FIT also continues to make strides in its Health Solutions business, which will be critical to its success and growth going forward. Currently, its health products and services -- which include smartwatches, trackers, and a mobile app -- only account for about 10% of revenue. However, the segment is growing much faster than its traditional tracker business, up 26% year/year. During its conference call last night, management also stated that it had a few significant wins in this area too, including Humana choosing to make Fitbit Care its health coaching platform for its employer group segment. That said, FIT faces immense competitive pressures from the likes of Apple, Samsung, and Google and it remains to be seen if FIT can continue to take market share.
As for its Q3 results, the company posted EPS of $0.04, beating analysts' bottom line estimates by $0.05. In addition to the pick-up in growth, FIT's earnings performance was supported by solid cost containment as General and Administrative costs dove 42% lower to $20 million. Overall, operating expenses declined by 17% to $150 million.
On a year/year basis, FIT also displayed strong improvement in other profitability metrics, such as Adjusted EBITDA surging by 256% to $21.0 million, and cash flow from operations going to positive $20.2 million from a cash burn of ($40.4) million a year ago
The not-so-good news is that gross margin also tumbled lower by 510 basis points to 40.1%. However, this was expected by the company as smartwatches become a larger portion of total revenue. Going forward, FIT is expecting gross margin to tick a little higher from Q3, while also expecting operating costs to continue to trend substantially lower.
FIT's performance on the topline was mixed. On the positive side, revenue of $393.6 million easily outpaced the $382.3 million consensus, and was up 0.3% -- the first increase in eight quarters. Driving the improvement was a 3% bump in average selling prices, with sales in EMEA also pretty strong at +17% to $104 million. Earlier, we also highlighted the encouraging trends occurring in its Health Solutions business, as it continues to add to its base of 1,500 customers and 100 health plans.
On the negative side, units sold decreased by 2% to 3.5 million, and U.S. revenue, accounting for 58% of total revenue, was down 6%. That was a slight improvement, though, from Q2 when U.S. sales fell by 8%.
In the earnings press release, FIT provided encouraging guidance for the fourth quarter. Namely, it issued upside EPS guidance of $0.07 vs. the $0.05 consensus, while saying it expects revenue to be greater than $560 million versus the $569.2 million consensus. FIT is also expecting to generate positive free cash flow of $90 million in Q4, and for its Health Solutions business to continue to grow. That said, revenue from Health Solutions is still expected to be immaterial compared to wearable device revenue.
And, finally, FIT anticipated that selling prices will continue to rise, but, once again, at least partially offset by a decline in device sales.
All in all, it was a promising report from FIT and a nice step in the right direction, but, the company still faces an uphill battle in terms of generating meaningful sales growth as it competes against some of the largest tech companies in the world. With that in mind, it will probably take a few quarters of sustained growth before investors truly buy into the turnaround.