台灣國際航電 (GRMN) 2002 Q2 法說會逐字稿

May I have your attention? I want to thank everyone for holding, and welcome to today's Garmin Limited conference call. Our host speaker will be Kevin Rauckman. I do need to remind everybody that today's conference is being conducted in a listen-only format and later we'll take questions from the floor. Also, today's conference is being recorded for transcription and playback purposes.

Mr. Rauckman, at this time I'll turn the conference over to you. And thank you for calling the Sprint conference center.

Thank you. This is Andrew Aiken [phonetic], general counsel and secretary. Good morning. We would like to welcome to you Garmin Limited 2002 second quarter earnings call. Please note that a copy of the press release concerning this earnings call is available at Garmin's investor relation site at on the World Wide Web at Garmin.com. [Inaudible] broadcast live over the Internet and a replay of the webcast will be available until August 31st. Also a phone recording will be available for 24 hours after this call. 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, market shares, product introductions, future demand for our products and our plans and objectives are forward looking statements. The forward looking events and circumstances discussed in the earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. [Inaudible] Form 10(k) for fiscal year-ended December 29, 201 filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Limited this morning are Gary Burrell, cochairman and co-CEO, Dr. Min Kaio [phonetic], cochairman and co-CEO, Kevin Rauckman, chief financial officer, and myself Andrew Aikin, general counsel and secretary. The presenters for this horning's call are Dr. Min Kaio and Kevin Rauckman.

At this time I would like to turn the call over to Dr. Kaio.

Good morning. You can see from the news item released this morning Garmin has achieved another record quarter of revenue. Total revenue increased 19 percent and our consumer segment recorded a 32 percent growth. Due to continued trends in Garmin [inaudible]. We also recorded an 11 percent [inaudible] increase in aviation [inaudible]. Overall we are pleased with the result as we achieved the 29 percent growth in each year from the prior year. One [inaudible] foreign currency. The strength in our business is evident by the level of growth, the level of revenue EPS growth and also said in maintaining strong margins despite the difficult economic environment. This continuous trends in our business enables us to achieve many [inaudible] given the quarter. We experienced a record quarter of revenue. We successfully lowered our product to Circuit City 620 stores, and Target 1,000 stores of two new Garmin nationwide retailers. And we introduced three new products during the quarter. The GPA O 49 aviation product that provides [inaudible] data to our GNS 400 and 500 series [inaudible] transceiver. This product allows pilots to have in flight access to the so-called next [inaudible] window data. A second [inaudible] VFH come that we offer with our popular VNS 400 and 500 series allowing pilots to communicate at higher altitudes. The GSP 20 which is a remote box is defined for use with Army reg. to high end [inaudible] by providing solar [inaudible] to this unit. [inaudible] 3 and GPS 5 of the multi products for the Australian market which incorporates [inaudible] data from the new data source and certain unique features. And lastly, the CEC version of our net talk VPS, GSM [inaudible] that began in China early in the second quarter and we have started and are continuing our testing and marketing efforts in Europe and other parts of the world.

In addition to this new product, we introduced various Asian [inaudible] products in Japan, Korea, China and Thailand. We also announced the introduction of our new portable aviation product, GPS net 196 at the beginning of the third quarter. We started to deliver this product at last week's Osh Kosh air show [inaudible]. We began shipping our new central inaudible series in volume earlier this month. This product provides significant power cost and size benefit over our existing product line, Exhibit 25 series are utilized in various OEM applications such as vehicle tracking. And lastly, we believe that we continue to maintain our [Inaudible position [inaudible] segments, owe [inaudible] dated April 2002 Garmin holds an 88 sent market share in the aviation portable GPS category, and 80 percent market share in the Panama [inaudible] category, a 61 percent market share in the transponder category, and a 60 percent market share in all [inaudible] category. I would also like to take this opportunity to provide an update on the development of a couple future product offerings. We expect our GPS FRS final product line to begin shipping next September in time for the holiday selling season. We are excited about this product offering as we have received many positive comments from our customers regarding the unique capabilities. In regard to the garment PDA, we are successfully [inaudible] with our system. The development of the Garmin PVA continues as we always several megasuppliers including the [inaudible] microprocessor provider to push for a product release date later this year. It continues to be our goal to introduce one of the early PDA's that incorporates the new palm OS. In regard to our look for the remainder of the year, as we progress into the third quarter, our consumer segment continues to drive our growth as we maintain the momentum that we experienced in the first half of the year. We also believe that the introduction of new aviation products will have effect the weakness that has occurred in the aviation segment. In addition we anticipate the introduction of many new products given the third and the fourth quarter as we move on track to produce the new product for the year.

As a result, we have raised our revenue and GPS estimates for the year. In summary, we are pleased with our results during the second quarter and we are looking favorable to a second half of the other year as we continue to exhibit growth in all these things. And we will continue to maintain our statistic forecast by growing our business through continuous product innovation, extended and bordering our target market and extending the Garmin brand.

