Garmin Ltd. (GRMN) reported fourth quarter earnings that missed consensus estimates by 19 cents, or 21.8%. Currency had a 15 cent negative impact on earnings, and if excluded would have raised the EPS by a like amount.
Garmin is deferring lifetime maps, connected services and premium traffic over their economic lives. Net deferrals were 19 cents a share in the last quarter.
Revenue
Revenue of $837.7 million was up 21.0% sequentially (appears to be weaker than normal seasonality). Garmin’s revenue was down 20.9% year over year, the second straight quarter of double-digit decline.
Volumes grew sequentially, but declined from last year, while blended average selling prices (“ASPs”) declined both sequentially and year over year. Specifically, units jumped 58.8% from the previous quarter and dropped 8.6% from last year. This was offset by the 23.8% and 13.5% sequential and year-over-year declines, respectively in ASP.
North America is clearly the market driving Garmin’s fortunes, since the region recorded the most significant sequential growth and the most significant decline from a year ago. Europe followed the same pattern, although the variations were smaller. Asia grew both sequentially and year over year and the growth from last year seems to indicate that Garmin is picking up market share in the region.
Specifically, North America contributed 64% of quarterly revenue (up 30.1% sequentially/down 30.1% from last year), Europe 28% (up 8.5%/down 4.6%), while Asia accounted for the balance (up 4.7%/up 46.4%).
Revenue by Segment
The auto/mobile, outdoor/fitness, aviation and marine segments generated 67%, 20%, 9% and 4% 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 26.5% sequentially and down 31.2% year over year, with both volumes and ASPs contributing. This business has been severely hindered by the availability of PND substitutes (primarily smartphones), as well as some aggressive pricing from competitors such as TomTom.
Garmin expects that unit market share was maintained in the last quarter (the company is the number one supplier in the U.S. and one of the largest suppliers in Europe). The primary focus areas are currently automotive OEMs (for in-dash applications) and emerging markets.
The Outdoor/Fitness segment was up 18.5% sequentially and 14.7% year over year. The segment has grown in importance over the past few years, as Garmin has launched a host of products that have met with great success. We expect these and other new products to continue driving sales in 2011, when the company will be reporting outdoor and fitness categories separately.
The Aviation segment revenue was up 17.7% sequentially and 10.2% year over year. The aviation segment continues to lag the overall economy in terms of recovery from the recession, but retrofit products are ideal for driving revenues during this time.
Garmin has been building its retrofit product line over the past few years. Management stated that the OEM and retrofit product lines drove the increase in the last quarter, evidence that the strategy is paying off. Garmin expects 2011 to be stronger as market conditions improve. The next two years will see revenues from the Part 25 business jet segment, so revenue growth for Garmin should continue.
The Marine segment was down 19.4% sequentially, but up 9.3% year over year. The sequential decline in December is normal for the marine segment, given the winter season. Garmin’s startegy here has been the building of a solid portfolio of products and strengthening strategic relationships with marine OEMs. This is what helped drive results in the last quarter.
Gross Margin
Gross margin for the quarter was 45.3%, down 435 basis points (bps) sequentially and 61 bps year over year. Volume increases helped the gross margin in the last quarter, while ASP declines (particularly in auto/mobile) and mix had a negative impact.
The sequential decline in the gross margin was entirely on account of the 775 bp decline in the auto/mobile gross margin, which offset the 294 bp, 649 bp and 338 bp increases in the outdoor/fitness, marine and aviation segments, respectively.
On a year-over-year basis, gross margins declined across all except the aviation segment, which saw an increase of 327 bps. The auto/mobile, outdoor/fitness and marine segment gross margins declined 464 bps, 276 bps and 172 bps, respectively.
Operating Performance
The operating expenses of $195.1 million were up 10.0% from the previous quarter’s $177.4 million. Expenses were flattish year over year. The operating margin shrunk 203 bps sequentially and 552 bps year over year to 22.0% of sales in the last quarter.
All expenses increased year over year as a percentage of sales, with SG&A increasing the most. However, the sequential decline was entirely on account of COGS, which increased significantly and was partially offset by declines in R&D, advertising and SG&A in that order.
On a pro forma basis, Garmin reported a net income of $132.9 million, or a 15.9% net income margin compared to $165.6 million, or 23.9% in the previous quarter and $278.4 million or 26.3% net income margin in the fourth quarter of last year.
The fully diluted pro forma earnings per share (EPS) were 68 cents, compared to 85 cents in the September 2010 quarter and $1.38 in the comparable prior-year quarter.
There were no one-time adjustments in the last quarter. Accordingly, the GAAP net income was the same as the pro forma net income of $132.9 million (68 cents a share), down from income of $279.6 million (85 cents a share) in the previous quarter and $278.4 million ($1.38 a share) in the year-ago quarter.
Balance Sheet
Inventories were down 21.6% sequentially, with inventory turns rising from 2.8X to 4.7X. Days sales outstanding (DSOs) went from 69 to 81. The cash and short term investments balance increased $27.5 million to around $1.26 billion, with the company generating $184.4 million from operations. Garmin spent around $9.3 million on capex, yielding a free cash flow of around $175.1 million.
The company also spent $12.1 million on acquisitions and $2.5 million on share repurchases. Garmin has no long-term debt and long-term liabilities of $270.1 million at quarter-end.
Guidance
Garmin provided guidance for 2011. The company expects revenue of $2.4-2.5 billion, gross margin in the 50-51% range, operating income in the $500-560 million range, operating argin of 21-22% and pro forma earnings of $2.25 to $2.50 per share.
Conclusion
The PND market is on a secular decline, which is the reason for the current softness in the auto/mobile segment. Since this remains Garmin’s largest business, the negative impact on results is likely to continue through 2011.
That said, we think Garmin has taken the right steps to weather the strom. The company has started focusing on automotive OEMs and we think its brand name will help it maintain position in the market through in-dash solutions.
Garmin was a late entrant here, so we need to take a wait-and-see approach to this measure. Garmin also lagged archrival TomTom in its decision to go for mobile apps. However, apps are a reality today after the Garmin phone idea failed.
The company will have a trtansitional year in 2011, as its basic reporting style will be altered to accommodate higher deferrals. Therefore, 2011 results would continue to show declines.
However, Garmin remains strongly positioned in all other segments in which it operates and has implemented product/partnership strategies here. We think this will pay rich dividends going forward.
Given the above, we believe a Neutral recommendation is justified at this point. The Zacks #3 Rank for Garmin shares is #3, implying a short-term (1-3 months) Hold recommendation.
GARMIN LTD (GRMN): Free Stock Analysis Report
Zacks Investment Research
