Good day and welcome to the GoPro Second Quarter 2020 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Christopher Clark, Vice President of Corporate Communications. Please go ahead, sir..

Thanks, operator. Good afternoon everyone and welcome to GoPro's second 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 consumer confidence does not further erode due to the global pandemic. We do not undertake any obligation to update these statements as a result of new information or future events.

Information concerning our risk factors is available in our most recent Annual Report on Form 10-K for the year ended December 31st, 2019, which is on file with the Securities and Exchange Commission and in 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 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 second quarter 2020.

The 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 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..

Thanks, Chris and good afternoon everyone. As we did during our Q1 2020 earnings report, we've chosen to post management commentary for the second quarter of 2020 including Brian's financial overview to the GoPro Investor Relations page on our website, and we encourage all to read the commentary.

I will give brief remarks now and then we'll go directly into Q&A. As we shared in the management commentary, GoPro's shift to a more direct-to-consumer business with lower operating costs is working.

While COVID-19 continues to negatively impact society globally, GoPro has adapted to the pandemic and we believe our consumers are learning to live with the pandemic too. Demand for GoPro cameras consistently improved throughout the second quarter and we've seen a faster-than-expected rebound in sell-through at retail.

Despite obvious challenges, we've been able to improve our efficiency and output in all areas of the business including significantly reducing both channel inventory and operating expenses. We remain on track with our product launches slated for the second half of 2020, which includes hardware, software, and subscription offerings.

We expect these new product launches to contribute to our momentum resulting in positive results for the rest of 2020 and continued growth in earnings expansion in 2021. Assuming that many of you on the call have read our written commentary, we'll now move on to Q&A..

[Operator Instructions] And we do have our first question. Our first question comes from Erik Woodring with Morgan Stanley..

Congrats on the quarter there. I just want to get your take on - you mentioned the improvement throughout the quarter in demand. Just curious if you could kind of break that down by region. Are there certain regions where you're seeing more of an improvement versus others. And then I have a follow-up after that. Thanks..

Eric, it's Brian. Yes, actually we saw improvement in every region. North America improved, retail snapped back, EMEA came back as well as Asia, and of course, our web store business did very well.

So we were very pleased in the quarter to see everything up and to the right as we moved week-over-week to the point where, quite frankly, we were by the end of June, we were matching - comping against the prior year in terms of sell-through and demand. So yes, every region was up.

So we're very pleased and quite frankly, we've seen that continue into July and August, which gives us the basis for the guidance we gave where we think we're going to do 900,000 units of sell-through in Q3, which is up 5% year-over-year. So we're continuing to see demand not just in Q2 week-over-week, but also as we head into Q3.

So we're very pleased with the demand profile globally for GoPro. And of course, gopro.com, we mentioned where 44% of our revenue came from gopro.com in Q2 and we expect it to be 36% to 40% in Q3, but that's on a much higher revenue base given our guidance of $220 million to $250 million of revenue in the third quarter.

So that would represent a 40% increase approximately of revenue growth on gopro.com in Q3 from Q2..

And then just as a quick follow-up to that, is there any way you could break down the improvement you've seen in demand from camera type. I mean, obviously, you mentioned that $300 and above were the large majority of sales, but improving demand for HERO8 and other models or was there any difference between some of the models? Thanks..

Sure, no problem. Yes, the bulk of the demand was actually on HERO8 Black, which was great. HERO7 Black also did well, but HERO8 definitely outpaced in the quarter, which is - we were expecting that. And we were at 95% $300 and above and we were at 90% I think in Q1.

That represents a trend we've seen and we've talked about over the last several quarters and maybe a year, back in 2016, '17, '18, we ran anywhere from 40% to 55% was MSRP of $300 and above.

We shifted that strategy in 2019 and we were about 70% of our business was greater than $300 MSRP and we expect that to increase in 2020 and probably even into 2021. So we're definitely seeing more demand at the high-end, which is good. That helps to drive revenue growth, but it's also where the best margin profile is for the company.

So that factor is good for us and it's good for the consumer. So it's good value proposition and the consumers are buying at the higher-end..

Yes, I would also add that, because this is a trend that has been progressively improving, we're also - we've been planning for it and we're also happy with the inventory levels for our other SKUs as well. So everything is in line with where we were planning on taking the business from an inventory standpoint..

Awesome. That's helpful. And if I could just ask last one is just you've mentioned the shift to higher-end devices, which are higher margin, you've mentioned the shift to DTC which is higher margin, but your gross margin profile has kind of been going the opposite direction.

