GoPro, Inc.

Q4 2023 Earnings Conference Call

2/7/2024

spk03: Good afternoon. Thank you for attending today's Go Pro fourth quarter 2023 earnings call. My name is Cole and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Chris Clark, VP of Corporate Communications. Please go ahead.
spk02: Thank you, Cole. Good afternoon and welcome to GoPRO's fourth quarter and full year 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 commentary from Nick, followed by Q&A. For detailed information about our fourth quarter and full year 2023 performance, as well as outlook, Please read our Q4 and 2023 earnings press release and 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 31, 2022. which is on file with the Securities and Exchange Commission, and other reports that we might 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. The 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 Flitman.
spk01: Thanks, Chris, and thanks, everybody, for joining us today. 2023 marked the beginning of our multi-year TAM expanding strategy, targeting long-term revenue, subscriber, and profit growth. Beginning in May 2023, we initiated the first stage of our growth initiatives, including a return to lower pre-pandemic pricing to drive unit sales, the reintroduction of entry-level price GoPro cameras to drive volume and reach new customers, increased marketing to drive awareness, and expanding GoPro's retail channel presence globally. These actions contributed to year-over-year retail channel unit sell-through growth of 25%, in the period from our shift in May to the end of the year. Across all channels, retail combined with direct-to-consumer through GoPro.com, 2023 unit sell-through growth since our strategy shift was 3% from the May, was up 3% from the period May 9th through the end of 2023, measured against the prior year period. Our retail channel's growth was largely offset by our GoPro.com direct-to-consumer channel, where we underestimated the impact of our strategic shift. In Q4, GoPro.com revenue, excluding subscription and services, was 14% of revenue, down from 33% the prior year period, due primarily to our strategic decision to eliminate subscription-related camera discounts at the time of purchase on GoPro.com. We believe our sell-through growth in retail gives us and importantly gives our retailers and distributors confidence to lean in as we look to launch a number of new products, as I'll touch on shortly. This, combined with our aggressive efforts to open more doors and expand our brand presence in all of our doors, is creating a groundswell of opportunity at retail for GoPro. Fourth quarter entry-level camera sell-through priced at $199 and $249 represented 28% of our product mix, up from zero in the prior year when we had no products offered in this price band. However, in analyzing our 2023 holiday season performance, we believe consumers were looking for discounts irrespective of already low price points, which was an outlier from the behavior we've seen in prior years. This resulted in lower than expected sell-through of our $249 Hero 10 Black product, which we did not discount during Q4. On the positive side, this resulted in better than expected margin in the fourth quarter. In 2023, we reinvigorated our marketing strategy to reestablish GoPro's larger-than-life brand presence across all of the major verticals we serve. 2024 is when we'll see GoPro's brand more loud and proud than we've seen in years, beginning with events like January's X Games, where fans tuned in to watch the world's best skiers and snowboarders pushing the limits of their sport, with many athletes wearing GoPro cameras in competition, capturing footage that was integrated into the broadcast to share first-person perspectives. To help translate our expanded awareness efforts into sales, we've been aggressively expanding the number of retail doors where we sell our products. Since May of 2023, we added more than 3,200 new retail doors which was ahead of our target for the year. We intend to continue to drive door growth with a target of 7,000 additional new doors over the next two years bolstered by new products. In addition to growing door count, we plan to refresh our point of purchase merchandisers, expand in-store brand presence, and enhance account management throughout the retail channel. Our stage one growth initiatives outlined above delivered a profitable fourth quarter and second half in 2023 on a non-GAAP basis. Fourth quarter revenue was $295 million, below our guidance of $325 million. Q4 revenue was short of guidance due to lower than expected demand trends in North America, particularly in December, driven in part by competition for share of wallet, as well as lower than anticipated sales of HERO10 Black due to our decision to not discount this entry-level price camera. The upside is that we retain margin on the hero 10 black units we sold. And this combined with our high margin subscription and service revenue to yield gross margin that outperforms the midpoint of guidance by 140 basis points. The improvement in gross margin plus savings and operating expenses during the quarter resulted in non gap earnings per share of 2 cents for the fourth quarter. In 2024, We expect gross margin to be 32.5% in the first quarter and improved throughout the year to 35% in the second and third quarters and to between 37 and 38% in the fourth quarter. This weighs out to a gross margin percentage in 2024 in a range of 35.5% plus minus 50 basis points, up from 32% in 2023. As we begin 2024 and look to the greater long-term opportunity for GoPro, we believe it's essential that we significantly scale the number of products we sell to serve more consumers in more categories and markets. Our research identifies several growth opportunities where GoPro can extend our market leadership. As we enter stage two of our TAM expanding strategy, we plan to expand our product roadmap over the next two years And in 2024, we plan to launch four new camera SKUs, giving us a lineup of cutting-edge, industry-leading cameras ranging in price from a volume-driving $199 up to $599 with more planned for 2025. In January, we announced plans to acquire Foresight Helmet Systems, an Australian maker of tech-enabled motorcycle helmets. We believe tech-enabling motorcycle helmets represents a