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spk09: Good day, and thank you for standing by. Welcome to Garmin Limited first quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Terri Sec, Director of Investor Relations. Please go ahead.
spk00: Good morning. We would like to welcome you to Garmin Limited's first quarter 2022 earnings call. Please note that the earnings press release 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 margins, operating margins, future dividends or share repurchases, 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. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Presenting on behalf of Garmin Limited this morning are Cliff Temple, 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.
spk02: Thank you, Terri, and good morning, everyone. As reported earlier today, consolidated revenue increased 9% to $1.17 billion, representing a new first quarter record. Four business segments reported revenue growth in the quarter, three of which delivered double-digit growth. We generated $229 million of operating income down 8% from the prior year. Operating margin was 19.5% and was negatively impacted by gross margin performance, which declined due to historically high freight costs combined with the strengthening of the U.S. dollar. In addition, operating expenses increased for a variety of reasons, including higher associate headcount, increased compensation costs, and the increase of certain operational expenses as business activities continue to normalize. We performed very well during the quarter, despite a combination of old and new headwinds. Supply chain constraints persist, which limited the orders we could fill. Russia's invasion of Ukraine created an unthinkable humanitarian crisis and further complicated the global economic outlook. Despite these challenges, Demand for our products remains strong, and we are optimistic about the future. Our board of directors recently approved a $300 million share repurchase plan, which is in addition to the proposed $2.92 per share dividend that will be considered by shareholders at the upcoming annual meeting. Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with fitness, revenue decreased 28% to $221 million. Gross and operating margins were 48% and 0%, respectively. All product categories declined, but the normalization of demand for cycling products was the main contributor. While revenue from fitness wearables declined, on a combined basis, wearable device revenue across all segments at Garmin experienced robust growth. We expected the first half of the year to be challenging for the fitness segment as we compare against the outstanding performance of the prior year. While the decline was greater than expected, we believe these trends will moderate in the back half of the year as we move past the pandemic swings of 2021 and benefit from new product introductions. Moving to the outdoor segment, revenue increased 50% to $385 million, with growth in multiple categories led by strong demand for adventure watches. Growth and operating margins were 64% and 39% respectively, resulting in operating income of $149 million. During the quarter, we announced sweeping updates to our adventure watch lineup, including our flagship Fenix 7 series, featuring a distinctive new design with a touchscreen display, and the Instinct 2 series, available in two sizes, including versions that can operate indefinitely using our exclusive solar power technology. We also announced the all-new Epyx with a bright AMOLED touchscreen display and class-leading battery life up to 16 days. We believe that strong demand for these new products, as well as other categories in the segment, will be a growth driver for the remainder of the year. Looking next at the aviation segment, revenue increased 1% to $175 million, with growth driven by OEM product categories. Supply constraints impacted sales of aftermarket products, but the situation improved throughout the quarter. Gross and operating margins were 73% and 23% respectively, resulting in operating income of $40 million. Aircraft OEMs are reporting robust orders from both new and existing customers. Aftermarket demand is also strong, as customers invest in new cockpit systems. We believe these are positive indicators of growth for the remainder of the year. The marine segment delivered another quarter of impressive results, with revenue increasing 21% to $254 million. We experienced broad-based growth across multiple product categories led by chart plotters. Growth and operating margins were 51% and 23%, respectively, resulting in operating income of $59 million. LiveScope has proven to be a halo technology for Garmin, and the new LiveScope Plus sonar system raises the bar with higher resolution images and improved target separation. We continue to see strong demand for our marine products, and LiveScope Plus builds on this momentum. We believe this is a positive indicator of growth for the remainder of the year. Moving finally to the auto segment, revenue increased 11% to $138 million, with growth from both OEM and consumer categories. Gross margin was 38%, and we recorded an operating loss of $20 million, driven by investments in auto OEM programs. In consumer auto, we continue to diversify our product offerings with the launch of the Instinct 2 Diesel Edition SmartWatch for truck drivers. In the OEM category, we made significant progress preparing for the launch of the next generation BMW computing module platform. BMW approved our new Poland factory, giving it a rare green rating for mass production readiness. We anticipate delivering production parts to BMW starting in the second quarter. Before I turn the call over to Doug, it's important to remember that our diversified business model offers many different paths to achieve our consolidated growth goals. We remain focused on creating highly differentiated products in all segments that excite our customers and lead to success. Regarding our outlook for the rest of the year, I mentioned several new and existing headwinds we face, and we cannot predict the impact these might have on the business. Also, the first quarter represents the lowest seasonal quarter of our financial year, and much of the year remains ahead of us. With these things in mind, we are maintaining our 2022 guidance issued in February, which called for consolidated revenue of $5.5 billion and EPS of $5.90 a share. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?
