Garmin Ltd. (GRMN) reported quarter earnings that beat the Zacks Consensus Estimates by 20 cents, or 30.5%. Currency had an 11 cent negative impact on earnings, and if excluded would have raised the EPS by a like amount. Revenue exceeded the consensus by 18.1%.

Garmin is deferring lifetime maps, connected services and premium traffic over their economic lives. Net deferrals were 26 cents a share in the last quarter.

Revenue

Garmin’s fourth-quarter revenue of $909.6 million was up 36.4% sequentially and 8.6% year over year, helped by positive seasonality that pushed up sales of both personal navigation devices (PNDs) and outdoor/fitness products.

Volumes were up 75.2%, just past the levels in the year-ago quarter. However, the blended average selling price (“ASP”) dropped 22.2% sequentially while increasing 7.7% from last year, due to a higher mix of PND business.

North America is clearly the market driving Garmin’s fortunes, since the region accounts for over half its revenue. While seasonality is witnessed across all its served markets, it is the most pronounced in this region.

Garmin stated that revenue growth in the last quarter was flat to up sequentially across all geographies. For the year, the EMEA region was up 19% and the Asia/Pacific up 13%, partially offset by a 7% decline in North America.

The performance in North America remains weak due to the secular decline in PNDs that Garmin has not been able to offset through in-dash applications. The improved performance in Europe was helped by the Navigon acquisition and market share gains. Asia remains a growth market.

Revenue by Segment

Garmin changed its segment presentation beginning in the first quarter of 2011, splitting its Outdoor/Fitness segment into the Outdoor and Fitness segments. The rest of the segments are being presented as before. Accordingly, the Auto/Mobile, Aviation, Outdoor, Fitness and Marine segments generated 64%, 8%, 13%, 10% and 5% of fourth quarter revenue, respectively.

Seasonality typically makes for significant variation in quarterly revenue, with the most significant increase in the December quarter, followed by the most significant decline in the March quarter.

The Auto/Mobile segment was up 50.8% sequentially and 3.6% year over year. Volumes were up sequentially, but from a year ago. However, pricing was stronger than the fourth quarter of 2010. The PND business has been severely hindered by the availability of PND substitutes — primarily smartphones from the likes of Apple Inc (AAPL), Research In Motion (RIMM) and others running on Google Inc‘s GOOG) Android OS — as well as some aggressive pricing from competitors, such as TomTom.

Garmin remains the number one supplier in the U.S. (60% share) and one of the largest suppliers in EMEA (30% share), but this position is not likely to help given the poor market conditions. The primary focus areas are currently automotive OEMs (for in-dash applications) and emerging markets.

The Aviation segment revenue was flattish sequentially and up 3.6% year over year. The aviation market continues to lag the overall economy in terms of recovery from the recession, but Garmin appears to have outperformed the market, given its new wins, penetration into the helicopter segment and focus on theretrofit market.

Management stated that the retrofit business again drove sequential increases in the last quarter, although it was offset by weakness in business jets. New products and stronger business from OEMs contributed to the increase in aviation revenues.

The Outdoor segment was up 27.8% sequentially and 35.2% year over year. Pent-up demand for new products, expansion into new categories and contribution from acquisitions were the main reasons for the growth in the last quarter. Garmin also saw market share gains in the GPS-enabled golf market.

The Fitness segment was up 37.3% sequentially and 17.0% year over year. The company continues to launch a host of products for both elite and recreational customers and recently refreshed the Forerunner product line. Seasonality impacted sequential performance, while growth from last year was the result of the many new products that Garmin continues to introduce in the category.

The important drivers in the segment remain the relatively high-end Forerunner and Edge line of products, which is a good thing even as far as margins are concerned. GPS-enabled running and cylcling products are gaining popularity all over the world, which was good news for Garmin, the market leader in the segment.

