GoPro Inc (GPRO) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Go Pro's first-quarter 2016 earnings call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Peter Salkowski, Head of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to GoPro's first-quarter 2016 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; our President, Tony Bates; and our Chief Financial Officer, Brian McGee.

Before we begin, I would like to remind you that statements on this call including, but not limited to, our projected future 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 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, for the ended December 31, 2015, 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 additional results to differ materially from 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 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 information and metrics for the first quarter of 2016. These slides 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 your questions. Now, I'll turn the call over to GoPro CEO, Nicholas Woodman.

Good afternoon, welcome. Today I'm going to review GoPro's first-quarter performance and then focus on how we are delivering against specific commitments we made on our February earnings call.

In the quarter, we generated revenue of $183.5 million, above the top end of our guidance. While our revenue was down 49% year over year on a sell-in basis, it's important to look at sell through which indicates consumer demand for GoPro remains strong. Based on third-party data and our own estimates, first-quarter sell through exceeded sell-in by approximately 50% and drove down channel inventory by over 20%. In addition, first-quarter sell-through, on a unit basis, was down less than 10% when compared to the first quarter of 2015, which benefited from the launch of Hero4.

With respect to commitments we made in February, we acknowledge the need to accelerate the development of software tools that make it easy for our customers to offload, access and edit their GoPro content. Later that same month, we announced the acquisition of two of the most popular mobile editing apps, Replay and Splice. We believe that Replay, with over 13 million downloads, represents the best automated edit experience on mobile. While Splice, with over 19 million downloads, represents the best manual edit experience. We intend to combine these two apps to simplify mobile content creation for not only GoPro customers, but for smartphone users as well.

Opening up GoPro as a content enabling platform for billions of smartphone users is an important evolution of our strategy, one that we are very excited about. And on Tuesday, we launched updated versions of both apps. Splice features an updated GoPro look and feel while Replay has been rebranded as Quick, which we believe does a terrific job of describing the apps ability to automatically produce engaging edits in just a few seconds.

Quick and Splice join our existing GoPro app, which in Q1 saw a 32% increase in daily active users and a 26% increase in monthly exports. And in early March, we released GoPro for desktop, a tool that simplifies the offload, access and sharing of GoPro content. In the first quarter, GoPro for desktop contributed to a 35% year-over-year increase in content exports.

We are making additional software advancements with our new GoPro VR app which further establishes GoPro as a leader in virtual reality. GoPro VR is a place to discover some of the world's most interesting and varied VR content. It is also a place where users can upload and share their own VR content. When combined with our new VR capture rigs, Omni and Odyssey, and our stitching software Color, it is clear that GoPro has created one of the world's most comprehensive platforms for capturing, stitching, sharing and enjoying VR content.

The GoPro VR app is available for iOS and Android. We invite you to download the app and watch the launch video for one of our latest products, Omni. Omni is a six camera spherical rig for capturing content for VR. In April, we showcased Omni at NAB, the National Association of Broadcasters event. And we took preorders for delivery in August. At $5000 for the complete system, which includes 6 GoPros and our stitching software, or $1500 for the rig alone, Omni represents the most versatile and cost-effective solution for capturing professional-quality VR content. Also at NAB, we demonstrated Odyssey, GoPro's 16 camera stereoscopic rig that works with Google's Jump VR platform. We invite you to watch Odyssey videos on Google's Jump website.

Cameras are the core of our business. And in February, we committed to a good, better, best product lineup to simplify decision-making for consumers. In addition to driving Q1 unit sell-through, we saw positive changes to product mix. According to third-party data, Hero Session at $199 represented more than 20% of our Q1 unit sell-through. Combined, Hero4 Silver and Hero4 Black represented approximately 48% of units sold during the quarter. This, along with the sellthrough and channel inventory information that I already shared, clearly validates that our product strategy is working. And, as promised, later this year, we will release Hero5, the next generation of GoPro.

