Q2 2022 Garmin Ltd Earnings Call
Thank you for standing by and welcome to the Garmin Limited 2nd quarter of 2022 earnings conference call. At this time, all participants are not listening only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. As a reminder, please program, maybe record it. And now I'd like to introduce your host for today's program, Theresa Sekt Director of Investor Relations. Please go ahead.
Good morning. We would like to welcome you to Garmin Limited's second quarter, 2022 Erning's Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations side on the internet at www.garmin.com slash. An archive of the webcast and related transcripts will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Many statements regarding our future financial position.
Revenue, earnings, growth margins, operating margins, future dividends or share purchases, market share product, introductions, future demand for our products, and plans, and objectives are forward looking statements. The forward looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting garment. Information concerning use risk factors is contained in our form 10K filed with the Securities and Exchange Commission. 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 results could change at any time. The pandemic is a huge part of the COVID-19 pandemic, and the pandemic is a huge part of the COVID-19 pandemic. The pandemic is a huge part of the COVID-19 pandemic, and the pandemic is a huge part of the COVID-19 pandemic, and the documentary deliberately 1000 years has come tonight, and the documentary is deliberately 300 years since Wuhan was in a dangerous virus, Thank you.
This results in outlook as a best estimate based on the information available as of today's date. Presenting on behalf of Garmin limited this morning are Cliff Pimble, President and Chief Executive Officer and Doug Bethan, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimble.
Thank you, Terry, and good morning, everyone. As reported earlier today, consolidated revenue came in at $1.24 billion, down 6% from the strong pandemic-driven comparable of 2021.
We generated $293 million of operating profit for the quarter, which was down 21% from the prior year, and operating margin was 23.6%.
Our performance in the quarter was influenced by several factors.
First, the US dollar strengthened significantly over the prior year, relative to other major currencies and unfavorably impacted second quarter revenue by approximately $57 million. But, I spent probably approximately $57 million.
Our strategy for managing currency fluctuations of this nature is to increase prices where we are able and reset pricing as we introduce innovative new products.
We believe this approach is very effective in managing currency changes over the long term.
But the rapid and relentless strengthening of the US dollar will be a significant headwind for the remainder of the year. The US dollar will be a significant headwind for the remainder of the year.
From a business segment perspective, under performance in fitness had a significant impact on our results, which I will cover in more detail in just a moment.
And finally, we continued to experience applied chain constraints, which limited the orders we could fill on the quarter, specifically in marine and aviation.
Considering our performance so far, we're adjusting expectations for the remainder of the year.
We now anticipate revenue of approximately $5 billion, which is flat through the prior year.
an EPS of $4.90, representing a year-over-year decline of approximately 16%.
This new guidance assumes currency exchange rates stabilize at current levels.
And we have adjusted growth expectations for fitness and marine, which reflect the current trends.
Doug will provide more details on our financial results and updated guidance in just a moment, but first I'll provide highlights on the performance and outlook of each business segment.
Starting with bidness, revenue decreased 34% to $272 million.
Growth and operating margins were 49% and 9% respectively.
resulting in operating income of $23 million.
quarter decline was broad-based, impacting all categories in the segment.
and was primarily driven by demand normalization in the advanced wearable and cycling categories.
These are categories which benefited significantly from pandemic fuel demand in the first half of 2021.
Although our Q2 performance was disappointing, we are encouraged by the response to our new product introductions.
During the quarter, we celebrated global running day with the launch of two new running watches.
The 4002 55 and the 4009 55.
The 455 solar version is our first running watch with solar charging capability. The 455 solar version is our first running watch with solar charging capability. The 455 solar version is our first running watch
which provides up to 20 days of battery life in smartwatch mode.
We also launched the Edge 1040 cycling computer featuring solar charging capability for superior battery life and multi-band GPS technology for accurate high performance positioning in the most challenging ride environments such as those found in urban areas or dense tree cover.
