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

My name is Erik Woodring. I lead the research hardware -- the hardware research efforts here at Morgan Stanley. Before I introduce Brian, I'm going to read a few disclosures that I forgot to read last session. So on the Morgan Stanley side for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please retort your Morgan Stanley sales rep. And from the GoPro side, I'd like to remind everyone that GoPro's remarks today may include forward-looking statements. Forward-looking statements and all other statements 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 in the company's commentary about business results and outlook is based on the information available as of today's date. GoPro does not undertake any obligation to update these statements as a result of new information or future events. Information concerning the company's risk factors is available in the company's most recent annual report on Form 10-K for the year ended December 31, 2022, which is on file with the SEC and as updated in future filings. So thank you, guys, for joining. Please welcome, Brian McGee, CFO of GoPro to our conference. You've been a mainstay here. I think we've probably done this for over half a decade now together. So obviously, I've been at the company for a while. Thank you for joining us. It's good to have you here.

Thanks for having us. Great to be here. I think this is the eighth year of doing it.

So exciting times. I'd like to start -- I think it's helpful to kind of set the stage before we get into some of the details. You've gone through a bit of a model transformation over the last, let's call it, 3 years where we've gone from some inconsistencies to actually 10% to 15% adjusted EBITDA margins over the last few years, you're trending closer to higher single digits this year, but maybe talk us through what normalized adjusted EBITDA margins are for this business as we look out 2 or 3 years into the future?

Yes. Let me maybe do a little retrospective here and then I'll answer the question. So over the last 4 years, we have made approximately $400 million of EBITDA. It's quite a bit. That enabled us to repay $125 million in debt $40 million in stock buybacks and increased our cash to about $370 million. So where do we come from? In Q2 of '22 COVID hit, we shifted the model to DTC kind of mentioned, we've reduced our retail footprint, largely unprofitable stores, and we added subscription to the model. In 2021, supply chain hit. In 2022, a little bit more supply chain, FX and in the back half of '22, the macro environment, which has continued into '23. And despite all of that, we still made $400 million of EBITDA. But what do we do to grow? I think we have to meet the consumer where they are. And what do I mean by that? I think we need to expand our distribution as the world has now opened up. We need to extend price points to entry-level to drive volume, but recognize the need based on the economic reality of where the world is, while innovating at the high end to grow. In addition, we'll continue to expand our subscription and services revenue and model. And all of this is to balance growth, margin, and profitability. And to your point, in 2021, our EBITDA margins were -- I think it was 14.5%, but I'll take the 15%. In 2022, I believe it was 10%. And if you adjust it for currency, it was about 13%. And as I look at the model, as we move forward and obviously not in '23, but as I think about '24, '25 and beyond, really, I want the model to be in that, again, the 10% to 15% range of EBITDA. And you look at that and you go, well, that's in line with a lot of companies in our peer group and towards the high end of our peer group, quite frankly. So we're pretty proud that we're able to be nimble enough to recognize where we are and make the adjustments necessary to drive growth and profitability and cash flow.

Okay. Good. So it's a good place to start. A lot of things that we can cover. I'd like to just get this out because it's kind of negatively commentated -- that's just asking about the consumer, right? The consumer is going through some challenges in terms of spending. And so maybe just help us understand some of the signposts that you guys are tracking to gauge the health of the consumer. And just as we're now 2/3 of the way through March, is everything tracking relative to expectations? Any changes that you'd call out one way or the other?

Yes. Actually, as we look at sell-through, that people who are buying either on GoPro.com or buying at Best Buy or other retail stores, that's the real measure of demand. We estimated we'd be, I think, on our earnings call, at about 525,000 unit sell-through. Looks like we're trending 550, 575-ish, so about 5% or so better than what we estimated early. And that's global. Asia is doing well, have been more concerned of late with North America and the consumer here, we were off at about 18% -- 17%, 18% in Q4 on consumer. In the U.S., this quarter, we're going to be off about 5%. So it's definitely on a year-over-year basis. So it's definitely -- we're seeing some showing up on the consumer side. And then I'll make -- the other point is we're obviously an aspirational brand. And people love to use it, they have been out skiing in Tahoe and stuff, and you see just hit the GoPros. But we haven't necessarily been since 2019 aspirational to the low end from an economic perspective [Audio Gap] at a $200 price point. And we forgave that for -- it was tough to make money there and then supply chain hit and things alike. I can't even get the components to build it anyway. And so that forced us to shift to the high end, which we did. And if we measure on MSRP price points, last quarter, 90% of what we expected to sell and that will be true in Q1, I believe, of '23 is at $300 and above price point. And so we have been able to shift the market. But that said, we are missing an opportunity to drive more volume. And so I typically get the question, well, how are you going to get back to 4 million units a year. You're at $283 bouncing around. Well, you're going to pick up on an annualized basis a lot of units at $299. And there's people who don't necessarily have the money right now and maybe for the next year or so, willing to be paying $400 for camera. So recognizing that we can actually move kind of to that price point. So I think you're going to see that. You are already seeing that, you can go on our website and you'll see it today on HERO8 as well as various retailers, and we'll keep moving on that. So that's something you'd expect, if people ask, how are you going to move units, that's one way. We will also -- in our road map, if we look into '24 and '25, I can't get into what it is obviously, I'm pretty sure. But we've been pretty good about telling you this is what we have coming in our road map and sticking it. And we have really cool products coming, obviously, Heroes, but others from a flagship perspective, that expand TAM in ways that can drive unit volume up into the upper 3s at least so that affords us the opportunity to start seeing some unit growth over time, subscription growth, revenue growth, margin improvements and then operating profit and cash flow.

