GoPro Inc. (GPRO) Q1 2021 Earnings Call Transcript

GoPro Inc. (NASDAQ: GPRO) Q1 2021 earnings call dated May. 06, 2021

Corporate Participants:

Christopher Clark — Vice President, Corporate Communications

Nicholas Woodman — Chief Executive Officer and Chairman

Brian McGee — Executive Vice President, Chief Financial Officer, Chief Operating Officer

Analysts:

Jim Suva — Citigroup Investment Research — Analyst

Nikolay Todorov — Longbow Research — Analyst

Paul Chung — JPMorgan — Analyst

Martin Yang — Oppenheimer and Company — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to GoPro’s First Quarter 2021 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Christopher Clark, Vice President of Corporate Communications. Please go ahead, sir.

Christopher Clark — Vice President, Corporate Communications

Thank you, operator. Good afternoon, everyone. And welcome to GoPro’s first quarter earnings conference call. With me today are GoPro’s CEO, Nicholas Woodman; and CFO and COO, 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, including but not limited to uncertainty related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time and our commentary and business results and outlook is based on the information available as of today’s date.

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 on Form 10-K for the year ended December 31, 2020, which may be updated in future filings with the SEC.

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 and which is posted on our website.

In addition to the earnings press release, we have posted management commentary and slides containing detailed financial data and metrics for the first quarter in 2021. The management commentary and slides as well as the link to today’s live webcast and the replay of this conference call are posted on the GoPro Investor Relations website for your reference. Our income statement related numbers that are discussed today during the call, other than revenue, are non-GAAP, unless otherwise noted.

Now I’ll turn the call over to GoPro’s Founder and CEO, Nicholas Woodman.

Nicholas Woodman — Chief Executive Officer and Chairman

Thank you, Chris. And good afternoon, everyone. Before we get started, I’d like to encourage everybody to read the commentary we posted earlier today to the GoPro Investor Relations page on our website. In addition to providing an overview of our quarterly results and forward-looking guidance, the commentary includes meaningful color about our business. I will now share some brief remarks and then we’ll go directly into Q&A.

First, I want to congratulate our team for driving GoPro subscription business pass 1 million subscribers, an exciting milestone we achieved in April. This represents growth of 80% year-to-date and 180% year-over-year. Equally exciting is that 1 million GoPro subscribers represents approximately $50 million of high margin and recurring revenue for GoPro.

I also want to congratulate our team on growing direct-to-consumer sales at gopro.com to 40% of total revenue for the quarter, up from 33% in Q4 2020. This also helps drive margin and subscriber growth as more than 90% of camera purchases at gopro.com results in a subscription attach. This is the new GoPro. We’ve evolved from a hardware unit sales-centric business to a successful consumer direct subscription-centric business with a significant opportunity to grow margin and profitability with continued subscriber growth.

Turning to our Q1 financial performance. Revenue in the first quarter of 2021 was $204 million, an increase of 71% year-over-year. Direct-to-consumer revenue via gopro.com exceeded $80 million or 40% of revenue, representing gopro.com’s second highest quarter ever, topped only by the Q4 2020 holiday quarter.

ASPs rose to a record $366 as demand for our more premium products increased in Q1 across all geographies. This had a positive impact on gross margins and non-GAAP EPS. In Q1, GoPro generated non-GAAP EPS of $0.03. Our year-over-year non-GAAP profitability improvement was $54 million. Non-GAAP gross margin in Q1 was 39%, up from 34% in Q1 2020. As I mentioned, this is the new GoPro.

Brian and I will now take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Mr. Jim Suva with Citigroup Investment Research.

Jim Suva — Citigroup Investment Research — Analyst

Thank you. And I want to give my sincere congratulations not only to both of you but your entire teams. Just truly remarkable results and your outlook it shows what the company is evolving to. So that’s fantastic.

