Hi, good morning. My name is Paul Chung. I'm the applied emerging tech analyst here at JP Morgan. I'm pleased to have with me Brian McGee, CFO and COO of GoPro. Before we get started, Jennifer is gonna read a Safe Harbor.
Thanks, Paul. 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 31st, 2022, which is on file with the SEC and as updated in future filings. Thank you.
All right, let's jump in. Brian, lots of changes on the last earnings report, kind of a big strategy shift. Before we get there, can you talk about how the firm has evolved, and then we can talk about that strategy shift.
Yeah. Thanks, Paul, and thanks for having us. I think I'll maybe just kinda jump into it a little bit. The main points, 'cause I don't think it was as big a shift as maybe we made it out to be. We clearly wanna expand our retail presence, both at price points, and expanding indoors. We wanna expand our TAM, particularly entry-level products. That's something we haven't done since 2019, because of supply chain. Pricing, we've moved more proactively to stimulate demand, and that's working. But it's not as dramatic as considering we were heavily promotional before. Yeah, we moved prices from basically $500 for our flagship to $400, but given we were so promotional, the average pricing was probably around $4.25 quarter.
Going $4.25 to $3.99 isn't quite as impactful as people might think. That's an important point to kinda get across. Then we wanna drive subscription 'cause that's a big piece of the story and kind of where we're headed with 2.36 million subs going to, we think, two and a half million or so at the midpoint of what we guided. Those are the kinda key points we wanted to take away. In this move, you know, we said, well, retail, over the last two years, accounted for about two-thirds of our products, of what we sold-
Mm-hmm.
In terms of total units. With this kind of shift, being able to expand TAM, 'cause the entry level will be predominantly retail, and we'll have some newer products that are at the high end, more in 2024, you'll see retail shift from about 2/3 of the business back to about 80%, maybe 85%. It's gonna be in that range. Then gopro.com will be the rest. It's a move, but it's a strategic move on price point, recognizing where the consumer is in this economy, and we need to drive more units. The driving more units directly results in driving subscription.
Even at the entry level, because we tested it in Q4 of last year and Q1, we know that even if someone's buying a $200 camera, about 30% of the time they're subscribing. That's actually pretty important because there's a lot of value in the subscription. We're showing that there's value, and they're staying in it, and they're using it. Yeah, the high end definitely garners a higher percentage of subscribers, but even the low end does.
Okay.
That's kind of an important takeaway, for folks.
Great. You are kind of, you know, going back into the retail channel. You know, where are you expanding? I mean, you used to be in duty free shops, kind of some of these specialty stores. Is that kind of the same strategy you're thinking about in terms of retail presence? Maybe you can talk about regionally, how you're expanding there too.
I think regionally, you, we'll expand in North America. We're seeing now with travel, cruise is really back. It hasn't been for several years, and we're finally actually selling product in cruise. Duty free has definitely expanded. That's expanded in Asia and in Europe, which is great. We reduced about 30% of our total door count in 2020. We won't bring it back in, I think, the full 30%, but we will definitely increase in specialty. We'll increase in major retailers in Europe, in the U.K., Germany and France for sure. Expand distribution in Southern Europe. There's some kinda mid-market and specialty markets that we have the opportunity to expand in the U.S.
Right. You mentioned the DTC is going to be maybe 20% in the future. Is there gonna be any kind of renewed focus on DTC?
We'll continue to compete from a DTC perspective, we wanna do well at DTC. We're just saying this is how the shift is. If you think about it, most of our DTC is gonna be high-end cameras. We don't sell much in the low end, the low end will be mostly going through retail. That's okay. It kind of balances out from a You know, channel perspective. I think the other thing to point out with this kind of strategy is the difference in the prior model between D2C and retail was about 400 basis points in margin to the benefit of dot-com. It's probably around 1,000- 1,200 basis points, much bigger with dot-com today. We will definitely focus on dot-com. We'll be competitive on dot-com.
We wanna do as much as we can on dot-com because it's better for us and better for the shareholders the more we're selling there. It's a competitive world. You know, we're also noticing that the consumer is spending more time out shopping. They're more active, and so we have to meet them where they are, and that's why we need to expand doors.
As we think about the business model that's always evolving, talk about kind of the growth trajectory of revenue and margins, now with the kinda lower price point on the camera, but maybe more on the volume side and then attach rate with the subscription. If you could expand on that.
