Good day and welcome to the GoPro Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Salkowski, Head of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to GoPro's second quarter 2016 earnings conference call. With me today are Nicholas Woodman, GoPro's CEO; Tony Bates, our President; and Brian McGee, our Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today may include forward-looking statements. These statements and all other statements made on this call that are not historical facts are not guarantees of future performance and subject to a number of risks and uncertainties that may cause the actual results to differ materially. Additionally, information concerning our risk factors is available in our most recent Annual Report on Form 10-K for the year ended December 31, 2015 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. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update any of these statements as a result of new information or future events. We report net profit and loss, and basic and diluted net profit and loss per share in accordance with GAAP and additionally on a non-GAAP basis. We believe that non-GAAP information is useful, because it could enhance the understanding of our ongoing economic performance. We use non-GAAP reporting internally to evaluate and manage our operations. We have chosen to provide this information to enable investors to perform comparisons of operating results in a manner similar to how we analyze our own operating results. A reconciliation of GAAP to non-GAAP financial data can be found in the earnings press release we issued today. All numbers that are disclosed in today's conference call other than revenue are non-GAAP unless otherwise noted.…

Thank you, Tony, and thanks to all of you for joining us today. If you've not already done so, I would encourage you to download from the Investors' section of our website the financial slides we posted concurrent with our press release earlier today. Our prepared remarks will be focused on the financial overview of Q2, as well as our related business trends. I will then provide update on our guidance. Our second quarter revenue of $220.8 million was up 20% sequentially, driven by an 8% sequential increase in units shipped and an 11% sequential increase in average selling price, or ASP. ASP is defined as total revenue divided by camera units shipped. Q2 revenue was down 47% year-over-year and we shipped 759,000 cameras in the quarter. As Nick noted, we estimate second quarter unit sell-through was up approximately 10% sequentially. Additionally, for the second quarter in a row, unit sell-through was more than 50% higher than sell-in, resulting in a significant sequential reduction in channel inventory that was just under 35%. Our inventory declined by $50 million or 36% to $90 million, our lowest inventory level since the second quarter of 2014. We believe that both our inventory as well as channel inventory levels are very well-positioned for our upcoming product launches. Regionally, the Americas accounted for the larger portion of our revenue, making up 56% of Q2 revenue followed by EMEA at 28% and APAC at 16%. Looking at our channels, direct and distribution revenue made up 58% and 42% of Q2 revenue respectively, compared to 46% and 54% of Q1 revenue respectively. As noted earlier, ASP per units shipped increased 11% sequentially. This improvement was due to a higher proportion of 399 and above cameras that collectively made up more than 50% of our unit shipped in…

Thank you. And we will first take a question from Simona Jankowski with Goldman Sachs. Simona K. Jankowski - Goldman Sachs & Co.: Hi. Thank you very much. I guess I just wanted to find out first if in the third quarter you expect sell-through to exceed sell-in again, or is it going to be the other way around? And then, as I look at your guidance into the second half, it seems to imply that the holiday season this year should be bigger than what you guys had back in 2014 with a very successful HERO4, and that seems to imply that not only will you have a successful product but the market is also still expanding, which I think a lot of investors are unsure about. So I would love to get your perspective on that.

Yes, Simona, this is Brian. I will sell start with the sell-in and sell-through question. We have been – actually, it's new. We have been continuing to report sell-through as well as sell-in and will continue to do that prospectively. I think we are trying to manage both sell-in and sell-through each quarter to be as close as they can be even with our product launches. So we don't get too far ahead or behind ourselves and we manage both our inventories and the inventories of the channel. And so I think that's kind of our approach to the business moving forward. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: And as a relates to – Nick Woodman here – as it relates to expanding the market and the new products that we have slated for back half of the year, yeah, we are definitely expanding the market by creating better user experiences that make it easier for our customers to capture, create and share engaging personal content. As we have shared, HERO5 is going to be the most connected experience that we have ever made specifically focusing on making it easy for our customers to access their content, so they can enjoy it. And then when they enjoy it, they can then do something with it, edit it using our terrific desktop and mobile editing tools and then more easily share their content. And then we are also expanding GoPro's solutions to include mobile solutions for smartphone users. Importantly, as we noted, we left Quik and Splice, both the apps open to be able to support photos captured with a smartphone. And we're seeing the adoption rate of smartphone users that are not GoPro users exceed – basically smartphone users are exceeding GoPro users in those apps and so you see those apps being very relevant to people that do not yet own a GoPro, and that gives us a terrific opportunity to make GoPro's brand and products relevant to the greater smartphone community of users and there obviously exists an opportunity to engage those smartphone users over time to participate in a greater GoPro ecosystem. And all of this is coming together fabulously for the fourth quarter.

