GoPro Inc (GPRO) 2015 Q1 法說會逐字稿

Good day, and welcome to the GoPro first quarter 2015 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Brown, Vice President of Communications.

Thank you. Good afternoon, and welcome to GoPro's first quarter 2015 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; our President, Tony Bates; and our Chief Financial Officer, Jack Lazar. Before we begin, I would like to remind you that statements on this call, including but not limited to those about our projected future and financial results, including revenue and expenses, economic and marketing trends, our future plans, prospects and growth opportunities, the continued adoption of our products, the anticipated benefits of our long-term strategy, our customers, competitive position, market share, and leadership position in various markets constitute forward-looking statements.

These forward-looking statements, and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. These forward-looking statements speak only to today's call, and we do not undertake any obligation to update these forward-looking statements. We refer you to our annual report on Form 10-K of the year ended December 31, 2014, which is on file with the Securities and Exchange Commission. In particular, to the section entitled risk factors, and to the other reports that we may file from time to time with the SEC, for additional information on factors that can cause actual results to differ materially from our current expectations.

We report net income and basic and diluted net income 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 have chosen to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results. A reconciliation of GAAP to non-GAAP financial data can be found in the earnings press release we issued today.

We ask that you review this information in conjunction with this call. All numbers that are disclosed in today's conference 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 of 2015. Both of those documents, and a link to the webcast for today's earnings conference call, are posted on the events and presentations page of GoPro's Investor Relations website for your reference.

In the interest of time, I would like to remind those participating in the Q&A portion of the call to please limit yourself to one question each. Now, I will turn the call over to GoPro's CEO, Nicholas Woodman. Nick?

Good afternoon, and thanks for joining us. Today, I will provide a recap of GoPro's key accomplishments during the first quarter. Tony will discuss our software and entertainment media initiatives, along with an update on our international expansion. Jack will then provide a more detailed update on our financials, as well as guidance for the second quarter. The three of us will then take your questions.

We kicked off 2015 with another well executed quarter, and delivered great results. The first quarter was the second highest revenue quarter in GoPro's history. Year over year, first-quarter revenue grew 54%, to $363 million. Gross margin was 45.2%, and operating income increased 135%, to $49 million.

Revenue from EMEA and APAC was up 66% year over year, with international sales contributing more than 50% of our revenue in the first quarter. Generating these results in a non-holiday quarter is something we're particularly proud of.

We view GoPro as a content enabling business, and we believe there's a strong correlation between viewership of GoPro content and sales of our products. We refer to this as our virtuous cycle. Our investments and product development efforts center around reducing the friction associated with capturing, editing, and sharing engaging content, which goes on to virally drive awareness of our brand and adoption of our products.

In the first four months of 2015, we introduced new products, acquired new teams and technology, signed new partnerships, and made sizable R&D investments for GoPro's future, all with the intention of fueling our content-driven business model. In January, we announced HEROCast, a breakthrough solution that allows networks to include exciting GoPro perspectives in their live broadcasts. HEROCast simultaneously enhances the viewing experience for fans, while promoting GoPro's brand, products, and perspectives. We think HEROCast has a big future in the broadcasting of live events, and we've seen strong interest since announcing this exciting new solution.

GoPro also invests in athletes and events that lead to some of the most popular content on the Internet today. Currently, we partner with over 130 athletes and sponsor more than 80 events, such as the X Games, the World Surfing League Championship, and the GoPro Mountain Games. This month, we invested in a long-term partnership with MotoGP, the world's premier motorcycle racing championship. Similar to Formula One, MotoGP attracts tens of millions of passionate fans from around the world. GoPro will provide MotoGP viewers with unique points of view that put them directly into the action, enhancing their viewing experience while authentically promoting our brand and products.

Also this month, GoPro held its annual winter athlete summit in British Columbia. Athlete-generated content is a vital component of our marketing strategy. Our summits provide us the opportunity to build relationships with some of the world's premier athletes, and train them on how to capture and share compelling GoPro content that drives viewership and appreciation of our mutual brands. This year's event in British Columbia drew top athletes, including Travis Rice, Lynsey Dyer, and Olympic gold medal winners Ted Ligety and Shaun White.

In three days, our athletes posted almost 800 photos and videos mentioning GoPro, reaching an audience of over 6.5 million people. Travis Rice, one of the world's top snowboarders posted a 15-second GoPro video to Facebook that generated nearly 0.5 million views within 24 hours.

Distribution of GoPro content drives social engagement, and our social media metrics are an indication of our brand strength. Facebook followers now total more than 8 million, and on YouTube, GoPro subscribers are up 48% year over year, to roughly 3 million. Twitter followers are up 49% year over year, to 1.4 million, and we remain one of the top ten brands on Instagram, with more than 4.5 million followers, up 141% year over year.

Building off of this momentum, we are investing in talent and technology to capitalize on where we see content moving in the future. Today, we're excited to announce our plans to acquire Kolor, a French company that has distinguished itself as a leader in virtual reality and spherical media solutions. Kolor software enables immersive, high-resolution spherical content that can be viewed on smartphones or virtual reality head-mounted displays for entertainment, education, and other uses. Kolor is one of several strategic investments we are making.

