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Fitbit’s IPO

fitbitFitbit (NYSE: FIT), based in San Francisco, CA, manufactures wearable fitness tracking devices that record various metrics, steps taken, distance traversed, calories consumed, and the quality of one’s sleep. Founded in 2007 as Healthy Metrics Research, the company changed its name to Fitbit in the same year. Consensus estimates call for revenue of $1.7 billion in 2015, an increase of over 120 percent over 2014, and EPS of $0.75, up slightly from the prior year.

Fitbit priced its 37 million share IPO on the NYSE on June 17 for a first trade on the following day at $20 per share. 22.4 million Class A shares were offered by Fitbit, thus raising $448 million for the company, while pre-IPO investors sold 14.2 million shares. The underwriters were granted a 30 day option to purchase an additional 5.5 million Class A shares. The deal was led by Morgan Stanley, Deutsche Bank, and BofA Merrill, while SunTrust Robinson Humphrey and Barclays were “passive joint book-running managers, and Raymond James, Piper Jaffray, Stifel, and William Blair were co-managers. At a recent share price of $33, Fitbit’s market cap is roughly $6.8 billion.

Seemingly well-positioned at the confluence of consumer wearables, a trend toward greater health and fitness awareness, and the current fascination with collecting and analyzing data on oneself through the use of smart sensors, software, and the cloud, Fitbit is among the year’s most intriguing consumer product IPOs. Co-founded by CEO James Park and CTO Eric Friedman, the company began selling wearable fitness trackers in 2009, when the first model shipped as a clip-on device. By 2013, the company’s annual revenue grew to $271 million. It nearly tripled to $745 million in 2014, and in the second quarter of 2015 revenue rose to $400 million from $114 million in the prior year.

Emerging from the pedestrian category of pedometers, Fitbit, self-proclaimed a “fitness platform” in its IPO prospectus, sold 20.8 million devices, from its inception through the first quarter of 2015, and sold 4.5 million connected units in the second quarter of 2015, as compared to nearly 11 million units sold in all of 2014. Since shipping its first wearable device, Fitbit’s product line has grown to encompass six wearable fitness tracking models, ranging in price from roughly $60 to $250, available in both clip-on, and wristwatch style configurations. Fitbit offers a “good, better, best” approach to marketing, as its products range from everyday fitness products, to a single “active” product, the Charge, and a “Performance” product, the “Surge” priced at $250. Fitbit claims an 85 percent revenue market share of the US connected activity tracker market, according to data gathered by the NPD group.

As one might imagine, the price points of Fitbit’s activity trackers increase according to functionality, from basic tracking of number of steps taken to the total distance and calories burned, sleep duration and quality, to more advanced functions, such as heart rate tracking and GPS-type functions, such as speed, distance, and exercise routs. In addition to wearable products, the company also sells wrist bands, clips, clasps, power cords, belt holsters, charging stations, logoed T-shirts and caps, backpacks, and even a wifi scale.

Of all the competitors on the market, which include Jawbone, Garmin, Omron, and others, Apple offers the most serious competition, as it offers a free fitness app in its iPhone 5 and iPhone 6 products, though technically neither device is a considered a “wearable.” However, the long awaited introduction of its first generation iWatch, is the most formidable intermediate term challenger to Fitbit. Even though the fitness tracking capability of the iWatch falls short of Fitbit, and the device is still significantly higher in price, Fitbit runs the risk of becoming the Garmin of the fitness tracking market. Intriguingly, Fitbit’s IPO was priced on the same day that Apple made its iWatch available for purchase on a world-wide basis.

Cloud Based Software, Consumer Stocks, Independent Stock Research, Internet Equity Research, Internet Stocks, IPO Research, Software Equity Research, Stock Research

Box IPO: Freemium Pioneer

box-logoBox (NYSE: BOX), the operator of a cloud-based collaboration platform, is a recent addition to the Software sector coverage of our Battle Road IPO Review. Box was founded in Mercer Island, Washington in 2005 by Aaron Levie, Dylan Smith, Sam Ghods and Jeff Quesisser, following research conducted by the group, which examined corporate cloud requirements. Levie is currently the CEO, Smith is CFO, and Dan Levin is COO and president of the company. Today, Box is based in Los Altos, California. Consensus estimates call for calendar year 2015 (fiscal year ending January 31, 2016) revenue of $290 million, up from $216 million in calendar 2014. The company’s loss per share is expected to narrow from $4.96 to $1.18 in the same time period.

The Box IPO was originally filed in March of 2014, but was postponed, presumably due to market conditions. The stock debuted on the New York Stock Exchange on January 23, 2015, at a price of $14.00 per share. Box offered 12.5 million Class A shares, with an underwriters’ option of another 1.9 million shares which was fully exercised. Morgan Stanley, Credit Suisse and J.P. Morgan were book-running managers for the transaction, BMO Capital markets was the lead manager, and Canaccord Genuity, Pacific Crest, Raymond Jones, and Wells Fargo were co-managers. At a recent share price of $17.80, Box’s market cap is roughly $2.1 billion.

Box is a pioneer of the “freemium” business model, in which it offers a free basic version of its software product to allow customers to get a feel for its service. In doing so, the company believes that it offers ease of use akin to Facebook, and other consumer facing internet applications. With Box, users can invite people to view or edit their files, as well as share their documents and photos. This allows employees to collaborate across different divisions of the same company regardless of geography, as well as with clients and partners in one secure place, anywhere, anytime, in 15 different languages. The company monetizes use through paid subscription fees to its more feature-rich service, as well as through premium support services, and professional services.

Box boasts over 32 million registered users, including users in nearly 100 percent of the Fortune 500. However, the sub-set of paying users is 47,000, which includes users in about half of the Fortune 500. As a free to use service initially, Box entices users throughout a company with its easy to use functions, security and scalability, which are designed to work for all files, locations, platforms, devices and operating systems, boasting features such as online storage, and custom branding.

Data from cloud apps developed by the likes of Salesforce.com (an investor in Box), as well as NetSuite and Googles Apps can be integrated into Box as well. Over 1,300 iOS and Android Apps have been developed by software developers certified by Box, and the company’s mobile version works with the Android, Windows Phone, iOS, Blackberry and WebOS platforms.

From a business model standpoint, Box has not come close to generating operating income since its founding. Echoing the results of many venture capital-backed internet and software IPOs of the last couple of years, Box has been generating losses at an increasing rate. Between 2012 and 2013, the company’s revenue more than doubled from $59 million to $124 million, yet its operating loss grew from $109 million to $159 million. Through the first nine months of 2014 the company generated revenue of $154 million, with an operating loss of $120 million. We note that Consensus estimates for 2015 call for a dramatic reduction in the company’s operating losses. An open question remains how quickly the company can achieve profitability. As a venture-backed IPO, our sense is that the company’s pre-IPO investors are sure to push for a secondary offering, thus expanding the float of the stock, we suspect sooner rather than later.

To see how Box screens against its cloud software peers which have come public in the last seven years, contact info@battleroad.com.