Right. Okay. Perfect. Maybe I just want to tease one thing out and that is so, at least when you talk globally a little bit stronger in March than you would have expected and just to be clear, that's kind of Asia-Europe, stronger U.S. in line is just -- that U.S. weaker than the other regions, but the outperformance coming from in Europe. Is that fair?

No. Actually, I think the out performance is coming in North America.

Okay, okay.

So Europe is going to be down between 5% and 10% year-over-year. The U.S. will be down about 5%. We expect it to be down about 10% and APAC will be about flat year-over-year.

Okay. Okay. Perfect. And I guess, rounding out this discussion again in more of the near term, is just this topic of channel inventory. You've obviously kind of reworked how you deal with the channel and some of your go-to-market. But are you still seeing your channel partners more tightly manage inventory? When can we kind of move past that and again, have more of an alignment of sell-in and sell-through?

Yes. We ended 2022 at kind of 680,000, I think, it was roughly units of -- in the channel. We expected in Q1 that number to come down about 50,000. It's going to be closer to 600,000 actually because sell-through has actually been doing much better. So that's good. So that's why on the demand since being down 9%, we're going to be down 5% because sell-through is going well. So that's actually a good sign for our business. That clears inventory down to reasonable levels, which really is going to help us in Q2. So we're pretty happy with that. To your other point, are retailers still pulling inventory down? They are and I've seen certain retailers around the world they pulled their inventories down to levels I haven't seen since Q2 of 2020 when the pandemic hit us. So the good news is they're down. They have hit the floor. I don't think they could get any worse. So the good news is we've been able to manage some of our larger retailers that they've managed their inventory down to a position where supply and demand are going to kind of balance out.

Okay. So let's talk about subscribers. It's been a really exciting story for GoPro over the last 3 years. You've added 2 million new subscribers in the last 3 years. Those are paying subscribers. You're at about 2.25% through the end of last year. How should we all think about the trajectory of that subscriber base? And maybe can you -- what are some of the actions that you're taking to ensure you limit churn, you grow that base? Are there new offerings? Are there new ways to improve attach, -- help us think holistically about the subscriber trajectory?

Yes. subscriber has been a terrific story for the company and it generates substantial revenue was $82 million in 2022. We expect it to be $100 million in 2023. And the margin profile is exceptionally high, 70% to 80% margin. So a very profitable part of our business. And we don't talk specifically about churn, but it's in a really good place and turns actually been improving over time. The other thing that's really improved because I think people are getting the value proposition and maybe for different reasons. So on gopro.com, it's bundled and you say, okay, they got it because they're financially incentivized to get it. And then a retail attach has gone from low 20s to about mid-30s. And that's important because about 60% of what we sell in units, maybe a little bit more, is in retail. And so actually, with those numbers, we actually generate more subscribers coming from retail attached. So people who bought it Gopro.com and then came to the app store and bought the subscription. So we get more actually from there from an absolute number. And actually, the attach rate, they're both pretty cost is almost indistinguishable, but the ones coming from retail are actually better from an attach rate. Well, not attached, but when they re-up the renewal, it -- so less churn. And so that's been great. And they have to go from paying $25 to paying $50. And so despite the bump, they see the value. And the value -- and we have this from consumer insights, -- and they're both very strong in what they do, people are coming from retail, and we know that they love the cloud aspect to it unlimited storage as well as the Quik app because they want to do mobile editing, right? And then you've got the folks, the cohort that's coming in through gopro.com, they are getting it into a bundle, but they love the bundle price, they're buying more accessories. So they -- if the math is easy, they can see they're making 3x to 5x the benefit of what it costs them for it. And so it's kind of a no-brainer. And yes, then they get the editing and the cloud service on top of it. So -- and actually is symbiotic between the 2 cohorts of kind of how they view it and we can measure it and drive the value.

