GoPro, Inc. (NASDAQ:GPRO) Q2 2022 Earnings Conference Call August 4, 2022 5:00 PM ET
Company Participants
Jalene Hoover – VP, IR
Nicholas Woodman – CEO
Brian McGee – CFO & COO
Conference Call Participants
Martin Yang – Oppenheimer
Anna Glaessgen – Jefferies
Erik Woodring – Morgan Stanley
Nik Todorov – Longbow Research
Jim Suva – Citigroup
Operator
Good day. And welcome to GoPro’s Quarter 2, 2022 Earnings Conference Call. Today’s conference is being recorded. At this time I will like to turn the conference over to Ms. Jalene Hoover, Vice President of Investor Relations. Please go ahead ma’am.
Jalene Hoover
Thank you, operator. And thanks for everyone for your patience. We were experiencing some technical difficulties this morning causing delay and your ability to join and wanted to wait. So as many of you could join us possible. Welcome to GoPro’s second quarter 2022 earnings conference call. With me today are GoPro’s CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Today’s agenda will include a brief introduction from Nick and some commentary from Brian, followed by Q&A.
For detailed information about our second quarter 2022 performance and our outlook, please read the management commentary we posted to the Investor Relations section of GoPro’s website.
Before I pass the call to Nick, I would 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, uncertainty related to the duration and impact of the COVID-19 pandemic and the war in Ukraine.
This means that results could change at any time. Our commentary about our business results and the outlook is based on the information available as of today’s date. And we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary, we refer you to our most recent annual report on Form 10-K for the year ended December 31, 2021, which is on file with the Securities and Exchange Commission and is updated in future filings with the SEC, including the quarterly report on Form 10-Q for the quarter ended June 30, 2022.
Today, we may discuss gross margin, operating expense, net profit and loss, EBITDA as well as basic and diluted net profit and loss per share in accordance with GAAP, and 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 and 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, which is posted on the Investor Relations section of our website.
In addition to the earnings press release and management commentary, we have posted slides containing detailed financial information and metrics for the second quarter of 2022. The management commentary, slides as well as a link to today’s live webcast and a replay of this conference call are posted on the Investor Relations section of GoPro’s website for your reference. Unless otherwise noted, all income statement-related numbers that are discussed in the management commentary other than revenue, are non-GAAP.
Now, I’ll turn the call over to GoPro’s Founder and CEO, Nicholas Woodman.
Nicholas Woodman
Thanks, Jalene, and hi everybody. Thank you for joining us today. As we shared in the management commentary which we posted to the Investor Relations section of our website. In Q2 2022, GoPro delivered a fifth consecutive profitable quarter on a GAAP basis at $0.02 per share and our eighth consecutive quarter of profitability on a non-GAAP basis at $0.08 per share. Camera sell-through out-paced expectations and we drove significant year-over-year growth in subscribers and subscription revenue. Both revenue and non-GAAP EPS in Q2 exceeded expectations at $251 million and $0.08 per share, respectively. Direct to consumer revenue increased nearly 9% year-over-year to $95 million, or 38% of revenue. And subscription and service revenue hit a new quarterly milestone of $20 million, positively impacting our bottom line.
Our subscription service continues to be a powerful financial engine for GoPro and represents our fastest-growing, highest-margin and most profitable product. We ended Q2 with 1.91 million subscribers, a 65% year-over-year increase of approximately 754,000 GoPro subscribers, and we are on the cusp of surpassing two million GoPro subscribers, which translates into $100 million of annual recurring subscription revenue with gross margin of 70% to 80%. We are on-track with our plans to launch several exciting new hardware and software products in the back half of 2022, wowing our customers with blistering new performance made easy thanks to significant updates to our software experience that will put a premium on convenience. We expect our new products and services to add to the momentum we enjoyed in Q2.
I want to thank everyone at GoPro for their incredible work. We’re thriving during challenging times thanks to your world-class execution. I’d also like to thank all of you on the call with us today. It’s an exciting time at GoPro and we’re grateful for your support and participation in our growth story. Before jumping into Q&A, Brian has a few comments to share.
Brian McGee
Thanks, Nick. And let us provide some colour on Q2, Q3 and our 2022 outlook. As a reminder, there both the CEO and CFO comments in the management commentary posted in the Investor Relations section of our website. As Nick mentioned, Q2 saw through exceeded guidance and revenue and EPS were also on the high end of guidance. Europe and APAC performed well particularly due to some rebound in international travel despite macro headwind in these regions. Our Q3 and full-year 2022 outlook consider several key macro dynamics impacting our business. As has been widely reported, — Big Box retailers are actively reducing their inventory along with weeks of supply. In terms of retail Big Box channel inventory, we believe we are well-positioned at approximately 9 to 10 weeks of inventory.
