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Garmin Ltd. (GRMN) Q2 2019 Earnings Call Transcript

Logo of jester cap with thought bubble.
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Garmin Ltd. (NASDAQ: GRMN)
Q2 2019 Earnings Call
Jul 31, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks

  • Questions and Answers

  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Garmin Limited second quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to introduce your host for today's conference, Teri Seck, Investor Relations Manager. You may begin.

Teri Seck -- Manager, Investor Relations

Good morning. We would like to welcome you to Garmin Limited's second quarter 2019 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 transcripts will also be available on our website.

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This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, gross and operating margins, and future dividends, market shares, price introductions, future demand for our products and plans and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission.

Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer.

At this time I would like to turn the call over to Cliff Pemble.

Clifton A. Pemble -- President and Chief Executive Officer

Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin reported strong results including record revenue and operating income for the second quarter.

Consolidated revenue for the quarter came in at $955 million up 7% over the prior year. Aviation, Marine, Fitness and Outdoor collectively increased 12% year-over-year. Gross margin improved to 60.3%. Operating margin expanded to 26.8%. Operating income increased 18% to $256 million.

This resulted in GAAP EPS of $1.17 and pro forma EPS of $1.16 in the quarter up 17% over the prior year. We are pleased with our performance for the first half of 2019 and these strong results give us confidence to raise our full year guidance.

Doug will discuss our financial results in greater detail in a few minutes, but first I'd like to provide a few brief remarks on the performance of our business segments. Starting with the Aviation segment. Revenue increased 20% driven by growth in both aftermarket and OEM product categories.

We experienced strong growth in our ADS-B product offerings. Gross and operating margins remain strong at 75% and 36% respectively resulting in operating income growth of 27% over the prior year. During the quarter, we achieved certification of the G5000 integrated flight deck for the Citation Excel and XLS bringing a state-of-the-art cockpit system to this popular family of aircraft.

We also announced the availability of the NXi upgrade for Cessna and Beechcraft models equipped with the original G1000 system. We continue to see strong customer demand and appreciation for this upgrade program.

As I mentioned earlier ADS-B has been a significant driver of growth in our Aviation business. According to the FAA as of July 1st, 2019 approximately 91,000 total aircraft have been equipped. Of which approximately 7,000 are commercial aircraft. Of the remaining 84,000 Garmin has captured roughly 80% market share. Based on everything we see it is likely that the ADS-B opportunities will continue into 2020.

While ADS-B has been a significant opportunity. It's not the only opportunity for the Aviation segment. New OEM platforms, retrofit cockpit systems, NXi upgrades and the growing demand for trainer aircraft represent opportunities for growth beyond the ADS-B cycle.

We are optimistic about the future of our Aviation business. Looking next at Marine. Revenue increased 13% as we experienced strong demand for our chartplotters and Panoptix LiveScope sonars. Gross and operating margins were 61% and 28% respectively resulting in strong operating income growth. Last quarter we mentioned that the Independent Boat Builders, Inc. named Garmin its supplier of the year.

I'm pleased to report that our relationship with IBBI has expanded and now includes audio equipment. Our Fusion brand of Marine Electronic Systems was selected by IBBI as a preferred choice for its members. New markets and new product category is an area of strategic growth because they represent significant growth opportunities.

In keeping with this strategy at the recent ICAST fishing show we introduced Force. Our first entry into the freshwater trolling motor market. Force was named Best New Boating Accessory and won the coveted Best of Show award for 2019 making Garmin a back-to-back Best of Show winner at ICAST. We are very proud of the accomplishments of our marine team and we're excited about the new opportunity that Force represents in the segment.

Looking next at the Fitness segment. Revenue increased 12% driven by growth in running products as well as contributions from our recent acquisition of Tacx. Gross and operating margins were 54% and 20% respectively. During the quarter, we began shipping our refreshed line of Forerunners providing both smartwatch features and enhanced running dynamics for all capabilities of runners. We also completed the acquisition of Tacx and are now in the process of expanding the distribution of Tacx products through Garmin retailers.

Turning next to the Outdoor segment. Revenue increased 4% on a year-over-year basis driven by growth in our golf and inReach products. We believe this is a remarkable accomplishment considering the significant impact of the Fenix 5 Plus launch during the first half of 2018. Gross and operating margins were 64% and 34% respectively.

