GoPro Releases Strong Hardware Earnings, Reiterates Virtuous Cycle Of Sales Driven By Content

| About: GoPro (GPRO)


Lofty valuations have been credited to hopes of content monetization.

During Q2 call, management pounded home the "content drives sales" mantra.

Sales and net income were solid but not amazing.

Headcount and job openings indicate continued growth.

One of the oft-cited reasons for GoPro's (NASDAQ:GPRO) meteoric advance is the assumption and hope of institutional investors that the company, with a commanding social media footprint, will at some point start to create incremental revenue off of their customer's videos. JMP Securities senior analyst Alex Guana (with a PT of $60, one of the highest on the Street) said early Thursday on CNBC,

"I think it's already given that it's a media play, what that value is, is undetermined. We think in internet advertising, that there is a $50 billion opportunity up for grabs this year. We think that the business model, as it exists today, can support a billion in revenue in terms of monetizing the content that they've already created."

During the Q&A portion of the investor call Thursday afternoon, Jeremy David from Citigroup finally asked the question on everybody's mind (at 35:35 on the playback), "I wanted to ask you about your media strategy in terms of incremental investments you might be doing to drive media revenue. . . . What sort of investments are you potentially looking at?"

Management's response was as follows:

"In terms of priorities we are primarily focused on making it easier for customers to capture, manage, create, share more engaging personal content at scale, realizing the promise of why a consumer buys a GoPro in the first place. And when we succeed with that our media opportunity is a natural organic outcome. . . . We're naturally increasing the pool of fabulous human experiences that we can aggregate and redistribute as GoPro programming. So in terms of where we place our priorities it's first on realizing the promise of GoPro to our consumer and we recognize an expanded media opportunity from that. That said, we are making investments and have an ongoing effort in parallel to build out our media distribution because even before we talk about monetization of that media; we benefit massively in that the more we distribute GoPro content and enable mass viewership of that content on Youtube, Xbox platforms and more distribution platforms to come, the more we drive enthusiastic awareness and adoption of GoPro which then leads to even more user generated content that we can aggregate and redistribute and on the long tail of that If we're successful with meeting the needs of our customers we naturally benefit with a down the road opportunity to monetize that media."

Nick Woodman, CEO, also summed it up very nicely in the press release, "We are seeing a tremendous volume of quality content generated by our users and a 200% year over year increase in video views on YouTube, which is fueling our virtuous cycle whereby viewership of GoPro content drives sales."

The market most likely will punish the company's stock for this answer but if gaining customers, followers, and creating content is really their number one priority than they're doing a phenomenal job. GoPro Studio, the company's video editing suite for desktops, was installed by users more than 850,000 times in Q2 alone. The GoPro app, which allows consumers to store and share their videos from their phone, was downloaded over 1.6 million times (representing 25% growth) and now has been downloaded a cumulative 8 million times. The company now has 2 million YouTube subscribers, 1 million Twitter followers, and 2 million Instagram followers who have tagged GoPro in over 6 million pictures.

GoPro, having only gone public barely a month ago, has been making strides to engage followers and customers. In July they debuted a GoPro channel on Pinterest and launched a GoPro channel on Xbox One with exclusive videos. During Q2 they also released the GoPro Channel on Xbox 360, generating more than a half million downloads and an average engagement time in the U.S. of just under 30 minutes. (PR Newswire) Perhaps the most important highlight of Q2 however is the update of GoPro App 2.5 which now allows for users to stream GoPro playlists directly to their phones. This could be a huge revenue stream in the future if the app were to feature targeted advertisements for sport or recreation equipment.

Units Shipped, Headcount, Margins

During Q2 the company reported unit shipments of 854,000 units, a slight bump from the preceding quarters 852,000 units. However, this is a huge jump (30.8%) from Q2 of 2013 when the company only shipped 653,000 units. The company's prospectus shows that over the last two years unit shipments from the first half of the year make up 42% of the year's total shipments. Projecting that number out for this year you get a total of 4062 unit shipments, or a paltry 6% year over year growth. However, if you take the growth rates from the 2012 to 2013 quarterly data (pg 71 of Prospectus) and apply them to the last two quarters of this year, the company will show a 49% YoY growth rate. This is unrealistic however, because they're most likely not going to show 145% growth in the third quarter as they did between 2012 and 2013. Finally, when looking at the annual growth rate of total shipments since 2011 (quarterly data is not available for 2011), there is an average growth rate of 84% YoY. For that to be sustainable this year, the company would need to sell 5.3 M units in the second half of the year. Also unrealistic. Most likely, the results would be between the blue and green scenarios. I'd expect about 4.75 million units this year.

GoPro reported Non-GAAP earnings of $11.7 M in the second quarter. This was adjusted up from the GAAP loss of -$19.8 M. The upward adjustments were for total stock based compensation and amortization of acquisition-related intangible assets. They were also adjusted for income tax adjustments. However, on an absolute basis, the stock-based compensation adjustment accounted for 92% of the difference. I thought it'd be beneficial to look at this adjustment for quarterly returns since Q1 2012. As you can see in the chart below, net income adjusted for TSBC as compared to the first quarter of 2014 was slightly lower by 4.8%. (Quarterly numbers for 2012 and 2013 from page 71 of the prospectus.)

Finally, headcount increased 8% from the first quarter to the second quarter of 2014. A quick look at GoPro's career page will prove that the company is hiring rapidly (with 80 current openings) which suggests a surge of demand and growth expected by the company. Furthermore, it appears as though GoPro is acknowledging its need for talent to help the it monetize its content as there are open positions for many media and marketing positions such as a Director of Advertising. This position will "develop the systems and relationships required to deliver high quality and high value cross-platform sponsorship packages into the GoPro media business."

Overall, solid earnings won't propel this stock up in the short term and long investors may have to be patient while the stock suffers due to a lack of news about content monetization.

Disclosure: The author is long GPRO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The authors position is small enough that it's not material to the author's portfolio.

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