However, we expect retailers to generally reduce weeks of inventory in the second half which could impact our sales into the channel. We expect continued strength in the U.S. dollar relative to international currencies and year-over-year FX impact the GoPro based on the midpoint of guidance to revenue gross margin and earning is approximately $10 million and a $11 million in Q3 and Q4 respectively.
They’re two times as much as in the first half of 2022. For 2022, based on our outlook, we expect the overall FX impact to revenue margin and earnings to be approximately $33 million compared to 2021. Inflation, rising interest rates and other macro-economic issues may impact demand as well as competition for share of wallet during the second half. Taking these macro dynamics into consideration for 2022, we expect camera unit sales up between 2.9 million and 3.1 million units which is down from our prior guidance of approximately 3.2 million units as well as year-over-year.
We expect second half 2022 compared to first half 2022 unit sales to grow nearly 60%, up from 46% in the same period in 2021. Reflective continued solid demand heading into Q3 and fuelled by the launch of two new cameras rather than one flagship camera in the second half. And our planned rollout of cloud-based editing later this year.
Furthermore, on the demand side, through July, we are running ahead of projected demand and fell through which is encouraging well disruptive quarter outlook. We expect ASPs in 2022 to increase 8% over 2021. We continue to effectively manage supply chain, the third quarter camera secured and the fourth quarter pipeline is well-developed. We expect full-year 2022 gross margin to be at the low end of our target range of 40% to 43% primarily due to a strengthening U.S. dollar along with some freight and component price increases.
We expect to reduce a 2022 operating expenses to range between $325 million and $330 million down from $340 million to $345 million. We are prioritizing certain hiring while slowing other hiring as well as taking other actions. To execute on planned product launches, we will continue to invest in product innovation and hardware, software, and the client experience as well as in targeted marketing while continuing to drive efficiencies in all areas of our business. I hope that additional colour is helpful. Operator, we are now ready to take question.
Question-and-Answer Session
Operator
Thank you, Sir. [Operator Instructions]. We will take the first question from Martin Yang from Oppenheimer. Your line is open, please go ahead.
Martin Yang
Hi, good afternoon. Thank you for taking the question. My first question is regarding camera shift to the higher end. Do you also observe maybe a higher attach rate to accessories as high end cameras contribute a higher percentage in units?
Brian McGee
Hi Martin, it’s Brian. Our catch has been pretty consistent through the years, although, I have to say because we’ve come out with new accessories. Of late, we are seeing a bit more in accessory sales in our quarters. So that’s definitely helping on the top line.
Martin Yang
Got it, thank you. And next question is on the geographic weakness, its strengths. Americas why is it down comparing to Europe and APAC, now what was the respective driving force or behind the growth for Europe and behind the decline in Americas?
Brian McGee
Yes. I think there’s been a bit more travel in Europe and we’re starting to see Asia Pacific opening up. We talked about travel before and historically seeing about 10% of our sales now. To get the combination I’d like direct to crew, direct into duty-free at airports. And then, people then buy we have to extrapolate purchases from online gopro.com, Amazon and other retailers which is the bulk of the purchases. So we’ve done a lot of surveys with customers and how they buy and why they buy. We have seen particularly in Europe and Asia, a rebound in travel, we’ve all seen that but through duty-free and crews were seeing that comeback and that was part of our upside in the quarter and which is great.
That said, it’s also those two channels were above 50% of where they were pre-pandemic. So that also says that the world keeps opening up and we have more room to grow. So, it’s will be a tailwind for us if that happens.
Martin Yang
Got it. Thank you, very much. I have no more questions.
Operator
We will take the next question from Anna Glaessgen from Jefferies. Your line is open, please go ahead.
Anna Glaessgen
Hey, thanks for taking my question. Why don’t dig a little bit into the expectation for 3Q on given retailer commentary, I understand, wanting to be conservative around, there are open supplies and [Apple] play some more inventory in light of where positioning is. That said, you guys obviously have had a flagship launch around the same time of the year for quite a while. I guess, how long in advance are you putting those orders in or is this guidance contemplating shift to those orders or more so conservatism around, open to buys and shape budget?
Brian McGee
Yes, Hi Anna, this is Brian. We feel very good about any sell through, so demand is definitely there. [indiscernible] continues and expected to — we did an upper end of our sell through guidance. And if that happens, that’s great because that gives more open to buy dollars for retailers.
