Fitbit faces disappointing Q2 outlook as it frontloads investments

The smart wearables maker is investing now to maintain its leading market position and says earnings will accelerate later in 2016
Written by Stephanie Condon, Senior Writer

Fitbit let down Wall Street on Wednesday, sending its stock down as much as 12 percent in after-hours trading with a disappointing projection for the second quarter of 2016. Yet its executives said on its earnings call that after frontloading on an array of investments including marketing and R&D this quarter, earnings will accelerate later in the year.

For the first quarter of 2016, Fitbit posted earnings of 10 cents a share on revenues of $505.4 million. That exceeded expectations of two cents a share on revenues of $443.3 million. On a year-over-year basis, Q1 sales rose 50 percent. However, its earnings per share dropped 63 percent year-over-year from 27 cents in Q1 2015.

For the current quarter, Fitbit is projecting earnings per share of eight to 11 cents on revenue of $565 million to $585 million. That's below Wall Street's expectations of 26 cents a share on revenues of $531.3 million.

But based on the traction of the two wearables it's introduced this year, Blaze and Alta, combined with other new products planned heading into the holidays, Fitbit expects to deliver around two-thirds of its full-year earnings in Q4.

"In terms of the back-ended nature of earnings this year, so the short answer is that yeah, we do feel confident, which is why we're actually raising guidance slightly for the year," Fitbit CFO Bill Zerella said on the call. "The linearity is a lot different this year than we've had in the past, and a lot of it's due to the timing of when we introduce new products."

Zerella said the company is raising its expected revenue range from $2.5 billion to $2.6 billion, while maintaining expected non-GAAP gross margins in the range of 48.5 percent to 49 percent.

In the meantime, Fitbit is putting a great deal of "marketing muscle" behind the Blaze and Alta, Zerella said -- and doing it on a global basis. That marketing push, though, is expected to give the brand momentum heading into the holidays.

On top of that, Zerella said, the company is "front ending" its engineering investments. He stressed the importance of introducing new products, pointing out that Blaze and Alta drove almost 50 percent of revenues in Q1, even though they were introduced in the last month of the quarter.

The company has been investing in R&D across hardware engineering, software engineering and firmware, as well as interactive and industrial design. Fitbit now has 755 employees in those R&D areas -- making up more than half of its employees -- compared to just 295 in Q1 2015.

Fitbit will continue to invest in R&D, Zerella said, to maintain a rapid pace of innovation that keeps it ahead of the market in terms of devices as well as other key aspects of the Fitbit platform and user experience. "We expect to continue to hire agressively," he said.

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