GoPro Inc (GPRO) 2021 Q3 法說會逐字稿

Good day, and welcome to GoPro's Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jalene Hoover, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to GoPro's Third Quarter Earnings Conference Call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Our agenda for today will include a brief introduction from Nick followed by Q&A. For detailed information about third quarter performance and our outlook, please read the management commentary we've posted to GoPro's Investor Relations website.

Before I pass the call to Nick, 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, including, but not limited to, uncertainties related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and our commentary about our 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 31, 2020, 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, EBITDA 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, and 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, which is posted on our website.

In addition to the earnings press release and management commentary, we have posted slides containing detailed financial data and metrics for the third quarter of 2021. The management commentary and slides as well as opening to today's live webcast and a replay of this conference call are posted on GoPro's Investor Relations website for your reference. All income statement-related numbers that are discussed today during the call other than revenue are non-GAAP, unless otherwise noted.

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

Thanks, Jalene, and good afternoon, everyone. GoPro had an outstanding third quarter with strong revenue, earnings, margin and cash flow growth that have led us to raise our margin and profitability outlook for the year. Strong demand, an effectively managed supply chain and channel inventories combined with a successful new product launch to yield our highest gross margins since 2015 and our fifth consecutive profitable quarter on a non-GAAP basis.

GoPro was profitable on both a GAAP and non-GAAP basis in the third quarter, generating EPS of $1.92 and $0.34, respectively. Non-GAAP gross margin in the quarter was 43.8%, up from 36.2% in Q3 2020. Sales of our higher-end cameras increased direct-to-consumer revenue, and 143% year-over-year growth in GoPro's subscription revenue drove the gross margin improvement. Revenue in the quarter increased 13% year-over-year to $317 million, driven by strong sales in all geographies as well as continued growth in our direct-to-consumer business. Direct-to-consumer revenue from GoPro.com totaled $94 million, up 16% year-over-year. These results illustrate how our direct-to-consumer, subscription-centric strategy has transformed GoPro into a higher-margin, more profitable business that's growing.

At the close of Q3, we had 1.34 million GoPro subscribers, representing 168% year-over-year growth, adding approximately 840,000 new GoPro subscribers since the close of Q3 2020. We've now passed the 1-year mark for the subscriber cohort who received their subscription as a part of their HERO9 Black bundle purchase, and we are encouraged that our annual subscriber retention rates from this cohort are healthy and in line with our expectations. We expect to exceed 1.7 million subscribers by year-end and remain confident in our subscription business' ability to positively impact margin over the long term. And our Quik app subscription continues to contribute margin as well, having closed the quarter with 168,000 subscribers.

Street ASPs continued to rise in Q3 2021, reaching $381, a 25% year-over-year increase. The mix of cameras with MSRPs of $300 and above, including our newly launched $499 MSRP HERO10 Black, grew to 98% of our third quarter camera revenue.

Despite supply chain constraints that are affecting many industries, we have successfully partnered with our suppliers to produce inventory to support our fourth quarter revenue expectations. GoPro.com and our retail partners will be stocked and ready for shoppers this holiday season.

I'd like to thank our roughly 750 global employees who have done an incredible job executing on all fronts amidst the many challenges the world is facing. Whether it be adapting to remote work, supply chain shortages or geopolitical hurdles, you all continue to rally on behalf of our customers to deliver world-class products and services. Thank you.

It's an exciting time at GoPro. In addition to expanding margins and profitability, our subscription strategy can expand our TAM by super-serving subscribers with value, performance and simplicity. Helping people get the most out of their personal content can also yield a very sticky relationship that we can leverage to maximize lifetime value over the long term. And our investments in software development across mobile, desktop and cloud can grow our TAM further, establishing GoPro as a powerful yet convenient content management, editing and sharing solution for GoPro camera owners and non-owners alike.

We believe our brand and technical capabilities afford us a unique opportunity to establish GoPro as a much larger player in the digital imaging space while offering exciting, differentiated solutions for a significantly greater number of consumers than we do today. We're excited about our Q3 performance and even more so about our future.

