Fitbit Swings to Losses on Plunging Holiday Sales

Revenue plunged 19.4% to $574 million in Q4 FY16 vs. $711.6 million in year-ago same period

Leading wearable fitness devices manufacturer Fitbit Inc. (NYSE: FIT) announced its Q4 FY16 and full-year FY16 financial results on February 22nd, 2017.

The San Francisco, California-based Company is a provider of health and fitness devices. The Company’s platform combines connected health and fitness devices with software and services, including an online dashboard and mobile applications, data analytics, motivational and social tools, personalized insights and virtual coaching through customized fitness plans and interactive workouts. Its core platform includes over eight wearable connected health and fitness trackers, including Fitbit Flex, Fitbit Charge, Fitbit Blaze, Fitbit Charge HR, Fitbit Surge, and Aria.

Its wearable connected health and fitness trackers are wrist-based and clippable devices that automatically track users daily steps, calories burned, distance traveled, and active minutes and display real-time feedback. Its users can synchronize their Fitbit devices with their computers as well as iOS, Android and Windows Phone mobile devices. Fitbit products are carried in 54,000 retail stores, and are available in 64 countries. Fitbit Group Health uses Fitbit activity trackers, software, and services to deliver innovative solutions for corporate wellness, weight management, insurance and clinical research. Read more about Fitbit’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Fitbit’s revenue plunged 19.4% to $574 million versus $711.6 million in the year-ago same period. Fitbit sold 6.5 million devices, and new products (Charge 2, Alta, Blaze, and Flex 2) comprised 96% of revenue during the reporting quarter, underscoring the importance for Fitbit to continue introducing new products.

Fitbit’s largest geographical segment, the US, reported a 28% plunge in revenue to just $381 million from $532 million a year ago. The 58% jump in Europe, Middle East, and Africa (EMEA) revenue to $134 million helped partly offset that decline, while Asia/Pacific (APAC) sales fell more than 50% to $25 million. Overall, Fitbit is still very much reliant on the US market for its revenues.

During the reporting quarter, gross margin took a massive hit, falling from 49% a year ago to 22%. This was due to a $78 million writedown of tooling equipment and component inventory, $42 million in increased rebates and channel promotions, a $41 million increase in return reserves related to excess channel inventory, and $17 million in increased warranty reserves for older products. During the quarter, GAAP operating expenses represented 54.4% of revenue, and non-GAAP operating expenses represented 49.6% of revenue.

In all, Fitbit swung to GAAP losses of $146.3 million during Q4 FY16, or ($0.65) per share, versus profits of $64.2 million, or $0.26 per share, in the year-ago comparable period.

During the reporting quarter, the number of active users grew 37% to 23.2 million from 16.9 million at year end 2015, the largest social fitness network as of year-end. Charge 2 was the largest selling connected health and fitness device as of the end of Q4 FY16, based on units, according to NPD and each of the products launched in 2016 have a 4-star rating on Amazon.com.

FY16 financial highlights

For the full-year FY16, Fitbit’s revenue jumped 17% to $2.17 billion from $1.85 billion in the prior year. Fitbit sold 22.3 million connected health and fitness devices during the year. US revenue grew 11%, EMEA revenue grew 86%, APAC revenue contracted 26%, and Other Americas revenue grew 19% during the year. The US accounted for 71% of total revenue; EMEA 18%, APAC 6%, and Other Americas 5% during FY16.

New products Fitbit Charge 2, Alta, Fitbit Blaze, and Fitbit Flex 2 represented 70% of the total revenue. About 26% of all activations in FY16 came from repeat customers; of the repeat customers, 20% were reactivated. Total year-end registered device users were 50.2 million, with 23.2 million active users.

On the other hand, gross margins fell to 39% from 48.5% in the previous year, while gross profits decline 6%. In all, Fitbit swung to GAAP losses of $102.8 million during FY16, or ($0.47) per share, versus profits of $175.7 million, or $0.75 per share, in the prior year. Fitbit’s cash, cash equivalents, and marketable securities totaled $706 million compared to $664 million as of December 31st, 2015.

