Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to todays Gopros third quarter 2019 results conference call I'd like to remind everyone that this conference is being recorded.
And then at this time I would like to turn the floor over to Christopher Clark Vice President of Communications.
Thanks, operator, good afternoon, everyone and welcome to Gopros third quarter 2019 earnings Conference call with me today, our Gopro CEO , Nicholas Woodman and CFO Bryan Mckeag.
Before we get started I'd like to remind everyone that our remarks. Today may include 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 31st 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 FCC.
Today, we may discuss gross margin operating expense net profit and loss as was basic and diluted net profit and loss per share in accordance with gap 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 operation.
We choose to provide this information to enable investors to perform comparisons of our operating result in a manner similar to how we analyze our own operating result.
A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release. It was issued this afternoon.
In addition to the press release, we have posted slides containing detailed financial data in metrics for the third quarter 2019.
These slides as well as a link to today's live webcast in a replay of this conference call is posted on the Gopro Investor Relations website for your reference.
Oh income statement related numbers that are discuss today during the call other than revenue are not gap unless otherwise noted.
Now I'd like to turn the call over to Gopros founder and CEO Nicholas Woodman.
Thanks, Chris and good afternoon.
Today I'm going to update you on the positive reception of our new product lineup and some key performance metrics.
And Brian will take you through Gopros third quarter performance and our improved outlook for the rest of 2019 and 2020.
Simply put all signs indicate herofour black and Max on questionable hit.
Since launch unit sales of heroic black at Gopro Dot com have eclipsed every previous new gopro, including last year's flagship hero seven black by 40%.
Purely black has also generated the highest social engagement and positive sentiment metrics of any new gopro.
Up 57% over hero seven black a year ago.
Considering the success hero seven black went on to have it's exciting to consider how hero eight black can contribute to our business.
And Max is proving to be a standout as well.
Through the month of October at Gopro Dot Com unit sales of backs shattered the debut performance of its predecessor fusion by a factor for.
Max is like having three cameras in one addressing multiple consumer segments be it users looking for a Max stabilized hero camera.
A feature rich walking camera or a professional grade 360 camera.
As we've shared we believe Max is going to play an increasingly important role in our business going forward, helping to raise s. peas, and gross margins, while delivering the wow innovation our customers demand.
Joining here away black and Max in our new lineup, our hero seven black at $329 and hero seven silver at $199.
We promised we were going to strengthen our business by maximizing value when performance at every price point and Weve delivered.
You won't find a weak spot in our offering this holiday and we're confident in our lineups ability to grow both topline and E. P. S. In the fourth quarter of 2019 and 2020.
As we mentioned since launch Herofour Black and Max have sold through at record levels at Gopro Dot com.
And in fact, all camera models are selling wallet gopro dot com with aggregated camera unit sales up 50% year over year.
We believe gopro dot coms sell through performance serves as an encouraging indicator of demand that's sell through ramps in retail channels.
Our investment in consumer research has led to a focused and highly innovative road map.
Thanks to our customers input and Gopros incredible product and engineering teams Fierro, eight black and Max both redefine what is possible with a camera.
We're confident these new products, along with our long term hardware and software road map can help us take more share of the greater 13 billion dollar digital imaging market.
And while we anticipated this level of demand for our new products the aforementioned to positive social sentiment metrics are beyond our expectations.
As I mentioned heroic black generated a 57% lift in positive sentiment over hero seven black setting a record for a new gopro camera.
In the first month, our product videos, social posts and other launch related assets achieved a global reach of 857 million up 5% from the launch of hero seven black.
We generated 70 million engagements on social channels.
74% from hero seven black and the hero eight Black launch video has become the most viral launch asset in our history.
This momentum builds off the widespread media and consumer claim we continue to see for our new products.
To give you a sense of the global press coverage Gopro receives during launch there were nearly 4000 articles and reviews published in the 10 days after our product announcement.
Reviewers acknowledge that we've taken our products to the next level of performance versatility and importantly appeal by addressing both the needs of our traditional customers as well is entirely new customer segments such as bloggers.
Again, we believe that by extending gopros branded products to solve problems for a broader set of consumers. We can grow our tam while taking more share from the greater 13 billion dollar digital imaging market.
[laughter] to further amplify excitement for here early blacken Max during the holiday quarter, we're rolling out an aggressive marketing campaign that includes out of home advertisements, including Billboards in major cities around the world.
A return to television in the United States, Germany, Australia, and Japan and in theaters for major film releases.
And we will of course, maintaining significant presence on digital platforms throughout the holiday quarter.