spk07: Thanks, Cliff. Good morning, everyone. I begin by reviewing our first quarter financial results, then provide comments on the balance sheet, cash flow statement, and taxes. We posted revenue of $1,173,000,000 in the first quarter, representing a 9% increase year-over-year. Gross margin was 56.5%, 330 basis point decrease from the prior quarter. The decrease was primarily due to higher freight costs and favorable impact foreign exchange rates. Operating expense, percentage of sales was 37%, a 50 basis point increase. Operating income was $229 million, 8% decrease. Operating margin was 19.5%, 300 basis point decrease. Our GAAP EPS was $1.09. Performa EPS was $1.11. Next, Look at our first quarter revenue by segment and geography. In the first quarter, we achieved double-digit growth in three of our five segments, led by the outdoor segment with a robust growth of 50%, followed by the marine segment with 21% growth, and the auto segment with 11% growth. By geography, 21% growth in APAC, 13% growth in Americas, was partially offset by a 1% decline in EMEA. which was negatively impacted by foreign exchange rates during the quarter. Looking next at operating expenses. First quarter operating expense increased by $42 million for 11%. Research and development increased $20 million year-over-year, primarily due to engineering personnel costs. Advertising expense increased approximately $3 million to higher spend in the outdoor and marine segments. SG&A increased $19 million compared to the prior year quarter, primarily due to increases in personnel-related expenses, information, technology costs. A few highlights on the balance sheet, cash flow statement, and taxes. We ended the quarter with cash market securities approximately $3 billion. Account receivables decreased sequentially to $600 million following a seasonally strong fourth quarter and grew year-over-year relatively in line with our sales growth. Inventory balance increased year-over-year to $1.3 billion. We're executing our strategy to increase day supply to support our increasingly diversified product lines to optimize the mix of ocean versus air freight shipments to carry sufficient levels of raw materials safety stock to mitigate increased lead times. In the first quarter of 2022, we generated free cash flow of $126 million, a $206 million decrease than the prior quarter, primarily due to increased working capital needs and higher capital expenditures. Also reported effective tax rate of 10.3%, compared to 12.2% in the prior quarter. The decrease in effective tax rate is primarily due to an increase in U.S. tax deductions and credits. This concludes our formal remarks. Daloom, can you please open the line for Q&A?
spk09: Thank you. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Paul Chung from J.P. Morgan. Please go ahead, sir.
spk11: Hi. Thanks for taking my question. First up, you have a very nice head start in outdoor sports. off the strength of, you know, Phoenix and other product releases. Any update to kind of the year and how we think about that? Should we expect kind of more product releases throughout the year? And then can you help us on the kind of seasonal outlook for outdoor? That would also be helpful.
spk02: Yeah, good morning, Paul. I think in terms of the update to the year, you know, we basically – are still seeing things the way that we've laid them out, and it's very early in the year to really make any conclusions based on the start that we've had. But we do have a strong product lineup right now, and we have more new products coming throughout the year in all of our segments. And so a lot of our momentum and growth is driven around new innovation and new products.
spk11: Gotcha. And then a similar question in fitness, you know, the pace of decline was a bit more than expected. How do we think about the balance of the year as well? What drove the minimal operating profit in the quarter? Is that mostly component and cost related? How does that rebound throughout the year?
spk02: Fitness was weaker than we expected for sure. The cycling category is the biggest contributor to that. We are comping against really strong results from last year. So there's lots of moving pieces, lots of dimensions to this. But the cycling side of things is really the one that's the biggest impact. But if you look at it from a different angle, the operating profit was mostly affected by FX and freight costs. if those things would have been under normal circumstances, we would have been pretty much in the range of where our gross margin and operating margin profiles are for the segment.
spk11: Gotcha. And then lastly, Doug, on pre-cash flow, kind of any update on the, you know, annual guide? And, you know, the share buyback messaging, that's new. We haven't seen, you know, buybacks in four years, last four years. How should we think about kind of the pace there and potential for more kind of material buybacks given, you know, $3 billion net cash? Thanks.
spk07: Yeah. Yeah, regarding free cash flow, yeah, still, you know, early in the year, but, you know, there's a couple things we need to consider, one of which, you know, is our working capital needs. You know, we did have some of those working capital needs here in Q1 where we saw, you know, inventory increased more than the previous year. You also need a Factor in, you know, last year, you know, we had a large amount of inventory increases in the back of the year. So hopefully we won't have as much of an increase, you know, in the inventory, I'll say, year over year than we did last year in there. But, you know, the working free cash flow and other things, CapEx, you know, is pretty consistent, you know, year over year for the full year. And, you know, it depends also on the operating side of things. But we'll be giving more guidance on that, you know, in Q2. You know, as it relates to the share buyback, it's something that we evaluated with the board, and we felt that was something that was appropriate at this point in time regarding the amount that we're going to be doing. You know, it's really depending upon, you know, marketing conditions, business conditions at a point in time, you know, as we amount that we buy back during the period.
spk01: Thank you.
spk07: Thank you.
spk09: Thank you. I see our next question comes from the line of Will Power from Baird. Please go ahead. Oh, great. Thanks for taking the question.
spk08: Maybe just to follow up first on fitness, I think, you know, we and you all knew that there were some particularly tough cycling comps year over year, but it sounds like there were some year over year weakness in the other fitness categories, too. And I guess I wonder if there are any areas you'd call out there, Any key drivers of that? Maybe any comments on changes in the competitive climate? Just trying to understand the broader fitness picture.
spk02: Yeah, good morning, Will. I think that, as we mentioned, all categories in this segment were weaker year over year. We're comparing against a really monster quarter from the last year. So that's one dimension. And then you can't discount the impact of our overall wearable product lineup across the company and particularly the release of the new adventure wearables on the outdoor side, which probably impacted things as well. So, as I mentioned, you know, we experience robust growth across all wearables at Garmin, so we feel like the market is robust and our position in the market is also very robust.
spk08: Okay, that makes sense. Cliff, it would be great to get a little color as to what you're seeing kind of real-time you know, across Europe, you know, as you talk to your retail partners, have you seen any change in kind of purchasing trends, appetite, you know, from them, just as you think about, you know, the impacts of the Russia-Ukraine conflict and inflationary pressures kind of across the continent, particularly in Eastern Europe? You know, as you exit Q1 and obviously now into Q2, you know anything you'd call out there with respect to, you know, demand trends?
