台灣國際航電 (GRMN) 2004 Q1 法說會逐字稿

Good morning. My name is Brooke, and I will be your conference facilitator. At this time I would like to welcome everyone to the Garmin Limited first quarter 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 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2.

I would now like to introduce Ms. Paulette Schwerdt, manager of investor relations. Thank you, Ms. Schwerdt, you may begin your conference.

Thank you. Good morning, we would like to welcome you to Garmin Limited 2004 first quarter earnings call. Please note that a copy of the press release concerning this earnings call is available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. Additionally, this call is being broadcast live on the Internet, and a replay of the webcast will be available until May 28, 2004. A telephone recording will be available for 24 hours after this call, and a transcript of the call will be available until May 28, 2004, on the website within 48 hours at www.garmin.com/stock. 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 this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 27, 2003, filed with the Securities and Exchange Commission.

Attending, on behalf of Garmin Limited this morning, are Dr. Min Kao, co-chairman and CEO; Kevin Rauckman, chief financial officer; Cliff Pemble, director of engineering; and Andrew Etkin, 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 press release issued this morning, you can see that in the first quarter of 2004 we again experienced record revenue. Total revenue for the quarter increased 28%. Excluding the effect of foreign currency, earnings per share made the high end of our guidance at 37 cents per share. Including the effect of foreign currency, diluted EPS was 32 cents.

We were able to achieve many significant accomplishments in our lab. We recorded over 20% in both our consumer and aviation businesses and in all three geographical regions. We shipped close to half a million units during the quarter, and demand for both new and mature products remains strong. We delivered 10 new products in the first quarter of 2004, many of which are significant to our business and they fill voids in the various markets we serve. These include the GPSMap60C and 60CS, our first handheld product was true sunlight-readable TNT color display for outdoor recreational users. The StreetPilot 2620, which features a preprogammed hard drive containing the entire North American or European [suite] level mapping out of the box. The automotive market continues to show high goals for Garmin, and reorders for all the earlier-released StreetPilot 2610 remains strong.

The Fishfinder 250C, which offers [inaudible] hard disk with sunlight-readable color finder at an attractive cost. The Forerunner 101 for the personal fitness market, a market we believe presents a new area of opportunity for Garmin, and our Foretrex 201, an portable navigator, which has strong appeal for sailing and hiking markets. GPS Map 296, a portable aviation product that delivers topographic mapping and terrain alerts in bright color to pilots.

Now we continue to expand our present portfolio with 149 granted to date and 456 applications still pending. Progress on our Oracle facility expansion continues on schedule. We look forward to expanding operations into our new warehouse in the second quarter and the office space addition during the first quarter. The Oracle EOP system is now live in our Taiwan, UK, and Cayman operations. We look forward to bringing the system live in our Oracle operation during the second quarter.

The quarter was not, however, without challenges. While we believe that comparative pricing pressures was not a significant factor, gross margins in the first quarter were impacted significantly by other factors.

First, we experienced cost increases in certain components such as the Flash Memory for which the mobile [inaudible] industry has created high demand and [therefore desiring and of their ability and price challenging]. Second, the normal price reductions in other NR line [sp] activities we undertook for those products that would be replaced by a large number of new products during the first half of 2004 also put pressure on margins. Finally, we experienced a shift in product mix as some of our popular, low-margin products sold in higher quantities.

As we look forward to the remainder of 2004, we anticipate the release of many more new products that provide innovative features and capabilities for not only our core marine, aviation, and recreation markets, but also for the automotive, PDA, and personal fitness markets. Consumer awareness and interest in GPS knowledge continues to grow, and we desire opportunities to serve customers for GPS-enabled products remains strong.

On the aviation side, we continue the outgoing and contract certification process of the GS1000 [inaudible]. We anticipate the completion of our first certification by the end of the second quarter, and we look forward to our initial revenues from this system. In addition to the Cessna, Diamond, and Mooney programs that have already been announced, we are also working with other aviation OEMs and hope to have more progress to report later this year.

Lastly, we are pleased to announce that our board of directors has authorized the company to purchase up to 3 million shares of Garmin stock. This program will give us the ability to buy back our shares at attractive levels and make a positive long-term investment for the company.

In summary, we are generally pleased with our first quarter results and look forward to the remainder of 2004. The significant investment in R&D resources that we have made in the past couple of years, our new product in pipeline remains robust. We believe that Garmin is well conditioned to take advantage of opportunities the future offers.

With that, I would like to turn the call over to Kevin to discuss operating results in Q2 2004 for your guidance.

Thanks, Min, and as is customary, I'd like to walk us through the first quarter results in detail and then talk a little bit about the second quarter guidance as well as the full-year guidance that I'm sure most of you saw in the press release this morning. So let's jump into the first quarter financial summary.

Our first quarter revenue, as Min mentioned, $158.3m, which is above the range of our guidance - our earlier guidance of $137m to $140m. So the revenue increase is up 28% from a year-ago quarter. Breaking that down by the different regions of the world, the U.S. revenue came in at $107.3m, a 26% increase from Q1 of '03 of $85.3m. Europe continues to track well and slightly above the U.S.; the European revenue for the quarter, $43.9m, a 31% increase from Q1 of '03 of $33.5m. Our Asian revenue results were $7.1m, up 42% from $5.0m a year ago.

Gross margin decreased during the period 9.5 percentage points down to 50.8%, which compares to 60.3% in the year-ago quarter. Roughly 51% was below our guidance of 56% to 57%, and more on this later. Sequentially, our first quarter gross margin was down 5.3 percentage points from the fourth quarter of '03.

Operating margins came in at 31.3% compared to 42.2% in the year-ago quarter, 31% below our guidance of 34% to 35%. Net income results were $34.7m. When we exclude the foreign currency loss that we experienced, the net income actually is $40.6m, and that number is at the top end of our earlier guidance on net income of $38m to $41m.

Earnings-per-share results, as Min said -- 32 cents on GAAP financials. When we exclude the effects of foreign currency, the EPS was 37 cents per share. That's down 5% from the year-ago quarter but at the top end of our earlier guidance of 35 cents to 37 cents per share. Total units sold during the quarter increased 7%, up to 478,000 units, which compares to 446,000 units from Q1 of '03.

