Ladies, gentlemen, and welcome to the Garmin Limited First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Terry Sac, Manager of Investor Relations.
Ma'am, you may begin.
Good morning. We would like to welcome you to Garmin Limited's first quarter 2019 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the internet at www.garmin.com/doc An archive of the webcast and related transcript will also be available on our website. In the first quarter of fiscal 2019, We refined the methodology used to allocate certain selling, general and administrative expenses to the segments. The composition of segments did not change.
Prior year amounts are presented as they were originally reported as it is not practical to accurately restate prior period activity accordance with a refined allocation methodology. For comparative purposes, we have included in the appendix of this webcast an estimate of the segment operating income impact if the refined allocation methodology would have been used in 2018 for both the 13 weeks ended March 31, 2018 and the 52 weeks ended December 29, 2018. There was no change to either the consolidated SG and A expenses nor the consolidated operating income. This earnings call includes projections and other forward looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, gross and operating margins and future dividends, market shares, product introductions, future demand for our products and plans and objectives are forward looking statements.
The forward looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10 K 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 Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble.
Kateri, and good morning, everyone. As announced earlier today, Garmin reported record revenue for the first quarter of 2019. With growth in operating income and EPS. Consolidated revenue came in at $766,000,000, up 8% over the prior year. Revenue from marine, aviation, fitness and outdoor collectively increased 12% year over year.
Gross margin was 59% compared to 60% in the prior year. Operating margin was 19.8%, and operating income grew 6% over the prior year. This resulted in GAAP EPS of pro form a EPS was $0.73, up 7% over the prior year. We are encouraged by our first quarter results. Since Q1 represents the lowest seasonal quarter of our financial year and much of the year remains ahead of us, we are maintaining the guidance issued in February.
Before moving on to segment highlights, I want to mention the recognition we received recently from Forbes, who rank Garmin as one of the top 5 best employers in America. Speaking on behalf of all Garmin employees, we are truly honored to receive this recognition. Garmen employees are passionate about what we do and we share a deep commitment to serving our customers and each other. Of the many qualities that make Garmin a great place to work, it's the commitment of our employees that sets us apart. Moving next to our chartplotters and Panoptix LiveScope sonars.
Gross margin was 58% and operating margin improved to 19%. During the quarter, we announced the Eco Map Ultra Series, combining built in Panoptix LiveScope compatibility with new mapping content. Also in our 1st year as their exclusive electronics supplier, we were named the 2018 supplier of the year by independent boat builders, Incorporated, the Boating Industry's largest purchasing cooperative. It's an honor to be recognized by the IBBI, and I want to thank our Marine team for delivering superior products service and support to our driven by growth in both aftermarket and OEM product categories. Gross and operating margin remained strong at 75% and 34% respectively.
During the quarter, we delivered the new G1000 NXI upgrade for the Citation Mustang, which is the 1st business jet to adopt our G1000 system. We announced compelling new products such as the GPS 175 GNX-three seventy five and the G3X touch, which expand the addressable market for our retrofit systems. Our aviation team was also recognized as an outstanding supplier to the industry. At the recent Embraer Suppliers conference, we were named Supplier of the Year for electrical systems. This is the 10th supplier award we received from Embraer and again, reflects the strength of our products, service and support.
I want to thank Looking next at fitness, revenue increased 9% driven primarily by strong growth in our wearable categories, Gross margin was 50% and operating margin was 10% in the quarter. Margins decreased due to a combination of factors, including lower selling prices and a shift in mix as certain products in our consumer wellness categories experienced significant year over year growth. In early April, we completed the acquisition of Tacx expanding our reach into the indoor cycling and training market. Yesterday, we announced a fully refresh line of running watches, with the 4 under 45 in two sizes, the 4 Runner 245 with optional music storage and the 4 runner 945, which has it all, These new smartwatches offer features that will appeal to a broad range of running enthusiasts. Also, we announced the availability of our menstrual cycle track feature.
This new feature was developed by Garmin Women focusing on the special needs of those who are highly active. This feature will help women make the connection between their current cycle phase, physical and emotional symptoms and their overall well-being. We also announced that we are cooperating with the University of Kansas on research to better understand how wearables and the biometric day to day produce can help women manage and improve their health. Moving to Outdoor, revenue increased 7% on strength across multiple product categories. The Outdoor segment generated strong growth in operating margins of 63% and 27% respectively.
