Good day, ladies and gentlemen, and welcome to the Garmin Ltd. 4th Quarter 2015 Earnings conference call. I would now like to introduce your first speaker for today, Terry Sec, Manager of Investor Relations. You have the floor, ma'am.
Good morning. We would like to welcome you to Garmin Limited's 4th Quarter 2015 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. 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, market shares, product introductions, future demand for our and objectives are forward looking statements. The forward looking events and circumstances discussed in this earnings call may not occur in actual results could differ materially as a result of risk factors affecting government. Information concerning these risk factors contained in our Form it this morning are Cliff Kimbble, President and Chief Executive Officer and Doug Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn
reported 4th quarter revenue of $781,000,000, representing a 3% decline year over year While our revenue trends are impacted by that the aviation, fitness, marine and outdoor segments as a group grew 11% year over year and contributed 66% of total revenues. This growth and diversification of few years. Gross margin was 52.9 percent ahead of our expectations, but down slightly year over year driven primarily by to invest in engineering and advertising. These factors offset by a lower than dollars in Looking briefly at our full year performance, these shifts that created significant revenue and margin headwinds. Despite these headwinds, the aviation business, marine and outdoor segments grew 9% on a combined basis, contributing nearly $1,800,000,000 in revenue for the year or 63% of the total and generating 75% of our operating income.
Gross and operating margins of 54 point 6% 19.5%, respectively, were down compared to 2014, but exceeded our expectations in a difficult global economy. Unit deliveries increased 7% for the year to 16,200,000 Doug will discuss financial results in greater detail in a few minutes. But first, I'll provide a few comments on each business segment. Beginning with the fitness segment, revenue for the year grew 16% driven by growth in activity trackers. Gross and operating margins were 55% 20%, respectively.
Gross margin was impacted by the competitive dynamics engineering. We believe these investments are strategically important in order to maximize the long term opportunity in the fitness market. In 2015, we introduced Garmin Elevate wrist heart rate technology into our running and activity tracker product lines, and we made significant enhanced to Garmin Connect Mobile. These developments have strengthened our position in the market and positively impacted our results for the year. In 2016, we are targeting revenue growth of approximately 10% in the Fizzent Fitness segment, New product introductions play a key role find 1% year over year as economic and geopolitical issues impacted sales of our core product categories.
This weakness was partially offset continued to generate strong gross and operating margins of 61% 33%, respectively, This represents a slight decline compared to 2014 due to product mix and additional investments in engineering and advertising to support new product launches. In 2016 we expect revenue growth of approximately 10%, which includes anticipated contributions from Pulse Light and the pending acquisition of Alorum. We anticipate that the wearable category will continue to be strong in 2016, driven by the new Phoenix 3 HR with wrist heart rate. In addition, we expect to benefit from new product introductions across other categories. Turning next to Aviation, we reported year over year revenue growth of 3% which exceeded our expectations in the midst of an industry decline of 5% as reported by the General Aviation Manufacturers Association Growth in operating margin remained strong at 74% 28%, respectively.
In the fourth quarter, the G3000 equipped HondaJet became the latest aircraft to receive FAA certification. Bringing the total to 64 aircraft platforms certified with the Garmin integrated cockpit. In 2016, we are targeting revenue growth of approximately 5 percent in the Aviation segment. While industry dynamics remain a factor market share gains and new platforms buy opportunities for growth. Looking next at the Marine segment, we reported year over year revenue growth of 15%.
Driven by strong sales was down slightly to 10% due to litigation related costs. However, operating income grew 9% for the year due to stronger revenue and gross margin. For 2016, we are targeting revenue growth of approximately 10% in the Marine segment, driven by new product introductions. We believe our product lineup is very strong as we enter the marine season and we look forward to another year of growth in 2016. Looking finally at the for the and 13% respectively, and our global market share remains very strong.