Like if you extrapolate, you know, if you say that gopro.com gross margins were roughly 5 points to 10 points higher than the rest of the business in 1Q or excuse me in 2Q that implies gopro.com gross margin is around 36% if my math is right.

So can you just help me bridge that gap to help me understand the other impacts that you're seeing on the gross margin line? Thanks..

Yes, Eric, no problem. The issue for quarter one and quarter two is the amount of revenue we had was so low that it under-absorbs overhead by about 500 basis points.

So that's the major driver quite frankly, why margins were down, and we have margins rebound in Q3 to 35% plus or minus 50 bps, and we think we're going to be at 38% plus or minus 50 bps in Q4.

So, we'll see margins come up as our volume comes up and our mix continues to improve to the high-end and with new products so – along with accessories and we have new accessories like this mini lifestyle bags as well as growth we're expecting in subscription.

So it all kind of comes together to help drive ASPs, revenue growth as well as margin improvement..

Okay, that's helpful. Thank you, guys..

And gopro.com, gopro.com better than 40 points by the way. So it's not down where you had said it so and it is 5% to 10% better than retail..

Thank you. We'll take our next question from Andrew Uerkwitz with Oppenheimer & Company..

Hey, thank you for taking my questions guys. Could you talk a little bit about how the change from direct-to-consumer is affecting how you guys forecast unit sell-through, if it has changed at all and then how has your confidence been around forecasting that on ongoing forward basis? Thank you..

Yes, hi Andrew, it's Brian again. Yes, our forecasting I think has improved quite a bit both on mix and in region along with gopro.com. We said in our first quarter commentary our expectation was that we'll be at least 40% on gopro.com we ended up at 44%. We talked about ASPs of $300, we matched it up. We put that in my commentary and it all lined up.

Actually, sell-through did a little bit better and so – and the demand profile hit just as we expected with mostly demand on Hero8 Black. Although like I said Hero7 did quite well and actually Max is starting to do very well in retail. So we're credited about that.

We really look to get information from retailers plus what we do on our own site and that we're able to re-trend that basically on a weekly basis to really use a lot of data mining to estimate what we're seeing on the trend line and where the demand profile is.

So that's been a real area of the company we focused in a lot on the data management side and I think it's paying off..

Got it. Thank you..

I would also add that as we focus more of our business on our best performing retailers, we get better data from them as well. So that helps sharpen our forecasting as well. And then of course, the direct feedback we get from our dotcom sales channel is very accurate..

Got it, yes no, I think that make sense. And then a question for you, Nick you didn't mention in your comments too much about the impact COVID has had on new product development.

Could you give us a little color on how comfortable you are with the new product road map being on time and where it's at and any impact COVID's had on that development?.

Yes, we've been very fortunate. We've got great manufacturing partners that have performed exceptionally well during this period. And of course, our internal team is – they are just the best of the best.

A small number of our employees need to continue to access labs at GoPro offices to continue with their product development work, but the vast majority of work can be done remotely and so we haven't missed a beat.

We're on time for all of our launches whether it's new hardware products, software or subscriptions and in some ways, it feels as though we're operating even more effectively and efficiently remotely. There's challenges that come with it for sure.

It's pretty difficult at times when your office has your entire family in it at home, but there is other aspects of working remotely at least for our culture that have been more streamlined and effective. The teams are doing a phenomenal job of communicating via video conferencing, morale is high.

Everybody is really excited about the roadmap that we've got, it's robust, it's expanding in terms of the ways that we're going to be serving consumers going forward.

I'm really excited that we're really succeeding I think in our shift from being a hardware specific company to now serving consumers as an end-to-end solution, spanning hardware and software and cloud.

And giving them different ways to experience GoPro be it subscription or otherwise and the outsize value that we've been delivering, but that we're really going to expand on later this year with new product launches.

It's been a long time coming, but it feels really good that the vision that we've had for GoPro is this end-to-end content solution for consumers is coming to fruition and I think it's going to make a lot of sense and excite consumers this holiday season..

Got it, I appreciate that color. And last question from me I think, is really a two-part question. One, I mean GoPro has clearly been a lifestyle brand for a while and it looks like you're trying to take Angela with some of the lifestyle products and gear. How big and material should we think that could be or will be over time.

And then a question for you, Brian, around that going forward, will that be part of the calculation for Street ASP or how should we think about that metric going forward? Thank you..

I'll take the first part its early days with our new products. We are exceptionally good at marketing our cameras, our app and it took us with – and when we introduce new products, it's a new muscle that we've got to learn, but we do learn it.

