GoPro, Inc. (NASDAQ:GPRO) 16th Annual Needham Virtual Technology & Media Conference May 18, 2021 3:00 PM ET

Company Participants

Nicholas Woodman - CEO
Brian McGee - CFO

Conference Call Participants

Vincent Kover - Needham & Co.

Vincent Kover

Good afternoon, everyone. Thank you for joining day 2 of the 16th Annual Needham Technology and Media Conference. My name is Vince Kover from the institutional equities team. I'm joined today with GoPro, specifically Nick Woodman, CEO; and Brian McGee, CFO. Thank you, gentlemen, for joining us this afternoon.

Nicholas Woodman

Thanks for having us.

Brian McGee

Thanks, Vincent.

Vincent Kover

Excellent. We're going to hold a conversation today for everyone in the audience. Please feel free to contribute if you are in the audience by utilizing your text box at the bottom of your screen. I'll be able to pose these questions to Nick and Brian for you. But before we get started, Brian, did you want to go over that disclosure quick?

Brian McGee

Yes, Vincent, thank you very much. 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. 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 risks 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, 2021, which on file with the Securities and Exchange Commission and as updated in future filings with SEC.

With that, let's kick it off. Vincent, thank you.

Question-and-Answer Session

Q - Vincent Kover

Excellent. Thank you for the formality there Brian. Nick, first question for you. I know you’ve recently reported earnings. You mentioned on the call that the company as the new GoPro. May be you could start off by providing some color on what that means in terms of your business transition?

Nicholas Woodman

Sure. Yes, by the new GoPro, we mean, the old GoPro was a hardware-centric business focused on unit sales as one of our key metrics, and unit sales is how we drove the majority of our gross margin and profitability. And that's how we started the business and grew the business and took the company public. And retail was the primary driving channel for generating those camera unit sales to the tune of 90% of our business going through retail, and only about 10% of our business going through dot-com.

So the old GoPro, hardware unit sales centric, almost entirely through retail, which involves distribution margin and retailer margin eroding GoPro margin, which raised the bar for how many units sales we needed to generate every year to achieve profitability. The new GoPro is a much more consumer direct model, which obviously has gross margin benefits. In Q1, our business was approximately 40% direct-to-consumer at gopro.com. And as well, the new GoPro is a subscription-centric business, which is having a very significant positive impact on gross margin and a predictable high margin revenue stream in the form of that subscription.

The two are going hand in hand, because the value proposition that we are allowed to offer consumers at gopro.com via subscription is outsized. It's a phenomenal opportunity to save at the time of your initial camera purchase, save on follow-on purchases, and get a number of very meaningful subscription based benefits that have ongoing value to the end user. So that's helping drive more consumers to purchase at gopro.com. So on top of everything else we're doing to grow our dot-com business, it's becoming a compounding effect, which these two gross margin enhancing activities driving direct-to-consumer and driving the subscription business are resulting in a significantly more profitable GoPro.

So we still have the same amazing brand, arguably more amazing because it's offering more value to consumers. We're still producing industry leading products. It's really just how we go-to-market and how we leverage this world class brand and product suite is yielding a more profitable outcome. That's what we mean by the new GoPro.

Vincent Kover

Excellent. I appreciate the clarity on that, Nick. And dovetailing off of those Q1 results and the Q2 guidance that the company gave, and Brian, please feel free to chime in wherever appropriate. What are some of the key takeaways regarding the first half of the year? And what would you say are the implications of the continued growth into the second half?

Brian McGee

Hey, yes, I'll take that one. Yes, in the first half it's getting back to profitability. The first quarter, we were profitable. We haven't been profitable in the Q1 since 2015. And you have to go back to Q1 of 2014, before we were profitable at this level of sales, $204 million. That's been a really good turnaround. As part of kind of what Nick was saying between old and new, our margins have gone from back in '17, '18, low 30s and now we're seeing 39 -- 38% to 39% to 40% margins. And so that's been a big shift driving more subscription. We're up at over 1 million now in Q2 in April. So we want to continue to drive that and trying to approach 2 million. It's kind of the next goal. But it doesn't stop there, right? That 2 million is just for where we're headed.