During the year, our presence at Honda expanded and now includes their pilot, Accord, civic and CRV models. Additionally, our presence at Mercedes recently expanded and now includes their and E class models. Looking at 2016, we expect revenue to decline approximately 15% driven primarily by ongoing declines in the PND market. We remain focused on disciplined execution in order to bring desired innovation to the market and to maximize profitability in the segment. As of 2016, we have reclassified our Action Camera product line from the outdoor segment into the auto segment.
We believe this change will hence the alignment of our engineering, marketing and sales resources. Going forward, segment results will be adjusted to reflect this change. So, in summary, as we faced in 2015 remain part of the operating environment. With this in mind, we are projecting revenue of approximately $2,820,000,000, which is flat year over year and steady gross margin of approximately 54.5%. We are projecting operating income of approximately 5 $10,000,000 with operating margins of approximately 18%.
Factoring in an effective tax rate of approximately 20.5 percent Pro form a earnings per share is expected to be approximately $2.25, which includes a $0.05 negative impact related to acquisition. So that concludes my remarks. Next, Doug will walk you through additional details of our results. Doug?
Thanks, Cliff. Good morning, everyone.
I'd like to begin by reviewing our fourth quarter and full year financial results. And moved to comments on the balance sheet, cash flow statement, and taxes. We posted revenue of $781,000,000 for the 4th quarter representing 3% decrease year over year. Gross margin was 52.9%, a 70 basis point decrease in the prior year. Driven by the increased competitive pricing in the fitness segment.
Operating income Operating margin was 18.7 percent, a decrease of 3.20 basis points from the prior year. This is a result of both a decline in the gross margin rate and operating expense growth of 5% or 12,000,000 dollars, driven by litigation related costs, increased spending in advertising and research and development. The pro form a effective tax rate of 13% pro form a EPS was $0.74. Looking at full year results. We put revenue of $2,820,000,000 for the year, representing a 2% decrease year over year.
Gross margin was 54.6%, a 130 basis point decrease in the prior year. Operating income compared to $691,000,000 in 20 14. Operating margin was 19.5%, a decrease of 460 basis points in the prior year, driven by both gross margin declines and increased operating expenses. Pro form a effective tax rate increased approximately 20% for full year 2015 compared to approximately 17% in 2014. Pro form a EPS was $2.49, a 20% decrease year over year.
We'll discuss gross margin operating expenses, effective tax rate in more detail later. Next, we look at Fourth Quarter full year revenue by segment. During the 4th quarter, we experienced growth in 4 or 5 segments, led by fitness with 14% growth, In Aviation, with 12% growth. Collectively, these four segments were up 11% compared to the prior year quarter. For the full year 2015, we experienced growth in 3 of our five segments, led by fitness with 16% growth and marine with 15% growth.
We have 4th quarter revenue charts on this and 35% our total 4th quarter 2015 revenue compared to 42% in fourth quarter of 2014. Fitness grew to 29 percent of revenue in the current period compared to 25% in the prior year. As you can see from the charts, illustrate our profitability mix by segment, Outdoor, fitness, marine and aviation delivered 75% operating income in 4th quarter 2015 compared to 68% in 4th quarter 2014. Drilling down year over year gross margin by segment, both aviation and marine posted gross margin rate increases due to product mix Fitness gross margin rate was lower due to competitive pricing dynamics and product mix. Looking at full year metrics.
For the full year, non auto segments made up 62% of total revenue compared to 57% 2014. A similar shift occurred in operating income with 75% of our 2015 operating income, collectively, coming from Outdoor, Fitness, Marine And Aviation segments compared to 69% in 2014. Looking next at operating expenses. As previously mentioned, 4th quarter operating expenses increased by $12,000,000, 5%. With a 250 basis point increase as a percent of sales.
Research and development increased $4,000,000 year over year. Or 90 basis points to 13.6 percent of sales. We continue to invest in innovation, increasing sources focused primarily on aviation, fitness, outdoor marine, where we see long term growth opportunities.
