Good day, ladies and gentlemen, and welcome to Garmin's First Quarter 2018 Earnings Conference Call. At this time I'd now like to turn the conference over to Terry Sec. Please go ahead.
Good morning. We would like to welcome you to Garmin Limited's first quarter 2018 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/stock. An archive of the webcast and related transcripts will also be available on our website. As a reminder, we adopted a new U.
S. GAAP revenue standard in the first quarter of 2018. The prior periods presented here have been restated to reflect adoption of this new standard. 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, growth 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.
Thank you, Terry, and good morning, everyone. As announced earlier today, Carmen recorded record revenue for the first quarter of 2018, with double digit growth in revenue, profit and EPS. Consolidated revenue came in at $711,000,000, up 11% over the prior year. Outdoor Fitness Aviation And Marine collectively increased 18% year over year, and contributed 80% of total revenues. Gross margin improved year over year to 60% due to segment and product mix.
Operating margin improved to 20% while operating income increased 22%. This resulted in GAAP and pro form a EPS of $0.68 with pro form a EPS growth of 31% over the prior year. We are pleased with our first quarter results, which delivered growth in revenue profits and earnings. 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. Doug will discuss our financial results in greater detail in a few minutes, but first I'll provide a few remarks on our performance in each business segment.
Starting with Outdoor, revenue increased 24% on strong demand for outdoor wearables. Segment generated strong gross and operating margins of 65% 30%, respectively, while operating income grew 27% over the prior year. During the quarter, we began shipping the descent dive watch. Descent brings innovation to the dive computer market by combining smartwatch utility with dive computer functions for the underwater adventure. Decent has been well received, and we are excited for the opportunities we have in this new product category.
Also, we recently announced the Tactics Charlie, a tactical theme smartwatch with unique features such as night vision compatibility, and jump master mode for Sky Divers. Looking next to fitness, revenue increased 20 percent, driven primarily by growth in the Advanced Wearables category. Gross margin improved to 58% due to product mix. Operating income improved to 20%, resulting in operating income growth of 81%. During the quarter, we began shipping the 4 10645 M, our first GPS running watch with integrated music and mobile payments.
We recently announced several new cycling products, including the Edge 130 and the Edge 520 plus. The Edge 130 is an entry level cycling computer packed with C and the Edge Five Twenty Plus offers advanced mapping and navigation capabilities. We also announced the VARIA RTL 510 the latest in our series of products that focus on cycling safety. We hosted our 2nd annual Connect IQ Developer Summit, bringing together application developers and business partners to participate in hands on workshop with our product managers and our engineers. Momentum behind Connect IQ is accelerating with more than 54,000,000 Connect IQ downloads to more than 8,000,000 compatible devices shipped since inception.
And finally, just yesterday, we announced a collaboration with the University of Kansas Medical Center on multiple research projects, exploring the use of wearable technology for the early detection of underreported health conditions, such as sleep apnea and atrial fibrillation. Turning next to aviation revenue increased 19%, driven by broad based strength across the market. Gross and operating margins remained strong at 75% 33%, respectively, resulting in operating income growth of 25% over the prior year. During the quarter, we started delivering our new TSI flight decks, including a version for the helicopter market. We also announced the 1st flight of the Citation XLS with the G5000 Integrated Avionics suite.
This represents a significant step forward on our path to certification. Looking next at the Marine segment, revenue increased 9%. Driven by our recent acquisition of Navionics. Excluding Navionics, our revenue was essentially flat year over year due to unfavorable weather conditions that have delayed the start of voting season and due to the challenging comparison to first quarter of 2017 when our lean segment grew 26%. Gross margin improved to 59%, while operating margin declined to 12%.
During the quarter, we announced the G CV 20 and alter high definition seminar offering higher resolution imaging at greater depth. Also, we were selected as the exclusive marine electronics supplier to the independent boat builders cooperative known as IBBI. IBDI is the voting industry's largest purchasing cooperative and is comprised of a 19 member network of leading brands. Beginning in 2019, members of the IBBI will get direct access to our full line of ring electronics. Looking finally at the auto segment, revenues were down 12% for the quarter due to the ongoing decline of the T and D market partially offset by growth in niche product lines.
Gross margin was 43%, while operating margin was 2%. During the quarter, we announced the next generation diesel T and V for trucks, which uses dash camera technology to provide enhanced driver alerts. 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 to move to comments on the balance sheet, cash flow statement, and taxes. We posted revenue of $711,000,000 for the first quarter, representing 11% increase year over year. Gross margin was 60%, 190 basis point increase in the prior year, driven by segment and product mix Operating expense as a percentage of sales was 40%, consistent with the prior year.
