GoPro Inc (GPRO) 2020 Q1 法說會逐字稿

Good day, and welcome to GoPro's First Quarter 2020 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Christopher Clark, Vice President of Corporate Communications. Please go ahead.

Thanks, operator. Good afternoon, everyone, and welcome to GoPro's First 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 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 the COVID-19 pandemic does not materially worsen.

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 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 first quarter 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 not 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. Due to the high volume of companies reporting earnings today, we've chosen to post management commentary for the first quarter of 2020 to the GoPro Investor Relations page on our website.

I'll now give brief remarks, and then we'll go directly into Q&A. Brian's financial overview is included in our posted remarks. As we shared in the management commentary, which I encourage all to read, GoPro is adapting to these challenging times with a strategic realignment to transition to a more efficient and profitable direct-to-consumer business. It is important to point out that while our business slowed due to COVID-19, we're seeing a positive rebound in demand and people have continued to buy GoPro cameras in significant numbers throughout the pandemic, as our written commentary outlines in detail. We believe the decisive action we've taken to lower operating expenses and accelerate our shift to a more consumer direct model capitalizes on this continued demand in an efficient manner, giving GoPro a much improved cash-generating business model that sets us up to succeed in the near-term with the potential to be more profitable than ever in the long term.

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

(Operator Instructions) Our first question today comes from Jim Suva with Citi.

This is Mike Cadiz for Jim Suva at Citi. So just one question for me, though we appreciate that ASPs will continue to move in an upward trajectory, I question to what degree do you think consumers will still continue to spend in excess of $300 per product, for a GoPro product, when unemployment data that we're seeing is increasingly getting so bad?

Thanks for your question. Well, currently, we're seeing the trends to the high end continue. So that's a good sign. And given that historically, GoPro purchase has been a mission-critical or passion-driven purchase for consumers, which has led the purchase to being a highly researched purchase. We know through our consumer research that consumers spend quite a bit of time deciding to buy a GoPro, deciding which model to buy, and they more often than not opt for the high end. And we know through our research that, that's -- that their willingness to buy the best and buy the highest-priced model is related directly to their purpose intent for buying in the first place.

So that's a long way of saying that GoPro is not a fad purchase. It's a purpose-driven purchase. And we see those trends continuing.

As it relates to the economy and people's purchasing power diminishing, that's a very good question, I think that we would likely see people perhaps buying in fewer numbers but still buying towards the high end because of what the part does for them and that the performance at the high end is very, I think, meaningful to our customers. It's why they buy in the first place. So we're confident about our ability to continue to sell at the high end. I think the outright total volume of sales is what would be in question. And that's even more of a reason for our -- well, that's one of the main reasons for our shift to a more direct business is that we can be profitable with a much lower threshold of total number of units needed to be sold to achieve that profitability.

Yes. And Mike, let me maybe add to that. Mike, if you can hear me, let me add a little color to what Nick said. I mean, the trends are clear. You go back to 2018 and 42% of what we sold through as mix was greater than $300. That moved to 70% in '19, and we were just at 90%. So we are seeing a resurgence there and stronger demand at the high end, just not only on 8, but also in MAX. We've seen 7 come up as well. So that's important. And that's across every deal, and it's especially, too, on gopro.com where the mix shifts even higher. So just to add a little bit of color there.

And our next question will come from Erik Woodring with Morgan Stanley.

So there's just a lot of moving pieces here, obviously, as you transition more to a direct-to-consumer business. But at the same time, you are seeing sell-through improve. And that color on recent trends is very helpful. I'm just curious if there's a way that you can frame how we should think about the revenue trajectory in '20 and 2021. I realize there's a lot of uncertainty, but with the moving pieces. I just want to make sure that I and the rest of us are all thinking about how you're thinking about the revenue trajectory? And I have a follow-up after that.

Yes. Erik, this is Brian. Let me start and maybe Nick can come in on top of me. We gave an opening remarks commentary, we expect sell-through to be in a range of 2.8 million to 3.2 million units in 2020. Based on what we're seeing on demand in Q2, we're feeling confident in the 600,000 units of sell-through, and we did 700,000 approximately in Q1. So we're about halfway to that point of the whole year. So that's encouraging.

