GoPro Inc (GPRO) 2017 Q4 法說會逐字稿

Good day, and welcome to GoPro's Fourth Quarter and Full Year 2017 Earnings Results Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jeff Brown.

Please go ahead, sir.

Thanks, operator.

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

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

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

These 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 containing detailed financial data and metrics for the fourth quarter and full year 2017.

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

Finally, 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.

Today, Brian and I will take you through GoPro's recent performance, including a sharpened focus on our camera, app and cloud products while reducing operating costs.

I'll offer some early but positive data on sell-through that followed changes in our pricing strategy.

And finally, I will share with you GoPro's 6 priorities for 2018.

I'll begin with a summary of GoPro's full year results for 2017.

Our fiscal year was marked by 3 strong quarters of operating efficiency and solid execution by our teams, overshadowed by a miss in the holiday quarter.

Full year revenue was $1.18 billion, flat year-over-year.

One highlight is that we increased our net cash position by $50 million sequentially.

And excluding our debt offering in April, GoPro's cash balance increased by $81 million since March.

Our cash position at the end of 2017 was $247 million.

Brian will provide more detail on our quarter and full year performance, but I want to stop here and note 3 takeaways for investors.

First, GoPro's brand is strong and our products are best-in-class.

Second, sell-through increased substantially following our price reductions, indicating significant demand for GoPro at the right price.

Third, GoPro is operating more efficiently and returning to profitability is a priority.

We've improved cost management, delivering OpEx of $476 million in 2017 and setting a 2018 OpEx target of below $400 million.

That's a cumulative reduction of more than $300 million from 2016.

And we expect to achieve this without sacrificing innovation.

To summarize 2017, GoPro made significant progress in turning our business around, reducing expenses while launching category-leading products and growing our brand globally.

But clearly, there were challenges.

As noted on our last earnings call, early in the fourth quarter, we saw solid demand for HERO6 Black but softer-than-expected demand for our mid-priced camera, HERO5 Black.

On December 10, we took action to price reduce both HERO5 Black and HERO5 Session by $100.

Our analytics indicated we should see a dramatic increase in sell-through, and that's what happened.

In December, unit sell-through of HERO5 Black in the U.S. and Europe more than doubled.

Sell-through of HERO5 Session roughly tripled.

On January 7, we made a decision to lower HERO6 Black by $100 to $399, and again, we saw an immediate dramatic lift in sell-through.

While the sell-through lift was offset by tighter margins and price protection, our fourth quarter challenges revealed important lessons that will guide us in 2018.

First, as indicated by our current sell-through, there is clearly significant demand for GoPro at the right price.

Second, a meaningful percentage of GoPro's customer base are loyal repeat buyers who are motivated to purchase by either a new model or a discount on an older model.

Third, we must improve the value proposition of our entry-level products to attract new customers in order to grow our community of future upgraders.

Fourth, GoPro's lack of a significant direct competitor has made it uniquely challenging for us to understand the price sensitivity of our products.

We must invest more in analytics to improve our understanding of our market, our customer and pricing dynamics so that we can produce more predictable results.

And we must improve as a data-driven organization so that analytics becomes as strong a muscle as our product, brand and social muscles have proven to be.

With that, I would like to take you through GoPro's 6 priorities for 2018.

Our first priority is to strengthen our analytics and understanding of our customer to enable better business planning.

Our second priority, increase investment in marketing to grow our brand and attract new customers globally.

Historically, when we combined well-priced products with significant marketing, we've been able to grow our business.

Consumer engagement with our brand is strong, as indicated by the 16% increase in social followers last year.

We believe this creates an exciting opportunity for us to market our 2018 lineup, our best valued products ever.

Our third key priority is to launch products that broaden GoPro's appeal at all price points, with greater emphasis on new consumers.

In 2018, GoPro will introduce multiple new cameras designed to resonate with a broad range of consumers, from repeat users to those discovering GoPro for the first time.

Our community is loyal, and we recognize the importance of bringing new people into our ecosystem so they can become upgraders.

In the first half of the year, we are launching a new and improved entry-level product to address what we see as a meaningful opportunity to expand our community of users.

Our fourth priority, eliminate friction in our camera, mobile and cloud experience.

We believe our success as a company is tied to the convenience of our camera app and cloud experience, and we must work tirelessly to eliminate any and all friction to maximize its appeal and effectiveness for our users.

