台灣國際航電 (GRMN) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Garmins second quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad.

Thank you. I would now like to turn the conference over to Ms. Polly Schwerdt, the Investor Relations Manager for Garmin. Please go ahead, ma'am.

Thank you, Paul [ph]. Good morning. We would like to welcome you to Garmin Ltd.'s 2003 second quarter earnings call. Please note that a copy of the press release concerning this earnings call is available at Garmins investor relations site on the Internet at www.garmin.com. Additionally, this call is being broadcast live on the Internet and a replay of the webcast will be available until August 29th. A telephone recording will be available for 24 hours after this call.

This earnings call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market share, product introductions, future demand for our products and our plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this call may not occur and actually results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 28th, 2002, filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Ltd. this morning are Dr. Min Kao, Co-Chairman and CEO; Kevin Rauckman, Chief Financial Officer; Cliff Pemble, Director of Engineering; and Andrew Etkind, General Counsel. The presenters for this morning's call are Dr. Min Kao and Kevin Rauckman.

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

Good morning from the news release issued this morning we can see that Garmin has achieved another record second quarter of revenue and net income. Excluding the effect of foreign exchange, net income increased 22% relative to the second quarter of 2002. The strength of our business is evident by seven consecutive year-over-year record quarters of revenue, strong margins and the level of EPS growth.

We were able to achieve many accomplishments since our last earnings report. We have seen another record second quarter of revenue net income. We maintained ongoing strong margins through product innovation, vertical integration and continuing improvement in quality and operating efficiency.

We shipped over half a million units, a 32% increase over the second quarter of 2002, and the most ever shipped in a quarter. We began to ship our GPS PDA integrated product, the I-queI-queI-que 3600, last week. We have strong back orders for this product, indicating significant potential for this product category, and we continue to experience strong growth in our portable after-market products.

We also announced the new Street Pilot 2610 and 2650, which provide new features such as touch screens, remote control, faster processing speeds and dead reckoning capabilities, which will enhance the user experience when operating in cities with tall buildings or other structures which normally block the GPS signal. This new product has been received positively in the market. I now expect it to begin shipping by the end of this quarter.

And we have reached an agreement to acquire UPS Aviation Technologies, which will be Garmins first turnkey application. We see great synergy between the two companies, with a good match in our corporate cultures and a common commitment to technology innovation. The company's strong product line, ADS-B technology and an energized team will provide our combined organization a strong basis to serve and grow our aviation business.

Lastly, due to the recent tax law changes and our cash position, we have announced our first dividend as a public company, a 50 cent per share dividend to be paid later this year.

With regards to the outlook for the second half of 2003, we are experiencing continued momentum in our consumer product lines. The demand for our portable automotive and hand-held recreational products continues to be strong. The increasing awareness and interest in GPS continues to drive the demand for these products.

We look forward to the PDA becoming available throughout our dealer network within the next couple months. We also anticipate the introduction of several exciting new products for the holiday season.

On the aviation side, progress continues on the development and certification of our new integrated cockpit for delivery in 2004. We also anticipate to complete the acquisition of the UPS Aviation Technologies by the end of the quarter. We are very excited and look forward to what our combined organization can accomplish in the future.

In summary, we are pleased with our results during the second quarter and we are looking forward to the rest of 2003 as we continue to exhibit growth in our business. We will continue to maintain our strategic focus by growing the business through ongoing product innovation, expanding and broadening our target markets and expanding the Garmin brand.

With that, I'd like to turn the call over to Kevin to discuss our financial results for the quarter and 2003 full-year guidance.

Thank you, Min. It's good to talk to you all again this morning and, as usual, as customary, I will-- I'll talk about the second quarter results, also look at the year to date, where we stand through the first half. I'd like to spend a few minutes on the cash flow situation and the balance sheet. I also plan to talk a little bit about the dividend announcement, the UPS AT acquisition and then finally end my remarks on giving-- reiterating our guidance for Q3 and also for the full year 2003.

So starting with the second quarter, I guess a summary would be the financial results of the company came in at or above the expectation that we've given in terms of guidance earlier. But just starting with the second quarter revenue, we achieved $143.5m, which was slightly above the range of our earlier guidance of $138m to $143m and that's a 17% growth rate from the year-ago quarter.

