Peter M. Salkowski - GoPro, Inc. Nicholas Woodman - GoPro, Inc. Charles Prober - GoPro, Inc. Brian McGee - GoPro, Inc..

Paul Coster, CFA - JPMorgan Securities LLC Joseph Wolf - Barclays Capital, Inc. Jason S. Mitchell - Bank of America Merrill Lynch Simona K. Jankowski - Goldman Sachs & Co. Stanley Kovler - Citigroup Global Markets, Inc. Yuuji Anderson - Morgan Stanley & Co. LLC Will V. Power - Robert W. Baird & Co., Inc. James Medvedeff - Cowen & Co.

LLC Charlie Lowell Anderson - Dougherty & Co. LLC Tavis C. McCourt - Raymond James & Associates, Inc..

Please stand by, we're about to begin. Good day, and welcome to the GoPro's First Quarter 2017 Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Peter Salkowski, Head of Investor Relations. Please go ahead, sir..

Thank you, operator. Good afternoon, everyone, and welcome to GoPro's first quarter 2017 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; COO, CJ Prober; and CFO, Brian McGee. Before we get started, I would like to remind everyone that our remarks today may include forward-looking statements.

Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today.

We do not undertake any obligation to update any of 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, 2016, 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.

Today, we may discuss gross margin, 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. In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the first quarter of 2017.

These slides and a link to the webcast for today's earnings conference call are posted on the Events & Presentations page of the GoPro Investor Relations website for your reference.

A link to the live webcast and a replay of today's conference call is posted on the Events & Presentations page of 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'd like to turn the call over to GoPro's CEO, Nicholas Woodman.

Nick?.

Good afternoon. Our first quarter performance marks a major step in GoPro's turnaround, and demonstrates our commitment to achieve full-year non-GAAP profitability. When we last spoke on March 15, GoPro affirmed first quarter revenue would be at the high end of guidance.

Today, I'm happy to report that year-over-year first quarter revenue grew by 19% to $219 million, candidly beating the high end of our guidance.

With full-year non-GAAP operating expenses targeted below $495 million, a $200 million reduction from 2016, we remain on track towards full-year non-GAAP profitability without sacrificing our product roadmap. I'm also happy to report that we have strengthened our balance sheet.

Earlier this month, we completed the convertible debt offering that put net proceeds of $92 million on the balance sheet, providing what we believe to be sufficient capital to fund our growth plans moving forward. And both brand recognition and demand for GoPro remained strong.

According to NPD, in the United States, GoPro had the three top selling cameras on a unit basis in the digital imaging category. And our premium priced HERO5 Black was the best-selling camera on both the unit and dollar basis.

Here, I'd like to take a moment to explain how average selling price or ASP is driving our 2017 revenue plan, while we estimate that our unit sell-through was down year-over-year, our ASP in the first quarter was up 25% sequentially and 13% year-over-year.

The increase in ASP is driven by the reduction of lower-price SKUs, the introduction of new premium products, like Karma and Karma Grip and customers' preference for our premium camera HERO5 Black. The net result is that higher ASPs are driving higher revenue. Next, our brand, social media metrics show that interest in GoPro is growing.

GoPro social channels are up over 25% year-over-year with nearly 32 million followers. This includes more than 10 million followers on Facebook and more than 12 million on Instagram. Today, the combination of our own channels, plus the reach of our advocates and athletes touches nearly 200 million consumers.

And according to Google, YouTube videos attributed to GoPro are up 67% year-over-year in the first quarter. Google also recently published a study of teens aged 13 to 17 that placed GoPro as the sixth coolest brand out of 122 companies. Our brand is strong and remains one of our greatest assets.

In our last call, we explained that GoPro is now focused on five key priorities for driving revenue and returning the company to full-year profitability in 2017. In a few minutes, CJ will take you through our progress on each of these. But I'd like to briefly cover two of them and how they are influencing our decision making.

First, making the smartphone central to the GoPro experience, we believe that to grow our business we must make it easy for consumers to seamlessly transfer content from their GoPro directly to their phone, where the GoPro App can create a great video for them automatically.

We are making significant advancements towards this game-changing experience, which we plan to share later this year. The second priority I want to speak to is expanding GoPro's product line for advanced users. While we remain focused on capturing new users, we're also developing leading-edge solutions for our advanced customers.

In 2016, we introduced Karma, an aerial, handheld and wearable stabilization system we refer to as Hollywood in a backpack. Our research indicates that in 2017, the U.S. drone market will generate more than $900 million and close to $3 billion worldwide.

Karma represents our entry into this important market, and we are very happy with its initial sales performance. According to NPD, for the month of March, Karma bundled with HERO5 Black was the number two best-selling drone, priced over $1,000 in the U.S. on a unit basis. We estimate this represents 19% market share for this price band.

And last week, GoPro announced the development of Fusion, a 5.2K spherical camera designed to capture professional quality content for both virtual reality and non-VR productions. In just a few days, we received more than 3,000 applications for the Fusion pilot program.

