台灣國際航電 (GRMN) 2006 Q2 法說會逐字稿

Good morning.

My name is Bobby, and I will be your conference operator, today.

At this time, I would like to welcome everyone to the Garmin Ltd 2nd Quarter Earnings Conference Call.

All lines have been placed on mute, to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

If you would like to ask a question during this time, simply press *, then the number 1, on your telephone keypad.

Ms. Schwertd, you may begin your conference.

Thank you.

Good morning.

We would like to welcome you to Garmin Ltd's 2006 2nd 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 August 30th 2006.

A telephone recording will be available for 5 business days 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 Ltd and business.

Any statements regarding our future financial position, revenues, earnings, market share, 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 10K for the fiscal year ended December 31st 2005, filed with the SEC.

Attending on behalf of Garmin Ltd 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 this morning's press release, you can see that we just finished another record quarter.

Total revenue and the EPS, again, both exceeded our expectations.

Revenue was up 64% year-over-year.

And EPS was up 65%.

Up 59% without foreign currency.

Over 1.2 million units were shipped in the quarter.

Up 81% from the same quarter in 2005.

We are very pleased with the size of this increase in volume.

This raised our total to over 16 million units shipped to date -- the highest number of any consumer GPS provider, which speaks for the strength of the Garmin brand.

We delivered 15 new products during the quarter. 69% of Q2 revenues were generated from products released within the last 12 months -- which demonstrated the success of our new products.

Our worldwide employees increased to over 3,800.

R&D continues to account for new [inaudible] of our total employees.

Price compression for T&D product continued.

But we are very pleased that it was offset by component cost reductions and the favorable products mix.

China's sell through continued to be very strong, as the result of an increased demand from our dealers and distributors.

We have experienced some bad loss on certain marine and high-volume PND products.

We are pleased to report that our 2nd Taiwan manufacturing facility has been up and running smoothly since the end of May.

We have added additional production lines in order to meet the anticipated demands in the upcoming part of this season.

Additionally, we continue to expand our marketing and sales infrastructure -- including the expectations that we soon acquire in new facilities in the UK, to support our European role.

Just some highlights for each of our full business segment.

Automotive business experienced another quarter of triple-digit growth -- driven by the strong sales of PND products introduced in late 2005 and early 2006.

According to independent market research, Garmin has maintained over 50% of the PND product market in the US.

In Europe, Garmin showed signs of continuing improvement.

We believe we are positioned for further improvement driven by continued forecast of our advertising and marketing efforts, combined with a strong product portfolio and the anticipated deliveries of additional new products.

In response to our strong growth and positive outlook for this segment, we have revised our growth expectations for 2006 from 75% to 125%.

Also, our fitness business was up 24%, driven by the continued strong sales of new products introduced in early 2006.

We believe Garmin has established itself as a leader of GPS-enabled devices in both running and cycling markets.

We will continue to increase our R&D and marketing efforts to grow these new markets.

In response to our continued strength, we have also revised our growth expectations for this segment from 15-20%.

Marine business was actually down 3%, despite all the position response to our new product offerings.

Poor weather and high fuel costs have resulted in a soft marine season.

We also experienced some decline of our marine products due to certain component shortages.

However, we continue to believe the marine segment is on track to meet our 2006 guidance of 10% growth.

The aviation segment experienced another quarter of soft growth, due to delays in certain OEM programs, and new product introductions.

However, we believe we are only a month away from the deliveries of our 430-530 watts and GMS 200.

Additionally, we announced several exciting [glass company] products, at last with Oshkosh Air Show -- which we look forward to delivering in 2007.

These new products present significant long-term growth potential.

As a result of this year's slow start in this segment, we have revised our 2006 revenue guidance from 20% to 10%.

However, we remain very optimistic about the long-term prospects for our aviation business.

As we look forward, we are optimistic about the remainder of 2006.

The total market for PND products is [inaudible] to at least double during 2006.

With our strong product portfolio and expanded marketing and advertising campaign, we feel that we are positioned to take advantage of these opportunities.

We continue to invest heavily in R&D, with R&D spending expected to exceed $100 million this year -- and expect to introduce 70 new products in 2006.

As a part of our expanded branding campaign, we will open a retail store on Michigan Avenue in Chicago to showcase Garmin's products and technologies.

Based on our [inaudible] performance, and a strong demand for our products, we are increasing our outlook for the year.

With that, I'd like to turn the call over to Cliff Pemble, our Vice President of Engineering, who will present a product update.

Our CFO, Kevin Rauckman, will then discuss our financial results, and updated 2006 guidance.

Thank you, Min.

I've been looking forward to walking our listeners through the Q2 product highlights.

During Q2, we ramped up deliveries of our new portable navigation devices that we introduced at the CeBIT show in Hannover, in March of 2006.

The new B310, 360 and C550 added Bluetooth hands free functionality as a major enhancement to our product line, Garmin now offers a comprehensive Bluetooth-enabled product lineup, and our Bluetooth solution continues to lead the industry in handset compatibility.

The StreetPilot C500 series added a brighter display and a high-sensitivity GPS receiver for better usability in the automotive environment.

In addition, the StreetPilot C550 now offers a unique, real-time traffic solution that eliminates additional accessories and wires often found in competitive solutions.

These new products have received very favorable press coverage and recommendations by experts in the industry.

The C550 was selected by GPS magazine as an editor's choice product.

And the new B360 was selected by PC Magazine as an editor's choice product.

In addition, these products have received favorable press in Time Magazine and on CBS news.

While we're delighted by the positive press coverage, we're most excited by the customer acceptance and demands of these products.

Turning next to the rental car market, we continue to make progress in providing affordable, easy-to-use solutions for rental car customers.

Most recently, Avis Budget Rental Car introduced the "Where-To" navigator, which is based on our StreetPilot C550.

Where-To will be offered to Avis and Budget customers for $9.95 per day, or $49.95 per week -- and will be available in approximately 125 cities in the US, Canada and Puerto Rico.

The Where-To Navigator is the first product to offer Bluetooth hands free calling and real-time traffic updates for the rental car market.

These features offer both safety and peace of mind to rental car customers.

