台灣國際航電 (GRMN) 2006 Q1 法說會逐字稿

Good morning. My name is Miles, and I will be your conference operator today. At this time I would like to welcome everyone to the Garmin first-quarter earnings release. (OPERATOR INSTRUCTIONS). I will now turn the call over to Ms. Polly Schwerdt, Manager of Investor Relations. Ma'am, you may begin your conference.

Thank you. Good morning. We would like to welcome you to Garmin Limited's 2006 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 June 2, 2006. 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 31, 2005 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 and Treasurer; Cliff Pemble, Vice President of Engineering, and Andrew Etkind, General Counsel. The presenters for this morning's call are Dr. Min Kao, Cliff Pemble and Kevin Rauckman.

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

Good morning. From the press release, you can see that we had a very good quarter. Total revenue and EPS both exceeded our expectations. Revenue was up 67% year-over-year. We are especially pleased that it was up sequentially from this seasonally stronger first quarter. Over 920,000 units were shipped, up 58% from the same quarter of last year. This was our total to 15 million units shipped state, the highest number of any consumer GPS provider, which speaks for the strength of the Garmin brand. We delivered 34 new products in Q1, a very significant achievement. Over 50% of Q1 revenues were generated from products released within the last 12 months. Our worldwide employees increased to over 3200, and R&D continues to account for nearly a quarter of our total invoices. We experienced some price erosion in the P&G market, but it was partially offset by cost reductions and favorable product mix.

Channel sell-through has been very strong. Many retailers have actually increased their orders for our products. As a result of this increased demand, we have experienced some product shortages due to constraints of our production capacity in certain long lead components.

To meet the increasing demand, we have completed the purchase of our second Taiwan manufacturing facility with production to begin in a few weeks. Additionally we continue to expand our marketing sales infrastructure, including an addition of a new facility in the UK.

Just some highlights for each of our four business segments. Our automotive business was up 252%, driven by the strong sales of PND products introduced in 2005. According to an independent market research, Garmin has over 50% of the PND market in the U.S.

In Europe Garmin showed signs of gaining market share into low double digits, and we believe that we had and we are positioned for further improvement, given the anticipated delivery of new products in Q2. Our (indiscernible) fitness business was up 21%, driven by the strong sales of new products introduced in Q1, and we expect continued strength driven by these new products. We believe Garmin has established itself as a leader of GPS enabled devices in both the running and cyclist markets.

[Modern] markets was also up 21%, also driven by the strong sales of new products introduced in Q1, which include our new mapping and (indiscernible) technologies. We also expect continued strength from these new products during the current modern selling season. The recent business experienced a much smaller growth, only 4%, when compared to the unusually strong first quarter last year. However, we expect this segment to grow faster going forward, driven by the completion of current (indiscernible) certification and the new promotion program.

As we look forward, we are opportunistic about the remainder of 2006. The total market for PND products is projected to nearly double this year. With our strong product portfolio and an expanded advertising campaign, we feel that we are well positioned. We continue to invest heavily in R&D and expect to introduce a total of 60 new products in 2006. Based upon our first-quarter performance and the strong demand for our new products, we are increasing our outlook for the year.

And finally, in light of the strong financial performance and continued growth opportunities, our Board has approved a 2 for 1 stock split and the doubling of our annual dividend in 2006.

With that, I would like to turn the call over to Cliff Pemble, our Vice President of Engineering, who will present a product update. Kevin Rauckman will then discuss our financial results and update his 2006 guidance.

Thank you. I have been looking forward to briefing investors on our Q1 product highlights. Last quarter was one of the most exciting periods in Garmin's history.

To recap Min's comments, we delivered 34 new products to the market during Q1, which is a record achievement for our engineering team. This morning I am going to provide a few highlights of what has been accomplished.

At this (indiscernible) show, we expanded our PND product family with the introduction of the StreetPilot C-500 series and the addition of two new products to our nuvi line, the nuvi 310 and the nuvi 360. Our new StreetPilot C-500 series inherits all the strength of the popular C-300 series like a client's ease-of-use and dual speakers for rich sound quality. The C-500 series has many of the industry-leading features found in the nuvi such as travel guidance, audio book and MP3 players, a high sensitivity GPS and a brighter display.

But the big news is the addition of Bluetooth capability for hands-free calling. Our Bluetooth solution features high-quality audio, and our software is compatible with approximately 200 handsets, which is nearly three times more than competitive offerings. In addition, we have added a unique location enabled thief protection system called Garmin Lock, and we designed a line of innovative power adapters which integrate a real-time traffic receiver into the cable, making our traffic solution much cleaner than solutions offered by competitors.

For the nuvi we also added Bluetooth capability and the Garmin Lock Theft Protection System. The nuvi has experienced strong demand since its initial introduction last year. We anticipate that the addition of these features will make the nuvis an irresistible choice for customers looking for elegance, ease-of-use and expandable capability all in one package.

In addition to our PNDs, Garmin introduced exciting new solutions for smartphone users. Our Garmin Mobile 20 is one of the first of its kind to offer four-in-one utility for smartphones, a Bluetooth-enabled GPS and three speakerphone capabilities, turn by turn navigation, and an innovative mounting system for the vehicle. And Garmin Mobile 20 provides more than turn by turn navigation. It also offers real-time content powered by our Garmin online data servers such as real-time traffic, weather conditions, gas prices, a location-enabled discount finder and safety camera databases.