And speaking of marketing Gopro content generated another record setting quarter in Q3, with 234 million organic views up 35% over our previous record set in Q1 of 2019.
Organic and Gopro video views on channels like you tube in Instagram increased 48% sequentially and 64% year over year.
These are huge gains on top of already large viewership numbers.
And Gopros brand continues to scale on social platforms, gaining 1.2 million new followers across all channels to surpassed 42 million.
Another area, where go probably think selling its software.
We shared on our last earnings call that we merged the quick mobile editing apps into the Gopro App for a simplified one app experience.
Within the first month of release, we saw a monthly active users grow 8% and a 73% jump in the number of people using the apps automated editing tools.
This resulted in a 131% increase in total edit sessions.
Disengagement bodes well for our plans to monetize the App in 2020.
And were fired up about how our plus subscription service is doing.
As of November 4th our plus subscriber count was 305000.
Up 21% since our last earnings call.
This accelerated growth is a result of several factors, including increased international availability.
Newly introduced annual subscriptions and improved in card accessibility had gopro dot com.
Okay.
With this momentum and our planned road map.
We're targeting to exit 2020 with between 600000 to 700000 paying plus subscribers.
Momentum, we've got it across our entire business.
<unk> our market to finding cameras are rapidly advancing mobile app.
For our accelerating high margin subscription service Gopro is steadily advancing on all fronts.
This puts us in a strong position for the rest of 2019, and we're confident in our ability to grow both topline and S. In 2020.
And with that.
I'll hand, it over to Brian .
Thanks, Nick My comments on the third quarter will be brief today as we discussed a production delay and expected results during October 2nd call.
And our Q3 results were above those outlined during that call.
Our detailed results Q3 quarterly comparison and Q4 in 2019 garden can be found in our press release and web site.
After a quick summary of our third quarter results I'll provide more color on why we are increasing our EPS outlook for 2019.
Thereby reaffirming that we remain on track for successful second half and four year for revenue growth and profitability.
For the third quarter revenue was 131.2 million within non-GAAP net loss 61.3 million.
Third quarter, GAAP and non-GAAP operating expenses benefited from decreases in advertising marketing and facility related costs.
GAAP operating expenses were 99.6 million and non-GAAP operating expenses were 90.3 million representing year over year reduction of 11% and 8%, respectively, our lowest quarterly level since 2014.
Turning to the balance sheet, we ended the period with 250 million in inventory.
Short term increasing inventory was due to the delay and shipping Hill a black camera. In addition, we pulled forward some tariff seven inventory to avoid tariff.
We ended the quarter 79 million in cash and cash equivalent and 72 million in accounts receivable.
Importantly, we expect to exit 2019, with an inventory balance of between 115 225 million and cash and cash equivalent of between $210 million to $250 million.
Now, let's discuss a quarterly business performance in more detail.
We estimate camera unit sell through for the third quarter of 2019 was between 852 900000 unit.
We believe I hear a seven channel inventory declined between 35%, 40%, putting us in a good position for Q4 and the holiday season.
Camera units shipped during the quarter totaled approximately half a million.
During Q3, we began shipments of Max which became available on shelf in late October .
True seven block and Max represented over 75% of our third quarter camera revenue.
Third quarter Street at GE with 274.
5% increase year over year.
Three D.S.P. is defined as total reported revenue divided by camera units shipped.
Turning to guidance.
We're improving our gross margin outlook for the second half and full year 2019 from what was provided during our call in early October .
Main factors driving this increase.
We expect onetime costs related to fairway blast to be $3 million lower than we previously noted.
Reduction of here, a black camera ramped at a faster pace due to our combined efforts with Jay will.
And we expect slightly lower operating expenses.
We continue to expect our mix of cameras to remain due to the high end.
And as a result expect S. P is to be about $280 per camera for the full year.
And we expect to increase our paying plus subscribers to more than 325000, as we exit 2019 or 75% growth over 2018.
And as Nick noted, we're targeting to exit 2020 with between 600000 700000 paying plus subscribers.
Therefore for the second half of 2019, we expect revenue to continue to be in a range of 680 to 715 million gross margin in a range of 37% plus or minus 50 basis points up from 36.5%.
Operating expenses of less than 200 million.
non-GAAP earnings of 33 cents to 44 cents per share.
GAAP earnings a 15 cents to 25 cents per share.
For the fourth quarter of 2019, we expect revenue to be in a range of 550 585 million gross margin in a range of 40% plus or minus 50 basis points.
Operating expenses of 105 million plus or minus 2 million.
non-GAAP earnings of 74 cents to 84 cents per share.
GAAP earnings of 65 cents to 75 cents per share.
