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Fitbit Inc  (NYSE:FIT)
Q1 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to Fitbit's First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom Hudson, SVP of Finance. Please go ahead, sir.

Thomas Hudson -- Senior Vice President, Finance

Good afternoon and welcome. 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 available from normal financial news sources.

This conference call is being webcast live on the IR 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. Both references will be to a year-by-year comparison unless specified otherwise.

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 up the call to questions. Let me introduce Fitbit's Chairman and CEO, James Park. James?

James Park -- Chief Executive Officer, President and Co-Founder

Thank you, Tom. Thank you to everyone participating today's call. I'm really pleased with our performance in Q1. We saw continued momentum across the business and demonstrated that our focus and execution are leading to better results.

Revenue was up 10% to $272 million and above our guidance. Device growth accelerated from a positive inflection in the fourth quarter up 36% year-over-year to 2.9 million devices sold. Smartwatches sold increased 117% and trackers sold increased 17% year-over-year. This marks the first quarter of positive year-over-year growth for trackers since Q3, 2016.

Smartwatches comprised 42% of revenue from 30% of revenue a year ago. As part of our strategy of launching more affordable and accessible devices, we continue to grow our community of active users. Revenue from Fitbit Health Solutions also increased 70% to $30.5 million, represented 11% of total revenue.

Our strategy for long-term growth and profitability in a consumer business to more effectively monetize our community of active users, customer acquisition is the first step. We do this today primarily through devices, which is why it's important we continue to deliver products that resonate with consumers, enterprise and healthcare customers. The 36% growth in devices sold was driven in part by the launch of our new products, Inspire HR, Inspire, Fitbit Versa Lite.

Trackers have always been key to our portfolio and we continue to see a clear segment of users who prefer this form factor. In fact, Inspire HR is currently the best selling device in the U.S. and the retail channel ahead of Samsung, Fossil and Garmin. Inspire launch help reverse decline in trackers, and we intend to begin shipping the upgrade for our kids offering these two in Q2, further supporting our expected growth in trackers looking forward.

In addition, our smartwatch franchise continued to grow faster than the industry helping Fitbit gain market share. Wired Magazine said about Versa Lite edition, quote, it's wrong to make one of the most popular products, Versa, incrementally more useful, attractive and affordable, and I don't want to be right. Initial Versa Lite sell-through has been lower than expected but increased overall awareness, helped drive greater growth in smartwatches in Q1 and helped us engage with the key younger audience.

The revenue trajectory of our business has historically been predicated on new product introductions. As these products get introduced, we can bring new users into our community, stimulate previously inactive consumers to buy a new device or convince existing users to upgrade their device. 67% of revenue in Q1 was driven by new products introduced in the last 12 months. 39% of activations came from repeat users. Of these repeat users, 53% came from users who were inactive for 90 days or more.

Across products, we believe there is still a significant upgrade opportunity with approximately 70% of our active users on a legacy device. With growth in devices sold, we are succeeding in getting more users on to the Fitbit platform. This is also due to our innovation in software ensuring it is fun and engaging the end user. For example, our recent partnership with Snap to launch the first Bitmoji smartwatch clock dynamically changes with you and your activity is a good example of how our software experiences play an important role in keeping our users motivated and engaged. This clock face quickly became one of the top 50 clock faces and was downloaded over 320,000 times in the first few weeks of availability. This gives consumers a fun way to personalize their device and get motivated to move more and be healthy.

As a result of getting more people onto the Fitbit platform, our active user number also increased in the quarter. This raises our confidence as we move to a commercial launch of our premium subscription service planned later this year. We are continuing to test this experience and expect to broaden testing in more of our users over the next several months to get feedback and iterate ahead of our expected commercial launch.

We believe we can begin to reduce the volatility and seasonality of our business by adding higher margin or consistent sources of revenue by delivering value that drives behavior change. The growth and importance of Fitbit Health Solutions further supports this opportunity. FHS revenue tends to be front-end loaded, centered around health plan wins and benefit cycles versus our more traditional consumer device business, which is due toward the holidays.

