Q3 2024 Garmin Ltd Earnings Call
Thank you for standing by and welcome to the Garmin Limited 3rd Quarter 2020 Ford Conference Call.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. I'd now like to turn the call over to Teri Seck, Director of Investor Relations. You may begin.
Speaker Change: An archive of the webcast and related transcript will also be available on our website.
Speaker Change: This earnings call includes projections and other forward-looking statements.
Speaker Change: regarding Garmin Limited and its business. Any statements regarding our future financial position, revenue, segment growth rates, earnings, gross margins, operating margins, future dividends or share purchases, market shares, product introductions, future demand for our products and plans and objectives are forward-looking statements.
Speaker Change: 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.
Speaker Change: Information concerning these risk factors is contained in our Form 10-K, filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. this morning are Clifton Pemble, President and Chief Executive Officer, and Douglas Boessen, Chief Financial Officer and Treasurer.
Speaker Change: At this time, I would like to turn the call over to Clifton Pemble.
Clifton Pemble: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered another quarter of impressive financial results as our products resonate with customers and we leverage growth opportunities across market segments and geographies.
Clifton Pemble: Consolidated revenue increased 24% to $1.59 billion, a new third quarter record, and we achieved record revenue in all five business segments.
Clifton Pemble: Gross margin expanded 300 basis points to 60%.
Clifton Pemble: Operating income increased 62% year-over-year, and operating margin expanded 640 basis points to 27.6%, reflecting both the higher gross margin as well as favorable operational leverage across the business.
Clifton Pemble: We reported proforma EPS of $1.99, up 41% year-over-year.
Clifton Pemble: Some are wondering how we have consistently delivered strong results when the financial health of the consumer is the subject of intense debate.
Clifton Pemble: The straightforward answer is that there is no single profile of a Garmin customer.
Clifton Pemble: Therefore, our results are not strictly correlated to broad generalizations of consumer behavior.
Clifton Pemble: Our business is highly diversified in many dimensions, from market segments to product categories within segments, each targeting different consumers.
Clifton Pemble: Additionally, our business is global in nature, allowing us to leverage growth opportunities wherever they exist.
Clifton Pemble: And finally, our products offer essential utility and unique differentiators that separate them from ordinary discretionary items.
Clifton Pemble: Another factor in our strong performance is that our products are clearly resonating with customers.
Clifton Pemble: For example, our market share in marine increased as measured by organic garment sales versus our competitors.
Clifton Pemble: Additionally, our market share in advanced wearables increased.
Clifton Pemble: According to the most recent IDC data, covering shipments through June of 2024,
Clifton Pemble: Garmin's global market share in advanced wearables increased over 200 basis points year over year.
Clifton Pemble: and we were the only global brand experiencing growth in shipments.
Clifton Pemble: According to IDC, we are now the number two advanced wearable brand in Europe and globally we are number three.
Clifton Pemble: These are remarkable outcomes considering the highly competitive and fragmented nature of this market.
Clifton Pemble: We believe this is a direct reflection of the strength of our products and brilliant execution by our global team.
Clifton Pemble: Given our strong performance for the first three quarters of the year, we are updating our full year 2024 guidance.
Clifton Pemble: We now anticipate revenue of approximately $6.12 billion and pro forma EPS of $6.85.
Clifton Pemble: Doug will discuss our financial results and outlook in greater detail in a few minutes, but first I'll provide a few remarks on the performance of each business segment.
Clifton Pemble: Thank you.
Clifton Pemble: Douglas Boessen, Clifton Pemble, www.cliftonpemble.com
Clifton Pemble: Starting with fitness, revenue increased 31% to $464 million with all categories contributing to growth and notably as our running and advanced wellness products resonate with customers.
Clifton Pemble: Gross margin was 61 percent, a 710 basis point improvement over the prior year driven by lower product cost and favorable mix.
Clifton Pemble: Operating income nearly doubled year-over-year, and operating margin expanded by more than a thousand basis points to 32 percent, reflecting both higher gross margin and favorable operating leverage in the segment.
