Fitbit numbers revisited and an old trick that works well

I finally had the chance to take a look at Fiibit's 10-k form for 2015.

The company apparently decided to prioritize revenue growth. Compared to earlier guidances of $1.2B~$1.4B for 2015, the company ended up achieving $1.86B! That's almost 150% growth year-over-year growth (again), all the while maintaining a healthy gross margin at 48.5%.

Fitbit's impressive revenue growth

Fitbit's impressive revenue growth

This growth, however, came at a cost: sales & marketing cost grew 3X over 2014 to $332M. They also doubled down on R&D, growing it by almost 3X to $150M. The result is an operational income of $348M and an operational margin of 18.7%, a meaningful drop from last the 21.2% in 2014.

The company's operational cash flow did grow significantly positive to $109M. They also significantly paid down the debt that they accumulated the previous 2 years in preparation for the IPO. This indicates that they are almost 100% sure that they no longer need external funding and the operational cash flow should continue to grow.

Overall Fitbit doubled the devices sold to more than 21m units and grew the active users to 16.8m.

 

Moving to traditional marketing

It's also apparent that while Fitbit relied on words of mouth and community effect to leap frog other competitors in the early years, it's now relying heavily on classical marketing tools to deepen market penetration, e.g. to cover the late adopters that are not the community-type. Interesting enough, this is more well explained in the Risk Factor section of the 10-k:

We have recently begun to spend significant amounts on advertising and other marketing campaigns to acquire new users, which may not be successful or cost-effective.

We have recently begun to spend significant amounts on advertising and other marketing campaigns, such as television, cinema, print advertising, and social media, as well as increased promotional activities, to acquire new users and we expect our marketing expenses to increase in the future as we continue to spend significant amounts to acquire new users and increase awareness of our products and services. In 2015, advertising expenses were $237.0 million, representing approximately 13% of our revenue. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to use our products and services, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing, accurately predict user acquisition, or fully understand or estimate the conditions and behaviors that drive user behavior. If for any reason any of our advertising campaigns prove less successful than anticipated in attracting new users, we may not be able to recover our advertising spend, and our rate of user acquisition may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products and services.

Over all they spent 13% of their 2015 revenue on advertisement. That's a huge jump from previous years. As a consumer brand, Fitbit's marketing expenditure is key to brand value, which is in turn key to the company value. Hopefully it will bring in stronger, longer-term revenues for the years to come.

 

Don't count on subscriptions – one shouldn't!

I've also expressed in various occasions that I don't think Hardware-As-A-Service is a valid model, or at least it's not necessary for a successful hardware startup. Fitbit remains such a proof.

To date, we have derived substantially all of our revenue from sales of our connected health and fitness devices, and sales of our subscription-based premium services have historically accounted for less than 1% of our revenue.

To date, substantially all of our revenue has been derived from sales of our connected health and fitness devices, and we expect to continue to derive the substantial majority of our revenue from sales of these devices for the foreseeable future. In each of 2015, 2014, and 2013, we derived less than 1% of our revenue from sales of our subscription-based premium services. However, in the future we expect to increase sales of subscriptions to these services. Our inability to successfully sell and market our premium services could deprive us of a potentially significant source of revenue in the future. In addition, sales of our premium services may lead to additional sales of our connected health and fitness devices and user engagement with our platform. As a result, our future growth and financial performance may depend, in part, on our ability to sell more subscriptions to our premium services.

Quite evidently, the key to consumer electronics is always good hardware products with great software experiences. Trying to milk consumers in any other way is at best inefficient and at worst back-firing.

 

Conclusion

Overall I think Fitbit is still a role model for hardware startups, despite that the share price and the market cap have suffered a lot recently. Especially when compared to Nest or Oculus, it's a public company that constantly update the data. A hardware entrepreneur should at least do his or her homework by regularly reading their 10-K or 10-Q filings. Much inspiration could be drawn from it.

Last but not the least, I've spoken about the oft-misunderstood defensibility of Fitbit in many occasions, which is a rare network effect in hardware products. Many people asked me: okay, now we know that, but how could we build it?

 

Inspiration for startup business strategy

Well, here's an old blog article (2010) from Fitbit's website « The Magic of 10,000 steps ». You'll see very clearly in the last paragraph of the article that how finding a solid trigger (the number 10,000) and build incentives into it further strengthen the user stickiness and network effect of the product:

Another reason to do it? For most people, it’s convenient, free and simple to do with just a little change to your daily routine. Working towards a 10,000 step a day goal? Good for you! Get motivated with one of our Fitbit groups, like 5k-6k steps a day. Already mastered 10,000? Maybe Active Maintainers is for you.

This is as plain language as it could be when it comes to business strategy. If you still don't feel inspired enough for your own startup strategy, I guess there are many other jobs and lives on earth that might be better for you than being an entrepreneur.

Also refer to:

Some thoughts about correlation: Startups v.s. CDOs

Burn rate and runway – a tale of two startups: Leano and Hardio