GoPro, Inc.

Ladies and gentlemen, good day and welcome to GoPro's first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Christopher Clark, Vice President of Corporate Communications. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to GoPro's first quarter earnings conference call. With me today are GoPro 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 keys 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 uncertainty related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and our commentary and 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 on Form 10-K for the year ended December 31, 2020, which may be updated in future filings 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 on a non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic. 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 and which is posted on our website. In addition to the earnings press release, we have posted management commentaries and slides containing detailed financial data and metrics for the first quarter of 2021. The management commentary and slides, as well as a link to today's live webcast and a replay of this conference call are 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-GAF unless otherwise noted. Now I'll turn the call over to GoPro's founder and CEO, Nicholas Woodman.

Thanks, Chris, and good afternoon, everyone. Before we get started, I'd like to encourage everybody to read the commentary we posted earlier today to the GoPro Investor Relations page on our website. In addition to providing an overview of our quarterly results and forward-looking guidance, the commentary includes meaningful color about our business. I will now share some brief remarks, and then we'll go directly into Q&A. First, I want to congratulate our team for driving GoPro's subscription business past 1 million subscribers, an exciting milestone we achieved in April. This represents growth of 80% year-to-date and 180% year-over-year. Equally exciting is that 1 million GoPro subscribers represents approximately $50 million of high-margin annual recurring revenue for GoPro. I also want to congratulate our team on growing direct-to-consumer sales at GoPro.com to 40% of total revenue for the quarter, up from 33% in Q4 2020. This also helps drive margin and subscriber growth, as more than 90% of camera purchases at GoPro.com result in a subscription attached. This is the new GoPro. We've evolved from a hard unit sales centric business to a successful consumer direct subscription centric business with a significant opportunity to grow margin and profitability with continued subscriber growth. Turning to our Q1 financial performance, revenue in the first quarter of 2021 was $204 million, an increase of 71% year over year. Direct-to-consumer revenue via GoPro.com exceeded $80 million, or 40% of revenue, representing GoPro.com's second-highest quarter ever, topped only by the Q4 2020 holiday quarter. ASPs rose to a record $366 as demand for our premium products increased in Q1 across all geographies. This had a positive impact on gross margins and non-GAAP EPS. In Q1, GoPro generated non-GAAP EPS of $0.03. Our year-over-year non-GAAP profitability improvement was $54 million. Non-GAAP gross margin in Q1 was 39%, up from 34% in Q1 2020. As I mentioned, This is the new GoPro. Brian and I will now take questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask a question, you may do so now by pressing star 1 on your touchtone phone. If you are using a speakerphone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, if you would like to ask a question, please press star 1 now. And our first question will come from Mr. Jim Subba with Citigroup Investment Research.

Thank you. And I want to give my sincere congratulations not only to both of you but your entire team. It's just truly remarkable results and your outlook, and it shows what the company is evolving to. So that's fantastic. When we start thinking about, you mentioned in your prepared comments, 2 million subscribers. I think you said by the end of calendar year 21. That's great. The operating margins, should we think about sustaining that operating margins at 50% as opposed to getting leverage added, or maybe it's you're putting more R&D and more enhancements to the subscriptions, and that's why we should keep it at 50%? I'm just kind of curious about that.

Yeah, hi, Jim. I'll take that. As we look at this year, yeah, we've been running 50%. As we continue to drive subscribers at a faster rate. It's going to outpace what we spend in operating expenses. So that 50% is going to probably grow into about 60% as we get to 2022. So it's going to continue to improve as a profit driver after the company. And it's clearly having an impact on margins. We saw that in Q1, you know, at 39%. And we've adjusted margins for this year. Previously, we were guiding 38 to 39, and now we're at 39% plus or minus 100 bps. So, definitely seeing improvement in margin as a result of subscription, but also, of course, you know, doing more sales direct to consumer. as well as the higher end of our product line, which is driving AFPs as well.

Thank you. And, again, my sincere congratulations to you and everybody on all of your teams.

Thanks, Jim. Yeah. Thank you for that, Jim.

Thank you. Our next question comes from Nick Total Longbow Research.

