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U.S. Research Published by Raymond James & Associates

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FitBit, Inc. July 13, 2015

(FIT-NYSE) Initiation of Coverage Tavis C. McCourt, CFA, (615) 665-3644, [email protected]

Communications Technology: Mobile Devices __________________________

After >100% Post-IPO Move, Initiate at MP3 on Balanced Risk/Reward

Recommendation: We are initiating coverage on shares of FIT with a Market Perform rating following their ~100% appreciation since the IPO. The company is almost unequaled in its near-term growth potential amongst publicly traded equities, but at current price levels we believe the valuation largely reflects this reality, even assuming modest upside to our current estimates. Over the long term, we view the company as having tremendous growth potential if it is able to navigate the changing nature of health/fitness tracking from wearable devices into apparel and other form factors.

FitBit is a health/activity tracking business, not a device business: FitBit’s primary goal is to help customers improve their health, and although it does this through various wearable devices today, ultimately we expect it to morph over the coming years into other types of wearables, including apparel, as sensor technology continues to improve, creating total addressable market (TAM) expansion into the future.

This business is in “land grab” mode and FitBit has inside track to dominance: We believe that over time users will churn very little from their health/fitness app platforms in order to be able to measure performance against historical data that in general cannot be transferred between apps. In essence, this business is about growing an active user base today, and with over 9 million users, we believe FitBit has the highest level of active users amongst its core fitness/activity band competitors. This is important as history suggests that early market leaders in consumer devices have been able to maintain leadership for many years and even decades given advantages in branding, purchasing power, and retail shelf space.

Estimates: Our 2015, 2016, and 2017 non-GAAP EPS estimates are $0.58, $0.76, and $1.09, and we expect revenue growth of 87%, 35%, and 25% in these three years.

Risk/Reward and Valuation: We believe that FitBit will, even under a pessimistic scenario, maintain a revenue multiple at least in line with its high-growth consumer product peers, which argues for a 4.0x revenue multiple, or $24/share as downside protection. In terms of upside potential, if we assume the company beats near-term earnings and growth is maintained at ~60% into 2016, we expect investors to start valuing the company on a $2/share EPS estimate, and placing a 30x P/E on this optimistic scenario would argue for upside potential to $60. Currently, the shares are trading in the middle of this broad range, essentially in line with our DCF valuation, and at a valuation that is consistent with its peers after adjusting for its superior revenue growth, as outlined in the report. We are initiating coverage with a Market Perform rating.

Non-GAAP Q1 Q2 Q3 Q4 Full GAAP EPS Revenues EPS Mar Jun Sep Dec Year Full Year (mil.)

2014A NA NA NA NA $0.56 $0.63 $745

2015E 0.27A 0.08 0.04 0.21 0.58 0.46 1,396

2016E 0.21 0.12 0.08 0.36 0.76 0.64 1,884

2017E 0.29 0.18 0.13 0.49 1.09 0.92 2,355

Rows may not add due to rounding. Non-GAAP EPS excludes amortization of intangibles, stock-based compensation, and non-cash tax expenses. Initial public offering within last 12 months; trailing 12-month share price figures represent range since that time.

Rating _________________________________ Market Perform 3 Current and Target Price __________________ Current Price (Jul-09-15) $42.25 Target Price: NM 52-Week Range $44.38 - $29.50 Suitability High Risk Market Data ____________________________ Shares Out. (mil.) 204.9 Market Cap. (mil.) $8,657 Avg. Daily Vol. (10 day) 12,962,980 Dividend/Yield $0.00/0.0% Book Value (Mar-15) $2.02 LT Debt (mil.)/% Cap. $26/10% Earnings & Valuation Metrics ______________

2014A 2015E 2016E 2017E

P/E Ratios (Non-GAAP) 75.4x 72.8x 55.6x 38.8x Company Description ____________________ FitBit, Inc., headquartered in San Francisco, CA, produces consumer electronics in the form of wearable fitness tracking devices. Its products offer several different levels of sophistication ranging from simple pedometer features (steps, distance, calories, etc.) to fully connected, smartwatch functionality (caller ID, texts, music control, etc.). Founded in 2007, the company has very nearly created the “activity tracker” market out of thin air and has led the way in its early popularity and development.

mailto:[email protected]

mailto:[email protected]

FitBit, Inc. U.S. Research


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Contents

Investment Thesis .................................................................................... 1

Valuation .................................................................................................. 3

Company Description ............................................................................... 5

Industry Overview .................................................................................... 12

Market Position and Opportunity ............................................................ 20

Financial Analysis ..................................................................................... 27

Outlook ..................................................................................................... 29

Valuation .................................................................................................. 34

Management Team .................................................................................. 36

Investment Risks ...................................................................................... 39

Conclusion ................................................................................................ 41

U.S. Research FitBit, Inc.


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Investment Thesis

We view FitBit as a market leader in the emerging space of health/fitness tracking. Today, FitBit sells a growing suite of wrist-worn wearable devices that measure a user’s steps taken, heart rate, sleep patterns, running pace, altitude changes, and other data that is useful to both mainstream users looking to become healthier and active and more elite athletes training for high-level races. FitBit is the dominant vendor of activity bands in the U.S. and the world, and is just now entering the fitness watch/smartwatch product category. Over time, FitBit’s business is likely to grow in two dimensions. First, more sensors and capabilities are likely to be measured that open up the market for more use cases. Second, measurement devices are likely to expand from wrist-worn devices today to actual apparel over time as sensors and chipsets become adapted to be woven into fabrics. FitBit is still at the beginning of a very long journey, and we believe that if the company can successfully navigate the many significant changes likely to occur in the health/fitness tracking market over the next several years, the company has the potential to grow revenues, earnings, and cash flows at a very significant rate for many years to come. The following are the keys to our investment thesis on FitBit.

Ultimately, This Is a Battle of App Platforms, Not Devices

There is a natural “lock-in” of consumers to a specific brand of fitness/activity tracker as the devices constantly update their associated applications and store the data on behalf of the user. Much of the value of tracking health data is comparing and contrasting different time periods – a user can see their improvement or can identify a lack thereof. Because FitBit does not allow the data to be transferred to other platforms, the user needs to continue to replace his or her wearable device over time with other FitBit devices in order to track these changes and see the patterns. Because of this dynamic, we view this market as being in a “land grab” phase with substantial potential market share shifts near term, but ultimately within three to five years, as the market matures, market shares may become solidified. FitBit is positioned well if this thesis plays out given its early lead in the market, and we believe the company could grow its platform from ~10 million active users today to hundreds of millions over time if globally successful.

The Potential Market Is Enormous

Although we expect FitBit to sell nearly 20 million devices next year, with average retail price points barely above $100, history suggests the consumer market for this type of device can become much, much larger. Gartner believes the total market for wearable health/fitness tracking devices is already over 70 million units annually, generating ~$9 billion in revenues, including all the GPS running watches, heart rate monitor chest straps, pedometers, activity bands, and smartwatches. This broader market definition is expected to roughly double by the end of the decade. If we look at consumer product markets where $99 price points are the norm, annual shipments can oftentimes reach well over 50 million or even 100 million units (digital cameras, low cost mobile phones, etc.).

Social Aspects Are Important

If one were to ask how FitBit has been able to garner the early lead in the activity tracker market, the answer would most likely start with the company’s understanding of the importance of social aspects of health/fitness monitoring to drive usage and adoption. FitBit has an active user base of over 9 million today, and many of these users were introduced to the product and its capabilities from a friend or family member. That friend/family member likely bought one and then invited in a number of his or her friends/family members to purchase a device so they could compare and contrast their performance and progress to a shared goal – to get healthier. FitBit spends substantial resources in making sure users



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become more social with their FitBit and facilitates contests/competitions between users, too. In addition, the company tracks who is sharing their experience with their social circle and has demonstrated that individuals who do share are much more likely to remain active users and to become repeat buyers. These efforts again create stickiness to the brand as one’s entire social circle needs to utilize a FitBit device to participate. We expect these social aspects of the product will continue to be important over time in driving market growth and will determine the ultimate market share. It is also clear that FitBit’s management understands this dynamic and knows how to execute on a strategy to drive this usage.

Our Thoughts on Sustainability of Market Share

For every iPhone-type global success story in consumer devices, there is a Flip HD that proves to be nothing more than a “flash in the pan,” and it is very difficult to tell the difference between the two at early stages of market development. However, we would note that more often than not, early market share leaders in growing markets tend to remain dominant for some time. The examples we would cite are GoPro (action cameras), Logitech (mice and keyboards), Garmin (PNDs and GPS watches), NETGEAR (Wi-Fi routers), and Microsoft (PCs). Apple has historically been an outlier in this regard by techni-cally being late to the MP3, smartphone, and tablet markets, but ultimately dominating all three. However, we chalk this up to Apple differentiating so successfully within these mar-kets that it essentially created new categories altogether in the eyes of most consumers (i.e., most consumers would not have viewed Blackberry as a smartphone in the same sense that the iPhone was a smartphone). Based on our experience, FitBit has the “inside track” to remain the dominant market leader in health/fitness tracking for many years as long as it continues to stay on top of technological changes and does not get caught off guard as the industry invariably shifts towards other types of devices in the future (watches, apparel, etc.).

Near Term, International Expansion Is the Obvious Growth Opportunity

In 2014, only 24.5% of FitBit revenues were outside the U.S. If we compare this to more mature global consumer product companies, it is clear that there is a lot of room for further growth internationally, as shown in the adjacent table with a select group of consumer product companies.

As shown, the group above averages ~42% of revenues outside the U.S., whereas FitBit only had 24.5% of revenues generated outside the U.S. last year. FitBit has ample opportunity to expand outside the U.S. if it is to become a successful, globally-oriented consumer products company.

Consumer Product Geographic Analysis

2014

% Sales Outside

The US

Apple 59.7%

Garmin 46.4%

Netgear 44.7%

Plantronics 42.0%

Deckers 24.3%

TomTom 82.7%

Sony (Yen) 83.2%

Nike 55.7%

Harley Davidson 29.4%

Logitech 57.1%

Universal Electronics 64.1%

Luxottica 44.0%

GoPro 36.2%

Harman International 69.6%

Michael Kors 21.8%

Starbucks 23.4%

MobilEye 45.8%

Tesla 54.0%

LuLu Lemon 5.9%

Polaris Industries 25.4%

Skull Candy 29.4%

Under Armour 9.3%

Control4 23.4%

Average 42.5%

Fitbit 24.5%


2014

% Sales Outside

The US

Apple 59.7%

Garmin 46.4%

Netgear 44.7%

Plantronics 42.0%

Deckers 24.3%

TomTom 82.7%

Sony (Yen) 83.2%

Nike 55.7%

Harley Davidson 29.4%

Logitech 57.1%

Universal Electronics 64.1%

Luxottica 44.0%

GoPro 36.2%

Harman International 69.6%

Michael Kors 21.8%

Starbucks 23.4%

MobilEye 45.8%

Tesla 54.0%

LuLu Lemon 5.9%

Polaris Industries 25.4%

Skull Candy 29.4%

Under Armour 9.3%

Control4 23.4%

Average 42.5%

Fitbit 24.5%


Source: Raymond James research.