While we have made great progress on many initiatives, unfortunately, there is one where we won't deliver; the first half of 2016 launch of our drone, Karma. As late as this week, we believed Karma's launch was on schedule. However, Karma includes revolutionary features that differentiate it from other drones, features that make it much more than a drone and deliver the versatility, value and performance that consumers expect from GoPro. To give ourselves more time to fine-tune these features, we have made the difficult decision to push Karma's launch to the holidays.

I'll finish by reiterating some key points. First, demand for GoPro remains strong. First quarter sell-through significantly exceeded sell-in resulting in reduced inventories. Second, we made significant improvements to our software. Our editing apps Quick, Splice and GoPro for desktop are experiencing strong adoption and are generating impressive results and there is much more to come. Third, our simplified product strategy is working. Session is succeeding as our entry-level product and we're excited for the launch of Hero5 later this year. And finally, we made the difficult decision to move Karma's launch to the holidays. Now, I will turn it over to Tony.

Thanks, Nick. My remarks today will focus on three areas, an outlook on the global retail landscape with particular focus on our progress in international markets; an outline of the GoPro developer program which is expanding GoPro's consumer ecosystem; and finally how our sharpened approach to marketing and entertainment is yielding measurable results.

I'll start with North American retail where, according to NPD, GoPro accounted four of the top five products on a unit basis in the digital camera camcorder category in the US. Hero4 Silver remains the best-selling digital image camera on a unit and dollar basis. On a unit basis, Hero4 Session moved to the number-2 spot up from number 8 in the fourth quarter, a big jump for a great product. This performance reinforces our decision to position Session as the entry-level product in our product line. Session's impressive sell-through reflects increased investment we are making in product-specific marketing including global television campaigns. Given the results we are seeing, we intend to continue with this approach.

We continue to make strong inroads in international markets, which in Q1 represented roughly 54% of GoPro's total revenue. A major element of this strategy is 146 athletes that we sponsor including American swimmer, Missy Franklin; Scottish trial cyclist, Danny MacAskill, and snowboarders, Ayumu Hirano from Japan and Yiwei Zhang from China.

Today, roughly 40% of our athletes come from countries outside of the United States. And in the first quarter, athletes tagged GoPro in more than 5,000 social posts, resulting in more than 12 million social engagements on social media. This week, we extended our agreement with one of the biggest sporting events in the world, the Tour de France. The three-week event is broadcast in 190 countries and organizers project a global TV audience of 3.5 billion viewers.

Each of the teams will have Session mounted on the bikes capturing immersive footage from the rider's point of view. This unique perspective will add drama and excitement to the episodic content that GoPro will be producing. Check out episode one of Beyond the Race appearing today on our blog, The Inside Line.

We're also getting ready for another season with MotoGP, the world's premier motorcycle racing championship with a huge international following. GoPro is the official wearable camera of MotoGP and we produce content for many of the races. We're also the title sponsor of the GoPro Motorrad Grand Prix Deutschland, race with an on-site audience of 210,000 and a TV audience of more than 15 million.

Now, onto APACE where the region accounted for 21% of GoPro's Q1 revenue, an increase of 9 percentage points over Q4. The APACE region showed a higher percentage of sell-through versus sell-in than the rest of our businesses.

A quick update on China, a top-10 GoPro market where we continue to invest in growth. In March, we opened our first retail store in one of the most popular shopping streets, [Tianjn].

Next, I want to highlight the great progress we're making with the GoPro developer program, an initiative for expanding GoPro's ecosystem to include companies that integrate GoPro into their products. The program offers GoPro toolkits for developers, enabling them to connect directly to GoPro products in innovative ways.

We developed this developer program in April with more than 100 companies including BMW, Fisher-Price, Polar, Telefonica and Toyota. These companies and others integrated GoPro solutions for a broad range of products and services including automotive, security, entertainment, coaching and family products. In the last month, we received more than 200 new applications from developers hoping to participate in our program.

Announced in tandem with the developer program is Works With GoPro, a verification program that will help consumers identify accessories and software that maps seamlessly to GoPro products.

