GoPro (NASDAQ:GPRO) recently announced that it will cut roughly 200 positions, or 15% of its workforce, to cut costs following four straight quarters of year-over-year sales declines and quarterly losses. GoPro also announced that it will shutter its entertainment division, which was intended to turn the action camera maker into a media company. President Tony Bates, who was hired to accomplish that goal over two years ago, will step down at the end of the year.
Those bleak announcements capped off a horrid year for GoPro, which lost over 40% of its market value due to waning demand for its action cameras, tougher competition, and a series of delays and blunders. Will another round of layoffs really get the company back on track in 2017?
A disastrous two years
GoPro's troubles started last year, when it pivoted away from its strategy of launching big flagship cameras every holiday season. Instead, it tried to reach more mainstream consumers with a diverse range of low to mid-range devices, and launched the ice cube-sized Hero 4 Session as its "premium" device for the year.
Unfortunately, GoPro's cheaper cameras started cannibalizing its pricier ones, causing gross margins to decline. The Session was initially priced too high at $400, and required two price cuts (resulting in millions of dollars in writedowns) to $200 before any buyers showed up. As GoPro's stock price plunged, it announced a $300 million buyback -- which was likely engineered to offset its stock-based compensation expenses instead of appeasing frustrated investors. It also hired several media veterans, including a former Hulu exec, in a vague bid to produce original content.
In February, GoPro spent over $100 million on two tiny video editing start-ups to beef up its backup and editing ecosystem. In April, it discontinued its low-end and mid-range devices (the Hero, Hero+, and Hero+ LCD) to streamline its product lineup to three higher margin devices -- the Hero 4 Silver, Black, and Session. GoPro then released teaser videos for the Karma drone, which many analysts predicted would offset its slowing action camera sales. But GoPro abruptly delayed the drone in May for unclear reasons.
The Karma finally arrived in September, but it immediately faced supply chain issues. Shortly afterwards, numerous drones fell out of the sky and prompted a full recall. FBN Securities analyst Shebly Seyrafi recently lowered his 2017 Karma revenue estimate from $150 million to $36 million -- which would represent a mere 2% of GoPro's estimated revenues for the year. To add insult to injury, GoPro offered free Hero 5 cameras to customers who had to return their Karma drones -- which will result in higher costs for the current quarter.
Will the layoffs fix anything?
GoPro plans to return to non-GAAP profitability during the holiday quarter, which would represent an improvement from the net loss it reported during last year's holiday quarter. But to hit that target, GoPro needs to cut costs and lay off a lot of employees. GoPro stated that the restructuring should reduce its operating expenses by about $650 million next year and enable it to return to full-year profitability next year. This isn't the first time GoPro has laid off workers -- it slashed about 7% of its workforce in January after its dismal holiday quarter last year.
The good news is that GoPro finally realized that gaining millions of subscribers on YouTube didn't really make it a "media company." To date, GoPro's media efforts seem to mainly consist of launching its app, which mainly plays professional and user-submitted videos, on various streaming platforms like Roku and Fire TV. GoPro partnered with YouTube last year to launch its 16-camera Odyssey rig for VR films, but the deal wasn't an exclusive one -- YouTube also started using Yi Technology's cheaper cameras earlier this year.
GoPro gained an early foothold in the 360-degree video market with its VR videos, but YouTube also opened the doors to a wide variety of cheaper, stand-alone 360 cameras -- which threw cold water on GoPro's media and VR ambitions. GoPro then launched its own GoPro VR app, but that fledgling ecosystem reaches far fewer people than YouTube. GoPro also launched a premium content portal which paid creators for their content and sold the clips to marketers, but that effort hasn't gained much momentum yet.
The silver lining
The road ahead looks hazardous for GoPro, but this round of layoffs comes with a silver lining. Cowen & Co. analyst Rob Stone recently told Bloomberg that "they're focusing on their core activities, and anything else that doesn't make money, they can't afford to continue."
This means that instead of launching poorly conceived devices, buying tiny apps, blowing cash on wasteful buybacks, or hiring highly paid media veterans, GoPro can focus entirely on improving its core camera business. However, that turnaround will require management to make bold eleventh hour moves -- which could be impossible as long as founder and CEO Nick Woodman remains in charge.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.