GoPro, Inc. (GPRO) Management Presents at Wells Fargo 2020 Virtual TMT Summit Conference (Transcript)
GoPro, Inc. (NASDAQ:GPRO) Wells Fargo 2020 Virtual TMT Summit Conference Transcript December 1, 2020 5:20 PM ET
Executives
Nick Woodman - Chief Executive Officer
Brian McGee - Chief Financial Officer
Analysts
Bryan Briggs - Wells Fargo
Bryan Briggs
Good afternoon, everybody, and welcome again back to the Wells Fargo TMT Summit. We’re happy to have with us today GoPro, Nick Woodman, CEO; and Brian McGee, CFO. We were limited on time. So I want to really dive right into it. Guys, thanks for being with us here today.
Nick Woodman
Thanks for having us.
Brian McGee
Thank you.
Brian McGee
And Bryan, why don’t I just do a quick Safe Harbor.
Bryan Briggs
Yeah.
Brian McGee
There may be forward-looking information that we may talk about today on this chat and it’s only valid for today and not in the future. And after that, please go see our 10-Q and 10-K and see our risk factors, they are on file with the Securities and Exchange Commission or on GoPro’s IR website. And with that, let’s kick it off.
Bryan Briggs
And I was just telling, Nick, as we started, this is not a green screen. This is I live in a museum and this carried is right behind me.
Nick Woodman
It’s like -- you’re like the character in the night -- A Night at the Museum.
Question-and-Answer Session
Q - Bryan Briggs
Yeah. That’s right. Guys, I want to start out at a high level and ask about how 2020 is unfolded for you guys. What are the headwinds? What are the tailwinds? Any silver linings there and maybe -- yeah, maybe let’s just start there and then I wanted to talk more about COVID with respect to, how it’s impacting the business and consumer dynamics, but right there at the high level?
Nick Woodman
Well, in one of life’s great ironies and let’s just start by saying, what a messed up year for everyone. And we had -- before COVID we were looking at a very strong year for GoPro. It came off of a strong 2019. Have a terrific product lineup. We’ve got so many aspects of our business and order, and we’re really looking forward to a smooth year and then COVID hit.
And the irony is that COVID proved a lot -- ended up serving as a catalyst for a number of things that we wanted to do at GoPro. But we were going to take more of a three-year timeline to do them and that is namely going more consumer direct. COVID just made that go from three months -- to three-year timeline to a three months timeline.
And so it’s really ironic that there is a silver lining, certainly, for GoPro, there’s a silver lining to COVID. And then we were forced to explore a new approach to the business in a much quicker timeline that ultimately has led to a far more efficient and profitable business.
We had to take a lot of cost out of the business when the initial impact of COVID hit in the spring. As with many consumer product companies, we took a big hit when consumers or people went into lockdown and fear levels were very high.
But then as summertime came around, we saw a real spike in our business and that’s because consumers started to go outdoors more. And while they weren’t jumping on airplanes to travel and so forth, they were exploring more of their home area, their home state. They were getting in their cars and going camping more.
And we saw big spikes in other outdoor brands sales as well. We are selling tents, backpacks, paddle boards, surfboards, you name it. It’s very clear that consumers were getting active again and droves and that benefited a number of businesses including GoPro and that that demand and momentum has not stopped.
And it set us up really well for the rest of the year with our more direct strategy. It set us up really well for the launch of HERO9 Black, which was a phenomenal launch. We’re having a great Q4. The kudos to our team for getting so much work done with our direct-to-sales capabilities so that we could take advantage of this more e-commerce center consumer behavior. It’s really benefiting us this holiday quarter and it sets us up extraordinarily well for the future.
We were able to take a ton of OpEx out of the business by being more consumer direct, and frankly, put more value into our offering for consumers at gopro.com than ever before with our GoPro subscription. And consumers have taken note and our direct sales have really taken off.
And retail is still really important to us and they sell a lot of our middle and entry level products. So it’s a nice balance there. But by and large, the way that we’re approaching the business is much more efficient. It’s much more focused on out -- super serving our end user.
And the net result is higher margin, lower operating costs, better inventory management, better cash management, cash generation, and ultimately, a more profitable GoPro. So…
Bryan Briggs
Yeah.
