GoPro - Earnings Call - Q3 2020

Transcript

Operator (participant)

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

Christopher Clark (VP of Corporate Communications)

Thank you, Casey. Good afternoon, everyone, and welcome to GoPro's Q3 2020 earnings conference call. With me today are GoPro 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 uncertainty related to the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and our commentary about business results and outlook is based on the information available as of today's date.

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 31, 2019, which is on file with the U.S. Securities and Exchange Commission and in other reports that we may file from time to time with the SEC, including the quarterly report on Form 10-Q for the quarter ended September 30, 2020. Today, we may discuss gross margins, 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 and which is posted on our website. In addition to the earnings press release, we have posted management commentary and slides containing detailed financial data and metrics for the third 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.

Nicholas Woodman (Founder and CEO)

Thanks, Chris, and good afternoon, everyone. Once again, we've chosen to post management commentary for our quarterly results, including Brian's financial overview, to the GoPro Investor Relations page on our website, and we encourage all to read the commentary. Now, I will give a brief remarks about the third quarter, and then we'll go directly into Q&A. As we shared in the management commentary, thanks to consistent momentum throughout the quarter and a strong launch of HERO9 Black coupled with our GoPro subscription service, in Q3, GoPro generated non-GAAP EPS of 0.20, $100 million of operating cash flow, and we expect to be profitable for the full year 2020. I'd like to thank all of GoPro's employees for their tremendous execution in a challenging year. It's thanks to them that we achieved such terrific results in Q3 and are poised for success going forward.

With the launch of HERO9 Black, we debuted not only an exciting new flagship, but our strategy to make the GoPro subscription central to our business and customer experience. GoPro subscribers who purchase directly from GoPro.com enjoy far more value than non-subscribers, while generating improved margin and cash flow for our business. This increased value to consumers at GoPro.com is accelerating our direct-to-consumer strategy while driving GoPro subscriber growth, both of which we believe will improve our customers' lifetime value and have a positive impact on profitability. We are seeing higher average order values and accessory attach rates with subscriber customers versus non-subscribers, an indication that subscribers are taking advantage of their subscription benefits in a manner that also increases their value to GoPro. Other highlights from the quarter include revenue growth of 109% sequentially and record GoPro.com revenue of 81 million.

We estimate sales through of approximately 955,000 cameras exceeding our expectations. We believe our Q3 performance sets us up for a strong Q4, and we expect to achieve full-year non-GAAP profitability. We expect to exit 2020 with low channel inventory, positioning us well for 2021. Our direct-to-consumer subscription-centric approach is generating improved cash flow, margin, and LTV while delivering a high-margin subscription revenue stream we expect will have a positive impact on profitability in 2021. We'll now move on to Q&A.

Operator (participant)

Thank you. If you would like to ask a question, you may press star one on your telephone keypad. If you're using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. If at any point you would like to remove yourself from the queue, you may press star two. Again, please press star one to ask a question. We will pause for a few moments to allow everyone the opportunity to queue for questions. We will take our first question from Andrew Urquhart of Oppenheimer.

Andrew Urquhart (Equity Analyst of Metals and Mining)

Hey, thanks for letting me ask a couple of questions. I just have two questions. The first one is for Brian. Brian, could you talk about the change in the business model from a working capital perspective, the benefits there, and how we should think about that on a GoPro basis? Clearly, it's been a positive, but how positive should we think it could be for cash management as we head into next year?

Brian McGee (EVP, CFO, and COO)

Hi, Andrew. Thanks. Yeah, the new model being direct-to-consumer is helping substantially. We saw that in Q3, where we had nearly $100 million of operating cash flow in the business. Actually, a good chunk of that came from working capital. DSOs improved 25% down to 35 days. We expect that to go down to 20-25 days by the end of Q4 and continue to improve, 20, maybe as low as 15 as we get through 2021. That is definitely helping to drive operating cash flow. We are managing inventory much better. You have noticed, actually, it is down by 50% from a year ago and down sequentially. We have continued to reduce our channel inventories, which is another area of the business we have been focused on. You will notice that even in Q4, we expect to reduce channel inventories another 200,000 units, and that is more than 800,000 for the year.

