GoPro, Inc. (NASDAQ:GPRO) Morgan Stanley Technology, Media and Telecom Conference March 2, 2021 5:00 PM ET

Company Participants

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

Conference Call Participants

Eric Woodring - Morgan Stanley

Eric Woodring

Good afternoon, everyone. My name is Eric Woodring. I am part of the IT hardware research team here at Morgan Stanley. Let me just read a quick disclosure for you here. For full disclosures please see the Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So with that, please join me in welcoming Nick Woodman, CEO and Brian McGee, CFO of GoPro to our conference. Nick founded GoPro way back in 2002. He’s been the CEO ever since while Brian joined in September of 2015 before being CFO [Ph] in 2016. So Nick, Brian thank you very much for joining us.

Brian McGee

Eric, thank you very much for having us. 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 risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2020, which is on file with the SEC, and as updated in future filings with the SEC.

With that, let’s rock and roll.

Question-and-Answer Session

Q - Eric Woodring

Cool, awesome. Thank you guys. So let’s start with the review of 2020, because in many ways, it was obviously a tough year for all of us. But it was also in a certain sense positive because it kind of helped shape what your business has become today, leaner and nimbler, kind of more focused on super serving your core customer. So maybe just walk us through what you learned in 2020. And how you and how you're using that to shape the future of GoPro.

Nicholas Woodman

Unmute. Okay, I'm unmute. That, as we discussed muting me can come in handy. Yeah, 2020 look, COVID, obviously, is everybody's nightmare. But ironically, for business for our business, it served as a catalyst to speed up some strategies that we were going to take more of like a three to five year approach to and we had to take a three to five month approach, because of COVID and that's taking our business more direct, and making subscription more central to our customers experience, and more central to our business model.

And one of the reasons that we fared really well, last year was that much of this was already in motion, it was just on another timeline. And so, we'd already done a lot of the research that made us comfortable that we could drive a much larger percentage of our business direct from gopro.com. We learned through customer research that a GoPro purchase is a highly considered, highly researched purchase decision. For most consumers, it's not a spontaneous bump into it at the store purchase decision. And we also learned that the vast majority of consumers that were research and consider buying a GoPro visit gopro.com as a part of their research process. And so it was clear to us that if we presented the consumer with a just hammer over the head, high value proposition that we can win a large percentage of purchases that would have otherwise not happened or would have gone to another retailer of GoPro.

And so that made us pretty comfortable that that data that research mean is pretty comfortable, that it was safe to pivot quickly to making gopro.com the highest value place that you could possibly buy a GoPro by making it available, making the flagship GoPro available to consumers at a discount if they also subscribed to the GoPro subscription for a year.

And so it's been a win win for us, it's been a win win for the consumer because they get enormous outsized value compared with what they were getting before. And, frankly, it's also been a win for our retailers who've had a tough go of it through COVID as well. You know, the natural question is how does this work for the retailer but our retailers are incredibly good at selling our entry level and mid-level products as well as our flagship, but they do a lot of business in our entry and mid-level priced products whereas at gopro.com, we primarily sell the flagship to traffic that comes through there.

And so by distributing our products, accordingly to where they sell really well, and reducing our retailer account to only the best retailers, we consolidated that offline business for the best retailers. And so for many of them, their GoPro business has grown year-over-year, which is incredible to say, even while we are, really showcasing and providing the most value around our flagship camera at gopro.com.

So if it wasn't for COVID, it, we would not have been able to move this quickly and have the support of our retailers and so forth. But because of how disrupted last year was, this strategy made sense for everybody. And I'm happy to say that across the board, everybody from our retailers to GoPro directly to our consumers are winning.

Eric Woodring

Awesome. That was a great summary. Maybe I'll touch on that the last point you're making about the DTC shift. So historically, the channel has been a big driver of your revenue, clearly that change this year 32% of sales came from gopro.com, that's going to 40% next or in 2021? How do we think about that trajectory, going forward, as you add more value to the opportunity on gopro.com. But at the same time, your retail tailors start opening their doors for, “normalized business” as we emerge from this pandemic. So is, is 40%, the peak that we should think about is 50, to 60 to 70, just kind of help us think about that mix shift.

