Good day and welcome to GoPro's First Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Lara Sasken, Senior Director of Corporate Communications. Please go ahead.

Good afternoon, everyone, and welcome to GoPro's first 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. All income statement related numbers that are discussed today during the call, other than revenue, are non-GAAP unless otherwise noted. In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the first quarter 2018. These slides and a link to the webcast for today's earnings conference call are posted on the Events and Presentations page of the GoPro Investor Relations website. Now, I'd like to turn the call over to GoPro's Founder and CEO, Nicholas Woodman. Nick?

Good afternoon. Today, Brian and I will take you through GoPro's recent performance, which we find encouraging. While recognizing that revenue and gross margin are weighted toward the second half of the year, we are pleased to say that GoPro is off to a good start in 2018, with robust sell-through proving there is strong global demand for our products. Revenue in the first quarter was $202 million, and camera unit growth increased 3% year-over-year. We reduced weeks of inventory in the channel by 30%, a trend that positions us well for the introduction of higher-margin products scheduled for the second half of the year. We ended the quarter with $145 million in cash and expect to increase our cash balance in the second quarter. Our results were driven by strong sell-through of HERO5 Black and HERO6 Black along with the launch of our new $199 entry-level HERO at the end of Q1. HERO is selling in line with our expectations, and we are expanding distribution to large retail partners like Walmart and Target in the second quarter. Brian will offer more detail on our financial performance, but I want to highlight four topics that summarize the quarter and point to our potential for the year. First, our time-tested good-better-best product strategy is working once again. Sell-through gained momentum during the quarter, and we grew share in North America, APAC, EMEA and Latin America. Second, our recent increase in marketing is beginning to have a positive impact on sell-through. In March, we ramped our global advertising and began seeing a positive impact in early Q2. We will continue to ramp marketing during Q2 and throughout the rest of the year. Third, we are driving down weeks of supply in the channel, clearing the way for new, higher-margin products in the…

Thanks, Nick. Let's turn to an overview of our performance for the first quarter and guidance for the rest of 2018. Revenue for the first quarter of 2018 was $202 million compared to $219 million for the same period in 2017. Camera units shipped grew 3% year-over-year, driven by demand of our HERO5 and HERO6 Black cameras and our recently launched entry-level HERO camera. On a GAAP basis, net loss was $76 million, a 31% improvement year-over-year, resulting in a $0.55 net loss per share. On a non-GAAP basis, net loss was $47 million, a 25% improvement year-over-year. Net loss per share on a non-GAAP basis was $0.34, an improvement of $0.10 from the prior year. Adjusted EBITDA was negative $34.5 million in the first quarter of 2018, an improvement of $11 million from a year ago. Cash and investments were $145 million in the first quarter of 2018. As of March 31, 2018, we had the ability to borrow up to $68 million under our asset-backed credit facility. We expect cash balances to increase in the second quarter and second half of 2018. We ended the quarter with inventory of $133 million, a sequential decrease of $18 million. We are managing our inventory to leave us well positioned for sales of our higher-margin products in the second half of 2018. Our sustained efforts around cost management resulted in non-GAAP OpEx of $94 million in the first quarter of 2018, a $37 million or a 28% reduction compared to the first quarter of 2017. We believe GoPro is on track to reduce full-year 2018 operating expenses to below $400 million while maintaining our product roadmap and increasing marketing. Additionally, head count is now below 1,000, down from a peak of nearly 1,800 employees in 2016. Turning to the balance sheet,…

Thank you. And we'll take our first question today from Paul Coster with JPMorgan.

Hi. Thanks. This is Paul Chung on for Coster. Thanks for taking my question. So can you expand on your new licensing relationship with Jabil? Looks like you can expand your end market exposure pretty significantly with some different use cases. So just want to size how big this opportunity can become. It seems going to be pretty high margin royalty-based business as well. And then when can we kind of expect some contribution from this partnership?

Hi. Thanks. Yeah, as we noted, it is an interesting opportunity for us to be able to extend some of our IP and know-how into other products without taking on the risk of developing those products ourselves. And Jabil, one of our contract manufacturers, came to us expressing an interest in going out and soliciting customers for our technology through a licensing relationship. And that we shared that we would share news of those deals at the appropriate time. And we don't have any more information to share on that, but it is a new area of the business that we look forward to.

Okay. And then just on the inventory levels, it looks like your visibility into sell-through has improved. Can you just give some examples of how you guys have been managing your channel relative to last year?

