GoPro Inc (GPRO) 2020 Q2 法說會逐字稿

Good day, and welcome to the GoPro Second Quarter 2020 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Christopher Clark, Vice President of Corporate Communications. Please go ahead, sir.

Thanks, operator. Good afternoon, everyone, and welcome to GoPro's Second Quarter 2020 Earnings Conference Call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee.

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 facts -- actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today, including, but not limited to, the assumption that consumer confidence does not further erode during -- due to the global pandemic. 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, 2019, 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 management commentary and slides containing detailed financial data and metrics for the second quarter of 2020. The management commentary and slides as well as a link to today's live webcast and a replay of this conference call are 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 non-GAAP, unless otherwise noted.

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

Thanks, Chris, and good afternoon, everyone. As we did during our Q1 2020 earnings report, we've chosen to post management commentary for the second quarter of 2020, including Brian's financial overview, on the GoPro Investor Relations page on our website, and we encourage all to read the commentary. I will give brief remarks now, and then we'll go directly into Q&A.

As we shared in the management commentary, GoPro's shift to a more direct-to-consumer business with lower operating costs is working. While COVID-19 continues to negatively impact society globally, GoPro has adapted to the pandemic, and we believe our consumers are learning to live with the pandemic, too. Demand for GoPro cameras consistently improved throughout the second quarter, and we've seen a faster-than-expected rebound in sell-through at retail. Despite obvious challenges, we've been able to improve our efficiency and output in all areas of the business, including significantly reducing both channel inventory and operating expenses. We remain on track with our product launches slated for the second half of 2020, which includes hardware, software and subscription offerings. We expect these new product launches to contribute to our momentum, resulting in positive results for the rest of 2020 and continued growth and earnings expansion in 2021.

Assuming that many of you on the call have read our written commentary, we'll now move on to Q&A.

(Operator Instructions) And we do have our first question. Our first question comes from Erik Woodring with Morgan Stanley.

Congrats on the quarter there. I just want to get your take on -- you mentioned the improvement throughout the quarter in demand. Just curious if you could kind of break that down by region. Are there certain regions where you're seeing more of an improvement versus others? And then I'll have a follow-up after that.

Erik, it's Brian. Yes. Actually, we saw improvements in every region. North America improved. Retail snapped back. EMEA came back as well as Asia. And of course, our web store business did very well. So we are very pleased in the quarter to see everything up into the right as we moved week-over-week to the point where, quite frankly, we were -- by the end of June, we were matching -- comping against the prior year in terms of sell-through and demand. So yes, every region was up. So we're very pleased. And quite frankly, we've seen that continue into July and August, which gives us the basis for the guidance we gave, where we think we're going to do 900,000 units of sell-through in Q3, which is up 5% year-over-year. So we're continuing to see demand not just in Q2 week-over-week, but also as we head into Q3. So we're very pleased with the demand profile globally for GoPro.

And of course, GoPro.com, we mentioned was -- 44% of our revenue came from GoPro.com in Q2, and we expect it to be 36% to 40% in Q3. But that's on a much higher revenue base given our guidance of $220 million to $250 million of revenue in the third quarter. So that would represent a 40% increase approximately of revenue growth on GoPro.com in Q3 from Q2.

And then just as a quick follow-up to that. Is there any way you could break down the improvement you've seen in demand from camera type? I mean, obviously, you mentioned that $300 and above were the large majority of sales, but improving demand for HERO8 and other models. Or was there any difference between some of the models?

Sure. No problem. Yes, the bulk of the demand was actually in HERO8 Black, which was great. HERO7 Black also did well, but HERO8 definitely outpaced in the quarter, which was -- we were expecting that. And we were at 95% $300 and above, and we were 90%, I think, in Q1. That represents a trend we've seen and we've talked about over the last several quarters and maybe year. Back in 2016, '17, '18, we ran -- anywhere from 40% to 55% was MSRP of $300 and above. We shifted that strategy in 2019, and we were -- about 70% of our business was greater than $300 MSRP, and we expect that to increase in 2020 and probably even into 2021.

So we're definitely seeing more demand at the high end, which is good. That helps to drive revenue growth, but it's also where the best margin profile is for the company. So that's actually for us, and it's good for the consumer. So it's a good value proposition, and the consumers are buying at the higher end.

Yes. I would also add that because this is a trend that has been progressively improving, we're also -- we've been planning for it, and we're also happy with the inventory levels for our other SKUs as well. So everything is in line with where we were planning on taking the business from an inventory standpoint.

