台灣國際航電 (GRMN) 2005 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Garmin Third Quarter Earnings Call. (Operator Instructions).

Ms. Polly Schwerdt, you may begin your conference.

Good morning.

We would like to welcome you to Garmin Limited's 2005 third quarter earnings call.

Please note that a copy of the press release concerning this earnings call is available at Garmin's Investors 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 Web cast will be available until November 26, 2005.

A telephone recording will be available for 24 hours after this 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 product 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. Kao.

Good morning.

From the press release issued this morning, you can see that we again experienced another record quarter.

And there were many significant accomplishments since our last our earnings report.

We recorded 26% growth in our aviation business and 31% growth in our consumer business.

Sales remained strong in all regions led by the European region's 54% increase in revenue.

And more than 700,000 Garmin products were shipped in the third quarter of 2005, a 31% increase over the same quarter of last year.

We shipped our 13th million unit during the quarter, a significant benchmark of the strength of Garmin brand.

49 new products were introduced year to date.

The response to our portable navigation devices has been especially strong, resulting in a triple-digit increase in the sales of our automotive product line.

The introduction of C-Series, I-series StreetPilot 2720 and M3 not only provides industry-leading features such as real-time traffic and text-to-speech function with street names, but also offered the consumer significant choices on-price form vector functions and capabilities.

This large product portfolio allowed us to reach a broad spectrum of retail channels.

For instance, the very popular C-Series is offered by most mainstream electronic retailers including Circuit City, Best Buy, Office Depot, CompUSA, Staples, Fry's, as well as many outdoor retailers such as the Bass Pro, Cabela and REI.

The low-cost and extremely portable I-series is offered by Target, Circuit City, Wal-Mart, REI and West Marine.

The high-end full-feature StreetPilot 2720 is offered by Best Buy, Circuit City, CompUSA and Car Toys.

The nuvi Personal Travel Assistant that was introduced very recently combines navigation, language translator, Travel Guide, MP3, Audio Book, and other features, all in one very elegant and easy-to-use device.

It's the latest Garmin innovation which creates a new category for the mobile market.

Our market position in automotive and mobile space has also been strengthened by the many partnerships that were made during the quarter, which include our partnership with Dollar Thrifty, which provides car rental, with a very popular and easy-to-use C-330.

Our partnership with Sprint Nextel to offer Garmin mobile, our entry into the wireless navigation arena, which provides voice, turn-by-turn navigation on handsets, was a true monumental(ph) function, which was an industry-leading accomplishment.

In our Tier 1 OEM relationship with Honda, which provides a company-designed GPS navigation module on the 2006 Honda Gold Wing motorcycle.

In the aviation market, we completed our first autopilot and the radar certifications, which are very significant accomplishments in making Garmin the only general aviation provider that can offer all essential cockpit technologies in a single, highly integrated system.

And finally, as a part of our continued effort to expand our XM offerings, we introduced the GPSMAP 396 and 376, which offers pilots and mariners real-time weather information on portable devices.

These products are the industry's first and have been received extremely well in their respective markets.

As a part of our growth strategy, we acquired MotionBased Technologies.

This provides exciting web-centric function through Garmin's current and future customers, so a community-based portal.

This acquisition enhances Garmin's location-based technology portfolio and we expect that it will contribute to our mobile business in the future.

On human resources, we added over 60 new associates company-wide, including 21 new engineer associates, bringing our research and development group to over 650 and to approximately 2,800 employees worldwide.

With regards to facilities, I'm pleased to report that our manufacturing facilities have been running well and successfully delivered the many new products that were introduced year-to-date.

And we expect to acquire a new facility in Taiwan in the next few months in order to meet the anticipated increase in demand in 2006 and beyond.

Additionally, as a part of our marketing initiative, we are planning to expand our European facility.

With regard to the future outlook, as we look forward we anticipate continued success for the remainder of the year.

Consumer awareness and interest in GPS continues to grow, which is clearly reflected in our financial results.

Core aviation and portable automotive product lines currently leads Garmin's growth.

We oversee growth opportunities in marine, outdoor and fitness product lines as we continue to develop new products and expand each product categories.

Additionally, we continue to explore additional, better core relationships and automotive and motorcycle OEM opportunities.

The introduction of Garmin Mobile with Sprint Nextel also set a stage for Garmin to expand its technologies into the wireless and aviation market.

The demand for portable navigation devices continues to show a significant expansion, particularly in Europe.

And we believe we are positioned to take advantage of this development.

In order to capitalize on these opportunities, our marketing team has committed to a significant holiday season advertising campaign around the globe.

We will be investing millions of dollars to promote the Garmin brand through expensive TV, radio and print ads.

In the aviation market, we continue to be pleased with the strong growth displayed by this business segment.

Over 1,000 aero products were delivered with Garmin's revolutionary G1000 into a cockpit and the number will continue to increase as certification on additional brands are introduced.

So in summary, we are pleased with our results.

In light of our strong third quarter results, we have updated our financial guidance to include higher revenue and EPS for fiscal 2005.

With that, I'd like to turn the call over to Kevin to discuss our financial results and the updated fiscal year 2005 guidance.

Thanks Min and good morning, everyone.

I'd like to quickly walk through the third quarter financial results and also update everyone on the year-to-date results and then end, as Min just mentioned on our updated guidance that we just came out with this morning in the press release.

So to first talk about the third quarter, Garmin's third quarter revenue reported this morning was 251.3 million, up 30% from a year ago.

Our North American revenue came in at $163.0 million, up 21% from 134.4 million.

Our European revenue was $75.6 million, up 54% from $49.0 million.

And our Asian revenue increased 25% to $12.7 million.

The gross margin during the quarter decreased 620 basis points to 51.5% from 57.7% a year ago and down 140 basis points sequentially from the second quarter of this year.

But the 51.5% was in line with our earlier expectations.

Operating margin was 33.9% compared to 39.8% in the third quarter of '04.

