Garmin Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the government limited third quarter 2019 earnings conference call. At this time, we'll put this on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised that today's conference is being recorded. If you require offer assistance, please press star, then zero. I would like to hand the conference over to your speaker today. Teresa Sachs, Head of Investor Relations. Please go ahead.

Good morning. We would like to welcome you to Garmin Limited's third quarter 2019 earnings call. Please note that the earnings, press releases, and related slides are available at Garmin's investor relations site on the Internet at www.garmin.com. An archive of the webcast and related transcripts will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, gross and operating margins, and future dividends, market shares, product introductions, future demand for our products, and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pimble, President and Chief Executive Officer, and Doug Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimble.

Thank you, Terry, and good morning, everyone. Earlier today, Garmin reported another strong quarter of revenue growth of 15% to $934 million. Aviation, fitness, outdoor, and marine collectively increased 24%. and contributed 85% of total revenues. Gross margin improved to 60.7%. Revenue growth and expanding margins resulted in significant operating leverage in the business. Operating income increased 33% year-over-year to $261 million. And operating margin expanded to 28%. This resulted in GAAP EPS of $1.19 and Performa EPS of $1.27 in the quarter. We are pleased with our performance in the first three quarters of 2019, and these strong results give us confidence to raise our full-year guidance, which I'll explain in a moment. So I will discuss our financial results in greater detail in a few minutes, but first I'd like to provide a few brief remarks on the performance of our business segments. Starting with the aviation segment, revenue increased 28%, driven by growth in both OEM and aftermarket systems. Growth in operating margins remained strong at 74% and 35%, respectively, resulting in operating income growth of 30% over the prior year. Growth in OEM systems was driven primarily by the recent certification of the Citation Longitude, featuring our G5000 integrated flight deck. However, the strength was broad-based as other aircraft platforms also contributed to the growth. Growth in aftermarket systems was driven by strong ADS-B sales and the recently certified G5000 integrated flight deck for the Citation XL and XLS. During the quarter, the G1000H NXI was certified in the Bell 407 GXI helicopter, representing the first IFR certification for this advanced helicopter flight deck. I'd like to highlight this morning's Autoland announcement. This new safety technology is designed to return an aircraft and its passengers safely to the ground in the event a pilot is unable to do so. We believe Autoland is disruptive new technology that will change the way people think about safety in general aviation aircraft. Autoland will soon be available as part of the G3000 integrated flight deck on the Cirrus VisionJet and the Piper M600 pending final FAA certification. Turning next to the fitness segment, revenue increased 28%, primarily driven by growth in wearables and contributions from tax. Gross and operating margins were 52% and 20% respectively, resulting in operating income growth of 33% over the prior year, At EPO, which is Europe's leading consumer electronics trade show, we announced a sweeping update to our line of consumer wearable products, including new versions of the Vivo Active series in two sizes, the Vivo Move 3 hybrid smartwatch series, and the all-new Venue smartwatch, featuring a brilliant AMOLED color touchscreen display, comprehensive health and fitness features, and long battery life. We also announced the Tacx Neo2T Smart Trainer featuring enhanced drive design and performance analytics to simulate an outdoor ride as realistically and quietly as possible. Turning next to the outdoor segment, revenue increased 23% on a year-over-year basis with growth in multiple product categories led by adventure smartwatches. Gross and operating margins improved year-over-year to 66% and 41% respectively, resulting in strong operating income growth for the segment. At the recent UTMB trail running event, we launched the Phoenix 6 Adventure smartwatch series with larger displays and innovative performance features. We also introduced the Phoenix 6X Pro Solar, the first of its kind with our exclusive solar harvesting technology. We've often mentioned that inReach technology has been a growth driver for the outdoor segment, and that was definitely the case in this most recent quarter. I'm pleased to report that inReach recently passed a significant milestone facilitating over 4,000 SOS incidents since its launch in 2011, demonstrating the crucial importance of satellite-based two-way messaging wherever our customers need assistance. We believe InReaps has room to grow in the future as more people recognize its potential to change outcomes and save lives. Turning next to the marine segment, revenue increased 9% as we saw solid sales across multiple product categories led by chart plotters. Gross and operating margins improved year-over-year to 60% and 19% respectively, resulting in strong operating income growth for the segment. During the quarter, we were named Manufacturer of the Year by the National Marine Electronics Association for the fifth consecutive year, reflecting the strength of our innovative products and our leading market position. We were also named the Exclusive Marine Electronics Provider by both Regulator Marine and Sea Hunt, solidifying our leadership in the premier center console boat market. Looking finally at the auto segment, revenue decreased 17%, primarily driven by declines in our OEM business and the ongoing P&D market contraction. Our global market share position in the P&D category remains very strong. Gross and operating margins improved year-over-year to 48% and 15% respectively, resulting in operating income growth of 39%. During the quarter, we began shipping the Overlander all-in-one navigation device which is a new product category designed for the growing community of overland adventure enthusiasts. So in summary, we're very pleased with the results in the first three quarters of 2019. Given this strong performance, we're raising our projected full-year revenue to approximately $3.65 billion. We're maintaining our full-year gross margin at approximately 59.5% and raising our full-year operating margin to approximately 24.3%. We're also updating our full-year perform-effective tax rate to approximately 16%, resulting in pro forma earnings per share of approximately $4.15. So looking quickly at guidance by segment, we've increased growth expectations for aviation to 20%, fitness to 16%, and the outdoor segment to 11%. Guidance for the auto and the marine segments are unchanged. That concludes my remarks. Next, Doug will walk you through additional details on our financial results.