Yeah. Hi, Paul. This is Brian. Yeah. Obviously, we use NPD and GfK, and we get a lot of our top customers to report. We've done a lot also on analytics. It's one of our goals for the year. We've used a lot of data to determine what kind of products consumers are going to want. And so that's all really helped. I think also the price moves have enabled us to increase our share, particularly in APAC and Europe, which I mentioned on the call. Asia was up 30 points in the $200 to $299 price band. Clearly, the HERO5 Black with the screen is resonating at that price point. And actually, EMEA in that price point was up about 10%. So both regions saw growth. We're also excited about the HERO product at $199. We didn't sell much in last year because we had way too much Session. And we expect that to do well in EMEA, in particular, where we see, as Nick had mentioned I think in prepared remarks, we see more competition at the lower end of the price point range versus the upper end. So that's how we're doing it.

Okay. Great.

Yeah, another point that I would add is that we have many years of data related to the sell-through of HERO cameras, HERO form factor cameras, all sharing the same general design at the $199, $299, $399 price points. And now that we have removed the Session form factor from our lineup, we're obviously seeing much better sell-through because consumers – it's clear from the data, both past and present, that consumers prefer the HERO form factor. But because we have all those years of data of selling a variation of the lineup that we now have, it's also contributing to our ability to understand sales ratios and the impact that some of our actions are going to have, because history is repeating itself a bit. Whereas during the Session years, all that data we were getting, we didn't have a benchmark for it from the past. So in retrospect, we just didn't have the visibility that we now do.

Got you. And then my last question is, looks like you're gaining momentum in Korea and Japan. And then how are you kind of getting users overseas to adopt your product? And do you think this market over time can surpass kind of your Americas on an absolute basis? Thank you.

Localization has been a big part of it, everything from translation of our packaging. Previously, we were selling an American to the rest of the world, and over the past couple of years we've done a much better job of localizing all of our products – packaging on the camera, user interface on our apps. They're now available in 10 languages. Voice control as well. And then at retail, we've localized how we sell. Again, in previous years, our go-to-market strategy at retail was to take our standard merchandising displays and put them into stores around the world, regardless of if that was really the right approach for that particular market. And in Japan, for example, we made significant modifications to our displays and going to smaller displays where necessary, getting better positioning in stores, making our products available out of the display so that consumers can pick them up and play with them a bit, which is very important in Japan, for example. So, that's gone a great way towards growing our sell-through in those regions. As well, our marketing is more localized. We're featuring more local faces and places, so that GoPro is more relevant to that consumer. We're not just showing them images from the United States in their home country, but we're showing them themselves living a GoPro lifestyle. And as well, we've been, for the first time, starting to spend some reasonable marketing dollars in those regions to drive awareness and drive demand and that's really important because we found that while GoPro's brand is one of the strongest consumer brands in the world, just your brand momentum is only going to get you so far and at a certain point, you have to spend against that brand to drive demand. And that's a big part of our 2018 strategy is to really back the terrific products and prices that we now have with world-class marketing, and we're seeing it in our results.

Great. Thank you very much.

And next we'll go to Joe Wittine with Longbow Research.

Thanks. Nice guide. Nick, you said...

Thank you.

Thank you.

...in your prepared remarks, you said sell-through, I think, gained momentum throughout the quarter, which obviously sounds encouraging. I hope you can give a little bit more color. Specifically, is that an apples-to-apples comment or is it driven by seasonality throughout the quarter or perhaps driven by what was a late quarter product refresh? I'm trying to get down to whether you think you saw an organic apples-to-apples improvement inter-quarter. Thanks.

Yeah, I meant exactly what I said, which is that momentum was gaining throughout the quarter, and we believe that that's a product of multiple things, one, awareness that we now had HERO5 Black at $299 and HERO6 Black at $399. When we launched those products, they were $100 more. And just because we lower price doesn't mean the whole world becomes aware of that instantaneously. So, we obviously saw some pretty significant sell-through spikes out of the gates with the price drop, but as awareness grows, momentum picks up. And then also as retailers have an opportunity to market the new prices and promotions around the prices can take hold, we see sell-through increases in the channel. And then we've also been doing great work to simplify our user experience and made advancements in the app experience. Those are all incremental additions to making customers happy and then getting better advocacy and driving sell-through. And then importantly, we began increasing our marketing spend in March. And as I shared in the prepared remarks, we began seeing the effect from that marketing in early Q2. There's a little bit of a lag from when you first start running more advertising until you actually start to see it in sell-through, and we started to see that. So, the use of momentum and growing momentum was intentional. It's been a nice groundswell and it's something that we believe that we can continue to build on as we further ramp our marketing spends during the second quarter and then again during the third quarter and then again during the fourth quarter. We're going to be progressively increasing our spends leading up to the important holiday season because we've got a great lineup, we see strong demand for it and we're going to capitalize on that, but we are going to do that within our sub-$400 million OpEx target.

