Q3 2020 GoPro Inc Earnings Call
Good day and welcome to the gold price third quarter 2020 earnings Conference call stays conference is being recorded at this time I would like to turn the conference over to Vice President of Corporate Communications Christopher Clark Mister Clark. Please go ahead.
Thank you Casey good afternoon, everyone and welcome to go through 232020 earnings Conference call.
With me today are Gopro C E O Nicholas Woodman and C. F O N C O L. Brian Mcgee.
Before we get started I would like to remind everyone that Ah remarks. Today may include forward looking statements.
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 and which is posted on our website.
<unk> and a challenging year.
It's thanks to them that we achieved such terrific results in Q3 and are poised for success going forward.
With the launch of hero nine Black we debuted not only an exciting new flagship, but our strategy to make the gopro subscription central to our business and customer experience.
Gopro subscribers, who purchased directly from Gopro dot com enjoy far more value than non subscribers, while generating improved margin in cash flow for our business.
Thank you you May press start to again, please press star one to ask a question we will pause for a few moments to allow everyone the opportunity to queue for questions.
Kind of inventories another 200000 units and that's more than 800000 for the year. So that's that's definitely been kind of a headwind for US you know obviously demands been there at 3.7, our expectations 3.7 million units of cameras sold through for a year, but I fell in.
[noise] is about 2.8, or so and that differences off taking inventory in the channel.
So.
I'm more.
That constraint has led to people traveling more locally and engaging in activities that are closer to home that they can drive too we saw a surge in outdoor activity b, a camping hiking biking over the the <unk>.
Spring and summer months.
Bandit functionality as a web camera that that certainly goes without saying it's has helped the relevance of our products to people, who are working and learning from home and need better.
Better video conferencing tools.
Which a gopro certainly serves as with its wide angle view and you can get a more flattering.
On that.
Little channels for us and and it helps to.
To 50% off.
Mounts and accessories and other goods that we we sell it go put our comp and.
We're able to sell more subscription and more value to the consumer, but we're seeing that and records in terms of revenue.
And we'll see that again I think from Q4.
It's expanding our margins expanding our cash flow and diversifying or not so much yet on the revenue basis, but definitely on a on a margin and operating profit basis to the direct to consumer model is definitely helping along with the subscription.
Benefit so we see that continuing into 2021 and beyond.
Great well, congratulations both Nick and Brian truly impressive results and thank you so much for the details.
Thanks very much.
Or when they would download the go pro out to pair with their camera the benefits of being a gopro subscriber would be explain to them and they could they could sign up that way.
And then of course are ongoing you know C. R M and other marketing efforts to convert go pro users to subscribers.
That that way and we grew a nearly.
500000.
Subscriber.
Base before.
Incorporating the the gopro subscription more tightly with a camera purchase it go for dot com and before we drove so much of our business to go put dot com, so that that bodes really well for us to continue to be able to convert.
Retail based consumers.
Into paying gopro subscribers using the same methods that we used before the launch of hero nine Black I think that's an important thing to remember that we've we've gotten quite good at growing or <unk> subscriber numbers across you know multiple channels and we continue to improve.
Move on that and so you're part of your question is how do we.
You know plan to continue to improve well one of the the important aspects of of making the gopro subscription so central.
To the Gopro experience was to make the gopro subscription synonymous with.
<unk> with the brand.
And make it synonymous with being a gopro owner and and stack. This gopro subscription with so many benefits so much value.
That.
<unk> it's.
It's just a no brainer to the consumer to take advantage of it we've been very focused on making the math simple for the consumer to do where they look at the 50 dollar annual subscription.
Cost and then they compare that to the savings that they're gonna get either when buying a camera or buying an accessory or buying a gift for for a friend or or one of their kids or whatnot and the math is simple easy to do to realize Wow I'm gonna pay for the subscription in a heartbeat.
And that's that's even before you consider the unlimited cloud storage.
The Ah damaged camera replacement guarantee and and even more benefits that we haven't rolled out yet so I think that given the right of subscriber growth that we've achieved before the launch appear O nine black that's very promising.
Given the rate of growth that we're seeing posts here Oh, nine black with the new centralized approach to making subscription so central to the brand experience, that's very encouraging and as we load up the subscription with even more value going forward you can see why we're we're feeling quite confident.
About our ability to continue to grow the subscription side of our business.
While importantly, delivering phenomenal value to the end user which results in strong retention of those user strong re up rapes, which is what we've been seeing so far and as I've mentioned, an opportunity to improve the lifetime value of our customer.
