Rising advertising and R&D expenses at Garmin Ltd.’s Fitness and Outdoor segments came under scrutiny during its first quarter earnings call last week, when analysts pressed executives on how long the company would have to sustain higher spending levels.

GRMN reported operating expenses reached 39.7 percent of revenues in the first quarter, up a whopping 360 basis points from the year earlier quarter.  Even as the negative effect of currency exchange rates resulted in flat sales, Garmin increased spending on advertising 13.5 percent and R&D by 10.2 percent. The company invested 18.1 percent of its revenue on R&D and 6.9 percent on advertising during the quarter, up 160 and 50 basis points respectively from the first quarter of 2014.   Legal expenses drove SG&A expenses up 10 percent to 16.9 percent of revenues, up 150 basis points from a year earlier. Inventory also grew 11.9 percent from a year earlier as the company prepared for several major product launches. Most of the increases took place at the company’s Fitness and Outdoor segments, where competition and consumer expectations are rising rapidly.

Executives said the elevated spending was within plan and likely to continue for the foreseeable future.

“The market is growing rapidly and we are in a mode of gaining market share, and so we are focused on that at the moment and taking advantage of the growth opportunity that's there,” said CFO Doug Boessen.

As an example, Boessen said Garmin will likely introduce wrist devices with optical heart sensors in the near future to close the gap with competitors that have introduced the technology in the last year. The technology is poised to quickly replace the heart rate monitors Garmin and other vendors use, which must be strapped to the users chest.

Fitness revenues up 31 percent, operating margins down 700 basis points
The Fitness segment posted revenue growth of 31 percent in the first quarter with contributions from activity trackers, its recently launched Forerunner 920XT watch and cycling products.

Fitness gross margin remained strong at 63 percent, while operating margin declined 700 basis points to 26 percent as Garmin ramped up advertising and R&D. Additions to the Vivo family, including Vívofit 2 and Vívoactive, began shipping late in the first quarter and are expect to reach additional retail channels throughout the second quarter as the wearables opportunity continues to expand. In cycling, GRMN announced the Vector  2 and 2S – the latest pedal-based power meters – designed for easy installation and maintenance.

“We are deliberately investing in our point-of-sale presence as we roll out new products and prepare the way for our spring advertising campaign,” said GRMN President and CEO Cliff Pemble.

While GRMN can quickly flex spending in response to market opportunities, Pemble said the Fitness segments margin profile is coming down due to heavier contributions from lower priced activity trackers.

Outdoor segment disappoints ahead of second action camera launch
The outdoor segment posted a revenue decline of 10 percent in the quarter, falling short of expectations. Though revenue declined – due in part to currency headwinds – gross and operating margins within the segment were strong at 66 percent and 31 percent, respectively.

“While outdoor started slowly in 2015, we do anticipate improvement in the second quarter as we are experiencing robust demand for the Fēnix 3 and as we launch additional new products within the segment,” Pemble said. “In April, we announced the Virb X and XE which will begin to ship in the second quarter.”

The Virb disappointed when it debuted last year, but Garmin said its new and improved versions and an enhanced mobile application that enables on-the-go mobile video creation, will help it gain momentum in the action camera market and broaden the revenue base of the outdoor segment.

GRMN also continues to improve its Garmin Connect mobile app, which has been criticized for a variety of glitches on product forums. 

“They've been working hard to improve our mobile app and product software in order to be able to be the most robust as possible,” Pemble said of Garmin engineers. “I think though that this is part of the reality of the mobile phones and Bluetooth connections, which are somewhat unreliable and software has to try to be as robust as possible, but there is still side effects.”

GRMN, which also operates Aviation, Marine and Auto segments, affirmed guidance it issued in February, which calls for approximately $2.9 billion of revenue in 2015 and approximately $3.10 of pro forma EPS. The company’s share price slipped about 4 percent Thursday