Q2 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.

Zhihua Yang; Associate; Oppenheimer & Co. Inc., Research Division

Presentation

Operator

Hello, and welcome to the GoPro Second Quarter 2023 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. (Operator Instructions)

I would now like to hand over to Christopher Clark, Vice President of Corporate Communications. The floor is yours. Please go ahead.

Christopher Clark

Thank you, Elliot. Good afternoon, everyone, and welcome to GoPro's Second 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 commentary from Nick and Brian, followed by Q&A.

For detailed information about our second quarter 2023 performance and our outlook, please read our Q2 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 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

Thanks, Chris, and thanks, everyone, for joining us today. Today, Brian and I will share commentary on our Q2 performance as well as our outlook, before going into Q&A. I want to encourage all on the call to read the detailed management commentary we posted on our Investor Relations website.

On May 9, we announced an updated go-to-market strategy, which included a return to lower prepandemic pricing and a renewed emphasis on our retail channels to better serve consumers' post-pandemic shopping behavior. We're happy to report that this has had a positive impact on our business and second quarter revenue and subscriber growth exceeded our expectations. Our improved sell-through has sustained thus far into Q3, driven by our retail channels.

Revenue in the quarter was $241 million, 10% above our guidance.

GoPro subscribers grew 27% year-over-year to 2.44 million, also surpassing our expectations.

Sell-through of our entry level-priced $199 HERO8 and $249 HERO9 Black cameras enjoyed a combined sequential lift of more than 50%, highlighting the importance of the entry-level product category as a TAM-expanding opportunity. It's important to note that the sales lift was incremental and did not cannibalize our higher-priced products.

As a reminder, the key points of our Q2 updated go-to-market strategy included: restoring camera pricing to lower prepandemic price points and discontinuing subscription-related camera discounts at the time of purchase at GoPro.com; reintroducing entry level-priced cameras to drive meaningful volume and subscriber growth; restoring our world-class presence at retail by increasing global distribution to best-in-class retailers that can help drive awareness and sell-through; and scaling our marketing spend to prepandemic levels over time.

At the start of the COVID pandemic, we exited approximately 30% of our retail doors globally and focused on driving much of our business to GoPro.com, as consumers primarily shopped from home. We significantly reduced our marketing spend and raised camera prices by $100 over a 2-year period due to supply chain constraints.

This strategy worked extremely well for us during the pandemic, yet limited our growth post pandemic. With our updated go-to-market strategy, we saw an immediate uptick in demand at retail across all regions. This enabled our global sales team to hit the ground running, working closely with existing retail and distribution partners, reengaging former partners and adding highly motivated new partners.

Our strategy is to grow our business with best-in-class distributors and retailers who span the spectrum from influential core specialty retailers who enhance our brand to larger big-box retailers who drive volume and mass market awareness of our products. Enthusiasm amongst our distributors and retailers is high, as they recognize the strength of our product line, our brand and the opportunity to grow our respective businesses together.

We're excited about the pace at which we're opening new doors, particularly in EMEA, which was the hardest hit by our pandemic door count reductions. To date, we've opened nearly 800 new doors in EMEA, and we're targeting approximately 2,000 total new doors worldwide by the end of 2023, with additional growth in '24 and 2025.

In addition to new doors, we're enhancing GoPro's brand presence at retail with updated point of purchase displays.

To drive greater awareness of GoPro and to support revenue growth in the second half of this year, we are increasing our investment in marketing. We are partnering with key retailers to amplify awareness, leveraging our collective reach to excite consumers during our upcoming launch and throughout the holiday season. It's great to be aligning once again with our retail partners in a meaningful way that we haven't been able to do since before the pandemic.

An indication of our sell-through momentum post strategy shift can be found in GoPro's results during the Amazon Prime Day period. Circana reported that consumer spending over Amazon's July Prime Day saw discretionary and general merchandise sales decrease 3% year-over-year, with unit sales down 8%. By contrast, during the same period, total GoPro camera unit sales for North America, which includes both our retail channels and GoPro.com, were up 6% year-over-year.

Our subscription business continues to be a highlight. As mentioned, we closed Q2 ahead of our expectations with 2.44 million subscribers, a 27% year-over-year increase. The attach rate via our app from cameras purchased at retail exceeded 40% in the second quarter, up from approximately 33% a year ago. Attach rates from cameras purchased via GoPro.com post our go-to-market strategy shift exceeded 40% as well. These subscription attach rates confirm the value our customers see in our subscription offering.

In Q4, we're excited to introduce an all-new desktop app that will make it easy for GoPro subscribers to organize and edit their GoPro content. Our new desktop app will sync with the subscriber's cloud and mobile app to provide a consistent and convenient experience across platforms. GoPro subscribers will enjoy full access to the desktop app and all of its powerful features at no additional charge.

There will also be a premium-level subscription offering for consumers that want to import footage from any camera, expanding GoPro's relevance as a digital imaging software solution to a much broader audience, an opportunity we intend to aggressively pursue over time.