To ensure that Fusion delivers an optimal user experience, we're working closely with technology and content leaders like Adobe, Fox Sports and Facebook, while the spherical market is in its early days, we believe Fusion, coupled with our brand, will help to position GoPro as a leader in this important category.

To summarize, GoPro is executing a turnaround. We are a considerably more efficient and effective company than we were just six months ago, and you are seeing it in our first quarter results. We have improved communication, collaboration, and decision making with a sharply-focused set of priorities.

We have improved execution by doing fewer things better. We've secured our balance sheet and we have dramatically reduced spending without compromising our product roadmap. We feel good about the first quarter, about our strong guidance for the second quarter, and about our goal of returning to full-year non GAAP profitability in 2017.

With that, I'll turn it over to our COO, CJ Prober..

Thanks, Nick. Today I'm going to provide an update view through the lens of our five key priorities for 2017. Our number one priority is to drive profitability through improved efficiency, lower costs and better execution, we feel great about the progress we are making here.

First, we drove down our Q1 operating expenses lower than expected, putting us in great position to achieve our full-year goal. Second, in Q1, we reduced channel inventory sequentially by over 13%, a trend we hope to accelerate with a scheduled price drop on HERO Session.

Beginning this weekend, the MSRP on the nearly two year old HERO Session will be reduced by $50 to $149. Third, we are on track with a number of initiatives aimed at improving the efficiency of our resources. For example we are on schedule with staffing up our Bucharest, Romania office to support our initiatives in software engineering.

And in Manila, we're building out our office for customer support, IT, and administrative services. Fourth, we have a number of initiatives in process to simplify and reduce costs in our supply chain, small changes in packaging, assembly, and shipping of our products that will show significant savings over time.

So, we feel great about the progress we've made to-date against our number one priority, and we recognize there is a lot of opportunity for further improvement. Next, I'll shift to our second priority, making the smartphone central to the GoPro experience.

While smartphones don't offer the versatility and durability of a GoPro camera, they do serve as a convenient tool for managing and sharing the content shot on a GoPro. While many of our consumers are still learning about our existing software, I'm happy to note that the investments we've made to date are working.

Specifically, in Q1, there were 5.2 million installs of our quick mobile editing app, more than three times the number of installs in the first quarter of last year, in addition, first quarter monthly active users are up 160% year-over-year. Content sharing from our Capture App grew 43% year-over-year.

We recently launched GoPro Plus, our subscription service in EMEA and APAC, and we continue to see better-than-expected conversion from trial to paid, with lower-than-expected churn. Free trial and subscriber growth remain strong, and we're excited to implement initiatives later this year that will improve the funnel into GoPro Plus.

These data points strongly corroborate our thesis that removing the pain points between capture and sharing result in deeper engagement by our consumers. As Nick noted, this year we're developing an exciting new software experience that makes it even easier for consumers to share their content.

Our third priority is to market the improved GoPro experience to our extended community. Since the advent of HD HERO in 2009, GoPro sold more than 25 million cameras. However, many of our early consumers are not aware of our improved software experience, which sets up a big opportunity for GoPro to reengage our existing community.

One initiative to address this is the trade up program we launched in the U.S. earlier this month. The program offers discounts of up to $100 to consumers who swap an older GoPro for a cloud-connected HERO5.

In just two weeks, the program stimulated thousands of trade-ins, and approximately 90% of the cameras we received back are HERO3 cameras from 2012 and 2013. Introducing these consumers to the superior quality and simplicity of HERO5 is a win-win for them and for us. Our fourth priority is to grow GoPro's international business.

Here we're proud to say that 60% our revenue in the first quarter was generated in markets outside of the U.S. This is particularly impressive when you consider that we opened our first international sales and marketing office in Europe just three years ago.

The international data also validates our strategy of entering new markets by putting small teams on the ground with a local approach. In Japan, we saw a big jump, with revenue up 83% year-over-year, and our category dollar share grew from 1.4% to 3.4%. In China, quarterly revenue was up 59% year-over-year, and our unit share grew from 1.7% to 3.1%.

The investments we've made in improving our software are also helping our international business. In the past seven months, we've gone from zero localizations on our Capture App and camera firmware to a total of 10 languages, including French, German, Korean, and simplified Chinese.

One point of validation is that between 70% and 90% of consumers in these countries are using our cameras in their local language.

Also, in February, one of the world's top manufacturers of smartphones, Huawei, announced that GoPro's editing software will be pre-installed on its new smartphones, starting with the Huawei P10 and Honor 8 flagship models.

Huawei's impressive market share in Asia and Europe present us with an opportunity to introduce millions of new consumers to GoPro's brand and software tools. Our fifth key priority is to expand the GoPro product line for advanced users. Once again, we're showing great progress. In February, GoPro rereleased our drone, Karma.

