台灣國際航電 (GRMN) 2004 Q4 法說會逐字稿

Good morning.

My name is Christy and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the Garmin fourth quarter earnings release conference call.

[Operator Instructions].

Thank you.

Ms. Schwerdt, you may begin your conference.

Thank you.

Good morning.

We would like to welcome you to Garmin Limited's 2004 fourth 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 March 4, 2005.

A telephone recording will be available for 24 hours after the call and a transcript of the call will be available on the web site within 48 hours at www.garmin.com/stock under the events calendar tab.

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 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, Chairman and CEO, Kevin Rauckman, Chief Financial Officer, Cliff Pemble, Director of Engineering and Andrew Etkind, General Counsel.

The presenters for this morning's call are Dr. Min Kao and Kevin Rauckman.

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

Good morning.

From the press release issued this morning, you can see that we have just finished another year of record revenue and earnings.

Total revenue for the year increased 33%, and earnings per share increased 15% verity to 2003.

Excluding the effect of foreign currency, earnings per share increased 22% relative to 2003. 2004 was another good year for Garmin.

There were many significant accomplishments.

We recorded our 14th consecutive year of revenue growth with 42% growth in our aviation business and 31% growth in our consumer business.

Over 2.3 million Garmin products were shipped in 2004, raising our total to over 10 million shipped to date, which is an exciting benchmark of the trends of the Garmin brand.

We delivered 50 new products in 2004, compared to 16 in 2003 and experienced strong demand across all product lines.

These products include a marine network system, which integrates our (inaudible) satellite with the receivers and radar, filling out our suite of higher-end marine network offerings, three new handheld product lines with beautiful yet very power efficient TNT color displays for our (inaudible) users, a number of new wearable products, which further expands our sports and personal fitness product offerings.

And several new automotive products, including a pocket-sized full-featured product at a sub-$600 price tag.

And we completed certification of our (indiscernible) for a total of six (indiscernible) 40 and 42 (indiscernible).

Superb coordination efforts with these (indiscernible) manufacturers also enabled us to bring the benefits of this revolutionary (ph) system to several hundred pilots in the short few months before the end of the year.

We feel that we accomplished a lot in this past year, but (indiscernible) of this.

As you will remember, we experienced margin erosion in the first half of the year due to a component cost increases and a record number of (indiscernible).

We also experienced severe product delivery problems due to component shortages and manufacturing capacity constraints arising from the record number of new products introduced, but we have additional investments in people and equipment, we have overcome most of the challenges.

We were able to meet most of the product demands in the fourth quarter, and we have additionally replenished our inventory to meet the anticipated demands for the common marine (indiscernible).

Our continued business trends enabled us to undertake a number of important growth initiatives in this past year, which include the completion of our $65 million facility (indiscernible), and also the airport hangar expansion in our Oregon AT division.

The addition of manufacturing capacity in our Taiwan facilities, we responded to the product demand challenges by increasing the number of accessory lines from 8 at the beginning of 2004 to the current number of 12 with (indiscernible).

And that increased our number of manufacturing associates from 800 to around 1,100.

The addition of over 400 new associates company-wide including 50 new engineering associates, (indiscernible) our research and development group to over 560 and to a nearly 2,500 total employees worldwide.

In a completion of our implementation of articles, the enterprise research provides improved integration of Garmin's new business in Taiwan and the U.K. and the U.S.

As we go forward in 2005, we anticipate another year of excitement and success.

Consumer awareness and interest in GPS technology continue to grow and we have invested in R&D to take advantage of these opportunities in both existing and new markets.

We expect to introduce over 50 new products in 2005.

Products recently announced at the consumer electronics show, including a package PC version of IQ, a new (indiscernible) integrated with a heart rate monitor, and also the very attractive (indiscernible) have been well received.

Two years ago we announced a relationship with the (indiscernible) division of Daimler Chrysler, which allows Garmin to install a custom designed (indiscernible) of six models of Chrysler, Dodge and Jeep vehicles.

While this only small (indiscernible) in our pursuit of the automotive (indiscernible) market, we are excited by this achievement and are continuing to explore additional opportunities.

As in hindsight, we look forward to delivering many new products including laser and radar and we expect to complete certification of the (indiscernible) in additional (indiscernible) models in 2005.

In addition to the Cessna, Garmin (indiscernible) shipments that we already begun.

We anticipate certification completion and shipment of (indiscernible) and the Cessna 172 this year.

We are also in discussions with other aviation OEMs and hope to have more profits from this segment in the year.

In summary, we are pleased with our 2004 results, and look forward to another year of growth in 2005.

The demand for our large portfolio of products helps us believe we are well positioned to take advantage of opportunities the future offers.

Since the formation of the company, our quest has to been to become a global (indiscernible) supplier of communication, aviation and information devices.

Toward the goal, we work hard to grow our business through continued product innovation, expanding and broadening our target markets and extending the (indiscernible) brands.

I feel that we have been achieving that goal by consistently delivering over 20% of annual growth and we will continue to maintain our focus on this strategy.

As a final note, I would like to take this opportunity to thank all of our employees, customers, suppliers, investors, (indiscernible) and distributors for making 2004 another successful year for Garmin.

We are very grateful.

