Garmin Ltd. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Thank you for standing by, and welcome to the Garmin Limited First Quarter 2024 Earnings Call.
Good morning. We would like to welcome you to Garmin Ltd.'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/stock. An archive of the webcast and related transcripts will also be available on our website.
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 4 segments delivering double-digit growth. Gross 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.
Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our first quarter financial results, implied comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.382 billion for the first quarter, representing a 20% increase year-over-year. Gross margin was 58.1%, a 120 basis point increase from the prior year quarter. The increase was primarily due to product mix in certain segments partially offset by segment mix. Operating expense as a 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 GAAP EPS was $1.43, pro forma EPS was $1.42.
[Operator Instructions] And your first question comes from the line of Joseph Cardoso from JPMorgan.
So maybe first one here is, you're starting off the year strongly. And I appreciate you guys are not updating the guidance here given we're only 1 quarter in, but I 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.
Yes. I think 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.
Got it. That's fair. And then maybe Cliff, you could touch on, like, obviously, wearables across fitness and outdoor have been performing strongly and part of that is what you just kind of referenced there around product releases or new product announcements. So I was 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.
We would say that our product lineup across fitness and outdoor 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. So 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 2 segments.
Your next question comes from the line of George Wang from Barclays.
Just firstly, maybe you can comment on kind of outlook for the inventory. You guys cut down inventory again in the March quarter. Just curious what's your expectation for the inventory situation exiting this year compared to last year?
Yes. So as it relates to inventory, 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.
Okay. Great. And also recognizing you guys are not updating the revenue guidance since it's early in the year. But any thoughts on kind of a refreshed outlook on the full year free cash and CapEx, considering the 1Q, the free cash flow is pretty strong. The CapEx was actually lower than expected. Just curious if there's any change to the full year outlook.
Yes. At this time, we're not updating our free cash flow or CapEx outlook. If we update our guidance into Q2, we'll update at that point in time. But we are very pleased with our cash flow that came in, in Q1 as primarily due to the strong sales that we saw.
Your next question comes from the line of Ben Bollin from Cleveland Research.
Cliff or Doug, I was hoping we could talk about the 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?
Yes. Yes. 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 cost from both the component as well as production standpoint.
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 2-wheel vehicles and the industrial truck contribution?
Yes. 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 why you've seen the margin change as it has. In terms of the new business, in terms of volumes, this is a very significant new volumes adding to our overall infrastructure and planning. In terms of revenue, we announced in first quarter that -- or pardon me 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.
Your next question comes from the line of Erik Woodring from Morgan Stanley.
Great. 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, 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 think about seasonality as we look forward on a go-forward basis? And then I have a follow-up.
Yes, I think, Erik, 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, 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.
Okay. And then, Doug, I know you like to have a kind of a rainy day slush fund. Again, it's always best to have liquidity when no one else does. And I appreciate that, but you have over $3 billion of net in gross cash, probably not earning your cost of capital today. Just 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 either accelerating buybacks or more work that you can do organically? What stops you from taking those kind of actions?
Yes, good question. As it relates to cash, we do have our priorities for cash being reliable dividends. As you mentioned, our 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 repurchase. It relates to share repurchases, that is depending upon your market conditions, business conditions. I do want to remind you that we were in the blackout for most of Q1 from a standpoint. But our priorities for cash are consistent with what they've been for a while.
Next question comes from the line of David MacGregor from Longbow Research.
I guess I wanted to ask around inventories, but maybe focus around channel inventories, if you will. And can you talk about sell-through rates across your various lines? And as you think across these lines, where are channel inventory levels, may be a little higher or a little lower, just adjusting for seasonal patterns, of course.
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 kind of disruption of the last 4 years in supply chain. So 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.
And if I could go back to the question on inventory, obviously, a substantial work down inventory this quarter, and you alluded to the strength of the business and just a lot stronger than maybe you had 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?
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 do production, but that's just a part of us managing our overall cost and having a lower cost structure.
Okay. And last question for me, is there any way you can sort of provide some color or granularity around how much of the growth right now? I mean, setting aside auto OEM, but the other 4 segments, how much of the growth rate now would be price versus unit growth?
I think it's mostly driven by higher unit volumes.
Congrats on all the progress.
Your next question comes from the line of Jordan Lyonnais, Bank of America.
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?
I think 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 performed very well in Europe. Asia has been influenced by auto OEM some, but we also have some tailwind with -- excuse me, 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.
[Operator Instructions] And your next question comes from the line of Noah Zatzkin from KeyBanc Capital Markets.
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 of 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 I 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?
Yes. I think generally, we would say our JL performance was in line with what we expected. I think leading right into that question about the overall state of the market I think I would say the marine market has kind of stabilized. 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.
Yes, sure. As it relates to JL Audio, basically, we expect JL Audio on the revenue line to be about 15% of the total marine business.
We have a follow-up question from David MacGregor from Longbow Research.
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. Just how you -- obviously, you've got a lot of innovation in the marketplace. You 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 your -- the mix and kind of the subscription rate around new product introductions over the balance of the year?
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.
This concludes our Q&A session for today. I will now turn the conference back over to Teri for closing remarks.
Thank you all for your time today. As usual, Doug and I are available for callbacks. Have a wonderful day. Bye.
This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.