The third quarter has been a time of reckoning for Fitbit – despite increased revenue and user adoption, the release of new products and continuing interest in both employer-sponsored wellness programs and clinical trials, profits aren’t rising to meet increased operational costs all those gains require. On a third quarter earnings call with investors, Fitbit executives said the company’s growth is slowing enough that it is downgrading its expectations for the year.
“We’re starting to see headwinds in business, which include supply constraints, challenges in impact and softening of demand,” Fitbit CEO James Park said in a call to investors. “Since going public five quarters ago, growth has been robust, but growth in profitability in 2016 is less than forecasted.”
Fitbit’s reported revenue for the quarter was $504 million, with the United States comprising 72 percent of that market. Park called the meager growth in other regions "disappointing," and said the company is looking to find more ways to engage as they further invest in research and development. The company has recently focused its innovation on both hardware and software sides as well as social networking and challenges to engage consumers. Challenges, Park said, account for levels of engagement at two and a half times compared to that of other users, and pointed to the recently released Adventures challenge – wherein users virtually explore trails around the world and receive awards for competing – as an example.
As a primary focus for engagement and growth, Fitbit will look to ways to beef up its role in healthcare, Park said. Specifically, that will involve better sensors and software and more strategic partnerships within the industry.
"We have invested, and will continue to invest, in R&D on sensors that capture more and more advanced continuous data, systems that analyze that data, and features that foster more engagement and communication," Park said. "We expect this R&D to make us an incredibly important partner to providers, pharmaceutical companies, insurers and employers."
While the company saw a 23 percent increase in revenue year-over-year to $504 million, introduced new products and saw a more engaged user base (measured in terms of a 50 percent increase in steps walked on the platform), Fitbit’s operating expenses increased 52 percent, leading the company to downgrade their expected revenue for the year by 25 percent.
Now, the company is taking steps to adjust expense growth to ensure it is commensurate with revenue growth, and it says it will focus on advancing its investment in research and development and looking for new expansion opportunities.
“We are actively looking to expand in adjacent markets, especially digital health, in order to diversify business,” Park said on the call. “We expect additional penetration and expansion to occur both via organic development and through M&A, and we see disciplined use of M&A as a key tool in accelerating our strategy.”
Fitbit’s Chief Financial Officer William Zerella said the shortfall versus the previous outlook was attributed to a few factors: softness in overall demand, an expectation for higher sales growth, and the supply limitations of the Flex 2 device.
“While we feel good about our product portfolio, we are taking a cautious view,” Zerella said. “And we expect these issues to have largely run their course by the end of the year.”
Parks pointed to a few reasons to be optimistic about the company: 60 percent of device activations are coming from new users, the company secured a partnership with corporate wellness program Virgin Pulse (demonstrating Fitbit’s increasing penetration into that sector). The company also recently launched a database of all clinical studies that have used Fitbit, highlighting its emerging role in healthcare.
“Looking to the future, we believe Fitbit has a key role to play in the healthcare ecosystem and how healthcare is practiced,” Park said.