What happened

Shares of Fitbit (NYSE:FIT) jumped on Thursday after the fitness wearables company reported its third-quarter results. Fitbit beat analyst expectations for both revenue and earnings, producing a surprise adjusted profit. The stock was up about 22.4% at 12:40 p.m. EDT.

So what

Fitbit reported third-quarter revenue of $393.6 million, up 0.3% year over year and about $12.4 million higher than the average analyst estimate. Device unit sales were 3.5 million, down from 3.6 million in the prior-year period, but a 3% increase in average selling price (ASP) offset that decline. That ASP increase was driven by a shift in mix toward smartwatches and away from cheaper fitness trackers. Smartwatches accounted for 49% of revenue in the quarter, up from less than 10% in the prior-year period.

The Fitbit Versa.

The Fitbit Versa. Image source: Fitbit.

Non-GAAP earnings per share came in at $0.04, up from a loss of $0.01 in the prior-year period and $0.05 better than analysts were expecting. Non-GAAP gross margin plunged more than 5 percentage points thanks to higher smartwatch sales, but that was offset by lower operating expenses.

Fitbit has made strides in the U.S. smartwatch market, according to CEO James Park: "We are now the number two player in the smartwatch space in the U.S., a category we just entered with zero share only 14 months ago. We also launched our most advanced tracker yet, Fitbit Charge 3, which is blurring the lines between trackers and smartwatches and is already one of the top-selling devices in the U.S."

Now what

Fitbit expects fourth-quarter revenue of at least $560 million, and full-year revenue of about $1.5 billion. Those numbers compare with $571 million of revenue in the fourth quarter of 2017, and $1.62 billion in 2017. Non-GAAP EPS of $0.07 is expected for the fourth quarter.

While Fitbit's revenue is still not really growing, the company's Versa smartwatch is clearly a hit. A lower gross margin will be a headwind as the company tries to boost its profits, but Fitbit is making some progress cutting costs. That's a good sign, one that investors rewarded on Thursday.

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