Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ Emerging growth company ☐
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2019,2022, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $677,709,000$715,511,000 based upon the closing price reported for such date on The Nasdaq Global Select Market.
Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.
Item 1. Business
We also offer a full ecosystem of mountable and wearable accessories. See Products for additional information.
Helping our consumers capture and share their experiences in immersive and exciting ways is at the core of our mission and business. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create and share engaging personal content. When consumers use our products and services, they often generate and share content that increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for our products. We believe revenue growth will be driven by the introduction of new cameras, accessories, lifestyle gear, and subscription offerings and GoPro app monetization.service offerings. We also believe new or improvedenhanced camera features drive a replacement cycle among existing users and attract new users. Additionally,Consumers can choose between numerous channels to purchase our goal to expand our total addressable market will be through the monetization of a new GoPro app experience that we believe addresses widespread pain points that anyone with a smartphone or GoPro faces. Key components of our 2020 strategy and beyond include the following:
Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding restructuring charges in 2019, 2018 and 2017.)
Empower our People: Deepen our Talent Development, Culture and Commitment. In every area of our company, we aspire to retain employees committed to growing GoPro through great ideas and innovation. We plan to do this by leveraging our strong brand recognition, unique culture, competitive compensation and benefits, and our strong commitment to our Diversity, Inclusion and Belonging initiative. GoPro’s culture has been central to our ability to attract top talent. The hallmark of the GoPro employment brand is a closely-knit community, referred to as the GoPro Family, who work collaboratively in a lively workplace and are supported by competitive compensation and benefits, growth opportunities and engaging programs to support professional development.
Products
Cameras. We offer a good-better-best camera line-up that includesfamily of flagship cameras, including our cloud connected HERO7 Silver, HERO7HERO11 Black, HERO11 Black Mini, HERO10 Black, HERO10 Black Bones, HERO9 Black, HERO8 Black and HERO8MAX cameras. Our HERO11 Black, cameras. We also offer MAX, our newest waterproof 360-degree camera. HERO7 Silver, HERO7HERO11 Black Mini, HERO10 Black, HERO9 Black, HERO8 Black, and MAX cameras are durable, waterproof (without a housing), come with select mounting accessories, and have built-in Wi-Fi and Bluetooth providingtechnology, that provide connectivity with a mobile device to enable remote control, content viewing, editing and sharing functionality. Our HERO11 Black, HERO11 Black Mini and HERO10 Black cameras offer 5.3K video at 60 frames per second, our HERO9 Black camera offers 5K video at 30 frames per second, and our HERO8 Black and HERO7 Black camerascamera can shoot video in 4K at 60 frames per second, while our HERO7 Silver camera can shoot video in 4K at 30 frames per second. MAX captures video in 360-degrees at 6K resolution and stitches to 5.6K. All of our current cameras feature multi-language voice and contextual control, electronic image stabilization, a simplified user experience, and the ability to auto-upload photos and videos to GoPro Plus via Wi-Fi for easy access and editing with our Quik app. HERO11 Black, HERO10 Black, HERO9 Black, HERO8 Black HERO7 Black, HERO7 Silver and MAX also feature GPS and additional sensors that capture location, elevation, speed and G-force loads. We also offer Open GoPro, an open API initiative, that makes it easy for third-party developers to integrate HERO9 and newer cameras into their own development efforts.
Mounts and accessories.accessories. We offer a wide range of mounts and accessories, either bundled with a camera or sold separately, that enhance the functionality and versatility of our products, and enable our consumers to capture their experiences during a variety of activities or moments from different viewpoints. Our equipment-based mounts include threeWe also produce and sell camera attachments called Mods, which allowsallow users to transform their HERO11, HERO10, HERO9 or HERO8 Black cameracameras into a production powerhouse. The Media Mod delivers shotgun-mic performance withprovides an integrated directional microphone, the Light Mod illuminates a scene and the Display Mod allows users to perfectly frame themselves during self-capture. In addition, we offer Max Lens Mod that brings Max HyperSmooth video stabilization and Max SuperView’s ultra-wide-angle photo and video to the HERO11, HERO10 and HERO9 Black cameras. Other equipment-based mounts include helmet, handlebar, roll bar and tripod mounts. Our 3-way mount is a 3-in-1 mount that can be used as a camera grip, extension arm or tripod, and our floating mounts such as the Handler, and Bite Mount + Floaty, allow our cameras to float in water. We also enable consumers to wear mounts on their bodies with the use of our magnetic swivel clip, wrist housing, chest harness and head strap. Additionally, we offer colored camera sleeves, spare batteries, dive filters and charging accessories and cables to connect our GoPro cameras to computers, laptops and television monitors. Our accessories expand the features, versatility and convenience of our cameras.
ApplicationsSubscription. .Our GoPro subscription offers a range of benefits to our consumers, including a camera protection plan and a platform that enables subscribers to easily access, edit and share content. The GoPro subscription also includes unlimited cloud storage supporting original source video and photo quality, access to a high-quality live streaming service on GoPro.com, as well as discounts on GoPro cameras, lifestyle gear, mounts and accessories. Our HERO5 Black and newer cameras automatically upload photos and videos to a subscriber’s GoPro account at the highest possible quality, while HERO7 Black and newer cameras can access our live-streaming service. We had 2.25 million subscribers as of December 31, 2022, representing 43% growth year-over-year.
Applications. We offer mobile and desktopweb applications to all consumers at no charge that provide a complete media workflow for downloading,archiving, editing, multi-clip story creation and sharing content on the fly using a smartphone or desktop. Additionally, the GoPro applications seamlessly integrate a user’s GoPro into the media workflow by allowing remote control of the camera using a smartphonefly. The Quik app makes it easy for camera content capture and offload. Using a GoPro MAX or Fusion, the GoPro applications enable creating, editing and sharing 360-degree camera content and enables users to re-frameget the 360-degree camera content to save traditional fixed-perspective videos. The GoPro app now incorporates a video editing solution to better identify meaningful moments in users footage and suggest story compilationsmost out of their favorite photos and videos. In addition,videos no matter which phone or camera is used to capture the GoProfootage. We believe the Quik app and the Quik subscription are important steps in expanding our total addressable market to all those who want to create, edit and organize the visual moments of their lives. The Quik subscription provides access to a suite of powerful yet simple editing tools which allows users to mix and
match filters for a highly-customizable editing experience and offersedit photos or videos themselves. Edits can be applied to single clips, or several clips of an expanded library of soundtracks and support.
Services. GoPro Plus is a subscription service that offers a range of benefits to our consumers, including damage protection, camera replacement, on-the-go accessevent can be put together into automated, music-synced videos. Quik subscribers can also conveniently share their favorite photos or videos via the Quik app where those special “keeper” photos or videos will be added to a user’s photos and videos, storage of unlimited photos and videos,private “Mural” feed. Furthermore, by integrating the Quik app editing and sharing capabilities using a smartphone andengine into the GoPro app,cloud ecosystem, we are now able to offer automatic, behind-the-scenes creation of videos and edits to users without any work on their part.
Lifestyle Gear. We offer a lifestyle gear lineup that melds our signature design and versatility across a line of bags, backpacks and cases. We also offer an expanded libraryexclusive line of soundtracks, premium support,t-shirts, hats and exclusive discounts on mounts and accessories. We had more than 334,000 paying subscribers asother soft goods that capture the spirit of January 31, 2020. Revenue earned to date from GoPro Plus was not material to our results.the brand.
Seasonality
Historically, we have experienced our highest levels of revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. While we aim to reduce the impact of fourth quarter seasonality on full year performance, timely and effective product introductions and forecasting, whether just prior to the holiday season or otherwise, are critical to our operations and financial performance.
Segment information and geographic data
We operate as one reportable segment. Financial information about geographic areas is presented in Note 10 Concentrations of risk and geographic information,, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Backlog
We do not believe that backlog information is material or meaningful as of any particular date or indicative of future sales, as our customers can change or cancel orders with limited or no penalty and limited advance notice prior to shipment.
Research and development
We are passionate about developing new and innovative products that inspire our consumers and enhance our brand. We are constantly innovating to deliver better performance, expanded functionality and increased convenience to enhance the appeal of our products. We strive to remain a market leader by consistently introducing innovative products, software and services that offer optimal performance at affordable price points.performance.
We have a user experience-driven approach to product development and our CEO leads product design. By engaging with customers, consumers and opinion leaders in our core markets around the world, our development team strives to introduce meaningful and empowering new features that expand the versatility and performance of our products. We also benefit from input received from our in-house production team, our sponsored athletes and our brand advocates that regularly travel the world capturing content using our products. We believe leveraging this input will help refine our existing products and influence future products that give us a competitive advantage.
Our engineering team supports the development of cameras, related mounts and accessories, firmware and software. Our hardware engineering team is responsible for developing technologiessolutions to support the concepts developed by our product team. These core technologiessolutions include GoPro’s custom designed GP1 processor,system on chip, which allows our cameras to perform advanced image computation, and provides unparalleled image quality and next-level image stabilization, new image silicon processors, image sensors and lenses, as well as the core algorithms that enable the systems to operate and provide optimal performance and features. Our hardware engineering team also integrates these innovations and firmware into our product designs, and develops our cameras, mounts and accessories.
Our software engineering team develops applications that enhance the functionality of our products and facilitate the management, editing, sharing and viewing of content. These applications are being developed for mobile, desktop and web-based platforms. Our core technologies include rendering engines to enable smooth video playback and editing, algorithms for moment identification, automatic story creation as well as cloud-based media storage, analysis and playback.
Our software engineering team also manages our cloud and web platforms that power our application experiences and direct-to-consumer channel via GoPro.com.
Manufacturing, logistics and fulfillment
Our products are designed and developed in the United States, France, China and Romania, and a significant majority of our manufacturing is outsourced to contract manufacturers located in China Mexico, Japan and Malaysia. In 2019, we moved most of our United States bound camera production from China to Mexico, a change catalyzed by tariff-related concerns.Thailand. We believe that using outsourced manufacturing enables greater scale and flexibility than establishing our own manufacturing facilities. Several key strategic parts are purchased from suppliers by us and then consigned to our manufacturers, while the vast majority of parts are procured directly by our contract manufacturers. Our strategic commodities team manages the pricing and supply of the key components of our cameras, including digital signal processors, sensors and lenses, and we leverage their expertise to achieve competitive pricing on the largest value-add components and leverage our contract manufacturers’ volume purchases for best pricing on common parts.
We have third-party facilities in China and MexicoThailand for final pack-out of our finished products. These finished products are shipped to outsourced fulfillment centers in California, Kentucky, Netherlands,the United States, as well as Hong Kong, Netherlands and Singapore that deliver our products to our customers.
Sales channels and customers
We offer our products in over 30,000 retail outlets and in over 10080 countries through our directretail sales channel to retailers and indirectlydistributors, and through our distribution channel.direct-to-consumer sales channel via GoPro.com. In 20192022 and 2018, our direct sales accounted for 46%2021, GoPro.com revenue represented 38% and 48%34% of our revenue, respectively, of which, revenue from gopro.com represented 23% and 16% of our direct salesnet revenue, respectively, and our distributorsretail accounted for 54%62% and 52%66% of our net revenue, respectively.
Direct sales
We sell directly to most of our retailers in the United States, some of our retailers in Europe and to consumers worldwide through our e-commerce channel.GoPro.com.
Independent specialty retailers. We use a network of location-based independent manufacturer representatives to sell our products to independent specialty retailers in the United States focused on sports and consumer activity capture markets. Our representatives provide highly personalized service to these retailers, including in-store merchandising, taking orders and providing clinics to educate retail sales personnel about GoPro products and services. We also have an internal, regionally focused sales team that provides a secondary level of service to both the independent specialty retailers and manufacturer representatives. Independent specialty retailers generally carry our higher end products, targeting their core customers who we believe tend to be early adopters of new technologies. Independent specialty retailers outside of the United States represent a similarly important sales channel for us, and we reach these customers indirectly through our network of international distributors.
Big box retailers. We sell to large retailers with a national presence, including Amazon.com, Inc., Best Buy, Inc., Target Corporation Wal-Mart,and Walmart, Inc., Dixons Carphone and Fnac. We support these retailers with a dedicated and experienced sales management team that we believe enables us to reduce channel conflict.
Mid-market retailers. We also sell to retailers with a large regional or national presence, often focused on specific verticals such as consumer electronics, sporting goods, military, hunting and fishing, and motorsports. In the United States, we sell directly to these mid-market retailers through our experienced sales teams assigned to particular accounts and regions.
E-commerce channel.GoPro.com. We sell our full line of products to consumers worldwide through our online store at gopro.com,GoPro.com, which we market through online and offline advertising. Sales through gopro.com were more than 10%GoPro.com revenue represented 38%, 34% and 32% of our totalnet revenue for 20192022, 2021 and less than 10% of our total revenue for 2018 and 2017.2020, respectively.
Distribution
We sell to over 5540 distributors who resell our products to retailers in international and domestic markets. We have dedicated sales personnel focused on providing a high level of service to these distributors, including assisting with product mix planning, channel marketing and in-store merchandising, development of marketing materials, order assistance and educating the distributors’ sales personnel about GoPro products.
In-store merchandising
Our in-store merchandising strategy focuses on our iconic GoPro-branded, video-enabled point of purchase (POP) merchandising displays that are located in nearly all retail outlets where our products are sold. These displays showcase GoPro videos and present our product ecosystem in a customer-friendly manner. Our larger retailers help us represent a broader range of GoPro products due to their in-store deployment of our larger and custom POP displays. We have been successful working with our retailers to further expand the footprint of our POP displays within existing stores. As of December 31, 20192022 and 2018,2021, we had approximately 29,000 26,000 and 23,000 POP displays,respectively, in retail outlets worldwide.
Marketing and advertising
Our marketing and advertising programs are focused on engaging consumers by exposing them to compelling GoPro content and educating them about new hardware features, as well as the power of our solutions for software editing (mobile, web and desktop applications) and content management (GoPro Plus).management. We believe this approach enhances our brand while demonstrating the performance, durability and versatility of our products. Our marketing and advertising efforts span a wide range of consumer interests and leverage both traditional consumer marketing and lifestyle marketing strategies.
Consumer marketing. Social media plays an important role in our consumer marketing strategy. Our consumers capture and share personal GoPro content on social media and content sharing platforms like Facebook, Instagram, TikTok, Twitter Vimeo and YouTube. In 2019,At the end of 2022, we gained 4.3 million new followers to our social accounts forreached a lifetime total of 42.849.6 million followers. Of the 4.3 million new followers on our social accounts, 2.4 million were on Instagram, resulting in a lifetime total of 19.1 million on Instagram.followers. To date, we have reached 1.4over 17.4 billion views of content tagged #GoPro on TikTok and more than 2.4 3.7 billion views on GoPro’s YouTube channel. We also integrate user-generated content and GoPro originally produced content into advertising campaigns across various platforms including print, online, billboards and other out of homeout-of-home advertising, and at consumer and trade facing events. This content also supports our in-store channel marketing efforts, appearing on our POP displays and other in-store marketing materials. We continue to believe GoPro content remains a significant asset that builds awareness for our brand and products.
Lifestyle marketing. Our lifestyle marketing programs focus on expanding GoPro brand awareness by engaging consumers through relationships with key influencers, event promotions and other outreach efforts. We cultivate strong relationships with influential athletes, celebrities, entertainers and brands, all of whom use our products to create and share engaging content with their own fans and consumers.
Competition
The market for cameras is highly competitive and characterized by frequent product introductions and rapid technological advances. We believe the principal competitive factors impacting the market for our products include quality, reliability and user experience, price and performance, design innovation, brand recognition, marketing and distribution capability, service and support, and brand reputation.
We compete against established, well-known camera manufacturers such as Canon Inc. and Nikon Corporation, as well as large, diversified electronics companies such as, Samsung Electronics Co. and Sony Corporation and specialty companies such as Garmin Ltd., the Ricoh Company, Ltd., Shenzhen Arashi Vision Co., Ltd. and SZ DJI Technology Co., Ltd. We believe we compete favorably with these companies’ products. Our durable and versatile product design facilitates increased functionality and wearability, and we offer a variety of mounts and other accessories that enable a wide range of consumer use cases that are difficult for other competing products to address. Further, we offer many professional-grade features within our camera and 360-degree camera product offerings at attractive consumer price points, including our HyperSmooth 2.05.0 which provides pitch axisis our most advanced stabilization in-appever and includes in-camera horizon leveling that provides a gimbal-like effect, super high-resolution video capability, voice control features,keeps shots smooth and level, and for our 360 experience, OverCapture, whichMAX SuperView and PowerPano. MAX SuperView provides the widest field of view ever from a GoPro camera while PowerPano allows a MAX userusers to capture content from every angle.a 6.2mp, 270-degree panoramic photo with the push of a button and creates an artifact-free shot of action or movement. We also provide users with a suite of free mobile and desktop applications that enhance the overall GoPro experience. Moreover, we believe we have achieved significant brand recognition in our target vertical markets. We believe our years of experience working with active and influential consumers contributes to our ability to develop attractive products and establishes the authenticity of our brand, thereby differentiating us from
current and potential competitors.
Smartphones and tablets with photo and video functionality have significantly displaced the market for traditional camera sales, and the makers of those devices also have mobile and other content editing applications and storage for content captured with those devices. Our Quik app and GoPro app, GoPro Plus service and Quik desktop editing applicationsubscription may not be as compelling a solution as those offered by other companies, such as Apple, Inc. and Google, although the GoProQuik app supports content from other platforms including content from iOS and Android. Also, itIt is possible that, in the future, the manufacturers of such devices, such as Apple, Google and Samsung, may continue to design their products for use in a range of conditions, including challenging physical environments and waterproof capabilities, or develop products with features similar to ours. In addition, new companies may emerge and offer competitive products directly in our category.
Intellectual property
Intellectual property is an important aspect of our business, and ourbusiness.Our practice is to seek protection for our intellectual property in the United States and certain jurisdictions globally, as appropriate. To establish and protect our proprietary rights and confidential information, we rely upon a combination of trademark, copyright, patent, trade secrets, and other forms of intellectual property rights, as well as contractual restrictions such as confidentiality agreements, licenses, and intellectual property assignment agreements with employees, contract manufacturers,
distributors and others.
GoPro is a leading innovator that holds a comprehensive portfolio of intellectual property rights. Our trademarks, including “GOPRO,” “HERO” and the GoPro logos, among others, are a critical component of the value of our business. In addition, we hold many issuedWe believe the strength of our trademarks, service marks, and pendingtrade dress have generated considerable brand loyalty, distinction, and renown among our customers and prospective customers.
GoPro’s patent portfolio been recognized as a leader in the high-tech and electronics industry. Our patents, including utility and design patents, forcover innovations that help our consumerscustomers capture, create and share their content using our cameras, mounts, accessories and software. Our patents cover technology and product areas that include physical structures,cameras, mounts, accessories, digital imaging, image processing, image stabilization, operational firmware and software, post-processing software, distributionmobile, desktop and cloud software, mount and accessory structures, as well as the ornamental aspects of our hardware and software products. As of December 31, 2019,2022, we had approximately 6821,218 issued patents and 441419 patent applications pending in the United States, and 314671 corresponding issued patents and 193122 patent applications pending in foreign countries.jurisdictions. Our issued United States patents will expire approximately between 2022 and 2041 and our issued foreign patents will expire approximately betweenat various times, starting in 2024, and 2039.no single patent or other intellectual property right is solely responsible for protecting GoPro’s products, software, and services. GoPro continues to invest in protecting its expanding innovation through ongoing development of its patent portfolio. We cannot be certain that our patent applications will be issued or that any issued patents will provide us with any competitive advantage or will not be challenged by third parties. We continually review our development efforts to assess our innovations, including their patentability. patentability, and regularly file patent applications to protect our innovations and technologies that come from our research, development, and design.
We take active measures to protect our intellectual property against unauthorized third-party use, including misuse of our patents, copyrights, trademarks and other proprietary rights. We monitor online marketplaces for infringing, knock-off, or counterfeit products and take action to remove those products. We have, and expect to continue to take legal action to enforce our intellectual property and proprietary rights when appropriate.
In addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, including contractual protections in agreements with employees, contract manufacturers, distributors and others. Despite these protections and efforts, we may be unable to prevent third parties from using our intellectual property without our authorization, challenging the validity of our intellectual property, breaching any nondisclosure or confidentiality agreements with us, or independently developing products that are similar to ours without infringing our intellectual property, particularly in those countries where the laws do not protect our proprietary and intellectual property rights as fully as in the United States.
EmployeesHuman capital
We are continually investing in the engagement and retention of our global workforce by creating an inclusive workplace, providing market-competitive benefits to support our employees’ health and well-being, and fostering a learning environment in support of their growth and development. As of December 31, 2019,2022, we had 926employed 877 people.
Diversity and Inclusion
GoPro strives to be a more inclusive, representative, and equitable organization, and to leverage our brand and marketing to champion these values. Through our comprehensive DEIB program, we take a multi-faceted approach to creating a sense of belonging for GoPro employees. NoneWe provide trainings, workshops, events, and speaker series to help increase safe spaces and visibility for people with identities that have been historically oppressed. We take a hybrid approach to employee training, utilizing a self-directed individual learning platform with research-backed content in addition to coaching and other manager led activities. In addition to our mandatory sexual harassment prevention and bullying prevention training, new modules were added to help employees recognize and address unconscious bias and microaggressions. We host virtual discussions on a variety of diversity, equity and inclusion topics to educate employees on issues faced by historically marginalized groups and to foster understanding and empathy, champion diverse leadership, and celebrate the contributions that diverse groups bring to us and our community.
When our people thrive, our business thrives. GoPro invests in safe spaces through our Employee Resource Groups (ERGs). ERGs enhance the employee experience and help drive DEIB strategy by building community and connection, expanding education and awareness, creating opportunities for professional development and providing valuable feedback to our People Team.
Our CEO, Nicholas Woodman, also signed on to the Outdoor CEO Diversity Pledge, committing us to, over the coming years, increasing representation of underrepresented groups in our hiring, marketing and athlete rosters, as well as sharing our learnings with other outdoor brands as a catalyst for industry change.
Employee Development and Training
We prioritize employee development and training, which we believe has a direct impact on employee growth, engagement and retention. To support managers and individual contributors within the company, we provide training and development opportunities through our online portal, Opportunity Lab. Opportunity Lab enables employees are currently coveredto access virtual instructor-led classrooms or self-directed web-based courses focused on topics such as the importance of using emotional intelligence in difficult times, leading change, understanding employee engagement, feedback and career development planning. We also offer employee development through our Mentorship Program. This program supports the employees’ professional development while expanding their network with our senior leaders.
Our leadership development and coaching programs focus on individual leadership growth, building trust and relationships with peers and sharing best practices. We continue to optimize our organizational efficiency and collaboration by providing ongoing training on effective meeting management and how to recognize unconscious bias. We believe that employee development is a collective bargaining agreement,shared responsibility of employee and manager, through both formal and informal methods (e.g., stretch assignments and peer-to-peer learning). Through our GROW Pro Plan program, managers and employees reflect on their individual skills and areas for development, guided by our company competency framework, and by what specific areas the employee would like to develop each year. We have a robust talent calibration and succession planning process to ensure we have experienced no work stoppages.fill the talent pipeline and identify any skills gaps with development plans.
Corporate and available information
We were originally incorporated as Woodman Labs, Inc. in California and began doing business as GoPro in February 2004. We reincorporated in Delaware in December 2011 and in February 2014, we changed our name to GoPro, Inc. Our principal executive offices are located at 30003025 Clearview Way, San Mateo, California 94402, and our telephone number is (855) 636-3578.(650) 332-7600. We completed our initial public offering in July 2014 and our Class A common stock is listed on The Nasdaq Global Select Market under the symbol “GPRO.” Our Class B common stock is not listed nor traded on any stock exchange.
We have registered and applied to register a number of trademarks with the United States Patent and Trademark Office and the trademark offices of other countries including “GOPRO,” “HERO” and the GoPro logos. This Annual Report on Form 10-K also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.
Our website address is www.gopro.com. Through a link on the Investor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available free of charge. The information posted on our website is not incorporated into this report. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Item 1A. Risk Factors
You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K before making an investment decision. The risk factors below do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. In that event, the trading price of our shares may decline, and you may lose part or all of your investment.
Risks related to our business and industry
We may not be able to achieve revenue growth or profitability in the future, and if revenue growth or profitability is achieved, we may not be able to sustain it.
Our historical results shouldcumulative GAAP income from the past three years may not be considered as indicative ofsustainable in future periods. We may not be able to achieve our future performance.forecast, sustain revenue growth or profitability, and our operating results may fluctuate unpredictably. For example, our annual revenue showed significant growth has been flat beginning in 2016, 2017 and 2018 with annual revenues of $1.185from 2020 to 2021 from $891.9 million to $1.16 billion,, $1.180 billion and $1.148 billion, respectively, and moderate growth in 2019 with respectively. In 2020, annual revenue of $1.195 billion.$891.9 million was negatively impacted by COVID-19. In addition, we incurred operating income of $39.0 million and $113.2 million and operating losses of $36.8 million for the full year in 2022, 2021 and 2020, respectively. In future periods, we could experience declines in revenue, or revenue could remain flat or grow more slowly than we expect, which could have a material negative effect on our future operating results.
