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spk08: Thank you for standing by and welcome to the Garmin Limited first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. Finally, a reminder that this conference is being recorded. I would now like to turn the conference over to Terri Sack, Director of Investor Relations. Please go ahead.
spk00: Good morning. We would like to welcome you to Garmin Limited's first quarter 2024 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, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introduction, 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.
spk06: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the first quarter with strong growth in consolidated revenue and operating income. The positive trends we experienced at the close of 2023 strengthened in the first quarter of 2024. Consolidated revenue increased 20% to $1.38 billion, a new first quarter record with four segments delivering double digit growth. Growth and operating margins expanded year over year to 58.1% and 21.6% respectively, resulting in record first quarter operating income of $298 million, up 51% year over year. This resulted in pro forma EPS of $1.42, up 39% over the prior year, which is a remarkable result considering the significantly increased Swiss tax rates. We're off to a great start and we're very pleased with these results. At the same time, we are mindful that Q1 is typically the lowest seasonal quarter of our financial year, and with this in mind, we're not updating the guidance we previously issued in February. Doug will discuss financial results in greater detail in a few minutes, but first I'll provide a few remarks on the performance of each business segment. Starting with business, revenue increased 40% to $343 million. a new record driven by broad-based growth across all product categories led by strong demand for advanced wearables. Growth in operating margins improved to 57% and 20%, respectively, resulting in operating income of $68 million. During the quarter, we launched the Forerunner 165, which was instantly recognized by the market as a product offering both exceptional value and great performance. Also during the quarter, we published a new edition of the Garmin Health Research Glimpse, which focused on sleep research initiatives. The health metrics collected by Garmin wearables provide researchers with a wealth of information contributing to a deeper understanding of the intricate relationship between sleep and overall well-being. Moving to outdoor, revenue increased 11% to $366 million, with growth driven primarily by wearables. Growth in operating margins improved to 66% and 29%, respectively, resulting in operating income of $107 million. During the quarter, we released our annual inReach SOS Year in Review, highlighting the importance of Garmin Response which coordinates emergency response services in more than 200 countries and territories and supports rescue efforts in more than 210 languages. The Emergency Response Coordination Center is an important part of what differentiates our inReach SOS service from others. We also produced and released an original docuseries called Seven Days Out, which follows two people on their journey through Nepal's Langtang hiking circuit. This docuseries highlights the extraordinary utility of our Fenix 7 Pro adventure watches, as well as the rich health metrics and long battery life these devices offer. 7 Days Out shows that ordinary people can accomplish extraordinary things with the right tools to help them beat yesterday. Looking next at aviation, revenue increased 2% in the first quarter to $217 million, driven by growth in OEM product categories. Gross margin improved 75%, and operating margin was 24%, resulting in operating income of $52 million. During the quarter, we unveiled a complete avionics modernization program for the highly popular Citation CJ2 business jet that offers new technologies and features designed to reduce pilot workload and improve safety. Also during the quarter, we added display options for our GWX-8000 StormOptics weather radar, which expands the availability of this advanced radar system to aircraft equipped with our highly popular GTN and TXI displays. Turning to the marine segment, revenue increased 17% to $327 million, primarily driven by the acquisition of JL Audio. Excluding JL Audio, revenue increased approximately 3% in the first quarter. Gross and operating margins improved to 55% and 27%, respectively, resulting in operating income of $88 million. We were recently recognized as Supplier of the Year by Independent Boat Builders, Inc. In addition, Garmin-sponsored angler Justin Hemner was champion of the recent Bassmaster Classic fishing tournament on a boat exclusively equipped with our Ecomap Ultra 2 chartplotters, forced trolling motor, and LiveScope Plus sonar system. During the quarter, we launched the GPSMap 16 family chartplotters, adding larger touchscreen options for greater clarity, connectivity, and control at the helm. We also launched the Panoptix TS70, our first deepwater live sonar, which provides real-time underwater imaging at depths up to 1,000 feet. Moving finally to the Auto OEM segment, revenue increased 58% to $129 million, with growth primarily driven by increased shipments of domain controllers to BMW. Gross margin was 18%, and we recorded an operating loss of $16 million. During the quarter, we were awarded new business to design and manufacture digital instrument clusters for two-wheel vehicles, as well as full infotainment systems for an industrial truck maker. That concludes my remarks. Next, Doug will walk you through additional details on our financial results.
