Q3 2023 Garmin Ltd Earnings Call
Hello, and welcome to the Garmin Ltd third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.
I will now turn the conference over to Teri Seck Director of Investor Relations. Please go ahead.
Good morning, we would like to welcome you to Garmin Limited's third quarter 2023 earnings call. Please note that the earnings press release and related slides are available at Garmin <unk> Investor Relations site on the Internet.
Www Dot Garmin Dot com slash stock an 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 opera.
Getting 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.
And 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.
Thanks, Jerry and good morning, everyone as announced earlier today Garmin delivered outstanding results in the third quarter.
With strong growth in consolidated revenues operating income and earnings.
Consolidated revenue came in at one point to $8 billion.
Up 12% over the prior year driven by growth in four of our five business segments.
Gross and operating margins were 57% and 21, 2% respectively.
Starting in operating income of $270 million up 13% year over year.
We registered GAAP EPS of $1 34, and pro forma EPS came in at $1 41 up.
Up 14% over the prior year.
We are pleased with our third quarter results and are updating our full year 2023 guidance accordingly.
We now expect revenue of approximately $5 $5 billion.
And pro forma EPS of $5 25.
Okay.
Before turning the call over to Doug I'll provide highlights by segment and an outlook of what we see ahead.
Okay.
Starting with the fitness segment revenue increased 26% to $353 million.
A new third quarter record for the segment and a continuation of the strong performance we've been experiencing all year.
Growth was broad based across all categories led by strong demand for Wearables.
Gross and operating margins were 54% and 21% respectively.
Resulting in improved year over year operating income of $75 million.
During the quarter, we introduced the new venue three smartwatch family in two sizes.
As well as the value pack vivo acted five with a bright am OLED display.
These wearables have robust new health and wellness features including nap detection and enhanced sleep coaching.
Also we recently announced that <unk> has.
Now approved for use with recently introduced products, including the venue three as.
As well as our popular epics, CRO and Phoenix seven Pro series watches.
The FDA cleared and clinically validated <unk> heart rhythms and checks for signs of atrial fibrillation.
The expansion of the ECG App gives our customers another powerful tool for managing their health.
Given the strong year to date performance and the current trends.
We now expect fitness revenue to increase approximately 20% for the year.
Yes.
Moving to the outdoor segment revenue increased 7% to a third quarter record of $434 million.
With growth across multiple categories led by adventure watches.
Gross and operating margins were 62% and 31% respectively.
Resulting in operating income of $136 million.
During the quarter, we launched the tactic seven with Brian and OLED display and night vision compatible flashlight.
Up to 31 days of battery life.
We recently announced the Mark carbon premiums Smartwatch collection.
<unk> from 130 layers of used carbon fiber.
Making these watches distinctive strong lightweight and ready for adventure.
We're pleased with the performance of the outdoor segment.
But the path to growth has been more challenging than anticipated when compared to the strong performance of 2022.
And the timing of product introductions in 2023.
Given the year to date performance, we now expect outdoor revenue to decrease approximately 5% for the year.
Yes.
Yes.
Looking next at the Aviation segment revenue increased 5% to a third quarter record of $198 million.
With growth driven by OEM product categories.
Gross and operating margins were strong at 75% and 25% respectively.
Resulting in operating income of $49 million.
During the quarter, we were ranked number one in avionics product support by Aviation International news for the 20th consecutive year.
Being consistently recognized for unrivaled support year after year highlight.
Highlights our strategic focus on taking care of customers.
Standing behind our products.
Also we recently announced a long term agreement to provide state of the art G 3000 integrated flight decks to beta technologies.
It's all electric aircraft.
Year to date revenue from aviation has increased 11% and we are very pleased with this result.
As a reminder, we faced significant supply chain constraints in 2022 this shifted revenue into the final quarter of the year as we caught up on back orders.
We do not expect these conditions to repeat in 2023.
With this in mind, we are maintaining our 5% growth estimate for the full year imply.