It took us I want to say a year, a year and a half with Plus to really learn how to properly market that subscription offering and then it really took off and we're seeing the growth that we're enjoying today and we're expecting that to accelerate.

And so we've learned that we need to learn these new muscles as it relates to introducing new types of products and so forth, but we're getting better and better at it and it's no different with our new lighting category where our first product is Zeus Mini and then our lifestyle products including bags – fantastic bag line.

I mean the quality and value and performance of this bag line is terrific. You get all the durability you'd expect from GoPro, but in a really lightweight design that just makes it so convenient and covering so many use cases for consumers that it is relevant to their active lifestyle, which obviously GoPro fits right in with.

But it is new and people don't know that we make bags yet and we need to get better at driving awareness for that, but just as we've done with Plus where with time we learn how to do that and be really effective. I'm super excited for our brand to grow in these new product categories over time.

And then as we get better at that, we'll add new product categories. I'd say that what we're very focused on is only entering product categories where we can offer authentic value and expanded value and product differentiation from what's already out there in the world.

And it also has to be authentic to our brand and make sense to the consumer why GoPro would make this type of product. And then through our more direct-to-consumer sales strategy, we believe we're going to be able to offer exciting new products at really attractive prices to consumers that results in a favorable margin to GoPro.

So it's win-win for everybody. And then, as you know, we can further expand the value to consumers that are subscribers to Plus because they get discounts when they buy direct from gopro.com. And it's just – it's going to be an exciting road ahead as it relates to new product introductions from GoPro, so stay tuned.

But as it relates to the materiality to our business, at this point, it's more of a brand expansion and us learning how to grow into new markets, new product categories and over time we expect it to become material, but for the time being, I wouldn't consider it.

So Brian, if you want to add color to that?.

Yes thanks, Nick. Yes, Andrew just selling more bags in lifestyle products and Zeus Mini in lighting and just adds to Street ASP. So it will be positive trend on that and so it's along with selling more of our cameras at the high-end, adding more accessories that people want, adding more on subscription. It all accumulates to higher Street ASP..

Got it, thank you guys I appreciated that..

Thank you..

[Operator Instructions] We'll take our next question from Paul Chung with JPMorgan..

Hey guys, thanks for taking my questions. So just on free cash, Brian, this is for you, the use of cash was a bit more kind of than previous guidance. What is going on there was it more of a function of kind of lower earnings or some puts and takes on working cap, then you had initially forecasted.

And then as we think about the second half, we would also expect a pretty strong seasonal 4Q or will you kind of get some benefits in 3Q for maybe the initial selling of the flagship refreshed.

And then can we even hit breakeven this year?.

Thanks, Paul. Yes, good question. In Q2, we have estimated back in the May call we did about $100 million of cash. And in the second quarter, we ended at 80, and that difference is basically all in accounts receivable.

It just happened to be a little bit of timing between when we thought we would have sales, and in the particular deals where we would have sales. So that moved around a little bit. So that's actually getting collected in July, and actual cash is actually up even today above where we were in June through that so that's a positive trend.

As we put in our guidance, our expectation is for cash to end Q3 given the higher revenue expectations because of sell-through and demand. We think we will end at about $130 million of cash and then include paying off the $30 million we have bought on asset backed line.

So that's cash flow from operations of that $80 million in Q3 and yes Q4 if you go off kind of guidance we gave it would be higher from a revenue perspective. I think, Q3, and that's to drive cash to about $300 million of their expectation, it's consistent with what we said on our last earnings call.

And given the fact that we think we're going to be profitable in Q3 on a non-GAAP basis between $0.01 and $0.07 per share, and what and we've got the year could be basically close to breakeven, and maybe even slightly profitable. So, yes, we think we have a shot of being profitable.

So the demand profile continue in a way we think it will for the remainder of the year..

Thanks, Brian. And then Nick just on the GoPro's Plus subs, as you've kind of moved to direct-to-consumer.

How is your attach rate kind of different when consumers buy on gopro.com or is it different and then what are your plans to kind of increase that attach rate as you do kind of ramp up this direct-to-consumer?.

Yes, we do a much better job of driving Plus attach earlier in the customers ownership of GoPro and the best time as you can imagine is when they're buying their GoPro because they're the most engaged and they're thinking about all the ways that they want to benefit and they're thinking about the value of their purchase.

And becoming a plus subscriber significantly expands the value of their purchase that improves the experience that they have. And that's something that we're going to be expanding significantly later in the year. So as appealing as GoPro Plus has been, it's going to get a major boost in a short while. So we have that benefit.

And then we have the benefit of increasing the total number of customers that we're serving directly through dotcom. So we can expand the attach rate through an improved plus subscription offering. And then expand the number of customers that we can attach to, because of the expanded direct business.

