Earnings Call Transcript - GPRO Q4 2023

Operator, Operator

Good afternoon. Thank you for attending today's GoPro Fourth Quarter 2023 Earnings Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Chris Clark, VP of Corporate Communications. Please go ahead.

Chris Clark, VP of Corporate Communications

Thank you, Cole. Good afternoon, and welcome to GoPro's fourth quarter and full year 2023 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 commentary from Nick followed by Q&A. For detailed information about our fourth quarter and full year 2023 performance as well as outlook, please read our Q4 and 2023 earnings press release and the management commentary we've 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. This means that results could change at any time 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 our most recent annual report on Form 10-K for the year ended December 31, 2022, which is on file with the Securities and Exchange Commission, and other reports that we might file from time to time with the SEC. Today, we may discuss gross margin, operating expense, net profit and loss, adjusted EBITDA, as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. 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. Unless otherwise noted, all income statement related numbers that are discussed in the management commentary and remarks made today 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, Chris, and thanks everybody for joining us today. 2023 marked the beginning of our multi-year Total Addressable Market (TAM) expanding strategy, targeting long-term revenue, subscriber, and profit growth. Beginning in May 2023, we initiated the first stage of our growth initiatives, including: a return to lower pre-pandemic pricing to drive unit sales, the reintroduction of entry-level priced GoPro cameras to drive volume and reach new customers, increased marketing to drive awareness, and expanding GoPro's retail channel presence globally. These actions contributed to year-over-year retail channel unit sell-through growth of 25% in the period from our shift in May to the end of the year. Across all channels, retail combined with direct-to-consumer through GoPro.com, 2023 unit sell-through growth since our strategy shift was up 3% from the period May 9th through the end of 2023, measured against the prior-year period. Our retail channel's growth was largely offset by our GoPro.com direct-to-consumer channel, where we underestimated the impact of our strategic shift. In Q4, GoPro.com revenue, excluding subscription and services, was 14% of revenue, down from 33% the prior-year period, due primarily to our strategic decision to eliminate subscription-related camera discounts at the time of purchase on GoPro.com. We believe our sell-through growth in retail gives us, and importantly gives our retailers and distributors, confidence to lean in as we look to launch a number of new products, as I'll touch on shortly. This, combined with our aggressive efforts to open more doors and expand our brand presence in all of our doors, is creating a groundswell of opportunity at retail for GoPro. Fourth quarter entry-level camera sell-through, priced at $199 and $249, represented 28% of our product mix, up from zero in the prior year when we had no products offered in this price band. However, in analyzing our 2023 holiday season performance, we believe consumers were looking for discounts irrespective of already low price points, which was an outlier from the behavior we've seen in prior years. This resulted in lower-than-expected sell-through of our $249 HERO10 Black product, which we did not discount during Q4. On the positive side, this resulted in better-than-expected margin in the fourth quarter. In 2023, we reinvigorated our marketing strategy to re-establish GoPro's larger-than-life brand presence across all of the major verticals we serve. 2024 is when we'll see GoPro's brand more loud and proud than we've seen in years, beginning with events like January's X Games, where fans tuned in to watch the world's best skiers and snowboarders pushing the limits of their sport, with many athletes wearing GoPro cameras in competition, capturing footage that was integrated into the broadcasts to share first-person perspectives. To help translate our expanded awareness efforts into sales, we've been aggressively expanding the number of retail doors where we sell our products. Since May of 2023, we added more than 3,200 new retail doors, which was ahead of our target for the year. We intend to continue to drive door growth with a target of 7,000 additional new doors over the next two years, bolstered by new products. In addition to growing door count, we plan to refresh our point-of-purchase merchandisers, expand in-store brand presence, and enhance account management throughout the retail channel. Our stage-one growth initiatives, outlined above, delivered a profitable fourth quarter and second half in 2023 on a non-GAAP basis. Fourth quarter revenue was $295 million, below our guidance of $325 million. Q4 revenue was short of guidance due to lower-than-expected demand trends in North America, particularly in December, driven in part by competition for share of wallet as well as lower-than-anticipated sales of HERO10 Black due to our decision to not discount this entry-level priced camera. The upside is that we retained margin on the HERO10 Black units we sold, and this combined with our high margin subscription and service revenue to yield gross margin that outperformed the mid-point of guidance by 140 basis points. The improvement in gross margin, plus savings in operating expenses during the quarter resulted in non-GAAP earnings per share of $0.02 for the fourth quarter. In 2024, we expect gross margin to be 32.5% in the first quarter and improve throughout the year to 35% in the second and third quarters and to between 37% and 38% in the fourth quarter. This weighs out to a gross margin percentage in 2024 in a range of 35.5% plus/minus 50 basis points, up from 32% in 2023. As we begin 2024 and look to the greater long-term for GoPro, we believe it's essential that we significantly scale the number of products we sell to serve more consumers in more categories and markets. Our research identifies several growth opportunities where GoPro can extend our market leadership. As we enter stage-two of our TAM expanding strategy, we plan to expand our product roadmap over the next two years, and in 2024, we plan to launch four new camera SKUs, giving us a lineup of cutting-edge, industry-leading cameras ranging in price from a volume-driving $199 up to $599, with more planned for 2025. In January, we announced plans to acquire Forcite Helmet Systems, an Australian maker of tech-enabled motorcycle helmets. We believe tech-enabling motorcycle helmets represents a meaningful opportunity for GoPro to extend its technical and marketing capabilities to create differentiated solutions within a $6 billion motorcycle helmet market, of which we believe we can service approximately $3 billion, with an eye towards entering additional helmet markets over time. There are a number of technologies used today by motorcycle enthusiasts, including communications, digital imaging, navigation, safety alerts and more that we believe can be integrated into helmets for enhanced performance, convenience, value and safety. We are on track to close this acquisition this quarter and will share specifics about our product vision as we get closer to the expected launch of our first helmet in 2025. To add more color, motorsports has been core to GoPro's business for the last 15 years. We've developed a strong brand across all disciplines of professional and enthusiast categories of motorsports, with a very strong following among motorcyclists. We are a major sponsor across a broad range of racing series, events and athletes, including the world's premier motorcycle racing series, MotoGP. In addition to leveraging our existing motorsports marketing and brand, we intend to leverage the motorsports retail channel we are currently building to support sales of our current camera line to also sell our helmets beginning in 2025. We also intend to partner with leading helmet brands as an OEM supplier to help them tech-enable their own premium SKUs. We have enormous respect for leading brands, and look forward to working with them to help drive innovation together. We are encouraged by early interest shown by some leading brands. Furthermore, we expect that success in the motorcycle helmet market can contribute to subscriber growth as we intend to support GoPro tech-enabled helmet owners with meaningful subscriber benefits and features. Looking at our current subscriber base, we closed 2023 with more than 2.5 million subscribers, representing 12% year-over-year growth. Consistent with previous quarters, retention for annual subscribers, who represent 90% of total subscribers, was between 60% and 65% for first year renewals and between 70% and 75% for second year renewals. Our new third-year cohort is renewing at greater than 80%. Importantly, we now have a larger pool of subscribers who are up for renewal in their second or third year than we do for the first year, which we believe will be a tailwind for subscriber retention going forward. Another positive for our subscription offerings is the initial release of our Quik desktop app for macOS and our new Premium+ subscription tier, both of which launched yesterday. The Quik desktop app, which is available at no additional charge to GoPro subscribers, brings the simplicity and convenience of automatic edits to desktop users, along with powerful yet convenient manual editing tools, synced editing between mobile and desktop apps, and the ability to import footage from any camera. We plan to launch a Windows version of the Quik desktop app later this year. We expect to grow subscribers in 2024 adding to the substantial Annual Recurring Revenue (ARR) we are already generating. We expect subscribers to be between 2.5 million and 2.6 million by the end of 2024, or 4% growth year-over-year at the high end of the range. To summarize, the retail expansion strategy we kicked off in May of last year is successfully growing our business at retail. We're excited about our expanding product line, the significant number of retail doors we're adding at a steady rate, and the significantly larger number of marketing activations we have planned throughout the year to drive awareness and demand, all of which we believe will contribute to growth. Our acquisition of Forcite reflects our belief that the GoPro brand can scale across multiple verticals globally. We have a number of exciting opportunities in front of us, and as we move through 2024, we are focused on execution and creating value for our shareholders. It's good to be on the build again.

