GoPro, Inc. (NASDAQ:GPRO) 39th NASDAQ Investor Conference Call December 5, 2018 9:30 AM ET
Nicholas Woodman - Chairman and Chief Executive Officer
Brian McGee - Executive Vice President and Chief Financial Officer
[Call Started Abruptly] the GoPro customer communities up today.
Q - Unidentified Analyst
Well, I think you mentioned the stabilization too, I mean some of those videos, you've got people flying on planes and it's still like they're just on rail, so it's pretty amazing. But Nick, let's start off, now that we've kind of seen what the product does, why don't we start – if you can just give the audience a quick overview of your business and kind of how you guys go to market?
Well, as many of you probably know, GoPro serves as a solution for active people that want to capture and share their experiences. And we believe that people buy solutions, not things. If you end up buying a thing, it's usually a mistake and you regret it, and you certainly never recommend things to your friends. But people are very happy when they buy solutions that work really well for them. And they do endorse those products and services to their friends.
And so for this reason, we've really renewed our focus on developing live capture and sharing solutions for doers in the world. Active people who are encountering use cases and problems were GoPro can serve as a solution that goes beyond what they can capture what their phone.
And I'm happy to say that we're growing our business. Again, thanks to this renewed focus. We've got a much better understanding of who our customer is through a lot of research. Thanks to our consumer insights team that we built over the past year.
We are making better product decisions, better marketing decisions, our communication to consumers is much clearer and more on point and it's resulting in strong sell-through that is giving us a lot of momentum in this fourth quarter.
We issued a press release at the end of – at the close of market yesterday, where we made it clear that GoPro had a strong Black Friday and Cyber Monday sales period. We're confirming that HERO7 Black continues to be the best selling new GoPro since launch. And strong sell-through of all three of our new HERO7 cameras at all three $199, $299, $399 price points drove global double-digit growth in unit sell-through for that period. So the momentum continues.
Yes. Actually on the release, it's worth pointing out that every geography we have, APAC actually led the way, but North America grew as did Europe. So all of our geo’s grew over Black Friday and Cyber Monday.
That's great. So Nick, you hit on some of the price points quickly there and you talked about the Black, the Silver, the White. Can you just give us a quick overview on the whole product line and how you guys think about the segmentation there?
Sure. We launched our first HD Camera in 2009. GoPro is actually 16 years old. Most people don't know that. And we launched our first HD HERO Camera in fall of 2009. And that's sort of the modern GoPro that most people know. And we really hit the – that's when we really started to grow as a global business.
And then in 2012, we launched our first three camera lineup, which was our HERO3 Camera line, HERO3 White, HERO3 Silver, HERO3 Black priced at $199, $299, $399. And we experienced tremendous growth when we did that. We moved from a one SKU company to a three camera model company and providing an entry level product at a great entry level price, value product at a mid-level price, and a high performance product at a premium price.
For the first time, the company was delivering solutions to three distinct customer segments and we grew volume dramatically and recognized, hey, [indiscernible]. This is a good go-to-market strategy. And we continued that with the HERO3+ line the next year, HERO4 line thereafter and we've done it most years since.
And HERO7, is a HERO lineup, is a HERO7 White for $199. That's our entry level product. HERO7 Silver is our mid-level product, which is a 4K30 camera very capable for – consumer is looking for a value-based offering.
And then our blistering performance offering, of course is HERO7 Black, which is far and away the most powerful and capable GoPro we've ever made, which you would expect from a company, every year you're going to come out with something new and better.
But HERO7 Black’s main innovation or standout innovation I should say, is HyperSmooth video stabilization, which as I mentioned, this is the best video stabilization found in any camera at any price point. And we have really outdone ourselves with this one and saving our customers $200, $300 on a gimbal, because they now get gimbal-like stabilization built into the camera itself. And it's proving to be a hit with our customers.
From the videos, it looks like it.
So you guys mentioned the importance around the holiday season in Q4, why did you roll-up promotions in the fourth quarter? And how do those compare to previous years?
Yes. The GoPro is being “promotional” during the fourth quarter, which means we're working with retailers to offer special bundles or discounts on our products during the key Black Friday, Cyber Monday period as well as during certain periods during the month of December to engage and attract consumers and to compete for share of wallet with other leading consumer brands that are doing the exact same thing.
There's been a bit of misunderstanding I think with investors that by promotional, we mean excessively steep discounts or price drop, permanent price drops or unnatural acts in terms of pricing to drive sell-through, which would have a detrimental effect on margin. That is not the case. When we say be promotional, we mean be promotional just like other leading brands are promotional. There's nothing unusual here.
