GoPro, Inc. (NASDAQ:GPRO) JPMorgan Global Technology, Media and Communications Conference May 24, 2021 4:15 PM ET

Company Participants

Brian McGee - EVP, CFO & COO
Nicholas Woodman - Founder, CEO & Chairman

Conference Call Participants

Paul Chung - JPMorgan Chase & Co.

Paul Chung

Okay. Hi, everyone. So welcome to the JPMorgan TMC Conference here today. My name is Paul Chung, and I cover Applied and Emerging Tech here at the firm. And I'm very happy to have GoPro's CEO, Nick Woodman; and CFO, Brian McGee here today with us. [Operator Instructions].

So Nick and Brian, hello. Thanks for your time today.

Brian McGee

Hello.

Nicholas Woodman

Hi Paul.

Brian McGee

But before we jump into Q&A, let me do a quick safe harbor, and then we can get into it. So I'd like to remind everyone that our remarks today may include forward-looking statements, forward-looking statements and other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially.

Additionally, any forward-looking statements made today are based on assumptions as of today. This means that results could change at any time and 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 31, 2020, and Form 10-Q for the quarter ended March 31, 2020, and which are both on file with the SEC and as updated in future filings.

And with that, Paul, let's kick it off.

Paul Chung

Okay. Great. So thanks, guys, and thanks for that, Brian.

Question-and-Answer Session

Q - Paul Chung

So I guess the level set, Nick, can you talk about the evolution of the firm through the years? We've known you a very long time, but just talk about how you started and kind of the growth and then where you are today.

Nicholas Woodman

Yes. I'll give a little bit of a tighter summary than that so that we actually can get more than two questions in, because I can go on.

But what I'd say is the -- what I said on the call, our last earnings call was that this is the new GoPro. And what I meant by that was the GoPro, we started back in 2002, if you can believe that, was entirely focused on unit sales and unit sales through retail. And we built up a global brand with that. And our partners have done our retail partners and distributors have done a phenomenal job helping us do that.

The new GoPro is more focused on direct-to-consumer sales through GoPro.com and driving subscription, the GoPro subscription, $50 a year annual subscription. Not to take anything away from our retail partners and distributors. In the first quarter, that was still 60% of revenue generated through traditional retail.

But what we recognized even before COVID was that our brand affords GoPro as real opportunity to be more of a direct company generating higher gross margin at lower operating costs to yield a more profitable business. And -- but because we were so entrenched in retail as a brand, as a culture, just -- that was going to be a multiyear process to move to where we are today.

Then COVID hit, and it became a necessity to go more direct. Because April a year ago was -- March a year ago was a pretty scary time for every business on the planet. And we said, okay, well, what was going to be a 3-year strategy is now a 6-month strategy, because we got to get there before the launch of our new HERO camera in the fall of last year.

We got to be ready for the holiday to capitalize as a direct business, and we need to leverage the holiday to really scale subscription so that we can make the most out of this year, 2021. And last year, we achieved that.

And I think it's really important for investors to appreciate that GoPro is not a COVID beneficiary. Some investors have been confused by that because we had a good year last year. We were profitable for the full year on a non-GAAP basis. And that's because of our shift to direct-to-consumer and because we grew our subscription significantly.

But unit sales were down. And we were hit by COVID hard from a demand and a sell-through perspective. Yet we yielded a profitable result because of our strategy shift and complements to the GoPro team for their execution, it wasn't easy. We are definitely positioned, we believe, to be a beneficiary of the world snapping back, or rather creeping back, from COVID as humans become more active, as they travel more. Travel is a really important part of our business, and it essentially is shut down.

So as the world becomes more active and travels more, that plays right into our wheelhouse of helping active people capture and share their experiences. And with each one of those customers that we get that comes back into the business, remember, a higher percentage of them are buying at GoPro.com, 40% of them in Q1. And at GoPro.com, approximately 90% of them are subscribing. So it's a -- we have a really significant opportunity to capitalize on consumer return to our business. Convert a significant percentage of them into GoPro from subscribers and benefit from that $50 a year annual recurring revenue.

