台灣國際航電 (GRMN) 2004 Q2 法說會逐字稿

Good afternoon.

My name is Kelly, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Garmin 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. (OPERATOR INSTRUCTIONS) Ms. Schwerdt, you may begin your conference.

Good morning.

We would like to welcome you to Garmin Ltd. 2004 second-quarter earnings call.

Please note that a copy of the press release concerning this earnings call is available at Garmin Investor Relations side 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 August 27, 2004.

A telephone recording will be available for 24 hours after this call, and a transcript of the call will be available on the website within 48 hours at Garmin.com/stock under the events calendar tab.

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, marketshare, 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 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 turn the call over to Dr. Kao.

Good morning.

From the press release issued this morning, you can see that in the second quarter of 2004, we again experienced record revenue and earnings.

Total revenue for the quarter increased 32 percent, and excluding the effect of foreign currency earnings per share exceeded the high end of our guidance at 49 cents per share.

Including the effect of foreign currency, diluted EPS was 52 cents.

As a result of major investments that we have made in the past couple of years, we were able to achieve many significant accomplishments since our last earnings report.

We recorded 30 percent growth in our customer business; over 40 percent growth in our aviation business and solid growth in all three geographical regions.

We delivered 26 new products in the second quarter of 2004, bringing us to a total of 36 new products introduced for the first half of the year.

These include our entry-level current Marine productline, the (indiscernible) chartplotters and sounders with a sunlight readable (indiscernible) display and attractive cost.

In marine network systems which integrates our new sunlight readable TFT (indiscernible) chartplotters, the GPS/Sounder FM satellite with a receiver in our future radar products.

Our first two (indiscernible) handheld productlines, the GPSMAP 60C and GPSMAP 76C, that provide a beautiful, yet very power-efficient TFT display for outdoor recreational users.

Both products are comparable with our net source (ph) (indiscernible) and delivers (indiscernible) navigation function at a very affordable cost.

At the high-end, portable marine GPSMAP276 and aviation GPSMAP296 that deliver marine mapping and aviation terrain alert in bright color.

Both products also provide street navigation with turn-by-turn (indiscernible) guidance like our StreetPilot products.

Two StreetPilot products each feature a preprogrammed hard drive the entire North American or European street-level (indiscernible) out of the box.

Three wearable (ph) for longer and full chest (ph) product for the personal fitness and (indiscernible) high-tech markets which we believe present new areas of opportunity for Garmin.

And GPS 18 sensor and the CSQ 1620 (ph) compact fresh module with (indiscernible) for pocket PC, notebook computer and various OEM applications.

The G1000 integrated cockpit that is comprised of 9 functional units, including primary and monofunction displays, (indiscernible) system, (indiscernible) computer, (indiscernible) navigation transponders, engine interface, and audio system.

We are pleased that after 4 years and over $50 million of investment, we completed the initial development of the G1000 fully integrated cockpit and its certification for the Diamond DA40 and Cessna182.

Both companies have commenced with a shipment of aircraft with this revolutionary cockpit system.

As announced earlier this week at Oshkosh AirVenture 2004, we are delighted that the Cessna172 and Raytheon Baron (ph) and (indiscernible) will also be certified and delivered with our G1000 copy (ph) system, as we continue to expand our patent portfolio with (indiscernible) granted today and 167 applications still pending.

Progress on our Arissa (ph) (indiscernible) continues on schedule.

We are currently expanding operations into our new warehouse and plan to move into the new office building during the first quarter.

Lastly, due to the favorable test rate and our test position, we have announced the 50 cents per share annual cash dividend to be paid later this year.

This quarter was not, however, without challenges.

The high demand by the mobile electronics industry has created a global shortage of LCD displays and various (indiscernible) source components.

While the price of flash memories has come down recently, component prices continue to be made firm, and we experienced severe component availability constraints during the quarter.

As a result, even though we were able to achieve a 32 percent increase in revenue in the quarter, we were unable to meet the customer demand of many of our products and significant debt loss demand.

As we look forward to the remainder of 2004, we are experiencing continued momentum in both aviation and (inaudible) small businesses.

