) reported second quarter earnings that beat the Zacks Consensus
Estimates by 28 cents, or 41.4%. Currency had a 4 cent negative
impact on earnings, and if excluded would have raised the EPS by a
The results are a reflection of the successful diversification
of revenues and a growing number of high-margin products across all
Garmin is deferring lifetime maps, connected services and
premium traffic over their economic lives. Net deferrals after
taxes were 5 cents a share in the last quarter.
Garmin's second-quarter revenue of $718.2 million was up 29.0%
sequentially and 6.5% year over year, helped by particular strength
in the outdoor segment, which increased double-digits from both
periods. Higher volumes (up 44.4% sequentially, 3.8% year over
year) were the main reason for revenue growth from both the
previous and year-ago quarters. The blended average selling price
("ASP") was down 10.7% sequentially but increased 2.6% from the
The Americas region was clearly the market driving Garmin's
fortunes, since the region 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 (55% share) grew 33.9% sequentially, the
EMEA region (37% share) grew 32.6%, while APAC (8% share) declined
6.2%. The decline in APAC was on account of a major customer
shifting the shipping location from the region. The three regions
grew -10.2%, 5.0% and -8.0%, respectively, from the comparable
Revenue by Segment
Garmin's Auto/Mobile, Aviation, Outdoor, Fitness and Marine
segments generated 55%, 11%, 14%, 11% and 9% 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 40.4% sequentially and 8.1% year over year. However,
Garmin continues to expect a 10-15% decline in both shipment and
revenue for the core PND market due to the availability of PND
substitutes - primarily smartphones from the likes of
Research In Motion
) and others running on
) Android OS.
Garmin remains the number one supplier in the U.S. (growing its
market share to more than 70%) and one of the largest suppliers in
Europe (35% 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 up 4.2% sequentially and 3.7% year over year.
Results in the last quarter benefited from stronger sales into the
OEM segment. However, the benefit was partially offset by weaker
sales in the after-market.
The recovery in the aviation market as been slower than
expected; however, new products and stronger business from OEMs
contributed to the increase in aviation revenues.
segment was up 30.2% sequentially and 24.1% year over year. Garmin
is seeing particular success in this segment because of the many
new products it has introduced that are graduially expanding its
markets and enabling it to enter new categories. The golfing
market, which didn't even exist a couple of years back, did very
well in the last quarter, driving results for the company. New
products are expected to remain an important driver of segmental
segment was up 14.9% sequentially and 4.9% year over year. Growth
continues to be driven by new higher-margin products, especially in
the running category. Garmin is also entering new segments (such as
swimming in the last quarter). 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 20.9% sequentially, while declining 14.3% from the
year-ago quarter. The decline from the year-ago quarter was on
account of weakness at both OEMs and in the after-market, which
Garmin said was because of the shrinking of the global marine
Garmin's strategy here has been the building of a solid
portfolio of products and strengthening strategic relationships
with marine OEMs. This could be the reason for the strong
Gross margin for the quarter was 58.7%, up 775 basis points
(bps) sequentially and 1,095 bps year over year. While volumes
alone drove the sequential expansion, the higher ASP helped the
expansion from last year. Additionally, segment-specific matters
The Fitness and Auto/mobile segments saw the greatest
expansions. The Fitness segment saw easier comps because there was
some heavy discounting on end-of-life products in the year-ago
quarter. Auto/mobile was helped by recognition of previously
deferred high-margin revenue.
The gross margin by segment was as follows - Auto/mobile 51.2%
(up 1,191 bps sequentially, up 1,573 bps year over year); Aviation
71.4% (up 322 bps sequentially, up 222 bps year over year); Outdoor
66.6% (up 531 bps sequentially, up 120 bps year over year); Fitness
69.3% (up 819 bps sequentially, up 1,094 bps year over year) and
Marine 63.6% (up 389 bps sequentially, up 776 bps year over
The operating expenses of $217.8 million were up 12.6% from the
previous quarter's $193.4 million and up 14.3% from $190.5 million
in the year-ago quarter. The operating margin expanded 1,218 bps
sequentially and 889 bps year over year to 28.4% in the last
All except advertising expenses declined sequentially as a
percentage of sales, but cost of sales declined the most (775 bps),
followed by R&D (314 bps) and then SG&A (237 bps).
Advertising expenses increased 109 bps.
On a pro forma basis, Garmin reported a net income of $185.9
million, or a 25.9% net income margin compared to $86.9 million, or
15.6% in the previous quarter and $109.5 million or 16.2% net
income margin in the second quarter of last year. The fully diluted
pro forma earnings per share (EPS) were 95 cents, compared to 44
cents in the March 2012 quarter and 56 cents in the comparable
There were no one-time adjustments in either the previous or
Inventories were down 5.7% sequentially, with inventory turns
increasing from 2.7X to 3.1X. Days sales outstanding (DSOs) went
from 71 to 62. The cash and short term investments balance dropped
$10.3 million to around $1.36 billion, with the company generating
around $223 million from operations.
Garmin spent around $12 million on capex, yielding a free cash
flow of around $211 million. Garmin has no long term debt and long
term liabilities were around $350 million at quarter-end.
2012 Guidance Much Better than Expected
Garmin provided very strong guidance. Revenue for the year is
expected to be $2.75-2.80 billion, with the gross margin at 52-53%,
operating margin of 21-22% and EPS of $2.70 to $2.85. The Zacks
Consensus Estimate for the year was $2.64.
We think 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 growing strength in
segments other than PND, we are growing increasingly positive about
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.
Garmin shares carry a Zacks #3 Rank, implying a Hold rating in
the short-term (1-3 months).
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