GoPro, Inc. Q1 FY2021 Earnings Call

Ladies and gentlemen, good day, and welcome to GoPro's First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Christopher Clark, Vice President of Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to GoPro's first quarter earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee. 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, including, but not limited to, uncertainties related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and our commentary and 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 on Form 10-K for the year ended December 31, 2020, which may be updated in future filings with the SEC. Today, we may discuss gross margin, operating expense, net profit and loss as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance. We use non-GAAP reporting internally to evaluate and manage our operations. We choose to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results. A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon and which is posted on our website. In addition to the earnings press release, we have posted management commentary and slides containing detailed financial data and metrics for the first quarter of 2021. The management commentary and slides as well as a link to today's live webcast and a replay of this conference call are on the GoPro Investor Relations website for your reference. All income statement-related numbers that are discussed today during the call, other than revenue, are non-GAAP unless otherwise noted. Now I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Thanks, Chris, and good afternoon, everyone. Before we get started, I'd like to encourage everybody to read the commentary we posted earlier today at the GoPro Investor Relations page on our website. In addition to providing an overview of our quarterly results and forward-looking guidance, the commentary includes meaningful insights about our business. I will now share some brief remarks, and then we'll go directly into Q&A. First, I want to congratulate our team for driving GoPro subscription business past 1 million subscribers, an exciting milestone we achieved in April. This represents 80% growth year-to-date and 180% year-over-year. Equally exciting is that 1 million GoPro subscribers represent approximately $50 million of high-margin annual recurring revenue for GoPro. I also want to congratulate our team on growing direct-to-consumer sales at gopro.com to 40% of total revenue for the quarter, up from 33% in Q4 2020. This also helps drive margin and subscriber growth, as more than 90% of camera purchases at GoPro.com result in a subscription attached. This is the new GoPro. We've evolved from a hard unit sales-centric business to a successful consumer direct subscription-centered business with a significant opportunity to grow margin and profitability with continued subscriber growth. Turning to our Q1 financial performance. Revenue in the first quarter of 2021 was $204 million, an increase of 71% year-over-year. Direct-to-consumer revenue via gopro.com exceeded $80 million, or 40% of revenue, representing gopro.com second highest quarter ever, topped only by the Q4 2020 holiday quarter. ASPs rose to a record $366 as demand for our premium products increased in Q1 across all geographies. This had a positive impact on gross margins and non-GAAP EPS. In Q1, GoPro generated non-GAAP EPS of $0.03. Our year-over-year non-GAAP profitability improvement was $54 million. Non-GAAP gross margin in Q1 was 39%, up from 34% in Q1 2020. As I mentioned, this is the new GoPro. Brian and I will now take questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. Our first question will come from Mr. Jim Suva with Citigroup Investment Research.

I want to extend my heartfelt congratulations not just to both of you but to your entire team. The results are truly impressive, and your outlook indicates the company's evolution. That's fantastic. In your prepared comments, you mentioned a goal of 2 million subscribers by the end of calendar year '21, which is excellent. Should we expect to maintain those operating margins at 50%, or might there be a need to invest more in R&D and enhancements to the subscriptions that would justify keeping it at 50%? I'm curious about your thoughts on that.

Yes. Jim, I'll take that. As we look at this year, yes, we've been running 50%. As we continue to drive subscribers at a faster rate, it's going to outpace what we spend in operating expenses. So that 50% is going to probably grow into about 60% as we get to 2022. So it's going to continue to improve as a profit driver for the company, and it's clearly having an impact on margins. You saw that in Q1 at 39%. And we've adjusted margins for this year. Previously, we were guiding 38% to 39%, and now we're at 39%, plus or minus 100 basis points. So definitely seeing improvement in margin as a result of subscription but also, of course, doing more sales, direct-to-consumer as well as the higher end of our product line, which is driving ASPs as well.

And again, my sincere congratulations to you and everybody on all of your teams.

Thanks, Jim.

Thank you for that, Jim.

Our next question comes from Nick Todorov from Longbow Research.

Congrats on the results as well. A couple of questions. So Brian, if I do some math, you guys had a very good quarter. You guided to a 10% increase in sell-through year-over-year, if my numbers are correct. I didn't see any comments regarding you raising the full year outlook for sell-through. I think you said that you expect your sales to grow towards the high end of your guidance range. But can you just clarify what you are expecting right now for sell-through for 2021?

Yes, Nick, our software performance exceeded our expectations in Q1, contributing positively to our revenue of $204 million, a 70% increase. We are projecting a midpoint of 825,000 for Q2, which aligns with our seasonal expectations. For the year, we continue to anticipate a sell-through of 3.6 million units for 2021. While that outlook remains unchanged, there is a slight shift towards higher-end products, which is benefiting our margins as well.

Well, if I can follow up, I think if my math is correct, that implies that your second half sell-through will be down 6% to 7% year-over-year. I just wonder, that looks a little bit conservative. Is that how you view it? Do you try to under-promise over deliver? Or how should we do that in that context?

