Fitbit (NYSE: FIT) reported its fourth-quarter results after the market closed on Feb. 26. Despite the launch of the Fitbit Ionic, the company’s first full-featured smartwatch, revenue declined compared to the disastrous 2016 holiday quarter.
Fitbit expects revenue to slump again in 2018 even as it launches more smartwatches, including one aimed at the mass market. Here’s what investors need to know about Fitbit’s fourth-quarter results.
What happened with Fitbit this quarter?
The launch of Fitbit’s first full-featured smartwatch wasn’t enough to prevent another disappointing holiday season.
- U.S. revenue declined by 13% year over year to $330 million.
- Asia-Pacific revenue jumped 56% to $39 million, Europe, Middle East, and Africa revenue rose 16% to $155 million, and Other Americas revenue grew 40% to $47 million.
- The Fitbit Ionic boosted the average selling price by 20% to $102 per device.
- New products were responsible for 36% of fourth-quarter revenue, including the Ionic, Alta HR, Fitbit Aria 2, and Fitbit Flyer.
- Repeat customers in 2017 accounted for 37% of all activations. Of those repeat customers, 41% came from customers who were inactive.
- Total active users grew 9% year over year to reach 25.4 million at the end of 2017.
- Non-GAAP gross margin was 44.2%, nearly double the 22.4% reported for the prior-year period. Various writedowns and charges reduced gross margin during the fourth quarter of 2016.
- GAAP operating expenses dropped by 14.3% year over year thanks to a reduction in sales and marketing spending.
Fitbit provided the following guidance for the first quarter and full year:
- First-quarter revenue is expected to decline by 15% to 20% year over year, to a range of $240 million to $255 million. Fitbit blamed a shift in consumer demand toward smartwatches, and said it expects limited revenue from new product introductions.
- First-quarter non-GAAP EPS is expected to be a loss of $0.18 to $0.21. Free cash flow will decline less than revenue, but still be roughly -$25 million.
- Full-year revenue is expected to be approximately $1.5 billion, down from $1.62 billion in 2017. Growth in Fitbit Health Solutions is expected to be immaterial.
- Full-year free cash flow is expected to be breakeven due to an $80 million tax refund payment.
- Fitbit expects full-year gross margin to be negatively impacted by device mix shift and fixed cost deleveraging.
What management had to say
The Fitbit Ionic was unable to save the company’s holiday season. CEO James Park laid out the reasons why during the conference call:
Ionic sales outpaced the trajectory of our prior highest priced device our legacy GPS watch Fitbit Search. However we had more aggressive goals for Ionic. We believe sales were impacted by aggressive promotional environment, fewer apps available at launch, the delay in the availability of SDK.
Fitbit built its own operating system for the Ionic, which led to a small number of available apps at launch. A high price tag was also undoubtedly a factor.
Fitbit plans to launch more smartwatches in 2018, including some aimed at the mass market. Park explained: “We believe there is significant opportunity to increase our share category and drive the growth of wearables around the globe by expanding reach to new demographics and leveraging new enterprise channels for distribution and attracting new audiences at the launch of a mass appeal smartwatch offering in 2018.”
Despite the launch of the Ionic, Fitbit was unable to grow revenue during the fourth quarter. What’s worse, its guidance for the first quarter and the full year call for even steeper revenue declines. Fitbit’s dominance of the fitness tracker market doesn’t mean much when demand is quickly shifting toward smartwatches.
The company is trying to adapt, with plans to a launch more smartwatches this year. The heavy lifting of building out the software was completed with the Ionic, so Fitbit should be able to bring new products to market at a swifter pace. But with Fitbit’s first attempt falling short, and with fierce competition in the smartwatch market, success is far from guaranteed.