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Edited Transcript of GPRO earnings conference call or presentation 9-May-19 9:00pm GMT

Q1 2019 GoPro Inc Earnings Call

Half Moon Bay May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of GoPro Inc earnings conference call or presentation Thursday, May 9, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian T. McGee

GoPro, Inc. - Executive VP & CFO

* Christopher Clark

GoPro, Inc. - Head of Corporate Communications

* Nicholas D. Woodman

GoPro, Inc. - Founder, CEO & Chairman

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Conference Call Participants

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* Erik William Richard Woodring

Morgan Stanley, Research Division - Research Associate

* Jim Suva

Citigroup Inc, Research Division - Director

* Nikolay Todorov

Longbow Research LLC - Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies

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Presentation

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Operator [1]

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Good day, everyone, and welcome to GoPro's First Quarter 2019 Earnings Results Conference Call. Today's call is being recorded. And at this time, it's my pleasure to turn the conference over to Christopher Clark, Head of Corporate Communications.

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Christopher Clark, GoPro, Inc. - Head of Corporate Communications [2]

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Thanks, operator. Good afternoon, everyone, and welcome to GoPro's First Quarter 2019 Earnings Conference Call. With me today are GoPro's CEO, Nicholas Woodman; and CFO, Brian McGee.

Before we get started, 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. 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, 2018, 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 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. 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. In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the first quarter 2019. These slides as well as a link to today's live webcast and a replay of this conference call is posted on the GoPro Investor Relations website for your reference. All income statement related numbers that are discussed today during the call, other than revenue, are not GAAP, unless otherwise noted.

Now I'd like to turn the call over to GoPro's founder and CEO, Nicholas Woodman.

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [3]

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Thanks, Chris, and good afternoon. Today, Brian and I will take you through GoPro's first quarter 2019 performance. In short, we had a great quarter. Strong consumer demand for the HERO7 line, improved collaboration with our retailers and continued execution drove our results. Revenue in the quarter was $243 million, representing 20% growth year-over-year. And as Brian will detail, we are raising our 2019 revenue and earnings guidance.

Strong sell-through and a mix shift towards our flagship, HERO7 Black, led to an 8% sequential and year-over-year increase in ASPs to $288. Inventory is at appropriate levels in each of our global markets, thanks to effective channel management and consistent demand for the HERO7 line. Our Q1 benefited from improved channel marketing collaboration with our distributors and retail partners around the world.

Our channel partners are benefiting from the strength of HERO7 Black and are motivated to drive awareness and sell-through in their markets. This contributed to our Q1 results, and we believe it will positively impact Q2 as well. We'd like to take this opportunity to thank our channel partners for their support of GoPro and the HERO7 line. It's a team effort, and together, we're making an impact.

To capitalize on our momentum, we doubled our year-over-year marketing spend in Q1. New creative campaigns and improved conversion rates drove positive results. Revenue is up in all regions, and GoPro.com achieved record traffic and sales during the quarter, with unique site visits up 38% year-over-year and web store conversions improving approximately 175% year-over-year, thanks to the strength of our product lineup and improvements we've made to the shopping experience at GoPro.com. We are committed to growing our GoPro.com direct sales channel as it represents an opportunity for us to improve margin over time.

We believe HERO7 Black's industry-leading HyperSmooth video stabilization and the improved video quality it enables is having a positive impact on our social channels. Organic viewership of GoPro content in Q1 hit 173 million views, an all-time quarterly high. And our social following increased by 1.3 million to approximately 40 million driven primarily by increases on Instagram and YouTube.

In April, GoPro received recognition for its social media performance, winning 2 Shorty Awards, one for best user-generated content and one for best overall presence on Instagram. And just last week, we announced that our YouTube channel achieved a significant milestone, surpassing 2 billion lifetime views. All this is contributing to growth in each of our regions.

In the U.S., according to NPD Group, in the first quarter, GoPro captured 89% unit share and 97% dollar share of our category, up from 86% and 95%, respectively, year-over-year. Also in the U.S., the HERO7 line represented the top 3 selling cameras in our category and HERO7 Black was the #1 selling camera in all of digital imaging by unit volume.

GoPro also gained market share internationally in Q1. According to GfK, in Europe, in the $199 and above price band, GoPro grew to 86% unit and dollar share, up from 85% and 84%, respectively, year-over-year. GoPro also grew within the APAC region during Q1. According to GfK, aggregate sell-through in China, Japan, Korea and Thailand grew 11% on a dollar basis year-over-year. Our subscription service Plus has grown to 220,000 paying subscribers, up over 10% since we reported on our last call and up 50% year-over-year. In mid-April, we rolled out the full benefits of Plus to additional international markets. We expect to accelerate our Plus subscription service through enhancing our offering, continued international expansion, increased marketing and new distribution channels. We see Plus as an important opportunity to grow margin and operating profit, and we are investing accordingly.