spk04: Doug? Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our first quarter financial results and provide comments on the balance sheet, cash flow statement, and taxes. We posted a revenue of $1 billion $382 million for the first quarter, representing a 20% increase year-over-year. Gross margin was 58.1%, 120 basis point increase in the prior year quarter. Increase was primarily due to product mix in certain segments, partially offset by segment mix. Operating expense, percentage of sales, was 36.5%, 330 basis point decrease. Operating income was $298 million, a 51% increase. Operating margin was 21.6%, a 440 basis point increase. Our gap EPS was $1.43. Performing EPS was $1.42. Next, look at our first quarter revenue by segment and geography. In the first quarter, we achieved double-digit growth in four or five segments, led by the auto AM segment, a 58% growth, the fitness segment, with 40% growth. The marine and outdoor segments also had double-digit growth of 17% and 11%, respectively. By geography, we achieved double-digit growth in all three regions, led by 30% growth in the MEA, followed by 17% growth in Americas, and 12% growth in APAC. Looking next at operating expenses, first quarter operating expense increased by $48 million, or 11%. Research and development increased approximately $21 million year-over-year, primarily due to engineering personnel costs. SG&A increased approximately $27 million per year prior to the quarter, primarily due to increases in personnel-related expenses, including impact of JL audio. A few highlights on the balance sheet, cash flow statement, and taxes. End of the quarter with cash and marketable securities approximately $3.3 billion. Account receivable increased year-over-year due to strong sales, but decreased sequentially to $695 million following the seasonally strong fourth quarter. Inventory decreased year-over-year and sequentially to approximately $1.3 billion. During the first quarter of 2024, we generated free cash flow of $402 million, $170 million increase than prior to the quarter. Capital expenditures for the first quarter of 2024 were $33 million, approximately $14 million lower prior year quarter our first quarter 2024 we paid dividends of approximately 140 million dollars according effective tax rate 15.6 percent credit 8.8 percent in the prior year quarter increase in effective tax rate is primarily due to the increase in the combined switzerland tax rate response to global minimum tax requirements conclude their phone remarks paulie can you please open the line for q a thank you and as mentioned the floor is now open for questions
spk08: are reminded to press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, that's star 1 to join the queue and your first question comes from the line of Joseph Cardoso from JP Morgan. Please go ahead.
spk05: hi good morning and thank you for the question um so maybe first one here is you know you're starting off the year strongly and i appreciate you guys are not updating the guidance here given we're only one quarter in but was wondering if you could help us think through the shape of the year relative to typical revenue seasonality and whether there are any puts and takes that investors should keep in mind that might be different relative to historical trends as we think about the remainder of the year and then i have a quick follow-up okay good morning um i think
spk06: You know, one thing to keep in mind as we go forward throughout the rest of the year is the timing of new product releases. I think Q1 was probably the most easy comp that we had in the year over year comparables as we now anniversary some of the strong product releases that we had last year and also consider the timing of new products this year. So that's part of what we have in mind as well.
spk05: Got it. No, that's fair. And then maybe, Cliff, you could touch on, obviously, wearables across fitness and outdoors have been performing strongly. And part of that is what you just kind of referenced there around product releases or new product announcements. So we're just curious if you could provide some other color there as to where you have been seeing the strength and perhaps touch on trends you're seeing relative to volume and pricing, as well as potentially new users versus replacement demand, just to get further granularity around some of the strength you're seeing in the wearables across both fitness and outdoor. Thanks for the questions.
spk06: We would say that our product lineup across fitness and outdoors is very strong. Our products are unique, highly differentiated compared to a lot of products that are on the market. So people look to our products for particularly inspiration around activity, but sports, wellness, all those things is something that we're known for. We're definitely seeing people appreciate our products for those things. Registrations have been strong, so we're seeing that follow through at retail, and we still see the majority of our users that are coming in as new users to Garmin as opposed to repeat. So we see that favoring new users in our overall product line between the two segments.
spk08: Your next question comes from the line of George Wong from Barclays. Please go ahead.
spk01: Hey, guys. Thanks for taking my question. Just firstly, maybe you can comment on kind of outlook for the inventory. You know, you guys cut down inventory again in the March quarter. Just curious, what's the expectation for the inventory situation exiting this year compared to last year?
spk04: Yeah, so as it relates to inventory, You know, it was lower on a year-over-year basis as well as sequential. And one of the big reasons was just due to our strong sales. As it relates to what we expect by the end of the year, we do expect inventory to increase year-over-year basis, primarily, hopefully, in line with our sales. Make sure we have enough inventory to meet our demand.
spk01: Okay, great. And also, you know, recommending you guys are not updating the revenue guidance. since it's so early in the year. But any thoughts on kind of a refreshed outlook on the four-year free cash and CapEx? You know, considering the 1Q, the free cash was pretty strong. The CapEx was actually lower than expected. Just curious if there's any change to the four-year outlook.