One important metric I think is important for the investor community to understand is about 80% of what we sell in units is going to new owners, people who don't own a GoPro, that's a little anecdotal, we don’t perfect data on it, but calling them 80-20 split. And so with gopro.com increasing as a percentage, and we have about a 90% attach rate on subscription with the offering, we see an expanding subscription offering, as we get go through '22, '23, et cetera. So doesn't stop it too. We've just talked about that kind of as a benchmark, just to get people to understand, hey, that's $100 million of annual recurring revenue. That's, call it, 50 points to 60 points of operating profit. So very profitable, but that profitability is going to continue to drive as we look ahead. And so that's the exciting part about the new GoPro, the subscription, the value we give to consumers, and the fact that they're updating it.

Vincent Kover

Awesome. Appreciate that, Brian. As you guys move forward, I'm very curious on, we've been seeing a lot of signs of recovery coming out of COVID. And hopefully we'll see travel start bouncing back over the summer. How do you guys think about that? Would you say that it's a tailwind for the business?

Nicholas Woodman

Absolutely. Travel is a big part of GoPro’s business, no doubt about it. And we serve the active lifestyle needs of our customers, the passion needs, the creative needs. And so you can think of it as different segments, right, of consumer activities and interests, and we’re a very meaningful tool, solution set for people. And travel is one of the larger markets for GoPro, because it's -- everybody can do it and does well. If you're able to afford it, travel, you're interested in anything, you do it.

And that has completely gone away with COVID and so people's travel became far more local. And you're hiking your local trails, instead of the trails to Yosemite and to seeing that coming back in earnest is very much an opportunity for GoPro. Just to give a nod to our retail partners, we're driving a lot more of our business direct, no doubt about it. But we still do quite a bit of business, 60% of revenue in the first quarter was done through retail.

And some of our best performing retailers are airport stores and stores in retail travel destinations, where people pick up a GoPro, because they didn't buy one before the trip and so forth. And then there's just a driving need for a GoPro to document that experiencing. So we're really excited about it. Our outlook for the year, obviously it'll benefit from travel rebounding, but it's not something that we planned on. You can't plan on anything in the age of COVID. You can hope, but you can't forecast based on hope. And so we're really happy to see the travel industry bouncing back. We hope that people are traveling safely. But it can only be a good thing for GoPro and that can be just set of human activity in general going forward. The more confident humans get over the next few months and year, that just plays into our wheelhouse.

I want to make it clear, because some investors have been confused about this. GoPro was not a COVID beneficiary. The consumer dollars didn't shift from doing other things like travel to GoPro. The reason why GoPro did well over the last year is we shifted our business to a direct-to-consumer strategy and a subscription strategy. And that delivered the frankly quite impressive results last year, amidst the depths of the pandemic. That was GoPro strategic execution that yielded that result. So, we are actually hit by -- look at our unit sales, they went way down, but we yielded a profitable outcome for the year, because of great strategic execution.

As consumers become more active and as the impact of COVID wanes, hopefully over time, that business we expect -- that consumer demand we expect to swell for GoPro, we will be -- we believe a post-COVID beneficiary. So, I just want to make that clear because some investors have thought that we were a COVID beneficiary because we had such a good year last year. And that couldn't be farther from the case.

Vincent Kover

You made that very clear there, Nick, much appreciated. And it sounds like travel is a big component of getting back to some of the historic levels that you might have -- saw before the pandemic. But are there any other paths towards those historic unit levels that you want to see?

Nicholas Woodman

Well, I think you have to ask yourself, what's changed in the world that would suppress our historic unit levels? Aside from reduction in human activity, and travel, nothing has changed. There's been no competitive threat, if anything, there's going to be a lot of pent-up demand to get out there and be more active and travel and live life and celebrate it. Well, that again, is GoPro’s wheelhouse.

You can say, oh, well, you reduced some of your retail door counts. So that'll cut down sell through. But we know that through research that a GoPro purchase by a consumer is a heavily researched purchase decision. So, during that research process, the user isn't able to find a retailer or gopro.com to buy it. Well, that's a problem but that's not the case. Because we still are widely available. GoPro was a -- sort of a -- on a whim purchase, like a pack of gum, well, then being in fewer retailers would actually hurt sell through because consumers just aren't bumping into your products frequently enough. But that's not really the way that a GoPro is purchased today.

And then on the flip side, there have been a number of value proposition enhancements to make a GoPro purchase even more rewarding, higher value returns for consumers with a subscription with all the benefits that we're offering, and frankly, with a lower price point. So we've expanded the value, reduced the price over the long-term with increased awareness, that should help us grow our business. So we think it's just a matter of time, until we get back to those kinds of numbers. And frankly, it's our job to grow beyond that. And we're pretty excited about our prospects as it relates to that.

