GoPro, Inc. (GPRO) Earnings Call Transcript & Summary

Perfect. Good morning, everyone. My name is Sabrina, and I'm a member of the IT hardware team here at Morgan Stanley. Today, we are very, very lucky to be joined by Brian McGee, the CFO at GoPro as well as Jalene Hoover, VP of Investor Relations. Brian joined GoPro in September of 2015, where he was initially the VP of Finance before being named CFO and has served as COO since February of 2020 as well. So thank you so much for being here.

Thanks for having us.

Perfect.

It's great to be here.

Very lucky to have you. So just housekeeping for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. I think Jalene has some...

Yes. Before we get started, I'd like to remind everyone that our remarks today may include forward-looking statements. Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today. This means that results could change at any time and our commentary about business results and outlook is based on the information available as of today's date. We do not undertake any obligation to update these statements as a result of new information or future events. Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2021, and Form 10-Q for the quarter ended September 30, 2022, which are both on file with the SEC and as updated in future filings.

Perfect. Thank you. So I guess, Brian, maybe just to kick off, during 3Q earnings, you reported solid results, but did derisk 4Q, just given the more cautious consumer spending environment and tighter channel inventory management. So now that we're 2 months into the quarter, how are these dynamics playing out versus your expectations?

Yes. Actually, I think the dynamics are playing out exactly how we narrowed it in November. We talked about the consumer and where they were. We talked about North America being a little bit tougher market. Europe actually for the last couple of quarters, and we're even seeing it now and APAC seeing really good kind of sell-through performance. So that's been going really well. Retailers are continuing to put the break on inventory. That's not a GoPro issue as much as it is a broader -- they're dealing with their own macro cash flow over-inventoried positions that we get kind of swelled up in. But we've also got enough market share that they also need us. So that's, I think, working to our benefit. As I think about sell-through, we talked about on the call, October was kind of in line with expectations. I can say Black Friday and Cyber Monday weekend were also within our expectations of what we expected to sell or sell through. And that was true regionally. We did well across the U.S., Europe and Asia Pacific. So we're very happy with our results on Black Friday, Cyber Monday. And so that's the first big hurdle and the next big hurdle is the next 4 weeks leading into Christmas. But so far, knock wood, so good. So we're happy with demand. People want GoPros, they're buying GoPros. And actually, we're continuing to see the market shift still into the high end. So our HERO11 Black continues to lead on the product. So that's good.

Yes. That's super interesting. You did touch a little bit on the channel and what we're seeing there. And we are seeing tighter inventory management that is in stark contrast we've seen in prior holiday seasons. And so just from your perspective, do you think this behavior is temporary? Or is this kind of a more permanent shift to retailers holding less inventory on their balance sheets? And how long do you expect the correction to last?

Yes. I think it's temporary. Look, a number of us have done channel checks. We're going to various stores. I won't name who they are. And the stores aren't very clean. They're picked apart. It's -- we don't have that problem per se because we've got point-of-purchase displays. We're in there. It's well merchandised from that perspective. But the stores generally look kind of hazard -- so I think they're going to have to realign that and figure out how to really do a much better job of merchandising. And I think we also have a bit of an advantage where we're not 1 of 6 or 8 brands that's competing a, for shelf space or for dollars quite frankly, right? We are the leading provider of GoPros and cameras. So we at least have that advantage. Now we compete with share of wallet. So we have that to deal with, which I think, by and large, we've been able to do the right kind of promotions and things in the quarter to generate the kind of sell-through we're seeing and hitting our expectations. So it's not -- we haven't done promotions outside of necessarily what we guided. So it's not more than that, but it's enough to get our share of wallet of what we needed to kind of for the quarter, at least so far, so far so good.

Got it. That makes sense. Foreign exchange has been a headwind that's affected all of our companies and GoPro obviously is no exception to that. So wondering if you could talk about how -- any related impacts to your financial performance, whether that be the second half or expectations moving forward?

Yes. If you look at 2021, that was our best year since 2014. Clearly, not in units, it's about half in units and revenue was about $1.2 billion. But if you look at it from an EBITDA to revenue perspective, it's about 15%. So we had a great year in 2021. Revenue was up about 30%. Units -- ASP were up quite a bit as we shifted kind of the market. As we look to '22 relative to '21, we're being impacted on the top line and bottom line by about $50 million. Most of that's in the second half, just with the U.S. dollar strengthening so much against the euro, the pound, Australian dollar, New Zealand dollar and the yen, right? So that's definitely impacted our results. That said, we're still going to have a terrific year. It's going to be the second best year since 2015. So despite that, we're still driving great cash flow, top line, yes, it's going to be off a bit from '21, but the bulk of that is currency. Otherwise, it'd be flat. So yes, so over time, currency is going to move the other way and then we come back -- those dollars come back. So this is a temporary kind of issue, kind of like what it was in 2001, 2002. I would think where the dollar strengthened and then all of a sudden, the pound went from GBP 0.85 to about GBP 1.40 or so.