So that contributes to our expectation to finish the year with between 600,000 to 700,000 Plus subscribers. We still feel really good about that. And then of course, that's something that we expect to further build on in 2021 as we grow our direct business further.

And then over time, we just continue to load up that Plus subscription offering with more and more value to further build upon the opportunity that we've got..

Okay, thanks for that..

Yes, Nick, I would even add on top of that so let me add on top of that because Nick right, but the other thing we've done and Andrew you kind of asked test on this about data. We've done some AB testing on the site and with Plus subscriptions, and found a very high attach model. So it - comes with some good data and analytics.

That is why we think we can drive to as Nick mentioned the 600,000 to 700,000 subscribers by the end of the year..

Yes and one more thing to is our shift to promoting annual subscriptions, with even more value is obviously having a positive impact with retention as well. We're really happy with where the term rate is and something that we're going to keep building on.

But Brian's right, there is a lot of small things that we're doing that are having big impacts on the program..

Okay, great. And then last question. If you could expand on the webcam feature, is that functionality has been added, what kind of feedback are you getting from consumers, and do you see kind of a bump there and sales in your view as a result of adding this feature? And why now for this feature as well? Thank you..

Well, the why now is, I think quite clear that people are using webcams and video conferencing far more than they were prior to COVID.

They're live streaming far more than they were prior to COVID, and what we recognized that with a firmware update, we could make it possible for our customers to use their GoPro’s Hero8 Black specifically as a webcam, it's just an important feature now more important than ever, that we want to do enable them with that functionality.

And that Hero8 Black with its wide angle lens is really differentiated from other web cameras.

And so far as it's just more versatile and it's very helpful for people who are video conferencing or live streaming activities where they just need a wider angle lens to fit the scene in, you know, whether they're giving instruction of some sort or where they can't be in the same location as where their computer is and they need some flexibility with having the web camera decoupled from the computer and give them more perspective, versatility than they could get from a traditional web camera.

So we're filling that GAAP it's interesting. I mean, the same wide angle performance and image quality and versatility that has made GoPro so successful as a activity camera is helping make it successful as a web camera as well. So that's great to see.

And then we're expanding on that further later this year with enhancing the live streaming experience that we currently offer, addressing some of the pain points that exists with some of the other live streaming platforms. So that'll be an added bonus for our customers as well.

And the feedbacks been great, I mean anytime you, you give somebody more performance, more capability for their money and enhance the value of your product and don't charge them anything for it, consumers love that. And so, it's been really positive we've received and it's something that we look forward to building upon going forward..

Great, thanks so much..

Thank you..

And we'll now take our next question from Jim Suva with Citigroup..

Good afternoon gentlemen, this is Mike Cadiz for Jim at Citi. I have one question, I appreciate the OpEx commentary in the prepared remarks.

However, I'm curious if there is any expected moderation in the variable selling costs and marketing in the 2021 as you continue to optimize the direct sales model or should we think of the second half guidance as the proper level going forward?.

Hi, Mike this is Brian. Yes in our last call, we said we wanted to get OpEx then to the - about the $250 million level in 2021, but we're also seeing a little bit higher demand. I think it's going to be between 5 to 16 to 80 million plus we'll do some investments to continue to optimize the site.

Not a lot, but a little bit that goes a long way to drive attribution to gopro.com. So, but we'll also see a nice lift. So even then, we're up a little bit in the second half.

And again, that's for variable selling costs, a little bit of digital marketing, and actually some continued enhancements on gopro.com on our site to improve the marketing on our phone..

Thank you. And we'll take our next question from Nik Todorov with Longbow Research..

Hey guys, thanks. Good afternoon.

Brian and Nick, I guess that 500,000 to 600,000 channel inventory target for exiting the year is that the right amount of inventory that we should be thinking about going forward as you guys position the model to direct or you expect that inventory in general to go down further in 2021?.

Hey Nik, this is Brian. No I think that's about the right level. I think at the end of 2021 more at the half million on a lower end of that range. I think we're going to end somewhere in the midpoint of the 500,000 to 600,000 at the end of 2020. We'll also bring our own inventory down. So our working capital position will improve.

This year and actually going into next year so no, we're happy with that. What's helping to drive that quite frankly is demand, I mean it sell-through. We think we did about 750,000 units in Q2 it's up more than 20% from our estimate of 600,000. And we're seeing that demand continues and talked about.

So - that leads us nicely into 2021 should demand profiles continue on that trajectory..

