Fitbit, Inc. FIT - $ NYSE Buy

Transcription

1 Scott W. Searle, CFA, (646) Sales (800) , Trading (800) COMPANY NOTE EQUITY RESEARCH August 02, 2018 Technology: Communications, Wireless & IoT Fitbit, Inc. FIT - $ NYSE Buy Company Update Estimates Changed Stock Data 52-Week Low - High $ $7.79 Shares Out. (mil) Mkt. Cap.(mil) $1, Mo. Avg. Vol. 6,795, Mo.Price Target $8.00 Cash (mil) $580.5 Tot. Debt (mil) $0.0 EPS $ Yr Dec E 2019E Curr Prev Curr Prev 1Q (0.15)A (0.21)A (0.21)A (0.10)E (0.12)E 2Q (0.08)A (0.22)A (0.19)E (0.06)E (0.07)E 3Q 0.01A (0.02)E (0.10)E 0.01E (0.03)E 4Q 0.03A 0.05E 0.05E 0.06E 0.02E YEAR (0.19)A (0.40)E (0.44)E (0.09)E (0.21)E P/E NM NM NM NM NM EPS estimates are fully diluted and pro forma adjusted Revenue ($ millions) Yr Dec E 2019E Curr Prev Curr Prev 1Q 298.9A 247.9A 247.9A 327.0E 324.2E 2Q 353.3A 299.3A 282.0E 371.5E 385.2E 3Q 392.6A 378.0E 365.7E 440.1E 438.2E 4Q 570.8A 555.6E 549.4E 575.6E 595.6E YEAR 1,615.5A 1,480.8E 1,445.1E 1,714.1E 1,743.3E Vol (m) FIT One-Year Price and Volume History Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug Price FIT: Versa Drives the Quarter; Year on Track Fitbit reported 2Q18 sales upside and maintained 2018 guidance of $1.5B, inline with our preview. Smartwatches provided strength, 55% of sales, up 2x seq, led by the mid-range Versa, which was capacity constrained. With tracker inventory cleared, management believes the category has bottom and will be reinvigorated by incremental product breadth and channel expansion (kids, elderly, healthplans, etc.). With new products, approaching break-even and growth, and the promise of digital health we maintain our Buy rating. 2Q18 upside constrained by capacity: Fitbit reported sales of $299M, down 15% y/y, up 21% seq, ahead of the guided range of $ M. Smartwatches were 55% of sales, up ~120% seq, driven by the debut of the mid-range ($200) Versa which surpassed 1M units 7-8 weeks after launch. Notably, Versa was capacity constrained and the company will add an additional line to support future demand. Aggregate units were 2.7M, down from 3.4M in the year ago period and up from 2.2M seq. We estimate trackers were ~$120M in sales, down from over $500M in December Gross margins of 40.9% were down 140bp seq related to mix (more smartwatches) and are expected to stabilize at current levels. A non-gaap loss of $0.22 was generally in-line with expectations as sales upside was offset by lower GMs and higher op-ex to support the Versa launch. The company had net cash of $580M. Trackers bottoming: After a 70%+ decline in tracker sales since 4Q16, management believes the category has bottomed with excess channel inventory finally cleared. Aided by new products to expand portfolio breadth such as kids (Ace), elderly, etc., and expanding channels (healthplans, carrier, etc.), Fitbit believes that growth will return to trackers starting in the current quarter. Versa success will likely be joined by more breadth: We estimate that the Versa sold ~1.2M units in the quarter, despite being capacity constrained. Additionally, it outsold Samsung, Garmin and Fossil smartwatches combined in North America. The company is investing in additional capacity and we expect a broadening of the product portfolio with the next several months. While the company does not pre-announce solutions we ultimately expect cellular connectivity to be supported which offers an attractive carrier sales channel. Overall, the category remains strong as noted by recent competitor results, i.e., Apple (AAPL NC) up 40%+ y/y. Tweaking numbers, maintain Buy: We are modestly tweaking our expectations to reflect upside 2Q18 results, 3Q18 guidance ($ M vs our $365M estimate with EPS of ($0.02) to $0.01) and reaffirmed annual guidance of $1.5B. We continue to maintain our Buy rating given the growing strength in smartwatches, bottoming and rebound in trackers, approaching break-even and the potential game changing opportunities of digital therapeutics. Buy. Important Disclosures & Regulation AC Certification(s) are located on page 5 to 6 of this report. Roth Capital Partners, LLC 888 San Clemente Drive Newport Beach CA Member FINRA/SIPC

