Earnings Call Transcript - GPRO Q4 2020

Operator, Operator

Good day and welcome to the GoPro's Q4 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Christopher Clark. Please go ahead, sir.

Christopher Clark, IR Representative

Thank you, operator. Good afternoon, everyone and welcome to GoPro's fourth quarter and full year 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 and quarterly report on Form 10-Q for the quarter ended September 30th, 2020, each of which is on file with the Securities and Exchange Commission. And as updated in future filings with the SEC, including the annual report on Form 10-K for the year ended December 31st, 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 enhances 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 fourth quarter and full year 2020. The management commentary and slides as well as a link to today's live webcast and 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 Nick - to GoPro's Founder and CEO, Nicholas Woodman.

Nicholas Woodman, CEO

Thank you, Chris and good afternoon, everyone. Before we get started, I'd like to encourage everybody to read the commentary we posted earlier today to the GoPro Investor Relations page on our website. In addition to providing an overview of our quarterly and annual results, plus forward-looking guidance, the commentary provides our thoughts on our business going forward. I will now share some brief remarks and then we'll go directly into Q&A. In 2020, we evolved GoPro into a more efficient, subscription-oriented direct-to-consumer business. We grew our GoPro subscriber base by 145% year-over-year to 601,000 subscribers and generated more than $200 million in cash flow from operations in the second half of the year. This represented 33% of our second half revenue and contributed to a year-end cash balance of $328 million. Strong Q4 performance resulted in $0.39 of non-GAAP EPS for the quarter, and $0.08 of non-GAAP EPS for the year. We achieved this with disciplined expense management, an approach we are committed to maintaining. Our 2020 performance amidst the pandemic demonstrates GoPro's enduring relevance as a personal experience sharing solution for consumers and a powerful creative tool for professionals. Looking ahead, our plan is to continue super-serving our core customers with outsized GoPro subscriber benefits while expanding our relevance to users of other cameras and smartphones through software-subscription offerings. We believe we can maintain our rapid pace of innovation, launching exciting new hardware and software products backed by significant world-class marketing, all within reasonable spend levels that are directionally in line with 2020. We're excited about 2021 even amidst the pandemic. We've proven time and again that GoPro can thrive during challenging times. We believe the steps we're taking to strengthen our business today will benefit us significantly when the world eventually rebounds from the pandemic in earnest. Fortunately, as a business, we do not have to wait for that to happen. I want to thank our employees around the world for their resilience and adaptability throughout 2020. Your dedication and world-class execution is why we are well positioned for the future. And now operator, we're ready to take questions.

Operator, Operator

All right, we'll take the first question from Paul Chung with JP Morgan.

Paul Chung, Analyst

Hi, thanks for taking my question. So just on your full year '21 guidance you know given the large kind of seasonal mix in second half, what kind of gives you the confidence in providing you know some visibility there? And you know what kind of large factors can sway this higher and maybe possibly to rebound to that $4 million kind of unit selling per year as the one in the past and then I have a follow-up.

Brian McGee, CFO

Yeah, hi, Paul, this is Brian. So let's talk about 2020, we sold through 3.6 million units, and we shipped in about 2.8 million units. And that delta is due to the fact we took channel inventory down about 800,000 units and ended the year at about 650,000 units on the channel. So that's an important distinction to make. We think we've got the right channel inventory in place. As we looked at '21, we expect to continue on the D2C transition, and shift our revenue up from the 32% that we had in 2020 to 38% to 42% in 2021. We have very good visibility into the first quarter, and our trends on the sell-through and selling perspective by hitting the mark related to our guidance of $185 million in Q1. We think on a range that sell-through is going to be in 3.4 million to 3.6 million units, right now and sell - and in the kind of 3 million to the 3.4 million. So, we may see about 100,000 units reduction in the channel even in '21. And that's really due to the fact that we're growing, our expectation is to grow more in D2C and continue to trim our retail inventories a bit and keep them at healthy levels going into the end of '21 and into 2022.

