Good day, ladies and gentlemen, and welcome to the Garmin Ltd. fourth quarter 2016 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Teri Seck. Please go ahead.
Good morning. We would like to welcome you to Garmin Ltd.'s fourth quarter 2016 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 transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products, 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 Ltd. this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble.
Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin finished 2016 on a strong note. Revenue for the quarter increased 10% over the prior year to $861 million. Outdoor, fitness, marine, and aviation collectively increased 25% year-over-year and contributed 74% of total revenues. Gross margin improved year-over-year to 54.7%. Operating margin was essentially flat at 18.6%, while operating income increased 10%. These strong results generated GAAP EPS of $0.72 and pro forma EPS of $0.73 in the quarter. Looking briefly at our full-year performance, 2016 was a remarkable year as we delivered four consecutive quarters of revenue and profit growth. Revenue increased 7% over 2015 and exceeded $3 billion for the first time since 2008.
Outdoor, Fitness, Marine, and Aviation increased 21% on a combined basis, contributing over $2.1 billion in revenue for the year, or 71% of the total, and generated 84% of our operating income. Gross and operating margins improved to 55.6% and 20.7%, respectively, while operating income grew 14%. This resulted in GAAP EPS of $2.70 and pro forma EPS of $2.83, both representing strong increases over the prior year. Unit deliveries increased 4% to 16.8 million, which is the second highest in our history and brought our total units shipped to over 173 million since Garmin's inception. Doug will discuss our financial results in greater detail in a few minutes, but first I'd like to highlight the 2016 performance and 2017 outlook for each of our five segments. Starting with Outdoor, revenue increased 33% on strong demand for Outdoor wearables, contributions from DeLorme, and growth in all other product categories.
The segment generated strong gross and operating margins of 62% and 34%, respectively, while operating income grew 32% over the prior year. Looking back at 2016, our fēnix line of adventure watches continue to show strong momentum, while high-end Chronos variations are opening new retail channels at watch stores and specialty retailers. Our Connect IQ application platform has become an important differentiator for our smart wearables. Connect IQ now features over 2,500 apps, widgets, and watch faces and has generated more than 24 million downloads since inception. To further promote the power and utility of Connect IQ, we will host our first-ever developer conference in mid-April, offering workshops and tools that developers can use to leverage the Garmin wearable ecosystem. Looking ahead, we anticipate revenue growth of approximately 10% in 2017. We anticipate that wearables will continue to be strong, led by the new fēnix 5 series.
fēnix 5 comes in three different sizes and features our new QuickFit band replacement system, allowing users to quickly change the style of their watch. We are also expanding our handheld device portfolio with inReach satellite communication technology, and we will introduce inReach devices into new geographic markets. Looking next at Fitness, we reported robust revenue growth of 24%, driven by strong demand for wearables with Garmin Elevate wrist heart rate technology. In addition, vívofit jr. was well received by retailers and customers during the holiday shopping season. Gross and operating margins were 53% and 20%, respectively. Gross margin was impacted by product mix, while operating margin was relatively flat to the prior year, resulting in operating income growth of 19%. Much has been said recently about the momentum change in certain wearable categories, specifically basic activity trackers.
Demand for products with more advanced features, particularly those with GPS capability, was very strong in the holiday quarter. One possible explanation is that customers want more than just a basic activity tracker. We believe we are well-positioned to capitalize on this trend with the broadest portfolio of activity trackers, many of which include GPS capability. In 2017, we are targeting revenue growth of approximately 5% in the Fitness segment, with strength in cycling and advanced wearables offsetting anticipated softness in basic activity trackers. Looking next at the Marine segment, revenue grew 16%, ahead of the overall market, pointing towards market share gains driven primarily by strong demand for fish finders and chart plotters. Gross margin was steady at 55%, while operating margin improved to 16%, resulting in operating income growth of 82% over the prior year.
Marine season is off to a great start, and we are ready to serve with a strong portfolio of products for every boating pursuit. For 2017, we are targeting revenue growth of approximately 10% for the marine segment. Turning next to aviation. We reported solid revenue growth of 10%, driven by ADS-B and retrofit upgrades, as well as growth in our OEM categories. Gross and operating margin remained strong at 75% and 28%, respectively, resulting in operating income growth of 12% for the year. In recent developments, Textron AirLand announced that the Scorpion light attack aircraft will be equipped with Garmin avionics, expanding the addressable market for our commercial off-the-shelf equipment into military and government applications. We are excited about our expanding partnership with Textron, and we look forward to serving on the Scorpion aircraft.
