GoPro Q2 Earnings: More Losses, Less Direction

| About: GoPro (GPRO)

Summary

Loss per share beat expectations, but it was not pretty.

Net cash outflow was $85 million for the quarter, on track to reach $300 million per year.

Karma's launch could siphon more cash by increasing inventory.

The management refused to provide information about Karma, which will either make or break GoPro.

Quik and Splice are nothing more than fancy, sponsored apps that raise awareness among non-GoPro users.

It was no surprise to anyone. GoPro (NASDAQ:GPRO) posted another quarterly loss, racking up $92 million in losses. EPS beat the consensus of -$0.72, coming in at -$0.52. This number excludes $17 million of stock-based compensation and $2.7 million of acquisition-related expenses. I do not believe that the $17 million is a fair adjustment as the company will have to pay the $17 million in the future somehow, either through cash (making it a real expense) or through new shares, which dilute existing shareholders and lower EPS.

As always, the management touted "new partnerships" similar to the ones that I mentioned in my previous article (read Total Strategic Failure). Put more bluntly, they are nothing more than fluffy PR. There is a good reason for this, as dazzling investors with the promise of future profit could divert their attention from GoPro's precarious financial condition.

In June I mentioned that the company is on track to lose around $300 million of cash every year. This was one of the "goals" that the company managed to achieve this quarter. During Q2, the company experienced cash outflow from operation of $45 million, but after adjusting for working capital gains of $22.4 million, cash outflow increased to $67 million. Adding this to Q1's adjusted cash outflow of $82, the year to date (two quarters) outflow is $149 million. This is in line with my estimated annual outflow of around $300 million. In addition to losses stemming from regular operation, I believe that working capital will play a significant role in siphoning cash in upcoming quarters as the company builds more inventory in preparation for Karma's launch.

Speaking of Karma, there is still little to no financial information on what seems to be the only thing capable of saving GoPro. When asked about the potential margin of Karma, the management declined to comment. Without financial visibility, I don't think it is wise for anyone to assign much hope to Karma. Keep in mind that GoPro will no longer have the first mover advantage that it enjoyed with the action camera product line.

Finally, the management seems lost with the app acquisitions (Quik and Splice). They cost the company over $100 million in total, but the management has yet to provide investors with a good reason. During the call the management mentioned that the number of smartphone users is exceeding GoPro users in those apps. An uninspiring comment as the apps were never designed for GoPro in the first place. Should the opposite happen, then there could be a reason for excitement. The management then stated that this gives the company "a terrific opportunity to make GoPro's brand and products relevant to the greater smartphone community of users." It would seem that the company had paid $100 million for a great marketing campaign, but it's still unclear how the cash spent will generate profits. Unfortunately, GoPro doesn't make a penny from being "relevant."

Conclusion

The financial outlook remains poor as the company continues to bleed cash quarter after quarter. An in-depth strategic discussion could have shed more light on the company's future prospects. Unfortunately, investors are still in the dark about GoPro's only lifeline. The management also failed to provide a good justification for acquiring Quik and Splice. Currently they are nothing more than sponsored apps that raise awareness for GoPro's brand. With cash running low ($279 million, down from $474 million at FYE 2015), GoPro needs more than awareness to survive.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.