GoPro (GPRO) Nicholas Woodman on Q2 2016 Results - Earnings Call Transcript

| About: GoPro (GPRO)

GoPro, Inc. (NASDAQ:GPRO)

Q2 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

Peter M. Salkowski - Head of Investor Relations, GoPro, Inc.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Anthony J. Bates - President & Director

Brian McGee - Chief Financial Officer

Analysts

Simona K. Jankowski - Goldman Sachs & Co.

Paul Coster - JPMorgan Securities LLC

Brian Finneran - Barclays Capital, Inc.

Charlie Lowell Anderson - Dougherty & Co. LLC

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Mike Koban - Raymond James & Associates, Inc.

Will V. Power - Robert W. Baird & Co., Inc. (Broker)

Brad Erickson - Pacific Crest Securities

Ben J. Bollin - Cleveland Research Co. LLC

Operator

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.

Peter M. Salkowski - Head of Investor Relations, GoPro, Inc.

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. In addition to the earnings press release, we have posted slides containing detailed financial data and metrics for the second quarter of 2016. These slides and a link to the webcast for today's earnings conference call are posted on the Events and Presentations page of the GoPro's Investor Relations website for your reference.

In the interest of time, I would like to remind those participating in the Q&A portion of the call to please limit yourself to one question.

Now let's turn the call over to GoPro's CEO, Nicholas Woodman. Nick?

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Good afternoon and welcome. Today, I'm going to review our second quarter performance and why we believe key indicators show that demand for GoPro remains strong and that we're well-positioned for the second half of the year. I will also provide an update on new hardware and software initiatives, all of which are on track for release later this year.

In the second quarter, revenue was up 20% sequentially to $221 million. We shipped 759,000 units, an 8% increase quarter-over-quarter, and our average selling price increased 11% sequentially. Second quarter revenue was down 47% year-over-year, largely due to continued channel inventory reductions of nearly 35% sequentially.

We estimate that sell-through, the best reflection of consumer demand, was down less than 10% year-over-year. Sequentially, sell-through was up approximately 10%. And for the second quarter in a row, sell-through was more than 50% higher than sell-in. We now have a simple product line, a clean retail channel and clear indications of strong consumer demand. We believe all of these factors put GoPro in a very favorable position for launching new products later this year.

Now, I will review our product in hardware, software and entertainment. Our HERO5 line is on track to launch later this year and delivers far and away the most convenient and connected user experience we've ever created, and it does so without sacrificing any of the performance GoPro is renowned for.

HERO5 includes several innovative and enabling features that dramatically simplify the experience contributing to what we believe will be the most successful new camera launch in GoPro's history. And Karma, our new drone, is on track to launch later this year. I have been using Karma extensively and it's so much more than a drone. I am convinced its versatility and ease of use will dramatically enhance how people capture their lives be it from the sky or otherwise. I am proud. Thanks to the incredible capabilities of our team that GoPro is set to be an innovator in this exciting growth category.

Now, I want to outline the progress we have made in software, building solutions that make it easy for people to manage, edit and share their content. In February, we announced the acquisition of two mobile editing apps and in May, we re-launched both apps as GoPro branded experiences.

The first is Quik, an automated editing apps that makes it incredibly easy to produce entertaining videos from both GoPro and smartphone footage. The second mobile editing app, Splice, makes producing custom edit easy. Since rebranding the mobile apps in May, Quik and Splice have doubled their combined monthly active users to 3.7 million and also doubled the amount of share content each month.

When GoPro acquired these apps, we made the strategic decision to continue the app support of content capture from smartphones, making GoPro software solutions relevant to billions of smartphone users worldwide. Given that these apps have been downloaded roughly 37 million times, it's clear that our overall user base extends far beyond GoPro owners. Clearly, there exists an opportunity to engage this larger audience in the greater GoPro ecosystem.

In the months ahead, we will be consolidating our mobile and desktop solutions into a clear and convenient cross-platform experience that will allow consumers to access, create and share anytime, anywhere. And we were also making progress in entertainment. A key initiative revolves around content partnerships.

GoPro is partnering with some of the world's most recognized brands to create original episodic content: Ford, Wimbledon and Real Madrid are just a few of the brands leveraging GoPro, its athletes and global community to engage their own audiences with uniquely compelling stories. You can check out some of this content on GoPro's blog, the inside line.