Before I finish, I want to highlight an upcoming event that reflects how we tie together new technology and global marketing. On May 27, GoPro entertainment is partnering with Wingsuit superstar, Jeb Corliss, for an event in China that's going to generate a lot of attention. Jeb will jump out of a helicopter at 6,000 feet, fly through the air at 120 miles per hour and punch through a target with just 10 feet between him and the Great Wall of China. The entire jump is going to be broadcast live using GoPro's HeroCast.

Jeb will transmit his experience live via China's [Tianjin] TV to an audience expected to reach a total of more than 500 million. Yes, 500 million people. The Great Wall event is just one example of how GoPro technology is creating significant opportunities for us in entertainment. With that, I will pass off to Brian.

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. Our prepared remarks will be focused on the financial overview of Q1 as well as our related business trends. I will then provide an update to our guidance.

Our first-quarter revenue of $183.5 million was above our guidance range of $160 million to $180 million and down 49% year over year and 58% sequentially. We shipped 701,000 cameras in the quarter. As Nick noted, in our first-quarter, global unit sell-through was approximately 50% higher than global unit sell-in, allowing our global channel inventory to decline by over 20%. Looking ahead to the second quarter, we again expect channel sell-through to be significantly higher than sell-in, enabling our global channels to further reduce their inventory ahead of our new product launches.

Regionally, the Americas accounted for the largest portion of our revenue, making up 46% of Q1 revenue followed by EMEA at 33% and APAC at 21%. Looking at our channels, direct and distribution revenue made up 46% and 54% of Q1 revenue, respectively, in line with the percentages of revenue we reported in the prior-year quarter. Based on retail price points, our $399 and above cameras combined to make up over 50% of our units shipped in the quarter. In addition, our $199 and below cameras accounted for over 40% of units shipped. Hero4 Session's performance greatly improved during the quarter, accounting for over 50% of units shipped at the $199 and below retail price points.

The average selling price of units shipped increased 16% sequentially. This is defined as total revenue divided by camera unit shipments and excludes price protection related to charges taken in both quarters. The improvement in average selling price was due to a higher proportion of $399 and above cameras and the $199 Hero Session replacing the $129 Hero. Seasonally high first-quarter accessory revenue has a favorable impact on the comparison to the fourth quarter average selling price. On a year-over-year basis, the average selling prices were slightly lower. We did not experience any noticeable pricing pressure for our products during the quarter.

Gross margin for the first quarter was 33%, impacted by charges related to our legacy products of $8 million for excess purchase commitments inventory write-downs and marketing development funds, or MDF, compared to 45.2% in the year-ago period. Excluding the charges, our gross margin in the first quarter would have been 36.8%. These charges were the result of lower sales estimates for our end-of-life Hero products. We have no further financial exposure remaining from either purchase commitments or our inventory specifically related to our end-of-life Hero camera line.

Operating expenses of $157.5 million in the first quarter of 2016 were up 37% year over year. R&D was up 46% year over year reflecting our investment in the development of next-generation cameras and drone-related products as well as our software and entertainment initiatives. Sales and marketing expenses grew 38% year over year reflecting the increase in our expanded branding and product marketing efforts which began in earnest during the fourth quarter of 2015.

In January, we adopted a restructuring plan designed to better align our resources to key growth initiatives resulting from restructuring expenses of $6.5 million in the first quarter. We plan to reinvest savings related to the restructuring into our most important priorities to drive revenue growth. Headcount at the end of March was 1,483.

We recorded an operating loss in the first quarter of $96.8 million and an adjusted-EBITDA loss of $86.8 million. Loss per share in the first quarter was $0.63, down from diluted earnings per share of $0.24 in the prior-year comparable quarter. GAAP net loss for the first quarter was $107.5 million or a loss of $0.78 per share. This compares with GAAP net income of $16.8 million or $0.11 per diluted share for Q1 2015.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of approximately $389 million, down $85 million from year end including $45 million in acquisition-related payments. In March, we secured a $250 million asset-backed credit facility. And, as of March 31, the borrowing base available to the Company under the facility was approximately $86 million and no borrowings have been made to date.

