Fitbit Inc (FIT) Q4 2018 Earnings Conference Call Transcript

Fitbit, Inc. (FIT)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

You're currently on hold for this Fitbit conference call. At this time we are assembling today's audience and plan to be under way shortly. We appreciate your patience, and please remain on the line.

Good day, and welcome to Fitbit's Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Tom Hudson, SCP of Finance. Please go ahead, sir.

Tom Hudson -- Senior Chairperson of Finance

Good afternoon and welcome. Fitbit distributed a press release detailing its quarterly and annual results earlier this afternoon. It's posted at our website at www.fitbit.com and available from normal financial news sources.

This conference call's being webcast live on the investor relations page of our website, where a replay will be archived. On this call, all financial measures are presented on a non-GAAP basis, except for revenue, which is a GAAP measure. A reconciliation of GAAP to non-GAAP financial measures is provided in our post-earnings release or in our earnings presentation materials posted on the IR page of our website.

This conference call will contain forward-looking information, which is subject to risks and uncertainties described in Fitbit's filings with the SEC and in today's press release. Actual results or events may differ materially.

We will begin with a commentary from James and Ron and will then open the call to questions. Let me introduce Fitbit's Chairman and CEO James Park. James?

James Park -- Chairman and Chief Executive Officer

Thank you, Tom. Thank you to everyone participating in today's call. 2018 was an important year for Fitbit. We continued to adapt to the changing wearables market, expanded our reach into healthcare, and delivered on our financial and product commitment. Specifically this meant targeting the faster-growing smartwatch segment of the wearables market while continuing to innovate in trackers and investing in a global Fitbit Health Solutions business.

I'm proud of our performance this year. Our results demonstrate that our strategy is the right one, placing us on a path back to growth and profitability. Importantly, we have confidence in our guidance, anticipate growth in both device shipments and revenue in 2019, the first time in two years, along with adjusted EBITDA break even at the top end of our guidance.

Full year revenue earnings and free cash flow exceeded our guidance. Revenue in 2018 was $1.51 billion, and we exited the fourth quarter with growth in devices sold. This was the first quarter that devices sold grew year-over-year since Q3 2016. We sold 13.9 million devices and became the No. 2 smartwatch company in the US. We grew our community of active users 9%, 27.6 million in 2018, and reached new users with a mass-appeal smart watch Fitbit Versa, our most advanced tracker Charge 3, and the launch of Fitbit Ace, making fitness fun for kids and extending health across the family. We also grew our Fitbit Health Solutions business 8% globally in 2018, set the foundation for future growth in this important vertical. We did this all while becoming more efficient as a business as we reduced our operating costs 12% year-over-year, $702 million.

Our strategy for growth and profitability in our consumer business has more effectively monetized an ever-growing community of users. A part of the strategy is growing our community of active users. We are bringing new users onto the platform with new products and experiences, and we are successfully retaining our existing customers. Nine percent growth to 27 million active users is a testament to our constant innovation and investments in both hardware and software and gives us confidence in our consumer monetization strategy, where we plan to launch an enhanced paid premium service offering second half of 2019.

Customer retention increased in 2018, and we grew devices sold in the fourth quarter to 5.6 million devices shipped, up 3% year-over-year. Sixty-five percent of activations in the fourth quarter came from new buyers. Of the repeat buyers, 56% came from consumers who were inactive for 90 days or greater. The launch of Fitbit Versa, our health and fitness-oriented smartwatch with mass market appeal, filled a critical need in the market, grew Fitbit's smartwatch revenue up 437% year-over-year, 44% of total revenue in 2018.

For consumers who prefer a sleeker profile wearable, we innovated on our successful tracker franchise and launched Charge 3, our most advanced tracker yet. We also launched Fitbit Ace, promoting healthy behaviors and making fitness fun for kids, all in a way that is designed to make parents feel comfortable. Fitbit Ace outperformed our expectations, and by promoting additional ties to our ecosystem we believe consumer retention is strengthened. We expect device momentum to continue to 2019 and anticipate device shipments will grow year-over-year.

