Company announces cost reductions to improve efficiencies and strengthen
performance
Guidance for 2017 reflects expectation of stabilized second half
performance
SAN FRANCISCO--(BUSINESS WIRE)--
Fitbit, Inc. (NYSE: FIT), the leader in the connected health and fitness
market, today 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.
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Targeting a reduction in the 2016 exit operating expense run rate of
approximately $200 million, to approximately $850 million for 2017,
which includes realigning sales and marketing spend and improved
optimization of research and development investments.
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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.
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Preliminary non-GAAP basic net loss per share of ($0.22) to ($0.44)
per basic share.
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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 addition to other measures designed to drive future growth, the
company will take action to reset performance incentives and to
encourage retention of employees who are critical to the achievement of
business goals. For example, Fitbit intends to seek stockholder approval
for a program under which certain employees may relinquish
out-of-the-money options at the time of the exchange in return for a
fewer number of restricted stock units. Fitbit expects minimal dilution
from this program. Additional details will be filed in Fitbit’s upcoming
proxy statement to be filed with the Securities and Exchange Commission.
Fitbit’s two co-founders, CEO James Park and Chief Technology Officer
Eric Friedman have also announced their intention to reduce their 2017
salary to $1.
For additional information regarding the non-GAAP financial measures
presented above, see “Non-GAAP Financial Measures” below.
Fitbit will provide further information to investors during the
company’s fourth quarter and full year 2016 conference call on February
22, 2017.
Forward Looking Statements
This press release contains forward-looking statements that involve
risks and uncertainties, including statements regarding the number of
devices sold; estimated revenue; non-GAAP diluted net loss per share;
non-GAAP effective tax rate; non-GAAP free cash flow; cash, cash
equivalents and marketable securities on our balance sheet as of
December 31, 2016; our long-term potential; the duration of
softer-than-expected demand; our ability to stimulate new demand and
expand the category, leverage data to deliver more personalization to
our users and develop new products; our ability to become the partner of
choice for the healthcare ecosystem; reductions in 2016 exit operating
expense run rate; the cost of our reorganization efforts; our ability to
deliver a smartwatch; the timing of product, service and offering
launches; the write down of tooling equipment and inventory, increased
rebates and promotions, and increased reserves discussed above; our
ability to reduce operating expenses; our stabilization of financial
performance in the second half of 2017; our outlook for the fourth
quarter 2016 and full years 2016 and 2017; a proposed option exchange
program and any resulting potential dilution; reductions in CEO and CTO
2017 salary; and potential for future growth in the connected health and
fitness market, smartwatch and overall wearables category and adjacent
markets. These forward-looking statements are only predictions and may
differ materially from actual results due to a variety of factors
including: the effects of the highly competitive market in which we
operate, including competition from much larger technology companies;
our ability to anticipate and satisfy consumer preferences in a timely
manner, our ability to successfully develop and timely introduce new
products and services or enhance existing products and services;
customer acceptance of existing and new products; seasonality; any
inability to accurately forecast consumer demand and adequately manage
our inventory; our ability to ship products on the timelines we
anticipate and unexpected delays; quarterly and seasonal fluctuations;
our reliance on third-party suppliers, contract manufacturers, and
logistics providers, and our limited control over such parties; delays
in procuring components and product from these third parties; product
liability issues, security breaches or other defects, which may
adversely affect product performance, our reputation and brand awareness
and overall market acceptance of our products and services; warranty
claims; the fact that the market for connected health and fitness
devices is relatively new and unproven; the ability of our channel
partners to sell our products; litigation and related costs; privacy;
other general market, political, economic and business conditions.
Additional risks and uncertainties that could affect our financial
results are included under the caption “Risk Factors” in our Annual
Report on Form 10-K for the full year ended December 31, 2015 and our
most recently filed Quarterly Report on Form 10-Q, which are available
on our Investor Relations website at investor.fitbit.com and on the SEC
website at www.sec.gov.
Additional information will also be set forth in our Annual Report on
Form 10-K for the full year ended December 31, 2016. All forward-looking
statements contained herein are based on information available to us as
of the date hereof and we do not assume any obligation to update these
statements as a result of new information or future events.
Change to Quarterly Reporting Calendar
Our fiscal year ends on December 31 of each year. In the first quarter
of 2016, we adopted a 4-4-5 week quarterly calendar, which, for the 2016
fiscal year, is comprised of four fiscal quarters ending on April 2,
2016, July 2, 2016, October 1, 2016, and December 31, 2016. We did not
adjust operating results for quarters prior to 2016. There were 91 and
92 days in the three months ended December 31, 2016 and December 31,
2015, respectively.
Disclosure of Material Information
Fitbit announces material information to its investors using SEC
filings, press releases, public conference calls and on its Investor
Relations page of the company’s website at http://investor.fitbit.com.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared
and presented in accordance with GAAP, we use the following non-GAAP
financial measures in this press release: non-GAAP gross margin;
non-GAAP free cash flow; non-GAAP operating expenses, non-GAAP diluted
net income or loss per share. We define non-GAAP free cash flow as net
cash provided by (used in) operating activities less purchase of
property and equipment. The presentation of these financial measures is
not intended to be considered in isolation or as a substitute for, or
superior to, financial information prepared and presented in accordance
with GAAP.