spk04: Yeah, at this time, we're not updating our free cash flow or CapEx outlook, you know, If we update our guidance into Q2, we'll update at that point in time. But we are very pleased, you know, with our cash flow that came in in Q1. It's primarily due to the strong sales that we saw. Okay, great. Thank you.
spk08: Your next question comes from the line of Ben Bolin from Cleveland Research. Please go ahead.
spk09: Good morning, everyone. Thanks for taking the question. Clifford, Doug, I was hoping we could talk about gross margin behavior within outdoor and fitness. Both were up year-over-year and sequential. You talked about encouraging product mix. Could you talk a little bit about how much of the traction or strength in gross margin is individual products versus maybe input prices, components, transport, just any moving pieces there to be aware of?
spk04: Yeah. Yeah, the gross margin was up year over year for both fitness and outdoor. Product mix was the biggest driver of that. And actually, we sold in more of our new products, which have a higher gross margin. We did see some favorability year over year for lower freight costs. And overall, our costs are lower year over year also. We continue to look at ways to lower our costs from both the component as well as production. standpoint.
spk09: That's great. And then the last one for me is when we look at the auto business, what's the right way to think about the trajectory of the margin performance here over time and any framing on how material the wins are when they start to contribute from the quarter, the two-wheel vehicles and the industrial truck contribution? Thank you.
spk06: In terms of margin, Ben, we've talked about how this segment will settle into a margin profile that's in the gross margin in the high teens and the operating margin in the mid-single digits. That's kind of typical what we see in this industry. We're certainly in the process of building our scale and the ramp into that, and so as the mix has shifted towards domain controllers, that's That's why you've seen the margin change as it has. In terms of the new business, in terms of volumes, this is very significant new volumes adding to our overall infrastructure and planning. In terms of revenue, we announced in Q4 that we had secured some significant new business. And this is in addition. So this is an adder to that. But overall, we do have a sizable amount of awarded business that's ahead of us.
spk08: Thank you. Your next question comes from the line of Eric Woodring from Morgan Stanley. Please go ahead.
spk10: Great. Thank you very much for taking my questions. You know, maybe just one on the modeling side to follow up on one of the first questions. I know you don't guide super granular on a quarterly basis, but if we look to 2Q, you know, historically, we see some seasonality that is quite strong. And you just posted a very above seasonal quarter. So I'm just wondering for 1Q, was there anything notable in terms of one-off tailwinds or anything unusual that would not repeat as we just you know, think about seasonality as we look forward on a go forward basis. And then I have a follow up. Thank you. Okay.
spk06: Yeah, I think one of one of the factors to consider is that the timing of new product releases both last year and this year will be a factor in creating noise between the quarters. This year, you know, Q1 was still marked by a relatively easy comp, especially in fitness, with our new product introductions that happened last year towards the end of Q1 into Q2. So definitely that will create a different dynamic in Q2, and then just generally as we look out for the rest of the year, the timing of other new product introductions is in our minds in terms of how we look at the whole year.
spk10: Okay, thank you. Doug, I know you like to have a rainy day slush fund. Again, it's always best to have liquidity when no one else does. I appreciate that, but you have over $3 billion of net in gross cash. It's probably not earning your cost of capital today. Can you help us understand why you wouldn't put more of that to work? Obviously, on an organic basis, you're seeing a ton of success. Why not complement that with you know, either accelerating buybacks or more work that you can do organically? What would stop you from taking those kind of actions? Thanks so much. Yeah.
spk04: Yeah, good question. You know, as it relates to, you know, cash, you know, we do have our priorities for cash, you know, being reliable dividends, you know, as you mentioned, you know, investments back in our business, whether for manufacturing facilities or just strengthening our business for the growth that we have. looking at strategic acquisitions such as JL Audio and then share of purchases. As it relates to a share of purchases, that is depending upon your marketing conditions, business conditions. I do want to remind you that we were in the blackout for most of Q1 from that standpoint. But our priorities for cash are consistent with what they've been for a while.
spk08: Thank you. Next question comes from the line of David McGregor from Longbow Research. Please go ahead.
spk02: Yes, good morning everyone and thank you for taking the questions. I guess I wanted to ask around inventories, but maybe focus around channel inventories if you will. Can you talk about sell-through rates across your various lines and as you think across these lines, where are channel inventory levels maybe a little higher or a little lower, just adjusting for seasonal patterns of course?
spk06: We think that channel inventory is really clean and healthy at this point. We don't see any concerns in terms of overall inventory. Retailers and across our businesses, frankly, are not placing big bets on inventory, so when they buy in, they know that there's customers there that want it, and the availability of product is much better now than it has been over the last disruption of the last four years in supply chain. We feel very good about it and we also feel like the registration rates are very consistent with the quantities that we're selling in. Right.