Another entertainment initiative, GoPro Awards is producing some of the best user generated content we've ever seen. GoPro Awards acts as a magnet for top quality photos and videos which can generate cash rewards for our customers when licensed or used in our own marketing. We launched GoPro Awards in October and so far the content has generated more than 21 million views on YouTube.

In the second quarter, two awards topped 1 million views and one of them on a rocket launched to space generated over 5 million views. And to top it off, two GoPro videos landed in the top five on Google's brand Leaderboard in May.

To summarize, GoPro is extremely well-positioned for the back half of the year. Channel inventories have been dramatically reduced, thanks to our streamlined product offering and strong consumer demand. We've enhanced our software offerings with dramatic improvements in mobile editing, leading to millions of downloads and monthly shares. And best of all, HERO5 and Karma will contribute to the largest introduction of new products in our history, all in time for what we think will be GoPro's most exciting fourth quarter ever, a quarter where we expect to return to profitability.

And with that, I will hand it off to Tony.

Anthony J. Bates - President & Director

Thanks, Nick. This afternoon, I will provide some perspective on our retail landscape and then I will discuss how GoPro's continued commitment to marketing is strengthening our brand and introducing new users to our ecosystem. By our own estimates in the domestic market, Session continues to be the number two best-selling camera on a unit basis. And according to NPD in the U.S., GoPro held six of the top 10 products on a unit basis in the digital camera, camcorder category.

In the second quarter, HERO4 Silver was the best-selling digital image camera on a unit and dollar basis, a spot that is now held for seven quarters in a row. And an achievement we are all very proud of, HERO4 Silver has now exceeded $1 billion in revenue, making it the best-selling camera in GoPro history.

In the second quarter, approximately 48% of GoPro's revenue was generated outside of the U.S. And according to GfK, in Europe, GoPro's unit share of the digital imaging category increased 110 basis points year-over-year to 9.4%. Our cameras accounted for four of the top five camcorders in Europe on a unit basis with HERO4 Silver again holding the number one position and Session, again, at number two.

We are also making good progress on our plans to expand in Asia. In Japan, while in the second quarter we expanded our store count by just over 25%, our unit sell-through is 91% year-over-year. According to GfK, our share of the action camera category in Japan is up 15 percentage points year-over-year to 42%. Congratulations to our team and partners on the ground in Japan.

China continues to be one of our fastest-growing markets. In the first half of the year, sell-through is up an estimated 140% versus the first half of 2015. And we continue to grow volume while maintaining price discipline. Our growth in China's powerful online market is particularly strong. In the first half of 2016, our sales volume grew over 150% on both Tmall and JD.com versus the same period a year ago. And in Korea, the number of stores that sell GoPro has expanded by over 65% sequentially to just over 680 stores.

In addition, in the second quarter we announced an exclusive partnership with Reliance Digital, India's largest consumer electronics retailer. This partnership will put GoPro's products on the shelf of up to 1,800 Reliance Digital stores across India.

We expect GoPro's presence in international markets to get a big boost later this year when we begin offering localized customer experiences in multiple languages, including German, French, Portuguese, Japanese, Korean, and Chinese. This includes packaging, camera UI and software apps, as well as marketing materials and point-of-purchase displays.

This match directly to a parallel initiative, developing localized content for our international websites, social media and in-store merchandising. The goal for our international expansion is as simple as it is ambitious – make GoPro easy and accessible for everyone.

Next, I want to highlight the dramatic growth in GoPro's social footprint. Year-over-year, the total number of GoPro followers on Facebook, Instagram, Twitter, and YouTube has grown by 32% to more than 25 million followers. This is a strong indicator of consumer awareness and the overall strength of our brand. It's the momentum we love to see headed into the holiday season.

As Nick outlined, GoPro is preparing to launch the HERO5 and our drone, Karma, later this year. Fundamental to our product strategy is our deep commitment to supporting the launch of these products with our largest marketing campaign to-date.

At the heart of our strategy is the virtuous cycle, where content posted by GoPro and our 160 sponsored athletes and our community of millions of users creates awareness of our brand and stimulates demand for our products.