Awesome. That's helpful. And if I could just ask last one. It's just you've mentioned the shift to higher-end devices, which are higher margin. You've mentioned the shift to DTC, which is higher margin. But your gross margin profile has kind of been going the opposite direction. Like if you extrapolate, if you say that GoPro.com gross margins were roughly 5 to 10 points higher than the rest of the business in 1Q -- or excuse me, in 2Q, that implies GoPro.com gross margins around 36%, if my math is right. So can you just help me bridge that gap to help me understand the other impacts that you're seeing on the gross margin line?

Yes, Erik. No problem. The issue for quarter 1 and quarter 2 is the amount of revenue we had was so low that it underabsorbed overhead by about 500 basis points. So that's the major driver, quite frankly, of why margins were down. And we have margins -- we guided Q3 to 35% plus or minus 50 bps, and we think we're going to be at 38% plus or minus 50 bps in Q4.

So we will see margins come up as our volume comes up and our mix continues to improve to the high end and with new products. So along with accessories -- and we have new accessories like Zeus Mini, lifestyle bags as well as the growth we're expecting in subscription. So it all kind of comes together to help drive ASPs, revenue growth as well as margin improvement. And GoPro.com is better than 40 points, by the way. So it's not downward, as you have said. So -- and it is 5% to 10% better than retail.

We'll take our next question from Andrew Uerkwitz with Oppenheimer & Co.

Could you talk a little bit about how the change from direct-to-consumer is affecting how you guys forecast unit sell-through, if it's changed at all? And then how has your confidence been in around forecasting that on a going-forward basis?

Yes. Our forecasting, I think, has improved quite a bit, both on mix and in region, along with GoPro.com. We've said in our first quarter commentary our expectation was that we would be at least 40% on GoPro.com. We ended up at 44%. We talked about ASPs of $300. We matched it up. We put that in my commentary, and it all lined up. Actually, sell-through did a little bit better. And so -- and the demand profile hit just as we expected, with most of the demand on HERO8 Black, although, as I said, HERO7 did quite well. And actually, MAX is starting to do very well in retail. So we're excited about that.

We really look -- get good information from retailers plus what we do on our own site, and we're able to return that basically on a weekly basis to really use a lot of data mining to estimate what we're seeing on the trend line and where the demand profile is. So that's been a real area the company we focused in a lot on the data management side, and I think it's paying off.

Got it.

I don't know -- I would also add that as we focus more of our business on our best-performing retailers, we get better data from them as well, so that helps sharpen our forecasting as well. And then, of course, the direct feedback we get from our dot-com sales channel is very accurate.

Got it. Yes. No. I think that makes sense. And then a question for you, Nick. You didn't mention in your comments too much about the impact COVID has had on new product development. Could you give us a little color on how comfortable you are with the new product road map being on time and where it's at? And any impact COVID has had on that development?

Yes. We've been very fortunate. We've got great manufacturing partners that had performed exceptionally well during this period. And of course, our internal team is -- they're just the best of the best. And we -- a small number of our employees need to continue to access labs at GoPro offices to continue with their product development work, but the vast majority of work can be done remotely. And so we haven't missed a beat. We're on time for all of our launches, whether it's new hardware products, software or subscriptions. And in some ways, it feels as though we're operating even more effectively and efficiently remotely. There's challenges that come with it, for sure. It's pretty difficult at times when your office has your entire family in it at home. But there's other aspects of working remotely, at least for our culture, that have been more streamlined and effective. The teams are doing a phenomenal job of communicating via video conferencing. Morale is high. Everybody is really excited about the road map that we've got. It's robust. It's expanding in terms of the ways that we're going to be serving consumers going forward. I'm really excited that we're really succeeding, I think, in our shift from being a hardware-specific company to now serving consumers as an end-to-end solution, spanning hardware and software and cloud, and giving them different ways to experience GoPro, be it subscription or otherwise, and the outsized value that we've been delivering but that we're really going to expand on later this year with new product launches. It's been a long time coming, but it feels really good that the vision that we've had for GoPro is this end-to-end content solution for consumers is coming to fruition, and I think it's going to make a lot of sense and excite consumers this holiday season.

Got it. No, I appreciate that color. And then last question for me, I think, is really a 2-part question. One, I mean, GoPro has clearly been a lifestyle brand for a while, and it looks like you're trying to take advantage of that with some of the lifestyle products and gear. How big and material should we think that could be or will be over time?

And then a question for you, Brian, around that. Going forward, will that be part of the calculation for street ASP? Or how should we think about that metric going forward?