During the quarter, we introduced MARC, a collection of 5 premium smart tool watches, These watches were created from our active lifestyle DNA to inspire adventures in flying, racing, sailing, exploring and sports performance. Also, we recently announced the Approach S40, a stylish golf watch featuring a color touch screen display, and smartwatch capabilities. Looking finally at the auto segment revenue decreased 10% for the quarter, due to the ongoing decline of the PND market, partially offset by growth in certain specialty product lines. Our global PND market share remains very strong. Gross margin was 45% and operating margin improved to 6%.
During the quarter, we launched the BC40 a new wireless backup camera that's easy to install and provides drivers with a wide clear view behind your vehicle. Also during the quarter, we announced that BMW selected us as their lead design and production partner of entertainment modules, for the BMW Group validating us as a tier 1 supplier to the world's most respected brands. Congratulate our automotive team and thank them for their hard work and dedication in securing this win. 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 first quarter financial results maybe comments on the balance sheet, cash flow statement and taxes. We posted revenue of $766,000,000 the first quarter, representing 8% increase year over year. Gross margin was 59%, 100 basis point decrease in the prior year. Operating expense, the percentage of sales, was 39.2%, eighty basis point decrease from the prior year. Operating income was $151,000,000, a 6% increase year over year.
Operating margin was 19.8% relatively consistent to the prior year. Our GAAP EPS was $0.74 and pro form a EPS was $0.73. Next, we'll look at our 1st quarter revenue by segment. We achieved record 1st quarter revenue of $766,000,000, Consolidated revenue grew 8% led by double digit growth in both marine and aviation. Also, both the fitness and outdoor segments achieved solid growth during the quarter.
Combined basis, marine, aviation, fitness and outdoor were up 12% compared to the prior year quarter. Looking next, the first quarter revenue and operating income charts. Collectively, marine, aviation, fitness and outdoor segments contributed 83% of total revenue in the first quarter of 2019 compared to 80% in the prior year quarter. Marine grew from 16% to 17%. Aviation grew from 21% to 22% and fitness grew from 23% to 24%.
You can see from the charts to illustrate our profit mix by segment marine, aviation, fitness and outdoor segments, collectively delivered 95% of operating income first quarter 2019, credits 98% in the first quarter of 2018. Looking next at operating expenses. Our 1st quarter operating expense increased by $16,000,000 or 6%. Research and development increased $4,000,000 year over year due to investments in engineering resources. Our advertising expense increased approximately $3,000,000 year over year and represented 3.6% of sales, consistent with the prior year quarter.
SG and A was up $10,000,000 or 16.5 percent of sales consisted of prior quarter. The increase was primarily due to legal related costs and personnel related expenses. Key highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $2,700,000,000. Contract receivable decreased sequentially to $453,000,000 following a seasonally strong 4th quarter.
Inventory balance increased on a sequential, near to basis compared with the seasonally strong 2nd quarter upcoming product launches. During the first quarter 2019, we generated free cash flow of $134,000,000, $53,000,000 decrease from the prior quarter. Also during the quarter, we paid dividend of $201,000,000, which includes both the December 2018 and March 2019 payments. During the first quarter of 2019, we reported an effective tax rate of 15.7 percent compared to 16% prior year quarter. This concludes our formal remarks.
Channon, can you please open the line for Q And A?
Questions. Our first question comes from Ben Bollin with Cleveland Research. Your line is open.
Good morning, everyone. Thanks for taking my question. Wanted to start in the fitness business. Could you talk a little bit about the mix overall? What drove the higher mix of kind of wellness devices in the quarter.
What were the incremental legal expenses within that business in the quarter and does that persist? And then any thoughts on margin trajectory through the year with new products launching? And then I have a follow-up.
Yes. So in terms of mix, Ben, we saw strong sales of our Vivo Move HR line well as our vivoactive 3. So those were drivers of mix towards the consumer wellness categories. In terms of legal, we wouldn't comment on specifics of it and to say we wouldn't expect a repeat of some of these, but again, the environment's unpredictable. So we don't really know in the future what additional things we might face, but we view it as a somewhat of a one time thing.
And in terms of margin trajectory, depending on how the mix goes, we would probably still anticipate some downward pressure on overall fitness margins probably in the lowtomid50s range, but that will depend on again, the overall product mix and the sales trajectory of some of those product lines.