Valuation

(EV/Revs) / Revenue Growth

This will be a volatile stock. There, we said it. Recent IPOs, especially ones well received by the market, tend to trade well for the first several months given limited supply of shares on the market and high demand from investors. Oftentimes the shares can have meaningful dips in front of lockup expirations as investors brace for a greater supply of stock hitting the market. We expect this will happen with FitBit as well, and a chart of GoPro over the last year is probably not a bad analogy for what investors may experience from FIT. However, in terms of core valuation, at some point 12-18 months after IPO, the shares will find a more stable level where the supply/demand environment for the shares is more balanced and the price more accurately reflects a fair fundamental valuation. Investors will likely argue over long-term sustainability of the growth and margins at FitBit, but we suspect that, ultimately, the company will trade at some kind of multiple of revenues or EPS relative to a growth rate. The metric that we find helpful with these types of stocks is (EV/revenues) / revenue growth, or ERRG. The ERRG multiple effectively normalizes revenue multiples across companies with similar long-term margin structures and sustainability, and given FitBit’s superior growth to just about anything else in the public equity markets, normalizing for growth is a necessity. ERRG is typically higher for recurring revenue software companies with low customer concentration and high long-term margins, and lower for hardware/device companies with little recurring revenue. Therefore, these types of companies generally trade at ERRGs that are reasonably high (0.3 on average). We compare FitBit to a number of high growth consumer product companies, as many share the same long-term margin structures and suffer from similar market share risks over time. As shown below, the company trades at 55.6x its 2016E earnings and at an EV/sales multiple of of 5.4x, both well above the median of its peer group, although we note that FitBit also has a stronger top-line growth trend relative to its closest peers, and a higher margin structure as well. The 2016E ERRG for its peer group is 0.17, whereas FIT’s current valuation creates an ERRG of 0.16, a slight discount. On a scatter plot of EV/revenue vs. revenue growth, FIT would seem to be trading roughly in line with what one would expect realtive to this comp group when adjusting for differences in growth rates. For these reasons, we believe FIT is about fairly valued assuming our current growth rate and long-term margin expectations. We note that with consumer product related companies, these growth rates can change dramatically, changing these valuation dynamics quickly, and creating volatility in the underlying shares, and we expect this to be the same for FIT.

Raymond James Consumer Product Industry Valuation Analysis Enterprise EV/ EV/ 2015 2015 2015 2016 2015E 2016E

2015E 2016E Value 2015E 2015E 2016E EBITDA Gross Revenue Revenue EPS EPS 2016

P/E P/E ($Mil) EV/EBITDA Revenues Revenues Margin Margin Growth Growth Growth Growth (EV/Revs)/Rev Growth

Growth Consumer Products

Fitbit - FIT 72.8x 55.6x 10,224$ 41.0x 7.3x 5.4x 18% 48% 87% 35.0% 3.6% 31.0% 0.16

GoPro - GPRO 31.5x 24.8x 7,240$ 19.0x 3.9x 3.2x 16% 45% 35% 20.0% 25.0% 27.3% 0.16

Harman - HAR 19.6x 15.0x 7,988$ 11.5x 1.3x 1.1x 9% 29% 13% 13.5% -0.9% 30.4% 0.08

Mobileye - MBLY 145.9x 75.9x 13,057$ 122.2x 60.2x 36.7x 47% 74% 51% 64.1% 85.7% 92.3% 0.57

Starbucks - SBUX 32.9x 27.9x 81,840$ 17.7x 4.3x 3.8x 21% 22% 17% 11.7% 18.2% 17.7% 0.33

Tesla - TSLA NM 75.4x 32,955$ 96.5x 5.7x 3.7x -3% 28% 80% 52.9% -121.4% NM 0.07

Lululemon - LULU 32.4x 27.2x 8,234$ 18.1x 4.1x 3.5x 20% 49% 13% 14.6% 1.9% 19.0% 0.24

Polaris Industries - PII 19.9x 17.0x 10,316$ 10.7x 2.1x 1.9x 17% 28% 12% 9.5% 11.7% 17.0% 0.20

Skull Candy - SKUL 19.6x 14.6x 192$ 6.6x 0.7x 0.6x -3% 35% 14% 10.5% 42.2% 34.3% 0.06

Under Armour - UA 78.7x 59.4x 18,957$ 37.1x 5.0x 4.0x 7% 47% 24% 22.6% 12.9% 32.5% 0.18

Control4 - CTRL 24.8x 16.0x 104$ 8.1x 0.6x 0.5x -5% 51% 13% 16.3% -41.5% 54.8% 0.03

Growth Median 31.5x 26.0x 9,275$ 17.9x 4.0x 3.4x 12.3% 40.0% 15.3% 15.5% 12.3% 30.4% 0.17

S&P 500 17.0x 15.5x 2.0% 2.0%

Source: Company filings, FactSet, Raymond James research

Raymond JamesConsumer Product - Industry Valuation Analysis

Source: Company filings, FactSet, Raymond James research. As of 7/9/15




2015 EV/Revenues vs. Revenue Growth

Source: Raymond James research. As of 7/9/15.

Risk/Reward

We believe downside potential in FIT’s stock would be a valuation consistent with its peer group revenue multiple despite its much stronger growth outlook. That would be consistent with ~4.0x EV/revs on 2015 estimates or ~$24/share. In terms of upside, if the company can keep its top-line growth growing at an elevated ~60% rate in 2016 as well, with typical margin flow-through, we expect EPS would likely be ~$1.30 and likely looking towards a $2.00 number in 2017. Under such a scenario, we expect a 30x P/E would be very achievable, making a $60 optimistic scenario a possibility. The shares trading at $40 are trading near the midpoint of these bearish/bullish scenarios.

Summary

We believe FitBit has the early lead in a very large potential market of health/fitness tracking. Although the product set and competitive set within this market segment may change over time, FitBit has proven itself adept at using its early advantages to maintain a high market share and growing user base. Although consumer product markets can be volatile, in most instances, early market leaders tend to dominate those markets for some time, and therefore we believe FitBit is likely to maintain its impressive growth and market share for some time. After rallying over 100% since the IPO, the shares are now trading at 5.4x 2016E EV/revenue and 55.6x 2016E P/E, a meaningful premium to its closest peers. Even accounting for FitBit’s stronger growth using trend line analysis and an EERG multiple, the shares appear fairly valued, warranting a Market Perform rating.




Company Description

FitBit (“the company”) is headquartered in San Francisco, California, and sells activity trackers and health and fitness trackers. FitBit helped create and now dominates the market for various wearable devices that track increasing amounts of health data. The FitBit platform combines connected health and fitness devices (pedometers, wearable activity bands, watch form factor, and a scale) with software and services, including an online dashboard and mobile apps, data analytics, motivational and social tools, personalized insights, and virtual coaching through customized fitness plans and interactive workouts. The platform helps people become more active, exercise more, sleep better, eat smarter, and manage their weight. FitBit currently offers seven different wearable products (Ultra, One, Zip, Flex, Charge, Charge HR, and Surge), a connected weight scale (the Aria), and an online, premium service, which offers additional features like food tracking and personalized coaching. FitBit’s online engagement encourages users to upload their accomplishments, share them with friends and with the public, to set goals and to obtain “achievements.” In order to measure and record an individual’s motion, progress, calories burned, etc., FitBit uses a various combinations three-dimensional accelerometer, altimeter, gyroscope, optical heart rate monitor, and GPS connectivity, and connects its devices via Bluetooth to one’s smartphone to display results.

History

FitBit was founded in 2007 by James Park and Eric Friedman. The pair had worked together for a number of years and on multiple different projects prior to founding FitBit. Notably, Park and Friedman worked together at CNET, Windup Labs, and Epesi Technologies, collaboration that stretches back more than 10 years. At the time of founding FitBit, the two realized that sensors and wireless technology had advanced to a point where they could be integrated into consumers’ everyday lives, to help people live more active and healthy lives.

After a year of development, FitBit released its first product – what is now known as the FitBit Classic, which was essentially a pedometer that one would wear in their pocket or clip to their belt – in September 2008. The company did not upgrade this initial launch until October 2011 when it released the FitBit Ultra. At the same time, the first native app for the iPhone was announced. A few months later, in March 2012, a native app for Android devices was release together with the FitBit Aria, its smart weight scale. Also in 2012, Fitbit launched its One and Zip products, both “clippable” in design and offering similar functionality. In 2013, FitBit released its first wrist-worn device, the Flex, and later that same year in October, it released the Force, though the Force would only be available for roughly four months before a voluntary recall was instituted in February 2014. That recall arose because of allergen-related, contact dermatitis. The specific materials causing these allergies were methacrylate (a common adhesive) and, to a lesser degree, nickel. Later in 2014, though, the company released its best-selling products yet, the Charge and the Charge HR. At the same time, FitBit announced the release of its Surge, which marked a turning point from pure activity tracking into the realm of fitness watches and even smartwatches, as the Surge has a GPS chip for run tracking, and allows for calls, texts, and music manipulation via a connected smartphone. Finally, in order to strengthen its Premium service offering, FitBit acquired FitStar in March 2015. FitStar offers enhanced features of coaching, workout customization, and goal-tracking personalization. A simple diagram (on the following page) shows this timeline.

Today, like GoPro in action cameras, FitBit has helped an existing industry bloom into something totally new. While smartwatches were foreseeable and while sports watches had been around for a long time (see Garmin), no other company managed to make the wearable activity tracker as mainstream as has FitBit. It has established a global reach that leverages 40,000 retail stores in 48 different countries and has leveraged this into sales of nearly 21 million devices since inception. In aggregate, FitBit users have taken more than 11 trillion steps since the rollout of the Classic, and the company maintains a near-70% market share (by dollars) in the U.S. activity tracker space. The mission statement, “To empower and inspire you to live a healthier, more active life,” is fitting for a company with these accomplishments.




Company History

Year Month Release Event

2008 September FitBit Classic

2011 October FitBit Ultra

Native App for iPhone

2012

March Native App for Android

April FitBit Aria

September FitBit One

FitBit Zip

2013 May FitBit Flex

October FitBit Force

2014 October

FitBit Charge

FitBit Charge HR

FitBit Surge

2015 March Acquisition of FitStar


Products

Before getting into the individual products offered by FitBit, it is important to note the hierarchy that FitBit uses to define target consumers for each product. FitBit categorizes consumers based on their goals, their frequency of activity and the intensity of their activities. The pyramid below illustrates the three categories of consumer, as defined by FitBit, and the product deemed most appropriate for each segment.

Fitbit’s Customer Pyramid

Source: FitBit, Inc., Raymond James research.




FitBit Classic

In September 2008, FitBit launched its original fitness tracking device, called the FitBit Classic. This original iteration was a simplified “clip-pable” device designed to track steps taken, distance traveled, calories burned, activity intensity, and sleep. The Classic, though, was discon-tinued in 2011. It debuted at $99.

FitBit Ultra

In October 2011, FitBit released a hardware upgrade for its Classic and named the iteration the FitBit Ultra. Following in the clippable tradi-tion, the Ultra offered all of the same functionality as the Classic but with the added features of an altimeter (measured in “floors,” which equaled about 10 feet), a clock, a stopwatch, and the option of new colors. This version was discontinued in 2012 but it debuted at $99.99.

FitBit Aria

The Aria is FitBit’s “smart” scale that can identify up to eight different users and can measure their weight, lean body mass percentage, body fat percentage, and body mass index (BMI). Once the data are collected, Aria uploads them wirelessly to a user’s FitBit Dashboard. The company boasts that daily users lose an average of 9 pounds in the first six months, that 74% of users lose weight in the first month, and that daily users are 15% more likely to lose weight than others. The Aria runs on standard AA batteries and bears a $129.95 price tag. It was released in April 2012.

Source: FitBit, Inc.

FitBit Zip

Announced in September 2012, the Zip represents FitBit’s current entry-level product line targeted at the “Everyday” user demographic. It allows an individual to track the most common data such as steps taken, distance traveled, calories burned, and active minutes. It, too, falls into the clippable category and is offered in five colors. The Zip was the first to employ replaceable watch batteries. These can last up to six months. As with other segments, the Zip has the ability to sync wire-lessly with supported mobile devices. The Zip costs $59.95.