Where-To was introduced at the National Association of Business Travelers Convention in Chicago, and was promoted heavily by Avis and Budget during the show.

Just this morning, Where-To was featured on the Today Show, complete with a driving demonstration and interviews with Avis management.

Going forward, we believe that the rental car market will play an important role in enhancing the awareness of Garmin and our product offerings.

Moving to motorcycles.

We recently introduced 2 new products for this market.

The StreetPilot 2820 adds Bluetooth capability to our existing StreetPilot 2000 series.

Riders can now hear audible directions, using a Bluetooth-enabled headset, and can also make and receive phone calls with a Bluetooth-enabled phone.

The StreetPilot 2020 has been selected by BMW Motorcycles for its MotorRad3 Navigator program in the US and Europe.

We recently announced the new Zumo Motorcycle Navigator at the MotoGP US Grand Prix motorcycle race.

We are really excited about the Zumo, because it's our first product designed specifically for the motorcycle market.

The Zumo features left-handed controls, and a high-brightness touchscreen display, which is usable with gloved hands.

The Zumo also includes Bluetooth-enabled headset operation, and hands free calling.

In our marine segment, we delivered our new GMR21 and 41 radars -- which feature a 24-inch dome, low-profile mounting and high-resolution target-discrimination.

We also introduced our first open-array radars -- the GMR404 and 406.

These new radar scanners are offered in 4-foot and 6-foot antenna configurations, and feature a target range of up to 72 nautical miles.

They also feature digital processing, narrow beam width for greater target resolution, and they offer an exciting new look that will complement any boat.

With the introduction of the GMR404 and 406, we now offer a comprehensive lineup of radar solutions for almost any boat and budget.

We also began deliveries of our new GPS map 378 and 478 chart [blotters].

These new products are multimode devices, which offer both preloaded marine data from [broading] activities, as well as preloaded street maps for car navigation.

The GPSMAP 378 is preloaded with maps of inland lakes and waterways, and the 478 is preloaded with our US BlueChart maps for the entire continental US, Alaska and Hawaii.

In the aviation market, we introduced the GPSMAP 496, at the recent Oshkosh Air Venture Show.

This product features a built-in Jeppesen database and airport director by AOPA -- and a high-resolution train database.

In addition, this is the first product to offer our exclusive SafeTaxi charts, which provide detailed mapping of over 650 airports.

The GPSMAP 496 is also a multimode device, and features preloaded street maps of North America -- with turn-by-turn navigation and instructions.

Turning next to experimental aircraft solutions.

We introduced the G900X -- integrated cockpit solution for experimental aircraft.

As some of you know, kit-builders invest a significant amount of time, money and emotional energy to create their own custom aircraft.

Now they can take advantage of high levels of integration, reliability and support offered by the G900X.

The G900X is targeted as the most-popular kit in the Lands Fair and RV family of aircraft.

It will be operated as a package, complete with mounting hardware and wiring harnesses, to make the installation as easy as possible.

The installation process will be supported by our distribution network, which will be trained in the specifics of kit-plane installation.

The G900X will be available in early 2007, and will be offered at a retail price of approximately $66,000.

In addition to kit-planes, we also introduced a G1000 product configuration specifically for the King Air C90 Aircraft.

This popular aircraft is known for its utility and low operating costs.

Adding a G1000 system will provide King Air owners with all of the benefits of a new factory-equipped aircraft, including WAAS-certified GPS navigation, solid state attitude and digital air-data centers, train avoidance, weather radar, and our GSP 700 digital autopilot system.

Expanding on retrofit solutions, Garmin introduced the revolutionary new G600 PFD/FD combo system.

This exciting product will bring the advantages of modern solid-state electronics to the broader retrofit market, at an affordable price.

The G600 includes a solid-state attitude sensor, a digital air-data system, and comes standard with our Safe Taxi airport maps.

Customers can also upgrade their system to include XM audio and weather capability, a train awareness system and Jeppeson charts.

Finally, I wanted to provide an update on the exciting VLJ market.

Progress continues on the Cessna Mustang program, and we remain on track to support Cessna's completion goals later this year.

We are also making good progress on the [Embraer Finile] program.

These exciting new aircraft to build momentum in the industry -- having logged over 235 firm orders since its introduction last fall.

At the Oshkosh show, Honda made the exciting announcement that they will enter the VLJ market.

We've been honored to support Honda's program leading up to this decision, and look forward to working closely with them as the development and certification progresses.

Also at Oshkosh, Diamond Aircraft showcased its new D-JET VLJ for the first time.

The D-JET will appeal to a broad set of owner-flown customers because of its lower acquisition costs and simple operation.

A Diamond customer will be able to experience consistency in the avionics across the entire product line -- from the single-engine VA40 through the D-JET platform.

With that, I'd like to turn the call over to Kevin, to discuss our financial results.

Thank you, Cliff.

Good morning, everyone.

It's a pleasure to be able to update everyone on our financial results.

You can see from the press release this morning that numbers were very strong.

They actually even exceeded our own expectations.

First of all, in consideration of the announcement of an approved 2-for-1 stock split-up coming on August 15th, I want to make it clear that all the per-share amounts in this presentation are on a pre-stock-split basis unless otherwise noted.

So, looking at the financial summary for the 2nd quarter, you can see that Garmin experienced a 64% top line growth, and a 59% EPS growth -- excluding the foreign currency gain.

We did have a $0.02 EPS impact, due to this foreign currency gain, of 2.9 million.

Our gross margins were better than expected, due to price erosion -- offset by the reduced product costs within the period, and favorable product mix.

The gross margins came in right at 50% EBIT.

31% operating margins were down from last year, but better than expected.

The gross margins impacted that 290 basis points unfavorable.

Our SG&A expenses of nearly 55 million or 20 basis points unfavorable with the year-ago quarter.

And our R&D -- although it grew at 51%, actually it was 50 basis points favorable on the Q2 '05 numbers.

SG&A was much higher than our 1st quarter of this year, due to increased advertising in both US and in the European markets.

And as Min said, we shipped nearly 1.3 million units during the quarter, across all business segments.

