Good day and welcome to GoPro’s Third Quarter 2017 Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Jeff Brown, Senior Vice President of Corporate Communications. Please go ahead.

Thanks, operator. Good afternoon, everyone, and welcome to GoPro’s third 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’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, 2016, which is on file with the Securities and Exchange Commission and 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 matter 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 detailing financial data and metrics for the third 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. A link to today’s live webcast today and replay of this 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 not GAAP, unless otherwise noted. Now, I’d like to turn the call over to GoPro’s Founder and CEO, Nicholas Woodman. Nick?

Good afternoon. GoPro has turned the corner. Our third quarter reflects strong and sustained improvements in our business. To start, we returned to both GAAP and non-GAAP profitability. Year-over-year, we drove operating expenses down 31% and grew revenue 27%, 11% sequentially, generating an additional $47 million in cash, strengthening our balance sheet. We improved gross margin for the quarter to 40%, and importantly, we are targeting double-digit revenue growth and full year non-GAAP profitability in 2017 with a responsible approach to the fourth quarter. We are determined to act as a vigilant steward of shareholder value, carefully managing operating expenses while leveraging GoPro’s growth and profitability to drive innovation and launch new product categories. In September, we successfully debuted HERO6 Black and Fusion to critical acclaim, and we backed it up with solid manufacturing and distribution, achieving a 90% global fill rate at retail for HERO6 Black. Initial sales of our premium-priced HERO6 Black are solid. Following the HERO6 launch, demand for our legacy product HERO5 Black was lighter than expected, but is beginning to benefit from a series of marketing initiatives engineered to drive demand during the holiday season. And following a midyear price adjustment, demand for GoPro’s entry-level Session camera was much higher-than-anticipated and will result in a sooner-than-expected end of life for this product. This limits our inventory at the entry-level price point during the quarter, but it identifies a significant opportunity for us to expand our market with a new entry-level product slated for 2018. In the meantime, our guidance reflects promotional programs and special edition SKUs that we believe will get us to our target. We are now focused on driving consumer demand and sell-through of our premium products to achieve our goal of full year non-GAAP profitability and exit the year with responsible inventory…

Thanks, Nick. As I’ve done on prior calls, I’m going to review our recent progress through the lens of GoPro’s five key priorities for 2017. Our first priority is to achieve profitability through improved efficiency, lower costs and better execution. We are very proud of the turnaround progress we’ve made this year, quickly returning GoPro to growth and profitability. In the years leading to our IPO, we had a track record for profitable revenue growth and stellar balance sheet management. Returning to this mode of operating is our number one priority for the year, and we believe that our team’s focus and hard work will allow us to deliver on our goals of double-digit revenue growth and non-GAAP profitability for the year. We also expect to strengthen our balance sheet and generating additional cash through the end of the year. Going forward, responsible management of that balance sheet will continue to be a priority. One big highlight from the quarter is our execution on HERO6. We launched our first smart camera on a new platform in GP1 and hit our development and production milestones to allow for our most global launch ever. We achieved a 93% global fill rate, which allows us to have our strongest-ever marketing execution with our partners at retail. This solid execution is reflected in the post-launch mix we’re seeing. While we only have a few weeks of data, the clear winner is our premium model HERO6 Black, which captured a stronger percent of mix than we were anticipating. As Nick noted, we’re now focused on generating demand for our full portfolio of products as holiday shopping kicks in. Our second priority is to make the smartphone central to the GoPro experience. There’s a strong correlation between the growth of GoPro and the adoption of smartphones.…

Thanks, CJ. Today, I will provide an overview of our performance for the third quarter and full year 2017 guidance. GoPro returned to profitability on both a GAAP and non-GAAP basis, driven by better-than-expected revenue growth, strong gross margin performance and lower operating expenses. In addition, cash increased by $47 million sequentially to $197 million and we expect to end 2017 with a cash balance between $225 million and $250 million. During the third quarter, we successfully launched our newest camera, HERO6 Black, which contributed significantly to the sequential increase in both ASPs and gross margins. Additionally, HERO6 Black was the largest contributor to sequential revenue increases across all geographies. Let’s dive in to the details of our third quarter financial results. Third quarter revenue was $330 million, a sequential increase of 11%. Year-over-year growth was 37%, driven by units, up 12% and ASPs, up 22%. Higher ASPs were driven by our mix of HERO5 Black and HERO6 Black camera offerings, which made up more than 70% of our revenue and units shipped for the quarter. Camera units shipped were more than 1.1 million in the third quarter. The ASP, defined as total reported revenue divided by camera units shipped, was $288, up 3% sequentially and 22% year-over-year, due to strong camera mix of our $399 and higher-priced cameras. We expect ASPs to increase in the fourth quarter to a record level. According to NPD and GfK, GoPro’s year-over-year global unit sell-through increased by 2%. Channel inventory continued to improve and we exited Q3 with nine weeks of inventory as compared to 10 weeks in Q2 and 11 weeks in Q1. As expected, absolute units in the channel increased. This is due to the channel fill ahead of the launch of HERO6 Black and our best-selling camera, HERO5 Black. These…

Thank you, ladies and gentlemen. [Operator Instructions] We first go to Paul Coster with JPMorgan.