Yes. Our perspective is that in the second half of the year, we will see that we've maintained our sales expectations. We are aiming for 20% to 25% year-over-year growth from 2020 to 2021, and we believe we will be at the higher end of that range, which is encouraging. Additionally, we anticipate a slight decrease in channel inventories. We will observe these developments in the second half. We also want to monitor how the situation with the pandemic evolves. So, that is our guidance.

Fair. Yes. Quick comment on, can you talk about what you're seeing from an inflationary standpoint and also regarding your inventory, particularly components. Do you anticipate any impact on GoPro from rising component prices or just higher logistics costs?

Yes. Obviously, we're seeing some impact on semiconductors. That's just kind of where the world is, right, from that perspective. But on the supply front, shortages, they've been widely reported, but we have enough supply to meet our projections. So I feel good about that. And we've been in a pretty good position to manage critical components well with our key OEM supplier of Jabil as well as some of our other key suppliers. So, we think we're in good shape there. I mean it continues to move around, but we're managing it; the team's on it. And any kind of impacts are already reflected in our guidance for margin. So despite that, we think margins are going to lift a bit in 2021 from where we were in February.

I have a question for Nick. You mentioned in your prepared remarks that a desktop version of the Quik app is in the works. Can you provide more details? I know it might be a forward-looking statement, but should we expect a similar experience to the mobile app? Are the economics comparable? Any insights you can share would be appreciated.

Yes, we shared that we see a desktop variant of our app in the future as we want to really meet our users where they are and serve them on whatever platform they're on, be it mobile, desktop, or cloud. And sharing our vision of our software suite of offerings, how we see that in the future. I thought it was important to give investors an understanding of sort of the potential reach of our brand and software as a solution set for users addressing their personal content needs wherever they are. And as you can imagine, some of the more passionate consumers who are interested in photos and videos have large amounts of them stored on hard drives and on their desktops and so forth. And so a desktop platform would be a more convenient way to serve them. We're not sharing anything in terms of timing or what the margin profile of that business would be. But I think it does underscore our opportunity to extend GoPro as a personal content solution provider for users regardless of what camera they're using to capture their content and regardless of what platform they're using to engage with, manage, and enjoy that content. So it's a pretty exciting and significant opportunity we believe to serve people in the future.

Our next question comes from Paul Chung with JP Morgan.

Great quarter and really good guidance. So as we think about gopro.com sales and projections for 40% to 45%, you're at that level today in Q1. I know Q4 and Q3 are probably more retail-heavy, but how are you getting consumers to get pushed into your website, or how are most customers aware that the camera plus subscription is kind of the best deal out there on your website?

No, there's always going to be work to be done because it would be amazing to have instant alignment and awareness among all consumers. It’s like a market turning green, but fortunately, that’s impossible for a good reason. We're continually bringing in new consumers and interest into the brand, and they need education. Younger consumers grow into the brand and require guidance. While we do not have universal awareness among consumers that the best value proposition is at gopro.com, it's a positive sign because it indicates significant growth opportunity. Even among GoPro's existing users, many may not be ready to upgrade and take advantage of it yet. There is a substantial group of consumers ready to purchase at gopro.com when they are prepared for the next flagship product. Therefore, there is a tremendous amount of potential left to enhance awareness and conversion at gopro.com from a marketing standpoint. Furthermore, there's room to improve the capabilities of our website to drive conversions. Historically, we were very retail-focused, which led to our website's shopping platform lacking the necessary investment and attention. The upside is that there are many straightforward improvements we can make to enhance user experience and shopping on the site to boost conversion rates, so there's a lot ahead.

Got you. And then you mentioned attach rate of 90% on the website. What are some examples where people opt out and why? And then what's that attach rate for your retail channel as well?

What you're asking about is the IQ test. Why would anybody not take advantage of the GoPro subscription and save $100 on their basket purchase at gopro.com? People buy for different reasons. We have commercial customers who are buying for their businesses where a subscription doesn't really make sense for that, except you would think at a minimum, you break it, we replace it, no questions asked guarantee would be a benefit to everybody. But whether you're a fire station or you're buying for your commercial business or other purposes, there are corner cases where the subscription just doesn't make sense. Also, we're aware that some people who are buying as gifts don't buy it with a subscription because we don't currently have the ability to transfer the subscription to somebody as a gift. That's something that we're working on so we can capitalize on getting 100% of gift givers to buy it because why wouldn't you want to save $100 on your basket purchase by buying that subscription and giving it to somebody? So there's a lot of opportunity left there, and that will be rolling out throughout the rest of this year and on because the opportunity, you can never get on top of all of it.

You asked about retail. We're currently seeing over 90 percent of cash coming from gopro.com with the subscription. The situation is improving in retail as well. It was previously in the 6 percent to 10 percent range, but now it appears to be moving up to 8 percent to 12 percent as more people learn about the offering and its benefits. We're beginning to see positive changes in retail, which is encouraging.

Okay. And as we think about ASPs in 1Q, which were at a record. Where can we see those ASPs go kind of beyond fiscal year '21? You already mentioned the 8% to 12% increase, but you layer in more subs, more accessories? And then do you see some more room to maybe raise prices for the next flagship from this time around?

