Christopher Clark – Director-Communications Nicholas Woodman – Chief Executive Officer Brian McGee – Chief Financial Officer.

Paul Chung – JPMorgan Andrew Uerkwitz – Oppenheimer Joe Wittine – Longbow Research Yuuji Anderson – Morgan Stanley Tim Young – Citi.

Good day, everyone and welcome to the GoPro Third Quarter 2018 Earnings Results Conference. Today’s call is being recorded. And now I’d like to turn the conference over to Christopher Clark, Director of Communications. Please go ahead sir..

Thanks, operator. Good afternoon, everyone and welcome to GoPro’s third quarter 2018 earnings conference call. With me today are GoPro’s CEO, Nicholas Woodman; and CFO, 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.

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, 2017, 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 release, we have posted slides containing detailed financial data and metrics for the third quarter 2018.

These slides as well as a link to today’s live webcast and a replay of this conference call is 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 not GAAP unless otherwise noted.

Now, I’d like to turn the call over to GoPro’s founder and CEO, Nicholas Woodman.

Nick?.

total organic impressions of HERO7 related launch assets were up 69% year-over-year and overall digital engagement rates hit an all time product launch high; on Instagram, we’ve seen a 331% year-over-year increase in post-launch impressions and 172% higher engagement.

Our ad click-through rates are up 141% year-over-year and our direct response conversion rates are up 534%. Traffic to gopro.com is up 40% year-over-year and we’re seeing significantly higher purchase conversion rates for HERO7 Black than we did for either HERO6 or HERO5 Black.

Another exciting marketing initiative is the HERO7 Black Million Dollar Challenge. We're asking owners of HERO7 Black to shoot our highlight video for us and will reward those customers with an equal share of $1 million, if they're clip is featured in the video set today view in mid December.

To date, we've received more than 6,500 submissions and the quality of content coming in is exceptional. Video clips that we consider marketing worthy are being acquired at significantly higher levels than our prelaunch rate, and the rate of submissions continues to ramp each week.

We're excited to show off our customers HERO7 Black content in our highlight video during the heart of the holiday shopping season. As it relates to amazing content captured with GoPro on October 15, we announced a collaboration with Adobe to populate it's Adobe stock platform with thousands of GoPro video clips.

The program is now live and we earn a share of licensing fees, enabling us to test the monetization of our vast and growing content library. As the quality of our customers, UGC improves in the era of HERO7 Black. There's an opportunity to populate our licensable library with fresh, higher quality content.

While it's early, we're excited to partner with Adobe on this opportunity. I'd like to take this moment to thank GoPro employees for the tremendous execution that went into the successful global launch of our HERO7 line. HERO7 marks our first three camera refreshed since 2012.

And the first time, we've launched in international markets ahead of North America. And we accomplished this with a much leaner organization than we've had in years. Well done, GoPro. Because of retailer demand for HERO7 Black, we were able to outperform in Q3 in terms of selling.

And as a result, we are adjusting Q4 revenue, while maintaining revenue guidance for the second half. I'd like to reiterate that, we believe, we’ll be profitable in Q4 and for the second half of 2018 and exit the year with low channel inventory positioning us well for Q1, 2019. And with that, I'll hand it to Brian..

Thanks, Nick. During our second quarter earnings call, we outlined our expectations for the third quarter and second half of 2018. The second half of the year is largely playing out as expected and continues to be on track to meet our financial objectives.

I’ll now recap key points from our Q2 call and provide an update on how Q3 results came in relative to that outlook. We suggested sell-through of 5 million units for the full year, which represents 16% annual growth with sell-through of 3 million units in the second half of 2018.

We believe sell-through was 1.1 million units in Q3 up slightly year-over-year, which tracks to our expectation. In particular, Asia-Pacific and Latin America continued to be regional growth drivers. In addition, we continue to expect to Q4 sell-through to be 2 million units. We expect to sell-in to be approximately 4.3 million units for 2018.

We expect to exit the year with low channel inventory, which sets us up well for the first quarter of 2019. We expect to be profitable on both a GAAP and non-GAAP basis for the fourth quarter.

Now I'll provide more detail on our performance in the third quarter and then offer guidance for the fourth quarter of 2018 and a qualitative outlook for the first quarter of 2019.

Our solid third quarter performance was attributable to better than expected demand for our cameras, in particular, our newly launched HERO7 Black as well as continued management of our expenses. For the third quarter of 2018, revenue was $286 million. Gross margin for the quarter was approximately 33%, up two percentage points sequentially.

