Fitbit’s results disappoint the market

Fitbit shares dropped 14 percent the day after the maker of wearable fitness trackers posted narrower margins in its first earnings report following an initial public offering (IPO).

Second-quarter gross margin, a measure of profitability, narrowed to 47 percent in the second quarter from 51 percent a year earlier. Revenue more than tripled to $400.4 million, and profits before certain items was 21 cents a share, San Francisco-based Fitbit said Wednesday in a statement.

Analysts on average projected sales of $319 million and profits of 8 cents, according to data compiled by Bloomberg.

The company, which dominates the market for fitness bands that monitor health data such as activity and sleep patterns, said it sold 4.5 million devices in the quarter. Costs to boost manufacturing capacity as well as slimmer profits on fast-selling newer products led to the gross margin decline, said Dougherty & Co. analyst Charles Anderson.

Fitbit shares fell to $44.60 at the close in New York, marking their biggest decline since the IPO.

The company went public on June 17 at $20 a share.

In his first call as CEO of a public company, James Park said the investments put Fitbit in position for a strong second half.

Fitbit plans to continue to increase spending on research and development, which rose by 130 percent in the first half of the year, and to boost spending on marketing, which climbed 360 percent, Park said.

“We’re going to be making some pretty big investments on the media side,” he said.

Among them is a deal with Kellogg that has put Fitbit ads on 20 million cereal boxes.

Chief Financial Officer Bill Zerella cited increased production capacity as one reason the company is expanding its ad budget.

“For the first time, we’re positioned to meet demand for our products,” he said in an interview. “We’ve always been supply constrained in the past.”

Net income in the second quarter rose to $17.7 million, or 7 cents a share, from $14.8 million, or 7 cents, a year earlier, the company said.

Third-quarter sales will be $335 million to $365 million, and profit before some items will be 7 cents to 10 cents a share, Fitbit forecast.

That compared with average analysts’ estimates of $262.9 million in revenue and 6 cents in profit.

In the first quarter, Fitbit’s market share in wearable devices was 34 percent, according to researcher IDC.

While Fitbit remained the biggest seller, its share declined from 45 percent a year earlier. China-based Xiaomi soared from nothing to 25 percent, on the strength of cheaper devices starting at $15, compared with Fitbit’s starting price of about $60 for a clip-on tracker. Market share for other rivals such as Jawbone Inc., Garmin Ltd. and Samsung Electronics also fell from the first quarter of 2014.

Mark Sue, an analyst at RBC Capital Markets, said the stock’s decline after the report is being driven by investor concerns about Fitbit’s valuation, which had soared to more than $10 billion.

“This is a stock that had reached nosebleed levels,” he said. “But it’s hard to argue with a company that’s growing 250 percent.” Bloomberg