台灣國際航電 (GRMN) 2005 Q1 法說會逐字稿

Good morning, my name is Kela and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Garmin First Quarter Earnings Release conference call.

Thank you. [OPERATOR INSTRUCTIONS] Ms. [Burke] you may begin your conference.

Thank you.

Good morning.

We would like to welcome you to Garmin Limited’s 2005 First Quarter Earnings Call.

Please note that a copy of the press release concerning this earnings call is available at Garmin’s Investor Relations site on the Internet at www.Garmin.com/stock.

Additionally, this call is being broadcast live on the Internet, and a replay of the webcast will be available until May 27, 2005.

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 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 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 25, 2004, 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. Min Kao.

Good morning.

From the press release issued this morning, you can see that in the first quarter of 2005, we again experienced record revenue and earnings.

Total revenue for the quarter increased 22%, and earnings per share increased 34% relative to first quarter of 2004.

Excluding the effect of foreign currency, earnings per share increased 38% relative to the same quarter of 2004.

We feel this was another good quarter for Garmin.

There were many significant accomplishments.

We recorded 59% growth in our aviation business,11% growth in our consumer business, and solid growth in all three geographic regions.

Over 484,000 Garmin products were shipped in the first quarter of 2005, a 32 % increase over the first quarter of 2004.

We delivered 15 new products in the quarter, which includes the very attractive new automotive product line. [inaudible] products [inaudible]which offers full featured aviation functions and the new 3-D aviation [inaudible] and the superior use of [inaudible] at a very affordable price.

Tuning marine chartplotters, the GPSMap 192C and GPSMap 198C, [inaudible] highly detailed marine charts of the United States.

An exciting addition to our outdoor fitness line is the Forerunner 301.

This combines the popular features of the Forerunner 201 with a heart rate monitor and Training Center software.

Two new PDAs, the iQue 3600A, the aviation version of the palm based iQue 3600, and the iQue M5, a Microsoft pocket PC phase GPS PDA [inaudible]with wireless technology.

And two new aviation XM satellite receivers which bring CD quality, [inaudible] audio and weather information to the general aviation cockpit, enhancing pilot [inaudible] .

We have added over 50 new associates company-wide including 28 new engineering associates.

Research and Development grew to over 600, and to over 2500 total employees worldwide.

We are pleased to report our final two automatic assembly lines are now in place with a total of 14, and we have increased our Taiwan manufacturing facilities personnel for our expanded production capacity.

We also continue to feel (ph) in preparation for the marine and the spring selling season and for the production of a record number of products planned for the year.

With the exception of some newly released products, we were able to meet most of the orders for the products throughout the quarter.

As we look forward, we anticipate (inaudible) for the remainder of the year.

Consumer awareness and interest in technology continues to grow and our promoted market is poised for a significant expansion.

Products that we introduced during the quarter, especially the (ph) products have been very well received.

To take advantage of the opportunities that lie ahead, we have recently formed a relationship with (inaudible).

We have had a limit of the Garmin brand.

They hear immediate and can’t go wrong including TV commercials and magazine ads will start in a few weeks.

In our Bali market, we also anticipate immediate shipments of more parts (ph) also additional assistance due to the Second Quarter.

We are excited with our relationship with Daimler Chrysler and are continuing to explore other automobile and motorcycle (ph) opportunities.

We continue to be pleased with a strong goal displayed by our aviation business technology.

The (ph) was recently completed for our aircraft the (ph), and we anticipate some participation of (ph) and Army for other AEN (ph) models later this year.

We are also in ongoing discussions of our aviation AEN and hope to have more progress to be (ph) throughout the year.

We (ph) the (ph) have created a particular interest in the AEN for the aircraft and we look forward to starting to (ph) opportunities.

We are pleased with our First Quarter 2005 results.

The (ph) of products remains strong and our new products have aligned to be mentioned above, fortunately remainder up to 2005 and the many opportunities before us.

We are comfortable with the financial guidance that we have provided for 2005.

The young attitude for the call (ph) financial results in the Fiscal Year 2005 Guidance.

Thank you.

Thanks Min.

Good morning everyone.

I’d like to focus my time on the financial results from the quarter also talking specifically about each segment and I mentioned some upcoming activities that we have in the second quarter as well as finalizing the 2005 Guidance for the full year.

First on the 2/1 Financial Summary, Garmin’s 2/1 revenue that Min mentioned we reported this morning was $192.7 million which was up 22% from the year ago quarter, looking at each geographic region, our revenue was $132.7 million, a 24.7% increase from $107.3 million a year ago, New York revenue came in at $50.3 million a 15% increase from 2/1/04 and our Asian revenue was $9.7 million, a 37% increase from $7.1 million a year ago.

Our gross margin for the quarter increased 280 basis points to 53.6% from 50.8% in Q1 of ’04.

Our Operating margin was 34.1% compared to 31.3% in Q1 ’04.

