GoPro, Inc. (NASDAQ:GPRO) Q4 2022 Earnings Conference Call February 2, 2023 5:00 PM ET

Company Participants

Christopher Clark - Vice President of Corporate Communications
Nicholas Woodman - Chief Executive Officer
Brian McGee - Chief Financial Officer & Chief Operating Officer

Conference Call Participants

Anna Glaessgen - Jefferies
Jim Suva - Citi
Martin Yang - Oppenheimer

Operator

Good afternoon. Thank you for attending the GoPro Q4 2022 Earnings Call. My name is Matt, and I'll be your 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. [Operator Instructions]

I'd now like to pass the conference over to our host, Christopher Clark, Vice President of Corporate Communications. Christopher, please go ahead.

Christopher Clark

Thank you, Operator. Good afternoon, everyone, and welcome to GoPro's Fourth Quarter and Full Year 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, followed by Q&A. For detailed information about our fourth quarter and full year 2022 performance and our outlook, please read the detailed management commentary will be 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, any continued impact from the COVID-19 pandemic or 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 our 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 in other reports we may file from time-to-time with the SEC.

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 fourth quarter and full year 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

Thanks, Chris, and hi, everybody. Thank you for joining us today. Before we get to Q&A, I have some brief remarks that summarize the detailed management commentary we posted to the Investor Relations section of our website, which I encourage each of you to read.

I first want to congratulate and thank everybody at GoPro past and present, who contributed to GoPro's incredible 20-year history. In Q4 2022, we celebrated our 20-year anniversary, and it's been inspiring to consider how far we've come from our first product, a 35-millimeter film camera designed to be worn on the wrist while surfing, to today, one of the world's most popular brands serving millions of the world's most active, creative and inspired humans. Gratitude to all.

The strength of our brand and subscription-based business strategy was evident in 2022, a year marked by macroeconomic challenges. Our high-margin subscription business is serving as a powerful financial engine, contributing meaningfully to our bottom line.

In 2022, we grew GoPro subscribers 43% year-over-year to $2.25 million, exceeding our annual target of $2.2 million and bringing our subscription and service revenue to an annual run rate of $100 million with 70% to 80% gross margin.

The growth in our subscription business helped us deliver profitability and positive EBITDA. We paid off debt of $125 million and repurchased $40 million in stock and we exited the year with a strong cash balance of $367 million.

2022 benefited from our complementary direct-to-consumer and retail channels, with each meaningfully contributing to our business throughout the year. Direct-to-consumer revenue from GoPro.com was 40% of overall revenue in Q4 and 38% for the full year of 2022, up from 33% and 34%, respectively.

In addition, our GoPro.com business grew 5% in 2022 over 2021, driven by 52% growth in subscription and services revenue. We estimate GoPro.com revenue growth was 12% in constant currency.

Like many companies, GoPro's results for the year and quarter were impacted by a stronger US dollar. On a constant currency basis, we estimate that revenue for the year would have been approximately $50 million higher or 5% above actual results. Gross margin would have been nearly 41%, versus 38.1% actual results and the EBITDA to revenue approximately 13% versus 9% actual results.

Considering the global FX and macroeconomic challenges, we believe our 2022 results reflect the strength of our subscription-based business model and the strong execution of our teams.

The future of GoPro is subscription based and we're laser-focused on what we believe is a significant high-margin growth opportunity. GoPro's focus on building our direct-to-consumer channel has increased our understanding of consumer behavior, and we are successfully leveraging this to drive engagement and LTV. While still early in this journey, we see significant opportunities to add further value for new and existing subscribers.

Our 2023 plan is to maintain GoPro's ongoing profitability and end the year with a strong cash position of $325 million to $350 million, while investing in critical long-term growth opportunities that we believe will position GoPro well for when the global economy recovers.

We're investing in the people, technology and innovation that we believe will drive subscriber growth, retention and ultimately, LTV. This includes expanding our hardware lineup to court a broader consumer base and rolling out a synced mobile, cloud and desktop experience that will target GoPro owners and non-owners alike with a new premium subscription tier.

As I reflect on our 20 years in business, I’m most proud of the innovation GoPro has become known for, as well as our purpose; serving the world’s most active and creative people with digital imaging solutions that help them capture and share their lives in exciting ways. This purpose combines with the strength of our brand, our people and our subscription based business model to give us confidence that we are well-positioned for the future, despite near-term challenges that we and many businesses including GoPro likely to face in 2023.