For the four year, we expect revenue to be in a range of 1.215 to 1.25 billion delivering growth of 6% to 9%.
non-GAAP B P. A in a range of 30 cents to 40 cents per share.
GAAP bps to be in a range of a slight loss of 10 cents to breakeven.
And EBITDA of 90 million plus or minus 5 million.
Additionally for the fourth quarter and here, we expect onetime costs related to fairway black production delay up 2.6 million in Q4.
Incurred 1.4 million affects costs in the third quarter.
Other income and expense to be 2.5 million expense.
Tax expense to be zero point, sevenmillion or 1.9 million for the year.
Share count to be 150 million for Q4.
And 148 million for the year.
To summarize we quickly recovered from the airway production delay and Gopro is on track to return to growth and profitability for the year, we continue to expect to grow 6% to 9% on the topline in 2019.
And as a reminder of our financial progress our EBITDA was negative 193 million and negative 31 million in 2016, and 2017, respectively. Our EBITDA turned to a positive 22 million in 2018 and Weve.
But positive 90 million in 2019, which is more than four x. increased year over year.
We continue to dramatically improve our financial performance, while bringing dynamic new product innovations to the market.
As we look ahead to 2020, we expect to grow revenue both units and ASP expand gross margin drive operating leverage and meaningful increases in EBITDA and EPS than 2020 over 2019 levels.
With that operator, we're ready to take question.
Thank you very much Sir and ladies and gentlemen that is star one on your telephone keypad to join the queue for questions and if you would just make sure that your mute function is turned off to allow us to receive that signal.
Once again that is star one for any questions at this time.
Pause for just a quick moment to allow everyone the opportunity.
All right and first from city, we have Jim Suva.
Thank you very much it's great you gained from our original ourselves initial guidance for 2020, how you mentioned some words like meaningful and grow our you know.
We didn't need rockets out at all so I can't changes don't get too ahead of themselves and then also I've a follow up.
Yeah, Hi, Jim This is Brian first it's it this is there a minor in 2019.
We have great products. It just hit the market growing 6% the 9% in revenue.
And increasing profitability dramatically along with a EBITDA of about 90 million.
As we frame 2020, and what meaningful is at a minimum and this is not providing guidance or target. The this is our targets. We we want to grow at least by 40% off our midpoint of our guidance for 2019.
<unk> per share and went to grow EBITDA, the 90 million at least 25% in 2020, so that's pretty meaningful increase in both Ernie and that castle for the company.
Thank you that yells greatly appreciate my follow up is there anything different about this Christmas holiday.
Competitively or the marketplace compared to the path and I'm not talking about your product is very good strong I'm talking about like shopping trended behaviour promotions or product placement or T cell market caps or something just wondering you know if there's anything different from market perspective.
To be conscious of that you guys have embraced you're seeing out there. Thank you.
Well, Nick here every year, so we get better and better, but how we approach the holiday quarter and as we shared last year.
Is it getting the case this year, we're working much more closely with our retail partners, bringing them into the fold earlier in our.
Sort of that Q4 market plan advertising planning process. So that we can combine efforts with our retailers to have much stronger presence a in their stores and in all of the advertising that they do so from that perspective, I think we're gonna do an even better job than we did a lot.
Last year with zero seven black and we did at a pretty darn good job of it then.
I'd say that there's more retailer and channel confidence in gopro or this year than there was last year last year was a bit of a show me here and as we all know hero seven black did a terrific job of showing the world what what are our brand is capable of.
And so coming into this year.
And we're coming off of a strong 2019 Q1, two and three with our retailers. So their confidence is high coming as the quarter, which that's that's really helpful. In terms of gaining support for Herofour black.
And for Max a and then we're also feeling really good about the entire lineup that we've got from 199 with Euro seven silver 329, a with hero seven Black and then 399, Joey Black and and for 99, Max I mean, it's just a blockbuster lineup that we've got and.
The sell through that we're seeing a gopro dot com is really strong and the product is evaporating from shelves at retail when it hits. So every indication is that the products are unquestionable hits with with consumers and that that just in turn gives retailers further confidence in our products and then the brand to do really well for the holiday So I think.
We're feeling good or retailers are feeling good and we should expect to have a strong quarter.
Yeah, Jim you're not do one kind of follow up on that and in particular for Max you know relative to fusion will see just because of the price point and that kind of product. It is we're going to being about four times more doors or with that product around the world, which really helps to drive you know unit growth and.
And high dollar growth and really good margin. So again, that's another element that we've now been able to bring to the table.
[noise], alright, and moving on we will hear from Eric what drink with Morgan Stanley .