And our average selling prices during Q2 were $338 per unit -- which is approximately 3% below our first quarter.

Moving next to review of our segments.

You can see from this slide that we experienced strong revenue growth across the automotive and mobile segments, as well as the outdoor fitness segments during the quarter.

Auto and mobile revenue grew over 2.5 times our 2nd quarter '04 revenue on the strength of our Nuvi, C Series and other PND products.

Within the auto and mobile segment, we've now achieved our full-year 2005 revenue numbers during the 1st half of '06.

And we still expect a strong 2nd half.

The outdoor and fitness segment continued to exceed expectations, as this segment is now 22% up, year-to-date.

Overall, our revenues have grown 65% during the 1st half of 2006, and the sales of products introduced within the last 12 months increased to 69% of our 2nd quarter revenue.

Looking next at both segment and geography differences, year-over-year.

Because of the explosive PND market, our automotive/mobile segment now represents 59% of our total business.

Growing from 38% of our total business a year ago -- and up from 47% during Q1 of '06.

Garmin Europe growth outpaced our North American market growth, and now represents 41% of our total business -- which is up from 37% during the 2nd quarter of '05.

Revenue by geography, a little bit more information here.

North American revenue was up 51% in the 2nd quarter, while our European business increased over 83% during the 2nd quarter.

Our Asian sales also grew 69% during the period.

The revenue results of 433 million represent the largest single quarter in our Company history, and we've now recognized over $750 million of revenue during the 1st half of 2006.

Looking next at our segments.

Gross margin results on a year-over-year basis.

Our 2nd quarter gross margins increased to nearly 60% within both our outdoor fitness and marine segments.

Q2 gross margins decreased to 66% and 42%, within our aviation and auto/mobile segments, respectively.

We did experience sequential gross margin improvement in all segments, with the exception of the automotive and mobile segment, which was flat with our 1st quarter results, at 42% of sales.

Favorable product mix -- as I said -- and improved product costs per unit were the main reasons our 2nd quarter gross margins remained at 50% overall.

Just doing a quick comparison on the entire… what we used to define as our "consumer gross margins…" Our consumer gross margins from the 1st quarter to the 2nd quarter came down from 48.1% to 47.6%.

About 50 basis points.

Q2 operating margins increased to 45% and 42%, within our outdoor fitness and marine segments, respectively.

Q2 operating margins decreased to 24% and 39% within our automotive/mobile and aviation segments, respectively.

The 2nd quarter total operating margins were down 260 basis points, due to declining gross margins and increased advertising during the 2nd quarter.

Garmin invested nearly 33 million in advertising during the period.

With the exception of our automotive and mobile segment, we expect short-term margins to remain relatively stable, despite the possibility of quarter-to-quarter variability due to product mix and the timing of several new product introductions.

We also expect that the automotive and mobile segment will experience declining operating margins, due to the reduced pricing in the markets and a continued transition toward mass-market levels.

Moving next to an analysis of our operating expenses during the 2nd quarter.

R&D increased $9 million year-over-year, in dollar terms -- but was down 50 basis points, to 6.2% of sales.

We did add 121 engineers to our engineering team, and now we employ over 850 engineers and engineering associates across the Company.

As I said, we increased our advertising spending, and it came in at 7.7% of sales -- compared with 5.6% of sales in the 2nd quarter of '05.

Our other SG&A, however, declined 200 basis points -- down to 4.9% of sales -- from 6.9% a year ago.

Looking next at our balance sheet as we've shown in the past.

Our balance sheet remains strong.

You can see that our cash during the period increased.

Cash and marketable securities during the period increased to $830 million.

Our accounts receivable did increase up to 296 million, due to the increased revenue, and accounted for approximately 62 days of sales.

We did ship a significant amount of sales in June, which drove the higher AR balance.

However, we have collected a significant amount -- approximately $170 million of cash has been collected from this June balance of 296 million.

Our inventory dollars were up 28 million over the 1st quarter, but our days of inventory metric declined.

At the end of the 2nd quarter, Garmin now holds 91 days of inventory -- which was down from 100 days in the 1st quarter of '06.

Looking at more detail on this inventory balance, we hold now at the end of the 2nd quarter, 85 million in raw materials -- which is approximately 31 days of inventory.

Our work-in-process and assemblies were 47 million of inventory -- or 19 days of inventory.

Also, we had 110 million of finished goods -- which represents our approximate 41 days of inventory.

And we ended the quarter with roughly 14 million in inventory reserves.

Finally, on the balance sheet, our retail channel inventory appears to be lean, as the sell-through of most of these new products is very strong during the 2nd quarter.

Our cash flow from operations during the 2nd quarter was 76.2 million.

CapEx came in at 11.8 million during Q2.

Therefore, the free cash flow that we generated during the 2nd quarter was $64.4 million.

Cash flow from investing was a $22.3 million use of cash during the 2nd quarter, made up of the CapEx that I mentioned of 11.8 million. $10 million net purchase of marketable securities.

Those are the 2 major drivers, there.

Cash flow from financing was a 5.4 million source of cash during Q2 -- which is generated by 2.8 million proceeds from stock options and source stock options during the period, and 2.6 million from a tax benefit related to the stock options -- which is a FAS123R expensing.

We did earn an average of 4.3% on all cash and marketable securities during the 2nd quarter.

A couple of other points on financials.

We came in with an effective tax rate of 15.5% -- which is very consistent with our 1st quarter results.

We also had a pretax amount of 2.5 million -- which was compensation expense, due to the fair value of the shares within our stock option and ESPP plans.

Therefore, we had a $0.02 EPS impact as expected, due to FAS123R.

And we forecast the full-year impact now to be $0.08 per share.

Finally, on the updated full-year guidance.

You can see from the press release this morning that we did, we raised our guidance.

We remain very optimistic about the future success of our business.

Now, we expect at least 1.6 billion of revenue during 2006, with a double-digit growth across all 4 of our business segments.

We've also increased our EPS outlook up to $3.90 per share, excluding the $0.08 per share of expensing of stock options under FAS123R.

This $3.90 is a 43% growth over 2005.