On the software side, we launched an exciting new feature in 2018 with female health tracking, which allows Fitbit users to track their menstrual cycle and understand how it affects other aspects of their health and fitness. Since the launch in May 2018, this feature has become highly utilized, with more than 8.1 million users adding to their dash. Additionally 46 million symptoms have been logged to the feature, making this one of the largest female health databases.

We also continue to make advances in sleep tracking, area Fitbit pioneered and continues to lead. To date, the company has tracked more than 9 billion nights of sleep. Fitbit is also testing a feature Sleep Score, the data program that gives users a more holistic look at their sleep to help them better track and understand their sleep patterns and quality. For devices with a relative SPO2 sensor like Versa, Ionic, and Charge 3, the program also tests consumer interest in tracking breathing disturbance. Underscoring users' interest and engagement in sleep, Sleep Score beta program enrolled approximately 10,000 users in less than two hours of launch.

These type of innovative software experiences will form the foundation to another key piece of our strategy to more effectively monetize our growing community of users, which I mentioned earlier, the planned launch of an enhanced paid premium service offering.

We have also observed that while most consumers have utilized our devices and software for fitness and weight loss, we are seeing a growing percentage of consumers utilizing these tools to manage chronic conditions. We believe there is a significant opportunity to leverage the investments that we make in a consumer-facing business to drive fee-to-fee revenue through our Fitbit Health Solutions business, or FHS.

Globally, healthcare costs are rising at an unsustainable rate. We have an opportunity to change that equation by leveraging our work with more than 1,500 Enterprise customers, 100 health plans, dealing a solution for behavior change at the population level.

We are steadily building momentum in our FHS business. More than 6.8 million Fitbit users, including employees at 70 of the Fortune 500 companies, have connected their data into population health management platform, and most recently Fitbit devices have been included as a covered benefit in 42 Medicare Advantage programs in 2019 plan year in 27 states across the country, which means that Fitbit devices are provided to many plan members for free. We have introduced two new devices, Fitbit Inspire and Fitbit Inspire HR, wearable devices specifically designed for the needs of our healthcare customers, to complement this opportunity, and we have observed good customer adoption in the Medicare Advantage Market.

On a global front, Fitbit Ionic has been used as the study device in the Singapore government's Health Promotion Border, HPB, technology-enabled longitudinal study. HPB study gathers novel insights into the behaviors of Singaporeans with the aim of personalizing health promotion. With the consent of participants who have signed up for the study, lifestyle and behavioral data are being collected over two years across various health topics, such as physical activity, nutrition, and mental wellbeing. The study will enable the HPB to analyze the interconnectedness across lifestyle data, collected from a large cohort, to provide insight to more tailored and timely ways.

Building on our commitment to help create lasting behavior change, we launched Fitbit Care in 2018, paired management solution that combines health coaching, wearables, and personalized digital interventions to better support patients outside the walls of the clinical environment. Fitbit Care was selected by Humana preferred health coaching solution for their employer group segment. In addition, Fitbit Care was chosen by a top insurance company for an innovative program to help seniors with type-2 diabetes better manage their health. The program aims to show the impact of activity on blood glucose levels, motivating participants to make positive lifestyle changes.

Looking forward, we believe Fitbit Care will enable us to transition our business from device sales only to per-member-per-month pricing, per-employee-per-month pricing, and shared risk models. In fact, just recently we signed a $2 million software and services deal for Fitbit Care with a large national plan on a per-member-per-month model.

In addition, we continue to collect clinical data to develop and test FDA-grade systems for health conditions, which include afib and sleep apnea. We expect the growth of our Health Solutions business to accelerate, driven by global growth and the addition of solutions-based software revenue. As a result, we anticipate that there will be double-digit revenue growth for Fitbit Health Solutions to approximately $100 million in 2019.

In closing, we expect to continue to grow and to begin to monetize our active user community in 2019. We see the wearable macro trends improving, smartwatch adoption rates increase, supported by subsidies offered by employers in the healthcare ecosystem. We've seen a positive shift in our business momentum, and we are forecasting consumer device shipments to accelerate in 2019. We also expect to continue to diversify revenue stream, double digit growth of our Fitbit Health Solutions business, and the addition of other non-device consumer revenue.