In the meantime, we’re innovating towards an exciting tomorrow where we believe GoPro will serve significantly more people than we do today.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Absolutely. [Operator Instructions] The first question is from the line of Anna Glaessgen with Jefferies. Your line is now open.

Anna Glaessgen

Hi, good afternoon guys. Thanks for taking my question. First, I want to start on this premium subscription here. Could you talk a little bit more about the research that you're seeing that justifies it? And what would be the additional features and options that it would give the subscribers?

Nicholas Woodman

Brian, do you want to start with attach rates and current subscription business and I’ll take the second part.

Brian McGee

Yeah. That sounds great. Yeah. Thanks, Anna. On our current subscription business, we ended the year with about 2.25 million subscribers that’s up 43%, and revenue was up 52%. So we're very excited about our subscription business and the fact that it's 70 to 80 points of gross margin.

If we kind of unpack that a little bit, just for everyone to remember on gopro.com, our tax rates are greater than 90% as we largely bundle a subscription with our cameras. The expanding part of the year was continue attach in retail, so someone buys at a retail store and then comes to the app store and signs up for subscription. And that increased substantially from low 20% attach in 2021 to nearly 35% attached in all of 2022.

So we saw a substantial growth on the retail side given the value proposition, which is great. And I think just to add to that point, as we look at the subscribers from gopro.com who came in on the bundle and those who came in retail and paid the initial 50 to the one who now through most of 2021 and 2022 paid 25 and upgraded to 50 when that one year came up.

Our retention rate across all of those cohorts have essentially stayed the same. And so we're seeing a nice uptick in ARPU from the cohort that Page 25 and now is moving up to 50. So as a backdrop, I’ll turn it over to Nick.

Nicholas Woodman

Yes. So based on the success that we're having with converting those people that buy their cameras at GoPro.com and as well as consumers who buy their cameras at retail, converting them to become GoPro subscribers. We have a lot of engagement. We've learned a lot from our subscribers about what more they want to see from GoPro. What they value the most. And then in parallel, we do a lot of consumer research to learn perhaps why some people aren't subscribing and what they'd like to see.

And then we're combining that also with data that we have from a previous desktop app that we had in the market some years ago. It was actually called Quik for desktop. And at the time of some setting that app some years ago, we had 1 million monthly active users of that desktop app, and it was really encouraging to see that for years after some setting that desktop application with no product updates, no product support, whatsoever. We still have hundreds of thousands of monthly active users. So it's a clear sign that there is significant demand for a desktop application from GoPro and our more recent consumer research confirms that.

And it also confirms that the launch of a desktop application that is synced to GoPro subscribers, cloud and mobile apps will definitely represent value that they're willing to pay a premium subscription amount for. But what's great is it will be an upsell because we'll still provide the current GoPro subscription pricing and benefits to existing subscribers and new subscribers, if they're not interested in the more premium tier. But all of our research and past experience indicates that this is a significant opportunity for us. We're really excited about it.

And I'd like to add that we do have experience selling subscriptions to people that don't even own a GoPro. As we mentioned on the call, we've seen nice growth with the Quik mobile app. And we are going to be taking those learnings and extending them to the desktop application and premiums here and be making that available to people that don't own a GoPro, so that they can leverage the app and cloud benefits and mobile editing benefits for editing their phone footage or footage that they're capturing with any camera, regardless of whether it's a GoPro or not. So this is an important TAM-expanding initiative for us. And it's something that we're going to be more and more focused on when we have the full mobile cloud and desktop suite out in the market.

Anna Glaessgen

Got it. Thanks a lot. And then turning to guidance, 1Q implies probably a double-digit drop in units. Can you talk a little bit about where we are in terms of seeing a more normalized sell-in and sell-through balance, particularly at the big-box retailers that have been destocking for several quarters now?

Brian McGee

Yes. Yes. Actually, let me start before I get into Q1 guidance, talk about Q4 a little bit. Given the environment and how we guided, we're very pleased with how revenue came out pretty close to the midpoint of what we guided to and we beat earnings by about 33% on the bottom-line. So, very proud of that for the quarter, and we increased cash.

This is a tale of comparing sell-in and sell-through. If you actually look at on a sell-through basis, the fourth quarter was down about 8% year-over-year. And most of that was in North America. The US market is definitely under more pressure with the consumer. So, that's definitely been an issue. On a sell-in basis, of course, we were down quite a bit more, mostly in North America and Europe, which were down 21% and 24% kind of respectively. But again, the sell-through kind of balanced out.

Now, if we look at it, the good news is GoPro.com helped to offset some of the negative retail trends. and was actually flat year-over-year. So, we're very pleased with that outcome.