Customer awareness and interest in GPS technology continue to grow, and we believe that with the many new products that were introduced that we have received in the first half of the year, our opportunities to serve customers remains strong.

We are also near the completion of a major product transition phase, and consequently look forward to some improvement in our margins.

On the aviation side, we continued the ongoing certification process of the G1000 integrated cockpit for additional aircraft models.

In addition to the Mooney, Cessna 206, 172 and (indiscernible) Jet and Raytheon programs that has been announced, we are in ongoing discussions with other aviation OEMs.

In summary, we are pleased with the strength of our business as exhibited by the 30 percent revenue growth in the first half of the year, and look forward to the remainder of 2004.

The demand for our new products remains strong, and our new product development pipeline remains robust.

We believe that Garmin is well-positioned to take advantage of the opportunities that (indiscernible) offers, and we continue to maintain our focus on growing our business through continuous product innovation, expanding and broadening our target markets and extending the Garmin breadth.

With that I would like to turn the call over to Kevin to discuss our financial results and Q3 and 2004 full year guidance.

Thank you, Min, and hello everyone.

I wanted to as typical, give the update on the quarter and look at the full year financial picture as it stands halfway through the year and then talk about the back half of the year 2004.

As I go through these numbers, little bit difference in focus.

Many of the operating margin and gross margin comparative points will actually be from Q1 '04 to Q2 '04 because I believe that is a more meaningful comparison.

But let me just walk through first of all the second-quarter overview.

As Min mentioned the revenue for the quarter was 189.7 million.

That's above the range of our earlier guidance of $173 to $180 million, and it does represent a 32 percent increase from the second quarter of 2003.

Breaking down the revenue by different regions around the world, our U.S. revenue came in at 125.7 million, a 25 percent increase from 100.3 million.

European revenue was up 52 percent to 56.3 million, and our Asian revenue exhibited a 24 percent increase, up to $7.7 million.

Gross margins did decrease 6.5 percentage points to 51.8 percent compared to the year ago quarter.

However, sequentially our gross margins were up 100 basis points from the first quarter of 2004.

Operating margins came in at 33.9 percent, which compared to 41.9 percent in the second quarter of last year.

Our net income results were $56.3 million.

The EPS results of 52 cents per share, and if you back out the foreign currency effects, the fact that we had a $3.6 million gain in the quarter, earnings per share results were 49 cents per share.

That is an increase of 11 percent from the year ago quarter, and it is above our earlier guidance of 44 to 48 cents per share.

It also happens to give us the 11th consecutive quarter where we have either met or exceeded both revenue and EPS guidance numbers for the business.

Total units sold for the quarter increased 11 percent to 569,000 units, which compares to 513,000 units in the year ago quarter.

Focusing little bit on the margin, margin results we did report gross margin for the quarter at 51.8 percent, as I mentioned that is sequentially up from the first quarter 100 basis points.

And the principal causes of the sequential gross margin increase were related to as we expected, improved product mix within the quarter for both our aviation and our consumer segments, which were offset by additional product transition costs related to the transitioning of older products into many of the new products that were introduced during the quarter.

We also experienced a slight improvement in our component costs during the quarter, and the revenue growth that we experienced actually occurred across all productlines, both consumer and aviation.

Our average selling price during the quarter increased to $333 with a slight improvement from the first quarter of $331, and that compares favorably to the $280 average selling price from the second quarter a year ago.

Approximately 45 percent of our second-quarter sales were generated from products that have been introduced within the last 12 months.

In this significant contribution from the new products points to the success of our sizable R&D investment that we've had over the last couple of years.

Moving next to the operating margin performance, Garmin achieved operating profits of $64.2 million during the quarter, again an operating margin of just under 34 percent.

During the second quarter our SG&A as a percentage of sales increased 50 basis points to 10.2 percent of sales.

The actual dollar investment of SG&A increased 40 percent if you exclude the Garmin AT acquisition from nearly a year ago, that increase was 32 percent over the second quarter of '03.

Keep in mind our revenues during this period were also up 32 percent.

And the increase in SG&A was driven primarily by four or five factors.

