GoPro Inc (GPRO) 2015 Q4 法說會逐字稿

Good day, and welcome to the GoPro's 4Q 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Salkowski. Please go ahead, sir.

Thank you, Chanelle. Thank you and good afternoon, and welcome to GoPro's fourth-quarter and full-year 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 market 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 leading 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 for 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 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 those of our current expectations.

We report net profit and loss, and 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 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 third fourth quarter and full year of 2015. 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 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 CEO, Nick Woodman. Nick?

Thank you. Good afternoon. Today's call follows the preliminary results we issued on January 13. For the fourth quarter, GoPro generated revenue of $436.6 million. For the full year, we generated revenue of $1.62 billion, representing year-over-year growth of 16%.

For the fourth quarter, we reported the loss of $0.08 per share. For the full year, we reported earnings of $0.76 per share. Fourth-quarter and full-year results were impacted by a charge of approximately $57 million, resulting from our decision to end-of-life the entry-level HERO, HERO Plus, and HERO Plus LCD products, which we will stop selling in April. This charge is higher than the $30 million to $35 million write-off that was communicated in January, and is due to our subsequent decision to simplify our product line to a good, better, best offering of HERO4 Session, Silver, and Black cameras.

Our performance can be viewed in several ways. It was the second-highest grossing quarter in GoPro's 13-year history, topped only by Q4 of 2014, when we launched the HERO4 line of cameras. Our share of the digital imaging category in both North America and Europe grew year over year. We shipped more than $6.5 million GoPros in 2015, up 27% year over year. We're proud to announce our cumulative total since 2009 now exceeds 20 million units.

In Q4, we reduced the price of HERO4 session to $199, positioning it as the best entry-level product we have ever made. The new price resulted in more than a three-fold increase in sale-through rates in December. Sell-through continues to be strong. Sessions' price, small-form factor, and simple one-button design are clearly resonating with consumers.

In several respects, business is good. However, our growth rate has slowed, and some analysts have attributed this to competitive threats and our ability to address a market beyond our core customer. That is not how we see it.

To start, I want to address concerns about competition. GoPro enjoys a growing category share lead in North America and Europe. In fact, according to NPD, in the fourth quarter of 2015, GoPro increased share in the US by 180 basis points year over year to 21.3% of the combined digital camera and camcorder category on a unit basis; while in the action camera category, GoPro's unit market share is over 85%.

In Europe, GSK reports our December share of the digital imaging market was up 500 basis points year over year to 13% of the total market. While we respect our competitors, the data shows they are not having any significant impact on our business.

Next, I want to talk about our total addressable market. There are concerns that it will be difficult for GoPro to grow beyond our core customer base. We believe that it's not a question of the size of our TAM, but rather our ability to deliver a seamless content solution that appeals to our TAM. There's little question that connected consumers have an interest in capturing and sharing engaging personal content. This isn't the problem. The problem is that it's still too hard to offload, access, and edit GoPro content.

What are we doing about it? We're doubling down. In January, we reduced our work force by 7%, and reallocated resources to accelerate software and hardware development that will improve the convenience of the GoPro experience.

In software, you'll see the beginning stages of this new experience in the March release of our entirely new content management application, GoPro for Desktop. GoPro for Desktop represents a breakthrough in convenient offload, access, and editing of GoPro content. It provides tools to easily sort large amounts of footage, as well as trim and share directly to Facebook, YouTube, and other social media platforms. An entirely new editing experience slated for release later this year will make it easy to create strikingly good edits in a matter of minutes.

In terms of doubling down in hardware, we are ensuring that any new and existing hardware products do a better job of connecting to smart phones and the cloud. Any advancements in software will be matched at the hardware level. Later this year, we will introduce the most connected and convenient GoPro we have ever made, HERO5.

To summarize, we acknowledge the challenges facing our business. We do not believe those challenges include a limited TAM or significant competitive pressure. Our challenge is to make GoPro simple.

In 2016, we are committed to delivering a breakthrough -- the breakthrough experience we have all been waiting for, a seamless offload, access, and edit solution across mobile, desktop, and platforms. It's against this commitment that you can judge our performance this year. With that, I'll turn the call over to Tony.

Thanks, Nick. We all share your excitement. My remarks today will focus on four areas: Highlights of our retail performance and software engagement; new partnerships we've formed for content and brand integration; updates on the continued strength of the GoPro brand; and I'll conclude with updates on our hardware initiatives.

I will start with a review of the competitive landscape. As Nick noted, the data shows competitors are not having a significant impact on our business. In fact, in the fourth quarter GoPro gained market share in the US. On a unit basis, GoPro accounted for five of the top 10 cameras, including the number one and number two spots in the combined digital camera and camcorder category.

