E Fitbit Misses Q3 Expectations And Lowers Full Year Guidance

It’s not just that Fitbit (FIT) reported a miss on the top-line, but more so that the company lowered expectations for the full-year and expectations regarding growth going forward. The average analyst estimate for revenue growth in 2016 was roughly 40%, before Fitbit’s revised guidance.Now, analysts expect the company to report revenue growth of roughly 26 percent for 2016.For 2017, analysts formerly modeled revenues growing roughly 16%, as of today and with Fitbit’s lowered expectations going forward, analysts model the company growing revenues roughly 3 percent.It remains to be seen if even that lowered 2017 top-line number can be achieved given Fitbit’s misunderstanding of demand for its products. A great deal of 2017 results will be determined by this holiday season’s sell-through and inventory levels in the retail channel coming out of the Q4 2016 holiday period.

Along with disappointing revenue results and guidance, earnings are now expected to come down to $1.07 for 2016 and only $.58 in 2017.Even I was taken by surprise when I saw that Fitbit had misunderstood its growth profile for 2016 as the company seemingly had a good deal of runway for growing its distribution chain internationally.I had modeled at least another 4-6 months of robust growth before the company would hit a “wall” in sales, brought on by a lack of additional distribution gains.But that is how it goes sometimes…everyone modeled wrong with regards to earnings and revenues.When such an occurrence comes to be, management must be called into question for their misguidance and misunderstanding regarding their product’s demand as well as operational execution shortcomings.

Back in early January I had warned investors about the pitfalls regarding Fitbit’s business model in an article titled “Fitbit's Total Addressable Market Hype May Leave Investors With Disappointment”.  As I expected, Fitbit’s executive team did not fully understand what their true, total addressable market (TAM) is or was given the state of business affairs. The company is still offering to investors and more obviously their employees that demand for fitness trackers should share in part of the smartphone market demand.This could not be further from accurate and is most illogical. A smartphone/cellphone is an essential good; in other words the average citizen has decided that a cellphone is a needs-based good.A fitness tracker, on the other hand, is not needed. Don’t get me wrong, it serves a purpose and can be proven useful as Fitbit continues to effort, but in no way shape or form is a fitness tracker necessary for any aspect of health & wellness. The consumer did just fine without it in the past.Having said that, Fitbit has found a niche market for itself and addresses a much smaller market demand than that garnered by cell phones. One can only hope, however, that management adjusts its understanding of the potential demand in light of what may be peak demand for fitness trackers.This is not to say Fitbit can’t grow revenues in the future, but it definitively suggests that double-digit growth is not likely in the cards without a diversification of the product segment.

Fitbit sold 5.3mm units in Q3 2016, up 11% year-over-year. Revenue grew 23% to $504 million. Domestic revenue grew 33% to $361 million, while international revenue grew 3% to $143 million. EMEA advanced 64% to $81 million, while APAC contracted 44% to $36 million. Fitbit’s latest product offerings, Blaze, Alta, Charge 2 and Flex 2 represented 79% of revenue in the quarter.Also during the quarter, 40% of the activations in the quarter came from repeat customers buying new products. And of these repeat customers, approximately 20% were re-activations, having been inactive for 90 days or more. While some may see this metric as a good thing, what should also be considered is that Fitbit is failing to drive significant new user growth.At 40% activation rate during the quarter, it shows that just under half of new product sales are coming from the existing user base.When we also consider the large attrition rate of >42% YOY, the total addressable market for fitness trackers shrinks at an alarming rate.For this reason amongst others, hardware sales tracking services provided by IDC will need to be continuously revised lower every single quarter as they have been since Q2 2016.I offered this same sentiment in an article titled “Apple's Smartwatch And The Smartwatch Category Facing Retail Discontinuation By 2018”.  In the article I discuss IDC’s proven inaccuracies when forecasting demand for smartwatches, another wearables sub-category. The category has performed so poorly, that Apple (AAPL ) has even offered its Apple Watch Series 1 as a door buster at Target (TGT) for Black Friday.  My verbiage on the subject matter is as follows:

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Luigi Campana 2 years ago Member's comment

Seth was too bullish near term and too bearish long term. There is also a lack of perception about the utility of the #Fitbit ecosystem which is wrongly considered inferior to smartphones. For some people a smartphone is more important, for others it is more important as a fitness tracker. $FIT

Gus B. 2 years ago Member's comment

Wasn't there a whole issue that came out that #Fitbit simply didn't work - that it wasn't reporting physical activity accurately? $FIT