Category Archives: Q1 2015

Thoughts on the Fitbit IPO filing

Fitbit, the company that makes a variety of fitness trackers, has filed for an initial public offering with the SEC, and its S-1 filing contains lots of financial and operating data for the past several years. There’s plenty here to dig into, but I want to focus specifically on the user numbers and what they suggest about abandon rates of these devices.

Revenues and margins

The first thing to note is that the headline financials look extremely good. Revenue growth is very strong, especially over the last couple of quarters (note that this is 4-quarter trailing revenue, to smooth out cyclicality):

Trailing 4 quarter revenue $mAs you can see, Fitbit’s revenues have risen from just over a quarter of a billion dollars per year in 2013 to almost a billion in the last four quarters, which is phenomenal growth. And it’s doing this without losing money – in fact, it’s enormously profitable (note that these margins are adjusted for the negative impact of the recall of the Fitbit Force in late 2013):

Fitbit adjusted marginsAs you can see, the company has very healthy net, operating and gross margins, which show no signs of falling. These revenue growth and margin metrics help to explain why the company is going for an IPO now – the numbers are very, very good. I would suggest that the launch of the Apple Watch also creates a trigger for this event: it both brings welcome attention to the sector, while threatening the concept of dedicated fitness trackers, so now is in some ways the perfect moment to IPO, while the sector is hot but before Apple’s entry causes problems. Perhaps even more importantly, the sector is only beginning to feel the effects of the Shenzhen ecosystem, and Fitbit today still clearly commands a significant price premium for its devices, one that will be increasingly difficult to maintain as cheap Chinese trackers enter the market.

User numbers and abandon rates

Definitions

To my mind, however, the various user numbers Fitbit reports were far more interesting, especially for what they suggest about how long people use Fitbit devices for after they buy them. Fitbit reports two different user numbers: registered users (reported on a fairly patchy basis) and paid active users (PAUs). The latter number is not quite what it sounds like, and that’s important here. Based on the definition in the S-1, a user only has to meet one of these three criteria within the preceding three months to qualify:

  • “[have] an active Fitbit Premium or FitStar subscription”
  • “[have] paired a health and fitness tracker or Aria scale with his or her Fitbit account
  • “[have] logged at least 100 steps with a health and fitness tracker or a weight measurement using an Aria scale.”

In other words, this is really just a measure of active users, incorporating those with paid subscriptions, those who have recently activated a device, and those who have recently used a device (with no double-counting). The only users that are excluded would be those who only use Fitbit’s dashboard without also using a Fitbit device (e.g. those manually entering activity or calorie consumption data).

Registered users vs. device sales

Let’s start with registered users (which is not defined but which I assume simply means those that have created an account at some time in the past). The first interesting comparison is looking at registered users against the total number of devices sold over time:

Registered users vs cumulative sales

What you see here is that the total number of registered users tracks very closely to the number of cumulative devices sold. In some ways, that’s not terribly surprising, but of course one important conclusion is that very few of Fitbit’s users have ever purchased more than one device. The difference between the two numbers at the four points in time we have available grows from under 500,000 to around 2 million over time. That’s probably not a bad proxy for the number of people who have bought more than one Fitbit device over time (though it’s not perfect – some may have bought more than two). That’s actually very small in the grand scheme of things – only about 10% of the total number of devices would have been sold to people who already had one.

Registered vs. active users

Let’s turn now to comparing registered and active users – if registered users are those who ever had a device, and active users are those still using one (plus the small number using a paid subscription), then this is a good indicator of the abandonment rate:

Registered paid users and cumulative salesAs you can see, the number of active users is far smaller than the number of registered users when added to that same chart. In the chart below, I’ve shown PAUs as a percentage of registered users at the four points in time where we have both numbers:

Paid users as percent of registered usersThe number bounces around at about 50%, rising or falling a little over time but remaining remarkably constant. In one sense, that’s obviously fairly bad news – in addition to the fact that very few Fitbit buyers purchase a second device, it would appear that half of those who bought one stop using it after a period of time. However, there’s a flip side to this, if you’re looking for a silver lining, which is that the number isn’t falling over time. In other words, over two years ago, the number was 50%, and it still is. I’m actually a bit surprised by this, because all the early abandoners should still show up in the numbers and drag the overall retention rate down, but that doesn’t seem to be happening. What’s interesting is that this correlates closely with a survey I did last year about fitness trackers. The key question here was the individual’s experience with fitness trackers:

Fitness tracker survey

As you can see, the 50% abandon rate suggested by the Fitbit numbers closely mirrors the results of the survey, with a 9%/11% split between former users and current users.

Recent device sales and active users

Another way to look at all this is to compare device sales and paid users (which was the first thing I did when the S-1 was released). We’ve already looked at the relationship between cumulative device sales and the active user base, but let’s drill down a bit. The chart below compares PAUs (in blue) with device sales over the prior 6, 9, and 12 month periods:Measures of base sizeThe line that correlates most closely with PAUs is the 6-month device sales number. This suggests that this may be a good estimate of how long people hold onto their Fitbit devices on average. That doesn’t mean every user abandons their device after six months – some clearly hold onto them a lot longer, while others likely abandon them more quickly.

