Operator:

Thank you for standing by. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Limited Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the floor over to Teri Seck, Director of Investor Relations. Teri, you may begin.

Clifton Pemble:

Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered another quarter of outstanding results with double-digit growth in consolidated revenues and operating income. Consolidated revenue increased 14% to $1.51 billion, a new second quarter record, with three business segments reporting strong double-digit growth. Gross margin was 57.3%, operating margin expanded to 22.7%, resulting in operating income of $342 million, up 20% year-over-year. We reported pro forma EPS of $1.58, up 9% over the prior year, which is a remarkable result considering the significantly higher effective tax rate. During the quarter, our global employment surpassed 20,000 associates, and we were recognized as a top employer by Forbes as well as U.S. News and World Report. We are proud of our associates who dedicate themselves to delivering growth through innovative and highly differentiated products. Given our strong performance in the first half of the year, we are updating our full year guidance. We now anticipate revenue of approximately $5.95 billion and pro forma EPS of $6. Doug will discuss our financial results and outlook in greater detail in a few minutes. But first, I'll provide a few remarks on the performance of each business segments. Starting with fitness. Revenue increased 28% to $428 million, primarily driven by wearables. Gross and operating margins improved to 57% and 25%, respectively, resulting in operating income of $108 million. During the quarter, we launched the Edge 1050 premium cycling computer with a vivid color touchscreen display, a built-in speaker for audible feedback, and Garmin Pay mobile payments. Also during the quarter, we celebrated Global Running Day, with Garmin users running nearly 11 million miles, beating last year by more than 2 million miles. Given the strong performance of the fitness segment, we are raising our revenue growth estimate to 20% for the year. Moving to outdoor. Revenue decreased 2% to $440 million, primarily driven by lower revenue from adventure watches following the anniversary of the fēnix and epix Pro Series launch. Gross and operating margins were 65% and 31%, respectively, resulting in operating income of $136 million. During the quarter, we launched the Approach Z30 smart laser rangefinder, with the range relay feature, which sends distance measurements to a compatible Garmin smart watch or the Garmin Golf smartphone app. We also launched our first cellular-based dog tracking collar, the Alpha LTE. This small rugged device attaches to existing dog collars and pairs with the Alpha app so users can view their dog's movement from a smartphone or an Alpha handheld device. The outdoor segment has performed as we anticipated so far this year, and we expect growth to accelerate in the back half of the year with new product launches. As such, we are maintaining our 7% revenue growth estimate for 2024. Looking next at Aviation, revenue was relatively flat in the second quarter at $218 million. We continue to see growth in OEM product categories, while the aftermarket declined in an ongoing normalization following the somewhat uneven results of the prior year. Gross and operating margins were 74% and 23%, respectively, resulting in operating income of $50 million. For the ninth consecutive year, we were recognized by Embraer as the best supplier, most recently in the Electrical & Electrical Systems category for our G3000 Prodigy Touch flight deck in the Phenom 100 EV and Phenom 300E. The Aviation segment has performed as expected so far this year, and we are maintaining our estimate of flat revenue in 2024. Turning to the marine segment. Revenue increased 26% to $273 million, primarily driven by the acquisition of JL Audio. Excluding JL Audio, revenue increased approximately 7%, outperforming widely reported market trends. Gross and operating margins improved to 54% and 22%, respectively, resulting in operating income of $60 million. We recently expanded the Force Kraken trolling motor series, adding a 48-inch shaft length to accommodate a broader range of both sizes. We also expanded our ice fishing offerings with the Panoptix PS-22 Ice Fishing Bundle, an ultra portable live sonar solution for winter fishing, which won a best of category award at this year's ICAST, the world's largest sportfishing trade show. This is our fourth consecutive win in the ice fishing category and seventh consecutive award at ICAST. Additionally in the quarter, we were once again selected as an exclusive supplier to Independent Boatbuilders Incorporated through 2029 for both traditional marine electronics as well as audio equipment. Given the strong performance of the marine segment, we are raising our revenue growth estimate to 15% for the year. And moving finally to the auto OEM segment, revenue increased 41% to $147 million, primarily driven by growth in domain controllers. Gross margin was 16%, and the operating loss decreased to $12 million. Our auto OEM segment continues to be recognized as an outstanding partner. We recently received the 2024 Global Award for Excellence in Technology and Development from Yamaha Motor for our motorcycle infotainment solutions. Auto OEM has performed as expected so far this year, and we are maintaining our 50% revenue growth estimate for 2024. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

Yes, thank you. [Operator Instructions] Your first question comes from the line of Joseph Cardoso from JPMorgan. Your line is open.

Douglas Boessen:

Yes. So when we think about that, yes, relating to the gross margin, back half versus what we've seen in the first half, we'll continue to see segment mix have an impact. That will have an impact to reduce the gross margin in the back half. As it relates to expenses, yes, we'll continue to make investments in R&D, primarily to support our innovation.

Clifton Pemble:

Yes, Joe, I think our performance in the aftermarket is definitely much better than the overall market. And even in the OEM channels that we serve, our performance is much better than the broader markets than reporting. I think we attribute this to really our product lines highly innovative and very broad. We're doing very well, and in chartplotters, we have the best mapping, and sonar systems, radar and autopilots. And trolling motors are somewhat of a newer category for us. It's expanding and helping us to take share.

Erik Woodring:

Hey guys, good morning. Thank you for taking my call. Doug or Cliff, either one of you, I just want to kind of get your viewpoint. As we think about the guidance increase, obviously, nice outperformance in 1Q, so you were tracking above and now we've seen you raised guidance. Would you say that that increase in guidance is solely a reflection of the better first half? Or are you seeing some of that sustain into the second half relative to your expectations? Just want to kind of get a sense, is this kind of a reflection just of 1Q outperformance? Or is the second half of the year better than you thought as well? And then I have a follow-up. Thank you so much.

Douglas Boessen:

And one thing to add in marine, we are anniversarying the JL Audio acquisition end of Q3 also.

Douglas Boessen:

Good question. There is a working capital consideration you take into consideration also. So one of which is inventory. Last year, in the back half, we saw some benefit relating to our inventory being lower. This year, we expect in the back half that we would be increasing our inventory. On a year-over-year basis, we probably expect inventory decrease in line with sales, so there will be a use of cash in the back half for inventory.

George Wang:

Hey guys, thanks for taking my question. Two parts. Firstly, can you give update thoughts on capital allocation, especially given still elevated cash balance, just the 2Q, the buyback was pretty small, just -- and also a related question just on the CapEx, you guys have still guided pretty elevated CapEx full year being $350 million, with the 1H being smaller spend. Maybe you can walk me through how you think about these two parts.

George Wang:

Okay. Just a quick follow-up, if I can squeeze in. I just wanted to, kind of honing on the auto OEM, especially kind of as we look beyond the BMW, the main controller. Last quarter, you guys alluded to two new wins just on the infotainment system side there. I assume it's higher margin. Can you kind of give a bit more thoughts and color if you can? Kind of I assume it's going to ramp starting from 2026 kind of in infotainment system, maybe kind of -- any color would be appreciated.

George Wang:

Okay, great. I’ll go back in the queue.

David MacGregor:

Yes, good morning everyone. Thanks for taking the questions. I guess I wanted to just pick up on the discussion around the OEM auto, and congratulations on the progress there. You're obviously in the market with a product that is succeeding with customers and building on the BMW, now with Yamaha and others. But I guess I'm a little confused on why there isn't a little more scale benefit in terms of your margin outlook. And so you mentioned there's still controllers and there's still that kind of gross margin profile that you've communicated in the past. But I would have thought maybe the -- your EBIT contribution would build as you build scale in that business. So is it just not a scale? It's just more variable cost than this than we expected? Or how should we think about the longer-term economics as you grow that business?

David MacGregor:

Okay. Maybe I could just shift gears and ask about fitness and outdoor, and just if you could talk about what you're seeing in retail conditions and retail inventories at this point.

David MacGregor:

Okay. And just last for me, on the marine guidance, up 15%. How much of the incremental growth there is coming from the addition of the trolling product offering? And just expanding that, having a product that maybe you didn't have to offer a year earlier.

David MacGregor:

And did you say what organic growth in marine was excluding JL?

David MacGregor:

Thanks very much. Good luck.

Jordan Lyonnais:

Hey good morning. Thanks for taking the question. A few of your competitors have started launching smart rings. Is that something Garmin is interested in, would be looking to expand to for the fitness line?

Jordan Lyonnais:

Got it. And then just a follow-up too, are you seeing any increases in promotions from you guys pushing it through retailers or anything else?

Jordan Lyonnais:

Got it. Thank you.

Benjamin Bollin:

Good morning, everyone. Thanks for taking the question. Cliff, I'm interested in your thoughts on the year-to-date performance in fitness, obviously, remarkable. How do you think about the drivers to what you've seen? You had certainly a product with Forerunner 165. I'm curious about that. Any thoughts on TAM? And then if you have any perspective on how a strong cohort of customers added during COVID, is there a bigger refresh opportunity? Any thoughts on that would be helpful.

Benjamin Bollin:

Okay. The last one for me. Also curious how you think about potential AI opportunities for both internal and customer use cases. It seems like you have a very unique high-fidelity data set in Connect. Just curious your thoughts on what you guys could be looking at or some options around AI. Thank you.

Benjamin Bollin:

Thank you.

Ivan Feinseth:

Thank you. Congratulations on another great quarter and a great first half.

Ivan Feinseth:

In the slides, you talked about the strength in fitness was driven by wearables, but the revenue decline in outdoor was driven by adventure watches. What is the difference between the -- what's driving the strength in the fitness wearables, let's say, versus the outdoor wearables?

Ivan Feinseth:

And then like some of the functionality like with the launch of the Pro models, you have the updated or the better ECG measurement and there's ongoing talk in health focus of the importance of HRV. Like can you talk about like how -- are there some things that are driving upgrades in sales? And what do you envision as far as future functionality?

Ivan Feinseth:

Thank you. And congratulations on the first half.

Operator:

Your next question comes from the line of Noah Zatzkin from KeyBanc Capital Markets. Your line is open.

Clifton Pemble:

Yes. So our marine business is mostly comprised of aftermarket, especially in this environment where boat building is at a reduced level as field inventory has worked down. With the addition of JL Audio, a lot of those sales we probably categorize more in the aftermarket area, although there is some that goes to OEM. It's a little harder to track in marine because some of the distribution channels are independent distributors who sell and turn to smaller boat builders. And so it isn't always possible to track exactly which products go where. But in general, we're seeing strength in the aftermarket channels as well as better-than-industry performance in the OEM side. In terms of the margin picture, I would say that other than the impact that we've talked about with JL Audio as a dilutive factor, overall, we don't see any change in the overall marine margin structure, especially as you mentioned towards the end of the year, we would see that the segment and the market really will continue to perform in the ranges that have been historically true.

Operator:

[Operator Instructions] Your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is open.

Clifton Pemble:

Yes. I think, Erik, we would say that there's not any significant evidence that spending patterns for our product lines and our customer base are currently being impacted. It's a little hard to say it's not because we don't have control data to measure that against because we're doing so well. But we do tend to target a customer base and product ranges that are not at the commodity low-end level. So we make premium products with clear differentiators, and customers seem to appreciate them and step up for them. So it would appear that that is resonating with customers.

Clifton Pemble:

Yes. Our Connect registration behaviors, we've mentioned those from time to time that most of the new accounts and the new devices we see registered on Connect are from new customers. We do see a healthy number of existing customers that continue to engage with Garmin and they upgrade their devices. And we see, frankly, a robust secondhand market where people might sell one of their products and trade up to another one, and somebody, a brand-new customer to Garmin, comes into Connect, which gives us an opportunity to then upgrade them in the future. So in general, I would say it's a very healthy environment, and mostly still driven by new customers.

Clifton Pemble:

Thank you.

Teri Seck:

Thank you all for joining the call today. Doug and I are available for callbacks. And we hope you have a great rest of your day. Goodbye.

Operator:

Thank you for standing by, and welcome to the Garmin Limited First Quarter 2024 Earnings Call.

Teri Seck:

Good morning. We would like to welcome you to Garmin Ltd.'s First Quarter 2024 Earnings Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. An archive of the webcast and related transcripts will also be available on our website.

Clifton Pemble:

Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the first quarter with strong growth in consolidated revenue and operating income. The positive trends we experienced at the close of 2023 strengthened in the first quarter of 2024. Consolidated revenue increased 20% to $1.38 billion, a new first quarter record with 4 segments delivering double-digit growth. Gross and operating margins expanded year-over-year to 58.1% and 21.6%, respectively, resulting in record first quarter operating income of $298 million, up 51% year-over-year. This resulted in pro forma EPS of $1.42, up 39% over the prior year, which is a remarkable result considering the significantly increased Swiss tax rates.

Joseph Cardoso:

So maybe first one here is, you're starting off the year strongly. And I appreciate you guys are not updating the guidance here given we're only 1 quarter in, but I was wondering if you could help us think through the shape of the year relative to typical revenue seasonality and whether there are any puts and takes that investors should keep in mind that might be different relative to historical trends as we think about the remainder of the year? And then I have a quick follow-up.

Joseph Cardoso:

Got it. That's fair. And then maybe Cliff, you could touch on, like, obviously, wearables across fitness and outdoor have been performing strongly and part of that is what you just kind of referenced there around product releases or new product announcements. So I was just curious if you could provide some other color there as to where you have been seeing the strength and perhaps touch on trends you're seeing relative to volume and pricing as well as potentially new users versus replacement demand, just to get further granularity around some of the strength you're seeing in the wearables across both fitness and outdoor.

Operator:

Your next question comes from the line of George Wang from Barclays.

Douglas Boessen:

Yes. So as it relates to inventory, it was lower on a year-over-year basis as well as sequential, and one of the big reasons was just due to our strong sales. As it relates to what we expect by the end of the year, we do expect inventory to increase year-over-year basis, primarily hopefully in line with our sales, make sure we have enough inventory to meet our demand.

Douglas Boessen:

Yes. At this time, we're not updating our free cash flow or CapEx outlook. If we update our guidance into Q2, we'll update at that point in time. But we are very pleased with our cash flow that came in, in Q1 as primarily due to the strong sales that we saw.

Benjamin Bollin:

Cliff or Doug, I was hoping we could talk about the gross margin behavior within outdoor and fitness. Both were up year-over-year and sequential. You talked about encouraging product mix. Could you talk a little bit about how much of the traction or strength in gross margin is individual products versus maybe input prices, components, transport? Just any moving pieces there to be aware of?

Benjamin Bollin:

That's great. And then the last one for me is when we look at the auto business, what's the right way to think about the trajectory of the margin performance here over time? And any framing on how material the wins are when they start to contribute from the quarter, the 2-wheel vehicles and the industrial truck contribution?

Operator:

Your next question comes from the line of Erik Woodring from Morgan Stanley.

Clifton Pemble:

Yes, I think, Erik, one of the factors to consider is that the timing of new product releases, both last year and this year, will be a factor in creating noise between the quarters. This year, Q1 was still marked by a relatively easy comp, especially in fitness, with our new product introductions that happened last year towards the end of Q1 into Q2. So definitely, that will create a different dynamic in Q2. And then just generally, as we look out for the rest of the year, the timing of other new product introductions is in our minds in terms of how we look at the whole year.

Douglas Boessen:

Yes, good question. As it relates to cash, we do have our priorities for cash being reliable dividends. As you mentioned, our investments back in our business, whether for manufacturing facilities or just strengthening our business for the growth that we have looking at strategic acquisitions, such as JL Audio and then share repurchase. It relates to share repurchases, that is depending upon your market conditions, business conditions. I do want to remind you that we were in the blackout for most of Q1 from a standpoint. But our priorities for cash are consistent with what they've been for a while.

David S. MacGregor:

I guess I wanted to ask around inventories, but maybe focus around channel inventories, if you will. And can you talk about sell-through rates across your various lines? And as you think across these lines, where are channel inventory levels, may be a little higher or a little lower, just adjusting for seasonal patterns, of course.

David S. MacGregor:

And if I could go back to the question on inventory, obviously, a substantial work down inventory this quarter, and you alluded to the strength of the business and just a lot stronger than maybe you had expected. What are the implications there for sort of second and third quarter margins as you rebuild that inventory? I would guess you get a better fixed cost absorption, better operating leverage. Should we be modeling a stronger margin performance as a consequence of inventory rebuild?

David S. MacGregor:

Okay. And last question for me, is there any way you can sort of provide some color or granularity around how much of the growth right now? I mean, setting aside auto OEM, but the other 4 segments, how much of the growth rate now would be price versus unit growth?