Number one, Oracle consulting costs, increased marketing and operating expenses during the quarter, increased call center expenses, the Garmin AT SG&A costs and finally, and the largest number increased advertising costs across the business.

Our R&D increased 110 basis points during the quarter to 7.8 percent of sales compared to the second quarter of last year.

The R&D increase in dollars was 53 percent over the year ago period.

R&D increased primarily due to the hiring of new engineering staff and other engineering program costs as we hired 30 new engineers during the period, engineers and engineering associates, and now we employ a total of 553 engineering associates around the world.

So overall our total operating expenses for the period increased 160 basis points, that's 18.0 percent of sales from 16.4 percent in the prior year period.

As I mentioned upfront, we did experience a $3.6 million foreign currency gain during the quarter as the dollar strengthened compared to our Taiwan dollar.

From 33.27 at the end of March to 33.68 at the end of June, that's a 1.2 percent change in the dollar relationship.

Management believes that earnings per share before the impact of foreign currency translation gain or loss is an important measure and the majority of our company's consolidated FX translation gain or loss is a result of the translation into new Taiwan dollars at the end of each reporting period of the significant cash that is held in U.S. dollars by our Taiwan sub.

This translation is required under GAAP because the functional currency of the subsidiary in Taiwan is new Taiwan dollars.

However, there is minimal cash impact as we stated before 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.

Therefore earnings per share before the impact of foreign currency gain or loss allows an assessment of our company's operating performance before the largely non-cash impact of the position of the U.S. dollar versus the Taiwan dollar.

And this therefore permits a consistent comparison of results between the periods.

Interest income for the period was $2.1 million.

We are currently earning approximately 2.1 percent pretax return on our marketable securities and overall, 1.6 percent return on our total cash balances on a consolidated basis.

During the second quarter our effective tax rate was 19.4 percent, which is 160 basis point favorable to our earlier guidance of 21 percent, and it compares favorably to last year's 60 basis points lower than the second quarter of '03.

The year-over-year improvement was caused by incremental tax holidays that we applied for in Taiwan during the quarter.

Overall we expect that our effective tax rate for 2004 and going forward will now be approximately 20 percent.

Moving next to an evaluation of our segment results, first on the second-quarter consumer segment, the consumer revenue was 148.5 million during the second quarter, representing a 30 percent increase.

Consumer segment in total made up 78 percent of our total revenue, and it is also the 11th consecutive quarter of year-over-year revenue growth in excess of 20 percent within the segment.

Unlike the first quarter we did experience growth across all productlines within the consumer segment, a demonstration of continued demand for all of the consumer GPS products that we manufacture and distribute.

During the second quarter our gross margin increased 20 basis points to 48.4 percent versus 48.2 percent in the first quarter.

The gross margin increase within the consumer segment is due to improved product mix, offset by additional products, transition costs during the quarter and the operating margins improved 150 basis points to 33.7 percent from 32.2 percent in the first quarter driven by these improved gross margins and lower SG&A and R&D expenses as a percentage of sales.

The aviation segment also grew very strongly.

The increase on the revenue was 41 percent, up to $41.2 million.

And aviation is 22 percent of our total revenues.

The revenue increase within the aviation segment is due to sales from both our panel mounts and our portable products in addition to having full quarter of Garmin AT product sales within the second quarter.

Aviation gross margins increased 380 basis points, up to 64.0 percent in the second quarter versus 60.2 percent in the first quarter of '04.

The margin increase is due to favorable product mix and reduced program costs that we experience in the first quarter that were associated with our G1000 cockpit.

So therefore the aviation operating margin improved 620 basis points up to 34.4 percent driven by improved gross margins and lower SG&A and R&D expenses within the quarter as a percentage of sales.

Moving next to evaluation of our cash flow and the balance sheet, our cash flow from operations during the quarter came in at $48.1 million.

Free cash flow generated was 24.2 million for the second quarter.

Keep in mind we define free cash flow as our operating cash less capital expenditures during the period.

Management believes that free cash flow is a useful measure of performance because it shows our ability to generate cash after the payment of capital expenditures.