In that same category on a dollar basis, GoPro cameras accounted for 6 of the top 10 products, including the number one spot. GoPro was also the leader in accessory unit sales, with 6 of the top 10 selling accessories, again including the number one spot.

According to GFK data in Europe, in the fourth quarter, GoPro accounted for six out of the top 10 camcorders. In December, GoPro held all five top spots. Based on our own 2015 data, we have seen in excess of 50% year-over-year growth in the UK and Italy. Additionally, in Japan, Korea, and China, each grew more than 80%. China remained a top-ten global market for GoPro.

I also want to note that roughly 50% of GoPro's 2015 revenue came from outside North America. Combined, revenue in Europe and Asia was up over 49%. We are particularly proud of our progress on international initiatives, which only began in earnest two years ago.

Shifting focus to software, our solutions continue to demonstrate growth. In 2015, GoPro app downloads are up almost 28% year over year, and installs of GoPro Studio are up 67% to 7.2 million. Content exports from Studio software are up 54%, and averaged 44,000 daily exports for the entire year.

Clearly, people want to edit and share their GoPro content. As Nick said, we expect these numbers to grow dramatically as we release new software solutions that simplify the process.

Next, I want to offer some context on platform partnerships that extend the reach of GoPro channel content and our brand. GoPro content is the foundation of our global marketing campaign. We clearly believe there's a strong correlation between the views of our videos and sales of GoPro cameras and accessories.

In the past two years we signed content-sharing agreements with digital distribution powerhouses like YouTube, Facebook, Instagram, XBox One, PlayStation, and Roku. Last week we announced an agreement enabling live streaming from a GoPro on Twitter's Periscope platform.

In the first four days, more than 2,700 people used a GoPro to broadcast live on Periscope. My favorite example is from ESPN's Winter X-Games, where gold medal snowboarder Chloe Kim did a live GoPro course preview that generated 2.6 million views on Periscope.

Another platform we're excited about is Facebook. We've been utilizing Facebook as a distribution platform for our 360 Video content. This yielded GoPro's most-viewed powerful video to date, Tahiti Surf VR, which has generated more than 20 million total views on Facebook.

In addition to expanding to new viewership platforms, GoPro has created partnerships for high-profile content integration. We are creating content with the National Hockey League, and this week signed an agreement with the PGA Tour, where a GoPro will be integrated into the broadcast on the 16th hole of this week's PGA tournament.

Illustrating GoPro's appeal outside sports, we partnered with the Grammy Awards to provide unique live broadcast perspectives of the upcoming February 2016 awards show. The PGA and Grammy live broadcasts will be enabled by HEROCast, our live broadcast solution that's enhancing how people experience events on TV.

It debuted last year in NBC's broadcast of the NHL All-Star Game, ESPN's Winter X-Games, and Moto GP in Europe. You can check out the footage from HEROCast and highlights of our partnerships on the In The Works page on GoPro.com.

Next, I want to update you on the continued strength and momentum of the GoPro brand. One indicator for popularity of our brand is the number of views we generate on social media platforms. A recent GoPro award submission, Frozen Kitten Lives, has generated over 4.5 million views on YouTube.

Cascadia, featuring bike stunt superstar and GoPro athlete Danny MacAskill, was released on December 12. In just two weeks, it became our second-most popular video of 2015, surpassed only by the HERO4 Session launch video. Cascadia has been viewed almost 15 million times on the GoPro channel.

Furthermore, Google announced that for the full year 2015, GoPro tied Apple on the Google brand leaderboard, a measurement of brands and companies with the most popular promotional content on YouTube. Also, Google informed us that in 2015, more than 4.6 years worth of content was uploaded to YouTube with GoPro in the title. That's a 22% increase from 2014. These data points serve as a powerful indicator of our brand's growing relevance.

Finally, I want to turn -- I want to update you on hardware. As impressive as GoPro technology is today, we are passionate about making our devices smaller, lighter, and easier to use -- and soon they will fly. GoPro's drone, Karma, will be on store shelves in the first half of 2016.

In November, we created a registration page on GoPro.com, where more than 100,000 consumers have already registered to receive updates about Karma. Drones are just one of the investments we are making that will change how the world will create and experience content.

Another key initiative for GoPro is virtual reality. We have several products in development that will position GoPro as a leader in VR. GoPro Odyssey is our 16-camera rig for shooting 360-degree, 3-D photos, and video. We announced Odyssey last year in partnership with Google. Content will begin appearing on Google's Jump platform later this year. Omni, GoPro's six-camera rig for shooting spherical content will be available this summer.

