GoPro Inc (GPRO) 2018 Q2 法說會逐字稿

Good day, and welcome to GoPro's Second Quarter 2018 Earnings Results Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Jeff Brown, SVP, Corporate Communications and Government Affairs.

Please go ahead, sir.

Thanks, operator.

Good afternoon, everyone and welcome to GoPro's Second Quarter 2018 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.

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, 2017, 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 them with 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 release, we posted slides containing detailed financial data and metrics for the second quarter 2018.

These slides as well as a link to today's live webcast and replay of this conference call is posted on 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?

Thanks, Jeff, and good afternoon, everyone.

Today, we will take you through some highlights of our second quarter performance and provide context on how GoPro is well positioned for the launch of 3 new products later this year.

We are on track, sell-through is solid in all regions, indicating strong demand, and we believe GoPro will be profitable in the second half of 2018.

And importantly, our plan is to exit the year with an improved margin profile, we believe, will translate into a profitable 2019.

GoPro is executing.

Second quarter revenue was $283 million, up 40%, sequentially.

Sales were driven by the success of our flagship camera, HERO6 Black as well as HERO5 Black.

After a 2 quarter gap in March, we reestablished our position at the entry level with the launch of HERO, which has received the highest customer satisfaction scores for a new camera in several years.

The combination of HERO, HERO5 Black and HERO6 Black represents our strongest good, better, best lineup ever.

According to the NPD Group, in the second quarter, GoPro held 97% of the action camera category in the U.S. by dollar volume.

And the 5 top best-selling Action Cameras in the U.S. were all GoPro's.

Our spherical camera, Fusion even with limited distribution has captured roughly 48% of the U.S. market on a dollar basis.

We are proud to play a leadership role and plan to drive the category forward with future innovation.

In both Europe and Asia, according to GfK, GoPro held 4 of the top 5 selling Action Cameras in the second quarter.

In Japan, GoPro's share of the Action Camera market increased to 58% by unit volume.

In Korea, sell-through grew 22% year-over-year by dollar volume.

Finally, during the second quarter, we reached 2 notable milestones.

First, GoPro sold its 30 millionth camera since the launch of our first HD HERO camera in 2009.

Second, since its launch in 2016, more than 4 million HERO5 Black cameras have been sold, making it the best selling GoPro in record time.

HERO5 Black achieved this 3 months faster than the previous bestseller, HERO4 Silver, which launched in 2014.

These milestones reflect global demand and the enduring strength of our brand.

As Brian will explain, we are closely monitoring a well-known industry-wide shortage of passive components such as resistors and capacitors.

While the shortage represents a risk to consumer electronics companies, we're fortunate to have an industry-leading operations team working closely with a large-scale contract manufacturer to secure supply.

This is factored into the guidance Brian will provide, shortly.

Another issue we are watching closely is the trade impasse between United States and China.

To date, GoPro has not been impacted by the tariffs imposed on goods manufactured in China.

As noted on previous calls, we have significantly dialed up our second and third quarter marketing spend to drive consumer awareness and demand for GoPro ahead of the holidays, and it's having an impact.

GoPro's overall digital presence is currently at levels we normally only see during the holidays.

Engagement is at a 2 year high and our advertising has driven a steady increase in website traffic as well as double-digit increase in organic conversion to sale.

GoPro's social following has jumped more than 760,000 from last quarter, driven by strong increases on YouTube and Instagram.

And improved analytics are adding a sharp focus to our strategy.

For instance, we've identified that roughly 50% of monthly active GoPro app users are using older HERO4 or HERO3 generation cameras.

This represents a significant opportunity to drive upgrades.

Educating this engaged audience on the incredible innovation packed into our new cameras is a top priority for us.

Understandably, there is a lot of focus on our Q4 execution.

It's important to note that the primary challenge related to sell through in previous fourth quarters was attributable to premium products we left in the market for a second year at their original prices.

This resulted in a significant drop in sell through.

Now that we understand this pricing sensitivity and the need for a complete good, better, best product offering, we have confidence in a predictable fourth quarter.

To summarize, GoPro is executing and looking forward to a profitable second half.

Brand awareness, consumer engagement and global sell through are strong.

Channel inventories are tracking towards historic lows ahead of launch and our products are on track.

We plan to continue to execute and exit the year with an improved margin profile that, we believe, will translate into a profitable GoPro in 2019.

With that, I'll hand it to Brian.

Thanks, Nick.

