GoPro Inc  (NASDAQ: GPRO) Q1 2020 Earnings Call Transcript

GoPro Inc  (GPRO) Q1 2020 earnings call dated May 07, 2020

Corporate Participants:

Christopher Clark — Vice President of Corporate Communications

Nicholas Woodman — Chief Executive Officer and Chairman

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

Analysts:

Mike Cadiz — Citi — Analyst

Erik Woodring — Morgan Stanley — Analyst

Andrew Uerkwitz — Oppenheimer — Analyst

Presentation:

Operator

Good day, and welcome to GoPro’s First Quarter 2020 Earnings Results Conference Call. [Operator Instructions]

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

Christopher Clark — Vice President of Corporate Communications

Thanks, operator. Good afternoon, everyone and welcome to GoPro’s first quarter 2020 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 the assumption that the COVID-19 pandemic does not materially worsen. 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 31, 2019, which is on file with the Securities and Exchange Commission and in other reports we may file from time to time 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.

In addition to the earnings press release, we have posted management commentary and slides containing detailed financial data and metrics for the first quarter 2020. These management commentary and slides, as well as a link to today’s live webcast and a replay of this conference call are posted on the GoPro Investor Relations website for your reference. All income statement related numbers that are discussed 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

Thanks, Chris and good afternoon, everyone. Due to the high volume of companies reporting earnings today, we’ve chosen to post management commentary for the first quarter of 2020 to the GoPro, Investor Relations page on our website. I’ll now give brief remarks and then we’ll go directly to Q&A. Brian’s financial overview is included in our posted remarks. As we shared in the management commentary, which I encourage all to read. GoPro is adapting to these challenging times with a strategic realignment to transition to a more efficient and profitable direct to consumer business.

It is important to point out that while our business slowed due to COVID-19, we’re seeing a positive rebound in demand and people have continued to buy GoPro cameras in significant numbers throughout the pandemic, as our written commentary outlined in detail. We believe the decisive action we’ve taken to lower operating expenses and accelerate our shift to a more consumer direct model capitalizes on this continued demand in an efficient manner. Giving GoPro a much improved cash generating business model that sets us up to succeed in the near term with the potential to be more profitable than ever in the long term.

Assuming that many of you on the call have already read our written commentary. We’ll now move on to Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today comes from Jim Suva with Citi.

Mike Cadiz — Citi — Analyst

Good afternoon, Nick and Brian. This is Mike Cadiz for Jim Suva at Citi. So, just one question for me. Though we appreciated that ASPs will continue to move in an upward trajectory. I question to what degree do you think consumers will still continue to spend in excess of $300 for product, for a GoPro product when unemployment data that we’re seeing is increasingly getting so bad? Thank you.

Nicholas Woodman — Chief Executive Officer and Chairman

Thanks for your question. Well, currently we’re seeing the trends to the high end continue. So that’s a good sign. And given that historically a GoPro purchase has been a mission-critical or passion driven purchase for consumers, which has led the purchase to being highly researched purchase. We know through our consumer research that consumers spend quite a bit of time deciding to buy a GoPro deciding which model to buy and they more often — than not opt for the high-end. And we know through our research that that’s — that their willingness to buy the best and buy the highest price model is related directly to their purpose intent for buying in the first place. So that’s a long way of saying that GoPro is not a sad purchase. It’s a purpose driven purchase and we see those trends continuing.

As it relates to the economy and people’s purchasing power diminishing, that’s a very good question. I think that we would likely see people perhaps buying in fewer numbers, but still buying towards the high end because of what the product does for them and that the performance at the high end is very, I think, meaningful to our customers that’s why they buy in the first place. So we’re confident about our ability to continue to sell at the high end. I think the outright total volume of sales is what would be in question and that’s even more of a reason for our or that’s one of the main reasons for our shift to a more direct business is that we can be profitable with a much lower threshold with total number of units needed to be sold to achieve that profitability.

