Fitbit, Inc. (NYSE: FIT) Rallies 26% After Reporting Third Quarter Earnings Results

Fitbit, Inc. (NYSE: FIT) is engaged within the development and commercialization of wearable technologies, such as smartwatches. Shares of the wearables company rallied 26%, through early trading on Thursday, November 1, 2018. Over the past three months, Fitbit has seen average daily volume of 5.85 million shares. However, volume of 25.9 million shares or dollar volume of $154.62 million, has already exchanged hands through early Thursday trading.

Shares of Fitbit, Inc. are rallying today, after the company announced third quarter earnings results. During the third quarter, Fitbit reported total revenue of $394 million, GAAP net loss of $0.01 per shares, non-GAAP earnings per share of $0.04. Furthermore, Fitbit reported a GAAP net loss of $2 million and a non-GAAP net income of $10 million. Fitbit sold 3.5 million wearable devices during the third quarter, with average selling price of $108 (an increase of 3% year-over-year). Here is the full press release detailing of the third quarter earnings results:

Fitbit, Inc. Press Release:

SAN FRANCISCO

• Revenue of $394 million, GAAP Net Loss Per Share of ($0.01), Non-GAAP Net Income Per Share of $0.04.
• Re-affirms full year 2018 revenue guidance of $1.5 billion.
• Fitbit grows both tracker and smartwatch devices sequentially. #2 player in the U.S. smartwatch category.

Fitbit, Inc. (NYSE:FIT), the leading global wearables brand, today reported revenue of $394 million, GAAP net loss per share of ($0.01), non-GAAP net income per share of $0.04, GAAP net loss of $2 million, non-GAAP net income of $10 million, cash flow from operations of $59 million and free cash flow of $47 million for its third quarter of 2018.

“We have been incredibly focused on executing our transition plan and as a result, saw a return to profitability this quarter, and are re-affirming our full year revenue guidance of $1.5 billion. We succeeded in growing our healthcare business by 26% and diversifying our revenue to compete in the changing wearables category and saw sequential growth in both tracker and smartwatch devices,” said James Park, co-founder and CEO. “We are now the number two player in the smartwatch space in the U.S. – a category we just entered with zero share only fourteen months ago. We also launched our most advanced tracker yet, Fitbit Charge 3, which is blurring the lines between trackers and smartwatches and is already one of the top selling devices in the U.S. All this shows the power of the Fitbit brand and our ability to continue to deliver a wearable platform consumers love and that drives positive health outcomes.”

Third Quarter 2018

For additional information regarding the non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Reconciliation of GAAP to Non-GAAP Financial Measures” below.

Third Quarter 2018 Financial Highlights

• Sold 3.5 million wearable devices. Average selling price increased 3% year-over-year to $108 per device driven by the growing mix of smartwatches.
• S. revenue represented 58% of revenue or $230 million, down 6% year-over-year.
• International revenue represented 42% of revenue and increased 10% year-over-year to $163 million: EMEA revenue increased 17% to $104 million; Americas excluding U.S. revenue declined 2% to $25 million; and APAC revenue was relatively flat at $34 million, all year-over-year, respectively.
• New devices introduced in the past year, Fitbit Versa^TM, Fitbit Charge 3^TM, Fitbit Ace^TM and Fitbit Aria 2^TM, represented 62% of revenue.
• GAAP gross margin was 39.0% and non-GAAP gross margin was 40.1%. 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 44% of revenue, and non-GAAP operating expenses represented 38% of revenue.
• GAAP impairment charge of $6 million to reflect the write-down of a minority equity investment.

Third Quarter 2018 Operational Highlights

• Diversified wearable device revenue from predominately trackers to smartwatches and trackers. Smartwatch revenue grew to 49% of revenue from less than 10% a year ago.
• Refreshed product line up. Versa outsold competitive offerings from each of Garmin, Samsung, Fossil in the U.S. Launched Charge 3 tracker device, our most advanced health & fitness tracker.
• Active community of users: 55% of our active users viewed Fitbit Feed in the quarter.
• 58% of activations came from new users, while 42% came from repeat buyers. Of the repeat buyers, 49% were previously inactive for 90 days or greater.

