Earnings Call Transcript - GPRO Q3 2020

Operator, Operator

Good day and welcome to GoPro's Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Vice President of Corporate Communications, Christopher Clark. Mr. Clark, please go ahead.

Christopher Clark, Vice President of Corporate Communications

Thank you, Casey. Good afternoon everyone and welcome to GoPro's Q3 2020 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, uncertainty related to the duration and impact of the COVID-19 pandemic. 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 31st, 2019 which is on file with the Securities and Exchange Commission and in other reports that we may file from time to time with the SEC including the quarterly report on Form 10-Q for the quarter ended September 30th, 2020. 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 additionally, 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 third quarter 2020. The management commentary and slides as well as a link to today's live webcast and a replay of this conference call are posted 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.

Nicholas Woodman, CEO

Thanks Chris and good afternoon everyone. Once again we've chosen to post management commentary for our quarterly results including Brian's financial overview to the GoPro Investor Relations page on our website, and we encourage all to read the commentary. Now, I will give brief remarks about the third quarter and then we'll go directly into Q&A. As we shared in the management commentary, thanks to consistent momentum throughout the quarter and a strong launch of HERO9 Black coupled with our GoPro subscription service, in Q3, GoPro generated non-GAAP EPS of $0.20, $100 million of operating cash flow, and we expect to be profitable for the full year 2020. I'd like to thank all of GoPro's employees for their tremendous execution in a challenging year. It's thanks to them that we achieved such terrific results in Q3 and are poised for success going forward. With the launch of HERO9 Black, we debuted not only an exciting new flagship, but our strategy to make the GoPro subscription central to our business and customer experience. GoPro subscribers who purchased directly from GoPro.com enjoy far more value than non-subscribers, while generating improved margin and cash flow for our business. This increased value to consumers at GoPro.com is accelerating our direct-to-consumer strategy, while driving GoPro subscriber growth, both of which we believe will improve our customers' lifetime value, positively impacting profitability. We are seeing higher average order values and accessory attach rates with subscriber customers versus non-subscribers, indicating that subscribers are taking advantage of their subscription benefits in a manner that also increases their value to GoPro. Other highlights from the quarter include revenue growth of 109% sequentially and record GoPro.com revenue of $81 million. We estimate sell-through of approximately 955,000 cameras exceeding our expectations. We believe our Q3 performance sets us up for a strong Q4 and we expect to achieve full year non-GAAP profitability. We expect to exit 2020 with low channel inventory positioning us well for 2021. Our direct-to-consumer subscription-centric approach is generating improved cash flow, margin, and lifetime value, while delivering a high-margin subscription revenue stream, we expect will have a positive impact on profitability in 2021. We'll now move on to Q&A.

Operator, Operator

Thank you. We will take our first question from Andrew Uerkwitz of Oppenheimer.

Andrew Uerkwitz, Analyst

Hey, thanks. Let me ask a couple of questions. I just have two questions. The first one is for Brian. Brian, could you talk about the change in the business model from a working capital perspective, the benefits there, and how we should think about that on a go-forward basis? Clearly, it's been a positive. But how positive should we think it could be for cash management as we head into next year?

Brian McGee, CFO & COO

Hi, Andrew, thanks. Yes, the new direct-to-consumer model is significantly benefiting us. In Q3, we achieved nearly $100 million in operating cash flow, with a substantial portion stemming from improvements in working capital. Our Days Sales Outstanding declined by 25% to 35 days, and we anticipate it will further decrease to between 20 and 25 days by the end of Q4, potentially reaching as low as 15 days in 2021. This improvement is positively influencing our operating cash flow. We're also effectively managing inventory, which is down by 50% compared to last year and has decreased sequentially. Additionally, we've focused on reducing our channel inventory and plan to cut it by another 200,000 units in Q4, totaling over 800,000 units for the year. This reduction has been necessary despite strong demand, with an expected 3.7 million cameras sold through this year, while our sell-in is approximately 2.8 million, reflecting our efforts to clear out inventory from the channel. We've projected cash to increase by $80 million in Q4, bringing it to $225 million, and we expect strong cash generation to continue into 2021.

