Garmin continues its sharp growth curve, riding on the popularity of personal navigation devices and outdoor/fitness GPS devices. The company grew sales during the second quarter by 64% to $432.5 million. 1,281,000 units were sold in the second quarter of 2006, up 81% from the same quarter in 2005. The company did experience some price erosion, reducing gross margins, but not as much as management expected.
Margins declined 2.9 percentage points to 50.0%. SG&A increased 20 basis points during the quarter due to increased advertising expenses. R&D expenses increased by nearly $10 million, but decreased as a percentage of sales. This all added up to a 65% increase in Garmins bottom line, with a net income of $123.3 million and diluted EPS of $1.12, up from 68 cents in 2005.
69% of Q2 revenues were generated from products released within the last 12 months. Because of this, Garmin will continue to invest heavily in R&D, with spending on-track to exceed $100 million this year and the planned introduction of 70 new products in 2006. Garmin has added 121 engineers since last year and now employs over 850 engineers and engineering associates across the company.
Garmin will continue to increase the production capacity of its new Taiwan manufacturing facility throughout the remainder of 2006 to support the growth within the automotive/mobile, outdoor/fitness, and marine segments. Average selling prices during Q2 were $338 per unit, approximately 3% below the first quarter.
Garmins outdoor and fitness division continues to exceed managements internal expectations. New product introductions in early 2006 drove strong sales for the segment, with increases of 24% for the quarter and 22% year-to-date. Second quarter gross margins increased to nearly 60% within the outdoor/fitness segment while operating margins increased to 45%. Garmin has revised top-line growth expectations for the outdoor/fitness segment upwards to 20% for the year, compared to the 15% previously expected.
Management said that retail channel inventory “appears to be lean,” with strong sell-through of most new products during the second quarter. All geographic areas experienced growth – North America revenue was $232.6 million, up 51%; Europe revenue was was helped by component shortages at Garmins rival company, TomTom, and came in at $177.8 million, up 83%; and Asia revenue was $22.1 million, up 69%.
Because of the strong growth in outdoor/fitness and PNDs, Garmin has increased its sales and earnings guidance for the year. The company now expects at least $1.6 billion of revenue during 2006, with double-digit growth across all 4 business segments. EPS outlook is now up to $3.90 per share, up 43% over 2005.
