Fitbit Files for IPO with $5 Billion Valuation, Set to Become First Wearable Fitness Tracker Company to Go Public

Fitbit is an iconic wearable technology company that has captured a significant share of the global market for its fitness-tracking wearable devices in recent years. On May 7, Fitbit filed its S-1 registration statement for an initial public offering (IPO). VCBeat has compiled and translated an article published by Rock Health, a seed fund and startup incubator focused on digital health, to provide an in-depth analysis of the developments surrounding this pioneer’s IPO.

Rumors about Fitbit’s revenue have been circulating within the industry since early last year. Investors have reacted to these figures with mixed responses; some suspect irregularities, while others believe them to be largely accurate or somewhat conservative. Fitbit’s rise is a story rooted in the wearable device sector, a field marked by stark polarization and rife with external misunderstandings, underestimation, and even malicious slander. This article focuses on Fitbit’s recent initial public offering (IPO)—dubbed the “Idiot IPO” by some journalists, yet praised by others for its “surprising profitability.” Fitbit’s S-1 filing has answered questions that have been debated for years, but it also leaves many uncertainties unresolved.

Objectively speaking, Fitbit has presented us with a remarkable growth story. In less than six years since the launch of its first device, and with less than $70 million in financing at the time, the company has grown into an industry leader with billions of dollars in revenue (net income) and a 50% gross margin, becoming a pioneer in the category of “connected health and fitness” trackers. Regardless of how one analyzes its S-1 filing, IPO price, or post-listing price fluctuations, the achievements of James Park and his team at Fitbit should not be overlooked. Park is a determined and visionary founder, yet at the beginning of this astonishing entrepreneurial journey, no one was willing to provide him with funding. Today, however, he and Fitbit stand at the forefront of the IPO wave.

Core Finance



Since launching its first device in late 2009 (a year later than previously promised), Fitbit has experienced explosive revenue growth, achieving a compound annual growth rate of 246% from 2010 to 2014 and reaching nearly $750 million in sales in 2014.Based on its actual revenue in Q1 2015, the growth in average selling price (ASP), and historical holiday-quarter sales, we project Fitbit’s full-year 2015 revenue to range between $1.6 billion and $2.0 billion.

Revenue growth over the past year—and likely extending into 2015—was driven not only by an increase in Fitbit device sales volume but also by a rise in the average selling price (ASP) of its devices. The increase in ASP resulted from a combination of factors: first, Fitbit’s continuous launch of higher-priced product lines (its first non-recalled device with a suggested retail price of $99 debuted in Q4 2014); and second, a proactive shift toward higher-margin distribution channels. (Note: The calculated ASP emphasizes average order revenue per device sold and average ancillary revenue per device sold, both of which are assumed to be negligible.)

Contrary to the expectations of some observers, Fitbit has achieved profitability, with its operating profit reaching $158 million in 2014. Over the past eight quarters, the company’s gross margin—excluding quarters affected by the massive recall of the Fitbit Force—averaged over 48%, while its operating margin averaged above 21% during the same period.These impressive figures help explain why the company has not pursued additional venture capital financing: its internal cash flow is sufficient to sustain its operational activities.

User, Participation and Retention


In its S-1 filing, Fitbit provided limited data on user engagement. Fitbit’s software platform relies on traditional internet metrics, making it unclear from the filing exactly how many users are actively engaged (i.e., daily active users and monthly active users). Most wearable devices are abandoned within six months of launch, which remains the most significant criticism leveled at such devices. In contrast, Fitbit introduced its own metric: Paid Active Users (PAUs). A PAU is defined as a user who has performed any one of the following actions in the past three months: subscribed to Fitbit Premium or FitStar; paired a tracker or scale with their Fitbit account; logged in and recorded at least 100 steps; or logged in and recorded a weight measurement. Fitbit uses the simple ratio of PAUs to Registered Users (RUs) to gauge user retention on its platform (with a higher ratio indicating better retention). In 2014, the PAU/RU ratio was 46%, while in the most recent quarter (Q1 2015), this figure rose to 50%, potentially due to a recency effect from comparing a single quarter against a full year.

However, this does not appear to represent the full picture of Fitbit user engagement. Based solely on this information, we can onlyIt is estimated that there are over 10 million inactive Fitbit devices on the market, accounting for 50% of all devices sold to date., or in other words, more than the total number of all devices sold between 2009 and 2013. Based solely on the S-1 filing, we cannot definitively state that the vast majority of Fitbit devices sold before 2014 are no longer in use; however, few other conclusions seem plausible.



Another approach to examining user engagement on the Fitbit platform is to analyze user churn or negative PAUs. This metric can be constructed by subtracting the change in PAUs from the total number of devices sold during the same period, under the assumption that buyers of these devices become active after purchase and serve as the primary drivers of new PAUs—as opposed to reactivated users or new subscribers. Adopting a perspective focused on negative PAUs or user churn provides a better method for studying Fitbit’s user retention on its platform, although it is not comprehensive. Analysis indicates that in 2014, Fitbit lost 6.8 million PAUs, of which 2.6 million were PAUs acquired before the end of 2013, while the remaining 4.2 million must have been new users added in the first three quarters of 2014 (by definition, PAUs could not churn before the end of 2014 if they were acquired in Q4, as PAUs are measured quarterly). This implies that more than 70% of Fitbit purchasers in the first three quarters of 2014 had churned by the end of that year (calculated based on the revenue distribution of devices sold in Q2/Q3 2014).

