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GoPro (GPRO)
Q2 2022 Earnings Call
Aug 04, 2022, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

You are currently on hold for the GoPros' quarter 2 2022 earnings conference call. At this time we are simply today's audience and plan to begin shortly. We appreciate your patience and please remain on the line.  Good day, and welcome to GoPro's 2022 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jalene Hoover, vice president of investor relations. Please go ahead, ma'am.

Jalene Hoover -- Vice President, Investor Relations

Thank you, operator. And thanks for everyone for your patience. We were experiencing some technical difficulties this morning, causing a delay in your ability to join, and wanted to wait. So as many of you could join as possible.

Welcome to GoPro second quarter 2022 earnings conference call. With me today are GoPro CEO, Nicholas Woodman; and CFO, and COO Brian McGee. Today's agenda will include a brief introduction from Nic and some commentary from Brian, followed by Q&A. For detailed information about our second quarter 2022 performance and our outlook.

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Please read the management commentary we've posted to the Investor Relations section of GoPro's website. Before I pass the call to Nic, 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 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 31st, 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 30th, 2022.

Today we may discuss gross margins, operating expense, net profit, and loss, EBITDA, as well as basic and diluted net profit and loss per share in accordance with GAAP and all the 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 since then in detailed financial information and metrics for the second quarter 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 -- Chief Executive Officer

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.

The camera sells through outpaced 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 thousand GoPro subscribers. And we are on the cusp of surpassing 2 million GoPro subscribers, which translates into $100 million of annual recurring subscription revenue with a 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 -- Chief Financial Officer and Chief Operating Officer

Thanks, Nic. I like to provide some color on Q2, Q3 on our 2022 outlook. As a reminder, both the CEO and CFO comments and the management commentary posted in the Investor Relations section of our website. As Nic mentioned, Q2 sell-through exceeded guidance, and revenue on EPS were also on the higher end of guidance.

Europe and A-PAC performed well, particularly due to some rebound in international travel despite macro headwinds in these regions. Our Q3 and full year 2022 Outlook considers several key macro dynamics impacting our business. It 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. The year-over-year Fx impact to GoPro based on the midpoint of guidance to revenue, gross margin, and earnings is approximately $10 million and $11 million in Q3 and Q4 respectively, or two times as much as in the first half of 2022.

To 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 macroeconomic issues may impact demand, as well as competition for shelf wallets during the second half. Taking these macro-dynamics into consideration for 2022, we expect camera unit sales at 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 of continued solid demand heading into Q3, and fueled by the launch of two new cameras rather than one flagship camera in the second half, and a planned rollout of cloud-based editing later this year. Furthermore, on the demand side through July, we are running ahead of projected demand and sell-through, which is encouraging relative to our third quarter outlook. We expect AFT in 2022 to increase 8% over 2021. We continue to effectively manage supply chain with third-quarter Camara 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 our 2022 operating expenses to a range of 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 cloud experience as well as in targeted marketing. While continuing to drive efficiencies in all areas of our business. I hope that additional color is helpful. Operator, we are now ready to take questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instruction] We will take the first question from Martin Yang from Oppenheimer. Your line is open. Please go ahead.

Martin Yang -- Oppenheimer and Company -- Analyst

Hi. Good afternoon. Thank you for taking the question. My first question is regarding the camera shift to the higher end.

Do you also observe a higher attach rate to accessories as high-end cameras contribute a higher percentage in units?

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Hi, Martin, it's Brian. Our attach 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 -- Oppenheimer and Company -- Analyst

Thank you. The next question is on the geographic weakness [inaudible] Americas, why is that down comparing to Europe and A-Pac? What was the respective driving force behind the growth for Europe, and behind the decline Americas?

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Yeah, 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 historically thing about 10% of our sales now. To get there, the combination of like direct to Cruise, direct to Duty free at airports. And then, people then buy, we have to extrapolate purchases from online, Google.com, Amazon, and other retailers, which is the bulk of the purchases.

And so we've done a lot of surveys of customers, and how they buy and what they buy. We have seen, particularly in Europe and Asia, a rebound in travel. We've all seen that, but through Duty-free and Cruise, we're seeing that come back and that was part of our upside in the quarter, which is great. That said, it's also those two channels are about 50% of where they were pre-pandemic.

So that also says if the world keeps opening up, you have more room to grow, which you know, will be a tailwind for us if that happens.

Martin Yang -- Oppenheimer and Company -- Analyst

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 -- Jefferies -- Analyst

Hey, thanks for taking my question. I want to dig a little bit into the expectations for 3Q given retailer commentary. I understand wanting to be conservative around their open supplies and appetite for more inventory in light of where positioning is. That said, you guys obviously have had a flagship launch around the same time every year for quite a while.

I guess how long in advance are you putting those orders in? Is this guidance contemplating shift to those orders, or more so conservatism around open to buys and chase budgets?

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Yeah. Hi, Anne, this is Brian. We feel very good about seltzer. The demand is definitely there.

As a matter of fact, if it continues, and we expect it to be at that upper end of ourselves, the guidance. And if that happens, that's great because that gives more open-to-buy dollars for retailers. So because they have to replenish their stock. So as long as our products are moving, they're going to keep buying.

I think we have pretty good visibility on the third quarter in terms of who's going to take what product and product availability, and the strength also on gopro.com, it has been very 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 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 and it doesn't have to knock it out of the park. It's like third or fourth and brings 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.

Anna Glaessgen -- Jefferies -- Analyst

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?

Nicholas Woodman -- Chief Executive Officer

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 that which has been encouraging popping up here in July, but that would be maybe upside to the numbers in the second half.

Anna Glaessgen -- Jefferies -- Analyst

Great. Thanks.

