q1 2018 earnings deck - s2.q4cdn.com · this presentation contains forward -looking statements,...

Q1 2018 EARNINGS DECKMay 2018

Safe Harbor StatementThis presentation contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including statements regarding our financial outlook for the second quarter 2018 and the full year of 2018; expected device mix; expected trends in smartwatch revenue, average selling price, our ability to reduce operating expenses, free cash flow, capital expenditures, gross margins and non-GAAP tax rate; expected growth of Fitbit Health Solutions and premium subscribers; and consumer and retail demand for trackers and smartwatches. These forward-looking statements are only predictions and may differ materially from actual results due to a variety of factors, including: the effects of the highly competitive market in which we operate, including competition from much larger technology companies; our ability to anticipate and satisfy consumer preferences in a timely manner; our ability to successfully develop and timely introduce new products and services or enhance existing products and services; retail and customer acceptance of existing and new products; any inability to accurately forecast consumer demand and adequately manage our inventory; our ability to ship products on the timelines we anticipate and unexpected delays; our ability to detect, prevent or fix quality issues in our products or services; uncertain ability to retain employees; our reliance on third-party suppliers, contract manufacturers, and logistics providers, and our limited control over such parties; delays in procuring components and product from these third parties or their suppliers; the ability of third parties to successfully manufacture and ship in a timely manner quality products; seasonality; product liability issues, security breaches or other defects, which may adversely affect product performance, our reputation and brand awareness and overall market acceptance of our products and services; ability to integrate acquired technologies and employees into our operations, particularly in new geographies; warranty claims; the fact that the market for connected health and fitness devices is relatively new and unproven; the ability of our channel partners to sell our products; litigation and related costs; privacy; and other general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the caption “Risk Factors” in our Annual Report on Form 10-K for the full year ended December 31, 2017, which is available on our Investor Relations website at investor.fitbit.com and on the SEC website at www.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. All forward-looking statements contained herein are based on information available to us as of the date hereof and we do not assume any obligation to update these statements as a result of new information or future events. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

This presentation also includes certain financial measures that are not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. These non-GAAP financial measures are in addition to, and not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. We have provided a reconciliation of those measures to the most directly comparable GAAP measures, which is available in the appendix.

Trademarks: Fitbit and the Fitbit logo are trademarks or registered trademarks of Fitbit, Inc. in the United States and other countries. Additional Fitbit trademarks can be found at www.fitbit.com/legal/trademark-list. Third-party trademarks are the property of their respective owners.

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http://www.sec.gov/

http://www.fitbit.com/legal/trademark-list

©2017 Fitbit, Inc. All rights reserved. Proprietary & Confidential.

TO MAKE EVERYONE IN THE WORLD HEALTHIER

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Presenter

Presentation Notes

Our Assets

Brand:#1 Wearables Brand Globally

Community:Large Social Fitness Network with 25 million active users*

Data:One of the largest activity, exercise, & sleep databases

*(As of 12/31/17)4

78M

47K WIDE RANGE of devices and

price pointsStores

Health & Fitness app on iOS and Android (U.S.)*

86 CountriesWearable brand globally

1#

1# Devices sold to date

(*As of 12/31/17)5

hours of heart rate data tracked

116B

6.5B

One of the Largest Activity, Exercise & Sleep Databases

213Bnights of sleep

102Tsteps

(*As of 3/15/18)

minutes of exercise tracked

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©2017 Fitbit, Inc. All rights reserved. Proprietary & Confidential. ©2017 Fitbit Inc. All rights reserved. 7

DiabetesHeart HealthSleep Apnea

Manage WeightGet More Active & FitSleep BetterReduce Stress

Focus on Outcomes and Conditions

Wellness Health

Across All Ages

Mental Health

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• Generated $248 million revenue, non-GAAP net loss per share of ($0.17).

• Generated $10 million in cash flow from operations and free cash flow of ($2) million.

• Average selling price up 16% y/y to $112 per device. Accessory and other revenue added an addition $3.67 per device.

• Non-GAAP gross margin increased 710 basis points y/y to 47%. (Improved product quality and lower warranty costs. Benefited from $12.4 million in revenue recognized from the release of outstanding reserves and rebates related to Wynit.)

• Non-GAAP operating expenses declined 4% y/y to $174 million.

• $658 million in cash, cash equivalents, and marketable securities on the balance sheet as of the quarter end.

Q1 Financial Highlights

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Q1 Business Highlights• Sold 2.2 million devices. Introduced 2 new smartwatches, Fitbit

VersaTM our mass appeal smartwatch, and co-branded Adidas Fitbit Ionic. Introduced kids targeted tracker, Fitbit AceTM. Products introduced over the past year represented 34% of revenue.