We also incurred operating losses of $2.3 million, $94.0 millionand $163.5 million for the full year 2019, 2018 and2017, respectively. Lower levels of revenue, lower product margins or higher levels of operating expenseexpenses in future periods may result in additional losses or limited profitability. Since the fourth quarterWe may experience such lower levels of 2016,revenue, lower product margins or higher levels of operating expenses for a variety of reasons, including, among other factors: investments in product innovation, advertising and marketing; increasing freight rates; shipping delays; increased supply chain costs; impact of currency exchange rates; failure to maintain higher average sales pricing for our cameras; or a recession or other sustained adverse market event that materially impacts consumer purchases of discretionary items, such as our products.
Additionally, we have implemented three company-wide restructurings of our business resulting in a reduction in our global workforce and the elimination of certain open positions, consolidation of certain leased office facilities, as well as the elimination of several high-cost initiatives, including the closure of our aerial products business, in order to focus our resources on cameras, accessories, software and accessories, cloudsubscription and services businesses.service. For example, in connection with the emergence of the COVID-19 pandemic, we implemented a restructuring plan in April 2020 (the 2020 Restructuring Plan) to realign our workforce to areas of growth combined with certain cost saving measures which reduced our operating expenses in 2020. We may not realize further or sustain cost savings from these previous actions. We may continue to incur significant losses in the futureexperience fluctuating revenue, expenses and profitability for a number of reasons, including other risks described in this 2022 Annual Report, on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors.
An economic downturn or economic uncertainty in the United States and international markets, as well as inflation, increasing interest rates or fluctuations in currency exchange rates may adversely affect consumer spending and demand for our products, which could impact our operating results or financial position.
Factors affecting the level of consumer spending include general market conditions, macroeconomic conditions, tax rates, inflation, fluctuations in foreign exchange rates and interest rates, and other factors such as consumer confidence, the availability and cost of consumer credit, levels of unemployment and a reduction in consumer spending or disposable income that may affect us more significantly than companies in other industries and companies with more diversified products.
The majority of our sales occur in U.S. dollars and an increase in the value of the dollar against the Euro and other currencies could negatively impact our results. For example, a strengthening dollar relative to other currencies could increase the real cost to consumers of our products in those markets outside the United States, which could lower sales and/or cause us to reduce our selling price to retailers and distributors in those markets. If global economic conditions are volatile or deteriorate, consumers may delay or reduce purchases of our products resulting in lower consumer demand for our products such that we may not reach our sales targets. Some product costs have become subject to inflationary pressure and we may not be able to fully offset such higher costs through price increases; our inability or failure to offset any such higher costs as necessary could harm our business, financial condition, and operating results. Strengthening or weakening of the U.S. dollar relative to foreign currencies in which we conduct business could impact sales of our products, which could have a material impact on our operating results. For example, in 2022, the Euro, Japanese yen and British pound all experienced declines in value relative to the U.S. dollar, which negatively affected our results of operations during the second, third, and fourth quarter of 2022 when compared to the prior year periods and could continue to negatively impact our results of operations in future periods if the U.S. dollar strengthens relative to foreign currencies.
Our goal to grow revenue and be profitable relies upon our ability to grow unit sales from our GoPro.com channel and our retail partners and distributors.
Our ability to grow revenue and be profitable relies on several factors, including but not limited to, our ability to successfully implement certain strategic go to market initiatives. We have invested significant resources in our GoPro.com sales channel, and our future growth relies, in part, on our continued ability to attract consumers to this channel, which has and will require significant expenditures in marketing, software development and infrastructure. If we are unable to continue to drive traffic to, and increase sales through our website, our business and results of operations could be harmed.
Retail and distribution partners may perceive themselves to be at a disadvantage based on DTC sales offered through GoPro.com. Due to these and other factors, conflicts with our GoPro.com sales channel could arise and cause retail partners and distributors to divert resources away from the marketing, promotion, and sale of our products. For example, due to increased sales or promotions through GoPro.com, our retailers may decide not to adequately display our products, choose to reduce the space for our products and POP displays in their stores, or choose not to carry some or all of our products or promote competitors’ products over ours, and any reduction in sales or decreases in revenue by our current distributors and retailers or loss of key distributors or retailers could adversely affect our revenue, operating results and financial condition.
We may not be able to acquire and retain subscribers at all or at historical rates, which could adversely impact our results of operations and our ability to be profitable.
We have experienced continuous growth in our subscription service over the past several years. Our continued revenue growth and profitability is dependent on our ability to continuously attract and retain subscribers, and we cannot be certain that efforts to do so will be successful. Any changes to our subscription model could have an adverse effect on existing subscribers as well as in attracting new subscribers. There are many factors that could lead to slowing subscriber growth or a decline in subscribers, including a decline in camera sales, attach rates or retention rates, our failure to introduce new features, benefits, products, or services that customers desire, changes to existing products and services that are not favorably received by our customers, or pricing and perceived value of our offerings. A decline in subscribers could have an adverse effect on our business, financial condition, and operating results.
If our sales fall below our forecasts, especially during the holiday season, our overall financial condition and results of operations could be adversely affected.
Seasonal consumer shopping patterns significantly affect our business. We have traditionally experienced greater revenue in the fourth quarter of each year due to demand related to the holiday season, and in some years, including 2022, greater demand associated with the launch of new products heading into the holiday season. Fourth quarter revenue comprised 29%, 34% and 40% of our 2022, 2021 and 2020, revenue, respectively. Given the strong seasonal nature of our sales, appropriate forecasting is critical to our operations. We anticipate that this seasonal impact is likely to continue and any shortfalls in expected fourth quarter revenue due to macroeconomic conditions, the inflationary impact on consumers’ share of wallet, product release patterns, declines in the effectiveness of our promotional activities or product mix, charges incurred against new products to support promotional activities for such new products, pricing pressures, supply chain disruptions, shipping delays, or for any other reason, could cause our annual results of operations to suffer significantly.
In addition, we typically experience lower revenue in the first half of the year as a percentage of total revenue for the year, as compared to second half revenue. First half revenue comprised 43%, 39% and 28% of our annual 2022, 2021 and 2020, revenue, respectively.
We rely on third-party suppliers, some of which are sole-source suppliers, to provide services and components for our products which may lead to supply shortages and other services, long lead times for components, and supply changes, any of which could disrupt our supply chain or our operations and may increase our costs.
Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products. We do not have internal manufacturing capabilities and rely on several contract manufacturers, located in China and Thailand, to manufacture our products. All of the components that go into the
manufacturing of our cameras and accessories are sourced from third-party suppliers. We do not control our contract manufacturers or suppliers, including their labor, environmental or other practices.
Some of the key components used to manufacture our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules and such lead times could increase as a result of shipping disruptions, global conflicts (Ukraine), or other factors. We have in the past experienced and may in the future experience component shortages, and the availability of these components may be unpredictable, including as a result of global conflict and the COVID-19 pandemic.
If we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable to us, or at all, which may adversely affect our ability to meet our development requirements or to fill our orders in a timely or cost-effective manner.
We also rely on third-party distribution facilities and logistics operators for substantially all of our product distribution to distributors, retailers, and to consumers. Our distribution facilities include computer controlled and automated equipment, which means their operations may be vulnerable to computer viruses or other security risks, the proper operation of software and hardware, electronic or power interruptions or other system failures.
Our reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, component availability, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability to execute on, a supplier roadmap for components and technologies, and natural disasters, fire, acts of terrorism, global conflicts, pandemics or other catastrophic events.
In particular, for our camera designs we incorporate system on chips, sensors, lens, batteries and memory solutions that critically impact the performance of our products. These components have unique design and performance profiles, and as a result, it is not commercially practical to support multiple sources for these components for our products. For example, we incorporate the GP1 system on chip in MAX as well as our HERO9 and HERO8 Black cameras and the GP2 system on chip in our HERO11 Black, HERO11 Black Mini, HERO10 Black and HERO10 Black Bones cameras and rely on a single supplier as the primary supplier of our system on chips.
Additionally, we rely on third parties to provide software and enterprise services. For example, we host our software applications and firmware upgrades for our cameras using Amazon Web Services (AWS). A prolonged AWS service disruption affecting our subscription products would negatively impact our ability to serve our consumers and could damage our reputation with current and potential consumers, expose us to liability, cause us to lose consumers, or otherwise harm our business. In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we use, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to the GoPro or Quik subscription as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our solutions for deployment on a different cloud infrastructure service provider, which could materially adversely affect our business, results of operations and financial condition.
If we do not successfully coordinate or if we encounter issues with our manufacturers, suppliers, or supply chain, business, brand, and results of operations could be harmed and we could lose sales.
Our business requires us to coordinate the manufacture and distribution of our products. The ongoing COVID-19 pandemic and global conflicts have resulted in industry-wide global supply chain challenges, including manufacturing, transportation and logistics.If we do not successfully coordinate with our service providers, we
may have insufficient supply of products to meet customer demand, we could lose sales, incur additional costs, and our financial performance may be adversely affected.
The effect of seasonal demand fluctuations on supply chains, transportation costs, fuel costs, labor unrest, natural disasters, global conflicts, regional or global pandemics, and other adverse effects on our ability, timing and cost of delivering products can increase our inventory, decrease our margins, adversely affect our relations with distributors and other customers and otherwise adversely affect our results of operations and financial condition.
Environmental regulations or changes in the supply, demand or available sources of natural resources may affect the availability and cost of goods and services necessary to run our business. We require our contract manufacturers and suppliers to comply with our formal supplier code of conduct and relevant standards and have ongoing audit programs in place to assess our suppliers’ compliance with our requirements. We periodically conduct audits of our contract manufacturers’ and suppliers’ compliance with our code of conduct, applicable laws and good industry practices. However, these audits may not be frequent or thorough enough to detect non-compliance. Deliberate violations of labor, environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could lead to negative publicity and harm our reputation or brand.
As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including disruptions or delays in supply chain. During the course of the ongoing COVID-19 pandemic and as a result of governmental responses to the COVID-19 pandemic among other macroeconomic factors, certain of our suppliers and manufacturers have experienced disruptions, resulting in supply shortages and costs increases, staffing shortages, manufacturing facility closures, and similar disruptions could occur in the future. Any increases in the costs of goods and services for our business may also adversely affect our profit margins particularly if we are unable to achieve higher price increases or otherwise increase cost or operational efficiencies to offset the higher costs.
Our future growth depends, in part, on further penetrating our total addressable market, and we may not be successful in doing so.
OurHistorically, the majority of our growth historically has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities.activities and our subscription products to help those people create compelling edits to share with friends, family and followers. We believe that our future growth depends on continuing to reach and expand our core community of users,customers of our products and services, followers and fans, and then utilizing that energized community as brand ambassadors to an extended community.
We believe that in ordermay not be able to expand our market, we must provide both innovative and easy-to-use products, as well as intuitive and easy-to-use software tools that enable effortless editing and sharing of content, with the smartphone central to the GoPro experience. While we believe our software and subscription services will increase our total addressable market, weofferings and cannot be certain that these efforts will be successful.successful, and as a result, we may not be able to increase our total addressable market, revenue or operating profit. We may not be able to expand our market, revenue and gross margin through this strategy on a timely basis, or at all, or recognize the benefits of our investments in this strategy, and we may not be successful in providing tools that our users adopt or believe are easy to use.
We plan to further build upon our integrated storytelling solutions, such as the GoPro app, HERO8 Black camera, MAX and GoPro Plus subscription solution in future periods, and our investments in these products and solutions, including marketing and advertising expenses, may not successfully drive increases in sales of our products and our users may not adopt our new offerings. If we are not successful in broadening our user base to reach more of our core customers with our integrated solutions,use, which will negatively affect our future revenue growth will be negatively affected, and we
may not recognize benefits from our investments in the various components of our storytelling solutions, and the marketing, sales and advertising costs to promote our solution.growth.
Our growth also depends on expanding ourthe market with new capture perspectives with our 360-degree camera, MAX, our FPV (first person view) lightweight camera HERO10 Black Bones, and our all-in-one vlogging and filmmaking offering, HERO11 Black Creator Edition, which is a resource-intensive initiativeare initiatives in a highly competitive market,markets, and by adding versatility to our products with expansion mods for HERO8HERO11 Black, HERO10 Black, and HERO9 Black. While we are investing resources, including software development, sales and marketing, to reach these expanded and new consumer markets, weWe cannot be assured that we will be successful in doing so.expanding the market with new capture perspectives or by adding new versatility to our products. If we are not successful in penetrating additional markets, we might not be able to grow our revenue and we may not recognize benefits from our investment in new areas. For example, we made significant investments in the aerial market, but decided in the first quarter of 2018 to close our aerial business in light of difficult market and regulatory conditions, and margin challenges.
To remain competitive and stimulate consumer demand, we must effectively manage product introductions, product transitions, product pricing and marketing.
We believe that we must continually develop and introduce new products, enhance our existing products, anticipate consumer preferences, and effectively stimulate customerconsumer demand for new and upgraded products and services to maintain or increase our revenue. Our products and services are subject to changing consumer preferences that cannot be predicted with certainty and development lead times may make it more difficult for us
to respond rapidly to new or changing consumer preferences. The markets for our products and services are characterized by intense competition, evolving distribution models, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introductions.introductions. Additionally, increasing concern over climate change could also result in shifting customer preferences with respect to our products, including reduced demand for our products and services based on their environmental impact, such as recyclability of components or packaging and energy usage required to develop and manufacture our products.
The success of new product introductions, such as the HERO11 Black, HERO11 Black Creator Edition HERO11 Black Mini, and HERO10 Black Bones depends on a number of factors including, but not limited to, timely and successful research and development of next generation systems, pricing, market and consumer acceptance, the ability to successfully identify and originate product trends, effective forecasting and management of product demand, purchase commitments and inventory levels, availability of products in appropriate quantities to meet anticipated demand, ability to obtain timely and adequate delivery of components for our new products from third-party suppliers, management of any changes in major component suppliers, management of manufacturing and supply costs, management of risks and delays associated with new product design and production ramp-up issues, and the risk that new products may have quality issues or other defects or bugs in the early stages of introduction including testing of new parts and features.
Our research and development efforts are complex and require us to incur substantial expenses to support the development of our next generation cameras, editing applications and other products and services. Our research and development expenses were $139.9 million, $141.5 million, $131.6 million for 2022, 2021 and 2020, respectively and we expect that our research and development expenses will continue to be substantial in 2023 as we develop innovative technologies. Unanticipated problems in developing products could divert substantial resources, which may impair our ability to develop new products and enhancements of existing products, and could further increase our costs. We may not be able to achieve an acceptable return, if any, on our research and development efforts, and our business may be adversely affected. As we continually seek to enhance our products, we will incur additional costs to incorporate new or revised features. We might not be able to, or determine that it is not in our interests to, raise prices to compensate for any additional costs.
Additionally, as a result of the macroeconomic environment, we may not be able to accurately forecast consumer demand and inventory requirements and appropriately manage inventory to meet demand. For example, inflationary pressures may have an impact on consumers’ share of wallet or our ability to raise prices. With respect to management and supply costs, we may be impacted by heightened demand for specialty memory, components and batteries that are not supported by our manufacturing partners. Such supply shortages may affect our ability to manage appropriate supply levels of our products and pricing pressures may negatively affect our gross margins.
In addition, the introduction or announcement of new products or product enhancements may shorten the life cycle of our existing products or reduce demand for our current products, thereby offsetting any benefits of successful product introductions and potentially lead to challenges in managing inventory of existing products. For example, in 2017, the introduction of the HERO6 Black camera at $499, while keeping the price point of the HERO5 Black camera at $399, negatively affected consumer demand for HERO5 Black, and we ultimately reduced the price of HERO5 Black to increase channel sell through rates. The HERO5 Black price adjustment had a cascading effect that resulted in price reductions for HERO5 Session and ultimately HERO6 Black cameras. Reduced product margins resulting from lower price point products may decrease the number of retailers willing to offer and promote our product lineup. Failure to manage and complete product transitions effectively or in a timely manner could harm our brand and lead to, among other things, lower revenue, excess prior generation product inventory, or a deficit of new product inventory and reduced profitability. For example, as a result of reducing the price of our HERO5 Black cameras in December 2017 and HERO6 Black cameras in January 2018, we incurred price protection and marketing development funds charges which resulted in a reduction in our revenue, gross margins and operating profits.
Additionally, our brand and product marketing efforts are critical to stimulating consumer demand. We market our products globally through a range of advertising and promotional programs and campaigns, including social media. If we do not successfully market our products or plan the right promotions for the right products at the right time, the lack of success or increased costs of promotional programs could have an adverse effect on our business, financial condition and results of operations.
We depend on sales of our cameras, mounts and accessories for substantially all of our revenue, and any decrease in the sales or change in sales mix of these products could harm our business.
We expect to derive the majority of our revenue from sales of cameras, mounts and accessories for the foreseeable future.future and an increasing amount of revenue attributable from our software and services. A decline in the price or unit demand for these products, whether due to a strategic shift in sales channel strategy and macroeconomic conditions, including variable tariff rates, competition or otherwise, or our inability to increase sales of higher price point products, would harm our business and operating results more seriously than it would if we derived significant revenue from a variety of product lines and services. In particular, a decline in the price or unit demand of our HERO camera line or MAX camera, or our inability to increase sales of these products, could
materially harm our business and operating results. Further, any delays or issues with our new product launches could have a material adverse effect on our business, financial condition and results of operations.
We face substantial risks related to inventory, purchase commitments and long-lived assets, and we could incur material charges related to these items that adversely affect our operating results.
To ensure adequate inventory supply and meet the demands of our retailers and distributors, we must forecast inventory needs and place orders with our contract manufacturers and component suppliers based on our estimates of future demand for particular products as well as accurately track the level of product inventory in the channel to ensure we are not in an over or under supply situation. To the extent we discontinue the manufacturing and sales of any products or services, we must manage the inventory liquidation, supplier commitments and customer expectations.
No assurance can be given that we will not incur additional charges in future periods related to our inventory management or that we will not underestimate or overestimate forecasted sales in a future period. Our ability to accurately forecast demand for our products is affected by many factors, including product introductions by us and our competitors, channel inventory levels, unanticipated changes in general market demand, macroeconomic conditions, including inflation or recession, and consumer confidence. If we do not accurately forecast customer demand for our products, we may in future periods be unable to meet consumer, retailer or distributor demand for our products, or may be required to incur higher costs to secure the necessary production capacity and components, and our business and operating results could be adversely affected.
Security and data breaches and cyberattacks could disrupt our web platform, products, services, internal operations, information technology systems, or those of our strategic partners, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation, and cause our stock price to decline significantly.
We are increasingly dependent on information systems to process transactions, manage our supply chain and inventory, ship goods on a timely basis, maintain cost-efficient operations, complete timely and accurate financial reporting, operate GoPro.com and respond to customer inquiries.Cyber-attacks may threaten our information systems and are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Despite the implementation of security measures designed to protect against such threats, our information technology systems, and those of our strategic partners and third parties on whom we rely, are vulnerable to cyber-attacks, security breaches, computer viruses damage, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures.
Our products, services and operating systems may contain unknown security vulnerabilities. For example, duethe firmware and software that are installed on our products may be susceptible to a late stage production delay,hacking or misuse, or we shifted the launch of the GoPro HERO8 Black camera from Q3 2019 to Q4 2019 resulting in a material shift of revenue from Q3 2019 to Q4 2019. This product delay shortened the timeframe for holiday season sales and resulted in overall lower 2019 financial performance comparedmay experience disruptions to our expectations.
WhileGoPro.com platform. In addition, we have developed and releasedoffer a comprehensive online cloud management service through our GoPro subscription. If malicious actors compromise our products and services, including without limitation hacking or breach of such products and services, our business and our reputation will be harmed.
In the ordinary course of our business, we electronically maintain sensitive data, including intellectual property, our proprietary business information and that of our customers and suppliers, and personally identifiable information of our customers and employees. We store and collect user data uploaded by users through the GoPro cloud, mobile and desktop apps and through certain marketing activities. For all of the foregoing, we collect and store that information in our or our third-party providers’ systems. These systems may be targets of attacks, malware, viruses or phishing attempts by cyber criminals or other wrongdoers seeking to addsteal our users’ content or data, or our customer’s information for financial gain or to harm our business operations or reputation.
Any security breach, unauthorized access or usage, or similar breach or disruption of our systems, or the systems of third parties on which we rely including web hosting services, billing and payment processing, or software could result in a disruption to our offerings,business or the loss of confidential information, costly investigations, remediation efforts and costly notification to affected consumers. If such content were accessed by unauthorized third parties or deleted inadvertently by us or third parties, our brand and reputation could be adversely affected. Cyberattacks
could also adversely affect our operating results, consume internal resources and result in litigation or potential liability for us and otherwise harm our business and our reputation.
While we maintain industry standard cybersecurity insurance, our insurance may be insufficient for a particular incident or may not cover all liabilities incurred by any such attacks. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, litigation to pursue claims under our insurance policies or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, reputation, operating results and financial condition. The increase in remote working may also result in heightened risks related to consumer privacy, network security and fraud. System disruptions, failures and slowdowns, whether caused by cyberattacks, update failures or other causes, could affect our financial systems and operations. This could cause delays in our supply chain or cause information, including data related to customer orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales, especially if the disruption or slowdown occurred during our quarters of peak demand.
Our international operations account for a significant portion of our revenue and operating expenses and are subject to challenges and risks.
Revenue from outside the United States comprised 59%, 55% and 52% of our revenue in 2022, 2021 and 2020, respectively, and we expect international revenue to continue to be significant in the future. Further, we currently have foreign operations in China, France, Germany, Hong Kong, Japan, Netherlands, Philippines, Romania, United Kingdom and a number of other countries in Europe and Asia. Operating in foreign countries requires significant resources and considerable management attention, and we may enter new geographic markets where we have limited or no experience in marketing, selling, and deploying our products. International expansion has required and will continue to require us to invest significant funds and other resources and we cannot be assured our efforts will be successful. International sales and operations may be subject to risks such as:
•difficulties in staffing and managing foreign operations;
•burdens of complying with a wide variety of laws and regulations, including environmental, packaging and labeling;
•delays or disruptions in our supply chain;
•adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
•changes to the taxation of undistributed foreign earnings;
•the effect of foreign currency exchange rates and interest rates, including any fluctuations caused by, inflation, recessionary concerns or the strengthening of the U.S. dollar relative to the foreign currencies in which we conduct business;
•political, economic instability, or social unrest in a specific country or region in which we operate, including, for example, the effects of Brexit, which could have an adverse impact on our operations in that location;
•organized crime activity;
•terrorist activities, acts of war, natural disasters, and pandemics, including the COVID-19 pandemic;
•wars and global conflicts, including the war in Ukraine;
•quarantines or other disruptions to our operations resulting from pandemics or other widespread public health problems;
•trade restrictions;
•the effects of climate change;
•differing employment practices and laws and labor disruptions;
•the imposition of government controls;
•lesser degrees of intellectual property protection;
•tariffs and customs duties and the classifications of our goods by applicable governmental bodies;
•a legal system subject to undue influence or corruption; and
•a business culture in which illegal sales practices may be prevalent.
The occurrence of any of these risks could negatively affect our international business and consequently our business, operating results and financial condition.
We depend on key personnel and qualified personnel to operate our business. If we are unable to attract, engage and retain qualified personnel, our ability to develop, transform and successfully operate our business could be harmed.
We believe that our future success is highly dependent on the contributions of our CEO and our executive officers, as well as our ability to attract and retain highly skilled and experienced research and development and other personnel in the United States and abroad. All of our employees, including our executive officers, are free to terminate their employment relationship with us at any time, and their knowledge of our business and industry may be difficult to replace.
We have implemented global reductions-in-force and restructuring actions to reduce our operating expenses. Our past restructuring actions and any future restructuring actions could have an adverse effect on our business as a result of decreases in employee morale and the failure to meet operational targets due to the loss of employees. If key employees leave, we may not be able to fully integrate new personnel or replicate the prior working relationships, and our operations could suffer as a result.
Qualified individuals are in high demand, and we may incur significant costs to attract and retain them including circumstances beyond our control, including increased wages due to inflation, increasing competition among employers in the prevailing labor market, and labor market constraints. We have limited control over these factors. Competition for qualified personnel is intense generally and particularly in the San Francisco Bay Area, where our headquarters are located. In particular, we compete with many other companies for skilled positions and we may not be successful in achieving future revenue growth driven by newly released productsattracting and services. For example,retaining the professionals we promoted GoPro Plus,need. While we utilize competitive salary, bonus and long-term incentive packages to recruit new employees, many of the companies with which we compete for experienced personnel also have greater resources to do so.