I'll take the first part. It's early days with our new products. The -- we're exceptionally good at marketing our cameras, our app. And it took us with -- and when we introduce new products, it's a new muscle that we've got to learn, but we do learn it. It took us, I want to say, 1 year, 1.5 years with Plus to really learn how to properly market that subscription offering. And then it really took off, and we're seeing the growth that we're enjoying today, and we're expecting that to accelerate. And so we've learned that we need to learn these new muscles as it relates to introducing new types of products and so forth, but we're getting better and better at it. And it's no different with our new lighting category, where our first product is Zeus Mini. And then our lifestyle products, including bags, is a fantastic bag line. I mean the quality and value and performance of this bag line is terrific. You get all the durability you'd expect from GoPro but in a really lightweight design that just makes it so convenient and covering so many use cases for consumers that it's relevant to their active lifestyle, which obviously GoPro fits right in with. But it is new and people don't know that we make bags yet, and we need to get better at driving awareness for that. But just as we've done with Plus, where, with time, we learned how to do that and be really effective, I'm super excited for our brand to grow in these new product categories over time. And then as we get better at that, we'll add new product categories.

I'd say that what we're very focused on is only entering product categories where we can offer authentic value and expanded value and product differentiation from what's already out there in the world. And it also has to be authentic to our brand and make sense to the consumer why GoPro would make this type of product. And then through our more direct-to-consumer sales strategy, we believe we're going to be able to offer exciting new products at really attractive prices to consumers that results in a favorable margin to GoPro so it's win-win for everybody. And then as you know, we can further expand the value to consumers that are subscribers to Plus because they get discounts when they buy direct from GoPro.com.

And it's just -- it's going to be an exciting road ahead as it relates to new product introductions from GoPro, so stay tuned. But as it relates to the materiality to our business, at this point, it's more of a brand expansion and us learning how to grow into new markets, new product categories. And over time, we expect it to become material. But for the time being, I wouldn't consider it. So Brian, if you want to add color to that.

Yes. Thanks, Nick. Yes, Andrew, just selling more bags in lifestyle products and Zeus Mini in lighting just adds to street ASP. So it's already a positive trend on that. And so it's along with selling more of our cameras at the high end, adding more accessories that people want, adding more on subscription. It all accumulates to a higher street ASP.

(Operator Instructions) We'll take our next question from Paul Chung with JPMorgan.

So just on free cash. Brian, this is for you. The use of cash was a bit more kind of than previous guidance. What's going on there? Was it more a function of kind of lower earnings or some puts and takes on working cap than you had initially forecasted? And then as we think about the second half, should we also expect a pretty strong seasonal 4Q? Or will you kind of get some benefits in 3Q for maybe the initial sell-in of the flagship refresh? And then can we even hit breakeven this year?

Thanks, Paul. Yes, good question. In Q2, we had estimated back in the May call we'd do about $100 million of cash. Ending the second quarter, we ended at $80 million. And that difference is basically all in accounts receivable. It just happened to be a little bit of timing between when we thought we would have sales and the particular geos where we would have sales. So that moved around a little bit. So that's actually getting collected in July. And actually, cash is actually up even today above where we were in June 30. So that's a positive trend.

As we put in our guidance, our expectation is for cash to end -- Q3 given the higher revenue expectation because of sell-through and demand, we think we'll end at about $130 million of cash, and that includes paying off the $30 million we have borrowed on our asset-backed line. So that's cash flow from operations of about $80 million in Q3. And yes, Q4, if you go off kind of the guidance we gave, it would be higher from a revenue perspective than Q3, and that should drive cash to about $200 million. That's our expectation. It's consistent with what we've said on our last earnings call.

And given the fact that we think we're going to be profitable in Q3 on a non-GAAP basis between $0.01 and $0.07 per share and what -- and we've guided the year to be basically close to breakeven and maybe even slightly profitable. So yes, we think we have a shot at being profitable should the demand profile continue in the way we think it will for the remainder of the year.

And then, Nick, just on the GoPro Plus subs. As you've kind of moved to direct-to-consumer, how is your attach rate kind of different when consumers buy on GoPro.com? Or is it different? And then what are your plans to kind of increase that attach rate as you do kind of ramp up this direct-to-consumer?

Yes. We do a much better job of driving Plus attach earlier in the customers' ownership of GoPro. And the best time, as you can imagine, is when they're buying their GoPro because they're the most engaged, and they're thinking about all the ways that they want to benefit, and they're thinking about the value of their purchase. And becoming a Plus subscriber significantly expands the value of their purchase. It improves the experience that they have. And that's something that we're going to be expanding significantly later in the year. So as appealing as GoPro Plus has been, it's going to get a major boost in a short while. So we have that benefit.

