Garmin Ltd. (GRMN) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Garmin Limited Second Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Teri Seck, Director of Investor Relations. Please go ahead.

Good morning. We would like to welcome you to Garmin Limited's Second Quarter 2026 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/investors. An archive of the webcast and related transcript will also be available on our website. . This earnings call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, foreign currency, tariff impacts, future demand for our products and plans objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble.

Thank you, Terry, and good morning, everyone. As announced earlier today, Garmin achieved another quarter of record-breaking financial results and a continuation of the positive trends we've been experiencing over the long term. Consolidated revenue increased 11% to $2.02 billion. We experienced robust expansion in consolidated gross and operating margins. the majority of which is attributable to favorable product mix. Margins also benefited from a $21 million tariff refund recognized in the second quarter. Even when excluding this benefit, our gross margin performance was impressive by any historical comparison, reflecting the strength of our product lines, our vertically integrated business model, and exceptional execution by our global team. Operating income increased 30% to $616 million, and pro forma EPS increased 29% to $2.81. Our first half performance exceeded expectations and gives us confidence to raise our full year 2026 guidance. We now expect 2026 revenue of approximately $8.05 billion and pro forma EPS of $10 per share. Services have been an area of strategic focus in recent years with each business segment pursuing unique opportunities to grow service revenue over the long term. We recently announced the strategic acquisition of Training Peaks and train heroic, which are leading endurance and strength training platforms connecting coaches to athletes who wish to maximize the impact of their training effort. We are very excited to welcome the Training Peaks and train heroic teams to our fitness segment and look forward to all that we can accomplish together. Doug will discuss our financial results in greater detail in a few minutes, but first, I'll provide a few remarks on the performance of each business segment. Starting with fitness. Revenue increased 25% to $757 million, a new second quarter record driven by growth across all product categories, led by continued strong demand for advanced wearables. Gross and operating margins expanded to 64% and 37%, respectively, resulting in operating income of $277 million. During the quarter, we launched the Forerunner 70, bringing comprehensive running features and a bright AMOLED display to our entry-level running lineup and the Forerunner 170 with additional running and training features. We also released our global annual global running and cycling data report that provides insights into the fitness activity [indiscernible] our customers and their athletic performance. More recently, we announced the Circa Smart band, a screenless wearable that offers rich wellness and fitness insights without requiring a subscription, which further expands the addressable market for our wellness devices. The Fitness segment has achieved outstanding performance over the long term. We are very pleased with these results and continue to expect the Fitness segment will be the strongest contributor to 2026 consolidated growth. Moving to outdoor. Revenue decreased 2% to $483 million, primarily due to consumer auto and adventure watch product categories. Gross and operating margins expanded to 69% and 34%, respectively, resulting in operating income of $164 million. The segment delivered improved profitability and operating income growth through favorable product mix and disciplined execution. We recently expanded our golf lineup with the launch of the approach Z10 a compact laser rangefinder that sends precise distances to compatible devices, bringing a high fidelity experience to game play. We also published our annual trends in golf data report, highlighting the participation in the sport is up and players are improving in nearly every shot category. Looking forward, we expect to achieve stronger revenue performance in the back half of 2026 due to the timing of product launches, resulting in improved full year growth when compared to 2025. Looking next at Aviation, revenue increased 8% to $269 million, reflecting growth in both OEM and aftermarket product categories. Gross and operating margins were 75% and 27%, respectively, resulting in operating income of $72 million. For the 11th consecutive year, we were named Best Supplier of the Year by Embraer, who recognized us for outstanding performance as a supplier of electrical and electronic systems for their Phenom business jets. This recognition validates the long-term investments we have made to create innovative products and build strong relationships with our customers. During the quarter, we launched the D2 Mach 2 Pro, our first Aviator smartwatch with inReach technology. We recently announced access an all-new family of highly integrated and scalable cockpit display solutions for a broad range of certified and experimental aircraft models. Axis combines navigation, communication, and audio functions into a single platform, reducing installation time, complexity and cost while delivering a monitoring cockpit experience. Access reflects decades of Garmin Innovation and sets a new standard for integrated flight displays. We are very pleased with the performance of aviation during the first half of the year and expect to achieve continued growth throughout the remainder of the year. Turning to the Marine segment. Revenue increased 14% to $341 million, with growth across multiple product categories. Gross and operating margins expanded to 61% and 29%, respectively, resulting in operating income of $100 million. The primary driver of margin expansion was the tariff refund recognized during the quarter, although product margins improved even when excluding this benefit. During the quarter, we launched the Garmin Signal VHF Marine radio which offers a color touchscreen and new features to enhance communication on the water. We recently announced the next-generation live Scope 2 sonar system, which offers improved range and clarity over previous live scope systems. LiveScope 2 received the Best Electronics award at the recent ICOS trade show validating our superior live scope technology and further separating us from others in the market. We are pleased with the performance of Marine during the first half of the year and believe we are on track to achieve full year growth that is consistent with that of the prior year. And moving finally to the auto OEM segment revenue increased 1% to $172 million, with growth primarily driven by domain controllers. Gross and operating margins were 22% and 2%, respectively. The gross margin expansion was primarily due to year-to-date cost recoveries that were recognized as revenue during the quarter. Operating income was positive on a GAAP accounting basis at $3 million in the quarter, driven by improved gross profit and lower research and development expenses. While we're excited about the positive quarter, we are expecting revenue to decline and the return to an operating loss in the back half of 2026, leading up to the launch of our next major program with Mercedes Benz in 2027. Wrapping up, I'm very proud of what our team has accomplished. We delivered strong growth, expanded profitability, invested in innovation, completed a strategic acquisition and introduced new products across nearly every segment of our business. As we look to the second half of 2026, our product portfolio is strong and we are confident in the opportunities that lie ahead. We believe our success is driven by our commitment to create products that are essential to our customers and supporting them with industry-leading quality, reliability and innovation. That concludes my remarks. Next, Doug will walk you through additional details of our financial results. Doug?

Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our second quarter financial results, provide comments on the balance sheet, cash flow statement, taxes and updated guidance, close to revenue of $2.022 billion for the second quarter, representing 11% increase year-over-year. Gross margin was 62.4%, a 360 basis point increase from the prior year quarter. Increase was primarily driven by favorable product mix and tariff refunds of approximately $21 million. . Operating expense as a percentage of sales was 32%, 80 basis point decrease. Operating income increased 30% to $616 million. Operating margin expanded to 30.4%, 140 basis point increase compared to prior year quarter. Our GAAP EPS was $2.80. Pro forma EPS $2.81. I Next, look at our second quarter revenue by segment and geography. During the second quarter, we achieved consolidated double-digit growth, led by the fitness segment with 25% growth, followed by Marine segment to 14% growth. By geography, we achieved growth in all 3 regions, led by 13% growth in EMEA, while by 12% growth in Americas and 7% growth in APAC. Looking next on operating expenses. Research and development expense increased $27 million, approximately 10%, while SG&A expenses increased $25 million, approximately 8%. [indiscernible] were primarily driven by personnel-related expenses. [indiscernible] highlights on the balance sheet, cash flow statement and taxes. In the quarter with cash, marketable securities approximately $4.4 billion. Accounts receivable increased both year-over-year and sequentially to approximately $1.2 billion on a seasonally strong sales in the second quarter. Inventory increased year-over-year sequentially to approximately $2 billion. During the second quarter of 2026, we generated free cash flow of $276 million, $148 million increase from prior year quarter. Capital expenditures for the second quarter of 2026 were $128 million, approximately $82 million higher than the prior year quarter. We expect full year 2026 free cash flow to be approximately $1.4 billion with capital expenditures of approximately $550 million. During the second quarter 2026, we paid dividends of approximately $202 million and purchased $43 million of company stock. At quarter end, we had approximately $448 million remaining share repurchase program authorized through December 2028 with an effective tax rate of 16.8% compared to 16.5% in the prior year quarter. Increase in effective tax rate primarily due to income mix by jurisdiction. Turning next to our full year guidance. Based on our performance during the first half 2026, our positive outlook for the remainder of the year, we now estimate revenue of approximately $8.05 billion compared to our previous guidance of $7.9 billion as a result of year-to-date performance we have increased our gross margin estimate to approximately 59.7% to 120 basis points higher than our previous guidance and is 100 basis points higher than the full year 2025 gross margin. [indiscernible] results have not been significantly impacted by higher memory costs. However, we do expect higher memory costs impacted second half, which has been factored into our full year gross margin guidance. Updated gross margin guidance does not include any additional benefit related to tariff refunds side of benefit already recorded in the second quarter. We expect our operating margin to be approximately 27%, 150 basis points higher than our previous guidance. Also, we expect a reform effective tax rate of 16.5% with our previous guidance of 16%, increases due to income mix by jurisdiction. We expect pro forma earnings per share of approximately $10 for our previous guidance [ $9.35 ]. This concludes our formal remarks. Rebecca, can you please open the line for Q&A.

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

Really nice performance and guide. Cliff, -- congrats on the circuit launch last week. Clearly, you're taking kind of the expertise you have broad-based and risk-based wearables and expanding it to new kind of form factors or adjacencies. Just maybe 2 questions. One a clarification. Just I want to make sure to get the kind of most advanced features excuse me, AI software features on the circa, the users still need the subscription to connect us. I just want to make sure that's correct. And then second, how far are you willing to go when we think about adjacent form factors. Just as I think about the broad wearables market, there are other wearable form factors having success. Is it your intention to expand to other form factors? And just kind of your thoughts on why you would or would would or would not go that direction?

