Q4 2022 Garmin Ltd Earnings Call
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Good morning, and thank you for standing by welcome to the Garmin Ltd fourth quarter 2023 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 one or you.
Telephone you will then hear an automated message advising me. Your hand is raised to withdraw your question Press Star. One again, please be advised that today's conference call is being recorded I would now.
I'd like to hand, the conference call over to your Speaker today Teri Seck. Please go ahead.
We would like to welcome you to Garmin Limited's fourth quarter and fiscal year end 2022 earnings call. Please note that the earnings press release and related slides are available at garments Investor Relations site on the Internet at Www Dot Garmin Dotcom Slashdot.
Five 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.
Statements regarding our future financial position revenues segment growth rate 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.
As a result of risk factors affecting garmin.
Information concerning these risk factors is contained in our Form 10-K filed with Securities and Exchange Commission in particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. It means that results could change at any time 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 Martin 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 fourth quarter revenue came in at $1 $3 billion, which is down 6% from the prior year and consistent with trends we experienced for most of 2022.
There are several factors that influenced our results, including the year over year strengthening of the U S dollar.
Macroeconomic and geopolitical concerns affecting Europe .
And the performance of retailers, who focused on inventory control.
One bright spot is the performance of our direct sales channel <unk>.
Including Garmin Dot com.
Which increased by strong double digits and accounted for greater than 10% of total net sales.
While our priority is to serve the needs of third party retail partners. Our direct channels are an increasingly important pillar of our go to market strategy.
Another bright spot is our gross margin performance.
Which improved 150 basis points over the prior year.
And exceeded expectations as we benefited from lower freight costs.
Yeah.
Our performance in 2022 was solid despite facing a mix a persistent and emerging headwinds.
<unk>, the general business environment and consumer behaviors.
We reported revenue of $4.86 billion, a 2% decline year over year.
Revenue was negatively impacted by approximately $228 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.
Our gross margin performance was strong at 57, 7% for the year.
And operating margin exceeded 21%.
As announced earlier this morning, we've combined the product categories of the consumer auto segment without door.
I'll provide more context in a moment that factors considered include the current size and scope of the consumer auto segment.
As well as the expected growth of the auto OEM segment.
We're cautiously optimistic as we turn our attention to 2023.
Have a great lineup of new products and additional product launches are planned throughout the year.
We anticipate consolidated revenue will increase approximately 3% to $5 billion for the year.
In the first quarter, we expect that revenue will decline in line with recent trends as we compare against the strong product launches from the prior year.
We expect to return to growth starting in the second quarter as we benefit from planned new product introductions.
It's important to remember that we are not focused on quarter by quarter or category by category performance.
Rather we focus on delivering solid results year after year.
Creating highly differentiated products and leveraging our diversified business model.
We're proposing a dividend of $2 92 sense consistent with the prior year, which will be considered by shareholders at the upcoming annual general meeting.
Doug will discuss financial results in greater detail in a few minutes, but first I'll provide highlights on our performance and outlook for each business segment.
Starting with fitness revenue decreased 28% for the year with declines across all categories.
Full year gross and operating margins were 50% and 9% respectively.
Resulting in operating income of $105 million.
During the quarter, we launched our first LTE connected kids smartwatch available exclusively at Garmin Dot com.
Bounce offers two way text and voice messaging.
As well as real time location tracking.
<unk> also tracks activities and steps throughout the day offers games and allows parents to assigned chores and give rewards.
We continue to explore new verticals in health and wellness.
And recently received U S. FDA approval for a clinically validated E. C. G are for the venue to plus smartwatch.
This app allows users to record their heart rhythms and checked for signs of Afib.
We believe this is an important step towards providing a full line of devices for managing a variety of health conditions.
For 2023, we expect revenue to be down approximately 5% in the segment as it stabilizes and as we anticipate the benefit of new product introductions.
Yeah.
Yes.
Moving to outdoor full year revenue increased 17%, resulting in record revenue of nearly $1 $5 billion for the year.
