Garmin Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2022

Key Takeaways

  • Record revenue growth: Garmin delivered Q4 revenue of $1.39 billion (+3% YoY) and full-year revenue of nearly $5 billion (+19% YoY), marking six consecutive years of record results.
  • Margin pressure persists: Gross margin declined due to elevated freight costs and higher operational expenses, driving a 15% drop in operating profit despite a still-strong 22.6% operating margin.
  • 2022 guidance: Garmin expects consolidated revenue to rise ~10% to $5.5 billion on new product introductions and market trends, and plans a 9% dividend increase to $2.92 per share.
  • Outdoor segment momentum: After Q4 supply constraints, new Fenix 7, Epix and Instinct 2 wearables have seen strong demand, and Garmin forecasts ~20% revenue growth in Outdoor for 2022.
  • Auto segment revenue climbed 26% in 2021 but incurred a $71 million operating loss due to heavy BMW platform investments, which are expected to continue through 2022 before meaningful volume ramps in 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Garmin Q4 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Thank you for standing by, and welcome to the Garmin Limited 4th 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. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms.

Operator

Teri Seck, Director of Investor Relations. Ma'am, you may begin.

Speaker 1

Good morning. We would like to welcome you to Garmin Limited's 4th Quarter and Fiscal Year 2021 Earnings Call. Please note that the 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 transcript will also be available on our website. This earnings call includes projections and other forward looking statements regarding Garmin Limited And it's business.

Speaker 1

Any statements regarding our future financial position, revenues, earnings, gross margins, operating margins, future dividends or share repurchases, Market shares, product introductions, future demand for our products and plans and 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 ks File with the Securities and Exchange Commission. In particular, there is significant uncertainty about the duration and impact of the COVID-nineteen pandemic. This means that results could change at any time and any statement about the impact of COVID-nineteen on the company's business results and outlook is the best estimate based on the information available as of today's date.

Speaker 1

Presenting on behalf of Garmin Limited this morning are Cliff Pimble, President and Chief Executive Officer and Doug Beson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimbles.

Speaker 2

Thank you, Terry, and good morning, everyone. As reported earlier today, We ended 2021 with 4th quarter revenue of $1,390,000,000 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 2 years. Operating profit came in at $315,000,000 down 15% over the prior year.

Speaker 2

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 remained very strong At 22.6 percent, 2021 was our 6th consecutive year of revenue and operating income growth, establishing new records for the company. Revenue increased 19% to nearly $5,000,000,000 and operating income grew 16%, exceeding $1,200,000,000 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.

Speaker 2

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 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 $5,500,000,000 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.

Speaker 2

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.

Speaker 2

Full year gross and operating margins were 53% And 24%, respectively, resulting in operating income growth of 17% over the prior year. In the Q4, 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 Lilly are overwhelmingly new to the Garmin brand, demonstrating the power of differentiation to attract new customers.

Speaker 2

The cycling category has more than doubled over the past 2 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 growth in 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.

Speaker 2

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 Q4, 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 18th, We announced sweeping updates to our Fenix Adventure Watch Series featuring a distinctive new design and a touchscreen display.

Speaker 2

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 2 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.

Speaker 2

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 73% 27%, respectively, resulting in operating income growth of 40%. In the Q4, 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 backorders, Which carry into the New Year.

Speaker 2

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 trends to drive revenue growth of 10% for the year, With revenue exceeding the peak we experienced 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.

Speaker 2

Full year gross and operating margins were 57% 28%, respectively, resulting in operating income growth of 39%. In the Q4, 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 the strong interest in boating and fishing will remain strong. Boatbuilders continue to report strong sales and retail partners are preparing for another year of growth.

Speaker 2

With these things in mind, we anticipate revenue from the Marine segment will increase 15%, surpassing the $1,000,000,000 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 $71,000,000 driven by investments in auto OEM programs. In the Q4, 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.