And when we break down the revenue like we typically do, our U.S. revenue during the second quarter was $100.3m, 14% up from $88.3m in Q2 '02. The European revenue, $37m, a 25% increase from $29.5m, and then our Asian revenue of $6.2m, which is a 24% increase from $5.0m in the year-ago quarter.

Gross margin increased 320 basis points up to 58.3% when compared to the 55.1% in Q2 2002 and the 58.3% slightly exceeded our earlier guidance of 57% to 58%. Our operating margins were 41.9% compared to an even 40% in the second quarter of '02, which again exceeded our guidance of 40% to 41%, due primarily to the stronger-than-expected gross margins we experienced during the quarter.

The net income results -- $47.2m and when you exclude the foreign currency loss, the number becomes $48.3m, which exceeded the guidance that we had given earlier of $44m to $47m of net income.

Bottom line -- earnings per share result of 43 cents per share and then excluding the effects of FX, 44 cents, which represents a 22% increase from the year-ago quarter and also exceeded our earlier guidance of 40 to 43 cents per share.

As Min mentioned, our total units sold for the quarter increased 32% up to just over half a million, 513,000 units, which compare to the 389,000 units in the second quarter of '02.

Looking next at the gross margin, we reported, as I mentioned, gross margin of 58.3% compared to the 55.1% in the year-ago quarter, at the top end of our earlier guidance, again, of 57% to 58%. Overall, the pricing we experienced remained flat as the average selling price during Q2 of '03 came in at $280 and, again, that compares to $277 during the first quarter of this year so basically flat on ASP. Gross margin was down sequentially by about 200 basis points from 60.3% in the Q1 time frame down to 58.3% in Q2, due primarily to the mix of products that we sold in the quarter.

We continue to experience the strong acceptance of our new products. Approximately 17% of our second quarter sales were generated from products introduced within the last 12 months.

Focusing next on our operating margin performance, Garmin achieved an operating profit of about $60.1m, an operating margin of 41.9%, which again exceeded our earlier guidance of 40% to 41% and the operating margin, year-over-year during the quarter, was up 190 basis points.

During the second quarter, SG&A as a percentage of sales increased 70 basis points up to 9.7% of sales, which is a 25% increase over the second quarter last year driven primarily by three main components, the increase in our call center expenses, increased insurance premiums and then the continued Oracle ERP implementation costs as we're right in the middle of that implementation right now.

R&D increased 60 basis points during the quarter to 6.7% of sales from 6.1% of sales during the second quarter of '02. On an absolute dollar basis, R&D increased 29% over the prior period and the increase is due to the timing of some of our program-- engineering program costs and also the hiring of new engineering staff. We continue to give guidance that we expect our R&D costs for the year to exceed a 20% growth rate. But during the quarter we hired 38 new engineers and engineering associates and now we employ a total of 399 engineers and associates around the world.

Overall, our total operating expenses as a percentage of sales increased 130 basis points to 16.4% from 15.1% in the prior period.

Looking next at the foreign currency loss that we experienced during the quarter, it came in at $1.3m as the dollar continued to weaken versus-- the U.S. dollar continued to weaken versus the Taiwan dollar and that rate came from 34.79 at the end of March '03 down to 34.61 at the end of June '03, which is about a .5% change.

Our interest income for the quarter came in at $1.8m. Our interest expense was $200,000 and I think you all probably saw earlier announcements but due to the retirement of all of our outstanding debt during the quarter, Garmin also unwound two outstanding interest rate swaps, which accounted for an $800,000 expense and then we also amortized a remaining $600,000 of capitalized bond issuance costs that had been on our balance sheet. So these are one-time events and, therefore, will not impact future earnings. But the combined impact was $1.4m of those two activities. And then as far as the cash, we're currently earning approximately 1.4% pretax return on our cash on a consolidated basis.

You may have seen that our tax rate changed also during the quarter. Our effective tax rate actually improved to 20% for the second quarter due to additional tax incentives received during the quarter from the Taiwan government. We reduced our tax provision during the second quarter to reflect these ongoing savings within the Taiwan subsidiary.

The effective tax rate of 20.0% was below our earlier guidance of 21.9% and 270 basis points lower than the second quarter '02 rate of 22.7%. The year-over-year improvement was caused, again, by the ongoing tax incentives through Taiwan.