Yeah, and, Joe, this is Brian. I'll add that moving HERO5 Black, a stronger $299 product in the market, we were able to take share back from competition in the APAC and EMEA regions, two regions that we think, from an international perspective, we have a lot of room to expand relative to the U.S. So, I think that was another important move and, again, I'll reiterate with HERO, that should resonate well in Europe as well.

Excellent. And then I wanted to switch gears to the timing of the second half launch. Is there anything fundamentally different on this year's launch versus typical or is it just kind of a timing or cutoff issue, September versus October?

Yeah, it's more of a September to October timing. There's nothing magical to that. The reality is, whatever we sell in for new products in September or October, they have to sell through in the quarter, right, in Q4. So, it's more of a timing thing between a few weeks.

Okay. And then with that, on gross margin, what in the new product mix will drive such a meaningful improvement? It's a big jump.

Yeah.

Is there something functionally more efficient in the BOM or is it pricing? It just seems more than the typical seasonal economies of scale benefit you'd expect. And I'll stop and think (28:37).

There's actually a number of things. For one, we won't be selling Karma really in the second half. That product had zero margin in the first half, so that's actually a major benefit. We'll have more Fusion, which is lot better than corporate average in margin. We'll have more subscription, which carries a higher gross margin. And we actually will have the right product cost in each price point, which actually, is probably the largest driver overall in the second half for the launch.

Are you able to quantify the Karma headwind on GM right now, Brian?

Karma headwind on GM is we don't say how much Karma we're selling, but it's basically zero. And, quite frankly, we've said that before. And even the HERO today is lower margin, so we'll improve that as well.

Excellent. Thanks, guys.

Thank you.

Next we'll go to Jim Suva with Citi.

Hi. This is Tim Young (29:38) calling on behalf of Jim Suva. Thanks for taking the question. On OpEx, given you mentioned the step-up in marketing programs while you maintained below $400 million OpEx guidance for the year, can you give us an opinion (29:52) on what specifically you're doing to drive the OpEx lower in 2018? Additionally, do you believe the $400 million per year is the right level going forward? Thank you.

Yeah, this is Brian. Well, first of all, we shuttered the aerial business, so that saved us substantial amount of money in 2018 over 2017. We've continued to drive more operating efficiencies in the business. If I go back two years, we were at $709 million. By the third quarter of 2016, we were at $186 million I believe in OpEx, so we're down by half from there. We peaked at about 1,800 people. We're already sub-1,000. So we're able to be more efficient in the business, plus without having as many product lines and focusing more in our core camera business, that actually makes us more efficient as well. So it's a combination of all those things. And, yes, we believe being sub-$400 million is the right level to operate the business.

Thank you.

And next we'll go to Andrew Uerkwitz with Oppenheimer & Co. Andrew Uerkwitz - Oppenheimer & Co., Inc.: Hey, thanks, guys, for taking my call. Just two quick questions here. Could you talk about your expectations for the subscription service and how you see that shaping up over the course of the year and into the future?

Okay. We're feeling good about our Plus subscription service. It's early days, but we've identified that consumers are willing to pay for the service. They value the offering. And now we're focused on growing the funnel and driving awareness within our customer community that the service exists and refining the experience so that they're getting even more value out of it once they are subscribers. We're happy that we've grown it from 130,000 at the beginning of the year to 147,000. It's an increase of 17%. And as I noted, it's early days. It's an entirely new business for us. But to get this traction out of the gates, we're learning a lot. And it's clear that subscription for GoPro is going to be an important area of focus and an important opportunity for us in our business going forward. Andrew Uerkwitz - Oppenheimer & Co., Inc.: Got it. And then you announced this week integration with Instagram Stories. Facebook, obviously, is focused on VR/AR. You guys have the Fusion. Could we see any future collaborations there to help drive 360 video or a deeper integration there with Facebook?