Implying that fourth quarter revenue from aviation will decrease approximately 10% year over year.
<unk>.
Yes.
Turning to the Marine segment revenue decreased 7% to $182 million with decreases across multiple product categories.
Really offset by contributions from JL audio.
As many of US have reported the marine market has slowed in 2023, but we've been performing better than the market and our third quarter performance exceeded our expectations.
Gross and operating margins were 52% and 13% respectively.
Resulting in operating income of $24 million.
During the quarter, we launched the GPS map 9000 series in multiple sizes include.
Including the 27 inch GPS map 90 227.
That was recognized with an innovation award at the recent international boat builders exhibition.
For the ninth consecutive year.
The National Marine Electronics Association named Garmin manufacturer of the year and we received five product of Excellence Awards.
We were also recognized as the most innovative marine company.
Sounding straight only.
Leading marine trade publication.
We recently completed the acquisition of J L audio and iconic premium audio brands.
Spans our ability to offer highly integrated audio features across all of our marine product lines.
Given the better than expected third quarter performance and the addition of J L audio.
We are updating our expectations for 2023.
We now expect full year Marine segment revenue to be approximately flat to the prior year.
During the fourth quarter, we expect <unk> to be approximately 15% of total marine segment sales.
Yeah.
Moving finally to the auto OEM segment revenue increased 59% to $110 million.
A third quarter record with growth, primarily driven by increased shipments of domain controllers to BMW.
Gross margin was 21%.
And the operating loss narrowed to $14 million.
During the quarter domain controller deliveries continued to ramp across the BMW lineup.
We also experienced strong growth in infotainment categories with contributions from Yamaha Motor Sports and Honda motorcycles.
Given the strong year to date performance, we now expect auto OEM revenue to grow approximately 40% for the year.
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 provide comments on the balance sheet cash flow statement taxes and updated guidance.
Posted revenue of $1 billion $278 million for the third quarter.
And a 12% increase year over year.
Gross margin was 57% 100 basis point decrease from the prior year quarter. The decrease was primarily due to segment mix, partially due to product mix and certain segments.
Operating expense as percentage of sales was 35, 9% 190 basis point decrease.
Operating income was $270 million, a 13% increase.
Operating margin was 21, 2%, a 20 basis point increase.
Our GAAP EPS was $1 34.
Our pro forma EPS was $1 41.
14% increase from the prior year.
Next well go to third quarter revenue by segment and geography.
During the third quarter, we achieved record consolidated revenue and growth in four of our five segments led by double digit growth in both the fitness not OEM segments.
Geography, Americas, and EMEA regions achieved double digit growth of 12% and 15% respectively.
The APAC region achieved solid growth of 8%.
Looking next at operating expenses third quarter operating expenses increased by $27 million for 6%.
Research and development increased $13 million year over year, primarily due to engineering personnel costs <unk>.
SG&A increased $12 million compared to prior quarter, primarily to increases in personnel related expenses information technology costs.
Advertising expense increased primarily approximately $2 million, primarily due to higher co op advertising spend.
A few highlights on the balance sheet.
Cash flow statement and taxes.
In the quarter with cash and marketable securities of approximately $2 8 billion.
Accounts receivable of $721 million includes the addition of JL audio and was in line with the year over year increase in sales.
Inventory balance decrease year over year to one 1 billion.
We continue to execute our strategy to optimize inventory reductions to our consumer inventory with an offsetting increase associated with our auto OEM business. The addition of audio inventory.
During the third quarter 2023, we generate free cash flow $312 million.
$8 million increase in the prior year quarter, primarily due to a lower use of cash purchases of inventory.
Capital expenditures for the third quarter were $46 million, we now expect full year 2023 free cash flow to be approximately $900 million.
During the third quarter, we paid dividends of approximately $140 million.
Also we purchased $9 million of company stock and approximately $18 million remaining at quarter end share purchase program authorized through December 2023.
Pro forma effective tax rate was seven 2% compared to four 3% prior quarter.