So going forward now, we expect that our effective tax rate for the remainder of the year will be approximately 21% and, again, may improve if the unit volume out of Taiwan factory continues to increase throughout the second half of the year.

Next, moving on to the segment analysis of the business, we look at the consumer segments first. Our consumer revenue was $114.3m during the second quarter, a 22% increase over the prior year. Consumer business is now 80% of our total revenues and, as Min mentioned, it's the seventh consecutive quarter of year-over-year revenue growth in excess of 20% within our consumer segment.

We experienced growth primarily across the automotive and recreational product lines, which, again, is a demonstration of our continued demand for these popular consumer GPS products. Total unit sales, as I mentioned earlier, were up 32% and the unit growth primarily came in our consumer segment.

The consumer gross margin for the quarter improved to 56.8% in the second quarter, which was up from 53% in the second quarter of '02, and this gross margin improvement within the consumer segment was driven by the higher sales volume during the quarter and also lower manufacturing overhead rates due to the higher volume production in Taiwan. So overall, the consumer operating margin improved to 260 basis points, up to 41.9%.

Our aviation segment during the quarter, the revenue came in flat at $29.2m compared to $29.1m in the second quarter of '02 and the aviation is now 20% of our total revenues. The aviation segment gross margin also increased. It increased up to 64.1% from 61.8% earlier in the second quarter of '02, again, due to improved product mix within the segment versus the year-ago quarter.

Operating margins were 41.9% and that's flat within the aviation segment, compared to 42% in the year-ago quarter due to increased gross margins offset by the increased operating expenses, primarily R&D costs, within that segment.

If I could next move to the year-to-date financial summary, our year-to-date revenue was $267.3m. Revenue growth was 19% over 2002. The gross margin improved to 59.2% compared to 54.6% in 2002.

Operating income year-to-date now was $112.4m and net income of $88.7m. So our operating margin, year-to-date, has now improved to 42.0% compared to 37.7% in 2002.

Our GAAP diluted EPS number now, year-to-date, is 81 cents per share compared to 54 cents in 2002. This 50% increase in EPS was partially caused by a large FX loss during 2002 and when you exclude the effects of the FX in our earnings per share results the year-to-date is 83 cents per share through the first half, which represents a 36% increase compared to the prior year.

Looking at how the revenue breaks down by geographic region year-to-date now, the U.S. revenue results are $185.6m, which is up 15% from the 2002 first half. European revenue of $70.5m, up 33% from the first half of '02, and Asian revenue of $11.2m, which is an increase of 23% from the first half of 2002.

On a year-to-date basis, looking back at the segments again, consumer revenue year-to-date of $209.6m, which is a 24% increase over the year-to-date 2002. At this point, consumer on the first half is 78% of total revenue and our margin year-to-date improved to 57.6% from 52.4% in 2002, due to both material and overhead cost improvements and also favorable product mix within the first half.

Our aviation revenue came in at $57.7m during the first half of '03 and that's a 5% increase when compared to the year-to-date numbers in '02. Aviation gross margin improved to 65.2% year-to-date from 61.2% last year and on a year-to-date basis both consumer and aviation units combined have now increased to 959,000 units, which is a 37% increase from 702,000 a year ago.

Our operating margin year-to-date was $112.4m or 42% of sales compared to 37.7% last year. Our SG&A as a percentage of sales increased 30 basis points to 10.3% of sales in the first half. R&D has remained flat at 6.9% of sales in the first half and, as we've communicated in the past, we intend to grow our operating expenses at roughly the same rate as our revenue growth during the year.

Non-operating income for the year-to-date we've experienced now a $2m foreign currency loss during the year as the dollar has weakened approximately 1.4% versus the Taiwan dollar. And the interest income so far this year is now $3.7m. Interest expense is $500,000.

Looking next at the balance sheet, you'll notice that the cash and the investments at the end of the quarter amounted to just under $525m. The marketable securities component of this number makes up about $258.4m of our cash position.

Accounts receivable balance was $60.7m at the end of the second quarter and this represents an increase of $6.2m from $52.1m at 2002 fiscal year-end due to strong second quarter sales and also relatively linear shipments during our second quarter '03.