Fitbit Health Solutions revenue grew 70% in Q1 to $30.5 million. Revenue growth was driven by robust international growth from key enterprise customer wins, strong execution in the U.S. Our FHS business is predominantly device-centric today, but without the channel margin discount, these sales are more profitable than the consumer device business sold in the retail channel.

We continue to make steady traction on our Fitbit Care software services platform. Fitbit Care is a health and behavior change platform for enterprise population that delivers meaningful and measurable health outcomes. We saw promising results that demonstrate Fitbit's ability to drive behavior change through analysis of more than 1,700 people who enrolled in the National Diabetes Prevention Program with our partner Celera Health. Celera found that participants redeemed the Fitbit device are more active and lost more weight during the program, and those who did not, and are more likely to be engaged in the platform a year later.

In addition, throughout the year, participants who utilize the Fitbit device reported more average minutes of weekly activity and those participants who did not redeem it with only 60 more minutes on average during weeks 10 to 52 of the program. Highlighting the growing software opportunity within the FHS platform, I'm also pleased to report that three major health plans are now using Fitbit Care and our devices for diabetes management.

Fitbit is committed to returning to growth and profitability, but we want to balance investment to drive future revenue growth with near-term cost savings. We continue to focus on driving operating leverage into the business with an effort to improve both our top line and reduced costs. Operating expenses declined 13% in the first quarter, while we continue to invest in Fitbit Health Solutions, consumer software and services, and our device's product roadmap.

With that, let me turn the call over to Ron to discuss our financials in more detail. Ron?

Ronald W. Kisling -- Chief Financial Officer

Thanks, James. My prepared remarks will focus on a financial overview of the first quarter. I will then provide our guidance for the second quarter and fiscal year 2019.

Before I go through the details, I would like to remind investors that financial references are non-GAAP measures, except for revenue, and growth references represent year-over-year changes, unless I specify otherwise. Fitbit sold 2.9 million devices, up 36%, with growth of smartwatches up 117% and trackers increasing 17%. We generated $272 million of revenue, up 10%, as the growth in devices sold was offset by a decline in the average selling price to $91.

As we refreshed our product portfolio and increased the accessibility of our platform with fun and easy-to-use devices, consumer demand improved. Smartwatches grew to 42% of our revenue in the first quarter, marginally less than in Q4 with the roll-out of multiple tracker devices this quarter. Fitbit Health Solutions business grew 70% to $30.5 million in revenue. FHS revenue tends to have the opposite seasonality of our consumer devices with revenue skewed toward the first half of the year rather than holiday period. Over time, as it becomes a larger percentage of our business, we believe that it can lessen revenue and cash flow seasonality.

U.S. revenue declined 3% to $135 million, and international revenue grew 26% to $137 million. EMEA revenue grew 35% to $87 million. APAC revenue grew 24% to $34 million, and Americas revenue, excluding the U.S., declined 5% to $15 million. The international market benefited from the introduction of our new products and the recovery in the UK market. Our direct business represented 11% of sales. We exited the year with a relatively clean global channel.

New products introduced in the past 12 months represented 67% of Q1 revenue compared to 33% a year-ago. Similar to the year-ago period, non-device consumer revenue represented approximately 1% of sales. Gross margin declined 1,290 basis points in Q1, in line with our expectations. The decline in gross margin appeared greater than normal, driven by two one-time events in Q1 2018.

Excluding a one-time revenue reserve reversal associated with the credit insurance claims, the warranty accrual reversal, gross margin declined 690 basis points. The 690 basis point decline was primarily driven by the increase in smartwatch revenue as a percentage of total revenue and the initial lower yield in Versa Lite following its product launch.

Operating expenses declined 13% to $151 million, and were 55% of revenue, down from 70% of revenue a year-ago. We are continuing our commitment to drive greater expense discipline in the business, remain on track to deliver our full-year operating expense guidance.

A portion of the Q1 decline in expenses was the result of the change in the timing of spend rather than additional saving. We shifted approximately $15 million of spend later in the year. In addition, we took a $2.5 million restructuring charge in the first quarter related to a reduction in staff. Our non-GAAP results excluded restructuring charge.