I want to thank our employees who have continued to execute at such a high level time and time again. Your passion for our customers and our products are what make GoPro such a powerful brand.

And I also want to thank our retail and distribution partners for their positive response to our go-to-market strategy shift. We're excited to grow our brand and business with you, and we are grateful for our partnership.

GoPro's retail channel represents a phenomenal opportunity to get our products and brand in front of consumers in an experiential way, and we couldn't be more excited for this upcoming holiday season.

Now I'll hand the call over to Brian to share some color on Q2 and our outlook for the rest of the year.

Brian T. McGee

Thanks, Nick. Stronger than expected sell-through of entry-level products contributed to second quarter revenue overperformance of $21 million to guidance. This Q2 revenue overperformance, combined with retailers continuing to carry lower weeks of supply, is contributing to a softer Q3 guide. Also contributing is a larger-than-expected drop-off in sales at GoPro.com due to the discontinuation of subscription-related camera discounts at the time of purchase.

As a reminder, our GoPro customers primarily purchase flagship cameras that are higher in ASP and margin. While we are seeing significant growth in retail sell-through, it is going to take longer than anticipated for this retail growth to offset the drop in GoPro.com sales. This will be accomplished by increasing the number of retail doors, increasing our brand presence in all doors with refreshed point-of-purchase displays and scaling marketing, which includes collaborative activations with retailers. Additionally, we have ongoing initiatives to support the sales on GoPro.com, including dedicated marketing, (inaudible), product bundles and tactics to improve conversion.

For the third quarter of 2023, we expect to deliver revenue of approximately $280 million, plus or minus $10 million, down 8% year-over-year. We estimate (inaudible) ASP in the third quarter to be approximately $355, down 7% year-over-year. Our expectation as a result of our strategy shift and associated price move is unit sell-through will increase 10% year-over-year to approximately 750,000 units.

Our guidance assumes channel inventory will be flat during the quarter. We believe there may be also macroeconomic pressures that impact consumer spending in the second half.

We expect gross margin in the third quarter to be 34% at the midpoint of guidance, down from 38.2% in the prior year quarter, but up from 31.6% in the second quarter of 2023. The year-over-year decline in gross margin percentage is primarily related to reduced camera pricing and higher camera demand at our lower-margin, entry-level price point.

It's worth pointing out that we are seeing GoPro subscriber attach rates amongst these entry-level camera buyers in a range of 20% to 30%, which is helping to drive subscribers and subscription and service revenue growth and offset near-term margin impact.

We expect subscribers to grow to 2.5 million by the end of the third quarter, or 20% growth year-over-year.

We expect non-GAAP net income per share for Q3 2023 of $0.02 per share at the midpoint of guidance. We expect shares outstanding to be approximately 169 million shares in the third quarter based on our current stock price and anticipated share repurchases in the quarter.

For 2023, we expect revenue of approximately $1.03 billion, down 6% from 2022. We expect units sold to grow by approximately 5% year-over-year to approximately 3 million units as a result of our recent price moves. This reduction in unit sell-through from 3.2 million units, which we guided to on our Q1 earnings call, is primarily due to a larger-than-expected drop-off of flagship camera sales at GoPro.com due to the discontinuation of subscription-related camera discounts at the time of purchase.

While retail channel sell-through of our cameras is expected to grow, we expect it will take longer than previously anticipated for it to offset the larger-than-expected decline in (inaudible) camera sales at GoPro.com.

In addition, while in our previous earnings call we shared our expectation of sales of approximately 3.5 million to 4 million units in 2024, the factors stated above could push this down to a range of 3.4 million to 3.6 million units in 2024.

We expect to end 2023 with between 2.5 million to 2.6 million subscribers, in line with our previous guide of 2.45 million to 2.6 million subscribers.

We expect gross margin to be 33% at the midpoint of guidance in 2023, which reflects both lower ASPs and the related price protection costs required to achieve lower pricing at retail to drive volume. We expect gross margin to improve sequentially each quarter in 2023.

We expect operating expenses to be approximately $370 million in 2023, up nearly 12% from 2022, largely driven by investments in research and development and increased marketing, which we expect to have an impact in Q4 and into 2024.

We expect non-GAAP EPS loss of approximately $0.18 at the midpoint for 2023. We expect to be profitable in the third and fourth quarter and generate adjusted EBITDA of approximately $15 million in the second half of 2023.

We expect to end 2023 with cash of $300 million, which includes an estimated $40 million in share repurchases.

To summarize, our strategic shift is working, albeit with some noise in the numbers in 2023 due to product mix, the impact of price protection and other factors Nick and I already discussed.

We look forward to finishing strong in 2023 and moving into 2024, when we expect to reap the full year benefit of our strategic shift, unburdened by price protection expense of nearly $30 million in 2023 associated with our price change.

We expect improved retail sell-through to continue. And as mentioned above, we expect 2024 units to grow to a range of 3.4 million to 3.6 million units.

