LakeTravis
Well-Known Member
GoPro might be in fairly big trouble. Just received this from a portfolio management group I follow closely--fortunately, I sold off all my GoPro up in the $70 range!
GoPro's Karma Recall: What Did Management Know, And When Did They Know It?
Summary
GoPro reported disappointing Q3 results, but the big disappointment was to follow with the Karma drone recall.
Investors have to wonder what GoPro's management knew about Karma's problem at the time of the earnings release.
Management's problems seem to run deeper than just “execution”.
A mere five days after GoPro (NASDAQ:GPRO) released its Q3 results, it announced a recall of all Karma drones sold to date, some 2500. Now Goldberg Law PC, which bills itself as "a national shareholder rights litigation firm" has announced that it is investigating GoPro for possible securities violations. If GoPro corporate officers were aware of the Karma problem prior to the earnings report, weren't they obligated to divulge the information to shareholders?
Source: diydrones.com
Suddenly Toxic
Following GoPro's Q2 earnings report, the company had seemed a promising turnaround story. It had the Hero5 camera and the Karma drone coming in the second half of the year, and these would fuel dramatic revenue growth for the second half. Second half revenue was predicted by GoPro management to be $945.7 at the low end of its guidance range. Full year revenue would be $1.35-1.5 billion.
GoPro's Q3 results disappointed, however, with revenue of $240 million, a 40% y/y decline. GoPro had a GAAP operating loss of $115.6 million. During the conference call, GoPro management blamed supply chain issues for a slow roll-out of the new products, but claimed those issues had been resolved as of the earnings report.
As a consequence, full year revenue guidance was lowered to $1.25-1.3 billion and revenue guidance for Q4 was set at $625 million at the midpoint. This would still have represented a 43% growth over the troubled 2015 Q4 that GoPro had, and would almost get GoPro back to the halcyon days of 2014 Q4 when revenue was $633.9 million.
Then the Karma recall was announced on November 8. GoPro was unable to offer any explanation for the recall, other than the fact that sometimes a Karma falls out of sky for no apparent reason.
Was the recall factored into GoPro's guidance? It's possible. During the conference call, GoPro indicated that Karma would constitute less than 10% of revenue. This is certainly believable based on the limited number of 2500 units that had been sold since the release of the Karma on October 23.
Taking 10% as an upper bound, that would indicate that the revenue impact would not be more than $62.5 million, but it will probably be less. The problem with the Karma recall is not so much the direct revenue impact it will have as what it says about the credibility of GoPro's management. How credible was the guidance to begin with?
Product Disappointments
At the time of the Q2 report, without having seen the actual new products, I made some reasonable (I thought) guesses about their capabilities. These were based on the latest Ambarella (NASDAQ:AMBA) chips, which had been released at the beginning of the year. These chips are fabricated on a 14 nm FinFET process, which is state of the art for fabrication of ARM processors. 14-16 nm FinFET processes are now pretty much standard in high-end smartphones from Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), and the processes are also used by companies such as Nvidia (NASDAQ:NVDA) and AMD (NYSE:AMD) for their latest generations of graphics processors.
With practically the whole world moving or having moved to 14 nm, it seemed only reasonable that GoPro would use Ambarella's 14 nm parts, which would have been the most capable camera systems on chip (SOCs) available. This would have put the processing inside a GoPro camera on par with high-end smartphones, which are becoming very sophisticated in terms of image processing and camera capabilities. This is best represented by the Apple iPhone 7 Plus dual camera system. Based on these expectations, I rated GoPro a buy.
When the Hero5 and Karma were unveiled, it became apparent that the Hero5 was not using the latest Ambarella processors, but something from a previous generation. I became a lot more cautious about the prospects of the new products. They had ease of use going for them, but not the cutting edge specs and capabilities that I thought they would need to be competitive. I reduced my rating to hold.
It wasn't until a teardown of the Hero5 appeared that I fully understood what GoPro had done. It had basically recycled the processor (the Ambarella A9 series) from the Hero4 Black.
Ambarella's A9 series has been around for quite a while, and while still very capable, is several generations behind in process technology. The lack of processor innovation represented a sort of sleight of hand, in which the core technology, several years out of date, was being sold to consumers dressed up in the new packaging of the Hero5 Black.
To be sure, that packaging represented some steps forward in ease of use, due to the touch screen, and durability, due to being waterproof. And of course, software has been updated. But the fact that GoPro went cheap on the processor left a bad taste.