We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Additionally, the shift to a work from home environment may impact our subscription serviceability to attract and retain our highly skilled employees.
Further, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Fluctuations in the price of our HERO8, HERO7Class A common stock may make it more difficult or costly to use equity compensation to motivate, incentivize and MAX camera lineup,retain our employees. For example, during 2022, our closing stock price ranged from a high of $10.91 in the first quarter to allow consumersa low of $4.76 in the fourth quarter. If we are unable to auto upload content to the cloudattract and make edits within the GoPro app editing solution. If all the components of the storytelling solutions do not work together seamlessly or our users do not adopt them, theyretain highly skilled personnel, we may not drive camera salesbe able to achieve our strategic objectives, and our business, financial condition and operating results could be adversely affected. In addition, we have been and will continue to expend resources to further innovate and deliver editing and sharing software solutions. If the software does not function as expected or users do not adopt our solution, sales of our MAX camera may be negatively affected. We cannot be assured that our investments in the development of software-related products and services will
Our gross margin can vary significantly depending on multiple factors, which can result in either increased revenue or profit. Changesunanticipated fluctuations in our operating results.
Our gross margin can vary due to consumer demand, competition, product pricing, product lifecycle, product mix, may harmnew product introductions, GoPro.com sales mix, subscription activation, renewals, and cancellations, commodity costs, supply chain, logistics costs and shipping costs, currency exchange rates, trade policy and tariffs, and the complexity and functionality of new product innovations and other factors. For example, our financial results. If there is a shift in consumer demand from our higher-pricedgross margin was 37.2%, 41.1% and 35.3% for 2022, 2021 and 2020, respectively. In particular, if we are not able to lower-priced cameras without a corresponding increase in units sold, our revenues and gross profit could decrease and losses could result.
As a result, our future growth and financial performance may continue to depend heavily on our ability to develop and sell enhanced versions of our cameras, mounts and accessories. If we fail to deliver product enhancements, new releases orintroduce new products and services that appeal to consumers, our future financial condition, operating results and cash flows will be materially affected. Product introductions may not always be successful and could be costly to develop and exitin a timely manner at the product cost we expect, or if ultimately unsuccessful. For example, we invested significant resources in development, marketing and support for the launch of our Karma drone, which we subsequently determined faced margin challenges and other obstacles, and we exited the aerial business in 2018.
We rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain and may increase our costs.
Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products. All of the components that go into the manufacturing of our cameras and accessories are sourced from third-party suppliers.
Some of the key components used to manufacture our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have in the past experienced and may in the future experience component shortages, and the availability of these components may be unpredictable.
If we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely affected. In addition, if we experience a significant increase inconsumer demand for our products our suppliers might not have the capacityis less than we anticipate, or elect not to meet our needs as they allocate components to other customers. Developing suitable alternateif cancellation rates for GoPro subscriptions are higher than expected or if there are product
sources of supply for these components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable to us, or at all, which may adversely affect our ability to meet our development requirements or to fill our orders in a timely or cost-effective manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service, financial stability, laborpricing, marketing and other ethical practices, and if we seekinitiatives by our competitors to source materials from new suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.
Our reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability to execute on, a supplier roadmap for components and technologies; and natural disasters, fire, acts of terrorism or other catastrophic events.
In particular, for our camera designs, we incorporate image processors, sensors, lens, batteries and memory solutions that critically impact the performance of our products. These components have unique performance profiles, and, as a result, it is not commercially practical to support multiple sources for these components for our products. For example, we incorporate the GP1 image signal processor from Socionext, Inc. in MAX as well as our HERO8 and HERO7 Black cameras and rely on Socionext as the primary supplier of our processors. If other suppliers of image processors become more advanced in performance or more competitive in cost, we may be placed at a disadvantage and not be able to continue improving our product performance as quickly or as competitively as planned. We do not currently have alternative suppliers for several key components. In addition, our products also require passive components such as resistors and multi-layer ceramic capacitors which may experience supply shortages and lengthening lead-times within the consumer electronics industry and may impact our supply chain. In the event that any of our key suppliers are unable to supply the components that we need to producereact or that are initiated by us to drive sales that lower our margins, then our overall gross margin will be less than we project.
As we innovate with new products, we may have lower gross margins that do not deliver a sufficient return on investment. In addition, depending on competition or consumer preferences, we may face higher up-front investments in development to compete or market our products, to meet anticipated customer demand, our business would be materially and adversely affected.
increased inventory write-offs. If we are unable to anticipate consumer preferences and successfully develop desirable products and solutions, we may not be able to maintain or increaseoffset these potentially lower margins by enhancing the margins in our revenue and achieve profitability.
Our success depends onproduct categories, our ability to identify and originate product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty and lead times for our products may make it more difficult for us to respond rapidly to new or changing product or consumer preferences. Additionally, our products are discretionary items for consumers subject to changing preferences. The overall market for consumer electronics is highly competitive and consumers may choose to spend their dollars on products or devices offered by our competitors or other consumer electronics companies instead of on GoPro products, which may adversely affect our sales. If we are unable to introduce appealing new products or novel technologies in a timely manner, or our new products or technologies are not accepted or adopted by consumers, our competitors may increase their market share, which could hurt our competitive position.
Our research and development efforts are complex and require us to incur substantial expenses to support the development of our next generation cameras, editing applications and other products and services. Our research and development expenses were $142.9 million, $167.3 million and $229.3 million for 2019, 2018 and 2017, respectively. We expect that our research and development expenses will continue to be substantial in 2020, and increase compared to 2019 as we develop innovative technologies. While we expect research and development to increase year-over-year, our budgets are constrained in 2020 and may require us to forego investment in certain products or features which might have been successful had we invested in them, and we may not choose the right features, products, or services to update or enhance. Unanticipated problems in developing products could also divert substantial resources, which may impair our ability to develop new products and enhancements of existing products, and could further increase our costs. We may not be able to achieve an acceptable return, if any, on our research and development efforts, and our businessprofitability may be adversely affected. As we continually seek to enhance our products, we will incur additional costs to incorporate new or revised features. We might not be able to, or determine that it is not
The impact of these factors on gross margin can create unanticipated fluctuations in our interests to, raise prices to compensate for any additional costs.
operating results, which may cause volatility in the price of our shares.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can. New entrants also enter ourthe digital imaging market category from time-to-time. These market factors could result in a loss of our market share and a decrease in our revenue and profitability.
The digital imaging market for cameras is highly competitive. Further, competition has intensified in digital imaging as new market entrants and existing competitors have introduced new products and more competitive offerings into our markets. Increased competition, tariffs, and changing consumer preferences may result in pricing pressures, reduced profit margins and may impede our ability to continue to increase the sales of our products or cause us to lose market share, any of which could substantially harm our business and results of operations.
We compete against established, well-known camera manufacturers such as Canon Inc. and Nikon Corporation, as well as large, diversified electronics companies such as Samsung Electronics Co. and Sony Corporation, and specialty companies such as Garmin Ltd., the Ricoh Company, Ltd., Shenzhen Arashi Vision Co., Ltd. and SZ DJI Technology Co., Ltd. Many of our competitors have substantial market share, diversified product lines, well-established supply and distribution systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do. Additionally, many of our existing and potential competitors enjoy substantial competitive advantages, such as longer operating histories; the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products; broader distribution and established relationships with channel partners or vertically integrated business units; access to larger established customer bases; greater resources to make acquisitions; larger intellectual property portfolios; and the ability to bundle competitive offerings with other products and services. Further, new companies may emerge and offer competitive products directly in our category. We are aware that certainCertain companies have developed cameras designed and packaged to appear similar to our products, which may confuse consumers or distract consumers from purchasing GoPro products.
Moreover, smartphones and tablets with photo and video functionality have significantly displaced the market for traditional cameras, and the makers of those devices also have mobile and other content editing applications and storage for content captured with those devices. We continue to focus on the value proposition of theOur software application, and GoPro mobile application by introducing new features and benefits that we believe will enable customers to edit and share their content easily. The GoPro app, GoPro desktop editing solution and the GoPro PlusQuik subscription serviceproducts may not be as compelling of a solution as those offered by other companies, such as Apple, Adobe or Google, although the GoProQuik application supports content from other platforms including content from iOS and Android. Manufacturers of smartphones and tablets, such as Apple, Google and Samsung may continue to design their products for use in a range of conditions similar to our products, including challenging physical environments and waterproof capabilities, or develop products with features similar to ours.
If We rely in part on application marketplaces, such as the e-commerce technology systems that giveApple App Store and Google Play, to distribute our consumersmobile and desktop apps. Apple and Google may raise commissions, change or modify rules or functionality for apps on the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our digital e-commerce business globally, could be materially adversely affected.
Our sales through gopro.com represent an increasing percentage of our revenue and we are focused on continuing to accelerate the growth of our e-commerce sales. Revenue from gopro.com represented more than 10% of revenue in the fourth quarter and full year 2019. Additionally, we expect to continue to increase sales through gopro.com as well as further converting portions of our distributors’ business into direct sales. Should we continue to pursue this strategy on a larger scale, it could create significant disruptionsmarketplaces, or make access to our distribution channel and the associated revenue. As we continue to convert distribution to direct sales, we might not be successful in the transition to increase e-commerce sales or direct to retail sales. Additionally, any reduction in sales by our current distributors, loss of key distributors or decrease in revenue from our distributorsapps more difficult, which could adversely affect our revenue, operating results and financial condition.
Any failure to provide effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations.
Any system interruptions or delays to our e-commerce business could cause potential consumers to fail to purchase our products, and could harm our reputation and brand. The operation of our direct to consumer e-commerce business through gopro.com depends on our ability to maintain an efficient and uninterrupted operation of online order-taking and fulfillment operations. Our e-commerce operations subject us to certain risks that could have an adverse effect on our operating results, including risks related to the technology systems that operate gopro.com and related support systems, such as system failures, viruses, cyberattacks, computer hackers and similar disruptions. If we or our designated third-party contractors are unable to maintain and upgrade gopro.com, or if we encounter system interruptions or delays, our operating results could be adversely affected.
Our gross margins can vary significantly depending on multiple factors, which can result in unanticipated fluctuations in our operating results.
Our gross margins can vary due to consumer demand, competition, product pricing, product lifecycle, product mix, new product introductions, commodity, supply chain and logistics costs, currency exchange rates, trade policy and tariffs, and the complexity and functionality of new product innovations and other factors. For example, our gross margin was 34.6%, 31.5% and 32.6% for 2019, 2018 and 2017, respectively. In particular, if we are not able to introduce new products in a timely manner at the product cost we expect, or if consumer demand for our products is less than we anticipate, or if there are product pricing, marketing and other initiatives by our competitors to which we need to react or that are initiated by us to drive sales that lower our margins, then our overall gross margin will be less than we project. For example, due to a late stage production delay, we shifted the launch of the GoPro HERO8 Black camera from Q3 2019 to Q4 2019, resulting in a material shift of revenue from Q3 2019 to Q4 2019 and a corresponding impact on our gross margin.
As we innovate with new products, we may have lower gross margins that do not deliver a sufficient return on investment. In addition, depending on competition or consumer preferences, we may face higher up-front investments in development to compete or market our products, and increased inventory write-offs. If we are unable to offset these potentially lower margins by enhancing the margins in our product categories, our profitability may be adversely affected.
The impact of these factors on gross margins can create unanticipated fluctuations in our operating results, which may cause volatility in the price of our shares.
We depend on key personnel to operate and grow our business. If we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow and operate our business could be harmed.
We believe that our future success is highly dependent on the contributions of our CEO and our executive officers, as well as our ability to attract and retain highly skilled and experienced research and development, sales and marketing and other personnel in the United States and abroad. All of our employees, including our executive officers, are free to terminate their employment relationship with us at any time, and their knowledge of our business and industry may be difficult to replace.
Since the fourth quarter of 2016, we implemented three global reductions-in-force and restructuring actions to reduce our operating expenses. TheseAdverse changes and any future changes, in our operations and management team could be disruptive to our operations. Our restructuring actions and any future restructuring actions could have an adverse effect on our business as a result of decreases in employee morale and the failure to meet operational targets due to the loss of employees. If key employees leave, we may not be able to fully integrate new personnel or replicate the prior working relationships, and our operations could suffer.
Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. While we utilize competitive salary, bonus and long-term incentive packages to recruit new employees, many of the companies with which we compete for experienced personnel also have greater resources than we do. Competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Fluctuations in the price of our Class A common stock may make it more difficult or costly to use equity
compensation to motivate, incentivize and retain our employees. For example, during 2019, our closing stock price ranged from a high of $7.55 in the second quarter to a low of $3.38 in the fourth quarter. If we are unable to attract and retain highly skilled personnel, we may not be able to achieve our strategic objectives, and our business, financial condition and operating results could be adversely affected.
If our sales fall below our forecasts, especially during the holiday season, our overall financial condition and results of operations could be adversely affected.
Seasonal consumer shopping patterns significantly affect our business. We have traditionally experienced greater revenue in the fourth quarter of each year due to demand related to the holiday season, and in some years, including 2018, demand associated with the launch of new products heading into the holiday season. Fourth quarter revenue comprised 44%, 33% and 28% of our 2019, 2018 and 2017 revenue, respectively. Given the strong seasonal nature of our sales, appropriate forecasting is critical to our operations. We anticipate that this seasonal impact is likely to continue and any shortfalls in expected fourth quarter revenue, due to macroeconomic conditions, product release patterns, a decline in the effectiveness of our promotional activities, product mix, charges incurred against new products to support promotional activities, pricing pressures, supply chain disruptions, or for any other reason, could cause our annual results of operations to suffer significantly. For example, due to a late stage production delay, our launch timing shifted for our HERO8 Black camera from Q3 2019 to Q4 2019 resulting in a material shift of revenue between Q3 2019 to Q4 2019. This product delay shortened the timeframe for holiday season sales and resulted in overall lower 2019 financial performance compared to our expectations.
In addition, we typically experience lower revenue in the first half of the year. For example, revenue of $535.1 million for the first half of 2019 decreased by $128.2 million, or 19%, compared to revenue of $663.3 million in the last half of 2018. First half revenue comprised 45%, 42% and 44% of our annual 2019, 2018 and 2017 revenue, respectively.
In contrast, a substantial portion of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses, which are not seasonal in nature. Furthermore, our customers may adjust their purchasing habits as a result of external events such as tariff avoidance or tariff impact that could result in a lower predictability of revenue. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate a negative impact on operating margins in the short term.
Changes to trade agreements, trade policies, tariffs and import/export regulations may have an adversea negative effect on our business and results of operations.
The United States and other countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty, tariff levels, or export or other licensing requirements. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs
and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of products, including components and materials, available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations. We are dependent on international trade agreements and regulations. If the United States were to withdraw from or materially modify certain international trade agreements, our business and operating results could be materially and adversely affected.
We do not have internal manufacturing capabilities and rely on several contract manufacturers, including component vendors, located in China, Thailand and Mexicoin other countries to manufacture our products. Our contract manufacturer locations expose us to risks associated with doing business globally, including risks related to changes in tariffs or other export and import restrictions, and increased security costs. Additionally, the current United States administration continues to signal that it may continue to alter global trade agreements and terms. For example, the United States imposed additional tariffs on imports from China and continues to potentially impose other restrictions on exports from China to the United States. The Office of the United States Trade Representative (USTR) recently identified certain Chinese imported goods for additional tariffs to address China’s trade policies and practices. Any announcement by the USTR to impose tariffs on GoPro cameras could have a material
adverse effect on our United States bound production, business and results of our United States operations. If these duties are imposed on our cameras, we may be required to raise our prices, which may result in the loss of customers and harm our business and results of operations.operations, or we may choose to pay for these tariffs without raising prices which may negatively impact our results of operations and profitability. Sales of our products in China are material to our business and represent a significant portion of our revenue. This revenue stream from China is at risk in the event China imposes retaliatory tariffs impacting in-bound sales of our products or imposes any other export restrictions on our products.
Beginning in the second half of 2019, we shifted most of our United States bound camera production from China to Mexico. Shifting United States bound camera production to Mexico may not be successful due to the timing of implementing changes such as recreating a new supply chain and identifying substitute components in new manufacturing locations, and we may not be successful in reducing our costs, or off-setting the impact of tariffs due to other potential tariffs. Additionally, we may not succeed at lowering potential tariff rates on United States bound production manufactured in Mexico due to the ongoing negotiations and congressional confirmation of the United States Mexico Canada Agreement and compliance with that Agreement. We continue to monitor manufacturing capabilities outside of China and currently manufacture certain cameras in Thailand to mitigate risks of additional tariffs, duties or other restrictions on our products destined for the United States and may decidechoose to transition more manufacturing outside of China.
We face substantial risks related to inventory, purchase commitments and long-lived assets, and we could incur material charges related to these items that adversely affect our operating results.
To ensure adequate inventory supply and meet the demands of our retailers and distributors, we must forecast inventory needs and place orders with our contract manufacturers and component suppliers based on our estimates of future demand for particular products as well as accurately track the level of product inventory in the channel to ensure we are not in an over or under supply situation. To the extent we discontinue the manufacturing and sales of any products or services, we must manage the inventory liquidation, supplier commitments and customer expectations. For example, in 2018, we exited the aerial business, but still had inventory of our Karma drone, which we sold throughout 2018. Also, in the fourth quarter of 2017, we recorded product charges of $5 million for excess purchase order commitments, excess inventory, and obsolete tooling, relating to the end-of-life of our former entry-level HERO product, slower than anticipated overall demand, and for excess inventory relating to the end-of-life of our REMO accessory.
No assurance can be given that we will not incur additional charges in future periods related to our inventory management or that we will not underestimate or overestimate forecasted sales in a future period. Our ability to accurately forecast demand for our products is affected by many factors, including product introductions by us and our competitors, channel inventory levels, unanticipated changes in general market demand, macroeconomic conditions and consumer confidence. If we do not accurately forecast customer demand for our products, we may in future periods be unable to meet consumer, retailer or distributor demand for our products, or may be required to incur higher costs to secure the necessary production capacity and components, and our business and operating results could be adversely affected.
If we fail to manage our operating expenses effectively, our financial performance may suffer.
Our success will depend in part upon our ability to manage our operating expenses, including but not limited to our cash management, effectively. We generated positive operating income for the full year of 2022 and 2021, though we incurred significant operating losses in 2018 and 2017 and, as2020. As of December 31, 2019,2022, we had an accumulated deficit of $583.7$196.1 million. Beginning in the fourth quarter of 2016 through the first quarter of 2018, weWe have implemented three global reductions-in-force and other restructuring actions to reduce our operating expenses. Although we plan to seek to operate efficiently and to manage our costs effectively, weWe may not realize the cost savings expected from thesecost reduction actions.
We will need to continue to maintain and improve our operational, financial and management controls, reporting processes and procedures, and financial and business information systems. We are also investing in areas we believe will grow revenue and our operating expenses might increase as a result of these investments. If we are unable to operate efficiently and manage our costs, we may continue to incur significant losses in the future and may not be able to maintain or achieve profitability.
A small number of retailers and distributors account for a substantial portion of our revenue, and if our relationships with any of these retailers or distributors were to be terminated or the level of business with them significantly reduced, our business could be harmed.
Our ten largest third-party customers, measured by the revenue we derive from them, accounted for 41%, 46% and 44% of our revenue in 2022, 2021 and 2020, respectively. One retailer accounted for 8%, 11% and10% of our revenue for 2022, 2021 and 2020, respectively. The loss of a small number of our large customers, or the reduction in business with one or more of our large customers, could have a significant adverse effect on our operating results. In the future, in response to unfavorable market conditions or consumer demand,addition, we may again needchoose to strategically realigntemporarily or permanently stop shipping product to customers who do not follow the policies and guidelines in our resources, adjust our product line and/or enact price reductions in order to stimulate demand, and implement additional restructurings and workforce reductions. For example, in the fourth quarter of
2017 and first quarter of 2018, we reduced the pricingsales agreements, which could have a material negative effect on our entire camerarevenues and operating results. Our sales agreements with these large customers do not require them to purchase any meaningful amount of our products annually and we grant limited rights to return product line to increase consumer demand, closedsome of these large customers.
Our success depends on our aerial products business dueability to unfavorable market conditions,maintain the value and implemented a workforce reduction. Any such actions may result inreputation of our brand.
Our success depends on the recordingvalue and reputation of chargesour brand, including inventory-related write-offs, or other restructuring costs. Additionally, our estimates with respectprimary trademarks “GOPRO,” “HERO,” and the GoPro logos. The GoPro brand is integral to the useful life or ultimate recoverabilitygrowth of our assets,business and expansion into new markets. Maintaining, promoting and positioning our brand will largely depend on the success of our marketing and merchandising efforts, including purchased intangible assetsthrough establishing relationships with high profile sporting and tooling,entertainment events, venues, sports leagues and sports associations, athletes and celebrity personalities, our ability to provide consistent, high quality products and services, and our consumers’ satisfaction with the technical support and software updates we provide, each of which requires significant expenditures. Failure to grow and maintain our brand, launch new products on schedule and free of defects or negative publicity related to our products, our consumers’ user-generated content, the athletes we sponsor, the celebrities we are associated with, or the labor policies of any of our suppliers or manufacturers could adversely affect our brand, business and operating results. Maintaining and enhancing our brand also changerequires substantial financial investments, although there is no guarantee that these investments will increase sales of our products or positively affect our operating results.
Consumers may be injured while engaging in activities with our products, and resultwe may be exposed to claims, or regulations could be imposed, which could adversely affect our brand, operating results and financial condition.
Consumers use our cameras, and their associated mounts and accessories to self-capture their participation in impairment charges.
a wide variety of physical activities, including extreme sports, which in many cases carry the risk of significant injury or death. We may be subject to claims that users have been injured or harmed by or while using our products, including false claims or erroneous reports relating to safety, security or privacy issues. Although we maintain insurance to help protect us from the risk of such claims, such insurance may not be ablesufficient or may not apply to secure additional financing on favorable terms, orall situations. Similarly, proprietors of establishments at all, to meet our future capital needs.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine towhich consumers engage in equity or debt financings or enter into credit facilities for other reasons. We may not be ablechallenging physical activities could seek to timely secure additional financing on favorable terms, or at all. For example, our current credit facility contains restrictive covenants relating to our capital raising activities and other financial and operational matters, and any debt financing obtained by us inban the future could involve further restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Further, even if we are able to obtain additional financing, we may be required to use such proceeds to repay a portion of our debt. If we raise additional funds throughproducts in their facilities to limit their own liability. In addition, if lawmakers or governmental agencies were to determine that the issuanceuse of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution. If we are unable to obtain adequate financing under our credit facility, or alternative sources, when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Data protection breaches and cyberattacks could disrupt our products services, internal operations,increased the risk of injury or information technology systems, and any such disruption could reduceharm to all or a subset of our expected revenue,users or should otherwise be restricted to protect consumers, they may pass laws or adopt regulations that limit the use of our products or increase our expenses, damage our reputation, and cause our stock price to decline significantly.
Our products, services and operating systems may contain unknown security vulnerabilities. For example,liability associated with the firmware and software that are installed on our products may be susceptible to hacking or misuse. In addition, we offer a comprehensive online cloud management service, GoPro Plus, which can be paired with our cameras. If malicious actors compromise the GoPro Plus service, or if customer confidential information stored in the Plus service is accessed without authorization, our business will be harmed.
In operating GoPro Plus, we rely on third-party providers for a number of critical aspects for GoPro Plus services, including web hosting services, billing and payment processing and consequently, we do not maintain direct control over the security or stability of the associated systems. If we or anyuse of our third-party providers are unable to successfully prevent breachesproducts. Any of security relating to our operating systems, products, services, or user private information, including user videos and user personal identification information, or if third-party systems which we rely upon to operate fail for other reasons, we may need to spend increasing amounts of time and effort in this area. As a result, wethese events could incur substantial expenses, our brand and reputation could suffer and our business, results of operations and financial condition could be materially adversely affected.
Interruptions with the cloud-based systems that we use in our operations, provided by an affiliate of Amazon.com, Inc. (Amazon), may materially adversely affect our business,brand, operating results of operations and financial condition.
We host the GoPro app, GoPro Plus, GoPro Awards, our website account sign up, and login and firmware upgrades for our cameras using Amazon Web Services (AWS) data centers, a provider of cloud infrastructure services, and may in the future use other third-party cloud-based systems in our operations. Accordingly, our operations depend on protecting the virtual cloud infrastructure hosted in AWS by maintaining its configuration, architecture, features, and interconnection specifications, as well as the information stored in these virtual data centers and which third-party internet service providers transmit. Any incident affecting their infrastructure that may be caused by human error, fire, flood, severe storm, earthquake, or other natural disasters, cyberattacks, terrorist or other attacks, and other similar events beyond our controlsubject to warranty claims that could negatively affect the GoPro Plus service. A prolonged AWS service disruption affecting our GoPro Plus service for any of the foregoing reasons would negatively impact our ability to serve our consumers and could damage our reputation with current and potential consumers, expose us to liability, cause us to lose consumers, or otherwise harm our business. We may
also incur significant costs for using alternative equipment or taking other actionsresult in preparation for, or in reaction to, events that damage the AWS services we use. Further, if we were to make updates to GoPro Plus that were not compatible with the configuration, architecture, features, and interconnection specifications of the third-party platform, our service could be disrupted.
