Thus far on Monday, shares of wearable camera company GoPro (GPRO 5.82, -1.70 -22.6%) are getting taken to the woodshed after announcing some pretty unsettling commentary from the company’s CEO and a Q4 warning which suggests revenues may underperform the Street.
Importantly, GPRO announced this morning that the company would exit the drone market after selling off its remaining Karma inventory. Amid increased competition in the drone market, GPRO highlighted that Karma reached the #2 market position in its price band in 2017, yet the product faces margin challenges in an extremely competitive aerial market. Furthermore, a hostile regulatory environment in Europe and the United States will likely reduce the total addressable market in the years ahead. The company stated that these factors make the aerial market untenable. Even so, the company will continue to provide service and support to Karma customers.
Additionally, as the company noted in their November earnings call, at the start of the holiday quarter GPRO saw soft demand for the HERO5 Black camera. Despite significant marketing support, the company found consumers were reluctant to purchase HERO5 Black at the same price it launched at one year earlier. The company added the caveat that the December 10 holiday price reduction provided a sharp increase in sell-through.
Not all products fared as such though, as globally GPRO noted the HERO5 Black sell-through more than doubled in the two weeks following the December 10 price reduction, while HERO5 Session sell-through roughly tripled.
Also, sales of the newly introduced flagship HERO6 Black camera performed as expected during Q4. On January 7, the company lowered the price of its premium model, HERO6 Black from $499 to $399 to align with its good, better, best product strategy.
Initial uptake of the company’s newly launched spherical camera, Fusion, was better than expected during the quarter.
Now this is where GPRO's announcement from this morning gets a little hairy; in terms of expectations for the coming quarter, GPRO stated that revenue is expected at about $340 million -- significantly under where the Street was expecting -- which includes a negative impact of about $80 million for price protection on HERO6 Black, HERO5 Black and HERO5 Session cameras as well as the Karma drone.
The company also gave expectations for GAAP gross margin for Q4 to be between 24-26%. Non-GAAP gross margin for Q4 is expected to be between 25-27%. Non-GAAP gross margin for the same period, excluding the price protection impact of $80 million and other charges of between $19-21 million, is expected to be between 44-46%. GPRO expects GAAP operating expenses to be between $136-140 million for Q4 and non-GAAP operating expenses to be between $118-122 million for the same period. GPRO also noted that it ended Q4 with cash and cash equivalents of $247 million, up $50 million compared to Q3.
Further, GPRO announced this morning the planned layoff of about 250 employees in an attempt to reduce the global workforce to fewer than 1,000. This restructuring of the business -- including layoffs and the exit of the drone business -- will result in an estimated aggregate charge of $23-33 million, including about $13-18 million of cash expenditures as a result of a reduction in force, substantially all of which are severance and related costs, as well as about $10-15 million of other charges, consisting primarily of non-cash items. On a slightly less important personnel note, the company also announced that CEO Nicholas Woodman would be reducing his 2018 cash compensation to $1.
The company expects to recognize most of the restructuring charges in 1Q2018 and will provide more detail on its 2017 results and 2018 outlook in its Q4 earnings report which will take place in early February.
On a parting note, CEO Woodman appeared on a segment on CNBC this morning. Among the questions posed to him, CEO Woodman was asked if he’d be open to being acquired. Woodman’s answer was basically that he’d be open to the idea in an attempt to scale GPRO even bigger by becoming part of a larger company.