Earnings Call Transcript - GPRO Q3 2022

Operator, Operator

Hello, everyone, and welcome to GoPro's Third Quarter 2022 Earnings Call. My name is Drew, and I will be facilitating the call today. I will now turn it over to Jalene Hoover, Vice President of Investor Relations, to start. Please proceed.

Jalene Hoover, Vice President, Investor Relations

Thank you, Drew. Good afternoon everyone and welcome to GoPro's third quarter 2022 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Today's agenda will include a brief introduction from Nick and some commentary from Brian, followed by Q&A. For detailed information about our third quarter 2022 performance and our outlook, please read the management commentary we posted to the Investor Relations section of GoPro's website. Before I pass the call to Nick, 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, uncertainty related to the duration and impact of the COVID-19 pandemic and the war in Ukraine. This means that results could change at any time. Our commentary about our business results and outlook is based on the information available as of today's date. And we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary, we refer you to the most recent annual report on Form 10-K for the year ended December 31, 2021, which is on file with the Securities and Exchange Commission and is updated in future filings with the SEC, including the quarterly report on Form 10-Q for the quarter ended September 30, 2022. Today, we may discuss gross margin, operating expense, net profit and loss, EBITDA 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 and 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, which is posted on the Investor Relations section of our website. In addition to the earnings press release and management commentary, we have posted slides containing detailed financial data and metrics for the third quarter of 2022. The management commentary, slides, as well as a link to today's live webcast and a replay of this conference call are posted on the Investor Relations section of GoPro's website for your reference. Unless otherwise noted, all income statement-related numbers that are discussed in the management commentary other than revenue are non-GAAP. Now, I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Nicholas Woodman, CEO

Thanks, Jalene, and hi everybody. Thanks for joining us today. As we shared in the management commentary, which we posted to the Investor Relations section of our website, in Q3 2022, GoPro delivered revenue of $305 million at the high end of guidance and cash flow from operations of $41 million. GAAP EPS was $0.10 and non-GAAP EPS was $0.19. Like many companies, GoPro's results for the quarter were impacted by a stronger U.S. dollar. On a constant currency basis, Q3 revenue would have been approximately $18 million higher year-over-year, or up 2%, gross margin over 40% versus 38% actual results and EBITDA to revenue approximately 16% versus 12% actual results. Considering global FX and macroeconomic challenges, we're pleased with our Q3 '22 results. Q3 was an exciting period of new product launches and milestones. In September, we introduced our new HERO11 lineup of cameras; HERO11 Black, HERO11 Black Creator Edition and HERO11 Black Mini, and we're happy to report that many will begin shipping to GoPro.com customers the week of November 7, and will be available at retail beginning the week of November 14. We also launched an enhanced cloud experience that automatically sends highlight videos to subscribers. And in August, we surpassed 2 million GoPro subscribers and are positioned to generate more than $100 million in annual recurring revenue with gross margin between 70% and 80%. GoPro subscription continues to drive value for our customers while serving as a powerful financial engine for our business. At the end of Q3, GoPro subscribers and subscription and service revenue grew respectively by 55% and 48% year-over-year to 2.1 million and $21 million, which positively contributes to gross margin and our bottom line. We are on track to achieve 2.2 million subscribers by year-end. GoPro's resilience during these challenging macroeconomic times is a testament to the meaningful role GoPro plays in people's lives, helping them capture and share experiences that would otherwise be impossible to document. We believe we're advancing our global relevance as a digital imaging solutions company that serves the world's most active and creative people. And our ongoing execution is thanks entirely to our talented and passionate employees. Looking ahead to 2023, we plan to invest in people, technology and innovation that yield leading-edge products and services with an emphasis on subscription value creation and growth. While we anticipate continuing macroeconomic headwinds in 2023 and potentially beyond, we are confident in our ability to operate GoPro as a profitable company and to strategically position the company for when the global economy improves and currency exchange rates normalize. Our business is strong. Our products are market-leading. And we feel well positioned for the future. Before jumping into Q&A, Brian has a few comments to share.

