Fitbit's Q4 Was 'Ugly,' Guidance Was 'Weak'

Fitbit Inc FIT pre-announced much weaker than expected Q4 results, while issuing its 2017 guidance well below previous expectations, including a meaningful loss and negative free cash flow.

Baird’s William Power maintained a Neutral rating on the company, while lowering the price target from $10 to $6.

“Ugly” Q4

“With tough upcoming comps, the company is evidently betting on a strong 2H'17, though investor confidence is likely to remain low,” the analyst mentioned.

Fitbit pre-announced sales of 6.5 million devices in Q4, with revenue of $572-$580 million, well below the estimates and the guidance, attributing the miss to weaker than anticipated demand during the holiday season, especially on Black Friday.

“FIT also announced it expects Q4 gross margin to be well below its previously guided 46 percent due to a number of charges including $68 million in equipment write-downs, $37 million in rebates and pricing promotions, $41 million due to greater channel inventory, and $17 million in warranty reserves,” Power stated.

2017 Guidance

The company guided to tough comps for H1 2017, as Fitbit laps new product launches and enters the year with higher-than-expected channel inventory levels and higher operating expense run rate.

The company also provides its preliminary revenue guidance for 2017 at $1.5-$1.7 billion, with non-GAAP EPS of ($0.22)-($0.44). Fitbit expects its non-GAAP free cash flow to be negative $50-$100 million.

The analyst pointed out that all the metrics were well below the previous estimates.

The company also revised its long term non-GAAP gross margin target from 50 percent to 45 percent.

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