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.