Clifton Pemble: During the quarter, we celebrated the 10th anniversary of Garmin Health, which leverages our extensive wearable portfolio and high-quality sensor data to support corporate wellness, population health, and patient monitoring initiatives.
Clifton Pemble: We also hosted the annual Garmin Health Summit to recognize innovative digital health solutions that utilize Garmin products.
Speaker Change: Douglas Boessen, Clifton Pemble
Speaker Change: Given the strong performance of the fitness segment, we are raising our 2024 revenue growth estimate to 27 percent.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Moving to outdoor, revenue increased 21% to 527 million dollars, driven primarily by adventure watches following the highly successful launch of the new Phoenix 8 series.
Speaker Change: Gross margin was 68 percent, a 570 basis point improvement over the prior year quarter, and was favorably impacted by lower product costs and a higher mix of revenue from adventure watches.
Speaker Change: Operating income increased 53% year-over-year and operating margin expanded 820 basis points to 40% reflecting both higher gross margin and favorable operating leverage in the segment.
Speaker Change: During the quarter, we launched the highly anticipated Phoenix 8 Series, as well as the Enduro 3.
Speaker Change: The Phoenix 8 Series features a brilliant AMOLED display, cutting-edge features, a built-in speaker, microphone, and an LED flashlight across all models.
Speaker Change: The Enduro 3 weighs only 63 grams but offers rich features for endurance athletes along with class-leading battery life, up to 320 hours in GPS tracking mode, and up to three months in smartwatch mode using built-in solar charging technology.
Speaker Change: We also launched the inReach Messenger Plus, our first satellite communicator to offer photo and voice messaging, expanding our customers' ability to stay in touch while roaming in areas of limited or non-existent cellular coverage.
Speaker Change: Given the strong performance of the outdoor segment in the third quarter and the positive response following the recent Phoenix 8 Series launch, we are raising our 2024 revenue growth estimate to 13%.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Looking next at aviation, revenue increased 3% to $205 million, driven primarily by aftermarket product categories.
Speaker Change: Gross and operating margins were 75% and 22% respectively.
Speaker Change: resulting in operating income of 44 million dollars, a decrease of 10% year over year driven by increased R&D spending to develop new products and certify new aircraft platforms.
Speaker Change: We recently announced our new G3000 Prime, which redefines the integrated flight deck experience with edge-to-edge all touchscreen displays and a highly flexible open architecture that seamlessly adapts to serve a broad and dynamic market.
Speaker Change: During the quarter, we announced an important new safety feature called Runway Occupancy Awareness.
Speaker Change: which uses ADS-B information to help reduce the risk of runway incursions and provide added confidence for pilots navigating busy and complex airports.
Speaker Change: Garmin is the first to bring runway occupancy awareness to market.
Speaker Change: Also during the quarter, our co-founders Dr. Min Cao and the late Gary Burrell were enshrined in the National Aviation Hall of Fame.
Speaker Change: This tremendous honor celebrates their pioneering work developing products that revolutionized the aviation industry.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Turning to marine revenue increased 22% to 222 million dollars, primarily driven by new revenue from JL Audio.
Speaker Change: Excluding JL audio, revenue increased approximately 7%, which is ahead of industry trends pointing to share gains in the market.
Speaker Change: Gross margin was 55%, a 290 basis point improvement over the prior year quarter, and was favorably impacted by lower product cost.
Speaker Change: Operating income increased 59% year-over-year and operating margin expanded 390 basis points to 17% reflecting both higher gross margin and favorable operating leverage in the segment.
Speaker Change: During the quarter, we received several awards, including being named.
Speaker Change: the 2024 Manufacturer of the Year.
Speaker Change: by the National Marine Electronics Association for the 10th consecutive year.
Speaker Change: along with six Product of Excellence awards, for a total of 63 over the last decade.
