Good day, ladies and gentlemen, and welcome to the Garmin Ltd. First Quarter 20 16 Earnings Conference Call. At this time, As a reminder, today's program may be recorded. I'd now like to hand the program over to Terry Sec. Please go ahead.
Good morning. We would like to welcome you to Garmin Limited's first quarter 2016 earnings call. Please note that the earnings press release and related slides are available at Garmin 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. This earnings call includes projections and other forward looking statements regarding Garmin Limited and its business. Any statements regarding our future financial positions, 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 in actual results 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 Timber, 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.
Thanks, Terry, and good morning, everyone. As announced earlier today, Garmin reported 1st quarter consolidated revenue of 6 24,000,000 up 7% year over year. Our fitness, outdoor, marine and aviation segments as a group grew 17% year over year and contributed 69 percent of total revenues. Each of these segments have an exciting growth story, which I will cover in a moment As a result of the strategic investments we have been making in recent years to grow and diversify our business. Gross margin was 54.5 percent, down year over year driven primarily by product mix.
Operating margin declined to 16.6 percent due to lower gross margin and an expense structure that was up slightly from the prior year. These factors combined with the higher year over year effective tax rate resulted in GAAP EPS and pro form a EPS in the quarter. Of $0.46 $0.49 respectively. The Beginning with the fitness segment, revenue grew 9% on a year over year basis, driven by strong growth of products with Garmin Elevate risk heart rate technology. Running and activity tracker categories experienced robust growth over the prior year somewhat offset by declines in the multi sport category.
Gross and operating margins were 51% and 12% respectively. Gross margin was impacted by product mix shifting towards lower margin activity trackers, while operating margin was further impacted by ongoing investments in advertising and research and development. As we've mentioned previously, we believe these investments are strategically for in order to maximize the long term opportunity we believe the performance will stabilize as we complete critical product and market transitions. Our product line continues to grow and I'm pleased to report that the Vivo active HR and the Vivo Fit 3 are now shipping. I'm particularly excited about the Vivo active HR which adds Garmin Elevate risk heart rate technology to our multi activity GPS enabled smart tracker.
The Vivo Fit 3 as move IQ automatic activity protection, while carrying forward the strengths that our Vivo Fit family is already known for, such as industry leading 1 year battery lights and an always on display. With these additions, we we have launched our spring Beat yesterday advertising campaign across multiple media outlets. I encourage everyone to look for our Beat yesterday creative material train stations, airports, movie theaters, and of course on television. Looking next at Outdoor, revenue increased 33% year over year as we experienced strong demand for outdoor wearables and dog products. Outdoor segment continued to generate strong growth and operating margins of 61% and 29%, respectively, and operating income grew 17% over the year ago quarter.
We recently launched several golf products, which have brought new excitement to the market, And additionally, we have completed the acquisition of Dolor and look forward to integrating their technology into a broad range of product categories. Looking next at Marine, revenue was up 29% over the prior year, driven by strong sales of Chartplotters and Fishfinders. Gross margin declined slightly in the quarter to 53% due to product mix, while operating margin improved to 12% as we successfully leverage recent investments in the segment. Operating income grew 125% over the prior year. In recent years, we've made significant investments in our marine segment.
As a result, our product line is extremely strong as we enter the 2016 marine season. Our recently launched GPSMAP 8400 and 8600 are the largest plotters we've offered and have strong differentiators that stand out in a highly competitive market. Another area of focus has been on improving our cartography offerings, We recently added depth contours to thousands of lakes in the U. S. And Canada, which will broaden our appeal in the inland fishing markets.
We also added an exciting feature to our chartplotters that we call quick draw contours which enables users create their own depth contours for small fishing lakes not covered by our HD Maps. Turning next to Aviation, revenue grew 8% over the prior year as we experienced growth in both OEM and aftermarket product line. Gross and operating margin remained strong at 74% 29%, respectively. Resulting in a 16% increase in operating income. During the quarter we expanded our reach into organizations that own and operate large fleets Aire ambulance provider, Aerieback, chose Garmin Avionics for their fleet of Bell 206 and Bell 407 helicopter and the United States Forest Service chose our G950 integrated cockpit system for their fleet of Sherpa aircraft that operated challenging role air traffic management system.
