Garmin Ltd. (GRMN) reported strong first-quarter 2014 earnings of 55 cents per share, comfortably beating the Zacks Consensus Estimate by 11 cents, on the back of strong growth in new products that are increasingly diversifying its business.
Revenues
Garmin’s first-quarter revenues of $583.2 million were down 23.2% sequentially but up 9.6% year over year and above the Zacks Consensus Estimate of $542.0 million. Volumes were down 44.4% sequentially but flat year over year. However, the blended average selling price (ASP) grew 38.5% sequentially and 9.8% year over year to $234.0 per unit. The increase was driven by mix changes and reduced revenue deferrals.
Revenues by Segment
Garmin’s Auto/Mobile, Outdoor, Aviation, Fitness and Marine segments generated 42%, 14%, 16%, 17% and 11% of the 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/Mobilesegment was down 36.5% sequentially and 3.8% from the year-ago quarter. The personal navigation device (PND) market weakness continued in the last quarter, which was partially offset by growth in original equipment manufacturers (OEM) and mobile product categories.
Garmin expects PND volumes to decline in 2014, in line with the 2013 rates but believes that niche categories, like dash cams and RV units, will help offset the decline, going forward. The company expects the OEM market to continue to generate good returns in the near future.
The Aviation segment revenues were up 9.9% sequentially and 19.3% 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 the positives for 2014.
The Outdoor segment revenues were down 33.7% sequentially but up 10.3% year over year. The year-over-year increase was due to several product introductions. Garmin expects to witness success in this segment because of the new products that are gradually expanding its markets and enabling it to enter new categories. The introduction of VIRB action cameras, fenix 2 and PRO series of dog collar products aided strong growth in the last quarter. Management believes further expansion into new categories and products will likely remain an important driver of segmental growth.
The Fitness segment decreased 15.5% sequentially but increased 38.4% 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 2014.
The Marine segment increased 34.6% sequentially and 19.3% from the year-ago quarter. The year-over-year growth was driven by new products including autopilot solutions, chartplotters and radars. Management expects new products to drive sales in 2014.
Garmin is trying to build a solid product portfolio (including acquisitions) and the strengthening of strategic relationships with marine OEMs.
Operating Results
The gross margin for the quarter was 56.7%, up 480 basis points (bps) sequentially as well as year over year. The increase was due to a favourable segment mix. Also, the amortization of previously deferred revenues aided margins.
The operating expenses of $210.5 million were up 7.3% from $196.2 million in the year-ago quarter. The operating margin shrank 2100 bps sequentially but was up 560 bps year over year to 20.6% in the quarter. Selling, general and administrative expense decreased year over year as a percentage of sales, while advertising and research and development expense remained same.
On a pro-forma basis, Garmin reported a net income of $108.1 million compared to $79.5 million in the first quarter of last year. Pro-forma earnings per share were 55 cents compared to 40 cents in the comparable prior-year quarter.
One-time adjustments in the quarter included currency-related gains.
Balance Sheet
Inventories were up 15.6% sequentially to $442.0 million. The cash and short-term investments balance was approximately $1.30 billion versus $1.33 billion in the prior quarter, with operations contributing around $71.2 million.
Garmin spent approximately $15.5 million on capex, yielding free cash flow of around $56.0 million. The company has no long-term debt.
In the reported quarter, the company spent approximately $88 million on dividends and $33 million on share repurchases. The company has $208 million remaining in the share repurchase program authorized through Dec 31, 2014.
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 reported quarter, the traditional PND business shrank to less than 50% of its total business, although Garmin remains the market leader. On the other hand, Garmin is seeing good growth in its target markets, all of which carry higher margins.
Additionally, Garmin’s partnership with Mercedes-Benz to provide navigation software to the latter’s upcoming models beginning 2014 and all models by 2017 will improve its share in the automotive market.
Garmin’s shares carry a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include GrafTech International Ltd. (GTI), Siemens Aktiengesellschaft (SI) and IAC Interactive (IACI). While GrafTech International sports a Zacks Rank #1 (Strong Buy) Siemens and IAC Interactive carry the same Zacks Rank as Garmin.
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