GoPro, Inc.

Good day and welcome to the GOPRO's Q4 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jalene Hoover, VP of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good afternoon, everyone, and welcome to GOPRO's fourth quarter and 2021 earnings conference call. With me today are GOPRO's CEO, Nicholas Woodman, and CFO and COO, Brian McGee. Today's agenda will include a brief introduction from Nick, followed by Q&A. For detailed information about our fourth quarter and 2021 performance and our outlook, please read the management commentary we've posted to GOPRO's investor relations website. Before I pass the call to Nick, I'd like to remind everyone that our remarks today may include forward-looking statements. Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance. and are subject to a number of risks and uncertainties which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today, including but not limited to uncertainty related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and our commentary about our business results and outlook is based on the information available as of today's date. We do not undertake any obligation to update these statements as a result of new information or future events. Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2020, which is on file with the Securities and Exchange Commission and in other reports that we may file from time to time with the SEC. Today we may discuss gross margin, operating expense, net profit and loss EBITDA, as well as basic and diluted net profit and loss per share in accordance with GAAP and additionally on a non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance. We use the non-GAAP reporting internally to evaluate and manage our operations, and we choose to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results. A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon, which is posted on our website. In addition to the earnings press release and management commentary, we have posted slides containing detailed financial data and metrics for the fourth quarter and for 2021. The management commentary and slides, as well as a link of today's live webcast and a replay of this conference call, are posted on the GoPro Investor Relations website for your reference. Unless otherwise noted, all income statement-related numbers that are to discuss today during the call, other than revenue, are non-GAAP. Now, I'll turn the call over to GoPro's founder and CEO, Nicholas Woodman.

Thanks, Jalene, and good afternoon, everyone. In 2021, GoPro navigated a challenging business environment and thrived. We successfully launched innovative new hardware, software, and subscription offerings and leveraged the first full year of our more direct-to-consumer, subscription-centric strategy to grow revenue, margins, and profitability while generating a record year-end cash balance of $539 million. 2021 revenue was $1.16 billion, up 30% year-over-year. Margins grew to 41.1% on a GAAP basis and to 41.4% non-GAAP. GAAP EPS increased to $2.27, with non-GAAP EPS increasing more than 10 times over 2020 to 90 cents. 2021 was our third consecutive profitable year on a non-GAAP basis, with Q4 bringing home the win with the successful launch of our new flagship camera, Hero 10 Black. Effective supply chain management kept shelves stocked globally for the holidays and we grew Q4 revenue and earnings year over year with revenue up 9% to $391 million and net income up 8% to $66 million. This strong performance coupled with our impressive cash generation as well as expected future cash generation contributed to our decision to announce a share repurchase program of up to $100 million of our Class A common stock. In addition to growth in revenue and profitability, 2021 was also a year of optimization across our business, including refining our product development approach and modernizing our e-commerce infrastructure. In 2021, we grew our direct-to-consumer revenue 39% year over year, to a record $392 million, representing 34% of revenue, up from 32% in 2020. Q4 direct-to-consumer revenue was $128 million, or 33% of revenue, up 10% year-over-year. Our direct-to-consumer efforts contributed to the addition of 815,000 new GoPro subscribers in 2021. bringing our GoPro subscriber total to approximately 1.6 million at year end, representing very strong growth of 107% year over year. And we're happy to report that subscriber retention rates remain at the same favorable levels we've mentioned on previous earnings calls, with several opportunities to further improve on this important metric. Our Quick App subscription, which we launched in spring of 2021 for mobile users, who do not own a GoPro camera through to approximately 221,000 subscribers by year end. Looking at 2022 and beyond, we plan to grow our business and expand our TAM by enhancing our product ecosystem, leveraging automation to help our customers more conveniently achieve success, creating derivative cameras to diversify our offerings, targeting TAM expanding use cases, in a more specific manner than we do today, and expanding our cloud, mobile, and upcoming desktop application capabilities to better serve GoPro customers while appealing to new customers who may or may not own a GoPro camera. We believe offering a broader portfolio of hardware products and software solutions to address new customer use cases and needs will enable us to expand our TAM. Our product roadmap is accordingly robust. tailored for consumers and professionals whose digital imaging needs require the types of solutions GoPro is uniquely positioned to provide. In just the past week, GoPro was honored by the National Academy of Television Arts and Sciences with our second Emmy Award, this time recognizing our industry-leading hyper-smooth video stabilization. Our two Emmys are testament to GoPro's thriving culture of innovation and incredibly talented people. At the end of 2022, we plan to increase our hardware offering from the two product types we have today, Hero and Max, to four distinct camera products. And we expect to expand that further by the end of 2023. This is in addition to the aggressive roadmap we have planned for software, including new cloud capabilities and an all-new subscription-based desktop application. To the GoPro team around the world, congratulations and thank you for delivering such impressive results in 2021. You definitely navigated some of the most challenging business conditions the world has ever seen to deliver market-defining products and equally impressive financial results. Your execution also combined with our passionately supportive work culture to land GoPro as the number one large business in Outside Magazine's reviews of the most desirable places to work. Congratulations and thank you again, everyone. We look forward to building on all of this positive momentum in 2022, our 20th anniversary year, to deliver what we believe will be another stellar year. With that, operator, we're ready to take questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're on 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.