To summarize our first quarter, sales are strong in each of our markets around the world, and we're proactively driving our business with our channel partners. We're maintaining a disciplined approach to expense management, and we are lowering our 2019 operating expense target to approximately $390 million, which is below our previously stated target of $400 million. We continue to expand our Plus subscription offering, while growing our core camera business in all of our regions around the world.

And given the success we've seen with launching new products every year to wow our customers, I am happy to share that we're planning an exciting, refreshed line up at all price points in Q4, including our next-generation spherical camera and an innovative multi-year road map, that, we believe, will result in continued momentum, growth and profitability for GoPro in 2019 and beyond.

And now with that, I'll turn the call over to Brian.

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Brian T. McGee, GoPro, Inc. - Executive VP & CFO [4]

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Thanks, Nick. I'll begin with an overview of our performance in the first quarter and then share some thoughts on upwardly revised revenue and earnings guidance for 2019.

In the first quarter of 2019, we continue to see strong demand for our flagship HERO7 Black camera, which resulted in revenue of $242.7 million, a 20% increase year-over-year. Gross margin for the quarter was 34.2%, up from 24.3% a year ago. Net loss was $10.2 million, a 79% improvement from the year ago quarter. Adjusted EBITDA improved by $34 million from the year ago quarter to nearly breakeven. GAAP operating expenses were $101 million for the quarter, a 16% decrease year-over-year. Non-GAAP operating expenses of $91 million for the quarter was a 3% decrease year-over-year. GAAP and non-GAAP loss per share was $0.17 and $0.07, respectively. Non-GAAP net loss improved 79% compared to the $0.34 loss per share in the year ago quarter. As of March 31, our headcount was 903.

Turning to the balance sheet. Accounts receivable as of March 31 were down $11 million sequentially. Our DSOs on accounts receivable were 44 days. We continue to execute on our inventory management ending the quarter at $119 million or a 10% decrease from the first quarter of 2018 and ending at the lowest first quarter level since Q1 2014. Cash decreased in the quarter to $133 million due to the seasonal timing of working capital activity. We expect cash balances to increase in the second quarter to approximately $150 million.

Now let's discuss our quarterly business performance in more detail. Camera units shipped totaled 842,000, an increase of 11% year-over-year, principally due to the demand of our flagship HERO7 Black camera, which accounted for over 90% of our camera revenue and over 85% of camera units shipped in the quarter.

First quarter street ASP was $288, an 8% increase sequentially and year-over-year. Street ASP is defined as total reported revenue divided by camera units shipped.

Revenue in all reported regions grew year-over-year. Revenue from our Asia PAC region grew 24%, while revenue from the Americas grew 23% and Europe grew by 12%. In addition, GoPro.com accounted for more than 10% of revenue for the quarter, increasing 90% year-over-year.

We estimate that camera unit sell-through for the first quarter of 2019 was over 900,000 units, in line with our expectations. We believe channel inventories declined on a sequential basis, in particular, we estimate that aggregate channel inventory of HERO7 Silver and HERO7 White cameras decreased by 20% sequentially.

GoPro.com is growing substantially, representing an increasing percentage of our business that is not tracked by either NPD or GfK. As Nick noted, we're increasingly focused on our dot com direct sales channel as it represents an opportunity to improve margin over time.

We continue to be on track to begin ramping our U.S. balance camera production in the second quarter in Guadalajara, Mexico, to support sales beginning in Q3. We expect most of our U.S.-bound cameras will be in production in Mexico in the second half of 2019. As stated previously, our decision to move most of our U.S.-bound production to Mexico supports our goal to insulate us against possible tariffs as well as recognize some cost savings and efficiencies.

I will now provide guidance for 2019. Framing 2019, we continue to expect both units sell-in and units sell-through to grow year-over-year. We expect our mix of cameras to remain queued to the high end and as a result, we expect ASPs to be above $280 per camera for the year. And as Nick shared, we expect to accelerate our Plus subscription service as it's a meaningful opportunity to grow margin and operating profit.

