GoPro CEO Nick Woodman admits initial sell-through of the HERO4 Session was "weak." Image source: GoPro.

GoPro (NASDAQ:GPRO) just announced a rough quarter, and the market is responding in kind. After climbing 7% in Wednesday's regular trading leading up to its third-quarter 2015 report, shares of the action camera maker reversed those gains -- and then some -- after the results hit the wires, falling more than 16% early Thursday.

On the surface, though, GoPro's quarter sounded impressive. Revenue rose 43% year over year to $400.3 million, and adjusted net income more than doubled to $36.6 million, or $0.25 per diluted share.

That would have been well and good, but GoPro's own guidance called for revenue of $430 million to $445 million (up 56% at the midpoint), and earnings per share of $0.29 to $0.32. Similarly, analysts' consensus estimates predicted GoPro would achieve revenue of $433.6 million and earnings of $0.29 per share.  

To GoPro's credit, however, adjusted gross margin did come in at a respectable 46.8% -- above the company's own expectations for 46% and a pleasant consequence of the outsized influence on overall results of GoPro's highest-end HERO4 Black and Silver cameras. Even so, the market is rightfully upset that GoPro just fell short of its own guidance on the top and bottom lines for the first time since going public last year.

"I am proud of our year-to-date accomplishments in which we posted strong financial results and expanded our portfolio of products," insisted GoPro CEO Nick Woodman. "However, our business in the third quarter was clearly more difficult than anticipated."

Three culprits
During the subsequent conference call, Woodman cited three primary factors they believe contributed to their underperformance.

First -- and as he technically suggested last month -- Woodman succinctly called early sell-through of GoPro's tiny new HERO4 Session camera "weak."

"In retrospect," Woodman elaborated, "we believe we priced the product 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."

As it turns out, at that price point consumers continued to choose the more feature-rich -- albeit larger form factor -- HERO4 Silver over the smaller, simpler Session.

"On a positive note," Woodman quipped, "this experience taught us how hard it is to sell against GoPro and our premium HERO4 Black and Silver products."

Second, when GoPro dropped the HERO4 Session's price to $299 -- a direct result, it says, of "strong feedback" from consumers and retailers, and its recognition underperformance was likely to continue -- GoPro incurred $19 million in market development funds and price protection (for example, when a customer is granted a price adjustment within a certain time frame after purchasing at a higher price).

Third, GoPro now believes it under-funded marketing in both the second and third quarters, negatively impacting demand on a broad basis. As a result, GoPro will more aggressively advertise beginning in the current quarter, including a return to television for the first time in a year. GoPro is also expanding its digital in-store and out-of-home initiatives globally.

And I might add a fourth item: timing of big product launches. Specifically, recall GoPro's biggest product launches this year came in the second quarter, namely in the form of both the HERO4 Session and lower-priced HERO+ LCD in the second quarter. Though it might be more difficult to quantify the negative effect of timing given the fact GoPro initially mispriced the Session as well, it seems fair to observe earlier timing of new product releases would almost certainly push demand forward in the year.

Looking forward
Consequently, for the current quarter GoPro expects revenue of $500 million to $550 million, or a decline of 17% year over year, led by strength in the Americas and direct channel sales. HERO4 Black and Silver will continue be the largest contributors to revenue, and gross margins should be 46%, plus or minus 50 basis points, and remain above GoPro's long-term target of 42% to 44%.  But given the aforementioned increase in marketing spending -- which should continue, by the way, into 2016 -- as well as a planned ramp in spending related to GoPro's software and entertainment initiatives, GoPro anticipates Q4 earnings per share of $0.35 to $0.45.

Analysts, on average, were looking for significantly higher fourth-quarter revenue of $690.5 million, and earnings of $0.82 per share.

Peering even further ahead, GoPro confirmed it's still on track for a first-half 2016 launch for both its differentiated quadcopter solution and a new six-camera spherical array focused on capturing high-quality virtual reality content. Woodman also promised as the launch nears that they'll share more details on the quadcopter's "unique value proposition," as well as plans to leverage GoPro's brand, marketing, and distribution to support these new products.

In the meantime, GoPro's board also approved a $300 million share repurchase authorization to begin in the fourth quarter. This likely helped take away at least some of the sting of today's big miss, and should allow the company to take advantage of its depressed stock with shares now down around 60% so far in 2015.

However, until GoPro can prove its corrective actions can put the company's core business back on track, it's hard to blame investors for taking another big step back from GoPro stock.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.