The last few years have not been kind to Fitbit (NYSE:FIT). The early leader in wearable activity trackers fell behind competition as many consumers upgraded to do-everything smartwatches, and the company lost market share to the likes of Apple (NASDAQ:AAPL) and Xiaomi in the process.
Fitbit has done a lot to play catch-up in the last year with the release of several of its own smartwatches. However, if the company is to return to sustainable growth, its health solutions and software business needs to kick into high gear soon.
First, a few numbers
Second-quarter 2018 revenue fell 15% year over year to $299 million. While that's an ugly stat to look at, revenue was up 21% from the first quarter of the year. Plus, the average selling price per device increased 6% from a year ago to $106. Thanks to the Versa smartwatch that was released in the spring, smartwatches made up 55% of total revenues compared to 30% 12 months prior.
A slew of new wearable releases has been the story here. The affordable Versa sold out during the quarter, and the company also recently released the Ace fitness tracker for kids. New devices released in the last year accounted for 59% of all sales. Thanks in large part to its product refresh, management is cautiously optimistic it can return to year-over-year growth during the second half of 2018.
Business that isn't wearable
If Fitbit is going to thrive, it needs to develop a meaningful business outside of wearable sales. Management has acknowledged this and has said that the focus for 2018 is developing business around "nonepisodic" recurring revenue that is not dependent on the number of wearables sold.
Device sales make up roughly 95% of Fitbit's top line, with the rest coming from a mix of accessories and software solutions. The company doesn't break out exactly how much health solutions and software are adding to the pile, but did say that paid premium subscription revenues increased 34%, an acceleration from the 30% reported in the first quarter.
Fitbit Health Solutions -- the arm of the company that works with insurance companies -- is now working with more than 100 health plans in the U.S. like Anthem's (NYSE: ANTM) Blue Cross Blue Shield and Humana (NYSE: HUM). CEO James Park said that while the segment still earns its keep from selling trackers to plan participants, the company hopes to soon set up health cost-savings sharing plans with insurers for whom it is able to lower patient bills. Fitbit also supports researchers in finding new uses for its trackers and continues to work on ways to monetize the data it is able to collect through subscription services.
Software on the consumer side is also an important segment. A tracking feature for women's health was launched on the Fitbit app a couple of months ago, and there have already been 2.9 million sign-ups. Other subscription and membership paid services are in the works to complement the Twine Health coaching service the company acquired early in the year. Management says that acquisitions could continue as Fitbit builds out its software strategy.
All of that shows up in Fitbit's research-and-development line item. Even though total sales were down 15% from a year ago, R&D increased 8% to $87 million in the second quarter. It's encouraging to see progress in more stable health and software business segments, but Fitbit still has a long way to go before volatile wearable sales get smoothed out with some substantive recurring revenue.