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Fitbit 3Q17 report ?3

02:09 02-Nov-17


I've finished reviewing Fitbit's conference call and I'm really struck by how sneakily good it is.  In addition to the $8M distributor bankruptcy hit, which is completely a one-off, the company had a $6M loss due to euro strength.  The bankruptcy alone decreased earnings by 3 cents per share; without it Fitbit would have been profitable for the quarter.  Figures like these are masking operational strength in a quarter that clearly included almost no Ionic sales, mainly due to timing and restricted initial supply.  Even so, Fitbit recorded positive EBiTDA, $5M in cash flow for the quarter.

Looking forward, Ionic and Blaze are the #1 and #2 most purchased-wearables in the U.S. on Amazon.  So far, 14% of Ionic buyers also bought the Flyer headphones.  That's a number that I will expect to improve in the next report.  Direct-to-consumer sales also grew 21% year-over-year to $33M and, assuming that trend continues, it should help margins considerably.  Data like this, and the fact that the 42% repeat customer figure is the best to date leads me to think that I've underestimated the stickiness of FitBit's user base.  The flip side is that the transition to Ionic may be slower than I was thinking, as reflected by management's comments about ASPs only increasing marginally for the fourth quarter.

I'm also still skeptical about the software development, even with over 1400 developers signed up.  However, with a full-blown launch of App Gallery and more software coming before holidays, I'm inclined to take more time, and reconnect with my reviewers before rushing to judgment publicly.  That's because it's becoming increasingly clear that management is playing the long game.  It commented that its road map envisions multiple  smart watch products that will coexist on the market simultaneously.  It also says it will pursue M&A opportunistically, and smart activity there is what initially drew my interest, even if it is not showing immediate results.  The balance sheet ended the third quarter with $659M and should end the year with at least $616M after the big marketing push.  Shares outstanding will be slightly higher than my projections, at 238M, but that's still over $2.50 per share in cash before what should be the company's biggest sales quarter in two years.

That tells me that the near-term downside is limited, despite my long-term concerns.  While this report indicates that the immediate upside may not turn out as big I was hoping, it's still much better than prior market expectations.  I'll still want to see Fitbit increasing its user base, and that's where the fourth quarter will still be a pivotal stepping stone towards healthcare partnerships.  Management also says the
FDA is pretty committed to providing a really accelerated pathway for approval
I'd like to know what that means in quantified terms, but I think Fitbit's superior sensor array can prove to be a differentiating factor.  Though there have been plenty of anecdotal cases from various vendors, Fitbit is already starting to go beyond that by citing 98% detection of atrial fibrillation with less than a 1% false positive rate.  FIT remains a GRoDT stock, but when I look at the details here, I think shares should take a big upward jump, simply based on the risk/reward prospects.  I don't know when or if the market will see everything that I did in this report, but it makes me much more willing to take a wait-and-see approach, regardless of what happens tomorrow morning.

On 11/01/2017 05:57 PM, Esekla wrote:

Fitbit has reported its third quarter results:

  • a loss of 1 cent per share beats by 3 cents
  • on revenue of $393M, which beats by $1M
  • guidance for sales of $570-600M beats by $7M at the mid-point
  • FY adjusted loss is expect to come in between 27 and 23 cents per share.

The results include an $8M hit due to the company's largest distributor in the U.S. going bankrupt.  3.6M devices were sold for the quarter, and 42% of the activations came from customers who made repeat purchases. Of the repeat purchasers, 39% came from customers who had been inactive for 90 days or greater.

All of this is fairly in-line with my own projections.  Gross margin came in at 45.2%, well ahead of my estimate.  Shares were initially up, but are now back to about even.  The report indicates to me that Fitbit is getting good traction with its new devices, but intends to spend heavily to promote them.  As such, I don't think the after hours action is very indicative.  This report is likely to generate upgrades from analysts, and I think we could easily see FIT shares appreciate substantially as they point out the multiple bright spots.