) reported first-quarter earnings that missed the Zacks Consensus
Estimate by a penny, or 2.4%. Currency had a 4 cent negative
impact on earnings, and if excluded would have raised the EPS by
a similar amount.
The basic story surrounding Garmin has not changed much during
the course of the last quarter, except for the aviation business
that grew strongly.
With a significant percentage of revenue continuing to come
from personal navigation devices (PNDs), Garmin's overall sales
continue to suffer. This is because smartphones based on new
operating systems mainly from
) continue to hurt its traditional area of strength. If
) new operating system is anywhere as popular as it is expected
to be, Garmin's PND business will shrink quicker than the 20%
rate management expects for this year
Garmin is deferring lifetime maps, connected services and
premium traffic over their economic lives. Net deferrals after
taxes were 8 cents a share in the last quarter.
Garmin's first-quarter revenue of $532.0 million was down
30.8% sequentially from the seasonally strong fourth quarter. It
was also down 4.4% year over year, mainly due to continued
declines in the PND market. Volumes dropped 50.0% sequentially
and 7.4% from the year-ago quarter. The blended average selling
price ("ASP") jumped 38.4% sequentially (driven by the PND
decline and recognition of previously deferred revenue). It was
also 3.2% higher than the year-ago quarter.
While seasonality drove sequential revenue declines across all
geographies, the decline from the year-ago quarter was indicates
that the Americas continue to drive Garmin's fortunes. Since it
accounts for the largest share of Garmin's revenues, even a
slight softness in the market has more of an effect on its total
revenue. While seasonality is witnessed across all its served
markets, it is the most pronounced in this region.
Specifically, revenue in the Americas (54% share) dropped
35.7% sequentially, the EMEA region (36% share) declined 24.5%,
while APAC (10% share) down 22.5%. The three regions were down
3.4%, 4.0% and 11.3%, respectively, from the comparable year-ago
Revenue by Segment
Garmin's Auto/Mobile, Outdoor, Fitness, Aviation and Marine
segments generated 47%, 14%, 14%, 15% and 9% of its quarterly
Seasonality typically makes for significant variations in
quarterly revenue, with the most significant increase in the Dec
quarter, followed by the most significant decline in the March
segment was down 42.2% sequentially and 9.6% from the year-ago
quarter. Garmin expects PND declines to result in a 15-20%
decline in total revenue due to the availability of PND
substitutes - primarily smartphones.
Garmin remains the number one supplier in the U.S. (with a
market share of more than 70%) and one of the largest suppliers
in Europe (around 30% market share). The primary focus areas are
currently automotive OEMs for in-dash applications (it signed on
Mercedes Benz in the last quarter) and emerging markets.
segment revenue was up 15.1% sequentially and 10.4% year over
year. Garmin's aviation business benefited from notable
strengthening of the OEM segment as well as continued share gains
in the helicopter segment. The light jet segment, in which Garmin
is greatly dependent, remains soft. Recovery in the aviation
market is slow and generally lags market recovery.
New products, opportunities in the retrofit segment,
opportunities in the military and government markets, and share
gains in the helicopter market remain positives for
segment was down 35.7% sequentially and 1.3% year over year. The
sequential decline was attributed to seasonality although mix
changes toward lower-end products affected both comps. Garmin is
seeing particular success in this segment because of the many new
products it has introduced that are gradually expanding its
markets and enabling it to enter new categories.
The golfing market, which didn't even exist a couple of years
back, its dog tracking and training products and GPS-enabled
watch for hunters and outdoor enthusiasts should continue to
drive sales through the year. New products across most categories
are expected to remain an important driver of segment growth.
segment declined 30.3% sequentially, while growing 1.7% year over
year. The sequential decline was seasonal. The year-over-year
comps were difficult because of Garmin's Forerunner product line
that was introduced in that quarter.
