Fitbit’s Stock Surges on the Versa’s Success and its Smartwatch Segment

Dylan Lewis: Why don’t we
kick things off with Fitbit? This is a company that has desperately needed
some good news, and it seems like they finally got it with this new report. Evan Niu: It was a pretty
strong release, in my opinion. Revenue was up to about $393 million, which
beat its own forecasts as well as analyst expectations. The big news here is that
they became profitable again. They’ve been losing money for about two years
as people have been shifting away from these basic fitness trackers towards
more full-featured smartwatches. The big challenge has always been, can they
transition from trackers to smartwatches successfully? And, of course, they still sell trackers. Those are really popular in the Middle East,
Africa, and some of those emerging markets. But in the U.S., it’s really all about
smartwatches these days. They were able to post adjusted net income
of $10 million, or $0.04 per share. Getting back in the black. Lewis: Worth noting that on, on a
GAAP basis, they did lose money. We have to emphasize that
adjusted income there. Exploring that outperformance a little bit,
it seems like the company is seeing success with the smartwatch line. That was really
the big, looming question for them. With the more simplified fitness trackers
out there, and that market being a little bit tougher with some competitors like Xiaomi
in the mix, can they go to the smartwatch market and make a big splash?
It seems like the answer is yes. Niu: Right, especially after their first smartwatch,
the Ionic, flopped. That thing did not sell well. It didn’t look that appealing from
a mainstream perspective. They considered more of a niche performance
type positioning, whereas the Versa is very clearly resonating much
better with consumers. If you remember, they spent years acquiring
different little companies to help them build their smartwatch strategy. And now,
we’re seeing the results of that. They sold about 3.5 million
devices during the quarter. Average selling prices were up a little bit
to $108 as the product mix continues to shift toward smartwatches, which are
now about half of revenue. I do think they’re making some
really impressive progress here. Lewis: You look at the overall market share,
a year ago, they had 0% market share in smartwatches. Flash forward to now, they are one of the
major players, they’re in second place in this market. Not only are the financial results looking
good, but in the competitive landscape, they are not only holding their own but taking
market share from other players. Niu: Exactly. Since Ionic launched in Q4 of last year,
a year ago, they really didn’t have anything. Now, we fast forward to today. Android Wear OS, which used to be
Android Wear, has done so terribly. No one is really buying those devices. [Alphabet] really failed on execution in terms
of getting into wearables. I think that’s given Fitbit this opportunity
to step up and fill that need, provide some type of alternative to Apple Watch. Apple Watch is still the dominant smartwatch
in the world right now, but people want competition, people want alternatives, and Fitbit is really
offering something else. Lewis: Outside of the financials, looking
at some of the user activity, I think there are a lot of really encouraging signs there. A lot of the activations that they’re seeing
over this quarter are from new users. It seems like engagement with folks that had
been users at some point and then fallen off is starting to get revitalized a little bit. Niu: Right. That’s always been a big
problem with these basic fitness trackers. It’s like when people start going to the gym,
then you get kind of lazy, then you just stop going. People would buy these fitness trackers, use them for
a couple of months, and then just stop using them. Let’s face it, we’re all lazy. The big challenge for Fitbit has always been,
how do we keep these users engaged? How do we motivate them to stay active and
improve their lives and health? They’re starting to make
some progress there. They said that out of the existing users that
had bought new Fitbits this quarter, about half of them had
previously been inactive. So, they are starting to get more people back
on the platform that had previously been dormant. Lewis: After quarters of declines on the revenue side,
the market was very happy to see some revenue growth, even if it was pretty meager.
How are you feeling about this company? It’s up like 35% since
this earnings release. Does anything that you’ve seen here change
your outlook on this business? Niu: I do think it was a very strong report, and I do think
they’re making a lot of progress with this turnaround. They had been on the ropes for
a while with these fitness trackers. But, at the same time, I don’t think they’re out of
the woods yet. This is going to be a long game. We’re talking about smartwatch platforms. Any platform strategy, by default,
is a very long-term strategy. So, they’re making progress,
but they still have to keep going. They’re also in consumer hardware.
It’s notoriously difficult. You have to constantly innovate, constantly
put out new products that people like, you have to build your platform, you have
to get more app developers on there. There are just so many pieces
to do well and maintain over time. And, you’re competing against literally the richest
company in the world. So, it’s going to be tough. That said, I’m impressed that they’ve been
able to do as well as they have over the past couple of years with transitioning to
smartwatches that people want to buy. Lewis: They’re guiding for what is essentially
a slight decline in revenue next quarter after being basically flat year over
year this most recent quarter. It’s not like the hardware segment
is showing blistering growth. It’s a nice return, and it’s a show of strength
in some key categories for them, but hardware is still this business.
It’s all of their revenue. That hasn’t changed. And I think what makes a hardware company really
compelling is if they can create a really viable platform. And I don’t see that yet with this company. There’s so much potential for it, but unless
I start seeing the signs and some money coming in on the software side for them,
I’m going to remain a skeptic. I think I can find better places
to put my money, honestly. Niu: I totally agree with you. They’ve been talking about this idea of building
up the services business for a long time, and they’re still trying, and they want to
get into corporate wellness programs. But these are still less
than 1% of revenue. Again, when it comes to building a platform,
you want to get away from relying totally on hardware, and grow your software
and services business a little bit. And on that front, they have
not made much progress.

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