Q2 2023 Garmin Ltd Earnings Call
Thank you for standing by my name is bullish and I'll be your conference operator today at this time I would like to welcome every once to the Garmin Ltd second quarter 2023 earnings Conference call.
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Thank you I will now hand, the call over to Terry.
Two Investor Relations you May begin your conference.
Good morning, we would like to welcome you to Garmin Limited second quarter 2023 earnings call. Please note that the earnings press release and related slides are available at Garmin as Investor Relations site at Www 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 segment growth rates earnings gross margins operating margins future dividends or share repurchases market shares product introduction 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 filed with the Securities and Exchange Commission.
Presenting on behalf of Garmin limited. This morning are Cliff Pemble, President and Chief Executive Officer, and Doug <unk>, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cliff Pemble.
Thank you Terry and good morning, everyone as announced earlier today Garmin reported second quarter consolidated revenue of $1.32 billion.
Up 6% over the prior year.
And that growth in three of our five business segments.
Gross and operating margins were 57, 5% and 21, 5% respectively.
We generated $284 million of operating income in the quarter.
GAAP EPS was $1 50, and pro forma EPS came in at $1 45 up one.
<unk> over the prior year.
We feel positive about our results for the first half of the year.
And are updating our full year 2023 guidance accordingly.
We now expect revenue of approximately $5 5 billion and.
And EPS of $5.15 here.
Before turning the call over to Doug I'll provide highlights by segment and an outlook of what we see ahead.
Starting with the fitness segment revenue increased 23% to $335 million.
Given by broad based growth across all product categories.
Gross and operating margins were 52% and 16% respectively, resulting.
Resulting in improved year over year operating income of $54 million.
During the quarter, we launched the edge $5 40 in the 840 cycling computers, featuring dynamic performance insights advanced mapping capabilities and solar charging to help cyclists ride longer smarter and train more effectively.
Given the year to date performance and current trends, we now expect fitness revenue to grow approximately 10% for the year.
Okay.
Moving to outdoor revenue decreased 3% to $448 million.
Growth in adventure watches was more than offset by declines in other categories.
Gross and operating margins were 63% and 31% respectively.
Resulting in operating income of $138 million.
During the quarter, we launched our next generation Phoenix Seven Pro series with.
With enhanced performance insights Hilton led flashlights.
And additional mapping capabilities.
We also launched the ethics pro series in three sizes.
All with bright AMOLED displays and a built in led flashlight.
Also during the quarter, we launched the approach 70 premium golf smartwatch available in two sizes featuring bright MLR display.
And with a built in barometer for more accurate reading on how each shot display.
We expected the first half of the year to be challenging in comparison to the outstanding performance of the prior year.
Given our year to date performance and the timing of the adventure watch launches, we now expect outdoor revenue to be approximately flat compared to the prior year.
Yeah.
Looking next at the aviation segment revenue increased 6% to $217 million with growth driven by OEM product categories.
Gross and operating margins were strong at 74% and 29% respectively.
Resulting in operating income of $63 million.
We recently announced the imminent service certification of our Revolutionary Auto land and auto throttle systems and select Beechcraft King Air models.
Marking the first time, we've offered these highly important safety technologies to the retrofit market as well as the first time, we have certified our auto land system and a twin engine aircraft.
Our smart <unk> system was recently selected for Flying magazine Editor's Choice Award the 15th time, we've received this prestigious award.
As you can see our focus on aviation safety technology is unwavering.
And I'm proud of what the aviation team has accomplished.
We are pleased with how our aviation segment has performed so far this year.
Given the year to date performance and the stronger comparable from the back half of 2022.
Maintaining our 5% growth estimate for 2023.
Yeah.
Yeah.
Turning next to the Marine segment revenue decreased 11% to $216 million, primarily due to the timing of promotions, which benefited Q1 and contributed to the lower revenue from chart plotters and Q2.
Gross and operating margins were 56% and 21%, respectively, resulting in operating income of $46 million.
During the quarter, we expanded our trolling motor series to a wider range of boats with the launch of the forest crack at.
This powerful Neutrolin motor features a pivot Chile mill for easy installation on a wider range of boats.
Yeah.
The marine market has experienced significant growth in recent years.
Due to increased interest in boating and fishing.
Given primarily by the pandemic.
<unk> drivers of this growth have mostly normalized and we now believe the market faces increasing headwinds caused by higher interest rates and greater economic uncertainty.
While our first half performance was essentially flat to that of the prior year.
We see signs that the market is softening, which impacts our revenue outlook for the remainder of the year.