Brian McGee, CFO & COO

Thanks, Nick. I'd like to provide some color on our Q4 and full year 2022 outlook. As a reminder, both CEO and CFO comments and the extended management commentary posted in the Investor Relations section of our website. Looking ahead, we anticipate continued impact from key macro dynamics on our business which we've contemplated in the fourth quarter and full year 2022 guidance. We expect to exit 2022 with cash of approximately $400 million, which contemplates continued share repurchases with $68 million remaining under our existing program. We expect the U.S. dollar to remain at current levels relative to the Australian dollar, British pound, euro and Japanese yen. Our 2022 outlook reflects anticipated FX impact to revenue, margins and earnings of more than $55 million compared to 2021 and that more than $20 million since our August earnings call. Unlike last year when retailers struggled to secure inventory, many have an abundance of merchandise resulting in reductions in open to buy dollars. Consumers are prioritizing living expenses and experiences over things while also paying more for food, housing, healthcare and other items as inflation hovers around a four-decade high. As a result, retailers are accelerating and increasing their promotional activities to reduce inventory, such as Black Friday deals being announced weeks in advance. Looking ahead into 2023, we will manage the business with the following priorities; laser focused on remaining cash flow positive, laser focused on subscription growth and retention, develop leading-edge technologies and innovative products, grow our total market share, manage appropriate levels of channel and owned inventory. While challenging in the present, currencies and the macroeconomic environment will improve over time. We are the market leader with an effective business model, which we believe will once again generate impressive earnings once macroeconomic conditions improve and currency exchange rates normalize. We expect to be profitable in 2023 while continuing to drive operating cash flow. We have the balance sheet strength to navigate the current economic environment and believe we will emerge as an even stronger GoPro in the future as our business fundamentals are sound.

Operator, Operator

Thank you. We will now begin today's Q&A session. Our first question is from Martin Yang from Oppenheimer. Please go ahead.

Martin Yang, Analyst

Hi. Good afternoon. Thank you for taking my question. Can you talk about the margin expectations for next year? In very general terms, what are the puts and takes assuming no further currency headwinds?

Brian McGee, CFO & COO

Yes. So Martin, on a constant currency basis, we'd expect to be at the low end of our operating model which is 40% to 43%. On an actual results basis, it's going to look a lot closer to the guidance we provided for the fourth quarter, so mid 30s plus or minus around that I would think just given currently what's going on with exchange rates. And it's all driven by exchange rates, by the way.

Martin Yang, Analyst

Got it. And the follow-up, GoPro Mini, is there any early signals you can get versus from reviews, from maybe core customer feedback on the Mini and whether or not Mini's delay has any meaningful impact on your 4Q guidance?

Brian McGee, CFO & COO

On the guidance question, no. As we've talked I think on the last call, our expectation is that Mini would be from a cell phone perspective in the fourth quarter I think number four in the lineup and HERO11 will be the best, HERO10 I think nine and then Mini. So that's been our expectation and we expect that to hold. I'll let Nick comment on the reviews.

Martin Yang, Analyst

Got it. Thank you very much. I appreciate the color.

Jim Suva, Analyst

Thank you, Nick and Brian, for the details. I have a question about the electronic stores reducing their consumer electronics inventory levels. I know GoPro.com has performed well, and you've managed your inventories there effectively. I'm curious about your external inventory levels and what information you have on that. I'm sure expectations are building, but how should we view the inventory levels at large retail stores, storefronts, and small retailers?

Brian McGee, CFO & COO

Yes, Jim, this is Brian. Let me talk about big box retail. In the third quarter, they lowered their inventories and weeks of supply compared to last year. Their on-hand inventory decreased by about 25% year-over-year, so they are definitely reducing it. I mentioned in my opening remarks that the open to buy dollars are down, and we've observed that they are now down to eight weeks of inventory, whereas they typically have around nine to eleven at this time of year leading into the holidays. This trend is indicative of a broader industry-wide issue related to demand and what retailers are willing to stock. We are noticing this situation throughout the sector, not just with big box retailers. Regarding our dot-com performance, we are pleased as it accounted for 32% of our revenue this quarter, an increase from 30% last year. Last year, we were at about 34%. We expect to reach between 35% and 40% on dot-com this year, so we are making significant strides in driving more demand to GoPro.com. This improves our margins and also boosts our subscriber numbers, as we have 95% of our transactions on GoPro.com. This change in our business model is proving to be quite successful.

Jim Suva, Analyst

And on your opening comments, Nick made some comments about of course focusing on cash flow. But what caught my ear was the increase in subscriptions and market share. To do that, does it take like more employees, more assessments, reshuffling? Are those bodies already in place, because you have seen great success with your subscriptions? Nick kind of alluded to even a bigger increase or focus, or maybe I'm just reading too much into that.

Brian McGee, CFO & COO

We expect to reach 2.2 million subscribers by the end of this year, which represents a 40% increase over 2021. Additionally, we've seen a more than 5% improvement in the retention of our annual subscribers, who account for 85% of our total subscriptions. While some companies reported declines in their storage businesses, we have experienced a doubling of our storage for GoPro content year-over-year. Consumers are actively using our services, and we are now offering auto highlight videos for those who store their content in the cloud, which enhances our offerings. As we move into 2023, we will continue to invest in software engineering to further develop our subscription and service offerings, as these are the most profitable segments of our business. Our subscription business generates margins of 70% to 80% and is our fastest growing product, serving as a key financial driver for GoPro.