Accounts receivable were $46.5 million at March 31, and DSOs were 23 days with net collections of nearly $100 million. Net inventory of $139.7 million was down 26% sequentially and reflects our lowest inventory level since the third quarter of 2014. In addition, we expect inventory to decline further in the second quarter.

I will now move on to our guidance. We are affirming our 2016 revenue guidance range of $1.35 billion to $1.5 billion. We expect modest sequential revenue growth in the second quarter resulting in the vast majority of our full-year revenue occurring in the second half of the year. Our guidance takes into account the delay in Karma, the launch of our VR products and the introduction of our next generation Hero5 cameras and accessories. We expect gross margin for the first quarter of 2016, excluding the charges related to our legacy Hero products, to represent the low point for the year.

Our hardware launches this year will be accompanied by ongoing software improvements and robust editing tools for desktops and mobile platforms. In addition, as Tony mentioned, our marketing assets are having a positive impact on sell-through and we remain committed to both brand and product marketing for the remainder of the year. As a result, we expect total operating expenses to grow sequentially throughout the year with research and development contributing to the majority of the growth. So with that, operator, we are ready to take questions.

(Operator Instructions)

Paul Coster, JPMorgan.

Yes, thanks for taking my question. First off, you've depleted the channel inventory and readiness for the next Hero launch later this year. Can you talk a little bit about what the plan would be for the Hero4 product that would be in the channel. Because one of the problems you had last year was you had a lot of products on sale at the same time. As you bring out Hero5, I assume that you'll try to retire the Hero4 products a bit more quickly this time.

And the other question is on the Hero Session, which is obviously doing much better. It is doing better, but it is doing so at a price point and a gross margin that was not originally intended. Is it sustainable as you look at the portfolio rolling forward? Thank you.

Hi Paul. This is Brian McGee. Let me take a cut at this for you. Yes, clearly with HERO4, we will transition it. I think we have a very effective transition plan for the products. We have already reduced channel inventories for Hero4 lineup, as well as our own inventory. So, I think, that one, I think we have pretty well in hand. I think we learned a lesson from the last time.

As far as Session goes, we've actually done a pretty good job of cost-reducing that product. Our more expensive product was sold in Q1 and our less expensive, or our cost-per-unit product will be introduced in Q2. So we've actually taken a pretty good cut at the product costs for Sessions to drive up margins.

Yes, and Paul, it's Tony, just to clarify what Brian said is that you'll actually see the HERO Session in the marketplace and not the Hero4 Session.

Right. So as we kind of approach this new product cycle, I think the last time around you named four or five factors that you got wrong in those, too many products, the differentiation wasn't right, there wasn't enough marketing, et cetera. Do you feel like all of the boxes have been ticked off this time? Can you summarize your degree of confidence going into this product cycle?

Hi Paul, this is Nick speaking.

We are feeling very good about lessons learned from last year. And, traditionally, GoPro has succeeded with a good, better, best product strategy that has the right products for consumers at three clear and easy to understand price points. Three has been a magic number for us in the past, and it will be a magic number for us moving forward. And we're already seeing the benefits of our simplified product line-up in the market today. The sell-through is improving and we're seeing beneficial changes to SKU mix. So, so far, it seems that our strategy is working.

Yes, and Paul, the other lesson learned, and we touched on it before, was really making sure we're putting the right level of emphasis on the marketing spend. I touched on that in prepared remarks, but we really have seen that increase in sell-through that we described. So that will be a key part and a key element moving forward, as well.

Got it. Thank you.

Joseph Wolf, Barclays.

Hey guys, it's Brian on for Joe. Just a quick question on Karma. Now that you've come to the decision to delay the launch, does that have any impact on the Hero5 timing, or could those be launched in conjunction for the holidays? Thanks.

Good question. And just the simple answer is no. Karma's schedule does not have any effect on or relation to Hero5.

Okay, great. And then, can you give any more color on the margin profile of karma, or how we should think about layering it into our model in 2017 and 2018?

No, this is Brian again, we didn't do that. And quite frankly, we've got Karma built into our model and we talked about margins in prepared remarks. And we could say that Q1 would be a low point for the quarter excluding the charges.