I'll start with an overview of our performance for the second quarter and then, I'll offer guidance for the remainder of the year.

Our second quarter performance was attributable to solid demand for GoPro cameras and strong expense and balance sheet management.

For the second quarter of 2018, revenue was $283 million, down 5% from the year-ago quarter, but up 40%, sequentially.

Gross margin for the second quarter was 31%.

Our second quarter GAAP net loss was $37 million, a 51% sequential improvement from the first quarter, resulting in a $0.27 net loss per share.

On a non-GAAP basis, our second quarter net loss was $21 million, a $0.15 net loss per share.

Adjusted EBITDA was negative $9 million in the second quarter, a substantial sequential improvement of $26 million.

We ended the quarter with inventory of $86 million, a sequential decrease of $47 million, our lowest inventory level since the second quarter of 2014.

This planned decrease in inventory leaves us well positioned for the launch of our 3 new products in the second half of 2018.

Our sustained efforts around cost management resulted in a non-GAAP operating expense of $104 million in the second quarter, a $13 million or 11% reduction compared to the year-ago quarter, despite doubling our advertising expenses to $22 million in the quarter.

Headcount at the end of the second quarter was 948.

We believe GoPro remains on track to reduce full year 2018 operating expenses to below $400 million, while maintaining our product roadmap and increasing marketing spend.

Turning to the balance sheet, accounts receivable at June 30 was $117 million, up from $81 million at the end of the first quarter and in line with the sequential revenue increase of 40%.

Cash and investments were $140 million at the end of the second quarter.

Now I'll dive into more detail on our business performance.

Camera units shipped in the second totaled 1.1 million.

We drove solid demand for HERO6 Black and HERO5 Black cameras, which accounted for approximately 75% of our camera revenue and over 60% of our camera units shipped in the quarter.

Due to the demand of HERO6 Black and HERO5 Black cameras, our second quarter street ASP was $264, nearly flat, sequentially, showing that our $199 HERO camera did not lead to cannibalization of our high-end cameras.

Street ASP is defined as total reported revenue divided by camera units shipped.

Moving on to our retail performance, according to internal estimates, GoPro's year-over-year global unit sell-through increased by approximately 1%.

Excluding end-of-life cameras sold at a discount, we estimate global unit sell-through of our core camera line up increased 32%, year-over-year.

We estimate [forward] weeks of inventory decreased 15% to 20%, to approximately 10 weeks, we expect both weeks of inventory and absolute channel inventory of HERO6 Black, HERO5 Black and HERO cameras to decline significantly by the end of the third quarter.

During the second quarter, we sold nearly all of our Karma drones, leaving a few thousand units that we expect we'll sell in the third quarter.

I will now move on to guidance for the remainder of 2018.

As we contemplate guidance, we are closely monitoring macro availability and shortages of passive components, such as resistors and capacitors.

As has been widely reported in the press, a shortage of passive components has created major supply chain challenges.

Our largest contract manufacturer, Jabil, who mentioned this issue on their earnings call, has the scale to work strategically with the supply base to source components for our cameras.

In addition, we are experiencing temporary price increases on certain components for our new cameras due to the shortages.

As you may have read in other reports, the industry-wide shortage is expected to last into 2019.

But I want to be very clear that all of this is factored into our guidance.

Turning to consumer demand as measured on a sell-through basis.

We estimate that camera unit sell-through in 2015, '16 and '17 was 5.7 million, 5.2 million and 4.3 million units, respectively.

For 2018, we believe camera unit sell-through will be approximately 5 million units, or 16% year-over-year growth.

In the first half of 2018, we estimate sell-through with 2 million units or flat year-over-year.

In the second half, we believe sell-through will be approximately 3 million units or 25% growth over the same period in 2017.

As a reminder, we lapped an entry-level camera in the second half of 2017.

Our expected unit growth in the second half of 2018 is attributable, in part, to the availability of an entry-level GoPro camera during the holiday season.

In addition, we believe street ASPs will increase slightly in second half compared to the second quarter due to growth in higher price point cameras.

We sold 1.8 million cameras in the first half of 2018, and believe we will sell 4.2 million cameras for the full year.

However, due to the dynamic supply situation, sales in the second half of 2018 may fluctuate, depending on the timing of supply.

In summary, we believe there is more demand than we currently have the ability to supply in the second half of 2018, reducing channel inventory to historically low levels exiting the year.

This provides us a significant opportunity to fill the channel in the first quarter of 2019.