Speaker 2

Last week, we announced the Instinct Diesel Edition, the first smartwatch 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 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 significant than anticipated And these investments are expected to continue throughout the remainder of the year as we fulfill our obligations to BMW.

Speaker 2

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.

Speaker 2

Doug?

Speaker 3

Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our Q4 and full year financial results. We'd like comments on the balance sheet, cash flow statement, Taxes and 2022 guidance. We posted revenue of $1,300,000,000 for the 4th quarter, representing 3% increase year over year.

Speaker 3

Gross margin was 55.5%, 300 basis point decrease from the prior year quarter. Decrease was primarily due to higher freight costs and favorable impact of foreign exchange rates. Operating expense as a percentage of sales was 32.8%, 170 basis point increase. Operating income was $315,000,000 A 15% decrease. Operating margin was 22.6%, a 4 80 basis point decrease from the prior year.

Speaker 3

Our GAAP EPS was $1.48 pro form a EPS was $1.55 a 10% decrease from the prior year pro form a EPS. Looking at the full year results, we posted revenue over $4,900,000,000 Representing a 19% increase year over year. Gross margin was 58%, a 130 basis point decrease from the prior year. The decrease was primarily due to higher freight costs. Operating expense as a percentage of sales was 33.6%, 50 basis point decrease.

Speaker 3

Operating income was $1,200,000,000 a 16% increase. Operating margin was 24.5%, 70 basis point decrease from the prior year. Our GAAP EPS was $5.61 pro form a EPS was $5.82 13% increase from the prior year pro form a EPS. Next, look at 4th quarter revenue by segment And geography. During the quarter, we achieved consolidated growth of 3% with double digit growth in the Aviation, Marine and Auto segments, partially offset by decline in the Outdoor segment.

Speaker 3

Fitness segment is relatively flat year over year. Our geography, 8% growth in APAC and 5% growth in Americas was partially offset by decline of 2% in EMEA, Negatively impacted by foreign exchange rates during the quarter. For the full year 2021, We achieved 19% consolidated growth with solid double digit growth in all of our 5 segments. By geography, we achieved double digit growth All three regions, led by 21% growth in APAC, followed by 19% in Americas and 18% Looking at operating expenses. 4th quarter operating expenses increased by $37,000,000 or 9%.

Speaker 3

Research and development increased $22,000,000 year over year, primarily due to engineering personnel costs. SG and A increased $15,000,000 compared to prior year quarter, primarily due to increases in personnel related expenses, information technology costs. Advertising expense was consistent with the prior year quarter. A few highlights on the balance sheet, cash flow statement And dividends. We ended the quarter with cash and marketable securities approximately $3,100,000,000 Accounts receivable increased sequentially to $843,000,000 with strong sales in the 4th quarter and was relatively flat year over year.

Speaker 3

Inventory increased year over year to $1,200,000,000 Increased due to several factors, including preparation for Q1 product launches, Increased levels of indoor cycling products, expansion of our global manufacturing footprint and executing our strategy to increase days of supply To support our increasingly diversified product lines. During 2022, we expect our inventory balance to continue to grow We work to optimize the mix of ocean versus airfreight shipments, to sufficient level of safety stock to mitigate increased lead times and generally manage the supply of raw materials. Turning to Q4 2021, we generated free cash flow of $49,000,000 For the full year 2021, we generated free cash flow of approximately $705,000,000 a $245,000,000 decrease from the prior year, primarily due to increased inventory levels and higher capital expenditures. 2022 Expect free cash flow to be approximately $725,000,000 with approximately $310,000,000 of capital expenditures. For 2022, we expect to continue to make investments, platform for growth, including our Taiwan manufacturing facilities, We continue renovation of our later facilities to increase workspace capacity and IT related projects.

Speaker 3

Also, we announced our plans to seek shareholder approval for an increase in our dividend beginning with the June 2022 payment. The proposal of the cash dividend of $2.92 per share or $0.73 per share per quarter, It's a 9% increase from our current quarterly dividend of $0.76 per share. For full year 2021, we reported an effective tax rate 10.3%. Turning next to our full year guidance. We estimate revenue of approximately $5,500,000,000 Increase of 10% over the prior year, double digit growth in 3 of our 5 segments.