Speaker Change: We were also recognized as the number one most innovative marine company for the second consecutive year by Sounding Strait Only, a leading publication for the recreational boating industry.
Speaker Change: Sounding straight-only considered both our culture and business practices, which makes this recognition especially meaningful to us.
Speaker Change: Last week we announced the acquisition of Lumishore, a leader in marine LED lighting solutions, which broadens our product portfolio and enhances our ability to seamlessly integrate technologies on the boat.
Speaker Change: The marine segment has performed as expected so far this year and we are maintaining our growth estimate of 15% for the full year 2024.
Speaker Change: Douglas Boessen, Clifton Pemble
Speaker Change: Moving finally to the auto OEM segment, revenue increased 53% to $169 million, primarily driven by growth in domain controllers.
Speaker Change: Gross margin was 20% and the operating loss narrowed to $1 million as efficiencies improved with higher sales volumes.
Speaker Change: During the quarter, we successfully launched the Garmin Design Domain Controllers across all remaining BMW car lines.
Speaker Change: Our AutoEM segment has performed as expected so far this year.
Speaker Change: However, it has been widely reported that the outlook of major automakers is softening.
Speaker Change: With this in mind, we are lowering our full-year 2024 revenue growth estimate to 40%.
Speaker Change: That concludes my remarks. Next Doug will walk you through additional details on our financial results. Doug.
Doug: Thanks, Clif. Good morning, everyone. I begin by reviewing our third quarter financial results, provide comments on the balance sheet, cash flow statement, taxes, and updated guidance.
Speaker Change: posted a revenue of $1,586,000,000 for the third quarter, representing a 24% increase year-over-year.
Doug: Close margin increase of 60%, 300 basis point increase due to lower product cost and favorable product mix in certain segments.
Doug: Operating expense, percentage sales was 32.4%, 350 basis point decrease.
Doug: Operating income was $437 million, a 62% increase.
Doug: Operating margin was 27.6 percent, a 640 basis point increase to achieve leverage on our strong sales and improved gross margins.
Doug: Our GAP EPS was $2.07, the Proforma EPS was $1.99.
Doug: Next, look at our third quarter revenue by segment and geography.
Doug: During the third quarter, we achieved record revenue on a consolidated basis for each of our five segments.
Doug: By geography, we achieve double-digit growth across all four regions.
Doug: led by the EMA region with 40% growth, followed by the APAC region with 18% growth, and the Americas region with 15% growth.
Doug: Thank you. Thank you. Thank you.
Doug: Looking next, operating expenses. Third quarter operating expense increased by $56 million, or 12%. Research and development and SG&A each increased approximately $28 million.
Doug: The year-over-year increases were primarily due to personnel-related expenses.
Speaker Change: He highlights the balance sheet, cash flow statement, and taxes.
Speaker Change: End of quarter with cash market securities for approximately $3.5 billion. Account receivable increased year-over-year, sequentially, to $922 million, following strong sales in the third quarter.
Speaker Change: Inventory balance increased year-over-year sequentially to approximately $1.5 billion.
Speaker Change: In the third quarter of 2024, we generated free cash flow of $219 million, a $19 million decrease from the prior year quarter. Capital expenditures for the third quarter of 2024 were $39 million, approximately $7 million lower than the prior year quarter.
Speaker Change: We expect full year 2024 free cash flow to be approximately $1.1 billion, capital expenditures approximately $250 million. During the third quarter 2024, we paid dividends, approximately $144 million, and purchased $20 million of company stock.
Speaker Change: At quarter end, we had approximately $270 million remaining in the share purchase program, which was authorized through December 2026.
Speaker Change: For an effective tax rate of 17.9%, compared to the pro forma effective tax rate of 7.2% in the prior quarter.
Speaker Change: Increase in effective tax rate is primarily due to the increase in combined Switzerland tax rate response to global minimum tax requirements.
Speaker Change: Turning next to our full-year guidance. Estimate revenue approximately $6.12 billion compared to our previous guidance of $5.95 billion. We expect gross margin to be approximately 58.5 percent, which is higher than our previous guidance, 57 percent, due to year-to-date performance.
