Hello, everybody, and welcome to the GoPro Third Quarter 2023 Earnings Conference Call. My name is Sam, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Christopher Clark, VP of Corporate Communications to begin. So Christopher, please go ahead.

Thank you, Sam. Good afternoon, everyone, and welcome to GoPro's third quarter 2023 earnings conference call. With me today are GoPro’s CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Today's agenda will include commentary from Nick and Brian followed by Q&A. For detailed information about our third quarter 2023 performance and our outlook, please read our Q3 2023 earnings press release and the management commentary we've posted to the investor relations section of GoPro's website. Before I pass the call to Nick, 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. This means that results could change at any time and we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary, we refer you to our most recent annual report on Form 10-K for the year ended December 31st, 2022, which is on file with the Securities and Exchange Commission and 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, adjusted EBITDA, as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon, which is posted on the Investor Relations section of our website. Unless otherwise noted, all income statement related numbers that are discussed in the management commentary and remarks made today, other than revenue, are non-GAAP. Now, I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman.

Thanks, Chris, and thanks everybody for joining us today. I'm excited to share the positive progress we're making against the growth and TAM expansion strategy we initiated in May 2023. A strategy we believe will drive meaningful revenue, subscriber, and profit growth over the next two years. As a reminder, this strategy included a return to lower pre-pandemic pricing to drive unit sales, the reintroduction of entry-level priced GoPro cameras to reach new customers, increased marketing to drive awareness, expanding GoPro's global retail channel presence to better serve consumers post-pandemic shopping behavior. In Q3 2023, both revenue and non-GAAP earnings per share exceeded the midpoint of our guidance. Revenue was $294 million and non-GAAP earnings per share was $0.04 and we ended the quarter on target with 2.5 million subscribers. In September we launched our new $399 flagship camera HERO12 Black, loaded with powerful new features for both professional and casual users and further establishing GoPro as the performance and value benchmark for our industry. As I mentioned, revenue for the quarter was ahead of guidance. This was a result of HERO12 Black and our entry level price point cameras, both exceeding our expectations. Our entry level SKUs generated 19% of camera revenue, demonstrating their TAM expanding potential without cannibalizing our high-end SKUs. Third quarter 2023 retail channel revenue grew 12% year-over-year to $231 million, or 78% of total revenue. Total camera unit sales grew 31% sequentially and 16% year-over-year. Total camera units sold into retail grew 35% and retail sell-through grew 29%, respectively year-over-year, aided by our renewed focus on growing our retail channel presence. Last quarter we shared a target of adding approximately 2,000 new retail doors globally by the end of 2023 and I'm happy to report that we're tracking ahead of that goal, having already added…

Thanks, Nick. The third quarter of 2023 represented the first full quarter operating under our growth and TAM expansion strategy that we implemented in May 2023. I'd like to now frame at a high level where we are as we evolve our business. Based on the full-year outlook provided today in our written commentary, revenue and unit sales for 2023 are expected to be ahead of what we estimated on our Q2 2023 earnings call. We return to year-over-year unit growth in the third quarter at 15% and expect unit growth to be approximately up 15% year-over-year in the fourth quarter. We increased door count by 13% since the second quarter. Through October, we are tracking to our estimated 1 million units of camera sell-through in the fourth quarter of 2023. We return to non-GAAP profitability in the third quarter and expect to be profitable on a non-GAAP basis in the fourth quarter. These are very positive, early signs that our plans to return GoPro to growth and profitability are working. Our success in selling more of our entry-level products than initially projected has put pressure on near-term margins. We expect margin pressure to continue through Q1 2024 until the replacement of our current low-margin entry-level products are replaced with newly designed entry-level cameras at lower price points -- lower product costs that are expected to come in the second quarter of 2024. We continue to invest in innovation, notably in system-on-chip, hardware accessories and software. In addition, we are expanding marketing and sales capabilities to fuel growth, while also driving efficiencies in other areas of the business. We have prudently tightened operating expenses for 2023, which we expect to be at $365 million, down from $370 million estimated during our last earnings report. We continue to tightly manage our…

Thank you. [Operator Instructions] Our first question comes from Erik Woodring from Morgan Stanley. Erik, your line is now open. Please go ahead.

