What can you say about Fitbit’s (FIT) executive team other than “Wow”? After lowering FY16 guidance upon missing Q3 revenues, the situation continued to deteriorate for Fitbit as demand for its fitness trackers continued to fall.  In Q3 2016, Fitbit lowered revenue expectations from a growth rate of 38% to just 25% growth. But on January 30, 2016 Fitbit announced yet another disappointment by releasing preliminary Q4 2016 results as follows: 

Fitbit expects to report 6.5 million devices sold and revenue for the fourth quarter of 2016 to be in the range of $572 million to $580 million, compared to the company’s previously announced guidance range of $725 million to $750 million. For the full-year 2016, Fitbit expects annual revenue growth to be approximately 17% from the previous forecasted growth of 25% to 26%. Non-GAAP diluted net loss per share for the fourth quarter is expected to be in the range of ($0.51) to ($0.56) compared to the previously announced guidance range of non-GAAP diluted net income per share of $0.14 to $0.18. The non-GAAP effective tax rate is expected to be materially higher than prior guidance. For the full-year 2016, Fitbit expects to earn approximately $32 million in non-GAAP free cash flow and have approximately $700 million in cash and cash equivalents.

Whether one looks at revenues or earnings, the picture is pretty bleak regarding 4^th quarter results. How the company missed by such a wide margin begs to question the leadership in position. I wouldn’t suggest that the CEO or CFO were asleep at the wheel, but rather never steering the ship in the first place. In order to miss guidance to this degree an organization has to have a divergence in communication between account executives and the chief operating officers of the company. For example; whoever has been handling the account for the likes of a Best Buy (BBY) or Wal-Mart (WMT) should have had a clear vision regarding sales and orders to the retailers and communicating this information to the C-suite so as to ensure capacity utilization is inline with a decrease in demand. That clearly did not and is not happening at Fitbit. There are several examples akin to the one mentioned that I could outline and have ample experience with identifying, but the results show that senior executives were not managing the business along the lines of decreasing demand. It is for this apparent and negligent reason the company has also offered additional information regarding its 4^th quarter performance as well as expectations for 2017.

The company expects non-GAAP fourth quarter gross margin to be materially below its previously issued 46% guidance due to excess inventory and other related charges as follows:

• One-time write-downs of tooling equipment and component inventory of approximately $68 million.
• Increased rebates and channel pricing promotions of approximately $37 million, which is recorded as a reduction in revenue.
• Increased return reserves of approximately $41 million due to greater channel inventory.
• Increased warranty reserves for legacy products of approximately $17 million.

For the full year 2017, Fitbit is providing some targeted financial metrics as the company transitions its business to the next stage of growth. The company expects a challenging year over year comparison in the first half of 2017 given that new product introductions represented 52% of revenue in the first half of 2016. In addition, the company enters 2017 with a higher operating expense run rate than the first half of 2016, and channel inventory levels that are higher than previously anticipated. The company expects stabilization in financial performance in the second half of 2017. Considering these factors, the company is providing the following guidance:

• Preliminary 2017 revenue guidance of $1.5 billion to $1.7 billion.
• Preliminary non-GAAP basic net loss per share of ($0.22) to ($0.44) per basic share.
• Preliminary non-GAAP free cash flow guidance of approximately negative $50 to $100 million.
• Long-term non-GAAP gross margin of approximately 45% versus previous 50% target.