And frankly the reason that we decided to be a bit more promotional, and when I say a bit more, I mean we decided to spend approximately $10 million more in promotion during the quarter. We decided to do this because our retail partners were telling us there’s going to be a very competitive holiday season with other brands being quite promotional.
If we wanted to better compete for share of wallet, we should consider being a bit more aggressive. And so we decided to do so and we're really happy we did so, because we had a terrific Black Friday and Cyber Monday and we're looking forward to the rest of December.
Okay. Now, Brian, you guys took down Q4 guidance, curious to hear your thoughts on why?
Yes. We overshot a bit in Q3, demand was very strong for HERO7 Black and our operations team did a really good job, getting product actually into the month of September to be able to fulfill that demand. So we overshot demand from mid point of what we guided by about $16 million.
We also said on our last call, we only have 4.2 million and we’ve raised it actually to 4.3 million units to ship during the whole year. So if we over shift a bit in Q3, we didn't have enough to make it up for Q4 because given the supply constraints on MLCC in resistors, capacitors, and other components in the industry that were constrained, what we could fulfill from a selling perspective. So that constrained Q4 a bit. And then as Nick mentioned, we did the out of the $10 million of promotion. That hit the topline and margin.
But when we look at the whole second half and how we guided for the whole second half, it was a flip-flop between a little bit more in Q3, a little bit less in Q4 and it actually balanced for the whole second half. So we’re right on where we expected to be for the second half. And it's good that as Nick had mentioned, we did the promotions, the Black Friday, Cyber Monday results speak volumes and we should see similar results of those same programs since we head into the most important holiday season in December.
That's a good point. That Black Friday and your performance during – sell-through performance during October and November are an indicator of how you're going to do for Black Friday, Cyber Monday. Also you have to take into account what's your promotional schedule is for the Black Friday, Cyber Monday period.
And then Black Friday, Cyber Monday performance is an even more accurate indicator of how you're going to do in December. And seasonal sales trends are real and how your sell-through is performing coming out of Black Friday, Cyber Monday as long as you're not doing anything radically different during the December period, you can expect those sell-through rates to continue. And that's why we're so happy coming out of a strong Black Friday, Cyber Monday. It's a good indicator for the December period.
Good analogy might be the opening weekend for a movie.
That's exactly the analogy.
And Brian, tariffs, obviously a hot topic. We've been hearing a lot about that at the conference. What you guys seeing so far?
Yes. On tariffs, few things. There have been three lists that have been put forth by the administration. We're not listed on any of those, so our cameras are not tariffed today. We have been very proactive on this very topic with our biggest contract manufacturer Jabil going back to July. How do we move U.S. based production out of China to another location? And so we've made a lot of progress there, and on our last call we talked about that. But I can say on this call or in this venue, we're going to move our U.S. – the bulk of our U.S. based production.
U.S. bound, I should say, production out of China to another location. And we should have that done sometime in Q2, Q3. So we will constrict if there is another list and assuming we would be on it. We will be in a position to be able to move that production into another location. We will continue to produce in China for local Chinese consumption as well as some non-U.S. markets because they're still 55% of the cameras that were sold.
Kind of an interesting side note. One is, we own the equipment that are in those plants. Jabil owns the building, we own the equipment. And so we can move the equipment at a pretty low cost. So that's one.
Two, depending on where we move it, we may actually see a total lower landed costs because of logistics and freight, and we expect the camera costs to be basically net neutral. So we may actually have a benefit here by moving the U.S. bound production into another location.
Well, it sounds like you guys have a good defensive strategy and then maybe there's even a little offense kind of mixed in?
And we're motivated now to be more in control of our own destiny. So this is a proactive move rather than a reactive move at this point.
Yes. Nick, I loved what you talked about, about kind of knowing your customer and kind of the personas that you guys have developed. So let's talk a little bit about the competitive landscape. I think you'd like to say you guys don't have any direct competitors, but how do you kind of think about the evolving landscape in your industry?
Well, what I always say is we do have direct competitors. That's true. But we've yet to have a direct competitor make any significant market share gains against us. And that's obviously a good thing. And we believe that stands to the strength of our brand, our global distribution, and importantly the strength of our product. I don't think I'm biased when I say that we do make the best product. We invest the most in it. We're relentless in innovation. We come out with new products every year.
Our competitors don't from – the biggest name competitors we have, we haven't seen new product in over two years. And we've seen them lose shelf space at retailers like Best Buy, and then can just contract. And so if anything, it looks like we maybe wearing people out.