We’ve recorded net income of $47.4 million and excluding foreign currency, our income was $56.2 million.

We have also reported earnings per share for the quarter of 43 cents per share and excluding FX, our earnings per share was 51 cents per share.

This earnings per share increase was 34% from a year ago quarter, however, excluding the foreign currency loss, our income statements increased from 48%.

As Min mentioned, our total units sold for the quarter increased 22% to 584,000 units, compared to 478,000 units in 2/1/04.

This 22% increase on units was in line with our 22% revenue increase for the quarter.

Our first quarter gross margin was 53.6% compared to 50.8%; the gross margin results are within the range of our expectations for the quarter.

Looking at the gross margin by segment, our consumer gross margin during the first quarter was 48.4%, our aviation gross margin during Q1 of ’05 came in at 66.5%.

We continued to experience strong acceptance of our new products that have been released and approximately 31% of our first quarter sales were generated from products produced within the last 12 months. (ph) operating profit was $65.8 million which was a 34.1% margin; the operating margin increased 280 basis points compared to First Quarter of ’04.

During Q1 of ’05, SG&A as a percentage of sales increased 20 basis points to 10.7% of sales from 10.5%.

The SG&A dollar increase was 23% over Q1 of ’04 was driven primarily by increased advertising, increased legal accounting fees, increased consulting, and (ph) expense which increased during the period.

Our R&D expenses decreased 20 basis points during the quarter to 8.8% of sales from 9.0% of sales during Q1 of ’04.

This represented an increase of 19% over the prior period, and the R&D increase was primarily due to the hiring of new engineering staff and increase in our overall engineering program ties.

During the period, we hired 28 new engineers and engineering associates and now we employ a total of 595 engineers around the world.

Overall, our total operating expenses as a percentage of sales decreased 10 basis points to 19.4% from 19.5% in the prior year period.

On the Other Income line of income statement, we experienced an $11.1 million foreign currency loss during Q1 as the US dollar continues to weaken compared to the Taiwan dollar; from 32.19 at the end of 2004 to 31.9 at the end of March 2005 at a 2.2% change.

The majority of our company’s consolidated foreign currency translation gain or loss results from translation into Taiwan dollars at the end of each recording period of the significant cash, receivables and payables held in US dollars by our company’s Taiwan subsidiary.

This translation is required under GAAP because of the functional currency of the subsidiary in Taiwan is actually Taiwan dollars, however, there continues to be minimal cash impact for the smart currency translation and we expect their Taiwan subsidiary will continue to hold the majority with cash in US dollars.

During the first quarter, we reported interest income of $3.9 million.

We currently are earning approximately 4% pre-tax on the marketable securities and overall, approximately 2.7% on our total cash balances on a consolidated basis.

The effective tax rate during the period came in at 19.4%; right at our earlier guidance for the year that we gave during our last conference call.

The 19.4% rate was 160 basis points lower than Q1 of ’04, which was 21% last year.

We expect that our effective tax rate for 2005 will remain at approximately 19.4%.

Moving next to the segment results, consumer revenue for the quarter was $137.5 million and represented an 11% increase over Q1 of ’04.

During the first quarter, our consumer segment made up 71% of our total revenues and we experienced growth within the segment across most consumer product lines but especially within the marine and recreational product lines

product lines, demonstrating continued demand for consumer EPS products.

As I mentioned the consumer gross margin increased to 48.4% in the quarter from 48.2 a year ago.

This result was strongly influenced by product mix, and also included product transition costs related to the new products that we introduced in Q1.

In the future, it is our goal to take advantage of the automotive growth opportunity that Min spoke about in the opening by offering product at a very attractive price in order to drive both revenue and EPS growth.

If we are successful with this automotive growth strategy we could see a more significant change in our gross margin going forward.

Finally, on the consumer segment, our consumer operating margin decreased 110 basis points to 31.1% from 32.2% a year ago.

This operating margin change was driven by improved growth margins more than offset by higher R&D and SG&A expenses as a percentage of sales.

Looking at the aviation segment, we are pleased with the fact that our revenue increased 59% during the quarter, up to $55.2 million, compared to $34.8 million in Q1 of ’04.

Our aviation segment made up 29% of our total company revenues.

The revenue increased due to continued shipments of our C1000 cockpit and strong handheld aviation product sales.

Our aviation gross margin increased to 66.5% from 60.2% in Q1 of ’04 due to favorable product mix within the segment and reduced C1000 program costs compared to last year.

The operating margins within our aviation segment increased to 41.7% a 13.5 percentage point improvement compared to 28.2% in Q1 of ’04 and the operating margins are due to improved growth margins, as well as reduced SG&A and R&D expenses as a percentage of sales within the segment.

Our cash flow for the period specifically from operations was $42.8 million during Q1.

Pre cash flow, as we talked about in the press release that we generated, was $31.1 million for Q1 of ’05.

