Garmin Stock

[Audio Gap] 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 Third 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, and market shares, product introductions, foreign currency, tariff impacts 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-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Besson, 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 12% to nearly $2 billion, with gross margin of 63.3%. We experienced a robust expansion in consolidated gross and operating margins. the majority of which is attributable to favorable segment mix and lower product costs.

Margins also benefited from tariff refunds of $33 million recognized in the third quarter. Even when excluding this benefit, our gross margin performance was impressive by any historical comparison, reflecting the strength of our product lines and the efficiency of our vertically integrated business model. Through strong operational execution, we delivered significant leverage to the bottom line. Operating income increased 34% to $612 million and pro forma EPS increased 39% to $2.76.

With most of 2026 behind us and considering the momentum we are experiencing entering the important Q4 holiday season, we anticipate delivering another record year of double-digit growth in revenue and profits. We now anticipate revenue of $8.15 billion, an increase of $100 million over the prior guidance and an increase of 12% over the prior year. We expect gross margin of 61% for the full year, which assumes higher cost for raw materials, particularly memory, which I will expand upon in a moment.

We further expect an operating margin of 29% and an expansion from our prior estimate and a tax rate of 16.5%, which is unchanged from my prior estimate. These assumptions result in pro forma EPS of $10.80, an increase of $0.80 over the prior guidance and a 26% increase over the prior year.

Before covering segment highlights, I want to provide additional context on supply chain matters. As previously mentioned, our results will soon reflect the higher cost of memory and other raw materials, which have increased significantly since last year, driven by both high demand and limited supplies. Our results have benefited from our safety stock of memory purchased at lower prices. New supplies are being purchased at current market prices, which are significantly higher than last year. This represents a headwind going forward and drives higher inventory amounts on our balance sheet.

Additionally, our inventory strategy is focused on product availability, which translates to higher inventory levels of certain critical components. And from time to time, we make prepayments to secure additional supplies. While it's too early to offer a comprehensive outlook for 2027, we expect our consolidated gross margin profile will return to a historical range, primarily due to higher memory costs. We believe a return to historical gross margin levels represents impressive performance given the unusual supply chain circumstances affecting many companies.

As we formulate our 2027 plan, we will look for every opportunity to offset this headwind by leaning heavily on our vertical integration and scale of operations and through strategic and selected mitigations which we have successfully used in the past. 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 16% to $694 million, a new third quarter record, primarily driven by broad-based wearable growth. Gross and operating margins expanded to 63% and 33%, respectively, resulting in operating income of $231 million. During the quarter, we launched the Circa Smart band, a screenless wearable offering rich wellness and fitness insights that expands our addressable market for wellness devices.

Initial demand for circa has been very strong and feedback from customers has been positive. We recently announced the next-generation edge cycling computers. The Edge 1060 features a built-in microphone and speaker for hands-free voice control and the easy-to-use Edge XPLORE3 is designed for riders of all levels. The Fitness segment has achieved outstanding performance throughout the year, and we expect this trend to continue in the fourth quarter. We are very pleased with these results and expect that the Fitness segment will be the strongest contributor to our full year consolidated growth.

Moving to outdoor. Revenue increased 20% to $597 million primarily driven by strong demand for adventure watches following the launch of the Phoenix 9 series. Gross and operating margins expanded to 68% and 39%, respectively, resulting in operating income of $233 million. During the quarter, we launched the Phoenix 9 and the Phoenix 9 Pro series with an all-titanium watch case option and the largest available AMOLED screen in our flagship adventure watch lineup. We also launched the Garmin Drive navigators that feature high-resolution ultra-wide displays and an elevated all-new user experience.

Looking forward, we expect growth momentum to continue in Q4, primarily driven by the Phoenix 9 series, resulting in improved full year growth rates when compared to 2025. Looking next at Aviation, revenue increased 5% to $253 million, with growth primarily driven by OEM product categories. Gross and operating margins expanded to 78% and 26%, respectively, resulting in $66 million of operating income.

We recently announced that the G1000 integrated flight deck for the iconic King Air aircraft has surpassed 1,000 systems in the field, marking a significant milestone as one of the most successful retrofit [indiscernible] programs in aviation history. We also announced that more than 2,500 aircraft are now equipped with our revolutionary Autoland system. Autoland is available in more than 15 models from piston powered aircraft to twin-engine jets, bringing added peace of mind to a growing number of pilots and passengers across the aviation industry.

Just this quarter, Pilatus aircraft and Epic aircraft announced the certification of government Autoland on the PC-12 Pro and the E-1000 airplanes. During the quarter, we introduced the G2000 Prime, bringing prime flight deck functionality to the high-performance piston and electric aircraft market. Also during the quarter, we announced the certification of an all-glass retrofit cockpit for the original Cessna Citation jet.

And finally, we made important updates to Garmin Pilot, adding Smart Charts coverage for Canada and Mexico as well as mobile clearance delivery, which allows pilots to obtain clearances electronically through the Garmin Pilot app. We are pleased with the performance of Aviation during the first 3 quarters of the year, and we expect fourth quarter year-over-year growth to be similar to that of Q3..

Turning to the Marine segment. Revenue increased 16% to $310 million with broad-based growth across multiple product categories led by sonar products following the launch of Live Scope 2 sonar systems. LiveScope is widely considered to be one of the most consequential innovations in modern fishing electronics. LiveScope 2 builds on this legacy of disruptive innovation by offering improved range and unprecedented image clarity.

Gross and operating margins expanded to 64% and 30%, respectively, resulting in operating income of $94 million. The primary driver of margin expansion was the tariff refund recognized during the quarter, although margins improved even when excluding this benefit. During the quarter, we expanded our sailboat product lineup with the GMI 40 instrument display and the Smart Drive steering actuator. We also launched the JL Audio A60 head unit series and the M200 speaker system. We were recently named Manufacturer of the Year by National Marine Electronics Association for the 12th consecutive year, an honor that's particularly meaningful because it reflects the opinion of the broader NMEA community for innovation, product quality, service and support.

We also received 6 product of excellence awards for multiple product categories as selected by NMEA dealers, certified installers in the industry professionals. We are pleased with the performance of Marine during the first 3 quarters of the year and believe we are on track to achieve full year growth that is consistent with the prior year.

Moving finally to the auto OEM segment revenue decreased 20% to $132 million, primarily driven by domain controllers. Gross margin was 16%, and the operating loss narrowed year-over-year to $12 million as we shifted R&D resources to other segments.

We expect fourth quarter revenue to decrease year-over-year, consistent with Q3 as domain controllers continue to decline as expected. We look forward to the launch of our next major domain controller program with Mercedes Benz, which we expect will drive significant growth in 2027.

Wrapping up, I'm very proud of what our team has accomplished. We delivered strong growth, expanded profitability. We invested in future innovation and introduced new products across nearly every segment of our business. We look forward -- as we look forward, our product portfolio is very strong, and we are confident in the opportunities that lie ahead. We believe 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. So 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 third quarter financial results, provide comments on the balance sheet, cash flow statement, taxes, updated guidance. Post a revenue of $1.986 billion for the third quarter. represent a 12% increase year-over-year. Gross margin was 63.3%, a [indiscernible] basis point increase in the prior year quarter. [indiscernible] was primarily due to favorable segment mix lower product costs due to the weakening of the Taiwan dollar, approximately $33 million in refunds of previously paid tariffs. .

Operating expense as a percentage of sales was 32.5%, 80 basis point decrease. Operating income increased 34% to $612 million. Operating margin expanded to 30.8%, a 500 basis point increase compared to prior year quarter. Our GAAP EPS was $2.80, and our pro forma EPS is $2.76. Next, we look at our third quarter revenue by segment and geography. During the third quarter, we achieved consolidated double-digit growth, led by the outdoor segment with 20% growth, followed by the fitness marine segments with 16% growth.

By geography, we achieved growth in all 3 regions, led by 15% growth in Americas, followed by 12% growth in EMEA and 4% growth in APAC. APAC sales growth is lower than America's name due to the challenging market conditions in China. Excluding China, APAC sales growth would have been more comparable to the other regions. Looking next at operating expenses. Research and development expenses increased $26 million, approximately 9%, primarily driven by personnel-related expenses.

SG&A expenses increased $30 million, approximately 10%, primarily driven by personnel-related expenses and advertising expense. A few highlights on the balance sheet, cash flow statement and taxes. Ended the quarter with cash and marketable securities of approximately $4.1 billion. Accounts receivable increased year-over-year to approximately $1.1 billion, while on the strong sales in the third quarter. Inventory increased year-over-year and sequentially to approximately $2.3 billion.

We're executing our strategy to increase inventory of certain components to mitigate the risk of supply constraints. Also, the cost of certain components has increased significantly year-over-year. During the third quarter of 2026, we generated free cash flow of $293 million, $132 million decrease from the prior year quarter. Decrease is primarily due to an increase in on-hand inventory, prepayments of inventory to secure future delivery strategic components, primarily offset by improved operating results.

Capital expenditures for the third quarter 2026 were $101 million, approximately $40 million higher than the prior year quarter. We expect full year 2026 free cash flow to approximately $1.1 billion capital expenditure of approximately $500 million. Decrease in our free cash flow estimate compared to the previous estimate is primarily due to increase in on-hand inventory repayments or inventory.

During the third quarter of 2026, we paid dividends of approximately $202 million and purchased $41 million of company stock. At quarter end, we had approximately $47 million remaining share repurchase program authorized through December 2028. For an effective tax rate of 18.1% compared to 21.2% in the prior quarter. Decrease in effective tax rate is primarily driven by an increase in U.S. deductions due to certain provisions of the U.S. tax legislation enacted in 2025, come effective in 2026.

Turning next to our full year guidance. Based on our performance during the first 3 quarters of 2026, and our positive outlook for the fourth quarter. We now estimate revenue of approximately $8.15 billion compared to our previous guidance of $8.05 billion. The result of year-to-date performance, we have increased our gross margin to approximately 61%, which is 130 basis points higher than our previous guidance. and is 230 days higher than a full year 2025 gross margin. We expect higher memory costs to impact the fourth quarter, which has been factored in a full year gross margin guidance.

We received the majority of our expected tariff refunds and our updated gross margin guidance only includes the benefit of share refunds already recorded in the year-to-date results. We expect our operating margin to be approximately 29% to 200 basis points higher in our previous guidance. Also, we expect a pro forma effective tax rate of 16.5%, consonant with our previous guidance. We expect to pro forma earnings per share is approximately $10.80 compared to our previous guidance of $10. This concludes our [indiscernible] remarks. Christy, could you please open the line for Q&A?

[Operator Instructions] Your first question comes from the line of Tim Long with Barclays.

Maybe 2, if I could. Could you touch a little bit on some of the new launches, the CNX 9s and circa. It sounds like initial feedback positive. But could you just kind of give us a sense of how you're viewing the ramp of those products over the next several quarters? And then second, I just did want to follow up on the gross margin. I mean, it sounds like this is largely memory and it's hitting you a little bit later since you had some advanced buys. But maybe as we look into next year, I'm assuming you're talking [indiscernible] as the more historic gross margins. If you could just clarify that and let us know the other puts and takes there.

In terms of the newer launches, -- we believe those were very successful. We're still catching up on some of the initial demand, especially on Circa, although fenix is also very, very strong. And so we're working hard to fill that backlog of demand we have for those new products. And Doug, maybe you can answer the question on the gross margin. .

Yes. So maybe I'll talk a little bit about the gross margins here in the quarter than we expect in Q4 than in the future. So yes, in Q3, there are 3 big drivers of that year-over-year improvement, one of which was favorable segment mix as Auto OEM is a lower percentage of our total this year versus last year. The second of which is lower product costs, primarily due to the weakening of Taiwan dollar. And then we did have some benefits relating to tariff refunds and we did receive a majority of our tariff refunds. There's some that we'll hopefully receive here in Q4 next year, but we'll record those as they're realized or realizable.

So then another thing relating to memory costs. We did see a small impact of increase [indiscernible] cost in Q3, but there will be more impact in Q4, and that's primarily due to our inventory, our inventory returns from a standpoint. Then as we get into 2027, there's a lot of moving parts relating to the gross margin from a standpoint, we'll have a segment mix, a situation where we have the ramp of Mercedes coming in. So therefore, there are probably some unfavorable segment mix.

We'll have the continued higher increased cost of memory that go through there also. But then also, there's a lot of other moving parts in our gross margin between FX, product mix and such and their standpoint. But we'll give you better feel for that when we get into 2027.

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

Cliff, I'd love to maybe step back from the quarterly results and -- could you just maybe rise a little bit on how you're seeing the competitive landscape evolve across the broader wearables market traditional smartwatch players kind of increasingly emphasizing fitness and performance. You have new competitors with kind of specialized health and wellness use cases. Just where is Garmin's competitive positioning strengthening -- and then do you see any areas where you see just greater competitive pressure? And then a quick follow-up, please.

Well, it is Erik. It is a very competitive market for sure. It's also a very market that's been around a while now. So the -- I think the players are fairly well entrenched in terms of their positions in the market. I think many of them are catching up to what we've known all along that health and fitness are very important drivers of interest in wearables. And so we're continuing to lead, I believe, in terms of product features and sensor capabilities and the ability to to help a user on their journey, whether it's a health and wellness focus or a fitness focus.

And I believe that trend is very durable. I believe that trend is something that's always going to be of interest of people, especially as there's more and more focus on health and wellness across every level, whether it's from the government side and also cohorts of generations that are more interested in their health. So we're very excited about it. We believe there's lots of opportunity ahead of us.

Okay. Awesome. No, I appreciate that. And then maybe just -- maybe this is a Doug question, but if we take a step back, realizing that you guys -- you do keep a lot of safety stock inventory, but we're in probably the most inflationary component environment we've seen in a long time. That's not just memory, but you just expanded Aviation gross margins 200 basis points year-over-year. Marine ex tariff refunds was up 200 basis points year-over-year outdoor in Fitness both expanding very strong. When you talk about product cost reductions, can you just maybe be a little bit more specific or granular on exactly not just what is happening, but why happening now, why maybe you couldn't execute on the year or 2 years ago, just given we're kind of in like -- it's just very counterintuitive given the environment we're in. So just trying to understand like exactly what it is and why now?

Yes. Maybe I'll start and Doug can certainly add to it. But as I mentioned in my remarks, our vertical integration is really paying off, both in terms of our flexibility and ability to to bring in the right components and the right -- and build the right products at the right time. But also the scale is really important. Our volumes have increased a lot, and so we have a lot of scale, which is helping in our overall efficiency. We did get some benefit from the Taiwan dollar. So that's part of our product cost, but also our products, many of our new ones, especially are premium in nature and have a lot of desirable features and capability. And so we're able to command higher margins for those products as well, which become a higher part of our mix.