• Acquired Twine Health, an innovative, proven health coaching platform.

• Non-device revenue, including paid premium and Fitbit Health Solutions software revenue, grew 30% y/y.

• Leveraged Fitbit OS investment, launched Versa with approximately 45% lower developmental hours than Ionic.

• Reduced warranty costs declined and released $12.4 million in reserves associated with the Q3 ’17 bankruptcy filing of distributor, Wynit.

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• Leading global wearable brand with 78 million devices sold since inception.

• Added 8 million social Feed users in and users collectively joined Feed an additional 2.4 million times in Q1.

• One of the largest social fitness networks as of year-end.

• 18,000 developers have joined the Fitbit developer community.

• In Q1, 38% percent of all activations came from repeat users; of the repeat customers, 49% came from users who were inactive for 90 days or greater.

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70

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Total Devices Sold78

2015 2016 2017 2018

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Growing User Community & Brand Relevancy

(units in millions)

$298.9

$247.9

Q1 2017 Q1 2018

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- 17%

Revenue• Q1 revenue contracted 17% y/y.

• Demand for wearable devices continued to shift towards smartwatches.

• Smartwatch revenue was 30% of total revenue, nearly doubling as a % of revenue sequentially.

• Average selling price increased 16% y/y to $112, devices sold declined 27% y/y.

• U.S. revenue represented 56% of total revenue or $140 million dollars, down 18% y/y. International revenue declined 16% y/y to $108 million or 44% of the total. • APAC revenue grew 33% to $28 million• EMEA revenue declined 26% to $65 million,

mainly as a result of weakness in the U.K.• Americas ex. U.S. declined 19% to $16 million

• Received $12.4 million in reserve release associated with Q3 Wynit bankruptcy.

• Fitbit.com revenue of $31 million, or 13% of total revenue.

($ in millions)

$181.6

$173.9

Q1 2017 Q1 2018

Non-GAAP Opex

• Average selling price increased 16% y/y, driven by mix.• Gross margin increased by 710pts y/y.

- ~300bpts driven by ~$12.4M one-time reserve release associated with the Wynit bankruptcy filing.

- ~400bpts driven by lower warranty reserve and skew of devices towards trackers.

• Demonstrated expense discipline, despite continued investment in innovations (R&D).

• Driving efficiency in devices, re-deploying to grow International, Fitbit Health Solutions and software services.

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-4%

Non-GAAP Gross Margin and Opex

40.0%

47.1%

Q1 2017 Q1 2018

Non-GAAP Gross Margin

+7%

($ in millions)

$85.9

$68.4

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50

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100

Q1 2017 Q1 2018

S&M

$70.7 $74.7

$0

$25

$50

$75

$100

Q1 2017 Q1 2018

R&D

$25.1 $30.8

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50

75

100

Q1 2017 Q1 2018

G&A

• Continued investment in innovation.

• Software focused and investment in Fitbit Health Solutions.

• Lower media spend. Shifted spend from Q1 to Q2, to support Versa launch when product is generally available.

• Lower POP spend.

• Expenses up driven by the timing of litigation expenses.

• Settled securities class action in Q1.

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+6% -20%

+23%

Non-GAAP Opex Detail

($ in millions)

• Benefited from a favorable change in working capital. Lower capex due to less tooling expense. Exited the quarter with $658 million in cash and short-term assets and no debt, including ($14) million related to the Twine Health acquisition.

• Sales return reserve of $83 million now included in Accrued Liabilities instead of netted against Account Receivables as required by the new accounting standard, ASC 606.

• Continue to anticipate approximately $80 million in cash refunds related to taxes paid in prior years.

Q4’16 Q1’17 Q2’17

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Q3’17 Q4’17Inventory $200.3 $141.5 $138.8 $123.9 $145.4

Inventory Turns 3.4 4.8 6.3 9.8 4.0

Accounts Receivables $194.8 $216.3 $261.0 $406.0 $214.4

Days Sales Outstanding 71 74 67 76 61

Capital Expenditures (capex) $28.2 $11.7 $18.4 $27.9 $12.6

Capex as % of Revenue 9.4% 3.3% 4.7% 4.9% 5.1%

Free Cash Flow $21.0 ($57.6) ($12.9) $24.6 ($2.5)

Cash & Marketable Securities $726.1 $675.8 $659.2 $679.3 $658.4

Q1’17 Q2’17 Q3’17 Q4’17 Q1’18

Balance Sheet and Cash Flow

($ in millions, except percentages, inventory turns and DSO)

($ in millions, except percentages and per share amounts)

Q2’18 Guidance

Guidance Context:

• Anticipate tracker declines to remain roughly constant Q1 to Q2, further channel de-stocking accounted for in guidance. Relatively clean channel entering Q2.