During the quarter, we began shipping the MARQ luxury watch. In addition, we experienced strong demand for golf wearables and the Instinct adventure watch. We also introduced refreshed line of handheld navigators adding inReach satellite communication technology to our flagship handheld devices.

Looking finally at the Auto segment. Revenue decreased 13% due to the ongoing decline of the PND market. Gross and operating margins improved year-over-year to 48% and 16% respectively. Our global market share position in the PND category remains very strong. We launched the DriveSmart 65 with integrated Alexa personal assistant bringing enhanced voice-controlled functionality to drivers. We also announced the Garmin Overlander, an all-terrain GPS navigator specifically designed to fit the needs of the growing overlanding community. This is a unique product offering for those looking to explore off the grid.

In summary, we are very pleased with our results in the first half of 2019. Given this strong performance, we are raising our projected revenue to approximately $3.6 billion for the year representing an 8% increase over the prior year.

Gross margin is projected to be 59.5% for the year. Operating margin is projected to be 23.2% assuming a pro forma effective tax rate of 16.5%, pro forma earnings per share is expected to be approximately $3.90. Looking at our annual revenue outlook by segment. We have increased our growth expectations for the Aviation segment to 17%, the Marine segment to 12%, and the Auto segment to down 15%, Fitness and Outdoor are unchanged.

That concludes my remarks. Next Doug will walk you through additional details on our financial results. Doug?

Doug Boessen -- Chief Financial Officer and Treasurer

Thanks Cliff. Good morning, everyone. I begin by reviewing our second quarter financial results with comments on the balance sheet, cash flow statement and taxes. We posted revenue of $955 million for the second quarter representing 7% increase year-over-year.

Gross margin was 60.3%, 180 basis point increase from the prior year. Operating expense as a percentage of sales was 33.4%, 80 basis point decrease from the prior year. Operating income was $256 million, 18% increase year-over-year. Operating margin was 26.8%, 250 basis point increase from the prior year. Our GAAP EPS was $1.17, our GAAP EPS was $1.16, a 17% increase from the prior year.

Next we'll look at our second quarter revenue by segment. We achieved record second quarter revenue of $955 million. Consolidated revenue grew 7% led by double-digit growth in our Aviation, Marine, and Fitness segments. Also the Outdoor segment had solid growth during the quarter. On a combined basis Aviation, Marine, Fitness and Outdoor were up 12% compared to prior year quarter.

Looking next at second quarter revenue and operating income. On a combined basis Aviation, Marine, Fitness and Outdoor segments contributed 83% of total revenue in the second quarter of 2019 compared to 80% in the prior year quarter. Aviation grew from 17% to 19%. Marine grew from 15% to 16% and Fitness grew from 25% to 26%. You can see it on the charts illustrate our profit mix by segment. On a combined basis Aviation, Marine, Fitness and Outdoor segments delivered 90% of operating income in the second quarter 2019 compared to 94% in the second quarter of 2018. The Aviation, Marine, and Auto segments had strong year-over-year increases and operating income dollars improved operating margins.

Looking next operating expenses. Second quarter operating expenses increased by $13 million or 4%. As a percentage of sales operating expenses were 33.4% in the second quarter 2019, 80 basis point decrease from the comparable quarter last year.

Research and development increased $7 million year-over-year in investments entering resources. Advertising expense was down $2 million compared to prior year quarter to lower expenses in Auto segment. SG&A was up $8 million compared to prior year quarter relatively flat as a percentage of sales. The increase was primarily due to personnel related expenses, incremental costs associated with recent acquisitions.

A few highlights on the balance sheet and cash flow statement. We ended the quarter with cash and marketable securities of approximately $2.4 billion. Accounts receivable increased sequentially and year-over-year to $584 million due to strong second quarter sales. The inventory balance increased sequentially year-over-year to $648 million due to timing of new products, raw material requirements, acquisition of Tacx.

For the second quarter of 2019 we generated free cash flow of $80 million, a $77 million decrease from the prior year quarter. Also during the quarter we paid dividends of $108 million. In the second quarter 2019 reported effective tax rate of 18.9% compared to effective tax rate of 19.4% prior year quarter. We continue to expect our full year 2019 pro forma effective tax rate to be approximately 16.5%. This concludes our remarks.

TJ, can you please open the line for Q&A?