With this in mind, we believe the marine segment revenue will be down approximately 7% in 2023.
Okay.
Moving finally to the auto OEM segment revenue exceeded $100 million quarterly.
Quarterly sales for the first time in our history, increasing 77%, primarily driven by shipments of domain controllers to BMW.
Gross margin was 24%.
And we recorded an operating loss of $18 million driven by ongoing investments as new programs move into production.
During the quarter, we received production approval for a new domain controller for safety critical instrument cluster functions, which will be incorporated into multiple BMW models throughout the remainder of the year.
Given the year to date performance, we now expect auto OEM revenue to grow approximately 35% for the year.
Yes.
That concludes my remarks next Doug will walk you through additional details on our financial results Doug. Thanks Cliff Good morning, everyone.
Let me begin by reviewing our second quarter financial results My comments on the balance sheet cash flow statement taxes updated guidance.
We posted revenue of $1 billion $321 million for the second quarter represent a 6% increase year over year.
Gross margin was 57, 5% 120 basis point decrease from prior quarter.
Kris was primarily due to segment mix.
Operating expense percentage of sales, 36% 90 basis point increase.
Operating income was 284 million, 3% decrease.
Operating margin was 21, 5% 210 basis point decrease.
Our GAAP EPS was.
$1 50.
Pro forma EPS was $1 45.
Next look our second quarter revenue by segment and geography.
This quarter, we achieved growth in three of our five segments double digit growth in both the fitness at OEM segments.
By geography, Americas region declined 1%, while the EMEA and APAC regions achieved double digit growth of 11% and 22% respectively.
Looking next operating expenses.
Second quarter operating expenses increased by $39 million, 9%.
Research and development increased $22 million year over year, primarily due to engineering personnel costs.
<unk> increased $13 million compared to the prior year quarter, primarily due to increases personnel related expenses and information technology costs.
<unk> expense increased approximately $3 million.
Primarily due to higher media spend.
A few highlights on the balance sheet cash flow statement and taxes.
We ended the quarter with cash and marketable securities of approximately $2 8 billion.
Accounts receivable increased both year over year sequentially $717 million.
Following the seasonally stronger second quarter.
Inventory balance decreased both year over year and sequentially to approximately $1 4 billion.
We are executing on our strategy to optimize inventory reductions in our consumer inventory increase associated with our auto OEM business.
Our second quarter of 2023, we generate free cash flow of $221 million $260 million increase a prior year quarter, primarily due to a lower use of cash purchases of inventory.
Capital expenditures for the second quarter were $53 million.
We expect full year 2023 free cash flow to be approximately $750 million capital expenditures of approximately $250 million.
For the second quarter, we paid dividends of approximately $140 million.
Also we purchased $26 million of company stock at approximately $27 million remaining at quarter end share.
Share repurchase program, which authorized through December of 2023.
Our reported effective tax rate eight 5% compared to seven 6% prior quarter.
Year over year increase in effective tax rate is primarily due to a larger amount of reserve releases in the prior year.
Turning next to our full year guidance.
We estimate revenue of approximately $5.050 billion compared to our previous guidance of $5 billion.
We expect gross margin to be approximately 57, 2%, which is lower than our previous guidance of 57, 5% primarily due to anticipated full year segment ex <unk>.
We expect an operating margin of approximately 20%.
Also expect our pro forma effective tax rate eight 5% is higher than our previous guidance, 8% due to projected full year income mix by tax jurisdiction.
This results in expected pro forma earnings per share of approximately $5 15.
This concludes our formal remarks.
Could you. Please open the line for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question. Please press the star followed by the number one on your telephone keypad.
I'll pause just a moment to compile the Q&A will stop.
Our first question comes from the line of Joseph Cardoso from J P. Morgan.
Good morning, and thanks for the question.
If I take a look at your full year guide for outdoor and fitness is the implication or the assumption. We should make is that we should see typical seasonality heading into the back half and if so what's driving your confidence tracking to the seasonal level of demand just given concerns around overall consumer spending and then I have a follow up thanks.
Yes, I think.
Joseph This is cliff.
I think fitness and outdoor probably should be looked at differently.
Because there's different dynamics in each one of those in the in the fitness segment.
We had a very strong.
First half because of the sell in of new products, which of course won't repeat as much in the second half in outdoor.
We were comping against a very strong first half in the prior year.
Moving into the back half, we see stronger results comping with our new products. So each one is different I think so far I would say that that we don't see signs of the kind of consumer behaviors that.
Our president and some other segments each segment, probably has a little bit different dynamic, but but we believe both of these segments should be strong in the back half.