That's definitely been kind of a headwind for us. Obviously, demand has been there at 3.7. Our expectation is 3.7 million units of cameras sold through for the year, but our sell-in is about 2.8 or so. That difference is all taking inventory out of the channel. You can clearly see it's having a beneficial impact. We've guided for cash to be up $90 million or, sorry, $80 million in Q4, sequentially to $225 million. We should continue to see strong cash generation as we get into 2021.

Andrew Urquhart (Equity Analyst of Metals and Mining)

Excellent. Yeah, thank you. It definitely seems like a huge improvement, so we'll update the model for some of those effects in 2021. Nick, I have probably an impossible question, so just any color you can provide. Back in March, which seemed years ago, back in March, obviously, a lot was fluid, a lot was changing. Your sell-through estimates were lower than they are today. Clearly, travel hasn't come back. Any color you could provide on changing demographics, changing customers? Does this open more opportunities for market penetration? Any color on your view of how the customer has changed and what it means going forward?

Nicholas Woodman (Founder and CEO)

You know, consumers are creative animals, and just because they adapt incredibly well to new circumstances. And so even though the coronavirus has placed restrictions on consumers in new ways, you know, travel, for example, getting on airplanes, going to foreign countries that will not let you cross their borders anymore, that constraint has led to people traveling more locally and engaging in activities that are closer to home that they can drive to. We saw a surge in outdoor activity, be it camping, hiking, biking, over the spring and summer months. You know, the old joke about you meet a foreign traveler to your home state, and they tell you all the places they have visited, and they have always seen more of your state than you have, and you were born there.

I think we've seen a shift in that people have gotten to know their local places far more intimately than they did before the coronavirus. There's a lot of positives to that, but included that they've stayed very active and they've found a need for a GoPro. There's also arguably an increased need for a GoPro to share these experiences with other people because you can't bring your friends and family along or join them like you used to. Sharing and communicating visually through the use of a camera, and when you're being active, that camera is a GoPro for a lot of people. That's been obviously a help to our business. Even with consumers who are staying more at home, staying intensely local, if you will, they are still creative.

They have creative needs and desires, and whether it's as a hobby or as a part of their work, and a GoPro serves as a very capable and versatile tool for creatives, for people that want to produce visual content. That hasn't changed at all just because people have stayed at home. Maybe the content that they're creating has changed a little bit. Of course, you have GoPro's expanded functionality as a web camera. That certainly goes without saying has helped the relevance of our products to people who are working and learning from home and need better video conferencing tools, which a GoPro certainly serves as with its wide-angle view, and you can get a more flattering perspective of yourself than you can from an embedded camera in a laptop or a computer screen.

I think across the board, human interests and tendencies have remained the same, but how they've gone about pursuing them in this era of COVID has changed. It is not as though humans have stopped being human. They're just doing different things. Fortunately for our business, we still have a meaningful place in their lives. We think that the same is going to be for winter, where people are not going to just stay cooped up in their homes all winter long, just as they had a yearning to get outside and experience their local areas in new ways. We believe they're going to in the wintertime as well. We think that GoPro is going to continue to serve as a useful communication and creativity tool for people throughout the winter as well as it did throughout the spring and summer.

Andrew Urquhart (Equity Analyst of Metals and Mining)

Got it. That's super helpful. I appreciate the color. Congratulations on the strong quarter, guys.

Nicholas Woodman (Founder and CEO)

Thanks so much.

Operator (participant)

Thank you. We will take our next question from Jim Suva of Citigroup.

Jim Suva (Managing Director)

Thank you so much, and congratulations, both Nick and Brian. My first question is, on the subscribers, are you seeing a higher attach rate of subscribers through GoPro.com or retail or any noticeable difference? If so, is there anything to glean from that?

