) reported first quarter earnings that beat the Zacks Consensus
Estimates by 4 cents, or 10.0%. Currency had a 1 cent negative
impact on earnings.
Garmin is deferring lifetime maps, connected services and
premium traffic over their economic lives. Net deferrals were 9
cents a share in the last quarter.
Garmin's first-quarter revenue of $556.6 million was down 38.8%
sequentially on seasonality. It was up 9.6% year over year due to
stronger demand. Volumes were down 55.7%, but better than in the
year-ago quarter. The blended average selling price ("ASP")
increased 38.2% sequentially and 1.5% from last year, due to the
mix of business in the last quarter.
North America is clearly the market driving Garmin's fortunes,
since the region accounts for over half its revenue. EMEA (largely
Europe) accounts for another third of its business. While
seasonality is witnessed across all its served markets, it is the
most pronounced in North America and Europe.
This resulted in a sequential decline of 44.9% and 33.9%,
respectively, in the North America and EMEA regions, which however
increased 5.7% and 16.6%, respectively, from the year-ago quarter.
Asia/Pacific was down 13.9% sequentially and up 8.5% year over
The performance in Garmin's key geographies will see a secular
decline due to the shrinking of the PND market that Garmin has not
been able to offset through in-dash applications.
Revenue by Segment
The Auto/Mobile, Outdoor, Fitness, Aviation and Marine segments
generated 50%, 14%, 13%, 13% and 10% of first quarter revenue,
respectively. Seasonality typically makes for significant variation
in quarterly revenue, with the most significant increase in the
December quarter, followed by the most significant decline in the
segment was down 51.8% sequentially and up 5.6% year over year. The
increase from the year-ago quarter was driven by share gains in
PNDs, stronger automotive sales and recognition of previously
deferred revenue. However, pricing was stronger than the fourth
quarter of 2010.
The PND business has been severely hindered by the availability
of PND substitutes - primarily smartphones from the likes of
Research In Motion
) and others running on
) Android OS - as well as some aggressive pricing from competitors,
such as TomTom.
Garmin remains the number one supplier in the U.S. and one of
the largest suppliers in EMEA, but this position is not likely to
help given the poor market conditions. The primary focus areas are
currently automotive OEMs (for navigation and infotainment
applications) and emerging markets.
segment revenue was up 2.1% sequentially and up 5.4% year over
year. The aviation market continues to lag the overall economy in
terms of recovery from the recession, but Garmin appears to have
outperformed the market, given its new wins, penetration into the
helicopter segment and focus on the retrofit market. Management
stated that the growth in the last quarter came from both the new
and retrofit business.
segment was down 36.3% sequentially and up 16.1% year over year.
Despite the seasonal weakness, increase from the year-ago quarter
was possible because of continued strength in several new products,
such as GPS-enabled golf products and dog tracking and training
segment was down 24.8% sequentially and up 26.3% year over year.
The increase from last year was due to the success of Garmin's
Forerunner 910XT, a multi-sport device. The important drivers in
the segment remain the relatively high-end Forerunner and Edge line
of products, which is a good thing even as far as margins are
concerned. GPS-enabled running and cycling products are gaining
popularity all over the world, which is good news for Garmin, the
market leader in the segment.
segment was up 29.6% sequentially and 9.3% year over year. A milder
winter in the U.S. appears to have brought forward the marine
season, which was the reason for the strong performance in the last
Management stated that demand was broad-based across all of
Garmin's marine products. Garmin's strategy here has been the
building of a solid portfolio of products and strengthening
strategic relationships with marine OEMs. This strategy is paying
off, with the segment showing shallow but steady growth over the
Gross margin for the quarter was 51.0%, up 329 basis points
(bps) sequentially and 404 bps year over year. ASP increases offset
the volume decline in the sequential comparison. However, the
expansion from the year-ago quarter was more volume-related.
The gross margin by segment was as follows - auto/mobile 39.3%
(up 156 bps sequentially, up 812 bps year over year); aviation
68.2% (up 369 bps sequentially and down 50 bps year over year);
outdoor 61.3% (down 663 bps sequentially and 98 bps year over
year); fitness 61.1% (down 329 bps sequentially, up 112 bps year
over year) and marine 59.7% (down 6 bps sequentially, down 496 bps
year over year).
The operating expenses of $193.4 million were down 17.2% from
the previous quarter's $233.7 million and up 18.2% from $163.6
million in the year-ago quarter. The operating margin shrunk 577
bps sequentially and expanded 151 bps year over year to 16.2% in
the last quarter.
Despite the gross margin strength and the typical
post-holiday-season decline in advertising expenses, both SG&A
and R&D increased significantly as a percentage of sales, which
in combination resulted in the sequential decline. SG&A
increases were the most significant on a year-over-year basis,
although all except cost of sales were up.
On a pro forma basis, Garmin reported a net income of $86.9
million, or a 15.6% net income margin compared to $165.6 million,
or 18.2% in the previous quarter and $95.5 million or 18.8% net
income margin in the first quarter of last year. The fully diluted
pro forma earnings per share (EPS) were 44 cents, compared to 85
cents in the December 2011 quarter and 49 cents in the comparable
There were no one-time adjustments in any of the above quarters,
so the GAAP net income was the same as the pro forma income as
Inventories were up 2.4% sequentially, with inventory turns
increasing from 4.8X back to 2.8X. Days sales outstanding (DSOs)
went from 61 back to 71. The cash and short term investments
balance decreased $23.2 million to around $1.40 billion, with the
company generating $122 million from operations.
Garmin spent around $5.8 million on capex, yielding free cash
flow of around $117 million. It also spent $77.9 million on
dividends, $2.8 million on acquisitions and around $0.3 million on
share repurchases. Garmin has no long-term debt and long term
liabilities were around $351 million at quarter-end.
2012 Guidance Reiterated
Management stated that Garmin's performance in the first
quarter, which is typically its weakest, was largely in line with
internal expectations for the year. Therefore, it reiterated the
guidance provided earlier.
Given expectations of 5-10% growth in the Marine segment, 5-10%
growth in the Aviation segment, 5-10% growth in the Outdoor
segment, 20-25% growth in the Fitness segment and a 7-10% decline
in the Auto/Mobile segment, Garmin is expected to see revenue of
$2.7-2.8 billion for the year. The gross margin is expected to be
flat to slightly up, operating expenses in the $520-540 million
range, operating margin of 19-20% and a tax rate of 13% resulting
in EPS of $2.45-2.60.
The Zacks Consensus for the year was $2.85, above the guided
Garmin's strong results were helped by the many new
higher-margin products that the company has been introducing over
the last few years and the company's strategy of increasingly
targeting the OEM segment with many of its offerings. The advantage
of this strategy is more stable revenues and steadier pricing.
At the same time, it has focused on individual customers in the
outdoor and fitness segments. Given its strength in segments other
than PND, we have a long-term (3-6 months) neutral recommendation
on the shares.
The primary negative for Garmin is its still significant
exposure to the PND segment, which is on a secular decline. We
think that Garmin could ultimately improve upon the situation by
focusing on auto OEMs for in-dash solutions and by building a
presence in emerging Asian countries. However, Garmin has entered
the race a bit late, so competition will be stiff.
We also see increasing opex this year, as management intends to
invest in both the aviation and marine segments. This will be a
downside to earnings.
Garmin shares carry a Zacks Rank of #3, implying a Hold rating
in the short-term (1-3 months).
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