Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Fitbit Inc  (NYSE:FIT)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, welcome to Fitbit's Third Quarter 2018 Earnings Conference. Today's call is being recorded. At this time, I'd like to turn things over to Tom Hudson, SVP of Finance. Please go ahead.

Tom Hudson -- Vice President of Investor Relations

Good afternoon and welcome. Fitbit distributed a press release detailing its quarterly results earlier this afternoon. It's posted on our website at www.fitbit.com and also available from normal financial news sources. This conference call is being webcast live on our Investor Relations page of our website where a replay will be archived.

On this call, all financial measures are presented on a non-GAAP basis, except for revenue, which is a GAAP measure. A reconciliation of GAAP to non-GAAP financial measures is provided in our post-earnings release or in our earnings presentation materials posted on the IR page of our website. This conference call will contain forward-looking information, which is subject to risks and uncertainties described in Fitbit's filings with the SEC and in today's press release. Actual results or events may differ materially. We will begin with a commentary from James and Ron and will then open the call to questions.

Let me introduce you to Fitbit's Chairman and CEO, James Park. James?

James Park -- Chief Executive Officer, President & Co-founder

Thank you, Tom. Thank you to everyone participating in today's call. I'm really proud of our performance this quarter. We demonstrated that we can gain share in the smartwatch category, deepen our reach in healthcare and successfully manage our operating expenses, which resulted in a return to profitability. These are important milestones as we continue to transform our business.

Q3 marks the seventh quarter in a row that we have delivered on our financial commitment with $394 million in revenue, flat year-over-year and up $100 million sequentially. We delivered $8 million in non-GAAP operating income, up from a loss of $3 million in Q3, 2017. We generated $21 million EBITDA and $0.04 in non-GAAP EPS versus a $0.01 loss in Q3 2017.

We grew international revenue 10% driven by strong results in EMEA. Additionally, our Health Solutions business grew 26% year-over-year, a significant achievement as we continue to add to our portfolio of more than 1,500 customers and 100 health plans. We also remain disciplined on expenses with operating cost down 17% year-over-year to $150 million. While the important holiday selling season is still in front of us, we enter Q4 with positive momentum and are well positioned to deliver on our 2018 guidance and maintain our profitability.

We succeeded in diversifying our revenue to compete in the faster growing smartwatch category. 14 months ago, we had zero share in the smartwatch category and today we are the Number 2 player in the US, which is a significant achievement and something I'm very proud of. Shipments for both smartwatch and tracker device sales accelerated sequentially, smartwatches represented 49% of revenue in the quarter, and demand for Versa remained solid, outselling each of the competitive offerings from Samsung, Garmin and Fossil in the US.

Despite smartwatches being a more competitive segment of the wearable market, we have demonstrated that we can quickly and effectively gain market share. This underscores the power of our brand and our ability to deliver devices consumers love. We also launched our most advanced tracker yet, Fitbit Charge 3, Charge 3 innovates in our Number 1 selling charge franchise, which has sold more than 35 million devices. It gives people powerful health and fitness features in a slim premium tracker design with smart functionality and long battery life all at an affordable price.

Charge 3 proves there's still room to innovate in the tracker category, provides evidence that the lines are blurring between trackers and smartwatches. It has advanced sensors including a relative SpO2 sensor that can unlock future health programs like the Fitbit Labs Sleep Score, second party apps like weather and the ability to process payments via special edition offering. Since launching the device, sell-through has been strong. Charge 3 is already the Number 1 selling Android compatible wearable device in the US, outselling the Number 2 player's point of sales by more than threefold over the past two weeks.