Sales are tracking above expectations in the U.S. We just launched Karma in Europe and next month, Asia. And as Nick mentioned, last week, GoPro unveiled the pilot program for Fusion, a 5.2K spherical camera for shooting virtual reality and OverCapture videos and photos.

OverCapture is a unique feature that allows users to punch out high-definition video and photos from the spherical captured angles. You can see a demonstration of Fusion on GoPro's blog, The Inside Line. So to summarize, we have a clear set of priorities.

We're focused on doing fewer things better, and we're now seeing the payoff in our execution and results. With that, I'll hand it over to our CFO, Brian McGee..

Thanks, CJ. Today, I will provide an overview of our first quarter performance and provide some guidance for the second quarter and full year of 2017. I'll start with our higher-than-expected first quarter revenue, which is up 19% year-over-year to $219 million.

Our revenue growth was driven by a year-over-year increase in camera revenue, strong accessory revenue, and the re-launch of Karma. We shipped 738,000 camera units in the first quarter, with our $399 and above cameras accounting for over 60% of the camera units shipped and total first quarter revenue.

Unit sell-through outpaced sell-in as a result of channel inventory declining 13% sequentially, with HERO5 Black channel units down nearly 30% from the end of the fourth quarter of 2016. We also expect channel inventories to decline sequentially for the second quarter of 2017.

Excluding the first quarter shipments of 129,000 previously discontinued cameras, we estimate channel inventory would have been down over 20% sequentially.

On a reported basis, first quarter Street ASP, defined as total reported revenue divided by camera units shipped, was up 13% year-over-year and 25% sequentially, driven by Karma, HERO5 Black, and accessory revenue.

Looking at revenue by geographic location, the Americas accounted for 44% of Q1 revenue with EMEA and APAC accounting for 31% and 25% respectively. Revenue in absolute dollars increased year-over-year across all geographies.

Direct channel revenue of $115 million accounted for 52.5% of Q1 revenue and was up 37% year-over-year benefiting from Karma, HERO5 Black, and accessories. Gross margin for the first quarter of 2017 was 32.3%, which compares to 33% in the first quarter of 2016.

The margin benefit from shipping previously-discontinued cameras, which were written down in prior period, was largely offset by charges related to price reduction for the HERO Session camera that we'll do in Q2, as well as other product-related costs.

This performance was in line with our guidance, despite Karma being a larger-than-expected percentage of our revenue mix. First quarter operating expenses of $131 million were down $51 million sequentially or 28%. The reduction in operating expenses reflects the impact of our restructuring actions.

Headcount at the end of the first quarter was 1,327, down 14% from the end of the year and 23% since the end of the third quarter of 2016. Sequentially, research and development expenses, and sales and marketing expenses were down nearly 20% and 40% respectively.

We incurred non-GAAP tax expense in the first quarter of $2 million versus the tax benefit of over $10 million in the first quarter of 2016. We reported a net loss per share in the first quarter of $0.44, this compares to a net loss per share in the year-ago period of $0.53. GAAP net loss for the first quarter was $111 million or $0.78 per share.

This compares with a GAAP net loss of $107.5 million or $0.78 per share for the first quarter of 2016. The company's negative GAAP tax rate of 25% for Q1 results from a higher proportion of pre-tax losses in the U.S. and pre-tax profits comes from our and pre-tax profit in foreign jurisdiction. Due to our full valuation allowance in the U.S.

and the company generating taxable income in foreign jurisdiction, the result is a negative effective tax rate. Turning to the balance sheet, accounts receivable at March 31 were $55 million, down from $165 million at the end of 2016. DSOs came in at 23 days.

First quarter inventory increased $40 million sequentially to $208 million, reflecting increases in HERO Session and HERO5 Black cameras, as well as Karma. We expect our inventory to be approximately $130 million by the end of the second quarter. At the end of the first quarter, we had cash of $75 million.

The sequential decline in cash was due primarily to the first quarter net operating loss, coupled with cash payments for accounts payable, other liabilities, and severance. These payments were partially offset by strong collections in the accounts receivable.

On a pro forma basis, total capital available to the company was approximately $250 million, which includes cash on hand of $75 million, borrowing availability through our credit facility of $82 million, and net proceeds from our convertible debt offering of $92 million. I'll now move on to guidance.

We expect revenue for the second quarter of 2017 to be between $260 million and $280 million. We expect our HERO5 Black camera to remain our top-selling product and for Karma to become an even larger percentage of our second quarter revenue. We except gross margin to be 33.5%, plus or minus 1 percentage point.

Operating expenses for the second quarter are expected to be in a range of $122 million to $126 million. We expect adjusted EBITDA for the second quarter to be in a range of negative $15 million, plus or minus $5 million.

Regarding 2017 guidance, we continue to target double-digit year-over-year revenue growth, operating expenses below $495 million, positive adjusted EBITDA and we continue to work towards our goal of achieving full-year non-GAAP profitability.