The increase was primarily due to income mix by jurisdiction.
Turning next to our full year guidance, we estimate revenue of approximately $5 billion $150 million compared to our previous guidance of $5.050 billion.
We expect gross margins to be approximately 56, 7% CAGR previous guidance 37, 2% change is primarily due to the anticipated full year segment mix. The mix of increased sales of newly acquired <unk> audio which has an expected gross margin lower than the marine segment average.
We expect an operating margin of approximately 19, 8%.
Also we expect our pro forma effective tax rate of eight 5% unchanged from our previous guidance.
The results and expected pro forma earnings per share approximately $5 25.
Which includes approximately <unk> <unk> dilutive impact led to a newly acquired audio which is unfavorably impacted by the effects of purchase accounting. This concludes our formal remarks, Sarah can you. Please open the line for Q&A.
Thank you. Thank you have a question. Please press star one on your telephone keypad.
To withdraw your question simply press Star one again.
Your first question comes from the line of Erik Woodring with Morgan Stanley. Your line is open.
Hey, good morning, guys. Thank you for taking my questions. Maybe if we just start higher level cliff you've raised the auto OEM growth rate guidance twice in the last two quarters.
This year, you're now anticipating 40% growth.
And then I have a follow up thank you.
Yeah, Good morning, Eric I think.
Yes.
The demand from the automakers basically is certainly not a guarantee at the beginning of the year. So.
We make estimates based on their best estimates with things ebb and flow throughout the year. So this really is just.
The tweaking of their build plans and their demands for our product.
As the year goes along and I don't really see this as a pull forward or.
Puts or takes from from the overall.
Growth outlook that we've provided.
Okay. That's helpful. Thank you and then maybe I'll stay on auto OEM for my second question.
We're seeing some nice improvement in <unk> and your auto OEM Opex base gross margins were down I think 240 basis points sequentially, but you saw operating margins improved more than 400 basis points sequentially. So.
Yes, if I if I do the simple math and say if you continue this trajectory you could see the auto OEM business turned to an operating profit by midyear next year.
Just curious if that's how we should be thinking about kind of the linearity of the auto OEM margin improvement or.
How we should be how you would change kind of the math that I just laid out are the trajectory that you guys are thinking about thank you.
Yes at the beginning of the year, we said that our target was for profitability in 2024, and we are still.
Progressing towards that I'm, not sure that I would I would put a lot of weight in the linearity because with.
Model changeovers, and new models coming on and the timing of those being somewhat.
Unpredictable.
The linearity from quarter to quarter, probably doesn't allow us to extrapolate directly too.
Mid next year, but.
We'll provide more updates at the beginning of 2024, when we have a chance to evaluate the full year.
Super Thanks, so much guys. Thank.
Thank you.
Your next question comes from the line of Joseph Cardoso with Jpmorgan. Your line is open.
Hey, Thanks for the question guys.
So first one from me is just on the Marine business last quarter, you talked about softness building in that business on the back of general macro headwinds and the strong.
A couple of years you guys had I guess can you just clarify how that has tracked versus your expectations 90 days ago. Just given that now you are including <unk> and the business mix and then just any updated thoughts on that business on a go forward basis. As you think about trough. Thanks, and then I have a follow up.
Okay.
So definitely at the beginning of <unk>.
Last quarter.
July into August.
There was.
A real Mark seasonality I guess is what we would say in.
The marine activity and I would I would probably attribute that at this point looking back is.
As being.
Back to the norms that we saw pre pandemic for deep seasonality in.
The early part of Q3.
As we moved into September things definitely got better in.
In the market and.
Then we acquired Jal towards the back half of the month of September so.
Things progressively got better as we went along but the headwinds that I've mentioned about the marine market continued to.
To be out there in the market has softened and I think everyone's reporting that and the behaviors of customers have definitely changed from what they were a year or two ago.
Okay. Thanks for that color. That's that's super helpful. And then just relative to the jail acquisition itself.
How are you thinking about the levers you have to drive margins in that business to track to the marine level average.