One final note, be sure to check out our Super Bowl commercial on Sunday. It illustrates our excitement perception, and reflects our belief that its rugged simplicity makes it the perfect activity capture solution for both core and mass-market customers. We posted the commercial to In The Works section of our website, so please check it out. With that, I will now turn the call over to Jack.

Thank you, Tony, and thanks to all of you for joining us today. If you've not already done so, I would encourage you to download from the Investors section of our website the financial slides we posted concurrent with our press release earlier today.

Our prepared remarks will be focused on a financial overview of Q4 and full-year 2015, as well as overall related business trends. I will then provide the guidance related to the first quarter and full year of 2016, which can also be found in today's press release.

Full-year 2015 revenue of $1.6 billion was up 16% compared to 2014. Units shipped in 2015 of $6.6 million were up 27% year over year, reflecting the expansion of both our business and our market share. EMEA and APAC regions combined made up 46% of the full-year revenue, representing almost a 50% dollar increase year over year, reflecting our ongoing successful international expansion.

Our fourth-quarter revenue of $436.6 million was slightly better than our preliminary results announced on January 13, up 9% sequentially and down 31% year over year. We shipped two million units, two million capture devices in the quarter. Cumulatively to date, we have now shipped approximately 20 million units.

Q4 was also our second-highest quarter ever, both in terms of revenue and unit shipments. Fourth-quarter revenue reflects global retail sell-through trends that were seasonally weaker than the prior year, as we did not have a major new product launch in Q4 2015. Additionally, we recorded a $21-million reduction of revenue for HERO4 Session price-protection-related charges in December.

Our direct sales channel made up 67% of Q4 revenue, compared to 62% in the same period last year. Regionally, the Americas was strongest, and made up over 65% of Q4 revenue, followed by EMEA at 24% and APAC at 11%. As a percentage of total revenue, both the Americas and APAC regions were slightly stronger on a year-over-year basis.

Our premium HERO4 Black and Silver product combined once again made up over 50% of our revenue. Since our December price reduction of the HERO4 Session, we have seen a strong up-tick in demand for this product. To date, we have shipped over 500,000 units. ASPs on all of our HERO and HERO4 products, with the exception of the HERO4 Session, were up sequentially, as we did not experience any noticeable pricing pressure for these products during the quarter.

Gross margin for 2015 was 41.7%, compared to 45.1% in 2014. Gross margin for the quarter was 29.6%, compared with 48% in the fourth quarter of 2014, and lower than the preliminary gross margin of 34.5% to 35.5% that we provided back in January 13.

We recorded product realignment charges of approximately $57 million to cost of revenue in the fourth quarter related to excess purchase order commitments, inventory, and obsolete tooling. This charge was greater than the preliminary range of $30 million to $35 million we provided on January 13, due to our late January decision to end-of-life our entry level HERO, HERO Plus, and HERO Plus LCD products, in order to simplify our product offering to our three best products -- HERO4 Black, Silver, and Session.

Excluding the impact of these additional product realignment charges, our gross margins would have been within the preliminary range of 34.5% to 35.5%. Excluding the impact of the product realignment and the Session price-protection-related charges, gross margin would've been 45.3%.

Operating expenses of $150.8 million in the fourth quarter of 2015 were up 36% year over year, and at the lower end of our preliminary reported range of $150 million to $152 million. Sales and marketing expenses were up 37% year over year, reflecting increased marketing spend during the holiday season, and our brand-building efforts.

Consistent with prior periods, R&D investments continued to drive a significant portion of the overall expense growth, and were up 49% year over year.

We recorded an operating loss in the fourth quarter of $21.6 million, and an adjusted EBITDA loss of $9.3 million, reflecting a lower-than-anticipated revenue, and the product realignment and price-protection-related charges previously mentioned.

Loss per share for the fourth quarter was $0.08, down from earnings per diluted share of $0.99 in the prior-year comparable quarter. GAAP loss for the fourth quarter was $34.5 million, or a loss of $0.25 per share. This compares with GAAP net income of $122.3 million, or $0.83 per diluted share for Q4 2014.

Turning to the balance sheet, we ended the year with cash, cash equivalents, and marketable securities of $474.1 million at December 31, up $51.8 million year over year, and represent 43% of GoPro's total assets. Cash flow from operations for the full year of 2015 was $158.9 million, including $22.9 million in the fourth quarter. Accounts receivable were $145.7 million at December 31, and DSOs of 30 days were in line with our expectations.