Yes. I don't want to get into pricing per se. But I think just given that we continue to sell more at the high end, our accessory attach, particularly on subscriber purchases, is substantially higher on purchases that are coming from retail as far as we can measure it. And then the subscription, of course, adds to the numerator. So yes, I think ASPs continue to push forward definitely in '21. We gave that range of 8% to 12%, right? And then it will increase in '22 as well.

Our next question comes from Martin Yang with Oppenheimer & Co.

Nick and Brian, so is there anything you can share on the user engagement for your GoPro app and how many active users are there and whether or not there's any insight you could derive from that group?

Sure. We're not going to be sharing any specifics on that during this call. But what I can say is there's a lot of insight to be derived from the group. Our team is doing a great job of capturing user behavior and also user outreach research to get their direct feedback on the new and improved Quik App experience that we launched at the end of Q1, and the team is learning a ton. We put out a new release of the app every two weeks. So we're rapidly responding to what our users are telling us, and we're dedicated to providing them the fastest evolving and best software experience that we can. That's exciting because this is a new, as I mentioned at the top of the call, new GoPro. And that doesn't just relate to our business model and ability to generate more profit out of our world-class brand and products. This is also the new GoPro because we're much better at responding and developing towards what our customers are asking for as a more capable software company. So we're really happy with what we're seeing. Even before the update to the Quik app, the previous GoPro app had 4.5 or better stars in the app stores. We've been really happy with where we've gotten that active, but of course, we think we've taken it to another level with the new version of the Quik App. And so you should please pay attention to our updates as they're going to be rolling off of the line here over two weeks and should be an exciting time.

I think in the past, there were references on, for instance, certain geographic areas where we have a more significant uptick in user engagement or activity, which implies that maybe certain regions have more opening up in the COVID environment. So are the kind of user insights you get from the apps, are there any more useful signals for you or inputs for you to do business planning and even product designs or hardware product lines?

Yes, it does help influence. We have learned how crucial travel is to our business because we can see where cameras are used globally when their GPS is turned on, as well as where a camera is initially paired to the app. This information helps us understand where an owner resides and how frequently they use their GoPro while traveling outside their home region. This insight has guided us in recognizing the travel market's significance for our business growth. A few years ago, we modified our marketing strategy to target travelers before they plan their trips since it presents a great opportunity for us to convert potential customers. It also indicates that we are performing exceptionally well as a business, despite the fact that travel is largely restricted in many parts of the world. This is encouraging as we consider the future opportunities for GoPro, especially with the expectation that travel will resume as more people are vaccinated and countries reopen. Our data clearly shows that this represents a genuine growth opportunity for us. I also want to commend all GoPro employees for positioning us for success even during the shutdown of one of our major markets. This data on camera and app usage is invaluable in helping us make informed business decisions.

No, that's right. My next question is on the accessory opportunities. How do you think about whether there's any potential innovation you could do regarding camera accessories? And is there more access rate with unique capabilities coming that may allow users to perhaps customize our cameras to more specific use cases outside of sports and travel framing? Or could there be some unique opportunities for you?

They are. We don't call our cameras the world's most versatile cameras for nothing. One of the ways that we make it easier for our customers to use their camera in more versatile ways is through the mounts and accessories that we produce. It helps consumers connect the dots as to the capabilities of their GoPro and how it might serve them. Our accessories business is doing quite well. It's a really important part of our business. It's one of our key differentiators. We have noticed that there is a demand for higher-end accessories from us that offer added value and functionality. Consumers are clearly willing to pay for that additional performance when we produce such a product. So you will see continued new accessories from us at the higher end as we seek to accomplish more for our end users. They keep telling us with their purchasing behavior that they're interested in buying such products from us. It's obviously a win-win for everybody.

And do high-end accessories have different margin profiles versus the camera?

Yes, I've got that. On margin, yes, accessories in general are priced slightly better than the corporate average on margin kind of in aggregate. So it's accretive to margin.

Got it. One more question, and then I'll jump back to the queue. Brian, when you think about maybe the margin sensitivity to every $100 million in subscription revenues, what's the impact on gross margins? And how should we think about the ongoing trajectory of having a higher percentage of subscription revenues? How does that impact your gross margins longer term?

Yes. It obviously helps it, but you have to put it in relative context of how everything else in the business is moving, right? But it definitely helps. We're running 70 to 80 points of gross profit margin on subscriptions, about 50 points or so, as I talked about earlier. And that's going to improve over time on operating profit. So it's definitely a contributor. It's one of our fastest-growing product categories that are also helping to contribute to margins. When I talk about margins in the second half of 2021, we'd expect margins in the 39% to 40% range. Part of that is due to, obviously, more camera sales but also subscription is definitely helping prop that up.

Thank you. Ladies and gentlemen, at this time, we have no further questions in the queue. So I will turn it back to Mr. Woodman for closing comments.

Thank you, operator. This is an exciting time for GoPro. As you can hear, we're energized by the opportunity ahead. All of GoPro's employees and partners around the world, thank you for making the magic happen. Thank you, everyone, for joining today's call. We appreciate your time and support very much. This is Team GoPro signing off.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.