Garmin Ltd. (GRMN) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Garmin Limited Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder this conference call may be recorded. I would now like to turn the conference, over Teri Seck, ma’am you may begin.

Good morning. We would like to welcome you to Garmin Limited’s second quarter 2017 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 transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, growth and operating margins, and future dividends, 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 the 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 Teri. And good morning everyone. As announced earlier today, Garmin recorded second quarter consolidated revenue of $817 million up 1% over the prior year. Outdoor, aviation, marine and fitness collectively increased 8% year-over-year and contributed 74% of total revenues. Gross margin improved to 58.5% compared to the prior year due to favorable segment revenue mix. As a result of our increased [indiscernible] and gross margins, our operating margin improved to 24.9%. This resulted in GAAP EPS of $0.91 and pro forma EPS of $0.88 in the quarter. Our results were positively impacted by growth in advanced wearables. Our Connect IQ app stores are a direct reflection of enduser engagement with our wearables. During the past 12 months there have been over 17 million downloads of an app, watch face or data filed from our Connect IQ store. And the total downloads increased to over $30 million since inception. Doug will discuss our financial results in greater detail in a few minutes, but first I’d like to provide a few brief remarks on the performance of each business segment. Beginning with the Outdoor segments, revenue grew 46% on year-over-year basis, driven by a strong growth of our Fēnix 5 smartwatches. Gross and operating margins expanded to 66% and 38%, respectively. While operating income grew 53% over the prior year. We experienced on strong demand for the Fēnix 5 watch series and anticipated will continue to have a positive impact on our outdoor segment for the remainder of the year. In addition, we continue to see solid growth of our new inReach devices and subscription based services. Finally, we launched the Approach S60 of premium watch for the golf enthusiasts and we recently announced the newest members of our Foretrex and Rino product lines. Looking forward, we are focused on opportunities in wearables and inReach. Turning net to Aviation, we reported strong revenue growth of 15%, driven by growth in aftermarket products. We also experienced positive contributions from our OEM product categories. Growth in operating margins remain strong at 75% and 32% respectively, resulting in operating income growth of 28% over the prior year. During the quarter we introduced our first Head-up Display, which is designed specifically for aircraft with integrated flight decks. We are pleased with the Cessna Citation Longitude will the launch platform for this new product category. We also received European approval for our G1000 NXi system expanding the reach of this aftermarket offering for King Air 200, 300 and 350 aircraft models. Looking forward, we are focused on maximizing ADS-B mandate opportunities and gaining share in the OEM market. Looking next at marine, revenue declined 3% however, this segment is performing as expected on the year-to-date basis with 10% revenue growth. We believe that favorable weather earlier in the year accelerated buying, which impacted the results of the second quarter. Growth and operating margins were 57% and 22%, respectively. During the quarter we completed the acquisition of Active Captain, a developer of crowd sourced content for boaters. In addition, we launched our next generation quatix wearable. Looking forward, we are focused on product innovations and gaining share in the inland fishing category. Looking next to business, revenue declined 15% driven by the rapidly maturing market for basic activity trackers and the timing of new product introductions. Gross margin was steady at 56%, while operating margin decreased year-over-year to 21%. While the quarter has been challenging for business, we remain positive about the opportunities in the segment. We expect these trends to continue into Q3, however, we anticipate ending the year on a stronger note as our product refresh cycle is completed. Looking forward, we are focused on areas of opportunity, particularly in the advanced wearable category. Looking finally at the auto segment, revenues were down 15% due to the ongoing decline of the PND market, partially offset by growth in several new categories such as fleets, cameras and RVs. Growth in operating margins declined year-over-year to 45% and 13% respectively. Our global market share position in the PND category remains very strong. During the quarter, we launched the VIRB 360, a compact, full spherical, immersive camera, built for adventure. VIRB 360 is an amazing device that captures video up to 5K 30 frames per second and makes it easy to share memories on the go. Looking forward, we are focused on disciplined execution to bring the desired innovation to the market and to maximize profitability in the segment. Turning finally to guidance, we are pleased with our consolidated performance in the first half of 2017 and believe we are well-positioned for the remainder of the year. As a result we are raising our projected revenue for the year to $3.04 billion, up about 1% over 2016. We project gross margin to increase to approximately 57.5% to the segment mix and we project operating margin of approximately 21% for the full-year. Assuming a pro forma effective tax rate of approximately 22%, pro forma earnings per share is expected to be approximately $2.80. Looking at our annual revenue outlook by segment, we have increased our growth expectations for the outdoor segment to 25% and the aviation segment to 10%. Marine and auto are unchanged, while the outlook for fitness has been revised to down 5% due to the continued decline in activity tracker category. That concludes my remarks, next Doug will walk you through additional details on our financial results. Doug?