And we'll pause a moment so that everyone has an opportunity to signal for questions. And we'll go to our first question from Eric Woodring of Morgan Stanley.

Hey, good afternoon, guys. Congrats on the quarter here. You know, maybe if we take a step back, this is your first year where you had the subscription bundle in the market for the full year. So, you know, we'd just love to know what you guys learned and maybe how you plan to enhance the value proposition there to provide more value for your customers.

And then I would follow up. Hey, Eric. Thank you. This is Nick.

Before I answer that and appreciate that question, I just want to acknowledge this has been a really tough day in the market and many businesses are facing significant challenges right now. We know the feeling. We've been there. And I want to acknowledge how tough business can be and how grateful we are to have GoPro in such a stable position with many growth opportunities ahead of us thanks to the strength of our execution, Most importantly, our people and our partners and our strategy. Business takes heart. It takes faith. And it's working for GoPro, and we're really grateful for it. So just want to acknowledge some of the turmoil that's going on in the world. And we've been through it, and we're happy to be on the other side and looking forward to see other businesses pull through as well. Eric, what did we learn, and how are we going to further create value Well, what we've learned, thankfully, is the subscription offering is a hit with consumers. They're passing the IQ test. They continue to convert at GoPro.com with the subscriptions, the camera purchase attach rate greater than 90%. So that's enduring. And we are getting better and better at driving awareness. That's a big opportunity for us. Awareness is still not as high as we'd like it to be. Awareness of the offering at gopro.com, I mean. And in general, we recognize that there's more to be done to drive awareness of GoPro in general and drive awareness of our newest products. We're all living the dream and very much immersed in GoPro. So it's obvious to us and everybody on the call that the reality is there's a lot more that we can do as a company to drive awareness of our brand, our latest offerings, and the value proposition of GoPro.com. So we see that as an opportunity. In terms of driving further engagement, we are seeing good engagement, as we've mentioned on previous calls, engagement of the various benefits that we offer. So subscribers are making use of their subscription, but we see through research we've done on what they want to see from us. They want to see our editing tools move into the cloud. They want to see more automation and convenience. The experience is really well tailored for what we would call users that are higher on the passion curve and are more interested in doing some of the work. They're the more creative types. This is a hobby or a profession for them. But our more mass market mainstream casual users, as you can imagine, they just want it to automatically work for them. The good news is we have that technology in the app already with our automated edits. And this year we're going to be porting that and all of the manual edit tools to the cloud and providing for a much more automated experience where you plug your GoPro into charge, it uploads all your footage to the cloud, we push you a highlight edit of all of your photos and videos that you just captured before you finish your beer. So that type of convenience is coming later this year. And those are the type of simplification features that we believe are going to further drive engagement and value for our subscribers and keep that churn rate moving south.

