GoPro, Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Unaudited results are compared with the corresponding 2017 periods unless noted.
Business context
GoPro’s revenue continued to depend primarily on cameras and related mounts and accessories. In Q1 2018, the company began shipping its HERO entry-level camera, updated its GoPro PLUS subscription service in the U.S., and announced the closure of its aerial business. It planned to sell through remaining Karma drone inventory.
Financial performance and liquidity
| Metric | Q2 2018 | First half 2018 |
|---|---|---|
| Revenue | $282.7 million | $485.0 million |
| Gross margin | 29.5% | 26.4% |
| Operating loss | $30.8 million | $105.6 million |
| Net loss | $37.3 million | $113.6 million |
| Diluted loss per share | $0.27 | $0.82 |
| Cash used in operations | $1.0 million | $98.2 million |
Q2 non-GAAP net loss was $20.8 million ($0.15 per share) and adjusted EBITDA was negative $8.7 million. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
At June 30, cash and cash equivalents were $114.8 million and marketable securities were $25.0 million, totaling $139.8 million, down from $247.4 million at year-end 2017. Total current assets were $380.1 million and current liabilities were $255.5 million. Long-term debt had a $134.4 million carrying value; the convertible notes’ principal was $175.0 million. The company reported no borrowings under its revolving credit facility and approximately $59.1 million of borrowing availability, subject to the borrowing base.
Changes versus prior periods
- Q2 revenue decreased 5% year over year; first-half revenue decreased 6%. Camera units shipped rose 1% in Q2 to 1.071 million and 2% for the first half to 1.829 million.
- Management attributed lower revenue mainly to reduced drone and accessories sales, lower-priced camera mix, and, for the first half, higher sales incentives. Q2 average selling price fell 6% year over year.
- Q2 gross margin fell from 35.6% to 29.5%; first-half margin fell from 33.8% to 26.4%. Management cited the greater mix of lower-priced, lower-margin cameras and higher operating costs.
- Q2 operating expenses declined 13% to $114.2 million, while first-half expenses declined 19% to $233.9 million. Cost reductions from restructuring were partly offset by Q2 advertising expense, which doubled year over year to $21.7 million.
- Q2 net loss widened from $30.5 million to $37.3 million. First-half net loss narrowed from $141.7 million to $113.6 million, with the comparison affected by prior-year tax expense and 2018 tax items.
- First-half operating cash use improved from $149.4 million to $98.2 million, but cash and marketable securities declined $107.6 million from year-end. The company cited payments of year-end liabilities and price-protection charges following product price reductions.
Outlook, risks, and unusual items
- Management said current cash, marketable securities, and available credit were expected to meet working-capital, capital expenditure, commitment, and other liquidity needs for at least 12 months. It expected 2018 non-GAAP operating expenses below $400 million and significantly lower capital expenditures than in 2017; these are expectations, not guarantees.
- The January 2018 restructuring targeted an approximately 18% global workforce reduction, closure of the aerial group, and office consolidation. First-half restructuring charges totaled $17.5 million, including $15.2 million under the 2018 plan.
- The company received an approximately $32.9 million IRS tax refund in February after the IRS concluded its audit of tax years 2012–2015. U.S. deferred tax assets remained subject to a full valuation allowance, limiting recognition of tax benefits from U.S. losses.
- ASC 606 was adopted in 2018 without recasting prior periods. The filing reports that adoption affected revenue by reducing Q2 revenue by $3.7 million and increasing first-half revenue by $3.3 million versus the former accounting basis.
- Key risks include continued losses and uncertain revenue growth, product pricing and mix, dependence on seasonal holiday sales, customer and supplier concentration, component availability, product launches, and the company’s ability to execute cost reductions. The filing also identifies privacy and cybersecurity, international and trade risks, and uncertainty around litigation.
- The company had $175.0 million of 3.50% convertible notes due in 2022. Conversion, repurchase, or default provisions could affect cash needs, dilution, and liquidity; the revolving facility also contains covenants.
- Shareholder litigation included a 2016 class action with a settlement in principle and preliminary approval, a separate 2016 securities class action, and 2018 shareholder class and derivative actions. The company said it could not predict outcomes or determine whether litigation would materially affect results.
Important facts for investors to verify
- Whether subsequent results show revenue stabilization and improvement in gross margin, particularly as lower-priced cameras and discontinued Karma inventory affect sales mix.
- Actual cash burn, liquidity, and credit availability relative to the company’s 12-month liquidity assessment.
- Progress against the non-GAAP operating expense target and whether restructuring savings offset costs and investment needs.
- Sales performance and consumer adoption of new cameras, software, and subscriptions, including the planned Fall 2018 product launch.
- Developments in shareholder litigation, the convertible notes, and any changes in customer or supplier concentration.