However, new cycling products were strong and helped results
in the last quarter The continued move toward higher-margin
products, especially in the running category will help segment
margins. GPS-enabled running and cycling products are gaining
popularity all over the world, which is good news for Garmin, the
segment was grew 27.3% sequentially and declined 10.3% from the
year-ago quarter. The sequential increase was seasonal, due to
the boating season. What is more significant is the decline from
the year-ago quarter, which was attributable to the aging product
lineup, bad weather and economic uncertainty.
Garmin's acquisition of Nexus Marine and the host of new
products are intended to strengthen its position in the
traditional fishing market and pursue growth in the recreational
Garmin's strategy here has been the building of a solid
portfolio of products (including through acquisitions) and the
strengthening of strategic relationships with marine OEMs.
The gross margin for the quarter was 51.9%, up 326 basis
points (bps) sequentially and 93 bps year over year. Volumes were
down from both the previous and year-ago quarter, even as prices
The outdoor, marine and aviation segments saw gross margins
declining, while fitness and auto/mobile margins expanded.
Outdoor and marine were also down from the year-ago quarter.
The gross margin by segment was as follows - Auto/mobile 42.4%
(up 436 bps sequentially, up 308 bps year over year); Aviation
69.9% (down 331 bps sequentially, up 171 bps year over year);
Outdoor 58.4% (down 404 bps sequentially, down 286 bps year over
year); Fitness 62.1% (up 190 bps sequentially, up 100 bps year
over year) and Marine 50.6% (down 418 bps sequentially, down
1,333 bps year over year).
The operating expenses of $196.2 million were down 12.4% from
the previous quarter's $224.1 million and up 1.4% from $193.4
million in the year-ago quarter. The operating margin shrank 446
bps sequentially and 120 bps year over year to 15.0% in the last
Cost of sales and advertising declined sequentially as a
percentage of sales, with R&D and SG&A increasing.
Specifically, cost of sales was 326 bps lower sequentially, while
advertising was down 191 bps. R&D and SG&A increased 565
bps and 398 bps, respectively.
On a pro forma basis, Garmin reported a net income of $79.5
million, or a 14.9% net income margin compared to $129.3 million,
or 16.8% in the previous quarter and $86.9 million or 15.6% net
income margin in the fourth quarter of last year. The pro forma
earnings per share (EPS) were 40 cents, compared to 66 cents in
the Dec 2012 quarter and 44 cents in the comparable prior-year
One-time adjustments in the quarter included currency-related
losses and tax adjustments.
Inventories were up 1.6% sequentially, with inventory turns
declining from 4.0X to 2.6X. Days sales outstanding (DSOs) went
from 72 to around 77. The cash and short term investments balance
fell $145.3 million to around $1.24 billion, with the company
generating around $59.4 million from operations.
Garmin spent around $11.6 million on capex, yielding a free
cash flow of around $47.8 million. Garmin has no long term debt
and long term liabilities were around $347 million at
Garmin expects 2013 revenue of $2.5-2.6 billion (down over 6%
from 2012), gross margin of 53-54% (slightly better than 2012),
operating income of $480-500 million (down nearly 19% from 2012),
operating margin of 19-20% (down 270 bps) and pro forma EPS of
$2.30 to $2.40 (down significantly from 2012). The guidance will
be updated after the second quarter.
The expected revenue decline is because the 15-20% decline in
in auto/mobile revenues will not be offset by the 5-10% growth
expected of the outdoor, fitness and marine revenues, and the
10-15% growth in the aviation segment.
The longer-term positives for Garmin remain the many new
higher-margin products that the company has been introducing over
the last few years and its strategy of increasingly targeting the
OEM segment with many of its offerings. The advantage of this
strategy is more stable revenues and steadier pricing over the
The primary takeaway from the quarter's results was the
weakness in the PND business, where Garmin's exposure is
significant. We think that its strategy of focusing on auto OEMs
for in-dash solutions and by building a presence in emerging
Asian countries could ultimately offset some of the revenue loss
in the auto/mobile segment.
However, it is apparent that this, as well as revenue
diversification across other segments will not help results in
the near term, which is the reason for the Zacks Rank #4 on the
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis
GARMIN LTD (GRMN): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis
To read this article on Zacks.com click here.