Andrew Uerkwitz, Analyst

Excellent. Thank you. It definitely seems like it's a huge improvement. So I'll update the file for some of those effects in 2021. And then Nick, I have probably an impossible question. So just any color you can provide. But back in March which seemed years ago, obviously a lot was fluid, lot was changing. Your sell-through estimates were lower than they were today. Clearly, travel hasn't come back. So any color you could provide on changing demographics, changing customers. Does this open more opportunities for market penetration? Any color on your view of how the customers changed and what it means going forward?

Nicholas Woodman, CEO

Consumers are highly adaptable and resourceful. Despite the restrictions imposed by the coronavirus, such as limitations on travel and access to foreign countries, many have started to travel locally and engage in nearby activities. We observed a significant increase in outdoor pursuits like camping, hiking, and biking during the spring and summer. It’s often amusing to meet someone from afar who shares stories of their travels while you recognize that you've explored more of your own state. This situation has prompted people to develop a deeper connection with their local surroundings than before the pandemic. This shift has led to increased activity, creating a demand for products like GoPro cameras. With fewer opportunities to share experiences in person, many people are turning to visual communication through cameras, with GoPro being a preferred choice when they’re active. Our business has benefited from this trend. Even for those who are remaining more homebound and engaged locally, their creative impulses persist, whether as hobbies or part of their jobs, and a GoPro remains a versatile tool for producing visual content. While the nature of the content may have evolved, the need for such tools hasn't diminished. Additionally, GoPro's capabilities as a web camera have enhanced its relevance for individuals working and studying from home, providing superior video quality compared to typical laptop cameras. Overall, human interests have not changed, but the ways in which people pursue them during this COVID era have evolved. Fortunately for us, we continue to play a significant role in their lives. We anticipate that this trend will continue into winter, as people will not stay indoors all season. Just as they sought new ways to enjoy their local areas in warmer months, we believe they will adopt a similar approach throughout the winter. We expect that GoPro will remain a valuable tool for creativity and communication during that time, just as it has been in the spring and summer.

Andrew Uerkwitz, Analyst

Got it. That’s super helpful. Appreciate the color. Congratulations on the strong quarter, guys.

Nicholas Woodman, CEO

Thank you so much.

Operator, Operator

Thank you. We will take our next question from Jim Suva of Citigroup.

Jim Suva, Analyst

Thank you so much. And congratulations both, Nick and Brian. My first question is on the subscribers. Are you seeing a higher attach rate of subscribers through GoPro.com or retail or any noticeable difference? And if so, is there anything to glean from that?

Brian McGee, CFO & COO

Hi, Jim. This is Brian. Let me start with that and maybe Nick can add to it. We are definitely seeing a higher attach rate. In the quarter, we noted that 85% of HERO9 Black purchases included a subscription, which is a significant figure and creates a huge opportunity. It's also interesting that 10% of these sales came from existing subscribers, while the remaining purchases were made without a subscription. This is important moving forward because we've experienced strong growth and expect to surpass 700,000 subscribers in 2020, reflecting over 125% year-over-year growth. Looking ahead to 2021, if we can approach $2 million with these growth rates, that would translate to an annual recurring revenue of about $100 million solely from subscriptions, without even considering the long-term value of customers purchasing additional goods and services from GoPro. Moreover, that $100 million is expected to yield around a 50% operating margin on net gross profit and operating profit. This channel is very profitable for us and supplements our hardware sales. As we've discussed, it helps to enhance operating cash flow and diversify from hardware, contributing to the operating profit that is pushing our margins into the 38% to 40% range and continues to drive earnings per share. This represents an exciting development for the company and provides significant value to subscribers.