Operating income was $142,000,000, a 22% increase year over year. Operating margin was 20%, learning basis point increase in the prior year. Our GAAP pro form a EPS was $0.68. Next, look at our 1st quarter revenue by segment. During the first quarter, we achieved a record 1st quarter revenue of $711,000,000.
Consolidated revenue grew 11% led by double digit growth in 3 of our five segments. Both the Outdoor and Fitness segment grew over 20% for the quarter. Combined basis, Outdoor, Fitness aviation and marine were up 18% compared to the prior quarter. Looking next, 1st quarter revenue and operating income charts. Collectively, Outdoor, Fitness, Aviation, Marine segments contributed 80% of total revenue in the first quarter 2018 compared to 75% in the prior year quarter.
Fitness grew from 22% to 23% and outdoor grew from 18% 20%. You can see when charts illustrate our profit mix by segment, Outdoor, fitness, aviation ring segments, collectively contributed 98% of operating income in the first quarter of 2018 compared to 94% first quarter of 2017. Outdoor, fitness, aviation segments each had year over year increase in both operating income dollars and operating margin. Looking next to operating expenses. Our 1st quarter operating expenses increased by $29,000,000 or 11%.
Research and development increased $20,000,000 year over year due to investments in engineering resources and recent acquisitions. Fraverizon expense decreased $7,000,000 year over year, representing 3.5% of sales, 150 basis point decrease. Decrease was primarily due to lower media spend and lower co op expense. SG and A was up $50,000,000 compared to the prior year quarter and increased 60 basis points percent of sales to 16.5 percent. Increase are primarily due to personnel related expenses, incremental costs associated with recent acquisitions, partially offset by lower litigation related expenses.
Few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash marketable securities of approximately $2,400,000,000. Cantecia will decrease sequentially $4,000,000, following a seasonally strong 4th quarter. Our inventory balance increased on a sequential year over year basis compared for the seasonally strong second quarter. During the first quarter of 2018, we generated free cash flow of $188,000,000, $93,000,000 increase for the prior year quarter as we benefited from working capital improvements.
Also in the quarter, we paid dividends of $96,000,000. In the first quarter of 2018, we reported an effective tax rate of 16% compared to a pro form a effective tax rate of 21.2% in the prior year quarter. Decrease in effective tax rate is primarily due to benefits from the US tax reform and the impact for lease reserves. This concludes our formal remarks. James?
Please open the line for Q
As
well, we do ask question has been Our first question comes from Joe Wittine with Longbow. Your line of line is open. Hi,
this is Nick on behalf of Joe. Congrats on a great quarter, guys. Really good job. Since you don't guide the quarter, I think it will be helpful if you can walk through which areas of the business was, were ahead of your expectations. I guess, what was the biggest surprise?
Well, we don't really provide information on our expectations by by, segment other than the the basic guidance that we've, earlier laid out. So I think quarter by quarter, you know, we have a lot of seasonality in our business and also cadence of our product releases. And so that can create, certainly ups and downs in in terms of the overall, yearly averages.
Okay. Understood. And in outdoor, the data we track on Phoenix showed surprising strength throughout the first quarter, even though you had fully anniversary at the Phoenix 5 launch. I'm just curious, is that strength surprising you? Can you give us some color on its performance?
Well, I think we we didn't start delivering the Phoenix 5 until late in the, first quarter of 2017. And so consequently much of Q1, of 2018 was, was not comping against that initial fill in. Q2 was our our biggest selling quarter for Phoenix 5.
Okay, got it. And on fitness, are you seeing any changes in the trajectory for basic trackers? And is it safe to assume that basic trackers are now less than a quarter of your fitness segment?
I think the general trend for basic trackers continues, as we have been, remarking and as the market has been demonstrating, there's pockets of strengths geographically and and also by product lines that we have, but but generally, we see a downward trend to that. In terms of breaking that out as a percentage of sales of fitness, we don't do that.
Thank you. Our next question comes from Doug Clark with Goldman Sachs. Your line is now open.
Hey, great. Thanks a lot. First question on the aviation business, I'm wondering if you can a little bit more detail you talked about kind of broad based strength, but it looked like in the quarter, there were a number of certifications or deliveries. So if you can give maybe a little bit more detail on kind of aftermarket versus OEM, and, and in particular, the strength of the pipeline for certifications.