Nicholas Woodman, CEO

Yes. And I would just add that we really want to emphasize to investors how laser-focused we are on growing our subscription business and investing in it to add ongoing value for our subscribers. It's proving to be very valuable to our subscribers. It's a differentiator for GoPro that goes beyond our already market-leading cameras. And it's just clearly proving to be the financial engine for our business. And so it's really everyone wins strategy when we emphasize our efforts around growing the value and scale of the subscription business. So I think Brian said it well, and I'm glad that you picked up on it, Jim.

Jim Suva, Analyst

Yes. And again, I meant the question in a very complimentary manner because it's been a great success. Thank you so much for the details.

Operator, Operator

Our next question today is from Erik Woodring from Morgan Stanley. Your line is now open.

Erik Woodring, Analyst

Hi, guys. Thank you for taking my questions. Maybe, Nick, if I ask you the first one. Now that you've launched all of the new flagship and derivative cameras, can you maybe just elaborate on why you changed your strategy? Was it something in the data? Was it something that you thought was kind of low-hanging fruit? I just love to kind of understand now that you can look back, what the driving force was behind the strategy change? And then almost getting to Brian's comment earlier, just how we should think about each of the new cameras in terms of important to sell-in and sell-through? And then I have a follow-up. Thanks.

Nicholas Woodman, CEO

Are you referring to not just having a good, better, best of the same camera, but rather coming out with different types of cameras at different price points?

Erik Woodring, Analyst

Exactly.

Nicholas Woodman, CEO

Okay. Through our customer research, we discovered that consumer behavior is more complex than we initially believed. Instead of just categorizing people by price sensitivity, we found varying interests across different price points. This led us to develop products that cater to these diverse needs, creating unique experiences and solutions for different consumer segments at various price levels. This strategy allowed us to introduce the HERO11 Black Creator Edition, building on the success of the previous model, offering top-tier features and performance, along with a higher price point. The response has surpassed our expectations, which is why we introduced the HERO11 Black version. As we explored other products, we noticed that consumers looking at lower price points preferred simplicity. We are still learning how to create a GoPro that maintains high video and photo quality while being more accessible to potential customers who expect new offerings rather than just discounted older products. We are committed to ongoing innovation to attract a broader audience and expand our market. Overall, we are pleased with our progress this year and want to commend GoPro's product development and operations teams for delivering exceptional products during challenging supply conditions. Once again, the GoPro team has excelled, and the products are remarkable.

Erik Woodring, Analyst

Okay, that was really helpful. Thank you, Nick. And then maybe, Brian, if I just direct one to you. You've obviously alluded earlier in Q&A and in your prepared remarks to big box retailers reducing inventories and weeks of supply. I'm just curious if from your seat, is there more inventory reduction to come or have we seen most of it, and now it's just kind of waiting for whatever reorders might come? And then any other color that you can share on how holiday demand is shaping up? How it might look different from last year would be great? And that's it for me. Thank you.

Brian McGee, CFO & COO

In our prepared remarks, I did comment that our sell-through in the month of October was right on track to where it needed to be. So that's been a positive. It's great for our demand planning team has been doing a heck of a job predicting what our demand levels would be. And again, they did it in Q3. We're able to kind of beat our numbers, so good job on that. This is a pretty challenging environment. And you'll see, even in my guidance, the range actually is pretty wide for Q4. And I think there's a bunch of dynamics at play here. Consumer behavior I think is going to be difficult to predict in the quarter because of living expenses and paying more for food, housing and care, inflation at all-time highs, interest rates rising, those are going to be difficult predictors. And at the same time, we have retailers who are absolutely not willing to carry as much inventory as they have historically. And those two dynamics are playing out. And that's why we definitely took our numbers down for Q4 as have so many. We're not alone or unique in this given what's going on. That said, I think our teams got a pretty darn good handle on kind of the demand dynamics. Like I said, we hit October. We're feeling good about kind of what our offers will be in the month of November and December. So I think those are positives. And so we came out in the midpoint of this guide. I'd also point out that we continue to track very well to the 2.2 million subscriber number. We still have two months to go, the big months, but so far we're tracking ahead. So the key pieces of our business that drives this model are moving in the right direction.

Erik Woodring, Analyst

Super. Thank you, Brian.

Operator, Operator

Thank you. We have no further questions at this time. So I will now refer you back to the management team for closing remarks.

Nicholas Woodman, CEO

Thank you very much, operator, and thank you everyone for joining today's call. As I said earlier, our business is well positioned to weather these challenging times and we're confident in our ability to operate GoPro as a profitable company until macroeconomic conditions improve and foreign exchange rates normalize. Despite the challenges ahead, we are very excited for the future. Many thanks again for joining today's call. This is team GoPro signing off.

Operator, Operator

That concludes today's GoPro third quarter 2022 earnings conference. You may now disconnect your line.