GoPro, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance sheet compared with December 31, 2014. GoPro sells mountable and wearable cameras and accessories globally, alongside free editing and sharing software. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $400.3 million | $280.0 million | $1,183.4 million | $760.3 million |
| Gross margin | 46.6% | 44.3% | 46.0% | 42.5% |
| Operating income | $27.6 million | $13.5 million | $96.0 million | $13.3 million |
| Net income | $18.8 million | $14.6 million | $70.6 million | $5.8 million |
| Diluted EPS | $0.13 | $0.10 | $0.48 | $0.04 |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $136.8 million | $53.7 million |
Q3 revenue grew 43% year over year, while nine-month revenue rose 56%. Units shipped increased 46% in Q3 to 1.6 million and 64% for the first nine months to 4.6 million. Management attributed growth principally to demand for the HERO4 line and international distribution expansion. Q3 sales outside the U.S. were 58% of revenue, versus 34% a year earlier.
Gross-margin improvement reflected a mix shift toward higher-margin HERO4 Black and Silver products and supply-chain cost improvements. Operating expenses increased 44% in Q3 and 45% year to date; research and development rose 59% and 66%, respectively, as the company invested in personnel, next-generation cameras, quad-copters, software, and other offerings. Q3 GAAP diluted EPS was $0.13; non-GAAP diluted EPS was $0.25. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Financial position and liquidity
- At September 30, cash and cash equivalents were $280.0 million and marketable securities were $233.1 million, totaling $513.1 million, compared with $422.3 million at year-end 2014.
- Current assets were $1,003.3 million and current liabilities $345.7 million. Inventory increased to $289.5 million from $153.0 million at December 31, 2014.
- Total liabilities were $378.6 million; the balance sheet presents no debt balance. The company repaid $114.0 million of debt in the first nine months of 2014.
- Operating cash flow was $136.8 million. Investing activities used $230.4 million, including $65.4 million for acquisitions and net purchases of property and equipment, as well as investment in marketable securities. Financing activities provided $55.5 million. Cash declined by $40.0 million during the period.
- Management stated existing cash, securities, and operating cash flow should meet liquidity needs for at least the next 12 months and foreseeable future. $90.2 million of cash was held by foreign subsidiaries; repatriation could trigger U.S. income taxes.
Material changes and notable items
- Revenue growth was concentrated internationally: Q3 EMEA revenue increased 179% and APAC increased 178%, while Americas revenue declined 7% year over year. The Americas decline was attributed partly to the timing of new-product shipments in 2014.
- Q3 revenue included approximately $19 million of price protection and marketing development funds related to lowering the HERO4 Session selling price.
- Acquisitions completed during the first nine months involved total consideration of approximately $70.2 million, primarily cash; acquired goodwill increased by $43.0 million. No goodwill impairment was reported.
- The board authorized a stock repurchase program of up to $300 million on September 30, 2015, expiring in September 2016. No shares had been repurchased under the program by quarter-end. Separately, quarterly share withholding for employee tax obligations totaled 147,684 Class B shares.
- Stock-based compensation was $62.6 million for the first nine months, up from $52.1 million. The CEO contributed 4.9 million Class B shares back to the company in Q2; the shares were retired.
Outlook, risks, and contingencies
- Management expected Q4 2015 revenue to increase sequentially but be below Q4 2014; the Americas was expected to represent a larger share of Q4 revenue. Q4 gross margin was expected to be relatively flat sequentially.
- Management expected Q4 operating expenses to increase versus both Q4 2014 and Q3 2015, including as a percentage of revenue, primarily due to sales and marketing and, to a lesser extent, research and development.
- The business is seasonal, historically generating its highest revenue in Q4. Management expected Q4 2015 to represent a smaller percentage of annual revenue than Q4 2014.
- Risks include reliance on third-party manufacturers, including some sole-source suppliers; customer concentration (one customer represented 14% of Q3 revenue); product demand and launch execution; and the ability to monetize software, services, and content investments. Four customers each represented at least 10% of receivables at September 30.
- The company had $87.7 million of contractual cash obligations, including leases, sponsorships, other commitments, and capital equipment purchases. It was under IRS examinations for tax years 2012–2013 and California examinations for 2011–2012; management could not estimate their potential impact. Gross unrecognized tax benefits were $25.2 million.
- A patent litigation settlement with e.Digital Corporation was reached in Q2 and did not materially affect the financial statements. Management said there were no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q4 revenue and margin expectations were achieved, particularly after the HERO4 Session price reduction and related $19 million of customer support.
- Whether elevated inventory and working-capital needs were consistent with subsequent demand and sell-through.
- How much of reported growth and profitability translated into recurring cash generation, considering stock-based compensation and other non-GAAP adjustments.
- Progress and costs associated with acquisitions, product development, and the authorized $300 million repurchase program.
- Outcomes of tax examinations, future changes in unrecognized tax benefits, and any effects of foreign-cash repatriation.