Fitbit Stock Down 14% After Earnings

Fitbit Charge 3

SAN FRANCISCO — Fitbit, Inc. (NYSE:FIT), maker of wrist-fitness devices, reported revenue of $571 million for the fourth quarter. The company said GAAP net income in the quarter was $15 million, non-GAAP net income of $36 million, cash flow from operations of $108 million and free cash flow of $96 million for its fourth quarter of 2018.

For the full year 2018, Fitbit reported revenue of $1.51 billion, GAAP net loss per share of $(0.76), non-GAAP net loss per share of $(0.20), GAAP net loss of $(186) million, non-GAAP net loss of $(49) million, cash flow from operations of $113 million and free cash flow of $60 million. Excluding a tax refund payment, free cash flow was ($12) million.

Shares in the company traded as low as 14% lower in after hours trading.

“I’m proud of our performance this year – our results demonstrate that our strategy is the right one, placing us on a path back to growth and profitability. We grew our active users 9% to 27.6 million, became the #2 player in the smartwatch category in the U.S., and grew the number of devices sold in the fourth quarter,” said James Park, co-founder and CEO. “In 2019 we’re committed to offering more affordable devices with engaging health and fitness features, making the health benefits of being on Fitbit even more accessible. As a result, we are forecasting active users, devices sold, and revenue to grow in 2019. We expect our Fitbit Health Solutions revenue growth to accelerate to approximately $100 million and to grow non-device consumer revenue.”

Fourth Quarter and Full Year 2018 Financial Summary

For the Three Months Ended For the Twelve Months Ended
In millions, except percentages and per share amounts

December 31,
2018

December 31,
2017

December 31,
2018

December 31,
2017

GAAP Results
Revenue $ 571.2 $ 570.8 $ 1,512.0 $ 1,615.5
Gross Margin 38.0 % 43.6 % 39.9 % 42.8 %
Net Income (Loss) $ 15.4 $ (45.5 ) $ (185.8 ) $ (277.2 )
Net Income (Loss) Per Share $ 0.06 $ (0.19 ) $ (0.76 ) $ (1.19 )
Non-GAAP Results
Gross Margin 38.7 % 44.2 % 40.9 % 43.4 %
Net Income (Loss) $ 36.3 $ (4.7 ) $ 48.8 $ (61.1 )
Net Income (Loss) Per Share $ 0.14 $ (0.02 ) $ (0.20 ) $ (0.26 )
Adjusted EBITDA $ 49.6 $ 22.5 $ (31.4 ) $ (52.2 )
Devices Sold 5.6 5.4 13.9 15.3

For additional information regarding the non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Reconciliation of GAAP to Non-GAAP Financial Measures” below.

Fourth Quarter 2018 Financial Highlights

  • Sold 5.6 million wearable devices, up 3% year-over-year. Average selling price decreased 2% year-over-year to $100 per device, driven by adding Fitbit Charge 3, the company’s most intelligent tracker, to our device mix.
  • APAC grew 26% to $49 million, U.S revenue decreased 1% to $328 million, EMEA revenue decreased 4% to $150 million, and Americas excluding U.S. revenue decreased 5% to $45 million, all year-over-year respectively. International revenue was $243 million, representing 43% of total revenue.
  • New devices Fitbit Versa, Fitbit Ace and Fitbit Charge 3 represented 79% of revenue.
  • GAAP gross margin was 38.0%, and non-GAAP gross margin was 38.7%. Gross margin declined year-over- year driven by the mix shift towards smartwatches.
  • GAAP operating expenses represented 36% of revenue, and non-GAAP operating expenses represented 32% of revenue.