Cool. That was an awesome response. Thank you for that. Maybe to touch on the other side of kind of where you're looking to add value and expand the TAM, you mentioned expanding hardware from two product types to two to four distinct models or product types, and then expanding that again in 2023. So just any additional details you can maybe share to help us think about how meaningful that opportunity could be and potentially how it could impact the directionality of sell-through moving forward. And that will be it for me. Thanks, guys. Congrats. Sure. Thank you.

Yes. I'll start by saying in some ways you could – when you look at GoPro's limited hardware line, I mean, we really make a Hero camera and a Max. And we sell – Max being our dual-lens 360 camera. And we sell – you know, older Hero cameras at lower price points for consumers that are looking for that type of value. But we really have two camera types, Hero and Max. And you look at the scale of the business that we have today, and you could argue that GoPro's success to date is really a proof point of a larger opportunity to serve consumer and professional needs in more specialized ways than we do today with just Hero Camera and Max. You know, in analogies, think about how many cars does Ford have to serve its customer base, or Chevy, or even like really high-end specialized brands like Porsche. They have a lot more than two car models to satisfy the various specialized needs and or demands, be they fashion or function. of their customer base to maximize their TAM penetration. So that's something we're really excited about. And like car manufacturers, we have very powerful platforms of our existing cameras that we can leverage to produce derivative camera types that are just sometimes more narrow in focus but can do a much better job more conveniently for the end user than a full-blown hero camera can today. In other areas, we think that we can go even further and do even more than a hero camera can in certain areas of performance where we have had ongoing demand and requests from our users for products like that. We're finally able, as a company, to go after some of these new product types and serve customers in these new ways to grow our TAM because the business is stable, the business is growing, the business is profitable, and we also understand how to get a good return on investment from any new product that we introduce. One of the reasons that our product line is as small as it is today is because we spent several years cracking the code on what is the best go-to-market strategy? What is the best way to derive the most margin and profit from our business? It can't be the way that we were doing it in the past. And so we came up with our direct-to-consumer and subscription-centric approach, which has obviously turned out to be quite successful for us. And now with that success, with that growth and profitability, we're able to confidently invest in some of these new products to grow our business further. But I do want to stress that the word derivative here is really important because we're able to leverage existing camera technology that we have as a platform to go and make these new cameras at less expense than if we were initiating ground-up camera programs, which would be more expensive. And that's why we're able to attack this opportunity with the modestly increased effects that you're going to hear about today.

Awesome. Thank you, Nick. I'm going to go to Martin Yang of Open Hybrid & Company. Hi, good afternoon. Thanks for taking my question.

So I think my first question is around your year-end subscribers. And you mentioned that stronger retail led to a slight miss on that shrubber count. Can you maybe go into details, you know, the reasoning why a relatively stronger retail can lead to a lower subcount? And are you expecting perhaps a total

uh revenue level where the mix favors highly higher on gopro.com and now you end up maybe having a more traffic going to retail hi hey martin this is brian um good question as we looked at q4 um kind of a similar thing happened to q3 q4 retail did exceptionally well um Gopher.com did well, too. I mean, we were up 39% for the year, $392 million. You know, our sub and subscription revenue was $53 million for the year, more than double year-over-year, which is, you know, has very high margins. The fact is, if you look at the KPIs around subscription, we increased our subscription attach on Gopher.com, which was in kind of 90s, low 90s, more mid-90s. So that actually improved. And retail attached has been steadily improving through the year. Q4 a year ago was about 8%. It moved to 15%. And by the end of Q4, it was about 25% attached from mobile. And so that's been very encouraging. But the mix shift in just units, given the dynamics of 90% to go for .com versus 25% to retail, that equation gets pretty tough, right? 90 to 25. So the challenge there was just the mix between strength of retail. And it's awesome that we have two very strong channels. Retail has done very well for us through the year. And direct-to-consumer did great, up 39%. And the company was up 30%. So obviously, we were a little bit shy of the $1.7 million. But it's really more of a positive attribute to where the demand came from and actually the KPIs that are driving subscription growth as we look ahead into 2022.