Fourth Quarter 2018 Guidance

• We expect revenue to be greater than $560 million, with device sales down and a higher average selling price.
• Non-GAAP net income per share of greater than $0.07.
• We expect gross margins to trend slightly higher from the third quarter.
• Capital expenditures as a percentage of revenue of approximately 5%.
• We anticipate free cash flow to be approximately $90 million.
• Non-GAAP effective tax rate of approximately 25%, but can vary significantly depending on profitability.
• Stock-based compensation expense of approximately $24 million and fully diluted share count of approximately 260 million.

Full Year 2018 Guidance

• We reiterate our full-year 2018 revenue guidance of approximately $1.5 billion.
• We expect the average selling price of our devices to rise, offset by a decline in device sales. We expect tracker device sales to decline and smartwatch device sales to increase.
• We are on-track to deliver or come in under our full year operating expense target of $740 million.
• Capital expenditures as a percentage of revenue of approximately 4%.
• Excluding the impact of the tax refund payment, we reiterate our free cash flow guidance of approximately ($20) million for 2018. Including the refund payment, free cash flow will be approximately $52 million.
• We expect non-GAAP effective tax rate to be approximately 25%, but may vary depending on geographic mix of revenue, tax credits, and shift to profitability.
• Stock-based compensation expense of approximately $98 million and basic/diluted share count of approximately 248/260 million.

For additional information regarding the non-GAAP financial measures presented above, see “Non-GAAP Financial Measures” below.

Webcast and Conference Call Information

Fitbit will host a conference call today at 5:00 p.m. Eastern Time, 2:00 p.m. Pacific Time, to discuss its results. Investors may access a live webcast of the call through the Investor section of Fitbit’s website at investor.fitbit.com. The call can also be accessed by dialing (888) 394-8218 or (646) 828-8193, access code 2357386. A replay of the call will be archived on Fitbit’s website for the following six months.

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our outlook for the fourth quarter 2018 and full year 2018; the rate of decline in tracker sales and the stabilization of the tracker market; expected device mix; consumer receptivity to Fitbit Charge 3; the features offered by our Fitbit Labs Sleep Score beta; future clinical validation and regulatory approval of our software; future opportunities in health coaching and wellness solutions; and trends in device sales, revenue, average selling price, operating expenses, capital expenditures, free cash flow, gross margins, non-GAAP basic net (loss) income per share, stock-based compensation expense, non-GAAP effective tax rate and basic/diluted share count. These forward-looking statements are only predictions and may differ materially from actual results due to a variety of factors, including: the effects of the highly competitive market in which we operate, including competition from much larger technology companies; our ability to anticipate and satisfy consumer preferences in a timely manner; our ability to successfully develop and timely introduce new products and services or enhance existing products and services; retail and customer acceptance of existing and new products; any inability to accurately forecast consumer demand and adequately manage our inventory; our ability to ship products on the timelines we anticipate and unexpected delays; our ability to detect, prevent or fix quality issues in our products or services; uncertain ability to retain employees; our reliance on third-party suppliers, contract manufacturers, and logistics providers, and our limited control over such parties; delays in procuring components and product from these third parties or their suppliers; the ability of third parties to successfully manufacture and ship in a timely manner quality products; seasonality; product liability issues, security breaches or other defects, which may adversely affect product performance, our reputation and brand awareness and overall market acceptance of our products and services; ability to integrate acquired technologies and employees into our operations, particularly in new geographies; warranty claims; the fact that the market for connected health and fitness devices is relatively new and unproven; the ability of our channel partners to sell our products; litigation and related costs; privacy; the impact of changes in tax law; the impact of tariffs; and other general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the caption “Risk Factors” in our Annual Report on Form 10-K for the full year ended December 31, 2017, and our most recently filed Quarterly Report on Form 10-Q. All forward-looking statements contained herein are based on information available to us as of the date hereof and we do not assume any obligation to update these statements as a result of new information or future events.