Looking in detail at the gross margin, we did report gross margins, as I said, at 50.8%, which is below our earlier guidance of 56% to 57%, and the principal causes of the gross margin reduction during the quarter were related to several factors. Number one, manufacturing cost increases primarily in the area of Flash Memory and other electronic components went against us compared to a year-ago quarter. Secondly, the product transition costs that we experienced as we began phasing our a number of our older products, and we are awaiting the pending delivery of the new and updated products, also had a negative impact on the margins during the quarter. And then, thirdly, the product mix changed as more popular, lower-margin products sold very well during the first quarter as we exceeded our revenue by $18m over the top end of our guidance.

I want to make a point here that the margin reduction is not due to competitive pricing pressures, as Min said. We don't believe that we've lost market share in any of our markets that we're selling into in some cases, and we've actually seen some expansion in market share.

Our average selling price during the period increased to $331 per unit from $288 per unit during the fourth quarter of '03, caused by increased sales in our automotive and PDA product lines, which, in all cases, have ASPs higher than our traditional average selling prices across the board.

When we look at the contribution of new products released within the last 12 months, approximately 28% of our first quarter sales were generated from those products that have been introduced in the last 12 months.

Moving next to the operating margin performance, Garmin achieved operating profit of $49.6m, which is 31.3%, and that, again, is under the earlier guidance of 36% to 37%. During the quarter, our SG&A cost as a percentage of sales, decreased 50 basis points down to 10.5% of sales. Looking at the absolute dollar increase on SG&A, we experienced a 22% increase. If we exclude the effects of the Garmin AT business, which we did not have a year ago in the first quarter, our SG&A increase was actually 14% over Q1 of '03 and, just to remind you all, the revenues during this period were up 28%. The SG&A increase was driven primarily by the continued Oracle consulting fees that we're paying as we come to the close of the Oracle implementation; increased marketing program costs; continued increase on our call center expense; and then, finally, factoring in Garmin AT SG&A costs, which we had during the quarter. These increases were partially offset by a small reduction of advertising costs during the period.

Our R&D increased 190 basis points to 9% of sales from 7.1% of sales during the first quarter of '03. The absolute dollar increase was 62% for the prior period. Excluding Garmin AT, that increase was 34%. So R&D continued to increase due to the hiring of our new engineering staff. We hired eight new engineers and engineering associates during the quarter, and now we employ a total of 523 engineering associates around the world.

So, overall, total operating expense as a percentage of sales increased 140 basis points to 19.5% of sales from 18.1% in the prior-year period.

Moving next to the other income line on the income statement, we did experience a $7.6m foreign currency loss during the quarter as the U.S. dollar weakened compared to the Taiwan dollar from 34.05 of Taiwan dollar at the end of the year to 33.27 at the end of March. That represents a 2.2 percentage change on the currency.

As we stated in last quarter, the majority of the company's consolidated foreign currency translation gain or loss results from translation into the Taiwan dollar at the end of each recording period of our significant cash that's held in U.S. dollars in Taiwan. The translation is required from Taiwan under generally accepted accounting principles because the functional currency in Taiwan is the new Taiwan dollars. However, as we have continued to state, there is minimal cash impact from this foreign currency translation, and we expect that the Taiwan subsidiary will continue to hold a majority of its cash in U.S. dollars.

Looking at interest income, we experienced interest income of $1.9m during the quarter. Currently, we are earning approximately 1.9% pretax return on our marketable securities and overall cash balances our return is 1.5%. The tax rate was fairly stable during the period. Our effective tax rate during Q1 was 21%. That's in line with our earlier guidance. However, it's 80 basis points lower than Q1 of '03. That rate was 21.8%. The year-over-year improvement was caused by a small shift in profit toward our entities that are taxed at lower effective tax rates during the year. Overall, we expect that the effective tax rate for the full year of '04 will continue to be 21%.

Moving next to the segment analysis, looking at first quarter consumer segment, our consumer revenue was $123.5m during the quarter, and that represents a 30% increase over Q1 of '03. So the consumer segment was 78% of our total revenues during the quarter, and we now have a 10th consecutive quarter of year-over-year revenue growth in excess of 20% within the consumer segment.

The growth we experienced within the consumer segment came mainly from automotive and PDA product lines. We believe it's a demonstration of continued demand for these consumer GPS products. The total unit sales for the quarter were up 7%, as I said, 478,000 over 446,000 a year ago, and the unit growth occurred primarily within our business within this consumer segment. Consumer gross margins decreased to 48.2% in the quarter from 58.5% a year-ago quarter, and this reduction was caused by the higher manufacturing costs that I mentioned earlier, product transition costs, and the unfavorable product mix during the period. Consumer operating margins also decreased 9.3 percentage points down to 32.2% from 41.5% in the year-ago quarter. The overall operating margin was driven by reduced gross margins partially offset by the lower SG&A expenses as a percentage of sales.

Our aviation segment, the aviation revenue during the period increased 22% to $34.8m during the quarter compared to $28.5m a year ago. So aviation segment was 22% of total revenues, and the revenue increase primarily came due to the sales we experienced from Garmin AT and also the recently released GPS MAT 296 product. Aviation gross margins decreased to 60.2% from 66.4% in the first quarter of '03, again, due to unfavorable product mix during the period and certain program costs that are associated with the new G1000 cockpit that is about to be released.

Operating margins within the aviation segment came in at 28.2%, that's down 16.6 percentage points compared to the year-ago quarter, and it's due to the reduced gross margins and our increased R&D expenses within the segment. R&D increases came from both our core technology and from the addition of the Garmin AT business, which is entirely in our aviation segment.

Moving next to cash flow - our cash flow, again, from operations was $52.3m for the first quarter. Free cash flow generated was $34.5m for first quarter 2004. Looking at cash flow from investing - cash flow from investing was a $45.1m use of cash, and the financing activities, cash flow from financing came in at $0.7m source of cash from the proceeds from the issuance of our stock options during the quarter. Capex for Q1 -- $17.8m, and that's primarily made up from the dollars expended on the U.S. facility expansion that Min alluded to.