Nicholas Woodman, CEO

I would just add that it's well-said and I would mention that we are not only seeing higher subscription attach rates, but also increased purchases and accessory attach rates among our subscriber customers. Our subscribers are making the most of the benefits available to them, including discounts of 30% to 50% on mounts, accessories, and other products sold on GoPro.com. This utilization of subscriber benefits is boosting their average order value and accessory attach rates, indicating a significant opportunity to enhance their lifetime value over time through this subscription offering.

Jim Suva, Analyst

Great. And then a quick follow-up, but I don't know if it's better for Brian or Nick or both of you whichever. But in your prepared comments you mentioned, as we begin to contemplate the impact of the expansion in your model meaning the subscriber base expanding so much. When you talk about contemplating the impact to your model, are you talking about like expanding the scale and scope of your products? Are you contemplating the way that you go to market because the GoPro.com seems to be direct – seems to be going very well? What type of contemplations are you kind of talking about in that reference?

Brian McGee, CFO & COO

Jim, maybe I'll start and then Nick can chime in. I think it's really related back to what I kind of started talking about on the model. The direct-to-consumer is a more profitable channel for the company. We're able to fill more subscriptions and more value to the consumer. We're seeing that in records in terms of revenue, and we'll see that again, I think in Q4. It's expanding our margins, it's expanding our cash flow, and diversifying, not so much yet on the revenue basis, but definitely on a margin and operating profit basis. The direct-to-consumer model is definitely helping along with the subscription benefit. So we see that continuing into 2021 and beyond.

Jim Suva, Analyst

Great. Well, congratulations both, Nick and Brian, truly impressive results. Thank you so much for the detail.

Brian McGee, CFO & COO

Thank you very much.

Operator, Operator

Thank you. And we will take our next question from Paul Chung of JPMorgan.

Paul Chung, Analyst

Hi guys. Thanks for taking my questions. And great execution this quarter, especially on cash flow very nice there. So you saw a big jump in DTC revenues, but your retail mix jumped up as well sequentially. So, assume the tax rate for customers going through retail for subs is much lower and plus, they don't get the cheaper camera deal with subscription. Is that the case, number one? And then number two, do customers realize they're missing the deal? And then how do you intend to kind of educate future customers and push them more to your website for DTC?

Nicholas Woodman, CEO

I'll start with that. Well, now remember until the launch of HERO9 Black, we were growing our subscription business, yes, through direct sales at GoPro.com where camera buyers could also purchase the subscription at checkout. But we were also growing our subscription numbers by signing on subscribers that bought at retail after the fact, either when they would open their camera packaging and see the literature for the GoPro subscription explaining the benefits and they would go online to subscribe. Or when they would download the GoPro app to pair with their camera, the benefits of being a GoPro subscriber would be explained to them, and they could sign up that way. And then of course, our ongoing CRM and other marketing efforts to convert GoPro users to subscribers. We grew a nearly 500,000 subscriber base before incorporating the GoPro subscription more tightly with the camera purchase at GoPro.com and before we drove so much of our business to GoPro.com. So that bodes really well for us to continue to be able to convert retail-based consumers into paying GoPro subscribers using the same methods that we used before the launch of HERO9 Black. I think that's an important thing to remember that we've gotten quite good at growing our subscriber numbers across multiple channels and we continue to improve on that. And so part of your question is, how do we plan to continue to improve? One of the important aspects of making the GoPro subscription so central to the GoPro experience is to make the GoPro subscription synonymous with GoPro with the brand and make it synonymous with being a GoPro owner and stack this GoPro subscription with so many benefits so much value that, it's just a no-brainer to the consumer to take advantage of it. We've been very focused on making the math simple for the consumer to do, where they look at the $50 annual subscription cost and then they compare that to the savings they're going to get either when buying a camera, or buying an accessory, or buying a gift for a friend or one of their kids or whatnot, and the math is simply easy to do to realize, wow, I'm going to pay for the subscription in a heartbeat. And that's even before you consider the unlimited cloud storage, the damaged camera replacement guarantee and even more benefits that we haven't rolled out yet. So I think that given the rate of subscriber growth that we've achieved before the launch of HERO9 Black, that's very promising. And given the rate of growth that we're seeing post HERO9 Black with the new centralized approach to making subscriptions so central to the brand experience, that's very encouraging. As we load up the subscription with even more value going forward, you can see why we're feeling quite confident about our ability to continue to grow the subscription side of our business while importantly delivering phenomenal value to the end user, which results in strong retention of those users, strong re-up rates, which is what we've been seeing so far. As I've mentioned, there’s an opportunity to improve the lifetime value of our customers. So across the board, kudos to the GoPro team that's responsible for this area of our business. It feels like we've got a lot of momentum that we can support going forward.