With that, I would like to turn the call over to Kevin to discuss our financial results in fiscal year 2005 guidance.

Thank you.

Thank you, Min and good morning to everyone.

As has become customary, I would like to focus my comments this morning on the fourth quarter results, also looking at the full year actual results, and then concluding my presentation with expectation of the upcoming 2005 year.

So let's get going on the 2004 fourth quarter.

Fourth quarter revenue results were $220.9 million, which was above our range of our guidance earlier of $200 to $204 million.

That's a 30% increase from the year ago quarter.

You probably saw from the press release we experienced growth across all global regions.

North American revenue was $164 million in the fourth quarter, which is up 26% from 130 in Q4 of '03.

European revenue was $47.8 million, a 41% increase.

Asian revenue was 9.1 million, up 49% from $6.1 million last year.

Our gross margin during the quarter decreased 140 basis points to 54.7% from 56.1% in the fourth quarter of '03.

However, the 54.7 was just above our earlier guidance of 52 to 54%.

Operating margin was 36.1% compared to 36.8 in fourth quarter '03, 90 basis points below our earlier guidance, 37 to 38%.

Net income results, 47.6 million.

However, excluding the foreign currency loss, we experienced net income of $68.5 million, significantly exceeding our guidance of 47 to $49 million.

Therefore, our earnings per share results for the quarter were $0.44.

Without the effects of foreign currency loss, we came in at $0.63 per share.

That's a 34% increase from the year ago quarter and it exceeded our earlier guidance of $0.50 to $0.54.

The total top line growth at 30% and bottom line growth of 34% in the quarter.

We also experienced a significant increase in our units sold during the quarter, up 21% to 718,000 units compared to 591,000 total units in the fourth quarter of '03.

As I mentioned, we reported gross margin of 54.7% compared to 56.1% in the fourth quarter of '03, above our earlier guidance.

We continue to experience a strong acceptance of our new products.

In the fourth quarter, approximately 43% of our sales were generated from products introduced within the last 12 months.

This has now been the third consecutive quarter where this metric has been above 40%.

Looking at the operating margin for the fourth quarter, our operating margin was $79.8 million, a 36.1% of sales, again, just below our earlier guidance of 37 to 38.

Operating margin did decrease 70 basis points compared to the fourth quarter of '03.

During Q4, SG&A as a percentage of sales decreased 90 basis points to 10.4%.

Overall, the dollar increase was 20% over the fourth quarter of 2003, during the period where our revenues were up 30% and this 20% increase is driven primarily by increased advertising as we expected during the holiday season.

Oracle consulting costs, increased call center expense, as we've continued to expand our call center to support our after market product, and a one-time patent license fee.

R&D increased 10 basis points to 8.1% of sales from 8.0% a year ago.

Our R&D dollars increased 32% over the prior period.

This increase came primarily due to the hiring of new engineering staff and also an increase in our overall engineering program costs.

During the quarter, we hired four new engineers and engineering associates, and now we employ a total of 567 engineers around the world.

So overall, our total operating expenses as a percentage of sales decreased 70 basis points to 18.6% of sales from 19.3% in the prior year period.

I'm sure you all noticed that we experienced a 25.3 million foreign currency loss during the fourth quarter as the U.S. dollar continued to weaken compared to the Taiwan dollar.

At the end of September 2004, the Taiwan dollar exchange rate was 33.99.

However, at the end of 2004, that rate was 32.19, a 5.3% change.

The majority of the company's consolidated foreign currency translation gain or loss results from translation into new Taiwan dollars at the end of each reporting period of a significant cash, receivables and payables held in U.S. dollars by the company's Taiwan subsidiary.

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

However, there is minimal cash impact from this foreign currency translation and we expect that the Taiwan subsidiary will continue to hold the majority of its cash in U.S. dollars.

Our interest income during the fourth quarter came in at $3.1 million, an increase over prior quarters.

We are currently earning approximately 3.1% pretax return on our marketable securities and approximately 2.1% on our total cash balances on a consolidated basis.

The effective tax rate during the affected tax quarter was 17.3%, came in below our earlier guidance of 20% and 370 basis points lower than the fourth quarter of '03, which was 21.0%.

This year over year range change was because of the change in tax rate, during Q4 2004, that resulted in our overall rate during the year of 19.4% during the full year of '04.

We expect that our effective tax rate for 2005 will remain at approximately 19%.

Moving next to the segment information, fourth quarter consumer segment, consumer revenue was $173.7 million, and represented a 27% increase over the prior year quarter.

Consumer segment was 79% of our total revenues, and this is now the 13th consecutive quarter of year over year revenue growth in excess of 20%.

When you break down the consumer segment, we experienced growth across most consumer product lines, but especially within the automotive and recreational product lines and continued demonstration of demand for consumer GPS products.

Again, our total unit sales were up 21% during the quarter, and unit growth occurred in both the consumer and the aviation segment.

Our consumer gross margin decreased to 52.7% in the fourth quarter from 54.2% in the year ago quarter.

Consumer gross margin reduction was driven primarily by unfavorable product mix within the quarter.

Our operating margin within the consumer segment decreased 170 basis points to 36.6%, from 38.3%.

This was driven by the reduced gross margins, as expected for the holiday season and additional R&D expenses.