Okay. And within Outdoor, Any thoughts you have on the initial interest for Mark or how you feel about the current lineup and what Mark does to the overall TAM as you move into these higher price point products?
Well, we feel like the initial interest in Mark has has been very encouraging. So we're now starting to deliver those devices into the field. So, we'll start to see some impact from that. In terms of what it does to our overall product lineup, I think it expands our reach towards the upper end of the watch market. In terms of where we're at today, obviously not the upper end of where watches are in total.
But for us, it expands our reach and we feel very good about it. We've received high marks in terms of the design of the product and the materials we've selected. So we feel very good about it. Thank you.
Thank you. Our next question comes from Rich Valera with Needham And Company. Your line is open.
Thank you. I was hoping you
could comment on the BMW deal and sort of how you'll get paid on that and what you'll actually get paid on. Thank you.
Well, I think maybe you're referring to some capitalized costs. So that's basically an agreement that we have to be able to recover some of our R and D costs that go into that project and those will be capitalized as we go along. But in terms of once we reach production point and it's like any other arrangement where we sell a product and they pay us for it.
Yeah, I guess the question was what exactly will you be selling them software or hardware? And you could kind of just give us a sense of the magnitude of what will be going into each vehicle?
Well, it's the main media computing modules that go into every vehicle and it drives the instrument cluster as well as the center stack and in some configurations that will also drive infotainment in the back seat.
Got it. And then just on Aviation, if you can kind of give us an update on your thoughts on the ADS B, one that sort of contribution this year and then how you think about that going into next year post the mandate?
Well, we don't break it out by categories, but it is generating growth. It's not the only growth driver though in the overall aviation segment because we're also seeing strong demand for retrofit systems integrated cockpit systems as well as display systems and GPS systems that go in the cockpit. We think the trajectory is still strong for this year, although towards the back half the year. There could be some tailing off of the growth rates. We do see that in 2020, that the market will probably continue somewhat because we don't think that every airplane that wants to be equipped will be, but we'll have to see how that goes as we reach that point.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Charlie Anderson with Dougherty and Company. Your line is open.
Thanks for taking my questions. Just going back to the wearables and some of the gross margins you're seeing there. I know Cliff you've had sort of a multi year trend of people going maybe more up market on wearables as opposed to down market. I wonder if we're seeing a reversal of that trend at all or if this is just a function of where we are point in time on the product cycle. And then I've got a follow-up.
Well, actually in the tracker category, it is people going up market because they're moving towards the higher end Vivo Move HR as opposed to a basic tracker band. It so happens that the margins on those products are lower than the headline of fitness. So depending on mix, of course, that impacts the overall segment margin.
Okay, great. And then just a housekeeping question for Doug. I noticed in the Q that We did see that reclassification of SG And A a little bit more to Aviation, a little bit less to Marine. I wonder if you could just walk us through the basis behind that change?
Sure. Actually, it's refinement our methodology for the general administration expenses. And As time goes by, there's evolution of our different segments, different dynamics with it, some of which relating to the late facility expansion here, some of which is aviation becoming a bigger piece of our business, international. So Looking at all the different dynamics, we took a look at by allocating our administrative expenses where we thought each one of our segments. So yes, there are incremental additional expenses being allocated to aviation.
Thank you. Our next question comes from Paul Coster with JP Morgan. Your line is open.
Hi, thanks. This is Paul Chung on for Coster. Thanks for taking my questions. So I have a couple on marine, where are you kind of seeing pockets of growth whether it's region, product subsets of the boating market. And then given the strong start for both marine and aviation for the year, has your outlook for 10% growth for both segments changed at all?
Yes. So in terms of marine growth and trying to add a little more color to that, I would say it's strong globally. Particularly it's strong here in the U. S. Market.
A large majority of our revenue is generated in the Americas market. And so products like Panoptix LiveScope and our chartplotters are driving some significant growth there. In terms of our outlook for both marine and aviation, As we mentioned, we're not ready to think about guidance yet because it's still early in the year, but we're encouraged by the results we've seen in both of those segments. I would say, as I mentioned earlier in aviation that towards the back half of the year, we would naturally expect that the growth rates of ADS B might come down a bit as the rush of people that are trying to get into the installed tapers off a bit, but that's what we're in participating and that's why we're just holding back a little bit.
Got you. And then my follow-up is on tax. What's your go to market strategy there. Can you give some more details on margins, revenues, I think you mentioned maybe 6 points of growth for fitness, but has that view now changed that you closed the acquisition?