Got it thanks for the color there and then maybe just as a quick follow up can you just touch on how much of a benefit youre seeing in your gross margins from moderating headwinds from components and freight and et cetera that some of these elevated costs that we had seen over the past couple of years.
Here in <unk> and then how much of that is still remaining as you enter the back half of the year and then I guess just quickly is the largest offset.
To those tailwind from easing component cost coming from the increasing mix of auto or are there other variables that I should be appreciating here. Thanks for the questions guys.
So this is Doug I'll give you kind of a perspective on gross margins first the.
The year over year decrease on a consolidated basis was due to segment mix.
<unk> is based upon where you see fitness and auto OEM, which have a lower gross margin than the consolidated average come a larger percentage of the total year over year.
Some of the other components, there's a lot of different moving parts within gross margin, but you mentioned freight yes, we are seeing some.
Favorable freight and that favorable freight is due to two pieces, one of which is a slower year for rates as well as we're shipping a larger percentage of our products Ocean versus air.
That's offset by other factors, including product mix within the segments. So within each one of the segments. Each one of the products are different.
Gross margin neutral depending upon how that mix is.
One quarter versus the other quarter that does impact that in there. So it's a lot of different moving parts in there.
And also as relates to freight I think you mentioned the question what for the future. So.
We've seen some good benefits in freight year over year, we would expect that year over year benefits to decrease just because we saw some of the freights come down towards the back half of the year, but we should.
We're expecting the overall rates to change.
Change that much but the year over year favorability in the year over year gross margins will decrease.
Thank you. Our next question comes from the line of Ben Bollin Cleveland Research. Please go ahead with your question.
Good morning, everyone. Thanks for taking the question.
Cliff I was hoping you could talk through how we should think about the profitability glide path within the auto OEM business, you've got really remarkable year over year growth.
Not much movement on the EBIT line. So at what point does that start to scale and then I have a follow up.
Yes.
Hey, good morning, Ben I.
I would definitely say.
The results in auto OEM are getting better I think.
The operating loss was cut by a third this last quarter on a year over year basis. So so we're seeing improvements I think there's gives and takes every quarter as the business is somewhat dynamic in the forecast from Oems.
Changes according to their business conditions, but in general I would say we're on the path that we expected.
Okay.
Bob.
Okay.
If you look at theirs.
There's been some headlines out there perhaps for Doug.
What's happening in Switzerland, with the global minimum tax.
Could you could you share any any way we should think about this how enactment or when the federal Council may do something how this could influence.
No potential tax rate into the future.
Yes, Ben.
Yes, we don't give.
<unk> guidance on our ETR beside the current year, but you are correct. There are some global minimum tax legislation out there.
And with that it's stating basically a minimum tax of 15%. So if that gets enacted that would basically have our tax rate at least 15% now I should say that theres a lot of moving parts in our protective.
Effective tax rate that may impact that also relating to income by mix reserved for Lisa and such but.
Yes.
On what how how that to legislation and when it's enacted.
<unk> is that our effective tax rate would be at 15% or possibly even higher.
That's great and then my last question.
Looking at the Marine business.
Cliff could you talk to how.
You talked about softer expectations into back half, but any thoughts on how aftermarket versus new boat delivery play into that or are they both soft name one worse than another or just any thoughts there and that's it for me. Thank you.
Yes, I think there's quite a few moving pieces and what's going on in marine I would say that.
From the from the mid range on up in terms of both sizes. The market is still very healthy in both from the OEM and aftermarket perspective, it seems like the weakness is more.
From the lower mid range, the lower lower end and of course, new boat buying activity generates both refit and.
And equipment added to the boat at the time of purchase. So so these are the things that are just all coming into play in.
Another factor really is the seasonality that we're seeing return that we haven't seen over the course of nearly four years now. So so I think theres a lot of dynamics I believe the market is still a very very good market.
It's one of the one of the last ones to really show. This normalization that we've seen in every other market and we expect it will come but it's.
It's with US now and I think going forward, we will concentrate on new products and driving growth through innovation.
Thanks, guys.
Thank you. Our next question comes from the line of George Wang from Barclays. Please go ahead with your question.
Oh, Hey, guys. Thanks for taking my question.
Firstly can you comment on the buyback.
<unk>, just given incremental higher free cash flow on the healthy.
Business profile, just just curious therefore the strategy in terms of capital return has changed I noticed kind of buyback ticked lower in Tokyo, just curious for any color on that.
So is it a question of joining the buybacks.