That was up 20 basis points sequentially from the second quarter of 2005.

We reported net income of 102.5 million.

Excluding the foreign currency gain that we mentioned in the press release, our net income was 72.9 million.

We also reported earnings per share for the quarter of $0.94.

This was $0.67 per share excluding the foreign currency gain.

So earnings per share for the third quarter increased 52% from the year-ago quarter.

Excluding foreign currency the increase was 16%.

Our total units sold for the quarter increased 31% to 708,000 units.

This compares to 540,000 units in the third quarter of '04.

As I said, we reported gross margins of 51.5% compared to 57.7% a year ago.

The gross margin results are within the range of our expectations for the quarter and for the year.

You may want to be reminded that in the third quarter of '04, those results were abnormally high due to extremely high favorable product mix, favorable raw material costs a year ago.

We had very low product transition cost in that quarter and we'd also just begun shipping the G1000 for the first quarter a year ago.

Looking at the margins by segment, our consumer gross margin during Q3 this year was 46.7% and our aviation gross margins during the third quarter came in at 66.5%.

We continue to experience strong acceptance of our new products.

Approximately 44% of our third quarter sales were generated from products that have been introduced within the last 12 months.

Garmin achieved an operating profit during the quarter of $85.2 million, which is an operating margin of 33.9%.

This is a decrease of 590 basis points compared to the third quarter of '04.

During Q3, SG&A as a percentage of sales decreased 70 basis points to 9.6% of sales from 10.3% of sales in the year-ago quarter.

This is a 22% increase of dollars over Q3 of '04 and it was driven primarily by increased advertising, increased finance and IT expenses, increased call center expenses and other administrative expenses during the period.

Our R&D during Q3 increased 40 basis points to 8% of sales from 7.6% of sales during the third quarter of '04.

This is a 37% increase over the prior period, and this increase came primarily due to the hiring of our new engineering staff and an increase in engineering program costs.

We did hire 21 new engineers during the third although that's Q2 of '05 and actually hired just under 100 engineers and engineering associates plus a year ago, September, 2004.

We now employ a total of 662 engineers and engineering associates around the world.

Overall, our total operating expenses as a percentage of sales decreased 20 basis points to 17.6% from 17.8% in the prior year period.

I'm sure you saw that we experienced a $36.4 million foreign currency gain during the quarter as the US dollar strengthened compared to our Taiwan dollar.

From 31.36 at the end of June to 33.19 at the end of September, this was nearly a 6% change in foreign currency.

The majority of our Company's consolidated foreign currency translation gains or losses results from the translations into new Taiwan dollars at the end of each reporting 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 foreign subsidiary in a subsidiary is New Taiwan dollar.

To remind everyone there is a minimal cash impact from this foreign currency translation and we expect this Taiwan subsidiary will continue to hold the majority of its cash in US dollars.

We also reported interest income during the third quarter of a 4.7 million compared to 2.4 million a year ago.

We're currently earning approximately 4.2% pre-tax return on our marketable securities and approximately 2.9% of our total cash balances on a consolidated basis.

The effective tax rate during the third quarter came in at 18.7% close to our earlier guidance of 19.4 and about 130 basis points below our third quarter of '04 range of 20.0%.

We expect that our effective tax rate for 2005 will remain at the year-to-date rate of approximately 19.1%.

Looking at the segments, the consumer revenue during the third quarter was $190.7 million, and represents a 31% increase over third quarter of '04.

Our consumer segment was during the period was 76% of our total revenues and we saw growth across both recreation and automotive product lines, but essentially within our automotive product line where we experienced triple-digit growth during the quarter.

Our consumer gross margin as I said decreased to 46.7% of the quarter from 55.9 a year ago.

This was strongly influenced by the product mix within the segment and the automotive product line became a much larger percentage of our overall consumer segment.

In the future, it's our goal to take advantage of the automotive growth opportunity by offering products at a very attractive price in order to drive both revenue and EPS growth.

If we continue to be successful with this automotive strategy, we can see a more significant change in our margin.

Our consumer operating margins decreased 9.2 percentage points down to 30.9% from 40.1% a year ago.

This was driven by the reduced gross margin that I just spoke about and increased R&D expenses, partially offset by lower SG&A expenses as a percentage of sales.

Our aviation revenue during the quarter increased 26% to $60.6 million compared to $48.1 million in Q3 of '04.

Our aviation business therefore was 24% of the total company.

The revenue increase within the aviation segment is due to continued shipments of the G1000 cockpit, our other panel mount products and strong shipments of our portable aviation products such as the recently introduced GPSMAP 396 product.

Our aviation gross margins increased to 66.5% from 63.1% a year ago primarily due to the favorable product mix a year ago in this segment.

And our operating margins within the aviation segment were 43.2%.

This is an increase of 4.1 percentage points compared to 39.1% in Q3 of '04.

So the overall operating margin within aviation increases due to increased gross margins, reduced SG&A and R&D expenses as a percentage of sales.

We did experience strong unit growth within both the consumer and aviation segments during the period.

Looking next at the balance sheet, our cash and investments at the end of the quarter increased up to $702.3 million.

Marketable securities make up $369.7 million of this total cash position.

Our accounts receivable balance was $151.8 million at the end of Q3 and represents an increase of $41.7million from $110.1 million at the end of 2004.

As we saw in the second quarter, our shipment linearity during the third quarter was back-end loaded into September, which caused higher receivable balances in the quarter.

Our days sales outstanding as they are in 60 days at the end of the third quarter which compares to 44 days a year ago.

We also have seen strong cash flow in October as we have now collected a significant amount of the September sales during the early part of Q4.

Our inventory increased to 173.2 million in Q3 '05 comparing to 163 million at the end of the Q2 of 2005.

As expected, our inventory days supplies metric remains essentially flat with the second quarter this year at 121 days.

We experienced the following inventory changes during the quarter.

Raw materials decreased 2.8 million to 54.1 million and represents about 35 days of inventory.