FitBit One

Released concurrently with the Zip, the FitBit One offers a slightly more advanced product while remaining in the clippable category. It is recog-nized as an upgrade for the Ultra and is also targeted at the Everyday consumer. In addition to steps, distance, calories, and activity, the One also measures sleep duration and “floors” climbed (one floor generally equals 10 feet). To go along with its data collection related to sleep, the One includes a silent/ vibrate alarm. It also syncs wirelessly with mobile devices, is offered in two colors, and features a rechargeable battery that lasts 10-14 days. The FitBit One costs $99.95.


FitBit Flex

May 2013 marked the release of the Flex and also the time when FitBit products would take the form with which most people are now familiar – the wristband. Also directed at the Everyday user, the Flex tracks steps taken, distance traveled, calories burned, active minutes and sleep and also offers the silent/vibrate alarm. Everyday users who are more comfortable with wearing a visible fitness tracker and who want easy access to information are the most likely buyers of this product. The Flex features an LED screen with five individual lights that will illuminate based on a user’s progress towards his or her daily goal. For example, if a user wished to take 1,000 steps, each time he or she completed 200 steps (20% of the goal), another light would be illuminated. Once 1,000 steps had been reached, all five lights would be illuminated. The Flex also offers inter-changeable wrist bands in 10 colors and a rechargeable battery that lasts up to five days. It costs $99.95.


Fitbit Force – Recalled

The Force was announced in October 2013 and followed in the wristband tradition of the Flex but it added some gravity to the LED display, giving it both time and daily activity information. It offers the same data collection as the Flex but was recalled voluntarily in February 2014 due to allergic reactions stemming from methacrylate and nickel used in the materials. It is no longer offered by the company.




FitBit Charge and Charge HR

In October 2014, FitBit released the Charge and the Charge HR (“Hear Rate” monitor). These were designed to be replacements for the Flex and offered much of the same functionality. Targeted at the Everyday user, Charges allow for measure-ment of steps taken, distance traveled, calories burned, floors climbed, minutes of activity, and sleep quality, and they also display the time along with caller ID for incoming calls from a paired smartphone. All the above information is provided on the same OLED screen. The same silent/vibrate alarm is available on Charges. They also come in four colors, three sizes, and feature a rechargeable battery that lasts seven to ten days. The Charge currently sells for $129.95. The Charge HR, on the other hand, differs only in price ($149.95), in the fact that it measures heart rate, and in the fact that it is targeted to the middle tier of the previously shown pyramid (“Active”). It institutes a proprie-tary technology known as PurePulse, which is a form of optical heart rate monitoring.

Charge Charge HR


FitBit Surge

In October 2014, FitBit also announced the release of its Surge activity tracker, the Cadillac of its product lines. The Surge, though, occupies somewhat of a grey area between a fitness tracker and a smartwatch. It offers all of the same features of the Charge HR but adds in water resistance, full GPS tracking for pace and elevation data, an LCD touchscreen interface, call and text notification, and music control for paired smart-phones. Unlike any other product lines, though, the Surge is targeted at the performance athletes, those who fall into the uppermost tier of the consumer pyramid. The Surge is offered in three colors and three sizes and costs $249.95.





Product Comparison

Classic Ultra Zip One Flex Force Charge C+HR Surge

Price $99 $99.99 $59.95 $99.95 $99.95 $129 $129.95 $149.95 $249.95

Metrics

Steps ● ● ● ● ● ● ● ● ●

Distance ● ● ● ● ● ● ● ● ●

Calories ● ● ● ● ● ● ● ● ●

Active Minutes ● ● ● ● ● ● ● ● ●

Sleep ● ● ● ● ● ● ● ●

Clock ● ● ● ● ●

Floors ● ● ● ● ● ●

Heart Rate ● ●

Elevation ●

Pace ●

Splits ●

Laps ●

Multi-Sport ●

Specs

Battery RP* RC** RC** RC** RC** RC** RC**

OLED Display ● ● ● ●

LCD Display ●

GPS ●

Features

Clippable ● ● ● ●

Wireless Sync ● ● ● ● ● ● ●

Colors ● ● ● ● ● ● ● ●

Sizes ● ● ●

Alarm ● ● ● ● ● ●

Caller ID ● ● ●

Texts ●

Music ●

Demo. M/F (%) N/A N/A N/A N/A N/A N/A 55/45 50/50 70/30

Target Consumer E E E E E E E A P

*RP – Replaceable, **RC – Rechargeable Note: Gray indicates a product is no longer being offered.





Geographic Breakdown

FitBit divides its revenue into four segments: Americas, Americas ex. U.S., EMEA, and APAC. As can be seen below, roughly 75% of sales have come from the U.S. segment, although that is down from 99% in 2011. The emerging picture is one of revenue growth and global expansion.

Revenue by Region

Source: FitBit, Inc., Raymond James research. $ in millions

In the most recent full year, 2014, the U.S. clearly dominated the sources of revenue. However, EMEA and APAC have shown some growth from 2011 when, combined, they accounted for less than 1%.

The following graph shows the growing portion of total revenue attributable to EMEA, Americas ex. U.S., and APAC over the last four years. The three regions represent a significant market opportunity for FitBit.

2014 Revenues by Region


Percentage of Total





Retailers/Distributors

As can be seen in the below graph, Fitbit relies a great deal on distributors and retailers to sell its products. The top three accounted for 35+% of sales in 2014 and 40+% of sales in 1Q15. The data again show the comparatively concentrated nature of Fitbit’s distribution.

Percent of Revenue by Retailer/Distributor


Industry Overview

We view FitBit as a health and fitness tracking company, but today its platform is entirely monetizeable through the sale of wearable devices, and we will therefore focus on these products when discussing the industry dynamics. As an industry, activity bands, fitness bands, fitness watches, and smartwatches can all be categorized as “wearable devices,” and that is the umbrella term we will utilize to describe FitBit’s most immediate market opportunity.

However, before discussing the various entrants, it is important to set the stage for the overlapping categories of products known as “wearables.” The chart below demonstrates the different segments. There are at least three categories of devices that are primarily used as activity/fitness trackers. These include wristbands, such as the FitBit Flex, clips/straps like the FitBit One, and sports watches such as the Garmin Forerunner series, which typically have GPS chips. Under the wearables moniker, we also list smartwatches, which we would define as any type of wearable that connects with a smartphone and allows users to access certain information that would normally be obtained on the smartphone screen. Finally, we list garments as a category, as we suspect that over time garments will be used to track activity as well, although there are no meaningful mainstream products in this category as of yet. Ultimately, we expect these categories to merge and for most vendors to compete across all categories and for certain products to cross traditional boundaries, such as the FitBit Surge, which is clearly a sports watch with GPS, but also interacts with smartphone controls, and the Garmin Vivosmart, which is a fitness band form factor, but displays the time and provides notifications from a user’s smartphone.




Wearables

Note: The FitBit Surge shows up in both activity/trackers and smartwatches as it is somewhat of a hybrid.


Below, we outline FitBit’s broad competitors across the many areas of wearables.

Garmin

Garmin has been involved in the wearable device industry for quite some time, with penetration in fitness tracking, smart wristbands, sports watches, and smart watches. Its product lineup includes the Vivofit (fitness tracker), the Vivosmart (smart wristband), the Vivoactive (smartwatch/fitness watch), the Forerunner series (running watches), the Edge series (cycling watches), and the fēnix series (multisport watches). With so many SKUs it is no surprise that its price points span a wide range – from as low as $40 for the Vivofit with the least expensive band all the way up to $600 for a metal version of the fēnix and for a high end Edge product. Because Garmin offers such a wide variety of products in this space, the table below illustrates the major takeaways.

Garmin Product Features

*Basic Activity

Tracking Smartphone/

Wi-Fi Connectivity GPS

FitBit Competitor

Vivofit ● Flex, Charge/HR Vivosmart ● ● Charge/HR Vivoactive ● ● ● Surge Forerunner ● ● NA Edge ● ● ● NA fēnix ● ● ● Surge *Basic Activity Tracking includes steps, distance, calories, and sleep.





It should be noted that the Edge is geared towards cyclists, a category in which FitBit still lacks some prowess. Also the fēnix and some Forerunners offer more than the typical steps, distance, calories, and sleep. They include measurements of VO2 max, cadence, stride form, and other data pieces that are geared towards the Performance category in FitBit’s sales demographics. The data from Garmin’s products can be uploaded onto its platform, Garmin Connect, to be analyzed on a smartphone or PC. Although beyond the scope of this report, Garmin even sells wearable devices for dogs, in the form of collars that help dog owners train their dogs more effectively.

Garmin’s product line is incorporated in its fitness segment, but also bleeds into its Outdoor segment. In aggregate, we estimate its wearable devices generate nearly $1 billion per year in revenue and are growing 10-20%, generating gross margins of ~65% and EBIT margins of 30-35%.

Jawbone

Jawbone was originally an audio-focused company, inventing a new type of wearable Bluetooth headset for cell phone users. It broke into the fitness/activity tracking market in 2011 with the release of its UP wristband. UP offers similar data metrics to other activity trackers including steps, calories burned, and sleep monitoring. The latest iteration, the UP3, released in April 2015, implements bioimpedance to gauge heart rate. Bioimpedance sends a tiny electrical signal into the skin and analyzes resulting perturbations to deduce biometrics like heart rate. The collected data can be viewed using Jawbone’s online platform. The UP3 costs $179 and is most comparable to FitBit’s Charge HR.

Xiaomi

Like many of its Chinese counterparts, Xiaomi is attempting to sweep out the low-end market. Starting as low as $12.99, the Mi Band offers many of the same features as the aforementioned competitors including steps, distance, calories burned, and sleep monitoring. There is an accompanying Mi Fitness App (not to be confused with the alternative “My” Fitness apps) that stores and monitors a user’s data, but the history only goes back one year. The app has also recently been made compatible with Google Fit, which should garner further exposure. Considering this, it is no surprise that Mi Bands also offer further integration with Android devices such as automatic, proximity-based unlocking. Despite its low price, the Mi Band also comes with a modified call notification feature. When a user’s phone has been ringing for a certain amount of time, the band vibrates to keep the individual from missing important calls. The Mi Band could present some disruption as its price is below that of the Zip but offers functionality on par with some of the higher end FitBit products.

Misfit

Misfit offers two main products – the Shine and the Flash. The Misfit Shine, released in 2012, is the mainstream activity tracker that measures steps taken, calories burned, distance traveled, and sleep depth. It can be paired with a mobile app available for both iOS and Android systems and costs $100. The Flash, released in October 2014, is the less expensive version ($49), whose lower price owes to the use of rubber rather than airline grade aluminum. One unique feature of Misfit products is their versatility in wearing. Shines and Flashes can be worn on the wrist or clipped to nearly any appendage or article of clothing. Misfit’s products also incorporate an online platform for data aggregation and monitoring. The Shine and the Flash compete most closely with the Zip, One, Flex, and the Charge.




Nike

In 2012, Nike released its FuelBand, which tracks calories, steps, Fuel points, sleep, distance, and other basic activity data. Uniquely, it offers a way to log different types of workouts and measure their relative intensity using a “Sessions” function. An individual Session can be anything from Yoga to plyometrics. The Nike+ daily activity tracking app is designed for synchronization with an iPhone 5 or later and allows for instantaneous sharing between you and your community. Other versions (Nike+ Running and Nike+ Training Club) allow for more specialization of the tracked activity.