I also want to mention that for the 13th consecutive year, Garmin was ranked number 1 in avionics support by Professional Pilot Magazine and by Aviation International News. I want to congratulate our team on earning this award once again, which is a testament to the quality of Garmin equipment and the amazing way our associates care for our customers. In 2017, we are targeting revenue growth of approximately 5% in the aviation segment. While industry dynamics remain a factor, market share gains, new platforms, and the ADS-B mandate provide opportunities for growth. Looking finally at the auto segment, revenues were down 17% for the full year, as expected, due to the ongoing decline of the PND market. However, our global market share remains very strong. Gross and operating margins were 44% and 12%, respectively.
While the downward trend of the consumer PND market is well understood, we do see incremental growth opportunities in certain product categories, including trucking, RV, cameras, and in our OEM business. We are focused on maximizing profits in this segment while leveraging these opportunities. Earlier today, we announced that BMW selected Garmin as a tier 1 supplier of infotainment computing modules for future BMW models produced in China. This is a pivotal win for us and validates the investments we have been making in the OEM category. Looking at 2017, we expect revenue to decline approximately 17%, driven by the ongoing decline of the PND market. We remain focused on disciplined execution in order to bring pragmatic innovation to the market and to maximize profitability in the segment. In summary, we see many opportunities ahead in each market we serve, and we are well-positioned with a strong product lineup.
With this in mind, we are projecting revenue of approximately $3.02 billion, flat year-over-year as growth in fitness, outdoor, aviation, and marine is offset by anticipated declines in the auto segment. We are projecting steady gross margin of approximately 56% and operating margin of approximately 20%. We expect a pro forma effective tax rate of approximately 22% for the year, resulting in pro forma earnings per share of approximately $2.65. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?
Thanks, Cliff. Good morning, everyone. I begin by reviewing our fourth quarter and full year financial results, then move to comments on the balance sheet, cash flow statement and taxes. We posted revenue of $861 million for the fourth quarter, representing a 10% increase year over year. Gross margin was 54.7%, a 180-basis-point increase from the prior year, driven by the shift towards segments with higher margin. Operating expense as a percentage of sales was 36.1%, a 200-basis-point increase from the prior year. Operating income was $160 million, 10% increase for the prior year. Operating margin was 18.6%. Our GAAP EPS was $0.72. Our pro forma EPS was $0.73. Looking at full year results, we posted revenue over $3 billion for the year, representing a 7% increase year over year. Gross margin was 55.6%, a 100-basis-point increase from the prior year.
Operating expense as a percentage of sales was 35%, consistent with prior year. Operating income was $624 million, 14% increase over the prior year. Operating margin was 20.7%, increase of 100 basis points from the prior year, driven by gross margin increase. Our GAAP EPS was $2.70, 13% increase over the prior year. Pro forma EPS was $2.83, 14% increase over the prior year. Discuss gross margin, operating expenses in more detail later. Next, we look at fourth quarter and full-year revenue by segment. In the fourth quarter, we achieved double-digit growth in four of our five segments, led by the Outdoor segment at 46%. Collectively, these four segments were up 25% compared to the prior year quarter. For the full year 2016, we achieved 7% consolidated growth, led by robust growth in our Outdoor and Fitness segments, and solid double-digit growth in our Marine and Aviation segments.
Looking next at the fourth quarter revenue charts. During the quarter, Fitness proved to be our largest segment, as it grew to 32% of revenue in the current period compared to 29% in the prior year. Outdoor grew from 16% to 20%. The auto segment represented 26% of our total fourth quarter 2016 revenue, compared to 35% for fourth quarter 2015. As you can see from the charts illustrate, profit mix by segment. Outdoor, Fitness, Marine, and Aviation collectively delivered 88% of operating income in fourth quarter 2016, compared to 74% fourth quarter 2015. Outdoor operating income as a percentage of total operating income increased from 27% to 36%. Total corporate operating margin was relatively flat year over year, as gross margin improvement was offset by increased operating expenses. Looking next at the full year charts.