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Charlie Anderson from Dougherty & Company. Your line is now open.

Charlie Anderson -- Dougherty & Company -- Analyst

Yeah, thanks for taking my questions and congrats on the strong results and the upside guidance.

Clifton A. Pemble -- President and Chief Executive Officer

Thanks Charlie.

Charlie Anderson -- Dougherty & Company -- Analyst

Yeah, so I want to start just within the guidance. I think Outdoor you had sort of single-digit growth in the first half, but you're still calling for 10% for the year. So I wondered if you could just kind of speak to what you anticipate having in the second half to sort of reaccelerate the growth rate there. And then on Tacx, I guess, I'm just sort of curious where things stand now. You're integrated to some degree, but how much headroom is there to improve gross margin and then also some of the sales distribution there. And then I've got a follow-up.

Clifton A. Pemble -- President and Chief Executive Officer

Yeah. So Outdoor we do anticipate in the back half that we'll be refreshing product line. So, that's built into our assumptions on the Outdoor segment. As far as Tacx goes its early days, but we are in the process of integrating them into our business infrastructure including our supply chain and they are also working on updating their factory facilities in order to build trainers. In terms of gross margin again early days, but there's probably opportunity to improve over time, but that would take some amount of time to be able to realize those savings as we go along.

Charlie Anderson -- Dougherty & Company -- Analyst

Perfect. And then Doug just real quick on inventory. It seems like it was up a decent amount year-over-year. I wonder, if you could just expand on what was going on there?

Doug Boessen -- Chief Financial Officer and Treasurer

Sure. Yeah, inventory is up year-over-year. It's due to a number of factors. One of which is just timing of product launches, the anticipation of product launches in the back half. Also some raw material requirements just making sure we have appropriate levels of safety stock.

And also we acquired Tacx so that basically was incremental increase year-over-year. Also looking at the prior number probably a little bit lighter last year on inventory than we would like to be in kind of looking at inventory on the go forward for the rest of the year.

I probably would expect the year-end inventory balance to be pretty similar to what I saw in Q2. It will probably go up some in Q3 probably similar type of year-over-year change I saw in Q2, but it will come down some, and we just want to make sure we have appropriate levels of inventory to meet our continuing demands.

Charlie Anderson -- Dougherty & Company -- Analyst

Perfect. Okay. Thanks so much.

Doug Boessen -- Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. Our next question is from Rich Valera from Needham & Company. Your line is now open.

Richard Valera -- Needham & Company -- Analyst

Thank you. Good morning. So, strong performance in Aviation and you attributed that the ADS-B and I guess I just want a follow-up if you thought that or why you thought that the ADS-B activity would continue into 2021, I'm sorry, 2020. Just what your thoughts are there?

Clifton A. Pemble -- President and Chief Executive Officer

Yeah. So, ADS-B was definitely a growth factor for the segment, but it's not the only factor. As I mentioned there's really broad-based growth across many product categories, and also the segments of the market OEM and aftermarket. In terms of our views of the activity after the mandate. We're basing that on feedback from our installing partners who are telling us that they are booked out some now into 2020. And just looking at the total number of aircraft that remain to be equipped and the rates at which they're currently being equipped. We feel like there's a good chance that those will continue into 2020.

Richard Valera -- Needham & Company -- Analyst

Got it. That's helpful. And then just on the Tacx acquisition. Can you say how much of the growth, the year-over-year growth in 2Q was from Tacx and then you made reference to the margins there. Can you just give us a sense of what their gross margins are either on absolute terms or relative to historical fitness gross margins?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah. So as it relates to the amount of Tacx for Q2. It was a little bit under half. We do expect Tacx for the full year to be about half of the year-over-year growth in the fitness business. And as it relates to the gross margins, we don't give specific gross margin by each one of our product lines, but like Cliff mentioned we're looking to improve those over time.

Richard Valera -- Needham & Company -- Analyst

Okay, thank you.

Doug Boessen -- Chief Financial Officer and Treasurer

Thank you.

Operator

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

Benjamin Bollin -- Cleveland Research -- Analyst

Good morning, everyone. Thanks for taking my questions. Cliff could you talk a little bit more on Aviation. Any thoughts on the mix of OEM versus retrofit and then you talked about ADS-B continuing into next year. Do you have any thoughts about the potential. Have you seen any pull-forward of other retrofit activity last year this year as the aircraft go out of service and how do you think about that implication on a look forward basis out late 2020 and beyond and then I have a follow-up.

