Fitbit in rude financial health ahead of IPO

Fitbit has for years been seen as the leader of the fitness-tracker pack but for the first time it has disclosed just what an industry lead it holds.

The San Francisco-based company has fended off competition in wearable wristbands from bigger brands such as Nike with its Fuelband, and other start-ups such as Jawbone with its UP range. Fitbit is responsible for about half of the market for bracelets and belt clips that monitor the wearer's daily activity and sleep.

When the company filed its prospectus for an initial public offering of at least $100m last week, even seasoned observers of the market were taken aback by the strength of its financial results. Fitbit increased its sales almost tenfold in the last two years, from $76m in 2012 to $745m in 2014.

"I was shocked by how high their revenue number was," says Julie Ask, a technology analyst at Forrester Research and fitness buff who has tried out most of the trackers on the market.

Sales tripled to $337m in the first three months of this year ending in March compared with the same period a year earlier. Gross margin - a metric closely watched in the results of consumer electronics companies such as Apple and GoPro, the action-camera maker - also increased from 41 per cent to 50 per cent.

Jan Dawson, analyst at Jackdaw Research, called the growth "phenomenal". "These revenue growth and margin metrics help to explain why the company is going for an IPO now - the numbers are very, very good," he said in a note on Friday.

However, Mr Dawson and others question whether Fitbit can maintain its lead. It now finds itself batting against the world's biggest technology companies, including Apple, Google, Microsoft and Samsung, which are all putting their considerable resources behind their own wearable-device initiatives and digital health platforms.

It also faces increased competition from sportswear including Nike, whose Nike+ app is riding high in the app-store charts, and Under Armour, which paid $475m to acquire popular health app MyFitnessPal in February.

Analysts disagree about how consumer demand for fitness trackers will be affected by smartwatches such as Apple Watch, Samsung's Gear range and others that run Google's Android Wear software.

Ben Wood, analyst at CCS Insight, predicts that the awareness of fitness tracking and wearable devices fuelled by Apple's splashy arrival will create a "rising tide that will lift the whole market", forecasting that sales of Fitbit-style sports bands will double from 40m to 80m between 2015 and 2018.

He says standalone fitness trackers will remain appealing to people who prefer devices with longer battery life than smartwatches or do not want to give up their traditional wristwatch. Within that segment of customers, Fitbit remains dominant.

"Fitbit has taken share this year as Jawbone dropped the ball," he says, referring to the latter's five-month delays in launching its latest UP3 tracker. "Fitbit has been very good at broadening their portfolio of devices."

On the other hand, analysts at NPD predict that sales of activity trackers will peak at 32m devices in the US next year.

"In the short term, Fitbit can say they have health data that other people don't have," says Ms Ask at Forrester. "But nobody knows yet if these fitness wearables are sustainable or go the way of low-end digital cameras."

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The big question for Fitbit is whether its devices can prove as useful as GoPro or as stylish as Beats, to ensure customers keep using them and upgrade as technology for features such as heart-rate scanning and GPS run tracking improves.

Mr Dawson says the company's prospectus's report of registered and active customer numbers suggests that "very few of Fitbit's users have ever purchased more than one device", despite significant upgrades to the trackers in recent months, and that "half of those who bought one stop using it after a period of time".

If customers are not seeing their health improve by using its products, Fitbit may not go the distance.

"Once Fitbit maxes out its addressable market, it's going to have a really tough time continuing to grow sales," Mr Dawson said in a note after the IPO filing was lodged. "This, taken together with the threat of Chinese vendors invading the space with much cheaper devices, reinforces my perception that Fitbit is IPOing at the best possible time from the perspective of its existing owners and investors, but that its future looks much less rosy than its past."

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