Fitbit (FIT) has been on the ropes for several quarters now, as smartwatches broadly cannibalize the basic fitness tracker category that has long been the core of Fitbit's business. The good news is that Fitbit recognized the market's pending transition years ago, and started acquiring defunct companies that contained the technological pieces that could underpin its own smartwatch ambitions. While the first product that came from those efforts (the Ionic) flopped, the second (the Versa) is performing significantly better in the marketplace for wearables.

The company is putting together a turnaround built on top of the Versa.

Fitbit Versa alongside various watchbands

Versa has much broader appeal than the Ionic. Image source: Fitbit.

Smartwatches now represent over half of revenue

Fitbit reported second-quarter results last night, noting that the Versa sold out during the quarter. Total revenue came in at $299.3 million, down from $353.3 million a year ago. Devices sold was down year over year, but up sequentially as Versa unit volumes ramped. Fitbit sold 2.7 million devices in the second quarter.

Average selling prices rose to $106, thanks largely to the product mix shifting toward pricier smartwatches. This quarter marked an important inflection point for Fitbit, with smartwatch revenue overtaking basic tracker revenue for the first time. Smartwatches now comprise 55% of total revenue, up from 30% in the first quarter. That's not to say that Fitbit is giving up on the fitness tracker market altogether. CEO James Park still believes that trackers will remain "an important part of wearable categories overall," and still plans on serving that market segment.

At a time when most Wear OS (previously Android Wear) manufacturers are exiting the market, there aren't too many challengers to Apple's dominance in smartwatches. "Retailers have been looking for a counterbalance for Apple and Versa has delivered," Park said on the earnings call. Fitbit also noted that Versa outsold all Samsung, Garmin, and Fossil smartwatches combined in North America during the quarter.

The company posted a non-GAAP net loss of $54.2 million, or $0.22 per share. Both top- and bottom-line results came in ahead of expectations, with analysts modeling for $285.4 million in sales and $0.24 per share in adjusted losses.

Returning to growth and profitability

Looking ahead, guidance for the third quarter calls for revenue in the range of $370 million to $390 million, with a non-GAAP net loss of $0.02 per share to a profit of $0.01 per share. Fitbit is reaffirming its full-year 2018 guidance, with revenue forecast to be approximately $1.5 billion.

Fitbit remains on track with cutting full-year operating expenses. The company previously said it was looking to reduce operating expenses by $60 million compared to 2017 levels, and full-year operating expenses are expected at approximately $740 million. However, Fitbit is boosting its capital expenditures associated with Versa production in order to satisfy better-than-expected demand.

Park expects Fitbit to return to growth and profitability in the second half of the year.