In June, we hosted our fourth GoPro Mountain Games in Vail, attended by more than 67,000 people. The festival included competitive events from mountain biking, rock climbing, whitewater kayaking, slacklining and, by far the biggest crowd-pleaser, canine dock-diving. At the games, we coached our athletes on shooting and editing, encouraging them to grow their social profile while driving recognition of GoPro products.

This year, our athletes posted more than 1,600 pieces of content and generated more than 3 million views and interactions on social media. In Europe, we activated that same strategy this summer by fitting each team in Tour de France with GoPros. By the end of the race, close to 1,000 posts related to GoPro and Tour de France have generated more than 1.6 million views and interactions.

In May, GoPro and Red Bull announced a multi-year global partnership of content production, distribution and cross promotion. GoPro is now the exclusive provider of point-of-view imaging technology for Red Bull event, which reached 76 countries and generate billions of impressions.

I will finish by saying that we are exactly where we want to be for the launch of our upcoming new products and are very proud of the planning and discipline that got us here. We simplified our product line, reduced channel inventories and strengthened our presence in international markets. We've assembled a powerful marketing approach built on an effective strategy, holding our base and reaching out to millions of new consumers. In essence, we believe we are extremely well-positioned for the launch of our new products later this year.

With that, I'll hand it over to Brian.

Brian McGee - Chief Financial Officer

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 the quarter. In addition, the higher proportion of units sold went through our direct channel. On a year-over-year basis, our ASPs were up 14%. We did not experience any noticeable pricing pressure in the quarter.

Gross margin for the second quarter was 42.4%, up sequentially from 33% in the first quarter and down from 46.4% in the second quarter of 2015. As mentioned during last quarter's earnings call, our first quarter 2016 margin excluding $8 million in legacy product charges would have been approximately 36.8%. Gross margin reflects a shift in sales mix to a good, better, best offering of HERO Session and HERO4 Silver and Black cameras and a higher proportion of direct sales. In addition, we had no further inventory write-off in the second quarter.

Operating expenses of $182.9 million in the second quarter of 2016 were up 42% year-over-year. R&D was up 55% year-over-year reflecting our investment in the development of next-generation cameras, drone, accessories and software. Second quarter R&D included approximately $7 million and non-recurring compensation expenses related to our recent acquisition. Sales and marketing expenses grew 34% year-over-year, reflecting the increase in our expanded branding, product marketing and entertainment initiatives.

We've recorded an operating loss in the second quarter of approximately $89 million, reflecting a year-over-year decline in units shipped and growth in operating expenses. Loss per share in the second quarter was $0.52, down from earnings per diluted share of $0.35 in the prior year comparable quarter. GAAP net loss for the second quarter was $91.8 million, or $0.66 per share. This compares with GAAP net income of $35 million, or $0.24 per diluted share for the second quarter of 2015.

Turning to the balance sheet, we ended this quarter with cash, cash equivalents and marketable securities of approximately $279 million, down $110 million or 28% from the first quarter, including more than $70 million in acquisition-related payments. Accounts receivable at June 30 were $65 million, and DSOs came in at 27 days. No borrowings have been made to date under our credit facility.

I will now move on to our guidance. We are maintaining our 2016 revenue guidance range of $1.35 billion to $1.5 billion. We expect revenue to grow consecutively in each of the third and fourth quarters. Our gross margin for the second half of the year is expected to be 40%, plus or minus 100 basis points.

Our hardware launches this year will be accompanied by ongoing software improvements and developments with a robust desktop and mobile editing tool. In addition, our marketing efforts are having a positive impact on sell-through and we remain committed to both brand and product marketing going into our new product launches.

As a result, we expect total operating expenses to grow modestly on a sequential basis for the third quarter and fourth quarter. Sales and marketing will continue to be the majority of the growth in operating expenses in support of our upcoming product launches. We expect the full year non-GAAP tax rate to be approximately 14%. And as Nick mentioned earlier, we expect to return to profitability in the fourth quarter of 2016.

So, with that, operator, we are ready to take questions.

Question-and-Answer Session

Operator

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.

Brian McGee - Chief Financial Officer

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.

Brian McGee - Chief Financial Officer

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.