Microsoft

Microsoft joined the activity tracking party in 2014 with its Microsoft Band, which tracks steps, distance, calories, activity, sleep, heart rate, and skin temperature. It also contains features of the smartwatch category including text notification, caller ID, calendar integration, and GPS. It was designed to operate with iPhones, Androids, and Microsoft’s OS. The Band also includes a voice command interface using its Cortana function. In order to log and store data, the Band is compatible with MyFitnessPal, RunKeeper, HealthVault, MapMyFitness, Strava, and MapMyRide.

Adidas

In contrast to other fitness tracker varieties, the Adidas Fit Smart is not designed to be worn 24/7. It is intended for use only during strenuous activity. It includes pace information, stride feedback, calories burned, distance traveled, and optical heart rate sensing technology developed by Mio. Its unique feature is a heart rate goal that produces messages telling the user whether to increase or decrease intensity to hit a targeted number of beats per minute. The niche occupied by Fit Smart is notable, though, as other fitness trackers with HR monitoring tend to have difficulty in higher intensity activity. The unit costs $199 but because it is specifically made for higher intensity activity, there is not a natural corollary among FitBit products. The most likely competing units are the Flex and the Charge/HR.

Suunto

Suunto is a Finnish company that has been around for nearly 100 years. It specializes in GPS based units but has developed a following among performance athletes in the wearables category. Over the years, it has developed a large number of tracking devices, GPS units and heart rate straps. Suunto’s differentiation is derived from its Movescount platform that allows users to download, manipulate, and even create their own apps. While the “Ambit” product line offers many standard activity tracking metrics, its use of GPS, altitude-barometer-compass functionality, and laps/routes features puts it in competition against FitBit’s Surge. The top of the line Suunto Ambit3 with HRM costs $550.

TomTom

TomTom has produced GPS-based devices since its inception in 1991. It entered the sports watch category with the release of the TomTom Runner ($129) and the TomTom Multi-Sport GPS watch ($149). Each product tracks distance, calories burned, pace, elevation, duration, route, and stride. Heart rate monitoring comes in the form of an added strap or in higher end models. An added feature is the ability to “race” yourself, or rerun previously recorded routes to try and achieve a better time. Both the Runner and the




Multi-Sport GPS watch allow for synchronization with iOS and Android devices. TomTom’s online platform is called MySports but it is compatible with RunKeeper, MapMyFitness, and Strava. The Runner likely competes with FitBit’s Charge/HR, and the Multi-Sport GPS watch likely competes with the FitBit Surge.

Polar

Like several of the previous companies, Polar has released multiple iterations of its sports watches, with the most recent ones being the A300 activity tracker, the M400 GPS watch and the V800 multi-sport watch. Each unit tracks steps, sleep, distance, calories burned, etc. throughout the day. A unique feature of the M400 is the “Run Estimator,” which tells a user the time it will take to complete a target distance given his or her current pace. Run Estimator may sound simple but, as the M400 is targeted at runners, the calculation alleviates some of the pace-related difficulties encountered by more performance-driven users. Measuring heart rate, though, requires an additional strap. All units, however, offer access to Polar Flow and, when using the H7 heart rate strap, Polar Beat. It also syncs with third-party apps like MyFitnessPal. The A300 is priced at $129, the M400 at $179, and the V800 at $449. Given the range of products available from Polar, there is competition with FitBit’s Flex, Charge/HR, and Surge.

Striiv

Striiv offers two different versions of the activity tracker product line. The Touch is a black smartwatch with activity tracking functions and sleep monitoring. The Fusion is the same as the Touch but comes in a variety of colors. And finally, the Band is a basic activity tracker that does not offer smartwatch functionality. The smartwatch versions offer steps, distance, and calorie and sleep tracking, but also provide call/text notifications, meeting alerts, and weather advisories. One unique factor is the detachable wristband, which allows for more versatile carrying. Prices range from $59 (for the Band) to $99 for the Fusion.

Smartwatches

While some overlap certainly exists between smartwatches and activity trackers/sports watches, they are considered distinct from one another in that smartwatches are geared towards mobile communication first, and the ability to monitor your personal wellness is an indirect result of each device’s native apps. For example, the Garmin fēnix, when paired with a smartphone, provides users with caller ID information and allows them to read incoming texts, etc. However, these functions are secondary to the fēnix’s use as an activity tracker. The caller ID and text notifications are meant to make staying in touch while exercising more convenient. In contrast, the smartwatch category employs Internet connectivity, calendar integration, call rerouting (to a Bluetooth headset, for example), and other device control as a primary function. The fitness tracking features are meant to be enjoyed as a peripheral function. As smartwatches are the latest in mobile connectivity and do offer many of the desired functions found in activity trackers, they will undoubtedly wield some influence over the near-term evolution of the market. However, they are generally more expensive and do not provide independent functionality from a user’s smartphone. In other words, the use of a smartwatch requires owning a smartphone. While the majority of FitBit’s target market likely already owns a smartphone (75% of revenues come from North America), the difference in cost between buying an activity tracker and buying a smartwatch can, in many cases, be hundreds of dollars. The way this relationship is manifested in consumer behavior will be discussed shortly. Major players in the smartwatch category include Apple (Apple Watch, $350-600, or even up to $12,000), LG (G Watch, $229), Motorola (Moto 360, $299), Pebble ($199) and Android (Gear S, $329). Because of the nature of this product segment, all of these devices are assumed to compete with FitBit’s Surge.




Smart Garments

The smart garments industry is very young. It currently only includes specialized products distributed to professional athletic associations and serious research affiliates. The idea behind this market is that, eventually, individuals will don an athletic shirt or athletic shorts that have imbedded chips constantly gathering data on all the metrics discussed so far. To date, the only notable player in this market has been Under Armour, which has no activity tracking hardware as of yet, but does offer UA Record, an online platform designed to store data gathered from various tracking devices. We do, however, expect the company to launch wearable devices and garments in the future.

Platforms

In our opinion, in the long term, the company who can offer the most useful platform to display and analyze data, and who gathers the most users will likely dominate the market for devices/hardware/wearables. As the differences in functionality are fairly limited, consumers are more likely to gravitate towards a product that can offer a simple, intuitive software interface and allow for easy access to an individual’s historic data. This trend has resulted in the development of a multitude of different platforms – essentially one platform for each company that produces activity trackers plus others from companies that specialize in just providing a software platform. The following is a brief discussion of each of the major players’ online communities.

FitBit App

FitBit has excelled in developing not only an easy to use app, but also in leveraging the app to promote an online community. The app encourages community sharing and group goal-setting. When a user achieves certain milestones (a large number of steps in a single day, for instance) that individual’s social circle can offer support and congratulations. Of note is the fact that FitBit intentionally elected not to integrate with Apple’s HealthKit (to be discussed further down). This decision allows the company to remain in control of its data and, more importantly, to remain in control of its users’ data. Recently, FitBit acquired FitStar, which enabled online, digital coaching through FitBit’s Premium service. FitStar’s software helps individuals set and meet goals, and it provides advice, tips, and encouragement. FitBit’s records show that it currently has 9.5 million active users.

Garmin Connect

Garmin Connect is the namesake’s online platform, developed to allow for simple uploading and monitoring of historical data. It offers sharing features so the user can encourage, compare, and set goals with his or her friends. It is compatible with walking, running, cycling, swimming, and skiing data. Garmin is truly unique in terms of the breadth of activities its platform tracks. The interface displays goals, tracks progress, and allows for the other individuals in a user’s social network to interact with him or her. We estimate Garmin Connect has 8 million active users.

Jawbone UP

Jawbone UP, or just UP, is the app that can be downloaded on iOS devices to facilitate the viewing and tracking of a user’s data. Notably, it does not require an UP2, 3 or 24 to use. Its functions can be




performed directly by an iPhone 5 or later. Not coincidentally, it works with Apple’s Health app. It also offers a screen to log food intake and sleep hours. It links with other apps such as MyFitnessPal and RunKeeper. UP also features Smart Coach, a tool that helps users interpret and analyze the data compiled by their tracker of choice, which, we note, is a unique feature.

Adidas miCoach

Adidas miCoach is meant to be paired with an Adidas Fit Smart. Its features are designed to operate in real time and provide voice coaching, strength and flexibility tips, in-game performance trackers, and detailed work analyses. As previously mentioned, the Fit Smart is meant for high intensity activity, not every day use. The app can be downloaded for Apple, Android, and Windows OS devices.

Suunto Movescount

Movescount is Suunto’s online platform that consolidates and stores data uploaded from sports watches. The name comes from Suunto’s labeling of each workout a “move.” It allows for a historical perspective, goal setting, and even lists “Leaderboards” of those users who have run the fastest or the longest, or hiked the tallest mountain, etc. This feature adds to the friendly competition of it social circle and is intended to inspire further use. The display is simple, listing all biometrics at the top and showing a GPS map of the most recent route. It also provides laps in the form of bar charts to compare progress over time. Movescount is proprietary to Suunto, but an app version can be downloaded for Android and Apple devices.

TomTom MySports

Similar to Garmin and Suunto, TomTom’s MySports has a simple display at the top with the various biometrics displayed in a clear manner. A GPS-created map of the most recent route is shown underneath the data. The two main access points are apps for iOS and Android. TomTom offers some cross-compatibility, though, in that it functions with Nike, RunKeeper, MapMyFitness, and Strava. In each of those applications, the upload is automatic. However, a manual upload option is available as well, which is of note because the majority of these devices are not designed to allow the user the freedom to obtain his or her data easily.

Polar Flow/Polar Beat

Together, these two apps compose Polar’s online platforms for all of their devices. The Beat version requires an H7 heart rate monitor. Both allow for data compilation and integration and can be downloaded for either an iOS or Android device. One unique feature of Polar Flow is that it not only tracks daily active time but also is “intelligent” in that it can differentiate among users who are sitting, lying down, running, walking, or standing, and it breaks the time out in a clear illustration.




Striiv Activity Tracking App

Striiv offers a free app available to both iOS and Android users, and is a requirement to activate any Striiv activity tracker. The app displays graphs showing sleep and activity data, it provides a leaderboard among the user and his or her social network, and even a game whose protagonist only advances when you make progress in your fitness activity. However, for the less-gaming inclined, a user’s steps, sleep, calories, minutes, and other metrics are presented in customizable window panes such that the dashboard can be changed to an individual’s preference. In addition, each pane/metric lists its own individual goal, and progress towards that goal is measured and displayed.

MyFitnessPal

As opposed to the many platforms geared towards data viewing and tracking, MyFitnessPal specializes in calorie tracking and diet monitoring. The focus is based on the fact that users who log daily food intake are far more likely to lose weight than others. As such, MyFitnessPal was created as a way to compile daily caloric intake and improve users’ chances of dropping weight. It is available on iOS, Android, and Microsoft and is compatible with FitBit data.

FitnessKeeper/RunKeeper

RunKeeper is a GPS-enabled fitness tracking app that can be downloaded for Apple or Android phones. It was developed and is owned by its parent, FitnessKeeper. The company claims to have 40 million users since its launch in 2008. The user is able to record statistics (steps, calories, distance, etc.) and get audible feedback via headphones from a coaching feature included in the app. Because it is an app that interfaces with a consumer’s smartphone, it also has the capacity to control music. The coaching feature periodically offers a user challenges to complete in a given amount of time.