spk02: Yeah, I think Europe is more notably weak, as you can see in our geographical results. I think really two aspects to that. One is the Ukraine situation. We definitely did see a noticeable impact in product registrations as that conflict broke out and was weaker for the initial and has only recently started to show some signs of its kind of popping back as people maybe normalize or get used to the risk environment that they're in there. But the other factor for Europeans is the high inflation. It's really not just European, but it's global. But they particularly are impacted by much higher fuel prices and concern and worry over the economy. So I think those factors impacted us in Europe, but we saw much stronger growth in Europe. Americas and APAC.
spk08: Yeah. Okay. I guess maybe just that last question, you maintain guidance for the year, maybe just any other color as to your confidence there. I mean, it sounds like it's really built just on the diversity of the business. And I recognize we're still early in the year, but as you think about the various uncertainties, you know, that are still out there, whether it's supply chain, you know, inflation, you know, et cetera, maybe just any other color as to, What gives you confidence in maintaining that outlook at this point?
spk02: Yeah, as you said, we're maintaining what we said in February. It is early in the year, and this is our lowest seasonal quarter, so we like to see how the year is evolving before we make any material changes to our outlook. I would say that, in general, we see positive indicators, as I said in my remarks, across many of our segments. And at the same time, the uncertainties have increased and the complexities have increased, so we recognize that as well. But the diversity of our business is very high. The demand in several of our segments is strong, and so that's what we base our confidence on as we go forward.
spk09: Okay, great. Thank you.
spk02: Thank you.
spk09: Thank you. Our next question comes from the line of Nick Todorov from Longbow. Please go ahead.
spk10: Thanks, and good morning, everyone. Doug and Cliff, first question on gross margin for fitness. How should we think about the trajectory throughout the year? Obviously, I think FX headwind, if anything, is probably going to increase into Q sequentially. And the logistics piece is probably not changing much. So any kind of color on trajectory of fitness gross margin through the rest of the year?
spk07: Yeah, as it relates to gross margin for fitness, yeah, two of the big drivers there obviously are freight and FX. And actually, FX is a bigger impact factor. on the fitness business, just given our EMEA side of the business in there. So that relates to the year. It's still early in the year here, but we have to manage through those headwinds, and we'll have to see how those mitigate, hopefully. We're doing things, hopefully, to help mitigate some of the freight, like I previously mentioned, on inventory. We're, you know, trying to optimize our ocean versus air to mitigate some of the increases there. But FX, you know, that's something that we've seen. And we're strengthening a dollar there, an increase in SWAT, to see how that all plays out for the rest of the year.
spk10: Okay. And then, Cliff, I think you mentioned in your remarks that you're starting to see some improvement in aviation in the aftermarket business as it relates to component supply. Do you have any visibility into further easing into the rest of the year, and do you expect maybe a return to some normal environment into the second half, or that's too early to call?
spk02: Yeah, I think one of the things we mentioned actually last time is we expected the first half of the year to be more challenging for the aviation aftermarket because of the supply chain constraints we were experiencing earlier. We've started to see that improve, especially as we rolled into the month of March and onward. But we do expect still to be able to see more improvement as we get into the back half because we're taking actions to dual source some parts as well as we're getting more supply from our existing suppliers.
spk10: Okay. Okay. And last question for me, there's been some signs of moderation of retail boating demand, and I know you're exposed more on the aftermarket side, but I'm just wondering, are you seeing any spillover effect, any signs of moderation on the aftermarket side of marine?
spk02: Yeah, I think really nothing to speak of. We still see very strong demand for our most popular products, and especially driven by the technology that we've made in the area of live sonar and our display systems are all very good and sought after. I would say in terms of retail boating, or I would say the OEM side is what we would call that, but in general we still hear our OEM partners say that they're sitting on years of backlogs in their business and working very hard to deliver the boats that have been ordered, so we still see a strong demand cycle moving forward from the
spk05: oem side of the business okay got it thanks good luck thank you thank you i share next question comes from the line of jeffrey rand from deutsche bank please go ahead hi thanks for taking my question um how are the current inventory levels in your channel for your cycling business and how do you think about end customer demand for cycling products through the rest of the year i think in terms of inventory um it varies by
spk02: product line, but the one that we've been talking about most is the indoor trainer inventory. Retailers do have a lot of inventory in the indoor training category, and they're selling through that, of course. We also have inventory that we have in our warehouses that would go into the channel as soon as it clears up. That's a situation that's going to be around for a while. We don't expect it to to improve quickly, so we're just going to have to be patient and work through that. In terms of other categories, it really depends by geography, by retailer, by product line, but in general, we think channel inventory levels are reasonable, and we don't see any concern there.
spk05: Great. Thank you. And then operating margins in your auto OEM business were relatively flat sequentially. How do you think about operating margins for this business over the next few quarters as projects ramp up further?
spk02: Yeah, I think in terms of what will happen going forward as our deliveries increase, we will be able to experience scale in that business, so it should improve our overall operating margin performance, although we're not expecting that to swing to a positive number in the near term. But as we start to deliver the new products to BMW and as our production scale increases, it should generally improve.
spk09: Great. Thank you.
spk02: Thank you.
spk09: Thank you. Aisha, our next question comes from the line of Ben Bolin from Cleveland Research. Please go ahead.