On a final note, we also announced today that two large shareholders disputed [inaudible] truck toured set in programs to litigation a small portion of their holdings. We do this as a benefit to all our shareholders [inaudible] additional [inaudible] in our stock.

With that, I would like to turn the call over to Kevin to discuss our financial results for the quarter end Q3 and [inaudible] 2002 guidance.

Thank you, Min.

Good morning, everyone. It's my pleasure to be able to go over the financial results from the current quarter and then I intend to look at the year to date results and also look forward to third quarter and full year guidance as Min mentioned, we did upgrade or revise the guidance for the full year. So, looking first at the second quarter in summary, second quarter revenue began at 122.8 million and this is just significantly exceeded our guidance earlier of 109 to 114 million and the 123 approximately revenue, approximate revenue was up 19 percent from the year ago quarter. When we look at where the revenue growth came from , it really came from across all regions of the country - of the company, the U.S. revenue came in at 88.3 million which is a 10 percent growth from 80.1 million a year ago. European revenue was up 43 percent to 29.5 million during Q2. And Asia revenue was up 79 percent up to 5.0 million during the quarter. Looking at gross margins, our gross margins during the second quarter improved to 55.1 percent and that compares to 53.1 percent in the second quarter of 2001. So the 55 percent is in line with our guidance earlier of 53 to 55 percent range. Operating margins were at 40.0 percent which exceeded our guidance of 33 to 35 percent. Net income was 32.1 million, again when we exclude foreign currency gains and losses in this quarter obviously a lot, that net income becomes 39.1 million and that exceeds the guidance we gave earlier of 30 to 32 million. Earnings they are share results were 36 cents per share, again excluding the effects of the foreign currency loss during the quarter, and that is a 29 percent growth from the year ago quarter, excluding F X. And so the 36 cents exceeded the guidance of 28 to 30 cents we gave. On a total unit base I, the total units sold for the quarter increased 9 percent. We sold 389,000 units, and that's again 9 percent compared to the 357,000 units we sold in the second quarter of 2001. Breaking a little bit further down on gross margin, our gross margin again improved to 55.1 percent compared to 53 percent in last year. And the mix of consumer and aviation revenue came in about as expected delivering the 55 percent gross margin in line with our expectations. Sequentially the gross margin improved 1.1 points from 54 percent to 55.1 percent. That's due mainly again to the product mix and our consumer segment as Min mentioned, the higher margin, marine and automotive products sold very well during the second quarter and that generated the incremental margin. So we continue to experience strong sell through of our new products and during the second quarter approximately 27 percent of our overall sales were generated from products introduced within the last 12 months.

Moving on to operating margin performance, the operating profit margin for the quarter was 49.1 million and that's again 40.0 percent exceeding our guidance of 33 to 35. Comparing that to second quarter of 2001 operating margin is up 2.9 percent or 2.9 points, and then comparing the margin to first quarter of 2002 operating margin is up five points, 5.0 points. During Q2, 2002 SG and A percentage of sales decreased point five points to 9 percent of sales. When we compare SG and A dollars on an absolute dollar basis, they increased 13 percent over the year ago quarter. Again that's during the period when our revenues were up 19 percent. And the SG and A increases were driven primarily by increased advertising dollars.

Looking at R and D that decreased 6.1 percent of sales from 6.5 percent of sales last year quarter. the R and D dollars on an absolute basis increased 11 percent again over the prior period, again our revenues were up at 19 percent during that period. During the quarter we did hire 27 new engineers across the business, so we're still committed and we're investing in future innovations as that continues to be a major strategic initiative for Garmin. Overall the total operating expenses across the business as a percentage of sales increased point 9 points to 15.1 percent of sales from 16 percent of sales in the prior period. I'm sure you all noticed we experienced a 9 million foreign currency loss during the second quarter of 2002 as the dollar weakened versus the Taiwan dollar. We started the period at the end of March at 35 Taiwan dollars to the U.S. dollar and we ended at the end of June at 33.56 Taiwan dollars to the U.S. dollar. That's roughly a 4 percent drop. And as we communicated, many time in the past we do not forecast or plan for the foreign currency gains or losses in our financial model. Nearly all the foreign currency volatility that we've experienced in this quarter and in past quarters is due to inter-company transactions and that's transactions such as receivables and payables between our U.S., our European and our Taiwanese subsidiaries as well as the excess cash that we hold in Taiwan in U.S. dollars denominated. We have very minimal exposure due to business - due to our business without side parties. Those our intention to keep the excess cash that we continue to hold across the business in U.S. dollars since that's our primary currency and because we only anticipate a small future business need for excess Taiwanese dollars.

Looking at the interest income expense for the second quarter, interest income was 1.8 million. The expense, interest expense was $.3 million. Interest income was lower than expected due to the continued weak interest rate environment. However, it's our expectation that we would experience incremental income during the second half as our on hand cash balance increases and we attempt to improve the returns on these excess cash balances.