Our GAAP and non-GAAP operating expenses were $112 million and $99 million in the third quarter. A reduction of $10 million compared to the year ago quarter, despite an increase of $13 million in advertising.

We continue to believe GoPro remains on track to reduce full year 2018 non-GAAP operating expenses to below $400 million for maintaining our product roadmap and increasing marketing spend.

In addition, positive adjusted EBITDA of $6 million was an improvement of $15 million sequentially, which resulted in an increase in cash and cash equivalents in the quarter to $148 million. Our third quarter GAAP net loss was $27 million, a 27% sequential improvement from the second quarter resulting in a $0.19 net loss per share.

And in non-GAAP basis, our third quarter net loss with $6 million, $0.04 net loss per share. Our headcount is approximately 900, which is 50% lower than the third quarter of 2016. Turning to the balance sheet, accounts receivable at September 30 was $149 million, up sequentially due to timing of shipments on HERO7 camera.

Inventory ended the quarter at $123 million, the lowest third quarter level since Q3 2014. Now let's discuss the quarterly business performance in more detail. As expected, channel inventory of our HERO6, HERO5 and HERO cameras reduced to low levels as a result of sell-through of 1.1 million units during the quarter.

Effective channel management enabled us to sell more of the HERO7 line during the quarter. Of the 1.1 million camera shift in Q3, which we have solid demand for HERO7, HERO6 and HERO black cameras, which accounted for over 60% of our camera revenue and camera units shipped in the quarter.

Third quarter street ASP was $261 relatively flat, sequentially. Street ASP is defined as total reported revenue is divided by camera units shipped. During the quarter, we sold nearly all of our remaining Karma drones. I'll now move on to guidance for the fourth quarter of 2018 and share some thoughts about the first quarter of 2019.

In line with our prior guidance, we continue to estimate camera unit sell-through will be 5 million units in 2018, of which approximately, 2 million units are expected in Q4, up approximately 50% year-over-year.

We have observed an industry trend of retail promotions increasing in both frequency and scale during the holiday season to compete for consumer's share of wallet. This year, we plan to initiate more promotions during the fourth quarter, which will have a negative impact on both Q4 revenue and margin.

However, we believe this will further ensure we exit the year at low levels of channel inventory, while preserving profitability in Q4 and the second half. Putting all of these factors together, for the fourth quarter of 2018, we expect revenue to be between $360 million and $380 million.

This adjustment to prior Q4 commentary is due to the higher than expected sell-in of HERO7 units in Q3, as well as the cost of additional promotion in the fourth quarter. Street ASP increased slightly sequentially, due to the higher mix of Hero7 Black.

Gross margin to be 38% plus or minus 50 basis points, which includes both impact of promotion and already anticipated higher costs incurred related to component shortages. Operating expenses to be $100 million plus or minus, $1 million.

Non-GAAP tax expense to be $0.7 million, GAAP EPS to be in a range of $0.09 to $0.18 per share, Non-GAAP EPS to be in a range of $0.21 to $0.31 per share, expect EBITDA to be positive for the quarter and the year, and cash to be above $190 million.

The delta from our prior year guidance to our current Q4 guidance is split roughly 60/40 between over performance in Q3 that resulted in revenue that was $16 million above the midpoint of our third quarter revenue guidance to $260 million to $280 million and the more promotional in Q4, specifically on our HERO7 Silver and White cameras.

Stepping back, the second half is playing out how we expected, albeit with a different revenue split between Q3 and Q4. We are reiterating that we expect to achieve profitability in both Q4 and the second half of 2018 and we expect to enter Q1 2019 with low channel inventory.

Looking at the first quarter of 2019, we expect sell-in and sell-through to be at least 1 million units, while exiting Q1 with low channel inventory.

We believe that our camera mix will continue to ship to the high end, and that's a combination of ASPs, margins and operating expenses should result in an approximate breakeven to slightly profitable first quarter. With that operator, we're ready to take questions..

Thank you. [Operator Instructions] And we'll go first to Paul Coster. Excuse me, at JPMorgan..

Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my question. So first off, on product mix, so I assume the HyperSmooth features skewing more sales towards the Black. I'm judging by your highest monthly sell-through in history, and of course, so that you mentioned, so.

Now as we think that 4Q model higher HERO Black mix relative to other year launches?.

Hi, Paul. This is Brian. Yes, we expect the mix to shift more to HERO7 Black, when historical and we expect that trend to continue into the first quarter of 2019.

And what comes with that is an increase in – an expected increase in ASPs both in the fourth quarter, we said, it'd be up slightly and I'll continue to drive up into the first quarter of 2019..