Given the year-to-date performance in current trends, we now expect fitness revenue to declining 25% for the year. The year-to-date performance in current trends, we now expect fitness revenue to declining 25% for the year.
Moving to Outdoor Revenue increased 18% to $382 million with growth across multiple categories led by venture watches.
Growth and operating margins were strong at 66% and 40% respectively, resulting in an operating income of $154 million.
During the quarter, we launched the Tactics 7, a premium smartwatch with unique capabilities such as night vision compatibility, as well as advanced tactical performance, and risk-based navigation features.
The outdoor segment has been a strong performer so far, and we are maintaining our revenue growth estimate for the year.
Looking next to this aviation revenue increased 13% to $205 million.
driven by growth in both OEM and aftermarket categories.
Gross and operating margins were strong at 72% and 30% respectively, resulting in an operating income of $62 million.
During the quarter, supply chain constraints eased, bringing backorders down from historically high levels.
But we have more work to do to meet the strong demand for our products.
We recently announced that we now have more than 25,000 integrated flight decks in service.
across a broad range of application.
from piston trainers to transcott metal business jets.
This achievement demonstrates the unmatched versatility and capability of our integrated flight tech systems.
The aviation segment has delivered solid performance so far, and we are maintaining our revenue growth estimate of 10% for the year.
Turning next to the Marine segment revenue decreased 7% to $243 million.
Demand for our products was even higher than it was during the historic second quarter of 2021.
but we were unable to satisfy all of the demand due to supply chain constraints.
Growth and operating margins were 57% and 28% respectively, resulting in operating income of $69 million.
Since it was first introduced in 2018, our live scope sonar system has been a game changer for the inland lake fishing market and has been a growth catalyst for the marine segment.
We recently expanded our product line up with the introduction of the live scope XR system.
which operates at greater depths and expands the addressable market for live action sonar to coastal and deep lake fishing applications and deep lake fishing applications
We're excited to bring live scope technology to the deep fishing market and believe it represents another growth opportunity for the marine segment. We're excited to bring live scope technology to the deep fishing market
Given our performance so far this year, and the anticipated return of normal seasonality patterns in the marine market. Tier Mesa
We will now expect revenue growth of 5% for the year.
Looking finally at auto revenue decreased 6% to $139 million with the clients in both consumer and OEM categories.
Consumer was impacted by lower sales of consumer P&Ds.
while OEM was impacted by reduced orders from automakers.
who face their own supply chain challenges.
Gross margin was 40%.
and we recorded an operating loss of $15 million driven by ongoing investments in Auto OEM programs.
During the quarter we entered a new product category with the launch of our first diesel headset.
Offering truck drivers high quality audio up to 50 hours of continuous talk time and unique integration features with our diesel navigator units.
While the first half of the year has been slightly below expectations,
We believe growth will resume in the second half as automaker production improves.
As a result, we are maintaining our revenue growth estimate of 5% for the year.
So in closing, while we are facing a variety of headwinds, it's important to remember our Diversified Business Model provides many opportunities for growth within each segment.
We have a very strong product lineup and more new products are on the way.
We remain focused on what we can control and will be agile and opportunistic as we navigate the evolving macroeconomic environment.
So that concludes my remarks. Next, Doug, we'll walk you through additional details on our financial results. Doug? Thanks, Cliff. Good morning, everyone. I begin by reviewing our second quarter financial results. Write comments on the balance sheet, cash flow statement, taxes, or updated guidance.
The cost of revenue of $1 billion, $141 million per second quarter, representing 6% decrease year-of-a-year.
The cost margin is 58.7%, relatively flat compared to the prior quarter as favorable segment and product mix offset the unfavorable impact of foreign exchange rates and higher break costs.
Operating expense to passenger sales is 35.1%, 230 basis point increase the prior year quarter.
Operating income was $293 million, and 21% decrease.
Operating margin was 23.6% for an 40 basis point decrease.
Our GAPEPS is $1.33, the former EPS is $1.44.