Brian McGee (EVP, CFO, and COO)

Hi, Jim. This is Brian. Let me start with that, and maybe Nick can chime in. We are definitely seeing a higher attach rate. As we looked in the quarter and we put this in our commentary, particularly on HERO9 Black, 85% of the purchases of HERO9 Black were with a subscription. That's a massive number and is creating a huge opportunity. It's interesting to note that 10% were purchased by existing subscribers, and the remaining were without a subscription. That's really important kind of headed forward because we obviously had strong growth. We expect to be nearly over 700,000 subscribers in 2020. That's greater than 125% growth on a year-over-year basis.

As we look ahead to 2021, if we can start to approach 2 million with the kind of growth rates we're seeing, that's an ARR of about $100 million going forward just on the subscription, not even counting the long-term value of the customer buying other goods and services from GoPro. To also point out, that $100 million has about a 50% operating margin on net gross operating profit. It is a very profitable channel for us. It helps to supplement what we do on the hardware. As we've talked about, from a model perspective, kind of to Andrew's point, it helps to drive operating cash flow. It's a diversification from hardware. That kind of operating profit is helping to drive margins into the 38-40% range that we've talked about as a company and to continue to drive earnings per share.

It is a very exciting development for the company and as well as for the subscribers because they get a lot of value.

Nicholas Woodman (Founder and CEO)

Yeah, I would just add, I think that was well said, and I would add that not only are we seeing higher subscription attach rates, we're seeing higher purchases and accessory attach rates amongst our subscriber customers. As I mentioned, they're taking advantage. Our subscribers are taking advantage of the benefits of being a subscriber. One of those benefits is they get 30-50% off mount and accessories and other goods that we sell at GoPro.com. And our subscribers are taking advantage of that subscriber benefit. It's driving up their average order value and their accessory attach rate, which obviously indicates we've got a significant lifetime value opportunity to improve that over time through this subscription offering.

Jim Suva (Managing Director)

Great. A quick follow-up, but I don't know if it's better for Brian or Nick or both of you, whichever, but in your prepared comments, you mentioned as we begin to contemplate the impact of the expansion in your model, meaning the subscriber base expanding so much, when you talk about contemplating the impact to your model, are you talking about expanding the scale and scope of your products? Are you contemplating the way that you go to market because GoPro.com seems to be going very well? What type of contemplations are you kind of talking about in that reference?

Brian McGee (EVP, CFO, and COO)

Jim, maybe I'll start, and then Nick can chime in. I think it's really related back to what I kind of started talking about. On the model, the direct-to-consumer is a more profitable channel for the company. We're able to sell more subscriptions and more value to the consumer. We're seeing that in records in terms of revenue, and we'll see that again, I think, in Q4. It's expanding our margins, it's expanding our cash flow, and diversifying, not so much yet on a revenue basis, but definitely on a margin and operating profit basis. The direct-to-consumer model is definitely helping along with the subscription benefit. We see that continuing into 2021 and beyond.

Jim Suva (Managing Director)

Great. Congratulations, both Nick and Brian. Truly impressive results, and thank you so much for the details.

Brian McGee (EVP, CFO, and COO)

Thank you very much.

Operator (participant)

Thank you. We will take our next question from Paul Chung of JPMorgan.

Paul Chung (Credit Risk Middle Office Associate)

Hi guys. Thanks for taking my questions. Great execution this quarter, especially on cash flow. Very nice there. You saw a big jump in DTC revenues, but your retail mix jumped up as well, sequentially at least. I assume the attach rate for customers going through retail for subs is much lower, and plus they do not get the cheaper camera deal with subscription. Is that the case, number one? Number two, do customers realize they are missing the deal? How do you intend to kind of educate future customers and push them more to your website for DTC?