We experienced growth across multiple product categories led by strong demand for adventure watches.
Full year gross and operating margins were 65% and 37% respectively.
And operating income of $556 million.
During the quarter, we launched the second generation Mark luxury smartwatch, featuring a bright amyloid touch screen display and premium grade five titanium materials.
We also expanded the instinct product line with the new crossover a unique hybrid smartwatch that is fully analog and fully digital.
Looking ahead, we expect the outdoor segment to grow approximately 2%.
Which includes contributions from consumer auto.
We expect the first quarter of 2023 to be challenging as we compare against the strong results from the prior year.
Which were driven by the launch of the flagship Phoenix Seven series, the instinct to series and the all new ethics.
We expect growth to resume starting in the second quarter, driven once again by new product introductions.
Yeah.
Yeah.
Looking next at aviation full year revenue increased 11% with contributions from both aftermarket and OEM categories and as supply chain constraints eased.
2022 was a record year for our aviation segment with revenue approaching $800 million and exceeding the levels achieved during the 80 S. P. A DSP mandate, which demonstrates our ability to deliver long term growth in core product categories, such as auto pilots GPS NAV com.
Display systems and services.
Full year gross and operating margins were 72% and 27% respectively, resulting in.
Operating income of $213 million.
During the quarter, we announced that L. Three Harris technologies has chosen the G 3000 tandem integrated flight deck, that's part of the U S Special operations command Armed Overwatch program.
The G 3000 system will provide the latest communication navigation surveillance and air traffic management capabilities for the Sky wouldn't aircraft.
Also we received <unk> approval for the G 5000, retrofit integrated flight deck and necessity citation excel and the X L. S. We also received FAA supplemental type certificate for the GI 275, electronic flight instrument and the <unk> Falcon seven.
The next business jet.
These approvals expand the addressable market for integrated flight decks, and standby instrumentation and business Jets.
The aviation segment continues to benefit from strong demand for <unk>.
The aftermarket products and new aircraft equipped with integrated cockpit systems.
We expect these trends to drive revenue growth of approximately 5% for the year.
Yes.
Turning to Marine segment delivered its 10th consecutive year of revenue growth.
Starting from about $200 million in 2012.
And exceeding $900 million in 2022, which is a new record and represents a compounded annual growth rate of 15% driven.
Driven by both market growth and significant market share gains.
For 2022 revenue increased 3% with growth across multiple Canada categories led by strong demand for sonar systems.
Full year gross and operating margins were 54% and 24% respectively.
Resulting in operating income of $215 million.
During the quarter, we announced that Garmin avionics plus is now preloaded you know certain flagship GPS map sharp clutters combining the best in class charts from both now the Onyx and Garmin.
Throughout the year, we received multiple accolades and awards. Most recently the prestigious IBEX Innovation award the National Boating industry Safety Award.
In recognition as one of the most innovative marine companies by soundings trade only.
Looking forward, we anticipate revenue from the Marine segment will increase approximately 5% for the year as.
As we leverage our strong market share position with typical marine growth patterns.
Yeah.
Yes.
Moving to the auto segment full year revenue decreased 4%.
Growth in auto OEM was more than offset by declines in consumer auto categories.
As mentioned earlier, we recently combined the product categories of consumer auto with outdoor.
As many know we were an early innovator in the consumer automotive market.
And the hyper growth we experience in the mid two thousands allowed us to invest in new opportunities and become a strong highly diversified company that we are today.
Looking back in 2008 revenue from the auto mobile segment exceeded $2 5 billion and represented more than 70% of our consolidated revenue.
Since that time, we've diversified our revenue base and the consumer auto segment has evolved into a collection of important specialty categories.
Many of which target adventure and off road vehicles.
Complement the strategic focus of the outdoor segment.
Separately, we believe that the auto OEM segment has reached a critical inflection point as new programs move into production.
<unk> significant growth over the next few years.
