Earnings Call: Q1 2021

May 6, 2021

Good day and welcome to GoPro's First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Christopher Clark, Vice President of Corporate Communications. Please go ahead. Thank you, operator. Good afternoon, everyone, and welcome to GoPro's Q1 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman and CFO and COO, Brian McGee. Before we get started, I'd like to remind everyone that our remarks today may include Forward looking statements and all other statements that are not historical facts are not keys 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 uncertainties related to the duration and impact The results could change at any time and our commentary and 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 on Form 10 ks for the year ended December 31, 2020, which may be We use non GAAP reporting internally to evaluate and manage our operations. 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 and which is posted on our website. In addition to the earnings press release, we have posted management commentary and slides containing detailed financial data and metrics for the Q1 of 2021. The management Commentary and slides as well as a link to today's live webcast and a replay of this conference call are pro investor relations website for your reference. All income statement related numbers that are discussed today during the call, other than revenue, are non GAAP unless otherwise noted. Now I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman. Thanks, Chris, and good afternoon, everyone. Before we get started, I'd like to encourage everybody to read the commentary we posted earlier today to the GoPro Investor Relations page on our website. In addition to providing an overview of our quarterly results and forward looking guidance, the commentary includes meaningful color about our business. I will now share some brief remarks and then we'll go directly into Q and A. First, I want to congratulate Our team for driving GoPro subscription business passed 1,000,000 subscribers, an exciting milestone we achieved in April. This represents growth of 80% year to date and 180% year over year. Equally exciting is that 1,000,000 GoPro subscribers represents approximately $50,000,000 of high margin Annual recurring revenue for GoPro. I also want to congratulate our team on growing direct to consumer sales gopro.com to 40% of total revenue for the quarter, up from 33% in Q4 2020. This also helps drive margin and subscriber growth as more than 90% of camera purchases at gopro.com With continued subscriber growth. Turning to our Q1 financial performance. Revenue in the Q1 of 2021 $204,000,000 an increase of 71% year over year. Direct to consumer revenue via gopro.com Exceeded $80,000,000 or 40 percent of revenue, representing gopro.com's 2nd highest quarter ever, Demand for our premium products increased in Q1 across all geographies. This had a positive impact on gross margins and non GAAP EPS. In Q1, GoPro generated non GAAP EPS of $0.03 Our year over year non GAAP profitability improvement was $54,000,000 Non GAAP gross margin in Q1 was 39%, up from 34% in Q1 2020. As I mentioned, This is the new GoPro. Brian and I will now take questions. Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. And our first question will come from Mr. Jim Suva with Citigroup Investment Research. Thank you. And I want to give my sincere congratulations not only to both of you, but your entire team's just truly remarkable Results and your outlook and it shows what the company is evolving to, so that's fantastic. When we start thinking about You mentioned in your prepared comments, 2,000,000 subscribers. I think you said by the end of calendar year 2021, that's great. The operating margins, should we think about sustaining that operating margins of 50% as opposed to getting leverage added or maybe it's you're putting more R and D and more enhancements to the subscriptions and that's why we should keep it at 50%, I'm just kind of curious about that. Yes. Hi, Jim. I'll take that. As we look at this year, yes, we've been running 50%. As we continue to Drive subscribers at a faster rate, it's going to outpace what we spend in operating expenses. So That 50% is going to probably grow into about 60% as we get to 2022. So it's going to continue to improve as a profit driver after the company and it's clearly having an impact on margins. We For this year, previously we were guiding 38% to 39% and now we're at 39% plus or minus 100 bps. So, I'm definitely seeing improvement in margin as a result of subscription, but also, of course, Doing more sales direct to consumer as well as the higher end of our product lines, which is driving ASPs as well. Thank you. And again, my sincere congratulations to you and everybody on all of your teams. Thanks, Jim. Yes. Thank you for that, Jim. Thank you. Our next question comes from Nick Todor with Longbow Research. Hey, guys. Yes, congrats on getting results as well. A couple of questions. So Brian, if I do some math, You guys had a very good quarter. You guided to 10% increase and sell through year over year if my numbers aren't correct. 