Yeah. So I think we saw a broad, strength in retrofit and, OEM product lines. I think there's a lot of, data on the overall situation with, OEMs. And, and, I think they're seeing some incremental improvements in their business, although it's it's low single digits. For us, I think it's a matter of product mix.
The the products that we're delivering as opposed to the the general market, the small and medium sized airplanes as well as single engineering planes are doing well. And, also on the retrofit side, we're seeing, general strength due to the ABSV mandate, which is also pulling in additional equipment purchases as people upgrade their panels.
Okay. And then my other question was actually back on outdoor. You had mentioned and the excuse me, lapping the launch of the Phoenix V and the sell in in the second quarter of 2017. So two questions. How do you think kind of the business trends for the rest of the year, given that the comps get more difficult.
And secondly, any visibility into what the refresh on that product looks like? Is it a 1 year cadence or 2 year cadence or anything touching on new solutions in the Phoenix lineup?
Definitely, we have a much more difficult comparison through the remainder of the year because of the Phoenix 5 launch. So we're expecting that, and that's reflected in our our outlook. In terms of, product refresh, I can't comment on the timing, but we do have a very active road map across our segments, including in outdoor. And, so we expect more product releases throughout the remainder of the year.
All right, great.
Thanks a lot guys.
Yes, thank you. Thank you. Our next question comes from Rich Valera with Needham. Your line is now open.
Thank you. Just wanted to clarify that the guidance for all of the segments remains unchanged. Is that correct?
Yes. We're basically reentering what we outlined before.
Got it. And I guess you kind of spoke to the fitness category, the plus 20% comp in the first quarter, but you're basically guiding for that to be, I guess, down in aggregate for the remainder of the year and that's because of the tougher comps with the Phoenix. Is that fair?
Well, fitness is really driven by other, tougher comps. We had significant sell in of new products in, q4 of 2017, and so that's That's a factor. And then we also have the issue of the ongoing decline of the basic activity trackers, which we're factoring into our overall outlook.
Got it. That's helpful. And then the margins in auto were a little lighter than we've seen was there anything unusual in the mix in auto this quarter? I'm just wondering how we should think of those margins as we go through the year, maybe maybe any bounce off the 1Q levels?
No, I would say it's mostly just some general variance that we would see especially with lighter sales as we did some promotions and things that could have impacted the overall margin level, but we would generally expect mid-40s kind of gross margins. We would expect the operating margins to come up because Q1 is the seasonally lowest quarter and we should be in a much better position in Qs 2 through 4 with more sales leverage.
Got it. That makes sense.
And then finally on the tax rate, I think you guided from 19% for the year, but you came in at 18%, are we still thinking that 19% is the right tax rate for the full year?
Yes. We still stay with our full year 2019. Part of the 2016, there was some reserve releases there. So you may be some lumpiness in the quarters depending on how those reserve leases that come out, but 2019 still our full year rate you're anticipating.
Got it. Thanks for the clarification. Nice job on the quarter, gentlemen.
Thank you. Our next question comes from Yuki Anderson with Morgan Stanley. Your line is now open.
Great. Thanks for taking my question. A quick one on outdoors. How did the other products decide Phoenix do in Q1. Was there anything to call out there in terms of a specific product that might have surprised the upside there?
Well, I think in terms of surprise, no, I think we are doing very well with our inreach, business, both hardware and subscription based. So that provided some additional boost to the segment as well. But beyond that, everything was pretty much in line with what we would have expected.
Okay. Got it. And then on Aviation, when we think about seasonality and sequential growth for the rest of the year, should it be kind of similar what we saw last year or is there something you would call out last year or this year that
would make them kind of unique?
Aviation doesn't really have the seasonality that many of our other markets do, but we would generally expect that our business would follow the trends in the industry and also be driven by these upside opportunities with ADS B.
Okay.
And if I could just do one more follow-up on aviation. Just I think this was alluded to on one of the previous questions. How much of visibility do you have on the OEM side of things just with some of the positive data points we see out there. Is there a probability that things might actually accelerate the end of the, to the end of the year, or do things not materialize that quickly there? Thanks a lot.
Well, I think there's excuse me, there's definitely a long supply chain in aviation and so the rapid moves in terms of growth are probably a little bit more challenging. I think the remarks that some of our partners have already made on the state of the industry really reflect how we would view it as well.
Thanks so much.
Yes, thank you. Thank you. Our next question comes from Brad Erickson with KeyBanc. Your line is now open.