In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we use, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to GoPro Plus as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our solutions for deployment on a different cloud infrastructure service provider, which could materially adversely affect our business, results of operations and financial condition.
The reputation of our services may be damaged, and we may face significant direct or indirect costs, decreased revenue and operating margins if our services contain significant defects or fail to perform as intended.
The GoPro Plus and GoPro app platforms are complex and may not always perform as intended due to outages of our systems or defects affecting our services. System outageswe could be disruptive to our business and damage the reputation of our services and result in potential loss of revenue. Significant defects affecting our services may be found following the introduction of new software or enhancements to existing software or in software implementations in varied information technology environments. Internal quality assurance testing and end-user testing may reveal service performance issues or desirable feature enhancements that could lead us to reallocate service development resources or postpone the release of new versions of our software. The reallocation of resources or any postponement could cause delays in the development and release of future enhancements to our currently available software, damage the reputation of our services in the marketplace and result in potential loss of revenue. Although we attempt to resolve all errors that we believe would be considered serious by our partnersexperience greater returns from retailers and customers the software powering our services is not error-free. Undetected errors or performance problems may be discovered in the future, and known errors that we consider minor may be considered serious by our channel partners and consumers. System disruptions and defects in our servicesthan expected, which could result in lost revenue, delays in customer deployment, or legal claims and could be detrimental to our reputation.
An economic downturn or economic uncertainty in our key United States and international markets, as well as fluctuations in currency exchange rates may adversely affect consumer discretionary spending and demand for our products.
Factors affecting the level of consumer spending include general market conditions, macroeconomic conditions, tax rates, fluctuations in foreign exchange rates and interest rates, and other factors such as consumer confidence, the availability and cost of consumer credit, and levels of unemployment. Additionally, Brexit has created economic and political uncertainty, including volatility in global financial markets and the value of foreign currencies. The impact of Brexit depends on the terms of the United Kingdom’s withdrawal from the European Union and such impact may not be fully realized for several years or more. The majority of our sales occur in U.S. dollars and an increase in the value of the dollar against the Euro and other currencies could increase the real cost to consumers of our products in those markets outside the United States. For example, in countries where we sell in local currency, we are subject to exchange rate fluctuations that create inherent risks for us and may cause us to adjust pricing which may make our products more or less favorable to the consumer. If global economic conditions are volatile or if economic conditions deteriorate, consumers may delay or reduce purchases of our products resulting in consumer demand for our products that may not reach our sales targets. Strengthening of the U.S. dollar and/or weakness in the economies of Euro zone countries could adversely impact sales of our products in the European region, which would have a material negative impact on our future operating results. Our sensitivity to economic cycles and any related fluctuation in consumer demand could adversely affect our business, financial condition and operating results.
We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.
The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject to United States export
controls, and exports of our products must be made in compliance with various economic and trade sanctions laws. Furthermore, United States export control laws and economic sanctions prohibit the provision of products and services to countries, governments and persons targeted by United States sanctions. Even though we take precautions to prevent our products from being provided to targets of United States sanctions, our products, including our firmware updates, could be provided to those targets or provided by our customers. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenue.
We could be subject to future enforcement action with respect to compliance with governmental export and import controls and economic sanctions laws that result in penalties, costs, and restrictions on export privileges that could have a material effect on our business and operating results.
Our international business operations account forWe generally provide a significant portion12-month warranty on all of our revenue and operating expenses and are subject to challenges and risks.
Revenue from outside the United States comprised 64%, 65% and 58% of our revenuecameras, except in 2019, 2018and 2017, respectively, and we expect international revenue to continue to be significant in the future. Further, we currently have foreign operations in Australia, China, France, Germany, Hong Kong, Japan, Netherlands, Philippines, Romania, United Kingdom and a number of other countries in Europe and Asia. Operating in foreign countries requires significant resources and considerable management attention, and we may enter new geographic markets where we have limited or no experience in marketing, selling, and deploying our products. International expansion has required and will continue to require us to invest significant funds and other resources and we cannot be assured our efforts will be successful. International sales and operations may be subject to risks such as:
difficulties in staffing and managing foreign operations;
burdens of complying with a wide variety of laws and regulations, including environmental, packaging and labeling;
adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
changes to the taxation of undistributed foreign earnings;
the effect of foreign currency exchange rates and interest rates, including any fluctuations caused by uncertainties relating to the U.K. leaving the European Union, (“Brexit”);
political, economic instability,where we provide a two-year warranty. For certain mounts and accessories, where permitted, we provide a lifetime or social unrest in a specific country or region in which we operate, including, for example, the effects of “Brexit,” which could have an adverse impact on our operations in that location;
organized crime activity, including those in Mexico;
terrorist activities and natural disasters;
quarantines or other disruptions to our operations resulting from future pandemics or other widespread public health problems;
trade restrictions;
differing employment practices and laws and labor disruptions;
the imposition of government controls;
lesser degrees of intellectual property protection;
tariffs and customs duties and the classifications of our goods by applicable governmental bodies;
a legal system subject to undue influence or corruption; and
a business culture in which illegal sales practices may be prevalent.
limited lifetime warranty. The occurrence of any material defects in our products could make us liable for damages and warranty claims in excess of these risksour current reserves. In addition, we could negatively affect our international business and consequently our business, operating results and financial condition.
Security breaches and other disruptions including cyberattacks could expose us to liability, damage our brand and reputation, compromise our ability to conduct business, require use to incur significant costs to correct any defects, warranty claims or otherwise adverselyother problems, including costs related to product recalls. Any negative publicity related to the perceived quality and safety of our products could affect our financial results.
In the ordinary course of our business, we electronically maintain sensitive data, including intellectual property, our proprietary business informationbrand image, decrease retailer, distributor and that of our customersconsumer confidence and suppliers,demand, and some personally identifiable information of our customers and employees, in our facilities and on our networks. Through GoPro Plus, users may store video and image files, including any telemetry or metadata that the user has chosen to associate with those files in the cloud. In our e-commerce services, we process, store and transmit consumer data. We also collect user data through certain marketing activities. For all of the foregoing internal and customer or consumer facing data and content collection, we collect and store that information in our or our third-party providers’ electronic systems. These systems may be targets of attacks, such as viruses, malware or phishing attempts by cyber criminals or other wrongdoers seeking to steal our users’ content or data, or our customer’s information for financial gain or to harm our business operations or reputation.
Any security breach, unauthorized access or usage, virus or similar breach or disruption of our systems or software could result in the loss of confidential information, costly investigations, remediation efforts and costly notification to affected consumers. If such content were accessed by unauthorized third parties or deleted inadvertently by us or third parties, our brand and reputation could be adversely affected. Cyberattacks could also adversely affect our operating results consume internal resources, and financial condition. Additionally, if defects are not discovered until after consumers purchase our products, they could lose confidence in the technical attributes of our products and our business could be harmed. Also, while our warranty is limited to repairs or returns and replacement, warranty claims may result in litigation, or potential liability for us and otherwise harm our business. Further, we are subject to general consumer regulations and laws, as well as regulations and laws specifically related to security and privacythe occurrence of consumer data or content. In the event of an incident affecting the security of consumer data or content, regulators may open an investigation or pursue fines or penalties for non-compliance with these laws, or private plaintiffs may sue us, resulting in additional costs and reputational harm to our business.
Any significant cybersecurity incidents or disruption of our information systems, and our reliance on Software-as-a-Service (SaaS) technologies from third parties, could adversely affect our business operations and financial results.
We are increasingly dependent on information systems to process transactions, manage our supply chain and inventory, ship goods on a timely basis, maintain cost-efficient operations, complete timely and accurate financial reporting, operate gopro.com and respond to customer inquiries.
Our information systems and those of third parties we use in our operations are vulnerable to cybersecurity risk, including cyberattacks such as distributed denial of service (DDoS) attacks, computer viruses, physical or electronic break-ins that damage operating systems, and similar disruptions. Additionally, these systems periodically experience directed attacks intended to lead to interruptions and delays in our operations as well as loss, misuse or theft of data. We have implemented physical, technical and administrative safeguards to protect our systems. To date, unauthorized users have not had a material effect on our systems; however, there can be no assurance that attacks will not be successful in the future. In addition, our information systems must be constantly updated, patched and upgraded to protect against known vulnerabilities and optimize performance. Material disruptions or slowdown of our systems, including a disruption or slowdown could occur if we are unable to successfully update, patch and upgrade our systems.
System disruptions, failures and slowdowns, whether caused by cyberattacks, update failures or other causes, could affect our financial systems and operations. This could cause delays in our supply chain or cause information, including data related to customer orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales, especially if the disruption or slowdown occurred during our seasonally strong fourth quarter. Any of these events could reduce demand for our products, impair our ability to complete sales through our e-commerce channels and cause our revenue to decline. If changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose customers or our business and operating results could be adversely affected.
The information systems used by our third-party service providers are vulnerable to these risks as well. In particular, we are heavily reliant on SaaS enterprise resource planning systems to conduct our order and
inventory management, e-commerce and financial transactions and reporting. In addition, we utilize third-party cloud computing services in connection with our business operations. Problems faced by us or our third-party hosting/cloud computing providers, or content delivery network providers, including technological or business-related disruptions, as well as cybersecurity threats, could adversely affect our business and operating results,results. Based on our ability to accurately reporthistorical experience with our financial results, as well as the experience of our consumers, which in turn could adversely affect our business and operating results.
As we expand our operations, we expect to utilize additional systems and service providers that may also be essential to managing our business. Our ability to manage our business would suffer if one or more of our providers suffer an interruption in their business, or experience delays, disruptions or quality control problems in their operations, orcamera products, we have an established methodology for estimating warranty liabilities with respect to change or add systemscameras and services. While we conduct reasonable diligence on our service providers, weaccessories; however, this methodology may not always be able to control the qualityaccurately predict future rates of the systems and services we receive from these providers, which could impair our ability to maintain appropriate internal control over financial reporting and complete timely and accurate financial reporting, and may affect our business, operating results and financial condition.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results.
Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the United States Federal Trade Commission (FTC) and various state, local and foreign bodies and agencies.
The United States federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data. Additionally, many foreign countries and governmental bodies, including in Australia, the European Union, India, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personal information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Such laws and regulations may require companies to implement new privacy and security policies, permit individuals to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact of such future laws, regulations and standards may have on our business. We expect that existing laws, regulations and standards may be interpreted differently in the future. For example, in January 2020, the California Consumer Privacy Act (CCPA) took effect, which provides new data privacy rights for consumers in California and new operational requirements for companies doing business in California. Compliance with the new obligations imposed by the CCPA depends in part on how particular regulators interpret and apply them. If we fail to comply with the CCPA or if regulators assert that we have failed to comply with the CCPA, we may be subject to certain fines or other penalties. Also, there remains significant uncertainty surrounding the regulatory framework for the future of personal data transfers from the European Union to the United States with regulations such as the recently adopted General Data Protection Regulation (GDPR) which imposes more stringent EU data protection requirements, provides an enforcement authority, and imposes large penalties for noncompliance. Compliance with the new obligations imposed by the GDPR depends in part on how particular regulators interpret and apply them. If we fail to comply with the GDPR or if regulators assert that we have failed to comply with the GDPR, we may be subject to fines of up to 4% of our worldwide annual revenue. Future laws, regulations, standards and other obligations, including the adoption of the GDPR and the CCPA, as well as changes in the interpretation of existing laws, regulations, standards and other
obligations could impair our ability to collect, use or disclose information relating to individuals, which could decrease demand for our products, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.
Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our products. As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards, contractual obligations and other legal obligations. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personal information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.warranty claims.
We may grow our business in part through acquisitions, joint ventures, investments and partnerships, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
We have completed several acquisitions and may evaluate additional acquisitions of, or strategic investments in, other companies, products or technologies that we believe are complementary to our business. For example, in the first half of 2016, we acquired two mobile editing application companies for aggregate cash consideration of approximately $104 million. We also may enter into relationships with other businesses in order to expand the distribution of our product offerings, which could involve joint ventures, strategic alliances and partnerships. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party or government approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.
We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all.
If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by users or investors. In addition, if we encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired business choose not to work for us, or we have difficulty retaining the customers of any acquired business, the revenue and operating results of the combined company could be adversely affected. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely affect our business, financial condition, operating results and cash flows. In addition, our original estimates and assumptions used in assessing any transaction may be inaccurate, including estimates of accounting charges. We have recorded significant goodwill and intangible assets in connection with our acquisitions, and in the future, if our acquisitions do not yield expected revenue, we may be required to take material impairment charges that could adversely affect our results of operations.
We may have to pay cash, incur debt or issue equity securities to enter into any such acquisition, joint venture, strategic alliances or partnership, which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such transaction could result in dilution to our stockholders. If we incur debt it would result in increased fixed obligations and could also subject us to covenants or other restrictions, or require the consent of the lenders under our credit agreements, that would impede our ability to manage our operations. In addition, our future operating results may be affected by performance earnouts or contingent payments. For example, for our 2016 acquisitions, deferred cash and stock compensation was payable to certain continuing employees subject to meeting specified future employment conditions. Furthermore, acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences,
additional stock-based compensation expense and the recording and subsequent amortization or impairments of amounts related to certain purchased intangible assets, any of which could negatively affect our future results of operations. We cannot assure investors that the anticipated benefits of any acquisition or investment will be realized.
Our success dependsThe ongoing COVID-19 outbreak has had a material impact on the United States and global economies and could have a material adverse impact on our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic and public health emergency of international concern. The global COVID-19 pandemic continues to evolve and the impact of new variants, increase in cases, or new government regulations is uncertain.
As a result of the COVID-19 pandemic, we accelerated a shift in our sales channel strategy to focus more on direct-to-consumer sales through GoPro.com, and implemented the 2020 Restructuring Plan to realign our workforce to areas of growth combined with certain cost saving measures which reduced our operating expenses in 2020 as a result of a 20% reduction of our global workforce and the consolidation of certain leased office facilities.
The pandemic may adversely affect our customers, our employees and our employee productivity. It may also impact the ability of our contract manufacturers, vendors and suppliers to operate and fulfill their contractual obligations, and result in an increase in costs, tariffs, delays or disruptions in performance. These supply chain effects, the direct effect of the virus and the disruption on our employees and operations, may negatively impact both our ability to maintainmeet customer demand and our revenue and profit margins. We might experience changes in consumer demand due to travel restrictions or economic instability and uncertainty. Additionally, the valuepandemic’s impact on local and reputationglobal economies could materially impact consumer purchases of discretionary items, such as our brand.products, which tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty and may slow our growth more than we anticipate. Both the health and economic aspects of the continued COVID-19 pandemic are highly fluid, and the future course of each is uncertain and subject to change.
Catastrophic events or political instability could disrupt and cause harm to our business.
Our success depends onheadquarters are located in the value and reputationSan Francisco Bay Area of our brand, including our primary trademarks “GOPRO,” “HERO,” andCalifornia, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, threat of fire, act of terrorism, public health issues or other catastrophic event in California or elsewhere that results in the GoPro logos. The GoPro brand is integral to the growth of our business and expansion into new markets. Maintaining, promoting and positioning our brand will largely depend on the success of our marketing and merchandising efforts, our ability to provide consistent, high quality products and services, and our consumers’ satisfaction with the technical support and software updates we provide. Failure to grow and maintain our branddestruction or negative publicity related to our products, our consumers’ user-generated content, the athletes we sponsor, the celebrities we are associated with, or the labor policiesdisruption of any of our supplierscritical business operations or manufacturersinformation technology systems could adverselyseverely affect our brand,ability to conduct normal business operations and, as a result, our future operating results. Maintaining and enhancing our brand also requires substantial financial investments, although there is no guarantee that these investments will increase sales of our products or positively affect our operating results.
If we do not effectively maintain and further develop our sales channels, including developing and supporting our retail sales channel and distributors, our business could be harmed.
We depend upon effective sales channels, including direct to consumer business through gopro.com, to reach the consumers who are the ultimate purchasers of our products. In the United States, we primarily sell our products directly through a mix of retail channels, including big box, mid-market, specialty retailers, and gopro.com, and we reach certain United States markets through distributors. In international markets, we primarily sell through distributors who in turn sell to local retailers; however, we also have direct sales relationships with certain customers and sell directly to consumers through gopro.com.
We depend on retailers to provide adequate and attractive space for our products and POP displays in their stores and acquiesce to our policies. We further depend on our retailers to employ, educate and motivate their sales personnel to effectively sell our products. If our retailers do not adequately display our products, choose to reduce the space for our products and POP displays in their stores or locate them in less than premium positioning, or choose not to carry some or all of our products or promote competitors’ products over ours or do not effectively explain to customers the advantages of our products, our sales could decrease and our businessresults could be harmed. If our retailers do not acquiesce to our policies, we may refuse to ship our productsOur key manufacturing, supply and our sales could decrease,distribution partners have global operations including China, Thailand, Hong Kong, Japan, Mexico, Netherlands, Singapore, Taiwan and our business could be harmed. Similarly, our business could be adversely affected ifthe United States. Political instability, global conflicts, public health issues or
other catastrophic events in any of our large retail customers were to experience financial difficulties orthose countries including as a result of climate change, the focus of their businesses in a way that deemphasized the sale of our products. We also continue to invest in providing new retailers with POP displays and expanding the footprint of our POP displays in existing stores, and there can be no assurance that this investment will lead to increased revenue.
Our distributors generally offer products from several different manufacturers. Accordingly, we are at risk that these distributors may give higher priority to selling other companies’ products. We have consolidated our distributor channels in certain regions, and if we were to lose the services of a distributor, we might need to find another distributor in that area and there can be no assurance of our ability to do so in a timely manner or on favorable terms. Further, our distributors build inventory in anticipation of future sales, and if such sales do not occur as rapidly as they anticipate, our distributors will decrease the size of their future product orders. We are also subject to the risks of our distributors encountering financial difficulties, which could impede their effectiveness and also expose us to financial risk if they are unable to pay for the products they purchase from us. Additionally, our international distributors buy from us in U.S. dollars and generally sell to retailers in local currency so significant currency fluctuations could affect their profitability, and in turn, affect their ability to buy future products from us. For example, the Brexit referendum vote in the U.K. caused significant short-term volatility in global stock markets as well as currency exchange rate fluctuations.
We have converted portions of our distributors’ business into direct sales, and increased sales through gopro.com, and if we were to do this on a larger scale, it could create significant disruptions to our distribution channel and the associated revenue. As we continue to convert distribution to direct sales, we might not be
successful in that transition. Additionally, any reduction in sales by our current distributors, loss of key distributors or decrease in revenue from our distributors could adversely affect our revenue, operating results and financial condition.
A small number of retailers and distributors account for a substantial portion of our revenue, and if our relationships with any of these retailers or distributors were to be terminated or the level of business with them significantly reduced, our business could be harmed.
Our ten largest customers, measured by the revenue we derive from them, accounted for 42%of our revenue for 2019 and 48% of our revenue for 2018 and 2017. One retailer accounted for 11%, 13% and 15% of our revenue for 2019, 2018 and 2017, respectively. The loss of a small number of our large customers, or the reduction in business with one or more of our large customers, could have a significant adverse effect on our operating results. In addition, we may choose to temporarily or permanently stop shipping product to customers who do not follow the policies and guidelines in our sales agreements, which could have a material negative effect on our revenues and operating results. Our sales agreements with these large customers do not require them to purchase any meaningful amount of our products annually and we grant limited rights to return product to some of these large customers.
If we encounter problems with our distribution system, our ability to deliver our products to the market and to meet customer expectations could be harmed.
We rely on third-party distribution facilities and logistics operators for substantially all of our product distribution to distributors and directly to retailers. Our distribution facilities include computer controlled and automated equipment, which means their operations may be vulnerable to computer viruses or other security risks, the proper operation of software and hardware, electronic or power interruptions or other system failures. Further, because substantially all of our products are distributed from only a few locations and by a small number of companies, our operations could be interrupted by labor difficulties, extreme or severe weather conditions, cyber-attacks, or floods, fires or other natural disasters near our distribution centers, or port shutdowns or other transportation-related interruptions, including security breaches, along our distribution routes. Additionally, we use one primary supplier for the third-party distribution and if this supplier were to experience financial difficulties, cyber-attacks, or other types of interruption it could adversely affect our business.
We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our business and operating results.
We generally provide a 12-month warranty on all of our cameras, except in the European Union, or EU, where we provide a two-year warranty on all of our cameras. For certain mounts and accessories, where permitted, we provide a lifetime warranty. The occurrence of any material defects in our products could make us liable for damages and warranty claims in excess of our current reserves. In addition, we could incur significant costs to correct any defects, warranty claims or other problems, including costs related to product recalls. Any negative publicity related to the perceived quality and safety of our products could affect our brand image, decrease retailer, distributor and consumer confidence and demand, and adversely affect our operating results and financial condition. Also, while our warranty is limited to repairs and returns, warranty claims may result in litigation, the occurrence of which could adversely affect our business and operating results. Based on our historical experience with our camera products, we have an established methodology for estimating warranty liabilities with respect to cameras and accessories.
We offer GoPro Plus, our subscription offering, which has a camera replacement benefit as part of the monthly or yearly subscription, which is available in the United States and internationally. Accidental damage coverage, extended warranties and other camera replacement benefits are regulated in the United States on a state level and are treated differently by each state. Additionally, outside the United States, regulations for camera replacement benefits vary from country to country. Changes in interpretation of the insurance regulations or other laws and regulations concerning extended warranties, accidental damage coverage or camera replacement benefits on a federal, state, local or international level may cause us to incur costs or have additional regulatory requirements to meet in the future, in orderour financial condition and operating results.
Our aspirations and disclosures related to continueenvironmental, social and governance (ESG) matters expose us to offer GoPro Plus in compliance with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future similar laws could result in
reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition.
Consumers may be injured while engaging in activities with our products, and we may be exposed to claims, or regulations could be imposed, whichrisks that could adversely affect our brand, operating resultsreputation and financial condition.performance.
Consumers useWe have published our cameras, drones and their associated mounts and accessoriesinaugural Sustainability Report which highlights our efforts to self-capture their participation in a wide variety of physical activities, including extreme sports, which in many cases carryaddress the risk of significant injury or death. Consumers may also use our drones for a wide range of flight activity, including aerial data collection, videography and photography. We may be subject to claims that users have been injured or harmed by or while using our products, including false claims or erroneous reports relating to safety, security or privacy issues, or that personal property has been damaged as a result of use of our drone. Although we maintain insurance to help protect us from the risk of such claims, such insurance may not be sufficient or may not apply to all situations. Similarly, proprietors of establishments at which consumers engage in challenging physical activities could seek to banenvironmental impact on the use of materials in our products in their facilitiesconsumer packaging, our commitment to limit their own liability. In addition, if lawmakers or governmental agencies werefocus on strategic recruiting practices to determineserve as the foundation for our diverse workforce, and to continue to maintain legal and ethical business practices. These statements reflect our current plans and aspirations and are not guarantees that the usewe will be able to achieve them. Our ability to achieve any ESG objective is subject to numerous risks, many of which are outside of our products increasedcontrol. Examples of such risks include the riskevolving consumer protection laws applicable to ESG matters and the availability of injurymaterials and suppliers that can meet our sustainability and other ESG goals.
Standards for tracking and reporting ESG matters continue to evolve. Our selection of voluntary disclosure frameworks and standards, and the interpretation or harmapplication of those frameworks and standards, may change from time to alltime or a subsetdiffer from those of others. Methodologies for reporting ESG data may be updated and previously reported ESG data may be adjusted to reflect improvement in availability and quality of third-party data, changing assumptions, changes in the nature and scope of our usersoperations and other changes in circumstances. Our processes and controls for reporting ESG matters across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures that may be required by the SEC and other regulators, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or should otherwise be restrictedability to protect consumers, they may pass laws or adopt regulations that limitachieve such goals in the use offuture.
Risks related to our products or increase our liability associated with the use of our products. Any of these events could adversely affect our brand, operating resultsIntellectual Property and financial condition.technology licenses
Our intellectual property and proprietary rights may not adequately protect our products and services, and our business may suffer if it is alleged or determined that our technology, products, or another aspect of our business infringes third-party intellectual property or if third parties infringe our rights.