Let me start thinking about, you mentioned in your prepared comments, 2 million subscribers, I think, you said by the end of calendar year ’21. That’s great. The operating margin, should we think about sustaining operating margins of 50% as opposed to getting leverage out or maybe it’s — you’re putting more R&D and more enhancements to the subscriptions and that’s why we should keep it at 50%. I’m just kind of curious about that.

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. Hi, Jim. I’ll take that. As we look at this year, yeah, we’ve been running 50%. As we continue to drive subscribers at a faster rate, it’s going to outpace what we spend in operating expenses. So, that 50% is going to probably grow into about 60% as we get to 2022. So, it’s going to continue to improve as a profit driver for the company. And it clearly have an impact on margins, you saw that in Q1 39% and we’ve adjusted margin for this year. Previously, we were guiding 38% to 39% and now we’re at 39% plus or minus 100 bps. So definitely seeing an improvement in margin as a result of subscription, but also of course doing more sales direct-to-consumer as well as the higher end of our product lines, which is driving ASPs as well.

Jim Suva — Citigroup Investment Research — Analyst

Thank you. And again, my sincere congratulations to you and everybody and all of your teams

Nicholas Woodman — Chief Executive Officer and Chairman

Thanks, Jim.

Brian McGee — Executive Vice President, Chief Financial Officer, Chief Operating Officer

Yeah. Thank you for that, Jim.

Operator

Thank you. Our next question comes from Nik Todorov with Longbow Research.

Nikolay Todorov — Longbow Research — Analyst

Hey, guys. Yeah. Congrats on great results as well. A couple of questions. So, Brian, if I do some math, you guys had a very good quarter. You guided to 10%, an increase in sell through year-over-year, if my numbers are correct. I didn’t see any comments regarding you raising the full-year outlook for sell-through. I think you said that you expect your sales to grow towards the high end of your guidance range, but can you just clarify what are you expecting right now for sell-through for 2021? Thanks.

Brian McGee — Executive Vice President, Chief Financial Officer, Chief Operating Officer

Yeah. Hi, Matt. We did see — sell-through came in a little bit ahead of where we thought we would be in Q1. And so, that was a positive that helped us achieve the $204 million revenue in Q1, up 70%. And we’re guiding, I think, Q2 to 825,000 at the midpoint. So it’s positive results in seasonally where we’d expect it to be. And for the year, we’re still holding to 3.6 million units software for 2021. So that outlook hasn’t changed, although I think the mix is maybe shifting still a little bit more to the high-end. And that’s of course helping margins a bit as well.

Nikolay Todorov — Longbow Research — Analyst

Well, if I can follow-up, I think if my math is correct that implies that your second half sell-through will be down 6% to 7% year-over-year. I just wonder that looks a little bit conservative, is that how you view it? you try to under-promise over-deliver or how should we view that in that context?

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. Our view is, when we get to the second half, we’ll see. We’ve held from a sales perspective, our sales for the year with the guidance. with — we talked about 20% to 25% year-over-year growth in ’21 over ’20. We’ve said that we think we’re going to be towards the higher end of that range now, which is positive. So, from a strong sell-through, and also I think we’re going to see channel inventories come down a bit more. So, mostly [Indecipherable] in the second half, we also want to see how the world emerges with the pandemic. So — yeah, so that’s how we guided it.

Nikolay Todorov — Longbow Research — Analyst

Yeah. Quick comment on — can you talk about what you’re seeing from an inflationary standpoint and also regarding your inventory, particularly components? Do you anticipate any impacts on GoPro from rising component prices or semi-shortages or higher logistics costs?

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. Obviously we’re seeing some impact on semi that’s just kind of where the world is, right, from that perspective. But on the supply front sort, shortages, they’ve been widely reported. But we have enough supply to meet our projections. So, we feel good about that. And we’ve been in a pretty good position to manage critical components. While our key ODM supplier Jabo [Phonetic] as well as some of our other key suppliers. So, we think we’re in good shape there. I mean, it continues to move around, but we’re managing it. Our team is on it. And any kind of cost that are reflected are already reflected in our guidance for margin. So, despite that, we think margins are going to lift a bit in 2021 from where we were in February.