Hey, guys. Yeah. Congrats on great results as well. A couple of questions. So, Brian, if I do some math, you guys had a very good quarter. You guided to 10% increase in sales through year over year, if my numbers are correct. I didn't see any comments regarding you raising the full year output for sales through. I think you said that you expect your sales to grow towards the high end of your guidance range. But Can you just clarify what you're expecting right now for sell-through for 2021? Thanks.

Yeah. Hi, Mac. We did see sell-through came in a little bit ahead of where we thought we would be in Q1. And so that was a positive that helped us achieve the $204 million revenue in Q1, up 70%. And we're guiding up in Q2 to $825,000 at the midpoint. So it's positive results and seasonally where we'd expect it to be. And for the year, we're still holding for $3.6 million when it's still through. for 2021. So that outlook hasn't changed, although I think the mix is maybe shifting still a little bit more to the high end. And that's, of course, helping margins a bit as well.

Well, if I can follow up, I think if my math is correct, that implies that your second half sell-through will be down 6% to 7% year over year. I just wonder, you know, that looks a little bit conservative. Is that how you view it? You try to, you know, under-promise, over-deliver, or how should we do that in that context?

Yeah, you know, our view is, you know, when we get to the second half, we'll see. We've held from a sales perspective our sales for the year with the guidance. You know, we talked about up 20% to 25%. year-over-year growth and 21 over 20. We've said that we think we're going to be towards the higher end of that range now, which is positive. So it's, you know, from us on, sell through. And also, I think we're going to see channel inventories come down a bit more. So we'll see how it goes in the second half. We also want to see how the world emerges with the pandemic. So, yeah. So that's how we got it.

Yeah. Quick comment, Don. Can you talk about what you're seeing from an inflationary standpoint and also regarding your inventory, particularly components? Do you anticipate any impact on GoPro from rising component prices or semi shortages or higher logistics costs?

Yeah. Obviously, we're seeing some impact on semis. That's just kind of where the world is, right, from that perspective. But on the supply front, you know, shortages, they've been widely reported. But we have enough supply to meet our projections. So I feel good about that. And we've been in a pretty good position to manage critical components uh well with our key odm uh supplier jable as well some of our other key suppliers so we think we're in good shape uh there i mean it continues to move around but but we're managing it uh teams on it uh and any kind of that uh reflected are already reflected in our guidance for margin. So, despite that, we think margins are going to lift a bit in 2021 from where we were in February.

Just one question for Nick, if I can squeeze. Nick, you mentioned in the prepared remarks that you foresee a desktop version of the Qlik app. Can you give us any color? I know it's probably a forward-looking statement, but should we expect a similar experience with the mobile app, or are the economics similar? Any color you can give us, we'll appreciate it.

Yeah, we shared that we see a desktop variant of our app in the future as we want to really meet our users where they are. and serve them on whatever platform they're on, be it mobile, desktop, or cloud. And sharing where we, you know, our vision of our software suite of offerings, how we see that in the future, I felt it was important to give investors an understanding of sort of the potential reach of our brand and software as a solution set for users addressing their personal content needs wherever they are. And as you can imagine, some of the more passionate consumers who are more passionate about photos and videos have large amounts of them stored on hard drives and on their desktops and so forth. And so a desktop platform is a more convenient way to serve them. We're not sharing anything in terms of timing or, you know, what the margin profile of that business would be. But I think it does underscore our opportunity to extend GoPro as a personal content solution provider for users, regardless of what camera they're using to capture their content and regardless of what platform they're using to engage with users. to manage and enjoy that content. So it's a pretty exciting and significant opportunity, we think, to serve people in the future.

Got it. Thanks, guys. Good luck. Thank you. Our next question comes from Paul Chung with JPMorgan.

Hi. Thanks for taking my questions. Great quarter and, you know, really good guide. So as we think about GoPro.com sales and kind of projections for you know, 40 to 45%. You're at that level today in Q1. I know 4Q and 3Q is probably more, you know, retail heavy. But, you know, how are you getting consumers to get pushed to the website? Are most, you know, customers aware that the camera plus subscription is kind of the best deal out there on your website?