On the balance sheet are cash and marketable securities at the end of the quarter, came in at $530.6m. Marketable securities make up $248.2m of this total cash position. Our accounts receivable balance at the end of the quarter was $76.8m, and that represents a decrease of almost $6m from the end of the year, primarily due to strong collections, improved linearity of the shipments that we experienced during the quarter, especially when compared to the fourth quarter of '03. Our DSO statistics came in at 46 DSO, and that actually compares to 39 DSO at the end of the first quarter last year, but it is down sequentially from 51 DSO at the end of 2003. Our inventory decreased during the period, down to $93.7m from $96.8m at the year-end of 2003, as we expected. The decrease in inventory during the quarter was due to stronger-than-anticipated first quarter sales and the use of certain of the electronic components that we purchased ahead of demand during the fourth quarter of '03.

So, overall, our balance sheet continues to remain strong. We feel like we're in a position for the future growth. I'd like to conclude my remarks on the guidance numbers that we had issued in the press release this morning. Looking at the second quarter, the revenue range in Q2 we expect to be $173m to $180m, so our top line on the heels of a 28% revenue growth of Q1, we expect to be 21% to 25% top-line growth in the quarter. Margins, we are predicting 53% to 54% during the second quarter; operating margins 34% to 36%. As I said, our effective tax rate should remain stable at 21%, and that will generate a $48m to $52m net income excluding any foreign currency effects, and we expect the earnings-per-share range to come in at between 44 cents and 48 cents per share. The 48-cent EPS represents a 9% growth over the second quarter of '03. We are also assuming our diluted outstanding share count as $109.3m. So we have not assumed any share buyback in these numbers.

Capex estimate for the second quarter of $20m, again, primarily driven by continued facility expansion in the [Oracle] facility.

And, finally, in the full-year guidance, we do, as we said in the press release this morning, we do expect that higher revenue to occur for the full year, higher than previously communicated. You may recall that the guidance we had given after last quarter's call was $660m to $690m. So, as I said, we expect higher revenues than that number; however, much like we experienced in the first quarter, we expect lower margins than earlier communicated. Earlier our guidance was 55 to 57, so we expect higher revenue for the full year with lower gross margins.

While we don't anticipate gross margins to return to the levels seen in our recent years, we do hope that the introduction of many of the new and innovative products that Min spoke of earlier will allow us to improve margins somewhat from the 51% results that we experienced in the first quarter of 2004.

Just to remind everyone, 10 products were introduced in the first quarter. Many of the 35 additional products expected during the remainder of the year should be released during the second quarter. Product mix during this transition period, and we do view this kind of as a transition period with so many new products coming out - the product mix during this transition is expected to be a major factor on the gross margins within the business, and we do expect to update our full-year estimates after the conclusion of our second quarter with that in mind.

That ends the formal responses and presentation. At this point, I'd like to open the call up to any questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star then the number 1 on your telephone keypad.

Your first question is from Mark Naby with Merrill Lynch.

Good morning, everyone, how are you?

Good morning.

Several things - I'll start off with three - number one, I want to get a better sense of the units you sold. It was only up 7%, and if you look back historically, actually, that's a very low percentage on a year-over-year basis. I do know that there were a lot of easy comps from prior periods because of the increased distribution outlets, so maybe you can talk about that, number one.

Number two, one would think if you have these higher-priced devices, the 331 ASP, which was up almost 20% on a year-over-year basis, you would have gotten higher margins. I'm still trying to figure out again why the margins have done what they did. That's number two.

And, number three, could you also talk a little bit about the AT transaction a little, and just figure out better what revenue contribution occurred in that aviation segment from that transaction in the first quarter of 2004? I'll start off with those.

Okay, as far as the 7%, I think we still see that as a nice growth in the business and, as we said, primarily this ASP that you mentioned, the 331, is driven by the automotive and the PDA product. So in any given period, we have some variability in unit growth. We earlier communicated we didn't expect much revenue contribution from the new products just released within the quarter. So I think as we look out for the rest of the year, the 7% to us is not a bad number. Obviously, we'd like to grow it closer to 20%.

Mark, I may add that the two things in the first quarter we do have a large back order for the new products. Many customers are waiting to buy the new product.

And on the second question, dealing with the higher prices and the higher margins, I think that's maybe an anomaly that's not correct. Just because we sell at a higher price and, again, I can just point out two product lines - automotive and PDA. Those are not necessarily higher margins. We don't give out exact margins, as you know, by product, but those are not necessarily higher margins. Our historical ranges are between 56% and 57%.

Another dynamic that's going on here is we're starting to introduce - or - we have introduced many more color products and by introducing color [TNTs], we are not able to price up and get the same margins on these newer products than we have been able to on the historical monochrome display. So it's just the nature of the market. Again, it's not something that is due to competitive pricing, but it's more the product mix and how many we sell at low, medium, and high price points.

Then, finally, the AT transaction that you mentioned - we experienced - you know, I think we'd given a number roughly around $20m for the year for Garmin AT on revenue, and we experienced about $5.5m of revenue contribution from that business in the first quarter at a breakeven. So I think we're right on track with what we had communicated to you earlier.

Great. Just one last thing related to Flash Memory prices, and you had just talked a minute ago they were up substantially. How much was the cost op? As you had built the inventories, things were - pricing was moving up. I just wanted to get a better sense of how much was it going up?

Actually, we use Flash Memory in every product we ship. So approximately we can account for about 4% due to the price increase to Flash Memory.

The other point on that cost is we've - historically, we've seen cost reductions, and so, as Min mentioned, 1% up compares unfavorably to cost reductions on the quarter-over-quarter basis. So I think that's - honestly, that was one of the three factors on the margin results for the first quarter.

Okay, I'll let other people ask questions. I'll probably come back. Thanks.

Your next question is from Mark Roberts with Wachovia Capital Markets.

Thank you, good morning.

Good morning.

Let me just follow up on Mark's last question about - did I understand - was it a 1% increase in Flash prices or a 1 gross margin point increase?

Our shipped product in the gross margins.

Okay, so it was 1 gross margin point was the increase in Flash?

Yes. I would probably have to more generalize - the Flash Memory and other IC devices.

Okay. Are you starting to see any softening in pricing or shortening of backlog in components in Flash Memory?

No, in fact, I think that we said mobile in the entire industry is very hot right now. We do experience a global kind of shortage problem. Not only is a price easier, but also we experience a shortage [inaudible].

