台灣國際航電 (GRMN) 2018 Q2 法說會逐字稿

Good morning.

My name is Julie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Garmin Ltd.

Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) And as a reminder, today's call is being recorded on August 1, 2018.

Thank you.

Teri Seck, you may begin.

Good morning.

We would like to welcome you to Garmin Ltd.

Second Quarter 2018 Earnings Call.

Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock.

An archive of the webcast and related transcript will also be available on our website.

As a reminder, we adopted the new U.S. GAAP revenue standard in the first quarter of 2018.

The prior periods presented here have been restated to reflect adoption of this new standard.

This earnings call includes projections and other forward-looking statements regarding Garmin Ltd.

and its business.

Any statements regarding our future financial position, revenues, earnings, gross and operating margins and future dividend, market shares, product introductions, future demand for our products and plans and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin.

Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission.

Presenting on behalf of Garmin Ltd.

this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer.

At this time, I would like to turn the call over to Cliff Pemble.

Thank you, Teri, and good morning, everyone.

As announced earlier today, Garmin reported strong second quarter consolidated revenue of $894 million, up 8% over the prior year.

Fitness, marine, aviation and outdoor collectively increased 17% year-over-year and contributed 80% of total revenues.

Gross margin improved to 58.5% compared to the prior year due to segment mix.

Operating income improved to $218 million, up 4% over the prior year.

This resulted in GAAP EPS of $1 and pro forma EPS of $0.99 in the quarter.

We are pleased with our performance in the first half of 2018, and these strong results give us confidence to raise our full year guidance.

Doug will discuss our financial results in greater detail in a few minutes.

But first, I'd like to provide a few brief remarks on the performance of our business segments.

Starting with the fitness segment.

Revenue increased 24%, driven by growth in advance wearables and in cycling.

Gross and operating margins were 56% and 23%, respectively, and operating income grew 40% over the prior year.

During the second quarter, we launched the vívoactive 3 music, expanding our music offerings into the advanced wellness category.

We also launched new Edge cycling computers and the next-generation Varia radars, targeting the cycling safety market.

The basic activity tracker category continued to decline during the first half of 2018.

However, the impact on our fitness segment was more than offset by growth in other categories.

Looking forward, we believe we are well positioned in the segment with a strong lineup of wearables and cycling products.

Looking next at marine.

Revenue increased 24% as weather conditions improved and boats were brought out of storage for the season.

Approximately half of the growth came from our recent acquisition of Navionics, while the other half was organic across multiple product categories.

Gross and operating margins were 59% and 21%, respectively, and operating income grew 14% over the prior year.

During the quarter, we introduced Panoptix LiveScope, a sonar system that generates real-time images underwater.

LiveScope was quickly recognized by the marine industry as disruptive new technology.

At the recent ICAST sportfishing trade show, LiveScope won the award for best new electronics and received the prestigious award for best of show.

We believe LiveScope is a game-changer for the fishing market.

Also during the quarter, we announced Sportsman Boats selected Garmin as their exclusive marine electronic supplier beginning with their 2019 model year boats.

Sportsman is one of the fastest-growing boat companies in the U.S. market, and it's an honor to be selected as their exclusive electronics provider.

Looking forward, we are focused on product innovation and gaining share in the inland fishing category.

Turning next to aviation.

Revenue increased 23%, driven by growth in both OEM and retrofit product categories.

We experienced particularly strong growth in our ADS-B offerings and from recently introduced products such as the G5 indicator system, TXi displays and GFC autopilots.

Gross and operating margins remained strong at 74% and 34%, respectively, resulting in operating income growth of 34% over the prior year.

We were recently selected by Tactical Air Support to provide an integrated flight deck to their fleet of supersonic F-5 fighter aircraft.

We also introduced the G30000H integrated flight deck for the Part 27 turbine helicopter market.

As I mentioned earlier, ADS-B has been a significant driver of growth in our aviation business.

With just under 18 months to go before the December 31, 2019, deadline, we wanted to provide an update on the market development and how we see things playing out as the deadline approaches.

According to the FAA, as of July 1, 2018, approximately 59,000 aircraft have been equipped.

The FAA has estimated that approximately 100,000 to 160,000 aircraft will eventually be equipped with ADS-B.

Based on the more conservative estimate, the market is just past the halfway point in the ADS-B cycle.

There are a few key observations that we would like to share.

First, significant opportunity remains in the ADS-B cycle.

According to FAA estimates, anywhere from 40,000 to 100,000 aircraft remain to be equipped.

