GoPro Inc (GPRO) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's GoPro's Third Quarter 2019 Results Conference Call.

I'd like to remind everyone that this conference is being recorded.

And then at this time, I would like to turn the floor over to Christopher Clark, Vice President of Communications.

Thanks, operator.

Good afternoon, everyone, and welcome to GoPro's Third Quarter 2019 Earnings Conference Call.

With me today are GoPro's CEO, Nicholas Woodman; and CFO, 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 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.

We do not undertake any obligation to update these statements as a result of new information or future events.

Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission, and in other reports that we may file from time to time with the SEC.

Today, we may discuss gross margin, operating expense, net profit and loss as well as basic and diluted net profit and loss per share in accordance with GAAP and additionally, 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.

We choose to provide this information to enable investors to perform comparisons of our 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.

In addition to the press release, we have posted slides containing detailed financial data and metrics for the third quarter 2019.

These slides as well as a link to today's live webcast and a replay of this conference call is posted on the GoPro Investor Relations website for your reference.

All income statement related numbers that are discussed today during the call other than revenue are not GAAP, unless otherwise noted.

Now I'd like to turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Thanks, Chris, and good afternoon.

Today, I'm going to update you on the positive reception of our new product lineup and some key performance metrics.

Then Brian will take you through GoPro's third quarter performance and our improved outlook for the rest of 2019 and 2020.

Simply put, all signs indicate HERO8 Black and MAX are unquestionable hits.

Since launch, unit sales of HERO8 Black at GoPro.com have eclipsed every previous new GoPro, including last year's flagship HERO7 Black by 40%.

HERO8 Black has also generated the highest social engagement and positive sentiment metrics of any new GoPro, up 57% over HERO7 Black a year ago.

Considering the success HERO7 Black went on to have, it's exciting to consider how HERO8 Black can contribute to our business.

And MAX is proving to be a standout as well.

Through the month of October at GoPro.com, unit sales of MAX shattered the debut performance of its predecessor Fusion by a factor of 4. MAX is like having 3 cameras in 1, addressing multiple consumer segments, be it users looking for a MAX-stabilized HERO camera, a feature-rich vlogging camera or a professional-grade 360 camera.

As we've shared, we believe MAX is going to play an increasingly important role in our business going forward, helping to raise ASPs and gross margins while delivering the wow innovation our customers demand.

Joining HERO8 Black and MAX in our new lineup are HERO7 Black at $329 and HERO7 Silver at $199.

We promised we were going to strengthen our business by maximizing value and performance at every price point, and we've delivered.

You won't find a weak spot in our offering this holiday, and we are confident in our lineup's ability to grow both top line and EPS in the fourth quarter of 2019 and 2020.

As we mentioned, since launch, HERO8 Black and MAX have sold through at record levels at GoPro.com.

And in fact, all camera models are selling well at GoPro.com with aggregated camera unit sales up 50% year-over-year.

We believe GoPro.com's sell-through performance serves as an encouraging indicator of demand as sell-through ramps in retail channels.

Our investment in consumer research has led to a focused and highly innovative road map.

Thanks to our customers' input and GoPro's incredible product and engineering teams, HERO7 Black and MAX both redefine what's possible with a camera.

We are confident these new products, along with our long-term hardware and software road map, can help us take more share of the greater $13 billion digital imaging market.

And while we anticipated this level of demand for our new products, the aforementioned positive social sentiment metrics are beyond our expectations.

As I mentioned, HERO8 Black generated a 57% lift in positive sentiment over HERO7 Black, setting a record for a new GoPro camera.

In the first month, our product videos, social posts and other launch-related assets achieved a global reach of 857 million, up 5% from the launch of HERO7 Black.

We generated 70 million engagements on social channels, up 74% from HERO7 Black.

And the HERO8 Black 8 launch video has become the most viral launch asset in our history.

This momentum builds off the widespread media and consumer acclaim we continue to see for our new products.

To give you a sense of the global press coverage GoPro receives during launch, there were nearly 4,000 articles and reviews published in the 10 days after our product announcement.

Reviewers acknowledge that we've taken our products to the next level of performance, versatility and importantly, appeal by addressing both the needs of our traditional customers as well as entirely new customer segments such as vloggers.

Again, we believe that by extending GoPro's brand and products to solve problems for a broader set of consumers, we can grow our TAM while taking more share from the greater $13 billion digital imaging market.

To further amplify excitement for HERO8 Black and MAX during the holiday quarter, we are rolling out an aggressive marketing campaign that includes out-of-home advertisements, including billboards in major cities around the world, a return to television in the United States, Germany, Australia and Japan and in theaters for major film releases.