Thank you.
There are really no changes in terms of go to market. They're the market leader, particularly in the European region. So we expect to continue to capitalize on that strength and we see opportunities for growth in the Americas and Asia where they're less represented. So we're working hard to implement those sales strategies right now. In terms of margins, it's fairly consistent with the overall headline margins of fitness.
So we don't anticipate really any impact there. There will be allocation of the purchase price to fitness. So that will impact some of the operating margins, but on a pre amortized basis, it's very positive to our fitness segment on a cash flow basis.
Thank you.
Thank you.
Thank you. Our next question comes from Nick Todorov with Longbow. Your line is open. Hey,
guys. Good morning. First of all, Jessica, you background noise. Just on Aviation, my sense is that results came a little bit better than expected. Maybe can you talk from your upper market OEM, what surprised that you saw quarter?
And then secondly, some of your competitors affected by the pricing environment given the pricing and capacity, maybe if you can comment about a gorgeous service center there?
So Nick, I'm sorry to say that your call quality was was kind of challenging. So I'm not sure that we've really tracked your question. I don't know if you could maybe try to restate it or help us out a little bit there.
Sorry about it. Can you hear me?
It's incrementally better.
Sorry, can you hear me better now?
It's better now. Thank you.
Okay. Sorry about that. So in Aviation, the sense is that a result came a little bit better than expected. Maybe can you talk about what are you saw some surprises either on the OEM or on the aftermarket side? And secondly, Can you comment if you see any changes in the pricing environment in the aftermarket side?
Some of your competitors have talked about some changes given the supply constraints. I was wondering see anything different?
Yes. So in terms of aviation and our view there and what we saw, I would say that aftermarket was very strong and that reflects true demand and sell through to customers that are out there. In terms of OEM, there is some timing related things that helped us in Q1, but that's in general, we still feel very positive about the OEM environment In terms of pricing and aviation, I would say that pricing has been firm. We did go through some pricing increases at the 1st part of the year. Which didn't seem to have any impact in terms of our demand that we're seeing in the segment.
Okay. So, you said you went through some price increases in the first during the first quarter this year or that was last year? I'm sorry.
It was basically in January.
Okay. Okay. Got it. And Doug, can you comment on what are some of the changes in OpEx allocation changes your outlook. I believe last quarter you were talking about expecting about 100 basis points increase OpEx as a percent of sales.
Had that outlook changed?
No. We have consistent with that outlook for the full year. So we have about 100 basis points increase for total operating expenses. We expect advertising as a percentage of sales to be relatively assistant year over year and probably about a 50 basis point increase in R and D on a full year basis than a 50 basis point increase and SG and A on a full year basis. So I'd also mention the tax acquisition, about 25% of that year over year increase in operating expenses will be attributed to the tax acquisition, which we closed on here in the second quarter.
Okay. And lastly for me, Automotive gross margin came a little bit stronger than the trend over the last couple of years. Is there anything worth calling out or was it anything maybe tied to the specialty products that offset some of the P and D declines or there's something else?
Yeah. One thing we did see in PND is that we had a new drive line of PND that was launched here in the first quarter. So With that new launch, we did see some improvement relating to our gross margin.
Okay, guys. Thanks. Good luck.
Yes, thank you.
Thank you.
Our next question comes from Ivan Feinseth with Tigris Financial Partners. Your line is open.
You. Thank you for taking my call and congratulations on another great quarter and being named one of the top 5 places to work. I have a few product questions and platform questions. First, at this year's connect IQ developer conference, like year over year, how is attendance growing and what have been some of the topics covered? And I really do also the new Connect IQ app that organizes the applications?
Yes. So our Connect IQ Summit was actually very, very good. We we had strong attendance, same as the previous years. So we're not seeing any decrease in the level of interest We announced new features for Connect IQ that allows app developers to further leverage the platform so they can have better access thorough access to the wireless capabilities of devices. There's great new animation tools that they can use to create more, lively apps So a lot of enthusiasm around the things that we've been doing.
Now is there any plans to create a, like a marketplace so that those who want to offer apps that they could charge would be able to do that because I know there are most of the ops are free. Some of the developers say if you'd like to send the money, let's say Paypal, you can do it. But is there eventually going to be a flick a formalized e commerce process on the platform?
