Image Source: Fitbit
Fitbit (FIT +0.00%) stock gained 20% in the two weeks following its reporting of second-quarter adjusted earnings per share of $0.12 on revenue of $586.5 million, just barely beating analysts' expectations for adjusted EPS of $0.11 on revenue of $578.5 million. The company is optimistic about the back half of the year and reaffirmed full-year guidance with adjusted EPS of $1.12 to $1.24 on revenue of $2.5 billion to $2.6 billion, significant increases from 2015. And Fitbit could beat these estimates as it continues to focus on R&D, international growth, and healthcare integration.
R&D
Research and development, or R&D, is critical to Fitbit's long-term success as more companies compete to develop fitness-tracking devices with the newest technology. In the first-half of 2016, Fitbit's R&D expense almost tripled year-over-year to $152.1 million, from $52.9 million. The increased expense will decrease earnings over the next several quarters, but it should provide a competitive advantage as the company works to secure new patents and develop new technology. According to CEO James Park in the first-quarter conference call:
Our R&D is spread across hardware engineering, software engineering, firmware, interactive, research, and industrial design. Total R&D headcount comprising all those areas at the end of Q1 was 755 compared with 295 in Q1 2015, currently more than half our employees. At the end of Q1 2016, our patent portfolio consisted of 140 issued patents and 156 patent applications pending. That compares with 77 issued patents and 132 applications pending at the end of Q1 2015. We feel that it will be difficult for many of our competitors to match the breadth and pace of our R&D over time.
Fibit's second-quarter results showed that management is on the right track with the Blaze and Alta, two devices launched earlier this year that incorporate some of the company's newest technology and designs. In Q2 2016, these higher-priced devices represented 54% of revenue, up from 50% in Q1, with two-thirds of Blaze and Alta activations in the quarter coming from new Fitbit customers. The two devices also helped push overall average selling price from $88 in 2015 to $99. Rumor has it the company plans to launch its two newest devices next month at IFA, the world's leading trade show for consumer electronics, and investors will be scrutinizing any new products to see if the R&D investments are paying off.
International growth
In addition to R&D, Fitbit is counting on international markets to continue delivering record sales, and the company saw its greatest revenue growth in the Europe, Middle East, and Africa region (EMEA), with second-quarter 2016 EMEA revenue up 150% year over year, compared with 42% growth in the United States. The U.S. and EMEA are Fitbit's two biggest markets with 76% of second-quarter revenue coming from the U.S. and 17% from EMEA.
Fitbit has increased overseas sales and marketing efforts this year, especially in Europe. In the first half of 2016, Fitbit increased its spending on sales and marketing 98% year-over-year, to $225 million. Its increased marketing spending in Europe produced partnerships with Let's Dance, Germany's version of Dancing With the Stars, the B2RUN series with an estimated 180,000 participants, and Lucozade, a popular sports drink in the U.K. These partnerships will build brand awareness and should contribute to future revenue growth in the region.
The Asia-Pacific region, accounting for only 2% of revenue, remains Fitbit's biggest opportunity for future growth. and the company continued ramping up its sales and marketing efforts there. Fitbit announced a partnership in May with Tmall.com to sell its products in China, where a higher percentage of retail sales are online compared with other countries. This partnership should allow Fitbit to rapidly grow sales in a market that can be challenging for foreign companies to break into.
Healthcare integration
On top of R&D and international expansion, Fitbit has ramped up its focus on integration into healthcare systems. The company recently hired Adam Pellegrini, former Walgreen Boots Alliance (WBA +0.00%) VP of digital health, who "will be responsible for leading Fitbit's vision, strategies, and programs to further drive the company's integration into healthcare systems around the world," as CEO James Park explained during the conference call.
The company continues gaining traction with the clinical research community and has partnered with leading medical institutions, such as Johns Hopkins University and Northwestern Medicine, in over 200 studies to gather data on everything from surgery recovery times to testing the impact of physical fitness on patients awaiting liver transplants. Fitbit believes these studies validate its ability to "engage consumers in the healthcare setting while providing powerful data and information to the clinical research community," as Park put it. If Pellegrini is successful integrating Fitbit devices into major healthcare systems, it could result in a large boost in sales depending on the size of the partner.
Fitbit's focus on R&D, international growth, and healthcare integration should be a solid path to sales. Fitbit has a ways to go before getting back to its 2015 IPO price of $20, but it's focused on the right areas for future success.
