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spk02: 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.
spk05: 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.
spk08: 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.
spk02: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted locally. Again, that's star followed by one. Our first question comes from Eric Woodring of Morgan Stanley. Eric, your line is now open. Please go ahead.
spk01: Hi, this is Sabrina on for Eric. Thank you so much for taking the question. And maybe the first one is, can you talk about the reasons, I know you touched on some of them, but just more in depth around your changes with the pricing strategy? And, you know, should we think about that as structural? And if so, what has changed?
spk08: Sure. The rationale behind it is that, you know, as I mentioned, we did a great job adjusting our go-to-market strategy for the pandemic. But ironically, that same go-to-market strategy that worked so well when consumers weren't going to stores and stores were closed and people were shopping online more, that strategy that allowed us to thrive during that period has been holding us back in this post-pandemic world where people are spending a lot more time, a lot more money in retail. Their shopping in stores is a form of entertainment. And we recognize that there's a lot of opportunity there that we need to address to fully maximize the potential of our business. And the response from retailers has been great. I mean, they're thrilled to have us getting our pricing to pre-pandemic levels to drive higher volume. Our data shows that the financial model that results is far superior to than not taking this action. And a big enabler is that we have such strong conversion rates of camera converting into subscribers via the GoPro app that, as I mentioned, retail is now the largest source of new subscribers online. Whereas, you know, during the pandemic, gopro.com is the biggest source of subscribers. All of the stars are aligning to create an opportunity for us to grow at retail again, drive more volume, convert subscribers via our app, and in many ways have the best of all worlds. So it's an exciting time. And when you look at the outlook that we have for the company through 2025, it's very compelling.
spk07: Yeah, actually, Sabrina, maybe I'll tag on to what Nick said. You know, we also have an immense amount of data that we've, you know, over the years, we've made a number of price moves since going back to like 2016, 2017, et cetera. And we've, you know, evaluated, you know, our historical sell-through list of past price drops and promotional offers. And we have extensive sell-through data that really provides insight into what's the impact of when we move prices 100 bucks. Secondly, you know, we've evaluated our historical sell-through volume in different pricing tiers as well and tiers we plan to enter into in 2023 and through 2025. And then you add marketing investment on top of it and we can kind of measures through what the direct brand investment is on retail partners and on overall demand. And I guess lastly, the other thing we'll do is expand distribution, which was pretty severely cut back, as Nick had mentioned, about 30%. And I'm actually pleased to say that while we have that data, what matters is what are the results. And I can say over the last couple days, because we measure the the results from some of our largest retail partners in the US and Europe. And while we expected a certain percentage lift in units, it's in fact lifting as much as double or triple what we thought. It's early days, it's a couple days in, but we're definitely seeing a positive impact on demand across the US and Europe so far. I'd also say that as you look at this from a modeling perspective, We would expect to have double-digit unit growth this year, 24 and 25. So we think that extends through. It's not just the pricing, but we'll also have new products as well. I won't get into that, but that's coming. That'll expand the overall offering. And we're able to actually lift ASPs, as I said, and prepared remarks will be down to about 250 bucks. average ASP in 23, but it should go back up a little bit in 24 and a little bit more in 25. So as you kind of model that out. So, you know, expect double digit units. That's going to lead to, you know, significant revenue growth and then profitability as we improve margins back into the upper 30s in 24-25. and drive meaningful EBITDA, which we'll use to buy back a lot of stock. So that's kind of the strategy in a nutshell.
spk01: Understood. Thank you so much for all that color. You know, the second question we have is, I wonder if you talk a little bit about consumer demand. I know you said things were stronger in the U.S. and Europe, but how is linearity through the quarter? Were there any changes of behavior that you saw in April? And then what is being baked into your 2023 outlook? Thanks.
