Q2 2019 Earnings Call
Good day, everyone welcome to Gopro second quarter 2019 earnings results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Christopher Clark Vice President of Corporate Communications. Please go ahead Sir.
Thanks, operator, good afternoon, everyone and welcome to Gopro second quarter 2019 earnings Conference call with me today are Gopro, CEO , Nicholas Woodman and CFO , Brian Mcgee.
Before we get started I'd like to remind everyone that our remarks today may include forward looking statements.
Forward looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially.
Additionally, any forward looking statements made today are based on assumptions as of today, we do not undertake any obligation to update these statements as a result of new information or future events.
Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 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 well as basic and diluted net profit and loss per share in accordance with GAAP and Additionally on a non-GAAP basis.
We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance.
We use non-GAAP reporting internally to evaluate and manage our operations we choose to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results.
A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon.
In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the second quarter 2019.
These slides as well as a link to todays live webcast and a replay of this conference call are posted on the Gopro Investor Relations Web site for your reference.
All income statement related numbers that are discussed today during the call.
Other than revenue are not GAAP unless otherwise noted.
Now I'd like to turn the call over to Gopros founder and CEO Nicholas Woodman.
Thanks, Chris and good afternoon today, Brian and I will take you through Gopros second quarter 2019 performance in short we are growing and we are profitable and as Brian will discuss in a few minutes, we are increasing our full year revenue guidance and tightening our full year EPS guidance, raising the midpoint by 14%.
Revenue in the quarter was 292 million, representing 20% growth sequentially and 3% growth year over year.
Excluding our aerial business.
Revenue grew 9% year over year.
Earnings per share was positive three cents, an 18% improvement year over year.
And our flagship hero seven black with its market, leading durability versatility and revolutionary video stabilization continues to draw customers to the high end.
Demand for hero seven Black helped drive ASP is up 7% year over year, excluding Ariel to $270.
And in the second quarter, we also saw higher than expected retail demand for hero, seven silver and hero seven white.
This demand held the gopro achieved a significant milestone in the quarter, surpassing more than 35 million hero cameras sold since we launched the first HD hero in 2009.
In addition to our strong performance at retail Gopro Dot com continues to thrive.
In the second quarter, we saw web traffic jump up 9% sequentially and 22% year over year a record for Q2.
E Commerce conversion increased 120% year over year and E Commerce revenue grew 55% year over year.
Thanks to continued demand in all regions channel inventory is at appropriate levels globally, and we believe we are well positioned for the launch of new products later this year.
And after previewing our upcoming fall product lineup.
Our distributors and retail partners are very excited about the continued innovation in our upcoming products and we believe we'll be able to expand our leadership position during the holiday quarter.
Gopro continues to lead in our markets globally.
And in Q2, we did not see an impact to sell through as a result of competition.
In the U.S. According to NPD group in the second quarter Gopro captured 94% dollar share of our category and hero seven Black was the number one selling camera in all of digital imaging by unit volume.
And the hero seven line, plus our spherical camera fusion, where the top four selling cameras in our category.
In APAC According to Gfk Gopro sell through grew by 1% and 11% year over year by units and dollars respectively.
In Japan, Gopro sell through increased by 11% year over year by dollars and our share of the action camera category by units increased from 58% to 59% year over year in Q2.
And in China.
Gopro sell through in units grew 9% year over year in the quarter.
In Europe . According to Gfk Gopro had three cameras in the top five in our category and in a 200 dollar and above price band Gopro held 83% and 82% market share in units and dollars respectively.
And importantly, based on our sell through data demand for cameras at price points of $300 and above increased more than 90% year over year.
Demonstrating our customers' preference for higher performance products, which we believe can help us expand margin over time.
And to generate additional excitement for our products, we launched our spring adventure travel campaign in Q2.
Which achieved the highest click through rate of any campaign outside of the hero seven launch.
During the second quarter, our social followers increased by nearly 1 million, bringing our total following to approximately $41 million.
Notably social conversions reached an all time high and Gopros monthly new follower growth rate is 24% ahead of where it was in 2018.
We continue to see high viewership of gopro content across all platforms with $158 million organic non paid views in the quarter up 21% year over year.
And our performance on you tube was record setting.
You tube accounted for 115 million organic views, our highest quarterly total ever.
And in June our Youtube channel registered 46 million organic views, making it our highest performing month ever.
This momentum is no accident, we continue to improve our understanding of our customers' interests and the result is an ever sharpening marketing strategy that continues to drive engagement and viewership.
Turning to software, we continue to both advanced and simplify the mobile experience for our customers.
Just yesterday, we merged the quick mobile editing app into the Gopro App for a simplified consolidated one app experience.
This represents an important milestone as we intend to now scale, the relevance and functionality of the Gopro App to appeal to not just gopro owners, but to non owners as well.