This mandated transition, which must be completed by theendof2019, requires the installation of an ADS V transponder in every aircraft operating in designated airspace. Carmen has been an early mover in the ADS V market, and we recently expanded our product offerings with the introduction of the GTX-three thirty five and 345 family of ADS B transponders. These transponders features an integrated dual link transceiver offering best available traffic awareness at a value price. We will continue to invest in ADS B solutions in order to make this transition simple, beneficial and cost effective for a broad range of aircraft and customers. We continue to support while industry dynamics remain a factor, market share gains and new platforms provide opportunities for future growth.
So looking finally at the auto segments, revenues were down 11% for the quarter, primarily due to ongoing PND market contractions and headwinds caused by additional revenue deferrals associated with auto OEM programs. Gross and operating margins were 44% and 9% respectively, During the quarter, it. Additionally, we experienced strong growth in infotainment systems for the APAC region and also the Middle East. Finally, we delivered production software for the new 2017 Mercedes E Class model. We remain focused on disciplined execution order to bring desired innovation the morning.
Next, Doug will walk you through additional details on our financial results. Doug?
Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our first quarter results then move to comments on the balance sheet and cash flow statement. We posted revenue of $624,000,000 for the first quarter, representing a 7% increase year over year. Gross margin was 54.5% a 4 30 basis point decrease from prior year, driven by product mix.
Operating expense grew 2% for $4,000,000, driven by increased spending in advertising and research and development. Operating income was $104,000,000. Operating margin was 16.6 percent, a decrease of 250 basis points from the prior year. This is a result of the decline in the gross margin rate Pro form a effective tax rate was 18.1 percent in the current quarter compared to 12.3% in the prior year. Due to projected income mix by jurisdiction.
We still anticipate a full year tax rate approximately 20.5%. The 1st quarter tax rate was positively impacted by the release of almost $4,000,000 of and pro form a EPS was $0.49. We'll discuss gross margin, operating expenses in more detail later. Next, as we look at 1st quarter revenue by segment. During the first quarter, we experienced growth in 4 or 5 segments led by robust double digit growth in Collectively, these four segments were up 17% compared to the prior year quarter.
Looking at the 1st quarter revenue charts on this page, the auto segment represented 31% our total 1st quarter 2016 revenue. Compared to 38% in the first quarter of 2015. Outdoor grew to 16% of revenue in the current period compared to 12% in the prior A can see from the charts illustrate our profitability mix by segment Outdoor, fitness, marine, and aviation collectively delivered 80% for operating income in the first quarter of 2016. Fitness operating income as a percentage of the total operating income decreased from 31% to 16%. While aviation increased from 24% to 29%.
Outdoor increased from 21% to 27% and marine increased from 4% to 10%. Drilling down year over year gross margin by segment. Aviation posted a gross margin rate increase of fitness, outdoor, auto and marine, posted gross margin declines due to shifts in product mix. Total corporate operating margin decreased from 19.1 percent in the first quarter of 2015 to 16.6% in the current quarter. Due to gross margin pressure and increased advertising and R and D investments.
The same factors contributed to the decrease and fitness operating margin. Looking next at operating expenses. As Presley mentioned, 1st quarter operating expense increased by $4,000,000 or 2%. However, percentage of sales, operating expense decreased from 39.7% in the first quarter of 2015 to 37.8 percent in the current quarter. Research and development increased $2,000,000 year over year, but declined 80 basis points to 17.3 percent of sales.
We continue to invest in innovation, the increasing resources focused primarily on aviation, fitness and outdoor. Our advertising expense increased $4,000,000 with the prior year quarter represented 5.2% of sales, a 40 basis point increase. Additional spending was focused on fitness for investments in media. SG and A was down $3,000,000 compared to prior quarter, decreasing 150 basis points percent of sales to 15.3%. The lower SG and A expense was driven primarily by a decrease in year over year litigation related costs.
