GoPro Inc (GPRO) 2017 Q3 法說會逐字稿

Good day, and welcome to GoPro's Third Quarter 2017 Results Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Jeff Brown, Senior Vice President of Corporate Communications.

Please go ahead.

Thanks, operator.

Good afternoon, everyone, and welcome to GoPro's Third Quarter 2017 Earnings Conference Call.

With me today are GoPro's CEO, Nicholas Woodman; COO CJ Prober; and CFO Brian McGee.

Before we get started, I'd like to remind everyone that our remarks today may include forward-looking statements.

Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially.

Additionally, any forward-looking statements made today are based on assumptions as of today.

We do not undertake any obligation to update these statements as a result of new information or future events.

Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2016, which is on file with the Securities and Exchange Commission and in other reports that we may file from time to time with the SEC.

Today, we may discuss gross margin, operating expense, net profit and loss, as well as basic and diluted net profit and loss per share in accordance with GAAP and, additionally, on a non-GAAP basis.

We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance.

We use non-GAAP reporting internally to evaluate and manage our operations.

We choose to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results.

A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon.

In addition to the earnings press release, we have posted slides detailing financial data and metrics for the third quarter of 2017.

These slides and a link to the webcast for today's earnings conference call are posted on the Events & Presentations page of the GoPro Investor Relations website.

A link to today's live webcast and replay of this conference call are posted on the Events & Presentations page of the GoPro Investor Relations website for your reference.

All income statement-related numbers that are discussed today during the call, other than revenue, are not GAAP unless otherwise noted.

Now I'd like to turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Nick?

Good afternoon.

GoPro has turned the corner.

Our third quarter reflects strong and sustained improvements in our business.

To start, we returned to both GAAP and non-GAAP profitability.

Year-over-year, we drove operating expenses down 31% and grew revenue 37%, 11% sequentially, generating an additional $47 million in cash, strengthening our balance sheet.

We improved gross margin for the quarter to 40%, and importantly, we are targeting double-digit revenue growth and full year non-GAAP profitability in 2017 with a responsible approach to the fourth quarter.

We are determined to act as a vigilant steward of shareholder value, carefully managing operating expenses while leveraging GoPro's growth and profitability to drive innovation and launch new product categories.

In September, we successfully debuted HERO6 Black and Fusion to critical acclaim, and we backed it up with solid manufacturing and distribution, achieving a 93% global fill rate at retail for HERO6 Black.

Initial sales of our premium-priced HERO6 Black are solid.

Following the HERO6 launch, demand for our legacy product HERO5 Black was lighter than expected but is beginning to benefit from a series of marketing initiatives engineered to drive demand during the holiday season.

And following a midyear price adjustment, demand for GoPro's entry-level Session camera was much higher-than-anticipated and will result in a sooner-than-expected end of life for this product.

This limits our inventory at the entry-level price point during the quarter, but it identifies a significant opportunity for us to expand our market with a new entry-level product slated for 2018.

In the meantime, our guidance reflects promotional programs and special edition SKUs that we believe will get us to our target.

We are now focused on driving consumer demand and sell-through of our premium products to achieve our goal of full-year non-GAAP profitability and exit the year with responsible inventory levels.

Our flagship, HERO6 Black, is quite simply the best GoPro we've ever made.

Powered by our custom-designed GP1 processor, HERO6 Black sets a new standard for image quality with its stunning resolutions, blistering frame rates and gimbal light stabilization.

Other features include zoom and vastly improved dynamic range and low light performance, and 3x faster WiFi allows HERO6 Black to seamlessly pair with your smartphone and the GoPro App to produce automatic QuikStory videos of your adventures.

And then, there's Fusion, GoPro's entry into the exciting new world of spherical capture.

Fusion can surround-capture everything around you in immersive 5.2K with incredible stabilization.

Critics are particularly impressed with OverCapture, a unique GoPro App feature that allows the user to punch out a traditional fixed-perspective video from the larger spherical video.

OverCapture evolves photo and video capture from the constraints of the point-and-shoot era to a powerful solution that makes it easy to capture everything around us.

For a better understanding of OverCapture, check out the video we posted on our blog, The Inside Line, on GoPro.com.

Fusion will be available in mid-November.

OverCapture will be available for desktop at launch and as an update to the GoPro App in January.