The majority of Quik App users are non gopro owners, who use the app to create and share and its of their smartphone footage.
It is our goal to transition these users to the new and improved Gopro, App, which will benefit from a rapidly advancing feature set over the quik app.
Our goal is to engage and monetize these new non gopro owners over time.
We believe software represents an important path to extend our brands to serve a larger total addressable market than we do today.
Turning to subscription we continue to make steady progress with our Gopro plus subscription service.
As of yesterday paid subscribers grew 15% to more than 252000 since we've reported on our last earnings call.
We've made steady progress in advancing the value awareness and adoption of plus.
In April we rolled out the full benefits of plus to 30 additional international markets.
In June we optimize the shopping experience at Gopro dot com to allow customers to add a plus subscription to their car at checkout.
And starting yesterday, we began selling annual subscriptions for plus at Gopro Dot com.
These incremental improvements are driving accelerated growth for plus which is increasingly important to gopro given the high margin nature of this service offering.
To summarize Q2, we ended up right, where we wanted to be and our momentum continued through July .
We are on track for an exciting fall product launch that we believe sets us up for a great second half.
Given our continued sell through momentum channel inventory levels and the strength of our upcoming launch we are raising our outlook for the second half of 2019.
And we believe that we can translate this momentum into both topline and operating profit expansion in 2020.
And now I will turn the call over to Brian .
Thanks, Nick I'll begin with an overview of our performance for the second quarter, and then discuss our outlook for 2018.
We are increasing our 2019 annual revenue guidance.
And now expect revenue to grow between 9% and 12%.
Or $1.25 billion to $1.28 billion.
And we are increasing the midpoint of our EPS guidance by approximately 14%.
To 40 cents per share.
We continue to expect positive EBITDA of approximately 100 million 2019.
And I'll give you more color on that at the end of my prepared remarks.
In the second quarter of 2019, we continue to execute on the business delivering revenue growth.
And profitability our results for revenue margin operating expenses and earnings were all in line with our prior guidance.
Several financial metrics for the second quarter our noteworthy.
Revenue increased 20% sequentially, 3% year over year, and 9% year over year, excluding our aerial business.
Three this increased 7% year over year, excluding our aerial business.
Based on sell through data demands for cameras that price points of $300 and above increased more than 90% year over year, meaning we're selling more profitable products.
Margins improved to 36%.
GAAP and non-GAAP operating expenses reduced year over year by 4% and 6% respectively.
GAAP loss per share improved 70% to eight cents.
While non-GAAP net income was 4.2 million or three cents per share a $25 million improvement year over year.
And inventory over the past 15 months has consistently turned approximately every two months.
Turning to the balance sheet for the quarter accounts receivable were $145 million and Dsos were 45 days.
In light of the uncertainty around tariffs, we proactively increase the U.S. bound camera production.
We continue to manage our inventory tightly maintaining approximately 60 days.
Ending the period with $129 million in inventory.
Cash and equivalents ended the quarter at $130 million.
Now, let's discuss our quarterly business performance.
In more detail.
We estimate camera unit sell through for the second quarter of 2019 was in line with our expectation of approximately 1 million in it.
While this represents a 14% year over year decline.
More than 90% of our sell through is in our premium higher margin products, which contributed to our profitability in the quarter.
We believe channel inventories are in a good position as we enter the second half of the year and should improve further as we head into launch in the fall.
In particular, we saw weeks of inventory decline in Europe as sell through exceeded sell in.
Tim and units shipped during the quarter totaled $1.1 million.
A 1% increase year over year.
Sure seven black represented over 85% of our camera revenue and we experienced stronger than anticipated demand for our head of seven silver and white cameras during the second quarter.
Second quarter Street, ASP was $270, a 2% increase year over year, and a 7% increase year over year.
Looting our aerial business.
Through this fee is defined as total reported revenue divided by camera units shipped.
Geographically, excluding our aerial business growth was primarily driven by North America at 19%.
Asia Pacific and Latin America, which grew 10% and 31% respectively.
Which was partially offset by a 6% decline in Europe .
We began ramping our U.S. bound camera production in June in Guadalajara, Mexico.
To support sales beginning in Q3.
We expect most of our U.S. bound camera to be in production in Mexico in the second half of 2019.
As stated previously our decision to move most of our U.S. found production to Mexico support our goal to mitigate the possible impact of tariffs.
As well as recognized some cost savings and efficiencies in our supply chain.
Turning to guidance.
We are increasing guidance for the full year 2019.
I will give you more color on the second half of the here.
Our business outlook is improving from the previous quarter.
Product sell through was strong in Q2 and it continues to be on track in July .
We are further encouraged on the second half outlook given positive feedback from both channel and retail partners on our fall product lineup.