Key highlights on the balance sheet and cash flow statement. We ended the quarter with cash, marketable securities over $2,300,000,000. Account receivable decreased both sequentially and year over year to $408,000,000. The inventory balance increased year over year sequentially to $518,000,000, so we grew product offerings prepared for seasonally strong second quarter. During the first quarter of 2016, we generated free cash flow of $115,000,000 compared to $64,000,000 in the first quarter of 2015.
Also during the quarter, we paid dividends of $97,000,000 repurchased about $20,000,000 of company stock with $140,000,000 remaining for purchase through December 2016. This concludes our formal remarks. Jonathan, could you please open the line for Q And A?
Our first question comes from the line of Ben Bollin from Cleveland Research. Your question please.
Thanks for taking the call in the question. Two questions. The first one, good revenue performance on the quarter. No change to guidance. And, I'm curious why no adjustment given the good revenue upside and kind of the expectations that you finished the year, what happens later in the year that would contribute to year on year revenue declines then I have a follow-up.
Okay. Good morning, Ben. In terms of guidance, it's still very early in the year, only 1 quarter behind us. And for a long time now, we've been facing the ongoing challenge of PND market contraction. So We want to try to make sure that we, adequately guide in terms of the uncertainties there as well as the other growth opportunities that offset it.
Okay. The other item, when you look at the Outdoor And Fitness business, you commented feel like the the fitness gross margin maybe starts to stabilize from here. Why is that the case? And kind of what are your thoughts on the ability to stem gross margin pressures in the outdoor business as well? Thanks.
Well, in terms of fitness, Our first quarter margin was lower based on product mix and it's seasonally lower quarter as well. So it's more sensitive to those things. Feel like we have a strong product lineup at this moment going forward into the year. So we think that it will stabilize in terms of outdoor, there's really not any change there in terms of the overall product structure or market structure. So we feel like the margin there is sustainable going forward.
Thank
you. Our next question comes from the line of Rich Valera from Needham And Company. Your question please.
Just maybe to ask in a different way with respect to the guidance, it would appear that your revenue guidance implies perhaps meaningfully less than seasonal uptick that you've historically seen in Q2. And I'm wondering is there anything we should be aware of that might cause you to have a less than typical seasonal uptick in 2Q, anything that was particularly strong in Q1, for instance, that might be a tough comp Any color there would be appreciated?
Well, I think year over year, we're going to be comping against some pretty strong products that we had last year. So that's one factor, but generally there's not anything material that changes the direction of the business
Got it. And then can you give any color on, I mean, I could think you had about a month of the norm in Outdoor. Can you give any sense of how much benefit you got from that in terms of either percentage points of growth or revenue?
The alarm was really immaterial for the quarter. It closed, really late in the quarter. So there was not much impact from alarm.
Can you give any sense of how much impact that might have in Q2?
No, we're not breaking that out, but think that we'll have a full quarter in Q2 and we'll be able to provide more color then.
Thank you. Our next question comes from the line of Simona Chankowski from Goldman Sachs. Your question please.
Hi, thank you very much. The first one is for Cliff. Also following up on the fitness segment. Can you talk about if you still see the growth rate for this year in the within of 10%. And then where do you see gross margins stabilizing for that segment?
Well, in terms of our outlook for the segment, we guided to 10% growth, which is still our outlook. There, I think there's various product categories that are up and down for the year. So that's in general where we see things. And could you repeat your second question, please?
Oh, sure. On where do you see gross margins stabilizing in the fitness segment?
Well, I think it's really in product product roadmap and the products that we have in the market. So, the newer products should help us stabilize our gross margin Our running line now is getting fully populated with risk based heart rate, which is helping as well. So we feel like those things will contribute to stabilization.
At the current levels, is that what you're implying?
Well, we think that the margin levels in fitness should be somewhere in the low to mid-50s. So that's about where we're targeting.
Okay. And then a couple of questions for Doug as well. First of all, what was the impact of FX in the quarter? And since the FX headwinds are now diminishing, if rates were to stay where they are, what would be the embedded FX impact for the full year?
