Overview

GoPro (GPRO) is enabling the way people capture and share their lives from a perspective only achieved with a GoPro. What began as an idea to help athletes document themselves engaged in sport, GoPro has become a mobile storytelling solution that helps the world share itself through immersive content.

Helping people capture, share experiences and manage content is at the core of its business. GoPro is committed to developing solutions that create an easy, seamless experience for consumers to capture, create, enjoy and store engaging personal content. When consumers use its products and services, those products and services enable compelling, authentic content that organically increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for its products. The company believe revenue growth may be driven by the introduction of new cameras, offerings, accessories and software applications. The company believe new camera features and related services drive a replacement cycle and attract new users. The company's investments in mobile editing and sharing solutions, auto-upload capabilities, local language user-interfaces and voice recognition in multiple languages drive the expansion of its total addressable market.

In the first quarter of 2018, the company began shipping its newest cloud connected entry-level camera, HERO, which features image stabilization, cloud connectivity, voice control and a touch display. The company also launched an updated GoPro PLUS subscription service in the United States which includes its “You Break It, The company Replace It” camera replacement program. The company's flagship HERO6 Black camera, powered by GoPro’s custom designed GP1 processor, is the most powerful and performance featured GoPro camera to date. The company offer many professional-grade features with its current good-better-best camera offering with HERO, HERO5 Black and HERO6 Black. The company's cameras are compatible with its ecosystem of mountable and wearable accessories, and feature automatic uploading capabilities for photos and videos to GoPro Plus, its premium cloud-based solution that enables subscribers to easily access, edit, store and share their content. All of its cameras are also compatible with GoPro QuikStories, its mobile experience that seamlessly uploads a user’s GoPro photos and video clips to his or her smartphone and transforms them into a ready-to-share video. GoPro QuikStories makes it simple to automatically create shareable video edits complete with music, effects and transitions.

The company's product offerings also include its waterproof 360-degree spherical camera, Fusion, and its drone and stabilization solution, Karma.

Second quarter 2018 financial performance

Revenue for the second quarter of 2018 was $282.7 million, a 5% decrease year-over-year from $296.5 million in the same period of 2017 primarily attributable to a decrease in drone and accessories revenue. Camera units shipped in the second quarter of 2018 of 1.07 million units was slightly up compared to 1.06 million units in the same period of 2017. Gross margin in the second quarter of 2018 was 29.5%, down from 35.6% a year ago, primarily attributable to an increase in sales of low margin cameras at $299 and below price points as compared to 2017. The company's second quarter operating expenses of $114.2 million decreased 13% year-over-year, despite the doubling of its advertising expenses to $21.7 million, resulting from its continued focus on cost management and the financial benefits recognized from its restructuring actions.

Net loss in the second quarter of 2018 was $37.3 million, or $0.27 per share, an increase of $6.7 million, or 22.0%, when compared to 2017. For the second quarter of 2018, non-GAAP net loss was $20.8 million, or $0.15 per share, and adjusted EBITDA decreased to negative $8.7 million. Non-GAAP net loss excludes, where applicable, the effects of stock-based compensation, acquisition-related costs, restructuring costs, non-cash interest expense and the tax impact of these items. See Results of Operations and Non-GAAP Financial Measures below for additional information.

Factors affecting performance

The company believe that its future success will be dependent on many factors, including those further discussed below.  While these areas represent opportunities for it, they also represent challenges and risks that the company must successfully address in order to continue the growth of its business and improve its results of operations.

Driving profitability through improved efficiency, lower costs and better execution. The company incurred material operating losses in 2016, 2017 and in the first half of 2018. The company's restructuring actions have significantly reduced its operating expenses in 2017 and the first half of 2018 resulting in a flatter, more efficient global organization that has allowed for improved communication and alignment among its functional teams. If GoPro is unable to generate adequate revenue growth, and continue to manage its expenses, the company may incur significant losses in the future and may not be able to achieve profitability. Refer to its Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.

