Thank you for standing by. My name is Bhavesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Ltd. Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star followed by the one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one once again. Thank you. I will now hand the call over to Teri Seck, Director of Investor Relations. You may begin your conference.
Good morning. We would like to welcome you to the Garmin Ltd. Second Quarter 2023 Earnings Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site at www.garmin.com/docs. 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, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, 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 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. Good morning, everyone. As announced earlier today, Garmin reported second quarter consolidated revenue of $1.32 billion, up 6% over the prior year, driven by growth in three of our five business segments. Gross and operating margins were 57.5% and 21.5%, respectively, and we generated $284 million of operating income in the quarter. GAAP EPS was $1.50, and pro forma EPS came in at $1.45, up 1% over the prior year. We feel positive about our results for the first half of the year and are updating our full year 2023 guidance accordingly. We now expect revenue of approximately $5.05 billion and EPS of $5.15 for the year.
Before turning the call over to Doug, I'll provide highlights by segment and an outlook of what we see ahead. Starting with the Fitness segment, revenue increased 23% to $335 million, driven by broad-based growth across all product categories. Gross and operating margins were 52% and 16%, respectively, resulting in improved year-over-year operating income of $54 million. During the quarter, we launched the Edge 540 and 840 cycling computers, featuring dynamic performance insights, advanced mapping capabilities, and solar charging to help cyclists ride longer, smarter, and train more effectively. Given the year-to-date performance and current trends, we now expect Fitness revenue to grow approximately 10% for the year.
Moving to Outdoor, revenue decreased 3% to $448 million, as growth in Adventure watches was more than offset by declines in other categories. Gross and operating margins were 63% and 31%, respectively, resulting in operating income of $138 million. During the quarter, we launched our next generation fēnix 7 Pro series with enhanced performance insights, built-in LED flashlights, and additional mapping capabilities. We also launched the epix Pro series in theee sizes, all with bright AMOLED displays and a built-in LED flashlight. Also, during the quarter, we launched the Approach S70 premium golf smartwatch, available in two sizes, featuring a bright AMOLED display and with a built-in barometer for a more accurate reading on how each shot is playing.
We expected the first half of the year to be challenging in comparison to the outstanding performance of the prior year. Given our year-to-date performance and the timing of the Adventure watch launches, we now expect Outdoor revenue to be approximately flat compared to the prior year. Looking next at the Aviation segment, revenue increased 6% to $217 million, with growth driven by OEM product categories. Gross and operating margins were strong at 74% and 29%, respectively, resulting in operating income of $63 million. We recently announced the imminent certification of our revolutionary Autoland and Autothrottle systems in select Beechcraft King Air models, marking the first time we have offered these highly important safety technologies to the retrofit market, as well as the first time we have certified our Autoland system in a twin-engine aircraft.
Our Smart Glide system was recently selected for a Flying Magazine Editors' Choice Award, the 15th time we have received this prestigious award. As you can see, our focus on aviation safety technology is unwavering, and I'm proud of what the aviation team has accomplished. We are pleased with how our aviation segment has performed so far this year. Given the year-to-date performance and the stronger comparable from the back half of 2022, we are maintaining our 5% growth estimate for 2023. Turning next to the Marine segment, revenue decreased 11% to $216 million, primarily due to the timing of promotions, which benefited Q1 and contributed to the lower revenue from chartplotters in Q2.
Gross and operating margins were 56% and 21% respectively, resulting in operating income of $46 million. During the quarter, we expanded our trolling motor series to a wider range of boats with the launch of the Force Kraken. This powerful new trolling motor features a pivot-style mount for easy installation on a wider range of boats. The marine market has experienced significant growth in recent years due to increased interest in boating and fishing, driven primarily by the pandemic. The pandemic drivers of this growth have mostly normalized. We now believe the market faces increasing headwinds caused by higher interest rates and greater economic uncertainty.
While our first half performance was essentially flat to that of the prior year, we see signs that the market is softening, which impacts our revenue outlook for the remainder of the year. With this in mind, we believe the marine segment revenue will be down approximately 7% in 2023. Moving finally to the Auto OEM segment, revenue exceeded $100 million of quarterly sales for the first time in our history, increasing 77%, primarily driven by shipments of domain controllers to BMW. Gross margin was 24%, and we recorded an operating loss of $18 million, driven by ongoing investments as new programs move into production.