Yes. So actually, there was a little impact of FX on a quarter over quarter basis. When you look at the euro of last quarter 2015 versus Q1 2016. And then also you had Taiwan dollar impacting that a little bit on a gross margin. So as it relates for the full year, we're basically, if we stay somewhere where we're at, we're probably anticipating little impact.
And then, thank you, Doug. And then a quick follow-up, in terms of the recent treasury rules on inversions, any impact for Garmin from a tax perspective?
No. We don't anticipate any impact relating to those regulations on our tax rate.
Thank you. Appreciate it.
Thank you. Our next question comes from the line of Paul Coster from JP Morgan. Your question, please.
Thank you, taking my questions. Couple, first up, the Marine segment was very strong relative to our expectations anyway. I'm just wondering from a year over year perspective, was there some thing that may that contributed to the strength in terms of product cycle or inventory levels or whatever?
I think year over year, Paul, as I mentioned, our product line is extremely strong this year. We had products early in Q1. Our comparable last year, Q1 of 2015 was quite a bit easier than what it will be in Q2. So all of those factors led to some early growth in Marine for this year.
Okay. So you noted that the gross margins were down in all segments except aviation and attributed it to product mix. Is there some broader message though? Is it just kind of flukeish that it happened in all segments this quarter or is it possible that seeing a change in competitive landscape or consumer taste or you're going after new markets and market segments that explain this shift?
No, we don't think so. In Marine, I mentioned there's a product mix factor there. So that's very understandable. I think outdoor fluctuates up and down. So really no change there.
Aviation is pretty steady. And automotive has been pretty steady as well.
Thank you. Our next question comes from the line of Tavis McCourt from Raymond James. Your question please.
Hey, thanks for taking my question. I've got a couple of them. First, in the auto segment, I guess if you could give us kind of the logic behind the, I don't know if it's a rebranding or new products between Nuvee and Drive, And does this signal kind of maybe a bigger emphasis on some of the safety and camera features associated with the with your new PNDs. And then in the prepared remarks and then in the press release, you mentioned the infotainment business, in APAC and emerging markets. Are these system sales or is this still, a turn by turn, driving software sales?
And then had a question on the fitness business. I think you indicated the activity tracker business for you was relatively strong in the quarter. Which is a bit surprising to me because I think you were kind of towards the end of a product cycle and launching a new one here in Q2. So did any of the Vivo fits 3 ship into the March quarter or is that all a June impact?
Okay. Thanks, Tavis. Kind of hitting from the top there. In terms of our rebranding of the P and D products, yes, indeed, we are rebranding intentionally. And we felt like Nuvee has served us well over the years, but also probably doesn't recognize some of the great new features that have been brought into the product line over the years and particularly you mentioned that the the safety features.
We have, we have lane departure warnings. We have camera features in the product with collision warnings. So we felt like it was time to, kind of recast the newbie line into something else. In terms of infotainment, those sales that we referred to were system sales that are done on a port install basis with automotive carmakers in APAC and also the Middle East. And then finally on fitness, bebofit 3 has really started shipping now.
So it's a Q2 impact, not a Q1 impact.
Got you. And then a follow-up, I assume if there was any impact from the earthquake in Taiwan, we probably would have seen it in March, but just want to make sure of that.
Yes. At this point, it's limited. This is one of the reasons why we keep healthy levels of safety stock. And at this point, we're working through that, but at this moment, we don't have any material impact.
Thank you. Our next question comes from the line of Charlie Anderson from Dougherty and Company. Your question please.
Yes, thanks for taking my questions and congrats on the results. I wanted to ask about Garmin Elevate. I think I heard you cliff say that that was helpful to margins. If I think about that on a year over year basis with products that sold with a chest strap, how does that compare? And as you go through bringing to more products, how is that going to influence gross margins and both maybe outdoor and fitness?
Yes. So maybe to clarify on that, we went through kind of a 2 step process in getting to risk heart rate. The first step was with a third party solution with our 4 runner 225 and then we transition to a garment solution after that on our 4 Runner 235 and Phoenix 3 HR. In terms of margin structure, certainly the risk based heart rate products are lower margin structure than our chest base. But at the same time, our Elevate technology is much higher margin structure than when we were using a third party.