Brian and I will now take questions.

(Operator Instructions) We'll take our first question from Jim Suva of Citigroup.

First of all, I just really got to commend you and your team for giving all the supply on the shelves and out there into the holiday season, your important quarter coming up. It seems like everywhere I look, left and right, every company is blaming it and you guys are well stocked. Can you maybe walk us through about the actions you did and such to prepare for the holidays? Because you guys are really, in a positive manner, the outliner or sharing -- shining star of a company who circumvented a lot of these supply chain challenges.

Jim, this is Brian. First of all, I'd like to welcome Jalene as our new VP of Investor Relations. It's great to have her on board. And so -- and then before I answer that question, I'd also like to really reiterate how excited we are about our outlook, our fundamentals of growing revenue, growing margin, growing profit and cash generation. It's proven to be enduring over the last 2 years. We've proven the positive impact of our direct-to-consumer business and subscription strategy, have cracked the code on how to leverage GoPro's incredible brand and products into meaningful growth and profitability. So that's, I think, a key theme, I think, for this quarter and as we look ahead into our guidance and outer years.

Jim, specific to your question on action, we've done -- we kind of talked about that even in the last few calls. Back in, I would argue, April, May of 2020, we looked at our product lineup and our forecasting and our demand planning. And that team has done an incredible job of understanding how to manage product transitions and forecast where our business is going to be, and we're right on track so far even in the fourth quarter from a sell-through perspective. So they've really done a terrific job on that. And that's resulted in our ability to work with suppliers and our operations team to line up that supply.

And we've been very constructive with our suppliers. The up-front was what we've needed into '21 and beyond for -- going back to that time period. And we haven't wavered from that. Our demand and forecasting capability has hit right on target for where we needed to be. And I think that's also helped because we know our suppliers know we're not trying to double-book. We're actually taking inventory to meet demand. And so that's a great partnership with suppliers to put us in a position where we've had supply throughout 2021 into the fourth quarter and even looking ahead into early 2022.

Look, thank you for the details and really, sincerely congratulations for managing such a complicated time period in light.

Thanks, Jim.

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

I would love to just know your -- where you guys think you were able to outperform in 3Q relative to the expectations that you set 3 months ago. We'll start with that, and then I have a follow-up.

Erik, this is Brian. Let me start and maybe Nick can chime in. Well, the good news is we have strong demand. I guess it's fundamentally stuck there in the quarter, and we're seeing that play out in Q4 as well. We launched a terrific new product. That's doing well. And I think with the -- retail really outperformed nicely in the quarter. It's great to have 2 strong channels, direct-to-consumer as well as our retail partners around the world. And particularly Europe and Asia Pacific, as those countries have had higher vaccination rates and more of the stores have opened, we've performed really well from a DTC perspective. But also, I think we've seen retail do well as people have gotten out and gone shopping. So that -- and going in store. So that's -- retail really drove the outperformance in the quarter. Direct-to-consumer was right in where we needed it to be, but retail did well.

Yes. I'd also just add that the products that we have in the market are all extremely -- just extremely well tied into the whole brand experience, from hardware to software to cloud, the -- how seamlessly our products are working together now from -- well, now with HERO10, HERO9 and HERO8. But in Q3, it was HERO9 and HERO8. The majority of our sell-through is coming from top-tier quality products, as you've seen from our higher ASPs.

Our teams have done such a better job managing channel inventories over the last couple of years that now the majority of the product that we have in channel is higher-value, higher-performance products that are yielding stronger demand as well. So across the board, we're really happy with how inventory channel management is just supporting our success on all fronts.

That's really helpful. And then I guess I'm going to ask one more question that's almost 2 questions in 1, and I apologize. I've just jumped on late. But did you -- were you able to essentially satisfy the demand that you had in the market? Another way of saying that, was the supply chain at all a headwind such that you weren't able to satisfy demand in the market?

And then the second part to that is just -- I remember last quarter, you mentioned perhaps some headwinds to producing and shipping legacy models just because of the supply chain environment. Curious if you were able to outperform your own expectations there on the legacy side as well. But that's it from me.