Early press reviews have been very positive, with PC Magazine giving it their Editor's Choice Award stating, there's still a place for dedicated fitness trackers, and they don't get much better than the Fitbit Charge 3. It's also worth noting that among our most loyal customers, those have laid a preorder purchase on fitbit.com, a substantial number were purchasing their third or more fitbit device. In the quarter, 42% of our total activations came from BP customers. We believe this speaks to our ability to build a loyal long-term customers base, while continuing to grow our funnel of new users. This gives us confidence in the lessening decline and further stabilization of the tracker category and our ability to grow device sales as we move into the final quarter of the year and begin to focus on 2019. Our engaging software experience and large global community continue to provide a powerful competitive mode, with one of the largest activity exercise and sleep databases, we continue to invest in providing our users with actionable information that helps them better understand their overall health and wellness. The Fitbit Labs Sleep Score beta is a great example of this, with 7.5 billion nights of sleep track, FitBit has built one of the largest databases of sleep. With the Sleep Score beta from Fitbit Labs, we are taking our leading sleep offering a step further and providing users a more holistic look at their sleep quality with a nightly score calculated using key metrics tracked by the advanced sensors in our devices like a relative SpO2 sensor. In addition to the Sleep Score beta, Fitbit will continue to work toward clinical validation and regulatory approval of its software for use in detecting health conditions such a sleep apnea and atrial fibrillation.

Our ability to innovate and develop advanced sensors and algorithms is critical to ensuring we deliver products and experiences consumers love at accessible price points. These capabilities are not only critical to our consumer business, but they are what powers our move into healthcare. Historically, Fitbit health solutions is focused on selling devices to enterprises as part of their wellness offerings, we've built a small but successful business doing this. As obesity related to the incidence of chronic disease that are largely lifestyle based increased and healthcare costs sky rocketed, we saw an opportunity to work more closely with the healthcare ecosystem to help drive behavior change at the population level and then the cost of care. This created the opportunity to diversify revenue into more durable higher margin opportunities. The acquisition and integration of Twine Health and the launch of Fitbit Care will be key to our success as we go deeper down this path. With Fitbit Care, we are delivering a solution that empowers people to take control of their health by providing accountability, support, guidance and resources that remove some of the most difficult barriers to behavior change.

Fitbit Care combines devices, health coaching and virtual care to deliver a more comprehensive approach to wellness in chronic disease management and prevention. While Fitbit Health Solutions is less than 10% of revenue today, it continues to gain traction, up 26% year-over-year. Most importantly in Q3, we had a significant customer win and an endorsement of our strategy to move from a device-centric approach to a solutions-oriented approach. Humana chose to make Fitbit Care its preferred coaching platform for the employer group segment, more than 5 million Humana members who have the potential to access Fitbit health and wellness solutions as part of this partnership. Our vision has always been to make the world healthier. When Eric and I started Fitbit over 11 years ago, we knew that the key to achieving that vision was in helping people make the lifestyle changes that can have a profound impact on their health. We're at a time where solutions like this are more important and relevant than ever. Lack of activity is causing rising obesity rates and continues to lead to an increase in chronic conditions globally. According to the CDC, half of all Americans live with at least one chronic condition such as heart disease, cancer, stroke or diabetes. We see a huge opportunity to help change the course of these growing issues and believe Fitbit is uniquely positioned to not only help consumers around the world make the lifestyle changes necessary to combat obesity and prevent or better manage chronic conditions, but through our work with employers' health plans and health systems, we can scale this solution at the population level.

We too are focused on getting healthy by continuing to drive operating efficiencies into the business and increasing agility. As I indicated earlier, operating expenses declined 17% year-over-year in the third quarter and we are on track to deliver our $740 million 2018 operating expense target and expect to drive operating leverage back into our P&L looking forward. Our business goals remain unchanged, reach new users expand within healthcare, drive behavior change and build business sustainability. We believe we can do this by leveraging our brand, community and data.

With that, let me turn the call over to Ron, who will provide more details about the quarter. Ron.

Ron Kisling -- Chief Financial Officer

Thanks, James. My prepared remarks will focus on the financial overview of the third quarter results. I will then provide our guidance for the fourth quarter of 2018. Before I go to the details, I would like to remind investors that all financial references are non-GAAP measures, except for revenue, unless I specify otherwise and all financial comparisons are on a year-over-year basis, unless specified otherwise. We sold 3.5 million devices and generated $394 million of revenue in the quarter, flat compared to the year ago quarter. The company benefited from diversifying its revenue stream with predominantly tracker sales to a more balanced revenue mix between trackers and smartwatches. This shift in mix resulted in a higher average selling price, but more importantly enabled FItbit to begin to materially shift its business model toward the fastest growing area of the wearable device market, smartwatches.