We own patents, trademarks, copyrights, trade secrets, and other intellectual property (collectively “intellectual property”) related to aspects of our products, software, services and designs. Our commercial success may depend in part on our ability to obtain, maintain and protect these rights in the United States and abroad.
We regularly file patent applications to protect innovations arising from our research, development and design as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We may not have sufficient intellectual property rights in all countries where unauthorized third-party copying or use of our proprietary technology occurs and the scope of our intellectual property might be more limited in certain countries. Our existing and future patents may not be sufficient to protect our products, services, technologies or designs and/or may not prevent others from developing competing products, services, technologies or designs. We cannot predict the validity and enforceability of our patents and other intellectual property with certainty.
We have registered, and applied to register, and/or used certain of our trademarks in several jurisdictions worldwide. In some of those jurisdictions, third-party registrations, filings, or common law use exist for the same, similar or otherwise related products or services, which could block the registration of or ability to use our marks. Even if we are able to register our marks, competitors may adopt or file similar marks to ours, seek to cancel our trademark registrations, register domain names that mimic or incorporate our marks, or otherwise infringe upon or harm our trademark rights. Although we police our trademark rights carefully, there can be no assurance that we are aware of all third-party uses or that we will prevail in enforcing our rights in all such instances. Any of these negative outcomes could affect the strength, value and effectiveness of our brand, as well as our ability to market our products.
We have also registered domain names for websites, or URLs, that we use in our business, such as gopro.com,GoPro.com, as well as social media handles. If we are unable to protect our domain names or social media handles, our brand, business, and operating results could be adversely affected. Domain names or social media handles similar to ours have already been registered in the United States and elsewhere, and we may not be able to prevent third parties from acquiring and using domain names or social media handles that infringe, are similar to,
or otherwise decrease the value of, our trademarks. In addition, we might not be able to, or may choose not to, acquire or maintain trademark registrations, domain names, social media handles or other related rights in certain jurisdictions.
Unauthorized third parties may try to copy or reverse engineer our products, infringe upon or misappropriate our intellectual property, or otherwise gain access to our technology.We may discover unauthorized products in the marketplace that are knock-offs, infringements or counterfeit reproductions of our products. If we are unable to stop producers or sellers of infringing or counterfeit products, sales of these products could adversely impact our brand and business.
Litigation may be necessary to enforce our intellectual property rights. Initiating infringement proceedings against third parties can be expensive, take significant time, and divert management’s attention from other business concerns. We may not prevail in litigation to enforce our intellectual property against unauthorized use.
We have been, and in the future may be, subject to intellectual property and proprietary rights claims from third parties, and may be sued by third parties for alleged infringement.
Third parties, including competitors and non-practicing entities, have made allegations of and brought intellectual property infringement, misappropriation, and other intellectual property rights claims against us, including the matter described in Item 3Legal Proceedings. We expect to continue to receive such intellectual property claimsNote 9 Commitments, contingencies and guarantees in the future.Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. While we will defend ourselves vigorously against any such existing and future legal proceedings, the effort and expense to support such disputes and litigation is considerable and we may not prevail or obtain favorable outcomes against all such allegations. allegations, including in the matter described in Note 9 Commitments, contingencies and guarantees in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
We may seek licenses from third parties where appropriate, but they could refuse to grant us a license or demand commercially unreasonable terms. Further, an adverse ruling in an intellectual property infringement proceeding could force us to suspend or permanently cease the production or sale of products/services, face a temporary or permanent injunction, redesign our products/services, rebrand our products/services, pay significant settlement costs, pay third-party license fees or damage awards or give up some of our intellectual property. The occurrence of any of these events may materially and adversely affect our business, financial condition, operating results or cash flows.
If we are unable to maintain, license, or acquire rights to include intellectual property owned by others in the products, services or content distributed by us, our marketing, sales or future business strategy could be affected or we could be subject to lawsuits relating to our use of this content.
The distribution of GoPro content helps to market our brand, products, services, and our products.software. If we cannot continue to acquire rights to distribute user-generated content or acquire rights to use and distribute music, athlete and celebrity names and likenesses or other content for our original productions or third-party entertainment distribution channels or for our software products, our marketing efforts could be diminished, our sales could be harmed and our future content strategy could be adversely affected. In addition, third-party content providers or owners may allege that we have violated their intellectual property rights. If we are unable to obtain sufficient rights, successfully defend our use of or otherwise alter our business practices on a timely basis in response to claims of infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business may be adversely affected. As a user and distributor of content, we face potential liability for rights of publicity and privacy, as well as copyright, or trademark infringement or other claims based on the nature and content of materials that we distribute. If we are found to violate such third-party rights, then our business may suffer.
If we encounter issues withWe use open source software in our manufacturersplatform that may subject our technology to general release or suppliers,require us to re-engineer our business, brand, and results of operations could be harmed and we could lose sales.solutions, which may harm our business.
We do not have internal manufacturing capabilities and rely on several contract manufacturers, located primarilyuse open source software in China and Mexico to manufacture our products. We cannot be certain that we will not experience operational difficultiesconnection with our manufacturers, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs and increased lead times. We also rely on a number of supply chain partners to whom we outsource activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. Our supply chain partners are located in China, Czech Republic, Hong Kong, Mexico, Netherlands, Singapore and a number of other countries in Europe and the Asia Pacific region. Our manufacturers and supply chain partners may experience disruptions in their operations due to equipment breakdowns, adding lines in a different country, labor strikes or shortages, transportation security vulnerabilities, natural disasters, component or material shortages, cyber-attacks, cost increases or other similar problems. Further, in order to minimize their inventory risk, our manufacturers might not order components from third-party suppliers with adequate lead time, thereby affecting our ability to meet our demand forecast. Therefore, if we fail to manage our relationship with our manufacturers and supply chain partners effectively, or if they experience operational difficulties, our ability to ship products to our retailers and distributors could be impaired and our competitive position and reputation could be harmed.
In the event that we receive shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards, and we are not able to obtain replacement products in a timely manner, we risk revenue losses from the inability to sell those products, increased administrative and shipping costs, and lower profitability. Additionally, if defects are not discovered until after consumers purchase our products, they could lose confidence in the technical attributes of our products and our businessservices. From time to time, companies that incorporate open source software into their products or services have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be harmed. For example, in the first quartersubject to suits by parties claiming ownership of 2018,what we decided to end the life of our REMO accessory due to issues related to battery performance.
We do not control our contract manufacturers or suppliers, including their labor, environmental or other practices. Environmental regulations or changes in the supply, demand or available sources of natural resources may affect
the availability and cost of goods and services necessary to run our business. We require our contract manufacturers and suppliers to comply with our formal supplier code of conduct and relevant standards and have ongoing audit programs in place to assess our suppliers’ compliance with our requirements. We periodically conduct audits of our contract manufacturers’ and suppliers’ compliance with our code of conduct, applicable laws and good industry practices. However, these audits may not be frequent or thorough enough to detect non-compliance. Deliberate violations of labor, environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could lead to negative publicity and harm our reputation or brand.
Failure to obtain new, and maintain existing, high-quality event, venue, athlete and celebrity sponsorships could harm our business.
Establishing relationships with high profile sporting and entertainment events, venues, sports leagues and sports associations, athletes and celebrity personalities to evaluate, promote and establish product credibility with consumers, including entering into sponsorship and licensing agreements, has and will continuebelieve to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute or make available open source software as part of their software to publicly disclose all or part of the source code to such software or make
available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a key elementmanner that would require us to disclose the source code or that would otherwise breach the terms of our marketing strategy. However, as competition in our markets has increased, the costs of obtaining and retaining event, venue, athlete and celebrity sponsorships and licensing agreements have increased. Additionally, we may be forced to sign longer term sponsorships in order to retain relationships. If we are unable to maintain our current associations with our event, venue, athlete and celebrity partners, or to do so at a reasonable cost, wean open source agreement, such use could lose the benefits of these relationships,nevertheless occur and we may be required to modify and substantially increasepublicly release our marketing investments. In addition, actions taken by endorsersproprietary source code, pay damages for breach of contract, re-engineer our productsapplications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that harm their reputations could also harmmay divert resources away from our brand image with consumers. The failure to correctly identify high impact events and venues or build partnerships with those who develop and promote those events and venues, promising athletes or other appealing personalities to use and endorse our products, or poor performance by our endorsers,development efforts, any of which could adversely affect our brandbusiness, financial condition or operating results.
Risks related to regulatory compliance
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results.
Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the United States Federal Trade Commission (FTC) and various state, local and foreign regulators and agencies. Our agreements with certain customers and business partners may also subject us to certain requirements related to our processing of personal information, including obligations to use industry-standard or reasonable security measures to safeguard personal information.
The United States and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use, processing, storage, deletion and dissemination of personal information. Further, all states have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving personal information.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact of such future laws, regulations and standards may have on our business. We expect that existing laws, regulations and standards may even be interpreted differently in the future. For example, California implemented the California Privacy Rights Act, or the “CPRA” which will be effective on July 1, 2023 and will amend the existing California Consumer Privacy Act. Additionally, comparable consumer privacy laws are set to take effect in 2023 in other several states. Failure to comply with these new state regulations may result in decreased salessignificant civil penalties, injunctive relief, or statutory or actual damages. Complying with this new privacy legislation may result in additional costs and expenses.
Additionally, many foreign countries and governmental bodies, including Australia, the European Union (EU), India, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection, use, processing, storage and deletion of personal information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States.
For example, in the EU, the General Data Protection Regulation (GDPR) imposes more stringent EU data protection requirements, provides an enforcement authority, and imposes large penalties for noncompliance. If we fail to comply with the GDPR or if regulators assert that we have failed to comply with the GDPR, we may be subject to fines of up to 4% of our products.worldwide annual revenue.
Among other requirements, the GDPR regulates transfers of personal data outside of the EU to countries that have not been found to provide adequate protection to personal data, including the United States, requiring that certain steps are taken to legitimize those transfers. We have undertaken certain efforts to conform transfers of personal data from the EU to the United States and other jurisdictions based on our understanding of current regulatory obligations and the guidance of data protection authorities. Despite this, we may be unsuccessful in establishing or maintaining conforming means of transferring such data from the European Economic Area, or EEA, particularly as a result of continued legal and legislative activity within the EU that has challenged or called
into question the legal basis for existing means of data transfers to countries that have not been found to provide adequate protection for personal data.
Further, the United Kingdom (U.K.) exited the EU on January 31, 2020 (also known as “Brexit”), which resulted in additional regulation of data protection in the U.K. that may continue to lead to further legislative and regulatory changes. In response to Brexit, the U.K. implemented the Data Protection Act that contains provisions that substantially implements the GDPR, including its own derogations for how GDPR is applied in the U.K., with penalties for noncompliance of up to the greater of £17.5 million (€20 million) or four percent of worldwide revenues. These changes have and may continue to lead to additional costs as we try to ensure compliance with new privacy legislation and will increase our overall risk exposure.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. It is possible that if our practices are not consistent, or are viewed as not consistent, with legal and regulatory requirements, including changes in laws, regulations and standards or new interpretations or applications of existing laws, regulations and standards, we may become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, loss of export privileges, or severe criminal or civil sanctions, all of which may have a material adverse effect on our business, operating results, reputation, and financial condition.One example of such a self-regulatory standard is the Payment Card Industry Data Security Standard, or PCI DSS, which relates to the processing of payment card information. In the event we are required to comply with the PCI DSS but fail to do so, fines and other penalties could result, and we may suffer reputational harm and damage to our business.
Future laws, regulations, standards and other obligations, as well as changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect, use or disclose information relating to individuals, which could decrease demand for our products, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.
Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.
We could be adversely affected by violations of the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act or similar anti-bribery laws in other jurisdictions in which we operate.
The global nature of our business and the significance of our international revenue create various domestic and local regulatory challenges and subject us to risks associated with our international operations. The United States Foreign Corrupt Practices Act, or FCPA, the United Kingdom Bribery Act 2010, or the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions generally prohibit United States based companies and their intermediaries from making improper payments to non-United States officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage. In addition, United States public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, United States companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.
We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anti-corruption laws may conflict with local customs and practices. Our global operations require us to import and export to and from several countries, which geographically expands our compliance obligations. In addition, changes in such laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations. We cannot be assured that our directors, officers, employees, agents or other agentsstrategic or local partners or representatives will not engage in prohibited conduct and render us responsible under the FCPA
or the U.K. Bribery Act. While we have compliance programs, they may not be effective to prevent violations from occurring and employees may engage in prohibited conduct nonetheless.If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery or anti-corruption laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Our effective tax rate and the intended tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business.
We are subject to income taxes in the United States and various jurisdictions outside the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates. Our tax expense could also be affected by changes in non-deductible expenses, changes in excess tax benefits related to exercises and vesting of stock-based expense, and the applicability of withholding taxes.
Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rate could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in, or our interpretation, of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amounts of jurisdictional earnings, or by changes in the valuation of our deferred tax assets and liabilities. The United States, the European Commission, countries in the European Union, Australia, and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals. These potential changes could adversely affect our effective tax rates or result in other costs to us.
In addition, we are subject to the examination of our income tax returns by the United States Internal Revenue Service (IRS) and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and other taxes and have reserved for adjustments that may result from the current examinations. We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on ourreputation, operating results and financial position.
If we are unable to maintain effective internal control in the future, we may not be able to produce timely and accurate financial statements, which could adversely affect our investors’ confidence and our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal control over financial reporting. We expect that the requirements of these rules and regulations will continue to place significant demands on our financial and operational resources, as well as IT systems.
While we have determined that our internal control over financial reporting was effective as of December 31, 2019, we must continue to monitor and assess our internal control over financial reporting. Our control environment may not be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and all instances of fraud will be detected.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities.
We use open source software in our platform that may subject our technology to general release or require us to re-engineer our solutions, which may cause harm to our business.
We use open source software in connection with our services. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software
and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute or make available open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could nevertheless occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, financial condition or operating results.
Our reported financial results may be negatively impacted by the changes in the accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. Other companies in our industry may apply these accounting principles differently than we do, which may affect the comparability of our consolidated financial statements. For example, in February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02 (Topic 842), Leases, which requires operating leases to be recognized on the balance sheet as a lease liability and corresponding right-of-use asset. Topic 842 was applied using a modified retrospective approach and was effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption was permitted. See Note 1 Summary of business and significant accounting policies, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a discussion on recent accounting standards.
If our estimates or judgments relating to our critical accounting policies and estimates prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in this 2019 Annual Report for the year ended December 31, 2019 in the section titled Management's Discussion and Analysis of Financial Condition and Results of Operations. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant estimates and assumptions made by management include those related to revenue recognition (including sales incentives, sales returns and implied post contract support), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill) and income taxes.
Catastrophic events or political instability could disrupt and cause harm to our business.
Our headquarters are located in the San Francisco Bay Area of California, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, threat of fire, act of terrorism, public health issues or other catastrophic event in California or elsewhere that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be harmed. Our key manufacturing, supply and distribution partners have global operations including China, Hong Kong, Japan, Mexico, Netherlands, Singapore, Taiwan and the United States. Political instability, public health issues or other catastrophic events in
any of those countries could adversely affect our business in the future, our financial condition and operating results.conditions.
If we fail to comply with environmental regulations and conflict minerals disclosures, our business, financial condition, operating results and reputation could be adversely affected.
We are subject to various federal, state, local and international environmental laws and regulations including laws regulating the manufacture, import, use, discharge and disposal of hazardous materials, labeling and notice requirements relating to potential consumer exposure to certain chemicals, and laws relating to the collection of and recycling of electrical and electronic equipment and their packaging.
We are also subject to the SEC’s conflict minerals rule which requires disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. We have and will continue to incur costs associated with complying with the rule, such as costs related to sourcing of certain minerals (or derivatives thereof), the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation.
Although we have policies and procedures in place requiring our contract manufacturers and major component suppliers to comply with applicable federal, state, local and international requirements, we cannot confirm that our manufacturers and suppliers consistently comply with these requirements. In addition, if there are changes to these or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
Changes in interpretation of any federal, state, local or international regulation may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition.
We also expect that our products will be affected by new environmental laws and regulations, including but not limited to laws and regulations focused on climate change, on an ongoing basis. Climate change has had significant legislative and regulatory effects on a global basis, and there are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy, which may have an impact on the way we manufacture products or utilize energy to produce our products. We may also become subject to regulations resulting in increased disclosure obligations with respect to our greenhouse gas emissions. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products and the cost of compliance, or could cause disruptions in the manufacture of our products and result in increased procurement, production, and distribution costs. Our reputation and brand could be harmed if we fail, or are seen as having failed, to respond responsibly and effectively to changes in legal and regulatory measures adopted to address climate change. Other regulations in the environmental area may require us to continue to monitor and ensure proper disposal or recycling of our products. Since we operate on a global basis, this is a complex process that requires continual monitoring.
To date, our expenditures for environmental compliance have not had a material effect on our results of operations or cash flows and, although we cannot predict the future effect of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business and financial condition.
We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.
The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject to United States export controls, and exports of our products must be made in compliance with various economic and trade sanctions laws. Furthermore, United States export control laws and economic sanctions prohibit the provision of products and services to countries, governments and persons targeted by United States sanctions. Even though we take precautions to prevent our products from being provided to targets of United States sanctions, our products, including our firmware updates, could be provided to those targets or provided by our customers. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenue.
We could be subject to future enforcement action with respect to compliance with governmental export and import controls and economic sanctions laws that result in penalties, costs, and restrictions on export privileges that could have a material effect on our business and operating results.
Risks related to Ownershipour need for additional capital
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional financing on favorable terms, or at all, due to among other things, general macroeconomic conditions, including rising interest rates and inflation.
Additionally, our current credit facilities contain restrictive covenants relating to our capital raising activities and other financial and operational matters, and any debt financing obtained by us in the future could involve further restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Further, even if we are able to obtain additional financing, we may be required to use such proceeds to repay a portion of our debt.
If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution. If we are unable to obtain adequate financing under our credit facility, or alternative sources, when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Risks related to ownership of our Class A Common Stockcommon stock
Our stock price has been and will likely continue to be volatile.
Since shares of our Class A common stock were sold in our IPO in July 2014 at a price of $24.00 per share, our closing stock price has ranged from $3.38$2.01 to $93.85 per share through December 31, 2019.2022. Our stock price may fluctuate in response to a number of events and factors, such as quarterly operating results; changes in our financial projections provided to the public or our failure to meet those projections; the public’s reaction to our press releases, other public announcements and filings with the SEC; significant transactions, or new features, products or services offered by us or our competitors; changes in our business lines and product lineup; changes in financial estimates and recommendations by securities analysts; media coverage of our business and financial performance; the operating and stock price performance of, or other developments involving, other companies that investors may deem comparable to us; trends in our industry; any significant change in our management; sales and purchases of any Class A common stock issued upon conversion of our convertible senior notes or in connection with the prepaid forward contract entered into in connection with such convertible senior notes, and general economic conditions. These factors, as well as the volatility of our Class A common stock, could also affect the price of our convertible senior notes.
In addition, the stock market in general, and the market prices for companies in our industry, have experienced volatility that often has been unrelated to operating performance. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Price volatility over a given
period may cause the average price at which we repurchase our own stock to exceed the stock’s price at a given point in time. Volatility in our stock price also affects the value of our equity compensation, which affects our ability to recruit and retain employees. In addition, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been subject to past shareholder class action lawsuits as well as derivative lawsuits and may continue to be a target for such litigation in the future. Securities litigation against us could result in substantial costs and liability and divert our management’s attention from other business concerns, which could harm our business. See Legal Proceedings.Note 9 Commitments, contingencies and guarantees, in the Notes to Consolidated Financial Statements for a discussion on legal proceedings.
If we fail to meet expectations related to future growth, profitability, or other market expectations, our stock price may decline significantly, which could have a material adverse effect on investor confidence and employee retention. A sustained decline in our stock price and market capitalization could lead to impairment charges.
The dual class structure of our common stock has the effect of concentrating voting control with our CEO and we cannot predict the effect our dual class structure may have on our stock price or our business.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of Class B common stock hold approximately 69.5%67.1% of the voting power of our outstanding capital stock as of December 31, 20192022 with Mr. Woodman, our Chairman and CEO, holding approximately 69.3%64.1% of the outstanding voting power. Mr. Woodman is able to control all matters submitted to our stockholders, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the trading price of our Class A common stock.
In addition, we cannot predict whether our dual class structure, combined with the concentrated control by Mr. Woodman, will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers, including FTSE Russell and S&P Dow Jones, have announced restrictions on including companies with multiple-class share structures in certain of their indexes. In July 2017, FTSE Russell announced that it plans to require new constituents of its indexes to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indexes. Because of our dual class structure, we may be excluded from these indexes and we cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.
If securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
Delaware law and provisions in our restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination
with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, or otherwise adversely affect the rights of the holders of our Class A and Class B common stock, including the following:stock.
our board of directors is not currently classified, but at such time as all shares of our Class B common stock have been converted into shares of our Class A common stock, our board of directors will be classified into three classes of directors with staggered three-year terms;
so long as any shares of our Class B common stock are outstanding, special meetings of our stockholders may be called by the holders of 10% of the outstanding voting power of all then outstanding shares of stock, a majority of our board of directors, the chairman of our board of directors or our chief executive officer;
when no shares of our Class B common stock are outstanding, only the chairman of our board of directors, our chief executive officer or a majority of our board of directors will be authorized to call a special meeting of stockholders;
our stockholders may only take action at a meeting of stockholders and not by written consent;
vacancies on our board of directors may be filled only by our board of directors and not by stockholders;
directors may be removed from office with or without cause so long as our board of directors is not classified, and thereafter directors may be removed from office only for cause;
our restated certificate of incorporation provides for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, by our board of directors without stockholder approval and which may contain voting, liquidation, dividend and other rights superior to those of our Class A and Class B common stock; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
Risks related to our convertible senior notesindebtedness and capped call transactions
We have indebtedness in the form of convertible senior notes.
In April 2017, we completed an offering of $175.0 million aggregate principal amount of 3.50% convertible senior Notesnotes due 2022 (Notes)(2022 Notes). We repurchased $50.0 million aggregate principal amount of the 2022 Notes in November 2020, and we repaid the remaining principal amount of $125.0 million at maturity in April 2022.
In November 2020, we completed an offering of $143.8 million aggregate principal amount of 1.25% convertible senior notes due 2025 (2025 Notes). As a result of thisthe 2025 Notes, offering, we incurred $175.0an additional $143.8 million principal amount of indebtedness, the principal amount of which we may be required to pay at maturity in 2022. 2025.
Holders of the 2025 Notes will have the right to require us to repurchase their 2025 Notes upon the occurrence of a fundamental change at a purchase price equal to 100% of the principal amount of the 2025 Notes to be purchased, plus accrued and unpaid interest, if any. In addition, the indentureindentures for the 2025 Notes provides that we are required to repay amounts due under thesuch indenture in the event that there is an event of default for the 2025 Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to Maturity Datematurity date for the 2025 Notes. There can be no assurance that we will be able to repay thisour indebtedness when due, or that we will be able to refinance thisour indebtedness, all or in part, on acceptable terms or at all.terms. In addition, thisour indebtedness could, among other things:
•heighten our vulnerability to adverse general economic conditions and heightened competitive pressures;
•require us to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and industry; and
•impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.
In addition, our ability to purchase the 2025 Notes or repay prior to maturity any accelerated amounts under the 2025 Notes upon an event of default or pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness outstanding at the time, including our credit facility. Our credit facility restricts our ability to repurchase the 2025 Notes for cash or repay prior to maturity any accelerated amounts under the 2025 Notes upon an event of default or pay cash upon conversion of the 2025 Notes, to the extent that on the date of such repurchase, repayment or conversion, as the case may be, after giving pro forma effect to such payment, our remaining borrowing capacity pursuant to suchwe do not meet certain financial criteria set forth in the credit facility falls below (i) to the extent that our fixed charge coverage ratio is at least to 1.0, the greater of (A) $37.5 million and (B) 15% of the lesser of the aggregate commitments under such credit facility and the aggregate borrowing base then in effect or (ii) to the extent that our fixed charge coverage ratio is less than 1.0 to 1.0, the greater of (A) $50.0 million and (B) 20% of the lesser of the aggregate commitments under such credit facility and the aggregate borrowing base then in effect. facility.
Any of our future indebtedness may contain similar restrictions. Our failure to repurchase the 2025 Notes at a time when the repurchase is required by the indentureindentures (whether upon a fundamental change or otherwise under the indenture)indentures) or pay cash payable on future conversions of the 2025 Notes as required by the indentureindentures would constitute a default under the indenture.indentures. A default under the indentureindentures or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness, including our credit facility. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness, repurchase the 2025 Notes or make cash payments upon conversions thereof.
Our credit facility imposes restrictions on us that may adversely affect our ability to operate our business.