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

Yeah. And Mike, let me maybe add — hey, Mike, if you can hear me. Let me add a little color to what Nick said, I mean the trends are clear you go back to 2018 and 42% of what we sell-through as mix was greater than 300 that moved to 70% in ’19 and we were just at 90%. So we are seeing a resurgence there and stronger demand at the high end particularly on seven [Phonetic] but also on Max, we’ve seen seven [Phonetic] come up as well so that’s important. And that’s across every deal and it’s especially true on gopro.com where the mix shifts even higher. So just to add a little bit color there.

Mike Cadiz — Citi — Analyst

Okay. Cool. [Phonetic] Thank you for the color.

Operator

And our next question will come from Erik Woodring with Morgan Stanley.

Erik Woodring — Morgan Stanley — Analyst

Hey, guys. Good afternoon. Thank you for taking the questions. So there’s just a lot of moving pieces here, obviously, as we transition more to a direct to consumer business, but at the same time, you are seeing sell-through improved in that color, on recent trends, it\s very helpful. I’m just curious, if there is a way that you can frame how we should think about the revenue trajectory in ’20 and 2021? I realize there is a lot of uncertainty, but what’s the moving pieces. I just want to make sure that, I and the rest of us, who are all thinking about — how you’re thinking about the revenue trajectory? And I have a follow-up after that. Thanks.

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

Yeah. Hi, Erik. This is Brian. Let me start and maybe, Nick, can come in on top of me. We gave an opening remarks commentary. We expect sell-through to be in a range of 2.8 million to 3.2 million units in 2020, based on what we’re seeing on demand in Q2, we’re feeling confident in the 600,000 units of sell-through and we did 700,000 approximately in Q1. So we’re about halfway to that point of the whole year, so that’s encouraging.

And just on the Q2 commentary, we’ve seen increases week to week and average yield [Phonetic], as a matter of fact, China is now statistically above the year-over-year trend, Australia is about 85% and actually our gopro.com, if I compare to where we’ve been trending in the last few weeks for about 3 times to 4 times the volume on gopro.com. So we’re definitely making an impact there on the D2C progress. We mentioned we will be — gopro.com would be about 40% of our total revenue in Q2. As a matter of fact, in April, it was just over 50%. So as we get reorders from retailers as they come back to online. We expect that to drop to about 40%.

It’s also important to note, just put it in perspective, that our Q2 revenue in — on gopro.com will be very close to — slightly below, but very close to where we were in Q4 of ’19, which is a record. So we are able to scale and drive a lot of business on our to D2C platform. On that commentary, we also said that we exited 2019 with channel inventory of about 1.4 million units and we expect to get to about half of that by the end of the year. So if we’re selling at a 3 million unit volume rate or so, at the midpoint of what we expect and we take channel inventory down by let’s say half, our selling then would be less than to sell-through.

So for 2020, and as we look ahead to 2021, with channel inventories aligned correctly for the business has impacted us 60,000 to 700,000 units should demand today at 3 million unit level. We could be — have very — we would have revenue growth, because then we would sell more units in ’21 versus ’20. And in the model with operating expenses being down to $250 million and margins up in the upper 30s, which includes [Phonetic] would be a profitable company as well.

Erik Woodring — Morgan Stanley — Analyst

That was amazingly helpful. I really appreciate all that color and kind of appreciating all the comments that you put in, in the press release together. If I can ask the second question here, just — and you mentioned you see the operating model drive the gross margins in the high 30% in the second half of the year. Just curious how you think about — how that may look two to three years from now, as the majority of your business is presumably going to be on gopro.com, that you would mentioned it’s higher margin? Just maybe long-term target for gross margins. Thanks.

Nicholas Woodman — Chief Executive Officer and Chairman

Sure, no problem. Let me just start with why we think it can be in the 38 to 40 points of margin. And as we think about how we’re modeling through the business in the opening commentary, where we would provide some out-sized value to the consumers and do more obviously, on D2C and was plus, taking that into account our margins on our platform or anywhere from 5% to 10% or 12% better than they are at retail quite frankly, and through distribution.