spk06: Good morning, everyone. Thanks for taking the question. Good morning. A couple of questions. The first is, Cliff, could you talk a little bit about how you think of fitness and outdoor wearables and how much of that business you think is completely new buyers versus how much might be refresh of pre-existing buyers? And then I had a follow-up.
spk02: Yeah, thanks. I think in terms of the customer profile of our wearables, it really depends by product line and by segment. But at the highest level, if you look across all our wearables, we are mostly selling to brand new customers to Garmin who are registering a new device for the first time and creating a Garmin Connect account. But we also have, of course, a sizable amount of business that we do with people who love to stay current on the latest products that we release. And so we see that side of the business as well. But right now, it's still a majority of people that are new to our wearables.
spk06: Okay. The other different question, can you remind us on the revenue recognition methodology with BMW, how it may change as you go into the broader platform outside of China, and any thoughts on content opportunity?
spk07: So as I said, the revenue recognition standpoint probably shouldn't be that much different than we have at this point in time. in the different models that come out from that standpoint, from a revenue recognition standpoint.
spk06: Any thoughts on content going forward as you get into more of these models? Does that change the amount of dollar content per vehicle, or is it similar with what you saw in China?
spk02: I think actually, Ben, that the content per vehicle on the newer platforms that we're delivering is much higher per vehicle than what we're seeing on the current products delivered out of China as well as out of the U.S. factory here. In some cases, once we get to full production mode with BMW, they've adopted it across all of their platforms. Some vehicles could have three or more of these modules within the vehicle, so it will dramatically increase per vehicle based on what we're delivering over the long term to BMW.
spk04: That's great. Thank you. Have a great day.
spk15: Thank you.
spk09: Thank you. I show our next question comes from the line of Elizabeth Grinfield from Bank of America. Please go ahead.
spk12: Hi. Good morning. As we think about the cycling business and the normalization that we're seeing, when do you expect it to completely have normalized and at what level? do you consider normal?
spk02: Yeah, I think that's a very good question. During the first half of 2021, we saw elevated demands for all cycling products, including the indoor trainers, where every factory, and speaking broadly, beyond just Garmin, every factory and every manufacturer of those devices were delivering all that they could make to the market because of the demand. So the first half was very robust because of that really strong pandemic-driven demand. And then that tailed off significantly in the second half. So we are expecting to see that those comps will improve starting in the second half and will probably take throughout the remainder of the year to really normalize. In terms of the levels we're seeing, generally we continue to see that the levels we're settling at for cycling products are in line with reasonable growth of the overall market over the past two or three years. So what that means is that the CAGR is probably somewhere in the 5% to 10% range of the overall market, and it's settling in at some reasonable growth level over 2019 or even early 2020-type numbers.
spk13: Great. Thank you very much.
spk02: Thank you.
spk09: Thank you. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. I show our next question comes from the line of Eric Woodring from Morgan Stanley. Please go ahead.
spk17: Awesome. Thank you guys for taking my question. Maybe just a few for me, starting with one clarification question, Cliff. You mentioned earlier about channel inventory levels being reasonable. Was that just a fitness comment or was that a total company comment?
spk02: I would say total across all of our product lines that are popular in retail.
spk17: Okay. And then, you know, in the prepared remarks in the presentation deck, you made similar comments in outdoor aviation and marine calling out positive indicators. Any way that you can just maybe for each of those markets, you know, elaborate just a bit on what those positive indicators are?
spk02: Well, I think if we just look at those one by one, I would say in outdoor, our new product releases and the adventure watches, we continue to work to fill all of the demand that we're seeing for those. And in addition, there's some golf products that we've struggled to match the demand popularity of some of the products that we have there. So that's the outdoor side of things. On the marine side of things, our new products, Panoptix LiveScope Plus system is extremely popular, and so we're working to fulfill a lot of back orders on that product, which also drives display systems. So there's kind of a broad-based demand in our marine segment because of that. And then finally in aviation, I think our biggest opportunity right now is the aftermarket side of things. We've been constrained because of the supply chain situation And as I mentioned, we're starting to see that get better incrementally, but it will take some time to really fully recover. But the backlogs that we have there are things that we need to deliver is strong.
spk17: Okay, super helpful. And then one last question for me on outdoor. How much of the outperformance, so to speak, in 1Q was a result of sales being pushed from 4Q into 1Q? And then kind of second to that, were you able to – fill the channel with all of the new products that you launched in outdoor, or is there still more to come, you'd say?
spk02: I think most certainly, you know, we tried to time the launch of the new products optimally, and we felt like it was not the best time to launch in late Q4. So there's probably some impact that shifted demand because people were waiting for our new products, for sure. But it's hard to speculate on that. on how much of that there was. And would you say your second part again?
spk17: Yeah, just curious, you know, if you were able to get enough supply to fill the channel to your, you know, ideal levels for those new products launched and outdoor, if there is still more of that to come in the future, you'd say.
spk02: I think for our initial plan, we definitely were able to fill the channel. And what we found is that the the reorders have continued to be strong, and so we're still chasing initial demand for that product line that we're working to fill.
spk16: Great. Thank you so much.
spk09: Thank you. Thank you. I'm sure there are further questions in the queue. At this time, I'd like to turn the call back over to Terri Seck, Director of Investor Relations, for closing remarks.
spk00: Okay, everyone. Thanks so much for your time. Doug and I are available for callbacks, and have a great day.
spk09: This concludes today's conference call. Thank you for participating. You may now disconnect. Good day and thank you for standing by. Welcome to Garmin Limited first quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Terri Seck, Director of Investor Relations. Please go ahead.