Brian McGee - Chief Financial Officer

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.

Operator

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

Paul Coster - JPMorgan Securities LLC

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?

Brian McGee - Chief Financial Officer

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.

Paul Coster - JPMorgan Securities LLC

Thank you.

Operator

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

Brian Finneran - Barclays Capital, Inc.

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 thing we see that we can share is we are very encouraged with the usage, particularly in the sharing, which points to a very similar likeminded approach that we've seen from GoPro users when they engage with our software. So that means the people not only want to create that content, they want to share it. And that plays to the strength of the GoPro movement and community we have.

And one little data point is, in our Splice app, we added Altro (34:10) that has the GoPro logo on it. And when we did that, we wondered whether people would want to associate that content, be it GoPro or non-GoPro content, with GoPro. And what's been really interesting is to see just how strong those exports have been with Altro (34:26). So it means that by definition, people are associating it with GoPro in a broader sense and that does create an opportunity, which is what you were asking about, to up-sell them in the future.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

It's actually approximately 70% of the videos shared from the Splice app have the GoPro Altro (34:49) slide that's branded GoPro attached to it. But the majority of content being shared from the app is smartphone content. The point is is that even the smartphone customers are excited to associate their content and themselves with the brand that brought them the app experience. That's very encouraging.

Brian Finneran - Barclays Capital, Inc.

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?

Brian McGee - Chief Financial Officer

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.

Brian Finneran - Barclays Capital, Inc.

Okay. Thanks.

Operator

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.

Brian McGee - Chief Financial Officer

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.

Operator

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 recognize that some time ago, we are also hiring folks who have that type of experience, right? So it's a shift both in terms of – you can call campaign. But I think ongoing the way we think about marketing the overall ecosystem of GoPro.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Just a follow-up on that. So that's a pretty complex methods to communicate within traditional, I don't know, marketing vehicles. Can you maybe elaborate a little bit more on some of the strategies or principles that will help you get that message across and the way that their consumer can digest it?

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Well, maybe I can answer this in a different way that will get to maybe what you are after, which is, even if you are just to look at HERO5 alone and what it means and how it compares as an upgrade over HERO4. Our current products pale in comparison to HERO5, just at the device level. So in terms of the risk of not getting it across the consumers why HERO5 is such a terrific upgrade for them, there is very little risk of that. The product on its own does that. The experience thereafter of accessing and then creating content, that's going to be a very nice to have in terms of winning the consumers understanding of that. But even if we just execute at the product level, we think the HERO5 is going to be hugely successful.

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Very helpful. Thanks for that perspective.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Sure.

Operator

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.

Brian McGee - Chief Financial Officer

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 today. They're much more mobile and on-the-go and fluid. And so, we are very focused on weaving the use of a GoPro, the hardware. And then the offloading of your content and the access to that content into that sort of mobile active lifestyle, because people don't want to have to think about there's some plan for it.

And so what that means is we're focused on how does a GoPro connect to a mobile phone, a smartphone and offload its content to the mobile on-the-go? How does a GoPro connect to the cloud and offload to a cloud account when you're at home on a high-speed network? And then, how do you access that content on any platform that you may be on, whether it's mobile, whether it's your desktop, whether it's via your television, and over-the-top service. And so we're thinking about all of those aspects to just – so that the user doesn't need to think about it, just frankly, it just works and we think we're doing a terrific job of realizing that later this year. And then I'll let Tony comment on the...

Anthony J. Bates - President & Director

Yeah. Just on your question about the GoPro branded content, I would say a couple of things you already see. You've seen a shift at least in the way that we approach content and tell the stories, Nick touched on it. We started to do some branded partnerships that are more episodic in nature. We've been known, I think, as really the company that brings you the short form music overlay inspirational moment and that's still very critical to driving the virtuous cycle that I talked about. And you'll see us do more of that and will engage partners to do that and we'll do that ourselves.

I think the other one is that we continue to see really good success in our user community, bringing us great new content. It's quite something when you step back and say, if you just look at some of out and out top videos that people recognize us for, they're actually coming directly from our users in the form of GoPro Awards.

So those are a couple opportunities that will continue to help drive the size of the content file. I will address because perhaps where this question goes, what does that mean in terms of long-term monetization? We are still looking at that, but it's still a very small part of the business. But we do still have a small licensing revenue stream that comes off of that content. Typically, it's someone looking for a unique piece of content, perhaps for their brand in terms of advertising. So it's not large, but we do have a steady flow there. And it's something that we continue to be very interested in.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Yeah. And I think as we shared on the IPO, our media opportunity really grows when we succeed with our core value proposition for consumers, which is helping them create great content, which we think we're going to be doing a very good job of by the end of the year with our new hardware and software experiences and solutions. And that when our customers are able to more frequently create compelling contents, we can improve the quantity and quality of their content, then our media opportunity grows with that. And we said that, first, we have to realize this for our customers, and then our media opportunity grows from that. And I'm excited to say that we're getting close to realizing this for our customers.

Mike Koban - Raymond James & Associates, Inc.

Great. Thanks, guys.

Operator

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?

Brian McGee - Chief Financial Officer

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 are the key drivers that really drove that acceleration there?

Anthony J. Bates - President & Director

The number one driver and I've talked about this before was, we need to invest, we need to put people on the ground, get teams there, get closer to making sure we understood not just expansion of distribution, which we have done a great job on, but also that we are merchandising in the right way working closely with our partners. And as I mentioned, there has been some execution.

And beyond that, lots of learnings about basically making sure we do the localization that I touched on, that we have local content that we put things in languages and so on. So we've got a lot of excitement from our retail partners out there. So not only have we got people closing on the ground and we have made those investments, but we've also got and excited about what's coming. And so as I mentioned, I think it creates a big potential for us in some of the markets where we were playing but not at the level that we're playing at today.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Yeah, until recently we were speaking American to the rest of the world. And now we are speaking to them in their own local tongue. And that is resonating fabulously and it's giving the respect to these important markets that's been long overdue.

Will V. Power - Robert W. Baird & Co., Inc. (Broker)

And then my final question is on Karma. And I wonder now that we're getting closer to the launch, if you can update us as to how you're feeling and thinking about retail space, commitments. Is this something that gets marketed alongside existing GoPro products? Should you expect a dedicated space for Karmas, to get put with that other drone categories, how is that going to shake out do you think?

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Well, these are great questions. But I can't share specifics about our channel marketing strategy for Karma. But what I can say is that we have shared Karma with some of our key retailers and we've shared our other new products with some of our key retailers and the reception has been fantastic. They're as excited, if not more excited, about some of our products than we are internally. And that's meaningful because these retailers meet with other companies and understand what else is coming after the holidays, whether it's directly competitive to GoPro or it's just share of wallet of the consumer and across-the-board, whether it's our U.S. customers or our international retail customers. Everybody is very excited about what we have on tap. And that bodes well for our ability to secure shelf space where strategically it makes sense for us.

And another point to note on is that this year we're doing a much better job of communicating with our retailers globally to prepare together as a team for new product launches and to maximize the marketing opportunities around those launches. And that's something that we've never really done a terrific job of before because strategically we held our new products much more closer to the vest and kept it secret from our retailers up until just before launch.

And we realized last year that we needed to be a much better partner with our retailers and get ahead of it earlier so that we could plan big launches with them. And that's something that I'm very proud of that we've changed our approach to channel marketing. And we expect it to bear fruit this second half.

Will V. Power - Robert W. Baird & Co., Inc. (Broker)

Great. Thanks. Yeah, good luck with the launches.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Thank you.

Operator

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

Brad Erickson - Pacific Crest Securities

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.

Brad Erickson - Pacific Crest Securities

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.

Brian McGee - Chief Financial Officer

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.

Brad Erickson - Pacific Crest Securities

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.

Brad Erickson - Pacific Crest Securities

Understood. Thank you, guys.

Nicholas Woodman - Founder, Chairman & Chief Executive Officer

Thank you.

Operator

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

Ben J. Bollin - Cleveland Research Co. LLC

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?

Brian McGee - Chief Financial Officer

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.

Brian McGee - Chief Financial Officer

Right.

Ben J. Bollin - Cleveland Research Co. LLC

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.

Ben J. Bollin - Cleveland Research Co. LLC

Thank you.

Operator

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.

Operator

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

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