Paul Chung, Analyst

Excellent, thanks again. And then you know your unit sell-through was up by you know maybe around 100k relative to guidance, kind of which are the difference there. I noticed regionally EMEA and Asia were a bit softer. And you mentioned the pandemic, like, you know, is there a kind of more preference for North American consumers to kind of go to the website and what's been the support overseas for GoPro.com sales? And how are you driving more traffic there? Any comments you can make? Thanks.

Brian McGee, CFO

Yeah, GoPro.com had a great record quarter. We've doubled the business on a year-over-year basis about 92% sequentially, so terrific performance on GoPro.com. Our revenue came in within our guidance. Within the split between retail and consumer, we were within like 5% of our revenue split kind of a little bit more heavy on retail than D2C. We definitely saw some slowness in EMEA and APAC channels, largely related to COVID, and North America did do well and better than what we expected and made up for some of that in Europe and in Asia. We've also taken that into account as we looked at our forecast for Q1 and our turning sell-through, we think is coming right into the 700,000 units that was provided on the commentary.

Nicholas Woodman, CEO

And Paul, just to add one more bit of color, there seems to be a preference with consumers for shopping offline versus online in certain regions like EMEA or Asia, and the answer to that is no. We definitely saw strong dot-com performance and then some softness as COVID lockdowns ramped up and the consumer online shopping did take a hit as a part of that. So we could map the softness to COVID lockdowns intensifying in certain regions. There just doesn't seem to be a headwind for us as it relates to growing our business internationally. There has been just specifically the pandemic.

Paul Chung, Analyst

And then my last questions is on, you know, the GoPro subs, very good progress there. What kind of features are users engaging with the most? And then next year when we kind of lap that large cohort of subs from your non-sales, what kind of gives you the confidence in low churn rates and retention? And, you know, are there any kind of cumbersome or high switching costs for consumers maybe related to stores that would kind of deter them from moving off GoPro help fix their concerns? Thanks.

Nicholas Woodman, CEO

Well, the consumer behavior and they're taking advantage of the various GoPro subscription benefits that is mapping to the consumer insights research that we did, and that we do ongoing to understand, you know, what are the biggest drivers for people signing up as a subscriber and I'm happy to say that they're taking advantage of the key benefits. That gives us a good feeling as it relates to subscribers getting value out of the subscription. They're making use of the subscription benefits ongoing. And that just points to an engaged customer that we believe we're going to be able to do a good job of retaining we have, as we've shared, very impressive retention and low churn rates, we're really happy with those. We've continued to drive those down as we continue to improve both the marketing of the subscription and driving awareness of the benefits so that consumers can take advantage of them, then they're happier customers and we get better retention and that's all moving in the right direction. So we feel really good about that. And that's just where we are today, in February. So we've got a lot on tap for the rest of the year to further improve retention and keep our churn low.

Brian McGee, CFO

And, Paul, the thing I guess I would add on top of it is, we have that visibility we are seeing solid traction even in Q1 on GoPro.com. That's also what's helping to drive up our ASPs, we're seeing margin improvement. We saw that in Q4, we've given a little bit of a standard margin guide for '21, 38% to 39%. The implied guidance in our management commentary points to a very profitable GoPro in 2021 with solid, again, solid cash generation in the $150 million or so range. So we're very happy with how the results went in Q4, and we'll look ahead in '21.

Paul Chung, Analyst

Great, thank you.

Operator, Operator

Our next question is from Andrew Uerkwitz with Oppenheimer & Company.

Andrew Uerkwitz, Analyst

Hey, gentlemen, thanks for letting me ask a couple of questions. The first one, I guess is probably for Nick. With the new, I guess, the new subscription of $9.99, presumably this is trying to capture the - and they use - they're using the GoPro app that don't have cameras. So what's the - how should we think about that number as it fits into your subscription number for the year? And if you can shed any light on how you can hopefully convert those folks to traditional GoPro users?