Our fifth priority, expand the value proposition of our subscription offerings.

GoPro has been most successful when it delivers outsized value to consumers.

With this in mind, we launched an updated version of our Plus subscription service earlier this week.

Plus was first introduced in 2016 to offer cloud storage, expanded editing solutions and more.

The new benefits of Plus include our You Break It, We'll Replace It camera guarantee, GoPro App cloud backup of your videos and unlimited photos, GoPro.com discounts and more.

Given that the original Plus became a quiet success, generating 130,000 paying subscribers as of today, we have high expectations for the updated Plus service, given its greatly expanded value for the same monthly price of $4.99.

Stay tuned for more subscription initiatives in 2018 as we plan for this to become an increasingly important part of our business moving forward.

Our sixth priority, attract, engage and retain top talent at GoPro.

Finding, motivating and engaging great people has been the bedrock of our success as a brand and developer of best-in-class products.

We intend to continue this by fostering a great culture and providing career growth opportunities to our employees.

I'd now like to finish with some thoughts on where we are in our turnaround and our progress toward returning to profitability.

While our fourth quarter was challenging, it's important not to lose sight of the incredible work that our teams accomplished in 2017.

We launched the industry-leading products, HERO6 Black and Fusion to critical acclaim.

We significantly advanced the convenience of our camera app and cloud ecosystem.

We continue to grow our brand globally and have shown there is strong demand for GoPro at the right price.

Our 2018 opportunity is to combine the sell-through we are now seeing with the higher-margin products we plan to release in the second half of the year.

In GoPro, we have the best product lineup we've ever created, backed by one of the world's strongest brands.

It's our job to leverage these assets to create value for our shareholders.

With that, I'll hand off to our CFO, Brian McGee.

Thanks, Nick.

Let's turn to an overview of our performance for the fourth quarter and full year 2017 and qualitative guidance for 2018.

Revenue for the full year of 2017 was $1.18 billion, which is flat year-over-year.

However, revenue outside of the U.S. grew by 4%, largely benefiting from growth in Asia of 27%.

We ended the year with cash and marketable securities of $247 million, a sequential increase of over $50 million.

Excluding the net proceeds from our convertible debt offering in April, our cash balance increased $81 million since March 31.

In the first quarter of 2018, we expect a cash refund of approximately $32 million related to the completion of tax audits.

As of December 31, 2017, we had the borrowing capacity of up to $112 million under our asset-backed credit facility.

Our focus on cost management yielded a $233 million reduction in our operating costs, taking our full year operating expenses down to $476 million in 2017.

Cost reduction remains a top priority, and we are targeting 2018 operating expenses below $400 million.

Much of the expected reduction in 2018 is attributable to our decision to exit the drone business, as well as additional operating efficiencies, which will contribute to reduced headcount from 1,273 at the end of 2017 to a target of less than 1,000 employees in 2018.

For the full year, adjusted EBITDA improved by $161 million or 84% to a negative $31 million, which is largely due to our aforementioned reduction in expenses.

Moving to the fourth quarter, revenue was $335 million, up 2% sequentially and down 38% year-over-year.

Gross margin for the quarter was 25%, down from 40% in the third quarter of 2017.

The decrease in gross margin was primarily due to retail price reductions on our camera and drone products, our exit from the aerial market and other charges totaling $95 million.

GAAP net loss for the fourth quarter was $56 million or a $0.41 loss per share compared to net income per share of $0.10 in the prior quarter.

For the full year, GAAP net loss was $183 million or $1.32 loss per share compared to a loss per share of $3.01 in the prior year.

We incurred a non-GAAP net loss in the fourth quarter of $41 million, resulting in a net loss per share of $0.30 compared to net income per share of $0.15 in the prior quarter.

For the full year, non-GAAP net loss was $96 million, or a loss per share of $0.69 compared to a loss per share of $1.44 in the prior year.

Turning to the balance sheet.

Fourth quarter inventory decreased $27 million sequentially to $151 million, reflecting reduction across most product lines.

Accounts receivable at December 31 was $113 million, up from $100 million at the end of Q3 2017.

DSOs were 30 days.

I'll now dive into more details on our business performance.

Fourth quarter Street ASP, defined as total reported revenue divided by camera units shipped, was down 15% sequentially to $246, primarily due to price protection charges.