Paul Chung, Analyst

Thanks for that. Regarding free cash flow, we saw solid performance mainly due to higher net income. The $225 million in ending cash for Q4 indicates a slightly slower pace, but it marks a good conclusion to the year in terms of cash. We haven't experienced cash flows like this in Q3 for quite some time. Has your cash flow seasonality shifted with DTC? It appears you've been becoming more efficient with working capital conversion, so as we consider next year's cash flow modeling, what are your thoughts?

Brian McGee, CFO & COO

Yes. Thanks, Paul. Yes, free cash flow for Q2 was actually a record for the company since we've been a publicly traded company. It's impressive. A lot of it came from reducing inventory and getting more efficient in accounts receivable, which is a direct result of doing more direct-to-consumer because we get paid in 3 days not 30 to 45 from retailers. So that's an important aspect of just the cash generation. We'll continue to reduce inventory in Q4. I think we should be down to about $100 million of inventory. Our inventory and accounts receivable I think will go up simply because of the absolute dollars of guidance, but it continues to improve on the metric of Days Sales Outstanding right down to about 25 days. So that's driving our cash flows. Looking ahead to 2021, we'll continue to see benefits from the model and continuing to manage inventory and accounts receivable appropriately. I think there'll be even from a cash generation perspective, they'll come more from earnings than I think will come from the balance sheet, although there'll still be some from the balance sheet. That's definitely earnings growth. We think while we're doing 3.7 million units of sell-through in 2020, our sell-in is quite a bit less right at about 2.8 million or so. That difference is really to reduce the amount of inventory that's in the channel. So that gives us tailwinds going into 2021 because if demand should stay at that level, 3.7 million to 4 million, our sell-in of course would be close to that because we have our channel inventories aligned. So that bodes well for revenue growth. We will have more direct-to-consumer and more subscriptions which should keep us in the operating model of 38% to 40%. We'll continue to be more efficient than operating expenses. That's going to lead to quite a bit of income generation in 2021 leading off with the cash.

Paul Chung, Analyst

Sure. And then last one on OpEx you provided $250 million in OpEx for fiscal year 2021 during the 1Q print. Does this guidance still stand? And then what variables can you either flex this up or down relative to where you expect next year? Is there any more cushion to cut costs if the top line doesn't agree next year?

Brian McGee, CFO & COO

We have successfully reduced operating expenses in 2020 by nearly $75 million compared to 2019 levels. We are still projecting expenses to be in the range of $300 million to $305 million. The earlier estimate of $250 million from April was based on lower expected sales. However, this outlook has changed. In August, we adjusted our guidance to $260 million to $280 million. As we continue to improve in inventory sales and the corresponding operating expenses, I believe that 2021 will likely see expenses around $290 million, especially with an anticipated increase in revenue and direct-to-consumer sales. If these expectations do not come to fruition, we have options to further reduce operating expenses as necessary. Nonetheless, we also recognize the importance of investing in our platform to enhance our direct-to-consumer capabilities going forward into 2021 and beyond.

Paul Chung, Analyst

Great. Thanks guys. Good job.

Nicholas Woodman, CEO

Thank you.

Operator, Operator

Thank you. We will take our next question from Erik Woodring of Morgan Stanley.

Erik Woodring, Analyst

Hey, guys. Congrats on the quarter. I guess, I just wanted to ask about your subscriber guidance so exceeding 700,000 by year-end that implies that you gain more than 200,000 new subscribers in the holiday quarter. But I'd imagine like you said in the press release that most of your HERO9 Black purchasers are purchasing through the subscription. So I guess, why wouldn't your subscription numbers by year-end far exceed the 700,000 at this point?