Yes. Thanks for taking my question. The initial outlook for 2018 looks pretty good. The fourth quarter’s, though, a little complicated, maybe a little difficult to understand. It sounds like you have HERO5 inventory, excess inventory in the channel and you want to get rid of it; at the same time, you’re looking to sustain this margin improvement. I’m just wondering what the trick is for sort of flushing that inventory out and entering 1Q with the right mix in the channel.

Hi Paul, Nick here. Yes, thanks. We’re actually feeling really good about our guidance for Q4. We’re really excited about how the year is turning out and, as Brian noted, we’re either meeting or exceeding most of the metrics that we laid out at the beginning of the year, of course most notably, double-digit revenue growth and profitability, profitability coming a little bit earlier than anybody expected in Q3, which is a solid win for the team. So I’d like to just acknowledge that. And then as it relates to HERO5 Black, it’s not that we’ve got a bunch of inventory in the channel and we’re trying to clear it all. Sorry if that came across as confusing. It’s just that, as to be expected, there’s a little bit of softness in HERO5 sell-through post-HERO6 launch. And while that’s to be expected given that the launch was totally dedicated to HERO6 and HERO6 ended up stealing HERO5’s thunder, we think that we’re going to be able to drive a substantial demand for HERO5 as promotional programs kick in this year. The holiday season hasn’t really started yet. It doesn’t really begin in earnest until mid-November through Christmas, and with the dedicated promotional programs that we have planned for HERO5 Black, we feel good about driving demand for that product and its contribution to our growth and profitability targets for the quarter. So overall, we’re feeling good and we didn’t mean to muddy the message at all. So sorry for that.

No, no. It’s probably me, actually. So next question is, so you’ll exit the year with a much reduced channel inventory and much reduced inventory in your own balance sheet. Is there a risk that you might leave more money on the table, perhaps in the first quarter of 2018? Or do you continue – is your intention, Nick, to continue to sort of throttle back and just manage this in a very intentional way moving forward? Or could you just sort of give us some color about how you expect to enter 2018? That would be helpful. Thank you.

Our goal is to enter 2018 with a bang. I don’t think that we’re approaching the business in an overly conservative manner. I think that we’ve got very clear goals for 2018, which is to continue double-digit growth and profitability for 2018 as well. We’re – as we previewed a bit, we’re excited about our new product road map for 2018, several new products planned, and I believe it’s just a terrific continuation of the innovation and the focus on simplifying the consumer experience that has restored growth to GoPro this year. So overall, we’re feeling really good about the job done in turning the company around this year and how it sets us up well for 2018 starting with our entry into Q1, thanks to our responsible management of Q4.

Okay, thank you.

Next question comes from Joe Wittine with Longbow Research.

Hey, thanks. Can you share with us some quant on how much you expect camera ASPs to increase as the new mix is fully out in the wild, let’s say, compared to calendar 2017’s mix?

Yes. Hi, Joe. This is Brian. As we’ve said – well, Q3 was $288, so that was up 22% year-over-year. We expect Q4 actually to be close to $300 on ASP, which should be a record. And if I look from 2017 to 2018, that would be somewhere between 2% to 5% growth in ASP based on the road map personally.

Got it. And then on HERO Session, I mean, we saw the inventory of operation over the last couple of weeks. So the first part is, did that also have a negative impact on the fourth quarter guide? And secondarily, what is the holiday strategy for the $300 price point? Last year, you were – you had the strategy of being pretty active with the discontinued cameras. I assume you’re not going to do that this year, but are you content with standing pat at $299 as the low point? Thank you.

Yes. Hey, Joe, it’s CJ. Great question. The good news is that, with the entry-level price we have on Session, we’ve shown that there’s a real market at that price point. As we said on the call, in 2018, we’ve got a new product to address that entry level, which we’re even more excited about than Session because it needed better form factor for that price point. So on the positive side, we see great opportunity at that price point. Our guidance for this quarter reflects promotional promo brands, special edition SKUs and plans to build – to bridge the GAAP between where we are today and that next product.