So across the board you know kudos to go pro team that's responsible for this area of our business. It feels like we've we've got a lot of momentum that we can support going forward.
Great. Thanks for that and then you know I'm free cash, though really good performance. There you know primarily.
Even by your you know higher net income.
Your 225 million and and any cash for four Q suggest you know slightly lower pace, but nice finished the year in cash. So we haven't seen cashless come in and <unk> like this in a long time has your has your cashless season now changed based on on D. T C.
It sounds like you can get you've been getting a lot more efficient I'm working have conversion. So as we think about next year modeling casual.
[noise] yeah, Thanks, Paul Yeah.
Yeah free cash flow for cute he was actually a record for the company since we're in a public park polka couture the company compressor a lot of it came from reducing inventory getting more Christian M. A R which is a direct result of doing more direct to consumer because.
We get paid in three days not 30 to 45 some retailers. So that's an important aspect of just the cast generation will continue to reduce inventory and queue for I think we should be down to about 100 million of inventory.
<unk>, our inventory and a R. I think it goes up simply because of the absolute dollars of guidance, but it continues to improve on on the metric of D. S. L. I kind of about 25 days. So that's driving Ah cashflows and as I look ahead. The 21 will continue.
The system, obviously benefit from from the model and continuing to manage our inventory and accounts receivable appropriately and I think there'll be even from a cast generation perspective, it'll come more from earning and I think that will from the balance sheet, although so there'll be some from the balance sheet.
But definitely earnings growth and and we get that Paul because we think while we're doing three 7 million units itself through in 2020 or sell in is quite a bit last night about 2.8, or so and that difference is really the reduced the amount.
A inventory that's in the channel so that gives us tailwind going into 2021, because if the man should say you know at at that kind of level 3.74 million or.
Our cell in of course would be close to that because we'd have our channel inventories online so that bodes well for revenue growth, we will have more direct to consumer and more subscription which should keep us in the operating model of 30th of 40% will continue to.
To be more efficient and operating expenses and and that's going to lead to quite a bit of income generation in 2021, leading off through the cash.
Gotcha, and then last last one on Opex you provided you know 250.
Million in Opex for fiscal year 21 during the <unk> does this guide and I still stand and then you know what variables can you either flex this up or down relative to where you expect next year is there any more cushion to to cut costs. If topline doesn't agree next year.
Thanks, guys.
Yeah, Yeah, no worries every reduced with the model, we've been able to reduce operating expenses and 2020, nearly 75 million or so from 20th 19 level. So we're still driving into the 300 to three O five range.
250 number back in I think April was assuming a lower amount of sell in.
And fell through back at the beginning of the pandemic. That's obviously changed I believe in August we had guy did two six is it to a D.
Isn't that can chime in.
Well, let's see we'll see.
Well, we said there'll be above 700000.
I remember you also have a.
Sizable retail as well so it's not just so we'll get some organic with people coming in and we expect up or dot com to be in the 40% range of of revenue. So it's gonna be a lot of the the grass is gonna come from <unk> Dot com, where consumers take advantage.
The subscription as part of a camera offering and certainly factor everything and we come up with you know more than 700000, we think exiting this year and getting to nearly.
That's a great question, but.
I I can't share that with you because I would be sharing.
Very valuable.
Consumer research that helps us drive our roadmap right because.
But thats a you I'll answer it a different way.
Bye.
Reiterating that.
We do a lot of.
Consumer research to understand both what our existing users are enjoying or not about our current products what they'd like to see most.
That helps us with driving upgrade.
And keep keeping people engaged.
With with within our community and then we also do research to understand why our potential.
Potential customers buying a gopro, what's what's keeping them on the fences.
And what what would they like to see is it something entirely new or is it is it just one or two things that are perking them.
File a claim hero nine black is receive whether it's the four and a half stars you see for our App.
And the App store, whether it's all of the above or none of them are accidents. There were a result of research that is allowing us to make better more strategic decisions on behalf of our customers, which is leading to an improved business and you combine that with that.
D C and subscription centric strategy, which we also evaluated research with consumers uhm.
Uhm I, just you know again hats off to the team at Gopro and everybody Who's responsible for these areas of the business they've been doing terrific work. The the researches is obviously played out as well as the business decisions that came out of that research.
Oh, that's awesome and if I could to make one last one in here. It's just you know.