Investing in research and development and enhancing its customer experience. The company's performance is significantly dependent on the investments the company make in research and development, including its ability to attract and retain highly skilled and experienced research and development personnel. The company expect the timing of new product releases to continue to have a significant impact on its revenue and the company must continually develop and introduce innovative new cameras, mobile applications and other new products and services. The company plan to further build upon its integrated mobile and cloud-based storytelling solutions and subscription offerings in future periods. The company's investments, including marketing and advertising expenses, may not successfully drive increased revenue and its users may not adopt its new offerings. If the company fail to innovate and enhance its brand, its products, its integrated storytelling solution and the value proposition of its subscriptions, its market position and revenue will be adversely affected. Further, GoPro has incurred substantial research and development expenses and if its efforts are not successful, the company may not recover the value of these investments.

Growing its total addressable market globally. The company continue to believe that international markets represent a significant growth opportunity for GoPro. Revenue from outside the United States comprised 60% of total revenue in the first half of 2018. While the total market for digital cameras has declined in recent periods, as smartphone and tablet camera quality has improved, the company continue to believe its consumers’ differentiated use of GoPro cameras, its integrated storytelling solution and its brand helps insulate its business from many of the negative trends facing this category. However, the company expect that the markets in which the company conduct its business will remain highly competitive. The company plan to increase its presence internationally through the active promotion of its brand, the creation and cultivation of regional strategic and marketing partnerships, the continued introduction of localized products in international markets with region specific marketing, and an investment focus on the biggest opportunities in both Europe and the Asia Pacific region.

The company's growth also depends on expanding its total addressable market with its updated subscription service, Plus, as well as other services and capture solutions, including spherical, which are all resource intensive initiatives in highly competitive markets. If GoPro is not successful in penetrating additional markets, the company might not be able to grow revenue and the company may not recognize benefits from its investment in new areas.

Marketing the improved GoPro experience to its extended community. The company intend to continue investing resources in its marketing, advertising and brand management efforts. Historically, its growth has largely been fueled by the adoption of its products by people looking to self-capture images of themselves participating in exciting physical activities. The company's future growth depends on continuing to reach, expand and re-engage with this core demographic and grow it. In addition, the company need to expand its user base to include a broader group of consumers. The company believe that consumers in many markets are not familiar with its brand and products and believe there is an opportunity for GoPro to expand awareness through a range of advertising and promotional programs and campaigns, including social media. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for it to determine if GoPro is efficiently allocating its resources in this area.

Seasonality. Historically, GoPro has experienced the highest levels of revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. While GoPro has implemented operational changes aimed at reducing the impact of fourth quarter seasonality on full year performance, timely and effective product introductions and forecasting, whether just prior to the holiday season or otherwise, are critical to its operations and financial performance.

Research and development

Year-over-year total research and development expense decreased $17.3 million, or 31%, and $32.5 million, or 27%, in the second quarter and first half of 2018, respectively, compared to the same periods in 2017. The fluctuations in the second quarter and first half of 2018 reflect an $8.1 million and $20.1 million decrease, respectively, in cash-based personnel-related costs due to a reduction in global research and development headcount, a $4.1 million and $7.5 million decrease, respectively, in depreciation and other supporting overhead expenses and a $1.8 million and $3.5 million decrease, respectively, in consulting and professional services costs. Research and development headcount has decreased 32% from June 30, 2017, principally as a result of its restructuring actions. See Restructuring costs below for additional information regarding restructuring charges recorded in 2018 and 2017.

Liquidity and Capital Resources

The company's primary source of cash is receipts from sales. Other sources of cash were from proceeds from employee participation in the employee stock purchase plan and the exercise of employee stock options. The primary uses of cash are for inventory procurement, payroll-related expenses, general operating expenses, including advertising, marketing and office rent, purchases of property and equipment, and other costs of revenue.

As of June 30, 2018, its cash, cash equivalents and marketable securities of $139.8 million were down $107.6 million, or 43.5%, compared to December 31, 2017. The decrease was primarily due to payments on accounts payable and price protection charges related to price reductions in the fourth quarter of 2017 and first quarter of 2018. The net cash used in operations of $98.2 million as of June 30, 2018 was primarily due to the impact of price reductions in the first quarter of 2018. As of June 30, 2018, $42.1 million of cash was held by its foreign subsidiaries.