• Expect smartwatches to become a greater % of revenue mix.

• Expect the change of mix towards smartwatches to put downward pressure on gross margin.

• Expect free cash flow to decline less than revenue, but worse than Q1 as there are less receivables to turn into cash receipts.

• Tax rate driven by geography of revenue, tax credits. Expect quarterly volatility.

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Revenue $275 $295

y/y decline (22%) (17%)Non-GAAP net loss per share ($0.27) ($0.23)

Capex as a % of revenue ~5%

Free cash flow (~$85M)

Non-GAAP tax rate ~25%

Stock-based compensation ~$26M

Non-GAAP share count (basic) ~242M

Low High

FY ’17 Guidance

($ in millions, except percentages and per share amounts)

FY’18 Guidance

Revenue ~$1.5 BillionNon-GAAP OPEX $740 millionCapex as % of revenue ~4%Non-GAAP free cash flow BreakevenStock-based compensation ~$110MNon-GAAP share count (basic/diluted) 248M/260M

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Guidance Context:

• We extrapolated the demand trend forecasted in Q1 2018 and incorporated a further reduction in channel inventory levels. We expect smartwatches to become the majority of revenue in H2.

• Expect ASP to be up y/y driven by mix shift and roughly flat with Q1.

• Expect gross margins to decline as smartwatches become a greater % of mix, partially offset by operating efficiencies in how we run the business.

• Expect to reduce non-GAAP opex by ~$60 million y/y.

• Expect free cash flow to be break-even, excluding expected ~$80 million tax refund payment.

• Expect full-year tax rate volatility driven by geographic mix of revenue and shift to profitability / tax credits.


GAAP to Non-GAAP Reconciliation(In thousands, except percentages and per share amounts)

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures inthis presentation: non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating loss, non-GAAP operating loss before incometaxes, non-GAAP net loss, non-GAAP diluted net loss per share, non-GAAP free cash flow, revenue on a constant currency basis, and adjusted EBITDA. Thepresentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented inaccordance with GAAP.

We use non-GAAP measures to internally evaluate and analyze financial results. We believe these non-GAAP financial measures provide investors with usefulsupplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may varyindependent of business performance, and enable comparison of our financial results with other public companies, many of which present similar non-GAAP financialmeasures.

There are limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to our GAAP financialmeasures reflect the exclusion of certain items, specifically stock-based compensation expense, depreciation, amortization of intangible assets, interest income, net and therelated income tax effects of the aforementioned exclusions, that are recurring and will be reflected in our financial results for the foreseeable future. In addition, thesemeasures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. A reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this presentation, andinvestors are encouraged to review the reconciliation.

Guidance for non-GAAP financial measures excludes Jawbone litigation costs, stock-based compensation, impact of restructuring, amortization of acquired intangibleassets, and tax effects associated with these items. We have not reconciled guidance for non-GAAP financial measures to their most directly comparable GAAP measuresbecause certain items that impact these measures are uncertain, out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAPfinancial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

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The following are explanations of the adjustments that are reflected in one or more of our non-GAAP financial measures:

Stock-based compensation expense relates to equity awards granted primarily to our employees. We exclude stock-based compensation expense because we believe that thenon-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In particular, companies calculatestock-based compensation expense using a variety of valuation methodologies and subjective assumptions.

In January 2017, the Company conducted a reorganization of its business, including a reduction in workforce. The restructuring costs impacted our results for the firstquarter of 2017. Restructuring costs primarily included severance-related costs. We believe that excluding the is expenses provides great visibility to the underlyingperformance of our business operations, facilitates comparison of our results with other periods, and may also facilitate comparison with the results of other companies inour industry.

Litigation expense relates to legal costs incurred due to litigation with Aliphcom, Inc. d/b/a Jawbone. We exclude these expenses because we do not believe these expenseshave a direct correlation to the operations of our business and because of the singular nature of the claims underlying the Jawbone litigation matters. We began excludingJawbone litigation costs in the second quarter of 2016 as these costs significantly increased in 2016, and may continue to be material for the remainder of 2017. Althoughnot excluded in reporting for the first quarter of 2016, these litigation expenses were $9.1 million in that quarter.

Amortization of intangible assets relates to our acquisitions of FitStar, Pebble, Vector and Twine Health. We exclude these amortization expenses because we do notbelieve these expenses have a direct correlation to the operation of our business.