Average selling price increased 3% offsetting the 2% decline in devices sold, accessory and other revenue added an additional $3.04 per device. Accessory revenue declined $3 million year-over-year due to the timing of Charge 3 availability and fewer units sold. Paid premium revenue, while still immaterial to our results grew 16%. US revenue represented 58% of revenue or $230 million, declining 6% in the quarter. International revenue grew 10% to $163 million with EMEA, our largest region, returning to growth. With strong relative demand for trackers in the UK and the selling of Charge 3, we saw recovery from the second quarter. APAC revenues were flat with the prior year at $34 million and Americas excluding the US declined 2% to $25 million. Retail channel inventory is relatively clean as we begin to build inventory ahead of the important holiday selling season. Charge 3 began shipping toward the end of the quarter, but we expect the majority of the units to be shipped in Q4. We optimized to maximize on-shelf dates for our retail partners and did not ship direct fitbit.com Charge 3 orders during the quarter.

In addition, direct channel revenue decreased in part due to the decline in discounted sales derived from customer claims. In response to customer complaints on out of warranty devices, we have offered customers discounts on new products in lieu of providing replacements. These discounts are then more redeemed through our direct channel. The improved quality of our products has resulted in fewer customer complaints and as a result, fewer shares of discount offers, therefore driving a decrease in direct channel revenue. Together, these negatively impacted our direct consumer business fitbit.com. Fitbit.com revenue represented 6% of revenue or $22 million. Gross margin declined 510 basis points to 40.1%. The decline was expected, driven by the growing mix of smartwatches and end of life promotions of legacy tracker offerings, partially offset by lower warranty costs and lower customer support costs.

Operating expenses decreased 17% to $150 million. Research and development cost decreased 8% to $66 million and sales and marketing cost declined 14% to $63 million. As quality has improved, customer support case volume has shrunk, leading to lower expenses. In addition, we spent less on point of purchase displays. General and administrative expenses were $20 million, down 42%. On a normalized basis, excluding the $8 million increase in cost in Q3, 2017 from the bankruptcy of one of our distributors WYNIT, general and administrative expenses declined 24%. We remain focused on continuing to reduce our breakeven rate and improving efficiency in our business.

With lower operating expenses in Q3 and higher sales, we recognized an operating profit of $8 million. Interest and other income of $3 million. We recorded income tax expense of $1.3 million, resulting in net earnings per share of $0.04 in the quarter, cash flow from operations were $59 million and capital expenditures in the quarter were $12 million, resulting in a free cash flow of $47 million. Excluding the benefit of the tax refund payments from the IRS, free cash flow in the quarter was negative $25 million. We ended the quarter with $623 million in cash and short-term investments and no debt.

Before turning to guidance, I wanted to briefly discuss a $6 million GAAP charge we took in the quarter, resulting from the writedown of a minority equity investment. We believe the investment provides us an option to explore promising technology without bearing the direct operating expense. During Q3, we concluded that we needed to write down the value of this investment resulting in the $6 million charge to other expense.

Now let me turn and address our forward-looking outlook. Our policy is not to make any changes to our full-year forecast, unless there are material deviations from the original guidance. As a result, we reaffirm our full-year 2018 revenue guidance of $1.5 billion and we expect Q4 revenues to exceed $560 million, roughly flat on a year-over-year basis. Our fourth quarter benefits from the lessening decline in the year-over-year decline of tracker revenue and the continued growth of our smartwatch franchise.