meaningful opportunity for GoPro to extend its technical and marketing capabilities to create differentiated solutions within a $6 billion motorcycle helmet market, of which we believe we can service approximately $3 billion with an eye towards entering additional helmet markets over time. There are a number of technologies used today by motorcycle enthusiasts including communications, digital imaging, navigation, safety alerts, and more that we believe can be integrated into helmets for enhanced performance, convenience, value, and safety. We are on track to close this acquisition this quarter and will share specifics about our product vision as we get closer to the expected launch of our first helmet in 2025. To add more color, motorsports has been core to GoPro's business for the last 15 years. We've developed a strong brand across all disciplines of professional and enthusiast categories of motorsports with a very strong following among motorcyclists. We are a major sponsor across a broad range of racing series, events, and athletes, including the world's premier motorcycle racing series, MotoGP. In addition to leveraging our existing motorsports marketing and brand, We intend to leverage the motorsports retail channel we are currently building to support sales of our current camera line to also sell our helmets beginning in 2025. We also intend to partner with leading helmet brands as an OEM supplier to help them tech enable their own premium SKUs. We have enormous respect for leading brands and look forward to working with them to help drive innovation together. We are encouraged by early interest shown by some leading brands. Furthermore, we expect that success in the motorcycle helmet market can contribute to subscriber growth as we intend to support GoPro Tech-enabled helmet owners with meaningful subscriber benefits and features. Looking at our current subscriber base, we closed 2023 with more than 2.5 million subscribers, representing 12% year-over-year growth. Consistent with previous quarters, retention for annual subscribers who represent 90% of total subscribers was between 60% and 65% for the first year renewals and between 70% and 75% for second year renewals. Our new third year cohort is renewing at greater than 80%. Importantly, we now have a larger pool of subscribers who are up for renewal in their second or third year than we do for the first year, which we believe will be a tailwind for subscriber retention going forward. Another positive for our subscription offerings is the initial release of our Quick Desktop app for macOS and our new Premium Plus subscription tier, both of which launched yesterday. The Quick Desktop app, which is available at no additional charge to GoPro subscribers, brings the simplicity and convenience of automatic edits to desktop users along with powerful yet convenient manual editing tools, synced editing between mobile and desktop apps, and the ability to import footage from any camera. We plan to launch a Windows version of the Quick Desktop app later this year. We expect to grow subscribers in 2024, adding to the substantial ARR we are already generating. We expect subscribers to be between two and a half million and $2.6 million by the end of 2024, or 4% growth year-over-year at the high end of the range. To summarize, the retail expansion strategy we kicked off in May of last year is successfully growing our business at retail. We're excited about our expanding product line, the significant number of retail doors we're adding at a steady rate, and the significantly larger number of marketing activations we have planned throughout the year to drive awareness and demand. all of which we believe will contribute to growth. Our acquisition of Foresight reflects our belief that the GoPro brand can scale across multiple verticals globally. We have a number of exciting opportunities in front of us, and as we move through 2024, we are focused on execution and creating value for our shareholders. It's good to be on the build again. Operator, we are now ready to take questions.
spk03: Great. If you'd like to queue for a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by 2. Again, to join the queue for a question, please press star 1. We'll pause here briefly as questions are registered. Our first question is from Eric Woodring with Morgan Stanley. Your line is now open.
spk04: Yes, good evening. I just had two questions quickly, and I wasn't sure if the first one's for Nick or Brian, but last quarter you laid out a fairly clear vision for 2024 guiding to, I think it was 1.1 to 1.2 billion of revenue, 10% unit growth plus, I think it was 40 million of net income. You removed some of that language from the prepared remarks this quarter. So just How should we think about maybe the full year just beyond 1Q? And then I have a follow-up. Thank you.
spk05: Yeah, maybe I'll start and Nick wants to chime in. I think, first of all, we just guided for the first quarter. Obviously, you saw that in our prepared remarks. I'll comment there, though, that has nothing to do with Seltzer. That's actually going pretty well. We should be 550 million units plus or minus 50,000 units, which is in line with where we've been in the first quarter in the last two years. That's on sell-through. Sell-in will be a little bit less. We expect to take channel inventory down about 17% to about 700,000 units. So that's why Q1 revenue is off a bit if you compare that on a year-to-year basis. We're still selling products but not in as we deplete older inventory. in favor of higher margin product that begins shipping in in Q2 and Q3. In addition, Nick talked about the investment we're making in product that's under review to expand our roadmap and we're evaluating those investments or the level of those investments for 25 and 26. And that will obviously impact OpEx All those decisions aren't done yet, and so we'll give an update on that on the next call.
spk04: All right. Maybe, Brian, just one point of clarification. In the prepared remarks in the table that shows first quarter guidance, there's a line that says unit sell-through, and it says 400,000 units. You just alluded to 550,000 units. If you could just give some clarification on which one we should be looking for, that would be super helpful.
spk05: I think that would sell in.