Our work in process and assemblies decreased 2.2 million to 32.2 and represents 22 days of inventory.

Our finished goods increased 17.0 million to 98.8 million and this represents 64 days of inventory.

Our overall inventory reserves decreased down to $11.8 million during the quarter.

We will continue to focus on supply chain management during the remainder of 2005 and into 2006.

On cash flow for the business are cash flow from operations was $85.9 million during the third quarter of '05.

Free cash flow generated was $81.2 million.

And again, we define free cash flow as operating cash less capital expenditures.

Our cash flow from inventing during Q3 was $40.9 million use of cash.

Cash flow from financing was 12.9 million use of cash.

And overall, our CapEx for the quarter was $4.7 million.

Looking next at our year-to-date financial results, the year-to-date revenue now stands at 708.5 million at 31% growth over 2004.

Our year-to-date gross margins as we discussed in the press release this morning has come in at 52.6%.

Our operating income year-to-date is 240 million and net income of 224.1.

Our GAAP diluted EPS is now $2.05, which compares to 1.45 in '04.

This 41% increase in EPS includes a 23.8 million FX gain in a year compared to $0.5 million gain during the '04.

So earnings per share results excluding the foreign currency stand at $1.88 per share, again, a 31% increase compared to the prior year.

Breaking down our revenue on a year-to-date by geography, our North American revenue was 449.7 million, a 22% increase.

Europe year-to-date is now up 50% at 223.3 million.

And our Asian revenue has seen a 42% increase up to $35.5 million.

The Consumer segment -- consumer revenue is 538.4 million year-to-date, a 29% growth rate over 2004 and makes up 76% of our business.

The aviation revenue is now $170.1 million through the third quarter of '05, a 37% increase when compared to year-to-date '04.

And overall, both our consumer and aviation units combined, we've shipped just under 2 million units at 1,999,000, a 26% increase from 1,578,000 units at year-to-date '04.

Our year-to-date operating profit is 240 million or 33.9% of sales.

SG&A increased as a percentage of sales to 11% from 10.3% a year ago.

Our SG&A dollars have increased 39% compared to 2004.

Excluding the restructuring costs and legal settlements that we discussed in the second quarter, on a year-to-date basis, SG&A has now increased 31%.

Our R&D has decreased as a percentage of sales up to 7.7% from 8.1% in 2004.

The R&D dollar investment has decreased 26% compared to a year ago.

Going forward, we expect to see higher advertising costs, especially in the fourth quarter as a result of our strategic plan to promote the Garmin brand in the consumer market, both in the US and increasingly in Europe.

At Garmin Limited, we'll pay $0.50 per share dividend for all shareholders of record as of December 1, 2005.

The payment will be made on December 15, 2005 and it will require $54 million use of cash.

Under our share repurchase plan Garmin during the quarter, we repurchased 352,000 shares for a total use of cash of $14.7 million.

The year-to-date, during 2005 we've now repurchased 638,000 shares for our total use of cash of $26.7 million.

There now remain $2.3 million shares that are available to purchase under our 3 million share repurchase plan.

And finally, I'd like to give little more detail on our updated fiscal year 2005 guidance.

As you saw though, we have now moved from representing our numbers from million into billions and we are expressing that our full-year guidance will be 1.0 billion to 1.02 billion for the full year, which is a 31% to 34% growth rate.

Our gross margins for the year should come in at 51% to 52%.

Operating margins, 32% to 33%.

As I said earlier, our effective tax rate for the year should be 19.1%.

Therefore, our net income range will be between $276 and $282 million excluding any foreign currency.

And our earnings per share expectation is now $2.53 to $2.58, which is a 22% to 25 % bottom line growth.

This assumes an outstanding diluted share count of 109.2 million and, overall, our CapEx expectation for the full year sits around $30 million.

So that's our update on financials.

I would welcome any questions.

We have a Q&A line open, so feel free to join in.

(Operator Instructions).

Your first question comes from the line of Benjamin Swinburne with Morgan Stanley.

Hey.

Good morning.

It's Ben Swinburne.

How you guys doing?

Hi Ben.

Question on segment margins going forward Kevin.

You've got some very impressive top line in the aviation segment, gross margins seemed to stabilize nicely.

I'm just wondering on the OpEx side it seems that you should be continuing to show going forward some nice operating leverage in that segment.

Can you sort of comment are there any big projects like on the R&D side instead of the size of the G1000 that might bring EBIT margins back down again?

Or should we assume that you will show as long as the top line stays sort of at a similar growth level show some operating leverage on the EBIT line for aviation?

Are you referring specifically consumers the first?

Is that what you're asking?

No.

Just on the -- first of the aviation side.

Okay.

It's about --

Assuming -- go ahead.

Sorry.

I was just going to say on the aviation side, the operating margins they came in at 42%, a little over 43%, we would expect to continue to see operating margins in that level.

But on the consumer segment, as we've been communicating over the past several quarters, we are expecting just due to the product mix that our gross margins will be coming down.

And as Min and I both mentioned, we're anticipating in the short-term in this holiday season investing millions of dollars on an advertising campaign which should we hope push sales and overall demand.

So those are some of the big projects I guess that were we're on the mid -- in the middle of.

So you don't see aviation EBIT margins actually getting better despite 20% plus sort of top line?

43% not good enough, huh?

No.

It's great.

I just -- I just wonder any -- you have -- you look at your EBITA margin in Aviation early '04 you down in the high 20's.

I think, we're fairly stable in terms of our overall Aviation segment right now.

So I would not guide to higher operating margin at this point.

And then, just following up on your point on consumer, sort of looking within the automotive segment, is there a material difference in margins as you move up and down the price curve?

In other words, is it the street pilot the higher 2610 stuff higher margins then the more recent low ASP price products?

Yes.

I think, again, just to reiterate what we've said in the past, absolutely there's a difference, and we have quite a bit of variability within the different price points.

If you look a year ago, primarily what we were selling in our automotive product line, particularly was the 2620 products, which has -- we didn't -- we do not give product line margins, but definitely were higher --

Yes.