Hey, good evening, guys I guess, if I just started out I'm just curious if you could provide any update on the production date delays you mentioned a month ago is there any issue with.
Are there any lingering effects just any more color.
Production delays.
Hello.
Yeah, Hi, this is Brian Yeah, like we said before we're not going to get into the details, but I can say, it's behind us and we're just moving forward.
Okay, Perfect and then I guess the second question would just be you provided some really bullish data points about early sales of the of the here away in the Max I'm on Gopro Dot com, but the last quarter. You said it was you know roughly 10% of sale. So I'm just I'm just wondering if you cannot kind of speak more broadly about all your distribution channels, just how the how the eight and.
The Max or selling I realize that they were only available on gopro dot com initially, but I'm just having anymore color you can provide kind of more broadly I'm across distribution channels would be helpful.
[noise] well.
We're seeing a as we shared really strong record setting a sales it gopro dot com for both new products and strong sales of stuff. The entire line frankly, that's something that I think it's really important for investors to know that.
The entire Gopro line is selling a strong so that's that's terrific to see we've done a great job of realigning the the lined up to do a better job of meeting.
The needs and desires of the different customers that are each different price points. So I think we're doing a better job of that this year than we ever have before and then as it relates to retail sell through product is more or less evaporating as soon as it's getting a on shelf.
Which is terrific to see that Gopro dot com sell through performance seems to be mirrored through our retail channels.
And then beginning next week, we think that supply to stores gets ahead of demand to where retailers can actually have product on shelf and capitalize on that that demand more fully a than they have been today, but so far every indication is that the demand for the products as much.
Matching up to the positive reception that they've seen since launch and I think it's important to note that we track a social sentiment consumer sentiment around the new products from year to year.
And we're seeing substantially higher positive consumer sentiment consumer response for the new products and we have in the past. So that's great had another great indicator of consumer interest.
Awesome, that's very helpful. Thank you guys.
Thank you.
The next we have Andrew Uerkwitz with Oppenheimer and company.
Hey, Thanks, gentlemen, appreciate the.
Ability to last couple of questions here.
From my first question, Nick you mentioned broadening your marketing.
Channels, and et cetera, going TV and other others.
And you also mentioned a Z logging as an area of growth should we expect to see on your digital presence more.
More partners, whether its switch streamers or lives tumors on you too.
As partners to drive a interest and the products or is most of it just couldn't be traditional media.
Thank you.
[noise] are moving into of logging has definitely allowed us to expand the types of influencers are that we work with too.
Help get the worried about out about our products and and through you know there authentic use of our product demonstrate to consumers how relevant gopro can be to them. So.
In addition to addressing you know a new customer segment with both Herofour black and Max's blogging capabilities. It just also affords us the opportunity work with more people to grow the brand. So yeah that is something that you'll be seeing from us.
And like I said that the the consumers reception to the new functionality.
The if the new Gopros has been has been really positive it's something that I think consumers had to connect the dots a little bit more on with our previous models and there was a lot of speculation as to the viability of other gopro being used effectively for blogging, but I think we've answered all those questions and doubts that with this year's lineup.
And you only need to do at the Gopro search on Youtube to see that just how many blogger reviews. There are of the new products and how well the received to get a sense that we're we're definitely hitting a hitting the mark on that front.
Got it. Thank you know, it's a great opportunity within the next question is on the Max any any fear.
That the Max my.
Take share away from the eight black.
[noise] no fear from a well way, it's always nice to up sell our customers too sure more capable and more profitable products. So that's terrific. I think you. Maybe you know your question May specifically be about does does a demand outstrip supply of.
Max and at the expense, yes, I hear a way to black and no we're not worried about that.
These things take time for consumers direct I mean, the hero camera line has such a strong brand right and.
So we've done a really great job of establishing that as the.
Go to choice for any consumer that's looking for a a gopro like a camera and so as exciting as Max is and it is doing as well as we'd hoped it would and more.
It's going to take some time for consumers to get a big one become aware of Max versus the hero Cameron to get comfortable with the idea of a dual lands threesixty blogging and hero camera all in one I think that it's going to take share over time.
From the hero camera and that are in the future I do think that Max and Max like cameras from Gopro have the potential to be the category, leading a camera that we sell but but again, that's going to take some time and that affords us the ability to grow into the opportunity versus it.
Being like a light switch that we can't respond to quickly enough, we don't see a a risk of that happening.
Got it and then last question on the software side.
If we think about maxi other are there certain limitations you its overcome before the software AI can catch up to the <unk>.
Auto editing of the of the Max versus something like that Europe .