Clifton A. Pemble -- President and Chief Executive Officer

Okay. So, Ben the mix in terms of OEM and retrofit, we don't break it down in detail, but we've said directionally in the past that it's roughly split between the two evenly, and that remains to be true. And we saw pretty much identical growth rates between those two categories of product for the quarter.

So, there's strength across both categories of the markets that we serve. In terms of pull forward impact on ADS-B for sure those people that have equipped with ADS-B and have taken the time to fully upgrade their panels with new technology.

They obviously are not going to be upgrading in 2020 again per se, but there's many, many more aircraft out there that are needing new technology. Some of them are flying with equipment that's decades old and we believe this is an opportunity for people to reassess the electronics in their aircraft and upgrade to new technology that's available now.

Benjamin Bollin -- Cleveland Research -- Analyst

Okay. And then within the automobile business. Could you talk maybe a little bit about how the revised guidance. Is that all inclusive of first half. Is it inclusive of contribution from BMW China later this year and then any longer term thoughts or color you can provide on the lead design opportunity with BMW, where are you in the facility and when does that become more material over time? Thank you.

Clifton A. Pemble -- President and Chief Executive Officer

Yes. So, our automobile guidance takes into account everything we've experienced so far. We are rolling forward the benefits that we've had into the guidance and not making bold assumptions about where the market will go.

Although we're pleased with how the performance of certain product categories in the segment have performed particularly the higher end PND lines have been stronger than what they've been in the past. So, that's all good news.

In terms of BMW the first set of our program is scheduled to be a 2020 program and that's progressing as we have said before. There will be minimal impact in 2019. That's been built into our guidance obviously. And the newer sets of business that we won with BMW is an ongoing effort.

It will take some number of years now to develop, but we're in the process of investing in the capital infrastructure that we need to be able to support that program including upgrading some of our existing factories and establishing a new facility in Europe.

Benjamin Bollin -- Cleveland Research -- Analyst

Thank you.

Clifton A. Pemble -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Paul Chung from JPMorgan. Your line is now open.

Paul Chung -- JPMorgan -- Analyst

Hi. Thanks, guys. Thanks for taking my questions. So, just a follow-up on Aviation. So your guidance kind of suggests a slowdown in second half relative to the first half. Is that just some conservatism there or do you think ADS-B upgrades have kind of peaked in 2Q?

Clifton A. Pemble -- President and Chief Executive Officer

Yes, I think, we definitely see some reason to be a little more cautious in the second half. We're comping against really strong growth numbers last year. And the installation capacity in the field is pretty much established and fixed. So, it's harder to grow on big numbers like we did in the past. So, we believe that's a solid guide for the segment and inevitably as we approach the deadline there will certainly be a wind down of the activity as we go forward. So, we're looking forward to that as well.

Paul Chung -- JPMorgan -- Analyst

Okay. Thanks for that. And then a follow-up on Outdoor margins. With the kind of refresh of Fenix probably coming in the second half. How should we kind of think about operating margins there as we're kind of hitting some tough comps there as well. Is there some possible uplift maybe to ASPs on the refresh?

Clifton A. Pemble -- President and Chief Executive Officer

Yes, I can't comment on specific plans for the line, but I would say that like every other product launch that we do, there's opportunities for improved margin both gross and operating margins as new products come into the mix. And we promote the older products that are being phased out.

Paul Chung -- JPMorgan -- Analyst

Okay. And then last question on Fitness. Thanks for the kind of reiterated six points of growth from Tacx this year. Is that mainly from the kind of existing base European business and does not include any Americas or Asia expansion potential and then kind of what your initial read on possible demand in those regions?

Clifton A. Pemble -- President and Chief Executive Officer

Yes, I think, that's based on what we see from the Tacx business historically and rolling out the product into new markets does take some time. So, there's some incremental benefit from that, but that's already figured into our outlook.

Paul Chung -- JPMorgan -- Analyst

Thank you.

Clifton A. Pemble -- President and Chief Executive Officer

Thank you.

Operator

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

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Thank you for taking my question and congratulations on another great quarter.

