Q3 2022 Garmin Ltd Earnings Call
Okay.
Thank you for standing by and welcome to Garmin Ltd third quarter 2022 earnings Conference call.
At this time all participants are in listen only mode. However, at any point in time, if you'd like to ask a question simply press star one one on your telephone as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Teri Seck director of Investor Relations. Please go ahead.
Morning.
Like to welcome you to Garmin Limited's third quarter 'twenty 2022 earnings call. Please note that the earnings press release and related slides are available at Garmin <unk> Investor Relations site on the Internet.
W. W. Dot Garmin dotcom Slashdot and archive of the webcast and related transcript will also be available on our website. This 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 or share repurchases market shares 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 garmin information concerning these risk factors is contained in our Form 10-K.
With the Securities and Exchange Commission in particular, there is significant uncertainty about the duration and the 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.
Our close Campbell, 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 reported earlier today consolidated third quarter revenue came in at 1.14 billion.
Down 4% from the prior year.
Revenue was negatively impacted by approximately $70 million due to the strengthening of the U S dollar relative to other currencies.
Excluding this impact revenue would have increased about 2% over the prior year.
While the stronger dollar negatively impacted revenue.
Cost of goods benefited due to the weakening of the Taiwan dollar.
In addition cost of freight came down as more products are being shipped by ocean.
And as rates decline due to excess capacity in the shipping industry.
These combined with favorable segment mix resulted in gross margin of 58, 8%.
An increase of 40 basis points over the prior year.
Expenses increased 4% as growth in R&D, and SG&A was partially offset by advertising efficiency.
This resulted in operating income of $239 million, which was down 15% from the prior year.
Operating margin was solid at 21%.
Considering our year to date performance, we are adjusting expectations for the remainder of the year.
We now anticipate full year revenue of approximately $4 $85 billion a year over year decline of 3%.
We are raising our full year EPS guidance to $4.95 on improving gross margins increased efficiency in our expense structure.
The lower full year effective tax rate.
Doug will provide more details on our financial results and updated guidance in a moment.
First I'll provide highlights on the performance and outlook of each business segment.
Yeah.
Starting with fitness revenue decreased 18% to $280 million, primarily due to lower sales of advance wellness wearables and indoor cycling products.
Gross and operating margins were 53% and 15%, respectively, resulting in operating income of $41 million.
During the quarter, we launched the index P. P M smart blood pressure monitor, which measures systolic and diastolic blood pressure at home or on the go.
When paired with our Garmin connect App users can see either measurement history and trends alongside other health status.
We also launched the venue as Q2.
Featuring a Brian Emel, let display and up to 11 days of battery life, which is nearly double that of its predecessor.
Considering year to date performance in that business segment, we are maintaining our expectation that revenue will decline 25% for the year.
Yeah.
Moving to outdoor revenue increased 5% to $340 million driven by growth in adventure watches and in reach devices and services, partially offset by declines in other product lines.
Gross and operating margins were strong at 65% at 36%, respectively, resulting in operating income of $121 million.
In rates remote communication devices and response coordination services have been a strong product category and unique differentiator for the outdoor segment.
During the quarter, we launched the Unreached messenger, a versatile communications focused device with global two way texting location sharing and Sos capabilities.
Whenever a customer presses the Sos button their communication is sent to our Garmin response center.
Which oversees and coordinate our unique response based on the situation.
Since launching enrich services in 2011.
The Garmin respond center is coordinated over 10000 enriched Sos responses.
And more than 150 countries and on all seven continents for activities ranging from hiking and backpacking to roadside assistance in areas of poor cell phone coverage.
Many customers claims and risk products and services were instrumental in returning safely to family and friends.
Considering year to date performance and the outdoor segment and current trends, we now expect revenue to grow 17%.
Sure.
Looking next at aviation revenue increased 4% to $188 million, primarily driven by growth in aftermarket product lines.
Demand for aviation products remains strong and we continue to experience higher than normal backlogs for our products.
Supply chain constraints have improved that continue to affect our ability to completely clear the backlog.
Gross and operating margins were strong at 73% and 26% respectively.
And operating income of $48 million.
Okay.
During the quarter, we announced that our <unk> 3000 integrated flight deck was selected by tactical Air to modernize F. Five fighter aircraft operated by the U S Navy and Marine Corps.
Our expanding role on the EB five demonstrates the capability and versatility of our integrated cockpit systems for use in demanding military applications.