Our DSOs during the quarter came in at 44 days. Inventory increased during the quarter to $66.8m from $57.5m at year-end 2002, as we had expected. So we had earlier guided to an increased level of inventory during the second quarter as we bought ahead some components to mitigate SARS risk and we also prepared for new product launches, specifically around the I-queI-queI-que 3600 and the Street Pilot 2610 and 2650.

All outstanding debt was retired during the quarter as we repurchased outstanding the industrial revenue bonds on our account. The debt retirement will now save approximately $1m of interest expense per year.

Cash flow again was strong. Cash flow from operations during the quarter, $46.1m. Free cash flow generated during the quarter of $42.6m. Our cash flow from investing for the second quarter was $12.8m use of cash and cash flow from our financing activities equaled $19m use of cash and that's represented by the $20m debt retirement, offset by-- partially offset by $1m in proceeds from the issuance of our common stock related to the company's stock options plan. Capital expenditures during the quarter were $3.5m and, again, overall we're very comfortable with our balance sheet. It remains strong and we feel like we're in a good position moving forward.

Just a few comments on the dividend announcement this morning. The Garmin board, as you saw, has approved a 50 cent per share cash dividend to be paid during the fourth quarter of this year for all shareholders of record as of December 1. The estimated use of cash will be approximately $54m during fourth quarter.

And the payment of dividends after this year, 2003, will be-- continue to be at the discretion of the board and we will-- they will take into account the following factors: future operating results, anticipated business needs and then plans for future acquisitions or expansion. And another comment, just because we're listed on the NASDAQ, Garmin Ltd. is a qualified foreign corporation and, therefore, we expect that this new 15% tax rate on dividends will apply for nearly all of Garmin Ltd.'s investors.

Min mentioned in his opening remarks about the UPS Aviation Technologies acquisition and just to kind of summarize a few things here, Garmin has agreed to buy the stock in a stock transaction of UPS Aviation Technologies from UPS for a cash price of $38m. We do estimate that the closing date will be later in the third quarter.

And some of the benefits of this acquisition include additional engineering resources, which will allow Garmin to bring more products to market, particularly within our aviation segment. Secondly, the ADS-B and WAAS technology that has been developed through this business during the Safe Flight 21 and also Capstone programs is an advantage to us-- will be an advantage to us.

UPS AT, when we went to look at this business, appeared to be a very good fit within our current Garmin culture and, again, as Min mentioned, we're pleased to be in the middle of this transaction. We do expect to have-- to be EPS neutral due to this acquisition the remainder of 2003 and into 2004, however, we can't release sales-- what the sales impact to our business is, just due to the confidentiality agreement we have with UPS at this point.

That's a quick overview on UPS AT. Finally, I'd like to end and talk about guidance for both the third quarter and full year. The third quarter '03 guidance, as we had in our press release, we're expecting revenue to be in the range of $120m and $125m, which represents 11% to 16% growth, top-line. We expect gross margins to be between 57% and 58%, operating margins between 37% and 38%. As I mentioned, our effective tax rate, approximately 21%, which will drive net income between a range of $36m and $39m, excluding foreign currency effects. And our EPS range for the quarter between 33 cents per share and 36 cents per share and that represents a 14% to 24% bottom-line growth.

We do assume, with this guidance, that our outstanding diluted shares will be approximately 109.0 million shares. Cap ex during the quarter should come in around $10m and that's maintenance-level cap ex, as well as facility expansion cost here in the Kansas City area.

For the full year, we really haven't changed our guidance, other than to bring the revenue range from $515m on the low end up to $525m. So for the year, $525m to $540m of revenue, a 13% to 16% growth rate across the top. Gross margins between 57% and 58%, operating margins between 39% and 40%, effective tax rate at 21%, net income between $166m and $175m, excluding foreign currency, and then an EPS range between $1.53 at the low end up to $1.60 at the high end, and that is a 16% to 21% growth for the year. Our capital expenditure estimate for the year, $33m.

So that concludes my presentation. I'd like to open it up, as usual, for questions. If you're in the queue, I'll be happy to ask questions here and I'll be happy to answer them.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please star, then the number one on your telephone keypad. Your first question is from Ben Swineburn [ph] with Morgan Stanley.

Good morning, guys. Thanks a lot.

Good morning.

Good morning.

A couple of questions. I promise to make it quick. I'm wondering if you could give us an update on the OEM side in the auto segment, if you've got anything to add there in terms of where you are with the major players? You talked about the culture importance at Garmin and I'm wondering on the UPS acquisition if you plan on relocating employees or engineers down to your main facility in the U.S.?