Brian McGee, CFO & COO

I'll start with this, and maybe Nick can chime in. What we indicated is that we expect to exceed 700,000 subscribers, but we didn't specify how far beyond that. It's important to note that we also have significant retail contributions, so we're anticipating some organic growth as well. We project that GoPro.com will account for about 40% of our revenue. A substantial portion of this growth will be driven by GoPro.com, where consumers are leveraging the subscription along with the camera offerings. When we consider all these factors, we estimate reaching more than 700,000 subscribers this year and approaching two million by the end of 2021. This growth will result in considerable annual recurring revenue of nearly $100 million as we look beyond 2021, with very high operating margins around 50%. This transformation will positively impact both our revenue and margins, earnings per share, and cash flow.

Nicholas Woodman, CEO

Yes, I would also add that there is a bit of a delay between when a retail consumer buys their camera and when they sign up for a subscription. This time gap needs to be considered, especially regarding GoPros received as gifts. We will sell a number of GoPros during the holidays, and those customers also experience a delay. The gift recipient becomes the owner and needs to learn about the GoPro subscription, which means there is time for them to become a subscriber as well. You cannot simply correlate the purchase date of the GoPro with when that subscriber is likely to appear.

Erik Woodring, Analyst

Okay. That's helpful. I guess kind of if we're taking a bigger picture with the HERO9 Black, I think you guys addressed a number of what you could call pain points, whether it's the front-facing color display or the removable lenses, which all was awesome. So I guess, I'm just thinking as you look forward on your product roadmap, where do you hear from customers? Or what are customers saying that they're looking for? And how could that kind of influence your new hardware and new software features you're thinking about that could drive camera upgrades into the future?

Nicholas Woodman, CEO

That's a great question, but I can't share specific consumer research because it is valuable for guiding our development. However, I can say that we conduct extensive consumer research to understand both the satisfaction of our current users and their requests for new features. This insight helps us implement upgrades and keeps our community engaged. We also investigate why potential customers may hesitate to purchase a GoPro, exploring various factors such as brand perception, pricing, and any unmet needs that could lead to new products. This research is continuous. All our current products, whether hardware or software, are thoroughly researched, which should give investors confidence in GoPro's upcoming product launches. Those familiar with our company know that in our early years, we enjoyed considerable success but operated more like a startup, relying on instinct. About three to three and a half years ago, we began to invest and improve our capabilities. Now, we have a skilled team that effectively communicates with consumers regarding their preferences for GoPro. To put it differently, the growth in our subscription business, the acclaim for the HERO9 Black, and the high ratings in the App Store are all results of strategic decisions informed by our research. Coupled with a consumer-centric and subscription-driven strategy, we commend the GoPro team and everyone involved in these initiatives for their outstanding work. The outcomes of our research and the resultant business decisions have been evidently successful.

Erik Woodring, Analyst

No, that's awesome. And if I could sneak one last one in here. Just clearly, a benefit of the new subscription bundle is the discount on the camera relative to the camera as a standalone. So, I guess how do you guys at GoPro make sure that these new subscribers aren't just taking advantage of the pricing discount, and can remain subscribers longer than one year, and don't turn off the platform at a higher rate than theoretically the subscribers you had prior to the change in the pricing model? Thanks.