But nevertheless, we go to work for our customer, so we're not going to take our foot off the gas just because we see that we're doing well against competitors. We're not in business to be competitors, we're in business to super serve our customers. So we're dedicated to innovation and coming out with new products every year and we believe that the best defense is to just be absolutely relentless in our pursuit of innovation and just where everybody out, so far so good as far as that strategy goes.
One, as you guys look to kind of continue that innovation, how do you guys think about it from the hardcore user versus the more casual users? Is it really focusing on that high-end to help drive that or is there innovation at a little right there?
It's important to innovate across all of our products. Every GoPro we make as a GoPro. So we don't care if you're only buying the entry level $199 product, we want you to be completely wowed by that product, because it took a lot of work to get your attention to get you excited to buy the product. And most importantly, you have a real need.
Our research shows that GoPro’s are not impulsive purchases. Our customers buy GoPro’s for a reason, they have intent. They research our cameras extensively, and they are oftentimes coming into buy a White or Silver camera and learn about the benefits, the capabilities of the Black camera, and they end up trading up and they're very informed.
And this is great because it means that people aren't buying it on a whim. It's not a fad-based purchase. They actually hope to get value out of it. And so we're dedicated to delivering real value to anybody that pays for a GoPro. And don't just believe me when I say it, go read the reviews on Amazon for the HERO7 line. We are so proud of these reviews. All three of the cameras have over four star reviews. 86% or 87% of White or Silver buyers say they would recommend it to a friend, and 95% of HERO7 Black buyers say they would recommend it to a friend.
On Best Buy reviews, HERO7 Black has 4.6 stars and people are raving about it and I'm so proud of our team for what they've accomplished. And this is the type of company that we wanted to build one that delivers real value to consumers and really wows them.
Brian, let's shift a little bit to talk about the financials. Can you talk a little bit about some of the reductions you've made in OpEx and headcount since 2016 and what are your expectations for OpEx in 2019?
Yes. We've made tremendous headway on the OpEx front. In 2015, I think we spend $709 million. This year in our guidance, we'll spend sub $400 million. That's sub $400 million includes our ability to increase our ad spend for marketing by about 50% from 2017. So we went deep enough to be able to put some investment back into the brand and into the product, which is great.
When we went public, we had 900 people that went to a peak of about 1,800. We're back down to 900 people by Q3. So we've done a really good job controlling OpEx. And as we see growth in 2019 from a topline perspective, we think we can keep OpEx in the $400 million to $420 million range. So some investments in marketing, a little bit in technology kind of hold everything else kind of flat.
Great. And then in terms of topline, how do you see the TAM kind of expansion in the next three to five years?
Yes. Well, let me talk about this year and maybe you can hit the three to five. This year, we've talked about global unit sell-through, which is real demand that’s people actually buying product that retail on gopro.com of about 5 million units.
We're about 60% of the way there. We think it's roughly in line to get 2 million units sold through in the fourth quarter. So that's growth of about 16% from 4.3 million units last year. So that's real growth.
This year, we will be able to sell about 4.3 million units in. So if demand stays at five or can grow even from there, we will see growth in 2019 from a sell-in perspective of a quite a bit, right. So we're pretty encouraged by the total demand that we've been able to predict.
And not only the prediction, but how we manage inventory. Our own inventory on the balance sheet, we ended Q3 with the lowest inventory going back to Q3 of 2014. Same was true in the second quarter. We expect inventory actually to reduce in the fourth quarter on our balance sheet and it will reduce in the channel. Well, we will be down to some of the lowest levels, at least post IPO that we've had in terms of channel inventory exiting a year, it will be the best we've ever had.
All right. So Nick, what about the longer-term view?
Well, it's really exciting. The customer research we've been doing to learn that our customers are buying their GoPro’s for a purpose, which means that we build such a durable product that's being used for so many years, tells us that our customers are getting a lot of value out of their GoPro purchase.
So we've built reputation of building a really high quality product that lasts. We shared on our Q2 call that roughly half of our 5 million monthly active GoPro app users are using HERO4, 3+ and 3 Cameras, cameras that are four to six years old.
That's awesome. Now, if you maybe saying, oh man, what do you mean awesome, that you have a really long upgrade cycle. No, why that's awesome is that they're still using GoPro that are four to six years old. They're getting value out of them. That is phenomenal for our brand, but also phenomenal to see that that many people are still using their GoPro’s out of – roughly we've sold more than 30 million HD HERO devices.