Yeah. We estimate sell-through to be about 3.2 million cameras this year. We think that can grow to about 3.6 million or so in 2024 and back to about 4 million in 2025. It kinda ladders up, because you go, okay, you did about 2.9 million the year before. The entry level, which we completely had to stop because of supply chain, that could be anywhere from a 500,000- 800,000 units. It was 600,000 in 2019. That can drive quite a bit of volume. We'll add more doors in 2023, 2024, probably 2025, that kinda ladders up. We'll have some newer products more on the high end that kind of expand the market as well.
It not only expands the market, but it balances out margin. Over the last couple years we've been kinda high 30s, low 40s margin. Currency impacted us a bit. This year, because of price protection to kinda make this shift, and selling some of the low-end cameras will be kind of low, 34%-ish. Our expectation is by 2024 and 2025, we'll be between kinda 38%-ish at the midpoint. Doing that and we're able to do that because the products we're gonna sell this year and a bit next year at entry level, those were products that weren't, you know, priced for that price point. It was really for much higher price, so we have the wrong cost.
We'll come out with new products, next year that have the right cost point for the right price point. I just gotta work through a little bit inventory, this year and next year to drive that, and that's cool. We'll drive cash, for this year. The result of that, though, as you get to 3.2 million, 3.6 million, 4 million units and get a margin profile in the upper 30s, is we generate a lot of profitability. Our estimate is we'd be over $100 million of EBITDA in 2024 and expect to be over $200 million in 2025. We said combined $300 million. It breaks out about like that. We, we have plenty of cash today, and we'll take that cash and, you know, buy back shares.
Who knows, we may buy back some of the debt too, 'cause that's due in November 2025, and we have plenty of money to pay that down too. We may do a combination of that. Nonetheless, from a shareholder perspective, I'd expect to see a you know, return to capital to shareholders as we generate that kind of profitability.
Gotcha. You know, what kind of trends do you think would maybe drive some upside to camera unit sales? I mean, you have, travels pretty much back at pre-pandemic levels, and I know there's some correlation there with travel demand versus, you know, how your camera sales do. But what are some of the things you think that could drive some upside to some of those estimates?
I think China drives some. Quite honestly, China's a big market for us. It's actually doing well. There's a lot of travel within China, and we're doing quite well in that market. For the most part, there's not a lot of travel going in and out of China. China is typically accounted for about 20% of the total travel market, internationally, and it's still near zero. There's not a lot of flights going in and out yet. As that emerges, that's definitely gonna help us. That'll help activity in Southeast Asia, Europe, and the U.S.
I think as importantly as kinda like travel and bigger macro things like that that kinda move the needle, moving pricing into the levels we've done puts us back in our historical kinda price bands, $200-$400. That's kinda the sweet spot of where we've been historically. We have really good data from not just consumer insights, but demand planning on where we would expect volumes to be at specific price points and within tiers.
Mm-hmm.
We've been doing this quite a long time. In fairness, getting it right. I mean, the last 10 quarters, 12 quarters. I mean, we've hit, you know, our top line numbers, and despite all the activities, have we had to pull numbers down occasionally, just recognizing where we are in the world and the economies? Yeah, we did, but then we hit the number. You know, I think we're pretty darn good at figuring out where the world is, where demand is, and demands at price points. The other important part is that translates, if we hit this volume correctly, into more subscribers. We think that'll be... If we hit these kind of volumes and the uptake rates that we provided on the call, you know, we should be at 3 million subs come, you know, ending 2025.
You know, already more than $100 million of, you know, subscription and service revenue this year, and that'll just continue to grow, and it's, you know, between 70 and 80 points of margin. It's a very profitable piece of our business. It will not only grow from just units, but it'll grow because, you know, we'll expand the offerings too. This year we have, you know, Subscribe to GoPro. It's initial $25 entry. Year two is $25, and we see that uptake rate quite nicely. We'll come out with a desktop version of that later this year. We know from consumer insights that's gonna have a really. Consumers really want that.
They want it because while they do a lot on mobile with multi-clip edits and single clip edits, and they'll do frame grabs and whatever on their phone, the fact is, when you're doing 5.3K, 60, 4K120, file sizes, you know, get pretty big.
Yeah.