Yes, I would add to that. Our production builds also allow us to adjust for this beneficial skew mixture..

Okay. And then my second question is on channel. So I noticed your indirect sales slightly bigger portion than past quarters. Is this function of maybe more international mix? Can you just talk about the dynamics going on there? And how should we think about kind of longer term impacts on both gross and operating margins if this continues? Thanks..

Yes. No problem, Paul. Part of the reason international was higher this quarter as we actually launched first with the HERO7 line up internationally. So they actually got more product in the quarter versus North America.

As we look to the fourth quarter, we expect actually all three geographies to grow year-over-year and obviously, sequentially, and the mixed shift a bit more to America’s versus Europe and APAC..

And I just like to give a big shout out to the GoPro's operations team for coordinating the first ever international launch for us. This is the first time we've ever launched international markets. Before the U.S., we launched several days early, internationally, and that in a year where we launched three new cameras for the first time since 2012.

Just a really big shout out to that team on it and it's a great sign of GoPro’s improving execution and efficiency..

Great. And then my last question is on GoPro Plus. So you got some nice growth there. So how big do you envision this business can become and what are kind of the steps you’re taking to increase more adoption? Thank you very much..

Thank you. Yes, GoPro Plus is growing steadily. And as I shared in my remarks, we’re focused on testing new pricing tiers and new benefits to provide the increased value proposition and differentiated value proposition to consumers. And we're very focused on increasing refining and increasing our marketing efforts to drive awareness.

Our internal research shows that we only have approximately 25% awareness of GoPro Plus amongst our community, which points to a real opportunity to grow the subscription service further at an increasing rate..

Thank you..

We’ll move next to Andrew Uerkwitz at Oppenheimer..

Hey, thanks gentlemen for taking my call. Two questions, the first one on the Silver and White discounting.

Could you just walk through kind of the thought process there? Is it different? Because you're seeing something in the channel is made you want to do this to the conversation you had with your partners kind of any additional color there on the discounting? That'd be great..

Sure. Yes, we've received feedback from our retailers that this was going to be a very promotional holiday. And they encouraged us to be more promotional and we took their advice and decided to be promotional on both Silver and White in addition to HERO7 Black, which we already had planned promotions for.

HERO7 White and Silver are selling in line with our expectations and together with these promotions that we've got planned for the heart of that holiday buying period, we expect them to play their part in our good, better, best strategy.

And it's important to note again, that we're seeing a mix shift to the high end due to the strength of HERO7 Black. And again, I'm going to give another shout out to our operations team – for ensuring that we've got the inventory to support this mix shift.

And as well manage it with future builds, so they can support it, if the shift continues into 2019, which we expect it will..

Got it. And then on the near term parts shortages, component shortages, does the mix shift change your thoughts there at all as far as your major….

Andrew, this is Brian. I think, as we kind of shared last quarter and our prepared remarks today, we continue to see 5 million units of global sell-through demand for GoPro in 2018. And our sell-through trends are remaining consistent with kind of the guidance we've given.

We obviously, over perform in Q3 with revenue that was $16 million above the midpoint of a previous guide and that shifted revenue to Q3 from Q4. We mentioned being more promotional, which we just talked about on Silver and White. That will definitely impact a little bit revenue and margin versus what we had guided previously.

But then we'll still be profitable in the fourth quarter, and the second half and grow cash balances towards the end of the year. As we looked forward to Q1, we believe sell-in, sell-through will be at least 1 million units, and we expect to see this sequential increase in the ASPs. So hopefully that answers your question.

We'll see more of a shift up to HERO7 Black, both in the fourth quarter and in the first quarter, as Nich had mentioned..

Yes. And the components constraints should not affect our ability to build more HERO7 Black..

Got it. Okay. Yes, it's – and then if you breakeven your profitability – profitable in Q1 next year, that seems like it could bode well for the entire year.

How are you thinking about marketing sales strategy, or even R&D, as you start to have a little bit more cash flexibility in 2019?.

Yes. We shared that could be an area, where we increase spending. On our last call, we shared that we could see OpEx going up to potentially $420 million next year. And that the areas of where we would increase spending would be in R&D and in marketing, if we were to do so.

We are going to be increasing marketing in Q1 2019, when compared to first quarter 2018.

We've learned that it's important to take in always on-approach to our marketing as we had done in our brand building years, as opposed to being off and on, as we had done in other years post IPO as far more effective to stay on, to keep driving awareness, keep the drum beat of loud and proud as it does have a significant impact on our ability to drive sell-through.