And we will, of course, maintain a significant presence on digital platforms throughout the holiday quarter.

And speaking of marketing, GoPro content generated another record-setting quarter in Q3 with 234 million organic views, up 35% over our previous record set in Q1 of 2019.

Organic GoPro video views on channels like YouTube and Instagram increased 48% sequentially and 64% year-over-year.

These are huge gains on top of already large viewership numbers.

And GoPro's brand continues to scale on social platforms, gaining 1.2 million new followers across all channels to surpass 42 million.

Another area where GoPro is excelling is software.

We shared on our last earnings call that we merged the Quik mobile editing app into the GoPro app for a simplified one-app experience.

Within the first month of release, we saw monthly active users grow 8% and a 73% jump in the number of people using the app's automated editing tools.

This resulted in a 131% increase in total edit sessions.

This engagement bodes well for our plans to monetize the app in 2020.

And we are fired up about how our Plus subscription service is doing.

As of November 4, our Plus subscriber count was 305,000, up 21% since our last earnings call.

This accelerated growth is a result of several factors, including increased international availability, newly introduced annual subscriptions and improved in-cart accessibility at GoPro.com.

With this momentum and our planned road map, we are targeting to exit 2020 with between 600,000 to 700,000 paying Plus subscribers.

Momentum.

We've got it across our entire business.

Be it our market-defining cameras, our rapidly advancing mobile app or our accelerating high-margin subscription service, GoPro is steadily advancing on all fronts.

This puts us in a strong position for the rest of 2019, and we're confident in our ability to grow both top line and EPS in 2020.

And with that, I'll hand it over to Brian.

Thanks, Nick.

My comments on the third quarter will be brief today as we discussed our production delay and expected results during our October 2 call.

And our Q3 results were above those outlined during that call.

Our detailed results, Q3 quarterly comparisons and Q4 and 2019 guidance can be found in our press release and website.

After a quick summary of our third quarter results, I'll provide more color on why we are increasing our EPS outlook for 2019, thereby reaffirming that we remain on track for a successful second half and full year for revenue growth and profitability.

For the third quarter, revenue was $131.2 million with a non-GAAP net loss of $61.3 million.

Third quarter GAAP and non-GAAP operating expenses benefited from decreases in advertising, marketing and facility-related costs.

GAAP operating expenses were $99.6 million and non-GAAP operating expenses were $90.3 million, representing year-over-year reductions of 11% and 8%, respectively, our lowest quarterly level since 2014.

Turning to the balance sheet.

We ended the period with $250 million in inventory.

This short-term increase in inventory was due to the delay in shipping HERO8 Black cameras.

In addition, we pulled forward some HERO7 inventory to avoid tariffs.

We ended the quarter with $79 million in cash and cash equivalents and $72 million in accounts receivable.

Importantly, we expect to exit 2019 with an inventory balance of between $115 million to $125 million and cash and cash equivalents of between $210 million to $250 million.

Now let's discuss our quarterly business performance in more detail.

We estimate camera unit sell-through for the third quarter of 2019 was between 850,000 to 900,000 units.

We believe our HERO7 channel inventory declined between 35% to 40%, putting us in a good position for Q4 and the holiday season.

Camera units shipped during the quarter totaled approximately 0.5 million.

During Q3, we began shipments of MAX, which became available on shelf in late October.

HERO7 Black and MAX represented over 75% of our third quarter camera revenue.

Third quarter street ASP was 274, a 5% increase year-over-year.

Street ASP is defined as total reported revenue divided by camera units shipped.

Turning to guidance.

We are improving our gross margin outlook for the second half and full year 2019 from what was provided during our call in early October.

The main factors driving this increase are: We expect onetime costs related to HERO8 Black to be $3 million lower than we previously noted.

Production of HERO8 Black cameras ramped at a faster pace due to our combined efforts with Jabil, and we expect slightly lower operating expenses.

We continue to expect our mix of cameras to remain skewed to the high end, and as a result, expect ASPs to be above $280 per camera for the full year.

And we expect to increase our paying Plus subscribers to more than 325,000 as we exit 2019 or 75% growth over 2018.

And as Nick noted, we're targeting to exit 2020 with between 600,000 to 700,000 paying Plus subscribers.

Therefore, for the second half of 2019, we expect revenue to continue to be in the range of $680 million to $715 million; gross margin in the range of 37%, plus or minus 50 basis points, up from 36.5%; operating expenses of less than $200 million; non-GAAP earnings of $0.33 to $0.44 per share; GAAP earnings of $0.15 to $0.25 per share.