Our overall expectation is for 2019 revenue to grow between 7% to 10%, up from our previous guide of 5% to 8%. We expect 2019 margins to be 36.5% plus or minus 50 basis points. We expect non-GAAP tax expense to be approximately $2 million to $2.5 million and other income and expense to be approximately $8 million in expense. We are using a fully diluted share count of approximately 146 million shares for Q2, 147 million shares for the second half in 2019.

We expect full year operating expenses to be approximately $390 million as we realize more efficiencies in the business, while also investing in our product road map, marketing and our subscription service. We believe the combination of revenue growth, margin improvement and reduced operating expenses enables us to increase our profitability outlook in 2019, with non-GAAP EPS in a range of $0.25 to $0.45 per share and GAAP EPS to be approximately breakeven. More specifically, for the second quarter of 2019, we expect revenue to be in a range of $285 million to $305 million, gross margin in the range of 35.5% plus or minus 50 basis points, operating expenses of $96 million to $98 million, non-GAAP earnings of breakeven to $0.06 per share.

For the second half of 2019, we expect revenue to grow in a range of 4% to 9%, [Black] slightly up in units and higher ASPs versus the second half of 2018, gross margin in the range of 37.5% plus or minus 50 basis points, OpEx in the range of $200 million or $205 million.

To summarize, we are pleased with our performance in the first quarter of 2019. With this momentum and continued execution, for the full year 2019, we expect to deliver positive EBITDA of $90 million to $100 million, grow revenues 7% to 10%, increase cash above $200 million and be profitable over the year.

With that, operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Paul Coster at JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [2]

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Nick, at one point you talked of a multi-year road map. I wasn't clear on whether your intent is to have one or to articulate one. If it's the latter, perhaps you can explain?

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [3]

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Oh, we definitely have multi-year road map. No, I was just sharing that we've got a very strong multi-year road map that, we believe, will help us not only maintain, but build on this momentum and grow GoPro top line and profitability. We got a much better understanding of our customers. As we've shared on previous calls, we've been investing more and more in consumer research and getting to understand our customers, better understand why exactly they're buying each of our models, what drives them, and we're doing a much better job of factoring that information into our product road map to better appeal to our customers going forward. And I'd also add that as we see ASPs rising, it's important to note that it's well known now that over the entire history of GoPro, our customers have gravitated towards our higher-end, higher-performance products. And if you think about how much of our business is done, how much sell-through is at the $399 HERO7 Black, it's an indication that there's an opportunity to develop even higher performance, higher price point products that some percentage of our customers will be excited about. So I would say that this is one of the areas we see an opportunity to grow and better appeal to consumers because they are clearly telling us, they want the very best from GoPro.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [4]

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Got it. So the revenue guidance for the year, it looks to me like it's mainly to do with the increase in ASP. So unit volume-wise, it's somewhat flattish here, is that a correct interpretation? And then one other question I'll just ask and pass thing is the retail channel innovations that you've implemented, it sounds like they -- 1Q and 2Q, they are applied and they have instant effect apparently. But is that -- is it kind of one-shot deal or do you anticipate this being some kind of constant improvement process?

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Brian T. McGee, GoPro, Inc. - Executive VP & CFO [5]

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Paul, this is Brian. Let me take the first part of that question. On the revenue growth, it is largely ASP-driven, although we were up in Q1 about 11% on units. We'll be up a bit in the second half, as I said in prepared remarks, and ASPs should be up around 8% in Q2 and then up in the second half. And it's good to note that kind of adding to what Nick said about consumers gravitating to the higher end and higher ASP, but I'd say that we're in the 4.5 million to 5 million kind of units per year selling more in the high end, we really have a solid business, solid revenue and profitability for the company. It enables us to go for TAM expansion, and in my prepared remarks talking about EBITDA growing this year from $20 million in '18 to $90 million to $100 million in 2019.

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [6]

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And as it relates to your question about, is there more to do with retailers globally to improve our presentation at retail? Absolutely. We are now in a position of growth and returning profitability that allows us to operate from a position of strength and invest where we see opportunity to get strong return. And that's definitely true at retail. We -- part of how we grew our brand globally and grew sell-through to where we have is through strong retail presence. But in many channels, it's been a while since we've refreshed our presence. There's an opportunity to expand our presence and improve how we present GoPro to consumers in different regions. We've spoken a lot about localization of our brand and our go-to-market strategy and store and that's something that we continue to invest in. Again, all within our stated OpEx target of $390 million, but there's a lot of opportunity to work more closely with retailers to improve our store presence, improve our store positioning, and frankly, leverage more of their expertise and understanding of their customer, so that together we're working on joint marketing plans, joint business plans that speak directly to really localize GoPro for that specific retailers, customers in ways that we haven't before. It's a team effort, as I mentioned on the call, and we're really grateful to our channel partners for working so closely with us to grow our respective business together.