Speaker 3

We expect gross margin to be approximately 57.5%, Lower than our full year 2021 gross margin, primarily due to higher supply chain costs and less favorable foreign exchange rates, partially offset by increases We expect an operating margin of approximately 22.8%. The full year pro form a effective tax rate Expect to be approximately 10.5%. This results in expected pro form a earnings per share of approximately $5.90 Finally, I discuss the changes in our methodology for classification of certain expenses and allocation of certain expenses among the segments. Plan to reflect these changes in our reporting for the Q1 of 2022 and prior periods will be recast and formed to the revised presentation. The new expense classification result in less indirect SG and A costs being classified as R and D expense, which we believe will provide a more meaningful representation The costs incurred to support R and D activities, consistent with the way management will use the information in decision making.

Speaker 3

We estimate that approximately $61,000,000 expense As classified as R and D in 2021 will be reclassed as SG and A. Future reports will also reflect a refined methodology to allocate certain SG and A expenses to segments in a more direct manner based on analysis of activity supported by the expenses. We believe this refined allocation approach results in more meaningful representation of segment operating income. We estimate that fitness and outdoor will be allocated more SG and A expenses, resulting in lower operating margin, while other segments will be allocated Less SG and A expenses, resulting in higher operating margin. These changes have no impact on our consolidated operating income or net income.

Speaker 3

This concludes our formal remarks. Valerie, please open the line for Q and A.

Operator

Thank you. Our first question comes from Nick Toretto of Longbow Research. Your line is open. Yes.

Speaker 4

Thanks, and good morning, everyone, and congrats on great execution and results. Cliff, I think I heard You mentioned during the prepared remarks that you're raising prices in some segments. Can you talk in which Categories or segments, are you able to mitigate the rising input cost? And how should we think about the cadence Of debt mitigation throughout the year, I'm assuming in some segments, it's harder to pass through to increase prices immediately.

Speaker 2

Yes, Nick, 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.

Speaker 4

Okay. Got it. And as a follow-up, Can you talk about how are you navigating to the component constraints? I think particularly in Aviation, something we've heard is that Obviously, component lead times have stretched quite a bit, but some components that are used in avionics have been announced as end of life. So I'm just curious, are you facing any redesigning activity?

Speaker 4

And how should we think about potentially that impacting aviation margins in the near term?

Speaker 2

Yes. I think component constraints have been a challenge for a while now. As I mentioned in my remarks, vertical integration It's 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.

Speaker 2

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 cycles. 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.

Speaker 2

So again, I think we're able To handle this situation better than most because of our strong R and D and our focus on vertical integration.

Speaker 4

Got it. Very helpful. And Doug, if I can sneak one in for you. Just can you talk about OpEx puts and takes in 2022? I know you mentioned you're going to be changing the and reallocating expenses.

Speaker 4

But based on the current reported basis, how should we think about OpEx Parts moving as a percent of sales?

Speaker 3

Sure. So, yes, percentage of sales for the full year and looking at the Different categories. Yes, I'll talk about it on the new methodology from that standpoint. That's the way we're reporting in 2022, and we're reviewing our cast in 2021. So we expect on overall operating expenses as a percent of sales year over year, probably about 120 basis point increase year over year.

Speaker 3

Looking at the various categories, 1st, advertising. We expect advertising and sales to be up slightly, maybe about 10 basis And looking at R and D, we expect that to be up probably about 40 basis points as a percentage of sales. There, we're continuing to make investments in headcount as well as compensation related items impacting R and D. Then in SG and A, we expect that to be up about 70 basis points of change 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.

Speaker 4

Got it. Very helpful. Thanks guys.

Operator

Thanks, Alex. Thank you. Thank you. Our next question comes from Paul Chung of JPMorgan. Your line is open.

