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

Good morning. My name is Paul Chung. I'm the applied emerging tech analyst here at JPMorgan. And I'm pleased to have with me Brian McGee, CFO and COO of GoPro. Before we get started, Jennifer is going to read us safe harbor.

Thanks, Paul. 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, 2022, which is on file with the SEC and as updated in future filings. Thank you.

All right. So let's jump in. So Brian, lots of changes on the last earnings report kind of a big strategy shift. But before we get there, can you talk about how the firm has evolved, and then we can talk about that strategy shift?

Yes. Thanks, Paul, and thanks for having us. I think I'll maybe just kind of jump into it a little bit. The main points -- because I don't think it was a big of a shift as maybe we made it out to be. We clearly want to expand our retail presence, both at price points and expanding indoors. We want to expand our TAM, particularly entry-level products. That's something we haven't done since 2019 because of supply chain. Pricing, we moved more proactively to stimulate demand, and that's working. But it's not as dramatic as considering we were highly promotional before. yes, we move prices from basically $500 for our flagship to $400. But given we were still promotional, the average pricing was probably around $425. So going $425, the $399 isn't quite as impactful as people might think. So that's an important point to kind of get across. And then we want to drive subscription because that's a big piece of the story and kind of where we're headed with 2.36 million subs going to, we think, 2.5 million or so at the midpoint of what we guided. Those are the kind of key points we want to take away. In this move, we said, well, retail, over the last two years, accounted for about 2/3 of our products of what we sold in terms of total units. With this kind of shift being able to expand TAM because the entry level will be predominantly retail, and we'll have some newer products that are at the high end more in '24, you'll see retail shift from about 2/3 of the business back to about 80%, maybe 85%, it's going to be in that range. And then gopro.com will be the rest. So it's a move, but it's a strategic move on price point, getting -- recognizing where the consumer is in this economy, and we need to drive more units. And the driving more units directly results in driving subscription. Even at the entry level, because we tested it in Q4 of last year in Q1, we know that even if someone is buying a $200 camera, about 30% of the time, they're subscribing. So that's actually pretty important because there's a lot of value in the subscription. We're showing that there's value and they're staying in it and they're using it. So yes, the high end definitely garners a higher percentage of subscribers, but even a low end does. So that's kind of an important takeaway for folks.

Great. And then -- so you are kind of -- going back into the retail channel, where are you expanding? I mean, you used to be in free shops, kind of some of these specialty stores. Is that kind of the same strategy you're thinking about in terms of retail presence? And then maybe you can talk about regionally how you're expanding there, too?

Yes. I think, regionally, we'll expand in North America. We're seeing now with travel cruises really back. It hasn't been for several years, and we're finally actually selling product in cruise. Duty-free has definitely expanded, that's expanded in Asia and in Europe, which is great. We reduced about 30% of our total door count in 2020. We won't bring it back, I don't think the full 30%, but we will definitely increase in specialty. And we'll increase in major retailers in Europe, in the U.K., Germany and France, for sure, expand distribution in Southern Europe. And there's some kind of mid-market and specialty markets that we have the opportunity to expand in the U.S.

All right. And then you mentioned the DTC is going to be maybe 20% in the future. Is there going to be any kind of renewed focus on DTC?

We'll continue to compete from a DTC perspective. And we want to do well at DTC. We're just seeing this is how the shift is. But if you think about it, most of our DTC is going to be high-end cameras. We don't sell much in the low end, and the low end will be mostly going through retail. So that's okay. It kind of balances out from a channel perspective. I think the other thing to point out with this kind of strategy is, the difference in the prior model between DTC and retail was about 400 basis points in margin to the benefit of dot-com. It's probably around 1,000 to 1,200 basis points, much bigger with dot-com today. So we definitely want to -- we will definitely focus on dot-com. We'll be competitive on dot-com. We want to do as much as we can on dot-com because it's better for us and better for the shareholders, the more we're selling there, but it's a competitive world. And we're also noticing that the consumer is spending more time out shopping, they're more active, and so we have to meet them where they are, and that's why we need to expand doors.

And then as we think about the business model that's always evolving, talk about kind of the growth trajectory of revenue and margins now with the kind of lowered price point on the camera, but maybe more on the volume side and then attach rate with the subscription, if you could expand on that?