We saw continued strength in the aviation segment.

As Min mentioned our revenue increased during the quarter 42% to 47.2 million compared to $33.3 million in Q4 of '03.

Our aviation segment, accounted for 21% of our total revenues, and the revenue increase was due to the continued shipments of our newer G1000 cockpit, as well as strong hand held aviation product sales during the quarter.

The aviation gross margins decreased to 61.9% from 64.2% in Q4 of '03.

This is due primarily to the product mix during the quarter made up primarily of changes with increased G1000 cockpit sales.

Our operating margins for the aviation segment were 34.3%.

That's actually an increase of 330 basis points compared to 31% during the fourth quarter of '03.

This increase was due to the reduced gross margins that were more than offset by the reduced R&D and SG&A expenses as a percentage of sale within the aviation segment.

Finally, for the fourth quarter, I'm going to talk about cash flow.

The cash flow from operations during the quarter was 57.5 million.

Free-cash flow generated was 37.2 million.

Again we define that as operating cash flow less CapEx.

Cash flow from investing during Q4 of '04 was a 31.4 million in use of cash, cash flow from financing activities, a 49.0 million use of cash, primarily made up of our dividend payment we made during the fourth quarter.

Capital expenditures for the fourth quarter were 20.3 million.

And as I mentioned, Garmin Ltd. paid a $0.50 per share dividend on December 15.

Total use of cash was $54 million.

Moving next to overall fiscal year 2004 financial results, 2004 revenue was $762.5 million, a growth of 33% over 2003.

Our gross margin decreased to 53.9% compared to 57.7% in 2003.

Operating income was 270.7 million and our net income after tax is 205.7 million.

Operating margins decreased to 35.5% compared to 39.6% in 2003.

Our GAAP diluted EPS was $1.89, which compared to $1.64 in 2003 representing a 15% increase in earnings per share.

The FX loss during 2004, however, was 24.8 million.

Therefore, the earnings per share results excluding the effects of foreign currency were $2.07, representing a 22% increase compared to 2003.

So, in summary, our top line growth of 33%, EPS growth of 22%during the year.

We saw strong sales across all global regions, North American revenue during the full year was $531.5 million, a 28% increase.

European revenues continued to expand 196.9 million for the full year, up 48% over 2003, and our Asian revenue was $34.1 million, a 35% increase over 2003.

Consumer revenue of 591.0 million during the full year represents a 31% increase over fiscal year 2003.

For the full year, our consumer segment made up 78% of our total revenues.

The consumer gross margin decreased to 51.5 from 56.0 in 2003, due to unfavorable product mix and other cost of sales increases during the year such as warranty costs, freight and license fees.

Our aviation revenue is 171.5 during the fiscal year 2004, which is a 42% increase compared to 2003.

Aviation made up 22% of total revenues and aviation gross margin decreased to 62.4 from 64.2 in 2003 due primarily to the introduction of the G1000 cockpit during '04, and higher aviation OEM content that we experienced during the year.

Overall, both consumer and aviation units combined increased up to 2.306 million from 2.066 million, which is an increase of about 12% on unit growth:

Fiscal year 2004,operating profits, as I mentioned, were 270.7, or 35.5% of sales compared to 39.6% in '03.

During the full year, our SG&A as a percentage of sales was flat at 10.4% compared to 10.4% last year.

Because we had our Garmin AT in just the last four months of 2003, we looked at SG&A costs and R&D costs excluding Garmin AT.

SG&A expenses increased 29% for the full year, excluding AT.

Including AT, SG&A increases 32% over fiscal year 2003.

The R&D overall increased to 8.1% of sales from 7.6% during 2003, due to the hiring of 52 engineers during the year.

Excluding our Garmin AT, business R&D expenses increase 27%.

However, including Garmin AT, the overall R&D expense increased 41% over fiscal year 2003.

We also experienced, much like we had in the fourth quarter, a 24.8 million foreign currency loss during the full year '04 as the U.S. dollar weakened versus the Taiwan dollar.

The rate at the end of the '03 was actually 34.05, at the end of '04, 32.19, a 5.5% reduction.

Our interest income was 9.4 million for the full year.

Moving next to the balance sheet, our cash and investments at the end of the year amount up to 573.6 million.

Marketable securities made up 322.2 million of this total cash position.

Our accounts receivable balance came in at a 110.1 million at the end of '04.

This represents an increase of 27.4 million from 82.7 at the end of '03 due to strong 2004 sales.

When we looked at the shipment linearity during the fourth quarter of '04, it was roughly the same as 2003, therefore we ended the year of '04 at 53 DSO compared to 51 DSO at the end of 2003.

Inventory increased to a 155 million at the end of the year of 2004, up from 96.8 million at the end of 2003.

The increase in inventory was primarily due to increase in finished goods and raw materials as we meet anticipated demands for our products during 2005.

Days of sales in our inventory balances were 161 days, compared to 145 days at the end of '03.

Garmin continues to evaluate the adequacy of our inventory reserves given increased demand and feel that we have appropriate reserves on the books at the end of 2004.

So, overall our balance sheet remains strong and positions us well for future growth.

Our fiscal year 2004 cash flow, we came in at cash flow from operations at 204.1 million during the year.

Free cash flow generated was 126.0 million.