Our credit facility contains restrictive covenants relating to our capital raising activities and other financial and operational matters which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, our credit facility contains, and the agreements governing the 2025 Notes will contain, a cross-default provision whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. For example, the occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $25 million would cause a cross default under the indenture governing the Notes, as well as under our credit facility. The occurrence of a default under any of these borrowing arrangements would permit the holders of the 2025 Notes or the lenders under our credit facility to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the note2025 Note holders or the trustee under the indentureindentures governing the 2025 Notes or the lenders under our credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.
Conversion of the 2025 Notes will, to the extent we deliver shares upon conversion of such 2025 Notes, dilute the ownership interest of existing stockholders, including holders who had previously converted their 2025 Notes, or may otherwise depress our stock price.price or may adversely affect our financial condition.
The conversion of some or all of the 2025 Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the 2025 Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2025 Notes may encourage short selling by market participants because the conversion of the 2025 Notes could be used to satisfy short positions, or anticipated conversion of the 2025 Notes into shares of our common stock could depress our stock price.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the 2025 Notes is triggered, holders of the 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of
the 2025 Notes do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the 2025 Notes, may have a material effect on our reported financial results.
Under current GAAP an entity must separately accounteffective January 1, 2022, the treasury stock method for convertible instruments has been eliminated and instead, the application of the “if-converted” method is required for the debt component and the embedded conversion optiondetermination of convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as the Notes we are offering, in a manner that reflects the issuer’s economic interest cost. The effect of the accounting treatment for such instruments is that the value of such embedded conversion option would be treated as original issue discount for purposes of accounting for the debt component of the Notes, and that original issue discount is amortized into interest expense over the term of the Notes using an effective yield method. As a result, we will initially be required to record a greater amount of non-cash interest expense because of the amortization of the original issue discount to the Notes’ face amount over the term of the Notes and because of the amortization of the debt issuance costs.
Accordingly, we will report lowerdiluted net income (or greater net loss) in our financial results because of the recognition of both the current period’s amortization of the debt discount and the Notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the if-converted method, the effect of which is that conversion will not be assumed for purposes of computing diluted income (loss) per share if the effect would be antidilutive.on a GAAP and non-GAAP basis. Under the if-converted method, for diluted income (loss) per share purposes, convertible debt is antidilutive whenever its interest, net of tax and nondiscretionary adjustments, per common share obtainable on conversion exceeds basic income (loss) per share. Dilutive securities that are issued during a period and dilutive convertible securities for which conversion options lapse, or for which related debt is extinguished during a period, will be included in the denominator of diluted income (loss) per share for GAAP and non-GAAP would generally be calculated assuming that all of the 2025 Notes were converted solely into shares of Class A common stock at the beginning of the reporting period, that they were outstanding. Likewise, dilutive convertible securities converted during a period willunless the result would be included inanti-dilutive, which would negatively affect diluted net income (loss) per share. The impact from the denominator for the period prior to actual conversion. Moreover, interest charges applicable“if converted” method added approximately 15 million shares to the convertible debt will be added back to the numerator. We cannot be sure that the accounting standards in the future will continue to permit the use of the if-converted method. If we are unable to usediluted share count. Under the if-converted method, in accounting for the shares issuable upon conversionsome of the incremental dilution is offset as we are able to add back the after tax effected interest expense from the 2025 Notes, then our diluted income (loss) per shareto the extent the result would not be adversely affected.anti-dilutive.
In addition, if the conditional conversion feature of the 2025 Notes is triggered, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The prepaid forwardCapped Call transactions may affect the value of the 2025 Notes and our common stockClass A Common Stock and may result in unexpected market activity in the Notes and/or our common stock.we are subject to counterparty risk with respect to Capped Call transactions.
In connection with the issuancepricing of the 2025 Notes, we entered into a prepaid forward with a forward counterparty. The prepaid forward is intended to facilitate privately negotiated derivativecapped call transactions, by which investors in the Notes will be able to hedge their investment. In connectionor Capped Calls, with establishing its initial hedge of the prepaid forward, the forward counterparty (or its affiliate) entered into or expects to enter into one or more derivative transactions with respect to our Class A common stock with purchasers of the Notes concurrently with or after the offering of the Notes.financial institutions. The prepaid forward is intendedCapped Calls are expected generally to reduce the potential economic dilution to our stockholders from the issuanceholders of our Class A common stock (if any) upon any conversion of the 2025 Notes, andwith such reduction and/or offset subject to allow certain investors to establish short positions that generally correspond to commercially reasonable initial hedges ofa cap.
The capped call counterparties and/or their investment in the Notes. In addition, the forward counterparty (or its affiliate)respective affiliates may modify itstheir hedge positionpositions by entering into or unwinding one or more derivative transactionsvarious derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions at any time, including followingprior to the offeringmaturity of the Notes and immediately prior to or shortly after April 15, 2022, the Maturity Date of the2025 Notes (and are likely to unwind their derivative transactions and/do so during any observation period related to a conversion of the 2025 Notes or purchase or sell our Class A
common stock in connection with any conversion orfollowing an repurchase of the Notes, in connection with the purchase or sale of2025 Notes by certain investors and/the Company on any fundamental change repurchase date or in the event that sufficient borrow of our Class A common stock becomes available)otherwise). These activitiesThis activity could also cause or avoid an increase or a decrease in the market price of our Class A common stock or the 2025 Notes.
The prepaid forward initially facilitated privately negotiated derivative transactions relating to our Class A common stock, including derivative transactions by which investors in the Notes established short positions relating to our Class A common stock to hedge their investments in the Notes concurrently with, or shortly after, the placementpotential effect, if any, of the Notes. Neither we nor the forward counterparty control how such investors may use such derivative transactions. In addition, such investors may enter into other transactions in connection with such derivative transactions, including the purchase or sale of our Class A common stock, at any time. As a result, the existence of the prepaid forward, such derivativethese transactions and any related market activity could cause more sales of our Class A common stock overactivities on the term of the prepaid forward than there would have otherwise been had we not entered into the prepaid forward. Such sales could potentially affect the markettrading price of our Class A common stock and/or the Notes.
The fundamental change repurchase feature2025 Notes will depend in part on market conditions. Any of these activities could adversely affect the Notes may delay or prevent an otherwise beneficial attempt to take over our company.
The terms of the Notes require us to repurchase the Notes in the event of a fundamental change. A takeovertrading price of our company would trigger an option ofClass A common stock or the holders of the Notes to require us to repurchase the2025 Notes. In addition, if a make-whole fundamental change occurs prior to the Maturity Date of the Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Furthermore, the indenture for the Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions of the indenture may have the effect of delaying or preventing a takeover of our company.
We are subject to counterparty risk with respect to the prepaid forward.
WeAdditionally, we will be subject to the risk that the forward counterpartycapped call counterparties might default under the prepaid forward.Capped Calls. Our exposure to the credit risk of the forward counterparty willcapped call counterparties is not be secured by any collateral. Global economic conditions have in the recent past resulted in, and may again result in, the actual or perceived failure or financial difficulties of many financial institutions. If the forward counterparty becomescapped call counterparties become subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under our transactions with the forward counterparty.capped call counterparties. Our exposure will depend on many factors, but, generally, an increase in our exposure will be correlated to an increase in the market price of our Class A common stock. In addition, upon a default by the forward counterparty,capped call counterparties, we may suffer more dilution than we currently anticipate with respect to our Class A common stock. We can provide no assurances as to the financial stability or viability of the forward counterpartycapped call counterparties to the prepaid forward.Capped Calls.
General Risk Factors
Our effective tax rate and the intended tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business, and such tax rates and tax benefits may change in the future. We are subject to income taxes in the United States and various jurisdictions outside the United States. Our effective tax rate could be adversely affected by a change in our effective tax rate as a result of changes in, or our interpretation of, tax law changes and related new or revised guidance and regulations, changes in our geographical earnings mix, unfavorable government reviews of our tax returns, material differences between our forecasted and actual annual effective tax rates, or by evolving enforcement practices.
In 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which contained significant and impactful changes to the U.S. tax law, including, effective as of January 1, 2022, requiring the capitalization and amortization of research and development expenses, which accelerates the utilization of our net operating losses. There are various proposals in Congress to amend certain provisions of the Tax Act. The state of these proposals and other future legislation remains uncertain and, if enacted, may materially affect our financial position.
On August 16, 2022, the United States enacted the Inflation Reduction Act (IRA), which introduces, among other items, an excise tax that would impose a 1% surcharge on stock repurchases, net of stock issuances beginning in 2023. We could be subject to this new excise tax, depending on various factors, including the amount and frequency of any future stock repurchases and any permitted reductions or exceptions to the amount subject to the tax.
The United States, the European Commission, countries in the European Union, Australia, and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals. Changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting (BEPS) project that was undertaken by the Organization for Economic Co-operation and Development (OECD). The OECD, which represents a coalition of member countries, recommended changes to numerous long-standing tax principles related to transfer pricing and continues to develop new proposals including allocating greater taxing rights to countries where customers are located and establishing a minimum tax on global income. These changes, as adopted by countries, may increase tax uncertainty and may adversely affect our provision for income taxes and cash flows.
We are subject to the examination of our income tax returns by the United States Internal Revenue Service (IRS) and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and other taxes and have reserved for adjustments that may result from the current examinations. The final determination of tax audits and any related legal proceedings could materially differ from amounts reflected in our income tax provisions and accruals. In such case, our income tax provision and cash flows in the period or periods in which that determination is made could be negatively affected.
We maintain significant deferred tax assets related to net operating losses, temporary differences, and tax credits. Our ability to use these tax attributes are dependent upon having sufficient future taxable income in the relevant jurisdiction and, in the case of tax credits, how such credits are treated under current and potential future tax law. Changes to the Tax Act, other regulatory changes, and changes in our forecasts of future income could result in
an adjustment to the deferred tax asset and a related charge to earnings that could materially affect our financial results.
Our reported financial results may be negatively impacted by the changes in the accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. Other companies in our industry may apply these accounting principles differently than we do, which may affect the comparability of our consolidated financial statements.
If our estimates or judgments relating to our critical accounting policies and estimates prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in this 2022 Annual Report in the section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant estimates and assumptions made by management include those related to revenue recognition (including sales incentives, sales returns and implied post contract support), inventory valuation, product warranty liabilities, the valuation, impairment and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill), the fair value of our convertible senior notes, and income taxes.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019,2022, we leased office facilities around the world totaling approximately 370,000310,000 square feet, including approximately 198,000196,000 square feet for our corporate headquarters in San Mateo, California. All of our properties are currently leased. We believe our existing facilities are adequate to meet our current requirements. If we were to require additional space, we believe we will be able to obtain such space on acceptable, commercially reasonable terms. See Note 9 Commitments, contingencies and guarantees,, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for more information about our lease commitments.
Item 3. Legal Proceedings
On February 13, 2018Refer to Legal proceedings and February 27, 2018, two purported shareholder derivative lawsuits (theinvestigations included in Part II, Item 8, Note 9 Commitments, contingencies and guarantees, to the Notes to Consolidated Federal Derivative Actions) were filed in the United States District CourtFinancial Statements of this Annual Report on Form 10-K for the Northern District of California against certain of GoPro’s current and former directors and executive officers and naming the Company as a nominal defendant. The Consolidated Federal Derivative Actions are based on allegations similar to those in two now-resolved shareholder class actions - one filed in 2016 which was settled and received final approval of the Court on September 20, 2019, and the other filed in 2018 which had final judgment entered in favor of defendants on June 24, 2019, following the Court’s granting of defendants’ motion to dismiss. The Consolidated Federal Derivative Actions assert causes of action against the individual defendants for breach of fiduciary duty, and for making false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. The plaintiffs seek corporate reforms, disgorgement of profits from stock sales, and fees and costs. The Consolidated Federal Derivative Actions are currently stayed.year ended December 31, 2022.
Different shareholders filed two similar purported shareholder derivative actions on October 30, 2018 and November 7, 2018 in the Delaware Court of Chancery (the Consolidated Delaware Derivative Actions). Defendants’ motion to dismiss the Consolidated Delaware Derivative Actions is pending.
Other shareholders filed similar purported shareholder derivative actions on December 26, 2018, February 15, 2019, and January 27, 2020 in the Delaware Court of Chancery. Those actions are either stayed or defendants’ time to respond to the complaint has not yet passed.
On January 5, 2015, Contour LLC filed a complaint against the Company in federal court in Utah alleging, among other things, patent infringement in relation to certain GoPro cameras. On November 30, 2015, Contour dismissed the Utah action. On November 30, 2015, Contour IP Holdings LLC (“CIPH”), a non-practicing entity re-filed a similar complaint in Delaware seeking unspecified damages. GoPro filed an inter partes review (IPR) at the US Patent and Trademark Office. The case was transferred to the Northern District of California in July 2017 and was stayed in favor of the IPR proceedings, most recently on December 12, 2018. Upon conclusion of the IPRs, the District Court lifted the stay on October 1, 2019. On October 8, 2019, the court entered a schedule for the remainder of the case, with trial currently scheduled to begin on August 31, 2020. We believe that this matter lacks merit and we intend to vigorously defend against CIPH.
We are currently, and in the future, may continue to be, subject to litigation, claims and assertions incidental to our business, including patent infringement litigation and product liability claims, as well as other litigation of a non-material nature in the ordinary course of business. Due to inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of these matters. We are unable at this time to determine whether the outcome of the litigation would have a material effect on our business, financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Company’s Common Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information. Our Class A common stock is listed on The Nasdaq Global Select Market under the symbol “GPRO.” Our Class B common stock is not listed noror traded on any stock exchange.
Holders. As of January 31, 2020,2023, there were 145were 295 holders of record of our Class A common stock and 32 holders24 holders of record of our Class B common stock.
Dividends. We have not declared or paid any cash dividends on our capital stock and do not currently intend to pay any cash dividends on our Class A or Class B common stock in the foreseeable future.
Securities authorized for issuance under equity compensation plans. The information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from our Proxy Statement to be filed with the SEC for our 2020 Annual Meeting of Stockholders within 120 days after the end of our fiscal year ended December 31, 2019.
Performance graph. The graph below compares the cumulative total return on our Class A common stock with that of the S&P 500 Index and the S&P 500 Consumer Durables Index. The graph assumes $100 was invested (with reinvestment of all dividends, as applicable) at the close of market on December 31, 20142017 in the Class A common stock of GoPro, Inc., the S&P 500 Index and the S&P 500 Consumer Durables Index, and its relative performance is tracked through December 31, 2019.2022. Note that historic stock price performance is not intended to be indicative of future stock price performance.
Sales of unregistered securities. During the period covered by this Annual Report on Form 10-K, we have not sold any equity securities that were not registered under the Securities Act of 1933, as amended.
Issuer purchases of equity securities.No shares of
Share repurchase activity for our Class A orand Class B common stock were purchased during the fourth quarterthree months ended December 31, 2022 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Repurchased (1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (1) |
October 1 - 31, 2022 | | — | | | $ | — | | | — | | | $ | 68,382 | |
November 1 - 30, 2022 | | 1,505 | | | $ | 5.32 | | | 1,505 | | | $ | 60,382 | |
December 1 - 31, 2022 | | — | | | $ | — | | | — | | | $ | 60,382 | |
Total | | 1,505 | | | $ | 5.32 | | | 1,505 | | | |
(1) Represents shares repurchased pursuant to the stock repurchase program approved by our board of 2019.directors on January 27, 2022, authorizing the Company to repurchase up to $100 million of common stock.
(2) Represents the average price paid per share, inclusive of commissions.
Item 6. Selected Consolidated Financial Data
The information set forth below for the five years ended December 31, 2019 is not necessarily indicative of results of future operations, and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.Reserved
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| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(dollars in thousands, except per share amounts) | 2019 | | 2018 (1) | | 2017 (1) | | 2016 (1) | | 2015 (1) |
Consolidated statements of operations data: | | | | | | | | | |
Revenue | $ | 1,194,651 |
| | $ | 1,148,337 |
| | $ | 1,179,741 |
| | $ | 1,185,481 |
| | $ | 1,619,971 |
|
Gross profit | $ | 412,789 |
| | $ | 361,434 |
| | $ | 384,530 |
| | $ | 461,920 |
| | $ | 673,214 |
|
Gross margin | 34.6 | % | | 31.5 | % | | 32.6 | % | | 39.0 | % | | 41.6 | % |
Operating income (loss) | $ | (2,333 | ) | | $ | (93,962 | ) | | $ | (163,460 | ) | | $ | (372,969 | ) | | $ | 54,748 |
|
Net income (loss) | $ | (14,642 | ) | | $ | (109,034 | ) | | $ | (182,873 | ) | | $ | (419,003 | ) | | $ | 36,131 |
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| | | | | | | | | |
Net income (loss) per share: | | | | | | | | | |
Basic | $ | (0.10 | ) | | $ | (0.78 | ) | | $ | (1.32 | ) | | $ | (3.01 | ) | | $ | 0.27 |
|
Diluted | $ | (0.10 | ) | | $ | (0.78 | ) | | $ | (1.32 | ) | | $ | (3.01 | ) | | $ | 0.25 |
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| | | | | | | | | |
Other financial information: | | | | | | | | | |
Adjusted EBITDA (2) | $ | 71,958 |
| | $ | 21,778 |
| | $ | (31,368 | ) | | $ | (192,807 | ) | | $ | 179,309 |
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Non-GAAP net income (loss) (3) | $ | 35,255 |
| | $ | (31,909 | ) | | $ | (95,867 | ) | | $ | (201,247 | ) | | $ | 111,564 |
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Non-GAAP diluted income (loss) per share | $ | 0.24 |
| | $ | (0.23 | ) | | $ | (0.69 | ) | | $ | (1.44 | ) | | $ | 0.76 |
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(1)
| The Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) on January 1, 2019, and adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2016-16 Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory on January 1, 2018. Prior periods were not adjusted for the adoption of these standards.
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(2)
| We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of: provision for income taxes, interest income, interest expense, depreciation and amortization, point of purchase (POP) display amortization, stock-based compensation, impairment charges and restructuring costs. |
| |
(3)
| We define non-GAAP net income as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring costs, non-cash interest expense, gain on sale and license of intellectual property and income tax adjustments. Acquisition-related costs include the amortization of acquired intangible assets and impairment write-downs (if applicable), as well as third-party transaction costs for legal and other professional services. |
See Non-GAAP Financial Measures in
Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information and a reconciliation of net income (loss) to Adjusted EBITDA, net income (loss) to non-GAAP net income (loss), and shares used in the calculation of non-GAAP diluted income (loss) per share.
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| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
(in thousands) | 2019 | | 2018 (1) | | 2017 (1) | | 2016 (1) | | 2015 (1) |
Consolidated balance sheet data: | | | | | | | | | |
Cash, cash equivalents and marketable securities | $ | 165,148 |
| | $ | 197,512 |
| | $ | 247,390 |
| | $ | 217,953 |
| | $ | 474,058 |
|
Inventory | 144,236 |
| | 116,458 |
| | 150,551 |
| | 167,192 |
| | 188,232 |
|
Working capital | 208,925 |
| | 174,574 |
| | 203,156 |
| | 157,074 |
| | 538,066 |
|
Total assets | 792,803 |
| | 698,359 |
| | 850,246 |
| | 922,640 |
| | 1,102,976 |
|
Total indebtedness | 148,810 |
| | 138,992 |
| | 130,048 |
| | — |
| | — |
|
Total stockholders’ equity | 233,529 |
| | 212,112 |
| | 298,705 |
| | 446,945 |
| | 772,033 |
|
| |
(1)
| The Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) on January 1, 2019, and adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2016-16 Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory on January 1, 2018. Prior periods were not adjusted for the adoption of these standards.
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7. Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a variety of factors, including but not limited to, those discussed in Risk Factors and elsewhere in this Annual Report on Form 10-K.
This MD&A is organized as follows:
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• | •Overview. Discussion of our business and overall analysis of financial and other highlights affecting the business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of the MD&A. |
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• | Components of Our Results of Operations. Description of the items contained in each operating revenue and expense caption in the consolidated statements of operations.
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• | Results of Operations. Analysis of our financial results comparing 2019 to 2018 is presented below. An analysis of our financial results comparing 2018 to 2017 can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 15, 2019, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at https://investor.gopro.com.
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• | Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.
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• | Contractual Commitments. Overview of our contractual obligations, including expected payment schedule and indemnifications as of December 31, 2019.
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• | Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
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• | Non-GAAP Financial Measures. A reconciliation and discussion of our GAAP to non-GAAP financial measures.
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•Components of Our Results of Operations. Description of the items contained in each revenue, cost of revenue and operating expense caption in the consolidated statements of operations. •Results of Operations. Analysis of our financial results comparing 2022 to 2021 is presented below. An analysis of our financial results comparing 2021 to 2020 can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 11, 2022, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at https://investor.gopro.com.
•Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.
•Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
•Non-GAAP Financial Measures. A reconciliation and discussion of our GAAP to non-GAAP financial measures.
Overview
GoPro helps its consumersthe world capture and share their experiencesitself in immersive and exciting ways. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create and share engaging personal content. When consumers use our products and services, they often generate and share content that organically increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for our products. We believe revenue growth may be driven by the introduction of new cameras, accessories, lifestyle gear, and software and subscription offerings and GoPro app monetization.offerings. We believe new camera features drive a replacement cycle among existing users and attract new users, expanding our total addressable market. Our investments in image stabilization, mobile app editing and sharing solutions, modular accessories, auto-upload capabilities, local language user-interfaces and voice recognition in more than 12 languages drive the expansion of our global market.
In 2019,2022, we began shipping our HERO8HERO11 Black flagship camera that includes our GP2 processor, a larger sensor and HyperSmooth 5.0 image stabilization. The larger sensor provides 10-bit color video at up to 5.3K video at 60 frames per second, 27 megapixel (MP) photo resolution, 8:7 aspect ratio video for a larger vertical field of view, and Hyperview, which features enhancedallows for a 16:9 field of view. HyperSmooth 2.05.0 image stabilization includes 360-degree Horizon Lock, which keeps video footage steady. The HERO11 Black also includes the Enduro Battery, which improves the camera performance in both cold and moderate temperatures, TimeWarp Video 2.0, built-in mounting, live streaming, cloud connectivity, voice control, improved audio3.0, Night Effects Time Lapse, and a front-facing and rear touch display. HyperSmooth 2.0 includes dramatically improved pitch axis stabilization, a new Boost mode for absolute maximum stabilization, and powerful in-app horizon leveling that provides gimbal-like stability. TimeWarp Video 2.0 automatically applies a high-speed, ‘magic-carpet-ride’ effect to videos, while live streaming enables users to share content in real time on social media platforms. We also introduced three new accessories for the HERO8 Black camera, called Mods, which enables users to transform their HERO8 Black camera into a production powerhouse. The Media Mod delivers shotgun-mic performance with an integrated directional microphone, the Light Mod illuminates a scene and the Display Mod allows users to perfectly frame themselves during self-capture. We also began shipping our newest 360-degree waterproofHERO11 Black Creator Edition which is an all-in-one content capturing bundle that makes vlogging, filmmaking and live streaming easier than ever. Creator Edition combines the HERO11 Black, Volta, Enduro Battery, Media Mod, and Light Mod to create professional-quality videos.
In November 2022, we began shipping our HERO11 Black Mini camera MAX, in 2019. Our MAXwhich has all the power of the HERO11 Black, but is smaller, lighter and simpler with a one-button design. The HERO11 Black Mini includes our GP2
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
processor, the larger sensor used in our HERO11 Black flagship camera, features MAX HyperSmooth 5.0 image stabilization 360-degree MAX TimeWarp Video, MAX SuperView, PowerPano, built-in mounting, high-quality audio, live streaming, voice control and a front facing touch display. MAX HyperSmooththe Enduro Battery.
In the first half of 2022, we expanded our software solutions with the launch of our new GoPro Player + ReelSteady desktop app, which provides the highest performanceindustry-leading video stabilization yet, while MAX SuperView provides the widest view ever fromand 360-reframing tools in a GoPro camera. PowerPano allows users to capturesingle post-production app. Additionally, we began shipping HERO10 Black Bones which is a 6.2mp, 270-degree panoramic photo with the push of one button and creates an artifact-free shot of action or movement. Our MAXspecifically built FPV (First Person View) drone camera features six built-in microphones that allow users to capture immersive 360-degree audio, directional audio for vloggingincludes our GP2 processor, HyperSmooth 4.0, and the best stereo sound ever from a GoPro. GoPro Player + ReelSteady desktop app. The camera delivers the same image quality and video frame rates as the HERO10 Black camera.
Our HERO8HERO11 Black, MAXHERO11 Black Mini, HERO11 Black Creator Edition, HERO10 Black, HERO10 Black Creator Edition, HERO9 Black and HERO7 line ofMAX cameras are compatible with our ecosystem of mountable and wearable accessories,accessories.
We offer our GoPro subscription, which includes unlimited cloud storage supporting source video and feature automatic uploading capabilitiesphoto quality, camera replacement and damage protection, highlight videos automatically delivered to you via the GoPro Quik app when footage is uploaded to your GoPro cloud account, access to a high-quality live streaming service on GoPro.com, as well as discounts on GoPro gear, mounts and accessories.
