GoPro, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; year-to-date results cover the nine months ended September 30, 2014. GoPro sells mountable and wearable cameras and accessories globally. The company completed its IPO on July 1, 2014.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $280.0 million | $192.1 million | $760.3 million | $624.3 million |
| Gross profit / margin | $124.0 million / 44% | $64.0 million / 33% | $323.4 million / 43% | $210.3 million / 34% |
| Operating income (loss) | $13.5 million | $(0.7) million | $13.3 million | $28.1 million |
| Net income (loss) | $14.6 million | $(1.1) million | $5.8 million | $16.8 million |
| Diluted EPS | $0.10 | $(0.01) | $0.04 | $0.13 |
| Adjusted EBITDA | $36.2 million | $8.6 million | $90.5 million | $51.9 million |
Q3 revenue rose 46%, with camera units shipped up 32% to 1.089 million; average selling price fell 2%, mainly from product mix. Nine-month revenue increased 22%, as units shipped rose 15% and average selling price increased 2%. Gross-margin gains reflected lower HERO3+ costs and, for the nine-month period, higher average selling prices. Adjusted EBITDA is a non-GAAP measure.
- Operating expenses rose materially: Q3 R&D increased 116% and G&A 161%; nine-month R&D increased 119% and G&A 228%. Higher headcount and investment contributed, and stock-based compensation was a major factor in G&A.
- Stock-based compensation was $52.1 million for the first nine months, versus $7.3 million a year earlier, including $27.6 million of increased expense associated with CEO RSUs. Nine-month operating income and net income declined despite higher revenue and gross profit.
- Nine-month cash from operations was $53.7 million, versus $20.1 million; investing cash outflow was $25.8 million, including $22.9 million of capital expenditures and $3.2 million for an acquisition. Financing provided $108.4 million, primarily reflecting IPO proceeds and debt repayment.
- Cash and cash equivalents were $237.7 million at September 30, 2014, versus $101.4 million at December 31, 2013. Current assets were $498.4 million and current liabilities $225.0 million.
- Long-term debt was zero at quarter-end. GoPro repaid $108.0 million of term debt at the IPO closing and terminated its credit facility in August 2014.
Material changes and notable items
- The company received $200.8 million of IPO proceeds after underwriting discounts and commissions; after offering expenses, reported net proceeds were approximately $194.6 million. It used $108.0 million to repay debt. Preferred shares converted to Class B common stock, and the company established Class A and Class B common shares with different voting rights.
- Revenue concentration increased: one retailer accounted for 27% of Q3 revenue and 19% of nine-month revenue. Three customers represented 30%, 14%, and 13% of accounts receivable at September 30.
- The company sold receivables without recourse, including $121.6 million during the first nine months; factoring fees were $1.1 million. Inventory was $117.0 million at quarter-end.
- Contractual cash obligations totaled $60.9 million, including operating leases, sponsorships, other commitments, and capital-equipment purchases.
- Management corrected a prior-quarter cash-flow presentation error: Q1 operating and investing cash flows had each been understated by $3.2 million. The company determined the revision was not material to prior periods.
Outlook, risks, and contingencies
Management expected revenue and gross-margin percentage for the quarter ending December 31, 2014 to increase versus both the prior-year quarter and Q3 2014. It expected R&D to be relatively flat sequentially but higher year over year; sales and marketing to increase versus both comparison periods; and G&A to be relatively flat sequentially but higher year over year. Management cautioned that it did not expect to sustain or increase its revenue growth rates.
Key risks include dependence on a limited number of retailers and distributors, third-party manufacturers and suppliers (including sole-source suppliers), and outsourced logistics providers; the ability to launch products and attract customers; and changes in product mix, selling prices, and regional demand. Q3 sales outside the U.S. were 34% of revenue, down from 56% a year earlier. Ordinary-course legal proceedings were not expected by management to have a material effect; an appeal in a previously disclosed matter had oral argument on October 7, 2014. The filing also describes indemnification obligations whose future exposure is unknown. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether Q4 revenue and margin expectations were achieved, and how HERO4 launches and product mix affected results.
- Separate operating performance from the sharp increase in stock-based compensation, including CEO RSU expense and potential future dilution.
- Monitor retailer and receivables concentration, inventory levels, and reliance on contract manufacturers and sole-source components.
- Review the sustainability of operating cash flow, the scale of capital and other contractual commitments, and the impact of seasonality and receivables sales.
- Track the disclosed appeal and any developments in litigation or indemnification exposure.