Q3 2021 Garmin Ltd Earnings Call
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Good day and thank you for standing by welcome to the Garmin Ltd third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your first speaker today Ms. Teri Seck Ma'am. Please go ahead.
Good morning, we would like to welcome you to Garmin Limited's third quarter 2021 earnings call. Please note that the earnings press release and related slides are available at garments Investor Relations site at Www Dot Garmin Dotcom Slashdot and archive of the webcast and related transcript will also be available on our website.
Earnings call includes projections and other forward looking statements regarding Garmin limited and its business any statements regarding our future financial position revenues earnings gross margins operating margins future dividends market shares product introductions future demand for our products and plans and objectives are forward looking statements the forward looking events and circumstances.
Stanford is discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting garmin information concerning these risk factors is contained in our Form 10-K and Form 10-Q filed with the Securities and Exchange Commission in particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results.
Could change at any time and any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date.
Presenting on behalf of Garmin limited. This morning are Cliff Pemble, President and Chief Executive Officer, and Doug <unk>, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cliff Pemble.
Thank you Terry and good morning, everyone.
As announced earlier today Garmin reported record revenue of $1.2 billion for the third quarter.
Increasing 7% over the pandemic fuel levels, we achieved in the prior year.
Operating income declined year over year to $283 million.
Due to a combination of higher freight costs affecting gross margin.
And increased expenses as we invest in R&D information technology and marketing initiatives.
Operating margin was very strong at 23, 7%.
There are two things to consider when looking at our performance in the back half of the year.
First financial comparisons to the prior year are more challenging due to the pandemic driven demand and retail disruptions of 2020.
Also we are facing one of the most challenging supply chain environment and history.
Our vertically integrated business model and commitment to safety stock was a key factor driving revenue growth for the quarter.
Supplies are tight and we expect freight cost to remain elevated as we rush to fill retail shelves in time for the important holiday selling season.
I am pleased with what we've accomplished in this tough environment and I'm very proud of our team who've worked tirelessly to maintain continuity of supply.
From our factories to customers.
Last time, I mentioned that we invested in our fourth production facility in Taiwan.
I am pleased to report that this facility is operational and will help us fill more orders during the important holiday selling season.
Given our strong performance in the first three quarters of the year, we're updating our full year guidance.
Now anticipate revenue of approximately $4 $95 billion up 18% over the prior year with double digit growth expected in each of our five business segments.
In a moment, Doug will provide more details on our financial results and updated guidance, but first I'll provide a few highlights for each business segment.
[laughter].
Starting with fitness revenue increased 4% to $342 million with growth driven primarily by cycling products and advanced Wearables.
Our connect IQ development platform is a strong differentiator for us and we are deploying it across a broader range of garmin devices.
We recently held our fifth annual developer conference, where we announced a partnership with <unk> com to deliver real time glucose information via our connect IQ App on selected smart watches and cycling computers, even during activities.
Fitness segment revenue has grown 26% year to date and we are maintaining our revenue growth estimate of 17% for the year.
Yeah.
Moving to outdoor revenue decreased 3% to $324 million.
The decrease in revenue is due to the strong sell in activity associated with the launch of our solar adventure watches in the prior year quarter.
And limited supplies of traditional handheld and dog products in the current quarter.
During the quarter, we launched the approach our 10, our first portable golf monitor.
The <unk> can be used on course, we're at home to help golfers improve their game with more than a dozen key metrics shown in real time.
Customers are very enthusiastic about the our 10 and it's on its way to becoming another halo product for Garmin.
Outdoor.
Revenue has grown 26% year to date, and we are maintaining our growth estimate of 17% for the year.
Yes.
Looking next at aviation revenue increased 19% to $180 million with growth in both OEM and aftermarket product categories.
During the quarter, we were ranked number one in avionics product support by Aviation International news for the 18th consecutive year.
Being consistently recognized for unrivaled support year after year clearly shows our strategic focus on taking care of customers and standing behind our products.
Also in the quarter, we announced the certification of the GSE 600, H flight control system on the Bell 505 helicopter.
This advanced out of pilot includes state of the art safety features such as electronic stability control and hover assist mode.