Yeah, and a follow-up on that is that your 2022 SIP target is a little higher than what I would expect. Has that 2.2 million target factor in maybe a relatively stronger retail channel that you saw in 4Q or that was more of a normalized mix?

It's about the same mix that we have pending. We had about 34% was direct-to-consumer and the rest was retail. Now, direct-to-consumer does better. We can do better on the subs number. It's worth pointing out that about one in four sometimes one in three cameras go through D to C. And so as you model out, we expect to have unit growth in 2022, as well as AFP growth. So you can kind of model out that and kind of get to those numbers.

Got it. Thank you very much. Our next question is from Nick Todorov, Wong Bo Research.

Hey, guys. Good afternoon. First, a clarification on the first quarter of guidance. Brian, if I take the midpoint, 215 on the sales, 41.5 on gross margin, and 80 million for OPEX, I get to about 10 million of operating profits. I think the comments say 11 to 12 million of net income. Can you bridge that for me, please?

Yeah, I said approximately 80 million in OPEX. And there is a spread on margin as well. So I think those two things will get into the 11 to 12 million range. And it's great to see, you know, the model that we delivered, you know, such terrific results in 2021 is continuing in 2022 in Q1. We just guided, I think, 6% up on the midpoint and revenue and, you know, up nearly 150%, 120 to 150% up on net income. So we're getting really good leverage on the model on 10% to your unit because we're transitioning more units at a high end. We have more subscriptions. Margins are up. We're controlling more off-backs. And that's flowing to the bottom line. So the model's continuing to play out in 22 as it did in 21.

Okay, or maybe we'll take a offline because again, it's still struggling to get to 11 million or 12 million of net income. But a question on sell through, I think based on the comments for the first quarter, you're guiding to slight decline in units year over year. How should we think about sell through in the first quarter and then sell through for the year? I think you're expecting units to be up

and then how can you what can what can you say about your channel inventory strategy this year yeah um for q1 we expect to be over 600 000 units and sell through um we're seeing that we've seen europe a rebound at the beginning over covid gopher.com has actually been uh doing very well uh and north america is coming back so feel good about the 600 000 sell-in will be a little bit less than that. It'll be between $500,000 and $600,000. So channel inventory would come down a little bit in Q1. And, you know, it's going to ebb and flow quarter to quarter. For the year, we think units would be up. But I think units from selling and sell through will be largely balanced for the year. So I think as Nick had talked about on the roadmap, more products, I think you'd see a bit more maybe sell and then sell to MQ4, so it kind of balances out throughout the year.

Okay. And, Nick, for your question, I guess, can you compare and contrast how the new hardware roadmap is different than the good, better, best strategy that you were running for the last couple of years? I know you can say... Oh, I'm glad you asked.

Yeah, I'm glad you asked. It is important to offer some value options to consumers. You've got to meet a consumer where they are, and not every consumer is at the passion or need level where they want to buy your most capable, most expensive product. So we still will have value offerings like we do today, but our focus is more on premium solutions. that are differentiated from one another. And so without going into detail about the products themselves, if you look at our good, better, best strategy that we used to have, that was three different price points of the same camera. And the camera got higher resolution, higher frame rates, maybe some additional features as you went to the higher price point product but by and large they were very similar and they were built for the same use cases so you know you were you were attracting the same customer but just they might have been an entry-level mid-level or high-end customer but at the same customer type going forward we think it's important to build very differentiated, specialized solutions for different use cases to appeal to entirely new groups of users that have new needs that, you know, a hero camera maybe solves, but, you know, maybe it's got some other aspects to it that are undesirable for that use case, and the user doesn't need all these other things that the hero camera does, and so it ends up being more than they need or not enough of what they need. And so we're very focused on identifying what are the particular challenges that people are having. And I make it a point to mention consumer and professional because I think it sometimes gets missed that GoPros are used by professionals the world over, whether it's for film, television, their own commercial purposes, their own research purposes. We just won our second Emmy. Congrats again to the team for their work on hypersmith video stabilization. You guys deserve that recognition and got it. But it's not a good, better, best strategy. It's use case A, B, C, D, E, F, G, all very different from one another. And, you know, rather than make one Swiss Army knife that does it all for some people, some people want specialized knives, and that's what we're going to build for them.

