an evaluation of Fitbit's financial and operating performance as displayed in case of Exhibits 5 and 6, and

276 Part 2 Cases in Crafting and Executing Strategy depreciation, and amortization) to range from suggested that he believed the stock could fall another $400 million to $480 million for the 2016 fiscal year. 50 percent and speculated, "Gradually the market The projections were based on Fitbit's stellar for single-purpose devices (fitness tracker) is head- 2015 fiscal year when annual revenue increased to ing toward zero, and there is nothing FIT can do $1.86 billion from $745 million in 2014 and net earnings to reverse the trend."" In addition, Chowdry com- increased to $175.7 million from $131.8 million in 2014. mented that unlike Apple, Inc., Fitbit does not have a However, 2016 proved to become a much more trou group of developers or a way of generating income as bling year than managment expected. The company's Apple does. Even though the Fitbit tracker products 2016 revenues failed to meet expectations, it recorded a were much cheaper than Apple's ($129 as compared loss of $102.8 million, and adjusted EBITDA fell from to $349 for the cheapest Apple Watch Sport), Apple $389.9 million in 2015 to $30.0 million in 2016. The had an inventory of more products than Fitbit. Activ- company's declining financial performance continued ity tracking is just a feature used by Fitbit, and this during the first quarter of 2017 with its net loss exceeding feature was being used in many other devices by a $60 million for the three-month period ending April 17. variety of companies 2017. Exhibit 5 presents Fitbit's consolidated statements Leerink analysts were cautious about projections of operations for 2014 through the first quarter of 2017. for sales increases at Fitbit and suggested a target The company's condensed consolidated balance sheets price to buy the stock of $18. The analysts suggested for 2015 and 2016 are presented in Exhibit 6. that ongoing sales would likely remain sluggish after initial increases related retailer inventory needs for Analysts' Assessments new products were satisfied. 2 Analysts were becoming concerned about Fitbit's Fitbit's Strategic Inflection Point long-term viability as early as February 2016 when its share price declined by 20 percent by month-end. An Going into mid-2017, James Park and Eric Friedman analyst with Global Equities Research, Trip Chowdry, were confronted with how best to bolster Fitbit's EXHIBIT 5 Fitbit, Inc., Consolidated Statements of Operations, 2014-First Quarter 2017 (in thousands) 2015 2014 First Quarter 2017 $298.942 180.643 118.299 2016 $2.169,461 1,323,557 845,884 $1,857,998 956,935 901,063 $745,433 387.776 357,657 87.785 91,174 30,746 320,191 491,255 146,903 54,167 112,005 33,556 Revenue Cost of revenue Gross profit Operating expenses Research and development Sales and marketing General and administrative Change in contingent consideration Total operating expenses Operating income Interest income (expense), net Other expense, net Income before income taxes Income tax expense Net income 209,678 191,379) 1,096 533 189,750) 129,671) $ 160,079) 958,349 (112.465) 3,156 14 (109,295) 16,518) $ (102.777) 150,035 332.741 77.793 7.704) 552.865 348,198 11.019) (59.230) 287,949 112,272 $ 175,677 199,728 157.929 (2.222) (15,934) 139,773 7.996 $131,777 Source: US Securities and Exchange Commission Form 8-K, Fitbit, Inc. for fiscal 2015: Form 10-K for 2016; Form 10- First Quarter 2017 Case 4 Fitbit, Inc., in 2017: Can It Revive Its Strategy and Reverse Mounting Losses? 277 December 31, 2015 EXHIBIT 6 Fitbit, Inc., Condensed Consolidated Balance Sheets, 2015-2016 Assets December 31, 2016 Current assets Cash and cash equivalents $ 301,320 Marketable securities 404.693 Accounts receivable.net 477,825 Inventories 230,387 Prepaid expenses & other current assets 66,346 Total current assets 1.480.571 Property and equipment, net 76.553 Goodwill 51,036 Intangible assets, net 27.521 Deferred tax assets 174,097 Other assets 10.448 Total assets $1,820.226 Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity Current liabilities Accounts payable $ 313.773 Accrued liabilities 390.561 Deferred revenue 49.904 Income taxes payable 7.694 Total current liabilities 761,932 Other liabilities 59.762 Total liabilities 821,694 Stockholders' equity Common stock & paid-in capital 859,368 Accumulated other comprehensive income 1978) Retained earnings 140,142 Total stockholders' equity 998,532 Total liabilities and stockholders' equity $1,820,226 $ 535,846 128,632 469,200 178,146 43.530 1.355,414 44,501 22.157 12,216 83,020 1.758 $1,519,066 $ 260,842 200.099 44,448 2,868 508,257 29,358 537,615 737,841 691 242.919 981,451 $1.519,066 Source: Fitbit, 1, 2016 10% market standing and turn around the company's rapidly deteriorating financial performance. It was a common comment among analysts that Fitbit needed to be more than a one-product company, Since the activity tracking feature was being used in many other devices by a variety of companies, Fitbit had to think of new uses of the tracker as well as new devices. As one journalist suggested, "Standalone fit- ness trackers are iPods in a world that's moving to After all, Park had recently commented, "The next big leap will come when we tie into more detailed clini- cal research and create devices that can make light- weight medical diagnoses. You look at blood glucose meters today. I wouldn't necessarily say that those are the most attractive or consumer-friendly devices. I would say consumer-focused companies, whether it's us or Apple, probably have an inherent advantage in the future. One possibility for the company was to become a platform-rather than just a product. iPhones. "13