No. It's just it's just work and we're progressing really getting there and that's I'm I'm. Assuming you have used back said is that I know you're a fan you were a fan of fusion and and if you haven't used that you're going to be very delighted and ER and surprised at how far we've come with a.
Mobile experience and the key frame.
Editing, it's a again it just watch some of the reviews on you tube. If you haven't used the product yourself and you'll see that that we really surprised people with how far we've taken that app experience kudos to our team for nailing. It on this one and from this great starting point, our our customers can expect continued advice.
Transmitted in the mobile editing experience from Gopro, both for Max and for a that hero camera as well.
Got it thanks, guys appreciate the color.
Thank you.
[laughter].
And once again, ladies and gentlemen that is star one if you'd like to join the queue for questions.
We'll next move to Nick told her out with Longbow Research.
Hey, guys and good afternoon appreciate the color on 2020, I Wonder if you can.
You got a little deeper can you give us how should we think about the dynamic between units and a speed contribution as we go into Tony Tony.
Yeah, and Nick This is Brian <unk> with respect to Tony Tony will provide more details on our next earnings call anger be that's probably more appropriate I didn't give you. Some details on prepared remarks, but I do want to say that we see 2020 as a growth there topline expanding clearly on the bottom line, we do think.
Important for shareholders as a company. So again, just a to say while not guidance. Our targets are at a minimum to be showing earnings per share growth of at least 40% above the midpoint of 2019 and driving EBITDA growth of at least 25% over.
The 90 million, we're talking about for 2019.
Okay, all right and can you remind us into unit shipments are you guys reported as did that include accessories and how should we think about DSP impact once you start shipping demod.
[noise].
Ah, Yes, p. the total revenue divided by camera. So we only report the cameras, we ship nothing accessories, but the accessories are included in the revenue.
The Mark.
I would probably helped lift ASP is a little bit and a 2020.
Okay. Okay, and then can you comment you know seems like you're having some good traction with the trade or trade up program in I think you I saw some amex discounts there, we're making very attractive for users to go and Gopro Dot com any way you can quantify how much you know that is driving that the sales.
In your you're a direct channel there or any color you can provide additional.
No we don't actually break that out clearly, helping and it does every year, but we don't breakout or that portion of it.
Okay and last one from me I was wondering if you can comment a little bit more on Threeq, you sell through and the channel reductions I think you mentioned that hero seven Black channel inventory was down 35 percentage can you comment on how much overall channel was down sequentially.
Yeah actually my comments around here, a seven where all three cameras black silver and why were down 35% to 40%.
So that's the key can indicator for how we closed off the channel <unk>.
There's no way the block in the channel right. So.
Okay and in any way you can not try to try to quantify and not quantify but forecast what do you expect from sell through in the fourth quarter.
We expect sell through to be higher in the fourth quarter than it was in 2000.
Okay got it thanks, guys. Good luck.
Thank you [noise].
All right and looks like your final question will be a follow up from air Woodring with Morgan Stanley .
Hi, guys. So just want to ask given the commentary that you gave around the Max just curious what type of you know I realize its initial the what type of users do you see buying them actually be still kind of prosumers or do you see that kind of going down to the to the regular consumer level to the blood flogging level. Just just curious on early kind of read through for that.
Max is definitely a consumer level camera that is more than capable enough for prosumer professionals.
We we shared that our goal.
With the development of our Star first dual lens camera fusion was that was a prosumer pro focused camera that we intended to be a us the development stepping stone for us to get to a consumer version of such a product, which we've we believe we've completely nailed with Max so its a.
Max is there's more than ready for the consumer primetime and that does matched to the type of buyer that we're seeing and as well the the type of.
Response that we're seeing on on you tube and Instagram and the like is that a Max is is very exciting for them the mainstream user.
Okay, great. Thank you guys.
Thank you. Thank you.
[noise], alright, and ladies and gentlemen that does conclude the question and answer portion of our call today I'd like to turn the floor back to Nicholas Woodman for any additional for closing remarks.
Thank you operator to close I'd like to thank everyone for joining todays call and a special thank you to Gopros 900 employees around the world for making this year is incredible products possible Gopros technology and innovation now matched the strength of its brand and that's very apparent in both heroic.
Black and Max as well as our totally revamped Gopro app.
This is only possible thanks to the people of Gopro, who dedicate so much of their time and energy to make the magic happen huge thanks team and well done.
To our investors, Brian and I will be it Nasdaq's Investor Conference in London on December 4th and we're excited to connect with many of you there.
So thanks very much everyone. This is team gopro signing off.
Yeah.
And ladies and gentlemen, once again that does conclude our presentation for today, we do thank you for joining US you may now disconnect.