Cash flow from investing Q1 was $45.1 million use of cash.

This was driven primarily by our CapEx investment and net purchases of marketable securities.

Finally the cash flow from financing was $1.1 million force of cash generated from our proceeds from the issuance from stock options during the period.

Capital expenditures for Q1 were $11.8 million.

Cash and investments at the end of the quarter amounted to $601.3 million; marketable securities make up $352.1 million of this total cash position.

Our accounts receivable balance came in at $101.7 million at the end of Q1 and represents a reduction of $8.4 million from $110.1 million at the end of 2004.

Shipment and linearity during Q1 was roughly the same as 2004 and our days of sale outstanding therefor at the end of Q1 were 47 days, which compares to 46 days at the end of Q1 of ’04.

Inventory did increase to $166.4 million at the end of Q1 from $155 million at the end of 2004.

Increase in inventory was primarily due to the increase of raw materials as we meet anticipated demand for products during the second quarter, upcoming second quarter, and beyond.

In the last few months, our primary focus has been on building an efficient level of safety stock so we won’t run into the same product deliver problems that we experienced last year.

Marine shipments particularly pick up, as you know, in early Q2s, so we have to build up the stock for the seasonal increase in our orders.

We do expect a reduction in our inventories by the end of the marine season.

Overall, our balance sheet remains strong and we are positioned well for future growth.

I mentioned a couple of upcoming activities.

I just wanted to mention just briefly, the fact that we are near to completion of a restructuring of our company to give us more flexibility in the future to make tax efficient transfers of cash from our subsidiary company into our parent company.

We recently formed a Netherlands company and a Netherlands Antilles company, which will be structured between our Garmin Limited parents and our Taiwan subsidiary.

The one time cost that we expect to pay during the upcoming quarter is approximately $4 million.

Possible future uses of the cash by the parent company include acquisitions, share buy-back; we are in the middle of an approved share buy-back plan, and then finally dividends.

Min mentioned in his comments the Yao Ming endorsement and with our April 6th announcement of the partnership with NBA all-star Yao Ming we committed to additional maritime SG&A investments in an upcoming TV advertising campaign that we expect to began in the same time period.

We estimate that the second quarter increase to SG&A outside our normal seasonal expenses of SG&A will be approximately $3 million for this advertising campaign.

Finally, we would like to affirm our earlier, full year 2005, guidance numbers.

As you saw in the press release this morning, Garmin remains optimistic that our revenue will come in at $890-915 million, which is a 17-20% growth.

Gross margins will be between 52-54%, operating margins between 33-34%.

Our effective tax rate approximately 19%, which will drive a net income between the range of $250-260 million excluding foreign currency affects.

Our EPS range is expected to be between $2.30 and $2.38 excluding the FX effect, which is 11-15% growth rate.

This is based on an outstanding diluted share count of 109.4 million shares.

We also expect our CapEx investment for the full year to be approximately $30 million.

That ends my comments on the financial summary and results for the quarter.

At this point we would like to open up the conference to any questions you might have.

[OPERATOR INSTRUCTIONS].

We will pause for a moment to compile the Q&A rooster.

Our first question comes from Ben Weinberg of Morgan Stanley.

A couple of question for you Kevin.

I wanted to ask first about the gross margins on the ABHD side.

You mentioned the program costs related to C1000, which sounds like those — I would characterize them exclusively [inaudible] discussed as relativly one time, or something that has been a fixed cost for last year, which is now out of the mix.

So should we assume that the margin levels [inaudible] aviation going forward are relatively sustainable?

As think, as we have said in the past, we expect to have gross margins around the mid 65% range.

So I think there are fairly sustainable given where we stand today, yes.

Just a little more color on the restructuring.

Historically what percentage of your cash has been held as parent and what is the additional flexibility if you could be a little more specific around the creation of the two new legal entities for you.

Traditionally the amount of cash has been fairly low in terms of total cash, between 20-30% of the total cash at the parent company and we were hoping to be able to have this flexibility on future earnings from our Taiwan subsidiary to be able to move cash up efficiently without significantly having to pay withholding taxes on that cash.

I see, so what is the timing on completing that, at which point you will have access to that capital.

Well we are planning on completing the restructuring in the current quarter, the second quarter, which is why we talked about one-time costs.

Then moving forward I think you will just see us having a lot more flexibility and more cash to be able to move.

It is not going to be a one-time event.

I think we would be able to expect to be able to move that Taiwan cash up over a period of time.

Our next question comes from Steve Starkie [ph] of Bright Creek Investments.

Kevin just to followup on that question about the cash, what is the current balance in Taiwan and will this new corporate structure totally eliminate withholding taxes?

I don’t want to get into too many of the details other than the main reason we wanted to set this up is to drastically reduce, and I am not saying it is going to get to zero, but it is a much more efficient structure.

Just roughly.

Ballpark.

Over 50% of our cash is held in Taiwan right now.

Okay.