For the full year, the non-auto segments made up 71% of total revenue, compared to 62% in 2015. A similar shift occurred in operating income, with 84% of 2016 operating income collectively coming from the Outdoor, Fitness, Marine, and Aviation segments, compared to 75% in 2015. Looking next at operating expenses. Fourth quarter operating expense increased by $44 million or 16%. Research and development increased $23 million year over year, 140 basis points to 15% of sales. We continue to invest in innovation, increasing resources focused primarily on Aviation, Fitness, Outdoor, and Marine, where we see long-term growth opportunities. Fourth quarter of 2016 was also impacted by the additional Wahoo expense and the addition of the DeLorme business. Our advertising expense increased $11 million from the prior year quarter, representing 7.9% of sales, a 60-basis-point increase. Additional spending was focused on the Outdoor Fitness segments to support growth in wearables.
SG&A was up $9 million compared to the prior quarter, decreased 10 basis points as a percent of sales to 13.3%. Increased spending in SG&A was driven primarily by the additional Wahoo expense, and the addition of the DeLorme business, partially offset by a year-over-year decrease in litigation-related costs. A few highlights from the balance sheet and cash flow statement. We ended the quarter with cash, marketable securities of approximately $2.3 billion. Accounts receivable increased sequentially due to the holiday quarter and decreased year-over-year to $527 million. Our inventory balance decreased year-over-year to $485 million as we exited the seasonally strong fourth quarter. During the fourth quarter of 2016, we generated free cash flow of $165 million, a $34 million increase over the prior year quarter.
Also during the quarter, as a result of the additional Wahoo, we paid two quarterly dividends of approximately $96 million, for a total of $192 million. We purchased $28 million of company stock. We extended the expiration date of our share purchase program to December 2017 and have approximately $75 million remaining for purchase. We expect to repurchase as business and market conditions warrant. Assuming our dividend payments were normalized with four dividends totaling $385 million, we returned $478 million cash to our shareholders through dividend payments and through share purchases in 2016. The effective tax rate was 19% in the current quarter, compared to 13.2% in the prior quarter. The increase is primarily due to the full-year impact of the U.S. R&D tax credit being recorded in the fourth quarter of 2015, compared to being spread over all four quarters in 2016.
Our full-year 2016 effective tax rate was 18.9%, a 70-basis-point decrease from the prior year, primarily due to income mix by tax jurisdiction. We expect our full-year 2017 pro forma tax rate to be approximately 22%. Switzerland is in the process of aligning the corporate tax rules with evolving international tax initiatives. We've elected at this time to align certain Switzerland tax positions with these initiatives, resulting in a year-over-year increase in pro forma tax rate. The utilization of our deferred tax asset will reduce our cash tax liability, we do not expect to pay any additional cash taxes in Switzerland in 2017. We announced that we plan to seek shareholder approval for a dividend of $2.04 per share, paid in four installments of $0.51 per share per quarter, beginning with the June 2017 calendar quarter. This concludes our formal remarks.
Jonathan, would you please open the line for Q&A?
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Joe Whitney from Longbow Research. Your question, please.
Hi, thanks. First off, I want to be clear on fitness, specifically trackers, because the guidance is a lot better than many had feared and would kind of suggest you intend to take share, at least relative to the main competitor in 2017. The key driver from your perspective is that you're seeing consumers adopt GPS-enabled more strongly. Is that right?
Yeah, we saw, Joe, particularly strength in more advanced trackers, as I said in my remarks, particularly those with GPS.
Cliff, how would you expect the GPS-equipped product set to evolve? I don't know if you have data to show it or not, but are you seeing your dedicated running customers move from traditional Forerunner to products like vívoactive HR, and/or the Forerunner 35?
I think probably we see more of the other direction, where people who got started in a more basic activity tracker or something in our vívo line might wish to move up into more advanced running devices as they explore the sport. I think vívo, its quality is daily wear, so it certainly wouldn't preclude people from moving in the other direction. We think mostly it's an upward movement.
Okay, great. On fēnix, in what quarter will fēnix 5, which obviously looks great, by the way, in what quarter will the channel fill occur? Will it happen mostly in March or into the second quarter?