With that, let me turn the call over to Ron, who can provide more details on the fourth quarter and full year results. Ron?

Ron Kisling -- Chief Financial Officer

Thanks, James. My prepared remarks will focus on a financial overview of the fourth quarter and full year 2018 results. I will then provide our guidance for the first quarter and fiscal year 2019. Before I go through the details, I'd like to remind investors that the financial references are to non-GAAP measures, except for revenue or unless I specify otherwise.

For the full year, Fitbit sold 13.9 million devices and generated $1.51 billion of revenue. The wearables category is competitive and has been elastic in nature, and we have not seen an acceleration in the commoditization of wearables. In fact, driven by the strength of our brand and the shift in mix of our devices toward smartwatches, we've seen our average selling price in 2018 increase 4% to $105.00, partially offsetting the 9% decline in devices sold. Accessory and other revenue added an additional $3.37 per device sold in 2018. For the full year, accessory revenue declined 32%, while health services and other revenue grew 29%.

In the fourth quarter, Fitbit sold 5.6 million devices, up 3% over the prior year, marking our first growth in device shipments in two years. We generated $571 million of revenue, flat compared to 2017, but the growth in devices sold was offset by a decline in average selling price to $100.00.

As we refresh our product portfolio and increase the accessibility of our platform with fun and easy to use devices, consumer demand improved over the course of 2018. Smartwatches grew to 44% of our 2018 revenue but were marginally less in Q4 with the successful rollout of our Charge 3 offering during the holiday selling season.

For the full year, US revenue declined 7% to $881 million dollars. International revenue declined 6% to $631 million. In the fourth quarter, US revenue declined 1% to $328 million, while international revenue grew 1% to $243 million. The US and APEC regions were above expectation, while AMIA was under expectations, driving by weakness in the UK market.

The primary difference in regional growth during the fourth quarter was driven by Versa demand. The fourth quarter, the promotional environment was more intense than anticipated. Consumers responded favorably to our promotion of Fitbit Versa domestically, leading to strong sales in the US. In AMIA, the market structure makes dynamic pricing more difficult. Our decision not to promote Versa in AMIA negatively impacted sell-through, most specifically in our largest market, the UK. However, learning from past challenges, we adjusted our sell-in shipments. While regional sales were less than planned, we exited the year with a relatively clean global channel.

New products introduced in the year represented 79% of Q4 revenue and 57% of full-year revenue. As we have previously indicated, we have deemphasized our investment in accessory revenue, focusing on higher turn items and lowering our capital allocation. Conversely, while still immaterial to revenue, we continue to invest resources to grow higher-margin sources of revenue like software services.

Gross margin decline 550 basis points in Q4 and 250 basis points in 2018. The decline in gross margin was primarily driven by the shift in mix to smartwatches. In addition, higher promotion of legacy tracker offerings and higher hosting costs, driven by the database migration to Google Cloud, also negatively impacted margins. We offset some of the gross margin decline by improving our operating efficiency.

We focused on four areas to improve efficiency: product returns, warranty claims, product quality, and customer support cost. In 2018, we achieved approximately $100 million in year-over-year efficiency gains in these areas. Our product defect parts per million improved 29%, and our customer support contact rates declined 17%.

Operating expenses in the fourth quarter were 32% of revenue. Sales and marketing costs were the largest expense at $101 million, down 29% on a year-over-year basis. To support the launch of Versa, we pulled forward marketing costs to earlier in the year, anticipating a halo effect from the success of our Versa launch. In addition, some promotional costs were shifted to contra-revenue in 2018 from operating expense, as compared to the prior year, when we spent less on point of purchase to play.

Research and development costs were $63 million in the fourth quarter, down 18%, driven by lower consulting cost and prototype spend. General administrative expenses in the fourth quarter were $21 million, down 17%, driven by lower litigation cost. Also benefiting operating expenses, we exited the year 1,694 heads, down 55 2017.

For the full year 2018, operating costs declined 12% to $702 million, below our $740 million target. Sales and marketing costs declined 17% as we improved our customer acquisition funnel and reclassified a portion of spend to contra-revenue. R&D costs declined 4%. SGNA declined 6%, excluding the one-time cost associated with the bankruptcy of Win It, due 3-2017.