Also, it's important to note, in my prepared remarks, I covered quite a bit of time covering the performance of our marketing since launch. We've got significant increases in engagement and overall, we're very pleased with the initial results of our more feature centric marketing campaign.

That's doing a much better job of driving awareness of HERO7’s new features and why, both new customers and upgraders alike maybe interested. Now we're seeing it in sell-through. So you can expect that approach to continue at amplified levels in the first quarter and to a certain degree throughout 2019..

Awesome. Thank you, guys for all the additional color. I appreciate it..

Thank you very much..

[Operator Instructions] Moving next to Joe Wittine at Longbow Research..

Hey guys. Nick, so Black looks great. But I'm still struggling with the promotions. Just because, as you said before, when showing your dad you are the market, you have no competition domestically at least.

So I'm struggling to understand, why retailer would say GoPro needs to be promotional because other categories presumably are? On top of that you always partaken in holiday promotions, so maybe a little bit more detail on this advice on why you’re choosing to go this way?.

Sure. It's for share of wallet.

So consider a consumer may be really excited to buy a GoPro, but they're also really excited to buy, say a pair of Beats headphones and maybe the Beats headphones are $100 bucks off and they may decide, hey, I got to take advantage of this promotion on headphones during this Christmas period and I’ll wait to save up and buy a GoPro in February.

It's not that retailers or GoPro per se are necessarily worried about losing a sale to a direct competitor.Although, we take all competition seriously and the promotion, certainly don’t hurt.

It’s about competing for share of wallet and also when you are participating in retailer promotions over the holiday period, you get included in their advertising. Retailers pitch in for the cost of the promotion. The cost of promotion is not solely born by GoPro.

So that’s an opportunity to get leverage out of our retailers holiday marketing spend and get GoPro’s name and the HERO7 line into the limelight if you will during the holiday season. So it’s really important on many levels to participate in those promotions. So that’s why we’re doing that. And I believe that answered.

Was there a part of your question I left out?.

No, that’s fair. Maybe similar topic and I appreciate that.

Do you envision any scenario based on the early sell-through that you’re seeing where the company puts in a permanent price reduction to Silver and White kind of similar to what you are seeing with other products that have been sort out of the gate?.

No. We’re not seeing any signs that we would need to do that. The only reason that we needed to price protect in 2015 and 2017. I know it’s easy to think that GoPro always price protects because we had in a couple of fourth quarters in 2015, 2017, in all other fourth quarters, we never priced protected.

So this price protection is not the norm for GoPro. We’ve only had to do that when we did not sell-through enough of our products over the holiday and we were looking at having too much inventory in the channel and we had to help our retailers sell-through that inventory, so we had the lower price. And that’s the reason for price protection.

When we see sell-through like we’re seeing so far this fourth quarter combined with the sale sell-through that we expect to see during the promotional period, we do not think that we are going to have too much inventory in the channel. And that would allow us to maintain the intended retail price, which would make price protection unnecessary.

So that’s why I am emphatically saying that, no, we do not believe that we are going to have to price protect this holiday. We are quite confident in our ability to have a strong holiday quarter..

Okay. That’s helpful context. Every year’s a little bit different here obviously. And then last for me. As far as the discontinued cameras go or I don’t know if that’s the right way to put it, but the five, the six, the last year’s HERO, and then the sessions.

Can you address Brian, what you have of those on your 9/30 balance sheet as well as what’s in the channel. Because we’re seeing some of these cameras still on the bestseller list and they seem to be taking demand from some of the new cameras. So I’m wondering when that maybe kind of evaporates? Thanks..

Yes, no worries. Actually in the channel, we ended the HERO6, HERO5 and HERO going into a launch at the lowest level we probably ever had in the history of the company. And it was – I think less than 200,000 units globally. We expect all of those to be sold out by end of November.

So we’re in actually really good shape going into the selling season where those are out and then the new cameras takeover fully. And we have very, very little in the way of – in our inventory of HERO6 and HERO5 very small..

And it’s important to note that those units that are selling-through in the channel those are taken into account when we do our forecasting and the sell-through of our own new HERO7 products. So everything is in line with our expectations for the quarter..

Great. Thanks guys..

Thank you..

Thank you..

We’ll go next to Yuuji Anderson at Morgan Stanley..

Great. Thanks for taking my question. Two if I may, on the gross margins for Q3, I believe it was a little bit light versus the forecast. Would appreciate any color behind that one. And then on sell-through, I know you called out global sell-through and you saw particular strength in a couple of the international markets there.