Nikolay Todorov — Longbow Research — Analyst

Got it. Just one question for Nick, if I can squeeze. Nick, you mentioned, if I may, in prepared remarks that you foresee a desktop version of the Quik App. Can you give us any color? I know it’s broadly a forward-looking statement, but what — should we expect a similar experience with the mobile app or are the economics similar? Any color you can give us there are appreciated.

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. We shared that we see a desktop variant of our app in the future as we want to really meet our users where they are and serve them on whatever platform they are on, be it mobile, desktop or cloud and sharing where we — our vision of our software suite of offerings how we see that in the future. I thought it was important to give investors an understanding of sort of the potential our reach of our brand and Software-as-a-Solution software users addressing their personal content needs wherever they are.

And as you can imagine, some of — the more passionate consumers who are more passionate about their photos and videos have large amounts of them stored on hard drives and on their desktops and so forth. And so, a desktop platform is a more convenient way to serve them. We’re not sharing anything in terms of timing or what the margin profile of that business would be, but I think it does underscore our opportunity to extend GoPro as a personal content solution provider for users regardless of what camera they’re using to capture their content and regardless of what platform they’re using to engage with, to manage and enjoy that content. So, it’s a pretty exciting and significant opportunity, we think, to our people in the future.

Nikolay Todorov — Longbow Research — Analyst

Got it. Thanks, guys. Good luck.

Operator

Our next question comes from Paul Chung with JPMorgan.

Paul Chung — JPMorgan — Analyst

Hi. Thanks for taking my questions. Great quarter and real good guide. So, as we think about gopro.com sales and kind of projections for 40% to 45%, you’re at that level today in Q1. I know 4Q and 3Q is probably more retail heavy but how are you getting consumers to get pushed into website? Are most customers aware that the camera plus subscription is kind of the best deal out there on your website?

Nicholas Woodman — Chief Executive Officer and Chairman

No. There is always going to be work to be done there, because it’s amazing if we could have instant alignment and awareness amongst our consumers, that’s like a marketer’s dream. But fortunately that’s impossible to do for a good reason. You’re always bringing new consumers new interest into the brain and they need to be educated. You have younger consumers who are growing up into the brand and they need to be educated. And so, the answer is no. We do not have universal awareness amongst consumers that the best value proposition is gopro.com but that’s a good thing. Because it means that there is significant amount of growth opportunity. And then, even amongst those users who — those consumers — those GoPro customers who are aware who are our existing GoPro users. They may not be at the point in their GoPro product experience lifecycle where they’re ready to upgrade and to take advantage of it. So, we certainly have a large number of consumers that are waiting in the wings to buy at gopro.com and they upgrade to the next flagship or the flagship after that or what have you. So, there is a tremendous amount of opportunity left to drive awareness and conversion at gopro.com and that’s from a marketing perspective.

And that’s before we even start talking about improving the platform capabilities of our shopping of our website to drive conversion further. I mean, as I’ve shared in the past, we were such a retail-centric and focused business for so many years that the sophistication and capabilities of gopro.com as a shopping platform kind of just suffered from a lack of investment and focus. The positive to that now is, there’s just a ton of low-hanging fruit to continue to improve the user experience, shopper experience and [Technical Issues] capabilities to drive conversion further. So, a lots to come.

Paul Chung — JPMorgan — Analyst

Got you. And then, you mentioned attach rate, 90% on the website, what are some examples where kind of people opt out and why? And then, what’s that attach rate for your retail channel as well.

Nicholas Woodman — Chief Executive Officer and Chairman

Hi. What you’re asking about is that the IQ test? What if anybody not take advantage of the GoPro [Technical Issues] save $100 on their basket purchase at gopro.com. People buy for different reasons. We have commercial customers who are buying for their businesses where a subscription doesn’t really make sense for them. Except you would think, at a minimum, you break it we replace it, no questions asked, guarantee would be a benefit to everybody. But whether you’re a fire station or you’re buying it for your commercial business or other purpose, there are corner cases where the subscription doesn’t make sense.