Free cash flow does not have any standardize meaning described by GAAP and therefore may not be comparable to similar measures presented by other companies.

Next our cash flow from investing during the period was 83.9 million use of cash made up within primarily by three components the CapEx investment, a net purchase of marketable securities and finally purchases of intangible assets.

Our cash flow from financing was 3.1 million use of cash made up primarily from the share repurchase that we announced and began to purchase modest amounts of shares under this program during the quarter.

Capital expenditures during the period were 23.9 million, and the majority of that was in the U.S. facility expansion, about 17.3 million came from that expansion.

Finally, as Min mentioned in his opening comments, Garmin Ltd. will pay a 50 percent share dividend for all shareholders of record at December first of this year; the payment will be made on December 15th of 2004.

Cash and investments at the end of the quarter amounted to 526.8 million, and our marketable securities or investments make up 284.1 million of this total cash position.

Accounts receivable balance at the end of the period was 98.6 million.

That's an increase of 15.9 million from the end of the year's position primarily due to the strong shipments that we experienced toward the end of the second-quarter.

Our DSO at the end of the second quarter was 55 days.

Inventory, however, decreased to 89.9 million at the end of the second quarter, as expected, and the decrease in inventory during the first half was primarily due to stronger than anticipated second quarter sales and the use of certain electronic components that we purchased ahead of demand during the fourth quarter of last year.

Interesting to note that our days of sale of inventory is 108, and that's actually a reduction compared to the days of sales that we experienced a year ago in the second quarter.

So overall our balance sheet continues to be strong and positions us well for future growth.

If I could quickly move to the year-to-date financial summary and go over a few of the key statistics there our year-to-date revenue was 348.0 million.

That is for the June quarter.

Revenue growth experiences 30 percent over the first half of '03.

Our gross margins through the first half are 51.4 percent.

Operating income through the year-to-date numbers are 113.8 million with net income of $91 million.

Our GAAP diluted EPS was 83 cents compared to 81 cents a year ago, and this 2 percent increased EPS was partially caused by the foreign currency loss year-to-date compared to a $2 million foreign currency loss in the first half of 2003.

If we exclude the effects of foreign currency, earnings per share results were 86 cents, which represents a 4 percent increase compared to the prior year.

On a year-to-date basis revenue for our U.S. operating subsidiary was $233 million, a 26 percent increase.

European revenue increased 42 percent up to $100.2 million year-to-date, and our Asian revenue was up to $14.8 million, a 32 percent increase.

Consumer revenues on the year-to-date basis 271.9, a 30 percent increase compared to the year-to-date 2003, the mix for the year-to-date is still the same 78 percent of our business being consumer.

The aviation revenue increased 32 percent on a year-to-date at $76.1 million.

So total for the year all units combined for consumer and aviation increased to just over one million units, 1,048,000 which is an increase of 9 percent.

And finally on the year-to-date operating margin performance, our operating profit year-to-date again $113.8 million or 32.7 percent of sales.

Our SG&A as a percentage of sales for the year remain roughly flat at 10.4 percent, just slightly up from 10.3 a year ago.

R&D, however did increase as a percentage of sales to 8.3 percent from 6.9 percent during year-to-date 2003.

As we communicated in the past we intend to grow our operating expenses at roughly the same rate as our revenues and have been able to achieve that.

Finally, I would like to conclude with a third quarter and full year guidance.

You saw in the press release we expect our third-quarter -- our current quarter revenues to come in at 167 to 174 million, which is a 23 to 28 percent growth rate.

We expect gross margins to improve -- continue to improve as they did from Q1 to Q2 up to 53 percent in the third quarter.

Operating margins for the third quarter to be 33 to 34 percent.

As I mentioned, we expect our tax rate to stabilize at 20 percent for the third quarter, which will bring in our net income between 46 and $49 million excluding foreign currency.

That would drive EPS for the third quarter of 42 to 45 cents per share for a 15 percent growth rate at the top end of that range.

We are assuming for the third quarter our outstanding diluted shares will be 109.0 million and that we will have a CapEx investment during the third quarter of approximately $12 million.