The next question comes from the line of Joseph Cardoso with JPMorgan.

Maybe I just wanted to start first on Fitness. Obviously, you had very strong growth in the quarter. maybe against you guys setting very high standards for yourselves over the couple of quarters and maybe more robust growth. Just wanted to touch on the trends you're seeing in 3Q and obviously into 4Q today, just relative to registration, sell-through inventory, new users, the whole on bit of of kind of KPIs that we will kind of like to hear about? And how are you thinking about maybe the durability here as we're heading into the holiday season? And then I do have a follow-up.

Yes. I think in terms of registrations, that's something we watch very closely, and it's really a near real-time pulse on the overall market. Our registrations did outpace our sell-in. So there's some implication there that the channel is destocking a little bit probably because people are getting ready to bring in more stocks for the holiday season. But the demand for our products and the pull-through at the registration level is very strong. .

In terms of durability, again, you know what I've mentioned before that there's a lot of opportunity in this market, and we've demonstrated over the long term that we've delivered strong double-digit growth rates across segments that are highly influenced by wearables, particularly fitness and outdoor. And so looking at Q4, we see more of the same of that. And also the feedback from our retailers and their plans are very strong. As I mentioned, we have significant backlog we're working to fill for the fourth quarter. And so that's our objective in the coming weeks.

Got it. I appreciate the color there, [indiscernible]. And then -- maybe just switching gears here. I wanted to touch on BarminConnect plus traction and what you're seeing maybe an update there. Just particularly just given as we think about when the product was launched and maybe cycling past in a more material way, customers who are enjoying early free trials. How has that trended? And also curious to hear like what you guys are seeing around maybe implications around new products, potentially having features only available via Connect Plus and how you're thinking about the opportunity around that?

Yes. Connect Plus has outgrown the general rates of the underlying segments where those products can benefit from Connect Plus. Of course, that's probably to be understood because it it's growing from a smaller base. But Connects Plus has outpaced our expectations and the renewals and the commitments after the free periods have been very strong for those people that sign up for it. and even products that you wouldn't suspect have would be of interest for Connect Plus, particularly Circa.

People are also signing up for comes to get more out of circa. So -- we feel very good about Connect Plus and we have a long-term road map to further expand that. In terms of just offering features of new products only through Connect Plus, I mean, -- we're already doing that today in terms of features like nutrition, that's available with Connect Plus. But in general, our approach to the market has always been to offer rich features on our products that delight our customers and satisfy them. And if they want more, we'll offer more with Connect Plus.

The next question comes from the line of David McGregor with Longbow Research.

I guess I wanted to just ask about kind of channel inventories and the pre-season sell-in. You kind of touched on this in response to a previous question, but how are you seeing that seasonal selling? And do you sense retailers and dealers or maybe just staying lean ahead of the election? Or is there some other reason why maybe we're seeing a little bit of an aberration from what's historically been a pattern there?

Yes, I don't think there's any aberration at all, and I certainly couldn't figure out how to tie it to elections. But as I mentioned in some other comments that retailer interest in Q4 promotions is very strong, and we're working on filling all of their orders for the holiday season.

Okay. Okay. I guess second question just on Thailand, any update on the manufacturing facility there and is production is still expected to begin in 1Q 2017. And I guess when does the capitalization of costs in and the expensing begin?

Yes. I'll maybe make a comment on the time lines and Doug can respond to the capitalization, but we're on track to open the new facility expected to start producing new products in the first quarter of 2027, and it's something we desperately need as our volumes have basically reached our capacity. So we're excited to bring more capacity online.

Yes. As it relates to when it starts hitting the P&L when it basically gets into production at that point in time, it will go through -- flow through the goods at that point in time.

So 1Q '27?

Yes. Yes.

The next question comes from Ivan Feinseth with Tigress Financial Partners.

And congratulations on another record quarter. Starting with the fenix, what kind of uptake on the fenix are you seeing from people who are new to Garmin and new to the fenix versus people who are upgrading from existing watches and what model have they been upgrading the most from?

In terms of new versus existing, as has been the history of the fenix launches, initial demand, particularly is very strong from existing users who are upgrading mostly from more than 1 generation old, it can vary. But the response has been very positive. And then, of course, as the product makes its way further out into the channel, we start to see more new users come to the platform.

And then based on the fact that you look for price increases on components, but I feel you have pricing power. What do you feel about your -- how do you feel about your pricing power, especially considering that a lot of your customers buy really based on features versus price?

I think we're definitely pricing is something that when I mentioned the mitigations that we can use, it's 1 of the things that we can we can look at. It's 1 of the tools that we have, but we don't over focus on 1 particular thing, and we try to get the best balance of all the different ways that we can mitigate cost increases in our supply chain in order to achieve an outstanding result.

I would probably just remind people that a little more than a year ago now -- everyone was faced with higher supply chain costs really driven by tariffs, and that was something that we were able to navigate successfully because of the diversity of our business and our vertical integration and our ability to create products that people want.

And then you said that you've had strong demand for the circa but -- and some I'm supply constrained. And only for like $50 more, you could get the Lilly with the screen or even $100 more for the vivoactive, are you seeing customers or are you getting feedback that they're going into the store, looking at the circa and saying only for just a little bit more, I can get a lot more functionality. Do you see some upgrades there?

Well, I think we certainly see a lot of demand for something like vivoactive. It's a very, very popular product I think people that are looking at Circuit are looking at it for a specific region, which is on the screenless approach, and they want the ability to have flexibility with other devices that they might wear -- so we don't necessarily have strict data points around how it's driving people into other products. But the demand that we've been experiencing for circa is very strong and definitely exceeded our expectations, which is what we -- what I like to call a happy problem. And so we're working hard to expand our production and to fill all the orders that we have.

Just what kind of feedback are you getting that people are looking at the circuit and if they're going for a screenless product that people are considering a ring, let's say, versus a watch where are people kind of thinking about the functionality of the two?

Yes. I think, again, it really boils down to personal choice. We aren't necessarily hearing people make those kind of trade-offs at least in in ways that we can really dig that signal out of the noise. But I think by offering a broad range of products, that's really been our approach all along is to have broad ranges of products that allow people to select something that's right for them.

I have 2 other quick questions. On the auto land hitting 2,500 planes, is that still just original equipment kind of brand-new plane? Or do you have now an upgrade process that you can retrofit an existing plan?

Well, it's really also retrofit because our King Air line includes auto land option -- and so we're applying Autoland technology to both original equipment as well as retrofits.

Okay. And then 1 last. When in '27, will we start to see the impact of Mercedes, Will that be on the '28 models that come out in late '27 or on the '27 models that will start to come out next year? .

Yes. I think in terms of precise timelines, I probably can't really say. I would say that it will be early in the year than later. We are basically having to follow, of course, the Mercedes direction in terms of ramp-up and supplies that they need for their new model year. So we're expecting early in the year, but again, something that we're following the orders of Mercedes.

The next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. .

I guess just to circle back on tariffs, I think there were $33 million of refunds in the quarter. Would you expect to receive additional refunds in the fourth quarter or beyond and then if you could just provide kind of any thoughts around kind of the run rate impact that you're experiencing and maybe any opportunity for further offset looking to '27.

Yes. So we have received the majority of our tariff refunds. We've applied for some of those. And find some of that. So it all depends upon how quickly the government process those and receive those. -- but we do have a smaller amount that we still haven't received yet when we do expect to receive either in Q4 or 2027. A run rate for those, it really depends upon how those are processed through the system. .

And then, Cliff, maybe just one on marine, another very strong quarter. Now sitting in the off season, how are you feeling about kind of the end market the trajectory there? Just any thoughts would be helpful.

Yes. If I think about the end market broadly, I would say it's probably a little bit soft right now. It's not necessarily a concern, but the market in general is probably just a tad bit softer. We've still found ways to be successful and grow again based on innovation and and probably some benefit from people refitting existing boats as opposed to purchasing new boats from time to time. But there's still strong demand for the new boat segment, particularly in the in the mid-range of the market. And so there's bright spots there as well. But certainly, I think high fuel prices have probably had more of an impact in Marine than maybe some of the other segments. And -- and people -- since it's kind of the off-season now, they're probably in a wait-and-see mode. .

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

Thank you. Good morning, everyone. I appreciate you taking the question. Cliff, you made a reference to fenix around refresh and also talk to registration trends. Could you share any perspective on how you think about new users versus refresh opportunity outside of fenix. When you look at 4Runner, Vivo and even circa how it fits in. Just any thoughts on user expansion versus net new? And then I have a follow-up for Doug.

I think the new user profile outside of Phoenix is very, very strong, heavily weighted towards new users. And products like circa, products like vivoactive, the entry-level running products like the 470 and 170 all attract significant numbers of new users to the Garmin ecosystem.

Okay. Doug, I was hoping you could share a little bit about the inventory prepayments. Just any ways to think about the structure of these agreements, how variable, how material, just any flex or how locked in you are? That would be helpful.

Yes. Relating to the inventory prepayments, it's really related to the memory supply constrained situation and just negotiating with those suppliers there and just basically ensuring that we're going to be able to get the supply whenever we need that from a standpoint. So it's kind of on a one-by-one basis depending upon that situation. .

The next question comes from the line of Ronald Epstein with Bank of America Merrill Lynch.

Maybe just 2 quick ones. In the Avionics business, one of the things we've heard is there's been issues across the industry, getting pinged circuit boards and other components, how have you guys been managing that? And how has it been for a tonic that, that supply chain is different than your consumer supply chain out of Taiwan?

I think there's definitely second order effects driven by the memory situation and the overall AI build-out that creates both availability, supply issues as well as some pricing issues in other areas. For example, you mentioned PCBs, that's very true that there's some concerns there as well as even things you wouldn't think of like cabling and being able to find the cable supplies that we need.

But I think that's one of the secret sauces of Garmin's business is leveraging the scale and the relationships we have across the entire business in order to serve the needs of things like aviation, which are more nichey and lower volume. And we're able to successfully do that by, again, leveraging all of those things in our business to be able to create a good result for aviation.

Got it. And then maybe just a follow-up on a question I asked a couple of years back that there's been a change in the law. We can no longer import [indiscernible] drones given Garmin's expertise in Medicaid and in aviation, is there an opportunity there for Garmin in the growing market?

Well, I think some of the drones you might be referring to are more of the consumer drones and that market is mature and kind of saturated. I think a lot of interest in drones right now, of course, is around military uses, and there's a lot of companies focusing on that. We don't really see that as being our area of total expertise. So we're focused on the markets where we serve, where we feel like there's lots of opportunity to advance technology and innovation. .

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

Thank you all for joining us today. As typical, Doug and I are available for call backs, and we hope you have a nice day. Bye. .

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Garmin Ltd. Second Quarter 2026 Earnings Call. [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 Ltd.'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 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-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. this morning are Cliff Pemble, President and Chief Executive Officer; and Douglas 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 achieved another quarter of record-breaking financial results in 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 TrainingPeaks and TrainHeroic, 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 TrainingPeaks and TrainHeroic 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 activities of our customers and their athletic performance.

More recently, we announced the CIRQA 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 that 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 AXIS, 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 modern cockpit experience. AXIS 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 LiveScope 2 sonar system, which offers improved range and clarity over previous LiveScope systems. LiveScope 2 received the Best Electronics Award at the recent ICAST trade show, validating our superior LiveScope 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. Cost revenue of $2.022 billion (sic) [ $2.02 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%, 440 basis point increase compared to prior year quarter. Our GAAP EPS was $2.80. Pro forma EPS of $2.81.

Next, we 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 with 14% growth. By geography, we achieved growth in all 3 regions, led by 13% growth in EMEA, followed by 12% growth in Americas and 7% growth in APAC. Looking next, operating expenses. Research and development expense increased $27 million, approximately 10% while SG&A expenses increased $25 million, approximately 8%. Increases were primarily driven by personnel-related expenses.

A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $4.4 billion. Accounts receivable increased both year-over-year and sequentially to approximately $1.2 billion on the 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 the 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 of 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. For the effective tax rate, was 16.8% compared to 16.5% in the prior year quarter. Increase in effective tax rate is primarily due to income mix by jurisdiction.

Turning next to our full year guidance. Based on our performance during the first half of 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. Year-to-date results have not been significantly impacted by higher memory costs. However, we do expect higher memory costs impact the 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 besides the 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 pro forma effective tax rate of 16.5% from our previous guidance of 16%, increases due to income mix by jurisdiction. We expect the pro forma earnings per share is approximately $10 from our previous guidance, $9.35. This concludes our formal remarks.

Rebecca, could 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 CIRQA launch last week. Clearly, you're taking kind of the expertise you have broad-based and wrist-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 CIRQA, the user still needs a subscription to Connect+. 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 not go that direction?

Yes. Thank you, Erik. In terms of CIRQA and the features, what we're trying to communicate there is that CIRQA comes with all of the features that people have expected and get in any Garmin wearable on Garmin Connect. They can certainly add the additional features of Connect+, including the AI and the nutrition tracking and other features that we'll add in the future. But 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 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 understand is 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 more of a 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 MacGregor with Longbow Research.

This is Joe Nolan on for David. I just wanted to ask a follow-up on the cost 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 costs, 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 is 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 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 off of our production line. So we expect 2027 would be a year that auto OEM would again return to growth.

Your next question comes from Akanksh Chauhan with JPMorgan.

This is actually Joe Cardoso from JPMorgan. So maybe for my first question, I was just curious, I think late last year, you announced a partnership around health 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 unfolding and whether we could 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 Truemed partnership. And that has been a great new distribution channel for our products. 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, TrainingPeaks and TrainHeroic. How should we think about these 2 in terms of your long-term strategy for the company? And how are you thinking about the synergies across these platforms playing out in the context of both your product portfolio as well as potentially Connect+ and how you're thinking about that unfolding for the company?

Well, it's early days. And in terms of traditional synergies, we're really not thinking about any of those. The synergies we're thinking about in TrainingPeaks and TrainHeroic really has to do with our product line and the ability to offer what I would call a 360-degree experience for our customers where using our devices, they record information that is then loaded into the training platform and coaches are able to review that and provide recommendations, which then modifies the behaviors of the users. So we feel like that's a fantastic thing to achieve to be able to give a full experience to our customers of training and improvement.

Your next question comes from Noah Zatzkin with KeyBanc Capital Markets.

I guess just a follow-up on CIRQA. Any early feedback? I know it's super early from retail partners or consumers you'd like to share. And I noticed on the website -- on your website, it seems as if the product sold out and now the ship wait time is 5 to 8 weeks. So just wondering if that's kind of demand or supply driven or how we should think about that?