Yes. No, absolutely makes sense. And you touched a little bit on pricing, but I wonder if you could dive a little bit deeper into that. So obviously, the environment is getting more promotional. You guided 4Q ASPs down 2% year-over-year, up 6% at constant currency. So are you seeing more or less aggressive discounting versus your expectations? I guess that's first? And then should we still think about 4Q ASPs being around $370?

Yes. We're not discounting more than what we had talked about on the conference call. And in constant currency, we'd be over $400 of ASP. To put that a little bit in perspective, if you went back to 2016, I believe our ASPs are about $264 a unit. So we're up substantially. I think the CAGR on that is like 15% or 13%, 15% kind of range. That's pretty darn good. And why? We went more direct-to-consumer, so we garner more of the margin dollars and the revenue. We've moved the market to the high end. The low end was 20%, 25% of what we sold. That's not true anymore. 80% to 90% is $400 and above on price point. So we've been able to move the market, and we've got a great subscription business that is about 7%, 8% of our revenue this year. That's $80-plus million. We expect that to be more than $100 million next year. And the key to that is 70 points to 80 points of margin. So that -- I've called it the financial engine of GoPro, and it's really true as we continue to drive and expand subscription and our service revenue, that helps to kind of maintain that financial momentum for the company to the point where we've been -- since the pandemic starting Q3, we've been profitable on a non-GAAP basis every quarter since Q3 of 2020, and we expect to be profitable this quarter, so that makes 10 in a row. And I believe it's 9 out of 10 on a GAAP basis. So quite good. And the cash flow has been phenomenal.

Yes. Speaks to the strength of your model. When you think about 2023, maybe we can start there. You talked about unit volumes nominally below 2022 levels. So just from your view, how much conservatism is baked into that guide? Obviously, the health of the consumer is key, but what are some of the scenarios in your mind that would cause you to end up above or below that guide?

Well, I think the economy is going to have a lot to do with that. Do we go into a recession or not? Quite frankly, we've got to kind of get through Q4 and the price. We got to finish this quarter. Execution is the name of the game and then get into really '23. Volumes could be better if the consumer springs back a bit. It's going to have to spring back more in the U.S. The U.S. from where we see it is a little bit weaker than it's been the last couple of years. Europe has actually been doing really well and Asia has really picked up. You saw that in our reported numbers in the last quarter. So those are markets that have come out of the pandemic. The U.S. kind of came out of it first. And they kind of got price supported a little bit with the government and now with inflation, food pricing, interest rates going up, that's kind of hit the brakes a little bit on the U.S. consumer. But that said, we're hitting our forecast. So far so good.

And do you think pricing could be a potential also -- let's say, units are down slightly, could pricing help to be an offset there, so revenue is more flat year-over-year?

Yes. I think the way I'd characterize it on the call is units will be down, I think, a bit in '23, but ASP would offset it. So revenue is kind of neutral. And we see that even now in the fourth quarter, we're still lifting more on the highest end products. We're able to put out products that are more expensive like the HERO11 Black Creator Edition right, for vloggers and people who want to really capture that POV experience, right? And that's sustaining out just like it did on the HERO10 Creator Edition. So people are spending up. They are buying more 11s than, I think, maybe we expected. So more 10s and actually the lower end has kind of eased off just a little bit. And then we'll see. I think as we get to crawl towards Christmas, that lower end will probably pick up because that's historically what happens. But so far, we're seeing ASPs be able to lift a little bit, and I think that's going to happen in '23. We'll also have more subscription revenue, which -- that's the top line, there's no bottom line. So denominator, right? So that's actually going to help ASPs as well.

Just a follow-up. I mean, you said just now around kind of more durable demand actually for the higher ASP products. I wonder if you have a sense of why that is. Is that a sense of demographics? Is that the quality of the product?

I'd argue it's the quality of the product. We've just continued to do such great things with the product, starting with HERO7 with HyperSmooth, and now we've continued to advance the algorithms on HyperSmooth. On HERO11 Black, you can now do instead of 4:3, 8:7 frame rates, which is awesome for transferring that into social, right? So -- and we did that because we changed this image sensor to match with that capability and our GP2 processors. So we work with our partners to create the technology and the innovation and the advancements in the product to be able to offer that to the consumer. I got a question earlier, like, does the consumer know like how this all kind of works in the back, I think, no. What they care about is, oh, they now have 10-bit processing, which is -- now it's going to work across multiple platforms, particularly in software. And they know they can go 8:7. That's great for social, they can -- if they want to crop to 4:3, cool. And now on top of that, the additional benefit, if you think about it from a subscription perspective is, historically, there's -- capture is great, but there's a lot of work in editing. And you go -- it's almost anxiety like oh, I got to deal with this. Now it goes to the cloud, you go away, come back and within a very short period of time, you have an auto highlight video. So what went up in the cloud for you just came back with the awesome video that's done with AI, machine learning, to recapture your best moments, we give it to you, you can take it as it is and share it or edit it. Now others who give you that similar concept, it's take it or leave it. You don't get the edited. With our Quik app, you get the edited. So it takes the kind of pain out of editing, the time out of it, and we give you a really good quality video.

