Trading in shares of wearable camera manufacturer GoPro (NASDAQ:GPRO) had to be halted for 25 minutes after a disastrous earnings performance. The GoPro stock tanked almost 20% in after-market trading following the company’s Q4 2015 earnings call where the company posted a double-miss, and then proceeded to issue terrible Q1 2016 guidance. GoPro reported Q4 2015 revenue of $436.6M, down a massive 31.1%Y/Y, and $59.5M below the consensus on Wall Street. Non-GAAP EPS of -$0.08 compared poorly to the $0.99 posted by the company during last year’s comparable quarter.Wall Street expected GoPro to break even. On a GAAP basis, GoPro’s bottom line performance looked even worse after posting a net loss of $34.451M (EPS of -$0.25), compared to a net income of $122.26M (EPS of $0.83) that the company posted in Q4 2014.

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GoPro has its deep product price cuts to blame for the huge losses. The company slashed prices of its Hero4 Session camera from $400 to $200. The effect on GoPro’s gross margin was incredible. GoPro’s gross margin fell from 48% in Q4 2014 to just 29.6% in Q4 2015.

That said, it was GoPro’s terrible Q1 2016 guidance that really did the damage. GoPro said that it expects revenue of $160M-$180M during the current quarter, a massive 50.4%-56% year-over-drop, and way below Wall Street’s expectation of $298M for the period. To contrast that with what it achieved in Q1 2015, GoPro’s top line had expanded 54%Y/Y, to $363M. So, the guidance implies a big fall. Meanwhile, the company said that it expects gross margins to come in at 36%, an improvement over fourth quarter gross margins, but still way below the 45.1% gross margins it posted during Q1 2015.

For the full year, GoPro said that it expects sales of $1.4B-$1.5B, a year-over-year decline of 6.3%-12.5% compared to $1.6B revenue the company posted in 2015. The current year will, therefore, mark the first time that GoPro records revenue decline for a full year.

Killing Product Lines

The fact that GoPro still failed to meet ultra-low expectations for a second quarter running gives you an idea of how badly things have turned out for the company. Throw in the extremely poor Q1 guidance and you get a feeling that the management has really been blindsided by events and did not expect things to quite turn out the way they have.

GoPro’s huge gross margin contraction can be chalked up to a $57M charge that the company took, due to what it termed as obsolete tooling, excess inventory, and excess purchase order commitments. While GoPro had anticipated taking such a charge, it had not envisioned such a huge amount. GoPro had offered a guidance of only $30M-$35M for the charge. To try and get things back to normal, GoPro announced that it will simplify its product offerings to consist of just three cameras: Hero4 Session, Hero4 Silver, and Hero4 Black.

The move to kill some product lines appears to confirm what investors have feared all along, that GoPro’s management does not understand the market very well. Investors will remember that GoPro released the Hero+ last September, retailing at $200. By selling the new camera at a similar price point to the beleaguered Hero4 Session, GoPro was risking sales, with the new camera potentially cannibalizing Hero4 sales.

The decision to kill some of its product lines appears to be the chief reason why the company issued such weak Q1 2016 guidance. It also serves to highlight why GoPro is now viewed by the investing world as a risky bet due to its heavy reliance on a narrow line of products to drive its top line. The latest set of results clearly shows that this investor sentiment is well-deserved.

GoPro has not made much progress in its quest to become a full-fledged media company instead of a mere hardware company. GoPro launched a Licensing Portal last year that allowed users of GoPro cameras to submit photos and videos to its content library and earn licensing revenue when people use them in their marketing campaigns. But this is yet to become a significant revenue driver for GoPro. GoPro announced that its creative community had submitted 86,000 videos and photos to-date and that company had paid out almost $240,000 for the content. Assuming GoPro takes a 30% cut on content licensed from its library, it follows that the company has only managed to make ~$100,000 from its content library to-date. GoPro Founder and CEO Nicholas Woodman, however, did acknowledge the need to make it easier for people to submit and share content by saying:

"growth slowed in the second half of the year, and we recognize the need to develop software solutions that make it easier for our customers to offload, access, and edit their GoPro content."

Summing It Up

GoPro did not outline its plans to launch its Karma drone or the Hero5 Session as per earlier rumors. But given that the company expects revenue growth to somewhat recover, beginning from the second quarter, there is a possibility that the company will go ahead with the planned launches. GoPro shares could recover during the second half of the year if the company’s new products gain significant traction. GoPro stock still remains a high-risk bet that only bold contrarian investors should consider adding to their portfolios.