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

Welcome to day 3, everyone, of the TMT Conference. My name is Erik Woodring. I lead the hardware coverage here at Morgan Stanley. Before we get into things, 2 disclosures to read first from my end. Please see -- for important disclosures, please see the Morgan Disclosure -- Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And then from the GoPro side -- before we get started, GoPro would like to remind everyone that its 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 its 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 its most recent annual report on Form 10-K for the year December 31, 2023, which is on file with the SEC and as updated in future filings.

You nailed that one.

So I'm very pleased to welcome back GoPro's CEO, Nick Woodman; and CFO, Brian McGee, mainstays of the Morgan Stanley TMT Conference. Thank you guys for joining us today.

Thanks for having us.

Thank you.

Nick, I think it would be helpful to start -- to kind of go into how this company is evolving. If we could kind of talk about kind of look back in 2024, 2025 is a bit of a year of transition, but you're kind of putting in the building blocks to drive a return to growth in 2026. So let's start just high level. Kind of walk us through what happened in '24, how you're thinking -- how that translates into '25 and what changes for '26?

Well, maybe I'll start by focusing on '25, which is '25 is all about continuing to transform GoPro to operate with a lower cost operating model, to get more leverage out of new product launches later this year and in 2026. The goal is to grow revenue through new product launches and to materially grow profitability by again, getting more leverage out of a lower cost operating model. I mean that is our 100% focus. And the way that we expect to grow the business is to launch new products that recapture share in our core action camera market, launch new 360 cameras that grow share in the 360 camera market, which is growing. And importantly, a major focus for us is to launch new cameras, new products and services into adjacent product categories and markets that we don't get compete in. Today, GoPro is competing in a $1.5 billion action camera TAM, up until the launch of our refreshed MAX camera a few weeks ago, which is now just shipping to stores. And in 2024, we were exclusively participating in a $1.5 billion action camera TAM, whereas by mid-2027, we're targeting participating in approximately $7 billion TAM, which is a pretty material increase in our opportunity. And again, that's through launching new products into adjacent categories and markets where we can leverage the camera platforms that we already have in our road map for our existing markets that we serve, and we can refactor them to participate and compete in adjacent markets, an example of which is the motorcycle helmet opportunity that we've talked about before. And the way that we afford to do this with a lower cost operating model, again, is a platform-based approach, working more closely in the JDM, joint development fashion with our manufacturing partners and reorganizing GoPro as an organization that is entirely product development-centric. And looking at any spend or activity that isn't contributing to the development and launching of incredible products and services for our customers and cutting those out of the business. So that's reflected in our OpEx outlook for the year.

And so I was going to ask you kind of the drivers of that efficiency, and we kind of went through those. But -- so maybe the question that I'll ask is, is that sustainable for you? Like that's the new GoPro, meaning if and when we get to 2026 and a return to growth, that can be the operating model going forward. You kind of have enough emphasis -- enough umph in that model to continue to drive products forward, continue to drive growth, unit, subscription, services, et cetera?

1,000%. That is the goal. This is not a process of reducing cost for a period of time and then building back up from there. The way that we're approaching this is to operate this way in a sustainable fashion ongoing. And with GoPro's presence in 25,500 retail doors globally now built back up from 19,000 doors exiting COVID. And with our strong global brand, social reach, support of our distribution retail partners and whatnot, our brand is incredibly strong and well positioned to take advantage of and maximize sales of new products that we launch. But it's -- we recognize it's really important we've got to get more leverage out of the business and do so in a lower cost manner.

Okay. Let's maybe back up and talk through the product stuff at the heart of what you guys do. You released the flagship HERO13 Black last year. You have the new cost-effective HERO. You just released the refreshed MAX 360 a couple of weeks ago. Just maybe some highlights of the product portfolio. What is the reason why people should be buying these products? And what has feedback been?

GoPro always produces the highest performance, best image quality cameras in the market. Review after review, you see that. Our products are always critically acclaimed. Fortunately, they're always ranked at the top of their class. The same goes for HERO13 Black. The same goes for HERO as an entry-level camera. It's phenomenal. For $199 what you get, it's pretty amazing. And while we've only started selling MAX -- the refreshed MAX on our website, it's currently shipping to our global distributors and retailers. The response have been fantastic. And we're really looking forward to the launch of MAX 2 later this year, which we think is going to also reset the bar for the 360 camera market. And then when you pair our hardware experience with our software experience, and more so through the GoPro subscription where your GoPro camera auto uploads, it's content to the cloud, what the camera is charging and then you can access and edit that footage using the GoPro app. The full experience is unmatched by any of our competitors. And as a result, we're seeing a really strong retention in our subscription business, which tells you that the value that we're providing from start to finish for consumers is best-in-class.