Nicholas Woodman, CEO

Well, you'll get some bleed out, right? I mean that's inevitable. But as long as your net-net coming out ahead, you hit on a terrific marketing approach to drive subscription and then prove to these new subscribers how much value there is in the program and ensure they are educated on that value. Once they realize that value over their year of subscription, they become long-term subscribers because they realize it. As I mentioned in my answer to a previous question, we're going at great lengths to make the value very obvious to consumers. The math has to be very simple in terms of how quickly a subscriber can recoup the cost of the subscription when they take advantage of the benefits that's quite obvious and they can do it very, very quickly which is really important. You need to make a subscriber a winner quickly while ensuring that it drives a profitable business, which Brian shared the subscription business is generating 50% operating profits, not gross margin, operating profits of 50%. We believe we can build on that over time. It's a win-win for the consumer and for the business, ultimately for investors we believe. Our job is to retain them and to just make it overwhelmingly obvious how much value they're getting. For what we can tell so far, we're achieving that. The reason we achieved such good subscription growth prior to the launch of HERO9 Black and prior to this strategy shift is because we had very good retention rates and what we would consider to be low churn rates. That's as important as everything you're doing on the other side of the coin to bring new customers in. That tells us when we get subscribers in, we impress them with the value they stay on as subscribers and drive a healthy program for a healthy business for GoPro. That's what we've achieved to date, but we are not done yet. We are loading up the GoPro subscription with more benefits that will really impress our users but not negatively impact the profitability of the business for GoPro.

Erik Woodring, Analyst

That’s really helpful. Thank you guys, and congrats again on the quarter.

Nicholas Woodman, CEO

Thank you so much.

Operator, Operator

Thank you. We will now take our final question from Nik Todorov of Longbow Research.

Nik Todorov, Analyst

Thanks. Good afternoon, everyone. Nick and Brian, I believe you mentioned that demand has exceeded expectations.

Brian McGee, CFO & COO

Did we lose him?

Operator, Operator

I believe we may have lost Nik.

Brian McGee, CFO & COO

Did we lose him? I wasn’t sure I got disconnected.

Operator, Operator

Okay. We’ve got Nik.

Nik Todorov, Analyst

Hello, can you hear me?

Operator, Operator

Yes sir.

Nik Todorov, Analyst

Okay, great. I’m sorry, guys. I don’t know what happened. I could hear you, but you couldn’t. Sorry. I’ll just restart from the over. You guys were saying that demand is coming up above expectations. If I look at the full-year guide for sell-through and sell-in, I think you're guiding to 3.7 million units of sell-through, which is at the midpoint of your prior quarter guidance and then 2.8 million of sell-in at the lower end of your 2Q expectations or guidance that you gave at the time. I guess, how do you square those two? Why are we not leaning more towards the higher end of those ranges that you gave in the last quarter?

Brian McGee, CFO & COO

Hi, Nikolay, this is Brian. Look, we've increased our revenue and earnings per share guidance for 2020 versus our prior outlook. So that's important to point out. We continue to reduce channel inventories by 200,000 or so units in the fourth quarter. Just to put that in perspective because normally that will be our sell-in as well as sell-through, but by taking channel inventory down in Q4 if you pro forma that out, that's $60 million of revenue and $0.10 to $0.15 a share. If you do that on the 800,000 units we're going to take down of channel inventory that's nearly $0.25 billion of revenue that we look forward to recouping in 2021 should demand levels stay at the level they're at today. That sets the company up nicely for 2021. I'll also point out while there's limited downside, there’s some upside, but we kind of gained inventory back earlier in the year just due to uncertainties in the market. We should see some demand and benefit in the channel as we go into 2021. We are really positioning to exit the year with very low inventory. As I mentioned about $100 million for GoPro as well as getting channels down to about, I think the 550,000 or 600,000 unit range. So that really sets the company up nicely for 2021.

Nik Todorov, Analyst

Okay, got it. And if I look at GoPro.com, I think in the third quarter results, I guess I wonder, do you expect it to be between 36% and 40% even if I adjust for the upside in revenue. It looks like the GoPro.com came a little bit below that. I wonder was it all because of retail upside? As we look forward, how should we think about revenue from direct-to-consumer into 2021?

Brian McGee, CFO & COO

Well, the answer to your question is within our prepared remarks on Q3. We had guided at 35% to 40%. That was on a lower guide of revenue, and actually Dot-Com did better than we had expected. But so did retail. We saw very good strength in retail. There are two important channels for us. Obviously, we're more profitable on GoPro.com versus the retail channel, which is why you're seeing margins come up on both actual results and our guidance. I think that's pretty key; that leads us to 2021 nicely.

