Fitness tracker and smartwatch company Fitbit (NYSE:FIT) reported its second-quarter results after the market closed on July 31. While tracker sales rebounded, the Versa Lite smartwatch was a flop. That led Fitbit to slash its guidance for the full year, and to change its approach to pricing and promotions. The company's streak of revenue growth will end in the third quarter, raising questions about its turnaround.

Fitbit results: The raw numbers

Metric

Q2 2019

Q2 2018

 Change

Revenue

$313.6 million

$299.3

4.8%

Net income (loss)

($68.5 million)

($118.3 million)

N/A

Non-GAAP earnings per share (loss)

($0.14)

($0.22)

N/A

Devices sold

3.5 million

2.7 million

31%

Data source: Fitbit.

What happened with Fitbit this quarter?

  • Revenue from trackers rose 51% year over year, accounting for 59% of total revenue. Meanwhile, smartwatch revenue tumbled 27% year over year, partly due to weak sales of the Versa Lite Edition.
  • Tracker unit sales jumped 56% year over year, while smartwatch unit sales decreased 7%.
  • Average device selling price slumped 19% year over year to $86, reflecting the introduction of more-affordable devices.
  • New devices introduced in the past 12 months include the Charge 3, Inspire, Inspire HR, Ace 2, and Versa Lite Edition. These accounted for 68% of total revenue in the second quarter.
  • U.S. revenue was $181 million, down 1% year over year. International revenue grew 14% year over year to $133 million.
  • Revenue for the health solutions segment was up 16% year over year, and the business remains on track to produce about $100 million of revenue this year.
  • Gross margin under generally accepted accounting principles (GAAP) was 34.5%, down from 39.8% in the prior-year period. Non-GAAP (adjusted) gross margin was 35.6%, down from 40.9%. Both numbers were hurt by lower warranty benefit and lower average selling prices, although yield loss and efficiencies improved.
  • Non-GAAP operating expenses were down 18% year over year to $160 million, which helped to reduce the company's losses during the quarter.
The Fitbit Versa Lite smartwatch.

The Fitbit Versa Lite smartwatch. Image source: Fitbit.

What management had to say

During the earnings call, CEO James Park discussed the disappointing Versa Lite Edition launch:

We attribute the Versa weakness to our pricing go-to-market strategy ... This resulted in lower promotional dollar spend and less sell-through. While Versa Lite received good press and consumer reviews, we saw that consumers were willing to pay more for a smartwatch with additional features or look for discounting versus everyday value.

CFO Ron Kisling quantified how badly the Versa Lite underperformed, saying, "What we're seeing generally across the course of the year in our guidance was Versa Lite over $150 million below what our initial expectations were."

While the Versa Lite didn't sell well, the original Versa exceeded expectations, Park said. The company is reevaluating its pricing and promotion strategy for future hardware launches, and it's accelerating hardware product development.

Despite its cheapest smartwatch coming up short, Fitbit remains focused on affordable price points, according to Park: "We're confident there's a real opportunity to deliver a device innovation through more affordable and accessible price point, and we continue to focus on bringing devices to market in the $50 to $300 price range that are easy to use and feature-rich."

Looking forward

For the third quarter, Fitbit provided the following guidance:

  • Revenue between $335 million and $355 million, down 10% to 15% year over year.
  • An increase in devices sold and a decrease in average selling price.
  • Non-GAAP gross margin will trend lower than the second quarter due to a mix shift toward smartwatches, higher hosting costs, and higher promotions.
  • Non-GAAP operating expenses will be relatively flat year over year.
  • An adjusted EBITDA loss between $19 million and $27 million.
  • A non-GAAP EPS loss between $0.09 and $0.11.

Fitbit lowered its guidance for the full year due to weak Versa Lite sales. The company now expects:

  • Revenue between $1.43 billion and $1.48 billion, down from a previous guidance range of $1.52 billion to $1.58 billion.
  • An increase in devices sold and a decrease in average selling price.
  • A non-GAAP gross margin of roughly 35%, down from previous expectations of roughly 40%, due to lower revenue, higher returns, and higher promotions.
  • Non-GAAP operating expenses of approximately $640 million, down from the previous range of $660 million to $690 million.
  • An adjusted EBITDA loss between $60 million and $85 million.
  • A non-GAAP EPS loss between $0.31 and $0.38.
  • A free cash flow loss between $120 million and $150 million.

Fitbit's turnaround appeared to be picking up steam with the launch of the original Versa, but the company was unable to find the same success with the Versa Lite. The full-year outlook has been derailed by that disappointing product, and it will now take even longer for the company to return to profitability.