Camera unit shipped in the fourth quarter totaled 1.4 million, a sequential increase of 19%.

Our highest price cameras, HERO5 Black and HERO6 Black, accounted for over 75% of camera units shipped in the quarter and were 84% of total fourth quarter camera revenue.

Due to higher-than-expected HERO5 Black channel inventory, overall weeks of inventory increased sequentially and year-over-year to 16 weeks.

We expect channel inventory to improve 25% to 30% in the first quarter of 2018.

Moving on to our retail performance.

In the U.S., according to NPD, in units, GoPro maintained above 80% share of the Action Camera market, a position it's held for 4 consecutive years.

In Europe, according to GfK, sales from GoPro represented 69% dollar share and 44% unit share of the Action Camera market.

GoPro's ASPs were on average 3x higher than the rest of this market, indicating an opportunity to pursue additional market share through strategically priced products.

In APAC, Japan is leading the way as an important growth market, with GfK reporting that sales have doubled for 2017 and 2016.

In China, a top 10 market for GoPro, GfK reported year-over-year increase in GoPro unit sales of 28%, which is also 2 years of consecutive sales growth.

According to internal estimates, GoPro's year-over-year global unit sell-through decreased by approximately 15% due to the limited inventory of an entry-level price point product in the second half of 2017.

And now I'll move on to our GoPro app and social media stats for the fourth quarter and full year 2017.

The App Store rating for the GoPro App improved dramatically from 2.4 stars in September 2017 to 4.7 stars in December 2017.

Growth in the number of HERO5 and HERO6 customers connecting to the app increased from an average of 58% in 2016 to nearly 80% in 2017.

2.2 million new cameras were connected year-over-year, a 36% increase.

Quik app installs increased year-over-year by 120% to 26 million in 2017, and was nominated for the second year in a row as Google Play Store's App of the Year.

Significantly more, HERO6 users are engaging with QuikStories over HERO5, thanks to our improved out-of-box experience.

GoPro gained more than 4.8 million new social media followers in 2017 to 35.1 million or 16% growth, and GoPro remains the #1 CE brand on Instagram.

And finally, GoPro content was viewed by approximately 700 million times in 2017, up more than 25% year-over-year.

I will now move on to qualitative guidance for 2018.

Due to the higher weeks of channel inventory ending 2017, we expect revenue in the first half of 2018 to be lower as compared to the first half of 2017.

As we expect to reduce channel inventory leading into the second half of 2018, we expect revenue growth in the second half of 2018 compared to the second half of 2017.

We expect margins to be in the mid-20% range in the first half, recovering to the upper 30s in the second half due to the introduction of new higher-margin products.

Margins will fluctuate through the year due to several factors, including a higher revenue mix from our Karma drone in the first half as compared to prior periods.

We plan to sell off the remaining inventory while continuing to support all Karma products sold, and a new camera to capture customer demand at the entry-level price point.

Karma margins are now 0, and with the initial margins of our entry-level SKU, will be below corporate average, but will be replaced with the higher-margin improved camera in the second half of 2018, along with other new cameras.

We expect that our inventory of HERO, HERO5 Session and HERO5 Black cameras and Karma will be largely depleted in the first half of 2018.

We expect GAAP and non-GAAP tax expenses for the full year of between $3 million to $5 million.

For the first half, we expect GAAP and non-GAAP tax expense to be approximately $1 million to $2 million, respectively.

Piecing all this together from a profitability perspective, on a non-GAAP basis, we expect to be unprofitable in the first half of 2018 before returning to profitability in the second half of 2018, resulting in a loss for the year.

However, we expect our loss to narrow compared to 2017.

And I'll add that we could be profitable in 2018 with better-than-expected uptake of our products and improved leverage from our marketing efforts.

From a cash perspective, we expect to use cash in the first half, but to increase cash in the second half with new products, improve margins and lower operating expenses.

With that, operator, we are ready to take questions.

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

This is a Paul Chung on for Coster.

So first off, can you give us a sense for potential opportunities in your distribution channel or where you can expand?

And then on the global basis, looks like China and Japan are doing quite well.

Are you reallocating resources there to drive -- ride that momentum?

And how would you describe the competitive landscape there in those markets [and potential]?

Thanks for your question.

International remains one of our priorities.

