GoPro Inc (GPRO 5.92%) reported earnings after the market closed on May 3, and the initial reaction by the market seems to be pretty positive, with shares jumping nearly 10% the next day and adding on more this week.
If you just look at estimates from Wall Street versus what GoPro reported, there was reason to be excited. But I think there were troubling signs in the report that shouldn't be overlooked by investors.
Image source: GoPro.
First, the good news
Revenue of $202.3 million and a net loss of $47.4 million, or $0.34 per share, were enough to top Wall Street's estimates and that's what has the stock moving higher. Analysts were expecting $184.2 million in revenue and a loss of $0.38 per share. Beyond the headline numbers, there were some positive signs for the business overall:
- Cash on the balance sheet was up from $74.9 million a year ago to $144.8 million at the end of the first quarter. The cash gives GoPro more flexibility in operations and the ability to build out inventory during the all-important holiday season. But keep in mind that the increase in cash did come at a cost, because there's now $132.2 million of long-term debt that GoPro didn't have a year ago. If we include debt, net cash dropped 83% versus a year ago to $12.6 million.
- Inventory is down to $132.6 million from $207.7 million a year ago. Reducing inventory helps with cash management and lowers the risk of inventory writedowns if products don't sell as well as anticipated.
- Non-GAAP operating expenses fell from $131 million a year ago to $93.7 million as GoPro shed costs associated with its Karma drone and cut back on sales and marketing costs. Headcount was down to 1,020 people from 1,327 just a year ago.
Reducing inventory and operating expenses will make GoPro a leaner company with more financial flexibility going forward. And the added cash is a nice cushion if the remainder of 2018 is rough.
Why all is not well at GoPro
While there were some positives for GoPro, it's hard to overlook some serious flaws.
- Gross margin in the first quarter was 24.3%, down from 32.3% a year ago and 40.1% in Q3 2017 when GoPro's operations appeared to have peaked. CEO Nick Woodman said gross margins could be "upper-30s" in the second half of the year, but it's hard to be impressed by these margin levels given the fact that it's chasing a lower price point to attract consumers.
- Revenue per unit shipped, or "street ASP," as GoPro calls it, was $267 compared to $296 a year ago. This isn't a perfect metric because revenue includes accessories and other sales, but it's a metric that shows how a lower price point for cameras is impacting the company's business. If street ASP continues to fall, it's going to be tough for GoPro to make up the difference in volume.
- ASP guidance wasn't given, but investors should expect ASPs to fall going forward because GoPro is expanding distribution of the $199 Hero camera to Target and Walmart in the second quarter. If Hero is successful in big-box retail, it could eat away at sales of higher priced cameras, pushing ASPs toward $200.
The trends above are troubling because GoPro is targeting 2018 operating expenses of "below $400 million" and with low margins and falling ASPs there's a lot of pressure to sell cameras at volume. If we assume a 30% gross margin and a $267 ASP, GoPro will need to sell 5 million cameras just to break even. That's not impossible given the fact that it shipped 6.6 million cameras in 2015, but increasing from 4.3 million shipments in 2017 will be a tough task, especially with a shrinking marketing budget.
GoPro may already be admitting defeat
Even after all of the numbers and projections from GoPro, Woodman may have said everything investors need to know with this quote in the company's press release: "Our first quarter performance makes it clear that there is significant demand for GoPro, at the right price."
In other words, GoPro has no pricing power. At this point, GoPro's success or failure comes down to being a low-cost producer of action cameras. That's not a great place to be.
The future looks... unimpressive
Woodman said that a new line of cameras due later this year wouldn't generate revenue until the fourth quarter, indicating that we may already have product delays compared to previous cycles that launched in the third quarter. Partly as a result of those delays, gross margin for the second half of the year is expected to be in the upper-30s, which will lead to an expected narrow loss for the year.
We're now in the third year of GoPro's recovery plans and the best the company can do is launch lower-price, low-margin products that leave the company unprofitable even after slashing operating costs. That's not impressive and I don't think it's a strategy that will lead to long-term success.
