Fitness wearable company Fitbit (NYSE:FIT) reported first-quarter 2018 results that declined year over year once again. However, while many challenges remain, it looks like this could be the year the company finally makes some headway in catching up to the competition.

First, the numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year % Increase (Decrease)

Revenue

$247.9 million

$298.9 million

(17%)

Cost of revenue

$133.7 million

$180.6 million

(26%)

Operating expenses

$197.5 million

$209.7 million

(6%)

Earnings (loss) per share

($0.34)

($0.27)

N/A

Devices sold

2.2 million

3.0 million

(27%)

Average device selling price

$112

$96.50

16%

Chart by author. Data source: Fitbit quarterly earnings.

Versa off to a strong start

At first glance, Fitbit had a terrible quarter. Business was down by nearly every metric, the only bright spot being control over costs, but this was largely expected. Management had warned that this would be the situation back when reporting the full-year 2017 results. The company is still trying to make a comeback after consumers moved on from pure fitness trackers to more-advanced smartwatches.

So although the numbers are undeniably ugly, this one metric offers some hope: Smartwatches were 30% of revenue in the quarter, nearly double what it was three months ago. Though it was met with criticism, the Ionic -- Fitbit's first smartwatch -- is responsible for the increase in that key category.

The company's second proper smartwatch, the Versa, is reportedly off to a strong start. Realizing that going toe-to-toe with Apple's (NASDAQ: AAPL) smartwatch is probably a losing strategy in the long term, Versa aims to offer similar features and longer battery life at a competitive price -- starting at $199 compared to Ionic's $249 and the Apple Watch's $329 starting price.

Versa launched with good reviews, and Fitbit says that smartwatches will become the majority of sales later this year. The higher sales price per unit should help the bottom line, and the number of available apps will help make that a reality. Fitbit's app store is still anemic with 750 options, compared to the over 2 million available from Apple, but that's respectable considering it launched about six months ago.

In an attempt to squeeze what's left out of the declining fitness tracker segment, all trackers will share an operating system to streamline manufacturing and lower costs. The Ace tracker for kids, released concurrently with Versa, will provide the template. The company isn't completely giving up on the segment because fitness trackers still sell well as an entry-level product and in emerging markets.

Fitbit watches.

The Fitbit Versa, left, and Ionic smartwatcherecens. Image source: Fitbit.

The future is software ... and healthcare

Fitbit CEO James Park has long talked about transforming the company into a healthcare business rather than simply a device seller. While fitness-tracking features can help users with issues like diabetes, heart health, sleep, and mental health, Fitbit exists as little more than a hardware manufacturer at this point. With ample competition, that means wild swings in revenue and profits.

Recent moves could eventually lay the groundwork to change that. Fitbit acquired health coaching service Twine Health during the first quarter, and co-founder Dr. John Moore is now Fitbit's first medical director. A recent agreement with Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) Google Cloud Healthcare API is designed to integrate Fitbit's data into the medical world, making it easier for medical professionals to collaborate and help patients. Fitbit also said to look for the launch of premium features and subscriptions for consumers to drive revenue outside of hardware later this year.

It seems that Fitbit's rebound is going to take much longer than management anticipated, but Park and company are confident this will be the year the groundwork is laid for a return to growth. With Fitbit finally focused on being a smartwatch maker, and with new software services for the medical field and health-conscious consumers looming, perhaps it will be able to add a new revenue line item by the end of 2018 that isn't based on "devices sold."

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (A shares), Alphabet (C shares), Apple, and Fitbit. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.