We will report auto OEM as a standalone segment, starting with fiscal year 2023.
Yeah.
This change in segment organization provides an opportunity to discuss why we have chosen to participate in the auto OEM market.
The automotive market is undergoing significant transformation.
As electrification gains momentum.
While the industry has many capable suppliers.
Not all are equipped to meet the demand as the electronic and software content in vehicles rapidly evolves.
Our vision is to be recognized as a leading global supplier of integrated electronic solutions to the auto industry.
To achieve this vision, we intend to leverage our technology portfolio, our vertically integrated business model.
In our global manufacturing footprint.
Yeah.
Auto OEM revenue is generated from three product categories domain controllers infotainment units and all other.
Explaining a little bit about these categories domain controllers are remote computing modules that control various systems throughout the vehicle.
NW program consists primarily of domain controllers for infotainment instrumentation and rear seat entertainment.
Infotainment units are self contained systems that include a display ad.
And the user control system for functions, such as navigation and audio.
Multi media and Internet based apps.
We currently supply infotainment units to automakers in Asia and Europe .
And finally, the other category includes a collection of software map database cameras wearables and other revenue lines.
Our current customer base includes some of the most respected global automakers, including BMW, Toyota Yamaha Honda Daimler Ford and Gili.
We are working with these and many other Oems on future opportunities.
Yes.
During 2022 auto OEM revenue increased 11% to $284 million with growth driven by contributions from new programs.
Full year gross margin was 32%.
And we recorded an operating loss of $79 million driven by ongoing investments to complete new programs.
Operating loss was $29 million lower than the prior year and was better than expectations due to higher sales and a reduction in development expenses.
Late last year, the BMW group recognized garman with a supplier innovation award for our work on the theater screen rear seat entertainment system offered on the flagship seven series automobile.
This is a significant achievement considering the complexity of the program the high expectations of our customer and the fact that we're a relative newcomer to the industry.
I'm also pleased to report that during 2022.
We secured additional commitments from BMW that increased our total awarded volume by nearly 50% and expanded our supply footprint, which now encompasses the north American region.
Europe and China.
Looking forward, we expect auto OEM revenue to increase 30% in 2023.
We expect the first quarter to be approximately flat to the prior year with significant growth starting in Q2, driven by the timing of new model launches.
Many are wondering about our long term outlook for the auto OEM segment, and importantly, the pathway to profitability.
While we do not provide guidance beyond the current year, we can share our vision for where the auto OEM segment goes from here.
Our long term projections consider programs currently awarded along with many other assumptions that may.
May or may not materialize.
Based only on the business already secured.
Our projections indicate that we could experience a compound annual growth rate of approximately 40% over the next few years, which if achieved.
Would result in 2025 revenue of approximately $800 million.
We anticipate much of this growth will be driven by domain controllers, but carry a lower gross margin profile.
Also generate significant volume leverage as we aim for profitability in 2024.
We plan to build on this success with innovation that leads to new opportunities such as the highly acclaimed unified cabin concept, we showcased at the recent consumer electronics show.
In summary, 2023 marks the beginning of a new era for our auto OEM segment.
The opportunity is significant.
Path forward is clear and.
And we're focused on delivering growth and profits in the auto OEM segment.
That concludes my remarks next Doug will walk you through additional details on our financial results and our 2023 guidance Doug.
Thanks, Leslie good morning, everyone.
Let's begin by reviewing our fourth quarter and full year financial results.
And provide comments on the balance sheet cash flow statement taxes, our 2023 guidance posted revenue of over $1 $3 billion for fourth quarter, representing 6% decrease year over year.
Gross margin was 77% 150 basis point increase over the prior quarter.
Increase was primarily due to lower freight costs.
Operating expense percentage of sales was $36, 5% 370 basis point increase.
Operating income was $267 million, 15% year over year decrease.
Operating margin was 25% 210 basis point decrease in the prior year.
Our GAAP EPS was $1 53.
Our pro forma EPS was $1.35.