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Operator [7]

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And we'll go next to Erik Woodring at Morgan Stanley.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [8]

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Just a quick question. You had mentioned channel inventory for White and Silver was down 20%. I'm just wondering if you can comment on Black -- the HERO7 Black inventory? And then I have a follow-up.

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Brian T. McGee, GoPro, Inc. - Executive VP & CFO [9]

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Yes. Black was basically flat quarter-over-quarter, and it needed to be that way because as we look ahead to Q2 with increasing revenue, we expect quite a bit of that to be on Black and that needed to be in the channel, which is good. And I'd say all of our products are at appropriate level, inventory level in the channel and across all the geos as well.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [10]

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Okay. Perfect. And then just as my follow -- sorry, go ahead.

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [11]

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We just -- just to add to that, we feel that we're really well positioned for future transition to a refresh line up as we shared it's coming in the fall. It is really important to note that, that transition is incredibly important to us and we feel like we're in a great spot inventory-wise.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [12]

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Okay. Perfect. And then just as my follow-up, just curious what you've heard in terms of customer reaction since you added the unlimited cloud storage and increased discounts on accessories for the Plus subscription enrolled out to new regions. Just curious what you've heard from customers, how pickup has been internationally? Just any color you could share on that would be great.

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [13]

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Sure. We're obviously happy with the 10% sequential growth -- I'm sorry, yes, to 220,000 unit subscribers. There's no question that the added benefits that we're bringing on to Plus are having a positive impact and of course, making the full suite of benefits available to our international customers for the first time is having a positive impact. So I think, the proof is in the pudding, the proof is in the numbers in terms of the subscriber growth. I'd note that one of the most sort of promising opportunities we have to significantly improve or accelerate subscription rates is that we've learned that it's paramount to acquire a new subscriber at the time of camera purchase, if not very shortly thereafter, and we currently don't have the ability to do that. We don't have the ability yet to attach Plus to a camera purchased at GoPro.com. That's coming online in short orders. That's going to be very helpful. And we're also talking to retailers about how we can offer Plus subscription in their stores at the time of purchase and make it economically beneficial to the retailer to help us grow that Plus subscription. Right now it's a bit like, if you compare our Plus subscription to, say, Best Buy selling insurance for flat screen TVs, imagine how hard it would be for Best Buy to sell insurance if they were only able to pitch the consumer on the offer 2 to 3 weeks after that consumer took that TV home and had it hanging on their wall, that would be a very difficult conversion. And that's actually the -- what we've been dealing with Plus, but we've been able to grow the subscription to 220,000 subscribers. So like Best Buy being able to add insurance to its TV sale at the time of purchase, it's going to make a tremendous impact, we believe, when we can offer Plus at the time of camera purchase both at GoPro.com and through our retail channel. And so that's a very important change in our go-to-market strategy that we think is going to have a significant impact on our subscriber base in the future.

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Brian T. McGee, GoPro, Inc. - Executive VP & CFO [14]

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And Erik I'd chime in. 220,000 paid subscribers, that's more than $3 million of revenue a quarter, which has created very high margin. So it's very accretive to margin and the bottom line.

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Operator [15]

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(Operator Instructions) And we'll go next to Nikolay Todorov at Longbow Research.

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Nikolay Todorov, Longbow Research LLC - Analyst [16]

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Congrats on the great quarter, and thanks for all the details around guidance. Brian, if I heard correctly, you mentioned that you expect both sell-through and sell-in to increase for 2019. As far as I remember, you mentioned that on the last call that sell-through last year was 4.8 million units. So we should say 4.9 million in 2019, but at the same time, you're kind of guiding to about 4% to 5% unit growth, and you guys shipped 4.3 million last year, so that puts you around 4.4%, 4.5%, so that's kind of 300,000 units of delta. Can you please try and help me explain any kind of bridge to that gap?

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Brian T. McGee, GoPro, Inc. - Executive VP & CFO [17]

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Yes. I think we try to manage our channel inventory. And so our expectation is about 4.9 million or so units sell-through in 2019, and that is up from 4.8 million in 2018. And so channel inventories would drop from about 1 million units to about 700,000 or so, if this proves out how we guided. And we were down in Q1. We expect to be flat to down in Q2; Q3, maybe slightly up, and Q4 will be down.