Convertible Notes

In April 2017, the company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes in a private placement to purchasers for resale to qualified institutional buyers. The Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. The Notes are convertible into cash, shares of the Class A common stock, or a combination thereof, at its election, at an initial conversion rate of 94.0071 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. The company pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year. Proceeds received from the issuance of the Notes were allocated between a liability component (long-term debt) and an equity component (additional paid-in capital). The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature.

In connection with the Notes offering, the company entered into a prepaid forward stock repurchase transaction agreement (Prepaid Forward) with a financial institution. Pursuant to the Prepaid Forward, the company used approximately $78.0 million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of shares of its Class A common stock underlying the Prepaid Forward is approximately 9.2 million shares. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the forward counterparty will deliver to it the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward were treated as treasury stock on the condensed consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the forward counterparty delivers the shares underlying the Prepaid Forward to it. The net proceeds from the Convertible Senior Notes offering of approximately $91 million were used for general corporate purposes.

Liquidity

The company believe, based on its most current projections, that its cash, cash equivalents and marketable securities, and amounts available under its credit facility, will be sufficient to address its working capital needs, capital expenditures, outstanding commitments and other liquidity requirements for at least the next 12 months.

The company expect that operating expenses and inventory purchases will constitute a material use of its cash balances. The company intend to continue to manage its operating activities in line with its existing cash and available financial resources. The company continue to believe that the restructuring actions and other cost saving initiatives GoPro has taken will enable it to continue to significantly reduce its operating expenses to below $400 million on a non-GAAP basis for the full year 2018.The company expect to spend significantly less on capital expenditures in 2018 compared to 2017. The company's actual future capital requirements may vary materially from those currently planned and will depend on many factors, including its rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the timing of new product introductions, market acceptance of its products and overall economic conditions, as set forth in its Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.In March 2016, the company entered into a credit agreement with a syndicate of banks that provided for a secured revolving credit facility under which the company could borrow up to an aggregate of $250.0 million. The company's credit facility terminates in March 2021. No borrowings have been made from the credit facility to date.GoPro has completed acquisitions in the past and the company may evaluate additional possible acquisitions of, or strategic investments in, businesses, products and technologies that are complementary to its business, which may require the use of cash.

In the future, the company may require additional funding to respond to business opportunities, challenges or unforeseen circumstances. If GoPro is unable to obtain adequate financing under its credit facility, or other sources, when the company require it, its ability to grow or support its business and to respond to business challenges could be significantly limited. In the event additional financing is required from outside sources, the company may not be able to raise it on terms acceptable to it or at all.

Shareholder class action lawsuits

On January 25, 2016, a purported shareholder class action lawsuit was filed in the Superior Court of the State of California, County of San Mateo, against the Company, certain of its current and former directors and executive officers and underwriters of the Company’s IPO (“Defendants”). The complaint purported to bring suit on behalf of shareholders who purchased the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with the Company’s IPO and alleged claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The suit sought unspecified damages and other relief. A similar complaint was filed on May 13, 2016, and consolidated on June 7, 2016. Defendants filed a demurrer (motion to dismiss) to the consolidated action. On July 13, 2016, the court sustained the demurrer dismissing the complaint with leave to amend the complaint. The plaintiff filed an amended complaint on October 7, 2016. Defendants filed a demurrer to the amended complaint on October 28, 2016. On December 16, 2016, the court overruled the demurrer with respect to the Section 11 and 15 claims and sustained the demurrer in part and overruled the demurrer in part with respect to the Section 12(a)(2) claim. Defendants answered the amended complaint on January 3, 2017. On November 20, 2017, the parties reached an agreement in principle to settle the action. The court preliminarily approved the settlement on March 28, 2018 and a final settlement approval hearing is scheduled for July 27, 2018.