Research and development costs were $64 million, down 15% due to lower employee cost, lower prototype and consulting expense. Sales and marketing costs were $65 million, down 5% as we shifted some media spend from Q1 to Q2, and experienced lower customer service cost.

General and administrative costs were $23 million, down 27%. G&A costs primarily benefited from lower cost of litigation, a shift in legal spend in the second half of the year. An additional reduction in our real estate footprint in San Francisco also contributed to lower rent expense. We generated an operating loss of $58 million, offset by $5 million of interest and other income for a pre-tax loss of $53 million. Our tax rate was 28.3%, resulting in a $15 million benefit, and our net loss per share was $0.15.

Capital expenditures were $6 million or 2.2% of revenue. Much of the investment in tooling equipment to launch our new products will occur in the second quarter rather than the first quarter. The change in working capital resulted in a use of cash of $33 million, driven by an increase in inventory and accounts receivable. Free cash flow in the quarter was negative $74 million. We ended the quarter with $644 million in cash, cash equivalents and marketable securities on our balance sheet, and no debt.

Now let me turn and address our guidance. For full-year 2019, we reiterate our prior guidance, expect device shipments to grow, driven by the introduction of lower priced devices as we execute on our strategy to grow our community of active users. We expect smartwatches to exceed 50% of our total revenue, which while favorably impacting device unit growth, negatively impacts gross margin.

Our Fitbit Health Solutions business is on track to deliver approximately $100 million in revenue for the full-year with the growth rate in the high teens. In addition, we expect to grow our premium subscription service. As a result, we expect revenue to grow 1% to 4% to approximately $1.52 billion and $1.58 billion. We expect gross margin to decline modestly for the full-year to approximately 41%, trending higher in the second half, driven by operating leverage from higher revenue and improving product yield. This will be partially offset by a lower warranty benefit for 2019 compared to 2018, and device mix shift toward smartwatches.

At the size of Fitbit Health Solutions, software and services revenue increases, which will favorably benefit gross margin given their higher gross margins in our consumer device business. For the full-year, we expect to reduce operating expenses by 2% to 6% at 2018 levels to a range of $660 million to $690 million. Our intent is to continue to drive efficiencies into the business through the ongoing optimization of our real estate footprint, and redeploying capital to growing our Fitbit Health Solutions business, and non-device consumer revenue.

We expected adjusted EBITDA in the range of negative $30 million to breakeven. Despite by the anticipated year-over-year improvement in operating income and lower capital expenditures, we will receive less benefit from changes in working capital than in 2018 and expect to consume approximately $40 million to $70 million of cash.

We entered 2019 with accounts receivable approximately $100 million lower than we entered 2018. By 2018, we expect our free cash flow generation to be back-end loaded, and anticipate consuming cash in the first half of the year, generating cash in the second half. Because of the timing of collection varies, we expect to optimize to an annual free cash flow figure rather than on a quarterly basis. We expect capital expenditures to decline year-over-year to approximately 3% for the full year as we shift to less capital intensive development, consolidate our real estate footprint.

Moving to taxes, we expect our full-year effective tax rate to be approximately 30%. So this could fluctuate substantially depending on the geographic distribution of earnings. We expect full-year stock-based compensation expense to be approximately $83 million and the basic share count of approximately 260 million. Our balance sheet remains robust. Looking forward, we will augment organic investment with targeted M&A. We expect M&A will continue to play an important role at Fitbit, we plan to target technology and talent acquisition, and businesses to accelerate the transition of our business through our digital health and recurring revenue.

Turning to Q2. Our guidance reflects the introduction of three new tracker products. One, in a more challenging smartwatch comparison with the successful launch of Fitbit Versa last year. We also expect FH revenue growth to decelerate from the high Q1 growth rate. As a result, we expect revenue to grow 2% to 7% on a year-over-year basis to a range of $305 million to $320 million. We expect second quarter gross margins to be between 36% and 38%. Second quarter gross margin typically expands from Q1, our revenue increases, yields begin to improve from our new product introductions.