We expect gross margins to be approximately 41%. As a percentage of revenue, we expect Q4 operating cost to trend materially lower and net income per share to exceed $0.07. We expect free cash flow of approximately $90 million in Q4. Given the uncertainty in the timing of additional tax refund payments of approximately $6 million, this excludes that impact. Our tax rate will vary depending on our profitability and the geographic mix of income. We expect our tax provision to shift from a benefit to an expense of approximately 25% in the fourth quarter. We anticipate a fully diluted share count of approximately 260 million shares and stock-based compensation of approximately $24 million.

As I noted above, we are reiterating our full year 2018 revenue guidance of $1.5 billion. We expect the decline in devices sold year-over-year to be partially offset by an increase in the average selling price per device from the shift toward smartwatches. We expect fiscal 2018 free cash flow of approximately $52 million, and excluding our tax refund, we expect to consume approximately $20 million in cash. We expect to continue to grow our Fitbit Health Solutions business and increase our premium subscribers but this growth will be relatively immaterial to our wearable device revenue.

We are on track to reduce operating expenses by approximately $50 million from 2017 level to $740 million, consistent with our previously stated commitment. Our intent is to continue to drive efficiencies into the business and redeploy capital through growing our software services, Fitbit Heath Solutions and our international sales footprint. Our balance sheet remains robust with $623 million in cash and marketable securities at the end of Q3.

In addition, as I noted earlier, we expect to receive approximately $6 million in additional tax refund payment. We intend to continue to augment organic investment with targeted M&A similar to the acquisition of Twine Health and we expect M&A will continue to play an important role at Fitbit and we are targeting businesses that will help transform our business toward digital health and recurring revenue. There was a lot of great momentum in the quarter. And before I conclude, I wanted to share one more positive development for our business as it relates to the tariff that we announced earlier this year. I'm pleased to say that wearable devices and smartwatches were excluded from the most recent tariff list, meaning that these tariffs do not apply to our smartwatches or fitness trackers. With that, let me turn the call back to the operator to answer questions, operator.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll hear out first question today from Scott Searle with ROTH Capital.

Scott Searle -- Roth Capital -- Analyst

Hey, good afternoon. Thanks for taking my question and thank you for not making Halloween scary. You know James, maybe to start, just you've done such a great job on the smartwatch front with Versa in the mid-tier. I was wondering if you could give us a little bit more color in what your goals for market share might be? It looks like probably in the last quarter in the 12% to 13% range, but you're really just kind of attacking today that mid-tier category. What is the goal? How do you get to some of the high tier? When do we start to see some more of that? And then on the healthcare front, you're starting to get some early traction, early signs with what you've announced with Fitbit Care. I was wondering if you can provide a little more color, some more use cases and maybe some quantification of what that could look from a revenue standpoint as we start to get to 2019. Thanks.

James Park -- Chief Executive Officer, President & Co-founder

Sure. So on the smartwatch side, I think for context, 14 months ago, we had 0% share in the smartwatch category. We launched Ionic and then most recently Versa and within a span of 14 months, we've become the Number 2 player. So already, we've made great strides. We're continuing to invest in the smartwatch category, so you should expect that to broaden our portfolio over time, because we do see that is a very fast growing category for us.

On the healthcare side, very proud that Fitbit Health solutions grew 26% year-over-year and a lot of that is explained by the fact that the cost of chronic disease management is rapidly increasing and it's becoming a very pressing issue for health plans and enterprises. So the growth reflects the fact that we added to our customer base of 1,600 health plans for enterprises and looking forward, we're trying to shift our model away from being purely device centric to being a more solutions oriented business that combines both devices and software services and Fitbit Care is really the key part of our strategy to do that and Humana's selection of Fitbit Care is a really powerful endorsement of our strategy. And in terms of numbers that we can share, what we can say is we're committed in 2019 to provide more transparency into our healthcare business, as it continues to grow.

Scott Searle -- Roth Capital -- Analyst

And maybe James, if I could just follow quickly, in the healthcare model, so do you envision this being subscription based, do you envision sharing in the cost savings and outcomes management on that front? Thank you.