In addition to the GoPro subscription, we offer the Quik subscription which makes it easy for users to get the most out of their favorite photos and videos, captured on any phone or camera, through the use of the Quik mobile app’s editing tools. These editing tools include features such as trim, color, crop, filtering, auto-sync of edits to music, and the ability to change video speed. Quik mobile app’s editing tools can be used with footage captured on any phone or camera. We believe the Quik subscription is an important step in expanding our total addressable market to those who may not own a GoPro Plus,camera. We also offer Open GoPro, an open API initiative that makes it easy for third-party developers to integrate their HERO camera into their own development efforts.
We continue to monitor the current evolving macroeconomic landscape. Increasing inflation places pressure on many areas of our subscription service that provides a camera protection plan, discountsbusiness, including our product pricing, operating expenses, component pricing and consumer spending. In 2022, the strength of the U.S. dollar relative to other foreign currencies largely impacted our revenue and gross margin. If the U.S. dollar strengthens relative to other foreign currencies in the future, our financial results will be negatively impacted. See Item 1A. Risk Factors for further discussion of the possible impact of inflation and the strong U.S. dollar on our business.
GoPro, accessoriesInc.
Management’s Discussion and enables subscribers to easily access, edit, storeAnalysis of Financial Condition and share their content.Results of Operations
The following is a summary of measures presented in our consolidated financial statements and key metrics used to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.
| | (units and dollars in thousands, except per share amounts) | Q4 2019 | | Q4 2018 | | % Change | | FY 2019 | | FY 2018 | | % Change | (units and dollars in thousands, except per share amounts) | Q4 2022 | | Q4 2021 | | % Change | | FY 2022 | | FY 2021 | | % Change | |
Revenue | $ | 528,345 |
| | $ | 377,378 |
| | 40 | % | | $ | 1,194,651 |
| | $ | 1,148,337 |
| | 4 | % | Revenue | $ | 321,021 | | $ | 391,149 | | (18) | % | | $ | 1,093,541 | | | $ | 1,161,084 | | | (6) | % | |
Camera units shipped (1) | 1,857 |
| | 1,413 |
| | 31 | % | | 4,260 |
| | 4,337 |
| | (2 | )% | Camera units shipped (1) | 850 | | | 1,033 | | | (18) | % | | 2,810 | | | 3,145 | | | (11) | % | |
Gross margin (2) | 38.2 | % | | 37.7 | % | | 50 bps |
| | 34.6 | % | | 31.5 | % | | 310 bps |
| Gross margin (2) | 32.5 | % | | 41.2 | % | | (870) | bps | | 37.2 | % | | 41.1 | % | | (390) | bps | |
Operating expenses | $ | 105,725 |
| | $ | 109,150 |
| | (3 | )% | | $ | 415,122 |
| | $ | 455,396 |
| | (9 | )% | Operating expenses | $ | 102,596 | | | $ | 102,449 | | | — | % | | $ | 367,873 | | | $ | 363,889 | | | 1 | % | |
Net income (loss) | $ | 95,820 |
| | $ | 31,671 |
| | 203 | % | | $ | (14,642 | ) | | $ | (109,034 | ) | | (87 | )% | |
Diluted net income (loss) per share | $ | 0.65 |
| | $ | 0.22 |
| | 195 | % | | $ | (0.10 | ) | | $ | (0.78 | ) | | (87 | )% | |
Cash provided by (used in) operations | $ | 88,251 |
| | $ | 48,413 |
| | 82 | % | | $ | (24,444 | ) | | $ | (42,434 | ) | | (42 | )% | |
Net income | | Net income | $ | 3,073 | | | $ | 52,626 | | | (94) | % | | $ | 28,847 | | | $ | 371,171 | | | (92) | % | |
Diluted net income per share | | Diluted net income per share | $ | 0.02 | | | $ | 0.32 | | | (94) | % | | $ | 0.18 | | | $ | 2.27 | | | (92) | % | |
Cash provided by operations | | Cash provided by operations | $ | 25,562 | | | $ | 163,848 | | | (84) | % | | $ | 5,747 | | | $ | 229,153 | | | (97) | % | |
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Other financial information: | | | | |
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| Other financial information: | | |
Adjusted EBITDA (3) | $ | 112,092 |
| | $ | 58,807 |
| | 91 | % | | $ | 71,958 |
| | $ | 21,778 |
| | 230 | % | Adjusted EBITDA (3) | $ | 22,014 | | | $ | 71,571 | | | (69) | % | | $ | 94,754 | | | $ | 167,798 | | | (44) | % | |
Non-GAAP net income (loss) (4) | $ | 102,498 |
| | $ | 42,356 |
| | 142 | % | | $ | 35,255 |
| | $ | (31,909 | ) | | (210 | )% | |
Non-GAAP income (loss) per share | $ | 0.70 |
| | $ | 0.30 |
| | 133 | % | | $ | 0.24 |
| | $ | (0.23 | ) | | (204 | )% | |
Non-GAAP net income (4) | | Non-GAAP net income (4) | $ | 21,090 | | | $ | 66,147 | | | (68) | % | | $ | 80,923 | | | $ | 146,068 | | | (45) | % | |
Non-GAAP diluted net income per share | | Non-GAAP diluted net income per share | $ | 0.12 | | | $ | 0.41 | | | (71) | % | | $ | 0.47 | | | $ | 0.90 | | | (48) | % | |
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(1) (1) Represents the number of camera units that are shipped during a reporting period, net of any returns. (2) One basis point (bps) is equal to 1/100th of 1%. (3) We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of provision for income taxes, interest income, interest expense, depreciation and amortization, point of purchase (POP) display amortization, stock-based compensation, loss on extinguishment of debt, and restructuring and other costs, including right-of-use asset impairment charges. (4) We define non-GAAP net income as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring and other costs, including right-of-use asset impairment charges, non-cash interest expense, gain on sale and license of intellectual property, loss on extinguishment of debt and income tax adjustments. Acquisition-related costs include the amortization of acquired intangible assets and impairment charges (if applicable), as well as third-party transaction costs for legal and other professional services. | Represents the number of camera units that are shipped during a reporting period, including camera units that are shipped with drones, net of any returns. Camera units shipped does not include drones sold without a camera, mounts or accessories. |
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(2)
| One basis point (bps) is equal to 1/100th of 1%. |
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(3)
| We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of: provision for income taxes, interest income, interest expense, depreciation and amortization, point of purchase (POP) display amortization, stock-based compensation, impairment charges, and restructuring and other costs. |
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(4)
| We define non-GAAP net income (loss) as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring and other costs, non-cash interest expense, gain on sale and license of intellectual property and income tax adjustments. Acquisition-related costs include the amortization of acquired intangible assets and impairment write-downs (if applicable), as well as third-party transaction costs for legal and other professional services. |
Reconciliations of non-GAAP adjusted measures to the most directly comparable GAAP measures are presented under Non-GAAP Financial Measures.
Full Year and Fourth Quarter 2022 financial performance
Full year 2022, including the fourth quarter, were largely impacted by foreign exchange rate fluctuations, inflation and other macroeconomic factors that challenged demand and increased competition for share of wallet when compared to the prior year period. Revenue for the full year of 2022 was $1.09 billion, or a 5.8% decrease from the same period in 2021. The strengthening of the U.S. dollar negatively impacted full year 2022 revenue when compared to 2021 by approximately $50.4 million, and we shipped 2.8 million camera units, or a 10.6% decrease compared to the same period in 2021, partially due to the macroeconomic factors impacting U.S. big box customers and their reductions to on-hand inventory. These decreases to revenue were partially offset by an increase in GoPro.com channel revenue. The increase in GoPro.com channel revenue was driven by subscription and service revenue improving 52.1% year-over-year to $82.4 million, as the number of subscribers grew 43% year-over-year to 2.25 million as of December 31, 2022. From the beginning of the year, our subscription and service revenue benefited from continued improvements in our annual GoPro subscriber retention rate by 6%. In 2022, our GoPro subscriber attach rate from sales on GoPro.com remained steady at above 90%, while our GoPro subscriber attach rate from post-camera purchase at retail through our Quik app increased to nearly 35% from 22% in 2021; a more than 50% improvement year-over-year. While our GoPro subscribers increased year-over-year and GoPro subscriber retention improved, the absolute number of GoPro subscribers who churned out also increased year-over-year. Our 2022 average selling price, as defined as total revenue divided by camera units shipped, increased 5.4% year-over-year to $389, primarily due to 73% of our camera revenue mix being derived from cameras with a manufacturer’s suggested retail price (MSRP) equal to or greater than $500
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Full year and fourth quarter 2019 financial performance
Revenue for 2019 was up 4% year-over-year at $1.195 billion, compared to $1.148 billion38% in 2018. Excluding Karma,the same period in 2021. Additionally, 90% of our 2022 camera revenue mix was derived from cameras with an MSRP equal to or greater than $400 compared to 85% in the same period in 2021. Consumer demand for 2019 increased 7% year-over-year. Gross margin for 2019 was 34.6%, up from 31.5%our products as measured via 2022 channel inventory activity saw sell-through outpacing sell-in, leaving channel inventory as of December 31, 2022 slightly above prior year levels at approximately 685,000 units. The increase in 2018. The year-over-year margin improvementchannel inventory over 2021 was primarily due toa favorable sales mix and lower averagesecond camera costsoffering, HERO11 Black Mini, being introduced in 2019, partially offsetNovember 2022 alongside our flagship, HERO11 Black camera. Excluding HERO11 Black Mini, channel inventory would have declined year-over-year. While the absolute level of inventory in the channel entering 2023 is generally in-line with prior year balances, weeks of inventory entering the first quarter of 2023 is largely impacted by United States tariffs and one-time costs relatedanticipated macroeconomic headwinds in Q1 2023. As a result, we anticipate unit sell-through for the first quarter of 2023 to decrease 9% year-over-year as retailers continue to reduce their on-hand inventory. The gross margin percentage for full year 2022 was 37.2%, down from 41.1% in 2021, which was negatively impacted by approximately 270 bps due to the production delaystrengthening of HERO8 Black. We shipped 4.3the U.S. dollar. Net income decreased in 2022 to $28.8 million compared to $371.2 million in 2021, primarily driven by the release of tax valuation allowances in 2021 of $284.6 million. Adjusted EBITDA for the full year 2022 was $95 million or 8.7% of revenue, compared to $167.8 million or 14.5% of revenue for the same period in 2021.
Our annual GoPro subscriber retention rate represents the number of annual GoPro subscribers that renewed their subscription in the period over the number of annual GoPro subscribers with renewal dates in the same period. The number of churned GoPro subscribers represents those subscribers that did not renew their subscription on their renewal date. Our GoPro subscriber attach rate from sales on GoPro.com represents the average number of new subscriptions sold on GoPro.com in the period over the number of camera unit sales to customers eligible for a new GoPro subscription on GoPro.com for the same period. Our GoPro subscriber attach rate from post-camera purchases through retail on our Quik app represents the average number of new GoPro subscribers in the period over the corresponding number of camera units sold through the retail channel.
Revenue in 2019,the fourth quarter 2022 was $321.0 million, or a 2%17.9% decrease from 2018. However,the same period in 2021. On a constant currency basis, we estimate that our fourth quarter 2022 revenue was negatively impacted by approximately $20.2 million due to the strengthening of the U.S. dollar year-over-year. Our average selling price for 2019 increased 6% year-over-year to $280 (defined as total revenue divided by camera units shipped). Excluding Karma, our 2019 average selling price increased 8% year-over-year.
Revenuewas $378 for the fourth quarter of 20192022, or a 0.3% decrease year-over-year. However, on a constant currency basis, we estimate our average selling price would have increased by approximately 6% year-over-year. Our fourth quarter 2022 camera revenue mix from cameras with an MSRP equal to or greater than $500 was $528.3 million, a 40% increase year-over-year from $377.4 million76% compared to 70% in the same period in 2021. Looking at cameras with an MSRP equal to or greater than $400, 90% of 2018. In addition,our camera revenue mix was derived from this price band in the fourth quarter of 2022 and for the same period in 2021. Camera units shipped in the fourth quarter of 2022 was 850 thousand, compared to 1.0 million camera units for the same period of 2021. GoPro.com revenue was $128.2 million in the fourth quarter of 2022 and represented 39.9% of total revenue, compared to 32.7% of total revenue for the same period in 2021. Retail revenue represented 60.1% and 67.3% of total revenue for the fourth quarter of 2022 and 2021, respectively. Subscription and service revenue, which is included in the GoPro.com channel, was $22.2 million in the fourth quarter of 2022, or a 29.7% increase year-over-year. We had 2.25 million GoPro subscribers as of December 31, 2022, a 43% increase year-over-year. The gross margin percentage for the fourth quarter of 20192022 was 38.2%32.5%, updown from 37.7% in the same period of 2018. Revenue and gross margin41.2% in the fourth quarter of 2019 were positively2021, which was impacted by the launchyear-over-year strengthening of the MAX and HERO8 Black cameras inU.S. dollar by approximately 380 bps. Net income for the fourth quarter of 20192022 was $3.1 million compared to the launch of the HERO7 line of cameras$52.6 million in the third quarter of 2018. Camera units shippedsame period in 2021. Adjusted EBITDA for the fourth quarter of 20192022 was 1.9$22.0 million, units, compared to 1.4$71.6 million units infor the same period of 2018. Our fourth quarter of 2019 average selling price (defined as total revenue divided by camera units shipped) increased to $285, a7% increase year-over-year.
Our full year 2019 and fourth quarter of 2019 operating expenses decreased 9% and 3%, respectively, primarily attributable to our continued focus on cost management and the financial benefits recognized from our restructuring actions.
We returned to profitability on a GAAP and non-GAAP basis in the fourth quarter 2019 with net income of $95.8 million and $102.5 million, respectively. In addition, for 2019, our GAAP net loss improved year-over-year by $94.4 million to a net loss of $14.6 million and we returned to profitability on a non-GAAP basis with net income of $35.3 million. 2019 adjusted EBITDA improved to $72.0 million from $21.8 million in 2018.2021.
Factors affecting performance
We believe that our future success will be dependent on many factors, including those further discussed below. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to operate our business and improve our results of operations.
Driving profitability through improved efficiency, lower costs and better execution. We generated positive operating income for the full year of 2022 and 2021, and we continue to make strategic decisions to create growth and profitability in our business. Though in 2020, we incurred an operating losses in 2019, 2018loss. Our 2022 and 2017, however, ourprior years restructuring actions, along with continued effective cost management, have significantly reducedallowed us to scale our on-going operating expenses in 2019 and 2018based on our growth strategies, resulting in a flatter, more efficient global organization that has
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
allowed for improved communication and better alignment amongstamong our functional teams. We remain focused on increasing sales through GoPro.com, while also continuing to cultivate the partnerships with our distributors and retailers, in order to grow both sales channels concurrently.We have grown our subscribers and subscription revenue over the past several years and continue to make strategic decisions to enhance our subscription offerings, grow subscribers, and increase subscription revenue.
If we are unable to generate adequate revenue growth, orsuccessfully sustain our direct-to-consumer and retail sales models, grow subscribers and subscription revenue, and continue to effectively manage our expenses, we may incur significant losses in the future and may not be able to achievemaintain profitability.
Investing in research and development and enhancing our customer experience. Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled and experienced research and development personnel. We expect the timing of new product releases to continue to have a significant impact on our revenue and we must continually develop and introduce innovative new cameras, mobile applications and other new offerings. We plan to further build upon our integrated mobile, desktop and cloud-based storytelling solutions, and subscription offerings.offering. Our investments, including those for marketing and advertising, may not successfully drive increased revenue and our customers may not accept our new offerings. If we fail to innovate and enhance our brand, our products, our integrated storytelling solutions,mobile and desktop app experience or the value proposition of our subscriptions,subscription, our market position and revenue will be adversely affected. Further, we have incurred substantial research and development expenses and if our efforts are not successful, we may not recover the value of these investments.
GrowingImproving Profitability. We believe that our total addressable market globally. continued focus on growing our sales from our GoPro.com channel, including subscription and service revenue, will support our ability to be profitable on an annual basis due to an improved margin structure as well as continued operating expense control. As a result of this strategic focus on GoPro.com sales, we believe we can remain profitable with annual unit sales similar to 2021 and 2022. In addition, we continue to work closely with our distributors and retailer partners to grow the retail sales channel. We believe that there is additional growth available through the retail sales channel, which will also be a driver to achieve profitability.
We continue to believe that international markets represent a significant growth opportunity for GoPro.to achieve profitability. While the total market for digital cameras has continued to decline as smartphone and tablet camera quality has improved, we continue to believe that our consumers’ differentiated use of GoPro cameras, our integrated storytellingmobile and desktop app and cloud solutions, our continued innovation of product features desired by our users, and our brand, all help support our business from many of the negative trends facing this category.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
market. However, we expect that the markets in which we conduct our business will remain highly competitive as we face new product introductions from competitors. We will continue to leverage our brand recognition to increase our global presence through GoPro.com with the active promotion of our brand, the creation and cultivation of regional strategic and marketing partnerships, the expansion of localized products in international markets with region-specific marketing, and an investmenta focus on the biggest investment opportunities. However, sales in international locations subjects us to foreign currency exchange rate fluctuations that create inherent risks for us and may cause us to adjust pricing which may make our products more or less attractive to the consumer. Continued fluctuations in foreign currency exchange rates could have a continued impact on our future operating results.
Our growthprofitability also depends on expanding our total addressable market with our subscription and service GoPro Plus, and capture solutions, including MAX, which faces intense competition.offering. If we are not successful in penetrating additional markets,with our direct-to-consumer sales model through GoPro.com, expanding our product, subscription and service offering, increasing our paid subscriber base through both GoPro.com and retail aftermarket mobile app attach, and improving subscriber retention, we might not be able to grow revenueremain profitable and we may not recognize benefits from our investment in new areas.
Marketing the improved GoPro experience to our extended community.experience. We intend to continue investing resources infocus our marketing advertisingresources to increase traffic to GoPro.com, improve the consumer experience on GoPro.com, and further improve brand management efforts.recognition. Historically, our growth has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. Our future growthgoal of sustaining profitability depends on continuing to reach, expand and re-engage with this core user base. We believe that consumers in our core user base in many markets are not familiaralignment with our brand and products and believe there is an opportunity for GoPro to expand awareness through a range of advertising and promotional programs and campaigns, including through social media. In addition, we may look to expand our user base to include a broader group of consumers.strategic priorities. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our resources in this area.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Seasonality. Historically, we have experienced the highest levels of total revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. While we have implemented operational changes aimed at reducing the impact of fourth quarter seasonality on full year performance, timely and effective product introductions and forecasting, whether just prior to the holiday season or otherwise, are critical to our operations and financial performance.
Macroeconomic Risks. Macroeconomic conditions affecting the level of consumer spending includes general market conditions, fluctuations in foreign exchange rates and interest rates, and inflation. Although the majority of our retail sales occur in U.S. dollars, we sell in local currency through our GoPro.com channel, which subjects us to exchange rate fluctuations that create inherent risks for us and may cause us to adjust pricing which may make our products more or less attractive to the consumer. If sales denominated in foreign currencies increase in the future, fluctuations in foreign exchange rates could have a continued impact on our future operating results. Some product costs have become subject to inflationary pressure and we may not be able to fully offset such higher costs through price increases. Our inability or failure to adjust pricing could harm our business, financial condition, and operating results.
Components of our Results of Operations
Revenue. Our revenue is primarily comprised of product revenue,sales, and subscription and service offerings, net of returns and sales incentives (including price protection), and subscription services. Revenueincentives. Product revenue is derived from the sale of our cameras and accessories directly to retailers, through our network of domestic and international distributors, and through gopro.com.on GoPro.com. Subscription and service revenue is primarily derived from the sale of our GoPro subscription and Quik subscription on GoPro.com and the Quik mobile app. See Critical Accounting Policies and Estimates and Note 1 Summary of business and significant accounting policies,, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for information regarding revenue recognition.
Cost of revenue. Our cost of revenue primarily consists of product and subscription costs, including costs of contract manufacturing for production, third-party logistics and procurement costs, warranty repair costs, tooling and equipment depreciation, third-party hosting fees, excess and obsolete inventory write-downs, amortization of acquired developed technology, license fees, tariffs and certain allocated costs related to our manufacturing team, facilities, including right-of-use asset impairment charges, cloud storage costs and personnel-related expenses.
Operating expenses.We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative.
Research and development. Our research and development expense consists primarily of personnel-related costs, including salaries, stock-based compensation and employee benefits. Research and development expense also includes consulting and outside professional services costs, materials, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses associated with the development of our product and service offerings.
Sales and marketing. Our sales and marketing expense consists primarily of advertising and marketing promotions of our products and services, and personnel-related costs, including salaries, stock-based compensation and employee benefits. Sales and marketing expense also includes point of purchase (POP) display expenses and related amortization, sales commissions, GoPro.com and subscription provider fees, trade show and event costs, sponsorship costs,
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
consulting and contractor expenses, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses.
General and administrative. Our general and administrative expense consists primarily of personnel-related costs, including salaries, stock-based compensation and employee benefits for our finance, legal, human resources, information technology and administrative personnel. TheGeneral and administrative expense also includes professional service costs related to accounting, tax, legal services, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses.