2021. Thanks. Yes. Hi, Mac. We did see, Seltzer came in A little bit ahead of where we thought we would be in Q1. And so that was a positive that helped us achieve the $204,000,000 revenue in Q1, up 70% and we're guiding up in Q2 to 825,000 at the midpoint. So it's positive results and seasonally where we'd expect it to be. And for the year, we're So, holding for 3,600,000 units sell through for 2021. So, That outlook hasn't changed, although I think the mix is maybe shifting still a little bit more to the high end and that's Of course, topping margins a bit as well. Well, if I can follow-up, I think if my math is correct, that implies Your second half sell through will be down 6% to 7% year over year. I just wonder, that looks a little bit conservative. Is that how you view it? You try to under promise over deliver or how should we view that in that context? Yes. Our view is when we get to the second half, we'll see. We've held from a sales Our sales for the year with the guidance with we talked about 20% to 25% Year over year growth in 'twenty one over 'twenty. We've said that we think we're going to be towards the higher end of that range now, which is positive. So it's from a sell through And also, I think we're going to see channel inventories come down a bit more. So, We will see that in the second half. We also want to see how the world emerges with the pandemic. So, Yes. So that's how we guided it. Yes. Quick comment on, can you talk about what you're seeing From an inflationary standpoint and also regarding your inventory, particularly components, do you anticipate any impact on GoPro Yes. Obviously, we're seeing some impact on semis. That's Just kind of where the world is, right, from that perspective. But on the supply front, Shortages, they've been widely reported, but we have enough supply to meet our projections. So, I feel good about that. And we've been in a pretty good position to manage critical components Well, with our key ODM supplier Jabil as well as some of our other key suppliers. So, we We think we're in good shape there. I mean, it continues to move around, but we're managing it, our team is on it. And any kind of That are reflected are already reflected in our guidance for margin. So despite that, we think margins are going Just one question for Nicky, if I can squeeze. Nick, you mentioned if In the prepared remarks, did you foresee a desktop version of the Quick App? Can you give us any color? I know it's probably a forward looking statement, What should we expect a similar experience with the mobile app or are the economics similar? Any color you can give us there, I appreciate it. Yes. We shared that we see a desktop variant of our app in the future as We want to really meet our users where they are and serve them on whatever platform they're on, be it mobile, desktop or And sharing where we our vision of our software suite of offerings, How we see that in the future, I thought it was important to give investors an understanding of sort of the potential Reach of our brand and software as a solution set for users addressing Their personal content needs wherever they are. And as you can imagine, some of the more passionate Consumers who are more passionate about photos and videos have large amounts of them stored on hard drives and on their desktop and so forth. And so a desktop platform is a more Convenient way to serve them. We're not sharing anything in terms of timing or You know what the margin profile of that business would be, but I think it does underscore our opportunity They're using to capture their content and regardless of what platform they're using to engage with, To manage and enjoy that content. So it's a pretty exciting and significant opportunity we think is to serve people in the future. Got it. Thanks guys. Good luck. Thank you. Our next question comes from Paul Chung with JPMorgan. Hi, thanks for taking my questions. Great quarter and really good guide. So as we think about gopro.com sales and kind of projections for 40% to 45%, you're at that level today in Q1. I know 4Q And 3Q is probably more retail heavy, but how are you getting consumers to get pushed to the website? Are most customers aware that the Camera Plus subscription is kind of the best deal out there on your website? No, there's always going to be work to be done there because it would be amazing if we could have Instant alignment and awareness amongst all consumers, that'd be it's like a marketer dream. But fortunately, that's impossible to You're always bringing new consumers, new interest into the brand And they need to be educated. You have younger consumers who are growing up into the brand And they need to be educated. And so the answer is no. We do not have Universal awareness amongst consumers that the best value proposition is at gopro.com. But that's a good thing Because it means that there's a significant amount of growth opportunity among users who those consumers, those GoPro customers who are aware, who Our existing GoPro users, they may not be At the point in their GoPro product experience