spk07: Yeah, actually, yeah, when I was at your conference in early March, you know, I had mentioned we could be up to as much as 575,000 units sell through in a quarter. In fact, we hit that number on the high end of what I had said. From the, it was, the quarter wasn't linear at all. March lifted about 33% from where we were in January and February. So we continued to see strong demand through the quarter. April was about where we needed it to be. And we've continued to see good strength in GoPro.com. And, yeah, we're seeing the U.S., actually Europe, starting to do well and Asia doing well. So getting to... 3.2 million units, that's going to be the low end. It's going to help contribute our entry-level products to drive growth, and we're seeing very strong growth right now on Hero 11 Black. So we're pretty excited by the results, what we're seeing on the price move.
spk01: Perfect. Thank you.
spk02: As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. Our next question comes from Martin Yang of Oppenheimer to begin. Martin, your line is now open. Please go ahead.
spk03: Hi, good afternoon. Thank you for taking my question. First, I want to ask about the hardware. How would you size or would you model additional benefits for hardware margins for higher volume embedded in your longer term outlook? And do you benefit anything from recently declined component costs?
spk07: Hi, Martin. Yeah, we have seen component costs come down, particularly memory, but discrete as well. And that'll mostly start to hit, positively affect our numbers in the second half. I've got to work through more expensive inventory in the first half. and we'll continue to see some cost reduction into 24. We would also, some of the entry-level price points with products today that we'll introduce aren't at the optimized cost either, and so we'll take a bit of a margin hit there, but we'll convert product to cash, and that's embedded in our outlook. And in 24, we would expect to continue with entry level, but at cost points that actually would be margin positive versus not right now in 23. So we have that going for us. And we'll have some newer products as well in 24 and 25 that help kind of round out the overall you know, demand and product profile for the company. And that all leads to margins that go up between 36% to 40%. And if currency goes back to 2021 levels, it's about 10%. You'd see margins in the kind of 39% to 43% range. So if the dollar should weaken further, that would also benefit us back to where we used to be.
spk03: Got it. Thanks. And second question is on subscribers. So do you see or do you have a relatively lower R pool for subscribers coming from the retail channel? You know, is there a meaningful difference? If there is, are both channel subscribers from both channels going to converge over time or there will be a sustained gap between R pool from the two sets of subscribers?
spk07: Yeah, good question. The ARPU between the two are pretty close, actually. So they're going to both converge because the pricing is now going to collapse to be the same, whether you subscribe on gopro.com or you subscribe via the app post-retail purchase. And so we'll see ARPU up over time because as people move from kind of the entry-level price point of 25 and then upgrade to 50, that'll have a positive effect on ARPU. And speaking of which, we gave a range of outcomes for subscribers, and we assumed that At the low end, it's about 35% retail attached. And on the high end, it's about 40. Guidance of $2.5 million is kind of in the middle of that. And Q1, we said, was nearly 50%, which was amazing, up a lot. I mean, 23% year over year from an attached perspective on retail. That's a bit of an anomaly because we have a lot of demand in Q4 that turns into subscribers in Q1, and we have a low base, obviously, of sell-through in proportion to the people coming in. You'll see that normalize a little bit more down to about 40%, I think, in Q2 and Q3, and maybe a little bit less in Q4, where it flips the other way, where we sell a lot and the sell-through's big, but the people who buy don't convert until Q1. So the seasonality is a bit opposite, of subscriber growth quarter to quarter versus our revenue growth, if that makes sense. So we're still pretty excited. 35 to 40% still pretty darn good attached. And obviously, we'll do more to continue to grow that, as Nick had said. But those are the assumptions behind how we came up with the range. And those same assumptions were used for estimating 24 and 25.
spk03: Got it. Thank you. Really appreciate the details. That's all the questions from me.
spk02: And as a reminder, to ask any further questions, please press star followed by one on your telephone keypad now. We'll just pause for any further questions to come in. And there are no further questions, so I'll hand back to management for any closing remarks.
spk08: Wow, showstopper. Well, thank you, operator, and thank you everybody for joining today's call. As I said earlier, this is a very exciting time at GoPro, and we believe our best days are ahead of us. It's time to grow again, and we're really excited about our new go-to-market strategy, and it's great to see such uh compelling results straight out of the gates so stay tuned for more from us and until then thank you this is team gopro signing off and this concludes today's call thank you everyone for joining you may now disconnect your lines
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