And as we're expanding, our marketing budget for 2018, in addition to targeting entry-level customers and growing our base of future [upgraders], we're also going to be focusing our increased marketing and budget on continuing to grow our international markets.

We still have a lot of room to grow in terms of awareness, driving for GoPro in markets like Japan and in China.

And as you noted, in 2017, we saw the impact that we can make on sales in those regions when we do apply more marketing spend, and as well, as we continue to improve our localization of our brand and products and in-store merchandising in those regions.

Paul, and I'd also add, and I've mentioned this in our prepared remarks, if you look at the data out of GfK, on a unit basis, we have 44% share in EMEA or in the European market, and we have opportunities to use an entry-level price point product there to take some of that share back.

So I think that's also an important market.

Got you.

And then, next question is on the Plus monthly service.

So on the 130,000 subs, can you give us a sense for how those subs have been growing every quarter since launching?

And what you think the potential TAM is for subs from your existing customer base?

And how should we think about the margin profile for that service over time?

We're very happy with how the original launch of Plus went.

It was -- the launch was on the quiet side.

We didn't do a ton to aggressively promote it because we were in a learning mode for Plus subscription.

And what we found was that we had a very high free trial to paid subscriber conversion rate, which was great, and then we also had a very low churn rate, which was also really encouraging.

And frankly, the pickup rate and the churn rate exceeded our expectations in terms of positive performance.

Because the original version of Plus didn't have as robust a feature set and benefit to the user, and so we were happily surprised to see how engaged our customers were with Plus, and it grew to this 130,000 subscriber level that we have today.

We're pretty excited about the prospects for the new and improved Plus because we've significantly improved the value proposition, essentially rolling all that was Care into -- all that was GoPro Care into the new Plus, and we kept the price the same.

And the metrics that we see for GoPro Care uptake of our customers has been very strong.

So net-net, we feel like Plus is in a really good position to appeal to consumers, and it's going to play a more important part in our business moving forward as well as other subscription initiatives that we're working on.

Our goals are that, eventually, the value that we continue to build into Plus will ultimately make it so appealing that it would be essentially awkward for one of our customers to not subscribe to the program.

So subscription is going to be central to our business moving forward.

And Paul, you asked the question about the margins on it.

The margin is very profitable today.

The margins are very high because it's our channel.

So we're looking forward to this product and continuing to grow it.

It will definitely add to corporate margins over time.

Next question comes from Joe Wittine with Longbow Research.

Question on the entry level, which I think you said is still slated for the first half.

It sounds like you're targeting expanding the [TAM] to a new customer type.

So could you provide any more detail on that on exactly what demographic you're targeting.

And with that, maybe you can provide some thoughts on how you're managing the balance of drawing in that new customer, the new entry-level customer, while maintaining your core customer at the price points you're accustomed to?

When we say that we're going to be expanding our marketing to take better advantage of the terrific products we have at the really appealing prices and that we're going to be targeting our entry-level customer opportunity more than we have before, I think it's important to note that we're going to be -- it's incremental marketing budget that we're adding.

And we are going to be maintaining our existing efforts to market our premium products, so we won't be risking the sell-through and demand generation that we've enjoyed at the high end of our product line.

We're going to allocate incremental spend to create a now second marketing funnel to attract new entry-level customers and to promote the benefits of these new products.

Now as it relates to the first half of the year release of our new entry-level product, what I can share about that product is that it's going to incorporate features that have proven to be very appealing with consumers and significantly move the needle on sell-through.

For the last couple of years, our entry-level product has been Session form factor camera that has not been as widely appealing as we had hoped it would be.

And in certain markets internationally, it hasn't resonated at all.

And so we see a pretty significant opportunity to update our entry-level form factor and go with product features that have proven to be very successful with consumers, so we're excited about that.

And that's something that we're going to build into our full product line and we'll -- we believe we'll really benefit from in the second half of 2018 when we introduce new products with higher margins that we believe can get us back to a profitable pace when we combine those higher-margin products with the sell-through that we're now seeing in our business.

And Joe, this is Brian, I'll also add that the step up in the marketing ad spend is significant year-over-year, but it's also contemplated in the sub-$400 million OpEx for 2018.

Okay.

Got it.

And then just my follow-up, Brian, a clarification on the guidance where you seem to be drawing a line on the sand between the first half and the second half.