We are passionate about innovation, and we love taking a formula one approach, pushing the limits of design and engineering to wow our customers. We believe the strength of our brand, and the breadth of our content-driven model, gives us the ability to expand into new and exciting product categories over time.

Our content-driven model continues to scale GoPro as an aspirational movement. Millions of people shared their content on our brand platform, and their shared experiences inspire millions of others to live bigger and more active lives, to capture and share their own experiences. Helping the world to express and celebrate itself in such a motivational manner is one of the moat satisfying aspects of our business. And we believe it instills our brand with an invaluable degree of goodwill and good karma.

Now I will hand it over to our President, Tony Bates.

Thanks, Nick. I'm going to take the next few minutes to provide some details on our software and entertainment media initiatives, as well as our international expansion, and how our investments in these areas help fuel the GoPro movement. I'll start with software. The tools we offer to help consumers edit and share their content continue to grow. Creating better tools for editing and sharing content is a top priority for GoPro. The resulting increase in user-generated content will serve as a catalyst for our continued virtuous cycle in GoPro entertainment opportunities.

We are making significant investments in software. Related operating expenses are up 125% year over year. The results of this investment can already be seen in terms of the numbers. The GoPro Studio app for PC and Mac was installed 1.7 million times in Q1, up 138% year over year. And the GoPro mobile app was downloaded 2.6 million times in Q1, totaling 16 million cumulative downloads.

Consumer engagement has been equally impressive. GoPro Studio exports have reached 40,000 per day, a 68% year-over-year increase, and content submissions to the GoPro video of the day and photo of the day increased 50% sequentially. We are very pleased with our progress in growing the distribution network for GoPro entertainment.

In March, we signed an agreement with Vessel, a new premium video service. And last week, the GoPro Channel was introduced to more than 10 million viewers on Roku. In Q1, we passed a big milestone on Microsoft's Xbox, with more than 1 million installs of the GoPro app, with users watching, on average, 25 minutes of GoPro videos during each viewing session. Overall viewership of GoPro content remains incredibly strong. One of our top viewed videos from Q1 was pole vaulting with Allison Stokke, which was posted in February and currently has more than 5 million combined views on YouTube and Facebook.

Beyond the Ice series, with the NHL, was posted in late January and currently has over 6.5 million views. Videos published on the GoPro Channel on YouTube were up 93% year over year, and views were up 46%. GoPro is tied for the number one spot on YouTube's 2015 ads leaderboard. Our entertainment division is a key area of investment, and serves as the created engine of GoPro marketing both creating and acquiring content that drives demand for our products. Investment in GoPro entertainment is up 95%.

Next, our focus on our global sales results and opportunities for regional expansion aimed at further realizing our total addressable market. According to NPD, on a unit basis, GoPro's five capture devices models accounted for the top five products in the combined digital camera and camcorder category. In the same category, on a dollar share basis, GoPro accounted for three of the top five products, including the number one spot. GoPro was also the leader in accessory unit sales, with 7 of the top 10 selling accessories.

Now let me turn to international expansion. Last year, EMEA and APAC accounted for more than 500 million of the $1.4 billion of GoPro generated revenue. This quarter, combined revenue from EMEA and APAC was up 66%, and accounted for 50% of revenue. Clearly, our investments in worldwide marketing and distribution are paying off. A recent study conducted for GoPro by Ipsos polled consumers in nine countries across five continents. The study showed a 70% year-over-year increase in aided awareness of the GoPro brand. In addition, the number one use case for a GoPro capture device, cited by almost 50% of survey respondents, was for making family videos, further evidence that GoPro is increasingly becoming part of documenting everyday life.

In Europe, we opened our first sales and marketing office in Munich last year, and more recently established an office in Amsterdam. These offices bring us closer to the distributors that sell our products, and millions of new consumers. We know that Europe is a set of distinct markets, and expects localization of content to suit regional needs. Today, GoPro products are sold in thousands of locations across EMEA, including specialty stores and the large retail chains such as Media Markt, Dixons, and Phonak. In the month ahead, there will be continued investment, more localization of channel marketing, and more news about events and athlete partnerships, all of which will help unlock the national affinity millions of European consumers have for the GoPro movement.

Now let's turn our focus to the APAC region. While much of our success to date has been in English speaking countries such as Australia, we are now focusing on opportunities in Japan, Korea, and of course China. We introduced GoPro to the China market in January. To date, we have built strong relationships with key online retailers such as T-Mall, JD, Amazon and [Sooning], as well as more than 300 premier consumer electronics, lifestyle and outdoor stores across China. Based on strong initial sales, we are expanding our retail presence across China.

Similar to our approach in Europe, we're going to drive our brand and products with a local content strategy that inspires consumers -- Chinese consumers, to capture and share their passions via key social communities like WeChat, Weibo, YouTube and others. By the end of the current quarter, we plan to capitalize on our China momentum by offering a wider range of GoPro products, from our low opening price point HERO model to our top of the line HERO4 Black. We are confident and excited about our China market strategy.

