Garmin Ltd. (GRMN) reported strong third-quarter 2013 earnings of 69 cents per share, exceeding the Zacks Consensus Estimate by 9 cents, helped by strong growth in new products that are increasingly diversifying its business.
Revenues
Garmin’s third-quarter revenues of $643.6 million was down 7.6% sequentially and 4.3% year over year. Volumes were down 8.3% sequentially but grew 12.0% from the year-ago quarter. However, the blended average selling price (ASP) grew 2.6% sequentially and 8.2% year over year. The increase was driven by mix changes and amortization of previously deferred revenues.
Revenues by Segment
Garmin’s Auto/Mobile, Outdoor, Aviation, Fitness and Marine segments generated 50%, 16%, 13%, 13% and 8% of its quarterly revenues, respectively.
Seasonality typically makes for significant variations in quarterly revenues, with the most significant increase in the December quarter, followed by the most significant decline in the March quarter.
The Auto/Mobile segment was down 6.4% sequentially and 16.1% from the year-ago quarter. The personal navigation device (PND) market weakness continued in the last quarter. Garmin expects PND volumes to decline 20% globally in 2014.
Garmin remains the number one supplier in the U.S. (with a market share of more than 70%) and one of the major suppliers in Europe (around 30% market share). The primary focus areas are currently automotive original equipment manufacturers (OEMs) for in-dash applications and emerging markets.
The Aviation segment revenues were down 5.2% sequentially but up 14.6% year over year. The year-over-year increase was due to notable strength in the OEM segment. The aviation market recovery appears to be gathering momentum with three straight quarters of double-digit year-over-year growth.
New products, opportunities in the retrofit segment, opportunities in the military and government markets, and share gains in the helicopter market remain positives for 2014.
The Outdoor segment revenues were down 5.2 % sequentially and 4.0% year over year due to tough year-ago comparisons. Garmin expects to see success in this segment because of the many new products that are gradually expanding its markets and enabling it to enter new categories. During the quarter, management introduced VIRB and VIRB Elite products in the camera market and believes further expansion into new categories and new products will likely remain an important driver of segment growth.
The Fitness segment decreased 3.8% sequentially but increased 25.0% year over year.
Management believes that the continued move toward higher-margin products, especially in the running category, will help segment margins in the near term. GPS-enabled running and cycling products are gaining worldwide popularity, which is good news for Garmin, the market leader. Management also has several new products in the pipeline that are expected to drive growth in the second half of the year.
The Marine segment decreased 24.0% sequentially but grew 23.5% from the year-ago quarter to 8% of total revenue. The year-over-year growth was driven by new products, some pent-up demand and positive seasonality. Management expects new products to drive sales this year.
Garmin is trying to build a solid product portfolio (including through acquisitions) and the strengthening of strategic relationships with marine OEMs.
Operating Results
The gross margin for the quarter was 54.8%, down 30 basis points (bps) sequentially but up 140 bps year over year. Lower volumes led to the sequential decrease. The year-over-year increase was due to a favourable segment mix. Also, the amortization of previously deferred revenues was positive for margins.
The operating expenses of $201.1 million were up 1.1% from $199.0 million in the year-ago quarter. The operating margin shrank 80 bps sequentially and 20 bps year over year to 23.6% in the last quarter. All, except advertising expenses, increased sequentially as a percentage of sales.
On a pro-forma basis, Garmin reported a net income of $136.2 million compared to $145.8 million in the third quarter of last year. Pro-forma earnings per share were 69 cents compared to 74 cents in the comparable prior-year quarter.
One-time adjustments in the quarter included currency-related gains.
Balance Sheet
Inventories were up 8.7% sequentially to $416.7 million, with inventory days increasing from 116 days to 124 days. Days sales outstanding (DSOs) went up from 63 days to around 66 days. The cash and short-term investments balance were approximately $1.20 billion versus $1.23 billion in the prior quarter, with the company generating around $216.6 million from operations.
Garmin spent around $11.6 million on capex, yielding a free cash flow of around $205.0 million. Garmin has no long-term debt.
2013 Guidance
Garmin expects 2013 revenues of $2.5 billion–$2.6 billion (reiterated), gross margin of 53%–54% (reiterated), operating income of $530 million (previous $500 million), operating margin of 21% (previous 20%), a tax rate of 16% (previous 15%) and pro-forma earnings per share of $2.40 to $2.45 (previous $2.30–$2.40). The Zacks Consensus Estimate for the year is $2.41, which is at the lower end of the historical range.
Conclusion
Garmin’s results indicate that the company is successfully diversifying its business away from the shrinking PND market. This has been possible because of focused research and development efforts that have resulted in a steady flow of innovative higher-margin products. The company is also increasingly collaborating with OEMs for product designing, which is leading to greater volume, predictability and more stable pricing.
In the last quarter, the traditional PND business shrank to less than 50% of its total business, although Garmin remains the market leader in the category. On the other hand, Garmin is seeing good growth in its target markets, all of which carry higher margins.
Though management expects the PND market to continue to impact top and bottom line results, the forward guidance provided was encouraging, indicating strong growth to continue in the upcoming quarter.
Garmin shares carry a Zacks Rank #1 (Strong Buy). Other stocks that have been performing well and are worth a look include Melco Crown Entertainment Ltd (MPEL), Kemper Corp. (KMPR) and Fiserv, Inc. (FISV). All these stocks carry a Zacks Rank #1.
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