For the full year then, we've updated guidance with the press release today, and our revenue is expected to come in at for the full year $718 million to $732 million, which would be a 25 to 28 percent top line growth.

Gross margins for the year 52 to 53 percent.

Operating margins for the year 33 to 34 percent, a full year tax rate of 20 percent, which brings us down to a net income in the range of 193 to 198 million excluding foreign currency, and an earnings per share range now of 1.79 to $1.85, which is a 9 percent growth rate at the top end, again assuming a 109 million outstanding share count.

CapEx for the year does not change, we are still expecting $60 million of capital expenditures, which is made up primarily of the Olathe, Kansas facility expansion of 40 (ph) and the rest of the business spending around 29 million of capital expenditures.

So that ends our formal comments for this morning, and we would like to open up the Q&A line for anyone that has questions.

(OPERATOR INSTRUCTIONS) Mike Rappaport. (ph)

Great quarter, if you could quantify the effect that the constraints on components had for the quarter and also any failures to ship or backlog you had at the end of the quarter that would be useful.

Also could you tell us where the cash is and where the dividend is actually paid out of?

The first question would be the constraints on the component availability.

I think we're not prepared to quantify that other than to say that demand has been strong.

We could have shipped more product if we in fact were able to all the components that we had in our demand.

So that's the answer to that.

The second question being the dividend; we have cash as we have said in the past in each of the operating units.

The payment of the Garmin Limited dividend will be out of Garmin Ltd., and there is roughly just under $100 million in cash in that entity.

Could you talk about any backlog you had at the end of the quarter?

We're not prepared to quantify that other than to say that backlogs were strong.

We ended the quarter at a higher level in backlog than we traditionally have at the end of the second quarter.

Okay.

If you are getting what you ordered but the time between ordering and receiving is four months, is the forecast -- I mean the forecast must have ramped -- started out conservatively on the new products and ramped over time.

When do you think the two converge, or when do you think you'll be able to get the components that are in your current demand forecast?

We think that the forecast is just to understand is in (indiscernible).

So the last time that an order we received from our distributor (indiscernible) are accurate so while we try to do as good forecast as we can, we our practice is always to place long-term P.O.s in order to secure components.

Unfortunate, given that this significant (indiscernible) shortage period some suppliers continue to expand (indiscernible).

Some suppliers (inaudible) might not even be four months and four months could be another five months and (indiscernible) today still could not even when you place an order four months in advance, cause they only confirm our orders month by month.

Thanks again for the great quarter.

Good luck to you going forward.

Jim Duffy.

Question looking forward on the guidance.

Where are the factors that you expect to contribute to gross margin improvement that's going to allow you to reach your guidance improvement in the back half of the year on the gross margins?

As I mentioned in my comments I think we did experience product transition costs as we were still phasing out many of the older products.

So we are expecting that to continue to help as we get into the back half of the year, and we have kind of come through now 36 new products brought to market.

The other thing that we look at all the time obviously is product mix, and product mix has so much variability given that what we see right now in the back half.

Those two factors, those two factors will help us increase our margins 120 basis points basically from the second quarter.

Okay.

Can you comment on the margin outlook for the consumer segment versus the aviation segment looking forward?

We really do not want to break down the margin picture because again there is enough variability between the segments.

But other than to say maybe aviation should -- we talked about a 64 percent aviation margin, that shouldn't change much in the back half of the year.

Okay.

Looking into your inventory situation, what is the split there between finished goods and raw materials?

I will have to get back to you on that, Jim.

I'll provide that to you later.

I don't have those numbers in front of me other than to say that given the strong shipments during the end of the quarter, our finished goods did not go -- obviously inventory came down in total.

There has been historically low.

Right, lower, so if I can get you the actual numbers later.

Okay, final question.

Prepaid expenses looks like it had a pretty big jump in the quarter.

Was there an explanation for that?

Yes, periodically we will make payments to certain key suppliers mainly to if there is beneficial terms to us.

We've done that in the past, and that's exactly what happens.

One of our suppliers offered us good pricing, long-term agreement if we were able to prepay some costs there and that's exactly what happened in second quarter.

Very good.

Nice quarter, guys.

