GoPro Inc (GPRO) 2019 Q4 法說會逐字稿

Good day.

And welcome to the GoPro's Fourth Quarter 2019 Earnings Results Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Christopher Clark.

Please go ahead, sir.

Thanks, operator.

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

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

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.

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 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 earnings press release, we have posted slides containing detailed financial information and metrics for the fourth quarter and full year 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, we'll review our fourth quarter and fiscal 2019 performance, which was highlighted by our strongest new product lineup ever and a successful return to revenue growth and profitability.

I'll also touch on our strategic priorities for 2020.

And then Brian will walk you through our full year and fourth quarter financial performance and 2020 outlook.

In 2019, we grew revenue 4% year-over-year and earned $35 million of net income.

This represents a $67 million bottom line improvement over 2018.

Adjusted EBITDA increased more than 3x year-over-year to $72 million.

We are proud of these achievements.

And while our 2019 growth and Q4 results fell slightly short of our expectations, it's important to step back and recognize just how much we've strengthened our business and balance sheet.

Some key highlights for the year that contributed to our profitability were our proactive move of U.S. bound camera production to Guadalajara, Mexico; material growth of consumer direct sales at GoPro.com; and the growth of our high-margin Plus subscription service, which as of the end of January totaled more than 334,000 paid subscribers.

And importantly, our industry-leading products continue to drive consumers to the high end of our camera lineup, lifting both ASPs and gross margin.

We enter 2020 with the most exciting product lineup in our history, serving new customer segments like vloggers and ultra-creatives with increased performance and versatility.

In Q4, we saw phenomenal sell-through of both HERO8 Black and MAX during the Black Friday, Cyber Monday period.

However, in December, sell-through returned to levels still slightly up from the HERO7 line in the prior year, but below our growth expectations.

Despite these dynamics, we generated fourth quarter revenue of $528 million, the third largest quarter in our history; and $102 million in profit, our second most profitable quarter ever.

Importantly, consumers continue to gravitate towards our highest end products, which is having a positive impact on ASPs.

A very positive trend is that in 2019, 90% of GoPro's revenue came from the $300-and-above price band, up 62 -- up from 62% in the prior year.

And in the U.S., GoPro captured 93% dollar share of the action camera category in Q4 according to NPD Group.

And we continue to grow our multi-lens camera business with the introduction of MAX.

According to NPD Group, during Q4 in the U.S., MAX, which only began selling on October 24, captured 54% unit share and 66% dollar share of the spherical camera market.

And when combining MAX with our legacy Fusion camera, GoPro captured 62% unit share and 72% dollar share, up from 14% and 38%, respectively, year-over-year.

The innovations featured in HERO8 Black and MAX, including best-in-camera stabilization of any cameras in the world, continue to keep GoPro on the cutting edge.

And with the available Media and Light Mods, which have both received positive reviews and are selling well at GoPro.com, we are now serving important new customer segments.

And our Plus subscription service continues to gain momentum as well.

As I mentioned at the top of the call, as of January 31, paid subscribers grew 69% year-over-year to more than 334,000, up 10% since our Q3 earnings call.

We expect strong growth to continue.

And in fact, we are targeting to have between 600,000 to 700,000 paid subscribers a year from now, which would contribute between $35 million to $40 million of high-margin annual recurring revenue on a forward-looking basis into 2021.

And in marketing, an important component of the HERO8 Black and MAX launch was our Million Dollar Challenge, where we invited our customer community to shoot our HERO8 Black and MAX highlight video.

We were floored by the quality and volume of submissions we received.

HERO8 Black and MAX users submitted more than 42,000 videos, an increase of 68% over last year's Million Dollar Challenge.

We awarded just over $22,000 to each of the 45 contributors who were selected for the video, which we published last week.

In the first week since publishing, the highlight reel garnered more than 5x the views of last year's video.

You can see this incredible showcase of our customers' creativity, talent and passion on any of our brand channels, including Instagram and YouTube.

