Good afternoon, everyone. Welcome to Oppenheimer's Annual Tech Conference. Today, we have the pleasure to host company GoPro and the CFO, Brian McGee. Before we begin our virtual fireside chat, on the IR of GoPro, Jennifer Jarrow have some safe harbor statement to share. Jennifer, please go ahead.
Thanks, Martin. 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 thirty-first, 2022, which is on file with the SEC, and as updated in future filings. Thanks, Martin.
Thank you, Jennifer. Brian, thank you so much for being here today. I would like to maybe start our chat with some of the very significant recent changes, you and Nick have introduced to the company, which is your go-to-market strategy. You know, maybe talk a high level, what was the rationale for the strategic shift, of your approach to go-to-market, and what are the key elements of that strategic shifts?
Yeah. Thanks, Martin, and thanks for having us present today. On that, let me kinda maybe dial it back to when COVID happened. We had to shift our strategy pretty significantly to drive more, you know, direct-to-consumer, as stores were closed, and we had to find a way of getting product to consumers, which we did. That was really a positive. In addition, as supply chain issues happened through COVID, you know, we could no longer, you know, afford or even acquire enough components to, you know, support kind of an entry-level SKU, right? Historically, you know, back in 14, 15, 16, 2018, etc., we had an entry-level SKU, and we would sell, you know, 800,000 or so units a year, kinda to that market segment.
Roll forward, post-COVID, the world's opening up, supply chain's improving, component costs are coming down, freight costs are coming down, etc., that, that was a time where now where we can actually get those components to support expanding our TAM. So that's one. Two, and, and so, so that enables us to, to drive that part of the market and also recognize we have to meet the consumer where they are, and that means kinda two things. One is consumers were out shopping more, so they were less online and more offline, going to stores. That was an important consideration, and that's real, and it's happening, and we're seeing that growth in the retail segment. Secondly, we have to recognize where the consumer is economically. Depends on food, gas, inflation, interest rates going up, mortgages, etc.
Having that entry-level price point is proving to be, yeah, a TAM expander and help consumers get into GoPro, right? Now, most of our customer base, in fairness, tends to be, be more upper income, so we know that from the demographic of our customer, but we know we have a lot of customers who aren't there, and, and we need to help them kinda get into GoPro. From a kinda camera and go-to-market perspective, that was important. We had closed... We had 36,000 or 37,000 storefronts as we went into COVID. We had to reduce some of those. We're at about 26,000 or 27,000, I would estimate now. You know, 3 million of those out of the 36,000 was Russia, Ukraine, so we can't be there. That puts us to about 33,000.
You know, we've, we've clawed some back in Q2. We'll get a few thousand more in this year, and we'll continue to, to drive that, and I think on our conference call, Nick had mentioned getting back to the 33,000 kinda level. A lot of that'll be in Europe and then some in the United States and Latin America. I don't think Asia was as impacted quite frankly on the storefront side, but we'll obviously look at that too. That was an important thing from a go-to-market perspective. As part of that, we estimate that, you know, the amount of products sold at retail would go from about two-thirds, even through, you know, 2021, 2022, is about two-thirds of what we sold. That'll go to 80% or 85%. It'll increase, but not, like, dramatically, right?
You know, gopro.com will still continue to drive that or drive their business, which, you know, I'll point out, got to be at a close to 40%, and that was up from 5%-10% pre-COVID, and now we're settling at about 20%. We thought it'd be a slight higher than that, but it's settling out to be about 20%. A little bit less than what we thought, but still you know, more than double from where we were even pre-COVID. That's an important, you know, consideration.
I think one other element to this that I don't think people fully appreciate is our subscription business. I'm sure we're gonna get into some of the mechanics. At a high level, kind of if you think about it, in 2021, our subscription revenue was about $54 million. This year it'll be about $100 million. It's double, right? We continue to drive subscribers. We, we were at one point, just under 1.6 million subs in 2021. We estimate we're gonna close out this year somewhere between 2.5 million and 2.6 million. A substantial increase there. You know, people go, "Well, why, why sell kind of the entry-level kind of price point at low margin?" It is low margin, we know that.