Interest in ADS-B is increasing, and many customers are using the opportunity to refresh their panels with additional equipment.

This enhances the growth opportunity for Garmin.

Second, shock capacity appears to be a limiting factor in ADS-B adoption.

With a modest increase in shock capacity, it is possible to reach the low end of the FAA estimates by the December 31, 2019, deadline.

If shock capacity does not increase or if the final equipage level increases above the more conservative estimate, the opportunity would continue past the deadline.

Finally, ADS-B is a significant opportunity but it is only one of many that we are pursuing.

To prepare for the future beyond the ADS-B cycle, we are investing in long-term opportunities such as gaining share in the OEM market, establishing a position in government and defense markets and developing new product categories.

In summary, we are pleased with the performance of our aviation business, and we are optimistic about its future.

Turning next to outdoor.

Revenue increased 4% on a year-over-year basis, driven by growth across all product categories.

While this growth rate is below recent trends, we feel it is a remarkable accomplishment considering the strong growth we experienced in Q2 of 2017, driven by the initial channel fill of the fenix 5 series.

Gross and operating margins were 64% and 36%, respectively.

Late in the quarter, we launched the fenix 5 Plus series, adding music, color maps and mobile payments to all 3 watch sizes.

In addition, we expanded our sensor technology with the addition of Pulse Ox to the fenix 5X Plus, providing blood oxygen saturation awareness for athletes and outdoor enthusiasts.

We also launched the inReach Mini, a compact, versatile satellite communicator that can be used with other Garmin products paired with a smartphone or used as a stand-alone device.

Looking forward, we are focused on opportunities in wearables and other product categories within the outdoor market.

Looking finally at the auto segment.

Revenues decreased 19% due to the ongoing decline in the PND market.

Gross and operating margins declined year-over-year to 42% and 7%, respectively.

Our global market share position in the PND category remains very strong.

Looking forward, we are focused on disciplined execution to bring the desired level of innovations to the market and to maximize profitability in the segment.

In summary, we are pleased with our results in the first half of 2018.

In light of the strong performance, we are raising our projected revenue to $3.3 billion for the year, up about 6% over 2017.

Gross margin is projected to be 58.5% for the year, which is unchanged from the previous estimate.

Operating margin is projected to be 21.5%, which is a slight improvement over our previous guidance.

Assuming a pro forma effective tax rate of approximately 17.5%, pro forma earnings per share is expected to be approximately $3.30.

Looking at our annual revenue outlook by segment.

We have increased our growth expectations for the fitness segment to 10% and the aviation segment to 18%.

Outdoor and auto are unchanged, while the outlook for marine has been revised down slightly to 15%.

That concludes my remarks.

Next, Doug will walk you through additional details on our financial results.

Doug?

Thanks, Cliff.

Good morning, everyone.

I'd like to begin by reviewing our second quarter financial results and make comments on the balance sheet, cash flow statement and taxes.

We posted revenue of $894 million for the second quarter, representing an 8% increase year-over-year.

Gross margin was 58.5%, a 30 basis point increase from the prior year.

Operating expense as a percentage of sales was 34.2%, 120 basis point increase from the prior year.

Operating income was $218 million, a 4% increase year-over-year.

Operating margin was 24.3%, a 90 basis point decrease from the prior year.

Our GAAP EPS was $1, and pro forma EPS was $0.99, a 9% increase from the prior year.

Next, I'd like to look at our second quarter revenue by segment.

During the quarter, we achieved 8% consolidated growth led by robust double-digit growth in our fitness, marine and aviation segments.

This growth was partially offset by a decline in our auto segment, which resulted in continued decline in the auto PND business.

On a combined basis, fitness, marine, aviation and outdoor were up 17% compared to the prior year quarter.

Looking next at second quarter revenue and operating income.

On a combined basis, fitness, marine, aviation and outdoor segments contributed 80% of total revenue to second quarter of 2018 compared to 73% in the prior year quarter.

Fitness grew from 22% to 25%.

Aviation grew from 15% to 17%.

Marine grew from 13% to 15%.

As you can see from the charts that illustrate our profit mix by segment, on a combined basis, the fitness, marine, aviation and outdoor segments delivered 94% of operating income in the second quarter 2018 compared to 84% second quarter 2017.

The fitness and aviation segments had year-over-year increase in both operating income dollars and operating margin.

Looking next at operating expenses.

Second quarter operating expenses increased by $31 million or 11%.