Nicholas Woodman, CEO

Sure. Thanks, Andrew. Yeah, we're really excited about the upcoming revamp and subscription-based offering to the GoPro app; you're spot on. It's a way for us to serve as a personal content solution helping users of any camera, including smartphones get the most out of their personal photos and videos. We all suffer from the bottomless pit that is our camera roll. You know the feeling when you capture a great photo or video or have one sent to you and you save it to your camera roll, and you have that moment where you wistfully look at it and acknowledge there's a good chance you're never going to see that again. That's a very widespread problem shared by everybody that uses a phone and with a phone they're lucky, because they actually know where their photos and videos are. So with the upcoming GoPro app revamp and the Mural wall feature, it makes it really easy for you as a user to send that photo or a video that you know, the moment you see it that you want to keep track of and revisit later, and you send it to the app, you don't even have to open the app to have it go there, you send it straight from your camera roll, and it'll be presented to you on your Mural, serving as a chronological feed of your personal favorite moments. Then combined with that are all of our top tier, powerful editing tools and auto video generation capabilities. The GoPro app is going to scale over time as the most enabling yet simple app to help you get the most out of your personal content. We think that this is a significant size market globally. Our brand is well positioned to solve this problem for people. Importantly, we have the brand to drive awareness to grow usage of this app at what we believe will be impressive scale. We don't need to take on much additional OpEx to go and make this possible for people that don't own a GoPro, because we're already building this solution for GoPro users. By making it subscription-based, we can extend access to anybody that owns a smartphone or another camera. Over time, we think that this is going to become a meaningful solution for people that is going to punch way above its weight class in terms of its value proposition to what the user pays to use it on an annual basis. So we're pretty excited about it.

Andrew Uerkwitz, Analyst

Yeah, got it. I appreciate that additional color. And I guess the next question -

Nicholas Woodman, CEO

I want to address a part of your question. The Quik app, which we discontinued a year and a half ago, has about 8.6 million monthly active users. It's a free app, but it's outdated compared to the new GoPro app experience. This presents a significant opportunity for us to market the new GoPro app to these Quik users and gradually transition them to the GoPro app. We have around 5 million monthly active users of the GoPro app, and if they are not already subscribers for $49.99, there's an opportunity for us to upsell them to the $10 annual functionality. This includes the Mural experience and numerous premium editing tools that we are rolling out gradually. These are just two among many growth initiatives we have planned for this new subscription service.

Andrew Uerkwitz, Analyst

Got it, got it that's helpful. And I guess when I think about your unit guidance for 2021, it looks like it's coming in a little bit down year-over-year, is that on a sell-through basis or on a sell-through basis? Is that mostly just caution around COVID? Or is there something more to it related to just you know, fewer stores and just the further decline in retail? Any color there would be helpful.

Brian McGee, CFO

Yeah. Hi, Andrew it's Brian. It's really a number of things, COVID for one and being cautious. I think as the world opens up, there's opportunity to expand that as you recall early in 2020, we would have had 3.2 million to 3.4 million; we raised about 2.6 same with sell-through. We have the ability to step it up, and that would increase profitability further back, because we get a lot of financial leverage from that. I think that's solid upside. We will also see more movement to the high end as $300 and more price points and less on the lower end as well. This is helping to drive ASPs, that's going to be supported in GoPro.com, which is helping with margins and profitability. We think it's unbalanced with capability we have today. I think there's hopefully upside as the world comes back.

Andrew Uerkwitz, Analyst

Got it. And then just last question, it looks like based on your guidance, your cash balance by the end of the year is going to be healthier now, one we haven't seen in a while. How is that affecting your view on potential investment opportunities, whether it's M&A or internal? How are you thinking about that use of cash going forward?