Results of Operations
The following table sets forth the components of our consolidated statements of operations for each of the periods presented, and each component as a percentage of revenue:
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| Year ended December 31, |
(dollars in thousands) | 2019 | | 2018 | | 2017 |
Revenue | $ | 1,194,651 |
| | 100 | % | | $ | 1,148,337 |
| | 100 | % | | $ | 1,179,741 |
| | 100 | % |
Cost of revenue | 781,862 |
| | 65 |
| | 786,903 |
| | 69 |
| | 795,211 |
| | 67 |
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Gross profit | 412,789 |
| | 35 |
| | 361,434 |
| | 31 |
| | 384,530 |
| | 33 |
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Operating expenses: | | | | | | | | | | | |
Research and development | 142,894 |
| | 12 |
| | 167,296 |
| | 15 |
| | 229,265 |
| | 19 |
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Sales and marketing | 206,431 |
| | 17 |
| | 222,096 |
| | 19 |
| | 236,581 |
| | 20 |
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General and administrative | 65,797 |
| | 6 |
| | 66,004 |
| | 6 |
| | 82,144 |
| | 7 |
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Total operating expenses | 415,122 |
| | 35 |
| | 455,396 |
| | 40 |
| | 547,990 |
| | 46 |
|
Operating loss | (2,333 | ) | | — |
| | (93,962 | ) | | (9 | ) | | (163,460 | ) | | (13 | ) |
Other income (expense): | | | | | | | | | | | |
Interest expense | (19,229 | ) | | (2 | ) | | (18,683 | ) | | (1 | ) | | (13,660 | ) | | (1 | ) |
Other income, net | 2,492 |
| | — |
| | 4,970 |
| | — |
| | 733 |
| | — |
|
Total other expense, net | (16,737 | ) | | (2 | ) | | (13,713 | ) | | (1 | ) | | (12,927 | ) | | (1 | ) |
Loss before income taxes | (19,070 | ) | | (2 | ) | | (107,675 | ) | | (10 | ) | | (176,387 | ) | | (14 | ) |
Income tax (benefit) expense | (4,428 | ) | | (1 | ) | | 1,359 |
| | — |
| | 6,486 |
| | 1 |
|
Net loss | $ | (14,642 | ) | | (1 | )% | | $ | (109,034 | ) | | (10 | )% | | $ | (182,873 | ) | | (15 | )% |
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Revenue
|
| | | | | | | | | | | | | | | | | |
(camera units and dollars in thousands, except average selling price) | Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
2019 | | 2018 | | 2017 | | % Change | | % Change |
Camera units shipped | 4,260 |
| | 4,337 |
| | 4,303 |
| | (2 | )% | | 1 | % |
| | | | | | | | | |
Average selling price | $ | 280 |
| | $ | 265 |
| | $ | 274 |
| | 6 |
| | (3 | ) |
| | | | | | | | | |
Direct channel | $ | 548,322 |
| | $ | 551,095 |
| | $ | 634,888 |
| | (1 | ) | | (13 | ) |
Percentage of revenue | 45.9 | % | | 48.0 | % | | 53.8 | % | | | | |
Distribution channel | $ | 646,329 |
| | $ | 597,242 |
| | $ | 544,853 |
| | 8 |
| | 10 |
|
Percentage of revenue | 54.1 | % | | 52.0 | % | | 46.2 | % | | | | |
Total revenue | $ | 1,194,651 |
| | $ | 1,148,337 |
| | $ | 1,179,741 |
| | 4 | % | | (3 | )% |
| | | | | | | | | |
Americas | $ | 523,975 |
| | $ | 494,797 |
| | $ | 582,917 |
| | 6 | % | | (15 | )% |
Percentage of revenue | 43.9 | % | | 43.1 | % | | 49.4 | % | | | | |
Europe, Middle East and Africa (EMEA) | $ | 359,187 |
| | $ | 366,438 |
| | $ | 333,454 |
| | (2 | ) | | 10 |
|
Percentage of revenue | 30.0 | % | | 31.9 | % | | 28.3 | % | | | | |
Asia and Pacific (APAC) | $ | 311,489 |
| | $ | 287,102 |
| | $ | 263,370 |
| | 8 |
| | 9 |
|
Percentage of revenue | 26.1 | % | | 25.0 | % | | 22.3 | % | | | | |
Total revenue | $ | 1,194,651 |
| | $ | 1,148,337 |
| | $ | 1,179,741 |
| | 4 | % | | (3 | )% |
2019 Compared to 2018. Revenue for 2019 was up 4% year-over-year at $1.195 billion, compared to $1.148 billion in 2018, despite a $28.6 million decrease in Karma drone and drone accessory revenue, as we exitedThe following table sets forth the drone business in 2018. Excluding Karma, revenue for 2019 increased 7% year-over-year. We shipped 4.3 million camera units in 2019, a 2% decrease from 2018. Our average selling price for 2019 increased 6% year-over-year to $280, primarily due to a shift of cameras sold equal to or greater than $300, which represented 90%components of our camera revenue mix. Excluding Karma, our 2019 average selling price increased 8% year-over-year. Average selling price is defined as total revenue divided by camera units shipped. Year-over-year, revenue by channel has slightly shifted from direct to distributionConsolidated Statements of Operations for each of the periods presented, and revenue by geography has slightly shifted from EMEA to APAC primarily due to increasing our advertising and marketing efforts in APAC and an increase in demand for our cameras in APAC. Revenue from gopro.com is includedeach component as a componentpercentage of our direct channel, and represented 10%, 8% and 7% of total revenue for 2019, 2018 and 2017, respectively.revenue:
Cost of revenue and gross margin
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
Cost of revenue | $ | 772,088 |
| | $ | 772,136 |
| | $ | 786,657 |
| | — | % | | (2 | )% |
Stock-based compensation | 1,902 |
| | 1,954 |
| | 1,935 |
| | (3 | ) | | 1 |
|
Acquisition-related costs | 7,818 |
| | 11,434 |
| | 5,985 |
| | (32 | ) | | 91 |
|
Restructuring costs | 54 |
| | 1,379 |
| | 634 |
| | (96 | ) | | 118 |
|
Total cost of revenue | $ | 781,862 |
| | $ | 786,903 |
| | $ | 795,211 |
| | (1 | )% | | (1 | )% |
Gross margin | 34.6 | % | | 31.5 | % | | 32.6 | % | | 310 bps |
| | (110) bps |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 | | | |
Revenue | | $ | 1,093,541 | | | 100 | % | | $ | 1,161,084 | | | 100 | % | | $ | 891,925 | | | 100 | % | | | | | |
Cost of revenue | | 686,713 | | | 63 | | | 683,979 | | | 59 | | | 577,411 | | | 65 | | | | | | |
Gross profit | | 406,828 | | | 37 | | | 477,105 | | | 41 | | | 314,514 | | | 35 | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | |
Research and development | | 139,885 | | | 13 | | | 141,494 | | | 12 | | | 131,589 | | | 15 | | | | | | |
Sales and marketing | | 166,967 | | | 15 | | | 156,694 | | | 13 | | | 151,380 | | | 17 | | | | | | |
General and administrative | | 61,021 | | | 5 | | | 65,701 | | | 6 | | | 68,364 | | | 8 | | | | | | |
Total operating expenses | | 367,873 | | | 33 | | | 363,889 | | | 31 | | | 351,333 | | | 40 | | | | | | |
Operating income (loss) | | 38,955 | | | 4 | | | 113,216 | | | 10 | | | (36,819) | | | (5) | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | |
Interest expense | | (6,242) | | | (1) | | | (22,940) | | | (2) | | | (20,257) | | | (2) | | | | | | |
Other income (expense), net | | 1,740 | | | — | | | (176) | | | — | | | (4,881) | | | (1) | | | | | | |
Total other expense, net | | (4,502) | | | (1) | | | (23,116) | | | (2) | | | (25,138) | | | (3) | | | | | | |
Income (loss) before income taxes | | 34,453 | | | 3 | | | 90,100 | | | 8 | | | (61,957) | | | (8) | | | | | | |
Income tax expense (benefit) | | 5,606 | | | 1 | | | (281,071) | | | (24) | | | 4,826 | | | 1 | | | | | | |
Net income (loss) | | $ | 28,847 | | | 2 | % | | $ | 371,171 | | | 32 | % | | $ | (66,783) | | | (9) | % | | | | | |
2019 Compared to 2018. Gross margin of 34.6% in 2019 increased from 31.5% in 2018, or 310 bps, reflecting a favorable product sales mix, 271 bps, and lower average camera costs, 131 bps, partially offset by slightly higher operational expenses, (71) bps, and higher sales incentives, (70) bps.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenue
Research and development
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
Research and development | $ | 125,142 |
| | $ | 134,866 |
| | $ | 191,182 |
| | (7 | )% | | (29 | )% |
Stock-based compensation | 17,167 |
| | 19,636 |
| | 24,963 |
| | (13 | ) | | (21 | ) |
Acquisition-related costs | — |
| | — |
| | 3,028 |
| | — |
| | (100 | ) |
Restructuring costs | 585 |
| | 12,794 |
| | 10,092 |
| | (95 | ) | | 27 |
|
Total research and development | $ | 142,894 |
| | $ | 167,296 |
| | $ | 229,265 |
| | (15 | )% | | (27 | )% |
Percentage of revenue | 12.0 | % | | 14.6 | % | | 19.4 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(camera units and dollars in thousands, except average selling price) | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
| 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Camera units shipped | | 2,810 | | | 3,145 | | | 2,820 | | | (11) | % | | 12 | % | | | | | |
| | | | | | | | | | | | | | | |
Average selling price | | $ | 389 | | | $ | 369 | | | $ | 316 | | | 5 | | | 17 | | | | | | |
| | | | | | | | | | | | | | | |
Retail | | $ | 682,799 | | | $ | 769,019 | | | $ | 609,368 | | | (11) | | | 26 | | | | | | |
Percentage of revenue | | 62.4 | % | | 66.2 | % | | 68.3 | % | | | | | | | | | |
GoPro.com | | $ | 410,742 | | | $ | 392,065 | | | $ | 282,557 | | | 5 | | | 39 | | | | | | |
Percentage of revenue | | 37.6 | % | | 33.8 | % | | 31.7 | % | | | | | | | | | |
Total revenue | | $ | 1,093,541 | | | $ | 1,161,084 | | | $ | 891,925 | | | (6) | % | | 30 | % | | | | | |
| | | | | | | | | | | | | | | |
Americas | | $ | 521,270 | | | $ | 607,534 | | | $ | 483,331 | | | (14) | % | | 26 | % | | | | | |
Percentage of revenue | | 47.7 | % | | 52.3 | % | | 54.2 | % | | | | | | | | | |
Europe, Middle East and Africa (EMEA) | | $ | 300,870 | | | $ | 305,654 | | | $ | 218,670 | | | (2) | | | 40 | | | | | | |
Percentage of revenue | | 27.5 | % | | 26.3 | % | | 24.5 | % | | | | | | | | | |
Asia and Pacific (APAC) | | $ | 271,401 | | | $ | 247,896 | | | $ | 189,924 | | | 9 | | | 31 | | | | | | |
Percentage of revenue | | 24.8 | % | | 21.4 | % | | 21.3 | % | | | | | | | | | |
Total revenue | | $ | 1,093,541 | | | $ | 1,161,084 | | | $ | 891,925 | | | (6) | % | | 30 | % | | | | | |
20192022 Compared to 2018. 2021. Revenue for the full year of 2022 was $1.09 billion, or a 5.8% decrease from the same period in 2021. Full year 2022 was primarily impacted by foreign currency exchange rates, inflation and other macroeconomic factors that challenged demand and increased competition for share of wallet. The year-over-year decreasestrengthening of $24.4 million, or 15%, in total research and development expense in 2019the U.S. dollar negatively impacted full year 2022 revenue when compared to 2018 reflected2021 by approximately $50.4 million, as we shipped 2.8 million camera units, or a $12.2 million10.6% decrease compared to the same period in 2021. The decrease in restructuring costs, a $5.6 million decrease in depreciation and other supporting overhead expenses, a $3.9 million decrease in cash-based personnel-related costs and a $2.5 million decrease in stock-based compensation.
Sales and marketing
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
Sales and marketing | $ | 198,074 |
| | $ | 207,346 |
| | $ | 219,036 |
| | (4 | )% | | (5 | )% |
Stock-based compensation | 8,043 |
| | 9,459 |
| | 10,498 |
| | (15 | ) | | (10 | ) |
Restructuring costs | 314 |
| | 5,291 |
| | 7,047 |
| | (94 | ) | | (25 | ) |
Total sales and marketing | $ | 206,431 |
| | $ | 222,096 |
| | $ | 236,581 |
| | (7 | )% | | (6 | )% |
Percentage of revenue | 17.3 | % | | 19.3 | % | | 20.1 | % | | | | |
2019 Comparedunits shipped was partially due to 2018. The year-over-year decrease of $15.7 million, or 7%, in total sales and marketing expenses in 2019 compared to 2018 reflected an $8.8 million decrease in overall advertising and marketing expenses, a $5.0 million decrease in restructuring costs, a $3.9 million decrease in allocated facilities, depreciation and other supporting overhead expenses, and a $1.4 million decrease in stock-based compensation,the macroeconomic factors impacting U.S. big box customers as they focused on reducing on-hand inventory levels. These factors were partially offset by a $3.0 million52% increase in app marketplacesubscription and credit card processing fees, and a $0.6service revenue year-over-year to $82.4 million, increasewhich is included in travel related expenses.
General and administrative
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
General and administrative | $ | 55,220 |
| | $ | 52,865 |
| | $ | 65,788 |
| | 4 | % | | (20 | )% |
Stock-based compensation | 10,076 |
| | 9,838 |
| | 13,859 |
| | 2 |
| | (29 | ) |
Acquisition-related costs | — |
| | 22 |
| | (22 | ) | | (100 | ) | | (200 | ) |
Restructuring costs | 501 |
| | 3,279 |
| | 2,519 |
| | (85 | ) | | 30 |
|
Total general and administrative | $ | 65,797 |
| | $ | 66,004 |
| | $ | 82,144 |
| | — | % | | (20 | )% |
Percentage of revenue | 5.5 | % | | 5.7 | % | | 7.0 | % | | | | |
2019 Comparedthe GoPro.com channel. Our 2022 average selling price increased 5.4% year-over-year to 2018. Total general and administrative expenses were slightly down in 2019 compared to 2018$389, primarily due to a $2.8 million decrease73% of our camera revenue mix being derived from cameras with an MSRP equal to or greater than $500 compared to 38% in the same period in 2021. Additionally, 90% of our 2022 camera revenue mix was derived from cameras with an MSRP equal to or greater than $400 compared to 85% from the same period in 2021.
Cost of revenue and gross margin
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Cost of revenue | $ | 676,771 | | | $ | 680,963 | | | $ | 570,064 | | | (1) | % | | 19 | % | | | | | |
Stock-based compensation | 1,805 | | | 1,794 | | | 1,548 | | | 1 | | | 16 | | | | | | |
Acquisition-related costs | 47 | | | 1,152 | | | 4,598 | | | (96) | | | (75) | | | | | | |
Restructuring costs | 8,090 | | | 70 | | | 1,201 | | | 11,457 | | | (94) | | | | | | |
Total cost of revenue | $ | 686,713 | | | $ | 683,979 | | | $ | 577,411 | | | — | % | | 18 | % | | | | | |
Gross margin | 37.2 | % | | 41.1 | % | | 35.3 | % | | (390) | bps | | 580 | bps | | | | | |
2022 Compared to 2021. Gross margin of 37.2% for the full year of 2022 decreased from 41.1% in the same period of 2021, or 390 bps, primarily due to the negative effect of foreign currency exchange rates on 2022 sales, 270 bps, lower margin on our hardware sales, which reflects increased product costs as well as sales incentives, 120 bps, restructuring costs, 70 bps, and lower volume on operation costs, 60 bps, partially offset by a $2.7 million increase in allocated facilities and other supporting overhead expenses.
Restructuring costs
First quarter 2018 restructuring plan. On January 2, 2018, we approved a restructuring plan to further reduce future operating expenses and better align resources around our long-term business strategy. The restructuringincreased margin contribution from subscriptions of 130 bps.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Research and development
provided | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | | | | | | | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Research and development | | | | | | | $ | 122,420 | | | $ | 123,631 | | | $ | 110,112 | | | (1) | % | | 12 | % | | | | | |
Stock-based compensation | | | | | | | 17,221 | | | 17,263 | | | 13,415 | | | — | | | 29 | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Restructuring costs | | | | | | | 244 | | | 600 | | | 8,062 | | | (59) | | | (93) | | | | | | |
Total research and development | | | | | | | $ | 139,885 | | | $ | 141,494 | | | $ | 131,589 | | | (1) | % | | 8 | % | | | | | |
Percentage of revenue | | | | | | | 12.8 | % | | 12.2 | % | | 14.8 | % | | | | | | | | | |
2022 Compared to 2021. The year-over-year decrease of $1.6 million, or 1%, in total research and development expense for the full year of 2022 compared to the same period of 2021 was primarily driven by a reductiondecrease of our workforce of approximately 18%, the closure of our aerial group and the consolidation of certain leased office facilities. Under the first quarter 2018 restructuring plan, we recorded restructuring charges of $17.8$1.6 million including $14.1 million related to severance and $3.7 million related to acceleratedin allocated facilities, depreciation and other charges, which primarily relatesupporting overhead expenses.
Sales and marketing
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | | | | | | | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Sales and marketing | | | | | | | $ | 158,657 | | | $ | 148,288 | | | $ | 134,917 | | | 7 | % | | 10 | % | | | | | |
Stock-based compensation | | | | | | | 8,173 | | | 8,045 | | | 5,779 | | | 2 | | | 39 | | | | | | |
Restructuring costs | | | | | | | 137 | | | 361 | | | 10,684 | | | (62) | | | (97) | | | | | | |
Total sales and marketing | | | | | | | $ | 166,967 | | | $ | 156,694 | | | $ | 151,380 | | | 7 | % | | 4 | % | | | | | |
Percentage of revenue | | | | | | | 15.3 | % | | 13.5 | % | | 17.0 | % | | | | | | | | | |
2022 Compared to exiting office spaces and the closure2021. The year-over-year increase of our aerial products business.
First quarter 2017 restructuring plan. On March 15, 2017, we approved a restructuring plan that provided for a reduction of our workforce by approximately 17% and the consolidation of certain leased office facilities. Under the first quarter 2017 restructuring plan, we recorded restructuring charges of $23.1 million, including $10.3 million, relatedor 7%, in total sales and marketing expense for the full year of 2022 compared to severancethe same period of 2021 was primarily driven by a $6.4 million increase in overall advertising and $12.8marketing expenses primarily attributable to online campaigns, a $2.1 million related to acceleratedincrease in cash based personnel-related costs, a $1.2 million increase in allocated facilities, depreciation and other charges. The actions associated with the first quarter 2017 restructuring plan were substantially completed by the fourth quarter of 2017.
Fourth quarter 2016 restructuring plan. On November 29, 2016, we approvedsupporting overhead expenses, and a restructuring plan that provided for a reduction$0.8 million increase in our workforce of approximately 15%, the closure of our entertainment group and the consolidation of certain leased office facilities. Under the fourth quarter 2016 restructuring plan, we recorded restructuring charges of $40.0 million, including $36.8 milliontravel related to severance and $3.2 million related to accelerated depreciation and other charges, which primarily pertain to exiting office spaces. The actions associated with the fourth quarter 2016 restructuring plan were substantially completed by March 31, 2017.
See Note 11 Restructuring charges, to the Notes to Consolidated Financial Statements.
Other income (expense)
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
Interest expense | $ | (19,229 | ) | | $ | (18,683 | ) | | $ | (13,660 | ) | | 3 | % | | 37 | % |
Other income, net | 2,492 |
| | 4,970 |
| | 733 |
| | (50 | ) | | 578 |
|
Total other expense, net | $ | (16,737 | ) | | $ | (13,713 | ) | | $ | (12,927 | ) | | 22 | % | | 6 | % |
2019 Compared to 2018. Total other expense, net, increased $3.0 million in 2019 compared to 2018, primarily due to a $5.0 million gain on the sale and license of intellectual property recognized in 2018, which did not recur in 2019,expenses, partially offset by a $2.4$0.2 million increasedecrease in net foreign exchange rate-based transaction gains.consulting and professional services.
Income taxesGeneral and administrative
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | 2019 vs 2018 | | 2018 vs 2017 |
(dollars in thousands) | 2019 | | 2018 | | 2017 | | % Change | | % Change |
Income tax (benefit) expense | $ | (4,428 | ) | | $ | 1,359 |
| | $ | 6,486 |
| | (426 | )% | | (79 | )% |
Effective tax rate | 23.2 | % | | (1.3 | )% | | (3.7 | )% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | | | | | | | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
General and administrative | | | | | | | $ | 49,152 | | | $ | 53,958 | | | $ | 53,694 | | | (9) | % | | — | % | | | | | |
Stock-based compensation | | | | | | | 11,792 | | | 11,548 | | | 9,221 | | | 2 | | | 25 | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Restructuring costs | | | | | | | 77 | | | 195 | | | 5,449 | | | (61) | | | (96) | | | | | | |
Total general and administrative | | | | | | | $ | 61,021 | | | $ | 65,701 | | | $ | 68,364 | | | (7) | % | | (4) | % | | | | | |
Percentage of revenue | | | | | | | 5.4 | % | | 5.7 | % | | 7.7 | % | | | | | | | | | |
20192022 Compared to 2018. 2021We recorded an income tax benefit. The year-over-year decrease of $4.4$4.7 million, or 7%, in 2019 ontotal general and administrative expense for the full year of 2022 compared to the same period of 2021 primarily reflected a pre-tax net loss of $19.1$4.6 million which resulted in an effective tax rate of 23.2%. Our income tax benefit was primarily related to an overall decrease in losses before income taxes, a benefit from the reversal of previously accrued tax provision on uncertain tax positions that were no longer necessary due to the expiration of the statute of limitations and settlements with certain taxing jurisdictions, partially offset by the valuation allowance on United States federal and state net deferred tax assets and a shortfall tax impact from stock-based compensation. Our 2018 negative effective tax rate of 1.3% resulted primarily from a benefitlegal related to the conclusion of an IRS audit and a benefit related to the set up and current year activity of disregarded entities (foreign branches) for United States tax purposes, partially offset by the valuation allowance on United States federal and state net deferred tax assets and a shortfall tax impact from stock-based compensation.
See Note 8 Income taxes, to the Notes to Consolidated Financial Statements for additional information.expenses.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restructuring costs
Fourth quarter 2022 restructuring. In December 2022, we approved a restructuring plan to reduce camera production-related costs by globally realigning our manufacturing footprint to concentrate our production activities in two primary locations: China and Thailand. Under the fourth quarter 2022 restructuring, we recorded restructuring charges of $8.1 million, including $7.0 million for camera production line closure costs and $1.1 million for related transitional costs to migrate production to our remaining manufacturing locations.
Second quarter 2020 restructuring. On April 14, 2020, we approved a restructuring that provided for a reduction of our global workforce by approximately 20% and the consolidation of certain leased office facilities. Under the second quarter 2020 restructuring, we recorded restructuring charges of $31.5 million to date, including a $12.5 million right-of-use asset impairment primarily related to our headquarter campus, $7.4 million related to severance, and $11.6 millionrelated to accelerated depreciation and other charges. The right-of-use asset impairment charge was recorded as a restructuring expense, primarily in the operating expense financial statement line items in the Consolidated Statements of Operations.
We ceased using a portion of our headquarters campus in the third quarter of 2020 as part of the second quarter 2020 restructuring. The unused portion of our headquarters campus has its own identifiable expenses and is not dependent on other parts of our business, and thus was considered its own asset group. As a result, we impaired a part of the carrying value of the related right-of-use asset to its estimated fair value using the discounted future cash flows method. The discounted future cash flows were based on future sublease rental rates, future sublease market conditions and a discount rate based on the weighted-average cost of capital. Based on the results of our assessment, we recognized a $12.3 million impairment. In October 2021, we entered into a fully executed and consented sublease agreement for this previously ceased-use portion of our headquarters campus. The sublease term will extend through December 2026.
See Note 11 Restructuring charges, to the Notes to Consolidated Financial Statements.
Other income (expense)
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| | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | | | | | | | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Interest expense | | | | | | | $ | (6,242) | | | $ | (22,940) | | | $ | (20,257) | | | (73) | % | | 13 | % | | | | | |
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Other income (expense), net | | | | | | | 1,740 | | | (176) | | | (4,881) | | | (1,089) | | | (96) | | | | | | |
Total other expense, net | | | | | | | $ | (4,502) | | | $ | (23,116) | | | $ | (25,138) | | | (81) | % | | (8) | % | | | | | |
2022 Compared to 2021. Total other expense, net, decreased $18.6 million for the full year of 2022 compared to the same period of 2021, primarily due to a $14.2 million decrease in non-cash interest expense related to our 2022 Notes and 2025 Notes, a $2.5 million decrease in cash interest expense related to the repayment of our 2022 Notes during the second quarter of 2022, and an increase in interest income of $2.8 million, attributable to higher yields on cash and marketable securities, partially offset by an increase in net foreign exchange rate-based losses of $0.9 million.
As part of the adoption of ASU 2020-06 in fiscal year 2022, the requirement to recognize a debt discount related to the debt conversion feature of our 2022 Notes and 2025 Notes under the prior authoritative accounting guidance for convertible debt was eliminated, and as a result there was no non-cash interest expense recognized during any period in 2022. We repaid the remaining principal amount of $125.0 million of the 2022 Notes at maturity on April 15, 2022.
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income taxes
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| | | Year ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 | | | | | |
(dollars in thousands) | | | | | | | 2022 | | 2021 | | 2020 | | % Change | | % Change | | | | | |
Income tax expense (benefit) | | | | | | | $ | 5,606 | | | $ | (281,071) | | | $ | 4,826 | | | (102) | % | | (5,924) | % | | | | | |
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We recorded an income tax expense of $5.6 million for the year ended December 31, 2022, on pre-tax net income of $34.5 million. Our income tax expense for the year ended December 31, 2022 primarily resulted from a tax expense on pre-tax book income, partially offset by the income tax benefits from stock-based compensation, the federal and California research and development credits, and an income tax benefit related to the foreign provision to income tax return adjustments.
Our 2021 income tax benefit of $281.1 million primarily resulted from a tax expense on pre-tax book income, offset by the income tax benefit from the full release of valuation allowance on United States federal and state deferred tax assets and the release of a portion of our uncertain tax positions as a result of a lapse in the statute of limitations in certain jurisdictions, and income tax benefits from stock-based compensation and federal and California research and development credits.
See Note 8 Income taxes, to the Notes to Consolidated Financial Statements for additional information.
Quarterly results of operations
The following table sets forth our unaudited quarterly consolidated results of operations for each of the eight quarterly periods in the two-year period ended December 31, 2019.2022.
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| Three months ended |
(dollars in thousands, except per share amounts) | Dec. 31, 2022 | | Sept. 30, 2022 | | June 30, 2022 | | March 31, 2022 | | Dec. 31, 2021 | | Sept. 30, 2021 | | June 30, 2021 | | March 31, 2021 |
Revenue | $ | 321,021 | | | $ | 305,130 | | | $ | 250,685 | | | $ | 216,705 | | | $ | 391,149 | | | $ | 316,669 | | | $ | 249,586 | | | $ | 203,680 | |
Gross profit | 104,303 | | 116,045 | | 96,004 | | 90,476 | | 161,074 | | 138,053 | | 99,282 | | 78,696 |
Operating expenses | 102,596 | | 91,614 | | 91,349 | | 82,314 | | 102,449 | | 89,452 | | 89,780 | | 82,208 |
Net income (loss) | $ | 3,073 | | | $ | 17,570 | | | $ | 2,519 | | | $ | 5,685 | | | $ | 52,626 | | | $ | 311,761 | | | $ | 16,952 | | | $ | (10,168) | |
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Net income (loss) per share: | | | | | | | | | | | | | | | |
Basic | $ | 0.02 | | | $ | 0.11 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.34 | | | $ | 2.01 | | | $ | 0.11 | | | $ | (0.07) | |
Diluted | $ | 0.02 | | | $ | 0.10 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.32 | | | $ | 1.92 | | | $ | 0.10 | | | $ | (0.07) | |