GoPro Goes- Public, That Is. A Look at the Final Prospectus

As pretty much everybody knows, GoPro went public last Wednesday. How refreshing to see a company go public that’s actually making a product and money. GoPro sold 8.9 million shares of its class A common stock at $24 a share and raised a bit less than $200 million. $110 million will go right out the door to repay a line of credit they took out so they could pay a dividend to shareholders back in December of 2012.   Hmmm. Wasn’t January 1, 2013 when taxes on dividends went up?

Existing shareholders sold an additional 8.9 million shares, but the company won’t see the proceeds from that. I should also note that the class A shares will have just one vote per share. Well, that’s not so weird, but what should be noted is that the class B shares will have ten votes per share. What’s the result?

“The holders of our outstanding Class B common stock will hold approximately 98.4% of the voting power of our outstanding capital stock following this offering, with our executive officers and directors and their affiliates holding approximately 72.8%, and Mr. Woodman, our Chief Executive Officer, holding approximately 47.7% after his sale of 3,562,892 shares of Class A common stock in this offering. These holders will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction.”
As you may recall, Tilly’s did the same thing when they went public. I’m not thrilled with borrowing money to pay dividends (though I understand the tax issue) and don’t think much of this duel class of stock stuff that makes management less accountable.
But now that I’ve vented a little (I feel much better, thank you) I suppose I have to admit that GoPro has grown phenomenally, is profitable, and has what I think is a well thought out and defendable market position, so I guess they can do anything they want.
The Virtuous Cycle
Warren Buffet has said he loves businesses with moats around them. The moat is a competitive advantage that’s very hard and expensive to duplicate. GoPro calls that their virtuous cycle. I recommend you go take a look at their prospectus (page 94) to get a feel for it. Here’s how they describe it.
“We believe our business focus results in a virtuous cycle and a self-reinforcing consumer acquisition model that fuels our growth. Our products in the hands of our customers enable compelling, authentic content that organically increases awareness for GoPro and drives demand for our products.”
They don’t just sell you the camera and accessories. That, I suspect, would not create a long term defendable market position because, as GoPro acknowledges, lots of big companies with piles of money make cameras.
By the way, they don’t call their camera a camera. It’s a “capture device.” That may sound a bit like a distinction with no meaning, but I think it’s critical. Capture device kind of sounds cooler than camera, but there’s more to it than marketing. If I were to ask CEO Nicholas Woodman about this, I suspect he might tell me something like, “A camera is just for taking pictures. A capture device is the piece of equipment you need to start the cycle of obtaining, managing, and sharing the sounds, images and activities that are important to you.”
When you buy a GoPro capture device, you also receive the GoPro Studio and App which offer, “…intuitive, easy-to-use tools for managing, editing and sharing professional-grade footage. We see an opportunity to further develop these currently separate software solutions into an integrated and enhanced GoPro content management platform.”
They feel strongly enough about the role of their software that they allocate a portion of their revenue to it and recognize it over time. I’ll spare you the specifics of the accounting.
GoPro got its start in action sports, where durability was a key attribute and they provided a relatively inexpensive and convenient way to capture images. But what the company says it’s doing is “…transforming the way consumers capture, manage, share and enjoy meaningful life experiences. We do this by enabling people to capture compelling, immersive photo and video content of themselves participating in their favorite activities.”
You’ll note that they don’t say there anything about action sports. Or sports. Sure, “meaningful life experience” can be backcountry snowboarding. But it can also be a picnic with the grandchildren. If you’ve got them using your hardware and software, if you can make them part of a community that’s based on that use as well as the activity, anybody who’s willing to figure out the technology is a potential customer. GoPro describes this as expanding “…into new vertical markets.”
But let’s look a little further down the road. Suppose GoPro has successfully created these communities. A really interesting question is whether or not GoPro has to continue to sell the participants new hardware to keep them as customers. One of their strategies is to “Scale as a media brand.” Here’s how they describe it.
“We are investing to scale GoPro as a media entity and develop new revenue opportunities by increasing production of GoPro originally produced content while simultaneously increasing the aggregation and redistribution of our customers’ “best of” UGC. Additionally, we are investing to develop, distribute and promote GoPro programming on additional partner platforms such as
Virgin America and Xbox Live.”
Revenue from this activity won’t be meaningful in 2014, but longer term, I’m wondering if all their customers need to be people who own their capture devices.   Opps, look what I just found on page 93. “…having recognized the role GoPro content plays in attracting and exciting consumers, we are expanding the distribution of GoPro programming to engage and build relationships with even those consumers who do not own a GoPro capture device.”
And I thought I was so damned clever.
I make this all sound awfully easy, and it isn’t. But GoPro can pick the market segments it wants to focus on, and I don’t see any group of people with common interests and a bias towards creating and sharing content that would be off limits. Virtuous cycle indeed.
But if only because, like me, they read this prospectus competitors are going to think they might be able to do the same thing. GoPro has taken a couple of steps to try and stay ahead of the curve. Through a couple of small acquisitions (CineForm in 2011 and General Things in October, 2013) as well as internal growth, GoPro now has a software team of 72 employees. Research and development spending was $74 million in 2013, up from $36 million the previous year and $8.6 million in the year before that. The whole engineering team has grown from 2 to 176 between 2010 and 2013.
We’ll move on to the numbers next. But it’s this potential moat- what GoPro calls its Virtuous Cycle- where you have to focus to evaluate the company’s prospects.
Before we move on, let’s have what I call “Fun with Risk Factors.” GoPro’s 220 page prospectus has 26 pages of risk factors. Like with most IPO’s if you actually read and believed them all, you’d never buy any stock. I used to think risk factors were important. Now, they seem to have deteriorated to the lawyers covering asses rather than a thoughtful exposition of business challenges.
My favorite risk factor has to be the second one on page 19 which says, “We depend on sales of our capture devices for substantially all of our revenue, and any decrease in the sales of these products would harm our business.” There’s then a ten line paragraph explaining what it means.
Really guys? If your sales go down it would be bad? I would never have known that. Thanks for alerting me.
Okay, now that I’ve vented some sarcasm, on to the numbers.
Financial Results
 