David S. MacGregor:

Congrats on all the progress.

Jordan Lyonnais:

I appreciate that it's a softer comp in the quarter, but really strong growth in Europe and Asia, too. Are you expecting those markets to continue on this trend and you see a recovery?

Operator:

[Operator Instructions] And your next question comes from the line of Noah Zatzkin from KeyBanc Capital Markets.

Clifton Pemble:

Yes. I think generally, we would say our JL performance was in line with what we expected. I think leading right into that question about the overall state of the market I think I would say the marine market has kind of stabilized. It's historically not a huge growth market, as you know. So I think we're kind of past some of the ripples that we've seen over the last few years. And there is certainly some issues out there right now with boat inventories that people have been talking about. But in general, those have not impacted us in any kind of significant way.

Douglas Boessen:

Yes, sure. As it relates to JL Audio, basically, we expect JL Audio on the revenue line to be about 15% of the total marine business.

David S. MacGregor:

I guess there's been some talk just in the macro lately of consumers getting more cautious and mixing down, and then we get these rather disappointing consumer confidence numbers here today. Just how you -- obviously, you've got a lot of innovation in the marketplace. You talked already about the strong mix, and that seems to be overpowering whatever might be occurring underneath in terms of deteriorating consumer confidence. But what are you seeing at all in terms of just maybe leading indicators or things you watch for consumer mix down and how that might ultimately impact your -- the mix and kind of the subscription rate around new product introductions over the balance of the year?

Operator:

This concludes our Q&A session for today. I will now turn the conference back over to Teri for closing remarks.

Operator:

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.

Operator:

Good morning, and welcome to the Garmin Limited Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks we'll have a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Teri Seck, Director of Investor Relations. Thank you. Please go ahead.

Clifton Pemble:

Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the fourth quarter with strong growth in consolidated revenue and profit. Consolidated revenue increased 13% to nearly $1.5 billion, representing a new fourth quarter record with three business segments delivering double-digit growth. Gross and operating margins expanded year-over-year to 58% and 23%, respectively, resulting in operating income of $340 million, up 27% for the year. This resulted in pro forma EPS of $1.72, up 27% over the prior year. We entered 2023 cautiously optimistic, but as the year continued, we experienced better than expected momentum in multiple segments, which resulted in a record breaking year. Consolidated revenue increased 8% to $5.2 billion, which is a new annual record. Operating income increased 6% to nearly $1.1 billion and operating margin came in at 21%. During the year, component lead times and availability continued to normalize, while shipping bottlenecks eased. These factors, combined with healthy demand for our products, reduced inventory levels and boosted free cash flow to nearly $1.2 billion. We believe current inventory levels are appropriate and expect inventory will grow from this point forward at a rate that is roughly in line with sales. Looking forward, we have a robust lineup of recently introduced products and additional product launches are planned throughout the year. We anticipate 2024 consolidated revenue will increase approximately 10% to $5.75 billion. Our results and outlook for the year give us the confidence to propose an annual dividend of $3 per share, an $0.08 increase over the prior dividend amount, which will be considered by shareholders at the upcoming annual meeting. In addition, our Board of Directors recently approved a $300 million share repurchase program over the next three years. Before moving on to the performance and outlook for each business segment, I want to mention the recognition we received recently from Forbes who ranked Garmin number two on their list of best large employers in America. We're honored to be recognized for creating a best-in-class workplace. Garmin associates are passionate about what we do and we share a deep commitment to serving customers and each other. Moving next to segment highlights. Fitness revenue increased 21% for the year with growth across all product categories, led by strong demand for our new running watches. Full-year growth in operating margins were 53% and 17%, respectively, and operating income more than doubled to $232 million. At the recent Consumer Electronics Show, the Venu 3 was recognized with three awards including best of innovation for outstanding engineering. With its rich wellness and fitness features, bright display and long battery life, the Venu 3 is indeed a best-in-class product. Looking ahead, we have a strong lineup of recently introduced running, cycling, and wellness products and expect to launch additional products during the year to support growth. With this in mind, we expect fitness revenue will increase approximately 7% for the year. Moving to Outdoor. Revenue decreased 4% for the year as solid performance in the second half of the year could not fully offset the weaker first half. Full-year gross and operating margins were 63% and 30%, respectively, resulting in operating income of $515 million. During the fourth quarter, we expanded our lineup of underwater diving products with the introduction of the Descent G1 Solar Ocean Edition, our first-ever product made with recycled ocean-bound plastics. We also launched the new Descent Mk3 dive watch and the Descent T2 transceiver with enhanced SubWave communication technology that enables diver-to-diver messaging and tank pressure monitoring on the wrist. For over two decades, our eTrex series of handhelds have been an essential product for outdoor adventures. We recently launched the eTrex Solar, our first handheld GPS with solar charging technology. This new handheld can operate indefinitely using only the power harvested from the sun, which is a game changer for hikers, explorers and off-the-grid adventurers. Looking ahead, we expect that our strong outdoor product road map will result in revenue growth of 7% for the year. Looking next at Aviation. Revenue increased 7% for the year to $846 million, a new record driven by growth in OEM product categories. Full-year gross and operating margins were 74% and 27%, respectively, resulting in operating income of $226 million, up 6% over the prior year. During the quarter, our G3000 integrated flight deck was selected by Embraer backed Eve Air Mobility for its electric vertical takeoff and landing aircraft. Eve Air Mobility joins a growing list of advanced air mobility companies who have selected our state-of-the-art cockpit systems. More recently, Garmin was ranked number one for the 20th consecutive year in Professional Pilot's 2024 Avionics Manufacturers Product Support Survey. This accomplishment is the direct result of the strong commitment and hard work of our aviation team and the investments we have made in this business. In recent years, the aviation segment has experienced growth in OEM equipment categories driven by an increased interest in private air travel. We expect this trend to continue in 2024 as aircraft makers work through historically high back orders. On the other hand, we expect softer aftermarket sales in the coming year. With these things in mind, we expect aviation revenue to be approximately flat to the prior year. Turning next to the Marine segment. Revenue increased 1% to $917 million, a new record and included approximately $42 million of revenue from the recently acquired JL Audio business. Excluding JL Audio, revenue from marine decreased approximately 3% for the year. The marine market has slowed in 2023 with many players reporting double-digit revenue declines, but we outperformed by capturing market share from our competitors. Full-year gross and operating margins were 54% and 20%, respectively, resulting in operating income of $179 million. During the fourth quarter, we launched the ECHOMAP Ultra 2 chartplotter series designed with premium sonar, mapping and wireless networking capability. We also launched the GSD 28 sonar with rapid return technology for higher resolution imaging in deepwater. These innovations demonstrate why our marine segment is performing so well in an otherwise soft market. Looking forward, we expect marine revenue will increase approximately 10% for the year, with growth driven by JL Audio, which is expected to be about 15% of total marine sales. Moving finally to the auto OEM segment. Revenue increased 49% to $423 million, a new record with growth primarily driven by increased shipments of domain controllers to BMW. Full-year 2023 gross margin was 23% and our losses narrowed progressively throughout the year, ending at just under $10 million for the fourth quarter. Many are wondering what lies beyond the BMW programs that are currently fueling our growth. I'm pleased to report that during 2023, we were awarded a new multi-year contract with another premium automaker to supply domain controllers on a global basis starting in 2027. This is projected to be the single largest award in the history of our auto OEM business, expanding our market share and customer base for domain controllers. We're also winning new business in other categories. We recently announced our motorcycle entertainment solution was selected by Yamaha Motors for certain motorcycles and smart scooters. This award adds to the already strong business we have with Yamaha across both two-wheel and marine vehicles. I'm proud of the progress our auto OEM team has made in 2023. Looking ahead, we expect revenue to increase approximately 50% as deliveries of domain controllers continue to ramp up, and we expect to reach profitability on a quarterly basis in the back half of the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

Thank you. [Operator Instructions]. Our first question will come from Joseph Cardoso from JPMorgan. Please go ahead. Your line is open.

Clifton Pemble:

Thanks. Good morning. So on the first part of the question in terms of our ability to overachieve, what we've mentioned as a peak of about $800 million in 2025. I would say that we don't project that far out in terms of ability to under or overachieve. We're going by input from the manufacturers who provide us with their longer-term forecast, but those can go up and down as production dates near. So I think, in general, those are just reference points for people to consider. In terms of the margin profile, we've been telling people that the margin in auto OEM is expected to go down as it has been doing. We do expect to be in that 20 -- mid-20% kind of range for the segment. That's our target, but it's based on a mix of very high volume, lower margin products as well as some lower volume, higher-margin products that are only speculative.

Clifton Pemble:

So the most significant new win that we mentioned with the global automaker is a program that does not require a significant amount of R&D investment. So as a result, it will be lower intensity in terms of the investment that we will make in that to bring that customer on board.

Clifton Pemble:

Thank you.

George Wang:

Hey guys. Congrats on the quarter. Just two quick ones. Firstly, just in terms of the capital return, nice to see additional $300 million of share authorization. Just curious kind of any additional color you can share in terms of the cadence. Do you guys plan to front-load some of the buyback near term or kind of more evenly spread? So just kind of try to get any possible additional color, so beyond this kind of over three years?

George Wang:

Okay, great. Just a kind of follow-up in terms of the business. It's nice to see revenue kind of approaching 10% growth year-over-year, obviously partially aided by the auto OEM business. So my question is really kind of as you project for FY '24 by segment versus three months back, any major sort of incremental data point you kind of want to share from any of the segments, whether it's the fitness or the outdoor? Just curious if anything has changed to curate over the last three months?

George Wang:

Okay, great. Thanks for the color. I'll go back to the queue.

David MacGregor:

Good morning everyone. Great quarter. Congratulations. I wanted to just start off by asking you for your impressions on kind of the fourth quarter holiday sales season. What you were seeing from the consumer, what patterns you were noticing, how people were responding to different price points. I mean any color you can provide on the state of the consumer and what you took away from kind of the fourth quarter?

David MacGregor:

And any kind of competitive dimension here we could color in for us?

David MacGregor:

Yes. And you're not seeing any mix down or any dynamic like that?

David MacGregor:

Okay. As a follow-up, I just wanted to ask on the automotive business. You noted that you expect the business to turn profitable in the second half. How are you thinking about an end of your exit run rate on segment margins?

David MacGregor:

That's for the full-year, right?

David MacGregor:

Got it. Thanks very much. Good luck.

Jordan Lyonnais:

Good morning. Thanks for taking the time. Would you guys be able to give more color on what drove the lower revenue in aviation aftermarket?

Jordan Lyonnais:

Got it, thank you so much.

Operator:

Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead. Your line is open.

Clifton Pemble:

Yes. I would say, Erik, that there's probably no one mold to put Garmin in when it comes to the breadth and depth of our businesses. We still and always will serve those premium niche markets in our traditional markets. And we see new opportunities like auto OEM as a way to leverage the strength we have in vertical integration, our smart factories, our supply chain capability and our ability to serve customers, which has been very attractive. So at the end of the day, it's profit dollars that we can put in the bank. And going about doing that, we simply try to play to all the strengths that we have.

Clifton Pemble:

Well, I would say that ideally, we would want to have a very even cadence between those two segments when it comes to product launches. It doesn't always work out that way just because of the nature of product development and the complexity of the various product lines that we take on. I would expect in 2024 that outdoor will be more active than fitness. But then again, in 2023, fitness was more active than outdoor.

Clifton Pemble:

Thank you.

Noah Zatzkin:

Hi, thanks for taking my questions. Maybe just one on kind of marine for me. Just wondering if you could kind of expand upon how you're thinking about end market dynamics this year? And just any color on your OEM business versus aftermarket and how you're thinking about that dynamic playing out as we look into 2024? Thanks.

Noah Zatzkin:

And then maybe just one in terms of -- I know you're guiding to the pro forma tax rate of 15.5%, but any update on kind of when the tax rate officially changes?

Noah Zatzkin:

Thank you.

Benjamin Bollin:

Good morning everyone. Thanks for taking the question. Cliff, I'm curious how you think about the contribution of new activations versus refresh across both outdoor and fitness. And then I had a follow-up.

Benjamin Bollin:

Is there any differences that you've noticed between outdoor and fitness? Does one seem to be more of a refresh versus the other or it's pretty linear across segments?

Benjamin Bollin:

Okay. The last one for me is curious what you're seeing in China and India. Just bigger picture, what's your strategic initiatives there? What are you trying to do? What type of performance have you seen? And that's it for me. Thanks.

Benjamin Bollin:

Thanks.

Ivan Feinseth:

Good morning. Congratulations on the great quarter and year. And thanks for taking my questions. I have a couple of questions. You mentioned gaining market share in smart wearables. There was recently another notable large smart wearable company that had an issue with their pulse ox readings and eventually dropped right now from their product offering. Do you feel -- or did you see that as a major driver of consumer choice to the Garmin watches?

Ivan Feinseth:

And then you started to roll out significant upgrades to your Connect app. And what are you still your thoughts on maybe tiering that as far as a premium subscription level?

Ivan Feinseth:

And then two questions on the automotive OEM side. You mentioned that the new customer you're onboarding will not require much R&D. Is that because you're going to get a lot of mileage going forward from the R&D that you've invested so far and that each incremental customer will be more and more profitable?

Ivan Feinseth:

And then my last question, you mentioned the strong product momentum going into '24. Can you give us some idea of what areas and new products we could expect to see?

Ivan Feinseth:

All right. Thank you. Congratulations and wishing you a big '24.

Operator:

We have no further questions. I would like to turn the call back over to Teri Seck for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Hello, and welcome to the Garmin Ltd. Third Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Teri Seck, Director of Investor Relations. Please go ahead.

Cliff Pemble:

Thanks, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the third quarter with strong growth in consolidated revenue, operating income and earnings. Consolidated revenue came in at $1.28 billion, up 12% over the prior year, driven by growth in four of our five business segments. Gross and operating margins were 57% and 21.2%, respectively, resulting in operating income of $270 million, up 13% year-over-year. We registered GAAP EPS of $1.34, and pro forma EPS came in at $1.41, up 14% over the prior year. We are pleased with our third quarter results and are updating our full year 2023 guidance accordingly. We now expect revenue of approximately $5.15 billion and pro forma EPS of $5.25. Before turning the call over to Doug, I’ll provide highlights by segment and an outlook of what we see ahead. Starting with the fitness segment, revenue increased 26% to $353 million, a new third quarter record for the segment and a continuation of the strong performance we’ve been experiencing all year. Growth was broad-based across all categories, led by strong demand for wearables. Gross and operating margins were 54% and 21%, respectively, resulting in improved year-over-year operating income of $75 million. During the quarter, we introduced the new Venu 3 smartwatch family in two sizes as well as the value packed vivoactive 5 with a bright AMOLED display. These wearables have robust new health and wellness features, including nap detection and enhanced sleep coaching. Also, we recently announced that our ECG App is now approved for use with recently introduced products, including the Venu 3 as well as our popular, epix Pro and fēnix 7 Pro series watches. This FDA cleared and clinically validated app records heart rhythms and checks for signs of atrial fibrillation. The expansion of the ECG App gives our customers another powerful tool for managing their health. Given the strong year-to-date performance and the current trends, we now expect fitness revenue to increase approximately 20% for the year. Moving to the outdoor segment. Revenue increased 7% to a third quarter record of $434 million, with growth across multiple categories, led by adventure watches. Gross and operating margins were 62% and 31%, respectively, resulting in operating income of $136 million. During the quarter, we launched the tactix 7, with a bright AMOLED display, a night vision compatible flashlight and up to 31 days of battery life. We recently announced the MARQ Carbon premium smartwatch collection, crafted from 130 layers of Fused Carbon Fiber, making these watches distinctive, strong, lightweight and ready for adventure. We’re pleased with the performance of the outdoor segment, but the path to growth has been more challenging than anticipated when compared to the strong performance of 2022 and the timing of product introductions in 2023. Given the year-to-date performance, we now expect outdoor revenue to decrease approximately 5% for the year. Looking next at the aviation segment. Revenue increased 5% to a third quarter record of $198 million, with growth driven by OEM product categories. Gross and operating margins were strong at 75% and 25%, respectively, resulting in operating income of $49 million. During the quarter, we were ranked number one in avionics product support by Aviation International News for the 20th consecutive year. Being consistently recognized for unrivaled support year after year highlights our strategic focus on taking care of customers and standing behind our products. Also, we recently announced a long-term agreement to provide state-of-the-art G3000 integrated flight decks to BETA Technologies for its all-electric aircraft. Year-to-date, revenue from aviation has increased 11%, and we are very pleased with this result. As a reminder, we faced significant supply chain constraints in 2022 that shifted revenue into the final quarter of the year, as we caught up on back orders. We do not expect these conditions to repeat in 2023. With this in mind, we are maintaining our 5% growth estimate for the full year, implying that fourth quarter revenue from aviation will decrease approximately 10% year-over-year. Turning to the marine segment. Revenue decreased 7% to $182 million, with decreases across multiple product categories, partially offset by contributions from JL Audio. As many have reported, the marine market has slowed in 2023, but we’ve been performing better than the market, and our third quarter performance exceeded our expectations. Gross and operating margins were 52% and 13%, respectively, resulting in operating income of $24 million. During the quarter, we launched the GPSMAP 9000 series in multiple sizes, including the 27-inch GPSMAP 9227 that was recognized with an Innovation Award at the recent International Boatbuilders’ Exhibition. For the ninth consecutive year, the National Marine Electronics Association named Garmin Manufacturer of the Year, and we received five Product of Excellence awards. We were also recognized as the Most Innovative Marine Company by Soundings Trade Only, a leading marine trade publication. We recently completed the acquisition of JL Audio, an iconic premium audio brand that extends our ability to offer highly integrated audio features across all of our marine product lines. Given the better-than-expected third quarter performance and the addition of JL Audio, we’re updating our expectations for 2023. We now expect full year marine segment revenue to be approximately flat to the prior year. During the fourth quarter, we expect JL Audio to be approximately 15% of total marine segment sales. Moving finally to the auto OEM segment. Revenue increased 59% to $110 million, a third quarter record with growth primarily driven by increased shipments of domain controllers to BMW. Gross margin was 21% and the operating loss narrowed to $14 million. During the quarter, domain controller deliveries continue to ramp across the BMW lineup. We also experienced strong growth in infotainment categories, with contributions from Yamaha Motorsports and Honda motorcycles. Given the strong year-to-date performance, we now expect auto OEM revenue to grow approximately 40% for the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

[Operator Instructions] Your first question comes from the line of Erik Woodring with Morgan Stanley.