I still don't know what GoPro is using in the Karma, but if they went the same route as Hero5, they might have gotten themselves in trouble. If a camera (or a smartphone) has a system crash on you, you just cycle power and reboot. It happens so rarely that the inconvenience is minimal.
If a Karma suffers a system crash in flight, it's a little more serious. And it doesn't matter that it's a rare occurrence, because the consequences will be more than inconvenient.
Investor Takeaway
Following the Q3 report, GoPro's management has been roundly criticized for its "poor execution." Well, that's part of it, but there also seems to be a lack of sound engineering and business judgment. My experience in engineering tells me that whatever the source of the Karma problem, it had probably been identified and was known long before the release of the Karma on October 23, let alone the earnings release on November 3.
At some point, a decision was made to ship the product anyway, based on any number of rationalizations that are usually made under such circumstances: We think we've fixed it... we haven't seen the problem in a while... it happens so rarely the public probably won't notice...
I disagree with some GoPro supporters that GoPro's problem isn't competition. GoPro definitely has competition, both in cameras, and in drones. The DJI Mavic Pro turned out to be far more capable and easier to use than the Karma. The Mavic is everything I wished that the Karma had been.
2500 Karmas in the first two weeks of sales isn't really very many. I suspect that the Mavic is eating the Karma's lunch, so that pulling the Karma off the market wasn't really such a loss.
I see the failure of GoPro's management as much more than a failure of execution. GoPro's management fails to understand what it needs to do to field truly competitive products. It seems to lack the necessary technological depth. And it tries to conceal the lack of technical innovation in superficial user interface improvements. GoPro wouldn't be the first company I've seen to engage in elaborate dissembling to conceal a lack of technical competitiveness.
So now, I come to the hard part. It's always a struggle for me to offer a simplistic buy-hold-sell rating when the situation is more nuanced, as it usually is. I'm not convinced that GoPro is a lost cause. On the other hand, I've seen enough of this management to convince me that regime change is essential.
Should investors hold on in hopes of new management or possibly an acquisition? It would not be unreasonable, and there might be some premium to be made over the current share price. Selling at this juncture seems ill advised, since there already seems to be some recovery from all the bad news.
So, the company is still a hold. Investors can either hold and hope for things to get better or hold for an opportune moment to exit the stock. I suggest the latter.
Disclosure: I am/we are long AAPL, NVDA.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
GoPro's Karma Recall: What Did Management Know, And When Did They Know It?
Summary
GoPro reported disappointing Q3 results, but the big disappointment was to follow with the Karma drone recall.
Investors have to wonder what GoPro's management knew about Karma's problem at the time of the earnings release.
Management's problems seem to run deeper than just “execution”.
A mere five days after GoPro (NASDAQ:GPRO) released its Q3 results, it announced a recall of all Karma drones sold to date, some 2500. Now Goldberg Law PC, which bills itself as "a national shareholder rights litigation firm" has announced that it is investigating GoPro for possible securities violations. If GoPro corporate officers were aware of the Karma problem prior to the earnings report, weren't they obligated to divulge the information to shareholders?
Source: diydrones.com
Suddenly Toxic
Following GoPro's Q2 earnings report, the company had seemed a promising turnaround story. It had the Hero5 camera and the Karma drone coming in the second half of the year, and these would fuel dramatic revenue growth for the second half. Second half revenue was predicted by GoPro management to be $945.7 at the low end of its guidance range. Full year revenue would be $1.35-1.5 billion.
GoPro's Q3 results disappointed, however, with revenue of $240 million, a 40% y/y decline. GoPro had a GAAP operating loss of $115.6 million. During the conference call, GoPro management blamed supply chain issues for a slow roll-out of the new products, but claimed those issues had been resolved as of the earnings report.
As a consequence, full year revenue guidance was lowered to $1.25-1.3 billion and revenue guidance for Q4 was set at $625 million at the midpoint. This would still have represented a 43% growth over the troubled 2015 Q4 that GoPro had, and would almost get GoPro back to the halcyon days of 2014 Q4 when revenue was $633.9 million.
Then the Karma recall was announced on November 8. GoPro was unable to offer any explanation for the recall, other than the fact that sometimes a Karma falls out of sky for no apparent reason.
Was the recall factored into GoPro's guidance? It's possible. During the conference call, GoPro indicated that Karma would constitute less than 10% of revenue. This is certainly believable based on the limited number of 2500 units that had been sold since the release of the Karma on October 23.