Our
advertising expense increased $3,000,000 for the prior year quarter, represented 7.3% of sales, 50 basis point increase. Additional spending was primarily in the fitness segment, the near term focus on market share growth in wearables. SG and A was up $5,000,000 compared to the prior quarter, increasing 100 basis points percent of sales to 13.4%. Increased spending in SG And A was driven primarily by litigation related costs and IT expenses. A few highlights on the balance sheet and cash flow statement.
We ended the quarter with cash and marketable securities about $2,400,000,000. Counterceval increased sequentially due to the holiday quarter and was down year over year to $531,000,000. The inventory balance increased year over year $501,000,000, so we grew our product offerings and continue to maintain an adequate supply raw materials for safety stock. In the fourth quarter of 20 15, we generated free cash flow of $101,000,000. Also in the quarter, we paid dividends of $97,000,000 repurchased $23,000,000 of company stock with $160,000,000 remaining for purchase through December 2016.
With our dividend, stock repurchase activity during 2015, returned $509,000,000 of cash to our shareholder So previously mentioned, our effective tax rate decreased to 13% in the current quarter. Compared to a pro form a tax rate of 19 of income mix by tax jurisdiction, which is positively impacted by the increase in actual full year taxable income compared to previous projections. And the resulting catch up benefit for the 1st 3 quarters of 2015. Consistent with prior year, 4th quarter tax rate include the full year impact of the R and D tax credit. Our full year pro form a effective tax rate increased from 17% in 2014 to 20 percent in 2015, primarily due to income mix by tax jurisdictions.
We expect our full year We announced this morning we plan to seek shareholder approval for a dividend of $2.04 per share, payable in 4 installments of $0.51 per share per quarter beginning with the June 2016 calendar quarter. As Cliff mentioned, beginning in 2016, we will recast action camera sales and expenses from our outdoor segment to our auto segment. As such, provide a supplemental schedule of Help Assist and updating your models. I looked at a schedule confound within the appendix today's webcast. This concludes our formal remarks.
Andrew, can you please open the line for Q
you. You. Our first question is from Simona Sypniewski from Goldman Sachs. Your line is open.
Hi, thank you very much. First, of all, just in terms of the 10% growth in outdoor that you're expecting, how much of that is organic versus the contribution from M and A. And then just a follow-up, I wanted to get a sense for your thought process on, OpEx and marketing expense into this year. Relative to last year, some of the fitness growth initiatives have not played out quite as expected. So just curious if you're considering pulling back on that a bit?
Yes. So Simona, the, in terms of the contributions from acquisitions, We don't break it out in detail, but a big portion of the growth in outdoor is the acquisitions and then some organic growth on top of that. In terms of the OpEx, we're looking at 2016 relatively conservatively, we do have expenses that we incurred in a partial year of 2015 that rolled through a full year of 2016. So that some of the increase. And then we have, targeted investments in key areas where we see opportunities for growth.
Our next question comes from the line of Ben Bollin from Cleveland Research.
Thanks. Good morning. When you look at the different product segments, how are you thinking about the gross margin trajectory on a look forward basis relative to what you seen over the last couple of years?
Well, I think the biggest dynamic then is the changes in the fitness market due to the competitive dynamics and the expansion of the overall market. So that's one that's that's driving lower from where it's traditionally been. I would say that the other segments are pretty much on trajectory from where they've been. But keep in mind, we did see some change in the past year due to the currency issue and that will take some time to to stabilize in terms of our ability to go back up as we introduce new products and new margin structures into market.
And when you look at your OpEx performance or your guidance when you're thinking about OpEx in 2016, the implied OpEx figure looks basically flat to up in 2016 versus 2015. Last year, I think you grew about $100,000,000 year on year. 14, you grew at about $80,000,000 year on year. Is that how we should think about the model going forward? You kind of major heavy lifting it's done and now you're getting back to steady state or is this a kind of a pause year for you?