Brian McGee

Yeah. Maybe I'll take that Eric. I think you're right, we did say we should be about 40% direct-to-consumer, in 2021. We expect it to continue to improve as we you know, there's there'll be more awareness, of course, on what the offering is on gopro.com.

And we'll be making investments, I think we talked about in our conference call on our website to drive more traffic, more conversion, make our advertising and CRM more effective to the consumers that we have. So all those will kind of work in tandem to continue to drive more business on a DTC, which will also drive more subscription. That's the other thing that Nick talked about. And we bundle these subscription with the high end camera, and we're getting about a 90% of tats, we've continued to get a 90% tats in 2020. And that's continued into 2021. So we're very happy about that.

And the result is, our subscription business is very profitable. It’s about more than 70 points of gross profit, it's better than 50% operating profit to the business. So when we look at our margin expansion from 36% in 2020, to 38% or so -- 38% to 39% in 2021. That's coming from our DTC growth, which is more profitable as a channel versus retail, more subscription, which is very profitable, and continuing to sell higher ASP higher margin, cameras, right and accessories.

So that's kind of the threat factor that's helping to move margin, continue to move margin in the positive territory. And if you look at kind of how we got to 2021 it put us on double digit EBIT when we should historically been flat. So it's the shift has improved margins, improved subscription is better for the consumer, we have a direct, more direct relationship with consumer. And we've been able to reduce operating expenses significantly in the model as well, which is a major factor to driving profitability for the company.

Eric Woodring

Awesome. So maybe let's let's dive right into this subscription service. You had 761,000 subscribers at the end of the year, you expect to reach a million kind of halfway through this year, 2 million by the end of the year are those still targets that that you believe you're still on track to achieve?

Brian McGee

You’re right. We were at 761 plus145% growth over 2019 and a 52% jump sequentially. So, nice improvement. Yeah, we said actually, yesterday, we're on track to be at a million subscribers in early Q2. So we are targeting for that. And our goal is to approach 2 million subscribers by the end of this year. And just to put that in perspective, as we get near 2 million subscribers, 2 million, that's $100 million of annual recurring revenue, looking ahead to 22 at you know, 50 points of profits.

So that's $50 million, looking into right their profitability into 2022 before we add any more subscribers. And so, the other nice part about this is this software and subscription piece of our business is helping to diversify their business. It's not just hardware, it's now hardware and software and that software component being very profitable, and the overall results for GoPro.

Eric Woodring

Super, so maybe just to build upon that point before we head to a different topic is, clearly you changed your sales motion in September to drive the bundled, camera subscription offering with the HERO9 Black. It's obviously been a tremendous success for you high attach rates. But those annual subscribers kind of come due next September. So what is GoPro doing to make sure that those subscribers stay on the platform, stay committed to the subscription service and kind of continue for more than just this initial one year period?

Brian McGee

Nick, you want me to take that or you want to go.

Nicholas Woodman

No, I've got this on a mute thing, so I yeah, sorry about that. So, as it relates to subscription, it's important for people to know that before we bundled the camera with a subscription, like gopro.com, we grew to roughly 500,000 subscribers, and with very low churn rates. And that's really important, because that proves that's great data that proves our ability to attract subscribers without, the camera discount and retain subscribers without the camera discount.

We have great data that shows that subscribers are taking advantage of the subscriber benefits. Average order values with subscribers are higher than non-subscribers, because they're taking advantage of the additional discounts at gopro.com. You know, as a subscriber, you get 30% to 50% off accessories at gopro.com. We're seeing a higher return to GoPro and purchase rates with subscribers than non-subscribers. And it's just really good to see that the subscribers are taking advantage of the benefits because it shows one they understand the benefits. And two, they're finding it valuable. So that's really important.