On November 16, 2016, a purported shareholder class action lawsuit (the “2016 Shareholder Class Action”) was filed in the U.S. District Court for the Northern District of California against the Company and Mr. Woodman, its Chairman and CEO, Brian McGee, its CFO, and Anthony Bates, its former President (“Defendants”). The complaint purports to bring suit on behalf of shareholders who purchased the Company’s publicly traded securities between September 19, 2016 and November 4, 2016. The complaint purports to allege that Defendants made false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified compensatory damages, fees and costs. On February 6, 2017, the court appointed lead plaintiff and lead counsel. On March 14, 2017, the lead plaintiff filed an amended complaint against the Company and certain of its officers (“GoPro Defendants”) on behalf of shareholders who purchased the Company’s publicly traded securities between September 19, 2016 and November 8, 2016. On April 13, 2017, the GoPro Defendants filed a motion to dismiss the amended complaint. On July 26, 2017, the court denied that motion and directed plaintiff to amend its complaint to add all defendants the plaintiff intended to sue. On August 4, 2017, plaintiff filed a second amended complaint, which Defendants answered on September 8, 2017.

On November 8, 2017, a purported shareholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California against certain of GoPro’s current and former directors and executive officers and naming the Company as a nominal defendant. The action is based on allegations similar to those in the 2016 Shareholder Class Action and asserts causes of action against the individual defendants for breach of fiduciary duty for allegedly disseminating false and misleading information, breach of fiduciary duty for allegedly misappropriating information and for insider stock sales, unjust enrichment, violation of Section 25402 of the California Corporations Code, and for contribution and indemnification. On January 4, 2018, the court signed an order relating this case to the 2016 Shareholder Class Action. On January 22, 2018, defendants filed a motion to dismiss for lack of subject matter jurisdiction and improper forum. Before briefing on that motion was complete, the plaintiff voluntarily dismissed the action on February 22, 2018.

Beginning on January 9, 2018, the first of four purported shareholder class action lawsuits (the “2018 Shareholder Class Action”) were filed in the U.S. District Court for the Northern District of California against the Company, Mr. Woodman, and Mr. McGee. Similar complaints were filed on January 11, 2018 and January 24, 2018. On April 20, 2018, the court consolidated the four cases and appointed lead plaintiff and lead counsel. On June 18, 2018, plaintiffs filed their Consolidated Amended Complaint (the “Complaint”). The Complaint purports to bring suit on behalf of shareholders who purchased the Company’s publicly traded securities between November 2, 2017 and January 5, 2018. The Complaint adds Mr. Prober, GoPro’s former COO, as a defendant (together with GoPro, Mr. Woodman and Mr. McGee (“Defendants”), and purports to allege that Defendants made false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”), asserts claims under Section 20A of the 1934 Act against Mr. Woodman and Mr. McGee, and seeks unspecified compensatory damages, fees and costs. The time for Defendants to respond to the Complaint has not yet passed.

On February 13, 2018 and February 27, 2018, two purported shareholder derivative lawsuits (the “Derivative Actions”) were filed in the U.S. District Court for the Northern District of California against certain of GoPro’s current and former directors and executive officers and naming the Company as a nominal defendant. The Derivative Actions are based on allegations similar to those in both the 2016 Shareholder Class Action and the 2018 Shareholder Class Actions and assert causes of action against the individual defendants for breach of fiduciary duty, and for making false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. Plaintiffs seek corporate reforms, disgorgement of profits from stock sales, and fees and costs. On March 15, 2018, the court signed orders relating the Derivative Actions to the 2016 Shareholder Class Action. The court consolidated the Derivative Actions on April 6, 2018. On May 8, 2018, the court stayed the Derivative Actions pending resolution of the 2016 Shareholder Class Action or commencement of any shareholder derivative action alleging substantially the same facts as those in the Derivative Actions, whichever occurs first.

GoPro is currently, and in the future, may continue to be subject to litigation, claims and assertions incidental to its business, including patent infringement litigation and product liability claims, as well as other litigation of a non-material nature in the ordinary course of business. Due to inherent uncertainties of litigation, the company cannot accurately predict the ultimate outcome of these matters. GoPro is unable at this time to determine whether the outcome of the litigation would have a material effect on its business, financial condition, results of operations or cash flows.

References