Okay. And also, Kevin, to revisit the product mix issue, you mentioned that you don't think you're losing market share in any category, and you're not seeing any pricing pressure, but you mentioned that the automotive products and the PDA products have lower gross margins. Are those the two categories where you face the most number - the most sophisticated number of competitors?

Well, I have to answer this question. We will not say that we have not experienced price pressure from competitors. I see while restating that competitive pricing pressure has not been a significant factor of our gross margin erosion. As far as the competition is concerned, I would say that automotive, it is true that during the later part of last year, due to the introduction of Magellan product, we did experience some competitive pressure there. But, at the same time, I want to say that you may recall we introduced our StreetPilot product 2610 at a price of 999, and we have not reduced the price at all. That's how we saved that - our gross margin erosion has not been due to our competitive pressure.

Okay. Can you talk about product mix in some specificity? I'm a little unclear - what would have been the high-margin products that didn't sell in the first quarter that would have kept gross margins up?

I think the problem is probably more difficult to predict, given that product transition time, okay? I would say that, you know, for instance, that, frequently, our U.S. market responded totally different from the European market. While we introduced the StreetPilot 2610 we reduced the price of our older StreetPilot by a couple of hundred dollars. Our European market lost the new price point and, in fact, has been requested more product than we had planned for. On the other hand, the U.S. market, the transition to the new StreetPilot went amazingly fast and sales of the old product have basically just stopped. So, as such, you know, we took a more aggressive approach to the most of demanded inventory, which ended up cause a little more than what we had anticipated.

So, anyway, this is just one example of product mix. We introduced the StreetPilot 2610, which was largely the same margin as the older product, but these are transition stage because of how the market reacted to these transitions, we did, you know, take an aggressive approach to remove of the demand inventory of the older StreetPilot, and that's one example that the problem this has impacted our margins.

Okay, and my last question, and then I'll turn it over to some other folks. Kevin, it looks like that the guidance for the 2Q is for higher revenues than what I had been anticipating, lower gross margins, but the net effect is about a wash. But yet you weren't willing to give similar guidance for the year. You did talk about higher revenues, lower gross margins, but you seem to be hedging on expected EPS impact for the full year. Should we conclude from your comments that you just don't know how much the gross margins are going to decline and how much EPS impact it's going to have? Or that there is essentially no change from your prior EPS guidance?

I think the better way to interpret would be the range of possible outcomes is just too broad, and we weren't comfortable with trying to pin it down to an exact number. If you read into my comments, we're hopeful that -- the first quarter really made us sit back and think and evaluate what is occurring in the gross margin and the transition process that we're going through. So we're sitting at - after Q1 - a 51% margins. When we look out at the next quarter, given what we expect to release, and we think 53% to 54% makes the most sense. However, we really want to wait until we get through that second quarter. We're introducing more products in the second quarter than we did all of last year. So that's a substantial transitionary phase we're going through and more than we've ever done in any one quarter. So that's really how you need to interpret the guidance without pinning it down to an exact number.

Okay, if I could restate it a different way, perhaps - it sounds to me like, based on what you saw in the first quarter, in the tone of your guidance, that you are seeing much higher-than-expected demand for your automotive products, which are lower-margin products, and you are just unclear what the mix is going to be for the rest of the year in automotive relative to the higher-margin recreational products. Would that be a fair statement?

I think it would be a fair statement, but I would also extend that past the automotive, because some of the same factors that we are experiencing in automotive, we are also experiencing, let's say, in the outdoor recreational market as we are introducing new products there -- and in the marine business -- as we're introducing new color displays and other products in that market. So I think it's a fair statement, but it needs to be extended to more broad application across all product lines.

Okay, and based on Min's comments about color displays, I would assume that the new products are going to generally have lower margins than the old products.

Not always. I think Kevin earlier used that example.

Right. It depends - again, there is a lot of variability, and you know our pricing strategy and our product strategy - we like to introduce choice to the consumer - low-, mid-, and high-range. So, again, there are so many variables in that gross margin equation, that's what kind of pushed us to how we communicated the full-year guidance.

The big part of the uncertain in the gross margin is how do we transition from the old to the new product. I think the product mix during this period is very critical.

Great, thank you.

Thank you.

Your next question is from Jim Duffy with Thomas Weisel Partners.

Thank you. Just digging into the gross margin a little bit more, the manufacturing cost increases - was there an operational element to that or was it all related to cost of goods?

It was primarily related to cost of goods. I mean, I think if you look at the volume that we experienced in the second quarter, you know, if volume had been down, we might have experienced some pressure, but it's primarily due to the raw material components.

Warranty cost is part of it, too.

That's true, yeah. On certain product lines we experience incremental warranty costs. I was thinking more on the labor and the overhead efficiency of the factory. We didn't see an impact there, however, we did, on a percentage of sales, have an impact due to some incremental warranty costs.

Okay. The next question has to do with your inventory of components. Last quarter you indicated that you had purchased ahead on some of the components [background noise] stronger than maybe you anticipated. How is your inventory of components, and are you now going to be going to the market to repurchase things like Flash at potentially higher rates?

I think it goes both ways. All one way, you know, in one way we are working down the inventory we had purchased in advance of the new product we have planned for the past six months. But there are other ways we do experience [inaudible] component shortage situation with components such as Flash Memory and LCD displays. So as we have experienced high demand for our new product, we are working very hard to try to get as many components as we can.

Okay. The final question relates to the inventory of finished goods. You mentioned that some of the margin pressure came from clearing inventory of aged products. How do you feel you sit at this point with new products coming down the pipeline? Are your older products completely out of inventory or do you still have some work to go there?

I think that gets back to Min's earlier comments on the transition. I feel like, overall, when you look at finished goods compared to where we were, let's say, a year ago or a quarter ago, I think we're probably right on track. We do still have inventory on older products, and that gets down to how do we - traditionally, we have given, like, price protection as we get to the end of a life of our product, so there will continue to be that as we end-of-life and phase in a new product - we'll give price protection to our dealer channel. But, overall, I feel - I think we feel pretty comfortable where we stand right now on the finished goods of older products.

Okay, thank you.

Thanks.

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

Good morning, Kevin, Min.