Thanks.

The next question comes from Jim Duffy of Thomas Wiesel Partners.

Thanks.

Kevin, can you give us the split of inventory between raw materials, work in progress, finished goods, etc.?

I will be filing that with a 10Q next week, but I will just say that of the roughly $11 million increase in inventory during the period, the vast majority of that was in the raw material and assembly area.

Very little in the finished goods.

Can you speak to the nature of the finished goods inventory, mostly marine, but is there any old, dated products in there that you’re concerned about?

Much like we had at the end of last quarter or last end of the year, when we look at the makeup of the finished goods inventory and still we’re fairly fresh, fairly new, so we feel pretty comfortable with the type of finished goods inventory that we’re holding right now.

Okay.

And looking at the 11% revenue growth in the consumer business, that’s a deceleration for what we’ve seen in previous quarters.

Can you speak in a little bit more detail about the mix of the product shipments in the consumer side of things, and why we may have seen it fall off like that, and also maybe some commentary on inventory in the channel?

Yes, I’ll just close and then mention we saw growth across most the product lines.

I mentioned recreational, marine, the automotive, primarily what’s caused that is the timing of some of our new products, the C series in particular which came out late in the quarter.

We think that the fact that we now can see [inaudible] didn’t ship until late in the quarter, probably overhung the market a little bit, and as we had mentioned, I think we have high expectations for the automotive growth in the second quarter and beyond.

As far as the inventory in the channel and we typically state that when we look at the makeup of our dealers and distributors and what they have, pretty much as expected in what it’s been in the past.

We don’t see a lot of old inventory, it’s fairly clean.

Okay.

Final question.

You mentioned pursuit of growth in the automotive category and expectations, if that could weigh on gross margins.

Do you have any thoughts on where you would see - - if you’re successful with that, where you would see the consumer gross margins going by the end of the year?

I don’t want to lay out a number because the variability within our gross margins is quite high even going anywhere from 30 to 80% gross margins across the board.

We just want to set the expectations that if we are successful with high growth in the automotive market and we will see a natural decline in consumer gross margins [inaudible].

Okay.

One final question that came to me.

Your previous guidance had accounted for, I think it was 5 cents from stock options expensing in the back half of the year.

Is there an adjustment for that in your current endorsement of the guidance given that the rules have changed and that won’t be - - forced to recognize that until next year?

Yes.

It is our anticipation at this point is [inaudible] timing of the stock option spending that we will likewise move the timing of that through January of ’06, so inherent in our calculation of the GPS for the year we assume that roughly 5 cents goes out.

As I mentioned, we have some restructuring costs and SG&A expenses also that we’ve added into that number for the year.

Okay.

Thanks.

The next question comes from Bill Benton of William Blair.

Could you just talk about how much the transition costs in the quarter have impacted gross margin and give us a sort of [inaudible].

Well, transition costs are typically higher in the first quarter when we have new products that are introduced in advance of the marine and the spring season, and this year’s transition costs were not as significant as last year’s, now at probably a few million as a result of the large number of the 16 new products that we’re introducing this first quarter.

And so, you said the C Series came out late in the quarter.

I had noticed maybe some discounting on the higher end street [inaudible] during the quarter, is that primarily the reason why - - Are you discounting on the high end at this point in front of the C Series, or [inaudible] primarily?

[inaudible] our products [inaudible] typically when one of the new product lines come up, we reduce the price on the older products and the [inaudible] costs with 2600 series [inaudible] cost.

Okay.

It didn’t appear as though your competitor responded until recently.

Have you seen any impact on the competitive front, on the [inaudible] side recently in the channel?

From a [ ] perspective?

Yes.

I mean just in terms of an impact there.

It looks they’ve responded recently.

We are a [ ] product [inaudible] and we did not ship product until toward the end of the first quarter.

In fact, I can [inaudible] , so in our own hand, we are very excited about the very encouraging responses from the market [inaudible] .

As far as competitors are concerned, I assume - - this [inaudible] impact on their business.

Okay.

Just one final question.

In terms of the distributors that you mentioned, Best Buy, and Circuit City, have you seen any change in the approach that they’re taking to the category at this point?

[inaudible] is an exciting category, so we have seen the major distributors have put a lot more emphasis on this category.

But in terms of new competitors, you haven’t seen any new ones yet?

[inaudible] Best Buy and Circuit City [inaudible] to four of the products there, and here I can see maybe two products on the primary [ ] product and others that [inaudible]

Okay.

Thanks guys.

The next question comes from Ronald Epstein of Merrill Lynch.

Yes.

Good morning.

I just want to circle back on the automotive strategy.

So are you saying if there is more growth in the automotive segment that’s actually is going to put downward pressure on gross margins or it could?

We understand that the market is poised for very significant growth and quite a lot of [inaudible] certainly there is opportunity for the traditional distribution channels, but also there are plenty of promotional, of like the program we did before.

