Garmin Ltd.’s (GRMN) first quarter earnings excluding the impact of foreign exchange missed the Zacks Consensus Estimate by 4 cents in a seasonally weak quarter for the company. Earnings were up 52% from the year-ago quarter.


Revenue of $431 million was down 59.3% sequentially and 1.3% year over year. The decline from the year-ago quarter was related to a 1.3% decline in the blended ASP (average sale price), as volumes stayed essentially flat. The sequential decline was mainly on account of the every strong fourth quarter, which typically generates over 30% of total revenue for the year.

The revenue decline was more pronounced in North America and Europe, which are the regions that experience particular holiday-driven strength in the Dec quarter. Moreover, PND adoption in Asia remains encouraging. North America contributed 56% of quarterly revenue (down 68.4% sequentially), Europe 34% (down 41.1%), while Asia accounted for the balance (down 4.4%).

Revenue by Segment

The Auto/Mobile, Outdoor/Fitness, Aviation and Marine segments generated 51%, 24%, 15% and 10% of fourth quarter revenue, respectively.

The Auto/Mobile segment was down 72.8% sequentially and 14.9% year over year. The sequential decline was a bit more than normal seasonality, as there was some channel-stuffing in the Dec quarter that had to be balanced out in the March quarter. This was also the reason for the decline from the year-ago period.

However, Garmin continued to gain market share in Europe and Australia, as well as the Asian countries of Taiwan, Thailand, Malaysia and Singapore. According to NPD, Garmin’s North America market share also expanded from 53% in the Mar 2009 quarter to 58% in Mar 2010. But this was a decline from the 60% share in the Dec quarter.

The Outdoor/Fitness segment was down 30.9% sequentially but up 28.4% year over year. The sequential decline was seasonal, but the increase from the year-ago period was very encouraging. New products and better distribution across all geographies have been driving growth in this segment.

Aviation segment revenue was up 2.4% sequentially and 11.8% year over year. This segment has been hit by the recession and the increase in the last quarter was largely related to recovery in the retrofit business. The impact of new products and timing of OEM shipments also helped.

The Marine segment was up 21.5% sequentially and 8.7% year over year. The strength in the last quarter was related to a broad recovery in the market and indicative of a strong boating season this year. The company has a range of new products, as well as several in the pipeline that should drive continued revenue growth.


Gross margin for the quarter was 53.6%, up 760 basis points (bps) sequentially and 869 bps year over year. The gross margin increase from both previous and year-ago quarters were largely mix-related, as higher-margin aviation, outdoor/fitness and marine segments represented a larger revenue share in the last quarter. Management also lowered warranty estimates in the quarter, which contributed to the gross margin expansion.

The Auto/Mobile segment gross margin was up 362 bps sequentially and 1,047 bps year over year due to slightly stronger PND pricing. Aviation gross margins also expanded 298 bps and 156 bps from the previous and year-ago quarters, respectively. Outdoor/Fitness declined 497 bps sequentially, but increased 329 bps from the year-ago quarter. Marine segment margins shrunk the most, declining 645 bps sequentially and 153 bps from the year-ago quarter.

The operating expenses of $8.7 million were up 10.9% from the previous quarter’s $7.9 million. The operating margin declined 823 bps to 19.3%. However, it expanded 606 bps from the year-ago quarter. The sequential decline was due to higher R&D and SG&A expenses that could not be scaled down at the same rate as the revenue decline. Although R&D and SG&A also increased in comparison to the year-ago quarter, this was more than offset by the gross margin increase and helped by lower advertising expenses as a percentage of sales.

Operating margins were down in all except the Aviation segment.

Net Profit

On a pro forma basis, Garmin had a net income of $75.5 million, or a 17.5% net income margin compared to $286.1 million, or 27.0% in the previous quarter and $51.0 million or 11.7% net income margin in the first quarter of last year. Our pro forma estimate excludes foreign currency impact on a tax-adjusted basis in the last quarter.

On a GAAP basis, the company recorded a net profit of $37.3 million ($0.19 per share) compared to $278.4 million ($1.38 per share) in the previous quarter and a net profit of $48.5 million ($0.24 per share) in the prior-year quarter.

Balance Sheet

Inventories were down 14.9% sequentially, with inventory turns going from 7.4X to 2.2X. Days sales outstanding (DSOs) were around 89, down from 75 days in the Dec quarter. The cash and short-term investments balance increased $199.8 million to around $1.31 billion, with the company generating $200 million from operations.

Garmin spent around $3.9 million on capex and $47.2 million to repurchase 1.4 million shares in the last quarter. Approximately $253 million remains available under the current authorization plan, which expires at the end of 2011. Garmin has no long-term debt and long-term liabilities totaled $317 million at quarter-end. The annual cash dividend was raised from $0.75 a share to $1.50 a share.

2010 Guidance Reiterated

Management did not provide guidance for the next quarter, but reiterated the guidance for fiscal 2010. Accordingly, revenue is expected to be around $2.9-$3.1 billion, gross margin of around 46-48%, operating income of $675-$725 million, yielding an operating margin of 23-24%. Additionally, the effective tax rate is expected to increase in 2010, yielding a pro forma earnings per share of $2.75 to $3.15.

The auto/mobile segment is expected to see a revenue growth of -5% to 5% and margin decline of 200-300 bps. PND prices are expected to be down 5-10% for the year and units are expected to be flat. The revenue growth will be driven by mobile and OEM penetration. Outdoor/fitness, Aviation and Marine are expected to see revenue increases of 5-10% each.

Raymarine Bid

Garmin has made a bid to acquire Raymarine Plc for GBP 12.5 million, representing an enterprise value of GBP 107.4 million, including Raymarine’s net debt of GBP 94.9 million.

Management believes this would be a good strategic fit for Garmin, since Raymarine primarily targets the OEM segment, which has not been an area of focus for Garmin. Therefore, the acquisition would enable the company to move beyond its traditional aftermarket and retail segments.

While management did not mention the impact of the acquisition on the bottom line, it is expected that there would be a $150 million addition to revenues in the first year of ownership. Since Garmin is a cash-rich company, the use of cash for acquiring companies that round out its portfolio is a big positive in our opinion.
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