James Park -- Chief Executive Officer, President & Co-founder

Yes. So, it's going to be a combination. There's always going to be device sales that are going to be involved in our healthcare business, but increasingly more and more revenue is going to come from, what we call, PMPM or PEPM per member per month or per employee per month. Revenue will also come from reimbursement dollars from payers and this is a little bit further out, but potentially some sharing in cost savings as well.

Scott Searle -- Roth Capital -- Analyst

Thank you . Nice quarter.

Operator

We'll hear next from Alex Fuhrman with Craig-Hallum Capital Group.

Alex Fuhrman -- Craig-Hallum Capital Group. -- Analyst

Great. Thank you very much for taking my question and congratulations on a really nice quarter here. Wanted to ask about some of the new products that you've had out over the last year. You now have a good track record with the Ionic and the Versa. Couple weeks of really strong performance, it sounds like with the Charge 3. Would love to get a better sense of who has been buying these products, the other particular product that are helping to pull in new users and curious who -- I am thinking about the Charge 2 legacy customers and some of those users you've had for a few years, which products have those users been gravitating to of the ones that you've watched recently?

James Park -- Chief Executive Officer, President & Co-founder

So with the details that we can share, so definitely a large percentage of purchasers of our new products are upgrade users and that's the testament to the power of our user base and our community of around 25 million active users and that's something that we continue to leverage pretty heavily, as we launch new products. I would say that the sweet spot of our user base is very mainstream anywhere from 20 to mid-50s. That's been the core of our strength and where people gravitate toward to, I think it really depends on the product. That's why we try to offer a pretty wide range of products really from trackers to advanced health and fitness smartwatches. So again depending on the product, the age and gender demographic is a little bit different.

Alex Fuhrman -- Craig-Hallum Capital Group. -- Analyst

And then if I could ask about your direct channel, it's been down year-over-year throughout the year, curious what your plans are for marketing on fitbit.com or for the holiday season and if that's something that you would envision returning to growth in the future?

Ron Kisling -- Chief Financial Officer

Yeah. So, this is Ron. So in terms of the declines, particularly that we saw in Q3, there were two primary factors. First, we optimized to align our fitbit.com Charge 3 orders with the retail on shelf date, so we didn't shift any of the Charge 3 orders from dot.com until the fourth quarter.

Secondly, revenue decreased in part and this has been a factor throughout the year due to a decline in discounted sales from customer service claims, we sometimes offer certain customers discounts on new products in lieu of providing replacements for out of warranty devices. These discounts are redeemed primarily through our direct channel and with the improved quality of our products, this is resulting in fewer customer complaints and as a result, fewer discount offers, driving a decrease in direct channel revenue. So together these factors negatively impacted fitbit.com. Certainly, as we go into the holiday season, we offer promotions not only in the channel but on the direct business as well, so we would expect to see that an important part of our Q4 revenues going into Q4.

Alex Fuhrman -- Craig-Hallum Capital Group. -- Analyst

Okay. Thank you very much.

Operator

From Deutsche Bank, we'll move to Jeffrey Rand.

Jeffrey Rand -- Deutsche Bank -- Analyst

Hi. Congratulations on the great quarter. I just wanted to ask about Versa. I know you guys sold out in the prior quarter and were ramping up inventory this quarter. Did you guys still see strong sales there and kind of what are your inventory levels there going into the holiday season?

Ron Kisling -- Chief Financial Officer

So, I think with respect to Versa, demand remains strong. As James mentioned earlier, Fitbit is now the Number 2 player in the smartwatch category in the US and we continue to outsell the competitive offerings from Samsung, Garmin and Fossil each in the US. And in the quarter, smartwatch sales were about 49% of revenue. We're seeing sequential growth off of the prior quarter. I think which demonstrates that there's still a market for both and I think the importance of providing choice for consumers. So we see that as a key point and competes very favorably going into Q4 with the momentum we see going into Q4.

