Q1 2024 GoPro Inc Earnings Call

Participants

Chris Clark; VP, Corporate Communications; GoPro Inc

Nicholas Woodman; Chairman of the Board, Chief Executive Officer; GoPro Inc

Brian McGee; Chief Financial Officer; GoPro Inc

Andrew North; Analyst; Oppenheimer & Co. Inc.

Presentation

Operator

And welcome to the GoPro first quarter 2024 earnings call. My name is Lauren, and I will be coordinating your call today. (Operator Instructions)
I will now hand you over to host Chris Clark, VP Corporate Communications, to begin. Please go ahead.

Chris Clark

Thank you, Lorne. Good afternoon, and welcome to GoPro's first quarter 2024 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; and Chief Financial Officer and COO, Brian McGee. Today's agenda will include include brief commentary from Nick followed by Q&A for detailed information about our first quarter 2024 performance as well as outlook, please read our Q1 2024 earnings press release and management commentary, we posted to the Investor Relations section of GoPro's website.
Before I pass the call to Mick, 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. This means that results could change at any time, 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, 2023, which is on file with the Securities and Exchange Commission and as updated in filings with the SEC, including the quarterly report on Form 10-Q for the quarter ended March 31, 2024.
Today we may discuss gross margin, operating expense, net profit and loss adjusted EBITDA as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis, 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. Unless otherwise noted, all income statement related numbers that are discussed in the management commentary and our remarks today, other than revenue are non-GAAP.
Now I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Nicholas Woodman

