Hello, everybody, and welcome to today's GoPro third quarter 2022 earnings call. My name is Drew, and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. If you change your mind, press star followed by two. I'm now going to hand over to Jalene Hoover, Vice President, Investor Relations, to begin. Please go ahead.
Thank you, Drew. Good afternoon, everyone, and welcome to GoPro's third quarter 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 and some commentary from Brian, followed by Q&A. For detailed information about our third quarter 2022 performance and our outlook, please read the management commentary we've 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, uncertainty related to the duration and impact of the COVID-19 pandemic and 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 the 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 as updated in future filings with the SEC, including the quarterly report on Form 10-Q for the quarter ended September 30, 2022. 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 third quarter 2022. The management commentary slides as well as a link to today's live webcast and 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.
Thanks, Jalene, and hi, everybody. Thanks for joining us today. As we shared in the management commentary, which we posted to the investor relations section of our website, in Q3 2022, GoPro delivered revenue of $305 million at the high end of guidance and cash flow from operations of $41 million. GAAP EPS was $0.10 and non-GAAP EPS was $0.19. Like many companies, GoPro's results for the quarter were impacted by a stronger U.S. dollar. On a constant currency basis, Q3 revenue would have been approximately $18 million higher year-over-year or up 2%. Gross margin over 40% versus 38% actual results and EBITDA to revenue approximately 16% versus 12% actual results. Considering global FX and macro economic challenges, we're pleased with our Q3 2022 results.
Q3 was an exciting period of new product launches and milestones. In September, we introduced our new HERO11 lineup of cameras, HERO11 Black, HERO11 Black Creator Edition, and HERO11 Black Mini. We're happy to report that Mini will begin shipping to gopro.com customers the week of November seventh and will be available at retail beginning the week of November 14th. We also launched an enhanced cloud experience that automatically sends highlight videos to subscribers. In August, we surpassed 2 million GoPro subscribers and are positioned to generate more than $100 million in annual recurring revenue with gross margin between 70%-80%. GoPro Subscription continues to drive value for our customers while serving as a powerful financial engine for our business.
At the end of Q3, GoPro subscribers and subscription and service revenue grew respectively by 55% and 48% year-over-year to $2.1 million and $21 million, which positively contributes to gross margin and our bottom line. We are on track to achieve 2.2 million subscribers by year-end. GoPro's resilience during these challenging macroeconomic times is testament to the meaningful role GoPro plays in people's lives, helping them capture and share experiences that would otherwise be impossible to document. We believe we're advancing our global relevance as a digital imaging solutions company that serves the world's most active and creative people. Our ongoing execution is thanks entirely to our talented and passionate employees. Looking ahead to 2023, we plan to invest in people, technology, and innovation that yield leading-edge products and services with an emphasis on subscription value creation and growth.
While we anticipate continued macroeconomic headwinds in 2023 and potentially beyond, we are confident in our ability to operate GoPro as a profitable company and to strategically position the company for when the global economy improves and currency exchange rates normalize. Our business is strong, our products are market-leading, and we feel well positioned for the future. Before jumping into Q&A, Brian has a few comments to share.
Thanks, Nick. I'd like to provide some color on our Q4 and full year 2022 outlook. As a reminder, there are both CEO and CFO comments in the extended management commentary posted in the investor relations section of our website. Looking ahead, we anticipate continued impact from key macro dynamics on our business, which we've contemplated in the fourth quarter and full year 2022 guidance. We expect to exit 2022 with cash of approximately $400 million, which contemplates continued share repurchases with $68 million remaining under our existing program. We expect the US dollar to remain at current levels relative to the Australian dollar, British pound, euro, and Japanese yen.
Our 2022 outlook reflects anticipated FX impact to revenue, margin, and earnings of more than $55 million compared to 2021, and up more than $20 million since our August earnings call. Unlike last year, when retailers struggled to secure inventory, many have an abundance of merchandise, resulting in reductions in open-to-buy dollars. Consumers are prioritizing living expenses and experiences over things, while also paying more for food, housing, healthcare, and other items as inflation hovers around a four-decade high. As a result, retailers are accelerating and increasing their promotional activity to reduce inventory, such as Black Friday deals being announced weeks in advance.
Looking ahead into 2023, we will manage the business with the following priorities. Laser-focused on remaining cash flow positive, laser-focused on subscription growth and retention, develop leading-edge technologies and innovative products, grow our total market share, manage appropriate levels of channel and owned inventory. While challenging in the present, currencies and the macroeconomic environment will improve over time. We are the market leader with an effective business model, which we believe will once again generate impressive earnings once macroeconomic conditions improve and currency exchange rates normalize. We expect to be profitable in 2023 while continuing to drive operating cash flow. We have the balance sheet strength to navigate the current economic environment and believe we will emerge an even stronger GoPro in the future as our business fundamentals are sound. Operator, we are now ready to take questions.
Thank you. We'll now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. We ask that you ask one question with one follow-up and then rejoin the queue for further follow-ups. Our first question today is from Martin Yang from Oppenheimer. Please go ahead.