Cash flow from investing for the full year was 184.3 million use of cash.

Cash flow from financing was 51.1 million use of cash, again primarily due to the dividend payment and the capital expenditures that we had for the full year was 78.1 million, made up primarily of the Olathe Kansas facility expansion that that we completed at the end of the year.

Finally, I'd like to end on guidance numbers for both first quarter and full year.

As you noted in the press release, due to the desire to focus more on long-term results of the company, we decided to discontinue the practice of providing specific quarterly revenue margin and EPS guidance.

We will, however, continue to provide annual guidance and update those expectations on a quarterly basis.

We will provide general demand outlook and trends for the current quarter.

With that in mind, our expectations for Q1 2005, include continued top-line growth of nearly all product lines due to the recent introduction of many new consumer and aviation products.

And while competition has increased, our view of the near term is still strong, given the acceptance of many of these new products that were released both at the consumer electronics show and prior.

So the full year, the guidance that we put in the press release and expect for the fiscal year 2005, top-line revenue range of 890 million to 915 million, which represents a 17 to 20% growth.

We expect gross margins to be between 52 and 54%.

You recall we ended the full year '04 at 54% roughly.

Our operating margins will be 33 to 34% expected.

As I mentioned earlier, we think the effective tax rate will be 19% for the full year of '05.

This derives a net income within the range of 250 to $260 million, excluding any possible foreign currency effect, and the EPS range will be 230 to 238 excluding any FX effect.

This represents an 11 to 15% growth and is based on an outstanding diluted share count of 109.3 million shares.

The guidance we did release this morning in the press release includes a $0.05 per share impact due to the expensing of stock options in our employee stock purchase plan in the back half of 2005.

And finally, our capital expenditure estimates for the full year is $25 million, now that we've completed the large facility expansion here in Kansas.

That concludes my presentation for the morning.

I'd like to at this point turn it over to any questions you all may have.

[Operator Instructions].

Your first question or comment comes from the line of John Bucher with Harris Nesbitt.

John Bucher here with Nesbitt.

A question for you all on capacity planning.

Could you indicate what utilization rate that you were operating at the end of 2004 with the new production facilities that you have brought up by then?

And then, also, provide some backgrounds as to your plans for increasing production capacity in 2005 as you alluded to that there would be some expansion here, and whether at the end of 2005 you can give an idea in terms of, you know, percentage increase in capacity or actual unit volume increase and what sort of target utilization rate that you're targeting?

Thank you.

John, this is Min.

Our transition rate of our tier one capacity was at 110% at the end of the 2004.

The main reason is to get caught up with our Christmas demand and also to gear up sufficient level of effective stock as we enter the marine industry season.

Our capacity is currently now again is function of the product mix, but our existing capacity at Klaus meant to be 3.5 million units a year, including some overtime.

3.5 million units is the current production capacity?

Yes, including some overtime.

Is there a range that you might be able to provide for what you are targeting for the end of this year?

Well, I think that our deposit as I stated in my report, that we will have 2 additional lines coming on -- coming in March, so with that we'll be at full capacity. 3.5 million is what our factory is capable of producing.

: Okay.

And then there will be 2 additional lines that would provide a commensurate volume increase on top of that?

That will include --

That includes that.

Yes.

That includes the 2 lines, yes.

Okay.

And then the next question and I will yield the floor.

Can you indicate what sort of production ramp you're expecting in the automotive units that we will be shipping to Mopar provide any sort of you know rough timing on that and then how you expect the unit volumes to ramp over time?

Thank you.

We really cannot speculate on tax rate of the system.

Any numbers probably need to come from Mopar.

But here this would be the least expensive installed available.

So we hope we have good success with it.

Thank you.

Thank you.

Your next question comes from the line of Bill Benton with William Blair.

Thanks.

Good morning, guys.

Hi, Bill.

Good morning.

Just if you could -- I know, Kevin, you had mentioned that the quarter was relatively linear, in terms of shipments.

Could you remind us relative to last year, could you kind of talk about whether more back - no I guess you didn't say it was linear, you said it was a similar pattern.

Can you talk about kind of what that pattern was and what the inventory -- your view of what inventory looks like in the channel right now?

Okay.

Yes.

I mentioned the linearity was similar to '03.

And if you look -- recall what we talked about in '03 is that we had a slow start, and then we really ramped up in November and December.

So many of our sales that we got in December obviously will not be collectible until January.

That's the drag (ph) of the 53 DSO, but again very similar to what we experienced in '03, and as far as the inventory channel, to the best of our knowledge, we really haven't seen much difference there.

We feel like the channel is relatively clean.

We haven't seen an increase in inventory by any means and the products that we release-- the new products we release have been pretty well received and have sold through pretty well.

Okay.

I like your new C series by the way, but with that comes the question of what are you doing with the high-end Street Pilot?

I have been searching the web here and seeing a little bit of discounting going on.

I wonder if some of your retailers are looking to add that on the shelf next to it, or are they looking to maybe phase out the higher end and want to come in with the lower price C series?

Well, I think it really depends on which retailers you talk to, and some retailer indicate that they are interested in keeping both our high end and mid range products.

Okay.

So, kind of a mix as you are seeing it right now?

Yes.

That's that is what we have been told some major retailers.