Cliff Pemble:

I think the demand from the automakers basically is certainly not a guarantee at the beginning of the year. So, we make estimates based on their best estimates, but things ebb and flow throughout the year. So this really is just the tweaking of their build plans and their demands for our product as the year goes along. And I don’t really see this as a pull forward or puts or takes from the overall growth outlook that we’ve provided.

Cliff Pemble:

Yes. At the beginning of the year, we said that our target was for profitability in 2024, and we’re still progressing towards that. I’m not sure that I would put a lot of weight in the linearity because with model changeovers and new models coming on and the timing of those being somewhat unpredictable, the linearity from quarter-to-quarter probably doesn’t allow to extrapolate directly to mid next year. But we’ll provide more updates at the beginning of 2024 when we have a chance to evaluate the full year.

Joseph Cardoso:

So first one for me is just on the marine business. Last quarter, you talked about softness building in that business on the back of general macro headwinds and the strong couple of years you guys had. I guess, can you just clarify how that has tracked versus your expectations 90 days ago, just given that now you’re including JL in the business mix? And just any updated thoughts on that business on a go-forward basis as you think about a trough? Thanks. And then, I have a follow-up.

Joseph Cardoso:

That’s super helpful. And then just relative to the JL acquisition itself, how are you thinking about the levers you have to drive margins in that business to track to the marine level average, post or pre the acquisition? Is it more of a volume play for you, or do you have additional actions you can take to drive margins to improve in that business? And any thoughts around time line of when you can kind of get those margins up to like the historical corporate average? Thank you.

Operator:

Your next question comes from the line of George Wang with Barclays.

Doug Boessen:

Yes. Our priorities for cash are the same. Those priorities are, obviously, reliable dividends; second of which is investments back in our business, primarily CapEx weighted to build our infrastructures; and third of which relates to our strategic acquisitions such as JL Audio. And then also due to a share repurchase. So, as it relates to share repurchases, we do have an authorization through the end of this year, about $18 million there. And that’s -- and we have our purchases really based upon the market, the business conditions as such. So, similar type priorities for allocations and consistency of how we’ve gone through the share buybacks.

Cliff Pemble:

Yes. I think, George, it was similar to what we mentioned in our remarks that last year was an incredible year with the introduction of the fēnix 7 and epix. And this year, the timing of our refreshes of that product line came later than we had anticipated. So definitely comping against what we saw in 2022 was difficult. But, we are positive about our new product lines. They’ve been received well and generated growth in this last quarter. And we’re seeing strength across other product lines in this segment as well. In terms of future outlook, we don’t really comment on the next generations, but we’re constantly refreshing our product road maps. And I would anticipate next year to have very strong product releases.

Unidentified Analyst:

This is Jordan on for Ron. So I just had a quick question. Could you guys give any commentary on current backlog and then channel inventory that you guys are seeing going into like the holidays?

Operator:

Your next question comes from the line of Ben Bollin with Cleveland Research.

Cliff Pemble:

Yes. I think there’s so much has happened between then and now that it would be hard to really build a bridge from where we were back then in terms of margin structure to now. I would say that the product mix probably has a big part of that. And so, as the segment ebbs and flows in terms of various categories, the gross margin will vary accordingly.

Cliff Pemble:

We’re looking across all of the things that we offer as a company, including content and are looking for ways that we can monetize that into value-added services for our customers. Some recent examples of that are marine chart subscriptions that come with our chartplotters and also outdoor maps that we can bundle with all of our products really that focus on the outdoor segment. So, we’re looking more organically at that and not necessarily at M&A, but we do have a lot of opportunities where we can leverage.

Unidentified Analyst:

This is Joe Nolan on for David. So, I’m not expecting any sort of quantitative guidance or anything, but I was just hoping you could talk high level about some of your initial thoughts for 2024? And just maybe how conversations are going with customers regarding 2024?

Unidentified Analyst:

Got it. Okay. And then just a quick follow-up. With the UAW strike, just can you talk about what sort of -- what impact, if any, that’s having on your guys business?

Operator:

Your next question comes from the line of Noah Zatzkin with KeyBanc.

Cliff Pemble:

Yes. Noah, the big driver really is, as we mentioned in the remarks, wearables have been very strong. And that’s across all of the wearable families in fitness, from running watches to the advanced wearables to even basic wearables. So, everything there has been strong. Other categories in the segment were also very strong. We saw strength across the whole segment really. So it definitely was much better than what we had anticipated earlier in the year, as our new products came to market and they were well received.

Doug Boessen:

Yes. So relating to those margins, obviously, the decline in sales had an impact on us, obviously, deleveraging on our expenses. Also relating to the gross margins, we did -- as we previously talked about, with JL Audio in there, that’s a lower gross margin than the marine average. So, that did have an impact on it also. So, it’s really just a combination of that gross margin and some product mix in our marine organic business there as well as the sales output. Then on an ongoing basis, as it relates to JL Audio, we should see -- as Cliff talked about, as it relates to our gross margins, they are lower. So there’ll probably be some dilution of that as we go, but hopefully, we’ll be able to get some synergies and opportunities, get those improved as we move along.

Ivan Feinseth:

Congratulations again on the great results and the increased outlook. On the acquisition of JL, you talked about expanding the marine audio, but what about do you think some opportunities for you to integrate this in automotive OEM audio? And then recently, another company launched a headset, a bone induction headset. Do you think there’s opportunity to expand in some of the consumer product audio areas?

Ivan Feinseth:

And if you went into home audio with them, would you be rebranding? It would be a Garmin brand or a Garmin JL brand?

Ivan Feinseth:

Very good. And then on the introduction of the new MARQ Carbon. What kind of like uptake are you seeing from, let’s say, people new to the brand or upgrading existing watches? And also because of the much higher price points, are you looking to go into like a different type of marketing platform or different retail distribution for those watches?

Ivan Feinseth:

And then on the new ECG functionality on the fēnix -- on the Pro line, is that because you’re able to integrate because of the more advanced sensors that are now in the Pro line, or how broad can you go, let’s say, with that functionality?

Ivan Feinseth:

Then one last question. Do you think that there’s some opportunity at some point to incorporate the SOS functionality of inReach within a watch, just for that one feature?

Operator:

[Operator Instructions] Your next question is a follow-up from Erik Woodring of Morgan Stanley.

Cliff Pemble:

Yes. I think every year is probably different. As I mentioned earlier, retailers are positive about what they are anticipating for the fourth quarter. So, we’re definitely gearing up for that. And when we provide these estimates, we definitely want to provide estimates that we have high confidence in. And so, that is how we approach the guidance.

UnidentifiedAnalyst:

A quick question, too, on aviation. Are you guys seeing any changes in demand for biz jet products? I know you guys -- in the press release, you said that it was driven by the OEM sales.

Operator:

There are no further questions at this time. I will turn the call back to Teri Seck for closing remarks.

Operator:

This concludes today’s conference call. Thank you for joining. You may now disconnect.

Operator:

Thank you for standing by. My name is Wallace and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Limited Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now hand the call over to Teri Seck, Director of Investor Relations, you may begin your conference.

Clifton Pemble:

Thank you, Teri. And good morning, everyone. As announced earlier today, Garmin reported second quarter consolidated revenue of $1.32 billion, up 6% over the prior year, driven by growth in three of our five business segments. Gross in operating margins were 57.5% and 21.5% respectively. And we generated $284 million of operating income in the quarter. GAAP EPS was $1.50 and pro forma EPS came in at $1.45, up 1% over the prior year. We feel positive about our results for the first half of the year, and are updating our full year 2023 guidance accordingly. We now expect revenue of approximately $5.05 billion, and EPS of $5.15 during the year. Before turning the call over to Doug, I'll provide highlights by segment and then look at what we see ahead. Starting with the fitness segment, revenue increased 23% to $335 million, driven by broad based growth across all product categories. Gross in operating margins were 52% and 16% respectively, resulting in improved year-over-year operating income of $54 million. During the quarter, we launched the Edge 540 and 840 cycling computers featuring dynamic performance insights, advanced mapping capabilities, and solar charging to help cyclists ride longer, smarter and train more effectively. Given the year-to-date performance and current trends, we now expect fitness revenue to grow approximately 10% for the year. Moving to outdoor revenue decreased 3% to $448 million, as growth in adventure watches was more than offset by declines in other categories. Gross in operating margins were 63% and 31% respectively, resulting in operating income of $138 million. During the quarter, we launched our next generation fenix 7 Pro Series Pro Series with enhanced performance insights, built-in LED flashlight and additional mapping capabilities. We also launched the epix Pro Series in three sizes, all with bright AMOLED displays and a built-in LED flashlight. Also during the quarter, we launched the Approach S70 premium golf smartwatch, available in two sizes featuring a bright AMOLED display. And with the built-in barometer for a more accurate reading on how each shot is playing. We expected the first half of the year to be challenging in comparison to the outstanding performance of the prior year. Given our year-to-date performance and the timing of the adventure watch launches, we now expect outdoor revenue to be approximately flat compared to the prior year. Looking next at the Aviation segment, revenue increased 6% to $217 million, with growth driven by OEM product categories. Gross and operating margins were strong at 74% and 29%, respectively, resulting in operating income of $63 million. We recently announced the imminent certification of our revolutionary Autoland and Autothrottle systems in select beach craft King Air models, marking the first time we have offered these highly important safety technologies to the retrofit market as well as the first time we have certified our Autoland system in a twin-engine aircraft. Our Smart Glide system was recently selected for a FLYING Magazine Editor's Choice Award, the 15th time we received this prestigious award. As you can see, our focus on aviation safety technology is unwavering, and I'm proud of what the aviation team has accomplished. We are pleased with how our Aviation segment has performed so far this year. Given the year-to-date performance and the stronger comparable from the back half of 2022, we are maintaining our 5% growth estimate for 2023. Turning next to the Marine segment. Revenue decreased 11% to $216 million, primarily due to the timing of promotions, which benefited Q1 and contributed to the lower revenue from chartplotters in Q2. Gross and operating margins were 56% and 21%, respectively, resulting in operating income of $46 million. During the quarter, we expanded our trolling motor series to a wider range of boats with the launch of the Force Kraken. This powerful new trolling motor features a pivot style mount for easy installation on a wider range of boats. The Marine market has experienced significant growth in recent years, due to increased interest in boating and fishing driven primarily by the pandemic. The pandemic drivers of this growth have mostly normalized, and we now believe the market faces increasing headwinds caused by higher interest rates and greater economic uncertainty. While our first half performance was essentially flat to that of the prior year, we see signs that the market is softening, which impacts our revenue outlook for the remainder of the year. With this in mind, we believe the Marine segment revenue will be down approximately 7% in 2023. Moving finally to the Auto OEM segment. Revenue exceeded $100 million of quarterly sales for the first time in our history, increasing 77% primarily driven by shipments of domain controllers to BMW. Gross margin was 24%, and we recorded an operating loss of $18 million driven by ongoing investments as new programs move into production. During the quarter, we received production approval for a new domain controller for safety-critical instrument cluster functions, which will be incorporated into multiple BMW models throughout the remainder of the year. Given the year-to-date performance, we now expect Auto OEM revenue to grow approximately 35% for the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

[Operator Instructions] Our first question comes from the line of Joseph Cardoso from JPMorgan.

Clifton Pemble:

Yes, I think -- Joseph, this is Cliff. I think fitness and outdoor probably should be looked at differently because there's different dynamics in each one of those. In the Fitness segment, we had a very strong first half because of the sell-in of new products, which, of course, won't repeat as much in the second half. In outdoor, we were comping against a very strong first half in the prior year. And moving into the back half, we see stronger results comping with our new products. So each one is different. I think so far, I would say that we don't see signs of the kind of consumer behaviors that are present in some other segments. Each segment probably has a little bit different dynamic, but we believe both of these segments should be strong in the back half.

Doug Boessen:

Joseph, this is Doug. I'll give you kind of a perspective on gross margins. First, the year-over-year decrease on a consolidated basis was due to a segment mix, and that is based upon where you see fitness and auto OEM, which have a lower gross margin than the consolidated average coming a larger percentage of the total year-over-year. As some of the other components, there's a lot of different moving parts within gross margin, but you mentioned freight. Yes, we are seeing some favorable freight and that favorable freight is due to two pieces, one of which is its lower ever rates as well as we're shipping a larger percentage of our products ocean versus air. So that's offset by other factors, including a product mix within the segments. So with each one of the segments, each one of the products you have a different gross margin there depending upon how that mix is one quarter versus the other quarter, that does impact that in there. So there's a lot of different moving parts in there. And also as it relates to freight, I think you mentioned a question what for the future, so we've seen some good benefits in freight year-over-year. We would expect that year-over-year benefit to decrease just because we saw some of the freights come down toward the back half of the year. But we should -- we're not expecting the overall rates to change that much, but the year-over-year favorability and the year-over-year gross margins will decrease.

Benjamin Bollin :

Good morning, everyone. Thanks for taking my question. Cliff, I was hoping you could talk through how we should think about the profitability glide path within the auto OEM business. You've got really remarkable year-over-year growth and really not much movement on the EBIT line. So at what point does that start to scale? And then I have a follow-up.

Benjamin Bollin:

Okay. If you look at -- there's been some headlines out there perhaps for Doug, on what's happening in Switzerland with the global minimum tax? Could you share any ways we should think about this, how an Ackman or when the federal accountant may do something, how this could influence potential tax rate into the future?

Benjamin Bollin:

That's great. And then my last question, looking at the Marine business, Cliff, could you talk to how -- you talked about softer expectations in the back half, but any thoughts on how aftermarket versus new boat delivery play into that? Are they both softening, one worse than another? Just any thoughts there? And that's it for me. Thank you.

Operator:

Our next question comes from the line of George Wang from Barclays. Please go ahead with your question.

Doug Boessen:

So is the question regarding the buybacks?

Doug Boessen:

Yes. Basically, we'll evaluate our share repurchase just based upon the business and market conditions. The situation is we have a $300 million authorization through the end of '23, we have $26 million, $27 million of that remaining. It was really just based upon business conditions and market conditions.

Clifton Pemble:

Yes. I think backlogs have come down a lot, and most of that is due to the easing supply chains that we've seen allowing us to fill the orders much faster than we were last year for both aviation and marine. I think some of those dealers across aviation and marine in the past year were interested in keeping more safety stock on their shelves because they wanted to make sure they could serve customers coming into the shops. And as lead times have come down, they have relaxed a little bit their concern over being able to serve their customers. So that's also part of the moving pieces that we're seeing as things normalize in both aviation and marine. I would say that the channel inventory is mostly healthy. And as we go forward, it will be replenishment type of activity that goes on.

Operator:

Our next question comes from the line of David McGregor from Longbow Research. Please go ahead, with your question.