We expect adjusted EBITDA to be in the range of a loss of $59 million to $47 million, and we expect a net loss of $0.20 to $0.17 per share. Our guidance reflects an effective tax rate of approximately 25%, which will vary depending on the mix of domestic and international revenue, and the basic share count of approximately 258 million shares.

Stock-based compensation expense is expected to be approximately $21 million. Our 2019 revenue growth is front-end loaded as smartwatch revenue growth favorably benefits total revenue growth. However, as we move into the back half of the year, year-over-year growth comparisons become more difficult. We feel good about our Q1 results, but given the inherent volatility, the back-end loaded nature of our consumer device business, we believe it is prudent to maintain our full-year guidance for revenue growth of 1% to 4%. We expect a typical fall product launch and are confident in our product pipeline, but remain prudent given the changing competitive landscape.

With that, let me turn the call back to the operator to answer questions. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we will take our first question from Scott Searle with ROTH Capital. Please go ahead.

Scott Searle -- Roth Capital -- Analyst

Hey, good afternoon. Nice quarter. Thanks for taking my question. Maybe just for starters, I'm not sure if I heard correctly, Ron. But did you say non-hardware revenue of 1% in the quarter, and I'm wondering how that kind of filters into your expectations for Health Solutions over the course of this year. And along with that, I was wondering if you could address the Inspire product portfolio within to that channel. There had been a lot of talk previously with some of your product cycles and driving costs down to be able to hit price points, where health payers and providers would actually subsidize distribution and adoption of that given the health benefits that you see with a lot of diabetes programs and the like that you're talking about. Are we starting to hit those price points and what are the expectations that are kind of filtered into your expectations for the second half of this year?

Ronald W. Kisling -- Chief Financial Officer

So, Scott, on your first question regarding the non-device revenue, it was about 1%. That's kind of across both pieces of the business. What I would say is, that's fairly consistent with what we saw last year. As we continue to focus on the roll-out of Fitbit Care, we would expect that percentage to grow the services side of the business and the health business. And as we launch a premium subscription service in the second half, we would expect that also to increase our non-device revenue mix in the second half. And on the healthcare side your question around the affordability of devices, so clearly Inspire and Inspire HR resonated really well with our healthcare customers. Fitbit Devices are now a covered benefit for a lot of 2019 Medicare Advantage plans in 27 states. And so, that's being paid for by the MA platform.

Scott Searle -- Roth Capital -- Analyst

Got it. And if I could just follow quickly, and then I'll get back in the queue. Inventory seemed like it was a little bit up this quarter, I know given the product launches and otherwise. Anything else to be read into that because it sounds like certainly we're on the trajectory of higher yields, better utilization in terms of that impacting product gross margins in the second half. Your thoughts kind of on inventory, and I'd love to hear your latest thoughts on a buyback. Thank you.

Ronald W. Kisling -- Chief Financial Officer

Okay. So, on the inventory levels, yeah, we're were up slightly, a lot of that has to do with the product launches that came right toward the end of the quarter. But broadly speaking, we believe inventory levels in the channel and -- are healthy, and kind of at the levels we would like them to be going into the product. I think when it comes to -- it's not buyback, we continue to evaluate it. Our priority is really to preserve our opportunity to invest in growth. We continue to be very disciplined in our approach to M&A. But we do look at it as an opportunity to deepen our relationship with our customers through our long-term value, particularly with the focus on bolstering our services business, and extending our reach into healthcare.

Scott Searle -- Roth Capital -- Analyst

And maybe if I could, Ron, just in terms of the non-hardware model and opportunity, what are we going to be able to get some more visibility into how you're thinking about monetizing, particularly on the healthcare line in those premium subscription services. Are we going to see more in the second half of this year? Thanks.

Ronald W. Kisling -- Chief Financial Officer

Yes. I think your question -- I'm going to let James talk a little bit more about kind of what we're seeing right now. But we expect to launch some programs in the second half, and that should provide a lot more visibility in terms of exactly how we're looking to monetize your services, and monetize our -- over 27 million active users. We're currently testing and iterating moving toward a second half launch.