Additionally, a recent survey by Aviation International News ranked Garmin number one in avionics product support for the 19th consecutive year.
This long period of recognition demonstrates an unwavering commitment to meet the needs of highly demanding markets from owner flown aircraft to large part 135 commercial operators.
I congratulate our team for once again, earning this award.
Which is a testament to the quality of Garmin equipment, and the amazing way our associates care for our customers.
The aviation segment has delivered solid performance, so far but supply chain constraints are affecting our ability to achieve our original plan by the end of the year.
With this in mind, we are adjusting our revenue growth estimate to 7% for the year.
Mhm.
Turning to the Marine segment revenue decreased 5% to $197 million.
Marine business is highly seasonal and Q3 typically represents the lowest quarter of the year.
For the past two years, these seasonal trends a bit difficult to predict due to the influence of the pandemic.
We believe the market is returning to more typical seasonal trends.
Gross and operating margins were 56% and 23% respectively.
Resulting in operating income of $45 million.
During the quarter, we began shipping the lifestyle XR system, which operates at greater depth and expands the addressable market for live action sonar to coastal and deep like fishing applications.
We also launched the lifestyle plus ice ice fishing bundle with high resolution real time imaging, which creates the ultimate portable solution for winter fishing.
And finally, we continue to be recognized for innovation and achievements in the marine industry.
For the eighth consecutive year, the National Marine Electronics Association named Garmin manufacturer of the year and.
And we also received five product of Excellence Awards.
Very proud of our accomplishments in the marine market and I congratulate our team on these achievements.
Considering year to date performance in the Marine segment and the return of typical seasonality patterns, we are lowering our revenue growth estimate to 3% for the year.
Looking finally at auto revenue decreased 2% to $136 million as declines in consumer product lines more than offset growth in OEM programs.
Gross margin was 40% and the operating loss driven by investments in auto OEM programs narrowed significantly from the prior year to $16 million.
During the quarter, we announced that our tread navigators had been selected by Arctic Cat as standard equipment on select side by side off road vehicles, beginning in model year 2023.
Considering year to date performance in the automotive segment and current trends.
We now expect revenue declined 7% for the year.
So that concludes my remarks next Doug will walk you through additional details on our financial results Doug. Thanks Cliff Good morning, everyone.
I'll begin by reviewing our third quarter financial results my comments on the balance sheet cash flow statement taxes or updated guidance.
We posted revenue of $1 billion $140 million for third quarter, representing a 4% decrease year over year gross margin was 58, 8% 40 basis point increase compared to prior year quarter.
Increase was primarily due to favorable segment mix and lower freight premier partially offset by the net unfavorable impact of foreign exchange rates.
Operating expense as a percentage of sales was 37, 8% 310 basis point increase the prior quarter.
Operating income was $239 million, 15% decrease.
Operating margin was 21% 270 basis point decrease.
Our GAAP EPS was $1 nine pro forma EPS was.
$1 24.
Next look at our third quarter revenue by segment and geography.
Third quarter growth in the outdoor and aviation segments more than offset by declines in the fitness marine and auto segments.
<unk>, the Americas region was down 2%.
The EMEA region was negatively impacted by foreign exchange rates, excluding the impact of foreign exchange rates EMEA sales performance put them more in line to Americas sales performance.
APAC region was up 10% for the prior year, excluding approximately $16 million impact foreign exchange rates APAC region would have been up 19% over the prior year.
Looking next operating expenses.
Third quarter operating expenses increased by $18 million or 4% research and development increased $10 million year over year, primarily due to engineering personnel costs SG&A increased $12 million compared the prior year quarter, primarily due to increases in personnel related expenses and information technology costs and charges.
<unk> expense decreased approximately $4 million lower co op advertising.
If you highlights on the balance sheet cash flow statement and taxes ended the quarter with cash and marketable securities of approximately $2 $7 billion.
Placebo was relatively flat year over year and decreased sequentially $641 million.
Inventory balance increased year over year to approximately $1 $5 billion.
This increase was in line of our expectations, we've been executing our strategy to reduce freight costs through higher mix of ocean versus air shipments.
For the third quarter of 2022, we generated free cash flow of $104 million $100 million decrease from the prior quarter, primarily due to lower operating income increased working capital needs.
Capital expenditures for the third quarter were $50 million.
Expects full year 2022 free cash flow to be approximately $450 million capital expenditures of approximately $250 million.
Also during the quarter, we paid dividends of $141 million repurchased $83 million of the company's shares and $186 million remaining at the end of the quarter.
