Fitbit Inc. reported fourth-quarter results reached the low end of a downbeat forecast given in January. It also projected a steep drop in first-quarter sales and continued losses.

Sales in the fourth quarter fell 19.4 percent to $573.8 million versus guidance calling for sales in the range of $572 million to $580 million. Prior to its January guidance update, Fitbit had been pegging sales in the range of $725 million to $750 million. The year-over-year decline in revenues was blamed on weaker demand and higher rebates and seller allowances.

The fitness wearables leader showed a loss of $146.3 million, or 65 cents a share, in the period against earnings of $64.2 million, or 26 cents, in the same period a year ago. The period marked its first loss as a public company.

Excluding non-recurring costs, the loss in the period came to 56 cents a share. In its January update, Fitbit said it expected loss in the range of 51 cents to 56 cents a share compared to the previously announced guidance range of income per share of 14 to 18 cents.

The company sold 6.5 million devices in the quarter, down from 8.2 million in the same quarter a year ago. Its Charge 2, Flex 2, Blaze and Alta accounted for 96 percent of total revenue.

Geographically, fourth-quarter revenues from the EMEA vaulted 100.1 percent while Asia-Pacific revenues climbed 201.7 percent. In the U.S. and the Americas excluding the U.S., however, revenues decreased 28.3 percent and 18.4 percent year over year, respectively.

Revenues from the U.S. accounted for 67 percent of fourth quarter revenues, EMEA brought in 23 percent, Americas excluding the U.S contributed 6 percent and the remaining 4 percent came from Asia-Pacific.

Gross margins in the quarter eroded to 22.1 percent of sales from 48.9 percent a year ago. Margins were impacted by a write down of tooling equipment and component inventory of $78 million; increased rebates and channel pricing of promotions of $42 million recorded as a reduction in revenue; increased return reserves of $41 million due to greater channel inventory; and increased warranty reserves for legacy products of $17 million.

Operating expenses represented 54.4 percent of revenue versus 33.4 percent a year ago.

On a conference call with analysts, management highlighted some recovery initiatives to jumpstart growth. These steps include offering a streamlined set of products, improving software and services to offer more personalization to customers and achieving greater integration into the healthcare ecosystem.

“We are looking at developing form factors beyond the wrist to build a full ecosystem of products that support a consumer’s health-and-fitness journey,” said James Park, Fitbit’s co-founder and CEO.

Fitbit also repeated plans to expand into the smartwatch space. Added Park, “If you look at any industry data in the market in terms of sell-through, we think entering this market will double our addressable market. Our acquisition of Coin, Pebble and Vector have accelerated our efforts.”

The company also revealed that it paid $23 million for intellectual property and employees from smartwatch startup Pebble Technology Corp. and $15 million for those assets from Vector Watch. It said it will continue to explore acquisitions.

“M&A will play a role in health-care opportunities,” Park said. “We’ll definitely be looking at M&A to accelerate our efforts.”

Other rebuilding steps included reducing its operating expense run rate by $200 million in 2017 versus 2016. The company had announced in January plan to cut 6 percent of its global workforce, or 107 positions.

Fitbit also plans to continue to scale the business globally, including leveraging a new engineering center in Romania gained through the recent acquisition of assets of Vector Watch, enabling the company more efficiently manage growth in the EMEA region. The accessories segment is being shifted to licensing arrangement rather than managing production and inventory directly.

Finally, Fitbit hired a new EVP of operations, Jeff Devine, to manage overall operations, customer service and quality. Devine brings more than 25 years of experience in the technology space, including stints at Cisco, Nokia and Hewlett Packard.

For the first quarter of 2017, Fitbit expects revenues in a range of $270 million to $290 million, which represents about a 45 percent decline from sales of $505.4 million recorded in the first quarter of 2016. Wall Street’s consensus estimate had been $307.6 million.

The company expects a non-GAAP loss per share to be in a range of 18 cents to 20 cents, which compares to adjusted earnings of 10 cents a year ago. Wall Street had expected a loss of 15 cents on average.

Presuming some improvement in the second half of the year, Fitbit reiterated the annual revenue forecast it gave in January, for $1.5 billion to $1.7 billion in revenues with a net loss arriving between 22 cents to 44 cents. For comparison, Fitbit’s sales totaled $2.2 billion in 2016 with a pro-forma loss of 12 cents a share. Analysts were looking for 2017 revenue of $1.59 billion and a loss of 39 cents per share.

Photo courtesy Fitbit