In the fitness market, we delivered our new Forerunner 205 and 305 products. These new devices offer a high sensitivity GPS receiver and exciting new software enhancements, all combined in a sleek watch-like form factor. We delivered our new Edge product lines designed exclusively for cyclists. The Edge has quickly become the must have device for cyclists around the world, as it is the only product to offer speed and distance monitoring with wireless heartrate and cadence sensor capability in an elegant yet robust package.

Our fitness products include Garmin Training Center Software, which allows users to manage their own workup data on a personal computer, and our entire line of fitness products is compatible with our MotionBased Web portal, which allows users to analyze, archive and share workout data with other MotionBased users around the world.

In the outdoor market, we expanded our offerings with our new x-Series products, our new GPS 60Cx and CSx at a high sensitivity GPS receiver for best performance went operating in dense foliage and other obscure signal conditions. Both the 60 x-Series and the eTrex x-Series feature a [Micro SP] memory card slot, which allows the user to expand the available memory for maps and user information, or they can choose to purchase one of many pre-program data cards offered by Garmin which contain detailed inland lakes and topographic information, as well as our popular BlueChart data for mariners.

In our Marine line, Garmin launched 15 new products during a coordinated rollout occurring March 25 with our Marine retail partners. This rollout was considered a success, and we see continued strength in our Marine product line moving into the latter part of this season.

In addition to the 15 new products delivered during the first quarter, we also introduced new products in our Marine portable and radar product lines. The GPSMAP 378 and 478 offer exciting new capabilities in our Marine portable product lineup. The GPSMAP 378 offers a preprogram map containing detailed inland lakes information combined with street level mapping information provided by [Nastech]. The GPSMAP 478 offers preprogrammed map containing detailed BlueCharts combined with Nastech map. Both of these products include an automotive kit which provides out of the box turn by turn navigation capability with voice prompts and can display real-time weather information using the optional GSM 30 XM data receiver.

In our radar product line, Garmin introduced two new products, the 2 kilowatt GMR 21 and the 4 kilowatt GMR 41. These new radars are housed in a smaller 24 inch dome with low vertical profile which increases flexibility in mounting. These radars also feature our narrow beam width antenna technology for better target resolution and digital display processing with ethernet connections, making it easy to add radar capability to the Garmin (indiscernible) network.

In the Aviation market, the GPSMAP 396 continues to be a strong seller. This product has a unique position in the market as the only portable navigator with real-time weather capability provided by XM. During Q1 we completed certification of the Columbia 400 with the G1000 integrated cockpit system. The Columbia 400 includes dual pinpoint 4 inch displays mounted in an instrument panel, which rivals the look of a premium luxury car.

In addition, it includes our new keyboard controller -- the GCU 476, and the aircraft also includes our GSP 700 flight control system. We continue to make progress in the development of our G1000 system for the very light jet market. The test of the Mustang program is nearing the final stages of flight test certification and is on track for completion in the second half of '06.

Recently Diamond Aircraft flew their new [dJet DLJ] for the very first time with good results. The Embraer's Phenom 100 and 300 project is well underway, and we recently completed a critical design review on the program.

Finally, we continue to work with Honda as they develop their proof of concept jet aircraft. The population of G1000 equipped aircraft continues to grow. During Q1 we delivered over 300 new systems to aircraft manufacturers, and the total population of G1000 equipped aircraft exceeds 1800 units. We continue to enjoy strong relationships with the industry's finest players. We are honored to be a key supplier to Cessna, Cirus Design, Columbia, Diamond, Embraer, Honda, Kodiak, New Piper, Raytheon and Tiger Aircraft. We are working hard to support these OEM customers in the exciting general aviation market.

With that, I would like to turn the call over to Kevin who will be giving the financial presentation.

Thanks, Cliff. It is a pleasure to be able to update you all on the financial results from the first quarter. As you can see, we have very strong financial performance, and I'm going to walk you through, first of all, a summary.

As you can see, our topline revenue growth was 67% with our EPS growth this quarter at 86%. We did see a $0.06 EPS impact due to a foreign currency loss of a little over 7 million, and overall our bottom line without the foreign currency impact was around 65%. So 67% topline and 65% bottom line without effects.

The gross margins during the quarter of 50.5 were better-than-expected due to price erosion, which was offset by reduced product costs and favorable product mix during the period. Looking at our operating margins, our operating margins came in at 31%, which are down from last year but better-than-expected. It is due to again the gross margin, unfavorable gross margin of about 310 basis points, increased SG&A of about 100 basis points, and favorable R&D expenses of 110 basis points.

The SG&A expense was higher-than-expected due to higher than planned advertising in both the U.S. and European markets. Part of this increase was also due to the volume and the fact that our revenue volume was higher than earlier anticipated. So, therefore, we had higher cooperative advertising spend during the quarter.

On units shipped, we shipped over 900,000 units across the business, and the average selling price in total was $350 per unit. This compares about 6% higher than Q1 of '05, which was $330 on an average selling price.