Vincent Kover

Excellent. Shifting gears a little bit, gentlemen, back to the subscription platform. I understand that you guys hit about –a million subscribers on the platform. Can you share any color as far as when you're planning on targeting, hitting 2 million in subscribers and what that might look like over the next couple of years?

Brian McGee

Let me take that. It's kind of an extension of what I was referring to before. Yes, we actually hit a million a bit earlier, which is to great . Wewant to approach 2 million this year. We are on target to do that. And we're seeing that from kind of two areas. One is, gopro.com continues to have about a 90% attach with subscription. But we've also seen more recently people coming in from retail, a large increase there too. So, the attach rate is improving on the retail side as we drive more awareness. So that's pretty exciting.

Beyond the 2 million, we haven't given numbers for ‘22 to ‘23. But given my comments before, we expect subscribers to grow in ‘22, ‘23 and beyond. Because, as I said before, about 80% or so of new products purchased are the consumers new to GoPro. And we think the attach -- we’ll continue to ride on the subscription piece with the attach. So, we're looking forward to the outer years and to continue to grow the total absolute number of subscribers.

Nicholas Woodman

Yes, something I would add to what Brian said is, we've been asked by investors, what do you think are going to be the most retentive qualities of GoPro's subscription offering that will keep subscribers engaged? And on one hand, our goal is to load up the subscription benefits. So that we're serving -- we're benefiting a subscriber at different points during their GoPro experience. You have different needs, like, right when you buy, obviously, the camera discount is super helpful and then discounts on accessories are helpful. But then once you're kitted out, things like cloud storage and app functionality have more long-term value, then you come back around. So, when somebody wants to upgrade, well, there's the camera discount, again that kicks back end and that's all great. And that's just where we are today with the subscription benefits.

Our plan is much like Amazon did with Prime, is just to identify what are the broad array of benefits and value points that a broad spectrum of consumers will find valuable. And make it just an absolute no-brainer, one to sign up and two to stay a subscriber, because we're getting so much benefit. In addition to that, certain aspects of the GoPro experience will be significantly enhanced and made more convenient for subscribers, which just as a baseline experiential benefit to their every time use of a GoPro. That type of convenience will be evergreen benefit and value we think. So, we don't think that we need like a bunch of one hit wonders and always chasing the next benefit and so forth to keep subscribers. We think that just at the end of the day, being a subscriber is going to just make using your GoPro that much more convenient and help you be successful every time you use it. And there's a lot of value in that as well.

Vincent Kover

Excellent. If you could touch a little bit on the launch of your Quik App and how that's going. Ultimately how that fits into the overall subscriber strategy? That would be helpful from an investor standpoint.

Nicholas Woodman

Sure. It's important for subscribers to know that when we talk about our target of approaching 2 million GoPro subscribers by the end of this year, we are not including Quik subscriber numbers. So when you're thinking about GoPro's business, it's quite easy. There's a GoPro subscriber, which is a $50 a year subscription that benefits GoPro camera owners, then there is a $10 a year Quik subscription which benefits smartphone-only users or people that use other cameras than a GoPro. In addition to is, it’s sort of like a light software subscription for GoPro users if they're not already a GoPro full blown GoPro subscriber. So we think of the subscriptions as different businesses, different revenue streams and therefore different subscription tanks. So that's just really important to understand. And the purpose of the Quik App subscription for smartphone-centric users is to make GoPro accessible and relevant to people that don't own a GoPro.

We recognize that we are doing a ton of software development work, mobile development, cloud development, and eventually desktop development to help people get more out of their personal content, their personal photos and videos. And we realize that almost all of the work that we're doing for GoPro camera owners directly applies to solving problems for people that use their phone primarily, or use another camera. And it just didn't make sense to not make these software solutions available to everybody. And so the Quik App is our first action in doing so, and it's exciting because obviously, there's a pretty large number of people out there that have an interest in their personal photos and videos, who are also frustrated by how hard it is to keep track of their favorite ones, manage them in a kind of an entertaining way that's fun to go back to and revisit. Because what good is a photo or a video, if you only look at it at the time you took it, and then you never see it again, it’s kind of bizarre.