14% decrease from the prior year pro forma EPS.
Looking at the full year results posted revenue of $4.806 billion, representing a 2% decrease year over year.
Gross margin was 57, 7% 30 basis point decrease in the prior year.
Operating expense as a percentage of sales was 36, 6% 300 basis point increase.
Operating income was $1.028 billion, a 16% decrease.
Operating margin was 21, 1% 340 basis point decrease from the prior year.
GAAP EPS was $5.04 pro.
Pro forma EPS was $5 13, 12% decrease from the prior year pro forma EPS.
Next look at fourth quarter revenue by segment and geography.
In the fourth quarter growth in the aviation Marine and outdoor segments was more than offset by declines in our fitness and auto segments, resulting in 6% consolidated decline.
By geography, the 4% growth in Americas was more than offset by 17% decline in EMEA, 9% decline in APAC, which was negatively impacted by foreign exchange rates during the quarter.
For the full year 2022, consolidated revenue declined 2% with growth in the outdoor aviation and marine segments more than offset declines in our fitness and auto segments.
By geography, we achieved 3% growth, both Americas and APAC, but these increases were more than offset by a 12% decline in EMEA.
Okay next.
Operating expenses.
Fourth quarter operating expenses increased by $21 million or 5%.
Research and development increased approximately $11 million year over year, primarily due to engineering personnel costs.
SG&A increased approximately $13 million compared to prior quarter, primarily due to increased personnel related expenses information technology costs.
Advertising expense decreased approximately $3 million due to lower co op advertising.
A few highlights on the balance sheet cash flow statement dividends and share repurchase.
We ended the quarter with cash Mark with securities of approximately $2 $7 billion.
Accounts receivable increased sequentially to $657 million to seasonally strong sales in the fourth quarter and decreased year over year.
Inventory increased year over year to approximately $1 $5 billion year over year increase is due to executing our strategy to reduce freight costs through higher mix ocean versus air shipments as well as implications of navigating a challenging supply chain environment, which we've been operated.
As a business environment continues to evolve we're working to optimize our inventory.
As such we anticipate our 2023 ending inventory balance relatively flat year over year.
The declines in our consumer inventory offset by expected increases associated with the grow our auto OEM business.
For the fourth quarter 2020 to generate free cash flow of $309 million $260 million increase the prior year quarter.
For the full year 2020 to generate a free cash flow of approximately $544 million $161 million decrease from the prior year, primarily due to higher use of cash for inventory income taxes.
For 2023, we expect free cash flow to be approximately $700 million approximately $275 million capital expenditures.
But 2023 and expect to continue to make investments in our platform for growth, including continued renovation or facilities in Taiwan or like that.
Related projects.
The result of the additional week in the fourth quarter 2022, we paid two quarterly dividends totaling approximately $280 million.
Also we announced our plan to seek shareholder approval for an annual dividend of $2 92 or.
73 cents per share per quarter, beginning with our June 2023 payment.
2020 to repurchase $207 million of company stock at approximately $93 million remaining as of year round the share repurchase program authorized through December 2023.
For full year 2022 reported effective tax rate of eight 6%.
Our effective tax rate.
Seven 9% 240 basis point decrease from the prior year, primarily due to favorable income mix by tax jurisdiction increase in U S tax deductions and credits.
Fiscal year 2023 pro forma effective tax rate expected to be 8%, absolutely flat year over year.
Turning next to our full year guidance.
We estimate revenue of approximately $5 billion.
Increased approximately 3% over the prior year.
We expect gross margin to be approximately 37, 5% relatively consistent to our full year 2022 gross margin.
We expect an operating margin approximately 23%.
Full year pro forma effective tax rate expected to be approximately 8%, resulting in expected pro forma earnings per share approximately $5 15.
Concludes our former remarks Corey can you. Please open the lines for Q&A.
Yeah.
Thank you very much at this time, we will conduct a question and answer session. As a reminder to ask a question.