What does this mean for Fitbit’s prospects?

We talked at the beginning about how well Fitbit is doing financially. It’s selling over 10 million devices per year at this point, growing rapidly, and making good margins on them. So, how important is this abandon rate information to our evaluation of Fitbit’s prospects going forward? Well, one could argue that at just 10 million sales per year, there’s tons of headroom, especially as Fitbit expands beyond the US (the source of around 75% of its revenues today). But in most consumer electronics categories, there’s a replacement rate for devices, which continues to drive sales over time even as penetration reaches saturation. The biggest worry in the data presented above is twofold: one, very few Fitbit buyers have yet bought a second device; and two, many don’t even use the first one they bought anymore. Once Fitbit maxes out its addressable market, it’s going to have a really tough time continuing to grow sales.

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.

Thoughts on Comcast’s Q1 2015 earnings

Comcast’s results today were notable for a significant transition that’s about to happen: this was likely the last time Comcast will report more TV customers than broadband customers:

Screenshot 2015-05-04 10.57.34As of the end of March, the two numbers were just 6,000 apart, so next quarter the two will have crossed over, and Comcast will have more broadband than TV subscribers. This is a hugely symbolic moment for a cable company, but Comcast is far from the first to make this transition – in fact it’s the last of the major public cable operators to do so:Screenshot 2015-05-04 11.10.55 Continue reading

Thoughts on Twitter’s Q1 2015 earnings

Twitter’s earnings last night were something of a mess. Revenue fell short of the company’s forecasts, user growth was nothing special, two previous metrics were retired and two new ones introduced which don’t look great right now, and to top it off, the earnings report was accidentally posted before the market closed. Last quarter, I said this about Twitter’s results:

…there are three main growth drivers for [companies like Twitter]: user growth, increased engagement, and better monetization of that engagement. Twitter’s problem continues to be that only one of these three is going in the right direction… User growth has been slowing significantly over the past two years, and especially over the last few quarters. This quarter the company added just 4 million MAUs (or 8 if you’re charitable and give them back the 4 million additional MAUs they claim they lost to an iOS 8 bug). Even at 8 million, that’s by far the slowest growth in several years. Engagement, meanwhile, as measured by timeline views per MAU, has also been stagnant or falling for several quarters. The only metric moving in the right direction is monetization, and boy is it moving in the right direction!

I’ve often used these three metrics – user growth, engagement, and monetization – as a framework for evaluating Twitter’s earnings, and in Q4, only one was moving in the right direction. In Q1, however, even monetization stumbled, leaving the company without a single improving metric among the three. Let’s quickly review the key metrics here. Continue reading

Thoughts on Apple’s Q1 2015 earnings

Apple’s earnings came out today, and as ever the total revenue, profit, and iPhone shipment numbers, as well as Apple’s enormous and growing pile of cash were major focus areas for people covering the company. However, I always like to look under the hood a little at some other numbers others might not be so focused on. So here, in no particular order, are a few of those second-tier numbers you might not have seen reported on elsewhere.

One quick note: here, as in all my analysis, I use calendar quarters rather than an individual company’s fiscal calendar in my charts and comments, so bear in mind that in what follows I’m talking about the first calendar quarter of 2015 when I say Q1 2015, and so on.

iPhone average selling prices

iPhone average selling prices have largely moved in one direction over the last several years, as Apple has kept older iPhones on the market longer: downwards. However, what we started to see last quarter was a reversal of this trend, and it continued this quarter. This chart shows a separate line for each year for the last five calendar years, which allows you to see how things have changed over time more easily, given the cyclical nature of this business:
Screenshot 2015-04-27 14.40.17 Continue reading

Comparing Microsoft and Amazon’s cloud businesses

Amazon finally provided the first direct visibility over the finances associated with its AWS business today, and it provides an opportunity to compare them with one of the other two big enterprise cloud businesses which compete with it, Microsoft’s. Microsoft doesn’t explicitly report its cloud revenues, but “Commercial Cloud” is one of a number of revenue categories it provides enough detail around in its 10-Q to allow us to calculate it with some accuracy. Here, then, is a comparison of Amazon’s AWS revenues and Microsoft’s Commercial Cloud revenues over the same five quarters:

Screenshot 2015-04-23 18.09.34As you can see, the two are almost neck and neck at this point, with Microsoft’s cloud revenues catching up to Amazon’s over time. It seems likely that they will pass AWS revenues in the next couple of quarters. But the obvious problem with this chart is that they’re not measuring the same thing: AWS is a discrete business, largely focused on public cloud services, whereas Microsoft’s revenues reflect several quite different businesses that it’s lumped together under this heading. However, this reflects something I wrote about last quarter, which is that Amazon would actually quite like to have a cloud business that looks more like Microsoft’s:

It continues to be critical for both companies (and Google) to migrate their way up the cloud stack to the higher-layer services (as both I and Nadella called them), but Microsoft is already there, while Amazon continues to try to compete in a space I’m really not sure they can.