Thanks, Cliff. Good morning, everyone. I’ll begin by reviewing our second quarter financial results to move the comments on the balance sheet, cash flow statement and taxes. We posted revenue of $817 million for the second quarter, representing 1% increase year-over-year. Gross margin was 58.5%, a 150-basis point increase from the prior year created by the shift towards segments with higher margin. Operating expense, as a percentage of sales, is 33.6%, 130 basis points increase from the prior year. Operating income was $203 million, 1% increase year-over-year. Operating margin was 24.9%, 20 basis point increase from the prior year. The increase in gross margin was an offset to increase in operating expenses. Our GAAP EPS was $0.91, pro-forma EPS was $0.88, 1% increase from the prior year. Next, we’ll look at our second quarter revenue by segment. During the quarter, we achieved 1% consolidated growth, led by double-digit growth in our Outdoor and Aviation segments. This growth was partially offset by the decline our fitness segment, as a result of the steep decline activity tracker category. The continue decline in the auto PND business. Collectively, outdoor, aviation, marine and fitness were up 8% compared to prior year quarter. We’ll go next to second quarter revenue and operating income. Collectively, the outdoor, aviation, marine and fitness segments contribute 74% of total revenue in the second quarter 2017, compared to 70% prior year quarter. Outdoor grew from 17% to 24% and aviation grew from 13% to 15%. As you can see from the charts illustrating our profit mix by segment, the outdoor, aviation, marine and fitness segments collectively delivered 86% of operating income in the second quarter 2017, compared to 80% second quarter of 2016. The outdoor and aviation segments, a year-over-year increase in both operating income dollars and operating margin. Looking next to the operating expenses. Our second quarter operating expenses increased by $12 million or 5%. Research and development increased $13 million year-over-year, 150 basis points to 50.6% of sales. We continued to invest in innovation, increasing resources focused on fitness, outdoor, marine, aviation, segments that receive long-term growth opportunities. SG&A was up $1 million compared to prior quarter, was relatively flat as a percent of sales. Our advertising expense was $2 million less than the prior quarter, traditional spend in outdoor segment was more than offset by decreases in the fitness in all the segments. A few highlights from the balance sheet and cash flow statement. We ended the quarter with cash and marketable securities of approximately $2.3 billion. Accounts receivable increased sequentially year-over-year to $515 million. Our inventory balance decreased sequentially to $525 million for actually the seasonally strong second quarter. During the second quarter of 2017, we generated free cash flow of $129 million, a $6 million decrease from the prior year quarter. Also during quarter, we paid dividends of $96 million. We purchased $36 million of company stock, $11 million remaining for purchase through December 2017. During the second quarter 2017, we reported an effective tax rate of 25%, which includes $7 million of income tax expense result from a new accounting standard related to the expiration of share-based awards. Excluding the $7 million of income tax expense second quarter 2017 pro forma effective tax rate was $21.9%, compared to 21% the prior year quarter. 90 basis point year-over-year increase pro forma effective tax rate is primarily due to the Company’s election to align certain Switzerland corporate tax positions, international tax initiatives partially offset by income mix by tax jurisdiction. We continue to expect our full year 2017 pro forma effective tax rate to be approximately 22%. This concludes or formal remarks. Takeya [ph] could you please open the line for Q&A.

Thank you. [Operator Instructions] Our first questions comes from Charlie Anderson of Dougherty & Company. Your line is now open.

Yes, thanks for taking my questions. Cliff I wanted to start with, I noticed that APAC revenue growth had accelerated versus Q1. I wondered if you could just talk about what’s going on there? I think may be Fēnix is playing a part there. I just wondered as we think about distribution and opportunities in Asia for some of your products kind of where we sit? And then I had a follow-up for Doug.

Yeah good morning Charlie. Definitely Asia has been doing well. It is growing from a smaller base. Wearables are definitely popular in that market, as well, but we’re also seeing growth in some of our other segments such as Marine and Outdoor.

