GoPro, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results for the three months ended December 31, 2018. GoPro primarily sells cameras, mounts and accessories, with software and subscriptions supporting its camera ecosystem.
Financial performance
| Metric | Q4 2018 | Q4 2017 | FY 2018 | FY 2017 |
|---|---|---|---|---|
| Revenue | $377.4m | $334.8m | $1,148.3m | $1,179.7m |
| Gross margin | 37.7% | 23.8% | 31.5% | 32.6% |
| Operating expenses | $109.2m | $138.1m | $455.4m | $548.0m |
| Net income (loss) | $31.7m | $(55.8)m | $(109.0)m | $(182.9)m |
| Diluted EPS | $0.22 | $(0.41) | $(0.78) | $(1.32) |
| Operating cash flow | $48.4m | $57.0m | $(42.4)m | $(36.9)m |
| Adjusted EBITDA | $58.8m | $(26.5)m | $21.8m | $(31.4)m |
- FY 2018 camera shipments were 4.34m units, up 1% from 4.30m; estimated consumer sell-through was 4.8m units, up 9%.
- At December 31, 2018, cash, cash equivalents and marketable securities totaled $197.5m, down from $247.4m a year earlier. Working capital was $174.6m; inventory was $116.5m.
- Convertible notes had $175.0m principal outstanding, with a $139.0m net carrying amount; they bear a 3.50% coupon and mature in April 2022. The $250m revolving credit facility, due March 2021, had no borrowings outstanding.
- Total assets were $698.4m, total liabilities $486.2m and stockholders’ equity $212.1m. Contractual cash obligations were approximately $289.3m, including $175.0m of note principal and $107.8m of operating lease payments.
Material changes and unusual items
- Annual revenue declined 3%. The $62.0m reduction in Karma drone and accessory revenue after exiting that business was partly offset by lower sales incentives; Q4 2017 included $80.5m of price-protection and marketing-development charges.
- Q4 revenue rose 13% year over year and gross margin improved 1,390 basis points. Management cited higher camera shipments, strong sales of higher-margin HERO7 products, and the prior-year price-protection charges. Q4 estimated camera sell-through rose 20% year over year.
- FY gross margin decreased 110 basis points. The filing attributes pressure to lower average selling prices, prior-year sales of previously written-off cameras and component shortages, partly offset by lower sales incentives and operating improvements.
- Operating expenses fell 16.9%, reflecting cost controls, lower-cost jurisdictions and restructuring, despite advertising expense increasing $18.2m. The 2018 restructuring plan reduced the global workforce by approximately 18%, closed the aerial group and consolidated facilities; FY restructuring charges were $22.7m.
- FY operating cash use increased to $42.4m, including a $70.4m cash outflow from accounts payable and other liabilities, partly offset by a $32.9m IRS refund. Cash and securities declined $49.9m during the year.
- Adoption of ASC 606 increased reported FY 2018 revenue by $2.7m versus the prior accounting basis. Adoption of the new lease standard in 2019 was expected to add approximately $89m–$93m of lease liabilities; management did not expect a material income-statement or cash-flow impact.
Outlook, management commentary and risks
- 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.
- For 2019, GoPro planned to maintain operating expenses at a level similar to 2018 while investing in awareness, demand generation and its product roadmap. It expected R&D expense to remain substantial and increase versus 2018. The filing provides no quantified revenue or earnings guidance.
- Planned priorities included improving profitability and execution, developing cameras and integrated mobile/cloud offerings, growing GoPro Plus, and expanding international marketing. Management said the Mexico production relocation for most U.S.-bound cameras was expected to be cost-neutral, but acknowledged timing, supply-chain disruption and tariff uncertainty.
- Key risks include sustained losses and cash use; dependence on camera sales and seasonal Q4 demand; intense competition from smartphones and camera makers; product launch, pricing, inventory and component-supply risks; tariffs and international exposure; and cybersecurity, privacy and cloud-service risks. Ten largest customers represented 48% of 2018 revenue, and one retailer represented 13%.
- GoPro reported multiple shareholder class and derivative actions. One earlier IPO-related case received final court approval for a settlement funded primarily by insurers; another proposed settlement remained subject to court approval and was expected to be funded entirely by insurers. The company said it could not determine whether the remaining litigation would materially affect results or cash flows.
- GoPro Plus had more than 185,000 paying subscribers at year-end and more than 200,000 as of February 12, 2019; subscription and GoPro Care revenue had not been material to results.
Most important facts for investors to verify
- Whether Q4 profitability and margin gains persist after accounting for the unusually weak Q4 2017 comparison and its $80.5m of price-protection charges.
- Whether cost reductions and the planned 2019 expense discipline can produce sustained positive operating cash flow and profitability.
- Cash runway and obligations: $197.5m of cash and securities, negative FY operating cash flow, $175.0m note principal due in 2022, and future lease liabilities.
- Execution and cost impact of moving U.S.-bound camera production to Mexico, including tariffs, supply continuity and the stated cost-neutral expectation.
- Customer concentration, product demand and sell-through, inventory exposure, and the adoption and monetization of HERO7, software and subscription offerings.
- Developments in shareholder litigation, tax matters and other contingencies; outcomes and potential financial effects are not clear from the filing.