Garmin Ltd. reported sales inched up 1 percent in the second quarter as double-digit growth in its outdoor and aviation segments offset 15 percent decline in both fitness and auto.

Highlights for the second quarter 2017 include:

• Total revenue of $817 million, growing 1 percent over the prior year, with outdoor, aviation, marine and fitness collectively growing 8 percent over the prior year quarter and contributing 74 percent of total revenue
• Gross margin improved to 58.5 percent compared to 57 percent in the prior year quarter
• Operating margin improved to 24.9 percent compared to 24.7 percent in the prior year quarter
• Operating income was $203 million, growing 1 percent over the prior year quarter
• GAAP EPS was 91 cents and pro forma EPS(1) was $88 cents.
• Strong demand for the highly anticipated fēnix® 5 watch series led to significant growth in its outdoor segment
• Launched the VIRB 360, Garmin’s first immersive 360-degree 5.7K/30 fps spherical camera
• Connect IQ store has delivered 17 million downloads to its customers in the past year bringing the total number of downloads since inception to over 30 million

Executive Overview from Cliff Pemble, president and chief executive officer: “We delivered another quarter of revenue and earnings growth led by strong double-digit growth in our outdoor and aviation segments,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “The demand for advanced wearables was particularly strong, but was partially offset by negative trends in the activity tracker market. Our results thus far give us confidence in raising our outlook for the remainder of the year.”

Outdoor
During the second quarter of 2017, the outdoor segment grew 46 percent driven by strong demand for its fēnix 5 watch series. Gross margin improved to 66 percent while operating margin improved to 38 percent, resulting in operating income growth of 53 percent. Garmin launched the Approach® S60, its newest GPS golf watch with a sunlight-readable color touchscreen display, and recently announced new offerings in its Foretrex and Rino lineup. Looking forward, Garmin will be focused on growth opportunities in wearables and inReach product lines.

Aviation
The aviation segment posted revenue growth of 15 percent, driven primarily by strong aftermarket sales and positive contributions from OEM product categories. Gross and operating margins were strong at 75 percent and 32 percent, respectively, resulting in 28 percent operating income growth. During the quarter, Garmin announced its first Head-up Display (GHD) system for integrated flight decks and are pleased that it will be incorporated on the Cessna Citation Longitude coupled with the G5000® integrated flight deck. Garmin also received approval from the European Aviation Safety Agency for its previously announced G1000® NXi system. Looking forward, Garmin is focused on maximizing ADS-B mandate opportunities and gaining share in the OEM market.

Marine
Revenue in the marine segment declined 3 percent during the quarter, with gross and operating margins of 57 percent and 22 percent, respectively. For the first half of the year Garmin delivered 10 percent revenue growth and 9 percent operating income growth and remain confident in its outlook for the year. During the second quarter of 2017, Garmin announced the acquisition of Active Corporation, a developer of crowd sourced content for boaters and launched its latest marine wearable, the quatix® 5, adding autopilot control and the ability to mark remote multifunction display waypoints. Looking forward, Garmin is focused on product innovations and gaining share in the inland fishing category.

Fitness
Revenue in the fitness segment declined 15 percent during the quarter, with gross and operating margins of 56 percent and 21 percent, respectively. The drop in revenue was primarily driven by a decline in the activity tracker category due to the general decline of the basic activity tracker market and the timing of product introductions. Looking forward, Garmin is focused on growth opportunities in advanced wearables devices.

Auto
The auto segment recorded revenue decline of 15 percent in the second quarter of 2017, primarily due to the ongoing PND market contraction partially offset by growth in niche categories such as fleet, camera and RV. Gross and operating margin declined year-over-year to 45 percent and 13 percent, respectively but increased sequentially. During the second quarter of 2017, Garmin launched the VIRB 360, a compact, multi-lens, full spherical 360-degree camera. The VIRB 360 offers an easy-to-use camera that captures video up to 5K/30fps with four built in microphones and easy upload. Looking forward, Garmin is focused on disciplined execution to bring desired innovation to the market and to optimize profitability in the segment.

Additional Financial Information
Total operating expenses in the quarter were $275 million, an increase of 5 percent over the prior year. Research and development increased 11 percent primarily due to engineering personnel costs related to Garmin’s wearable product offerings and aviation. Selling, general and administrative expenses increased 2 percent, and were relatively flat as a percent of sales. Advertising decreased 5 percent primarily due to reduced media spending and lower cooperative advertising.
The effective tax rate in the second quarter of 2017 was 25 percent. The pro forma effective tax rate in the second quarter of 2017 was 21.9 percent (see attached table for reconciliation of this non-GAAP measure) compared to an effective tax rate of 21 percent in the prior year quarter. The year-over-year increase in the pro forma effective tax rate is primarily due to the company’s election to align certain Switzerland corporate tax positions with evolving international tax initiatives partially offset by income mix by tax jurisdiction.

In the second quarter of 2017, Garmin generated $129 million of free cash flow (see attached table for reconciliation of this non-GAAP measure). Garmin continued to return cash to shareholders with Garmin’s quarterly dividend of approximately $96 million and its share repurchases activity, which totaled approximately $36 million in the second quarter of 2017. Garmin have approximately $11 million remaining in the share repurchase program authorized through December 31, 2017. Garmin ended the quarter with cash and marketable securities of approximately $2.3 billion.

2017 Guidance
Based on its performance in the first half of 2017, Garmin said it is updating its full year guidance. The company said it now anticipates revenue of approximately $3.04 billion driven primarily by higher expectations for its outdoor and aviation segments partially offset by lower expectations for the fitness segment. Garmin’s outlook for marine and auto is unchanged. The company said it anticipates its full year pro forma EPS will be approximately $2.80 based on an improved gross margin of about 57.5 percent, operating margin of about 21 percent and a full year pro forma effective tax rate of about 22 percent.

Previously, guidance called for  approximately $3.02 billion of revenue and approximately $2.65 of
pro forma EPS.

Photo courtesy Garmin