And we expect a mix of camera terrain skewed to the high end.
And as a result, we continue to expect this piece to be about $280 per camera for the year.
We expect to continue to grow our plus subscription service in 2019, two enhancing our offering international expansion and increased marketing.
Our full year expectation based on the above its revenue to grow between 9% to 12% or 1.25.
The 1.28 billion an improvement over our prior guidance of 7% to 10% growth.
Margins to be 36.5%, plus or minus 50 basis points.
Operating expenses to be approximately $390 million.
non-GAAP tax expense to be between 2 million and $2.5 million.
Other income and expense to be approximately $10 million and expense.
Fully diluted share count of approximately 147 million shares.
non-GAAP EPS in the range of 35 cents to 45 cents per share.
GAAP EPS to be approximately breakeven.
More specifically for the second half of 2019, we expect revenue to be in a range of $715 million to $746 million.
Gross margin in a range of 37.5% plus or minus 50 basis points.
Operating expenses of 202 million, plus and minus $3 million.
non-GAAP earnings of 37 cents to 49 cents per share.
And GAAP earnings of 10 cents to 30 cents per share.
To summarize we are pleased with our performance in the second quarter of 2019 with this momentum and continued execution for the full year 2019, we expect to deliver positive EBITDA of approximately $100 million.
And increased cash above $200 million.
With that operator.
We are ready to take questions.
Thank you at this time, if you do have a question placed in us by pressing star one again that will be star one for questions well hear first today from Andrew Uerkwitz with Oppenheimer.
Hey, Thanks, gentlemen for taking my questions.
It seems like in Q2 in the June quarter, silver and white did little bit better than expected.
However, it sounds like the second half you're still assuming the higher end.
Cameras will do better.
Is that something you're getting that feedback from your retail partners or is that something you're seeing in your data how should we think about that mix.
Thanks, Andrew Silver and white.
Did do better than expected in the second quarter, but it wasn't.
At the expense of seven black just to be clear. So that's a net positive to selling more of the entire line.
And.
It's it's feedback that we're getting from sell through data.
Got it.
And then if you could share.
Sounds like that your partners are pretty excited for this fall has there been any discussion on how we should think about.
Channel going forward for the current products promotions that sort of thing.
Well, obviously self strong sell through in Q2 and continued strong sell through in July .
Helps us achieve the appropriate channel inventories that.
Position us well for the introduction of new new product.
I can't comment on but the new product line.
It is but I can share that our strategy works really well for a product transition.
And our retailers are all.
So far the reaction has been universally positive on the new product line.
We learned a tremendous amount from zero seven black and what it is specifically about our products both current and.
Future that would excite consumers in the line and whereas last year.
The holiday success was really dependent on hero seven black being the star I'd say our strategy. This year is to perpetuate our flagship as the as the far away.
Runaway star, but we built more performance and excitement into our entire product line. So we think we're de risking our our 2019 Q4 strategy by having a much stronger lineup overall, where each of the skews. We believe is going to be a strong contributor.
And that can help us both be de risk the corridor.
Grow and maintain and build upon the momentum we've got that then carry that importantly into 2020 as well.
Great. Thank you I appreciate that color and if I could just ask another quick one Brian .
It may be too early to know, but how should we think about the mix between the two quarters in the second half.
Similar to last similar to 18.
Between the two quarters.
Let's just say I think the way the food have Q3 model that wouldn't be ahead of that.
Got it so I think some of the upside is we think probably more in Q4.
Got it Super helpful. Thank you gentlemen.
Well hear next from Eric would ring with Morgan Stanley .
Hey, Good afternoon, guys. I was just wondering if you could talk about the profile of some of the plus subscribers that you see signing up are they.
Protagoras offers are they your average consumer just curious on that and then I have a follow up.
We don't have.
Consumer data at that level, we do know what is driving the subscription conversion.
Of customers, we've done a lot of research to understand what features that are most interested what's come what's compelling them to sign up for a free trial in the first place what's compelling them to convert to paid subscriber and what's compelling them to stay on.
And in the case of some churn what's compelling them to to churn out and so we're getting a better understanding of the motivations of our subscribers.
And so you've seen us make consistent improvements to the service, adding value, adding benefits of course, rolling the subscription out more globally and in improving the discoverability of the service and the ease by which our customers can sign up and all of this is contributing to accelerated.
Growth for the service, which is obviously really important to us given the high margin nature of the service. We have we have more advancements plates planned for later this year and look forward to.
Hopefully reporting on a continued acceleration of the growth.
Awesome. Thanks, and then just as it relates to [noise].
HM two performance in the first half.
If I just look back at my notes I think you guys said asps would be up 8% year over year in the first half they weren't up quite that much just curious if that's more of a product of mix because you talked about.