As we shared, there are other things that we're working on with Facebook and Instagram that we're excited about, but we can't go into any more detail than that. Andrew Uerkwitz - Oppenheimer & Co., Inc.: Got it. Thank you. And then just a last question. I think you guys make such really good cameras. I mean, they're just really great. They're well ahead of the competition. Do you feel the need to kind of launch cameras every single year still? Or are there pockets that you think you could fill without launching a kind of flagship every single year?

Well, as we shared on our previous earnings call, we've learned a lot of lessons over the years, and a very important one is that our customers need to see one of a couple things from us to consider upgrade or purchase. And that is a discount on older products, and they love to see new products from us that get them excited, make their GoPro lifestyle easier. And that's what we're focused on doing. Our strongest years have been where we wow the customer, and we're going back to that strategy going forward. Andrew Uerkwitz - Oppenheimer & Co., Inc.: Got it. Thank you so much, guys. And excellent quarter. Thank you.

Thank you so much.

And next we'll go to Charlie Anderson with Dougherty & Company. Charlie Lowell Anderson - Dougherty & Co. LLC: Yeah, thanks so much for taking my questions. It sounds like within OpEx, marketing is kind of the variable spend here. So I wonder as you guys look forward and when you're growing in the back half, I know you mentioned that's going to grow. But taking the long-term view, I wonder just how we should think about sales and marketing spend and how it relates to revenue. And if you want to speak to R&D as well as a percent of revenue, I'm just kind of curious how we think about OpEx in terms of the business model overall. Then I've got a follow-up.

Yeah, hi, Charlie. This is Brian. I think I'll kind of go back to the prepared remarks. We expect to be below $400 million in operating expenses. That includes a pretty sizeable increase in marketing. That's kind of getting back to the roots of the company, making great products and doing great marketing around it that helps sell product through the channel and gets good products into the hands of consumers. So we're going to continue with that model. We continue to believe we can operate the business more efficiently and actually drive more marketing in the future to continue that advancement. And so that's how we'll operate the business. R&D is going to go on roadmap, and then we'll try and get more efficient in SG&A to keep the OpEx in line to the top line.

Something I would add to that as it relates to marketing, not necessarily to OpEx but it brings up a good point, which is we see significant opportunity overseas to continue to grow. When you look at some of the marketing budgets that we have for some of the overseas regions where we have remarkably strong revenues but with very little, if any, marketing support, you realize that there's a real opportunity to grow the business further. It's just an indication of a strong opportunity in those regions that we're going to be marketing against going forward. And even here in the United States, marketing spends, even this year, are down over previous years, where we spent quite a bit more and grew a bigger business. And so across the board over time, we see the opportunity to increase our marketing spend to drive awareness and demand globally. It's clear there's opportunity. But it's also important to note that we're getting much more effective with our marketing spend. We're doing a much better job of measuring our return on spend and across the board, we're getting more for every dollar that we spend. So, we feel that even as we're ramping budgets, we're getting more for every dollar. So, it's headed in the right direction in that regard.

Yeah, Charlie, actually one other thing to add, just kind of on an overall, we've done a better job of broadening the company out on a geo basis to lower cost geographies for R&D and SG&A. So, that's also helped quite a bit. We have Manila; we have engineering and operations in China; Bucharest, we opened an office there for R&D for software engineering. So, those are good examples of where we've been able to actually increase the level of effort in the company but at a more effective cost point. Charlie Lowell Anderson - Dougherty & Co. LLC: Great. And then just real quick on Q2, I'm curious, you mentioned the channel, the inventory coming down – I think 30% was the metric you gave. Do you regard it as a clean channel now and do you think that sell-through matches sell-in Q2? And then maybe on top of that, to what degree does the HERO channel fill up some of the new retailers impact Q2 relative to sell-through? Just some of those moving parts would be helpful to understand.

Yeah, in Q1, more was sold through than was sold in. In Q2, we expect, again, more to sell through than we would sell in. The channel inventories are getting more clean. Europe's probably the cleanest it's been in probably several years, even now. So, we're in pretty good shape there. North America is cleaning up very well, and Asia, particularly with some of the market share gains. So, we're feeling good about where we're going to end up in Q2 or where we believe we'll end up in Q2 on channel.

And it points towards very clean channels for the introduction of new products in the second half of the year, which is important on several levels. But really, it's terrific when we launch new products and those are the products on shelf, it's clear to the consumer and those are the products that we end up selling in Q4, not a backlog of older products. So, sell-through is benefiting us in many, many ways in the immediate but as well as in preparation for Q4. Charlie Lowell Anderson - Dougherty & Co. LLC: Great. Thanks so much.