Right. And then I think that was once an argument that people would make as you take -- you take footage and you don't know what to do with it. And you're effectively handholding people now to say "here, we'll make it easy for you. We'll give you the tools to even edit it." Can we quickly touch on MAX 2? I know you don't want to necessarily give away any special details. But just help us understand what's so important about the 360 cam market. You talked about it being a growing market. Obviously, that's one aspect. But are you seeing kind of a shift away from that core user that's kind of going up to the 360 cam? And any details you can give us or hints about kind of where you plan to bring innovation and differentiation versus the original MAX?

There's a bit of cannibalization from the action camera market into 360. But then the data shows that the 360 camera market is also TAM expanding, which is exciting for us. It's really exciting considering we didn't have any 360 camera sell-in in 2024. That was all sell-through of our MAX inventory. So the reintroduction of the -- of a refreshed MAX just a few weeks ago, which again is shipping to our global retailers today as we speak, that's exciting for us because that's obviously a new revenue opportunity for us again to be reentering that market. And in terms of MAX 2, yes, I mean we believe, based on the sale of our other products, the sale of MAX back in 2023 when we sold our last units in Q4, it was 35% of the market, and that was with then, call it, 3-year old product. And as well, the feedback from our retailers around the world who are extremely excited for us to reenter that market with MAX 2 in earnest with a new flagship, we're pretty excited about it.

Okay. Great. And the other thing I wanted to just kind of quickly touch on is the TAM expansion because you're talking about a kind of 4x plus TAM expansion. When we think about adjacencies to the degree that you can talk to, I know you mentioned kind of Forcite as an example. But what are some of the adjacencies that get you from kind of $1.5 billion TAM to a $7 billion TAM? I know the services and [indiscernible] as well. So...

I'm not going to go into specifics about products just for competitive reasons. But what I can say is the adjacent product categories and markets that we intend to enter are all well within our wheelhouse. They relate directly to GoPro's brand today, they are products that people would expect from GoPro. So we believe our ability to be successful with these new product introductions is -- it's a ripe opportunity for us in each of that.

Good, and maybe before we turn it over to Brian, I just want to, Nick, maybe elaborate on the channel strategy. Shifting from DTC during the pandemic, clear reasons why, to now opening more retail doors, kind of how far along are we in this kind of expansion of retail doors? What's the goal? And kind of how do we think about the impact of that? What's the ultimate -- what's the ultimate end status goal of this change? The transition, let's call it.

Well, the strategy is to set ourselves up for a successful launch of new products with a global network of retailers where our brand is presented in a best-in-class manner, supported by the retailer, supported by our global distributors, which -- that work is largely done. That investment is largely made. That's part of how we're reducing our OpEx this year as we don't have to make those investments anymore. As I mentioned, coming out of COVID, we were at about 19,000 doors globally down from 32,000 doors pre-COVID. We're back up to approximately 25,500 doors today, and we'll end the year somewhere between there and 26,000 doors. The total addressable doors that we have through our distributors is about 30,000 and that will be a slower process from here out, reaching that number over time. So I'm happy to say that, that investment is made.

Okay, cool. Brian, let's turn to you. You guided to about $125 million of revenue in 1Q. That's based on a bit over 420,000 units of sell-through, I think it's 425,000 of sell-through. We're about 2/3 of the way through the quarter. Just any comments you can share on how the quarter is tracking, how sell-through is tracking, characterizing the demand landscape, et cetera?