And then last, Kevin, thanks for the color on the dividend rationale. I was wondering if you could just talk a little bit more about, given the cash balance on the balance sheet and the free cash generation for the business, should we expect to see a recurring dividend going out, you know, into the future as well as potential for growing that dividend unless there is sort of a major acquisition in your plans? Thanks.

The first one was auto OEM. You asked about the dividend and the second question was UPS. OK.

All over the map there, sorry.

Over the map. To quickly talk about dividend, I think the wording that we put in the release and our expectation here is that we plan to pay an annual dividend, however, it is a discretionary dividend and, you know, depending on the needs of the business, whether there's acquisitions in the future or other expansions, we want to have that flexibility.

Got you.

But, again, it's planned to announce an annual dividend at this point.

Secondly, as far as the UPS AT acquisition, we have no plans at this point to relocate anyone and, again, we felt like it was a very good fit with our business and want to-- after closing, we'd like to retain people in Oregon and move on from there.

As far as the auto OEMs, you want to answer that?

Yeah, on the auto OEM side, Ben, we continue to pursue relationships but we don't have anything to announce at this time. The design cycles and so forth in auto, as you know, are very, very long so there's really nothing that we can report to you right now.

Got it. Thank you very much.

Thank you.

Your next question is from Mark Naby [ph] with Merrill Lynch.

Thanks very much. Hey, guys, how you doing?

Pretty good, Mark.

A question related to maybe some trends that you saw between the second quarter and maybe going into the third. Obviously the Northeast experienced some bad weather. That couldn't have boded well for marine sales and now it appears, at least for the month of July, so far we've seen very good weather. Is it possible that you could actually-- you're seeing, maybe, some stronger sales on the marine side in the third quarter? That's the first thing.

Also, maybe Min or Kevin, if you want to talk about the competitive dynamics that are going on? Obviously, we know about Navman and what's happening there with Brunswick and what they're doing.

And I have a third question, but why don't you answer those two first?

About the marine concern that-- basically the marine season is almost over, so we don't see much of a catch up.

As far as Navman is concerned, Navman product are now becoming available in the market, however, we have very little visibility with regard to the market response to their product at this time. As always, we do not want to under-estimate our competition and we are continually developing new products in anticipation of the competition.

OK.

You had a third question?

Yeah, the third question related to the guidance you just provided. UPS is closing at the end of this quarter, right? Does the revenue number reflect, the new $525m to $540m -- and the $540m has not changed -- reflect revenues that you will receive from UPS? That's the first part.

Yeah, the way we approach that is, you know, we're not able to give out any sales numbers at this point, again, as I mentioned due to confidentiality. So our anticipation is as we move and get through closing that we would announce that and also discuss expected revenue increases due to that business. So we can't-- we really aren't able to talk about anything at this point specifically, so the numbers that I just guided to did not include any revenue contribution from that business.

OK, so just-- that's very important. So to be clear again, so UPS avionics does-- those numbers are not recorded in the $525m to $540m of revenue?

That is correct.

OK, because that was-- Now the other thing, Kevin, relates to your tax rate, which obviously was lower in the second quarter--

Right.

--and now it should be lower, modestly, in the third and fourth quarter. What would it-- I mean, if you do the math, one would expect, actually, your EPS estimates, then, to go up as opposed to, it looks to me, like the bottom end went from $1.54 to $1.53 and the top end stayed at $1.60. Is that correct?

Right.

Even though the tax rate went down?

That's correct.

OK. I just wanted--

The tax rate came down about 90 basis points for the rest of the year and I think where you see it fall out is between the operating expense of the business and we really did not-- we did not feel like we needed to raise guidance, even though there was a minimal impact on tax rate.

Because the-- I'm sorry, you said the expenses-- you feel your expenses are going to be up in the back half more than you thought?

I think we're trying to be-- you know, with the second half, we're anticipating that they could be, given the R&D, you know, the engineers that we've hired now in the back half. So I think kind of minimal impact on EPS with a change in tax rate. So we chose not to up-- increase guidance at this point.