The Marine segment was down 10.0% sequentially and up 16.4% year over year. The solid growth from the year-ago quarter was the result of improving market conditions and share gains. The sequential decline was attributable to typical seasonalilty.

Garmin’s strategy here has been the building of a solid portfolio of products and strengthening strategic relationships with marine OEMs. This strategy is paying off, with the segment showing small but steady growth over the years.

Gross Margin

Gross margin for the quarter was 47.7%, down 394 basis points (bps) sequentially and up 235 bps year over year. ASP increases offset the volume decline, accounting for the increase from the year-ago quarter. However, the sequential performance suffered, as the company sold a large volume of lower-ASP products. Warranty adjustments impacted the year-over-year comparison.

The gross margin by segment was as follows — auto/mobile 37.8% (down 569 bps sequentially, up 313 bps year over year); aviation 64.5% (down 191 bps sequentially and 593 bps year over year); outdoor 67.9% (up 201 bps sequentially and 20 bps year over year); fitness 64.4% (up 428 bps sequentially, up 16 bps year over year) and marine 59.8% (up 492 bps sequentially, down 357 bps year over year).

Operating Performance

The operating expenses of $233.7 million were up 18.6% from the previous quarter’s $197.0 million and up 19.8% from $195.1 million in the year-ago quarter. The operating margin shrunk 9 bps sequentially and 5 bps year over year to 22.0% in the last quarter.

The sequential decline was primarily on account of the weaker gross margin. The decline from the year-ago quarter was the net result of lower cost of sales and higher R&D, SG&A and advertising expenses.

On a pro forma basis, Garmin reported a net income of $165.6 million, or an 18.2% net income margin compared to $150.4 million, or 22.5% in the previous quarter and $132.9 million or 15.9% net income margin in the fourth quarter of last year. The fully diluted pro forma earnings per share (EPS) were 85 cents, compared to 77 cents in the September 2011 quarter and 68 cents in the comparable prior-year quarter.

There were no one-time adjustments in any of the above quarters, so the GAAP net income was the same as the pro forma income as discussed above.

Balance Sheet

Inventories were down 13.8% sequentially, with inventory turns increasing from 2.8X to 4.8X. Days sales outstanding (DSOs) went from 71 to 61. The cash and short term investments balance decreased $63.9 million to around $1.40 billion, with the company generating $225 million from operations.

Garmin spent around $12 million on capex, yielding a free cash flow of around $213 million. It also spent $155.9 million on acquisitions. Garmin has no long term debt and long term liabilities were around $356 million at quarter-end.

2012 Guidance

Garmin provided guidance for the year. Given expectations of a 5-10% growth in the Marine segment, 5-10% growth in the Aviation segment, 5-10% growth in the Outdoor segment, 20-25% growth in the Fitness segment and a 7-10% decline in the Auto/Mobile segment, Garmin is expected to see revenue of $2.7-2.8 billion for the year.

The gross margin is expected to be flat to slightly up, operating expenses in the $520-540 million range, operating margin of 19-20% and a tax rate of 13% resulting in EPS of $2.45-2.60.

The Zacks Consensus for the year was $2.53, within the guided range.

Conclusion

Garmin’s strong results were helped by the many new higher-margin products that the company has been introducing over the last few years and the company’s strategy of increasingly targeting the OEM segment with many of its offerings. The advantage of this strategy is more stable revenues and steadier pricing. At the same time, it has focused on individual customers in the outdoor and fitness segments. Given its strength in segments other than PND, we have a long-term (3-6 months) neutral recommendation on the shares.

The primary negative for Garmin is its still significant exposure to the PND segment, which is on a secular decline. We think that Garmin could ultimately improve upon the situation by focusing on auto OEMs for in-dash solutions and by building a presence in emerging Asian countries. However, Garmin has entered the race a bit late, so competition will be stiff.

Garmin shares carry a Zacks Rank of #2, implying a Buy rating in the short-term (1-3 months).

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