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

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

Thanks, Chris, and thanks everybody for joining us today. I'm excited to share the positive progress we're making against the growth and total addressable market (TAM) expansion strategy we initiated in May 2023. A strategy we believe will drive meaningful revenue, subscriber, and profit growth over the next two years. As a reminder, this strategy included a return to lower pre-pandemic pricing to drive unit sales, the reintroduction of entry-level priced GoPro cameras to reach new customers, increased marketing to drive awareness, and expanding GoPro's global retail channel presence to better serve consumers post-pandemic shopping behavior. In Q3 2023, both revenue and non-GAAP earnings per share exceeded the midpoint of our guidance. Revenue was $294 million, and non-GAAP earnings per share was $0.04, and we ended the quarter on target with 2.5 million subscribers. In September we launched our new $399 flagship camera HERO12 Black, loaded with powerful new features for both professional and casual users, and further establishing GoPro as the performance and value benchmark for our industry. As I mentioned, revenue for the quarter was ahead of guidance. This was a result of HERO12 Black and our entry-level price point cameras both exceeding our expectations. Our entry-level SKUs generated 19% of camera revenue, demonstrating their TAM expanding potential without cannibalizing our high-end SKUs. Third quarter 2023 retail channel revenue grew 12% year-over-year to $231 million, or 78% of total revenue. Total camera unit sales grew 31% sequentially and 16% year-over-year. Total camera units sold into retail grew 35% and retail sell-through grew 29%, respectively year-over-year, aided by our renewed focus on growing our retail channel presence. Last quarter we shared a target of adding approximately 2,000 new retail doors globally by the end of 2023, and I'm happy to report that we're tracking ahead of that goal, having already added 2,500 new retail doors as of today. Our work with these retailers includes refreshed point-of-purchase merchandisers, improved in-store brand presence, and enhanced account management to enable premium representation in each retail location. Our 2024 target is to open more than 3,000 additional retail doors globally, bringing our total to approximately 25,000 doors, which would be an increase of more than 30% from when we initiated this growth strategy in May of this year, 2023. To further leverage our growing retail network, we're going to expand our TAM. Over the next two years, we plan to introduce several new types of cameras beginning in the second quarter of 2024. We believe each of these new camera SKUs will address distinct use cases and will be built at improved margin profiles, which we expect to contribute materially to revenue and earnings in 2024 and 2025. In addition to scaling our presence at retail, we continue to enhance the shopping experience at GoPro.com, where we sell in more than 60 countries. While GoPro.com is a significant direct-to-consumer sales channel, representing 22% of revenue in Q3, including our subscription revenue, it's also where consumers can learn about our complete end-to-end camera and software ecosystem, which includes our subscription service. Our subscription service continues to perform as both a high-value solution for subscribers and a high-margin revenue stream for GoPro. We finished Q3 on target with 2.5 million subscribers, representing 20% growth year-over-year. Subscriber attach and retention rates remain strong, and we expect to finish 2023 with between 2.5 million and 2.6 million subscribers, with additional subscriber growth in 2024. As an added benefit for GoPro subscribers, later this month we're launching a desktop version of our Quik app for Mac OS at no additional charge. The Quik desktop app will bring the simplicity and convenience of automatic edits to desktop users, along with manual editing and media management tools, synced editing between mobile and desktop apps, plus the ability to import footage from any camera. We plan to launch a Windows version of the Quik desktop app in the second quarter of 2024. As a part of the Quik desktop app launch, we're introducing a new premium plus $99 subscription tier that includes an advanced desktop-based HyperSmooth Pro video stabilization feature, plus increased cloud storage for footage captured with any camera. GoPro subscribers at both the original $49 premium tier and the new $99 premium plus tier will continue to enjoy unlimited cloud storage of footage captured with their GoPro at original quality. We expect our new Quik desktop app to further establish GoPro as an exciting end-to-end content creation solution for consumers, whether they're just getting started or they're advanced creators. Our innovative auto-editing experience represents a convenient starting point for new creators, and we believe the ongoing investments we're making in AI and computer vision will help maintain GoPro as an innovator in this space. To reinforce GoPro's commitment to innovation and engineering excellence, we recently welcomed Vince Nakayama as GoPro's new Senior Vice President of Engineering. Vince brings a unique blend of software, hardware, and UX experience to GoPro, having delivered many unique product and content experiences while holding influential roles at HP, Silicon Graphics, NetApp, Apple, Sony, Amazon, Flex, and Microsoft. He's passionate about cameras and cutting-edge technologies, and we're excited for him to augment our efforts in AI to help our customers enrich their content and discover more utility in the use of their cameras and accessories. On the marketing front, we're making solid progress in driving awareness and visibility for GoPro's brand through increased marketing collaboration with our retail channel partners, as well as expanded athlete and event sponsorships and activations that align with the markets we serve. An example of this is the recently expanded slate of motorsports series GoPro is now aligned with as the official action camera partner: MotoGP, FIA Karting World Championships, AMSOIL Championship Off-Road, Pro Motocross Championship, Monster Energy Supercross, MXGP, World Supercross, Formula DRIFT, and Nitrocross. These partnerships, along with the many other sponsorships in other verticals we serve, benefit both GoPro and the series themselves through the incredible content we produce together. Content that authentically demonstrates the performance of our products and legitimizes our brand in the sport. We're excited about our future, which would not be possible without our approximately 900 passionate employees. I want to thank them for their commitment to excellence. We foster a workplace culture of respect and accountability, an approach that yields consistently high employee engagement rates and third-party recognition. Most recently, we were recognized by US News and World Report as one of the best places to work, adding to Outside Magazine's recognition of GoPro as one of the 50 best places to work for the past two years. We're excited for the upcoming holiday season. Demand is strong. We're making steady progress expanding our retail network. And we're looking forward to launching new margin-accretive hardware in 2024, while continuing to enhance our software and subscription offerings. We believe our strategy positions us well for the rest of the year and will yield meaningful unit, revenue, subscriber, and profit growth in 2024 and 2025. Now, I'll pass the call over to Brian to share some color on our Q4 outlook.