Got it. Thanks for the answer, Nick. Thank you.

And we'll go to our next question. JP Morgan.

Hey, guys. Thanks for taking the question. So just to expand again on the, you know, the new derivative products, how are the ASPs going to kind of trend? Looks like your gross margin guide is pretty similar range, so I expect it to be pretty similar. And then are you looking to kind of attack different demographics to, you know, drive more sub-growth there? Is it kind of existing users, combination of both? Just comments there.

Yeah, the ASPs, as you can see from the guide, were going after developing premium solutions. You know, we had a lot of experience chasing volume unit sales with lower-priced products. and it's not nearly as fun or profitable a business to be in. We don't like dumbing down our products. We like developing the highest performing products possible for those consumers and pros that have specific needs and they're looking for that level of quality from GoPro and that's what we're building our brand of business on and it's turning out to be a smart move because there's a lot more margin and ultimate earnings power in that approach. In terms of, I would just think about, you asked about different demographics and so forth, more so I would say we're targeting different use cases and we're targeting some of the same use cases that we serve today but in a more purposeful and specific manner to just better serve that user that really wants to use their GoPro for this specific purpose. We already made the Swiss Army knife. It's the hero camera that, you know, if you're an athlete and you want to put it on your helmet, it works great. If you're a vlogger building your career as an influencer, it works amazingly well for that. Throw it in a dive housing and it's arguably the world's best scuba diving camera. I mean, the HERO camera is a jack of all trades. But with that comes some lack of specialization that some tip of spear customers really need or desire. And it also comes with some excess for people that don't need everything that a HERO camera does. And then for other users, it doesn't do enough. And we need to do things that they have been asking for for years that we just can't get done with a hero camera due to certain physics constraints. But if we make an entirely new camera based off of hero camera technology, but we break the mold in terms of what the cameras form and purpose is, we can deliver for these people. And they've indicated that they're willing to pay even more for these types of specialized solutions. So it's going to be really exciting when we get there and we have a broadened product offering, broader portfolio, more tools for more people, more legs to stand on. We don't need these products to be hero cameras, again, in terms of sales volume. When you hit a lot of uh singles doubles and the occasional triple and occasionally you catch one and goes out of the park that's great for business and that's our strategy here is uh to have a bunch more stakes in the fire that are backed by consumer research and we're we're absolutely clear people want this from us uh and time will tell us if some of them can take on the the hero camera you know for the the top spot in terms of volume But incrementally, we think these are going to add up to be very meaningful for our business from a growth perspective over time.

Great. Thanks for that. And then on cash flow, Brian, you know, record cash flows for the firm this year. You know, if you could expand on the performance there, the kind of sustainability of working cap efficiency, and then your cash guide suggests strong cash flows again this year. if you could talk about kind of where, you know, on the share buyback, are you going to be quite aggressive there? I mean, you haven't really bought back shares in better part of three years. So any comments there? Thanks.

Yeah, no, no worries. Yeah. Cashflow was record 211 million in 2021, 18% of revenue. And we really brought it home in Q4 with up 160 million or 41% of our revenue in cash. The model is really driving that on all levels. One is we're more profitable, so most of the cash is coming from earnings. We get terrific AR. You know, we're at 26 days when historically we'd be in the 30s or 40s this time of year. So the working capital aspect is great. We took inventory down 37 million in the quarter. So we got very good use of cash working off the balance sheet, which we expected to do. Yes, we expect to have cash, you know, basically be still above 500 million, but we have to pay back $125 million in one of our converts. We'll do that in April, but yet still be over 500 million. So that says we're going to generate cash, you know, nice cash in 2022. So, and the model is really, really driving that and strategic shift to D to C and we have great collections and inventory management even in retail. So that's paving the way for us to do it. We will, you know, buy back shares throughout the year and it's great that, you know, we have the opportunity to do that again and work down shares. You know, it's also worth pointing out, you know, in my prepared remarks, you know, Our share count was 163 million in 2021. It's going to increase about 26 million shares just because we have to increase the share count relative to the converts. That's the new standard we have to implement in Q1. Obviously, that has an impact on EPS, but the absolute dollar growth of net income is there for Q1 as well It was 2022, so I wanted to make sure I pointed that out to review your model.