Under Armour - MapMyFitness Suite

MapMyFitness is a set of apps made for iOS devices. It is owned by Under Armour. It includes other subcategories like MapMyRun and MapMyRide, each catered to a different sport and user base. Being free apps, the information provided is fairly simple – distance, time, pace, splits, and GPS. There is also elevation data and the app ranks climbs based on how steep and long they are. The main feature of MapMyFitness apps is that the online community can share routes and other runs with others who are in the same vicinity. In other words, users who are located in Baltimore, Maryland, can see the various routes that other MapMyFitness users have taken and decide which one to take. Under Armor paid over $700 million for the companies that now encompass its fitness apps (adding Endomondo to those mentioned above), which in aggregate boast ~130 million users.

Apple HealthKit

Apple HealthKit is an app that allows for aggregation and storage of data collected by third-party app developers for fitness tracking devices. In other words, the apps developed for the platforms mentioned up to this point could all feasibly centralize their collected data in Apple’s HealthKit. Currently, the Health app framework is targeted mostly at healthcare professionals. Data regarding patients’ blood pressure, heart rate, etc. can all be remotely aggregated and stored by HealthKit. The release of the Apple Watch is




likely to provide a great deal of information for HealthKit to utilize. Technically, anyone carrying an iPhone is inputting data into its Health app, which measures steps taken or distance run. This expansion would technically give the company over 200 million and potentially over 300 million app users, although we suspect very few are aware of the functionality today.

Google Fit

Google Fit is the Android response to Apple’s HealthKit. Similar to HealthKit, Google Fit operates as a centralized housing app for other fitness trackers’ collected data. However, it also has the ability to track a user’s walking, running, and cycling. The app is free in Google Play and is compatible with all current Android devices. A user’s Google Fit health profile is also accessible via Internet (i.e., on a tablet or smartphone).

Strava

Like some of the other products mentioned here, Strava is a website and app only – i.e., it does not have an accompanying device. Strava combines the friendly competition of Movescount with the suggestions feature of MapMyFitness to create an online community where top performers are crowned “King” and “Queen” of the Mountain and individuals can pace themselves against others who have completed the same route. The app tracks distance, pace, elevation, speed, and power/energy. There is also a “badge” and achievement feature. Strava indicated in October 2014 that there are roughly 3 million activities recorded each week.

Market Position and Opportunity

Market Size

We use Gartner data to assess the potential size of the wearables market through 2020, although we take all forecasts in this relatively new category with a giant grain of salt given the nascent nature of the market and the uncertain technological and economic changes that could alter this forecast. As can be seen on the following page, the wearables market is expected to grow to nearly $16 billion in annual revenue by 2020. This data is reasonably inclusive and includes five different categories: smart wristbands, sports watches, other fitness monitors (e.g., clippable trackers), chest straps, and smart garments. FitBit’s core products (Zip, One, Flex, Charge, and Charge HR) and how they fit into the wearables space will be addressed later in this report. The takeaway here is that wearables are already nearly a $10 billion market, and although we suspect it is likely to grow faster than Gartner outlines below, at least in 2015, FitBit’s current revenue estimate of $1.4 billion is still a relatively small part of the larger opportunity.




Total Wearables Opportunity Revenues

Source: Gartner, Raymond James research. $ in millions

The below graph depicts the wearables market growth in millions of units sold per year. All five categories are included. The “total units sold” figure represents the market into which FitBit is selling. However, we note that other research firms estimate that fewer than 30 million units were shipped in 2014 and more than 70 million will ship in 2015. We suspect the larger base number for Gartner is due to its broader definition of fitness watches (estimates over 15 million units shipped in 2014) and broader medical-related devices such as chest strap heart rate monitors as well. We do believe that Gartner’s estimate for 2015 and likely 2016 will prove far too conservative based on the growth rates already reported publicly by FitBit and Garmin.

Total Wearables Opportunity Units

Source: Gartner, Raymond James research. units in millions

Combining Gartner’s data with our forecasts for FitBit, a market share projection can be calculated. In Gartner’s very broad definition of the wearables category, FitBit has well below 20% share today, and we believe this can grow to 20% market share by 2020 as it continues to broaden its product line and expand internationally.




FitBit Market Share by Units

Source: Gartner, Raymond James research.

FitBit Market Share by Revenue


The adjacent graph depicts FitBit’s market share using only its core products (i.e., the One, Zip, Flex, and Charge/HR) and the corresponding addressable market. It excludes the portion of the market represented by chest straps, smart garments, etc. Based on this narrower definition, FitBit may be as high as 60% share in 2015, which is more consistent with other third-party research estimates.

FitBit Addressable Market Share (units)


Overall, a broad definition of the wearables market currently accounts for roughly $9 billion in revenue, with FitBit accounting for roughly 15% of revenues. By 2017, that number is projected to be over $14 billion, representing a three-year CAGR of roughly 18%. We expect this forecast to prove conservative as new functionality and form factors are launched across the industry. We expect that FitBit has ample opportunity to gain market share as it expands into new product categories with new capabilities and form factors as well as likely growth outside the U.S.




Web Checks and Google Trends Data: A Measure of FitBit’s Near-Term Momentum

In order to gauge the popularity of certain fitness tracking devices, we consult Amazon and Best Buy best-selling lists on a weekly basis. As can be seen in the graphs below, FitBit consistently commands a 50+% share of the top 10 best-selling fitness trackers at both retailers.

FitBit Share at Amazon and Best Buy

Source: Amazon, Best Buy, Raymond James research.

We also track the average selling prices (ASPs) of FitBit products at Amazon and Best Buy. The graph below shows that, not only has FitBit’s share of the top 10 best-sellers remained consistently high, but also the ASPs have been steadily rising over the past six months as it has broadened the product line (we average retail ASPs across those SKUs in the top 10).

FitBit ASPs at Amazon and Best Buy

Source: Amazon, Best Buy, Raymond James research.




Google Trends Data

We also employ Google Trends tracking, which measures the relative frequency of searches globally when provided with a certain key word. Our data measures the search frequency of the term “FitBit.” It is important to note here that, being relative data, each data point is produced as a comparison to recent data points. A value of 100 indicates that there have been more searches for the particular key word in question than the previous data points. As can be seen, FitBit’s Google trends are moving in the right direction.

FitBit Google Trends

Source: Google, Raymond James research.

For comparison, the below graph shows Google Trend data for the Jawbone UP, the Misfit Shine, and the Garmin Vivofit. As can be seen, the last time the trends were close was two years ago, in March 2013. FitBit has not only continued on a more positively sloping trend, but it has also recorded much higher search frequencies. These observations suggest that FitBit is only growing in popularity.

Competitors’ Google Trends vs. FitBit’s





The year-over-year growth in Google Trends is more volatile, owing to very high rates in the second half of 2013. They are, nevertheless, still growing at a high rate, and that rate is accelerating as of late, coinciding with the company’s broader product launches in 1H15. The following graphs break those growth trends into two segments: 2013-2014 and 2014-2015. If anything, this spring has seen a re-acceleration of search volume for FitBit as it has begun advertising in relation to its new product releases.

FitBit Year-Over-Year Google Trends, 2013-2014


FitBit Year-Over-Year Google Trends, 2014-2015





We conduct a monthly consumer survey and track the current ownership and general intention to purchase a fitness band or smartwatch in the future, as well as which brand consumers plan to buy. As can be seen in the graphs below, FitBit not only remains the strongest player in both current ownership and in consumers’ future purchase intentions, but its popularity is also steadily increasing. We note that, even during the Apple Watch launch (i.e., the first calendar quarter of 2015), consumers’ intentions to purchase FitBit products continued to rise.

Current Smartwatch/Fitness Band

Source: Surveymonkey, Raymond James research.

Fitness Band Purchase Intentions

Source: Surveymonkey, Raymond James research.

Apple Watch




Financial Analysis

Historical Performance

The adjacent table summarizes FitBit’s financial performance during the period between 2010 and 2014. Over the last five years, FitBit’s revenue has grown at a CAGR of 246%, rising to $745 million from just $5.2 million. “Units sold” depicts a CAGR of 270%. Using a simple revenue/units sold calculation, the ASP has actually decreased roughly $20 to $68 from $89, as the company added lower priced SKUs after its initial $99 price point. Gross margins were relatively stable from 2010 to 2012, ranging between 32% and 36%, but experienced two rather volatile years in 2013 and 2014, hitting 22% and 48%, respectively. However, when adjusting for the effects of the FitBit Force recall, 2013 gross margin was 47% and the 2014 gross margin was 50%, showing a nice upwardly progressing pattern as the company gained scale. Ex-recall, EBIT margins in 2013 and 2014 were 28% and 24%, respectively.

Force Recall Adjustments

2013 2014

REV 271,087$ 745,433$

Rev Adjustment 30,607$ 8,112$

Rev Ex Recall 301,694$ 753,545$

COGS 210,836$ 387,776$

COGS Adjustment 51,205$ 11,339$

COGS Ex Recall 159,631$ 376,437$

GP 142,063$ 377,108$

GM (Ex-Recall) 47% 50%

EBIT (8,954)$ 157,929$

EBIT Adjustment (84,650)$ (22,840)$

EBIT Ex Recall 75,696$ 180,769$

EBIT Margin (Ex-Recall) 28% 24%

Force Recall Adjustments

Source: Company filings, Raymond James research.

EBIT and EBIT margin did not turn positive until 2014, when they reached $158.0 million and 21%, respectively. Similarly, EBITDA was negative until 2013, when it came in at $79 million, and then $191 million in 2014.

Historical Financial Performance (Reported)

Fiscal Year - December 5-Year

$ thousands (ex. EPS) 2010 2011 2012 2013 2014 CAGR

Units 58 208 1,279 4,476 10,904 270%

ASP 89 69 60 61 68

Revenue 5,180$ 14,454$ 76,373$ 271,087$ 745,433$ 246%

Y/Y Growth 179% 428% 255% 175%

Gross Margin 32% 36% 35% 22% 48%

EBIT (1,366) (4,313) (3,775) (8,954) 157,929

EBIT Margin -26% -30% -5% -3% 21%

EBITDA (1,255) (4,023) (2,401) 79,049 191,042

GAAP EPS (0.06) (0.18) (0.17) (1.32) 0.63

Non-GAAP EPS - - - 0.17 1.87

Y/Y Growth 987% Source: FitBit, Inc., Raymond James research.




Near-Term Forecast

In the table below, we show quarterly and full year expectations for 2015 and 2016. We expect revenue to increase by roughly 87% in 2015 and 35% in 2016 with gross margins remaining stable at 47-48%. The year-over-year growth rates for revenue are a bit elevated in 1H15 due to the initial channel fill of Charge HR and Surge product lines, and are expected to slow down, but we still expect top-line growth to remain quite robust through 2016 as the company expands distribution and likely its product lineup as well. EBIT margins, too, should remain fairly stable in the 13-14% range as the company is investing very heavily in both R&D and S&M to drive further growth.

Near-Term Financial Forecast Fiscal Year - December

$ thousands (ex. EPS) 1Q15 2Q15 3Q15 4Q15 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E

Units 3,866 3,950 3,000 6,200 17,016 5,219 5,333 4,350 8,990 23,892

ASP 87 82 82 79 82 80 80 80 77 79

Revenue 336,754$ 323,900$ 246,000$ 489,800$ 1,396,454$ 417,528$ 426,600$ 348,000$ 692,230$ 1,884,358$

Y/Y Growth 209% 185% 61% 32% 87% 24% 32% 41% 41% 35%

Gross Margin 50% 47% 47% 47% 48% 47% 47% 47% 47% 47%

EBIT 89,935 20,988 8,261 75,706 194,890 68,714 34,033 20,574 126,578 249,899

EBIT Margin 27% 6% 3% 15% 14% 16% 8% 6% 18% 13%

Non-GAAP EBIT Margin 28% 9% 7% 18% 16% 19% 11% 9% 20% 16%

EBITDA 93,383 35,488 25,561 94,776 249,208 88,884 55,050 42,523 149,552 336,008

GAAP EPS 0.22 0.10 0.02 0.19 0.46 0.18 0.09 0.05 0.32 0.64

Non-GAAP EPS 0.80 0.13 0.04 0.21 1.19 0.21 0.12 0.08 0.36 0.76

Y/Y Growth -36% -74% -13% 92% 68% -36% Source: FitBit, Inc., Raymond James research.