-- than our overall consumer business at that time.

And now, when you look at the mix of products with c-series and now, getting into i-series at much lower price points, so we definitely have lower margins, which is why we continue to talk about product mix within that segment.

Great.

Thanks a lot.

Thank you.

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

Good morning, guys.

Hi William.

Good day, William.

Just a question for you on the P&D side.

Obviously you've shown lot of growth year-over-year there.

Can you comment on whether you saw good sequential growth there on a dollar basis domestically and internationally?

I think it depends on which area we talk about.

I mean, for example, our European business at least -- we've talked about it consistently, generally goes on vacation in August.

Right.

Sequentially, we are is a -- we expect that to be down in -- from Q2 to Q3.

But -- just P&G in general we saw - so I guess it depends on which market we talk about.

In the US, we did see sequential growth in the P&D market.

Okay.

And then, Nastech (ph), I guess on their call talked about the automotive dealers in United -- and Europe selling these P&G's and some of the impact from that.

Have you -- can you maybe discuss what's happening domestically on that front as you think about maybe development and distribution on the automotive side for P&Ds?

You're talking about are we selling into more OEMs in the US?

No, I'm actually, specifically talking about selling your portable products within automotive -- automotive dealer channels?

Well, I think, it's still a fairly small component of our overall business.

Most of our P&D sales continue to be in the retail channel.

So it's a fairly small number.

Okay.

In Europe, are you selling quite a bit of these products in the automotive channel -- in the actual automotive dealers?

Yes.

We've -- in Europe, we've begun to sell the c-series to various automotive manufacturers such as Citron, Peugeot, Mazda, Saab just to name a few, so definitely we're starting to see more traction there in the automotive -- in the European market.

Okay.

And just a final question, on distribution channels, can you just maybe I think, Min walk through kind of a bunch of stuff in terms of the -- which products are stocked in which channels, how are the channels where you've historically been in reacting to the broader product line-up?

Are they stocking them all or are they switching things around a little bit in terms of a line-up?

Specifically, I'm talking about obviously P&Ds again?

Yes.

I think it depends where we always have transition of new products.

I think as we -- the c-series and the i-series in particular and hopefully the Newbi(ph) as we get into that.

Not every retailer carries every sku.

So we definitely have some transition as you go from an older technology into newer.

But again it just depends on the retailer.

Okay, great guys.

Thanks a lot.

Thanks.

Your next question comes from the line of John Bucher with Harris Nesbitt.

Thank you.

Can you say whether it's too early to tell whether you're starting to see channel replenishment demand on the i-series?

I'm sure you probably benefited quite a bit in the third quarter for the channel fill on that product.

Just curious as to how it's doing and if you can give us an update?

I think it's a little bit too early to tell.

We've only made it through the first four weeks of the quarter, but we do expect that we're are kind of seeing a ramp up of demand in the holiday season.

But it's a little bit early to give specific numbers.

Typically, all the way though the Thanksgiving weekend is pretty large business, but it's -- we are not there yet.

And just thought I'd update -- since your Analyst Day where you pretty much said you didn't think the component market was going to be a limiting factor at all in your sales this year - at least I think that's what you indicated.

Any changes there?

Is that -- could any component market trends either change your view of anticipated profitability or your ability to ship product from now through year-end?

Well, I don't think it's going to have much impact on profitability.

But we have started to see longer lead times and shortages on certain electronic components, such as flash memory, which we did talk about on the Analyst Day.

And we have taken a more defensive approach by maintaining higher levels of finished goods, which you saw in our results for the quarter.

The dynamics of this automotive market during the holiday season have created some component shortages that we're working hard to expedite material in order to meet the required demand of our products.

Okay.

Then shifting to the aviation business, can you say what number of G1000 design win opportunities are currently in play for new light turbine aircraft under development?

I'm not asking you to name the aircraft, but just to give us an idea of how many G1000 new design win opportunities are out there.

Yes, John, I think a rough number is about six aircrafts that are currently in process that are not currently on the market.

And that you're actively engaged with them one way, shape or form or other, you're responding to an RFP or something formal?

Yes, actually more than that, actually working on certification.

So you're working on certification for six more air crafts for G1000?

Yes, again, that's approximate just, what I can count off the top of my head, but there are --

And those are light turbine?

Not all of them, no.

Okay, thank you.

I'll give somebody else a try here.

Thanks.

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

Good morning.

Hey, Jeff.

Kevin, I don't know if it was intentional or not, but you seemed to exclude marine from talking about year-over-year growth in the consumer category.

Was that down year-over-year?

Yes, we saw marine come down two or three year-over-year basis.

Okay.

Keep it -- keep in mind, we had a couple of things hitting us in the marine business this quarter.

If you recall, a year ago, we introduced many new products to the market late in the second quarter which carried over into the third quarter of '04 and we had abnormally high numbers to compare on a year-over-year basis.

And then, secondly, we're planning on refreshing many of the new products within our marine product line, and we have been working with our dealers to try to have them sell through the remaining inventory and therefore I think that hurt us just in the short-term on the marine business.

Okay.

So, I think the first part of that was you kind of had a tougher comp year-over-year.

Right, definitely.

Okay, good.

I know it's not really your tradition to do this and I love tradition, but let's try to break it here

You tried to get us break it last quarter.

Could you give us some sense of what you're seeing for average ASP compression on auto?

It would be very helpful in helping us.

I won't give you an exact number, but I will tell you if you lookyear-over-year, Q3 '04 to Q3 '05, we're definitely down significantly on price point just because of what we are - I mentioned the 2620 a year ago and now we're selling c-series and i-series.

So, I'll just say, not name and number, but we've seen significant reduction on price ASP.

I think that shouldn't surprise anybody.

It is lower this year.

Yes, no.

That's a good thing.

You've been very competitive on that front.

Your guidance here implies if I look at the mid points of the range for Q4, 35% revenue growth and 9% EPS growth.