Let me next do the segment revenue. As we communicated earlier, Q1 is the first quarter where we are providing results for our new four segment business model. So we are in kind of a transitionary period in the type of information and the level of detail that we are providing. As you can see from this slide, we have experienced strong revenue growth across all segments other than the Aviation segment.

In fact, the automotive revenue -- automotive global revenue grew over 2.5 times compared to Q1 of '05 on the strength of our nuvi, c-Series and other PND products. With the exception of Aviation, we are on track within all segments to meet or exceed our 2006 revenue goals, which I will provide later on in my presentation.

The Aviation segment should increase its growth rate beginning in Q2 and continue for the remainder of the year. And as Min stated, sales of our products introduced within the last 12 months, which we view as a very important metric to our business, increased to 51% of our first-quarter revenue.

Looking next to the segment and geography on a percent basis, because of the stronger PND market during Q1, our automotive and mobile segment now represents 47% of our total business. You can see that is significantly up from 22% of the total part of our Garmin business a year ago.

Looking at the geography, Garmin Europe growth outpaced our North American market growth, and Europe now represents 32% of our total business, up from 26% during the first quarter of 2005.

Our North American revenue increased over 50%, while our European business increased over 100% during the first quarter. We also saw strong growth in our Asian markets, and the Asian sales grew 83% during the period. In fact, a point of note here, if you look at that revenue results of the 322 million, this represents the largest single quarter in our Company's history.

Let me next at the segment gross margin. This is without a doubt the first time you all have seen a breakdown to this level of detail. Our Q1 gross margins increased to 57% and 55% within our outdoor, fitness and our Marine segments respectively. The first-quarter gross margins decreased, however, to 62% and 42% within our automotive, mobile and Aviation segments respectively.

We did experience favorable product mix and improved product cost per unit, which were the main reasons that our overall first-quarter gross margins remained above the 50% level. For those still tracking at home, based on our old segments, the consumer gross margins during the period compared to the fourth quarter actually increased from 47.7% in Q4 up to 48.1% in Q1. This will be the last time we talk about the consumer margins in that regard.

Let me next at the operating margin performance. Our Q1 operating margins increased to 39% and 37% within our outdoor, fitness and Marine segments respectively. Q1 operating margins decreased, however, to he 24% and 35% within our automotive, mobile and Aviation segments respectively.

The first quarter total operating margins were down 300 basis points year-over-year due to the decline in gross margins and the increased advertising we spent. Garmin invested 18 million in advertising during the period, which is about $2 million higher-than-expected due to our increased revenue during Q1. With the exception of our automotive/mobile segment, we expect short-term margins to be relatively stable despite the possibility of quarter to quarter variability related to product mix and the timing of new product introductions.

We also expect that our automotive/mobile segment will experience declining operating margins due to this product mix and a continued transition towards mass-market levels. When we compare the consumer segments from our whole business model looking at operating margins in Q4 to Q1, we also saw an increase in operating margins going from 28.6% in Q4 up to 30.1% in Q1.

Looking next at our operating expenses, we saw R&D increase about $8 million year-over-year in absolute dollar terms, but this was down 110 basis points to 7.7% of sales. We added 37 people to our engineering team during the quarter, and now we employ nearly 750 engineers and engineering associates.

We also increased our advertising spending as I mentioned as a percentage of sales to 5.7% compared with 3.5% a year ago.

The other SG&A investment also declined 120 basis points to 6.0% of sales from 7.2% a year ago. This represents about a $5.6 million increase in other SG&A. But overall our operating expenses were flat as a percentage of sales at 19.5% during Q1.

Let me at our balance sheet. You can see that our balance sheet continues to remain very strong. We saw cash and marketable securities increase to 765 million at the end of Q1, which is a little over $50 million increase. Accounts Receivable also increased to 200 million due to increased revenue and now accounts for approximately 60 days of sales. I will try to preempt a few of the questions I am sure you'll have on Accounts Receivable and the fact that the linear of the shipments that we saw during Q1 were actually back in -- a a little bit back-end loaded into March where we shipped roughly 45% of the sales of our quarter in March, and that was one of the reasons we saw an increase in AR during the period.

Our inventory dollars were flat with the fourth quarter, but our days of inventory metrics, again a significant measurement, declined during the period. At the end of Q1, we now hold 100 days of inventory, which is down from 114 days at the end of 2005.

Looking further into the details of what makes up these 100 days of inventory, we ended the quarter with 74 million in raw materials, about 34 days. We had 38 million in width and assemblies, about 19 days of inventory, and our finished goods came down to 101 million, which is about 47 days. We also ended Q1 with around 13 million of inventory reserves.

Looking at the retail channel inventory, it appears to be very lean as the sell-through of most of our products remains strong during Q1. When we evaluate cash flow, we saw that cash flow results during the period, cash flow from operations came in at 56.2 million. Free cash flow, as we stated in the press release during Q1, was a little over 41 million. We did invest about 14.9 billion of CapEx during Q1. Cash flow from investing was 87.1 million use of cash, and this was primarily made up of the 14.9 million of capital expenditures, as well as a net purchase of marketable securities of around 72 million. Cash flow from financing was an 11 million use of cash during Q1. The two primary components of that was 6.7 million proceeds from stock options, as well as a 4.4 million tax benefit related to stock option exercises.

So overall we increased the marketable securities line about 72 million during the period, and we earned an average of 4.0% on all cash and marketable security balances during the quarter.