Well, I think it is demand and supply driven, but definitely ahead of anything that we had imagined. We had expected that we would receive a good reception to that product when we introduced it. We had discussions with retailers and things in advance, and they all were very excited about it. But the actual result once we announced the product was very strong, ahead of our expectations. So we will be chasing back orders for a while. But it is early days, but in the first few days of registration tracking, it was very, very strong. So the product is already getting out to customers.

Great. And maybe just one on the Thailand facility. Any updates there? And then maybe just how we should think about the opportunity from a cost perspective and a capacity perspective?

Yes. So Thailand is on track, and we're in probably the most intense part of our capital expenditures to be able to build and equip that facility. We expect it to be finished towards the end of the year, and we'll start utilizing it in early 2027. Initially, we're building the product or the site out in phases.

And so our first phase is about 400,000 square feet, but it can -- in total, has a potential of doubling our capacity across all of Garmin. So we have a lot of room to grow there. The cost structure is probably the same or even slightly less than what we have globally right now. But in general, we're doing this out of the ability to differentiate and kind of give us additional manufacturing options as we diversify our business.

Your next question comes from Ivan Feinseth with Tigress Financial Partners.

Congratulations on the huge results and the increase in guidance. Two questions. My first is on the JL Audio Primacy. What kind of uptake or reception are you seeing on that? And since this is not like a direct-to-consumer product, but it looks like you need professional install, what kind of inquiry are you getting from the professional install community about becoming a dealer for this and getting training and stuff by you to sell it and install it?

Yes. We had a good reception to Primacy. We hosted large groups of home audio installers and custom audio outfitters in our facility down in Miramar, Florida, and we had a very good reception to that and very good reviews from them coming out of that. It is a specialty product, highly specialty product. And so it's going to take some time to really see the pull-through of that, but the initial reactions and the feedback we got from people was strong.

And my second question on the new AXIS displays. How does that compare to some of the competing products as far as cost and integration? And what kind of reception are you getting to that?

The reception to AXIS is very strong. There's really nothing else like it out on the market, and it has basically been designed to address the ability to lower installation costs to simplify for both OEMs and homebuilders and to provide a level of integration that they just didn't have access to before. So we're very excited about that, and we think it really resets the bar in terms of integrated flight displays.

Your next question comes from Ronald Epstein with Bank of America.

This is Alex Preston on for Ron this morning. I just wanted to turn to aviation real quick. And I was wondering if you could talk a little bit about the demand that you're seeing across end markets, right? So it seems that business aviation has been strong maybe despite some macro concerns, defense and government platforms have support. Just curious if there's any sort of more detail you could give there?

Yes. I think business aviation continues to be strong. As you know, OEMs are sitting on pretty much record backlogs as they work through those. So there doesn't appear to be an excess capacity issue. Customers still want these vehicles and appreciate them for what they do. And so the OEM side of things has been going very well. The aftermarket side has been resilient and strong even despite some of the bumps that we've seen in the near term with fuel prices and things like that. But good used airplanes are things that people invest in and they add equipment to. And so that market has been resilient.

And sort of, I guess, to follow up, any changes to what you're thinking going forward into the second half, maybe into '27 on those demand drivers?

No, really no changes at all. We see things kind of moving as they have been.

We have reached the end of the Q&A session. I will now turn the call back to Teri Seck for closing remarks.

Thanks to all of you for joining us today. Doug and I are available for callbacks, and we hope you have a great rest of your day. Bye.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for joining us, and welcome to the 2026 Annual General Meeting of Shareholders of Garmin Limited. Thank you for being here. I will now hand the conference over to Josh Maxfield, Chairman of the Annual General Meeting, Vice President and Secretary, Garmin Limited. Josh, please go ahead.

Ladies and gentlemen, may I have your attention, please. We would like to start the annual meeting. Good afternoon to those here in Zurich, and welcome to those listening to the webcast. I am Josh Maxfield, Vice President, General Counsel and Secretary of Garmin Limited. I am acting as Chairman of this 2026 Annual General Meeting of Garmin Limited pursuant to Article 16 of the company's Articles of Association.

I would like to extend a special welcome to the members of our Board of Directors and our executive management who are present online. Before we commence the formal business of this meeting, I would like to recognize our President and CEO, Cliff Pemble, who will review our achievements in 2025 and the first quarter of 2026.

Thank you, Josh, and welcome to those who are joining from Zurich and to our shareholders who are attending this webcast. 2025 was another remarkable year of achievement for Garmin.

Revenue increased 15% to $7.25 billion, a new record with growth and record revenue in every segment. Operating margin expanded to 25.9%, resulting in record operating income of $1.88 billion, an 18% increase over 2024. We're off to a great start in 2026, achieving strong double-digit growth in both revenue and operating income during the opening quarter of the year in a continuation of the positive business trends we've been experiencing over the longer term.

Throughout the year and into 2026, we launched many new products and received numerous awards and recognition across our diverse business segments. We were ranked #1 in product support for the 22nd consecutive year by Aviation International News and for the 21st consecutive year by Professional Pilot Magazine.

We were named Manufacturer of the Year by the National Marine Electronics Association for the 11th consecutive year with 8 Product of Excellence awards, and we were recognized for the third consecutive year as the most innovative marine company by Soundings Trade Only, a leading trade publication for the recreational boating industry.

We received 5 innovation awards for groundbreaking achievements in technology across various product categories at the 2026 Consumer Electronics Show and the Phoenix 8 Pro was officially recognized as the best connected device at the 2026 Mobile World Congress in Barcelona.

These awards and many more are a testament to our associates' passion and commitment to serving our customers and each other. I'm proud of our accomplishments in 2025 and want to thank Garmin's amazing associates worldwide for their tremendous dedication and effort.

With a strong product line and a great team, I'm confident we are well positioned for long-term success. Thank you again for joining today, and I'll now turn the meeting back over to Josh and Zurich.

Thank you, Cliff. Present at this meeting is Mr. Yasha Price, who is a partner in the law firm of Versch & Gering LLP, which firm was elected as independent voting rights representative by shareholder vote at our 2025 Annual General Meeting.

Also present are Mr. Roger Mueller and Ms. Michaela Held of Ernst & Young Limited, Garmin Limited statutory auditor. Ms. Vera Negali and Mr. Florian Schweighofer, both lawyers in the law firm, Bar & Karrer AG; and Mr. Paul Cassett, Principal Counsel at Garmin. I have appointed Ms. Negali as vote counter and Mr. Cassett as Secretary of the meeting to keep the minutes.

I will now report on the organization of this Annual General Meeting and the presence of a quorum. The Board of Directors has invited shareholders to this Annual General Meeting in accordance with Swiss law and our Articles of Association by way of a proxy statement filed with the United States Securities and Exchange Commission.

The invitation to this Annual General Meeting contains the agenda items and the proposals of the Board of Directors. No shareholder has requested the inclusion of an item or proposal on the agenda of today's meeting. The Board of Directors has fixed the close of business on April 10, 2026, as the record date for this meeting.

Shareholders registered in our share register with voting rights at the close of business U.S. Eastern Time on the record date are entitled to attend, vote or grant a proxy to vote at this meeting. In accordance with Swiss law, any additional shareholders who registered in our share register at the close of business U.S. Eastern Time on May 22, 2026, are also entitled to attend, vote or grant -- proxy to vote at this meeting.

Shareholders who are registered in Garmin's share register on May 22, 2026, but have sold their shares before the meeting date are not entitled to exercise voting rights with respect to the matters to be resolved upon at this meeting. A copy of the Garmin Limited 2025 annual report to shareholders, which contains the consolidated and statutory financial statements of Garmin Limited for the fiscal year ended December 27, 2025, and the auditor's reports have been made available on Garmin's website 20 calendar days before the meeting.

I have received an affidavit from Computershare Communication Services, the company's mailing agent, stating that notice of this Annual General Meeting, together with the proxy statement, proxy card, annual report and return envelope, were duly mailed by Computershare Communication Services to all shareholders of record as of the applicable record date who elected to receive notice by mail.

At the request of the independent voting rights representative, Versch & Gering LLP, and in accordance with Article 689c, Paragraph 5 of the Swiss Code of Obligations, I inform all shareholders present or represented at this meeting that Versch & Gering shared with us the aggregate for, against and abstain voting instructions of shareholders of record on each proposal on today's agenda and therefore, not -- each proposal on today's agenda today and therefore, not earlier than 3 business days before the date of this meeting.

Each proposal at this annual meeting requires the affirmative vote of a majority of the votes cast, excluding unmarked, invalid and non-exercisable votes and abstentions. We will now ascertain whether a quorum is present. Under Garmin's Articles of Association, the quorum for a general meeting of shareholders is the presence in person or by proxy of at least a majority of the total number of shares entitled to vote at a general meeting of the shareholders.

As of May 22, 2026, there were 192,822,422 shares of Garmin Limited issued and outstanding which number excludes 2,078,543 treasury shares. Ms. Negali, please could you report the number of shares represented at this meeting?

There are present or represented at this Annual General Meeting 167,76,275 shares or 86.65% of the issued and outstanding shares of Garmin Limited entitled to vote at this general meeting. All of such shares are represented by the independent voting rights representative.

Thank you. A majority of the shares entitled to vote at this meeting is represented. Therefore, a quorum is present, and today's meeting is validly constituted. We will now proceed with the formal business of this meeting. We will follow the order of business listed in the agenda. The first item on the agenda is the proposal for approval of Garmin's 2025 annual report, including the consolidated financial statements and the statutory financial statements of the company for the 2025 fiscal year.

Mr. Mueller and Ms. Held of Ernst & Young Limited have informed me that Ernst & Young Limited does not have anything to add to its audit reports. Ms. Negali, please could you report the voting results on this proposal?

Proposal 1, approval of the 2025 annual report has been approved with 99.97% of the votes cast.

Proposal 2 on the agenda is to approve the appropriation of available earnings. The full text of the proposal is contained in our proxy statement. Ms. Negali, please could you report the voting results on this proposal?

Proposal 2, the approval of the appropriation of available earnings has been approved with 99.92% of the votes cast.

Thank you. Proposal 3 on the agenda is the approval of a cash dividend in the aggregate amount of $4.20 per outstanding share to be paid out of the company's reserve from capital contribution in 4 equal installments on dates to be determined by the Board of Directors.

The full text of the proposal is contained in our proxy statement. Ernst & Young Limited has confirmed that in their opinion, the distribution proposed by the Board of Directors complies with Swiss law and the company's Articles of Association. Mr. Mueller and Ms. Held of Ernst & Young Limited have informed me that Ernst & Young Limited has no additional comments on its confirmation regarding the dividend proposal of the Board of Directors. Ms. Negali, please could you report the voting results on this proposal?

Proposal 3, approval of the payment of a cash dividend has been approved with 99.91% of the votes cast.

Thank you. Proposal 4 is to discharge the members of the company's Board of Directors and the executive management from liability for their activities during the 2025 fiscal year. It is customary for Swiss companies to include such a proposal on the agenda of their Annual General Meetings of Shareholders.

The discharge is only effective with respect to facts that have been disclosed to shareholders and only binds shareholders who either voted in favor of the proposal or who subsequently acquired shares with knowledge that shareholders have approved this proposal.

In accordance with Swiss law, members of the company's Board of Directors and the executive management cannot vote on the discharge of liability. So the number of votes cast on this proposal will be lower than on the other proposals. Ms. Negali, please could you report the voting results on this proposal?

Proposal 4, the discharge of the directors and the executive management from liability for activities during the 2025 fiscal year has been approved with 98.92% of the votes cast.

Thank you. Proposal 5 on the agenda is to reelect 6 directors. The Board of Directors has nominated Susan M. Ball, Jonathan C. Burrell, Joseph J. Hartnett, Min H. Kao, Catherine A. Lewis, and Clifton A. Pemble for reelection for a term extending until completion of the next Annual General Meeting. Voting is for each director nominee separately. Ms. Negali, please could you report the voting results on this proposal?

All 6 nominees to the Board of Directors pursuant to Proposal 5 have been elected with no less than 86.35% of the votes cast.

Proposal 6 on the agenda is the reelection of the Chairman. The Board has nominated Dr. Min Kao, who is currently the Executive Chairman of Garmin, for reelection as Chairman for a term extending until completion of the next Annual General Meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 6, Dr. Min Kao's reelection as Chairman has been approved with 93.56% of the votes cast.

Thank you. Proposal 7 is the reelection of 4 members of the Compensation Committee of the Board of Directors. The Board has nominated Susan M. Ball, Jonathan C. Burrell, Joseph J. Hartnett, and Catherine A. Lewis for reelection as members of the Compensation Committee for a term extending until completion of the next Annual General Meeting. Voting is for each nominee separately. Ms. Negali, please could you report the voting results on this proposal?

All 4 nominees for reelection to the Compensation Committee pursuant to Proposal 7 have been elected with no less than 91.96% of the votes cast.

Proposal 8 on the agenda is the reelection of the independent voting rights representative. The Board has proposed that the New York law firm of Versch & Gering LLP be reelected as the independent voting rights representative for a term extending until completion of the next Annual General Meeting.

Versch & Gering has lawyers who have expertise and experience in Swiss as well as U.S. legal matters. Versch & Gering does not perform any other services for Garmin. Ms. Negali, please could you report the voting results on this proposal?

Proposal 8, reelection of the independent voting rights representative has been approved with 99.95% of the votes cast.

Thank you. Proposal 9 on the agenda is to ratify the appointment of Ernst & Young LLP as Garmin's independent registered public accounting firm for the 2026 fiscal year and to reelect Ernst & Young Limited as Garmin's statutory auditor for a further 1-year term. Ms. Negali, please could you report the voting results on this proposal?

Proposal 9, ratification of the appointment of Ernst & Young LLP as the company's independent public accountant and reelection of Ernst & Young Limited as statutory auditor has been approved with 96.65% of the votes cast.

Thank you. Proposal 10 on the agenda is an advisory resolution approving the compensation of Garmin's named executive officers as disclosed in the proxy statement for this Annual General Meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 10, advisory vote on executive compensation has been approved with 95.35% of the votes cast.

Proposal 11 is an advisory vote on the 2025 Swiss statutory compensation report. Under Swiss law, we are required to prepare a separate Swiss statutory compensation report each year that contains specific items in a presentation format determined by Swiss law.

A copy of the Swiss statutory compensation report is contained in Annex 1 of the proxy statement for this meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 11, advisory vote on the Swiss statutory compensation report has been approved with 95.84% of the votes cast.