Initiatives like the Million Dollar Challenge bolster engagement within the GoPro community and helped attract 4.2 million new social followers in 2019, up 29% year-over-year.

On any given day in 2019, GoPro content generated more than 2 million organic views, which totaled a record 737 million organic views during the year, a year-over-year increase of 29%.

Turning to software.

GoPro made significant progress in 2019.

In Q4, monthly active users of the GoPro App grew 20% year-over-year and usage of the app's automatic editing feature grew 400%.

In 2020, we plan to monetize a new GoPro App experience that addresses widespread pain points that anyone with a smartphone or a GoPro faces, one that we believe GoPro is uniquely positioned to solve.

We believe that our app strategy can significantly expand our TAM, while growing a new source of high-margin revenue for our business.

The time has come for GoPro to establish itself not only as a leader in digital imaging hardware, but in software as well.

Our 2020 focus is this: maximize the profitability of our core hardware business by super-serving our most engaged customers with high-end higher ASP products; scale our Plus subscription business to 600,000 to 700,000 paid subscribers by year-end; and release a new GoPro App experience to address what we believe to be a significant TAM and profit expanding opportunity.

And we intend to do this while keeping a tight rein on OpEx.

We are also focused on scaling our direct-to-consumer capabilities to further improve gross margin and profitability.

In 2019, direct-to-consumer sales through GoPro.com grew 40% year-over-year and generated more than 10% of our revenue.

We are determined to aggressively build on this momentum in 2020.

Finally, as you saw in our press release, I am pleased to share that Brian McGee, who has served as GoPro's Chief Financial Officer since March 2016, has been appointed to Chief Operating Officer in addition to his ongoing role as CFO.

Brian has proven himself to be a tremendously important leader at GoPro, with a deep understanding of our business.

And all of us at GoPro are excited to work with Brian in his new expanded role.

That's a perfect segue to turn the call over to Brian, who will elaborate on our plans to expand profitability and create value for GoPro shareholders in 2020 and beyond.

Thanks, Nick.

On a personal note, I want to take a moment to say thank you to you and the Board for their continued confidence in me and my appointment to COO along with my ongoing role as CFO.

I'm looking forward to continuing the journey, building on the momentum we have established over the past several years and driving value creation in the business in 2020 and beyond.

Now I'll share an overview of our performance for 2019 and then discuss our outlook for 2020.

For the full year 2019, revenue increased 4% to $1.195 billion.

Excluding Karma, which we discontinued in 2018, revenue grew 7% year-over-year.

On a GAAP basis, we incurred a full year net loss of $14.6 million, but were profitable on a non-GAAP basis with net income of $35.3 million, in line with our goal to achieve full year profitability.

In 2019, our GAAP EPS improved to a $0.10 loss per share compared to a $0.78 loss per share in 2018, while our non-GAAP EPS improved to $0.24 net income per share compared to a $0.23 net loss in 2018.

And adjusted EBITDA of $72 million represented a more than 3x improvement from 2018.

We are pleased with the positive impact our operational initiatives had on our financial performance, as shown by the continuous improvement to our bottom line.

Looking back in 2016, we had a non-GAAP net loss of $201 million, which has improved each successive year to a net loss of $96 million and $32 million in 2017 and 2018, respectively; and finally, returning to profitability in 2019 with non-GAAP net income of $35 million.

Looking at the fourth quarter of 2019.

We were profitable on both a GAAP and non-GAAP basis with net income of $95.8 million and $102.5 million, respectively.

Non-GAAP gross margin was 38.6%, which was negatively impacted by tariffs and freight costs associated with our HERO8 Black production delay, which contributed to a 180 basis point impact on gross margin and approximately a $0.06 impact on EPS in the quarter.

Our GAAP and non-GAAP earnings per share for the fourth quarter were $0.65 per share and $0.70 per share, respectively.

Adjusted EBITDA for the fourth quarter improved to $112 million, a 91% increase from $59 million a year ago.