I'd like to take a moment to stop and thank everyone at GoPro who has made HERO6, Fusion and our amazing software ecosystem possible.

Your work continues to position GoPro as an innovative technology leader on a global stage.

Central to our user experience is the smartphone, one of the best things that have ever happened to GoPro.

The ubiquitous adoption of smartphones drives global interest in visual expression, creating a growing market opportunity for GoPro.

The smartphone also serves as a platform for our hardware and software ecosystem, which includes our cameras, the GoPro App and QuikStories.

Increasingly, a GoPro serves as an unfettered lens to a smartphone, enabling differentiated light capture and sharing to social platforms.

Be it Instagram, Facebook, YouTube or WeChat, GoPro is aligned with the social megatrends of today.

In preparing for the megatrends of tomorrow, GoPro's research and development centers in the U.S., France and Switzerland are developing further breakthroughs in image science, VR, machine learning and computer vision, innovations which will improve and perhaps reinvent how people communicate through shared experience in the future.

It's an exciting time to be working at GoPro.

While scaling responsibly, we've built an incredible team and an inspiring product roadmap that sits at the nexus between technology and storytelling.

As we look forward to 2018 and the exciting roadmap we have planned, our target is to continue GoPro's double-digit revenue growth while significantly improving EPS and operating cash flow above 2017 levels.

This is our focus.

With that, I'll hand it off to CJ.

Thanks, Nick.

As I've done on prior calls, I'm going to review our recent progress through the lens of GoPro's 5 key priorities for 2017.

Our first priority is to achieve profitability through improved efficiency, lower costs and better execution.

We are very proud of the turnaround progress we've made this year, quickly returning GoPro to growth and profitability.

In the years leading to our IPO, we had a track record of profitable revenue growth and stellar balance sheet management.

Returning to this mode of operating is our #1 priority for the year, and we believe that our team's focus and hard work will allow us to deliver on our goals of double-digit revenue growth and non-GAAP profitability for the year.

We also expect to strengthen our balance sheet by generating additional cash through the end of the year.

Going forward, responsible management of that balance sheet will continue to be a priority.

One big highlight of the quarter is our execution on HERO6.

We launched our first smart camera on a new platform in GP1 and hit our development and production milestones to allow for our most global launch ever.

We achieved a 93% global fill rate, which allowed us to have our strongest-ever marketing execution with our partners at retail.

This solid execution is reflected in the post-launch mix we're seeing.

While we only have a few weeks of data, the clear winner is our premium model HERO6 Black, which captured a stronger percent of mix than we were anticipating.

As Nick noted, we're now focused on generating demand for our full portfolio of products as holiday shopping kicks in.

Our second priority is to make the smartphone central to the GoPro experience.

There's a strong correlation between the growth of GoPro and the adoption of smartphones.

As we've noted, our vision is to make GoPro an untethered lens to the smartphone, allowing consumers to easily access and share the amazing content they capture.

As we evolve our connected phone experience, we are closely tracking consumer engagement with our devices, apps and content.

The good news is that we're seeing strong success in growing consumer engagement of our solutions.

More specifically, the number of engaged camera users we had in Q3 has grown 74% year-over-year and 18% sequentially.

This is the measure of the number of HERO4 and later generation cameras that connect to our applications at least once a quarter.

Growing this engagement is a key focus area for us and we're excited to see the increase in our consumers' frequency of use.

Shares via the GoPro App are up 30% year-over-year and 36% sequentially.

This does not include content that is saved to your camera roll from the app and shared from there, which is a common use case for our users.

Monthly active users for Quik are up 155% year-over-year and 30% sequentially.

Overall, we're very pleased with the progress we've made in offering a compelling connected experience and we have many exciting new developments on the roadmap.

Our third priority is to market the smartphone experience to our existing community.

In addition to the great sales execution, we're excited about the marketing campaigns driving awareness of our new products.

Viewership of our launch and related videos is on par with our viewership last year, which is encouraging, given our marketing spend is considerably lower, albeit more targeted.

On social, there have been over 150,000 conversations about HERO6 and Fusion to date, reaching more than 1.7 billion users.

Positive sentiment was 9% higher than for HERO5 in the same period a year ago.

Negative sentiment through Q3 and launch has been at an all-time low, confirming that we continue to deliver amazing products for our consumers.

