GoPro, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
GoPro sells cameras, mounts and accessories, and subscription services globally. The quarter was materially affected by COVID-19 and elevated channel inventory at the end of 2019. Management accelerated its shift toward direct-to-consumer sales, including through gopro.com.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $119.4 | $242.7 |
| Gross profit / gross margin | $38.4 / 32.2% | $80.3 / 33.1% |
| Operating expenses | $94.5 | $100.6 |
| Operating loss | $(56.1) | $(20.3) |
| Net loss / diluted loss per share | $(63.5) / $(0.43) | $(24.4) / $(0.17) |
| Adjusted EBITDA, non-GAAP | $(41.4) | $(1.0) |
| Cash used in operating activities | $(68.3) | $(65.0) |
Revenue fell 51% year over year and camera units shipped declined 60% to 341,000. Average selling price rose 22% to $351. The gross margin decline was 90 basis points; management cited pandemic effects and lower unit volume, partly offset by product mix, higher direct-channel contribution and lower sales incentives.
At March 31, cash and cash equivalents were $117.4 million and marketable securities were $7.5 million, down from combined cash and securities of $165.1 million at December 31, 2019. Operating cash outflow reflected the net loss and working-capital movements, including lower accounts payable and higher inventory, partly offset by collections of receivables. The company drew $30.0 million on its revolving credit facility; $70.2 million remained available to borrow, subject to the facility’s terms.
Debt included $175.0 million principal amount of 3.50% convertible notes due 2022, carried at $151.4 million, and $30.0 million outstanding under the credit facility. Current liabilities were $214.6 million and current assets were $372.9 million. The company reported compliance with its credit facility financial covenants.
Changes and management outlook
- Revenue declined across all reported regions; direct-channel revenue was $64.9 million, or 54.3% of total revenue, while gopro.com represented 17% of revenue. Distribution-channel revenue was $54.5 million.
- Operating expenses decreased 6% year over year, but rose to 79% of revenue from 41% as sales fell. General and administrative expense increased 18%, primarily due to higher legal litigation costs.
- Management expected its channel, marketing and restructuring actions to begin affecting results in Q2 2020. It believed the shift to direct sales could improve gross-margin structure and, together with lower costs, accelerate profitability. No specific revenue or earnings guidance was provided.
- On April 14, 2020, the board approved a restructuring involving an approximately 20% workforce reduction and planned facility reductions. Estimated charges were $31 million to $49 million, with a substantial portion expected in Q2; management expected the plan to be substantially completed by the end of Q2.
- Management projected 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, incorporating planned actions. It cautioned that future financing might be needed and could be unavailable or unfavorable.
Risks, contingencies and unusual items
- COVID-19 created substantial uncertainty around consumer demand, retail closures, supply chains, operations and future financial performance. The company could not estimate the pandemic’s duration or full financial impact.
- The direct-sales transition could fail, reduce distributor or retailer support, or require discounting. The company also relies on third-party manufacturers, suppliers and logistics providers, including sole-source suppliers.
- Convertible notes carry $175.0 million of principal due in 2022; conversion, repurchase or default provisions could affect liquidity. The credit facility matures in March 2021 and is secured by substantially all company assets.
- Undiscounted future obligations under multi-year agreements were $212.1 million; operating lease liabilities totaled $69.4 million. These obligations add to liquidity demands.
- GoPro reported $27.5 million of gross unrecognized tax benefits; up to $13.0 million could potentially be released within 12 months, though additional uncertain tax positions may arise.
- Derivative shareholder actions included stayed federal proceedings and other Delaware matters; a consolidated Delaware action was dismissed with prejudice on April 28, 2020. A patent suit brought by Contour IP Holdings remained pending, with trial rescheduled for December 14, 2020. The company said it could not determine a range of loss and did not expect the matters to have a material adverse effect based on available information.
Important facts for investors to verify
- Whether the direct-to-consumer transition can offset lower unit sales and sustain margins and revenue.
- Actual restructuring charges, cash costs, workforce reductions and facility savings versus the stated estimates and timing.
- Cash burn, borrowing availability and covenant compliance, particularly as the credit facility approaches its March 2021 maturity.
- Convertible-note settlement and repayment capacity, including any effects of conversion or fundamental-change provisions.
- COVID-19 effects on demand, inventory, suppliers, retailers and the company’s one-year liquidity assessment.
- Developments in the pending patent litigation and tax uncertainties.