Yeah. Thank you on that. Definitely we'll start in late in Q1, so it'll be mostly a full impact in Q2.
Okay, I'll stop with that. Congrats.
Thank you.
Thank you. Our next question comes from the line of Paul Coster from J.P. Morgan. Your question, please.
Yes. Thanks for taking the question. First one is the revenue outlook for 2017 looks pretty conservative to me. I'm just wondering, Cliff, whether you'd be kind enough to share the assumptions, sort of the big macro assumptions that have gone into that guidance. I've got a couple of small follow-ups.
Well, I think some would say it's conservative, others might say it's not. As you know, there's a lot of dynamics going on in the market right now. I think everybody's focused on fitness and what the dynamic will be there. I think it is an area where there is uncertainty because of everything that's going on, but we believe that we still have ability to grow. Outdoor, we see ongoing opportunities for fēnix, as we mentioned in our remarks, as well as expansion of the DeLorme opportunity. Marine is off to a great start, and we do think our product line is strong. We should be able to have a strong year in marine. Finally, aviation is an industry that has had ongoing challenges with the economic situation.
That's not really changing in our view. We do see these opportunities that we've been pursuing, adding to incremental growth. Finally, in auto, there's not much more to say there except that the PND market decline continues, as you're well aware. We are excited because we are to a point now in the business where the growth in the other segments are offsetting the declines in PND.
Your nearest competitor in fitness is very visible with headlines regarding corporate relationships. You're, I think, less so. How important is that market to the growth of that category for Garmin?
Well, we're investing in that category as well. We have had our own sets of successes, which have been published out there, some of them, and some of them have not. We don't break it out by categories in that area, but we are investing there. We have dedicated teams, both on the sales and engineering side, that are working on product customizations and engagements with customers that allow us to win deals there.
Okay, last question is on the PND side. You obviously are still investing because otherwise you wouldn't win such key accounts as BMW in China. Why bother investing? Isn't it time to just harvest the cash from that segment and let it kind of fade away or even cut it at some point?
There's still opportunities in PND, one thing I'd like to clarify is that the BMW opportunity is not PND. That's auto OEM, that's a different category of products within our overall auto segment. PND, we do still see opportunities there. As I mentioned, some of the specialty opportunities in RV and truck are things that we're investing in, as well as camera technology. We're taking a pragmatic approach, as I mentioned in my remarks. We believe there's still customers that are interested in those products, and with the right amounts of innovation, we can keep the category healthy.
Okay. Congratulations on the good print.
Thank you, Paul.
Thank you. Our next question comes from the line of Charlie Anderson from Dougherty & Company. Your question, please.
Thanks for taking my questions, my congrats on the strong results and the BMW win.
Thank you.
I wanted to start on BMW. I wonder if you could talk to us about timing of when we may see the first revenue there, then also scope. I think there's a lot of ways you guys approach that market, be it hardware, software. Anything you can give us in terms of additional color then maybe even roughly ASP per vehicle? Is it measured in the tens of dollars, hundreds of dollars? Any additional color there would be helpful. Thanks.
BMW, we anticipate the program will be starting in the 2020 model year, which means late 2019, for production and revenue. Start of the revenue ramp. It is for vehicles in the China market, this is local production for local vehicles. It is a hardware-based tier 1 opportunity, we invested in our factory capability in order to be qualified as a tier 1 supplier to BMW. As such, because it's a hardware opportunity, the ASPs are definitely much higher than what typical software opportunities are, although I can't share the details of what those are.
Okay, great. I just have a couple of follow-ups for Doug. Number one on the FX. I think your original guidance for the year was EUR 1.10. I wonder where you finished, what you're implying in the guide for 2017. I don't know if I missed this, but CapEx for 2017, if you could share that.
What we're anticipating for our FX assumptions for 2017 are basically the current rates that are out there, EUR 1.05. As it relates to CapEx, we anticipate the CapEx to increase in 2017, primarily due to the Olathe expansion, probably between total CapEx of between $130 million and $140 million.
Perfect. Thanks so much.
Thank you.
Thank you. Our next question comes from the line of Ben Bollin from Cleveland Research. Your question, please.