A few other financial metrics. Our effective tax rate during Q1 was 15.5%, just below the expectations -- our expectations of 16%. We anticipate that the 15.5% rate will continue throughout 2006. And as required by FAS 123R, we expensed stock option expense during the period. We expensed 2.5 million of compensation expense due to the fair value of shares with our stock option and ESSP plan. The $0.02 EPS impact was expected, and we still forecast full-year impact to be around $0.07 per share, which leads us the final -- my slide which is updated guidance.

As you saw from the press release this morning, we upped our annual guidance for 2006. We remain optimistic about the future success of our business. We now expect at least 1.4 billion in revenue with double-digit growth across all four of our newly defined business segments. We have increased our EPS outlook up to $3.47 per share, which excludes $0.07 per share of expensing of options. This $3.47 is a 27% growth rate over 2005.

We've also increased our revenue guidance for our automotive mobile segment up to at least a 75% growth rate for 2006. All other business segments' revenue growth rates remain unchanged from the last quarter. We now expect to spend 70 million of CapEx during the year, which includes 10 million of our new Taiwan facility purchase during Q1, 20 million of production equipment, leaving around 40 million of maintenance CapEx across our business. We expect a stable outstanding share count of 109 million shares.

That ends the formal presentation. We appreciate all of your interest, and at this point we are going to open up the conference call for Q&A.

(OPERATOR INSTRUCTIONS). John Bucher, Harris Nesbitt.

One housekeeping question and then just a couple of operational ones if I could. I'm not sure if you mentioned it or not, but the 3.6 million in other income, was that sale of marketable securities and if you can --

Yes, that was sale of marketable securities, and we are required to list that as a non-operating gain related to sale of stock prior to maturity.

Okay. And then moving onto the operational questions, you have indicated a couple of things that it appears in the commentary that you expect the market share increases that you have seen in Europe, that you expect some of that to continue. Is there any margin impact that you are anticipating now that Europe is about a 1/3 or so of the revenue mix? You have talked about product mix and some of that that was favorable, but is there any impact on European sales mix to the margin?

And then also related to that, you have talked about the PND expectations for PND margins to decline. Can you quantify that or provide some color and commentary around that point also? Thank you.

Well, as you pointed out, the automotive market both in U.S. and, frankly, also specifically in Europe is supported for continued strong growth, and I think it is our goal to take advantage of this growth opportunity by offering the products that Cliff has outlined. That may include very attractive prices, and it has included some very attractive prices in order to drive both revenue and EPS growth.

So I think if we are successful with that strategy, we should see or could see a more significant change in our margin, particularly in the PND market. So overall I would expect that the PND margin should come down, but again that is all baked into our overall guidance assumptions that I just walked through. I'm not -- I think we have talked about maybe 300 basis points roughly in that order of magnitude in the past. We will just have to see how the full year shakes out as we get into -- experience the growth in Europe and in the U.S.

And then on the European sales mix?

Well, specifically, yes, we would expect the European market to continue to grow a little bit faster than the U.S. market. So that will -- again, the expectation on margins again are all accounted for with that expectation.

Okay. And then the final question, I know that you don't provide quarterly outlook, but I'm just wondering would you see any reason to believe that the historical sequential trend from first quarter to second quarter on the top line that that same trend should apply in '06 as it did in '05?

Well, it is hard to say the exact trend. Definitely sequentially we expect revenue to be up Q2 over Q1 given the market that we are right in the middle of with the Marine selling season and also a pretty strong PND market as well.

Jeff Evanson, Dougherty & Co.

Thank you for taking my questions. It appears that possibly we are looking at the Marine product category decelerating throughout the year. I am a little puzzled by that given that you should probably face easier comps in the back half of '05. Could you talk a little bit about what is going on in that category?

Did you say decelerating?

I think so. Yes, you grew 20% and your guidance is 10.

Yes, I think overall we would still expect decent growth rates quarter-over-quarter as we get into Q2 and Q3. But I think you implied in the fact that we are going to be a 10% plus for the year, the growth rates are going to be a little bit below the growth rate we experienced in Q1.

And is that due to timing of new product launches or --?

Primarily. As Cliff mentioned, we rolled out 15 new products for a pretty strong rollout in Q1. We expect them to continue to sell well. But if you can only bring out that level of new products, it tends to drive short-term performance in any one segment.

Okay. You have launched some new language capabilities for your PNDs, and we are hearing that certain markets are getting improved data for mapping in Asia. I'm wondering if you would care to comment about a PND launch in certain Asian markets such as China sometime in '06?

Well, I think that the PND market for Asia is still emerging. The data quality is still not quite there, and also it tends to be expensive. However, we have been working on various versions of products to cover China, Japan, Thailand, Taiwan, and also Malaysia. So we believe within the next year we will start to see more contribution from that part of the world.

Okay. Great. Last question, the Eclipse VLJ appears to be shaping up very well for their launch this year. I know that [Avadine] is designed into that, but they have typically partnered with your navigational radios. Do you have an opportunity there still?

Our understanding is not in that program.

All right. Okay. Thank you.

Ben Swinburne, Morgan Stanley.

