When GoPro Inc. (NASDAQ:GPRO) cut prices on its line of Hero cameras in mid-December, it was clearly either a reason to panic or a shrewd strategy to boost sales late in the holiday season. Now we know that it wasn't shrewd at all -- it was a panic move by GoPro, which is now in a fight for its own survival.
GoPro announced Monday that its fourth-quarter results are going to be well below expectations and that it's laying off hundreds of workers and exiting the drone business, formerly a high-flying growth opportunity. Here are the key factors investors need to know.
GoPro's Q4 flop
Fourth-quarter revenue is expected to be $340 million for GoPro, well below its $470 million guidance given just two months ago. To make matters worse, gross margin will be 24% to 26% on a GAAP basis, far lower than the 41% to 42% guidance given in November.
A price-protection provision of $80 million drove the reduction in sales and margin as GoPro covered its price cut down to retailers. But that's just the beginning of the bad news for GoPro.
Layoffs are coming (again)
GoPro said it would reduce its global workforce from 1,254 people to less than 1,000, which follows other large layoffs the past two years.
The workforce reduction will reduce operating expenses to below $400 million for 2018, compared with an expected $490 million in operating expenses a non-GAAP basis in 2017.
GoPro's pricing mistake
The big problem for GoPro in the quarter was its pricing structure. Customers have gotten used to annual price reductions for older models of technology and cameras, something GoPro didn't do this year. Instead, it tried to keep its Hero5 Session camera at $299 and its Hero 5 Black at $399, and then introduce the new Hero6 Black at $499. Customers balked at the prices.
GoPro was forced to reduce camera prices to $199, $299, and $399 for the good-better-best camera strategy, resulting in the costs I outlined. Management said sell-through improved after the price reductions, but it was a mistake to think customers would be willing to pay $499 for a GoPro in the first place.
Drones crash and burn
GoPro's drones have faced challenges since they hit the market, but there was some hope they would fill an interesting niche for customers. That hope is over after GoPro announced it's exiting the drone business.
It's probably best for GoPro to focus on products in its core camera market rather than keep chasing the drone dream. But there's no question this is an embarrassing defeat for GoPro and Nick Woodman, who hoped to be a big player in drones at one point.
What is GoPro's "new normal"?
GoPro was hoping new cameras would bring back high margins in the mid-40% range, a margin it used to enjoy consistently. That would make it relatively easy to return to profitability if camera volumes held steady. But the price reductions needed to sell cameras in 2017 show that GoPro may not have much pricing power and may have to settle for much lower gross margin long-term, potentially on a lower revenue base as well.
That'll make it tough to make money, even if operating expenses are reduced to below $400 million. To put the challenge into perspective, if gross margin settles at 30%, GoPro would need to sell $1.33 billion of product just to cover operating expenses. This year it'll sell only about $1.19 billion of product, and next year it'll have to make up for sales from the Karma drone.
The road ahead for GoPro looks even more challenging than it did a day ago. I'm ending my hopeful thumbs-up call on my CAPS page and giving up hope that a turnaround is around the corner.