So I would tie a bow on it by saying the old flagship of GoPro's old retail-centric business, the old flagship was our new HERO camera that we come out with every year. And everything we did as a brand in the business served unit sales of that. The new GoPro and our new flagship is a subscriber. And everything we do as a brand and a product company serves, driving more subscribers.

So the new unit, as it were, is subscriber, not how many cameras we're selling. And that's really how we've evolved, how we're creating a lot more value for our customers, for our business and ultimately for shareholders.

Paul Chung

Okay. That was actually a very good overview. I'm not sure if we need to do a session anymore. But thanks for that. So just talk about your retail footprint that you're kind of deciding to put less emphasis on, like which channels are you pulling that back? And then also talk about kind of your key customers with Amazon and Best Buy, and how are they, kind of, pushing people to sign up for these subscription? I guess those are two different questions.

Nicholas Woodman

Brian, you want to take that one?

Brian McGee

Yes. Paul, when we looked at it, we had very good data from when we launched HERO8. We initially launched on GoPro.com for about 2 weeks in Europe and America. We wanted to see what the list would be back in the day, and they were quite high. Because we had aspirations of looking at a direct-to-consumer model back in 2019, but over a longer maybe time horizon.

So we had good data that we could actually lift our direct business if we chose to go that route. Fast forward 6 months later, we were forced into that at a much accelerated rate. And that's proven itself out where we went from 10% of our business being direct-to-consumer to now is 33% in 2020 and 40% last quarter.

So it's a massive increase. We did cut back our retail footprint. We focused on our stronger retail partners. We went -- reduced our less profitable retail partners. So that's helped from a margin perspective, even on the retail side, and obviously drove our drastic consumer business, which is more profitable and, as Nick mentioned, the subscription side.

It's also worth noting that we mostly sell the flagship -- I mean, HERO9 black camera today on gopro.com. And so retail, they still sell our flagship, but they sell more of the mid-tier and entry-level products. And so the channel structure became more symbiotic that GoPro could sell the higher end camera because that's your highly researched product, and that's what people are buying on GoPro.com. And retail is selling mid-tier and entry level. Still some flagship, but that's limited, right, and how we just we distribute.

So it's worked out very well from a structural perspective. And the retailers who are left have a bigger share of what's left in the retail pie. So they're actually seeing growth as even though we're growing our direct-to-consumer business.

Paul Chung

And is there a big push from like an Amazon and a Best Buy to push for a subscription? I know on the website, you get the subscription with the camera at a lower price, it's kind of a no-brainer in that respect. But to go to the website, how your other retail partners, how are you getting that the attach rate to be higher?

Brian McGee

On the retail footprint, let me give maybe some numbers, and Nick, you can chime in. Obviously, we have on GoPro.com, we have about a 90% attach of subscription to camera sale, and that's been pretty consistent over the last year or so. And at retail, the -- as people buy cameras there, the attach rate has been around 6%, maybe as high as 10%. We've seen it actually shift up recently and more in the 8% to 12%.

So we've definitely seen a noticeable increase on the retail side. We have more to do, I think the market there to get those consumers to be subscribers, but we have seen a nice uptick, even in the retail side. Nick, if you have anything more to add?

Nicholas Woodman

Yes. We're just going to get better and better at putting the GoPro subscription benefit in front of our users that buy at Best Buy or anywhere else. We have a number of touch points that we can leverage, but in front of them like the app and so forth. And that's something we're getting better at over time, and we're seeing pretty meaningful increases in the percentage of conversion.

So like Brian said, it's an opportunity over time to continue to improve upon that. It's not solely an opportunity to attract a subscriber via GoPro.com. Pretty much anybody that buys at GoPro over time, will have -- do a better job of converting them.

Brian McGee

And Paul, I think it's probably worth also pointing out, if people haven't heard our last earnings call, just how important subscription is. We think it will generate $55 million to $60 million of revenue, so that's about 5% of what we kind of guided for the year. But it represents 20% to 30% of our profit generation.

And so that's very important. It's also worth pointing out that for the cameras we sell each year, roughly about 80% are to new customers. So people -- consumers who didn't have a GoPro before. So that's an important step because as that continues and we have a better churn and continue to do better there, we can actually grow the total subscriber count.

So we got to 1 million in April. We've talked about approaching 2 million this year. But given those economics, we see the total number of subscribers growing over time. It's not capped at 2 million, we've just kind of put that out as a bogey for this year. But it can go much higher in '22, '23, '24, just given those economics.