Okay.

Just a final question on Mopar as well.

I guess, you know, there's been a little bit of confusion on Harmon announcing they were going to be doing something with Chrysler starting in 2007.

Can you maybe help alleviate some of that confusion, and can you maybe discuss a little bit -- I know -- are the profitability metrics around the Mopar solution, should we think about that as similar to what you commented in the past about an OE-type solution?

We cannot really comment on Mopar's plans.

So, I think that the comment is come from Mopar.

But all we can say is that we are excited by this relationship and look forward to exploring additional opportunities.

As far as the profit margin is concerned, certainly we won't be able to receive a 50% margin for this kind of OE relationship.

Okay, we should think about it in terms of what -- maybe in the past you said on OE relationships?

Within that range, yes.

Within that range.

Okay.

Great, thanks.

Thank you.

Your next question comes from the line of Ron Epstein with Merrill Lynch.

Hi, this is actually Stephanie Hong (ph) calling for Ron.

And I have a couple of questions.

Can you comment on the ASPs that are, excluding avionics?

I want to see a trend where the average selling prices are without the G1000.

Since the vast majority of our units comes from the consumer business, the fourth quarter ASP came down from the prior quarter from 355 down to 308, and that still was higher than the fourth quarter of '03, and it speaks to the fact of the type of product and the mix of product that we were selling.

Again, we tried to focus your attention away from ASPs because so much of it has to do with the product mix and the number of which products were being sold.

As we expected, we saw it during the fourth quarter, because many of our sales are at lower price points for the holiday season, we would see a reduction in ASP during Q4 of '04.

Okay, thanks.

One more question, Dellia (ph) manufacturers are seeing a pickup in the corporate jet market.

We wanted to know kind of what you are seeing in the general aviation market.

Stephanie, this is Cliff.

I think there has been a lot of increases awareness and attention in the general aviation market, both in the jet area as well as the piston-type market.

We have seen an increase in that business.

So for the Q4, Cessna commented that their single engine jets grew over 40% year-over-year.

Is that the expect you're expecting for the G1000?

I think for 2005, we will definitely experience good growth in G1000.

I think there has been a demand for new aircraft because of the new technologies being offered.

Okay.

Thank you.

Your next question comes from Mark Roberts with Wachovia.

Thank you.

Good morning.

If I could revisit the unit volume in the fourth quarter, was there a particular category and product or particular product that drove the high year-over-year unit sales?

No.

Actually, we saw, as I mentioned, we saw strong growth across nearly all product lines.

But only when we didn't see as much growth is in the PDA product, because we had introduced the iQue 3600 late in the year last year and had a pent up demand there, but in general we saw unit growth across aviation segment and most of the product lines in the consumer segment.

Okay.

You mentioned earlier in the year, earlier last year, that you anticipated that shortly the unit volume or at least the revenues from automotive-oriented products would equal or surpassed marine-oriented products.

Did that happen in the fourth quarter?

I think we can confirm that that did happen in the fourth quarter.

Okay.

Should we anticipate going forward that now your largest dollar volume category will be automotive?

No, I don't think you can conclude that.

Our recreational product line is still the largest and appears to be.

It will continue although we do expect a nice growth from the automotive product line.

Okay.

So, there doesn't -- margins were up a little bit, so, can we conclude-- you mentioned earlier last year that the automotive products generally had somewhat lower gross margins.

Is that still true?

I think that's still true.

It's just that we had a lot of growth from other products outside the automotive product line, including aviation.

Okay.

Those are all my questions.

My other questions have been answered.

Your next question comes from the line of Benjamin Weinberg with Morgan Stanley.

Good morning, guys.

Kevin, I want to go back and revisit the comments you guys made up front and then last year's results, Min spoke to the margin compression first half of last year and how you guys have alleviated a lot of the shortages of components and capacity.

Is that how we should look at the inventory growth in the fourth quarter, effectively what you have is a lot of raw materials and you are ready and you don't have an issue with a big surge in demand and color displays and flash that might have been in shortage of quantities last year, you've gotten that taken care of?

Is that the way to look at it?

When you look at our inventory policy, it's always been, and we haven't changed it, we try to keep at least 60 days of finished goods on hand to be able to respond to customer demand.

If you look at the breakdown right now, we have between 60 and 75 days of finished goods.

Most of that is on the newer products.

We feel there is very low risk there.

However, I think some of the increases were in raw materials and some of our assemblies.

We admit we need to do a better job there of working that through the production process over the next six months, and that's really what we're working on right now.

Got it.

Thanks.

And then if I could ask a big-picture question.

A couple of years ago you were talking about the wireless opportunity and GPS cell phone.

I think you had launched something in Europe but backed away from it, any updates there in terms of the opportunity, whether you are focused on it, is it part of the plans in '05?

Well, we have interest in what is going on in the wireless market.

There has been a lot of change since we stopped focusing on devices and starting to look at possible applications, for example, our GPS-10 Bluetooth module.

We will probably here more on that front in the current year.

Correct.

Great.

Thank you very much.

Your next question comes from Jim Duffy with Thomas Weisel Partner.

Thank you.

Good morning.

Historically, you guys have provided a little color on the actual split between raw materials work and process and finished goods and inventory.

Can you do that for us this quarter?