From a media perspective, the HERO6 launch generated more than 2,000 articles and got high marks from [CE] critics.

Influential sites like Engadget put HERO6 in the excellent category.

TNEC gave it 4.5 out of 5 stars and Mashable credits the GP1 processor with making HERO6 Black the new standard.

Our paid campaigns for the holiday quarter, which focuses on HERO6 and QuikStories, is now in full swing.

For the first time, we're marketing the combined GoPro and smartphone experience to our existing community.

The campaign is focused on out-of-home, OTT videos, paid search and rich media, designed to funnel conversions later in the quarter.

Our investments will be focused on key markets throughout North America, Europe and Asia.

Another important metric we track is the number of HERO6 purchasers who are upgrading from a previous generation GoPro.

Internal data from our application showed that approximately 30% of those who purchased the HERO6 in the first 3 weeks following launch also owned either a HERO4 or HERO5.

If you include all GoPro models, we believe the percentage of upgraders to be higher.

We're excited about this healthy mix of new users and upgraders.

Our fourth priority is to grow our international business.

Our focus on growing international markets is continuing to pay off as we're seeing strong growth in EMEA and APAC, representing 29% and 21% of our Q3 revenue, respectively.

APAC revenue for the quarter is up 153% and EMEA is up 26% on a year-over-year basis.

In APAC, Japan is leading the way as an important growth market.

According to GfK, camera unit sales in Q3 are up 99% on a year-over-year basis.

The growth in Japan is being driven in part by a younger female demographic that values the unique selfie perspective that is enabled by a GoPro.

In China, a top 10 market for GoPro, GfK reports a year-over-year increase in GoPro unit sell-through of 25%.

As a reflection of the importance of this market, Nick is headed to Asia next week and will stop in China to promote HERO6 Black ahead of the big Singles' Day event on November 11.

Our fifth and final priority is to expand the GoPro experience for our advanced users.

Fusion and Karma are both products that expand the GoPro experience.

Preorders for Fusion on GoPro.com are in line with expectations and we begin shipping to consumers in November.

Fusion was showcased at our launch event on September 28 and generated more than 1,300 stories worldwide, including great notices from critics who were particularly impressed with the OverCapture feature.

One critic noted that not having to worry about pointing the camera in the right direction to capture the action is the "special sauce" that makes Fusion more versatile than other 360 cameras.

Fusion's OverCapture experience will be live on our desktop application when we begin shipping later this month and available on the GoPro mobile app in January.

We expect to make Fusion available through select retail partners in Q1 as well.

According to the NPD Group's Retail Tracking Service, among drones priced above $1,000 in the U.S., in Q3, GoPro's drone Karma held its unit share at 24%.

Because the margin profile of the first generation of Karma is well below our corporate average, we're taking a deliberately constrained approach limiting distribution and in-store merchandising.

We expect to maintain this strategy until the launch of our next drone.

To summarize, our focus on these top 5 priorities is leading to strong execution and results and we've reestablished GoPro's business as growing and profitable.

Leading to 2018, we expect to continue to drive profitable growth while being smarter than ever at managing our balance sheet and capital.

With that, I'll turn it over to our CFO, Brian McGee.

Thanks, CJ.

Today, I will provide an overview of our performance for the third quarter and full year 2017 guidance.

GoPro returned to profitability on both a GAAP and non-GAAP basis, driven by better-than-expected revenue growth, strong gross margin performance and lower operating expenses.

In addition, cash increased by $47 million sequentially to $197 million and we expect to end 2017 with a cash balance between $225 million and $250 million.

During the third quarter, we successfully launched our newest camera, HERO6 Black, which contributed significantly to the sequential increase in both ASPs and gross margins.

Additionally, HERO6 Black was the largest contributor to sequential revenue increases across all geographies.

Let's dive into the details of our third quarter financial results.

Third quarter revenue was $330 million, a sequential increase of 11%.

Year-over-year growth was 37%, driven by units, up 12% and ASPs, up 22%.

Higher ASPs were driven by our mix of HERO5 Black and HERO6 Black camera offerings, which made up more than 70% of our revenue and units shipped for the quarter.

Camera units shipped were more than 1.1 million in the third quarter.

The ASP, defined as total reported revenue divided by camera units shipped, was $288, up 3% sequentially and 22% year-over-year, due to strong camera mix of our $399 and higher-priced cameras.

