GoPro, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are in millions unless otherwise noted. GoPro sells cameras, mounts, accessories and subscriptions globally. Results were materially affected by COVID-19.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $134.2 | $292.4 | $253.6 | $535.1 |
| Gross profit / margin | $40.7 / 30.3% | $102.2 / 34.9% | $79.1 / 31.2% | $182.5 / 34.1% |
| Operating loss | $(44.9) | $(6.9) | $(101.0) | $(27.2) |
| Net loss | $(51.0) | $(11.3) | $(114.5) | $(35.7) |
| Diluted loss per share | $(0.34) | $(0.08) | $(0.77) | $(0.25) |
| Adjusted EBITDA (non-GAAP) | $(22.4) | $13.6 | Not clearly provided for the six-month period | Not clearly provided for the six-month period |
- Revenue and volumes: Q2 revenue fell 54% year over year; camera shipments declined 59% to 448,000. Average selling price rose 11% to $300, reflecting a richer mix of higher-priced cameras and subscription growth. Revenue from gopro.com was $59.5 million, or 44.3% of Q2 revenue, versus 9.0% a year earlier.
- Margins and expenses: Q2 gross margin contracted 460 basis points, attributed mainly to lower unit volumes increasing fixed costs per camera and higher sales incentives, partly offset by product mix and subscription revenue. Operating expenses fell 22% year over year to $85.6 million, including restructuring-related effects.
- Cash flow: Cash used in operations was $43.7 million in Q2 and $112.0 million in the first half, versus $1.0 million and $66.0 million, respectively, in the comparable 2019 periods. First-half operating cash use reflected the net loss and working-capital outflows, including lower accounts payable, partly offset by collection of receivables. First-half investing cash flow was positive $12.2 million and financing cash flow positive $29.6 million, including a $30.0 million credit-facility draw.
- Balance sheet at June 30: Cash and cash equivalents were $79.7 million, down from $150.3 million at year-end 2019; marketable securities were zero. Current assets were $314.1 million and current liabilities $190.1 million. Total assets were $555.2 million, total liabilities $423.1 million, and stockholders’ equity $132.1 million; accumulated deficit was $698.2 million.
- Debt: The company had $30.0 million outstanding under its revolving credit facility and $154.1 million net carrying value of convertible notes, totaling about $184.1 million in reported debt. The notes have $175.0 million principal, bear 3.50% interest and mature April 2022. GoPro reported $58.5 million of borrowing availability under the credit facility and compliance with its financial covenants.
Material changes and management commentary
- Compared with Q2 2019, first-half revenue declined 53%, shipments 59%, and net loss increased to $114.5 million from $35.7 million. The company attributed the downturn primarily to COVID-19.
- Management accelerated its shift toward direct-to-consumer sales and reduced reliance on distributors and retailers. GoPro.com contributed 33.4% of first-half revenue, versus 10.6% in the first half of 2019. Management said direct sales historically carry higher gross margins, but the channel shift may reduce the total addressable market.
- On April 14, 2020, GoPro approved a restructuring plan that reduced its global workforce by approximately 20% and consolidated certain leased facilities. It recorded $11.5 million in plan charges, including $7.9 million of severance and $3.6 million of accelerated depreciation and other charges.
- Management reported channel inventories were down 25% sequentially and 45% from Q4 2019, and said product demand increased during Q2. It introduced a HERO8 webcam feature and lifestyle gear in July 2020.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Based on its projections incorporating cost reductions and the direct-to-consumer transition, management believed available cash and securities would meet working-capital, capital expenditure, commitment and other liquidity needs for at least one year from issuance of the financial statements. It cautioned that additional financing may be needed and may not be available on acceptable terms.
- COVID-19’s duration and effects on consumer demand, retail operations, suppliers, contract manufacturers and supply chains remained uncertain. Management expected the pandemic’s impact could continue to be material. The restructuring savings and the direct-to-consumer strategy may not deliver expected results.
- Key business risks include persistent losses, intense competition and smartphone substitution, product-launch and seasonal-demand uncertainty, reliance on third-party and some sole-source suppliers, customer and distributor concentration, and e-commerce, cybersecurity and privacy risks. The business is also exposed to foreign-exchange, tariff and international operating risks.
- Contractual commitments included $215.8 million of undiscounted future obligations under multi-year agreements with terms longer than one year. Operating lease liabilities had a $67.1 million present value. These amounts are disclosed separately and should not be treated as immediately payable in full.
- Contingencies include shareholder derivative actions and a patent-infringement case brought by Contour IP Holdings; the latter’s trial was rescheduled to December 14, 2020. GoPro said it believed the patent matter lacked merit but could not predict litigation outcomes or determine whether they would materially affect the company.
- Income tax expense was $1.1 million in Q2 despite a pretax loss, including discrete tax items and the effect of the Altera tax decision. GoPro maintained a full valuation allowance against U.S. deferred tax assets and disclosed $28.7 million of gross unrecognized tax benefits.
Important facts for investors to verify
- Whether the COVID-19-driven revenue and shipment declines reverse, and whether channel inventories and demand continue to improve.
- Whether the direct-to-consumer strategy can grow profitably without damaging retailer and distributor relationships or gross margins.
- Cash burn, available credit-facility borrowing capacity, covenant compliance and the ability to address the $175.0 million note principal due in 2022.
- Whether restructuring savings are realized while protecting product development, and whether the company can return to profitability.
- Developments in the patent and shareholder litigation, tax uncertainties, and supplier or e-commerce disruptions.