Fitbit Expects to Grow Sales This Holiday Season

Fitbit (FIT) reported its third-quarter results after the market closed on Nov. 1. The fitness-wearables company is still suffering from double-digit revenue declines, but new products like the Ionic smartwatch have the company optimistic that it can return to growth this holiday season. A big tax-related charge knocked down the bottom line, but the company came close to turning a profit on an adjusted basis. Here's what investors need to know about Fitbit's third-quarter results.

Fitbit results: The raw numbers

Data source: Fitbit.

The Fitbit Ionic smartwatch. Image source: Fitbit.

What happened with Fitbit this quarter?

• U.S. revenue declined by 32.4% year over year to $244.2 million, but it increased 23% compared to the second quarter.
• Europe, Middle East, and Africa revenue grew 9.6% year over year to $88.7 million, but it was down 18% compared to the second quarter.
• Asia-Pacific revenue slumped 3.7% year over year to $34.4 million, but it was up 63% compared to the second quarter.
• Americas, excluding the U.S., revenue was down 2.6% year over year to $25.3 million, but it was up 4% compared to the second quarter.
• 32% of revenue was generated by products launched in the past 12 months, which includes the Alta HR and Ionic smartwatch.
• The average device selling price was $104.72, up 12% year over year and up 4% from the second quarter. The Ionic sells for $300, pushing up the average.
• While the number of devices sold plunged compared to the third quarter of last year, Fitbit managed to grow device sales by about 7% sequentially.
• Accessory and other revenue totaled $3.60 per device, down from $3.98 in the second quarter.
• GAAP operating expenses declined by 5% from the second quarter, although expenses increased by 3.2% compared to the same period last year.
• Gross margin was 44.5%, down 330 basis points year over year. Warranty changes in some countries and a change in the replacement policy for legacy devices affected the gross margin.
• Fitbit took an $86 million charge stemming from the establishment of a valuation allowance against deferred tax assets.

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

• Fourth-quarter revenue expected between $570 million and $600 million, compared to $574 million in the fourth quarter of 2016.
• Fourth-quarter non-GAAP EPS between a loss of $0.03 and a profit of $0.01, compared to a loss of $0.56 in the fourth quarter of 2016.
• Full-year revenue between $1.615 billion and $1.645 billion, with a non-GAAP EPS loss between $0.23 and $0.27.
• Full-year free cash flow loss expected between $30 million and $50 million.

What management had to say

During the conference call, Fitbit CEO James Park discussed reviews of the new Ionic smartwatch:

Reviews to date from both the experts and the press and consumers have been largely positive. Using average Amazon customer reviews and the U.S. as a proxy, the launch of Ionic marks the best reception of any Fitbit products within the first month of sales with a rating of 4.2 stars.

Park also touched on the company's efforts to reduce its costs, which had exploded prior to the disastrous 2016 holiday season:

With the first nine months of the year, R&D costs have grown 5%, but operating expenses have trended below our forecasted $850 million and are down year-over-year. We also continue to advance the quality of our offering. Actual defective parts per million, one of our key quality indices, has improved 36% during the last nine months. And because of our improved reliability and testing capability, we can further forecast additional improvements.

Looking forward

Fitbit boosted its full-year revenue guidance a bit, and it now expects to grow revenue during the holiday quarter, although that's not saying much given how much sales dropped last time around. The fourth quarter will be the real test of whether the positive reception for the Ionic ultimately translates into improved sales.

Fitbit very nearly broke even on a non-GAAP basis in the third quarter, and it looks like the darkest days are behind the company. But costs will need to keep coming down for Fitbit to return to meaningful profitability. With the pace at which Fitbit needs to come out with new products just to tread water, that will be easier said than done.