We actually had a lot of promotional opportunities and those opportunities could potentially be [inaudible] for a product like this.

It’s [inaudible] final [inaudible] margin we have [inaudible].

Okay.

Question for Kevin.

Kevin, can you comment on what ASPs were during the quarter if we excluded avionics.

To say - - We generally don’t focus on our ASPs - - We’ve probably been able to determine that it’s fairly flat on the year where [inaudible] basis - - if you just look at consumer alone, I think we saw an ASP that came down slightly because of product mix and some of the pricing that we’ve already talked about in consumer segments.

But definitely I knew that it was a downward trend on ASPs within the consumer segment.

Okay.

And then I have another question for you.

I just do a quick days and inventory kind of calculation, and I calculate for Q1 you guys had almost 170 days?

Yes.

What we did it internally, additional focus within the [ ] we want - - we determine to look forward on the expected product costs; we calculated days of about 139 days looking on a forward-looking basis as opposed to backward-looking.

I’m assuming [inaudible] you’re probably looking back on half to 12 months.

I don’t know how you calculated it, but when we calculate it now, we like to focus more on forward-looking because we’re in a growth business and, again, days came to about 139 days.

So 139 days of product is what you think you’ll need to keep the chain full?

Well, I think as I mentioned that the 139 includes significant amount of raw materials.

So, we’re hoping that by the time we get to the end of Q2, I think we have the right amount of finished goods.

So I think raw materials can come down and help us on the raw inventory end.

Okay and then there’s one last question.

On the back of the G1000, how is the certification going for the G1000 for the custom Mustang?

Well, we feel like it’s going well.

The first flight of the Mustang occurred over the last weekend and we were pleased with the results of that and was able to support testing on getting it for [inaudible].

Any bugs in the software?

I mean, is it is just going along?

I know that avionics software can be kind of difficult.

As you see, you get a [inaudible].

It’s still a developmental program, so it’s an ongoing effort.

Okay, but you guys are happy with where it is at this point?

Yes.

And when do you expect to have certified by?

I believe Mustang is to be certified towards the latter part of 2006.

Great, thank you.

Thank you.

Our next questions comes from Mark Roberts of Roberts & Co.

For kind of modeling purposes, when do you start the automotive parts shipping in the second quarter, should be anticipate that ASP’s on the consumer side will go down but will have pretty significant increases in volume going forward?

To answer that ASP automotive product is higher than our consumer over average.

So, it will be incremental units at a higher ASP.

And, Kevin, did I understand you correctly that this is going to be a lower gross margin product, so we should model in those products coming in at lower gross margins?

As Min mentioned earlier, it just depends on the mix of the deals and the promotional activity that we have.

I think we see growth in many different avenues.

And so, I don’t mean to be evasive, but we really don’t want to quantify with that, other than I think the in general the trend could be down on the automotive side, I think again depending on the mix of product.

Okay, great, thank you.

Our next questions comes from Jeff Evanson of Dougherty & Company.

Good morning.

A couple of questions here.

Min, during your comments I believe I heard a comment that there was some demand that you were unable to fill.

Is that is correct, could you expand on that please?

The reaction that the [inaudible] are typical for new product ramp up with it will take a few months to feel the heat of that quarter.

So first we start keeping [inaudible] toward the end of last quarter and we are able to ramp up production in April, and it will probably take another month to [inaudible] order.

So that’s very typical any new product ramp up.

I think I also heard you say you expanded some capacity in Taiwan.

Could you tell me where you stand there on capacity utilization?

Well I think that at the beginning of last year we had 8 assembly lines and we have since increased that up to 14 lines total.

The number of worker we have then more like 750 to 800 people and now we have a total of around [inaudible] workers.

Last year we work [inaudible] at any time in the range of 40 hours a week, 45 a week.

And right now we are about at more like 60 and now capable of doing 70, a significant amount of overtime.

So overall [inaudible] we feel that this year we must prepare for any [inaudible] of the market demand.

Okay.

Do you still feel that you need to expand to a new facility in Taiwan then?

I think we need to.

I feel that our existing capacity will probably carry us into 2006.

And actually we are exploring various options to expand our manufacturing capacity.

Okay.

Obviously, this is more of a Kevin question, you’re going to file the Q and we’re going to look at the reserves relative to inventory obsolesce.

Could you talk about, Kevin, what we’re going to see then, and the questions we’ll ask?

In other words, I think it’s possible to see a concern that there could be some risk of obsolesce given the slow growth on the consumer side.

Would you like to address that now?

Sure, I’ll talk about that.

The overall reserves on a dollar basis are about the same as where we ended the year.

And I think again, the slower growth in the consumer is just that we didn’t see as fast a growth on the automotive side.

And again, when we look at the type of inventory [inaudible] I think we’re in fine shape there from an obsolesce and from a reserve basis.

So I don’t believe that the risk really increases just due to the fact that 11% growth consumer in the first quarter.