Thanks. So first, just curious on marine. I understand the weather seems to play a role there, but doesn't necessarily fit with some of the other public companies that have reported in the space. Results seem to have been better frankly. So wondering if fuel pricing is weighing on things?
Are there other factors that may be going on that are weighing on marine that we should be considering
Well, some of the boat builders have reported that their business was slightly down in the quarter. And I think weather is definitely a real thing you know, when people are thinking about bringing out their boats and there's a feet of snow outside, it's a little bit challenging. So, we believe that that the start of the season was impacted. And the other thing that I mentioned in my remarks is that last year, we are comping against a significant growth of 26%, which the season kind of started earlier last year. So there's a little bit of variance in terms of how the seasonality is gone, but we would expect that Q2 should be stronger.
Got it. That's helpful. Thanks. And then, Doug, can you just remind us what the original guidance contemplated in terms of the euro FX rate? And then may have missed that in the press release, but if you could provide us any what the FX tailwind was in Q1, that'd be great.
Yeah. The Q1, the tailwind was about $30,000,000. And basically for our guidance, we're assuming, roughly the current euro rates.
Got it. And then one last one, if I could. I guess just historically in not updating your guidance after Q1, I think you've always said in the press release and I may have missed this in the prepared remarks that it's because of seasonally lowest part of the year. You're simply not updating, whereas this time you're reiterating, should we discern any difference between those two messages?
Our next question comes from Ben Bollin with Cleveland Research. Your line is now open.
Good morning, everyone. Thanks for taking my questions. Could we start with within fitness? When you look at 4 Runner 645, how much sell and benefit do you think you saw in 1Q? Is it readily available at this point, or is there any more sell and benefit into 2Q and then a couple of brief follow ups.
I think 645, you know, was a great new product launch and we did see some benefit from the selling. Phenomena. We're, basically now waiting to see, you know, how things go with the sell through. So, I would say at this point, we're we're probably pretty much caught up terms of overall sell in. Okay.
On the advertising numbers, Doug, you mentioned down year over
year. On, I think some lower co op figures and lower media spend. Is there anything different how you think about advertising at this point through the course of the year. Does it get back to normal? Is this the new normal?
What's the right way to think about that line item?
Yes, Ben, I'll maybe comment on that. I would say that as our product mix and as the market has evolved, we're fine tuning our approach. So, we were able to take some benefit in Q1. We would expect that we would probably have similar to 2017 and Qs 2 through 4 in terms of our overall advertising.
Okay. And my last item, just looking at the aviation business, What's your characterization of, the aviation retrofit capacity today you know, how much do you have any thoughts on backlog or how utilized these guys are? What percent of the fleet do you think has migrated to ADS B? And how are the capacity expansion plans progressing with the aviation build up? And I'll feed the floor.
Thank you.
Yeah. So, I would say that the shop capacity is constrained. Right now, we're seeing increasing lead times that shops are reporting when customers are coming in looking for options to upgrade their airplanes. I think the availability of of technicians is definitely a factor and then just overall the number of shops and their general floor space capacity is is a challenge. That said, people are still getting in.
People are are making appointments and and they're starting to realize that it's, definitely time to upgrade. In terms of percentage of fleet, I would, you know, it's a little bit hard to specifically quantify it. We believe we're roughly 50% through the fleet, of people that will upgrade, and and there will be some, tail lagers that probably spill over past 2020 or into 2020 as they, perhaps don't get into the shop or maybe they don't think they need to upgrade until they try flying in the new environment. Thank
you. Our next question comes from Charlie Anderson with Dougherty And Company. Your line is now open.
Yes, thanks for taking my questions and my congrats on a strong start to the year as well. So APAC was, really strong year over year, maybe the strongest we've seen in a few years. I wonder if there were any specific calls there in terms of any geographic expansion door counts or are there any specific products that did well in APAC? And then I've got a follow-up.
Okay. Yes. So APAC definitely it's growing from a smaller base. So so their growth numbers are are higher. They're doing very well in, the wearable areas.
Several countries are are very strong in terms of wearables. And in that market, even many categories in the fitness area, including basic trackers are doing well.
Okay, great. And then, Navionics, I wonder if there was any more specificity you could give there on the Q1 impact both on revenue and OpEx? And then, Doug, are we still on track for the CapEx number you outlined earlier?
Yes. So regarding Navionics, As Cliff mentioned, majority of the marine growth was due to Navionics and also say we're on track with that and it was accretive in the first quarter. And relating to a CapEx, no adjustments to free cash flow or CapEx forecast at this time.