Brian McGee, CFO

Yeah, well, the two uses of cash in '22 we'll pay back take the $125 million out of debt, right and convert, and there's more in 2025; we split that and actually pay them up early in Q4, which is good. I think from an OpEx perspective we mentioned we will continue to be hawkish. We will continue to invest in innovation and technology, and improving the website experience for GoPro.com. Those are key initiatives for the company. While taking investment, there are other areas where we will be able to be more prudent and cut back. We want to stay in the $305 million to 315 million range for OpEx in 2021. And that's upside, because our revenues are up too, so that's also contributing. But we're definitely going to make those investments and be prudent about our cash balances. And actually to your point, we're at $328 million ending 2020. We haven't had a $300 million number in cash for a number of years. The cash generation in the second half was well above $200 million, which was a record for our company; two quarters in a row where we had $100 million in operating cash flow.

Andrew Uerkwitz, Analyst

Got it. Thank you so much, guys, great quarter.

Brian McGee, CFO

Thank you.

Operator, Operator

All right. We'll take the next question from Jim Suva with Citigroup Investment Research.

Jim Suva, Analyst

Thank you, Nick and Brian. I sincerely want to say congratulations on managing through a very, very challenging year of 2020, quite remarkable results. I have one question for Brian and one for Nick. Brian, you know, you're being CFO, we normally talk to you about seasonality, you know, quarter-to-quarter. I realized 2020 was very difficult. You gave in your commentary some very good 2021 outlooks. For revenues and EPS, is seasonality kind of still in place largely, or was COVID lapping us? You thinking about vaccines being prevalent more as we increase to the year and maybe people go on vacations and travel and do more extreme stuff later on the year, is there a chance that second half could be even seasonally stronger, stronger stronger than expected? Or I just kind of wonder about what you built into your guidance? And then for Nick, you know, as CEO, your move to subscription model has been fantastic. Are there a couple of apps or interface items or variables, whether it'd be video editing, or the upload function that really surpassed your expectations that seems to really draw the subscriber base in even more, I'm just kind of wondering because I know that you have a lot of enhancements, which one, two or three really are bringing in so much. Thank you.

Brian McGee, CFO

Yeah, hi, Jim, thank you. Let me start. We expect that on a year-over-year basis to grow in every quarter in '21 over 2020. The biggest growth, of course, will be in quarter one and quarter two. Our guidance implies 55% growth in Q1 '21 over Q1 '20, obviously, in the first half is when the pandemic hit us at '20. So, there will be some seasonality; Q2 and Q4 tend to be seasonally stronger for the company. You should expect that kind of in the modeling.

Jim Suva, Analyst

Thanks, Brian. And, Nick anything on that the app that really is bringing this up so much?

Nicholas Woodman, CEO

Yeah, it's a good question. As I shared before, we're happy to see that both our research and the reality how consumers are taking advantage of subscription benefits are aligning. The savings at GoPro.com are important. We're seeing the lion's share of lifestyle goods and accessory sales going to subscribers, who are taking advantage of the 30% to 50% savings they get at GoPro.com on non-camera items. That's really good to see because that shows one that there's a comprehension of those savings. Two, we're seeing subscribers pay for their $49.99 annual subscription very quickly, with the savings they're getting through their backpacks, mounts and accessories for their cameras, hats, and shirts that they're buying. There's real value there, and it heads up quickly to the $49.99 annual GoPro subscription. That's a really positive sign. But as it relates to the app, content backup is really important to our customers, you know, we're a company that helps people capture some of the most exciting and meaningful moments in their lives. They want to safeguard those moments and our cloud backup is of significant value; we're seeing good usage there. The editing tools that we offer in the GoPro app are really important to our subscribers. That's one of the reasons we're really excited about the upcoming GoPro app revamp, because we're going to introduce new editing tools at a steady clip for our customers ongoing. Of course, the Mural Content Management wall, which is going to do a phenomenal job in helping people keep track of their content that they're capturing and generating and easily sharing from their wall. That's going to be a significant enhancement to the overall experience, you know, building on what our customers are already using and capitalizing on the feedback they're giving us on what they want to see next. Kudos to our research, consumer research team and our product teams for both going out and learning what our customers want from us and then going and building it for them. It's paying off in spades. That's the underlying strength in the business that you see; this is GoPro that's serving a real purpose in people's lives. We're doing a terrific job of it and I think that's why you're seeing the business perform so well.