And again, that 500,000 subscriber count that we got to before bundling the camera. And the low retention rates that we saw there, we're seeing that continue with the new cohort. You're right, it is on the anniversary, where the subscriber it's an opt out events that would make a subscriber a nonsubscriber at that point. And our job is to create as much value for that subscriber between now and then as possible to ensure that they're motivated to stay honest subscribers. Some of the things that we're going to be doing to enhance the already significant value of go to subscription is we're going to be including at no additional charge the $10 a year subscription value of the GoPro app experience that's coming out soon.

That is going to dramatically simplify managing all of your personal photos and videos and helping you get more out of them. That is an app experience. It's also going to be open to smartphone only users and users of other cameras, but it will have significant benefits to GoPro camera owners as well. And we're going to be rolling out additional benefits to create more value for GoPro subscribers between now and the anniversary date.

But based on the data that we're seeing, so far, and the engagement level amongst our subscribers you feel really confident that the vast majority of those subscribers will stay on as subscribers after the anniversary date.

Eric Woodring

Awesome. So, you beat me to my next question, which was to talk about kind of the innovation engine on the GoPro side. You mentioned that the new app experience. So I'd love to, if you have any further comments on that, I'd love for you to share them just in terms of, what value you think you bring to non GoPro owners or smartphone owners or what pin point you're solving. And then just broad, more broadly for your platform, where you think there are other pin points, and then how you can solve them through new hardware, new software features.

Nicholas Woodman

Well, I think that all of that tie back to what is our vision for GoPro going forward. And if you asked me, a few years ago, two years ago, what was our vision for GoPro it would have been a much more camera, GoPro camera centric vision. We want to help the world capture and share experiences that only a GoPro can capture. And as we've developed our app capabilities, and expanded our worldview, of who we can serve, and who would be, we would be genuinely good at how we can be genuinely good at serving additional customers, we recognize that we have an opportunity to be the company, be the brand that helps everyone get the most out of their personal photos and videos, not just, you know, people that buy a GoPro camera. And it's because we all share, whether you're a GoPro customer or you just use your smartphone, we all have shared a lot of the same problems centered around how to make sense of just the vast number of photos and videos that we capture.

And you talk to anybody about how satisfied they are with the camera roll experience on their phone, and nobody's satisfied with it. We all know the feeling of seeing or capturing a great photo or video and looking at it wistfully, before you close out of the camera roll app, knowing you're not likely to see that image anytime soon.

And if you do, it's just because you kind of stumbled upon it. And that's not like a really satisfying content experience. These are our lives most meaningful moments. It's why you captured it in the first place. And so to solve that, we've totally revamped the GoPro app. And we've created what we call the Mural wall, that you can post your best your favorite shots to, from your camera roll or from email or from text, if somebody sends you a great image that you want to keep track of, without even opening the GoPro app, you can, you can send that image to your Mural wall. And you know, it's they're easy to find, and surrounded by all the other favorite images that you've sent there. And they're all in one place. And then tied to that experience is a deep suite of editing tools and auto video generation capability and so forth so that for people that want to get more and do more with their personal content they can. But even if it's just as a simple and fun way to curate your content, and have it all backed up that original quality in the cloud and, and just finally answer this, this, this very pervasive problem, which is, when am I ever going to make use of these photos and videos I take? The new GoPro app is the way.

And so when you ask what other problems are there so that we can solve for people? I think it all starts with first helping people manage their content. And so they come to you to engage with their content. And then at that point, you can layer on additional products and services to help them get even more out of their personal content and grow a really meaningful business in that way.

Eric Woodring

Awesome. That is that that was super thorough. Thank you for that. Brian, I'm going to shift you a bit here just to talk about kind of the cost and margin side. So OpEx is running near all-time lows, you've become much more efficient in terms of your OpEx spend. Just what have you been able to do? How have you been able to do that while still kind of keeping this innovation alive and perhaps accelerating?

Brian McGee

Yeah, I think we've prioritized exceptionally well on a company making the transition to DDC continuing to drive innovation and technology and then on our platform and making those the priorities for the company and where we're going to spend, and then everything else becomes secondary to that. I guess the one thing we would say is what we control is what we spend. And I think we've proven we can keep to be more efficient, giving OpEx from 700 and something million few years ago to under 300 million last year, while still driving innovation, I think it's pretty damn good.

