While the Fitness segment continued to struggle and overcome the maturity of the basic activity trackers space in Q4, Garmin’s Outdoor segment remains on fire, led by the Fēnix line of adventure watches.
Sales in Outdoor segment grew 15.9 percent in the fourth quarter to $203.3 million. Significant contributions came from wearable devices combined with growth of inReach subscription services. Outdoor’s operating profits improved 25.7 percent to $73.3 million as gross and operating margins improved to 63 percent and 36 percent, respectively.
For the year, Outdoor’s revenues expanded 28 percent on strong demand for wearables and growth in inReach subscription services. The segment posted gross and operating margins of 64 percent and 36 percent respectively, resulting in operating income growth of 36 percent over the prior year.
Cliff Pemble, Garmin’s president and CEO, said the Fēnix line of adventure watches continued to show strong momentum, driven by the new Fēnix 5 series.
“There are many positive things that we can say about this product line, but one I’d like to highlight is that the variety of sizes and styles offered in the Fēnix 5 family has successfully broadened our customer base,” said Pemble. “In particular, the majority of customers registering Fēnix 5S devices are women, which was a previously underrepresented demographic in our Fēnix customer base.”
Pemble said Garmin continues to believe its Connect IQ application platform is an important differentiator for its smart wearables. Connect IQ now offers more than 3,500 apps, widgets and watch faces, and has generated over 45 million downloads since inception, approximately half of which occurred in the past year. The second annual developers’ conference will be held in mid-April to further support Connect IQ.
For the current year, revenue in the Outdoor segment is projected to increase approximately 13 percent. Said Pemble, “We anticipate the growth will be driven primarily by the Fēnix series and supported by growth in other product categories within the segment.”
In the Fitness segment, sales in the quarter inched up 0.8 percent to $276.2 million. The gains were driven by GPS enabled products, partially offset by declines in basic activity trackers. Gross and operating margins increased to 53 percent and 21 percent, resulting in a 24.1 percent growth in operating income, to $57.3 million.
For the year, revenue in the Fitness segment declined 7 percent, driven by the rapidly maturing market for basic activity trackers, partially offset by growth in advanced variables and our children’s line of activity trackers. Gross and operating margins was 55 percent and 19 percent respectively. Gross margin improved due to product mix while operating margin declined from the prior year.
The Fitness segment recently launched the Forerunner 645 Music, which brings both music and Garmin Pay to a wearable, with advanced features such as running dynamics and connectivity.
Pemble said Garmin is targeting revenue in the Fitness segment to be flat in 2018 as growth in advance variables, cycling and children’s trackers is offset by further declines in basic activity trackers.
In the Marine segment, revenue climbed 24.1 percent in the quarter to $83.7 million, driven by its updated lineup of chartplotters and fishfinders, as well as contributions from its recently acquired Navionics product line. Gross margin improved to 55 percent.
The Marine segment showed an operating loss of $10.5 million due to a one‐time accrual for a litigation settlement. In the year-ago period, operating earnings were $3 million.
For the year, the Marine segment’s revenue grew 13 percent, driven by growth in chartplotters, fishfinders and contributions from its Navionics acquisition. Gross margin improved to 57 percent while operating margin declined 13 percent due to litigation related costs.
During the fourth quarter, Garmin began shipping its new connected offerings in our popular Echomap and Striker product, lines enabling connectivity through its new ActiveCaptain mobile app. Marine is expected to be a growth segment in 2018 due to market share gains and new product innovations.
At the Miami Boat Show, Garmin announced that Sea Hunt Boat Company, one of the top selling saltwater boat brands in the United States, is now offering Garmin electronics in their line of watercraft. We are excited by the opportunity to serve Sea Hunt and their customers.
For the current year, Garmin anticipates revenue in the Marine segment will increase approximately 18 percent, consisting of both organic growth, as well as growth from our recent Navionics acquisition.
In its other segments, sales in the Auto segment declined 13.7 percent to $195.5 million. Operating earnings fell 10.1 percent to $17.4 million. Revenues in the year were down 15 percent with operating profits down 10.1 percent to $19.4 million. Revenues are expected to decline approximately 17 percent.
In the Aviation segment, sales rose 10.7 percent to $129.8 million. Operating income climbed 27.0 percent to $41.8 million. Aviation sales grew 14 percent in the year with operating earnings ahead 23 percent. Aviation sales are projected to climb approximately 13 percent in 2018.
Companywide, earnings improved 1.6 percent in the quarter to $135.6 million, or 73 cents a share. Excluding the impact of foreign currency losses and discrete tax items, adjusted pro-forma earnings rose 8.6 percent to $149.8 million, or 79 cents a share. Wall Street’s consensus estimate was 76 cents.
Sales in the quarter rose 3.2 percent to $888.5 million. Combined revenue from outdoor, aviation, marine and fitness increased 9 percent, and represented 78 percent of our revenue in the holiday quarter.
Gross margin improved to 56.2 percent compared to 54.7 percent in the prior year quarter. Operating margin improved to 20.2 percent compared to 18.6 percent in the prior year quarter.
For the full year, net earnings climbed 36.0 percent to $695.0 million, or $3.68. On a pro-forma basis, earnings rose 35.1 percent to $555.3 million, or $2.94. Revenues moved up 2.2 percent to $3.09 billion.
Pemble noted that the full year marked its second consecutive year of revenue and operating income growth and came despite a decline in the PND (personalization navigation device) market for nearly a decade and a “rapidly matured” market for basic activity trackers that “left additional gaps to fill.”
He added, “We filled these gaps and more because of the strength and diversity of our business.”
Combined revenue from outdoor, aviation, marine and fitness increased 9 percent and generated 90 percent of its operating income for the year.
For 2018, Garmin is projecting revenue of approximately $3.2 billion, up 3 percent year-over-year as growth in outdoor, aviation, marine is partially offset by ongoing declines in the Auto segment. Gross margin is expected to improve to approximately 58.5 percent, operating margin of approximately 21 percent and full year pro forma effective tax rate of approximately 19 percent, resulting in pro forma earnings per share of approximately $3.05, up from $2.94 in 2017.
“In summary, we are entering 2018 with a strong product line up and we see many opportunities ahead,” said Pemble.
Asked in the Q&A session if the Outdoor segment may soon face maturity challenges much like the Fitness segment, xx said, “Well, I think there’s always risk in any of these consumer market, so for sure that’s something that we’re aware of. We believe the market though is still doing well and we believe there’s opportunity for additional innovation and new products that can come to the market.”
He also said the Fēnix, the single largest product category within the Outdoor segment, is seeing “very strong” with product roadmaps that should allow Garmin to bring in newer product such as the Fēnix 5 while discounting older models to support average selling prices.
Asked about the Fitness segment, Pebble said TomTom’s move to exit the fitness category will have little impact on Garmin. Said Pemble, “I think TomTom’s contribution was fairly low on an overall market basis, and the primary impact of that would be to Europe. So I think certainly that’s in our overall view of the market but it’s not necessarily moving the needle in terms of the overall guidance.”
Pemble said the launch of the 645 is “imminent,” with some final adjustments to features, while the Vívomove HR has been better than expected and Garmin is catching up to demand. He also said that despite a number of introductions in the Fitness segment over the last six months, a slowdown shouldn’t be expected.
Said Pemble, “We do have a very active roadmap of new wearables that are coming in 2018 and beyond. So we’re still very much developing the product line and introducing new products and features.”
Photo courtesy Garmin