Nicholas Woodman (Founder and CEO)

I'll start with that. Now remember, until the launch of HERO9 Black, we were growing our subscription business, yes, through direct sales with GoPro.com, where camera buyers could also purchase the subscription at checkout. We were also growing our subscription numbers by signing on subscribers that bought at retail after the fact, either when they would open their camera packaging and see the literature for the GoPro subscription and explaining the benefits, and they'd go online to subscribe, or when they would download the GoPro app to pair with their camera. The benefits of being a GoPro subscriber would be explained to them, and they could sign up that way. Of course, our ongoing CRM and other marketing efforts to convert GoPro users to subscribers.

We grew a nearly 500,000 subscriber base before incorporating the GoPro subscription more tightly with a camera purchase at GoPro.com and before we drove so much of our business to GoPro.com. That bodes really well for us to continue to be able to convert retail-based consumers into paying GoPro subscribers using the same methods that we used before the launch of HERO9 Black. I think that's an important thing to remember, that we've gotten quite good at growing our subscriber numbers across multiple channels, and we continue to improve on that. Part of your question was, how do we plan to continue to improve?

One of the important aspects of making the GoPro subscription so central to the GoPro experience was to make the GoPro subscription synonymous with GoPro, with the brand, and make it synonymous with being a GoPro owner, and stack this GoPro subscription with so many benefits, so much value, that it's just a no-brainer to the consumer to take advantage of it. We've been very focused on making the math simple for the consumer to do, where they look at the $50 annual subscription cost, and then they compare that to the savings that they're going to get either when buying a camera or buying an accessory or buying a gift for a friend or one of their kids or whatnot.

The math is simple, easy to do to realize, "Wow, I'm going to pay for this subscription in a heartbeat." That's even before you consider the unlimited cloud storage, the damaged camera replacement guarantee, and even more benefits that we haven't rolled out yet. I think that given the rate of subscriber growth that we've achieved before the launch of HERO9 Black, that's very promising. Given the rate of growth that we're seeing post HERO9 Black with the new centralized approach to making subscription so central to the brand experience, that's very encouraging.

As we load up the subscription with even more value going forward, you can see why we're feeling quite confident about our ability to continue to grow the subscription side of our business while importantly delivering phenomenal value to the end user, which results in strong retention of those users, strong re-up rates, which is what we've been seeing so far, and as I've mentioned, an opportunity to improve the lifetime value of our customers. Across the board, kudos to the GoPro team that's responsible for this area of our business. It feels like we've got a lot of momentum that we can support going forward.

Paul Chung (Credit Risk Middle Office Associate)

Great. Thanks for that. Then on free cash flow, really good performance there, primarily driven by your higher net income. Your $225 million in ending cash for 4Q suggests a slightly lower pace, but nice finish to the year in cash. We have not seen cash flows come in in 3Q like this in a long time. Has your cash flow seasonality changed based on DTC? Sounds like you have been getting a lot more efficient on working cap conversion. As we think about next year and modeling cash flow.

Brian McGee (EVP, CFO, and COO)

Yeah, thanks, Paul. Yeah, free cash flow for Q2 was actually a record for the company since we've been a publicly traded company. It's impressive. A lot of it came from reducing inventory, getting more efficient in AR, which is a direct result of going more direct to consumer because we get paid in three days, not 30-45 from retailers. That's an important aspect of just the cash generation. We'll continue to reduce inventory in Q4. I think we should be down to about $100 million of inventory, our inventory, and AR. I think it goes up simply because of absolute dollars of guidance, but it continues to improve on the metric of DSO down to about 25 days. That's driving cash flows.

As I look ahead to 2021, we'll continue to see some, obviously, benefits from the model and continuing to manage inventory and accounts receivable appropriately. I think there'll be even, from a cash generation perspective, there'll come more from earnings than I think it will from the balance sheet, although there'll still be some from the balance sheet, but definitely earnings growth. We get that, Paul, because we think while we're doing 3.7 million units of sell-through in 2020, our sell-in is quite a bit less, right, about 2.8 or so. That difference is really to reduce the amount of inventory that's in the channel. That gives us tailwinds going into 2021 because if demand should stay at that kind of level, 3.7-4 million, our sell-in, of course, would be close to that because we'd have our channel inventories aligned.