After the 2-for-1 stock split, our post-split EPS guidance is now $1.95 -- excluding FX, and we'll be using that as we go forward, as our updated and revised guidance post-split.

We've also increased our revenue guidance for automotive and mobile segment -- up to at least a 125% growth rate for 2006.

We've increased our outdoor fitness growth expectations from 15% up to 20% this year.

The marine segment remains unchanged at 10%, and we've now reduced our aviation segment growth expectations down -- from 20% to 10%.

We now expect to spend 85 million of CapEx during the year, which includes 10 million for our new Taiwan facility we've spent in Q1. 15 million of production equipment.

Approximately 30 million for the UK headquarters facility that we hope to soon have an announcement on.

Which leaves approximately 30 million for maintenance CapEx across our business.

We have stable pre-split outstanding share count at 109.5 million shares.

And overall, we're very excited as we enter into the back half of this year.

Those are the updated guidance numbers for Garmin, and it also concludes my presentation.

At this point, as is customary, we're going to open up the lines for a question-and-answer session.

We'll be happy to take any of your questions that you might have.

At this time, I'd like to remind everyone, in order to ask a question, please press *, followed by the number 1 on your telephone keypad.

Again, that is *, followed by the number 1, if you'd like to ask a question.

We'll pause for just a moment to compile the q-and-a roster.

Your first question comes from Noelle Swatland of Lehman Brothers.

Hey, guys.

Congratulations on a great quarter.

I was just hoping you could talk a little bit more about this revised automotive guidance.

In particular, I'd be curious as to your thoughts on the particular strength in Europe relative to the US.

Also, kind of where you see your share moving in the 2nd half of the year.

Also, just following some of the recent component constraints that TomTom had, I'd be curious.

I think some of the early data for June and July have shown that you all had gained some share at their expense, in those months.

And then just lastly, just on auto.

Can you just talk about -- after a very strong quarter -- this quarter -- kind of what you expect for, in terms of seasonality.

If you could, just remind us what normal seasonality is, in the 3rd quarter.

Thanks.

Okay.

Well, as we just showed, Europe is our fastest-growing market.

I think we've seen and continue to see improvements in Europe.

But we're not satisfied with the progress that we've achieved yet, in Europe.

I think recent improvements in Europe have been in certain geographic regions, but not like the UK, for example.

We have continued to improve focus in Europe, and believe that we've gained some share, there.

Not necessarily just due to one of our competitors' components shortages, but just overall strength of our own products.

We also hope that as we go through the 2nd half, we'll be able to gain share up to approximately 20% of the overall European market.

On the US side, we believe we're still -- as Min said -- we're exceeding 50% market share, there.

So both geographic regions have been good to us.

And I hope that will continue.

As far as sequential expectations -- I think we've seen early on in Q3, the trends have continued to… We've seen our PND market, in particular, continue to achieve good results.

And just to remind people that we're going into a somewhat slower season in Europe, with holidays and then vacations kind of taking hold in August and September.

We're not going to give any kind of definitive numbers on Q3, in terms of expectations.

Then what was your final question?

There was another?

I guess just from a total company perspective.

I think historically, you said in the 3rd quarter, we should… Normal seasonality has been around down 5% sequential.

Should we see the similar trends this year, even off the stronger quarter?

I think it's going to be in the… If anything, it's going to be single-digits.

That number, probably -- without giving an exact number -- is probably not too far off.

Too much variability, right now.

As you know, we don't have a large backlog in any given quarters.

So business conditions change as we go through the periods, but I guess in general, there are probably no results or trends that would say that that number's way off.

Thanks.

Thank you.

Your next question comes from John Bucher of BMO Capital Markets.

Thank you.

It's John Bucker -- BMO.

Question for you all on the backlog that you alluded to, and some of the commentary.

I know last quarter, you indicated that there was a fairly significant amount of revenue that couldn't be realized because of seem component scarcities.

And I think that you said in the commentary that both marine and the portable automotive categories experienced some scarcities.

Could you just give us some idea -- is this displaced, still?

Can you sort of quantify how much revenue you weren't able to realize because of this?

I probably won't quantify the amount of missed opportunity.

But as in previous quarters, we did experience some quarters of long lead-time components.

They do include LCDs and other IT components.

Many of these have 3-4 month lead-time.

So, the lead-time -- I'm sure the components do remain fairly long.

And as I said, we've experienced a few -- some production shortages or constraints.

It's nearly impossible to hit 100% forecasting accuracy within the period.

Especially when many of our customers raise demand within the lead-time window.

So without quantifying, I think that's the curve.

We've been able to manage it fairly effectively.

But in any quarter, we're going to leave some revenue on the table.

Okay.

And then just 2 more.

With the significant mix-shift toward PNDs as a percentage of your overall portfolio, do you now have any significant customers or significant specific revenue-generating products?

Like those that are reaching 5% or more?

Well, we certainly have customers that are 5%.

We don't have any…

I meant on the product.

We don't have any 10% customers, at this time.

Oh -- product-wise?

Yes.

Well, certainly the PND.

You're talking 59%.

The Nuvi and the C Series both are very high, very strong sellers, and make up roughly 70-80% of our PND market.

PND sales.

So they're quite large.

In the C Series, can you say if the C500 is gaining significant… Are you seeing the typical transition in unit shipment rate between the C300 and C500 as it ramps up?

Or is that still dominated by the C300 Series?

Well, John, in this country, C500 is just starting to ramp up.

The selling of C300s is very strong.

Then a final question on the aviation side.

You indicated that you expect that you're several months away.

I think that's what you said.

In terms of the availability of the [inaudible] upgrade for the 430/530.

Do you think that that's a significant cause of overhang right now in aviation?

And do you anticipate fairly substantial, rapid commercial response when that does become available?

From a standpoint of modeling aviation in the 2nd half of this year?

Yes, John.

There definitely is some indication that the delay of the WAAS 430/530 is causing some overhang in the market.

From every indication, it does appear that when we complete that, there will be a definitely significant uptake in aviation products.

Okay.

Thank you.

I'll turn it over to somebody else.

Your next question comes from Bill Benton of William Blair.