During the quarter, we received production approval for a new domain controller for safety-critical instrument cluster functions, which will be incorporated into multiple BMW models throughout the remainder of the year. Given the year-to-date performance, we now expect auto OEM revenue to grow approximately 35% for the year. 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 second quarter financial results, my comments on the balance sheet, cash flow statement, taxes, updated guidance. We posted revenue of $1.321 billion for the second quarter, representing a 6% increase year-over-year. Gross margin was 57.5%, 120 basis point decrease from prior quarter. Decrease was primarily due to segment mix. Operating expense as a percent of sales was 36%, 90 basis point increase. Operating income was $284 million, 3% decrease. Operating margin was 21.5%, 210 basis point decrease. Our GAAP EPS was $1.50, pro forma EPS $1.45. Next, look at our second quarter revenue by segment and geography.
During the second quarter, we achieved growth in three of our five segments, double-digit growth in both the Fitness and Auto OEM segments. By geography, Americas region declined 1%, while the EMEA and APAC regions achieved double-digit growth of 11% and 22% respectively. Looking next at operating expenses. Second quarter operating expenses increased by $39 million, or 9%. Research and development increased $22 million year-over-year, primarily due to engineering personnel costs. SG&A increased $13 million compared to the prior quarter, primarily due to increases in personnel-related expenses, information technology costs. Advertising expense increased approximately $3 million, primarily due to higher media spend.
A few highlights on the balance sheet, cash flow statement, and taxes. We ended the quarter with cash and marketable securities of approximately $2.8 billion. Accounts receivable increased both year-over-year sequentially to $717 million, following this seasonally stronger second quarter. Inventory balance decreased both year-over-year and sequentially to approximately $1.4 billion. We're executing on our strategy to optimize inventory, the reductions in our consumer inventory increases associated with our Auto OEM business. For the second quarter of 2023, we generated free cash flow of $221 million, a $216 million increase in the prior quarter, primarily due to a lower use of cash from purchases of inventory.
Capital expenditures for the second quarter were $53 million. We expect full year 2023 free cash flow to be approximately $750 million, cap expenditures approximately $250 million. For the second quarter, we paid dividends of approximately $140 million. We purchased $26 million of company stock and had approximately $27 million remaining at quarter end in the share repurchase program, which authorized through December 2023. Reported effective tax rate, 8.9%, compared to 7.6% prior quarter. Year-over-year increase in effective tax rate is primarily due to a larger amount of reserve releases in the prior year. Turning next to our full year guidance. We estimate revenue approximately $5.05 billion, compared to our previous guidance of $5 billion.
We expect gross margin to be approximately 57.2%, which is lower than our previous guidance of 57.5%, primarily due to anticipated full year segment mix. We expect an operating margin of approximately 20%. Expect a pro forma effective tax rate of 8.5%, which is higher than our previous guidance of 8%, due to projected full year income mix by tax jurisdiction. This results in expected pro forma earnings per share of approximately $5.15. This concludes our formal remarks. Vesh, could you please open the line for Q&A?
Thank you. At this time, I would like to remind everyone in order to ask a question, please press the star followed by the one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Joseph Cardoso from JP Morgan.
Good morning. Thanks for the question. You know, if I take a look at your full year guide for Outdoor and Fitness, is the implication or the assumption we should make is that we should see typical seasonality heading into the back half? If so, what's driving your confidence tracking to the seasonal level of demand, just giving concerns around overall consumer spending? Then I have a follow-up. Thanks.
I think, Joseph, this is Cliff. I think Fitness and Outdoor probably should be looked at differently, because there's different dynamics in each one of those. In the Fitness segment, we had a very strong first half because of the sell-in of new products, which of course, won't repeat as much in the second half. In Outdoor, we were comping against a very strong first half in the prior year, and moving into the back half, we see stronger results, comping with our new products.
Each one's different. I think so far, I would say that, we don't see signs of the kind of consumer behaviors, that are present in some other segments. Each segment probably has a little bit different dynamic, but, we believe both of these segments should be strong in the back half.
Yep. Got it. Thanks for the color there. Maybe just as a quick follow-up, can you just touch on how much of a benefit you're seeing in your gross margins from moderating headwinds, from components and freight and et cetera, to some of these elevated costs that we had seen over the past couple of years, here in 2Q? How much of that is still remaining as you enter the back half of the year? I guess, just quickly, is the largest offset to those tailwinds from easing component costs coming from the increasing mix of Auto, or are there other variables that I should be appreciating here? Thanks for the questions, guys.