We expect to add additional doors globally and to expand our rollout of new point-of-purchase displays to improve our in-store presence. We also plan to expand marketing and collaboration with our retailers to drive awareness and sell-through.

We believe all of the aforementioned, combined with our 2024 product road map, including a new entry level-priced camera with a significantly improved margin profile, will increase units, revenue, margin and profitability substantially in 2024 and beyond.

Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) We have a question from Martin Yang, with Oppenheimer.

Zhihua Yang

Can you maybe talk first about the new users you're getting from the lower-priced tier cameras? Do you have a sense of the key incentive (inaudible)? Or maybe asked in a different way, the share of users completely new to GoPro because of some of those new camera buyers at the lower camera tiers, are they different than in previous years?

Brian T. McGee

I don't know if Nick heard it. Martin, thanks. Let me maybe take that, and Nick can come over the top of me.

We clearly recognize, and I talked about this maybe even back in March, with the economy and what's going on, on a macro level, we're trying to meet the customer where they are, that they're shopping more in retail, and also recognizing the fact that consumer wallets are getting squeezed by inflation and other costs that they're experiencing.

And so we've reinstituted the entry-level price point between $199 and $249, and that's historically driven a lot of growth for us prepandemic. We had to stop because of supply chain of course when COVID hit in 2020. But it usually represents 25% or so of sales, which immediately that's what it generated of revenue in Q2.

So that's an important growth driver for us in units and can represent anywhere from 600,000 to 1 million units of demand that's new TAM we haven't been experiencing for nearly 4 years. So that's on the kind of business front.

The incentive, I think, is price point, and they're getting a really good value proposition. In addition, we're seeing 20% to 30% attach on the subscription on an entry-level price point, when we're seeing just over 40% on somebody who is buying in at the flagship level. So that's really encouraging to see. Obviously, it's less, but that's still a -- that's an attach rate of where we were nearly a year ago, and now we've been able to move it up.

So it's good to see that people are coming in to the subscription, they're buying into the cameras. We can also measure, and we've measured it before, the behavior characteristics of all subscribers tends to be the same in the ecosystem: what they download, how much they upload. As a matter of fact, we're seeing even more upload happen on HERO11 than we even saw in HERO Black as well as the total number of people kind of taking advantage of a cloud system [auto-highlight edits].

So that's a very encouraging sign, that the behavioral characteristics of people in the entry level really do mirror actually now our flagship product. So I think that's encouraging.

Nicholas D. Woodman

I would just add that the entry-level customers' buying behavior is matching historically how and where GoPro customers buy. The bulk of entry-level purchasing is done at retail, where GoPro.com primarily sells through our higher-priced products. And even with the lowering of our prices to prepandemic levels and the reintroduction of entry-level pricing on our HERO8 and then HERO9 cameras, that trend didn't shift. Those cameras were primarily sold through retail. And also, our marketing messaging didn't shift for the entry-level introduction, pricing introduction.

So there was nothing that we were doing that would have been a catalyst to attract a different type of buyer with that. That was a natural market, consumer market reaction to pricing. It shows the interest in GoPro and the desire to purchase, but sometimes people just can't afford it or they're not confident enough yet to be buying our high-end products. But when we have something that better matches their budget, they're quick to buy.

So that, in combination with what Brian said, we believe that this is reaching the same type of customer. But excitingly, it's showing that there's a bigger market for us, for GoPro and for our products. There are many consumers waiting in the wings, are ready to buy when we have the right product for them at the right price point.

Zhihua Yang

Got it. A quick second question is, can you share your updated view on the competitive landscape? And more recently, we saw a competitor, a smaller competitor, announcing their new generation of cameras. Do you have a view on the near-term competitive landscape? And overall, how are you seeing you're performing on both the lower-priced tier and the higher-priced tier market?

Nicholas D. Woodman

We feel really good. We take our competitors very seriously. We've always had competition at GoPro, and it drives us to passionately develop the highest performance products that we can and then also offer them at really astounding value to consumers so that we never lose our leadership position.

And we're aware of new competitive product that comes out, and we feel really, really, really good about how we stack up, not only with our existing products, but also with what we have planned for launch a little bit later in this year.

So all good on that front. But no, we don't take competition lightly. It's what drives us, and our customers can thank our competition for where GoPro is today, because it really pushes us to be best in class.

I wouldn't factor in any change in your outlook for GoPro based on anything new that's come out competitively.

Operator

This concludes our Q&A. I'll now hand back to the management team for closing remarks.

Nicholas D. Woodman

Thank you, Elliot, and thank you, everybody, for joining today's call. As I said earlier, we're excited for our upcoming launch and holiday season, and we look forward to updating you on our next earnings call.

Between now and then, we'll be presenting at the Oppenheimer 26th Annual Technology, Internet & Communications Conference next week.

And thanks again for joining today's call. This is Team GoPro signing off.

Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.