Fitbit (FIT) Q2 Earnings Top; Stock Falls 3% On Weak Outlook

Fitbit, Inc. (NYSE:FIT) reported second-quarter 2016 adjusted earnings (excluding all one-time items but including stock-based compensation) of 7 cents per share, which surpassed the Zacks Consensus Estimate of 4 cents.

However, the third-quarter guidance was lower than analysts’ expectations, which sent shares down 3% in after-hours trading.

Revenues

Fitbit reported revenues of $586.5 million, which were up 46.5% year over year and up 16.1% on a sequential basis. The top line exceeded both the guidance of $565 million–$585 million and the Zacks Consensus Estimate of $580.2 million.

Fitbit posted accelerated unit and revenue growth both in the U.S. and Europe, Middle East and Africa (EMEA) markets during the second quarter. Additionally, the Fitbit Charge HR witnessed some pent up demand during the second quarter.

The company sold 5 million connected health and fitness devices in the reported quarter.

Geographically, revenues from the United States accounted for 75.9% of the second-quarter revenues, Asia-Pacific contributed 2.5%, EMEA brought in 17% and the remaining 4.7% came from the Americas excluding the U.S.

Second-quarter revenues from the EMEA jumped a massive 150.5%, followed by the Americas, excluding the United States, where revenues recorded a significant rise of 63%. In the U.S. revenues increased 42% year over year, while in the Asia-Pacific revenues declined 53.6%.

Margins and Net Income

In the reported quarter, Fitbit’s gross margin was 41.8%, down a whopping 450 basis points (bps) sequentially and 511 bps year over year.

An increase in warranty reserves for legacy products had an adverse effect on the gross margin. Management expects that the additional reserves will be adequate to cover future warranty liability paving the way for a more normalized gross margin in the third quarter of 2016.

The gross profit for the second quarter was $245.4 million with a gross margin of 41.8% that declined 450 bps on a sequential basis and 511 bps on a year-over-year basis.

Pro-forma net income was $15 million or earnings per share of 7 cents compared with $11.4 million or earnings per share of 5 cents in the previous quarter and $45.8 million or earnings of 19 cents a year ago.

Balance Sheet and Cash Flow

Cash and cash equivalents at the end of the second quarter was $416.1 million compared with $722.1 million at the end of the first quarter.

At the end of the quarter, accounts receivables were $377.5 million compared with 339.7 million in the previous quarter, an 11.1% increase on a sequential basis. Inventories were $190.6 million, down $21.5 million from the first quarter, a decline of 10.1% sequentially.

Guidance

For the third quarter, Fitbit expects revenue to remain in the range of $490 million to $510 million. It expects non-GAAP gross margin to be 48% to 49%. Additionally, it expects adjusted EBIDTA in the range of $70 million to $80 million and non-GAAP net income per share in the range of 17 to 19 cents.

Fitbit expects stock based compensation expense to remain in the range of $26 million to $28 million and the non-GAAP tax rate to be approximately 30%.

Our Take

Nearly two-thirds of Alta and Blaze activations during the second quarter came from new customers, while the remaining came from repeat customers who already owned a Fitbit device.

Blaze and Alta accessories taken together grew 40% on a sequential basis, whereas other accessories taken together posted an increase of 21%.

Fitbit has launched Chinese, Japanese and Korean language versions of its products for their respective markets and also partnered with Alibaba’s TMall platform during the second quarter. This generated a whopping 100 million consumer impressions and drew nearly 1.3 million unique visitors to TMall.

The company has also increased its R&D headcount to 863 during the second quarter which makes up 59% of the company’s total intake.

Fitbit currently has a Zacks Rank #4 (Sell).

Better-ranked stocks include Amkor Technology, Inc. (NASDAQ:AMKR) and MeetMe, Inc. (NASDAQ:MEET) , both sporting a Zacks Rank #1 (Strong Buy) and Camtek Ltd. (NASDAQ:CAMT) carrying a Zacks Rank #2 (Buy).