Fitbit Inc. rode the strength of the company’s Versa smartwatch—which sold out during the second quarter—to beat analysts’ estimates on income and revenue.

For the quarter ended June 30, the wearables company reported a net loss of $54 million, or (22) cents per share, beating analysts’ expectations by 2 cents. Fitbit also reported revenue of $299 million, beating consensus estimates by $$13.9 million.

“Our performance in Q2 represents the sixth consecutive quarter that we have delivered on our financial commitments, made important progress in transforming our business and continued to adapt to the changing wearables market. Demand for Versa, our first ‘mass appeal’ smartwatch, is very strong. Within the second quarter, Versa outsold Samsung, Garmin and Fossil smartwatches combined in North America, improving our position with retailers, solidifying shelf space for the Fitbit brand and providing a halo effect to our other product offerings,” said James Park, co-founder and CEO.

Second Quarter 2018 Financial Highlights

  • Sold 2.7 million wearable devices. Average selling price increased 6 percent year-over-year to $106 per device driven by the growing mix of smartwatches.
  • U.S. revenue represented 61 percent of revenue or $182 million, down 8 percent year-over-year.
  • International revenue represented 39 percent and declined 24 percent year-over-year to $117 million: EMEA revenue declined 39 percent to $66 million; Americas excluding U.S. revenue declined 35 percent to $16 million and APAC revenue grew 66 percent to $35 million, all year-over-year, respectively.
  • New devices introduced in the past year, Fitbit Ionic , Fitbit Versa , Fitbit Ace  and Fitbit Aria 2 and accessory Fitbit Flyer, represented 59 percent of revenue.
  • GAAP gross margin was 39.8 percent, and non-GAAP gross margin was 40.9 percent. Both GAAP and non-GAAP gross margins were negatively impacted by the change in mix towards smartwatches, partially offset by improved warranty costs.
  • GAAP operating expenses represented 73 percent of revenue, and non-GAAP operating expenses represented 65 percent of revenue.

Second Quarter 2018 Operational Highlights

  • Smartwatch revenue grew to 55 percent of revenue, up from 30 percent on a sequential basis.
  • Versa outsold Samsung, Garmin and Fossil smartwatches combined in North America.
  • The retail channel reduced tracker inventory, depressing reorder rates and tracker sales. EMEA was disproportionately exposed as tracker revenue was a larger percentage of revenue in the region as compared to the U.S. in prior quarters. We expect Q2 to be the trough in the year-over-year decline in tracker sales.
  • Active community of users: 56 percent of our active users viewed Fitbit Feed in the quarter and our female health tracking feature has experienced more than 2.9 million total signups.
  • 60 percent of activations came from new users, while 40 percent came from repeat buyers. Of the repeat buyers, 51 percent were previously inactive for 90 days or greater, up from 39 percent in Q2 2017, driven by smartwatches.

Third Quarter 2018 Guidance

  • The company expects revenue to decline (3 percent) year-over-year to a range of $370 million to $390 million and the EMEA region to return back to growth.
  • Non-GAAP basic net (loss) income per share in the range of ($.02) to $.01.
  • Capital expenditures as a percentage of revenue of approximately 5 percent.
  • The company anticipates free cash flow to be approximately ($30) million, excluding $72 million in tax refund payments that we received in early July 2018.
  • Non-GAAP effective tax rate of approximately 2 percent, but can vary significantly depending on profitability.
  • Stock-based compensation expense of approximately $26 million and basic share count of approximately 247 million.

Full Year 2018 Guidance

  • The company reiterates our full-year 2018 revenue guidance of approximately $1.5 billion.
  • The company expects the year-over-year decline in revenue from tracker devices to improve, driven by clean channel inventory levels, consumer feedback and our product pipeline. In addition, we anticipate additional supply of Versa to become available.
  • The company expects gross margins to be approximately flat from the second quarter.
  • The company expects to drive non-GAAP operating expenses 7 percent lower, to a target of $740 million.
  • Capital expenditures as a percentage of revenue of approximately 5 percent.
  • The company expects free cash flow to decline less than revenue to approximately ($20) million for 2018. Guidance excludes the benefit of the tax refund payment the company received in early July and the potential impact of tariffs.
  • The company expects non-GAAP effective tax rate to be approximately 25 percent, but may vary depending on geographic mix of revenue, tax credits and shift to profitability.
  • Stock-based compensation expense of approximately $102 million and basic/diluted share count of approximately 248/260 million.

Photo courtesy Fitbit Inc.