Good morning.

You've introduced a lot of new products in the past and did not see the margin decline that you saw this quarter. What is really different about this product introduction cycle relative to prior years? Is it just more? Is there something different that maybe I'm not seeing?

Well, I think the more comment is correct. I mean, you have, like I said, more in this upcoming quarter than we've ever - really ever even released in an entire year. So that's one comment. Secondly, I guess we're kind of ticking along with cost reductions, period-over-period, and, again, it's really the Flash Memory and some other components that did go against us in the quarter. So it's another difference that we haven't always experienced as the demand tightened on certain components, and the costs came up. So those two and then, again - I hate to be redundant, but those truly are the major points. And then the mix, you know, the mix between the product lines as well. That's really what's different as what we've experienced in the past.

Turning the page a little bit, Garmin AT - is that making you any money at this time?

No, as I stated, we generated about $5.5m of revenue at a breakeven. So, as we had told you guys earlier, we had expected that to be neutral to EPS and, in fact, so far, that's what we're experiencing.

Okay, and then one last question - the G1000 - you said second quarter release. Are there any penalties associated with a late release or anything - I know it's in the hands of the FAA, but any penalties that Cessna or anybody else could impose if you're late in the release?

I think on the penalty side, the penalty is not making your customer happy, but there is no financial penalty at this point.

There is no contractual penalty.

Right.

Thank you.

Thanks.

Again, I would like to remind everyone in order to ask a question, please press star then the number 1on your telephone keypad. Your next question is from John Bucher with Harris Nesbitt.

You've identified the three factors of the margin change and gone through them. I was wondering if you had to rank-order them, I know there was -Flash, you said, accounted for about a 1% gross profit margin decrease, and Min seemed to imply that there were other components besides just flash involved here. Is the component cost increases and the tighter component market - is that a head-and-shoulders factor above the other two or are they all about equal in terms of the impact they had on your coming in at 50.8% gross profit margin?

Yeah, I would say that the component cost altogether will account for about 1% and the rest, you know, kind of spread between the product mix and the product end-of-life effect on the later - the later true effect kind of all together.

Can you say specifically - Kevin had mentioned price protection in the dealer channel. Is that actually a material factor, in and of itself, impacting the first quarter's margins?

It's just one of the components. I would not say it's the material. It's a part of what Min described as kind of product transition and price end-of-life.

And then one final question on the aviation segment - the FAA has announced an ADSB evaluation period that's going to go through the end of December 2004. Can you characterize what kind of potential upside there might be to the Garmin AT business unit with any potential future deployment of ADSB?

John, this is Cliff. I think we're uniquely poised to be able to serve that market if it should materialize like we hope it will. We're already serving some flight schools with product and anticipate that there will be demand in the future for our new products with interfaces to ADSB.

Is that something that can be as significant as, say, G1000 rolling out in terms of category of new equipment for you?

I wouldn't say it's as significant as G1000, but it can be very meaningful because, depending on how the service works and customers' impressions of it, it could be very popular amongst general aviation consumers.

Thank you very much.

Thank you.

The next question is from Rich Valera with Needham and Company.

Thank you. I was wondering if you could talk about the expected margin profile of the 35 or so new products rolling out? In other words, how do you expect they would affect the mix, which is obviously been going against you from a margin standpoint over the last quarter or so?

I think you have to read into what we said in the second quarter guidance, and that we're expecting some of those products will be introduced in the early part of the quarter and some will be released closer to the end, but our overall margin expectation for the quarter is 53% to 54%, but we're expecting them to be, overall, similar to the past history that we've experienced.

Okay, and on the opex side, have you curtailed any activities you might have done otherwise on the marketing or advertising side to help manage the opex over the last quarter?

Well, as you heard from me, it's 14% SG&A costs, which is below our revenue growth, and so I don't think we've made any meaningful change. We're still advertising, we're still trying to support our customers through cooperative advertising dollars, and I think the bottom line is not really much change there.

Okay, and of the two main components of your margin decline, I guess, you have the product transition issues, which sounds like you expect to work through them, really, primarily, over the next quarter or so, and then you have the mix. What's your sense of where the mix goes? You know, it sounds like the automotive and the PDA have a lot of momentum, and that may not reverse itself anytime in the near future. What's your sense of how that mix shifts over the next few quarters?

I think your comment on that doesn't change much in the near term is probably pretty accurate. I guess the only other comment I could make here without getting specific is we experienced 51% in the first quarter, and we're hopeful that will increase overall across our business as we get into the second quarter and then the remainder of the year.

With most of that coming - it sounds like component costs - you're not going to get much relief there. Mix - it doesn't sound like you get a lot of relief. So is it fair to say most of the increase in gross margin is going to come from the transition issues being alleviated, to some degree?

I think that's part of it. I would also -- back on the costs, I mean, we're looking at - based on what we know now, costs will hopefully not be hurting our margin. Again, we've traditionally experienced cost reductions quarter-over-quarter. We had a 1% margin impact, roughly, in the first quarter. I would hope that costs would be neutral to any kind of margin results in the near term.

That's not because you're expecting Flash -- or anything else -- prices to improve or is it?

That's right. We're not expecting it to improve where hopefully it's not pulling it up or pulling down at this point.

Okay. All right, thank you.

Thank you.

Your next question comes from [Herb Buckbinder] with Wachovia Securities.

A couple of questions - when you introduce your next - or come through with your next introduction of new products, which could be next year, can you talk a little bit about the transition that could occur from year to year to year, and are we looking at, progressively, margins going down?

Another question would be I'm surprised that you can't get a premium price for the color radar, and you said it was not a competitive issue, but what's causing you not getting a so-called extra margin on that or at least a normal margin on it?

I guess the first question - if you're asking about '05, and we've already indicated that it's difficult to give a specific outlook on '04. So to talk about '05, I think at this point, would be very difficult.

As far as the color radar, I think you're just pointing at one of our almost-100 products that are out in the market. Maybe - can you be a little more specific about what you're referring to there?

Just that you said that you couldn't get a normal margin on [audio break] product, and it implied that you couldn't charge what you really wanted to charge for it, and I just thought that because - I don't know what the competitive situation is on color products, but I thought you'd be able to get at least a normal good margin on it.