Nick Woodman
… net net, we don’t wish the pandemic on anyone. But it’s ironically been a good thing for our business and looking forward to 2021.
Bryan Briggs
Yeah. And maybe you might answer this was like, hey, I just told you what happened. But maybe there’s a wrinkle there, I want to parse out if it’s there. Are you seeing any differentiation in terms of dynamics on a regional basis, either domestically or internationally are -- is once bringing back faster? Are people traveling more U.S. versus international? There may be no, it’s what I just told you is the same across the globe?
Brian McGee
Nick, you want me to start on that? I want to…
Nick Woodman
Yeah.
Brian McGee
…if you can jump in. I think arguably the U.S. came back a little bit quicker followed by Asia and then EMEA. But we saw that in Q2, where we had very strong sell-through, Q3 our sell-through improved, we initially talked about 900,000 units selling through, we did 955,000, up I think, 11% year-over-year.
So we’re seeing all regions with growth and we saw that in Q3 as we reduced our channel inventories that enabled distributors and retailers to be able to buy more product and we’re still seeing good sell-through in Q4. So we’ll see how the rest of it goes. But so far, it’s global and that’s really encouraging to see.
Nick Woodman
Yeah.
Bryan Briggs
Thanks. Thanks, Brian. One of the things we’ve been talking about, as we’ve metered through this pandemic and it -- I think it actually feeds into your move to direct is, we’re seeing a pull-forward in demand, right? I think in yesteryear you used to wait until maybe it’s almost a game, I can order something on December 22nd and it is going to show up on time, right? And we’ve seen promotional work earlier in the season, maybe the good uncle, order stuff early, make sure it’s here. So there’s a demand pull-forward is my thesis. And I’m wondering if you’re seeing that, what you’re seeing so far in the first couple days of the holiday season or maybe running into the holiday season, are you seeing a demand pull-forward and is that starting to reinvigorate your direct-to-consumer business?
Nick Woodman
Yeah. There has been a pull-forward this year. Although, the Black Friday, Cyber Monday time period is still a massive event in consumer spending. So while we have seen a strong results this fourth quarter and we’ve seen many brands, GoPro included, and retailers be more active in quoting consumers earlier in the fourth quarter. That’s definitely been something we’ve seen across the Board and we were well prepared for in our plans and so we’re pretty happy with how it’s gone.
Make no mistake, the Black Friday, Cyber Monday period is still like a ring of the bell for a large percentage of consumers to say, okay, let’s get out our wallets and start shopping. Even though a lot of the promotions were available from a lot of the brands earlier, at least from our perspective, we’re still seeing a big jump there. So any concern that consumers weren’t going to show up for Black Friday, Cyber Monday, I think, it’s -- from our perspective that myth has been dispelled.
Bryan Briggs
Yeah. Along those same lines, Nick, you talked about the push to direct-to-consumer, it dovetails in with a theme that we talked about and that’s in these macro dislocations, underlying secular trends get exacerbated. It’s a one way ratchet. They don’t snap back once the coast is clear. You’ve fundamentally change consumer behavior. So I want to know if that’s kind of the thesis of why we leaned into direct-to-consumer. What was the decision process behind that maybe? And what kind of -- you talked about the traction you’re experiencing, but do you concur with that? Yeah, this isn’t going to snap back. We’re -- it’s a one way ratchet in terms of our direct-to-consumer push and where can that be at maturity -- where do you want it to be at maturity as a percentage of the business?
Nick Woodman
Well, I can’t speak for other businesses and other brands. There are certain dynamics to their own customer and their own business that’ll determine whether they stay more D2C or more e-commerce driven or whether consumers want to go into a store and buy it or not.
But I can speak for GoPros and we got comfortable with a shift to being more direct-to-consumer because we had good data as to consumers propensity to buy directly from gopro.com. We’ve been growing our direct business year-over-year for quite some time. There have been periods of time where certain regions were low on inventory at retail and we saw enormous spikes in our dot-com business, despite not increasing ad spends in those regions at all.