Your repurchase program authorized through December 2023.
During the third quarter of 2022 reported effective tax rate four 3% compared to five 9%. The prior quarter decrease in effective tax rate was primarily due to income mix by tax jurisdiction increase in U S tax deductions and credits.
Turning next to our full year guidance, we estimate revenue approximately $4 $85 billion compared to our previous guidance of $5 billion.
Our gross margin to be approximately 57, 5%, which is higher than our previous guidance 56, 7%, primarily due to year to date performance, including favorable segment mix and lower costs.
We expect an operating margin of approximately 27%.
Also we now expect our full year 2022 pro forma effective tax rate to be approximately 8% lower than our previous guidance of eight 5% to projected full year income mix by tax jurisdiction, which.
Results in pro forma earnings per share approximately $4 95.
This concludes our formal remarks, Jonathan could you. Please open the line for Q&A.
Certainly once again as a reminder, if you have a question at this time. Please press star one one on your telephone.
And our first question comes from the line of Paul Chung from Jpmorgan. Your question. Please.
Hi, good morning, and thanks for taking my question so.
Aviation is on track to kind of hit record annual revenues, even ahead of 19 levels.
If you could expand on kind of the product portfolio.
Youre, gaining share where you have pricing power.
What new products Youre excited about and then on the margin front can you see operating leverage with.
Kind of record revenues, maybe heading into 'twenty three.
As inflation FX and.
In supply chain dissipates I know the ESP cycle in 19 drove those mid 30% operating profit margin.
Can you get to that low 30 soon and then a follow up.
Yes, thanks, and good morning, Paul.
And in aviation, we've been able to.
Build the revenue that was vacated by the ASB mandate.
Through a couple of a couple of things we have new product lines.
Such as our auto pilot system switch.
You know as we certify each new aircraft.
We are able to offer a totally new product category to that.
Particular.
Group of aircraft that are out there. So we're definitely gaining share it is a new product category.
To pilots.
And then indicators.
One alone indicators are <unk> 75, as well as our <unk>.
And our Standalone GPS now com products. The GTS series had been very strong in this environment, where people are are retrofitting their planes as far as the forward look we're not really ready to talk about 2023, but aviation and of course, it will be a market where.
The operating profit is driven by the investments we have to make and so as new programs come along which tend to be long lifecycle, we sometimes have to invest in advance. So that's one variable that will look at as we think about our 2023 guidance and then also the sales volume.
Will will drive leverage and so.
Again, we're not quite there yet in terms of of I'm talking about 2023, but those are factors we will consider.
Great and then follow up on fitness Youre seeing.
Recovery here and margins you mentioned earlier this year.
<unk> and component inflation as some of the primary drivers for kind of the underperformance in the first half. So how are those two shocks evolving and can we get back to the 20% here.
Shortly as we head into the holiday season, and then separately on competition you have Apple with ultra.
Google pixel here ramping.
Does the data showing you on market share and how are you kind of protecting your niche categories and are you adjusting pricing somewhat increasing promotions increasing marketing anything you can comment there. Thank you.
Okay.
Yeah, so in terms of fitness.
Yeah.
<unk> definitely did impact us I think in terms of the improvement we saw it would be.
Primarily due to.
Product mix as we had new products in the segment are running categories. In particular have been very strong with the release of the $2 55 and $9 55.
Series in terms of a particular target I think where we where we landed in Q3 was actually where historically, we've kind of targeted in terms of.
Mindset around what is the performance of this segment at fitness is a more competitive segment due to the advanced wellness wearables. So that mid teens kind of range for operating margin is is actually a very good result, and that will fluctuate up and down depending on promotions and and on product cycles.
In terms of competition, we're always mindful of that.
We still believe even with the release.
The Apple ultra and the Google pixel that we have unique differentiators.
Not the least of which is some of our products are able to have 25 times the battery life of <unk>.
Those devices. So that's a significant advantage and we're more oriented to the unique needs of our users around activity and an adventure.
So we continue to believe that we can carve out unique spaces for ourselves there and we don't believe that we're losing market share in light of that.
Okay, great. Thank you thank.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of David Macgregor from Longbow Research. Your question. Please.
Yes, good morning, thanks for taking the questions.
I guess I wanted to just start off by I think I heard you say the free cash flow guide for the year was $4 50, I was just wondering what the.
How are you thinking about inventory within that context.
Our year end targets would look like.
Great question, Yes.
Full year free cash flow.
Estimate is $450 million.
And.