Simona, I just want to add one other thing. So, your question vis-à-vis 2014, we were also in a very different place in terms of our expansion on a global basis. And so we have to take that into account back then we won in China, back then we didn't have the types of store count, so I talked about in the prepared remarks. Back then, we weren't entering India as well. So not only are we doing multiple product lines and we are making it easier which we think will expand the opportunity. We're also in a different place in terms of our distribution than we were back then. Simona K. Jankowski - Goldman Sachs & Co.: That's very helpful. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: And one thing important to add beyond distribution is the fact that we're localized now in language support, packaging, and content. Simona K. Jankowski - Goldman Sachs & Co.: That's very helpful. Just as a follow-up on the margin side, back then, you guys had margins in the mid to high 40%s versus your expectation of around 40%, this time around. Is that a function of that international mix or pricing or perhaps the impact of the Karma? Would love to get your thoughts on that.

Yes, hi, Simona. This is Brian again. We pushed back into the 40%s. Two quarters ago we were 29%, went to 33% and now 42% in the last quarter. We have a lot of mix, right, new products both HERO5, Karma. We've depleted the distribution channels quite a bit quite frankly in international markets and you saw that as we're much more direct in North America this past quarter. So we will be filling those channels as well. And just included in that we also said it would be possible at the 40% level in the fourth quarter. So moving into making money. Simona K. Jankowski - Goldman Sachs & Co.: Thank you.

And next, we'll move on to Paul Coster with JPMorgan.

Yes, thanks. First question is, I guess, I'm a little unclear as to whether the 3Q sequential growth is the function of new product shipping or whether it's just simply as seasonal strength. If it's new product, then obviously it must be just a small amount near the end of the quarter. Can you clarify on that? And then I guess the other thing is that you're basically bringing out product that's going to bring a new experience to the consumer. And I am just wondering how you're going to articulate that experience both in-store and more broadly so that people get the fact that something new and different is happening here outside of just the hardware?

Yeah. Hi, Paul. This is Brian. For the third quarter, we didn't divvy it up between Q3 and Q4 because we looked at it as the whole year as we kind of talked about almost six months ago when we were doing guidance. I'd expect to have although some channel fill later in Q3 on the new products as we go to the holiday launch. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: And as it relates to your question about how we're going to get the word out about our new products and experience that we're creating for our customers, we're going to be expanding upon the more product-centric global marketing campaign that has proved so successful in the first half of the year. Before 2016, GoPro was largely focused on marketing our brand in a very aspirational image-based presentation of the company. And then, in 2016, we shifted to more product-centric, still leveraging the strength of the brand to excite and engage consumers. But we've done a much better job of educating consumers on our products, educating them on the simplicity of Session, for example. And that's led Session to having a fabulous recovery and is now the number two selling camera in North American and European markets. So congratulations to our marketing team on that turnaround and doing Session justice. And you'll see the same type of approach in how we bring our new products to market, whether it's HERO5 line of cameras, whether it's the incredible desktop, mobile and cloud software experiences that we're creating for our customers or Karma and related accessories. They will all fall into this new marketing approach.

Thank you.

And next we'll move on to Joseph Wolf with Barclays.

Hey, guys. It's Brian Finneran on for Joe. I guess my first question, you were talking about Quik and Splice apps. Can you talk about any data you guys have on conversion of the smartphone users of those apps into GoPro customers or if you are tracking that going forward? Nicholas Woodman - Founder, Chairman & Chief Executive Officer: That's a really good question. No, we cannot provide any data to that. And that is something that we're going to be looking to get a better understanding of moving forward because this large engaged audience of users that we have now that do not own a GoPro, but are actively using these apps to produce content that they capture with their smartphone, this is just an enormous opportunity we believe to grow a relationship with them. And as I mentioned, get them to engage in the greater GoPro ecosystem, whether that's other software tools, whether that's, of course, getting them to upgrade to our hardware products as well. I think that the most important thing for now, given that the rebrand was fairly recent on these apps, is just seeing how strong and effective the GoPro brand has been at driving awareness of the apps, driving download and usage rates of the apps. As I mentioned, the apps are being used by far more smartphone-only users than GoPro users, which means that we are being successful in extending the brand to a new group of customers that don't yet own a GoPro. And that can only be a good thing in terms of growing our global relevance and turning that into business down the road. Anthony J. Bates - President & Director: Yes. Hey, Brian. It's Tony. I'll just add a couple of points to Nick's. I think the other…