We use non-GAAP measures to internally evaluate and analyze financial
results. We believe these non-GAAP financial measures provide investors
with useful supplemental information about the financial performance of
our business, enable comparison of financial results between periods
where certain items may vary independent of business performance, and
enable comparison of our financial results with other public companies,
many of which present similar non-GAAP financial measures.
There are limitations associated with the use of non-GAAP financial
measures as an analytical tool. In particular, many of the adjustments
to our GAAP financial measures reflect the exclusion of items,
specifically stock-based compensation expense, amortization of
intangible assets, and the related income tax effects of the
aforementioned exclusions, that are recurring and will be reflected in
our financial results for the foreseeable future. In addition, these
measures may be different from non-GAAP financial measures used by other
companies, limiting their usefulness for comparison purposes. We have
not provided a reconciliation of our non-GAAP financial measures to
their most directly comparable GAAP measures in this press release
because we have not yet finalized the specific items required to
reconcile our non-GAAP financial measures to their most directly
comparable GAAP financial measures. Accordingly, a reconciliation of the
non-GAAP financial measures to the corresponding GAAP measures is not
available without unreasonable effort. A reconciliation of our non-GAAP
financial measures will be presented in our reporting of the fourth
quarter and full year 2016 financial results scheduled for February 22,
2017.
Guidance for non-GAAP financial measures excludes stock-based
compensation, amortization of acquired intangible assets, and tax
effects associated with these items. We have not reconciled guidance for
non-GAAP financial measures to their most directly comparable GAAP
measures because items that impact these measures are out of our control
and/or cannot be reasonably predicted. Accordingly, a reconciliation of
the non-GAAP financial measure guidance to the corresponding GAAP
measures is not available without unreasonable effort.
The following are explanations of the adjustments that are reflected in
one or more of our non-GAAP financial measures:
-
In March 2014, we recalled the Fitbit Force after some of our users
experienced allergic reactions to adhesives in the wristband. This
recall primarily impacted our results for the fourth quarter of 2013,
the first quarter of 2014 and the fourth quarter of 2015.
-
Stock-based compensation expense relates to equity awards granted
primarily to our employees. We exclude stock-based compensation
expense because we believe that the non-GAAP financial measures
excluding this item provide meaningful supplemental information
regarding operational performance. In particular, companies calculate
stock-based compensation expense using a variety of valuation
methodologies and subjective assumptions.
-
Litigation expense relates to legal costs incurred due to litigation
with Aliphcom, Inc. d/b/a Jawbone. We exclude these expenses because
we do not believe these expenses have a direct correlation to the
operations of our business and because of the singular nature of the
claims underlying the Jawbone litigation matters. We began excluding
Jawbone litigation costs in the second quarter as these costs
significantly increased during the second quarter of 2016, and may
continue to be material for the remainder of 2016. Although not
excluded in reporting for the first quarter of 2016, these litigation
expenses were $9.1 million.
-
Revaluation of redeemable convertible preferred stock warrant
liability is a non-cash charge that will not recur in the periods
following our initial public offering.
-
Amortization of intangible assets relates to our acquisition of
FitStar. We exclude these amortization expenses because we do not
believe these expenses have a direct correlation to the operation of
our business.
-
The change in contingent consideration relates to our acquisition of
FitStar. This is a non-recurring benefit that has no direct
correlation to the operation of our business.
-
Income tax effect of non-GAAP adjustments relates to the tax effect of
the adjustments that we incorporate into non-GAAP financial measures
in order to provide a more meaningful measure of non-GAAP net income.
-
Adjustment to shares includes the conversion of the redeemable
convertible preferred stock into shares of common stock as though the
conversion had occurred at the beginning of all periods presented, and
the shares issued in our initial public offering in June 2015, as if
they had been outstanding since the beginning of the second quarter of
2015.
-
Purchase of property and equipment is deducted from net cash provided
by (used in) operating activities to arrive at non-GAAP free cash
flow, which reflects the amount of cash generated that is available to
be used for investments in the business.
About Fitbit, Inc.
Fitbit helps people lead healthier, more active lives by empowering them
with data, inspiration and guidance to reach their goals. As the leader
in the connected health and fitness category, Fitbit designs products
and experiences that track everyday health and fitness. Fitbit’s diverse
line of award-winning products includes Fitbit Surge®, Fitbit BlazeTM,
Fitbit Charge 2TM, Fitbit Charge HRTM, AltaTM,
Fitbit ChargeTM, Fitbit Flex 2TM, Fitbit Flex®,
Fitbit One® and Fitbit Zip® activity trackers, as well as the Aria®
Wi-Fi Smart Scale. Fitbit products are carried in 54,000 retail stores,
and are available in 65 countries, around the globe. Fitbit Group
Health uses the power of the Fitbit activity trackers, software, and
services to deliver innovative solutions for corporate wellness, weight
management, insurance and clinical research.
Fitbit and the Fitbit logo are trademarks or registered trademarks of
Fitbit, Inc. in the US and other countries. Additional Fitbit trademarks
can be found at www.fitbit.com/legal/trademark-list.
Third-party trademarks are the property of their respective owners.
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Source: Fitbit, Inc.