Hi, good afternoon. Thank you for taking my question. Can you talk about the margin expectations for next year? What are the puts and takes, in very general terms, assuming no further currency headwinds?
Yeah. Martin, on a constant currency basis, we'd expect to be at the low end of our guidance, our operating model, which is 40%-43%. On a reported results basis, it's gonna look a lot closer to the guidance we've provided for the fourth quarter, so mid-30s%, ± around that, I would think, just given what's currently going on with exchange rates. It's all driven by exchange rates, by the way.
Got it. A follow-up on GoPro Mini. Is there any, you know, early signals you can get on, for instance, from reviews, from maybe core customer feedback on the Mini and whether or not Mini's delay has any meaningful impact on your full year guidance?
On the guidance question, no. As we talked, I think on the last call, our expectation is that Mini would be, from a software perspective, in the fourth quarter. I think number four in the lineup. HERO11 Black will be the best, HERO10 Black, I think nine, and then Mini. So that's been our expectation, and we expect that to hold. I'll let Nick comment on the reviews.
Thanks. Thanks for that. Well, I didn't catch the first part of that question.
Yeah. What are the customer feedback on Mini? You know, what the core users are saying about this new product?
Well, the media reviews haven't come out yet. Those are embargoed until we actually start shipping Mini. But the feedback that we've received just through the coconut wireless, if you will, is very positive. Mini is a result of continued demand for us to bring back the Session-like experience that we previously had in the Session camera. Those of you may remember that we had Session and HERO5 Session, which is a cube-shaped camera that was distinct for its one-button simplicity and really convenient form factor. I can assure everybody who is interested in seeing that form factor come back, we've hit it out of the park with Mini.
It's everything that Session camera was and so much more as it features all of the resolution, frame rates, performance of the full HERO11 Black camera, but in a much simplified and slimmed-down camera. It's become my favorite GoPro of all time. I'm really excited for this product to get in the hands of our customers, and I think it's going to be another hit for GoPro.
Got it. Thank you very much. Appreciate the call.
Our next question today comes from Jim Suva from Citigroup. Please go ahead.
Thank you, Nick and Brian, for the details. I have a question. We've been hearing about the electronics stores working down consumer electronics inventory levels. I know GoPro.com has been a great success, and you've been able to, you know, manage your inventories there a little better. Just wondering about your external inventory levels. How are they? What are you kinda hearing? I'm sure it's built into consensus expectations, but what should we think about inventory levels here kind of at the big box retailer storefronts and also just the small retailers?
Yeah, Jim, this is Brian. Let me comment on big box retail. In the third quarter, they reduced their inventories along with weeks of supply on a year-over-year basis. Their on-hand inventory declined about 25% year-over-year. They're definitely bringing them down, and I mentioned that in my opening remarks that the open-to-buy dollars are definitely down. We're seeing it. I think they were down to eight weeks of inventory. They're normally around nine, 10, you know, 11 this time of year going into the holidays. They're definitely squeezing inventory down. By the way, that, you know, that's not related just to GoPro. I think this is more of a broader industry-wide issue regarding kind of demand and what retailers are willing to hold. We're seeing it across the board.
It's not just big box. We're gonna see it everywhere. On the dot-com front, we're pretty pleased. I mean, they were up to 32% of revenue in the quarter. I think that was up from 30% last year. I think overall last year, we were about 34%. We should be between 35%-40% on dot-com this year. We're definitely making good progress on driving more demand to gopro.com. And of course, that's improving. You know, it'll help on our margin front, but it also helps to drive subscribers, right? 'Cause we have 95% attach on the gopro.com front. That's pretty exciting as we've made that business model change, and it's proving to be pretty sound.
On your opening comments, Nick made some comments about, of course, focusing on cash flow, but what caught my ear was the increase in subscriptions and market share. To do that, does it take, like, more employees, more investments, a reshuffling? Are those bodies already in place? 'Cause you have seen great success with your subscriptions, but it seems like Nick kind of alluded to even a bigger increase or focus, or maybe I'm just reading too much into that.
No. If you and Nick can comment maybe on top of me. You know, we expect to be at, you know, 2.2 million subscribers by the end of this year. That's up 40% over 2021. Another thing we pointed out is retention of our annual subscribers, who make up 85% of the total subs, has improved about 5%, actually better than 5%, from this time last year. We're seeing, you know, some companies reported their storage business was actually down in storage. We're the opposite. Our storage has doubled year-over-year for GoPro content. We're seeing real usage by the consumers, and now we're providing, you know, auto highlight videos for people who put their content up in the cloud. Which is another great service.
We'll continue to drive more software engineering into 2023 to continue to build out our subscription and service offerings because it's the most profitable portion of our business, right? As a product, a subscription is 70%-80% margin and the fastest-growing product we've got. We call it the financial engine for GoPro, and it's turning out to be the case.
Yeah. I would just add that we really want to emphasize to investors how laser-focused we are on growing our subscription business and investing in it to add ongoing value for our subscribers. It's proving to be very valuable to our subscribers. It's a differentiator for GoPro that goes beyond our already market-leading cameras. It's just clearly proving to be the financial engine for our business. It's really a everyone wins strategy when we emphasize our efforts around growing the value and scale of the subscription business. I think Brian said it well, and I'm glad that you picked up on it, Jim.