Disclosure of Material Information

Fitbit announces material information to its investors using SEC filings, press releases, public conference calls and on its Investor Relations page on the company’s website at http://investor.fitbit.com.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures in this press release: non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP operating income (loss) before income taxes, non-GAAP net income (loss), non-GAAP diluted net income (loss) per share, non-GAAP free cash flow, and adjusted EBITDA. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP.

We use non-GAAP measures to internally evaluate and analyze financial results. We believe these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and enable comparison of our financial results with other public companies, many of which present similar non-GAAP financial measures.

There are limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to our GAAP financial measures reflect the exclusion of certain items, specifically stock-based compensation expense, depreciation, amortization of intangible assets, impairment of equity investment, interest income, net, and the related income tax effects of the aforementioned exclusions, that may be recurring and will be reflected in our financial results for the foreseeable future. Our adjustments to our non-GAAP financial measures previously included the exclusion of litigation expense related to matters with Aliphcom, Inc. d/b/a Jawbone. In addition, these measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. A reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

Guidance for non-GAAP financial measures excludes stock-based compensation, amortization of acquired intangible assets, and tax effects associated with these items. We have not reconciled guidance for non-GAAP financial measures to their most directly comparable GAAP measures because certain items that impact these measures are uncertain, out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

The following are explanations of the adjustments that are reflected in one or more of our non-GAAP financial measures:

• Stock-based compensation expense relates to equity awards granted primarily to our employees. We exclude stock-based compensation expense because we believe that the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In particular, companies calculate stock-based compensation expense using a variety of valuation methodologies and subjective assumptions.
• In January 2017, the Company conducted a reorganization of its business, including a reduction in workforce. The restructuring costs impacted our results for the first quarter of 2017. Restructuring costs primarily included severance-related costs. We believe that excluding this expense provides greater visibility to the underlying performance of our business operations, facilitates comparison of our results with other periods, and may also facilitate comparison with the results of other companies in our industry.
• Litigation expense relates to legal costs incurred due to litigation with Jawbone. We exclude these expenses because we do not believe these expenses have a direct correlation to the operations of our business and because of the singular nature of the claims underlying the Jawbone litigation matters. We began excluding Jawbone litigation costs in the second quarter of 2016 as these costs significantly increased in 2016.
• Amortization of intangible assets relates to our acquisition of FitStar, Pebble, Vector and Twine Health. We exclude these amortization expenses because we do not believe these expenses have a direct correlation to the operation of our business.
• A non-recurring impairment charge of $6 million to reflect the write-down of a minority equity investment.
• Income tax effect of non-GAAP adjustments relates to the tax effect of the adjustments that we incorporate into non-GAAP financial measures such as stock-based compensation, amortization of intangibles, restructuring and valuation allowance in order to provide a more meaningful measure of non-GAAP net income (loss).

About Fitbit, Inc. (NYSE: FIT)

Fitbit helps people lead healthier, more active lives by empowering them with data, inspiration and guidance to reach their goals. As the leading global wearables brand, Fitbit designs products and experiences that track and provide motivation for everyday health and fitness. Fitbit’s diverse line of innovative and popular products include Fitbit Charge 3™, Fitbit Alta HR™, Fitbit Alta®, Fitbit Ace™, Fitbit Flex 2®, and Fitbit Zip® activity trackers, as well as the Fitbit Ionic™ and Fitbit Versa™ smartwatches, Fitbit Flyer™ wireless headphones and Fitbit Aria 2™ Wi-Fi Smart Scale. Fitbit products are carried in over 39,000 retail stores and in 86 countries around the globe. Powered by one of the world’s largest social fitness networks and databases of health and fitness data, the Fitbit platform delivers personalized experiences, insights and guidance through leading software and interactive tools, including the Fitbit and Fitbit Coach apps, and the Fitbit OS for smartwatches. Fitbit Health Solutions develops health and wellness solutions designed to help increase engagement, improve health outcomes, and drive a positive return for employers, health plans and health systems.

Fitbit and the Fitbit logo are trademarks or registered trademarks of Fitbit, Inc. in the U.S. and other countries. Additional Fitbit trademarks can be found at www.fitbit.com/legal/trademark-list. Third-party trademarks are the property of their respective owners.