Speaker Change: We expect an operating margin of approximately 24% compared to our previous guidance, 21.3%.
Speaker Change: Also, expect a performative tax rate of 16.5% higher than our previous guidance of 16% to projected full-year income mix by tax jurisdiction.
Speaker Change: This results in expected proforma earnings per share of approximately $6.85, an increase of $0.85 from the previous guidance of $6.00. This concludes our forum remarks. Rob, could you please open the line for Q&A?
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Ben Bowen from Cleveland Research. Your line is open.
Ben Bowen: Good morning, everyone. Thanks for taking the question. Clif, I was hoping you could share a little thought on what you see as the underlying drivers within wearables. Could you speak to how you think about the growth of the installed base versus refresh?
Ben Bowen: and what you've seen with some of these recent launches. And then I had a follow-up.
Clifton Pemble: Yeah, so Ben, as we remarked,
Clifton Pemble: in our prepared statements, you know, the...
Clifton Pemble: The drivers and wearables is that we're a very unique player in the market. We offer a lot of different products across many different use cases. And so we're able to find ways to be successful across
Clifton Pemble: Current registration trends still point to the majority of our users being new to Garmin, which is a great thing. So we're seeing that grow.
Clifton Pemble: which is good. And then in terms of the recent launches, as I mentioned, the Phoenix 8 series was very well received by the market and we're continuing to fill demand for that product as it rolls out across all of our retail channels.
Speaker Change: And there were also a number of mentions on the stronger gross margins related to lower product costs. Could you provide some color on what it is that you're seeing or what you're doing to see those benefits?
Speaker Change: I think there's quite a few moving pieces in the product cost. One is pure materials costs, which we're definitely seeing some benefit there of the scale of our business across all of our segments.
Speaker Change: But also, we're getting some help from the Taiwan dollar and efficiencies in our factory operations as our scale has increased significantly.
Speaker Change: The last one for me, interested in any thoughts you have going into the holidays about how you view retailer commitments to inventory levels into the holidays. Any thoughts on what it is that they're seeing versus prior years? Thanks.
Speaker Change: Retailers are telling us that they're eager to take in our products, they're planning for promotions. The retail channel appears to be very clean, especially as we transition some of our product lines like the Phoenix 8.
Speaker Change: So I believe we're in a good position and that's that's what we're hearing from our retail partners.
Speaker Change: Thank you.
Speaker Change: Your next question comes from a line of Eric Woodrick from Morgan Stanley. Your line is open.
Eric Woodrick: Hey guys, thanks for taking my questions. Two, if I may, just to start, Clif, really impressive performance on fitness and outdoor, especially on the gross and operating margin side. You're posting margins that we haven't necessarily seen before for these segments. So just curious from your perspective,
Eric Woodrick: if we put aside the cost downs that you alluded to, you know, how much of this is your pricing strategy really flowing through to margins? And really the question I'm getting at is, is how sustainable are these margin levels as we think about moving from some of these, moving on from some of these new product launches? Can you sustain these margins? Are these abnormally high? Could you just maybe help us unpack that? And then I just have a quick followup. Thank you.
Speaker Change: Yeah, I think it's probably difficult to put aside cost downs because that's obviously an important way that companies continue to reinforce their margin structure. So we're working very hard on that.
Speaker Change: and each new design we try to make gains in terms of the efficiency of the design as well as the component cost.
Speaker Change: But in terms of sustainability, I think that's one of those questions that everyone's going to have an opinion on.
Speaker Change: What we focus on is creating products with unique differentiators that allow us to have premium pricing and offer things that our competitors don't. So that's going to continue to be our recipe going forward.