I think Kevin was just trying to use, you know, some part of example. The higher-priced product with new product spread don't command higher margins but, on the other hand, in some of the new products like GPS60C and 60CS, power handheld TNT display product, we do expect to have pretty good margin on those new products.

What I'm looking for is that the general comment, ex significant introduction of new products, that obviously you're going to have a new wave of new products next year. I just wonder if, again, it's kind of like what Braatz was asking - if this transition is going to be a year-to-year situation, we're going to have a transition every year as a whole new barrage of products are introduced.

I think the way you look at that is if that, in fact, occurs, which we would hope, that we would see continued demand in revenue with continued increase at high levels. However, the margin may not be at 55% to 56% to 57%. So we may get there differently, get there on the bottom line differently than we have in the past.

As long as you can keep up the top-line growth. That's the key right now.

Well, you keep up the top-line growth with new product introductions and innovation. So that's what our continued focus is on.

Thanks a lot.

Your next question from Mike Rappaport with Rice Voelker.

Good morning, guys.

Hey, Mike.

Can we go back to basics a little bit? It seemed like, to me, last year we were running significantly above the model - at least my interpretation of the model - which is that gross margins would be kind of in the low 50s over an extended period of time, and that operating margins would be in the low 30s. You were at 60 and almost 40. Where do you see the model now and how do you see it evolving? Is it still kind of low 50s, low 30s, going forward?

I think that's a good point. We didn't really focus on it because we assumed everyone realized that first quarter last year was a really tough comp, and we did experience some one-time cost reductions and other favorability. But when we looked at - I think your point is a good point. I think we would look at margins as, you know, low 50s and operating margins low 30s is kind of the financial model, in general.

Okay. And where are you going to price the Terrain products? I guess they're coming out in the next couple of weeks?

Don't have exact price with that, and we do know that we'll give a higher margins on our existing for 513.

Okay, so the Terrain - the add-on - the POS [sp] will be higher margin?

Yeah, I think that there will be a new model called GNS530 Terrain, and so probably we give those higher margins on our existing 530 model.

Okay, how about the upgrading the existing 530s - what kind of cost and margin are we going to see there?

I don't have that exact number with us.

We can check that and get back to you, Mike.

Okay, well, thank you very much.

Thank you.

Your next question is from [Jamie Lester] with SAC Capital.

Hey guys, just a few questions. One, is it a fair interpretation to say that some significant part of the gross margin decline was from clearing out the StreetPilot 3s to make room for the 2610s? Or is that not - am I reading too much into that?

That is probably -

Yeah, I think that's one of the products that we experienced. As Min mentioned earlier, as we brought out the 2610, and now we have the 2620, you know, that's one of the impacts on the margin, sure.

Okay. The second question - for the buyback, how much are the - I mean, assuming the share price kind of where it is - 3 million shares, say, $100m, do you have that much cash that's not tied up in Taiwan, right, that's not going to be subject to the dividend withholding?

Yes, I mean, we would pay the - we buy the stock back out of our Garmin Limited organization, and we have enough cash at that point.

You have over $100m at the parent level, okay, okay, whatever it is, okay. And the third question is - on the SG&A side, did you say you were saying 14% growth year-over-year?

Yes, on an absolute dollar, excluding the acquisition that we did not have in Q1 of last year - Garmin AT.

Okay, but is that the guidance for the full year also?

I think what we continue to look at is we want to be at or below the revenue run rate so we don't get margin - operating margin deterioration due to SG&A.

Okay. I guess what I was trying to figure out is if I had certain numbers, around $70m for the year, which I think I'd walk through - or at least you'd inferred from the last guidance, should that number stay flat? I guess I'm trying to think about revenues are going to come in higher than expected. I would think there would be some variable component of SG&A to those revenues. So should the absolute dollar number stay roughly flat or what's the - you asked this today, I guess - of SG&A to the higher revenues?

I think the way you look at our financial model, even though we didn't give detailed guidance for the full year is the major change is on the revenue and on the gross margin. We don't anticipate making any significant changes on the operating expenses other than what we communicated last time.

So no changes as a percentage of revenues?

Right.

Okay. All right, thanks a lot, guys.

Thanks.

Your next question is from [Steve Sharkey] with [Flat Creek Investors].

I have two questions, one for Min and one for Kevin. Min, do you still think it makes sense to manufacture all of the consumer products in Taiwan or have you considered moving any of that production to China?

We spoke before for the - this year we probably expect to produce 2.5 million units, but that, you know, is comprised of almost 100 different among those. So from the cost efficiency point of view, we do not believe at this point it is more cost-effective to do outsourcing or go to China.

Okay, just because you've got so many different small production runs, okay. And, Kevin, can you just give me the breakdown just very roughly of your cash balances - cash and marketable securities between U.S., Taiwan, and BVI?

You mean Cayman?

I'm sorry, Cayman.

Yeah, rough numbers -- $530m total; $200m Taiwan; $100m Cayman; $230m U.S.

Okay, great. Thank you very much.

You're welcome.

Your next question is from [Jason Yellin] with Cobalt Capital.

Hi, thanks for taking my call. Two questions, actually - the first is on units. If my numbers are right, you did about 7% year-over-year unit growth in Q1. Throughout 2003, those numbers were 24% in Q4, as high as 42%, 30%-plus in Q2 and Q3. Any particular reason for that - the slowdown this quarter in units sold?

Again, with introduction of 10 new products that we add to the markets are way off the addition of 10 new products will be deeper in the second quarter. Customers are expecting to buy the new product. So that would, you know, it would [inaudible] the market a little bit.

Got it, so some delay in purchasing from customers because of the arrival of the new products?

It is so.

Okay, good, and second question - not to beat a dead horse, but just going back to gross margins, I guess what I'm trying to figure out is what sort of change since February 11th, the last conference call. You said back then - you said today, actually, that Flash pricing surprised you. You knew about the new product introductions. So was all of the real discrepancy since February 11th, the mix and the unexpected result of that?

Well, I think that was a major part of it, but we didn't know at that time, even on some of the cost implications, you know, on the manufacturing costs. We had some indication but we're always trying to get the best cost we can on the components, so I think mix is definitely the one thing that changed. Costs, you know, we were hopeful that it would get better, and it didn't.