A question. Your business now you mentioned is skewed more towards European and T&D, which I am sure are tied to each other. Can you talk about what unit trends were sequentially in the first quarter? Obviously the nuvi was very strong and helped you on the pricing side. But did your share lift in the first quarter in Europe mean that your overall unit for PND actually grew first quarter versus fourth quarter? And then I have a follow-up.

Okay. I think really on the product mix side what we experienced in the c-Series continued to sell very strongly, but the nuvi, as you recall, had just come out in Europe late last year. Then we saw the nuvi pick up as a percentage of the overall PND market. So I would just say from a sequential change that was the main I guess trend that changed the c-Series. The nuvi are the two strongest product lines in PND. The nuvi is the one that has picked up the greater percentage of that total.

As far as the market share, I think -- there are so many research reports out there, and from our best guess, it looks like share has picked up in Europe. We hope that that will continue as we go through the rest of the year.

Did your production capacity limit you at all in the first quarter? In other words, given the demand for the nuvi in Europe and in the U.S., could you have -- do you actually leave some revenue on the table because you just could not get the units out as quickly?

Yes, I think there was some constraint there. I mean we have been working very diligently to bring our second factory up. There is also expense. Min mentioned a little bit of constraints on component availability. So I would say there was some lost opportunity or lost revenue.

Okay. And then last question, Kevin, in Europe you go against a pretty formidable competitor in TomTom who has got a little bit of a different distribution model. Your European business has change so much over the last three years. Any thoughts on positioning yourself into going direct to retail rather than using resellers if that is an opportunity or if it is something that does not really change the game that much?

No, I think we still view that our loyal and European distributors are very important to the market. As you know, the European market is quite fragmented. There are unique opportunities and challenges in each geography there, and we feel like continuing to use those distributors is a benefit to us not only in the sale of the product but also in the aftermarket or support of those products after the sale.

Thanks and thanks for the additional disclosure.

Noelle Swatland, Lehman Brothers.

Congratulations on a great quarter. Just a couple of quick questions here. I think last quarter you had expected Marine to start to ramp and some of your fitness new products to start to ramp in the first quarter. But it seems as though maybe relative to your earlier expectations, we saw more of the initial shipments in Marine possibly than you had anticipated. Is that fair in terms of some of the revenue upside, or should we see as you had previously outlined more of that to really ramp in Marine and fitness in the second quarter?

Well, overall we feel that we have executed quite well in delivering our new products. So because of this (indiscernible) good distribution of I believe our new products, we experienced a better-than-expected ramp-up of our sales.

Is that the same with fitness as well, or is that delayed a little bit?

I don't see much difference. I think both businesses are up 21%. So we feel that both are driven by the delivery of new products.

Okay. I know you all don't comment on quarterly guidance, but as you start to think about the total Company gross margins moving into the second quarter, can you give us some qualitative metrics to think about? Should we think that given the volume ramps in some of these new products combined with some discounting on some of your older PND units ahead of this new 500 series and nuvi products, that we could see a sequential decline in your margin?

Well, I think to reiterate what we put in both the press release and in my comments, we feel like other than the automobile segment, which we think is actually going to be coming down in margins, the other segments should be relatively stable on margins because of the new product introductions to the midpoint about the strength of the Marine and the outdoor fitness products. But auto/mobile as it is almost 50% of our business has a significant impact on the results. So given the fact that we expect those to come down, I mean I cannot really give you a much more detail other than to say that is what our expectation is.

And then just lastly, how do you expect -- you had said that you continued to focus on R&D spend this year. Can you give us what you expect for the full year in terms of percentage of sales for R&D?

I mean looking at the full year last year we ended the year at about 7.3% on R&D. I think we should be roughly that same number, maybe a little bit below that. It depends on the topline growth, but I think you should not see an increase on R&D as a percentage of sales during the year. We are committed to hiring, but obviously when we are in period where revenue is growing at 37%, it is hard to hire more than 37% growth on engineering talent.

Bill Benton, William Blair.

My congratulations on a strong quarter. In terms of I think you talked about 75% or better growth in auto, I think 10% or better in Marine and 20% or so in Aviation, could you remind me what your recreational target is and if I got (indiscernible) correct?

Yes, the outdoor fitness segment we had guided to 15% or greater.

Okay. And that is the same as --

That was the same as what we had last time, and we did as we stated 21% growth through the first quarter.

Right. Okay. And then in terms of the channel inventory, you're feeling that it is relatively clear even though you shipped some of this later in the quarter, but the sell-through was obviously strong during the quarter which gives you that confidence?

Yes, that is correct. I think evaluating the major retailers and distributors we sell to the channel inventory appears to be pretty lean.

Yes, issue on product shortages.

Okay. And then, Kevin, did you say -- when you said 300 basis points decline, was that just in the automotive area that you were looking at then, or was that an overall number?

No, I think what I meant to imply was that it is really the full business. We guided to an overall operating margin for the year of about 30%, so that is kind of just where I came up with those numbers.

The 300 basis points given the fact that we were higher than that last year.

Right. Okay. And then I know it is hard to figure out which shares are -- I guess in Europe, it sounds like you had done pretty well despite the fact that your competitor there was i guess transitioning some old product and cutting price. Did you see the impact of that at all? Was Europe as you expected, or was it maybe a little bit tougher and you advertised more to overcome some of that price cutting and them flushing out their lines?