Doug? Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our third quarter financial results to move the comments on the balance sheet, cash flow statement, and taxes. We posted third quarter revenue of $934 million, representing 15% increase year-over-year. Gross margin was 60.7%. 130 basis point increase from the prior year. Operating expense, percentage of sales, was 32.7%, 240 basis point decrease from the prior year. Operating income was $261 million, a 33% increase year-over-year. Operating margin was 28%, a 380 basis point increase from the prior year. Our GAAP EPS was $1.19. Our performing EPS was $1.27. a 27% increase from the prior year. Next, we'll look at third quarter revenue by segment. We achieved record third quarter revenue of $934 million. Consolidated revenue grew 15%, led by solid, diligent growth in our aviation, fitness, and outdoor segments. Also, the marine segment had solid growth of 9% during the quarter. On a combined basis, aviation, fitness, outdoor marine, We're up 24% compared to the prior year quarter. Looking next at third quarter revenue and operating income. Combined basis, aviation, fitness, outdoor, and marine segments contributed 85% of total revenue in third quarter of 2019 compared to 80% in the prior year quarter. Aviation grew from 18% to 20%. Fitness grew from 24% to 26%. and outdoor grew from 26% to 28%. As you can see from the charts that illustrate our profit mix by segment, combined basis, the aviation, fitness, outdoor, and marine segments delivered 92% of operating income in the third quarter of 2019 and 2018. All five segments had strong year-over-year increases in operating income dollars and improved operating margins. Looking next at operating expenses, Our third quarter operating expenses increased by $21 million for 7%. Percentage of sales operating expenses were 32.7% for third quarter 2019, 240 basis decrease in a comparable quarter last year. Research and development increased $10 million year-over-year due to investments in engineering resources. Our advertising expense was up $2 million for the prior year quarter 2019, due to higher outdoor fitness expenses partially offset by lower expenses in the auto segment. SG&A was up $10 million for the prior year quarter, but decreased percentage sales. Increase was primarily due to personnel-related expenses and incremental costs associated with recent acquisitions. A few highlights on the balance sheet and cash flow statement. We ended the quarter with cash and market securities for approximately $2.5 billion. Account receivable decreased sequentially due to seasonal trends and increased year-over-year to $558 million due to strong third-quarter sales. Inventory balance increased sequentially to $750 million prepared for a seasonally strong fourth quarter. Year-over-year increases due to timing of new products, acquisition of tax, and efforts to increase data supply to support our increasingly diversified product lines. In the third quarter of 2019, We generated free cash flow of $158 million. During the third quarter of 2019, we reported an effective tax rate of 11.6% compared to the effective tax rate of 8.5% prior quarter. Increase in effective tax rates primarily due to lower income tax reserve releases in the third quarter of 2019. Also, we've updated our guidance for the full year to perform an effective tax rate to approximately 60%. This concludes our formal remarks. Lydia? Can you please open the line for Q&A?

Yes, ladies and gentlemen, as a reminder to ask a question, you will need to press the star then the one key on your touchdown telephone. To withdraw your question, please press the pound key. Please stand by while we'll compile the Q&A roster. And our first question coming from the line of Charlie Anderson with Doherty & Company. Your line is open.