Finally I'd like to reflect on the growing ecosystem of partners that contribute to GoPro's business. Last year, we announced a partnership with BMW to integrate the GoPro app with their iDrive control platform. And just recently, BMW unveiled two factory integrated GoPro mounting options for their cars. And this month, Toyota announced that GoPro mounts will be factory installed in all of their 2016 Tacoma trucks. Also this month, 3-D Robotics unveiled Solo, a new quadcopter that will ship with GoPro's frame mount, optimizing its design for use with HERO3 and HERO4 capture devices.

These are just three instances where we've seen GoPro independently adopted as a de facto capture solution. We are extremely proud of everything we have accomplished in the quarter, and truly appreciate the support from our customers and partners.

And with that, I will hand over to Jack.

Thank you, Tony, and thanks to all of you for joining us today. If you have not already done so, I would encourage you to download, from the investor section of our website, the financial slides we posted concurrent with our press release earlier today. My prepared remarks will be focused on the financial overview of Q1, as well as our related business trends. And then I will provide guidance for the second quarter of 2015.

We kicked off 2015 with a very strong quarter. Our financial results reflect revenue, gross margin and EPS that were all in excess of our Q1 guidance. Also, as Nick and Tony previously mentioned, Q1 was the second highest revenue quarter in GoPro's history. Our first-quarter revenue of $363.1 million was up 54% year over year, and above our guidance range of $330 million to $340 million. Gross margin for the quarter was 45.2%, compared with 41.1% in the first quarter of 2014, representing a 410 basis points increase year over year, and 70 basis points greater than the midpoint of our Q1 guidance. Operating income for the first quarter was $49.1 million, or 14% of revenue, an increase of $28.2 million, or 135% year over year.

Adjusted EBITDA was $56.5 million, or 16% of revenue, an increase of $27.9 million or 97% year over year. And earnings per diluted share for the first quarter were $0.24, up 140% year over year, and above our guidance of $0.15 to $0.17. Our continued investments in product development and scale, coupled with strong demand for our current line of capture devices, is producing what we believe is a highly attractive business model.

Let's take a closer look at our Q1 performance. Our revenue growth for the quarter was driven primarily by a 58% year-over-year increase in capture devices sold. During the quarter, we shipped approximately 1.3 million capture devices to our retail and distribution partners throughout the world. This was our third consecutive quarter of shipping over 1 million capture devices. And over the last three quarters, we've shipped approximately one-third of our 14.6 million cumulative historical units.

Revenue from our direct sales channel increased 48% year over year, to $162.4 million, driven by continued strong sell-in and sell-through with our domestic big box retailers. Sales to our distributors increased 59% year over year, to $200.7 million, due primarily to strong demand for our international -- for our products.

On a product basis, we saw significant consumer demand for our HERO4 Black and Silver products. These two capture devices were our best sellers during the quarter, on both a revenue and unit basis, and made up over 50% of our Q1 revenue and units. Our guidance going into the quarter was for strength in our international channels, and our Q1 results reflect this.

EMEA and APAC revenue increased 65% and 67% respectively, and sell-through has been good to date. The strength of our worldwide marketing and distribution presence is reflected in these current-quarter results. First-quarter revenue by geography was as follows: Americas was $180.1 million, or 50% of revenue; EMEA was $139.1 million, or 38% of revenue; and APAC was $43.9 million, or 12% of revenue.

The combined EMEA and APAC regions made up 50% of our Q1 revenue, up from the 47% recorded in Q1 of 2014. First-quarter gross margin increased 410 basis points year over year, to 45.2%, due primarily to favorable mix shift to our new HERO4 Black and Silver capture devices. Q1 gross margin was once again above our long-term target model range of 42% to 44%.

ASPs declined slightly, due to strong EMEA and APAC revenue, which is primarily served through our distribution channel, coupled with the expansion of our product line to include a lower ASP entry-level HERO capture device. This was partially offset by a year-over-year increase in revenue from products sold at $399 and above. We did not experience any noticeable pricing pressure during the quarter.

Operating expenses of $115.1 million were up 51% year over year, and 4% sequentially. Sales and marketing expenses were up 34% year over year, a rate less than our overall expense growth, demonstrating continued operating leverage from these efforts. Consistent with prior periods, our R&D investments drove the overall expense increase, and were up 68% year over year and 15% sequentially. Our continued aggressive investment in R&D reflects our long-term focus on the development of next-generation devices, our software and entertainment initiatives, and international expansion.

GAAP net income for the first quarter was $16.8 million, or $0.11 per diluted share, and this compares with GAAP net income of $11 million, or $0.08 per diluted share, for Q1 of 2014. Our Q1 of 2015 GAAP results reflect a charge of $15.8 million in stock-based compensation, related to the achievement of market-based conditions for certain restricted stock units.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of $491.9 million, up $69.6 million or 16% sequentially, due primarily to cash flow from operations. Cash increased $380.7 million year over year, and at the end of the first quarter represented over 50% of GoPro's total assets. Cash flow from operations for Q1 of 2015 was $66.3 million. Accounts receivable of $106 million decreased $78 million, or 42% sequentially, due to collections of Q4's seasonally strong receivables.