Good morning, guys.

Congratulations, again.

First, thanks for supporting Michigan Avenue, by the way.

Happy to do so.

Then, could you -- Kevin, maybe -- give us a sense for how current your view is into the channel?

Obviously you noted that you had a lot of shipments in the June quarter.

I'm just curious how often you're getting kind of an update with regard to those levels in the channel, right now.

I don't think there's been a significant change, there.

I believe our major customers that we're selling to give us pretty good visibility into the sellthrough in that channel.

I think just given the success and the popularity of some of the new VMC series -- both 3 and 5 series -- we feel that the channel inventory is pretty lean, right now -- as I mentioned in my presentation.

Then how much of your back-half expectation for automotive growth in Europe is really attributable to market share versus market growth, in your opinion?

Just from your angle?

I know you said you expect to go… Maybe… I don't know where you think you're at right now in the 12% range or so… Maybe to 20%?

If you could, just give us some [expectations].

There's not been… We haven't seen all the recent research data.

But we're probably in the mid-teens right now.

Hope to get to at least 20 by the end of the year.

It's hard to quantify how much of that is market share growth and how much of that is market expansion.

But it's obviously both is what we're planning for the back half of the year.

Then just a bigger picture.

And I guess it goes a little bit onto maybe John's question on the C300 versus C500.

Are you seeing anything in terms of actually rolling out these new products… You guys obviously get a price premium on the new products versus transitioning out the old products.

Are you seeing enough differentiation in those products that the customers really still want to trade up and pay the extra money on those new products versus maybe just saying, "I'll just have the stripped-down version at the lower price point?"

Yes.

I can definitely [inaudible] the new has been received very well, and [inaudible] number 2 [inaudible] NPD in this country.

So definitely, there are a significant number of customers who want to pay the premium to buy the best.

Okay.

And you don't see any shifts there, I guess.

I guess it's too early to talk, necessarily, to the 500 Series versus the 300 Series.

That would be the most.

Because you guys did a great form fact on the Nuvi thing.

But maybe that comparison is too early to tell what customers are doing, in terms of buying patterns?

I think that's correct.

Okay.

Great, guys.

Thanks again.

Thank you.

Your next question comes from Ron Epstein of Merrill Lynch.

Hey.

Good morning, guys.

A couple questions for you.

One -- Kevin -- what are you going to do with all the cash?

You guys are building up quite a stockpile of cash on the balance sheet.

And in terms of capital deployment.

What are you thinking?

Yes.

You saw a lot of our balance sheet.

I didn't highlight it, but we have 180 million of dividend on the balance sheet.

First of all, we're doubling the dividend.

I think we're continuing to look at strategic acquisitions, quite honestly.

We've spent considerably more time in that arena in the last couple of quarters.

So we're looking to try to do some fold-in acquisitions, where they make sense.

But those are 2 of the major uses of it.

In addition to our own reinvestment, as you saw from the increased CapEx.

Yes.

Those are the 2 or 3 major strategic areas for cash.

Now, you guys… You've announced the 1 retail outlet.

Are you planning to do more?

Or is this going to be sort of the flagship?

Well, we see it as a flagship store.

At the time, we have not planned to go beyond this one.

Okay.

Then, I guess, a question for Cliff.

When we think about modeling out demand for the G600 and the G900, how should we think about it?

We just kind of need a starting point, when we build out our models.

If you can give us any color on what kind of demand you think you're going to see for that product when it's introduced, it would be helpful.

These products, I guess.

Well, the G900 -- maybe talking about that, first.

It's targeted at a specific set of kit planes.

So while it's a great product and has a nice price, I think the overall market of that, compared to the larger retrofit or larger G1000 market is going to be fairly small.

For the G600, I think we're entering into really new territory, in terms of the retrofit market.

We have every reason to believe that it will be a very large market, just based on our 430 and 530 experience.

And the product is designed to work with our installed base of 430 and 530 customers.

So we believe that there could be a potentially large uptake in that product.

I know this is a difficult question for you to answer, but can you kind of put some sort of bounds on large?

When we think about modeling, we need someplace to start.

You know what I mean?

No?

Maybe not?

All right.

So…

[laughter]

We get so excited, and I don't have a number.

Okay.

Now, all right.

So you guys put the G1000 on the King Air C90.

Can that be moved up to the B200 or the 350?

I would anticipate there would be a path to that.

Yes.

That's great.

I think that's it, for now.

Thank you.

Your next question comes from Mike Rappaport with [Reiss Woelker].

Good morning.

Thanks for having a great quarter.

I had a question for probably Cliff or Min.

You did the C90.

Who did the King Air 5 or the Citation 500 Series?

Would that give them RVSM -- a pretty simple solution and easy path to it?

I think if we did a 500, definitely, we'd have to include RVSM.

But a project like that is very complicated.

Okay.

Is there a much different timeline on that than the King Air?

Well, at this time, we really don't have any activity going on, on other programs?

Well, thanks again for the great quarter.

We'll talk to you soon.

Thanks, Mike.

Your next question comes from Mark Roberts of Roberts & Company.

Thank you.

Good morning.

Congratulations on a good quarter.

Cliff -- can you give us a sense, to the extent you'll disclose it on your marketing studies -- for the 3rd and 4th quarter… how the channel mix will change as we go into the 4th quarter.

Are we going to see a dramatic increase in catalogue sales?

Or is it going to be more retail?

If you could, put some color around that.

Well, we would think that the big-box retailers are really going to dominate the overall sales picture with our product lineup.

Circuit City, Best Buy… Those kinds of places.

Are you seeing any particular channel either in the US or Europe where you're seeing an increase in the revenue mix?

Well, definitely, those big-box retailers are doing a great job right now with the product offerings.

So, as a mix, should we continue to conclude that the catalogue and online channel -- as a percent -- will continue to go down?

I don't think it will go down.

I think it's growing with the entire category.

Okay.

Thank you.

Thanks, Mark.

Your next question comes from Adam Benjamin of Jefferies & Company.

Thanks.

Can you give a little more granularity, with respect to the automotive and mobile bucket, as to how much of that is represented by the PNDs, specifically.

