GoPro, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; quarterly figures are unaudited. GoPro sells cameras, mounts and accessories, with newer offerings including HERO5 cameras, cloud services, editing apps and the Karma drone. Cameras and accessories generated substantially all revenue.
Financial performance and liquidity
| Metric | Q4 2016 | FY 2016 | Comparable period |
|---|---|---|---|
| Revenue | $540.6 million | $1,185.5 million | Q4 2015: $436.6 million; FY 2015: $1,620.0 million |
| Revenue change | Up 24% | Down 27% | Year over year |
| Units shipped | 2.284 million | 4.762 million | Q4 2015: 2.002 million; FY 2015: 6.584 million |
| Gross margin | 39.2% | 39.0% | Q4 2015: 29.4%; FY 2015: 41.6% |
| Operating income (loss) | $(26.6) million | $(373.0) million | Q4 2015: $(41.3) million; FY 2015: $54.7 million |
| Net income (loss) | $(115.7) million | $(419.0) million | Q4 2015: $(34.5) million; FY 2015: $36.1 million |
| GAAP diluted EPS | $(0.82) | $(3.01) | Q4 2015: $(0.25); FY 2015: $0.25 |
| Cash from (used in) operations | $12.7 million | $(107.8) million | Q4 2015: $20.8 million; FY 2015: $157.6 million |
- Fourth-quarter non-GAAP net income was $42.4 million, or $0.29 per share, and adjusted EBITDA was $44.3 million. For FY 2016, non-GAAP net loss was $201.2 million and adjusted EBITDA was $(192.8) million. These company-defined measures exclude specified items and should be considered alongside GAAP results.
- Operating expenses were $834.9 million for FY 2016, up from $618.5 million. Research and development rose 48% to $358.9 million, and sales and marketing rose 37% to $368.6 million.
- Cash, cash equivalents and marketable securities totaled $218.0 million at year-end, down 54% from $474.1 million. Working capital was $157.1 million; total assets were $922.6 million and total liabilities $475.7 million. The company reported no debt outstanding.
- A secured revolving credit facility has a $250 million commitment; availability was approximately $150 million at year-end under the borrowing-base formula. No amounts had been drawn.
- FY investing cash flow was $19.3 million, including $104.4 million spent on two mobile-editing acquisitions, offset by marketable-security maturities and sales. Capital expenditures were $43.6 million.
Material changes versus prior periods
- FY revenue fell 27%, with units shipped down 28%. Management attributed the decline partly to channel inventory reduction during the first three quarters and the absence of a late-2015 major product launch. Average selling price was approximately flat for the year.
- Q4 revenue rose 24% year over year, driven by HERO5 launches, 14% unit growth and a 9% increase in average selling price. Management said production issues constrained initial HERO5 Black shipments and the Karma withdrawal reduced revenue versus expectations. Q4 included 0.2 million discontinued camera units; excluding those units, management estimated average selling price growth of about 17%.
- FY gross margin fell 260 basis points. Higher HERO5 unit costs and fewer units over which to allocate fixed overhead weighed on margins. Prior-period comparisons also reflect legacy-product charges: $57 million in Q4 2015 and $8 million in Q1 2016; FY 2016 benefited from approximately $18 million of sales of previously written-off legacy inventory.
- Operating cash flow swung from $157.6 million provided in 2015 to $107.8 million used in 2016, amid lower revenue and higher operating expenses. Year-end accounts payable and accrued liabilities increased, partly reflecting inventory procurement for the holiday season.
Outlook, management commentary and key risks
- Management forecast Q1 2017 revenue of approximately $190 million to $210 million, expected a slight increase in 2017 average selling price, and revised its long-term gross-margin model to 39%–41% from 42%–44%.
- Management expected 2017 operating expenses to be reduced by more than $100 million versus 2016, on both GAAP and non-GAAP bases, and stated a goal of achieving non-GAAP profitability in 2017. It anticipated further cost-saving and restructuring actions and possible related charges.
- 2016 restructuring charges totaled $43.1 million, including $36.6 million in Q4. The Q4 plan included a roughly 15% workforce reduction, closure of the entertainment group and office consolidation. Management estimated approximately $4 million of additional charges in Q1 2017.
- The $419.0 million GAAP net loss included a $101.9 million valuation allowance against U.S. deferred tax assets. The company concluded those assets were not more likely than not to be realized.
- Karma was withdrawn in November 2016 after reports that some units lost power in operation; GoPro offered refunds and resumed U.S. shipments in Q1 2017. HERO5 production delays and the drone withdrawal affected holiday-season execution. Drone competition, safety and evolving regulation remain risks.
- Other material risks include dependence on camera and accessory sales, intense competition from smartphone and camera makers, seasonal sales concentration, channel and major-customer concentration, foreign-exchange exposure, reliance on outsourced manufacturing and some sole-source components, inventory forecasting, and cybersecurity and data-privacy risks. Best Buy represented 17% of FY revenue and Amazon 11%; the ten largest customers together represented 50%.
- The filing describes shareholder class actions, including securities claims with motions or proceedings pending, and an ongoing IRS examination for tax years 2012–2015. The company said it could not determine whether litigation outcomes would materially affect results. It reported effective disclosure controls and internal control over financial reporting; the auditor also expressed an unqualified opinion.
Important facts for investors to verify
- Whether 2017 revenue guidance and the targeted non-GAAP profitability were achieved, and whether the promised expense reductions translated into sustainable GAAP improvement and cash generation.
- Whether HERO5 supply and product execution improved, Karma’s relaunch and international shipments proceeded as planned, and customers adopted GoPro’s cloud and software offerings.
- Whether channel inventory normalized and sell-through supported subsequent sales; management estimated FY 2016 channel sell-through exceeded sell-in by more than 10%.
- Whether cash and borrowing availability remained adequate as operating cash flow was negative for the year; distinguish the $250 million facility commitment from approximately $150 million of year-end availability.
- How future gross margins compare with the revised 39%–41% model, and how restructuring, inventory, acquisition-related and tax items affect reported results.
- Developments in the shareholder litigation and IRS examination, along with customer concentration, warranty exposure and any further product-quality or safety issues.