Thank you so much, and thank you guys for taking my questions. I have two. Maybe Nick or Brian, 4Q sell-through guidance of 1 million units, obviously, great to hear you are tracking there at this point. That's up about 10% year-over-year, I believe. Can you just give us a bit more detail on how you would characterize the demand environment, and specifically, how you think about that growth being driven by the lower price point in GoPro's specific actions and products versus just kind of a better overall consumer health for the holiday period. If you could just kind of dissect that, however best, that would be really helpful and then I have a follow-up. Thank you.

Maybe I can start and then Nick can come in behind me. Just to kind of maybe frame it a little bit, Q3 was off the charts good. I mean we were up 31% sequentially. We moved our price point to where they've historically been. We saw terrific performance out of HERO12 Black and even more momentum quite frankly out of the entry level products. And retail performed exceptionally well, up 35% in sell-in of units year-over-year and nearly 30% increase in sell-throughs. So the retail side of it is doing very well. We expect that to continue in the fourth quarter. HERO12 will do well and we'll have growth over what we did in HERO11 just based on the performance we're seeing to date and our expectation for the quarter. I think the other thing we'll see that's helping to drive the business is about 30% or so of our unit volume in the fourth quarter will be our entry-level product. And I mean, that's up substantially from last year. We had some, but we continue to drive the entry-level and that's driving units. And that's why I mentioned, we still get hit a little bit on margin, but we drive more subscribers as a result of that, nearly 30% of that. And it reduces inventory and drives cash flow. So from that perspective, it's positive, and we expect to replace our entry-level price point products that we're selling today with a new one that's got an appropriate cost profile in Q2 of 2024 and that, as I mentioned, lifts margins next year about 230 basis points. So kind of framing it that way and I can say our sell-through so far to date between retail and GoPro.com are tracking to where we need to be for the quarter. We have to now get into the holiday season. We're coming into that with Black Friday and Cyber Monday and the holiday and the like. But, so far that's going well. We have great indications from our retail partners too who are also very excited. So I don't know if Nick, did you have anything more to add?

Yes. I mean, I'd add it was great to see HERO12 Black come out of the gates so strong and maintain that momentum. HERO12 Black's proven to be -- have a really good launch and follow on sales that compare really well with HERO11 Black's performance a year ago. So it's great to see that improvement. And we think that's not only due to it being a phenomenal product that's been really well received by media and consumers alike. But this year we also have the support of our retail partners in a way that we haven't had since before the pandemic. So it's a great indicator that our strategy to focus more on our retail presence and work more closely with our retail partners is paying off. That's great to see. And then as we noted in my prepared remarks, the strength of our entry-level products has really been exceeding our expectation, but without cannibalizing our higher-end products. So our expectation that our entry-level price products would expand the TAM and bring in new customers without eroding the high end as proven to be true. So it's a great -- puts us in a great position going into the holiday season, because we have a much better lineup for every buyer at every price point, every type of gift giver this year compared with last year. So we are feeling really good.

Okay, that's really helpful. Thank you both for all of that color. I guess maybe my second question is for you, Brian. And your business is transactional and very seasonal. And we haven't yet passed the 2023 holiday period, but you've given us some fairly specific guidance for the entirety of 2024. Can you maybe just help us understand what gives you confidence to kind of set some of these bogies for next year and kind of how you come to these conclusions so far in advance? Just give us some confidence in the baseline that you're setting for next year would be really helpful. And that's it for me. Thank you.

Yeah, no worries. Well, let's say, I think we're going to see continued growth on the entry level to more units than we were doing this year, because we'll have a full year of selling that. So that's several hundred thousand units alone going into 2024 and we're seeing that demand. So that's going to continue. We really started this kind of mid or, call it, May of this year. So, it's just kind of putting a full year bent to kind of the increase in demand. We're seeing strong demand in HERO12. We expect that to continue. And we have some other new products coming that are going to -- should -- we would expect that they're going to do really well next year. So at least three new products next year coming as well as what we've got today going into 2024. So from that perspective it's good. We'll continue to add doors, expand that reach another 14% next year. We've got the full year of pricing at our lower price points, $399 and below, versus $499 and below. That alone is lifting unit volume, and we're seeing that demand happen as we meet the consumer where they are. So that's another aspect of where we go and adding more doors and we're driving a lot more engagement with subscription. We'll drivee subscription up, we expect in the year. So we're seeing positive momentum on where we're going so far with Q3 now behind us, Q4 ahead of us with really strong retail demand and consumer demand. So I think we can look ahead and go -- the moves we've made mid-year of 2023, we expect to continue to be playing out in 2024. And then I talked -- that’s on the top line, and then I talked about how do we improve margin and getting to about 37%. And that's really key for us next year as we drive that margin. OpEx goes up a little bit to support innovation. And that goes right to the bottom line for pretty substantial profit improvement as we laid it out.