Okay. And then, finally, is there any way to quantify the benefit to the first quarter from exiting the year with, I think, you said before seven to eight weeks of inventory? Can you quantify the first quarter benefit as it compares to prior first quarters? How much sell-in will benefit versus what you’ve seen in the past?

Yes, Joe. This is Brian. Let me kind of tackle that one. We expect channel inventories to come down significantly in the fourth quarter actually to absolute levels that are kind of the lowest we’ve seen in the last two to three years. So that’s good news as we head into the first quarter of 2018. And just for reference, we ended the fourth quarter of 2015 with about 14 weeks, even higher exiting the fourth quarter of 2015. So we are trying to be very thoughtful about how much inventory we have, both on our balance sheet as well as within the channel as we look into 2018.

All right, thank you.

The next question comes from Yuuji Anderson with Morgan Stanley.

Great, thanks for taking my question. I was hoping if we could get some additional color on HERO6 sell-through. Is there a way to kind of compare this with what you saw with the HERO4 Black? I believe that was your other $499 product. Is there any comparison there?

There are some. Actually, from a percentage perspective, the HERO6 Black is doing substantially better than the HERO4 Black. Out the gate, HERO4 Black was about 20% of our sell-in, about 16% of sell-through in the fourth quarter of 2014, and we’re seeing substantially better than the HERO6 Black.

Okay, got it. And then a clarification on inventory levels coming down exiting the year. Is that also on a weeks’ basis?

Yes, it would be on a weeks’ basis as well.

Okay, got you. And then, I guess, one more for me just on international there. I mean, I guess, it’s fair to say that, that mix should continue to grow going into Q4. Just clarification on that. And number two, just like how should we think about sell-through going internationally versus going into next year?

Yes. I mean, our focus to grow international markets remains. So I think continuing that trend, as you suggested, is the way to think about it. As we noted, we’re continuing to see really strong sell-through in APAC. On a sell-in basis, we’re up 153% year-over-year for the quarter. And that remains a key kind of growth area and strategy for us.

Yes. I would add that the resources that we’ve applied to achieve that growth have been at a level where it’s clear to us there’s still a lot of low-hanging fruit there. It’s not as though we have to go in with all guns blazing to achieve that type of growth. So still a lot of opportunity internationally.

Okay, great. Thank you so much.

Next question comes from Stan Kovler with Citi.

Hi, good afternoon. Thanks for taking the question. I just wanted to see if you can address – there have been some competitive launches of consumer devices, particularly in the quarter, from a number of competitors. As that may not hit the exact used case, but are close enough, can you just help us understand how the value proposition that you guys have is comparing to some of these new offerings? Just a competitive environment question.

Sure. I’m going to take a wild guess that you’re referring to Google Clips, which really I think the media and investment community had a bit of a major reaction to that product being directly competitive with GoPro, which, to a certain extent, is understandable at any time a global brand like Google would come out with something even closely resembling a camera that it would spook people. But I think after a bit of reflection and investigation, people realize that it’s just an entirely different type of devising, that very different use cases. It doesn’t shoot video. It doesn’t capture sound and it’s generally designed for more static use cases than a GoPro. I think what is encouraging, though, is to see that other companies are raising awareness that differentiated complementary forms of capture to a smartphone exists and that can raise interest levels amongst national market consumers. And when they go to research products like this, GoPro stands at the top. And as we’ve seen over the years as we consistently have competition from competitors big and small, we’ve been able to grow share and, internationally, across the board. And I think that just reflects GoPro’s ability to compete. Competition is good, but we tend to fare quite favorably with direct competitors. And as it relates to Google’s product and perhaps others like it, if it’s difficult to compete with GoPro directly head-on, then I think it’s even more difficult for an indirect product to have much of an impact on our business.

Yes, Stan. The one thing I would add is, on Clips, one of the things that was noted about that product was the AI that enables the capture. And what’s interesting to us is HERO6 is our first smart capture – smart camera and we use a lot of the same techniques in terms of identifying the right moments. We don’t do it to initiate capture. We do it after the fact to identify moments, whether it’s through face detection, analyzing telemetry, looking at audio cues. So a lot of the media attention around that product was around the AI and we have a lot of those exact same investments. I would say we’re actually much further ahead in terms of the moment identification we have in HERO6 in our apps today.

I appreciate the response there. If I could just follow up, actually I wanted to ask about drones. So you know that you’re constraining sales to some degree because of margins. Some of our work in terms of store checks is showing that maybe the attach rate or the growth in the category might be slowing a bit. I was curious about your take in terms of consumer appetite that you’re seeing for the product when you do get potentially a higher margin product to market and your views on that. Thank you.