spk00: Good morning. We would like to welcome you to Garmin Limited's first quarter 2022 earnings call. Please note that the earnings press release 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 at 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 margins, operating margins, future dividends or share repurchases, 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. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any time, and any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Presenting on behalf of Garmin Limited this morning are Cliff Temple, 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 Pimbles.
spk02: Thank you, Terri, and good morning, everyone. As reported earlier today, consolidated revenue increased 9% to $1.17 billion, representing a new first quarter record. Four business segments reported revenue growth in the quarter, three of which delivered double-digit growth. We generated $229 million of operating income down 8% from the prior year. Operating margin was 19.5% and was negatively impacted by gross margin performance, which declined due to historically high freight costs combined with the strengthening of the U.S. dollar. In addition, operating expenses increased for a variety of reasons, including higher associate headcount, increased compensation costs, and the increase of certain operational expenses as business activities continue to normalize. We performed very well during the quarter, despite a combination of old and new headwinds. Supply chain constraints persist, which limited the orders we could fill. Russia's invasion of Ukraine created an unthinkable humanitarian crisis and further complicated the global economic outlook. Despite these challenges, demand for our products remains strong, and we are optimistic about the future. Our board of directors recently approved a $300 million share repurchase plan, which is in addition to the proposed $2.92 per share dividend that will be considered by shareholders at the upcoming annual meeting. Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with fitness, revenue decreased 28% to $221 million. Gross and operating margins were 48% and 0%, respectively. All product categories declined, but the normalization of demand for cycling products was the main contributor. While revenue from fitness wearables declined, on a combined basis, wearable device revenue across all segments at Garmin experienced robust growth. We expected the first half of the year to be challenging for the fitness segment as we compare against the outstanding performance of the prior year. While the decline was greater than expected, we believe these trends will moderate in the back half of the year as we move past the pandemic swings of 2021 and benefit from new product introductions. Moving to the outdoor segment, revenue increased 50% to $385 million, with growth in multiple categories led by strong demand for adventure watches. Growth and operating margins were 64% and 39% respectively, resulting in operating income of $149 million. During the quarter, we announced sweeping updates to our adventure watch lineup, including our flagship Fenix 7 series, featuring a distinctive new design with a touchscreen display, and the Instinct 2 series, available in two sizes, including versions that can operate indefinitely using our exclusive solar power technology. We also announced the all-new Epyx with a bright AMOLED touchscreen display and class-leading battery life up to 16 days. We believe that strong demand for these new products, as well as other categories in the segment, will be a growth driver for the remainder of the year. Looking next at the aviation segment, revenue increased 1% to $175 million, with growth driven by OEM product categories. Supply constraints impacted sales of aftermarket products, but the situation improved throughout the quarter. Gross and operating margins were 73% and 23%, respectively, resulting in operating income of $40 million. Aircraft OEMs are reporting robust orders from both new and existing customers. Aftermarket demand is also strong, as customers invest in new cockpit systems. We believe these are positive indicators of growth for the remainder of the year. The marine segment delivered another quarter of impressive results, with revenue increasing 21% to $254 million. We experienced broad-based growth across multiple product categories led by chart plotters. Growth and operating margins were 51% and 23%, respectively, resulting in operating income of $59 million. LiveScope has proven to be a halo technology for Garmin, and the new LiveScope Plus sonar system raises the bar with higher resolution images and improved target separation. We continue to see strong demand for our marine products, and LiveScope Plus builds on this momentum. We believe this is a positive indicator of growth for the remainder of the year. Moving finally to the auto segment, revenue increased 11% to $138 million, with growth from both OEM and consumer categories. Gross margin was 38%, and we recorded an operating loss of $20 million, driven by investments in auto OEM programs. In consumer auto, we continue to diversify our product offerings with the launch of the Instinct 2 Diesel Edition SmartWatch for truck drivers. In the OEM category, we made significant progress preparing for the launch of the next generation BMW computing module platform. BMW approved our new Poland factory, giving it a rare green rating for mass production readiness. We anticipate delivering production parts to BMW starting in the second quarter. Before I turn the call over to Doug, it's important to remember that our diversified business model offers many different paths to achieve our consolidated growth goals. We remain focused on creating highly differentiated products in all segments that excite our customers and lead to success. Regarding our outlook for the rest of the year, I mentioned several new and existing headwinds we face, and we cannot predict the impact these might have on the business. Also, the first quarter represents the lowest seasonal quarter of our financial year, and much of the year remains ahead of us. With these things in mind, we are maintaining our 2022 guidance issued in February, which called for consolidated revenue of $5.5 billion and EPS of $5.90 a share. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results.