As I'll also note in our management commentary, we wanted to sell through about 950,000 units in Q4, and we ended up at about 900,000. So, a little bit short. Channel inventory actually is in line with kind of where we've been historically, and up a little bit just because of -- we introduced a new product with HERO11 Mini late in the quarter. So, since that and pull that out and actually were down year-over-year in channel inventory.

But we wanted to be 50,000 less and put us in a healthier position kind of exiting the year. So, we'll actually see that come out in Q1, which is impacting our sell-in in the first quarter. Sell-through is actually normalizing to that down 9% on the midpoint of our guide. So, not as bad as the sell-in.

So, the channel inventory aspect, the consumer and retailers trying to get their own inventories healthy, it's not a GoPro thing, it's -- they're trying to just manage their own business has impacted us in Q4 and then in Q1. I think that starts to normalize because they're getting down to you're going to get down at some pretty low levels in Q2 or in Q1 and getting into Q2. So, that's kind of how we see that playing out. And hopefully, as a much stronger market as we get to the second half of 2023.

Anna Glaessgen

Great. Thanks.

Operator

Thank you for your question. The next question is from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Unidentified Analyst

Hi, thank you. This is Maya on for Erik. Just starting, where do you believe kind of year-end subscribers will land for 2023?

Brian McGee

Yes. So, we didn't give guidance for the whole year just because of the macro complexity that's going on in the market. We do expect subscribers to be up. It will be up about 100,000 in Q1. We expect to end that. We're not going to give guidance for the year, but we do expect to have growth.

I think the other thing we'll point out is we expect to have at least $100 million of revenue from subscription and service in 2023 that will be up from about $82 million or so in 2022. So we'll see nice revenue growth. We'll still have a subscriber growth, and we'll be adding to the subscriber tiers. As Nick had said, which will have a nice upsell, generate a higher subscription dollar amount and better margin. So, looking forward to that.

Unidentified Analyst

Great. Thank you. And then just as a follow-up, how would you kind of characterize the pricing environment from the December quarter? And do you expect that to continue trending into the March quarter, or how do you see that the pricing environment?

Brian McGee

Yeah. I think the pricing environment were promotional in Q4 and we're able to come in within our numbers. I think Q1 will it's not as promotional in Q4. That's only the more promotional period. But the margins, we expect about 36%, plus or minus a bit, and 39% in constant currency in the first quarter. That takes into account, the pricing environment we expect in the quarter.

Unidentified Analyst

Great. Thank you.

Operator

Thank you for your question. The next question is from the line of Jim Suva with Citi. Your line is now open.

Jim Suva

Thank you. Brian and Nick, the December quarter also was pretty challenged in terms of like weather and airports and people being stuck and canceling vacations, and just getting from point A to point B. I'm wondering, if that has some impact. And also, post-COVID, now that people are starting to travel again – are there behaviors turning back to pre-COVID purchasing of GoPro, like when they go on big exciting trips, whether it be skiing, scuba diving or any changes in behavior? Thank you.

Brian McGee

I could, Jim. Let me start and then do you want to go, Nick, or do you want me to?

Nicholas Woodman

I'll take the second half, take the first half.

Brian McGee

All right. On the first half, Jim, I think we saw really good travel and sales in like September, October. November as a lot of people were traveling to Europe. So our business has been really strong there. It kind of ebbed off a bit in December. I think the bigger issue, quite honestly, is the North America and the consumer followed by retail coming back on their inventory that's had, I think, a bigger impact than necessarily travel?

And then China kind of in the fourth quarter was going through ebbs and flows, with COVID. They're trying to come out of that. But as people want to travel in China, or out of China, they're being restricted in a number of countries. As a matter of fact, I saw flights to, I think, into Europe and UK have basically been reduced dramatically from China, just given the current COVID situation.

So, and China represents about 20% of that – or historically have 20% of the travel market. So that's been an area that's been a little bit more challenged, but the North America places, Europe places kind of propped up, I would say, from a travel perspective and use the GoPro.

Nicholas Woodman

Yeah. And on the behavioral front, we're definitely seeing an increase usage of customers using their GoPro’s, connecting with the GoPro app since the start of COVID when travel shut down.

We shared that, in 2022, we had approximately 15 million unique GoPro cameras connect to the GoPro Quik app during the year, which is great, because in 2020, that number was about $12.1 million. And we've seen it steadily climbing back since.

So that's really encouraging to see the correlation between people's increased activity, increased travel and increased camera and app usage. We think we're also benefiting from the improved overall GoPro experience and how well the camera works with the app, how your GoPro now auto uploads, your most recent footage to your GoPro cloud account while the camera is charging.