We generated operating income of $36 million and $2 million in interest and other income for a pre-tax profit of $38 million in the fourth quarter. Due to the geographic mix of income and expense over the course of the year, we incurred a low tax rate of 5%, resulting in taxes of $2 million. Earnings per share for the fourth quarter were $0.14 per share.

For the full year, we generated an operating loss of $84 million and interest and other income of $11 million, for a pre-tax loss of $72 million, for a net loss per share of $0.20. The tax revision was a benefit of $24 million for the full year 2018.

Capital expenditures in the fourth quarter were $13 million, and $53 million for the full year 2018. The reduction in capital expenditure on a year-over-year basis resulted in a $36 million favorable benefit free cash. We generated $96 million in free cash flow in the fourth quarter, and excluding our tax refund consumed $12 million in cash for the full year 2018, meeting our guidance. Including the tax refund payment, free cash flow for 2018 was $60 million. We ended 2018 with $723 million of cash in short term investments and no debt.

Now let me turn and address our guidance. For full year 2019, we expect device shipments to grow, driven by the introduction of lower-priced devices as we execute on our strategy to grow our community of active users. We expect smartwatches to become more than 60% of our revenue, negatively impacting gross margins but favorably impacting device unit growth. We expect to continue to grow our Fitbit Health Solutions business to approximately $100 million in revenue, grow our premium service subscriber. As a result, we expect revenue to grow 1-4%, to approximately $1.52 billion, $1.58 billion.

We expect gross margin to decline modestly for the full year to approximately 40%, driven by a lower warranty benefit in 2019 compared to 2018, a shift in device mix toward smart watches, and higher hosting costs. This will be partially offset by improved operating efficiency, benefit from the growing revenue contributions from our Fitbit Health Solutions business non-device consumer revenue. In addition, we expect our smartwatch gross margin to increase year-over-year. The first quarter will be our seasonally lowest gross margin. We expect it to rise a couple of hundred basis points by Q2 and continue to increase in subsequent quarters.

For the full year, we expect to reduce our operating expenses approximately 4% from 2018 levels to a range of $660 million to $690 million. Our intent is to drive efficiency into the business by the continued optimization of our real estate footprint and redeploying capital to growing our Fitbit Health Solutions business and non-device consumer revenue.

We expect adjusted EBITDA to be in the range of breakeven to negative $30 million. Despite the anticipated year-over-year improvement in operating income and lower capital expenditures, we will receive less benefit from changes in working capital than in 2018 and expect to consume approximately $40 million to $70 million in cash.

Net of the change from adopting ASC-606 in 2018, which resulted in the reclassification of sales return reserves as a liability rather than contra AR, we entered 2019 with receivables approximately $100 million lower than when we entered 2018. Like 2018, we expect our free cash iterations to be backend loaded and anticipate consuming cash in the first two quarters.

It is important to note that we received higher cash collections in Q4, leading to upside in 2018 but lower Q1 receipt. Because the timing of collection varies, we expect to optimize to an annual free cash flow figure rather than on a quarterly basis. We expect capital expenditures to decline year-over-year to approximately 3% for the full year as we shift to less capital-intensive development and consolidate our real estate footprint.

Moving to taxes, we expect our full year tax rate to be approximately 30%, though this could fluctuate substantially depending on the geographic distribution of our earnings. We expect full year stock based compensation expense to be approximately $90 million and a basic share count of approximately 260 million.

Our balance sheet remains robust. Looking forward we will augment organic investment with targeted MNA. We expect MNA will continue to play an important role at Fitbit, like the acquisition of Twine Health helped transform our business toward digital health and recurring revenue.

Turning to Q1, first quarter results are impacted by the confluence of seasonality in our business and the continued shift in consumer purchasing behavior toward the purchase of smartwatches. We expect revenue to grow approximately 4% on a year-over-year basis to a range $250 million to $268 million. We expect first quarter gross margin to be approximately 34-35%.