And so that mix of shifting to more to our platform on D2C basis would add about 2 to 3 margin points on an aggregate basis. We see margins expanding into — above that, or I should say expanding on a year-over-year basis from ’20 to ’21. And actually say if there is — where have a higher amount of volume [Indecipherable] ticks overhead coverage as well as the higher run rate of direct to consumer. As I said in our opening remarks, direct to consumer was about 10% of our revenue in 2019, we expect it to be around 45% in 2020 and to increase further in 2021 would be actually the majority of our revenue. So you would see over time an expanding margin profile on a long-term model.

Erik Woodring — Morgan Stanley — Analyst

Welcome. Thank you very much.

Operator

And we’ll take our final question from Andrew Uerkwitz with Oppenheimer.

Andrew Uerkwitz — Oppenheimer — Analyst

Hey. Thanks, gentleman for taking my questions. I appreciate it. If you could read through the transcript of the remarks and you talked about the retail strategy there. Could you go to a bit more detail, I was little confused. For example, our big box retailers still getting the 300 plus cameras. What is the footprint store shrinkage look like? And then, on that stores are getting shrunk, how are those chosen, was it by sales, strategic location or it was a branding considerations. Could you just give us a little bit more color on retail? What the new retail channels going look like?

Nicholas Woodman — Chief Executive Officer and Chairman

Hi, Andrew. Yeah. In North America, our flagships will be beginning in Q4. Our flagships will be sold primarily at gopro.com possibly with some sales at some key strategic retailers for key periods. But by and large, you could expect us the GoPro flagships being available at gopro.com exclusively and we will be primarily focusing on selling our mid and entry-level products with big box retailers, which consequently their — for many of them, the majority of their business is in the mid and entry levels. So that’s not a big change for them. That’s not the case for everybody, but for most of the big box retailers that is the case. And then we’re not sharing any information on total number of doors GoPro will be available in, but as it relates the big box is important for us to be represented there with our mid and entry-level products in our accessory line which is considerable business for them.

And then specialty stores remain important to us, provided that they reopen in a — at the appropriate time and as far as decision making goes around which stores to stay there, it’s obviously related to revenue, but also to importance from location and how well those stores represent GoPro’s brand. The specialty business isn’t that big for us, but it’s, as we’ve stated it’s important for our brand to be well represented at what we call passion epicenters whether they be at the beach or at ski resorts or mountain bike resorts and the like, so at the appropriate time, we’ll be working with them again when they reopen, but obviously that’s to be seen when that will be.

Andrew Uerkwitz — Oppenheimer — Analyst

Sure. I appreciate that color, but if you can also kind of help me and this might be a dumb question. But what I think of the 300 plus product, 300 plus camera sale, I think of Hero Black and HERO Max, if that shifts been upwards of 90% would that shift actually — should we see that shift actually go down a bit because of the heavy retail focused on low and mid in or does the silver actually kind of fit into that plus 300?

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

Andrew, let me answer that. Right now and — you want to say something.

Nicholas Woodman — Chief Executive Officer and Chairman

No. You go ahead.

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

Yeah, Andrew. Today on the 90% that would be Max Hero8 Black and Max HERO7 Black, which is at $329 and right so —

Nicholas Woodman — Chief Executive Officer and Chairman

Got you. Okay. That’s helpful.

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

I think I add a little bit more color on top of what Nick said in his prior remarks. In terms of like last, in Q4 when we were at the platform that had HERO8 Black when we were able to relaunch the product. We saw outsize growth on year-over-year basis across all of our region in Europe and in the US. And so we have very good data points on-demand profiles when we’re able to have products at a pretty sole basis on gopro.com. So that gives us a very good data to align this model on the high end with our platform.

Andrew Uerkwitz — Oppenheimer — Analyst

Got it. That’s helpful.