Thanks, Erik. Let me start with that. I think what we've said is we have the supplies to meet the demand for Q4 2021, and that continues to hold. I think we put in our prepared remarks that we would sell about 3.1 million units or so in 2021. We think we're on track to do that. And that is pretty consistent with what we had talked about in August.

And so with supply chain, if we could have built more units at maybe mid-tier, entry level, would there have been more demand? Yes, but we're not able to build that, and that's pretty consistent with what we talked about in August. And so we focused on the products quite frankly that are at the top of our lineup. It's also the best experience for people who want to own GoPros. And so that's a double benefit. We make more money. We shifted more to the high end. I think it was 98% of products we sold that had MSRP of greater than $300. Our ASPs are up 25% year-over-year to $381.

So it's -- from that perspective, it's not a tennis game as much as it is how to make money. And I think we've cracked that code, as I said in my opening remarks, of how to drive meaningful growth and profitability even though it's maybe fewer units. So hopefully, that helps.

We'll take our next question from Paul Chung of JPMorgan.

So can you talk about the price increases you implemented? You're seeing very nice impact to margins. So is the step-up here in that 43% range kind of the right way to think about it moving forward? Freight costs come down. I know that's going to impact 4Q but kind of looking into fiscal year '22.

Yes. Paul, maybe I'll start and maybe Nick can comment after me. We'll, yes, definitely push pricing up on a bit on HERO10 Black and -- but the performance is there to justify that price increase, and we're seeing that demand, which is great. As the only camera out there that's 5.3K60, if you want to go out and find something, you pay $3,500, not $500. So we think we've got a very good value proposition for the market, and you can get it for $399 if you take the subscription on GoPro.com, which continues to drive really good results and well better than 90% attach on a subscription, which is a very important part of our business and our strategy. So that's definitely played out nicely.

If I look at margins overall, we'll be increasing our kind of guidance model, long-term model to 40% to 43%. Overall, we think we have that -- the ability to sustain that. As we look ahead, we're almost 44% in Q3. We'll be 40.5% plus or minus a bit in Q4, as you pointed out, but that's mostly related to being impacted, about 250 to 300 basis points, due to freight in. Just freight rates are just skyrocketing because of the supply chain. But that will ease up as supply and demand level off in Q1. And so that -- we should be able to stay in that region. We'll be at 41% margin in 2021. We haven't been at that level of margin since 2015.

So that's a nice step up. And it's driven by shifting to the high end, driving ASPs up, subscription really adds to it and more direct-to-consumer because we get better AOV on GoPro.com. So it's all really working in a fundamentally good way that's driving a massive cash generation. We had plus $60 million in Q3. It's 19% of revenue, and our trailing 12-month cash generation has been 15%, around $166 million. So pretty happy with that.

Yes. That's great. And then on the...

One thing -- I'm sorry to interrupt. But one thing I would add is as it relates to price and our ability to produce higher-performing products that our customers are willing to pay for, our research made it clear that consumers would be willing to pay more for more performance. Our model of offering value adds via subscription at GoPro.com helps to buffer that risk of going higher price and not being as appealing to everybody that may not be willing to pay that much. They can come and purchase through GoPro.com. So that helps a lot.

And then as well, our strategy of dropping last year's flagship down to be the mid-tier product and having 2 years ago flagship be an entry-level product, that's just worked out really well for us because having a Black camera in each of our product price points really communicates value and performance to consumers no matter what price point they're buying at, which also helps with our pricing power. So that has been a sound strategic move that's really benefited from us.

But then just one thing that I would add is I think it's important to note that the best-selling GoPro is the highest priced GoPro. And what that means is that we have the license to go even higher in terms of performance and higher in terms of price to attract -- to move people up, a certain percentage of our customers up, and even to expand our TAM into new product categories that speaks to -- serves consumers that we don't yet serve. So I just -- I would point that out that there is a very powerful aspect to recognize and appreciate that the majority of our sales come from our flagship. That just tells you straight up there's an opportunity to continue to go upstream.

