Fitbit (NYSE:FIT) is a producer of fitness and health-tracking wearable devices, with a global market share in excess of 20%. The company's revenue comes from selling devices, charging for subscription to premium contents (stats and personal training) and to corporate wellness programs (less than 1% of sales).
Fitbit had a reassuring quarter and the conference call shed some light on very interesting data points that validate our thesis expressed in our previous article.
I'll give an update of the most significant elements of the call, not necessarily pertaining to the financial data, but more related to the strategic developments of the business.
- Fitbit hired a new VP for the Digital Health Division, Adam Pellegrini, who was previously president of Digital Health at Walgreens (NASDAQ:WBA). This appointment shows the paramount importance of the Corporate Wellness Program at Fitbit and will help develop the go-to-market relationship with healthcare providers, benefiting from the expertise of an insider.
- Management confirmed that the Corporate Wellness Program is progressing well and Fitbit is becoming the wearable of choice for healthcare fitness tracking studies, mainly thanks to the numerous collaboration with clinics and universities.
- The last few quarters saw an increase in R&D, marketing and G&A costs, mainly in order to maintain a strong product pipeline and keep the competitive edge. However, opex might grow at a lower pace since marketing will be used more tactically around shopping season and the R&D team will be up and running.
- The implementation of SAP will be fully operational in 2017, allowing a better comprehension and management of the operational processes.
- The company eyes China as a strategic end market, with James Park (CEO and founder) meeting Alibaba (NYSE:BABA) executives in its headquarters in May.
- New products seem to have lower warranty costs, which should reduce the risk of one-offs.
- Q4/16 will see the highest number of new product launches, but management is going to be more disciplined in the future, promising a more predictable cadence of new launches.
- Alta and Blaze accounted for 54% of sales, showing that customers are ready to invest in more sophisticated products.
- ASP held up well, also thanks to the contribution from accessories, which was quantified in $3/device, a very high number, testament to the premium perception in the eyes of Fitbit's clients.
- 67% of purchases came from new users while 33% were upgrades from existing users. Even more encouraging was the ability to re-engage users who have been inactive for 90 days or more: 20% of new Alta and Blaze sales came from that cohort.
- In an attempt to expose the cheap valuations of the stock and the confidence in a bright future for the company, the management has committed not to sell any of the shares it owns until at least the end of 2016 and possibly beyond.
Finally, on financial results:
- Gross margins dropped to 42%, but the slowdown is meant to be temporary. Management explained that the current quarter was impacted by higher warrant liabilities and assured that Q3 will see an increase to more normal levels (49-49%), thanks to (1) an improvement in operating leverage, (2) lower warranty provisions since the new products have better quality and (3) strong margins from new products. In any case, the current drop is not due to an increase in competition or operational problems.
- In the US, the most mature market, sales grew 37% in H1/16 while in EMEA the increase in number of devices was a staggering 100%.
- Given the hedging strategy, there will be no financial impact from Brexit.
The market reacted favorably to the results, with the stock up 9% at the opening. Nevertheless, we think that a combination of cheap valuations, exposure to secular growth, a clear strategic plan and strong commitment from the management point to a continuation of the re-rating of the stock.
We continue to recommend buying the stock until at least $19.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.