GoPro, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017. GoPro sells cameras, drones and accessories globally through retail, wholesale and direct channels. Results reflect shipments of HERO5 cameras and the return of Karma drone sales.
Financial performance
Amounts are in millions of dollars except per-share data and units. Comparisons are year over year.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $296.5 | $220.8 | $515.1 | $404.3 |
| Gross profit / margin | $105.6 / 35.6% | $93.0 / 42.1% | $174.2 / 33.8% | $152.7 / 37.8% |
| Operating expenses | $130.6 | $202.4 | $287.4 | $383.5 |
| Operating loss | $(25.0) | $(109.4) | $(113.2) | $(230.8) |
| Net loss / diluted loss per share | $(30.5) / $(0.22) | $(91.8) / $(0.66) | $(141.7) / $(1.02) | $(199.2) / $(1.44) |
| Adjusted EBITDA (non-GAAP) | $5.1 | $(76.8) | Not stated here | Not stated here |
| Cash used in operating activities | $11.4 | $45.5 | $149.4 | $78.7 |
- Q2 revenue rose 34% year over year; camera shipments increased 40% to 1.061 million. First-half revenue increased 27% and camera shipments increased 23% to 1.799 million.
- Q2 gross margin fell 650 basis points. Management attributed the decline mainly to the HERO4-to-HERO5 product transition and lower-margin Karma sales, partly offset by supply-chain savings and higher shipments.
- Q2 operating expenses declined 35%, reflecting restructuring and other cost reductions. The company remained loss-making under GAAP despite positive Q2 adjusted EBITDA, a non-GAAP measure.
Financial position and liquidity
- At June 30, cash and cash equivalents were $149.8 million, with no marketable securities, versus cash and investments of $218.0 million at December 31, 2016. First-half operating cash outflow was $149.4 million; cash declined by $42.4 million overall, aided by financing proceeds.
- Current assets were $401.9 million and current liabilities $242.6 million. Inventory was $126.7 million, down from $167.2 million at year-end.
- GoPro issued $175 million principal amount of 3.50% convertible senior notes due 2022. Their balance-sheet carrying amount was $125.8 million after discounts and issuance costs; the notes’ effective nonconvertible borrowing rate was approximately 10.5%. The company used $78 million for a prepaid forward transaction covering approximately 9.2 million shares.
- No credit-facility borrowings were outstanding. Approximately $89 million was available under the borrowing-base facility at quarter-end, subject to its terms and covenants; the company reported covenant compliance.
Outlook, commentary and material risks
- The filing refers investors to the company’s earnings release for Q3 and full-year 2017 outlook; it does not provide clear numerical guidance in the filing. Management said cash, cash equivalents and available facility borrowings were expected to cover liquidity needs for at least 12 months, and expected 2017 operating expenses and capital spending to be lower than in 2016.
- Management identified product innovation, smartphone-centered editing and sharing, international expansion, and new aerial and spherical products as opportunities, while warning that adoption and returns on investment are uncertain. A limited commercial release of the Fusion spherical camera was planned by year-end 2017. QuikStories launched in July, after the reporting quarter.
- Restructuring charges totaled $14.8 million in the first half. The March 2017 plan targeted approximately 270 positions; actions were expected to be substantially complete in Q3. The company cautioned that cost savings may not be realized and further losses could continue.
- Key risks include seasonal demand and holiday execution, competition and smartphone substitution, product-transition and inventory forecasting challenges, reliance on third-party and sole-source suppliers, Karma product quality and drone regulation, and customer concentration. Two customers represented 49% of quarter-end receivables; each contributed at least 10% of Q2 revenue.
- Tax expense was recorded despite losses, principally because profitable foreign jurisdictions generated tax expense while U.S. deferred tax assets had a full valuation allowance. The IRS was examining tax years 2012–2015; the potential impact was not estimable. Gross unrecognized tax benefits were $73.5 million.
- Litigation includes a securities class action whose motion to dismiss was denied July 26, 2017, after quarter-end; the filing says the potential impact could not be determined. A separate securities class action was dismissed with final judgment for GoPro in June 2017. An IPO-related shareholder action remained pending in state court.
Important facts for investors to verify
- Whether revenue and camera sell-through trends support sustained growth: Q2 shipments rose 40% year over year, while estimated global camera sell-through fell approximately 9%.
- Whether gross margins recover as product mix, Karma sales and cost savings evolve; Q2 margin was 35.6%, versus 42.1% a year earlier.
- Whether cash burn is manageable: first-half operating cash use was $149.4 million, and quarter-end cash was $149.8 million.
- The full economic and dilution implications of the convertible notes and prepaid forward, including conversion, repurchase and counterparty risks.
- Developments in tax examinations and shareholder litigation, and any resulting financial exposure.