We expect ASPs to increase in the fourth quarter to a record level.

According to NPD and GfK, GoPro's year-over-year global unit sell-through increased by 2%.

Channel inventory continued to improve and we exited Q3 with 9 weeks of inventory as compared to 10 weeks in Q2 and 11 weeks in Q1.

As expected, absolute units in the channel increased.

This is due to the channel fill ahead of the launch of HERO6 Black and our best-selling camera, HERO5 Black.

These increases were offset by decreases in Session, HERO5 Session and prior generation products.

We expect channel inventory to decline significantly in the fourth quarter.

Revenue increased sequentially and year-over-year across all reported geographies and channels.

On a sequential basis, EMEA and APAC were the strongest regions, with 21% and 17% growth.

Year-over-year APAC growth was 153%, driven principally by Japan, Australia and South Korea.

Gross margin for the third quarter was 40.1%, up from 36.2% in the second quarter of 2017.

This sequential improvement was due to strong sales of our higher ASP cameras, which overall carry higher gross margins.

The third quarter continued to benefit from our cost management efforts, with operating expenses declining 42% year-over-year to $108 million and declined 7% as compared to the second quarter of 2017.

Third quarter operating expenses were comparable to the third quarter of 2014.

We now expect operating expenses to be below $490 million for the full year.

Headcount was 1,254 full-time employees at the end of the third quarter.

GAAP net income for the third quarter was $15 million or $0.10 per share.

This is an improvement over our GAAP net loss of $104 million or $0.74 loss per share in the third quarter of 2016.

We achieved non-GAAP profitability of $0.15 per share in the third quarter compared to net losses per share of $0.09 and $0.50 in the second quarter of 2017 and third quarter of 2016, respectively.

Adjusted EBITDA for the third quarter was $36 million, a $109 million improvement year-over-year.

Turning to the balance sheet.

Inventory in the third quarter was $177 million, up from $127 million in the second quarter, and we've anticipated demand in the fourth quarter.

We expect inventory to be below $125 million as we exit 2017.

Accounts receivable at September 30 was $100 million compared to $96 million in the second quarter, and DSOs were 27 days.

I will now move on to guidance for 2017 and initial thoughts on 2018.

We expect revenue for 2017 to be between $1.305 billion and $1.325 billion, which is double-digit growth of between 10% and 12% over 2016.

We expect fourth quarter gross margins to be 41.5%, plus or minus 50 basis points, which puts annual margins between 38% and 39%.

Gross margins are trending up to 41% in the second half of 2017 due to our improved product offering.

Operating expenses in the fourth quarter are expected to be in the range of $129 million to $131 million.

The sequential increase in operating expenses is primarily driven by marketing, advertising and sales to support demand generation during the holiday season as well as payroll-related expenses.

For the fourth quarter, we expect a GAAP tax credit of $2 million and a non-GAAP tax expense of $3 million.

We expect earnings per share for 2017 to be between minus $0.02 to positive $0.08 per share, with a share count of approximately 142 million.

For the fourth quarter, we expect to be profitable on both a GAAP and non-GAAP basis.

We expect fourth quarter GAAP EPS of $0.30 and non-GAAP EPS of $0.42, each plus or minus $0.05, respectively.

Our expected results for 2017 are in line or better than the goals that were established since the beginning of the year: double-digit revenue growth, operating expense reduction and a return to non-GAAP profitability.

We're also pleased that our revenue split between Q3 and Q4 is much better than in prior years.

As we look ahead, we will continue to drive operating efficiencies across the business, with a focus on improved profitability and cash generation.

As discussed last quarter, our operational improvements related to the launch of HERO6 drove third quarter performance, and we have intentionally constrained inventory purchases in order to both enable double-digit revenue growth and to exit 2017 with low inventory.

Careful stewardship of our business during the holiday quarter positions GoPro for continued success in 2018.

While we are not yet providing specific guidance for 2018, as Nick noted, we are feeling good about where we are headed.

Our roadmap points to double-digit revenue growth at margins of 40% for the year, in line with our long-term target margin model of 39% to 41%.

Operating expenses are tracking in line with 2017 and will be below $500 million.

We expect to generate both cash and EPS significantly above levels posted for 2017.

With that, operator, we're ready to take questions.