Putting all these factors together, for the third quarter of 2018, we expect revenue to be between $260 million and $280 million, gross margin to be 34% plus or minus 1 percentage point, operating expenses to be $95 million to $100 million, non-GAAP tax expense to be $0.5 million, EBITDA positive and cash to be up slightly, sequentially.

And for the fourth quarter of 2018, we expect revenue to be between $380 million to $400 million, gross margin to be 40% plus or minus 1 percentage point, operating expenses to be $95 million to $100 million, non-GAAP tax expense to be $1 million, inventory to be below $100 million and cash to increase to approximately $190 million, plus or minus $10 million.

From a profitability perspective on a non-GAAP basis, we expect to be profitable in the second half of 2018, resulting in a loss for the year of approximately $25 million to $35 million but positive on an EBITDA basis.

Directionally, our plan for 2019 includes the following: as supply catches up, we will fill depleted channels meeting expected demand for the first quarter of 2019; gross margin to be similar to our exit rate of Q4 2018; operating expenses to be in the range of $400 million to $430 million to support our roadmap and global marketing and we believe this translates into a profitable GoPro in 2019, along with improved cash flow.

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

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

This is Paul Chung on for Coster.

So first off, lots of numbers you put out there, thanks for that.

So as OpEx continues to kind of come down, you mentioned you are on track to hit $400 million, given your headcount reduction, et cetera.

The pickup in marketing spend.

Can you just talk about your marketing spend is being targeted?

And how do you ensure you get the best return on your investment?

Paul, thanks for that.

Our marketing spend is increased globally, and we're running it multiplatform, not just digital, but out of home, which includes billboards and train stations, public spaces to really distribute and get people excited about GoPro's brand in many ways and -- in many ways, this is leveraging experience that we gained during our big brand-building years, pre-IPO and during that IPO period, where GoPro's brand was much louder and prouder.

And so we've got proven experience in this area and we're seeing an impact.

Digitally speaking, we've got exposure online at levels that we normally only see during the holiday period and yet, it's only August.

So that's great in terms of driving exposure and awareness for GoPro in the lead-up to the holidays and we're seeing significantly improved website traffic and conversion on sale on our website and as well, we're seeing a lot of indications in our social performance that the marketing is working.

Okay, great.

And then, can you talk about the regions and where you're seeing pockets of strength?

Looks like EMEA was up pretty nicely, maybe some FX benefit there, but any color would be great.

Paul, this is Brian.

Actually it was less FX, EMEA has done a really good job of getting channel inventories down.

They were actually one of the lowest.

And so we needed to fulfill that demand on HERO6 and HERO5 product.

APAC was also a bit low on channel inventory and we had [to feed] HERO6 and HERO5.

In North America, that's where we were probably most challenged from a channel perspective.

Even there demand was up for HERO6 Black and HERO5 Black, and our kind of older products actually sold through nicely to help clear up the overall channels.

So we had strong demand across the board particularly for our flagship products HERO6 Black and then HERO5 Black.

Okay, and the last question is on gross margins, you mentioned exiting 4Q of '18, you expect 40s moving forward.

How should we think about gross margin fluctuating between the quarters throughout the year?

Well, we've been increasing margin as we kind of said back in February, right?

We said it would be high 20s, I think we came out weighted about 28-or-so percent and we said we'd be in the high 30s exiting second half of 2018.

You saw it inch up to 34% in Q3 and that's due to a mixture of still selling some HERO6 and HERO5 Black product but also, channel filling some of the new products.

And then, we're selling all new product in the fourth quarter, so you're seeing the full benefit of what we've been narrating for a while now that the new products we have that are coming particularly at $199 and $299 price points are much better cost points than historically.

So that's why you're seeing the margin improvement.

Yes, I'd like to add though, that even though we're improving our margin profile on our new products this fourth quarter, each one of our good, better, best products is improving significantly for consumers.

We're not gaining margin at the consumer expense rather, we're building a lot of innovation and capability into our new products.

So I think that's just very important to note and we're very excited about the new products that we have in store for this, for our customers this holiday season.

We'll take our next question from Jim Suva with Citi.

This is Tim Yong calling on behalf of Jim Suva.

Can you talk about component shortages you mentioned in your prepared comments.

Is the shortage getting better or worse compared to a quarter ago?

And how should we think about margin [and ramping] impact from the shortage in the second half of 2018?

Thanks, Tim.

I'll take this.

We gave the components shortage a little bit of airtime on the call.

It has actually gotten worse since the last call.