No, there's always going to be work to be done there because, you know, It would be amazing if we could have instant alignment and awareness amongst all consumers. That's like a marketer's dream. But fortunately, that's impossible to do for a good reason. You're always bringing new consumers, new interest into the brand, and they need to be educated. You have younger consumers who are growing up into the brand, And they need to be educated. And so the answer is no. We do not have universal awareness amongst consumers that the best value proposition is at gopro.com. But that's a good thing because it means that there's a significant amount of growth opportunity. And then even amongst those users who – those consumers, those GoPro customers who are aware, who are existing – GoPro users, they may not, you know, be at the point in their GoPro product experience lifecycle where they're ready to upgrade and to take advantage of it. So we certainly have a large number of consumers that are waiting in the wings to buy at GoPro.com when they upgrade. to the next flagship or the flagship after that or what have you. So there's a tremendous amount of opportunity left to drive awareness and conversion at gopro.com, and that's from a marketing perspective. And that's before we even start talking about improving the platform capabilities of our shopping, of our website, to drive conversion further. I mean, as I've shared in the past, we were such a retail – centric and focused business for so many years that the sophistication and capabilities of gopro.com as a shopping platform kind of just suffered from a lack of investment and focus. The positive to that now is there's just a ton of low hanging fruit to continue to improve the user experience, shopper experience, and the site capabilities to drive conversion further. So a lot to come.

Gotcha. And then you mentioned attach rate of 90% on the website. What are some examples where kind of people opt out and why? And then what's that attach rate for kind of your retail channel as well?

You're asking about the IQ test. Why would anybody not take advantage of the GoPro subscription and the save $100 on their basket purchase at GoPro.com. People buy for different reasons. We have commercial customers who are, you know, buying for their businesses where a subscription doesn't really make sense for them, except you would think at a minimum the you break it, we replace it, no questions asked guarantee would be a benefit to everybody. But whether you're a fire station or you're, you know, buying it for your commercial business or other purpose, there are corner cases where the subscription just doesn't make sense. Also, we're aware that some people who are buying these gifts don't buy it with a subscription because it's We don't currently have the ability to transfer a subscription to somebody as a gift. That's something that we're working on so that we can capitalize on getting 100% of gift givers to buy it because why wouldn't you want to save $100 from your basket purchase by buying that subscription and giving it to somebody? So there's a lot of opportunity left there, and that will be rolling out throughout the rest of this year and on because the opportunity just – you can never get on top of all.

Gotcha. And Paul, you asked a question.

Sorry, you asked about retail. So we're about 90 plus percent attached on gopher.com with the subscription. And it's actually improving in retail. It was kind of in the 6% to 10% range. It looks like it's moving up to 8% to 12% as more people become aware of the offering and the benefits. So we're starting to see improvement even on the retail side, which is good. Okay.

And when you think about ASPs, you know, in 1Q, which we're at a record, where can we see those ISPs go kind of beyond, you know, fiscal year 21? You already mentioned the 8% to 12% increase, but you layer in more subs, more accessories, and then do you see some more room to maybe raise prices for the next flagship from this time around?

Yeah, I don't want to get into pricing per se, but, I think just given that we continue to sell more at the high end, our accessory attacks, particularly on subscribers from GoPro.com, are substantially higher on purchases than are coming from retail, as far as we can measure it. And then the subscription, of course, adds to that. And so, yeah, I think ASGs continue to push forward, definitely in 21. We give that range an 8 to 12, right? And then it'll increase in 22 as well.

Great. Thank you. Thank you. I'd like to ask a question. You may do so at any time by pressing star 1. Our next question comes from Martin Yang with Oppenheimer & Company.

Good afternoon, Nick and Brian. Thanks for taking my question. So is there anything you can share on the user engagement for your GoPro app and how many active users are there and whether or not there's any insight you could derive from that group?

Sure. We're not going to be sharing any specifics of that on this call, but what I can say there's a lot of insight to be derived from the group, and our team is doing a great job of capturing user behavior and also user outreach research to get their direct feedback to the new and improved Quick App experience that we launched at the end of Q1, and the team is learning a ton. We put out... a new release of the app every two weeks. So we're rapidly responding to what our users are telling us, and we're dedicated to providing them the fastest evolving and best software experience that we can. And that's exciting because this is a new, as I mentioned at the top of the call, new GoPro. And that doesn't just relate to our business model and ability to generate more profit out of world-class brand products. This is actually the new GoPro because we're much better at responding and developing towards what our customers are asking for as a more capable software company. So we're really happy with what we're seeing. And You know, even before the update of the Quick app, the previous GoPro app was four and a half or better stars in the app stores. And so we've been really happy with where we've gotten that app to. But, of course, we think we've taken it to another level with the new version of the Quick app. And so you should please pay attention to our updates as they're going to be rolling off of the line here every two weeks, and it should be an exciting time.

