GoPro’s holiday season was even worse than the company predicted

Yesterday, GoPro released its final financial figures for the last quarter of 2017, giving us a wholesale look at how the company performed across the year, including how it finished during the holiday stretch. The results aren’t as bad as they were during the company’s awful 2016, but they’re not great either.

GoPro had already guessed in November that it was in for an underwhelming fourth quarter, and that was two months before it canceled the Karma drone and laid off hundreds of employees. When the company announced that news in January, GoPro reduced its expectations again. What was supposed to be a quarter with $470 million in revenue was now only supposed to generate about $340 million. Yesterday’s final results show GoPro even underperformed that estimate, bringing in just $334 million and change.

By revenue, that’s the worst fourth quarter for GoPro since the company went public in 2017.

GoPro CEO Nick Woodman spoke to The Verge back at CES in early January, where the company had arranged for us to hop in a few BMW M5s and do donuts around GoPro’s new 360-degree Fusion camera. Before we did any of that, we talked about the news that GoPro was canceling Karma, and what the state of his company looks like going forward.

Regarding the company’s rough finish to 2017, Woodman chalked it up, in part, to GoPro taking too long to understand that it should have discounted the cameras the Hero 6 was supplanting, the Hero 5 Black and Hero 5 Session.

“The data is clear that our customers demand a couple of things from us every fourth quarter if we hope to sell them a new GoPro,” Woodman said. “They obviously demand that we introduce a compelling new model. And they demanded that we offer them last year’s model at a reduced price. And we failed on that second part. Hero 6 we nailed. Fusion we nailed. But selling Hero 5 Black and Hero 5 Session at the same price that we offered them a year earlier caused a problem.”

GoPro customers “demanded that we offer them last year’s model at a reduced price. And we failed.”

How does a company with such a long and deep relationship with both the retail industry and its customers mess this up? Woodman argued that GoPro’s dominance in the action camera market — the company’s products accounted for over 80 percent of action cameras sold, according to an NPD report cited in its earnings release — has made it hard to notice when something’s amiss.

“We don’t really have significant direct competition to take market share from us when we make a mistake,” he said. “AT&T has Verizon. Ford has Chevy. BMW has Mercedes. So when AT&T makes a product pricing mistake and market share quickly goes to Verizon or T-Mobile, AT&T can say, ‘oh my God we’ve got to fix this problem and course correct.’ In GoPro’s case, historically, when a consumer hasn’t purchased GoPro, they more often than not don’t buy anything.”

Woodman continued this thought on a call with investors this week. “A competitor would help us understand the dynamics of our market, our business, pricing sensitivity. The challenge has been, frankly, that in many cases the only data we had access to was our own. So that’s why some of these pricing challenges that may seem obvious really were not obvious.”

GoPro cut the prices of the Hero 5 Black and Session by $100 in December, a move that it says doubled and even tripled sales in some markets. It made a similar price cut to the Hero 6 in January. But the damage to the holiday season was done. GoPro had gone from its first profitable quarter in two years to stepping on its own foot.

And then it canceled Karma.

Karma was a product that always seemed fraught. It had been delayed for months by the time a screaming Woodman pulled the drone out of a backpack and thrust it in the air like he was standing on top of Pride Rock. It was recalled within weeks, on election night no less. And when it came back on the market, it never really stacked up, feature-wise, to industry leader DJI’s drones. (GoPro’s argument on this front has always been that Karma was made for GoPro users, not necessarily as direct competition to DJI.)

“It is absolutely clear that our customers want to buy GoPros from us, not really a drone.”

But the decision to cancel Karma was a purely financial one, according to Woodman. “Our drone program was the most expensive program that we had going at the company, for the smallest number of customers,” he said. “When you look at the total number of Karmas we were going to sell over the lifetime of Karma, and you compare that to just one year’s sales of GoPros, it is absolutely clear that our customers want to buy GoPros from us, not really a drone.”

Knowing that, Woodman said that the margins on the Karma were too thin compared to what it makes on its cameras to justify keeping the program alive. “Cameras are just a lower cost for us to develop, because the whole system architecture of a camera is smaller,” he said. “It’s a smaller engineering job. It’s a smaller user experience job. Everything about a camera program is smaller than Karma. Karma was a Formula One car of consumer electronics products. You’ve got the drone. You got the controller. You’ve got the grip. You’ve got the gimbal. And all of these systems need to work together in harmony.”

Still, Woodman argued that Karma wasn’t a lost cause. “We had a dramatically bad launch. But the fact that in February 2017 we were able to relaunch it, and have it become the second best-selling drone in the thousand-dollar-and-up category is a testament to the terrific concept,” he said.

The fourth quarter of 2017 wasn’t all bad for GoPro. The company lost less money than it did in the fourth quarter of 2016 ($55 million versus $115 million). And the year as a whole was a marked improvement on the abysmal 2016 it suffered. GoPro nearly halved its losses from year to year and increased its cash balance to a total of $247 million. It is projecting operating expenses in 2018 of less than $400 million, which would be almost half of what the company spent in 2016.

GoPro has new cameras coming in 2018, including a new entry-level product in the first half

On the investor call, Woodman spoke about what the company plans to do moving forward. In 2018, he says GoPro will release “multiple new cameras designed to resonate with a broad range of consumers,” and that a new entry-level product is coming in the first half of the year. GoPro will also try to arm itself with more analytics so that it has a better understanding of what customers think of those products.

As for the rumors of whether the company is actively exploring a sale, Woodman told me at CES that rumors is all they are when I asked what is going on. For all his charm and bluster, the CEO knows when to call on his years of experience running a sometimes tumultuous company to give an answer that won’t rock the boat.

“The simple answer to that is we don’t have a sale process going. We’re definitely open to opportunities that would allow us to scale GoPro in a way that we couldn’t alone, but my job as an entrepreneur and the CEO of a publicly traded company, my responsibility is to provide a return to our investors,” he said. “If there is an opportunity allows us to grow GoPro and provide a compelling return to investors, absolutely we would entertain that. But at the same time, day to day we have to strategize and operate the business as though we’re going to remain independent, because that’s the responsible thing to do.”

After that, we headed to the cars. Following some brief instruction, Woodman got into the BMW, looked out the window, and shouted, “rip it!” A few donuts later, the tail of his car smashed the Fusion camera into the pavement.