Great. And then on the sub base, can you expand on the cohort that we're kind of lapping now into the holiday season from the large subs taken in last year? So what's been the attrition rate? What's been the feedback from customers regarding what features are making them keep the subscription? And then I have a last question after that.

Brian, maybe you want to speak to the first part. I can take the second part.

Yes. Sorry. I was on mute. My bad. On subscription itself, our attached to camera purchase at GoPro.com continues to be in the -- better than 90%. It's actually improved on 10 versus 9, which is great to see. And our annual subscriber retention rate from the cohort from last year who bought the subscription with HERO9, that, we would say, is healthy and in line with our expectations, and that's also why we expect to continue to be over 1.7 million subs by the end of the year.

I think it's also worth continuing to point out that the growth in subs is primarily related to the fact that 85% of whoever is buying a GoPro camera is new to GoPro. So 15% upgrade, 85% are new, and that's the major driver for subscription growth that we've been able to experience. Obviously, we want to retain as many as we can. But the retention side has been very healthy. It's where we needed to be. We'll try and always improve it, of course. But the new customer acquisition is actually a bigger driver than it is on churn.

Got you. And then last question on cash flow. What a really great year. I think your cash guidance suggests you're on track to exceed $200 million, which is more free cash flow than all your previous quarters in the company's history combined. So it's pretty impressive what you guys have done here. So now that you have some flexibility here on cash, what are your intentions? Can you expect to see some share buybacks anytime soon, any M&A, et cetera?

Yes. Thanks, Paul. From a capital allocation perspective, what we'll do is we'll post up Q4, put some healthy -- another $100 million or so of cash in the balance sheet. And as a reminder, we have to pay down $125 million in our convert that's due April of '22. Obviously, we have plenty of cash to do that. And as we get into 2022, we'll look at other ways of capital allocation. We'll do some -- we've done some small M&A here and there, tuck-in kind of things that are small, I don’t see a big thing on the horizon that's going to need up a lot of cash.

(Operator Instructions) We'll take our next question from Martin Yang with Oppenheimer & Co.

Very impressive results. My first question is on your share of DTC sales in September quarter. It's up slightly year-over-year, but I thought given the very significant value proposition for the bundle sales and discount, the share might be a little higher. So was the DTC share of total sales in line with your expectations?

Actually, it was and retail outperformed particularly in Europe and Asia. So yes, we -- as a matter of fact, I think we'd also put out a note ahead of earnings that we were discounting 10. We actually didn't discount 10, HERO10 Black, at all in Q3. It was a normal offer of a stand-alone price that's $399 or you could buy in a hard bundle, I think, at $450. I think it was the price. And that was pretty standard even what we did from an offering on HERO9 Black. So GoPro.com came in at our expectations. We had said in our August call that it will be well below 40% of the mix. We knew that. It kind of came in there, but retail happened to be strong, as we pointed out earlier in the call.

Got it. And my second question, the final question is, can you maybe talk about the puts and takes in the gross margin in the fourth quarter? What contributed to the sequential decline?

Yes. The principal reason for the sequential decline was freight. Freight rates are just going through the roof in the fourth quarter as everyone's trying to get supply and to meet holiday demand. That's the #1 driver. I'll point out that in our August call, we were at 40 points of margin for 2021. And on this call, we're lifting our 2021 gross margin up to 41%, and we're lifting our target model from 39% to 41% to now 40% to 43%. So we think given the product mix, the pricing, the demand profile for GoPros, we can be in that higher target margin range and be into the 40%, which is why we're able to generate the earnings were generating as well as the cash flow.

Thank you. At this time, I would like to turn the call back over to management for any additional or closing remarks.

Thank you, operator, and thank you, everyone, for joining today's call. As you've heard, there's a lot to be excited about going forward, revenue growth plus expanding margins and profitability and cash generation, and thanks to the fundamental strength of our more direct-to-consumer, subscription-centric model. We can't wait to see you at investor events during the quarter and to check back in with all of you on our next earnings call in February. Until then. This is Team GoPro signing off.

This concludes today's call. Thank you for your participation. You may now disconnect.