Where the two businesses overlap, Amazon’s is certainly quite a bit larger, but Microsoft’s cloud business looks a lot like the kind of business Amazon is trying to build, and quite rightly. The kind of business Amazon is in today is rapidly commoditizing, and its chances of moving up the stack are much slimmer than Microsoft’s, which has a much longer history in this space and a massive legacy customer base to migrate over to it.

One other thing we don’t know about Microsoft’s cloud business is its profitability. It sits within the Commercial Other category at Microsoft, which reports gross margins of 41% last quarter, but those margins have been rising rapidly as Microsoft builds scale in this business. Amazon’s operating margins on AWS, meanwhile, are far higher than in its core e-commerce business, but they appear to have fallen quite a bit year on year, likely reflecting that commoditization and the increasing competition in this space. I’m not sure Amazon will be able to turn those margins around in the near future unless it is able to execute that transition to higher-stack services and therefore better differentiate its offerings. Microsoft’s trend currently looks healthier on both the revenue growth and margin side. And of course Microsoft has quite a few other more profitable segments to lean on while it builds this business, whereas Amazon continues to struggle to break even in its core business.

 

Yahoo’s tiny, slow-growing mobile business

We’ll have to wait for the transcript to be sure, but Marissa Mayer must have described Yahoo as a mobile-first business a dozen times or so on the earnings call this afternoon. However, as Yahoo has also been quantifying its mobile business lately, we have some hard numbers to evaluate this claim by, and they’re not all that good at backing up her repeated claim.

First, here’s mobile as a share of revenues for Yahoo, as compared with Facebook and Twitter. Yahoo’s number is expressed as a percentage of what it calls “traffic-driven revenue”, while Facebook and Twitter’s are as a percentage of ad revenue, which likely means much the same thing:

Yahoo mobile ad percentagesYahoo’s percentage is clearly growing somewhat, but not very fast, and it’s clearly light years behind Facebook, which began life as very much a desktop business, or Twitter, which has arguably always had a mobile-centric approach, especially to advertising. Those are mobile-first businesses: it’s hard to argue on this basis that Yahoo is.

Another way to look at things is revenue:

Yahoo mobile ad revenuesHere, fledgling Twitter, which had just $20 million in revenue in Q1 2011, has already passed Yahoo and seems to be lengthening its lead. Facebook, meanwhile, is in a whole different league, and also growing much more rapidly. Again, Yahoo is clearly no mobile powerhouse just yet, and at these growth rates it’s just going to get left further and further behind.

If Yahoo is taking a mobile-first approach to product development, that’s clearly a good thing, and it certainly seems to be the case. But a company that has over 80% of its business tied to the legacy desktop world has a long way to go before it can call itself a mobile-first company.

Thoughts on Verizon’s Q1 2015 earnings

Verizon reported results this morning. In listening to the call and reviewing some of my numbers, I was struck my the fact that Verizon is in the midst of several important transitions. I’ll highlight three here today:

  • Converting the phone base to smartphones
  • Converting the phone base to installment billing
  • Converting broadband subs to FiOS

Each of these three transitions is largely about moving a portion of Verizon’s base from one thing to another, rather than about growth per se, but each has a financial impact, and two of the three are accompanied by new growth opportunities.

Converting the phone base to smartphones

The first transition is converting the phone base to smartphones, and specifically to 4G LTE smartphones. Here’s what that process looks like at Verizon Wireless:

Converting base to smartphonesAs you can see, the total number of phones isn’t really growing much (in fact, Verizon lost phone customers in Q1). But smartphones within the base, and especially 4G smartphones, are growing very rapidly. The financial impact here is that smartphone owners, and 4G smartphone owners in particular, consume lots more data. In a world where almost every plan includes unlimited text and voice, the path to growth from these customers is increasing data usage, and getting them on a 4G smartphone is the best way to do that. This growth opportunity will last for another couple of years at least – there are still 11 million 3G smartphones and 17 million basic phones in the base to convert. But at some point it will come to an end. Continue reading

Thoughts on Neflix’s Q1 2015 earnings

I’m kicking off the Q1 2015 earnings season (past earnings posts here) with a post on Netflix, just as I did last quarter. I’ll also be doing an updated deck for subscribers to the Jackdaw Research Quarterly Decks service. Having done a pretty broad run-down last time around, I’m going to focus on three things this time around:

  • Subscriber growth, especially in the domestic streaming business
  • Profitability of the US streaming business
  • Profitability of the other two businesses.

Subscriber growth in the US becomes ever more cyclical

As I said last time around, subscriber growth in the US is likely to slow down over time as the service reaches later adopters and much of the lower-hanging fruit is already harvested. However, Netflix had a really good quarter for net additions in Q1, and year on year additions were flattish compared to last quarter rather than down dramatically too:

Quarterly net addsYear on year sub growthSo what happened? Was I wrong about the long-term trend? Actually, no. What’s happening is that Netflix’s domestic subscriber growth in particular is becoming increasingly cyclical, driven heavily by new series launches in Q1 and lower in every other quarter. This is easier to see in this quarterly chart showing just US streaming subscriber growth: Continue reading