Okay. Thanks so much. Thank
you. Our next question comes from Ronald Epstein with Bank of America.
Hey, good morning guys. It's Christine Liwag for Ron. If recovery continues to gain momentum for light and medium sized jet, and we see more orders for Textron Jets. What's your ability to ramp up production? And then also how should we think about incremental operating margins excluding mix in that business?
Yes. So we think we are very flexible in ramping up our capacity. We're currently investing approximately $200,000,000 to more than double our production capacity for aviation. So we're ready to serve when OEMs need to increase their forecast.
And incremental operating margins?
Incrementally, I would say that, as as we grow with market growth, I would say we would get leverage as we bring on new, aircraft platforms, we would need resources to be able to certify and develop the the equipment for those aircraft. So we may have to continue to invest some portion of that back into the business.
Great. And how do you think about capital deployment today? And what are your priorities for uses of cash?
Yes. So just the cash, our priorities first of all, related to reliable dividend, you know, we're increasing, a proposal to increase our dividend this year. Second, of which is investments back in the business, similar to the expansion we have here at Leita Facilities, and then strategic acquisitions such as the Navionics and the lower Maxiciencies in the past.
Thank you. Our next question comes from Paul Coster with JPMorgan. Your line is now open.
Hi, thanks. This is Paul Chung on for Casper. Thanks for taking my questions. So just on overall units coming down year on year, but your your kind of blended ASPs up to around $2.40. Is this more a function of you know, aviation contribution or price increases across your portfolio.
Looks like outdoor and fitness gross margins were up and you did mention shift towards Advanced Wearables. Can you just comment on the dynamics there and what do you expect is peace to trend for the rest of the year and which particular segment you're seeing the most pricing power.
Well, I would say the best way to understand that is, is simply, segment and product mix across a very diverse and large set of product segments. So, on one hand, on the very low end, the basic activity trackers are down. And on the other hand, we have growth in many of our other segments. So it's it's, there's probably not a lot that you can read into the number other than segment and product mix.
Our next question comes from Will Power with Baird. Your line is now open.
Great. Thanks. Yeah. Maybe we can just start on a fitness. I know you've mentioned the new Edge products.
Just so I'm clear that those are, will hit selling in Q2. Is that correct? And then just on thinking about fitness gross margins, is this, given the continued shift towards Advanced Wearables, is this kind of high 50 range? Is that the sustainable range kind of moving forward?
Yes. So Edge products were, Q2. Those were announced and delivered, based simultaneously in terms of fitness gross margin, definitely we would see a trend upward as the lower margin activity trackers decline. But at the same time, we we do wanna, caution that that the overall segment is competitive, so we wanna be able to, promote our products and be able to maintain market share as well.
Okay. And then, Doug, on free cash flow, strong results, in the quarter. Any updated thoughts as to how to think about free cash flow for the full year?
Yes. Q1 came in strong. On free cash flow, primarily due to some working capital improvements, especially in the, accounts receivable standpoint. And right now, we're keeping our same guidance for the full year to 5 60 right now.
Thank you. Our next question comes from Ivan Feinseth with Tigris Financial. Your line is now open. Thank
you. Congratulations on another great quarter and thank you for taking my call. A little more detail on the Connect IQ, the recent conference and, like, year over year, how much was the attendance up also year over year? How many more apps are on there? And what is your vision to create an e commerce site?
I know all the apps are free, but, some of the app developers, for example, they will allow you to pay them if you like the app. Do you see a more formalized process and What is the process to bring in some more commercial developers of apps to the platform?
Yes. So in terms of the conference, we did see significant growth in the number of attendees this year. We had 127 attendees that came for the attendees that we had last year, more than half of them returned, to come to the conference again. And so We received a lot of positive remarks about the usefulness of the summit to them and the ability to answer their technical questions and to provide feedback to us on our product roadmap. So we felt really good about it and, something that that we believe helping us gain more momentum.
In terms of the features we rolled out, we we rolled out features around messaging, around music and also mapping, but we also worked with our developers to give them a way to monetize their apps. So that's something that they will be able to control on their end, and and there's not, as much infrastructure required on our end, but but we do have the hooks in place now for them to be able to
Thank you. As I show no further questions in queue, I'd like to turn the conference back over to Terry Seck for closing remarks.
Thank you, James. That concludes our earnings call for this quarter. Doug and I are available for callbacks. Thank you.
Thank you. Ladies and gentlemen, that does conclude today's call. Thank you very much for your participation. You may all disconnect.