We also had a slight change in our tax rate for the quarter. The incentive tax rate actually improved did during the second quarter down to 22.7 percent due primarily to additional tax incentives that we received during the quarter from the Taiwan government. We reduced our tax provision during Q2 to reflect these ongoing savings within our Taiwan subsidiary. So we envision that our effective tax rate for the remainder of the year will be approximately 24 percent, again resulting in an overall effective tax rate for the full year at 24 percent. Moving on to the break^down between the business segment, our second quarter consumer segment was we achieved some very strong results there. They're consumer revenue was 93.7 million during the second quarter and that represents a 32 percent increase over the second quarter of 2001. During the quarter consumer revenues were 76 percent of total, and it's really driven by stronger make strong marine, recreation and automotive product sales which just demonstrates a continued demand for our overall consumer GPS products. [inaudible] I did mention earlier that the total unit sales for the quarter were up 9 percent and this was clearly paced by our consumer segment.

Consumer growth margins improved to 53.0 percent in the second quarter and that's an increase from 48.2 percent in the second quarter of 2001. The gross margin improvement was driven primarily by, again, product mix as we shifted to some of the higher margin marine and automotive products that sold well. We also experienced in our factories material cost reductions that helped contribute to this result of increased margins.

So overall, in a consumer segment; our operating margins improved 7.3 points up to 39.3 percent

Second quarter aviation segment, the aviation revenue declined 11 percent to 29.1 million during the second quarter of this year from 32.8 million second quarter last year and aviation would then be 24 percent of our total revenues during the quarter. Aviation revenues increased 11 percent sequentially again when compared to our first quarter signaling a continued slow return of the aviation market since the events of September 11th last year. The aviation growth margin decreased to 61.8 percent from 63.8 percent in 2001. That's due to the product mix between the hand held and the panel mount products within the segment. Gross margins, however, was up sequentially 1.2 percentage points which is 61.8 versus 60.6 in the first quarter of this year. Operating margins declined in the aviation segment 6.2 points down to 42 percent compared to 48.2 in the second quarter of last year, and that's due to a 35 percent increase in our R and D investment of that segment.

Moving on to the year to date financials, I'll just highlight where we stand through the end of June. Our year to date revenues now stand at $223.7 million, and that is an 18 percent growth rate over the same period in 2001. Gross margins improved for the full year to 54.6 and that compares favorably to 53.4 percent last year. Operating income results were $84.4 million and net income for the year 58.9 million. So our operating margins have improved over a point from 36.4 percent last year up to 37.7 percent this year. Our gap diluted EPS for the year to date through June was 54 cents compared to 56 cents last year. That decrease is due to a 9.7 million year to date foreign currency loss compared to a 7.3 million gain we experienced in the same period in 2001. Earnings they are share results when we exclude the effects of foreign currency came in at 61 cents per share, and that represents a 20 percent increase compared to the prior year.

year to date revenue, when we break it down across the different regions, U.S. market continues to grow. If the U.S. revenue is at $161.4 million year to date, which is up 15 percent. Europe increased even faster through the first half, 28 percent increase up to $53.2 million of revenue. And Asia also has experienced growth. Asian revenue was 9.1 million year to date, which is in the 36 percent increase.

Looking at the segments on a year to date basis, consumer revenue again 168.5 million received a 30 percent increase over 2001 year to date and that's 75 percent of our total revenues. And the margins in the consumer segment improved to 52.4 percent from 49 and a half percent last year due to higher margin, new products introduced in that period. Aviation revenue, 55.2 million year to date, declined 8 percent compared to year to date 2001. I think that's still in line with what we've given as guidance earlier, and 25 percent of our total revenues year to date are in the aviation segment.

Our aviation gross margins have remained fairly plat at 61.2 percent comparing to 61.7 percent last year. On a total unit basis, both consumer and aviation units increased up to 702000 units from 682,000 units a year ago which is an increase of 3 percent. Looking at our year to date operating margins, operating profit was 84.4 million or 37.7 percent, again compared favorably to last year at 36.4 percent. During the year to date 2002 our SG and A costs as a percentage of sales have remained flat at approximately 10 percent of sales. SG and A dollars have increased 17 percent compared to year to date 2001 and year to date 2002 revenues have increased 18 percent. So we're growing the SG and A component of our operations at approximately the same level of revenue.

R and D has remained flat at 6.9 percent of sales, and likewise we have brought our R and D dollars 18 percent compared to last year. During the same period our revenues have also increased to 18. As we've communicated in the past, certainly our intention to grow our operating expenses at roughly the same rate as our revenues, and that's what we've experienced year to date, 2002 to this point.

Just to summarize our foreign currency loss for the year, we now have experienced a 9.7 million foreign currency loss year to date as the dollar has weaken. U.S. dollar continues to weaken against the Taiwan dollar. Roughly seen about a 5 percent drop year to date. Our interest income through June is 3.4 million and our interest expense came in at 700,000 through June.

