So much for that turnaround.
Fitbit (FIT) had been putting together a comeback in recent quarters, driven in large part by the success of the Versa, Fitbit's mainstream smartwatch. The company had introduced an even more affordable Versa Lite earlier this year, which looked promising considering its $160 price point. But the consumer electronics market can be fickle, and the Versa Lite is not selling well.
Investors were disappointed with Fitbit's second-quarter results, sending shares to all-time lows.
Versa Lite. Image source: Fitbit.
Consumers prefer discounting over "everyday low pricing"
Total revenue increased to $313.6 million in the second quarter, and profitability was hurt in part by the product mix shifting toward lower-priced devices. Devices sold increased 31% to 3.5 million, but average selling price (ASP) fell 19% to $86 "due to the introduction of more affordable devices," according to Fitbit.
The company had refreshed its tracker lineup when it introduced the Versa Lite, and those basic trackers are enjoying robust demand while Fitbit's smartwatch products are not.
|
Metric |
Change (YOY) |
|---|---|
|
Tracker revenue |
51% |
|
Tracker devices sold |
56% |
|
Smartwatch revenue |
(27%) |
|
Smartwatch devices sold |
(7%) |
Data source: Fitbit. YOY = year over year.
Fitbit attributed the decline in smartwatch revenue to poor sales of the Versa Lite, and the company is cutting its full-year guidance as a result. On the conference call, CEO James Park added:
However, our sales mix was different than we anticipated. Versa Lite sales did not meet our expectations, leading to a contraction of quarterly smartwatch revenue growth. We subsequently reduced our Versa Lite sales expectations for the remainder of the year and are lowering our full-year 2019 revenue and gross margin guidance. We attribute the Versa weakness to our pricing go-to-market strategy.
The regular Versa often gets promotions and discounts that help spur sales, but Fitbit tried a different strategy of "everyday low pricing" with the Versa Lite, according to Park. That helped reduce the company's promotional spending, but it became clear that consumers preferred to hunt for discounts on the Versa, which has more advanced fitness-related features like swim tracking and on-screen workouts. Many of the promotions often bring the cost of the Versa down to be comparable with the Versa Lite. The standard Versa sold better than Fitbit's projections.
That all translated into an adjusted net loss of $35.8 million, or $0.14 per share.
Cutting 2019 guidance
Fitbit is cutting its full-year forecast and now expects 2019 revenue to be $1.43 billion to $1.48 billion, down from prior guidance of $1.52 billion to $1.58 billion in sales. At the midpoint, that reflects a reduction of $95 million. Adjusted gross margin is now expected to be 35%, down from Fitbit's previous outlook of 40%.
In an effort to stem its losses, Fitbit will also try to spend less, with adjusted operating expenses now forecast at $640 million, down from the previously expected range of $660 million to $690 million. Free cash flow for the year is now expected to be negative $120 million to negative $150 million, considerably worse than the negative $40 million to negative $70 million Fitbit previously guided to.
