Garmin's (GRMN) Q2 2021 Results - Earnings Call
Garmin Ltd. (NASDAQ:GRMN) Q2 2021 Earnings Conference Call July 28, 2021 10:30 AM ET
Company Participants
Teri Seck – Manager-Investor Relations
Cliff Pemble – President and Chief Executive Officer
Doug Boessen – Chief Financial Officer and Treasurer
Conference Call Participants
Paul Chung – JPMorgan
Ben Bollin – Cleveland Research
Jeffrey Rand – Deutsche Bank
Will Power – Baird
Nik Todorov – Longbow Research
Ivan Feinseth – Tigress Financial
Derek Soderberg – Colliers Securities
Erik Woodring – Morgan Stanley
Operator
Thank you for standing by, and welcome to the Garmin Ltd. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] as a reminder today’s conference call is being recorded. I would now like to hand the conference over to your host, Teri Seck, Manager of Investor Relations. Please go ahead.
Teri Seck
Good morning, everyone. We would like to welcome you to Garmin Ltd. second quarter 2021 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 earning call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, gross margins, operating margins, future dividends, market shares, product introduction, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed on this earnings call may have occurred and actual results could differ materially as a result of various 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.
In particular, there’s significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at anytime, and any statement about the impact of COVID-19 on the company’s business results and outlook is the best estimate based on the information available as of today’s date.
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’d like to turn the call over to Cliff Pemble.
Cliff Pemble
Thank you, Teri. Good morning, everyone. As announced earlier today, Garmin reported record revenue and operating income for the second quarter. Consolidated revenue increased 53% over the prior year and exceeded $1.3 billion. We experienced strong double digit growth in all five business segments. Profitability in the quarter was also strong. Operating margin expanded to 28% and operating income increased 97% to $371 million.
There are two important things to consider when looking at our Q2 performance. First, Q2 of 2020 was negatively impacted by the onset of the COVID-19 pandemic, which reduced consumer demand and disrupted our retail partners. As a result, a portion of the current period growth is attributable to the unusual comparable from the prior year. Second, the compound annual growth rate from 2019 to 2021 was 18% for the period, which is very much in line with recent trends during quarters less impacted by the dynamics of the pandemic. We believe this indicates that the underlying market is healthy and continues to grow.
To meet the growing demand for our products, I’m pleased to report that later this fall, we plan to open a fourth production facility in Taiwan, which will approximately double our capacity. This is part of a multi-year initiative to improve our capacity and prepare for opportunities that lie ahead. Also we entered a new phase of our Olathe facility expansion to convert the former warehouse building into additional office space. These projects follow the recent completion of other notable investments, including a new production facility for Tacx cycling trainers, our new auto OEM production facility in Europe and the expansion of our Olathe facility to include auto OEM production.
Given our strong performance in the first half of the year, we’re updating our full year guidance. We now anticipate revenue of approximately $4.9 billion, up 17% over the prior year with double digit growth expected in each of our five business segments. In a moment, Doug will provide more details on our financial results and updated guidance. But first I’ll provide a few brief remarks on the performance and outlook of our business segments.
Starting with fitness, revenue increased 40% to $413 million with growth across all categories led by cycling products and advance wearables. During the quarter, we celebrated Global Running Day with the launch of two new running watches the Forerunner 55 and the Forerunner 945 LTE. The Forerunner 945 LTE is noteworthy because it includes built-in conductivity and leverages a safety monitoring capability of our recent GEOS acquisition. We also launched the Venu 2 smartwatch in two sizes, which will enhance the appeal of these devices across a broader range of customers. Given the strong performance of the Fitness segment, we’re raising our revenue growth estimate to 17% for the year.
Moving to outdoor. Revenue increased 57% to $323 million with growth across all categories led by adventure watches. During the quarter we launched our smallest Dive watch, Descent Mk2S featuring multiple dive modes, multi-sport training and smartwatch features for everyday use. Given the strong performance of the Outdoor segment, we are raising our revenue growth estimate to 17% for the year.