DSOs of 26 days were flat sequentially, and inventory increased by $11 million sequentially, and turns were 5.0. Our capital expenditures were $5.2 million, and our depreciation and amortization was $5.4 million.

I will now move on to our guidance for the second quarter. After a great start to the year, we're also quite optimistic about our second quarter. Channel inventory levels, both in the US and abroad, look healthy, and we continue to see positive sell-through trends. In Q2, we expect an increase in revenue from both our distribution and direct channels, with the dollar increase in the latter being more significant. Geographically, we expect the largest dollar increase in revenue to come from the Americas, followed then by APAC. Accordingly, we currently anticipate revenue of between $380 million and $400 million for the second quarter. And at the midpoint of our guidance, this represents an increase of 59% year over year, and is greater than the 54% year-over-year growth we just recorded in Q1.

In the second quarter, we expect our product and channel mix to remain favorable, and our HERO4 Black and Silver devices to continue making up over 50% of our revenue. Given these expectations, we expect gross margin will continue to be at or above our long-term target. And accordingly, we, for the second quarter, anticipate our gross margin will be 45%, plus or minus 50 basis points, and at the midpoint up 280 basis points from the 42.2% we recorded in the prior-year comparable quarter. We will continue to invest prudently in the people, products and infrastructure necessary to pursue both our growth and our vision.

To support our ongoing investments in broadening our family of capture devices, accessories, software, and entertainment, we anticipate our operating expenses will be $125 million, plus or minus $2.5 million, with the majority of the growth coming from R&D. We estimate our effective tax rate to be approximately 25%, with fully diluted shares outstanding of approximately $150 million. Accordingly, we anticipate EPS to be in the range of $0.24 to $0.26.

So with that, operator, we're ready to take questions.

(Operator Instructions)

We'll take our first question from Paul Coster with JPMorgan.

Thanks for taking my question. Curious minds want to know whether Nick used a body double in the American Express advert, but that is not my question. (laughter) My main question is really, we've seen a little bit of price action. If you look on Amazon in Europe, for instance, it looks like the price has been cut a little bit. Is this because of the strength of the US dollar? And for that matter, as we roll into the middle of the year, when traditionally we approach perhaps what might be a product refresh, should we expect, after this very exciting second quarter, that perhaps gross margins dip, and ASPs come down a bit, before the next product iteration?

That is one large question, Paul. (laughter) Now, since I think the first part of that question is very relevant, Nick, would you like to answer the question about AmEx?

I did not use a body double, but at a certain point during the shoot, I wish I had been. (laughter)

Okay, so on to the quarter. Regarding the -- I think you referred to it as price action in Amazon. And I think from our perspective, what we do is, we put product out there, we set a recommended retail price, and the retailers go, and they're all competitive, and I think that's the way it plays out. I don't think we really saw significant impact of FX in the most recent quarter. I know that's a pretty popular topic this quarter. But we generally sell our products through distribution in dollars, and then the distributors, in turn, convert to the local currencies when they sell to the retailers. So I wouldn't say that it had much of an impact on us.

As far as gross margins, I think the best thing to comment on is at this point, we're extremely happy, obviously, with what we recorded in the last quarter, at 45.2%. And the guide of 45% to -- 45%, plus or minus 50 basis points, I think just continues to reflect that people really see the value in our products. And the high end of the product line seems to be doing quite well. So how that plays out over time, we'll see. But right now, I think we're just quite happy with the way things are working out.

Great. Thanks very much.

Thanks, Paul.

Our next question comes from Erinn Murphy with Piper Jaffray.

Good afternoon, and congrats on a very solid quarter. I guess just strategically, for Nick, if you could just maybe walk through the Kolor acquisition a little bit more? How do you see the teams integrating, just from a cultural perspective? Maybe just help us think about what that business looks like today? And then ultimately, how you're thinking about some of the longer term opportunities this could add? And I do have a housekeeping question for Jack, as well, if that's possible.

Sure. Terrific question. I think from a cultural perspective, there's fabulous parallels between Kolor, their passion for enabling immersive, engaging content, spherical content, tailored for virtual reality viewing experiences. That marries really well with our passion for enabling similarly engaging and immersive content. So the DNA of the two companies marries really well. Kolor is based in the French Alps, which is also another -- a plus. They're going to be a really fun office to visit, and I'm headed out there this week to welcome then to the family.

And as far as relating to future road map, and we see that incredible opportunity for GoPro to be at the forefront of the virtual reality movement, and enabling spherical content for viewing and other use cases than virtual reality. Given that GoPro is already the most widely used capture device for capturing life experiences in an immersive manner, it's only natural that we have a seat at the table in the virtual reality movement, moving forward.

Erinn, it's Tony. Just to add a couple of things. One thing I would encourage everyone -- investors and anyone on the call -- to go download the Kolorize app. We just released a great piece of content. As Nick mentioned, you have already been seeing many people using GoPros in different kind of three-dimensional rigs to capture the beginning of the spherical media content, and I'd really encourage you to take a look at that. Until you've really experienced it, it's hard to totally understand what's possible with this. We're at the beginning of a great piece of technology, but we really feel that the market and leadership is really coming towards us.

