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GPRO > SEC Filings for GPRO > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for GOPRO, INC.

Form 10-Q for GOPRO, INC.


11-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statements in this report, which are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements may contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or other wording indicating future results or expectations. Forward-looking statements are subject to significant risks and uncertainties. Our actual results may differ materially from the results discussed in these forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, those referenced in "Risk Factors" in Part II, Item 1A, and elsewhere in this report. Our business, financial condition or results of operations could be materially harmed by any of these or other factors. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report. References in this report to "GoPro," "we," "us," "our" and the "Company" refer to GoPro, Inc., a Delaware corporation, and its subsidiaries.
Overview
GoPro is transforming the way consumers capture, manage, share and enjoy meaningful life experiences. We do this by enabling people to capture compelling, immersive photo and video content of themselves participating in their favorite activities.
We were founded in 2004 to address the limitations of traditional cameras. In 2004, we shipped our first product, a wrist-mounted, waterproof, film-based capture device, and in 2006 we shipped our first digital capture device, the Digital HERO. We introduced our first HD capture device in 2009, the HD HERO, and we introduced our current HERO3+ family of capture devices in late 2013. We also sell mountable and wearable accessories that enable professional quality capture at affordable prices.
We have continued to enhance our product offering by providing software solutions that address the pain points of managing, editing and sharing content. GoPro Studio enables our customers to easily edit and share simple or complex videos. The GoPro App enables customers to easily and wirelessly manage and share content from our HERO capture devices.
Since we launched our first HD camera in 2009, we have experienced rapid growth. In the three months ended June 30, 2013 and June 30, 2014, we generated revenue of $177.1 million and $244.6 million, respectively, and in the six months ended June 30, 2013 and June 30, 2014, we generated revenue of $432.1 million and $480.3 million, respectively. In the three months ended June 30, 2013 and June 30, 2014, we reported net income (loss) of $(5.1) million and $(19.8) million, respectively, and in the six months ended June 30, 2013 and June 30, 2014, we reported net income (loss) of $18.0 million and $(8.8) million, respectively. Substantially all of our revenue has been generated from the sale of cameras and accessories.
Our sales strategy initially targeted independent specialty retailers focused on action sports markets, which we believe helped to establish the authenticity of our brand. We now sell our products both directly and through distribution. Our direct channel includes big box, mid-market and independent specialty retailers, as well as our website. We use our distribution channel to sell internationally and into certain specialty markets. As of June 30, 2014, our products were sold to customers in more than 100 countries and through more than 25,000 retail outlets. Sales outside of the United States represented 48% and 46% of our revenue for the three months ended June 30, 2013 and June 30, 2014, respectively, and 52% and 49% of our revenue for the six months ended June 30, 2013 and June 30, 2014, respectively.
We believe consumer demand for compelling content, combined with our self-capture technology and the popularity of social media, create a significant media opportunity for GoPro. GoPro programming, a combination of GoPro originally produced content and "best of" user-generated content, or UGC, has developed a growing audience. To scale this, we have built a team of production professionals who regularly produce content based on inspiring stories from around the world, captured exclusively with our capture devices. In addition, we actively curate and redistribute, with permission, UGC as GoPro-branded content through the GoPro Network, which includes the GoPro Channels on Facebook, Instagram, Twitter, Virgin America, Xbox 360 and YouTube.


We face potential challenges that could limit our ability to take advantage of these opportunities, including the risk that we may not be able to continue to develop and introduce new products and attract new customers. We do not expect to sustain or increase our revenue growth rates. In addition, we rely on a small number of retailer and distributor customers for a significant portion of our revenue. One retailer accounted for 15% and 17% of our revenue for the three months ended June 30, 2013 and June 30, 2014, respectively, and 14% and 15% of our revenue for the six months ended June 30, 2013 and June 30, 2014, respectively.
We rely on contract manufacturers for the production of our cameras and accessories. All of the components that go into the manufacture of our cameras and accessories are sourced from third-party suppliers, and some of these suppliers are the sole source for important components. We utilize third-party logistics providers for product fulfillment. Key business metrics
In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.

                                              Three months ended                      Six months ended
(in thousands)                        June 30, 2014       June 30, 2013       June 30, 2014       June 30, 2013
Key business metrics:
Units shipped                                854                    653               1,706               1,607
Adjusted EBITDA                      $    25,724        $         2,341     $        54,351     $        43,264

Units shipped. Units shipped represent the number of individual packaged camera units that are shipped during a reporting period, net of any returns. Packaged camera units include a waterproof housing, a battery, selected mounts and other accessories which vary by model. We monitor units shipped on a daily basis as it is a key indicator of revenue trends for a reporting period. We use units shipped to help optimize our fulfillment operations and shipment allocations in order to better maintain operating efficiencies and improve customer satisfaction.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted after excluding the impact of:
provision (benefit) for income taxes, interest income, interest expense, depreciation and amortization, POP display amortization and stock-based compensation. We use adjusted EBITDA as a key measure to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA is not prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. You should consider adjusted EBITDA alongside other financial performance measures, including our financial results presented in accordance with GAAP.