Just to lay a little ground work, GoPro sells in over 100 countries through more than 25,000 retail stores. 49% of revenue was international in their last complete year (2013). 17% of total revenue came from
Best Buy during that year.
Here’s a summary of GoPro’s financial results for recent years and the March 31 quarter.

 

Here are those same categories shown as a percentage of revenue.
The 8% quarter over quarter revenue decline for the March 31 quarter was the result of some production delays in 2013 that pushed some additional sales into 2013’s first quarter, making revenues in that quarter larger than they would typically be. The gross margin increase during the quarter resulted from lower product costs and a 3% increase in the average selling price. The quarter over quarter expense increases were mostly the result of adding employees. There were 139 more people in R&D, 99 more in sales and marketing, and 58 more in G&A compared to a year ago.
With regards to the 87% revenue growth from 2012 to 2013, I guess we can just say that more people wanted GoPro’s products. The average selling price was up 19%. Units shipped were “only” up 66%. The decline in gross margin from 43% to 37% was due to the new Hero3 products costing 67% more than the Hero2. The cost increase was due to the “…inclusion of additional features and functionality in our Hero3 capture devices.”
I like that they didn’t try and pass the whole cost increase on to the consumer. Feels like a company that’s working hard to stake out their territory and build their moat. Very strategic. You might have expected gross margin to rise with volume. Perhaps it ultimately will.
The largest part of the growth in other expense categories was personnel.
The balance sheet, obviously, improves rather dramatically with the completion of the IPO. Equity at the end of 2012 was a negative $80 million. It had improved to a negative $5.4 million at the 2013. Net income of $60 million will do that for you. At March 31, it was a positive $10.4 million and on a proforma basis, assuming the completion of the offering, it would be $88 million at March 31. Net cash provided by operations was $102 million in 2013, up from $8.4 million in 2012.
Given the market they are going after and the competition, I’d like to see some further strengthening of the balance sheet. Though they expect growth rates to decline (they always do when companies get larger) their continued profitability will solve that problem.
Well, I’ve got to admit I’m impressed. We’re looking at a solidly profitable business that’s already $1 billion in revenue. It’s got a moat it can dig in the form of its Virtuous Cycle and significant growth opportunities. The thing I like most is the clear vision  and strategy. You don’t see that all the time.   One of the values of having that, and it doesn’t get discussed very much, is the clarity it brings to day to day operations. It makes you focused and efficient.   Let’s see where that takes them.

