Peter M. Salkowski - GoPro, Inc. Nicholas Woodman - GoPro, Inc. Anthony J. Bates - GoPro, Inc. Brian McGee - GoPro, Inc..

Paul Coster - JPMorgan Securities LLC Jason S. Mitchell - Bank of America Merrill Lynch Doug Clark - Goldman Sachs & Co. Charlie Lowell Anderson - Dougherty & Co. LLC Ben J. Bollin - Cleveland Research Co. LLC Jim Duffy - Stifel, Nicolaus & Co., Inc. Will V. Power - Robert W. Baird & Co., Inc. (Broker) Joe H.

Wittine - Longbow Research LLC Brad Erickson - Pacific Crest Securities Jerry Yuan Liu - Morgan Stanley & Co. LLC Erinn E. Murphy - Piper Jaffray & Co..

Good day, ladies and gentlemen, and welcome to GoPro's Third Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Peter Salkowski, Head of Investor Relations. Please go ahead, sir..

Good afternoon, everyone, and welcome to GoPro's third quarter 2016 earnings conference call. With me today are Nicholas Woodman, GoPro's CEO; Tony Bates, our President; and Brian McGee, our Chief Financial Officer. Before we get started, I would like to remind everyone that our remarks today may include forward-looking statements.

These forward-looking statements and all other statements made on this call that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause our actual results to differ materially.

Additionally, any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update any of those forward-looking 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, 2015, which is on file with the Securities and Exchange Commission, and in other reports that we may file from time to time with the SEC.

We report gross margin, operating expenses, net profit and loss and 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 to manage our operations. We have chosen 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 financial data can be found in the earnings press release we issued today. In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the third quarter of 2016.

These slides and a link to the webcast for today's earnings call are posted on the "Events & Presentations" page of the GoPro's Investor Relations website for your reference. Any income statement related numbers that are discussed during today's conference call other than revenue are non-GAAP, unless otherwise noted.

In the interest of time, I'd like to remind those participating in the Q&A session to please limit yourself to one question. Now, I'll turn the call over to GoPro's CEO, Nicholas Woodman.

Nick?.

Good afternoon and welcome. Today, I'm going to review how GoPro is now a simple end-to-end storytelling solution – thanks to recently launched products and services. I will also recap our third quarter performance and provide thoughts related to 2017.

With our recent product launches, we have delivered on the hardware and software vision outlined at the time of our IPO. Hardware highlights include our new HERO5 line of cameras, the most connected GoPros ever, and Karma, our exciting entry into the drone market.

In software, we introduced GoPro Plus, a cloud content management solution that seamlessly connects to HERO5 cameras and Quik, our mobile and desktop editing suite. We finally made it easy for our customers to capture, edit and share great personal content. And the experience is awesome.

Starting with our new cameras, HERO5 Black and HERO5 Session represent dramatic improvements and eliminate many pain points. Every GoPro is now waterproof without a separate housing. We eliminated buttons where they weren't absolutely necessary. We added voice control to both cameras and a touch display to HERO5 Black.

We improved image quality and added high-performance in-camera video stabilization and importantly, HERO5 Black and HERO5 Session can now auto upload your photos and videos to the cloud. Next, I'll review Karma, which went on sale in the U.S. on October 23. As we've shared, Karma is so much more than a drone.

It's Hollywood-caliber aerial, handheld and mountable stabilization in a backpack for $799. Karma represents an exciting set of solutions for new and existing customers and extends our brand into an important new category. Next, I'll review our progress in software and services.

In February, we committed to providing a seamless upload access and editing experience across mobile, desktop and cloud platforms and we delivered. HERO5 customers can now auto upload photos and videos directly from their camera to a GoPro Plus cloud account.

Owners of older generation cameras can manually upload their content using the Quik desktop app. Once the users' content has been uploaded to a GoPro Plus account, it's easy to access, edit, and share that content using a smartphone, and the Quik app.

I want to take a moment to thank all of the GoPro employees who contributed to making this fantastic experience possible. Thank you. As good as these products are and as impactful as we expect them to be, unfortunately we experienced production issues that resulted in lower than expected launch volumes for HERO5 Black and Karma.