Hi. Good morning. Thanks for taking my question. Doug, could you tell us a little bit more about what's happening with the Swiss tax position? What exactly are you doing? Is this one time in 2017, and the rate declines going forward, or is 22% kind of the new baseline? Then I have a follow-up for Cliff.
Sure. As I mentioned, Switzerland is in the process of aligning their corporate tax rules with evolving international tax initiatives. You may have heard corporate tax reform in Switzerland was proposed and voted on recently, but it didn't pass. They're working on a new proposal, but the timeline for that's not known at this time. As a result of all that, we elected this time to align our certain Switzerland tax positions with international tax initiatives, and also mention that we don't expect to pay any additional cash tax in Switzerland 2017 since we have deferred tax that's reduced our cash tax liability.
As it relates to beyond, we anticipate this 22%, or we anticipate this 300 or so basis point increase to be in there in the future and depending upon what other kind of initiatives come up from Switzerland and such, but we think that will probably continue at that type of rate from a book standpoint.
Okay. Cliff, you talked about the roll-up of your thoughts in fitness and a little bit in outdoor with fēnix and the handheld on DeLorme. Do you have any thoughts on what you expect to see on golf and in dog training in 2017? It looks like those grew organically in 2016. Are you expecting more of the same there? Thank you.
Yeah. Ben, definitely all of the categories in outdoor showed growth in 2016. Golf and dogs are both very niche-y categories in comparison to some of the other categories, and there's been a lot said in the last year or two about the situation in the golf market and the declining interest and even some notable bankruptcies in golf-specific retailers. We're generally believing that those will be flat in the coming year. Again, they're niche categories, and they have cycles, so they'll generally be trending in line with what they have been.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Jerry Liu from Morgan Stanley. Your question, please.
Hi. Thank you. First on outdoor and fitness, could you give us a little bit more color on this past holiday season? Some of the competitors had weaker than expected performance. Were you able to take share, gain shelf space, or were you able to use some promotional activities to help generate demand? Thank you.
Well, I think, Jerry, many of our products that we offer in outdoor and fitness are beyond some of the notable news that's been circulating in terms of the overall activity tracker market. Our product lines were strong, particularly those with GPS. fēnix was a good performer. We see people wanting to step up to a more advanced smartwatch kind of a product, which fēnix definitely falls in that category.
Okay. When we look at 2017, I think you're looking at a second straight year where outdoor's going to grow faster than fitness and outdoor, again, two years of strong growth compared to at least the prior three years when you were roughly flat. It seems like there's more than product cycles. There's some pretty strong secular trends for you. Other than some of your maybe existing customers moving up from the vívo lines, are you seeing even more retailers stock your outdoor products for the first time? Are you seeing sort of a higher level of new users coming to Garmin, coming to especially the fēnix products?
Yeah. I think we've talked about the secular trends, particularly in fitness, and we do anticipate that basic activity trackers are going to see a maturing cycle starting now and going forward into the future. With that said, on the outdoor side, we do see positive response to our fēnix 5 announcement, and we anticipate starting deliveries of those soon. We also do see increasing interest from retailers in the outdoor wearables. For example, we're gaining additional shelf space in some of the key retailers, particularly in the U.S., and expanding our shelf space in the U.S. market. It is attracting a different kind of customer. There's certainly a strong running bias in people that buy a fēnix product, but we're also seeing people that are just generally aspirational and love any kind of outdoor activity move up to the watch.
Understood. Lastly, when we look at channel inventories, both how it trended in the fourth quarter and what you're expecting for the first quarter?
We believe our channel inventories are reasonable exiting the year and into Q1, many retailers, particularly in the U.S., try to manage their inventories very carefully as they close out their year. We believe our inventory situation is okay.
All right. Thank you.
Thank you.
Thank you. Our next question comes from the line of Tavis McCourt from Raymond James. Your question, please.
Hey, Cliff and Doug. Couple of quick follow-ups on the BMW announcement. Is there any upfront cost, either expensed or capitalized, heading into that 2019 launch? Should we think of this as kind of a scalable solution that BMW could use for a range of cars or kind of specifically for high-end? Secondly, on the wearables business, I wonder if you could give me a sense of, I guess, the mix of the wearables business, or if you just want to talk about it in terms of fitness terms of products that do not have GPS at this point. How small a portion is that of the mix? If there's any chance we can get an update on number of Garmin Connect users, active or otherwise, however you guys define them internally, that would be helpful. Thanks.