For the year. That's for the year, 2016

Okay, thanks.

Thank you.

Simona Jankowski, Goldman Sachs

Hi, this is actually Doug Clark on behalf of Simona. First question, going back to the channel inventory and sell-in versus sell-through. I understand sell-through is supposed to be higher again in the second quarter. Can you give us a sense of where we are in absolute levels, or where you expect to be exiting second quarter in terms of that inventory reduction?

This is Brian again. We would expect to see inventories come down pretty substantially in the channel in Q2. Kind of order of magnitude, I think, in the range of 35% to 50% down on a weeks-of-inventory basis in the channel, which is pretty substantial. And our inventory will come down, as well.

Okay, that's helpful. And then, second question was, and I think you talked about this in terms of the back-end loaded year, but I want to revisit the monetization of software products and now it sounds like VR products. Can you talk a little bit about your current strategy with a broader portfolio and some of the acquisitions that you've made?

Yes, as you mentioned, we have a much broader portfolio including mobile now. I wouldn't say that you should focus heavily on a monetization strategy, at this stage. What we are really trying to do is put the best possible portfolio of products across an ecosystem ranging from desktop to mobile both for our traditional capture devices as well as VR. There is a small amount of revenue that does come from the VR side of it. As you do know we acquired Color, but I wouldn't say it was going to be material in this year.

Okay, great. Thanks for taking my questions.

Charlie Anderson, Dougherty & Company.

Yes, thanks for taking my question. I'm sorry; I was jumping in between calls and missed the script, so maybe this has been answered. But on Karma, I wonder, now that you have the benefit of time, is anything going to change there as far as pricing or the way it's being engineered, look and feel, anything like that.

And then I also wonder just your views on the drone market. Is this something we're going to have to annually refresh like the big competitor there? Where does pricing look like it's going to shake out by the time we get to Q4? Any color there would be helpful.

Thanks.

Hey Charlie, this is Nick, those are good questions. We can't share any information about how Karma may or may not evolve as we get closer to launch. But what I can share, is that we are incredibly excited about this product. And, the upside to the delay is that it does allow us to launch Karma at a terrific time of year and we do expect it to benefit from the holidays.

And then, additionally, as it relates to product refreshes moving forward, again, it's something that we can't share. And we historically don't share information about our road map or changes that may occur.

Okay, thanks so much.

Thank you.

Andrew Uerkwitz, Oppenheimer & Company.

Yes. Thanks for taking my call. Question. Could you talk a little bit about the strategy of integrating the mobile apps; is there a way to monetize that? And if you could share, the number of active users and how you view that fitting into everything? Thank you.

Sure.

We're really excited about our acquisition of both Replay and Splice. They are both best-in-class mobile editors; Splice being a more manual edit experience and Replay, now Quick, being a more automated edit experience. And what we shared on the call was that we plan to unite those two experiences into one combined app over time that will make it easy for our customers and for smartphone users, as well, to more easily create terrific, engaging edits in a matter of seconds.

And this is an interesting and important evolution of our strategy. We see GoPro as a content-enabling platform. But historically, we've seen it as a content-enabling platform for people that own a GoPro. And now, moving forward, we've expanded our view to look at GoPro as a platform to enable anyone with a GoPro or with a smartphone to help them create terrific content. So, I invite you to download and try the Quick and Splice apps.

And whether you own a GoPro or not, you can create awesome footage using content you already have on your smartphone. And you can see how this strategy extends our brand and extends our solutions in a meaningful way to smartphone users, so that we can prove GoPro to them and, over time, potentially upsell them on our other products and services. And so, that's an opportunity for us to leverage our software to grow our core business.

And Andrew, I'll address a couple other parts of your question. One you just said do you have any updates on usage; what we can tell you right now is both of these apps coming in, were over 1 million MAUs type of number. The other thing, just to give you a real-time update, as Nick mentioned earlier, we just put the new apps in the App Store and we've been really, really pleased with the overall ratings and just the level of interest and downloads. So, we feel really good about what's going on there.

