GoPro, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. GoPro principally sells cameras and related accessories globally. The company began shipping its HERO7 camera line during the quarter and reported approximately 185,000 GoPro Plus subscribers at quarter-end, up 39% year over year.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $285.9 million | $329.8 million | $771.0 million | $844.9 million |
| Gross margin | 31.8% | 39.6% | 28.4% | 36.1% |
| Operating income (loss) | $(21.4) million | $8.0 million | $(126.9) million | $(105.1) million |
| Net income (loss) | $(27.1) million | $14.7 million | $(140.7) million | $(127.0) million |
| Diluted EPS | $(0.19) | $0.10 | $(1.01) | $(0.92) |
| Operating cash flow | $9.8 million | $55.5 million | $(88.4) million | $(93.8) million |
Q3 adjusted EBITDA was $6.2 million and non-GAAP net loss was $6.1 million, or $0.04 per share. These company-defined non-GAAP measures exclude specified items and should be considered alongside GAAP results.
- Revenue and margins: Q3 revenue fell 13% year over year while camera units shipped declined 4% to 1.095 million. Management attributed the revenue and gross-margin declines mainly to lower price points and product mix; component supply shortages also reduced Q3 margin. Aerial and accessories revenue was down $22.3 million year over year. For the first nine months, revenue decreased 9% and gross margin fell 7.7 percentage points.
- Expenses and earnings: Q3 operating expenses declined 8% year over year to $112.4 million, notwithstanding higher advertising spend. The company remained loss-making. Nine-month operating expenses fell to $346.2 million from $409.9 million, but this did not prevent a larger operating loss.
- Liquidity: At September 30, cash, cash equivalents and marketable securities totaled $148.2 million, down from $247.4 million at December 31, 2017. Current assets were $452.9 million and current liabilities $331.7 million. The filing says projected liquidity, including credit-facility availability, should cover requirements for at least 12 months.
- Debt: The company had $175 million principal amount of 3.50% convertible senior notes due 2022, carried at $136.7 million net on the balance sheet. It had no borrowings under its revolving credit facility; approximately $101.6 million was available to borrow at September 30, subject to facility terms.
- Cash flow: Nine-month operating cash use was $88.4 million, while investing activities provided $31.9 million, largely from marketable-security maturities. Financing activities used $2.7 million. Cash and cash equivalents ended the period at $143.2 million.
Material changes and management commentary
- The January 2018 restructuring targeted an approximately 18% workforce reduction, closure of the aerial group and consolidation of leased offices. Nine-month restructuring charges totaled $21.5 million. Management cited cost controls and restructuring as drivers of lower operating expenses.
- Management expected full-year 2018 non-GAAP operating expenses below $400 million and significantly lower capital expenditures than in 2017. It stated that fourth-quarter seasonality is historically important, making product launches and holiday demand material to results.
- Management attributed lower Q3 revenue principally to lower retail price points and lower aerial and accessories revenue. Camera units priced above $399 represented 62% of sales mix in Q3 2018, versus 85% in Q3 2017.
- The filing identifies continued losses, uncertain revenue growth and profitability, intense competition, changing product mix, supply constraints, inventory forecasting, and reliance on third-party manufacturers as key business risks. It also notes potential exposure to trade-policy and tariff changes, particularly for China-based production.
Contingencies and unusual items
- The IRS concluded its 2012–2015 audit; GoPro received a $32.9 million tax refund in February 2018. The nine-month tax benefit also included a $10.9 million benefit primarily related to the audit conclusion and release of uncertain tax positions. The company maintains a full valuation allowance against U.S. deferred tax assets.
- Adoption of new revenue-recognition guidance changed the timing of some sales incentives and website revenue and the presentation of refund liabilities. Prior periods were not restated; Q3 2018 revenue would have been $3.1 million lower under the former standard.
- Several shareholder lawsuits are disclosed. A 2016 IPO-related case received final settlement approval in July 2018. The parties in another shareholder class action reached an agreement in principle, subject to documentation and court approval, with settlement funding expected from insurers. Other shareholder class and derivative matters remained pending or stayed; the company said outcomes and potential financial effects could not be determined.
- At September 30, the company disclosed $109.7 million of future minimum operating lease payments and $181.0 million of undiscounted expected obligations under specified multi-year agreements.
Important facts for investors to verify
- Whether HERO7 sales, pricing and holiday-season demand can reverse revenue declines without further pressure on gross margin.
- Whether cost reductions and the planned non-GAAP expense level translate into sustained operating improvement and positive cash generation.
- Liquidity trends, availability under the borrowing-base-dependent credit facility, and the company’s capacity to address the $175 million note principal at maturity or upon a triggering event.
- Inventory, component availability and tariff developments, including possible effects on production costs, pricing and product supply.
- Progress and potential costs of the pending shareholder litigation, and the extent to which any settlement is covered by insurance.