We expect GAAP and non-GAAP tax expenses for the full year of between $13 million to $15 million and $6 million and $8 million respectively. For the second quarter, we expect the GAAP and non-GAAP tax expense of approximately $5 million and $1.5 million respectively.

We expect our second quarter basic share count to be approximately 136 million shares. With that operator, we're ready to take questions..

Thank you. We'll take our first question, this will be from Paul Coster with JPMorgan..

Yeah. Thanks for taking my question. I've got two really.

The first one is to do with the ASPs which are higher, welcome, but gross margins look like they stuck in the low 30%s at the moment, is this what we should expect moving forward, and what has to happen to the gross margins to improve from here given the ASP shift? My second question is, you referred to under $495 million of pro forma operating expenses, that kind of leaves room for interpretation.

What are the factors that cause you to go well under $495 million versus just sneaking under that target? Thanks..

Hi, Paul. This is Brian. On the gross margin guidance, we tested that annual long-term model of 40%, plus or minus 1 percentage point. What drives our margins, we have a seasonal business, we have lower first half volumes versus the second half, in particular cameras would be up much more in the second half, our camera business is very good on margin.

Karma is at (24:28) much higher percentage, fortunately it's selling well in the market. But it has kind of a meaningful differential in margins relative to our cameras. Karma will be lower as a percentage of our overall business in the second half.

As CJ mentioned in his prepared remarks, we have some efficiency in supply chains, which means we will get some product-related cost reductions as well in the second half and we have some new product introductions that will also be more profitable. So that addresses the margin point, I think.

The under $495 million, we will be below $495 million, as we recalled in the prepared remarks, we wanted to make sure that we're doing things that really drive to our product roadmap and the reductions we took don't impact that product roadmap, I think going below that, could impair our long-term ability to drive into new markets and so I think that's the answer to the OpEx..

Yes. The only thing I would add, Paul, on the OpEx is as we've talked about before, where we kind of are adopting a new culture are around cost and so we're always looking for efficiencies (25:46) things differently to get cost out of our both OpEx and COGS. And so, that's an ongoing effort, we're not done there.

But as Brian said, we're still shooting for our target of below $495 million..

Okay. My last, just a quick follow-up and that is that you appear to be really focused on your core customer base by fewer things better, as Nick said, and you appear to be creating a higher value solutions for that segment.

Can you – is this how it's going to be moving forward and we're not really sort of focused on the mass market at this stage, or am I misinterpreting? Thanks..

Hi, Paul. Nick here. When we developed storytelling solutions with a bias towards the GoPro community, that doesn't just include people that own a GoPro, that includes consumers who are lookalikes to consumers who have already purchased a GoPro. And the market for our products is far from saturated we believe.

I know there are some concern over that, but when we look at data indicating whether new customers or whether HERO5 Black customers, for example, that own the GoPro before or not, it's clear to us that we're getting a lot of new customers that have never owned a GoPro.

So, we're finding that solutions that work really well for our greater GoPro community are appealing to new – entirely new customers as well. And so, we also have a strategy around the development of products for our more advanced customers that also service meaningful solutions for prosumers as well as professionals.

We're not developing products specifically for the professional market per se, but rather traditionally GoPro products for consumers have always been good enough if jot market-leading products for the professionals. So, don't focus too much on, are we just narrowing our roadmap to be focused specifically on the existing GoPro community.

We're developing solutions that we believe will be a hit with that community, but for sure they'll still be designed to be attractive to new customers and a broad range of customers to pull them in and ultimately grow that community..

Great. Thank you very much..

Thank you..

We'll now take a question from Joe Wolf with Barclays..

Thank you. I had a couple of questions. First, I'm curious about going a little bit deeper into this trade-in program, where you – I guess you can get a little bit of data on – I guess a refresh cycle.

How does that work exactly, what is – is there any economics for GoPro at this point? Or what's the – how does that work exactly with the customer? And similarly on the monetization front, the Huawei smartphone activity sounds interesting, but is that a revenue driver or a customer experience driver as you look at that right now? And then I've got a couple of others..

Yeah, it's CJ. Yeah. Good question. It's CJ, I'll take that. On the trade-up program, the way that that works is consumers with an existing pre (29:42) HERO5 GoPro can send us in their camera and they can get a discount off HERO5 cloud connected solution.

And what's really driving that is the experience that we offer through our HERO5 products are significantly simpler and better to our earlier generation products, and many of those early consumers in fact aren't aware of that.

And so this was – the trade-up program was designed to incentivize consumers who haven't perhaps used their GoPro in a while to trade that in for the superior HERO5 experience.

And again, as I said in my prepared remarks, we're seeing thousands of consumers take advantage of that, and most of the cameras that we're getting back, 90% or so, are HERO3 vintage, so 2012 and 2013 cameras. And we're doing this directly with the consumers.