You will need to press star one on your telephone and wait for your name to be announced to withdraw your question Press Star. One again, please stand by while we compile the Q&A roster.
Okay.
First up we have Paul Chung with Jpmorgan.
Paul Your line is open.
Hi, Thanks for taking my question. So just first off on outdoor can you talk about some of the drivers that could.
Provide some upside to your guidance here or 2% I know you have some.
Kind of tough comps in the first half.
Kind of expand on price versus volume benefits product mix would be helpful and then.
Outdoor finishes the year kind of exceeding 50% of operating profit.
That's a mix where do you see that mix trending this year.
As we layer in consumer auto I know this is small but it can be margins kind of in the high.
30% moving forward and I have a follow up.
Yeah. Good morning, Paul in terms of potential drivers for upside we're really not.
Thinking about.
Forecasting some of those I would I would just point people back to you.
The history in terms of the segment and our product introduction cadence around Wearables in particular, we have a very active product roadmap for the year.
So we're factoring that in but also recognizing that 2022 was a banner year for.
For growth in those in those product lines. So so that's really what's affecting our thinking and that's what.
We used to create the guidance that we've offered.
In terms of consumer auto yes, those product lines are going to continue to to have the margin profiles that that has historically been disclosed although we won't be talking about that going forward anymore, but I would say that as consumer auto products and moved to more specialty <unk>.
Driven applications the margins will will definitely come up as we we have more unique products there.
Thanks, and then just on overall gross margins.
I would've thought see some benefits here from.
Kind of a lower component of inflation FX and freight.
Can you quantify the impact in 'twenty, two kind of related to those cost in expectations for 'twenty three related to that and we're at.
Could you kind of see some upside to initial guide of kind of flattish margins.
And then similar question on operating margins at Samsung.
Cover fitness, maybe some pressure in marine.
Auto is still probably a big drag, but where could you see some upside there to flattish margin guide here. Thank you.
Yeah, I'll start maybe with a comment and then hand, it over to Doug, but I would say that you know the 57 five is.
A very good initial margin guide and it reflects a lot of benefits that we're seeing in the supply chain, particularly freight.
But it's offset also by the growing mix of auto OEM products. So that's kind of the.
The highest level view of how we came up with that.
That 57, five and then Doug probably has additional comments that you can make on the details yeah. So yes, <unk> has a record of correct from the Big picture Thats right. So we are expecting some favorability in 'twenty three due to freight cost.
We've made a concerted effort to ship a larger percentage of our products on ocean versus air as well as we're seeing today.
Overall freight rates come down so we did see that come down.
Throughout 'twenty, two so they'll probably be living more favorability in the first part.
Hum.
Part of the year and then the other big factor impacting 'twenty three is the segment mix as cliff.
Mentioned the.
Auto OEM business does have a lower gross margin than our average so as that becomes a larger piece of our total that will cause the gross margin to come down as such as it relates to.
<unk>, if you look at FX.
Euro rate the average during 2022 was about 1.6, that's about where we are today, it's really difficult to predict that FX.
There from that standpoint, but that's just kind of a point of reference you know as it relates to the FX in there.
And so that kind of gives you a flavor and maybe I'll give you a little bit also on operating expenses. Since you had mentioned things about the.
Operating margin so as it relates to these are <unk>.
<unk> of sales for the full year and so when we think about 2023, we expect the total operating expenses probably to be up around 60 basis points or so and looking at the different categories and up X. There first one advertising, we'd expect that to probably be a little bit lower.
Maybe about 10 basis points or so that's primarily do that segment mix, our auto Oems bigger piece of the total which doesn't spend that much on advertising than as you move into.
R&D that'll probably be up we estimated at around 30 basis points or so we will continue to make investments in innovation on new products as such and then SG&A, which has made up about 40 basis points. There as you know we've continued to build the infrastructure expenses to support that growth.
Great. Thank you so much.
Yep.
Thank you please standby for our next question.
Maybe to ask a question. Please press star one one.