So we think that that's a pretty big opportunity that we're excited about over the long-term. And it also allows us to get tremendous leverage out of the software work that we're already doing on behalf of GoPro camera owners. It's not very much if any more work to make those software products available to non-GoPro camera owners. So it's not like we have to spool up a whole bunch of additional OpEx to go and do this development. We're building these solutions anyway. And it's an exciting time too because our software potential is not restricted by the number of cameras that we sell, right? So the Quik App and future software products will be -- they are the first GoPro products that are not really considered as a camera attach. So that obviously has a significant TAM expanding implications as well.

Vincent Kover

Great, great, excellent. It's pretty widely reported within the industry about the chip shortage. I'm just curious how if at all that affects your business and is there any steps that you and your team are taking to mitigate that?

Nicholas Woodman

Good question. Yes, there's definitely a chip shortage and has been widely talked about. We've done on this basically year ago and kind of looked ahead and we've been spending a lot of time on demand planning, forecasting our business and projected out and have been very consistent in our view of products and needs. So the team has done on it, and we've been able to satisfy demand for GoPros to the consumers, which has been great. Our expectations based on guidance we gave for the year that we have to supply to meet that guidance for 2021. So, so far, so good. It's a day-to-day thing now. But I think we're managing through it about as well as we can.

Vincent Kover

Excellent. On that -- based on a similar vein, very curious if you can share any insight regarding product roadmapping for this year? Is there anything that we should be expecting from the flagship launch standpoint in the second half of the year? Any thoughts you can share along those lines?

Nicholas Woodman

Yes. I'm excited you asked that, because I wanted to actually talk about our new products. I wanted to use this conference to tell you all about them. This is a global -- just kidding. Yes, all we can say is that you can look at -- sorry for that though, if I made anybody's split their coffee out, I was just kidding. What I can share about our roadmap is we're really excited about it. And you could look to historical product release cadence from GoPro as a guide on what to expect for the rest of the year.

We've been very consistent at launching new flagships. We've been very clear that that's a very important part of our business to engage and excite new customers, who are considering the brand, as well as to engage and excite our loyal existing users, and compel them to upgrade. So as with years pass, there will be an exciting new flagship later this year from GoPro. And obviously, some other surprises as well. So stay tuned and stay excited.

Vincent Kover

Everybody can appreciate a good surprise, I'm looking there Nick. And expected OpEx levels ticked up a little bit over the course of the year, it seems. Is this an optimal threshold for the business? Or do you think you'll need to make further adjustments to support your growth?

Brian McGee

We've done a heck of a job on OpEx. We've taken it down 2020 below 300 million. It peaked at over 700 million. So pretty sizable reduction, as we prioritized the business into where it is today. At the current level, we’re projecting about 320 million in OpEx. It's about the right level for this business. And as we expect to grow, even in 2022, I think it's largely in that range. We're committed to trying to drive more operating profit in this business. It's a very good cash generating business. We’ve generated 200 million of free cash flow in the second half of 2020, kind of balancing in a very good position. We expect to generate 150 net plus million free cash flow this year, mostly in the second half, as you'd expect, as we drive more of our revenue in the second half. But most of that free cash flow will be from earnings, not from improvements in balance sheet. We will have some improvements in balance sheet because of the direct-to-consumer model improves AR collection. So, for example, our DSOs have gone from mid 40s, down to 30, I think they can get maybe a little bit better. So we're counting on that. So the OpEx is just one piece of a larger puzzle of the benefits of direct-to-consumer, particularly on operating profit, and free cash flow.

Vincent Kover

Got it. Excellent. And Brian, maybe this one for you as well, if you can give us your thoughts on what factors are contributing to the expected expanded gross margins?

Brian McGee

Yes, there’s four or five factors that are moving us, Nick talked about kind of the old GoPro where we were low 30s margin to now we’re 39% or so. The factor in that, a more direct-to-consumer is more profitable. Our subscription business, the margins there have been 70 points to 80 points. So very high, it’s the fastest growing piece of our business, that's the most profitable. So that's contributing to it. The mix of what we sell, we continue to shift it more to the high end. That's where we make more of our money. And we’ve seen that in our ASPs. They have increased continuously over the years. That was very strategic and targeted. If I go back a few years, our ASPs were about $260 a camera; and roll forward today, it's more than $300, well above. So that's contributed to, obviously growth in revenue, but also margin.

And then as I get to the second half, the ops team -- our operations team has done a great job getting our U.S. bound production, realigned so that we avoid tariff for the most part in the second half of 2021 and then beyond. So that yields another point of margin. So we were impacted at about 1 percentage point or so in the first half of '21. And so we get that back a little bit in the second half of 2021.