Yes. Sell-through is on track for 425,000 for the quarter, which is good news. We actually saw a nice uptick in February from January. So that's continuing to build momentum as we work our way through the quarter. I think the other point I'll make, you talked about OpEx and we're talking about kind of growth. We'll reduce OpEx about $100 million or so year-over-year. About 75% of that is in sales and marketing, G&A and about the other 25% in R&D. So we're continuing to invest in R&D to drive that road map to achieve that TAM. And I'll say roughly 80% of that 25%, Erik, is related to GP3. We spent the money for the new chip that's now about to come out. So those expenses are done. And so the rest of the efficiency in R&D is really more around how we do ODM, JDM. We've decided to give up on desktop, and so we're leveraging that as we work our way. So the amount of money we're spending on innovation continues, and that's how we're able to drive forward. So we're leveraging the rest of the business in order to spend money to drive product development.

Okay. Something I noticed from 1Q, you're kind of guiding to a channel inventory reduction. You've done a good job at managing the channel. And at the same time, you're actually expanding retail doors. And so is this reduction, again, as I'm thinking about the setup for 2026, is this reduction kind of intended to get you ready for these new products, get the channel clear, kind of get old product out of there and kind of be able to move into 2026 with kind of like a clean slate, so to speak?

Yes, there's some of that, I think, in Q1. We took channel inventory down a lot in Q4 as you know, and it comes down about 10% in Q1. So it does help to build some of that momentum for Q2, 3 and 4. And that's a typical pattern we see in Q1. I'd say the other thing we talked about, which is the bigger move is our own inventory. We expect it to go from about $120 million, I think exiting Q4 to under $100 million -- exiting Q1. So we'll continue to drive our own inventory down to be more efficient in how we manage SKUs and factories. So it's not just channel, it's our own inventory [ as well ].

I'd like to talk to kind of the pricing dynamics too this year because 1Q ASP was about $365. That's down high single digits year-over-year, but you're guiding to ASP growth for the entirety of 2025. And so help us understand how you kind of get from that 1Q decline to the full year growth? Is it simply new products? Or what is it that's going to help you go on that trajectory?

Yes, it's really mixed. And you have to remember, Q1s are lowest revenue point anyway. So from a seasonality perspective, I would say that about half of the move is due to, as you know, we guided revenue down. That means units are down. But our subscription revenue is basically flat year-over-year. So we pick up -- we have the numerator with the lower denominator. So about half that pickup is just due to that and then the rest is due to mix as we come out with newer products.

Okay. I think it would be helpful. You guys talked about this on the earnings call, but I just want to give you the chance to do it again. Just talking about tariffs, you've done a lot of supply chain work to mitigate the impact of tariffs. So maybe just touch on that first. And then the second question to follow that is really the different puts and takes that we should be thinking about for the trajectory of margins because that's another area where you're doing a lot of work in terms of cost downs for new products, managing FX. You also have a weak market backdrop that you're fighting through, but still driving margins higher. So touch on tariffs and then touch on the kind of the puts and takes on gross margins?

Yes. On tariffs, we've done a terrific job managing supply chain. We call it China Plus One. Our cameras are fully diversified. And so we manufactured cameras in Thailand for U.S. consumption, in China for rest of the world. And so that's eliminated tariffs there. Even at the accessory level, we've moved large, not entirely, but mostly out of China into other geographies. So that's -- we've taken our tariff expense from high $20 million to basically this year it will be near zero. So the team has done a terrific job on that. As I think about margins, we talked about on the conference call, we were at 34% margin in 2024. We expect to be 35% in 2025. And so that's largely driven by cost reduction. We get the benefit of a higher percentage of our subscription business as part of the mix, which is over 70 points of margin. So that's a nice benefit when you lower the numbers. We'll come out with newer products that, again, drive margin expansion for the business. We continue to optimize our freight cost duty warranty. One of the things Nick talked about how we're best-in-class in HERO13, HERO12 and now other products we come out with. But we've also done an incredible job at improving the quality of that production as well and development. And our return rates, our warranty rates, they're like half, or better than what they've ever been historically as a company, which were already low. I mean we already built great products and we're just making them even better. So all those things really stack up to drive margin, more operating efficiency in the business.

So you touched on subscriptions there. I want to pivot it back to you, Nick, and kind of touch on the subscription part of the business. Because with the shifting kind of go-to-market emphasis, you have shifted the value proposition of what I still call GoPro Plus. I know it's not GoPro Plus anymore.

A long time ago.

Yes. I can't get my mind off of it. Can you just talk to us about the features that subscribers care the most about when it comes to the platform that you offer on the subscription side, what you've added, what you're adding and what this means for the subscription story for GoPro?