Next, look at our second quarter revenue by segment and geography.
For the second quarter, double-digit growth and outdoor navigation segments are more than offset at a climbs, a fitness, a reign, and auto segments. Ar than Week 2 A
By geography, America's region was flat, and we were determined to contribute about half of the revenue for the quarter.
The EMEA impact regions both impacted by foreign exchange rates declined during the quarter.
Looking next at operating expenses.
Second quarter operating expenses increased by $26 million or 6%. Research and development increased $15 million year over year, primarily due to engineering personnel costs.
This DNA increased $10 million prior to quarter, primarily due to increases in personnel-related expenses, and information technology costs.
Our advertising expense is relatively consistent year over year.
The highlights on the balance sheet, catch low statement and taxes.
End of the quarter would cash Markle's securities approximately $2.9 billion.
Counterceiving will increase sequentially to $699 million, following a seasonally stronger second quarter. Decline year over year, relatively in line for sales decline.
Immatory balance increase year-to-year to approximately $1.5 billion.
Reckless Junior Strategy increased days of supply to support our increasingly diverse supply product lines.
Optimize the mix of ocean versus air freight shipments and it carries efficient levels of raw materials, safety stock to mitigate increased lead times.
In the second quarter of 2022, we generate free cash flow of $5 million. It will earn $115 million decrease from prior quarter, primarily due to lower operating income and increased operating capital needs. in
The cabling's been at yours for second quarter for $75 million.
We expect full year 2022 free cash flow to be approximately $500 million, capital expenditures approximately $300 million.
Also in the quarter, we paid dividends of $129 million. We purchased $31 million of company shares, leaving $260 million remaining, share a purchase program, and authorize the December 2023. Authorize the December 2023.
Precide quarter of 2022 put an effective tax rate of 7.6% compared to 14.8% prior quarter.
The decrease in effective tax rate is primarily due to income mix by tax jurisdiction and increase in U.S. tax deductions and credits.
Turning next, to our full of your guidance.
We estimate revenue of approximately $5 billion per quarter of previous guidance a $5.5 billion.
As briefly mentioned, the strengthening of US dollar is a significant unfavorable impact or a segment of revenue. we saw earlier.
Assuming the Euro will be a parity with the US dollar for the remainder of the year, year-over-year unfavorable revenue impact will accelerate in the back half of 2022.
We expect close margin to approximately 56.7%, which is lower than our previous guidance, 57.5%, primarily due to the anticipated full-year unfavorable impact for exchange rates.
Expect operating margin approximately 20%.
Also, we expect to perform an effective tax rate of 8.5%, which is lower than our previous guidance of 10.5%, to project a full year income mix by tax jurisdiction.
This results an expected pro-former earnings per share approximately $4.90. This concludes our former remarks. Jonathan, please open the line for Q&A.
Certainly, once again if you have a question at this time, please press star then one and one again.
One moment for our first question.
And our first question comes from the line of Paul Tunkfib, JP Morgan, your question please.
Hi, thanks for taking my question. Just first up on fitness, where are we on the channel levels on some of the cycling products and what's been the initial demand, feedback for refreshing some of the 4Runner designs, including the 955?
And how should we think about kind of the seasonality for the balance of the year for fitness? Do you expect to win 2018?
Yes, sir. I know follow.
Okay, good morning, Paul.
Channel levels and cycling, I'd say you have to kind of look at two different sides of that. One is the cycling computer side and the other is the indoor trainer side. The cycling computer side and the response to the new 1040 is very good and so the inventory levels at the channel I think are fine.
the indoor cycling side of things with the tax trainers. I think generally the the market right now is heavy on inventory of all kinds of trainers from every manufacturer and so there's kind of a backup at retail of those products which impacts our sell-in.
It's going to take some time, I think, for retailers to work through that. In general, the retail demand is generally what people would expect for this time of the year. It's not really the season yet in the Northern Hemisphere and we should see improved retail sales.
in the back half of the swinter approaches.
