GoPro, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. GoPro sells cameras, drones and accessories globally; these products generated substantially all revenue. The filing was signed November 3, 2016.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $240.6 million | $400.3 million | $644.9 million | $1,183.4 million |
| Gross margin | 40.3% | 46.6% | 38.7% | 46.0% |
| Operating income (loss) | $(115.6) million | $27.6 million | $(346.4) million | $96.0 million |
| Net income (loss) | $(104.1) million | $18.8 million | $(303.3) million | $70.6 million |
| Diluted EPS | $(0.74) | $0.13 | $(2.18) | $0.48 |
- Q3 revenue fell 40% year over year; camera units shipped declined 36%. For the first nine months, revenue declined 46% and units shipped declined 46%.
- Q3 gross margin fell 630 basis points year over year, mainly from product mix and lower unit volume spreading fixed overhead across fewer units.
- Operating expenses rose 34% year over year in Q3 to $212.7 million, including higher product-launch advertising, personnel and overhead costs.
- Operating cash flow was negative $41.7 million in Q3 and negative $120.4 million for the first nine months, versus positive $4.6 million and $136.8 million, respectively, in 2015. Nine-month cash use reflected losses, partly offset by working-capital inflows.
- Cash and investments totaled $224.9 million at September 30, down from $474.1 million at December 31, 2015. Cash and cash equivalents were $131.6 million; marketable securities were $93.3 million. Current assets were $503.0 million and current liabilities $354.2 million.
- No credit-facility borrowings were outstanding. The secured revolving facility provides up to $250 million, subject to a borrowing-base formula; approximately $112 million was available to borrow at quarter-end. The company reported compliance with covenants.
- Inventory was $145.2 million, up $55.3 million sequentially, reflecting preparation for the holiday launch. Total liabilities were $393.7 million; the filing reports no outstanding facility borrowings.
Material changes and unusual items
- Management attributed weaker year-over-year results to reduced channel sell-in across regions and the lack of a major camera launch until HERO5 began shipping in September. Q3 revenue increased 9% sequentially, while units shipped rose 34%; management said average selling price fell 19% sequentially due to camera mix and lower accessory sales.
- Production issues, primarily with HERO5 Black, constrained Q3 shipments and were expected to limit holiday-season supply. Management estimated HERO4 channel inventory declined more than 70% sequentially; HERO5 inventory increased to support launch.
- Q3 included a $6.0 million impairment charge for abandoned in-process research and development assets and $4.3 million of accelerated depreciation tied to plans to vacate and sublet certain leased offices. The company expected about $5.4 million of additional accelerated depreciation over an estimated 11 months.
- Two mobile-editing application acquisitions cost approximately $104 million in cash in the first half of 2016, adding about $89 million of goodwill. Up to approximately $37 million of additional cash and stock compensation is payable to continuing employees subject to future service.
- A January 2016 restructuring reduced the global workforce by approximately 7%; $6.5 million of costs were incurred and the plan was completed by September 30.
Outlook, risks and contingencies
- Management expected significant sequential and year-over-year Q4 revenue growth, with Q4 sell-through expected to exceed sell-in. However, full-year 2016 revenue guidance was reduced to $1.25–$1.30 billion from $1.35–$1.50 billion, reflecting limited HERO5 Black and, to a lesser extent, Karma drone supply. The company expected modest sequential Q4 operating-expense growth, primarily for marketing, partly offset by lower R&D expense.
- HERO5 cameras and the GoPro Plus subscription service launched October 2, 2016; Karma drone shipments began after quarter-end. International GoPro Plus availability was expected in Q1 2017. These launches bring execution, demand and supply risks, and the filing cautions that software and services investments may not generate meaningful revenue or profit.
- Management said existing cash, investments and anticipated operating cash flows should cover needs for at least 12 months. Risks include holiday seasonality, product-transition and production issues, demand forecasting, inventory and purchase commitments, competition, customer concentration, reliance on third-party manufacturers and the still-developing drone and software businesses.
- The IRS was examining tax years 2012–2014; the potential impact could not be estimated and an unfavorable outcome could materially harm results. Gross unrecognized tax benefits were $49.3 million, and management said the balance could materially increase within 12 months, though the range could not be reliably estimated.
- Shareholder securities class actions remained pending, including a federal action with a motion to dismiss scheduled for January 2017 and a California state action with a demurrer hearing scheduled for November 22, 2016. The filing said the ultimate outcomes and potential financial impacts could not be determined.
- The company had $53.7 million of undiscounted future obligations under certain multi-year agreements. A 3.5-year Red Bull agreement includes cash and equity consideration; approximately $7 million of restricted shares had been issued in Q2.
Most important facts for investors to verify
- Whether HERO5 Black and Karma production and delivery met holiday demand, and whether the reduced $1.25–$1.30 billion revenue outlook was achieved.
- Whether revenue, gross margins and cash generation stabilized after the steep year-over-year declines and nine-month operating cash outflow.
- How inventory levels, channel sell-through versus sell-in, and remaining HERO4 inventory developed after quarter-end.
- Whether GoPro Plus, software investments and the drone business produced sustainable revenue and returns relative to their costs.
- Any developments in the IRS examination, unrecognized tax benefits, shareholder litigation, credit-facility availability and contractual commitments.