Well, it's hard to look too far down the road because we don't know what additional things will encounter in the markets. But in terms of your observation around the previous years, yes, we did ramp up substantially in those years, both in terms of our advertising spend as well as engineering spend as we launch new categories. We're looking at 16 as being somewhat of a stabilizing year we feel like the levels that we're at in particularly like the advertising area is something that we can work well with in the coming year.
Our next question comes from the line of Paul Coster from JP Morgan. Your line is open.
Yeah, thanks for taking my question. The P and D segment obviously continues through to be a way to on growth, but it's now declining to the point where I imagine it's easier to start thinking about, which in terms of I'm just wondering what your thoughts are in terms of the positioning of the P and D segment, whether you're prepared to yield part of that market in order to just focus on ability and growth moving forward?
Well, the P and D market is still a significant generator of revenue and profits. And we feel like the market is on a global basis. We believe we're the market leader on a global basis. So we really don't see any significant changes that we plan to make in terms of our approach to the market and coming year.
Okay. Well, I think every call you ask when you think that market might stabilize, so let's see why this should be any different. Any thoughts there?
Well, it's a mixed story around the world. Some some countries and some markets, as you know, have shown signs of stabilization while others have continued to decline. So it's still a dynamic situation.
Last question, the ad spending that we've seen recently, is there sort of one time deal or do you believe that you've now established a new run rate in terms of your ad allocation?
I think for the time being, we feel like we've established a runway that we're comfortable with and, we'll continue to evaluate as market conditions evolve.
Great. Thank you.
Thank you.
Our next question comes from the line of James Faucette from Morgan Stanley from, pardon me, Faucette. Your line is open. Hi, thanks.
James Foster here from Morgan Stanley. Quick questions on both what you saw in 2015 and then the 4th quarter geographically, it looked like the U. S. And Europe was down whereas Asia Pac was, quite strong. I'm wondering if you can give a little bit of at least segment color where it's notable for those different regions.
Just trying to determine what kind of what was driving the difference in the performance there. And then how are you thinking about the respective segments in 20 16 in those geographies and things that we should be looking for. And then, so that's a geographic question. And then, so quick follow-up question is, you seem to finally be getting a little more, at least footprint with the automakers with the end dash tech How should we be thinking about your view on potential returns and return improvement on the investment that you've been putting into in DASH and what you think the way forward is for that part of the business? Thanks.
So in terms of the geographic mix, you're correct that the Americas segment was weaker and Europe course, was down and then APAC was strong. I think the dynamics there in Europe, first of all, the currency trends probably impacted us most. And I think by segment, we were actually pleased with many of the results that we had in 2015 and the gains that we had in terms market share and unit deliveries. In terms of the Americas, it was down. And I think the biggest impact there was the activity tracker and fitness markets, which were primarily driven out of the Americas and in terms of its overall development.
During the year. And then in APAC, we've had strong success in terms of some of our segments there, particularly outdoor. And also auto sales, auto OEM sales into various markets in APAC and the Middle East. So in terms of our outlook to 2016, I think we would anticipate some improvement in the Americas side of things, especially as we see growth in some of our traditional markets. I think in Europe, we're continuing to plan for growth in terms of unit deliveries and overall improvements in margins and stabilization in currencies.
In APAC, we continue to see an outlook for growth in terms of what's happening there as well. On the automotive OEM question, I would say that, that, yes, we continue to make incremental progress. I would say that it's pleasing, but at the same time, we're not satisfied with that. We continue to drive for more wins. As you know that this particular market in business is a long lead business.
And so our business develops very slowly and probably can't say when we would see a stabilization, although we're trying to adjust our investments as well as going after on near term deals that would help us improve the overall picture there. So in general, I feel good about where we're at I feel like we have more work to do. Thanks. Thank you.
Thank you. Our next question comes from the line of Robert Spingarn from Credit Suisse. Your line is open.
Hi, good morning.
Good morning.