Operator

We would take the next question from Eric Woodring from Morgan Stanley. But only open because. Go ahead.

Eric Woodring -- Morgan Stanley -- Analyst

Thank you. Good evening, guys. So, maybe if I just start on the kind of sell in the 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? Let's just take the bifurcation there. And then, I don't know if I missed that in the prepared comments, but did you provide any comments on sell-through for 3Q and 22? And then I have a follow-up. Thanks, guys.

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Yes. I think on the demand side, we're actually seeing stronger demand than we 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 delta continues and like I said, as we're expected to, we have very good visibility then into [inaudible]. 

Eric Woodring -- Morgan Stanley -- Analyst

OK. And then,  maybe just Brian again on I think about seasonality. Back-of-the-envelope math for me kind of implies you need to get toward the higher end of seasonality, revenue seasonality in both 3Q and 4Q, if we take kind of the midpoint of your sell in 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 -- Chief Financial Officer and Chief Operating Officer

Yeah. 3Q would be a little bit below in terms of unit, where we've historically been. Q4, a top higher, but that's because we have two new products coming out, and that's in the fourth quarter versus one. So if it wasn't for that, we would have tempered, you know, the outlook 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 long.

Operator

[Operator instruction] We'll take the next question from Nik Todorov from Longbow Research. Please go ahead, sir.

Nikolay Todorov -- Longbow Research -- Analyst

Thank you. One question on America's, 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 think 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 -- Chief Financial Officer and Chief Operating Officer

Yeah. I see a couple of things. One is, will 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, you know, reaches 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 an 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, and the 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 come down a bit, but Europe and Asia have come up. So I think we're seeing a cycle and part of that on reopening. And so that's the beauty about having a global business is we get to manage a global business, sometimes certain goes are up, and others are down and then they cycle around.

And we continue to enjoy the benefit of being that diversified globally. 

Nikolay Todorov -- Longbow Research -- Analyst

OK. For a second question is more of a kind of strategy going forward. So obviously, I think your move to moving camera of demand to the high end of your product 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 zero 11 coming? Are those kinds of complementary products that are just two additions to the TAM, and ASP should continue to trend up, obviously for one reason because of subscription. But even if we strip out a subscription, how should we think about the mix of ASP versus units going forward into next year?

Brian McGee -- Chief Financial Officer and Chief Operating Officer

I think as we look at it going into next year, we expect to have ASPs continuing to go up, more to the high end, and more unit growth. So have we expected to have units growing a bit in 2023? And that's largely due to, I think Asia and Europe is 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 think I'd also point out the strength of what's going to help drive our speed in 23, and I said this in the May call, as I look at subscriptions and the number of subscribers we expect to be at 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, that we're already doing that in 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. So I'd expect to be at least a point 23 because of the growth in the subscription.

And that's continuing to drive to the high end where we make more money as well as DTC.

Nikolay Todorov -- Longbow Research -- Analyst

OK. Got it. Last question for me, a quick one. What do you expect for sell-through for the fourth quarter, or for the full year?

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Sell-through for the whole year, it's going to be about 3 to 3.1 million units. We're pretty close to selling.

Nikolay Todorov -- Longbow Research -- Analyst

Got it. Thanks. Thanks for the answers, Brian.

Operator

Next question from Jim Suva from Citigroup. You're on it open. Just go ahead.

Jim Suva -- Citi -- Analyst

Thank you. Brian, you mentioned Big Box retailers in North America. Kind of 9 to 10 weeks inventory. You thought that 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 that 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 -- Chief Financial Officer and Chief Operating Officer

Yeah, we see that's a good level because those are good healthy in stocks where they don't lose camera sales. If they could choose to drop inventories, they have their business to run to and they're trying to get their inventories down and cash flow. So we'll see what they do. And each one will deal with it differently.

Like the one, I'll do the same thing. But, I think if they go to low even in seven or eight weeks, they could be stocked out and miss sales. Maybe that comes back to go for the account too. So maybe it's 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 2024. [inaudible] 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 -- Citi -- Analyst

Yeah. So Brian was then previously making this up three, six months ago, your inventory bigger than 9 or 19 weeks or more, their comments about lowering inventory on other consumer electronics that they have in the stores.

Brian McGee -- Chief Financial Officer and Chief Operating Officer

No, it's more the latter. We've been consistent in a 9 to 10-week range. 

Jim Suva -- Citi -- Analyst

Yeah, that's what I thought. OK. Thank you so much for the clarification.

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Just for the record, I mean, we've done a really, really good job of managing channel inventory, and not getting off our skis 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 -- Citi -- Analyst

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 -- Chief Financial Officer and Chief Operating Officer

Thanks, Jim.

Operator

It appears that there is no for the question at this time. Mr. Speaker, I like to turn the conference back to you for any additional or closing remarks.

Nicholas Woodman -- Chief Executive Officer

Thank you, operator. And thank you, everybody, for asking Brian all the questions. You made my job very easy. I just like to close by saying were excited for the rest of the year, and all of the new products and services that we got on top for later this year.

It's gonna be very exciting. And we're also very excited to connect with you at these 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

[Operator signoff]

Duration: 0 minutes

Call participants:

Jalene Hoover -- Vice President, Investor Relations

Nicholas Woodman -- Chief Executive Officer

Brian McGee -- Chief Financial Officer and Chief Operating Officer

Martin Yang -- Oppenheimer and Company -- Analyst

Anna Glaessgen -- Jefferies -- Analyst

Eric Woodring -- Morgan Stanley -- Analyst

Nikolay Todorov -- Longbow Research -- Analyst

Jim Suva -- Citi -- Analyst

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