I think we’re in a good position there.

We look at that pretty closely every quarter.

Okay and then last question just to clarify.

The guidance you’re reaffirming now excludes a negative impact from stock options, whereas the guidance you can you last quarter did include—

That’s right.

So on an apples-to-oranges basis are we essentially reaffirming guidance roughly 5 cents lower?

Well I think what we’ve done there we’ve had one time [inaudible] that I mentioned that we added in and then we’ve taken out the stock option impact.

So fair anyway you want to look at that.

Okay fair enough.

Thank you very much.

Our next question comes from Mike Rappaport from Rice Volker.

You mentioned that you thought that you could inventories down at the end of the marine season.

I was wondering if you give us what your target is there and maybe a target by the end of the year and go to some flavor as to where the relative changes will come?

I assume that the finished goods with remain in the 70 days and raw materials will come down more substantially?

I think you hit it.

We’re not going to quantify how much that is, other than the fact that I think finished good from a days prospective is fairly close to where we want to be.

And we think the improvements will be taken on the raw materials when you come to our [inaudible] that we have purchased, like display and that kind of thing in the upcoming quarter.

Okay will it be a substantial change?

I don’t know how you define substantial.

I don’t think it’s going to $1 million or $2 million.

I think we’re going to see better improvement than that, but I’m not going to quantify how much.

Yes because our goal is to reduce the inventory by much more than just $1 or $2 million, but at [inaudible] time, we went through our inventory in terms of DOS.

We feel that the demand for our new products are strong and we may have a [inaudible] second quarter over the [inaudible] to our inventory.

Okay, currently you would forecast that it would go down in dollars and that would obviously be in more substantially in [inaudible]?

Right.

Thank you.

The next question comes from Peter Friedland of Fulcrum Global Partners.

The question on the business model, clearly the last few years you have been growing a number of new problems that you’ve been bring out there, and it just seems like you’re more like assuming that you can continue the pace moving forward, it seems the business model is changing to where transition costs are going to occur more frequently.

You’re just going to have a lot of products that you’re going to have cycle through and it seems like product cycle is increasing significantly, especially in auto and given the competitive environment.

So is it fair to say that the margin outlook, and this is mostly on the consumer side, is this going to be lower going forward?

We actually [inaudible] that we’ve got in the position of [inaudible] that the transition cost should be higher in the first quarter because we are depending on the consumer market [inaudible] is where we have [inaudible] has more product.

So naturally you may see transition costs to occur more in the first quarter than the rest of the year.

To answer your general question, I that think we were trying to- we set an expectation depending on how successful the automotive line is in particular, we could see some pressure, when you look at recreation and marine, those markets, those product lines, we haven't seen substantial price reductions on them other than your kind of natural change over when we take old products and add in new products.

But that's been ongoing for years with Garmin.

Okay.

And then on the cell phone side, any further discussion regarding some kind of application, navigation applications in the cell phone market?

We don’t have anything that we can share at this time.

Okay.

Our next question comes from J.B.

Groh of D.A. Davidson.

Question on aviation, how much of that Q1 strength was TAWS upgrades and stuff like that?

Well we are very thankful that we have the TAWS upgrade in the quarter but I wouldn't say that was the majority of the increase.

I think with TAWS and the continued G-1000 shipments to the OEM we saw—even our existing businesses the 430, 530 kind of our panel map products retrofit continue to be strong in the overall handheld market but TAWS was certainly incremental.

TAWS and the GDL 69-- the XM satellite with the receiver are contributed to our growth [indiscernible]

Okay and then just lastly to clarify this one more time, the option expense and the restructuring kind of wash out, correct?

Correct.

And the—in addition to the SG&A on the marketing with Yowmen [ph]?

Correct.

Okay.

Thanks a lot.

Our next question comes from Bill Benton with William Blair.

Just a quick follow up.

When you talk about the auto side not growing as fast, I'm presuming you're talking revenue and not units, is it safe to assume the auto units maintain a relatively rapid growth rate in the first quarter?

It's safe to assume that.

Okay.

And then when you talk about the gross margin pressure potentially from a faster automotive, are you really referring more to the Mopar ramping than necessarily maybe your existing core automotive margin?

I can't put the [indiscernible] Mopar and the [indiscernible] products for our promotional products.

Okay.

And so both of those would be impactful in terms of the margin?

Yes.

We are—that is why we are successful.

Okay.

At the expense of higher revenue rates.

Okay, thanks guys.

Next question comes from John Bucher of Harris Nesbitt.

Question on the marine market, do you think there might be an upside related to insurance related replacement from the last years hurricanes?

Well it's difficult to quantify how much that is, I would just say that so far when we look at the current quarter, we're expecting a nice growth rate from our marine business.

But how much of that is due to the insurance market, it's hard to say.

And your full-year guidance, can you say what minimum level of consumer segment revenue growth is assumed in your full-year revenue guidance?