Proposal 12 is a vote on the 2025 Swiss Statutory nonfinancial matters report. Under Swiss law, we are required to prepare a statutory nonfinancial matters report each year that contains items determined by Swiss law. A copy of the Swiss nonfinancial matters report is contained in Annex 2 of the proxy statement for this meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 12, vote on the Swiss statutory nonfinancial matters report has been approved with 99.67% of the votes cast.

Thank you. Proposal 13 is to approve the fiscal year 2027 maximum aggregate compensation for the executive management as required by Swiss law and our Articles of Association and as disclosed in the proxy statement for this Annual General Meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 13, binding vote to approve the fiscal year 2027 maximum aggregate compensation for the executive management has been approved with 98.1% of the votes cast.

Thank you. Proposal 14 is to approve the maximum aggregate compensation for the Board of Directors for the period between this 2026 Annual General Meeting and the 2027 Annual General Meeting as required by Swiss law and our Articles of Association and as disclosed in the proxy statement for this Annual General Meeting. Ms. Negali, please could you report the voting results on this proposal?

Proposal 14, binding vote to approve the maximum aggregate compensation for the Board for the period between the 2026 Annual General Meeting and the 2027 Annual General Meeting has been approved with 99.89% of the votes cast.

Thank you, Ms. Negali. I therefore confirm that all proposals have been approved by Garmin shareholders with the required majority. This concludes the results of the voting. The voting results on all proposals on the agenda will be filed with the SEC on a Form 8-K report within 4 business days of this meeting and will be available on Garmin's website.

This concludes the meeting. Thank you for your interest in Garmin. We wish you a good weekend and look forward to another successful year.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Garmin Limited First 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. Teri, please go ahead.

Good morning. We'd like to welcome you to Garmin Limited's First 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/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, 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 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-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. 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 achieved remarkable financial results during the first quarter of 2026 in a continuation of the positive trends we've been experiencing over the long term. Consolidated revenue increased 14% to $1.75 billion, which is a new first quarter record. We achieved double-digit growth rates in 3 segments, and we experienced strength in many product categories across the business, including wearables, which were a significant contributor to consolidated growth.

Gross and operating margins expanded to 59.4% and 24.6%, respectively, resulting in record first quarter operating income of $432 million, up 30% year-over-year and pro forma EPS of $2.08, up 29% year-over-year. We're off to a great start in 2026, and we are very pleased with our results. As a reminder, the first quarter is typically the lowest seasonal quarter of our financial year. While the initial trends are encouraging, much of the year remains ahead. With this in mind and consistent with our typical practice, we are maintaining the guidance issued in February, and we'll provide updates as the year unfolds. 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 42% to $547 million, which is a new first quarter record, driven by broad-based growth across all product categories, led by strong demand for advanced wearables. The primary driver of our performance is higher unit volumes, resulting in meaningful market share gains. Gross and operating margins were 62% and 29% respectively, resulting in operating income of $158 million. During the quarter, we launched the Varia RearVue 820, our brightest and most powerful radar tail light for cyclists. We expanded on-device messaging for select wearables with a new Connect IQ app that allows customers to read, reply and react to WhatsApp messages right from their wrist. We also announced that select wearables can now integrate with the highly acclaimed Natural Cycles birth control and Cycle Tracking app, empowering women to better understand and manage their reproductive health.

The Fitness segment has achieved outstanding performance over the long term, and we are very pleased with these results. As mentioned in February, we expect that the Fitness segment will be the strongest contributor to 2026 consolidated growth. Moving to Outdoor. Revenue decreased 5% to $418 million as we compared against a strong prior year quarter, which included the launch of the Instinct 3 smartwatch family. Fenix smartwatches performed well during the quarter, even considering the strong comparable from the prior year. Gross and operating margins were 67% and 28%, respectively, resulting in operating income of $119 million. During the quarter, we released the Approach G82 handheld GPS with a built-in launch monitor and the Approach J1, our first GPS watch specifically designed for junior golfers.

The Approach J1 was created by Garmin Associates who through their own experiences, recognize that aspiring junior golfers also want tools designed specifically for them to learn the game and improve performance. I'm proud of the way that our teams lean on their own experiences to bring unique, highly differentiated products to market. Also during the quarter, we launched the zumo XT3, our newest and most advanced motorcycle-focused GPS device and the Catalyst 2, a compact device for motorsports that helps high-performance drivers achieve faster times on the track.

Looking forward, we expect second quarter outdoor performance to be similar to that of Q1. We also expect to achieve stronger performance in the back half of the year due to the timing of product launches, resulting in improved full year growth when compared to 2025. Looking next at Aviation, revenue increased 18% to $264 million with growth contributions from both OEM and aftermarket product categories. Gross and operating margins were 75% and 27% respectively, resulting in operating income of $71 million. During the quarter, Daher unveiled their new TBM 980 single-engine turboprop aircraft featuring our G3000 PRIME avionics suite. Also, the Hondajet Elite II was certified by the FAA, becoming the first twin turbine business jet with Garmin Emergency Autoland technology. We are very pleased with the performance of aviation during the first quarter, and we expect to achieve solid growth throughout the remainder of the year.

Turning to the Marine segment. Revenue increased 11% to $355 million with broad-based growth across multiple product categories. Gross and operating margins were 56% and 26%, respectively, resulting in operating income of $91 million. The year-over-year margin compression was primarily due to higher tariff costs. During the quarter, we launched a new 360-degree scanning sonar with Spy pole, allowing anglers to see a bird's eye view of fish and underwater structure in every direction. Also during the quarter, we launched the quatix 8 Pro, our purpose-built nautical smartwatch with inReach technology for 2-way satellite and cellular connectivity. Our Marine segment is off to a very good start, and we believe we are on track to achieve growth consistent with the prior year.

And moving finally to the auto OEM segment. Revenue increased 1% to $170 million with growth primarily driven by infotainment programs. The segment operating loss narrowed to $6 million due to gross profit improvement and lower R&D expenses. We continue to achieve important milestones leading up to the launch of our next large-scale program with Mercedes-Benz, which we anticipate will drive significant growth starting in 2027 and beyond. As a reminder, we expect auto OEM revenue to decrease in 2026 as the BMW program has reached peak volumes and as certain legacy programs approach end of life.

We also expect the operating loss to narrow compared to 2025, although we are not expecting the segment to be profitable on a GAAP basis for the full year. Wrapping up, we continue to outperform expectations in a business environment characterized by economic whiplash and geopolitical uncertainty. Even in these challenging circumstances, we believe that great products and customer service always win. As strong as our product line currently is, we are planning to launch even more new products throughout the year, including some that represent new categories for Garmin. 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 first quarter financial results, provide comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.753 billion for the first quarter, representing a 14% increase year-over-year. Gross margin was 59.4%, a 180 basis point increase from the prior year quarter. The increase was primarily due to favorable foreign currency impacts. Also for your reference, [we do not record] any benefit or receivable related to any potential refund of previously paid tariffs.

Operating expense as a percentage of sales was 34.8%, 110 basis point decrease. Operating income was $432 million, a 30% increase. Operating margin was 24.6%, a 290 basis point increase over the prior year quarter. Our GAAP EPS was $2.09, and pro forma EPS was $2.08. Next, we look at first quarter revenue by segment and geography. During the first quarter, we achieved double-digit growth in 3 of our 5 segments, led by the Fitness segment with 42% growth, followed by the Aviation segment with 18% growth, and Marine segment with 11% growth. By geography, we achieved growth in all 3 regions, led by 25% growth in APAC, followed by 15% growth in EMEA and 10% growth in Americas. EMEA and APAC regions benefited from favorable foreign currency impacts.

Looking next at operating expenses. First quarter operating expense increased by $59 million or 11%.

Research and development increased approximately $28 million. SG&A increased approximately $31 million compared to the prior year quarter. Both increases were primarily due to personnel-related expenses. A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $4.3 billion. Accounts receivable increased year-over-year due to strong sales, but decreased sequentially to $941 million following a seasonally strong fourth quarter. Inventory increased year-over-year and sequentially to approximately $1.9 billion.

During the first quarter of 2026, we generated free cash flow of $469 million, a $9 million increase from the prior year quarter. Capital expenditures for the first quarter of 2026 were $67 million, approximately $27 million higher than the prior year quarter. During the first quarter of 2026, we paid dividends of approximately $174 million, purchased $40 million of company stock. At quarter end, we had approximately $491 million remaining share repurchase program, which is authorized through December 2028. For an effective tax rate of 14.3%, which is comparable to 14.5% in the prior year quarter. This concludes our formal remarks. Ben, can you please open the line for Q&A.

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

Maybe for my first question, can we just double-click on the performance, the strong performance in the quarter, both from a revenue and gross margin perspective. Cliff, it sounds like you're cautiously optimistic about the year despite kind of sticking to the typical full year guidance practice here. So maybe can you just touch on what is reinforcing that view, for example, how did demand momentum trend through the quarter and into 2Q to date? And then as you think about kind of the component cost and availability trends that we talked about last quarter, how did that trend through the quarter? And any change in view relative to your ability to navigate those dynamics versus 90 days ago? And then I have a follow-up.

Yes. Joe, I think, as I mentioned, we're very pleased with the initial results. Q1 does tend to be our lowest quarter. So we take it as a data point, but we definitely need to see more of the year unfold before we can really start to tweak what our 2026 results expectation will be. In terms of demand trends, they're consistent, continue to be very strong, like we saw in the prior year. Registration rates are continuing to be strong. We have not seen any impact from some of the recent developments in the Middle East and some of the conflict there when it comes to registration rates.

In fact, some of them are the strongest that we've been experiencing in the near term. So no worries there for the near term. Component costs wise, I would say that right now, we are not experiencing that in our current results. But keep in mind that component costs come through our inventory on the balance sheet. So consequently, as costs change, we'll see some of those go up as the year unfolds. We do have significant safety stock of some components that are under pricing pressure. So I would expect that 2026 is still going to be somewhat muted, and we'll start to see some effect in 2027.

Got it. Great color there, Cliff. And then maybe for my second one, and this is perhaps a bigger picture question. Over the last 6 months or so, we've seen a couple of private wearable companies complete successful funding rounds, disclose healthy revenue trends. And I think both are pursuing a somewhat different approach, both in terms of form factors and perhaps a more aggressive push into subscriptions or hardware-as-a-service models relative to incumbents like yourselves, so just given that, maybe just curious to hear your thoughts on how you're assessing the competitive implications just given that different approach being taken by these challengers. And maybe alternatively, do you see this as more of a market expanding dynamic potentially that could open the door for you to evolve how your own monetization approach is taken over time?

Yes. I would say that if there's anything that we've learned over the years is that customers want choices when it comes to devices, especially those that they wear. So that's what we're seeing, I think, in the market today is an expansion of options for people. And for us, again, we're -- we don't rule anything out. We're open to all kinds of devices and form factors in how we deploy our wearable sensor technology.

So I would say that, again, we see this as expanded opportunity for everyone. And I would point out that our results also reflect the general increase in the market and awareness and use of wearable devices for both fitness activity as well as wellness monitoring. In terms of subscription-based models, I would remind everyone that we have been expanding our role in subscription-based services for our products. In the services that we offer for those with Garmin Connect Plus as well as other services that we have in segments across the business. And so it's an area of enhanced focus for us as well.

Your next question comes from the line of Tim Long with Barclays. Tim?

This is Alyssa Shreves, on for Tim Long. Just a few quick questions. It sounded like you said strong demand for advanced wearables in the quarter. What are you seeing in the lower tier of the portfolio? Is there anything kind of -- are you seeing a dispersion in customer trends between the 2? And then I have a follow-up.

Yes. So when we talk about advanced wearables, we're really talking about those wearables that have GPS and the ability to download applications and that kind of thing. And really across our wearable price bands, all of those products pretty much qualify in that category. It's really the very basic kind of wearable bands like our vivosmart line that aren't considered advanced wearables, but those are a small part of our portfolio. So within advanced wearables, we have many different price tiers from entry level on through to premium, and we're definitely seeing strong demand, both at the low end and the high end of those ranges.

That's helpful. And then just a quick question on the GEOS. I know the commentary on the call about the FX with EMEA and APAC. But in the Americas business, is there anything to call out in the GEOS, anything you're seeing there in customer trends?

No, I don't think there's anything particular at this point to call out. There are a lot of dynamics in the geographies right now, the geopolitical spectrum. And so time will tell, but initial indications are that some of the initial kind of bumps that occur whenever there's a big change like that have evened out and people are starting to get back to kind of normal patterns. So right now, I would say we're encouraged by what we see. But again, it's a very dynamic environment.

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

I wanted to ask about the new product introduction because it seems as though there was maybe a stronger-than-normal new product quarter. I wonder if that's true. And if so, can you just talk about the impact on growth and margins from -- just strictly from new product launches?

I think we typically release somewhere around 100 new products a year, and we would expect that 2026 is in line with that, if not slightly stronger as we look at some new things. In terms of margin profiles, new products are the ones that come out and they're fresh design. So they have all the latest components and design optimizations that we do. And they also -- if they have new features and capabilities and segmentation in the market, we can typically bring them out at appropriate prices for their particular competitive landscape. So they can be a margin enhancer. But in general, we rely on new products to really drive revenue growth within the company.

Right. And just to clarify on that, do we see maybe a slightly larger proportion of the reported revenues being generated from new products versus what we might have otherwise seen in prior years?

No, I would say it's historically consistent with what we've seen. Again, we're very consistent with product introductions, which means that generally, our revenue mix from new products tends to be pretty similar from year-to-year.

Okay. Good. And just as a follow-up, I wonder, you talked about the auto OEM business and the transition between the BMW and the Mercedes programs. Can you just help us think through kind of the -- how you're thinking about the cadence of revenues in 2026 leading into the ramp of that Mercedes early 2027?

As we mentioned in the remarks, we expect that 2026 would be a slightly down year compared to previous year because of the ramp down of the BMW program, which is starting to -- its tail off cycle into phase out. And then 2027 should be a ramp-up year for the Mercedes program.

You were flat in this quarter. Do you expect to be flat in 2Q and then see that revenue gap become more visible? Or do we see that begin in 2Q?

Yes. I would say probably not able to share the specific dynamic of Q2 just yet. But again, for the whole year, we definitely expect the long-term forecast that we're receiving would result in a slightly down year for auto OEM in 2026.

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

I wanted to start, could we discuss a little bit in aviation. Could you discuss what you're seeing with respect to demand around new deliveries versus the retrofit opportunities? And any thoughts on order volume with bonus depreciation and what that's doing to backlog? And then I have a follow-up.

