) reported fourth quarter earnings that missed the Zacks
Consensus Estimate by 8 cents, or 10.8%. Currency had a 2 cent
negative impact on earnings, and if excluded would have raised
the EPS by a similar amount.
The earnings miss in the last quarter was because of a
greater-than-expected decline in personal navigation device (PND)
market. Garmin has been diversifying its revenues and continues
to generate a higher percentage of revenue from a growing number
of higher-margin products across all segments.
However, the advent of smartphones based on new operating
systems mainly from
) have taken a toll on its traditional area of strength. If
) new operating system is anywhere as popular as it is expected
to be, Garmin's PND business will suffer further.
Garmin is deferring lifetime maps, connected services and
premium traffic over their economic lives. Net deferrals after
taxes were 11 cents a share in the last quarter.
Garmin's fourth-quarter revenue of $768.5 million was up 14.3%
sequentially due to positive seasonality, but down 15.5% year
over year, mainly due to continued declines in the PND market.
Volumes jumped 35.1% sequentially and dropped 18.0% from the
year-ago quarter. The blended average selling price ("ASP") was
down 15.4% sequentially but improved 3.1% from the year-ago
The Americas region was clearly the market driving Garmin's
fortunes, since it accounts for over half its revenue. While
seasonality is witnessed across all its served markets, it is the
most pronounced in this region.
Revenue in the Americas (58% share) grew 17.1% sequentially,
the EMEA region (33% share) grew 12.4%, while APAC (9% share) up
6.0%. The three regions grew 8.0%, 18.0% and -13.0%,
respectively, from the comparable year-ago quarter.
Revenue by Segment
Garmin's Auto/Mobile, Outdoor, Fitness, Aviation and Marine
segments generated 57%, 15%, 14%, 9% and 5 of the quarterly
Seasonality typically makes for significant variations in
quarterly revenue, with the most significant increase in the
December quarter, followed by the most significant decline in the
segment was up 13.6% sequentially and down 24.6% 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 32% market share at the end of the last
quarter). The primary focus areas are currently automotive OEMs
(for in-dash applications) and emerging markets.
segment revenue was down 4.1% sequentially and 2.1% year over
year. Garmin's aviation business has not had a very good year in
terms of revenues as recovery in the aviation market is slow and
generally lags market recovery.
However, Garmin did mention some important wins in the
business jet category, as well as continued success of its
cockpit solutions that should drive revenue in 2013. New
products, opportunities in the retrofit segment, opportunities in
the military and government markets, and share gains in the
helicopter market could be other positives for 2013.
segment was up 12.3% sequentially and down 2.1% year over year.
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
The golfing market, which didn't even exist a couple of years
back, continued to do well in the last quarter. Its dog tracking
and training products and GPS-enabled watch for hunters and
outdoor enthusiasts were added positives for the quarter. New
products are expected to remain an important driver of segmental
segment jumped 60.5% sequentially and 9.7% year over year, the
only segment to have posted both sequential and year-over-year
increases. Management stated that the existing portfolio of
cycling and multi-sport product lines continued to do well in the
Additionally, Garmin's running business benefited from the
newly-launched Forerunner 10, which is targeted at the low-end
segment. 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 market
segment was down 11.7% sequentially and 8.6% from the year-ago
quarter. Apart from normal seasonality, Garmin suffered on
account of the weak economic conditions across the world and
particularly in Europe. 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 boating segment.
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 48.6%, down 476 basis
points (bps) sequentially and up 96 bps year over year. While
stronger volumes offset a weaker ASP in the sequential
comparison, the opposite was true for the year-over-year
The gross margin shrunk sequentially across all except the
aviation segment. However, gross margins in both the aviation and
Auto/mobile segments grew year over year.
The gross margin by segment was as follows - Auto/mobile 38.1%
(down 514 bps sequentially, up 29 bps year over year); Aviation
73.2% (up 432 bps sequentially, up 872 bps year over year);
Outdoor 62.4% (down 617 bps sequentially, down 545 bps year over
year); Fitness 60.2% (down 447 bps sequentially, down 419 bps
year over year) and Marine 50.6% (down 1,323 bps sequentially,
down 921 bps year over year).
The operating expenses of $224.1 million were up 12.6% from
the previous quarter's $199.0 million and down 4.1% from $233.7
million in the year-ago quarter. The operating margin shrunk 432
bps sequentially and 251 bps year over year to 19.5% in the last
Cost of sales and advertising increased sequentially as a
percentage of sales, with R&D and SG&A declining.
Specifically, cost of sales increased 476 bps sequentially,
followed by advertising (down 161 bps). R&D and SG&A
dropped 143 bps and 62 bps, respectively.
On a pro forma basis, Garmin reported a net income of $129.3
million, or a 16.8% net income margin compared to $140.3 million,
or 20.9% in the previous quarter and $165.6 million or 18.2% net
income margin in the fourth quarter of last year. The fully
diluted pro forma earnings per share (EPS) were 66 cents,
compared to 72 cents in the Sep 2012 quarter and 85 cents in the
comparable prior-year quarter.
There were no one-time adjustments in either the previous or
Inventories were down 12.1% sequentially, with inventory turns
increasing from 2.8X to 4.0X. Days sales outstanding (DSOs) went
from 69 to around 72. The cash and short term investments balance
increased $14.7 million to around $1.38 billion, with the company
generating around $175 million from operations.
Garmin spent around $12 million on capex, yielding a free cash
flow of around $163 million. Garmin has no long term debt and
long term liabilities were around $378 million at
2013 Guidance Disappoints
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 Zacks
Consensus Estimate for 2013 has moved down 50 cents since the
The main reason for the disappointment is the expected decline
of 15-20% in auto/mobile revenues, which 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 #5 on the
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