It's much like we said at the beginning of the year; we're expecting aviation to outpace the consumer growth rate for a total of 20 so, aviation is above that and consumer is slightly below that, in the high teens probably is what we’re looking at right now.

Hopefully after we get to the second quarter we can have a better visibility on the back half of the year and we will update at that time.

And can you say whether the G-1000 unit shipments exceeded 150 in the first quarter?

I don't think they exceeded 150; it may have been close to that John but probably didn't exceed.

Okay and then final question on the component pricing trends, I'm guessing with the ramp up in raw materials in addition to wanting to be ready for—to be able to support the new products, you must also be finding fairly favorable component pricing out there, would that be correct?

Actually we haven't really seen a whole lot of movement on the price—component pricing.

Keep in mind that many of our components are purchased from Asian suppliers and with the devaluation of the US dollar there's some pressure there on the upside, but in general it's been fairly flat.

Okay and the real final question, last quarter you said that portable automotive was a bigger contributor than marine and boating, was that the case in the fist quarter also?

Q1 of '05 versus Q1 of '04?

I just want to understand the question.

Last quarter, the last quarter of '04, you said that portable automotive was a bigger revenue contributor than the marine and boating market and I am wondering whether the same situation existed in the first quarter.

No.

No it did not.

I think we saw growth in the portable automotive than –but not to the same extent as marine and recreation.

Would some of that have been automotive channel inventory or do you think it was more a case of the overhang for the pending C-series products?

It is the overhang.

Yes.

The overhang of the C-series.

Thank you.

Our next question comes from Mike Rappaport of Rice Volker.

One follow up question, do you anticipate the gross margin will be roughly flat sequentially going into June?

I think—I think that all I can comment on there is that we gave a 52-54% range in the total company for the year and we really don't want to comment on second quarter margins other than what we said earlier.

Yeah, 52-54 is the [indiscernible] [market] that we can predict at this time.

But again, the biggest variable would be how successful our automotive products will be.

Right.

If we are very successful [indiscernible] the number can come down.

Right.

But it's—presumably you have some greater visibility into June than you do into—

[indiscernible] We feel that by the end of the second quarter we will have much better visibility in terms of our total year of our revenue and gross margin expectations.

Right.

So you can't give a number now that would be for June?

No.

[indiscernible]

Okay.

Thank you.

Our next question comes from Rich Valera from Needham & Company.

On the C-series, can you comment if you see the gross margin for that, once it gets up and running, sort of in line with the current consumer gross margins or would that be below consumer—current consumer gross margins?

I think the margin of the series—in much of the C-series kind of varies a lot because of, first of all our margin in the US differs quite much from Europe and other markets.

Okay.

But on average you think it will be –if you blended it all together, close to the corporate—close to the consumer average or below?

I think it really depends on how successful we are in each of the markets, US versus Europe.

At this point it could –it's [indiscernible] that range but I hesitate to say it's going absolutely be 48% in the second quarter.

Sure, sure.

Just in terms of the competitive landscaping in the auto area, Tom Tom has obviously made some product introductions that look quite competitive with the C-series.

But, just bigger picture, can you talk about the competitive dynamics with Tom Tom in Europe over the past year or two where it seems like they've had a bigger presence and sort of how, if there's been group market share shift and sort of how you see that playing out as they make a bigger push into the US market?

Well, we haven't heard about Tom Tom's effect in the European market, we believe [indiscernible] and some other [indiscernible] of them and we're competitive.

So far we haven't heard about Tom Tom's products coming to the US market but we don't—we don't have as much [indiscernible]

But in terms of the competitive situation in Europe, can you say if it looks like they've sort of taken meaningful share there in the last year or two or has that been a fairly stable situation?

Yes.

They have been quite successful in Europe in this past year.

Okay.

And on the aviation side, have you actually shipped any units for the Cessna 172 yet?

Yes, a few we have.

So you took some revenue for those in this current quarter?

Yes, I think we have.

So you took some revenue for those in this turning quarter.

Yes.

Okay and one final one.

In terms of transition costs, I just wanted to be clear.

I think you answered to a previous question, Kevin, you mentioned that the discounting of the current INR stress pilot are part of the transition cost that you mentioned going back to the overall transition costs.

That is correct.

Great.

And I know that this has been asked several times, I just want to be clear.

You have the 5 cent stock option expensing and sort of offsetting that you have a $4 million corporate restructuring plus the 3 million sort of Yao Ming of advertising expenditures, is that—

Yes.

We have all of those three components banked into our-- [inaudible]

Got you.

Okay.

You have the $3 million is more in target for the second quarter and we [inaudible].

Okay.

Fair enough.

Thank you.

Our next question comes from Adam Wright of Kymikos Associates.

My main question here again you communicated that [inaudible] inventory and that the last quarter, the [inaudible] mentioned that you were all ramping for the marine and spring season.