I think the new deliveries are definitely a strong contributor to the growth, stronger than the aftermarket side, although both contributed to the growth. Aviation aircraft makers are sitting on high backlog still. And so consequently, their volumes and cadence tend to be -- tend to move slowly as they work through backlog, but their objective is not to clear out backlog. Their objective is to keep feeding backlog and to incrementally grow as well. So in general, we see it as a very healthy cadence in the OEM side of things and have not, at this point, heard of any indications that people are hesitating around the purchase of new aircraft.

Okay. The other -- Cliff, you talked a little bit about thoughts on the commodity environment and how that looks this year and even into next. I guess bigger picture, how are you thinking about the overall balance sheet and working capital strategy with that backdrop? Has it changed? Any thoughts around working capital commits, more strategic procurement? Anything along those lines that you guys are thinking about that you can share?

Yes. As it relates to our balance sheet and inventory, we look at inventory really as a business tool for us. Depending upon the situation, we'll look at that to increase our safety stock for key components as such. And also, obviously, demand of our product, we have to take that into consideration. But it's really a key part of our overall operations is to make sure that we use that inventory appropriately to make sure we have products for when the customer needs it as well as to manage our full supply chain, including the commodities are out there.

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

Cliff, can we just get a very kind of high-level view from you on the state of the consumer, specifically the consumer that you guys kind of sell into? Just anything that is changing? I know you mentioned the Middle East conflict hasn't had any impact, but there's just a lot of kind of cross currents in the economy today. So I would just love your updated view on the state of the consumer. And maybe if you could tie into that. Just given your answer to that, maybe is there a specific segment or market where you maybe feel incrementally better about the year more than 90 days ago versus anywhere you feel maybe incrementally more cautious? Just if you could maybe tie those together and then a quick follow-up, please.

I would say that, Erik -- I would say that what we see of the consumer is pretty much the same as what we have seen over the past several quarters. There is a lot of public talk about how consumers are stressed. And certainly, we probably all have to believe that's true. At the same time, many of the banks and monitors of personal credit usage and spending seem to be very positive. People seem to be shaking off whatever their concerns are that they're voicing. For the customer base that we serve, we tend to serve those that place a high priority on their personal health and wellness as well as products for active lifestyles and mobility.

And so we believe we're serving a customer base in a market that's probably a little more resilient than what the average reporting out there is. In terms of segments where we feel better or worse, I would say we're optimistic about all of them. I would say that if there's any area of concern when it comes to oil prices and conflict is that it can tend to give some of those markets like marine and aviation, a little more hesitancy as people think about fuel prices and investments there. The one thing I would think is a positive even in that backdrop is that the stock market and the financial markets have been very strong, and so that tends to offset any hesitation. So in general, it's a mixed bag, but I would say the environment and the scenario is really very good considering everything that's going on.

Okay. That's super helpful. And then just as a quick follow-up. Cliff, you kind of alluded to leveraging your balance sheet in this commodity environment. Is the message that you're sending we will see costs going up in the second half and therefore, there will be some margin pressure, all else equal? Or given the illusion that costs or given that you're alluding to costs going up, how will you kind of protect margins with higher input costs? I just want to make sure I kind of understand the message as we go into the second half and in 2027.

Yes. As we mentioned, our -- we do have a lot of safety stock around some components that we've accumulated. And so the impact on our financials due to higher input costs at this point, we feel are well controlled in 2026, and we've included those in our outlook for our guidance. We're not at all starting to think about 2027 or issuing guidance from that but definitely people should expect that the higher input costs that are rolling their way through our inventory would start to appear more in 2027. So that's what we're seeing.

I think for our business, definitely, the bill of materials is -- if you look at our margin structure, we have ways that we can offset some increases here and there with efficiencies in other areas. So we're going to work hard to protect those margins. It's not our goal to go backwards. But again, we are facing some headwinds because of the component environment.

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

Congratulations on another great quarter and a great start to the year. And for the number of new watches that you're making that incorporate, inReach and LTE functionality, what percentage of buyers are signing up for a subscription plan?

Yes. We don't break it out, but the obvious point of those devices with the connectivity hardware is to use the services. And one of our key differentiators as a company is especially the inReach service around messaging and SOS services. And so we feel like we have a strong differentiator there that gives a real why Garmin for those product lines. And so I would expect to see more of those kinds of products coming to market in the future.

And then that including your family of apps, can you give like a big picture of how you see that growing your user base as they use like Messenger and Explore and those are integrated in more and more products?

We see people engaging with our apps across the broad spectrum. As you point out, there are several different app properties that we have that people rely on, such as Garmin Connect, of course, is kind of a baseline, but we also have the Golf app. We have Messenger. We have all kinds of apps across our business that interact with our devices. So we see strong engagement from our customers and good feedback from them.

And then especially Messenger, as somebody gets a Garmin watch, they tend to connect with maybe friends that weren't using it, but you see the overall growth of Messenger being used that could be a big driver to more product adoption?

We see Messenger pulling in not only the Garmin device user that manages the device, but also their friends, which allows them to communicate and of course, gives us opportunity to expose more people to the Garmin brand.

And then my second question is, how much more robust is the functionality that you provide on board to Mercedes compared to what you're providing to BMW?

Well, I think you're probably thinking maybe of content or ASP, but I would definitely say that it's a more complex unit and higher ASPs than what we saw with BMW because of its level of integration and also strong volumes. So we expect to see, again, Mercedes to be a strong contributor to scale starting in 2027.

Your next call comes from the line of Jordan Lyonnais with Bank of America.

[ANA Aviation], could you give a sense of what the size is of the defense and government markets and if that contributed to the gains in the quarter?

Well, we tend to send -- sell our products on a commercial off-the-shelf basis to opportunities within government and military. There are some light customizations that we do. But in general, we're selling the same platforms that we sell across commercial as well. It's a smaller part of our overall business, but one that we view as a key opportunity.

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

Hoping to get your thoughts on some of the more recent changes in tariff policy and whether or not that's changed your view on the overall tariff impact this year versus last quarter? I think relatedly, maybe how are you thinking about the potential magnitude of refunds that you might be positioned to recoup over time?

Yes. Regarding tariffs, yes, first of all, regarding the gross margin, year-over-year, there was an unfavorable impact on tariffs this Q1 versus last year since the tariffs were not in effect for that period of time. As we think about the remainder of the year, we do expect there to be some tariff impact for the remainder of the year, basically at the current trends we're seeing. Obviously, that's evolving, but that's our current opinion. As it relates to the refunds, we have not recorded any receivable or benefit for those refunds at this point in time. We'll continue to evaluate that and record at the appropriate time and provide more details when we do record that receivable and benefit.

Great. And then maybe just one on Marine, another strong quarter there. What are you guys seeing in terms of the underlying trends in the marine end market? And maybe just any color around what you -- what you think is helping to drive what I assume to be share gains there? That would be great.

I think for Marine, for us, we saw particular strength on deliveries to builders. So they definitely helped contribute to the growth that we have in the quarter, although the retail and the aftermarket was also a contributor. I think in general, we're starting to hear some of those customers start to express some worry given the current geopolitical situation. But I think a lot of times, that worry takes some time to filter through the market. So we're taking a wait-and-see approach on that. But in general, I would say that the overall market has been very strong, and we've had a very, very positive reaction to our new products, particularly the Spy pole and the 360 sonar.

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

Just a couple of cleanups. I guess on operating expenses, dollar expenses are up, but you're leveraging those increases very well. How should we think about the pace of incremental operating expense investment in '26 and '27 and also your ability to continue leveraging those investments at the operating line?

Yes. Regarding the operating expenses on a consolidated basis, for the full year, a percentage of sales, we expect operating expenses to be relatively consistent year-over-year. So a few things impacting our operating expenses. Obviously, the biggest driver there is personnel-related expenses, really the headcount, compensation as such, primarily in the R&D side of things just to fuel our innovation. But a couple of things also in the quarter, one of which was foreign currency that impacted our top line, they increased that, but also did increase some of our expenses there, too. Then also, we did have an acquisition of MYLAPS that anniversary this year also from that standpoint and they're annualized. So those are some factors in there. But we expect relatively consistent kind of pace in our operating expenses.

Flat year-over-year, I guess, is the guide.

Yes, consistent growth.

Right. And then secondly, just on distribution, are you seeing any meaningful change this quarter in the route to market? Any growth in distribution network to call out and how that may have influenced the reported margins?

I would say nothing specific to call out. We have very broad-based distribution across all kinds of retailers and distributors. And so I think the diversity of our go-to-market channels is probably richer for Garmin than any other company out there because of the broad base of markets we serve as well as the broad product categories that we have within each market.

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

Thank you all for joining us today. Doug and I are available for callbacks, and we hope you all have a great day. Bye.

This concludes today's call. Thank you for attending. You may now disconnect.

[Audio Gap]

Hello, everyone. Thank you for joining us, and welcome to the Garmin Limited Fourth Quarter and Full Year 2025 Earnings Conference Call. I will now hand the call over to Teri Seck, Director of Investor Relations. Please go ahead.

Good morning. We would like to welcome you to Garmin Ltd.'s Fourth Quarter and Full Year 2025 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 morning's earnings call includes projections and other forward-looking statements regarding Garmin Limited 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 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-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. 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 Clifton Pemble.

Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin achieved another quarter of outstanding financial results, driven by strong broad-based demand for our products. Consolidated revenue increased 17% to more than $2.1 billion, which is a new fourth quarter record and our first quarter to exceed $2 billion. We experienced strong double-digit revenue growth in 3 business segments, reflecting the strength of our highly diversified business model. Gross margin was comparable to the prior year at 59.2% while operating margin expanded 60 basis points to 28.9%. This resulted in record fourth quarter operating income of $614 million, up 19% year-over-year and record pro forma EPS of $2.79, up 16%.

2025 was another year of remarkable growth and achievement for Garmin with record consolidated revenue, record operating income and record revenue for all business segments. We attribute this strong performance to our strategic focus on market diversification and creating superior products that are essential to our customers' lives. This approach has been a winning strategy for us since we were founded more than 36 years

ago. Consolidated revenue increased 15% to $7.25 billion, which is a new annual record and up nearly $1 billion over 2024. Gross margin of 58.7% was comparable to 2024, which is a significant achievement considering the impact of generationally high tariff structures that took effect early in the year. Operating margin expanded by 60 basis points to 25.9%, resulting in record full year operating income of nearly $1.9 billion, up 18% year-over-year. Before sharing our full year outlook, I want to provide insights on what is important to us when considering forward-looking guidance. Our primary objective is to deliver the best result for Garmin on a consolidated basis. There are many factors that influence individual segment results. And we have said before that the diverse nature of Garmin's business gives us multiple paths to achieving consolidated goals. This makes individual segment growth targets less relevant, especially when viewed in isolation. With this in mind, we will continue to provide consolidated guidance measures and we will provide qualitative forward-looking insights for segments when it is helpful to do so, but we will no longer emphasize individual segment growth targets. This approach aligns with our primary objective to deliver the best results for Garmin on a consolidated basis.

With this in mind, we anticipate 2026 to be another year of strong top and bottom line growth. We expect revenue to increase approximately 9% to $7.9 billion, and we expect operating income to exceed $2 billion for the first time.

Many are wondering how industry-wide memory constraints will affect us. Our guidance considers everything we know about the supply chain environment, including recent cost pressures on memory components. It's our practice to continually seek efficiency throughout our entire supply chain by leveraging our vertically integrated business model and scale to optimize our cost structure. We've always used inventory as a business tool, and we have intentionally increased inventory levels of certain components and products to ensure we can meet long-term demand. We also have strong relationships with our suppliers and are working closely with them to meet the expected demand for our products.

While no one wishes to see supply chain challenges, we believe we are well prepared. Our strong results and positive outlook give us confidence to propose an annual dividend of $4.20 a share, reflecting a 17% increase over the current dividend amount, which will be considered by shareholders at the upcoming annual meeting. In addition, our Board of Directors recently approved a $500 million share repurchase program, effective through December 2028. Doug will discuss our financial results and outlook in greater detail in a few minutes, but first, I'll provide a few remarks on the performance of each business segment.

Starting with Fitness. 2025 was another exciting year of growth as customers embrace the healthy active lifestyles our brand represents. For the year, Fitness revenue increased 33% to $2.36 billion, surpassing $2 billion for the first time and was driven by wearables as we continue to benefit from both market share gains and market growth.

Gross margin was 60%, a 130 basis point improvement over the prior year. Operating income increased 50% year-over-year to $726 million, and operating margin expanded 360 basis points to 31%, reflecting both improved gross margin, and operating leverage. During the quarter, we announced our collaboration with health care payments provider, TrueMed to assist customers using pretax health savings account and flexible savings account funds for qualifying purchases of select Garmin products. We recently published our annual Garmin Connect data report which shows that on average, our users increased activity levels by 8% during the year, reflecting a high level of engagement with our products and app platforms. At the 2026 consumer electronics shows, the [indiscernible] 4 and the [indiscernible] 4970 received innovation awards for novel features in digital health and fitness, and we announced exciting enhancements to our premium [indiscernible] Connect Plus service with nutrition tracking and insights powered by AI-based active intelligence to help users achieve nutrition goals.

Looking forward, we expect another year of strong performance for fitness driven by demand for our current product lineup and contributions from new product introductions. We also expect that the Fitness segment will be our strongest contributor to 2026 consolidated growth.

Moving to Outdoor full year 2025 revenue increased 5% to $2.05 billion, also exceeding $2 billion for the first time. Growth in outdoor was primarily driven by adventure watches with a full year of contributions from the highly successful fenix 8 series that was launched in 2024 followed by the launch of the Phoenix 8 Pro with inReach technology in September of 2025. Gross and operating margins were 66% and 34%, respectively, resulting in operating income of $690 million. During the quarter, we launched the inReach Mini 3+ satellite communicator with voice, text and photo sharing. This compact and rugged communicator offers essential SOS safety features and reliable communication that explorers can use to stay connected with loved ones while venturing beyond cell phone coverage. And with up to 2 weeks of battery life in the 10-minute tracking mode, the inReach Mini 3 Plus can be used on multi-day trips without added worry of battery charging. Several outdoor products also received CES Innovation Awards, including the Phoenix Pro microLED version, [indiscernible] BlazeEquine Wellness System and the Descent S1 Buoy which highlights our commitment to exploring new product categories and developing groundbreaking innovation.

Looking forward, we expect full year growth in Outdoor to accelerate in 2026 compared to 2025 driven by a significant number of new product introductions. We also expect stronger performance in the back half of the year due to the timing of product launches.