Take a little bit of time now on the balance sheet. Our cash and investments at the end of the quarter now stand at 380.7 million. We have continued to pursue acquisition opportunities and we've talked to you all about that. That would be a strong strategic fit for future business. We don't have anything to announce at this point, but we are still in pursuit of good ideas to invest in. Our accounts receivable came in at 53.2 million which is increased slightly from our year-end position at 48 million. Incidentally, our [inaudible] outstanding has improved now from 55 days at year-end - at the end of the second quarter of 2001 down to 48 days at the end of the second quarter 2002.

Inventories also continue to reduce. We have decreased our inventory position down to $46.4 million at the end of the quarter and that compares to 61.1 million we had at the end of 2001. For the inventory reduction it's about $14.7 million compared to the end of 2001. During the second quarter we also purchased $9.3 million of our outstanding industrial revenue bonds as we communicated to you I think in our last call, and these were issued in 1995 and we retired those bonds as a strategic move to reduce our long term debt.

Cash flow continues to be a positive story. Cash flow from operations now year to date has exceeded $78 million. Our free cash flow has exceeded $73 million so far this year. Cash flow from investing year to date 2002 is 35.7 million source of cash and cash flow from financing equals a 12.2 million use of cash, again representing our debt reduction associated with our Taiwan facility and our 1995 IRBI just mentioned. Capital expenditures year to date we've invested $5.5 million in capex. We didn't repurchase any company stock during the second quarter, however, we feel like our balance sheet remains strong and has position as well for future growth across the business. And finally as I move to the area of guidance I want to talk about our third quarter that we're currently in. We've - we're giving guidance across the third quarter revenue coming in at the range of 95 to $100 million. That represents a 9 to 15 percent growth over the same quarter last year. We estimate that our gross margins will stay as they have the first half of the year, 53 to 55 percent range. Operating margins in the 33 to 35 percent range. As I communicated earlier, the effective tax rate will be at 24 percent in the third quarter. And that drives a net income, excluding any foreign currency effects, of 25 to $27 million. So our EPS range, our guidance for the third quarter, is 23 cents to 25 cents excluding F X, and that would represent a zero to 9 percent growth rate for the third quarter based on our outstanding diluted shares of 108.2 million shares outstanding. And again as Min mentioned up front, we're revising our full year guidance upward. Revenues to be coming in in the range of 415 to $430 million, that's a 12 to 17 percent growth rate for the year. We're keeping with our earlier guidance that gross margin may come down as much as one percentage point, 52 to 54 percent range, operating margins between 34 and 36 percent, effective tax rate stays constant at 24 percent, and that drive the net income between 115 and $123 million again stripping out any foreign currency effects. So our EPS range now upwardly revised to $1.07 to $1.14 for the year excluding FX, representing 10 to 18 percent growth rate across our business in fiscal year 2002.

Hopefully that gives you a pretty good understanding of where we stand financially. At this point I'd like to open up the call to questions any of you may have. 00:29:50

If you would like to ask a question at this time, please press star 1 and we'll take your questions.

The first question is from John Branford [phonetic]. You have the floor.

Kevin?

Excuse me. The line with John Branford open at this time.

Kevin? Kevin, can you hear me? Kevin?

We'll try another line.

Adam [Inaudible] line is open for questions.

Hi, good morning. Kevin, are you guys - we're having a hard time hearing the management team.

Operator, we can't hear the management team.

[Pause.]

Please hold. I'll try to correct that.

Thank you.

[Pause.]

Excuse me. Is the management team on line at this time?

Yes, we are.

Okay. Very well. Pardon that interruption. Adam winder has the conference line for questions.

Okay.

Okay, great. Good to have you back. Kevin, question on the R and D, the R and D growth was not as great as I would have expected at 10 percent on an absolute basis. I thought you guys had talked about 20 to 25 percent kind of absolute growth in R and D. Was this just a function of this timing in the quarter or have you made a conscious decision to pull back a little bit in term of what you expect R and D to grow year over year?

Yeah, I think what we've continued to do, we're definitely committed to grow R and D as much as possible. And I mentioned that R and D dollars increased 11 percent. So what happened there is we experienced some lower program to do the timing of the expenses. So we certainly remain committed to the future development of new products. And I mentioned we hired 27 engineers throughout the quarter and we've added 40 additional engineers throughout the full year now. So I don't think you should read anything negatively into that. Again, it's just due to some timing of some of the expenses and we would still expect R and D to continue to grow at or above the rate we did in the second quarter.

Okay, great. Moving over to some of the new product areas, could you give us an update, a little bit more detail in terms of you said ought mow I have was strong, where that was, what that was all about? And maybe an update on how some of the testing is going on the cell phone.

The first question is about the automotive product. We have experienced pretty good growth in both U.S. and Europe, and especially the European market has a real good demand for this type of product. And also I indicated that we have instituted a new version of product in the European market with the respect to the market would be fruitful for us. Additionally, some other nationwide retailers were picking up the N [inaudible]] 0 overall it's pretty good [So] [inaudible].