Yes. Thank you, Erik. In terms of circa and the features, what we're trying to communicate there is that circa comes with all of the features that people have expected and get in any garment wearable on Garmin Connect. They can certainly add the additional features of Connect, including the AI and the nutrition tracking and other features that will add in the future. I think our main point and one of the things that we felt was a unique differentiator for us is the fact that our product is so richly featured right out of the box compared to competitors. In terms of other form factors, I won't comment specifically on our product road map, but as we've demonstrated over time, we -- we tend to move into categories and explore new things. And so our product road map is very rich, and I would expect that we'll see additional new product in the future, just like you've always seen from us.

Okay. All right. That's helpful. And then maybe just as my follow-up, I guess maybe the broad question is just how sustainable is kind of this broad-based margin expansion that we're seeing. It's incredibly impressive, obviously, even when you exclude the tariff refund. And what I'm really trying to under is -- and you talk a lot about mix as a tailwind. Can you just be a little bit more specific? When you say mix, is this kind of lower cost products mixing in? Is this higher priced products mixing in? Is there anything within mix that is kind of notable that you would call out that is sustainable tailwind. I just want to make sure I understand when we're talking about mix, I understand just how sustainable that trend could be as we think not a quarter or beyond, but like 1, 2, 3 years beyond where we are from now.

With regard to margin, I would say that it's never our strategy to go backwards. But that said, everyone is facing higher costs, especially in the area of memory. And so we recognize that's a headwind. We're going to use the same playbook with memory as we did with tariffs in managing the business and trying to provide outstanding performance. So we don't rule anything out, and we'll continue to leverage everything we have in our toolbox to be able to mitigate the cost of memory. In terms of mix, I think it is somewhat of a generic term. On the obvious side of that, it's when we reduce or release new products in our families that come out at higher margins. And so when those new products start to become a greater part of the overall sales mix. We see higher margins in the segments because of that. And then there's also some improvements in the basic product cost side of things as well that we've been able to achieve through our vertical integration and leveraging our scale.

Your next question comes from David McGregor with Longbow Research.

This is Joe Nolan on for David. I just wanted to ask a follow-up on the costs there. You talked about memory chips briefly. You guys obviously put up a strong margin performance in 2Q, but can you just talk about how to think about price cost as we move into the second half and you have higher memory chip cost, but if there's any other raw materials or other buckets to keep in mind?

I think we've benefited from having a strategic inventory of memory that we've been using throughout the year. So the higher costs that are in the market today have not yet impacted our financials. We do expect that to start to impact us in the back half, and we've included that in our guidance. But in terms of other components, I think everything's under pressure right now. We're seeing far less attention in some of those other component categories, far less movement. But I think everything is certainly under pressure because of the AI demand. But again, we're managing that in the same way we manage any other ripple in the dynamics. Again, I would call people's attention to our response around the tariffs and how we've been able to manage the business to be able to provide outstanding performance.

Got it. And then on the auto OEM business, you have the current air pocket between contracts. Just wondering if you could talk about how to think about second half quarterly cadence on revenues? And just remind us on the timing of the upcoming contract, if anything has changed there?

Yes. So we do expect back half revenue to decline versus 2025 as we've reached the peak of our BMW volumes. And we are on track in preparing for the launch of the next program, a major program with Mercedes-Benz in early 2027 as those products start to come up with our production line. So we expect 2027, would be a year that auto OEM would again return to growth.

Your next question comes from Akansh Chohan with JPMorgan.

Yes. This is [indiscernible] from JPMorgan. Maybe for my first question, I was just curious, I think late last year, you announced a partnership around savings accounts and I'm just curious if you're actually starting to see any tangible traction in terms of that driving any demand across your product portfolio? And how you guys are thinking about that opportunity on building and whether we can start to see any near-term benefits from that? And then I do have a follow-up.

Okay. Sorry, I think the line was a little garbled when you mentioned the partnership. Could you clarify again?

Yes, the HSA reimbursement partnership, I believe, October of last year, maybe you announced some partnerships on that front.

Yes, the [indiscernible] partnership. And that has been a great new distribution channel for our products and and we don't quantify results by customer, but it was a great way to expand our reach, especially for people that want to purchase a high-quality wearable using HSA funds.

Got it. And then maybe, Cliff, just wanted to get you to talk about the acquisitions you mentioned in your prepared remarks, training peaks and train heroics. How should we think about [indiscernible] 2 in terms of your long-term strategy for the company? Like how are you thinking about the across these platforms playing out in the context of both your product portfolio as well as potentially Connect plus and how you're thinking about that unfolding for the company?