So that was just an organic shift of sell-through from a retail channel to dot-com, just due to inventory availability, that was an indicator that, okay, well, consumers really will swim to where the product is and buy direct from gopro.com, if that’s the place to get it. And we did other tests as well, that confirmed that that wasn’t just a regional thing, that’s a global thing. So that was good to see.
And we’ve also made a fundamental shift in the value proposition at gopro.com. It’s not just, hey, HERO8 Black or flagship is available here. It’s also [Technical Difficulty] and if you are a GoPro subscriber, you can get it for $299 instead of $349; I am sorry, $449. So if you want to become a subscriber right now to get that deal, it’s $50 bucks. So your total basket price is $349 and you saved $100 over the $449 purchase price.
And with that -- with the GoPro subscription, there’s so much value that that’s a -- we’ve really shifted the value proposition to gopro.com. That’s really driving our direct business. It’s helping us grow our subscription business.
And we’re only going to offer more value to consumers over time through the GoPro subscription to help make it even more attractive, improve retention even further. It’s already really good. We’re really happy with it, but that’s something we’re going to continue to build upon. And so direct-to-consumer is an ongoing key initiative for GoPro as our subscription business. They go hand in hand.
Bryan Briggs
Yeah. Yeah. I will -- actually, I’ll jump into that right now. Because you noted you’ve made it a big push to go into subscription. Can you talk a little bit how that ties into the model, you’ve done that? How large of an opportunity is that represent, because you’re on track to hit what 600,000 to 700,000 by year end, is that this time next year? Are we going to be talking about 1 million, 2 million and what is that -- what does that mean for the financial model, Brian, from your perspective?
Brian McGee
Yeah. Bryan, good question. We talked about actually exiting 2020 with over 700,000 subscribers. We’ve already pushed through in November 600,000. We’re very comfortable with the 700,000 guidance for that we gave on our earnings call. So that’s actually good to see on gopro.com.
We also talked about on our -- on the conference call, we have about 85% of what’s being bought on gopro.com, whether it’s HERO9 or HERO8, 85% comes with the subscription, which is very high and we see very high retention rate particularly on annual. So it gives us some really good data and information plus the value proposition we’re offering that pushes us into 2021.
On our earnings call, we also talked about trying to reach up to 2 million subscribers in 2021. And given the growth in direct-to-consumer and the attach rate, we feel good about that number. And just to put it in perspective, at 2 million subscribers exiting ‘21, that’s $100 million of annual recurring revenue going into ‘22, before we even add any new subscribers. And to put it in financial perspective, that’s at least 50% operating profit for the business. So very accretive to the bottomline and earnings per share, as well as cash flow.
I think the other point I’ll make on that the direct-to-consumer push, it’s enabled us to streamline our inventory, reduce channel inventories this year in retail. We’re going to reduce some about 100,000 units. That’s a sizable number exiting with about 600,000 units in retail going into ‘21. So we’re trying to set up ‘21 to be a winning year.
And cash generation from this model has improved dramatically. You saw that in Q3, where we generated nearly $100 million of operating cash flow and we forecasted $225 million of cash in addition. So that’s another $80 million or so free cash flow and Q4 notwithstanding to convert, so the convert would be on top of that. So I think this model puts us in a really good position from an operating model and cash perspective, as we head into ‘21.
Bryan Briggs
Got it. Drilling down on this subscription product, we’ve been talking about in the push subscriptions. You’ve talked recently about launching a newer subscription based experience. Can you give us any further color on that and how that shaping up? How that pretends to impact the financial model as well, to Nick and Brian, both you guys?
Nick Woodman
Sure. Yeah. What we shared is that in December, later this month, we’re going to launch a new updated version of the GoPro app. That’s -- we will have a new solution set, a new experience that will address some content-related consumer challenges that we think we’re uniquely positioned to solve on behalf of the consumer.
The GoPro camera owner will get that app experience later this month and then we’ll introduce it to smartphone users in Q1 via a subscription. It -- as it turns out, we were working on the challenges that we were -- the problems that we were solving for our GoPro users turned out to be problems that everybody with a smartphone faces.
And it became clear to us that we should make the GoPro app available to people that don’t even own a GoPro and serve them through the app. It’s through software. And it’s a terrific opportunity for us to address a much larger TAM when you consider the number of people using smartphones compared to using GoPros.