That bodes well for revenue growth. We'll have more direct-to-consumer and more subscription, which should keep us in the operating model of 38-40%. We'll continue to be more efficient in operating expenses, and that's going to lead to quite a bit of income generation in 2021, leading off to the cash.

Paul Chung (Credit Risk Middle Office Associate)

Gotcha. Last one on OpEx, you provided $250 million in OpEx for fiscal year 2021 during the 1Q print. Does this guide kind of still stand? What variables can you either flex this up or down relative to where you expect next year? Is there any more cushion to cut costs if top line does not agree next year? Thanks, guys.

Brian McGee (EVP, CFO, and COO)

Yeah. Yeah, no worries. Yeah, we've reduced with the model, we've been able to reduce operating expenses in 2020, nearly $75 million or so from 2019 levels. So we're still guiding into the $300-$305 range. The $250, remember back in, I think, April, was assuming a lower amount of sell-in and sell-through back at the beginning of the pandemic. That's obviously since changed. I believe in August, we had guided $260-$280. I think we continue to see improvements in sell-through, channel inventory, and then so the resulting OpEx, I think in 2021, is probably more in the $290 range as we see a lift in revenue and DTC. If it doesn't materialize, there's some benefits or OpEx that we can reduce further if needed.

We also need to continue to invest in a platform that's going to help drive direct-to-consumer even further in 2021 and beyond.

Paul Chung (Credit Risk Middle Office Associate)

Thanks, guys. Great job.

Operator (participant)

Thank you.

Brian McGee (EVP, CFO, and COO)

Thank you.

Operator (participant)

We will take our next question from Erik Woodring of Morgan Stanley.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Equity Research)

Hey, guys. Congrats on the quarter. I guess I just wanted to ask about your subscriber guidance. Exceeding 700,000 by year-end, that implies that you gain more than 200,000 new subscribers in the holiday quarter. I'd imagine, like you said in the press release, that most of your HERO9 Black purchasers are purchasing through the subscription. I guess why wouldn't your subscription number by year-end far exceed the 700,000 at this point?

Brian McGee (EVP, CFO, and COO)

Hey, I'll start with this and maybe Nick can chime in. Let's see. We said it would be above 700,000. We didn't say how far. Remember, you also have sizable retail as well. It's not just we'll get some organic with people coming in. We expect GoPro.com to be in the 40% range of revenue. It's going to be a lot of the growth is going to come from GoPro.com, where consumers take advantage of the subscription as part of the camera offering. When we factor everything in, we come up with more than 700,000, which I think is exceeding this year and getting to nearly 2 million by the end of 2021. That has significant ARR of nearly $100 million if we look ahead past 2021 at very high operating margins around the 50% range.

That does transform the business both now then on a revenue basis as well as margins and earnings per share and cash flow.

Nicholas Woodman (Founder and CEO)

Yeah, I would also add that.

Paul Chung (Credit Risk Middle Office Associate)

Oh, sorry.

Nicholas Woodman (Founder and CEO)

I'd also add that there's a bit of a lag between when a retail consumer buys their camera and when they would sign up for a subscription. You have to factor that time gap into account. As well, when you're talking about GoPros that are received as gifts, we'll sell a number of GoPros during the holidays. They get opened on Christmas. Those customers also, there's a lag there where now that gift recipient is now the owner, needs to learn about the GoPro subscription, and there's a time lag for them to become a subscriber as well. You can't just map the time of purchase of the GoPro necessarily to when that subscriber should show up.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Equity Research)

Okay, that's helpful.