Scott Searle -- Roth Capital -- Analyst

Great, thank you. Nice quarter.

Operator

We will take our next question from Jeffrey Rand with Deutsche Bank. Please go ahead.

Jeffrey Rand -- Deutsche Bank -- Analyst

Hi, thanks for taking my question. Can you talk a little bit about the size of the addressable market in the healthcare space over the next few years and kind of how this splits out between hardware and software?

Ronald W. Kisling -- Chief Financial Officer

Yeah. So right now, our revenue for our healthcare business is predominantly devices. And our strategy there has been really about trying to increase the affordability of those devices, and you saw that with Inspire and Inspire HR, and that drive toward affordability as I mentioned before has allowed employers and health plans to heavily or fully subsidize these devices to their employees or their health plan members, including our win in a lot of the Medicare Advantage plans in the space. Over time though, we relaunched Fitbit Care last year, and we do expect that to be a much more meaningful part of the healthcare revenue stream. Overtime, we're beginning to see a lot of good traction, in fact, three national health plans are currently using Fitbit Care, as their means for diabetes and diabetes management, other chronic disease condition management for the members.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you. And just as a follow-up, do you think you have the sales force in place to kind of build out this healthcare market or do you think that's something that you will have to kind of investing going forward?

Ronald W. Kisling -- Chief Financial Officer

We continue to invest in the sales and marketing capability of our healthcare business, and I think the interesting thing to note is that it's not just a U.S. opportunity, but a global one as well, in fact, the performance of FHS in the first quarter where we saw 70% year-over-year growth was driven both by strong execution in the U.S. along with increased growth internationally as well.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you.

Ronald W. Kisling -- Chief Financial Officer

And the other thing I wanted to reiterate was our Q1 performance for FHS gives us even greater confidence that we'll hit our $100 million revenue target by 2019.

Operator

We'll move next Mark Rosenkranz with Craig-Hallum Capital Group. Please go ahead.

Mark Rosenkranz -- Craig-Hallum Capital Group LLC, Research Division -- Analyst

Hey, good afternoon. Thanks for taking my questions. Wanted to ask a little more on the Fitbit Health Solutions pipeline. You mentioned you added three major companies during the quarter. Just wondering if you see the opportunity more in terms of adding more companies or getting deeper exposure in different devices across this? Just kind of the general pipeline there.

Ronald W. Kisling -- Chief Financial Officer

Yeah. Can't talk too much about the pipeline, but I just wanted to clarify that it's not companies that we added, it's health plans, which is a major difference. And health plans have a much, much larger set of numbers versus a typical company with their number of employees. A lot of our focus right now is toward health plan, and I think that's why you're seeing a lot of the wins there that we're getting is on the health plan side.

Mark Rosenkranz -- Craig-Hallum Capital Group LLC, Research Division -- Analyst

Okay, great. That's helpful. And then, on the tracker side, just wondering with the introduction of the Charge 3, and some of the newer devices you've put out, are you seeing any type of changes in the active user base in terms of any type of difference in steps or just user activity in general with a kind of a newer audience on the newer devices?

Ronald W. Kisling -- Chief Financial Officer

I think our demographic is staying pretty much the same across the entire portfolio. I would say that the one difference that we saw was with Versa Lite, where it is attracting a much younger audience. And that was the goal of that product, and part of our strategy to bring new users onto Fitbit. I think the other interesting thing to note is that Inspire and Inspire HR were highly successful in bringing new users onto our tracker portfolio, which shows that with continued innovation and a drive toward affordability, the tracker category actually has room to grow even with new users.

Mark Rosenkranz -- Craig-Hallum Capital Group LLC, Research Division -- Analyst

Great. Congrats on a great quarter.

Operator

Moving next, we'll go to Katy Huberty with Morgan Stanley. Please go ahead.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Congrats on the revenue growth this quarter. I believe I heard you say that Versa Lite sell through was a little lower than expected. Can you talk about why you think that was and with channel inventory healthy more broadly, is it also where you want it to be for that product? And I have a follow-up.