Yes, the GoPro subscription is all about convenience. As you noted, in the early days of GoPro, we created a problem by making it so easy to capture all these life experiences, then you had the burden of what to do with all the footage and that footage was stuck on people's SD cards. They weren't even watching it. And so we developed the GoPro subscription to make it easy for people to offload and access content. It's as easy as plugging your GoPro into charge and your content goes up to the cloud, and we create an automatic edit for you that you get a notification on your phone that "Hey, we have a highlight video that we've prepared for you." And it just drives -- helps drive engagement. You can go interact with your content in the cloud via the app and edit in the cloud without downloading it to your phone. The whole experience is super streamlined. So at the highest level, that's the primary benefit that is getting people to subscribe and engage and stay subscribers because it's sticky. Once you are hosting somebody's content in the cloud and it's GoPro content, these are meaningful experiences for people that -- and knowing that it's hosted in the cloud at its original content -- sorry, original quality, that was a big improvement that we made years ago that really drove uptick in engagement. And then as we add new features and continue to make it easier for people to edit and get more out of their content, we see engagement growing. For example, we just launched a few weeks ago an updated 360 editing experience in the app, and we saw material increases in engagement amongst our 360 camera owners. And how much they were editing and sharing their content. So there's a direct benefit to driving subscriber acquisition, engagement and retention when we continue to improve that experience. So that's terrific. And as a result, we're seeing historic highs in terms of retention. I don't know if you want to talk about that.

Yes, I was going to ask. So like churn retention, you guys have been very transparent about that. So Brian, just maybe walk us through how that's changed?

I'm proud of it.

Yes. No, the retention part has done exceptionally well. Aggregate retention a few years ago was about 63%, 64%. We ended last year at 69%. Actually, even this quarter, we're pushing up over 70% now. So I mean for consumer electronics business, that kind of tension is big. I mean it's up to -- it's not SaaS because you've got to be 90-some percent. But that's not our full business, right? So that's been pretty incredible. Even the attach rates have improved substantially. So over the last few years, gone from lows of 10, put it into 15%, got to 30%. Last year, we ran 42% attach on aggregate, right? So even that's improved quite well on GoPro.com as well as even in retail, right? And the attach when people buy at retail and then they come back and sign up on the app or on GoPro.com.

Like a pretty cool stat too, in terms of how much is being utilized. There's over 12 million hours of GoPro customer content in our subscriber cloud. And it grew how many hours last year? 3.5 million hours alone last year, I believe. So it's impressive growth. But before anybody freaks out about the storage cost, remember, Brian shared that it's over 70% gross margin.

Yes, [indiscernible].

It's all good.

Nick, can you -- I know we kind of talked about the TAM question earlier. You mentioned Forcite. I mentioned Forcite. It's one of the most recent acquisitions that you guys have done. I think that's maybe a good example of maybe characterizing how you think about TAM expansion. So can you just maybe revisit the reason for that? And what that -- what acquiring them brings to GoPro that maybe you hadn't or couldn't do fully organically or maybe this just accelerates what you were doing organically?

Yes. Just as a reminder, Forcite was an Australian tech-enabled helmet company that we acquired to help facilitate our own development of tech-enabled motorcycle helmets. And we shared that -- our strategy is to launch our own branded helmets as well as work with other leading brands to help tech enable their own helmets. And that's an example of an embedded camera opportunity where we believe it just makes sense that there's GoPro cameras and other technologies integrated into a product like that because it's just a better user experience. In the specific case and why we chose to enter the motorcycle helmet market is that GoPro is a really strong brand and reputation in that consumer activity, both on the street and on the track. And our brand has been present in motorsports since 2008. And that's a slow-moving industry from a technology perspective. So we saw an opportunity to be a bit disruptive and bring new value and capability to an otherwise sleepy industry. But we recognize that we don't have a brand for helmet. And so we're being smart about who we partner with and how we develop our products so that it's authentic and accepted by consumers as being legitimate because obviously, a big part of the helmet industry is safety. And we recognize that through some brand partnerships, we can gain that authenticity pretty quickly. So that's going well. And then also, as a part of GoPro's long-term vision, we view embedding cameras and other things that people are already using as a significant opportunity for us. Like the GoPro today builds and sells cameras on the shelves of ski shops, surf shops, Best Buys, MediaMarkt, et cetera, around the world, Amazon, what have you. And that's a great foundation for us to go and grow into new markets by taking that capability performance of a GoPro, but making it more convenient by streamlining it into something that you already own and are using. So we see that embedded approach being significant over time to help us diversify, help us grow our TAM into much bigger markets than we're in today. And motorcycle helmets will be one of the first examples of that.