Great. Thank you. And we'll go to our next question from Jim Suva of Citigroup.

Thank you. I have two questions. The first one is, I guess, more of an observation and looking for your commentary. You know, I travel quite a bit. And suffice it to say, a lot of destination and international travel has been on pause for, say, two years or so. And I was just thinking as I walked past, like, the duty-free shops and the shops in the airport where people buy spontaneous, hey, I just arrived to, you know, Australia, and I'm going to go scuba diving, so I buy a GoPro camera that's waterproof. Those type of things really haven't, you know, activities haven't occurred for a couple years. so with that i'm just wondering in your outlook are you assuming some travel comes back all travel comes back no travel comes back and i assume that channel has kind of been what's our word dormant for the past couple years or so but any commentary on this or maybe it's not material but i would think it's kind of meaningful because um people buy when they go on destinations

Yeah, hi, Jim. You are absolutely right. They do. That has been dormant. If there's one area where COVID has impacted GoPro, it's been on international travel and travel destinations. We've been out of duty-free, out of cruise, you know, that spontaneous purchase or people just buying in advance of going somewhere, you know, on Best Buy, Amazon, or on GoPro.com. So that's definitely been absent. you know and historically been about 10 of our revenue so it is material from that perspective so when it does come back it will be a nice tailwind for gopro we've not factored in i have not factored in a big return to international travel um not yet for 2022 it may happen but we're not in the current guide that we have it's not So that's a call option if it does come back. We'll be in position with supply chain to meet that demand.

Great. And then my follow-up question was, you announced a stock buyback of $100 million, but then you also have a convert. And I assume given inflationary environment and your employees have been doing so well, there's probably some compensation, you know, boosts that come into share count or something. Nick, can you walk us through again the share count from where we kind of exited the December quarter? Seems like there's a fair amount of moving parts for the share count we should be aware of, and your stock buyback adds additional guidance if we could get some thoughts on that.

I'd love to answer that, but Brian would kick me in the shins under the table even through the phone line, so I'm going to hand that one over to Brian.

yeah but nick i hope you're rewarding your employees for really doing a good job nick they really did so hopefully they get some merit oh yeah no it's been a good it's been a good year for gopro on all fronts and thanks for saying that okay yeah and i appreciate that and just matter of fact in our office in 2021 um we will be um paying bonus for our employees we did not pay a bonus in 2020 so it's well earned for the employees of the company um so congrats to them We still do our, you know, standard share issuance to employees. And, you know, the buyback in part is intended to, at a minimum, cover that dilution. And if we can generate enough cash flow, we can take it down further. So, we have that opportunity. If, as we continue to perform, we can cover more than just employee dilution.

Great. Thanks so much, Brian. And with no other questions in the queue at this time, I will now turn the call back over to management. Thank you, operator. And thank you, everyone, for joining today's call.

This year marks GoPro's 20th anniversary, and we couldn't be more proud of the work that we're doing. We believe the world needs specialized camera and software solutions that GoPro is uniquely positioned to provide, and we intend to deliver such solutions at a brisk pace over the next few years to diversify our offerings and appeal to a larger audience of consumers. Our teams are strong, our brand is strong, and our balance sheet is strong. We intend to leverage all three to create more value than ever before for consumers and investors alike. We look forward to seeing you at upcoming investor events and at our next earnings call in May. Until then, thank you very much.

This is team GoPro signing off.

And so this concludes today's call. Thank you for your participation. You may now.