Garmin Lifts Guidance As Q2 Returns To Growth
Garmin, Ltd. slightly raised its sales guidance for the year after reporting a return to growth in the second quarter, led by a 31 percent gain in the fitness segment. Sales were down 3 percent in the outdoor segment and 11 percent in the marine segment. Earnings and sales both topped analyst targets in the quarter.
Highlights for the second quarter of 2023 include:
- Consolidated revenue of $1.32 billion, a 6 percent increase compared to the prior-year quarter. Wall Street’s consensus target was $1.28 billion.
- Gross margin and operating margin were 57.5 percent and 21.5 percent.
- Operating income was $284 million, a 3 percent decrease compared to the prior-year quarter.
- GAAP EPS was $1.50 and pro forma EPS was $1.45, representing 1 percent growth in pro forma EPS over the prior-year quarter. Wall Street’s consensus target was $1.43.
“We returned to consolidated revenue growth in the second quarter with growth in three of our five segments, demonstrating the resilience of our diversified business model. Our recent wearable launches have been well received and we expect continued revenue growth throughout the remainder of the year,” said Cliff Pemble, president and chief executive officer of Garmin.
Revenue from the fitness segment grew 23 percent in the second quarter, with growth across all categories led by strong demand for advanced wearables. Gross and operating margins were 52 percent and 16 percent, respectively, resulting in $54 million of operating income ($23.5 million prior year). During the quarter, Garmin launched the Edge 540 and Edge 840 cycling computers. Garmin said, “These advanced yet compact cycling computers add dynamic performance insights, advanced mapping capabilities, solar charging, and more to help cyclists ride smarter and train more effectively.”
Revenue from the outdoor segment decreased by 3 percent in the second quarter as growth in adventure watches was more than offset by declines in other categories. Gross and operating margins were 63 percent and 31 percent, respectively, resulting in $138 million of operating income ($163.4 million prior year). During the quarter, Garmin launched the Fēnix 7 Pro Series, with enhanced performance insights, built-in LED flashlights and additional mapping capabilities, and the Epix Pro Series, in three sizes, with AMOLED displays and built-in Led flashlights. Garmin also launched the Approach S70 premium golf smartwatch, available in two sizes with a AMOLED display and enhanced golf analytics.
Revenue from the aviation segment grew 6 percent in the second quarter with growth driven by OEM product categories. Gross and operating margins were 74 percent and 29 percent, respectively, resulting in $63 million of operating income ($61.7 million prior year). Garmin recently announced the Garmin Autoland and Autothrottle systems will become available for retrofit installations in select Beechcraft King Air aircraft. This certification will mark the first retrofit offering of the Garmin Autoland system in a twin-engine aircraft.
Revenue from the marine segment decreased by 11 percent in the second quarter, primarily due to the timing of promotions, which contributed to the lower revenue from Chartplotter products in the quarter. Gross and operating margins were 56 percent and 21 percent, respectively, resulting in $46 million of operating income ($68.6 million prior year). During the quarter, Garmin expanded its trolling motor series to a wider range of boats with the Force Kraken.
Revenue from the auto OEM segment grew 77 percent during the second quarter primarily due to increased shipments of domain controllers. Gross margin was 24 percent, and Garmin recorded an operating loss of $18 million in the quarter (negative $24.5 million prior year). During the quarter, we received approval to begin production of a new domain controller for safety-critical instrument cluster functions, which will be incorporated into multiple BMW models throughout the remainder of the year.
Additional Financial Information
Total operating expenses in the second quarter were $475 million, a 9 percent increase over the prior year. Research and development increased by 11 percent primarily due to engineering personnel costs. Selling, general and administrative expenses increased 7 percent driven primarily by personnel-related expenses and information technology costs. Advertising expenses increased by 7 percent primarily due to higher media spend.
The effective tax rate in the second quarter was 8.9 percent compared to 7.6 percent in the prior-year quarter. The year-over-year increase in the effective tax rate is primarily due to a larger amount of reserve releases in the prior year.
In the second quarter of 2023, Garmin generated approximately $221 million of free cash flow. Garmin paid a quarterly dividend of approximately $140 million and repurchased approximately $26 million of the company’s shares within the quarter, leaving approximately $27 million remaining as of July 1, 2023, in the share repurchase program authorized through December 29, 2023. Garmin ended the quarter with cash and marketable securities of approximately $2.8 billion.
2023 Fiscal Year Guidance
Based on the performance in the first half of 2023, Garmin is adjusting its full-year guidance. It now anticipates revenue of approximately $5.05 billion and pro forma EPS of $5.15 based on a gross margin of 57.2 percent, an operating margin of 20.0 percent, and a full-year effective tax rate of 8.5 percent. Previous guidance called for revenue of approximately $5.00 billion and pro forma EPS of $5.15.