Thanks, Nick. The third quarter of 2023 marked the initial full quarter of our growth and TAM expansion strategy that we initiated in May 2023. I want to provide a high-level overview of our current position as we advance our business. According to the full-year outlook shared in our written commentary today, we anticipate that revenue and unit sales for 2023 will exceed our previous estimates from the Q2 2023 earnings call. We saw a return to year-over-year unit growth in the third quarter at 15% and project similar growth of about 15% year-over-year in the fourth quarter. Our door count has increased by 13% since the second quarter, and we are on track to reach our target of 1 million camera units sold in the fourth quarter of 2023. We achieved non-GAAP profitability in the third quarter and expect to maintain profitability on a non-GAAP basis in the fourth quarter. These early signs suggest that our efforts to restore GoPro's growth and profitability are effective. Increased sales of entry-level products, surpassing our initial projections, have put pressure on short-term margins, which we anticipate will persist through Q1 2024 until we replace our current low-margin entry-level products with newly designed models at lower price points, expected in the second quarter of 2024. We remain committed to innovation, especially in system-on-chip, hardware accessories, and software. Additionally, we are enhancing our marketing and sales capabilities to drive growth while efficiently managing other areas of the business. We've made prudent adjustments to operating expenses for 2023, now projected at $365 million, down from $370 million previously estimated. We are closely managing our balance sheet, particularly inventory and days sales outstanding (DSO), and we expect to finish the fourth quarter with inventory below $100 million, roughly 40 days of inventory. By the end of 2023, we anticipate having $300 million in cash, including at least $10 million in stock buybacks during the fourth quarter, totaling $40 million in share repurchases for the year. Our guidance reflects our enthusiasm for the fourth quarter and 2023, as well as for the future. Looking ahead to 2024, we project unit sales between 3.3 million and 3.5 million, representing a growth of over 10% compared to 2023, which would translate to revenue between $1.1 billion and $1.2 billion. We expect to conclude 2024 with around 25,000 doors, indicating roughly 14% year-over-year growth. We aim to enhance gross margin from 32% in 2023 to around 37% with some fluctuations in 2024, driven by multiple factors: approximately 230 basis points from launching our lower-cost entry-level product in Q2 2024; 150 basis points from price adjustments made in 2023 for our strategic price initiatives; around 80 basis points from cost savings on product components; and about 70 basis points from subscription growth and other enhancements. We anticipate operating expenses will grow moderately from $365 million in 2023 to roughly $385 million in 2024. We expect non-GAAP tax expenses to be about $1.5 million in 2024. Successfully achieving these targets would lead to revenue growth, margin increases, and subscriber growth. Additionally, we project significant earnings leverage in 2024, aiming to generate between $30 million and $50 million in non-GAAP net income, representing a solid improvement of $50 million to $80 million over 2023. This boost in profitability will allow us to enhance our capital allocation in 2024. In summary, we are satisfied with the results from our first full quarter implementing our growth and TAM expansion plan. We anticipate exciting developments and software releases in the fourth quarter and believe we will enter 2024 with greater momentum, positioning our strategies as a catalyst for expanded growth and profitability in 2024 and 2025. Now, operator, we are ready to take questions.