2 VALUATION We continue to rate FIT a Buy and see upside to our $8 PT, 1x EV/2018E Sales with continued product execution and behind the scenes development of its digital health migration. Trading at ~0.5x EV/2018 sales, clearly investors are giving limited opportunity or benefit of the doubt to FIT. In contrast to ~30 months ago, shares of FIT traded at 4x EV/Sales. Yes, market expectations called for more robust growth (30+%) and there was abundant euphoria for wearables and smartwatches in the afterlaunch period of the Apple Watch; however, FIT trades like a broken Consumer Electronics company with limited prospects. The valuation is similar to PC companies during difficult periods and broken handset and smartphone companies, i.e., Motorola in At a minimum, we believe the Street has failed to recognize the balance sheet (~$3 in net cash per share), the brand, and the loyal and valuable installed base of 25+ million daily users (60 million installed base). We believe that with commercial success around smartwatches and visibility to the model and monetization strategy the ecosystem, data, and especially digital therapeutics, investors will revalue shares of FIT. Given that these strategies are nascent we remain cautious, but see limited near-term downside. We see upside to the $8 range (1.0x EV/2018E Sales) as channel inventory is worked down, new product cycles emerge (smartwatch) and the market conditions and outlook improve. Impediments to achieving our price target include growth of the overall wearables category, particularly smartwatches and stabilization of fitness trackers. Competition and pricing also remain key factors from both high solutions at Apple, as well as lower end competition from Chinese OEMs. Additionally, the company needs to establish modest success with its ecosystem and to continue to develop partnerships and solutions in key digital therapeutics markets. RISKS Gross Margins: Gross margins, while more modest that prior expectations and results (now mid 40 s vs high 40 s) will continue to pose a risk. Each 100bp swing translates to $0.07+ EPS. Past history in PCs, smartphones and other consumer electronics indicates that this level of profitability is not sustainable over the long-term. However, we note several factors; 1) The market still remains in the early stages of development with ~20% penetration in the US and < 5% internationally. Additionally new product cycles, such as smartwatches are even less penetrated. 2) Scale is a huge factor for gross margin vitality. Fitbit remains the largest vendor in wearables (slightly ahead of Xoami and Apple). We expect fitbit will remain a top three scale leader. 3) OS and ecosystem can defend gross margins similar to smartphones where the value shifted from OEMs and operators to the operating systems and resulting ecosystem. Market share and Competition: On the surface of IDC fitness tracker and wearable estimates, fitbit s market share has declined to 12% in the most recent quarter. However, adjusted for sell-through we estimate FIT share at ~16%, down from 19% (adjusted) in 2016, but posied to further recover with the Ionic smartwatch introduction in October. We believe the brand recognition and product performance, will keep fitbit a market leader in wearables and fitness trackers, in our opinion. Success in new product cycles (Smartwatch): Technically, until the Ionic, fitbit had not offered a true smartwatch (According to IDC, a smartwatch must support third party app downloads). However, pre-ionic watches have done well (Surge and Blaze). We believe early customer and critic review have been positive as has Ionic sell-throughoverall, we believe FIT will be well positioned for success and to take on market leader Apple, but note that its near-term product portfolio remains limited. OS and Ecosystem: There is tremendous risk in the OS and ecosystem. At present, Apple s Watch OS and Googles Wear 2.0 have early traction and time to market advantages (Apple via the Apple Watch success, over 50% share in 4Q17 (IDC), and Google with early adoption from several OEMs). Fitbit will need to build a developer community and leverage its installed base quickly, in our opinion. The risk of losing the OS Page 2 of 6

3 and ecosystem wars is to be relegated as a low margin hardware vendor. We believe the company is well positioned with the early performance of the first generation Ionic and 1,400 person developer community. Burning cash: While the company has yet to achieve sustained positive EBITDA since the 2016 swoon, Fitbit has reduced discretionary marketing costs and firmed its overall op-ex structure. The result was a conclusion to 2017 with ~$680M in cash on the balance, plus another $80M in tax rebates (this compares to earlier year expectations of cash below $600M including working capital). Despite 2018 weakness, the company has targeted achieving EBITDA break-even. Digital Health/Therapeutics Strategy: It remains early days for the digital health strategy. While nascent, there is no assumption built into our model related to contribution on this front. However, we believe that success and strength in this vertical can drive a strong brand/channel, sustainable user base, and long tail on the lifetime value of users. We believe more elements to this strategy will become available over the next 12 to 18 months and could translate to hundred s of millions of annual recurring sales. COMPANY DESCRIPTION Fitbit is a pioneer and leading provider of fitness tracker, smartwatch and other wearable solutions. The company has shipped over 70M devices and maintains an active base of 23+M users. Additionally, with new sensors and technology featured in the Ionic, Fitbit can track and monitor physiological data such as heart rate which can be used with partners to improve healthcare outcomes and overall patient care. Page 3 of 6

