Q1 2023 GoPro Inc Earnings Call
Participants
Brian T. McGee; Executive VP, CFO & COO; GoPro, Inc.
Christopher Clark; VP of Corporate Communications; GoPro, Inc.
Nicholas D. Woodman; Founder, CEO & Chairman; GoPro, Inc.
Sabrina Elizabeth Hao; Research Associate; Morgan Stanley, Research Division
Zhihua Yang; Associate; Oppenheimer & Co. Inc., Research Division
Presentation
Operator
Hello, everybody, and welcome to GoPro's First Quarter 2023 Earnings Conference Call. My name is Sam, and I'll be coordinating your call today. (Operator Instructions) I will now hand you over to your host, Christopher Clark, Vice President of Corporate Communications, to begin. So Christopher, please go ahead.
Christopher Clark
Thank you, Sam. Good afternoon, everyone, and welcome to GoPro'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 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 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.
Nicholas D. 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's 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 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 and to position GoPro for success during the pandemic. When consumers shifted their spending online and physical retailers were either closed or 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 SKU 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 repurchased $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 million 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 HERO11 Black, HERO11 Mini, HERO10 Black and HERO9 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 HERO9 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 unit 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 Quik 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 nonowners. 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 Quik 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 Quik 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Erik Woodring of Morgan Stanley.
Sabrina Elizabeth Hao
This is Sabrina on for Eric. And maybe the first 1 is, can you talk about the reasons and you touched on some of them, but just more in depth around your changes with the pricing strategy? And should we think about that as structural? And if so, what has changed?
Nicholas D. Woodman
Sure. The rationale behind it is that -- 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 they're shopping in stores as 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 a -- during our pricing to prepandemic levels to drive higher volume. Our data shows that the financial model that results is far superior 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 whereas during the pandemic GoPro.com was the biggest source of subscribers.
So 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.
Brian T. McGee
Yes. Actually, it's Brian. Maybe I'll tag on to what Nick said. We also have an immense amount of data that we've over the years, we've made a number of price moves since going back to like 2016, 2017, et cetera. And we've evaluated our historical sell-through lift 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. Secondly, we've evaluated our historical sell-through volume in different pricing tiers as well and to as we plan to enter into in 2023 and through 2025. And then you had marketing investment on top of it, and we can kind of measure 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 of days because we measure the results from some of our largest retail partners in the U.S. and Europe. And while we expected a certain percentage lift in units, it's in fact listing as much as double or triple what we thought and it's early days. It's a couple of days in, but we're definitely seeing a positive impact on demand across the U.S. and Europe as 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 not just the pricing, but we'll also have new products as well. I won't get into that, but that's coming that will expand the overall offering, and we're able to actually lift ASP, as I said in prepared remarks, we'll be down to about $350 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 expect double-digit units. That's going to lead to 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 the...
Sabrina Elizabeth Hao
Understood. My -- the second question we have is, I wonder if you could 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 in behavior that you saw in April? And then what is being baked into your 2023 outlook?
Brian T. McGee
Yes. Actually. Yes. When I said at your conference in early March, I had mentioned we could be up to as much as 575,000 unit sell-through in the quarter. In fact, we hit that number on the high end of what I had said. From a -- it was -- the quarter wasn't linear at all. Actually, March lifted about 33% from where we were in January and February. So we continue 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 yes, 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 going to help contribute our entry-level products to drive growth, and we're seeing very strong growth right now on HERO11 Black. So we're pretty excited by the results of what we're seeing on the price move.
Operator
(Operator Instructions) Our next question comes from Martin Yang of Oppenheimer.
Zhihua Yang
First of all, 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?
Brian T. McGee
Martin, yes, we have seen component costs come down, particularly in memory, but discrete as well. And that will 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 price points will -- entry-level price points with products today that will introduce aren't at the optimize 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 2023. 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 kind of the overall 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.
Zhihua Yang
Got it. And second question is on subscribers. So do you see or you have a relatively lower ARPU for subscribers coming from the retail channel? Is there a meaningful difference if there is or both channel subscribers from both channels going to converge over time or there will be a sustained gap between ARPU from the 2 sets of subscribers?
Brian T. McGee
Yes, good question. The between the 2 are pretty close actually. So they're going to both convert to the pricing now going to collapse to be the same, whether the 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 will 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 a 35% retail attach. And on the high, it's about 40%. We -- our 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 attach 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 is big but the people who buy don't convert until Q1. So the seasonality is a bit opposite in subscriber growth quarter-to-quarter versus our revenue growth, if that makes sense. So we're still pretty excited 35% to 40% still pretty around get attached. And obviously, we'll do more to continue to grow that, as Nick has 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.
Operator
(Operator Instructions) And there are no further questions. I'll hand back to management for any closing remarks.
Nicholas D. Woodman
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 compelling results straight out of the gate. So stay tuned for more from us. And until then thank you. This is team GoPro signing off.
Operator
And this concludes today's call. Thank you, everyone, for joining. You may now disconnect your lines.