Long-Term Forecast

In the table that follows, we have outlined our longer-term forecast for the company. It is important to note, here, that there are increasing uncertainties in our forecasts the farther out we get. There are several assumptions affecting the trajectory of the numbers going forward. We assume flattish ASPs and continued double-digit growth in the industry. We also assume that FitBit can take share broadly as it expands its product categories. However, this picture can change depending FitBit’s product mix and the landscape of competition in the industry. More entrants could put pressure on prices and could take share from FitBit, or the company could fail to see an industry transition toward other forms of wearable tracking.

Turning to the numbers, we expect both revenue and units sold to increase at a four-year CAGR of 17%. Revenue, in particular, should reach just under $3 billion by 2019. We expect gross margins to remain stable at 48-50%. We anticipate solid performance from FitBit in regard to profitability as well, as EBIT and EBITDA increase at a four-year CAGR of 35% and 31%, respectively, as the company returns to a more normalized margin structure for a market leader in consumer products. We assume that non-GAAP EBIT margins trend up to the low 20% range (22.5% to be exact), creating a healthy environment for EPS growth of 30% CAGR over the next few years based on our assumptions.




Long-Term Financial Forecast

Fiscal Year - December 2016E 2017E 2018E 2019E

Units 23,892 29,865 34,344 37,779

ASP 79 79 79 79

Revenue $ 1,884,358 $ 2,355,448 $ 2,708,765 $ 2,979,641

Y/Y Growth 35% 25% 15% 10%

Gross Margin 47% 48% 49% 50%

EBIT 249,899 367,716 488,106 608,672

EBIT Margin 13% 16% 18% 20%

Non-GAAP EBIT Margin 16% 18% 20% 23%

EBITDA 336,008 471,517 614,373 763,652

GAAP EPS 0.64 0.92 1.27 1.62

Non-GAAP EPS 0.76 1.09 1.41 1.78

Y/Y Growth -36% 43% 29% 26%

Source: FitBit, Inc., Raymond James research. $ thousands (ex. EPS)

In general, FitBit enjoys a strong market position in a rapidly growing segment of consumer electronics. Having very nearly created the “activity tracker” space out of thin air, FitBit maintains one of the most recognizable brand names and a very prolific online social community. The company’s performance over the next few years will depend on its ability to attract and maintain users, leveraging its online platform and maneuvering against the many competitors in the market. It will also need to forecast effectively and manage its supply chain efficiently. Nevertheless, in a new industry that is both popular and fashionable, FitBit has a sizable head start in recognition, R&D and business partnerships, not to mention an expected 32% five-year CAGR for revenues and an expected 26% five-year CAGR for EPS.

Outlook

What Comes Next?

As wearable devices gain in popularity and utility, there are certainly questions as to where the industry will be in the future. It is an important discussion point regarding any consumer device and especially one that has the potential to affect the way the average person lives his or her life. There appear to be a few steps that most retail technology goes through, and there is no reason to believe that FitBit will follow a different route.




Minimization Leads to Form Factor Expansion

Over the course of the coming years, wearable technology will likely go through several size iterations, with the general trend being towards the smaller. Currently, most wearables come in the form of a band, a watch, or a clip-on. In the not so distant future, smaller housings will allow for seamless inclusion into the actual shirt, shorts, pants, shoes, etc. that a consumer wears. Consider that, today, there are fashion designers making items that create their own light, items that change color in sunlight, and even items that can be manipulated by eye contact. Of note is the fact that fashion designer Tory Burch recently paired with FitBit to make covers exclusively for the Flex. These designs demonstrate well the potential for assimilation of electronics (including data trackers) into everyday clothing items, which will be made more possible with each size reduction. It also opens the doors to the world of smart garments.

Monitoring and Sensor Expansion

Once electronics and other wearable sensors are more ubiquitously imbedded in our clothing, there is an enormous potential for new metrics to be tracked. Some fitness monitors already take measurements regarding hydration, sun exposure, VO2 max, etc. Healthcare providers are investigating the use of activity trackers for monitoring blood glucose as well. A wearable device seems like an obviously preferable method compared to the rather intrusive means of collecting such data today. Researchers are attempting to gauge blood oxygen levels using the same underlying technology used in optical heart rate monitors. Multipoint activity trackers can provide combined data streams (for example, from an HR monitor, wristband, and shirt) that track an individual’s overall physiology, not just steps, calories, distance, and sleep. Another newly developed use is allowing for imaging of a fetus while a woman is pregnant. She can wear a shirt fixed with sensors that then provide a feed on her tablet or smartphone. In addition to imaging, it provides heart beat information. Sports bras are another area where heart rate monitors are becoming imbedded, as they offer an ideal location for taking such measurements. Other companies are investigating the ability to use smart socks to communicate information about gait, impact, and stride cadence to other tracking devices being worn. The combined information could then be uploaded to a user platform, viewed, tracked, and manipulated. In keeping with the current interest in having content obtained on an individual’s smartphone available on that same individual’s tablet, television, PC, etc., smart garments are expected to integrate with other household appliances as well. We suspect FitBit’s ability to expand the data that it monitors will be dramatic over the coming years, but with significant product management decisions having to be made along the way to determine the right time to integrate any new sensor or measurement function based on the quality of potential results and market demand.

Bigger Data, Privacy, Security

The next step is to manage, analyze, store, and protect all the information gathered by these trackers. As their size diminishes, as they begin tracking a wider variety of health statistics, and as they communicate this information to various devices around the home, the question becomes what to do with all of this data. Big data analytics companies have empowered the developers of consumer interfaces with the ability to learn from past behavior and predict future behavior. There is no reason to believe that data from fitness trackers and health and wellness devices will be any different. Therefore, data analysis and interpretation will be a major part of the future of activity tracker evolution as well. In addition, as with almost all data-driven industries, privacy and security are likely to be major concerns in the future. The infrastructure of storage and protection should see meaningful expansion, as wellness tracking demonstrates its utility in both social and medical realms. It is harder to predict where this data will drive the industry, as much of the resulting cycles will depend on what is found in the data.




New Channels to Market: Wellness Programs

We believe that a significantly helpful stepping stone on fitness trackers’ paths to ubiquity will come from corporate wellness programs. FitBit has been involved in many corporate health programs and incentive-based competitions. Employees are presented with the option to use a fitness tracker and record their data. Achieving goals and maintaining a healthy lifestyle can result in anything from simple recognition to reductions in their insurance premiums. Studies have even shown that healthier employees are more productive and show higher retention rates. On its website, FitBit lists Adobe, BP, box, Redbox, McKesson, Diageo, and NetApp, among others, as companies that have chosen to offer these types of wellness programs. Currently, these partnerships account for less than 10% of revenues, but we see no reason to believe that the frequency of such programs will decrease in the future. As such, it does represent a strong potential for expansion for FitBit.

New Channels to Market: Insurance

The popularity and efficacy of fitness trackers has even spread into the insurance business. Currently, companies are utilizing fitness monitoring devices to offer discounts and rewards programs to their customers. Discovery Insurance in South Africa has instituted a plan of this nature and, notably, John Hancock in the U.S. has developed such a partnership with FitBit. The John Hancock plan is known as Vitality and encourages users to be more active while allowing the insurance company access to their FitBits’ data. Depending on their level (Silver, Gold, or Platinum), which is, in turn, dependent on their activity, individuals can earn up to a 15% discount on their life insurance and can earn rewards towards hotels, merchandise, and other products. With the popularity of wearables and with the ever-increasing accuracy and breadth of their data collection, it is not surprising that such relationships would develop. It is also reasonable to expect that similar agreements will continue in the future.

FitBit’s Proprietary Technology

Aside from sourcing some base semiconductor content from third-party suppliers, FitBit does incorporate a fair amount of proprietary tools in the creation of its products. The company has spent a significant amount of time designing and purchasing its own machine tools, which are then used in the manufacturing process at Flextronics.

In addition to manufacturing tools, FitBit has also developed proprietary technology for use in the Charge HR and Surge to measure and collect heart rate data. “PurePulse” technology, as it is called, is FitBit’s own version of optical heart rate monitoring (OHRM). OHRMs consist of a sensor flanked by two LED lights, which shine directly into an individual’s skin and capillaries. When a person’s heart beats, blood flowing into the capillaries affects the way the sensor receives reflected light and therefore allows for measurement of heart rate. While OHRMs have been around for some time, the differentiation arises in the algorithms each producer uses to average HR over time and to adjust for abrupt increases and decreases. As a continuous OHRM, FitBit makes strides into the fitness tracker world with comparably accurate readings for day-to-day uses.

FitBit has taken steps to ensure that its data tracking technology is accurate and reliable. The company described the process of calibrating its devices as using a “true” measurement against which FitBit’s raw data is corrected. For instance, when attempting to validate its calories-burned feature, the company set as its baseline the Parvos Medics TrueOne 2400, which measures gas composition of an individual’s breath (a historically accurate approach). Then, analysis of FitBit’s data allowed for development of equations and algorithms to “correct” those readings and bring them in line with the “true” reading of the Parvos Medics 2400. The graph below shows the results of one of these tests. The black line represents




Parvos’ measurements and RevB 1 and 2 are two trials of second revision of FitBit’s hardware. As can be seen, the readings are reliable up to about 7-7.5 mph. Once the individual reaches 8 mph, they start to fall below Parvos’ range of error.

Results of FitBit’s Caloric Burn Accuracy Test


In order to produce accurate readings for steps, FitBit implemented a simple click-counter and compared that data to data produced by one of its trackers. The company also included trackers developed by two competitors (the orange and red smudges), which were kept anonymous. This first graph shows percentage accuracy (as compared to the click counter) for FitBit and two other competitors for an individual walking up stairs at a “normal” pace. Clearly, each is comparably accurate at a standard walking speed.

Results of FitBit’s “Standard” Walking Pace Accuracy Test (Steps)

Source: FitBit, Inc. Percent Accuracy Measured Against Click-Counter




An interesting trend emerges, though, when the individual slows down his or her walking pace – FitBit actually increases in accuracy while the two competitors suffer significantly, as illustrated below.

Results of FitBit’s “Slow” Walking Pace Accuracy Test

Source: FitBit, Inc. Percent Accuracy Measured Against Click-Counter

FitBit enlisted the help of an elderly man who uses a walker for its final test. To understand the reasoning behind this, consider that a standard fitness tracker counting a user’s steps will depend greatly on the movement of that individual’s arm (i.e., the motion measured by the internal accelerometer). A walker steadies a user’s arm and softens the impact of each step. These effects combine to reduce the number of steps counted. Nevertheless, the graph below clearly shows that FitBit performed well under such circumstances.

Results of FitBit’s Accuracy Test


Ultimately, FitBit owns and develops its own algorithms that interpret the data output of sensors. It is these algorithms that determine the accuracy of the data being displayed to the end user, and ultimately the accuracy and usability of data gathered is likely the single biggest reason consumers will choose to stay with a health/fitness tracking device.




