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    Garmin Ltd (GRMN)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$103.25September 28, 2023
    Final Price$128.76December 28, 2023
    Price Change$25.51
    % Change+24.71%

    What went well

    • Garmin is experiencing strong momentum in its outdoor and fitness segments, with an incrementally more positive outlook due to their current product lineup and roadmap.
    • Garmin's auto OEM business is growing significantly, with expected revenue expansion and a target of $800 million by 2025. The company is leveraging its strengths and investments to achieve this growth.
    • Garmin is outperforming in the marine segment despite a softer market, gaining market share, and expects to continue outperforming in 2024, with new revenue from JL Audio expected to contribute about 15% of segment revenue.

    What went wrong

    • Garmin is experiencing economic challenges in key Asian markets, particularly China, where performance has been only "okay" due to the challenging economic situation; in India, the market is small, and efforts to reset their approach are just beginning.
    • Garmin's fastest-growing segment, the Auto OEM business, is also its lowest gross margin segment, which may lead to overall margin compression as this segment grows larger; this shift could impact the company's profitability.
    • The marine market declined by approximately 10% in 2023, and Garmin acknowledges continued softness in the market; although they expect to outperform competitors, reliance on a declining market could present risks to growth.

    Q&A Summary

    1. Auto OEM Revenue and Margin Outlook
      Q: Can you overachieve on $800M auto OEM target?
      A: We rely on manufacturers' forecasts, which can vary as production dates approach, so we don’t project that far out. Our auto OEM margins are expected to continue declining, targeting a mid-20% margin range for the segment, based on a mix of high-volume, lower-margin products and lower-volume, higher-margin speculative products.

    2. Automotive Profitability Timeline
      Q: When will automotive segment reach profitability?
      A: We expect to turn profitable in the second half on a quarterly basis, exiting with gross margins in the mid-to-upper teens and operating margins in the mid-single digits. However, we don’t expect full-year profitability in 2024 but will work towards it in 2025.

    3. Capital Return Strategy
      Q: Will you front-load the new $300M buyback?
      A: We completed our previous $300 million authorization, and the Board has authorized an additional $300 million over the next 3 years. The cadence of share repurchases will depend on market and business conditions at the time.

    4. Outdoor and Fitness Outlook
      Q: Any changes in outlook for outdoor and fitness?
      A: We demonstrated good momentum in Q4 and the back half of 2023 in both outdoor and fitness. We are now incrementally more positive on these segments, considering our current product lineup and the roadmap ahead.

    5. Marine Segment Dynamics
      Q: How are marine end markets and OEM vs. aftermarket?
      A: The marine market declined about 10% in 2023, but we outperformed with market share gains. In 2024, we expect to continue outperforming the market. Aftermarket remains the larger portion, influencing us more. Any softness should be offset by new revenue from JL Audio, expected to be about 15% of segment revenue for the year.

    6. Consumer Demand and Holiday Sales
      Q: How was the consumer response during holidays?
      A: Consumer response was better than expected and seemed quite strong. Our sell-through was very good, driving increased production in Q3 and Q4 to meet demand.

    7. Market Share in Smart Wearables
      Q: Did competitor issues boost Garmin wearables?
      A: While we're unsure if competitor issues were a major driver, our products are performing well due to their strong features, including health and wellness monitoring and activity performance. We may also be gaining market share in wearables.

    8. Aviation Aftermarket Decline
      Q: What caused lower aviation aftermarket revenue?
      A: The aviation aftermarket has a narrow distribution through specialty installers. Following supply chain challenges in 2022, dealers increased inventory. In 2023, they began reducing inventory levels, which we expect to continue into 2024.

    9. Monetizing Connect App
      Q: Will you offer premium tiers for the Connect app?
      A: We're exploring options to monetize our app base cautiously, respecting users' trust in our data security and privacy. Premium features could lead to premium tiers in some apps, similar to what we've done in golfing.

    10. Switzerland Tax Rate Increase
      Q: When does the tax rate change to 15.5%?
      A: Switzerland passed legislation increasing the combined tax rate to 15%, effective beginning of 2024. We've guided to a 15.5% pro forma tax rate for the full year, reflecting this change and global minimum taxes.

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