Looking next at aviation. Revenues increased 43% to $181 million. And we experienced growth in both OEM and aftermarket categories. Revenue in the quarter was comparable to the levels achieved in the second quarter of 2019, which is significant considering the impact ADS-B had on 2019 performance.
During the quarter, Autoland was awarded the prestigious Robert J. Collier Trophy as the year’s greatest achievement in the fields of aeronautics or astronautics. Autoland is the first certified autonomous system designed to activate during an emergency to safely fly and land the aircraft without human intervention.
We also announced the acquisition of AeroData, a leading provider of performance information for commercial aircraft serving more than 135 airlines worldwide. AeroData broadens our presence in commercial, and we look forward to building on their success. We’re pleased with how the aviation segment has recovered from the impact of the pandemic and the completion of the ADS-B mandate. We now expect full year revenue to increase approximately 10%.
Turning next to the Marine segment, revenue increased 66% to $262 million with growth across multiple categories led by chartplotters. During the quarter, we announced support for Mercury’s SmartCraft engines, expanding list of engines compatible with our display systems. We also launched the MSC 10 marine satellite compass, which provides precise position and heading information without the interference challenges associated with traditional magnetic compass systems. The marine segment is off to a great start in 2021, and we expect that demand will continue to be strong throughout the remainder of the year. With this in mind, we expect full year revenue to increase approximately 27%.
And looking finally, our auto revenue increased 74% to $148 million with growth contributions from both consumer categories and new OEM programs. During the quarter, we launched our first connected dash cam with Live View monitoring and premium subscription based cloud storage. Given the strong start to the year, we now expect the auto segment to increase approximately 15%.
In summary, we’re very pleased with our performance so far, which gives us confidence to raise our guidance for the year. In addition, we are investing for the future by expanding both our production capacity and office facilities. So we are well positioned to seize opportunities that lie ahead.
That concludes my remarks. Next, Doug will walk you through additional details on our financial results and our updated guidance. Doug?
Doug Boessen
Thanks, Cliff. Good morning, everyone. I’ll begin by reviewing our second quarter financial results, make comments on the balance sheet, cash flow statement, taxes and our updated guidance. We posted revenue of $1.327 billion for second quarter, representing 53% increase year-over-year. Gross margin was 58.8%, 50 basis point decrease the prior quarter. Operating expense as a percentage of sales was 30.9%, 670 basis point decrease to the prior quarter. Operating income was $371 million, a 97% increase. Operating margin was 28%, 630 basis point increase. Our GAAP EPS was $1.64 and pro forma EPS was $1.68.
Next we will look at our second quarter revenue by segment and geography. We have a highly diverse business model provide the rich set of opportunities and reduce our reliance on single markets and product lines. Fitness is our largest segment contributing 31% of the sales in the second quarter, followed by outdoor at 24%, during the second quarter, which we achieved double-digit growth in all of our segments, led by auto with 74% growth. By geography, America’s region contributed about half our revenue, remaining coming from EMEA and APAC. We achieved double-digit growth in all three regions led by strong growth of 72% APAC, followed by 53% in Americas and 46% in EMEA.
Looking next, at operating expenses; second quarter operating expenses increased by $83 million or 25%. Research and development increased $35 million year-over-year, primarily due to engineering personnel costs across all of our segments. SG&A increased $34 million compared to prior quarter, but decreased as a percentage of sales to 12.5%, 270 basis point decrease compared to the prior year. Increase in SG&A was primarily due to increases in personnel related expenses, information technology costs. Advertising expense increased approximately $14 million due to higher spend in the fitness and outdoor segments.
A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $3.2 billion. Accounts receivable increased sequentially and year-over-year to $737 million, due to strong second quarter sales; Inventory balance increased sequentially and year-over-year to $939 million, primarily due to raw material requirements. During the second quarter of 2021, we generated free cash flow of $120 million, a $22 million decrease with the prior quarter.