I guess kind of if we're thinking bigger picture with the HERO9 Black, I think you guys addressed a number of, I guess, what you could call pain points, whether it's the front-facing color display, the removable lenses, which all look awesome. I guess I'm just thinking, as you look forward on your product roadmap, where do you hear from customers or what are customers saying that they're looking for? How could that kind of influence your new hardware and new software features you're thinking about that could drive camera upgrades into the future?

Nicholas Woodman (Founder and CEO)

That's a great question, but I can't share that with you because I would be sharing very valuable consumer research that helps us drive our roadmap, right? I'll answer it a different way by reiterating that we do a lot of consumer research to understand both what our existing users are enjoying or not about our current products, what they'd like to see most. That helps us with driving upgrade and keeping people engaged within our community. We also do research to understand why aren't potential customers buying a GoPro? What's keeping them on the fences? What would they like to see? Is it something entirely new, or is it just one or two things that are irking them? Is it something about the brand? Is it something about the pricing?

Is there an entirely new problem that we're not aware of that we can solve for people that maybe results in a new product? That research is ever ongoing. All of the products that we make now, be it hardware or software, is heavily researched. That should give investors more confidence in GoPro's new product rollouts over time so that they're informed. I can share with you I think everybody that's been following the company for a while knows that we had so much success in our early years that we were more of a startup culture, and we were flying by the seat of our pants, just holding on to the rocket ship that was GoPro. It wasn't in our culture to do a lot of this market research.

That's changed over the last, oh, about three years ago, three and a half years ago, we started to really invest and get good at it. Now we have an excellent team that works very efficiently at staying in touch with consumers about what they'd like to see from GoPro. So said differently, whether it's the growth in the subscription business, whether it's the critical acclaim HERO9 Black has received, whether it's the four and a half stars you see for our app in the App Store, whether it's all of the above, none of them are accidents. They're a result of research that is allowing us to make better, more strategic decisions on behalf of our customers, which is leading to an improved business. You combine that with a B2C and subscription-centric strategy, which we also evaluated and researched with consumers.

I just, again, hats off to the team at GoPro and everybody who's responsible for these areas of the business. They've been doing terrific work. The research has obviously played out as well as the business decisions that came out of that research.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Equity Research)

No, that's awesome. If I could sneak one last one in here, it's just clearly a benefit of the new subscription bundle is the discount on the camera relative to the camera as a standalone. I guess, how do you guys at GoPro make sure that these new subscribers aren't just taking advantage of the pricing discount and can remain subscribers longer than one year and don't turn off the platform at a higher rate than theoretically the subscribers you had prior to the change in the pricing model? Thanks.

Nicholas Woodman (Founder and CEO)

You will get some bleed out, right? I mean, that's inevitable. As long as you're net-net coming out ahead and ideally coming out very far ahead, you've hit on a terrific marketing approach to drive subscription and then prove to these new subscribers how much value there is in the program and ensure that they're educated on that value. As they realize that value over their year of subscription, they become long-term subscribers because they realize it. As I mentioned in my answer to a previous question, we're going at great lengths to make the value very obvious to consumers. The math has to be very simple in terms of how quickly a subscriber can recoup the cost of the subscription when they take advantage of the benefits. That's quite obvious. They can do it very, very quickly, which is really important.

You need to make a subscriber a winner quickly while ensuring that it drives a profitable business, which Brian shared. The subscription business is generating 50% operating profits, not gross margin, operating profits of 50%. That is something that we believe we can build on over time. It is a win-win for the consumer and for the business and ultimately for investors, we believe. Our job to retain them is to just make it overwhelmingly obvious how much value they are getting. For what we can tell so far, we are achieving that. Part of the reason that we achieved such good subscription growth prior to the launch of HERO9 Black and prior to this strategy shift is because we had very, I would say, good retention rates and what we would consider to be low churn rates.

That is as important as everything you are doing on the other side of the coin to bring new customers in. That tells us that when we get subscribers in, we impress them with the value. They stay on as subscribers and drive a healthy program for a healthy business for GoPro. That is what we have achieved to date. We are not done yet loading up the GoPro subscription with more benefits that are going to really impress our users but not negatively impact the profitability of the business or GoPro.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Equity Research)

No, that's really helpful. Thank you, guys. And congrats again on the quarter.

