GoPro, Inc.

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 McKee. 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 DOPO'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 guaranteed the 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. It seems that results could change at any time, and our commentary about our business results 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. The reconciliation of GAAP and 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 a link to today's live webcast and a replay of this conference call are posted on DOPRO'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 DOPRO's founder and CEO, Nicholas Woodman.

Thanks, Jolene, 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 and effectively managed supply chain and channel inventories combined with a successful new product launch can 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 34 cents, 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 one-year mark for the subscriber cohort who received their subscription as a part of their Hero 9 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's ability to positively impact margin over the long term. And our Quick App subscription continues to contribute margin as well, having closed the quarter with 168,000 subscribers. Street ASPs continue 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 Hero 10 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 is 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.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you were using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from Jim Sula of Citigroup.

Thank you. First of all, I just really got to commend you and your team for getting all the supply on the shelves and out there into the holiday season. You know, 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 shining star of a company who's circumvented a lot of these supply chain challenges. Thank you.

Hi, Jim. This is Brian. First of all, I'd like to welcome Jalene as our new VP of Industrial Relations. It's great to have her on board. 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 two years. We've proven the positive impact of our direct-to-consumer strategy business and subscription strategy have, you know, 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 other years. Jim, specific to your question on action we've done, we were kind of tough about that even in the last few calls. Back in I would argue April, May of 2020, you know, we looked at, you know, our product lineup and our forecasting and our demand planning. And that team has done an incredible job of understanding how to, you know, 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 software 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. They're up front with 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 and for the fourth quarter and even looking ahead into early 2022.

Well, thank you for the details and really sincerely congratulations for managing such a complicated time period in life. Thank you. Thanks, Jim.

Thank you. We'll take our next question from Eric Woodring with Morgan Stanley.

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

Hi, Eric. This is Brian. Let me start, and maybe Nick can chime in. 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 retail really outperformed nicely in the quarter. It's great to have two strong channels, direct-to-consumer as well as, you know, our retail partners around the world. And in particular, Europe and Asia Pacific and those countries have had higher vaccination rates. and more of the stores have opened. We've performed really well from a D2C perspective, but also I think we've seen retail do well as people have gotten out and going shopping and going in-store. Retail really drove the outperformance in the quarter. Direct-to-consumer was right in where we needed it to be, but retail did well.

Yeah, 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. How seamlessly our products are working together now from – Well, now with Hero 10, Hero 9, and Hero 8. But in Q3, it was Hero 9 and Hero 8. You know, 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, you know, across the board, we're really happy with how inventory channel management is just supporting our success on all fronts.

That's really helpful. Thank you both. And then I guess I'm going to ask one more question that's almost two questions in one. And I apologize, I've just jumped on late. But were you able to essentially satisfy the demand that you had in the market? Another way of saying that was, 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 for me. Thanks, guys.

Thanks, sir. Let me start with that. I think what we've said is, you know, we have the supplies to meet the demand for Q4 in 2021, and that continues to hold. I think we've 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, you know, we focused on, you know, the products, quite frankly, that are – you know, 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 parts we sold that had MSRP greater than $300. Our AFPs are up 25% year-over-year to $381. So 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.

Yep, that makes perfect sense. Thank you. Thank you, Brian.

Thank you. We'll take our next question from Paul Chung of JP Morgan.

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

Yeah, Paul, maybe I'll start, and maybe Nick can come in after me. We definitely push prices up a bit on Hero 10 Black, but the performance is there to justify that price increase, and we're seeing the demand, which is great. It's the only camera out there that's 5.3Ks. 60 that you know if you want to go out and find something you're paying 3 500 bucks not 500. so we think we've got a very good value proposition uh 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 and well better than 90 attached on our subscription which is a very important part of kind 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 the ability to sustain that as we look ahead. You know, we're almost 44% in Q3. We'll be, you know, 40 and a half 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. Freight rates are just skyrocketing because of supply chain. But that'll you know, ease up as, you know, 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, you know, and it's driven by, you know, shifting to the high end, Driving AFPs 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 our massive cash generation. We had plus $60 million in Q3. It's 19% of revenue in our trading 12-month cash generation. It's been 15% at $166 million. So pretty happy with that. Yeah, that's great.

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 uh, you know, offering value ads, uh, via subscription at gopro.com helps to, uh, buffer that risk of going higher price and, and not being as appealing to everybody, um, that may not be willing to pay that much. Uh, they can come and purchase through gopro.com. So that, that, that, that, that helps a lot. And then as well, our strategy of, uh, dropping last year's flagship down to be the mid tier product. And, um, you know, having two years ago flagship be the 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. And 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 customers. 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 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, you know, can you expand on the cohort that we're kind of labbing now into the holiday season from, you know, the large subs taken in last year or 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.

Sorry, I was on mute. My bad. Yeah, on subscription itself, our attached to camera purchase at GoPro.com continues to be better than 90%, especially improved on 10 versus 9, which is great to see. And our annual subscriber retention rates from the cohort from last year who blocked the subscription with Hero 9, we would say it's healthy and in line with our expectations, and that's also why we expect it 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 need it 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.

Gotcha. And then last question on cash flow. What a really great year. I think your cash guidance suggests you're on track to as 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? Thank you. Yeah.

Thanks, Paul. From a capital allocation perspective, You know, 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, you know, as a reminder, we have to pay down $125 million in our convert. That's the 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, toughened kind of things that are small. I don't see a big thing on the horizon that's going to eat up a lot of cash.

Thanks, Scott.

Thank you. Once again, if you would like to ask a question, please press star 1. We'll take our next question from Martin Yang with Oppenheimer and Company.

Hi. Good evening and good afternoon. Very impressive results. My first question is on your share of PTC sales in September quarter. It's up slightly year over year, but I thought given the very significant value proposition for the bubble sales and discounts, The share might be a little higher. So was the UPC share of total sales in line with your expectations?

Actually, it was. And retail outperformed, particularly in Europe and Asia. So, yeah, as a matter of fact, I think you also put out a note ahead of earnings that we were discounting 10. We actually didn't discount 10. Hero 10 Black at all in Q3. It was our normal offer of a standalone price at $399, or you could buy in a hard bundle, I think at $450, I think was the price. And that was pretty standard, even what we did uh from an offering uh on hero nine until nine blocks so now gopro.com came in on our expectations we we had said in our august call that um it would be uh well below 40 of the mix um you knew that and it kind of came in there but you know 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? You know, what contributed to the sequential decline?

Yeah, the principal reason for the sequential decline is was freight. Freight rates are just going through the roof in the fourth quarter as everyone's trying to get supply in to meet holiday demand. That's the number one 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% 41% and 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 we're generating as well as the cash flow.

Got it. Thank you. 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 and 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.

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