OK. I'm sorry, just one last question from me. This will be very brief. If you look at the percentages by segment, you know, by region, North America you were up 14%, Europe you were up 25% and Asia you were up 24%. If I look at your first quarter press release, I notice that North America you were up 17%, so there's a deceleration there, Europe you were up, year-over-year, 41% versus, again, 25% in the second quarter and it looks like Asia you were at 22% in the first quarter, now you're at 24%, so there's an up-tick there. Any comments as far as overall regional trends?

As you just mentioned, the extremely wet weather in the East Coast has had an impact on the marine sales.

I'm sorry, Min, I couldn't hear that.

The wet weather in the East Coast--

Yep?

Yeah, has had an impact on the marine sales in the second quarter.

Got you. But you would expect for the third quarter your growth rate to trend up, maybe back more to where you were in the first quarter or, you know, beyond that-- before that, I mean?

I think every quarter has its own dynamics. I mean, second quarter was typically more of a marine season. The third quarter, you know, sequentially is down, but that's expected. So, you know, trend-wise I would not-- you know, we really probably can't comment on that at this point.

OK. Thanks a lot, guys.

Thanks.

Thank you.

Your next question is from John Bucher with Harris Nesbitt Gerard.

No, it's John Bucher.

Hi, John.

Hi, John.

We know who you are.

Sort of a follow-up on the last question with marine, understanding the significant wet weather impacted the marine sales there, but putting that aside, do you believe it's possible that the portable automotive, which you mentioned, you know, experienced strong growth, could portable automotive revenues surpass marine and recreation product revenues by year-end 2003 with the two new products that you've got coming out? So you'll have essentially three portable automotive products on the market in the second half of 2003.

Well, as you commented, you know, the portable automotive has been one of our growth areas and I think it would a far stretch to assume that they're going to, you know, surpass our marine business, but as you know, we don't make specific numbers public in terms of what that level is. I think the bottom line is we expect the portable automotive, with these new products, the 2610 and 2650, to continue to improve. However, to guide to an expectation that that's going to exceed our marine or any other segment, I don't think is probably accurate.

OK. The UPS Aviation Technologies acquisition, do you expect any restructuring charges to have to be taken? I know there's some product overlap between the two businesses. Do you expect any restructuring charges in 2003?

No, not really, and as I mentioned in my guidance, we would expect that the EPS effect from this acquisition would be neutral to our business this year. So, no.

And then the facilities expansion that you have going on right now--

Yes?

Are you going to be changing any of your plans at all because of the UPS AT acquisition? And then if you could just provide a general update on how that acquisition-- I mean, how that expansion's coming along?

No, as I mentioned, we have no intention to move anyone between the sites, so the facility that we're building here will continue to-- will be built to support our existing Garmin International business and our U.S. sub and as far as the status of that, I think we're on track and if you were here physically you'd see lots of activity on our-- you know, on our land here. So, again, it's on track and on budget.

Would the same apply to the Oracle ERP implementation and have you had any adverse order fulfillment, order entry issues as a result of that implementation?

Well, first of all, definitely no order fulfillment because, you know, we haven't gone live with that implementation. But we are right in the middle of that implementation and, you know, as we communicated earlier, expect to be done by the end of the year.

And then finally, total head count?

Total head count, right at 1800 employees now around the world.

Thank you very much.

Thank you.

Your next question is from Adam Weiner with Credit Suisse First Boston.

Hi, good morning.

Hi, Adam.

Hi, Adam.

Yeah, related to the UPS acquisition, in regards to the engineering talent it brings along on the aviation side, I guess, in particular, will these folks be put to work on the new product suite that you're developing and is there anything we can infer from that, like is that project on track? Do you have everything you need? Does this add any additional capabilities as you roll out that new product suite?

Adam, this is Cliff. We really can't talk about plans or projections with UPS until we close the transaction.

Just a general comment about the integrated cockpit. As we said, we still feel we're on track for end-of-year certification with deliveries in '04.

OK. Kevin, just related to the dividend, is there any-- is there any more color you can provide in terms of the motivation behind, you know, why this particular number and why not something more or less? Is there any inference we can make about potential acquisitions you might be looking at? Or is this just a conservative kind, you know, view in terms of use of cash?

Well, I think I'll make a couple of comments here. As we've considered a dividend, you know, it's always interesting to determine what is the appropriate level of cash that we need to run the business and also, what would be an appropriate dividend to begin with.

