GoPro (GPRO) Posts Huge Q3 Loss; Sales Plunge, View Cut

GoPro, Inc. (NASDAQ:GPRO) added to its string of quarterly losses, with disastrous third-quarter 2016 results, as the company struggled with major production issues in the wake of the release of its new Hero5 cameras. The action camera maker’s fourth consecutive quarterly loss was even wider than expected by investors and came in at 70 cents per share. The figure missed the Zacks Consensus Estimate of a loss of 54 cents by a whopping 30%.

The company’s streak of earnings misses was broken only once in recent times, as it managed an 11.1% beat last quarter.

Shares plummeted about 20% in late trading in the aftermath of the results, as the wearable action camera maker marked the fourth consecutive quarter of declining sales and also trimmed its full-year 2016 guidance.

In addition to the terrible numbers, investors were likely upset because GoPro managed to disappoint the already incredibly low expectations from the company, after promising investors a sensational third-quarter earnings report last month. Further, the company also reduced its sales target for the year, expecting a weak holiday season. This must have spooked investors as the company is expected to generate nearly half of its revenue for 2016 in the upcoming holiday season.

Shares of Ambarella, Inc. (NASDAQ:AMBA) , who supplies video processing chips for GoPro cameras, fell almost 3% in extended trading.

Also, non-GAAP loss of 60 cents for the quarter was in stark contrast to the earnings of 25 cents generated in the comparable quarter last year. Massive top-line contraction, along with high operating expenses (particularly R&D expenses) extended losses for the company.

Inside the Headlines

GoPro’s revenues plunged drastically from the prior-year quarter’s tally, to $240.6 million (down 40% from $400.3 million in third-quarter 2015). This marked the company’s fourth consecutive quarter of dwindling sales. The top-line figure also lagged the Zacks Consensus Estimate of $303 million by a huge margin.

Revenues continued to be weighed down by slowing demand for GoPro’s Hero gadgets. The company also said that delayed shipments due to production and supply chain issues hurt revenues and could affect the holiday season as well.

GoPro recently launched its new Hero5 camera and its long-awaited consumer drone Karma, however their revenues were not reflected in the third-quarter earnings results, as they went on sale only last month.

The company’s international sales witnessed strong growth in China and Japan.

For the quarter, non-GAAP gross margins shrank 620 bps year over year to 40.6%.

Non-GAAP operating loss came in at $88.6 million, as against an operating income of $47.5 million generated last year. R&D expenses, which shot up 43% year over year, driven by investment in product development, dragged operating loss. Also, sales and marketing expenses (up 38% year-over-year) added to the pressure.

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The company launched GoPro Plus – a cloud-based subscription service – that enables auto-upload of footage from a GoPro camera to a GoPro Plus cloud account for on-the-go access, editing and sharing using a smartphone and the Quik app.

In the quarter, the GoPro Mobile App was downloaded over 3 million times leading to over 33 million cumulative downloads. On the other hand, GoPro Studio installations totaled about 1.5 million.

In addition, the rebranded Quik mobile app has doubled its monthly active users since May, while doubling the amount of share content each month. The company also released Quik app for desktop.

Notable Developments

Till date, GoPro’s Hero 5 Black cameras and Karma drones have faced production issues and delayed shipments, which are expected to restrain the company's ability to meet demand in the ongoing quarter as well. The company’s new products also had a rocky start with Amazon.com Inc. (NASDAQ:AMZN) , as GoPro had temporarily stopped selling them on the e-commerce site in mid-October due to a pricing dispute.

Liquidity

Exiting the quarter, the company had cash and cash equivalents of $131.6 million, down significantly from $280 million a year back.

Guidance

In light of such dreadful results, the company lowered its guidance for 2016. It now projects revenues in the range of $1.25–$1.3 billion (previous guidance: $1.35–$1.5 billion).

The company remains optimistic about the success of its hardware launches this year and expects to return to profitability in fourth-quarter 2016.

For fourth-quarter 2016, the company anticipates to generate non-GAAP diluted earnings per share of 30 cents (+/- 5 cents), on revenues of $625 million (+/- $25 million).

GoPro also revealed plans to limit its operating expenses in 2017 to $650 million, in an attempt to try to return to full-year profitability next year. This is comparable to a 2016 exit run rate of about $780 million.

Our Take

In recent months, the company has been struggling to achieve its earlier growth and go beyond its trademark action cameras. Last quarter, GoPro said it would cease production of certain entry-level cameras, in its attempts to turn around its slumping business. What followed were huge inventory write-downs and tens of millions of charges being booked in connection to the re-pricing of its HERO4 camera, excess inventory and obsolete tooling.

GoPro had earlier reduced its inventory of older legacy cameras, in order to prepare for its new products. Now, the company seems unable to meet the forecasted demand of its new action cameras due to internal issues and a compromised production ramp. This could have serious ramifications, as a robust holiday season might have provided GoPro the chance to turn its fortunes around.

The company is facing pressure to establish a more mainstream market for its cameras, however, tough competition from smartphones from brands such as Apple Inc. (NASDAQ:AAPL) and Samsung Electronics (KS:005930) Corp. have been making it difficult for the company. This winter holiday season will be a test for consumers’ appetite for the new products and is likely to foretell the success of GoPro’s new products.

GOPRO INC-A Price, Consensus and EPS Surprise

Written By: Zacks Investment Research