Right. Okay. Super helpful and kind of gives us a feeling for how we could think about that $1.5 billion.

Just about motorcycle helmets.

Yes, yes. The other side of this, and we touched about it in subscription. It's just kind of what you've been doing on software. Because you've done a lot when it comes to software and editing features and cloud and making it easier to use the content. Is there a way that you are changing -- or maybe what are your efforts to kind of monetize that software? Because the other thing you're doing is going after non-GoPro users as well with your tools?

Not anymore. So that's an example of narrowing our focus, reducing cost. We're no longer going after non-GoPro owners because the expense of doing so, we don't see the return. And we're very focused on maximizing the GoPro owner experience to maximize our subscription business and full stop. And part of that, by the way, as Brian touched on, we eliminated our desktop application ambitions because that was an area of savings because when we looked at the impact that was having on our subscriber business, the ROI wasn't what we had hoped for, but that also made it an easy decision to double down on our cloud and mobile app experience and that's what we're doing.

Okay. That's super clear then. Brian, let's shift back to you. And let's talk about kind of capital structure because you have the convert coming up in 2025. You talked about ending 2025, I think with kind of $50 million of cash. Just what are the cash needs of this business? And how do you think about the ideal capital structure for GoPro? You've had that convert for a long time, obviously, but just help us think through what the future capital structure could look like?

Yes. In terms of converts, if you go back to '20 through '22, I believe we had about $270 million of debt. That's now been reduced to $90 million of debt, that's due in November. So we've done a good job basically paying that off from operating earnings. We expect to pay that off in November of this year, and exit the year with about $50 million in cash in the bank. In addition to that, though, we have a $50 million asset back line with Wells Fargo. So that gives us basically $100 million of operating capability to run the business, which is enough. And then as Nick touched on it, we get -- you get some newer products out on the back end of this year, which also helps in subscription and then we have growth into '26. And I would expect our operating expenses to stay basically flat from '25 to '26 to really drive operating leverage in the business. That's an important thing for investors to know. We're not going to increase OpEx. And that, basically, as you get a little bit of growth, margins stay at that 35% range, you generate a lot of EBITDA. So we get cash. So then in '26, we have opportunities with cash to buy back shares or continue to invest in the business.

That was kind of go to where I was going to go next. So what does that mean for capital allocation?

I think in '26, you could see some capital allocation where we could buy back stock.

Okay. Perfect. And before we close, we have kind of 2 minutes here. Nick, maybe just to end it with you and maybe start where we began, which is we're talking to some speed bumps in the market, some competitive pressures. FX has been really strong. But the vision that you guys are kind of explaining, at least, in covering you for as long as I have, feels clearer than it has in a long time, and there's a lot of foresight that I think you guys are bringing and willing to, even if it's taking some near-term pain, set yourselves up for 2026. And so I'm excited to see how it plays out. Maybe just the closing message that you would want to send to everyone as they think about GoPro as an investment, as a story, again, kind of ending where we began, what's the message you want to say?

No, I think you just said it. I would think about the strength of GoPro's brand globally. It's one of the strongest brands in the world. We've invested so much money and energy into it over the years. And we're really well poised to get a lot of leverage out of that in back half of '25 and then '26 by operating the company in a much lower-cost fashion. The reality is that we have a lot of opportunity for new products, again, developed in a platform manner with our existing manufacturers where we can develop variance of the products that we're making today and tomorrow in a lower-cost fashion, and we recognize that there's a significant opportunity for our brand to expand into new product categories that are adjacent to where we're selling today as well as entirely new markets, like we talked about motorcycle helmets being the first of several that we've identified. That's a lot of opportunity. Maybe the key takeaway for investors is recognizing our commitment to doing so with a lower cost operating model. Leverage, leverage, leverage.

Right. Leveraging the model.

Yes, leveraging the model to drive profitability, not [indiscernible].

No, it's a perfect way to end. So Nick, Brian, thank you very much for joining us.

Thank you.

Thank you.