spk07: Doug? Thanks, Cliff. Good morning, everyone. I begin by reviewing our first quarter financial results, then provide comments on the balance sheet, cash flow statement, and taxes. We posted revenue of $1,173,000,000 in the first quarter, representing a 9% increase year-over-year. Gross margin was 56.5%, 330 basis point decrease in the prior quarter. The decrease was primarily due to higher freight costs and favorable impact foreign exchange rates. Operating expense, percentage of sales was 37%, a 50 basis point increase. Operating income was $229 million, 8% decrease. Operating margin was 19.5%, 300 basis point decrease. Our GAAP EPS was $1.09. Performa EPS was $1.11. Next, Look at our first quarter revenue by segment and geography. In the first quarter, we achieved double-digit growth in three of our five segments, led by the outdoor segment, a robust growth of 50%, followed by the marine segment, 21% growth, and the auto segment, 11% growth. By geography, 21% growth in APAC, 13% growth in Americas, was partially offset by 1% decline in EMEA. which was negatively impacted by foreign exchange rates during the quarter. Looking next at operating expenses. First quarter operating expense increased by $42 million for 11%. Research and development increased $20 million year-over-year, primarily due to engineering personnel costs. Advertising expense increased approximately $3 million to higher spend in the outdoor and marine segments. SG&A increased $19 million compared to the prior year quarter, primarily due to increases in personnel-related expenses, information technology costs. A few highlights on the balance sheet, cash flow statement, and taxes. We ended the quarter with cash marketable securities approximately $3 billion. Account receivables decreased sequentially to $600 million following a seasonally strong fourth quarter and grew year-over-year relatively in line with our sales growth. Inventory balance increased year-over-year to $1.3 billion. We're executing our strategy to increase days applied to support our increasingly diversified product lines to optimize the mix of ocean versus air freight shipments to carry sufficient levels of raw materials safety stock to mitigate increased lead times. In the first quarter of 2022, we generated free cash flow of $126 million, a $206 million decrease than the prior quarter, primarily due to increased working capital needs and higher capital expenditures. Also reported an effective tax rate of 10.3%, compared to 12.2% in the prior quarter. The decrease in the effective tax rate is primarily due to an increase in U.S. tax deductions and credits. This concludes our formal remarks. Daloom, could you please open the line for Q&A?
spk09: Thank you. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Paul Chung from J.P. Morgan. Please go ahead, sir.
spk11: Hi. Thanks for taking my question. So first up, you had a very nice head start in outdoor sports. off the strength of, you know, Phoenix and other product releases. Any update to kind of the year and how we think about that? Should we expect kind of more product releases throughout the year? And then can you help us on the kind of seasonal outlook for outdoor? That would also be helpful.
spk02: Yeah, good morning, Paul. I think in terms of the update to the year, you know, we basically – are still seeing things the way that we've laid them out, and it's very early in the year to really make any conclusions based on the start that we've had. But we do have a strong product lineup right now, and we have more new products coming throughout the year in all of our segments. And so a lot of our momentum and growth is driven around new innovation and new products.
spk11: Gotcha. And then a similar question in fitness, you know, the pace of decline was a bit more than expected. How do we think about the balance of the year as well? What drove the minimal operating profit in the quarter? Is that mostly component and cost related? How does that rebound throughout the year?
spk02: Fitness was weaker than we expected for sure. The cycling category is the biggest contributor to that. We are comping against really strong results from last year. So there's lots of moving pieces, lots of dimensions to this. But the cycling side of things is really the one that's the biggest impact. But if you look at it from a different angle, the operating profit was mostly affected by FX and freight costs. if those things would have been under normal circumstances, we would have been pretty much in the range of where our gross margin and operating margin profiles are for the segment.
spk11: Gotcha. And then lastly, Doug, on pre-cash flow, kind of any update on the, you know, annual guide? And, you know, the share buyback messaging, that's new. We haven't seen, you know, buybacks in four years, last four years. How should we think about kind of the pace there and potential for more kind of material buybacks given, you know, $3 billion net cash? Thanks.
spk07: Yeah. Yeah, regarding free cash flow, yeah, still, you know, early in the year, but, you know, there's a couple things we need to consider, one of which, you know, is our working capital needs. You know, we did have some of those working capital needs here in Q1 where we saw, you know, inventory increased more than the previous year. You also need a Factor in, you know, last year, you know, we had a large amount of inventory increases in the back of the year. So hopefully we won't have as much of an increase, you know, in the inventory, I'll say, year over year that we did last year in there. But, you know, the working free cash flow and other things, CapEx, you know, is pretty consistent, you know, year over year for the full year. And, you know, it depends also on the operating side of things. But we'll be giving more guidance on that, you know, in Q2. Thank you. You know, as it relates to the share buyback, it's something that we evaluated with the board, and we felt that was something that was appropriate at this point in time regarding the amount that we're going to be doing. You know, it's really depending upon, you know, marketing conditions, business conditions at a point in time, you know, as we amount to a buyback during the period.
spk01: Thank you.
spk07: Thank you.
spk09: Thank you. I see our next question comes from the line of Will Power from Baird. Please go ahead. Oh, great. Thanks for taking the question.
spk08: Maybe just to follow up first on fitness, I think, you know, we and you all knew that there were some particularly tough cycling comps year over year, but it sounds like there were some year over year weakness in the other fitness categories, too. And I guess I wonder if there are any areas you'd call out there, Any key drivers of that? Maybe any comments on changes in the competitive climate? Just trying to understand the broader fitness picture.
spk02: Yeah, good morning, Will. I think that, as we mentioned, all categories in this segment were weaker year over year. We're comparing against a really monster quarter from the last year. So that's one dimension. And then you can't discount the impact of our overall wearable product lineup across the company and particularly the release of the new adventure wearables on the outdoor side, which probably impacted things as well. So, as I mentioned, you know, we experience robust growth across all wearables at Garmin, so we feel like the market is robust and our position in the market is also very robust.
spk08: Okay, that makes sense. Cliff, it would be great to get a little color as to what you're seeing kind of real-time you know, across Europe, you know, as you talk to your retail partners, have you seen any change in kind of purchasing trends, appetite, you know, from them, just as you think about, you know, the impacts of the Russia-Ukraine conflict and inflationary pressures kind of across the continent, particularly in Eastern Europe? You know, as you exit Q1 and obviously now into Q2, you know anything you'd call out there with respect to, you know, demand trends?