Also, we’re aware that some people who are buying its guests don’t buy it with a subscription because we don’t currently have the ability to transfer a subscription to somebody as a gift. That’s something that we’re working on so that we can capitalize on getting 100% of gift givers to buy it because why would you want to save $100 on your basket purchase by buying that situation and giving it to somebody.

So there is a lot of opportunity left there. And that will be rolling out throughout the rest of this year and on because the opportunity is just you can never get on top of all of it.

Brian McGee — Executive Vice President, Chief Financial Officer, Chief Operating Officer

[Speech Overlap] Sorry, you asked about retail. So, we’re about 90-plus-percent attach on gopro.com with the subscription. And it’s actually improving in retail, it’s kind of in the 6% — call it, 6% to 10% range. It looks like it’s moving up 8% to 12% as more people become aware of the offering and the benefit. So, we’re starting to see improvement even on the retail side, which is good.

Paul Chung — JPMorgan — Analyst

Okay. And then, as we think about ASPs in 1Q to add a record. Where can we see those ASPs go kind of beyond fiscal year ’21, you had mentioned the 8% to 12% increase, but you layer in more sales, more accessories and then do you see some more room to maybe raise prices for the next flagship from this time around.

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. I don’t want to get into pricing per se, but I think just given that we continue to sell more at the high end, our accessory attach particularly on subscribers from gopro.com are substantially higher on purchase that are coming from retail as far as we can measure it. And so — and then, the subscription of course add to the numerator. And so, yeah, I think ASPs continue to push forward definitely in ’21 if we give that range of 8% 12%, all right and then it will increase in ’22 as well.

Paul Chung — JPMorgan — Analyst

Great, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Martin Yang with Oppenheimer and Company.

Martin Yang — Oppenheimer and Company — Analyst

Hi. Good afternoon, Nick and Brian. Thanks for taking my question. And so, is there anything you can share on the user engagement for your GoPro app and how many active users are there and whether or not there’s any insight you could derive from that group?

Nicholas Woodman — Chief Executive Officer and Chairman

Sure. We’re not going to be sharing any specifics of that on this call. But what I can say is, yes, there is a lot of insight to be derived from the growth and our team is doing a great job of capturing user behavior and also user outreach research to get their direct feedback to the new and improved Quik App experience that we launched at the end of Q1. And the team is learning a ton. We put out a new release of the app every two weeks. So we’re rapidly responding to what our users are telling us. And we’re dedicated to providing them the fastest evolving and best software experience that we can. That’s exciting, because this is a new, as I mentioned on the top of the call, this is a new GoPro. And it doesn’t just relate to our business model and ability to generate more profit out of our world-class brand and products. This is actually the new GoPro because we’re much better at responding in developing towards what our customers are asking for as a more capable software company. So, we’re really happy with what we’re seeing.

And even before the update the Quik App, the previous GoPro app is 4.5% or better stars in the App Stores. And so, we’ve been really happy with where we’ve gotten that active. But of course, we think we’ve taken it to another level with the new version of the Quik App. And so, you should please pay attention to our updates as they’re going to be rolling off of the line here every two weeks and it should be an exciting time.

Martin Yang — Oppenheimer and Company — Analyst

Thanks. I think, in the past, there are references on, for instance, certain geography, we have a more significant uptick in user engagement interactivity, which implies that maybe certain regions have more opening up in the COVID environment. So, are the kind of user insight you get from the apps, are there any more used for signals for you or inputs for you to do business planning and even product designs, hardware product designs.

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah, it does help influence. I mean, we also learn how important travel is for our business because we can understand — I mean, all the data is anonymous, of course. But we can understand where a camera is used around the world. They have GPS turned on and also where a camera was — like set up and initially paired with the app. And that helps us understand directionally where an owner lives in what region and how much they actually use their GoPro when they’re out of their home region and their traveling. And that really helped us learn how important the travel market was for growing our business.