And then we have the benefit of increasing the total number of customers that we're serving directly through dot-com so we can expand the attach rate through an improved Plus subscription offering and then expand the number of customers that we can attach to because of the expanded direct business. So that's a -- that contributes to our expectation to finish the year with between 600,000 to 700,000 Plus subscribers. We still feel really good about that. And then, of course, that's something that we expect to further build on in 2021 as we grow our direct business further and that, over time, we just continue to load up that Plus subscription offering with more and more value to further build upon the opportunity that we've got.

Yes. Nick, I would even add on top of that. Let me add on top of that because Nick's right, but the other thing we've done -- and Andrew, you kind of asked -- touched on this about data. We've done some A/B testing on the site and with Plus subscriptions and found a very high attach model. So it doesn't -- it comes with some good data and analytics that is why we think we can drive to, as Nick mentioned, the 600,000 to 700,000 subscribers by the end of the year.

Yes. And one more thing, too, is our shift to promoting annual subscriptions with even more value is obviously having a positive impact with retention as well. We're really happy with where the churn rate is and something that we're going to keep building on. But Brian is right. There's a lot of small things that we're doing that are having big impacts on the program.

Okay. Great. And then last question. If you could expand on the webcam feature. As that functionality has been added, what kind of feedback are you getting from consumers? And do you see kind of a bump there in sales in your view as a result of adding this feature? And why now for this feature as well?

Well, the why now is, I think, quite clear. That people are using webcams and video conferencing far more than they were prior to COVID. They're live streaming far more than they were prior to COVID. And we recognize that with a firmware update, we could make it possible for our customers to use their GoPros, HERO8 Black specifically, as a webcam. It's just an important feature now, more important than ever, that we wanted to enable them with that functionality. And that HERO8 Black, with its wide-angle lens, is really differentiated from other web cameras insofar as it's just more versatile, and it's very helpful for people who are video conferencing or live streaming activities, where they just need a wider-angle lens to fit the scene in, whether they're giving instruction of some sort or where they can't be in the same location as where their computer is and they need some flexibility with having the web camera decoupled from the computer and give them more perspective versatility than they could get from a traditional web camera. So we're filling that gap. It's interesting. I mean the same wide-angle performance and image quality and versatility that has made GoPro so successful as an activity camera is helping make it successful as a web camera as well. So that's great to see.

And then we're expanding on that further later this year with enhancing the live streaming experience that we currently offer, addressing some of the pain points that exist with some of the other live streaming platforms. So that will be an added bonus for our customers as well. And the feedback has been great. I mean any time you give somebody more performance, more capability for their money and enhance the value of your products and don't charge them anything for it, consumers love that. And so it's been really positively received, and it's something that we look forward to building upon going forward.

And we'll now take our next question from Jim Suva with Citigroup.

This is Mike Cadiz for Jim at Citi. I have one question. I appreciate the OpEx commentary in the prepared remarks. However, I'm curious if there's any expected moderation in the variable selling costs and marketing into 2021 as you continue to optimize the direct sales model. Or should we think of the second half guidance as the proper level going forward?

Mike, this is Brian. Yes. In our last call, we said we wanted to get OpEx down to about the $250 million level in 2021, but we're also seeing a little bit higher demand. I think it's going to be between probably $250 million and $280 million, plus we'll do some investments to continue to optimize the site. Not a lot, but a little bit that goes a long way to drive attribution to GoPro.com. So -- but we'll also see a nice lift. So even then, we're up a little bit in the second half. And again, that's for variable selling costs, a little bit of digital marketing and actually some continued enhancements on GoPro.com, on our site, to improve the marketing on our performance.

And we'll take our next question from Nik Todorov with Longbow Research.

Brian and Nick, I guess, that 500,000 to 600,000 channel inventory target for exiting the year, is that the right amount of inventory that we should be thinking about going forward as you guys position the model to direct? Or you expect that inventory in the channel to go down further in 2021?

Nik, this is Brian. No. I think that's about the right level. I think we'll probably end '21 more at the 0.5 million, on the lower end of that range. I think we're going to end somewhere in the midpoint of the 500,000 to 600,000 at the end of 2020. We'll also bring our own inventory down. So our working capital position will improve this year and actually going into next year. So we're happy with that.

We're -- what's helping to drive that, quite frankly, is demand. I mean sell-through, we think we did about 750,000 units in Q2. It's up more than 20% from our estimate of 600,000. And we're seeing that demand continue, as we talked about. So that leads us nicely into 2021 should demand profile continue on that trajectory.