(Operator Instructions) We first go to Paul Coster with JPMorgan.

Yes.

The initial outlook for '18 looks pretty good.

The fourth quarter, though, is a little complicated, maybe a little difficult to understand.

It sounds like you have HERO5 inventory, excess inventory in the channel and you want to get rid of it; at the same time, you're looking to sustain this margin improvement.

I'm just wondering what the trick is for sort of flushing that inventory out and entering 1Q with the right mix in the channel.

Hi Paul, Nick here.

Yes, thanks.

We're actually feeling really good about our guidance for Q4.

We're really excited about how the year is turning out and, as Brian noted, we're either meeting or exceeding most of the metrics that we laid out at the beginning of the year, of course, most notably, double-digit revenue growth and profitability, profitability coming a little bit earlier than anybody expected in Q3, which is a solid win for the team.

So I'd like to just acknowledge that.

And then as it relates to HERO5 Black, it's not that we've got a bunch of inventory in the channel and we're trying to clear it all.

Sorry if that came across as confusing.

It's just that, as to be expected, there's a little bit of softness in HERO5 sell-through post-HERO6 launch.

And while that's to be expected given that the launch was totally dedicated to HERO6 and HERO6 ended up stealing HERO5's thunder, we think that we're going to be able to drive a substantial demand for HERO5 as promotional programs kick in this month.

The holiday season hasn't really started yet.

It doesn't really begin in earnest until mid-November through Christmas, and with the dedicated promotional programs that we have planned for HERO5 Black, we feel good about driving demand for that product and its contribution to our growth and profitability targets for the quarter.

So overall, we're feeling good and we didn't mean to muddy the message at all.

So sorry for that.

No, no.

It's probably me, actually.

So the next question is, so you'll exit the year with a much-reduced channel inventory and much-reduced inventory on your own balance sheet.

Is there a risk that you might leave more money on the table, perhaps in the first quarter of '18?

Or do you continue -- is your intention, Nick, to continue to sort of throttle back and just manage this in a very intentional way moving forward?

If you could just sort of give us some color about how you expect to enter 2018 that would be helpful.

Our goal is to enter 2018 with a bang.

I don't think that we're approaching the business in an overly conservative manner.

I think that we've got very clear goals for 2018, which is to continue double-digit growth and profitability for 2018 as well.

We're -- as we previewed a bit, we're excited about our new product roadmap for 2018, several new products planned, and I believe it's just a terrific continuation of the innovation and the focus on simplifying the consumer experience that has restored growth to GoPro this year.

So overall, we're feeling really good about the job done in turning the company around this year and how it sets us up well for 2018 starting with our entry into Q1, thanks to our responsible management of Q4.

Next question comes from Joe Wittine with Longbow Research.

Can you share with us some [quant] on how much you expect camera ASPs to increase as the new mix is fully out in the wild, let's say, compared to calendar '17's mix?

Yes.

Hi, Joe.

This is Brian.

As we've said -- well, Q3 was $288, so that was up 22% year-over-year.

We expect Q4 actually to be close to $300 on ASP, which would be a record.

And if I look from 2017 to 2018, that would be somewhere between 2% to 5% growth in ASP based on the roadmap we're seeing.

Got it.

And then on HERO Session, I mean, we saw the inventory of operation over the last couple of weeks.

So the first part is, did that also have a negative impact on the fourth quarter guide?

And secondarily, what is the holiday strategy for the sub $300 price point?

Last year, you were -- you had the strategy of being pretty active with the discontinued cameras.

I assume you're not going to do that this year, but are you content with standing pat at $299 as the low point?

Yes.

Hey, Joe, it's CJ.

It's a great question.

The good news is that, with the entry-level price we have on Session, we've shown that there's a real market at that price point.

As we said on the call, in 2018, we've got a new product to address that entry level, which we're even more excited about than Session because it's an even better form factor for that price point.

So on the positive side, we see a great opportunity at that price point.

Our guidance for this quarter reflects promotional programs, special edition SKUs and plans to build -- to bridge the gap between where we are today and that next product.

Okay.

And then, finally, is there any way to quantify the benefit to the first quarter from exiting the year with, I think, you said before 7 to 8 weeks of inventory?

Can you quantify the first quarter benefit as it compares to prior first quarters?

How much sell-in will benefit versus what you've seen in the past?