And so, we adjusted our marketing strategy years ago to court the traveler in advance of when they’re doing their planning stages for their trip and so forth because we knew that that’s a target-rich environment for us converting consumers perspective. And it also tells us now that we’re doing remarkably well as a business, given that travel is all but turned off in so much of the world. And so that’s really encouraging as we look to the future of GoPro and growth opportunities as the world hopefully begins to recover from the pandemic in earnest as more people get vaccinated and as more countries open back up for travel and as people feel safe again.

Without a doubt, our data indicates that this is a real growth opportunity for us, but terrific job all GoPro’s employees for putting us in such a good position to succeed as a business, even one of our major markets is essentially shut down. That’s an example of the type of data that we get from camera usage and from our app usage that helps inform us in terms of making better business decisions.

Martin Yang — Oppenheimer and Company — Analyst

No, that’s great. My next question is on the accessory opportunities. How do you think about if there is any potential innovation you could do regarding the camera accessories. And is there more accessories with a unique ability is coming that may allow users to perhaps customize from camera to a more specific use cases outside of sports and travel, streaming some of the following [Phonetic] video choices. could those be opportunities for you?

Nicholas Woodman — Chief Executive Officer and Chairman

They are. We don’t call our cameras the world’s most versatile cameras for nothing. And one of the ways that we make it easier for our customers to use their camera in more personal way is with the Mountain accessories that we produce. It helps consumers connect the dots as to the capabilities of their GoPro and how it might serve them. And so, our accessories business is doing quite well. It’s a really important part of our business. It’s one of our key differentiators. And we have noticed that there is a demand for higher end accessories from us that offer added value, added functionality and consumers are clearly willing to pay for that additional performance when we produce such a product.

So, you will see continued new accessories from us at the higher end as we seek to accomplish more for our end users and as they keep telling us that their purchasing behavior that they’re interested in buying that product from us. It’s obviously a win-win for everyone.

Martin Yang — Oppenheimer and Company — Analyst

In our high end accessories of different margin profiles versus the camera?

Nicholas Woodman — Chief Executive Officer and Chairman

Brian, you want to take that one?

Brian McGee — Executive Vice President, Chief Financial Officer, Chief Operating Officer

Yeah, I’ve got that, Martin. Yeah, accessories in general are placed slightly better than corporate average on margin, kind of an aggregate. So it’s accretive to margin.

Martin Yang — Oppenheimer and Company — Analyst

Got it. One more question on that and let me jump back to the queue. Brian, when you think about maybe the margin sensitivity to every 100 million subscription revenues, what’s the sensitivity in to gross margins and how should we think about being ongoing trajectory of having a higher percentage of subscription revenues and what does that do to your gross margins longer term?

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. And obviously helps it. But you have to put it in relative context of however anything else in the business is moving, right. So — but it definitely helps it because we’re running 70 to 80 points of profit margin on subscription and about 50 points or so that I talked about earlier and that’s going to improve over time on operating profit. So it’s definitely a contributor. It’s one of our fastest growing product category that is also helping to contribute the margins. And so, when I talked about margin listening up a bit in the second half, for example, of ’21, we’d expect margins in 39% to 40% range. And part of that’s due to obviously more camera sales but also subscription is definitely helping cost out [Phonetic].

Martin Yang — Oppenheimer and Company — Analyst

Got it. Thank you very much.

Operator

Thank you. Ladies and gentlemen, at this time we have no further questioners in the queue. So I will turn it back to Mr. Goodman for closing comments.

Nicholas Woodman — Chief Executive Officer and Chairman

Thank you, operator. Now, this is an exciting time for GoPro. And as you can hear, we’re energized by the opportunity ahead. To all of GoPro’s employees and partners around the world, thank you for making the magic happen. And thank you everyone for joining today’s call. We appreciate your time and support very much. This is team GoPro signing off.

Operator

[Operator Closing Remarks]