Well, I think, as I just mentioned, we saw increases of all of those components, and I feel like, again, feel like the finished goods is in pretty good shape.

Raw materials is due to the decision to bring on more parts in order to not get short, and the forth quarter ended the marine and spring season we have seen an increase of raw materials over the Q3 of '04, but the raw material number is approximately, let's see, over the third quarter, we saw about a 17 - $16 million increase on raw materials.

Finished goods was about 15.

Okay.

Thank you.

And has your inventory situation changed dramatically since the end of Q4, as we look at it right now?

I think it's too early to tell.

We've only had a few weeks of shipments, but in general, I think we're still working through the inventory levels, as I mentioned, raw materials and assemblies, in particular.

I probably category categorized it as not a significant change at this point.

Okay.

On the capacity issue, any update on the search for additional space in Taiwan?

Actually, for the last three to five years, our long-term plan, we have started the process of looking at additional facilities for expansion.

So far, we have not identified any site.

Min, when do you hope to have that resolved?

Well, again we continue to - as you know in Taiwan, it is not, it is not easy to find a site which is convenient to where you are, and our top candidate has been foresight (ph) with cost wide (indiscernible) facility and so far we have not had any success.

Okay.

Thank you.

Your next question comes from the line of Peter Friedland of Fulcrum.

Hey, guys.

A couple of questions.

The first is on your revenue growth or your revenue outlook for '05.

Can you just give us an idea how that would break down to consumer and aviation?

Can we expect them to grow at the same rate?

Some color there.

The way we look at it, earlier we had hoped that we would see similar growth, roughly 20% of growth between both, but actually, it looks like given the aviation business, we probably see 20% above in aviation, a little below 20% for the consumer segment.

Okay.

That's what we have in our forecast right now.

Okay.

I know you guys aren't giving any Q1 guidance, but should we expect the same kind of seasonality that you usually experience coming out of that holiday season?

Yes.

It would be sequentially down.

We would say that, but I'm really not going to give you any specific numbers.

Okay.

Okay.

Thanks, guys.

Your next question comes from the line of Jeff Evanson with Darby and Company (ph).

Thank you.

I was wondering if you can give us some sense of the mix in the aviation segment between OEM and after market in the quarter.

I'm not prepared to quote an exact number, but historically we have seen about 20% of our aviation business with OEMs and we definitely given the G1000 we saw that increase during the - both the quarter and the year.

Okay.

As you're moving in to some maybe a little bit different markets or a little bit broader consumer markets than you have had in the past with emphasis on PDAs and automotive, how do you expect that will change the amount and nature of marketing spending in '05?

That's always a challenge in (inaudible) forecasts.

We do have an advertising budget which is somewhat fixed due to media and another component of that is due to cooperative advertising, which is more variable in nature, so given the expected 20% topline growth, it is the high end of our range.

We expect the SG&A or advertising dollars to increase at a similar rate.

Might we see more -- excuse me, less co-op and more media as a result of this shift?

I think we're looking at -- we're looking at both, but I think that could happen, yes.

Okay.

Then, a last follow-up on the Mopar deal.

Obviously you have ambitions beyond what you announced a couple of weeks ago.

Are those ambitions within Daimler Chrysler, outside of that manufacturer, or both, and maybe what kind of benchmarks are you looking towards for take rates to expand those relationships?

Well, we continue to look for opportunity.

We don't have anything specific we can share with you at this time, but we are really thrilled with the initial relationship with Mopar.

Okay.

Thank you.

Your next question comes from the line of Connell Moducos (ph) with Lehman Brothers.

Hey, guys, a question on average selling prices.

Given that competition is increasing and we have seen a general trends at least on reseller level that prices are trending down.

How should we see average selling prices for Garmin in '05, both with and without aviation?

Well, if you recall, we have seen all tie ASPs increasing until we got to the fourth quarter, so at this point, it's really hard to forecast, given the product mix, but I wouldn't expect a significant difference on the overall ASP than we had for the year.

The ASPs in '04 really increased because of the new revamp product line that you have, the color screens and things like that and the PDAs selling for the whole year and -- as well as G1000 being there at least during the second half.

Right.

But in general one would expect that they would trend down.

If you exclude aviation, how would you see ASPs?

Same answer.

I think we have 60 new products coming out in '05.

Not that we're going to be adding color screens because we had those in most cases last year, but we don't anticipate a significant reduction in ASP.

Okay.

Thanks.

Thank you.

You have a follow-up question or comments from the line of Bill Benton with William Blair.

Could you talk about any component pricing breaks you have seen or what is going on the component pricing side?

Well, lately we really have not seen much movement overall. (Inaudible) On the other hand, due to the variation of the U.S. dollars, relative to all Asian currencies, many components from Asia are more expensive than a year ago.

Overall, we don't see any kind of significant movement one way or the other.

Okay.

And then you talked a little bit about your marketing budget.

Would you consider, I guess, looking at a car rental opportunity as more of a sales and marketing type budget item rather than necessarily looking for a return on that kind of -- from the sale?

Well, it is not our top priority, but frankly, we have continued to look into this market.

We cannot provide more specific information at this time, but we are looking into the market.

You are continuing to look there?

Yes.

Okay.