Yes. Thanks, Chris, and thanks, everybody, for joining us today. GoPro exceeded guidance in Q1, delivering revenue of $155.5 million, non-GAAP gross margin of 34.4% and non-GAAP EPS loss of $0.21. We ended Q1 with 2.5 million subscribers, a 6% year-over-year increase. Today's earnings call marks the one-year anniversary of the start of our multiyear transition to expand our TAM by restoring our brand presence at retail, scaling our marketing efforts in our core markets and substantially broadening our product portfolio to serve more people who want to capture, create and share content in ways that go beyond the phone GoPro's brand resonates with a broad range of end users from active consumers to professional athletes, influencers and film and television professionals who rely on their GoPros to capture unique content that stands out, we see an opportunity to be the world's most exciting brand focused on enabling differentiated alternative forms of content creation across a broad range of markets and use cases to date, and we've been primarily serving this wide range of users and use cases with the world's most versatile camera, the HERO camera.
And while the HERO camera has done an amazing job in its role and will continue to be our flagship for some time. We believe we can expand our TAM and business by developing a broader range of products that more specifically meet the needs of our customers while also targeting entirely new market segments.
In 2026, we expect to have in market the broadest most differentiated lineup in our history we are developing a full spectrum of specialized diversified products to serve consumers capture needs in more convenient and enjoyable ways than ever before at price points, ranging from entry level through professional rather than compete in a digital imaging market with me-too products.
We intend to grow GoPro with fun and exciting alternative capture solutions that enable consumers and professionals in unique value added ways. We see a long runway of totally new specialized products that converge with our software solutions to establish GoPro has the world's leading alternative capture company. As an example of this TAM expansion strategy through specialization and diversification.
In February 2024, we completed the acquisition of foresight helmet systems in Australia and maker of tech-enabled motorcycle house. As discussed in our Q4 earnings call. We believe Tecan enabling motorcycle helmets and combining them with a value added software experience represents a meaningful opportunity for GoPro to extend its technical and marketing capabilities to create differentiated solutions within a $6 billion motorcycle helmet market, of which we believe we can target a SAM of approximately $3 billion.
We are excited to expand our brand into this new product category and expect to announce our first helmet products in the second half of 2025. We also intend to partner with leading home brands as an OEM supplier to help them tech-enabled their own premium SKUs. We have enormous respect for leading brands and look forward to working with them to help drive innovation together.
But that's just on the hardware front. We also are excited to build upon our synced mobile desktop and cloud software experience to make GoPro an even more powerful, yet simple solution for anyone wanting to create engaging content regardless of what camera they use. We see this as a long-term opportunity. And we believe our 2.5 million subscribers and high retention rates, our testament to that opportunity and our ability to execute against it. In February, we rolled out the initial release of our quick desktop app for Mac OS. and our new Premium Plus subscription tier. The quick desktop app, which is available at no additional charge to GoPro subscribers brings the simplicity and convenience of auto.
Adam, if I don't have automatic edits to desktop users along with powerful yet convenient manual editing tools, synced to editing between mobile and desktop apps and the ability to import footage from any camera. We're planning to launch a Windows desktop app later this year.
Our new premium plus 99 subscription tier includes an advanced desktop-based hyper smooth Pro video stabilization feature plus increased cloud storage for footage captured with any camera GoPro subscribers at both the original $49.99 premium tier and new $99.99 premium plus tier enjoy unlimited cloud storage footage captured with their GoPro at original quality.
We've already added more than 20,000 Premium Plus subscribers with nearly 80% having upgraded from the $49.99 annual premium tier, a solid start that we are excited about. In addition, our aggregate annual subscription retention rate increased to a new high of 69% in the first quarter, up 6% year over year. We also made significant progress expanding our global retail presence. During Q1, we added approximately 1,000 new retail doors and importantly, deepened relationships with key partners to improve in-store merchandising and brand exposure.
To excite consumers and drive sell-through. Since Q2 2023, we've added more than 4,200 doors and believe we're on track to add an additional 3,000 to 6,000 new doors by the end of 2025, enhancing our go-to-market capabilities for our expanding product roadmap. As mentioned previously, the bulk of our door count increase over the last year has been in Amea where in Q1 we saw a greater than 50% lift in retail channel sell-through year over year.
This is a clear and positive sign that our strategy to grow retail channel sales is working. In addition to growing door count. We are refreshing our point-of-purchase merchandisers, expanding our in-store brand presence and enhancing account management throughout the retail channel. For example, in North America, we're in the process of updating our endcap displays with BestBuy.
This started with installing our larger eight foot end cap displays in all Best Buy premium experience stores that feature a camera experience shop, which we completed in mid-April. And by mid July, we expect to have completely refreshed all of our merchandising displays in all Best Buy stores. Additionally, we're working closely with Best Buy to train select blue shirt employees on GoPro products to help them maximize GoPro sales in their top stores, having a passionate and knowledgeable in-store salesperson can have a significant impact on our joint business.
And we're very excited to be a part of this exclusive sales program with BestBuy, one of the world's largest consumer electronics retailers. We believe growing our brand presence in thousands of new doors over the coming years will help maximize awareness of our brands and present our expanding product portfolio in the best possible way.
As we previously highlighted in our Q4 2023 earnings commentary, we've been reinvigorating our efforts to drive awareness of our brand and all the major verticals that we serve. In Q one, our brand was prominently displayed in snow focused events like the X Games and free ride World Tour in mountain biking with the Red Bull hardline and dark vest events and into real motorsports events, including Supercross and Moto G P.
We are also leveraging select events as platforms to host retail super clinics to grow engagement and product knowledge amongst key retailers serve these important markets. There are many exciting initiatives underway at GoPro as we work to expand our TAM by growing our brands, strengthening our presence at retail and developing a significantly broader offering of specialized diversified products.
Given consumers' growing appetite for content creation, we believe we are well positioned to leverage our unique hardware and software ecosystem to serve consumers in exciting ways and grow our business over the long term, firmly establishing GoPro as the world's leading alternative capture company, offering, content capture and creation solutions that go well beyond the phone.
This transformation will take time. However, we expect that it won't be until 2025 as we enter the third year of our growth strategy that we will show improved revenue and profit growth. We believe 2025 will be the first full year that we benefit from our investments and efforts. We can expect the door count of 26 to 29,000 retailers.
And we're well on our way to having the broadest most differentiated product portfolio in our history in 2026 due to the development process. Taking longer than expected, the launch of our new entry-level camera will push from Q2 to Q3 in 2024, and our new 360 camera will push to late Q4. This is expected to negatively impact revenue in a range of $65 million to $85 million in 2024.
Importantly, our exciting new flagship HERO camera and all of its innovation and performance enhancements remains on track for a scheduled launch later this year. While 2024 will be challenging from a revenue and profitability perspective, we believe we have the right long-term strategy to expand GoPro into new markets in order to drive growth and profitability. We recognize this will require patience, but we believe that this patient we'll be rewarded over the long term.
Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions)
Erik Woodring, Morgan Stanley.

Thank you for taking my question. This is Kathy on behalf of Eric. So just wanted to ask you alluded to a delay in the launch of your new entry-level camera to the third quarter. So could you please walk us through what and folding behind the scene, like what's the main factors causing the delay in windows?
We realize this delay and how significant it was and what gives you confidence that all of your other product launches remain on track? And I have a follow-up.

Nicholas Woodman

Yes, I think the main focus for our three 60 product is and with any of our products is to launch the highest quality experience possible. So we're taking more time to get that experience to live up to the brand promise for our customers. And the same goes for our entry-level product on our flagship new HERO camera remains on track, and obviously, we're very excited about that that's going to be a terrific new product that's going to really impress people with a number of new features and capabilities.
And I just want to reiterate that that product remains on track. And what gives us confidence in the time line for our various products is specifically that we're giving ourselves more time to launch these products at a performance and quality level that people have come to expect from GoPro.