Clifton A. Pemble -- President and Chief Executive Officer

Thanks, Ivan.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

I have two questions. First, there is a coming European ADS-B mandate. It looks like it starts from June of 2020. What type of opportunity do you see there?

Clifton A. Pemble -- President and Chief Executive Officer

Yeah, that's an opportunity we are obviously watching and preparing for it. It's certainly going to be a much smaller opportunity than what we've seen in the Americas because the majority of ADS-B potential aircraft are in the American market, but still remains an opportunity for us to be able to serve that mandate as well.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Very good. And now on the Tacx product line. What type of opportunity or like new product introduction do you see in their fitness equipment in addition to I guess what they called the fitness trainers where it attaches to a bicycle, but they have a really nice treadmill and exercise bike, which I think there could be a big opportunity. What is your outlook or vision for bringing new products in those lines to market and their marketing plans?

Clifton A. Pemble -- President and Chief Executive Officer

Well, we won't comment on specific plans, but I would say that we do have a solid road map in the Tacx division for their products and we're investing more in R&D to be able to bring those to market.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Okay. Very good. Thank you.

Clifton A. Pemble -- President and Chief Executive Officer

Thanks, Ivan.

Operator

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

William Power -- Baird Equity Research -- Analyst

Great, thanks. Maybe first question on Fitness. I know you introduced some new Forerunners. I guess any early color on what sell-through is looking like versus initial sell-in on those products?

Clifton A. Pemble -- President and Chief Executive Officer

Yeah, we think the sell-through is very strong. The products have been received very well by the market and we're excited about the new products.

William Power -- Baird Equity Research -- Analyst

Okay. And then on the Outdoor front. I guess it's probably early, but just looking at some of the new products introduced I guess the MARQ Instinct. Any initial thoughts on demand there, I guess, that's the first time in a while we haven't heard Fenix called out. I'm guessing that's a function of timing and refresh. And do we expect that to get refreshed in the second half?

Clifton A. Pemble -- President and Chief Executive Officer

Yeah, so MARQ, we're very pleased with how things have gone out of the gate. The sell-in was delightful for us and then the sell-through has been something that we think is very strong. The Instinct has been a very strong product for us. It's expanded the base of users in the adventure watch market. So, it's got a strong following, a strong sell-through. The Fenix obviously has been a little over a year now since we introduced the Fenix 5 Plus and we expect to have additional new product announcements coming shortly.

William Power -- Baird Equity Research -- Analyst

Okay. Thank you.

Clifton A. Pemble -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Erik Woodring from Morgan Stanley. Your line is now open.

Erik Woodring -- Morgan Stanley -- Analyst

Hey good morning, guys. Congrats on the quarter. I guess I just want to start out on Aviation again since you brought up the new data points from the FAA. So, I just want to confirm if that -- if we're 91,000 or through 91,000 planes. Does that imply basically that there's something like 10,000 to 70,000 more upgrades to go before year-end and then I have a follow-up.

Clifton A. Pemble -- President and Chief Executive Officer

Yeah, I think, there's admittedly some amount of shifting definitions of those numbers provided by the FAA and we interpret the 90,000 obviously is including everything like I highlighted including commercial as well as experimental aircraft.

The 100,000 to 160,000 aircraft probably only includes just those GA aircraft and people aren't really thinking about the high-end experimentals. They would also want to have that equipment. So, we see a pretty significant runway even if you ignore those nuances and just look at it for what it is.

We think that the 100 number is certainly too low. And if you look at the higher number the 160, it would appear that we have nearly the same amount of market left to go in the cycle. So, that represents a significant opportunity.

Erik Woodring -- Morgan Stanley -- Analyst

Awesome. Thanks for that color. And then I guess if we could just talk about Marine quickly. So you raised guidance. I'm just wondering if that's a result of general market growth in the Marine business a result of macro factors or is it more a function of you guys getting more share than you originally expected?

Clifton A. Pemble -- President and Chief Executive Officer

I think there's a combination of those factors. Certainly the market has been strong especially in the higher-end boats and that's where our equipment and our content is very strong, but we also see market share gains as we've introduced these disruptive new technologies like Panoptix LiveScope that's caused people to rethink their choices and purchase new equipment that's compatible with our system so that they can take advantage of the new technology.

Erik Woodring -- Morgan Stanley -- Analyst

Awesome. Thank you again.