I may add that the cost increases of our components were not a surprise, because I think warn us for some time, they said maybe six months. But the availability issue has sometimes caused us to use more expensive parts and purchase parts from sources that are more expensive. But obviously the element that was most difficult was the product transition and associated costs, which also affected the product mix. Before introduce a new product that replaced an old one, it is very dedicated act. Though we do not wish to have shortage of our old products before the new products become available. But at the same time, we don't end our image of the old product. So I view this transition period, really, as the product mix become hard to take - the impact of overall margin.

Thank you.

Thank you.

Your next question is from [Rob Burkby] with American Century.

Hey, guys. Just two questions - one following up on Jason's unit question. Kevin, if I look at that 7%, and I exclude auto, aviation, and the PDA. So what I'm left with is a lot of stuff in the recreational bucket. Did you have any growth, year-over-year, in that bucket of units?

I think the - as Min mentioned, there was some overhang in the market, and there's a lot of new products out. I would say we had some, but it was very moderate compared to the growth in automotive PDA and aviation.

Okay, but if you were drill down and even exclude the ones where you've got a new product coming out, I mean, you don't have new products across the entire recreational segment. So if you were just looking at same-store products, year-over-year, where there is not a replacement in sight, would you have had growth in those?

Again, growth but moderate - very moderate growth.

Okay, and then the second question on margins - I'm sure you guys with all these new products you're launching, you've got to have good data from your engineering and marketing and finance people, just sort of cost-accounting of what you at least expect -- if you could get a market price for these products, what you would expect the margin to be. Kevin, when you look at that whole portfolio, I know you don't know what the mix is going to turn out to be, but if you just look at the margin of the new portfolio of products, is it in the mid-50s or is it just, in summation, lower than the current business?

I think -

Let me try that - answer the question. Our dealing does provide very accurate margin allowances [inaudible]. We have products - you know, at least margin as low as 30 and as high as 80. So the product mix is really the biggest for certain factor in terms of our ability to protect our future gross margin.

Okay, thanks a lot.

Thank you.

Your next question comes from [Mark Anderson] with [Excel Capital].

Yes, just a couple of quick questions. What was your warranty reserve at the end of the quarter?

I don't have that number in front of me. I'll just make a general comment that warranty costs did increase as a percentage of sales, which, as we mentioned earlier, is part of the product mix based on where we experience warranty claims. I can get you the exact number. We're filing the Q, which it will be in the Q in the next week, so we'll have the data there.

Okay, that was it. Thank you.

Your next question from [Brent Bondera] with [Acropolis].

Hi, Kevin. I think - I don't want to put words in your mouth, but I believe that you and Min acknowledged that a key reason for gross margin improvements in the past was due to the falling material cost environment. In light of the growing global economy fueled by U.S. growth, one would expect that, at the very least, the costs would remain the same or probably be in a rising cost environment. What are your plans to solidify the 50.8 gross margin or, hopefully, increase it from here in light of that environment?

Well, again, to talk about what we mentioned earlier, we're expecting that, like you said, in the cost side we hope to be neutral as opposed to hurting us at least 1 percentage point in the quarter. Secondly, you mentioned volume, and I do feel like, as we go from $158m revenue that we experienced in the first quarter up to $180m in the second quarter and, hopefully, have continued forward-looking expansion that that will help us in our overall manufacturing costs. That's how we envision getting from 51 up to a higher number, over time.

Okay, so I guess my fear here is that it's going to erode below the 50% range. I mean, we're coming from 60 - if material costs continue to go up slight - just say slightly - do you guys see that you can at least stabilize the gross margin?

Well, in going forward, we don't believe [inaudible] price increases would kind of hurt us anymore than what we are today. The product mix, our competition, like we - you know, we've got the [inaudible] up to this point - competitive price increase hasn't been a factor but, you know, that we cannot deny this is always a possibility.

Okay, thank you.

Thank you.

Your next question from [Zach Perzel] with [Precept Capital].

[no response]

Mr. Perzel, your line is open.

Hello?

Hello?

Hello?

Oh, I was wondering when the certification, the FAA approval for the G1000 is expected?

We expect, as Kevin mentioned, that we should be certified by the end of this quarter, Q2, with deliveries commencing immediately thereafter.

I'm sorry, the last part I couldn't hear.

With deliveries commencing immediately thereafter.

Okay, thanks.

Thank you.

Next we have a follow-up question from Mark Naby with Merrill Lynch.

Hey, guys, I just want - one last thing just related to, again, the unit growth - just going back on this. So, Min, I hear you that the 7% was a little less than you would have anticipated because of the way the customer was buying the devices. So are you expecting an acceleration in the second through fourth quarters of 2004 because of the rollout of the new products that you're doing? In other words, you said this 7%, you weren't very happy with. Are you anticipating, in the forecast that you are providing, an acceleration of unit growth or are ASPs going to remain where they are?

Well, we certainly hope the number will go much more than 7%. Otherwise, we would not be able to give our guidance.

Okay, and the other thing, as it relates to the competitive environment -- who do you guys on the consumer side - you - meaning Garmin - view as the biggest competitive threat? Obviously, there's a lot of stuff going on with [Navman] and their devices and other people. I wanted to see what you guys think is your fiercest competitor right now, because there is a lot of price competition going on.

Well, Mark, I think that's a tough question, because it seems like there's a lot of players in there. You mentioned Navman, but there's many others that we could go through the whole long list, but we don't view them as being one that's most risky over the others. They all are aggressive, and we're working hard to create product that will be better than theirs.

Okay, and just related - Kevin - related to inventory - I just want to make sure - are we expecting to be down substantially in the second quarter? Min said $96m in the fourth quarter, now you're at $93m.

I said we reduced in Q1, and, you know, there's - I didn't really give an expectation for inventory in the second quarter, but I would not expect it to be significantly down.

Not significantly down?

I would not. I'd say, right now, you should assume probably flat inventory.

Yeah, in one major sector there is that - there is a global shortage of components. So I think that's - frankly, we are sitting on $35m to $40m back order for now if we don't get all the parts to deliver.

Okay, thanks very much.

Thanks.

Your next question comes from Mark Roberts with Wachovia Capital Markets.