It's really a pilot program, not through our retail partners, so the economics are through our direct business. On the Huawei relationship, it's really an opportunity for us to expose the software that we've built, and grow the GoPro brand in markets that we're still driving a lot of awareness.

So Huawei is incredibly strong in Asia, of course, and also in EMEA. And by having GoPro software pre-installed on their smartphone devices, it just exposes their consumers to GoPro, and allows us to bring them into our ecosystem and, in future, introduce them to our hardware as well. But there is no direct monetization from that partnership..

Okay. That's helpful. A question on the other – on the, I think, the 360 Fusion, and I guess also the Karma-related. My understanding – that the Fusion is more of a professional kind of camera and that's sort of a pilot.

And then, on the Karma, can you give us a little bit more detail as to sort of beat (31:57) your expectations, but as I hear the commentary about the second half, when you talk about Karma sales, are you thinking about that as the hardware? Are you thinking about a sale with a camera? How should we be thinking about units and drones in terms of the actual camera? And as you think about the second half, why would you already not believed – I don't quite understand that dynamic of Karma being lower in the second half, wouldn't that be a great holiday gift?.

Yeah. For Fusion, the spherical camera market is still in its infancy. If you track the sell-through of spherical cameras that are out there, the units sold through at retail is still quite low, despite that some of these cameras have been in the market for more than a couple of years now.

And it's still a heady experience for consumers to capture spherically, whether it's for VR consumptive viewing, or whether it's to produce traditional content from the spherically-captured content, like you can with Fusion and the OverCapture experience.

And so, we believe that the strongest segment for Fusion initially is going to be the professional and the prosumer tip-of-the-spear consumer market.

Fusion, the product itself, is – the experience is – it's like using a GoPro, it's very straightforward, and we think that our more advanced customers will find it appealing, but we just think that the market is more professionally focused at the moment.

And that, combined with Fusion's technical specifications and overall capabilities, we believe it's going to be a category leader when we make it more broadly available. And so that's our thinking around that, why we are positioning it from the outset as more of a professional and prosumer solution.

And then, in terms of Karma, we expect our overall camera unit volume to grow over the second half of the year, and certainly in the fourth quarter. And as we've shared, we have HERO6 planned for this year.

And so, we believe that that, as a percentage of our business, is going to increase over the course of the year and, as a result, we expect Karma to be a smaller percentage of our business, and be less impactful to gross margin..

And this is Brian, Joe. I'm going to follow-up on that, adding to what Nick is saying. The camera piece of our business is very good margin and profitable, much more so than Karma. So the mix aspect of this, as we get in – go from the first half to the seasonally stronger second half, just makes the math work better on margins..

But when you sell a Karma – I'd like just a little bit more clarity, how you're defining that – you're selling a Karma, are most of them being bought with a camera? Are most of them being bought without a camera?.

At the moment, most are being bought with a camera, actually..

So, when you say that the margins, are you just splitting between the hardware and the camera in that comment?.

So, I look at it as the bundle as being Karma, and a separate camera sale as being unique, and therefore....

Okay..

...that particular sale is higher, and we expect to sell proportionally a lot more cameras in the second half than the first half. And therefore, that's what's driving the margins..

Understood. Thank you. And then just one last question, Brian.

Cash, what is the comfort level you have, do you expect to generate some cash towards – to the end of the year, to build that cash above the $75 million in absolute cash, or are you very comfortable with your availability and liquidity right now?.

So, obviously, we're very comfortable with the availability that we've got. As I mentioned, $250 million on a pro forma basis. The cash will be flat, maybe down slightly in Q2, just because we guided for an EBITDA loss, but then working capital makeup some of that because of inventory reductions and we grow it into Q3 and Q4..

Okay. Thank you..

We'll now move to Jason Mitchell with Bank of America..

Hi, guys. Just to start with a couple of balance sheet questions.

I guess, can you help me understand why inventory was up so much in Q1, because you've kind of entered with a little excess channel inventory on Black, is that just related to the Karma? And then, on accounts payable, that was a bit higher than it usually is in Q1, is that also related to inventory build, and is that going to kind of trend down in 2Q?.

So, on the assets (37:55) related inventory and, as I mentioned, we'll bring inventory down to below $130 million. So, basically that helps pay for the accounts payable, right? And actually – what we mentioned in the fourth quarter, there's actually more channel inventory of Session than there was of HERO5 Black.

And HERO5 Black could depleted (38:16) at the highest percentage sequentially, which was nice. And as we mentioned, part of the increase was Session, part of it was HERO5 Black, which is our strongest selling product, as we go into the kind of (38:32) for Q2 and then Karma was up a little bit as well..

Okay. And then I guess on just the 2Q guidance. Can you kind of help a little bit more with understanding the puts and takes for the driver of the upside to guidance.

I mean, how much of that is Karma versus kind of the cameras?.