The following table presents a reconciliation of net income to adjusted EBITDA:

                                             Three months ended                    Six months ended
(in thousands)                        June 30, 2014      June 30, 2013     June 30, 2014      June 30, 2013
Net income (loss)                    $      (19,841 )   $      (5,085 )   $      (8,792 )   $        17,950
Income tax (benefit) expense                  1,639            (2,568 )           5,521               7,459
Interest (income) and expense, net            1,390             1,369             2,725               2,701
Depreciation and amortization                 4,177             3,207             7,988               5,416
POP display amortization                      4,166             2,886             8,679               5,111
Stock-based compensation                     34,193             2,532            38,230               4,627
Adjusted EBITDA                      $       25,724     $       2,341     $      54,351     $        43,264


Results of Operations

The following table sets forth the components of our consolidated statements of
operations for each of the periods presented:
                                             Three months ended                     Six months ended
(in thousands)                        June 30, 2014      June 30, 2013      June 30, 2014      June 30, 2013
Revenue                              $      244,605     $      177,082     $      480,321     $      432,139
Cost of revenue(1)                          141,736            120,242            280,938            285,870
Gross profit                                102,869             56,840            199,383            146,269

Operating expenses:
Research and development(1)                  34,663             16,687             63,402             28,699
Sales and marketing(1)                       43,701             39,065             85,042             74,738
General and administrative(1)                41,171              7,044             51,049             14,032
Total operating expenses                    119,535             62,796            199,493            117,469
Operating income (loss)                     (16,666 )           (5,956 )             (110 )           28,800
Other income (expense), net                  (1,536 )           (1,697 )           (3,161 )           (3,391 )
Income (loss) before income taxes           (18,202 )           (7,653 )           (3,271 )           25,409
Income tax (benefit) expense                  1,639             (2,568 )            5,521              7,459
Net income (loss)                    $      (19,841 )   $       (5,085 )   $       (8,792 )   $       17,950

(1) Includes stock-based
compensation expense as follows:
Cost of revenue                      $          154     $          157     $          322     $          377
Research and development                      1,657                556              3,058                997
Sales and marketing                           1,654              1,454              3,068              2,658
General and administrative                   30,728                365             31,782                595
Total stock-based compensation
expense                              $       34,193     $        2,532     $       38,230     $        4,627


The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented as a percentage of revenue:

                                       Three months ended               Six months ended
                                  June 30, 2014   June 30, 2013   June 30, 2014   June 30, 2013
Revenue                               100%            100%            100%            100%
Cost of revenue                        58%             68%             58%             66%
Gross profit                           42%             32%             42%             34%

Operating expenses:
Research and development               14%             9%              13%             7%
Sales and marketing                    18%             22%             18%             17%
General and administrative             17%             4%              11%             3%
Total operating expenses               49%             35%             42%             27%
Operating income (loss)               (7)%            (3)%             0%              7%
Other income (expense), net            -%             (1)%            (1)%            (1)%
Income (loss) before income taxes     (7)%            (4)%            (1)%             6%
Income tax (benefit) expense           1%             (1)%             1%              2%
Net income (loss)                     (8)%            (3)%            (2)%             4%



Revenue
                                        Three months ended                                         Six months ended
                        June 30,       June 30,                     Percent       June 30,       June 30,                     Percent
(dollars in millions)     2014           2013         $ Change       Change         2014           2013         $ Change       Change
Revenue               $    244.6     $    177.1     $     67.5         38 %     $    480.3     $    432.1     $     48.2         11 %