Fitbit is going through a transitional phase and is working to reduce operating costs, improve efficiencies, and strengthen performance while maintaining necessary investment to drive future growth and maintain its global leadership position. It reduced FY16 exit operating expense run rate by $200 million, while conducting reorganization, including a reduction in manpower that impacts 107 positions or 6% of its global workforce. The Company is also entering the smartwatch category to invigorate and capture a large addressable market by leveraging Fitbit’s brand and vast experience delivering a best-in-class health and fitness experience on the wrist.

Segmental highlights

Fitbit has four geographical segments: US, EMEA, APAC, and Other Americas.

During Q4 FY16, Fitbit’s largest geographical segment, the US, reported a 28% plunge in revenue to just $381 million from $532 million a year ago. Other Americas revenue fell to $33.4 million from $37.84 million, while EMEA revenue grew to $134.2 million from $84.78 million. APAC revenue fell more than 50% to $24.86 million from $56.57 million in the year earlier corresponding period.

For the full-year FY16, the US accounted for 71% of total revenue ($1.5 billion), with the EMEA accounting for 18% ($389.2 million), followed by APAC with 6% ($130.6 million) and Other Americas with 5% ($110 million).

Other highlights

Job cuts: In January 2016, Fitbit said it would be laying off 6% of its staff in an effort to cut costs in order to “address this reduction in growth and what we believe is a temporary slowdown and transition period”. The Company said it has now reduced its operating expense run rate by $200 million by laying-off 110 employees. Total operating expenses for 2016 were $958 million, which had ballooned by over 70% from $552 in 2015.

Acquisitions: In Q4 FY16, Fitbit acquired assets from Pebble for $23 million and Vector Watch for $15 million, comprised of intellectual property and talent. Including the acquisitions, headcount ended the year at 1,753 employees, with 61% in R&D. In Digital Health, the Company added key partnerships with leading companies, including Medtronic, and an integration with one of the largest US health plans, demonstrating the early potential of wearable devices in different healthcare settings.

Fitbit also continued to scale the business globally, including leveraging a new engineering center in Romania gained through the recent acquisition of assets of Vector Watch, enabling the Company to efficiently serve the global business and further expand its presence in EMEA. It also restructured its accessories strategy, choosing to partner and license rather than managing production and inventory directly.

New appointments: Fitbit hired a new executive vice president of operations, Jeff Devine, to manage overall operations, customer service, and quality. Jeff brings more than 25 years of operating experience scaling global technology brands.

Foray into smartwatches: Fitbit is entering the smartwatch category to invigorate and capture a large addressable market by leveraging Fitbit’s brand and vast experience delivering a best-in-class health and fitness experience on the wrist following its acquisitions of Pebble and Vector. Fitbit intends to launch a watch to take on Apple Inc.’s (NASDAQ: AAPL) popular wrist-worn product.

Guidance for FY17

For FY17, Fitbit expects revenue to be in the range of $1.5 billion to $1.7 billion with non-GAAP gross margins in the range of 42.5% to 44.0%. Non-GAAP basic net loss per share is predicted in the range of ($0.22) to ($0.44) and non-GAAP free cash flow of approximately negative ($50) to ($100) million. Stock-based compensation expense is estimated at $100 million to $110 million and basic share count of approximately 233 million.

For Q1 FY17, revenue is expected to be in the range of $270 million to $290 million. Non-GAAP basic net loss per share is forecast in the range of ($0.18) to ($0.20). Stock-based compensation expense is estimated at $23 million to $25 million and basic share count of approximately 226 million.

Stock Performance

Fitbit’s stock ended the day at $6.25, gaining 0.64%, at the close on Wednesday, March 01st, 2017, having vacillated between an intraday high of $6.40 and a low of $6.20 during the session. The stock’s trading volume was at 7,799,831 for the day. The Company’s market cap was at $1.38 billion as of Wednesday’s close.

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