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Fitbit (FIT) Q3 Earnings Beat, Revenues Match Estimates

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Fitbit, Inc. FIT reported third-quarter 2016 adjusted earnings (excluding all one-time items but including stock-based compensation) of 13 cents per share, which surpassed the Zacks Consensus Estimate of 11 cents.

However, the fourth quarter guidance was lower than analysts’ expectations, which sent shares down 1.9%.

In the quarter, 60% of the activations came from new customers who purchased new products and the remaining 40% were repeat purchases of new products.

Fitbit rolled out new products Charge 2, Flex 2, Blaze and Alta gold series. The company also rolled out a new software feature Adventures that offers users a personal challenge experience. Fitbit started a new accessories partnership with Simply Vera Vera Wang for Kohl's.

On the corporate wellness front, Fitbit partnered with Virgin Pulse and added new clients including Dr. Pepper/Snapple Group and Pitney Bowes.

The company also increased its R&D headcount 105% year over year during the third quarter, which makes up 60% of the company’s total workforce.

FITBIT INC Price, Consensus and EPS Surprise

Let’s check out the numbers:

Revenues

Fitbit reported revenues of $503.8 million, which was up 25.8% year over year but down marginally on a sequential basis. The top line was within the guidance of $490 million to $510 million and matched the consensus mark.

New products – Blaze, Alta, Fitbit Charge 2, Flex 2 – and related accessories contributed 79% to third quarter revenues compared with 54% in the second quarter.

Geographically, revenues from the United States accounted for 71.7% of the third quarter revenues, EMEA brought in 16.1%, Asia-Pacific contributed 7.1% and the remaining 5.1% came from the Americas excluding the U.S.

Third quarter revenues from the EMEA jumped a massive 103.8%, followed by the Americas, excluding the United States, where revenues recorded a significant rise of 54.5%. In the U.S. and the Asia-Pacific, revenues increased 15.5% and 14.3% year over year, respectively.

Margins and Net Income

Gross profit for the third quarter was $241.1 million and gross margin was 47.9%, up 151 basis points (bps) sequentially and 90 bps year over year.

An increase in warranty reserves for legacy products was offset by lower cost on certain replacement units and additional reserves leading to a more normalized gross margin compared to the second quarter of 2016.

Pro-forma net income was $31 million or earnings per share of 13 cents compared with $15 million or earnings per share of 7 cents in the previous quarter and $46.4 million or earnings of 19 cents a year ago.

Balance Sheet and Cash Flow

Cash and cash equivalents at the end of the third quarter was $284.2 million compared with $416.1 million at the end of the second quarter.

At the end of the quarter, accounts receivables were $461.4 million compared with 377.5 million in the previous quarter, a 22.1% increase on a sequential basis. Inventories were $215 million, up $24.3 million from the second quarter, an increase of 12.8% sequentially.

Guidance

For the fourth quarter, Fitbit expects revenues to remain in the range of $725 million to $750 million, much lower that than the Zacks Consensus Estimate of $991.19 million. The company expects non-GAAP earnings per share to be in a range of 14 cents to 18 cents. The Zacks Consensus Estimate is pegged at 67 cents. It expects non-GAAP tax rate to be approximately 33%.

Zacks Rank and Stocks to Consider

Currently, Fitbit has a Zacks Rank #4 (Sell). Some better-ranked stocks in the wider technology sector include Electronics for Imaging, Inc. EFII,  Logitech International SA LOGI and Stratasys Ltd. (SSYS - Free Report) , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For the current year, the consensus estimate for Electronics for Imaging has gone up by 23.8% in the past 30 days. The same for Logitech and Stratasys has gone up by 4.4% and 27.8%, respectively over the same time frame.

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