Shares of Fitbit fell $1.16 to $6.05, or 16.1 percent, Monday on the New York Stock Exchange after the wearables leader announced preliminary fourth-quarter results that were well below previous guidance.

In a release, Fitbit said it sold 6.5 million devices in the holiday quarter and fourth-quarter revenue would come in the range of $572 million to $580 million, well below its previous guidance range of $725 million to $750 million. Fitbit expects a net 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.

Non-GAAP fourth-quarter gross margin is now projected to be materially below its previously issued 46 percent guidance due to excess inventory and other related charges as follows:

  • One-time write downs of tooling equipment and component inventory of approximately $68 million.
  • Increased rebates and channel pricing promotions of approximately $37 million, which is recorded as a reduction in revenue.
  • Increased return reserves of approximately $41 million due to greater channel inventory.
  • Increased warranty reserves for legacy products of approximately $17 million.

Fitbit also announced it would cut about 6 percent of the company’s global workforce, representing 110 jobs, in a cost-cutting move. The cost of these reorganization efforts is expected to be approximately $4 million to be recorded in the first quarter of 2017. Overall, Fitbit is targeting a reduction in the 2016 exit operating expense run rate of approximately $200 million, to approximately $850 million for 2017, which includes realigning sales and marketing spend and improved optimization of research and development investments.

“Fourth-quarter results are expected to be below our prior guidance range; however, we are confident this performance is not reflective of the value of our brand, market-leading platform, and company’s long-term potential,” James Park, Fitbit cofounder and CEO, said in a statement. “While we have experienced softer-than-expected holiday demand for trackers in our most mature markets, especially during Black Friday, we have continued to grow rapidly in select markets like EMEA, where revenue grew 58 percent during the fourth quarter.”

For 2106, annual revenue growth is now expected to be about 17 percent from the previous forecast growth of 25 percent to 26 percent. For the full year 2016, Fitbit expects to earn approximately $32 million in non-GAAP free cash flow and have approximately $700 million in cash, cash equivalents, and marketable securities on its balance sheet.

In November, the company slashed its earnings-per-share guidance for the holiday quarter to just a quarter of what analysts had been expecting.

“Looking forward, we believe Fitbit is in a unique position to stimulate new areas of demand by leveraging the data we collect to deliver a more personalized experience while developing upgraded versions of existing products and launching additional products to expand into new categories.” said Park. “As the overall wearable category leader, we exited the year with an engaged community of over 23.2 million active users, making us uniquely positioned to be the partner of choice for the healthcare ecosystem, which is a key component of our long-term strategy.”

However, Fitbit provided a soft outlook for the current year. Year-over-year comparisons are expected to be challenged in the first half of 2017 given that new product introductions represented 52 percent of revenue in the first half of 2016. In addition, the company enters 2017 with a higher operating expense run rate than the first half of 2016, and channel inventory levels that are higher than previously anticipated. The company expects stabilization in financial performance in the second half of 2017.

Considering those factors, the company provided the following guidance:

  • Preliminary 2017 revenue guidance of $1.5 billion to $1.7 billion.
  • Preliminary non-GAAP basic net loss per share of (22 cents) to (44 cents) per basic share.
  • Preliminary non-GAAP free cash flow guidance of approximately negative $50 to $100 million.
  • Long-term non-GAAP gross margin of approximately 45 percent versus previous 50 percent target.

In addition to other measures to reduce costs and jumpstart growth, Fitbit said it will take action to reset performance incentives and to encourage retention of employees. For example, Fitbit intends to seek stockholder approval for a program under which certain employees may relinquish out-of-the-money options at the time of the exchange in return for a fewer number of restricted stock units. Fitbit expects minimal dilution from this program.

Shares of Fitbit tumbled 75 percent last year amid an increasingly competitive market for wearable devices. Fitbit’s shares now sit well below its November 2015 IPO price of $20.

Fitbit’s two co-founders, CEO James Park and Chief Technology Officer Eric Friedman have also announced their intention to reduce their 2017 salary to $1.

Fitbit will provide further information on its fourth quarter conference call on February 22.

“We believe the evolving wearables market continues to present growth opportunities for us that we will capitalize on by investing in our core product offerings, while expanding into the smartwatch category to diversify revenue and capture share of the over $10 billion global smartwatch market,” said Park. “We believe we are uniquely positioned to succeed in delivering what consumers are looking for in a smartwatch: stylish, well-designed devices that combine the right general purpose functionality with a focus on health and fitness. With the recent acquisition of assets from Pebble, Vector Watch and Coin, we are taking action to position the company for long-term success.”

Photo courtesy Fitbit