Yes, we'll be about -- we estimate sell-through to be about 3.2 million cameras this year. We think that can grow to about 3.6 million or so in '24 and back to about 4 million in '25. And it kind of ladders up because you go, okay, you did about 2.9 million the year before. The entry level, which we completely had to stop because the supply chain, that could be anywhere from 0.5 million to 800,000 units. It was 600,000 in 2019. So that can drive quite a bit of volume. We'll add more doors in '23, '24, probably '25, and so that kind of ladders up. We'll have some newer products more on the high end that kind of expand the market as well. And not only expands the market, but it balances out margin. So over the last couple of years, we've been kind of high 30s, low 40s margin. Currency impacted us a bit. And this year, because of price protection to kind of make this shift and selling some of the low-end cameras will be kind of low 34-ish percent. But our expectation is, by '24 and '25, we'll be between kind of 38-ish percent at the midpoint. And doing that -- and we're able to do that because the products we're going to sell this year and a bit next year at entry level, those were products that weren't priced for that price point. It was really for a much higher price so we have the wrong costs. So we'll come out with new products next year that have the right cost point for the right price point. So I'm just going to work through a little bit of inventory this year or next year to drive that, and next year, we'll drive cash for this year. The result of that, though, as you get to 3.2 million, 3.6 million, 4 million units, and get a margin profile in the upper 30s is we generate a lot of profitability. And so our estimate is we'd be over $100 million of EBITDA in '24 and expect to be over $200 million in '25. We said combined $300 million and it breaks out about like that. And we have plenty of cash today, and we'll take that cash and buy back shares. And who knows when we may buy back some of the debt, too, because that's due in November '25, and we have plenty of money to pay that down, too. So we may do a combination of that. But; nonetheless, from a shareholder perspective, I'd expect to see a return to capital to shareholders as we generate that kind of profitability.

Got you. And then what kind of trends do you think would maybe drive some upside to camera unit sales? I mean you have -- travel is pretty much back at pre-pandemic levels, and I know there's some correlation there travel demand versus how your camera sales do. But what are some of the things you think that could drive some upside to some of those estimates?

I think China drives some. Quite honestly, China is a big market for us. It's actually doing well. There's a lot of travel within China, and we're doing quite well in that market. But for the most part, there's not a lot of travel going in and out of China. And China has typically accounted for about 20% of the total travel market internationally, and it's still near 0. There's not a lot of flights going in and out yet. So as that emerges, that's definitely going to help us, and that will help activity in Southeast Asia, Europe and the U.S. I think as importantly as kind of like travel and bigger macro things like that, that kind of move the needle, moving pricing into the levels we've done puts us back in our historical kind of price bands, $200 to $400. And that's kind of the sweet spot of where we've been historically. We have really good data from not just consumer insights, but demand planning on where we would expect volumes to be at specific price points and within tiers. We've been doing this for quite a long time, and, in fairness, getting it right. I mean the last 10, 12 quarters, I mean, we've hit our top line numbers. And despite all the activities, we had to pull numbers down occasionally, just recognizing where we are in the world and the economies. Yes, we did, but then we hit the number. So I think we're pretty darn good at figuring out where the world is, where demand is and demands at price points. And the other important part is that translates, if we hit this volume correctly, into more subscribers. And we think that will be -- if we hit these kind of volumes and the uptake rates that we provided on the call, we should be at 3 million subs come ending 2025. So we're already more than $100 million of subscription and service revenue this year, and that will just continue to grow, and it's between 70 and 80 points of margin. So it's a very profitable piece of our business. And it will not only grow from just units, but it will grow because we'll expand the offerings, too. So this year, we have subscribed to GoPro, its initial $25 entry, year two is $25, and we see that uptick rate quite nicely. We'll come out with a desktop version of that later this year. And we know from consumer insights that's going to have a really -- consumers really want that. And they want it because, while they do a lot on mobile with multi-clip edits, and single-clip edits and multi frame grabs and whatever on their phone, -- the fact is when you're doing 5.3k/60, 4K/120, file sizes get pretty big. And dealing with that on mobile can be challenging. And so having a desktop application where consumers can now use it on desktop and then share from there is actually really compelling. And we know that from a consumer insights perspective. And we can charge a higher price point for that and get people in actually who don't even own a GoPro because we will enable non-GoPro content into that kind of segment. So that's good. So that expands our TAM, expands our price points on subscription. But the other thing we know from consumer insights is that people who are existing subscribers to GoPro and paying the $50, they want that, too. And so they'll get that as part of their overall subscription. And so while I want to drive to the high end and drive higher price points, I also have to worry about retention, and that's another retentive tool where we're already 60% to 65% retained in year one, 70% to 75% in year two. We want to keep driving that up because the more we can drive that up, that 3 million, if I'm right, could go much higher. So that's a real opportunity that we have. We modeled it out based on our current stats of subscribers and their behavior, but that doesn't mean we're going to be static. We're going to continue to offer value and improve the value proposition for our customers.

Yes. And then the retail attach rate for the first quarter was around 50%. So what kind of drove this? And then, I think you mentioned the stats already, but where do you expect for kind of attach rates for both retail and DTC? DTC has always been much higher.

