Fitbit Inc. reported a steep loss and sales decline in the third quarter amid its transitional year, but indicated that sales are improving in most regions sequentially and its first smartwatch, the Fitbit Ionic, has launched strongly.

On a conference call with analysts, James Park, chairman and CEO, said reviews from bloggers, press and consumers for Fitbit Ionic, launched on October 1 just after the quarter’s close, “have been largely positive.”

“Using average Amazon customer reviews and the U.S. as a proxy, the launch of Ionic marks the best reception of any Fitbit products within the first month of sales with a rating of 4.2 stars,” said Park. “Fitbit Ionic and Blaze are now considered the number one number two selling smartwatches on the Amazon in the U.S., demonstrating that consumers continue to embrace our offering.”

He said the Fitbit Ionic marks the largest R&D investment in Fitbit’s history, ranks as the company’s most-advanced Sensor technology, and brings the first a health and fitness-first platform to a smartwatch. Said Park, “The launch of Ionic not only enables us to enter the faster- growing smartwatch market, but it is also a platform for us to deliver our most powerful health and fitness tools into the market, furthering our mission to make the world healthier.”

The watch is also helping Fitbit maximize the ROI on its investment of Pebble technology last year. Finally, over 1,400 developers have signed up to support the platform and a number of additional apps are expected to be available for consumers for the holiday selling season.

“Our goal is not to have the greatest number of apps, but the quality ones that bring increased purpose and utility to our devices like weather, streaming music or payment, in addition to specific vertical health care innovations like being able to see your glucose level on a clock face without opening an app,” said Park.

Paired with the smartwatch launch, Fitbit also launched a companion wireless headset offering, Fitbit Flyer; and a Wi-Fi smart scale, Aria 2 with improved accuracy that can measure body fat. Park said 14 percent of Ionic purchasers are also purchasing the Flyer.

The third quarter ended September 30 saw sales decline 22.1 percent to $392.5 million, in line with a forecast calling for sales in the range of $380 million to $400 million.

But Fitbit underscored that sales are improving on a sequential basis, driven by demand for its trackers, new product introductions and rising selling prices. Devices sold continue to improve from 3.4 million in Q2 to 3.6 million in Q3 despite lower seasonality in the third quarter.

New products introduced in the last year represented only 32 percent of revenue. The Charge 2 remained its best-selling product.

Among regions, the U.S. improved 23 percent sequentially to $244.2 million and represented 62 percent of its revenue. Year-over-year, sales were down 32.4 percent in the U.S.

On a sequential basis, Asia-Pac revenue advanced 63 percent to $34 million with strong contribution from markets like Japan. In the Americas excluding U.S., revenue grew 4 percent sequentially to $25 million.

EMEA declined 18 percent sequentially to $89 million as share gains in growth in Germany were offset by weakness in the U.K.

“Across the continent, we expect a shift towards full- feature devices,” said Bill Zerella, CFO, of the EMEA. “However, unlike when the U.S. experienced a shift in consumer demand to its full-feature devices, we now have a smartwatch offering to meet expected demand.”

Park said Fitbit’s fundamentals “continued to improve,” In addition to devices sold rising sequentially, average selling price increased 4 percent sequentially from the second quarter of 2017 and 12 percent year-over-year, to $104.72 per device. Accessory and other revenue, including the Fitbit Flyer headphones, added the equivalent of $3.60 per device.

Forty-two percent of the activations in the quarter came from customers who made repeat purchases. Of the repeat purchasers, 39 percent came from customers who were inactive for 90 days or greater. Park said the repeat buying behavior, driven by new devices, “not only indicates the growing relevance our devices play in their daily lives, but also highlights the sustainability of our business model.”

The company noted that the Fitbit app was the #1 downloaded health and fitness application, based on U.S. downloads, on both the iOS and Android platforms.

The Community section in the Fitbit app, which includes a Feed feature designed to increase engagement and offer users a supportive environment continued to grow. Since launching the feature in March 2017, more than 15.0 million users have utilized the Feed, with over 1.1 billion views of shared posts and more than 3.7 million Group joins.

The activity tracker leader showed a loss of $113.4 million, or 48 cents a share, in the quarter, against net earnings of $26.1 million, or 11 cents, a year ago. The latest period included charges related to a restructuring announced in January.

Excluding all non-recurring items, the loss was $2.8 million, or 1 cent a share, against earnings of $45.7 million, or 19 cents, in the same period a year ago. Results were slightly ahead of Fitbit’s guidance calling for a non-GAAP net loss per share in the range of 2 to 5 cents.

The combination of continued sequential revenue growth with expense discipline also allowed Fitbit to move back to positive adjusted EBITDA of $6 million, also ahead of guidance.

The improvement in earnings on an adjusted basis came despite the September bankruptcy of WYNIT, the largest electronics distributor in the U.S. The filing resulted in $8 million less revenue and an increase of $8 million in bad debt expense in the quarter.

For the full year, Fitbit lifted its sales guidance to a range of $1.62 billion to $1.65 billion, versus previous guidance calling for revenues in the range of $1.55 billion to $1.7 billion.

The non-GAAP net loss per share is now expected in the range of 23 cents to 27 cents. Previously, it expected an adjusted loss in the range of 22 cents to 40 cents.

For the fourth quarter, revenue is projected in the range of $570 million to $600 million and on-GAAP net income is expected to range from a loss of 3 cents a share to a profit of one cent.

Park said the company continues to make progress on its transition plan that includes the launch of the Fitbit Ionic and restructuring efforts that focused on improving business processes and operating efficiencies.

R&D costs have grown 5 percent as investments are being made in innovation because the company believes it’s “still the early days to the growing trajectory in wearables.”

But operating expenses have trended below its forecasted $850 million and are down year-over-year. Defective parts per million has also improved 36 percent during the last nine months and that’s expected to reduce warranty costs, lower contact center expenses and improve customer satisfaction.

The CEO noted that while the company typically only updates its  active user number publicly on an annual basis, it has  grown its active user base year-to-date despite the year-over-year decline in growth in units sold.

Park added,  “This growth gives us confidence that the investment we are making in our R&D can improve customer engagement. By empowering people to take a more proactive approach to their health, either by helping identify possible health issues or simply helping people get healthier with intelligent insights, personalized guidance and a motivation to reach their goals, we believe our devices can move from a nice-to-have to a must-have, which, in turn, will enable us to strengthen the durable nature of our business.”

Photo courtesy Fitbit