Jon Braatz.

A couple questions on the aviation side.

I am trying to get a handle on how strong that business might be or how weak.

How much revenue did UPS contribute in the quarter, around 5 million?

That is a pretty good number, yes.

And the G1000 revenue, modest at best?

Yes, just a couple million, due to our initial shipments into those OEM's that Min mentioned.

So it looks like the aviation business might be picking up a little bit, let's say the core business.

Is that indeed the case, is that business getting a little bit better than what we have seen recently?

We certainly experienced, as I mentioned, growth not just in the initial G1000, but also our tantamount (ph) product.

So I would say we certainly saw that in the second quarter, and we're hopeful that can continue throughout the rest of the year.

Is UPS contributing anything positive to the in terms of the bottom line yet?

In terms of the bottom line, no.

As we mentioned for the year we expect them to be neutral to EPS, and that is in fact what we have experienced.

Okay.

The other thing is a little difficult there is they have really aided us in the certification of many of these OEMs in the aviation products.

So it's becoming more and more difficult on a stand-alone basis because they are investing R&D, and we are integrating our R&D teams to be able to help both the core business and the Garmin AT business.

One final question when I look at the G1000 and the planes that you're going to be on up to this point, would it be accurate to say that you have maybe 40 percent of the general aviation market at this point?

Are you asking about the G1000?

Yes, the G1000.

When I add up all the units that were let's say built last year and looked at it as a percent and what you're going to be on now, is 40 percent a good number at this point?

We have not (indiscernible) exact (indiscernible) that might be too far away (indiscernible) and we are still kind of talking with other OEMs, so.

All right, Min.

Thank you.

Peter Friedland.

Regarding the G1000 could you give some color and what kind of revenues we should expect '04 '05?

And '06 based on what you've won or what you've announced?

And then secondly, if you can talk about the situation with WestMarine with respect to what they are expecting to do in Q3 given some of their recent public comments?

I think actually the story for the back half of the second half really hasn't changed much.

We have talked about incremental sales related to the G1000 upwards of $15 million for the year.

As I mentioned just a couple million occurred in the second quarter.

So we expect to still see that.

We haven't commented on '05 or '06, and in terms of a quantification we don't expect to today other than to say there will be follow on OEM announcements as we go through the year.

And then the WestMarine,

I think that as for the component supplies is concerned we anticipate that the price will remain tight through the end of the year, and we will be working very closely with WestMarine on a weekly basis and tried to supply the product that they need.

But truthfully at this time we have not been able to deliver everything they wanted.

Okay.

They are hinting that they are planning to buy less in terms of electronics in Q3.

Well Q3 has always been a low quarter for the Marine business.

Okay, then just one last question.

You mentioned purchase of intangibles on the cash flow statement, if you could give some color on that?

Other than to say as I mentioned there was some benefit for us to do that, and it's a long-term agreement.

And the way it shows up on the cash flow is both in the operating cash and also in the investing because of the short-term and long-term nature.

But I can't -- I'm not able to communicate who we're talking about other than it is one of our key suppliers.

When we say long-term it is not all along (ph) it is just in multiple years of agreement.

It's over one year.

Okay, great.

Brian (indiscernible).

This is Barat (ph) for Brian.

I just wanted to ask you questions about what I think (indiscernible) you have been experiencing in the segment.

Even though the shift has mix to most of our consumers ASPs have gone up.

Would you add some color as to which lines and consumer segments are seeing (indiscernible).

I think related to the ASP as I mentioned we saw growth across all product lines.

I think one of the things that is impacting that ASP is obviously we talked about transitioning old products into new products, and many of the new products have favorable ASPs, higher prices in general, out of the 45 percent of our revenue that came from new products.

But we also mentioned that product mix is very variable, and it's hard to predict exactly what that's going to do in the future.

But that's really the dynamic that is impacting ASP.

From my calculations sequentially accounts receivable went up 22 million.

That is the biggest move I've ever seen except for the fourth quarter.

And given your quoting revenues when you ship can you just talk about really why that number is so big?

We had a strong June.

We had a very strong late in the quarter shipment as many of the new products hit the market.