You can download the app via a link at GoPro.com/spherical. And we have a demonstration video that we've published that will be included with the app download. It's land, sea and air, and it gives you a fantastic immersive experience of what's possible, capturing spherical virtual reality content with GoPro, and viewing it with Kolor software.

And Erinn, I think you had a housekeeping item. We'll let you slip in.

Jack, just for you, inventory up about 82% year over year. Clearly, the second quarter guidance very strong at 59%, from a sales perspective. Could you just help us marry those two together? How you see inventory tracking throughout the balance of the year, relative to sales? Thank you.

Sure. So I can comment on inventory. It is up. It's up $11 million sequentially, which is the way I look at it. And that's actually by plan. We -- one of the reasons we went public was to create working capital to be able to better serve our customers. And one of the main reasons -- one of the main ways in which we wanted to serve the customers was have a better availability of inventory.

So I think we've been conscientiously growing that inventory. Our lives -- or our products generally have pretty long product lives, actually. For example, we're still selling the HERO3 White from several years back. I think in the end, what's probably most relevant here is that our inventory this quarter is up less than the guide we just gave you. So I think that it's a rational growth in inventory that we think is designed to take care of our customers.

Fantastic. Thank you, gentlemen.

Our next question comes from Joseph Wolf with Barclays.

Thank you. Couple of questions. I just wanted to go -- on the acquisition that you made, was there any internal development on the spherical video on the software side or the hardware side you've been working on that you could now coordinate with the -- with Kolor? Or is this an add-on completely to what the -- you guys have been working on?

Yes, we don't talk generally about internal developments and road maps. But I would just reiterate, GoPro is currently, today, pretty much the de facto standard for folks capturing spherical media content. You see a lot of rigs, either with 3-D printers and so on. And so with Kolor being essentially the leading player, in terms of the way that people view that type of media, there's been a natural connection for a long time. And as Nick mentioned, the DNA really brings these things together. So we've been the default capture device for quite some time.

And then just as -- you talked about the geography. And if we look at the mix going forward, how do you think that that plays out? And then I guess if you look at the demographic of the buyer internationally, with that big bump in the first quarter, are the people buying the camera globally the same? Is it a broad mix? Do you have the same kind of mix? What can you tell us about the customers?

So regarding the geo revenue, Joe, I think what we'd point out is what we've been pointing out for quite a long time. We think there's a tremendous TAM opportunity, worldwide, for our products. In some quarters, it will be stronger in international; some quarters, it will be stronger in Americas. But overall, our job is to just grow it everywhere. And we think we're really just starting to touch on the beginnings of that TAM. We need to go out and execute. We need to make the experience better for the consumer. And we need to continue developing and delivering new capture devices.

So I don't think we really set a target that we would share outside. Mostly because, honestly, we're going after new ground here. And we're going to grow in certain regions each quarter more quickly than others. And I think the overall goal is just continue to get more and more devices sold into the market.

Yes, Joe, I'll just touch on the demographic question, and point you back again to the recent study, the Ipsos data. Two things that really came out with that. That when we invest, we see results. We see that in terms of the aided awareness. I talked about the 70% year-on-year increase.

But I think the other one that we start to see -- and this is on a broad basis, but certainly in international -- is the way that people think about using their GoPro. To see a survey respond in such a way, with 50%, the number one use case was around capturing moments with family, is a big shift. And that's an important shift that we can help to capitalize and grow the opportunity in our TAM.

And I would say the other thing that I outlined a little bit was, we have put a lot of investment, globally and internationally. We're going to continue that. That gives us a couple of things. One, we're getting very close to the visibility, and more understanding of our customer base. And it also really starts, for us, to start to think about where we want to invest, in terms of localized content, as I addressed. And both of those things, I think, will really fuel expansion in our TAM.

Thank you. That's very helpful.

Thanks, Joe.

Our next question comes from Steven Beckert with Robert W. Baird.

I apologize if this has already been asked, but could you talk a little bit more about the geographic revenue mix? EMEA, in particular, was very strong this quarter. What drove that relative out-performance versus Americas and Asia Pac?

I think the combined EMEA and APAC, as we mentioned, was 50% in this last quarter. And if you look at overall, that's up from last year. I think what we're seeing is this effort that we've been making. We put feet on the street in Europe throughout last year, and I think that we're seeing some nice results from that. We're also much closer to the overall customer.

We're -- at this point last year, we barely had a relationship with the end retailer, and now we're constantly in discussions with them. In fact, we get weekly data from a variety of these guys. So this is all part of the long-term investment we're making. We're very aware that people worldwide, not just in North America, want to use GoPros. And our job is to get closer to them and provide them the opportunity to do that.

Yes, I would just add, Steven, this is really a strategy we have in place. And frankly, it's a matter of executing in the right rhythm and cadence. We know it works, and we put folks out there. We talked about the Munich office, and all the investments we've put there. And it is paying dividends, and we're going to continue on that.