For the fourth quarter of 2019, we expect revenue to be in the range of $550 million to $585 million; gross margin in the range of 40%, plus or minus 50 basis points; operating expenses of $105 million, plus or minus $2 million; non-GAAP earnings of $0.74 to $0.84 per share; GAAP earnings of $0.65 to $0.75 per share.

For the full year, we expect revenue to be in the range of $1.215 billion to $1.25 billion, delivering growth of 6% to 9%; non-GAAP EPS in the range of $0.30 to $0.40 per share; GAAP EPS to be in the range of a slight loss of $0.10 to breakeven; and EBITDA of $90 million, plus or minus $5 million.

Additionally, for the fourth quarter and year, we expect onetime costs related to HERO8 Black production delay of $2.6 million in Q4.

We incurred $1.4 million of such costs in the third quarter; other income and expense to be $2.5 million expense; tax expense to be $0.7 million or $1.9 million for the year; share count to be 150 million for Q4 and 148 million for the year.

To summarize, we quickly recovered from the HERO8 production delay, and GoPro is on track to return to growth and profitability for the year.

We continue to expect to grow 6% to 9% on the top line in 2019.

And as a reminder of our financial progress, our EBITDA was negative $193 million and negative $31 million in 2016 and 2017, respectively.

Our EBITDA turned to a positive $22 million in 2018, and we expect positive $90 million in 2019, which is more than 4x increase year-over-year.

We continue to dramatically improve our financial performance while bringing dynamic new products and innovations to the market.

As we look ahead to 2020, we expect to grow revenue, both units and ASPs, expand gross margins, drive operating leverage and meaningful increases in EBITDA and EPS in 2020 over 2019 levels.

With that, operator, we are ready to take questions.

(Operator Instructions) And first, from Citi, we have Jim Suva.

It's great you gave some original -- or some initial guidance for 2020.

You mentioned some words like meaningful and growth.

Are you now -- are you positioned to at least bracket that at all so expectations don't get too ahead of themselves?

And if not, and then I also have a follow-up.

Yes.

Jim, this is Brian.

First, just as a reminder, in 2019, we have great products that just hit the market, growing 6% to 9% in revenue and increasing profitability dramatically along with EBITDA of about $90 million.

As we frame 2020 and what's meaningful is, at a minimum -- and this is not providing guidance or target, but this is our targets.

We want to grow at least by 40% off our midpoint of our guidance for 2019 for earnings per share.

And we want to grow EBITDA, off the $90 million, at least 25% in 2020.

So that's a pretty meaningful increase in both earnings and cash flow for the company.

That detail is greatly appreciated.

And my follow-up is, is there anything different about this Christmas holiday season competitively or the marketplace compared to the past?

And I'm not talking about your product is very good and strong.

I'm talking about like shopping trends or behaviors or promotions or product placement or keystone market caps or something.

Just wondering if there's anything different from a market perspective that we should be conscious of that you guys have embraced or seen out there.

Well -- Nick here.

Every year, we get better and better at how we approach the holiday quarter.

And as we shared last year and is again the case this year, we're working much more closely with our retail partners, bringing them into the fold earlier in our sort of the Q4 market plan, advertising planning process so that we can combine efforts with our retailers to have much stronger presence in their stores and in all of the advertising that they do.

So from that perspective, I think we're going to do an even better job than we did last year with HERO7 Black, and we did a pretty darn good job of it then.

I'd say that there's more retailer and channel confidence in GoPro this year than there was last year.

Last year, it was a bit of a show-me year.

And as we all know, HERO7 Black did a terrific job of showing the world what our brand is capable of.

And so coming into this year -- and we're coming off of the strong 2019 Q1, 2 and 3 with our retailers.

So their confidence is high coming into the quarter, which -- that's really helpful in terms of gaining support for HERO8 Black and for MAX.

And then we're also feeling really good about the entire lineup that we've got from $199 with HERO7 Silver, $329 with HERO7 Black and then $399 HERO8 Black and $499 MAX.

I mean it's just a blockbuster lineup that we've got.

And the sell-through that we're seeing at GoPro.com is really strong, and the product is evaporating from shelves at retail when it hits.

So every indication is that the products are unquestionable hits with consumers.

And that just, in turn, gives retailers further confidence in our products and in the brand to do really well for the holiday.

So I think we're feeling good.

Our retailers are feeling good.

And we should expect to have a strong quarter.

Yes.

And Jim, I'd do one kind of follow-up on that.