Say the Nuvis and the Street Pilot series.

Well, I kind of alluded to it a little earlier.

Depending on whether you're talking US or Europe, the Nuvi and the C Series combined make up about 70-80% of the total PND space for us, right now.

Right.

You said of the "PND" space.

But of the total automotive.

Yes.

PND is a very, very significant portion of the mobile aspect, right now.

Our mobile part of the automotive mobile is very, very small.

We've seen an increase of subscribers with our Sprint relationship, but not at a significant level, really.

Okay.

So it's fair to assume maybe 90-plus percent?

Yes.

Thanks.

Thank you.

Your next question comes from the line of Jeff Evanson of Dougherty & Company.

Good morning.

Thank you for taking my questions.

Do you think the G600 could achieve the same penetration as the 430/530 radios have?

We certainly hope so.

So do we.

A different way of asking the question previously asked.

Let's talk a little bit about PNDs.

I'd like to know what kind of ASP compression you saw here -- maybe sequentially -- from Q1 to Q2.

And Min, you suggested that component cost reductions were a helping or contributing factor in sustaining the GM, sequentially.

Yet, given your ramped-up Taiwan plants here in May, are there possibly efficiency gains to go in the back half of the year, to offset some further ASP compression in the back half?

Yes.

Certainly.

As we reached our level of [inaudible], there is always room for improvement in efficiency.

And Jeff, on the ASP -- this was in the auto/mobile segment we saw single-digit ASP declines between Q1 and Q2.

Can you give us some sense of how you offset that between components and efficiency gains in the quarter?

Or was it a 60/40 proposition -- skewed toward components?

Or is it more skewed than that?

It's more skewed than that.

Components were more than that.

I guess if I have a concern here, it would be that… Do you feel you have sufficient inventories to meet back-half holiday-related demand?

We could set up for a situation here where there's a bit of a rush to the suppliers going on in Q3, here.

Do you feel you're well positioned there?

And what are some things you may be doing to mitigate some of the component shortages and backlog issues we're seeing?

Yes.

Frankly, we do have concerns about that, too.

Because the 1st of the year, we did run in a component and product shortage problem.

But in order to mitigate it first, now we have a new… During the 1st half of the year, we also ran into a matching capacity constraint.

And we feel that was additional.

The 2nd… As we stated, it's up and running right now.

We pretty much mitigated the production capacity concerns.

As far as the material is concerned, we try to be more aggressive, and try to work much harder on the long [impart].

Again, we just don't know how [inaudible] the market will be for the 2nd half of the year.

I guess, Jeff, we've reached too little of inventory, now.

A couple of quarters, we had too much.

Exactly.

Cliff, this is a question for you -- related to your PND new product cycle times.

It seems as though you're kicking out new PND models -- I guess in excess of 2X -- your closest competitor.

Do you feel that you need to maintain that rate of the new product introductions in that category?

Or do you see yourself scaling that back a little bit?

Well, I think first of all, I'd say your comment is very much a complement to our R&D staff.

We are working very hard to bring new products out.

I think some of the new products that we've introduced so far this year were a bit of a catch-up phase.

So they did come out at a faster rate.

That said, though, we still have a lot of backlog of development activities that we're working on.

So I would anticipate strong rollouts, moving forward, into 2007.

Okay.

And then I apologize for all these questions.

My last one, here.

Without disparaging our friends at the FAA -- could you describe what's led to the WAAS upgrade delays?

Well, WAAS equipment is some of the most-complex equipment that we are producing.

It involves a lot of certification details.

It involves a lot of development detail.

We're essentially taking a product line that was developed and certified under different rules and regulations -- meaning C129 -- and then what WAAS is, today.

So quite honestly, I think we under-estimated the amount of work it takes to do that.

And we're working very hard to get there, now.

We've expanded our staff and added outside resources to help us out, but it's still a very big job.

My understanding is that regulators have been kind of moving the target on you, though.

You know, I guess from my perspective, I feel like there's been a high level of cooperation with the FAA.

And I think they're very motivated to get this out to market.

Because they realize that the large installed base of our customers represents a huge opportunity to promote the benefits of the WAAS system.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from the line of Peter Friedland of the Soleil Group.

Hey, guys.

A few things.

First, on the new products you're planning for the remainder of the year.

Could you try to break those out by category?

Roughly?

Well, I think we'll continue to have some automotive and mobile offerings that will be coming shortly.

Some of those that we've already announced -- like Zumo.

And we've got some OEM-specific versions of our C-Series that will be coming out, as well.

And then the rest are real dominated by aviation products that we'll be rolling into Mustang, as soon as it's completed.

Okay.

Then a follow-up to an earlier question.

As a percentage of your PND revenue, or unit volume -- roughly speaking… What percent of that goes through the big box retailers?

Yes.

We don't usually quantify that, but I think to Cliff's earlier point, I think the trends are basically the same.

And I think it's still in the US -- it helps you to define market, too.

The US market is still a significant portion of the big box retailers.

They'll see a significant mix-shift over time, there.

Then on the marine business.

The seasonality, this year.

Should it be generally the same as in previous years, where Q3 is weak and then it comes back up a bit in Q4?

[inaudible]

Okay.

Okay, great.

Thank you.

Okay.

Thank you.

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

Thank you.

Hello, everyone.

Can you speak specifically to some things that you're doing to improve your presence in Europe?

Certainly, you've ramped up the advertising spend, there.

What are some other kind of changes in your go-to-market strategy that have helped your presence?

I think we talked earlier with you and others about the additional staffing and resources and marketing that we've tried to put in place.

We've put a lot more focus in working with each of our distributors, in the various countries.

And working out specific promotional activities, to try to push the demand in each of those countries.

And obviously, the TV advertisements and the overall advertising campaign that you mentioned.

I think all 3 of those combined have brought us -- I guess -- stronger focus in the European market.

As you look at your advertising spend, how is it split, between the US market and Europe?

In Q2, it was just a little bit weighted toward the US side.

Okay.

And clearly, your efforts are working, with the share gains you're seeing.

Some of your suppliers are suggesting that the market growth may be slowing in Europe.