In terms of the other fitness products, the 955 and the 255, the demand has been very good. The demand has been very good.
and we're working through actually back orders on those as well.
Great. And then on aviation, you saw some record, kind of quarterly revenues, kind of resulting in, you know, very nice operating leverage for the segment. Now it's above that 30% mark again. You know, can you expand on, you know, some of the strength you're seeing in the segment and a product mix, market share, and you've kind of provided the revenue outlook, but how should we think about the margin outlook for...
You know aviation in the second half.
Yeah, so definitely a good quarter. I think that we were able to catch up on some of our lingering back orders.
in the segment. Most of those were targeted to the aftermarket. Both sides of the aviation segment, the OEM side in the aftermarket, grew in the quarter. We expect that to continue in the back half because OEMs of course are working to fill the back order that they have for airplanes, which are still very strong and we're still catching up on orders in the aftermarket side.
of things as well. In terms of market share, as we said before, we're very strong in everything from the piston singles on up through the midsize business jet, and we continue to...
to win more platforms in those categories and are working on new projects to......and are working on new projects to......and are working on new projects to...
to build our revenues for the future.
And then margin wise, I would say that aviation has been very solid when it comes to our margin profile. And you know, in that 70% margin range for gross margin, which funds a very heavy R&D investment to create the products that we offer. And kind of that that mid mid upper 20 range for operating margin is kind of the sweet spot. As we get more leverage of course it goes up but generally we tend to target in that range.
Great, and then lastly, if I could fit one more in, outdoor, very strong quarter with the refresh of the Phoenix. outdoor, very strong quarter with the refresh of the Phoenix.
despite some tough comps. How is the cell through kind of tracking there and the status of the channel there? And then do you have a sense for kind of upgrade versus new users to the platform, particularly for the Phoenix and any thoughts that would be great? So, I'm going to start with the next one. I'm going to start with the next one. I'm going to start with the next one.
What was the sell-through tracking there and the status of the channel there? And then do you have a sense for upgrade versus new users to the platform, particularly for the Phoenix? Any thoughts there would be great. Thanks. It's
So the refresh has gone very well. I think it's taken us...
some time, but we we're getting close to being caught up on the initial demand for the Phoenix and the Epics.
Since it was launched earlier this year, there's still some pockets of lingering back orders in those categories that we're working to catch up on. In terms of the channel, we think it's very, very healthy and seems to be normalizing right now with kind of the shell-in shell-through being balanced. The
In terms of user profile, we're seeing pretty much what we have seen.
in recent launches, which is roughly about half of our users coming into those families are new users and then we have upgrade users coming from all kinds of products from much older generation Phoenix to even our advanced wellness customers who are looking to upgrade to a more capable launch.
Great, thank you.
Thank you.
Thank you. I'm moment for our next question. Thank you. Thank you. Thank you.
And our next question comes from the line, a Ben Bullet from Cleveland Research. If you have any questions, please. Thank you. Thank you.
Thanks for taking the question.
Chris Indog, I had a bigger picture question on inventory levels. When you think about your current balance sheet, the exposure to inventory, I know there's been some targets to build that. All of those thoughts evolved.
And then a follow on, based on the behavior you're seeing from your partners, your go to market partners.
Do you have any thoughts about what they're thinking about going into the holiday selling season and their overall commitments to inventory levels from where they stand right now?
Yeah, so maybe just a high level comment on our overall inventory. As you know,
component lead times have been very long.
And so in order to ensure we have the materials to be able to meet demand, we've had to increase.
our weeks of supply on the raw material side. In some cases, we've been faced with what we're typically before the pandemic, you know, 13 to 26 weekly times, now extending 26 to 52 weekly times. So it's a very challenging situation. And what we don't want to do is we left with demand with no inventory to build. Additionally, on the inventory side, the freight side of things has been really challenging. And in order to solve the freight cost issue, we have to have more.
solid long-term, long-life cycle products that we can sell over time. So we feel very good with where we're at right now. In terms of go-to-market and their outlook for the upcoming holiday season, it's still early days, so there's work being done to finalize all of that. The early indications that we have in some of the segments is a very strong commitment to the future. Thank you.
to promoting products in big quantities for the holiday season. So that's what we know so far, but again, it's probably very early days.
