Fitbit Crushes Expectations In Q3, But A Follow-On Equity Offering Drags Its Shares Down

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Following the bell, Fitbit announced its third-quarter financial performance, including revenue of $409.3 million, and earnings per share using normal accounting methods of $0.19. The company’s adjusted profit totaled $0.24 per share.

The results are notably strong. Investors had expected the company to report a far-slimmer $0.10 adjusted per-share profit off of revenue of just $350.97. Shares in the company, however, are sharply lower in after-hours trading, off nearly 9 percent as of the time of writing.

What is going on? Despite a smashing quarter, Fitbit’s equity is getting whacked by what, so far as TechCrunch can tell at current tip, is planned liquidity for current shareholders, a newly announced follow-on offering, and legal friction.

Starting with the legal point, Jawbone and Fitbit have a legal back and forth going, with the latest news being a counterclaim filed by the former. Fitbit has a pending patent infringement case on the books, but Jawbone has denied all allegations…using the fun word “frivolous.” Because everyone likes to go to court.

Here’s what Jawbone had to say:

“Fitbit is knowingly and willfully misusing its patents as part of its efforts to protect its market power. Both in this case and in a concurrently filed case in Delaware, Fitbit alleges that Jawbone infringes three of its patents. The infringement allegations in both lawsuits are plainly meritless, and Fitbit had no reasonable basis for bringing either case.”

Fitbit’s response:

“We have been able to successfully compete in a competitive market by providing consumers with products they want at price points they find attractive. These allegations are unfounded, and yet another misguided attempt for publicity in order to deflect attention from Jawbone’s own lack of performance. Fitbit’s primary focus is and continues to be on delivering innovative products and services that empower people around the world to reach their health and fitness goals.”

The timing of this countersuit isn’t an accident, given the fact that earnings dropped today.

Relating to the liquidity point, here’s the key paragraph:

lockup

A bunch of equity first doodling its way onto the markets is a great way to lower your share price in the short-term. Essentially, the stock that has until now been under lock and key will be salable. That means that employees may sell it. If they do en masse, it could depress the firm’s share price. Or not, depending. Investors, it seems are voting with their own sell buttons.

But that is not all. Fitbit also intends to sell a bundle of new equity. A release put out in tandem with its earnings makes that plain. Here is the crux verbiage:

lol

Investors are likely not enthused at the idea of Fitbit needing, or even wanting, more cash and are, I can presume, not jumping for joy at the implied dilution of their own earnings.

Summing, Fitbit smashed earnings expectations, boosted its to-line guidance to $1.8 billion for the year, and ended the financial period with $575.5 million in cash. All that wasn’t enough to balance out the follow-on offering. Perhaps that’s why Box has made noise that it does not intend to use a similar financial technique as it works towards profitability.