spk02: Yeah, I think Europe is more notably weak, as you can see in our geographical results. I think really two aspects to that. One is the Ukraine situation. We definitely did see a noticeable impact in product registrations as that conflict broke out and was weaker for the initial and has only recently started to show some signs of its kind of popping back as people maybe normalize or get used to the risk environment that they're in there. But the other factor for Europeans is the high inflation. It's really not just European, but it's global. But they particularly are impacted by much higher fuel prices and concern and worry over the economy. So I think those factors impacted us in Europe, but we saw much stronger growth in Europe. Americas and APAC.
spk04: Yeah.
spk08: Okay. I guess maybe just that last question, you maintain guidance for the year, maybe just any other color as to your confidence there. I mean, it sounds like it's really built just on the diversity of the business. And I recognize we're still early in the year, but as you think about the various uncertainties, you know, that are still out there, whether it's supply chain, you know, inflation, you know, et cetera, maybe just any other color as to, What gives you confidence in maintaining that outlook at this point?
spk02: Yeah, as you said, we're maintaining what we said in February. It is early in the year, and this is our lowest seasonal quarter, so we like to see how the year is evolving before we make any material changes to our outlook. I would say that, in general, we see positive indicators, as I said in my remarks, across many of our segments. And at the same time, the uncertainties have increased and the complexities have increased, so we recognize that as well. But the diversity of our business is very high. The demand in several of our segments is strong, and so that's what we base our confidence on as we go forward.
spk09: Okay, great. Thank you.
spk03: Thank you.
spk09: Thank you. Our next question comes from the line of Nick Todorov from Longbow. Please go ahead.
spk10: Yeah, thanks, and good morning, everyone. Doug and Cliff, first question on gross margin for fitness. How should we think about the trajectory throughout the year? Obviously, I think FX headwind, if anything, is probably going to increase into Q sequentially. And the logistics piece is probably not changing much. So any kind of color on trajectory of fitness gross margin through the rest of the year?
spk07: Yeah, as it relates to gross margin for fitness, yeah, two of the big drivers there obviously are freight and FX. And actually, FX is a bigger impact factor. on the fitness business, just given our EMEA side of the business in there. So it relates to the year. You know, it's still early in the year here, but, you know, we have to manage through, you know, those headwinds, and we'll have to, you know, see how those mitigate, hopefully. You know, we're doing things, hopefully, you know, to help mitigate some of the freight. Like I previously mentioned on inventory, we're, you know, trying to optimize our ocean versus air to mitigate some of the increases there. But FX, you know, that's something that we've seen. And we're strengthening a dollar there, an increase in SWAT, to see how that all plays out for the rest of the year.
spk10: Okay. And then, Cliff, I think you mentioned in your remarks that you're starting to see some improvement in aviation in the aftermarket business as it relates to component supply. Do you have any visibility into further easing into the rest of the year and – Do you expect maybe a return to some normal environment in the second half, or that's too early to call?
spk02: Yeah, I think one of the things we mentioned actually last time is we expected the first half of the year to be more challenging for the aviation aftermarket because of the supply chain constraints we were experiencing. We've started to see that improve, especially as we rolled into the month of March and onward. But we do expect still to be able to see more improvement as we get into the back half because we're taking actions to dual source some parts as well as we're getting more supply from our existing suppliers.
spk10: Okay. And last question for me. There's been some signs of moderation of retail boating demand, and I know you're exposed more on the aftermarket side. I'm just wondering, are you seeing any spillover effect, any signs of moderation on the aftermarket side of marine?
spk02: I think really nothing to speak of. We still see very strong demand for our most popular products and especially driven by the technology developments that we've made in the area of live sonar and our display systems are all very good and sought after. I would say in terms of retail voting, or I would say the OEM side is what we would call that, but in general we still hear our OEM partners say that they're sitting on years of backlogs in their business and working very hard to deliver the votes that have been ordered, so we still see a strong demand cycle moving forward from the OEM side of the business.
spk15: Okay, got it. Thanks. Good luck.
spk09: Thank you. Thank you. Our next question comes from the line of Jeffrey Rand from Deutsche Bank. Please go ahead.
spk05: Hi. Thanks for taking my question. How are the current inventory levels in your channel for your cycling business, and how do you think about end customer demand for cycling products through the rest of the year?
spk02: I think in terms of inventory, it varies by product line, but the one that we've been talking about most is the indoor trainer inventory. Retailers do have a lot of inventory in the indoor training category, and they're selling through that, of course, and we also have inventory that we have in our warehouses that would go into the channel as soon as it kind of clears up, but that's a situation that's going to be around for a while. We don't expect it to improve quickly, so we're just going to have to be patient and work through that. In terms of other categories, it really depends by by geography, by retailer, by product line, but in general we think channel inventory levels are reasonable and we don't see any concern there.
spk05: Great, thank you. And then operating margins in your auto OEM business were relatively flat sequentially. How do you think about operating margins for this business over the next few quarters as projects ramp up further?
spk02: Yeah, I think in terms of what will happen going forward as our deliveries increase, we will We will be able to experience scale in that business, so it should improve our overall operating margin performance, although we're not expecting that to swing to a positive number in the near term. But as we start to deliver the new products to BMW and as our production scale increases, it should generally improve.
spk09: Great. Thank you.
spk02: Thank you.
spk09: Thank you. Ayesha, our next question comes from the line of Ben Bolin from Cleveland Research. Please go ahead.