Operator, Operator

Operator, we are now ready to take questions.

Erik Woodring, Analyst

Yes. Good evening. I just had two questions quickly, and I wasn't sure if the first one is for Nick or Brian. But last quarter you laid out a fairly clear vision for 2024 guiding to I think it was $1.1 billion to $1.2 billion of revenue, 10% unit growth plus. I think it was $40 million of net income. You removed some of that language from the prepared remarks this quarter. So, just how should we think about maybe the full year, just beyond 1Q? And then, I have a follow-up. Thank you.

Brian McGee, CFO & COO

Sure. I'll begin, and then Nick can add his thoughts. Firstly, we provided guidance for the first quarter, as you noted in our prepared remarks. However, our comments have nothing to do with sell-through, which is performing well. We're expecting to sell around 550,000 units, give or take 50,000 units, which aligns with our performance in the first quarter over the past two years regarding sell-through. Sell-in will be slightly lower as we plan to reduce channel inventory by about 17% to around 700,000 units. This is why Q1 revenue appears to be lower when compared to the previous year. We are still moving product, but as we clear out old inventory, we will prioritize higher-margin products that will start shipping in Q2 and Q3. Additionally, Nick mentioned the investments we are making in product development, which are currently under evaluation for our roadmap and the potential impact on operating expenses for 2025 and 2026. These decisions are not finalized yet, and we will provide an update in our next call.

Erik Woodring, Analyst

All right. Maybe Brian just one point of clarification. In the prepared remarks, in the table that shows first quarter guidance, there's a line that says unit sell-through and it says 400,000 units. You just alluded to 550,000 units. Just if you could just give us some clarification on which one we should be looking for, that would be super helpful.