Nicholas Woodman (Founder and CEO)

Thank you so much.

Operator (participant)

Thank you. We will now take a final question from Nick Tovarov of Longbow Research.

Nick Tovarov (Analyst)

Yeah, thanks. Good afternoon, guys. Nick and Brian, I think you guys talked about demand coming up above expectations.

Brian McGee (EVP, CFO, and COO)

Oh, did we lose him?

Operator (participant)

I believe we may have lost Nick.

Brian McGee (EVP, CFO, and COO)

Did we lose him?

Nick Tovarov (Analyst)

Oh, I wasn't sure if I got disconnected.

Operator (participant)

Nick, if you're still on the line, please press star one now. Okay, we've got Nick.

Nick Tovarov (Analyst)

Hello, can you hear me?

Operator (participant)

Yes, sir.

Nick Tovarov (Analyst)

Okay. I'm sorry, guys. I don't know what happened. I could hear you, but apparently you couldn't. Sorry, I'll just start from the over. You guys were saying the demand is coming up above expectations. If I look at the full-year guide for sell-through and sell-in, I think you're guiding 3.7 million units of sell-through, which is at the midpoint of your prior quarter guidance, and then 2.8 million of sell-in at the lower end of your QQ expectations or guidance that you gave at the time. I guess, how do you square those two? Why are we not leaning more towards the higher end of those ranges that you gave in the last quarter?

Brian McGee (EVP, CFO, and COO)

Hi, I'm Nick Lawrence with Brian. Look, we've increased our revenue and earnings per share guidance for 2020 versus our prior outlook. That's important to point out. We continue to reduce channel inventories by 200,000 or so units in the fourth quarter. Just to put that in perspective, because normally that would be our sell-in as well as sell-through, by taking the channel inventories down in Q4, if you proform that out, that's $60 million of revenue and $0.10-$0.15 a share. If you do that on the 800,000 units we're going to take down of channel inventory, that's nearly a quarter of a billion dollars of revenue that we look forward to recouping in 2021 should demand levels kind of stay at the levels they are today. It just sets the company up nicely for 2021.

I'll also point out, while there's some upside, we constrained inventory back earlier in the year just due to the uncertainties in the market. We should see some demand and benefit in the channel as we go to 2021. I think we're really positioning to exit the year with very low inventory, as I mentioned, about $100 million for GoPro, as well as getting channel down to, I think, the 550,000-600,000 unit range. That really sets the company up nicely for 2021.

Nick Tovarov (Analyst)

Okay, got it. If I look at GoPro.com, I think in the third quarter results, I guess I wonder you expected to be between 36-40%, even if it just for the upside in revenue, it still looks like GoPro.com came a little bit below that. I wonder, was it all because of retail upside? As we look forward, as we think about 70% of revenue being the upper threshold for eventually getting revenue from GoPro.com, how should we think about revenue from direct-to-consumer into 2021?

Brian McGee (EVP, CFO, and COO)

Yeah, I think on a, to answer your question, it was in our prepared remarks on Q3. Yeah, we had guided at 35%-40%, and that was on a lower guide of revenue. Actually, dot-com did better than we had expected, but so did retail. We saw very good strength in retail. There are two important channels for us. Obviously, we're more profitable on GoPro.com versus the retail channel, which is why you're seeing margins come up on both actual results as well as our guidance. I think that's pretty key. That leads us to 2021 nicely, right?

Nick Tovarov (Analyst)

Yeah. Okay. Nick, I think I want to throw a—I'm sorry.

Nicholas Woodman (Founder and CEO)

Tovarov, you made a comment that the dot-com business being capped at 30%, we don't see it that way. Just that's ballpark where it is now, but we see many opportunities to continue to grow the direct side of our business.