Yes. I mean that's a great segue into some of my questions around subscription. Subscription attaches are already close to 100% on gopro.com. On retail, it's more kind of in the mid-30% range. So wondering what are some of the actions you're taking to increase retail attach rates? And when do you think -- or where do you think those attach rates will stabilize?

Well, let's see, on gopro.com, as you mentioned, our attach rate consistently since we launched that in Q3 of '20 has consistently been 90-plus percent, and that's terrific. And we've continued also to grow gopro.com. We've taken it from about 30% to mid to now maybe upper-30s as a percentage of our overall revenue. At a time when we're actually seeing others who have an online business actually as a percentage falling back. And so we've actually been able to grow it, which is terrific. So the team's done a really good job there. On the retail front, we've gone from kind of about 10% attach a couple of years ago to then it was 20%, now mid-30s. So we were up 50% from an attach to the point where if you do the math, about 2/3 of what we sell goes -- in units goes through retail, about 1/3 through gopro.com. With those kind of numbers, we actually generate more subscribers from retail than we do from gopro.com. And the behavior from both cohorts is basically the same. The -- how they use the product, how much content they push up to the cloud, how much they pull down is very consistent. You wouldn't even know kind of the difference. Retention rates are basically the same. And that's the other thing we talked about on the conference call is we've seen a better than 5% retention rate on subs, and that was year-over-year Q3 of '21 to Q3 of '22. But it wasn't just point to point. We've seen improvements every quarter in retention rate. So a steady improvement, which is great, and people are getting into it. They're getting their highlight videos. So they can actually see the value. It's not just the financial value because it has been pretty much a financial play. But now it's not just a financial play, it's a time play. You're getting real value, we're delivering value from the software perspective to you that saves you time and energy that you can now devote to other things.

Yes. I mean just on that, thinking about trying to more aggressively court non-GoPro users with an improved content management solution. I know something you've spoken about, that is a competitive area. And so in your view, what is going to get GoPro to win in that market?

Well, I'd say we're -- we've already got our toe in the water because we talk about the GoPro app, and we sit in this year at about 2.2 million subs. So we're on track to do what we said we were going to do. We also have the Quik app, which is about 300,000 subscribers. And those are people who just have mobile phones, their contents on mobile, and they transfer that content into -- or some of it into the Quik app and then from there, they make their highlight videos. And so we've seen that grow over time, and we've improved kind of the flow. The music genres definitely improved substantially as well. And that's a market we think we can go after in the long term. So it's not just going to be subscribed GoPro, but also we'll work with the folks who have a phone and you want to put content in the cloud, great. If you want to have us tap into your phone with your content, if you put it in the app, we can come back and give you a great storytelling solution. So as much as you have really active capture, we give you a great result at the end.

Yes. No, I mean that's great. I think maybe moving back towards thinking about kind of your, I guess, more traditional camera business. Since COVID, you've been focusing more on higher-margin opportunities for growth, they're not just maximizing maybe lower margin unit shipments. So how is that strategy impacting your camera installed base, both in terms of new users as well as the monetization of existing users?

Yes. We've -- historically 2017, '18, '19-ish, we were selling through 4 million, 4.3 million units. The pandemic hit and the kind of the world stopped for about almost half a year. And then the second half really reignited it, which is great, but we had to do some discounting in order to do that. That hurt margins. By the time you get to '21, our margins have gone from low-30s up to 40% -- over 41%. So terrific results and on a constant currency basis, we'd be over 40% in 2022. So we've been able to hold that because unlike a lot of businesses, we actually make money on our hardware and even more money on the subscription and service side. So one is not subsidizing the other. So that puts us in a good spot, but we've been constrained with supply chain. And let's face it, we were forced to move to the high end because that's where we make money. That's the best value proposition for who wants to use a GoPro and actively capture and share their life. So that made sense. Now that supply chain is easing up, we do have the opportunity to look at newer markets where we can expand even on the high end, and we have things on our road map to do that, but we also have the opportunity to push lower and get people in to a GoPro at a price point. Look, we have to be real about where the economy is and what people can afford. And not everyone can afford to spend USD 350 to USD 500 for a camera, some need to spend less, and we'll get them in the ecosystem. As a subscriber with the benefits of GoPro, and that can drive more units, but it will still be profitable right? Back in the day, the low end wasn't necessarily profitable. And that's kind of the difference. So I guess the message for investors is, it's not a tentative game, it's how to make money game. And if I can make money at $3 million, great. If I can push it to $3.5 million, and make a bit more and get more into the ecosystem, who will then upgrade later, but still be engaged with GoPro, perfect.