The way to think about our Q2 guidance – this is CJ – is that we're seeing a strong performance in our core business, which I would attribute to great products. I mean, HERO5 is being very well received by consumers and demand from (39:17) $399 product is really strong. And then as we said, we've launched Karma in the U.S.

this quarter and it's performing better than expected. We've just got then into EMEA and APAC next month. And so, that's a contributor as well, but it's not just Karma. I mean our core business is performing really well..

Okay. Thank you..

We will now move to Simona Jankowski with Goldman Sachs..

Hi. Thank you. I think you mentioned sell-through was down year-over-year, could you help quantify that.

And I think if I did the math right, it was actually up year-over-year last quarter, So just curious to what you'll attribute the return to year-over-year declines in sell-through? And then I was curious if you're able to parse out for us what ASPs did for the cameras without including Karma or the accessories? Thanks..

Yeah. Simona, this is Brian. Sell-through was down excluding the EOL products about 20%. We mentioned on the February call, we expect the channel inventory to decline, we expect them to also decline in the second quarter and that's largely related to the EOL products we sold in Q1.

The biggest driver of the reduction sequentially was HERO5, right? And so that's – that product is doing well in the market..

And on the ASPs?.

And on ASPs, you'd expect – well, we have ASPs going up as part of mix year-over-year and I'd expect as the retailers start to sell-through the same mix of products we're selling in, that they're going to seeing ASPs up as well..

And the question specifically, if you were to strip out, Karma and accessories..

Yeah, and our ASPs are up just on cameras as well..

Yeah..

Year-over-year, they're up and sequentially they're up..

Yeah. Part of what the – the answer to the both questions is that, this time – in the first quarter of 2016, remember we were selling through that channel, a lot of lower priced inventory in the form of our HERO, HERO+, and HERO+ LCD products that were all priced in the $129 to $249 range.

And while those products were selling well, they were heavily discounted and as a result, you had those higher sell-throughs that now as a comp were down from that year-over-year, but also you are seeing ASPs up which is terrific..

Thank you. That's helpful..

Simona, just one other comment. We've said this on the last call that we expect ASPs in 2017 as a year, to be above 2016 and that's an aggregate as well in camera..

Great. Thanks..

We'll now move to Stanley Kovler with Citi..

Yeah, thanks for taking my question. I was wondering, it seems like within your mix portfolio, if you can parse out if this was just a function of the channel inventory, or also on the demand side the mix of HERO5 going up and then how you think about the mix of your higher end products, as we move throughout the year.

And then just on the expenses, it seems like Q2 guidance is already implying that you're operating at the full year OpEx number. So curious how we should think about the opportunities you have in the second half of the year to maybe get further below that book that you have for OpEx. Thank you..

Yeah, I think even in the prepared remarks and guidance we expect the HERO5 Black to continue to be the top selling product for this quarter. NX should do well throughout the year. So the mix is definitely going to help there on from a margin perspective and ASP.

In terms of OpEx, we did $131 million, guided for midpoint, I guess it would be $124 million and I think the second half would be, we're not guiding for but if you do the math against $495 million, it will be less than the $124 million quite a bit..

Thanks. And then just as a follow-up, I wanted to ask you what kind of progress you're making on the chip development of the new chip as you move away from your previous partner, if you can update us on that situation. Thank you..

Yeah, hey, Stanley, it's CJ. So we don't really discuss our future products and roadmap, but I will say there is no change of plans in terms of launching HERO6 in 2017..

Thank you..

We'll now move to Yuuji Anderson with Morgan Stanley..

Great. Thanks for taking my question. Most of them have been answered. But just one on Karma. How should we think about the retail footprint there? On what stage are you in? How are you feeling about channel and if we're not there yet like when do you think you will be fully distributed? Thanks..

Yeah. Hey, it's CJ. So, in the U.S., we're still reaching new doors. In EMEA because we just launched there, we're continuing to roll out Karma. In Asia, we haven't started. So we still have a ways to go in terms of getting Karma in – across the retail footprint that we have planned..

Thanks so much..

Will Power with Baird has the next question..

Oh, great. Thanks, yeah. A couple of questions. Maybe just a – first, just a follow-up on channel inventory that was down in Q1.

It sounds like, Brian, you expect further reduction in Q2? Is that expected, just to be clear, to be in balance as you exit Q2 or do you expect further channel inventory reductions in Q3? And I just – just also curious just the session, the price reduction, is that the biggest piece of that that you're trying to drive down, I will start with that?.

Yeah. Channel inventory reductions in the first quarter were across every products actually, not just limited to one. In Q2, it's coming down largely due to the DLL (46:08) products we sold in Q1. We expect the affect to be clear in Q2.

I think some of the other products will also be down, like Session and Grip, we'd expect to be hearing that the price move that we're going to do in a couple of days..

Okay.

And so do you think that you have that imbalance kind of as you exit the quarter or there are further reductions coming out of Q2?.