I think, you guys even put out a note a few weeks ago kind of talking about it.

And so we wanted to frame this kind of properly.

Demand is very strong and supply is coming little bit later than we'd like in the fourth quarter.

We have good supply pipeline going into 2019.

So we think we can catch up but maybe not in time although, we're working on that for the fourth quarter.

So that means we would have more sell-through than we would have sell-in.

But if we do get upside, it is fair to point out that about every 100,000 units that we would be able to ship would generate about $10 million of profit.

So that's important to note.

And I think on the $4.2 million I think we have pretty good line of sight on that and we're very comfortable achieving that for the year.

And all of this is factored into guidance of course.

And you actually asked another question in there which was, what was the impact on component cost on the margin -- that's factored into our guidance, then the second half it impacts us about 1 percentage point.

We think that actually goes away in the first quarter of 2019.

(Operator Instructions) We'll go now to Andrew Uerkwitz with Oppenheimer & Co.

I just have 2 questions.

One is, you may have mentioned this, I missed the very beginning of your call.

How could the supply shortage, the component shortage potentially affect your product mix?

Or I guess put it a different way, how -- would it be favorable or unfavorable if the shortage kind of gets worse from here on product mix into the back half of the year?

I think -- as I just said, I think we have pretty good line of sight for where we are on a sell-in basis on the 4.2 million units.

We don't see it worsening.

We have pretty good visibility in with Jabil, who is our biggest contract manufacturer.

So if anything, what I mentioned is there's more timing about when we would get the product to be able to fulfill it in the fourth quarter but we would have products to fill the pipeline and channel in Q1 of '19.

As we said, we're comfortable with how we've guided and so that -- if anything there is upside and not downside.

Yes, I think that point about the importance of us covering the supply shortage is really to help explain the gap between total demand for GoPro and our top line revenue and ability to meet that demand.

I'd just like to be on record with saying GoPro does not have a demand problem.

Full stop.

It really comes down to pulling in the supply of some of these components so that we can build them early enough in Q4 and recognize them as sell-in revenue to potentially recognize upside that our current demand is showing, exists.

It's not as much that we see significant downside risk and thus, we were confident in guiding towards that.

No, I appreciate that.

Because the way I was thinking about it, it seemed like if there is a component shortage, it means you're not making the newer cameras at the higher ASPs.

So it sounds like you're appropriately thinking about that with your guidance [since leaving] upside on the table effectively is what you are doing here.

We are actually only building new cameras with higher ASP.

So there's -- we're no longer building our older cameras.

And as we mentioned, our channel inventory of those units is heading towards historic lows, this is a -- we have a -- we're looking at a very good transition from our old product to our new product.

So you won't have much of our older product on shelf and we'll be primarily selling through as well as selling in our newer products during the fourth quarter.

Excellent.

Appreciate that color.

And then if I could do just one follow-up.

With the kind of the -- the new operating kind of expense structure, how has that changed the focus of R&D product development?

What's some of the tangible things you can share about how that's either improved or gotten more focused and what areas you are kind of thinking about?

Well, we spent a lot of effort on getting to know our customer better, understanding through analytics as well as consumer outreach through focus groups to learn about their sensitivities, their interests.

And being a much more focused company, primarily targeting a great camera app and cloud experience for our customers, it's really narrowed the amount the work that there is to do.

So even though, we've reduced operating budget, we've still been able to maintain healthy R&D and product innovation and development budgets to continue to deliver exciting products to our consumers every year.

Now we also understand the importance of delivering new products to our customers every year as we share that's a very important focus for us moving forward.

Because new products -- nothing excites consumers more than new products, and that's why we're really excited for this holiday season where we've got 3 new cameras at the good, better, best price points for the first time since 2012.

So when you factor in our thinning out inventory in the channel, coupled with these exciting new products, priced appropriately, we're looking forward to a strong fourth quarter.

We'll go now to Ryan Goodman with Bank of America Merrill Lynch.

First one is just on the fact that you're coming out with 3 new products.

I just want to ask on that, so I was under the impression it was going to be a mid and high-end refresh.

So I guess, can you walk me through the decision to do a refresh on the entry level as well?

And should we be thinking that this is just going to fill in the gap for HERO?

So yes, just curious on color on why you're doing that just maybe 6 months into the launch or less?

Sure.

The decision to launch HERO back in March was because the data was clear that we had a gap at the $199 price point we did not have a HERO camera there, we had a Session camera.