Thanks. In the past, there were references on, for instance, certain geography will have a more significant uptick in user engagement or activity, which implies that maybe certain regions have more opening up in the COVID environment. So the kind of user insight you get from the apps Are there any more useful signals for you or inputs for you to do business planning and even product designs, hardware product designs?

Yeah, it does help influence. I mean, we also learn, you know, how important travel is, business, because we can understand – I mean, all the data is anonymous, of course, but we can understand where a camera – is used around the world that they have GPS turned on and also where a camera was set up and initially paired to the app. And that helps us understand directionally where an owner lives and what region and how much they actually use their GoPro when they're out of their home region and they're traveling. And that really helped us learn how important the travel market was for growing our business. And so we adjusted our marketing strategy years ago to court the traveler, you know, in advance of, you know, when they're during their planning stages for their trip and so forth, because that's a target-rich environment for us from converting consumers' perspective. And it also tells us now that, you know, we're doing remarkably well as a business, given that travel is all but turned off in so much of the world. And so that's really encouraging as we look to the future of GoPro and growth opportunities as the world, you know, hopefully begins to recover from the pandemic in earnest as more people get vaccinated and And as more countries open back up for travel and as people feel safe again, without a doubt, our data indicates that this is a real growth opportunity for us. But, you know, terrific job, you know, all of GoPro's employees for putting us in such a good position to succeed as a business, even when one of our major markets is essentially shut down. So that's an example of the type of data that we get from camera usage and from our app usage that helps inform us in terms of making better business decisions.

Oh, that's great. My next question is the accessory opportunities. You know, how do you think about, you know, if there's any potential innovation you could do regarding camera accessories? And is there – more accessories with unique abilities coming that may allow users to perhaps customize your camera to more specific use cases outside of sports and travel, you know, training or, you know, some of the online video. Could those be opportunities for you?

They are. You know, we don't call our cameras the world's most versatile cameras for nothing. And One of the ways that we make it easier for our customers to use their camera in more versatile ways is with the mounting accessories that we produce. It helps consumers connect the dots as to the capabilities of their GoPro and how it might serve them. And so our accessories business is doing quite well. It's a really important part of our business. It's one of our key differentiators. uh and we are uh have noticed that uh there is a uh demand for higher end accessories from us that offer added value added functionality and consumers are clearly willing to pay for that additional performance when we produce such a product so you will see continued new accessories from us at the higher end as we seek to accomplish more for our end users. And as they keep telling us that they're purchasing behavior, that they're interested in buying such products from us, it's obviously a win-win for everybody.

And are high-end accessories have, you know, different margin profiles versus the camera?

Brian, you want to take that one? Yeah, I've got that. Yeah, I'm Martin. Yeah, accessories in general are probably slightly better than corporate average on margin, kind of an aggregate. So it's attributed to margin.

Got it. One more question, then let's jump back to the queue. Brian, when you think about, you know, maybe the margin sensitivity to every 100 million subscription revenues what's the sensitivity to gross margins and how should we think about the ongoing trajectory of having a higher percentage of substitution revenues and what does that do to gross margins in the longer term?

Yeah, it obviously helps it, but you have to put it in relative context of how everything else in the business is moving, right? But it definitely helps it because we're running 70 to 80 points of growth profit margin on subscription and about 50 points or so, as I talked about earlier, and that's going to improve over time. on operating profit so it's definitely a contributor it's one of our fastest growing product categories that is also helping to contribute the margins and so when i talk about margins you know uh listening up in the second half, for example, of 2021, we'd expect margins in the 39% to 40% range. And part of that's due to obviously more camera sales, but also subscription is definitely helping prop that up. Got it. Thank you very much.

Thank you. Ladies and gentlemen, at this time, we have no further questions in the queue. So I will turn it back to Mr. Woodman for closing comments.

Thank you, operator. Well, this is an exciting time for GoPro. And as you can hear, we're energized by the opportunity ahead. To all of GoPro's employees and partners around the world, thank you for making the magic happen. And thank you, everyone, for joining today's call. We appreciate your time and support very much. This is Team GoPro. signing off.

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