We’re still seeing a lot of strength in the $1,000 range price [indiscernible] for drones. And as we’ve shared in the past, GoPro’s Karma drone is the number two best-selling drone in North America in the $1,000 and above price point. And – but I think when we first shared that, we were high teens and we’ve actually grown share since then. So Karma certainly is a terrific platform for us as we further our own capabilities and value proposition for consumers with our next-generation drone offerings. And the consumer feedback to Karma specifically, actual owners of Karma has been quite good, and so we’re feeling really good about our prospects in the future there.

Thanks a lot. Good luck, guys.

Thank you very much.

Next question comes from Mike Koban with Raymond James.

Hey, guys. Thanks for taking my question. This is Mike Koban, on for Tavis McCourt. First of all, I just kind of wanted to make sure I understood the guidance for the fourth quarter. It looks like it’s implying kind of the low double-digit decline year-over-year, but I was wondering if you could – I believe last year was a big sell-in year, so I was wondering if you could give us some – a little bit more color on kind of what this implies or how you think about it as far as Q4 sell-in. And then I’ve got one follow-up.

Yes. Mike, this is Brian. Yes, the midpoint of the guidance would be down year-over-year in Q4 about 13%. But the fact is, for the whole – we look at the whole year, right? So for the whole year, the guidance is up 10% to 12% on revenue growth and actually the midpoint of our guidance on EPS is to be profitable. So that’s a pretty dramatic turnaround from 2016. I think we should kind of point that out. We also were able, because of supply chain and kind of execution in the quarter for Q3 able to get more fill rate of HERO6 Black into Q3. And that pulled from Q4. So in fairness, you kind of have to look at almost the second half kind of together, right, Q3, Q4, where in our guidance will be profitable as well on both the GAAP and non-GAAP basis in the fourth quarter, and then profitable for the year. As far as channel inventories go, we exited the fourth quarter of 2016 with about 14 weeks and we want to be more like six to eight weeks, including this year. And so that’s a pretty dramatic reduction in sell-in in the quarter because we have to really work in the first quarter of 2017 to get that inventory moved.

Got you, thank you. And then as far as the little bit of commentary you gave us on 2018, are you assuming that there’ll be other product launches? And are you willing to give us any information about potential ASPs of those?

Well, for 2018 kind of overall, we talked about entry-level price points. So they’re in our prepared remarks, and CJ and Nick have talked about it. We’re looking to get double-digit revenue growth, which kind of go by kind of how we outlined 2018 margins with 40% and OpEx for $500 million. That’s going to drive to a pretty decent EPS number well above $0.40 actually. So, for 2018 and an EBITDA substantially above $100 million and pretty good cash flow. So I mean, we’re not guiding for that, but that’s kind of a scenario of – as we’re able to generate 10%. That’s kind of the expectation we’d have.

Yes. And just to take a head-on because you asked it. Yes, there will be several new products from GoPro in 2018.

Great, thanks guys. That’s all I got.

Thank you.

Next question comes from Rob Stone with Cowen and Company.

Hi, guys. One quick follow-up on the 2018 commentary, which would be the tax rate. I know that’s going to depend on geographic mix and other things, but any color you could provide just looking at last part of getting to a non-GAAP EPS for next year?

Yes. We expect – we actually do our non-GAAP tax based on cash tax paid in 2017 and we’ll apply that same methodology for 2018. For non-GAAP tax expense, so there is going to be $8 million to $10 million next year, pretty much spread pretty evenly throughout the year actually. And on a GAAP tax, it will be in the $13 million to $15 million range.

Okay. And as you’re thinking about getting to double-digit growth in 2018, I’m assuming that Fusion doesn’t have that much impact this year because, some of it availability, higher price point and not very many weeks to sell it, but how much does 360 as a category that you’ve not been in before out there for a full year roughly contribute to your view on next year?

Yes, you’re right. It’s CJ. Your commentary around the impact this year is accurate. We’re shipping the first units to customers in November. We’re going to be – by the end of the month, we’ll be caught up in terms of preorders with supply and we’ll be shipping directly to customers. In Q1, we’re going to roll Fusion at retail. And so in 2018, you’ll obviously have a bigger impact, but will still be relatively small in relation to our core activity camera business.