And as we've shared numerous times, the consumer really wants a HERO camera more than they want a Session camera.

And so we saw an opportunity to release a HERO camera that would drive sell-through at the $199 price point globally and HERO has done that.

I want to call out, it has not cannibalized the higher price GoPros as was a concern to some investors.

We have years of selling $199, $299, $399 HERO cameras so we felt confident in our ability to forecast sell-through rates and those forecast have come to be.

So that's terrific.

And as we look forward to the new product that we're going to launch this holiday, having all of the cameras of the same generation sharing many of the same user experience advancements is really important.

We want to have a consistent user experience across all of our products.

We also saw opportunities to lower the manufacturing cost related to the HERO camera and benefit in terms of margin as well.

So launching a new entry-level camera this holiday season is a benefit to the consumer and to GoPro's margin as well.

Okay.

And then, just one follow-on, another one on the shortage.

So I guess, can you help me understand how much of this is going to be a unit factor in getting to that 5 million number, and how much of it is a margin factor?

Because you mentioned there's like a 1% hit to the margins in the near term which should go away in the first half of '19, but you're also talking about exiting at 40%.

I think that's a little bit higher than you've talked about in the past.

Just any color there would be helpful.

Sure.

Ryan, so let's parse this a little bit.

So the 5 million number is sell-through.

So between what is already in the channel, HERO5, HERO6 et cetera.

That sales plus what we fill in is new, on the new product.

So the combination of all products through the year we think the total demand on the sell-through basis is about 5 million units, okay?

Our ability to supply is at the moment, we think limited, to 4.2, with hopefully some upside.

And so we think we'll exit in the fourth quarter based on guidance about 40% plus or minus 1 percentage point on exiting into 2019, right.

But and I also mentioned within the guidance for what we're going to sell in the second half the impact on component cost because of the shortage is about 1 percentage point.

Right, but again this -- what this means is, we'll end up with channel inventories that are basically at historical lows for 2018 or exiting the year but we have a solid pipeline of product ready to go into 2019.

We'll now take a question from Yuuji Anderson with Morgan Stanley.

I think this is the first time that you're providing some explicit guidance on a sell-through that you're expecting this year.

So just kind of high-level curious to hear what drives the confidence in that [as] you're providing that?

Yes, thanks Yuuji.

A couple of points.

One is we're 40% in, so that's good.

We've got 2 down, 2 to go.

Historically, Q3 has -- we're very consistent there so that comes down to Q4.

And if I compare Q4 and I look at last year where we didn't have an entry-level camera, that's the biggest difference in absolute units of increase in the fourth quarter from the sell-through perspective, we just didn't have a product.

And so if I compare against the prior 2 years, that did sell-through of more than 2 million units and we did about 1.3 million units in the fourth quarter of '17.

The reason is we didn't have an entry-level product.

And then, we also think that given the new products we have [all with display] versus selling against the Session, that we're going to see a lift in demand, which we're already seeing quite frankly, and we see it in HERO5 -- sorry, HERO6, HERO5 Black and HERO.

So we're already seeing that demand lift.

And in my prepared remarks, we talked about the fact that if I exclude all the EOL cameras, our mainline cameras are up 32% year-over-year on a sell-through basis.

That's what's giving us the confidence that we can actually deliver on these numbers.

Got it, appreciate the color, that makes a lot of sense.

And then just a quick question on the Q2 gross margins, I believe that also came in slightly higher than expected.

So can you just walk through a little bit just that bridge between what you guided going into the quarter and what led to that outperformance there?

That performance was really demand for HERO6 and HERO5.

HERO6 did exceptionally well.

Channels were depleted particularly in Europe.

I think I gave that commentary earlier.

We had to fill channels there, North America was strong in HERO6 as well as Asia.

As a matter of fact, Asia, that region actually had higher sales of HERO6 and HERO5 versus the other regions.

So very strong HERO6 Black in Asia and then EMEA.

And Yuuji, I would just add that sell-through rates that we're forecasting for Q4 are in line with historical rates that we've achieved in years where we have had newer products and where we did not leave older flagship products out at their 1-year-old price in the second year.

So we don't need to achieve any heroic sell-through levels or anything like that to achieve our targets for the fourth quarter.

The sell-through that we need to achieve is supported by historical levels that we have seen before.

And our last question will come from Joe Wittine with Longbow Research.

HERO5 Black and HERO6 Black were 60% of units.

So I think the remaining 40% is mostly entry-level HERO.

