GoPro, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2016, with comparisons to Q1 2015. GoPro sells mountable and wearable cameras and accessories globally through retailers, distributors, and its website; these products generated substantially all revenue. The company said it sold in more than 100 countries and through more than 40,000 retail outlets.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or prior balance-sheet date |
|---|---|---|
| Revenue | $183.5 million | $363.1 million; down 49% |
| Gross profit and margin | $59.7 million; 32.5% | $163.7 million; 45.1% |
| Operating expenses | $181.1 million | $141.5 million; up 28% |
| Operating income (loss) | $(121.4) million | $22.3 million |
| Net income (loss) | $(107.5) million | $16.8 million |
| Diluted earnings (loss) per share | $(0.78) | $0.11 |
| Adjusted EBITDA | $(86.8) million | $56.5 million |
| Non-GAAP net income (loss) | $(86.7) million | $35.6 million |
| Operating cash flow | $(33.3) million | $66.3 million |
| Cash, cash equivalents and marketable securities | $388.7 million at March 31, 2016 | $474.1 million at December 31, 2015 |
At March 31, 2016, total assets were $928.9 million, current assets $602.4 million, total liabilities $249.5 million, and stockholders’ equity $679.4 million. Cash and cash equivalents were $248.7 million and marketable securities were $140.0 million. The company had no borrowings under its new secured revolving credit facility; the borrowing base available was approximately $86 million against a $250 million commitment, potentially expandable to $300 million subject to conditions. Cash flow from investing activities was $1.0 million, including $45.0 million of acquisition spending and $8.2 million of property and equipment purchases. Financing activities provided $1.4 million.
Material changes versus the prior comparable period
- Units shipped fell 48% to 701,000. Revenue declined across all regions: Americas down 53%, EMEA down 57%, and APAC down 14%.
- Management attributed weaker revenue to seasonally lower sell-in as channel partners reduced inventory, no major product launch in Q4 2015, and a prior-year benefit from HERO4 launches. Q1 estimated global sell-through exceeded sell-in by about 50%; GoPro expected channel inventory reduction to continue in Q2.
- Gross margin contracted 1,260 basis points. Approximately $8 million of charges related to legacy HERO products—including excess purchase commitments, inventory write-downs, and marketing development funds—accounted for about 380 basis points of the decline. Lower volume and sales mix also weighed on margin.
- Operating expenses rose despite lower revenue. R&D increased 56% and sales and marketing increased 41%; G&A declined 31%, primarily reflecting lower CEO restricted-stock-unit compensation expense.
- Cash and investments decreased $85.4 million from year-end. Operating cash use reflected the net loss and payments of prior-year liabilities, partly offset by collections of receivables and lower inventory.
Outlook, management commentary, and risks
- Management expected revenue to grow sequentially each quarter, with most annual revenue in the second half. It expected Q1 to be the year’s low point for gross margin, while cautioning that margin would vary with product, channel, geography, and volume mix. No specific revenue or earnings guidance figures were provided.
- Management expected operating expenses to rise sequentially, especially R&D, and planned increased marketing spending. Priorities included next-generation HERO5 cameras, consumer drone products, software and services, and entertainment initiatives. The company stated it planned to release its first consumer drone product in 2016.
- A January restructuring reduced the global workforce by approximately 7%; Q1 restructuring expense was about $6.5 million, primarily severance. The plan was substantially completed by March 31, and management said savings would be reinvested in growth priorities.
- GoPro acquired a mobile editing application company for approximately $45 million in cash in March. A second acquisition closed April 11 for approximately $59 million. Up to approximately $37 million of additional deferred cash and stock compensation is payable to certain continuing employees subject to employment conditions. Management said the acquisitions support future software offerings.
- Risks include execution and returns on significant product, software, marketing, and entertainment investments; product-launch and seasonal demand dependence; channel inventory changes; and reliance on third-party manufacturers, including some sole-source suppliers. Two customers represented 15% and 13% of Q1 revenue; three customers represented 36%, 23%, and 14% of receivables at quarter-end.
- Shareholder securities class actions were pending in federal and California state courts; the company said it could not predict outcomes or determine potential material impact. The IRS was examining tax years 2012–2014 and California tax years 2011–2012; potential impact was not estimable. Gross unrecognized tax benefits were $45.4 million at quarter-end.
- The company stated existing cash, investments, and operating cash flow were expected to meet liquidity needs for at least 12 months. It also noted that some foreign-held cash could incur U.S. taxes if repatriated, and that future external financing might not be available on acceptable terms. No material change in disclosed market risks was reported.
Important facts for investors to verify
- Whether revenue and unit shipments recover as new products launch and channel inventory normalizes, particularly given management’s sequential-growth outlook.
- Whether gross margin improves after Q1’s legacy-product charges and whether further inventory or purchase-commitment exposure arises.
- Whether spending growth in R&D and marketing produces revenue or profitability, and how acquisition-related costs and deferred employee compensation develop.
- Liquidity after the April acquisition, cash held by foreign subsidiaries, and the actual availability and terms of the borrowing-base credit facility.
- Developments in the shareholder litigation and tax examinations, including any material financial exposure.
- Customer and supplier concentration, and the effect of channel sell-through versus sell-in on future orders and receivables.