We're pleased with how the aviation segment has recovered so far this year and now expect full year revenue guidance to increase approximately 12%.
Turning next to the Marine segment revenue increased 25% to $208 million with.
With growth across multiple categories led by chart plotters.
We continue to be recognized for innovation and achievements in the marine industry.
For the seventh consecutive year, the national bringing Electronics Association named Garmin manufacturer of the year and we also received five product of Excellence Awards.
During the quarter, we introduced surround view the industry's first intelligent camera system.
Revised at 360 degree bird's eye view around the vessel.
We also announced our partnership with Malibu boats.
Our seven inch touch screen displays will be standard equipment across the Malibu axis boat line, beginning with the 2022 model year.
Given the strong year to date performance on the Marine segment, we are raising our revenue growth estimate to 30% over the year.
And looking finally at auto revenue increased 7% to $138 million with growth, primarily driven by OEM programs.
During the quarter, we began production shipments of the BMW computing module from a litho, Kansas manufacturing facility.
And we delivered prototypes of the next generation BMW system from our new manufacturing facility located in Poland.
We also recently announced a refreshed lineup of drive navigators for the consumer auto segment.
These devices offer larger higher resolution displays as well as enhanced connected features.
Given the strong year to date performance of the auto segment, we are raising our revenue growth estimate to 17% for the year.
That concludes my remarks next Doug will walk you through additional details on our financial results and updated guidance.
Thanks Cliff good morning, everyone.
Again by reviewing our third quarter financial results with my comments from our balance sheet cash flow statement taxes or updated guidance.
Revenue of $1 billion $192 million, the third quarter, representing 7% increase year over year.
Gross margin was 58, 4% 100 basis 180 basis point decrease compared to prior year quarter.
The decrease was primarily due to higher freight costs.
Operating expense percentage of sales 34, 7% 310 basis point increase the prior quarter.
Operating income was $283 million, 11% decrease.
Operating margin was 23, 7% before 90 basis point decrease.
GAAP EPS was $1.34 pro forma EPS was $1 41.
Next we'll go to third quarter revenue by segment.
Maybe highly diverse business model provides a rich set of opportunities reduce our reliance on single markets and product lines.
For the third quarter, we achieved growth in four of five segments double digit growth in both marine and aviation.
Fitness is our largest segment contributing 29% of the sales third quarter, followed by outdoor at 27%.
Looking at revenue by geography, the Americas, and EMEA regions grew 10, 10%, 9%, respectively. The APAC region decreased 2%.
The Americas region contributed nearly one half of our revenue remaining coming from the EMEA and APAC regions.
Looking next operating expenses.
Third quarter operating expenses increased by $62 million or 18%.
Research and development increased $39 million year over year, primarily due to engineering personnel costs.
SG&A increased $21 million compared to prior quarter, primarily due to increases in personnel related expenses and information technology costs.
Our advertising expense increased approximately $3 million due to higher media spend.
Yes.
A few highlights on the balance sheet cash flow statement and taxes.
In the quarter with cash Mark those securities were $3 $2 billion.
Accounts receivable decreased sequentially and year over year to $639 million inventory balance increased both a sequential year over year basis, $1 1 billion, primarily due to raw material requirements preparation for the seasonally strong fourth quarter.
During the third quarter 2021 generate free cash flow of $204 million $32 million decrease compared to prior quarter Cabo.
Capital expenditures for third quarter $41 million.
Full year 2021 free cash flow to be approximately $750 million capital expenditures of approximately $325 million.
Third quarter 2021 put in effective tax rate five 9% compared to six 9% the prior year.
<unk> was primarily due to impact return to provision adjustments associated with filing the U S tax return.
Next to our full year guidance.
Estimate revenue of approximately $4 95 billion increased 18% to the prior year double digit growth each of our segments.
We expect gross margin to be approximately 58, 2% lower than our previous guidance 58, 5% due to higher freight costs.
We expect an operating margin of approximately 24%.
So we expect our full year 2021 pro forma effective tax rate to be approximately 11, 5%, which resulted in pro forma earnings per share of approximately $5 60.
Who's a former remarks, Rachel can you. Please open the line for Q&A.