Yes. No, that totally makes sense. I know you talked a little bit about supply chain. And so just wondering how our component and logistics costs trending for GoPro. Are these at this point year-over-year gross margin tailwinds? Or are they still headwinds on a year-over-year basis?

At the moment, there's still a bit headwinds. But the component -- we manage the component side actually pretty well. So even our margins were like 41% last year, they'd be 40% in constant currency. So it's about a 1% margin hit on component pricing. In the grand scheme of things, that's not so bad. As things flip around, we'll see component prices eventually move back down lower. And so we'll get -- we'll reap that margin reward. But it didn't really hurt us in a big way, and I have to thank our partners because as we work through '20 and '21, we've always had product. And we were on shelf holiday last year when a lot of people weren't. So got to be grateful for some things. We did get a lot of support. We've gotten a lot of support in '22 and have been able to stay ahead of supply chain and have inventory in the channel.

Yes. Is there a sense of timing around when these will become -- I know you said it's not necessarily as big, but...

Yes, I'm not sure, I'm in the guess on that.

Okay. That is fair.

And it's not that material.

And it's not that material. That is fair. Thinking about gross margins overall, FX has obviously been a swing factor. But when should we expect to see you back in your 40% to 43% operating model? And how should we think about the margin expansion trajectory over the next few years?

Yes. Well, on a constant currency basis, we're there, on a real reported basis, no. But we're not the only one in that ballgame. Look, currencies all -- look, currencies have already started to move back. They've moved back about 5%, 6%, depending on which currency you're looking at. So that will be kind of helpful for us. Over time, it renormalizes and then you're easily back. We've said that I would think between the road map and the growth, we think we can achieve in subscription, we'll continue to propel margins because the subscription side is running 70% to 80% gross profit is going to help move the needle up on the margin front. So -- but that said, we've -- even if it stayed constant and you get the bit of that revenue growth, you held margin, we've controlled OpEx exceptionally well. In '21, we generated about $168 million of EBITDA. That was almost all free cash flow, paid down $125 million of debt. We set in this year at $400 million of cash. That's about half of our market cap at the moment, right? And so we're a cash generating machine, which, by the way, has afforded us the ability to get back into the share repurchase game. We bought back $40 million worth of shares in 2022. If it can make $50 million, $100 million or more of cash flow, EBITDA in '23, we have the opportunity to buy back more shares in '23. So $40 million is about what our stock-based comp is. So if I can get to more than that, it's starting to really help the EPS side of the equation. So we'll be working hard to try and buy back more shares.

Yes. No, that's great. And on capital allocation, it's been a few years since GoPro has been active in the M&A market. So wondering what's your appetite for M&A today? And what type of acquisition would GoPro potentially be looking for?

We've done some -- we did some last year that were smaller. So I still think if we do any M&A, I think it's smaller, it's less likely to be acquihire where you're just buying talent unless it was very specific to something we wanted to solve. And there would be in software if we were going to do it. It would be really to have something that would add to the innovation of what we bring to the market as GoPro, right, so...

And I guess maybe in the last few minutes, kind of bring it back, high level, is there a certain growth algorithm that GoPro seeks, switches over the long term? And how should we think about that?

I think the algorithm centers all around subscription. Subscription, I said it is the financial engine of GoPro. It's where we make the most money. It's the fastest-growing product that we have that adds the most -- adds real value to whoever buys a camera. The subscription offers the financial mechanism, so it pays for itself. But now it's offering a service and ability to take what you've captured on an awesome device and become a creator with it. And that creative aspect is something we have not had as a company or it was painful. And so we will continue to enhance that just like we've done with the auto highlight videos. We will move into desktop in '23, so add more features and functionality on desktop, not just mobile and be able to tear up in the subscription offering to offer more value to the consumers who want that. And we've become an interesting price point solution that's substantially cheaper than what's in the market, but offers way more value and flexibility. That will be used with GoPro content and non-GoPro content. So we have -- that affords us the opportunity to move beyond just GoPros into the phone market. And that's a massive TAM that if we can get that right, really unlocks a lot of financial potential for top line growth. Clearly, bottom line because they're very profitable in the service and subscription side and cash flow and for just to buy it back even more shares if we're successful with that.

Perfect. Well, that was amazing conversation. I think we're out of time, but I want to thank you for joining us today. We're very lucky to have you.

Thank you for having us. Appreciate it. Thank you.