So because we have replenish their stock. So as long as our products moving, they’re going to keep buying. I think we have pretty good visibility on the third quarter in terms of moving the [indiscernible] product and product availability and the strength also on gopro.com, you can be there and encouraging as well. So from that perspective, it’s good. And then, we’ll get to the fourth quarter, we have really good data historically on new products and how many products in the lineup and which products move and at what rates and relative to each other. And so obviously, we’ll have a flagship product for the fall and an additional product, that additional product, we expect to do well, but it doesn’t have to knock it out of the park. It’s like third or fourth and ring of what we have to do and sell through. So we’re not completely dependent on it to meet all the numbers. But it’s still important in terms of relative numbers and expectations for the year.
Anna Glaessgen
Great, and just going off the prior questions around the dispersion across regions in performance. Are you expecting? What are you expecting for the Americas to the back half of the year?
Brian McGee
We expect Europe and Asia to continue to open. And we’re not expecting a lot of additional growth from North America. We’re seeing some of it, which has been encouraging popping up here in July. But that would be maybe upside to the numbers in the second half.
Anna Glaessgen
Great, thanks.
Operator
We will take your next question from Erik Woodring from Morgan Stanley. Your line is open, please go ahead.
Erik Woodring
Thank you. Good evening, guys. So maybe if I just start on the kind of selling forecast. So the rationale that you described is very clear. I just wanted to get a better understanding of is the cut to your selling forecast. Or what percentage of the cut in your selling forecast is due to retailers carrying lower inventory versus like a real time, demand, real time reaction to demand that you’re seeing on GoPro? I’d love just to like the bifurcation there. And then I don’t know if I missed it in the prepared comments. But did you provide any comments on sell through for 3Q in ’22? And then I have a follow up. Thanks, guys.
Brian McGee
I think on demand side, we’re actually seeing a stronger demand than we’ve initially guided for in the quarter which is very encouraging. July was nicely ahead of expectations. So we’re seeing solid demand that really picked up in Q2, picked up more in Asia and continued in Europe. The second quarter in Europe was up year-over-year. So very positive. So as long as the sell through continues, like I said, as we expect it to, we have very good visibility then into selling. So —
Erik Woodring
Okay. And then maybe just, Brian, again, on thinking about seasonality back of the envelope math, for me kind of implies you need to get towards the higher end of seasonality, revenue seasonality in both 3Q and 4Q, if we take kind of the midpoint of your selling plus your ASP comments. And so is that the right way to think about it? Or will revenue be overly skewed to 4Q because of the product launch cadence? I just want to make sure we’re thinking about 3Q revenue and 4Q revenue correctly. And that’s it for me. Thanks, guys.
Brian McGee
Yes, no worries. Yes. 3Q would be a little bit below in terms of unit where we’ve historically been. Q4 a touch higher. But that’s because we have two new products coming out in the fourth quarter versus one. So if it wasn’t for that, we would have tempered the outlet to be less. But considering we have more products to sell, we’ll get the load in and the sales and the sell through. And that’s what’s driving the numbers for ’22 and they’ll help drive it for ’23 as well.
Operator
[Operator Instructions] We’ll take the next question from Nik Todorov from Longbow Research. Please go ahead sir.
Nik Todorov
Thank you. One question on Americas. Brian, I think you mentioned that you don’t expect much growth from America in the second half. I just wonder maybe if you can explain why you seen this bifurcation in America revenue and demand versus the rest of the world? I understand the retail Big Box inventory digestion is one hand but is there anything besides that, that you see that driving that differentiation in demand?
Brian McGee
Yes. There is actually a couple of things. One is Big Box retailers are a large part of our North American business. So that definitely has an impact. And so we’ll see how that goes. The good news is, we have, as I said in prepared remarks retrieve inventory in 9 to 10 weeks, which is pretty good. And historically, right where we would want them to be so that they’re not missing sales.
So hopefully, we can keep it. We expect it to come down. But if we keep selling through and see the demand, like we’ve been seeing in July, that maybe that doesn’t get cut. So maybe that’s upside for us. I think, since the pandemic, I think we’re seeing a little bit of a cycle too because North America back in the second half of ‘20, first half of most of ’21 was very strong for North America, and Europe and Asia were much more tempered on our business. And we’re seeing that cycle, where North America over the last couple of quarters has kind of cut down a bit. But Europe and Asia have come up. So I think we’re seeing just a cycle on part of that reopening as such. So that’s the beauty about having a global business is we get to manage a global business. And sometimes certain geos are up and others are down in an day cycle around and we continue to enjoy the benefits of being that diversified globally.