But then during the conference call, you mentioned that there was a shortage of critical components that were coming to end of the usual hoarding of critical components in raw materials line of the inventory amount which falls to “reasonable levels” now that the shortages were coming to an end.

But this quarter you say again that you’re ramping towards the marine and spring season and you mentioned that raw materials are up a lot.

Can I just kind of get an idea of what in the plan has changed?

It just doesn’t add up in my opinion.

I am going to say that we are.

Last year we had our [inaudible] in inventory [inaudible].

So this year [inaudible] in terms of finished goods and critical parts, we are changing [inaudible] for long term [inaudible] high level finished goods and critical parts. [Inaudible] and also [inaudible] has more product to May to June or July in the increased [inaudible].

So we want to prepare for to me the demands.

I see what you’re saying, but in the last quarter when you all mentioned that raw materials would fall to reasonable levels, now that the shortage has come in an end, you already knew, of course, about the problems last year and would have known what you needed to do in the current quarter.

I think that we are right on the end of April.

The fairy season is coming up and [inaudible] getting all those critical parts will become [inaudible] to meet the demand in the next quarter.

I see.

You mentioned that the inventory would fall as green season comes to an end.

Are you all [inaudible] when does green season end, what quarter or what month?

Probably around July [inaudible].

July.

Okay thank you.

The next question comes from Cory Gosman [ph] of ML Capital.

[Inaudible question]

Yes, they have.

With higher coupling growth rate and still a pretty health [inaudible].

So if it’s not successful, will gross margins go up or stay where they are?

It’s already moderately successful that we’ll probably stay [inaudible] in our projection.

You know if it’s widely successful then we can see the impact on the market.

Good luck with that.

Thank you.

Our next question comes from Thomas Capola [ph].

Through factors consumer statement real quick, Kevin.

It looks like you had 11% growth in your consumer business with that slight deceleration and you said you see just like natural declining consumer margins.

Does that mean you except kind of the same rate in declining margins in the coming quarters or--?

Can you extrapolate a little bit on that?

Well yes, I think what we were trying to communicate is that we’re still [inaudible] for the full year at 52 to 54% range.

Again as Min just mentioned if we’re widely successful in our automotive, then we could see some natural compression there.

But we’re not willing to quantify how much at this point because there’s so many variables in that strategy.

Okay and you had a lot of great product rollouts in the first quarter.

Do you anticipate the same kind of aggressively consumer product rollout that you think will maybe get consumer growing faster than 1% in the next couple of quarters?

Well without a doubt we expect second quarter consumer growth to be about 11%.

We’ve said that and we’re expecting it to be a much healthier growth [inaudible] we specifically see.

And again, we entered these 16 products in the first quarter; we’ll have a sizable amount in the second quarter, many of which will be consumer products.

So, I think the general expectation here is top line consumer growth is going to accelerate in the second quarter and beyond.

Accelerate faster than 11%, like 15% or you’d rather not—

We’re not going to lay out a number, but it’s going to be-- Again, this is the first quarter in a while where we haven’t seen it above 20%.

I would expect to get up to that level again.

Great okay.

Great thank a lot.

I appreciate it.

The next question comes from Amy [inaudible]

Thank you for taking my call.

I’m very new to this company and industry, so please bear with my questions.

Your annual report indicates that Garmin has formed a relationship with BMW and Honda.

Has Garmin the [inaudible] line product for those automobiles already?

Amy, we’ve been designing products through BMW on the motorcycle side for quite some time now.

The Honda relationship that was announced in Japan is quite new and I’d believe that we’ve supplied anything yet, but we anticipate doing so this year.

Okay and then the automotive part what percent of this overall [inaudible] automotive product line contributed to the overall?

Well [inaudible] the breakdown revenue contributions below the consumer segments, we just made comments that the automotive historically has been the fastest growing.

I think we expect it to be that way this year as well.

But we don’t quantify how much the total consumer segment is automotive versus any of the other product lines.

Okay and then did I hear you right that starting from the second quarter Garmin is going to supply Mopar?

Yes.

We have this deal where we will be selling a dealer installed option called the Navis [ph] within Mopar starting within the second quarter.

And currently GM and Prague [ph] they are experiencing very difficult times [inaudible] and other Japanese automakers, and there’s a general weakness in the automotive industry.

So you see a lot of elevations on the automotive products line for your overall revenue?

Well, keep in mind Garmin contributes as a portable option and then a dealer installed option.

We don’t have any OEM deals at this point, but we do [inaudible] that the automotive product line for navigation products is poised to accelerate quite a bit in the next couple of years.

So, there’s a difference between what GM’s doing on the OEM business versus what we’re seeing on a portable or a dealer installed option for navigation products.

Okay.

Well that answers all my questions.

Great.

Thank you very much.

Any closing remarks.

I would just like to thank you for participating.

We’ll talk to you at the next conference call.

Thank you.

This concludes today’s conference call.

You may now disconnect.