Clifton Pemble:

Yes. I mean, we also look at that. That really relates to building scale in the business as revenues increase. We haven't really talked about those kinds of number externally because we're a company that focuses on true GAAP financials. So we include all of our costs as are expensed, and we all try to make our -- all of our businesses profitable and perform well on that basis.

Clifton Pemble:

Yes. I mean I think we raised our guidance outlook for the full year, reflecting strength that we've seen in the business and acceleration into the back half. So that reflects our current view of the business.

Clifton Pemble:

Well, I think these devices are being incorporated across model lines. And so that takes some time, and it's dependent on BMW's own engineering work and scheduling into production. So we're basing our forecast on what we have been told for their production plan for cars containing our devices.

Clifton Pemble:

Yes. I think we expect it to be more like normal than ever before in recent memory. We've seen this trend in recent quarters where the markets are returning to the level of promotions and discounting and sales that we saw in the past. So we're expecting that. It will probably be very similar to what we've seen over the past year. Honestly, it kind of more normalized even last year. So that's what we expect going forward is really a normal cadence.

Operator:

Our next question comes from the line of Ivan Feinseth from Tigress Financial. Please go ahead, with your question.

Clifton Pemble:

I think the first B lab reflects our commitment to ongoing research and innovation in the area of biometrics and performance for athletes as well as wellness features in our products. So we continue to invest in that area, and it's something that's important to us to differentiate our products from others. In terms of AI, we've been using AI techniques in our products and in our algorithms on both cloud-based applications as well as on our devices for quite a while. We continue to see this trend, and we continue to develop our capabilities in that area as well. I think in terms of how we deploy that in the company, there's probably a mixed bag of responses there that I would say. Some of it is good and can be helpful to us in productivity and other applications of AI that have been broadly discussed in the media may not be for us. But in general, we're approaching it with prudence.

Clifton Pemble:

Yes. I think what you're seeing reflects our intentional strategy to increase revenues from subscription-based sources. And so the golf apps [ph], our tax trainers, inReach, aviation databases, outdoor maps, all of these things are playing into our desire to increase revenues from recurring sources.

Operator:

Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead, with your question.

Clifton Pemble:

Okay. Yes. So the launch of those two new families, the epix Pro and the fenix 7 Pro, I think, went very well. We feel like the sell-through as indicated through our registrations is going exactly as we had planned. And I think we're seeing very similar trends as what we've seen in the past in terms of mix of new customers and existing customers that upgrade. So I think I would say that all is pretty much as we would expect and as what we've seen in the past on those two product lines, really no sensitivity from the consumer in terms of softness there relative to any economic issues. I think the question of the consumer health is really depends on the product line that you're talking about. And those products are definitely higher-end products that target more affluent customers. So we feel like everything there is going as we had planned.

Clifton Pemble:

Yes. I think our view is really based on all of the latest data that we see and also talking to all of our retailers and distributors. There's definitely pockets of strength in the market. But increasingly, we're seeing some feedback that there's some hesitancy on the part of some customers who, in the past, felt like they had much more money to spend who maybe now don't or are faced with very high interest rates at their financing a purchase and can't buy it with cash. So these are the kind of initial signs that we're seeing that just want to cause us to be a little bit more cautious for the back half.

Clifton Pemble:

Yes, that's true.

Operator:

[Operator Instructions] Our next question comes from the line of Jordan [indiscernible] from Bank of America. Please go ahead, with your question.

Clifton Pemble:

Well, I think each geography has its own particular situation. And Asia is a big place. So some countries are doing very well and doing well with our new releases, while in some -- in other cases, maybe the economies aren't so good, specifically China. We're not completely dependent on 1 country in Asia for our results. So the diversity of our markets there allow us to show the results that we have. Similarly, in EMEA, I think they're probably on a different time line when it comes to their economic progress. And so when they were a little softer early on, they've been a little stronger, especially as we've introduced some of these new products.

Doug Boessen:

Yes. This is related to media spend, primarily relating to the new product launch that we had. So a lot of that media spend is really tied to -- we have new products, making sure that we get to see a message out to our consumers.

Unidentified Analyst:

Got it. Thank you.

Teri Seck:

Thanks for your time today. And Doug and I are available for callbacks. Have a great day. Bye.

Operator:

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Limited First Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. Teri Seck, Director of Investor Relations, you may begin your conference.

Clifton Pemble:

Thank you, Teri and good morning, everyone. As reported earlier today, consolidated first quarter revenue came in at $1.15 billion which is down 2% from the prior year. Four of our 5 business segments posted double-digit revenue growth driven by new product introductions and solid demand trends which mostly offset an expected decline in outdoor. Gross margin improved to 56.9%, driven primarily by lower freight costs. We generated $197 million in operating income, down 14% from the prior year and operating margin came in at 17.2%. We feel positive about our first quarter results which are consistent with the expectations we communicated in February. As such, we are maintaining the full year guidance issued in February, calling for revenue of $5 billion and EPS of $5.15. It's important to remember that Q1 is typically the lowest seasonal quarter of our financial year and much of the year lies ahead of us. Our diversified business model offers many different paths to achieve our goals and we believe we are on track to do just that. Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with fitness, returned to growth with revenue increasing 11% to $245 million, driven by strong demand for advanced wearables, especially running watches introduced during the past year. Gross and operating margins were 49% and 4%, respectively, resulting in improved year-over-year operating income of $11 million. During the quarter, we launched the Forerunner 265 and Forerunner 965 which combine advanced training metrics, recovery insights and everyday health stats with a vibrant sunlight readable AMOLED display that does not sacrifice battery life. Moving to outdoor. Revenue decreased 27% and to $329 million, primarily due to year-over-year declines in the adventure watch category as we passed the 1-year anniversary of the highly successful Phoenix 7 Epic and Instinct 2 launch. Gross and operating margins were 62% and 23%, respectively, resulting in operating income of $77 million. Our adventure watches are known for the rugged dependability, long battery life and rich biosensing capabilities that enable their use in demanding applications. During the quarter, we announced that the Phoenix 7 will be worn on the upcoming Polaris Dawn Spacelight mission to provide insights into the impact of space travel on the human body. Also during the quarter, we launched new handheld devices with the introduction of the GPSMAP 67 series and eTrex SE. These versatile handhelds offer longer battery life, improved positional accuracy and global communication via inReach satellite technology. We recently announced the DRIVE 53 GPS navigator featuring a high-resolution capacity of touch screen display, a fresh new design and built-in traffic options to simplify the drive. We also announced the zumo XT2, a rugged motorcycle navigator that's built for adventure, with a larger and brighter 6-inch sunlight readable display. We expected the first quarter of the year to be challenging in comparison to the outstanding performance of the prior year. We believe these trends will moderate as we introduce new products throughout the remainder of the year. Looking next to the aviation segment, revenue increased 22% to $214 million, with contributions from both OEM and aftermarket product categories. Gross and operating margins were strong at 72% and 27%, respectively, resulting in operating income of $58 million. During the quarter, we announced additional certifications for our GFC autopilots which expands our addressable market, bringing the performance and safety enhancing benefits of our flight control technology to more aircraft models. We also recently attended the Embraer Suppliers Conference, where we were named best supplier in the categories of systems as well as services and support for our G3000 flight deck in the Phenom 100EV and 300E aircraft. In addition, we were named the best of the best supplier to the entire Embraer organization. We also received an Operational Excellence Award from Airbus Helicopters. These prestigious awards are an affirmation of our reliable performance during the supply chain crisis and reflect our strong commitment to providing the best products and outstanding service to our customers. I'm very proud of what our aviation team has accomplished and believe there is much more we can achieve in this market. We are pleased with how our aviation segment has performed so far this year. The supply chain disruptions of the prior year appear to be mostly behind us, while demand for new aircraft and retrofit systems remains resilient. Marine segment delivered another quarter of impressive results with revenue increasing 10% to $279 million, primarily due to the timing of spring promotions. Gross and operating margins were 54% and 26%, respectively, resulting in operating income of $72 million. During the quarter, we expanded our strong lineup of chartplotters with the introduction of the ECHOMAP UHD2 series which are preloaded with premium Garmin Navionics-plus cartography and offer wireless data sharing of live sonar and navigation information with other chartplotters on the boat. Also during the quarter, we were recognized as the leader in navigation and sonar categories by Best Marine Electronics and Technology and for the fifth consecutive year, received a 2023 Top Product award from Boating Industry Magazine. Moving finally to the Auto OEM segment. Revenue increased 11% to $81 million, primarily driven by increased shipments of domain controllers to BMW. Gross margin was 28% and we recorded an operating loss of $20 million driven by ongoing investments as new programs move into production. During the quarter, we began deliveries of domain controllers for the 2024 BMW X5 and X6 from our [indiscernible] Kansas facility which represents an important milestone in expanding our manufacturing capability to serve world-class automakers. We also expanded our footprint in the 2-wheel market with the launch of an entertainment system for additional models of Yamaha sport touring motorcycles. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

[Operator Instructions] And your first question comes from the line of George Wang from Barclays.

Clifton Pemble:

Yes. As we mentioned, George, we're not [indiscernible] our guidance. We're reaffirming what we said in February. The first quarter, as we mentioned, is the lowest seasonal quarter of our year, so there's a lot of the year left in front of us. So it's our practice to reevaluate more closer to the Q2 time frame.

Clifton Pemble:

Yes, I think it was very difficult to predict what the outdoor performance would be because our Q1 of 2022 was so amazingly strong with the incredible launch of the Phoenix 7, the Epics and the Instinct. So it was a little hard to predict but we feel like the general trend was in line with what we expected. I think it's important to note that from a cyclical point of view, we're always introducing new products. And so we expect, as the year goes on, our performance will moderate and improve as those new products come out. And then in general, I would say, from the market standpoint and also the channel inventory, we don't see anything out there that's concerning. We have fantastic products that people want and the inventory and the channel appears to be at the correct levels.

Benjamin Bollin:

Cliff, I wanted to -- the first question for you. Could you share any thoughts you have about the Auto OEM opportunity with BMW? How that -- how you expect that to ramp through the course of the year? And then any thoughts you have on the gross margin and operating margin profile of the business as it gets larger? And then I have a follow-up.

Benjamin Bollin:

Okay. The other question. You touched on inventory in outdoor. Could you share any thoughts you have about channel inventory levels in some of the categories that have been maybe more lean, marine, aviation? Where do you think inventory levels are there? And any thoughts on where that goes? And then, a second question around this maybe a little bit. Have you seen any observations that you could share around smaller go-to-market partners and how they're managing financing either for working capital or their own operations? And that's it for me.

Operator:

Your next question comes from the line of David MacGregor from Longbow Research.

Clifton Pemble:

Yes, David, I would probably say right now, it's mostly timing as carmakers ramp up their new model years. And we'll see some variation from quarter-to-quarter as they adjust their plans. They are navigating a very complex supply chain. So sometimes things vary up and down but we try to be flexible and role with what they need from us.

Clifton Pemble:

Yes. I think the promotions and retail activity that we've had so far in 2023 have been very successful. It shows that there's a lot of enthusiasm on the part of customers to obtain the latest technology and people are certainly excited by the promotions and the ability to obtain the products they want at lower prices. So we feel like that's going very well. In terms of other indicators in the market, I think there are some areas of the OEM market that are starting to slow down a bit in terms of where they were at a very torrid pace that typically tends to be in the lower-end boat ranges and inventories are starting to be more healthy, so people can actually buy some of those off of a lot now. But the mid- to upper range of the market where a lot of the boats are built to order, there's still many back orders as we understand it from our partners and they're still taking orders for those products. So we feel like there's still a lot of demand out there for -- especially the higher-end products.

Clifton Pemble:

Yes. I think the pullback in co-op advertising was not a change in strategy by anyone. It was really just a matter of the sales volume that was being pushed last year in our Outdoor segment. So it's squarely associated with the dynamics of that product launch from last year. But there's no change in the commitment of retailers in terms of carrying these products and getting on board with the exciting launches that we have coming up.

Clifton Pemble:

We're still seeing strong results from our direct-to-consumer. We're seeing growth in both online sales as well as subscriptions and services across the business. So we're very excited about that and we continue to look for ways to differentiate in that area.

Paul Chung:

So just on aviation, very strong performance to kind of start the year. I know there were some pushouts into 2Q from 1Q of last year that helped the quarter year-on-year but -- is this the right kind of quarterly run rate of revenues to kind of think about through the year? And can you end on both industry trends which look quite positive for business jet, how pricing has evolved as volume and kind of expanding wallet share per plan? And then I have a follow-up.

Paul Chung:

Okay, great. And then on fitness, on the 965, what's been the customer feedback there? I know there's been some extended wait periods for shipments. I assume demand is holding up pretty well? Or is there something else going on? Are you seeing new customers [indiscernible]? Or upgrades from existing users given the kind of attractive AMOLED screen? And did you recognize any benefits for the product in product releases in 1Q? And then on the operating margin side, there's a big dip here similar to last year. What is driving that? I know it's seasonally weaker but typically has been in that mid-teens to 20% in the past. So will this kind of be a recurring 1Q margin hit in fitness kind of moving forward?

Operator:

Your next question comes from the line of Ivan Feinseth from Tigress Financial Partners.

Clifton Pemble:

Thanks, Ivan.

Clifton Pemble:

So as we mentioned, we started shipments for 2024 models of the X5 and the X6. So I guess maybe you have to in the state, you might have to wait to see some of those vehicles. We're delivering in Europe to additional models there and also in China.

Clifton Pemble:

Yes. I think, Ivan, we are strategically focused on creating some recurring revenue across our product lines where we can offer additional value to our customers for content or services that go along with our products. So Plain Sync and the GDL60 is one example of that. In terms of Connect, as everyone knows, that's a long-standing app and relationship we have with millions of customers that use that every day. As we go forward, we're certainly examining ways that we can provide additional value to those customers as well as revenue opportunities for Garmin. But we're very careful about how we do that because we want to make sure that we don't take anything away from our users and we only provide additional value that they would be delighted with. So we're looking at that but it will take some time, I think, before we arrive at the final answer.

Clifton Pemble:

Yes. Yes, I think Connect IQ certainly has a lot more opportunity to build on what is there with monetization and payment capability. We do have mobile payments on our devices and we certainly are looking at ways that we can extend that into a broader payment platform. On our wearables but we do have some work to do in order to put all the pieces together there.

Clifton Pemble:

Thanks, Ivan.

Erik Woodring:

Maybe if we just start on fitness, realizing you're not updating guidance but you guided to the year down 5%. You started the year up 10%. And the comps are pretty easy throughout the year. So I guess I just want to make sure, is there anything that we -- are there any kind of like speed bumps that we should think of for the rest of the year that would suggest performance is really going to deteriorate through the year? Or is this just kind of like you said at the top of the call, Cliff, a bit of a wait-and-see approach?

Erik Woodring:

Okay. Super helpful. And then similar to one of the earlier questions on fitness but this time on outdoor. Obviously, tough comparison in the first quarter but we saw some pretty significant operating margin deleverage there. I believe operating margins were down to an all-time outdoor low. And so can you help us understand what some of those significant margin headwinds are? What is kind of temporary versus permanent? And if a return to kind of like that 30% range is how we should think about normalized operating margins? Or if that's changed and why?

Erik Woodring:

Okay, perfect. And then, I guess the last question; just on the Auto OEM business. I appreciate all the color that you've provided first there. One thing I wanted to try to square away was gross margins falling from where they are today to, call it, the high teens but operating margins increasing from where they are today to [indiscernible] like a ton of operating leverage in the business. And so maybe help us gain comfort on why you can see OpEx almost cut more than in half over a span of 12 months? Why there's such significant leverage business in such a short period of time? And that's it for me.

Operator:

[Operator Instructions] Your next question comes from the line of Noah Seskin from KeyBanc.

Clifton Pemble:

Yes. No, I think we'll have a very strong first half of the year with new product introductions. And then we'll be in a good position in the back half to be able to work with promotions and holiday seasons with these products.

Clifton Pemble:

I think we'll be heavily weighted in the front half of the year in terms of introductions in outdoor.

Clifton Pemble:

There is probably more, I would say, balanced kind of product introduction calendar for fitness across the year. So we had some, obviously, in Q1 and we'll have some throughout the remainder of the year, some really exciting products, I think.

David MacGregor:

I just wanted to come back to the comments about lower freight costs. And you attributed the 40 basis points of gross margin improvement to freight. That's roughly $4 million or $5 million by my math, if I've got that correct. Is that how we should think about the benefit in 2Q and going forward until an anniversaries out? Or does that savings actually become a more significant number in 2Q and going forward?