Revenue for the three months ended June 30, 2014 increased 38% to $244.6 million from $177.1 million for the three months ended June 30, 2013, primarily due to an increase in units shipped. Units shipped in the three months ended June 30, 2014 increased 31% to 0.9 million from 0.7 million in the three months ended June 30, 2013. Further contributing to the increase in revenue in the three months ended June 30, 2014 was a 5% increase in the average selling price of units shipped. The increase in average selling price in the three months ended June 30, 2014 was primarily driven by a shift in product mix to the HERO3+ Black edition capture devices. Our revenue in the three months ended June 30, 2014 also increased, to a lesser extent, as a result of an increase in accessory unit shipments. Our revenue increased in each of our primary geographical regions of the Americas, Asia Pacific and EMEA (Europe, Middle East and Africa) in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Revenue for the six months ended June 30, 2014 increased 11% to $480.3 million from $432.1 million for the six months ended June 30, 2013, due to an increase in units shipped and their average selling price. Units shipped in the six months ended June 30, 2014 increased 6% to 1.7 million from 1.6 million in the six months ended June 30, 2013. Average selling price of units shipped increased 4% in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in average selling price in the six months ended June 30, 2014 was primarily driven by a shift in product mix to the HERO3+ Black edition capture devices. Our revenue in the six months ended June 30, 2014 also increased, to a lesser extent, as a result of an increase in accessory unit shipments. Our revenue increased in each of our primary geographical regions of the Americas, Asia Pacific and EMEA in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.


We expect revenue to increase in the three month period ending September 30, 2014 compared to the three months ended September 30, 2013 and June 30, 2014.

Cost of revenue, gross profit and gross profit margin

                                      Three months ended                                     Six months ended
                       June 30,     June 30,                    Percent      June 30,     June 30,                    Percent
(dollars in millions)    2014         2013        $ Change       Change        2014         2013       $ Change       Change
Cost of revenue       $  141.7     $  120.2     $     21.5         18 %     $  280.9     $  285.9     $    (5.0 )       (2 )%
Gross profit          $  102.9     $   56.8     $     46.1         81 %     $  199.4     $  146.3     $    53.1         36  %
Gross profit margin         42 %         32 %                                     42 %         34 %

Gross profit margin increased to 42% in the three months ended June 30, 2014 from 32% in the three months ended June 30, 2013 primarily due to lower product costs for our HERO3+ capture devices introduced in the fourth quarter of 2013 compared to our previous generation HERO3 capture devices, coupled with a 5% increase in average selling prices of units shipped. In addition, reserves for unused purchase commitments declined from the three months ended June 30, 2013, which contributed to an increase of three percentage points in gross margin. Gross profit margin increased to 42% in the six months ended June 30, 2014 from 34% in the six months ended June 30, 2013 primarily due to lower product costs for our HERO3+ capture devices compared to our previous generation HERO3 capture devices, coupled with a 4% increase in average selling prices of units shipped. This was partially offset by increased sales of lower margin LCD BacPac and Battery BacPac accessories.
We expect gross profit margin to fluctuate over time based on product mix, changes in product costs related to the release of different capture device models and changes in average selling price. We expect our gross margin percentage to increase in the three month period ending September 30, 2014 compared to the three months ended September 30, 2013 and to decrease compared to the three months ended June 30, 2014.


Research and Development
                                 Three months ended                                     Six months ended
(dollars in       June 30,      June 30,                    Percent     June 30,      June 30,                    Percent
millions)           2014          2013         $ Change      Change       2014          2013         $ Change      Change
Research and
development      $    34.7     $    16.7     $     18.0        108 %   $    63.4     $    28.7     $     34.7        121 %
% of revenue            14 %           9 %                                    13 %           7 %

Research and development expense increased $18.0 million, or 108%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, due primarily to a $8.5 million increase in personnel related costs associated with increased headcount to support our broadened product portfolio, a $4.5 million increase in consulting and outside professional service costs, a $2.3 million increase in facility and information technology support costs and a $2.0 million increase in equipment costs.
Research and development expense increased $34.7 million, or 121%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to a $16.8 million increase in personnel related costs associated with an increase in headcount, a $9.6 million increase in consulting and outside professional service costs, a $3.7 million increase in facility and information technology support costs and a $3.1 million increase in equipment costs. We expect our research and development expense for the period ending September 30, 2014 to increase in absolute dollars as we continue to make significant investments in developing new products, applications, functionality and other offerings. We expect research and development expense to increase in the three month period ending September 30, 2014 compared to the three months ended September 30, 2013 and June 30, 2014.

Sales and Marketing
                                       Three months ended                                      Six months ended
                       June 30,      June 30,                    Percent      June 30,      June 30,                     Percent
(dollars in millions)    2014          2013        $ Change       Change        2014          2013         $ Change       Change
Sales and marketing   $    43.7     $    39.1     $     4.6         12 %     $    85.0     $    74.7     $     10.3         14 %
% of revenue                 18 %          22 %                                     18 %          17 %

Sales and marketing expense increased $4.6 million, or 12%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, due primarily to a $4.1 million increase in personnel related costs associated with an increase in headcount, a $1.0 million increase in facility and information technology support costs, a $0.8 million increase in consulting and outside professional service costs and a $0.8 million increase in sales commissions and other selling expense, partially offset by a $1.0 million decrease in advertising and promotional activity costs and a $0.4 million decrease in equipment costs.
Sales and marketing expense increased $10.3 million, or 14%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to a $7.9 million increase in personnel related costs associated with an increase in headcount and a $1.8 million increase in facility and information technology support costs.
We expect our sales and marketing expense for the period ending September 30, 2014 to increase in absolute dollars as we continue to actively promote our products. We expect sales and marketing expense to increase in the three month period ending September 30, 2014 compared to the three months ended September 30, 2013 and June 30, 2014.