And just on the Q2 commentary, we've seen increases week-to-week in every geo. As a matter of fact, China is now specifically above the year-over-year trend. Australia is about 85%. And actually at gopro.com, if I compare it to where we've been trending in the last few weeks for about 3.0 to 4.0x the volume on gopro.com. So we're definitely making an impact there on the D2C progress.

We mentioned we would be -- gopro.com would be about 40% of our total revenue in Q2, as a matter of fact in April was just over 50%. So as we get reorders from retailers, as they come back to online, we expect that to drop to about 40%. It's also important to note, just to put it in perspective, that Q2 revenue on gopro.com would be very close to -- slightly below, but very close to where we were in Q4 of '19, which was a record. So we're able to scale and drive a lot of business on our D2C platform.

On that commentary, we also said that we exited 2019 with channel inventory of about 1.4 million units, and we expect to get to about half of that by the end of the year. So if we're selling at a 3 million unit volume rate or so at the midpoint of what we expect and we take channel inventory down by basically half, our sell-in then would be less than the sell-through, so -- for 2020. And as we look ahead to 2021, with channel inventories aligned correctly for the business at an exit of 600,000 to 700,000 units, should demand stay at the 3 million unit level, we could be -- have very -- we would have revenue growth because then we would sell more units in '21 versus '20. And in the model with operating expenses being down to $250 million and margins up in the upper 30s, we think we could be a very profitable company as well.

That was amazingly helpful. I really appreciate all that color and kind of piecing all the comments that you put in the press release together. If I can ask a second question here, just you mentioned you see the operating model driving gross margins in the high 30% in the second half of the year. Just curious how you think about how that may look 2 to 3 years from now as the majority of your business is presumably going to be on gopro.com, which you've mentioned is higher margin. So just maybe long-term target for gross margins.

Sure. No problem. Let me just start with why we think we can be in the 38 to 40 points of margin. And as we think about how we're modeling through the business, in the opening commentary, where we would provide some outside value to the consumers and do more, obviously, in D2C and with plus, as -- taking that into account, our margins on our platform are anywhere from 5% to 10% or 12% better than they are at retail, quite frankly, and through distribution. And so that mix of shifting to more to our platform on a D2C basis would add about 2 to 3 margin points on an aggregate basis. We see margins expanding into above that, or I should say, expanding on a year-over-year basis from '20 to '21, and that's because if we have a higher amount of volume, I've got to fix overhead coverage as well as a higher run rate of direct-to-consumer.

As I said in our opening remarks, direct-to-consumer was about 10% of our revenue in 2019. We expect it to be around 45% in 2020, and to increase further in 2021 to be actually the majority of our revenue. So you would see over time an expanding margin profile on a long-term model.

And we'll take our final question from Andrew Uerkwitz with Oppenheimer.

If you could -- I read through the transcript, the remarks, and you talked about the retail strategy there. Could you go into a bit more detail? I was a little confused. For example, are big box retailers still getting the $300-plus cameras, what does the footprint store shrinkage look like? And then on the stores that are getting shrunk, how are those chosen? Was it by sales, strategic location? Was there branding considerations? Could you just give us a little bit more color on the retail, what the new retail channel is going to look like?

Andrew, yes, in North America, our flagships will be -- beginning in Q4, our flagships will be sold primarily at gopro.com, possibly with some sales at some key strategic retailers for key periods. But by and large, you can expect the GoPro flagships being available at gopro.com exclusively. And we'll be primarily focusing on selling our mid and entry-level products with big box retailers, which, consequently, there -- for many of them, the majority of their business is in the mid and entry level. So that's not a big change for them. That's not the case for everybody. But for most of the big box retailers, that is the case.

And then we're not sharing any information on total number of doors GoPro would be available in. But as it relates, the big box is important for us to be represented there with our mid- and entry-level products and our accessory line, which is considerable business for them. And then specialty stores remain important to us, provided that they reopen at the appropriate time. And as far as decision-making goes around which stores to stay there, it's obviously related to revenue but also to importance from location and how well those stores represent GoPro's brand.

The specialty business isn't that big for us. But it's -- as we've stated, it's important for our brands to be well represented at what we call passion epicenters, whether they be at the beach or at ski resorts or mountain bike resorts and the like. So at the appropriate time, we'll be working with them again when they reopen. But obviously, that's to be seen when that will be.

