GoPro, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Comparisons are with Q1 2017 unless otherwise noted. GoPro’s revenue primarily comes from cameras, drones, mounts, accessories, and related services.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Revenue | $202.3 million | $218.6 million, down 7.4% year over year |
| Gross profit / margin | $44.9 million / 22.2% | $68.6 million / 31.4% |
| Operating expenses | $119.7 million | $156.8 million, down 23.7% |
| Operating loss | $74.7 million | $88.2 million |
| Net loss / diluted loss per share | $76.3 million / $0.55 | $111.2 million / $0.78 |
| Operating cash flow | Use of $97.1 million | Use of $137.9 million |
| Adjusted EBITDA (non-GAAP) | Loss of $34.5 million | Loss of $45.7 million |
| Cash, cash equivalents and marketable securities | $144.8 million | $247.4 million at December 31, 2017 |
At March 31, 2018, current assets were $391.6 million and current liabilities were $249.7 million. Long-term debt, representing the net carrying value of the convertible notes, was $132.2 million; the notes’ principal amount was $175 million. No borrowings had been made under the revolving credit facility; reported borrowing availability was approximately $68.3 million.
Changes and business developments
- Camera units shipped rose 2.8% to 758,000, despite lower revenue. Management attributed the revenue decline mainly to lower drone and accessory revenue, lower average selling prices, and higher sales incentives.
- Gross margin fell 920 basis points. Management cited a mix shift toward lower-margin HERO and Karma products, increased sales incentives, the prior-year sale of discontinued inventory, and higher restructuring and acquisition-related costs; operational improvements partly offset these factors.
- Operating expenses declined, reflecting cost controls and prior restructuring actions. However, GAAP net loss improved year over year while remaining substantial.
- GoPro began shipping its entry-level HERO camera and launched an updated GoPro PLUS subscription service. In January, it announced closure of its aerial group and a workforce reduction of approximately 18%.
Accounting comparability: GoPro adopted ASC 606 in Q1 2018 using the modified retrospective method. The filing reports revenue of $202.3 million under ASC 606; it states the quarter’s revenue would have been $209.3 million under the prior ASC 605 accounting. Prior-year figures were not retrospectively adjusted, so reported year-over-year comparisons are not fully on the same accounting basis.
Cash, debt and liquidity
- Cash and marketable securities decreased by $102.6 million from year-end, primarily due to operating cash use and payments of accounts payable, bonuses and severance. Cash used in operations included $62.6 million of price-protection credits applied to customer receivables and a $50.7 million decrease in accounts payable; collections of receivables, including a $32.9 million IRS refund, partly offset cash outflows.
- Management stated that available cash, marketable securities and credit-facility availability were expected to cover working capital, capital expenditures, commitments and other liquidity needs for at least 12 months, based on current projections.
- The $175 million 3.50% convertible senior notes mature in April 2022. The notes have an initial conversion price of approximately $10.64 per share. The company reported $4.6 million of interest expense in Q1, including non-cash accretion and issuance-cost amortization.
Outlook, risks and unusual items
- GoPro expected 2018 non-GAAP operating expenses to be below $400 million, capital expenditures to be significantly lower than in 2017, and sales and marketing costs to be higher for full-year 2018 than in 2017. These are expectations, not guarantees.
- Management emphasized continued risks to growth and profitability, including product demand and pricing, competition, product mix, seasonality, inventory forecasting, and reliance on third-party and sometimes sole-source suppliers. It also warned that cost savings and new products or subscription offerings may not deliver expected results.
- Q1 tax benefit was $2.8 million, including one-time tax items. The IRS concluded its audit of tax years 2012–2015, and GoPro received a net refund of approximately $32.9 million in February 2018. The company maintained a full valuation allowance on U.S. deferred tax assets.
- Q1 restructuring charges totaled $16.7 million; approximately $14.2 million related to the new 2018 plan. GoPro also disclosed $122.6 million of future minimum operating lease payments and $183.4 million of undiscounted obligations under multi-year agreements with terms longer than one year.
- Shareholder litigation remained pending, including a proposed settlement in one IPO-related action awaiting final court approval and other shareholder class and derivative actions. The company said it could not predict outcomes or determine whether litigation would have a material effect.
- Customer concentration is notable: two customers each represented 14% of Q1 revenue, and two customers accounted for 52% of accounts receivable at quarter-end. The company also identified cybersecurity, privacy and regulatory risks, including the EU GDPR taking effect in May 2018.
Important facts for investors to verify
- How revenue and gross margin trend after adjusting for ASC 606 presentation differences, sales incentives and product mix.
- Whether camera demand, average selling prices and channel sell-through support improved revenue and margins, including the planned sell-through of remaining Karma inventory.
- Whether expense reductions and the 2018 restructuring translate into sustained cash-flow improvement without weakening product development or marketing effectiveness.
- Whether liquidity remains adequate given continued operating cash use, the $175 million note principal, credit-facility terms and other commitments.
- Developments in shareholder litigation, tax matters, customer concentration and supplier availability.