Dealing with that on mobile can be challenging. Having a desktop application where consumers can now use it on desktop, and then share from there is actually really compelling. We know that from a consumer insights perspective. We can charge, you know, a higher price point for that and get people in actually who don't even own a GoPro, 'cause we'll enable, you know, non-GoPro content into that kind of segment. That's good. That expands our TAM, expands our price points on subscription. The other thing we know from consumer insights is that people who are existing subscribers to GoPro and paying the $50, they want that too. They'll get that as part of their overall subscription.
You know, while I wanna drive to the high end and drive higher price points, I also have to worry about retention.
Right.
That's another retentive tool where we're already 60%-65% retained on year one, 70%-75% on year two. We wanna keep driving that up, 'cause the more we can drive that up, that $3 million, if I'm right, could go much higher.
Yeah.
That's a real opportunity that we have. We modeled it out based on our current, you know, stats of, you know, subscribers and their behavior, but that doesn't mean, you know, we're gonna be static. We're gonna continue to offer, you know, value and improve the value proposition for
Gotcha.
for our customers.
Yeah. The retail attach rate for the first quarter was around 50%. What kind of drove this? I think you mentioned the stats already, but what do you expect for kind of attach rates for both retail and DTC? DTC has always been much higher.
Well, DTC has historically been higher because we bundled the subscription with the camera. We're not bundling anymore. It's straight up if you wanna take the subscription. I'd expect retail and dot-com kind of to normalize collectively. We expect for the year to be anywhere between 35% and 40%. That's the guidance range we gave, which was 2.45 million subs-2.6 million subs ending this year. That's an annual thing. What I have to worry about is seasonality. Our business is seasonal from camera sales-
Got it.
as you know.
4Q. Yeah.
We sell a lot in the fourth quarter. What happens is those sales in the fourth quarter translate into mobile attached subscription in Q1.
Yeah.
We have a very high numerator because of sales in Q4 coming into subscription, but our lowest sell-through quarter is Q1. I have a lower denominator and a higher numerator, so I get a much better, bigger attach. This is the math. We expect that balances out a bit throughout the year. We get into that 30%, 35%, 40% range. To put that in perspective, I think last year we were between 25%-30%. We've improved it a lot. We've done a lot of marketing in-app, letting consumers know, okay, this is the value proposition, this is what you're gonna get. We're kind of noisy about that in the app when you're attaching your camera to the phone. That definitely kind of helps to market it.
We've made it more aware, more front and center, as part of the strategy and talking to consumers.
Gotcha.
We're seeing that pay off.
Let's talk about the new products you launched last year, you know, the Bones Creator and Mini. What's been some of the reception there? As you talk about those and kind of the flagship, what's been somewhat of the kind of upgrade cycle that you've seen from the data?
Yeah. Bones was basically a Hero10 that we stripped down to be the lightest weight camera you can have for the aerial market for drones. We exited drones, which saved us quite a bit of money, quite frankly, in OpEx. It was a success from a commercial perspective in terms of market share, having Karma out, but just it wasn't viable long-term from a profitability perspective. Okay, fine. It's still an important market. People still fly drones. We were able to stay relevant in that market by creating a product that for, you know, drone enthusiasts, where you have a lightweight camera on top. That's fine. We charge $400 and pull a lot of cost out and make a lot of margin.
It's very successful from that perspective because it got us back into that market and it cost us nothing to develop that. From an ROI perspective, it was big. Creator Edition takes our flagship product and bundles a kit basically for vloggers. That's actually been very successful and it's a pretty significant percentage of our revenue at the flagship level. It's a really nice bundle. It's good for retailers as well because they can differentiate at different price points on their shelf. That's actually really good. Mini is doing okay. We said from day one, we don't expect it to be in the top 3 of sell through. It's in kind of 4 or 5 range of product.
Again, it's a deriv ative where people want a lighter weight camera. They don't need screens. They know how to work the camera. It's one button. It's pretty simple. kind of like Session was, but in this case, you know, much more, you know, capable camera from that perspective. Again, the investment there was small relative to what we would do for flagship. When you look at it from an ROI perspective, you go, Okay, I have a new camera for a different use case that enables somebody to want a second or a third camera, right? For their specific application.
Got you. On the, on the upgrade cycle. You release kind of a flagship update every year. What kind of, I mean, the camera itself is excellent. The quality is so great. I mean, what more can you do to kind of, enhance the kind of next gen and, how often are people gonna be upgrading and how do you entice them to upgrade?
