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GoPro, Inc. (GPRO)

Q2 2017 Earnings Call· Thu, Aug 3, 2017

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Transcript

Operator

Operator

Good day, everyone, and welcome to the GoPro Second Quarter 2017 Results Conference. Just a reminder, that today's call is being recorded. And now it's my pleasure to turn the conference over to Jeff Brown, Vice President of Communications. Please go ahead, sir.

George Brown - GoPro, Inc.

Management

Thanks, operator. Good afternoon, everyone, and welcome to GoPro's second quarter 2017 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; COO, CJ Prober; 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 any of 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, 2016, which is on file with the Securities and Exchange Commission and other reports that 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 matter 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 2017. These slides and a link to the webcast for today's earnings conference call are posted on the Events & Presentations page of the GoPro Investor Relations website for your reference. A link to the live webcast today and a replay of today's conference call is posted on the Events & Presentations page of the GoPro Investor Relations website 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 GoPro's CEO, Nicholas Woodman. Nick?

Nicholas Woodman - GoPro, Inc.

Management

Good afternoon. Our second quarter performance capped a strong first half of the year for GoPro, where brand engagement, consumer demand, and sell-through of our products were better than expected. Our second quarter was EBITDA-positive and our revenue grew year-over-year by 34% to $297 million. Inventory was down 39% in the second quarter, positioning us well for new product releases later this year. For the third consecutive quarter, our premium priced camera, HERO5 Black, was the best-selling camera in the United States, and GoPro's drone, Karma, is the nation's number two selling drone brand. Our second quarter gross margin was 36%, a sequential improvement, buoyed by the margin strength of HERO5 Black and HERO5 Session. We expect margins to continue to improve throughout 2017 with the introduction of new products. And we remain on track to reduce our annual operating expenses by 30% year-over-year to less than $495 million. To summarize, we're seeing strength across our business, thanks to strong demand and improved focus and execution. We continue to track toward our goal of low double-digit revenue growth and full year non-GAAP profitability in 2017. While it's encouraging to see improved momentum in our business, we're particularly excited about innovations in our roadmap that will enhance our relevance to consumers in this increasingly smartphone-centric world. Last week, we launched QuikStories, a new GoPro App feature that represents our biggest leap forward in ease of use since the invention of the GoPro itself. QuikStories automatically copies footage from your GoPro to your phone, and the GoPro App then creates an awesome ready-to-share video for you. We think this experience is game-changing for our customers and for our business. GoPro has sold more than 26 million cameras since the launch of the HD HERO in 2009. And today, we are the most…

Charles Prober - GoPro, Inc.

Management

Thanks, Nick, and good afternoon, everyone. The vision for the future that Nick just shared, evolving GoPro beyond a standalone device into a meaningful extension of the smartphone, presents an enormous opportunity for new products and for reaching millions of new consumers. The work we've been doing to turn GoPro's business around is providing a strong foundation from which to realize this vision. With that in mind, I'm going to provide an update on GoPro's progress against the five key priorities we established at the start of this year. Our first priority is to achieve profitability through improved efficiency, lower cost and better execution. Our focus on doing fewer things better is paying off, and you're seeing that in our results. Our OpEx for the quarter came in below the low end of our expectations. Our investments in Romania and the Philippines are now paying dividends, and we continue to look for new opportunities to drive additional savings. On our last call, I noted the efforts to improve the cost profile of our supply chain. These efforts are contributing to the higher-than-expected gross margin we achieved for the quarter. Next, a sharp focus on inventory and channel management resulted in a 39% reduction in inventory quarter-over-quarter; forward weeks of supply in the channel is down 25%. Both of these position us well for upcoming product launches. Finally, I'm happy to report that the execution across our teams on delivering HERO6 has been stellar, and we're on track for launch later this year. I'll save the details for our launch event, but I know you're going to be super-impressed. Our second priority is to make the smartphone central to the GoPro experience. Aligning with the smartphone requires us to deliver products with very intuitive designs. In this regard, our efforts have…

Brian McGee - GoPro, Inc.

