GoPro, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are unaudited.
Business context and reporting period
GoPro sells cameras, mounts and accessories, as well as subscriptions and services, through retail, distributors and GoPro.com. In September, it began shipping its HERO12 Black camera and related products. The company is pursuing higher unit sales, a larger retail presence and subscriber growth; subscriptions and services remain a smaller but growing part of revenue.
Financial performance and liquidity
- Q3 revenue: $294.3 million, down 3.5% year over year. Camera units shipped rose 15.8% to 923,000, while average selling price fell 16.7% to $319.
- Revenue mix: Retail revenue was $231.0 million, or 78.5% of revenue, versus 67.7% a year earlier. GoPro.com revenue was $63.3 million, down 36%; subscription and service revenue was $24.8 million, up 16.2%.
- Subscriptions: 2.50 million GoPro subscribers at quarter-end, up 20% year over year. Q3 subscriber attach rate was 40%; disclosed annual renewal rates were 60%–65% for first-year renewals and 70%–75% for second-year renewals.
- Profitability: Gross margin was 32.0%, down from 38.0%. Operating loss was $3.8 million versus operating income of $24.4 million; net loss was $3.7 million, or $0.02 per diluted share, versus net income of $17.6 million, or $0.10 per diluted share. Adjusted EBITDA was $7.2 million versus $35.2 million.
- First nine months: Revenue was $710.0 million, down 8.1%; gross margin was 31.3%, versus 39.2%. Operating loss was $66.1 million and net loss was $50.8 million, compared with operating income of $37.2 million and net income of $25.8 million in 2022.
- Cash flow: Operating activities used $76.6 million in the first nine months, versus $19.8 million used a year earlier. Investing activities provided $107.4 million, mainly from maturities of marketable securities; financing activities used $33.3 million, including $30.0 million of share repurchases. Cash and cash equivalents declined by $2.8 million to $221.0 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $259.5 million, down from $367.3 million at year-end 2022. Long-term debt had a $141.7 million carrying value; the 1.25% convertible notes have $143.8 million principal due November 2025. The $50 million revolving facility was undrawn; the company reported compliance with its financial covenants. Current assets were $559.8 million and current liabilities $300.8 million.
Material changes versus comparable periods
- Lower camera prices and a greater share of lower-priced entry-level products increased unit shipments but reduced average selling price and gross margin. Cameras priced at an MSRP of at least $400 made up 75% of Q3 camera revenue mix, versus 87% a year earlier.
- The May 2023 MSRP reduction generated a disclosed $26.7 million price-protection charge based on estimated channel inventory. The MD&A also cites $37.3 million of total price-protection charges for the first nine months; the relationship between these figures is not clearly explained in the supplied filing text.
- Q3 retail revenue increased 12% year over year, while GoPro.com revenue declined 36%, reflecting a shift toward retail. Subscription revenue grew despite the decline in total revenue.
- First-nine-month operating cash use increased, with working-capital outflows including higher accounts receivable and inventory. Cash and marketable securities together fell by $107.9 million from December 31, 2022.
Outlook, commentary and risks
- The filing gives no specific numerical revenue or earnings guidance. Management said current cash, securities and credit-facility availability should meet working-capital, capital-expenditure, commitment and other liquidity needs for at least one year from issuance of the financial statements.
- Management expects fourth-quarter revenue to be seasonally strongest, particularly around holiday shopping, but warns that sales shortfalls could materially affect annual results. It plans a more cost-effective entry-level camera solution for Q2 2024; current sub-$300 cameras are expected to carry low margins until then.
- Management’s stated priorities include growing unit sales and subscribers, rebuilding retail distribution, controlling operating expenses and returning to annual profitability. It cautions that failure to deliver growth, improve subscription retention or manage costs could lead to further losses.
- Key risks include consumer weakness, inflation, interest rates and foreign exchange movements; pricing and product-mix pressure; intense competition; dependence on third-party and some sole-source suppliers; seasonal demand; and reliance on retail partners and distributors. Q3 gross margin was also affected by price reductions and retail-channel mix, partly offset by lower operating and component costs and subscription contribution.
- GoPro identified no goodwill impairment trigger as of September 30, 2023, but said a continued decline in market capitalization or performance below expectations could prompt future impairment testing and a charge.
- A patent case brought by Contour IP Holdings remains on appeal after its patents were ruled invalid and judgment entered for GoPro. The company intends to defend the appeal; it said it could not determine a loss or range of loss for legal matters, and did not expect their ultimate cost to be material.
- The company expects to deliver cash up to principal on the 2025 notes under current projections. Its credit agreement requires minimum liquidity, and the filing describes possible cash-settlement, refinancing and covenant risks. The company also reported $209.6 million of undiscounted future obligations under specified multi-year agreements longer than one year.
Important facts for investors to verify
- Whether unit growth and the retail-channel shift can offset lower selling prices and margin pressure, and whether the planned Q2 2024 entry-level product improves margins as expected.
- The actual amount of price-protection claims and how the disclosed $26.7 million and $37.3 million figures reconcile.
- Subscriber growth, attach rates and renewal performance, including whether subscription growth can continue to contribute meaningfully to revenue and profitability.
- Fourth-quarter holiday demand, working-capital needs and cash generation, given the seasonality and first-nine-month operating cash outflow.
- Liquidity and covenant headroom, and the company’s ability to meet or refinance the $143.8 million principal due in November 2025 while funding operations and commitments.
- Developments in the patent appeal, tax uncertainties and any market or operating changes that could lead to goodwill impairment.