While our teams worked tirelessly to solve the problems; we expect the situation to have a negative impact on results for the second half of the year. As a consequence of our compromised production ramp, we were unable to fully restock channels, which have been cleared of legacy products during the third quarter.

And furthermore, we anticipate difficulty catching up to meet forecasted demand during the fourth quarter. As a result, third quarter revenue was up only 9% sequentially to $240 million. We shipped slightly over 1 million cameras in the quarter and we are lowering our 2016 revenue expectations.

Despite the anticipated difficulty in meeting fourth quarter demand, we expect to be profitable for the quarter. Looking forward to 2017, we expect the market's strong reception of our new products this holiday to set us up for double-digit year-over-year revenue growth.

This combined with plans to lower our 2017 operating expenses well below $700 million, gives us confidence that GoPro can return to full-year profitability next year. In summary, we're proud of the customer experience that we've built and we are keenly focused on executing the fourth quarter. With that, I'll hand it off to Tony..

Thanks, Nick. Today I'm going to provide some color on our retail landscape, review our launch metrics, and I'll close on our expectations for operating expenses in 2017. I'll start with our retail performance and the transition to HERO5.

Together with our retail partners we were very effective in drawing down inventories of previous generation HERO4 product. In the third quarter, HERO4 channel inventory dropped over 70% sequentially.

Unfortunately, the production issues resulted in limited restocking of our channels and will negatively impact our ability to meet forecasted demand in the fourth quarter. That said, we are now at full production and aggressively ramping distribution of HERO5 globally. This includes Amazon.

With only four weeks of data, the early read is that demand for our new products is strong and that consumers are showing a distinct preference for our premium offering HERO5 Black. By comparison, in the U.S. HERO5 products accounted for approximately 75% of our sell-through mix versus HERO4 at 54% during its first four weeks in 2014.

Despite the production issues we encountered, GoPro maintained its long-standing category leadership in both North America and Europe. According to NPD, in the U.S., GoPro held three of the top five positions in the camera, camcorder category. For the eighth consecutive quarter, HERO4 Silver held the number one spot on a unit basis.

Based on our estimate, Session was the second best-selling camera in the U.S. on a unit basis for the third consecutive quarter. Moving to international, GoPro continued its solid progress in key markets. In Europe, according to GfK GoPro's third quarter digital imaging unit share increased year-over-year 200 basis points to 11%.

HERO4 Silver volume increased nearly 14% sequentially and GoPro accounted for four of the top five camcorders in Europe on a unit basis. By our estimates, in the third quarter HERO4 Silver was the top-selling camera for the eighth consecutive quarter.

And with three weeks of data, unit sell-through for HERO5 Black in Europe was 45% higher than HERO4 Silver and Black combined during the same period in 2014. In Japan, GfK reports that GoPro's third quarter unit sell-through was up sequentially 67% and 125% year-over-year.

Our share of the action camera market in Japan for the third quarter has increased 10 points year-over-year to 41%. In India, we are rolling out HERO5 this month and looking forward to a great partnership with our retail partners Reliance and Stereovision.

In China, initial shipments of HERO5 Black quickly sold through and China remains a top 10 country for GoPro. A brief update on software, monthly active users of the Quik mobile app have almost doubled since we re-branded earlier this year. In the third quarter, the Quik mobile app was downloaded more than 3 million times.

Since the launch of GoPro Plus at the end of September, we are seeing a higher than expected attach rate and lower than expected churn. Next, I'll talk about marketing. I'll begin with our September launch event where 120 journalists, critics, and social media influencers joined us at the Squaw Valley Resort for the unveiling of our new products.

In addition, the event was live streamed to over 1 million viewers with roughly 70% of the audience outside of the U.S. The social media metrics surrounding our launch reflect strong demand for GoPro. According to Google, September searches for the term GoPro were up 43% year-over-year on a global basis.

And our social media reach has expanded by more than 30% year-over-year, including a 60% increase on Instagram, where we now have over 10 million followers. Our marketing campaign for HERO5, Karma and the Quik app are now building momentum into the holidays with aggressive placement in digital, outdoor and television.

