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1 Good Sign for Fitbit's Ionic

Fitbit (NYSE: FIT) reported third-quarter results last week, with mixed results translating into a mixed market reaction. Unit sales fell 31% to 3.6 million, but average selling prices (ASPs) jumped 14% to $108.31. The company's core U.S. business grew while the Europe, Middle East, and Africa segment slipped. Shares dipped briefly the day after, and currently still trade around $6.

It's not an exaggeration to say that Fitbit is betting its future on Ionic, its recently launched full-fledged smartwatch that can run third-party apps. Fitbit has scooped up several smaller start-ups in recent years in order to accelerate its smartwatch roadmap, while the broader trend in the wearables market toward multipurpose devices is undeniable. The shift in consumer preferences toward multipurpose devices is crushing demand for single-purpose fitness trackers, and Fitbit's declining unit volumes speak for themselves.

Data source: SEC filings. Chart by author.

The good

With so much riding on Ionic, management provided some encouraging commentary regarding the new smartwatch. When asked about demand, CEO James Park said:

So on Ionic demand, I think we're pretty happy with the initial results of the Ionic launch. And I mentioned on the script that actually, today on Amazon, collectively, Fitbit devices are #1 through #3 in smartwatches on Amazon on the best-sellers list. That's Ionic at #1, a Blaze SKU at #2, and another Ionic SKU at #3. And Ionic has been rated at 4.2 stars.

So I think strong initial launch. 42% of the activations for Ionic we're seeing as repeat customers, the rest being new. So I think that shows a promising blend of existing and new people coming into the Fitbit ecosystem. And either way, whether it's people upgrading from a lower ASP device to the higher ASP, Ionic or new customers coming in, I think that's demonstrating that we're able to expand our total addressable market with this launch. So I think promising initial results.

The most positive aspect of this snippet is that 58% of Ionic buyers are new to the platform, which shows that Fitbit is making some progress with appealing beyond its core niche of fitness enthusiasts.

The bad

However, the bad news is that Fitbit doesn't have a great track record of actually retaining the new users that it acquires. The company only discloses its mix of active and registered users on an annual basis, but for reference Fitbit finished 2016 with 23.2 million active users out of 50.2 million registered users; less than half of registered users are active.

Image source: Fitbit.

The key to bolstering retention and engagement will be how well Fitbit can execute on delivering a multipurpose device, which will include both expanding its catalog of third-party apps as well as improving other features like mobile payments (Fitbit Pay).

Apple (NASDAQ: AAPL) added cellular connectivity to Apple Watch Series 3 -- Ionic's main competitor -- this year, and despite my initial reservations, the feature actually does appear to be driving sales. If cellular connectivity proves over time to be an important feature, that will raise the bar even further for Fitbit since developing and engineering devices with cellular connectivity requires significantly more resources.

Ionic is off to a quick start, but this is going to be a marathon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends AMZN, Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.