GoPro, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. GoPro sells cameras, mounts and accessories, and subscription services through retail, distribution and direct channels. Results are unaudited and consolidated.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $242.7 million | $202.3 million | +20% |
| Gross profit / margin | $80.3 million / 33.1% | $44.9 million / 22.2% | Margin +10.9 percentage points |
| Operating expenses | $100.6 million | $119.7 million | -16% |
| Operating loss | $(20.3) million | $(74.7) million | Improved |
| Net loss / diluted loss per share | $(24.4) million / $(0.17) | $(76.3) million / $(0.55) | Improved |
| Adjusted EBITDA (non-GAAP) | $(1.0) million | $(34.5) million | Improved |
| Cash used in operating activities | $(65.0) million | $(97.1) million | Lower cash use |
Revenue growth reflected higher sales of cameras priced at $399 or more, with HERO7 Black accounting for over 90% of product revenue. Camera shipments rose 11% to 842,000; average selling price increased 8% to $288. Gross margin benefited from product mix and operating improvements, partly offset by higher sales incentives. Reduced low-margin Karma drone sales also supported the margin comparison.
Financial position and liquidity
- At March 31, cash and cash equivalents were $86.9 million and marketable securities were $46.3 million, totaling $133.3 million, down $64.3 million from year-end. Management attributed the decline primarily to payments of accounts payable and personnel costs, and inventory purchases.
- Operating cash outflow was $65.0 million; investing cash outflow was $1.4 million; financing provided $1.1 million. Capital expenditures, net, were $0.7 million.
- Convertible notes had $175 million principal outstanding, due April 2022, with a 3.5% coupon; their balance-sheet carrying amount was $141.3 million. Reported interest expense was $4.5 million, including non-cash accretion. No borrowings had been made under the $250 million revolving credit facility, which matures in March 2021; GoPro reported covenant compliance.
- Operating lease liabilities totaled $84.7 million at quarter-end. Current liabilities were $234.0 million, compared with current assets of $396.5 million.
Changes, outlook and risks
- Compared with Q1 2018, lower operating expenses and substantially higher gross margin narrowed the operating and net losses. Management linked the expense reduction to cost controls, lower headcount and fewer restructuring charges.
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management said available cash, marketable securities and credit-facility availability should cover working capital, capital expenditures, commitments and other liquidity needs for at least 12 months. It also expected 2019 R&D expenses to increase year over year as it develops new technologies.
- Management highlighted dependence on product launches, camera sales and product mix; competition from smartphones and other camera makers; seasonality, especially fourth-quarter sales; customer adoption of software and subscriptions; and reliance on third-party and some sole-source suppliers. It warned that tariffs or supply-chain changes could raise costs or disrupt operations. The company said it was shifting most U.S.-bound camera production from China to Mexico, with completion expected in the first half of 2019.
- GoPro adopted ASC 842 leases on January 1, 2019, recognizing lease right-of-use assets and liabilities; the filing says adoption did not materially affect the income statement or cash flows. Subsequent to quarter-end, on April 30, the company agreed to terminate part of its headquarters lease, reducing future lease payments by about $30.2 million, while an extension adds about $18.0 million. A $13.6 million termination fee is payable principally over two years and may be reduced if the landlord re-leases the space.
- Legal proceedings include shareholder and derivative litigation. A 2016 shareholder class action settlement received preliminary court approval and is subject to final approval; the company said it would be funded entirely by insurers. GoPro said it could not determine whether other litigation would have a material effect.
Important facts for investors to verify
- Whether revenue, camera shipments and gross margin remain resilient beyond HERO7 Black sales and the favorable Q1 product mix.
- Whether operating cash burn and working-capital needs are manageable relative to the $133.3 million of cash and securities, including the $175 million notes principal due in 2022.
- Whether the Mexico production shift was completed as expected and whether tariff, supplier and manufacturing risks affect costs or product availability.
- The final cost and timing effects of the headquarters lease termination and extension, and final court approval and coverage for the 2016 shareholder settlement.
- How much of reported improvement relies on non-GAAP adjustments; GAAP net loss remained $24.4 million in Q1 2019.