Valuation

In judging a fair present value for FitBit, we will broadly use a discounted cash flow (DCF) analysis and compare it to similar publicly-traded equities. For comps we utilize other consumer product companies with double-digit growth expectations for the next two years.

DCF

Based on our long-term financial estimates for FitBit, which include roughly $3.5 billion in revenues and 25% EBIT margins in 2020, we obtain a net present value of future free cash flow of ~$38/share, discounting back using a 13% discount rate. This revenue level is consistent with ~44 million devices sold at today’s ASP of ~$80, but given the likely changes in form factors and capabilities over time, we believe that focusing on revenue is appropriate rather than getting too caught up in a unit and ASP discussion. We suspect that to get to the revenue levels in our long-term model, FitBit would have to have 100 million+ active users, and likely have entered the broader apparel market either directly or through partnership in order to allow multiple devices/user. However, given the difficulty of forecasting such an early stage growth company and industry, we believe that a sensitivity analysis around our DCF valuation is probably more meaningful.

Valuation Sensitivity (Price/Share at Various Revenues/Margins at Maturity)

Revenues

$-millions 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0%

1,500 $14 $16 $17 $19 $22 $25 $28

2,000 $17 $19 $20 $23 $26 $29 $32

2,500 $20 $23 $24 $27 $30 $33 $36

3,000 $23 $26 $28 $31 $34 $37 $40

3,500 $26 $29 $32 $35 $38 $41 $44

4,000 $30 $33 $36 $39 $42 $45 $48

4,500 $34 $37 $40 $43 $46 $49 $52

5,000 $38 $41 $44 $47 $50 $53 $56

5,500 $42 $45 $48 $51 $54 $57 $60

6,000 $46 $49 $52 $55 $58 $61 $64

6,500 $50 $53 $56 $59 $62 $65 $68

7,000 $54 $57 $60 $63 $66 $69 $72

Assumptions:

WACC = 13%

Fitbit Valuation Sensitivity (Price/Share At Various Revenues/Margins At Maturity)

EBIT margins

Source: Raymond James research. Assumptions: WACC = 13%

Above, we highlight a valuation sensitivity for FIT shares based on varying assumptions of revenues and EBIT margins. We have utilized a discount rate of 13% and a terminal multiple of 17x based on current mature consumer product company comps, but frankly the analysis is not that sensitive to discount rate. A 1% change in discount rate adds or subtracts to the price per share in the above analysis by ~$2.00. Our long-term model assumes 25% EBIT margins and ~$3.5 billion in revenues, which as shown above creates a present equity value of ~$38/share. If we presume the business matures after 2015, at $1.5 billion in revenues and a 15% margin level, the shares may be worth only low double-digits, whereas if we presume FitBit can become a much larger consumer products company with over $7 billion in revenue earning Apple- and Garmin-like EBIT margins (~30%), a present value of over $70 would be the mathematical outcome.




The point to this analysis is that FIT shares are likely to be volatile for the next few years as the company is in a growth phase, as investors are intuitively trying to understand how big and profitable the company will ultimately become when it matures, and quarterly beats or misses can have a big impact on investor confidence of these assumptions. As shown above, small changes in assumptions can lead to dramatic changes in valuation expectations.

Comp Analysis

We compare FitBit against a comp group of other consumer product companies across various industries that are expected to grow double-digits and generate profits for the next two years. This is a reasonably small list given the slow growing global economy, and FitBit is growing much faster than just about everything else on the list.

Raymond James Consumer Product Industry Valuation Analysis Enterprise EV/ EV/ 2015 2015 2015 2016 2015E 2016E

2015E 2016E Value 2015E 2015E 2016E EBITDA Gross Revenue Revenue EPS EPS 2016

P/E P/E ($Mil) EV/EBITDA Revenues Revenues Margin Margin Growth Growth Growth Growth (EV/Revs)/Rev Growth

Growth Consumer Products

Fitbit - FIT 72.8x 55.6x 10,224$ 41.0x 7.3x 5.4x 18% 48% 87% 35.0% 3.6% 31.0% 0.16

GoPro - GPRO 31.5x 24.8x 7,240$ 19.0x 3.9x 3.2x 16% 45% 35% 20.0% 25.0% 27.3% 0.16

Harman - HAR 19.6x 15.0x 7,988$ 11.5x 1.3x 1.1x 9% 29% 13% 13.5% -0.9% 30.4% 0.08

Mobileye - MBLY 145.9x 75.9x 13,057$ 122.2x 60.2x 36.7x 47% 74% 51% 64.1% 85.7% 92.3% 0.57

Starbucks - SBUX 32.9x 27.9x 81,840$ 17.7x 4.3x 3.8x 21% 22% 17% 11.7% 18.2% 17.7% 0.33

Tesla - TSLA NM 75.4x 32,955$ 96.5x 5.7x 3.7x -3% 28% 80% 52.9% -121.4% NM 0.07

Lululemon - LULU 32.4x 27.2x 8,234$ 18.1x 4.1x 3.5x 20% 49% 13% 14.6% 1.9% 19.0% 0.24

Polaris Industries - PII 19.9x 17.0x 10,316$ 10.7x 2.1x 1.9x 17% 28% 12% 9.5% 11.7% 17.0% 0.20

Skull Candy - SKUL 19.6x 14.6x 192$ 6.6x 0.7x 0.6x -3% 35% 14% 10.5% 42.2% 34.3% 0.06

Under Armour - UA 78.7x 59.4x 18,957$ 37.1x 5.0x 4.0x 7% 47% 24% 22.6% 12.9% 32.5% 0.18

Control4 - CTRL 24.8x 16.0x 104$ 8.1x 0.6x 0.5x -5% 51% 13% 16.3% -41.5% 54.8% 0.03

Growth Median 31.5x 26.0x 9,275$ 17.9x 4.0x 3.4x 12.3% 40.0% 15.3% 15.5% 12.3% 30.4% 0.17

S&P 500 17.0x 15.5x 2.0% 2.0%

Source: Company filings, FactSet, Raymond James research

Raymond JamesConsumer Product - Industry Valuation Analysis

Source: Company filings, FactSet, Raymond James research. As of 7/9/15

As shown above, the median comp in the peer group is trading at 4.0x 2015 EV/revenues with gross margins of 40%, EBIT margins of 12.3% and revenue growth of 15.3%. FitBit is growing faster, and already has higher margins than the median, so we would view a 3.9x revenue multiple as reasonable downside protection (this would equate to ~$24/share).

To gauge whether FIT’s valuation is accurately giving it credit for its superior growth, we utilize a ratio called ERRG, or EV/revenues divided by revenue growth. This essentially normalized the revenue multiple for different revenue growth levels and assumes the compared companies have similar margin structures and sustainability in their businesses, which we believe to be true in this case. Using 2016 estimates, the median peer has an ERRG of 0.17, with a broad range from 0.03 to 0.57; however, the two high ERRGs are companies that are not quite consumer products, as Starbucks controls its own retail experience and Mobileye sells into the auto market, which is generally characterized by high levels of sustainability over time. In any event, FIT appears to be effectively in line with the peer group on ERRG, at 0.16.

The other analysis we do is simply a quick scatterplot of its peer group comparing revenue growth and EV/revenues.




2015 EV/Revenues vs. Revenue Growth

Source: Raymond James research. As of 7/9/15.

When drawing a trend line through the scatterplot, FIT is clearly right on the trend line, which would argue against the stock being materially undervalued or overvalued relative to these peers when adjusting to its superior growth rate.

In sum, based on the ~100% appreciation since the IPO pricing (at $20/share), FIT shares do not appear to be undervalued relative to its peers or reasonably long-term DCF assumptions. We believe the shares will be volatile, likely following a similar trading pattern of many strong performing IPOs, where the valuation gets quite high and then trades down into a lock-up expiration six months after the IPO. We believe that FitBit’s earnings and cash flow growth potential are enormous, but believe it is more prudent to wait for a pullback in the shares before being more aggressive in our rating. We expect the shares to trade roughly in line with the overall market from current levels, warranting a Market Perform rating.

Management Team

James Park, Chief Executive Officer and Co-Founder

James Park co-founded FitBit and has been a member of the board of directors since March 2007, chairman since May 2015, and president/CEO since September 2007. Prior to FitBit, he served as a director of product development at CNET Networks, Inc. Before CNET, Mr. Park was the president and co-founder of Wind-Up Labs, Inc., an online photo sharing company that was acquired by CNET in 2005. He was also chief technology officer and a co-founder of Epesi Technologies, Inc., a software company. Mr. Park attended Harvard and studied computer science.

Eric Friedman, Chief Technology Officer and Co-Founder

Eric Friedman is a co-founder and has been a member of the board of directors since March 2007 and an executive officer since September 2007. Before FitBit, Mr. Friedman was an engineer manager at CNET. Prior to that, he co-founded Wind-Up Labs, was also a founding engineer of Epesi Technologies, and a




member of Microsoft’s real time collaboration group. He holds a B.S. and an M.S. in computer science from Yale University.

Bill Zerella, Chief Financial Officer

Bill Zerella has served as CFO since June 2014. From October 2011 to June 2014, he was the CFO of Vocera Communications, a public healthcare technology company. Before Vocera, Mr. Zerella was CFO of Force10 Networks Inc., a networking company that was acquired by Dell. Before Force10, he was CFO at Infinera Corporation, a telecom equipment provider, and CFO at Calient Networks, Inc., an optical equipment provider. Mr. Zerella has also held many other senior level financial and business management positions at GTECH Corporation and Deloitte & Touche LLP. Mr. Zerella has a B.S. in accounting from the New York Institute of Technology and an M.B.A. from the Leonard N. Stern School of Business at New York University.

Hans Hartmann, Chief Operations Officer

Hans Hartmann has been the COO since February 2011. Before this, Mr. Hartmann was COO of Skyline Solar, Inc., a supplier of solar energy systems. In 2009, he served as vice president of operations at Element Labs, Inc., a manufacturer of LED technology, and from August 2009 to March 2010 as vice president of operations and hardware engineering at Element Labs. Barco N.V. acquired Element Labs in March 2010, after which Mr. Hartmann was vice president and general manager of Barco Video Lighting Solutions. Recently, he was senior vice president of operations at Dash Navigation, Inc., a provider of automotive GPS solutions; senior vice president of operations at OQO, Inc., a computer hardware company; vice president of operations at Wave7 Optics, Inc., an optical networks company; vice president of operations at Force10 Networks; vice president of operations at ConvergeNet Technologies, Inc., a data storage company; and vice president of manufacturing operations at JetFax, Inc., an Internet fax services company. Before working at JetFax, he served for approximately 15 years in various roles at Hewlett-Packard. Mr. Hartmann has a B.S. in electrical engineering from New Jersey Institute of Technology and an M.S. in manufacturing systems engineering from Stanford University.

Woody Scal, Chief Revenue Officer

Woody Scal has been chief revenue officer since October 2010. Before this, he was a partner at Avanti Growth Partners, a private equity and consulting firm. Prior to Avanti, Scal was executive vice president and a member of the board of directors of CamelBak Products LLC, senior vice president at Kransco Partners LLP, a private equity firm; director of business development at Kransco Group Companies, a toy company; director of development at Visa International, a financial services company; product manager at General Mills, a food products company; and an analyst at Cambridge Associates. Mr. Scal holds a B.A. in history from Williams College and an M.B.A. from Stanford Business School.

Gareth Jones, Vice President and General Manager of EMEA Sales

Gareth Jones is in charge of FitBit's sales and marketing arm in Europe, the Middle East, and Africa. He has more than 20 years of experience in global sales and marketing. Before FitBit, he worked as a GM in Europe for Coca-Cola and Mars and other companies such as Iomega, Kodak Cameras, and Flip Video. He helped lead Kodak Digital Cameras into Europe in the early 2000s and was involved with Flip Video both before and after the Cisco acquisition. At FitBit, Mr. Jones has been in charge of launches in the UK, Germany, France, Spain, Israel, Dubai, and South Africa.