In regard to the sell phone set up, we start delivery [Cell] of the GSM to Canada in April. the sale so far has been mostly to the professional market and has not been at a high volume. As far as the introduction of this product to other markets is concerned, it's been [inaudible] process. Each country requires additional testing and approval process. So at this point in time we don't have any specific contract^or additional approval to report.

Okay. And one more quick question if I could. Can you characterize any discussions that may be going on with automotive O E's? I mean my sense is that perhaps that was put opt back burner to some extent. Do you care to elaborate?

I would indicate at our last conference call that [inaudible] BMW motorcycle and also additional exposure to the general market, actually that had created quite a bit more interest from automotive and other motorcycle companies. So at the time we are actively discussing [inaudible].

Okay. Thanks.

Your next call, question is from Robert Springnar's [phonetic] line. You have the floor.

Good morning.

Hey, Rob.

Very impressive consumer sales growth. Could you talk a little bit - it sounds like ought motive was the strength in Europe, but I've always felt [Automotive] was an important wild card for your revenue growth story and it's starting to get some traction. Is that what's going on?

I think it's probably a fair statement.

I'm sorry?

I think that is a correct statement.

Okay. So are there other areas in Europe - is there a way for us to characterize how large the European market is relative to the U.S. for automotive and some of the other areas as well?

It would be difficult to categorize. In general as we indicated before, we introduced products first in the U.S. and to be followed by the European market. So you have this special product, you probably see lagging behind. In past years we were successful making product and right now we start to see some results, additional results in Europe.

It seems to me, would it be fair to say that Europe can continue to grow as a percentage of total sales?

I'll say that probably right now the European sales account for 25 percent of our profit sales. And I would not expect it to go beyond 30 percent of our total sales.

Okay. All right. Kevin, I wanted to ask you just for a moment about cash flow. The quarter was strong in so many different ways, but the one area I noticed a little bit of difference or weakness was on the free cash by virtue of the way we calculated, it was about half of last year's level. I did notice that the deferred tax liability shrunk. Is that part of what's going on there?

That's just one of the components. There's actually several - you know, several items that affected our cash flow for the year or - and as I mentioned we retired some debt and that was certainly a use of cash. We also paid a substantial - some license fees or prepaid license fees to one of our partners, so it was a strong - it was a significant use of cash as well. And I think that kind of offset some of the strength in our cash flow from operations.

Let me give you some numbers. When we calculate free cash flow, we exclude the effect on debt.

Okay.

So I've got you, the way I do is really a change in that debt excluding acquisition and stock repurchases, doing about 24 million in the quarter versus 48 last year.

Right.

So that license payment sounds like it could be sizeable.

Yeah, it was.

As being weak at all. It was in line with our spec Asians.

I'm not saying they are. I'm trying to measure it against - I think the quarter was quite strong on several different levels, but this is the one area where the number was a little bit below my forecast.

Okay.

Now, having said that, it looks like inventories have come down for six consecutive quarters.

Right.

I'm going to attribute that to strong inventory management. Especially I suppose one can expect inventories to drop as you sell into the seasonally strong quarter. But interestingly, they've dropped, like I said, for a year and a half.

I think when you get down to the level that we're at now, I would not expect significant reductions on inventory going forward. We certainly with a strong quarter you get a sell through you reduce your inventory balances by quarter end. At some point we've reduced inventories as far as they can go. I'm not saying we're at that time. I'm not going to give guidance saying we're going to see continued operating cash increases due to reduced inventory.

Okay. Just a couple more quicks ones. Aviation sales growth in the quarter was there, but how much of that is attributable - not so much to recovery from 9-11, but just to seasonality? I mean the Q1 to Q2 growth last year was closer to 20 percent.

Yeah, I think 11 percent sequential increase [inaudible] in year 2000 increase, I believe year 2000 we have 12 percent increase.

I've got for aviation, and I might be wrong here, 22 percent. About 27 to 33. My point is simply that the second quarter strength would be a seasonal factor, not necessarily representative of a recovery from 9-11.

I think the other way to put that is we typically have a stronger second quarter due to just the timing of some of our aviation shipments, you know, aligning ourselves for a third quarter trade show called Osh Kosh that we just went to last year. That was certainly in line with our expectations. We still views it as a recovery from an overall weak aviation market at the end of last year.

So having said all of that, since you gave us total sales guidance for the year, would you say a flat aviation number at around 106 million for the year is appropriate?

I think that may be - yeah, flat - we're communicating kind of single digit growth. I don't think you'll see a 10 percent growth at this time, but you can see anywhere from 0 to 9 percent on aviation, 106 to 110, somewhere in that range.

Okay. And just to finish up while we're talking about guidance, your guidance change is roughly consistent with the 7, tenths up side from the consensus in the quarter. So that implies that you're real I not really not raising guidance for the latter half of the year. Plus, you've talked a little bit about some margin decline, gross margin decline later on in the year. Can you talk about what our expectation should be?