Inventory is a big driver of that.
As you've noticed our inventory hasn't been increasing year over year and did increase.
Here in Q3, as we look at.
Q4, our year and we would expect that our full our end of year inventory will be lower on a sequential basis compared to Q3, maybe by around.
10% or so and that would mean that our year end inventory would probably be up over the comparable period in 2021 by mid teens or so.
So there will be.
Last year comparing that to it you saw in 2021 actually inventory increase from Q3 to Q4 about 10%.
Okay, and then I realize it varies rather dramatically across the different segments, but could you talk a little bit about just field inventories inventory.
In the field.
Yes, right now I would say that we feel like channel inventory is mostly at reasonable levels. The one exception to that has been the indoor cycling trainers, which.
The channel is full of trainers from all manufacturers not just just a garment specific thing.
Because of the shift from indoor cycling training during the panic pandemic to more outdoor cycling training. So thats the one area that.
The market is continuing to work through but in general we feel like the levels are are mostly good the one thing that.
Is a factor out there as we as we look forward and really kind of difficult to predict how it will go but retailers generally have inventory of lots of different things right now so as they move into Q4, many have signaled that there they are promoting and so you know as.
As we as we look at Q4 will.
We will be looking for signals around open to buy dollars and promotions that they are willing to do given their overall inventory picture.
Okay.
Last question for me is just.
As you think forward to 2023, and I realize youre, probably going to have a lot more to say about 2023 once we come to January but just thinking at a high level.
If 2023 ends up being sort of the more negative type of macro scenario and things really are down rather significantly.
Can you just talk about your ability to flex opex.
And just how much flexibility out there.
I think we do have some flexibility around.
Opex, particularly in the areas of advertising and some of the discretionary areas.
I think I think that.
Slowing some of the other things in terms of R&D commitments.
Or are more difficult are take more time to really see the result, we do have a list of priorities that we've vetted and we're committed to regardless of the environment. So that we can.
Growth for the future.
But right now I would say that they were taking a generally cautious wait and see view about about how things go and we're being very careful with how we spend and grow our head counts.
Okay. Thank you very much.
Thank you one moment for our next question.
And our next question comes from the line of Ben Bolan from Cleveland Research. Your question. Please.
Good morning, everyone. Thanks for taking the question.
Cliff I was hoping you could speak a little bit about how you think about device refresh any thoughts around.
The composition of mix in particular in Wearables that you think.
Refresh represents today and.
And how that has evolved throughout COVID-19. What you saw in the last couple of years and then I have a follow up.
Yes, I think we are typically seeing still.
Still the majority of customers coming into our platforms as as new to Garmin customers.
So there's certainly an element that is.
People that buy a second device or a new device of some kind and there are some secondary market for our devices as well so that they might sell them on online and then we get a new customer.
To reduce device, but in general it's still slightly over a majority of those customers are new to garmin.
Okay.
The last question is.
If I recall.
Last year.
I believe government had.
Slightly better inventory availability versus a lot of other categories I was left the impression that might've benefited some.
Some of the retailer commitments into the holidays last year.
Please please correct me if I'm wrong, but I'm curious if that's playing into anything youre seeing this year and then I'm also curious what youre seeing from your partners in terms of how they're thinking about working capital commitments into the holidays and beyond have you seen any change in how much inventory, they're willing to sit on.
Or how how far in advance they're ordering product.
Thanks.
And so last year, we did feel like we had availability win.
Many others did not due to supply chain issues, even even so I think we were still limited on some of the things that we could supply and in some of our deliveries came very late in the quarter, which might've missed the overall holiday season. So there was a lot of dynamics last year that we won't comp this year because things.
Are more normal and and of course, we'll have to wait and see how the customer responds in Q4, two to the holiday buying season.
In terms of.
Our partners.
Like I mentioned earlier I think what they call open to buy dollars in the retail channel is something thats really important retailers do have a lot of inventory of many different things and.
And so they're balancing what to bring in based on what they think will sell well and they can maximize their results as well so it's a little bit different environment. This year, because last year was all about getting anything they could and this year is all about selling the right things.
Thank you.
Thank you one moment for our next question.
Okay.
And our next question comes in line of Ivan <unk> from Tigress Financial Partners. Please go ahead. Thank.
Thank you for taking my question and congratulations on a great cadence of new product introductions. So.
On the blood pressure monitor this is the second item in your index line or are you envisioning expanding the index as a product line now that you have the blood pressure monitor going along with the scale and what other types of.