Can you just clarify whether you expect that return to both sales growth and non-GAAP profits to be merely in the second half in aggregate, or are you referring to both the third and fourth quarter individually as well?

I know you're not probably thrilled to guide the September quarter at this point, but if you can clarify this as much as you're willing to.

Yes.

I think I'm going to stick to first half and second half at this point, although I will say that we do expect the loss to narrow quite a bit in 2018 from 2017.

And quite frankly, if the marketing uptake is solid with -- and resonates with consumers as well as the new products we think we're coming out with, that we're not too far from being profitable for the year.

So it's close.

I'd all also like to add just one thing, which is, I think, it's really important not to confuse the lack of profitability or revenue in the first half of the year with a lack of demand.

We are seeing significant demand for GoPro at our new prices that are appropriately aligned with market demand.

Sell-through is good, and it's just that we have quite a bit of channel in the -- inventory in the channel that we need to sell-through.

But sell-through is good, which means demand is good for GoPro when our products are priced appropriately.

We'll go and take our next question.

We'll take Doug Clark with Goldman Sachs.

My first one is on the comments on repeat customers being kind of a larger percentage than you expected.

Can you give more details on that as now that you have some data on it, how large is the repeat customer base on a unit basis or anything there?

Yes.

Analytics is incredibly important to us, has been important to us as an even -- and we recognize that we need to make even more investment there to better understand our market, our customer, pricing dynamics so that we can more predictably plan and operate our business.

We do understand that we have a larger than previously understood community of very loyal repeat customers, and they need to see 1 of 2 things from us to be motivated to purchase a GoPro, and that is either a significant new model upgrade or they need to see a discount on the previous year's model.

And that was really the heart of the problem for HERO5 Black is that many of our customers -- well, the problem is that, that product was in the market for second year at the same price that it was introduced at the year prior.

And a number of our customers either already owned the product or waiting to upgrade to it, but weren't happy to do so when it was still at its original price.

And that explains the significant uptake in sell-through we saw when we lowered the price by $100.

It was more than a 2x sales uplift for HERO5 Black and approximately a 3x sales uplift for HERO5 Session when we lowered both of those products by $100, which again, signifies there's significant demand for GoPro at the right price.

In terms of the specifics around the percentage of our customer base being a repeat customer, that's not something we're sharing at this time, and frankly, we need to sharpen our understanding of our customer.

We have a lot more data now than we used to.

We -- before HERO5, well, actually since the launch of HERO5, we have a connected camera that's connecting to our app, which now has a login, which allows us to do a much sharper -- better job of understanding our customers' behavior.

We have a cloud subscription service that also has important data feeds.

Then the amount of information that we now have access to, to really learn more about our customer and our business is something we're going to be investing in to really help us this year and beyond.

I would add one more thing, which is not obvious, which is it's been very challenging for us to fully understand the true nature of our business because we really don't have a significant direct competitor.

We have competition, but we don't have any one single competitor who takes share from us when we make a pricing or a product mistake.

That competitor would help us understand the dynamics of our market, our business, pricing sensitivity.

And the challenge has been, frankly, that in many cases, the only data we've had access to is our own.

And so that's why some of these pricing challenges that may seem obvious really were not obvious.

And now that we recognize that, we're really going to be bolstering our analytics capabilities moving forward.

Okay.

Thanks.

My other question is, and you've mentioned a few times kind of the increased sell-through post the price cuts in the month of December.

Can you talk about how sell-thorough has been in the month of December now that the entire portfolio has had that?

And then secondarily, if you can give any more granular detail on first quarter expectations in terms of revenues?

Sure.

I think you meant how sell-through is maybe going in January?

Yes, yes.

Right.

Right.

As I mentioned, we saw approximately 2x uplift for HERO5 Black, a 3x uplift for HERO5 Session and even larger uplift for HERO6 Black when we lowered the pricing of that product by $100 on January 7. Even after the traditional leveling out of the sales lifts, they're still at a rate that indicates there's strong demand for GoPro with these new prices.

And their -- those prices have now been in the market long enough that we see them adhering to historically proven decay rates that are enabling us to forecast how the rest of the year is looking.

And we're happy with the sell-through that we have, and we think that it puts us in a really good position to marry that demand with our higher-margin products in the second half of the year to put GoPro back on a profitable pace.

And Doug, this is Brian.

I'd also point out, in the guidance for channel inventory, our expectation is based on the current sell-through rates.