And as you know, if your terms are greater than 30 days which they typically are, you don't get any of that cash.

So that's really the key driver of the A/R balance.

I wouldn't put too much other stock into that.

And also looking at your (inaudible) products like the (indiscernible) of your PDA, they seem to be targeting sort of a lower ASP type opportunity. (indiscernible) trying to move up the ASP (inaudible)?

Is that a sign of, is that the market or is it time that you have to have a low priced product now for some of those kind of applications?

We believe we have to cover all segments of the market, Vijay, and so the question the 3200 enables us to compete at the lower end of those markets for the value of the consumer.

Thanks so much.

(OPERATOR INSTRUCTIONS) Adam Wright. (ph)

Hope you didn't answer these questions, I was cut off for a second there.

Basically just following up I wanted to mention the WestMarine comment regarding them ordering less in the third quarter, you had mentioned that is always a slow quarter.

I think what the gentleman was getting at and what I would like to ask is WestMarine mentioned that it had gotten large shipments from the electronic segment assuming that was you all of course.

Towards the end of the quarter you mentioned you got some discounts on those products and that (indiscernible) boating season is pretty much done with they canceled some third-quarter orders.

So I was wondering how that was going to affect sales, I am assuming that happened with other retailers as well because I checked the product, the Marine product had a lot of trouble getting on the shelves.

That is the first question.

Actually for the marine business the season usually ended around June, July timeframe.

So July is typically the last time we have the opportunity to ship product.

While we have similar shortages (ph) throughout the season, we are able to ship some of the last of the delayed shipments in July to WestMarine to make up the shortage experienced during the season.

But beyond July usually all (indiscernible) September we reload (indiscernible), and then by the fourth quarter, that's when they start to pick up product for the 2005 marine season.

So what you heard is not consistent with what we know about the marine business.

What did you say, it's not consistent with what you saw, you're saying?

It is not inconsistent with what we know about the practice of the marine business.

I see.

Okay, and also one question.

You mentioned 45 percent of sales are from new product in the quarter.

If my understanding is correct, usually it has historically been about mid-20 percent range.

Is that correct?

That's right.

We've run between 20 and 25 percent many of the last -- several of the last quarters.

So this is a big quarter for us on new product introductions.

Okay, because I was wondering in terms of the going forward next year are you planning on -- will new product introductions be as high?

I mean, last year I think it was in the teens.

This year it is supposed to be 45.

Do you think in order to continue -- the sales case, will you have to continue introducing in the 40 number, 40-range, etc.?

We certainly are having a big year because of the new product introductions; some of those products we've introduced in the first quarter were actually intended to be in late 2003.

But were slightly delayed into 2005.

We would expect to introduce something over 30 products, but right now we don't have a specific number that we can provide you.

Last and real quickly I missed when you mentioned third-quarter margin guidance, can you give that number again?

53 percent.

Rich Valera.

I was wondering with the G1000 if you could talk about what kind of ASP you expect there.

I know it is a pretty big range.

Was wondering if you can sort of generalize that and also with the various OEM agreements can you talk about how much potential cannibalization there is with your 430 and 530 products, which I would imagine in some cases might be swapped out for a G1000.

Thank you.

I will just comment on the pricing.

We generally said it depends on the configuration.

We talked about 9 kind of unique modules that make up that configuration.

Generally priced between 30 and $40,000 per chip (ph) set per plane, and increasing over time depending on the plane that it is installed in.

(inaudible)

Which we're not shipping yet.

As far as the cannibalization we do not see much of that.

I think as we mentioned we saw in the second-quarter strong consistent or core panel map sales, so we are not seeing any kind of that cannibalization at this point.

John Bucher.

(inaudible) for John Bucher.

Just want to get a sense what the new products, I think higher ASPs.

Can you tell us whether they have higher gross margins or are they in a similar range with your other products?

I think just by seeing the gross margin results they are definitely not lower, but I am not going to quantify how much or how little that is impacting us.

The gross margin for both mature and new product there is a large (indiscernible) into about 80 percent.

Also with the component market can you give us a sense which product segments that the tight component market affected you outside of the Marine market?