David MacGregor:

Okay. And just a follow-up. I guess, talk about Europe and Asia Pac and just what you're seeing there in terms of consumer behavior, consumer order patterns. Any color you can provide there would be helpful.

Operator:

There are no further questions at this time. Ms. Teri Seck, I turn the call back over to you for some final closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good morning, and thank you for standing by. Welcome to the Garmin Ltd. Fourth Quarter 2022 Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your speaker today, Teri Seck. Please go ahead.

Clifton Pemble :

Thank you, Teri, and good morning, everyone. As reported earlier today, consolidated fourth quarter revenue came in at $1.3 billion, which is down 6% from the prior year and consistent with trends we experienced for most of 2022. There are several factors that influenced our results, including the year-over-year strengthening of the U.S. dollar, macroeconomic and geopolitical concerns affecting Europe, and the performance of retailers who focused on inventory control. One bright spot is the performance of our direct sales channel, including garmin.com, which increased by strong double digits and accounted for greater than 10% of total net sales. While our priority is to serve the needs of third-party retail partners, our direct channels are an increasingly important pillar of our go-to-market strategy. Another bright spot is our gross margin performance, which improved 150 basis points over the prior year and exceeded expectations as we benefited from lower freight costs. Our performance in 2022 was solid despite facing a mix of persistent and emerging headwinds affecting the general business environment and consumer behaviors. We reported revenue of $4.86 billion, a 2% decline year-over-year. Revenue was negatively impacted by approximately $228 million due to the strengthening of the U.S. dollar relative to other currencies. Excluding this impact, revenue would have increased about 2% over the prior year. Our gross margin performance was strong at 57.7% for the year, and operating margin exceeded 21%. As announced earlier this morning, we've combined the product categories of the consumer auto segment with outdoor. I'll provide more context in a moment, but factors considered include the current size and scope of the Consumer Auto segment as well as the expected growth of the Auto OEM segment. We're cautiously optimistic as we turn our attention to 2023. We have a great line-up of new products and additional product launches are planned throughout the year. We anticipate consolidated revenue will increase approximately 3% to $5 billion for the year. In the first quarter, we expect that revenue will decline in line with recent trends as we compare against the strong product launches from the prior year. We expect to return to growth starting in the second quarter as we benefit from planned new product introductions. It's important to remember that we are not focused on quarter-by-quarter or category-by-category performance. Rather, we're focused on delivering solid results year after year by creating highly differentiated products and leveraging our diversified business model. We're proposing a dividend of $2.92, consistent with the prior year, which will be considered by shareholders at the upcoming Annual General Meeting. Doug will discuss financial results in greater detail in a few minutes, but first, I'll provide highlights on the performance and outlook for each business segment. Starting with Fitness, revenue decreased 28% for the year with declines across all categories. Full year gross and operating margins were 50% and 9%, respectively, resulting in operating income of $105 million. During the quarter, we launched our first LTE-connected kids smartwatch available exclusively at garmin.com. Bounce offers two-way text and voice messaging as well as real-time location tracking. Bounce also tracks activities and steps throughout the day, offers games and allows parents to assign chores and give rewards. We continue to explore new verticals in health and wellness and recently received U.S. FDA approval for a clinically validated ECG app for the Venu 2 Plus smartwatch. This app allows users to record their heart rhythms and checks for signs of AFib. We believe this is an important step towards providing a full line of devices for managing a variety of health conditions. For 2023, we expect revenue to be down approximately 5% in the segment as it stabilizes and as we anticipate the benefit of new product introductions. Moving to Outdoor. Full year revenue increased 17% resulting in record revenue of nearly $1.5 billion for the year. We experienced growth across multiple product categories, led by strong demand for adventure watches. Full year gross and operating margins were 65% and 37%, respectively, resulting in operating income of $556 million. During the quarter, we launched the second-generation MARQ luxury smartwatch featuring a bright AMOLED touchscreen display and premium Grade 5 titanium materials. We also expanded the Instinct product line with the new Crossover, a unique hybrid smartwatch that is fully analoged and fully digital. Looking ahead, we expect the Outdoor segment to grow approximately 2%, which includes contributions from Consumer Auto. We expect the first quarter of 2023 to be challenging as we compare against the strong results from the prior year, which were driven by the launch of the flagship fēnix 7 Series, the Instinct 2 Series and the all new epix. We expect growth to resume starting in the second quarter, driven once again by new product introductions. Looking next at Aviation, full year revenue increased 11%, with contributions from both aftermarket and OEM categories and as supply chain constraints eased. 2022 was a record year for our Aviation segment with revenue approaching $800 million and exceeding the levels achieved during the ADS-B mandate, which demonstrates our ability to deliver long-term growth in core product categories, such as autopilots, GPS NAVCOM, display systems and services. Full year gross and operating margins were 72% and 27%, respectively, resulting in operating income of $213 million. During the quarter, we announced that L3Harris Technologies has chosen the G3000 tandem integrated flight deck as part of the U.S. Special Operations Command Armed Overwatch Program. The G3000 system will provide the latest communication, navigation, surveillance and air traffic management capabilities for the Sky Warden aircraft. Also, we received EASA approval for the G5000 retrofit integrated flight deck in the Cessna Citation XL and the XLS. We also received FAA supplemental type certificate for the GI 275 electronic flight instrument in the Dassault Falcon 7X business jet. These approvals expand the addressable market for integrated flight decks and standby instrumentation in business jets. The Aviation segment continues to benefit from strong demand for both aftermarket products and new aircraft equipped with integrated cockpit systems. We expect these trends to drive revenue growth of approximately 5% for the year. Turning to Marine. The segment delivered its 10th consecutive year of revenue growth, starting from about $200 million in 2012 and exceeding in $900 million in 2022, which is a new record and represents a compounded annual growth rate of 15%, driven by both market growth and significant market share gains. For 2022, revenue increased 3%, with growth across multiple categories, led by strong demand for sonar systems. Full year gross and operating margins were 54% and 24%, respectively, resulting in operating income of $215 million. During the quarter, we announced that Garmin Navionics+ is now preloaded in certain flagship GPSMAP chartplotters, combining the best-in-class charts from both Navionics and Garmin. Throughout the year, we received multiple accolades and awards, most recently the prestigious IBEX Innovation Award, The National Boating Industry Safety Award and recognition as one of the most innovative marine companies by Soundings Trade Only. Looking forward, we anticipate revenue from the Marine segment will increase approximately 5% for the year, as we leverage our strong market share position with typical marine growth patterns. Moving to the Auto segment. Full year revenue decreased 4% as growth in auto OEM was more than offset by declines in Consumer Auto categories. As mentioned earlier, we recently combined the product categories of Consumer Auto with Outdoor. As many know, we were an early innovator in the consumer automotive market and the hyper growth we experienced in the mid-2000s allowed us to invest in new opportunities and become the strong, highly diversified company that we are today. Looking back in 2008, revenue from the Automobile segment exceeded $2.5 billion and represented more than 70% of our consolidated revenue. Since that time, we've diversified our revenue base and the Consumer Auto segment has evolved into a collection of important specialty categories, many of which target adventure and off-road vehicles that complement the strategic focus of the Outdoor segment. Separately, we believe that the Auto OEM segment has reached a critical inflection point as new programs move into production, driving significant growth over the next few years. We will report auto OEM as a standalone segment starting with fiscal year 2023. This change in segment organization provides an opportunity to discuss why we have chosen to participate in the auto OEM market. The automotive market is undergoing significant transformation as electrification gains momentum. While the industry has many capable suppliers, not all are equipped to meet the demand as the electronic and software content in vehicles rapidly evolves. Our vision is to be recognized as a leading global supplier of integrated electronic solutions to the auto industry. To achieve this vision, we intend to leverage our technology portfolio, our vertically integrated business model and our global manufacturing footprint. Auto OEM revenue is generated from three product categories

Operator:

[Operator Instructions] First up, we have Paul Chung with JPMorgan.

Clifton Pemble :

Yes. Good morning, Paul. In terms of potential drivers for upside, we're really not thinking about forecasting some of those. I would just point people back to the history in terms of the segment and our product introduction cadence around wearables, in particular, we have a very active product road map for the year. So we're factoring that in, but also recognizing that 2022 was a banner year for growth in those product lines. So that's really what's affecting our thinking, and that's what we use to create the guidance that we've offered. In terms of Consumer Auto, yes, those product lines are going to continue to have the margin profiles that have historically been disclosed, although we won't be talking about that going forward anymore. But I would say that as Consumer Auto products move to more specialty-driven applications, the margins will definitely come up as we have more unique products there.

Clifton Pemble :

Yes. Yes, I'll start maybe with a comment and then hand it over to Doug. But I would say that the 57.5 is a very good initial margin guide and it reflects a lot of benefits that we're seeing in the supply chain, particularly freight, but it's offset also by the growing mix of auto OEM products. So that's kind of the highest level view of how we came up with that 57.5, and then Doug probably has additional comments that you can make on the details.

Operator:

[Operator Instructions] Our next question comes from George Wang at Barclays.

Clifton Pemble :

Yes. Good morning, George. I think in terms of channel inventory, we view that as in a much healthier place as we enter 2023 compared to what it was a year ago. At this time, our sell-in was definitely far below levels of registrations that we saw for our products. So we view that as a signal that the inventory in the channel came down quite a bit. In terms of our outlook, we're not thinking. Our guide really reflects any more stocking or destocking. We're looking at things as being pretty stable in that regard. And we're simply trying to kind of moderate our outlook based on, obviously, the results that we had in 2022, combined with the new product introductions that we see going forward that should stabilize things.

Clifton Pemble :

Yes. I think we -- as we look across our product lines, we have various categories that are super strong in their markets because of the unique differentiators that we offer compared to others. And you've already mentioned that marine and aviation are two major market areas where we're leaders in their respective areas, for example, in Marine, we're the top marine electronics provider, consumer electronics provider to the industry by sales. And in Aviation, we're the market share leader in both aftermarket and integrated cockpit systems for new aircraft in the midsized business jet on down through piston aircraft. So very strong positions. It's due to, again, highly differentiated unique products, and that's our focus for our investment and our activities going forward is continuing to create those kinds of products. If you look at one of the bigger categories, obviously, broadly is wearables. There's all kinds of categories that comprise that anywhere from kids' activity trackers on through to luxury smartwatches. And so it's hard to quantify on any one level where market share is because there's not a lot of data, but what we do is try to focus on being unique and innovative and offer things that customers can't get anywhere else.

David MacGregor :

Just a couple of questions. First of all, on inventory. I know you had expected to be down about 10% in the fourth quarter, you ended up relatively flat. Was that just maybe a little stronger investment in the automotive ramp than you had anticipated? Or maybe you could just talk about what happened there?

David MacGregor :

Right, right. Okay. And then just you mentioned consumer. I guess as you think across the broader consumer exposure you have, I guess, what were your takeaways from the holiday season? And did you see any mix down within the various product lines?

David MacGregor :

Right. Great. That makes sense. And then a question on Marine. I guess this was a pull-forward category during the pandemic. How do orders look now heading into the season?

David MacGregor :

Okay. Last question for me. Just on outdoor, there was some negative operating leverage in the fourth quarter. Can you just talk about what happened there?

Operator:

And next question comes from Ben Bollin at Cleveland Research Company.

Clifton Pemble :

Yes, I think, Ben, refresh really depends on the product line. I think as you can appreciate people that spend more for some of these devices tend to hold on to them longer. So we probably see a longer refresh cycle on the more premium families such as fēnix than we do, for example, in the lower-end wearables such as Vivoactive and Venu. But I think the good news for our customer base and what we noticed consistently in behaviors of our customers is that they tend to be active customers and more dedicated to the purpose of the device than what we've heard from others. And so we have a very strong active user base. They remain active, and it continues to grow year after year.

Clifton Pemble :

Well, we created those projections based on the outlook provided to us by the OEMs. And so as we win these programs, the programs are scoped based on a certain estimate of volumes, which may or may not materialize. Those volumes assume certain kinds of consumer uptake on various features. So again, lots of assumptions built into that, but it's a significant amount of volume that comprises these programs. And consequently, that's what drives the compounded growth rate that we talked about.

Erik Woodring :

Cliff, it's very rare to see the gap between Fitness and Outdoors. It's rarely to see those results deviate from each other so widely over the 12-month span. I realize some of that was impacted by the fēnix, the fēnix launch. But looking back outside of that, what were some of the biggest factors that drove this deviation? And then kind of what are you doing as you look into 2023 and beyond to make sure that the Fitness business can actually inflect back to growth at some point? And underscoring that question, can you just maybe talk about competition and whether that's playing into that or is this more of a market dynamic? And then I have a follow-up.

Erik Woodring :

Great. That's really helpful. And I guess maybe a second one is in your prepared remarks, you just highlighted a number of what I think of as very interesting either approvals or wins in the aviation business during the quarter. Kind of similar to -- I don't -- I'm not asking you to do the same for these types of wins as you did with the Auto OEM business. But can you just help us maybe understand like when and by how much some of these approvals or wins can actually translate into P&L contribution? Meaning, like are they material to the model in 2023. Is this -- you get approval today and this becomes a driver in a few years? Any way to just help us understand the importance of these wins in the context of the P&L would be helpful?

Operator:

Our next question comes from Ivan Feinseth of Tigress Financial.

Clifton Pemble :

Well, good morning Ivan, I can't share details on the specific products. But as we mentioned, we have an active road map across all of our segments. This is our strategic focus is to drive revenue through new product introductions, and so we have a very active year planned. Last year was a great year, too. which rebounded a lot from kind of the pandemic dip that we saw in some introductions, but 2023 should also be a very great year for introductions.

Clifton Pemble :

Well, Qualcomm is a significant partner of ours in the Auto OEM segment for our platforms. But the SOS activity with them is really focused more on mobile phones and so they're somewhat different, but we do see that as an interesting new avenue to utilize our in-reach response center and leverage the capability we have in coordinating rescues and responses to remote concerns that customers have for a long time now.

Clifton Pemble :

Yes, I would say there's really two factors that have influenced the growth in our direct sales channel. One is the underlying subscription business that goes along with things like InReach and many other categories that we have driving subscription revenue for the company. The other is really, frankly, the retail situation with our products out at third-party retailers. As I mentioned, many of them were focused on inventory control. And consequently, I think in some cases, probably undershot the amount of inventory they needed to satisfy demand. And so we saw a big uptick in our garmin.com sales because people were looking for products and able to find it on our website.

Teri Seck :

Thank you, everyone. As always, Doug and I are available for callbacks throughout the day, and we hope you have a wonderful day. Bye.

Operator:

Thank you for standing by and welcome to the Garmin Limited Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program Teri Seck, Director of Investor Relations. Please go ahead.