Our capital expenditures for second quarter were $110 million. We expect full year 2021 free cash flow to be approximately $750 million and capital expenditures approximately $400 million to invest in expansion projects that Cliff previously mentioned. During second quarter 2021, we reported effective tax rate of 14.8% compared to the prior year quarter gap tax rate of 6.8%, pro forma tax rate of 14%.
Turning next to our full year guidance, we estimate revenue of approximately $4.9 billion, an increase of 17% for the prior year with double-digit growth in each of our segments. We expect gross margin to be approximately 58.5%, which is lower than our previous guidance of 59.2% due to higher supply chain costs. We expect in operating margin of approximately 23.8% also expect pro forma effective tax rate of 11.5%, which is higher than our previous guidance of 10.5% the income mix by jurisdiction, which results in pro forma earnings per share approximately $5.50.
This concludes our formal remarks. Valerie, if you please open the line for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Paul Chung of JPMorgan. Your line is open.
Paul Chung
Hi, thanks for taking my question and great quarter. So just on the Forerunner 945 LTE, can you give some insights on how that product is doing? What percent of customers are repeat versus new? And then on the monthly LTE contract, how is that margin profile there shake out? And what percent of customers are opting for the LTE function and is the strategy to kind of expand LTE to the Phoenix and other watches and expand the subscription service? And I have a follow-up.
Cliff Pemble
Yes, good morning. Paul, I think it’s early days for the 945 LTE. So really not a lot to say yet about the results there and we don’t provide results by product category anyway but I would say that in terms of the kind of customer that will buy this product is a customer that’s specifically interested in the safety story the Garmin offers with the integration with our GEOS subsidiary that we recently acquired, it allows us to offer now with the connectivity and end-to-end solution for people that want real time monitoring of their activities and also the ability to some in safety, help if they need it. So that’s the kind of customer that would take that product. And again, it’s early days and I really can’t speak to the roadmap right now, but it’s something that is compatible with the approach we’ve taken with our InReach product line in terms of safety monitoring for active lifestyles.
Paul Chung
Okay, great. And then on aviation, you’re approaching 2019 levels of revenue and very nice rebound in operating margins. Should we expect to see operating margins kind of hit north of 30% as we navigate through the balance of the year or are there some different dynamics of product mix going on with less ADS-B benefit and then on AeroData, how much contribution should we expect there and talk about any cross selling opportunities you see with that existing customer base. And then finally on Autoland, can this be another kind of ADS-B type of opportunity? I’ve seen very high ASPs for this product. So let’s assume not as large of an adoption there, but what is the penetration rate you think that goes and does AeroData kind of fit in here in terms of improving the overall performance of this feature. Thank you.
Cliff Pemble
Yes. So in terms of operating margin, it’s come up in this period because of the additional sales leverage that we have and our aviation team has, of course worked very hard on managing expenses during a pretty difficult challenge that we face. But that said, we don’t forecast really the operating margin that we have for the future. Other than to say, we strive to be and expect to be very profitable. It will depend on the investments that we make in the programs and the new products that we’re doing in aviation. In terms of AeroData contribution, it’s a small adder, but an important one because it’s a very important performance calculation that are done for commercial flights that help airlines conserve fuel, and also provide safety escape procedures for engine out during takeoff. And so that’s a critical function that’s required in commercial aviation, and it’s something that we think we can expand to business aviation as well.
And then finally, on Autoland. Autoland is delivering on three models right now, the TBMs, the SF from Cirrus and then the M600 from Piper. And of course in those models, it’s a 100%. So this is not an option. So the market is growing rapidly. The number of aircraft out there is growing with the delivery of those models and they’re very popular models. In terms of the AeroData, part of that, they aren’t closely connected to Autoland per se, but that AeroData in business aircraft would be something that’s an enhancer from a safety and performance point of view.