Brian McGee

And actually maybe up from over the top or maybe have come over the top of them. Before the next question, the quality piece is really important. And I'd argue a hero 12 block is and arguably the best quality patents we put out in the market from Accolade to people who use it but it manifests itself in different ways, life and now it's got the lowest return rate that anytime you buy.
Firstly, it has the lowest warranty rate. The warranty rates are small anyway, but it cut in half or better. And on the call, volumes in the customer support are less than half of what they would be in other cameras. So the team has done a great job improving the quality of the products we put out. And we that's what our customers expect. So and we'll continue to do that and make sure they're ready when they're ready.

Understood. So just kind of just as a follow-up, if even if we adjust for the pushout for the Energy Bill, on your revenue guidance and Heine, a below seasonal. So how much of that is macro driven by or macro-driven? Like how would you would you ascribe us to elongating replacement cycles or pauses?

Brian McGee

Yes. And yes, maybe I'll start on this one and Nick can come into it. We had anticipated that retail would grow and there this year. And in fact, no retailers are reporting flat to down revenue in their businesses and largely due to macroeconomic factors. In addition, we're seeing retailers also carrying less inventory and the economic conditions in the US and China are good examples of that you're seeing it reported almost every day.
On the flip side, we have been able to grow in Europe and it was up 13% year-over-year in the quarter, and that's through expanding our door count and our distributors. We added twice the number of distributors over the last year. And the increase in distribution and doors in Europe have overcome or helped to offset the impact of larger macroeconomic environment.
Yes. So we are seeing a positive development from that perspective on getting door count. And I guess the other one I'll point out is our subscription business continues to be a bright spot. We had 48% attach in Q1, a new record, 69% annual aggregate retention rate. And so are still at 2.5 million subs. And we're adding, as Nick said, 20,000 plus premium plus subscribers. So on definitely people who are buying the cameras are engaged and staying engaged on the subscription and with the products.

Thank you.

Operator

[Andrew North], Oppenheimer.

Andrew North

Hey, guys, this is Andrew on for Martin. I just have two questions today. When you said that 80% of the premium plus subscribers have upgraded from the original premium tier. So where did the other 20% come from? But that I'd call it bucket.

Brian McGee

And the other 20% were people who are new to buy subscription and they backed up Premium Plus subscription at $100.

Andrew North

Okay. Got it. Then in the in the prepared remarks, you made some commentary rather you cite a little bit of increasing competition. Could you give us a little more details on the competitive pressure? Is that coming from heavier discounting, feature differentiation of any extra detail would be great.

Nicholas Woodman

And yes, we've seen some increased competition in our core HERO camera category, specifically through discounting and discounting it is questionable, whether that's at a sustainable level for our competitors. But that's that's what's been impacting the core Hero camera business specifically is extremely discounted product, which tells you that they were likely having trouble moving that product without discounting and on sell-through data that we were I'm seeing was indicating that as well.
And then in the three 60 space, you know, we haven't come out with a new Max 360 cameras since Max's launch in 2019. And during that two-year period, the 360 categories grew considerably. And so we're really excited for MAX two and excited to take back considerable share. We believe with the launch of that product.
And fortunately that product pushing out to late Q4, it doesn't help us on that front until then. But that's another area where we've been absent with new product introductions for a few years. Max two represents a significant opportunity for us to take back share there over time. Those are the two primary areas of competition that we've been seeing.

Brian McGee

And Nick, I'd add on to that, the price discounting continue actually in China as well and the combination of the economy in China and folks buying more local brand to grow, which is, I think, a phenomenon we're seeing and across the China market with other brands. So it definitely impacted us as well.

Nicholas Woodman

Yes, I would say a bright spot at the time for the few bright spots with regards to competition is our upcoming new entry level camera that we're launching in Q3 has received really positive and feedback from retailers and distributors and as well athletes and influencers that we've shared that product with. And so we're very encouraged by the TAM expanding potential. This entry-level product will have. It's a different type of product than we've made before, and it's really in response to consumer research that we've done for what not just entry-level, but what consumers in general want to see from GoPro. So we think we're hitting it on all marks with that product.
And that's coming in Q3. And then as well, our new flagship HERO camera, as I previously mentioned, is on track for launch later this year. And we think that that's going to be redefining the HERO camera category with its features and capabilities. And then of course, when we do launch MAX two at the towards the end of Q4, we're expecting that to be very competitive as well. So on all fronts, we think that we're well positioned, but we've got a little bit of ways to go to get to launch those products.

Andrew North

Perfect. Appreciate the color. Thank you.

Operator

Thank you. We have no further question and so will now hand back to the management team for closing remarks.

Nicholas Woodman

Well, thank you, operator, and thank you, everyone, for joining today's call. As we mentioned, we believe that we have the right long-term strategy to expand GoPro into new markets in order to growth drive growth and profitability. We recognize that this will require patience, but we believe that patience will be rewarded over the long term. Thank you very much, everybody, for joining today. This is team GoPro signing off.

Operator

This concludes today's call, and thank you for joining everyone. You may now disconnect your lines.