That's really interesting. Thanks. And then I guess just one question on Karma. Is there any color you can provide us on the economics of it? Is it safe to assume that the margin profile of Karma will be roughly in line with the current GoPro corporate average if it's going to be in the 40% to 41% range for the second half of the year? Or will volumes just not be high enough to really sway it one way or the other?

Yeah. Hi, Brian, we're not going to get into each of the product profiles from a margin. We look at margin as more of a blended basis for the overall business and operate it that way.

Okay. Thanks.

And next we'll move on to Charlie Anderson with Dougherty & Company. Charlie Lowell Anderson - Dougherty & Co. LLC: Yeah, thanks for taking my questions. I was wondering, you talked about sell-through was a little bit better than sell-in, obviously. I wonder if you can characterize maybe if the ASPs were similar. What were the dynamics there? And also maybe geographically how that looked, maybe the Americas versus EMEA versus APAC. Any color there would be helpful.

Yeah, I can comment on the sell-in obviously because that's our ASPs. And from a sell-through, it's really reporting on volumes, not on their revenue ASP, so that I can't comment on. But the sell-through has been broad. Every region sold through more than we sold-in across the board, whether it be U.S., Europe, or Asia. Anthony J. Bates - President & Director: Yeah, maybe just to add. One, you said it was slightly better. It was 50% higher. So we're pretty proud of that, even bringing down inventory. But the second, we don't see a big shift. I think that's what you are asking, if there's a regional – we don't break it down, but just to give you color commentary. It's pretty much consistent across the board. I touched on it even with the point I was making about China, where we've maintained price discipline, we are not seeing a dynamic where there's a difference in terms of the ASP across the globe, very similar mix. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: And we obviously saw prices come down on the products that we discontinued. But we've actually been happy to see price stability on our three core products internationally, that is Session, HERO4 Silver and Black. There does not appear to be any significant discounting on those products, which is terrific. Charlie Lowell Anderson - Dougherty & Co. LLC: And then a follow-up for me. I imagine with HERO5 and Karma, it's a good opportunity to sell a new product to your existing base. Do you have any sense of how active that existing base is? What percentage are still on a weekly basis, on a monthly basis posting videos online, et cetera? Nicholas Woodman - Founder, Chairman & Chief Executive Officer: We do have some insight through the GoPro app. And the download rates for that actually exceed unit sales. So we have a lot of people who seem to be downloading that app for maybe the consumptive aspect of it because you can access the GoPro channel via it. But we do track camera connections, meaning how many times the app connects to the camera and frequency and what people are actually doing with their GoPros. And we see that the actual usage rate of the camera itself is encouraging. We're not breaking it out into specifics for you. But we are getting better at getting that data and having better insight into the usage behavior of our customers, and it's encouraging. Charlie Lowell Anderson - Dougherty & Co. LLC: Great. Thanks so much.

And next, we'll move on to Jim Duffy with Stifel. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Thanks. Good afternoon, guys. Nick, it sounds like you're excited about the marketing strategy in support of the holiday launches. Can you maybe share some more specifics on the campaign and the philosophy behind it? Does the campaign represent a comprehensive solution, including the supporting apps? And Karma, will it be more individual product specific? Nicholas Woodman - Founder, Chairman & Chief Executive Officer: That's a good question. By the end of the year, GoPro is going to be much more of an ecosystem company and an end-to-end solution for our customers. Whereas in previous years, we were primarily focused on enabling the capture of experiences, we're now by the holidays going to be enabling not only the capture experiences but the ability to easily access your footage after the fact. And then, importantly, we're a solutions company that's bringing you terrific and entertaining ways to edit that footage so that none of the experience of capture, accessing and creating footage is a chore. We're making it fun and entertaining. And so, from a marketing perspective, we can't just market any one aspect of that. We have to market the whole solution to the consumers so that the light bulb goes off and they see, oh my, I see now how GoPro has solved the whole story for me, and that's a terrific reason to upgrade. Anthony J. Bates - President & Director: Yeah. It's Tony. Just maybe one thing to add. I think, as Nick alluded to, we already sort of shifted from brand to product. But perhaps, the best way to capture where it's headed is through experience-based marketing. And as Nick mentioned, it's an ecosystem. And on that we…