Our next question comes from George Wang at Barclays. George Your line is open.
Oh, Hey, guys. Thanks for taking my questions I have two firstly can you talk about the kind of channel inventory.
The influence your view on the group.
Rose.
So it kind of thing a segment for this year.
Okay.
Yeah, Good morning, George.
In terms of channel inventory, we view that as in a much healthier place as we entered 2023 compared to what it was a year ago.
At this time are our sell in was definitely far below levels in registrations that we saw for our products. So we view that as a signal that the inventory in the channel came down quite a bit in terms of our outlook. We're not thinking our guide really reflects anymore stocking or destocking, we're looking.
At things as being pretty stable in that regard and we're simply trying to.
You know.
Moderate our outlook based on obviously the the results that we had in 2022 combined with the new product introductions that we see going forward that should stabilize things.
Okay, Great and then my second question, just maybe you can unpack a little bit more in terms of the areas kind of product categories, where you are taking shares.
In the prepared remarks, you talked about.
You guys are taking share in the marine segment.
Maybe you can give more color just what about in aviation.
You guys have a higher shares well just cut off for any particular areas you own the quality in terms of share gains.
Yes, I think as we look across our product lines, we have various categories that are super strong in their markets.
Because of the unique differentiators that we author compared to others.
And you've already mentioned that marine and aviation are too.
Major market areas, where we are leaders in their respective areas for example, and in marine where the.
Top marine electronics provider consumer electronics provider too to the industry by sales.
And in aviation, where we're the market share leader in.
Both aftermarket and integrated cockpit systems for new aircraft and the midsized business jet on down through piston aircraft. So very strong position that is due to.
Again highly differentiated unique products.
And that's our focus for our investment and our activities going forward is continuing to create those kinds of products. If you look at one of the bigger categories, obviously broadly as wearables. There's there's all kinds of categories that comprise that anywhere from kids activity trackers on through to luxury.
Art watches and so it's hard to quantify.
On any one level where market share is because there's not a lot of data, but what we do is try to focus on being unique and innovative and offer things that customers can't get anywhere else.
Great that's it for me.
Okay.
Thank you very much one moment for our next question.
Yeah.
And our next question comes from David Macgregor of Longbow Research David Your line is open.
Okay.
Okay.
Here, we go sorry, I was on mute I apologize for that and good morning.
Good morning.
Just a couple of questions first of all on the inventory I know you had expected to be down about 10% in the fourth quarter you ended up relatively flat.
Was that just maybe a little stronger investment in the automotive ramp than you had anticipated or maybe you could just talk about what happened there.
Yeah, It's really primarily I would probably say mix type of thing.
Mid estimates coming into the quarter about what type of a mix we'd have.
During that period of time, it may have been a little bit different we have a little it might be maybe stronger sales of some of our.
Newer products, where you had to build some inventory wasn't necessarily related to Oh, yes, but some other consumer products that we have as we think about inventory for next year I mentioned, we want to optimize that we've had significant.
Increases in inventory the last couple of years. So our goal for 2023 is two to keep that.
Totally flat with our 2022 levels.
Free cash flow also.
Right right. Okay. Thank you for that and then just you mentioned consumer I guess as you think across the broader consumer exposure you have.
I guess what are your takeaways from the holiday season did you see any mix down.
The various product lines.
Yes.
I would say David that that.
We have such a broad range of products that we're probably exposed across all levels of of the strata of consumers.
I would say that.
In some of our more.
Bell curve consumer facing.
Product categories.
And certain price points that we did see more pressure.
In those than we did in the upper price point ranges, where customers are are probably more resilient too.
Two the economic factors that are impacting everyone right. Now. So there is there is some signs of that but again, we have been focused more on products that have unique differentiators and and a half as such higher price points that we can command in the market.
Right, Okay that makes sense.
And then a question on Marine I guess this is a pull forward category during the pandemic.
The orders look now heading into the season.
And then one of the things we've been saying for a while now is that we've definitely noticed the marine market has returned to its more.