Yeah. Again, I meant the question in a very complimentary manner because it's been a great success. Thank you so much for the details.
Thanks for that.
Just to reiterate, if you would like to ask a question, please press one on your telephone keypad. If you change your mind, please press star followed by two. Our next question today is from Erik Woodring from Morgan Stanley. Your line is now open.
Hey, guys. Thank you for taking my questions. Maybe Nick, if I ask you the first one. You know, now that you've launched all of the new flagship and derivative cameras, can you maybe just elaborate on, you know, why you changed your strategy? Was it something in the data? Was it something that you thought was kind of low-hanging fruit? I'd just love to kind of understand, you know, now that you can look back, what the driving force was behind the strategy change. Almost getting to Brian's comment earlier, just how we should think about each of the new cameras in terms of importance to sell-in and sell-through. I have a follow-up. Thanks.
Are you referring to not just having a good, better, best of the same camera, but rather, coming out with different types of cameras at different price points?
Exactly.
Is that it? Okay.
Exactly.
What we learned through customer research was that what we thought before was people just broke into categories of different price sensitivity. You had your entry-level buyer, your value buyer who wants to buy last year's flagship at a discount, and then you have your tip-of-the-spear buyer that needs the latest and greatest and is willing to pay for it. We learned that there's a lot more to it than just price, and that there are also different interests at different price levels. It's a bit of a matrix. What we went to work on was developing not just products at different price points, but different experiences, different solutions for different types of consumers at different price points.
that gave us the confidence to, you know, go in both directions, to the higher end, with the HERO11 Black Creator Edition, which builds on the success of HERO10 Black Creator Edition the year before, where we really are pushing the boundaries of features and performance and also price. You know, it's our highest priced GoPro, and it's done quite well. It exceeded our expectations and stayed there, and we're really happy with that, and that's why we came out with the HERO11 Black version of that. As we moved into different products, we realized that, you know, as you come down the price stack, people are also looking for more simplicity. We're not done there yet.
We're still learning about how simple, how straightforward, yet still how capable, you know, ultimately in terms of the quality of video and photos that it captures, can we make a GoPro and make GoPro more accessible to more people who are maybe interested at a lower price point, but they want something new from us, and they don't necessarily just wanna buy yesteryear's product at discount after discount. We're not done yet with innovation and exploring new products that can court our customers in an exciting way to grow our TAM.
We're really happy with how it's gone this year, and kudos to GoPro's product development engineering teams and operations team for getting out such great products this year during, you know, challenging supply periods where there's challenges in supply and so forth. Once again, Team GoPro got the job done and the products are just outstanding.
Okay, that was really helpful. Thank you. Thank you, Nick. Then maybe Brian, if I just direct one to you. You know, you obviously alluded earlier in Q&A, and in your prepared remarks to big box retailers, you know, reducing inventories and weeks of supply. I'm just curious if from your seat, is there more inventory reduction to come, or have we seen most of it and now it's just kind of waiting for whatever reorders might come? Then any other color that you can share on, you know, how holiday demand is shaping up, how it might look different from last year would be great. That's it for me. Thank you.
Sure. No worries. In our prepared remarks, it did comment that our sell-through in the month of October was right on track to where it needed to be. That's been a positive. It's great for you know, our demand planning team has been doing a heck of a job predicting what our demand levels would be. Again, they did it in Q3. Well, we were able to kind of beat our numbers, so good job on that. This is a pretty challenging environment, and you'll see even in my guidance, the range actually is pretty wide for Q4. I think there's a bunch of dynamics at play here. Consumer behavior I think is gonna be difficult to predict in the quarter because of you know, living expenses and paying more for food, housing, care, inflation at all-time high.
I think that's, you know, interest rates rising. Those are gonna be difficult predictors. At the same time, we have retailers who are absolutely not willing to carry as much inventory as they have historically. Those two dynamics are playing out, and it's why we definitely took our numbers down for Q4, as have so many. We're not alone or unique in this, given what's going on. That said, I think our team's got a pretty good handle on kind of the demand dynamics. Like I said, we hit October. We're feeling good about kind of what our offers will be in the month of November and December. I think those are positives. We came out, you know, in the midpoint of this guide.
I also point out that we continue to track very well to the 2.2 million subscriber number. We still have two months to go, the big months, but so far we're tracking ahead. The key pieces of our business that drive this model are moving up to the right in the right direction.
Super. Thank you, Brian.
Thank you. We have no further questions at this time, so I'll now refer you back to the management team for closing remarks.
Thank you very much, operator, and thank you everyone for joining today's call. As I said earlier, our business is well positioned to weather these challenging times, and we're confident in our ability to operate GoPro as a profitable company until macroeconomic conditions improve and foreign exchange rates normalize. Despite the challenges ahead, we are very excited for the future. Many thanks again for joining today's call. This is team GoPro signing off.
That concludes today's GoPro third quarter 2022 earnings conference. You may now disconnect your lines.