Research and development increased $15 million year-over-year due to investments in engineering resources and recent acquisitions.

Advertising expense was up $2 million for the prior year quarter and was relatively flat as a percent of sales.

SG&A was up $16 million compared to prior year quarter, relatively flat as a percentage of sales.

The increase was primarily due to personnel-related expenses, incremental costs associated with recent acquisitions.

A few highlights on the balance sheet and cash flow statement.

We ended the quarter with cash and marketable securities of approximately $2.4 billion.

Accounts receivable increased sequentially and year-over-year to $533 million.

Inventory balance decreased sequentially in year-over-year to $501 million as we exited the seasonally strong second quarter.

For the second quarter of 2018, we generated free cash flow of $157 million, a $28 million increase from the prior year quarter.

Also during the quarter, we paid dividends of $100 million.

During the second quarter 2018, we reported an effective tax rate of 19.4% compared to pro forma effective tax rate of 21.4% in the prior year quarter.

The decrease in the effective tax rate was primarily due to the benefits from U.S. tax reform.

We expect our full year 2018 pro forma effective tax rate to be approximately 17.5%.

This concludes our formal remarks.

Julie, could you please open the line for Q&A?

(Operator Instructions) Your first question comes from the line of Joe Wittine from Longbow Research.

In aviation, I appreciate the color, Cliff, and we've heard of the tight capacity, too.

Can you just take it a step further and help us understand how this may play out in your reported results in '19 and '20?

Let's say, the FFA's conservative scenario plays out, so the 100,000 in total sales, and you do get that modest increase in shock capacity to, let's say, allow the industry to meet 100,000 by the end of 2019.

So the question is, would you still see healthy growth in '19 versus '18?

And then if it were to drop off there and be "complete" at January 1, 2020, would that be enough of a drop-off to potentially drive Garmin aviation down in 2020?

Just a little more help taking us through the model will be great.

Well, I think just to shed some light on that specific category of ADS-B, it's only one category within our broader aviation segment.

So if we just speak generally about that, I would say that with some additional shock capacity, of course, that would drive additional sales in that category.

As I mentioned in my remarks, there is a follow-through trend with customers adding additional equipment to their aircraft.

When they're bringing the aircraft in for work, a lot of times, it makes sense to add other things that they want to have in the aircraft.

So we're seeing a compounding effect from that, and we would expect that to continue as the mandate approaches.

In terms of specific numbers around aviation for '19 and '20, we can't really provide specific color on that.

As I said in my remarks, we're working on more than one opportunity.

So we believe that we have growth paths beyond the ADS-B cycle.

And given what we see playing out with ADS-B, we do anticipate more of a soft landing than a hard cliff of revenues in terms of that category.

Perfect.

And I wanted to move to fitness, where the numbers were very impressive.

I think the product cycle is obviously your friend today.

Looking to the second half, should we anticipate, I don't want to say a pause, but simply an easing in the timing of new product introductions, especially in advance wearables?

Or do you have these things spaced out to the point where you would have us expect a "typical" slate of new product announcements into the holidays?

We do have some additional announcements that will come in the back half of the year.

But for the most part, our product lineup is set.

We do have a very refreshed product lineup this year, so we feel good about our positioning.

And of course, last year, we did have the introductions of some of our advance wearables and new categories in wellness in the back half of the year.

So we're comping against that.

The fitness market has shown that it's been a little more dynamic, so we are taking a more cautious view on the back half.

But we believe there's strong reason that our products and our business should perform well.

And then last one for me.

Doug, can you help us on ad spend at all, especially modeling the second half here on a year-over-year basis?

Your ad dollars were kind of flattish, a little bit up in the second quarter, though you're still down for the first half in total.

So how will the second half look year-over-year, especially considering I think you pulled back some in last year's fourth quarter?

Yes.

So as it relates to advertising, to give you a full year perspective on it, yes, we expect full year advertising dollars to be relatively flat year-over-year as well as a percentage of sales.

So second half will even out, so that we're basically a situation that will be flat, hopefully, for year-over-year.

Your next question comes from the line of Yuuji Anderson for Morgan Stanley.

My question is on the auto's guidance.

It seems to imply some accelerated declines until the end of the year, so hoping to get a little bit more color on that.

And similarly, on that point, how should we think about the mix between PND and the other categories exiting the year?

Yes.

So in terms of auto, as we've -- has been our practice really for years, is we do take a fairly conservative view of that given the situation of the market.

We do see the ongoing decline of PND.

