When GoPro Inc. (NASDAQ: GPRO) cut prices on its line of Hero cameras in mid-December, it was clearly either a reason to panic or a shrewd strategy to boost sales late in the holiday season. Now we know that it wasn't shrewd at all -- it was a panic move by GoPro, which is now in a fight for its own survival.
GoPro announced Monday that its fourth-quarter results are going to be well below expectations and that it's laying off hundreds of workers and exiting the drone business, formerly a high-flying growth opportunity. Here are the key factors investors need to know.
Image source: GoPro.
GoPro's Q4 flop
Fourth-quarter revenue is expected to be $340 million for GoPro, well below its $470 million guidance given just two months ago. To make matters worse, gross margin will be 24% to 26% on a GAAP basis, far lower than the 41% to 42% guidance given in November.
A price-protection provision of $80 million drove the reduction in sales and margin as GoPro covered its price cut down to retailers. But that's just the beginning of the bad news for GoPro.
Layoffs are coming (again)
GoPro said it would reduce its global workforce from 1,254 people to less than 1,000, which follows other large layoffs the past two years.
The workforce reduction will reduce operating expenses to below $400 million for 2018, compared with an expected $490 million in operating expenses a non-GAAP basis in 2017.
GoPro's pricing mistake
The big problem for GoPro in the quarter was its pricing structure. Customers have gotten used to annual price reductions for older models of technology and cameras, something GoPro didn't do this year. Instead, it tried to keep its Hero5 Session camera at $299 and its Hero 5 Black at $399, and then introduce the new Hero6 Black at $499. Customers balked at the prices.
GoPro was forced to reduce camera prices to $199, $299, and $399 for the good-better-best camera strategy, resulting in the costs I outlined. Management said sell-through improved after the price reductions, but it was a mistake to think customers would be willing to pay $499 for a GoPro in the first place.
Drones crash and burn
GoPro's drones have faced challenges since they hit the market, but there was some hope they would fill an interesting niche for customers. That hope is over after GoPro announced it's exiting the drone business.
It's probably best for GoPro to focus on products in its core camera market rather than keep chasing the drone dream. But there's no question this is an embarrassing defeat for GoPro and Nick Woodman, who hoped to be a big player in drones at one point.