Clifton A. Pemble -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Nick Todorov from Longbow Research. Your line is now open.

Nikolay Todorov -- Longbow Research -- Analyst

Hi, guys. Thanks for squeezing me in. Cliff on ADS-B we've been talking about tight capacity for a while now and we saw some inflection in ADS-B installations this quarter. So in your view where did capacity come from in order to accommodate those installations and you obviously guided to upside in Aviation relative to prior expectations. So, there seems to be some incremental demand that's coming up. Where do you see that capacity I guess coming from?

Clifton A. Pemble -- President and Chief Executive Officer

Yeah, so a few factors. One is that the market is certainly gravitating toward quicker solutions as we get closer to the mandate. People are realizing that they need to be compatible with the mandate.

And so they're selecting some solutions right now that will get them by. We expect some of those will come back in the future to do more. We've also been working proactively to expand our installed base. So, that's helped improve the throughput certainly of our equipment. So, that's yet another factor that's out there.

And then finally, I think, shops had figured out how to be more efficient and so they've obviously been hiring people the rates, the labor rates have been improving, which of course attracts employees into the field. So there's many different combinations of things that are going on that have improved the throughput in recent months.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. And just as a follow-up on ADS-B. So, I mean, there are some indications that suggest that a lot of the remaining planes that are yet to be equipped with ADS-B are older air-frame machines that the owners may hesitate whether to upgrade or to scrap the airplane. I mean what are you hearing from your partners and dealers in terms of the mix of remaining aircraft that need to get equipped with ADS-B in terms of what's the likelihood that we're going to get to that 160,000 high end of estimates?

Clifton A. Pemble -- President and Chief Executive Officer

Well certainly hitting the high end is more of a challenge than hitting the lower numbers, but we do think it's possible to do. For the air-frames that are out there where people might be contemplating the upgrade versus scrap. I think those airplanes probably aren't candidates anyway. So, they've already been factored into the projected numbers.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. Got it. And on OpEx, we've talked about this in the last couple of quarters, but have your expectations changed. I'm just asking because the first half growth in OpEx trailed growth in sales and the guidance kind of implies a pretty steep growth maybe a little bit abnormal in OpEx in the second half. I know Tacx is playing a factor, but I guess can you please refresh your expectations there?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, sure. You're exactly, right. Tacx and the acquisitions will play a bigger factor in the back half. So, that will cause our OpEx to grow at a faster rate in the back half.

To give kind of a rundown between the different OpEx. So overall operating expense is consolidated. We would expect as a percentage of sales probably about a 50 basis point increase year-over-year. Looking at advertising, I still think as a percentage of sales that will probably be relatively flat year-over-year.

So, probably have some year-over-year increases in advertising just as we have new product launches come out in the back half and they're a little bit higher year-over-year increase we saw in the first half. Then as it relates to R&D, we expect that to be relatively as a percentage of sales consistent year-over-year. Then in SG&A that will probably be up about 50 basis points and that's primarily due to the acquisitions impact on the back half of the year or a period of time.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. So, it seems like relative to original expectations R&D is now expected to be flattish versus previously. I think you were expecting plus 50 basis points?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, and that's really because of leverage and the sales. We took our sales up from that standpoint. So in R&D area we're continuing to add headcount there to -- for our product lines, but continue to optimize that as we go along, but yes it's really just leveraging basically increased sales.

Nikolay Todorov -- Longbow Research -- Analyst

Okay. That's helpful. Thanks guys. Good luck.

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, thank you.

Operator

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Teri Seck for closing remarks.

Teri Seck -- Manager, Investor Relations

Great. Thank you, everyone for calling in. Doug and I are available for callbacks throughout the day. Have a wonderful one.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Teri Seck -- Manager, Investor Relations

Clifton A. Pemble -- President and Chief Executive Officer

Doug Boessen -- Chief Financial Officer and Treasurer

Charlie Anderson -- Dougherty & Company -- Analyst

Richard Valera -- Needham & Company -- Analyst

Benjamin Bollin -- Cleveland Research -- Analyst

Paul Chung -- JPMorgan -- Analyst

Ivan Feinseth -- Tigress Financial Partners -- Analyst

William Power -- Baird Equity Research -- Analyst

Erik Woodring -- Morgan Stanley -- Analyst

Nikolay Todorov -- Longbow Research -- Analyst

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