The first quarter is typically our lowest gross margin quarter as it is negatively impacted by fixed cost leveraging due to the seasonally lower revenue. This was masked in the first quarter of 2018 as we had one-time benefits of approximately 600 basis points from the $12 million Win It payment, warranty reserve release associated with our legacy tracker business. In addition, approximately 600 basis points apply is due to higher smart watch revenue. As we have noted above, we expect gross margin to improve for the remainder of 2019 to approximately 40%.

We expected adjusted EBITDA to be in the range of negative $72 to negative $64 million, and we expect a net loss of $0.24 to $0.22 cents per share. Our guidance reflects a tax rate of approximately 25%, which will vary depending on the mix of domestic and international revenue, and a basic share count of approximately 254 million shares. Stock-based compensation expense is expected to be approximately $24 million.

With lower AR entering Q1, driven in part by higher collections in Q4 2018, we expect free cash flow to be down in the first quarter. With that, let me turn the call back to the operator to answer questions. Operator?

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We will take our first question from Alex Fuhrman with Craig-Hallum Capital Group. Please --

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Great. Thank you very much for taking my question, and congratulation on a return to revenue growth here. You know, I wanted to ask about the Fitbit Health Solutions and the $100 million target for 2019. I think you indicated that that business is growing double digits. Would love to get a sense of what that does to the margins of your business as that presumably becomes a bigger and bigger piece over time. And then just thinking about the opportunity. I mean, it strikes me that Fitbit Health Solutions is already partnered with a lot of different companies, I think something like 70 of the Fortune 500 companies out there. Is that a rough proxy for how well you think Fitbit Health Solutions is penetrated in the corporate workplace? Or can you give us a sense of how deep you think the relationship is with the companies you are? Are there some of those companies where you have a very deep relationship and others where perhaps you're just scratching the surface? Would love to get a better sense of where that opportunity is. Thanks.

Ron Kisling -- Chief Financial Officer

Yeah. Thanks. So the first question, with respect to gross margins, so it is accretive to our overall gross margins. Today's revenue is prominently devices. However, that device business is higher margin than our consumer business. As we go forward, though, we're beginning to roll out, you know, higher margin solutions, even within FHS around services and software with the Fitbit Care, as well as growing internationally. As James mentioned, we signed a $2 million software services deal for Fitbit Care with the national health plan during the year. So overall it's accretive, and as the mix moves more toward services and software it will be more accretive to our gross margins.

James Park -- Chairman and Chief Executive Officer

Yeah, and I think the good thing is we're starting to develop really strong and positive relations, relationships with a lot of the large national health plans, whether that's Humana, United, et cetera, and that gives us confidence that we can continue to grow the Fitbit Care business, which again is primarily software and services versus our traditional corporate wellness device-driven model. And there's a good proof points that have happened in 2018 and that we see in 2019 that give us confidence in that double digit growth target of $100 million in 2019.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Great. That's really helpful. Thanks. And then if I could just ask one housekeeping question as well on the gross margin guidance. Is that, should we interpret your comments to mean that gross margin will march higher as the year progresses and end up in the neighborhood of 40% for the full year? Or end up around 40% by the fourth quarter?

Ron Kisling -- Chief Financial Officer

No, the gross margins will track favorably toward the end of the year and will trend toward 40% for the full year.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Okay. That's great. Thank you.

Operator

If you find that your question has been answered, you may remove yourself from the queue by pressing *2. We will take our next question from Scott McConnell with D.A. Davidson. Please go ahead.

Scott McConnell -- DA Davidson -- Analyst

Great. Thanks for taking my question. So my understanding, and I think you touched on this a bit, is that the wellness or health providers who are partnering with Fitbit through Fitbit Health Solutions are using the data from the Fitbit devices to promote better activity and health from the participants. So my question is how is Fitbit thinking about or balancing the value of user data versus the security and sensitivity of this health data, particularly as consumers become increasingly aware and protective of their data? Thanks.

James Park -- Chairman and Chief Executive Officer

Yeah, thanks. That's an important question. So I think the good thing is that our business model is aligned with the interests of our consumers, so since the very beginning of the company we've had a very firm privacy policy where we say we don't sell data to third parties and we only share your data with third parties only with your explicit op-in consent. And that holds very true for our healthcare business, as well. In fact we have a bill of rights where we enshrine the rights, the data rights of our consumers, and we won't work with employers or health plans who don't subscribe to those bill of rights.