In particular, for MAX, relative to Fusion, we'll see -- just because of the price point and the kind of product it is, we're going to be in about 4x more doors with that product around the world, which really helps to drive unit growth and high dollar growth and really good margins.

So again, that's another element that we've now been able to bring to the table.

And moving on, we will hear from Erik Woodring with Morgan Stanley.

I guess if I just start out, just curious if you could provide any update on the production delays you mentioned a month ago.

Was there any issue with the supply of HERO8?

Are there any lingering effects?

Just any more color on that production delay.

And then I have a follow-up.

Yes.

This is Brian.

Yes, like we said before, we're not going to get into the details, but I can say it's behind us.

And we're just moving forward.

Okay.

Perfect.

And then I guess the second question would just be -- you provided some really bullish data points about early sales of the HERO8 and the MAX on GoPro.com.

But the last quarter, you said it was roughly 10% of sales.

So I'm just wondering if you can kind of speak more broadly about all your distribution channels, just how the 8 and the MAX are selling.

I realize that they were only available on GoPro.com initially, but just any more color you could provide kind of more broadly across the distribution channels would be helpful.

Well, we are seeing, as we shared, really strong record-setting sales at GoPro.com for both new products and strong sales of the entire line, frankly.

That's something that, I think, is really important for investors to know, that the entire GoPro line is selling strong.

So that's terrific to see.

We've done a great job of realigning the lineup to do a better job of meeting the needs and desires of the different customers that at are each different price points.

So I think we're doing a better job of that this year than we ever have before.

And then as it relates to retail sell-through, product is more or less evaporating as soon as it's getting on shelf, which is terrific to see that the GoPro.com sell-through performance seems to be mirrored through our retail channels.

And then beginning next week, we think that supply to stores gets ahead of demand to where retailers can actually have product on shelf and capitalize on that demand more fully than they have been to date.

But so far, every indication is that demand for the products is matching up to the positive reception that they've seen since launch.

And I think it's important to note that we track social sentiment, consumer sentiment around the new products from year-to-year.

And we're seeing substantially higher positive consumer sentiment, consumer response for the new products than we have in the past.

So that's great -- another great indicator of consumer interest.

And next, we have Andrew Uerkwitz with Oppenheimer & Company.

For my first question, Nick, you mentioned broadening your marketing channels, et cetera, going to TV and other others.

And you also mentioned vlogging as an area of growth.

Should we expect to see on your digital presence more partners, whether it's Twitch streamers or live streamers on YouTube as partners to drive interest in the products?

Or is most of it is just going to be traditional media?

Moving into vlogging has definitely allowed us to expand the types of influencers that we work with to help get the word out about our products and through their authentic use of our product, demonstrate to consumers how relevant GoPro can be to them.

So in addition to addressing a new customer segment with both HERO8 Black and MAX' vlogging capabilities, it just also affords us the opportunity to work with more people to grow the brand.

So yes, that is something that you'll be seeing from us.

And like I said, the consumers' reception to the new functionality and capability of the new GoPros has been really positive.

It's something that I think consumers had to connect the dots a little bit more on with our previous models.

And there was a lot of speculation as to the viability of a GoPro being used effectively for vlogging.

But I think we've answered all of those questions and doubts with this year's lineup.

And you only need to do a GoPro search on YouTube to see just how many vlogger reviews there are of the new products and how well they're received to get a sense that we're definitely hitting the mark on that front.

Got it.

No, it's -- I think it's a great opportunity.

My next question is on the MAX.

Any fear that the MAX might take share away from the 8 Black?

No fear from a -- well, it's always nice to upsell our customers to more capable and more profitable products.

So that's terrific.

I think you may be -- your question may specifically be about does demand outstrip supply of MAX and at the expense of HERO8 Black.

Yes, yes.

And no, we're not worried about that.

These things take time for consumers -- I mean the HERO camera line has such a strong brand, right?

And so we've done a really great job of establishing that as the go-to choice for any consumer that's looking for a GoPro like camera.

And so as exciting as MAX is, and it is doing as well as we had hoped it would and more, it's going to take some time for consumers to get -- one, become aware of MAX versus the HERO camera; and two, get comfortable with the idea of dual-lens, 360, vlogging and HERO camera all in one.

I think that it's going to take share over time from the HERO camera and that in the future, I do think that MAX and MAX-like cameras from GoPro have the potential to be the category-leading camera that we sell.

But again, that's going to take some time, and that affords us the ability to grow into the opportunity versus it being like a light switch that we can't respond to quickly enough.

We don't see a risk of that happening.

Got it.

And then last question on the software side.