In the summertime, I think in the June, July timeframe, we surpassed – June, July timeframe, we surpassed 30 million in units sold. We estimate that roughly 10 million of our customers are still active, 5 million monthly, 10 million in aggregate. And that we have such a large installed base of legacy cameras being used. It tells you that man, if they're still using their GoPro’s after all this time, there's a really good opportunity to upgrade them over time. It's just a matter of time for a lot of them.
And what we have to do as a product company is develop such an amazing breakthrough for them that they're compelled to upgrade. We don't want to drive upgrades via obsolescence. It doesn't match the usage profile of our customer. We love keeping them engaged and then we'll win them over with major innovation breakthroughs like HERO7 Black with HyperSmooth.
We don't have any data yet as to how HERO7 Black is or isn't driving upgrade, but anecdotally there's a lot of evidence. If you go and read customer comments on YouTube video reviews and on Instagram, it's clear that people are talking a lot about upgrading. People are talking a lot about buying a GoPro for the first time.
And it just makes sense that really well innovation like HyperSmooth video stabilization would excite people. And importantly, our marketing is so much better this year being more feature focused and being more energized and directed at our core customers that it's really resonating.
And as this relates to a growth in the next three to five years, we look at our total – at our TAM as a combination of active consumers as people that are doers that are doing things that cause the problems that GoPro solves.
And we also look at the capture centric consumers who were interested in photography and videography as a hobby, as a passion. They're interested in being very social and where the active community of consumers merges with the capture centric consumers. That point of intersection is a super segment of our customer target base that we're focused on super serving.
Our research shows that there's roughly 250 million consumers that are in that super segment and we've sold to roughly 30 million of them. Well, not really, because we sell multiple cameras to people. So maybe we sold the 20 million of them. There's a lot of growth opportunity for GoPro. We've got to drive awareness and do a better job of creating compelling products and compelling marketing campaigns that really excite people and we're showing this year that when we do that we can grow.
Awesome. Well, we've got a minute left here. Any questions from the audience?
Do you see yourself as only an imaging-based product company or might you expand into more on the lifestyle Fitbit type products ever?
Our brand – so for the time being, yes, we see ourselves as a active lifestyle capture and sharing solution company, right. Really laser focusing on nailing that for people. We're doing an extremely good job on the capture side with our cameras.
GoPro’s are very easy to use now. They're fantastically capable devices and we need to match that level of convenience and performance with the software side of our business and with our cloud subscription and there's a lot of opportunity there. And then that will make GoPro an end-to-end solution for consumers.
Once we achieve that, then we can talk about extending the brand and the new product categories. And there is that opportunity because the lifestyle aspect of our brand is very strong and there's a lot of ways that can go. But for the time being, we're going to remain laser focused.
And one last question, Nick. So what gets you excited about the future of GoPro and what might investors being missing or misunderstanding about the story?
Well, I think what investors are misunderstanding today is that everybody is waiting for us to blow it again, this fourth quarter because that's the reputation we have established for the last three years.
We've had very challenging fourth quarters for the last three years, and we need to restore our credibility with investors and we recognize that we need to have a successful Q4 for investors to believe. And it's clear talking with investors that everybody is waiting for the Boogeyman to pop out from the bushes and take us out this fourth quarter.
What is it going to be this year that's going to knock GoPro off of its momentum? And now that we're through, so I think what investors are missing is that there is no Boogeyman. We shared that we identified root cause of our challenges of the last three, four quarters, and they were largely related to selling flagship products for a second year in a row at the original prices, and the result is that consumer demand drops by 50%.
And when you don't forecast for that, you're done. And you have to spend the next year regrouping and getting yourself in shape for the next fourth quarter. And having understood what root cause is, we solve for this year, we have much better forecasting in place. We understand our business and our customer much better and you're seeing it in the performance of the business.
So hopefully, we’ve done a good job of showing fourth quarter performance to-date. We feel good about the rest of the quarter and we feel really well positioned for Q1 and full-year of profitability in 2019.
I think investors also questioned the overall demand for GoPro. But as we've seen, we're growing demand. When we've got great product at great prices, we can grow our business that's happening. And I think investors also are worried about competition and you read a lot in the press about low cost competitors and so forth.
But if you really listen to our earnings calls, where we share what our market share is globally, and that the only place we see some significant volume of competitors is in EMEA with about 900,000 units at sub €100 competitive knockoff products being sold.
That's not a business we want to be in. There's no money in it. So across the Board, we're doing well as a business. We have growth insight, profitability insight, and we're taking share, so we are feeling good.
End of Q&A
Sounds good, Nick. Thanks to you and Brian for joining us here on stage today.