4 FitBit Inc Fiscal Year Ends December Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Income Statement 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E E 2019E Revenue , , , , ,714.1 COGS (1) , ,013.5 Gross Profit R&D S&M G&A Operating Income (62.0) (38.5) (69.2) (71.2) (9.5) 16.8 (36.3) (23.0) (0.2) (6.1) (88.3) (133.0) (39.2) Amortization Non-recurring Costs (9.2) Operating Income (reported) (91.4) (63.4) (27.6) (18.7) (92.7) (95.5) (35.5) (11.3) (62.4) (49.1) (28.3) (7.7) (112.5) (201.1) (235.0) (147.5) Net Interest (1.0) Other (0.7) (59.2) EBT (89.8) (62.9) (27.1) (14.8) (90.9) (91.1) (33.3) (9.1) (60.3) (46.9) (26.1) (5.5) (109.3) (194.6) (224.4) (138.8) Income Tax (29.7) (4.7) (0.6) 23.6 (0.7) (2.2) (18.1) (14.1) (7.8) (1.6) (6.5) (41.6) Net Income (60.1) (58.2) (113.4) (45.5) (90.3) (114.7) (32.6) (6.9) (42.2) (32.8) (18.3) (3.8) (102.8) (277.2) (244.5) (97.2) Share (Basic) Shares (FD) EPS (Basic) - GAAP ($0.27) ($0.25) ($0.48) ($0.19) ($0.38) ($0.47) ($0.13) ($0.03) ($0.17) ($0.13) ($0.07) ($0.01) $0.75 ($0.47) ($1.19) ($1.00) ($0.38) Pro Forma EPS (FD) ($0.15) ($0.08) $0.01 $0.03 ($0.21) ($0.22) ($0.02) $0.05 ($0.10) ($0.06) $0.01 $0.06 $1.07 ($0.12) ($0.19) ($0.40) ($0.09) % of Sales Gross Margin 40.0% 43.0% 44.9% 44.2% 42.3% 40.9% 41.1% 41.0% 40.0% 40.5% 41.0% 41.5% 48.5% 39.3% 43.4% 41.2% 40.9% R&D 23.6% 19.2% 18.1% 13.4% 30.1% 24.0% 18.8% 13.4% 22.0% 19.8% 16.7% 13.4% 7.1% 12.6% 17.7% 19.7% 17.3% G&A 8.4% 7.3% 6.9% 4.5% 12.4% 8.5% 6.7% 4.6% 7.7% 6.9% 5.9% 4.6% 3.8% 4.9% 6.4% 7.2% 6.0% Op Inc (normalized) (20.7%) (10.9%) 1.0% 1.4% (27.9%) (23.8%) (2.5%) 3.0% (11.1%) (6.2%) (0.1%) 3.5% 20.1% (0.3%) (5.5%) (9.0%) (2.3%) Net Inc (20.1%) (16.5%) (28.9%) (8.0%) (36.4%) (38.3%) (8.6%) (1.2%) (12.9%) (8.8%) (4.2%) (0.7%) 9.0% (4.7%) (17.2%) (16.5%) (5.7%) % Change Revenue (40.8%) (39.8%) (22.1%) (0.5%) (17.1%) (15.3%) (3.7%) (2.7%) 31.9% 24.1% 16.4% 3.6% 149.3% 16.8% (25.5%) (8.3%) 15.8% Op Inc (267.3%) (191.4%) (94.3%) (105.2%) 11.6% 84.7% (333.2%) 106.1% (47.5%) (67.7%) (97.6%) 21.3% (17.0%) (101.6%) % 50.7% (70.6%) EPS (252.0%) (166.7%) (92.4%) (104.6%) 39.8% 175.0% (252.4%) 113.9% (55.1%) (73.9%) (123.0%) 6.7% 91.1% (111.2%) 59.9% 108.4% (77.7%) Source: SEC filings, company reports and ROTH Capital Partners (1) Adjusted for $12M Wynit bankruptcy reversal Pro Forma EPS reflect adjusted tax rate of 25% in 2018 and 30% in 2019 Scott W Searle, CFA ssearle@roth.com (646) Page 4 of 6

5 Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Disclosures: ROTH makes a market in shares of Fitbit, Inc. and as such, buys and sells from customers on a principal basis. Shares of Fitbit, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month. Distribution of IB Services Firmwide IB Serv./Past 12 Mos. as of 08/02/18 Rating Count Percent Count Percent Buy [B] Neutral [N] Sell [S] Under Review [UR] Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12- month price target. Ratings System Definitions - ROTH employs a rating system based on the following: Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least 10% over the next 12 months. Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return between negative 10% and 10% over the next 12 months. Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciate by more than 10% over the next 12 months. Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of the prior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be relied upon for UR-rated securities. Not Covered [NC]: ROTH does not publish research or have an opinion about this security. Page 5 of 6

6 ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright Member: FINRA/SIPC. Page 6 of 6