Nik Todorov, Analyst

Yes. Okay. And Nick, I think…

Brian McGee, CFO & COO

I would also say…

Nik Todorov, Analyst

Sorry.

Brian McGee, CFO & COO

Nikolay, you made a comment that the Dot-Com business being capped at 30%, we don't see it that way. Just as a ballpark where it is now, but we see many opportunities to continue to grow the direct side of our business.

Nik Todorov, Analyst

Yeah. I think…

Brian McGee, CFO & COO

No, no because we expect it to be around 40% in Q4. I think we mentioned that. That will be about an 80% lift.

Nik Todorov, Analyst

Yeah.

Brian McGee, CFO & COO

Looking ahead to 2021, we believe it can still be above 50%. We're not setting a specific target because both channels are important. If it’s 45%, that's fine, and if it’s 55%, that's also fine. The focus is on whether we are generating more revenue by effectively managing working capital, margin, operating expenses, and driving cash and earnings per share. The percentage may vary, but what's crucial is that the absolute dollar amount continues to grow. That’s where we achieve margin expansion and operating leverage.

Nik Todorov, Analyst

Yeah. Got it. And last question, Nick, I think in the prepared remarks you talked about a new app experience that will bring a solution to a widespread problem that you believe you're uniquely positioned to address. I wonder, if you can give us any details around that or any color? Thanks.

Nicholas Woodman, CEO

Well, I can't talk about anything at the product level. But what I can share is we recognize that GoPro's brand is so much bigger than the products that we currently make and the consumers that we currently serve. One of our research indicates that one of the most accessible ways to make GoPro more relevant to people that don't own a GoPro camera is through software, and through solving problems that we can address with an app. Making it available to smartphone users represents a much bigger total addressable market to solve for than just the people who are either going to buy a GoPro or then service those customers who buy a GoPro with additional accessories and subscriptions. Through this research, we went to work considering what are some big problems that are out there. It turns out that there’s a problem that is coincidentally shared by both GoPro users and smartphone users alike. By developing this new app experience, we get tremendous leverage because this is something that we want to build for the GoPro community, but we realize that it serves as a phenomenal solution for consumers that are just using their smartphone to capture photos and videos and are dealing with the inherent problems that come with that. I'm not just talking about editing; it’s more in line with editing and content creation, but also managing this content in a really compelling way. We believe this is going to resonate with people. Importantly, to our business, it can help us extend our brand to serve people outside of hardware owners. It represents an opportunity to generate a new subscription revenue stream with consumers that don’t own our hardware. The total addressable market we are addressing is obviously very big. It’s addressing the needs of the average smartphone user. It’s not like these users need to be ultra-passionate about content creation or editing. We think that's one of the smaller opportunities. The problem we are addressing is much more widespread. I can almost guarantee that everybody on the call here suffers from it. We're excited about that. I want to stress again that we get almost a free option to explore this market opportunity with non-hardware owners, smartphone users because we're doing this work anyway for our GoPro community. The leverage we get from that development is terrific. As I shared, we'll be sharing this first with GoPro users towards the end of this year, giving them a glimpse of what it'll be for smartphone users. In Q1, we'll roll it out to smartphone users as a, what we believe to be, attractive and accessible subscription program that will be meaningful to the smartphone community.

Nik Todorov, Analyst

Got it. Thanks.

Operator, Operator

Thank you. I would like to turn the conference back over to management for closing remarks.

Nicholas Woodman, CEO

I am sorry about that. I was on mute. Okay. Well thank you, operator. I'd like to close by once again thanking GoPro's amazing employees, who worked so hard to deliver wow! to our customers every year. This year they did it from their home offices, spare bedrooms, and garages. You are the best of the best. Thank you for being the backbone of both this company and this brand. Thank you to everybody for joining today's call. Stay safe. And stay stoked. This team GoPro signing off.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's call. You may now disconnect.