And that's important because that's the fastest growth generator for the company in terms of subscriber and it's the most profitable. It's 70 to 80 points of gross profit and about 50 to 60 percentage points of operating profit. So it's very profitable, the most profitable part of our business, that we want to continue to grow, as Nick has said.

Paul Chung

Sorry, can you repeat that 80% -- what was that new customer?

Brian McGee

So our new customers, people who buy GoPros, the 3.5 million or 4 million a year, 80% of those people are new.

Paul Chung

Really? Well...

Brian McGee

So that's why we think we can continue to grow the absolute number of subscribers over time. Because we have a new pool of people to attract to.

Paul Chung

And the subscription kind of helps you understand your user base a little bit more, would you say? In terms of like demographics, new users, existing users on that?

Nicholas Woodman

Well, absolutely. I mean, they provide us with a lot more information about themselves when they purchased through GoPro.com, and as opposed to the purchase through Best Buy or Target or something that Best Buy or Target has that customer information, understands what they bought and so forth.

So our ability to better understand our customer when we make a direct sale goes way up. And we're also investing in a CRM database that -- the customer database that allows us to market to our customers as individuals as opposed to speaking with one voice to everybody in our CRM database as we do today.

You could say like, how is it that GoPro still doesn't have the ability to market to its end users as individuals for a company that's maturity. And on one hand, I would agree with you. And on another hand, I would say, well, we were such a retail-centric business that we didn't have the leadership or the emphasis on our direct business to even know what investments to make and so forth and have those be sound investments.

Whereas last year, we hired Aimée Lapic, who's our SVP of Digital, and she's done such a terrific job. We expanded her role to Chief Marketing Officer as well so that she could own the whole end-to-end strategic process and execution process for driving awareness and conversion of our direct-to-consumer business.

And the team that she's assembled and people that she brought in and so forth had led to an understanding of where to invest to get really significant return, ultimately with the goal of driving conversion at GoPro.com. And one of the ways that you do this is through improving the amount of information you have on your customers and then being able to market to them as individuals knowing what products they already own and so on, what are their interest.

And so this is a pretty table stakes yet impactful new capability that's coming on later this year for GoPro. I would share that our -- we've shared this before, but I'll share it again, is that, I think, is really important. Our conversion rates at GoPro.com is below industry standards, significantly below industry standard for a consumer electronics retailer selling products in our price range.

So there's a lot of opportunity just to get to status quo for conversion rate. Conversion rate is simply converting traffic to your site into sales. And we think that we can even do better than industry standard over time because we have such a phenomenal value proposition for the GoPro subscription offering that is not available elsewhere. So it's unique in that regard to GoPro.com.

So logic would tell you that you could do better than industry average, if you have a better than industry average value proposition relative to the rest of where the places we can get a GoPro.

So tons of LTV value improvement opportunity as it relates to driving our direct business.

Paul Chung

Sure. And then just sticking on channel and DTC, how is it different internationally? And how is that mix in terms of your website versus kind of retailer?

Nicholas Woodman

Brian?

Brian McGee

Yes. It's definitely highest in the U.S. We've been able to expand nicely in EMEA as we had, kind of, the information we have from HERO8 days. We've definitely picked up good share across European markets on GoPro.com. We don't sell on GoPro.com in China, we go through distribution. But in other Asian markets, we have done quite well. That was actually a little plus as we kind of work through it. We weren't sure what the lift would be, but it was quite nice. Over time, it should do better.

I mean, as Nick had mentioned, we have been impacted by COVID, particularly travel. So big travel hotspots in Southeast Asia, Thailand, places in Europe have -- where travel hasn't happened. We've definitely been impacted. We think that's a tailwind as the world reemerges, right? Because people will travel to buy cameras there, they'll buy it at duty free, they'll get them for cruise. They'll buy the camera in the store, GoPro.com, in anticipation of going, et cetera. So that's definitely a tailwind for us as the world kind of reemerges and starts traveling again more internationally than just domestically.

Paul Chung

Okay. And then kind of on components, how is the firm navigating? Is it impacting you guys at all? And then talk on your partnership with Jabil and how you're navigating that area?