Thank you.

And next we'll go to Yuuji Anderson with Morgan Stanley. Yuuji Anderson - Morgan Stanley & Co. LLC: Great. Thanks so much for taking my question. Two quick ones from me. What is your expectations for unit mix in Q2 versus Q1? Should we expect more of a shift or an incremental shift over to the newer camera?

I think the interesting, the mix should hold pretty much on sell-through and sell-in where it's been in the first quarter because in Q1 at $199 we have HERO as well as HERO5 Session. And so as Session sells through and gets out of the channel, which we expect that to happen pretty quick here, then that will convert over to the new HERO as a broader proportion of the $199 product lineup. So – and I'd argue now at that level and for HERO, we're at the right mix for selling through product for where it's distributed. Yuuji Anderson - Morgan Stanley & Co. LLC: Got it. So, it sounds like HERO5 should come up sequentially with the rest of the group then?

Yeah, there's still strong demand for HERO6 and HERO5. Yuuji Anderson - Morgan Stanley & Co. LLC: Okay. Got it. And then my other question is just you mentioned how you plan on increasing the cash balance in Q2. Will that include using the credit facility?

No. The credit facility was, I think – forget what I said – $68 million, I think, available. But we don't need the credit facility. We have enough operating cash to operate the business. We don't plan on drawing on it. Yuuji Anderson - Morgan Stanley & Co. LLC: Okay. That's it from me. Thanks so much.

Thanks.

And our last question today comes from Ryan Goodman with Bank of America Merrill Lynch.

Hey. Thanks for taking the questions. So, one follow-up on the channel. You've given us some pretty good color on that on the last couple of questions. But I did see the distribution percent of revenue came in at 51%. That's as high as it's been in a couple of years. So, just curious, what's driving that? Should I be thinking too much on that? Is that a function of getting ready for the Target and Walmart rollout of HERO? And then one follow-up to that. Let's start with that.

Yeah, on distribution, that's largely due to international, quite frankly. International did well in the quarter, Europe and Asia. And as we've mentioned, we picked up market share. So we sold a lot more HERO6 and HERO5 Black internationally.

Okay. Great. That helps there. One other one I had is after the HERO launched, it looked like there was some elevated discounting activity just with HERO5 Black. There was a $50 off discount for a couple of weeks in there. So just wondering how we should think about that. Was that something that was kind of in the plans? Was that a response to any impact to HERO5 Black demand after HERO was out or preparation for the channel? Just any color you can give us on the discounting strategy there would be helpful. Thanks a lot.

Yeah, particularly in Q2 and some in Q4, we'll do some what I call normal discounting and promotions. Dads, grads, Father's Day, et cetera, Black Friday, Cyber Monday. So those are things we plan in the normal course of the business. Q2 even last year tends to be a good promotional quarter. And so that's more normal course. It wasn't related to the launch of the HERO product. We don't see the HERO product cannibalizing HERO5 and HERO6 Black.

Yeah, I think that's what you're getting at. And just to stress that again, HERO5 Black and HERO6 Black are selling very well. And HERO at $199 is joining the party and is not showing signs of being cannibalistic to these other mainstay products.

Thank you, everyone. I'd now like to turn the conference back over to management for closing remarks.

Thanks, operator. Well, to sum up today's call, we obviously had a good quarter and we're optimistic about our second quarter as the reasons for our restored sell-through momentum are simple. One, we've removed Session from our lineup and restored our proven HERO form factor, now with touch displays to the $199, $299, $399 price points that GoPro's brand was built upon. Sell-through growth and market share gains make it clear; consumers love the HERO camera much more than Session, and they're loving it even more now that they've got touch displays and are priced well. We believe this bodes well for sell-through going forward. And second, we're increasing our global marketing efforts to capitalize on this consumer demand for our much improved product lineup. Great products at great prices backed by significant marketing is the strategy that made GoPro successful during our strongest years, and it's once again our strategy going forward while keeping OpEx below $400 million. We're focused on continuing the execution that benefited us in Q1, and we look forward to Q2 and the second half where we'll be releasing new, higher-margin products that we believe can position GoPro for growth and profitability. Thanks very much for joining us today, everyone. This is team GoPro signing off.

And this concludes today's call. Thank you all for your participation. You may now disconnect your lines.