Paul Chung
Thank you very helpful.
Operator
Thank you. Our next question comes from Ben Bollin of Cleveland Research. Your line is open.
Ben Bollin
Good morning, everyone. Thanks for taking the question. Doug, could you tell us a little bit about how you would characterize the current supplies situation on components? Inventory was obviously looks like a lot of it was raw materials, but how did that influence that availability influence 2Q? How’d you think about what that could do for the remainder of the fiscal year? And then I have a follow-up.
Doug Boessen
Yes. I’ll give you a little flavor on the inventory. The reason that inventory is up year-over-year is due to raw material requirements. We’re looking at making securing our raw material requirements to make sure that we’re meeting the increased demand. I’d say as it relates to the supply chain situation that is something that we’re managing very effectively on a daily basis, just to making sure that we do have the appropriate to components to meet that demand. As I think about the rest of the year as it relates to inventory I think it will increase some even more than what we have today. Probably increased more than what our sales level is going to be and probably just a rough number, probably close to $1 billion probably by the end of the year. That’s something that we’re – the team is all focused on making sure that we are managing the situation, like I said, on a daily basis we have with that.
Ben Bollin
Okay. And then the other item with this facility expansion, as you bring on the fourth Taiwan facility and the potential to double your production, could you talk us through where you think you are right now on utilization of the existing footprint and the timing for when the fourth facility will be online or ready to go, just approximate timing for that would be helpful. Thank you.
Cliff Pemble
Yes, Ben. I think in terms of utilization of our existing footprint, specifically talking about our consumer manufacturing, I would say, we’re almost at a 100% capacity. I mean, we’ve been bursting at the seams especially keeping up with this market growth and demand. So it’s a very important step for us. And in terms of timing of the new facility, we’re targeting a fall opening to start to produce products there and that will help alleviate our overall capacity constraints.
Ben Bollin
Thank you.
Operator
Thank you. Our next question comes from Jeffrey Rand of Deutsche Bank. Your line is open.
Jeffrey Rand
Hi. Thanks and congrats on the strong quarter. Your consumer auto business appear to bounce back nicely in the quarter, can you talk about what is driving, is this new or older products? And how do you think about this business going forward?
Cliff Pemble
We saw, Jeffrey, growth in all of the categories in our consumer auto business. We’ve been talking for a while about the growth opportunity and the strength in specialty products. Of course, they did very well and the traditional P&D also bounced back. Some of that is simply the pent up demand as people traveled less last year, and of course, had less demand for those products. But in general, all of the categories did well.
Jeffrey Rand
Great. And based on your revised outlook, it looks like year-over-year revenue growth is going to decelerate in the second half of the year. Are you seeing any signs of slowing demand? Or is this just kind of being driven by the hard comps of the second half of last year?
Cliff Pemble
Yes, I think, there’s really a few things to consider in our guide. First of all, last year, the first half was very challenging because of the pandemic and we believe that a portion of the impact in the first half was really shifted to the second half. So our second half benefited from what we weren’t able to do in the first half due to the pandemic. And I mentioned those factors earlier that there was a pullback by consumers initially. And then retail partners were disrupted, many of them not even open their doors. So that is a factor as we look at our guide. And then we also look at our product release timing of this year versus last year. That’s a factor in our outlook and finally potential uncertainties around supply chain that’s still exists. So that’s what went into the guide and yes it is at a lower rate than what we experienced in the first half, but we believe that much of that is explained by the factors I just mentioned.
Jeffrey Rand
Great. Thank you.
Operator
Thank you. Our next question comes from Will Power of Baird. Your line is open.
Will Power
Okay, great. Thanks for taking the question. Yes, I guess echo my congratulations on the strong quarter. I guess I’d love any color that you’re able to provide broadly, probably across categories on what the channel inventory situation looks like. And as soon as like strong in demand do you feel like channel inventory is imbalanced where you wanted, so maybe just kind of sell it versus sell through it any broader color there and how that may or may not be impacting the forward outlook?
