Fitbit Inc. reported a loss of $80.9 million, or 34 cents per share, in the first quarter ended March 31, compared to a loss of $60.1 million, or 27 cents per share, in the same quarter a year ago.

The company reported sales of $247.9 million, a 17 percent decline from last year. Fitbit’s income and revenue topped analyst expectations, but the company’s forecast for the current quarter is lower than expected as the company works to sell off old products and shift focus to the new Versa.

“We made important progress in the transformation of our business in the first quarter as we continue to adapt to the changing wearables market. Early sell through of Fitbit Versa, our first true mass appeal smartwatch, has been the best in our company’s history, positioning us to expand our user base and capture greater share of the fast-growing smartwatch market,” said James Park, co-founder and CEO. “We continued to deepen our relationship with our users, investing in software and services that deliver on our promise of helping people achieve better health outcomes. To this end, we closed the acquisition of Twine Health and, most recently announced a long-term collaboration with Google that will accelerate innovation in digital health and wearables.”

First Quarter 2018 Financial Highlights

  • Sold 2.2 million wearable devices. Average selling price increased 16 percent year-over-year to $112 per device driven by the growing mix of smartwatch devices.
  • U.S. revenue represented 56 percent of revenue or $140 million, down 18 percent year-over-year.
  • International revenue represented 44 percent and declined 16 percent year-over-year to $108 million: EMEA revenue declined 26 percent to $65 million; Americas ex. U.S. revenue declined 19 percent to $16 million and APAC revenue grew 33 percent to $28 million, all year-over-year, respectively.
  • New devices introduced in the past year, Fitbit Ionic, Fitbit Versa and Fitbit Aria 2 and accessory Fitbit Flyer, represented 34 percent of revenue.
  • GAAP gross margin was 46.0 percent, and non-GAAP gross margin was 47.1 percent. Both GAAP and non-GAAP gross margin benefited from $12.4 million in revenue recognized from the release of outstanding reserves and rebates related to Wynit, in addition to lower warranty costs.
  • GAAP operating expenses represented 80 percent of revenue, and non-GAAP operating expenses represented 70 percent of revenue.

First Quarter 2018 Operational Highlights

  • Smartwatch revenue nearly doubled to approximately 30 percent of revenue, on a sequential basis from the fourth quarter of 2017.
  • Strong Versa pre-orders, and the best sell-through sales in North America of any device in the company’s history in the first week of availability.
  • Tracker device sales impacted by a reduction in retail channel tracker inventory. Exited the first quarter of 2018 with a relatively clean retail channel.
  • Leveraged Fitbit operating system investment, launched Versa with approximately 45 percent lower development hours than Ionic.
  • 38 percent of activations came from repeat users; of the repeat users, 49 percent came from users who were inactive for 90 days or greater.
  • 18,000 developers have joined the Fitbit developer community.

Second Quarter 2018 Guidance

  • Expect results to be impacted by the reduced demand by the channel for trackers, partially offset by an increase in smartwatch revenue, driven primarily by Versa sales. Expect smartwatches to grow as a percentage of revenue, but the overall mix to continue to be skewed towards trackers. Expect revenue to decline approximately 19 percent year-over-year and to be in a range of $275 million to $295 million.
  • Non-GAAP basic net loss per share in the range of ($0.27) to ($0.23).
  • Capital expenditures as a percentage of revenue of approximately 5 percent.
  • With lower receivables entering the second quarter of 2018, expect free cash flow to decline from the first quarter of 2018 to approximately ($85) million in the second quarter of 2018.
  • Effective non-GAAP tax rate of approximately 25 percent.
  • Stock-based compensation expense of approximately $26 million and basic share count of approximately 242 million.

Full Year 2018 Guidance

  • The company reiterate’s the full-year 2018 revenue guidance of approximately $1.5 billion. The company has extrapolated the tracker demand trend experienced in the first quarter of 2018 and incorporated a further reduction in channel inventory levels. The company expects smartwatch revenue to become the majority of revenue in the second half of the year and average selling price to be up year over year and roughly flat with the first quarter of 2018. The company expects to grow Fitbit Health Solutions and increase premium subscribers, but this growth will be relatively immaterial to wearable device revenue.
  • The company expects gross margins to trend lower through 2018 as smartwatches become a greater percentage of revenue mix, partially offset by operating efficiencies.
  • The company expects to drive operating expenses 7 percent lower, to a target of $740 million.
  • Capital expenditures as a percentage of revenue of approximately 4 percent.
  • The company expects free cash flow to decline less than revenue and expect to breakeven for 2018. Guidance excludes the benefit of an expected $80 million tax refund payment.
  • The company expects effective non-GAAP tax rate to be volatile driven by geographic mix of revenue, tax credits and shift to profitability.
  • Stock-based compensation expense of approximately $110 million and basic/diluted share count of approximately 248/260 million.