I'd say it's actually pretty balanced now. I mean, most of the cameras I think are going to be in line to where they need to be in Q2. It's just that DLL (46:44) is going to come down and then definitely we would expect to drive down, just because (46:48)..

Okay..

We also expect the biggest demand to be in HERO5 line..

Right, okay. And then I just had a follow-up with respect to some of Nick's comments at the open, I think alluding to some mobile phone, I don't know, ease of use improvements expected in the second half of the year.

I guess, I'm just trying to understand is that tied to some of the new apps that have been enhanced, or I guess not as new anymore The Plus products, is there something new entirely that you think is going to help improve that usability experience..

We share that some of our software objectives – well, one of our primary objectives for the year and beyond is to make the smartphone central to the GoPro experience. We've also shared that we are in the process of collapsing our multiple apps into a simplified single GoPro app for our customers.

And as far as the experience that I alluded to, helping make it easier for our customers and so far as their GoPros are auto offloading their content to a phone where the app can make the edit, that's an experience that we're building into our existing app experience..

Okay. All right. Thank you..

Okay. Will, one other thing – the one other thing I'd add to this is that and I kind of touched on this in my prepared remarks – it's CJ, is that, the enhancements that we've made to date are actually showing great progress.

I shared some stuffs around Quik and the sharing increase that we're seeing on Capture and we obviously have lots of other data that we look at to gauge engagement around camera usage in HERO5 versus prior models. And we're very happy with the progress that we're seeing there.

So, the fact that we're making enhancements, this is just going to help to accelerate that..

Great. Thanks..

James Medvedeff with Cowen and Company has the next question..

Hi.

Can you hear me?.

Yeah..

Hi, guys. Thanks for taking my questions.

Actually, we'd like a couple of the last guys, most of mine have been answered, but can you – so I just want to make just for housekeeping purposes, the guidance for full year non-GAAP profitability, is that at the operating line or at the net income line?.

So, we've talked about being EBITDA positive for the year and we're working our plan and we're working towards being full year profitability and that profitability would be at the bottom line after tax..

And after interest expense?.

Correct..

Okay.

And is it about $1.3 million, $1.4 million a quarter of interest on the convert?.

Well, the convert is $175 million times 3.5% for the year, so divide that by four..

Thank you..

$6 million, so $1.5 million roughly..

Okay.

And then, my final question for now is, what is the strategic thinking, or what is the thought behind the price cut on the Session?.

Hey, James, I can take that. So, Session's a two-year old product at this point, so it's a natural time to make that move. It's also – doesn't offer the same experience that our HERO5 Session offers, or HERO5 Black, of course, in terms of being cloud connected.

And so, a added benefit of this is that in EMEA, where we see lower price competitors, bring Session more in line with that, and accelerate the channel inventory reductions that Brian highlighted. But it's really just a two-year-old product, and it's the right time for that..

How many do you have in inventory?.

We're not going to split it out, but it's not too many that we can't sell them throughout the balance of the year..

Well, that should be finished by the end of this quarter?.

No. It will be finished by the end of the year..

Okay. Great. Thank you..

We'll now move to Charlie Anderson with Dougherty and Company..

Yeah. Thanks for taking my questions. I'm hopping between calls here, so sorry if this has been asked. But just maybe kind of big picture views on the drone market, you mentioned how it's lower gross margin for you.

Is it the type of thing where you're going to be pretty modest in your distribution until you can get a product that's at higher gross margin, or margin more in line with what you're looking for? And just generally how you're feeling about that market in general, how is it trending, what are table stakes, that sort of thing? Thanks..

We are growing distribution for Karma strategically through retailers that we believe are well-suited to sell it, and that's internationally, as we've shared. And we're feeling good about the category. We're feeling good about Karma. Karma is exceeding our expectations, as we shared.

In North America, according to NPD, as I shared in my remarks, it was the number two best selling drone in the $1,000 and up price band for drones, which is something that we're very happy with.

And we believe that that represents roughly 19% market share for that price band, which is impressive, given the admittedly rocky start that we got off to with Karma. And our retailers are very positive about the product, our customers are very positive about the product.

So we are feeling very good about it, and it's going to serve as a terrific platform for us to build upon with future models. So, overall, we are quite optimistic about the category and about our ability to succeed in it..

Great. And then a follow-up for me on the growth that we're seeing in China and Japan, how much of that is distribution based versus you're seeing solid growth on kind of a same-store sales, retailers you were already at? Thanks..

Yeah, the latter. We are seeing the benefits of having small effective teams in region who are helping to localize our marketing, and not just in terms of our advertising, but also our marketing at retail. We've made some changes in how we present the product to the retail customer that have made significant improvements in same-store sell-through.

And I would say that there is distribution expansion as well, but it's more biased towards the latter – your latter statement, which is improving same-store sell-throughs..