We are definitely (indiscernible) superior competitive market, and we believe too we are providing a much better view of the demand in our market position given that our new products we expect to deliver in part of this week or next.

Okay. And then just one quick one. I don't know if we can get the revenue gross margin operating margin for the four quarters of 2005. Are you guys going to post that to the website at all?

No, we're going to plan on as we go through the year just giving quarter-over-quarter guidance in comparison to the prior year. So we will lay that out again as we go through the year. We won't post back to Q4 '05 by segment.

Okay. I lied on one thing. You mentioned new promotions in the Aviation segment to kind of spur some growth in the second quarter. Can you give us a little color on that?

It is primarily referring to the retrofit market where we are rolling out some special promotional programs to try to drive demand in sales there.

Okay. Just the right kind of focus towards retrofit then? Okay, great guys. Congratulations, again.

Rich Valera, Needham & Co.

I was hoping you could comment on your strategy for going mass-market? You rolled out the i-Series last year, which I think was probably not as strong as you had hoped, but you had great success with the c-Series and the nuvi. I was just wondering sort of how you plan to take things downmarket? Do you think you will take the nuvi form factor and maybe strip it down some and then move down that way? Or do you think that the i-Series with that very small screen is still the way to go downmarket?

Well, actually the i-Series did quite well in the UK, particularly toward the end of the year with the low-priced point. I think going forward the components market is so dynamic and we are evaluating where the sweet spots are landing in terms of display, size and cost. So in terms of display size, in terms of features, all those things, we're keeping everything on the table. We would expect to see kind of a multi-prong strategy where you might have units in the higher end and units on the lower end.

Great. And then as a percentage of sales, Kevin, SG&A, should that be sort of similar to what it was last year do we think?

I think it will tick up a little bit just given our commitment to advertising and promotion within these fast-growing markets, particularly PND. So I think generally what we would expect is SG&A to be a little bit higher on percentage of sales during the year and R&D to be a little bit lower. Hopefully we can keep the operating expenses in the 19 to 19.5% range as we go through the year. Of course, a lot of it depends on the volume growth on the topline.

J.B. Groh, D.A. Davidson.

So much for seasonal weakness. I had a couple of questions on Aviation and kind of the timing issues there. Obviously you had the TAWS impact last year. Can you quantify that in any way so we can get more of an apples-to-apples? It seems like there was a big bump there. Is that business higher margin?

Yes, I think in general the TAWS was somewhere in the 7 to $8 million range in terms of the year-over-year impact. We had it in Q1 '05 and do the mandate, and then kind of short-term benefit, we did not have 7 to 8 million in Q1 of '06.

And so is that higher margin business than the incumbent stuff?

Yes.

Okay. And then the timing on Columbia certification, it appears as though you had maybe some expenses in Q1 where you are not going to recognize some benefits until Q2. Is that a correct assumption?

Well, I think there is some of that. There is also just some natural variability as I talked about quarter-over-quarter because the Aviation margins were a little bit lower than we had been experiencing. But it was both. It was both kind of natural product mix and as well as some Q1 costs related to that business.

I mean if you characterize, say, OEM/G1000 type revenues versus hand-helds versus retrofit GPS systems, are the margins similar in those three buckets?

Pretty similar. The only difference in the Aviation segment, as I think you know, are portable products. Like the 396 that Cliff mentioned, that has a little bit higher margin than the OEM and retrofit.

And seasonally that is probably a better Q2 and Q3 product than a Q1 product I would guess?

That is correct.

And then just a couple of housekeeping questions. The $0.05 remaining in stock option compensation, if that accrues evenly throughout the year?

We hope so, yes. There is some variability based on what the stock price does, but in general, yes.

And then could you give us a quarter-end share count? I don't know if that was in the release or not.

Yes, it was in the release. It was 109. On a diluted base, it was 109.1 -- one second, 161.

That is end of the quarter shares outstanding? Okay, great. Thanks a lot, guys.

Jim Duffy, Thomas Weisel Partners.

Are there any factors that give you reason to believe that seasonality should be any different this year from previous years, particularly in the consumer business?

Yes, that was an earlier question, and the answer was not really. We expect sequential increase from Q1 to Q2 much like we have experienced in the past.

And how about the ramp over the remaining quarters of the year?

Well, Q4 is going to be a large quarter. We typically see a Q3 dip for various reasons. Europe generally slows down a little bit, and the Marine selling season is over with. PNDs don't normally move as fast during Q3, and then we have a big ramp-up in Q4 due to the holiday season.

I guess where I'm going with this is your Q1 is typically around 20% of the total year, which suggests that the full-year number could come in well above that 1.4 billion.

Well, we will have to update you and others at the end of the second quarter. I think that we have communicated that 1.4 is the low threshold number. We will just have to see how Q2 goes.

Okay. Now on the cost of product, can you speak to the component environment in some more detail in some of the areas where you are seeing improvement in cost of product? Is that exceeding your objective that you have stated in the past for more than a 10% year-to-year decline in cost?

I think it depends on which components we are talking about. I think Flash, for example, is definitely more than that. We have seen more than 10% cost reduction on Flash memory in the short-term. It displays also I think maybe around a 15 to 20% level in the short-term. So definitely product costs helped us offset some of the price erosion that Min mentioned earlier in his part of the presentation.