Is that discrepancy explained by, obviously you mentioned, advertising spending, but what about gross margins?

I think it definitely implies if you look at the 51% to 52% for the year, then we would expect margins to continue to come down a little bit primarily due to the consumer gross margins which is due to the product mix of what we expect to sell in the holiday season.

So, it's both that and increased ad spending for the quarter.

Okay.

The Edge product, did you really get much of a contribution from that product in Q3 or is it still ramping?

No.

We did not.

All right.

And then, could you give us a bit of an outlook into '06 for aviation on new product introductions and timing?

In particular, I'm curious about the LPV upgrade for the 430/530 radios.

When you think that will happen?

And when do you think that G1000 will be available for the retrofit market?

The last upgrade, Jeff, is planned for mid-year of 2006, and we're making great progress on that -- don't see any issues there.

For G1000 in retrofit, we really don't have anything to comment on at this time, so I wouldn't plan on that.

Okay, thanks.

Thank you.

Your next question comes from the line Mike Rappaport(ph).(inaudible)

Good morning.

Good morning.

Just congratulations on another great quarter and follow through this improvement on the industry side.

The question is you gave a $30 million CapEx number for '06, I know you were shopping for a building in Taiwan.

Does that include in the $30 million or you're going to buy that this year?

That's -- it's definitely -- it does not include that.

We have some additional kind of internal costs for equipment and manufacturing and that kind of thing, but the timing on that is difficult to predict.

As Min mentioned we're working on a deal, but it did not include the purchase of that facility.

Okay.

It could either be in the Q4 or Q1, we're not sure yet.

Okay.

And how big a number is that going to be?

It's roughly around US $10 million dollars, somewhere in that range.

So that's for the building?

I think that's for Taiwan.

For Europe it could be in the order of $30 million.

Right.

Okay.

And then finally, congratulations on reaching the $1 billion.

Thank you.

Thank you.

Yes, thank you.

We've got to do it now.

You got two or three more months.

Yes.

Your next question comes from the line of Noelle Swatland with Lehman Brothers.

Hey, guys.

Hey, good morning.

Good morning.

Good morning.

Just one or two things here.

You had commented a little bit on some reordering on the i-series platform.

I was just wondering, in general, how you're seeing overall ordering going into the holiday season so far in October?

And typically, when you start to see ordering patterns start to accelerate?

That's my first question.

Well, I think, as I said this earlier that we've only been through the first four weeks of the quarter.

And clearly with the expectations, we have reaching $1 billion, generating a sizable increase in Q4.

So, we are in good shape, right now.

We are hopeful that in the next four or eight weeks, we will come through some strong demand.

But, it's - again it is too early to tell on how sell through will be in the quarter.

It looks as though, in the third quarter sequentially, after a very strong sell-in in the second quarter, that your portable units were up about 20%, 25%, sequentially.

Can you comment, I know you've given, sort of, what auto did in terms of sales, in terms of sales year-over-year.

Can you comment on how you felt units did year-over-year?

Yes, we really don't want to - we don't comment on units at the automotive level other than, I think consumer, consumer units grew strong growth, pretty much tracking with sales.

But, we don't - we will not make public what the automotive in particular units did.

Okay.

And then over time, just in terms of the targeted mix on the i-series versus the c-series and StreetPilot?

Do you have any targeted framework?

Well, we expect that - we did not have a strong contribution in i-series, in Q3, we will expect that to get much - become much larger in Q4.

The c-series, in particular, was operated or contributed majority of the sales in the automotive product line in Q3.

We should see that change a little bit, as we get into the holiday season, and i-series becomes the larger percentage of that overall business.

Can you just comment, in terms of where we are, in terms of shipments, right now, in the I3 and I5, just regionally?

Where we are in the - what do you want, sales?

What you are looking for?

I mean obviously, the i-series is shipping into Europe, I'm just curious, how the i-5 was doing in the timeframe?

Yeah, I mean, as Min talked about it, it's in -- retailers like Circuit City and other retailers.

So we're shipping that unit well too.

Okay.

And then just a last question, just on SG&A this quarter, it seems that historically in your third quarter SG&A on average ranged between about 9.5% and 11% of sales.

I was just wondering this quarter sort of at the lower end of the range, what some of the factors may have been?

Well, I think, if you look at - we didn't do any TV advertising in the third quarter.

Lot of that tied in with the volume and we also talked about sequentially down from Q2 to Q3, which we experienced.

Those are two of the major factors.

But it's definitely within our expectations in our normal range.

You should see that ramp up in Q4, due to the advertising and other factors, we talked about.

Okay.

Great.

Thank you.

Thank you.

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

Thank you.

Hi Jim.

Hello everyone.

Hi

Kevin, could you provide a little more detail on the receivables?

Did the shipments play in quarter, was that from specific product?

And then I guess as a follow-up to that, how do you feel about inventory levels in the channel?

Well, I think, we were not surprised.

If you look at the typical Q3, as I mentioned with Europe, in particular, August is the slow month and September picks up as we start selling into the holiday seasons and everybody comes back from vacation.

So, I mentioned we collected a large amount of the receivables that came in September.

We've already collected in October that number is over $90million.

So, the cash flow continues to be strong.

I wouldn't be overly concerned about it.

But that's factor of receivables.

On inventory in the channel, I think, I mentioned a little bit about the marine.

We'd expect that the marine channel to be pretty clean as we get ready to sell new products that will come out in the next couple of quarters.

Overall, our automotive products are selling well.

So, I think, the channel inventory is pretty much as usual.

No large amounts of inventory just sitting there.

Okay.

How about a little more detail on triple-digit growth in automotive?

Well, we're not going to announce the exact percentage.

But -- I will just leave it that.

Is it closer to 100% than 150%?

I don't want to get any more specific at this point.

Okay.

Thanks.

On the advertising itself, can you speak to the year-to-year growth in advertising spend plans for Q4?

And when and where should we expect to see this advertising?