Okay. And then for Doug, I was wondering I know currencies have changed since we started the year as you’ve updated your full year guidance. I wonder if you get update us on some of the FX assumptions.

Sure.

And then CapEx and free cash flow for the year, thanks.

As it relates to FX for talking about Q2 impact, we had about a $10 million headwind in revenue in Q2. And as relates the forecast and the guidance for the remainder of the year, what we do is we update our FX assumptions based on the current trends. So what the current FX rates, we currently seeing out there is pretty similar to what we used in our guidance and our forecast. As it relates to free cash flow, right now, for free cash flow for full-year, we are expecting about $550 million. Of that we’re expecting CapEx to be about $130.

Great, thanks so much.

Thank you.

Thank you. Our next question comes from the line of Doug Clark of Goldman Sachs. Your line is now open.

Hi, thanks for taking my question. My first one is on the fitness segment. Last quarter you talked about the revenues from fitness trackers or activity trackers being about a half of sales. Can you talk about what that was this quarter, given the declines that you saw?

Well, the market is down significantly. NPD shows that the market is down about 32% in Q2 and so our mix has definitely come down a lot, our advance wearables and running in GPS-based trackers are much bigger part the segment now.

Okay. That makes sense. And just to be clear the 32% decline that’s for the activity tracker portion specifically?

Yes that’s the basic activity trackers in the U.S. market.

Got it. And then my follow-up question was on the outdoor segment. Can you talk a little bit about the Fēnix sell in, versus sell through in the quarter and where we are from a availability and distribution standpoint.

We believe that availability is good right now, we are still expanding some retail channels that are taking the product in their summer reset, but in general it’s fully available in most retail outlets out there. There definitely was some pent up demand for the device as we announced it at CES and delivered a few weeks later. So there’s some pipeline effect, for sure. But we do see follow-up orders and strong interest in the product.

Okay great. And then final one for me. Can you talk about just the historic, I guess, the go-forward refresh cadence of the Fēnix product line. I think last year or this is actually two years between the Fēnix 3 the Fēnix 5. Is that what we might expect to see going forward?

Yes I can’t comment on our future plans, but we do have a very active roadmap in all of our wearables.

Got it thanks for my questions.

Thank you.

Thank you. Our next question comes from the line of Joe Wittine of Longbow Research. Your line is now open.

Hi everybody, great quarter.

Thank you Joe.

Maybe I’ll stick on Fēnix 5 just as a quick follow-up to that last question. Have you learned anything from a demographic perspective based on the various flavors you offer and smaller – and what many would consider more approachable case sizes? Any data that suggests you’re expanding the tent?

Yes for sure. So three case sizes 42, 47 and 51. 51 was the size of the previous model of Fēnix. In the small size, we’re definitely seeing a majority of those customers trend towards the female demographic. So that’s a totally new demographic for us and very exciting to see this expand into the area of lady adventurers. On the larger size, adding the masses has really expanded the opportunity for the bigger products, so we’re excited about that as well.

Makes sense. Shifting to fitness, I know the low end of fitness garners completely outsized share of investor questions for you. So can you talk about whether the most current segment guidance represents, for lack of a better word, a kitchen sink? I asked because the magnitude of the decline have obviously been a little bit of a surprise throughout the first half. So you may not want to use the word kitchen sink, but is there some capitulation in your thoughts when you assembled the new guide? It seems like based on the magnitude of the decline that may be the case.

Well certainly we’re counting on a steep decline in the activity tracker market. We’re following the rising and falling tides in that area, so that’s baked into our assumptions. And also, we’re comping against strong product introductions from last year. Our product introductions will take place a little later in this year in terms of refreshes. So that’s brought into our guidance. That said we do expect Q3 to continue the softer trends and moving into Q4, then we believe that things will improve.

Thanks. And then finally from me automotive. Can you help us understand at all when segment declines could narrow? I mean, I guess you could look at the second quarter and say, we saw a slight narrowing. But there’s a thought that eventually, PNDs obviously should become less of an anchor in your OEM business will become a bigger piece of the mix. So give us some high-level thought on potentially when that could happen. And within that if you could update us on what’s happening with OEM today from a volume perspective, so ex-ing out the impact of the deferred rev rec. Thanks.