Vincent Kover

Great, Brian, you mentioned the mix of direct-to-consumer, how should investors be thinking about that over time?

Brian McGee

Yes, it's going to -- we expect it will continue to grow. We've not provided an optimal level. It's going to move around a bit in quarter to quarter. We did expect that -- we increased in our last conference call the mix of our business this year. We think it's going to be 40% to 45% of overall revenue. And our previous guidance was 38% to 42%. So we've upped that for the year, I think it'll continue to grow in '22 and '23. It just becomes the value proposition we offer is strong on gopro.com for the consumer. Retail, so still is, as Nick had said, an important channel for us, even if I get to 50 points, this is still 50% in retail from 60. So, again, it's both channels are very important for the company. And I'd argue it's symbiotic too. And obviously that's one of the things that's worked as we've gone direct-to-consumer, we drive mostly our flagship product on gopro.com. It's highly researched. We sell mostly flagship on gopro.com. Retail sells flagship too. But they also sell mostly mid-tier and entry level but we don't sell so much of that on gopro.com. So that becomes symbiotic between the two channels and enables retail to grow, and us to grow on direct-to-consumer.

Vincent Kover

Excellent. I appreciate that. And just for the audience quickly, we're left with about 5 minutes remaining. So please feel free to enter any questions into the test box, happy to pass those along to a Nick and Brian here. Nick, real quickly, if you don't mind, can you elaborate on your capital allocation policy and how you think about future M&A opportunities if any?

Nicholas Woodman

Sure. I will split this with Brian. I think he's having a chuckle that I got asked the capital allocation question. As it relates to M&A, we always keep our feelers out for opportunities that could accelerate our vision, where, for us, we largely find ourselves considering nip and tuck type of acquisitions. We've done a number of acquisitions over the years, for our scale of business, big and small. And we've learned through wins and losses, what works well for us. So that puts us in a really good position to be realistic about what's really going to benefit us, what's our ability to really incorporate another company's capabilities to accelerate ours.

So I'd like to think that we're pretty good at it. Now, the last few acquisitions have been quite successful for us. But investors should consider this as nip and tuck acquisitions that they may never even necessarily hear about and know for shaking movers there. It'd be great if we came across something that was just like a really huge catalyst for the business. But today, that doesn't seem like an opportunity for us. But that's also terrific because it means that we're working on seems to be quite unique to us.

From a competitive standpoint, we're feeling really good. Obviously, that can change at any time. But it feels like we're on a really good differentiated path to create significant value for shareholders going forward. And it seems to be something that is, feels largely that we're in control of our own destiny on this one, it comes down to execution.

Vincent Kover

Got it. Anything to add to that?

Brian McGee

Yes. Maybe I'll add to that, and just say, like we expect to be in with cash in 470 million to 500 million in 2020, so up 150 million or so, or better on the year. That I would expect to continue in 2022. We have 125 million notes we will pay off in April of 2022. But beyond that, we continue to generate cash flow, if there's opportunity for some share repurchase to cover dilution. So we'll look to that as we get to '22 and beyond as we shore-up the balance sheet, and we have the opportunity to get something back.

Vincent Kover

Well, thank you so much for joining us today at our conference. Before we part, any parting thoughts for the audience?

Nicholas Woodman

Well, first and foremost, thanks for everybody's time. We really appreciate you taking the time to listen and hear about how much our business has evolved. And just on behalf of all of GoPro’s employees around the world, we appreciate that. And know that we're extremely excited about our business going forward. We love what we do. And we're feeling quite optimistic that we're onto a winning strategy here as it relates to driving more of our business direct, driving a higher percentage of our customers to be GoPro subscribers. And on that note, importantly, it's a win-win for everybody, because our consumer, our end user gets so much out of being such a subscriber that they feel like they're really winning. And we as investors and operators, have all witnessed what it does for our bottom line. So it just feels really good to be so closely aligned with our end users, and closely aligned with investor interest, that on a personal note I've never had more fun being the CEO of GoPro, so may it continue.

Vincent Kover

Excellent. And the passion definitely comes through, Nick. Thank you both for joining us today, Nick and Brian, much appreciated. For everyone in the audience, if there's any remaining questions, please feel free to reach out to team representative, happy to get that over to Nick, Brian and their team. Thank you guys again. Look forward to seeing you well in the future, hopefully in person next time.

Nicholas Woodman

Thanks, Vincent.

Brian McGee

Thank you so much.

Vincent Kover

Bye, bye.