And in many cases and probably all, employers and health plans don't actually wanna see that individualized data, and we've been very successful in striking that balance between consumer privacy and maximizing the usefulness of that data in affecting health outcomes and lowering healthcare costs for our large healthcare partners.

Scott McConnell -- DA Davidson -- Analyst

Great. Very helpful. Thanks for letting me ask a question.

Operator

We will take our next question from U.G. Anderson with Morgan Stanley. Please go ahead.

U G Anderson -- Morgan Stanley -- Analyst

Great. Thanks for taking my question. I was hoping we could unpack the gross margin guidance a little bit more here. How much of an effect is there from some of the other elements that you called out in the press release and the slides versus the mix shift to smartwatches? And I guess at a higher level I'm trying to better reconcile how you expect gross margins for smartwatches to improve throughout the year even though ASPs are expected to decline.

Ron Kisling -- Chief Financial Officer

Yeah, so I think a couple thing. One is your lower ASPs don't necessarily mean lower gross margin, so certainly there's opportunities as we continue to develop and to leverage design and manufacturing efficiencies, and so we do actually expect our gross margin on our smartwatches to improve in 2019 versus 2018. And for the year as a whole, we're, as we get close to 40%, we're only down slightly from 2018, and really that drive is just because of an increased mix in smartwatches, which continually do have a lower margin than trackers, but if you see tracker gross -- excuse me, smartwatch gross margins improving in 2019 over 2018.

U G Anderson -- Morgan Stanley -- Analyst

Got it. Thanks so much for that. And if I could sneak one more on some of the software pieces that you mentioned there. You mentioned a premium software offering the back half of the year. Should that be bucketed with Fitbit Health Solutions, or is that broadly for the consumer, the consumer channel as well? And I guess just one more just on Fitbit Health Solutions generally speaking, does this segment have, do you generally have better visibility in this segment as you kind of guide for accelerated revenues this year?

James Park -- Chairman and Chief Executive Officer

Yeah, so on the first one, when I talk about the launch of an enhanced premium offering the second half of the year, that's primarily consumer, and we're pretty excited about the offering, especially as our active users grow. I think there's a huge opportunity given our 27 million active users. If you project a reasonable in-industry competitive attach rate, that there's a pretty big revenue opportunity there, and we're pretty excited about it.

Our strategy around FHS with that offering is actually to take what we've developed on the consumer side and then sell it into enterprises with the appropriate level of administrative software and control. So I think there's a dual opportunity.

And then on the healthcare side, you know, again, our guidance on the approximately $100 million in revenue is driven by a lot of the proof points and successes that we saw in 2018 and what we're seeing coming into 2019. I think the important thing to note is that it's not just the US opportunity. A lot of that revenue growth is also coming globally as well outside of the US.

U G Anderson -- Morgan Stanley -- Analyst

Great. Thanks so much.

Operator

Once again, if you'd like to ask a question. Please press *1. We will take our next question from Charlie Anderson with Dougherty and Company. Please go ahead.

Charlie Anderson -- Dougherty and Company -- Analyst

Yeah, thanks for taking my questions. Just another one from me on gross margins. You had mentioned that you'll be up a couple hundred basis points, it sounds like, in Q2, so I think the implication is you're kind of tracking toward the mid-40s almost to a degree in the back half of the year. So I wonder if you could just maybe bridge that, you know, 600 basis points or so gap between first half and second half. Maybe it's a little bit more than that actually. Are you actually implying that trackers will become a larger portion of the mix in the back half versus the first half? And then just maybe anything else to call out numbers like that.

Ron Kisling -- Chief Financial Officer

Yeah, certainly. So one of the biggest drivers that we touched on was really the seasonality of revenue. So the back half of revenue was seasonally stronger than the first half. So that actually gives us a little bit of a lift. We do see smart watch mix actually increasing a little bit in 2019, but, as I indicated, as we move our products into 2019 we should see smart watch gross margins also improve over 2018. So you're gonna see the structurally gross margins improve a little bit, and then lastly in the back half of the year we do see some accretive impact on margins from the services, the premium services business, in FHS that James spoke about.