And, you asked monetization again. Yes, in the short time, the plan is really to create the best editing solution out there. That will drive more engagement; it will drive more people to get excited about GoPro. And that's the best in strategy for now.

Perfect. I appreciate that. Thanks.

Will Powers, Robert Baird.

Yes, a couple of questions. I know you maintained full-year of guidance and that's in spite the delay of the Karma. So I'm wondering what you expected to offset it? Any other color there would be helpful.

Could you ask the question again, I'm sorry.

You maintained the full-year guidance, despite the delay of the Karma. And I'm trying to understand what might be offsetting that to give you confidence in the full-year number?

Yes, this is Brian. First of all, I think we've done a great job in Q1 hitting our numbers. I think we have pretty good visibility coming into the next quarter and the back half of the year with the nice launch. It is going to be both capture devices as well as Karma. So both are in the mix. We expect to be shipping both and we're going to stay in the guidance range.

Okay. And along those lines, if you could comment on your confidence around the Q2 guidance calling for sequential increase without new products. I assume that's just normal seasonality. Any other color there would be helpful.

No, we've said it would be up, but modestly for Q2. And actually, Q2 tends to be seasonally a bit lower, quite frankly. But, we have a pretty good sense for where that's going to come out at.

The other thing just to touch on, in terms of confidence level, as we talked about a couple times in the remarks, we have seen very effective response vis-a-vis the marketing spend, particularly the product marketing. So that just gives us an added level of confidence in terms of execution.

Okay. Thank you.

Brad Erickson, Pacific Crest Securities.

Hi, thanks for taking my questions.

Obviously, since it's been two years now since your last high-end launch with the Hero Black and Silver, how should we think about your expectation or the Hero5 consumer mix in between replacement sales versus new buyers to the category? I'd be curious to get your expectations for the portion of each for that product.

That's a good question.

I think we feel very good about Hero5's value proposition both to core existing customers, as well as new more mass-market customers. We've been very open about our desire and focus on a broader customer base for the last couple of years. And, you are seeing it now in terms of the types of software that we're developing and the experiences we're creating and how we're now positioning GoPro as a content-enabling solution for smartphone users and casual users, as well as our existing core customer base. And you are going to see that approach continue in our hardware design, as well.

Got it. And then, could you talk a little bit about the distribution plan for Karma, and any hints there. Is this something that's going to get into the majority of your doors where you are already at for cameras initially? And any specific geographies that may be included or excluded at first. Thanks.

Again, a good question. We can't share specifics. But what we can share, is that we do believe that Karma is going to benefit from our global distribution. It's going to benefit from the global strength of our brand. And Karma is very much in line with the types of value proposition that have resonated with consumers so far from GoPro. So, expect consistency there. But, beyond that, we can't share any information about our distribution plans for Karma.

Anything further, Mr. Erickson?

No, that was all, thank you very much.

Jim Duffy, Stifel.

Hello. A couple of questions for me around the software platform and the strategy. Firstly, are you on track for the content-management platform introduction later this year?

Yes. I think, what we can tell you, without going into specifics, we really do feel good about the progress we've made in software, both in the recent evolution of the application side of it and continued progress on the content-management side. In fact, I would point you to even some of the pieces, the work we've done in the recent GoPro desktop app, where we see the first vision of what a great unified media-management platform can look like. So, we haven't really disclosed details or timing, but we feel very good about the progress.

Okay. Then, you've touched on this some, but I'm going to dig in a little more on it. Could you help us a little more on the decision process and strategic rationale for supporting smartphone footage? You mentioned over time up-sell opportunities to these customers. How about a little bit more shape around just how that generates revenue?

Sure. That's a good question. Specifically, we believe that smartphone users and GoPro users alike, there's obviously a lot of overlap, all have a shared interest in creating short and engaging videos to share. For example, if you go on holiday with your family and, if you're just using your smartphone and you capture 15 different videos and 30 photos, it's difficult for smartphone users to synthesize that into a short summary edit that they can use to share their experience both with themselves and with friends and family. So there is a desire for smartphone users to create compelling content, just as there is a desire for GoPro customers.