Looking next at Aviation, full year 2025 revenue increased 13% to $987 million with growth contributions from both OEM and aftermarket product categories. Gross and operating margins expanded year-over-year to 75% and 26%, respectively, Operating income increased 22% to $257 million. During the quarter, we launched the D2 Air X15 and the D2 [indiscernible], our latest aviator smartwatches with cockpit connectivity and advanced aviation, health, fitness and smartwatch features. We announced that the Garmin G5000H cockpit system was selected for the Brazilian Air Force UH-60 Black Hawk helicopter, part of a growing list of military modernization programs based on our advanced commercially available integrated cockpit systems.

On December 20, 2025, our Autoland system was used by a customer for the first time, returning the aircraft and crew safely to the ground following rapid depressurization while operating in instrument flight conditions over the Rocky Mountains. This incident illustrates how our cockpit systems can improve the safety margins of flight. We are very proud of our aviation team for creating our award-winning Auto LAN technology. Looking forward, we expect aviation revenue will continue to grow in 2026, in line with historical norms.

Turning to the Marine segment. Full year 2025 revenue increased 10% to $1.18 billion, driven by growth across multiple categories led by chartplotters. Gross and operating margins were 55% and 21%, respectively, resulting in operating income of $251 million. We recently introduced the flagship GPS Map9000XSV lineup to further strengthen our offerings in the Chart Platter category. The GPS map 9000 XSB offers stunning 4K resolution displays, 5 gigahertz WiFi networking and industry-leading sonar performance. Also during the quarter, we launched Garmin OnBoard, a versatile man overboard and engine cutoff system that uses wireless technology, offering users freedom to move around the boat while still enjoying the protection of this important safety system. Garmin OnBoard was selected as the winner of the 2025 Dame Design Award in the Safety and Security Award category at the recent [indiscernible] Marine exhibition in Amsterdam.

During 2025, we received multiple awards, including being named Most Innovative Marine Company by Soundings Trade Only for the third consecutive year, NMEA Manufacturer of the Year for the 11th consecutive year and we received the National Boating Safety Award for the fifth consecutive year. This is an unprecedented level of industry recognition, and we attribute our success to the outstanding products we offer and our strong commitment to serving customers.

In 2026, we expect Marine segment growth to be consistent with the prior year based on improving market conditions. Moving finally to the auto OEM segment. Full year 2025 revenue increased 9% to $665 million, primarily driven by growth in domain controllers. Gross margin was 17%, and the operating loss was $49 million for the year. At the recent Consumer Electronics Show, we introduced our next-gen unified cabin domain controller that adds digital key capability, seat specific audio and video and an AI system designed to make vehicle interactions more conversational and powerful. We also announced our collaboration with Meta to explore new ways of interacting with the vehicle.

We continue to achieve important milestones leading up to the launch of our next domain controller program. I'm pleased to report that this program is with renowned global automaker, Mercedes-Benz and will broadly apply across their portfolio of passenger car models with significant volumes ramping up in 2027. In 2026, we expect revenue to decrease year-over-year as we have reached the peak of BMW domain controller volumes and a certain legacy programs approach end of life. We expect operating losses to narrow in 2026 as we shift certain auto OEM R&D resources to accelerate product road map development in other segments. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our fourth quarter and full year financial results, provide comments on the balance sheet, cash flow statement, taxes, our 2026 guidance. We post a revenue of $2.125 billion for the fourth quarter, representing a 17% increase year-over-year. Gross margin was 59.2% comparable to the prior year. Operating expense percentage sales was 30.3%, a 60 basis point decrease. Operating income was $614 million, 19% year-over-year increase. Operating margin was 28.9%, a 60 basis point increase from the prior year. Our GAAP EPS was $2.73, and pro forma EPS fell $0.79, a 16% increase from the prior year pro forma EPS.

Looking at our full year results. We posted revenue of $7.246 billion, representing a 15% increase year-over-year. Gross margin was 58.7% comparable to the prior year. Operating expense as a percentage of sales was 32.9%, a 50 basis point decrease. Operating income was $1.876 billion, 18% increase. Operating margin was 25.9%, a 60 basis point increase from the prior year. Our GAAP EPS was [ $8.59 ], pro forma EPS was $8.56, 16% increase on prior year pro forma EPS.

Next, look at our fourth quarter revenue by segment and geography. During the fourth quarter, we achieved record revenue on a consolidated basis. We achieved double-digit growth in 3 of our 5 segments led by the fitness segment with 42% growth. Followed by marine segment with 18% growth, aviation segment with 16% growth. By geography, the Americas region achieved strong double-digit growth of 21%, resulting in quarterly revenue exceeding $1 billion for the first time. EMA region, APAC region had 14% and 8% growth, respectively.

For full year 2025, we achieved record revenue on a consolidated basis and record revenue for each of our 5 segments. Our geography, we achieved 18% growth in EMEA, 40% growth in Americas and 12% growth in APAC. Looking next, operating expenses. Fourth quarter operating expenses increased by approximately $80 million or 14%. Research and development increased by $36 million, primarily due to personnel-related expenses. SG&A increased by $44 million, primarily due to increased advertising and personnel-related expenses.

A few highlights on the balance sheet, cash flow statement, dividends and share repurchase. [indiscernible] We ended the quarter with cash and marketable securities of approximately $4.1 billion. Accounts receivable increased sequentially and year-over-year to approximately $1.3 billion due to strong sales in the fourth quarter. Inventory balance increased year-over-year to approximately $1.8 billion. For our fourth quarter of 2025, we generated free cash flow of $430 million, a $30 million increase from the prior year quarter. For the full year 2025, we generated free cash flow of approximately $1.4 billion, a [ $24 million ] increase from the prior year. Our full year 2025 capital expenditures were $270 million, an increase of $77 million over the prior year. For 2026, we expect free cash flow to be approximately $1.4 billion, approximately $400 million of capital expenditures. The expected year-over-year increase in capital expenditures primarily due to a new manufacturing facility in Thailand, we expect to be operational in early 2027.

During 2025, we paid dividends of approximately $664 million. Also, we announced our plan to seek shareholder approval for a $0.60 increase in our annual dividend beginning with the June 2026 payment. This is a 17% increase from our current annual dividend $3.60. [indiscernible] a cash dividend of $4.20, $1.05 per share per quarter. 2025, we purchased $181 million of company shares. Also, our Board of Directors recently approved a $500 million share purchase program through December 2028 to replace the remainder of the previous $300 million authorization. Our full year 2025 pro forma effective tax rate was 17.4% compared to 16.7% in the prior year. Increase in the current year effective tax rate is primarily due to the 2025 U.S. tax legislation, which changed capitalization requirements of certain R&D costs, resulting in a decrease in certain U.S. tax deductions and credits.

Turning next to our full year 2026 guidance. We estimate revenue approximately $7.9 billion increased approximately 9% for 2025. We expect gross margin to be approximately 58.5%, a 20 basis point lower than our 2025 gross margin due to higher product costs, partially offset by favorable segment mix. We expect an operating margin of approximately 25.5%. 2026 pro forma effective tax rate is expected to be 16%, [ a 140 ] basis point decrease compared to 2025.

Expected year-over-year decrease in 2026 pro forma effective tax rate, primarily due to an increase in certain U.S. tax deductions [indiscernible] of certain provisions in 2025 U.S. tax legislation, which came effective 2026. This results in expected pro forma earnings per share approximately $9.35, a 9% increase over 2025 pro forma earnings per share. This concludes our formal remarks. Jade, can you please open the line for Q&A.

[Operator Instructions]

Your first question comes from the line of Joseph Cardoso from JPM.

And maybe if I could, for the first one, just wanted to touch on the memory side of things. like Cliff, I appreciate the comments that you made, but I was curious if you could help contextualize more, like how material of an impact you're expecting memory to be on your 2026 guide. And which areas of the portfolio are more or less impacted there? And then as we think about mitigation factors, you obviously mentioned the inventory. However, how are you thinking about other levers like de-specking or pricing to offset any headwinds here? And then I have a follow-up.

Joe, I think in terms of quantifying the impact, we don't quantify individual components of our cost structure. So we won't be sharing that. Definitely, there's pressure on memory costs. There are certainly a lot of items in our overall BOM that pricier items like displays and that kind of thing. So we simply just manage the entire BOM to be as cost efficient as possible. There's other opportunities to make the bombs more efficient and also make our overall supply chain more efficient, looking for cost opportunities across the spectrum. So we're working all different angles, and there isn't 1 area to identify that we would isolate because it's the entire picture. I would remind everyone that our overall margin structure is higher, and that's because we're a vertically integrated company. And so therefore, when we see some variation at the BAM level, of course, the impact to the overall margin is less impactful.

Got it. I appreciate the color there. And then maybe just as my follow-up, obviously, another strong quarter, actually a year for wearables and in fitness. You highlighted share gains and obviously, the market growth around product refreshes as key drivers. I'm assuming pricing has also been a tailwind this year for Garmin. Correct me if I'm wrong there. But could you maybe just talk about how each of these factors have contributed at least at a high level to the wearables growth this year? And as we think about growth for 2026 that you highlighted as being a larger contributor, at least as it relates to the fitness segment as a whole. How are you thinking about each of these factors and any kind of shift in terms of contribution there.

[indiscernible] Yes, our 2025 results in Fitness and Outdoor was influenced heavily by wearables. And definitely, volume was the driver. There's some minor impact from ASP, but most of it was really volume driven. And as we look forward to 2026, we feel like the momentum in the market for our brand and for our products is is still there. That's why we're basically on the qualitative side of things, saying that we expect the growth to continue, and we also expect that Fitness will be the larger contributor because of the broader product line across running and advanced wellness.

And Cliff, maybe just anything between how much is new customers versus existing customers refreshing from '25 looking at '26?

Yes. I think we're still seeing -- most of our new customers are new to Garmin. So that's a very encouraging thing, and we see strong pull-through rates on registrations, showing that as products go into the channel, they're selling out and customers are activating those. So we feel very positive about the customer trends and very positive about the retail landscape.

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

Cliff, maybe just touching on auto OEM. Back in early 2023, you first introduced the idea that this business could grow 40% annually. I think the target was scaling to $800 million of annual revenue. You didn't quite get there, but I would just love to like better understand from you what you learned about this business over the last 3 years, that gives you the conviction to kind of double down as we go forward? And just to carry on that is just what details can you share with us about the next evolution of this business with Mercedes as we think about through your growth rates or customer diversification targets or target margins. We just love to understand kind of what you learned and how that influences the next 3 years of this business, please? And then a follow-up.

Okay. Yes. So our view in 2023 was based on what we knew at the time, which was based on projections given to us by our automotive OEM partners and of course, like everything, they go through cycles and some of their assumptions are not always correct. And in that case, I think the outlook was more positive then than what it turned out to be because of changes in the overall -- their market structure and their geographic results, whether it's between Asia, Americas or Europe. So that's the situation we found ourselves in. In terms of what we learned, I think we have been managing this business in really 2 goals. One is to achieve scale, and we're working and making good progress towards that. The other is to invest for the future so that we can demonstrate to automakers that we have the innovation capability and the operational capability to meet their needs. And I think we've definitely achieved that as well. And so as we look forward, one of the adjustments we're making is to shift some of those R&D resources that we've been using to develop new business and concepts and develop our other product lines. And we feel like we've reached a point of critical mass where automakers realize that we can do this job for them, and it would then allow us to work on the scale part of the equation.

And then maybe just following up, I was kind of taking it back by your outdoor comments on 2026 or was at least eye catching, you're alluding to accelerating growth in new product features. I guess I was just going through the IDC data quickly. And fenix is the large majority of wearables revenue in the Outdoor segment. And if history is a guide, the next fenix wouldn't launch until January 2027. So I guess, just I'm wondering inherently in your messaging about outdoor, if you're maybe messaging different timing for fenix launch or if maybe you're expecting to launch all new models in this segment? Just trying to kind of get a better understanding of exactly how to think about new product launches and the potential for acceleration in outdoor this year?

Well, we don't comment on specific product launch timing. The only thing that we would like people to know is that we do have a very active year plan for for outdoor. And I would expect that many of our launches would occur in the back half of the year, which is why I commented that we expect the revenue to be stronger in the back half. So that's our plan, and we'll continue to update people as we go along throughout the year.

Your next question comes from the line of Tim Long from Barclays.

You have Alissa on from Tim Long team. Just a quick question on Aviation. With the Blackhawk win, should we kind of assume higher military exposure in the aviation segment? Is this an area of expansion for you? Just kind of trying to think about if there's different go-to-market strategy there? And then I have a follow-up.

Is, in terms of a project like the Black Hawk helicopter they're using commercial off-the-shelf components from our cockpit system lineup to retrofit those aircraft and fully modernize them. And this is an example of a great program. There's lots of these kinds of programs around where they don't necessarily have to be the same kind of hardened military requirements for or what people might think of for fighter jets and that kind of thing. But we still can provide modern cockpit systems to these workhorse aircraft that the military depends on.

So it definitely is a growth opportunity, but they're incremental in our view. So they add to the total, and they're good wins, and we continue to pursue more.

That's helpful. And then just a follow-up, how is -- any update on how Connect Plus uptake is tracking?

So Connect Plus is definitely an exciting adder to our business. We added the nutrition features, I mentioned earlier. The nutrition feature really accelerated the number of free trials that we have. And so that was really good to see. And also, the conversion rate of those trials is very, very high. So we think that's a winner feature and we'll continue to expand and enhance Connect Plus in order to add more value to customers there.

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

Cliff, could you talk a little bit more about Mercedes in this ramp opportunity? Is this for 2027 model years, so it commences in late '26. Is this commencing in later '27 for 2028 model year? Just any thoughts on when we can start to expect some contribution from that effort?

I think there'll be some limited contributions in late 2026. It's really, I would say, inconsequential, but the ramp is really early 2027 and it's a very aggressive program and ramp with significant volumes that will be achieved over the life of the program.

The other one I wanted to touch on is you commented a little bit about channel inventory overall. Have you seen any change in behavior of your retail partners as they've recognized that hardware costs are going up broadly in other consumer electronics. Do you think that's influencing their commitments or their visibility they're providing you? Any thoughts on pull forward that you might be seeing? That's it for me.

Yes. I think retailers really are enthused about carrying our brand. We saw a much higher level of engagement from certain retailers over the holiday season as they were happy to offer something from Garmin that was different from everything else that they typically offer. And I think their enthusiasm is really triggered by their customers. They see customers coming into the store, the customers are buying. So I feel like, overall, the retail picture, especially some of the brick-and-mortars has been very pretty positive.

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

I wanted to just start on fitness and ask you about the TrueMid collaboration and how meaningful the 2026 revenue growth allowing HSA FSA funds to be used in the purchase of select Garmin products could turn out to be.