Sure. But if you could also kind of help me, and this might be a dumb question, but when I think of the $300-plus product, $300-plus camera sales, I think of HERO Black and HERO MAX, if that shift has been upwards of 90%, would that shift actually -- should we see that shift actually go down a bit because of the heavy retail focused on low and mid end? Or does the Silver actually kind of fit into that plus $300?

Let me take that. Right now on the -- do you want to take that, Nick?

No, you go ahead.

Yes. Andrew, today, on the 90%, that would be MAX, HERO 8 Black and actually HERO 7 Black, which is at $329. And so we're going to -- right -- so -- if that's helpful. I'd add a little bit more color on top of what Nick said in his prior remarks. In terms of like last -- in Q4, when we were the platform that had HERO 8 Black when we were able to relaunch the product, we saw outsized growth on a year-over-year basis across all of our regions in Europe and in the U.S. And so we have very good data points on demand profiles when we're able to have products at a presold basis on gopro.com. So that gives us very good data to align this model on the high end with our platform.

Got it. That's helpful.

Yes. And just to add a little color to your question about would having our flagship not as available at big box retailers, would that shift volume, SKU mix to the mid and low end. We don't believe so because, as I mentioned earlier, it's very clear to us through our customer research that GoPro is a highly researched purchase. It's -- consumers aren't buying GoPro when they bump into it in the store. And so during that research process, the majority of our customers come to gopro.com to learn more.

So we believe that by having gopro.com be one of the few places where our flagship is available, that won't necessarily shift buying behavior because consumers aren't buying out of the convenience of going into a store, they're doing their research and then they're buying the flagship where they can find the most value. And that's a really important part of our strategy is that by primarily selling our flagship products at gopro.com, we can deliver far more value to consumers, be it through bundling or with a plus subscription and other value adds. We can layer on a lot more value for the consumers' money than we ever could at retail, which will further help drive sales of the flagship to gopro.com and ultimately be a win for the consumer by -- while being a win for GoPro.

Got it. That's super helpful. And I guess my last question, and Nick, you've answered it somewhat as far as -- obviously, it's a researched and purposed purchase, but your sell-through the last couple of years or sell-in, I guess, your sell-through based on the comments you've made, has been roughly around, I think, around 4 million a year, 4 million units a year. It's been very steady despite the broader industry trends which are not steady.

Your breakeven is now 2 million a year. You're shifting to this direct-to-consumer. I don't expect COVID will have a lasting impact. It might be in a long time, but won't have a lasting impact on travel and adventure. Do you think, under the new structure, you can achieve that 4 million run rate again at some point in the future? Or is there a certain loss of sales due to the new business model?

No. I mean consumer interests and passions don't necessarily go away. They might get put on hold for a little while, as you say. And people have different priorities during a pandemic, although we continue to see robust sell-through, I think, a stronger sell-through of GoPro's during this period than people would have imagined. So that's good to see. So no, we believe that the overall TAM for GoPro remains the same, but we're going to be serving that TAM in a more direct fashion and, as I mentioned, with more value offered to consumers at the time of purchase. So net-net, I mean, there's going to be a balloon of value for consumers that wasn't there before, and there already was significant value. So that bodes well in terms of GoPro being able to capitalize and convert on that consumer interest and demand.

And as you note, the more that the world returns to normal or the new normal, whatever that is, the premise, the promise and the potential of GoPro remain the same for the consumer. So there's no reason to believe that over time, we can't grow back into the types of volumes that we sold through with our older retail-based go-to-market strategy, but it's great that the threshold to profitability is as low as it is. And the signs that we're seeing is that we're going to be able to perform quite well during the pandemic and increasingly better as the impact of the pandemic lessens over time. So hopefully, that answers your question. I think it's a matter of when, not if.

That does conclude the question-and-answer session. I'll now turn the conference back over to management for any additional or closing remarks.

Thank you, operator. I'd like to close by underscoring how strongly we believe our strategy sets us up to succeed, both during and after this pandemic. We can deliver significantly more value to consumers as a more direct company, which we believe will translate into expanded value for investors as well. I want to thank all of GoPro's employees around the world for their resilience during these difficult times. You've all come together and maintained an exceptional level of execution while keeping yourselves and those close to you safe. Your dedication and passion for GoPro gives me great confidence in our potential going forward.

Thank you, everyone. This is Team GoPro signing off.

Thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.