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Nikolay Todorov, Longbow Research LLC - Analyst [18]

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Okay. And Nick, I think, you mentioned 4 new camera refreshes, and correct me if I heard it wrong, but you mentioned the fourth quarter, is there a change in the timing of the launch this year or nothing changed there?

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [19]

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Well, I can't go into any more specific than what I shared. I think you could look historically to GoPro's new product launches for some indication on what to expect, but we are really excited to see consumers reacting so positively to the HERO7 line. It's terrific for our team to see their research really paying off and resulting in increased sell-through and in engagement. If you look at the strength of the brand socially, we are as strong or stronger than we've ever been. We believe it's due in large part to the incredible quality of content coming off of a HERO7 Black with it HyperSmooth stabilization. It really is resulting in gorgeous video, that is fantastic to watch, that's driving social viewership. It's driving viral awareness and appreciation of our brand and the products that we make, and that's teeing us up, we believe, famously for our new lineup refresh later this year because everybody's expectation is we're going to deliver something exciting, and you can be darn sure that that's what we've got on TAM.

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Nikolay Todorov, Longbow Research LLC - Analyst [20]

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Okay. That's helpful. And regarding the subscription availability, do you guys have a time line where you expect to have that service launch globally because I think you can obviously get a lot of benefits? And then currently, can you give us any updates on -- if you have any data around your current monthly active users, so we could kind of understand the long-term trajectory there?

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [21]

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Sure. Well, we shared that in April we rolled out the full Plus benefits to more than 30 countries internationally, and we'll be continuing to add countries as the year goes on. And then we're also working on additional benefits. And as I mentioned, most importantly, we're working on additional distribution channels being able to offer the Plus subscription at the time of checkout at GoPro.com when a consumer is buying a GoPro and as well we're exploring with retailers the opportunity to sell Plus in their stores at the time of camera purchase. I can't overemphasize the importance of distribution as it relates to growing subscriber base because the -- our consumer is never more engaged and interested in a service like Plus than they are at the time of camera purchase. It's the best time to educate them as to the value of the service and to convert them. And we literally to date have not had that opportunity. So it really is a significant lever that we've got, that we're going to be bringing online in short order as far as allowing the Plus subscription attach at GoPro.com and selling it through retail as a longer-term initiative, that's something that we're keenly focused on because we recognize the importance of Plus to our customer, to our business and its ability to improve margin over time. So we're investing accordingly.

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Nikolay Todorov, Longbow Research LLC - Analyst [22]

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Okay. And do you have any number around monthly active users currently?

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [23]

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Well, all that we're sharing and reporting on is that we've got 220,000 active paid subscribers as of today -- as of yesterday.

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Operator [24]

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We'll take our final question today from Jim Suva at Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [25]

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Can you talk a little bit about now that you've had a couple quarters or over a full quarter in holiday sell-through of your newest product, the take-up rate of upgrades versus new additions to the systems? I know you can track them through their e-mails and what they're using and things like that, but any thoughts around is it percent of take-up versus new subscribers so far?

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [26]

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That's a great question, but we're not prepared to share any information about the split between upgrades versus new customers. I can share that anecdotally we're seeing higher engagement levels than we've really ever had before socially, both with new customers and with existing customers. That's a great indication. We're seeing higher-than-typical engagement via the app connect from the HERO7 Black customer to the GoPro app than we've seen with previous GoPros, which is great. It shows that with each new generation of camera, we're making them more convenient, and our customers are using them more frequently and getting more out of their purchase, so that's terrific. And when you combine that with how much more social engagement we're seeing in higher quality of content being shared, we believe that this is helping drive awareness, helping drive upgrade and helping drive new customer acquisition. So across the board, we're feeling good about the impact that HERO7 Black is having on our ability to grow in all regions globally.

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Operator [27]

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And with no additional questions at this time, I'd like to turn the program back over to management for any additional or concluding remarks.

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Nicholas D. Woodman, GoPro, Inc. - Founder, CEO & Chairman [28]

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Thank you, operator. I'd like to close by, once again, thanking all of our global channel partners for their continued support of GoPro. And of course, a big thank you to GoPro employees around the world. We're a force of positivity, as we all know, helping the world celebrate itself in exciting ways, and I'm grateful to be on the team with you making this happen. We look forward to seeing investors in Boston at the JP Morgan Conference on May 14 and at the Baird Conference on June 5 in New York. And with that, thanks for joining the call, everyone. This is team GoPro signing off.

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Operator [29]

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And ladies and gentlemen, once again that does conclude today's conference. Again, I'd like to thank everyone for joining us today.