Yeah, thanks for taking my questions, and I congrats on a really strong quarter outlook. Cliff, I want to start with aviation. You mentioned some of the strength in OEM. I wonder if maybe you could just sort of speak to the pipeline of opportunity there, sort of the order book. As we think about ADS-B, we'll cycle down at some point, and the ability of OEM to potentially offset some of that cycling down, then I've got to follow up.

Okay. Okay. Good morning, Charlie. Yeah, in terms of OEM, as reported last quarter in the gamma results, General Aviation Manufacturers Association, there's been strength across the categories of business jets that we're on as well as strength in the piston aircraft, particularly addressing the training market. So that's driving continued momentum into Q3 and beyond. We see those opportunities as ongoing because particularly in the training market, The need for pilots is very acute, and the demand for aircraft trainers is high. In terms of ADSD and its impact, it's definitely a growth driver for us, but even absent that particular category, we saw strong growth in the business. We're gaining confidence that going forward, the cockpit modernization efforts that we're seeing across the fleet and demand for new aircraft should lead to positive results for the segment.

Great. And then for my follow-up, I think, you know, wearables business is doing very well for you right now. I wonder if maybe you could speak to what you're seeing in terms of unit growth versus ASP increases as you've moved up market here. And, you know, is there a trajectory of continued ASP increases in the future from your standpoint? Thanks.

Yeah, we're definitely seeing unit growth in the business. So the market is expanding and we're taking share as people recognize the value of our solutions and the capability of our products. We do see some ASP benefits as well as we introduce higher-end products like the Phoenix 6 line with unique features as well as MARC. So there's a positive impact there as well. Great. Thanks so much. Thank you.

Our next question is coming from the line of Robert Stegner with Credit Suisse. He'll let himself in.

Hi. Good morning. Good morning. Really, really just strong numbers across the board and particularly on the operating margin. I wanted to ask you, Doug, you talked about the various categories in your slide number 16. And while these are maybe moving around on an absolute basis, they seem to be fairly low historically on a percentage of sales basis. And I was wondering if you could talk to the trends there, R&D, is a bit lower than it's been. It sounds like maybe we back in that a little bit. And then the other two categories as well. How sustainable is this level of overhead?

Yeah, sure. That's great. So I want to give you a little bit of perspective on operating structure, as you said, between, you know, advertising, SG&A, and R&D. So thinking about it on a full year base, a percentage of sales, you know, what we're thinking about as it relates to advertising, We anticipate advertising percentage sales to be relatively flat year-over-year. So with that, we will be spending more advertising dollars this Q4 than we did the last Q4, and that's primarily a function of just having, you know, new product launches. So we will be very targeted, you know, in our advertising, depending upon, you know, what those product launches are. As it relates to SG&A, thinking about SG&A, Full year percentage of sales, I anticipate that to be relatively flat year over year also. What we have in there is a piece of that is due to acquisitions. The other piece of it is just general merit, other type of inflational type of increases we have in SG&A. Thinking about R&D as a full year's percentage of sales, right now we look at that probably about 50 basis points lower This year and last year, you know, from a dollar standpoint, there will be an increase. The situation there is that we are capitalizing some of our R&D expenses. There are certain auto OEM contracts that include contractual guarantees for reimbursements of R&D expenses. So in those cases, you know, our R&D expenses are capitalized. They're put on the balance sheet, you know, until that cash is received from our OEM receipts. I should say the expense structure, depending upon what kind of different product launches we have and kind of advertising, some of that will fluctuate quarter over quarter. But right now we're getting some nice leverage due to our sales also.

I was going to ask you, if you look at the non-auto R&D, are you at a point here where that decreases over time as a percentage of sales? Like you just said, on scale, you're at some kind of a critical mass where it doesn't have to track at this point with the growth in sales?

You know, it really is a function of that top-line sales we have. So here's what I would say. We'll continue to invest in R&D as we continue to have new products over that period of time. And some of those We'll invest before the products come in in that situation. But, you know, we'll continue to invest appropriately to support, you know, our diversified line of products over a period of time as we go through.