Speaker 5

Hi. Thanks for taking my questions and Very nice, Brent. So just on margins, given the very strong kind of outdoor aviation Revenue guide would have thought that kind of overall margins would have 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?

Speaker 3

Yes, this is Doug. We don't give a breakout of the different proponents of Gross margin on freight. But can we give you a little bit of background on what's driving that, the 50 basis point decline? So we do Expect to see higher supply chain costs year over year. Freight increased during the year in 2021, so So we're going up against no tougher comps in freight 1st part of the year.

Speaker 3

Also, we will see some headwinds relating to FX also for an exchange rate in there too that will give us some headwinds in there too. So and then as Cliff mentioned, we're looking to Increase selling prices where we can. But as you mentioned, there's a lot of puts and takes, a lot of moving parts in that gross margin. You have, like you've mentioned, some Different things relating to segment mix and there we factored in new product launches, but there overall are still some headwinds on the supply chain side of things and FX That are bringing that, I'll say, from overall basis down about 50 basis points.

Speaker 5

Got you. And then just on Outdoor, 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?

Speaker 5

And How is the Pfenex refresh been received?

Speaker 2

Yes, I think the handheld and dog products, as I mentioned, Paul, the back orders for those, of course, push into the New Year and those were driven by supply constraints that we experienced at the end Of last year, those are getting incrementally better, although we still are taking a wait and see attitude, but we're building and shipping everything That we can. I think that those categories are meaningful, but small in the overall Scheme of the outdoor segment. So I don't think you're really going to notice a lot of seasonality effect because of that. In terms of the guide and the potential impact on From the new adventure watches that we introduced, the reception to those watches has been very strong as I mentioned. And of course, the interest in those products and the momentum from them is behind our 20% Estimate growth for the year.

Speaker 2

So we're very pleased with that and we think we'll have a very good year in outdoor.

Speaker 5

And then lastly on Aviation, your guide implies revenues now well above the Record 19 levels on ADS B, but what's driving the guide this year? How has 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.

Speaker 2

Yes. So definitely we've recovered a lot of revenue that went away after the ADS B mandate. We expected that revenue to go away Because it was a once in a generation mandate from the FAA to equip every general aviation aircraft, which once that's done, that opportunity, of course, It's gone, but we've been able to recover those revenues through a strong product line, particularly, our flight control systems Are very strong, very well received in the market and that's driven upgrades in cockpits. And as I mentioned in my remarks, The general sentiment around OEM aircraft makers is that order books are strong, customer interest is very strong and of course, We're in the bell curve of general aviation, which gives us the ability to grow along with the market there.

Operator

Thank you. Our next question comes from Jeffrey Rand of Deutsche Bank. Your line is open.

Speaker 6

Hi. Thanks for taking my question and congrats on a good quarter year. Your auto OEM business is clearly a good growth opportunity

Speaker 4

for you going forward, but at a

Speaker 6

lower margin compared to some

Speaker 2

of your other businesses.

Speaker 6

How do you think about the revenue growth opportunity versus the headwind to gross margin for the overall company for this business?

Speaker 2

Well, I think, Jeffrey, the opportunity in auto OEM, of course, is the large scale 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. Great.

Speaker 6

Thank you. And as a follow-up, you noted a reduction in your cycling products in your prepared comments, and there have been some demand concerns at one of the largest indoor cycling companies recently. How do you think about this business going forward? And if there was some pull in during the earlier part of the pandemic, how long do you think this takes to work through before the business kind of returns to typical growth.

Speaker 2

Yes, I think your question is interesting. We're not here of course to talk about 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 pull in, there probably was some. People got interested in those kinds of products.

Speaker 2

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.

Speaker 6

Great. Thank you.

Operator

Thank you. Thank you. Our next question comes from Ben Bollin of Cleveland Research. Your line is open.