Okay. Okay. So let's dig into that a little more because you are doing a lot on the software side. Maybe help detail for all of us, what actions you're taking to kind of, I guess, I'd call it, better monetize your software amongst your installed base. And then really, again, an initiative has been about expanding that TAM to non-GoPro customers. So I guess the question is, one, how are you monetizing software? And then 2, why are you uniquely positioned to capture this kind of like non-GoPro wallet share?

Sure. We have talked about it in our last conference call in March. We'll expand not from mobile to desktop. So later this year, we'll have a desktop application for editing really cool things that you're going to be able to do with that. And just to put in perspective, if you go back in the day, we used to have a desktop application that was free, and we discontinued it. But there was like 800 to 1 million monthly users on that. That's a lot -- there are a lot of people, particularly prosumers and if you think about our cameras, they're great for the average person, but they're made for prosumers too and doing 5.30K, 60, 120 kind of video, you really need a desktop for some of that. A lot of phones just can't handle that kind of compute. And so that's a great market for us to go after and monetize. And so it gives us the ability to have a base subscription and then up sell it into a premium subscription with desktop. Now as we do that, you asked the question, well, what do you do about people who don't have a GoPro? Well, today, we already offer that. It's called the Quik app. So people spend, I think, $10 a year for that app and it enables you to take any content, whether it be GoPro phone, whatever, whatever you happen to shoot it in and do mobile edit, right, on that. And we have about close to 300,000 subscribers there, right? So we've already created that market. And now for us, it's, okay, how do we continue to drive that, monetize it, advertise it, etcetera. So that's definitely an opportunity for the company. I think -- but first, and there are some things we're doing from a software perspective that's coming with GoPro subscription and then both that and the premium, that will actually help us monetize at the low end. So that's coming.

Cool. So let's shift back. You mentioned it earlier, kind of this TAM expansion on the camera side. Again, we're hardware junkies at heart. And so it's always fun to talk about new cameras. And I realize there's a certain path that you're allowed to share now, but you've taken a bit of a new path in the most recent year, you've launched these new derivative cameras that aren't necessarily huge investments, again, they're derivative, so you're building off of what you've already done with your flagship Hero products. But how has that opened up your TAM? And again, kind of building on what you said earlier, where is that going?

Yes. You take markets like vlogging, right? So we created a creator addition. So it's not just a GoPro, it's the whole kit. It's an absolute vlogging kit, which comes with stabilization and great run time that is perfect for that market. We came out with Bones, which is basically for drones. So it's a lighter weight strip down camera that becomes for FPV flying, that's still a big market, and we're able to participate in that. We came out with Mini -- HERO11 Black Mini, which is a much lighter weight product than the 11 Black. But it doesn't have a screen and it does certain things that -- it almost equals actually from a software perspective, what the 11 Black is, but it only does video. But it's made for you just hit the button and you go, right? So it's a much simpler kind of camera to use and it's lighter weight, you don't even feel it on your head where you can feel the 11 Black kind of on your head from a weight perspective. So you can think about -- as you think about in the future, weight, run time, those kinds of things become important for our customers. And so we'll have derivatives there, derivatives in markets we're not even participating in and I can pick up 2 -- so well, 1 and another one that will on and deepen...

1.5.

1.5. So it's a great road map. And that road map goes out 2, 3 years of thought. So it's not -- I think historically, it was kind of like, wow, we were -- okay, what do we do next year? And then what are we going to do? We plan this out much better. And that's why we've been able to become more efficient in engineering, right? And because the situation is better, the chip sets are consistent, our firmware development, it's much more consistent because we're dealing with one platform, etcetera, right? So -- and we're able to get new differentiated products out quicker to support the needs of our customers.

Okay. So maybe let's shift now kind of almost moving down the P&L. You've talked about 40% to 43% as being your target gross margin range. I know you haven't guided to a target this year that's not necessarily what I'm asking. It is just you're encountering a number of kind of headwinds and tailwinds in 2023. Can you maybe help us understand what are some of the more influential puts and takes this year on gross margins? And then as we look beyond this year to a more normalized period, is there a certain mix of subscribers you need to see to get into that 40% gross margin range? Or is it just that you don't -- you need FX to not be the significant headwind that [indiscernible]? Help us understand how you get it back into 2023.