Cliff Pemble
Yes. Thanks, Will. I think in terms of channel inventory, it’s better than it has been in the past, but still depending on product and segment there’s areas of lean inventory that we continue to scramble to fill. We’re air shipping, lot of our products right now in order to keep up with that. And the sell through that we see, especially on those products that we have the ability to observe through registrations in Garmin connect. The sell through has been in line with the deliveries we’re making. So the inventory situation a little bit better, but still not where we need to be.
Will Power
Okay. And then just wanted to ask on the M&A outlook from here. I mean, obviously you continue to generate strong cash flow? Just any color on areas of interest and kind of what valuation parameters look like and how much of a barrier is that here, given some of the broader demand trends for some areas you might be targeting?
Cliff Pemble
I think M&A is something where we’re continually looking at. We are usually looking at a few different opportunities at anyone given time. I really don’t ever share what specifically we’re interested in, but I would say anything that complements our segments in terms of technology or adjacent products is, are things that are interesting to us. Valuations are kind of a challenge, is very nuanced right now. There’s obviously a lot of exuberance in the market and expectations. So we certainly don’t want to, and aren’t interested in those things that are simply out of line. And so we typically don’t engage on those.
Will Power
Okay. Thank you.
Operator
Our next question comes from Nik Todorov of Longbow Research. Your line is open.
Nik Todorov
Hi. Yes. Good morning, everyone. And thanks for the questions. Doug, if I look at the guidance, you took gross margin down because of the component cost. But you took operating margins guide up. I wonder, is that driven by leverage or has your OpEx plans for the year change? I have, because it looks like your R&D and specifically OEM out or R&D came down meaningfully sequentially, is that reflecting, receiving credits from OEMs or what’s driving that?
Doug Boessen
Yes. I just want to give you a flavor for the overall OpEx for the full year as percentage of sales and kind of sequential what’s going on there. So on a full year basis as a percentage of sales, we expect operating expenses to be up about 60 basis points year-over-year, looking at each one of the categories advertising, our goal is to keep that relatively flat for percentage of sales on a full year of basis. Now it will increase on absolute dollars, as co-op increase sales and media spend. As it relates to R&D, we do expect that to be up about 50 basis points year-over-year percentage of sales and there just increased head count to support our product roadmap. We’re talking about investing in auto OEM, et cetera.
Then on SG&A, a little flavor there, percentage of sales on a full year basis. We expect that to be slightly up maybe about 10 basis points, and that’s really due to increased sales, also driving that to volume some of the areas such as IT costs, as well as product support and different operations. As it relates to R&D on a sequential basis the situation there is that is lower in the second quarter due to reimbursement of some change or requests from our OEM partners. The situation is whenever an OEM partner gives a change or request, we get reimbursed for that and that shown as reduction in R&D. So there may be a little bit bumpy between the quarters there from my standpoint.
Nik Todorov
Okay. Got it. Very helpful. Thanks. And Cliff, if I look at the aviation guidance and implies meaningfully lower sequentially second half revenue. What would be driving aviation sales to go down from here? And also as it related as speak aviation, how should investors think about normalized operating margins in aviation once that business kind of goes back to normal?
Cliff Pemble
I think in terms of second half Nik, again, we try to analyze all the factors that we can and in coming up with that. And there’s quite a bit of art and a little bit of science that goes into it. But some of our outlook for the second half is related to the timing of deliveries of certain products to customers. So that’s one thing we benefited some in the first half because of some accelerated delivery. So that’s part of it.
In terms of the normalized growth rates, I mean, there’s a lot of studies and a lot of people that put effort into long-term projections for the aviation market, and they typically grow at or above GDP levels for developing countries. And frankly, those studies are so long-term, it’s very difficult to know how real they are based on everything that can happen. As we know, pandemics can change the whole course of the growth trajectory. So we probably only look at that from a passing interest point of view and we generally say that we want our Aviation segment to continue to grow both in terms of market share and penetration on platforms and with market growth.