And that if GoPro can provide solutions to smartphone users that help them be more successful storytellers, more habitual video storytellers, then, over time, we can get them thinking about our hardware products in ways that they haven't before. So if you are more regularly creating and sharing video from your smartphone content, it's not a stretch to think that you'd be thinking about using a GoPro to help you capture new perspectives and new types of content that you otherwise could with your smartphone. So, in short, opening up our software solutions, just to include smartphone users, allows us to build a relationship with a community of consumers that we're currently reaching.

That's helpful Nick, thanks for that.

My last question is just on the go-forward strategy on build versus buy or license. Any new thinking with respect to that? You continue to invest in the R&D line, but we've seen more of the recent activity with acquisition.

Well, where we see opportunities to accelerate our vision and where it makes sense, from a product and from a cultural perspective, we'll go for it. We are excited about our vision; the vision remains the same and we are aggressive in our pursuit of it. So, where we can build internally we will, but where we need to look to the outside, we'll do that as well.

Okay. Thank you.

Erinn Murphy, Piper Jaffray.

Great, thanks, good afternoon.

A couple of questions. First, Nick, for you, I was hoping you could speak to the decision to bring Danny Coster from Apple in. How do you plan to work alongside with him? And then, I can't remember when he starts. So when he starts, what products or what kind of future product pipeline will he already be working on?

Thanks.

Sure, Danny's been here a couple of weeks now and he is acting as my right hand in design across all of the Company. And, the rationale for bringing Danny in, is that we are constantly looking to advance and enhance our approach to business and our approach to design. We are a customer, consumer-facing business and we recognize the need to continue to push the limits of what we are capable on all fronts. And really, that means bringing in the best possible people to help expand the potential of our team. We have an incredible team here at GoPro. I think over the last couple of years, you've seen outstanding advancements in the design and presentation of GoPro's products and brands, and Danny is just a fabulous addition to that

And then, in terms of the products that he'll be working on, are you working on 2017, 2018 at this point? Or is he able to affect some of the product launches that you've already talked about for the back half of this year?

Yes to both aspects of your question. We're certainly working on products that go years out, but where there are opportunities to affect more near-term products, Danny and the rest of the design team are making improvements there, as well.

Okay. And then, in terms of overall retail AFPs during the quarter, can you speak to the trends of the capture devices in the quarter itself? If you'd get back and look at that, I think it's a little bit better than we were anticipating. But, if you could provide any color for the pricing trend during the quarter, that would be great.

Yes, this is Brian, Erinn.

The pricing trends were favorable because the mix in part, and also, with Sessions replacing the Hero 129 product. So, more Silver Black, more Sessions, less of the 129 product and, quite frankly, seasonal impacts from accessories also helps as well. And we saw really no pricing pressure in the market. And, you see that even on the year-over-year comparison, where AFPs were essentially unchanged year over year.

Thanks.

Erinn, this is Tony.

I'd just add, the way we are meant to look at it is, with the clearing of the inventory, what you're seeing is obviously the sell-in. And that's why it's much similar to last year. It's much more like the good, better, best portfolio strategy that we had before, right. That's why it is kind of playing out that way.

Thanks Tony for that.

And not to beat a dead horse on the Karma. But, what I'm trying to understand is, if you have obviously pushed it back to the back half of the year, what maybe would the revenue guidance in Q2 potentially have looked like? I mean you're looking for a little bit of an acceleration versus Q1. How much more would it have been in Q2?

And then, with just less of a runway at the end of the year when you do start shifting it into the channel closer to holiday, I still am struggling to understand the content that you have. Is it just more units you're shipping in, more retailers that are taking commitments? Because you just don't have that runway on the back end of the launch to really see the sell-through rates necessarily materialize this year? Any kind of context around that would be helpful for our models.

Yes Erinn, I think, for the most part, most of the revenue we've had has been second-half anyway, quite frankly. So, that's the way you need to think about it. And we don't really give guidance on specific products either; but, in this case, it's really second-half driven. And principally has been, anyway.

Thank you. Best of luck.

