Another Tough Quarter for Fitbit

Fitness-wearables company Fitbit (FIT +0.00%) reported its fourth-quarter results after the market closed on May 3. Revenue tumbled 40%, driven by elevated levels of channel inventory and generally tepid demand for its products. Fitbit maintained its guidance for the full year, which calls for a major revenue decline and significant losses. 2017 will be a transition year, according to the company, with connected health expected to be a key driver of future growth.

Here's what investors need to know about Fitbit's first-quarter results.

Fitbit results: The raw numbers

Data source: Fitbit.

Image source: Fitbit.

What happened with Fitbit this quarter?

Excess channel inventory left over from Fitbit's disastrous holiday quarter weighed on the company's U.S. sales.

• U.S. revenue declined by 52% year over year to $170 million. Fitbit claimed that consumer demand was stronger than this number suggests, with the discrepancy due to elevated channel inventory levels.
• Europe, Middle East, and Africa revenue grew by 17% year over year to $88 million, Asia-Pacific revenue slumped 63% to $21 million, and Americas ex-U.S. revenue dropped 15% to $20 million.
• Eighty-four percent of Fitbit's total revenue was derived from products introduced in the past 12 months. These include the Charge 2, Alta HR, and Flex 2.
• Gross margin was 39.6%, down from 46.3% in the prior-year period. Product mix, excess component materials, and manufacturing capacity were cited as drivers behind the decline.
• The average selling price of Fitbit's devices declined by 4% to $96.45.
• Revenue from accessories and other sources came out to $4.70 per device sold.
• GAAP operating expenses declined by about 2.5% year over year.
• Fitbit had $726 million of cash and marketable securities on the balance sheet at the end of the first quarter, and no debt.

Fitbit provided the following guidance for the second quarter and for the full year.

• Second-quarter revenue between $330 million and $350 million, down from $587 million during the prior-year period.
• A second-quarter non-GAAP EPS loss of between $0.14 and $0.17, down from a gain of $0.12.
• Full-year revenue between $1.5 billion and $1.7 billion, non-GAAP EPS loss between $0.22 and $0.44, and a free cash flow loss of between $50 million and $100 million. The full-year guidance was unchanged.

What management had to say

Fitbit CEO James Park defended the company's accomplishments and pointed to an improving channel inventory situation later in the year: "In the 10 years since Fitbit was founded, we have transformed the wearables category with more than 63 million devices sold, over 50 million registered device users, and a global retail footprint of more than 55,000 stores. Underlying consumer demand has been better than our reported results in North America as we work down channel inventory levels, giving us increased confidence that we will enter the second half of 2017 with a relatively clean channel."

Park reiterated that 2017 will be a tough year: "While 2017 remains a transition year, we have executed on our restructuring plan and are focused on positioning the company for the next stage of growth within wearables and connected health."

Looking forward

Fitbit's full-year guidance remained unchanged, so at the very least the situation hasn't gotten any worse. Elevated channel inventory is a headwind, but sales are still expected to decline by as much as 30% for the full year, so that's far from the only problem.

Fitbit is reportedly working on a smartwatch, but rumors have emerged that the company is having major issues. Fitbit probably has other new products up its sleeve for 2017, but a full slate of product launches leading up to the 2016 holiday season failed to produce anything but a dramatic sales decline. If one thing is clear from Fitbit's first-quarter report, it's that the company has a lot of work to do.