Yeah, let me first address the gross margin. I think when we look at the mix of product, we just came through a very strong quarter where we have automotive products selling well, we have our high end marine products selling well, and we've also talked about a relationship with [inaudible] which is more of an OEM, OEM type product. And so those are - that was hopefully continue to sell well. It could drive down some of our margins because of the low price point, the lower margin. OEM product to Tymax [phonetic]. And with that we've also just today introduced another OEM sensor board called a GPS 15 and between the Tymax and the 15, the price point of those products are much lower, much lower than our average ASP. So we're anticipating that we'll continue to sell those products, those newer products in the OEM category well in the second half and that could drive down overall margins it not to the point.

And then -

And then your other point on second half, I can't dispute that. We're still trying to be somewhat conservative given the consumer confidence information that came out today. We're trying not to be overly aggressive in the second half, but we certainly flowed through the results of the first half for the full year.

Second half numbers essentially stay the same, so in other words, my interpretation of that is that the up side surprise that we all saw in the second quarter is not expected to happen in the third and the fourth?

I think that's a fair statement.

Okay. Thanks very much.

You're welcome.

Your next question comes from John Brock's line. You have the floor.

Kevin, I apologize, I was disconnected so I hope I'm not asking anything that somebody answered earlier.

Can you tell me a little about the sell through or what the initial sales for Circuit City and Target might have been and what the impact on second quarter revenues from just introducing the products to those markets?

This is men. The sale through at Circuit City and Target actually quite God. In fact, we are in the process of taking additional SKU's [inaudible].

Okay, okay. Secondly, again, going back maybe to sort of the second half, certainly I've been hearing some of your new products, like the Rhino and the GEO and the new transponder and certainly GPS 196 have been - are going to be very popular. I'm trying to get a sense as to how you estimate or how you forecast those new sales into the second half, how aggressive are you? And are you allowing for some surprises there potentially given what I'm hearing in term of population popularity of those products?

I think the quick we are is to go along with our conservative stance, we're somewhat conservative in putting in the impact of the Rhino, the GE 49, the 330 and those types of products. And the other thing I want to communicate is when we introduce a product, a lot of you all expect this huge step function in revenue. And typically how we see it, how we experience it is more of a slow growth rate as we introduce a 3 pilot 3 a year ago. Now we're seeing some pretty strong benefits a year later. and we would not expect - we certainly want Rhino to, for example, as one product, to do very well, but it would not have a significant impact in the second half unless it does much better than expected. So hopefully that answers your question.

Okay, Kevin. Thank you.

Okay. Thank you.

The next question is from John Buicker's line, you have the floor.

[inaudible] impressive quarter.

Thank you.

Just curious. Can you give us an estimate of what percentage of your [[inaudible]. [accounted for by GPS module shipments, 25 and other modules?

The GPS sensor product line only contributes a small percentage of our sales. I would say maybe a couple points above revenue, because our Target market is not a high volume, low end market for which you basically only compete on price. [[inaudible]] instead we play a mixed market approach by providing products [[inaudible]. So our volume hasn't been high, but we've been able to achieve a good market on these products.

Okay. So since they're a small percentage, they shouldn't adversely affect gross margin at all?

I think it will affect ASP more than gross margin.

Okay. They are included in your 389,000 unit count, then?

Yes.

Yes.

Can you talk a little about the Navtok [phonetic] GSM product? I know you said you got relatively low volume shipments going into China. Can you say whether the product is in active testing by a number of carriers? Is it in the carrier labs and they are going an operability testing on it, or does the product still being considered but not yet in the labs with the number of carriers around the world?

I can tell you we are inactive, we have active activity with one major carrier in Europe along with various smaller areas [inaudible] users in other countries.

Can you give any update product development wise you gave us a little bit of update on the PDA product. What about other radio interfaces for the Navtok for the GSM, can you give us any product development update on that?

We don't have any update at this time.

Okay. And just to confirm the aviation weather data link product, did that begin shipping in the second quarter?

Yes, we have started the [inaudible] product in small quantities since it is a new category [inaudible] and also its do you remember Asian. It operated involved two other companies, Opcom and [inaudible]. So we have a good [inaudible]. Right now the product at a slow initial rate, a little bit more time to work out any potential [inaudible] issues before [inaudible].

Did you say you have a fairly strong backlog for that product?

Yes, we have a sizeable backlog.

And is that product going to be accounted for in the unit count?

It will.

Okay. Thank you very much.

Thank you.

The next question is from Denise steel's line. You have the floor.

Great. I'm just wondering, you mentioned on the palm operating system that you were successfully integrating that into the PDA. I'm wondering if you could maybe just give a little bit more detail on how far along you think you are there and what the time frame would be for that product.

[inaudible] before the end of the year.

Okay. And in terms of the integration of the operating system, are you halfway through or can you characterize sort of that development work?