Charlie Anderson -- Dougherty and Company -- Analyst

Okay, great. And then for my follow-up, James, you mentioned sort of the expectation of sort of the industry standard attach rate. I wonder if maybe if there's any peers you would call out or maybe roughly what that would be. And then also I wonder if you'd be willing to talk about at this point how much revenue, what percent of revenue is software and services and what are some of the goals you're looking toward in terms of when we could see maybe like a double digit percent of revenue? Thanks.

James Park -- Chairman and Chief Executive Officer

Yeah. We don't really break out the premium part of our business today as a portion of revenue, but when we look at peers in the industry, there's a lot of connected devices out there that have a service model attached to it. And so when we're building the business model for our offering, those are some of the targets that we're looking at.

Charlie Anderson -- Dougherty and Company -- Analyst

Okay. Thanks so much.

Operator

We will take our next question from Jim Suva with Citi. Please go ahead.

Jim Suva -- Citigroup -- Analyst

Hi, this is Josh Keel on for Jim. Thanks for taking our questions. I'm surprised ASP is guided to decline in 2019 as more buyers seem to be gravitating toward smart watch devices. Can you talk a bit more about the dynamics at play there?

Ron Kisling -- Chief Financial Officer

Yes. So I think, as we look to '19, we expect them to decline, but I think as we talked about we don't expect that to impact gross margins. We did talk about one of our, in terms of offering choice to consumers and driving an increase in our active users, is offering more accessible and affordable devices in 2019. And so those products will be dilutive on our ASPs.

James Park -- Chairman and Chief Executive Officer

Yeah, and this is an important part of our strategy, as I mentioned in the prepared remarks. We're seeing a lot of success in our hardware and software and their capability to retain our users, so again our strategy right now is a focus on increasing the number of active users and then monetizing them starting in the second half of the year with a premium paid offering. When we launch these more affordable and accessible devices, we're still targeting a pretty healthy gross margin. So I would see the ASP decline as more an indication that we're leaning really heavily into the strategy of increasing active users.

Jim Suva -- Citigroup -- Analyst

Great, and as a follow up, do you have plans to further reduce op ex in 2020 beyond the range you gave for 2019?

Ron Kisling -- Chief Financial Officer

You know, we haven't provided any guidance for 2020. What I would say is we'll continue our focus on driving efficiency in the business. I think we've demonstrated that in 2018 and expect to continue that in 2019. We've done that while continuing to invest in software services, new products, and health, and I would expect that focus on efficiency to continue.

Operator

We will take our next question from Nikolay Tatarov with Longbow Research. Please go ahead.

Nikolay Tatarov -- Longbow Research -- Analyst

Hey, good afternoon, guys. I wanna go back to the ASP question. So understanding broadly that Versa was doing better than expectations for the most of 2018, so it seems like you had success at that price point, so can you give us some sense of, you know, I understand the dynamic of you're trying to grow users, but are you seeing any price pressure? I mean, why do you consider to lower prices for your trackers, given that you had recent success with Charge 3 and Versa? Is there a competitive pressure from some lower price Chinese competitors maybe? Or is something else going on?

James Park -- Chairman and Chief Executive Officer

Yeah, no, it's not really due to competitive pressure. It's one, you know, we've identified a gap and need in the market at a certain price point, and secondly, as I said before, we wanna lean really heavily into the growth of the active user strategy but do it in a way that doesn't really materially affect gross margins, which it can, you know, from Ron's remarks we're still expecting about a 40% gross margin for the full year. So I think we're striking the right balance between active user growth and gross margin and ultimately increasing the total revenue that we're seeing per user that we acquire.

Nikolay Tatarov -- Longbow Research -- Analyst

Okay. And, James, I understand you don't comment on future products, but can give us a sense of where it was gonna be in trackers or smart watches where you expect to launch some new lower priced products?

James Park -- Chairman and Chief Executive Officer

Yeah, I think we see opportunities both in watches and trackers to implement the strategy of increasing active users with attractive ASPs.