So, Cliff, I have one for you on aviation in strength in the quarter and just what you're seeing there given that some of these new products, I don't think, come online, as you said, until 2016. And then, Doug, for you, wanted to ask about your expectations for free cash flow in 2016, just given I guess the easy compare with 15, you had the tax payment and then what buyback assumption might be in your 'sixteen free cash flow?
Okay. So starting, first, Robert, with the aviation side of things, we were pleased with what happened in Q4. I think, we would attribute that to several factors. One is there was a kind of a rush of deliveries that took place at the end of the year, which typically does happen and we had newer platforms that of course were part of that mix allowing us to grow some of our revenues on the OEM side. And then we also ran successful promotions in Q4, which helped grow our overall sales in the retrofit side.
So think generally we feel good about where aviation ended the year, but we do continue to see the headwind in terms of the overall market that we've been talking about for a while.
But before we go to Doug, do you see just on the back of that Do you have any line of sight as to when this market really fundamentally improves or is this global environment with FX and and oil, etcetera? Is it just cloud everything well into the future?
I think my view is that, that still presents a significant cloud to the longer term. For growth in terms of market share and new platforms, which we continue to do. So we're not necessarily completely pessimistic, but we we recognize that the overall trends are challenged, particularly as you see more stock market volatility. And of course, the lingering effect of lower oil prices and geopolitical.
And just to be clear, without the new product introductions on sort of same products, would you say volumes are trending negatively in 2016?
I would say it's probably flat based on where things stand today. There's some steady state deliveries that are going on with our existing OEMs and many of our OEMs are doing reasonably well in this environment. But again, it's a headwind for everybody.
Okay. Okay. Thanks. Sorry, Doug. I got that from Aviation.
Yes. Regarding free cash flow, we expect about $400,000,000 of free cash flow for 2016. That assumes about $75,000,000 of CapEx. And regarding a share of person for 2016, we'll actually monitor that depending upon markets and the business conditions during 2016.
Is there anything in particular in that $400,000,000 that makes it a bit lower than, let's say, the last couple of years before 2015?
Well, it is the we were factoring in the income forecast that we have in our guidance as well as taking into consideration our working capital needs and inventory and such.
So those are still rising a bit?
Just a bit. It probably is working capital should not increase as much as it has in the previous years, but it'll probably a little bit as we grow our business.
Okay. And in any particular segments?
Probably where we have the new product offerings, primarily business area. Also in inventory, historically, we've added some raw material requirements for safety stock. Now we built that up and we'll kind of monitor that as we go along, we see the additional safety stock we need to build up.
Thank you. Our next question comes from the line of Charlie Anderson from Dougherty and Company. Your line is open.
Yes, good morning. Thanks for taking my questions. I just want a quick clarification on the growth rate assumptions in Outdoor and auto, if those were apples to apples with the reclassification with actually camera? And then secondly on fitness, I wonder if we could kind of deconstruct this a little bit. On a constant currency basis, how much did it grow in 2015?
What are sort of the market assumptions for 'sixteen in terms of the core runner cycler cycling activity tracker and then maybe market share are you assuming to start a pretty steady with market share?
Yes, this is Doug. I'll take the first part of that regarding guidance numbers we had for Outdoor and auto. Yes, we actually those guidance numbers that we gave factored in recasting reclassifying the prior numbers. So beginning in 2016, the segment information that you'll see in our queues go forward will have those numbers recast.
And in terms of our outlook, Charlie, in 2016 on fitness, we're projecting 10% overall the segment and that's pretty much an equal mix of growth in trackers as well as the other product lines of cycling the running and all of those. In terms of market share where we are today, we believe we are the market share leader in the GPS enabled wearable device part of the market. We believe that our share is currently in the low to mid-forty percent range. The market has expanded to significantly in the past years. So in terms of overall unit deliveries, we are still in a growth mode, and we would expect to take some additional share and reclaim some share in the coming years.
We feel our product lineup is much stronger it was with many more products coming out with risk based heart rate.
Great. Thanks so much.
Thank you, Charlie.