James Park -- Chief Executive Officer, President and Co-Founder

Yeah. So we did go in with high expectations for Versa Lite, especially as it was targeted toward a younger and newer demographic for us. And it did have lower-than-expected sell through. But from our point of view, it's still pretty early for that product, that's something that's entirely new. We're continuing to build awareness, it started off out of the gate, really great, customer and press reviews have been really positive. And right now, we're shifting media spend to periods of higher conversion to drive sell-through of the product, including Mother's and Father's Day.

I think the benefit that we've seen with Versa Lite so far is that it's increased overall awareness, and help drive the growth of our overall smartwatch portfolio, which is up 117% year-over-year. The other interesting thing too is that related to that, we saw less cannibalization of Versa and Charge 3. I think there's significant opportunity as well for our smartwatch portfolio, because we do see that 70% of our active users are still on legacy devices. So there's a significant upgrade opportunity.

Katy Huberty -- Morgan Stanley -- Analyst

And then, back on the Health Solutions business, beyond affordability and price points, are there also features that you consider to be killer apps in the future that can really increase penetration of the population within the health plans that you've signed up?

Ronald W. Kisling -- Chief Financial Officer

Yes, for sure. There's a lot of work that we're doing on the R&D side around health specific features. So, for instance, on the FDA side, we continue to collect and gather a lot of clinical data to test and develop FDA cleared solutions around health and disease conditions like AFib, sleep apnea and other health conditions, which we hope to introduce soon. And we're maintaining a continuous dialogue with the FDA throughout that process. So I think that's a taste of some of the innovations that can occur to drive further growth in our category.

Katy Huberty -- Morgan Stanley -- Analyst

And then, just lastly, as it relates to the premium service, you expect a launch in the back half of the year. Is the timing tracking to what you thought three months ago, and any guidelines as to what you think the uptake of that service might be in the installed base over the first 12 months?

Ronald W. Kisling -- Chief Financial Officer

So, just stepping back a bit, just to give people a better picture of our vision for a service offering. What we plan on launching over time is a service that uses all of your Fitbit data and select third-party data to screen and diagnose our users or health conditions, giving them deeper insights and analytics about their health and ultimately giving them guidance and coaching, directly address their health issues or to reach their wellness goals, and we think we're uniquely positioned to offer this for our users. And we're still on track, we're making steady progress for a launch later this year. We're continuing to test and iterate. We're actually going to be broadening our testing over the next several months to get additional feedback. Again, we're well on track to launch version one of our service vision later this year.

James Park -- Chief Executive Officer, President and Co-Founder

Katie, I just want to get back to one of your earlier question is just in terms of inventory levels with respect to Versa Lite. Inventory levels are in line with where we want to be for Versa Lite,

Katy Huberty -- Morgan Stanley -- Analyst

Okay. Great. Thank you.

Operator

Moving next, we'll go to Jim Suva with Cit. Please go ahead.

Jim Suva -- Citigroup Inc -- Analyst

Thanks very much. And I have two questions, and I'll ask them at the same time and you can answer them whatever you want. Can you comment on your strength in international markets. I assume it was attractive new product launches, but also in those markets, I would say, especially in Asia, there's a lot more competing devices. Are you seeing your installed base growth there or what's kind of due diligence that you've seen that really helps out with that growth in the international markets?

And then my second question is on ASP, I think it's correct that you're about $91 this quarter. With the launching of the kind of low price point trackers like for children and kids and stuff like that. Is it fair to say that as the year progresses, the ASPs could come actually a bit lower, but yet those are higher profit margins. And is that the way to think about it? Thank you.