Could you comment on what the sell-through trend look like in the United States?.

So to answer the first question on the Q3, as we looked at doing promotions for the holiday season for some of the units we’ve sold in Q3 were those would actually hit in the promotions. We had to take a revenue reserve in margin reserve for those products. And so that lower the margin from 34% to the 33.2%. So it’s all attributable to promotions.

On the U.S. side and the European side, on a year-over-year basis on sell-through for Q3, they’re actually down. But they were down because they were competing against $149 session camera from the prior year. As we look right now, we’re actually trending well up across every geography on sell-through.

So that’s in line with the guidance we have because we estimate we’re going to lift 50% to 2 million units in Q4..

Yes. We’re seeing very positive effects from the strength of HERO7 Black helping us grow our business globally..

Yes. And then just on the shipments for the new products going in.

For the Silver and the White, is it such that there’s a little bit more channel still going to come in Q4? Or was the timing roughly the same as the HERO7 Black?.

Well, we launched those products concurrently, all three at once in internationally and then a few days later in United States. But we’ll continue to sell in all three skews throughout the course of Q4, if that’s what you’re asking..

And then my last question, as part of the promotions to finish off the year, will you be doing some kind of trading program?.

Trade off is something that we’ve been experimenting with. To learn how effective it is from a CRM perspective that driving upgrade within our community. We tested this a bit at launch. It was very successful. We got a bunch of good data.

You’ll see us turn it on and off periodically as we’re gathering data, testing different offers and really learning about what triggers upgrade within our community. So that’ll help explain you why sometimes you see it, sometimes you don’t. We’re learning a lot from it..

All right. Thank you so much..

Thank you..

And we’ll take our final question today from Jim Suva at Citi..

Hi. This is Tim Young calling on behalf of Jim Suva. Thanks for taking the question.

Can you maybe just a little quick follow-up on the trading program? Can you provide some color on your progress in terms of monetizing and doing installment base, especially with the new product launch?.

We’re not sharing information as to what degree were driving upgrade amongst our existing users and frankly, it’s a little bit early for us to get a good read on that.

Anecdotally, you can learn a lot by reading a user – by watching user reviews on Instagram and on YouTube for example and then reading the audience – the viewer comments below those video posts. And we shared some of our favorites on gopro.com/news. You can watch several user reviews.

These reviewers bought HERO7 Black with their own money and you’ll see thousands of viewer comments below their videos that give you a really good read on customer sentiment around our new products.

And you’ll note that in those comments, there are countless mentions of people saying, GoPro finally gave me a reason to upgrade GoPro – I’m finally going to upgrade from my HERO3. I just sold my HERO5 and got my HERO7 Black in the mail. And I love it, no regrets. So it’s only anecdotal, but we did not see this during HERO6 launch or HERO5 launch.

So anecdotally it looks like HERO7 Black is really resonating with our community and driving a lot of upgraded intense, which is great to see. And then in terms of upgrading – sorry, monetizing our community further, it’s great to see GoPro Plus grow 16% sequentially to 185,000 subscribers.

And as I mentioned, we see a lot of opportunity to grow that at a faster rate given awareness is quite low at 25%. And we’re going to be testing additional pricing tiers and benefits globally to do everything we can to grow that number because it’s clear there’s a significant opportunity there..

And then my last question is on the tariffs.

Are you seeing any impact so far? And how large is it?.

On the tariff other companies have successfully sort of exclusion on the tariff and we believe there are reasons for our cameras to also be excluded if we’re ever included in a tariff list in the future. But we’re being very proactive on this topic. We also believe we have an option to move our U.S.

bound production out of China in the first half of 2019 if necessary. And I want to reiterate, however, we are not moving production out at this time, but we’re preparing to do so if necessary..

Got it. Thanks..

And I’ll now turn the conference back to management for any additional or concluding remarks..

Thank you, operator. I’d like to extend a big, big thank you to all 900 GoPro employees around the world for their ongoing execution this year, it’s been phenomenal. And thanks to their creativity and capability. HERO7 Black is an unquestionable hit in each of our markets globally. So much so that we’re seeing a skew mix shift towards our $399 flagship.

HERO7 White and HERO7 Silver are selling in line with our expectations. And when we combine this with the promotions we have planned for the heart of the holiday buying season, we are confident in a successful holiday quarter for GoPro positioning as well for Q1 2019 as well. So thanks very much for joining today’s call everyone.

This is team GoPro signing off..

And once again, ladies and gentlemen, that does conclude our conference for today. Again, thank you all for joining us..