Yes, Joe.

This is Brian.

I can tackle that one.

We expect channel inventories to come down significantly in the fourth quarter actually to absolute levels that are kind of the lowest we've seen in the last 2 to 3 years.

So that's good news as we head into the first quarter of 2018.

And just for reference, we ended the fourth quarter of 2015 with about 14 weeks, even higher exiting the fourth quarter of 2015.

So we are trying to be very thoughtful about how much inventory we have, both on our balance sheet as well as what's in the channel as we look into 2018.

Next question comes from Yuuji Anderson with Morgan Stanley.

Great.

I was hoping if we could get some additional color on HERO6 sell-through.

Is there a way to kind of compare this with what you saw with the HERO4 Black?

I believe that was your other $499 product.

Is there any comparison there?

There are some.

Actually, from a percentage perspective, the HERO6 Black is doing substantially better than the HERO4 Black.

Out the gate, HERO4 Black was about 20% of our sell-in, about 60% of sell-through in the fourth quarter of 2014, and we're seeing substantially better than that on HERO6 Black.

Okay, got it.

And then a clarification on inventory levels coming down exiting the year.

Is that also on a weeks' basis?

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

Okay, got you.

And then, I guess, one more for me just on international there.

I mean, I guess, it's fair to say that mix should continue to grow going into Q4.

Just clarification on that.

And #2, just like how should we think about sell-through going internationally versus -- going into next year?

Yes.

I mean, our focus to grow international markets remains.

So I think continuing that trend, as you suggested, is the way to think about it.

As we noted, we're continuing to see really strong sell-through in APAC.

On a sell-in basis, we're up 153% year-over-year for the quarter.

And that remains a key kind of growth area and strategy for us.

Yes.

I would add that the resources that we've applied to achieve that growth have been at a level where it's clear to us there's still a lot of low-hanging fruit there.

It's not as though we had to go in with all guns blazing to achieve that type of growth.

So there is still a lot of opportunity in international.

Next question comes from Stan Kovler with Citi.

I just wanted to see if you can address -- there have been some competitive launches of consumer devices, particularly in the quarter, from a number of competitors as -- that may not hit the exact use case, but are close enough.

Can you just help us understand how the value proposition that you guys have is comparing to some of these new offerings?

Just a competitive environment question.

Sure.

I'm going to take a wild guess that you're referring to Google Clips, which really I think the media and investment community had a bit of a knee jerk reaction to that product being directly competitive with GoPro, which, to a certain extent, is understandable.

Any time a global brand like Google would come out with something even closely resembling a camera that it would spook people.

But I think after a bit of reflection and investigation, people realize that it's just an entirely different type of devising, that has very different use cases.

It doesn't shoot video.

It doesn't capture sound and it's generally designed for more static use cases than a GoPro.

I think what is encouraging, though, is to see that other companies are raising awareness that differentiated complementary forms of capture to a smartphone exists and that can raise interest levels amongst mass market consumers.

And when they go to research products like this, GoPro stands at the top.

And as we've seen over the years as we've consistently have competition from competitors big and small, we've been able to grow share and -- internationally, across the board.

And I think that just reflects GoPro's ability to compete.

Competition is good, but we tend to fare quite favorably with direct competitors.

And as it relates to Google's product and perhaps others like it, if it's difficult to compete with GoPro directly head-on, then I think it's even more difficult for an indirect product to have much of an impact on our business.

Yes, Stan.

The one thing I would add is, on Clips, one of the things that were noted about that product was the AI that enables the capture.

And what's interesting to us is HERO6 is our first smart capture -- smart camera and we use a lot of the same techniques in terms of identifying the right moments.

We don't do it to initiate capture.

We do it after the fact to identify moments, whether it's through face detection, analyzing telemetry, looking at audio cues.

So a lot of the media attention around that product was around the AI and we have a lot of those exact same investments.

I would say we're actually much further ahead in terms of the moment identification we have in HERO6 in our apps today.

I appreciate the response there.

If I could just follow up, actually I wanted to ask about drones.

So you noted that you're constraining sales to some degree because of margins.

Some of our work in terms of store checks is showing that maybe the attach rate or the growth in the category might be slowing a bit.

I was curious about your take in terms of consumer appetite that you're seeing for the product when you do get potentially a higher margin product to market and your views on that.