What's the mix between the U.S. and Europe, et cetera?

Well, on a year-over-year, we really - I don't have those numbers in front of me, but we would expect - I think, we invested, just about, $11 million in advertising in Q3.

I think that number should probably, close to double in the fourth quarter.

We're going to be doing over 600 TV spots, just in the US alone.

We're also doing TV advertisements in Europe, and we've mentioned, radio and print -- print, is kind of ongoing.

So there are substantial investments that we're in the middle of right now.

You'll start to see, as far as timing, we're right -- just two weeks in on the TV spots, in the US.

So, you'll start to see, hopefully, quite a bit more of that in the next six or eight weeks, as we pursue that broadbased common branding within the market.

Okay.

I guess, I will just have to get home and spend some more time watching TV.

There you go.

Thank you, guys.

Nice quarter.

Thanks.

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

Hi.

Hey guys, a question on the P&D Market.

As far as, the information and data points we've been hearing from other companies in this space, it seems like P&D unit sales have been up, sequentially in Q3, both in Europe and in U.S.

So could you just comment on, I mean, would that be consistent with you guys?

Are you sort of, provided a little color there, but just maybe you can give us some color your sequential movements in units and then revenue in that category?

Well, I mentioned a little bit earlier, we expected a sequential reduction in Europe, but we did see an increase in the U.S. market.

Overall, we saw sequentially little bit up, on automotive.

But, it depends again, on which geographic region we talk about.

For Europe, I guess, what you're saying about the vacation month of August in Europe is not really consistent with what we've heard from some other companies.

So, was there something else specific to you guys where you had a real strong channel fill in Q2 or was it the price reduction on --?

No, I think, if you look at any short term period, you're going to have some anomalies.

We definitely had a strong channel going to Q2, as c-series hit for the first time really strongly.

I mean, that was really the main factor from Q2 to Q3.

If you look at sequentially going forward, too, we expect that sequentially we're going to be significantly up in both US and Europe on the automotive and P&D as we go into the Q4 because we're going to generate some strong year-over-year growth rate too.

So it's more with the short-term looking Q3 only is a little bit -- I think it's misleading.

Okay.

And as far as the consumer segment and that order of magnitude on the different categories within that segment just could you place auto, outdoor and marine?

As far as growth sequentially?

Percentage of revenue.

Well, I think what we saw growth in our recreations business, Mark, we saw growth in automotive, obviously, I've mentioned marine was down, PDA was slightly down also.

Obviously, aviation was up.

But those were roughly the trends going on in the market.

What percentage of total revenue?

Aviation -- well automotive became a much larger percentage of our consumer business during the quarter.

Okay.

Triple-digit growth rates.

Okay.

I mean, was that in the 30% range, if there any?

No.

I can't quantify that.

I mean, I can, but we're not -- I'll not.

Okay.

And then just for Q4 how big should we expect Newbi as a percent of the auto business?

Well, we -- I think we're coming out with it in the middle of the quarter.

So it won't have a full quarter effect, but we hope it will be a very popular product just due to elegant thin and form factor and all the content that we put into the product.

But we don't have an absolute number that we're going to quote here in terms of auto.

I think anytime we introduce a product, it takes a few months to really ramp up and takeoff.

The c-series did that as we introduce in March, by June it was selling well, I think with the Newbi you'd expect similar type trends there as we introduce it in November and it starts selling into the holiday season and thereafter.

Okay, cool.

Thanks, guys.

Thank you.

Your next question comes from the line of Neal Miller with Fidelity Investments.

Hi all, I'm trying to multitask here with several conference calls.

But one of the question I had was how do you go about measuring the productivity of your engineer hires?

And you do it by division aviation versus commercial?

Or can you give any color as to what your expectation are out of these engineers and how do you measure their productivity?

Neil, one of the measures we use as a percentage of revenue that comes from our new products.

Right.

Kevin reported that was about 40% in this quarter, which has been historically very high.

Okay.

And you mentioned the qualification in aviation effort as well.

But I'm just kind of wondering whether and I know -- to stay ahead of competition, you want to innovate, and I'm just kind of wondering what other measures there might be other than new products as a percent of sales?

Well, getting products in on time in the market definitely.

And for Kevin, any updates on capitalization and freeing some of the money from Taiwan?

Not a lot of change there.

We didn't anticipate there would be change in the quarter.

But we - it's still our intention to long-term move some of the cash in our Taiwan subsidiary up to the parent company to give us more flexibility.

But I don't have any other new news to report.

Nothing changed during the quarter there.

Okay.

Thanks so much.

Thank you.

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

Good morning, guys.

Hi Ron.

Good morning.

Just about every conceivable question has been asked, so I'm going to ask some broader aerospace question.

Would you guys ever consider entering the Part 25 market for avionics?

I think certainly we want to be open to that and consider it.

Would it take a large -- I mean how big of an investment would it take for Garmin to do so in terms of additional engineers?

I mean, there is a lot more certification that has go on right?

We do feel that there is a lot more work to do to get to Part 25.

So it would require additional R&D and also SG&A expenses to be able to support that kind of a market.

Okay.

And then just maybe one more follow-up question on aviation.

What view - if Garmin has one, you guys must or you're willing to share with the market -- what view do you guys have on the very light jet market?

Well, clearly, there is a lot of excitement in very light jet market.

And a lot of entrants, I think the natural market dynamic will say that for lower prices more people are going to purchase those aircraft.

So it will be increased sales for the companies offering those aircraft.

Okay.

And then just one last follow-on back on the Part 25.

If Garmin were to do that, say, down the road at some point, what kind of response do you think you'd see from the incumbent?

Well, there are already systems on the markets from those incumbents.

So I can't speculate how they would respond if we moved further into that market.

Okay.

Fair enough.

Thanks.

Thanks.

You have a follow- up from line John Bucher with Harris Nesbitt.

Thank you.

Bill asked earlier about the dealer channel for the portable automotive products.