I think our PDA product differs from other PDA, those on the market today because [inaudible] approach to integrate integrate with our GPS difference. The amount of [inaudible] and we feel that we have made real good progress with the integration of the system.

Okay, great. And if I could ask again, the Target in Circuit City fell in during the quarter, could you give us a sense for that in terms of building their inventory, what that contributed in the quarter?

I made the comment it was the first step, but it was not significant, if I can use that word, to the results of the overall quarter. [men]

But they are taking additional SKU's in the fourth quarter?

And we'll be able to continue to build and develop those two relations ships.

Great thanks a lot. Great quarter.

Thank you.

Next question is from Tim Kerr's line. You have the floor, please.

Hi. Just on the sensor boards for OEMs, who are you competing with there?

[inaudible] we are taking a mixed market approach to this market [inaudible] a few major suppliers, all the OEMs like [inaudible] surf [inaudible]. [inaudible] we tried to go after the more mixed market approach.

How about Qualcom?

No, Qualcom is not a GPS [inaudible].

Okay. They provide chips for -

Qualcom is really more in the sales form. They don't do any GPS chip sets.

Okay. And what kind of ASP are we talking about in that business?

ASP on the OEM board is much lower than our average ASP. It's somewhere around $50 to $100, in that price range, depending on the product.

Thank you.

The next question comes from Mark Navey [phonetic]. You have the floor.

Thank you. How are you guys?

Good. How are you, Mark?

Good, thanks. A lot of questions were asked. I have just a couple more. I just want to get a better understanding on the tax rate again.

Sure.

What exactly, you said 22.7 obviously because of leverage there, but tell me why, normally 25.4 and we've seen it go down. I don't know what exactly is happening there.

I think we continue to take advantage of whatever is offered by the Taiwan government. And when we evaluate the investment in high tech capital, we are able to have a larger or smaller percentage of our overall profit be tax exempt over in Taiwan kind of on a 5- year tax holiday. So in the second quarter we went back and applied again for some additional incentives and received them and then when looking at the overall profitability in Taiwan as it relates to the total profitability of the company that impacted favorably our effective tax rate. So we haven't had - it could happen some^time in year, in fact when we got news of the improvement in the tax rate, that's why we've updated our guidance.

Kevin, going forward, should that - it should be 24 percent going forward? Yes, that would be obvious.

Yes, it should. That's what I communicated for the full year now.

I mean even beyond that, go to '03 and beyond I'm saying.

If time fluctuates, but it could still be in that range, yes. It could come down, you know, fluctuate between 23 to 25, that's kind of how we've talked to you guys about that in the past.

Okay. That's one question. The other question I would like to - BMW motorcycle sales, you know, against [inaudible], I believe. I'm getting all my names wrong, I'm sorry about that. But I'm trying to figure tout how are things going on? It would be a good gauge to hear about how the progress is going along there. [Inaudible.]

Overall the sales to BMW motorcycle is a small percentage of our overall [inaudible] sales. But there is some percent in fact we just received another order from BMW in Europe.

Okay. And I remember in the past you used to talk about [inaudible] maybe having sales of about $40 million in a year and actually that was last year. We tried to hopefully double that from 2000. What dined of growth rates are you experiencing in '02 with respect to, you know, again, a [inaudible] or any version related to that?

We don't have exact number for you, but we feel that we have achieve the goal.

And the other question I guess, obviously, you know, as a result of strong marine sales [inaudible] particularly in North America, are you seeing - actually maybe you can point us, are you seeing any difference in your customer base? The customer is asking for different things that are surprising you for number one, and number two, are you like, for example you're talking about Circuit City and adding any more products there. I mean, is there anything that they're seeing that they want more of as opposed to something that is surprising you in the past?

The first question is about the marine sales. Late last year we introduced our high end product to [inaudible], but definitely we have made progress into the high end market so that we should be well received by upper end market. The second question is about the Circuit City and Target.

I think he was asking about surprises, anything that surprised us in our customer base. I would just say a general statement, no, I don't believe that we've really been surprised by the level of sales by any of our major customers in any one area.

Kevin, has there been a shift at all in any of those - in those distribution out lets like you were seeing more one obviously to me one would see more on the marine side in the second quarter as opposed to a Wal-Mart, for example, I could be wrong.

Are you asking are we selling more as a percentage of our total business in one area than we have in the past?

Yeah, that would be another question as well, correct.

I think the major - the top ten customers that we've had in the past are still the top ten, and if we're successful in the marine, it generally applies across the marine product line to all of our customers. So I do not really see any surprises there in terms of the component or the contribution from any one customer.

Okay. And with respect to aviation, we had always talked about a second half, '02, '03 time frame for rolling out first second quarter then second half regarding some of your new aviation devices. Anything there that maybe - has anything changed in that time frame?

Mark, this is Gary Burrell. We really don't have a change. We're about on the track that we communicated previously.