Which of the components are in tight supply?

LCD. Some LCDs and IEC components that typically has three or four months of a long lead time.

Okay. And then a question on your strategy for utilization of the new manufacturing capacity, how do you see the division of labor between the two facilities? Will one focus on PNDs? Can you just provide a little color on that?

I think the new facility will be primarily for the production of the PND products. Shifts to factory only one out (indiscernible) apart so that we will not see much difference in terms of labor cost and operations.

Okay. Is that something that should help you on the margins in that product category because there will be less changeover costs or utilization factors will provide some leverage? Am I thinking about that correctly?

Well, volume will drive the efficiency. So it all depends on the volume.

Okay. And then final question. The contribution of Garmin Mobile, is that meaningful at this point in time? What type of traction are you seeing with that revenue contributor?

We are seeing growth in subscribers for Garmin Mobile, but it is still a very small early adapter kind of market right now. So it is really not material to the overall results.

Peter Friedland, Soleil Group.

Not to belabor the seasonality questions, but just a few more questions on that.

Should we give Q2 guidance?

Well, I'm just really trying to get a rough sketch for the (technical difficulty)-- the pattern for some of these segments for the whole year. So for Marine, is this Q2 -- is that typically the strongest quarter of the year in absolute dollars for Marine?

Well, every year it is different. I think in general that is the case, especially with the rollout of the many new products for Q1. We would expect those to continue to sell well in Q2, yes.

And then for the outdoor products, how does that segment typically look across the year?

I think it's much like a PND where Q2 and Q4 are the largest quarters during the year. So I would expect sequentially that there would be some growth in that segment also during Q2.

Okay. And then a question on Aviation. It looked like just looking at the GAMA numbers for Q1, the industry shipments and for the planes that you guys were on were very strong. So is there -- I would have thought your Aviation business would have been a little bit stronger. So is that just a timing issue?

Yes, I think there is a factor in timing. We talked about the new certification of a new aircraft that will pick up in Q2.

Okay. Actually one other thing on your European revenue. Can you give some breakout of that revenue by country so -- are you still more focused in the UK, or is it starting to spread out?

No, I think it is very similar to what we have talked about in the past. That is you have got France and Germany, Italy, Spain and the UK being five of the largest geographics, and we're not going to breakout the numbers between those countries. UK is not the dominant geography at this point.

Ron Epstein, Merrill Lynch.

Just a couple of questions. What do you guys think about semi-integrated products with the OEMs? Have you pursued that route at all?

Yes, we have actually done quite a bit of that. One of the most visible was the MOPAR project, the (inaudible). In Europe we continue to work with automotive OEM provides to do the semi-integration like you're talking about.

Okay. So that is an area where you are continuing to pursue?

Yes, we actually have quite a bit of effort and resources devoted to that.

And how about not dealer move more OEM, true kind of space plate removal kind of thing where there is something in the dash?

Yes, so far our efforts have been really focused on the PND and how to integrate that into the vehicle. I think most OEMs seem to have a lot of interest in that versus going deeper into the instrument panel.

Okay. Interesting. Another question I guess for Cliff. How many aircraft are you currently working on trying to certify?

Well, there's various projects we have going with those existing announced customers, as well as unannounced customers. I guess we probably have six to eight projects open at this given time -- things we are working on.

So six to eight mixed, some announced some are not?

Yes.

Okay. Then I guess another question that really did not get asked yet on this call, even though pretty much every other question did. What do you guys think now about the GPS market opportunity in cellphones? You know, I guess there was a view at one point that some of the PNDs could get cannibalized by cellphones, and you guys launched your own cellphone product. What view do you have on what is going on in that segment of the market?

There are probably several things to consider. One is the pure application play like the existing Garmin Mobile product with Sprint. Certainly there is going to be classes of users that want that convenience and want to use it on a basic feature phone. So that is one area. The limitations are the screen size and network speed in terms of downloading maps.

The second consideration is the smartphone market where there is a larger display and access to more memory. We definitely see some potential for growth there, which is why we introduced the Garmin Mobile 20 product, which specifically addresses Smartphones users. But overall it appears like PND continues to be the strongest category, and while there will probably be gains in smartphone and feature phone applications, it seems like people like the larger display and the dedicated device.

John Bucher, Harris Nesbitt.

Actually to pick back up on the G1000, tying into your revenue outlook for the Aviation segment of up 20% or so, I guess with the Mustang shipping towards the end of this year, it is likely that the real high ASP G1000 shipments probably don't start until is it possibly not until the fourth quarter?

Yes, I would really say that first quarter of '07 is when to really expect to see some of that impact because the shipments in the fourth quarter are going to be very limited.

And those again just kind of going on, I know you don't typically talk specifics on ASPs and the like, but is your expectation that those are going to be equipped with redundant systems including radar, flight directors and autopilots and other things that will probably drive that ASP up substantially above the piston engine units?

Yes, most definitely. The jet market requires, as you say, the redundancy, the dual attitude, dual air data, free displays, radar, flight control. We would expect to see some trending up of the ASPs in the piston market as well as we bring the flight control solution to more aircraft.