spk06: Good morning, everyone. Thanks for taking the question. Good morning. A couple of questions. The first is, Cliff, could you talk a little bit about how you think of fitness and outdoor wearables and how much of that business you think is completely new buyers versus how much might be refreshed? of pre-existing buyers, and then I had a follow-up.
spk02: Yeah, thanks. I think in terms of the customer profile of our wearables, it really depends by product line and by segment. But at the highest level, if you look across all our wearables, we are mostly selling to brand-new customers to Garmin who are registering a new device for the first time and creating a Garmin Connect account. But we also have, of course, a sizable amount of business that we do with people who love to stay current on the latest products that we release. And so we see that side of the business as well. But right now, it's still a majority of people that are new to our wearables.
spk06: Okay. The other different question, can you remind us on the revenue recognition methodology with BMW and how it may change as you go into the broader platform outside of China, and any thoughts on content opportunity.
spk07: So as it relates to that, from a revenue recognition standpoint, it probably shouldn't be that much different than we have at this point in time in the different models that come out from that standpoint, from a revenue recognition standpoint.
spk06: Any thoughts on content going forward as you get into more of these models? Does that change the amount of dollar content per vehicle, or is it similar with what you saw in China?
spk02: I think actually, Ben, that the content per vehicle on the newer platforms that we're delivering is much higher per vehicle than what we're seeing on the current products delivered out of China as well as out of the U.S. factory here. In some cases, once we get to full production mode with BMW, they've adopted it across all of their platforms. Some vehicles could have three or more of these modules within the vehicle. So it will dramatically increase per vehicle based on what we're delivering over the long term to BMW.
spk04: That's great. Thank you. Have a great day.
spk15: Thank you.
spk09: Thank you. I show our next question comes from the line of Elizabeth Grinfield from Bank of America. Please go ahead.
spk12: Hi, good morning. As we think about the cycling business and the normalization that we're seeing, when do you expect it to completely have normalized and at what level do you consider normal?
spk02: Yeah, I think that's a very good question. During the first half of 2021, we saw elevated demands for all cycling products, including the indoor trainers, where every factory, and speaking broadly, beyond just Garmin, every factory and every manufacturer of those devices were delivering all that they could make to the market because of the demand. So the first half was very robust because of that really strong pandemic-driven demand, and then that tailed off significantly in the second half. So we We are expecting to see that those comps will improve starting in the second half and will probably take throughout the remainder of the year to really normalize. In terms of the levels we're seeing, generally we continue to see that the levels we're settling at for cycling products are in line with reasonable growth of the overall market over the past two or three years. So what that means is that the CAGR is is probably somewhere in the 5% to 10% range of the overall market, and it's settling in at some reasonable growth level over 2019 or even early 2020-type numbers.
spk13: Great. Thank you very much.
spk02: Thank you.
spk09: Thank you. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. I show our next question comes from the line of Eric Woodring from Morgan Stanley. Please go ahead.
spk17: Awesome. Thank you guys for taking my question. Maybe just a few for me. Starting with one clarification question, Cliff, you mentioned earlier about channel inventory levels being reasonable. Was that just a fitness comment or was that a total company comment?
spk02: I would say total across all of our product lines that are popular in retail.
spk17: Okay. And then... you know, in the prepared remarks in the presentation deck, you know, you made similar comments in outdoor aviation and marine calling out positive indicators. Any way that you can just maybe for each of those markets, you know, elaborate just a bit on what those positive indicators are?
spk02: Well, I think if we just look at those one by one, I would say in outdoor, you know, our new product releases and the adventure watches are We continue to work to fill all of the demand that we're seeing for those. And in addition, there's some Gulf products that we've struggled to match the demand popularity of some of the products that we have there. So that's the outdoor side of things. On the marine side of things, our new Panoptix LiveScope Plus system is extremely popular. And so we're working to fulfill a lot of back orders on that product, which also drives display systems So there's kind of a broad-based demand in our marine segment because of that. And then finally, in aviation, I think our biggest opportunity right now is the aftermarket side of things. We've been constrained because of the supply chain situation. And as I mentioned, we're starting to see that get better incrementally, but it will take some time to really fully recover, but the backlogs that we have there are things we need to deliver is strong.
spk17: Okay, super helpful. And then one last question for me on outdoor. You know, how much of the outperformance, so to speak, in 1Q was a result of, you know, sales being pushed from 4Q into 1Q? And then kind of second to that, you know, were you able to fill the channel with all of the new products that you launched in outdoor, or is there still more to come, you'd say?
spk02: I think most certainly we tried to time the launch of the new products optimally, and we felt like it was not the best time to launch in late Q4. So there's probably some impact that shifted demand because people were waiting for our new products for sure, but it's hard to speculate on how much of that there was. And would you say your second part again?
spk17: Yeah, just curious if you were able to get enough supply to fill the channel to your ideal levels for those new products launched and outdoor, if there is still more of that to come in the future, you'd say.
spk02: I think for our initial plan, we definitely were able to fill the channel, and what we found is that the reorders have continued to be strong, and so we're still chasing initial demand for that product line that we're working to fill.
spk16: Great. Thank you so much.
spk02: Thank you.
spk09: Thank you. I'm sure there are further questions in the queue. At this time, I'd like to turn the call back over to Terri Seck, Director of Investor Relations, for closing remarks.
spk00: Okay, everyone. Thanks so much for your time. Doug and I are available for callbacks, and have a great day.
spk09: This concludes today's conference call. Thank you for participating. You may now disconnect.
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