James Park -- Chief Executive Officer, President & Co-founder

Yeah. So Versa continues to be solid and as Ron mentioned, we have pretty strong momentum going into the quarter, clean inventory levels as well. So actually if you look out to 2019, as well with that momentum and what we see in our product portfolio, we do expect to gain more market share in the fast growing wearables category and we do expect unit shipments to increase year-over-year. So overall, it's a pretty positive story.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. And then just talking about gross margins, do you see the low-40s as a kind of a good place going forward, now that you've -- kind of smartwatches are about 50% of your share?

James Park -- Chief Executive Officer, President & Co-founder

Yes. With the current mix, we would expect to see gross margins in that low-40s. I think specifically going into Q4, we expect to see a slight increase -- improvement in gross margins, some of that is due to the launch of Charge 3, which would drive a little bit of a slight mix back toward trackers versus Q3 and some of the lower promotions on these(ph) products that we saw in Q3. But that's a good range with some slight improvement from what we saw in Q3 going forward.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

We'll hear next from Charlie Anderson with Dougherty & Company.

Charlie Anderson -- Dougherty & Company -- Analyst

Yeah, thanks for taking my questions. James, I wonder if maybe you could update us on just sort of the preserve process at FDA. I think some of your peers have gotten through there and then sort of once you reach that, what are the ramifications for Fitbit and then I've got a follow up.

James Park -- Chief Executive Officer, President & Co-founder

Yes. So we're continuing to actively participate in the digital health preserve program. We don't have any specific updates to share at this time, but we are continuing to work on our clinical trials and clinical validation for detecting some of our more advancing health conditions such as apnea and afib, and we're working closely with the FDA to figure out when the earliest that we can roll this out to our users. So that's the update on that side, but overall, it's also important to note that a lot of the impact that we're going to have on our consumers and on our healthcare business is managing chronic disease conditions as well around diabetes, hypertension, et cetera and that is where our Fitbit Care platform plays a strong role today and not just in the future.

Charlie Anderson -- Dougherty & Company -- Analyst

Great and then for my follow-up. Just looking to the deck you guys put with our names on it, if my math is right, it looks like the tracker units were down 30% or so in Q3 and it sounds like you're implying that they're going to be down in Q4. I'm just curious what the degree of that is as you have Charge 3 out, any sell through indicators in October, would that tell you that we're starting to see that flatten out to some degree and it sounds from your earlier comments that you do feel like in the '19, there should be some flattening out there, just any additional commentary on the trajectory of that tracker decline over time? Thanks.

Ron Kisling -- Chief Financial Officer

Yeah. So, this is Ron. We definitely saw a lessening in the rate of decline in trackers from Q2 to Q3 by about 15%. So as we indicated, we believe Q2 was the trough and that declines will -- year over year declines will improve going forward. I think sell through, as we indicated, has been strong, particularly with Charge 3 being the Number 1 selling new Android compatible wearable device outselling the Number 2 by 3x. I think particularly as we look forward into 2019, it's really about the opportunity to grow overall device sales and specifically looking at the decline in trackers or smartwatches.

We continue to gain traction in smartwatches and a decline in trackers, but if you look at Charge 3, it's our most advanced tracker that actually includes some smartwatch features, reflecting the boring of the lines that we're starting to see between trackers and smartwatches and we believe that offering consumers a choice across features, form factors, accessibility and affordability will allow us to grow our share and the overall number of units, particularly going into 2019 where we see our overall share in the growing wearables market broadly increasing and overall units increasing on a year-over-year basis.

Charlie Anderson -- Dougherty & Company -- Analyst

Great. Thanks so much .

Operator

We'll hear next from Thomas Forte with D.A. Davidson.

Scott McConnell -- D.A. Davidson -- Analyst

Hi, thanks. It's actually Scott on for Tom. And so one question on tariffs, in the event that the next round of tariffs is on everything out of China, what could you do to mitigate the effects of tariffs such as moving your manufacturing out of China or possibly negotiating manufactured pricing?

Ron Kisling -- Chief Financial Officer

Yes. So, again, it's definitely good news that our products are excluded from the most recent tariff lift. In terms of future tariffs, what I can say is that for the most recent lift, the administration removed our products after a lot of careful consideration and we're confident that they'll come to the same conclusion on any future list that they create. And in addition, there's a number of different ways that we're working with our supply chain to mitigate any potential risk as well. So we feel pretty good about our exposure on the tariff risk.