Full Year 2018 Financial Highlights

  • Sold 13.9 million wearable devices, down 9% year-over-year. Average selling price increased 4% year-over-year to $105 per device, driven by our device mix.
  • 38% of all activations came from repeat customers; of repeat customers, 52% came from customers who were inactive during a prior period.
  • APAC revenue grew 27% to $146 million. U.S. revenue decreased 7% to $881 million, EMEA revenue decreased 13% to $384 million, and Americas excluding U.S. revenue decreased 13% to $101 million, all on a year-over-year basis respectively.
  • U.S. comprised 58% of revenue; EMEA 25%, APAC 10%, and Americas, excluding U.S. comprised 7% of revenue. International revenue was $631 million, or 42% of revenue, down 6%, year-over-year.
  • Revenue from Fitbit.com was $155 million, representing 10% of revenue.
  • New devices Fitbit Versa, Fitbit Ace and Fitbit Charge 3 represented 57% of revenue.
  • GAAP gross margin was 39.9% and non-GAAP gross margin was 40.9%. Non-GAAP gross margin declined 250 basis points year-over-year driven by the device mix shift towards smartwatches.
  • GAAP operating expenses declined 11% and non-GAAP operating expense declined 12%, each year-over-year, respectively.
  • Cash, cash equivalents, and marketable securities totaled $723 million as of December 31, 2018, compared with $679 million as of December 31, 2017.

Full Year 2018 Operational Highlights

  • Active users grew 9% to 27.6 million from 25.4 million as of December 31, 2017, driven by our continued innovation and investments in hardware and software, bringing new users to our community and engaging existing users.
  • Smartwatch revenue grew to 44% of revenue, up from 8% in 2017. Became the #2 selling smartwatch company in the U.S.
  • Headcount totaled 1,694 employees as of December 31, 2018, with 56% of employees in research and development.
  • The Fitbit Health Solutions business grew 8% in 2018. Fitbit extended its reach with employers, acquired Twine Health (Fitbit Care), and expanded our relationship with payors and health systems. Fitbit became a key Medicare Advantage partner in 27 states with a top payer. Fitbit Care was chosen as the preferred coaching solution for Humana’s employer group segment.

First Quarter 2019 Guidance

  • We expect an increase in devices sold and a decline in average selling price. We expect revenue to increase 1% to 8% year-over-year, in the range of $250 million to $268 million.
  • Non-GAAP gross margin to be approximately 34% to 35%.
  • Non-GAAP basic net loss per share in the range of ($0.24) to ($0.22).
  • Capital expenditures as a percentage of revenue of approximately 3%.
  • Adjusted EBITDA to be in the range of a loss of ($72) million to a loss of ($64) million.
  • Effective non-GAAP tax rate of approximately 25%.
  • Stock-based compensation expense of approximately $24 million and basic share count of approximately 254 million.

Full Year 2019 Guidance

  • We expect devices sold to increase in 2019, but average selling price to decline, driven by our intention to increase accessibility to our platform and grow our community of active users. We expect revenue to grow 1% to 4% year-over-year, in the range of $1.52 billion to $1.58 billion.
  • We expect a lower warranty benefit and the mix shift towards smartwatches to put downward pressure on gross margin, partially offset by improved efficiencies. We expect non-GAAP gross margin to trend higher from the first quarter towards 40% for the full year, driven by improving device gross margin and a small benefit from the growth of non-device consumer revenue in the back half of the year.
  • We expect to continue to drive operating leverage into the business and are targeting operating expenses in the range of $660 million to $690 million.
  • Capital expenditures as a percentage of revenue of approximately 3%.
  • We expect adjusted EBITDA to be in the range of ($30) million to breakeven.
  • With the year-over-year change in working capital less of a benefit in 2019 versus 2018, we expect free cash flow to be less than adjusted EBITDA in the range of approximately ($40) million to ($70) million.
  • Effective non-GAAP tax rate of approximately 30%. We expect effective non-GAAP tax rate to be volatile driven by geographic mix of revenue, tax credits, and our shift to profitability.
  • Stock-based compensation expense of approximately $90 million and basic/diluted share count of approximately 260/276 million.