GoPro, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. GoPro sells mountable and wearable cameras, accessories, and related software. This is a pre-IPO quarter; the company completed its IPO on July 1, 2014.
Financial performance
- Revenue: Q2 revenue was $244.6 million, up 38% year over year; six-month revenue was $480.3 million, up 11%. Q2 growth reflected a 31% increase in units shipped and a 5% rise in average selling price, mainly from product mix favoring HERO3+ Black cameras. Six-month units shipped rose 6% and average selling price rose 4%.
- Margins and operating results: Q2 gross profit was $102.9 million and gross margin 42%, versus $56.8 million and 32% a year earlier. Six-month gross margin was 42%, versus 34%. Lower HERO3+ product costs and higher selling prices helped; accessory mix partly offset the six-month improvement. Q2 operating loss was $16.7 million versus $6.0 million; six-month operating loss was $0.1 million versus operating income of $28.8 million.
- Profit and adjusted EBITDA: Q2 net loss was $19.8 million ($0.24 per share), versus a $5.1 million loss; six-month net loss was $8.8 million ($0.11 per share), versus net income of $18.0 million. Adjusted EBITDA, a non-GAAP measure, was $25.7 million for Q2 versus $2.3 million, and $54.4 million for six months versus $43.3 million.
- Expenses: Q2 operating expenses increased to $119.5 million from $62.8 million. General and administrative expense included $34.2 million of stock-based compensation, including $27.6 million related to CEO RSUs, of which 1.5 million vested immediately. Six-month stock-based compensation was $38.2 million, versus $4.6 million.
- Cash flow and liquidity: Six-month operating cash flow was $6.7 million, versus cash used of $3.2 million. Investing outflow was $15.6 million, including $12.7 million of capital expenditures and $3.2 million for an acquisition. Cash rose $3.5 million to $104.9 million. At June 30, current assets were $299.9 million and current liabilities $212.6 million.
- Debt and IPO: At June 30, term debt was $108.0 million; the $50.0 million revolving facility was undrawn. On July 1, GoPro used IPO proceeds to repay the term loan in full. The company issued 8.9 million shares at $24 per share. The filing reports approximately $200.8 million of proceeds after underwriting discounts and commissions, and $194.6 million after underwriting discounts and commissions plus other offering expenses.
Changes, outlook, and risks
- Q2 revenue growth accelerated compared with the six-month rate, but profitability weakened as expenses rose substantially. Management attributed R&D growth to product development and higher headcount; sales and marketing costs also rose with headcount and business expansion.
- Management expected September-quarter revenue to exceed both the prior-year September quarter and Q2 2014. It expected gross margin to exceed the prior-year September quarter but decline from Q2. R&D and sales and marketing expenses were expected to increase versus both comparison quarters; G&A including stock-based compensation was expected to rise year over year but fall from Q2. GoPro cautioned that it did not expect to sustain or increase its revenue growth rates.
- Risks include reliance on a small number of retail and distributor customers (one customer represented 17% of Q2 revenue), third-party manufacturers and suppliers, some sole-source components, and outsourced logistics. The filing also identifies product-development and customer-demand risks.
- Contractual cash obligations totaled $175.8 million at June 30, including sponsorship, lease, capital-equipment, and debt commitments. Management said existing legal proceedings were not expected to have a material impact. The company disclosed a nonmaterial correction to its prior-quarter cash-flow presentation: operating and investing cash flows had each been understated by $3.2 million.
Important facts for investors to verify
- Reconcile the filing’s IPO proceeds figures ($200.8 million after underwriting discounts and commissions versus $194.6 million after other offering expenses) and confirm the use of proceeds, including the $108.0 million debt repayment.
- Assess the sustainability of margins and revenue growth, given product mix, customer concentration, and management’s warning that growth rates may not be sustained.
- Evaluate the effect and future recognition of stock-based compensation, including the CEO’s market-condition RSUs and the quarter’s unusually high G&A expense.
- Review cash-flow quality, particularly the impact of receivables factoring, working-capital timing, and the disclosed cash-flow reclassification.
- Confirm post-IPO liquidity and remaining obligations under the revolving facility and other contractual commitments.