Okay. And then a final question for next year. So you’ve talked about operating expenses more or less flat with this year. How do you think about allocating that between headcount and other things that you might spend money on to lubricate other revenues like sales and marketing? Are you looking for ways to be more people-efficient and spend money on stuff that add to the…

Yes, let me start and then – this is CJ, and maybe Brian can add in. We’re continuing to look for efficiencies always and we talked about on prior calls kind of a cultural shift that we’ve had this year to get to the OpEx numbers that we have. So for example, our locations in Bucharest and the Philippines and building up the teams there to really support our overall efforts. And then, finally, as we look at – as Brian guided for this year, we’re going to be – we expect OpEx to be below $490 million for the year. To the extent we’re above that in any amount or even on par with that, there are opportunities in 2019 and 2020 that we’re excited about that we could start investing in from an R&D perspective in 2018. But we mentioned the $500 million is we wouldn’t expect that to be a big variance at all from where we expect to land in OpEx this year.

Great, thank you.

Next question comes from Jason Mitchell with Bank of America Merrill Lynch.

Hi, guys. Just a few questions real quick. So just for Q4, do you still kind of see the HERO5 as a bigger volume product versus the HERO6 given kind of the first month sales trends? And then, could you talk about how much shipping there was for the HERO6 in 3Q versus the HERO5 when it launched in 2016? Because I think you had some units shipped, but most of them were in 4Q? Thanks.

Hi, Jason. This is Brian. On the HERO5 volume mix, that product proved to be the largest percentage of what we ship in and ship through in Q4. As comparing HERO5 Black to HERO6 Black, we ended up shipping more HERO6 – sorry HERO5 Black into October of last year. So substantially more HERO6 Black went into Q3 versus last year, and actually that was intentional because, as we’ve said before, we’re trying to kind of rebalance our mix between quarter three and quarter four and not have so much in the fourth quarter. So our product execution is enabling that and supply chain, et cetera. So that’s actually a positive result that we can spread the load between the quarters.

Okay. And then just a quick follow-up. On your share count for the fully diluted, does that also include the convertible debt option?

I think it does. Yes, and it seems we’re able to actually pay the convertible debt offering down in the five years.

Okay, thanks guys.

Thank you.

Your last question comes from Ben Bollin with Cleveland Research.

Thanks for taking the question. Brian, on the commentary on the HERO6 Black, you talked about the sell-in mix being higher. How would you say the initial the sell-through read has been for HERO6 Black in the month of October versus the new product in the year-ago period? And then I have a follow-up.

The HERO6 – well, the HERO5, with sell-through, it’s kind of hard to compare because one is the $399 price point and the other is $499, but I can say we’ve been – the HERO6 Black sell-through has been quite good, as we’ve commented before, comparing to a HERO4 Black, which was the same price point. It’s – we’re doing much better at that price point than the HERO4 Black did. So I think you’ve got to sort of get it from that perspective.

Okay. And then I’m interested in your thoughts on how much you think or you saw tailwind from FX in the quarter, how you’re thinking about that in 4Q, how significant translation impact was for you? And I know a lot of your foreign partners [indiscernible] buy in U.S. dollars. So I’m curious if you’ve seen any way, any shift in how they buy. Are they looking to make – or order more because they make more margins? Just any read you have on how FX has influenced results in 3Q and how you’re thinking about in 4Q. Thank you.

Yes. It’s been neutral. As we mentioned, a lot of distributors, particularly in Asia, buy in U.S. dollar. The distributors in Europe tend to buy in U.S dollars as well. Some of our direct accounts buy in local currency and we have local currency expense, so that can balance out. If anything, over the last few months on an FX perspective, the dollar’s actually weakened to the pound and to the euro, and so that’s actually kind of helping from a channel perspective, but we tend to price in local currency. So I think consumer doesn’t necessarily see it.

Thank you.

Now with no further questions in queue, I’d like to turn the conference back over to Nicholas Woodman for closing remarks.

Thank you very much. I’d like to close today’s call with a big, big thank you to the 1,300 GoPro employees around the world who have helped turn our company around. We are in a very, very different place than we were a year ago, and it’s thanks to all of your execution of our strategy to do fewer things better. And that is just what we’ve done. While spending far less, we’ve improved efficiency and effectiveness on every level. We grew our brand globally and launched our most impressive products ever on time and on shelf. And the products that we’re developing for 2018 and beyond look to continue our reputation for market-defining innovation and, importantly, excitement. While we remain focused on finishing 2017 strong, it’s impossible to not be excited about the future. With that, this is Team GoPro, which now includes our new board member Rick Welts of the Golden State Warriors, signing off.

Thank you, ladies and gentlemen. That does conclude today’s conference. We thank you for your participation, and you may now disconnect.