Speaker Change: Okay, I appreciate that. And then just as a follow-up, obviously you alluded to the auto OEM market backdrop weakness. You know, you had previously set that $800 million target for auto OEM in 2025, and just given your comments on OEM softness, does that target change at all? Does it change either the magnitude or the timing of that $800 million kind of goal? And then second to that, does it have any impact on any of the new OEM contracts that you've signed in recent quarters? And that's it for me, thanks.
Speaker Change: I think in terms of next year, we really aren't ready to comment on that, although obviously the trends in the car industry are, you know, softer than they used to be, so we'll look at that and provide an update when we...
Speaker Change: introduce our 2025 outlook. In terms of impact on on our new programs I would say at this point too early to say I think some of those are rolling out beyond 2025.
Speaker Change: And so I would expect as the economy evolves, as people believe that it will with lower interest rates, that it could get better and the outlook would improve.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Got it. Thank you so much, Cliff.
Speaker Change: For more information, visit www.fema.gov
Speaker Change: Your next question comes from a line of Ivan Feinseth from Tigris Financial Partners. Your line is open.
Ivan Feinseth: All right, thanks for taking my question and congratulations on another great quarter, just phenomenal.
Speaker Change: The Connected subscriptions and some of the downloads of, let's say, Messenger and some of the new features in Messenger as you kind of grow out this.
Speaker Change: app ecosystem, what kind of uptake are you seeing? And at what point do you think you would start to give some indication as the revenue that's coming from some of these subscriptions?
Speaker Change: Thank you. Bye.
Speaker Change: Yeah, Ivan, in terms of the paid apps and some of the things that you've seen recently on our store, we view these as incremental, as they bring value to customers, and so those are
Speaker Change: enhancers to our overall
Speaker Change: Revenue and Margin Structure.
Speaker Change: as we roll more of that out. Expanded inReach, we've been excited about that, being able to have the higher bandwidth.
Speaker Change: and picture and voice sharing, which is great for people that go out in areas where cellular coverage is just really poor. So we expect that to be a big part of the
Speaker Change: completely incremental in terms of the use case for the product, although it's early days and probably not a lot to share in terms of what the early results are so far.
Speaker Change: In terms of the Messenger, specifically, it's a great product, like I said, very new, and so we're just now starting to see it roll out and being used by customers.
Speaker Change: And then what kind of reception are you seeing to the new introduction of your new dash cams?
Speaker Change: And if you see a lot of what's going on out there, there seems to be an increasing demand or people are finding that these are becoming a necessary item. What kind of growth potential do you see going forward on those?
Speaker Change: The dash cam market is very mature but the market did receive our new product releases very well. We've focused on providing dash cam functionality that's superior to others including
Speaker Change: A heavy focus on quality optics and a broad range of use cases from daytime to nighttime. So I think the market appreciates that and we've had a favorable response.
Speaker Change: Alright, thanks. Congratulations again. Thank you.
Speaker Change: Your next question comes from the line of Jordan Leonates from Bank of America. Your line is open.
Speaker Change: Hey, good morning. Thanks for taking the question. On the Aero side, are you guys seeing any impact from the strike and re-ramping up now that the strike is over for Textron?
Speaker Change: I think I think the strike probably had some small near-term effects as TechStrong was unable to deliver their plan in terms of aircraft but I think they're working hard now to
Speaker Change: to go back to normal, and so we don't anticipate any long-term effects.
Speaker Change: Douglas Boessen, CFP®, Financial Planner & Investment Advisor
Speaker Change: And then on the guidance raised from this quarter versus last quarter, because it was so strong,
Speaker Change: What is giving more confidence in the visibility that you guys have into 4Q now versus this past quarter?
Speaker Change: I think as we move along through the year, of course, we get more confidence in the last quarter. A lot of the plans with retailers don't materialize until sometime in Q2 or Q3, and so with a more complete picture now, of course, we can be more confident in the fourth quarter.
Speaker Change: Got it. Thank you so much. Thank you.
Speaker Change: Douglas Boessen, Clifton Pemble
Speaker Change: Our next question comes from a line of Noah Zetskin from Key Bank Capital Markets. Your line is open.