Clifton Pemble:

Thank you, Teri and good morning everyone. As reported earlier today, consolidated third quarter revenue came in at $1.14 billion down 4% from the prior year. Revenue was negatively impacted by approximately $70 million due to the strengthening of the U.S. dollar relative to other currencies. Excluding this impact, revenue would have increased about 2% over the prior year. While the stronger dollar and negatively impacted revenue, cost of goods benefited due to the weakening of the Taiwan dollar. In addition, cost of freight came down as more products are being shipped by ocean and as rates decline due to excess capacity in the shipping industry. These combined with favorable segment mix resulted in gross margin at 58.8%, an increase of 40 basis points over the prior year. Expenses increased 4%, as growth in R&D and SG&A was partially offset by advertising efficiency. This resulted in operating income of $239 million, which was down 15% from the prior year. Operating margin was solid at 21%. Considering our year-to-date performance, we are adjusting expectations for the remainder of the year. We now anticipate full year revenue of approximately $4.85 billion, a year-over-year decline of 3%. We are raising our full year EPS guidance to $4.95 on improving gross margins, increased efficiency in our expense structure, and the lower full year effective tax rates. Doug will provide more details on our financial results and updated guidance in a moment, but first, I'll provide highlights on the performance and outlook of each business segment. Starting with fitness, revenue decreased 18% to $280 million, primarily due to lower sales of the advanced wellness wearables and indoor cycling products. Gross and operating margins were 53% and 15% respectively, resulting in operating income of $41 million. During the quarter, we launched the Index BPM smart blood pressure monitor, which measures systolic and diastolic blood pressure at home or on the go. When paired with our Garmin Connect app, users can see their measurement history and trends alongside other health stats. We also launched the Venu Sq 2 featuring a bright AMOLED display and up to 11 days of battery life, which is nearly double that of its predecessor. Considering year-to-date performance in the fitness segment, we are maintaining our expectation that revenue will decline 25% for the year. Moving to outdoor, revenue increased 5% to $340 million, driven by growth and adventure watches and InReach devices and services, but partially offset by declines and other product lines. Gross and operating margins were strong at 65% and 36% respectively, resulting in operating income of $121 million InReach remote communication devices and Response Coordination services have been a strong product category and unique differentiator for the outdoor segment. During the quarter, we launched the InReach Messenger, a versatile communication focused device with global to a texting location sharing and SOS capabilities. Whenever a customer presses the SOS button, their communication is sent to our Garmin Response Center, which oversees and coordinates a unique response based on the situation. Since launching InReach services in 2011, the Garmin Response Center has coordinated over 10,000 InReach SOS responses in more than 150 countries and on all seven continents for activities ranging from hiking and backpacking, to roadside assistance in areas of poor cell phone coverage. Many customers claim the InReach products and services were instrumental in returning safely to family and friends. Considering year-to-date performance in the outdoor segment and current trends, we now expect revenue to grow 17% year-over-year. Looking next at Aviation, revenue increased 4% $188 million primarily driven by growth in aftermarket product lines. Demand for aviation products remain strong. And we continue to experience higher than normal backlogs for our products. Supply chain constraints have improved that continue to affect our ability to completely clear the backlog. Gross and operating margins were strong at 73% and 26% respectively, resulting in operating income of $48 million. During the quarter, we announced that our G3000 integrated flight deck was selected by Tactical Air to modernize F-5 fighter aircraft operated by the U.S. Navy and Marine Corps. Our expanding role on the F-5 demonstrates the capability and versatility of our integrated cockpit systems for use in demanding military applications. Additionally, a recent survey by Aviation International News ranked Garmin number one and avionics product support for the 19th consecutive year. This long period of recognition demonstrates an unwavering commitment to meet the needs of highly demanding markets from owner flown aircraft to large Part 135 commercial operators. I congratulate our team for once again earning this award, which is a testament to the quality of Garmin equipment and the amazing way our associates care for our customers. The Aviation segment has delivered solid performance so far, but supply chain constraints are affecting our ability to achieve our original plan by the end of the year. With this in mind, we are adjusting our revenue growth estimate to 7% for the year. Turning to the Marine segment. Revenue decreased 5% to $197 million. The Marine business is highly seasonal and Q3 typically represents the lowest quarter of the year. For the past two years, these seasonal trends have been difficult to predict due to the influence of the pandemic. We believe the market is returning to more typical seasonal trends. Growth in operating margins were 56% and 23%, respectively, resulting in operating income of $45 million. During the quarter, we began shipping the LiveScope XR system, which operates at greater depths and expands the addressable market for live action sonar to coastal and deep lake fishing applications. We also launched the LiveScope ice fishing bundle with high-resolution real-time imaging, which creates the ultimate portable solution for winter fishing. And finally, we continue to be recognized for innovation and achievements in the Marine industry. For the eighth consecutive year, the National Marine Electronics Association named Garmin Manufacturer of the Year, and we also received five Product of Excellence awards. I'm very proud of our accomplishments in the Marine market, and I congratulate our team on these achievements. Considering year-to-date performance in the Marine segment and the return of typical seasonality patterns, we are lowering our revenue growth estimate to 3% for the year. Looking finally at Auto, revenue decreased 2% to $136 million as declines in consumer product lines more than offset growth in OEM programs. Gross margin was 40% and the operating loss driven by investments in auto OEM programs, narrowed significantly from the prior year to $16 million. During the quarter, we announced that our Tread Navigators have been selected by Artic Cat as standard equipment on select side-by-side off-road vehicles beginning in model year 2023. Considering year-to-date performance in the Automotive segment and current trends, we now expect revenue to decline 7% for the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

Certainly. [Operator Instructions] And our first question comes from the line of Paul Chung from JPMorgan. Your question please?

Clifton Pemble :

Yeah, good morning, Paul. I think in Aviation, we've been able to build the revenue that was vacated by the ADS-B mandate through a couple of things. We have new product lines such as our Autopilot systems, which as we certify each new aircraft, we are able to offer a totally new product category to that particular group of aircraft that are out there. So we're definitely gaining share as a new product category in autopilots. And then indicators, the stand-alone indicators, our GI 275 as well as our G5 and our standalone GPS NAVCOM products, the GTN series have been very strong in this environment where people are retrofitting their planes. As far as the forward look, we're not really ready to talk about 2023, but aviation, of course, will be a market where the operating profit is driven by the investments we have to make. And so as new programs come along, which tend to be long life cycle, we sometimes have to invest in advance. So that's one variable that we'll look at as we think about our 2023 guidance and then also the sales volume will drive leverage. And so again, we're not quite there yet in terms of talking about 2023, but those are factors we'll consider.

Clifton Pemble :

Yeah. So in terms of Fitness, FX definitely did impact us. I think in terms of the improvement we saw, it would be primarily due to product mix as we had new products in the segment. Our running categories, in particular, have been very strong with the release of the 255 and 955 series. In terms of a particular target, I think where we landed in Q3 was actually where historically, we've kind of targeted in terms of mindset around what is the performance of this segment. Fitness is a more competitive segment due to the advanced wellness wearables, so that mid-teens kind of range for operating margin is actually a very good result and that will fluctuate up and down depending on promotions and on product cycles. In terms of competition, we're always mindful of that. We still believe, even with the release of the Apple Ultra and the Google Pixel that we have unique differentiators, not the least of which is some of our products are able to have 25 times the battery life of of those devices. So that's a significant advantage, and we're more oriented to the unique needs of our users around activity and adventure. So we continue to believe that we can carve out unique spaces for ourselves there, and we don't believe that we're losing market share in light of that.

Operator:

Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Your question please.

Doug Boessen :

Yes, great question. Yes, our full year free cash flow estimate is $450 million. And inventory is a big driver of that. As you've noticed, our inventory has been increasing year-over-year and did increase here in Q3. As we look at year-end, we would expect that our full -- our end of year inventory will be lower on a sequential basis compared to Q3, maybe by around 10% or so and that would mean that our year-end inventory would probably be up over the comparable period in 2021 by mid-teens or so. So there will be -- and last year, comparing that to it, you saw in 2021, actually inventory increase from Q3 to Q4 about 10%.

Clifton Pemble :

Yeah. Right now, I would say that we feel like channel inventory is mostly at reasonable levels. The one exception to that has been the indoor cycling trainers, which the channel is full of trainers from all manufacturers, not just a garment specific thing because of the shift from indoor cycling training during the pandemic to more outdoor cycling training. So that's the one area that the market is continuing to work through. But in general, we feel like the levels are mostly good. The one thing that is a factor out there, as we look forward and really kind of difficult to predict how it will go. But retailers generally have inventory of lots of different things right now. So as they move into Q4, many have signaled that they're promoting. And so as we look at Q4 we'll be looking for signals around open-to-buy dollars and promotions that they're willing to do given their overall inventory picture.

Clifton Pemble :

I think we do have some flexibility around OpEx, particularly in the areas of advertising and some of the discretionary areas I think that slowing some of the other things in terms of R&D commitments are more difficult or take more time to really see the result. We do have a list of priorities that we've vetted and we're committed to, regardless of the environment so that we can grow for the future. But right now, I would say that we're taking a generally cautious wait-and-see view about how things go, and we're being very careful with how we spend and grow our headcounts.

Operator:

Thank you. And our next question comes from the line of Ben Bollin from Cleveland Research. Your question please.

Clifton Pemble :

Yeah. I think we are typically seeing still the majority of customers coming into our platforms as new to Garmin customers. So there's certainly an element that is people that buy a second device or a new device of some kind. And there's some secondary market for our devices as well. So they might sell them on online, and then we give a new customer to reduce device. But in general, it's still slightly over a majority of those customers are new to Garmin.

Clifton Pemble :

Yeah. So last year, we did feel like we had availability when many others did not due to supply chain issues even so, I think we were still limited on some of the things that we could supply and some of our deliveries came very late in the quarter, which might have missed the overall holiday season. So there was a lot of dynamics last year that we won't comp this year because things are more normal. And of course, we'll have to wait and see how the customer responds in Q4 to the holiday buying season. In terms of our partners, like I mentioned earlier, I think what they call open-to-buy dollars in the retail channel is something that's really important retailers do have a lot of inventory of many different things. And so they're balancing what to bring in based on what they think will sell well. and they can maximize their results as well. So it's a little bit different environment this year because last year was all about getting anything they could and this year is all about selling the right things.

Operator:

Thank you. And our next question comes from the line of Ivan Feinseth from Tigers Financial Partners. Please go ahead.

Clifton Pemble :

Yeah, good morning, Ivan, I would say, generally, we're always looking at new category opportunities. So index has been a great category for us as a wellness device on the scale first, and the blood pressure monitor has been a delightful surprise in terms of the interest that we've had in that and we quickly sold out what we had on hand and looking for more deliveries. So we're excited about that, and we're constantly looking at new categories to grow our business.

Clifton Pemble :

Yeah. I don't have specific stats in front of me on that. We do see that and track it. It's at a level less than what I mentioned earlier in terms of just people that are buying another Garmin device, but I don't have those specific stats in front of me.

Operator:

Thank you. And our next question comes from the line of Erik Woodring from Morgan Stanley. Your question please.

Clifton Pemble :

Yeah. Good morning, Erik. So geopolitical risks have been something we've dealt with since the beginning of the company. They're really not new. They tend to be shifting around the globe as things evolve. In terms of looking at new capacity, I mean, we've demonstrated recently that we have the ability and the expertise to stand up new factories in new regions such as our automotive OEM factory in Poland. We, several years ago, created a factory in China. So we have that diversity, and we're able to quickly stand up capacity where we need it. So we just constantly look at that and evaluate what our needs are.

Clifton Pemble :

Yeah. I think this question of volume versus pricing, that's always the big question as you think about pricing your products and running promotions. And the name of the game is maximizing. For us, we always want to maximize the profit dollars for Garmin that allows us to be successful. So it's a big question, and I don't think anyone has a magic way to do it, but we try to balance all of those factors and also take into account the availability of products in various stages of life cycle that we can promote the older ones, for example, and allows us to keep the pricing on the newer products higher.

Doug Boessen :

Yeah. So yes, gross margin. So as you mentioned, there's a lot of different moving pieces in that gross margin number. So some of our headwinds probably in the top we have lean that one is just the FX impact we had on revenue. Now we do have, as Cliff mentioned, the other side of that with the strengthening of the U.S. dollar against the Taiwan dollar, there's a lower cost relating to that piece of -- but it's not able to offset all of that headwinds relating to the FX on the revenue side. Then kind of taking you back a little bit, one of our biggest headwinds we had previously related to our freight. Freight had been increasing quite a bit year-over-year. So now we're seeing some of those freight costs decline. And it's actually declining for two reasons, one of which relating to lower freight rates. And the other 1 is that we are shipping a larger percentage of our shipments on ocean versus air, so that's given us some benefit that we have from standpoint. So those are big drivers. And you always have some other things in there relating to a segment mix from a consolidated standpoint, one segment has a higher percentage of the total, like, for instance, of Aviation or Outdoor increases more than other ones, that gives a benefit from that standpoint. So -- and then also you got product mix in there. as it relates to new products that we're launching in the period of time and proposal times of the year also we had. So a lot of different mixes.

Doug Boessen :

Yeah. Appreciate it.

Teri Seck:

Thanks, everyone, for your time today. Doug and I are available for callbacks this afternoon. Thank you. Bye.

Operator:

Thank you for standing by and welcome to the Garmin Ltd. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will b a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program Teri Seck, Director of Investor Relations. Please go ahead.

Cliff Pemble:

Thank you, Teri and good morning everyone. As reported earlier today consolidated revenue came in at $1.24 billion, down 6% from the strong pandemic-driven comparable of 2021. We generated $293 million of operating profit for the quarter, which was down 21% from the prior year and operating margin was 23.6%. Our performance in the quarter was influenced by several factors. First, the US dollar strengthened significantly over the prior year relative to other major currencies and unfavorably impacted second quarter revenue by approximately $57 million. Our strategy for managing currency fluctuations of this nature is to increase prices where we are able and reset pricing as we introduce innovative new products. We believe this approach is very effective in managing currency changes over the long-term, but the rapid and relentless strengthening of the US dollar will be a significant headwind for the remainder of the year. From a business segment perspective, underperformance in fitness had a significant impact on our results, which I will cover in more detail in just a moment. And finally, we continue to experience supply chain constraints, which limited the orders we could fill in the quarter specifically in marine and aviation. Considering our performance so far, we're adjusting expectations for the remainder of the year. We now anticipate revenue of approximately $5 billion, which is flat to the prior year and EPS of $4.90, representing a year-over-year decline of approximately 16%. This new guidance assumes currency exchange rates stabilize at current levels and we have adjusted growth expectations for fitness and marine, which reflect the current trends. Doug will provide more details on our financial results and updated guidance in just a moment, but first I'll provide highlights on the performance and outlook of each business segment. Starting with fitness, revenue decreased 34% to $272 million. Gross and operating margins were 49% and 9%, respectively resulting in operating income of $23 million. The second quarter decline was broad-based impacting all categories in the segment and was primarily driven by demand normalization in the advanced wearable and cycling categories. These are categories which benefited significantly from pandemic fuel demand in the first half of 2021. Although, our Q2 performance was disappointing, we are encouraged by the response to our new product introductions. During the quarter, we celebrated Global Running Day with the launch of two new running watches, the Forerunner 255 and the Forerunner 955. The Forerunner 955 solar version is our first running watch with solar charging capability, which provides up to 20 days of battery life in smartwatch mode. We also launched the Edge 1040 cycling computer featuring solar charging capability for superior battery life and multiband GPS technology for accurate high-performance positioning in the most challenging ride environments such as those found in urban areas or dense street cover. Given the year-to-date performance and current trends we now expect fitness revenue to decline 25% for the year. Moving to outdoor. Revenue increased 18% to $382 million with growth across multiple categories led by Adventure Watches. Gross and operating margins were strong at 66% and 40%, respectively resulting in operating income of $154 million. During the quarter, we launched the tactix 7, a premium smartwatch with unique capabilities such as night vision compatibility as well as advanced tactical performance and risk-based navigation features. The outdoor segment has been a strong performer so far and we are maintaining our revenue growth estimate of 20% for the year. Looking next at aviation. Revenue increased 13% to $205 million driven by growth in both OEM and aftermarket categories. Gross and operating margins were strong at 72% and 30%, respectively, resulting in operating income of $62 million. During the quarter supply chain constraints eased bringing back orders down from historically high levels, but we have more work to do to meet the strong demand for our products. We recently announced that we now have more than 25,000 integrated flight decks in service across a broad range of applications from piston trainers to transcontinental business jets. This achievement demonstrates the unmatched versatility and capability of our integrated flight deck systems. The aviation segment has delivered solid performance so far and we are maintaining our revenue growth estimate of 10% for the year. Turning next to the marine segment. Revenue decreased 7% to $243 million. Demand for our products was even higher than it was during the historic second quarter of 2021, but we were unable to satisfy all of the demand due to supply chain constraints. Gross and operating margins were 57% and 28% respectively, resulting in operating income of $69 million. Since it was first introduced in 2018 our LiveScope Sonar system has been a game changer for the inland lake fishing market and has been a growth catalyst for the marine segment. We recently expanded our product lineup with the introduction of the LiveScope XR system which operates at greater depths and expands the addressable market for live action sonar to coastal and deep lake fishing applications. We're excited to bring live scope technology to the deep fishing market and believe it represents another growth opportunity for the marine segment. Given our performance so far this year and the anticipated return of normal seasonality patterns in the marine market, we will now expect revenue growth of 5% for the year. Looking finally at auto. Revenue decreased 6% to $139 million with declines in both consumer and OEM categories. Consumer was impacted by lower sales of consumer PNDs, while OEM was impacted by reduced orders from automakers who face their own supply chain challenges. Gross margin was 40% and we recorded an operating loss of $15 million, driven by ongoing investments in auto OEM programs. During the quarter we entered a new product category with the launch of our first diesel headset offering truck drivers high-quality audio up to 50 hours of continuous talk time and unique integration features with our diesel navigator units. While the first half of the year has been slightly below expectations, we believe growth will resume in the second half as automaker production improves. As a result, we are maintaining our revenue growth estimate of 5% for the year. So, in closing while we are facing a variety of headwinds it's important to remember, our diversified business model provides many opportunities for growth within each segment. We have a very strong product lineup and more new products are on the way. We remain focused on what we can control and we'll be agile and opportunistic as we navigate the evolving macroeconomic environment. So that concludes my remarks. Next Doug will walk you through additional details on our financial results. Doug?