Post our pre the acquisition is it more of a volume play for you or do you have additional actions you can take to drive margins to improve in that business and any thoughts around timeline of when you can kind of get those margins up to the historical corporate average. Thank you.
Well I think in general that this category, probably will we will still be on the lower end of the overall segment, but we do have ways that we can improve it over time as you say leverages is one of those things leverage in terms of our overall purchasing power of the company as well as operational leverage and efficiencies and taking advantage.
<unk> is a broader garmin infrastructures. So those those are the things we're focused on as we get immediately enter this in.
Over time, we should be able to bring it up closer to what our audio categories are currently.
Okay.
Your next question comes from the line of George Wang with Barclays. Your line is open.
Oh, Hey, guys. Thanks for taking my question.
Just still kind of on the buyback.
Capital allocation, just given the kind of cash balance over $2 8 billion.
Noticed kind of buyback wasn't that large last quarter, just curious if the philosophy.
<unk> will change to some back.
The capital allocation front.
Especially on the buyback and also additional kind of bolthouse.
If any on the horizon.
Yes.
Our priorities for cash or the same.
One of those priorities, obviously reliable dividends.
Second which is you know investments back in our business, primarily capex related to <unk>.
To build our infrastructures.
And third of which relates to our strategic acquisitions, such as JL audio and then also due to a share repurchase so as it relates to share repurchase we do have an authorization.
Through the end of this year about $18 million in there.
And we gave our purchases are really based upon the market the business conditions as such so similar type priorities for allocations and consistency of how we've gone through the share buybacks.
Okay got you I just had a quick a follow up just in terms of our door.
Thank you all.
Kind of a tougher compare year over year basis.
It's kind of a pending for the problem loans just curious.
If you can double click on this segment.
Since your prior expectation.
Maybe it'll be weaker.
The margin just curious any refresh on the horizon for the Phoenix next Phoenix Walsh.
Okay.
Yes, I think.
George It was similar to what we mentioned in our remarks that.
Last year was an incredible year with the introduction of the Phoenix <unk> and ethics.
And this year the timing of our refreshes of that pipeline came later than we had anticipated so.
Definitely comping against what we saw in 2022 was was difficult, but we are.
Positive about our new product lines that have been received well and generated growth in this last quarter.
And we're seeing strength across other product lines in this segment as well in terms of future outlook, we don't really comment on the next generations, but we're constantly refreshing our product roadmaps.
And I would anticipate next year to have.
Very strong product releases.
Great. Thank you I would go back to the queue.
Your next question comes from the line of Ron Epstein of Bank of America. Your line is open.
Yeah.
Hi, Good morning, this is Jordan on for Ron.
Just a quick question could you guys give any commentary on current backlog and then channel inventory that you guys are seeing going into the holidays.
Yes, I think backlog wise, Jordan, we arent.
<unk>.
It really has a long backlog because retailers tend to put in their orders.
Mostly to when they need them.
But the indications that we have.
From retailers or that they.
They see.
Potential for the fourth quarter selling season, they're preparing for a good season in the channel inventories up to this point had been.
Adequate or lean even so they are gearing up for a good shopping season.
Great. Thank you guys.
Thank you.
Your next question comes from the line of Ben Bollin with Cleveland Research. Your line is open.
Good morning, everyone. Thanks for taking the question.
Clifford Doug I'm curious on your bigger picture perspective on outdoor fitness gross margins if you look back.
Pre COVID-19.
We still haven't quite recovered to the gross margin level seen in 2017 18, just curious how you think about the opportunity to return to those levels.
And at the higher end Wearables category, and then I have a follow up.
Yes, I think theres. So much has happened between then and now that it would be hard to really build a bridge from from where we were back then in terms of margin structure.
Now I would say that product mix, probably has a big.
Part of that.
And so as the segment ebbs and flows in terms of various categories. The gross margin will will will vary accordingly.
Okay.
And then the other question for you.
A bigger picture also.