Finally, I want to address operating expenses from a 2016 exit run rate of approximately $780 million. While we are not offering specific details today on our 2017 plan, we expect to reduce operating expenses to approximately $650 million for 2017.

We believe this can be achieved without impacting our product roadmap and should result in profitability for 2017. With that, I'll hand over to Brian..

we ended the quarter with cash, cash equivalents and marketable securities of $225 million, down $54 million from the end of the second quarter. Accounts receivable at September 30 were $92.4 million, and DSOs came in at 35 days. No borrowings have been made to date under our credit facility, and we have no debt.

As of September 30, we had borrowing availability through the credit facility of over $110 million. I will now move on to our guidance for 2016 and 2017. We expect fourth quarter revenue to be approximately $625 million, plus or minus $25 million, resulting in 2016 revenue of between $1.25 billion and $1.3 billion.

We expect unit sell-through to exceed sell-in during the fourth quarter, resulting in full-year unit sell-through to be at least 20% greater than sell-in. Channel inventories are expected to be lean, as we exit 2016.

Our camera ASP is expected to improve sequentially, with the HERO5 Black camera accounting for the majority of the camera shipped in the fourth quarter. Gross margin for the fourth quarter is expected to be 40%, plus or minus 100 basis points.

We expect fourth quarter total operating expenses to grow modestly on a sequential basis with both marketing contributing to the increase. With the recent launch of several hardware and software products, we expect a sequential decline in fourth quarter R&D spending.

We expect fourth quarter 2016 non-GAAP earnings per share to be $0.30, plus or minus $0.05, using a 2016 non-GAAP tax rate of approximately 12% and a fourth quarter fully-diluted share count of approximately 146 million shares. Turning to 2017; our goal is to return to profitability for the year.

Leveraging operating efficiencies, we are targeting total operating expenses to be approximately $650 million for the year. We expect double-digit year-over-year revenue growth and plan to provide full-year revenue and gross margin guidance when we report our fourth quarter 2016 results in early February.

We expect our 2017 non-GAAP tax rate to be approximately 15% and our fully-diluted share count to be approximately 152 million shares. So with that, operator, we're ready to take questions..

Thank you. We'll go to Paul Coster with JPMorgan..

Thank you for taking my question, I'm going to make it a two-part question, I apologize.

Nick, can you provide us a little bit of color around the production issues and did they affect both the camera and the drone and if, so why? And then, my second question is the profit profile next year, will it be do you think a little bit more similar to 2015 where the profit was more front-end loaded than we saw last year? Thank you.

[Technical Difficulty] (21:10-21:31).

Please stand by..

I'm sorry Paul, it's Tony. We were somehow on mute. Let me just pick up your first part, which was the production issues. Yes, we did have an issue on both the HERO5 and Karma, but bulk of the issue has really been around the H5 line, in particular H5 Black and fundamentally we found an issue very late.

As we mentioned, demand is very strong and we are really essentially playing, once we address the issue, which we did very quickly with the team and then started to get a full ramp back up, we just can't catch up to the forecasted demand and that's what you see reflected.

But there was a slight issue on both, but really the big issue has been on the H5..

Hi, Paul, this is Brian. Regarding your question about 2017, we'll give full-year guidance in our next call. As we've said in our prepared remarks, I think clearly, you'd expect Q1 to be down sequentially, of course, because we've done that historically, and obviously, strength in the second half with Q4.

That's kind of our normal kind of seasonality pattern. As you'd expect, we'll do that this year. We've done that in 2015 and 2014. So that's kind of the profile. And then it's really driving operating expenses back down to drive profitability for the year..

Hey, just one other point I wanted to clarify. I mentioned it in the notes. With respect to the H5 production issue, at this point we are at full production. So we are at full ramp and it's just a question of us getting those channels loaded to meet the forecast demand that we've seen from our retailers..

Thank you. Our next question will come from Jason Mitchell with Bank of America Merrill Lynch..

Hi, guys.

So I just wanted to know if you could give us a little bit of a breakdown on what you're expecting in terms of like the drones shipping in Q4 versus like camera shipments?.