Products in that segment are you thinking about.
Yes, good morning Ivan.
I would say generally we're always looking at new category opportunities. So <unk>.
Indexes has been a great category for us as a wellness device on the on the scale first and the blood pressure monitor has been a delightful surprise in terms of the interest that we've had in that and we quickly sold out.
We had on hand, and looking for more deliveries. So we're excited about that and we're constantly looking at new categories to grow.
Our business.
And then on your <unk>.
In Wearables.
Can you give some indication of percentage of people, who already own our garmin product and are adding another one because you can tell by the activation and the connection to the <unk> App.
Or what percentage are new and let's say, how many people, let's say continue to use two devices or let's say give it to a family member or had other people.
Yes, I don't have a specific stats in front of me on that we do see that and track it at a level less than what I mentioned earlier in terms of just people that are.
Buying another garmin device, but I don't have the specific stats in front of me.
Okay. Thank you congratulations again.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Erik Woodring from Morgan Stanley . Your question. Please.
Hey, guys. Good morning, Thanks for taking the question I guess, maybe Chris I'll start with you and maybe just a high level question and that is you know how do you discount or consider geopolitical risk and how that influences your manufacturing footprint and are there any regions that you'd target as it pertains to Roe.
All sorts of new capacity or.
It was the premise of that question someone out of line and then I have a backup thank you.
Yeah, Good morning, Eric.
Yes, geopolitical risks have been something we've dealt with since the beginning of the company. There. They are really not new they they tend to be shifting.
Around the globe as as things evolve.
In terms of looking at new capacity I mean, we've demonstrated recently that we have the ability and the expertise to standup new.
Our factories and in new regions, such as our automotive OEM factory in Poland.
We are several years ago created a factory in China. So we have that diversity and we're able to quickly stand up capacity, where we need it. So we just constantly look at that and and.
Evaluate what our needs are.
Okay. That's helpful. And then and then maybe just digging into the consumer facing businesses that you have is there any way you can help us kind of understand here in the back half of the year.
You know, how how we should think about volume versus pricing and which one.
It is a more significant driver of growth.
We're limiting declines versus the other and then one more thanks.
Yes, I think this question of a volume versus pricing Thats always the big question as you think about pricing your products and running promotions in <unk>.
And the name of the game is maximizing for US we always want to maximize the profit dollars for garmin that that allows us to be successful. So it's a big question and I don't think anyone has a magic way to do it but we try to balance all of those factors and also take into account.
The availability of products in various stages of lifecycle that we can promote the older ones for example, and allows us to keep the pricing on the newer products higher.
Okay. That's helpful. And then last question for me maybe this is for Doug.
Really nice performance on the on the margin side, both gross and operating maybe if we just stick on the gross side can you maybe list from most to least impactful kind of the the upside versus downside a headwind versus tailwind drivers for the nice margin performance this quarter.
And then just kind of second to that or just maybe helping us understand what percentage of Cogs is in Taiwan dollars versus U S dollars and that's it for me. Thanks.
So yes gross margins. So as you mentioned theres a lot of different <unk>.
Moving pieces in that gross margin number so some of our headwinds are probably in the top when we'd have led to that one is just the FX impact we had on our revenue now we do have as cliff mentioned, but the other side of that with the strengthening of the U S.
Dollar against the Taiwan dollar there is lower costs related to that piece of it but.
But it is not able to offset all of that.
Headwinds related to the FX on our revenue side, then kind of taking you back a little bit.
One of our biggest headwinds we have previously related to.
Our freight freight had been increasing quite a bit.
Year over year. So now we're seeing some of those freight costs decline and it's actually declining for two reasons one of which.
Relating to lower freight rates and.
The other one is that we are shipping a larger percentage of our.
Yeah.
Shipments on Ocean versus Air just give me some benefit that we have different standpoint. So those are our big drivers and you always have some other things in there relating to a segment mix.
From a consolidated standpoint, one segment has a higher percentage of the total like for instance of aviation or outdoor.
<unk> has more than other ones that gives a benefit from that standpoint, so and it also got your product mix in there.
<unk> two new products that we're launching in the period of time and.
Proposals times of the year also that we have somewhat different mixes.
Great. Thanks for the color Doug.
I appreciate it.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Teri Seck for any further remarks.
Thanks, everyone for your time today, Doug and I are available for callbacks and this afternoon. Thank you bye.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect.
Sure.
Okay.
The conference will begin shortly.
As Johan during Q&A you.