If that will reduce 25% to 30% in the first quarter, we should see further reduction actually in the second quarter.

Got it.

And then any comments specifically on first quarter revenue guidance?

No.

We're going to keep that at first half.

And part of that is, quite frankly, due to the fact that with the channel inventory, we also have the sell-through Karma, there's some kind of moving parts there that kind of go possibly between quarters.

So I think we're better off on a half view.

I think one -- and one more really important point as it relates to our sell-through rates, some information we can give you that provides sort of a directional guide to what sell-through is, is that with the current sell-through rates we're seeing, we are forecasting sell-through growth in 2018 over 2017.

So we believe we are going to sell-through more units in 2018 than we did in 2017, which indicates growing demand, which is what we all want to hear.

Next question comes from Stanley Kovler with Citi.

This is Josh Kehoe on for Stan.

I guess, going back to those comments, what are your expectations for camera unit growth in 2018?

And would do you consider sort of a long-term stable run rate?

And I guess, how did that relate to the overall camera market?

I think you're asking about channel inventory?

So we expect channel inventory, actually, to decline in the first and second quarters, so in the first half, which we kind of talked about.

We expect sell-through to be more balanced with sell-in, and I think in the second half as we introduce the new products.

And so even in 2017, in total, sell-in and sell-through were actually balanced, and that was true for the fourth quarter.

We will sell-through more in Q1 and Q2.

It would more balanced with overall sell-through growth in 2018 over 2017.

I think that's the key point there is that, again, just to reiterate, we expect to increase sell-through for the year, indicating a growth in demand for GoPro.

And that's based on the sell-through trends we're seeing today, following historically proven trends.

And I have a follow-up, do you think $400 million a year approximately for OpEx is an appropriate run rate in 2019 and beyond?

Or does it possibly fall further maybe closer to 2014 levels?

Well, at the moment, we're continuing to -- if you step back, I mean, 2016, we spent $709 million.

So we'll have taken OpEx down by close to 50% over 2-year period of time.

That's pretty big.

We'll continue to find operating efficiencies as we run the business, and that's the way we're just going to keep operating.

Next question comes from Andrew Uerkwitz with Oppenheimer & Co.

Nick, if you can just comment, when you look out beyond 2018 and into the future, could you comment on how you think the camera industry could evolve over time, and then what role the fusion camera could play in that?

Sure.

I and the rest of the GoPro believe that the camera is going to continue to play a supporting role to the phone.

The phone is the computer that we all have in our pocket.

It's how we communicate.

It's how we socialize.

It's how we express ourselves.

But it has its limitations.

And really, GoPro's opportunity is to pick up where the phone leaves off in terms of serving as an extremely convenient, capable, durable tool for self-capturing life experiences that just simply would be difficult to capture without a GoPro.

And as we've made significant improvements to how seamlessly a GoPro works with a phone, last year, with the launch of HERO6 and the GoPro App, improving transfer speeds more than 3x and the GoPro App's ability to auto edit a video for you.

And now we're expanding it even further with the -- the convenience further with the launch of -- the updated launch of GoPro Plus, which is now, at the end of February, going to be able to have the GoPro App upload any GoPro photos and videos you captured directly to your cloud account, so you really never need to touch a computer again if you're a GoPro Plus subscriber and you own a HERO5 or 6. We see that trend continuing.

We see people -- the human behavior to continue to share, express itself more.

And GoPro's positioned, we believe, brilliantly to serve as a really useful tool to the hundreds of millions, if not billions, of consumers who are sharing themselves more and more today.

Where Fusion plays into that, Fusion today is an incredibly versatile tool for our more "tip of the spear" prosumer and professional customers.

Fusion is selling very well.

It proves that GoPro can sell products at higher price points, provided the value is really there, which it is with Fusion.

And in terms of its long-term place in GoPro's lineup and as it relates to expanded business opportunities, Fusion will get easier to use over time and will become more consumer and mainstream-ready.

And we're learning how to do that now with its more Pro version.

We're very excited about Fusion's place in GoPro's and our consumer's future.

And we're continuing to make the appropriate investments to make that future happen.

And then just a follow-up.

I appreciate that color.

Where are you spending the bulk of your R&D dollars at this point?

And do you feel the need to do major hardware upgrades every single year?