Income tax effect of non-GAAP adjustments relates to the tax effect of the adjustments that we incorporate into non-GAAP financial measures such as stock-basedcompensation, amortization of intangibles, restructuring and valuation allowance in order to provide a more meaningful measure of non-GAAP net income (loss).

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GAAP gross profit

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Three Months EndedMarch 31, 2018 April 1, 2017

Non-GAAP gross profit:GAAP gross profit $ 114,123 $ 118,299Stock-based compensation expense 1,098 18Impact of restructuring — 37Intangible assets amortization 1,516 1,319Non-GAAP gross profit $ 116,737 $ 119,673

Non-GAAP gross margin (as a percentage of revenue):GAAP gross margin 46.0% 39.6%Stock-based compensation expense 0.4 —Impact of restructuring 0.0 0.0Intangible assets amortization 0.6 0.4Non-GAAP gross margin 47.1% 40.0%



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Non-GAAP research and development:GAAP research and development $ 89,336 $ 87,758Stock-based compensation expense (14,671) (14,344)Impact of restructuring — (2,744)Non-GAAP research and development $ 74,665 $ 70,670

Non-GAAP sales and marketing:GAAP sales and marketing $ 72,052 $ 91,174Stock-based compensation expense (3,447) (3,248)Impact of restructuring — (2,000)Intangible assets amortization (161) —Non-GAAP sales and marketing $ 68,444 $ 85,926

Non-GAAP general and administrative:GAAP general and administrative $ 36,088 $ 30,746Stock-based compensation expense (4,425) (4,155)Litigation (expense) credit (765) 114Impact of restructuring — (1,594)Intangible assets amortization (71) (58)Non-GAAP general and administrative $ 30,827 $ 25,053



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Three Months Ended

March 31, 2018 April 1, 2017Non-GAAP operating expenses:GAAP operating expenses $ 197,476 $ 209,678Stock-based compensation expense (22,543) (21,747)Litigation (expense) credit (765) 114Impact of restructuring — (6,338)Intangible assets amortization (232) (58)Non-GAAP operating expenses $ 173,936 $ 181,649



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Non-GAAP operating income (loss) and operating income (loss) before income taxes:

GAAP operating loss $ (83,353) $ (91,379)Stock-based compensation expense 23,641 21,765Litigation (expense) credit 765 (114)Impact of restructuring — 6,375Intangible assets amortization 1,748 1,377Non-GAAP operating loss (57,199) (61,976)Interest income, net 1,350 1,096Other income, net 517 533Non-GAAP operating loss before income taxes $ (55,332) $ (60,347)



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Non-GAAP net loss and net loss per share:Net loss $ (80,877) $ (60,079)Stock-based compensation expense 23,641 21,765Litigation (expense) credit 765 (114)Impact of restructuring — 6,375Intangible assets amortization 1,748 1,377Income tax effect of non-GAAP adjustments 13,767 (3,722)Non-GAAP net loss $ (40,956) $ (34,398)

GAAP diluted shares 239,431 226,511Other dilutive equity awards — —Non-GAAP diluted shares 239,431 226,511Non-GAAP diluted net loss per share $ (0.17) $ (0.15)



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Non-GAAP free cash flow:Net cash provided by operating activities $ 10,158 $ 49,138Purchase of property and equipment (12,616) (28,157)Non-GAAP free cash flow $ (2,458) $ 20,981Net cash provided by investing activities $ 31,170 $ 24,466Net cash used in financing activities $ (4,934) $ (546)



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Three Months Ended

March 31, 2018 April 1, 2017Revenue on a Constant Currency BasisInternational GAAP Revenue $ 108,368 $ 128,523Foreign exchange effect (9,306)International revenue excluding foreign exchange effect $ 99,062International GAAP revenue year-over-year change (16)%International GAAP revenue excluding foreign exchange effect year-over-over change (23)%

US GAAP revenue $ 139,496 $ 170,420US GAAP revenue year-over-year change (18)%



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Adjusted EBITDA:Net loss $ (80,877) $ (60,079)Stock-based compensation expense* 23,641 21,765Litigation (expense) credit 765 (114)Impact of restructuring — 6,375Depreciation and intangible assets amortization 12,204 10,517Interest income, net (1,350) (1,096)Income tax benefit (609) (29,671)Adjusted EBITDA $ (46,226) $ (52,303)

* A portion of stock-based compensation expense for the year ended December 31, 2017 was allocated to and included in "Impact of restructuring," thus explaining the difference between the total by function presented in this table compared to the amounts presented in the above tables.

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q1 2018 earnings deck - s2.q4cdn.com · this presentation contains forward -looking statements,...

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