I think, Kevin, you mentioned there was a one-time patent license fee in the quarter, in the SG&A line?

Right.

Can you give any magnitude on how that was?

It was roughly a million dollars.

I can't really give you any specific details on it, though.

Okay.

That's great.

Thank you.

Thank you.

You have a follow-up question and comment from the line of John Bucher with Harris Nesbitt.

One other question related to raw materials and more components focused also.

You indicated you had some room for improvement on the current balance of raw materials.

As you look out at component availability and some of the trends you have seen in 2000 or expecting for 2005, there was a fairly dynamic market in 2004 for a number of types of components.

What are your expectations for 2005?

Do you think it will be more stable?

Are things more in equilibrium or are you expecting there could be surprises as you look out this year?

Thank you.

I would say that (inaudible) in 2004 we have been taking a more defensive approach with critical parts, but at this point, we don't see any significant risk for components this year, so along that line, we must have to review our inventory strategy and may plan to trim down our raw material inventory.

Thank you.

Your next question comes from the line of Rich Valera with Needham & Company.

Kevin, on the R&D side, I think you mentioned that you added 4 people during the quarter.

It was up quite significantly in dollar terms.

Can you explain that, and say if you think that sort of the right dollar level to think about as a baseline going forward?

Yeah.

What we saw, even though we only added 4, we definitely brought on over 50 people during the year, so we saw, you know, about a third of that as just general costs.

Actually, almost half of that is general cost increase, salaries and benefits and the cost of R&D.

We also did see an increase in our Taiwan R&D, which increased during the quarter.

But in general, looking forward, you know, we ended at about 8.1% of sales, as I mentioned.

I think, with a 20% growth rate, we would still like to see R&D grow as a percentage of sales somewhere around 50 basis points, could possibly be the number in '05.

Okay.

That's helpful.

And then, just with respect to the inventory, do you have any targets in terms of inventory days for overall inventory, you know?

What is your sort of -- how do you plan to manage that going forward?

Well, I think it gets back to our earlier comments, and that is 161 days is probably too high.

And we're looking at evaluating raw materials and assembly parts that go into the production process, so we'd like to see that come back down to more reasonable levels.

Okay.

Thank you.

Your next question comes from the line of Thomas Kapola (ph) with CDBEM Management (ph).

How are you, guys?

I appreciate you taking the time.

I guess I don't understand the business as well as others.

I know you were stressing not to focus on ASPs coming in and subsequent margin compression, so what should we be focusing on?

You know, where is the turn there?

What should we be looking for?

Well, I was looking for revenue in EPS.

As you guys model internally, where do you see ASPs coming to?

Is there an end to this or -- ?

Well, I can't add too much more other than we don't expect a significant change in ASP.

We had 50 new products last year.

We expect 60 in '05, and there's a lot of variability there, but in general, it's not a significant change in the market

So I guess you will continue to introduce new products even though ASPs will continue to contract and try to make it up in volume?

We are not sure that EPS will contract when it is introduced with the automotive products.

They can have higher ASPs (inaudible) or personal fitness products, so, you know, in a way, we are not quite sure that indeed we will see a significant change in ASP.

All right.

Thanks, guys.

I appreciate it.

Thank you.

Our next question comes from the line of Adam Wright with Kynikos Associates.

Hello.

Hello.

Sorry about that.

My phone is screwing up here.

I'm sorry to beat a dead horse but you mentioned you were evaluating the reserves so you had enough on the books.

May I ask what the reserve number was and the quarter date change as a total inventory in Q4?

It actually came down a little bit.

It's interesting when you look at the types of products, as I mentioned earlier.

We don't have a lot of old inventory sitting around and finished goods it's a lot of new product.

Therefore, we think the risk is very low as far as any losses in the future.

Okay.

Also, I know you gave raw materials, I think, 15 million sequentially.

Yes.

And then finished goods up 15 million sequentially.

May I ask, do you have a work in progress line?

Will you release that?

It came up to about $4 million, which is the overall, $35 million increase.

Are we not allowed to get the reserve number?

That is part and parcel of the--

Well, I mean, we I guess I will go ahead and distribute that.

It is about $11.5 million.

Okay.

Thanks very much.

Yes.

Your next question comes from the line of Peter Friedland with Fulcrum.

Hey you guys, just to follow up.

Just looking at the '05 working capital, how should we expect that to trend looking at the lower inventories, did you have to put a lot of working capital towards those areas, and roughly speaking, what should we expect for '05 for total working capital?

Well, I would say that, you know, we saw roughly a $60 million use of cash on inventory.

I would not expect to see that kind of a level in '05.

It should be lower than.

That I'm not going to give a specific number.

Accounts receivable on the other end, as sales continue to increase like we hope they do that will continue to increase on an absolute dollar basis.

We may not get much benefit on A&R.

I have classified it in general as working capital, improvement due to the inventory balance.

Okay.

Fair enough.

Thank you.

Your next question comes from the line of Todd Smith with the Wisconsin Board.

Good morning, folks.

Congratulations on a nice quarter and a great year.

Thanks Todd.

I have a couple of questions.

First of all, on the new products that you guys are intending to introduce in '05 I think you said 60, can you break -- how many are going to be going into aviation?

How many are going to be in marine?

How many are going to be consumer?