Thank you as a reminder to ask a question just press Star and then the number one on your telephone keypad and do we do all your question just press the pound key please standby, while we compile the Q&A roster.
Yeah.
Yeah.
Our first question comes from the line of Paul Chung from Jpmorgan. Please proceed with your question.
Hi, Thanks for taking my question. So just on aviation you know <unk>.
Hi, guys kind of suggests.
Sequential down tick typically see.
<unk> <unk> of what's going on there is that an impact from supply chain headwinds and then on op margins stabilized in <unk>, but you're still remain well below that.
Low thirty's range, you've seen historically so is this the right level to think about moving forward or is there also some transitory hits in the near term.
Yes, Thanks Paul.
Certainly there is some noise associated with aviation in the prior year versus this year as well. So part of it is is timing of shipments that occurred from year to year.
But also lead times on equipment in aviation is getting longer so we're accounting for that and wanting to make sure that we're.
Taking into account all of those factors that might affect Q4 revenue.
And then as we think about next year in the context of pretty strong business jet demand.
Do you see this business growing along with the industry or at a faster pace given kind of the new certifications auto land and smart glad that you've introduced.
Yes, I think we have the most innovative product line for sure so across aftermarket and OEM were well positioned with our products and on the platforms that are the most popular.
The most significant interest in business jet demand right now is in the sweet spot of where our products are installed. So I would expect that we would continue to perform well as the industry performs.
Okay, Great and then lastly inventory balances have increased as you signal how comfortable are you heading into the holiday holiday season, we supply components logistics and then.
Separately as we head into fiscal year 'twenty two.
How should we think about working cap, particularly on the inventory you're going to have a bigger harvest and then the.
Pace of Capex in 'twenty, two would be helpful as well thank you.
Yeah, I'll just make a comment on the general inventory and then ask Doug good to.
To finish the other parts of your question, but in this environment I think inventory is.
Is definitely a positive thing.
And we've been able to secure the kind of inventory that we feel we need to to make for a successful year I think nobody would ever say they have too much in this environment and with shipping delays that are taking place. So we hear of everyday in the news definitely at a higher level of inventory is required.
Yes, but first regarding free cash flow and inventory levels as Cliff mentioned, we will be continue to.
Keep our inventory levels at the appropriate level to meet our demand so there will be.
<unk> levels at year end.
As it relates to Capex.
Forecast for the current year is $325 million is a number of our projects that we do have in.
In place for that so we do expect some elevated.
Capex going into 2022.
So those things will be factored into free cash flow when we come up to it.
1022 relating to the inventory levels as well as our Capex.
Yeah.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Ben Bolan from Cleveland Research.
Line is open.
Good morning, Thanks for taking the question.
Cliff.
We could talk a little bit about.
How do you think about the advanced Wearables business near term longer term.
Fitness and outdoor in particular.
Any thoughts you have on.
Maybe you saw some pull forward during COVID-19, how significant do you think that might have been versus kind.
Kind of a broader secular category growth.
Also interested any thoughts you have on sell in inventory stocking versus like sell through performance and where channel inventory you feel is today versus maybe history.
Yeah. So.
I would say in terms of the general performance of those categories over the past nearly two years now certainly there was a lot of pandemic related interest in those products in the early part of the pandemic cycle.
That interest of course still remains very strong and we believe as the industry has reported that there's still a lot of growth potential in the wearables market I think we're positioned really well in that market. Because we we are differentiating ourselves around the active lifestyles theme so everything.
We do with our product has a purpose and is built for purpose.
In terms of sell in versus sell through I think we we can definitely see those trends with our product registrations and we feel like.
The sell in and sell through is matched very well at this point in the inventory levels in the channel are better than they have been although again, depending on product lines. There can be pockets of imbalances here and there.
And then the other question I have is just in regards to.
Calendar <unk> this year versus prior years.
Have you seen any notable changes either in timing around retailer commitments as they prepare for the holiday any thoughts around the promotional environment.
Versus prior years and anything along the lines with consumer behavior do you think they're shopping earlier versus prior and that's it. Thank you.
Yes, so in terms of our Q4 versus prior years last year.