Ronald W. Kisling -- Chief Financial Officer

Yeah. So, this is Ron, I think on your on your first question, I think some of the strength international, I think was you broadly -- I think some of the strength we saw, just in terms of demand in the US was driven by new product introductions. The strategy of launching more accessible devices was a significant contributor to the growth in units or specifically when you look at EMEA, we're seeing a recovery in the UK market, and then broadly, increasing demand with new products. I think what you saw in the U.S. is some of that was impacted by really just the timing of sales in the U.S. I think back to the second question on ASPs, first I think -- the decline that we saw in Q1 was expected and in line with our Q1 product introduction strategy, specifically driven by the introduction of the more affordable devices and Inspire and Inspire HR and Versa Lite designed to lower the barriers to joining our community increased active users, which we saw in the quarter.

This doesn't mean that all of our new product introductions will fall into the category of sort of more affordable devices. While we do expect a decline in Q2 ASP's, driven somewhat by product mix and new product introductions. The rest of the year will fluctuate based on the timing of new product introductions. And I think as we've talked about before, when you look at gross margins, you'll -- one, lower priced devices don't necessarily mean lower gross margins. More specifically, while Q1 margins were low driven primarily by the seasonally low revenue, we are on track to see progression and improvement of gross margins throughout the year, and up to our full-year expectations of approximately 40% on the gross margin side.

James Park -- Chief Executive Officer, President and Co-Founder

And to provide some further detail on Ron's comment. If you look at our entire product roadmap, today in our portfolio, we have devices ranging from close to $50 to $300. We do expect that to maintain that price range across our entire portfolio. So, again, as Ron mentioned, ASPs are really going to depend on the timing of (inaudible).

Jim Suva -- Citigroup Inc -- Analyst

Great. Thank you so much for the details. It's much appreciated.

Operator

Next, we'll go to Jeff Garro with William Blair & Company.

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

Good afternoon, and thanks for taking the questions. Like to ask about FHS and the pipeline insolvency and maybe in a different way. I do think of Q2 and Q3 as the main selling season for health plans and employers. So, wanted to ask if there's anything you can point to in terms of reference accounts or building out the network of partners that's resonating with prospects?

Ronald W. Kisling -- Chief Financial Officer

Yes, for us actually, a lot of the selling comes in the second half of the year, and we start to see that benefit in the first half of the year. That's typically how we see the plan and benefit cycle working for us. And so our comments around there is growth in the healthcare business for us is skewed toward first half. But you can still expect to see high teens growth rate for the full-year. And again, we're still on track to hit our $100 million revenue target.

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

Maybe a follow-up on that for further. I'm thinking a little bit about the new health plans and selling in front of or building out relationships in front of open enrollment. And the next year plans start. So thinking about what's going to drive FHS growth in 2020, and how over the summer, you're going to -- to help build those relationships to generate revenue from new members that those customers, those plants have starting January 1 of 2020?

Ronald W. Kisling -- Chief Financial Officer

Yeah. So we continue to have really good high level engagement with a lot of the key national health plans and a lot of the regional blues as well. Myself and the senior members of our healthcare business do regularly meet with the senior management, a lot of our key partners and future partners, as well. And so a lot of our growth and interest is being driven not only by the continued focus on affordability of our device portfolio, but there's a lot of interest in our Fitbit Care product as well, as you can see by the fact that there's already three national health plans you've adopted as our chronic disease management platform.

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

Great. That's really helpful. Maybe one more for me. Again, on FHS, and your work with health plans, and you talked about health plans using Fitbit devices and software for diabetes management. Curious how the health plans might be using it differently than Solera, the example that you gave during the script, and then also any earlier thoughts on how that same model or similar models can work with different disease states beyond diabetes?

Ronald W. Kisling -- Chief Financial Officer

Yeah. So, our partnership with Solera is fairly complementary, Solera is a marketplace and we offer a solution for diabetes. So the way that Fitbit Care works is that, it's a platform where we ingest data frp, not only our devices but third-party sources as, such as from glucometers. There's a triage element where our health coaches can see users' data and then guide health plan members or employees to meet their goals around lowering A1C levels or their blood pressure readings, et cetera. And so that's the offering that we're selling, and Solera is one of our partners that helps us reach a lot more customers.

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

So, again (technical difficulty) a diabetes example other disease states that you're addressing now, or I think you can address to that combination of software and hardware in the future?