During the quarter, we did experience strength in both truck and camera products, so we're offsetting some of those declines with new categories.

And in terms of OEM, we are seeing some programs roll off like Chrysler and other new programs, which have not contributed yet such as BMW.

So we'll see some ups and downs in the OEM portion of the contributions.

But that's our outlook for the remainder of the year.

And then, of course, as we move into future years, we'll be able to update that as we see new programs coming on and as the categories change.

Got it.

And then just a quick clarification on the prepared remarks for the outdoor segment there.

With the guidance, it looks like there should be some acceleration off of Q2.

Is that building in some additional product launches there?

Yes.

So in outdoor, we do have additional launches in the back half of the year.

But for the most part, our major categories are set.

And I think we're right where we expected to be in the segment, and so that's why we left our guidance unchanged.

Your next question comes from the line of Brad Erickson from KeyBanc Capital Markets.

Just a few follow-ups here.

First, on the fitness business.

I guess it's kind of interesting, when you look at that business, it's like, I don't know, $160 million or so higher than it was 3 years ago or so.

Margins seem to be tracking kind of in line, though, or below where you were at those levels.

Talk about just overall fixed cost leverage you start to get, particularly as you get some of these nice channel fill quarters.

It seems like you've returned a little bit of margin expansion.

Just what should be the expectation around fitness margins there?

Well, I think we've been targeting our margins around the mid- to upper 50s and our operating margins in the low to mid-20s in the segment.

And as we see lumpiness around the seasonality as well as product launches, that can be up and down.

But that's generally the long-term targets that we're shooting for.

Got it.

And then just on aviation, do you have any sense -- can you give us a sense, rather, of what's the attach rate that your resellers are seeing for when they're selling ADS-B with, say, other avionics products?

I would say it's very high, probably close to all of them.

Got it.

And then lastly, just around FX.

It seems like that should have been maybe a bit of a tailwind to start the year, probably neutralize as it becomes a headwind.

What's the -- any clarity you can give us on the net benefit your -- or headwind you're contemplating ode-to-FX for the year in the updated guidance?

Yes.

So for Q2, you're correct.

There was a tailwind on revenue, about the $20 million.

And looking at the back half of the year, we expect very little, probably immaterial impact.

The euro right now is pretty well consistent with what, I'll say, the average was for the back half.

So probably if everything stays the same as it is right now, a very little impact on the back half.

Your next question comes from the line of Charlie Anderson from Dougherty & Company.

I wanted to ask about geographic again.

I know I asked this last quarter.

But Asia was very strong.

Again, I wonder if there were any particular geos you could call out there that are doing well.

And is it a sense why your building there and you're sort of in an expansion phase?

Or just kind of roughly what's going on there?

And then also in Europe, it seems like if there was one geo that slowed down Europe a little bit.

So wondering if you could maybe unpack what's going on there.

And I've got a follow-up.

Yes.

So in Asia, there are some larger countries that are driving some growth there.

Particularly, China and Japan have been superstars in terms of the overall APAC market, but there are other markets as well that are doing very well.

In terms of the Europe dynamic, I think our year-to-date performance there can be completely attributed to the fenix effect from last year.

They were superstrong in their launch of fenix from last year, and they had almost really the whole quarter of Q2 to be able to launch fenix 5. This year, we announced the fenix 5 with less than 2 weeks to go in the quarter.

So consequently, they had very little opportunity in terms of their channel fill as compared to other markets.

So I think the dynamics there can be completely attributed to fenix.

Got it.

And then on fitness, going to be up 10% in the year.

I wonder to what degree you would attribute that to ASP relative to units.

And I wonder, as you move to these high-end wearables, does it feel like that's a multiyear trend?

Or just kind of roughly, how do you look at that going forward in terms of consumers willing to sort of pay up for more features?

Yes.

Definitely, the dynamic of the market is that customers are stepping up for more capability and for unique offerings like what we have.

And so there's definitely an increase in the ASP that we see there, but we also see growth in units as well.

So we had super strong performance in our advance wearables category.

Okay.

Our next question comes from the line of Ben Bollin from Cleveland Research.

Could you talk a little bit, going back to fitness, were there any unique items in the quarter?

Did you continue to see some sell-in benefit for Forerunner 645?

Are you seeing any further box expansion or linear square foot expansion in your existing partners?

Well, we did announce the vívoactive 3 music, and that product seemed to have been received well in terms of its unique design and capabilities adding to the vívoactive line of music.

So that was one dynamic.

