Fitbit's push into smartwatches pays off: sold-out Versa launch buoys wearable company in Q2

By Dave Muoio
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It was a bit of a bumpy start, but it’s beginning to look like Fitbit’s push into the smartwatch market is beginning to bear fruit. While the company is still operating at a loss, yesterday’s Q2 earnings report revealed that the Fitbit’s downward revenue and device sales trend was lessened by the success of its Versa smartwatch, which the company said has outsold all Samsung, Garmin, and Fossil’s smartwatches in North America combined.

“I'm pleased to report that for the sixth quarter in a row we have delivered on our financial commitments and are making progress in our multiyear transition, which include adapting to the changing wearable device market, transforming the business from an episodic-driven model centered around device sales to more non-device recurring revenue, deepening our reach into healthcare, and increasing our agility and optimizing our cost structure,” James Park, CEO, President, and cofounder of Fitbit, said yesterday during a call with investors.

In the second quarter, Fitbit’s reported a total revenue of $299 million (down from $353.3 million in Q2 2017), GAAP net loss of $118 million (from $58.2 million), and non-GAAP net loss of $54.2 million (from $19.3 million). This quarter’s 2.7 million devices sold is still short of Q2 2017’s 3.4 million sales, but the average selling price of Fitbit’s devices has increased 6 percent to $106 per item thanks to the growing influence of smartwatch offerings in the company’s catalogue — in fact, smartwatches made up 55 percent of the company’s quarterly revenue, which is up from 30 percent in this year’s first quarter.

This trend can largely be attributed to the Versa smartwatch, which launched in March and, according to the company, sold out during the most recent quarter.

“The success of Versa has improved the company's positioning with retailers, solidified shelf space for the Fitbit brand, and has provided a halo effect to our other product offerings,” Park said. “Retailers have been looking for a counterbalance to Apple, and Versa has delivered it.”

Park also warned that the company will be increasing its media and advertising spending for the Versa moving forward, a conscious choice to build on the smartwatch’s early success. And there is evidence that building awareness is having an impact on the business, with the company reporting that 60 percent of device activations came from new users and that among the repeats, 51 percent had previously been inactive for 90 or more days.

As for Fitbit’s other efforts, Park said that the company’s channel reduction of fitness tracker products has generally run its course, and cited clean channel inventory levels and consumer feedback as evidence that the decline in sales hit its trough in Q2. He also paid lip service to the company’s continued interest in health and wellness, whether that be the result of clinical research partnerships, home biomarker monitoring for chronic conditions, deployments across health systems, and news health app or feature launches (for instance, March’s launch of women’s health tracking).

“We know that wearable devices can help people get healthier,” Park said. “The question now is how these devices will continue to evolve and what role they will play in healthcare. We have been working to lay the foundation for growth into the healthcare channel by strengthening our relationships with key players in the healthcare ecosystem, building out our direct sales team, adding capabilities like the human coach platform, and collaborating with developers to create health-focused apps.”

Both in response to an investor inquiry and on his Twitter account, Park affirmed his belief that Fitbit is on track to break even in the next quarter and “return to growth and profitability in the second half of the year.”

Fitbit’s gains in the smartwatch market are noteworthy, but still pale in comparison to those of its chief competitor, Apple. In its own recent quarterly financial report, the tech juggernaut reported a 17 percent increase in quarterly revenue supported in no small part by its wearables division.