lifecycle where they're ready to upgrade and to take advantage of it. So We certainly have a large number of consumers that are waiting in the wings to buy gopro.com when they have to the next flagship flagship after that or what have you. So, there's a tremendous amount of opportunity left to drive awareness and conversion at gilper.com and that's from a marketing perspective and that's before we even start talking about improving the platform capabilities of our Shopping of our website to drive conversion further. I mean, as I've shared in the past, we were such a retail centric And focus business for so many years that the sophistication and capabilities of gopar.com as a shopping platform kind of just suffered from a Investment and focus, the positive to that now is there's just a ton of low hanging fruit to continue to improve the User experience, shopper experience and the site capabilities to drive conversion further, so lots to come. Got you. And then you mentioned attach rate of 90% on the website. What are some examples where kind of people opt out and why? And then what's that attach rate for kind of your retail channel as well? You're asking about it, the IQ test, Why would anybody not take advantage of the GoPro subscription and save $100 on their basket purchase atgopro.com. People buy for different reasons. We have commercial customers who are buying for There are businesses where a subscription doesn't really make sense for that, except you would think at a minimum the you break it, we replace it, no questions asked Guarantee it would be a benefit to everybody, but whether you're a fire station or you're buying it Also, we're aware that some people who are buying as gifts don't buy it with a subscription because We don't currently have the ability to transfer a subscription to somebody with a gift. That's something that we're working on, so that we can Capitalize on getting 100 percent of gift givers to buy it because why wouldn't you want to save $100 on your basket purchase by buying that subscription and giving it to somebody. So there's a lot of opportunity left there and that'll be rolling out throughout the rest of this year and on because the opportunity just you can never get on top of all Got you. And then Paul, you asked a question sorry, you asked about retail. So we're about 90% plus of cash on gopher.com with the subscription. And it's actually improving in retail. It was kind of in the 6% to 10% range. It looks like it's moving up to 8% to 12% as more people become aware of the Offering and the benefits. So we're starting to see improvement even on the retail side, which is good. Okay. And when we think about ASPs in 1Q, which were at a record, where can we see those ASPs go Kind of beyond fiscal year 2021, you already mentioned the 8% to 12% Increased but you layer in more subs, more accessories and then do you see some more room to maybe raise prices for the next flagship from this time around? Yes, I don't want to get into pricing per se, but I think just given that we continue to sell More at the high end, our accessory attacks, particularly on subscribers from GoPro.com are substantially higher On purchases that are coming from retail as far as we can measure it. And so and then the subscription, of course, adds to the numerator. And so, yes, I think ASPs continue to push forward definitely in 2021. I think we gave that range 8 to 12, Right. And then it will increase in 2022 as well. Okay, great. Thanks. Thank you. Our next question comes from Martin Yang with Oppenheimer and Company. Good afternoon, Mick and Brian. Thanks for taking my question. So is there anything you can share on the User engagement for your GoPro app and how many active users are there and whether or not there's any insight you could derive From that group? Sure. We're not going to be sharing any specifics of that on this call. But what I can say is, yes, there's a lot of insight to be derived Our team is doing a great job of capturing user behavior And also user outreach research to get their direct feedback to the new and improved Quick App Experience that we launched at the end of Q1 and the team is learning a ton. We put out a new release of the app every 2 weeks. So we're rapidly responding to what our users are telling us and we're dedicated to providing them The fastest evolving and best software experience that we can. That's exciting because this is a new, as I mentioned on At the top of the call, GoPro and that doesn't just relate to our business model This is also the new GoPro because we're much better at responding and developing towards what our customers are asking for as a more capable software company. So, We're really happy with what we're seeing. And even before the update to the Quick App, The previous GoPro app was 4.5 or better stars in the app stores. And so we've been really happy with where we've gotten that app to, but of course we think we've taken it to another level with the new version of the Quick App. And so you should please pay attention to our updates as they're going to be rolling off of the line here every 2 weeks