I think the market was still very distorted with many retailers starting to reopen or figure out how to open in light of the pandemic and their their inventories and online warehouses, where we're very much depleted. So we're still seeing that pandemic driven spike.
On a year over year comparison basis in terms of promotional environment. This year I would say that things feel like they're getting a little bit back to normal.
Although it remains to be seen I would say that.
There's not a rush as far as we can see that everyone's trying to shop. Early there is obviously reports of that in light of the general inventory situation you see with products on the market.
But in general I would say that it's looking more normal and the seasonality of the business.
Thank you.
Yeah.
Your next question comes from the line of real power from Baird. Please proceed with your question.
Okay, Great Yeah, I guess a couple of questions.
First I was hoping to come back just to somewhat supply chain commentary I guess just trying to.
Better understand it if possible where youre seeing the primary impacts you know what what segments I guess in particular and how youre thinking about the overall impact in Q4 versus what you saw in Q3 is expected to get worse as a stabilizer.
There's some some broader views on that front would be great.
Okay.
Yes, let's say that the.
The supply chain environment as I mentioned earlier in my remarks is a really tough where we're handling thousands of components on.
On a day to day basis, and managing the AR, the inflow and the use of those components and in some cases allocating.
How they are allocated to product manufacturing.
In terms of our Q3 I would say that definitely we saw an impact in the outdoor segment with regard to those products I mentioned in the dog products in the traditional <unk>.
Handhelds, but for the most part across the business.
We're doing okay, and managing it again on a day to day basis.
So that's generally what we see.
Okay.
Okay. Thanks.
And then a question on auto I guess, maybe maybe two part.
You think about the.
OEM segment, what's the current thought process on margin outlook. There I know there have been investments.
You know programs.
Ramp up but any thoughts.
How to think about the cadence of margins from here, then I guess on the consumer side.
You know margins down a bit year over year operating margins down a bit your view I assume that's just something tied to mix, but any color there would be helpful too. Thanks.
Yes, so auto OEM.
And the margin outlook as our business transitions to the tier one manufacturing opportunities that we've been talking about of course.
I have a thinner.
<unk> on the gross margin line, so that will definitely impact our gross margin as we develop the scale and get these programs into production then.
Of course our.
What we're working towards is profitable bottom line, but again you should think of those in terms of traditional auto OEM margin structures on the consumer side definitely we saw some impact on on margin. There part of that is freight, but we also had some component.
And the consumer auto side that impacted the gross margin.
Okay. Thank you.
Thank you. Your next question comes from the line of Ivan scientists from financial Partners. Please proceed with your question.
Thank you for taking my call and congratulations on good performance in a difficult time.
Thank you.
Some of the headwinds you spoke about freight things like that are you starting to see them abate or what is your near term outlook.
Some of these.
So near term it we would say it's.
An ongoing thing.
We probably don't see anything in the near to intermediate term that really changes.
Whats happening right now until Theres really more capacity brought into the system in some of these bottlenecks.
It gets solved.
But maybe you have a slight increase in cost, but its not really disrupting your manufacturing process right.
Like I've mentioned, we've managed that situation very well, probably as well as anyone could ever imagine and I would say.
In this environment of course, we're very sensitive to the profitability. So so we're using this.
Situation too to reevaluate pricing of both existing products as well as new product.
Introductions and promotions that we do in order to adjust.
And your Capex.
Spending you said, you're going to increase spending on R&D and.
In marketing and what kind of R&D areas can you give some idea of what your.
Working on or see like new opportunities also in your I T.
What areas are you looking to invest in and improve and what type of marketing initiatives can we expect to see going forward.
Well in terms of R&D one of the.
The bigger pieces of the increase in Q3 was was the investment in the auto OEM programs to bring the next generation BMW system to market, which will launch later next year.
And then across the business, we've had higher personnel costs as we work to retain our people.
And also general growth as we invest in new product categories, and new markets across our segments.
It is.
Our business is very much driven around the.
The cloud and the online component of our products.
The things that we offer and so we're investing in the infrastructure that we need to support.
All of that business marketing wise again, we've got some exciting product roadmaps and so we're working on all of those and getting ready to launch new products.
I really liked the decks com partnership the integration of <unk> into your App and Wearables there what other kind of areas can you give some idea of stuff that youre looking at.