Okay. And then just quickly, Cliff, for you, I wanted to ask about M&A. And, you know, I'm often focused on capital deployment. There's a couple things out there. I just wondered if you could comment on them. The possibility out in the last 24 hours that Google could be looking at Fitbit, and how that might change the dynamics in the industry. And then also, you know, at the same time, I think United Technologies has talked about or maybe in some kind of a situation where it may have to sell a GPS navigation business as part of its upcoming transaction with Raytheon. Can you comment on your interest in those types of properties?

Yeah, so we've seen the speculation, obviously, around Fitbit and Google. It's really hard to say what we can think about that without any kind of formal announcement and whether or not it's even a real thing. We believe that Fitbit's customer base is very different from ours, and our product focus is also different. So it's not something that we believe impacts us, and we're not worried about it. In terms of other opportunities, we look at every opportunity basically in terms of what it can bring to Garmin, both in terms of technology or product lines. So we would evaluate any of those opportunities based on that and what we can achieve with it going forward.

Would military be of interest since it really hasn't been a big historical focus for you?

I think generally the military and defense is an area of interest and potential growth for us. We've been focused on adapting our off-the-shelf products into those opportunities rather than doing full custom bid development kind of work. So those are the opportunities we're mostly focused on. Great. Thank you both. Yep. Thank you, Robert.

Our next question coming from the line of Ben Bowman with Cleveland Research. Your line is open.

Sorry for that. Good morning, everyone. Appreciate you taking my question. Can we start within fitness and outdoor, could you walk us through a little bit of where you think you are in the rollout of new products? It still looks like there's some extended lead times. Where do you think you are on channel inventory, supply? overall tightness as far as raw materials, and then I have a follow-up.

Yeah, so in terms of product introductions, we're mostly set for the remainder of the year, so we have a very strong lineup going into Q4. With any new product announcement, ramping up is always a challenge for any company, so we're in the process of doing that, and that's part of the the inventory situation with us as well as we build inventory to build these products and deliver them during the fourth quarter.

A second one, looking at inventory, you continue to expand the SKU count. Is there a way to think about what is normal for inventory into the future? And then, within the new product launches themselves, are there any particular pieces, that you have not been able to source or you're having any yield issues, anything of significance that would extend availability into next year?

Yeah, so definitely we are taking a different approach to some of these markets by offering unique kinds of products, especially appealing to people who want to differentiate themselves rather than wearing the same kind of products. So that does lead to higher skews. It does lead to higher levels of inventory, and that's something that we use as a tool in the business. We've seen some normalization of these amounts because we're focused on safety stock in the inventory and reducing risk, making sure that we can deliver the products that we want to deliver to the market, especially during the selling season. So in terms of yields and things like that, I mean, again, like I mentioned, as new products ramp, there are initial challenges, but Our factory is working very hard, and the product is flowing to the market.

And the last question I have is, as it relates to automotive, any update on the timing of the BMW China opportunity or the broader BMW Tier 1 status? And when does the company begin to make some of the investments? either new facilities or greater headcount as you support that bigger long-term opportunity as a Tier 1 vendor? Thank you.

Yeah, so the China opportunity will be ramping up starting in later 2020 and into the 2021 model year. So that's what we've been preparing for in the first phase of this opportunity with BMW. In terms of making additional investments for our business that comes after 2020, that opportunity. We're in that process right now. We've been hiring additional people in the automotive segment to support that business, and we're in the process of selecting new sites that will produce the product, especially in the European market. Thank you. Thank you.

Our next question coming from the line of Paul Chung with JP Morgan. Your line is open.

Hi, guys. Thanks for taking my question. So first up, just on aviation margins, you've seen, you know, a nice step up in operating margins kind of over the course of, you know, the last three years. You know, some scale benefits on ADS-B in your core business, I assume. You know, your gross margins have been pretty steady, but if you could kind of expand on what's behind that step up there, and do you expect that mid-30% range to stand, you know, as we look beyond fiscal year 19? And then can you also kind of help us size the EDSB opportunity, you know, in Europe and the runway there and your kind of expectations for overall demand next year after the deadline in the U.S.? And I have a follow-up.