I was wondering if I could just ask specifically on the Mopar supply agreement, if you can just talk about the trends that you've seen over the last several months there.

Thank you.

Well, I think the delivery of the navig system that began in May.

We talked a little about it on the last earnings call region and we've been -- those units now, the navigs are available on five different auto models.

There are still additional platforms that are under development.

I think, although the initial results have been slow, we do expect to see an increase in the take rates as we continue throughout the rest of this year.

The 2005 model year and the dealers we hope continue to offer incentives to sell those vehicles.

That's where we stand today.

Kevin, can you say whether some of the increased -- sequential increase in the marketing and SG&A, and -- are you to devote any specific marketing that's tagged for that program?

I think it's both pretty broad based branding promotions is what we're -- expecting to see in fourth quarter, I would not characterize it is specific to that that opportunity.

Thank you.

Thank you.

Your next question comes from the line of JB Groh with DA Davidson.

Hi, guys.

I had a couple of question on aviation.

How would you characterize the growth there between new handheld model and G1000 as it -- is one dominating there in terms of the growth?

I think they both grew well, but we were very pleased with the protocol map -- GPSMAP 396 that I mentioned.

That was a very strong growth product for us in the quarter.

So the portable units were very strong during Q3.

And presumably the margin's going to be much better there?

Yes.

Good margin too.

And of the six potential new design wins, how do you break that out the between new OEMs and existing OEMs that you have a relationship with?

It's a mix, JB.

There are some totally new ones and there are some of our existing customers as well.

Okay.

And just as a kind of housekeeping issue, I mean how are you going to report these -- the $1.50 deal in the Sprint Nextel partnership?

Is that all going to go into consumer?

Yes, all of those are in consumer and into our -- well just to say consumer.

Yes.

Okay.

And then lastly, it looked -- you might have covered this - I hopped on a little late but incremental margin on consumer was real low, and I'm guessing there was -- what was the factor in Q3 last year that made the margin extraordinarily good?

Well, I mentioned it briefly during my formal presentation.

It's just that we had -- we had lower raw material costs as a mix of products with the 2620 in particular being very high.

I think if you look at -- and then even the earlier question on the pricing, if we're selling at a lower price point and our margins just are not going to be as strong in an automotive sense.

So those are some of the key factors when you just look on a year-over-year basis.

Yes, but the reason I'm asking is it looks like it's like 1.4%, so it's -- I mean it's obviously not just the Q3 of this year issue, would probably had something to do with what is going on last year in terms of a tough comparison.

Yes.

I guess those are my comments I made earlier.

Q3 of '04 was very high --

Okay.

-- and abnormally high things if you look at a mix of what we were selling in automotive last year versus this year, which is what drove the margin change.

Okay.

Fine.

Thanks a lot.

Thanks.

You have a follow-up question from the line of Jeff Evanson with Dougherty & Company.

Hi.

Could you please repeat the operating margins for aviation and consumer this quarter?

Just a second.

The consumer operating margin-let's see, I talked about -- margin decreased 9.2 percentage points, it went down to 30.9% for consumer.

And the aviation operating margin was 43.2%.

Okay.

And finally, on the I-Fi(ph) my sense is you're little backlogged there in getting that product out to stores.

Am I just see anecdotal evidence or are you seeing that as well?

We're seeing that as well.

Okay.

What percentage of saturation into the market do you expect in time for the holidays?

You think you can achieve all of that expected demand?

It's challenging.

Yes.

We're doing the best we can, yes.

As I talked a little bit about on the components with an increasing top line the way we're experiencing, and we're trying to meet the demand we can but it's challenging.

Okay.

Thank you.

Thanks.

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

Thank you and good afternoon guys.

Just with respect to the fourth quarter guidance, there is a pretty significant sequential decrease in operating margin implied there, I think around 250 basis points.

Could you talk about the proportion of that on the gross margin versus the OpEx side?

Do we expect a sort of 50/50 gross margin versus OpEx, or if there's any color you can add there?

Yes.

I think if you look at it, it is roughly 50/50 between increased SG&A costs which drive the operating expenses up as well as the gross margin decline due to the higher mix of automotive in the quarter which hits the gross margin line.

So it's both -- about 50/50.

Thank you.

And then with respect to your longer term advertising plans and marketing plans, do you have -- I don't think you do but I'll just ask this anyway -- do you have a targeted percentage of revenue for your sales and marketing?

It's going to be somewhere around 11% this year, it looks like.

Is that something we would look for that level going forward?

Do you expect much leverage on that line?

Is there any way we can sort of better try to think about how that line will trend longer-term?

I wouldn't expect a lot of leverage there.

The thing we're trying to do here is invest in advertising to really drive that top line while the demand is strong.

So a lot of it depends on how successful we are there.

But much like we did in the second quarter, we'll evaluate at the end of the fourth quarter to see how effective the advertising campaign was.

But I think we're committed to advertising and brand promotion while we're in the middle of this high micro C&D markets among others.

And one final question if I could.

On the consumer, there is an implied consumer gross margin obviously in your fourth quarter guidance which is obviously down sequentially.

But I'm wondering is there some factors that could cause that to rebound going forward?

I think you mentioned marine is very light near-term and that could come back stronger which would be favorable -- favorable impact on the mix.

But how could we think about consumer gross margin longer term?

If auto still drives the growth next year, does that keep going down or does marine come back and we see that stabilize?

I think you're thinking of that correctly.

A lot of it just depends on how successful -- with the business category and the recreational products which generally above our consumer average and how successful our new marine products that we talked about, how successful they are.

But even with that, the automotive is still such a large growth, I wouldn't expect that there'd be a lot of shifts there from a margin perspective.

But those are some of the - I think those are some of the factors on how successful the new marine products and some of the recreational business products will do.

Okay.

That's it for me.

Thank you.

Thanks.

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

Hi guys.

Just quick on the Newbi again, what has been the response thus far that you are getting from the channels?