Hey, Joseph, this is Doug. I'll give you kind of a perspective on gross margins. First, you know, the year-over-year decrease on a consolidated basis was due to a segment mix, that is based upon where you see Fitness and Auto OEM, which have a lower gross margin than the consolidated average, becoming a larger percentage of the total year-over-year. As you know, some of the other components, you know, there's a lot of different moving parts within gross margin, but you mentioned freight. Yes, we are seeing some favorable freight, and that favorable freight is due to two pieces, one of which is it's lower year over rates, as well as we're shipping a larger percentage of our products ocean versus air.
That's offset by other factors, including a product mix within the segments. With each one of the segments, you know, each one of the products, you know, have a different gross margin there. Depending upon, you know, how that mixes, you know, one quarter versus the other quarter, that does impact that in there. It's a lot of different moving parts in there, and also as it relates to freight, I think you mentioned a question, what for the future. We ex— you know, we've seen some good benefits, you know, in freight, you know, year-over-year.
We would expect that year-over-year benefit to decrease just because we saw some of the freights come down toward the back half of the year. We're not expecting the overall, you know, rates to change that much, but the year-over-year favorability in the year-over-year gross margins will decrease.
Thank you. Our next question comes from the line of Ben Bollin from Cleveland Research. Please go ahead with your question.
Good morning, everyone. Thanks for taking the question. Cliff, I was hoping you could talk through how we should think about the profitability glide path within the Auto OEM business. You got really remarkable year-over-year growth and really not much movement on the EBIT line. At what point does that start to scale? Then, I have a follow-up.
Yeah, good morning, Ben Bollin. I would definitely say, you know, the results in Auto OEM are getting better. I think the operating loss was cut by a third this last quarter on a year-over-year basis. We're seeing improvements. I think there's gives and takes every quarter as the business is somewhat dynamic, and the forecast from OEMs changes according to their business conditions. In general, I would say we're on the path that we expected.
Okay, if you look at— there's been some headlines out there, perhaps for Doug, on, you know, what's happening in Switzerland with the global minimum tax. Could you share any ways we should think about this, how enactment or when the Federal Council may do something, how this could influence, you know, potential tax rate into the future?
Yeah. Yeah, Ben. Yes, we don't give future guides on our ETR besides the current year, but you're correct. There are some global minimum tax legislation out there. And with that, it's stating, you know, basically a minimum tax of 15%. If that gets enacted, you know, that would basically have our tax rate at least 15%. Now, I should say that there's a lot of moving parts, you know, in our effective tax rate that may impact that also relating to income by mix, reserve for lease and such. Yes, depending on what— how that legislation and when it's enacted, the situation is that our effective tax rate would be at 15% or possibly even higher.
That's great. Then my last question, looking at the Marine business, Cliff, could you talk to how—you talked about, you know, softer expectations into back half, but any thoughts on how aftermarket versus new boat delivery play into that? Or are they both softening or one worse than another? Just any thoughts there, and that's it for me. Thank you.
Yeah, I think there's, there's quite a few moving pieces in what's going on in Marine. I would say that, from the mid-range on up, in terms of, boat sizes, you know, the market is still very healthy, and, both from the OEM and aftermarket perspective, seems like the weakness is more from the lower, mid-range to lower end. Of course, new boat buying activity generates, both, refit and, equipment added to the boat at the time of purchase. These are the things that are just all coming into play, and, another factor really is the seasonality that we're seeing return that we haven't seen, over the course of nearly four years now. I think there's a lot of dynamics.
I believe the market is still a very, very good market. It's one of the last ones to really show this normalization that we've seen in every other market, and we expected that it would come, but it's with us now, and I think going forward, we'll concentrate on new products and driving growth through innovation.
Thanks, guys.
Thank you. Our next question comes from the line of George Wang from Barclays. Please go ahead with your question.
Oh, hey, hey, guys, thanks for taking my question. Firstly, can you comment on the buyback prospects, just given incremental higher free cash flow, kind of healthy, you know, business profile? Just curious if the strategy in terms of capital return has changed? Just, you know, I noticed kind of buyback ticked lower in 2Q. Just curious if any color on that?
As, is the question regarding the buybacks?
Yeah. Yeah.
Basically, we'll, we'll evaluate our share purchase just based upon, you know, the business and market conditions. You know, the situation is we have a $300 million authorization through the end of 2023. We have, you know, $26 million-$27 million of that remaining. It's really just based upon the business condition, the market conditions.