Well, we're pushing inventory, converting to cash. We can use that cash for stock buybacks, right? We have an engineering program that will replenish an entry-level SKU at an appropriate margin. I mentioned it's about a 300 basis point difference between what we're doing today and what we'll do in the second half of 2024. We'll drive subscribers. I mean, we'll sell 700,000 or 800,000 products this year in the entry-level category, $199, $249. That's gonna generate over 200,000 subs. Those 200,000 subs over two years will pay us $75. What is that? $16 million. That's before any churn. That's before year three. Maybe I'm getting $12 million out of that.
Well, that's great 'cause that's, that's helping our business as I look, as I look forward. I think one of the areas, and, and, and by the way, as we continue now to, as we've told you and the world, that we think we can grow into 2024 and 2025, A, because they've got this TAM expanding thing at entry level, we also have a, a really robust roadmap we think that is gonna generate unit growth, and drive innovation. So that's important. That drives more units. In addition, on the subscription front, we have our base subscription. We'll have a tiered subscription, right, for desktop, and we know from consumer insights that our desktop, application, we will push that to the GoPro subscriber for free, and we know from consumer insights that's highly valued. Now, why are we doing that?
We're doing that to attract new people in as a sub, so improve our attach rates, improve our one-year and two-year retention rates, which currently are 60%-65% year one, 70%-75% year two. If I can improve retention rates or, or attach rates, which we've done, like we were at low 20s a couple of years ago, 33% in Q2 of 2022, and then Q2 of 2023 over 40. We'll keep driving that because we'll add value proposition now, right? We'll continue to drive the retention rates. If we can do that and drive units, well, then we can start driving, you know, the subscription dollars. Out two years, right, we've doubled from 2021 to 2023. It can probably go up in a range of 50% or so by 2025.
That pushes you to $130 million-$160 million in subscription revenue just in 2025, but that makes 70 points of margin. There's $100 million of gross profit. That boom comes right down the bottom line, right? That's really good, and, you know, we've said we should be able to get into the upper 30s, you know, in margin. Part of that, a big part of that, is that growth in subscription. I can have our hardware margins be in the mid-30s, with subscription at a 70% take, now I'm in the upper 30s in gross profit, and we control our OpEx and that comes down to the bottom line. I don't think that's fully appreciated in how that model's out in our PNL in 2024 and 2025.
Just to put it in perspective, you know, this year, 2023, because we're, you know, selling our product, this lower margin, which we'll fix, we're at about 29 points of gross profit on those hardware sales, right? 2022 we were at 36, in 2021 it was 40, but currency helps, so if you adjust for currency, it's 36. Next couple of years, we, we know we can improve on the 29, and so it's not a stretch to think that, oh, this is how GoPro is gonna get into the upper 30s of margin on a weighted basis between hardware and subscription. That's why subscription is so important, and the more we can drive that, the more either profitable we can be, or we can drive price to, on hardware to keep driving subscriptions.
It becomes a flywheel in, in that sense, right? The entry level becomes an important aspect of that go-to-market strategy because it expands the TAM, which is great. We get higher unit volume, higher sales, it helps with unit economics, and it helps drive subscription. I hope that helps with kind of the model and the why, right? And the, the, the how we're gonna do it, you know, becomes, you know, we'll expand retail doors, which you kind of talked about. We'll expand our point-of-purchase displays, which really helps with merchandising for the consumer and the retail outlets. We will do a lot more marketing collaboration with retailers-...
to really try to help them reach their audience so that it's GoPro, we'll expand our marketing back to levels we used to be at, you know, in the 2017, 2018 kind of time frame. Then I'll include changing up some of that advertising to be less digital, I think more physical, so there's more presence for GoPro. We'll look at some other new growth initiatives that, you know, we can see as we've done some work out, out in the future. I think all of that kind of, like, drives a, a, a nice engine of profitability as we look out to 2024 and 2025. That's kind of a long-winded answer, but I think it was good to get that out.
I would call that a very comprehensive answer. Maybe deeper into the second quarter performance. You saw really a very strong customer response to the lower priced products. Maybe on a high level, how would you characterize the early customer response so far on the new go-to-market? How what did you learn from it, and how would you tweak based on what you saw in the early periods or quarters of that adoption?