Brian McGee, CFO & COO

I think that was sell-in, with 400,000. Sell-through is 550,000.

Erik Woodring, Analyst

Sell-in would be 400,000. And then as a follow-up on the acquisition of Forcite, you mentioned the ability to serve a $3 billion motorcycle helmet market. Should we view this as an addition to your current market? I see helmet-mounted GoPros as one of your main use cases now. How should we consider what is new versus what is already part of your existing market? What technology will you bring to GoPro that hasn't been introduced yet, and how does that relate to the current market you are addressing? That's all from me. Thank you.

Brian McGee, CFO & COO

Yeah. Actually, before answering that Nick, Erik, you're right. In our prepared remarks, we actually said 550,000 to plus or minus 50,000, and it should have been units sell-in in the table, Erik. So, good catch.

Nicholas Woodman, CEO

Thank you for your question, Erik. Yes, there will be some overlap, as many motorcyclists purchase a GoPro to attach to their helmet. However, looking ahead, there are significant benefits to be gained from integration. We believe this can also broaden the total addressable market by enhancing the appeal of having technology built into the helmet rather than simply mounted on the outside. This approach can attract more motorcyclists who may not be inclined to use attachments. So, it's a combination of factors. As I noted, we have a strong reputation across all of motorsports, and given Forcite's expertise in the motorcycle sector, which is the largest market, it makes sense for us to begin with tech-enabled helmets here. We envision the opportunity eventually extending beyond motorcycles, but we will start by learning in the motorcycle market, leveraging Forcite’s experience and our own brand strength. Additionally, the growing retail network we are developing to market our current camera line will also support the launch of our first helmets in 2025.

Erik Woodring, Analyst

Awesome. Thank you very much, Nick. That was awesome content.

Martin Yang, Analyst

Hi. Good afternoon. Thank you for taking my question. My first question is about subscribers. How do you see your long-term growth for your subscriber base? As you acquire more multi-year renewed users, do you anticipate the long-term growth rate to exceed mid single-digits? Additionally, how should we consider the growth of ARR for subscription revenues in relation to subscriber growth?

Brian McGee, CFO & COO

Hi, Martin. It's Brian. Let me hit Average Revenue Per User (ARPU) first. We're seeing ARPU improvements of about 5%. So, that's great. We are also seeing the total subscribers in years two, three and four now will be larger than year one. And so, that helps drive the ARPU. And as you see it, we're continuing on each successive year to retain more and more subscribers, which is great. The growth is largely going to be tied into unit growth over time, right? So that's a key kind of metric, I think, for the subscription business. We gave a range of 2.5 million to 2.6 million subs this year. If we continue with ARPU growth, it could actually go beyond 2.6 million. So, you could see more growth. We've kind of held it back a little bit maybe to be conservative there. So, hopefully that helps answer your question.

Martin Yang, Analyst

Thank you for the clarification. I would like to ask about the mixed comments regarding the 2025 helmet product. Can you specify whether this helmet is branded by GoPro, produced entirely by Forcite, or if it features GoPro's hardware in a different product?

Nicholas Woodman, CEO

As we share, we're going to be launching our own line of GoPro-branded helmets. And after the acquisition, Forcite will be a part of GoPro. So, it will be GoPro designed and manufactured helmets. And then, we also are intending to support other leading helmet brands who wish to tech-enable their helmets as well, serving as a technical OEM supplier to them. Brand counts for a lot in every industry, and we're looking to leverage our brand to help establish a new bar for performance, convenience, value, safety in tech-enabled helmets, and then use that to then help drive the industry forward with the support of other leading brands that want to do the same.

Martin Yang, Analyst

Got it. Thanks for the clarification. My last question is on gross margin outlook for '24. Last quarter you provided a breakdown of different components as source of improvement for margin expansion in '24. Do you still believe those key components are the same as you guided before? If there's any changes, what are they?

Brian McGee, CFO & COO

They're the same, Martin. We have the introduction of our new lower product cost, entry-level product in Q2, which is in our management commentary. We have reduced price protection year-over-year about $30 million. We do have identified product cost and tariff savings. The tariff savings might be new in there. We didn't have that last time. The team has done a good job with that subscription growth, another improvement. There is a potential offset in there that we've factored in, which is we're seeing potential increases in memory pricing later this year. So that can be something that could impact us that we've tried to reflect in our numbers, if that helps.

Martin Yang, Analyst

Got it. Thank you, Brian. That's all for me.

Operator, Operator

We have no additional questions, so I will pass the conference back to the management team for any closing remarks.

Nicholas Woodman, CEO

Thank you, operator, and thank you everybody for joining today's call. As we mentioned, we're excited to be growing in retail in an effort to expand our TAM, and we believe we can drive long-term revenue, profit and margin growth with our expanded product line and increased marketing activities planned for the rest of the year, combined with our steady addition of more retail doors targeting 7,000 additional doors over the next two years. Lots to be excited about. And as I mentioned, it's good to be on the build again at GoPro. Thank you, everyone. This is team GoPro signing off.

Operator, Operator

That concludes today's call. Thank you all for your participation. You may now disconnect your line.