Nick Tovarov (Analyst)

Yeah, I think we—

Brian McGee (EVP, CFO, and COO)

No, no, because we expected to be around 40% in Q4. I think we had mentioned that that'll be about an 80% lift, right? Looking ahead to 2021, it should still be in that—well, we think it can still be above 50, but we're not really setting a target because they're both important channels, I guess is the point. If it's $45,000, if it's $55,000, if we're making more money as a result of how we're dealing with working capital and margin and OpEx and driving cash and earnings per share, it may slow the round a little bit on a percentage basis, but what's important is the absolute dollars continue to grow, right? That's where we get the margin expansion and operating leverage.

Nick Tovarov (Analyst)

Yeah, got it. Last question, Nick, I think in the prepared remarks, you talked about a new app experience that will bring a solution to a widespread problem that you believe you're uniquely positioned to address. I wonder if you can give us any details around that or any color. Thanks.

Nicholas Woodman (Founder and CEO)

I can't talk about anything at the product level, but what I can share is we recognize that GoPro's brand is so much bigger than the products that we currently make and the consumers that we currently serve. One of our research indicates that one of the most accessible ways to make GoPro more relevant to people that don't own a GoPro camera is through software and through solving problems that we can address with an app and make available to, say, smartphone users who represent a much bigger TAM to solve for than just the people who are either going to buy a GoPro or then service those customers that buy a GoPro with additional accessories and subscription and so forth. Through this research, we went to work on considering what are some big problems that are out there.

It turns out that there's a problem that is coincidentally shared by both GoPro users and smartphone users alike. In doing the work to develop this new app experience, we get tremendous leverage because this is something that we want to build for the GoPro community. We realize that it serves as a phenomenal solution for consumers that are just using their smartphone to capture photos and videos and are dealing with the inherent problems that come with that. I'm not just talking about editing. It's more in line with editing and content creation, but also managing this content in a really compelling way. We believe this is going to really resonate with people. Importantly to our business, one, it can help us extend our brand to serve people outside of just hardware owners.

Two, it represents an opportunity to generate a new subscription revenue stream with consumers that don't own our hardware. Three, the TAM that we're addressing is obviously a very big one if it's addressing the needs of the average smartphone user. It's not like these users need to be ultra passionate about content creation or editing or anything like that. We actually think that's one of the smaller opportunities. The problem that we're addressing is much more widespread, and I can almost guarantee that everybody on the call here suffers from it. We're excited about that, but I want to stress again that we get almost a free option to go and explore this market opportunity with non-hardware owners, smartphone-only users, because we're doing this work anyway for our GoPro community. The leverage that we get out of that development is terrific.

As I shared, we'll be sharing this first with GoPro users towards the end of this year so you can get a glimpse of what it's going to be for smartphone users. In Q1, we'll be rolling it out to smartphone users as what we believe a very attractive and accessible subscription program that we think is going to be really meaningful to the smartphone community and users.

Nick Tovarov (Analyst)

Got it. Thanks.

Operator (participant)

Thank you.

Nicholas Woodman (Founder and CEO)

I shared with you a little more, and I thought I was, but I thought you deserved it, Nick Tovarov.

Nick Tovarov (Analyst)

I appreciate it. Thanks.

Nicholas Woodman (Founder and CEO)

Thank you very much.

Operator (participant)

Thank you. At this time, we have no further questions. I would now like to turn the conference back over to management for closing remarks.

Nicholas Woodman (Founder and CEO)

Oh, sorry about that. I was on mute. Thank you, operator. I'd like to close by once again thanking GoPro's amazing employees who work so hard to deliver wow to our customers every year. This year, they did it from their home offices, spare bedrooms, and garages. Dang, you are the best of the best, and thank you for being the backbone of both this company and this brand. Thank you to everybody for joining today's call. Stay safe and stay stoked. This is Team GoPro signing off.

Operator (participant)

Thank you, ladies and gentlemen, for your participation in today's call. You may now disconnect.