Yes, basically you will evaluate our share repurchase just based upon the business and market conditions.
The situation is we have a $300 million authorization through the end of 'twenty three we have.
26 $27 million that are remaining.
So it's really just based upon the business conditions and market conditions.
Okay, Great just if I can squeeze a quick follow up but just.
Can you comment on the backlog and the channel inventory really two parts.
On the industrial business kind of marine and aviation incrementally weaker you mentioned that it's more seasonal for the marine can you comment on the backlog across marine and aviation also any thoughts on the channel inventory on the Phineas and kind of wearable side of the business.
Yes, I think I think backlogs have come down a lot and most of that is due to the easing of supply chains.
We've seen allowing us to.
To fill the orders much faster than we were last year for both aviation and Marine I think some of those dealers.
Across aviation Marine in the past year, where were interested in keeping more safety stock on their shelves because they wanted to make sure. They can serve customers coming into the to the shops.
And as lead times have come down they have relaxed a little bit their concern over over being able to serve their customers. So so thats also part of the moving pieces that we're seeing as things normalize in both aviation Marine I would tell you that the channel inventory is mostly healthy and and as we go forward it will be.
Replenishment type of activity that goes on.
Okay, great. Thanks.
Okay.
Thank you. Our next question comes from the line of David Macgregor with Longbow Research. Please go ahead with your question.
Yes, good morning, everyone and thanks for taking my questions.
Just a question on the automotive OEM and just go back to a previous question on this.
Trying to think about profitability and trying to understand the economics around this business, but is there any way to separate.
The startup costs, and just kind of a one times in the ramp up cost.
From the profitability of the volume that you are shipping.
Yes, I mean, we.
We also look at that that really relates to building scale in the business as revenues increase.
We haven't.
Really talked about those kinds of numbers externally because we are a company that focuses on untrue GAAP financials. So.
We include all of our courses or extension and we all try to make our all of our businesses profitable and perform well on that basis.
Okay.
Are you thinking about second half revenues for the automotive OEM and your.
Our annual guidance.
Yes, I mean I think.
We raised our guidance outlook for the full year, reflecting.
Strength that we've seen in the business and the acceleration into the back half. So that reflects our current view of the business.
Okay, you mentioned that you'd added another controller program I'm just wondering if it's possible.
To see program additions or due to ship under the programs that you have now.
Well I think these these devices are being incorporated across model lines and so that takes some time and it's dependent on bmw's.
One engineering work and scheduling into production. So so we're.
Basing our forecast on what we have been told for their production plan for cars containing our devices.
Okay.
Thanks for that and then my follow up question is really ranked discussing promotional expectations for the rest of the year.
Obviously, theres a seasonal pattern to play here, but I'm just wondering how youre thinking about your.
We required spending on promotional programs with promotional support into the second half of the year versus second half last year.
Yes, I think we expect it to be more like normal than ever before in recent memory.
We've seen this trend.
In recent quarters, where the markets are returning to the level of promotions and discounting in.
And sales.
We saw in the past so we're expecting that it will probably be very similar to what we've seen over the past year honestly it kind of more normalized even last year. So so that's what we expect going forward is really a normal cadence.
Okay. Thanks, very much good luck. Thank you.
Thank you. Our next question comes from the line of Ivan <unk> from <unk> Financial. Please go ahead with your question.
Alright, Thank you for taking my questions and congratulations on the great automotive OEM progress.
Thank you.
Can you go into a little detail about the opening of the first be analytics lab.
Like what your expectations are and what do you think you can gain from that and also since everybody is talking about AI. What are your thoughts on how AI can help product that your product development and product functionality.
I think the first speed lab reflects our commitment to <unk>.
Ongoing research and innovation in the area of biometrics and <unk>.
<unk> performance for athletes as well as wellness features in our products. So we continue to invest in that area and.
It's something that's important to us to differentiate our products from others.
In terms of.
AI, we've been we've been using AI techniques in our in our products and in our algorithms on both cloud based applications as well as on our devices for quite a while.
We continue to see this this trend and we continue to develop our capabilities in that area as well I think in terms of how we deploy that in the company.
There's probably a mixed bag of responses there that I would say.
Some of it is good and can be helpful to us in productivity in other applications of AI that had been broadly discussed in the media you know may not be for us, but in general we're approaching it with.
With prudence.
And then one last question a lot of your new products that you've introduced like the recent golf watch have come with the delineation on the application for an upgrade and a subscription.
Can you give me your views or outlook.
Far as creating subscription revenue and tearing the functionality and pricing for some of your apps.