Speaker 7

Good morning, everyone. Thanks for taking the question. Cliff, I guess it's been danced around a little bit. But when you look at the spread In terms of your 2022 guidance for outdoor and fitness, It's the widest gap we've seen since, I guess, 2017 and it ended up being about a 35 point spread between the 2 in terms of year over year growth. But I guess I'm interested in your thoughts on the high end wearables within the segments.

Speaker 7

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 and cycling? What's driving that spread.

Speaker 2

Well, lots of moving pieces, Ben, and you've kind of hit on the major ones. The one thing I would just highlight in addition is that product lifecycle differences between the two segments Can definitely impact the growth patterns between the segments. We're coming off a super strong Launch in outdoor, as I mentioned, with the new Phoenix, the Epix and the Instinct products and the cadence of introductions in fitness is a little bit different. Combine that with the overall normalizing of the cycling market, that's why there's the difference between outdoor and fitness.

Speaker 7

Okay. And the last one for you is, if you look through the elevated auto OEM investments 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?

Speaker 2

I think we've mentioned before and it's very Nicole, in the auto business that the margins can be in the mid to high teens on certain highest volume product lines. So that's what we're Expecting, I think that's what we've communicated before to the market.

Speaker 7

Great. Thanks.

Speaker 2

Thank you.

Operator

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

Speaker 8

Okay, great. Thanks. Yes, I guess a couple of questions. Maybe circling back on fitness. I know, Cliff, you noted some of the cycling headwinds, which Probably aren't a big surprise, but would love to get a bit more color on the confidence and key drivers within the Wearables segment Do you expect to help offset some of the cycling pressure?

Speaker 8

And I guess within that, any color on Forerunner And what you're seeing there, is that something that you think can grow as we kind of come out of the pandemic? Just thoughts there too.

Speaker 2

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 Venue and Vivoactive 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's, half marathons, marathons have been mostly canceled during the last 2 years.

Speaker 2

As some of those start to come online, we think it will drive additional

Speaker 8

Okay. And then just second question on marine, how do we think about The potential pull forward impact you saw there, obviously, you're confident in a continuing strong growth outlook. So it feels like You're not expecting as much of a comp issue there, but would love any kind of color there? And then any Thoughts on best marine and the impact that would have on the 2022 guidance?

Speaker 2

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 boat.

Speaker 2

So there's plenty of opportunity for retrofit In the market and as the new boats are built, many of them are equipped with Garmin products. And so, we believe, that the growth opportunity In marine, it's still very good. In terms of Vessware, 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.

Speaker 9

Great. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Eric Woodring of Morgan Stanley. Your line is open.

Speaker 9

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.

Speaker 9

But What are you just seeing in 2022 versus 2021 that give you the confidence in the 15% growth?

Speaker 2

Yes, I would say, Eric, it's really the same factors that drove 2021 carry forward into 2022. We see strong demand from the boat builders, as they ramp up production to fill the demand. They've got historic back orders on their books as well. So they're increasing their production and that benefits us. And then generally, the enthusiasm Around new technologies in marine, particularly the fishing area and the advanced sonars that we offer, continues to be strong, bringing new people in to the market, causing them to replace their old equipment, including both sonars and chartplotters.

Speaker 2

So these trends have been the same for a while now and we expect those Continue in 2022.

Speaker 9

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?

Speaker 9

And then On the operating side, just is the pressure mostly blamed on investments in autos? Or again, is there investment Outside of autos, that is going to be more elevated in 2022 relative to, say, 2021?

Speaker 3

Yes. Regarding the gross margin, it's

Operator

Lot of factors that

Speaker 3

have taken place there, product launches, new products take that into consideration, some are more impact On FX and other ones, and as Cliff mentioned, some are relating to selling prices. So We do expect probably some kind of depressed overall consolidated, but I think it's going to be a mix of among the various segments To get that overall one, hence I probably would say auto OEM one would probably would see that gross margins, we'd say that would be down year over year just because The BMW will be a bigger piece of that overall business and then fitness also is in the pressures that they have probably be down in there too. And then other ones are Probably dependent upon what product launches and all those different things. Relating to the cost side, yes, on Autoimmune side, R and D Expenses will probably be up over the previous year 2021. But also, we're seeing increased investments across all of our R and D, we'll make those investments really to drive innovation as well as we'll see some from the SG and A side of things, IT type of Costs increasing, those type of things, just higher level of our business, larger footprints we have, manufacturing operations, those type of things are driving some expense They're in there also.