In terms of overall distribution, I think for the most part, our distribution is pretty well set, although we see some countries and some areas, some markets improving incrementally.

But for the most part, it's what it's been for a while.

Great.

And then within fitness, in the press release, you talked about the potential for more high-end wearables or more high-end features in that product category.

What is your assessment of what those characteristics or features are, what makes it a high-end wearable?

And then last item would be, have you seen any benefits from TomTom exiting the market in the first half?

And how do you think that opportunity could play out in the back half?

So in terms of customer preferences, they do seem to be moving towards products with more features.

It seems like smart features are a table stakes, if you will.

Customers like the sensor technology and especially the additional features that we bring to the table such as stress monitoring and sleep tracking.

And then just in general, I think our products are very strong around the GPS side and the position location focus of our watches, which make them very strong in the active lifestyles.

Music, payments and maps are certainly adding to that, so we see those as all positive points for the customer.

In terms of shifts in the competitive landscape, I would say in terms of TomTom's exit, there's probably some effect depending on the country that you talked about.

Some countries still report that there's strong inventory of competitive products in the market, and so those areas probably haven't changed as much as well as others.

The channel is pretty much flushed through, and so that does lead to increased opportunities for our profits.

Your next question comes from the line of Ivan Feinseth from Tigress Financial.

I have questions in 3 areas.

First, congratulations on the F-5 win.

Can you give us some idea of the number of units and the price of that product?

Yes.

In terms of number of units, of course, these are very specialized aircraft, so it's a small quantity.

But we view it as a stepping stone into that market.

And it shows the capability of our cockpit systems to be able to be used in a very advanced, specialized application like the F-5.

In terms of our chipset prices, we can't talk about those details.

But again, we're very excited about the opportunity, and we believe it will be a stepping stone for us into more.

That's what I thought.

Do you have -- can you give us some color on some other potential wins in the pipeline?

In terms of things that haven't been announced, we can't speak to those.

Definitely, there are a lot of exciting opportunities that are coming that have been announced.

For instance, the Longitude is in its final stages of certification.

Also, we have positions on the Cessna Sky Courier and the Denali as well.

Very good.

Also, on your infotainment platform, can you give us any progress on potential OEM adoption?

We're very encouraged by what we see in the deal pipeline, and we believe that we'll have additional news to share this year in terms of more customers.

Then I just have one last area.

I see you recently expanded the sleep monitoring function in the Connect app to work with your wearables.

And I know that you had announced a partnership with the University of Kansas to focus on sleep apnea.

Is -- are there some -- did that come from some of that progress?

Or will you be expanding?

Can you give us some insight into what's happening with the research relationship there?

Yes.

We believe that our sensor technology shows a lot of promise in being able to play in the light medical device market.

And so participating in these studies is one way to start verifying the technology and proving that it can be used for certain applications.

That's a long pathway in terms of our development there.

It involves qualification of the product and certification of the product with various FDAs around the world, but it's a step in towards a growth opportunity in the future.

Yes.

I really like that because sleep is probably the next frontier in improving health.

And I also like the new oxygen sensor in the 5 Plus.

So congratulations again.

Thanks, Ivan.

(Operator Instructions) Your next question comes from the line of Joe Wittine from Longbow Research.

No one wants to ask a fenix question, I will.

Can you talk us through what you've seen so far for Plus?

How does the launch compare to the F-5 launch?

And are there any interesting insights you've gathered on the current mix of Plus versus fenix 5 purchases because it seems like you'll be selling them side-by-side?

Yes.

Still early days, but we're very encouraged by what we see in terms of the market feedback and the real-time information we get as people register their products.

I think out of the gate, the higher-end versions, the 5X Plus have been very strong.

And we're starting to see the momentum gather around the other versions as well.

Can you say how the channel fill will compare to the channel fill for the fenix 5, which is pretty substantial in last year's second quarter?

Will it be a little bit smaller because you'll be selling them side-by-side or not necessarily?

Well, definitely, there's the factor that a very confident product is side-by-side with the fenix 5 Plus.

There's no question about that.

We will use that in terms of our overall strategy in the market in terms of pricing the 2 different versions.

But that said, it's still very early days.

With only just literally days in the back half of the quarter that we had to ship products, we were very pleased with our overall contribution from the fenix 5 Plus.

There are no further questions in the queue at this time.

I'll turn the call back over to Teri Seck.

Thanks, everyone.

Doug and I will be available for callbacks today.

Have a great day.

And that concludes today's conference call.

You may now disconnect.