How significant is the impact of the aforementioned user churn for a company whose gross margin derives from hardware devices rather than software subscriptions? Consider the iPhone: Apple enthusiasts eagerly chase the latest models during biennial major updates, leaving outdated products to gather dust. For Fitbit, however, the answer may not be so straightforward. Given Fitbit’s relatively negligible sales volume two years prior, it is difficult to assess in 2012 whether users would upgrade to newer models when discarding their old devices. Nevertheless, we can estimate the average number of devices per customer by comparing the cumulative total of devices sold with the total number of registered users. The results show that this figure has been steadily declining as total device sales have increased, gradually approaching 1 (1.09) by the first quarter of 2015. As Fitbit moves out of its period of rapid growth, this metric warrants close attention.

The lack of long-term user engagement and repeat purchases appears somewhat inconsequential in the face of a growing market.By compressing the analysis period to a single quarter, we can clearly see that, at least for now, new user acquisitions exceed churn. In the short term, Fitbit is well-positioned to leverage its competitive advantages and maintain a 50% gross margin by continuing to sell millions of devices. However, the user engagement and retention data in Fitbit’s S-1 filing are the most concerning, revealing serious issues with user retention on its device and software platform, as well as limited ability to drive long-term user engagement. These issues are particularly critical in the healthcare sector: maintaining good health requires sustained habits in diet, exercise, sleep, and other areas—a long-term process rather than a temporary effort. Fitbit has not yet demonstrated that its platform can deliver meaningful health improvements, though admittedly, no other company has achieved this either.

If Fitbit can successfully overcome this challenge, it will transform from an excellent company that rose with the tide into a great one capable of building an iconic consumer healthcare brand. For investors, the question is how long the market will continue to grow at this pace, and whether Fitbit can increase user engagement before wearable devices approach their peak—that is, before annual device sales reach saturation.

Distribution and Marketing

Fitbit clearly ramped up its distribution and marketing efforts in 2014, which helped the company achieve 175% growth last year. In 2014, Fitbit strengthened (or possibly established, as the S-1 filing does not explicitly state) its relationship with Wynit Distribution, marking the most significant change for the company that year. By distributing Fitbit products to retailers such as Costco, Sports Authority, and the Army and Air Force Exchange Service, Wynit’s share of Fitbit’s revenue increased from 10% in Q1 2014 to 13% by the end of 2014, becoming Fitbit’s largest single distributor, followed by Best Buy and Amazon. Fitbit’s top five distributors accounted for approximately 50% of the company’s total revenue, helping its products reach more than 45,000 retail stores across over 50 countries.

Many studies have focused on the use of activity trackers in corporate wellness programs. Although Fitbit considers corporate wellness programs one of the five major levers for business growth, its S-1 filing provides no insights into its success in this market, beyond mentioning that the company received its first corporate wellness order for 1,000 units as early as 2010. It does not even disclose the name of the pioneering buyer. While it remains unclear how many Fitbit products are sold through this channel, the features highlighted in its IPO prospectus—such as employee onboarding, leaderboards, reporting, and analytics—underscore the importance Fitbit attaches to this market.

If you have recently flown with Virgin America or watched the NFL playoffs, you would certainly have noticed Fitbit’s first nationwide advertising campaign, launched in 2014. The company spent $71 million on advertising, which was the primary driver behind its more than 300% year-over-year increase in overall sales and marketing expenditures in 2014 compared to 2013. As Fitbit has stated, it holds a dominant market share in the United States and has established itself as the leading brand in this category. Fitbit’s substantial investment in advertising and marketing underscores the company’s recognition that it must strengthen its consumer presence to not only maintain but also reinforce its leading position in the activity tracker market.

For companies newly entering the wearable device sector, Fitbit’s growth story offers valuable lessons. First and foremost, identifying the right distribution channels and securing suitable partners are absolutely critical to achieving rapid growth. Advertising will play an increasingly important role in building brands within this category. Wearable devices are evolving into a pure consumer electronics segment, where (costly) marketing has historically been a key determinant of competitive success.

R&D and Growth

In describing the year-over-year change in revenue for the first quarter of 2015, Fitbit noted that $233 million of its Q1 revenue came from new products launched in the fourth quarter of 2014, accounting for 70% of total revenue for Q1 2015. This figure is significant because Fitbit has not discontinued its older products, including the Zip, One, and Flex models, whereas all its newly introduced products are positioned at higher price points (above $129) compared to existing offerings. This underscores the critical importance of a steady stream of new product launches, particularly for the holiday season (over the past three years, Q4 sales have averaged 44% of annual revenue). At this stage in Fitbit’s development, a recurrence of an incident like the one involving the Fitbit Force (released in October 2013 and recalled in February 2014 due to skin irritation issues) would be disastrous for the company, with repercussions extending far beyond net income.