Turning to the balance sheet.

We ended the period with cash and cash equivalents of $165 million, an $86 million sequential improvement.

Accounts receivable ended at $201 million.

And inventory declined $106 million sequentially, ending at $144 million.

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

Camera units shipped during the quarter and for the year totaled 1.9 million and 4.3 million units, respectively.

Cameras, with retail prices above $300, represented more than 90% of our revenue in the fourth quarter and 90% for the full year compared to 74% and 62% for the same periods in 2018, respectively.

The shift to our higher-priced cameras reflect customer demand and our strategic initiatives to move the market to cameras with both higher ASPs and margins.

As a result, fourth quarter street ASP increased to $285, a 7% year-over-year increase and in line with our guidance for the quarter.

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

We estimate camera unit sell-through for the fourth quarter and 2019 was approximately 1.4 million units and 4.3 million units, respectively.

And we ended the quarter with higher channel inventory based on the factors Nick discussed.

We are pleased with the demand for our new products, which generated $528 million of revenue for the quarter, our third highest revenue quarter in our history we achieved profitability on a GAAP and non-GAAP basis for the quarter.

And we reached our second highest quarterly adjusted EBITDA of $112 million and exited the year with an operating model focused on balancing the need for continuous innovation and cost management.

With 2019 behind us, I will now provide guidance for 2020.

In terms of product trends and impact on revenue, we are targeting camera ASPs to increase between 6% to 10% year-over-year due to sales of higher priced cameras as well as accessories and subscription revenue growth.

Camera unit sales are expected to be 6% to 10% lower year-over-year, given channel inventory levels exiting 2019, which translates into guidance of approximately flat revenue year-over-year.

As I previously mentioned, we exited Q4 2019 with higher levels of channel inventory than anticipated.

We expect demand for our products in the first quarter to be at historical levels of approximately 850,000 to 900,000 units of sell-through.

However, from a sell-in perspective, Q1 will be a quarter of correction, as sales into the channel and resulting revenue is expected to be lighter than our historical percentage of Q1 revenue.

The combination of normal sell-through and reduced sell-in will reduce channel inventory to appropriate levels exiting Q1.

With that context, we expect the following for Q1: revenue in a range of $140 million to $160 million, net loss of $40 million to $50 million and cash to be essentially flat sequentially.

We expect to be profitable for quarter 2, quarter 3 and quarter 4 with expanded gross margin and EPS for the year.

More specifically, for 2020, we expect gross margin to be in the range of 38% to 39%, non-GAAP earnings of $0.40 to $0.50 per share, GAAP earnings of $0.01 to $0.11 per share, EBITDA increasing to between $95 million to $110 million, approximately 50% growth at the midpoint year-over-year, cash to increase year-over-year by $80 million to $100 million.

To summarize, we expect to continue to improve our profitability in 2020, with net income increasing $30 million at the midpoint of our outlook.

We expect margins to increase through the year while continuing our focus on effective cost management.

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

(Operator Instructions) We'll take our first question from Andrew Uerkwitz with Oppenheimer & Company.

The first question is, Brian, could you -- on the inventory piece, is there a particular model that's higher than another?

Could you kind of give us a little color on what that inventory looks like?

Yes.

I mean if I compare it to where we've been historically, our inventory, both what we have on hand and what's in the channel, our highest selling inventory, it's our newest inventory.

And some years past, it was older inventory that we had to discount and to get rid of it.

We don't have that issue as I look ahead to 2020.

So that's good.

It's a standard lineup, which is great.

It's also worth pointing out, sell-through levels we expect 850,000 to 900,000.

That's our historical Q1.

We are on track to hit that for the quarter, so based on the sell-through we're seeing and the like.

So we feel good about the sell-through and being able to get channel inventories aligned by the end of Q1 going into a really good selling season in Q2, 3 and 4.

Got it.

And then just broadly speaking, Nick, you mentioned, I think, 90% of revenue is the higher price points.

Is there more simplification that it can be done in the lineup?