Yes, we didn't break it out. Obviously, the bulk of the revenue is going to be on cameras. As we said in the prepared remarks, particularly the HERO5 Black will be the top-selling camera in the quarter..

Okay.

Well I guess then, do you expect the drone to help split ASP at all or is it mostly going to be driven by the camera mix?.

Yes, I think from a ASP perspective, we'll obviously see an aggregate lift with Karma, but we've also seen a lift in camera ASP, irrespective of Karma..

Our next question comes from Simona Jankowski with Goldman Sachs..

Hi. Thanks. This is actually Doug Clark on behalf of Simona. First question on the OpEx for 2017. You mentioned, well, first of all that it's down pretty significantly from 2016. So wondering if you could detail where those cuts are going to come from, particularly after you said that it's not going to impact the product roadmap..

Let me pick that up. We're not outlining sort of the full color. We're in the process of that right now. When we think about how we're framing up the OpEx plan for next year, number one, we are already at the stage where we have pretty good line-of-sight around really focus around our key core product line.

So the focus is really going to be around core camera, the associated software with that and of course aerial. And so, it gives you a little bit of a sense of where we are going with that.

Obviously, that's likely to potentially include some restructuring around that, so the way we get there is obviously a combination of looking efficiency, but also really taking a very strong focused view towards product innovation of course, but really around our core business..

We now go to Charlie Anderson with Dougherty & Company..

Yes, thanks for taking my questions. I wonder on the outlook for next year, it's interesting. You haven't seen holiday sell-through yet.

So I guess what gives you that confidence of the trajectory of the products? And then I wonder also, to what degree are you counting on new products into next year and then also, the outlook on the drone business into next year? Thanks..

I think that we're seeing strong initial reception and enthusiasm from consumers. And certainly, the critics have agreed that HERO5, GoPro Plus and Karma are all impressive new products from GoPro. And we're seeing impressive sell-through rates, strong demand.

So we feel good that this is unfortunately a manufacturing and production ramp-up issue, not a demand issue..

And our next question comes from Ben Bollin with Cleveland Research..

Thanks for taking the question.

When you look at some of the new items – the warranty attachment you've been offering, the service that you're offering on a subscription basis, could you talk a little bit about what you're seeing about attachment there, and how it's trended relative to what you had expected, and if we should see that manifest in any way like in deferred revenue? And then longer-term, when you think about the action camera market, I know this question comes up a lot.

But how are you thinking about the TAM, the growth opportunity in kind of the competitive environment over the next 12 months to 18 months? Thank you..

Yeah. Just in terms of GoPro Plus, as I mentioned in my remarks, we are seeing a higher attach than we had forecasted. And the caveat would be here we're still in the early days, right. So it's one month in. And for those of you who have been following it, it's a free-to-pay model that we have, right. So it's a free trial.

So I would say, pretty optimistic that these attach rates are a lot higher than we expected, order 50% higher than we forecast right now, without giving you the details. We're also seeing a very strong kind of indicator around churn. Some of the folks in the team have been in these businesses, and we see very favorable churn rates right now.

Too early to call how that manifests revenue-wise, but we do also think that – to your second point, vis-à-vis TAM, the primary thesis is that if we make it that much easier for you to capture, offload and create a great editing suite and ultimately share those things, which is really what GoPro Plus along with the new H5 camera does is that it will open up an increased TAM for us.

The second part about your question on competition, we are always sort of making sure that we look out there and see what's going on, we think we have very, very strong competitive products right now and we're not seeing competition.

I think you see that – we don't see that manifesting in price, we see early indication with sell-through that the preferences for our premium product. And so it still is very much similar in terms of competition. I think the number one thing is we have a really great set of products, probably the best products we ever put in the market for sure.

And now an end-to-end solution that really allows it. The big pain point has been it's very hard to unlock all that great content that we capture, and now we have that solution and we think that will help drive TAM..

We will continue on to Jim Duffy with Stifel..

Thank you. My question is a big picture question. I understand, we believe you underserved the market in 2016, and you're planning OpEx savings for next year, trying to get the profitability.

What is the big picture, longer-run plan for the business beyond targeting profitability? What are the category assumptions that underpin this? Do you have any sort of long-run view on margin targets? I'm trying to figure out where you are trying to bring us, so we can decide whether we want to go along with you for the ride?.

