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More Trouble Ahead for Fitbit After Terrible Holiday Quarter

By Timothy Green - Updated Feb 23, 2017 at 7:30PM

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Sales tumbled and profits turned to losses as the wearables company struggled to cope with lower-than-expected demand. Things won't get better anytime soon.

Fitness wearables specialist Fitbit (FIT) reported its fourth-quarter results after the market closed on Feb. 22. It was a disastrous holiday season for Fitbit, featuring a steep decline in sales and major losses. Much of this bad news was telegraphed in Fitbit's preliminary release last month, so there weren't any surprises.

Guidance for 2017 was far from optimistic, calling for a big decline in revenue and continued losses. Fitbit has slashed costs and laid off employees, but it won't be enough to offset the expected drop in sales. Here's what investors need to know about Fitbit's fourth-quarter results and its outlook for this year.

Fitbit results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$573.8 million

$711.6 million

(19.4%)

Net income

($146.3 million)

$64.2 million

N/A

Non-GAAP EPS

($0.56)

$0.35

N/A

Devices sold

6.5 million

8.2 million

(20.7%)

Data source: Fitbit.

All of Fitbit's current products displayed in various colors.

Image source: Fitbit.

What happened with Fitbit this quarter?

Fitbit's growth came to a grinding halt during the holiday quarter, prompting the company to announce layoffs.

  • U.S. revenue dropped 28% year over year to $381.5 million; Europe, Middle East, and Africa revenue rose 58% to $134.0 million; Asia-Pacific revenue slumped 56% to 24.9 million; and Americas revenue fell 12% to $33.4 million.
  • New products, which include the Charge 2, Flex 2, Alta, and Blaze, accounted for 96% of revenue.
  • Gross margin crashed to 22.1%, down from 48.9% during the prior-year period, due to a $78 million writedown of tooling equipment and component inventory, a $42 million reduction in revenue related to increased rebates and promotions, increased return reserves of $41 million, and increased warranty reserves for legacy products of $17 million.
  • Fitbit reduced its exit operating expense run rate by $200 million thanks to cost-cutting efforts, including a 6% reduction in its workforce.
  • Operating expenses still grew 31% year over year, leading to a sizable loss.

Fitbit's guidance for the first quarter and 2017 calls for steep revenue declines:

  • For the first quarter: Revenue between $270 million and $290 million, and non-GAAP EPS loss between $0.18 and $0.20. Revenue was $505 million during the first quarter of 2016.
  • For 2017: Revenue between $1.5 billion and $1.7 billion, non-GAAP EPS loss between $0.22 and $0.44, and free cash flow loss between $50 million and $100 million. Revenue was $2.17 billion during 2016.

What management had to say

Fitbit CEO James Park didn't directly acknowledge the company's struggles in the earnings press release, instead talking up its long-term potential:

Our 10-year history of building this category, coupled with our powerful brand and engaged global community gives us confidence we are making the right investments to support our vision and drive long-term success. We will leverage our leadership position, recently acquired talent and IP, and the valuable data we collect to improve demand and continue to set the pace of innovation for the industry through more personalized experiences, deeper insights and guidance, expansion into new categories and deeper integration within the healthcare system.

Looking forward

Fitbit expects to burn cash in 2017 as it works to reinvigorate its business. New products will likely be released, possibly including a proper smartwatch that could go toe-to-toe with the Apple Watch. Layoffs and other cost-cutting measures will put an abrupt end to the explosion of headcount and costs that have defined Fitbit over the past couple of years. With demand for its products simply not materializing, Fitbit now faces the difficult task of returning to growth while simultaneously slashing costs.

Fitbit is still the fitness band market leader, and its brand remains powerful. But the market is only so big. 2017 will be a tough year for the company and its shareholders as it navigates this new reality, and only time will tell whether Fitbit can turn things around.

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