 

 

6 replies
  1. Croc Dundee
    Croc Dundee says:

    Hi Jeff,
    Thanks for another great insight. It will be interesting to see what GoPro have up their sleeve for the next release and what their distribution strategy is.

    Here in Australia we are seeing the negative effects of distribution being opened up in a big way. As a core retailer we have seen sales in GoPro decline by 55% over the past 3 months compared to last year and I know we aren’t alone. Unfortunately having the surf edition exclusive to the core channel isn’t compelling enough when big box retailers are offering discounts and cheap expended warranties. We are still selling accessories for the time being but the “devices” are almost dead.

    We are waiting to see what the program is for the next release before we decide if we will continue to stock GoPro. Other core retailers I speak to are waiting to see the next release as well while others have stopped stocking it. It would be interesting to hear if that is the case in other markets?

    Maybe GoPro has evolved beyond or outgrown core stores? What are your thoughts?

    Thanks,

    CD

    • jeff
      jeff says:

      Hi CD,
      I don’t know that GoPro did this, but it would not be uncommon for a company to push distribution for better results before going public. They specifically note in the prospectus that they will not be able to continue growing at the same rate they have been growing at. The core got them going, but like most brands, especially one that’s a billion dollar and growing, the core supplies a diminishing percentage of their revenues. That’s just arithmetic. As I said in the article. the key issues are 1) their ability to tie the customer to them via software and apps and 2) their ability to expand into other vertical niches. They may honor the core market, but their longer term business plan is not about it.

      Thanks for the info and the comment.

      J.

  2. You Know Who
    You Know Who says:

    What’s not to like about a company who creates a new class of business, doubles it’s sales EVERY year since it’s inception and then goes public? Sign me up. Croc Dundee not withstanding this is an electronic device and as such was never destined to be a core only item.

    From very humble beginnings this is a true american dream story. To be in my twenties and a Billionaire? Well we can dream.

    • jeff
      jeff says:

      Yeah, even I struggled to find anything meaningful to be critical about.

      See you at Agenda I hope.
      J.

  3. Steve
    Steve says:

    Hi Jeff,

    First of all, great comments and analysis. Following on from what Croc Dundee had to say, I find it interesting (perhaps peculiar is a better word) that GoPro appears to use distributors in all major markets except the U.S., including Australia (where it uses different distributors for its three market segments) and Europe. It seems to be an antiquated distribution strategy in this day and age which reduces brand cohesion, communication with the customer/retailer, and margins. I would be interested in your comments on this strategy and, specifically, if you see this as sustainable over the long term.

    Best,

    Steve

    • jeff
      jeff says:

      Hi Steve,
      I’m guessing that their rate of growth and strategy may have required the use of distributors. It was the fastest way to get established in all these markets. Remember they came out of nowhere with a whole new concept. I imagine they saw it as important to get big and established before potential competitors (who, as they point out in the prospectus are way larger and better resourced than GoPro) saw what they were doing. Distributors was the fastest way to do it. It’s also more cash efficient. Yes, you make less money, but the distributor shoulders a lot of the expense burden. Look at the equity on their balance sheet before the offering. Do you think they could have afforded to go to the expense of learning about and getting established in all the markets where they have distributors? I don’t.

      The possible downsides you mention about distributors are correct. It’s all about who you pick for your distributor, the written agreement, and how you monitor. But who’s to say that if you walked into the market by yourself without local knowledge you wouldn’t make some of the same mistakes that can be made if you use a distributor? As to sustainability over the long term, I’ve watched other brands buy out or somehow take over their distribution as they become established in a national market. Wouldn’t be surprised if GoPro eventually did the same thing.

      Thanks for the comment,

      j.

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