Yep. We get that question every year. What more can you do? Yet we come out with really cool stuff.
Stabilization's been great.
Stabilization's been amazing. No, there'll be new features and benefits on the next upgrade. Actually we have a roadmap that goes out several years as well, right? We're not like, Oh, what are we gonna do next year? No, that's already in kinda engineering, right? It's gone beyond actually just hardware because you mentioned, you know, image stabilization. There's some hardware aspects to that because you require horsepower in your system on chip architecture that goes into the product. That's really a firmware, software kind of thing, right? That's one of the things that's started to differentiate us over the last few years is, yeah, the hardware is great, they're rugged and they work amazingly well and you get the coolest shots ever.
It's also comes with amazing software and firmware and stabilization and attaching to now the app, and now you can go camera as a hub. You come home, you charge your camera and your content goes up to the cloud, and within 15 minutes you get an auto highlight video automatically back, you know, using AI. As people talk about AI, it's like we've been doing AI and machine learning for years now with our editing service. That we'll continue to evolve that and make it better.
Mm.
It's not just hardware. We've been really making a lot of strides on software, in the company and you're seeing that in how we do cloud, how you get content to cloud, how you access content, how you can use our editing with. The most common features people want are multi-clip edits, single clip edits. They'll do extracts, you know, single pics out of video. They'll use Mural and then make their edit and they can share it. We've come a long way from, you know.
Yeah.
From when we went public, for sure in terms of the whole kind of system and architecture for the consumer.
Yeah. Can you talk about the desktop app 4Q launch? How that will help kind of subscription attach and what are the features and, you know, should people be paying a lot of attention? I assume so, yes.
I think they should be paying attention. Yeah. I can't get into the what is it that'll make itself evident when we launch it. It does two things. One is it, as I said, it enables us to charge a higher price point for people who just wanna do desktop editing. They don't wanna do mobile. They can use content that's non-GoPro. You can't do that technically today. That expands the TAM, kind of like what we've done with Quik, right? 'Cause Quik is another subscription we offer where people just have phone content, they wanna make an edit and then share that. For $10 a year, you can, you know, use, you know, our editing capability, which is great.
we've proven that out, and then we have about 290,000 or so subs last quarter just paying $10 million a year. $3 million a year at really high margin, and that's cool. Just kinda think about it like that expands the TAM up on the upper side, though. Again, retention, we know from our consumer insights data that people who subscribe to GoPro wanna have that capability, and we'll offer that as part of a retentive tool to. Hopefully I can grow that 60%-65% to 65% or 70% by offering that.
Yes.
as an example. That saves. You know, you get 5%, that's a lot. You know, 150,000-200,000 subs, you know, over time. It, you know, it cascades too, right? It lifts. If you can drive that over a couple years, that $3 million we said can is somewhere between $3 million and $3.5 million.
Gotcha. Just talk about the dynamics between annual and monthly subs, and are more, you know, folks thinking about the annual, and then is that more sticky and, you know, driving higher retention?
It's, definitely more sticky to be an annual. We've, over time, really pushed the annual subscription. Now it's represents about 90% of total subs.
Nice for cash flow as well.
It's very good for cash flow 'cause you get the money up front. Then we amortize it out over the year. Yeah, it's huge. The 90%, we've been at 90%, probably for the last year.
Okay.
It's really kinda been there, and I think it'll actually improve too. That, that's also good. I think while we're talking about subs too is the other reason to try and drive more through retail, aside from the fact that people are shopping there, so you wanna you gotta, you know, fish where the fish are, so they say, is over the last year, we actually generated more subscribers, who came in, who bought at retail and then came into the mobile app afterwards than we did through gopro.com, even though gopro.com had a 90% attach rate.
The absolute numbers, because, you know, I mentioned 2/3 of our sales volume was through retail, and as we've improved the that rate by which people subscribe there, from, you know, low 20s to now almost 50%, I mean, that drives a lot of volume. Another reason to be stronger on the retail side.
Then talk about the pricing power. Do you see opportunities to raise price? You know, what are some of the subscribers in terms of features using the most?
Well, we just basically lowered price. We can do that for a number of reasons, right? I mean, as you went through supply chain, we saw costs going up. A lot of people did.
I meant more on the sub-subscription.