Brian McGee

Yes. Jabil is obviously a great partner for us. And we work very closely with them. On the supply front, everybody has been tested by this. For sure. It's been interesting to navigate. We got on it, though, about a year ago, we've been doing a much better job kind of forecasting our business, forecasting the mix, how we're going to do product transitions, and we forecasted ahead our business even into '22 with supply chain. And that's helped us tremendously as we've been able to navigate supply and demand.

We've been able to satisfy demand throughout this pandemic. And our forecast for the year or the guidance we gave, we think we have the product available to meet the numbers. So that doesn't mean we don't have to work it every day because we do. The team is doing a remarkable job. But we think we have the product to make the numbers we've given.

Paul Chung

Okay. So let's talk more about the subscription. So what features do you get? What's been the most insightful feedback from your heavy users? What do they want? And how are you kind of -- what kind of innovative additions are you thinking of in the future for the subscription?

Nicholas Woodman

Well, good news is we're seeing use of all of the features and benefits, which shows comprehension of the subscription benefits and engagement on the part of the end user, that they're taking advantage of the subscription benefits which is great, because that points towards them realizing value from their subscription.

The worst thing is if they're not using the benefits because then you know that they're not getting the value, and that's going to be hard to retain them. One of the strategic reasons for enabling discounts at GoPro.com is because it's very easy for consumers to immediately realize monetary value, savings that offset the cost of their subscription. That's intentional, because then the subscriber gets that dopamine satisfaction of, bam! I already covered just right away covered the cost of my subscription with it.

And this may be why we're seeing a lower rate of subscribers who are subscribing at the time of purchase. They opt out of the annual Auto Renew at a lower rate, significantly lower rate than the previous cohort that was subscribing after purchasing at retail.

So let me unpack that a little bit. There's two cohorts of subscribers. There's a subscriber that was a part of the 500,000 subscribers we've generated or attracted before the launch of HERO9 when we offered the discount of GoPro.com. It's a pretty significant subscriber base, 500,000.

Now these are people that bought at Best Buy or Target or Amazon or at a ski shop. And then later learned about the GoPro subscription, via our app or some other CRM effort, and then they subscribe. They have a higher rate of toggling the auto renew toggle off in their app management interface, on their iPhone or Android phone. They turn auto renew off at a higher rate than the new cohort that is getting their subscription at the time of purchase.

And we're doing research to understand why that is. It's a good thing that the bulk of our subscribers are not turning auto renew off. It would indicate they have a greater likelihood of staying on the subscribers after their anniversary. And we don't know this for sure yet, because we're still in the midst of doing our consumer research. But you can imagine that this group of subscribers is feeling better about the subscription straight out of the gates because, yes, they did get the camera savings. But this cohort also is buying more accessories, getting additional savings right out of the gates.

So their first experience with the subscription is, man, I'm saving a bunch of money with this thing. That may be leading to them having more of a feeling that they'll stay on as subscribers. The two cohorts are behaving fairly the same, essentially the same as it relates to camera usage, app usage, the amount of footage that's going into the cloud, how much they're taking advantage of that unlimited storage of their GoPro footage.

But this new cohort is buying more accessories and opting out less. So it's a good sign as it relates to your attention.

Paul Chung

I guess you'll get better data on the opt out once you anniversary in September, or that...

Nicholas Woodman

We do -- remember, we do have data on the resubscribe for the auto renew rates of the cohort that subscribed independently on camera purchase. And we're happy. I mean, I think it's important for investments to know. We do have auto renewal data, retention data, and we're happy with it. And this is something that we continue to improve upon. So it would be false to say that there's this cliff event coming that is this unknown for us. We do have a lot of data, and we're happy with what we're seeing.

And again, the behavior of this new cohort is even better, we think, more promising than the previous cohort that we're already happy with how they're being.

Brian McGee

And Paul, let me add one thing on that and maybe clear something up. On our goal to approach 2 million subscribers by the end of 2021, the biggest driver of achieving that is new subscriber growth, new people coming in. The retention piece, it's obviously important, and we want to get as much retained as possible. But that's not an area that's going to flip it one way or the other.

Yes. The acceleration is due to people coming into the program. So the retention, while it gets a lot of attention, is less dramatic than getting the new subscribers in.

