Behind Fitbit’s Focus on Profit Margins
Fitbit’s profit margin
In 2Q17, consumer technology firm (QQQ) Fitbit’s (FIT) gross margin rose 100 basis points YoY (year-over-year) to 43%, driven by product mix, higher average selling price, and lower warranty expenses. Fitbit’s management stated that its gross margin would have been higher if price protection for its Flex 2 device and tolling write-offs had been excluded in 2Q17.
Although operating expenses fell 10% YoY in 2Q17 to $212.65 million, it was insignificant compared with its revenue fall of 40% YoY. Fitbit lowered its spending sales and marketing expenses by 15% YoY to $118 million in 2Q17. The firm reported an operating and earnings loss for the second-straight quarter.
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Shift to low-cost location
In order to offset declining sales, Fitbit wants to focus on improving its profit margin. The company has ramped up spending on R&D (research and development) over the past two years to build and launch the Ionic. Fitbit is also likely to increase marketing expenses in 4Q17 to generate consumer interest for this much-awaited smartwatch.
Last December, Fitbit bought a small Bucharest-based smartwatch company, Vector. Fitbit believes the engineering talent in Bucharest is comparable to that in San Francisco and available at one-third of the total cost. Fitbit CFO (chief financial officer) William Ferrell stated: “Our goal is, over time, to have a more distributed engineering organization that can better deliver…engineering resources at a more cost-effective price.”
The office at Bucharest initially had 32 employees last year. This number has now increased to 80 employees, and Fitbit expects the number to reach 150 by the end of 2017 and 300 by the end of 2018.