Actually, we guided 2021 up slightly in OpEx, that will be the first time in five years, we would increase our OpEx. And again, it's for innovation, in technology, and on some of our new products, definitely on the platform, and software, and some of the things that Nick had just spoken about. And we'll leverage SG&A to be able to make those investments then hold on in OpEx to drive, basically operating leverage and expansion in the model.

Nicholas Woodman

One thing I would add to that to is even with our new software, and subscription initiatives, they're all based off of what we're already building for the GoPro community. And so we're getting tremendous leverage out of our development investments. And so it's not like we have to spool up new teams and make all these new investments to go serve smartphone users. It's really we're just, adapting our app experience here and there to be, more relevant to non GoPro camera owners. And there's, there's a tremendous opportunity and tremendous amount of leverage there. So that's, I think that's an important thing to know.

Eric Woodring

No, that's great, because it feeds right into this next question, which is, you have the mixing of subscription, you have the DTC mix shift, both that are positive tailwinds for margins. And so, clearly your margins are set to step up this year, should we think about 38% to 39%, being the long term margin opportunity? And from a gross margin perspective, could it be higher, obviously, as you as you mix in more subscriptions, just, any way to that we can think about kind of the long term trajectory of margins as you sit here today.

Brian McGee

Yeah, now, they can expand it, included in the 38% to 39%. We're still building some products in China, that has tariffs. And that's embedded in our guidance for margin, as we're, we shift that around that definitely helps on the margin front. As we the subscription side of it, that growth there and the new app experience, and with Mural is another area where that's not really in our guidance. Right. So that's upside and the new app is going to be our expectation is it'll be just as profitable as the current subscription model for GoPro. So that's another expanding and EBIT expanding opportunity for the company.

Eric Woodring

Awesome. So like that I kind of want to finish with capital allocation. And so clearly, this mix shift to DTC has been beneficial for your cash generation, you ended the year, you expect to end this year with, $470 million to $500 million of cash on your balance sheet. That's company record. I know some of it is earmarked for the 2020 to convert, but just how are you thinking about capital allocation today, or into the future as you do have a better cash profile than you have had perhaps in recent years?

Brian McGee

Yeah, no doubt the, the company's balance sheet is in a just really good position. We haven't been in this position for a number of years generating. We had cash flow from operations of over 200 million in the second half of 2018, and we expect to generate 150 million or so in 2021. We're generating cash. And some of it is earmarked for some of the debt repayments, we've got the 125 million to repay April of 2022.

As we hit kind of those numbers, there is the opportunity as we look ahead into 2022 and beyond to do more with that capital. You know, share buybacks could be on the table. We don't expect to do major M&A if we did any of these smaller prime more in the software realm than in the hardware space, small pockets. We do that periodically. So that would be kind of the use of cash proceeds.

Eric Woodring

Also, we have one minute here left. I just want to go back and touch on the subscription offering clearly because it's becoming much more important for you guys. That is, you've had success in keeping customers on the platform, you've had success in acquiring new customers, you're adding new features. Is there an opportunity to raise prices? Or is that not something that needs to be considered? I'm just curious how you guys think about that?

Nicholas Woodman

Okay, I didn't get to unmute -- manually. I mean, in the future, it's always an option, right? But it's, it's one. Make sure you do your homework on you don't want to get that one wrong, it happened to Netflix at one point. So when we feel confident that the retention rates are phenomenal, we're just bursting at the seams with value, then that's an opportunity. But that's an opportunity that we really need to earn. And it needs to be abundantly clear that that financially, makes sense. It's all about value for the end user. And so when we have created so much value for the end user, and we're helping them be so successful that we've earned the right to eventually one day raise prices, is that something we've considered sure, but that's, that's not really on the on the horizon, near term horizon.

Eric Woodring

Okay, awesome. So listen, we're right at. We're right at 30 minutes here. I really appreciate you guys both taking the time to sit down and virtually chat with me here. Look forward to having you back again. But I thank you very much for your time. Both you.

Nicholas Woodman

Thanks, Appreciate.

Brian McGee

Thanks, I appreciate that.