Oh, okay, great. Just, just, if I can, can squeeze in quick, follow-up. Just, can you comment on the backlog and the channel inventory? You know, really two parts, kind of, on the industrial business, kind of Marine and Aviation, you know, incrementally weaker. You mentioned that it's more seasonal for the Marine. Can you comment on the backlog across Marine and Aviation? Also, any thoughts on the channel inventory, on the Fitness and kind of wearable side of the business?
Yeah, I think backlogs have come down a lot, and most of that is due to the easing supply chains that we've seen, allowing us to fill the orders much faster than we were last year for both Aviation and Marine. I think some of those dealers, across Aviation and Marine, in the past year were interested in keeping more safety stock on their shelves because they wanted to make sure they could serve customers coming to the shops. As lead times have come down, they have relaxed a little bit their concern over being able to serve their customers.
That's also part of the moving pieces that we're seeing as things normalize in both Aviation and Marine. I would say that the channel inventory is mostly healthy, and as we go forward, it will be replenishment type of activity that goes on.
Okay, great. Thanks.
Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Please go ahead with your question.
Yes, good morning, everyone, and thanks for taking my questions. Cliff, just a question on the Auto OEM, and just go back to a previous question on this. Just trying to think about profitability and trying to understand the economics around this business. Is there any way to separate the startup costs and kind of the one times and the ramp-up costs from the profitability of the volume that you are shipping?
Yeah, I mean, we also look at that. That really relates to building scale in the business as revenues increase. We haven't really talked about those kinds of numbers externally, because we're a company that focuses on true GAAP financials. You know, we include all of our costs as they're expensed, and we all try to make all of our businesses profitable and perform well on that basis.
Great. Okay. How are you thinking about second half revenues for the Automotive OEM in your annual guidance?
Yeah, I mean, I think, you know, we raised our guidance outlook for the full year, reflecting strength that we've seen in the business and acceleration into the back half. That reflects our current view of the business.
Okay. You mentioned that you'd added another controller program. I'm just wondering if it's possible that we'll continue to see program additions, or do you just ship under the programs that you have now?
Well, I think these devices are being incorporated across model lines, and so that takes some time, and it's dependent on BMW's own engineering work and scheduling into production. So we're, you know, basing our forecasts on what we have been told for their production plan for cars containing our devices.
Okay. Thanks for that. My follow-up question is really around the discussion of promotional expectations for the rest of the year. Obviously, there's a seasonal pattern at play here, but I'm just wondering how you're thinking about your required spending on promotional programs or promotional support into the second half of the year versus the second half of last year.
I think we, we expect it to be more like normal than ever before in recent memory. You know, we've seen this trend, in, in recent quarters, where the markets are returning to the level of promotions and discounting and sales that we saw in the past. So we're expecting that. It'll probably be very similar to what we've seen over the past year. Honestly, it kind of more normalized, even last year. So, that's what we expect going forward, is really a normal cadence.
Okay. Thanks very much. Good luck.
Thank you.
Thank you. Our next question comes from the line of Ivan Feinseth from Tigress Financial. Please go ahead with your question.
Hi, thank you for taking my questions, and congratulations on the great, Automotive OEM progress.
Thank you.
Can you go into a little detail about the opening of the Firstbeat Analytics Lab and, like, what your expectations are and what you think you can gain from that? Also, since, you know, everybody's talking about AI, what are your thoughts on how AI can help product— your product development and product functionality?
I think the Firstbeat Lab reflects our commitment to ongoing research and innovation in the area of biometrics and performance for athletes, as well as wellness features in our products. We continue to invest in that area, and it's something that's important to us to differentiate our products from others. In terms of AI, you know, we've been using AI techniques in our products and in our algorithms on both cloud-based applications as well as on our devices for quite a while. You know, we continue to see this trend, and we continue to develop our capabilities in that area as well.
I think in terms of how we deploy that in the company, that, you know, there's probably a mixed bag of responses there that I would say. You know, some of it is good and can be helpful to us in productivity, and other applications of AI that have been broadly discussed in the media, you know, may not be for us, but in general, we're approaching it with prudence.
One last question: A lot of your new products that you've introduced, like the recent golf watch, have come with a delineation on the application for an upgrade and a subscription. Can you give me your views or outlook as far as creating subscription revenue and tiering the functionality and pricing for some of your apps?