Inventory of $188.2 million was down 35% sequentially, primarily due to the shipments from the holiday season, as well as inventory write-downs related to the product realignment.

We have re-purchased 1.5 million shares at an average price of approximately $23, for a total of $35.6 million through December 31. We have remaining share repurchase authorization of $264.4 million.

I will now move on to our guidance. For Q1, we are providing selected quarterly guidance, in addition to full-year 2016 revenue expectations. In future quarters, we will only provide annual guidance, and refine it as necessary. Because we manage GoPro on an annual basis, and our business is typically seasonal, we believe providing annual guidance, as opposed to detailed quarterly updates, aligns investors with our internal approach to running the business.

For the full year, we currently anticipate introducing new aerial and capture devices that will be complemented by ongoing software improvements. We expect revenue to grow sequentially each quarter, and for it to be seasonally strong, with the vast majority in the second half of the year.

Accordingly, we currently anticipate 2006 revenue to be in the range of $1.35 billion to $1.5 billion. The first quarter is typically our slowest seasonal quarter for revenue, and that will be the case in 2016. During Q1 we implemented our product realignment strategy, allowing us to feature our best products for consumers. We expect sell-through to be significantly higher than sell-in, enabling our global channels to further reduce their weeks of inventory, which in turn will negatively impact first-quarter sell-in.

Accordingly, we currently anticipate first-quarter revenue of between $160 million and $180 million. We expect the Americas region will be strongest in terms of dollars, and that EMEA and APAC regional revenue will increase as a percentage of total revenue. We expect distribution revenue to exceed our direct revenue in Q1.

On a product basis, we expect HERO4 Black and Silver will contribute over 50% of our first-quarter revenue, and that based on recent sell-through trends, Session will become a significantly greater percentage contributor to our total revenue.

For the first quarter, we anticipate gross margin will be 36%, plus or minus 100 basis points, and will be adversely affected by approximately 500 basis points, due to high fixed overhead costs, given the lower levels of expected revenue.

In January, we adopted a restructuring plan designed to better align the Company's resources toward key revenue growth initiatives. We will continue to invest in the people, products, and infrastructure necessary to pursue our growth and our long-term vision. Our R&D is primarily being invested in the development of next-generation aerial and capture devices, as well as software and entertainment initiatives.

Excluding the $5 million to $10 million of anticipated restructuring costs, we currently anticipate operating expenses for the quarter to be between $165 million and $170 million, with the majority of the growth coming from research and development, and marketing. Additionally, we anticipate operating expenses will grow sequentially throughout the year.

For the quarter, we anticipate and adjusted EBITDA loss of between $95 million, plus or minus $2.5 million. With that, operator, we're ready to take your questions.

Actually, thank you Jack. As Jack noted, this is the last time we will provide quarterly guidance. We believe that maintaining a long-term focus is more consistent with the initiatives we explained today, and is more consistent with how we've traditionally run the business since our founding in 2002.

Prior to taking GoPro public in June of 2014, we enjoyed 13 years of strong and consistent growth. During this period, we maintained a consistent long-term perspective, with a focus on annual performance. This allowed us to undertake bold initiatives to grow the business.

Following our IPO, we shifted our focus to a shorter-term quarterly horizon. With our shift to annual guidance, we are aligning our decision-making with the approach this Company was built on. With that, operator, we will now take your questions.

Thank you.

(Operator Instructions)

Paul Coster, JPMorgan.

Yes, thanks very much for taking my question, and thanks to Jack, as well, for a roller coaster, I think, is the best way of describing it. Welcome to Brian, who will hopefully get back to the strong and consistent growth story that Nick was talking of. My question -- I've got so many questions -- but the one I think I'm most interested in at the moment is the -- how you think the product mix shakes out over the course of the year? The Session obviously is doing well from a unit volume perspective? Do you expect the ASP to creep back up? Does it weigh on gross margins? Can you give us some shape, some sense of the mix of those products through the year, the effects on ASPs, and the effects on gross margins to the best you are able to predict to any of the above? Thanks.

Hi, Paul, it's Jack.

Hi, Jack.

I'll try and take this as much as I can. We're in the middle of this product realignment, so it's a little difficult to come up with what we think the expectations are. Right now, we're really trying to simplify with Black, Silver, and Session. I think what we are pleased with is that we have an entry-level product that's really a killer product in Session, we're starting to see those sell-through trends. Black and Silver remain pretty consistent.

Of course, a lot of this is going to depend on what we do from our product release over the course of the year. It's a little hard to get into what that mix will actually look like. But we did say 50% of our revenue was Black and Silver this last quarter. We did say 50% or more will be Black and Silver in the upcoming quarter. That should give you some indication.