So I wouldn't read too much into, you know, our announcement other than the fact that we feel comfortable with the level of cash, however, we want to allow some flexibility for future, whether there is another acquisition. I mean, there's no other pending deal that, you know, you should think is out there. So, again, we felt like, given our level of cash on the balance sheet it would be appropriate to make an initial dividend payment. However, again, we want to allow ourselves flexibility as we continue to be a growth business.

OK, fair enough. And just on the product side, how have the Geko sales been working through? And any additional color in terms of the PDA, in terms of, you know, you just started to ship that, how is the order flow so far relative to your expectations earlier this year?

Well, I think, you know, the Geko product* is still relatively new. There appears to be-- the good thing, there appears to be no impact, thus far, on our eTrex sales. You know, the Geko's smaller size and its simple operation, we think, have really created another product category, I would say, much like the Rino that came out last year and this allows us to tap into some new groups of consumers who are interested in learning about basic GPS, which is really what this Geko product was aimed at.

OK and the PDA?

As I mentioned, we are shipping a small quantity of the product. The demand has been strong. So we expect to fill the back orders in a couple months.

OK. Thank you.

Thanks.

Your next question is from Mark Roberts with Wachovia Securities.

Thank you. Good morning. Revisiting the guidance question, Kevin, it looks like relative to the 2Q, you're guiding gross margins down by about a point. Is that due to, again, a continued shift in mix or is that due to pricing?

I think it's more due to mix. You know, we were at 58.3% in the second quarter. We're saying 57% to 58%. It's a very moderate change, but, you know, with a PDA coming out and just other product mix issues, we felt like that is the appropriate margin guidance going forward.

OK. And then when you talk about operating margins relative to the nearly 42% operating margins you had this quarter, you're guiding down, you know, even to the high end of the range nearly 4 points. Is that-- how much of that downward sequential operating margin is in selling expenses?

Well, I think it's true it's both in selling and R&D expenses. It's really volume driven since sequentially Q3 is our weakest quarter. So, you know, we have SG&A and R&D costs built into the business and since $120m to $125m is the appropriate revenue number, that drives a lower operating margin for the quarter.

OK. All right. And last question, in looking at sort of blended ASP pricing on the units you gave, it looks like it's down year-over-year for the first half about 12%. Are you able to continue to give us quantification of how much of that variance, 12% ASP decline, is mix and how much is just price erosion from older products that are being discounted or rebates, that sort of thing?

Yeah, I understand you're looking at one data points, Q2 last year. If you look at-- the way we look at it, if you look at ASPs and how they kind of spiked up last year in the second quarter, but by the end of the year we were basically at a $277 or $280 price point, so the way we view is really flat and by the end of the year, we could-- we would still expect to be at that-- roughly that same level.

I think you may be implying something about rebates and discounts, however, I think there's not really any trends, significant trends that we see, that are impacting pricing in the market. So we always tend to have people shy away from ASP because it-- there's so much mix with the several-- tens of dozens of products that we sell that kind of drive that number up and down.

OK. Thank you.

Your next question is from Peter Friedland with W.R. Hambrecht.

A couple of questions. First, on the consumer business, you're at about 20% year-over-year growth and I just wanted to see if you could quantify that a bit within the individual segments, outdoor, marine and auto? And then, secondly, if you could talk about new products coming out for the remainder of the year, excluding the two new Street Pilot products, how many new products are you expecting? And will those be enhancements to existing products or any totally new products there? And just-- and the last question, on the PDA, you said about 50,000 units in the second half of the year. How many units should we expect, roughly, in Q3?

Let me, first of all, just talk about product line detail. As you know, we really don't give that out publicly, however, we did comment on the fact that the growth primarily came from the automotive, the portable automotive products, during the period, as well as the outdoor recreational products. But other than that, I can't quantify, you know, how much or which one was stronger, but both of those product lines were definitely delivering strong growth to us in the second quarter.

New products and enhancements?

Yeah, Peter. On-- probably for the year, we anticipate about 25 will be the total number of new products for the year. I really can't comment on details of what those will be and so forth, but we do believe 25 will be the right number.

On the PDA, I think you're asking for a Q3 number. I think we want to keep a general commitment in terms of number of units and won't really give guidance for the third quarter, specifically. However, you know, again, Min mentioned they've begun shipment and there is back order, so we're hopeful that that product does very well as it sells into the channel.