Well, FX has been kind of #1. And that's not just for GoPro. I think that's pretty much true for the world or U.S. companies anyway. I mean if I look at '22, I think we reported 38% just over margin on a constant currency basis, it was 41%. So we get impacted about $50 million of currency in '22. As I looked at '21 kind of our -- sorry, '23 in the first quarter, I think we talked about 36 points of margin, I believe, in 39 in constant currency. So we're not far off and that's on pretty low volume. So we can get back into the 40-plus percent. It's going to take a little bit of currency help. And I think that's true for a lot of CE companies. So I'm not alone there. We'll continue to grow subscription, which is going to help on the margin trend and kind of try and balance out what I talk about in the low end. Initially, it's a little bit tough. I got to get the new products out in '24 for that. But those will come, and then we'll expand upstream into the upper price points to help balance, as I said in my early remarks, unit growth, revenue growth, margin profile. I think the other thing, particularly as we think about entry-level, is it going to have our standard corporate margin? No, it's going to be less. But the ROI is simple, because I already have the kit. For us, it's about, okay, what's the form factor going to be? It's a little bit of mechanical work, firmware is almost done, a lot of bit of optics will change some things around, make it cheaper and get it into the market. So the ROI is high, even though the margin may be low.

And so something that has transformed for this business is you spend, let's call it, $300 million to $300 million of OpEx a year. It was almost, it was more than double that, going to the number...

$708 million in [indiscernible].

Look nobody's counting. Can you just maybe -- again, have you gotten more efficient? And where are you kind of focusing your R&D efforts today? Is it more software than hardware, again, maybe just some package that's pending for us.

Yes. Well, we got out of certain businesses, too. And so that helped. We have become more efficient in hardware engineering particularly as we look at chip set design, that's definitely helped, which comes into firmware. So we're not bouncing around on our SoCs. And that really helps stabilize the hardware teams and our firmware teams and then software. So the investments are in -- some in hardware. It has been -- our biggest investment in people has been in software. And that's really to drive subscription, getting desktop out, etcetera, and driving new features and benefits that make the value proposition and the stickiness for the subscription service to hold. And it has, and we'll continue to do kind of more on that front. And we've had to do more to build out our storefront on gopro.com and make that more efficient, etcetera. So it's kind of the combination from an engineering perspective, web and cloud engineering, hardware engineering, and then software to support cameras and cloud and subscription.

Okay. Let's talk about -- as you mentioned it earlier, but cash you're in a much stronger cash position today, you ended last year with about $370 million of cash. You resumed a small buyback for the first time in years. When we think about capital allocation, our buyback is the main priority today? And then as we think into the future, any changes that you'd consider making to the capital structure and allocation beyond just the near term?

Yes. Last year, as I mentioned, we repurchased about $40 million of stock. We said that's what we would do. The Board had authorized $100 million. The $40 million covers stock-based comp that keeps everything neutral from a kind of EPS perspective? And we'll continue -- we'll do $40 million, I would expect -- and I said this on our conference call, we do $40 million this year. And if we make more on EBITDA beyond that, then we have the ability to go further. The Board re-authorized to this back up to $100 million. So that's a positive. In the future, if I look at it, if you -- let's just say we are making $400 million again over the next 3 or 4 years, not out of the realm of possibility. We're certainly gunning for it. And let's assume no M&A, etcetera, and I already have enough cash on the balance sheet, but I will go harder at stock buybacks. And if you think about it, for that level, it could not only cover what we give to employees from a stock-based comp perspective. But over and above that, I can probably take out 25% of the current stock at the current market price. So -- but if I can't -- if I can generate the kind of EBITDA as we've done in '21 and '22, that kind of mirrors some of the best-run consumer electronics companies in the world. And I'm not going to get rewarded from a multiple perspective, well, I'll change the model to Infinity and drive the denominator down to drive the EPS goals. So one way or the other, we've got to move in the other direction.

No, perfect. So we have 2 minutes. I want to give you the opportunity. We've talked a lot different topics on revenue all the way down kind of the P&L, capital allocation, cash generation. So -- maybe just as a final word, helping us understand maybe what you see is most underappreciated about the GoPro story today. What we should all take away from this session is what's most important?

Yes. Phenomenal brand, right? And we've -- over the last several years, we've changed the model to be -- the brand is aspirational, and the companies delivered the kind of profit that you'd expect from a brand that is as strong as GoPro. And exceptional user base, we've been able to shift the model to not just hardware, but software and subscription and services, which is really important, and that will continue on that evolution as we look ahead. And our goal is to continue to evolve the brand, evolve the product in ways that make people want to buy more, not just the aspirational but participatory in the use of GoPro. Doing things that makes you -- what we do is unique from a POV perspective. And people say, yes, the phone can -- the phones probably hit us a little bit, but I'm out skiing, I don't see anybody wanting a phone in the head. I don't see it on their chest. I don't see -- it's not on the motorcycle. It's not like their skateboard, it's not, right? So we provide something that is unique in perspective and enables you to capture that shot that you want to share. And we're unique in that perspective. We lead in it. We're the market share leader. We'll continue to be the market share leader. We are innovating in it and at the same time, having a heck of a lot of fun and driving a lot of profit. And that's what I'll leave people with.

Perfect. So we're out of time, guys. Thank you all for being here, Brian. Obviously, thank you for your time. Very much appreciate it.