Fitbit in the fourth quarter managed to show its first quarterly year-over-year increase in device sales since the fourth quarter of 2016. But shares were trading down about 16 percent in late-afternoon trading amid warnings of softer-than-expected sales for the first quarter and margin deterioration for the year.
In the first quarter, Fitbit said it expects sales to increase between 0.8 to 8.1 percent to between $250 million and $268 million, from $247.9 million in the same period a year ago. Analysts were expecting revenue of $268 million.
The Q1 loss, excluding certain items, is expected to range between 22 cents to 24 cents a share, while analysts were predicting a 15-cent loss. The adjusted loss in the year-ago period was 17 cents.
On a conference call with analysts, Fitibit officials said gross margin could come under pressure this year from the shift toward smartwatches and a lower warranty benefit.
Fitbit has moved into the smartwatch market to cushion the hit from slowing growth of its popular colorful fitness trackers, but has faced tough competition from deeper-pocket companies such as Apple Inc., Samsung Electronics and Xiaomi. Rival Garmin last week forecast full-year revenue and profit above expectations as well as a strong fourth quarter.
For the fourth quarter, Fitbit reported:
- Sales inched up 0.1 percent to $571.2 million, topping the consensus estimate of $568.16 million.
- The profit on an adjusted basis came to $36.3 million, or 14 cents a share, rebounding from a loss of $4.7 million, or 2 cents, a year ago. Results were 7 cents better than analyst’s consensus estimate of 7 cents a share.
- Net earnings came to $15.4 million, or 6 cents a share, against a loss of $45.5 million, or 19 cents, a year ago.
Fitbit sold 5.6 million wearable devices in the quarter, up 3 percent year-over-year. Average selling price decreased 2 percent year-over-year to $100 per device, driven by adding Fitbit Charge 3 to its device mix.
Among regions, APAC grew 26 percent to $49 million, U.S revenue decreased 1 percent to $328 million, EMEA revenue declined 4 percent to $150 million, and Americas excluding U.S. decreased 5 percent to $45 million, all year-over-year respectively. International revenue was $243 million, representing 43 percent of total revenue.
New devices Versa, Ace and Charge 3 represented 79 percent of revenue in the quarter.
GAAP gross margin was 38.0 percent versus 43.6 percent a year ago, and non-GAAP gross margin was 38.7 percent, down from 44.2 percent. The margin decline was due to mix shift towards smartwatches.
The bottom-line improvement largely reflects a sharp reduction in operating costs as expenses have been adjusted over the last year to better align with sales. On a reported basis, operating expenses were reduced to 38.0 percent of sales from 43.6 percent. On a non-GAAP basis, operating expenses were lowered to 36.3 percent from 44.2 percent.
In the year, the loss on an adjusted basis was $48.8 million, or 20 cents a share, down from an adjusted loss of $61.1 million, or 26 cents, a year ago. The net loss came to $185.8 million, or 76 cents a share, against a loss of $277.2 million, or $1.19, in 2017. Revenues were down 6.4 percent to $1.51 billion.
For 2019, Fitbit expects devices sold to increase, but average selling price to decline, driven by its intention to increase accessibility to the Fitbit platform and grow active users. Revenues are expected to expand 1 percent to 4 percent year-over-year, in the range of $1.52 billion to $1.58 billion.
Lower warranty benefit and the mix shift towards smartwatches are expected to put downward pressure on gross margin in the year, partially offset by improved efficiencies. Non-GAAP gross margin is projected to trend higher from the first quarter towards 40 percent for the full year, driven by improving device gross margin and a small benefit from the growth of non-device consumer revenue in the back half of the year. Non-GAAP gross margin in 2018 was 40.9 percent.
Fitbit expects to continue to drive operating leverage and is targeting operating expenses in the range of $660 million to $690 million in 2019, down from $792.9 million in 2018. Adjusted EBITDA for 2019 is expected to be in the range of a loss of $30 million to breakeven. For 2019, adjusted EBITDA was a loss of $31.4 million.
With the year-over-year change in working capital less of a benefit in 2019 versus 2018, free cash flow is expected to be less than adjusted EBITDA in the range of a negative $40 million to $70 million.
Image courtesy Fitbit