So So it is improving from where we were in that interim step, but not necessarily compared to the risk of the chest based solutions of the past.
And then just a quick follow-up. I wonder if you guys saw any sell through data from anyone on marine and an outdoor and how that matched up with the sell through rates you reported in Q1?
Yes, I think those markets are fairly niche and retailers don't carry a lot of inventory. So the sell through has been fairly robust. There's been a lot of spring promotions around some of the marine products and it's been doing very well in channels like Bass Pro and Cabela's.
Thanks so much.
All right. Thank you, Charlie.
Thank you. Our next question comes from the line of Will Power from Robert Baird. Your question please.
Great. Thanks. Yes, just curious on back on the fitness side. As you look at the year over year growth and key drivers, qualitative qualitatively, any color around U. S.
Growth versus what you're seeing internationally and perhaps product mix across geographies there?
Yes, I think we're actually seeing very good results in the European region in terms of the market development there. Europe is probably behind that of the U. S. So there's a growing market there and players are establishing themselves including Garmin We've also seen strong uptake of wearables in APAC, including both fitness based wearables as well as outdoor based wearables.
Okay. And does the U. S. Still grow year over year within fitness? Any color there?
Yes, definitely the U. S. Is still growing. No question about that, but it's a more mature market than those other regions.
Okay. And then just on
the outdoor segment, you referenced both Phoenix and golf, I guess, improving. I guess just how would you characterize, I guess, the key pieces or key drivers of the growth there? I mean, is it evenly balanced or is there something there that's driving an outsized benefit?
Well, I think 2 things in Outdoor that really drove the growth was Phoenix line. And also dog products. Those are the 2 major drivers. There were some incremental contribution by golf, but the other 2 were really the major contributors. Phoenix has been strong in recent quarters and over 2015, we're going to now start to comp against those strong results in Q2, Q3 and Q4 with Phoenix.
So, we're going to have to navigate that in terms of comparables, but been very strong, especially since we've added risk based heart rate to it.
Thank you. Our next question comes from the line of James Faucette from Morgan Stanley. Your question please.
Hi, this is UGI Anderson on for James. Think most of my questions were answered, but I was hoping on aviation, perhaps if you get a little bit more color on the different geographies, I mean, what are you seeing in terms of OEM versus retrofit as you go region to region. And I guess it would be helpful to just get your perspective on the strength of order activity generally versus everything that we're hearing in the macro environment?
Yes, I think we still see challenges in aviation, like we noted in the remarks, some of the underlying factors that have slowed the market recently are still there. But for us, new platforms have been a big driver of the success and we're seeing some incremental increase in revenues in the retro side too, especially in, ADSP products.
Does that answer your question?
Yes, thanks so much.
Thank you. Our next question comes from the line of Brad Erickson from Credit Securities. Your question please.
Great. Thanks for taking my questions. First, just on the fitness segment, when you split between the activity trackers versus the running watches, where are you looking for stronger growth this year between those two product sets within fitness?
I think we're looking for strong growth really in both of those categories and that's what we experienced in Q1.
So fair to say roughly equal from a growth rate perspective?
That's been what we've been experiencing. Yes.
That's helpful. And then ultimately, how do you think about the size of these new, the emerging geographies you talked about for fitness where you're seeing sort of higher growth, how do you think about the ultimate size of those markets relative to what you've found in terms of a TAM here in the U. S. For fitness?
I think theoretically the size of those markets is really driven by, population and especially population that's interested in in health and fitness. I would say generally Europe should match that profile pretty well. I think in APAC, of course, there's a lot of population, but maybe not yet the kind of lifestyle or health focus that what you have in the U. S. And Europe market.
So Nevertheless, I think there's still good uptick of fitness products in APAC. I think they're very interested in running products as well as fitness and multi sport products.
Thank And this does conclude the question and answer session of today's program. I'd like to hand the program back to Terry Sac for any further remarks.
Thanks, everyone. Doug and I will be available for any follow-up calls later today. Thanks. Have a good day. Bye.
Thank you. Ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.