Well I think connect IQ is a very.
Versatile platform.
That allows people to tap into.
By far the best hardware based platform for Wearables and.
Purpose driven devices that we have in cycling in the outdoor traditional those kinds of products.
So it's a great asset for us and we're constantly working on new opportunities to showcase connect IQ apps with our devices.
Okay. Thank you.
Thank you.
Thank you once again, ladies and gentlemen, if you have a question. Please press star and then the number one on your telephone keypad. Your next question comes from the line of Nick Todorov from Longbow Research. Please go ahead.
Yes, thanks, and good morning, everyone.
Question on Marine I think you guys continued to perform exceptionally well, there and even versus tougher comps.
Especially if you compare it to something about our segment that benefited last year from Covid like fitness and outdoor so can you give us some a little bit more details on whats driving the ability to address upside and marine is it.
Our ability to have better supply than competitors and gaining share or what kind of some of the drivers there.
Well, there's a lot of moving pieces and all of that for sure I would say that our product line is superior.
And we're gaining market share with particularly some of the Halo technologies, because we have such as.
Life scope.
The supply chain issue is again across the business, but in marine.
We were able to benefit, thereby being able to continue to deliver products and take advantage of opportunities and then on the OEM side of marine.
They're of course ramping up their production lines to meet the boat demand that is still a.
Very persistent and extends even now we're hearing into 2023 in terms of their backlog. So we're working to support those.
Customers those OEM customers and support the general growth of the market, that's taking place right now.
Okay. Thanks for that and then a question on on the model, Doug maybe maybe I'm sorry, if I missed this but you took gross margin down for the year, but then the operating margin.
Can you share what is the offsetting factor there yes.
Yes, it's really.
Leveraging operating expenses, so looking at our operating expenses really gave that the difference between.
Operating margin as well as the COO.
Margin decline there.
Okay. Okay got it. Thanks, that's all the questions right. Good luck guys.
Thanks, Nick.
Thank you and once again, ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone again, just press Star and then the number one on your telephone keypad. Our next question comes from the line of Erik Woodring from Morgan Stanley. Your line is open.
Thank you and good morning, everyone Cliff I guess this one is just for you I just wanted to be clear would you say as you sit here today.
Obviously, we know about the supply chain challenges, but do you feel confident right now in Garmin <unk> ability to have products on the shelf for the holiday season I. Just wanted just wanted to start with that one then I have a follow up.
Yes.
Excuse me enough.
And I'm, just I'm not sure.
I'm not sure you heard me correctly, you said are you confident and I said, yes, yes, no that's perfect.
Second question was just if we look by geographies APAC was noticeably weaker than North America or in EMEA. Just curious if you could share some color there why that would be thanks.
Yes in APAC, there's really two factors one was the rolling.
Progress of the pandemic as delta swept through various countries across the region and so we had some impact in the markets generally is as they were more stringent lockdowns and measures taken to control the delta spread and then the other major factor was the timing of product introductions, particularly in outdoor.
Or the <unk>.
APAC market is.
Definitely reliant.
On those product introductions, and so theyre comping against the very strong introduction of our solar products that we did last year in Q3.
Got it thanks, and if I could just sneak one last one in there just you made you made those comments about the.
The boating market, specifically the OEM market.
I guess with that you know the fact that backlog is potentially extending out to 2023.
Is it is it accurate to say that.
There might not be a week of a off season. This year similar to last year is that a is that a fair thing to say.
But I think the OEM part of the business is.
A smaller percentage compared to aftermarket so even if it swings to a greater degree it's less influential on the overall business just because of the mix of that.
But that said I would say that the seasonality of marine is a little bit more normal in the current year versus where we saw last year or so so we would expect is as economies and business activity tends to normalize around the pandemic and endemic behaviors of this of this virus.
Yes.
That.
The marine industry would also return to its normal seasonality and we've seen some of that in Q3 and Q4.
Okay perfect. Thank you guys, yes. Thank you.
Thank you once again, ladies and gentlemen, if you have a question just press star and then the number one on your telephone keypad.
Okay.
Okay.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to Gary. Please go ahead.
Thanks, everyone for your time today and have a great day.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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