Okay, and then one follow up would be specifically if you look at the outdoor business. In case you look at the outdoor business. In case you look at the outdoor business.
for the adventure watches.
How are you thinking about the performance of that business through your end? How are you thinking about the performance of that business through your end?
and how are you balancing the potential risks of...
Maybe you've already seen some pull-forward each, haven't seen it yet, given the refresh versus, you know, the stronger underlying spectacular demand. That's it. Thank you.
Yeah, so our guide for the year is up 20%. We had a strong first half, so as you can infer from the data, we expect that we'll moderate in the back half.
We believe our product line is very strong and we believe that that is achievable right now and we also have more new products coming which should boost our overall ability to grow in the back half.
Thank you.
Thank you one moment for our next question.
And our next question comes from Nikolay Todorov from Longbow Research. Your question, please.
Thank you and good morning everyone. First question on the marine. I guess, Cliff, can you talk about where do you see the constraints? I know you had some constraints in the prior quarter but it seems like they have worsened. And also it seems like you are building still a strong backlog. How much of that do you consider perishable given the macroeconomic backdrop?
Yeah, so the constraints, Nick, I would say they're not worse, but they, in some cases, they didn't get much better during the quarter.
The main issue there was key components for our chart flotters in order to be able to deliver those higher in flotters and we prioritize. The main issue was the key components for our chart flotters.
customers in the segment that impacted our selling prices.
But in general, I would say the backlog, we've made some progress into Q3 and covering some of that.
And we are assuming that we'll have a greater level of seasonality, more typical of the segment. Q2 is usually the highest quarter of the year, and then it follows off as people in the northern hemisphere bring their boats out of the water and put them in storage, and they wait to upgrade boats and work on them in the spring. So we're assuming some of that may be deferred, but that's why we brought our guide down to about 5%.
Okay, and then second question I have is that maybe on the OPEC side, maybe can you talk about what are the changes you are implementing following the vision in the outlook, how is the OPEC line changing given the new outlook?
I think we're definitely taking a look at that and we're looking at two different areas. We're being very selective in our hiring to make sure that we don't outgrow our revenue growth.
We're also looking at our general OpEx.
focusing on priorities and essentials and making sure that we narrow the priorities to the most important things. So we're trying to manage that and steer it for the long term. So we're trying to manage that and steer it for the long term.
Okay, last one if I can squeeze. Fitness gross margin, should we expect given the current environment and the inventory overhang that high 40s is kind of the norm in the near term or is there any potential puts and takes that can change the direction?
Yeah, in the fitness gross margins, a lot of, we said puts and takes in it. We did see some unfavorability relating to the foreign exchange rates, which we would anticipate that to continue in the back half. Cliff talked about also freight. Freight's also been impacting our gross margins also there from that standpoint. So you've seen some of the other segments that may have seen some improvement in there likeVs Raidspicking apps orIO
Thank you, let's go.
Thank you one moment for our next question.
And our next question comes in line of Ivan Fainseff from Tigris Financial. Your question please. Thank you for taking my question and congratulations on the good aviation performance. Following the introduction of the diesel headset do you think there's an opportunity for you to expand into aviation cockpit headsets considering that's really only dominated by two companies and none of those have the cockpit presence that you have?
Yeah, I think, good morning Ivan. We're really excited about the diesel and as I've mentioned many times in the past, our strategies for growth are introducing new products and new product categories, entering new markets and this reflects.
that commitment. Right now we're focused on attacking the opportunities on the truck side, and then we're exploring other avenues where this kind of technology might be useful.