Okay. And in talking about sell-through I understand, last year was an easier comp and that's why you're seeing your sell-through growing year-over-year. But if you look at traditionally in the third quarter sell-through has been anywhere from 1.0 million to 1.1 million units.

So that's implies roughly down 15% versus that level, but then the implied fourth quarter for sell-through for about 1.2 million units that's down like more than 20% versus the traditional level of sell-through that you're seen the fourth quarter? So why that delta, you're essentially implying that the fourth quarter is going to be weaker than seasonal, I guess.

Is there anything else driving that or how should it bridge that gap?.

Yes hi Nik good question. Yes, if you actually look at how we guided in second half, units would be down a little bit more than 10% I think on a year-over-year basis. And so but teaser up, so we're up about 10% I think we said we'd be above 10% ASP lift in Q3 of 2020 over Q3, of 2019. And Q4 will be higher.

So on a revenue basis, on the second half I think we did about $660 million of revenue. Last year, second half and our guidance implies something about 5% less than that. So on a revenue basis and margin basis, we're actually better and we're going to drive more profitability..

Great, and Nick, you guys started collecting a lot more data on how - I'm sorry.

What do you have something helpful - no, no I'm sorry I think, yes?.

Nik, I would just add to what Brian said that, we're focused on driving profitability, and we're making business decisions, products decisions, pricing decisions, distribution decisions, to drive a more efficient and more profitable business. We're not fixated on unit sell-through, like we used to be we're fixated on earnings growth..

Yes, I mean last, I think a couple years ago, you talked about you know, the fourth quarter being the fourth quarter always has been a very competitive environment.

So I would assume given the current economic situation that it's going to be even more challenging to draw attention from customers and get their money? How do you view the fourth quarter environment now that we're about to go in? And in terms of discounting and promotions, where are you guys? I guess not what are you guys planning but how do you read a situation?.

Well, one of the benefits of going direct-to-consumer is the value that we can provide consumers while still generating a healthy margin for GoPro. And that can be more challenging at retail over any fourth quarter, especially when there is a lot of competition for - consumer wallet, as you know.

And so this is another reason that our direct-to-consumer shift is so important to us is it allows us to do a better job of delivering expanded value to consumers to help convert them into paying customers, while simultaneously generating margins that result in a profitable GoPro. It's all about value.

And so your question about how do you attract consumers is you got to allow them with your products, you got to allow them with your performance, you got to allow them with the experience and you got to allow them with value.

And the trick for any business is to do so and generate a healthy margin and we believe that we've got a terrific plan to do that, this fourth quarter, and as well going forward into 2021.

Retail is still important to us, but we’re learning that a - there's a more profitable, efficient way and value laden way to operate our business and serve our customers than being so reliant on retail and load balancing our business more strategically between retail and direct is going to result in a much more profitable business we believe.

And I think you're going to see that in 2021. And we're going to start to see what GoPros brand and product line are really capable of as it relates to generating profits..

Okay, got it. Last question from me, I think you guys started collecting a lot more data on how customers use your cameras and you last year you announced some new features and abilities for GoPro to be used for example as a blogging camera.

I guess do you guys have any data or update? How is that application going is there an uptake? What is the customer feedback on that end?.

Yes, we've been very successful with establishing GoPro as a staple for any serious blogger, and you can see for yourself, via Instagram or YouTube, TikTok, what have you, Influencers are regularly using GoPro to help communicate with their audiences.

And that was very clearly demonstrated at the launch of Hero8, where and before that Hero8, but really punctuated by Hero8 and Maximum. And so far as how well those cameras work as a blogging solution and we're excited that the new products that we got on tap take that even further.

So, we're seeing this as an important consumer use case where we are in fact succeeding in serving our customers in this way. And live streaming is another one that we see growing due to the pandemic. And as I mentioned, we're going to be expanding our live streaming capabilities and experience for consumers later this year.

And so across the board, we're constantly looking at ways to make the world's most versatile camera even more versatile and valuable for our customers..

Okay, got it. Thanks, guys good luck..

Thank you..

Thank you. And we have no further questions at this time. I would now like to turn the call back to management for additional or closing remarks..

Thank you, operator. Well, I'd like to close the call today by sharing my gratitude for GoPro employees around the world. You all are excelling and executing during extremely challenging times and to our millions of customers, it will appear as though you haven't missed a beat when we launch our new products later this year.

They're going to be amazed because you all are truly amazing and so, on behalf of all of them. Thank you so much for all the terrific work. It's going to be a fun rest of the year. And to everybody else on the call thank you for joining. Stay safe. This is team GoPro signing off..

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect..