Q3 2015 Results Earnings Conference Call
October 28, 2015, 05:00 PM ET
Peter - Head of IR
Tony Bates - President
Nicholas Woodman - CEO
Jack Lazar - CFO
Paul Coster - JPMorgan
Brian - Barclays
Jeremy David - Citi
Simona Jankowski - Goldman Sachs
James Faucette - Morgan Stanley
Alex Gauna - JMP Securities
Erinn Murphy - Piper Jaffray
Charlie Anderson - Dougherty & Company
Will Power - Robert W. Baird
Good day and welcome to the GoPro, 3Q '15 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Peter [Sirkowski] [ph], Head of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon and welcome to GoPro's third quarter 2015 earnings conference call. With me today are GoPro's CEO, Nicholas Woodman; our President, Tony Bates; and our Chief Financial Officer, Jack Lazar.
Before we begin, I would like to remind you that statements on this call including, but not limited to those about our projected future and financial results, including revenue and expenses, academic and market trends, our future plans, prospects and growth opportunities, the continued adoption of our products, the anticipated benefits of our long-term strategy, our customers, competitive position, market share and leadership position in various markets constitute forward-looking statements.
These forward-looking statements and all other statements that may be made on this call, that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. These forward-looking statements speak only to today's call and we do not undertake any obligation to update these forward-looking statements.
We refer you to our annual report on Form 10-K for the year ended December 31, 2014, which is on file with the Securities and Exchange Commission, in particular, to the section entitled Risk Factors and to other reports that we may file from time to time with the SEC for additional information on factors that can cause actual results to differ materially from our current expectations.
We report net income and basic and diluted net income per share in accordance with GAAP, and additionally on a non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our ongoing economic performance. We use non-GAAP reporting internally to evaluate and manage our operations. We 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. We ask that you review this information in conjunction with this call. 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 third quarter of 2015. 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 each.
Now, I’ll turn the call over to GoPro's CEO, Nicholas Woodman. Nick.
Thanks Pete. Good afternoon, everyone and thanks for joining our call.
As we head into the important holiday season, GoPro continues to execute again our long term vision and strategy. As GoPro’s Founder and largest shareholder, I am very excited about the foundation we've established and the investments we're making to scale GoPro into its next phase in 2016 as an expanded ecosystem that includes a broad portfolio of hardware, software and entertainment products.
To begin, I want to address our performance in the third quarter. We generated revenue of $400 million, which equates to 43% growth year-over-year and non-GAAP EPS of $0.25.
While we experienced strong year-over-year growth, this quarter marks the first time as a publically traded company that we delivered results below the expectations that we outlined in our guidance. We take this situation very seriously. I want to explain three factors we believe led to our underperformance for the third quarter.
Factor one, initial sale-through of HERO4 session was weak. In retrospect, we believe we priced the products too high at $399, which caused consumer confusion where they were asked to decide between the HERO4 session and one of our best selling products HERO4 Silver also priced at $399.
Given the popularity of HERO4 silver, initial sales of session were not in line with our expectations. On a positive note this experience taught us how hard it is to sell against GoPro and our premium HERO4 black and silver products.
Factor two, after receiving strong feedback from consumers and retailers combined with our recognition that the session's underperformance was likely to continue we took action to price adjust session to $299 in September. This resulted in $19 million of price protection and MBF, which is reflected in our reduced revenue for the quarter.
Since the price adjustment we've seen an increase in sale through as a percentage of product mix session is now selling in line with what we’d typically expect for a product at this price point. Translation, while it got off to a slow start, session is now performing as a full-fledged member of the HERO4 line up.
Factor 3, marketing. Looking back we now believe we underfunded marketing in the second and third quarters of this year, which impacted demand. To address this, we're taking a more aggressive advertizing approach in the fourth quarter, which includes a return to television following a one-year hiatus.
We're also expanding digital out of home and in-store initiatives globally. To check out a couple of the inspiring television spots we've slated for this holiday season visit GoPro.com/intheworks.
Conclusion, we made some mistakes and we've taken corrective action. While the affect of these actions will take some time to be fully realized, we believe we're approaching the holidays with a strong product line up, priced appropriately and backed by a world-class global marketing campaign.
Next I am going to cover strategic investments that will in 2016 if all GoPro into a broad reaching echo system of products, software, services and entertainment. We continue to be excited about our pace of innovation and our track record speaks for itself. Over the past 12 months, we've released six new capture devices that span strategic price points and feature sets.
According to NPV in the third quarter, GoPro accounted for five of the top 10 products on a unit basis in the combined digital camera and camcorder category in the United States.
On a dollar basis we had four of the top 10 products and seven of the top 10 accessories and we're excited to take our hardware knowhow into exciting new product categories, starting with the rapidly growing market for consumer Quadcopter.
We remain on track to launch in the first half of 2016 and current development and product performance are delivering terrific results. We through to fund share some recent footage from one of our development units showcasing the quality of content were already able to capture.
Check it out at GoPro.com/intheworks, which I should mention is a section of our website, where we provide behind the scenes updates on some of the projects we're working on.
As we draw closer to launch we'll share more about our Quadcopter’s unique value proposition as well as our plans to leverage GoPro’s powerful brand, marketing and global distribution network to support this important new product.
Another exciting new product category slated for 2016 is spherical capture for virtual reality. In the first half of 2016, we will be launching a six camera rig that will enable high quality spherical photo and video capture resulting in some of the most engaging VR footage the world has ever seen.
To get a taste of the immersive VR experience that our cameras are already enabling, visit GoPro.com/intheworks to watch a video that puts you on the back of a superbike as it battles for the lead. I’d like to add that the talented racer featured in the video is in fact one of our own, GoPro employee Martin Schwartz.
And finally the category that is the core of our business capture devices. As you can imagine there is no shortage of passion or focus as we develope the next generation of GoPros for 2016.
In software we continue to invest and are making significant progress with a laser focus on reducing the amount of time it takes our customers to one, offload content from their cameras, two access it and three, create engaging short edits.
While our new software platform is still in development I made a short video this weekend to demonstrate our progress and we posted it to GoPro.com/intheworks for you to take a look.
My wife was out of town and I had the rare chance to be solely responsible for my three boys ages five, three and one. We decided to cover Pumpkin, the first ever for my one-year-old and I was able to document the experience on the fly with HERO4 session and later that day I used our development software to create a short video in less than three minutes.
Two points I’d like to stress about this experience are one that without GoPro it would have been impossible for me to on the fly self document this very special experience and two, thanks to our innovative software I was able to quickly condense roughly 40 minutes of footage into a 30 second piece of content that is extremely valuable to my family and goes well beyond the smartphone snapshot or third person video clip.
Given that our customers are already exporting on average over 50,000 videos a day using our studio desktop software, imagine their productivity when they have access to this powerful new experience.
Another area where we're making significant investments is GoPro Entertainment. GoPro is a content driven business and we can credit much of our global brand strength and sale success to the incredible photos and videos shared by millions of our customers.
GoPro is the number one brand channel on YouTube and earlier this month the GoPro channel surpassed one billion cumulative views. Google informed us that we're one of only four brands to have reached this milestone.
We continue to believe that there is a strong correlation between the quality and quantity of our customer's shared content and the growth of our business and with GoPro Entertainment we're now taking a more aggressive approach to stimulating this aspect of our business.
We've recently announced GoPro Awards, an ongoing program that rewards the GoPro community for sharing their best GoPro photos, raw video clips and video edits for inclusion in GoPro channel programming, licensing and more.
GoPro Awards will grant up to $5 million annually to creators of GoPro content that emotionally engages, amazes or excites from extreme to mainstream moments, professional to consumer. GoPro excitedly encourages all GoPro customers be they enthusiasts or production professionals to participate by presuming their interests, capturing their experience with the GoPro and submitting their most compelling moments to GoPro.com/awards.
We formally announced the campaign earlier this month and in the first week we received more than 27,000 submission a 550% increase from the week prior.
Content is being submitted from a spectrum of customers that includes families, enthusiast, film students and entertainment professional. The first awards have been granted and they are terrific examples of how GoPro user generated content stands on its own as entertainment. We posted three of our favorites to GoPro.com/intheworks, have a look.
In addition to driving GoPro Entertainment programming initiatives, we expect GoPro Awards to also serve as a terrific content aggregator for GoPro Licensing. Licensing.gopro.com is a tool, which creative professionals can use to discover and license compelling GoPro photo and video content. We launched this service in July and we're excited to scale with the help of GoPro Awards.
In 2016, we plan to announce several new GoPro entertainment initiatives, new products and services for our customers and new revenue streams for GoPro.
As a major shareholder, one of the things that I am most excited about is the incredible talent we've recruited in recent months. We've always benefited from exceptional people being attracted to our business and as we continue to execute against our vision we're attracting an increasing number of industry leading professionals.
Last week we've recruited Bill McCulloch, the former Vice President of Creative Development and Operations from HBO Sports. A producer with a 11 MEs under his belt, Bill will serve as GoPro Executive Producer for Team and Motorsports Programming. And yesterday, Claude Ruibal, the former Head of Global Sports Content for YouTube joined GoPro as Head of Global Sports Content Partnerships.
Also this quarter we hired Sandor Barna, the former Chief Technology Officer of Aptina to our Lead Core Technology Team within the Consumer Devices Group, which also includes our Optics and Image Science teams. These people bring enormous talent and experience to GoPro.
Each is focused on new initiatives and producing new products and new services and I want to emphasize they are all recent hires. They recognize exactly where we are in our growth trajectory and they joined GoPro because they believe in our vision and the potential of our business.
Before I hand it over to Jack, I want to revisit what I outlined on our last conference call. I continue to believe GoPro is very well positioned at the center of four of today's most exciting consumer megatrends. User generated content, social media, Quadcopter and virtual reality.
In my 13 years of leading GoPro, I am now more convinced than ever that we're on the right track and that the investments we're making will scale GoPro as an expanded ecosystem, with a broad portfolio of hardware, software and entertainment products that take advantage of these megatrends and strongly position us for growth.
With that I'll hand it off to Jack.
Thanks Nick and thanks to all of you for joining us today.
If you’ve not already done so, I'd encourage you to download from the Investor Section of our website, the financial slides we posted concurrently with our press release earlier today. The eco financial data is provided in these slides as well as our press release. So I'll be focusing my remarks on the Q3 related business trends and our guidance for the fourth quarter.
Third quarter revenue growth margin and EPS represented strong growth on a year-over-year basis. On a year to date basis, all of our key metrics, revenue growth, gross margin, EPF, adjusted EBITDA and unit growth clearly demonstrate the success of our products and business.
Year-to-date revenue of $1.2 billion was up 55% and is already 85% of our full year 2014 revenue. Third quarter revenue of $400.3 million was up 43% year-over-year, plus the lower guidance range of $430 million to $445 million due primarily the weaker than anticipated demand for HERO4 session and $19 million offset to revenue for price protection and MBF related to the session price change and overall sultry trends particularly domestically that were seasonally weaker than the prior year.
Year-to-date units shipped of $4.6 million were up 64% and the $1.6 million captured devices shipped in the third quarter increased 46% year-over-year. Regionally in both EMEA and APAC revenue were up over a 175% each year-over-year as our international expansion strategy has been working well.
In China we localized both our apps and firmware and China was once again a top 10 region in terms of revenue. However, our APAC revenue was down sequentially due almost entirely to weak demand in Australia and New Zealand, was we believe is a result of a stronger U.S. dollar and higher recommended retail prices in those regions.
In the America our revenue was down 7% year-over-year. Wider than anticipated session revenue, coupled with sell-through trends that were worse than seasonal and favorably impacted this region.
Looking at our channels both direct and distribution revenue were up year-over-year too and 126% respectively. However, this revenue was less than anticipated in our guidance, particularly in the direct channel primarily due to lighter than anticipated session demand and unfavorable sell-trends in the United States.
On a product basis, revenue from our HERO 4 black and silver products made up over 50% of our camera revenue. Q3 FPs were relatively flat and overall we did not experience any noticeable pricing pressure during the quarter.
Gross margin for the quarter was 46.8% compared with 44.5% in the third quarter of 2014 representing a 230 basis point increase year-over-year and 80 basis points greater than the midpoint of our guidance.
Session price protection and MBF impacted gross margin by a bit over 200 basis points reflecting the continued strength of our premium products and supply chain efficiencies. Q3 growth margin was above our long term target model range of 42% to 44%.
Operating expenses of $139.8 million were up 44% year-over-year and slightly below our guidance range of $140 million to $145 million.
Sales and marketing was once again increased at a rate lower than the year-over-year revenue growth. R&D investments drove the overall expense increase and were up 54% year-over-year reflecting our long-term commitment for the development of next generation capture devices, our recently announced Quadcopter and our software and entertainment initiatives.
Operating income for the third quarter was $47.5 million or 11.9% of revenue, an increase of 72% year-over-year and adjusted EBITDA was $56.7 million or 14.2% of revenue up 57% year-over-year. Both of these metrics demonstrate the significant leverage in our model over the past 12 months.
Earnings per diluted share for the third quarter were $0.25, up a 108% year-over-year with lower guidance of $0.29 to $0.32. The price protection in MBF accruals related to the session launch impacted our third quarter EPS negatively by approximately $0.10 on a tax affected basis.
GAAP net income for the quarter was $18.8 million or $0.13 per diluted share, up from $14.6 million or $0.10 per diluted share for Q3 2014.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents and marketable securities of $513 million up $275 million year-over-year representing 42% of GoPro's total assets.
Inventory increased by $70 million sequentially and in turn were 3.4 times. We were building inventory for the upcoming holiday season, so lighter than anticipated demand resulted in inventory terms that were below our target levels.
Over $80 million of this inventory related to new products introduced this year. Accounts receivable were essentially flat and DSOs increased by two days to 27. Additionally, our Board of Directors has recently approved a stock repurchase plan of up to $300 million.
Our newly authorized Class A share repurchase program runs for 12 months allowing us to remain opportunistic buyers and return cash to shareholders. I’ll now move on to our guidance for the fourth quarter.
Our performance year-to-date has been strong with revenue and operating income growth of 56% and 145% respectively. As we've noticed throughout this call session sell-through has been weaker than anticipated and our overall sell-through in the third quarter underperformed.
Additionally, we're heading into our fourth quarter with channel inventory levels that are at our target with the exception of session and to a lesser extent the HERO plus LTD which are higher.
Comparatively in 2014 overall channel inventories were low as we were launching new products. Additionally, our revenue visibility for the upcoming quarter is less clear than in previous years given that we do not have the benefit of a fourth quarter launch.
Accordingly we anticipate revenue of between $500 million and $550 million. At the midpoint of our guidance, this represents a decrease of 17% year-over-year for the fourth quarter and an increase of 23% for the full year of 2015. We expect the Americas region and our direct channel to be the strongest in Q4.
On a product basis HERO4 black and silver will be the largest contributor to our fourth quarter revenue. We expect our product and channel mix to remain favorable and for our gross margins to continue to be above our long term target of 42% to 44%.
For the fourth quarter we anticipate our gross margin will be 46% plus or minus 50 basis points at the midpoint.
We will continue to invest in the people, products and infrastructure necessary to pursue our growth and our vision and particular as Nick noted, we are increasing our marketing spend significantly going into the fourth quarter to stimulate additional demand in this important holiday season and we expect to continue increase levels of marketing spend going into 2016.
Additionally, we're ramping our spending related to our software and entertainment initiatives to continue executing against our long-term vision. To partially offset this incremental spending we're reducing some of our other variable expenses.
We anticipate our operating expenses in the fourth quarter will be between a $160 million and $170 million with the majority of growth coming from sales and marketing and R&D.
We estimate our effective tax rate to be approximately 23% with fully diluted shares outstanding of $147 million. Accordingly, we anticipate EPS to be in the range of $0.35 to $0.45.
So with that, operator we’re ready to take questions.
Thank you. [Operator Instructions] And we’ll take our first question from Paul Coster with JPMorgan.
Yes, thanks very much for taking my question. So we can't attribute the slowdown just to the session right. It does sound like sell-through has slowed across other product categories relative to product expectations.
And so Nick I guess I am trying to figure out whether we're experiencing some kind of maturing of the market of the market or you expect the S curve of adoption for the second phase of S curve adoption as a result of innovation that will be coming to market, perhaps you can help us because it feels like, we've lost momentum.
Well, Paul this is Jack. Let me handle the session piece of this we've shipped in product obviously in the quarter a significant amount and it didn’t sell through at the rates at which we expected.
However, our guidance going into the quarter was actually for a significant additional amount of session to ship in. So that’s really -- what you got in the third quarter was session didn’t sell through as well as we anticipated and we didn’t get to put the second tranche of session into the channel because we're trying to maintain our channel inventory levels.
I think the sessions are a really good product as we've noted we all use this product quite a bit and it's the beginning of our product cycle for this product and we think that we can -- that we'll see increased adoption of session going forward and that’s one of the reason why we changed the price.
As far as the sell through reduction I think what we saw was some unfavorable trends from late July, early August through the August, September timeframe and this is traditional a very slow portion of the year, its seasonally one of the weakest parts of the year. So were relating what we saw. We're holding out to see how Q4 is going to play out.
We're still very confident we've very good set of products but we're going in with the channel that is a little more active target levels than it was in the prior year which make it a tougher comp.
Okay. So is the channel which is the main issue here going into the fourth quarter…
Well I want to be clear though Paul on the channel it's not that the channel has got too much inventory in it. It’s that the channel had very little inventory in it last year right.
If you look at the full year we're going to be up 23%, 24% for the year on our overall revenue. So we've got very good year-to-date numbers, We’re confident we’ve seen a business that’s growing. We’ve already shipped 85% of what we shipped all of last year.
So I think just we have a little different timing of launches session was a little weaker than we thought and then going into Q4, there is just a little more -- there is a normal level of inventory in the channel that’s comparing to a lighter level last year.
Okay, well one other question entertainment revenues, will they be material in 2016 do you think?
We're not giving guidance in terms of whether it would have been material or not. I think what I'll tell you is that we continue as we talked about part of amazing team we had a strategy that we're executing I think well against.
You saw what is happening with Awards we're really, really pleased with content that we're getting and that is a big part of what we think is going to very critical for the entertainment strategy that we're laying out internally but it's little too early really to give you any numbers around that Paul but we're making large investments in this areas. So we clearly see that there is an opportunity there and as it's a big part of our ongoing investment story that Nick laid out.
Yeah and I would add that we plan to launch new entertainment related products and services in 2016. So it's not just a matter of scaling what’s you already seeing from us, but excited about innovation that we have in that area as well.
Okay, one last question Nick, how are we to conceptualize this? You're obviously depicting something other than your traditional product category. Can you help us understand that?
Sure, well I think it speaks volumes about our appetite renovation at GoPro and as well that we're not resting on our morals. We’ve got a terrific historical performance in the form of our HERO3 and then HERO Plus and then HERO4 black and silver products and while we know those products resonate with consumers we also don’t know what we don’t know about what could even resonate with a broader market and even be a better GoPro than we're currently making today.
And so session is the result of us kind of trying to blow everything up and if we were to start all over again, what type of a GoPro would be develop and that is session and I stand by it it’s my favorite GoPro, it’s the one I always pick off the shelf when I am chasing my kids out or doing something that personally interested in.
I recently over a weekend the ways were so good I served for 8.5 hours in one day. I filmed every single way of I did and didn’t catch with my session and I only used 20% of our battery life.
If this was another one of the GoPro, I would have had to paddle in and swap out batteries several times. So this product is incredible. I think that a combination of the time of year that we launched it which is maybe a little bit snooze as it relates to consumer purchasing habits combined with the fact that are selling against the strength of HERO4 black and silver, we’re learning how hard it is to compete with GoPro.
But that said, as we noted since the price change session is selling in line with what we would typically expect for a product of that price point. So while it's not the outperformer that we may have anticipated it to be at launch it’s a healthy member of the HERO4 family.
Okay. Thank you.
And we’ll take our next question from Joseph Wolf with Barclays.
Hi guys its Brian sitting on for Joe. I just had a quick question the press release was multiple launches that target the user experience in the content side of the business and the only hardware launch with immediate revenue potential is the session.
Is there any way for us to track or if you guys track these launches on the software and content side, about how they’re driving hardware sales or uploads from users should have been frustrated by earlier tools. So I guess more simply put just how are you measuring the success of the non-hardware investments?
That’s a good question. We definitely track usage rates above the app and desktop software and with each earnings call, we’re happy to report that we’ve seen video exports from GoPro Studio our desktop application handle increase. It's now over 50,000 uploads or exports from GoPro Studio daily on average.
And so that we see that while we can't necessarily make a direct correlation to increase product sales -- hardware sales, we are seeing increased levels of activity amongst our customers which you could extrapolate want to believe that they're having a better overall user experience, which ultimately is in the long term going to lead to people thinking more favorably of our products and services, which ultimately should help drive sell-through.
Yeah, I think that obviously we take consumer and customer feedback very seriously whether it's in the form of survey data as well the way the rate is. Someone shared a great compliment and is clearly some of the folks wanted.
We were able to enable it and it failed to pinpoint that absolutely paramount. So the question is directly attributed like an ex amount of cameras probably not, but we know as the more we make it easier for folks to upload the content mange it and have a great clear clip like this new development software in under three minutes, it's really a professional looking clip and then get that shared out. We believe that will lead to more camera sales.
Yeah, please do take a look at GoPro.com/intheworks to see the video that I edited this weekend. It's really inductive of what’s very different about the GoPro value proposition and how we're really transforming the content creation experience for the everyday consumer.
Okay. Yeah that’s really helpful. And then I guess my other one is just on the margin I know you had said margins are pretty high here ever with the 200 basis point impact of the session. Is there -- is it just stronger than anticipated sales of black and silver or is there or any other dynamic that I’m missing there.
We sell premium products and people pay for them and I think that one of the benefits we really have is a great brand and that brand will get people to continue to block the things like HERO4 black and silver.
Realistically look at -- we've now shipped over $1 billion worth of black and silver since it was launched. It's a lot of product and it’s a lot of product that comes with very good margin. So I think there is other credits the Ops teams deserves a lot of credit for getting supply chain efficiencies.
The engineering team is constantly looking for way to pull the cost out of the products and we continue to optimize over the year. But we get a good mix of products and we sell at decent price points.
One of things you don’t see is ASP erosion. One of the things we didn’t point out in the script for example is that if you take into account the impact of the NDF on what the economy refer to as the street ASP the revenue divided by the units. It's not the true reflection of our ASPs but it's what you guys see.
But if you take that into account, there was a $10 reduction to get down to flat ASPs the last quarter. So that’s taking into account the entire impact of the session price protection and NBF.
So I think what we've learned over the years is that we designed products really well. We've got much better at manufacturing them and fortunately our marketing and our brand is what helps us sell these premium products at very good margins.
Great, thanks guys.
And we’ll take our next question from Jeremy David with Citi.
Hi, good afternoon. Thanks for taking my question. Just wanted a little bit more clarity on some of the product launches we're going to see, but it was supposed to launch in the second half of this year.
So is that pushed till the first half of next year or is that a different launch that we're talking about and then and the timing of the HERO5 and I think it's too much comment on that but we obviously have learned a lot from launching product at different times of the year its great start to the holiday season year this year earlier in the year, what’s the best time of the year to launch a product at the time? Thank you.
Hi Jeremy, so maybe there is some confusion as to our roadmap for releasing our multi-camera rigs for VR and Spherical and Surround 360 Degree Capture. Earlier this year we did launch Odyssey which is our 16 camera rig that we developed for Google for limited distribution to support their 360 Degree content jump platform.
And we're currently selling those products and then we’ve been slated for a 2016 first half launch of our six camera spherical rig that we announced earlier in the year. So we’re on track with that and then as it relates to the best what HERO5 if that's what you want to call it I think and the best time of year to launch new products.
I think that the challenges we faced this year were related to two things. One that session didn’t go as well as we’d anticipated and then on top of hat we didn’t have an additional significant new product launch for the fourth quarter and those two things combined have created challenging situation for us.
Independently though if a session had been more successful when we launched it in July, we wouldn’t be having this challenge right now. So it's another way of saying that we can't successfully launch new products outside of the fourth quarter. This current situation doesn’t mean that we will always now beholding to a fourth quarter launch of new products.
I would like to add one thing on top of this it is important to take a step back and look at year-over-year growth. With the guidance that we just gave we’re still growing a little less than 25% on a year-over-year basis.
So I think that’s a pretty respectable number for any company with well over $1 billion in sales and what it shows is that you’re going to get into these timing issues and comp issues and all that, but on a really on a year-over-year basis the revenue growth is really quite strong.
Good. If I can have a follow-up on the buyback plan, you said you'll be opportunistic and whether I mean we were stuck at $25 does that mean that that should be actually back of the year or how should we think about the timing of the payment? Thanks.
Yeah, I would say that we’ve been authorized to repurchase up $300 million in the next 12 months and we’re going to be opportunistic about it. I don’t think we’re going to give any guidance to the levels that we’re going to be buying at but obviously we felt strongly enough about it where we actually saw Board approval to go and do it.
We’ll take our next question from Simona Jankowski with Goldman Sachs.
Hi, thanks very much. Can you help us quantify the impact of the channel inventory that you referenced? I think it would be helpful if you maybe tell us how many weeks of inventory you saw in the channel a year ago versus where that is today? And then how many weeks of inventory you think you might be exiting the fourth quarter with?
Well just as a remainder we are at with the exception of the session in HERO Plus LCD to a much lesser extent HERO Plus LCD. We are at our target level right now.
We have not disclosed what our target levels are but I will make a comment on this that I personally believe that we're looking at, at least a month of inventory difference in the front. So if you do quick math on that based on a month out of what we just guided to midpoint of five and a quarter, you're looking at a pretty significant amount that would actually would have turned into an increase in revenue year-over-year.
Now that's speculation. So I can’t obviously ground it in anything other than my speculation, but based on what we know that’s basically what we're seeing. We launch very, very late in Q3 and then into Q4 last year and so we really just did not have a chance to have the channels in the full up at the time of the launch.
The other thing I would point out is there are questions on some of the domestic stuff. You have to remember the launch last year was very heavily tied to the domestic regions.
In fact one of our largest general partners received the vast majority of the HERO4 launch product. So it does restore the domestic numbers a little bit too, but to basically answer your question, I think there is probably about a month that we're talking about here and that’s one of the reasons why I stress at this point to look on a year-over-year basis.
Got it. So another way to think about that is that if we were just looking at it on a normalized basis in terms of sellthrough, instead of looking at a 17% year-on-year decline, which is where you're guiding, it would've been something maybe up the low double digits in terms of sellthrough if there wasn't that difference in the channel fill.
That's exactly right. And look we're not sitting here to make excuses for this guy. I think we're not making excuses for growing revenue 23% year-over-year. We think that's pretty good, but there are a lot of strange new launches that are in the comp and it's like that for every company. So we're just trying to explain it for everyone.
Okay. And in terms of the ASP trends into the fourth quarter, any guidance you can give on that? It sounds like the mix of product is going to be a little more skewed to the low end because of the Session price cut, and then the lack of a high-end product and then you've got FX as well. So what would you expect for ASPs in terms of Q-on-Q or year-over-year ranges?
Well first FX doesn’t so much affect us on the ASP side. We have very few countries where we actually operate in the local currency and those places we're usually shipping to a distributor in U.S. dollars. So they're taking the risk, but we can’t really use that one.
Overall ASP’s I think what I would point out is basically what we said in the script which is that when you look at the gross margins for the upcoming quarter we're still looking at 46% gross margins which is pretty healthy which means the mix has to be pretty good.
But the ASP should come down on a sequential basis?
We didn't comment on the ASP’s and we just didn't give any guidance on it, but if they were coming down materially, I think it would probably affect the gross margins right.
Okay. No, I just thought more from a mix perspective, but that's fine. Thank you.
Yeah. Thanks Simona.
And we will take our next question from James Faucette with Morgan Stanley.
Thanks very much. I wanted to just dovetail with a couple of Simona's questions. First, so just a clarification, Jack, so your planning assumption right now is that on a sellthrough basis that your sales will be up year-over-year in the December quarter kind of teens-type range? Did I understand that correctly?
I don’t think we gave that specific guidance, but what I would say is that we certainly expect sellthrough to outperform selling this quarter.
Okay. And then as far as looking at next year, clearly you'll have new product launches, a few new platforms that should help encourage incremental camera attach rates, etcetera.
How should we be thinking or how should we be planning for that? Once we get past this channel fill, are you expecting that will be on a more normalized basis and expect to return to a similar growth rate as what we saw this year for the full year?
And part of that, I guess the second part of that question is where are we on the international expansion? Clearly 2015 was a big year for international expansion. How much further do you have to go from a distribution standpoint at least to feel like you are where you want to be on international distribution? Thanks.
So as far as 2015 we're really not going to get into the specifics of what we think the year is going to look like. I think we've given enough clues and things that we’re working on at this point where I think if we are put -- if we all thought just comparing quarter-over-quarter and all that kind of stuff it will get confusing.
Overall I think we’re very excited about the product line we have for the upcoming year. I can tell you we all -- we think about it and that means that clearly we'll be looking to continue to be a growth company getting into more specifics in that I think there is probably not the right time to do right now.
And this is Tony I'll talk about the international. I think that you’re going to continue to see us invest. I think certainly in Asia Pac that definitely more would be there. I've highlighted China. We test on it.
If you look in the last quarter we actually doubled the amount of hours that we find from the previous quarter. Overall China is in the top 10 and if you look at it on a revenue basis for the first nine months that we've actually been in China it's actually our fastest growing country launch that we've ever done in GoPro's history.
So that's just to give you one type of market where we see continued market expansion, but I think we do see growth opportunity in the APAC and EMEA and couple that we'll continue to invest selectively on the sales side, but couple that is what we're doing on the marketing.
And I want to stress that very informally but the increased marketing spend that we talked about in terms of demand generation is really a global play, it's not just the U.S. phenomena. Obviously a lot about to see U.S. CDS but it is really booked from global. So we see the opportunity still very strong on a global basis not any change in the fall.
[Operator Instructions] We’ll take our next question from Alex Gauna with JMP Securities.
Thanks very much. You've been really helpful in terms of describing the puts and takes around what happened with the Session. I'm wondering in touching on not having a new high-end flagship for the holiday season here, how that came to be?
Because it seems rather intuitive that Apple has set a consumer expectation for a one-year cadence. And I'm wondering why that did not happen for this holiday season? Thanks.
Hi, Alex that’s a great question and maybe comparison to draw and as we've noted in the past we’re going to come out with new products when we think that we have meaningful advancements in terms of performance and value proposition for consumers.
And if we don’t have that, then we’re not just going to release a new product just for the sake of releasing a new product and selling our customers something that they don’t really need.
But that said to revisit session that’s what we anticipate a session to be, session is a terrific products that’s maybe just slightly ahead of its time here at GoPro and that if it hadn’t performed line of our expectations we would be having a very different call right now.
So is virtual-reality at the point where it is not too far ahead of its time that we can think about that helping you for 2016? You are on the vanguard of making that happen for the industry.
And how can we think about how that might contribute in terms of rigs, in terms of a multiplier effect on cameras and in terms of what's happening with Kalour on the software side?
I think you're right to think of virtual reality as being a future opportunity for GoPro and one that we are terrifically well positioned to take advantage of. We are a leader in the space of spherical capture for virtual reality and the leading platforms like Facebook and Google and Microsoft are looking at us to enable incredible user generated and professionally captured spherical content to help make virtual reality a success.
But it is early days there and so our developments there to keep us well positioned in the front and frankly we see a lot of the same opportunities in virtual reality that we're currently enjoying in non spherical content capture and we think the users, consumers are going to be excited about this capture in the future, but I would be conservative in terms of how much credit you give us on a revenue basis. We're more in a positioning phase now as we develop our new products for that category.
And we will take our next question from Erinn Murphy with Piper Jaffray.
Great, thanks for taking my question. Jack, I guess I have a question for you. Maybe just going back to the dynamic between the direct and indirect channels, with direct growing about 2% and the indirect, as you've talked about, obviously up triple digits.
I guess one clarification on the guidance -- so with the slowdown in direct in the Americas in Q3, I guess what gives you confidence that those are the two regions that will be the strongest within the fourth quarter?
Then with the big sell it into the international channels, just help us think about how we should think through the sellthrough piece of the international channels in the fourth quarter? Thanks.
Well hey Erinn, thanks for the question and I think it’s important to keep in mind what we're comping to okay. So, last year in the third quarter we basically did not launch HERO4 into that channel. So that was a pretty easy comp quite frankly versus the third quarter of last year.
Whereas we were comping against the initial sell-in for some of the largest BIGBOX retailers in the third quarter. So, I think that’s the part of what makes the difference here.
We were expecting the business obviously in the direct channel primarily BIGBOX US to be better in this past third quarter and obviously that was part of the miss that we had on the revenue side.
As we go into fourth quarter and the sellthrough that’s required for international, I think that we just got demonstrated performance. We track this stuff on a weekly basis. Think of it this way, we did not hit our expectations for the quarter for revenue guidance, but yet we also did not force products that had been already released. We ended up with channel inventory levels that are at third level, but we want them to be out there.
So we're pretty careful and I think from that perspective we have a pretty good insight into what the sell through actually look like.
On the domestic side one of the reasons why we think it will be significantly more positive in the fourth quarter is primarily because again we have pretty good visibility in there not as good as maybe we've had in the past, but we have pretty good visibility into the domestic channel.
And I think that as you dig down deeper into the domestic, it's just a more seasonal channel right. So domestic direct is a more seasonal channel than any other channel that we have and so we see nice sequential change there.
So it's a combination of a lot of factors there, but I think we have a pretty good handle on what’s actually happening.
And we'll take our next question from Charlie Anderson with Dougherty & Company.
Yeah, thanks for taking my question. I have a two part on Session. It noted that Amazon took the price to $275 a couple weeks ago and Best Buy has a price-match guarantee. I wonder how that impact on the dynamics as it relates to price protection.
And then secondly on Session, I wonder on the specs you mentioned you felt like price was the issue, but I wonder on the spec sheet if you felt like anything was the issue in terms of why it didn't sell the way you wanted it to?
