GoPro, Inc. — Q2 2016 Form 10-Q
Business context and period. GoPro sells mountable and wearable cameras, accessories and related software globally. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $220.8 million | $419.9 million | $404.3 million | $783.0 million |
| Gross margin | 42.1% | 46.3% | 37.8% | 45.7% |
| Operating income (loss) | $(109.4) million | $46.1 million | $(230.8) million | $68.4 million |
| Net income (loss) | $(91.8) million | $35.0 million | $(199.2) million | $51.8 million |
| Diluted earnings (loss) per share | $(0.66) | $0.24 | $(1.44) | $0.35 |
- Q2 revenue fell 47% year over year, while units shipped declined 54% to 759,000. First-half revenue fell 48% and shipments fell 51% to 1.46 million.
- Q2 gross margin improved to 42.1% from 32.5% in Q1, reflecting product mix, a higher direct-channel share and no further inventory write-downs. It remained below the prior-year quarter, partly due to higher marketing development funds, product mix and lower unit volume.
- Q2 operating expenses rose 37% year over year to $202.4 million, led by research and development and sales and marketing investment. First-half operating expenses were $383.5 million.
- Operating cash flow was $(78.7) million for the first half, versus positive $132.1 million a year earlier; Q2 alone used $45.5 million. First-half investing cash outflow was $38.5 million, including $104.4 million of net acquisition spending. Cash and cash equivalents ended June at $163.5 million.
- Cash, cash equivalents and marketable securities totaled $279.2 million at June 30, down from $474.1 million at December 31, 2015. Total assets were $864.4 million; current assets were $472.2 million and current liabilities $226.3 million.
- No credit-facility borrowings were outstanding. The secured revolving facility has commitments of up to $250 million, but the amount available under the borrowing-base formula was approximately $82 million at June 30. The company reported compliance with its financial covenants.
Material changes and notable items
- Management attributed the sharp year-over-year sales decline to seasonally weaker camera sales and the lack of a major camera launch since the prior holiday season. Channel sell-through was estimated at about 50% above sell-in in each of the first two quarters, helping reduce company inventory.
- GoPro acquired two mobile-editing application companies for approximately $104 million in cash during the first half. The acquisitions added about $89 million of goodwill; up to approximately $37 million of deferred cash and stock compensation is payable to continuing employees subject to service conditions.
- A January restructuring reduced global headcount by approximately 7%; the plan was substantially completed in Q1, with $6.5 million of first-quarter expense.
- The company issued Red Bull 821,693 restricted Class A shares valued at approximately $7.3 million under a 3.5-year content, distribution and cross-promotion partnership. Total undiscounted future obligations under specified multi-year agreements were approximately $67 million, up from $28.8 million at year-end.
- GoPro committed to vacate and sublet certain auxiliary office facilities. Related changes in estimated useful lives are expected to add approximately $7 million of accelerated depreciation over the following 13 months.
Outlook, risks and contingencies
- Management planned to launch HERO5 cameras and its first consumer drone, Karma, in fall 2016. It expected revenue to grow sequentially in both Q3 and Q4, with Q3 sell-in expected to exceed sell-through because of launches; operating expenses were expected to rise sequentially in both quarters, mainly from sales and marketing.
- Management expected positive operating cash flow beginning in Q4 2016, based on anticipated second-half revenue growth. It said existing liquidity and future operating cash flow should meet needs for at least 12 months, while noting that forecasts depend on product launches, demand and other factors.
- Key risks include execution and consumer acceptance of new hardware and software, sustained investment ahead of potential software and services revenue, seasonal sales concentration, reliance on third-party and some sole-source suppliers, and the possibility of needing additional financing.
- The company disclosed shareholder class-action litigation in federal court and a consolidated state securities action. The state court dismissed the complaint with leave to amend; the company said it could not determine the potential financial impact of the litigation.
- The IRS was examining tax years 2012–2014. GoPro reported $51.4 million of gross unrecognized tax benefits and said an unfavorable resolution could materially affect results; the potential change over the next 12 months could not be reliably estimated.
Important facts for investors to verify
- Whether HERO5 and Karma launches achieved the timing, demand and sequential revenue growth assumed in management’s outlook.
- Whether channel inventory, sell-through and company inventory continued to normalize, and whether gross margins recovered.
- Whether operating expenses, acquisition-related compensation and cash burn remained consistent with the company’s liquidity and positive-cash-flow expectations.
- Actual borrowing availability under the asset-based credit facility and any changes in covenant compliance or liquidity needs.
- Developments in the shareholder litigation and IRS examination, including any material financial exposure.