It's hard to complain about many of the recent moves GoPro Inc. (GPRO) has made to stabilize sales and narrow its losses. But the end result of all this maneuvering could simply be to let the company carve out a niche as a provider of hardware for action sports, outdoors and drone enthusiasts, rather than a mass-market consumer electronics firm.
The good news: After dropping 27% in 2016 to $1.19 billion, GoPro's sales are rebounding a bit. Sales rose 19% annually in Q1 thanks to the late-2016 launch of GoPro's Hero5 camera line and foldable Karma drone, and Q2 sales guidance of $260 million to $280 million implies 22% growth at the midpoint.
Also: After years of aggressive spending growth driven by fantasies of becoming a consumer hardware and content giant, GoPro has gotten serious about cutting costs. Adjusted (non-GAAP) operating expenses fell 17% annually in Q1 to $131 million, and the company expects them to be "below $495 million" in 2017, after totaling $708.8 million last year.
GoPro has also done a decent job of narrowing its product line: The company now sells just four consumer devices -- the Hero5 Black, Hero5 Session and Hero Session cameras, and the Karma -- along with related accessories and mounts. This serves to lower R&D costs and simplify marketing, and might also help keep inventories in check.
But revenue growth appears set to slow in the back half of the year, in spite of GoPro's plans to launch a Hero6 camera towards the holiday season. Though the company's sales are set to rise over 20% during the first half of 2017, analysts on average forecast full-year sales will grow just 11% to $1.32 billion. Tempered expectations for the Karma are a factor: Though GoPro expects Karma to grow as a percentage of revenue in Q2, it's forecast to decline as a percentage of sales in the second half of 2017.
Moreover, a good argument can be made that GoPro still needs to be more aggressive with its cost-cutting. In 2014, when the company posted adjusted EPS of $1.32, it had adjusted operating expenses of just $369.4 million on revenue of $1.39 billion. This year, analysts expect sales to be slightly lower, yet GoPro is effectively guiding for expenses to be over 30% higher.
The margin pressure that GoPro is seeing also makes it unlikely that earnings will return to 2014 levels anytime soon. Whereas GoPro had an adjusted gross margin of 45.1% in 2014, its adjusted GM was just 32.3% (down 70 basis points annually) in Q1, and is forecast to be in a range of 32.5% to 34.5% in Q2. Though margins should rise in the second half due to seasonal volume growth, the price cuts the company has made to prop up camera sales remain a major headwind, more than offsetting the margin benefit the Karma is providing.
