Garmin Sees Robust Growth In Outdoor And Fitness In Q4

Garmin Ltd. reported fourth-quarter earnings on an adjusted basis were slightly down but well above Wall Street estimates. Strong double-digit growth was seen in its outdoor, fitness and marine segments.

Highlights for the fourth quarter 2016 include:

• Total revenue of $861 million, growing 10percent over the prior year, with outdoor, fitness, marine and aviation collectively growing 25 percent over the prior year quarter and contributing 74 percent of total revenue
• Gross margin improved to 54.7 percent compared to 52.9  percent in the prior year quarter
• Operating margin of 18.6 percent compared to 18.7 percent in the prior year quarter
• Operating income growth of 10 percent
• GAAP EPS was 72 cents a share and pro forma EPS of 73 cents for fourth quarter 2016. Wall Street’s consensus estimate was 53 cents.
• Introduced the fēnix 5 with three watch designs that are expected to appeal to a broader range of wrist sizes and style preferences

Highlights for the fiscal year 2016 include:

• Total revenue of $3,019 million growing 7 percent over the prior year, with outdoor, fitness, marine and aviation collectively growing 21 percent over the prior year and contributing 71 percent of total revenue
• Gross and operating margins of 55.6  percent and 20.7  percent, respectively, both improving from 2015 levels
• GAAP EPS was $2.70, a 13 percent improvement over the prior year, and pro forma EPS⁽ was $2.83, a 14 percent improvement over the prior year
• Shipped approximately 16.8 million units, up 4 percent from the prior year and over 173 million since inception
• Connect IQ app store establishes itself with over 2,500 apps and over 24 million downloads since inception

“2016 was a remarkable year of growth driven by strong sales in our outdoor, fitness, marine, and aviation segments,” said Cliff Pemble, president and Chief Executive Officer of Garmin Ltd. “Entering 2017, we see additional growth opportunities ahead and we are well positioned to seize these opportunities with a strong lineup of great products.”

Outdoor:

The outdoor segment grew 46 percent in the quarter with significant contributions from wearable devices combined with growth in all other product categories and the contribution of DeLorme products. Gross margin remained strong at 61 percent while operating margin was relatively flat at 33 percent, resulting in 42 percent operating income growth. We recently announced our fēnix 5 series with three different designs all featuring Garmin Elevate wrist heart rate technology and our QuickFit band replacement system: the fēnix 5S is perfect for smaller wrists without sacrificing multisport functionality, the fēnix 5X includes preloaded wrist-based mapping, and the compact fēnix 5 is feature-packed with an all-new industrial design. We expect outdoor to continue to be a growth segment in 2017 as we leverage opportunities in wearables and other product categories in the segment.

Fitness:

The fitness segment posted strong revenue growth of 20 percent in the quarter driven by wearables with Garmin Elevate™ wrist heart rate technology. Gross margin increased year-over-year to 52 percent with operating margin of 17 percent, resulting in a 15 percent growth in operating income. The recently launched vívofit jr. was well received by retailers and customers during the holiday quarter and we see additional growth potential for wearables designed specifically for children. We believe fitness will be our largest revenue contributor in 2017, and enter the year confident in our product lineup.

Marine:

The marine segment posted strong fourth quarter revenue growth of 19 percent driven by our solid lineup of chart plotters and fish finders. Gross margin decreased year-over-year to 52 percent due to product mix, while operating margin improved to 4 percent. In the quarter, we introduced new touchscreen and keyed chartplotter combo offerings in our popular GPSMAP® product line, many with built-in sonar, and new radar and entertainment offerings. We expect marine to continue to be a growth segment in 2017 as we focus on market share gains and new product innovations.

Aviation:

The aviation segment posted solid revenue growth of 13 percent in the quarter with growth contributions from both OEM and aftermarket. Gross and operating margins were 77 percent and 28 percent, respectively. During the quarter, we received FAA installation approval for our helicopter ADS-B offerings, supported Cirrus in the certification and initial deliveries of the SF 50 light jet, and Textron Airland announced our selection as the avionics provider for the Scorpion light attack aircraft. We continue to invest in upcoming certifications with our numerous OEM partners, as well as ongoing opportunities for long-term market share gains.

Auto:

The auto segment recorded revenue decline of 17 percent in the quarter, primarily due to the ongoing PND market contraction. Gross margin remained constant at 42 percent, while operating margin declined year-over-year to 9 percent. At the recent CES show we announced our next generation Drive series PNDs, which offer expanded safety and driver awareness features and WIFI capability that enhances the process of updating maps and other content stored on the device. During the quarter, we were chosen as a Tier 1 infotainment hardware supplier for BMW affirming recent investments in our OEM program.

Additional Financial Information:

Total operating expenses in the quarter were $311 million, a 16 percent increase from the prior year. Advertising increased 19 percent, driven by year-over-year increases in the fitness and outdoor segments to support wearables. Research and development and selling, general and administrative expenses increased 22 percent and 9 percent, respectively, due primarily to recent acquisitions and an additional week in our fourth quarter 2016.

The effective tax rate in the fourth quarter of 2016 was 19.0 percent, an increase from 13.2 percent in the prior year quarter. The year-over-year increase in the fourth quarter 2016 tax rate is primarily due to the recording of a full year of the U.S. research and development tax credit in the fourth quarter of 2015 versus being spread over four quarters in 2016.

In the fourth quarter of 2016, we generated $165 million of free cash flow (see attached table for reconciliation of this non-GAAP measure). We continued to return cash to shareholders through dividends and share repurchases. As a result of the additional week in the fourth quarter 2016, two quarterly dividends were recorded totaling approximately $192 million and we repurchased approximately $28 million of Company stock. We have approximately $75 million remaining in the share repurchase program which was extended through December 31, 2017, and expect to repurchase Company stock as business and market conditions warrant. We ended the quarter with cash and marketable securities of approximately $2.3 billion.