TrueMed is a way by which people can purchase the product on our website using using their HSA funds. And it really is a great program, and each product that's in the program has to be evaluated and approved, but it allows people another payment approach basically on our website. So the customers come directly to our website. They purchased the product that's available to be purchased with this program. And it has quickly become one of our significant outlets, if you will, if you consider it a stand-alone outlet for our products.

Okay. Let me just follow up by, again, within Fitness. Just thinking about within the wearables category, sort of nontraditional form factors, how are you thinking about the opportunity for Garmin there and from a timing standpoint? How likely we are to see developing something and introducing something there.

We don't share our future product plans in what direction we might go with those. I would point everyone to our history, which is that we explore new product categories and new form factors and deliver really great products to our customers. So that's what we'll continue to do to drive and grow the segment.

Okay. If I could just squeeze in a third one quickly. Are you able to quantify the benefit to Garmin, if the Supreme Court overturns the [indiscernible] tariffs?

Yes. We probably won't share specific dollar amounts, but as you can appreciate, the 20% tariff and now moving to 15% is a significant cost adder to our products. So as we mentioned in our remarks, we've done an excellent job. Our teams across the world have done phenomenal in mitigating that. And I think we've come out on the other side of that in a very, very good position and if it goes away, then certainly that changes the game in terms of our cost structure and things, but there's offsetting factors, too, with the supply chain constraints and memory issues that are going on right now. So there will be puts and takes, but we're not really counting on one approach or the other. We're assuming that everything stays pretty much as it is with regard to tariffs.

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

Congratulations on another great quarter and phenomenal year. while some of my questions have been answered as far as tariffs and memory concerns, it's incredible that your supply chain and your integrated manufacturing capabilities have helped to mitigate that. With the launch of your new products that have connectivity like the fenix Pro and the expanded capabilities in the new [indiscernible]. What kind of uptake are you seeing on the subscription services? And what percentage, for example, of people buying the fenix Pro are opt-in for the LTE and satellite connectivity.

Yes. I think fenix 8 Pro is a product that's built around connectivity. So when somebody buys that product, they're definitely interested and motivated to activate the inReach service. We've already seen SOS events with the fenix 8 Pro, where people bought the product, are wearing them on adventures and they needed help or needed some other kind of service while they were out there, and they were able to achieve that right on the wrist. So we think it's a breakthrough platform. It's certainly not for everyone. But on the other hand, it's an important adder to our product line, and we'll continue to expand on that to add that capability to more products.

And my follow-up question is, what kind of halo effect are you seeing on products from your acquisition last year of MYLAPS, including there was some optimism that would help with, for example, the Garmin Catalyst, and I see just launched an upgrade to the Catalyst was that -- did that have an effect and then you just launched some competitive track capabilities on the new Zumo XT 3.

Yes. So MYLAPS allows us the opportunity to improve the overall race experience for customers from the sign-up process on through to race day, in race results and the devices that they wear during the race. So we feel like this is going to give us a high level of fidelity with customers as they embrace and pursue these these race activities. And in terms of the other markets, one of the benefits of MYLAPS is that it's across many different markets, so running is one, but they also do, as you say, the racing and also moving into equine as well. So we just feel like that opens up new avenues for us to apply our innovation and our unique products into new areas.

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

I guess maybe zooming out, if you could just kind of share any thoughts maybe around the global wearables market, how that's kind of been trending? Has it been kind of stagnant or a tailwind to your trends? And any changes that you've seen over the last year or so, either competitively or just in overall growth rates?

So from our perspective, what we believe is happening is that the overall market has been on a growth path. I would call it in the steady growth in the mid-single to up to 10% kind of range. Everyone will get confirmation on that as data comes out for the full year. But that's our belief of what's happening in the market. So that's 1 driver of our overall growth, but market share has been a really important one for us as well as we've been able to take share both above and below us, from different players. And so I think people recognize the value of our products and the uniqueness of the features that they offer, and we're seeing the results of that with our market share.

Great. Really helpful. And then maybe just one more on marine, impressive growth there in '25, given kind of the choppiness in the end market. So I think you mentioned maybe kind of consistent growth expected in '26. What's kind of underlying that from a kind of industry perspective? And in general, like any thoughts around the marine industry looking out this year would be great.

Well, what we see in Marine is that the market has been, I'd say, finding its footing and is incrementally positive as we move into 2026. So the underlying market seems, I would say, healthy. The boat shows seem very active. And it's a similar story where especially those larger boats with more equipment, they tend to be very popular and a lot of our equipment goes on those boats. And of course, in the fishing story with our products and the industry-leading sonar capability and chartplotters and mapping all of those things are driving market share for us as well.

Your next question comes from the line of Ron Epstein from Bank of America.

So yes, maybe just changing gears a little bit in the patient direction. Can you talk a little bit to the recent acquisition facility you guys bought in Meta and what your goal is for that and what that can bring to the table for Garmin?

Yes. So we were really excited to find that facility. We have lots of projects and lots of equipment that have to go into all kinds of aircraft. As you know, the process of taking our products to market is not as simple as just creating the product. They all have to be certified on each type of aircraft. And this facility allows us not only very, very significant hanger space to bring in very large aircraft, but it also allows us to build a completely new staff of people that can do certification work and aircraft modifications. So we believe over the long term that will help us reach new opportunities and more aircraft with more equipment.

And if I can read between the lines a little bit, is the facility like this give you the capability to maybe offer things on larger airplanes?

Well, it's a very large hanger. Yes, I'm excited about that.

All right. And if I may, just a quick follow-on here. Following up on -- I think it was Alyssa's question earlier about some of the defense stuff you guys are doing? With the changes in the defense acquisition system, the Department of War, Department of Defense, whatever you want to call it, has been trying to do more stuff on commercial terms with commercial contractors broadly. And you guys are almost exclusively commercial. Is that opening a door for you to do other things that maybe weren't -- I don't know, in the plan just a year ago before they really started to push more commercial because one would think potentially, given everything that's going on, maybe that is more opportunity for you all.

We believe that will bring more opportunities even though some of these discussions and the shift has has started to gain some momentum. The actual selection and identification of programs and all of that still takes time. So we view it as a long-term opportunity, but a nice shift as people look at the equipment that's available and realized that military especially could benefit from the commercial products that we offer.

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

Just one quick follow-up, Cliff. I would just love to know how you're thinking about kind of the ratable side of your business. Over the last 3 years, that revenue capture over time has marginally decreased to around 5%, that's really seems to be mostly part of your success in the transactional business. So I'm just wondering how much of a priority is growing this ratable kind of part of your business? And is there any way I know it kind of constitute subscriptions and services. But is there a way to help us think about margins on the ratable business versus the point-in-time business?

Yes. I think like every kind of subscription-based business, the margins tend to be higher service-based businesses are definitely higher that way. Our objective is to grow those within Garmin, but we also are not focusing on that as the only growth path. And so we're growing everything around it. The nice part is that our subscription base business has been growing as strongly or even stronger than the overall business, but everything else is growing around it so much that it still hasn't triggered that [ 10 ]% threshold yet. So -- so we feel like we're in a good position. We have lots of ideas of things that we can offer people going forward. And we're going to continue to build that business across every one of our segments.

At this time, there are no further questions. I will now turn the call back to Teri Seck for closing remarks.

Thanks, everyone, for joining us today. As usual, Doug and I are available for callbacks. And we hope you have a great day. Bye.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Garmin Ltd. Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Teri Seck, Director of Investor Relations. You may begin.

Good morning. We would like to welcome you to Garmin Limited's Third Quarter 2025 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 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 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-K and Form 10-Q 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 achieved another quarter of outstanding financial results, reflecting the strength of our unique, highly diversified business model. Consolidated revenue increased 12% to nearly $1.8 billion, which is a new third quarter record, and we experienced strong double-digit revenue growth in three of our business segments. These results are even more remarkable, considering the strong comparison from last year when consolidated revenue increased over 24%.

Gross and operating margins were 59.1% and 25.8%, respectively, resulting in record third quarter operating income of $457 million, up 4% year-over-year and pro forma EPS of $1.99. We are pleased with our results so far in 2025, and we are on track to achieve full year revenue of $7.1 billion as communicated in July.

Given our strong year-to-date performance and outlook for the remainder of the year, we are raising our full year EPS guidance. We now anticipate pro forma EPS of $8.15 a share, reflecting in an increase of $0.15 over the prior guidance. In a moment, I will cover changes to the segment revenue model that is the foundation for our consolidated guidance. But it's important to remember that the segment model is simply a point-in-time guideline that evolves based on trends throughout the year.

With the majority of 2025 behind us, and the momentum we are experiencing entering the important Q4 holiday season, we anticipate delivering another record year of double-digit growth in revenue, operating income and EPS. Doug will discuss our financial results and outlook in greater detail in a few minutes, but first, I'll provide a few remarks on the performance and outlook for each business segment.

Starting with Fitness. Revenue increased 30% to $601 million, with growth led by strong demand for advanced wearables. Our performance can be attributed to the breadth and depth of our wearable product lines, which offer highly differentiated features across many different price points. Gross and operating margins were 60% and 32%, respectively, resulting in operating income of $194 million. During the quarter, we launched several new products, including the Edge 550 and 850 cycling computers that bring new coaching plans and cycling metrics to the Edge lineup, the Bounce 2 smartwatch for kids offering voice calling, messaging and geo-fencing alerts and the Venu 4 smartwatch with a premium all metal design, a built-in flashlight and many new health and wellness features.

We also announced our collaboration with King's College London to study the health of women and their partners during and after pregnancy with an emphasis on detecting and managing potentially dangerous conditions such as gestational diabetes and hypertension. Garmin is the exclusive partner of King's College London for this study, which is one of the largest of its kind to incorporate wearables into study protocols and results. Given the strong performance of the Fitness segment and the demand we are expecting during the holiday season, we are raising our revenue growth estimate to 29% for the year.

Moving to Outdoor. Revenue decreased 5% to $498 million, driven primarily by consumer auto and adventure watches following the 1 year anniversary of the dezl series launch as well as the highly successful fenix 8 launch. Gross and operating margins were 66% and 34%, respectively, resulting in operating income of $170 million. During the quarter, we launched the fenix 8 Pro, which adds satellite and cellular connections and offers a range of communications options, including voice, text, live tracking and SOS using the Garmin Response Center, making this smartwatch the ideal companion for adventures on and off the grid.

In addition, the fenix 8 Pro lineup now includes a version with a microLED display. MicroLED has been highly sought after for its superior brightness and the ability and the fenix 8 Pro is the first device of its kind to offer this exciting new display technology. I'm proud of our global team who worked very hard to bring microLED technology to the wearable market.

Also during the quarter, we entered a new market with the launch of our Blaze equine wellness system designed to help horse riders, owners and trainers monitor their horses' health and fitness levels. We are pleased with the performance of the Outdoor segment, but delivering back-to-back years of double-digit revenue growth has been more challenging than originally anticipated, following the 1-year anniversary of the highly successful product launches in this segment, most notably the fenix 8. The recent launch of the fenix 8 Pro partially offset pipeline fills from the previous year, but did not fully close the gap when compared to the fenix 8 launch.

As it has in the past, product release cycles can create short-term noise, but in the long-term view, the Outdoor segment has been a remarkable performer and has a remarkable track record of growth. Considering our year-to-date performance and outlook for the fourth quarter, we now expect Outdoor revenue to increase 3% for the year.

Looking next at Aviation, revenue increased 18% in the third quarter to $240 million, with growth contributions from both OEM and aftermarket product categories. Gross and operating margins were 75% and 25%, respectively, resulting in operating income of $61 million. During the quarter, we certified a retrofit integrated cockpit system for the Cessna Citation CJ1, which brings new capabilities and safety-enhancing technologies to this popular light jet. We also added Autoland and Autothrottle capability to the King Air 350, which is the largest and most complex aircraft to receive Autoland capability to date.

And we announced additional certifications for our GFC 600 autopilot bringing the performance and safety enhancing benefits of our flight control technology to more aircraft models. Given the strong third quarter performance of the Aviation segment and recent trends, we are raising our revenue growth estimate to 10% for the year.

Turning to the Marine segment. Revenue increased 20% to $267 million, with growth across multiple categories, including chartplotters, audio and cartography. Gross and operating margins expanded to 56% and 19%, respectively, resulting in operating income of $49 million. During the quarter, we expanded our trolling motor product lines with the Force Current, which is the industry's first hands-free Kayak propulsion system, and we expanded the Force Kraken lineup, which now includes a model with a 110-inch drive shaft for large fishing boats. We also launched the ECHOMAP Ultra 2 chartplotter offering a large 16-inch display, premium mapping and exceptional sonar capabilities.

We were recently recognized by the National Marine Electronics Association as Manufacturer of the Year for the 11th consecutive year, and we received 8 Product of Excellence awards ranging from chartplotters to marine smartwatches, reflecting the strength and diversity of our product lineup. Given the strong third quarter performance of the Marine segment and recent trends, we are raising our revenue growth estimate to 10% for the year.

And moving finally to the Auto OEM segment, revenue decreased 2% to $165 million as certain legacy programs approach end of life and were partially offset by growth in our most recent BMW domain controller program. Gross margin was 15% and was negatively impacted by an increase in accrued warranty costs associated with prior period sales, which contributed to the operating loss of $17 million. During the quarter, we shipped the 3 millionth BMW domain controller, demonstrating our capability as a respected Tier 1 supplier to the automotive market. We continue to achieve important milestones leading up to the launch of our next large auto OEM program, which is anticipated to add significant production volumes and expand the scale of our business. Given the year-to-date performance and recent trends, we now expect Auto OEM revenue to increase approximately 8% for the year.

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 third quarter financial results and provide comments on the balance sheet, cash flow statement, taxes, updated guidance. Posted revenue of $1.77 billion for the third quarter, representing a 12% increase year-over-year. Gross margin was 59.1%, a 90 basis point decrease from the prior quarter. The decrease was primarily due to higher product costs. Operating expense as a percentage of sales was 33.3%, a 90 basis point increase.

Operating income was $457 million, a 4% increase. Operating margin was 25.8% 180 basis point decrease compared to prior year quarter. Our GAAP EPS was $2.08, and pro forma EPS was $1.99.

Next, we look at our third quarter revenue by segment and geography. In the third quarter, we achieved double-digit growth in 3 of our 5 segments, led by the Fitness segment with outstanding growth of 30%, followed by Marine segment growth of 20%, Aviation segment growth of 18%. By geography, we achieved double growth in all 3 of our regions, led by 14% growth in APAC, followed by 13% growth in EMEA and 10% growth in Americas.