Tim Roberts, Vice President of Interactive

Tim Roberts became the vice president of interactive in September 2010. Before then, he was the founder and chief executive officer of Infectious, LLC, a print-on-demand platform. Prior to Infectious, Mr. Roberts was the vice president of product and marketing at Odeo, Inc., a podcasting company; senior




director of product management at Yahoo! Inc., an Internet company; vice president of product management and co-founder of Bigstep.com, a hosting company acquired by Affinity Internet in 2002; and director of products at T/Maker Company, a personal computer software company acquired by Deluxe Corporation in 1994. He has a B.A. in psychology from Vassar College.

Tim Rosa, Vice President of Global Marketing

Tim Rosa is vice president of global marketing and is in charge of brand and product marketing, partnerships, advertising and media, PR and events, FitBit.com, premium services, CRM, customer acquisition, engagement, and monetization. Mr. Rosa has accumulated more than 15 years of experience with FitBit, Electronic Arts, DivX, 2K Sports, and ESPN Videogames. Most recently, he was VP of global brand development at Electronic Arts, where he led branding for FIFA, Madden, Battlefield, Need for Speed, and others. He has led marketing efforts for the famed video game publisher, 2K Sports, and increased NBA 2K market share from 10% to 80% in five years. Mr. Rosa went to the University of Michigan-Flint.

Andy Missan, Vice President and General Counsel

Andy Missan has been vice president and general counsel since March 2013. Prior to FitBit, Mr. Missan served as vice president and general counsel of MobiTV, Inc., a provider of mobile video solutions; vice president and general counsel of Danger, Inc., a mobile devices and services company; and vice president and general counsel of Replay TV, Inc., a DVR technology company. He has also held senior legal and business affairs positions at the RCA Records Label/BMG Entertainment and Sony Music Entertainment Inc. Mr. Missan has a B.A. in government from Oberlin College and a J.D. from Northwestern University School of Law.

Mark Silverio, Vice President of America Sales

Mark Silverio is in charge of sales and channel marketing in North and South America. Mr. Silverio has amassed 20 years of sales and marketing experience in the mobile electronics space. Before FitBit, he was in charge of U.S. sales for TomTom, VP of sales at Navigon, which was later acquired by Garmin, and he worked in multiple roles in the PDA and smartphone market at Palm. Mr. Silverio has a B.S. in marketing from the Carroll School of Management at Boston College.

Meena Srinivasan, Vice President of Finance and Human Resources

Meena Srinivasan brings over 20 years of strong financial, operational, and business strength, along with “Big 4” public accounting experience to lead FitBit's financial division. Recently, she was VP of finance and human resources at Stratify, Inc., a technology company that was acquired by Iron Mountain, Inc. in 2007. Ms. Srinivasan spent eight years at PriceWaterhouseCoopers performing audits. She is a chartered accountant from India, certified public accountant in California, and holds an M.B.A. from the East Carolina University.

Headcount

Fitbit’s general headcount has steadily increased since 2011. The graph on the following page illustrates the relative size of each division over the last few years.




FitBit Headcount


Below, we outline the changes in ownership that occurred as a result of the company’s IPO.

Ownership Pre- and Post-IPO

Pre-IPO

Ownership Pre-IPO

Voting % Post-IPO

Ownership Post-IPO Voting %

% of Shares Selling in IPO

Execs/Board 30% 30% 27% 30% ~5%

Other 5% Holders (VCs) 57% 57% 49% 55% ~8%

Other Shareholders 13% 13% 12% 12% ~5%

Public Shareholders 0% 0% 12% 3%


Investment Risks

Competition Is Intense

The connected health and fitness devices market has a multitude of participants, including specialized consumer electronics companies, such as Garmin, Jawbone, and Misfit, and traditional health and fitness companies, such as Adidas and Under Armour. In addition, many large, broad-based consumer electronics companies either compete in FitBit’s market or adjacent markets or have announced plans to do so, including Apple, Google, LG, Microsoft, and Samsung, which includes Android wear and Android wear vendors. The potential advantages that these companies could garner through their scale, expertise, and existing product portfolios could cause issues for FitBit in the future.

Forecasting

The company’s ability to accurately forecast demand for its products and services could be affected by many factors, including unanticipated changes in general market conditions, as well as the weakening of economic conditions or consumer confidence in future economic conditions. Due to the recent rapid growth in demand for FitBit’s connected health and fitness devices, FitBit may not carry a significant




amount of inventory to satisfy short-term demand increases. If the company fails to accurately forecast customer demand, it may experience excess inventory levels or a shortage of products available for sale.

Reliance on Suppliers

FitBit relies on Flextronics as its primary contract manufacturer, and Flextronics is currently the sole manufacturer of the majority of FitBit’s devices. The company’s reliance on a sole contract increases risk since the company does not currently have any alternative or replacement manufacturers. FitBit has limited control over suppliers, contract manufacturers, and logistics providers, including aspects of their specific manufacturing processes and their labor. Because many of the key components in its products come from limited or sole sources of supply, FitBit is susceptible to supply shortages and long lead times. The company has in the past experienced, and may in the future experience, component shortages.

Concentration of Distribution

In 2014, Wynit Distribution, Best Buy, and Amazon.com accounted for approximately 13%, 12%, and 11% of revenue, respectively, and approximately 19%, 10%, and 11%, respectively, for the three months ended March 31, 2015. The company has agreements with these large retailers and distributors, but these agreements do not require them to purchase any meaningful amount of products. If the nature of FitBit’s relationship with one of these retailers were to change for the worse, it could result in meaningfully negative effects to its operations and financial performance.

Consumer Behavior and Spending

FitBit’s products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, and other factors, such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, tax rates, and consumer discretionary spending.

Product Defects, Recalls, and Litigation

FitBit voluntarily recalled the Force in February 2014, and the recall was made official by the Consumer Product Safety Commission (CPSC) in March 2014. The recall has exposed the company to CPSC regulatory proceedings and extensive litigation in various jurisdictions. Consumers’ allergic reactions included skin irritation, rashes, and blistering. The negative impact was primarily in the fourth quarter of 2013 and the first quarter of 2014. The company does not believe that these ongoing legal proceedings relating to the FitBit Force or FitBit Flex are material, but their existence should stand in illustration of the potential for such risks in the future.

Data Protection

If the wider public does not perceive the benefits of connected health and fitness devices as a result of concerns regarding privacy or data security or for other reasons, then the market for these products and services may not further develop. Governments are continuing to focus on privacy and data security, and




it is possible that new privacy or data security laws will be passed or existing laws will be amended in a way that is material to FitBit’s business. FitBit may be required to take further and more significant steps to protect and store consumers’ data, and those steps could involve significant capital expenditures. FitBit also depends on third-party data center service providers.

Successful Protection of IP

FitBit’s failure or inability to protect intellectual property rights could diminish the value of the brand. The company has devoted substantial resources to the development of proprietary technologies and related processes. As it faces increasing competition and gains an increasingly high profile, the intellectual property rights claims against the company have grown and will likely continue to grow. Currently, FitBit has 77 issued patents and has 132 patent applications pending in the U.S. Recently, one of FitBit’s smaller competitors, Jawbone, filed a lawsuit alleging that FitBit has infringed on one of its patents related to monitoring various physiological conditions from a wearable band. Typically in early-stage technology end markets it can take years for IP disputes to be settled, and we expect this to be the case in wearables as well.

Potential for FDA Influence

As previously mentioned, some of FitBit’s products (the Aria, for example) fall under the jurisdiction of the FDA and it is likely that, as activity trackers and health and fitness monitors become increasingly engrained in society, they become significant enough to warrant regulation by the FDA, too. Similar steps have already been taken regarding the Flex and the Force. However, if activity trackers become categorized as “medical devices,” then it may entail significant extra costs for FitBit and could result in harm to its operations and financial performance.

Conclusion

In conclusion, FitBit is a clear market leader in the emerging and fast-growing market of health/fitness tracking. It is benefitting from increasing consumer interest in health and fitness, and has meaningful opportunities for growth by expanding to new product categories and meaningfully growing its presence outside the US. The current valuation is rich by almost any measure relative to any peer group of consumer product companies, but its current growth rate is also meaningfully higher. When we normalize for the company’s growth outlook, we find the valuation about appropriate following a ~100% appreciation since the pricing the IPO at $20. We are therefore initiating coverage with a Market Perform rating.

All statements in this report attributable to Gartner represent Raymond James’ interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this research report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.




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Important Investor Disclosures Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Raymond James Ltd., Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) 659-8200; in Latin America, Raymond James Latin America, Ruta 8, km 17, 500, 91600 Montevideo, Uruguay, 00598 2 518 2033; in Europe, Raymond James Euro Equities SAS (also trading as Raymond James International), 40, rue La Boetie, 75008, Paris, France, +33 1 45 64 0500, and Raymond James Financial International Ltd., Broadwalk House, 5 Appold Street, London, England EC2A 2AG, +44 203 798 5600.

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For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state.

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Additional information is available on request.

Analyst Information

Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of Raymond James & Associates, Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of Raymond James & Associates, Inc., and are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public companies, and trading securities held by a research analyst account.

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The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.

Ratings and Definitions

Raymond James & Associates (U.S.) definitions




Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions

Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Latin American rating definitions

Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Europe (Raymond Euro Equities SAS & Raymond James Financial International Limited) rating definitions

Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.

Rating Distributions

Coverage Universe Rating Distribution* Investment Banking Distribution

RJA RJL RJ LatAm RJ Europe RJA RJL RJ LatAm RJ Europe

Strong Buy and Outperform (Buy) 55% 66% 50% 44% 22% 44% 0% 0%

Market Perform (Hold) 40% 33% 50% 34% 9% 23% 0% 0%

Underperform (Sell) 5% 2% 0% 22% 2% 0% 0% 0%

* Columns may not add to 100% due to rounding.

Suitability Categories (SR)




Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.

Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential for long-term price appreciation.

Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets.

High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal.

Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.

Raymond James Relationship Disclosures

Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months.

Company Name Disclosure

FitBit, Inc. Raymond James & Associates co-managed an initial public offering of FIT shares within the past 12 months.

Raymond James & Associates makes a market in shares of FIT.

Stock Charts, Target Prices, and Valuation Methodologies

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies.

Target Prices: The information below indicates our target price and rating changes for FIT stock over the past three years.

Risk Factors

General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Specific Investment Risks Related to the Industry or Issuer

Communications Technology Risks Communications Technology risks include, but are not limited to, competitive conditions (intense global competition), pricing and availability of components, reliance on outside manufacturers and suppliers, constant innovation, complex technologies, rapid technological change, labor strife, patent registration and infringement, capital constraints, regulatory issues, customer concentration, industry consolidation, lengthy and unpredictable sales cycles, and macroeconomic pressures affecting demand.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/Disclosures/index. Copies of research or Raymond James’ summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6

th Floor,

880 Carillon Parkway, St. Petersburg, FL 33716.

http://www.rjcapitalmarkets.com/Disclosures/index

http://www.raymondjames.com/




For clients in the United Kingdom:

For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients.

For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom.

For clients in France:

This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monétaire et Financier” and Règlement Général de l’Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers.

For institutional clients in the European Economic Area (EEA) outside of the United Kingdom:

This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

For Canadian clients:

This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements.

Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows:

This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client releasa ble resear ch

This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.

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