Fitbit identifies new products and add-on features and services as its top two growth levers, while also pinpointing brand awareness, global distribution, and corporate wellness as other key growth opportunities. What types of biosensing capabilities will Fitbit develop in its future devices? Although Fitbit allocates approximately 7% of its revenue to research and development (with 10% dedicated to advertising), its S-1 filing makes no mention of any new products. Given that such hardware devices can be rapidly commoditized by competitors, it is crucial for Fitbit to identify relevant physiological parameters for tracking within its core market and to sequentially launch new devices equipped with these sensing capabilities.

Today, Fitbit’s devices can track steps (accelerometer), distance traveled (GPS), heart rate (optical sensors), floors climbed (barometric pressure), sleep duration and quality (accelerometer), body weight (scale), and body fat percentage (scale/bioelectrical impedance). Notably, the company is not limited to wrist-worn form factors—prior to the launch of the Flex in mid-2013, all Fitbit trackers were clip-on or pocket-sized devices, and the company also offers smart scales. We should also not overlook Fitbit’s hiring of biochemist Aaron Rowe, who has previously worked at Scanadu and Integrated Plasmonics. Will Fitbit launch clinical-grade devices in the future? As of its S-1 filing, there are no indications to suggest so.



Fitbit has already recognized many potential risks associated with its growth. In addition to the user engagement and retention issues discussed above, Fitbit’s greatest risk lies in competition from industry peers (the S-1 filing identifies Garmin, Jawbone, Misfit, Under Armour, adidas, Apple, Google, LG, Microsoft, and Samsung as competitors). Fitbit faces competition across multiple tiers, spanning the full spectrum from low-end to high-end products, and even including software-based tracking solutions. To date, Fitbit has achieved considerable success in this highly competitive market, not only outperforming venture capital-backed companies such as Jawbone but also withstanding Nike’s aggressive entry before it launched major advertising campaigns. However, tech giant Apple differs significantly from Jawbone and Nike. The Apple Watch, officially released this spring, covers most of the core functionalities of Fitbit’s entire device lineup while offering a wide range of additional features unrelated to health. The Apple Watch’s potential for success in the activity-tracking sector stems not only from Fitbit’s existing user base—who are likely to switch products given churn rates—but also from the majority of consumers who would never consider purchasing a single-purpose device. Conversely, Fitbit can integrate basic smartwatch functionalities into its devices (for example, the recently released Fitbit Charge includes caller ID).

Valuation

As is customary, Fitbit omitted the expected pricing for its new share issuance in its initial filing documents, leaving a small window for speculators. Its most appropriate competitor appears to be GoPro, a manufacturer of connected wearable cameras. Although GoPro boasted higher full-year revenue ($985 million) at the time of its IPO, the metric preferred by investors seems to be adjusted EBITDA; in this regard, Fitbit’s $191 million was significantly higher than GoPro’s $134 million. Ultimately, GoPro debuted with a market capitalization of $3 billion, which quickly doubled to over $6 billion. Based on this, we are inclined to infer that in the current capital market,$3 billion will be the floor for Fitbit’s IPO, with some valuation metrics predicting it could reach $5 billion (based on revenue multiples from 2015) or even $8 billion (based on price-to-earnings ratio).

Questions for Domestic Wearable Device Startups to Consider

Based on the above information, VCBeat raises several questions worth considering for domestic health wearable device companies:

1. User stickiness remains the most thorny issue in the wearable sector, and Fitbit is no exception. The game will continue as long as new user acquisitions outpace churns. The key lies in striking the right balance.

2. Is it really a good strategy to blindly cut prices or engage in price wars? Why has Fitbit seen increasing sales despite raising its prices?

3. Like other consumer digital products, wearables are heavily influenced by distribution channels in terms of sales volume. How can newly founded smart hardware companies build strong channel capabilities from scratch?

4. After its last round of venture capital financing, amounting to $43 million, in August 2013, Fitbit did not raise additional funds for nearly two years, instead achieving substantial sales revenue. If you cannot break free from a cash-burn model, does this indicate that you have failed to identify a viable profit model? How long can you afford to burn cash before finding one? Do you truly have a clear plan in mind?

Additional Information in the Fitbit S-1 Filing Worthy of AttentionClick here for those interested in studying the original text of the Fitbit S-1 filing.

• Fitbit was initially established as Healthy Metrics Research, Inc. in March 2007




• In March 2015, Fitbit acquired FitStar for $11.5 million in cash and 13.6 million shares (valued at $19.25 per share), of which $7.7 million was contingent consideration; additionally, $5.4 million in cash and stock was allocated as retention bonuses.




• Flextronics is the sole manufacturer of Fitbit devices.




• One of Fitbit's products, “Aria,” is regulated by the FDA.




• Over 20% of Fitbit’s revenue comes from the global market

(Translated by Chen Xin; Edited by Luo Xiaosou)