GoPro, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. GoPro sells cameras, accessories and subscription services globally through direct and distribution channels.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $131.2m | $285.9m | $666.3m | $771.0m |
| Gross margin | 21.7% | 31.8% | 31.7% | 28.4% |
| Operating loss | $71.2m | $21.4m | $98.4m | $126.9m |
| Net loss | $74.8m | $27.1m | $110.5m | $140.7m |
| Diluted loss per share | $0.51 | $0.19 | $0.77 | $1.01 |
Q3 camera shipments fell 56% year over year to 479,000 units; average selling price increased 5% to $274. Operating expenses declined 11% year over year to $99.6m. Adjusted EBITDA was negative $52.7m in Q3, versus positive $6.2m a year earlier. For the first nine months, gross profit was $211.0m, compared with $219.3m.
Cash flow and liquidity: Net cash used in operating activities was $112.7m for the first nine months, compared with $90.8m used in 2018. Q3 operating cash use was $46.7m. Cash, cash equivalents and marketable securities totaled $79.0m at September 30, down $118.5m (60%) from year-end 2018. Inventory rose to $250.0m from $116.5m, largely reflecting a $133.6m inventory cash outflow. The company said available liquidity, including its credit facility, should meet requirements for at least 12 months.
Debt: Convertible notes have $175.0m principal, bear 3.5% interest and mature in April 2022; their net carrying value was $146.2m. The $250m revolving credit facility, due March 2021, had not been drawn, and the company reported compliance with its financial covenants.
Material changes and management commentary
- Management attributed the steep Q3 revenue decline primarily to a late-stage HERO8 Black production delay, shifting flagship-camera shipments from Q3 to Q4; the HERO7 launch had occurred in Q3 2018. Q3 gross margin also fell, reflecting higher sales incentives and lower HERO7 Black selling prices.
- Nine-month revenue declined 14% year over year, including an expected $29.5m reduction in aerial revenue as GoPro sold remaining Karma inventory after exiting the aerial business in 2018. Nine-month gross margin improved, mainly due to lower camera costs and product mix.
- GoPro began shipping MAX in September and HERO8 Black in October 2019. Management highlighted new camera features, accessories, app and cloud functionality, and GoPro Plus as potential demand drivers. The filing provides no numerical revenue or earnings guidance; management cited historical fourth-quarter seasonality and said R&D expense was expected to increase year over year in 2019.
Risks, contingencies and unusual items
- Cash usage and elevated inventory make holiday-quarter sell-through and demand forecasting important. GoPro warned that product-launch delays, excess inventory, component shortages, competition, and tariff or trade-policy changes could pressure revenue and margins. It had shifted most U.S.-bound camera production from China to Mexico in the second half of 2019.
- Substantially all revenue depends on cameras, mounts and accessories; the company also relies on third-party manufacturers and some sole-source component suppliers. The filing identifies competition from smartphones and established electronics and camera makers as a continuing risk.
- GoPro reported $195.8m of undiscounted future obligations under certain multi-year commitments with terms longer than one year. Operating lease liabilities totaled $71.7m at September 30; lease accounting adoption added $60.1m of right-of-use assets and $88.3m of lease liabilities at January 1, 2019.
- Unrecognized tax benefits were $31.5m; the company said the amount could change by up to $5.0m within the next 12 months. A 2016 shareholder class action settlement received final court approval and was funded by insurers. Other derivative litigation remained pending or stayed; management could not determine whether litigation outcomes would materially affect the company.
- The company cited a full valuation allowance on U.S. deferred tax assets, potential volatility in the tax provision, and significant convertible-note obligations. It stated that disclosure controls were effective as of quarter-end and reported no material change in internal control during Q3.
Investor verification priorities
- Confirm HERO8 Black and MAX launch timing, Q4 shipment and sell-through, and whether the deferred demand translated into revenue and cash receipts.
- Track inventory levels, sales incentives, gross-margin recovery, and operating cash burn after the production ramp.
- Assess liquidity against the $175m note principal due in 2022, conversion-related cash exposure, and the availability and covenants of the undrawn credit facility.
- Monitor tariff and production-shift costs, supplier capacity and concentration, and seasonal or customer-channel demand.
- Review developments in tax examinations and derivative litigation, and any changes to the company’s stated 12-month liquidity outlook.