Oh wait in silver doing okay in twoq or if there are any other factors.
Hi, I know, it's not a systemic issue in the business. It has more to do with mix with silver and whites as being a little bit stronger in the quarter and that drove most of it.
And that was really more timing between Q2 in Q3.
So we still expect to be about $280. It came up for the year.
First thing on that yes.
Great. Thank you very much.
And again for questions, let us start one at this time, we'll hear next from Nick today, Ross with Longbow Research.
Hi, guys. Thanks for taking the question congrats on the good results and outlook.
Brian if we can go to the guidance it implies some some really strong.
Lift into the ASV in the second half in order to get to that 280 for the full year specifically.
During the third quarter orders in the fourth quarter or you just mentioned that the third quarter should be closer to the street at 310 can you give us some color on how should we think about ASP versus units in the second half.
Yeah for that for the second half and we guided at the second half by the way.
As we can.
And that's a timing differences between Q3 and Q4 right on as we kind of go into the fall.
But we feel comfortable that that would be about the right level for Q3 unit growth in the second half if I take the midpoint of what we talked about would be about 3% unit growth year over year and ASP growth will be about 7%. So we're going to continue to see.
Migration to the upper end by the way that's also driving the whole model right, it's driving a revenue left.
Our margin improvement sequentially from the first half to the second half.
We're holding opex and that's driving a lot of earnings leverage in the second half.
Okay, and that's 3% for the year.
Okay got it and then 3% unit growth do you expect that to be more centered around the fourth quarter on just because I'm looking at the September quarter last year was an easy comp from a unit perspective.
Yeah, I think units will be up in both quarters.
Okay. All right that's helpful and lastly in the fourth quarter also kind of seems like a SP is going to be historically high at least that's what's implied is there something is that a function of the product that you guys are launching I think Nick you mentioned theres a potential for maybe or even ahead of a hero seven black tea or probably a camera for 99.
Or is just the fact that you're probably going to refresh the fusion.
[noise] multiple products in our road map are going to contribute to this.
Okay.
Got it.
And are you guys sharing how much an absolute values the sales to gopro dotcom.
We didn't we were above 10% in the first quarter and slightly under that in the second quarter.
So good growth, 55% up year over year, so solid performance and execution and on the web site.
Okay and last one from me I'm, sorry. So you mentioned sell through was about 1 million units and that was down 14% year over year I just want to make sure that that's Oh, yeah, that's correct and I would also point out that at the 300 going about price point as we mentioned in our prepared remarks, Tom was up more than 90%.
So we are with the continued execution and innovation, we're bringing to the market and the value proposition that's driving to the higher end for our consumers.
Got it thanks, good luck guys.
Thanks.
And from Wedbush Securities, we'll hear from at least.
Right.
Hi, guys. Thanks for taking the question.
I was just wondering if you could give us a little bit more color on the.
The gaps and perhaps if you can go into some detail about how.
How many dawn gopro users are on the apps, roughly and how you're going to engage them and potentially expand your addressable market that way.
The majority of users of the Quik App, our non gopro owners, which is on one hand.
An opportunity for us to get more of our Gopro users gopro owners using the quik app.
Which is why we combined the gopro app and the quick happened to one app to improve discovery, a an overall simplification of of our software experience for our customers. So we're really excited that those two apps are now combined.
And the the positive about the majority of Quik App.
Users being non gopro owners as it shows that we have the ability to.
Engage and provide a valuable content solution for consumers that don't yet own a gopro or or may never own a gopro and so it it creates the affords us the opportunity to better learn about these customers and how we can serve them through software.
And our belief is that we can.
Leverage our brand and technical capabilities to monetize them over time and it's it's.
It's interesting when you think that the ticket to admission to benefit from Gopro as a brand and as a solution providers.
Has historically started at a $199 with our hero seven white product.
And then we have our free Quik app.
And now the Gopro App, that's free that non user non gopro owners can use and so there's this big you field of opportunity between free and $199 a that we can target consumers that maybe aren't passion in enough about our tools brands and services to spend 199, but they may be interested in buying services or solutions from us that are somewhere between free and that that $199.
Hardware ticket to enter the Gopro 10.
Great. Thank you that's all for me.
Thank you.
And with no other questions I'd like to turn things back to management for closing remarks.
Thank you operator.
We feel great about the second half of the year and the up coming holiday quarter, We've got strong momentum and we're very enthusiastic about our new product line line. That's coming this fall so to our customers fans and partners around the world.
Thanks, so much for helping us achieve this position of strength and we look forward to wowing you soon.
Investors will be in New York City at the Citi Conference on September 4th and hope to see you there.
Thanks to everyone for joining todays call. This is team gopro signing off.
And again that will conclude today's conference. Thank you all for joining us.