We're still seeing a lot of strength in the $1,000 range price span for drones.

And as we've shared in the past, GoPro's Karma drone is the #2 best-selling drone in North America in the $1,000 and above price point.

And -- but I think when we first shared that, we were high teens and we've actually grown share since then.

So Karma certainly is a terrific platform for us as we further our own capabilities and value proposition for consumers with our next-generation drone offerings.

And the consumer feedback to Karma specifically, actual owners of Karma have been quite good, and so we're feeling really good about our prospects in the future there.

Next question comes from Mike Koban with Raymond James.

This is Mike Koban, on for Tavis McCourt.

First of all, I just kind of wanted to make sure I understood the guidance for the fourth quarter.

It looks like it's implying kind of a low double-digit decline year-over-year, but I was wondering if you could -- I believe last year was a big sell-in year, so I was wondering if you could give us some -- a little bit more color on kind of what this implies or how you think about it as far as Q4 sell-in.

And then I've got one follow-up.

Yes.

Mike, this is Brian.

Yes, the midpoint of the guidance would be down year-over-year in Q4 about 13%.

But the fact is, for the whole -- we look at the whole year, right?

So for the whole year, the guidance is up 10% to 12% on revenue growth and actually the midpoint of our guidance on EPS is to be profitable.

So that's a pretty dramatic turnaround from 2016.

I think we should kind of point that out.

We also were able, because of supply chain and kind of execution in the quarter for Q3 able to get more fill rate of HERO6 Black into Q3.

And that pulled from Q4.

So in fairness, you kind of have to look at almost the second half kind of together, or Q3, Q4 where, in our guidance, will be profitable as well on both a GAAP and non-GAAP basis in the fourth quarter, and then profitable for the year.

As far as channel inventories go, we exited the fourth quarter of 2016 with about 14 weeks and we want to be more like 6 to 8 weeks exiting this year.

And so that's a pretty dramatic reduction in sell-in in the quarter because we had to really work in the first quarter of 2017 to get that inventory moved.

Got you.

And then as far as the little bit of commentary you gave us on 2018, are you assuming that there'll be other product launches?

And are you willing to give us any information about potential ASPs of those?

Well, for 2018 kind of overall, we talked about the entry-level price point that was in our prepared remarks (inaudible) talked about it.

We're looking to get double-digit revenue growth, which kind of goes by kind of how we outlined 2018 margins at 40% and OpEx for $500 million.

That's going to drive to a pretty decent EPS number well above $0.40 actually.

So 50,000 in '18 and an EBITDA substantially above $100 million and pretty good cash flows.

So I mean, we're not guiding for that, but that's kind of a scenario of -- as we're able to generate 10%.

That's kind of the expectation we'd have.

Yes.

And just to take it head-on because you asked it.

Yes, there will be several new products from GoPro in 2018.

Next question comes from Rob Stone with Cowen and Company.

One quick follow-up on the 2018 commentary, which would be the tax rate.

I know that's going to depend on geographic mix and other things, but any color you could provide just looking at that last part of getting to a non-GAAP EPS for next year?

Yes.

We expect -- we actually do our non-GAAP tax based on cash tax paid in '17 and we'll apply that same methodology for 2018.

For non-GAAP tax expense, so there it is going to be $8 million to $10 million next year, pretty much spread pretty evenly throughout the year actually.

And on a GAAP tax, it will be in the $13 million to $15 million range.

Okay.

And as you're thinking about getting to double-digit growth in '18, I'm assuming that Fusion doesn't have that much impact this year because of limited availability, higher price point and not very many weeks to sell it, but how much does 360 as a category that you've not been in before out there for a full year roughly contribute to your view on next year?

Yes, you're right.

It's CJ.

Your commentary around the impact this year is accurate.

We're shipping the first units to customers in November.

We're going to be -- by the end of the month, we'll be caught up in terms of preorders with supply and we'll be shipping directly to customers.

In Q1, we're going to roll Fusion at retail.

And so in '18, you'll obviously have a bigger impact, but it will still be relatively small in relation to our core activity camera business.

Okay.

And then a final question for next year.

So you've talked about operating expenses more or less flat with this year.

How do you think about allocating that between headcount and other things that you might spend money on to lubricate other revenue like sales and marketing?

