Fitbit Inc (FIT) Reports Disappointing Preliminary 4Q:16 Results


Fitbit Inc (NYSE:FIT) announced preliminary financial results for the fourth quarter ended December 31, 2016.

Based upon preliminary financial information, Fitbit expects to report 6.5 million devices sold and revenue for the fourth quarter of 2016 to be in the range of $572 million to $580 million, compared to the company’s previously announced guidance range of $725 million to $750 million. For the full-year 2016, Fitbit expects annual revenue growth to be approximately 17% from the previous forecasted growth of 25% to 26%. Non-GAAP diluted net loss per share for the fourth quarter is expected to be in the range of ($0.51) to ($0.56) compared to the previously announced guidance range of non-GAAP diluted net income per share of $0.14 to $0.18. The non-GAAP effective tax rate is expected to be materially higher than prior guidance. For the full-year 2016, Fitbit expects to earn approximately $32 million in non-GAAP free cash flow and have approximately $700 million in cash, cash equivalents, and marketable securities on its balance sheet. Fourth quarter results are subject to change based on the completion of the company’s customary year-end audit review process.

“Fourth quarter results are expected to be below our prior guidance range; however, we are confident this performance is not reflective of the value of our brand, market-leading platform, and company’s long-term potential. While we have experienced softer-than-expected holiday demand for trackers in our most mature markets, especially during Black Friday, we have continued to grow rapidly in select markets like EMEA, where revenue grew 58% during the fourth quarter. To address this reduction in growth and what we believe is a temporary slowdown and transition period, we are taking clear steps to reduce operating costs. Looking forward, we believe Fitbit is in a unique position to stimulate new areas of demand by leveraging the data we collect to deliver a more personalized experience while developing upgraded versions of existing products and launching additional products to expand into new categories,” said James Park, Fitbit co-founder and CEO. “As the overall wearable category leader, we exited the year with an engaged community of over 23.2 million active users, making us uniquely positioned to be the partner of choice for the healthcare ecosystem, which is a key component of our long-term strategy.”

Fitbit is taking direct action to reduce the expense basis of the company while maintaining necessary investments to drive future growth and maintain its global leadership position in the wearables market.

  • Targeting a reduction in the 2016 exit operating expense run rate of approximately $200 million, to approximately $850 millionfor 2017, which includes realigning sales and marketing spend and improved optimization of research and development investments.
  • Conducting a reorganization of its business, including a reduction in force, that will impact approximately 110 employees, constituting approximately 6% of the company’s global workforce, creating a more focused and efficient operating model. The cost of these reorganization efforts is expected to be approximately $4 million to be recorded in the first quarter of 2017.

“We believe the evolving wearables market continues to present growth opportunities for us that we will capitalize on by investing in our core product offerings, while expanding into the smartwatch category to diversify revenue and capture share of the over $10 billion global smartwatch market,” said Park. “We believe we are uniquely positioned to succeed in delivering what consumers are looking for in a smartwatch: stylish, well-designed devices that combine the right general purpose functionality with a focus on health and fitness. With the recent acquisition of assets from Pebble, Vector Watch and Coin, we are taking action to position the company for long-term success.”

The company expects non-GAAP fourth quarter gross margin to be materially below its previously issued 46% guidance due to excess inventory and other related charges as follows:

  • One-time write downs of tooling equipment and component inventory of approximately $68 million.
  • Increased rebates and channel pricing promotions of approximately $37 million which is recorded as a reduction in revenue.
  • Increased return reserves of approximately $41 million due to greater channel inventory.
  • Increased warranty reserves for legacy products of approximately $17 million.

For the full year 2017, Fitbit is providing some targeted financial metrics as the company transitions its business to the next stage of growth. The company expects a challenging year over year comparison in the first half of 2017 given that new product introductions represented 52% of revenue in the first half of 2016. In addition, the company enters 2017 with a higher operating expense run rate than the first half of 2016, and channel inventory levels that are higher than previously anticipated. The company expects stabilization in financial performance in the second half of 2017. Considering these factors, the company is providing the following guidance:

  • Preliminary 2017 revenue guidance of $1.5 billion to $1.7 billion.
  • Preliminary non-GAAP basic net loss per share of ($0.22) to ($0.44) per basic share.
  • Preliminary non-GAAP free cash flow guidance of approximately negative $50 to $100 million.
  • Long-term non-GAAP gross margin of approximately 45% versus previous 50% target.

In the wake of the earnings announcement, Fitbit shares are falling nearly 16% to $6.08.

On the ratings front, Fitbit has been the subject of a number of recent research reports. In a report issued on January 18, Longbow Research analyst Joe Wittine maintained a Hold rating on FIT. Separately, on January 13, Wedbush’s Nick McKay reiterated a Hold rating on the stock and has a price target of $8.50.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Joe Wittine and Nick McKay have a yearly average loss of -7.4% and -31.6% respectively. Wittine has a success rate of 45% and is ranked #3848 out of 4378 analysts, while McKay has a success rate of 11% and is ranked #4264.

Sentiment on the street is mostly neutral on FIT stock. Out of 21 analysts who cover the stock, 18 suggest a Hold rating , 2 suggest a Buy and one recommends to Sell the stock. The 12-month average price target assigned to the stock is $10.00, which implies an upside of 39% from current levels.

Fitbit, Inc. engages in the development of wearable device which tracks data of an individual’s health. It offers products which can track a person’s activities, such as calories burned, sleep quality, steps, and distance. The data collected allows an individual to monitor their progress towards their own personal goals.

 

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