Fitbit Inc. reported earnings in the second quarter fell sharply but came in ahead of Wall Street’s estimates for second-quarter sales and earnings. It also confirmed its revenue and profit guidance for the full year. Sales jumped 46 percent.

Fitbit reported revenue of $586.5 million, GAAP diluted net income per share of 3 cents, non-GAAP diluted net income per share of 12 cents, GAAP net income of $6.3 million and adjusted EBITDA of $48.3 million for its second quarter of 2016.

Wall Street, on average, was looking for 11 cents a share on a non-GAAP basis on sales of $578 million.

“Second quarter results reflect accelerated unit and revenue growth in the U.S. and EMEA, our two largest markets, despite an unusually strong Q215 with the full availability of Fitbit Charge HR fulfilling built-up demand in that quarter,” said James Park, Fitbit co-founder and CEO. “Our strong profitability reflects careful management of operating expenses, while we continue to invest in future growth. Based on the progress of our business, against a backdrop of a growing worldwide opportunity for our products, we remain confident in our guidance for the year.”

Second Quarter 2016 Financial Highlights

  • 5.7 million devices were sold.
  • Q2 2016 revenue increased 46 percent year over year.
  • U.S. comprised 76 percent of Q216 revenue, EMEA 17 percent, APAC 2 percent and Other Americas 5 percent.
  • U.S. revenue grew 42 percent year over year, EMEA 150 percent, APAC 54 percent and Other Americas 63 percent.
  • APAC was impacted by factors including the progressive shutdown of retailer Dick Smith in Australia and a reduction of channel inventory. Excluding the Australia impact, APAC revenue increased 98 percent year over year.
  • New products, Fitbit BlazeTM and AltaTM, including related accessories, comprised 54 percent of Q2 2016 revenue, compared to 50 percent in Q1 2016.
  • Gross margin was affected by an increase in warranty reserves for legacy products, with an expectation the additional reserves taken will adequately cover future warranty liability, allowing a return to more normalized gross margins beginning in Q3 2016.
  • The 120 percent GAAP and 90 percent non-GAAP year-over-year increase in operating expense reflects increased investments in R&D and marketing to drive innovation and growth.

Second Quarter 2016 and Recent Fitbit Operational Highlights

  • Of all the activations of Alta and Blaze in the second quarter, approximately two-thirds were by new customers, and the other third were by people who own, or previously owned, another Fitbit device. Similar to last quarter, approximately a fifth of those repeat purchasers were reactivations, having been inactive for 90 days or more.
  • Together, Blaze and Alta accessories grew 40 percent sequentially from Q1 2016, and all accessories together grew 21 percent sequentially.
  • Fitbit completed the installation of new, larger display materials in many retail locations.
  • The company launched Chinese, Japanese and Korean language versions of products into their respective markets, and launched a relationship with Alibaba’s TMall platform, generating 100 million consumer impressions and approximately 1.3 million unique visitors to TMall.
  • R&D headcount grew to 863 in Q2 2016, comprising 59 percent of the company’s headcount.

Outlook and Guidance

Fitbit’s outlook for the third quarter of 2016 is as follows:

  • Revenue in the range of $490 million to $510 million
  • Non-GAAP gross margin of approximately 48 to 49 percent
  • Adjusted EBITDA in the range of $70 million to $80 million
  • Non-GAAP diluted net income per share in the range of 17 cents to 19 cents
  • Non-GAAP diluted share count between 244 million and 247 million
  • Stock-based compensation expense in the range of $26 million to $28 million
  • Non-GAAP tax rate of approximately 30 percent

Fitbit’s outlook for the full year of 2016 is as follows:

  • Revenue in the range of $2.5 million to $2.6 billion
  • Non-GAAP gross margin of approximately 47 percent
  • Adjusted EBITDA in the range of $430 million to $490 million
  • Non-GAAP diluted net income per share in the range of $1.12 to $1.24
  • Non-GAAP diluted share count between 244 million and 250 million
  • Stock-based compensation expense in the range of $92 million to $97 million
  • Non-GAAP tax rate of approximately 30 percent