Nik Todorov
Got it. Thank you, guys. Good luck.
Cliff Pemble
Thank you.
Operator
Thank you. Our next question comes from Ivan Feinseth of Tigress Financial. Your line is open.
Ivan Feinseth
Thank you for taking my question and congratulations on another incredible quarter.
Cliff Pemble
Thanks, Ivan.
Ivan Feinseth
On your increased guidance, you increased the guidance for marine tremendously from 15% to 27%. What is driving that growth?
Cliff Pemble
Well, the marine market continues to be very strong. There’s a lot of interest in boating, our boating OEMs. The people that build the boats are backlogs now many into 2022, and some are even saying that’s closing as well. So there’s just a lot of interest in boating. Our retail partners also see a lot of interest in people upgrading their existing boats. So the momentum is there and we’re simply working very hard to satisfy the needs of the market.
Ivan Feinseth
And you’re seeing equal demand from OEMs and let’s say, aftermarket products as well, which has been doing better?
Cliff Pemble
I would say just generally, they’re both very strong, it tends to go up and down. The OEMs have taken some time to spin up their production. Because of course, it’s very complex and a lot of materials involved in what they do. But they’re definitely accelerating. We’re seeing that in our OEM product sales and meanwhile retail, there’s still a lot of interest from our retail partners and a lot of promotions plan for the products in the future.
Ivan Feinseth
A lot of people would say, buy and use boats and then just upgrading all of the marine equipment.
Cliff Pemble
Yes. When they can find the used boat the market is so incredibly tight, no one is letting go of their boats.
Ivan Feinseth
And then also with your incredible innovation on the aviation side for autonomous control, like auto land and smart glide, are you seeing incorporating that in OEM automotive, autonomous capability and working with some of – not only the OEM manufacturers, but some of the OEM autonomous computer manufacturers of say like Nvidia and Qualcomm, and then, Waymo and GM Cruise.
Cliff Pemble
I would say that the autonomous technologies between aviation and auto are very different, so there’s little overlap in terms of what we’re doing in those areas. So really nothing to comment there.
Ivan Feinseth
But what about your camera capabilities, you have some AI capabilities in your OEM cameras.
Cliff Pemble
Yes. I mean, from a sensor fusion point of view and sensor technology, those are building blocks for sure of things that can be applied. But for the most part auto OEMs have their strategies and their partners that they’re using to work on the autonomous kind of features that they want. And so we’re a part of their overall plan, but not necessarily the ones that are doing their technology.
Ivan Feinseth
And then one last area, in corporate wellness, you had made some comments on opportunities there. What kind of opportunities do you see growing the let’s say, corporate wellness integration into your Garmin Connect app and things like that.
Cliff Pemble
Well, we continue to press on those opportunities. I think what’s interesting about corporate wellness and some of those programs wellness opportunities that are out there. Each one is different. It requires some level of customization, especially on the part of partners. The benefit that we have in our offering is that we have a broad product line that can be applied to almost any kind of opportunity. And we’ve served opportunities anywhere from the very highest end Phoenix on down to the entry-level vívofit. So we continue to work on those and we continue to look for more opportunities in that space.
Ivan Feinseth
Thank you and congratulations again.
Cliff Pemble
Thanks, Ivan.
Operator
Thank you. [Operator Instructions] Our next question comes from Derek Soderberg of Colliers Securities. Your line is open.
Derek Soderberg
Hey guys, thanks for taking my questions. Doug, I want to start with automotive margins. I’m curious how we should think about gross margins and operating margins sort of that trajectory as you transitioned to the OEM side on some of those investments you’re making there conclude maybe over the short or medium term? And I have a follow-up.