Well, as we shared earlier on the call, we have a very loyal and passionate customer base that is looking for new things from us each year.

And in simplest terms, they need to see either exciting new models from us or discounts on older products to be compelled to buy.

And it's our job to provide them with both of those whenever we can.

And we also recognize there's a significant opportunity to improve the appeal of our entry-level products so that we -- and tailor marketing to entry-level customers so that we can significantly grow the percentage of new customers we get every year because the data shows that many of those customers grow into repeat customers over time.

So we have to do a better job of not only being appealing to and marketing to the high end of our market, but we also have to address the entry level and in many markets we see significant opportunities to do that.

Other areas that we're investing significantly is in our software.

Our customers tell us that your cameras are easy enough to use.

It's really the convenience of uploading my footage to the phone and the ease of using the app to get to that shareable piece of content, that's where our customers really want to see us make continued improvements.

So we're investing accordingly, all the way up to the cloud experience with updates to Plus, like we just launched.

And we're not done yet.

We have several more subscription initiatives that we have planned for the year that we believe are going to do an even better job of solving our customers' challenges from start to finish when they use a GoPro.

So we're investing across the board.

Next question comes from Yuuji Anderson with Morgan Stanley.

On the new SKU launch in the first half, how should we think about that ramp versus the channel inventory drawdown that you're expecting in Q1, and I presume Q2?

Is that kind of part of that or is it entirely -- is that shelf space just entirely different from the 16 weeks that we're seeing right now?

This is Brian.

Yuuji, you should -- the entry-level product was the Session and then the HERO5 Session, which will be mostly -- the Session is mostly out of the channel.

So this is new.

We still expect the channel inventory, overall, to decline even with -- in the first quarter.

And we're pretty excited about the product.

We think there's a very good value proposition for the consumer at this entry-level price point in the first half, so.

And that should carry onto the year with new products.

Okay.

Got it.

That make sense.

And then on your comment on sell-through expectations for the full year, should we think about it as returning to growth with the additional SKU launches in the second half?

Or are you expecting something sooner with the new entry launch?

The first half and second half revenue, we talked about was incorporated the entry-level product in the first half as well as the new products in the second half.

And Yuugi, to make the point, we expect sell-through to be much higher in the first half, and it will be more balanced in the second half.

But overall, for the year, it would be higher -- 2018 sell-through's higher than 2017.

Next question comes from James Medvedeff with Cowen.

I have a couple of questions about expenses.

The sales and marketing took a nice increase here in the fourth quarter, as it does every fourth quarter.

And the run rate for non-GAAP was $120 million.

So how should we think about getting that down to $100 million or less per quarter?

And what is the cadence of that through 2018?

Yes.

So if we're below $400 million for the year, some of the quarters have to be less than $100 million, right, by definition.

And so -- and you're right, we have more advertising spend in the fourth quarter, as we discussed in the last conference call.

And we will definitely step up marketing throughout 2018.

I think that's a key component to the overall strategy, build innovative products and then market them.

And then go and leverage the rest of SG&A to drive OpEx down.

Okay.

So you're committed to continuing to spend R&D at relatively the same rate?

No.

Obviously, we'll have to pull R&D -- R&D will come down by definition of exiting the Karma business and the drone business.

So obviously, that will come down, but we'll also pull down SG&A.

So we think we will have enough investment in R&D to drive the innovation we need on our product road map for our customers, and then we'll leverage SG&A and drive more marketing spend to drive product demand.

I just want to second on what Brian said that nobody should confuse our reduced OpEx with us being unable to continue innovating or drive a really exciting -- innovation is at the core of this company's culture.

It's a big part of how we attract and retain employees.

And frankly, it's -- the only way that you can continue to invent an exciting future for our customers in the form of a great road map is through innovation, so that is something that we are keenly committed to.

And our R&D budget for 2018 not only secures our road map for 2018, but it's also laying the groundwork for an exciting 2019 as well.

So I just want to make that abundantly clear.

Yes, of course.

So my second question is on gross margin potential.

It's becoming apparent that new products are coming out, and as you said in your prepared remarks, the loyal and passionate user base is going to need a price reduction to -- in other words, bring out a model at a price and it's only good at that price for a year, right?

Because then you replace it with another high-end model and the question is are you able to improve the cost structure of making those other products at the same rate as you have to reduce the price?

That's our job to.