And next, we move on to Mike Koban with Raymond James. Mike Koban - Raymond James & Associates, Inc.: Thanks, guys. This is Mike Koban on for Tavis McCourt. I just had a couple questions. First of all, the margin guidance for the second half, I was just wondering if you could give us a little color as to -- that seems to decrease and I was wondering if you could give us a little color as to why that might be.

Hi, Mike. This is Brian. Overall, if you look even historically there's – let me back up, sorry. I think the guidance range was still in the 40%s. We've got product transitions from old to new. We have mix, as I said before, HERO5, Karma, plus more in international as we've (43:14) channels. So it's a combination of all those things that puts us into the 40% plus or minus 100 basis point range. Again, I will point out, we will be profitable in Q4 as well. So it drives the model into that profitability. Mike Koban - Raymond James & Associates, Inc.: Great, thanks. And just kind of a couple kind of strategic level questions. As far as the software enhancements that are coming, I wonder if you could tell us a little bit about how you're trying to change the experience of getting that video off the camera. How you want to simplify that. And then secondly, as far as the media content, I was wondering if you could give us a little perspective on when you think you might have like GoPro branded content beyond the stuff that you are working with today? And that's it, thanks. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: Sure, I can speak to making it easier for our customers to offload their content and then access it. Something we talk a lot about within the company is weaving GoPro into our customer's life flow. And that really means not asking our customers to do anything outside of what they normally do. And that is not asking them to go hunker down in front of their computer for a few hours on a Sunday to offload, manage and edit their GoPro content. That's just not how people live their lives…

And we'll move on to Will Power with Baird. Will V. Power - Robert W. Baird & Co., Inc. (Broker): Great. Thanks. Yeah. Just maybe a clarification on channel inventory. Given the stronger sell-through, is channel inventory now in fact where you'd like it and more balanced or are there still further cuts on existing products you need to make?

Yeah, hi, Will. This is Brian. No, I think we've done a great job in channel inventory. This is two quarters in a row our inventories have come down dramatically low, over 20% in – sequential in the first quarter and then another almost 35% in the second quarter. So I think we're positioned where we need to be. The existing products continue to sell out in the summer months and then be ready for a heck of a launch in the second half. Anthony J. Bates - President & Director: Yeah. I mean, just to be emphatic, we are right where we want to be. We couldn't be more pleased with the work we've done on this. And as Brian mentioned, there has been improvements. But we're exactly where we want to be. And we are really closely tracking and making sure that we can ramp into our second half plans. But, yeah, we feel really good about our inventory right now. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: And I'd just like to add that when we see the sell-through rates that we are seeing and consumer demand for our products, which are over a year and half old, it just gets you excited for what customer reaction – what we believe customer reaction to our new products should be. It's an exciting time. Will V. Power - Robert W. Baird & Co., Inc. (Broker): And just speaking of sell-through, I was curious on the comments around Japan, China, couple of Asia markets you highlighted upfront in terms of the significant growth in sell-through. Any more color you can provide in terms of what you view as the key drivers there, it was an increased marketing on your part, was it added distribution, I mean what…

And Brad Erickson with Pacific Crest Securities will have our next question.

Hi. Thanks for taking my questions. Just couple of follow-ups. First, I guess when you look at entering the drone market here coming up, how do you think about that as an incremental TAM that you're tapping into? It it roughly the same size as the action camera market, bigger, smaller? How do you guys think about that? Nicholas Woodman - Founder, Chairman & Chief Executive Officer: Well, today, the drone market is a subset of the overall GoPro market we believe. I mean, if you look at the numbers that are estimated for total unit sales, that becomes clear. But I think that what's exciting is the drone market is so early days. And the leaders in that space currently – we recognize that we're not the first to market in this category. But importantly, the leading brands there now are not household names. And thankfully GoPro is globally a household name. And the drone category grew somewhat, thanks to GoPro, with GoPro being the original enabling camera on drones. GoPro, many people think we already make drones even though we don't. And so we think that we're very well-positioned to become an innovator and a respective leader in this category with Karma. That's something we're excited about. We think that it is something that our existing community is very excited about. And we believe that GoPro, because of our brand, because of our global distribution and, frankly, because of the user experience that we're creating and dedicated to, we think that we can help expand the overall drone category just through a terrific ease-of-use and versatility story that the consumers have not yet seen from existing drone suppliers.