Nik Todorov
Okay. Got it. Second question is more of a kind of a strategy going forward. So obviously, I think you move to the moving camera demand to the high end of your products set. So increasing the ASP and kind of maybe lowering units. But looking forward, it sounds like you’re going to have an additional product launch this year. How should we think about this going forward? Are the new products outside of the maybe Hero11 coming? Are those kind of a complementary products that are just addition to the TAM and ASP should be continued to trend up obviously for one reason because of subscription. But even if we strip out subscription, how should we think about the mix of ASP versus units going forward into next year?
Brian McGee
I think as we look at it going into next year, we expect to have APS continuing to go up more to the high end and more unit growth. So we’ll have we expect to have units growing a bit in 2023 and that’s largely due to I think Asia and a bit of Europe’s going to drive that. And if North America can come back, if it’s in recession, or going through some of those economic issues, if that comes back, then we do better.
I can also point out the strength of what’s going to help drive ASPs in ‘23. And I said this in the May call, as I looked at subscription, and the number of subscribers, we expected it 2.2 million that’s going to continue to grow into 2023 given the model and we expect to see subscription revenue up about 50% year-over-year.
It’s up way up, already during that ’21 over ’20. So that’s also going to have a positive impact on gross margin while we’re at 40 points in 2020 or 2022, sorry I’d expect to be at least 2023 because of the growth in subscription. And that’s continuing to drive to the high end where we make more money as well as B2C.
Nik Todorov
Okay. Got it. Last question for me quick. What do you expect for sell through for the fourth quarter, or for the full year?
Brian McGee
Sell through for the whole year. It’s going to be about 3 million to 3.1 million units. Pretty close to sell in.
Nik Todorov
Got it. Thanks. Thanks for the answers, Brian.
Operator
Next question from Jim Suva from Citigroup. Your line is open. Please go ahead.
Jim Suva
Thank you. Brian, you mentioned Big Box retailer in North America, 9 to 10 weeks inventory. You thought that was pretty good. The question is, is that confirmed with the Big Box retailers and they’re fine with that? Or is there a chance at the Big Box retailers may actually want to take things lower? I’m just kind of curious about that 9 to 10 weeks reference you made.
Brian McGee
Yes. We see that’s a good level because those are good, healthy in stocks where they don’t lose camera sales as they, they could choose to drop inventory. They have their business to end to in trying to get their inventories down and cash flow. So we’ll see what they do. And each one will deal with it differently. They will do the same thing. But I think, if they go too low, even in seven, eight weeks, it could be stocked out and miss sales. Now maybe that comes back to gopro.com, too. So maybe it slipped to us. But we’ll work with the retailers to try and hold as much weeks of inventory as possible. So that’s just a dynamic we have to work through between Q3 and Q4. But that’s all [indiscernible] took the numbers down, right because we don’t know exactly where they’re going to go because they’re managing their business too. So it’s pretty dynamic.
Jim Suva
Yes, so Brian was then previous making this up three, six months ago, your inventory bigger than 9 to 10 weeks? Or is it more their comments about lowering inventory on other consumer electronics they have in the stores?
Brian McGee
No, it’s more the latter. We’ve been consistent in the 9 to 10 week range.
Jim Suva
Yes, that’s what I thought. Okay thank you the clarification.
Brian McGee
Yes, just for the record, I mean, we’ve done a really, really good job of managing channel inventories and not getting over our SKUs because we know that if it goes too high, that’s just trouble for us and for the retailers. And that causes discounting, etc. So we’ve seen how that’s played out, historically and we haven’t had to do that in the last two years.
Jim Suva
Great, thank you. It helps us bridge the concern about what they’re saying and in the media
versus the reality of behind the doors of what you’re doing. So thank you so much, Brian, and Nic for the details.
Brian McGee
Thanks Jim.
Operator
It appears that there is no further question at this time. Mr. speaker, I’d like to turn the conference back to you for any additional closing remarks.
Nicholas Woodman
Thank you, operator. And thank you, everybody for asking Brian, all the questions. You made my job very easy today. I just like to close by saying we’re excited for the rest of the year. And all of the new products and services that we’ve got on tap for later this year. It’s going to be very exciting. And we’re also excited to connect with you at a slate of upcoming events later this quarter. So thank you again, for your attention, for your support. And until then, this is team GoPro signing off.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
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