I think that the component shortage actually applied to all product lines.

Mark Anderson.

A couple quick questions here.

What was your warranty expense and accrual during the quarter?

And how does it compare to the first quarter and the year ago quarter?

We will be filing our 10-Q next week but just in general our warranty costs were just slightly lower for the second quarter compared to the first quarter.

So really not much variation in our gross margins related to warranty.

Just it was higher than last year.

Yes.

Definitely higher than last year, but not a significant variable between Q1 and Q2.

Both on the expense side and the accrual side?

Yes.

Next question was really I guess with regard to Brunswick and their purchase of Navman earlier I guess, earlier last year.

Are you seeing any change in the way they are approaching the aftermarket business now that they seem to be in bed with these guys and what do you expect them to do going forward with that business?

We've really had very little (indiscernible) we are unable to make any comment on it.

Are you seeing any new products out there?

Are you seeing pushback from potential distributors?

What is Brunswick's game plan do you think?

We have not seen new products of (indiscernible) to my (indiscernible) knowledge.

Okay.

Thank you.

Dan Mendoza. (ph)

You commented a couple times that June was a particularly strong month.

Can you give us a little bit more color on what the linearity was like in the quarter?

We generally do not make that public other than to say we have many new products introduced, and a lot of those hit in June, so it was a strong month but we are not going to comment on whether that was 20 percent or 50 percent in the quarter.

It was a sizable number, though.

Have you commented on what linearities like typically for you guys?

Anytime every quarter is kind of unique depending on the timing of the new product introduction.

That's really what drives that linearity for lack of linearity.

Is this quarter going to be more a normal quarter for linearity, or.

I would say our best view right now would be more linear, yes.

More linear than normal or more linear than Q2?

Both.

And then in terms of inventory with all the new products that shipped, are you holding sort of end of life product in inventory that needs to be sold, or is that moved through already?

I think we always have a fair amount of inventory both older and new, and we reserve accordingly.

So I would not expect any unique impacts to the income statement related to that if that's when you're getting at.

Last question is given a more linear than normal expectations for Q3 should we expect the DSOs to come down pretty significantly?

At this point we would expect DSO to not increase in the third-quarter, yes.

Why wouldn't they come down if the quarter is a lot more linear?

In theory they should.

All right.

Very good thanks.

Benjamin Swinburn. (ph)

I wanted to go back and (indiscernible) a point you made earlier on OpEx where I think you talked about operating expenses growing in line with revenue.

Just want to make sure I heard you right and also what time frame you were talking about; was that second half of the year.

I think basically what we're looking at, if you run the full year guidance numbers is that we should not see a deterioration on SG&A as a percentage of sales for the year.

R&D we're definitely committed to investing as much as we need to.

We've added quite a few engineers, as I've mentioned.

So we might see a slight deterioration there on a full-year basis excluding the Garmin AT.

So keep in mind we only had four months of their business last year.

My follow-up then is looking out -- I know you're not going to talk about your numbers on '05, but as your mix, your contribution to revenue shifts more and more to consumer and more and more to sort of shorter life cycle products, correct me if that is a misstatement -- how much does the marketing advertising strategy and cost levels come into play? (indiscernible) made the point of moving down the price curves more value product for the consumer, it is obviously a consumer education issue that comes out of this whole thing and your business has changed a lot in terms of mix and even size the last couple of years.

Do you have to sort of sustain a pretty aggressive marketing budget looking out into next year and even beyond to keep the, to fuel the top line?

Let me correct you on your first statement.

Our view is that we see strong growth in the aviation business, so I do not believe that the consumer is growing faster than the aviation, although they are both growing quite strongly.

But your point on the advertising or the support of that business is accurate that much of the SG&A increase for example on the second-quarter was due to advertising.

So we have a high degree of the advertising tied to the volume.

And as unit volumes go up or sales volume then we have to invest more to be able to support that, so I think that is a fair statement.

At this time there are no further questions.

Thanks everyone again; we will be in touch at the next quarter call and thanks for participating.

Thank you.

This concludes today's conference call.

You may now disconnect.