The Holidays Won't Be Happy for Fitbit

By Markets Fool.com

Image source: Fitbit.

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Fitness wearables company Fitbit (NYSE: FIT) reported its third-quarter results after the market closed on Nov. 2. While Fitbit's results matched its previous guidance, the company's disappointing outlook for the holiday season forced it to cut its full-year guidance. Just 2%-5% revenue growth is expected during the fourth quarter, a dramatic slowdown to say the least. Here's what investors need to know about Fitbit's third-quarter results.

Fitbit results: The raw numbers

Metric

Q3 2016

Q3 2015

YOY Growth

Revenue

$503.8 million

$409.3 million

23.1%

GAAP EPS

$0.11

$0.19

(42.1%)

Non-GAAP EPS

$0.19

$0.24

(20.8%)

Devices sold

5.3 million

4.8 million

10.4%

YOY = year over year. Data source: Fitbit Q3 2016 earnings report.

What happened with Fitbit this quarter?

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Fitbit's third quarter was in line with its guidance, but the company's outlook for the holiday season was disappointing.

  • U.S. revenue accounted for 72% of total revenue, growing by 33% year over year. EMEA revenue grew by 64%, accounting for 16% of total revenue, while APAC revenue slumped 45%, accounting for just 7% of revenue.
  • New products launched in recent quarters, including Blaze, Alta, Charge 2, and Flex 2, accounted for 79% of total revenue.
  • Average selling price grew by 11%.
  • 60% of activations during the quarter came from new customers, with the rest coming from repeat customers.
  • Operating expenses soared 52% year over year, driving down profits.

Fitbit lowered its guidance for the full year, and its guidance for the fourth quarter calls for almost no growth at all.

  • For the fourth quarter: revenue between $725 million and $750 million, representing growth of just 2%-5% year over year; and non-GAAP EPS between $0.14 and $0.18.
  • For the full year: revenue between $2.32 billion and $2.345 billion, representing growth of 25%-26% but down from a previous guidance range of $2.5 billion to $2.6 billion; non-GAAP EPS between $0.55 and $0.59, down from $1.07 in 2015.

What management had to say

Fitbit CEO James Park pointed to the positive reception for the company's new products but admitted that growth wasn't as fast as anticipated:

I am pleased to see positive reception for our new products launched in the third quarter. We are attracting new customers while our existing ones are upgrading their devices, underscoring the strength of the Fitbit brand and growing relevancy of wearables as part of consumers' everyday lives. We continue to grow and are profitable, however not at the pace previously expected. We are focused on improving the utility of our products and integrating more deeply into the healthcare ecosystem and believe we can leverage our brand and community to unlock new avenues and adjacencies of growth.

Looking forward

Fitbit has ramped up spending dramatically in recent quarters in an effort to drive growth. But with guidance for the fourth quarter calling for nearly flat revenue compared with the fourth quarter of last year, even with a slate of new products, investors have every reason to be concerned.

With growth set to virtually disappear this holiday season, justifying its heavy spending and the subsequent earnings declines will become more difficult going forward. Fitbit may have some tricks up its sleeve in the form of new products for 2017, but new products don't seem to be helping this holiday season.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.