I think as it relates to margins, we guided to 36%, plus or minus a point. If you add back those fixed costs that we're getting burdened with this quarter due to the low revenue, it gives you a feel for probably the levels of gross margin that we think we can probably operate in as we go into the rest of the year, here. Of course, all of this is probably going to change as we release new products, but that's where we're seeing it right now.

Can I follow up, that implies that the Session gross margin starts creeps up, notwithstanding the fact that you've taken this price action that I assume is a irreversible. Can you comment on that?

Yes, I think we're actively looking at ways to optimize the margin on Session. We feel like when we made this decision to lower the price to $199, obviously we focused in on the cost side of it, to. Hopefully, we'll see some benefits from that as we move forward.

Okay. Thanks, Jack. Good luck, Brian.

Thank you.

Joseph Wolf, Barclays.

Hi, thanks. I think this may be a continuation of the last question, and also my best wishes to Jack as you move on in life and career. You talked about launching the HERO5. If you're going back to basics with the good, better, best, are you going to drop a product later in the year and stick to three action cameras? How do you think about the breadth of the mix as the Karma and some virtual reality products come out?

I'll take the first part of the question, this is Nick Woodman. As it relates to future products in our lineup, we can't comment on what that will be, only that we're very excited about all of the products that we're working on. Could you repeat the second part of your question, please?

How do you -- well, I will rephrase it. If you think about your -- you talked about the addressable market and the market share gain. With the new hardware products that are coming out, Karma and VR, do you think those are new audiences, or they an extension of your traditional audience?

That's a good question. They're both. We have a very passionate and active customer base, millions of people who over the years have bought and enjoyed their GoPros. I think that every new product we make, we take into account this existing customer base. We develop our products to resonate with those customers who have already raised their hand, and said that they're interested in our brand and our solutions. But obviously, we're seeking to expand the reach and relevance of GoPro. I think that we're going to accomplish that both with our Karma product and associate products, as well as our Virtual Reality products.

All right. Thanks, Nick.

Charlie Anderson, Dougherty & Company.

Yes, thank you for taking my questions, and Jack, best of luck. I wanted to ask -- I didn't know if I caught it, but if you talked about what true sell-through should be in Q1? I want to understand -- product realignment sounds like it's is a big head wind on Q1 revenue. If you could quantify that at all, or talk about -- as I think about the full-year guidance, are you expecting true sell-through to improve or not improve versus what you expect in Q1?

Q1 it's really an adjustment. What we're doing is the alignment. As we do that alignment, we're cleaning up the channels a bit. Clearly, given the fact that we did give some annual revenue guidance, we do think that we will see increased sell-through as the year progresses on.

Think of this as the time in which we took an internal look and said okay, what's the best thing for the customer? The best thing for the customer is to actually simplify the product lines, and then clean up the channel so that we can present the best solutions -- and then to complement that with some of the things we're doing in the future here. Short answer of this is yes, we expect the sell-through to pick up. This quarter sell-through will be significantly greater than the sell-in, and significantly is certainly more -- it's not 10%, it's a lot more than that.

Nick here. I will add to that. The more simplified the presentation of our value proposition to consumers is, the better our conversion rate at retail. When you give the consumer too many choices you confuse them, and they often-times end up buying nothing. If you give them only the best of your solutions, and you present the value proposition to those solutions clearly, you generally get better conversion.

Something else that we're doing moving forward is adjusting our marketing slightly to be more product-centric, and do a better job of communicating the product itself and the benefit of GoPro cameras themselves, and less about the big-branded visuals that we've been come to known for. Because as we move into a more mass-market customer, we recognize that we have to make our value proposition more obvious to them. When you combine more product-centric marketing, clear communication, with a much more concise and to-the-point product line, we think that we can improve sell-through over time.

Charlie, just one last thing, just to hit that point. One of the reasons I talked about the Super Bowl ad in my prepared remarks is you'll get a sense of that, the shift towards a more-product centric marketing approach. Check it out.

Great, and just to follow on to that, I just wonder if you could talk about how operating expenses should trend through the year? We're seeing the spike in Q1. I know your Super Bowl ad, marketing's probably pretty high -- how we should think about that trajectory?

Yes, we were -- this is Jack, Charlie. We were pretty explicit on the guidance that we expect it to increase sequentially throughout the year.

Thanks so much.

Tavis McCourt, Raymond James.

Thanks for taking my question. Jack, you mentioned I think in the answer to a question that you would expect Black and Silver to be 50%, or a little above 50%, for the March quarter. I'm a bit confused. Are you still selling the HERO lineup -- HERO, HERO Plus, and LCD into the channel in March?