I think one other thing I would add, as we think about international, we also have opportunities to reach wide audiences with the type of content that people love. I would just take you back. The MotoGP announcement that we just did really gives us an opportunity to reach a very large global audience. And so you'll see us investing in those types of opportunities along the way. I think that all helps with the awareness, and helps us grow our international footprint.

Great. Appreciate the color.

Thank you.

Our next question comes from Tavis McCourt with Raymond James.

Thanks for taking my question, and great quarter. Tony, a couple for you. You mentioned in your prepared comments that you're tied for number one on the ad leaderboard now. Tell us a little bit about what that means for those of us without a media background, and maybe an overview of the timing of the monetization strategy, as it relates to media.

Yes. Maybe just to step back, in terms of the media strategy. We're going to continue to invest heavily. I talked about it in the prepared comments. We're up almost 95%, year over year, in terms of the investments we're making within the media entertainment group. Really happy with the distribution channels that we've put in place. I want to reiterate that. But continued strong ability for folks to view our content.

We are putting much more focus on increasing the content that we produce. We're up 93% year on year, in terms of the content that we produce on our GoPro Channel. And more importantly, we're seeing this groundswell, in terms of users that are starting to submit their content to us. We have a couple of programs -- I mentioned video of the day and photo of the day -- sequentially up 50%. Huge increase. Those all create opportunities.

In terms of the revenue and the monetization, we're still in the very early days of that. While it is not significant in the overall size of the revenue today, we are seeing an increase in revenue from entertainment media activities. Still small relative to other businesses, but we have seen an increase. The main thing that we're focused on overall, though, is continuing to drive the virtuous cycle. We know the more people that see the great content that we produce, or that we curate from users who submit it, drives people to be interested in GoPro. We've seen this shift, in terms of the way that people think about GoPro. Some of that is actually to do with the way that we curate the content, but more importantly, the way the users are submitting the content.

So we're going to continue on the strategy. We feel really good about it. We're going to continue to invest. And I feel that we're really on track.

Thanks. And Jack, a follow-up. On the cash flow statement, it indicates about a $5 million acquisition in Q1. What was that?

So we do, periodically, some small acquisitions that are just frankly immaterial to actually disclose. And so from time to time, you'll see things like that, and we hope to bring you things in the future.

Okay, thanks very much.

Our next question comes from Charlie Anderson with Dougherty & Company.

Thank you so much for taking my question, and congrats on the great results and guide. I wanted to ask about the HERO4. It's obviously been a spectacular launch. I wonder if you have any data yet on how many of the HERO4 buyers are repeat buyers, or coming from a HERO3 or a HERO3+? And also, some of the usage statistics. Do you know if they're using it more than the HERO3 and HERO3+ users were?

Yes, I'll take a stab at addressing that. I think, Charlie, we don't have deep data. One of the things we all have been focusing on is, we are adding more analytics. I'll give you a couple of stats that we do see. We see a lot more folks using the camera, particularly the new HERO devices, not just for capturing great video, but also the amount of photo usage. So we're really becoming a strong leader, in terms of capture overall. That's represented in the MPD data that I shared with you earlier.

In terms of repeat buyers, I think there's a couple of things that I would offer. One, we now have a full line of products. Part of our strategy was absolutely to make sure that we had full price point and coverage across the full range. We now have the top five products, in terms of the camera and the camcorder category. So I think that we see a combination of our core buyers, but we also see an expansion, in terms of folks adopting the product.

And just to add on to that, this full line of products, I think, really goes understated to a certain extent, because there is nobody who has a set of products that go from $129 to $499. And I think that's really important. And I think what's equally as important is, we've got all those products, and we've made our business model better.

And so I think that's a -- it's a key part of this overall growth. Because look, we know we are going to find people who just want $129 products. And yes, the vast majority do, today, want products that are $399 and above, and allow you to do some pretty amazing things. But there's a combination of people out there, and we're trying to address them all. And I think so far, the product launch from last year has really gone exceptionally well.

Thanks so much.

Our next question comes from James Faucette with Morgan Stanley.

Just two quick questions from me. First, in conjunction with the HERO4 launches, you also have the new lower-priced products. And to date, we've seen your ASPs have been better than expected. On the flip side of it, is it seems like there's not enough channel inventory of the new lower-priced products. I'm just wondering if and when we may start to see the channel get as much of the lower-priced products as they would like? And how we should think about the impact on ASPs, at least in the near term, as that happens?

And then my second question is, around the acquisition of Kolor is -- does the -- like it's pretty clear, the value that this software solution will provide for professional media creation. But is there an opportunity -- or how do you think about the attraction of that for more of the consumer? And what are the points of leverage that you can get, with that team, into the consumer market? Thank you very much.

Hey, James, I'll take the first part of that. And -- so regarding the channel, one of the things is, I think Erinn asked earlier about inventory. So obviously, our inventory is up $11 million, quarter over quarter. And again, it's by design, because we're trying to get more product into the channels. So I think that most places that you go, you will you find the products on shelf, and that's what we're trying to do. We're also seeing healthy sell-through. So I think the machine is working pretty well right now.