Management

Thanks, CJ. Today, I will provide an overview of our second quarter performance and provide guidance for our third quarter and full year 2017. The second quarter was highlighted by solid revenue growth across all regions and channels, sequential margin improvement and reduced operating expenses that resulted in positive adjusted EBITDA. In addition, camera unit sell-through increased sequentially, and forward weeks of supply in the channel are down 25%. Looking ahead to full year 2017, the launch schedule for our new products remain on track. We continue to target low double-digit year-over-year revenue growth. Gross margins improved during Q2, and we are making progress towards our long-term target of 39% to 41%. And we continue to work towards our goal of achieving non-GAAP profitability. That said, let's dive into the details of our second quarter financial results. Second quarter revenue was $297 million, a sequential and year-over-year increase of 36% and 34%, respectively. Our strong revenue growth was principally driven by demand from our HERO5 Black camera and sequential revenue growth from Karma. Camera units shipped was over 1 million in the second quarter, a sequential and year-over-year increase of 44% and 40%, respectively. Our HERO5 Black camera with the retail price point of $399 accounted for over 60% of our camera units shipped in the quarter and over 70% of the total second quarter camera revenue. Camera unit sell-through increased globally by more than 18% sequentially, driven by HERO Session and HERO5 Black. According to NPD and GfK, GoPro's year-over-year global unit sell-through declined approximately 9%, which is partially attributable to our Q2 2016 discounting of legacy products that drove higher than normal sales volumes for that period. HERO5 cameras continue to outsell HERO4 cameras on comparable launch periods, and unit sell-through increased 13% at price points above $300.…

Operator

Operator

Thank you. And we'll go first to Paul Coster at JPMorgan.

Paul Coster - JPMorgan Securities LLC

Management

Yes. Thank you. And well done. Good job on turning this around. Moving forward, though, with the full year guidance and the fourth quarter commentary, Brian or Nick, it points to – it sounds like you're throttling back intentionally the sales in the fourth quarter, so you avoid some of the seasonality you've had in the past. Am I interpreting that correctly? And am I also correct in assuming that the product launches actually occur within the third quarter, not in the fourth quarter? Thank you.

Nicholas Woodman - GoPro, Inc.

Management

Thanks very much, Paul. You're spot on. You're seeing the results of our shift to run GoPro in a more predictable manner. We are on track to launch our new products on time this year. And this is allowing us to shift more of our second half revenue into Q3 than we have in the last couple of years. And we're also building inventory to achieve a specific revenue target that results, we hope, in double-digit revenue growth and profitability for the year. And this approach also ensures that we'll exit 2017 with appropriate inventory levels that set us up well for the start of the year. And I want to be very clear that we are building specific inventory levels to achieve low double-digit revenue growth and profitability. And if there is demand that exceeds this, we won't be able to realize it, but that's okay. This is how we ran GoPro for many years before going public. It's a very responsible approach that allows us to be more predictable and manage our growth, and as you noted, importantly, exit the year with appropriate inventory levels. And to your point about the timing of a launch, we're not sharing specifics around the timing, but we generally will sell in product – ship product to customers in advance of a launch and we realize those revenues at that point. So that is why we are able to realize revenue from new product shipments in the third quarter.

Paul Coster - JPMorgan Securities LLC

Management

All right, got it. So you're now operating within capacity and not pushing the boundaries with all of the kind of excess in both directions that previously was experienced, is my interpretation there. And you can comment upon that, Nick. But also just one thought here is that at one point, you talk about this massive TAM opportunity, and yet, at the same time, maybe this is more of the same, you're focusing in on expanding the experience for your existing customer base. Can you sort of reconcile those two thoughts with us? Is it that you're kind of trying to reestablish some momentum from the core and then building out, or something of that nature?

Nicholas Woodman - GoPro, Inc.