Yeah. And, Charlie, I don't if you caught the prepared remarks – it's CJ – GoPro has become a global brand, and we did that without localizing our products up until Q4, which is quite amazing, right, like if you bought our product in China or Japan, you were using it in English.

And so in Q4, we localized the product into 10 languages, the camera and our associated software. And we're seeing that pay off, so 90% of our consumers in China are using the product in their native language. And that's obviously paying dividends for us..

Perfect. Thanks so much..

We'll now move to Tavis McCourt with Raymond James..

Hey, guys. Thanks for taking my questions. Brian, a couple of clarifications. First, I think you said sell-through on a unit basis was down 20% year-over-year in the first quarter, and I think is that excluding end-of-life products.

I assume you mean you're excluding end-of-life sales in both quarters, did I hear that right?.

That's correct..

Okay..

Yeah, it was comparable..

Okay.

And then, I think you also said cash would be down slightly in Q2, I imagine that's before the convert is taken into consideration, or do you expect cash to be down despite the fact that you've got the covert coming on the balance sheet?.

If the question was around the $75 million that we had not counting the convert, which we just tuck in the bank. So, we guided for negative EBITDA in Q2. So we'd have – that'll be a cash use, so we have working capital, so we'll deplete inventory in the quarter by quite a bit, actually.

And then these assets make payables, so – and that is kind of a flat to down on cash in Q2, but we build it up in the second half as we drive higher seasonal revenue..

Okay. And then, in the cash flow from operations for Q1, obviously, inventory was a big drag, but you also mentioned some other items like severance.

Could you break out if there was – what the materiality of some of the non-recurring cash flow items were in Q1?.

They weren't that material..

Okay..

The severance piece was small..

Okay. Got you..

And as a reminder, we had this $75 million at the end of the Q1 and in April, we added $92 million to the balance sheet and we have $82 million available against the borrowing capacity. So, we're pretty well capitalized..

Yeah. And then one product question for you, Nick or CJ.

So, on – how does the Fusion differ from the Omni, both spherical cameras kind of what is kind of the product difference there?.

They're completely different products in a number of regards. Omni is a chassis to receive six GoPros, whereas Fusion is a single GoPro....

Okay..

...in and of itself. You don't combine multiple GoPros to build Fusion. It is a self-contained spherical camera that you can use for spherical capture, for virtual reality applications or thanks to OverCapture which is capturing every angle at once, capturing over what you need, more than you need.

You can then reframe your shot during post production editing to produce a traditional fixed perspective video just as though you'd shot it with a single camera, but you had perfect aim of the camera at all times.

So, Fusion is a very versatile capture solution for traditional content creators as well as for leading edge content creators for virtual reality..

Great. That's helpful. Thanks, Nick..

Thank you..

We'll now move to Joe Wittine with Longbow Research..

Hi. This is (59:22) on behalf of Joe. Thanks for taking the question. So, in the last earnings call you compared the HERO4 sell-through with the HERO5 that's 4Q of 2016 versus 4Q of 2014.

Can you do a similar comparison for the first quarter of 2017 HERO5 sell-through versus HERO4 sell-through in the first quarter of 2015, how that's compared?.

Sell-through, actually, I don't have that actually in front of me, but knowing that the HERO5 Black on a percentage basis is higher than both the HERO4 and HERO5 and we're up revenue-wise year-over-year. The HERO5 would have outpaced the HERO4..

Versus Q1 of 2015?.

Yeah.

Q1 of 2015?.

Yeah. Because you're ....

Q1 of 2016, I don't have that – I don't have that in front of me..

Yeah. Because you're comparing the launch versus the launch last quarter. But that's okay. So, if I can follow up, given the Q1 numbers in the guidance if we assume the second quarter OpEx is going to be down sequentially. That too implies that your fourth quarter sales and marketing has to be down at least 40% year-over-year.

I mean, do you believe that having several new products, we're assuming that that level of marketing will be sufficient and I'm assuming that you're not going to guide for quarter OpEx, but just generally speaking..

Yeah. I think the important thing to note Nick (60:51), is that most of our entertainment expenses were in the marketing line. So, when we made the decision to move away from our entertainment business, the biggest impact there was in our marketing line..

Okay. Okay.

And the last one to squeeze in, is the trade-in program dilutive to gross margin?.

No..

No. Okay. All right. Thank you, guys..

That will conclude the Q&A session. At this time, I'll turn it back over to CEO, Nick Woodman, for closing remarks..

Thanks very much for joining today's call, everybody.

I just like to close by saying that since founding GoPro in 2002, I've really never had the privilege of working with such a strong and capable team, which you're seeing in our first quarter results is a direct result of the much improved communication, collaboration and culture that we have within the company, and it's never been better and with this in mind, I believe we are entering a new and exciting era for GoPro, where once again we are aligning the strength of our business with the strength of our brand.

And with that said, on behalf of all of our employees around the world, this is team GoPro signing off..

And again, that does conclude today's conference call. Thank you all for your participation..