spk02: And if I could go back to the question on inventory, obviously a substantial work down in inventory this quarter and you alluded to the strength of the business and it's just a lot stronger than maybe you'd expected. What are the implications there for sort of second and third quarter margins as you rebuild that inventory? I would guess you get a better fixed cost absorption, better operating leverage. Should we be modeling a stronger margin performance as a consequence of inventory rebuild?
spk04: No, that's not really a big factor for us, but there is the part where you're mentioning there just basically leveraging some of our overheads, due production, but that's just a part of us managing our overall costs and having a lower cost structure.
spk02: Okay. The last question for me, is there any way you can sort of provide some color granularity around how much of the growth right now, I mean, setting aside auto OEM, but the other four segments, how much of the growth right now would be price versus unit growth?
spk06: I think it's mostly driven by higher unit volumes. Good. Thanks very much.
spk02: Congratulations on the progress.
spk08: Your next question comes from the line of Jordan Leone, Bank of America. Please go ahead.
spk03: Good morning. Thank you for taking the question. I appreciate that it's a softer comp in the quarter, but really strong growth in Europe and Asia, too. Are you expecting those markets to continue on this trend and you see a recovery?
spk06: I think so. You know, one factor to consider geographically is the impact of higher auto OEM volumes on those regions. So when we produce and sell, for instance, domain controllers out of Europe, that tends to increase disproportionately the revenue there. So there's some puts and takes because of that, but generally our wearable products perform very well in Europe. Asia has been influenced by AutoEM some, but we also have some headwind due to currency issues in the region as well. So there's just lots of factors. There probably isn't any one that we could point to and try to draw conclusions about it. Okay.
spk03: That's helpful. Thank you.
spk08: Before we continue on to the next question, a reminder, if you would like to raise your hand and join the queue, please press star 1 on your phone keypad. And your next question comes from the line of Noah Jackson from KeyBank Capital Markets. Please go ahead.
spk07: Hi, thanks for taking my questions. Maybe just on the marine segment, strong performance there. First, hoping you could provide kind of an update on how JL Audio is performing post-acquisition relative to expectations now that we're a couple quarters in. And then second, if you could remind us what the full year benefit from JL Audio is embedded in the marine guide. And then was just hoping to get your thoughts on the state of the marine end market in general, given what looks like pretty strong organic outperformance this quarter versus the industry. Thanks.
spk06: Yeah, I think generally we would say our JL performance was in line with what we expected. I think, you know, leading right into that question about the overall state of the market, you know, I think I would say the marine market has kind of stabilized. It's It's historically not a huge growth market, as you know. So I think we're kind of past some of the ripples that we've seen over the last few years. And there is certainly some issues out there right now with boat inventories that people have been talking about. But in general, those have not impacted us in any kind of significant way. And I think on a full year basis, Doug?
spk04: Yeah, sure. As it relates to GL Audio, basically, We expect JL Audio on the revenue lines to be about 15% of the total marine of business.
spk07: Thank you. Very helpful.
spk08: You have a follow-up question from David McGregor from Longbow Research. Please go ahead.
spk02: Yeah, thanks for taking the follow-up. I guess there's been some talk just in the macro lately of consumers getting more cautious and mixing down, and then we get these rather disappointing consumer confidence numbers here today. Obviously, you've got a lot of innovation in the marketplace. You've talked already about the strong mix, and that seems to be overpowering whatever might be occurring underneath in terms of deteriorating consumer confidence. But what are you seeing at all in terms of just maybe leading indicators or things you watch for consumer mix down and how that might ultimately impact the mix and and kind of the subscription rate around new product introductions over the balance of the year?
spk06: I would say generally our customer base are in groups that are probably less affected by the overall sentiment that you hear broadly about. So we certainly have products across all kinds of price ranges, but mostly our products tend to be products with high innovation and high desirability, and therefore their pricing is not necessarily at the bottom of the market. So in general, we've actually seen very strong response to some of our high-end products, even when we release products, for example, in running like the Forerunner 165, which is an incredibly strong product, and we're receiving a great result from that. But we also continue to see strength in the higher-end products as well. So in general, I would say mostly people are buying based on their needs, and we haven't seen a lot of evidence of mixing down that we could point to with confidence. Great. Thanks very much. Good luck.
spk08: Thank you. This concludes our Q&A session for today. I will now turn the conference back over to Terry for closing remarks.
spk00: Thank you all for your time today. As usual, Doug and I are available for callbacks. Have a wonderful day. Bye.
spk08: This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.
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