General and Administrative
                                 Three months ended                                    Six months ended
(dollars in       June 30,      June 30,                   Percent     June 30,      June 30,                    Percent
millions)           2014          2013        $ Change      Change       2014          2013         $ Change      Change
General and
administrative   $    41.2     $    7.0     $     34.2        489 %   $    51.0     $    14.0     $     37.0        264 %
% of revenue            17 %          4 %                                    11 %           3 %

General and administrative expense increased $34.2 million, or 489%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, due primarily to a $30.4 million increase in stock-based compensation, a $2.9 million increase in personnel related costs associated with an increase in headcount, a $0.5 million increase in consulting and outside professional service costs and a $0.2 million increase in facility and information technology support costs. Of the total increase in stock-based compensation, $27.6 million was attributable to the issuance of 4.5 million RSUs to our CEO during the quarter, of which 1.5 million RSUs immediately vested during the quarter. General and administrative expense increased $37.0 million, or 264%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to a $31.2 million increase in stock-based compensation, a $4.8 million increase in personnel related costs associated with an increase in headcount, a $0.5 million increase in consulting and outside professional service costs and a $0.5 million increase in facility and information technology support costs.
We expect our general and administrative expense, when excluding stock-based compensation, to increase in absolute dollars due to the anticipated growth of our business and the required infrastructure to support our growth. Including stock-based compensation, we expect general and administrative expense to increase in the three month period ending September 30, 2014 compared to the three months ended September 30, 2013 and to decrease compared to the three months ended June 30, 2014.

Other income (expense), net

                                  Three months ended                                     Six months ended
(dollars in        June 30,      June 30,                    Percent     June 30,      June 30,                    Percent
millions)            2014          2013        $ Change      Change        2014          2013        $ Change      Change
Interest expense  $    (1.4 )   $    (1.4 )   $       -          0  %   $    (2.7 )   $    (2.7 )   $       -          0  %
Other income

(expense), net (0.1 ) (0.3 ) 0.2 (67 )% (0.5 ) (0.7 ) 0.2 (29 )% Total other
income (expense),
net $ (1.5 ) $ (1.7 ) $ 0.2 (12 )% $ (3.2 ) $ (3.4 ) $ 0.2 (6 )%

Interest expense for the three and six months ended June 30, 2014 remained relatively flat compared to the three and six months ended June 30, 2013.


Provision for Income Taxes
                                Three months ended                                   Six months ended
(dollars in       June 30,      June 30,                   Percent    June 30,      June 30,                  Percent
millions)           2014          2013        $ Change     Change       2014          2013       $ Change     Change
Income tax
(benefit)
expense          $    1.6      $    (2.6 )   $     4.2     (162)%    $    5.5      $    7.5     $    (2.0 )    (27)%
Effective tax
rate                 (9.0 )%        33.6 %                             (168.8 )%       29.4 %

Income tax expense for the three months ended June 30, 2014 was $1.6 million compared to a tax benefit of $2.6 million for the three months ended June 30, 2013. The tax expense for the three months ended June 30, 2014 was higher than for the three months ended June 30, 2013 primarily due to the impact of losses which could not be benefited in 2014 and foreign withholding taxes. Income tax expense for the six months ended June 30, 2014 was $5.5 million compared to $7.5 million for the six months ended June 30, 2013. The tax expense for the six months ended June 30, 2014 was lower than for the six months ended June 30, 2013 primarily due to lower U.S. pre-tax income.


Liquidity and Capital Resources

As of June 30, 2014, our principal sources of liquidity were our cash balances
totaling $104.9 million and $50.0 million available under our revolving credit
facility.

Cash Flows. The following table sets forth the major components of our
consolidated statements of cash flows data for the periods presented:
                                                             Six months ended
                                                      June 30,     June 30,    Percent
(dollars in thousands)                                  2014         2013      Change
Net cash provided by (used in) operating activities  $  6,749     $ (3,240 )    308%
Net cash used in investing activities                 (15,569 )     (7,872 )    (98)%
Net cash provided by financing activities              12,289        1,925      538%
Net increase (decrease) in cash and cash equivalents $  3,469     $ (9,187 )    138%

Cash flows from operating activities . . .

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