Go harder, I think. Look, the success is good. We went from, you know, 0 to 60, flat out, our, our entry-level products were nil through 2022. We introduced it a little bit in Q1 and then Q2, went to 25% of our revenue was entry-level product. That's a nice shift for us, expanding the TAM, it shows there is a TAM there, right? We knew it. We tested it. We've had it historically, we tested two things. We tested what would our expectation be on lifts, which we hit, and two, what was our expectation of driving subs? They're both kind of important, the sub, you know, retention, as far as we can tell, is in the 25%-30% range. Well, think about it.
A year ago, the total retention rate of people buying at retail, and then, and then the attachment coming back through the app was 33%. We've matched that even on an entry-level price point, and of course, on, on our flagship product, you know, at, at $400, the, the attach rate, you know, via retail and on gopro.com, is, is way better than 40%, right? It's a nice blend-out of, of attribute for, you know, our subscription business. We, we will continue to expand and, and hold that, that price point. We just have to get the right cost point in there, and that's just gonna take a little bit of engineering effort. That's just time. The market's there. We've proved the market is there, and we've proved the subscription will tag along with it, right?
I think that's the important takeaway from Q2. We said when, you know, in Q1, we were going down this path, and we've proved it out. The one thing that, you know, where we got a little bit off a little bit in the estimates was, what was gonna be the percentage of our business on gopro.com? It turned out to be a little bit less than what we had predicted, but it's not terrible. I mean, it's still double where it was historically. By the way, we wanna continue to drive that because, you know, our margin profile on gopro.com is about 1,200 basis points better than it is in retail now that everything's stacked up.
Remember previously in the older model where we bundled, I said it was about 400 basis points. Now it's expanded. It's much bigger because price points are, are lined up, right? It behooves us to continue to find ways to sell on gopro.com.
You know, when you think about the lower tier products today, those are essentially older GoPro cameras. Understandably, you want to burn through those inventories before you introduce new, lower-priced cameras. You highlighted the lower, the next-generation entry-level cameras will give you some margin benefit based on redesign. Do you see similar redesign or similar margin benefits that come, that will eventually come to your higher-end cameras also?
Yeah, we're always looking to improve our cost profile, even on the high end, and we'll continue to do that. We've seen some pretty decent cost reduction on discrete components, memory. I mentioned freight, freight costs. We're, we're starting to see that maybe less on the SoC side of it. I, I think everyone's kind of in that same boat, quite honestly. But other costs are, are definitely coming down and, you know, that'll help our margin profile as we look ahead. Yeah, stay tuned on that. I think we have a good, robust roadmap that we can surprise and delight the customer and our investors.
Got it. Going back to the mix between your direct-to-consumer channel, gopro.com, and retail channels, do you feel that the 80 to-- 80 retail, 20 to gopro.com is the ideal mix? Do you, or, or do you feel that, you know, there'll be some more optimizations to be done?
No, I think first and foremost, foremost, we wanna be able to sell cameras. If it's sold at retail, great. If it's sold on dot com, it's great. I, I don't know that there's an optimal, quite honestly. Obviously, if we're selling more on gopro.com, well, the bottom line's better, as I pointed out. Okay, from that perspective, if we can do better there, that's good. But at the same time, we're, we're meeting the consumer where they are, and in fact, we have to expand doors, right? We're gonna go from-
Mm-hmm
... like, 26,000 to, you know, 33,000 or so, over the next, you know, year or two, well, two, maybe a little bit longer, depending on how long it takes to put that in. That helps to drive awareness, drive the brand, drives our POP, the shopping experience, the whole merchandising, and gets GoPro out there. I think it's gonna be buoyed by GoPro picking up its advertising efforts. I mean, we've gone. You know, when COVID hit, I mean, we couldn't do outdoor, right? Everything went digital, and now, you know, okay, we have to kind of move a little bit away from that and go more out of home.
You'll see us more in, in ski events, more in moto, more in, you know, events that are physical spaces where people are actually out and about, and will see GoPro. I think that's important as we kinda think what's the ad strategy? Because, again, it's meeting the consumer where they are. They're not sitting at home on their computer looking and shopping on digital or their phones. They're actually out and about, and we'll, we'll make sure that we're out and about with them.