I think the thesis for GoPro remains the same that, the world is filled with an increasing number of consumers that are interested in capturing and expressing themselves visually and socially.

And that GoPro is at the epicenter of that as a storytelling solution that really is a differentiated way to capture and share one's life in a manner that you simply just cannot do with a smartphone or DSLR or any other type of camera.

And that now with the deployment of auto uploading cameras and GoPro Plus, which makes it easy for you to access your content and edit it using a smartphone and the Quik app, we've really made the GoPro experience seamless and contemporary. And it's frankly a night and day experience.

So I encourage anybody on the call to go and buy a HERO5 camera and sign up for a trial subscription to GoPro Plus and just see how terrific the experience really is.

And you can see that it's really a before and after improvement that we have made that we think can have a fundamental shift in the momentum and trajectory of our business as our customers are finally successful on a more frequent basis in creating and sharing great edits.

And then as we continue to build upon this experience we think we can better address the consumer demand to help them capture and share stories in this way. So that thesis remains the same. I'll hand it off to Brian to answer your more margin questions..

Yeah. Jim, this is Brian. We just reported 40.6% and 40% kind of guide, plus or minus 100 bps for Q4. Our expectation is to keep margins at around this level. So, the longer-term play is 40% or so in margins and then drive operating expenses to the point where we're making money..

We'll go to Will Power with Baird..

Okay, great. Thanks.

Yeah, so you talk to the HERO5 Black demand and some of the trends you're seeing there, I guess, I wonder what that means for the Session, what are you seeing on that front, does that imply that you're seeing weaker demand there than maybe you expected, and if so is that price, or any other color around I guess the Session? And then second part, I'd be curious on any updated thoughts on Amazon, what took place there, or how big of an impact that's had in Q4? Thanks..

Let me take that. So Session in particular HE5, Session, right now it's right in line with our own expectations in terms of mix. So we think – exactly how we thought about the product line, the good, better, best has played out. Yeah, again, it's early, we're still stocking into channel, but right now, it's totally in line with expectations.

In terms of Amazon, what I can tell you is Amazon is back online, if you go out there now, you'll see that they are about to take – they're taking orders and so that will be coming through, obviously hard to tell it, had a major impact, because as we said we were in a channel fill, we're still ramping that.

So, I think, overall probably not, Amazon is a great partner, and of course we want to have product available for them and that's about to happen. And so in the grand scheme of things given the production issues we have, probably it wasn't a big impact, but great to have the partner up and been able to order the product directly from them..

Our next question comes from Joe Wittine with Longbow Research..

Thanks. Brian, you compared HERO5 shipments in September I think, and that was your sell-in to HERO4 shipments in the first month of availability in September 2014. What is that same comp on a sell-through basis? So, H5 versus H4 to-date, I'm sure you have some data..

Actually, it was actually a sell-through comp..

It was all sell-through..

In my remarks, and so what we were trying to really show you was real-time sell-through, in the case of the U.S. you have to have about four weeks, in the case of Europe it's three weeks just because the data takes a little bit time to come through. So that was, actually, the clarity that was a sell-through comment..

Okay. I appreciate that.

And then quick follow-up on refresh here, so for your capture devices the cadence has, obviously, been 12 months in most cases, do you still expect to maintain that rate going forward? And perhaps more interestingly would Karma also be in the 12 month cadence or could that be longer given the engineering involved?.

Yeah. As we talked about before we typically – we don't provide information of roadmap and product cadence. So I really can't share any more details than that. What we're trying to do is map it to what the feature sets our users want and time products into the market most accordingly..

Our next question comes from Brad Erickson with Pacific Crest..

Hi, there. Thanks for taking the questions. Just in terms of the Q4 revenue composition, I guess, between action cameras and drones, it would seem like a fair assumption relative to the 2017 outlook as the unit growth would potentially be as high as mid-teens or maybe a little bit higher than that.

Is that kind of the correct way to think about it? And then with the balance of the revenue coming from drones, or am I off there?.