Clearly a benefit of the new subscription bundle is the discount on the camera relative to the camera as a stand alone until I guess, how do you do you guys go pro and make sure that these in new subscribers aren't just taking advantage of the pricing discount and can remain subscribers you know <unk>.
Longer than one year and don't turn off the platform at a higher rate than you know theoretically the the subscribers you had prior to the the change in the pricing model. Thanks.
Well, you'll get some bleed outright I mean, that's that's inevitable, but as long as your net net coming out ahead and ideally coming out very far ahead, you've you've hit on a terrific.
Marketing approach to drive subscription.
And then prove to these new subscribers how much value. There is in the program and ensure that they're educated on that value and then as they realize that value over there Europe subscription they become.
You know long term subscribers because they they they they realize it and as I mentioned, a and my answer to a previous question you know weird going at great lengths to make the value very obvious to consumers. The math has to be very simple in terms of how quickly subscriber can recoup.
There's the the cost of the subscription when they take advantage of the benefits that's quite obvious and they can do it very very quickly, which is really important you need to make a subscriber of winter quickly, while ensuring that it drives a profitable business, which Brian shared it the the subscription business.
Is generating 50% operating profits not gross margin operating profits, a 50% and that's something that we believe we can build on overtime.
And so then it's a win win for the consumer and into the business and ultimately some investors we believe and so our jobs are to retain them is to just make it overwhelmingly obvious how much value they're getting.
And for what we can tell so far we're achieving that you know the part of the reason that we achieved such good subscription growth prior to the launch of hero nine black and prior to this strategy ship.
Is because we had.
Barry I was good retention rates.
And what we would consider to be low churn rates.
And you know that's as important as everything you're doing on the other side of the coin to brand new customers in.
So that tells us that when we get subscribers in we impressed with them with the value they stay on as subscribers and drive a healthy program for healthy business <unk>. That's what we've achieved to date, but we're not done yet loading up the go pro subscription with more benefits that are going.
Really impressed our users, but not negatively impact the profitability of the of the business.
No problem.
No. That's really helpful. Thank you guys and congrats again on the corner.
Thank you so much.
Thank you and will now take a final question and make tons of rough long This research.
Yeah. Thanks, good afternoon, guys make.
And they can Brian I think you guys talked about you know demand coming up above expectations.
Oh did he live in I believe we May I ask the reason.
I wasn't sure I got this <unk>.
Yeah, So I'm the one place that star one now.
Okay, we've got neck.
Hello can you hear me.
Yes, Sir.
Okay, I'm, sorry, guys I don't know what happened I could I could hear you, but apparently you could've.
Uhm, sorry, I'll just have to start from the over you guys were saying the demand is coming up a rough expectations. If I look at the full your guide for sale through insulin I think your guidance 3.7 million units are still through which is at the midpoint of your prior quarter guidance, and then $2.8 million. So N of the law.
Sure and of your two Q uhm expectations or guidance that you gave at the time I guess, how do you square does too why are we not I'm leaning more towards the higher end of those ranges that you guys that you gave them in the last quarter.
And the class is Brian work, we've increased our revenue and earnings per share driving for 2021st things about prior outlook Uhm. So that's important to point out uhm, we continue to reduce channel inventories by.
200000.
Or so units in the fourth quarter and you know just to put that in perspective cause you know normally that'll be our cell in as well soft through but I took him to channel inventories down in queue for you know if you're pro forma that out with that you know 60.
A million dollars of revenue in 10 to 15 cents for sure and you have to do that on the 800000 units. We're gonna take down a channel inventory, that's nearly a quarter of a million dollars in revenue that you know, we look forward to recouping and 2021 should demand level kind of stay at kind of the.
Today. So you know it just set the company up nicely for 2021 also point out you know well there's limited there's some upside but you know we constrained inventory back earlier in the year just due to the uncertainties in the Mark.
But and so you know we should system.
Demand and benefit in the channel as we go to the 20th 21. So I think we're really positioning for the exit the year with very low inventories as I mentioned about 100 million for <unk> as well as getting channel downside I think the 550 or some kind of a thousand unit rooms. So.
I really felt the company up nicely for 2021.
Okay got it and if I look at Gopro Dot Com I think in the third quarter results I guess I I Wonder you know what you expect it to be between 36 and 40% even if I had just put a upside in revenue still looks like could go pro dot com came a little bit below that I I.
Wonder was it all because of retail upside and then as we look forward you know as we think about 70% of revenue being the the upper threshold for eventually getting revenue from go pro Dot Com you know how should we think about <unk>.