And if you guys -- I know you guys had initially thought about an 899 price point there, have you guys changed any of your thinking there on pricing?

Yes.

The response to the product has been very strong and we have sizable back order especially in Europe.

But we just started shipping product this week, so we are anxious to see the actual sales growth.

Okay.

You say you're shipping product this week?

I didn't know.

Did Kevin say mid quarter?

Is there a difference domestic versus international?

I said November which is - we're effectively into our November month right now.

Okay.

So you guys are shipping on there.

Yes.

Okay.

And then the other question I had is I know you guys are focusing a lot of the advertising on the branding front, could you talk about any expected point of sale advertising support you expect within the channels for the holiday season at some of the major retailers?

And I don't know if that's being supported by you or some of the map makers.

But is there going to be some support that you're expecting in the channel?

Yes.

We're looking at doing a better job of putting in-store merchandising and promotional activities on the -- within the retail channel.

So it's that as well as the TV advertising.

Okay.

And it's kind of broad based within all the different channels you're expecting it?

That's the intention, yes.

Okay.

I'm clear, guys.

Thanks.

Your next question comes from the line of Adam Benjamin with Jeffries & Company.

Hi, thank you.

This is Betsy Zeidman(ph) calling in for Adam, and all our questions have been answered.

Thank you.

Okay.

Your next question comes from Matt Carns with Boropass (ph) Capital.

Good afternoon.

I was just wondering if you could comment on what your average price was for buyback this quarter?

Yes.

It's roughly around a $42 price.

Thank you very much.

Thank you.

Your next question comes from Charles Eliot with Goldman Sachs.

Hi.

I'm with Goldman's in London and I followed TomTom to declare my interest.

I wondered if you could say how you are finding competition with a TomTom?

Certainly, the retailers we check, say it check in your for saying that it's TomTom and Garmin and pretty much no one else.

Well, I think that's good news, because, clearly, there's a lot of competitors in Europe.

We do know they're fierce competitors and then we believe we have a product -- strong product lines and very broad product lines with unique features that TomTom doesn't offer.

Which do you think as your unique features that TomTom doesn't offer?

Our products offer text-to-speech capability, which actually says the street names and points of interest which is very beneficial for awareness while you're driving.

Our Newbi product also offers travel guide and language translator functions as well as MP3, which are capabilities that enhance that portable navigation device segment.

Good.

Thanks very much.

Thank you.

Your next question comes from the line of Cory Johnson(ph) with Canal (ph) Capital.

Hi, guys.

Thanks for taking my question.

What percentage of your products do you think if we're looking a year from now will include serve chips in them?

I'm trying to understand how much of a - commodotize is not the right word - but I want to find out how much of your product is going to be sort of standard under the hood?

Yes, Cory, we're evaluating, basically, the use of serve versus Garmin technology and in almost every product that we do.

We make a decision based on best trade-off of cost and performance.

I would say that definitely we're going to continue to use our own technology in several key product lines --

Such as?

Such as?

For example, marine, some of our recreational even some automotive products.

So again, it's going to be difficult to say exactly what the percentage is or what the products will be that have serve.

What have been your impressions so far?

The performance seems very good.

We're very pleased with it.

Great.

Dr. Kao, I see you've been selling about $8.5 million worth of stock this year.

Is there some change in your philology there?

Or why have you decided to sell now?

Well, it's under the (inaudible - accent) plan so I really cannot make a comment on the plan.

But I just want to comment that this is the first time I sell any shares of the company.

Yes.

Going back to the third question, if you are using more standardized components, is it possible that your CapEx next year won't go up, maybe you won't need to build that second factory if you're using more standard components?

No. because the chipset that we're using - the -- Garmin's proprietary chip set is not a high degree of - can generate a high degree of CapEx.

Most of our CapEx comes from the production lines.

And we're doing assembly and tests to both consumer products.

We need incremental manufacturing capability irregardless of which chipset we use.

CapEx stays -- is going to continue to rise.

Guys thanks so much, I appreciate it.

Your next question comes from the line of Peter Vogel(ph) with Boston(ph) Company.

Yes.

I'm wondering if you can provide some color on what you expect the mix to be in auto between the 2700 series of C and the I and the Newbi.

And then a separate question is, elaborate on the sales of P&D to the auto dealers in Europe.

I wasn't familiar with that.

I'm just sort of wondering, is that similar to selling to the rental car agencies in North America?

And maybe some color on whether you could see that sort of phenomenon happen in North America as well?

I'll start with the mix of product.

We will, I mean, I think, in the short term, the c-series and the i-series will be a strong seller in the holiday season.

Obviously, 2720 is an important product as well, Newbi just coming online.

So that will not be a major seller in short term but obviously that can change over time.

As far as the P&D auto dealers, do you want to talk about that?

Well, most of the P&D sold through the European auto channels are distributors to auto importers.

Although, Jeff you are truly(ph) -- effectively installs so we can --

Is that it, Peter?

Well - maybe -- I don't really understand the sale of the P&D into Europe auto.

Did Min say that that sold through distributors that are actually selling them to the auto dealers?

Car importers.

Car importers, yes.

And I would assume that's probably for, more lower end vehicles, or midrange to lower end vehicles calls because the high end would be serviced through the in vehicle navigation?

Typically that's the case.

And then a final question on new products.

I think if the numbers are right, you guys have 14 more products to introduce before year-end.

Can you just comment on whether any of these could impact holiday sales or whether this is sort of -- we should think about it more of the refresh for early next year?

I'm sort of thinking about marine you guys have kind of hinted that there is a new product ramp coming for marine.

Yes.

Peter, I think most of the products that we'll introduce in fourth quarter, the remaining product will not have a material impact versus what's already been introduced and in the channel.

Thank you.

Okay.

Well, thanks everyone for the questions.

And we look forward to maintaining the dialogue that we look forward to finishing out the year and we'll update everyone at the next conference call.

Thanks very much.

This concludes today's Garmin third quarter earnings call.

You may now disconnect.