Garmin (GRMN) Beats Q2 Earnings on Higher Revenues, Margins - Analyst Blog


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GarminLtd. ( GRMN ) reported strong second-quarter 2014 earnings of $1.02 per share, comfortably beating the Zacks Consensus Estimate of 75 cents, on the back of strong growth in new products that are increasingly diversifying its business.


Garmin's second-quarter revenues of $777.8 million were up 33.4% sequentially, up 11.7% year over year which also beat the Zacks Consensus Estimate of $702.0 million. Volumes increased 52% sequentially and 6% year over year. However, the blended average selling price (ASP) was down 13.2% sequentially but up 6% year over year to $203.0 per unit. The year-over-year increase was driven by mix changes and reduced revenue deferrals.

Revenues by Segment        

Garmin's Auto/Mobile, Outdoor, Aviation, Fitness and Marine segments generated 45%, 19%, 14%, 13% and 9% of the quarterly revenues, respectively.

Seasonality typically results in considerable variations in quarterly revenues, with the most significant increase in the December quarter, followed by a major decline in the March quarter.

The Auto/Mobile segment was up 44.1% sequentially and 1.5% from the year-ago quarter. The personal navigation device (PND) market weakness continued in the last quarter but was less than expected, which was partially offset by growth in original equipment manufacturers (OEM) and amortization of previously deferred revenues.

Garmin expects PND volumes to decline in 2014, in line with the 2013 rates but believes that niche categories, like dash cams and RV units, will help offset the decline, going forward. The company expects the OEM market to continue to generate good returns in the near future.

The Aviation segment revenues were up 1.4% sequentially and 10.5% year over year. The year-over-year increase was due to notable strength in the OEM segment. The aviation market recovery appears to be gathering momentum with three straight quarters of double-digit year-over-year growth.

New products, opportunities in the retrofit segment, opportunities in the military and government markets, and share gains in the helicopter market remain the positives for 2014. Management expects new revenue contribution from the Cessna Latitude, Bell 505 and the Bell 525.

The Outdoor segment revenues were up 26.3% sequentially but down 0.7% year over year. The year-over-year decline was due to weak demand for VIRB action cameras.

Management does not expect much improvement in this segment due to slower-than-expected uptake of VIRB action cameras. However, expansion into new categories and products will likely remain an important driver of segmental growth.

The Fitness segment increased 50.2% sequentially and 78.9% year over year, driven by the ramp up of new products across multiple fitness categories.

Management stated that the Vivofit product had a strong start in the rapidly growing activity-tracking category. The company also believes that the continued move toward higher-margin products, especially in the running category, will boost segment margins in the near term. GPS-enabled running and cycling products are gaining worldwide popularity, which is good news for Garmin, the market leader. Management also has several new products in the pipeline that are expected to drive growth in the second half of 2014.

The Marine segment increased 23% sequentially and 1.4% from the year-ago quarter. The year-over-year growth was driven by new products including autopilot solutions, chartplotters and radars. Management expects new products to drive sales in 2014.

Garmin is trying to build a solid product portfolio (including acquisitions) and the strengthening of strategic relationships with marine OEMs.

Operating Results

The gross margin for the quarter was 57.1%, up 40 basis points (bps) sequentially as well as 200 bps year over year. The increase was due to a favourable segment mix. Also, the amortization of previously deferred revenues aided margins. 

Operating expenses of $225.7 million were up 5.6% from $213.8 million in the year-ago quarter. As a percentage of sales, selling, general & administrative and research & development expense decreased year over year, while advertising expense increased. The net result was an operating margin of 28.1%, up 370 bps year over year.

On a pro-forma basis, Garmin reported a net income of $199.8 million compared with $149.6 million in the year-ago quarter. Pro-forma earnings per share were $1.02 compared with 76 cents in the comparable prior-year quarter.

One-time adjustments in the quarter included currency-related gains.

Balance Sheet

Inventories were down 2.9% sequentially to $429.7 million. The cash and short-term investments balance was approximately $1.40 billion versus $1.30 billion in the prior quarter, with operations contributing around $164.0 million.

Garmin spent approximately $21.0 million on capex, yielding free cash flow of around $143.0 million. The company has no long-term debt.

In the reported quarter, the company spent approximately $88 million on dividends and $129 million on share repurchases. The company has $79 million remaining in the share repurchase program authorized through Dec 31, 2014.


For full year 2014, management expects revenues in the range of $2.75-$2.85 billion (prior $2.6-$2.7 billion); gross margin of approximately 56% (prior 54-55%); operating income in the range of $650-$675 million (prior $530-$565 million); operating margin of approximately 24% (prior 21%); pro-forma tax rate of approximately 15% (prior 17%) and pro-forma earnings in the range of $2.95-$3.05 (prior $2.50-$2.60). The Zacks Consensus Estimate for earnings for 2014 is pegged at $2.73.


Garmin's results indicate that it is successfully diversifying its business away from the shrinking PND market. Focused research and development efforts resulted in a steady flow of innovative higher-margin products which helped in the shift. The company is also increasingly collaborating with OEMs for product designing, which is leading to greater volumes, predictability and more stable pricing.

In the reported quarter, the traditional PND business shrank to less than 50% of its total business, although Garmin remains the market leader. On the other hand, Garmin is seeing good growth in its target markets, all of which carry higher margins. Additionally, Garmin increased its 2014 guidance, indicating a strong demand environment for its products, going forward.  

Moreover, Garmin's acquisition of Fusion Electronics will broaden the company's product portfolio, generating synergies for its customers in both OEM and after-market applications, expanding its share in the marine market.

Garmin's shares carry a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Broadcom Corp. ( BRCM ), Mistras Group, Inc. ( MG ) and Agilent Technologies ( A ). While Broadcom sports a Zacks Rank #1 (Strong Buy),  Mistras Group and Agilent have a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
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