Fitbit Earnings: Ionic Stumbles Out of the Gate

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It was hard to overstate how important the fourth quarter was going to be for Fitbit (NYSE: FIT). Recognizing the fundamental shifts in the wearables market, Fitbit started scooping up defunct start-ups that it could cobble together to create a smartwatch two years ago, including Coin, Pebble, and Vector. Those efforts culminated with the launch of Ionic late last year, Fitbit's first full-fledged smartwatch that supported third-party apps and mobile payments.

Unfortunately for Fitbit, Ionic has stumbled out of the gate.

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New products didn't resonate with consumers

Fitbit reported fourth-quarter earnings last night, and the disappointing results and forecast have sent shares to all-time lows. Revenue was close to flat at $570.8 million, which translated into a non-GAAP net loss of $4.7 million, or $0.02 per share. Devices sold declined by 17% to 5.4 million.

New products (Ionic, Alta HR, Aria 2, and Flyer) represented just 36% of revenue, suggesting that the gadgets did not resonate with consumers. In contrast, the new products during last year's holiday shopping season and product cycle (Charge 2, Alta, Blaze, and Flex 2) represented 96% of revenue. The harsh reality of the consumer electronics market is that companies need to consistently refresh their hardware lineups with compelling updates and new designs, and Fitbit disappointed here.

Ionic sales fell short of expectations. On the earnings call, CEO James Park said, "We believe sales were impacted by aggressive promotional environment, fewer apps available at launch, and a delay in the availability of our [software development kit]." Park added more color in response to an analyst question:

A "mass-appeal smartwatch" is in the works for later this year that will build on the Fitbit OS platform.

Time to focus on subscription offerings

The results underscore the need for Fitbit to grow its subscription business. The company recently acquired Twine Health, a digital health coaching platform. Here's Park again:

Historically, Fitbit has never generated more than 1% of revenue from subscriptions.

More pain in store

Fitbit's guidance for the first quarter calls for revenue to fall 15%-20% to $240 million-$255 million, far short of the $340 million in sales that the Street was expecting. For full-year 2018, Fitbit anticipates its device mix to continue shifting toward smartwatches while also growing its premium subscriber base. The company doesn't expect premium subscriber growth to be all that meaningful in the grand scheme of things, as it's still such a small business. Full-year revenue is expected to be about $1.5 billion.

It's becoming increasingly clear that Apple is eating Fitbit's lunch. Apple Watch sales are booming, with the latest Series 3 model in particular driving demand thanks to the addition of cellular connectivity. This last detail is especially important, because adding cellular connectivity to any product is extremely R&D intensive -- developing, validating, and certifying products for compatibility with various cellular networks in target markets costs a fortune. If cellular connectivity proves to be a feature that unlocks mainstream demand, Fitbit will struggle to keep up at a time when it's trying to cut operating expenses.

Competing with the richest company in the world is no easy task, and the odds are stacked heavily in Goliath's favor.

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Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.