Yes, Nick did point out that we would be discontinuing the products in April. They are winding down at this point, is what we're really doing.

Okay. Then have you guys run any experiments at retail from a merchandising perspective, taking some of the lower-cost items off the shelf, and see what it does to overall sales?

That's a good question. To answer your question specifically, no. But in talks with our retailers, they expressed confidence that Session would perform very well as our lowest-priced entry-level product at $199, and that many of the customers in fact would trade up to that product. We're feeling comfortable with that move.

Nick, you mentioned the HERO5 later on in the year. As we get to new product cycle, should we be thinking about a different ASP gross margin profile once everything's shipping back at full MSRP, or do you know yet?

Hi, it's Jack again. I think as we get closer to the release of those products, we will be happy to give more color on it. But at this point, we are really focused on the strategy for the next couple of quarters, and then of course delivering the products that we're going to have out later in the year.

Understood. Nick, final question. Tony mentioned Karma, before, on shelves in June. I'm wondering, from your perspective, this is a market where there's one dominant player in it, similar to the way GoPro was in action cameras. It's been difficult to unseat GoPro in action cameras. What would you view as a success in terms of you entering the flying camera market or drone market?

Good question. I will start off by being more specific about what Tony said. He said the first half of the year. He didn't mention June, specifically, for the release of Karma. What we consider to be successful for Karma -- that's a very good question. I think that we're uniquely positioned to be successful out of the gates with Karma, given the strength of GoPro's brand in the drone category.

The drone category -- the consumer drone category really took off -- not because of drones, but because of people attaching GoPros to drones. Even though GoPro has not had a drone product, per se, our brand is known as a drone Company, ironically. I think the consumers that are currently buying drones are anticipating what GoPro is going to do in the category.

When you combine that with our global distribution, our in-store merchandising, the fact that our brand is already known as a contributor to the drone movement, and our history of delivering extremely versatile and durable and capable capture solutions for consumers; I think that many people are giving us the benefit of the doubt that's going to help us with product launch.

Another aspect of our strategy is that we are seeking to be significantly differentiated from what existing drone companies are offering in the market place. They're -- have their approach, and we have ours. We think we're positioned to succeed, and we're excited for it.

Thanks very much.

Thank you.

Andrew Uerkwitz, Oppenheimer & Company.

Hi, thanks for taking my question. In the prepared comments, you mentioned your competition and your market share. I would tend to agree that I think competition in cameras is nil for you guys. Based on your guidance, it looks like you are implying units down in 2016. My question is, are you just facing a really tough TAM, a shrinking market, and you're having difficulty expanding that TAM? If you could expand on how you will get into some of these other horizontal camera markets, that would be useful, please? Thank you.

Sure. Our answer is just what we said on the call, which is you're right to note, we don't believe that our head winds are due to competitive pressures. We don't believe that our head winds are due to a limited TAM, or that we've saturated it.

The market for helping people self-capture amazing content of any experience, and then share that content is a massive one. We believe that every connected consumer in the world has an interest in capturing and sharing their personal experiences, visually expressing themselves in this age of social -- personal social media.

We believe that, because GoPro enables consumers to self-capture themselves in ways that they cannot with any other camera -- one way to think about GoPro, we're narrowly described as being an action, quote-unquote, camera Company. I'd prefer -- we would all prefer that we think of it more as GoPro as the world's leading activity-capture company. Action implys something risky and dangerous that you're doing.

But in truth, the majority of our customers use a GoPro to film themselves having fantastic weekends with their families and pursuing more everyday activities. Unlike a smart phone or a traditional camera where you need a third person to hold the camera, to photograph or film you, doing whatever it is that you love to do in life, with a GoPro, you can film yourself. That is just a huge enabling value proposition for consumers. It enables incredible content that is simply not possible without a GoPro. That total market opportunity is very significant, we believe.

The problem, as I stated earlier in the call, is not the TAM but it's our ability to provide a simple enough solution for the mass market TAM. GoPro as we've known it today has resonated with our core customer, who really wants the solution so badly that they're willing to deal with the inconvenience of manually offloading and accessing and then editing their content. But we're self-aware, and acknowledged that experience is too difficult for the mass market consumer today.

Our challenge and our opportunity is to simplify GoPro, and make it very seamless to automatically offload and then access and edit your content. When we achieved that, we think that we can significantly reignite the growth that we have been known for over the years.

I appreciate that candid answer. If I could just do one follow-up, do you think you can solve those problems internally, or do you think we should expect some M&A to help speed that transition along? Thank you. That's my last question.