Jim Suva, Analyst

Congratulations to you and your team on a great year. Looking forward to 2021. Thank you.

Nicholas Woodman, CEO

Thank you, Jim.

Brian McGee, CFO

Thank you, Jim.

Operator, Operator

All right. We'll take the next question from Nik Todorov with Longbow Research.

Nik Todorov, Analyst

Yeah, thanks guys. Brian and Nick, when you guys announced your plans to transition to a direct business model in 2Q, at the time I think you expected GoPro.com to become the majority of your sales in 2021. You guided below 50% for GoPro.com in 2021, and I think in the fourth quarter was the second quarter in a row where GoPro.com sales came a little bit lower than your expectations. I just wonder, has anything changed since the original comments when you announced the plan to go direct? Should we think that GoPro.com will become the majority of your sales at some point in time?

Brian McGee, CFO

Let me start with that one, Nikolay. When we first talked about that back in May, retail was completely shut, quite frankly, and we saw on our website, I believe we're over 40% in Q2 of 2020. It also wasn't clear how retail was going to come back and when the pandemic was going to end. We can have visibility on our business, which on our side, we doubled on a year-over-year basis. Since then, we've seen retail come back; it's still an important channel. We have two strong channels that we get product to consumers, GoPro.com plus our retail channel globally. That's a real advantage from a distribution perspective for the company. GoPro.com is obviously the more profitable channel for us and we'll continue to drive that in subscriptions. We're very happy with the fact that we were able to, throughout 2020, raise our numbers, and part of that was due to retail coming back and a good chunk of it was GoPro.com driving quite a lot of business.

Nicholas Woodman, CEO

Yeah, I would add to that, you're never going to hear us complain about retail coming back better than expected and being a healthy channel for us. Thank God for our retailers and many thanks to them for their continued support at GoPro. We've got a saying, one of our core values at GoPro is strength in numbers, that going it alone is a lot riskier than when you've got a number of strategic partners to help you succeed and that's the case of GoPro. That said, the bounce back of our retail channels' performance is actually helpful to GoPro because it reduces the risk significantly, as we continue to make investments to improve our direct-to-consumer capabilities, whether it's being able to do a better job of direct marketing to consumers, you know, more as an individual as opposed to just a mass market blast to everybody not even sure who owns a camera or not. Those are investments that we're making, that are going to yield significant returns for us this year. We're investing significantly in our e-commerce platform, to do a better job of merchandising the cameras, upselling accessories, and again, having a better understanding of who the customer is and what they might actually want to buy from us and where they are in their GoPro lifecycle. These are all investments and developments that take time. Our teams were able to double our direct-to-consumer GoPro.com revenues last year, but about how quickly we had to do that, and what improvements we were able to make to our approach from a technical standpoint, the team got a ton done, but it's just a fraction of the whole opportunity we have to enhance our capabilities. While we have a strong retail channel to help us drive our business while we make these investments and improve our direct-to-consumer capabilities, I don't see how that could possibly be seen as a negative. Another way of answering your question is that we absolutely see significant opportunity to grow our direct business over time. This is a marathon, not a sprint, and there's a lot of greenfield opportunity to improve our approach.