Speaker Change: Hi, thanks for taking my question. Maybe just a couple on the marine strength. I guess first on Lumashore, have you quantified how large that business is?
Speaker Change: in general.
Speaker Change: Yeah, I think the Lumishore and marine lighting in general is an incremental business to our marine segment.
Speaker Change: But an important one because it's another component on the boat that people want to have that we can provide and also integrate with our char plotter systems around the boat.
Speaker Change: In terms of
Speaker Change: Just some strong kind of market share gains, you know implied by your your growth When you look at the the industry, obviously, it's been it's been challenging
Speaker Change: like what's your kind of outlook on the marine industry in general?
Speaker Change: looking into like the kind of medium-term and then what kind of underpins confidence in continued market share gains there. Thanks.
Speaker Change: Yeah, I think in terms of...
Speaker Change: The outlook, you know, I think, again, this is
Speaker Change: somewhere where everyone will have an opinion.
Speaker Change: But it would seem to us that probably the market is fairly stable where it's at. Probably don't see a lot of additional moves to the upside or downside. And as the economy and especially the interest rate environment.
Speaker Change: improves, and I think people will obviously feel
Speaker Change: Douglas Boessen, Clifton Pemble, www.cliftonpemble.com
Speaker Change: But in terms of sustainability to do that, again, it gets more and more difficult as the market share grows, and so we're concentrating on just creating great products and making sure that we can serve the customers that are out there.
Speaker Change: Thank you.
Speaker Change: Our next question comes from a line of George Wang from Barclays. Your line is open.
George Wang: Oh, hey, guys. Thanks for taking my question. Just two quick ones. Firstly, can you kind of double-click on the inventory kind of, you know, channel restocking? You know, when I look at the balance sheet, inventory increased.
Douglas Boessen: Douglas Boessen, CliftonPemble.com
Speaker Change: Well, I think to start on the first question, George, our inventory is not related to channel inventory in any way.
Douglas Boessen: We're managing our own inventory to prepare for the higher selling season that's coming up in Q4, and I think we've mentioned over a few calls now that our inventory levels while they've been down have probably been uncomfortably low.
Douglas Boessen: And so we've been working to improve those so that we can serve all the product needs. And I think you saw in our results here in Q3 that having more inventory definitely was a good thing because we were able to serve all of the orders that came our way.
Douglas Boessen: In terms of sell-in versus sell-out, I would say that we have
Douglas Boessen: a very good ability to track.
Speaker Change: Douglas Boessen, Clifton Pemble, www.cliftonpemble.com
Speaker Change: the Phoenix 8, and also the existing products that have been in the market a while, such as the 4Runner 265 and 965, as well as the Vivoactive and Venu series, all of them have very strong registration rates.
Speaker Change: Okay, great. Just a quick follow-up. I guess in terms of margin profile for the auto OEM, you know, given software top-line outlook for the auto OEM, kind of some of your customers are lowering guidance. Does it affect your medium-term outlook for the margin profile? You know, obviously,
Speaker Change: you are getting close to profitability on the income side for the auto EM, you know, later this year. So just curious, any changing thinking in terms of the medium outlook for the gross margin and operating margin for the auto EM segment?
Speaker Change: but in general we've said that it would be in that high teens to 20% kind of range for gross margin.
Speaker Change: With lower sales, of course, comes the concern that...
Speaker Change: You don't have the ability to cover all the expenses in the segment on a fully loaded basis because of the lower sales volume.
Speaker Change: But, you know, that's unfortunate, but it's something we can't really do anything about because the automakers are the ultimate customer for this product and if their outlook is weakened then of course we have to respond to that.
Speaker Change: Okay. Great. Thanks again. I'll go back to the queue. Thank you.
Speaker Change: That concludes our question-and-answer session. I will now turn the call back over to Teri Seck for some final closing remarks. Thank you all for joining the call. Doug and I are available for callbacks, and we hope you have a great rest of your day. Bye.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.