I think in the past, you talked about, you know, maybe targeting, the travel, the users who are traveling, in addition to, the hard, hardcore sports enthusiasts, to have very different marketing messages. In your new, maybe a new focus to offline marketing and branding, is there any certain verticals or target audience that you will pay special attention to?
You know, we, we continue to drive... Well, obviously, we were impacted by COVID in travel. When that stopped, we had estimated back a while ago, we thought it was about 10% of our business. Clearly, some of that's coming back. We see it. We've seen it in Europe. We saw Europe pick up, I, I think last year. We're seeing China start to emerge and pick up. There's been a lot of travel inside China, and now markets are opening up, and flights are opening up from China to other markets, and we see that happening. We see a resurgence in business in China, which is important. We can directly attribute that to a certain extent. We see it in cruise. Cruise lines are going more.
We're finally actually selling back into cruise, duty-free, stores, in, in, international, destinations, airports, et cetera. You, you definitely kind of see that kind of happening. That, that's a, a tailwind for GoPro as travel continues to improve and people get out and about, and they can use their GoPro to go capture and document their events.
I want to talk about your subscription and its longer-term story around subscription a little bit more. With entry-level cameras, you are expanding the, your TAM a little bit, and but I think there is a sustainable install base for GoPro cameras. What do you think, comparing to the current attach rate, how do you think about the longer-term attach rate for subscription, and what would be your, you know, target, more stable, subscriber base in the maybe, in a, you know, two, three, or even five years time horizon?
Yeah, well, if we kind of talk about subscription, obviously we have our Quik subscription, which is just kinda $10 a year for people to use non-GoPro content. It's just their phone content, right?
Mm-hmm.
That's- we're nearly 300,000 subs there. That, that's an important segment, just, you know what I mean, you know, we help people document from what they've done on their phones or whatever. Then there's the main GoPro subscription, where we think we'll end, you know, between 2.5 million and 2.6 million, you know, subs. You know, you go back to 2021, we were at one point, just under 1.6, so that's pretty significant growth, more than 50%. If, if we're right about...
Our current, you know, attach rates, 'cause you asked the question, are just better than 40% in Q2, and that was both retail, so people buying at retail and then going to the mobile app store to download the app and subscribe, or people on from gopro.com, who, through the checkout process, they like, take the subscription. We even can tell, okay, they, they went through the checkout process, did take it, but then they came back later on the mobile app. Both are better than 40%. We wanna obviously continue to drive that, and we'll do things to drive it, like, for example, the desktop app.
That's important for people 'cause these file sizes start getting pretty large, and you can actually get content, into your computer and up to the cloud actually faster than I think you can do with cameras or have or even mobile upload. That's an important dynamic. Bigger screen and, hopefully, you know, much better capability from a desktop perspective in terms of machine power to help drive some of the edits. I mean, some of our file sizes can get, you know, pretty big.
Mm-hmm
... versus where they were a few years ago. That, that's definitely, you know, helpful. Then, you know, Our retention rates, and I mentioned what they were in year one and year two, it, they, they've now grown from, you know, being 50% or so in year one to now 60, consistently 60%-64%. As I mentioned, it was in the upper end of that range in Q2, and the second year is 70, 75. We wanna, you know, we will give, as an example, desktop for free to GoPro subscribers. We know there's attributable value there because we can measure it in consumer insights. I think that will help to expand attach rates, expand retention rates, et cetera. If we can grow units, right, you can start to see continued growth in subscription.
You know, you could, you could if you kind of model out kind of where we said units would go and, and, and modestly increase some of the KPIs around, you know, attach and retention, you could see, you know, nearing 4 million or so, maybe a range of, you know, 3.8-4.2, something like that, million subs in by the end of 2025, right? If, if, if we're right about where, where units and some of these KPIs and if we're actually delivering value. That kind of, those kind of numbers would generate, you know, $130 million-$160 million of, of subscription revenue out in 2025. Okay, at 70 points of margin, there's $100 million roughly, of just gross profit.
Mm-hmm.