And a really strategic aspect of this is that we’re already building this app for GoPro users. So it’s something of a free option to extend its functionality to serve smartphone users. It doesn’t -- we don’t spend any additional OpEx to do so. It’s a really unique opportunity to target a much larger TAM at very little additional spend and leverage our brand, our social reach, our marketing and the power and the glory of GoPro’s marketing capabilities to drive awareness of this new app experience and serve smartphone users in a new way, and hopefully, make our brand and product suite relevant to them in an entirely new way as well.
It will be a new subscription revenue stream separate from the GoPro subscription. The GoPro subscription is really targeted towards GoPro camera owners. It’s very hardware centric and a GoPro subscriber will get all the benefits of this new app experience, so that -- this will be a new feature for GoPro subscribers.
But for smartphone users that don’t own a GoPro and would have no need for the full GoPro subscription, there will be a different subscription tier for them that will allow them access to just the app and that will begin in the first quarter of 2021.
Bryan Briggs
Got it. And this just came in real time, so it’s -- can you ask them when do they expect to solve, make progress in the ever present kind of pain of getting content from the camera into something that’s watchable for your average person? I show my 15-year-old can put together a great edit, but if I’m out riding with my buddies and want to film and send around something cool. It’s a tall order. So I guess that question is editing on the fly?
Nick Woodman
Well, today, I would say to that, GoPro user today, the GoPro app does a pretty darn commendable job with that. So if you copy your footage from your GoPro over to the GoPro app.
The GoPro app will take that cluster of footage from any one day, for example, and auto edit it into a video for you. And if you don’t like the audio edit or there’s some aspect of the auto edit you don’t like you can manually tune it, manually edit it.
But for a lot of people, they’re very happy with what the initial auto edit is done. So, you go from shoot to having a shoot to transfer to auto edit, very conveniently, however, where we’re going with the new app experience that’s coming out in December, it takes that to the next level.
Bryan Briggs
Okay.
Nick Woodman
And I can’t go into any more detail than that. But I would say to that user stay tuned, check your email for updates from GoPro, and download and try the new app, I think, you’re going to be really excited by it.
Bryan Briggs
Awesome. Thanks guys. I wanted to circle back to something you mentioned before Nick and that’s you’ve introduced some new product categories over the past year lighting, lifestyle gear, the Max 360 camera and maybe more importantly the HERO9. So can you -- how do those products fit into your existing kind of portfolio where you see that going forward, ultimately how does those contribute to the revenue and the ASP trajectory of the portfolio? And then there’s got to be some great cross-sell opportunity in there too. So a bunch to unpack there but if you guys could fill for us?
Nick Woodman
Well, I’ve shared before that the new accessories and lifestyle goods that we’ve been coming out with them. I am wearing one of them right now. This handsome athletic sweatshirt that I’m wearing is something that we sell at gopro.com.
Bryan Briggs
Yeah.
Nick Woodman
And these new products, I would look at them largely as value adds for GoPro subscribers, primarily. And secondarily, they’re available for purchase at a terrific price to anybody that’s a fan of the brand and wants a cool sweatshirt, hat, bag, light. I mean, our bag line is incredible. I encourage everybody to take a look.
But for a GoPro subscriber they’re getting 30% to 50% off of these goods. So the pricing is just phenomenal. And why that matters to subscription is it adds a lot of value to the subscription and it makes it very easy for a subscriber to recoup their cost of subscription with just the purchase of $100 travel duffel bag for 30% off.
They’ve already recouped $35 of the $50 they spent on the subscription. You buy one more accessory for your GoPro, you break even, you buy another GoPro, save $100, now you’re $100 up. That’s a goal of this subscription is to make it really easy for people to recoup their -- the cost of their annual subscription. And by building out this catalog of high value goods, it helps us to appeal to people in ways other than just trying to sell them another camera or trying to sell them a mount or accessories specifically for their camera.
So strategically important in that regard and it’s going well, the products are being really well received by subscribers and non-subscribers. And we shared a previous investor conference, we were in that the -- these accessories and these lifestyle goods and coupled with the subscription and the discounts are really helping to drive the lifetime value of our customers and their average order values are much higher, their lifetime value is much higher than a non-subscriber.