Okay. And talking about sell-through, I understand last year was an easier comp, and that's why you're seeing sell-through growing year-over-year. But if you look at traditionally in the third quarter, sell-through has been anywhere from 1 point million to 1.1 million units. So that implies roughly down 15% versus that level. But then the implied fourth quarter for sell-through of about 1.2 million units, that's down like more than 20% versus the traditional level of sell-through that you see in the fourth quarter. So why that delta? You're essentially implying that the fourth quarter is going to be weaker than seasonal, I guess. Is there anything else driving that? Or how should I bridge that gap?

Yes. Nik, good question. Yes. If you actually look at how we guided and take the second half, units would be down a little bit more than 10%, I think, on a year-over-year basis. And so -- but ASPs are up. So we're up about 10%. I think we said we'd be about 10% ASP lift in Q3 of '20 over Q3 of '19, and Q4 will be higher. So on a revenue basis, on the second half, I think we did about $660 million of revenue last year second half, and our guidance implies something about 5% less than that. So on a revenue basis and on a margin basis, we're actually better, and we're going to drive more profitability.

Okay. Great. And Nick, you guys started collecting a lot more data on -- I'm sorry, would you have something helpful?

No. No. No. It's okay.

Yes. Nik, I would just add to what Brian said, that we're focused on driving profitability, and we're making business decisions, products decisions, pricing decisions, distribution decisions to drive a more efficient and more profitable business. We're not fixated on unit sell-through like we used to be. We're fixated on earnings growth.

Yes. I mean how -- I mean last -- I think a couple of years ago, you talked about the fourth quarter being -- the fourth quarter always has been a very competitive environment. So I would assume given the current economic situation that it's going to be even more challenging to draw attention from customers and get their money. How do you view the fourth quarter environment now that we're about to go in? And in terms of discounting and promotions, what are you guys -- I guess, not what are you guys planning, but how do you view the situation?

Well, one of the benefits of going direct-to-consumer is the value that we can provide consumers while still generating a healthy margin for GoPro. And that can be more challenging at retail over any fourth quarter, especially when there is a lot of competition for share of consumer wallet, as you know. And so this is another reason that our direct-to-consumer shift is so important to us, is it allows us to do a better job of delivering expanded value to consumers to help convert them into paying customers while simultaneously generating margins that result in a profitable GoPro. It's all about value.

And so your question about how do you attract consumers is you got to wow them with your products. You got to wow them with your performance. You got to wow them with the experience. And you got to wow them with value. And the trick for any business is to do so and generate a healthy margin, and we believe that we've got a terrific plan to do that this fourth quarter and, as well, going forward into '21. Retail is still important to us. But we're learning that a -- there's a more profitable, efficient way and value-ladened way to operate our business and serve our customers than being so reliant on retail, and load balancing our business more strategically between retail and direct is going to result in a much more profitable business, we believe. And I think you're going to see that in 2021, and we're going to start to see what GoPro's brand and product line are really capable of as it relates to generating profits.

Okay. Got it. Last question for me. I think you guys started collecting a lot more data on how customers use your cameras. And you -- last year, you announced some new features and ability for GoPro to be used, for example, as a vlogging camera. I guess do you guys have any data or update? How is that application going? Is there an uptick? What is the customer feedback on that end?

Yes. We've been very successful with establishing GoPro as a staple for any serious vlogger. And you can see for yourself, be it Instagram or YouTube, TikTok, what have you, influencers are regularly using GoPro to help communicate with their audiences. And that was very clearly demonstrated with the launch of HERO8, where -- and before that, HERO7, but really punctuated by HERO8 and MAX insofar as how well those cameras work as a vlogging solution. And we're excited that the new products that we've got on tap take that even further. So we're seeing this as an important consumer use case where we are, in fact, succeeding in serving our customers in this way. And live streaming is another one that we see growing due to the pandemic. And as I mentioned, we're going to be expanding our live streaming capabilities and experience for consumers later this year.

And so across the board, we're constantly looking at ways to make the world's most versatile camera even more versatile and valuable for our customers.

And we have no further questions at this time. I would now like to turn the call back to management for additional or closing remarks.

Thank you, operator. Well, I'd like to close the call today by sharing my gratitude for GoPro employees around the world. You all are excelling and executing during extremely challenging times. And to our millions of customers, it'll appear as though you haven't missed a beat when we launch our new products later this year. They're going to be amazed because you all are truly amazing. And so on behalf of all of them, thank you so much for all the terrific work. It's going to be a fun rest of the year. And to everybody else on the call, thank you for joining. Stay safe. This is team GoPro signing off.

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.