Yeah, so in terms of the operating margin in aviation, we're experiencing some solid leverage in the business as the revenues have outpaced our need to grow expenses. I would say that that we would still like to hire more people, engineering people in aviation, in order to be able to support ongoing opportunities that are going on there, but we're managing and it is giving us some leverage in the business. In terms of, you know, the expectations for the profit, I mean, at these kinds of investment levels and these kinds of revenues, obviously we should be able to be pretty predictable in terms of our operating profit, but as the business changes, we'll, of course, adjust and evaluate. For ADS-B, we're expecting that the opportunity will, of course, begin to flatten. That's inevitable as we go into the fourth quarter and into next year. But we do see spillover business into next year, particularly the first half, as shop capacity still remains limited, so there's mostly linear output from shops right now, and there's still more aircraft that need to be equipped. There are new opportunities, as you pointed out, so Europe is one of those, and also Canada is evaluating their compliance as well. Both of these, I would say, are interesting to us, but obviously the majority of the aircraft and the opportunities have been in the U.S.-based ADS-B that they'll be nice enhancers for the coming years.

Okay, thanks for that. And then second question on free cash flow, you know, it looks like you had a bit larger than normal inventory drag. It's quartering kind of less accounts receivable uplift than usual. You already mentioned it's a combination of new products and tax probably ahead of seasonally strong 4Q, but just want to get your thoughts on free cash flow to kind of end the year. Should we expect you know, slightly more outsized 4Q than usual, and do you have any estimate on, you know, where you think inventory balances will be in 4Q, or is it too early days? Thank you.

Sure. As it relates to a free cash flow for the full year, we would estimate our full year free cash flow to be around $575 million. That includes a CapEx estimate for the full year of about $125 million. And regarding inventory, yeah, inventory, you know, is up year-over-year Q3. We'd expect that to be up at year-end compared to year-end last year also. We expect it probably to be up around 25% year-over-year due to some of the things that Cliff mentioned, just making sure that we do have ample days of supply to support, you know, diversified product lines we do have.

So in that 525, is that more of a timing of, kind of working cap and you expect maybe slightly more, you know, normalization in the first half of 20? Or how should we think about that?

Thank you. So, sorry, 575. So, it's 575 we anticipate for the full year. So, with that, you know, as it relates to working capital, those are, you know, as it relates to 2020, you know, we'll kind of look at that, you know, we'll get into the planning cycle for that. But, you know, as the inventory that we mentioned, we do anticipate there to be some level of inventory that's going to be higher on a year-over-year basis just due to having more inventory to support, you know, our ongoing business. Thank you.

Our next question coming from the line of Nick with Longbow Research. Your line is open.

Thanks. Good morning, guys, and congrats on great results. Really impressive. I have a couple of questions. So the implied 4Q EPS guidance looks soft, which is not atypical for you guys. So is that a function of atypical conservatism, or is there a shift in operating expense dollars from 3Q to 4Q? I think that you talked about maybe increasing, having worth of the higher advertising expenses, or is there something else that drives that shift? what looks on the front, on the headline, are relatively soft. Yes.

As we mentioned, yeah, the advertising, we would expect, you know, those to be higher, you know, in the Q4 period of time, just to the new product for launches and such that we could have there.

Okay. And if we can shift gears to fitness, can you provide us some color on the gross margin there, which I was a little bit surprised given the revenue ramp up and the trend there. I understand tax is dilutive here, but is there anything else besides that affecting margins? And can you give us some color on the sell-through of the new products, and specifically for runners? I noticed that they were not highlighted in your remarks and presentations, and I know those were a core part of your portfolio and relatively new here in 2019. And, yeah, that's the question there with fitness.

Yeah, so we're preparing to be very promotional in fitness in Q4, particularly in the advanced wellness products that are more the consumer variety that are sold through the mass market outlet. So we're prepared for that. And in terms of specifics on product lines, definitely our new products have done very well. There's a lot of interest and excitement around those. The forerunners have been doing very well, and the sell-through is meeting our expectations, so we have no concerns there.

Okay, and lastly, just a follow-up and clarification on the free cash flow. So it seems like you brought down the capex plan from $150 to $125, yet free cash flow seems to be also going down. Is the delta coming up just from higher working capital headwinds?

Yes, correct. Our working capital is what the headwind is that's causing the overall free cash flow to come down, just increased inventory, as well as you will see the receivables, you know, up year over year. That's just a function of, you know, having higher sales, but it's really a function of working capital, primarily the inventory we talked about.

Okay, got it. Thanks, guys. Good luck.

Thank you.

Our next question coming from the line of Ivan Vincent with Tigris Financial Partners. The line is open.

