Fitbit Inc. reduced its loss in the second quarter as sales improved 4.8 percent but reduced its overall revenue guidance for the year due to soft Versa Lite sales.
“While we are disappointed to lower guidance for the year, we remain confident in our long-term transformation strategy and have demonstrated good results across key areas of the business. We saw growth in devices sold, increased active users and continued growth in our Fitbit Health Solutions channel, up 42 percent in the first half of 2019,” said James Park, co-founder and CEO. “In addition, we have made progress in diversifying our revenue towards building more predictable, recurring revenue streams with the launch of our premium services in two test markets. We are pleased with the initial results and expect a full launch this fall. Coupled with innovative hardware and software offerings, we believe we’re well positioned to bring more users to the Fitbit platform and continue to grow our business.”
In the quarter ended June 29, sales rose 4.8 percent to $313.6 million. Gross margins were reduced to 34.5 percent from 39.8 percent. The net loss was reduced to $68.5 million, or 27 cents a share, from $118.3 million, or 49 cents.
On a non-GAAP basis, gross margins were reduced to 35.6 percent from 40.9 percent. On a non-GAAP basis, the net loss was lowered to $35.8 million, or 14 cents, from $54.2 million, or 22 cents, a year ago.
Adjusted EBITDA was a loss of $30.8 million against a loss of $55.8 million a year ago.
Sales were in line with plans, gross margins were below targets, and both the non-GAAP loss and EBITDA topped guidance. Under its previous guidance, revenue was expected to grow 2 percent to 7 percent year-over-year and to be in the range of $305 million to $320 million. Non-GAAP gross margin was expected to be approximately 36 percent to 38 percent. The non-GAAP basic net loss per share was expected in the range of 20 cents to 17 cents. Adjusted EBITDA was expected to be in the range of a loss of $59 million to $47 million.
Second Quarter 2019 Financial Highlights
- Tracker revenue increased 51 percent year-over-year and represented 59 percent of revenue. Smartwatch revenue decreased 27 percent year-over-year, partly due to weaker than expected sales of Fitbit Versa Lite EditionTM, and represented 38 percent of revenue. Accessory and non-device revenue represented 3 percent of revenue.
- Devices sold increased 31 percent year-over-year to 3.5 million. Average selling price decreased 19 percent year-over-year to $86 per device due to the introduction of more affordable devices, lowering the barriers to joining our community of active users.
- U.S. revenue represented 58 percent of total revenue or $181 million, down 1 percent year-over-year. International revenue represented 42 percent of total revenue and grew 14 percent to $133 million: EMEA revenue grew 33 percent to $88 million; Americas excluding U.S. revenue grew 21 percent to $19 million and APAC revenue declined 26 percent to $26 million (all on a year-over-year basis).
- New devices introduced in the past 12 months, Fitbit Charge 3TM, Fitbit InspireTM, Fitbit Inspire HRTM, Fitbit Ace 2TM and Fitbit Versa Lite EditionTM, represented 68 percent of revenue.
- GAAP gross margin was 34.5 percent and non-GAAP gross margin was 35.6 percent. Both GAAP and non-GAAP gross margin were negatively impacted by lower warranty benefit compared to the prior year and the reduction in average selling price, partially offset by an improvement in yield loss and efficiencies.
- GAAP operating expenses represented 57 percent of revenue, declining 18 percent year-over-year to $179 million, and non-GAAP operating expenses represented 51 percent revenue declining 18 percent year-over-year to $160 million.
Second Quarter 2019 Operational Highlights
- Tracker devices sold increased 56 percent year-over-year. Smartwatch devices sold decreased 7 percent year-over-year.
- Average selling price declined 19 percent year-over-year.
- Fitbit Health Solutions revenue grew 16 percent year-over-year, with strength overseas, and is on-track to deliver its full-year revenue of approximately $100 million.
- 41 percent of activations came from repeat users; of the repeat users, 53 percent came from users who were inactive for 90 days or more. Active users increased year-over-year.
Third Quarter 2019 Guidance
- We expect an increase in devices sold and a decline in average selling price, each year-over-year. We expect revenue to decline 15 percent to 10 percent year-over-year and to be in the range of $335 million to $355 million.
- We expect average selling price to improve from Q2 as we plan to shift our new product introduction cadence back to innovation from value.
- We expect non-GAAP gross margin to trend lower than Q2 driven by the increase in revenue mix towards smartwatches, higher hosting costs, and higher promotions.
- We expect non-GAAP operating expenses to remain relatively at year-over-year.
- We expect non-GAAP basic net loss per share in the range of $(0.11) to $(0.09).
- We expect adjusted EBITDA to be in the range of a loss of $(27) million to $(19) million.
- We expect non-GAAP eective tax rate of approximately 25 percent.
- We expect stock-based compensation expense of approximately $19 million and basic share count of
approximately 260 million.
- We expect capital expenditures as a percentage of revenue of approximately 5 percent.
Full Year 2019 Guidance
- We expect an increase in devices sold in 2019 and a decrease in average selling price, each year-over-year.
- With weaker Versa Lite sales, we are lowering the midpoint of our 2019 revenue guidance by $95 million to $1.455 billion from $1.550 billion and now expect full year 2019 revenue to be $1.43 billion to $1.48 billion.
- We expect non-GAAP gross margin to be approximately 35 percent for the full year 2019, down from approximately 40 percent as previously expected, due to a decrease in revenue, higher returns and E&O costs, and higher promotions.
- We are reducing our non-GAAP operating expense target to approximately $640 million from the previously forecasted range of $660 million to $690 million.
- We expect non-GAAP basic net loss per share in the range of $(0.38) to $(0.31).
- We expect adjusted EBITDA to be in the range of $(85) million to $(60) million. Previously, guidance called for adjusted EBITDA to be in the range of $(30) million to breakeven.
- We expect non-GAAP effective tax rate of approximately 25 percent. We expect non-GAAP effective tax rate to be volatile driven by geographic mix of revenue, tax credits, and our shift to profitability.
- We expect stock-based compensation expense of approximately $80 million and basic share count of approximately 260 million.
- Capital expenditures as a percentage of revenue of approximately 3 percent.
- With the year-over-year change in working capital anticipated to be less of a benefit in 2019 as compared to 2018, we expect free cash flow to be less than adjusted EBITDA, and in the range of approximately $(150) million to $(120) million.