And also the way that we introduce new products and how we move other products through our lineup is also an opportunity for us to get more leverage out of a product that we've made in the year prior.

But you've nailed it, we both need to reduce the cost of manufacturing our products, that's both through -- starts with the definition of the product itself, and then it involves the designing of that product for low-cost manufacturer.

And then it's working with our suppliers to do the best job we collectively can to hit the price targets that we need to in order to generate necessary margins.

So that is one of the priorities of the company.

And then also how we manage the life cycle of those products also we take into account to build a road map that can serve our customers accordingly, so you're right on all fronts.

Final one, if I can squeeze one more in, is on ASP.

How should we think about with all the changing channel, sell-through and entry-level products coming in, Karma going out, higher-end product coming in the second half, how should we think about ASP in H1 and H2, however, you're willing to characterize it?

Yes.

Let's start off with the year.

So for the year, 2017, obviously, have the price protection in it, so that pulled the average Street ASP down to about $274.

For the whole of 2018, I expect it to be kind of around that neighborhood.

We'll have still some Karma to sell.

We'll have Fusion, which is higher price point.

We'll have the new products at new price points.

And so that's kind of going to balance it out.

In Q1, quite frankly, could be slightly higher, given we'll sell some of the Karma, but you got to think about it more for the overall year.

And so, at the end of the day, we think we've got the right value proposition that consumers will pay for because we've got the price right at the right price.

And our final question comes from Charlie Anderson with Dougherty & Company.

Just a couple of housekeeping.

Number one, Brian, you mentioned you use cash first half; generate cash, second half.

I wonder if you could define that to any degree beyond that in terms of whether it be a range or anything.

And then also and the subscribers, I think you guys did 130,000, are they all through their free trial period?

And as we think about the potential there, do you guys have a sense of how many cameras are active out there today?

On the subscribers, the majority -- obviously some of them are still in their free trial period.

The majority of them are through that field -- free trial period.

As I mentioned, the conversion from free trial to paid subscriber was very high, and the rate of churn, the rate at which subscribers would drop out after a period of paying, was very low.

And that was with the original Plus subscription offering, which has significantly less value than the new one.

And as well, I want to remind listeners that we did very little to promote Plus, the original Plus, because we were in a learning phase.

And now with the relaunch of Plus, we're much more aggressively marketing it through our app and other CRM tools to really engage and excite our customer base, so we're pretty excited about what we think we're going to be able to achieve with Plus.

Yes, Charlie.

And on cash, we're not going to get into specific numbers.

We'll use some cash in the first half, but it will look like quantitatively, or qualitatively, I should say.

Like kind of last year, we used a little bit, but then we end up driving a lot of free cash flow in the second half.

We've done a pretty good job.

If you look at our inventory, it's the lowest it's been in 4 years, actually, being 2017.

Our AP is down pretty substantially from where we ended last year.

Cash is up to $247 million.

We'll get $32 million in.

We had $112 million borrowing capacity, so that's $400 million of cash flow available to the company.

So we're in pretty good shape from a balance sheet perspective.

That does conclude our question-and-answer session.

I'd like to turn the conference back over to Nicholas Woodman for closing remarks.

Thanks very much.

Well, in closing, I'd like to summarize with a few key points.

First, I want to stress that we have a plan to reduce our operating cost to below $400 million, and we have the capital to run our business and continue to innovate and produce an exciting road map.

This is very important.

Second, our growing social following affirms that GoPro is one of the world's most recognized and inspiring brands.

We grew our social following by approximately 16% last year across all platforms.

And on Instagram alone, we grew us by 3 million followers to a total of 15 million followers on just that platform, so GoPro is very relevant and our customers and audience are very engaged.

Third, our products continue to lead the industry, and sell-through is solid now that we've aligned our pricing with market demand.

It's quite clear that there is significant demand for GoPro at the right price.

Fourth, we're excited about our 2018 road map, which includes new cameras designed to attract new users and existing consumers.

And starting in the second half of the year, we believe these higher-margin products will combined with our sell-through to return GoPro to a profitable pace.

Finally, we want you to watch out for new subscription offerings as this becomes an increasingly important part of our business going forward.

So thank you very much for listening.

And with that, this is team GoPro signing off.

And thank you, ladies and gentlemen.

That does conclude today's conference.

We thank you for your participation.

You may now disconnect.