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Fitbit 4Q17 report -4

16:52 26-Feb-18

Fitbit has reported results for its fourth quarter:

• a loss of 2 cents per share, misses by a penny
• on $571M in revenue, which misses by $17M
• 5.4M devices were sold in the quarter, with an ASP of $102
  
• Fitbit is up to 25.4M active users
• 1st quarter revenue guidance of $240-255M misses by $91.5M
• 1st quarter EPS guidance for a loss of 18-21 cents misses by 10.5 cents at the mid-point
  

The marginally good news is that the figures above imply that Fitbit made about $20M from coaching and other non-device sales.  The bad news is that U.S. revenue, which is still 58% of the company's revenue, decline 13% sequentially.  I think all of this aligns perfectly with my assessment that the company started by creating good hardware, but software is holding it back from creating a truly killer product.  The guidance even starts out by saying

We expect limited revenue from new product introduction.

and management seems realistic about the state of the business:

In 2018 we’ll focus on managing down expenses, continuing to expand in the smartwatch category and supporting our engaged global community on their health and fitness journeys.

Of course, management knew this long before this report, and that's why it's pushing the medical research aspect of its devices.  That's of questionable long-term value.  The one thing Fitbit does still have going for it in the short term is that wearable market is still the wild west.  Per this article:

Android Wear is not a perfect smartwatch operating system, but the primary problem with Android Wear watches is the hardware, like size, design (which is closely related to size), speed, and battery life. All of these are primarily influenced by the SoC, and there hasn't been a new option for OEMs since 2016. There are only so many ways you can wrap a screen, battery, and body around an SoC, so Android smartwatch hardware has totally stagnated.

That represents a barrier to entry, at least until Google starts taking a deeper interest.  In the meantime, Garmin and Fitbit have enough expertise to avoid poor system on chip solutions and roll their own, and even Garmin was flat in this segment.  Fitbit will continue lose out, though, unless it can radically improve its software development environment and support for independent programmers.

For now, the market is actually taking this better than it might, with an 11% drop in FIT shares, but that's off a pre-earnings bounce.  I'll review the earnings the call, but will only report again if I see something truly surprising.  Questions are always welcome, of course.

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