Speaker 9

Okay. Thanks, guys. I appreciate it.

Operator

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

Speaker 10

Hey, good morning. Good morning. Ian, in your supply chain relative to aviation, right, I mean, the private aviation market's Pretty much on fire, right? So I would imagine the demand signals you're seeing from some of your OEM customers, If they're not really strong right now, they will be soon. How are you set up for that potential ramp?

Speaker 2

Well, we're prepared with plenty of factory capacity. We have always focused on a strong supply chain in aviation, so 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 robust orders. And so, we feel like we're very prepared for the increases that they're looking at.

Operator

Great.

Speaker 10

And then what in terms of if you can even shed any light on it, because I know it's sensitive thing to talk about, but What's going on, on the new platform side? I mean, are you guys actively working with OEMs on potential new platforms?

Speaker 2

Sure.

Speaker 10

That's it, sir.

Speaker 2

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

Speaker 10

Fair enough. I know that's a tough question. But and then with the Fenix and the Epix, the Fenix 7 and the new Epix, Which are you seeing a better response to, because they seem to be pretty similar products?

Speaker 2

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.

Speaker 10

Got it. And I mean, the natural question is, it exceeded your expectations. So do you have The supply chain to meet that demand?

Speaker 2

We feel like we have plenty of contingencies and we're working on increasing our supply.

Speaker 10

Got it, got it, got it. And then maybe just one last question around just logistics. Given that you've got a relatively complex Supply chain, meaning you've got stuff coming from Asia and then you've got stuff built here in the U. S. How are you seeing the kind of the trans Specific logistics of product?

Speaker 2

I think the situation is challenging like everyone is reporting. So We are no different than that. We see the same things and we're working on managing that situation the best we can. It's a pragmatic balance between product availability, Which speaks to shorter, faster shipment methods, which of course are more expensive versus inventory levels, which allow us To get inventory on slower modes of transportation, which are more affordable. So we're doing our best to balance and I think we have a lot of levers that we can use in doing that.

Speaker 10

Okay, great. Thanks, Chris.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Derek Soderberg of Your line is open.

Speaker 11

Hey, guys. Thanks for taking my questions. Cliff, just curious if you could talk more about the retail channel broadly. There's been some reporting that a lot of Q4 growth came from inventory building. So if you

Speaker 5

could just share what you're seeing as

Speaker 11

it relates to sell in, sell through Broadly, that'd be great.

Speaker 2

I think retail channels were very dry for all the reasons that we know. And so Certainly, retailers wanted to have inventory available so that they could sell to customers. But at this moment, we feel like sell through is very good. We can definitely track sell through through our product registrations and our app platforms and we feel good about what we see there. And we don't believe there's any imbalances, that are material out in the channel except for the ones we've noted, which is really the trainer market.

Speaker 11

Got it. And I also wanted to ask about supply. You guys have done a really good job on inventory. It seems like you've done better than most. Now you have more capacity online with your new facility.

Speaker 11

Have you been to any degree benefiting at all from supply chain issues, Relatively speaking versus competitors, I guess in terms of Garmin just getting more product on the shelves?

Speaker 2

Yeah, I think we have been the beneficiary of some of the challenges that others have faced. So our investments In inventory, our investments in capacity, and our ability to be agile with our product designs has helped us a lot in In several segments.

Speaker 11

Got it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I could turn the call back over to Terri Speck for any closing remarks.

Speaker 1

Thanks, everyone. As always, Doug and I are available for callbacks throughout the day. Have a good one. Bye.

Operator

Thank

Speaker 4

you.

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