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GoPro, Inc. Records a Top-Line Beat, Delays Its Drone

By Steve Symington - May 5, 2016 at 6:57PM

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The action-camera maker hopes for good Karma in time for the holidays.

GoPro's HERO4 Session enjoyed surprisingly strong sales in Q1, Credit: GoPro.

GoPro (GPRO -1.49%) released first-quarter 2016 results Thursday after the market close. As expected, the action-camera specialist suffered a precipitous drop in sales from the same year-ago period. But it wasn't quite as bad GoPro had initially feared

Specifically, quarterly revenue declined 49.5% year over year, to $183.5 million. Based on generally accepted accounting principles (GAAP), that translated to a net loss of $107.5 million, or $0.78 per share.

On an adjusted basis, which excludes items like stock-based compensation and restructuring costs, GoPro's net loss was $86.7 million, or $0.63 per share. Adjusted gross margin fell 1,220 basis points, to 33%. And adjusted earnings before interest, taxes, depreciation, and amortization (EBTIDA) came in at a loss of $86.8 million.

By comparison, GoPro's guidance called for significantly lower revenue of $160 million to $180 million, and a wider adjusted EBITDA loss of $96 million (plus or minus $2.5 million), but also higher adjusted gross margin of 36% (plus or minus 100 basis points). To GoPro's credit, these results also include $8 million in charges related to legacy products for excess purchase commitments, inventory writedowns, and marketing development funds, the exclusion of which would have brought gross margin to 36.8%.

GoPro's founding CEO Nick Woodman elaborated,

Consumer demand for GoPro remains solid. Unit sell-thru was close to first quarter 2015 levels, a quarter which benefited from the launch of HERO4. Revenue exceeded our guide and, importantly, unit sell-thru rates were approximately 50% higher than sell-in which drove global inventory levels down.

More specifically, GoPro estimates that unit sell-thru fell less than 10% from the same year-ago period despite last year's benefit of the HERO4 launch. As such, unit sell-thru exceeded unit sell-in by roughly 50%, allowing global channels to significantly reduce a troublesome inventory glut. In fact, net inventory declined 25.8% from the end of 2015 to its lowest level since Q3 of 2014.

But Woodman also followed with some bad news: "[W]hile we had to make the difficult decision to delay our drone, Karma, the upside is that Karma's launch should now benefit from the holidays."

Unfortunately, GoPro's prepared remarks didn't provide any clarity surrounding its decision to delay Karma, which the company previously targeted for a first-half 2016 launch. During the subsequent conference call, however, management noted that the majority of revenue they expected Karma to generate was included in their second-half projections, anyway. As such -- and as long as Karma is still delivered in time for the crucial winter season -- I suspect the market will be willing to shrug off the delay given the relative strength in GoPro's core business.

According to NPD retail tracking, and keeping in mind that last quarter, GoPro decided to narrow its camera-device offering to its three highest-end models, GoPro commanded four of the top-five products on a unit basis in the combined digital camera/camcorder category in the United States -- which must include one of its now-discontinued models. That includes the No. 1 spot, as the HERO4 Silver remained the segment's best-selling device on both a unit and dollar basis. Meanwhile, HERO4 Session moved to the No. 2 spot -- up from No. 8 last quarter -- on a unit basis, as it effectively plugged the hole left by the absence of GoPro's lower-end HERO and HERO+ LCD models.

NPD data also showed GoPro's first-quarter combined digital camera/camcorder unit share in the U.S. rose 150 basis points year over year, to 20.9% -- albeit a sobering statistic that, combined with GoPro's falling revenue, serves as an indication of the decline of GoPro's core market. International sales represented more than half of total revenue in the quarter, as GoPro held six of the top-10 camcorders in Europe on a unit basis, and China remained a top-10 market for the company.

GoPro's decision to narrow its product line had another positive effect: Average selling prices of camera units shipped fell only slightly on a year-over-year basis, and ASPs climbed 16% sequentially from last quarter excluding price-protection charges related to previous price decreases for the HERO4 Session. Also as expected, higher-priced, higher-margin HERO4 Silver and HERO4 Black units represented more than 50% of units shipped. 

Meanwhile, GoPro's mobile app was downloaded another 2.8 million times in Q1, bringing cumulative downloads to nearly 27 million. GoPro's Studio was also installed nearly 1.5 million times, bringing cumulative installs for the editing software to 16.5 million.

Average daily video exports grew 33.5% year over year, to 52,000, during the quarter. During the subsequent conference call, GoPro also revealed that its previous acquisitions of leading mobile-editing apps Splice and Replay were completed for cash of slightly more than $100 million. 

Finally -- and despite its top-line beat to start the year -- GoPro reiterated its previous 2016 guidance for revenue in the range of $1.35 billion to $1.5 billion, or a 12% decline from 2015 at the midpoint. 

In the end, this report may not have contained everything GoPro bulls had hoped to hear -- less bad is, after all, still not good. And the delay of Karma arguably gives established competitors in the burgeoning drone space that much more time to cement their market-leading positions.

But GoPro also made notable progress handling its inventory problem, and its strategic decision to narrow its capture-device product line appears to be having the desired effect. While GoPro investors may not be completely satisfied, I would argue they should feel just a little better about where the company stands today.

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