Shares of Fitbit Inc. hit an all-time low after it failed to turn a profit in the fourth quarter, missing analyst earnings expectations. The wearable leader also gave a poor outlook for the current year, including first-quarter guidance well below Wall Street’s targets.

Shares of Fitbit ended at $4.68, down 68 cents, or 12.3 percent, on Tuesday.

In the fourth quarter, the company showed a loss on an adjusted basis of 2 cents, below Wall Street’s consensus target of a break-even results. When it reported third-quarter results on November 1, Fitbit said it expected results between a loss of 3 cents and earnings of 1 cent.

Other highlights of the quarter:

  • Revenues dipped 0.5 percent to $570.8 million, on the low end of its expected range between $570 million to $600 million. Wall Street’s consensus estimate had been $588.9 million;
  • Adjusted EBITDA came in at $22.5 million against a loss of $144.2 million a year ago. Adjusted EBITDA arrived higher than the projected range of negative $1 million to positive $18 million;
  • The net loss on an adjusted basis shrunk to $4.7 million from $125.7 million;
  • The net loss on a reported basis was $45.5 million against a loss of $16.3 million;
  • Devices sold in the quarter shrunk 16.9 percent to 5.4 million, down from 6.5 million a year ago.

For the year, sales sunk 25.5 percent to $1.62 billion. The net loss grew to $277.2 million on a reported basis from $102.8 million. On an adjusted basis, the loss came to $61.1 million versus a loss of $25.9 million. Adjusted EBITDA was a loss of $61.1 million against a loss of $25.9 million.

Devices sold in the year dropped 31.3 percent to 15.3 million.

On a conference call with analysts, James Park, CEO, noted that full year revenue and earnings were in line with guidance while free cash flow exceeded projections. Other positives included growing its active users to 25.4 million from 23.2 million at the close of 2016, increasing its premium paid users by 73 percent and launching Fitbit Ionic to enter the smartwatch categor,y as well as the related Fitbit OS and software development kit (SDK).

Park still said the company is facing a “multiyear transition process” with a goal of fully leveraging its brand, community and data across four areas: adapting to the changing wearable device market, deepening its reach into healthcare, increasing its agility and optimizing its cost structure and making its business model less dependent on device sales.

Park said the launch of the fitness performance-focused watch did not have enough of a mass appeal or competitive price point to fare as well as other competitors in the smartwatch market. In 2018 the company will introduce a family of smartwatch products with broader appeal to further widen the company’s focus beyond fitness trackers.

“We continue to see a healthy wearables market and believe that we are still in the early stages of product,” said Park. “We believe there is significant opportunity to increase our share category and drive the growth of wearables around the globe by expanding reach to new demographics and leveraging new enterprise channels for distribution and attracting new audiences at the launch of a mass appeal smartwatch offering in 2018.”

However, he said the overall category remains “incredibly price-sensitive with promotions playing an important role.” For example, Blaze, a two-year-old product, saw strong demand over the holiday period, particularly at the $150 price point, and even sold out in the quarter. Charge 2 also benefited from healthy demand and was Fitbit’s number one selling device in the fourth quarter. With the focus on deals, Fitbit saw less benefit from new product introductions.

Said Park, “We believe the consumer focused on price and value is an opportunity for us and one we will strategically focus on with future products.”

Overall, Park said growth in 2017 was impacted by a product lineup that was skewed towards connected health and fitness trackers versus the faster-growing smartwatch segment of the wearable device market.

Fitbit also took a “measured approach” with the rollout of Ionic and the device still launching in new markets, particularly in Asia. Added Park, “However ,we had more aggressive goals for Ionic. We believe sales were impacted by aggressive promotional environment, fewer apps available at launch, and the delay in the availability of SDK. With the eventual rollout of our SDK we are seeing encouraging engagement and thousands of developers working with our platform.”

On healthcare, Park said while Fitbit’s “pace of growth is strong, we are not yet seeing this translate into better health outcomes of scale due to the focus on episodic care rather than prevention. We believe that the healthcare system is broken and a shift towards outcomes and prevention is required to reach its full potential and bring real benefits to patients.”

But he cited the move by J.P. Morgan, Amazon and Berkshire Hathaway to enter the healthcare market as a sign that a shift toward prevention and “empowering individuals to take control of their health” will soon take place to lower healthcare costs and match Fitbit’s heatlhcare positioning.

In January, Fitbit announced that United Healthcare’s employee-sponsored wellness program would be using the Fitbit Charge 2. Later in the year, the company collaborated with DexCom to develop products to help people with diabetes manage their health.

On the operating front, Park noted that operating expenses declined 7 percent in 2017 despite continued investment in research and development. Looking forward, Fitbit expects to reduce operating expenses, an additional 7 percent on a year-over-year basis in 2018. Added Park, “We’re also looking at how we can do things differently leveraging the strengths of our partners or acquire where necessary to increase speed to market and our ability to scale the business more effectively. Our goal is to drive incremental margins on the device side of the business while redeploying capital to fit the health solutions and recurring revenue opportunities.”

Park finally discussed the companiy’s plans to shift its business model from episodic to recurring by making some services subscription-based, like the health coaching service from Twine Health, the platform that Fitbit acquired earlier this month.

He also discussed the many ways Fitbit was investing in coaching and guidance to bring “more of a lifetime value approach” to its offerings that aren’t as tied to devices. Said Park, “In 2017 repeat buyers represented 37 percent of activation with 41 percent of these repeat users in active during a prior period. This tells us that the return on investment into new form factors and software continues to enlarge our ecosystem, retaining existing customers while bringing new ones to platform.”

The company guided for first-quarter revenue of between $240 million and $255 million, representing a decline of 15 percent to 20 percent versus year-ago levels.  Analysts had been expecting $340 million. Fitbit expects a first-quarter EPS loss of between 18 cents and 21 cents and a negative free cash flow of $25 million. Analysts on average expected a loss of 9 cents.

Fitbit also guided for full-year 2018 revenue of $1.5 billion, down about 7.1 percent. The company expects full-year operating expenses to decline 7 percent to $740 million. Fitbit expects free cash flow to decline less than revenue and expect to breakeven for 2018

Concluded Park, “In closing, growth was not where we wanted to be, and while we worked to achieve more aggressive goals in 2017 we are confident of the transformational path and the progress we’re making towards building a more durable business. We remain focused on stabilizing and growing our track of business, regaining share in the overall wearable category with the continued penetration for our smartwatch offerings and transforming our business into a true digital hub platform with recurring revenue streams. We have a clear vision for where we are going, to focus on financial resources to get there and the operating discipline to grow free cash.”

Photo courtesy Fitbit