Can you break that out?

Yes.

Todd, right now, probably about a quarter of those would be in aviation, and maybe less than a quarter in marine and the rest in consumer.

Okay.

And then, for those of us who are not as familiar with the financial model at Garmin, can you just briefly summarize or kind of go over again the margin implications of products sold at OEM, you know, as far as gross margin, operating margin, and, you know, versus that is just that is just sold, you know, regular end market in both automotive and in aviation?

Well, I would say we've categorized it in the past, depending on what type of OEM.

The aviation OEM's are still 60% roughly, you know, 60% plus.

Automotive, OEM on the other hand, we have not given an exact number.

Instead it's definitely not the corporate average of 50% on the consumer side.

After market would be kind of consistent with corporate averages.

Okay.

And but on the OEM side, does the operating margin levels come out to about where the corporate averages today, or where you have cited they are likely to be in'05?

No, I'd say let's say they would be lower, given the R&D investment in those areas.

Okay.

And then one final question on ASP decline, several questions regarding ASP declines.

What would you guys -- how do you guys define the word "significant"?

Is that down 25% and greater, down 20% and greater, down 15% or greater?

In your mind, what is the definition of significant?

We don't even use that word when talking about ASPs.

Okay.

I would say, you know, -- I don't know how to answer that, actually.

I think in a way, that ASP rely nothing too wrong we try to manage.

I think that is just something if we try to resolve the problem mix.

On the other hand, I think the margins you know uncertainties is something we watch out closely on ASP.

Okay.

Fair enough.

Thank you.

Your next question comes from Bary Harnest (ph) with State Asset Management.

Good morning.

I guess we're in the afternoon now.

I had a question about the foreign currency just try to understand it a little bit.

The U.S. dollar has been stronger recently, which has been a change.

If currencies were to stay exactly where they are right now, would all five show a gain or a loss, and would it be minor or more material?

Thanks.

I would say in general, they should be, you know, again, if the rate stays the same throughout the whole year, there should be no impact.

There should be no foreign currency game or loss.

Unfortunately, what we had last year was a significant reduction or weakening of the US dollar and we had substantial amounts of Taiwan assets that needed to be restated and that really hit us hard in the fourth quarter, but again, almost all of it is non-cash.

It is just a restatement on the balance sheet.

In fact just to the extent that the U.S. dollar has been strong year to date, in theory, you know, if we stayed where we were right now, we would be looking at a gain then, is that correct?

Well I will think.

I think you got to mainly have a look at it U.S. dollar versus Taiwan dollar, and I don't think that's the case.

Okay.

Got it now.

Thanks.

Yeah.

Your next question comes from the line of Herb Bookbinder (ph) with Wachovia Securities.

Kevin, you've got $25 million in CapEx, which is way down and obviously cash flow should be good.

Any comments on what you might do with all the cash, the dividend of $0.50 last year?

Might you look at doing substantially more this year?

Are there any other long-range capital projects that you have that might use up some of this cash?

Well I think we are always evaluating opportunities whether it is an acquisition or investment in ourselves.

You know Min talked about earlier the Taiwan strategy and improving/increasing production capacity over the next three to five years.

That's an opportunity for us.

I really don't I think you can imagine, I don't want to speculate on what we do with our dividends strategy during the year.

Okay.

All right.

Thanks.

Thanks.

Your next question comes from the line of Connell Moducos with Lehman Brothers.

Thanks.

I have also a repeat question.

This is more on the auto OEM opportunity.

Do you see the need to be a bigger player in the auto electronics market potentially having a you know audio capabilities or something else that you need to do in order to get an entry into the market on a factory installed basis?

Well, Connell we are looking at all those kinds of opportunities and a lot of that is driven by the OEM's themselves and what they're willing to offer to us in terms of opportunity.

Do you think that not having the capability to do, you know, the rest of the electronics is a potential handicap?

Well, I think it depends on the carmaker and their vision and the opportunity.

Certainly having the components it's a better thing, but so far, we've been exploring opportunities that haven't required any.

Thank you.

Your next question comes from the Clark Sennett (ph) with Trescott Capital (ph).

I missed the majority of the call and I apologize for that.

But I just wanted to address a few things.

I noticed a lot of manufacturer rebates, you know, through the holidays, and I'm wondering what percentage of those rebates typically comeback to you and how that's going to impact you in the next quarter possibly as well.

Well, first of all, we have never made that number public.

Our typical experience, though, is we have ongoing rebates, whether it's a $50 rebate or $100 rebate, so we are required to approve for any expected costs that would come back in the next quarter, so I don't expect, due to what happened in the fourth quarter that you will see any impact in 2005.

Okay.

All right.

I just wanted to get a clarification on that and then, what about the inventories, again?

Can you break those down?

I missed most of the talk on that as well, as far as finished goods, work in progress, and raw materials.

Do you have that number?

Well, we had talked about raw materials increasing during the quarter about 16million.

The finished goods going up about 15 and work in process at about 4.

Those are the numbers we stated earlier.

Okay.

I missed that.

All right.

Fair enough.

Thank you.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

No, that's it.

Thank you everyone for joining us this quarter.

Thank you.

Thanks.

Bye.

Thank you.

This concludes our conference.

You may now disconnect.