Thank you. Our next question comes from the line of Travis McCormick from Raymond James. Your line is open.
Hey, thanks for taking my question. A couple for you, Cliff. In the Aviation business, where do we stand now in terms of the mix that's OEM versus aftermarket? And as you guided for the year, what are your assumptions on that aftermarket trend? And then in terms of the logic of moving the camera business to auto, Is there some operational logic there besides just moving it to a declining business category?
Should we expect more integration of cameras and new applications in the PND segment?
Yes, okay. So on Aviation, terms of the mix, we don't detail that out, but generally we see slightly stronger results in OEM as we add new platforms. And steady to increasing growth in terms of retrofit as we introduce new products into the market. In terms of our logic around the move of the action cameras, as I mentioned in my remarks, there's a lot of similarities in the technologies and the market channels for action cameras well as dash cameras that we haven't already in our automotive segment. And so consequently, we felt like it would better align all those resources create more efficiencies as we deal with those similar technologies and roots to market.
Thanks. And Doug, if we look at the full year guidance of roughly flat on the top line. As we think about Q1, should it be a significant departure from that, better or worse based on, I forget if Q1 was a disappointing or a strong quarter last year, but based on the comps and everything, how should we view Q1?
Yes, we don't give quarterly guidance, but the Q1 is a lower seasonal quarter for us.
Our next question comes from the line of Brad Erickson from Pacific Crest Securities. Your line is open.
Hi, thanks for taking my questions. First, just want to understand the margin dynamics, I guess, a little bit better for fitness. If we assume sort of flat FX, does 10% growth in fitness effectively equate to say stable margins or does that still imply some of margin erosion year over year?
Yes, Brad, we're projecting margin erosion in fitness in 2016. Of course, we had quite a bit of margin erosion in 15 due to both currency and the competitive dynamics. But in 2016, we're projecting that the margin will continue to come down. We're comping against much higher margins that we had last year in the first half in fitness. And we feel like it will stabilize down to a lower level about a 300 basis point impact.
Got it. That's helpful. And then just on the fitness products overall, you talked talked a lot about on this call thus far around the heart rate monitoring technology. Can you kind of give us a sense of maybe some of the other sensor technologies that are maybe of interest for those products in the future? Thanks.
Well, we don't talk about our future roadmap that we explorations going on around many different kinds of sensor technologies and looking at which ones of those will provide useful guidance information for average
Our next question comes from the line of Will Power from Robert Baird. Your line is open.
Great. Thanks. Yeah. Maybe just first a follow-up on aviation. I think on the previous caller, a couple of calls you had referenced some of the negative energy impacts.
I just wonder if you could give us a sense for what you're seeing on that front. How much is that limiting the growth opportunity in 2016?
I think the energy situation directly impacts particularly the helicopter market because helicopter can use significantly in the oil exploration and and all of the logistics that go around that. So that's one big impact. But then in terms of oil producing countries, the lower oil prices are having an economic impact broadly. And so the citizens are not necessarily anxious to buy when oil prices are low. So that's really the major factors that's creating headwind in terms of the oil impact.
Okay. And then just bigger picture, just as you think about the cash balance, and this is probably one of the regular quarterly questions too. Any updated thoughts with respect to plans for that cash balance, thoughts around more aggressive stock buyback or the ability to do that or just any other updated thoughts with respect to how to best utilize that?
I think the priorities for our cash are to be a reliable payer of a dividend over the long term. So we focus heavily on that. And then secondarily to look for opportunities for tuck in acquisitions that help complement our business, add resources or expand our market. So those are the 2 primary areas and then we intend to supplement that with a on where we are today, but it's something we evaluate as we go along depending on our cash flow and the overall situation.
Okay. Thank you. At this time. So I would like to turn the call back over to management for closing remarks.
Hey, thank you, everyone. Doug and I will be available for callback.
Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program. Andrea, I'll disconnect your telephone lines at this time. Everyone, have a great