Revenue from direct to consumer into 2021.
Yeah, I think on on you wanted to answer your question there within our prepared remarks on Q3, Yeah. We have got it at 35% to 40 and that was on on the lower guys of revenue and actually dotcom to better and we had.
Expected that so did retail <unk> very good strength in retail they're too important channel for obviously, we were more profitable as Oprah dot com versus the retail channel where to why are you screaming Martin come up on both actual results as well without guidance.
So I think that's that's pretty key and that that leads us to 2021 nicely alright.
Yeah, Okay, and Nick I think I have a fair amount also say I'm sorry, Nicola you. You you you you made a comment that the.
That the dot com business being capped at 30%, we we don't see it that way so just.
That's.
Ballpark, where it is now but we see many opportunities to continue to grow the direct side of our business.
Yeah, I I think I'm gonna have you ever since I called.
Medicine.
Nah cause we we expect it to be around 40% to four I think weird I've mentioned that that'll be cause that and 80% lift right. Yeah and looking ahead to 21, it should still being that we think it can still be above 50, so we're not really sending a target because they're both important tan.
Oh, I guess is the point so.
You know 45, greater cause 55 Grand if we're making more money as a result of Howard Ah dealing with working capital and margin and Opex and driving a cast and earnings per share you know that it may floating around a little bit between on a percentage basis, but what's important.
$2 continue to grow and that's where we get the margin expansion in the operating leopard.
Yeah got it and last question, Nick I think in the prepared remarks, you talked about our new App experience that will will bring out a solution. So widespread problem that you believe are uniquely positioned to address I wonder if you can give us any details are on that or any color. Thanks.
Well I can't talk about anything at the product level, but what I can sure is.
We we recognize that you know go pros brand is is.
So much bigger than b products that we currently making the consumers that we currently serve.
And one of the Ah research indicates that one of the.
Most accessible ways to make <unk> more relevant.
To.
People that don't on a go pro camera is through software.
And through solving problems that we can address with an app and make available to say smartphone users who represent a much bigger tam.
To solve for then.
Just the people who are either going to buy a go pro or then service those those customers, a biker oprah with additional accessories, and and and and and subscription and so forth and so through this research.
And we went to work on considering what are some big problems that are out there and it turns out that there is a problem that is coincidentally shared by both go pro users and smartphone users alike and so in doing the work to develop this new app experience, we get tremendous.
This leverage because this is something that we want to build for the Gopro community and we realize that it serves as a phenomenal solution for consumers that are just using their smartphone to capture photos and and and videos.
And and are dealing with the inherent problems that come with that.
And I'm not just talking about editing, it's it's more in line with no editing and the content creation, but also managing this content in a really compelling way.
And we believe this is gonna really resonate with people and importantly to to our business want it can help us extend our brand to serve people outside of this hardware owners to it represents an opportunity to.
Generate a new subscription revenue stream with consumers that don't on our hardware and three the tan that we're addressing is obviously a very big one if it's addressing the needs of the average smartphone user and it's not like these users need to be ultra <unk>.
Passionate about content creation or editing or anything like that we actually think that's one of the smaller opportunities. The problem that we're addressing is is much more widespread and I I can almost guarantee that everybody on the call here suffers from it.
So we're excited about that but I I want to stress again that we get.
Almost a free option to go and explore this market opportunity with with non hardware owners smartphone on the users because we're doing this work anyway for our Gopro community and the leverage that we get out of that development is terrific.
And as I sure will be sharing this first with gopro users towards the end of this year. So you can get a glimpse of what it's gonna be for smartphone users and then in Q1 will be rolling it out to the smartphone users as a.
What we believe are very attractive in an accessible subscription program that we think it's gonna be really meaningful to to the smartphone community of users.
Got it thanks.
Thank you I shared with you a little more than I thought I was but I thought you deserved it Nicola.
[laughter] I appreciate it.
Thank you very much. Thank you at this time, we have no further questions I would now like to turn the conference back over to management for closing remarks.
Oh, sorry about that I was on mute.
Okay, well, thank you operator I'd.
I'd like to close by once again thanking go pros amazing employees, who work so hard to deliver wow to our customers every year.
This year, they get it from their home offices spare bedrooms and garages.
Dang you were the best of the best and thank you for being the backbone of both this company and this brand.
And thank you to everybody for joining today's call stay safe and stay stoked.
This is Jean Gopro signing off.
Thank you, ladies and gentlemen for your participation in today's call you may now disconnect [music].
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