GoPro, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. GoPro sells cameras, mounts and accessories, and subscription services. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $292.4 | $282.7 | $535.1 | $485.0 |
| Gross profit / margin | $102.2 / 34.9% | $83.4 / 29.5% | $182.5 / 34.1% | $128.3 / 26.4% |
| Operating loss | $(6.9) | $(30.8) | $(27.2) | $(105.6) |
| Net loss | $(11.3) | $(37.3) | $(35.7) | $(113.6) |
| Diluted loss per share | $(0.08) | $(0.27) | $(0.25) | $(0.82) |
- Q2 revenue grew 3% year over year; excluding Karma drone business, management reported 9.4% growth. Camera units shipped were 1.082 million, up 1%; average selling price was $270, up 2% overall and 7% excluding Karma.
- HERO7 Black generated over 85% of camera revenue. Higher-priced camera mix, operational improvements, lower sales incentives and lower average camera costs supported the Q2 gross-margin increase. The decline in low-margin drone sales also helped.
- Q2 operating expenses were $109.1 million, down 4% year over year; lower sales and marketing costs were partly offset by higher general and administrative expense. Adjusted EBITDA was $13.6 million versus a loss of $8.7 million; non-GAAP net income was $4.2 million versus a loss of $20.8 million. These are non-GAAP measures and should be considered alongside GAAP results.
Cash flow, balance sheet and debt
- For the first six months, operating cash outflow was $66.0 million, compared with $100.6 million in 2018. The outflow reflected working-capital uses, including a $49.2 million reduction in accounts payable and other liabilities, a $15.5 million increase in receivables and a $12.7 million increase in inventory. Investing activities provided $5.0 million; financing activities used $0.1 million.
- At June 30, cash and cash equivalents were $91.3 million and marketable securities were $38.9 million, totaling $130.1 million, down from $197.5 million at year-end 2018. Cash alone was $91.3 million. Inventory was $129.2 million.
- Long-term debt carrying value was $143.8 million; the convertible notes have $175 million principal, bear 3.5% interest and mature in 2022. The company had not borrowed under its $250 million revolving credit facility, which terminates in March 2021, and reported compliance with its financial covenants.
- GoPro stated that cash, marketable securities and available credit were expected to cover working capital, capital expenditures, commitments and other liquidity needs for at least the next 12 months. This is management’s assessment, not a guarantee.
- Adoption of lease accounting in 2019 added operating lease right-of-use assets and lease liabilities to the balance sheet. At June 30, operating lease liabilities totaled $74.2 million.
Material changes, outlook and risks
- First-half revenue increased 10% year over year, while camera shipments rose 5%. Growth was driven by higher-priced cameras and partly offset by a $26.9 million reduction in aerial revenue as the company ran down remaining Karma inventory after exiting the drone business.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It cited continued focus on cost management, product innovation, mobile/cloud storytelling and subscriptions, while noting that product-release timing affects results and that sales are historically strongest in Q4.
- GoPro was shifting most U.S.-bound camera production from China to Mexico to address tariff exposure; some production had shifted in Q2, with most of the remainder expected in the second half of 2019. The transition may involve costs or disruption, and tariffs or trade restrictions could still affect results. Management also said some customers accelerated purchases to reduce potential tariff exposure.
- On April 30, 2019, GoPro agreed to terminate part of its headquarters lease, relieving about $30.2 million of future payments, while extending leases on other buildings for about $18.0 million of additional future payments. A $13.6 million termination fee is payable principally over two years and may be reduced if the landlord re-leases the space.
- Other disclosed risks include ongoing operating losses and accumulated deficit, intense camera and smartphone competition, dependence on a small number of customers and third-party suppliers, seasonality, inventory forecasting, and cybersecurity/cloud-service risks. One customer represented 17% of Q2 revenue. Unrecognized tax benefits were $32.5 million; transfer-pricing and other tax matters remain subject to examination.
- The 2016 shareholder class-action settlement had preliminary court approval and remained subject to final approval; the company said it would be funded entirely by insurers. A separate 2018 shareholder class action was dismissed with final judgment for defendants. Derivative actions remained pending or stayed; management said litigation outcomes could not be reliably predicted.
Investor facts to verify
- Whether improved gross margins and non-GAAP profitability translate into sustained GAAP profitability and positive operating cash flow.
- Cash and securities levels, working-capital movements, inventory quality and the pace of cash use.
- Progress and costs of the China-to-Mexico production shift, including actual tariff exposure and any supply disruption.
- HERO7 demand, average selling prices, customer concentration and seasonal sales performance.
- Ability to meet the $175 million convertible-note principal at maturity or upon relevant conversion or repurchase events, and the impact of the prepaid forward and possible dilution.
- Developments in lease obligations, shareholder and derivative litigation, and unresolved tax matters.