Scott McConnell -- D.A. Davidson -- Analyst

Great. Thank you.

Operator

You may be on mute, Yuuji Anderson. Your line is open if you still have a question.

Yuuji Anderson -- Morgan Stanley -- Analyst

Great, thanks so much, I'm here. Just triangulating a little bit more on the contribution of Health Solutions and how to think about that going forward? So it looks like non-devices revenue was down year-over-year. So just can you help us better understand what drove that and then kind of as we think about it in Q4, does this type of business have some kind of seasonality that we should be thinking about?

Ron Kisling -- Chief Financial Officer

Yeah. So overall, revenue per device was down, that was primarily driven by lower accessory revenue. That was due in part to late in the quarter shipment of Charge 3 and overall lower units. So accessories was what drove it. We did see premium revenues were actually up 16% on a year-over-year basis and as you look at sort of seasonality, when you look at sort of the enterprise health space, the seasonality is a lot less significant than what you see in the consumer space.

Yuuji Anderson -- Morgan Stanley -- Analyst

Great, thank you. And then just a quick one on the customer wins. So as these kind of come in in the future, how should we think about the revenue contribution from these large customer wins? Is this something that ramps rather quickly, is it predictable, just a little bit more color on that would be helpful?

James Park -- Chief Executive Officer, President & Co-founder

Yes. So I think the revenue trajectory is going to be -- there's no spike, it will be slow and steady, but it will be predictable.

Yuuji Anderson -- Morgan Stanley -- Analyst

Thank you so much.

Operator

We'll hear now from Jim Suva with Citi.

Jim Suva -- Citi -- Analyst

Thanks very much. This is pretty minor since you reiterated your full year revenue guidance, but I noticed for the out quarter, the December quarter you mentioned a level -- I'm sorry, above a certain level. Is there a change in the way that you're thinking about doing guidance and more of that versus the past orders and even last guidance for December has more of a revenue range, but I just noticed a little subtle change there in that guidance of above as opposed to a range.

Ron Kisling -- Chief Financial Officer

Yeah. I don't think this represents an overall change. I think we do not intend to make updates to our full year guidance, unless there is material deviations from original forecast. As you get into the fourth quarter, with one quarter to go, there is kind of a plug if you will to what the Q4 number is. And so that's why we've sort of characterized the guidance the way we did, while maintaining our full year guidance of $1.5 billion. I think it's important, we entered the quarter with good momentum and so we feel really good about where our position is.

Jim Suva -- Citi -- Analyst

Yeah, that's what I figured. Great. And then my follow up is on inventory. If you take inventory on a year-over-year basis and sales on a year-over-year basis, that will be getting rid of seasonality and things like that, but it looks like your inventory grew quite a bit relative to your revenue outlook year-over-year for the December quarter. Can you help us understand why that is, are you like ramping up even more so for holiday season, but it looks like year-over-year your revenues are going to be flattish to maybe down a percent year-over-year. So why the inventory changes so much? Thank you.

James Park -- Chief Executive Officer, President & Co-founder

Yeah. I think the biggest driver really has to do with the timing of new product introductions, with Charge 3 being announced and shipped in large quantities, a little bit at the end of Q3, large amounts into the channel in early Q4. A lot of that production of Charge 3 occurred in Q3 in terms of the buildup for the holiday season. So the variability you see is primarily driven by the timing of new product introductions.

Yuuji Anderson -- Morgan Stanley -- Analyst

Great. That makes a lot of sense. Thank you so much for the details and clarifications. It's greatly appreciated.

Operator

From William Blair & Company, we'll hear next from Jeff Garro.

Jeff Garro -- William Blair. -- Analyst

Yes, good afternoon and thanks for taking the questions. I wanted to ask a little bit more about the Humana relationship and maybe some of the mechanics behind that. So more specifically, I'm thinking, how is it marketed, is it available to all beneficiaries or is it targeted to those who either have chronic conditions or at risk for chronic conditions and then how do the devices used by end users get selected and ultimately how are payments being worked out between Humana, their employer clients and then the end customer.

