GoPro, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. GoPro sells cameras, drones, accessories and related software and services globally. Results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $218.6 million | $183.5 million | +19% |
| Gross profit / margin | $68.6 million / 31.4% | $59.7 million / 32.5% | Margin down 1.1 percentage points |
| Operating expenses | $156.8 million | $181.1 million | Down 13% |
| Operating loss | $(88.2) million | $(121.4) million | Loss narrowed |
| Net loss | $(111.2) million | $(107.5) million | Loss increased 3% |
| GAAP loss per share, diluted | $(0.78) | $(0.78) | No change |
| Cash used in operations | $(137.9) million | $(33.3) million | Use increased |
- Camera shipments were 738,000, up 5%. Revenue growth reflected HERO5 cameras, accessories and the February Karma drone relaunch. Shipments included 129,000 previously discontinued cameras written down in earlier periods.
- Direct-channel revenue rose 37% to $114.8 million; distribution revenue rose 4% to $103.8 million. APAC revenue grew 45%, EMEA 13% and Americas 12%.
- Gross margin declined despite the benefit from selling previously written-down inventory; higher unit costs for HERO5 products, lower Karma margins and product-related costs weighed on margin. Average selling price per camera shipment was up approximately 13% year over year.
- Operating expense reductions reflected restructuring and other cost savings. GAAP net loss was higher mainly alongside a $22.3 million income tax provision, versus a $14.3 million tax benefit in Q1 2016. U.S. deferred tax assets had a full valuation allowance, so GoPro did not expect tax benefits on U.S. losses.
- Non-GAAP measures: adjusted EBITDA loss was $45.7 million versus $86.8 million; non-GAAP net loss was $62.8 million versus $86.7 million; non-GAAP loss per share was $0.44 versus $0.63. These company-defined measures exclude specified items and are not substitutes for GAAP results.
Financial position and liquidity
- At March 31, cash and cash equivalents were $74.9 million, with no marketable securities, versus cash and investments of $218.0 million at December 31, 2016. The quarter-end cash balance included $51.1 million held by foreign subsidiaries.
- Current assets were $384.1 million and current liabilities $313.9 million. Inventory was $207.7 million, up from $167.2 million at year-end, while accounts receivable fell to $55.3 million from $164.6 million.
- Operating cash outflow reflected payment of year-end liabilities, including accounts payable and other liabilities, and a $40.5 million inventory increase, partly offset by $109.6 million of net receivable collections.
- GoPro had no borrowings under its secured revolving credit facility and approximately $82 million of borrowing availability at quarter-end, subject to its borrowing-base formula and covenants. It reported compliance with financial covenants.
- Subsequent financing: On April 12, GoPro issued $175 million of 3.50% convertible senior notes due 2022, initially convertible at approximately $10.64 per share. It used about $78 million of net proceeds for a prepaid forward stock repurchase covering approximately 9.2 million shares; it expected approximately $92 million of remaining net proceeds for general corporate purposes. The notes and forward transaction occurred after quarter-end.
Changes, outlook and notable items
- Management expected Q2 2017 revenue to increase sequentially and year over year, and 2017 average selling price to be higher than in 2016. It expected GAAP and non-GAAP operating expenses in Q2 and full-year 2017 to be below comparable 2016 periods. No specific revenue or margin guidance figures are stated in this filing; management referred investors to its earnings release for business outlook.
- On March 15, GoPro approved a restructuring eliminating approximately 270 employee and open positions and consolidating certain offices. It recorded $9.1 million of charges under this plan in Q1 and expected approximately $3 million of additional charges in Q2 and Q3. Actions were expected to be substantially completed in Q3.
- GoPro said its cash, post-quarter note proceeds, expected restructuring savings and available credit were sufficient for anticipated needs for at least 12 months, based on current projections. This is forward-looking and depends on business performance and access to liquidity.
- Material risks include continued losses and cash burn, execution of cost savings and product plans, product demand and seasonality, inventory and supplier exposure, intense competition, and the relaunch and safety of Karma. The filing also describes an IRS examination for tax years 2012–2015 and shareholder class actions; outcomes and potential financial effects could not be reliably determined.
- GoPro recorded $70.6 million of gross unrecognized tax benefits at quarter-end. It said the possible range of change in these benefits could not be reliably estimated and that they could materially increase within 12 months.
Important facts for investors to verify
- Whether revenue growth and camera demand persist after the contribution from previously written-down inventory, accessories and Karma, and how channel inventory develops.
- Whether gross margins recover from 31.4% and whether cost reductions translate into sustained improvement in GAAP profitability and operating cash flow.
- Cash needs, inventory levels and credit-facility borrowing availability, including the effects of the convertible notes and prepaid forward repurchase.
- Actual restructuring charges, completion timing and realized savings; the filing also reports 1,327 employees at March 31, down 14% from year-end.
- Developments in the IRS examination, unrecognized tax benefits and shareholder litigation, as well as any additional liabilities or material outcomes.