Nicholas Woodman — Chief Executive Officer and Chairman

Yeah. And just to add a little color to your question about would having our flagship not as available at big box retailers with that shift volume skew mix to the mid and low end, but we don’t believe so because as I mentioned earlier, it’s very clear to us through our customer research that GoPro is a highly researched purchase. It’s — consumers aren’t buying GoPro when they bump to it in the store and so during that research process the majority of our customers come to gopro.com to learn more. So we believe that by having gopro.com be one of the few places where our flagship is available that won’t necessarily shift buying behavior because consumers aren’t buying out of the convenience of going into a store. They’re doing their research and then they’re buying the flagship where they can find the most value and that’s a really important part of our stress is that by, [Phonetic] primarily selling our flagships products at gopro.com. We can deliver far more value to consumers be it through bundling or with — plus subscription and other value adds. We can layer on a lot more value for the consumers’ money than we ever could at retail, which will further help drive sales of the flagship to gopro.com. And ultimately be a win for the consumer while being a win for GoPro.

Andrew Uerkwitz — Oppenheimer — Analyst

Got it. That’s super helpful. And I guess my last question and Nick you’ve answered it somewhat as far as obviously it’s a researched and purposed purchase but your sell-through for last couple of year are selling, I guess your sell-through through based on the comments you’ve made, it’s been roughly around I think rough 4 million a year or 4 million units a year. It’s been very steady despite the broader industry trends which are not steady. Your breakevens now 2 million a year. You’re shifting to this direct to consumer. I don’t expect COVID will have a lasting impact It might be a long time, but one of the lasting impact on travel and adventure. Do you think under the new structure you can achieve that 4 million run rate again at some point in the future or is there a certain loss of sales through the new business model?

Nicholas Woodman — Chief Executive Officer and Chairman

No. I mean consumer interest and passions don’t necessarily go away. They might get put on hold for a little while as you say. And people have different priorities during a pandemic. Although, we continue to see robust sell-through I think stronger sell-through of GoPro’s during this period than people would have imagined. So that’s good to see. So, no, we believe that the overall TAM for GoPro remains the same, but we’re going to be serving that TAM in a more direct fashion and as I mentioned with more value offered to consumers at the time of purchase.

So net-net, I mean there’s going to be a balloon of value for consumers that wasn’t there before and there already was significant value. So that bodes well in terms of GoPro being able to capitalize and convert on that consumer interest in demand. And as you know the more that the world returns to normal or the new normal whatever that is, the premise — the promise and the potential of GoPro remain the same for the consumer. So there’s no reason to believe that over time we can’t grow back into the types of volumes that we sold through with our older retail based go-to-market strategy.

But it’s great that the threshold, the profitability is as low as it is and the signs that we’re seeing is that we’ll — we’re going to be able to perform quite well during the pandemic and increasingly better as the impact of the pandemic lessens over time. So hopefully that answers your questions. I think it’s a matter of when not if.

Andrew Uerkwitz — Oppenheimer — Analyst

Got it. No. That’s super helpful. I appreciate it. Gentlemen, I appreciate your time and good luck.

Nicholas Woodman — Chief Executive Officer and Chairman

Thank you.

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

Thanks, Andrew.

Operator

Thank you. That does conclude the question-and-answer session. I’ll now turn the conference back over to management for any additional or closing remarks.

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

Thank you, operator.

Nicholas Woodman — Chief Executive Officer and Chairman

I’d like to close by underscoring how strongly we believe our strategy sets us up to succeed both during and after this pandemic. We can deliver significantly more value to consumers as a more direct company, which we believe will translate into expanded value for investors as well. I want to thank all of GoPro’s employees around the world for their resilience during these difficult times. You’ve all come together and maintained an exceptional level of execution, while keeping yourselves and those close to you safe. Your dedication and passion for GoPro gives me great confidence in our potential going forward. Thank you, everyone. This is team GoPro signing off.

Operator

[Operator Closing Remarks]