Operator:

Certainly [Operator Instructions] And our first question comes from the line of Paul Chung from JPMorgan. Your question please.

Cliff Pemble:

Okay. Good morning, Paul. Channel levels and cycling, I’d say you have to look at two different sides of that. One is the cycle and computer side and the other is the indoor trainer side. The cycling computer side and the response to the new 1040 is very good. And so the inventory levels at the channel I think are fine. The indoor cycling side of things with the tax trainers, I think generally the market right now is heavy on inventory of all kinds of trainers from every manufacturer. And so there's a backup at retail of those products, which impacts our sell-in. It's going to take some time I think for retailers to work through that. But in general the retail demand is generally what people would expect for this time of the year. It's not really the season yet in the Northern Hemisphere and we should see improved retail sales in the back half as winter approaches. In terms of the other fitness products, the 955 and the 255, the demand has been very good, and we're working through actually back orders on those as well.

Cliff Pemble:

Yeah. So definitely a good quarter. I think that we were able to catch up on some of our lingering backorders in the segment. Most of those were targeted to the aftermarket. Both sides of the Aviation segment, the OEM side and the aftermarket grew in the quarter. We expect that to continue in the back half because OEMs of course are working to fill the back orders that they have for airplanes, which are still very strong and we're still catching up on orders in the aftermarket side of things as well. In terms of market share as we've said before, we're very strong in everything from the piston singles on up through the midsize business jet and we continue to win more platforms in those categories and are working on new projects to build our revenues for the future. And then margin wise, I would say that aviation has been very solid when it comes to our margin profile and in that 70% margin range for gross margin, which funds a very heavy R&D investment to create the products that we offer. And kind of that mid to upper 20 range for operating margin is the sweet spot. As we get more leverage, of course, it goes up. But generally we tend to target in that range.

Cliff Pemble:

So the refresh has gone very well. I think it's taken us some time, but we are getting close to being caught up on the initial demand for the fenix and the epix, since it was launched earlier this year. There's still some pockets of lingering back orders in those categories that we're working to catch up on. In terms of the channel, we think it's very, very healthy and seems to be normalizing right now, with kind of the sell-in sell-through being balanced. In terms of user profile, we're seeing pretty much what we have seen, in recent launches, which is roughly about half of our users coming into those families are new users and then we have upgrade users coming from all kinds of products, from much older generation fenix, to even our advanced wellness customers who are looking to upgrade to a more capable launch.

Cliff Pemble:

Thank you.

Ben Bollin:

Good morning, everyone. Thanks for taking the question. Cliff and Doug, I had a bigger picture question on inventory levels. When you think about your current balance sheet and the exposure to inventory, I know there's been some targets to build that. How have those thoughts evolved? And then a follow-on, based on behavior you're seeing from your partners, your go-to-market partners, do you have any thoughts about what they're thinking about going into the holiday selling season and their overall commitment to inventory levels from where they stand right now?

Ben Bollin:

Okay. And then one follow-up would be specifically as you look at the outdoor business for the adventure watches, how are you thinking about the performance of that business through year-end? And how are you balancing the potential risks of maybe you've already seen some pull-forward. You haven't seen it yet given the refresh versus the stronger underlying secular demand . And that's it. Thank you.

Ben Bollin:

Thank you.

Nikolay Todorov:

Yes, thank you and good morning everyone. First question on marine. I guess Cliff can you talk about where do you see the constraints? I know you had some constraints from prior quarter, but it seems like they have worsened. And also it seems like you're building still a strong backlog. How much of that do you consider perishable given the macroeconomic backdrop?

Nikolay Todorov:

Okay. And then second question I have is that maybe on the OpEx side, maybe can you talk about what are the changes you're implementing following the revision in the outlook how is the OpEx lines changing given the new outlook?

Nikolay Todorov:

Okay. Last one if I can squeeze. Fitness gross margin, should we expect given the current environment and the inventory overhang that high 40s is kind of the norm in the near-term, or is there any potential puts and takes that can change that direction?

Nikolay Todorov:

Got it. Thanks guys. Good luck.

Operator:

Thank you. And our next question comes from the line of Ivan Feinseth from Tigress Financial. Your question please.

Cliff Pemble:

Yeah. I think -- good morning, Ivan, we're really excited about the diesel. And as I've mentioned many times in the past, our strategies for growth are introducing new products and new product categories, entering new markets and this reflects that commitment. Right now, we're focused on attacking the opportunities on the truck side. And then we're exploring other avenues where this kind of technology might be useful.

Cliff Pemble:

Well, first, I think everyone hopes that the economic situation is short term, but none of that has really proved to be true. So we're making sure we're managing the business for the long-term. We are in need of more space in Olathe particularly to be able to bring more people back on to campus and also focusing on those priorities that we have particularly needing more people in aviation and some of the consumer areas as well and balancing our overall hiring needs. So we're committed to building out and finishing our space expansion here in Olathe. And then I think we're in good shape, when it comes to overall space accommodations for our people for the next kind of phase of growth.

Cliff Pemble:

Well, we have introductions planned in most every segment. And so stay tuned, but I'm pretty excited about some of what's coming.

Cliff Pemble:

Thank you.

Erik Woodring:

Hey, good morning, guys. Thank you for taking my question. Maybe Cliff, I'll start with a kind of a high-level question for you and then ask one for Doug. I think as we've gone through the pandemic and now kind of in this quasi-pandemic stage --consumer electronics have gone through a near record period of elevated demand that some could now say is normalizing. I would just love to get your take Cliff on just how you think about the TAM for your consumer-facing businesses. Do you think it's permanently larger today than pre-COVID levels? Is there a risk that it returns? Just high-level thought process and how you're thinking about the TAM as we move kind of past the peak of the pandemic.

Erik Woodring:

Okay. That's helpful. And then maybe Doug, by my math kind of gross margins in the second half will be a bit below 56%. Operating margins will be around 18.5%. So is there any way you can just kind of help us quantify the impact of the various factors impacting kind of this new lower second half margin outlook?

Erik Woodring:

And maybe if I could just clarify would you say that FX is the only kind of incremental headwind, or would you say freight is now more of a headwind than you expected 90 days ago?

Erik Woodring:

Okay. Thank you so much for the color guys.

Operator:

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Theresa Seck for any further remarks.

Operator:

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Good day, and thank you for standing by. Welcome to Garmin Limited First Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your first speaker today to Teri Seck, Director of Investor Relations. Please go ahead.

Clifton Pemble:

Thank you, Teri, and good morning, everyone. As reported earlier today, consolidated revenue increased 9% to $1.17 billion, representing a new first quarter record. Four business segments reported revenue growth in the quarter, 3 of which delivered double-digit growth. We generated $229 million of operating income, down 8% from the prior year. Operating margin was 19.5% and was negatively impacted by gross margin performance, which declined due to historically high freight costs, combined with the strengthening of the U.S. dollar. In addition, operating expenses increased for a variety of reasons, including higher associate head count, increased compensation costs and the increase of certain operational expenses as business activities continue to normalize. We performed very well during the quarter despite a combination of old and new headwinds. Supply chain constraints persist, which limited the orders we could fill. Russia's invasion of Ukraine created an unthinkable humanitarian crisis and further complicated the global economic outlook. Despite these challenges, demand for our products remains strong and we are optimistic about the future. Our Board of Directors recently approved a $300 million share repurchase plan, which is in addition to the proposed $2.92 per share dividend that will be considered by shareholders at the upcoming annual meeting. Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with business, revenue decreased 28% to $221 million. Gross and operating margins were 48% and 0%, respectively. All product categories declined, but the normalization of demand for cycling products was the main contributor. While revenue from fitness wearables declined, on a combined basis, wearable device revenue across all segments at Garmin experienced robust growth. We expected the first half of the year to be challenging for the fitness segment as we compare against the outstanding performance of the prior year. While the decline was greater than expected, we believe these trends will moderate in the back half of the year as we move past the pandemic swings of 2021 and benefit from new product introductions. Moving to the outdoor segment. Revenue increased 50% to $385 million with growth in multiple categories led by strong demand for adventure watches. Gross and operating margins were 64% and 39%, respectively, resulting in operating income of $149 million. During the quarter, we announced sweeping updates to our adventure watch lineup, including our flagship fenix 7 series featuring a distinctive new design with a touchscreen display, and the Instinct 2 series available in 2 sizes, including versions that can operate indefinitely using our exclusive solar power technology. We also announced the all-new epix with a bright AMOLED touchscreen display and class-leading battery life up to 16 days. We believe that strong demand for these new products as well as other categories in the segment will be a growth driver for the remainder of the year. Looking next at the aviation segment. Revenue increased 1% to $175 million with growth driven by OEM product categories. Supply constraints impacted sales of aftermarket products but the situation improved throughout the quarter. Gross and operating margins were 73% and 23%, respectively, resulting in operating income of $40 million. Aircraft OEMs are reporting robust orders from both new and existing customers. Aftermarket demand is also strong as customers invest in new cockpit systems. We believe these are positive indicators of growth for the remainder of the year. The marine segment delivered another quarter of impressive results with revenue increasing 21% to $254 million. We experienced broad-based growth across multiple product categories led by chartplotters. Gross and operating margins were 51% and 23%, respectively, resulting in operating income of $59 million. LiveScope has proven to be a halo technology for Garmin, and the new LiveScope Plus sonar system raises the bar with higher resolution images and improved target separation. We continue to see strong demand for our marine products and LiveScope Plus builds on this momentum. We believe this is a positive indicator of growth for the remainder of the year. Moving finally to the auto segment. Revenue increased 11% to $138 million, with growth from both OEM and consumer categories. Gross margin was 38%, and we recorded an operating loss of $20 million driven by investments in auto OEM programs. In consumer auto, we continue to diversify our product offerings with the launch of the Instinct 2 dezl edition smartwatch for truck drivers. In the OEM category, we made significant progress preparing for the launch of the next-generation BMW computing module platform. BMW approved our new Poland factory, giving it a rare green rating for mass production readiness. We anticipate delivering production parts to BMW starting in the second quarter. Before I turn the call over to Doug, it's important to remember that our diversified business model offers many different paths to achieve our consolidated growth goals. We remain focused on creating highly differentiated products in all segments that excite our customers and lead to success. Regarding our outlook for the rest of the year, I mentioned several new and existing headwinds we face, and we cannot predict the impact that these might have on the business. Also, the first quarter represents the lowest seasonal quarter of our financial year and much of the year remains ahead of us. With these things in mind, we are maintaining our 2022 guidance issued in February, which called for consolidated revenue of $5.5 billion and EPS of $5.90 a share. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Operator:

[Operator Instructions]. I show our first question comes from the line of Paul Chung from JPMorgan.

Clifton Pemble:

Yes. I think in terms of the update to the year, we basically are still seeing things the way that we've laid them out, and it's very early in the year to really make any conclusions based on the start that we've had. But we do have a strong product lineup right now, and we have more new products coming throughout the year in all of our segments. And so a lot of our momentum and growth is driven around new innovation and new products.

Clifton Pemble:

Yes. So fitness was weaker than we expected for sure. And the cycling category is the biggest contributor to that. We are comping against really strong results from last year. So there's lots of moving pieces, lots of dimensions to this. But the cycling side of things is really the one that's the biggest impact. But if you look at it from a different angle, the operating profit was mostly affected by FX and freight costs. If those things would have been under normal circumstances, we would have been pretty much in the range of where our gross margin and operating margin profiles are for the segment.

Douglas Boessen:

Yes. Yes. Regarding free cash flow, yes, still early in the year, but there's a couple of things you need to consider, one of which is our working capital needs. We did have some of those working capital needs here in Q1, where we saw inventory increased more than the previous year. You also need to factor in last year, we had a large amount of inventory increases in the back of the year. So hopefully, we won't have as much of an increase in the inventory, I'll say, year-over-year than we did last year in there. But the working free cash flow and other things, CapEx is pretty consistent year-over-year for the full year in there. It depends also on the operating side of things, but we'll give you more guidance on that in Q2. As it relates to the share buyback, it's something that we evaluate with the Board, and we felt that was something that was appropriate at this point in time. Regarding the amount that we're going to be doing, it's really depending upon market conditions, business conditions at a point in time, the amount that we buy back during the period.

William Power:

Great. Maybe just a follow-up first on fitness. I think we, and you all noted, there were some particularly tough cycling comps year-over-year, but it sounds like there was some year-over-year weakness in the other fitness categories, too. I guess I'm wondering if there are any areas you'd call out there. Any key drivers of that? Maybe any comments on changes in the competitive climate? Just trying to understand the broader fitness picture.

William Power:

Okay. That makes sense. Cliff, it'd be great to get a little more color as to what you're seeing kind of real-time across Europe. As you talk to your retail partners, have you seen any change in kind of purchasing trends, appetite from them just as you think about the impacts of the Russia-Ukraine conflict and inflationary pressures kind of across the continent, particularly in Eastern Europe? As you exit Q1 and obviously now into Q2, anything you'd call out there with respect to demand trends?

William Power:

Yes. Okay. I guess maybe just a last question. You maintained guidance for the year. Maybe just any other color as to your confidence there. I mean it sounds like it's really built just on the diversity of the business, and I recognize we're still early in the year. But as you think about the various uncertainties that are still out there, whether it's supply chain, inflation, et cetera, maybe just any other color as to what gives you confidence in maintaining that outlook at this point?

Operator:

Our next question comes from the line of Nik Todorov from Longbow.

Douglas Boessen:

Yes. As it relates to gross margin for fitness, yes, 2 of the big drivers there, obviously, are freight and FX. And actually, FX is a bigger impact on the fitness business just given our EMEA side of the business in there. So as it relates to the year, it's still early in the year here, but we have to manage through those headwinds, and we'll have to see how those mitigate hopefully. We're doing things, hopefully, help mitigate some of the freight. I previously mentioned inventory. We're trying to optimize our ocean versus air to mitigate some of the increases there. But FX, that's something -- and we've seen more of the strengthening of dollar there and increases. So we have to see how that all plays out for the rest of the year.

Clifton Pemble:

Yes. I think one of the things we mentioned actually last time is we expected the first half of the year to be more challenging for the aviation aftermarket because of the supply chain constraints we were experiencing. We've started to see that improve, especially as we rolled into the month of March and onward. But we do expect still to be able to see more improvement as we get into the back half because we're taking actions to dual source some parts as well as we're getting more supply from our existing suppliers.

Clifton Pemble:

Yes. I think really nothing to speak of. We still see very strong demand for our most popular products and especially driven by the technology developments that we've made in the area of live sonar, and our display systems are all very good and sought after. I would say in terms of retail boating or I would say the OEM side is what we would call that, but in general, we still hear our OEM partners say that they're sitting on years of backlogs in their business and working very hard to deliver the boats that have been ordered. So we still see a strong demand cycle moving forward from the OEM side of the business.

Jeffrey Rand:

How are the current inventory levels of your channel for your cycling business? And how do you think about end customer demand for cycling products through the rest of the year?

Jeffrey Rand:

Great. And then operating margins in your auto OEM business were relatively flat sequentially. How do you think about operating margins for this business over the next few quarters as projects ramp up further?

Operator:

I show our next question comes from the line of Ben Bollin from Cleveland Research.

Clifton Pemble:

Yes, thanks. I think in terms of the customer profile of our wearables, it really depends by product line and by segment. But at the highest level, if you look across all our wearables, we are mostly selling to brand-new customers to Garmin who are registering a new device for the first time and creating a Garmin Connect account. But we also have, of course, a sizable amount of business that we do with people who love to stay current on the latest products that we release. And so we see that side of the business as well. But right now, it's still more of an -- it's still a majority of people that are new to our wearables.

Douglas Boessen:

Yes. So as revenue recognition standpoint, probably shouldn't be that much different than we have at this point in time in the different models that come out from that standpoint -- from a revenue recognition standpoint.

Clifton Pemble:

I think actually, Ben, the content per vehicle on the newer platforms that we're delivering is much higher per vehicle than what we're seeing on the current products delivered out of China as well as out of the U.S. factory here. In some cases, once we get to full production mode with BMW, they've adopted it across all of their platforms. Some vehicles could have 3 or more of these modules within the vehicle. So it will dramatically increase per vehicle based on what we're delivering over the long term to BMW.

Elizabeth Grenfell:

As we think about the cycling business and the normalization that we're seeing, when do you expect it to completely have normalized? And at what level do you consider normal?

Operator:

[Operator Instructions]. I show our next question comes from the line of Erik Woodring from Morgan Stanley.

Clifton Pemble:

I would say total across all of our product lines that are popular in retail.