I understand there is some Karma too, but can you give us any comparison of that, call it, high 30s or 40% of units to what your entry-level has previously represented?

I think -- Joe, this is Brian.

I think historically, the $299, and $399 price point has held the lion's share of the dollar mix.

This quarter Q2 was 75% and 60%.

We've held that pretty tightly over the last 2 years.

So that's -- and we expect that to be consistent.

In terms of the other 40%, it's a combination of a little bit of HERO5 Session and then, HERO product, right.

That was demand at the low end.

Again, the mix is very consistent and Nick as he has alluded to, on a historical basis, we are running right at the mix levels we would expect.

Okay, got it.

And somewhat related, after going away the Sessions were Amazon best sellers for about half of July, it looks like you were participating in Prime Day so do I have that right?

And I was wondering it doesn't sound like it was an extra production run so was that inventory on your balance sheet or lingering inventory at the retailers?

It was inventory on our balance sheet that we got to Amazon for Prime Day.

Okay.

And then, with respect to tariffs.

Understand you're not included in the affected HS codes on the $200 million list, but it's a fluid situation.

So what is the plan if more codes do get added and these actually do go into effect?

Yes.

Interesting, I was at Jabil just a couple of weeks ago and talking about supply but also talking about this issue.

We are actively looking at how would we source outside of China.

They have 2 locations that may fit the bill for GoPro and I think if that comes down that way I think we can move pretty quickly into 2 locations that wouldn't be impacted by tariffs.

And frankly, there may even be reasons to go to these regions even for cost benefits outside of protecting ourselves against tariffs.

So as we continue to look for ways to operate our business more efficiently and drive costs down, this is something that the team is looking at.

Okay, great and since I'm last I'm going to do one more.

Of the 2019 commentary, obviously, the gross margin comment was the biggest surprise to me.

I'm just curious what you view as the biggest risk to hitting that number because GM has historically been a tough thing to model so far in advance, it's such a big step-up, the question kind of begs to be asked.

Well, what we talked about it is we're exiting with the product we have at 40% in the fourth quarter.

I think we have a pretty darn good handle on what the cost points are and we know what the price points are.

So from that perspective, I think our modeling for margin has been pretty good over a historical perspective.

And then, you have the second half where I have pretty good visibility into what I think our roadmap is going to be and then the cost of those products.

So that gives us the ability to say I think we have some better visibility than maybe previously.

And Joe just to add a little color to that the only reason that GoPro had a margin problem Q1, 2, and 3 of this year is because of the fact that we left premium products out for a second year in a row at their original price last fourth quarter in 2017.

We suffered significant drop in sell-through when we did that, that taught us a lot about our customers' pricing sensitivity as it relates to our products.

And that forced us to lower the price of HERO5 Black and HERO5 Session by $100.

We saw sell-through snap back, which was terrific but really, that pricing sensitivity and our not lowering those prices during the fourth quarter led to inventory overage in the channel, which forced us to lower price and erode margin.

Now, that we will not do that again, we will introduce all new products at the $199, $299 price points this holiday season.

History has shown that consumers that drives purchase intent.

So we think that we can hit our sell-through targets which will allow us to exit the year with low channel inventory, which of course, won't require us to lower prices and won't erode margin.

So I think that that's the single biggest reason why we are confident in our ability to maintain margin going into and through 2019, it's because we've got great new products that are going to excite consumers and won't force a price drop.

And that concludes today's question-and-answer session.

I'd like to turn the conference back to management for any additional or closing remarks.

Thank you, operator.

Well, thanks everybody.

To close, I'd like to address what we recognize is certainly of concern to our investors and that is our Q4 execution.

As you've heard we are executing and our performance is a result of the fact that we spent the last couple of years learning about our customers' pricing sensitivity, and their desires to see new products from us every year.

And the data is clear.

We have only seen sell-through challenges in Q4 when we've left year-old premium products out for a second year at their original prices.

We've learned that we need to launch new products to excite consumers and this year, as we've shared, we're launching 3 new cameras at the good, better, and best price points.

Something we haven't done since 2012.

We believe this will allow us to deliver a more predictable Q4 and importantly, set us up for a strong entry into 2019 where we believe we will be able to maintain gross margin.

The last 2 years have been a recovery period for GoPro.

And I believe our recent performance indicates we are exiting this recovery phase and executing on our plan to return to growth and profitability.

Thank you very much for joining today's call everyone.

This is team GoPro signing off.

This concludes today's call.

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