Paul Chung

Okay. And just -- I get a lot of questions about the stickiness of the subscription and a lot of that focus is on the data. So say you're using the GoPro app and have a bunch of data on your subscription. And like how easy is that to kind of fold over to a different service or put it on your phone or your computer, it's like -- is that a big factor in retaining some of yourselves with the data and where you store it? And can you store other data besides what's being filmed in one of your GoPro, et cetera?

Nicholas Woodman

Okay. So no, we're not a walled garden where -- or a locked garden where we won't allow you to access your data. We want to be successful as a business by providing incredible value and service to our end users, not by trapping them. So that won't be a strategy of ours.

And in terms of can you import footage from your phone or another camera into the GoPro App, the Quik app, and then have that backed up in the cloud, the answer is yes. GoPro subscribers, along with Quik subscribers who -- not to confuse people, but the GoPro subscription is a $50 a year annual subscription for people that own a GoPro.

And it includes camera discounts, accessory discounts, full use of the Quik app, which is our app, unlimited backup of anything you capture with your GoPro at its original quality in the cloud, and unlimited backup of any footage you import from your phone or another camera, anything you import into the Quik app, and post to your mural, which is your private feed that helps you keep tracking your favorite shots, or any edits that you make. That content will also be backed up unlimited at original quality in the cloud.

So in this way, the GoPro experience can serve as your own personal content solution regardless of what camera or a phone you captured it with. This same experience is available to smartphone only users who don't have a GoPro for $10 a year instead of $50 a year. Because the smartphone user is only subscribing to the Quik app, only getting the app benefits and therefore, they get it at a reduced rate of $10 a year.

Paul Chung

Got you. I guess the point I was trying to make was that if people are comfortable with your subscription and your app and having all the data there, maybe they just -- the retention will be higher because they just don't want to port that over somewhere else.

Nicholas Woodman

So there's that. I think there's that, but they'll be able to access and import that content over.

Paul Chung

Yes, That's kind of it.

Nicholas Woodman

Yes. Yes.

Paul Chung

Let's switch to, kind of, the new flagship in terms of features. What are consumers asking for? Can you give us any sneak peak or anything on the new flagship at all?

Nicholas Woodman

Well, I can't, except I can say it's going to be impressive. We -- and then if you just look back at previous launches, we're pretty good at blowing people's minds year after year after year after year after year. It's like what we do. So we're going to do it again this year. We're really excited about that.

And as I would say, as Brian noted though -- and this is not to take away from the importance of introducing wow every year. But as Brian noted, it's all wow to new customers who are new to the brand and new to the product. So when 80% of your customers directionally are new, it's all quite impressive.

But with that said, we're in the business to blow the socks off of our most loyal customers every year, and we're going to do that again this year. Something, though, that I would say is really important is simplifying the entire experience for everybody.

Paul Chung

Make it seamless?

Nicholas Woodman

Really experienced GoPro users and new users alike. And as it relates to the GoPro subscription, one of the aspects that's really wow now, that people should know about, and one of the primary benefits of the cloud capabilities is as a GoPro user today, if you're a subscriber, you can have this experience where you capture with your GoPro, come home, plug your GoPro in to charge. And as a subscriber, your GoPro will push any new content on the camera up to your cloud account, while it's charging, automatically.

So that the next time you want to take a look at that footage, you don't need to go find your GoPro and manually offload footage to your phone or plug your GoPro into a computer, that doesn't exist and -- I mean, you can do that. But the much more convenient experience is to just launch the Quik app. There, your footage is in the cloud and you can stream it and watch it.

And it's a very streamlined, very convenient experience that is a major benefit to GoPro subscribers. It's kind of what people expect these days, but are only able to realize now as a subscriber. So as a fundamental baseline product benefit, you get this convenience. And so anybody listening who was hoping GoPro would be that convenient, know that it is now and you should try it, you'll be blown away. And it will get you using your GoPro more because it's just that easy.

Paul Chung

Okay. Great. So unfortunately, I didn't get to most of my questions, actually, but we've run out of time, and it was very important. And thank you for your time today. Great.

Nicholas Woodman

Thank you. Thanks.

Brian McGee

Thanks, Paul.