Typical seasonality behaviors.
Behaviors and growth patterns.
That were prep.
Prevalent before the pandemic, so I think I've been personally pleased to see the market.
Really do kind of a soft landing it at a very high level, we still see strong demand for products.
Both at the OEM level as well as at the retail level and especially in the really unique categories that we offer the sonar systems.
That are very popular and command much higher price points.
Okay. Thanks last question for me just on outdoor there were some negative operating leverage in the fourth quarter can you just talk about what happened there.
I think it's primarily due to.
Our expenses there. So we continue to make investments in our R&D to really.
<unk> got to look our innovation for our new products are coming out.
Got it thanks, very much and good luck with everything.
Thank you.
Thank you very much one moment for our next question.
Next question comes from Ben Bolan, Cleveland Research Company Ben Your line is open.
Thanks, Good morning, everyone.
Good morning.
Cliff or Doug.
Interested in your thoughts when you think about the <unk>.
Okay into 'twenty three across the Wearables segment, most notably.
When you could you share with us how you think about refresh and the average duration that your existing users are holding onto their devices and maybe any thoughts on how that's changed as you approached 23.
And then I had a follow up.
Yes, I think <unk> been refreshed really depends on the product line I think as you can appreciate people that spend more for some of these devices tend to hold onto them.
Longer so we probably see a longer refresh cycle on.
The more.
Premium families such as Phoenix than we do for example in the lower end wearables such as vivo active in venue.
But I think the good news for our customer base and what we notice consistently and behaviors of our customers is that they tend to be active customers and more dedicated to the purpose of the device.
Then what what we've heard from others and so we have a very strong active user base. They remain active and it continues to grow year after year.
Okay.
And then the last one for me you made a comment about.
Potentially longer term auto OEM CAGR of 40% CAGR.
325 based on existing wins.
Can you talk through some of the factors that would get you today.
Just on unit performance from the existing OEM partners is it at a content angle.
Depending on what consumers select.
What's the right way to think about how you get to that type of level.
Well, we created those projections based on the the.
The outlook provided to us by the by the Oems and so as we win these programs. The programs are scoped based on a certain est.
Estimate of volumes, which may or may not materialize.
Those volumes assume certain kinds of.
Consumer.
Uptake on various features so again lots of assumptions built into that but it's a significant amount of volume that comprises these programs and.
Consequently, that's what drives the compounded growth rate that we talked about.
Thank you.
Great. Thank you very much standby for our next question.
Remember the press star one wanted to be.
We put into the queue.
Our next question comes from Erik Woodring Morgan Stanley Eric Your line is open.
Thank you and good morning, guys. Thanks for taking the call I've got.
Question I should say.
It's very rare to see.
The gap between fitness and outdoor it is rare to see those results deviate from each other so widely over a 12 month span.
Some of that was impacted by by the Phoenix flagship Phoenix wants, but looking back outside of that what were some of the biggest factors that drove this this deviation and then kind of what are you doing as you look into 2023 and beyond to make sure that the fitness business, Ken actually inflect back to growth at some point.
Underscoring that question can you just maybe talk about competition and whether that's playing into that or is this more of a market dynamic and then I have a follow up thanks.
Yes, I think really good question.
I would explain the gap of the differences between fitness and outdoor.
Driven by.
A couple of factors one you already mentioned Phoenix that that was an outside outsized.
Result in terms of our product categories, though so that widened on one side.
Fitness however.
What we saw really two things one is the indoor cycling areas.
The bike trainers and generally the cycling category has normalized after the pandemic. So we had a significant headwind in the segment due to cycling products coming back to.
Their normal sales levels, which we feel are still very healthy compared to 2019 levels, but reflect the change in priorities for customers as they do.
Other things with activities and the other factor is is the advanced wearables within the segment.
The products that compete in the most.
Active area of the market against the biggest players. So the competitive factors. There are certainly higher the promotional considerations are are more nuanced and so consequently, there is there is definitely some market and market share considerations in that product line because they are the hardest.