and should be an exciting time. Thanks. I think in the past, there were references on, for instance, certain geography will have A more significant uptick in user engagement or activity, which implies that maybe certain regions have more opening up In the COVID environment, so are the kind of user insight you get from the apps, Are there any more useful signals for you or inputs for you to do business planning and even product designs Yes, it does help influence. I mean, We also learned how important travel is business because we can understand I mean all the data is anonymous of course, but We can understand where a camera is used around the world if they have GPS turned on and also where Camera was initiated like set up and initially paired to the app. And that helps us understand Directionally where an owner lives and what region and that how much they actually use their GoPro When they're out of their home region and they're traveling, and that really helped us learn how important the travel market was And we adjusted our marketing strategy years ago To court the traveler in advance of when they're during their planning stages for their trip and so forth because That's a target rich environment for us from converting consumers' perspective. And It also tells us now that we're doing remarkably well as a business given that travel is All but turned off in so much of the world. And so that's really encouraging as we look to the future of GoPro and growth opportunities as The world hopefully begins to recover from the pandemic in earnest as more people get vaccinated and as more countries open back up for travel people feel safe again. Without a doubt, our data indicates that this is a real growth opportunity for us, but terrific Essentially shut down. So that's an example of the type of data that we get from camera usage and from our app usage that helps My next question is on the accessory opportunities. How do you think about if there's any potential innovation you could do regarding camera accessories? And is there more accessories with unique abilities coming that may allow users to perhaps customize their cameras to More specific use cases outside of sports and travel, streaming or some of the online video, Could those be opportunities for you? They are. We don't call Our cameras are the world's most versatile cameras for nothing. And one of the ways that we make it easier for our Customers to use their cameras in more versatile ways is with the mounting accessories that we produce. It helps consumers connect the dots As to the capabilities of their GoPro and how it might serve them. And so, our accessories business is doing quite well. It's It's a really important part of our business. It's one of our key differentiators. And we have noticed that There is a demand for higher end accessories from us that offer Added value, added functionality and consumers are clearly willing to pay for that additional performance When we produce such a product. So, you will see continued new accessories from us at Higher end, as we seek to accomplish more for our end users and as they keep telling us with their purchasing behavior that And our Hyatt accessories have Different margin profiles versus the Canada? Brian, you want to take that? Yes, I've got that. Yes, I'm Martin. Yes, accessories in general are probably slightly better than corporate average On margin, kind of an aggregate. So it's accretive to margin. Got it. One more question and then I'll jump back to the queue. Brian, when you think about maybe the margin sensitivity To every 100,000,000 subscription revenues, what's the sensitivity to gross margins? And how should we think about the ongoing trajectory of having a higher percentage of subscription revenues and what does that Yes. It obviously helps it, but you have to put it in relative context So, how everything else in the business is moving, right? So, but it definitely helps it We're running 70 points to 80 points of gross profit margin on Subscription about 50 points or so as I talked about earlier and that's going to improve over time on operating profit. So It's definitely a contributor. It's one of our fastest growing product categories that is also helping to contribute to margins. And so when I talk about margins, you know, listening up a bit, in the second half, for example, half twenty twenty one, We'd expect margins in the 39% to 40% range and part of that due to obviously Camera sales, but also subscription is definitely helping prop that up. Got it. Thank you very much. Thank you. Ladies and gentlemen, at this time, we have no further questioners in the queue. So I will turn it back to Mr. Woodman for closing comments. Thank you, operator. Well, this is an exciting time for GoPro. And as You can hear we're energized by the opportunity ahead. To all of GoPro's employees and partners around the world, Thank you for making the magic happen. And thank you everyone for joining today's call. We appreciate your time and support very much. This is team GoPro. Ladies and gentlemen, this concludes today's call. Thank you for your participation.