Now based on your overall bigger picture hiring and space expansion plans in Olathe, do you think that some of what you're going through that you're seeing right now is just more of short-term headwinds and what do you feel the bigger picture growth opportunities continue to be? Well of course I think everyone hopes that that the economic situation is short-term but but none of that is really proved to be true so we're making sure we're managing the business for the long term.
We are in need of more space in Olathe particularly to be able to bring more people back onto campus and also focusing on those priorities that we have, particularly needing more people in aviation and some of the consumer areas as well and balancing our overall hiring needs. So we're committed to building out and finishing our space expansion here in Olathe and then I think we're in good shape when it comes to overall space.
accommodations for our people or the next kind of phase of growth.
Right, and in upcoming new products, can you give us some idea of the areas that we should be stay tuned and focused on, where we'll see some new products introduced to the year, for the second half of this year?
Well, we have introductions planned in most every segment, so stay tuned. I'm pretty excited about some of what's coming.
All right, thank you very much.
Thank you. Thank you. One moment for our next question.
And our next question comes to the line of Eric Woodring from Morgan Stanley . Your question, please.
Hey good morning guys, thank you for taking my question. Maybe Cliff, I'll start with a kind of high level question for you and then ask one for Doug. I think as we've gone through the pandemic and now kind of in this quasi pandemic stage, consumer electronics have gone through a near record period of elevated demand that some could now say is normalizing. I would just love to get your take Cliff on just how you think about the time for your consumer facing businesses.
Do you think it's permanently larger today than pre-COVID levels? Is there a risk that it returns? Just high-level thought process on how you're thinking about the TAM as we move past the peak of the pandemic.
Thanks, Eric. Yes, I think that the pandemic certainly...
highlighted to people the importance of health and wellness and fitness. And so I believe that that change in people's focus probably is a very long and enduring Revolutionary time.
Mindset.
We did experience a lot of new demand and had new customers coming into our ecosystem. I believe that's a longer term opportunity than as they use those devices and then look for a device with new capabilities, they will then look to Garmin for an upgrade. I believe that creates an enduring customer base for us.
and lead to opportunities in the future.
Okay, that's helpful. And then maybe Doug, you know, by my math, kind of gross margins in the second half will be a bit below 56% operating margins will be around 18 and a half percent. So is there any way you can just kind of help us quantify the impact of the various factors impacting kind of this new lower second half margin outlook? Yeah, well a big factor that is foreign exchange rates. So as I mentioned, you know, the up.
Assuming parity for the Euro and the US dollar, we should expect the year of year impact change to accelerate. For instance, in Q2 of last year, 21, we're about 120. Then this year, the average for Q2, 22, was about 107. And then it went to buy I think a 118 and 115. Then if you assume parity, which is similar where we're at right now, that
Your your chain will accelerate. So that is the impact in our gross margin there as well for the bigger piece of that piece. But then also, if we mention, you know, freight something, you know, you have managing through that also.
And maybe if I could just clarify would you say that FX is the only kind of incremental headwind or would you say freight is now more of a headwind than you expected 90 days ago?
You know, it's interesting for eight. So, you know, freight was probably the biggest story, you know, maybe a couple quarters ago. We were year by year. Now, as Cliff mentioned, you know, we're mania piece of that as late as our inventory levels. We are trying to have a larger percentage of our shipments on ocean versus air, which is helping that. And also, on a year-of-year basis, you know, we saw some of those large increases last year in the rate.
and I probably see some of those rates are maybe a little bumpy here too, but more or less stabilizing. So there will probably be some ups and downs on freight through the back half of the year, kind of see what's going on with the rates, whether ocean, but it won't be as significant of a driver as the FX point of standard, which I think are going to be that bigger item that we're going to be headwind against in the back half.
Okay, thank you so much for the color guys.
Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Teresa Sack for any further remarks.
Thanks everyone for your time. Dug and I are available for callbacks. Have a great day. Bye.
Thank you ladies and gentlemen for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
Thank.
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