Right? I'll remind you, we did $80 million of net profit total in 2022, right? 2021 was $146 million. It starts to become, as you start getting to 3 million, 4 million subscribers, you know, I'm not giving a time period of when we can get in there, but I'm giving you some KPIs of, well, if you model it out, you can get into a range that gets pretty interesting by the end of 2025. If you can generate, you know, $100 million of gross profit, that exceeds, you know, the profitability for most of the years of this company.
You know, by looking at that.
That shouldn't be lost on people, right? 'Cause that-
Right
... that's an important KPI, right, for our business. That's fundamental.
Yeah, definitely. I think, maybe in the past there was, at one time, you talked about the percentage of new buyers who are entirely new to GoPro cameras. I think that was a number larger, much larger than 50%. With the entry-level cameras, do you see that, you know, overall buyers into new to the GoPro ecosystem becoming bigger? What does that say about your confidence over the subscription plan growth?
Yeah, good question. Over the last couple years, the, based on our consumer, you know, research and, you know, talking to consumers, we estimate that about 90% of what we sell in cameras every year is to people who are new to GoPro. As we expand the TAM, and go into entry-level, that percentage probably increases, right? Somewhere between 90%-95%, I, I would think, right? That, that's a positive from the perspective of, you know, subs- you know, sales, subscription, subscription growth, that fuels it, right? That's an important metric. The flip is also true, which is if we're only getting, you know, 10% or so upgrading, if I can double that, that's 400,000 cameras a year I can sell, right?
That, like, that's the flip to it, and that keeps also because people get a discount on that camera on year two, right, when they subscribe. They're saving $100. They're paying us $50 for the subscription. If they wanna stay in, they buy a new camera, they're getting $100 off. That, that's a no-brainer, right? I mean, you're, you're two for one better, and then you, you continue to have, you know, your content on the cloud, you know, and all the, all the, the, the benefits that, that come with being a subscriber, including you break it, we replace it, and the cloud service and our editing service. There's a lot of positives that, you know, are, you know, financially related, that keeps people in, 'cause it makes sense if you're gonna engage in the ecosystem.
Also the services we offer and enable you to kinda not only document, but edit and share, you know, your experiences.
Got it. Yeah, I think that's a very powerful argument, looking at both the new users new to the GoPro ecosystem, and also the potential for the 10% upgraders for that audience to expand through software subscription. So in the longer term, do you think the behavior between, you know, users coming through your retail channel and gopro.com in terms of subscription attach rate, retention to converge to similar levels? Do you see them as two very distinct group of users or, or new customers?
Well, they're, they're both new customers. They just came to us via different channels. The good news is we have both channels, you know, one operating really, really well. You know, retail's doing well, too, but we have to expand the number of doors, and I think improve the merchandising experience. You know, at retail, let's be fair, retail's been closed for a while. They're coming up, you know, some of the, you know, POP is older, and, you know, it's time to refresh it. That's something we need to do, and we're actively working on. Ironically, the attach rates via both channels, at least in Q2, post the price move, were pretty similar, actually. Which is good.
It says there's one's not dominating the other, and both are doing quite well from an attach rate perspective, and it's our job to continue to grow that attach rate like we've been doing over the last several years, which is, you know, why, why we think, you know, if you look at the KPIs, you can, you can see a path in, you know, two years of being near that 4 million subscriber level. That's an important, like, data point, because it, it just drives so much, you know, free cash flow for the company.
you know, day 1, you know, when you open, you know, business January 1st, if you're out 2 years and you have that kind of, kind of number, you know, you haven't sold a, a camera, an accessory, a hat, a shirt, nothing, and you've got, you know, backlog sitting there of, you know, darn near 15% of your revenue. That's a big deal, right?
Mm-hmm. That 4 million subscriber number is a very interesting, I think, a long-term target to evaluate a business. In the past, we, we tried to estimate the active install base, trying to look at GoPro, similar to how, you know, some of the smartphone manufacturers are positioning themselves by measuring the active install base of the hardware as an indirect measurement of their future software revenue potential. How does that 4 million subscriber compare to what you estimate would be the active GoPro hardware installs?