Clifton Pemble:

Well, I think if we just look at those one by one, I would say, in outdoor, our new product releases and the adventure watches are -- we continue to work to fill all of the demand that we're seeing for those. And in addition, there's some golf products that we've struggled to match the demand popularity of some of the products that we have there. So that's the outdoor side of things. On the marine side of things, our new Panoptix LiveScope Plus system is extremely popular. And so we're working to fulfill a lot of back orders on that product, which also drives display systems. So there's kind of a broad-based demand in our marine segment because of that. And then finally, in aviation, I think our biggest opportunity right now is the aftermarket side of things. We've been constrained because of the supply chain situation. And as I mentioned, we're starting to see that get better incrementally, but it will take some time to really fully recover. But the backlogs that we have there of things that we need to deliver is strong.

Clifton Pemble:

I think most certainly, we tried to time the launch of the new products optimally, and we felt like it was not the best time to launch in late Q4. So there's probably some impact that shifted demand because people were waiting for our new products for sure. But it's hard to speculate on how much of that there was. And would you say your second part again?

Clifton Pemble:

I think for our initial plan, we definitely were able to fill the channel. And what we found is that the reorders have continued to be strong. And so we're still chasing initial demand for that product line that we're working to fill.

Teri Seck:

Okay, everyone. Thanks so much for your time. Doug and I are available for callbacks and have a great day.

Operator:

Thank you for standing by and welcome the Garmin Limited Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Teri Seck, Director of Investor Relations. Ma'am, you may begin.

Cliff Pemble:

Thank you, Teri and good morning, everyone. As reported earlier today, we ended 2021 with fourth quarter revenue of $1.39 billion, up 3% over the prior year, representing a new record for Garmin. During 2021 quarter by quarter comparisons to the prior year have been difficult to interpret – due to pandemic driven swings of 2020. It's interesting to note that revenue grew 12% on a CAGR basis compared to Q4 of 2019. We believe this comparison better reflects the underlying strength of the business and we are very pleased with our development over these past two years. Operating profit came in at $315 million, down 15% over the prior year. Gross margin declined due to pressure that every business is facing notably higher freight costs. In addition, operational expenses increased for a variety of reasons, including higher associate headcount, increased compensation costs and the increase of certain operational expenses as business activities normalize. Even with these headwinds operating margin remain very strong at 22.6%. 2021 was our sixth consecutive year of revenue and operating income growth establishing new records for the company. Revenue increased 19% to nearly $5 billion and operating income grew 16% exceeding $1.2 billion, each segment delivered strong double digit revenue growth. I'm very proud of what we accomplished, especially considering the challenging operating environment everyone is facing. The availability of electronic components has been a major topic of conversation over the past year. While we are not always able to get everything we need, we believe we've been very effective in managing the situation as evidenced by our results. Our vertically integrated business model gives us greater levels of agility and flexibility in this dynamic supply chain environment. However, it's the creativity, determination and teamwork of our associates that made these accomplishments possible. I'm very proud of our associates and I'm grateful for all they have done. Looking forward we are encouraged by the opportunities of the new year. We have a great lineup of recently introduced products with additional introductions planned throughout the remainder of the year. We anticipate consolidated revenue will increase approximately 10% to $5.5 billion driven by new product introductions and strong market trends in many of our segments. Our results and outlook for the new year give us confidence to propose a 9% dividend increase, which will be considered by shareholders at the upcoming annual meeting. Before moving on to segment highlights, it's important to share context on how we see the business and markets evolve in 2022. The pandemic drove additional demand in certain product categories, which is starting to normalize from peak levels. This will create additional dynamics to consider for the coming year. And I will note these as I cover each segment. The nuances of individual categories are not a major concern for us, rather, it's our strategic focus on diversification that brings many opportunities for growth, which is the basis for our outlook for 2022. Starting with the Fitness segment, revenue increased 16% for the year as strong demand for advanced wearables and cycling products fueled our growth. Full year growth and operating margins were 53% and 24% respectively, resulting in operating income growth of 17% over the prior year. In the fourth quarter Fitness revenue was flat over the prior year as growth in wearables was offset by lower revenue in cycling. Product differentiation is a key factor in our ability to compete in the market for wearables. Lily is a great example with its small form factor, appealing design and unique display that hides when not in use. Customers buying Lily are overwhelmingly new to the Garmin brand, demonstrating the power of differentiation to attract new customers. The cycling category has more than doubled over the past two years, fueled by pandemic-driven demand for both indoor and outdoor cycling products. The market is starting to normalize at levels below recent peaks, but well above pre-pandemic levels. With this in mind, we expect Fitness revenue to be flat year-over-year, as grow growth and wearables is offset by lower revenue in cycling products. In addition, we expect revenue to decline in the first half as we compare against stronger periods from the prior year. In the back half of the year, we expect to return to growth as the cycling market stabilizes and with contributions from new products. In the Outdoor segment, full year revenue increased 14% with growth across multiple categories, driven by strong demand for adventure watches. Full year gross and operating margins were 65% and 38% respectively resulting in operating income growth of 9%. In the fourth quarter, Outdoor revenue decreased 8% primarily due to component constraints in our traditional handheld and dog product categories. We ended the year with unusually high back orders, which were pushed into the new year. On January 18 we announced sweeping updates to our fēnix adventure watch series featuring a distinctive new design and a touchscreen display. We also announced the all-new EPIX with a bright AMOLED touchscreen display and class leading battery life up to 16 days. Last week, we announced the all-new Instinct 2 Series in two sizes, which will expand the addressable market for this unique adventure watch. Select Instinct 2 models with solar technology can operate indefinitely using only the power of the sun, which is a breakthrough achievement in the smartwatch market. Demand for these new products has been very strong and we expect them to be a significant catalyst for growth in the coming year. With these things in mind, we anticipate outdoor revenue will increase approximately 20% for the year. Looking next at the Aviation segment, full year revenue increased 14% due to contributions from both OEM and aftermarket categories. Full year gross and operating margins were 73% and 27% respectively, resulting in operating income growth of 40%. In the fourth quarter, Aviation revenue was up 13%, driven by growth in OEM categories. Aftermarket sales were flat due to component supply constraints. Aviation also ended the year with unusually high levels of back orders, which carry into the new year. The pandemic highlighted the unique value proposition of general aviation. Aircraft OEMs are reporting robust orders from both new and existing customers. Aftermarket demand is also strong as customers invest in new cockpit systems. We expect these to ends to drive revenue growth of 10% for the year with revenue exceeding the peak we experience during the ADS-B mandate. We expect incrementally stronger growth in the back half as production levels increase over the course of the year. Moving to Marine, the segment delivered another year of impressive results. Revenue increased 33% with broad-based growth across all categories, led by strong demand for chartplotters. We benefited from both market expansion and share gains driven by our strong product portfolio. Full year growth in operating margins were 57% and 28% respectively, resulting in operating income growth of 39%. In the fourth quarter, Marine revenue increased 14% as the strong trends we experienced throughout the year continued. We recently acquired Vesper Marine, a company specializing in the design of modern VHF radio systems for the Marine market. Looking forward, we anticipate that strong interest in boating and fishing will remain strong. Boat builders continue to report strong sales and retail partners are preparing for another year of growth. With these things in mind, we anticipate revenue from the Marine segment will increase 15% surpassing the $1 billion threshold for the year. Moving finally to the auto segment. Full year revenue increased 26% with contributions from both auto OEM and consumer auto categories. Full year gross margin was 39% and we recorded an operating loss of $71 million, driven by investments in auto OEM programs. In the fourth quarter, auto revenue was up 21% with contributions from consumer specialty categories and new OEM programs. In consumer auto, we continue to launch new specialty categories that lead to growth opportunities. At CES, we announced the tread series for the side-by-side vehicles, bringing off-road specific features and inReach communications to the side-by-side market. Last week, we announced the Instinct Dezl Edition, the first smart watch designed specifically for the trucking market. BMW recently unveiled their vision for in-car entertainment, bringing a truly cinematic experience into the vehicle. This immersive entertainment system is powered by a multimedia computing platform designed and built by Garmin. We continue to invest heavily to bring this and other BMW systems to market. The investment has been more insignificant than anticipated and these investments are expected to continue throughout the remainder of the year as we fulfill our obligations to BMW. This will result in auto OEM operating loss for the year that is roughly comparable to that of 2021. We expect to start production of the next-generation BMW computing platform later this year at low volumes with a more meaningful production ramp occurring in 2023. With these things in mind, we expect total auto revenue to grow approximately 5% for the year. So that concludes my remarks. Next, Doug will walk through additional details on financial results and our updated guidance. Doug?

Operator:

Thank you. [Operator Instructions] Our first question comes to Nik Todorov of Longbow Research. Your line is open.

Cliff Pemble:

Yes. Nik, we have a diversified business. And so, each segment and sometimes within each segments different product categories have different considerations, when it comes to pricing. We’re looking at a combination of both more broad price increases where we are able as well as resetting product pricing as we introduce new products. I think that’s most of what I would probably comment on right now and I think it will take some time for some of these changes of course, to come through, but I’m confident that we’ll be able to see a difference as time goes on.

Cliff Pemble:

Yes, I think component constraints have been a challenge for a while now, as I mentioned in my remarks, vertical integration is a huge differentiating factor for us, because we’re able to use alternative components and we’re able to redesign things when we need to. And we have maintained very good relationships with suppliers. They’re under a lot of pressure at this time too. And they certainly get a lot of people beating them up. We try to focus on relationships. But that said, particularly in aviation, you mentioned end of life as a potential issue. That’s really not a new thing in aviation. I think avionics designs tend to have longer life cycle. So consequently, we’ve dealt with that issue for a long time and we manage through that mostly through a combination of redesigns and also safety stock. So again, I think we’re able to handle this situation better than most because of our strong R&D and our focus on vertical integration.

Doug Boessen:

Sure. So yes, percentage of sales for the full year and looking at the different categories, I’ll talk about it on the new methodology from that standpoint. That’s the way we’re reporting in 2022 and recasting 2021. So, we expect, on overall operating expenses as a percentage of sales year-to-year probably about 120 basis point increase year-over-year. And looking at the various categories first advertising, we expect advertising as a percentage of sales to be up slightly, maybe about 10 basis points. And looking at R&D, we expect that to be up probably about 40 basis points as a percentage of sales. There we’re continuing to make investments and head count as well as compensation related items impacting R&D. Then in SG&A we expect that to be up about 70 basis points as a percentage of sales year-over-year. There the big driver is primarily IT costs, but also, we’ll see increased costs in other parts of our business, such as product support, operations, just because of increased volume as well as more consumers and users.

Doug Boessen:

Thank you.

Paul Chung:

Hi. Thanks for taking my questions and very nice quarter. So just on margins, given the very strong kind of outdoor aviation, revenue guide would’ve thought that kind of overall margins would’ve seen some benefits there, even with the kind of negative auto contribution this year. So, can you quantify maybe the freight components kind of headwind baked in the margin guide?

Paul Chung:

Got you. And then just on outdoor, you know, with handheld and dog products maybe pushing into 2022, should we expect a little less seasonality in 1Q as a result. And then if you could expand on the outdoor guide, which is quite impressive. What’s driving the confidence in that guide and how has the fēnix refresh been received?

Paul Chung:

And then lastly, on aviation, your guide implies, revenues now, well above the record 2019 levels on ADS-B, but what’s driving the guide this year? How’s the product portfolio evolved? And then how should we think about operating margins for 2022 in aviation? Can we end the year kind of approaching that 30% or exceed that? Thanks.

Operator:

Thank you. Our next question comes with Jeff Harwin of Deutsche Bank. Your line is open.

Cliff Pemble:

Well, I think Jeffrey, the opportunity in auto OEM, of course, is the large scale that, that comes with these big programs. So that’s what we’ve been investing to bring to market. As I mentioned they do come with a different margin profile that hasn’t really been our concern relative to the rest of the business, because we’re focusing on the revenue growth and the scale opportunity. But the challenge for us in going forward, of course, is proving that we can get that scale and also be profitable in the business.

Cliff Pemble:

Yes, I think your question is interesting. I – we’re not here, of course, to talk about specific names, but I think I understand your comment. And I would say that our indoor cycling products are very different from some of the headline companies that have been talked about a lot recently. Our products are focused on athleticism and performance. And we're not really in the spin bike business, which has been hit pretty hard by people returning to gyms. But in terms of a pull in there, there probably was some, people got interested in those kinds of products. So, they did equip their bikes, they did equip their homes with training devices, but as I mentioned we're seeing the market sell out, normalize around levels above that of 2019, which was the last normal year in that cycle. So, there's some high channel inventory right now, not necessarily specific to our product lines, but every trainer maker rushed into the market and filled the channels. And so that will take some time to work through. We expect probably the better part of this year before things really normalize.

Cliff Pemble:

Thank you.

Ben Bollin:

Good morning, everyone. Thanks for taking the question. Cliff, I guess it's been dance [ph] around a little bit, but when you look at the spread in terms of your 2022 guidance for outdoor and fitness, there is widest gap we've seen since, I guess, 2017 and being about a 35-point spread between the two in terms of year-over-year growth. But I guess I'm interested in your thoughts on the high-end wearables within the segments, do you see any secular changes out there which are moving the difference between the two outlooks in the growth rates or going back to that last question, do you think it's just inventory in cycling, what's driving that spread?

Ben Bollin:

Okay. and the last one for you is, if you look through the elevated auto OEM investment that are happening right now, when you're on the back-end of this, when you're into 2023, any thoughts on what a normalized margin might look like within that business over time?

Ben Bollin:

Great, thanks.

Operator:

Thank you. Our next question comes from Will Power of Baird. Your line is open.

Cliff Pemble:

Yes, I think, we put out our view of the year based on a high level of confidence that we can achieve what we say. I think that we’ve seen a continual strength in the advanced wearable. That’s really all products with GPS smartwatch capability in our fitness product line. So, we – that includes runner that includes Venu and vívoactive and all those kinds of products. We’re coming off of strong releases from last year and some of the advanced consumer wearables, and then our running products have refreshes coming as well. So, all of those things coming together, we feel like will be positive things. And when you consider that events particularly races like 10-Ks, half marathons, marathons have been mostly canceled during the last two years as some of those start to come online, we think it will drive additional interest in running products.

Cliff Pemble:

In terms of a potential pull forward in marine? It’s always a possibility, I suppose, but in general, the marine market has been very constrained with the supply of boats, whether it’s new boats from manufacturers or used boats, people are not letting go of their boats. And so consequently they’re equipping their boats, there are a lot of boats out there and use that have very old equipment. These are long lived assets on the boats. So, there’s plenty of opportunity for retrofit in the market. And as the new boats are built, many of them are equipped with government products. And so, we believe that the growth opportunity in marine is still very good. In terms of Vesper just quickly comment on that. I would say that it’s a technology and engineering acquisition for us. So, it’s not material in terms of revenue or cost structure, but the group had very significant design capabilities in the area of VHF radios. And so that’s an area we want to build our capability in.

Cliff Pemble:

Thank you.

Erik Woodring:

Hey guys, thanks for taking my question. Maybe if we just stay on marine for one second. Can you help us just better understand how the drivers of the marine business are changing at all meaning, we know there are still backlogs that’s in the OEM business, that’s typically a smaller part of your marine business, but what do you just seeing in 2022 versus 2021 that give you the confidence in the 15% growth?

Erik Woodring:

Okay. Thank you. And then maybe if we just touch on the cost side, I guess based on the kind of the revenue and segment revenue, and then total gross margin disclosure, we do have to assume that gross margins are down across most segments. Is that fair to think, or should it be more acute in certain segments? And then on the operating side, just, is the pressure mostly blamed on investments and autos or again is there investment outside of autos that is going to be more elevated in 2022 relative to say 2021?

Erik Woodring:

Okay. Thanks guys. I appreciate it.

Operator:

Thank you. Our next question comes from Ron Epstein of Bank of America. Your line is open.

Cliff Pemble:

Good morning.

Cliff Pemble:

Well, we're prepared with plenty of factory capacity. We have always focused on a strong supply chain in aviation so that we can meet the needs of our customers. And as I mentioned in my remarks, absolutely we see the demand from the OEM side and they're reporting robust orders and so we feel like we're very prepared for the increases that they're looking at.

Cliff Pemble:

Sure.

Cliff Pemble:

Well, we're always working on things and of course we can't share anything in advance, but we're always working with new customers and new platforms.

Cliff Pemble:

They're. I suppose, they're similar in some respects, but they're really very different and they probably appeal to different users, but they've both been very strong. We're especially pleased of course with epix. I think people have embraced that very quickly and in both of those product lines, we're seeing very strong demand, which exceeded our expectations.