Yes, so PND has been a slowly declining market for the last eight to nine years, and it’s been a little difficult to predict when is the bottom. We continue to believe that there is a base of business out there, a certain class of customer that likes these kind of products and will continue to be a reasonable category going forward, but certainly not mass-market levels like it was in the past. The predicting has been very difficult, and we probably are in a better position of doing that today than we were in past. In terms of OEM, we’re continuing to build a business base there. There’s a lot of dynamics with OEM in terms of the wins, the time frame it takes to get those to market as well as the revenue recognition model that take place. A lot of our revenue taking place right now is being deferred because of software-based revenue recognition rules. So we’re excited about the progress in terms of wins. We believe that it will contribute to growth in the future, but as of right now, it’s still a smaller part of our overall auto category.

Fair enough. Thanks a lot.

Yes thanks Joe.

Our next question comes from Yuuji Anderson of Morgan Stanley. Your line is now open.

Great, thanks for taking my question. A question on the running watches. How did it do this quarter, year-over-year? And are you seeing kind of like the similar strengths and weaknesses there, where the advanced models are driving demand versus the entry-level watches? And then a question on operating margins for fitness generally. How should we think about potential expense management in that category given the current weakness that you’re seeing? And then just balancing that against your coming product launches, is there some opportunity to kind of realize some savings there? Thanks so much.

Yes, so in our Forerunner category, which is what I’d call our made-for-running product line, we’re seeing double-digit growth, strength in that product line, so we feel very good about that category of the market, if you will. In terms of the expense structure overall in fitness, certainly, there’s been a big increase year-over-year. Much of that is due to kind of a comping effect of adding resources over the year, and they’re just now being recognized on a full year basis. We believe we’re pretty well situated when it comes to overall resources in the segment. And we do think there’s opportunities to fine-tune our investments, particularly in marketing and advertising, as the categories – category mix is changing.

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

Good morning. Thanks for taking my question. The first one, I wanted to circle around on the outdoor business. If you look at the first half performance, I think the overall business is up 35% year-on-year. And the implied or the guide for the year now at 25% would imply kind of lower-than-seasonal back half relative to what you’ve seen the last couple of years. So I’m curious how you think about the seasonality in the back half and how much maybe channel benefit you got in the near term. And then I have a follow-up.

Thanks. Yes. So definitely, 25% for the year does imply a back half rate that’s different than what we’ve seen in the first half. As I mentioned earlier, the pipeline effect of Fēnix definitely had an impact, so we recognize that those pipeline fills occur once in a product introduction. But that said, we’re also comping against very strong growth rates of Fēnix 3 HR last year. So we’re just trying to look at all those factors and come up with a guide that we feel is achievable for the entire year.

Okay. And then looking at the aviation business, obviously, the retrofit opportunity has been pretty good on ADS-B and maybe incremental attachment there. But could you talk a little bit about each subset and the degree of visibility you feel you have from both OEM and retrofits? And what type of progress do you think you’re making on a market share front?

Yes. So continued strong interest in ADS-B, and it’s growing as we move into – towards the mandate deadline, which is the end of 2019. People basically say beginning of 2020. We believe we’ll continue to see that kind of momentum as the mandate approaches and people realize that they need to equip in order to be legal in their flying going forward. In terms of other product categories, ADS-B is definitely a strong category, but I’ve mentioned before in the past that we see a pull-through on other categories, particularly the aftermarket navigators and communication navigation, those kinds of things, as people think about are creating their entire panel. So we believe that is a positive trend, and we believe it will continue to go that direction as ADS-B moves towards the mandate. In terms of OEM, we’re incrementally positive, I guess, about what’s going on in the industry. But I would point out that industry growth on the OEM side has lacked any kind of conviction, and so as a result, we’re remaining conservative. But overall, we’re pleased with what we see so far.

Thank you. Our next question comes from the line of Tavis McCourt of Raymond James. Your line is now open.