You do have to remember that it is more attractive for a retailer to actually sell the HERO4 Black and Silver products. And so they tend to carry those over and above some of the lower-priced products like the $129 HERO. And so some of what you might be seeing is that it's just simply a reflection of the inventory mix that they choose to sell. We've got lots of product for you. If you want to sell it, we want to sell it to you. And we think that we should continue to see some good sell-through numbers.

As far as the impact on ASPs going forward, we just guided to margins of 45%, plus or minus 50 bps. That's obviously pretty good, and I think that reflects the fact that we're not expecting any significant decline in ASPs. And I did comment, in my prepared remarks, that we did not see any discernible pricing pressure over the last quarter. So I think our job is to go out and continue to innovate, put up great products, and make a better ecosystem, much of which we're making great progress in. And I think there's a lot more to do.

And then -- Nick here. Good question, as it relates to Kolor and adapting their technology, combined with our existing hardware technology to enable -- I think what you're getting at is consumer spherical content, consumer virtual reality content. And I think that virtual reality content production today is largely done by professionals or pro-sumer power users, who are combining six or more GoPros, using 3-D printed rigs to capture incredible content. And then they're using Kolor software to stitch that together, and Kolor's player to play it back.

And I think that, as we see more and more fantastic VR content being produced using our products, and as we make it easier for professionals and pro-sumers to do that, there's going to be a natural trickle-down desire, at the consumer level, where people are going to want to capture this type of experience for themselves. And I think that, because the consumer is already looking to GoPro as an enabler of self-capture, the type of content we're known for today, it's only natural to think that they would look to GoPro for virtual reality -- personal virtual reality spherical content capture solutions in the future. And I think that we're well poised to be a leader in that area.

We'll take our next question from Alex Gauna from JMP Securities.

Thanks for taking my question. Just curious, coming back to the investments you're making in software and in virtual reality right now. How should we think about your commitment to R&D and SG&A spending, as we roll forward here? And by that I mean, in the past, we've seen some throttling of your spend seasonally. And right now, you're -- we're seeing an increased spend, which is somewhat antithetical to seasonality. Should we think now, in terms of steady linear increases to your investments? Or would there still potentially be some softening, maybe seasonally, in the back half of the year, or in the summer months? Thanks.

Hey Alex, this is Jack. So on the overall OpEx spend, I think what we really focus in is two primary areas. Number one, what does it take to achieve our vision, and how fast can we do that? And to the extent that we have revenue that's growing at a rate that's at or better than what we're planning on, then that gives us the ability to flex the spending, in order to achieve those goals faster.

And so from our perspective, we've got a lot of projects going on here, a lot of things -- obviously, a lot of them are in R&D. And we feel like making these investments now is the right thing to do. And we're doing that, most importantly, while still delivering really good financial results. All of these results are up significantly, both on dollars and a percentage basis, for the most part, year over year. And when we're able to operate in a Q1 where we're able to do operating margins like we did, I think that's really our goal.

At the same time, we've got to invest in the future. And going after new efforts like what we're doing with Kolor, like some of the other areas that are less public at this point, I think these are the things that help us grow a greater TAM, and really give us a better opportunity. So as far as the trends going forward, I think we're just going to have to wait and see. It is really going to depend on the opportunities that are in front of us. But we are certainly dedicated to both investing and having a solid financial model for our investors.

I would like to just add to that, too, that we feel very good about the areas that we're investing in, the bets that we're placing. They're just so organic to GoPro and where we've come from, and where we see content going tomorrow, that as we say, we see GoPro as an athlete, and we like to stay over our center of gravity. And our investments in R&D and the future products are absolutely in our wheelhouse. We're feeling very good about these investments.

Alex, I just had one bit of color. You started off around software and I had given, in my opening remarks, the big increase. I would say the other thing that we are focused on is making sure that whatever we do equates with the ecosystem. And that's particularly true in the software area. And one other piece of that, right now, we are certainly investing in software R&D at a greater rate than hardware only. But as Jack said, overall, a very large increase in R&D.

That's great. Thank you. Congratulations. Powerful quarter.

Thank you very much.

Next question comes from Gus Richard with Northland.

Thanks for taking my question. In order to expand your market opportunity, what sort of applications' use models look most promising? I think you mentioned, in the call, family videos were like a number one use. And what sorts of products and enhancements, capabilities, do you need the most to exploit those opportunities?

That's a good question. I think it -- the biggest opportunity is to make it easier for people, not only to capture incredible experiences, but also to manage that data, that content, en masse, access it using their mobile device, and then give them easy tools for creating and sharing content. And that hasn't changed since we wept public. That hasn't changed over the last four years of our vision. It's -- GoPro is focused on enabling great content. And the beauty is, when you pair that vision with a capture device that's as versatile as a GoPro is, the range of use is limitless. And we see our customers showing us new use cases, and new market opportunities, all the time.

And as you see the growing ecosystem of other companies that are developing solutions that involve a GoPro, you can see that we're able to enter new markets and succeed, thanks to our partners' efforts, often independent of any dialogue with GoPro. And you've seen BMW with their new mounting options in their cars, and Toyota as well. And then 3-D Robotics choosing to incorporate a frame mount for the HERO3, HERO3+ and HERO4 cameras, in box with their new Solo quad drone. It's terrific to see that ecosystem growing, and our market opportunity expanding, as well.