Management

We should have you come over and help us with our communications. You're spot on. While we are building experienced sharing products and solutions for a much larger addressable market, we feel that the easiest way to gain momentum and the appropriate way, frankly, is to market these improved solutions to our existing community, our existing customer base and lookalike customers, consumers who fit a GoPro customer profile, but haven't yet purchased from us. It's just more effective to go and market to these lower hanging fruit customers, if you were, enable them with our new products, so that they can be successful in sharing their experiences and go on to become advocates for our brand and our product. That's the approach that we built the business on. That's the approach that has built GoPro into one of the strongest brands in the world. And that approach seems to be working, as we're seeing in our Q1 and Q2 results.

Paul Coster - JPMorgan Securities LLC

Management

Very good. Thank you. I'll jump back in the queue.

Nicholas Woodman - GoPro, Inc.

Management

Thank you.

Operator

Operator

And we'll move next to Yuuji Anderson at Morgan Stanley. Yuuji Anderson - Morgan Stanley & Co. LLC: Great. Thanks for taking my question. Two actually on the Karma. One, was it a 10%-plus contributor to the quarter? And then number two, can you update us on its effect to margins? I understand it was dilutive last quarter. Was there a quarter-over-quarter or sequential improvement on that end? Thanks so much.

Brian McGee - GoPro, Inc.

Management

Hi, Yuuji. This is Brian. It's not a 10% contributor in the quarter. And we actually were able to improve margins a little bit actually on Karma. It's still very low. But I think as we talk about margins, we've been able to increase margins both in the second and the third quarter in terms of our guidance. I think we're making progress towards our long-term goal of getting into the 39% to 41% range. Last year, we achieved 40% margin in the fourth quarter of 2016. And given the anticipated product launches, pricing and mix of our products, we expect similar or better margins than we had in the prior year in this fourth quarter. I think that margin expansion trend, coupled with really solid operating expense performance for the company, gives us a clear line of sight for, obviously, profitability in Q4, but also for the year as we've been talking about. Yuuji Anderson - Morgan Stanley & Co. LLC: Great. Thanks so much.

Operator

Operator

We will go next to Stanley Kovler at Citi.

Unknown Speaker

Management

Hi. It's actually Josh (29:23) on for Stan. Based on your guidance, OpEx in Q4 could be as high as $130 million. I'm wondering how much conservatism is baked into that OpEx guide of below $495 million? Could we see that at $480 million even? And on that, what are your expectations for 2018?

Brian McGee - GoPro, Inc.

Management

Yes. So, for OpEx, we do expect OpEx actually to increase a little bit in the fourth quarter, and that's due to the fact that we need to have a little bit more customer support to be trying to be selling more products to customers, so we need that. We'll also be doing some more marketing related to our product launches. So the increase there is really driven by those two things. Everything else will be – continue to be – controlled from an OpEx perspective. I think as we look at 2018, I think the story comes back around growth, continued growth, with new products on our roadmap. I think we'll see a gross margin trend targeting to our long-term model. We'll continue to have constraints on OpEx and be able to drive both the profitability and drive operating leverage in the models we've talked about previously. And I believe we'll continue to have positive cash flow as a result.

Unknown Speaker

Management

And on the backs of your comments of more marketing for the new products coming out. When will we see you build a marketing campaign for the Fusion? And what is your differentiation there from other 360-degree cameras coming to the market?

Charles Prober - GoPro, Inc.

Management

So, on the last point around the differentiation, we've had a lot of recent conversations with our retail partners, and they're very excited about Fusion. The 360 category, still relatively small but it's growing, and they see the opportunity for Fusion to really break out in that category. And the reason for that is we've made significant investments in our software experience, and we plan to extend that to Fusion and then add the capability to the OverCapture, which we've talked a lot about, and us and our partners are really quite excited about. And so it's really going to come down to the experience, and nobody's really delivered an experience in 360 yet that allows the broader consumer base to take advantage of that. Now, even before getting there, the great news for us is that our prosumer and professional customers are giving us really, really positive feedback on their experience with Fusion, and that – in their category, that doesn't rely on kind of the ease of use software experience that we do need for consumers. So we're excited about the initial feedback that we've gotten from our pilot partners to date.