Well regarding price protection, price protection has nothing to do. The price protection that we offered in the last quarter the $19 million was actually simply related to us changing the manufactures suggested retail prices. So that’s going from $399 to $299 and then effectively we give a credit to the folks who actually took products and had it still in their channels.
As far as Amazon selling products or Best Buy selling product they're free to price things within certain policies. What I would say is that these guys run programs all the time and frankly they're funding them right.
They're funding in ways where when you walk into a Best Buy and they offer you an SD Card maybe with the purchase of a GoPro, they believe that the margin that they're gaining from that sale is worth actually giving extra incentives sometimes to get it to actually buy the product.
So I don’t really view any of those as frankly either atypical to what’s happened in the past or out of the ordinary.
And as it relates to your question about the performance specs per session and if that has had any impact on the demand for session, I think that as we noted on a call that we did -- we do believe we cost some consumer confusion with the $399 price point selling against HERO4 silver, which is such a strong member of our lineup is no easy task.
And the size and convenience of HERO4 session clearly wasn’t enough to have it sell well silver and then I think calling a spade a spade sure if the specifications, the speeds and feeds if you will, of Session were stronger relative to Silver, it would have done better, but it’s important to note that the image quality of that product is outstanding as you see in a video that I produced and then we put on gopro.com/intheworks it is, we wouldn’t have released it if wasn’t an outstanding product that was up to the quality of the GoPro brand name.
And I think that as we looked at future models of future releases of Session that will see it bit more in line with our Premium products from a specification -- on a specification basis. But I do think that you’re right that did play into it somewhat.
And we will take our final question from Will Power with Robert W. Baird.
Great, thanks for sneeking me in there. I guess a couple of questions, maybe just on the geographic split. I saw that EMEA was up sequentially which obviously stood in contrast with the Americas and Asia-Pac.
I know you cited Australia and New Zealand as part of the Asia-Pac weakness. But I guess I just want to make sure I understand what the difference was in EMEA versus the other two regions. And then within Australia and New Zealand, have you seen improvement, I guess, over the last couple of months?
Regarding Australia and New Zealand, I would say we've seen some improvement lately. The currency has really looked very unfavorably against us there. It's resulted in very high recommended retail price and that in turn has affected demand.
And again since we don’t sell in the local currency, really our only option to address currency changes is to change the recommended retail price of distributors that we work closely and can still get their margin that's required to sell the product.
I think that we're seeing some favorable trends there. I think it's going to take a while though the dollar is strong there and I think the products are good. We're in the holiday season so we're hoping that we'll continue to see some upticks. As far as the other part of the question which was EMEA related.
That was did it work the cause, I think was question there.
Yes I think it’s just -- that's the story about comps. EMEA obviously had a strong quarter and this has been a big part of our story this year has been the growth in the rollout in various different regions.
So I feel like we've made really good progress there and regions have come up nicely and the comps are very good this quarter, probably less favorable next quarter because domestic will be so much significantly better. But overall if you look at the grand scheme of what we're trying to accomplish it's working.
Okay. Also I wanted to ask you on the Quadcopter opportunity in the first half of 2016. Distribution in particular, I wonder if you can frame how you feel about distribution. Have you had those discussions with Best Buys and others?
How do you think about shelf space for that product? Just want to get a sense for confidence, I guess along those lines. And the second part of that is, given that we are getting closer to that launch period, any updated thoughts with regard to how you are sizing the market?
Is that something that could be I don’t know couple hundred million dollars of revenue in, say, 2017? What are some of the parameters we might think about?
That’s a good question, I think in terms of distribution, we can’t speak to our strategy specifically, but as we've shared we believe that our global distribution network is something that give us a distinct advantage and it's an advantage that we're looking to exploit and that our distributors are excited about the product, our retailers are excited about the product. So we think that we got a terrific opportunity there.
And as it relates to the TAM, today we see the overall Quadcopter TAM as a subset of GoPro’s existing TAM given the cost of Quadcopters today, the complexity, the compromised user experience, we think that they're appealing to a subset of customers that we have today.
But for the same reasons if they're appealing because they enable incredible content from new perspectives that enable really immersive and engaging viewing experiences.
So this is why we think that we have such a significant opportunity in the space GoPro and aerial capture go hand in hand. And so as we bring our product knowhow and engineer terrific user experience for Quadcopters. We think that we can help expand the overall TAM over time and on that note, please do remember to GoPro.com/intheworks to see some footage that we just released.
This is the first ever video footage that we've release from our development program. So this is a sneak peak of what you can expect from GoPro in the air and more in 2016.
That concludes the question-and-answer session. I would like to turn the call back over to GoPro's CEO, Mr. Nich Woodman for any additional or closing remarks.
Well thank you everyone for joining our call today. Before we go, I want to let everybody know that we'll be at the NASDAQ, Raymond James, Barclays and Wedbush Conferences in December and on behalf of now more than 1500 employees around the world, many thanks for your ongoing support. This is Team GoPro signing off.
This concludes our conference for today. Thank you for your participation.
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