Thank you for taking my call, and a big congratulations on another great quarter. Thanks, Ivan. And congratulations on the launch of this new auto land. Can you give us some idea of what the incremental cost is to add it to a plane?

I think it's something that gets sold through the OEM provider. So in many cases on these more advanced aircraft that we're targeting, they contain the systems that are needed to be able to do the function, particularly like auto throttle, although there's some additional control elements that are needed. But in general, that's something that will be sold through and priced on their end.

And is this only available as a, you know, a build into a brand-new plane, or can existing planes or will eventually existing planes be able to get this upgrade to add to the tier?

There is a significant amount of complexity that goes along with the system, and so building it into the aircraft at design and production of new aircraft is the best way to do that. It's technically possible to bring it into other aircraft, but I think that's something we'd have to evaluate on a case-by-case basis.

And so it's available in two planes right now, right, the Piper and the Cirrus? Did you work with both or either of those two companies in the development of this?

Yeah, so the Cirrus SF-50 and the Piper M600 are the first two platforms. We've been working with both manufacturers to implement and certify the system. And they're in the final process of the aircraft level certification for the function. and should be a feature then that they would offer in their 2020 model years.

And you're going to be where this will be available. You don't have any kind of exclusive deal feature, right? You're going to be able to work with other manufacturers to integrate this as well, right?

Yes, it's definitely something that can be offered as part of our G3000 systems, and even beyond, we can do the G5000 as well. But it's something that's part of our core technology offerings for Garmin.

All right. Congratulations again. Thank you.

Thanks, Ivan. Our next question coming from the line of Eric Luthring with Morgan Stanley. Your line is open.

Hey, good morning, guys. Congrats on your quarter here. So I just want to get back to the aviation segment for a second. I know that in the past we've talked about kind of this 100,000 to 160,000 aircraft runway for ADS-V upgrades. Through the beginning of October, we're kind of past that 100,000 threshold. So at the low end of the range, it would imply we're kind of through ADS-B. At the high end, it implies we could have up to five more quarters of kind of strong ADS-B growth. And obviously, the implications for the model are huge because there's other retrofit work that can be done. So I'm just curious from your perspective how we should be thinking about the ADS-B runway going forward. as we kind of head into 2020, thinking obviously about the January deadline?

Yeah, I think it's probably somewhere in between the two scenarios you outlined. Definitely, as you pointed out, we've reached the low bar, if you will, on the number of aircraft that would equip. There's probably still an additional 25% of the fleet that that remains in question in terms of what kind of equipment they would select or if they even equip or if aircrafts are retired, which is also a scenario that's playing out for some kinds of aircraft. But we do think that the reality lies somewhere in between, and we're planning on continued activity into the first half of 2020.

Okay, that's helpful. Thanks. And then if we just shift to kind of outdoor and fitness, obviously huge product launches this quarter. Just curious if you could give any color on kind of what percentage of growth was a result of the new product launches available for the last month of the quarter versus legacy products that were available for, you know, call it the entirety of the quarter.

Yeah, outdoor was probably the one that was most impacted by product announcements within the quarter with the Phoenix 6, so it did have the a very positive impact on the outdoor segment. In general, in fitness, our new products that we introduced, the running products in Q2 as well as the new activity trackers in Q3 also had a positive impact on the quarter.

And is there any way that you could detail or just break out kind of one, if tax is performing in line with expectations, and then two, kind of what percent of fitness tax, you know, if it's still kind of contributing half of the growth this year that you expected, more or less, just any color, that would be great. Thanks.

Yes, the tax is meeting our expectations, so they're right in line with what we expected. The growth of the other categories was better than we expected, so it meant that for the quarter growth the majority of our growth was actually organic within the segment, but still tax met its expectations.

Awesome. Thank you. Congrats again.

Yep. Thank you.

And our next question coming from the line of Robertson Grand with Credit Suisse. The line is open. Hi.

I just want to come back on ADS-B a little bit. And I hear what you're saying, Cliff, about the eventual fade that we're all trying to time. But one thing that we learned from United Technologies earlier this earnings season was they're probably running at about four to five times their maintenance level of sales on ADS-B. They're somewhere between 250 and 300 million. And I think they said a normal number is around 60 to 70 million. I just wanted to see if you're seeing the same kind of magnitude of I understand that you're targeting, to some extent, smaller aircraft or much higher volumes of smaller aircraft, but is there any context you can give us regarding this? Because, obviously, we're all very focused on what the FAA looks like in terms of quantifiable numbers.