If you're a GoPro subscriber, now you're SD card is automatically cleared after that upload is complete, and you can now access, edit, share and enjoy your content without ever offloading to a computer or dealing with previous complexities. So we're seeing overall improved engagement, improved user success rates. And that's also, we believe, contributing to that 15 million active camera connects in 2022.

But to your question, Jim, there's a direct correlation between people getting out more and people getting more use of and seeing more value in their GoPros. And we're seeing that through purchases as well.

And unfortunately, that's somewhat tempered by the macroeconomic challenges and consumer confidence as it relates to their spending, but it's really good to see the overall GoPro community becoming more and more active as we move further and further from the pandemic.

Jim Suva

Thanks for the color. And my last question is, the equilibrium of retailers working down basically everything on their shelves, not just GoPro, but everything. But can you comment on when we're going to hit the equilibrium for the GoPro product on the channel side, you feel?

Nicholas Woodman

Yes. I know that there's some retailers who are hitting out of stock too, and we can see that. So they're getting down to a point where they're going to have to sort up the inventory balances. I think we'll get to Q1 with our guide, and we'll pull channel inventory down another 50,000 units. And I think at that point, we're probably pretty darn close to the equilibrium level. So, I think, it starts to normalize in Q2.

Jim Suva

Thank you, Brian, and thank you, Nick, so much for the details.

Operator

Thank you for your question. [Operator Instructions] The next question is from the line of Martin Yang with Oppenheimer. Your line is now open.

Martin Yang

Hi. Good afternoon. Thank you for taking my question. My first question is on margins. Do you expect any non-foreign exchange related headwinds to dissipate in the rest of 2023 that could potentially improve your margins?

Brian McGee

Yes. We're -- we -- in our management commentary, took down what our current assumptions are for FX and we're just holding to that. I'm not hedging one way or the other on FX and trying to provide a directional element. I can say in Q1, and I'll repeat it, we think we'll be at 36%, plus or minus 5, 0.05, but that equates to about 39% margins relative to 2022, actually, if you went back to 2021, it'd be even better. So margins have still been a headwind for the company at these levels.

Martin Yang

So does that imply inflation or component costs associated margin headwinds was roughly two points?

Brian McGee

Yes. I mean if we -- you mean from 2021, no, it'd be more on currency to and then a little bit on the component pricing. So it's 1% to 2%. So components have come up -- that's an area that is probably, at some point, going to come under pressure too, and you’ll start to see components coming down. I haven't seen that yet other than maybe memory. But I think that's some tailwind probably given the current environment as we get through look our way to 2022

Martin Yang

Got it. Thank you. My next question is about the direct-to-consumer or GoPro.com sales contribution in the fourth quarter. Usually, in the previous years, we see during the December quarter, GoPro.com have a slight dip in revenue contribution relative to previous quarters, maybe from high 30s or 40% down to mid-30s. This quarter, it was really strong. Is there any particular factors that is driving up the GoPro.com sales in 4Q?

Brian McGee

Yes. I think there's a couple of factors. And actually, it will play into 2023 as well. So one is, we obviously have the better pricing on GoPro.com and I think that's the word on that by giving out, we can measure a part of that.

Retail coming back probably helped on the DTC front. So that was good on the holiday. I think we had quite a bit of promotional activity on GoPro.com. So we were being bashful in driving sales and margin and subscribers. So the sub aspect to this is very important, because that's where we get some real good lifetime value going into 2023, 2024, 2025 with those customers.

And then, of course, our revenue from subscription and service being $22 million in the quarter and about $82 million on the year really helps on the GoPro.com front. And so as we look ahead, as we drive more than $100 million of subscription and service revenue and continue to drive GoPro.com, we’ll probably be over 40% on our B2C business in 2023, right? This directional trend is moving that way partly because we've got a very good competitive position on GoPro.com, but also the growth of subscription and service revenue.

Martin Yang

Got it. Thank you very much.

Operator

Thank you for your question. There are no additional questions waiting at this time. So I'll pass the call back to the management team for any closing remarks.

Nicholas Woodman

Thank you, operator, and thanks, everyone, for joining us today. As we mentioned, we're really excited for the year ahead despite macroeconomic challenges. We're investing in the people, technologies and innovation to continue releasing market leading hardware and software products that we believe will continue to grow our subscription business and position us well for when the global economy recovers. So here's to the start of GoPro's 21st year as a market leading company. Let's go. This is team GoPro signing off.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.