Yeah. They're kind of interrelated, right? We said, Okay, we'll drive prices up, and now that costs are coming down, we can drive costs down. We did a similar thing. I mean, we had the subscription at $50 initially, and in December of 2021, we actually shifted it to 2025. We saw a dramatic uptick in subscriber rate by doing that. It was very elastic moving to 2025. The question is, what were people gonna do in year two if 'cause then they had to pay $50. We saw the retention rate was between 60%-65% on year two for people paying $50. That was a big deal.
Actually we have really good data from, you know, Zuora, who we use on dot com, and we're in the 90-plus percentile of, you know, businesses our size with the consumer from a retention perspective. It's very high. I know if I compare against others who have their whole business as subscription, and compare their retention rates, we're right up there as well. We're pretty proud about the kinda being able to hold it and keep it sticky. We won't raise that $50. I don't see that. If you want, you know, just to drive desktop with more content than just GoPro, you'll have to pay more.
So-
That's an opportunity.
a premium tier?
A premium tier.
Okay.
we'll have, you know, a $10 tier, a $25-$50 tier, and a, you know, a tier that's higher than that, TBD. Probably in the $80-$100 range, I would think. we'll end up with three tiers of subscription to accommodate, you know, the consumer's use case. 'Cause not everyone owns a GoPro. We get it. A lot of people... 1 billion phones are sold a year or thereabout. we're actually going after both GoPro market, phone market, and then even digital SLR, right? For the desktop.
Right.
If you think about it, right?
Let's talk about cash. You know, this shift to more focus on attach rate and subscription is gonna drive cash flow. There's a lot going on on the P&L, but just how do we think about free cash flow over the next few years?
Free cash flow. We ended at $300 million in cash last quarter. We expect to basically hold that through the year, but increase share buybacks. We were talking about $40 million. That's what we bought back last year. We think we can boost it to about $70 million this year. If we're right on volumes, we can take volumes to 3.2 million this year and up to 3.6 million and 4 million, or 4 million, and that's where we've historically been, you know, we have the opportunity to really drive a lot of revenue. You know, we will spend more in OpEx, but not proportionally at the same rate.
It drives a lot of free cash flow in 2024 and 2025, to the point where I think I mentioned it earlier, I mean, our EBITDA, if we're right, should be better than $100 million in 2024 and $200 million in 2025. Those aren't numbers that haven't been done. I mean, in 2021, we generated, I think, $163 million of EBITDA. Last year, 2022, was about $100 million. And that's after currency, right? Because currency impacted us $50 million.
Component.
You know, it's not like, oh, they're gonna do something they haven't done. No. We clearly have done it.
We have a couple minutes left. I'll open the floor up for questions, but I do have a couple here from the iPad.
Mm-hmm.
Number one, do you plan to meaningfully reduce share count, or kind of just offset stock comp?
No, meaningfully reduce share count. Our expectation. Our Stock-Based Compensation is about $40 million a year. That's pretty low by comparison to a lot of companies. I think our share count last year, including the dilution from the debt, was about 178 million shares. By the end of 2025, if we buy back at the rate we've talked about, we'd end with, assuming a current stock price, right? You'd end at 120 million-125 million shares. Down about 50 million. That takes out about a third of the float.
Yeah. Okay. That's pretty cool.
It's a lot.
Yeah. Next question, seeing a lot of patent filings from GoPro related to UAVs and even some on AR and VR glasses. What can you tell us about new product categories that GoPro is looking to enter?
I can say that we have a substantial portfolio of IP that covers a lot of products and a lot of applications that gives us the ability to, A, be defensive if you have to be, that's kind of the world we live in, but also to develop products that can get into new markets that expands TAM.
Gotcha. Any questions? okay. I guess we'll kind of wrap it here. To leave us with what's the kind of most underappreciated, part of the GoPro story today, and then we can wrap there.
I think, you know, we're very dynamic in the business. We recognize kind of where the world is, and we've had to change with it, and we tend to change faster, and we're way more dynamic than I think most companies are. We get ahead of the curve quicker than most. While there's some initial pain to do that, like last quarter and, you know, we'll take some price pro hits, you know, this year to align where we need to be, but everyone's kind of taking hits in '23, so it's a year to transition. That sets us up to have a very successful 2024 and 2025 and beyond.
Okay, great.
Thanks, Paul.
Well, thank you, Brian. Appreciate it.