Well, DTC has historically been higher because we bundled the subscription with the camera. That's no longer going to -- we're not bundling anymore. It's straight up if you want to take the subscription. So I'd expect retail and dot-com kind of to normalize collectively. We expect for the year to be anywhere between 35% and 40%. And that's the guidance range we gave, which was 2.45 million to 2.6 million subs ending this year. The 50% -- and that's an annual thing. What we have to worry about is seasonality. So our business is seasonal from camera sales, as you know. So we sell a lot in the fourth quarter. And what happens is those sales in the fourth quarter translate into mobile attach subscription in Q1. So a very high numerator because of sales in Q4 coming into subscription, but our lower sell-through quarter is Q1. So I have a lower denominator and a higher numerator so I get a much better -- bigger attach. This is the math. But we expect that balances out a bit throughout the year, and we get into that 30%, 35%, 40% range. And to put that in perspective, I think, last year, we were between 25%, 30%. So we've improved it a lot. And we've done a lot of marketing in app, letting consumers know, okay, this is a value proposition. This is what you're going to get. And we're kind of noisy about that in the app when you're attaching your camera to the phone. So that definitely kind of helps to market it. We've made it more aware, more front and center as part of the strategy and talking to consumers, and we're seeing that pay off.

So let's talk about the new products you launched last year, the Bones creator and many, what's been some of the reception there? And then as you talk about those and kind of the flagship, what's been somewhat of the kind of upgrade cycle that you've seen from the data?

Yes. Bones was basically HERO10 that we stripped down to be the lightest weight camera you can have for the aerial market, for drones. Because we exited drones, which saved us quite a bit of money, quite frankly, in OpEx. And it was a success from a commercial perspective in terms of market share having Karma out, but just it wasn't viable long term from a profitability perspective. Okay, fine, but it's still an important market, people still fly drones. And so we were able to get stay relevant in that market by creating a product that for drone enthusiasts where you have a lightweight camera on top. And so that's fine. We charge $400 and pull a lot of cost out and make a lot of margin. So it's very successful from that perspective because it got us back into that market and it costs us nothing to develop that. So from an ROI perspective, it was big. Creator edition takes our flagship product and bundles a kit basically for vloggers. So that's actually been very successful and is a pretty significant percentage of our revenue at the flagship level. So it's a really nice bundle. It's good for retailers as well because they can differentiate at different price points on their shelf. So that's actually really good. And many has done. still okay. We never -- we said from day one we don't expect it to be in the top three of sell-through. It's in kind of 4, 5 range of product. But again, it's a derivative where people want a lighter weight camera. They don't need screens. They know how to work the camera. It's one button, it's pretty simple, kind of like Session was, but in this case, much more capable camera from that perspective. So -- and again, the investment there was small relative to what we would do for flagship. So when you look at it from an ROI perspective, you go, okay, I have a new camera for a different use case that enables somebody to want a second or a third camera, right, for their specific application.

Got you. And then on the upgrade cycle, so you released kind of a flagship update every year. What kind of -- I mean, the camera itself is excellent and the quality is so great, so I mean what more can you do to kind of enhance the kind of next gen? And how often are people going to be upgrading, and how do you entice them to upgrade?

Yes. So we get that question every year. What more can you do? And yet we come out with really cool stuff.

Stabilization has been great.

stabilization has been amazing. No, there will be new features and benefits on the next upgrade. And actually, we have a road map that goes out several years as well, right? So not like, what are we going to do next? No, that's already in kind of engineering, right? And it's gone beyond actually just hardware because you mentioned image stabilization. There's some hardware aspects to that because you require horsepower in your system-on-chip architecture that goes into the product. But that's really a firmware software kind of thing, right? And that's one of the things that started to differentiate us over the last few years is, yes, the hardware is great, that they're rugged and they work amazingly well, and you get the coolest shots ever, but it also comes with amazing software and firmware and stabilization and attaching to now the app and they can go Camera as Hub. So you come home, you charge your camera and your content goes up to the cloud. And within 15 minutes, you get an auto highlight video automatically back using AI because people talk about AI. It's like we've been doing AI and machine learning for years now with our editing service. So that -- we'll continue to evolve that and make it better. So it's not just hardware. We've been really making a lot of strides in software in the company, and you're seeing that in how we do cloud, how you get content to cloud, how you access content, how you can use our editing with -- and the most common features people want are multi-clip edit, single-clip edits. They'll do extracts, single picks out of video. So -- and then they'll use Mural and then make their edit and they can share it. So we've come a long way from when we went public for sure in terms of the whole kind of system and architecture for the consumer.