Ronald W. Kisling -- Chief Financial Officer

Yeah. So, right now, it's definitely diabetes along with hypertension. But there is an opportunity to extend that to other chronic disease conditions. For instance, sleep disorders or mental health, which are key areas of interest for companies (inaudible).

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

Great. Thanks for taking the questions.

Operator

(Operator Instructions) We'll move next to Elliot Alper with D.A. Davidson Companies. Please go ahead.

Elliot Alper -- D.A. Davidson Companies -- Analyst

Thanks for the question. So we're seeing politicians campaigning with healthcare as a primary topic of conversation. How do you see the current regulatory environment for healthcare in the U.S., and what are the opportunities for that to be a catalyst to sales? Thank you.

James Park -- Chief Executive Officer, President and Co-Founder

So I think the positive tailwinds for us is the recognition that outcomes-based healthcare is where everyone wants to go through. I mean, it's still a long journey to get to that point. But that coupled with the fact that the better we can manage, help people prevent or manage some of these expensive chronic disease conditions that are driven by lifestyle factors such as diabetes, high blood pressure, I think there's a recognition that by doing that, there's a good opportunity -- great opportunity to lower healthcare costs. So, I think all of that translates into a positive tailwind for our healthcare business, and our focus areas, which is again why we see a lot of interest from health plans and using Fitbit Care to manage chronic disease conditions for the members.

Elliot Alper -- D.A. Davidson Companies -- Analyst

All right. Thank you.

Operator

And next, we'll go to Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson -- Dougherty & Company LLC, Research Division -- Analyst

Yeah, thanks for taking my questions. I want to go back to some of the Versa Lite commentary. I guess I'm curious, embedded in your full-year guidance, which you didn't change, are you assuming that you sought to recover from the start that you had with some of these targeted marketing programs or is it the case that other parts of the business are outperforming to kind to offset? And then I got a follow-up.

James Park -- Chief Executive Officer, President and Co-Founder

Yeah. So, a comment on Versa Lite. So, it's still early in the lifecycle of that product, it's really new product in the eyes of consumers. So it's something that we need to build awareness on. So, we had a good start again with the customer and press reviews, it's a well-reviewed product. And a lot of what we are expecting to see it in terms of sell-through is going to come from, again, focusing and shifting our media dollars to keep periods like Mother's Day and Father's Day. Again, I think the great thing about Versa Lite, as I mentioned before, that it's driven overall awareness of our smartwatch portfolio. We actually saw less cannibalization of other products.

Charlie Anderson -- Dougherty & Company LLC, Research Division -- Analyst

Great. And then, for a follow-up, just on the smartwatch category, you've got multiple price points now within that Versa family. I'm kind of curious where you see sort of the white space in that category. What portions of the market are you not addressing at this point? You did mention that backup products are just kind of curious, where the room in the market is for you to grow the TAM? Thanks.

Ronald W. Kisling -- Chief Financial Officer

Yeah. So, I think, if you look at our product and price range from close to $50 to $300, that's the range that we'll continue operate in. And in terms of specific price points, I think from my perspective, we're pretty well covered. So, I don't -- shouldn't anticipate anything radically new on where our products are priced.

Charlie Anderson -- Dougherty & Company LLC, Research Division -- Analyst

Great. Thanks so much.

Operator

And ladies and gentlemen, at this time, this does conclude today's conference call. Thank you for your participation. You may now disconnect.

Duration: 42 minutes

Call participants:

Thomas Hudson -- Senior Vice President, Finance

James Park -- Chief Executive Officer, President and Co-Founder

Ronald W. Kisling -- Chief Financial Officer

Scott Searle -- Roth Capital -- Analyst

Jeffrey Rand -- Deutsche Bank -- Analyst

Mark Rosenkranz -- Craig-Hallum Capital Group LLC, Research Division -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Jim Suva -- Citigroup Inc -- Analyst

Jeff Garro -- William Blair & Company L.L.C., -- Analyst

Elliot Alper -- D.A. Davidson Companies -- Analyst

Charlie Anderson -- Dougherty & Company LLC, Research Division -- Analyst

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