James Faucette, Morgan Stanley.

This is Eugene Anderson on for James.

Just a question on the APAC growth. Was that mostly China there? I'm specifically curious to hear what the contribution was like from the T-Mall relationship? Or, is there any other region on the up there? And how should we think about product mix in APAC generally?

No actually, it was actually a broad set of countries that contribute. So we still feel very good about China, but they wouldn't necessarily be standout. So it was a broad set across APAC. I can't really give you too much color on the overall mix, but the mix, in general, is very, very similar to what we are seeing in the rest of our business.

Got it.

And then, so when we think about, just as a follow-up on the channel reduction. How much of what is left is weighted towards the legacy products versus, perhaps, some other reduction for your core lineup there?

This is Brian. We're back to reduced inventory pretty much across the board, quite frankly. I think the Silver Black Session has maybe come down a little bit quicker. We should be mostly through the Hero, Hero Plus by end of second quarter, from a sell-through perspective. And, Hero Plus Lcd will take a little bit longer. But, they are all moving pretty well.

Great. Thanks so much.

Rob Stone, Cowen and Company.

Hello. Thanks for taking my question. First one for Brian, can you just comment on how we should think about the effective tax rate for this year? The rate that equates to the benefit for this quarter was a little bit lower than I was expecting. And I do have a follow-up, thanks.

Sure, yes, we expect the non-GAAP tax rate to be approximately 11% for the year.

Okay. That's helpful.

And then a high-level question, maybe for Nick. You've got a lot of horsepower in VR for professionals. How are you thinking about the consumer of VR and VR capture market?

We think that GoPro has an opportunity to be a leader in consumer VR, just as it has been a leader in its current market. Enabling new perspectives that weren't possible before and differentiated forms of capture. We think that our brand and our reputation translate directly into virtual reality, and that's something that we are extremely excited about.

And that you can see our interest and our dedication through the acquisition of Color and through our advancements in more professional capture solutions like, Odyssey, and now Omni. And as you see those products get smaller, more compact and simplified, you can see what direction we're headed in for consumers.

Great. I won't ask you when the consumer product is coming. Thanks.

(laughter)

Thanks for not asking.

Rob Cihra, Sterne Agee.

Great, thanks very much. I just want to go back to the software strategy and investments, if I could, just for second. Which is, just trying to figure out what the key goal is. Because, if you look at, video pileups has always been a big game point for video and it's always been relatively easy to shoot a ton of video and hard to do something with it. So, I'm trying to figure out what GoPro is looking to do.

I mean, is it the Replay, now the Quick product, does it add automation; is that the key? And, whether it is or not, is that how you differentiate your product, get value add and sell more cameras. And if so, how you do that by making it openly available as was asked earlier?

Thanks. Yes. I think we've been very consistent on the vision for software, in general, which has been always one of the biggest pain points, as you mentioned. It's easier to capture a lot of content, but how do you first manage it in an easy way and then get to that great edit quickly. And then, have the ability to share it and that fuels the virtual cycle. Because if you see this great content that's been shot by your friends or on social media and so on, then you are more excited to go out and do that and buy GoPro capture devices.

So we really believe we need to bring the whole solution. And, we see, in particular, as you are probably aware, mobile is a key aspect of that, because people are snacking quickly and fast sharing. So that's the premise of the strategy. And the most important thing for us to do is really make that as seamless and easy as possible.

And to address what you asked, one of the things that we saw with doing the two acquisitions, is, it's not one or the other, per se, you said is it automatic. You are always going to have users who would like to have something very quick and get you to a very quick story that you can share; and that's more on the automatic side. But one of the things we loved about Splice, in particular, think of it as a fairly advanced editor, with a lot of control for the creator to do. And so really, as Nick alluded to, I think there's a very powerful strategy of bringing those two things together.

All right. Thanks.

And at this time, I would like to turn the conference back over to Mr. Woodman for any additional or concluding remarks.

I would just like to thank everybody for joining the call. We appreciate it very much. And, on behalf of all of GoPro, this is Team GoPro, signing off.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.