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

Thank you so much, and thank you guys for taking my questions. I have two. Maybe Nick or Brian, your Q4 sell-through guidance of 1 million units is obviously great to hear you are tracking there at this point. That's up about 10% year-over-year, I believe. Can you just give us a bit more detail on how you would characterize the demand environment, and specifically, how do you think about that growth being driven by the lower price point in GoPro's specific actions and products versus just a better overall consumer health for the holiday period? If you could just kind of dissect that, however best, that would be really helpful and then I have a follow-up. Thank you.

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

Yes, I would like to mention that it was wonderful to see the HERO12 Black have such a strong launch and maintain that momentum. The launch and subsequent sales have significantly outperformed HERO11 Black's performance from a year ago, reflecting a commendable improvement. We believe this success is not just due to the outstanding product quality that has been well received by both media and consumers, but this year we also have the support of our retail partners to an extent that we haven't experienced since before the pandemic. This is a strong indicator that our strategy to enhance our retail presence and collaborate closely with our retail partners is effective. As I mentioned earlier, our entry-level products have exceeded our expectations without negatively impacting our premium products. Our anticipation that these entry-level offerings would broaden the market and attract new customers without diminishing the high-end segment has been confirmed. This positions us well for the upcoming holiday season, as we now have a far superior lineup catering to every buyer at every price point compared to last year. We are feeling very optimistic.

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

Certainly, I believe we will experience continued growth in entry-level units compared to this year since we will have a full year of sales. This equates to several hundred thousand units heading into 2024, and we are observing a strong demand for them. We began noticing this uptick around May of this year, and it reflects the consistent demand we anticipate. The HERO12 is showing strong interest, and we expect that to persist. Additionally, we have several new products coming next year that are anticipated to perform well, at least three new launches in addition to our current offerings. We plan to expand our distribution reach by another 14% next year. We will also have a full year of pricing at our lower price points of $399 and below, compared to $499 and below, which is boosting our unit volume as we cater to consumer preferences. We are also increasing our engagement with subscription services, which we expect to grow throughout the year. As we move past Q3 and into Q4, we are seeing strong retail and consumer demand. The actions we've taken in mid-2023 are expected to carry into 2024. On the financial side, we aim to improve our margin to around 37%, which is crucial for us next year. Operating expenses will slightly increase to support innovation, contributing to a significant profit improvement as outlined.

Our next question comes from Martin Yang from Oppenheimer. Martin, your line is now open. Please go ahead.

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

Yes, Martin. This is Brian. Retention rates have generally been increasing and have risen from the 50s to 60% to 65% in the first year, with year two holding steady at 70% to 75%. We're very pleased with this progress. Additionally, we've noticed a roughly 5% improvement in retention rates among those who signed up online, which is an encouraging trend. We plan to focus more on the app stores as well. As we approach next year, being three years into this, we’ll start reporting on third-year retention. Overall, retention rates have continued to improve, alongside tax rates that are up year-over-year, indicating positive movement in our subscription area.

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

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

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

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

Thank you, Nick.

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

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

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