Nik Todorov, Analyst

Got it. Maybe a more - a question on overall demand trends and sell-through. If I look at the implied full year guidance, it sounds like you're expecting sell-through to be down in the second half of the calendar year. Most people operate under the impression that there's going to be some normalization from COVID. But maybe this is, you know, you're thinking differently. That's part of the reason for that guidance. I think, if we're looking at the broader consumer electronics space, the expectations are that there is if not growth for 2021, that demand will be at least flat versus very challenging - very easy to compare from 2020. How are you thinking about overall demand environments for GoPro as we go forward?

Nicholas Woodman, CEO

I'll pick that up and then, Brian, if you want to add anything. We shared our demand outlook in terms of our guide, I think where we differ from traditional consumer electronics, per se, is that, in many ways we're tied to human activity. The more active humans are, consumers are, the more they're out celebrating life and sharing experiences, the more of a value proposition we represent to those consumers. If you're talking about streaming video game sales or video game platforms, you know, consoles or things that remain in the house when somebody finally goes outside and travels more and is more active, we don't fall into that same stay-at-home consumer electronics category. My point is we're very well positioned to succeed during the pandemic and even better positioned to thrive on another level as the world, even if it takes baby steps, bounces back; imagine the outsized positive impact that can have on our business. We're not factoring that into our guide. Our outlook is that the world continues to go along the way that it's been, in certain areas of the world, there'll be better conditions as it relates to the pandemic, while others might be hit harder. But net-net, we think that we're positioned to succeed, and make no mistake; the world will bounce back at some point. We'll be there waiting.

Brian McGee, CFO

Nikolay, I think the other point to make is if you look at the distribution by quarter, it's more evenly distributed, which is actually more normal. At least within the company how Q4 going up to seasonality, of course, that enabled us to be profitable in quarters two, three, and four. We guided for basically breakeven, plus or minus, $0.03 in Q1. We think we can be profitable in Q1. We haven't done that in quite a long time. A very profitable GoPro in 2021, continuing to generate a lot of cash. If the demand profile comes back stronger, as Nick had mentioned, as the world comes back, we have an opportunity to drive more profitability and more revenue growth. We're forecasting 20% to 25% growth on a year-over-year basis, which is pretty darn good. Not bad on unit, but also some on ASP as we continue to shift to the high end, a strategy we've taken on since basically 2019 that worked very well for the company, and for the consumers for the product they get.

Nik Todorov, Analyst

Okay, I have a question about the conversion rate for subscriptions on purchases made through GoPro.com. In the last quarter, you mentioned that the conversion rate was between 80% and 85% for customers who bought flagship cameras. Can you provide an update on that metric? Also, how should we view the conversion rates in retail? It seems like you indicated they are significantly lower, so could you share some specific numbers? Thanks.

Brian McGee, CFO

Yeah, maybe I can start on that one and then Nick can chime in. On the conference call back in November, we saw the initial uptake for subscription on GoPro.com in the 80% to 85% range, as you mentioned. Through the quarter that continued to climb, and I believe we ended at close to 90% conversion on GoPro.com. That's a very nice metric. Organic through retail is obviously much lower, and I think those rates are similar around 7% to 12% kind of range. So obviously the lion's share of subscribers is coming from GoPro.com.

Nik Todorov, Analyst

Okay, got it. Thanks, guys. Good luck.

Brian McGee, CFO

Thank you.

Nicholas Woodman, CEO

Thank you.

Operator, Operator

All right. It appears there are no further questions at this time. Mr. Woodman, I'd like to turn the conference back to you for any additional or closing remarks.

Nicholas Woodman, CEO

Thank you, operator. Thank you, everyone. I'd like to reiterate our excitement through GoPro's future and for 2021, where we plan to super-serve our customers through high-value subscription offerings and unparalleled scale, GoPro's margin profitability and importantly, predictability. We believe we can continue to succeed during this pandemic, which puts us in a strong position for when the world begins to recover in earnest. Thank you again to all of GoPro's employees and partners who are making this possible. We're grateful for this group again. Thank you to everyone for joining today's call. We genuinely appreciate your time and support. This is team GoPro signing off.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.