I think the candid answer to that is we are always looking at opportunities to accelerate our execution and realization of our vision. We do believe that we're capable with the internal resources we now have, but that does not mean that we're not still keeping an eye out for opportunities to accelerate.

Ben Bollin, Cleveland Research.

Thank you for taking my question. I wanted to touch on the last one. Nick, the auto-upload, edit, aggregate, published, all of these items have been talked about for a period of time. Where do you think you are in your ability to bring out a turn-key offering or a platform that can integrate those functions? Then I have a follow-up on the operating expense line item.

We're committed to delivering this new experience in 2016, period. As I noted, you are going to start to see the first instances of that new experience in the form of our new GoPro for Desktop content management application that we'll be releasing in March, but 2016 is the year.

Looking at the OpEx, we're going to be up sequentially here in calendar 1Q, and as you said, up sequentially throughout the year. How do you mesh that with the 7% head count reduction that was discussed? Why aren't the figures going lower? Are you paying higher salaries? What's the disconnect there?

There's a couple of things. The fourth quarter actually is a -- probably not a great comp for what our real true run rate is. At the end of the year, you have less payroll taxes, we have more vacations. The Company was really great about making sure they took time off and enjoying the holidays, too. It's probably that $150 million we were at in this last quarter was probably a bit off of the normal run rate. If you were to ratchet that up a bit, the increases are not all that much.

That said, we're investing. That's what this is about. We have been saying for quite a while that we can't cut our way out of this. We have to invest our way out of it. We feel that we have the right set of products as we head throughout the rest of the year. Nick's talked a lot about the software here today, and now with the improvements we're going to be making there. We think that the market opportunity in front of us is quite large, and so this is the way to do it.

That's our approach to it. We're getting the benefit -- financial benefit, I should say, of some of the restructuring. But on the other side of it, we really are trying to reinvest items we think will drive the maximum growth.

Will Power, Robert Baird.

Great, thanks. A couple of questions. Maybe first a clarification. Thinking about channel inventory and the challenges there in Q1. Is it your expectation based on forecasts that channel inventory should be more balanced exiting the quarter so it's not a head wind, or loss of a head wind in Q2, or could that continue to be one of the challenges you face in Q2?

Yes, it is our expectations that we should have it pretty well cleaned up by the end of the quarter. We spent a lot of time on this. Clearly, the hardest part about this is it really is based on what the ongoing demand is. Based on what we know today, we think we have a pretty good approach to it. As Nick pointed out, having a simplified product line will actually probably increase the conversion quite a bit. We think that will only be a future benefit.

Okay. I appreciate that. Tony, in your remarks, you talked about some of the Facebook, Periscope, YouTube views, et cetera. I would be interested in your updated views on how you're thinking about monetizing some of that exposure, beyond what it does to the product sales and exposure from that end?

Yes, it's a great question, and I know it comes up frequently. I think what you can definitely see from us is a continued investment around our content initiatives. I talked a lot about that correlation. I can't give you any updates right now. Monetization, it's something that's always on our mind. It's not something I would say that you would want to factor in, in the short term, but we still see long-term opportunities there.

Okay, thank you.

Rob Cihra, Sterne Agee CRT.

Hi, thank you very much. Two questions, if I could -- one just to confirm I think what was said. With the inventory draw-down required as you get rid of the low end, are you saying that should be out of the way exiting Q1, so it's not going to be -- because you're ending sales in April, is that something you don't think's going to be a hit again to Q2?

Yes.

Okay. Then going back to the Session, obviously this has been an issue -- a learning experience, whatever -- all year long for you guys, or for the last six months, anyway. Yet you keep coming back to how it seems like you guys all really think it is a great product. It is now selling well now with the price half of where it started. Do you look at it as a product that just was mis-priced from the outset, or is it more than that? Is it you think it's so good that you're literally getting rid of all your low end, and having this as the low end? I'm just wondering where -- what the mistake was along that way? Thank you.

Good question. We believe the -- it was entirely about pricing. Session is arguably the best GoPro we have ever made. I have been around here -- this is Nick -- I have been around here for all of them. It's the most convenient, quote-unquote invisible capture solution we have ever made. It's part reduction, interface reduction, simple one-button on-off for both photo and video capture, reduction in parts. It makes it easier to pick it up and go use it and mount it in all the ways that our customers do. It's a massive enhancement in every regard, and something that I'm extremely proud of.

