Fitbit’s Revenue Boosted by New Product Sales

Fitbit sold 5.7 million devices, a 26.7% growth over the year-ago period

f1Leading wearable fitness devices manufacturer Fitbit Inc. (NYSE: FIT) announced its Q2 FY16 financial results on August 2nd, 2016.

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.

Q2 FY16 financial highlights

Fitbit Alta; Source: Fitbit
Fitbit Alta; Source: Fitbit

During Q2 FY16, Fitbit reported a 47% Y-o-Y growth in revenue to $586.5 million, mainly due to the higher units sold and revenue growth in the U.S. and EMEA, its two largest markets. Fitbit sold 5.7 million devices, a 26.7% growth over the year-ago period when it sold 4.5 million units. Two new products, Fitbit BlazeTM and AltaTM, including related accessories, comprised 54% of Q2 FY16 revenue, compared to 50% in Q1 FY16.

Of the total activations of Alta and Blaze in Q2 FY16, approximately two-thirds were by new customers, and the other third were by people who own, or previously owned, another Fitbit device. Similar to Q1 FY16, approximately a fifth of those repeat purchasers were reactivations, having been inactive for 90 days or more. Together, Blaze and Alta accessories grew 40% sequentially from Q1 FY16, and all accessories together grew 21% sequentially. The Company completed the installation of new, larger display materials in many Fitbit retail locations during the reporting quarter.

Fitbit’s gross margin declined 500 basis points Y-o-Y to 41.8% in Q2 FY16, due to an increase in warranty reserves for legacy products. Management expects gross margins to recover in Q3 FY16 since the additional reserves taken will adequately cover future warranty liability. During the reporting quarter, Fitbit’s R&D headcount grew to 863, comprising 59% of the company’s total headcount. The company has been ramping up spending on R&D in an effort to deliver new products to market quickly, while big increases in marketing have been helping to sell those new products. R&D spending increased by 162% Y-o-Y during Q2 FY16, while sales and marketing spending rose 70%. Overall, the 120% GAAP and 90% non-GAAP Y-o-Y increase in operating expense reflects increased investments in R&D and marketing to drive innovation and growth.

Despite higher revenue, the increase in operating expenses in Q2 FY16 hammered down Fitbit’s GAAP profits to $6.3 million, or diluted EPS of $0.03, versus $17.7 million, or diluted EPS of $0.07, in the year-ago quarter. Non-GAAP diluted EPS came in higher at $0.12, while adjusted EBITDA was at $48.3 million for the reporting quarter.

Fitbit’s Cash and cash equivalents at the end of Q2 FY16 was $416.1 million compared to $722.1 million at the end of Q1 FY16. At the end of Q2 FY16, accounts receivables were $377.5 million compared to $339.7 million in the year-ago period. Fitbit’s inventories were $190.6 million in Q2 FY16, down $21.5 million from Q1 FY16.

Segmental highlights

f3Fitbit has four geographical segments: U.S., EMEA, APAC, and Other Americas. The U.S. accounted for 76% of Q216 revenue; EMEA 17%, APAC 2%, and Other Americas 5%.

U.S. revenue grew 42% Y-o-Y during Q2 FY16; EMEA 150%, and Other Americas 63%. However, APAC revenue fell 54%, and was impacted by factors including the progressive shut down of retailer Dick Smith in Australia and a reduction of channel inventory. Excluding the Australia impact, APAC revenue increased 98% Y-o-Y during Q2 FY16.

Other highlights

Fitbit launched Chinese, Japanese, and Korean language versions of their products into these respective markets, and initiated a relationship with Alibaba’s TMall platform, generating 100 million consumer impressions and approximately 1.3 million unique visitors to TMall.

On August 1st, 2016, Fitbit announced that Adam Pellegrini will join the company as Vice President of Digital Health, beginning September 6, 2016. Pellegrini will be responsible for leading Fitbit’s vision, strategies, and programs to further drive the company’s integration into healthcare systems around the world. In this new role, Pellegrini will leverage the strength of Fitbit’s products, software and services to help create better clinical health outcomes while identifying new revenue opportunities for the company.

f4Fitbit is collaborating with New York design house PUBLIC SCHOOL to launch a new collection of premium bracelets and printed sport bands designed by PUBLIC SCHOOL for men and women. The PUBLIC SCHOOL for Fitbit Alta collection will be launched in stores by the end of 2016 and will feature the brand’s signature street aesthetic, like fine metals in edgy styles and sporty prints with bold graphic phrases.

Guidance for Q3 FY16 and full year FY16

For Q3 FY16, Fitbit expects revenue to remain in the range of $490 million to $510 million. It expects non-GAAP gross margin to be 48% to 49%. Additionally, it expects adjusted EBIDTA in the range of $70 million to $80 million and non-GAAP EPS to be in the range of $0.17 to $0.19. Fitbit expects stock based compensation expense to remain in the range of $26 million to $28 million and the non-GAAP tax rate to be approximately 30%.

For full year FY16, Fitbit expects revenue to remain in the range of $2.5 billion to $2.6 billion. It expects non-GAAP gross margin to be about 47%. Additionally, it expects adjusted EBIDTA in the range of $430 million to $490 million and non-GAAP EPS to be in the range of $1.12 to $1.24. Fitbit expects stock-based compensation expense to remain in the range of $92 million to $97 million and the non-GAAP tax rate to be approximately 30%.

Stock Performance

f5Fitbit’s stock surged after it was cleared of charges that it had stolen rival Jawbone’s trade secret. The company’s shares ended the day at $14.88, gaining 3.05%, at the close on Tuesday, August 23rd, 2016, having vacillated between an intraday high of $15.13 and a low of $14.80 during the session. The stock’s trading volume was at 7,760,508 for the day. The Company’s market cap was at $3.31 billion as of Tuesday’s close.

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