Yeah, I think, what you're seeing reflects our intentional strategy to increase revenues from subscription-based sources. So, the Golf apps, our Tacx trainers, inReach, aviation databases, outdoor maps, all of these things are playing into our desire to increase revenues from recurring sources.
All right. Thanks again. Thanks.
Thanks, Ivan.
Thank you. Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead with your question.
Hey, good morning, guys. Thank you for taking my questions, a few, if I may. The first one, you know, I know it's early, but can you maybe just give us some color on customer reception to the new epix Pro and the new fēnix 7 Pro series, launched in the quarter? I would just love if you can kind of weave that into, you know, your sense of what the con— the consumer is. Are you seeing demand stabilize? Are you seeing, you know, demand from upgrades versus existing, upgrades versus new customers? Any difference there, and then, any pricing sensitivity you're hearing from the customer? Just an overall read on the customer and how it's impacting some of these new product launches. Then I have a follow-up. Thank you.
Okay. Yeah. So the launch of those two new families, the epix Pro and the fēnix 7 Pro, I think went very well. We feel like the sell-through, as indicated through our registrations, is going exactly as we had planned. I think we're seeing very similar trends as what we've seen in the past in terms of mix of new customers and existing customers that upgrade. So I think, you know, I would say that all is pretty much as we would expect and what we've seen in the past on those two product lines, really no sensitivity from the consumer in terms of softness there, relative to any economic issues.
I think, you know, the question of the consumer health is really depends on the product line that you're talking about, and those products are definitely higher end products that target more affluent customers. We feel like everything there is going as we had planned.
Okay, that's helpful. Thank you. Then, you know, maybe just to follow up on your comments on the Marine business, Cliff. You know, I kind of understand the dynamics that you walked us through between the strong first quarter and a bit weaker second quarter. But can you maybe just elaborate on exactly what's going on in the market? The only reason I say that is I know you called out interest rates and macro concerns as headwinds, but neither of those dynamics are necessarily new. So just curious from your perspective, what are you seeing, you know, over the last 90 days that has really changed, you know, your view from this market growing to this market declining? Thanks so much.
Yeah, I think our view is really based on all of the latest data that we see, and also talking to all of our retailers and, and distributors. There's definitely pockets of strength in the market. You know, increasingly we're seeing some feedback that there's some hesitancy on the part of some customers who in the past, you know, felt like they had much more money to spend, who maybe now don't or are faced with very high interest rates if they're financing a purchase and can't buy it with cash. These are the, you know, kind of the initial signs that we're seeing that just cause us to be a little bit more cautious for the back half.
Maybe if I could just ask one follow-up to that. You know, after just kind of talking about the higher end products on the consumer side being okay, as it relates to the comments that you just made about hesitancy from customers and what you said earlier in Q&A, is —am I correct that that's largely at the lower end, where there might be more economic sensitivity versus the higher end that might be a bit more resilient, specifically marine?
Yes, that's true.
Okay, perfect. That's it for me. Thank you so much.
Awesome. Thank you.
Again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Jordan Lyonnais from Bank of America. Please go ahead with your question.
Hey, good morning. I just had a quick question. For— like in the macro environment for Europe and Asia, I know sales were up year-over-year for both, but how are you guys thinking about the demand when data is coming out that the macro environment is not improving? I don't know how are you guys looking at that for the full year?
Well, I think, each geography has its own particular situation. Asia is a big place, so, you know, some countries are are doing very well and doing well with our new releases, while, you know, in other cases, maybe the economies aren't so good, specifically China. We're not completely dependent on one country in Asia for our results, so, the diversity of our markets there allow us to show the results that we have. Similarly, in EMEA, I think they're probably on a different timeline when it comes to their economic, progress. So, you know, when they were a little softer early on, they've been a little stronger, especially as we've introduced some of these new products.
All right. Okay. The other question I had, too, was on the increase in advertising spend. Is it just actually running more promotions or it's stronger discounts?
Yeah, this is relating to, you know, media spend, primarily relating to the new product launch that we had. A lot of that, media spend is really tied to we have new products, making sure that, you know, we get to get the message out to our consumers.
Got it.
Advertising.
Great
Advertising is really— advertising is an item related to the specific promotion, as Doug said, of awareness of the product, not necessarily the discounting of the product itself.
Got it. Thank you.
Thank you.
There are no further questions at this time. Ms. Teri Seck, I'll turn the call back over to you.
Thanks for your time today. Doug and I are available for call back. Have a great day. Bye.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.