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Fitbit Face-Plants After Giving Weak Q1 Guidance, User Numbers

Fitbit ( FIT ) stock fell off the treadmill Tuesday, a day after the maker of wearable fitness devices reported better-than-expected fourth-quarter results, but guided Wall Street much lower than expected for the current quarter. Fitbit shares were down 19%, near 13.40, in midday trading on the stock market today , and at least five investment banks downgraded their rating on the company. Fitbit stock hit its all-time low of 12.90 on Feb. 11, after the company went public in June at 20 a share and peaked in August near 52. Several analysts downgraded the stock or cut their price targets after the San Francisco-based company late Monday posted Q4 earnings and gave Q1 and full-year 2016 guidance. In Q4, Fitbit earned 35 cents a share, excluding items, on sales of $712 million. Non-GAAP earnings per share rose 67%, and sales jumped 92% on a year-over-year basis. Analysts polled by Thomson Reuters expected 25 cents ex items on sales of $648 million. But for the current quarter, Fitbit is targeting non-GAAP earnings per share of 1 cent on sales of $430 million, at the midpoint of its guidance range. Analysts were modeling 23 cents and $485 million. Fitbit’s New Products Out In March Fitbit Chief Financial Officer Bill Zerella said Q1 is a product transition quarter, with the launch of the Fitbit Blaze smart fitness watch and Alta fitness wristband in March, as well as the discontinuation of the Fitbit Charge. Fitbit expects to incur higher sales and marketing expenses because of the global product launches, plus additional manufacturing expenses to maximize production of the new products. Piper Jaffray analyst Erinn Murphy downgraded Fitbit stock to neutral from overweight and slashed her price target to 14 from 24. The outlook for Fitbit’s new products is cloudy, and the company faces tough year-over-year comparisons in the second half of the year, she said in a research report. Pacific Crest Securities analyst Brad Erickson downgraded Fitbit stock to sector weight from overweight. He cited the risk of hardware commoditization and poor user metrics as reasons for the change. “We see little likelihood of dispelling anytime soon the longer-term bear thesis of slowing growth, pricing pressure and longer-term commoditization,” he said in a report. Fitbit is looking like the next GoPro ( GPRO ), a hardware company facing market saturation, slowing growth and margin and earnings erosion, he said. Erickson is also concerned about active-user trends. Fitbit added 18 million new registered device users in 2015, of which 13 million, or 72%, were active users at year-end. Erickson says Fitbit stock has a fair value of 14. Cowen analyst John Kernan reiterated his market perform rating on Fitbit stock but axed his price target to 19 from 41. FBN Securities analyst Shebly Seyrafi maintained his outperform rating but cleaved his price target to 25 from 50. Sterne Agee CRT analyst Rob Cihra kept his neutral rating on Fitbit and price target of 18. To turn things around, Fitbit needs to show leverage in the corporate wellness market, improve customer retention, and come out with new products with breakthrough sensors. Despite shipping over 30 million devices in the past two years, Fitbit ended 2015 with 16.9 million active users. “This kind of ‘churn’ is likely just natural and systemic to the health/fitness market, as some Fitbits ending up in drawers seems comparable to well-intentioned health club memberships that don’t get used,” Cihra said in a report. Fitbit faces competition from makers of dedicated fitness products such as Garmin ( GRMN ) and Under Armour ( UA ), but also from makers of smartwatches with fitness features such as Apple ‘s ( AAPL ) Apple Watch.

MWC: Apple Rivals Prep Waterproofing, Dual-Cam, Force Touch Display

Apple ’s ( AAPL ) rivals aim to get a jump on the upcoming iPhone 7 at the Mobile World Congress in Barcelona, strutting out new smartphones with some of the features that have been linked to Apple’s plans. “We find the improvements in rival smartphones — better display, slimmer camera modules, dual cameras, waterproofing, more (memory) and high-speed charging — a preview of the fall iPhone 7 launch,” Jeffrey Kvaal, a Nomura Securities analyst, said in a research report. The  iPhone 7 has been rumored to feature waterproofing for the first time. Apple does not officially take part at the MWC, but the company casts “a lengthy shadow” nonetheless, Kvaal added. Samsung on Sunday rolled out the Galaxy S7 and Galaxy S7 Edge. The handsets boast sleek designs with advanced camera features, water resistance and external memory. Sony ’s ( SNE ) Xperia X Performance also features waterproofing. At Citigroup, analyst Jim Suva wrote:  “While Apple does not participate in MWC, there was no lack of apps, software, and hardware support for the iPhone.  We were surprised that even Apple’s largest competitors commented that Apple is likely working on some very innovative and easy to use future enhancements. Thus the rush to launch competing products before Apple’s big September launch.” According to another Citigroup report, based on observations at the MWC, dual cameras also are becoming a standard feature. LG’s G5 and the ZTE Axon Elite are expected to feature dual cameras as well as new devices from Huawei and Xiaomi, says Citigroup. Apple’s rivals, though, are still playing catch-up in fingerprint security technology, such as its  pressure-sensitive “Force Touch” display, which uses technology known as “haptic feedback.” Citigroup forecasts that 19% of smartphones will use haptic technology in 2016 and 25% in 2017.