Are you looking for ways to be more people-efficient and spend money on stuff that add velocity?

Yes, let me start and then -- this is CJ, and maybe Brian can add in.

We're continuing to look for efficiencies always and we talked about on prior calls that are kind of a cultural shift that we've had this year to get to the OpEx numbers that we have.

So for example, our locations in Bucharest and the Philippines and building up the teams there to really support our overall efforts.

And then, finally, as we look at -- as Brian guided for this year, we're going to be -- we expect OpEx to be below $490 million for the year.

To the extent we're above that in any amount or even on par with that, there are opportunities in 2019 and 2020 that we're excited about that we could start investing in from an R&D perspective in 2018.

But we mentioned the $500 million is -- we wouldn't expect that to be a big variance at all from where we expect to land on OpEx this year.

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

Just a few questions real quick.

So just for Q4, do you still kind of see the HERO5 as a bigger volume product versus the HERO6 given kind of the first month sales trends?

And then, could you talk about how much shipping there was for the HERO6 in 3Q versus the HERO5 when it launched in 2016?

Because I think you had some units shipped, but most of them were in 4Q?

Hi, Jason.

This is Brian.

On the HERO5 volume mix, that product proved to be the largest percentage of what we ship in and ship through in Q4.

As comparing HERO5 Black to HERO6 Black, we ended up shipping more HERO6 -- sorry HERO5 Black into October of last year.

So substantially more HERO6 Black went into Q3 versus last year, and actually that was intentional because, as we've said before, we're trying to kind of rebalance our mix between quarter 3 and quarter 4 and not have so much be in the fourth quarter.

So our product execution is enabling that and supply chain, et cetera.

So that's actually a positive result that we can spread the load between the quarters.

Okay.

And then just a quick follow-up.

On your share count for the fully diluted, does that also include the convertible debt option?

Correct -- I think -- it does.

And it assumes we're able to actually pay the convertible debt offering down in the 5 years.

Your last question comes from Ben Bollin with Cleveland Research.

Brian, on the commentary on the HERO6 Black, you talked about the sell-in mix being higher.

How would you say the initial the sell-through read has been for HERO6 Black in the month of October versus the new product in the year-ago period?

And then I have a follow-up.

The HERO6 -- well, the HERO5, with sell-through, it's kind of hard to compare because one is a $299 price point and the other is $499, but I can say we've been -- the HERO6 Black sell-through has been quite good, as we've commented before, comparing to a HERO4 Black, which was the same price point.

It's -- we're doing much better at that price point than the HERO4 Black did.

So I think you've got to sort of get it from that perspective.

Okay.

And then, I'm interested in your thoughts on how much you think or you saw tailwind from FX in the quarter, how you're thinking about that in 4Q.

How significant translation impact was for you?

And I know a lot of your foreign partners insist just on buying in U.S. dollars.

So I'm curious if you've seen any way, any shift in how they buy.

Are they looking to make -- or order more because they make more margins?

Just any read you have on how FX has influenced results in 3Q and how you're thinking about it in 4Q.

Yes.

I think it's been neutral.

As we mentioned, a lot of our distributors, particularly in Asia, buy in U.S. dollar.

The distributors in Europe tend to buy in U.S dollars as well.

Some of our direct accounts buy in local currency and we have local currency expense, so that can balance out.

If anything, over the last few months from an FX perspective, the dollar has actually weakened to the pound and to the euro, and so that's actually kind of helping from a channel perspective, but we tend to price in local currency.

So I think consumer doesn't necessarily see it.

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

Thank you very much.

I'd like to close today's call with a big, big thank you to the 1,300 GoPro employees around the world who have helped turn our company around.

We are in a very, very different place than we were a year ago, and it's thanks to all of your execution of our strategy to do fewer things better.

And that is just what we've done.

While spending far less, we've improved efficiency and effectiveness on every level.

We grew our brand globally and launched our most impressive products ever on time and on shelf.

And the products that we're developing for 2018 and beyond look to continue our reputation for market-defining innovation and, importantly, excitement.

While we remain focused on finishing 2017 strong, it's impossible to not be excited about the future.

With that, this is Team GoPro, which now includes our new board member, Rick Welts, of the Golden State Warriors, signing off.

Thank you, ladies and gentlemen.

That does conclude today's conference.

We thank you for your participation, you may now disconnect.