Hey everybody thanks for taking my questions. Cliff I just had one for you and then a couple of clarifications for Doug. In your commentary around the auto business, Cliff, you mentioned managing it for profitability. It looks like this year, you’ll get pretty close to that 10% EBIT margin level and may end up below it, depending on cost in the back half of the year. And obviously, if the revenue growth continues to decline 10% or more next year, that will be tougher next year. Is that 10% EBIT margin levels a line in the sand? Or are you willing to run it for any level of reasonable profitability as the revenue scale down? And Doug, I’ll just – I’ll mention, while I’ve got the line, a couple for you. The full year tax rate, 22%, is that what we should be baking in for Q3 and Q4 as well? Also, you mentioned capital spending, I think $130 million for the year. That’s a pretty significant uptick, especially in the back half of the year here. Just wondering if there’s any specific projects that’s related to. I think that’s it. Thanks.

Yes. So Tavis, on the profitability on the auto side, we’ve said for a while that our goal is to manage the segment for maximum profitability, and that continues to be our mindset. I believe that as we move into the back half of the year and holiday buying season, we’ll see some uptick in overall seasonality that will allow us to leverage our expense base there. I think it’s hard to speculate on what-ifs, but 10% profit on a business like this is still good profit dollars. So we continue to try to maximize those opportunities through the right levels of innovation and also focusing on niche categories to bring more margin to the segment.

Great. Regarding first item, regarding CapEx. So yes, the project that we have that’s going to increase the CapEx in 2017, probably going into 2018, is some of the expansion we have here of late regarding our distribution center as well as manufacturing for aviation. We announced that last year. So we’ll see some spend here, some heavy spend come in the back half of the year that gets back up to the $130 million type of number. As it relates to tax rates, yes, our full year guide is 22%. For the first half, we’re somewhere close to that. Q3 and Q4 is going to be dependent on what kind of reserve releases we have in that period of time. We don’t factor those in until the actual reserve releases happen. But I think right now, the purpose is probably – your purpose is probably 22% full year, and each quarter is probably fair.

Got you. And on the free cash flow guidance Doug.

Sure.

Are you expecting any meaningful change in working capital ending the year versus where you were last year?

Yes. So last year, we had quite a bit of favorability in working capital, primarily on the inventory side. So this year, if you look at the numbers, getting to the $550 million, we do expect some operating income improvement year-over-year and increased CapEx. But also, we won’t see as much improvement year-over-year in our CapEx or in our – simply our working capital as we saw in 2016 primarily because of inventory. We expect inventory probably to be up year-over-year. Probably maybe a similar type of year-over-year change that we saw in Q2, we should expect to see at year end.

Great, very helpful. Thanks guys.

Sure. Tavis.

Thank you. Our next question comes from the line of Brad Erickson of KeyBanc Capital Markets, you line is now open.

Hi guys thanks. So back to the fitness margins real fast. Does the commentary you gave about the basic wearable declines, did that lessen the margin headwinds over time on the fitness segment? Or should margin erosion just generally be sort of the working expectation for going forward, at least for the foreseeable future?

So definitely the basic trackers have a lower margin profile so they’re becoming a smaller mix of the segment. It will improve our overall segment margin performance. We’re relatively flat on a year-on-year basis, and the reason for that is that our overall product line is more mature this year. So there’s some margin erosion that naturally occurs, and that’s we had fairly flat margin even though we had a lower mix of activity trackers.

*Got it. And then in terms of the holiday, can you just kind of talk about what you’re targeting for marketing and promotional activity, particularly for outdoor and fitness, relative to the year-ago period? Thanks.

I think you’ll see us do similar types and sizes of campaigns in the holiday buying season to support our overall revenue plan in our retailers as they carry our products.

Got it, thanks.

Clif, thank you.

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America Merrill Lynch. Your line is now open.

Okay, good morning guys, it’s Kristine Liwag on for Ron. In aviation, what was the growth in business jet OEMs in the quarter? And also, could you provide more color on which programs contributed to this growth. Is it light jets, medium-size jets or the super-mids?

I think generally, the industry has already kind of reported single-digit kind of growth in aircraft deliveries. And I would say that we’re heavily indexed into the small to midsize area of the market. So the light jet market, as you know, has been fairly weak and the mid-size has been more robust.

And then maybe switching gears. Boeing recently announced a new business unit focused on avionics. What do you think Boeing’s foray into avionics could mean for the industry. And how do you think this could trickle down to the large jets and affect you? I mean, a lot of your competitors in business jets also are suppliers to large aircraft like Boeings and Airbuses?

We can’t really speculate on all of their reasons for doing that. I think certainly, there’s some hurdles to understand and going from zero to full avionics capability, and so it does require significant investment, significant staff. But at this point it’s hard to speculate on what they have in mind.