So every indication that we have is the strategy is working and the long game here is to make the GoPro subscription even more central to our business, more central to our customer experience, loaded up with more value and we’re seeing the consumer return more value to GoPro, and ultimately, to our investors as a thank you in return.
Bryan Briggs
Got it. And…
Brian McGee
And Bryan just to add on top of that, because you asked about ASP, yeah, this year every quarter our ASP’s average price per camera on an aggregate basis is over $300, at least $300 or better. And that’s a sizable increase from where we’ve been historically. You’ll see in 2019 that we definitely shifted the business much higher to our ASP’s above $300, that’s continued into 2020, we think that continues into 2021 with both camera, subscription and more of the lifestyle offering that all builds on driving better ASP’s and margins.
Bryan Briggs
Awesome. Thanks guys. That -- you hit on everything I asked today. The -- I wanted to talk about the HERO9. How’s that been received? How is it stacked up against? What’s available in the category and is it driving incremental market share for you, give us your opinion on that?
Nick Woodman
Oh man. How much time do you have, now you’re talking about a subject I’m really excited about it. HERO9 is crushing it. I mean this product is -- our job is to reinvent Wow.
Bryan Briggs
Yeah.
Nick Woodman
What is Wow every year and every year our engineering team, our product development team nailed it. And in some years it is more obvious than others and with HERO9 Black they crushed it. We -- and part of the reason that they crushed it and why consumers are responding so positively to it and critics are responding so positively to it, is because we are -- we just had that many more years that much more time of consumer feedback that we’ve been able to build into the product.
Consumer research is central to our product belt development process. It has been for the last three years, three and a half years and you really saw the benefits of that first show with HERO7 Black. That was the first really consumer influenced camera that we made. Then we made it even better with HERO8 and with HERO9 we’re just -- we’ve really found our stride 23 megapixel sensor.
There was a big update, 30% longer battery life was something that was really important to our customers and then to introduce 5K video has been phenomenal. And people are wondering what the relevance of 5K is in their life.
Let me put it to you this way, a single video still from -- still image from 5K video is the equivalent of a 14.7 megapixel photo. So when you’re shooting 5K video at 30 frames a second, you’re basically shooting 15 megapixel photos at 30 frames a second. So then your ability to not only get a great video, but to pull out effectively a 15 megapixel photo from that video means that it’s so easy to get incredible photos of your adventures, misadventures, your kids, whatnot. It turns us all into pros, because shooting photos can timing is can be challenging. But shooting video you can always find a frame in there that looks amazing.
And then our Max Lens Mod this right here is it gives you the Max SuperView and Max HyperSmooth performance of our Max camera as an optional $99 accessory that just bayonets onto your HERO9 Black to make this the most stabilized camera on planet Earth. I can rotate this 360 degrees and the video will remain horizon locked and you can’t even tell that the camera moved.
The other day I attached this camera to a water ski rope, when my eight-year-old son was learning how to water ski. And this thing is bouncing around and doing 360s around the rope and you think the videos going to look like garbage. And the resulting content was rock solid, unbelievable and it -- it’s just a -- it’s a magical camera.
So when people wonder, how is it that GoPro stays a market leader? How is it that demand for GoPro stays so high even through pandemics? How is it that this company is so durable and enduring? It’s one we built a phenomenal brand, but the underpinning reality there and the energy source for that is our product teams keep producing magic like this that has built us the reputation that we have and continues to drive the demand that we see.
So that’s the shortest answer I can give for how HERO9 Black is contributing to the business and I just want to thank all of our product development and engineering teams for continuing to bring out the magic every year.
Bryan Briggs
Awesome. Well, Nick and Brian, I’ll let you drop the mic there. We’re out of time. These are short sessions. I’ve got to go bridle up the horses and get out of here. So thank you very much guys.
Nick Woodman
Good for GoPro on that -- the footage…
Bryan Briggs
Yeah.
Nick Woodman
…look great.
Bryan Briggs
Yeah. We’ll do. Great to hear from you…
Brian McGee
Thanks, Bryan.
Bryan Briggs
… and thanks for your insights, guys.
Nick Woodman
Thanks so much for having us.
Brian McGee
Cheers.