Yes. So, we're evolving the platform to be able support monetization. And as you say right now, it's not as strong of a link in terms of helping our app developers, but we're we're working on a roadmap that gets us there. And I think in the coming year, we should have improvements.
Very good. I love the new product cadence and the number of new cycling computers. My one question is on like the Zumo line, for example, it connects to the tire monitors. Are you going be offering the ability to have tire pressure monitors on a bicycle that connects to the cycling computers. I think that's a pretty cool feature.
Yes, it's definitely a technology we can leverage in cycling. And so I wouldn't wouldn't really in or out at this point because we're evaluating our roadmaps, but it is something that we can leverage across multiple product categories.
And as far as product line, are you looking to want to refresh to Zumo or what is your thoughts on the Zumo line?
Well, the Zuma line is an integral part of our overall PND lineup. And so we have a strong roadmap there as we do in the other areas as well, truck RV.
And then like the Garmin Canacc is pretty cool. And have you thought about some kind of other, onboard diagnostic port connection to any of your other GPS devices that could incorporate that data into the screen of the GPS?
We've invested some effort in understanding OBD connection to the vehicle and of course on our OEM side we have a lot of access to the vehicle in terms of the can buses and things. But in terms of aftermarket diagnostics, it's somewhat of crowded market. And so we've struggled to find a place where we can really carve out our own unique niche there. So it's not something that we've been actively pursuing recently.
Okay, understood. And then, I love the new Mark Watches. They are beautiful. Could you give some thoughts on, unit volume?
We don't break out by volume, but I would say as we mentioned in the remarks that the reception has been good and we're pleased with that. And so we're just at the front end now of delivering those products to market and we'll have an updated view in the future.
Thank you. And also on tax, can you give us some thoughts as far as product branding? Are you going to maintain the tax name or somehow in operate the Garmin name with it? Also, do you see any focus on specific products and, expanding the product availability into the U. S.
And the marketing strategy behind it?
Yes. So the tax name is very strong. So we want to to maintain that. And so the branding will be definitely taxes, the headline on those products and for the website and things we're calling it a Garmin company. In terms of our specific product focus, our emphasis at tax, taxes, emphasis before we acquire them was that smart trainers and advanced trainers is their specialty.
And so we're going to continue investing in that. And then in terms of bringing the product to other markets, we're working very hard to bring it into U. S. Distribution now in a more complete way. And so that's ongoing and should be more evident as we move into the back half of the year.
Thank you very much. Congratulations again.
Thanks, Ivan.
Thank you. Our next question comes from Eric Woodring with Morgan Stanley. Your line is open.
Hey, guys. Congrats on the quarter. Good morning. I just wanted to get at, 1st quarter revenue growth of 8% was strong, but in the past, you've talked about how the ramping of product launches and new product launches will essentially help accelerate growth in the back half of the year versus the first half. And so with guidance unchanged, I just kind of wanted to reconcile those data points given the outperformance in the first quarter.
Yes. So we mentioned in the last call that our product releases were back half loaded. And I think that's certainly playing out as we're just now getting our new fitness products to market and we'll have more releases as we go through the year. So we'll have to wait and see. We've mentioned before that this quarter is is literally the smallest contribution to our overall yearly revenues.
So we don't want to get too excited or disappointed on first quarter because there's a lot that lies ahead of us in terms of the overall sales environment and the competitive environment.
Okay. Thanks. And then just as my follow-up, auto results, revenue down 10% was the best performance you've had for that segment since the first quarter of 2016. So just curious, is that just the drive line PND that was launched or was there something else that contributed to any puts and takes or understanding any puts and takes would be helpful there?
It drives certainly help. That was a selling event, although we've heard good remarks from our retailers on the sell through of that product. So that's one dynamic, but we also saw a strong demand for our specialty P and Ds, particularly in the truck RV and motorcycle areas and that helped a lot. And so that represents really true demand in the market. So we were pleased with the result and we'll have to wait and see how things go throughout the remainder of the year.
And just curious, is that a trend you think that could continue or is it would you call that or think of that more as a one time a one time benefit to the quarter?
Well, hard to say. Again, we're waiting to see more data as we experience the sell through of the new products especially and as the driving season comes upon us here. So we'll have to wait and see.
Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Terry Sec for closing remarks.
Thanks everyone. Doug and I are available for callbacks throughout the day. Have a good one. Bye.
Ladies and gentlemen, this concludes today's conference. For your participation. Have a wonderful day.