OK. Then just regarding the new products, so 25 for the year, where are we today?

I think we have released seven new products year-to-date.

OK.

Six or seven, yeah.

Great. Thanks, you guys.

Thanks.

Your next question is from Jon Braatz with Kansas City Capital.

Good morning, Kevin, Min.

Good morning.

Good morning.

Going back to, you know, last year in the second half your sales growth was fabulous as you introduced some new products and I know you don't like to anticipate too much in terms of new product revenue, but when you look at your guidance for the second half of this year, what do you-- I mean, what kind of expectations do you have for the II-queI-que in terms of those numbers?

And then, just on the follow-up, you're talking about 25 new products for the full year and you've only had seven so far, so there's going to be a slew of new products coming forth in the second half. I just-- I guess I'm trying to anticipate or understand what kind of assumptions you're making for new product sales in the second half.

Well, I think one thing we continue to communicate on new product introductions is when we come out with a new product, it doesn't immediately impact substantially a quarter. I mean, it takes a while for a ramp-up and rollout to the dealers and so I think we-- why don't we just kind of guide in that direction? You think about a Rino product or a Geko, I think we're seeing, we think, reasonable sales now, but you don't-- just because we're releasing 10 or 15 products, there's a time-- you know, it's a matter of when we do it and then how we release those products that affects the sales for the second half.

So I think just to-- we would rather just say that we're very comfortable with our second half guidance and we need to, you know, get the products out before we can commit to anything different.

OK. And this is probably a question more for Cliff, the G1000 is basically expected to be rolled out by the end of this year, early next year, I'm trying to get a sense as to-- this is a product that's going to or will be-- will find some uses in business jets and so on as we saw with your win with, I think, the Citation or the Cessna Mustang, but, I mean, how big a new market are you actually entering with this G1000? Basically, you're into the general aviation business, but now this G1000 will be taking you into the business jets. How big a market is that, how big a new market might that be for Garmin?

I believe the biz jet new manufacture last year was somewhere around 700 units. Is that about right? Five to seven hundred units. So, I mean, that just gives you a sense for how many new planes are being produced per year.

OK. OK.

And there's obviously different contributions and rates from our avionics in the cockpit, depending on the configuration, but that's the amount of new planes per year.

OK and right now you're currently-- well, how many-- have you been certified for any aircraft yet?

No.

OK. All right. All right. Thank you.

Thanks, Jon.

Your next question is from Rayna Smith [ph] with Needham.

Hi, good afternoon.

Good morning.

Hi.

With the UPS acquisition, I just wanted to clarify a little bit, is that-- do they have market-ready products or are those products still in development?

They have products on the market already, Rayna.

OK, great. And with the I-queI-que launch, it sounds like that might impact the gross margin a bit in the third quarter. Would that impact increase in the fourth quarter?

No, I think, again, the numbers I've given this morning at roughly, you know, 58% to 59% or 57% to 58% are inclusive of any PDA sales that we would have. So, I mean, we've kind of told people that the PDA is not at the same gross margin as our weighted average, but, again, I've already-- we've already factored that in with our guidance.

OK, thanks.

Thank you.

Again, ladies and gentlemen, if you would like to ask a question, that's star, then the number one on your telephone keypads. Your next question is from Mike Rappaport [ph] with Rice Volcker [ph].

Good morning and thanks for the dividend.

You're welcome.

I'll probably be able to use it. The question was on the inventory levels, could you break it down in terms of raw materials, WIP and finished goods?

No, we've never done that. I think we're comfortable with the levels of inventory. You probably know and we've communicated that we're not a just-in-time inventory shop. We tend to hold whatever is necessary to run the business, given our strong balance sheet, but, no, we don't break it down below just total inventory.

OK. Could you comment, at least, then on the finished goods portion, whether that includes more marine than we normally expect to see this time of year, or is it really raw materials sitting there?

Yeah, I think the discussion I gave during my presentation was the fact that we did bring in some more raw materials and the finished goods balance at the end of the quarter was not anything that was unreasonable or out of expectation.

Mike, our guideline is generally to have six to eight weeks of finished goods inventory.

OK. OK, well, thank you.

Thanks.

There are no further questions at this time.

OK. Thanks, everyone.

Thank you very much. Talk to you next quarter.

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