Yeah. Starting first on BMW, for this program, there's not any significant upfront investment for this particular program. We had already made investments in our factories in order to be able to accommodate this kind of win, and those are already costs that we've incurred. For the solution, it's the media graphics unit, which actually is a common architecture piece across the entire BMW line, not only in China, but around the world. Consequently, this is production of that architecture for the China market, but it's scalable elsewhere. In terms of fitness, in terms of the mix there, as I mentioned, we are seeing stronger interest in more advanced products in the wearable side, and that includes what we would call our wellness line, like vívo, as well as obviously Forerunner, which are all GPS products.
We don't split those out by category, but I would say that the GPS was the stronger performer and basic activity trackers were weaker.
Any chance we can get an update on number of Garmin Connect users?
We don't have numbers to share right now, but we can certainly prepare those and share them in the future.
Great. Thanks.
Thank you.
Thank you. Our next question comes from the line of Simona Jankowski from Goldman Sachs. Your question, please.
Hi. Thank you. Another follow-up on the fitness segment. I think you mentioned in the prepared remarks that gross margins were impacted by product mix. I would've thought that the weaker basic activity trackers would actually have helped margins. Just wanted to clarify that point. Curious to hear what, if any, impact you saw from the new Apple Watch that included GPS.
Yeah. Definitely product mix is still a factor. Even though basic activity trackers were weaker, basic activity trackers have a very low cost basis, their margin profile doesn't necessarily improve the overall fitness market if they're weaker. That said also, the vívo line in general, including those with GPS, they're feature-rich products, and they have to sell at a competitive price, consequently, their margin profile is generally lower. In terms of Apple and the specific impact on our market by the Series 2, I would say that certainly, their initial results would appear like they're doing very well with Series 2, but we don't see the impact on our customers in our segment from that device.
I think that it's a very competent device, and it does a lot of things, but as we've said before in the past, we believe that it's attracting a slightly different customer base than what we speak to.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Will Power from Baird. Your question, please.
Yeah, great. Thank you. Just a couple of questions. I guess within the marine segment, looking at the growth outlook for 2017, how much of that is macro? Maybe your thoughts on what you're seeing from the broader environment there, versus share, and specifically maybe any other color on what's helping drive the share gains. Then, Doug, just any color on how to think about free cash flow for 2017. You gave us the CapEx number, but as we kind of fold that in, any other framing to that for 2017 would be helpful.
Okay. Will, starting with marine. Definitely there's a component of our outlook that reflects the improving macroeconomic conditions surrounding marine. Marine has been kind of on a slow growth trajectory since the downturn, and we continue to see that. Certainly some of that is due to organic market growth. Certainly the other part is the momentum we see in our business, and particularly, we believe we're taking share from the major competitors, and we believe the reason for that is our strong product lineup, and superior features and technologies that we have in our products.
Great. Regarding free cash flow currently for 2017, based on the current guidance we have, we anticipate free cash flow of about $500 million. As you mentioned, that includes the increased CapEx. As well as you saw in 2016, we had quite a bit improvements in working capital. Probably won't see as much of those working capital improvements in inventory, as well as the assumed year-over-year change in the operating income also.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Brad Erickson from Pacific Crest Securities. Your question, please.
Hi, guys. This is Elliott Aronson on the line for Brad. Thanks for taking the questions. Two things. Just wondering if you can provide a little bit more color on the types of content you would be providing for BMW or potential content. Then was also wondering if you could run us through the OEM margin profile and profitability looking to 2017 and beyond. Thanks.
Yeah. As I mentioned on BMW, what we'll be supplying is a hardware component that drives the overall media system in the vehicle. It is a higher dollar value type of product, which will definitely benefit on the revenue side. I think in terms of margin profile at OEM, we don't break it down by category, but we've generally said that the margin profile from the OEM business is generally lower than that of the overall auto business, so there would be some downward pressure as those revenues ramp up.
That's helpful. Thank you.
All right. Thanks, Elliott.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Teri Seck for any further remarks.
Thanks, everyone. Doug and I will be available for a call back. Have a great day.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.