Do you think about.
More opportunities with recurring revenue.
Talked about the warm and in reach and it seems like Thats expanded.
I'm curious if you see other opportunities to pursue maybe M&A and in the App space or other content space introduce your own.
High level thoughts on that thanks.
We're looking across all of the things that we offer as a company, including content and are are looking for ways that we can monetize that into value added.
Services for our customers. Some recent examples of that are Marine chart subscriptions that come with our chart plotters.
After our maps that we can bundle with with all of our products really are focused on the outdoor segment. So we're looking more organically at that and not necessarily M&A, but we do have a lot of opportunities where we can leverage.
Thanks, Chris.
Your next question comes from the line of David Macgregor with Longbow Research. Your line is open.
Hi, Good morning. This is Joe Nolan on for David.
So I'm not expecting any sort of quantitative guidance or anything but I was just hoping you could talk high level about some of your initial thoughts for 2024, and just maybe how conversations are going with customers regarding 2024.
Yeah, I think unfortunately, I really can't provide much color because as I mentioned earlier.
Most of our business lines are shorter cycle, meaning that retailers are focused now on Q4, and we really haven't had a lot of discussions around what they are thinking for next year.
So again I would just look generally at the momentum we have right now in the generally favorable indications, we're getting for fourth quarter.
As indications hopefully business will continue to be good into 2024.
Got it Okay, and then just a quick follow up with the UAW strike just can you talk about what what impact if any that is having on your guys business. Thanks.
Yes, Theres really no impact that we've had from that event.
Most of our OEM customers are.
Sure.
Outside of the big three that were affected by that so thats not something thats affected us.
Got it alright. Thanks.
Okay.
Your next question comes from the line of Noah is that skin with Keybanc. Your line is open.
Hi, Thanks for taking my questions, maybe just one for me on the stronger than expected trends in fitness, hoping you could provide some color around the drivers and maybe any larger trends at play as you see them that are driving better than expected performance in fitness.
Relative to expectations, a quarter or two ago, then I have a quick follow up thanks.
Yes, no the big driver really is as we mentioned in the remarks Wearables had been very strong and thats across all of the wearable families and fitness from running watches.
Advanced Wearables to even basic wearables. So everything there has been strong other categories in the segment were also.
Very strong we saw strength across the whole segment really so it.
It definitely was much better than what we had anticipated earlier in the year as our new products came to market and they were.
Well received.
Thank you and then maybe just one on marine EBIT margins.
The 13% down down sequentially quite a bit so just.
Hoping you could provide some color on kind of the puts and takes there.
And then how to think about.
Margins.
Relative to historical next quarter, given the addition of jail audio thanks.
Yes, so relating to those margins.
Obviously the decline in sales had an impact on us.
Asleep deleveraging on our expenses also relating to the gross margins we did as we previously talked about.
With <unk> audio win there thats, a lower gross margin than the marine average so that did have an impact on it also so it's really just a combination of that gross margin.
And some product mix.
Marine organic business, there as well as the sales output.
Ongoing basis as it relates to <unk> audio we should see split talked about as it relates to our gross margins. There are lower so there'll probably be some dilution of that as we go but hopefully you will be able to get some synergies and opportunities get those improved as we move along.
Thank you.
Okay.
Your next question comes from the line of Ivan sensor with Tigress Financial Partners. Your line is open.
Thank you for taking my questions and congratulations again on the great results in the.
Increased outlook.
Thanks, guys.
The acquisition of <unk>, you talked about expanding the marine audio but what about.
Opportunities for you to integrate this in automotive OEM audio and then recently.
Another company launched.
It's a bone induction headset.
I think there's opportunity to expand in some of the consumer product audio areas.
Hey, Jay all audio already has a fairly broad.
Market region across several markets, including of course Marine is one of the biggest but they also have products for aftermarket audio.
As well as power sports and.
Home audio and so consequently, they're pretty diverse which is exciting gives us some opportunities to explore.
Some new areas and.