[Operator Instructions] And our next question comes from Martin Yang from Oppenheimer. Martin, your line is now open. Please go ahead.

Thank you for taking the question. First question is about retention rate. I really appreciate your sharing the first year, second year retention. Can you maybe comment on how those retention rates changed versus a year or two years ago?

Yes. Hi, Martin. This is Brian. Retention rates have generally been increasing and have gone from the 50s now up to -- in the first year to 60% to 65% and year one and year two is holding at 70% to 75%. So we're very pleased with that. We have, even within that, seen improvement in retention rates from those who have signed up on the web, and that's improved about 10% -- 5%. So that's been encouraging -- an encouraging trends and we'll work more on the op stores as well. And as we get into next year, because we'll be kind of three years into this, we can start reporting on the third year retention. But so far, the retention rates have continued to improve, as well as the tax rates, which are up year-over-year. So things have continued to move in the right direction on subscription as well.

Got it. And the lower cost models have a lower attach rate for service, what are your plans to raise that attach rate or do you feel that 30% attach rate or subscription is where you want it to be?

Well, on the attach rate, currently it's 40%, right, for, I think, when combined between retail and GoPro.com and who comes in and buys. We think adding the premium subscription service will add to that retention rate. We've done a lot of work on consumer insights. That's why for people who subscribe to GoPro, they'll have access to desktop app. That's been a very positive response rate from a consumer insight perspective. So hopefully that drives not only attach, but increased retention rates over time. And we'll add other kind of services and applications to the service that disenhances it over time. And that's really the continue to drive attach, and retain the subscribers we have.

Got it, thank you. Last question for me is the upcoming new cameras for 2024. Can you maybe generally talk about the inspiration for the new designs? Are they coming from available product on the market, customer feedback, or any other source that would drive you to come up with new more -- maybe a more niche specific design.

Hey, I'll take that. Thanks. Yes, it's a little bit of everything. We're doing more and more consumer research to understand what consumers want to see from us, what maybe our current products are missing that would compel them to purchase. And as well, just through our experience in so many categories for so many years, we've been identifying new form factors, new capabilities that would better tailor a GoPro for a specific use case. I think that we're getting a better understanding that it's not just price points that we have to hit to attract consumers, but it's also unique usability and product functionality for different use cases that we think that if we nail it and we nail it at the right price point, we can expand our TAM. And that goes in both directions. We've shared that we're working on a new entry level product that's going to be at the appropriate margin level for GoPro that we're going to launch in Q2 next year. We're really excited about that. Not only is that going to be a phenomenal price point, but we also think the user experience is going to be phenomenal for that entry level user, really helping them be successful with their GoPro, which we believe is going to lead to increased engagement and the potential to upsell them to other products over time. And then at the high end, we have new products coming that we think are going to really excite consumers and help drive further growth. So it's across the spectrum that we're targeting new products. And next year is going to be a really exciting time.

Thank you, Nick.

And there are no further questions, so I'd like to hand the call back to the management team for any closing remarks.

Thank you, operator, and thank you, everyone, for joining today's call. As I said earlier, we're excited about the upcoming holiday season. Demand is strong. We're making steady progress expanding our retail network, and we're looking forward to launching new margin accretive hardware in 2024, while continuing to enhance our software and subscription offerings. And to those of you still trying to figure out the perfect gift to give this holiday season that will make you look like a hero, it's simple, GoPro. Thanks again for joining today's call everyone. This is team GoPro signing off.

This concludes today's conference call. Thank you everyone for joining. You may now disconnect.