Just a follow-up question, if I could. In looking at your specifically recreational handheld units, can you tell us the number of new units that you expect to roll out in the 2Q? Approximately?

Just a second, we're checking our list.

I think, Mark, the answer to that is in the range of four to five new products.

Four to five?

Mm-hm.

Okay. Now that compares with an existing complement, by my count, of recreational handheld products of 15 on the market. Is that about correct?

That sounds reasonable.

Okay. So just to revisit the question asked earlier, when you said that recreational units in the 1Q were up very modestly, you're saying it was up in some number of units but not materially. Is that a fair statement? I want to understand what you mean by "moderately."

I actually was thinking more in terms of the revenue. I didn't comment on the units.

Okay, okay. And just also to revisit the pricing issue, I mean, essentially when you all roll out a product, you price it at what you think the market will bear and what would be a competitive price, and what I hear you all saying today is that because the price you can roll it out at, even if you're not having to take price reduction, the price you can roll it out at is at a lower gross margin relative to the features and raw materials that you're putting into it than what you've been able to do in the past. Is that right?

I think, in general, for our existing product line is measured on [inaudible] product lines. We feel value, we have loaded our new product with margin signature our legacy products. I can specific easily [inaudible] 60C and 60CS - those margins are as good as our legacy products. The new product which we are tradition with low margin, particularly, in the new margins automotive, fitness markets, and PDAs.

Okay, so the new products are rolling out with margins similar to the products they are replacing so that if the mix were to remain the same, we would have seen gross margins up substantially higher. Is that right, Kevin? Even including the cost increases of components?

[inaudible] the same old 56%.

Higher than what they came in at - 51%?

Higher than what they came in at? I think that's true, yes.

Yes, again, we exercise our product mix is a big factor. It is our expansion in PDA, on automotive, and personal fitness market go fast than the margins can come down.

All right, thank you.

Your next question is from Adam Weiner with CSSC.

Hi, good morning.

Good morning.

Good morning.

Related to the G1000 planned rollout, yeah, I assume you have some of that baked into your forecast in terms of revenues in the back half of the year. Can you give us a sense for order of magnitude relative to the first quarter run rate of revenue? How can we expect the rollout of that new product to ramp and influence the revenue stream we're seeing in that business? And then on the gross margin side, we think about the product - is there any reason to think that that new product is going to alter the structure of the gross margins that we've seen in aviation, which have been historically over 60%?

I think we even commented on this on the last call. What we expect incrementally, year-over-year, due to the G1000, is in the order of magnitude of probably $10m.

For 2004?

For 2004, yeah. We have some of that that we expect to hit, as Cliff just mentioned, after the FAA certification in the second quarter, and then for the full year, roughly $10m. And then I think your other question was related to margins?

Yes, gross margins.

Yes, I think, roughly, the same but slightly - possibly slightly down, but I'd say similar at this point based on what we see, given our OEM relationships.

Okay, thanks.

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

Kevin, you just answered my question.

Okay, thanks.

Thanks.

Your next question comes from Rich Valera with Needham and Company.

Thank you. Sorry to beat a dead horse again, but I just wanted to be clear on the gross margins of new products. I think at one point during the call you mentioned that with color screen it was making the overall product margins tougher to replicate versus black-and-white screens. So with predominance of new products coming out with color screens, I am confused how you could still maintain similar gross margins to your old products as was just stated.

I think that the challenge here is we're speaking in general terms, and I was giving a specific example. So in one case, or a few cases, we might have some impact - and we're not talking order of magnitude large here, we're talking a couple of gross margin points. But that doesn't mean that there's a case across the board. I just was trying to use that as an example.

Okay, that's helpful, thank you.

Thanks.

Your next question is from [Ralph Lord] with Sanders Morris Harris.

Good morning, gentlemen. How are you all?

Good morning.

Two or three questions - one, what channels of distribution have you picked up in the last quarter that you didn't have last year?

I believe we picked up Radio Shack and [inaudible]. The first quarter of last year, as far as the retainer is concerned, I don't recall we have picked up any during this past quarter.

Okay, let's go to the general aviation market. It being what it is today, the G1000, is that going to go primarily into OEMs or do you have a good distribution outlook into the secondary market or replacement panels?

Ralph, I think primarily that product is an OEM product in the near term. Certainly, there is a desire to expand that into the other GA. Market customers with existing airplanes definitely love the system and want to find a way to get it in their aircraft but right now it's primarily driven by OEM.

Okay, and you mentioned Cirrus, Cessna, and Mooney?

Cessna, Diamond, and Mooney.

Diamond, okay.

Your next question comes from Adam Wright with [Comecos] and Associates.

Hello?

Hello?

Hello?

Sorry about that. Really quickly, I was calling about the iQue, the PDA was one of the drivers in the quarter. Until recently that was the only PDA/GPS combination in the U.S. market and, of course, now there's the Mitech has the [MIA68]. Granted, it came out very recently, and the distribution is very minimal at this point, but they're looking at Wal-Mart and Best Buy. It's gotten very strong reviews compared to the iQue, and I was wondering are you all factoring in or do you all expect to see any impact there, granted the volume numbers for the iQue were, at one point, estimated at 100,000 this year. So it's not in the millions so it doesn't have to do that much to impact. Are you expecting an impact from the 168?

Adam, like you said, it was only recently announced for availability in U.S. and European markets, so we really don't have a lot of visibility with regard to potential impact. We're definitely not underestimating it, and we're continually developing new products to meet competition.

Okay, all right, thanks very much.

Your next question is from Rob Burkby with American Century.

Hey, Kevin, just a follow-up on the inventories for a second. Of the $93m that's on the balance sheet, I don't know if you spiked out what percent is finished goods, but the statement was made that you're launching more products in 2Q than you launched all of last year. Is there a risk that you actually may have to take a write-down on some finished goods inventory?

Well, I think that as we've historically done, we are very conservative on our inventory obsolescence reserve. So I really don't think there is a risk there. That's about it.

Okay, all right, thanks.

Thank you.

At this time there are no further questions. Gentlemen, do you have any closing remarks?

No closing remarks. Thanks, everyone, for the detailed questions, and we look forward to updating everyone after the end of the second quarter. Thank you.

Thank you. This concludes the conference. You may now disconnect.