I think each one of those has their own nuances.
I think aftermarket audio is.
Very specific kind of play, but the expansion and power sports and also home audio our new areas of business for Garmin.
So if you went into a home audio with them would you.
Branding it would be a garmin brand or government J O'brien.
Well theyre already in home audio so they're currently selling systems right now sub woofers and things for.
For home theater systems and.
So we intend to continue those business lines and.
Invest in an appropriate level of innovation across their various product lines.
Very good and then on the introduction of the new more carbon so what kind of uptake are you seeing from let's say people new to the brand or upgrading existing watches and also because of the much higher price points are you looking to go into like a different type of marketing platform a different retail distribution.
For those watches.
I think mark carbon fits in nicely with our overall high end product line. If you look, especially in adventure watches starting with the Phoenix and FX line. These are premium watches anyway that customers do.
I appreciate them unique materials and unique designs and that's why we've been successful in carving out our own niche in this.
Huge market.
I think as we as we look at customers.
And the registrations they tend to vary by product line depending on.
On what it is that we see anywhere from mostly new customers coming into the category to repeat customers that either way.
We're pleased with the ability to offer a broad product line at low end to high end to cover as many customers as we can.
And then on the new <unk>.
ECG functionality on the Phoenix on the pro line is that because you were able to integrate because of the more advanced sensors that are now in the pro line or how broad can you go let's say what that functionality.
I think that's an indication of the platform capability that we have we we have sensor technology that we.
That we design and platforms and we're able to move that platform across all different kinds of product lines and so that the Phoenix and the epic Pro series are the ones that received that latest platform and we were able to then launch the ECG app for those products as well.
Then one last question.
Think that Theres some opportunity at some point to incorporate the Sos functionality of in reach within a watch.
Even for that one.
Sure.
Well I can't comment on specific features that we're constantly working on innovations across our product line. So.
I always feel like there is many more great ideas that we need to be working on and lots of opportunity ahead.
Thank you.
Thank you.
Again, ladies and gentlemen, if you have a question that is star. One. Your next question is a follow up from Erik Woodring of Morgan Stanley. Your line is open.
Awesome, Thanks, and thanks for taking the follow up guys I just wanted to ask you Cliff because you brought it up earlier just about your visibility into kind of consumer holiday demand. This year, what trends youre seeing that are emerging that will influence your outlook.
And I ask because the guide implies about 10% sequential growth in <unk> for revenue versus normal historical seasonality close to 15% to 20%. So just what the puts and takes are why potentially you might be seeing some sub seasonal growth and if that's a reflection of the holidays and consumer demand or if that is the kind of non <unk>.
Consumer pieces of the business. Thank you.
Yes, I think every year is probably different as I mentioned earlier and retailers are.
Positive about what they are anticipating for the fourth quarter. So we're we're definitely gearing up for that and.
When we provide these estimates we definitely want to provide estimates that that we have high confidence in and so.
That is how we approach.
The guidance.
Your next question comes from the line of.
Ron Epstein with Bank of America. Your line is open.
Hey, Thank you for the follow up quick question too on aviation.
Are you guys seeing any changes in demand for <unk>.
Curt products I know you guys.
Press release, you said that was driven by the OEM sales.
Yes, I think.
All of them all of the people who report this business jet activity are definitely saying that that activity remains strong there. They are sitting on big backlogs that they are trying to fill.
They haven't.
Dramatically increased production rates, meaning that there is still a large amount of backlog there has to be worked through over the next few years. So so as a result.
That market continues.
Showed promise as we worked through that and I would probably leave.
The forward speculation about aircrafts and demand to them, but that in general there seems to be.
Encouraging demand across all business jet platforms and customers still want these products.
Thank you.
Thank you.
There are no further questions at this time I will turn the call back to Teri Seck for closing remarks.
Thanks, everyone for your time today, Doug and I will be available for callbacks throughout the day and talking to many of you have a wonderful day.
This concludes today's conference call. Thank you for joining you may now disconnect.
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