Market really to compete in in terms of the overall space there so.
That's how I would frame those things in terms of what we're doing going forward.
There's probably two factors for fitness I would say are important one is that we see the cycling market stabilizing so that shouldnt be a factor going forward as we comp against those those declines from last year and then secondarily, we have a very active product roadmap for the year.
With some really exciting product releases and so we we always know we benefit from those new product introductions.
Great. That's really helpful. Thanks, Thank you Cliff and I guess, maybe a second one is on your <unk>.
Prepared remarks, you just highlighted number of what I think is very interesting you know either approvals or wins in the aviation business during the quarter.
Kind of similar to I don't know I'm not asking you to do the same for these types of wins as you did with the auto OEM business, but can you just help us maybe understand when and by how much. Some of these approvals are wings can actually translate into P&L contribution, meaning like are they material to the model. In 2023 is this you get approval today.
This becomes a driver in a few years any ways to just help us understand the importance of these wins in the context of the P&L. It would be helpful. Thank you.
Yes, I think generally our philosophy about when we make announcements about.
Progress in <unk>.
With various approvals, our new product launches, we we first and foremost make sure that those announcements are material to the revenue that will start to realize right away. So.
We hardly ever announce something that's years and years in advance. There is there is some minor exceptions to that but for the most part every announcement, we make is meaningful to the ongoing revenue stream. So the aviation programs with the.
The approval of the <unk> 5000, and the <unk> and also the <unk> 75 as revenue we are starting to generate now.
Okay very helpful. Thank you so much.
Thank you.
Thank you.
One moment for our next question please.
Yes.
Okay.
Our next question comes from Ivan <unk> of Tigress financial.
Hi, good morning.
Hi, Good morning, Thank you for taking my question and congratulations on the great.
Aviation OEM wins.
Can you go into some product new product introduction detail as far as kind of the categories.
The types of products, where we could see going forward this year.
Well good.
Good morning, Ivan I can't share details on the specific products, but as we mentioned we have an active roadmap across all of our segments. This is this is our strategic focus is to drive revenue through new product introductions and so we have a very active year plan last year was a great year too with.
Which rebounded a lot from kind of the pandemic dip that we saw.
In some introductions, but.
2023 should also be a very great year for introductions.
Congratulations on the announcement of working with Qualcomm on the Sos and the satellite messaging program is that could we see some more expansion in the OEM automotive market that incorporates some of that.
Their work with Qualcomm Snapdragon ride.
Perfect.
Well Qualcomm is a significant partner of ours in the auto OEM segment for our platforms, but the Sos activity with them is really focus more on mobile phones.
And so there are somewhat different but.
But we do see that as as an interesting new Avenue to to utilize our in reach response center and leverage the capability. We have in coordinating rescues in responses to two remote concerns that customers have for a long time now.
Hey, Thanks, one more question on the growth.
Online sales what do you see as the driver of that are you just giving a lot of people who have joined the garmin ecosystem buying more products than just going direct or is it from some of the effectiveness of digital advertising, that's driving traffic to your website.
Yes, I would I'd say, there's really two factors that have influenced the growth in our direct sales channel one is.
The underlying subscription business that goes along with things.
Things like in reach in golf and many other categories that we have driving subscription revenue for the company.
The other is.
Really frankly, the retail situation.
With our products out at third party retailers as I mentioned.
Many of them were focus on inventory control.
And consequently, I think in some cases, probably undershot the amount of inventory they needed to satisfy demand and so we saw a big uptick in our Garmin dot com sales because people were looking for products and able to find it on our website.
Alright. Thank you wishing you a big 2023.
Thank you.
Thank you very much at this time I would now like to turn the call back to Teri Seck for closing remarks.
Thank you everyone as always Doug and I are available for callbacks throughout the day and we hope you have a wonderful day.
Thank you for your participation in today's conference. This does conclude the program you may now.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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