Nicholas Woodman - GoPro, Inc.

Management

I would add that another differentiator is our brand. GoPro has proven that it's a category maker, and our customers look to us for products like Fusion, that the brand's built on enabling immersive experience sharing, and Fusion takes that to the ultimate level with its ability to spherically capture everything around you and share that as either a VR video or as a traditional piece of content that you would punch out from the OverCaptured content. And I think that Karma is a great example of GoPro's brand ability to introduce new products and to do well. As we all know, Karma had a challenged start, but since its launch, it's grown to become the number two best-selling drone in the United States, $1,000 and up. And that's testament both to the product quality and user experience of Karma and as well to the strength of the brand and its ability to introduce new products.

Unknown Speaker

Management

All right, great. Thanks.

Operator

Operator

And we'll move next to Jason Mitchell at Bank of America.

Jason Mitchell - Bank of America Merrill Lynch

Management

Hi, guys. Nice quarter. Just a couple of questions. First, can you kind of elaborate on maybe some of the drivers that seem to be helping Japan versus the other markets in APAC? And then on your launch of Karma kind of into the international markets, any early read how the reception is over there? Thanks.

Charles Prober - GoPro, Inc.

Management

Hey, it's CJ. I'll take the question on APAC. As I mentioned in my opening or my prepared remarks, we've really focused our attention from a sales and marketing perspective on key markets. And Japan in particular, the consumer there has received GoPro, and the brand and our products really well. And so what it really comes down to in Japan, and China and the growth that we're seeing in APAC overall, it's focus and execution from our teams on the ground there. And we're starting to enable them with additional resources, whether it's marketing or otherwise. As it relates to Karma and our rollout internationally, it's really too early to say. We're happy with the progress we've made to bring the product to market to date. When you think about kind of an international rollout of a product like Karma, it's more complicated than just the U.S. because it's several countries. We've got to get our PoP (35:10) into our retailers. We've got to set up the right customer support, infrastructure, et cetera, et cetera. But it's really too early to say internationally on Karma.

Nicholas Woodman - GoPro, Inc.

Management

One thing I would add to GoPro's growth in international markets is our very focused effort to localize both our products, our marketing, and our brand for these specific regions. In previous years, GoPro's marketing didn't really vary very much from the U.S. to selling in Japan, to selling in China, and Europe, and Latin America, et cetera, and that over the last couple of years we really – we gained a lot of traction over the last year in localizing our products, whether it was – the user interface is now available in 10 languages, voice control available in 10 languages. Our data shows that our customers in region, more than 70% of them are using GoPro's voice control feature in their native tongue, which is great to see that they're finding value in that feature. Instructions are localized. Marketing features local content. And we've just done a really terrific job of making GoPro relevant at the local level, and that is making a big impact on our relevance to that consumer. And that's also flowing through to how we sell in store. We've modified our in-store merchandising to fit the retail formats of stores. In Japan, we had to go with a much different merchandising strategy than we used in other countries. And that is paying off big dividends, as you can see. So across the board, we're becoming more sensitive to the markets that we're selling in, and as a result, we're doing a lot better.

Jason Mitchell - Bank of America Merrill Lynch

Management

And just a quick follow-up, is Karma being localized internationally? And then I think you said in your comments you expect gross margins improvements with the introduction of new products. Does that imply that the next line of cameras may have better margins than the current lines? Thanks.

Nicholas Woodman - GoPro, Inc.

Management

Localization is flowing through all of our touch points, all of our products. And I'll pass the second part of the question on to Brian.

Brian McGee - GoPro, Inc.

Management

Yes. You'd expect margins for our newer products to be higher than the corporate average.