Apple gets a lot of credit for developing an interface that two-year-olds can use, IOS touch interface. That's something that we have always been envious of. I'm happy to say that with Session, we've produced a product that I can confirm a 1-1/2-year-old can use; because my son [Bodie] regularly picks up my Session, presses the button, and follows the rest of the family around with it. That's a very meaningful breakthrough. I'm not just saying it to be cute. The fact that a 1-1/2-year-old can pick up a GoPro and successfully use it is massive, and we can't say that about the other products that we make.

To summarize, it was entirely about price. We're now seeing the sell-through rates and consumer appreciation that we were expecting when we designed the product. Don't take my word for it, go read reviews, customer reviews online at various online retailers, and you'll see that the consumer regards HERO4 Session very highly.

To follow that up, do you think you can make that and still make gross margin, because obviously gross margin profile change from the pricing. Do you think you can still make that good a product at $200 and actually make a big gross margin on it?

You have to look at it as a portfolio of products. We have certain products that we make better margins on and others that we make less on. Our approach to this is by cleaning up the product line at the low end, we were selling some other products that probably weren't having the best gross margins. This is a much better replacement, and our job is to optimize the cost on it. We think we can do that, and we think it will all work out just fine.

Great. Thank you very much.

James Medvedeff, Cowen and Company.

Good afternoon, and thanks for taking my questions. The first question I have is on mix. Was there anything unusual in the mix between hardware -- between capture devices and accessories in the quarter?

Yes, this is Jack. I would say that the accessory, the stand-alone accessory portion of our business in the fourth quarter was probably weaker than expected, and was weaker than the impacted capture devices; so yes, it was a little bit lighter, and that will affect what I am assuming is your street ASPs that you're looking at.

That's what I'm working -- yes, exactly. Okay, was there any revenue at all from the non-hardware type stuff? Paid views, content, software, services?

Yes, there was, but we don't get into that level of detail.

Okay, so not significant, or not -- yes, okay. The next question I have is that the guidance for next year, or for the first quarter, was a mid-point on gross margin of 36%. You said about 500 basis points was due to overhead absorption. That would get us to about 41%. How does that -- does that have any impact on the long-term model which was higher than that?

The long-term model is 42% to 44%. I think that we're not changing that approach. As we've said on many occasions, we will be above and below that at various different times. I think we can run a good business at these levels, not at the 29% level. We need to be a little higher than that.

Yes, sure. Finally, what was the jump in other long-term assets?

That's a reclassification for taxes. There's an accounting standard that came out that we're implementing prospectively. That was just a reclassification from short term to long term.

I see. Okay, thank you.

Jim Duffy, Stifel.

Thanks. Hi, guys. My level of questioning more high-level. You guys are the market, the numbers suggest the market is going the wrong direction. You're doubling down, wrapping the operating expenses across the year. Nick, what if you're wrong, and improvements in the content management and editing don't sell more capture devices? If the market really is at a glass ceiling, what's the contingency plan to create shareholder value?

That's a good question. Our business is dynamic, and we would adjust our business as we see fit as the year progresses. But we are confident in our ability to bring this new experience to market in a timely fashion, and we think that the strength of our existing communities' continued interest in GoPro and use of our products will have them be re-engaged, if you will, by this new GoPro experience; and that we think it's precisely what we need to attract new customers that we think fit our customer profile. But to specifically answer your question, our business is dynamic, and we would adjust it accordingly.

Jim, it's Tony. The only thing I would add is we are also entering new categories, not as traditional as digital camcorders as we talked about in market share, whether it's spherical, whether it's what we're doing in consumer drones. Even though it's long term, we're still making investments into the content areas. We look at this business as a portfolio, as well. I think -- I wouldn't necessarily say contingency, but we're certainly investing in more than just traditional cameras.

That's helpful. Thank you, guys, and best of luck.

Okay. It looks as if that will conclude the question-and-answer portion for today's session. I would now like to turn the call over to the Management Company for any additional or closing remarks.

Thank you very much. Nicholas Woodman here. Before we sign off, I want to say goodbye to our friend, colleague, and CFO, Jack Lazar. In early 2014, we recruited Jack to help us take GoPro public, and continue to scale our business. For the last two years, Jack has been a very strong leader, and a massive contributor to our vision.

Last year, we hired Brian McGee, a 30-year finance veteran who served as CFO of two publicly traded companies, to serve as Jack's successor. That day has come. Brian will be formally appointed the CFO in March. Brian, we're excited to have you on board; and Jack, we are massively going to miss you. But now that you are going to be on the beach, I hope you finally learn how to surf.

Thank you, Nick.

Thank you all for joining us today. This is Team GoPro signing off.

That does conclude today's conference. Thank you for your participation.