So your 20% outlook for 2006 per your previous comment really does not reflect the impact that you're going to see for these much higher ASP G1000 shipments which really start to be felt in the first quarter of '07?

Yes, I think that is fair.

Robert Schwartz, [Jefferies.com].

It is actually Jefferies & Co. Thank you. Those dot-com days are long gone. Thank you. And never were at Jefferies just to be clear.

I just want to get a couple of clarifications. You were kind enough to talk about some of the component declines that have helped you with your margins in the PND market. But you did not mention data, and I didn't know if there were any improvements in data costs or if they have been fairly stable and if you could give us some help there?

I think they have been generally stable. We have been able to improve the quality of our mapping data while at the same time keeping the prices pretty much in line with what we had.

Okay. That is very helpful. And your 75% revenue growth target for PND, can you remind us what that is up from?

Up from 60%.

Great. And I don't know -- maybe I misunderstood it. It was asked previously about whether actual units in PND were up sequentially, and I don't know if you were able to answer that or you did answer it and I misunderstood the answer.

No, I don't believe I did answer that. I think that was Dan's question, and actually sequentially they were slightly down, not to the normal level that we had with from Q4 to Q1. But we actually saw a slight decrease in (inaudible) local units during the quarters.

And was that largely because of the constraints you talked about, or are you pleased with the seasonality that you saw?

No, I think partly the constraints were there. Yes, that impacted it, and the good thing was though that the average price point in that market was a little bit up from Q4 to Q1 due to the nuvi contributions.

Yes. You mentioned 900,000 units. Is there any way to think about how that breaks across the various four components?

There is a way to think about it, but we are not willing to give that as public information.

I can understand that. And then my last question if I may, is when you look at Europe in the PND market, where do you see the vulnerabilities that allow you to take market share? And who do you think the losers are if you can if you're willing to talk about that?

I think it really gets back to Cliff's presentation on some of the really exciting features that we have added into the products like Bluetooth, hands-free. I think just the product portfolio that we have laid out we feel pretty comfortable with, but again we are not going to comment on who is going to be the loser. It just remains to see what happens there.

Peter Vogel, The Boston Company.

One clarification on a question. I'm wondering what was the new product contribution of the last 12 months or sales from products introduced in the last 12 months? Was that 51% or 61%?

I'm sorry, 5 1, 51%.

Okay. And if you could just help me understand this, you were manufacturing constrained. Component prices were in your favor, but there is some three to four month leadtimes on certain components. So how is that sort of all working together?

Can you kind of rephrase the question?

Well, I'm curious how -- the components shortages that you're seeing and that combined with manufacturing bottlenecks, how are you also able to see favorable pricing on components?

I think it is just a factor of what the overall market pricing is doing. I think we're not the only company that has experienced significant price reductions on Flash memory, on LCDs and displays. So it is not just volume dependent. It is just the nature of the market.

And when would you expect the three to four month leadtimes on certain chips to sort of ease?

We probably don't ever see that changing. I mean it has been that way for quite a long time, and it is just the way the market is.

Final question. You mentioned full production in the new facility by May. Is that ramping full production at a run-rate, or does it start in May? Will there be incremental startup costs?

Yes, it will start in May, and by the third quarter of this year, we will have significant expansion. So again, we are preparing for the Q4.

As far as startup costs, within the capital expenditures to purchase service map technology line, SMT lines, there is really no major startup cost.

[Chris Sipel], [Blueline Capital].

What was the actual dollar amount of the Taiwanese tax credit in the quarter?

We don't give that out in detailed tax credit information, other than to say what our effective tax rate is.

Okay. And second question, on the automotive side, how much of the growth was from selling into new doors versus sell-through? I know you guys touched on overall sell-through. How can I think about it just for the automotive sector?

I think generally -- I don't know that we can quantify the growth based on that, but in general we feel pretty comfortable with our current distributors and dealers that we're selling to. So most of the growth was just in incremental units of the existing doors that we are selling into. Now there is definitely some new store sales, but I would say that is a fairly small number on the big scheme of things.

Jeff Evanson, Dougherty & Co.

Sorry for the follow-up. In the PND area, by my count you have I guess kind of four main form factors for those products. Do you need four form factors, and how long do you think you will keep this 2000 Series form factor? I was kind of surprised to see the 2820 launched on that form factor.

Yes, that form factor has been really strong in terms of appeal for certain users. I think that the number of products that we offer in the PND area has been controversial compared to our competitors. But the reality is we're able to offer a solution for almost any buyer, which actually helps us gain more opportunities in our view. The 2820 was a product specifically requested by some of our work motorcycle OEM partners, and we see that as a strong offering. Longer-term, as I mentioned earlier, we don't know exactly where some of the sweet spots are going to go, but I would anticipate that we will be able to converge on the displays and form factors in some of our product lines.

I guess the 2000 Series is your oldest form factor. Is that one nearing the end of its lifecycle do you think?

I think it has come down with some of the newer products that still at the moment are quite strong.

Okay. Thanks, everyone, for your continued interest. At this point, we're going to close the call. If there are any follow-up questions, please feel free to call Polly or myself, Kevin Rauckman, and again we will talk to you at the next earnings call. Thank you.

Ladies and gentlemen, we do appreciate your joining us today. This does conclude our Garmin International first-quarter earnings release conference call. You may now disconnect.