Image source: Fitbit.
That's twice in a row that Fitbit (FIT) investors have sold off shares following an earnings release. Last time around, it was because gross margins were under pressure and expectations were high (as were share prices) heading into the release. This time around, the results themselves were solid and guidance was rosy, but Fitbit said it would conduct a secondary offering.
But once again there is evidence that Fitbit continues to make progress with moving upmarket.
There's a storm coming
Fitbit knows that the oncoming onslaught of smartwatches threatens to cannibalize stand-alone fitness trackers as a product category. This is why Fitbit has been focusing so much effort on its three most expensive products: Charge, Charge HR, and Surge.
If you go by IDC's estimates, Apple (AAPL -0.81%) immediately jumped to the No. 2 spot in the wearables market in the second quarter, and Apple Watch wasn't even available for the entire quarter. More importantly, IDC expects smart wearables to eat into basic wearables going forward -- a category where Apple is already dominating.
You'll notice that Fitbit has added a new data point to its earnings press release. Charge, Charge HR, and Surge accounted for 79% of total revenue for the quarter. Fitbit gave out this metric last time (it was 78% the prior quarter), but it was buried within the earnings conference call. Now the company wants to make sure you don't miss it.
Look at it this way: ASPs have soared ever since the launch of the Charge, Charge HR, and Surge.
Source: SEC filings.
Software updates to this trio of devices helped drive sales last quarter, according to CEO James Park. Fitbit sold 4.8 million devices during the quarter.
Moving on up
There's been evidence to suggest that Fitbit has historically had an abandonment problem, which is par for the course when you're talking about the fitness industry. This is another important aspect of why the move upmarket is so critical for Fitbit to pull off. The higher-priced devices have more features and functionalities that can boost engagement. The market for fitness trackers is evolving, as are consumer expectations.
Simply counting steps is not enough, and people grow wary of just tracking that metric. Instead, consumers now want -- and expect -- access to a wider array of health data from their fitness devices. Things like calories burned and heart rate data. Apple is raising the bar of consumer expectations by including these measurements in Apple Watch. While Apple is certainly not the first company to offer those types of readings, its influence in any market it enters cannot be ignored.
Since Fitbit is still entirely reliant on hardware revenue, it will eventually need to convince existing users to upgrade their devices. Fitbit is also using characteristic platform strategies to retain users. It has drawn a line in the sand and will not allow its devices to share data to Apple Health (although there are third-party methods). That's a clear shot at the Mac maker and evidence that Fitbit hopes to leverage its platform and data to spur consumer upgrades -- hopefully at increasingly higher prices.
