After four back-to-back quarters of posting quarterly losses, GoPro managed to get back in the green as it posted adjusted earnings of $0.16 per share in its fourth-quarter 2016 results. The action camera maker’s bottom-line figure beat the Zacks Consensus Estimate of $0.12 by an impressive 33%.

However, the earnings figure was a result of several adjustments made to the huge GAAP loss that GoPro reported ($0.82 per share). The huge GAAP loss for the quarter was much wider than the $0.25 loss generated in the comparable quarter last year.

Shares tumbled almost 14% at one point in late trading in the aftermath of the results, as investors were disillusioned with the company’s bleak sales outlook for first-quarter 2017. This was in spite of the fact that this was the second biggest quarter in terms of revenue in GoPro’s history. The drab guidance must have spooked investors as 2017 was supposed to be a turnaround time for GoPro and this is a terrible start to the same.

In addition, investors were likely upset with the multiple missed opportunities and goof-ups that GoPro had this quarter.

For full-year 2016, the company reported a non-GAAP net loss of $1.44 per share, in stark contrast to net income of $0.76 in 2015.

Inside the Headlines

GoPro’s revenues grew 23.8% from the prior-year quarter’s tally to $540.6 million. This marked the company’s return to revenue growth after four successive quarters of sales declines. The top-line figure still lagged the Zacks Consensus Estimate of $576 million.

This was the first quarter that reflected the performance of the recently launched Hero5 camera and its consumer drone Karma, and revenues were far short of the company’s earlier guidance of $625 million. The Karma recall hit the top line and manufacturing issues related to Hero5 camera also strained growth.

Nevertheless, Hero5 Black was the best-selling digital imaging device in units and dollars in the U.S. and Europe. Also, Hero5 Black sold more units in a single quarter in Europe, in this quarter, than any other GoPro camera ever.

For the quarter, non-GAAP gross margins expanded 990 bps year over year to 39.5%. Non-GAAP operating income came in at $31.6 million, as against an operating loss of $21.6 million generated last year.

R&D expenses were up almost 40% year over year, driven by investment in HERO5 cameras, Karma, accessories and software. In addition, sales and marketing expenses shot up 36% year over year.

The company recently launched GoPro Plus – a cloud-based subscription service – that enables auto-upload of footage from a GoPro camera to a GoPro Plus cloud account for on-the-go access, editing and sharing using a smartphone and the Quik app. Even though it is early days, the GoPro Plus is enjoying high retention rates in the U.S. and its subscriber base seems to be expanding.

In the quarter, the rebranded Quik mobile app was downloaded over 4 million times (up almost 30% sequentially), as its active users and monthly exports tripled in Dec 2016 over the prior year.

For full-year 2016, revenues plunged 26.8% year over year to $1.62 billion.

Notable Developments

Till date, GoPro’s Hero 5 Black cameras and Karma drones have faced production issues and delayed shipments, which restrained the company's ability to meet demand in the quarter. The company’s new products also had a rocky start with Amazon.com Inc. (AMZN), as GoPro had temporarily stopped selling them on the e-commerce site in mid October due to a pricing dispute.

Further, supply constraints made retailers cancel marketing support of GoPro’s new products, particularly its new Hero 5 camera, which obviously hurt revenues. Further, the company had to announce a recall of its new Karma drone after a mere fortnight of its commercial launch, as a few of them lost power during flight due to battery issues. This was also a huge setback for the company.

However, earlier this week, the company resumed Karma sales and the company plans to ramp production further. Karma is scheduled to be available in international markets this spring. We believe that GoPro is well set to capitalize on the fast-growing consumer drone market.

The company also launched several accessories during the quarter, including Karma Grip, a handheld stabilizer; Remo, a waterproof, voice-activated remote and Quik Key, a microSD card reader enabling quick editing and sharing from smartphones.

Liquidity

Exiting the quarter, the company had cash and cash equivalents of $192.1 million, down significantly from $280 million a year back.

Guidance

In light of such unfortunate events and uncertain market reaction, the company gave a very disappointing guidance for first-quarter 2017. It projects revenues for the current quarter in the range of $190–$210 million, which is well below the Zacks Consensus Estimate of $268 million for the quarter. The company expects gross margin in the low 30% range.

GoPro refrained from offering specific revenue or margin guidance for full-year 2017.

However, GoPro declared plans to limit its adjusted operating expenses in 2017 to $600 million, in an attempt to try to return to full-year profitability next year. This is comparable to a 2016 figure of about $709 million.

GoPro should be able to attain these massive cost reductions, in light of its recent business restructuring, which did away with many high-cost operations including its entertainment division.

It is likely that GoPro’s sales will gradually improve as it ramps production and expands Karma's reach to international markets. This will supplement its cost-reduction initiatives and enable it to achieve sustained, profitable growth.