Or are you still happy with the good, better, best strategy?

It's important to have products for each of the customer segments that are interested in GoPro and that we believe that we can get a good return on investment by developing products for.

So I think that having a multi-SKU lineup that addresses these important customer segments is a strategy that we're going to stick with.

Again, I shared on the last call that good, better, best represents 3 customer segments.

We've now moved past that.

We're now good, better, best in ultra-creative, with the ultra-creative customer segment being the one that MAX is designed for.

So we're very focused on identifying what the key customer segments we already sell to want most from us, and then as well it's important that we identify new customer segments that we think that we can authentically serve and get a good return on investment from.

Got it.

And then just kind of thinking longer term, it seems like you guys are still gaining share in the broader camera market.

Where do you think the kind of normalized level of sales could be?

Do you think we'll get back to a sustainable growth level?

Or do you think the camera -- the broader camera industry headwinds will remain there?

And so while you guys may gain some share, the revenue growth may be a little bit more difficult.

Should we kind of adjust our thinking there?

I think it's a combination of strong execution, and as I mentioned, identifying what customer segments, what problems exist that GoPro can uniquely serve and possibly add new customer segments to grow.

But what we're focused on for 2020 primarily is with the customer segments that we're currently serving, doing an even better job of creating higher performance products for them and moving even a higher percentage of our customers up the food chain to higher gross margin, higher ASP products.

We've proven that we're really good at that.

As we shared in 2018, 62% of our business was -- revenue came from the $300-and-above price band, and we moved that to 90% in 2019.

And we're not done yet.

We've still got tremendous innovation coming in future products.

And we're -- I believe we've done a pretty good job of building a reputation as a very fast-paced, highly innovative company that's capable of wowing our customers every year, and we're not going to stop that anytime soon.

So maximizing profitability via that strategy is our focus.

And as well, we see a pretty significant opportunity to expand GoPro's TAM and ultimate relevance to a larger number of consumers by building on our capabilities as a software company to address what we think are big global problems shared by virtually everybody that uses a smartphone to capture photo and video content as well as our existing GoPro customers as well.

It's an evolution of our strategy to leverage the strength of our -- and profitability of our hardware business to grow a new suite of products in the form of an app experience.

And that's something you're going to see from us in 2020.

Got it.

And then just to build on that, if you could just -- it seems like a lot of the innovation in the last couple of years have been, I would say, probably equally shared between the app experience and the camera.

Do you think that will continue in 2020, '21?

Or is there going to be a shift in focus to that more on the software side?

I can say, without a doubt, you're going to continue to see the same type of innovation, performance and overall wow coming out of our hardware, our camera development team.

Our road map is really exciting.

It's the heartbeat of GoPro, and it's something that we do really, really well.

So I'm very confident that our multiyear road map in cameras and accessories will continue to excite.

So there's no taking the foot off the gas there whatsoever.

What I'm talking about is adding an additional effort, investment and energy into bringing our software development up to the pace of our hardware development.

That's something that's really important, because as I mentioned in my prepared remarks that I really do believe it's time for GoPro to be recognized as a world leader in software as we are in digital imaging hardware.

And I think that we've got the team and the expertise to do it, and I'm really excited for 2020.

We'll now take our next question from Paul Coster with JPMorgan.

It's Paul Chung on for Coster.

So just first up on GoPro Plus, so nice growth there.

I mean you mentioned, I think, 600,000 subs by the end of 2020.

If you could kind of expand on how you get there.

Is this more from your existing installed base or more kind of dependent on new camera sales?

And then -- even if you do put up these sub numbers, it will still be around maybe close to $35 million in revenue contribution or around like 3%.

So are there any other levers you can pull there, like increasing pricing or providing more value-added options to kind of entice your installed base?

So growth is going to come from continued availability globally, improved marketing to drive awareness.

We still have a lot of opportunity there to drive awareness, improved just marketing of the benefits experience to our customers.

And then we're not done rolling out benefits to attract additional customers.