Nikolay Tatarov -- Longbow Research -- Analyst

Okay. And are you guys giving up any sense of how are you thinking about tracker units in 2019? I expect the declines are not gonna be as severe as 2018, but any qualitative expectation would be helpful.

Ron Kisling -- Chief Financial Officer

Yeah, I think, as we indicated, overall we expect growth in total devices. We also, as we've indicated before, see a little bit of a blurring of the line between trackers and smart watches. Our Charge 3 product is our sort of smartest tracker, with some features that are typically seen as smart watches. We do see some increase in mix of smart watches relative to trackers in 2019, but overall we expect to see increase in devices 2019.

Nikolay Tatarov -- Longbow Research -- Analyst

Okay. And lastly just a housekeeping. Maybe I missed this. Did you guys say how much of for key units were smart watches? I think you broke down that last quarter, but I didn't see that in the 4Q.

Ron Kisling -- Chief Financial Officer

Yeah, on a revenue basis, 44% of the revenue was smart watches.

Nikolay Tatarov -- Longbow Research -- Analyst

And have you said on units basis, or you haven't disclosed that?

Ron Kisling -- Chief Financial Officer

No. We haven't provided the unit breakdown.

Nikolay Tatarov -- Longbow Research -- Analyst

All right. Good luck, guys. Thanks.

Operator

We will take our final question from Jeff Garro with William Blair and Company. Please go ahead.

Jeff Garro -- William Blair and Company -- Analyst

Good afternoon, guys, and thanks for taking the question. Maybe following up a little bit on the product portfolio, you know, it sounds like both smart watches and more accessible price points are key trends for 2019. So maybe hoping for a little bit more reconciliation on that with prior talents on the Charge 3 features kind of blending into smart-watch-like features.

Ron Kisling -- Chief Financial Officer

Could you maybe clarify the question? I'm not sure...I completely followed what you asked.

Jeff Garro -- William Blair and Company -- Analyst

Yeah. Absolutely. So the Charge 3 is a higher end tracker with appropriately higher end features, and you've talked about the blurring of the lines there. So maybe just trying to elicit some more comments on how a lower price point smart watch is something where you see a lot of demand and something that's missing out there in the marketplace.

James Park -- Chairman and Chief Executive Officer

Yeah, so we see that the tracker customer, even though there's a blurring of the lines, we still see a distinction in consumer preference between trackers and watches. A lot of it's driven by the form factor. This isn't a generic piece of consumer electronics that people are buying. It's something that's very personal that people are wearing on their body, so again there's a lot of sensitivity to how the device looks, how slim it is. And again there's a lot of people who prefer the slimmer tracker form factor versus a watch, but as Ron mentioned, from a software and sensor capability, there's probably gonna be a blurring of those lines over time.

Jeff Garro -- William Blair and Company -- Analyst

That makes sense and is very helpful. One more for me. I wanted to ask about the paid premium software offering. You guys have had some type of software coaching offering in the past, and it sounds like this is a reinvigorated effort. So I'm curious kind of what you've learned from prior efforts and what might be different about this go around.

James Park -- Chairman and Chief Executive Officer

Yeah, I think our existing premium offering Fitbit Coach is pretty narrow in how it's targeted. It's very focused around activity and more geared toward high-intensity activity, and so the offering that we're envisioning will be more mass appeal and cover a lot of different needs for consumers ranging from activity to one of our core strengths which is sleep. So it will be more holistic and more broadly targeted, and therefore we feel it's a much bigger opportunity than the premium offering that you see today.

Jeff Garro -- William Blair and Company -- Analyst

Great. Thanks so much.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 45 minutes

Call participants:

Tom Hudson -- Senior Chairperson of Finance

James Park -- Chairman and Chief Executive Officer

Ron Kisling -- Chief Financial Officer

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Scott McConnell -- DA Davidson -- Analyst

U G Anderson -- Morgan Stanley -- Analyst

Charlie Anderson -- Dougherty and Company -- Analyst

Jim Suva -- Citigroup -- Analyst

Nikolay Tatarov -- Longbow Research -- Analyst

Jeff Garro -- William Blair and Company -- Analyst

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