Jason Mitchell - Bank of America Merrill Lynch

Management

Thank you.

Operator

Operator

And we'll go next to Joe Wittine at Longbow Research.

Nikolay Todorov - Longbow Research LLC

Management

Hi. This is Nikolay Todorov for Joe Wittine. Again, I wanted to clarify something. Thanks for providing the color on the sell-through declining. Did sell-in exceeded sell-through in the second quarter?

Brian McGee - GoPro, Inc.

Management

They're about equal actually on sell-in and sell-through. I think it's – since you brought up kind of the sell-through, I think it's good to point out, we mentioned it's up 18% on a sequential basis. Every geo actually was up on a sequential basis, which I think – for the ones we track, between NPD and GfK. We were down 9% overall, but if you adjust for a lot of the units that we had to basically work through the channel (38:41) products last year, we would've been up. So that's an interesting point. And then really, on a year-over-year basis, the strength has been in the $300-and-above price point, which is up 13%.

Nikolay Todorov - Longbow Research LLC

Management

Okay. And quickly, to clarify. You mentioned that the HERO5 is essentially outselling the HERO4 Silver and Black in the comparable launch period. Did I hear that correctly?

Brian McGee - GoPro, Inc.

Management

That's correct.

Nikolay Todorov - Longbow Research LLC

Management

Okay. And a quick follow-up. So...

Brian McGee - GoPro, Inc.

Management

That's on a unit basis, just to clarify.

Nikolay Todorov - Longbow Research LLC

Management

On a unit basis? Thanks. Quick follow-up. I wanted to confirm that when you launched QuikStories, it seems like it does not accept footage captured from the smartphone's native camera. I believe the legacy Quik App, when you acquired it, allow for that. So do I have this right? And is that the strategy going forward?

Nicholas Woodman - GoPro, Inc.

Management

QuikStories can accept footage captured natively from your smartphone. The footage won't be – at this time, it won't be automatically pulled into your QuikStory from your smartphone's camera roll. But when you're reviewing your QuikStory, you can very easily add any photos and videos that you may have captured with your smartphone to the story.

Nikolay Todorov - Longbow Research LLC

Management

Okay. Got it. And...

Nicholas Woodman - GoPro, Inc.

Management

And our strategy, moving forward, is to keep that open because we realize that our goal is to seamlessly align a GoPro with a smartphone, so that it feels like, using a GoPro is really like using an untethered lens for your smartphone, and that anything you capture with your GoPro automatically ends up on your phone. And so to the user, when they're reviewing their story, it's as though they captured it with their phone itself. And part of that seamless alignment is that we would allow users to include footage captured with their smartphone because we recognize that's primarily how people are sharing today. And we really see this as a significant opportunity for us to address a larger market of smartphone users who are so actively sharing themselves and their experiences to Instagram, YouTube, WeChat and other platforms of the like.

Nikolay Todorov - Longbow Research LLC

Management

Yes. Thanks. That makes sense. Quickly on Karma, give us an idea of any updates around market share data? How has that trended since you introduced a lower price point drone? Color would be helpful. Thanks.

Nicholas Woodman - GoPro, Inc.

Management

The only information that we're sharing at this time is that Karma continues to sell well, and as we stated on the call, according to NPD, Karma is the number two best-selling drone brand in the United States. And we're very happy with both Karma's sell-through and also the feedback we're getting from customers about their experience with the product. And we believe Karma is serving as a fantastic foundation for GoPro in drones to develop and launch new products in the future.

Nikolay Todorov - Longbow Research LLC

Management

Thanks. Good luck, guys.

Operator

Operator

And we'll go back to Paul Coster at JPMorgan.

Paul Coster - JPMorgan Securities LLC

Management

Yes. Just want to make sure that – you're not sharing either unit volumes for Karma, obviously, nor ASP for the Fusion products or for the new HERO? Just want to hear that for sure.