Okay. And last, just SG and A I know Adam asked the question about R and D. SG and A doing about 9 percent of revenue, again down from the percentage change in the first quarter, any comment there? One would assume you have to market more - you had such a very strong revenue number and just wondering there what's going to happen, you think, for the next -

I think on a percentage of sales base you're going to see that increase because of the 9 percent, a little bit skewed. We've had such a successful quarter on revenue. So I would expect that SG and A would on absolute dollar basis, will continue, but it will higher the percentage of sales somewhere around the 10 to 11 percent more likely is what you'll see in the second half.

What I was going to say if you look at SG and A in the first and second quarter a year ago it declined from the first and second quarter. Now it's done the opposite.

It's kind of interesting, because the advertising is certainly there, but it's also trade so related and we have a huge trade show scheduled in the first quarter and we spent less in the second quarter in the trade show which goes into our SG and A cost. So it's not really that abnormal, although I know last year we had some increases but there's things like advertising that impact that as well. Our goal would be to try to - what we enneeds to spend SG and A and grow that roughly at the same rate as our revenue.

Okay. Great. Thanks very much. Good job on everything.

Thanks.

We have three more questions in queue at this time.

The first question is from John Brock's line. Sir, you have the floor.

Just a follow-up, and this is directed to Gary. Gary, I get the sense that maybe I'm wrong, that most of the sales over in Europe and Asia are more consumer related. I'm wondering, is there - if I'm correct, number two, is there an aviation, potential aviation market in Europe and Asia that you've been unable to really take advantage of yet?

John, we are blessed with significant success throughout Europe, but we're expanding some in Asia, we're experiencing some sales into China and elsewhere. Truly the general aviation business is a lot smaller in those countries, that we've had fairly good penetration. There's probably there are definite ways we can grow in term of adding more content on the airplane [inaudible]

Okay. Thank you very much.

The next question is from Robert Stenganfein [phonetic]. You have the floor, sir.

Thank you. Just a follow-up to the question before the last one. Kevin, on the G and A, you mentioned a first quarter trade show. What kind of impact should we expect from Osh Kosh in the current quarter?

Nothing abnormal. We planned for it. We supported some of our larger shows that you should not see a huge bump due to an Osh Kosh event. .

Can we get over the 11 - 1.11, 2 million that we've seeing?

Yeah, I think we'll be about that on an absolute dollar. I said we'll grow the dollars just due to the overall support of the business, advertising, product support, general SG and A costs, but you won't see a substantial increase in dollars.

Okay. Then separately, going back to what Adam was talking about with the R and D, I find it interesting that had - year over year increase you had a sequential decrease yet you're higher. So one of the things I wanted to ask you is how many engineers do you have now? I think back around the time you went public you had roughly 200, so it would have been 15 percent of your work force and I'd like to just quit an update where you stand now.

I believe it's over 300 engineers across the business and we have about 1400 employees worldwide.

Okay. So only about - most of that increase is engineers?

Yes. The simple answer is the people cost is only a portion of the R and D cost. Program expenses go into developing product.

Uh-huh, uh-huh. So that explains really the sequential decrease?

Yes.

Okay. Thanks.

Uh-huh.

The next question is from Denise steel's line. You have the floor.

Thanks. Just actually two follow-ups. Wondering, Kevin, you mentioned in your comments that you would be keeping your foreign currency in dollars, is that -

That's true, yes.

Is that a change from what you had been doing in the past?

No, we were just trying to give you a little bit more detail and rationale as to why we were doing what we were doing. If we had a future need for incremental Taiwan dollars, we would convert, but at this point most of the needs we would have in the business are U.S. dollar denominated.

Okay. So no changes going forward?

No changes, no.

So if the dollar continues to decline, we could see again the substantial [inaudible]?

Yes, or gains the other way, because I think it's about flat right now through today.

Okay. And then I'm wondering if someone could give us an update on how the general aviation business trended during the quarter. I'm wondering if maybe it started off a little stronger and proceeded to get weaker, or what happened in that market?

Aviation typically is a segment that is not as - is not tied in with seasonality other than maybe Osh Kosh to a certain extent. But what we experienced is pretty linear sales throughout the quarter.

Okay. Thank you.

The next question is from Adam winier sign. You have the floor.

Hey, guys. Just another follow-up. Now that you may have some data related to July, can you perhaps characterize what the markets are like in the last few weeks? Are have there been anything that going on that maybe concerns you, any slow downs in the channels, anything of that nature?

I'd say the easy answer is we cannot characterize, but we did give Q3 guidance and take into account what we've seen so far at the beginning of the quarter.

Also, could you - I may have missed this in your opening comments. Did you add any new distribution in the quarter?

Not other than the two relationships we already mentioned which was Circuit City and Target.

Okay. Thanks.

There are no further questions at this time. If you do wish to ask a question, please press star 1 and you'll be placed into the queue.

[Pause.]

There are no further questions at this time.

Okay. Thank you, everyone, for participating. We look forward to ongoing relationship. Thanks.

Thank you.