Yeah, that, that's an interesting one. We're a bit unique, right, in, in how people use, use GoPros. It's, you know, you have your phone and your smartphone, you happen to be wherever you are, and you can easily take a, a snap, a video, a shaky video at that. You know, for, for GoPro users, the, the experience tends to be, it, it's a point-based product. Like, I'll use it when I go skiing, or I'm going kayaking with my son, and, right, you, you have it there, and just the, the color saturation and the video quality and stabilization is, is amazing, and the, the edits that come out of it, whether you're pulling stills from videos, which are very high quality stills, right? From a megapixel perspective, great imaging. That's how people use a camera, right?
Use it multiple times on their trips, if they go skiing or kayaking or mountain biking or, you know, surfing, whatever the case may be, right? Largely in places where you're not gonna put your phone, 'cause that doesn't make any sense, right? You're gonna protect the phone because... We'll give you the better POV shot and experience, you know, all in, whether you want to shoot linear or wide, or you use some of our, you know, Lens Mods to help you, you know, with that special shot. We're there for you to do it, and we're recognized, so you don't have to kind of worry about it. If you subscribe, and if you happen to break it, we replace it. You know, the consumer wins. We win.
Mm
... too, because we offer enough value that, you know, that, that's gonna just be, be awesome over time. The more we can drive that subscription number, the better off this business is, the investors are, and the consumer, 'cause the consumer wins with this program, and, and it's proving out. I mean, we've gone from, gosh, back in the day, we started this around, what, 2015 or 2016, and, you know, it, it was, you know, $2 million of revenue, and now we're sitting at $100 million. Like, it's been, like, it's been a great journey. We have more to go, but, it's, it's growing at a much faster rate because the value proposition, what we're offering, is, is correct for the consumer.
Mm-hmm. Yeah, I wanna maybe go one step further on the value of subscription. You talk about, you know, if you have 4 million subscribers, you get to, you know, $130 million-$160 million subscription revenues, $100 million gross profit dollars coming from those subscriber annual subscription revenue. How does that flow to the operating line? You know, you have double the gross profit of subscription over hardware. How does that ratio look like for operating margin?
The operating margin is historically been around 50%. As we continue to grow it, I think this year it's closer to, you know, 60% as we look at some of the incremental costs it takes to drive, you know, subscription and, and hardware, and I, I think that continues to leverage. You know, we'll bring 60 points. The, the amount of OpEx it takes to support is very low, right?
Mm-hmm.
So it's highly profitable to the bottom line.
Got it. That's great. I wanna move on to two questions regarding product development. Do you feel that the hardware improvement, the amount of, you know, hardware improvements is diminishing each year? How should we expect, you know, the, you know, how does GoPro camera itself gets better over time?
That, that's always been everyone asks every year we come out with a new product, like, "Wow, this is amazing!" How did you make it better than the last year," right? We've been doing that, every year. If I look at our roadmap between now, 2024, 2025, and beyond, as I think about kind of other opportunities and markets, we will continue to wow, and delight, our customers, delight the market, with new and improving, you know, hardware, software, services that go with it, subscription. We're not done with subscription, right? We'll continue to evolve it, between the base subscription, at the higher tier subscription and the value that, that comes with it.
I think over time, you know, we use, you know, AI, machine learning, computer vision today in our edits, and that's an area. It's not generative AI, where it's long form. It's short form into machine learning. We will continue to invest there, too, to, to drive the, you know, the, the value of that, edit and, and so that what, what happens from an auto-edit perspective that we give you back is continues to, you know, improve over time.
Again, that's another area where we create value for the consumer because once, once we can give you that edit, we've taken away or given you back an enormous amount of time, and you can take that and, and do your own edit and go, "Oh, that was cool, but I wanna add this, or I wanna add that," and you can easily do it, right? Whether you wanna do it on mobile or desktop, it won't matter. I think that, that's something as you start thinking about it down the road, where we will continue to invest in innovation in the company, is to drive that edit experience, because that's the other half of the value, right?
You created it, and now you want to be able to, like, take that and go without a lot of time, be able to share it, and that's pretty exciting as we're in early days there of how we bring that to market and help the consumer.
Got it. With that, I see no more questions coming from the audience. Thank you so much, Brian, for our time today. We're looking forward to our next conversation.
Awesome. Thanks, Martin. Thanks for having me.