What happened

Shares of Fitbit (FIT) slumped on Thursday after the wearables specialist reported its fourth-quarter results. While the company beat analyst estimates for both revenue and earnings, it issued disappointing guidance. As of 11:30 a.m. EST, the stock was down about 12.7%.

So what

Fitbit reported fourth-quarter revenue of $571.2 million, up 0.1% year over year and around $2 million above the average analyst estimate. Fitbit sold 5.6 million devices, up from 5.4 million in the prior-year period. Average selling price declined 2% year over year to $100, pushed down by the launch of the Charge 3 fitness tracker.

The Fitbit Versa, surrounded by various watchbands

The Fitbit Versa. Image source: Fitbit.

For the full year, 44% of Fitbit's revenue came from smartwatches. That's up from just 8% in 2017. Fitbit launched the affordable Versa smartwatch in 2018, providing a low-cost alternative to the Apple Watch.

Non-GAAP earnings per share came in at $0.14, up from a loss of $0.02 in the prior-year period and $0.07 better than analysts were expecting. Gross margin tumbled due to the shift toward smartwatches, but much lower operating costs pushed up the bottom line.

Check out the latest Fitbit earnings call transcript.

Now what

Fitbit had a decent holiday quarter, but its guidance overshadowed those results. First-quarter revenue is expected between $250 million and $268 million, up 1% to 8% year over year. Devices sold will increase, but average selling price will decrease. Analysts were expecting revenue of $272.3 million.

First-quarter non-GAAP EPS is expected to be a loss between $0.22 and $0.24, exceeding analyst estimates for a loss of $0.15 per share.

For the full year, Fitbit sees revenue between $1.52 billion and $1.58 billion, up 1% to 4%, along with a free cash flow loss between $40 million and $70 million. Analysts were expecting revenue of $1.57 billion.

Fitbit's turnaround is going to take time, as evidenced by its weak guidance. The company managed to produce positive free cash flow in 2018, but that included a substantial benefit from working capital. That won't repeat to the same degree this year.

While Fitbit's Versa smartwatch appears to be a success, slumping tracker sales are still weighing heavily on the company's results.