AT&T, T-Mobile Step Up Prepaid Wireless Battle Amid Economy Worries

The one-fifth of U.S. mobile phone users that buy prepaid wireless services stand to get much better data deals as AT&T ( T ),  T-Mobile US ( TMUS ), and Sprint slug it out. “The prepaid market is heating up with surprising deals,” said Roger Entner, chief analyst at consulting firm Recon Analytics. So-called postpaid wireless subscribers historically got the most bang for their money. Postpaid subscribers had two-year service contracts and were billed monthly. Service contracts have been phased out recently along with retail subsidies for Apple ( AAPL ) iPhones and other high-end smartphones. Most postpaid subscribers now buy phones in monthly installment plans. Prepaid customers, who typically bought less pricey phones upfront, generally were provided slower data services. But that’s changing. “Prepaid users are getting more 4G data at cheaper rates than ever,” Entner said. “When you look at the fighter brands (Cricket and MetroPCS, the most aggressive), you see the old days of prepaid being more expensive (per megabyte) than postpaid are gone.” Entner says MetroPCS customers get unlimited voice calls, texting and 3 gigabytes of 4G data for $40. A similar deal at Cricket provides 2.5GB of data. T-Mobile sells prepaid services under the MetroPCS brand, while AT&T has Cricket. AT&T acquired Leap Wireless and its Cricket brand for $1.2 billion in March 2014. Since then, AT&T has stepped up Cricket advertising while opening more retail stores. AT&T has expanded Cricket’s marketing reach through deals with Wal-Mart ( WMT ), Target ( TGT ) and GameStop ( GME ). T-Mobile acquired prepaid specialist MetroPCS in 2013 and has kept the brand alive. Both T-Mobile and AT&T, by coincidence, said they added 469,000 prepaid subscribers in the December quarter, while Verizon Communications ( VZ ) shed 157,000 and Sprint ( S ) lost 491,000. Some of Sprint’s prepaid subscribers upgraded to postpaid plans. On T-Mobile’s Q4  earnings conference call Feb. 10, CEO John Legere said that he expects the prepaid battle to heat up. “We’re killing it in prepaid,” Legere said. T-Mobile also sells prepaid services under the Boost Mobile and Virgin Mobile brands. “The majority of our growth is on MetroPCS, as opposed to our other brands,” Legere said. “Cricket has had some success, but AT&T is bleeding postpaid subscribers. We see MetroPCS’ main target not to be Cricket per se but to be Sprint. And I think you’ll see a lot more competition between MetroPCS and Sprint.” AT&T has lost postpaid phone subscribers for five quarters in a row, including 256,000 shed in Q4. Prepaid, Postpaid Wireless Lines Blur Marketing lines have blurred between the prepaid and postpaid customer segments, analysts say. Many prepaid plans renew automatically every month. Phone financing plans still lock in postpaid subscribers, though it’s easier for consumers to exit deals. “We’ve seen a shift in consumers from low-end, pay-as-you-go type (prepaid) plans to higher-quality plans,” Legere said. Prepaid plans start at around  $25.  America Movil ’s ( AMX ) TracFone subsidiary, with 25.6 million U.S. customers, focuses on the lower-spending part of the prepaid market. TracFone’s growth has stalled, though. Analysts say the prepaid market could be more important strategically if the U.S. economy slows down. Most economists do not forecast a recession in 2016. Some of T-Mobile’s postpaid subscriber growth has come from prepaid users converted to postpaid plans, with monthly installment plans for phone upgrades. Sprint in the second half of 2015 began adding postpaid phone subscribers for the first time in five years, including its Nextel brand. Some of Sprint’s prepaid subscribers also have migrated to postpaid plans. One concern among investors, said Oppenheimer analyst Tim Horan in a 2016 outlook research report, “remains that T-Mobile and Sprint are financing low-credit-quality customers and will get hurt in any potential economic weakness.” In Q4, T-Mobile reported “bad debt expense” of $228 million, up 52% from the year-earlier period. But Craig Moffett, an analyst at MoffettNathanson, says that worries could be overblown. “T-Mobile has never been able to fully shake the perception that its subscriber base is of lower credit quality than that of its peers,” said Moffett in a report. “Those customers would be hard hit in a recession. “The counter-argument is equally compelling. (It) holds that in a recession price sensitivity generally rises and that T-Mobile would actually benefit.” T-Mobile has gained share with its Uncarrier-branded marketing and price cutting. In November, T-Mobile launched “Binge On Demand,” which offers free video streaming. In Q4, T-Mobile added 917,000 postpaid phone subscribers. Verizon added 449,000, while Sprint added 366,000. In 2015, T-Mobile added 4.5 million postpaid subscribers, including about 1 million tablet users, and it added 1.3 million prepaid customers. AT&T lost 1.27 million postpaid phone subscribers, while gaining 1.36 million prepaid subscribers in 2015. “We expect AT&T will continue to be active with prepaid Cricket promotions while focusing on profitable, high-value customers in postpaid,” said UBS analyst John Hodulik in a report. Image provided by Shutterstock .