Fitbit reports strong Q2, hires Walgreens' digital health lead

By Heather Mack
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San Francisco-based Fitbit, maker of a series of popular wearable activity trackers, reported second quarter earnings and revenue that exceeded expectations, sent stock prices up and left the heads of the company optimistic for the “rest of the year and beyond," especially since the company will also be introducing new products by the end of the year and hired Adam Pellegrini, formerly of Walgreens, to lead Fitbit's efforts to plunge deeper into digital health.

In an open call with investors and analysts to report the numbers for 2016’s second quarter, CEO and chairman James Park remarked, “The latest industry reports by IDC (International Data Corp) show that Fitbit continues to be the leader in the worldwide wearables market.”

He cited adjusted earnings per share of 12 cents on revenue of $586.5 million, up 46 percent from last year’s Q2. Fitbit also reported GAAP diluted net income per share was $0.03, non-GAAP diluted net income per share was $0.12, a GAAP net income of $6.3 million, and adjusted EBITDA of $48.3 million. A year ago, Fitbit earned 21 cents per share on revenue of $400.4 million.

“Second quarter results reflect accelerated unit and revenue growth in US and EMA, the two largest markets, despite an unusually strong Q2 2015 with the full availability of the Fitbit Charge HR fulfilling built-up demand in that quarter,” said Park.

During the second quarter, Fitbit sold 5.7 million devices, with US sales comprising 76 percent of the quarterly revenue. Revenue in the US grew 42 percent year-over-year and 150 percent in Europe, the Middle East, and Africa, 54 percent in Asia Pacific and 63 percent in other Americas. New products, the Fitbit Blaze smart fitness watch and Alta, plus their related accessories, comprised over 54 percent of Q2 revenue. Accounting for the impacts in Asia Pacific, Fitbit noted the progressive shut down of Australia’s massive sports retailer Dick Smith and a reduction in inventory channels.

“I am confident in this company’s future for the rest of the year and beyond,” Park said during the call. “In fact, I am so confident, I will not sell my stock through the end of the year.”

Park said cofounder and CTO Eric Friedman as well as CFO Bill Zerella were joining him on that commitment, and pointed to a number of factors driving the company’s growth. Fitbit attributes this strong expected performance to moves including positive growth into an expanding international market (they just teamed up with Alibaba Group Holding’s TMall online platform, plus released a products aimed at native Chinese, Japanese and Korean speakers), the network community of users and consumers response to new products like the recently released Blaze and Alta. Additionally, Park credited continuing R&D investments that are allowing the company to integrate more deeply into the healthcare system. The company will release several new products by the end of the year in time for the holiday season. 

Zerella, CFO, said the second quarter marks another quarter of “outstanding results,” in which Fitbit exceeded its previous guidance. He said this was demonstrated by strength of the company’s business model, success of new products and hiring of developers is a key factor in driving sustainable growth.

“We continue to successfully attract more engineering talent to support our future product development plans, continuing to invest in software and fitness tracker device development,” Zerella said, counting an increase in R&D headcount to 863. “Our predominant focus is on groups with the capacity to develop new hardware, software and user experience, and we expect to continue adding to that headcount.”

While there has long been concern that Fitbit would be outpaced by the Apple Watch, it turned out to be a false alarm: the number of Fitbit Blaze sole alone were close to IDC’s estimate to Apple’s Watch in the second quarter. Moreover, Park said, the health of the industry appears to be robust – with IDC’s 20 percent compounding growth rate, they expect more than 200 million wearables shipping in 2020.

“An opportunity of this size will naturally attract a lot of competition,” Park said. “And there’s a misconception that an increasing number of competitors in the marketplace have created significant headwind for us, with new market entrants – large and small – being called out as causes for concern. However, it’s not the number of competitors that are important, but their impact on the market, and the reality is that most of these entrants have not altered the competitive dynamics of our industry.”

While it isn’t a simple market to succeed in, Fitbit points to the robust social experience of the app that gives it an edge over other fitness wearables, as well as localization of products.

Third quarter guidance was on-target, according to analysts, with Fitbit guiding for adjusted EPS between 17 cents and 19 cents on revenue between $490 million and $510 million.

As Fitbit moves forward, it will shift its focus more to the healthcare sector, Park said.

“While today this is a relatively small part of our total revenue, Fitbit’s success as a consumer brand is helping to drive our longer term vision and evolution into a leading digital health company,” Park said.

Park said Fitbit has taken part in over 200 studies in several major institutions, including Johns Hopkins University, University of Texas MD Anderson and UCSF, and the company only expects to increase their participation in clinical studies.

“Fitbit has been used to study how to better predict recovery from spine surgery by monitoring activity, or gauge the fitness of someone waiting for a liver transplant,” he said. “In this way, we can create ways to move the precision medicine movement forward by helping create plans that are adaptive and specialized rather than static and generalized. It’s an important validation of ability to engage consumers in a healthcare setting while providing powerful data and information to the research community.”

Park also pointed to the recent hire of Pellegrini, who will now serve as Fitbit’s VP of Digital Health, as an indicator of further growth of the company. Pellegrini comes from Walgreens Boots Alliance, where he was the VP of digital health. There, he was responsible for transforming how the chain approached omni-channel digital healthcare, including launching telemedicine and advancing their core digital pharmacy platforms. Additionally, Pellegrini’s team led the largest retail mobile health integration of more than 1 million connected devices and launched the company’s first integration of wearables – including, of course, Fitbit.

At Fitbit, Pellegrini will be responsible for leading Fitbit’s continued integration in healthcare systems around the world.

“Fitbit is uniquely positioned to help drive better health outcomes by incorporating its innovative technology, renowned brand and powerful engagement into clinical healthcare programs,” said Pellegrini in a statement. “I’m a passionate believer in the power of digital health technology to improve the effectiveness, efficiency and reach of our healthcare system.”