Thank you.

Thank you, Kristine.

Thank you. Our next question comes from the line of Ivan Feinseth of Tigress Financial. Your line is now open.

Hi, thank you for taking my questions and congratulations on another great quarter. My first question is on new product rollout. Can you give us some idea of what kind of new products can we expect to see in the second half of this year? And then I have a question about automotive.

Yes. So we can’t provide any additional details. We’ll be making announcements as we’re ready on the new products.

Is there any area specifically we could hope to see certain products in?

Again, I can’t comment beyond what we’ve already provided.

Okay. And then on the automotive and OEM side, since many companies like Apple and Google and even Microsoft are getting involved in supplying some kind of software or data to the self-driving car, how do you envision your role concerning cameras, autopilot systems, GPSes? And you have extensive OEM relationships. In the bigger picture, where do you see your role in enabling the self-driving car?

Well, I think the car of the future definitely has lots of components and a huge amount of technology that’s rolled in. There probably won’t be one clear supplier or clear winner in all of that. We have our areas of expertise, as you pointed out, and that’s where we’re focusing our effort in terms of finding opportunity.

And also, like, for example, one of the apps you have available for the Fēnix is the remote control for the Tesla, which, by the way, seems to be an incredible app. And people that own Teslas that hear about it don’t even know Garmin makes a watch. They’ve been buying the watch and are impressed with the app. Now that app happens to be made by a third-party developer on your platform. Do you envision working with some of the OEM manufacturers to develop apps for your wearables such as the Tesla app?

Well, certainly, one of the greatest strengths of our wearables is our app platform. It’s something we’ve invested in early. And as I mentioned, we’ve got a very positive amount of momentum going on in our app store. So people are able to create new utility and new applications for our devices, wearable and other devices as well using our Connect IQ. But in terms of specifics and working specifically with them, I can’t comment at this time.

Okay. Thank you very much.

Yes. Thanks, Ivan.

Thank you. Our next question comes from the line of Paul Coster of JPMorgan. Your line is now open.

This is Paul Chung on for Coster. So just to go back to outdoor, can you confirm the breakout between DeLorme versus Fēnix and other products? And on Fēnix, how much of that growth was from the smaller form factor targeted at women? And then finally, on the operating margin for the increased multi-function scale DeLorme? Or was it something more structural?

Yes. In terms of breakout by categories, we don’t do that in detail. Certainly, with the growth of Fēnix, it’s becoming a bigger part of our overall outdoor segment revenue. And DeLorme as well, the growth there is making a positive contribution, although from a smaller base.

Operating margin.

Yes, the operating margin situation, definitely there’s leverage when you have significant revenue growth such as what we did. And as I mentioned earlier, we believe, generally, our investments in terms of engineering and, to some extent, marketing and advertisement, we’re getting some leverage benefit out of those

Thank you.

[Operator Instructions] Our next question comes from the line of Will Power of Baird. Your line is now open.

Great, thank you. I guess a couple of quick follow-ups. Just coming back to aviation, you raised guidance there for the year. I know you had continued ADS-B strength, but maybe just any further color on what the upside surprise has been relative to your expectations? And then I got a second one.

Yes. So upside on aviation, definitely stronger growth in the aftermarket area than we anticipated.

Okay. Any key particular products, I guess, within that?

Well, again, ADS-B devices are strong growth area. And we are seeing the positive benefit of additional products being pulled into purchasing decisions as people retrofit their aircraft.

Okay. And then I just wanted to ask on the gross margin front. Based on the full year guidance, it implies slightly lower gross margins in the second half of the year versus the first half. I assume that’s principally a function of mix, but any other color there would be helpful.

Yes. It really relates to the fourth quarter. What you see basically relates to our promotional activity in the fourth quarter. But in gross margin, yes, the improvement we saw in the first half of the year, while that was due to segment mix, is having a higher percentage of our business in outdoor and aviation, which have higher margins, and then the decrease in the activity tracker business and the auto PND business.

Okay. Thank you.

Thanks Will.

Thank you. I’m showing no further questions at this time. I would like to turn the conference back over to over to Teri Seck for any closing remarks.

Thanks, everyone. Doug and I are available for callbacks this afternoon. Have a great day.