James Park -- Chief Executive Officer, President & Co-founder

Yes. So, I think overall, in 2019, as I said before, that's the year you can expect a lot more transparency from us in the healthcare business. For Fitbit Care and Humana, that is specifically for their employer group segment. And so again, as I mentioned before, that's going to be more predictable revenue streams that occur over time. There's not going to be a spike from that deal.

Jeff Garro -- William Blair. -- Analyst

Any insights you can give on how it's going to be marketed, whether it's by employer or if Humana has a kind of set plan for the employers that are clients of those types of plans?

James Park -- Chief Executive Officer, President & Co-founder

Yes. So it's going to be a combination of Humana, the employers and us making sure that there is strong uptake in the solution.

Jeff Garro -- William Blair. -- Analyst

Got it. Then, one last one from me, I want to ask about M&A as a potential use of cash. It sounds like something that you're still quite interested in, so curious about the level of targets out there that might be drawing interest from you guys and then just based on the profitability in the quarter and the visibility into Q4, whether you see that creating the ability to move a little bit faster, if you're seeing anything you like out there? Thanks.

James Park -- Chief Executive Officer, President & Co-founder

I think M&A is still an important part of our strategy, I think our focus is really looking at it as an opportunity to deepen our relationship with our customers, leveraging it to grow long-term value and accelerate our growth. I think the focus is really around bolstering our services business and extending our reach into healthcare. We will continue to remain disciplined, but we will continue to look at opportunities around these areas and believe it's an important part of our growth strategy.

Jeff Garro -- William Blair. -- Analyst

Great. Thanks, again.

Operator

Our final question today will be from Ryan Goodman with Bank of America Merrill Lynch.

Ryan Goodman -- Bank of America Merrill Lynch -- Analyst

Hi, guys. Thanks for the question. I got two. First one, it sounds like the sell-through trends are tracking pretty well for both Versa and Charge 3, is there any specific insights you can give so far into Q4? Has that sustained on both devices, just anything you can talk about there would be helpful. And then the second question, on Versa, I know you guys were ramping up production line recently. Just curious, can you give us an update on that? Is that fully engaged now and how much of an increase did that give you to Versa supply going forward? Thanks a lot.

Ron Kisling -- Chief Financial Officer

This is Ron. On the first question relative to I think Q4, as we said, we entered Q4 with really good momentum. I think we have a great product portfolio. Versa remains solid, the Number 2 smartwatch in the US and the early sell through on Charge 3 has propelled it to the Number 1 selling Android compatible wearable device in the US. You're basically selling 3x Number 2, so we believe our product portfolio positions us very well going into the holidays.

With respect to the Versa supply, that basically came online in the second half and with that supply, the constraints that we saw in the first half are really not a gating item as we look into the second half of 2018 on our Versa revenues.

Ryan Goodman -- Bank of America Merrill Lynch -- Analyst

Alright. Thanks a lot.

Operator

And that will conclude today's conference for today. Again, thank you all for joining us.

Duration: 40 minutes

Call participants:

Tom Hudson -- Vice President of Investor Relations

James Park -- Chief Executive Officer, President & Co-founder

Ron Kisling -- Chief Financial Officer

Scott Searle -- Roth Capital -- Analyst

Alex Fuhrman -- Craig-Hallum Capital Group. -- Analyst

Jeffrey Rand -- Deutsche Bank -- Analyst

Charlie Anderson -- Dougherty & Company -- Analyst

Scott McConnell -- D.A. Davidson -- Analyst

Yuuji Anderson -- Morgan Stanley -- Analyst

Jim Suva -- Citi -- Analyst

Jeff Garro -- William Blair. -- Analyst

Ryan Goodman -- Bank of America Merrill Lynch -- Analyst

More FIT analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fitbit. The Motley Fool has a disclosure policy.