Yeah, so definitely there's a difference, as you point out, in the business models between the two companies and FAA. So I think some of the multiplier that you mentioned could be due to that. I would say that, you know, for us, you know, again, if we subtracted the impact of ADS-B, we still had very strong growth in our aftermarket business. And I attribute that to the fact that we've got great products, and some of them don't even have anything to do with ADS-B, such as our autopilot systems, for example. and also our aftermarket cockpits for things like the Accel and the XLS. So the dynamic's a little bit different from us. There definitely is an argument to be made that as people are motivated to upgrade to ADS-B, they're also upgrading the other equipment, and we've said that before. It's difficult to quantify how much of that's interrelated, and there is quite a bit of cockpit equipment that needs modernization. Many cockpits are are decades old, and the equipment now that is offered on the market is compelling and allows people to upgrade their aircrafts into newer, safer, more reliable equipment. So we see that dynamic continuing even when ADS-B peaks and fades.

Okay, and then just sticking with aviation while I'm still here, I wanted to get an idea how we should think about the OE side. You talked about it earlier, an earlier question, talked about, you know, the ramp. You've got the longitude here. And I think you made some positive comments about the OE side. From where we sit, we see a very flattish overall OE market that is driven in some part probably for Garmin on new introductions. But overall, unit volumes are fairly flat. And I would say there's not a lot of increase in demand. But in the context of that, I wanted to get a sense of how small that business is relative for you to the overall aviation business, given how strong your aftermarket retrofit components are. In other words, should we worry too much about the OE side if it is indeed flat?

Well, I feel like our OEM business is actually targeting the sweet spot of where aviation is right now. As I mentioned in other questions, the trainer market is something that we'll see continued demand for several years to come as the pilot shortage is reckoned with in the industry and as there is significant demand for trainer aircraft to train these pilots. And then the class of aircraft that we're on is kind of the mid-sized business jet on down. And so, again, that's that's where that's kind of a sweet spot right now, particularly in this economy, as these tend to be, tend to tilt more towards owner-flown or the fractional areas, which has been a very strong area for us. So we see, you know, continued opportunity in the OESI. You asked the question about, you know, how significant is it relative to the overall segment, and as we've remarked in the past, it the segment is roughly split evenly between retrofit and OEM. So OEM is definitely a strong influencer in our business, and we see opportunities going forward that will continue.

Is there a reasonable way to split OEM into its varied components, whether it's piston versus jet, you know, along those lines, or aircraft versus trainers?

Yeah, I think if you look at the public information that's available for the industry through Gamma, they detail that out pretty well, but we have strong market share across all of those platforms. So you would track those numbers? We do track those numbers, yes.

Okay.

Thanks so much. Yeah, thank you so much.

Our next question coming from the lineup, Nick Loneroth with Longbow Research. Your line is open.

Yeah, guys, just a few follow-ups. One on Autoline, sounds like it's a product that has a little bit more heavy on the software side. Is that correct? And if it's correct, how should we think about the margin contribution to the overall aviation segment? I'm assuming that should be accretive, but are you willing to provide any call around that? Thanks.

I think in terms of margin percentage, we don't see any impact from that. We see this as an opportunity to provide additional content onto the aircraft platform, which in turn leads to profit dollars. So that's our view.

Okay. And quickly on Phoenix, I know it's pretty early, but can you give us some sense on, you know, how it sold through relative to your expectations? And specifically, are you willing to talk about mix within Phoenix? Our work kind of suggests that you're seeing some benefit from customers mixing up and buying higher-end Phoenix watches. So if you can give us any call there, that would be helpful. Thanks.

We are pleased with the sell-through, and we're working very hard to deliver on the backlog that we have in that product. we are seeing people step up to the higher-end versions, particularly the larger Phoenix 6X, and the interest in the 6X Pro Solar is also very strong. So there's a lot of positives in the Phoenix line that are driving our business. Thanks. Thank you.

I'm not showing any further questions at this time. I would now like to turn the call back over to Terry Smith for closing remarks.

Thank you, everyone. As usual, Doug and I will be available for callbacks throughout the day. Have a good one. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect. Everyone have a great day.