Got it. That's great. And then while I know you guys can't predict sell-through obviously for the second half of the year, in terms of either Q4 or second half channel fill, can you give us any sense of what your expectations are for the relative contribution from Karma versus HERO5? Is it fairly equal, more heavily weighted towards cameras? Just any color there would be helpful.

Again, we didn't break out the product mix between HERO5 and Karma. And so, again, when we talk about sell-in and sell-through, I think the philosophy moving forward is keeping them as tight as possible so the channels don't get imbalanced one way or the other. Anthony J. Bates - President & Director: Yeah, I mean, maybe just to add without going – you were asking about the mix. I mean, I think we look at it as a portfolio. So that's the guide we'd give you in the overall margin profile. But we will put the same level of rigor vis-à-vis tracking sell-through across the full portfolio. And that's going to be very important, that we bring the same level of discipline that we have just done vis-à-vis channel mix when we look at sell-through versus sell-in for both these products.

Got it. And then, finally, how long will it take to get the drone out to your full distribution channel? Is that something that will pretty much occur right away or will it ramp up over the first few quarters? Thank you. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: Yeah, it's a good question, but we're just not going to comment on our rollout strategy.

Understood. Thank you, guys. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: Thank you.

And next we'll move to Ben Bollin with Cleveland Research.

Good afternoon. Thanks for taking my question. I wanted to start, Brian, when you look at the operating expenses, you mentioned some incentive comp in the quarter and then gradual increase through the year. But there's so many investments being made right now, hardware, the cloud, software. Once that starts going to market, do those OpEx figures continue to grow because of future investments, should they firm? Any thoughts on the structure of the OpEx over time?

Again, as I said, I think in the second half we will see sequential growth in OpEx a little bit from Q2, the majority of that is going to be in sales and marketing, though, to really drive the product launches for HERO5, Karma and the rest of it. So kind of think about it that way. I do think we are getting kind of near the levels where we are reaching maturity in terms of how we build products in the level of investment that it takes from one to the next in terms of rollout. So that's how I view it. Anthony J. Bates - President & Director: Yeah. No, I would say the same. I think that, again, you know, we are reaching a point, as Brian mentioned, that there will be modest sequential increase and based on kind of what we'll think about the business today, yeah, we're reaching that maturity, but we haven't given any guidance such as (59:10) color commentary at this stage.

Right.

And follow-up, you talked a little bit about some of the discussions and showing some of the stuff off to partners. When you look at the partner feedback, any sense for how they view products later this year in terms of commitment levels. Do you feel like it's similar to how they have looked at products in prior years and make you sound maybe a little bit more enthusiastic that this year could be better than previous cycles. Any sense currently that you are getting from the partners on how much working capital they would provide to you in front of these launches and maybe how that compares to some prior launches? Nicholas Woodman - Founder, Chairman & Chief Executive Officer: I think the only color that we would be comfortable sharing is that GoPro remains a very important brand and a very important brand to our retail partners and that they remain as committed to us this year as they have in the past and nothing has changed there.

Thank you.

And at this time, there is no further time for questions. I would like to turn the call back over to the CEO, Nick Woodman, for any additional or closing remarks. Nicholas Woodman - Founder, Chairman & Chief Executive Officer: All right, thank you, everybody. I will close by saying we are right where we want to be going in the second half of the year. I want to congratulate and thank everyone at GoPro for all of the focus, passion, and execution over the last few quarters to get us to where we are. As we have said, we are right where we want to be and we're looking forward to a return to profitability in the fourth quarter and the biggest product launch and we believe the biggest second half of the year in our history. So I want to thank again everybody at GoPro for making this possible and to all of you on the call for tuning in. So thanks everyone, and this is GoPro, team GoPro signing off.

And that will conclude today's call. We thank you for your participation.