Doug Boessen
Sure. As it relates to overall auto, you’re seeing that those gross margins are decreasing as our auto OEM business becoming a bigger piece of auto. And also more specifically within auto OEM, you’re seeing that gross margin come down on a year-over-year basis also since some of our new programs primarily, BMW, be it hardware related, have a lower gross margin overall. So it’s really just going to be a function as it relates to the gross margin in there, as those newer piece of our business become a larger piece of that, and actually kind of play into a segment type of a mix in there from a standpoint of what’s on those gross margin on an overall basis. As it relates to the operating margins there, so yes, the consumer auto business is doing well. From that standpoint, we are in the investment stage relating to auto OEM. So with that we have a high R&D standpoint. So we’ll probably be in that for a couple of years here till we get into production standpoint.
Derek Soderberg
Got it. And then just curious quickly on Prime Day, wondering how that was relative to prior years? And if that had any impact on your guidance for the rest of the year? And then just a quick one on that as well. How does a Prime Day typically impact gross margin for you guys? Thanks.
Doug Boessen
Yes. So with that the Prime Day year-over-year, there was a shift from the standpoint. So last year, that was in the third quarter this year – in the second quarter. So that did impact, as Cliff talked about comparable that we do have. As it relates to the gross margins there are – that’s a more promotional business for us in that standpoint, but kind of from an overall full year standpoint probably didn’t impact it a whole lot.
Derek Soderberg
Great. Thanks.
Operator
Thank you. Our next question comes from Erik Woodring of Morgan Stanley. Your line is open.
Erik Woodring
Good morning, guys. Congrats on the quarter. Just want to start. So obviously you’re seeing a stronger 2021, your new guidance range implies some of the upside and 2Q can also continue into the second half. And so can you just maybe help us understand what has changed from your perspective over the last three months that gives you confidence in your new guidance targets? And then just are you embedding any component constraint – any impact from component constraints into that forecast? And then I have a follow-up. Thanks.
Cliff Pemble
Yes. Erik, when we create our guidance at the beginning of the year, as I mentioned, there’s a lot of art that goes into it because we’re a business that’s not driven by a backlog book, it’s consumer demand and a lot of times we don’t even see a forecast from our customers and we have to kind of project what they want. So we take that into account at the beginning of the year. By the time we reach this point in the year, of course, we’ve had much more time to evaluate the dynamics of the market and what’s happening. And also we start to see a picture of what will take place in the back half with promotions. So it gives us a better sense of how the year might finish. And that’s why we’ve been able to update our guidance this time, because we saw strong trends in the first half ahead of our expectations. And then as we looked at the second half, now we have more clarity of what’s transpiring for the end of the year.
Erik Woodring
Okay. That’s helpful. Thank you. And then, if we touch on margins, mix shift to autos would be a headwind to gross margins, but I believe your guidance also assumed some incremental pressures in the second half unrelated to mix? And so, maybe where are you seeing those pressures? Maybe can you talk about what you’re embedding in terms of cost pressures from the new manufacturing facility? And then maybe also component costs and how that impacts your gross margin, kind of all of that together into one. Thanks.
Cliff Pemble
Yes. I think it’s really very simple. I mean, we take all of those things into account. We look at the general trends of margins based on promotions, we look at what we’re seeing in terms of component trends and other supply chain pressures. So all of that has been factored into our outlook and we do that every year.
Erik Woodring
And maybe if I just clarify that, are you saying you expect more component cost pressure on the second half, or is it more related to logistics? Just want to make sure I understand that.
Cliff Pemble
Generally I would say our supply chain costs in the second half will increase more than what we have seen so far this year. And that’s been built into the guide that we’ve provided.
Erik Woodring
Okay. Super. Thank you so much, guys. Congrats again.
Cliff Pemble
Thank you.
Operator
Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Teri Seck for any closing remarks.
Teri Seck
Thank you so much for your time and have a great day. Bye-bye.
Operator
Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. Have a great day. You may all disconnect.