And then, of course, we've got ongoing efforts to improve churn rate, which is an important part of any subscription service, and we're doing quite well there, but we see opportunity to do even better.

So there's no one lever that makes all the difference in terms of getting that 600,000 to 700,000 number.

But we've got a number of levers, just as we have had in the past, that we think we're going to continue to improve upon that business.

And I just want to give a shout out to the team that's responsible for Plus.

They've been doing a phenomenal job, and we're really proud of the progress that we've made.

And Paul, let me kind of add on to that.

Nick mentioned churn, which basically improved 20%.

So we're going after that.

We're seeing better retention on the Plus side, which is great.

And while 3% of our revenue is very profitable, it's like 80 points margin and 40% to 50% operating profit.

So it matters to the bottom line as we grow the ARR of this business, boosting our margins from our hardware business to an overall better level as well as the bottom line.

Got you.

And congrats on your expanded role.

But -- so what does that mean for the company in terms of direction?

Which areas are you going to focus your attention on?

How will the strategy kind of change from the past year?

And then finally, how will your success be kind of measured?

Well, I hope it gets measured with a better stock price for employees and investors in GoPro.

That's #1.

I think we laid it out, I think, pretty well on the 2020 and what we want to do.

We're going to grow margins.

We're going to expand EPS.

We guided almost a double on EPS year-over-year.

We've got a great product lineup.

We'll continue to innovate.

And we'll continue to be more efficient in how we operate the business and create room to be able to invest in the things Nick talked about on the software side, while still holding our OpEx into a window that keeps us profitable.

Got you.

And then last question is, I'm not sure if I saw free cash flow guide.

So I assume you expect some positive free cash flow, given your net income guide.

But if you could help us with your expectations for cash from operations, CapEx.

Just want to get a sense for free cash flow magnitude for 2020.

And then finally, where would you kind of look to deploy that extra cash?

Sure.

Yes, in my prepared remarks, our expectation is to increase cash $80 million to $100 million in 2020 over our exit of $165 million in 2019.

So that's very nice cash flow.

No real big increases in CapEx, and it stays at kind of historical levels.

So it's really driving the profitability and working capital that's going to make the cash improvement.

And so when we get there, we can figure out, do we do buyback or do we do other things, but it puts the company in a much better cash position looking forward to '20 and '21.

We'll now take our next question from Erik Woodring with Morgan Stanley.

So if we just go back to the channel inventory in 4Q performance, I just want to piece together and make sure I understand that what's -- the reason you missed kind of your 4Q expectations is that sell-in for the newer models, the new lineup wasn't as good as you expected.

Is that correct?

I just want to make sure I have that right

The -- sorry, could you ask the question one more time?

Yes.

So I just want to kind of piece together.

You said channel inventory is higher, but it's not a result of legacy models.

It's more kind of even across all the models.

So if I combine that with your 4Q performance, does that mean essentially some of your newer models or maybe the HERO7 Black didn't sell as well as you expected?

I'd just love some color kind of combining those 2 comments.

Okay, I understand.

We had a really strong Black Friday, Cyber Monday period, where we were very happy with the sell-through that we saw.

And then post Black Friday, Cyber Monday in December, we saw sell-through return to levels that were still up from the year prior, the HERO7 launch year.

So that was good to see that growth year-over-year of our in-line products.

But the sell-through growth wasn't what we expected -- wasn't as much as we had expected.

And that resulted in us finishing Q4 with a bit more channel inventory than we were expecting.

And let me just add to that, because as we look ahead into Q1, we are seeing sell-through rates at kind of historical levels.

So we're going to be able to work our way through that inventory and after the raises in Q2 and the rest of the year.

Yes, I think that's really the key point that is important for people to recognize is we historically see 850,000 to 900,000 units of sell-through in Q1.

And we're seeing that again for this Q1, which puts us in a good position channel inventory-wise as we exit Q1 and enter Q2.