Looking at operating expenses. Third quarter operating expense increased by $76 million or 15%. Research and development increased by $37 million, SG&A increased by $38 million. Both increases were primarily due to personnel-related expenses.

A few highlights on the balance sheet, cash flow statement, taxes. We ended the quarter with cash and marketable securities of approximately $3.9 billion. Accounts receivables increased year-over-year to approximately $956 million following the strong sales in the third quarter. Inventory increased year-over-year sequentially to approximately $1.9 billion. We're executing our strategy to increase inventory of certain product lines to support strong customer demand as well as mitigate the effects of potential increases in tariffs.

For the third quarter of 2025, we generated free cash flow of $425 million, a $206 million increase on prior year quarter. Capital expenditures for the third quarter of 2025 were $60 million, which is $22 million higher than the prior quarter. We expect full year 2025 free cash flow to be approximately $1.3 billion with capital expenditures of approximately $275 million. During the third quarter of 2025, we paid dividends of $173 million, purchased $36 million of company stock. At quarter end, we had approximately $107 million remaining in the share repurchase program, which is authorized through December 2026. We had an effective tax rate of 21.2% compared to 17.9% in the prior year quarter.

Increase in effective tax rate was primarily due to the new U.S. tax legislation enacted during the quarter, which changed capitalization requirements of certain R&D costs resulting in a year-to-date adjustment due to a decrease in certain U.S. tax deductions and credits.

Turning next to our full year guidance. We estimate revenue of approximately $7.1 billion and gross margin of approximately 58.5%, both of which are consistent with our previous guidance. We now expect our operating margin to be approximately 25.2%, which is higher than our previous guidance of 24.8% due to lower operating expenses. Also, we expect a pro forma effective tax rate to approximately 17.5%, consistent with our previous guidance.

Expected pro forma earnings per share is approximately $8.15 compared to our previous guidance of $8.

This concludes our formal remarks. Bella, can you please open the line for Q&A?

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

Maybe, Cliff, I just wanted to start off with, if we could dig into the downward revision to the Outdoor guidance. It looks like the revenue outlook is coming down roughly 10% here in the back half. I was just curious if you could share any additional color on the main drivers behind the deviation from your outlook 90 days ago. I know you touched on the fenix 8 versus Pro dynamic, but any other areas of the portfolio you're seeing sluggishness relative to your earlier expectations? And then I have a follow-up.

Yes. I think our remarks pretty much cover our thinking there. The fenix 8 Pro did launch fairly late in Q3, so it didn't have a lot of time to make an impact. And the results from the fenix 8 release last year were incredibly strong. And so I think that those are all factors as we look at the back half of the year that we're thinking that maybe our expectations were a little bit too high to begin with. But if you look at the long term over several of these major launches like the fenix 7 to fenix 8 and now to fenix 8 Pro, the overall growth of our watch category has been strong double digits and also ahead of the market. And so we feel like in the long-term view that these devices in the Outdoor segment in general has been a remarkable performer.

Got it. And then maybe just switching gears a little bit here. When I look at the implied gross margin guide for 4Q, it appears you're embedding a seasonal step down. However, when we look at the historicals, it's not at the same magnitude that we've seen Garmin produce over a multiyear period, maybe more in line with recent trends. Can we just touch on the drivers behind that? Like what we're seeing in terms of driving a less seasonal decline related to mix? Less aggressive promotions? Is it more on the production side around utilization? Just curious any color you can share there? And then maybe just a quick clarification. Are you -- what are you guys assuming in the guide relative to FX headwinds and then potentially tariffs, if any, that are included in the guide?

Yes. This is Doug. Let me kind of give -- start out with the gross margin maybe first of all, the year-over-year on Q3. That is lower due to higher product costs. Part of that is relating to tariffs. Another thing relates to a strengthening of the Taiwan dollar, which does impact our cost of goods sold, as well as Cliff mentioned, there's warranty accruals like the prior year period sales. And that's partially offset by some favorable FX on sales due to the weakening U.S. dollar.

And as it relates to Q4, if I look at the change basically from last year, this year in Q3, it's about the same change in Q4 there because we do have some of those higher product costs in there that we had to take into consideration. Now we also do have to remember that Q4 versus Q3, Q4 is a more promotional period of time for us, so we did factor that in.

As it relates to some of our assumptions that are in there, as it relates to tariffs, we're factoring what the current tariff rates are out there. We are mitigating that due to certain things such as our higher levels of inventory to offset any potential increases in that. And also as it relates to FX, we did have -- as it relates to the top line, there are some tailwinds there from that standpoint. So we're factoring in similar type of trends in Q4 as we saw in Q3 from that standpoint.

So in Q4, we think it's pretty well consistent with some of the trends that we're currently seeing there with tariffs, with FX, and then Taiwan dollar after consideration as well as the euro and those type of things in there. But as you mentioned, there are a lot of moving parts in gross margin, but we've factored most of those -- all those in that we did know about.

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

Cliff, maybe just to start, I'd love if we could maybe take a step back and for you to help us understand where exactly you think we are in the kind of cycle for Fitness and Outdoor? Obviously, a little bit different dynamics for each business, but obviously, really strong performance for multiple years on the back of new product launches and pricing increases. So where do we stand kind of in the cycle for each business? And then I have a follow-up, please.

I think we look at it as an ongoing opportunity and not necessarily as a cycle as in ups and downs, but we are a small but growing market share player in the overall wearables market. We have a very broad and strong product line about -- across both fitness as well as adventure watches. We see the opportunity to continue to grow with market share gains and innovation in our product lines.

Okay. I appreciate that color. And then, Doug, if I could just turn over to you, maybe not necessarily core to any debates, but over the last 3 years, you've kind of guided CapEx up in the $300 million-plus range. And each year, it's kind of ended up lower than that. Just curious, again, kind of where you -- are you not able to find the dollars to spend? Or are there limitations to what you're just able to manufacture and that continues to get pushed out? Would just love a little color about kind of why spending plans are just a little bit lower than you had expected, just a bit of a continuation of '23 and '24.

Yes. Regarding cap expenditure, it's not an item where we don't have the money to spend. We do have $3.9 billion of cash from a standpoint. So it relates to CapEx, those estimates are done at the early part of the year, and we progress those throughout the year. And we have plans for those and sometimes some of those is pushed out. So it's simply a situation that we have expectations for those, just for one reason or the other, things just get pushed out. A lot of -- I should say a lot of those CapEx we have are really infrastructure to grow our business, for manufacturing, those type of things. And so it's just a situation where we come with that estimate and things just change during the year along the way and just kind of push those out.

But but we're not taking anything off the table from a standpoint of CapEx. We still think we need to have that infrastructure for growth in the future.

Your next question comes from the line of Tim Long with Barclays.

Two, if I could as well. First one, could you just touch on kind of channel inventory, what you're seeing there? I think you alluded to inventory related to tariffs a little bit earlier, but particularly in the Fitness and Outdoor segments, how you think the health of the channel inventory looks? And then second, just looking at the number, it looks like there was a little bit of a downtick in the Americas business in the quarter. Could you just touch on what drove that? And do you think there's -- that's a short-term blip or what could get that moving back growing sequentially?

Yes, Tim, I think that we view channel inventory as being healthy at this stage. The registrations and sell-out of our products has been stronger than the sell-in in recent, near-term weeks and months, and I think that's retailers positioning, getting ready to take things in for Q4. But the channel inventory looks very healthy and lean and ready for a good Q4 fill. There's really not a relationship between what we said about inventory and tariffs and channel inventory. When we talk about our inventory and bringing that in ahead of tariff impacts, that's inventory that we hold on our books, whereas the channel is a different consideration. We view the channel as being very lean.

As far as Americas, I think the difference there is that some of the other regions did benefit from FX. So if you adjust for that, they tend to be very comparable.

Okay. So I was just asking about the sequential downtick in Americas. Is that mostly FX? Or was there something else going on there?

Yes. Again, I wouldn't read a lot into that. I think some of that, again, is associated with our product cycles as well as currency movements and all kinds of things. So it's -- there's a lot that goes into that. But I think in general, we're pleased with the performance of all of our geographies.

Your next question comes from the line of Jordan Lyonnais with Bank of America.

I wanted to ask on autos. How should we think about the growth going into next year and until the BMW -- or sorry, the two 2027 contracts start up with new lines that are retiring?

Yes. So going into next year, as we've communicated, we've been in the peak adoption of the BMW program for a while now, actually have anniversaried that. And as some of these end-of-life programs wind down, 2026 could experience some revenue pressure because of those natural dynamics. We expect the new program to come online towards the back half of 2026. And so we're on track for that, and we continue to make progress in delivering that.

Got it. And on Aviation too, was there any greater driver of the growth that you saw between OEM and aftermarket that you could give more detail on?

Yes. I think they're both very comparable, both very strong for different reasons. The backlog in OEM, as you know, is very long. And so aircraft makers are building to that backlog, and we're benefiting from that. And in the aftermarket, the consumer behavior was resilient and people buying and equipping their aircraft. And so the trends are very positive there.

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

This is Joe Nolan on for David. The fitness business saw another great quarter. Just if you could talk about what's driving the growth there? I know advanced wearables have been strong in recent quarters. And if you could just give any update on new user growth?

Yes. I think we saw growth across both kinds of products that we have in Fitness in terms of wearables that would be the running products as well as the advanced wellness products. And I would say that the registration behavior, the consumer behavior that we see on the registrations is very strong across the whole business, including all of our wearables in Outdoor and Fitness. The convincing majority of people coming to our platform are new users, and we're seeing strong double-digit growth in those registrations in new products year-over-year.

Okay. Great. And then fourth quarter promotions typically step up a little bit for the holiday season. Is it fair to expect a pretty comparable promotional environment compared to last year? Is there any puts and takes to think about within that?

I would say that -- I would call it comparable. We have a lot of products to offer, which is great for retailers because there's something for everyone. And so we have strong promotions planned. I'd say they're in line with what we've seen in previous years, and I think we're really excited about what we have to offer.

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

Congratulations on another record quarter and the great new cadence of -- a new product introduction cadence. On the launch of the Blaze, what kind of uptake have you been seeing so far? And what is your production run projection?

Yes. I think Ivan, Blaze has been great. It's gotten a lot of attention. I think this is a market that is underserved in terms of technology. And at the same time, I think it's a market that's very traditional. So while it's gotten a lot of attention, it will take some time, I think, to build the channel and the momentum there. But we're excited about the early start. And I think we also have plans to enhance the roadmap and offer more products as well.

And what is kind of your target marketing strategy? And I mean, right now, one of the fastest-growing spectator sports is actually rodeos. So there's a lot of interest in horses and of course, traditional horse racing and horse training. So what's kind of your ideas for targeting -- penetrating the market?

Well, I think there's certainly different disciplines around horses. I think if you look at the common threads of each discipline, it's that the horse owners and the caregivers really love the animal, and they want to do the right thing by the animal. And so again, there's been hardly any tools available for people to assess horses, whether it's on the purchasing side, on the selling side of that as well as the training and the ongoing performance improvement of the animal. So I think that lends itself to a lot of opportunities of tools that have been available to people that can be applied to horses going forward.

Then with the launch of the 8 Pro with the satellite inReach connectivity and also on the Bounce, are -- what is the percentage of people buying those that are signing up for the connectivity plans?

Well, I think those two products are specifically designed with connectivity features, so anyone that buys those products is probably going to sign up for the additional services that go along with that, and that's exactly what we're seeing. It does target a unique user case. So if you look at Bounce for example, it's not just a watch for kids, it's a way for parents to monitor their kids and to communicate with them, especially for those that don't want to yet provide a smartphone to their kids. And so it just means that when you buy that product, you will absolutely sign up for the service that goes along with it.

And then with more and more products that you're launching, including inReach connectivity and also more people are signing up for the Messenger. What is kind of your vision for how inReach and the Messenger kind of grows the Garmin ecosystem?

Well, inReach and Messenger and our connected products have all been part of our strategy to offer off the grid communication and especially rescue services for people who are enjoying the outdoors. Things happen out there and consequently having the right equipment and having equipment that works, that connects to real people that can help you has been a unique differentiator for us. So we'll continue to work on products that fulfill that vision and continue to expand our product line.

Good luck for a strong year-end finish.

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

Cliff, could you talk a little bit about what you're seeing with respect to Auto on the accrued incremental warranty costs that you're seeing? And then any thoughts on where that Auto OEM margin structure looks over time? And then I have a follow-up.

Yes. I think the accrued warranty was an isolated situation where an issue arose in our product that we had to manage, and it did affect prior period sales. So there was a catch-up that went on with that, but that's been addressed and corrected. And I think the longer-term view on the margin structure is the same as what we've communicated before, where we're targeting mid- to upper teens gross margin and mid-single-digit operating margin in the segment when we're at scale.

Okay. And then the other question, with respect to the broader component supply environment, I'm interested if you're seeing any scenarios or situations arise. Notably, advanced process nodes where any availability issues, you feel good on your ability to source memory, components into the out year given kind of the radical demand you're seeing from hyperscale and what they're buying? Any thoughts there.

I think there's definitely some impact you're seeing in the overall semiconductor market associated with these large-scale new initiatives that are going on with AI and data centers and that kind of thing. I think it overall will benefit customers and us in the longer term because semiconductor providers are focusing on more higher performance processors on more dense memory configurations which overall are a benefit to the products going forward with better features, more storage, more capability.

Your last question comes from the line of Noah Zatzkin with KeyBanc Capital Markets.

I guess maybe just on the Marine segment and the raised guidance there, is that purely idiosyncratic? Or is there something in the end market that you see kind of improving underneath that?

Yes, I think the end market is definitely stabilized, if not really even back on an uptick, especially when you look at aftermarket. And so the market dynamic is good at this moment. Consumers seem resilient and interested in the products that we're offering. And there's also an element of market share gains in that, particularly in chartplotters, trolling motors, audio and cartography.

Great. And apologies if you touched on this, but just any thoughts around -- updated thoughts around tariffs would be great.

I think as we mentioned in our remarks, the tariff situation has been mostly stable for today's definition of stable. There can always be changes. But I think in general, we're managing through that. I think we've made all of the short-term adjustments that we had intended to make to our business model. And then going forward, we're focused on longer-term optimizations in our business, which is what we do as the normal course with tariffs or any other matter, we simply are always working to achieve the most efficient supply chain structure.

That concludes our Q&A session. I will now turn the call back over to Teri Seck, Director of Investor Relations, for closing remarks.

Thank you all for joining us today. We are available for callbacks, and we hope you have a great day. Bye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Everyone, have a great day.