GoPro, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. GoPro sells cameras, drones and accessories globally. During the quarter, it began shipping HERO6 Black; Fusion was expected to become available in Q4 2017.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $329.8 million | $240.6 million | $844.9 million | $644.9 million |
| Gross margin | 39.6% | 40.3% | 36.1% | 38.7% |
| Operating income (loss) | $8.0 million | $(115.6) million | $(105.1) million | $(346.4) million |
| Net income (loss) | $14.7 million | $(104.1) million | $(127.0) million | $(303.3) million |
| Diluted earnings (loss) per share | $0.10 | $(0.74) | $(0.92) | $(2.18) |
| Operating cash flow | $55.5 million | $(41.7) million | $(93.8) million | $(120.4) million |
- Revenue and units: Q3 revenue rose 37% year over year; camera shipments increased 12% to 1.144 million. Management attributed growth to HERO5 and HERO6, Karma, accessories and higher average selling prices. Q3 average selling price per camera unit shipped rose 22% year over year.
- Profitability: Q3 returned to GAAP profitability, but the $10.8 million income tax benefit materially contributed to net income; pretax income was $3.8 million. The nine-month period remained loss-making. Q3 adjusted EBITDA was $35.7 million versus a loss of $73.6 million a year earlier; non-GAAP net income was $21.1 million. These are non-GAAP measures and exclude specified costs.
- Margins and expenses: Q3 gross margin was down 70 basis points year over year but improved from 35.6% in Q2. Nine-month gross margin declined 260 basis points year over year, primarily reflecting lower-margin Karma sales and higher sales incentives. Q3 operating expenses fell 42% year over year to $122.5 million, following cost reductions and restructuring.
- Cash and liquidity: September 30 cash, cash equivalents and marketable securities totaled $196.6 million, down from $218.0 million at December 31, 2016. Nine-month operating cash use was $93.8 million. The company reported $71.7 million of cash held by foreign subsidiaries and approximately $110 million available under its borrowing-base credit facility; it said liquidity should cover requirements for at least 12 months.
- Debt: GoPro issued $175 million principal amount of 3.50% convertible senior notes due 2022. The balance sheet carried the liability component at $127.9 million; effective interest, including discount accretion and issuance-cost amortization, was approximately 10.5%. The notes are convertible under specified conditions, and the company said it currently intended to deliver cash up to principal upon conversion. It used $78 million of proceeds for a prepaid forward covering approximately 9.2 million shares.
- Balance sheet: Total assets were $825.4 million and total liabilities were $485.2 million at September 30. Inventory was $177.2 million; current liabilities were $308.8 million. The company had no borrowings under its revolving credit facility and reported compliance with its financial covenants.
Changes, outlook and risks
- Compared with Q3 2016, revenue and shipments increased, operating expenses were substantially lower, and the company moved from a large operating loss to operating income. However, Q3 gross margin was slightly lower, and the nine-month period still showed significant operating and net losses.
- Management cited restructuring and cost-saving efforts, including a March 2017 plan eliminating approximately 270 positions and consolidating facilities. The company recorded $16.8 million of restructuring charges in the first nine months of 2017. It had 1,254 employees at quarter-end, 19% fewer than at year-end 2016.
- The filing provides no specific numerical Q4 or full-year guidance. It directs readers to the company’s earnings release and investor-relations website for its outlook. Management noted typical fourth-quarter holiday seasonality and emphasized product execution, cost control, innovation and international growth.
- Key business risks include demand and seasonality, product launch or quality issues, intense camera and drone competition, inventory forecasting, reliance on third-party and some sole-source suppliers, and the challenge of sustaining profitability. GoPro also disclosed risks relating to cybersecurity, international operations, taxes and its convertible notes. Karma had been withdrawn in 2016 after units lost power and relaunched in 2017; management continued to note margin pressure on the drone.
- The IRS was examining 2012–2015 tax years; the filing said the matter would be submitted to the Congressional Joint Committee on Taxation and management did not expect a material adverse outcome. Gross unrecognized tax benefits were $70.3 million. Shareholder litigation remained pending, including a securities class action and an IPO-related action; the filing said outcomes and potential effects could not be determined.
- The company expected adoption of the new revenue standard in 2018 to require certain sales incentives to be estimated and recorded as revenue reductions earlier, but did not expect a material impact on quarterly or annual revenue. It expected adoption of a separate income-tax standard in 2018 to increase accumulated deficit by $10–15 million.
Important facts for investors to verify
- Whether Q4 product demand, HERO6 and Fusion launches, and holiday-season sales support continued revenue growth.
- Whether cost reductions translate into sustained operating profitability and positive operating cash flow, rather than a single profitable quarter.
- How gross margin develops, particularly given Karma’s margin pressure, product mix and sales incentives.
- Inventory levels, customer concentration, supplier capacity and the company’s ability to manage product forecasts and returns.
- Cash runway and borrowing availability, including the restrictions and potential cash, dilution and refinancing implications of the convertible notes and prepaid forward.
- Developments in the IRS examination, unrecognized tax benefits and pending shareholder litigation.