Garmin Foresees Weaker Margins

| About: Garmin Ltd. (GRMN)

Garmin Ltd. (NASDAQ:GRMN) reported fourth quarter earnings that beat the Zacks Consensus Estimate by 47 cents.


Revenue of $1.06 billion was up 35.6% sequentially and 1.1% year over year. This was the first year-over-year increase in five quarters. Volumes were up a whopping 71.2%, driven by seasonality, although the ASP declined 20.8%, mainly due to pricing pressures in Garmin’s core PND product family. The ASP also declined 3.2% from the year-ago quarter, but this was offset by a 4.4% increase in volumes.

Strength was broad-based across geographies, although North America witnessed the strongest growth. North America contributed 73% of quarterly revenue (up 52.7% sequentially), Europe 23% (up 3.8%), while Asia accounted for the balance (up 9.8%).

Revenue by Segment

The Auto/Mobile, Outdoor/Fitness, Aviation and Marine segments generated 77%, 14%, 6% and 3% of fourth quarter revenue, respectively.

The Auto/Mobile segment was up 48.8% sequentially but down 1.9% year over year. The sequential increase was driven by seasonality and was across all geographies. Management stated that PND market share was stable during the quarter, with North America share at around 60% and Europe at around 20%. The year-over-year decline was driven by a 6% decline in ASP, partially offset by a 3% increase in volumes.

The Outdoor/Fitness segment was up 12.5% sequentially and 24.4% year over year. This segment has picked up faster than the others, with the third straight quarter of double-digit sequential growth and the second straight quarter of double-digit year-over-year growth. New products and changes in consumer behavior have been driving this strength. Additionally, the company also enjoyed positive seasonality in the fourth quarter.

The Aviation segment revenue was up 11.4% sequentially but down 4.1% year over year. The weakness was due to lower spending, although retrofit spending fared better than OEM and portable.

The Marine segment was down 25.1% sequentially, but up 2.3% year over year. The sequential decline is in line with normal seasonality. The increase from the year-ago period was due to strength in new products.


Gross margin for the quarter was 45.9%, down 650 basis points (bps) sequentially and 88 bps year over year. The sequential decline in the gross margin was due to mix of business, which favored the lower-margin auto/mobile segment. The decline from the year-ago period was due to the pricing pressures in the PND business.

The Auto/Mobile segment gross margin was down 904 bps sequentially. The other three segments, which generate significantly higher gross margins, saw margin expansions of 608 bps, 20 bps and 1,135 bps, respectively, in the last quarter.

The operating expenses of $194.7 million were up 12.7% from the previous quarter’s $172.9 million. However, the operating margin declined 276 bps to 27.6%, compared to 30.3% in the third quarter. The lower operating margin was entirely on account of the weaker gross margin and partially offset by lower SG&A, advertising and R&D expenses, as a percentage of sales.

Net Profit

On a pro forma basis, Garmin had a net income of $286.1 million, or a 27.0% net income margin compared to $203.4 million, or 26.0% in the previous quarter and $197.8 million or 18.9% net income margin in the fourth quarter of last year. Our pro forma estimate excludes foreign currency and investment gains/charges in the last quarter.

On a GAAP basis, the company recorded a net profit of $278.4 million ($1.38 per share) compared to $215.1 million ($1.07 per share) in the previous quarter and a net profit of $157.7 million ($0.78 per share) in the prior-year quarter.

Balance Sheet

Inventories were down 17.0% sequentially, with inventory going from 4.0X to 7.4X. Days sales outstanding (DSOs) were around 75 days, down from 75 days in the Sept. quarter. The cash and short-term investments balance increased $81.8 million to around $1.09 billion, with the company generating $245 million from operations.

Garmin spent around $14 million on capex, yielding a free cash flow of around $232 million. Garmin has no long-term debt, and long-term liabilities totaled $306 million at quarter-end.


Management did not provide guidance for the next quarter, but it did provide guidance for fiscal 2010. Accordingly, revenue is expected to be around $2.9-$3.1 billion, gross margin of around 46-48%, operating income of $675-$725 million, yielding an operating margin of 23-24%. Additionally, the effective tax rate is expected to increase in 2010, yielding a pro forma earnings per share of $2.75 to $3.15.

The Auto/Mobile segment is expected to see a revenue growth of -5% to 5% and margin decline of 200-300 bps. The revenue growth will be driven by mobile and OEM penetration, while PND revenues will be flat. Outdoor/Fitness, Aviation and Marine are expected to see revenue increases of 5-10% each.