Fitness-wearables specialist Fitbit (NYSE:FIT) reported its second-quarter results after the market closed on Aug. 2. Revenue and earnings plunged on a year-over-year basis, as Fitbit continues to reel from decreased demand for its products. The situation did improve some, with Fitbit selling more devices compared to the first quarter, achieving a higher gross margin, and cutting its costs. The second half of the year will feature the launch of Fitbit's smartwatch, which could provide a revenue boost if successful. Here's what investors need to know about Fitbit's second-quarter results.

Fitbit results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$353.3 million

$586.5 million

(39.8%)

Net income

($58.2 million)

$6.3 million

N/A

Non-GAAP EPS

($0.08)

$0.12

N/A

Devices sold

3.4 million

5.7 million

(40.4%)

Data source: Fitbit.

A woman looking at a Fitbit Charge 2 on her wrist.

Image source: Fitbit.

What happened with Fitbit this quarter?

  • U.S. revenue declined by 55% year over year to $199 million. Consumer demand was stronger than expected, according to the company, allowing it to reduce channel inventory.
  • Europe, Middle East, and Africa revenue was up 9% to $109 million, Asia-Pacific revenue was up 46% to $21 million, and Americas ex-U.S. revenue was down 11% to $24 million.
  • Eighty-one percent of revenue was generated by products launched in the past 12 months, which include the Charge 2, Alta HR, and Flex 2.
  • The average selling price increased by 2% year over year, to $100.76 per device. Sales of accessories produced an additional $3.98 of revenue per device.
  • Fitbit sold 14% more devices during the second quarter than it did during the first quarter.
  • GAAP operating expenses declined by 10% year over year, while non-GAAP operating expenses declined 7%.
  • Gross margin was 42.2%, up from 41.8% during the prior-year period. Product mix, the increase in average selling price, and a reduction in warranty expense drove the improvement.
  • Fitbit had $676 million of cash and marketable securities on the balance sheet at the end of the second quarter, and no debt.

Fitbit provided the following guidance for the third quarter and for the full year:

  • Third-quarter revenue will be between $380 million and $400 million, down from $503.8 million during the prior-year period.
  • Third-quarter non-GAAP EPS will be a loss between $0.05 and $0.20, down from a gain of $0.19 during the prior-year period.
  • Full-year revenue will be between $1.55 billion and $1.7 billion, with a non-GAAP EPS loss between $0.22 and $0.40, and a free cash flow loss between $50 million and $80 million.

What management had to say

Fitbit CEO James Park said that the company is on track to hit its full-year targets: "Consumer demand in the second quarter was better than anticipated, enabling Fitbit to reduce channel inventory and generate better sales. We are executing according to our transition plan and have increased confidence in achieving our full year results."

Park also discussed the company's upcoming smartwatch: "Our smartwatch, which we believe will deliver the best health and fitness experience in the category, is on track for delivery ahead of the holiday season and will drive a strong second half of the year. In the long term, we are confident in our vision for the future and are uniquely positioned to succeed by leveraging our brand, community, and data to drive positive health outcomes."

Looking forward

Fitbit's results were terrible on a year-over-year basis, but an improving gross margin and declining operating costs are two signs that the company is on the right track. Costs will need to be reduced further, and revenue will likely need to start growing again, before the company can return to profitability.

Fitbit's smartwatch, set to launch later this year, has the potential to be the hit product that the company desperately needs. It won't be easy going up against the Apple Watch and other competing devices, though, especially given the concerns raised about problems plaguing Fitbit's development process. If Fitbit's smartwatch turns out to be a dud, the turnaround will likely stop dead in its tracks.

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