GoPro (GPRO 5.70, -1.48, -20.61%), which makes handheld cameras that are
specialized to capture high speed action sporting events, is trading sharply
lower today after reporting Q3 results and providing guidance for Q4 and Q1.
The Q3 results were actually quite good relative to expectations. GPRO reported
a ($0.04) loss in Q3, but that loss was narrower than expected. Also, revenue
fell 13.3% year/year to $285.9 mln, but that decline versus the prior year also
equated to a 1% increase sequentially from Q2; a substantial sequential decline
had been expected.
The Q4 guidance presented more of a problem. On the call, management indicated that it expects Q4 non-GAAP EPS of $0.21-0.31 and revenue of $360-380 mln. Both numbers are quite a bit below market expectations. As is true for many retailers, the Q4 holiday season is highly important for GPRO, and the nature and price point of its products exacerbate the quarter’s consequence -- the company’s cameras make great gifts, and thus holiday shopping tends to be a major catalyst for sales. The fourth quarter featured the company’s biggest revenue achievements in each year since GPRO went public, and in both 2014 and 2016, the quarter contributed at least 45% of total revenue for the year. While GPRO’s guidance for the upcoming Q4, if met, would still soundly give the quarter the highest sales for 2018, to come up short of expectations for this important quarter is disappointing.
What happened? For one, GPRO concedes that some sales expected in Q4 were pulled into Q3. That partly explains the Q3 upside and some of the Q4 downside. But the Q4 guidance is weak enough that it's probably that the consequence of more than just quarterly shift. GPRO says it met with its retail customers, and they prompted GPRO to be more promotional this holiday season. This advice isn’t uniquely targeted at GoPro cameras; industry promotions are increasing overall. As such, GPRO said it will heed this advice and offer more promotions in Q4 than it offered last year. On the negative side, this hurts margins in Q4, but it will allow the company to end Q4 with low inventory, setting up nicely for 2019.
During the earnings call’s Q&A section, GPRO made the argument that its primary battle is not entirely one of winning potential buyers away from direct competitors, but one for share of wallet. For example, a holiday shopper considering a GoPro purchase may also want to buy a pair of high-end headphones, and if those are promotionally priced at, say, $100 off, then the consumer might be tempted to use that promotion and wait to buy a GoPro in February. Competitive promotions are thus still an important element for GPRO even granting the company’s leadership in its own product category. Plus, promos allow the company to get included in retailers' advertising and push the product into the limelight.
On the positive side, GPRO says it expects to be breakeven or slightly profitable in Q1, whereas the market was expecting a loss in Q1.
Another big part of the story is that GPRO recently launched its new HERO7 Black, made available both internationally and domestically before the end of September, which has received a lot of positive reviews from both the press and users. HERO7 (also available in Silver and White versions) is its first three camera refresh since 2012). New features include HyperSmooth video, TimeWarp video, and improved audio performance. It's no surprise that GPRO launched this product just a few months before the holiday season. Sales have been brisk early; GPRO announced in early October that HERO7 Black achieved the highest retail unit sell-thru in week one of any new camera in the history of the company.
GPRO was a hot stock when it made its IPO debut back in June 2014. It priced at $24 and came close to hitting $100 in late 2014. However, by spring 2015 it had fallen to $40, and it has been situated below $10 since late 2017. Probing questions of competition further, a big problem for the company is that cameras on mobile phones have gotten a lot better. GoPro's cameras are clearly higher quality and much better for action sports, from deep diving to downhill skiing, but for those nursing more casual interest in videography, mobile phone cameras seem to be meeting needs adequately enough to make purchasing a separate camera a lower priority. Plus, it's likely mobile phone cameras will continue to get better.
There have also been concerns about a GoPro camera being a commodity product; it is just a camera, after all, and cameras proliferate the market. However, this argument is not as persuasive to us, as GoPro uses some very powerful processors and the end video is pretty amazing. Action sports is a niche market, but GoPro is the name of the game for enthusiasts there and has a strong competitive position. The question is, is that client base robust enough?
Overall, this was a rough earnings report for GPRO as investors had been hoping for a more bullish holiday season outlook given how popular its new HERO7 Black camera has been.
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