GoPro, Inc.

Hello, everybody, and welcome to Go Pro's first quarter 2023 earnings conference call. My name is Sam, and I'll be coordinating your call today. If you'd like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Christopher Clark, Vice President of Corporate Communications, to begin. So, Christopher, please go ahead.

Thank you, Sam. Good afternoon, everyone, and welcome to Go Pro's first quarter 2023 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 first quarter 2023 performance and our outlook, please read the management commentary we've posted to the investor relations section of GoPro's 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. This means that results could change at any time and we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary, we refer you to our most recent annual report on Form 10-K for the year ended December 31st, 2022, which is on file with the Securities and Exchange Commission and 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, adjusted EBITDA, as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. 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 the investor relations section of our website. Unless otherwise noted, all income statement related numbers that are discussed in the management commentary and remarks made today, other than revenue, are non-GAAP. Now I'll turn the call over to GoPRO's founder and CEO, Nicholas Woodman.

Thank you, Chris. Thank you, everyone, for joining us today. I'm going to briefly cover the highlights from our posted management commentary before Brian and I take questions. I encourage everybody to spend some time reading the details of our management commentary that is posted on our IR website, which includes our updated strategy that we believe will accelerate growth in units, subscribers, revenue, adjusted EBITDA, and earnings. Demand for our products during Q1 exceeded expectations. Sell-through was approximately 575,000 units, nearly 10% above our previous guidance of 525,000 units, and flat year over year. Regionally, North America and Asia Pacific led our Q1 outperformance, and demand was better than expected in our direct-to-consumer channel on gopro.com. We've reduced channel inventory in the quarter by nearly 95,000 units to below 600,000 units, setting us up well for the rest of the year. Our high margin subscription and service revenue continues to contribute meaningfully to our bottom line, generating 23 million in revenue in the quarter, which was up 24% year over year and represented 13% of revenue. We ended the quarter with 2.36 million GoPro subscribers, up 36% year over year. We continue to see improvements in retention of annual subscribers, who represent nearly 90% of our total subscriber count. In Q1, our first year renewal was between 60% to 65%, and second year renewal was between 70% to 75%. we expect to finish the year with between 2.45 million and 2.6 million subscribers, which should result in 100 million in subscription and service revenue for the year. For more than a year now, we have generated more new subscribers via our retail channel than via gopro.com, even with gopro.com subscriber attach rate remaining above 90%. In Q1, 2023, our subscription attach rate from consumers who purchased a camera at retail and later subscribed via our app was approximately 50%, a 23% year-over-year improvement. This is largely due to improved in-app marketing of GoPro subscription benefits. With the world having essentially moved on from the pandemic and consumers spending more of their time and money in retail stores, We believe an updated go-to-market strategy will accelerate growth in units, subscribers, revenue, adjusted EBITDA, and earnings. To help frame this opportunity, I'll share a brief retrospective on the changes we made in early 2020 to position GoPro for success during the pandemic when consumers shifted their spending online and physical retailers were either closed for operating under severely restricted conditions. Back then, we effectively reduced GoPro's retail presence by approximately 30% globally, significantly reduced GoPro's marketing budgets, increased GoPro flagship camera pricing $100 in response to supply chain constraints. We exited our higher volume, lower price point entry level skew in response to supply chain constraints, and we shifted to a much more direct-to-consumer business model, growing direct sales at GoPro.com as a percentage of revenue from approximately 10% in 2019 to 38% in 2022. This strategy benefited GoPro, driving ASPs, increasing profitability, and rapidly growing our subscriber base. We added 2 million subscribers during this time and generated more than 260 million of adjusted EBITDA between 2021 and 2022, which enabled us to repay 125 million in debt, repurchase $40 million of our stock, and end 2022 with cash of approximately 370 million. We achieved this despite a decline in camera unit sell-through of more than 30%. But now in our post pandemic world, we see an opportunity to adjust our go-to-market strategy to increase units to 3.2 million in 2023, 3.5 to 4 million units by the end of 2024 and over 4 million units by the end of 2025. We believe this investment in our retail channel will also have a meaningful impact on subscriber growth and profitability. and drive adjusted EBITDA of over $300 million over the combined 2024 and 2025 period. The key points of our updated go-to-market strategy, which we kicked off this week, include restoring pricing of our products to 2019 levels with an MSRP reduction of $100 for our flagship Hero 11 Black, Hero 11 Mini, Hero 10 Black and Hero 9 Black cameras. Reductions in inbound freight and product costs, along with an improved supply chain, are helping to enable this price adjustment from a margin perspective, as will the introduction of new, higher-priced, higher-margin SKUs in the future. Reintroducing an entry-level price point SKU with Hero 9 Black to drive meaningful volume and subscriber growth restoring our world-class presence at retail by increasing global distribution to best-in-class retailers, and eliminating camera discounts at the time of purchase at gopro.com. Thanks to the strength of in-app subscriber conversion of retail consumers, as well as improvement in subscriber retention, we believe we can generate more subscribers with growth in retail sales than if we continue our pandemic-driven strategy of focusing primarily on GoPro.com sales for subscriber growth. As I mentioned, we believe this improved strategy will drive units sell-in and sell-through to an improved 3.2 million units in 2023, 3.5 million to 4 million units in 2024, and above 4 million units in 2025. We believe GoPro subscribers will grow to 2.45 million to 2.6 million in 2023, 2.7 million to 2.8 million subscribers in 2024, and 2.9 million to 3.1 million subscribers by the end of 2025. We believe we will generate significantly improved adjusted EBITDA of approximately $300 million over the combined 2024 and 2025 period. And we will use these proceeds to accelerate the repurchasing of stock while also investing in growing our business. Our updated pricing and go-to-market strategy has been well received by retail partners, and we're excited to grow our business and brand through this important channel. In addition to our updated go-to-market strategy, we're also excited to introduce several new products later this year. including the Q4 launch of our brand new desktop editing experience that will be included in the current GoPro subscription at no additional charge to subscribers. The GoPro desktop app will sync your editing projects with the GoPro Quick mobile app to make transitioning between the apps seamless. Our research indicates that GoPro camera owners will highly value our desktop app and that it should help further improve our already notable subscriber conversion and retention rates. We're also excited to launch a new premium GoPro subscription tier in Q4, targeting both GoPro camera owners as well as non-owners. We believe GoPro can serve as a convenient solution for getting the most out of your personal content, no matter what camera you use. And we're excited to leverage our software and services offerings to expand GoPro's TAM. Speaking of serving non-GoPro camera owners, our quick subscription, which caters mostly to non-GoPro owning consumers looking for a convenient content editing and organizational app, continues to see organic growth despite limited marketing support. At the end of Q1 2023, we had 289,000 quick subscribers paying $10 per year to access the app's mobile editing tools. We're excited to build on this organic success with the upcoming Q4 launches I mentioned above. The go-to-market changes we're implementing come at a time of strength and demand, but also recognize where the world is potentially headed economically. Pandemic-related supply challenges are easing, and lower product and freight costs are enabling us to shift value back to the consumer with more accessible pricing and an entry-level SKU, both of which we expect will bolster growth in units, subscribers, revenue, and adjusted EBITDA that we will use to drive innovation and significantly increase share buybacks. This is a very exciting time at GoPro, and we believe our best days are ahead of us. Operator, we are now ready to take questions.