spk04: And then maybe just as a follow-up on the acquisition of Foresight, you guys alluded to being able to service a $3 billion TAM, motorcycle helmet market TAM. Should we think of that as being incremental to your current TAM? Because I think of, you know, helmet-mounted GoPros as one of your primary use cases today. And so how do we think about what's incremental and new and what technology you'd kind of be bringing to GoPro that you haven't been able to yet versus what is, I don't want to use the term cannibalistic, but part of a market that you're already addressing today. And that's it for me. Thanks so much.
spk05: Yeah, actually, before you go through that, you're right, you know, Oh, in our prepared remarks, we actually sent 550 to plus or minus 50, and it should have been unit cell N in the table. Eric, good catch.
spk01: Okay, perfect. Thank you. Thanks for your question, Eric. There will be some cannibalization, because you're right, there are many motorcyclists who buy a GoPro to attach it to their helmet. But as we look to the future, there's so many gains to be had from integration. And as well, we think it can help expand the TAM by making the value proposition of having technology integrated into the helmet, not attached to the outside of the helmet, can be TAM expanding in its ability to be more appealing to more motorcyclists that otherwise wouldn't want to necessarily have these attachments. So it's a little bit of both, but... As I mentioned, we've got a really strong reputation across all of motorsports. And given Foresight's expertise with the motorcycle market, it's also the biggest market. It aligns really well for that to be our start with tech-enabled helmets. But we see the opportunity over time being bigger than just motorcycles. But we're going to learn first in the motorcycle market capitalize on Foresight's experience, capitalize on our existing brand strength. And as I mentioned, the growing retail network that we're establishing to sell our existing line of cameras will also benefit us at the time of launch of our first helmets in 2025. Awesome.
spk04: Thank you very much, Nick. That was awesome content.
spk03: Thank you. Our next question is from Martin Yang with Oppenheimer. Your line is now open.
spk00: Hi, good afternoon. Thank you for taking my question. My first question is on subscribers. How do you see your long-term growth for the subscriber base as you have more multi-year renewed users in the subscriber base? Do you expect the long-term rate to go maybe at above mid-single digits? And also, how should we think about Beyond subscriber user growth for the ARR for our subscription revenues, do they have a different growth rate relative to subscriber base?
spk05: Hi, Martin. It's Brian. Let me hit ARPU first. We're seeing ARPU improvements of about 5%. So that's great. We are also seeing The total subscribers in years two, three, and four now will be larger than year one. And so that helps drive the ARPU. And as you see, we're continuing on each successive year to retain more and more subscribers, which is great. You know, the growth is largely going to be tied into unit growth over time. right so that that's a key kind of metric i think for the subscription business we gave a range of two and a half to 2.6 million subs um this year um it you know if we continue with our poo and growth it could actually go beyond 2.6 so you could see more growth um we've kind of held it back um a little bit maybe to be conservative there um so hopefully that helps answer your questions
spk00: Got it. Thank you. And then a quick following up on Nick's comments on the 2025 product for a helmet. Can you clarify if that's a helmet branded by GoPro, made still entirely by Foresight, or it's a different product with GoPro's own hardware in it?
spk01: As we share, we're going to be launching our own line of GoPro-branded helmets, and after the acquisition, Foresight will be a part of GoPro, so it will be GoPro-designed and manufactured helmets. And then we also are intending to support other leading helmet brands who wish to tech-enable their helmets as well, serving as a technical OEM supplier to them. Brand counts for a lot in every industry, and we're looking to leverage our brand to help establish a new bar for performance, convenience, value, safety in tech-enabled helmets, and then use that to then help drive the industry forward with the support of other leading brands that want to do the same.
spk00: Got it. Thanks for the clarification. My last question is gross margin outlook for 24. Last quarter, you provided a breakdown of different components and sources of improvement for margin expansion 24. Do you still believe those key components
spk05: are are the same as as you guided before if there's any changes what are they um uh they're the same martin we have the introduction of our new low uh lower product cost entry level product in q2 which is in our management commentary um we have reduced price protection year over year about 30 million dollars We do have identified product cost and tariff savings. The tariff savings might be new. In there, we didn't have that last time. The team's done a good job with that. Subscription growth and other improvements. There is a potential offset in there that we've factored in, which is we're seeing potential increases in memory pricing later this year. So that can be something that could impact us that potentially We've tried to reflect in our numbers if that helps.
spk00: Got it. Thank you, Brian. That's all for me.
spk03: We have no additional questions, so I will pass the conference back to the management team for any closing remarks.
spk01: Thank you, operator, and thank you, everybody, for joining today's call. As we mentioned, we're excited to be growing in retail in an effort to expand our TAMP. And we believe we can drive long-term revenue profit and margin growth with our expanded product line and increased marketing activities planned for the rest of the year, combined with our steady addition of more retail doors targeting 7,000 additional doors over the next two years. Lots to be excited about. And as I mentioned, it's good to be on the build again at GoPro. Thank you, everyone. This is Team GoPro signing off.
spk03: That concludes today's call. Thank you all for your participation. You may now disconnect your line.
Disclaimer

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