Are you seeing any indications of this?

Or do you believe that to be a valid point?

Or do you have a different perspective?

Are we talking about the 2nd quarter or going forward?

Looking forward.

Looking forward, we have mentioned that any indication…

Our suppliers probably wouldn't have visibility to the product mix in Europe versus US.

So I'm not sure what comment they would have.

Okay.

Then a final question.

Acquisition strategy.

What type of entities would you see as being nice tuck-ins to the portfolio?

I think it's been the same as we've communicated in the past.

It's technology-oriented.

It's something that would help in the existing 4 segments that we're already serving.

Either an engineering team or a technology that we could -- again -- fold in and help us be more competitive in whatever market -- depending on whether it's P&D or aviation, or even marine.

So it wouldn't be something that necessarily brings you into other markets?

No.

We're not looking into any major new markets, at this point.

Okay.

Thanks so much.

Nice quarter.

Thank you.

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

Hello, Rich.

Your line is open.

Thank you.

With respect to the component price declines, which seem to have been helping here, do you have any view on how component prices will likely trend in the 2nd half?

Do you expect to continue to benefit from these price declines?

Yes.

We're seeing continued downtrend in certain key components.

Do you have any view of sort of a longer-term trend, there?

Do you think that's something that is a pretty steady and longer-term trend that you expect to see?

Can't really comment on whether or not the specific trends and rates will continue.

I think components continue to come down, generally, within the market.

And as you look at some of the key components -- like memory -- typically what starts to happen is the density starts to increase as prices flatten out.

Great.

And Kevin, just to make sure I'm clear… Your 390 per share of EPS -- does that include or exclude the $0.08 of FAS123?

That's excluded.

Excluded.

I'm sorry.

That includes… As I was saying… You said 390 or 398?

The 390.

Yes.

The 390 included.

Okay.

So 398, excluding.

Yes.

Okay.

That's it for me.

Thanks, guys.

Thanks.

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

Good morning, guys.

Maybe you could help me out on this 430/530 question and how it relates to the G600.

Of the 430s and 530s you saw, could you give us a characterization of what's going into new aircraft, and what percent is retrofit?

I'm guessing that the brand new stuff's probably not a good candidate for G600, but the retrofit would be?

Yes.

The 430/530 really has a small presence in OEM -- especially as we've taken some of our key customers to the integrated cockpit solution.

So the majority of sales there is really in the retrofit market.

Okay.

Do you have an installed base number?

Over 60,000 units in the field.

Some people double up on those?

Yes, they do.

Then given the 10% guidance for '06 on aviation, it seems like there'd be a pretty significant ramp.

I think this question's kind of been answered in another way, but is most of that ramp in the 2nd half just the removal of the delays on the certification?

Or do new product sales play into that, as well?

Really, mostly the certification completion.

So you've got a little pent-up demand that's going to fall in the 2nd half?

Yes.

Then last question.

The margin in outdoor and fitness was pretty good.

You may have answered this question.

But what accounted for that strength?

I guess you'd expect those margins to go down along with the…

I think the benefit there is that we've seen a fairly flat pricing.

And yet we've been able to experience some cost reductions.

And then the overall unit volume picked up as well -- so all of those were in our favor.

That's why that kind of drove up the margin in the 2nd quarter.

Great.

Hey -- thanks a lot, guys.

Congratulations.

Thank you.

Your next question comes from Peter Barry with Bear Stearns.

Good afternoon to all.

Good morning.

Kevin -- could I ask you what ASP assumptions you've made as it relates to your guidance for the 2nd half that takes us to the full-year numbers?

I'm not going to give you an exact number, but we certainly expect the PND markets to become more price-competitive.

Both in the US and Europe.

So I mentioned single-digit from Q1 to Q2.

Which is not only price-reductions, but also product-mix implications.

With definitely pricing coming down -- especially in the holiday season.

The component-ASP relationship will probably be much the same in the 2nd half as it was in the 1st half?

I think we'll continue to see component cost reductions.

But we're predicting that, as I mentioned in my presentation, that overall, gross margins will continue to come down interest he automotive mobile segment.

As you set up for the 2nd half -- obviously a very important time of the year for you… Do you note any significant differences this year from last year?

I seem to remember you were going to have one less week in the 4th quarter than you did last year.

Certainly, the comparisons aren't going to be easy, given how strong a 4th quarter you had last year.

Could you sort of address those issues, and any other things you see slightly or significantly different today from where we were a year ago?

Oh, yes.

We don't really worry about the difference between 52 or 53 wks.

Yes.

Generally not a whole lot of difference.

Last year seems like a long time ago, too.

With the speed at which the market's moving.

Just one final one for me.

I just want to make sure I heard correctly.

Your current European market share is about 15%, and expected to go to 20% by year-end?

That's roughly the numbers we think we're sitting at right now.

Yes.

PND.

PND.

Thank you very much.

Thank you.

Your next question is a follow-up question from the line of John Bucher with BMO Capital Market.

Thank you.

Just sort of a housekeeping question, here.

The other accrued expenses -- they grew to 70 million from 29 million, Kevin.

What accounted for that?

There were actually quite a few factors in that.

Things like we've accrued for marketing expenses, even from advertising dollars.

Accrued license fees.

Warranty reserves and payroll.

Those are kind of all-encompassing that hit that line.

And going forward, what… Can you help us out just in terms of whether we should expect that same percentage type of growth going on?

Or could you just help us out modeling that line?

Some of those are tied in with the unit volumes.

So depending on how -- like, for example, our marketing programs.

If the unit volume goes up, obviously we'll have accrued sales programs and marketing programs, there.

But the number will probably not go back down to the earlier levels.

They should stay fairly high.

Okay.

And then maybe just to sort of try to tie together some of the previous questions on the after-market integrated cockpits.

The G900X and G600.

Would it be reasonable to assume that we could take a look at the unit shipment rates of the RV series and the Lancair Aircraft.

And since the G900X does not require any STCs or any certification, we could make some sort of take rate assumptions there off the base of RV and Lancair, as soon as that product becomes available.