So Brian phrased it as a quarter of correction in his prepared remarks, but that's really important to recognize that we believe we get out of the channel inventory issue by the end of Q1 and it sets us up for a profitable Q2 and then profitable Q3 and Q4, which is basically built on the strength of the product lineup that we've got out right now.

Okay, that additional color is super helpful.

And then just on the balance sheet, you guys had previously guided to cash and equivalents of $200 million.

Obviously, that may be a little bit lower.

And if you just -- the days payable looks like it was -- it came down fairly considerably.

So is working capital the kind of delta between where you ended up and where the guide was?

And would just love some color on the days payable comment.

Yes.

It was basically -- if you look at the balance sheet, accounts receivable was up significantly, and that's just timing of when we get the cash from when we make a sale.

So that will hit in Q1.

So that's definitely going to help working capital and cash flow in 2020.

So that becomes more of a timing issue.

And inventory, we thought we would be at about $125 million, I believe, and came in at $144 million, and that difference really relates more around the top line, so -- because we have the inventory.

So that -- those 2 are the dynamics on the cash.

Also if I could just sneak in a last one.

I'd love to just hear any kind of reception you got from the -- after the launch of the Mods, and especially if you could share anything that you've heard from what I would consider kind of new customers for GoPro, meaning like the vloggers that may be looking to GoPro cameras now where they hadn't done it before.

Sure.

Well, general reception has been very positive for the Mods ever since launch.

And now that we've got the Media Mod and the Light Mod out, the initial reviews of those have been very positive and they're meeting or exceeding expectation, which is always great to see.

And if sell-through at GoPro.com is any indication, people are really excited about them, because the sales are brisk.

So I think that we've successfully expanded performance and versatility of our flagship in a really meaningful way that's resonating with consumers, helping us reach new customer segments, as you know, like vloggers and ultra-creatives.

And that's encouraging, because that's a trend that we're going to continue to pursue, recognizing that those types of customers make up the vast majority of our buyers and as well we get the best return on our development investment.

So fortunately, our road map is aligned with what our customers seem to be interested in.

We'll now take our final question from Jim Suva with Citi.

And you've given a lot of detail so far.

You mentioned Black Friday sales were very strong, but then they were still up year-over-year, but decelerated in the month of December after Cyber Monday.

Any thoughts around why that deceleration happened, whether it be change in promotions, change in initial targeted sell-in base?

Or why do you think there is actually a change?

Well, there was mixed results across retail over that period.

We saw some retailers do really well.

We saw some retailers had some softness.

So I think that there's some macro issues going on there, certainly.

So that may explain part of it.

As you noted, we did see a slight increase of sell-through of our in-line products over the period -- over the December period year-over-year.

So that was good to see.

And it was a tough comp from the HERO7 here.

So we're happy to see that.

But yes, it wasn't up to our expectations.

We did have terrific promotions during the period.

And as we've shared, our products -- the lineup across the board has never been better at each SKU.

So we expected to see a bit better performance than we did.

I think it was a host of reasons, but honestly, there's nothing conclusive that we've identified that would explain why we came up a little bit short.

That does conclude today's question-and-answer session.

I'd like to turn the conference back over to management for any additional or closing remarks.

Thank you, operator.

I'd like to revisit how far we've come.

In 2019, we delivered top line growth, a return to full year profitability and a meaningful improvement in EBITDA.

And we believe our 2020 plan to super-serve our most engaged customers with high-margin, high-end products, meaningfully grow our Plus subscription business and launch and monetize a new GoPro App experience, all with a continued commitment to expense management will allow us to grow both margin and EPS in 2020, generating value for shareholders.

And I want to thank you -- give a thank you to the more than 900 GoPro employees around the world who are getting it done on behalf of our customers.

Your work has made GoPro the best-selling camera in North America for the past 6 years, and I'm looking forward to making it 7 in 2020.

This is team GoPro signing off.

Thank you.

That does conclude today's conference.

Thank you all for your participation.

And you may now disconnect.