Our next question is from Jeremy David with Citi.

Good afternoon. Thanks for taking my questions on GoPro. I wanted to ask you about China and the investments you need to make to grow the business. And as you look for the next couple of years, do you think China could get to 10% of your sales, or even maybe more? And how long would it take for you to get there?

Hey, Jeremy. Great question. We're not, certainly, giving guidance about forecasts about mix at this stage. I pretty much outlined the investments we're going to make. We're going to continue to expand our retail presence, as I talked about.

China is different. You do need to not only localize content, but you do need to make sure you're heavily integrated into the social networks, and the way the young community is much more mobile, moving forward. And we feel really good about those investments that we're making. So candidly, based on those initial strong sales that we got with our initial approach, which is both an online and offline approach, which is very unique in China, as many people know, have a much broader mix, in terms of online commerce. Results are good, and we'll continue to invest across the board, both in terms of retail, but also in the way we integrate with the social communities.

Yes, just to add on to that -- it's Jack here. I would say that China really is a unique opportunity. And when we look at it, there are some similarities, though. Feet on the street is one of them. So we're putting a lot of feet on the street. We know that we need to localize content. There is a recipe for doing this stuff, and we think we have a pretty good path for doing that. And frankly, there's a lot of demand for premium brands in China, and we think we fit that bill pretty well. So I think if you couple all this stuff together, it really makes for a good -- certainly a good market opportunity for us, that's in front of us.

The last thing I would point out is, it's very important that people remember that it's not just about the online opportunity there. We actually are seeing good sell-through from the POPs that we're putting in place in China, too, and various retail locations. So it's a complex opportunity. The good news is, it's relatively small today. And we think that makes for some nice growth, going forward.

Thank you.

Thanks, Jeremy.

Our next question is from Brad Erickson with Pacific Crest Securities.

Thanks for taking my questions. Just a follow-on to what you were just talking about. How are you finding customer awareness for the broader action camera category in China, thus far? Is it something you are having to create from scratch? Or is it more just gaining this incremental distribution you're talked about? And capitalizing on low hanging fruit, so to speak?

Yes, great question, Brad. I would first, if I may, say it's more than an action cam. Just the type of feedback we're seeing on a global basis, I already talked about some of the survey results we got back. People look at GoPro as a much broader base than just action cam. I think in China, one of the unique opportunities is, frankly, that people already give us feedback they will use it in a lot of different ways.

So really to address what you said, I think it is about executing on all the things I talked about, which is part of our strategy. Making sure we have the right affinity, localize content, and then driving the distribution. To Jack's point, we know that folks are very focused on premium brands. We see this with other folks out there. And so we feel pretty good that, if we execute in the way that I described, we can continue to grow the opportunity well in China.

Yes, and I would also add that, to see the success straight out of the gates that we've seen in China, just validates that our content-driven model works over there. GoPro content arrived in China before our product did. (multiple speakers) And so it paved the way. And we know from developing momentum in the offline retail channel, that it takes time. And that on a sell-through basis, we see things ramp up slowly over time. And that the sell-through performance that we're seeing tells us that people have been aware of GoPro for some time in China, and that there was pent-up demand there. So the content-driven model works, and that's encouraging.

And just since I guess we all have to get in on this one, since we are pretty excited about the opportunity, I do want to hit the first point that Tony mentioned, which was the action camera point. Please remember, in the data that we provided today, it was the top five cameras and camcorders. It wasn't in action cameras, it wasn't camcorders. It was -- this was NPD, so this was US -- but it was top five cameras and camcorders. And that's a great accomplishment, because that's the market that we're really going after today, which we think that that creates some pretty good opportunities for us.

Got it. That's helpful. Thank you.

Thanks, Brad.

Your last question comes from Rob Stone with Cowen and Company.

Thanks for fitting me in. So I had a question, maybe technical/philosophical, around spherical video capture. Do you expect that's going to continue to be based on multiple devices? Or do you see a role for some of these spherical video approaches that are using a single sensor and then some kind of a mirror or attachment to that?

Good question. I think that for anything to achieve mass market adoption, it's got to get easier. And that's all I will say about that.

Okay. Well, that's such a quick answer I'll slip in one follow-on. (laughter) (multiple speaker) or some other category?

Could you say that again, Rob?

Is the VR headgear a potential GoPro accessory? Or is that some other category?

That's a good question. And I just have to be, again, short and say that we don't comment on potential or future product categories.

Okay, thank you.

Thanks, Rob.

Okay. Thanks, everybody, for joining the call. As you heard today, our investments are paying off, and we continue to execute against our vision, the vision that we've shared with you. And as I said in my annual shareholder letter, we've never had more fun growing this business, and we are very grateful for your enthusiasm and support, as we take GoPro to the next level in 2015 and beyond. On behalf of our nearly 1,100 employees, this is Team GoPro, signing off.

Thank you for your participation. This does conclude today's call.