Then for the G600, there's probably a more protracted take-up, just because you've got to qualify installers, as well as that group-oriented STC process that you've got to get them up.

But that's probably a much more gradual ramp.

I would agree with both of your comments, John.

Thanks a lot.

Your next question comes from Steve Mortimer with Wellington Management.

Hi, guys.

In the past, you guys have seen a lot of gross margin pressure in the prior-transition quarters like we just went through -- and a rebound, thereafter.

Did we see that same sort of impact on gross margin despite the good results you put up?

And would that importantly we could see a margin pickup, actually, in Q3?

We're not predicting a strong margin pickup in Q3.

No.

Okay.

Thanks a lot.

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

Hey, Kevin.

Just a couple more housekeeping questions.

When we think about the tax rate through this year, and I know you haven't given out guidance for next year… But I guess -- what -- it's going to ramp up, over time?

How should we think about it?

We've communicated in past conference calls that that rate will likely go up into the upper teens over the next couple of years, and probably 20% better rate, longer-term.

So, long-term, we should be thinking about 20%?

That's right.

Okay.

And just… in the marketable securities, what do you guys have in there?

[inaudible] of the tax-exempt and taxable bonds.

High-quality upgrade investments.

So when we think about it -- I guess what I'm driving at -- when we think about your return on your cash and marketable securities… Is 4% the kind of range you should be thinking about?

Well, for right now.

You know the rates have been pretty… They've been fluctuating and they've been trending up.

A year ago, we were sitting a 2.5%.

So we're at 4.3 this quarter.

And hopefully, that'll… Well, it depends on what the fed does.

So it's really tied in with the fed rates.

Okay.

Yes.

So if we think about kind of what the fed's doing, that should give us kind of a skyline -- guideline -- of what's going on with your return on cash and marketable securities?

Yes.

Okay.

Great.

Thanks.

Thank you.

Your next question comes from the line of Steve Lidberg with Pacific Crest Securities.

Good morning.

With regard to the success in Europe… You've talked a little bit about the advertising initiatives.

I guess I was curious with regards to kinds of points of presence, and what changes we've seen on a sequential basis.

And any initial thought on what we might see in terms of the 2nd half?

And on further penetration.

Thanks.

Are you asking number of retailers?

Amount of shelf-space?

What are you asking?

Primarily retailers.

Yes.

Number of locations that you're selling product.

It's hard for us to predict what kind of presence is going to be increased in the 2nd half.

But we just feel like, given the products that we have in the marketplace, that we've introduced relationships we have in the various end-countries.

And distributors that we feel that we're going to be able to see continued growth there in Europe.

But I'm not going to quantify how many doors or more doors we're going to be in.

How about looking backward?

How much of a change have we seen in terms of channel expansion from the end of the year to the end of the 1st half, here?

Well, we definitely have seen signs of continued improvement.

But your [general] market is far more fragmented, and has [inaudible] of the US market.

So in a way, we have seen enough success in [inaudible] countries, and we'll continue to work in the rest of Europe.

It takes much time and effort to achieve a Pan-European effect.

Sure.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Steven Koffler, with Shannon River Partners.

Good morning.

Kevin, just a little further on the balance sheet.

You talked about the fact that receivables went up a fair amount, and indicated that was a sort of big ramp in June.

What was the reason for June being a pretty heavy month?

The [inaudible] that [inaudible] lot of new products.

New research.

New boundaries.

We did not probably ship until maybe early April or late May.

Part of the [inaudible] but also our [inaudible] partners' constraints.

Our 2nd factories started getting running by the end of May.

We were able to pump out a lot more products to fill the backorders.

Okay.

Given the seasonality, summer is usually slower everywhere.

Is it fair to expect a similar kind of linearity or do the supply issues counteract that?

We have seen a pretty strong July.

But as we ended August, [inaudible] the month would be real slow in Europe, with everybody going on vacation.

Thanks.

Thanks.

Your next question comes from the line of [Maude Scorehe] with Ivory Capital.

Hey, guys.

Congrats on a great quarter.

I just had a quick follow-up question.

Somebody asked earlier about the tax rate.

We had seen another company with similar tax structure to yours -- Trident -- talk about an 800-1,800 basis point increase in their tax rate.

I'm just curious if there are any changes in the Taiwan tax credits or structures over there that you guys are experiencing.

We know what's baked into our assumption is that there's an AMT that kicks in.

That's going to raise the rates.

But nothing of that order of magnitude that you just talked about with the other company.

We feel like we have a pretty good handle on the Taiwan tax credits that we get.

Okay.

Gotcha.

So with Trident, that's a completely different situation?

I don't know.

It must be.

I can't speak to their specifics.

Okay.

Gotcha.

But again, kind of ticking up to the high teens and kind of leveling out at 20%?

Right.

And then secondly, just wanted to touch on the cell phone navigations.

I know Verizon recently introduced an offering with a monthly subscription.

I'm curious if you're seeing -- 1 -- any impact on PND sales, there -- and just kind of what your outlook is, overall.

And then lastly, what you're doing more on the mobile side.

If you could just give me an update.

Well, we haven't seen any detectable difference in PND sales, based on the presence of Verizon or our Garmin mobile platforms out there.

I think we've said in the past that we want to participate in that space because it's a great way to get introduced to a customer that might be willing to purchase a mobile navigator on a monthly basis, and then later decide that he wants some other kind of Garmin product.

A dedicated device of some kind.

We think there's a lot of synergy between the two markets, truthfully.

I think in terms of Garmin mobile, we did recently introduce our Version 3 -- which introduces real-time traffic and gas prices into the application.

And right now, we're -- I believe -- the only provider that can offer real-time traffic and gas prices and weather in our application at a low price of $9.95.

So we're really excited about that new update, and we also rolled it out on the IDN network with Sprint.

Perfect.

Thank you, guys.

Okay.

Thank you.

And I think at this point, we're going to conclude the call.

I really appreciate the interest, again, in our company.

We'll look forward to updating everyone again at the end of the 3rd quarter.

So, thanks again.

Talk to you later.

Ladies and gentlemen, this concludes today's conf call.

You may now disconnect.