Taking 10% as an upper bound, that would indicate that the revenue impact would not be more than $62.5 million, but it will probably be less. The problem with the Karma recall is not so much the direct revenue impact it will have as what it says about the credibility of GoPro's management. How credible was the guidance to begin with?
Product Disappointments
At the time of the Q2 report, without having seen the actual new products, I made some reasonable (I thought) guesses about their capabilities. These were based on the latest Ambarella (NASDAQ:AMBA) chips, which had been released at the beginning of the year. These chips are fabricated on a 14 nm FinFET process, which is state of the art for fabrication of ARM processors. 14-16 nm FinFET processes are now pretty much standard in high-end smartphones from Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), and the processes are also used by companies such as Nvidia (NASDAQ:NVDA) and AMD (NYSE:AMD) for their latest generations of graphics processors.
With practically the whole world moving or having moved to 14 nm, it seemed only reasonable that GoPro would use Ambarella's 14 nm parts, which would have been the most capable camera systems on chip (SOCs) available. This would have put the processing inside a GoPro camera on par with high-end smartphones, which are becoming very sophisticated in terms of image processing and camera capabilities. This is best represented by the Apple iPhone 7 Plus dual camera system. Based on these expectations, I rated GoPro a buy.
When the Hero5 and Karma were unveiled, it became apparent that the Hero5 was not using the latest Ambarella processors, but something from a previous generation. I became a lot more cautious about the prospects of the new products. They had ease of use going for them, but not the cutting edge specs and capabilities that I thought they would need to be competitive. I reduced my rating to hold.
It wasn't until a teardown of the Hero5 appeared that I fully understood what GoPro had done. It had basically recycled the processor (the Ambarella A9 series) from the Hero4 Black.
Ambarella's A9 series has been around for quite a while, and while still very capable, is several generations behind in process technology. The lack of processor innovation represented a sort of sleight of hand, in which the core technology, several years out of date, was being sold to consumers dressed up in the new packaging of the Hero5 Black.
To be sure, that packaging represented some steps forward in ease of use, due to the touch screen, and durability, due to being waterproof. And of course, software has been updated. But the fact that GoPro went cheap on the processor left a bad taste.
I still don't know what GoPro is using in the Karma, but if they went the same route as Hero5, they might have gotten themselves in trouble. If a camera (or a smartphone) has a system crash on you, you just cycle power and reboot. It happens so rarely that the inconvenience is minimal.
If a Karma suffers a system crash in flight, it's a little more serious. And it doesn't matter that it's a rare occurrence, because the consequences will be more than inconvenient.
Investor Takeaway
Following the Q3 report, GoPro's management has been roundly criticized for its "poor execution." Well, that's part of it, but there also seems to be a lack of sound engineering and business judgment. My experience in engineering tells me that whatever the source of the Karma problem, it had probably been identified and was known long before the release of the Karma on October 23, let alone the earnings release on November 3.
At some point, a decision was made to ship the product anyway, based on any number of rationalizations that are usually made under such circumstances: We think we've fixed it... we haven't seen the problem in a while... it happens so rarely the public probably won't notice...
I disagree with some GoPro supporters that GoPro's problem isn't competition. GoPro definitely has competition, both in cameras, and in drones. The DJI Mavic Pro turned out to be far more capable and easier to use than the Karma. The Mavic is everything I wished that the Karma had been.
2500 Karmas in the first two weeks of sales isn't really very many. I suspect that the Mavic is eating the Karma's lunch, so that pulling the Karma off the market wasn't really such a loss.
I see the failure of GoPro's management as much more than a failure of execution. GoPro's management fails to understand what it needs to do to field truly competitive products. It seems to lack the necessary technological depth. And it tries to conceal the lack of technical innovation in superficial user interface improvements. GoPro wouldn't be the first company I've seen to engage in elaborate dissembling to conceal a lack of technical competitiveness.
So now, I come to the hard part. It's always a struggle for me to offer a simplistic buy-hold-sell rating when the situation is more nuanced, as it usually is. I'm not convinced that GoPro is a lost cause. On the other hand, I've seen enough of this management to convince me that regime change is essential.
Should investors hold on in hopes of new management or possibly an acquisition? It would not be unreasonable, and there might be some premium to be made over the current share price. Selling at this juncture seems ill advised, since there already seems to be some recovery from all the bad news.
So, the company is still a hold. Investors can either hold and hope for things to get better or hold for an opportune moment to exit the stock. I suggest the latter.
Disclosure: I am/we are long AAPL, NVDA.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