Yes, I think what Youre seeing reflects our intentional strategy to increase revenues from subscription based sources and so the.
The Gulf the golf apps are tax trainers and reach aviation databases.
<unk> mapped all of these things are playing into our desire to increase revenues from recurring sources.
Alright, Thanks again thanks.
Thanks Ivan.
Yes.
Thank you. Our next question comes from Erik Woodring from Morgan Stanley . Please go ahead with your question.
Hey, good morning, guys. Thank you for taking my questions. A few if I may the first one I know it's early but can you maybe just give us some color on customer reception to the new IBEX CRO and the <unk> seven pro series launch in the quarter and I would just love. If you can kind of weave that into you know your sense of what the.
Consumers are you seeing demand stabilize them.
Are you seeing demand from upgrades versus existing upgrades versus new customers any difference there and then any pricing sensitivity you're hearing.
The customer so just an overall read on the customer and how it's impacting some of these new product launches and then I have a follow up thank you.
Okay, Yeah, so the launch of those.
Two new families. The epics pro in the Phoenix seven CRO I think went very well.
We feel like the sell through has indicated through our registration as is going exactly as we had planned.
I think we're seeing very similar trends as what we've seen in the past in terms of mix of new customers and existing customers that that upgrade so I think.
No.
I would say that all is.
Pretty much as we would expect and it has to what we've seen in the past on those two product lines really no sensitivity from the consumer in terms of softness there relative to any economic issues.
Thank you.
The question of the consumer health is really depends on the product line that you are talking about and those products are definitely higher end products that target.
More affluent customers. So we feel like everything there is going as we had planned.
Yes.
Okay. That's helpful. Thank you.
And then maybe just to follow up on your comments on the marine business Cliff.
I kind of understand the dynamics that you walked us through between the strong first quarter and a bit weaker second quarter.
But can you maybe just elaborate on exactly what's going on in the market and the only reason I say that is I know you've called out interest rates and macro concerns as as headwinds, but neither of those dynamics aren't necessarily new and so just curious from your perspective.
What are you seeing you know over the last 90 days that has really changed your view from this market growing to this market declining. Thanks, so much.
Yes, I think our view is really based on all of the latest data that we see and also talking to all of our retailers and distributors, there's definitely pockets of strength in the market but.
Increasingly we are seeing some feedback that there is there is some hesitancy on the part of some customers who in the past felt like they had much more money to spend who who may be now down or are faced with very high interest rates. If they are financing.
<unk> and can't buy with cash. So so these are the kind of initial.
Signs that we're seeing that just want us cause us to be a little bit more cautious for the back half.
And then maybe if I could just ask one follow up to that.
Just kind of talking about the higher end products on the consumer side being okay. As it relates to the comments that you just made about hesitancy from customers and what you said earlier in Q&A.
Am I correct that that's largely at the lower end, where there might be more economic sensitivity versus the higher end of that might be a bit more resilient. This specifically in marine.
Yes, that's true.
Okay perfect. That's it for me. Thanks, so much awesome. Thank you.
Okay.
Okay.
Again, if you would like to ask a question. Please press the star followed by the number one on your telephone keypad.
Our next question comes from the line of Jordan XI on this for Bank of America. Please go ahead with your question.
Hey, good morning.
I just had a quick question.
Four.
And the macro environment for Europe and Asia.
I know sales were up year over year for both.
Got it.
How are you guys thinking about the demand.
When data is coming out of that.
The macro environment is not improving.
How are you guys looking at that for the full year.
Well I think each geography has its own.
Particular situation.
Asia is a big place. So some countries are doing very well and doing well with our new releases while.
In other cases, maybe maybe the economies aren't so good specifically China.
We're not completely dependent on one country in Asia for our results. So so.
The diversity of our markets there allow us to to to show the results that we have similarly in EMEA I think they're probably on a different timeline when it comes to their economic.
Progress and so.
When they were a little softer early on and they've been a little stronger, especially as we've introduced some of these new products.
Alright, Okay and then the.
Another question I had two was on the increase in advertising spend.
Is it just.
Actually running more promotions or it's.
Stronger discounts.
Yes, this is relating to <unk>.
Media spend primarily related to the new product launch that we had so a lot of that media spend is really tied to we have new products, making sure that.
We get the message out to our consumers.
Got it and advertising related.
Advertising is an item related to the specific promotion as Doug said.
Awareness of the product not necessarily the discounting of the district itself.
Got it thank you.
Thank you.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Thanks for your time today, and Doug and I are available for call back and have a great day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
[music].
Okay.