Hey, Brad. This is Brian. I think in the prepared remarks, I think we said bulk of the Q4 revenue would be cameras in terms of units, and then quads. So quad, on a percentage basis would be less than 10% for the quarter, if that helps..

We'll go to Jerry Liu with Morgan Stanley..

Hey, guys. Thank you. Just a question about the OpEx cuts next year. If we look at this holiday season, it seems like the products have started better than last holiday season, especially if there were no supply issues, yet you are cutting OpEx for next year.

So, are there any things you are seeing in demand with the HERO5 or Karma that makes you feel like you need to cut costs, or is it just a tip it in strategy or something else? Thank you..

We had a significant amount of cost in R&D and innovation that went into establishing this new platform. be it Karma as a platform, be it HERO5 as a platform for connected camera and GoPro Plus as our cloud content management platform.

And as we've now deployed what in some cases you could argue is the full GoPro 1.0 vision for the first time, we are now able to scale back a little bit in terms of spending there because the platforms are deployed and 2017 will be more of an evolutionary year for us versus a revolutionary year.

And so you're seeing some of that reflected in the OpEx..

And Erinn Murphy with Piper Jaffray. Your line is open..

Great. Thanks. Good afternoon. Just a couple of questions. One, I think there has been some mixed reviews on the Capture app thus far. Can you just talk about what you are learning from that? And have you been able to make any tweaks to the user interface there? And then secondly, just a clarification.

On some of the production issues, did that change how you are planning to be position with your key retailers into holiday or what you were planning to do with any of those, whether it was in the circulars for Black Friday or any other type of marketing events you would have typically done with these retailers? Thanks..

Yeah. Erinn, it's Tony. Just Capture, the reviews that you talked about mixed. At least our understanding, it's certainly not been about UI, it's been about the fact that we moved to a login process. It's a one-time login process. And that's a change. And so for some of the folks, especially the existing users, that was perhaps unexpected.

The logic there is that as we move to this model, which is much more of an ecosystem, it's, one, important to have a very strong relationship with our customers, but more importantly, it's definitely a way for us to start to understand more about what's going on analytics-wise.

And this is something that I think questions have been asked many times, I think from many of the analysts. And it's been part of the ecosystem strategy for a while. So, yes, we'll look at certain ways to perhaps really reduce friction, but really this is the plan of record going forward.

And we just got to keep improving on that and working with our customer base. And then your second question I think was vis-à-vis does this change relationship with retailers? No, it doesn't at the highest level, but of course as with everything, there is timing and there is turns and there's planning.

And as we started to ramp in a little later than we would have expected, that can have some impact to placement. That being said, we feel very strongly positioned to drive as much forecasted demand as we can, going into the holidays, right. So, and our retailers are with us on that..

And Erinn, one of the point you asked about Black Friday and the production issue on H5 won't affect Black Friday..

No..

Thank you. And we'll take a follow-up from Charlie Anderson..

Yeah, I just want to ask on Karma, there has not been a lot of availability there. You mentioned more of the production issues are on HERO5. So I'm wondering why we're not seeing some of the standalones available. We're not seeing a bundled with Session available. We're also seeing some competitors who have been issues there too.

So if there anything happening industry-wide in terms of the component shortages or anything?.

Well, I can't speak to other players in the market. We just candidly had the couple of issues there and started to go off to a slow start. So we are just ramping in. We are going to hopefully catch up. But it's been a slow start, so I don't think we can pin it on a component shortage at this stage.

We are doing everything we can to bring that supply to get to the forecasted demand. It has resulted in a limited availability. And that has made us focus on our primary H5 Black bundle just to address your question. As we continue to ramp and we continue to get production up there, you'll start to see those other variants over time..

Thank you. With no additional questions, I'd like to turn the conference back over to CEO, Nick Woodman..

Thank you very much. To close, I want to reiterate some key points in our outlook. GoPro products have never been better and demand is strong.

We've deployed a consumer experience that makes GoPro a seamless storytelling solution, and we believe the strength of our products will help lead GoPro to double-digit revenue growth and full-year profitability in 2017. With that, this is team GoPro signing off..

Thank you, ladies and gentlemen, again. That does conclude today's conference. Thank you all, again, for your participation..