If we think about MAX, are there certain limitations you have to overcome before the software AI can catch up to the auto-editing of the MAX versus something like the HERO?

No.

It's just work, and we're progressively getting there.

And I'm assuming you have used MAX, as I know you're a fan of Fusion.

And if you haven't used it, you're going to be very delighted and surprised at how far we've come with the mobile experience and with the keyframe editing.

It's -- again, just watch some of the reviews on YouTube, if you haven't used the product yourself.

And you'll see that we really surprise people with how far we've taken that app experience.

Kudos to our team for nailing it on this one.

And from this great starting point, our customers can expect continued advancement in the mobile editing experience from GoPro, both for MAX and for the HERO camera as well.

(Operator Instructions) We'll next move to Nick Todorov with Longbow Research.

Appreciate the color on 2020.

I wonder if you can dig a little bit deeper.

Can you give us -- how should we think about the dynamic between units and ASP contribution as we go into 2020?

Yes.

Nick, this is Brian.

With respect to 2020, we'll provide more details on our next earnings call.

I think it would be best -- probably more appropriate.

I did give you some details on prepared remarks.

But I do want to say that we see 2020 as a growth year, top line, expanding clearly on the bottom line, which I think is important for shareholders of the company.

So again, just to say, while it's not guidance, our targets are at a minimum to be showing earnings per share growth of at least 40% above our midpoint in 2019 and driving EBITDA growth of at least 25% over the $90 million we're talking about for 2019.

Okay.

All right.

And can you remind us -- and the unit shipments that you guys report, did that include accessories?

And how should we think about ASP impact once you start shipping the Mods?

Our ASPs are total revenue divided by camera, so we only report the cameras we ship, not the accessories.

But the accessories are included in the revenue.

The Mods would probably help to lift ASPs a little bit in 2020.

Okay, okay.

And can you comment -- it seems like you're having some good traction with the trade-up program, and I think I saw some Amex discounts that are making very attractive for your users to go on GoPro.com.

Any way you can quantify how much that is driving the sales in your direct channel there?

Any color you can provide, additional?

No, we don't actually break that out.

It's clearly helping, and it does every year, but we don't break out that portion of it.

Okay.

And last one for me.

I was wondering if you can comment a little bit more on 3Q sell-through and the channel reductions.

I think you mentioned that HERO7 Black channel inventory was down 35%-ish.

Can you comment on how much overall channel was down sequentially?

Yes.

Actually, my comments around HERO7 were all 3 cameras, Black, Silver and White.

We're down 35% to 40%.

So that's a key kind of indicator for how we clear out the channel.

There is no 8 Black in the channel, right?

So...

And any way you can try to quantify -- not quantify but forecast what you expect from sell-through in the fourth quarter?

We expect sell-through to be higher in the fourth quarter than it was in 2018.

It looks like your final question will be a follow-up from Erik Woodring with Morgan Stanley.

I just wanted to ask given the commentary that you gave around the MAX.

Just curious what type of -- I realize it's initial, but what type of users do you see buying the MAX?

Are these still kind of prosumers?

Or do you see that kind of going down to the regular consumer level, to the vlogging level?

Just curious on early kind of read-through for that.

MAX is definitely a consumer-level camera that is more than capable enough for prosumers and professionals.

We shared that our goal with the development of our first dual-lens camera, Fusion, was -- that was a prosumer, pro-focused camera that we intended to be the development stepping stone for us to get to a consumer version of such a product, which we believe we've completely nailed with MAX.

So it's a -- MAX is more than ready for the consumer prime time.

And that does match to the type of buyer that we're seeing, and as well, the type of response that we're seeing on YouTube and Instagram and the like is that MAX is very exciting for the mainstream user.

All right.

Ladies and gentlemen, that does conclude the question-and-answer portion of our call today.

I'd like to turn the floor back to Nicholas Woodman for any additional or closing remarks.

Thank you, operator.

To close, I'd like to thank everyone for joining today's call.

And a special thank you to GoPro's 900 employees around the world for making this year's incredible products possible.

GoPro's technology and innovation now match the strength of its brand.

And that's very apparent in both HERO8 Black and MAX as well as our totally revamped GoPro app.

This is only possible thanks to the people of GoPro who dedicate so much of their time and energy to make the magic happen.

Huge thanks, team, and well done.

To our investors, Brian and I will be at Nasdaq's Investor Conference in London on December 4. And we're excited to connect with many of you there.

So thanks very much, everyone.

This is team GoPro signing off.

And ladies and gentlemen, once again, that does conclude our presentation for today.

We do thank you for joining us.

You may now disconnect.