Nicholas Woodman - GoPro, Inc.

Management

No. You're correct, Paul. We're not sharing those details at this time.

Paul Coster - JPMorgan Securities LLC

Management

Okay. Then I'm sorry to be so picky, but I wonder if you could just – Brian, you can just elaborate on the – or share again the tax outlook? Boring stuff, sorry.

Brian McGee - GoPro, Inc.

Management

No problem. Tax on a non-GAAP basis for the third quarter will be $1.7 million, and for the year, about $8 million to $9 million.

Paul Coster - JPMorgan Securities LLC

Management

$8 million to $9 million. Okay. Right. Got it. Thanks. I'm good. Thanks. Bye.

Operator

Operator

And we'll go back to Longbow Research. Please go ahead.

Nikolay Todorov - Longbow Research LLC

Management

Quickly, guys, we're seeing signs that of heavy HERO5 Session inventory in retail and we (43:06) the product being removed from big box shelves. What is retailer support for that SKU and the brand overall? Maybe you can give us some sense of what kind of signals and lessons you learn from that middle price point? It seems like maybe give us how is that relative to your expectation?

Charles Prober - GoPro, Inc.

Management

Yes. We feel good about how HERO5 Session is performing. The feedback from retailers is good. It's performing in line with our expectations from a mix perspective. So, yes, I'm not sure what you're hearing there, but we're happy with the performance of that product.

Nicholas Woodman - GoPro, Inc.

Management

And I would just add that, just being candid and self-aware, that the original Session camera had a rocky start and we priced it incorrectly. Eventually we got it right and it's selling extremely well now at its new price point. HERO5 Session has never had a problem in the market. It's a phenomenal product, shooting at 4K, and voice control, and most of the features of the more premium HERO5 Black, but packaged into this smaller form factor. Don't confuse HERO5 Session with the original HERO Session. HERO5 Session has always done well in the marketplace and continues to do so.

Nikolay Todorov - Longbow Research LLC

Management

Okay. And lastly, the Prime Day stats that you gave were impressive, both for HERO5 Black and Session bundle. What does this equate in terms of maybe a rough percentage as a part of the 3Q sales guide? It seems to be a non – not – immaterial factor behind the nice guidance based on those interesting (44:55).

Charles Prober - GoPro, Inc.

Management

Could you clarify the question? I think you're referring to Q2 sales and how would those connect to our third quarter guidance?

Nikolay Todorov - Longbow Research LLC

Management

No, the statistics you gave for Prime Day, the nice sell-through for HERO5 Black and the Session, I mean, can you quantify, if you can, what kind of a rough percentage of the 3Q sales guide was that? Is that something immaterial? Or is it...

Charles Prober - GoPro, Inc.

Management

Yes. No. Sorry. Yes, no, the performance on Prime Day was great. We were super happy with it. It's not going to have a meaningful impact on the quarter.

Nikolay Todorov - Longbow Research LLC

Management

Okay. All right. Thank you. Good luck, guys.

Charles Prober - GoPro, Inc.

Management

Thank you.

Nicholas Woodman - GoPro, Inc.

Management

Thank you.

Operator

Operator

And, ladies and gentlemen, I have no additional questions at this time. Mr. Woodman, I'd like to turn the program back over to you for any additional or concluding remarks, sir.

Nicholas Woodman - GoPro, Inc.

Management

Thank you very much. To summarize, GoPro's momentum is growing. We're on track to achieve growth and profitability this year. And we see significant opportunities to grow in 2018 and beyond by continuing to develop GoPro as a natural extension of the smartphone. We see an opportunity to create new products that better address the needs of mobile users' desire – growing desire to share experiences on platforms like Instagram, YouTube, WeChat and more. Stay tuned. Thanks for joining today's call, everyone. This is team GoPro signing off.

Operator

Operator

And, ladies and gentlemen, once again, that does conclude today's conference and again, I would like to thank, everyone, for joining us today.