台灣國際航電 (GRMN) 2006 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Garmin Ltd. third quarter earnings release 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. [OPERATOR INSTRUCTIONS] Thank you.

Ms. Schwerdt, you may begin your conference.

Thank you.

Good morning.

We would like to welcome you to Garmin Ltd.'s 2006 third quarter earnings call.

Please note that a copy of 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.

Please note that this webcast does include slides which you can view during this call.

An archive of the webcast will be available until December 1, 2006.

A telephone recording will be available for three business days after this call and a transcript of the call will be available on our 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 its business.

Any statements regarding our future financial position, revenues, earnings, market shares, product introduction, future demand for our product and our plans and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin.

Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission.

Attending on behalf of Garmin, Ltd. this morning are 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 Kevin Rauckman and Cliff Pemble.

At this time, I would like to turn the call over to Kevin Rauckman.

Good morning, everyone.

I'd like to first start the call by saying that our Chairman and CEO, Dr. Min Kao, wanted to join us for the earnings call today but has recently experienced a death in the family and will not be presenting today.

So the agenda for this morning would be I'll walk us through a business update, hand it off to Cliff and he'll go through a product update and then I'll come back and go over the financial results from the third quarter.

Now as you saw from the press release this morning, Garmin just finished another record third quarter.

Both our total revenue and earnings per share exceeded our expectations.

Revenue was up 62% year-over-year and our earnings per share, excluding the effects of foreign currency, was up 52%.

Over 1.2 million units were shipped in the quarter, up 73% from the same quarter in 2005.

Our PND units alone grew nearly 200% during the quarter compared to the third quarter of 2005 and we're clearly pleased with the size of this increase in volume during the period.

This raised our total units to over 17 million units shipped to date, the highest number of any consumer GPS provider, I think, which speaks to the strength of our Garmin brand.

We also delivered eight new products during the quarter and are on track to meet our goal of 70 new products in 2006.

As we have seen in the past, 61% of our Q3 revenues were generated from products released within the last 12 months which again just demonstrates the strength of our new products.

And on the employment level, our worldwide employees increased to nearly 4,300.

We now have hired over 1,250 associates during the year and we still need to hire more to support our ongoing growth within the business.

Moving next to the operational highlights.

We did experience price compression on existing PND products but much of this was offset by favorable product mix.

Hand-held sell-through continued to be very strong, especially in North America, and as a result of the increased demand from our dealers and distributors, we have experienced some backlog on certain high volume PND products and have begun to ship these orders in high volume during the month of October.

We're also pleased to report that our second Taiwan manufacturing facility has been up and running smoothly since the end of May and we now have a total of 20 production lines in our Taiwan facilities and are able to respond quickly as Q4 holiday season demand increases.

Also because we anticipated an increase in our unit demand during this holiday season, we've managed our supply chain effectively and do not anticipate any significant component shortages in the upcoming quarter.

We recently completed the purchase of our new European headquarters and distribution center and are upgrading our facility currently for a planned move-in during Q1 of 2007.

As many of you probably saw a few days ago, we recently promoted Dan Bartel to VP of Worldwide Sales and a Managing Director of our U.K. subsidiary.

With this announcement, we hope to leverage Dan's knowledge of both the Europe and U.K. markets, capitalize our technical expertise and distribution channel strategies, and strengthen the overall management leadership in Europe through his unique understanding of our dealers, distributors in both North America and in Europe.

I'd like to review some highlights from each of our four business segments.

First, the automotive/mobile business.

The auto business experienced another quarter of strong growth to 147% driven by the strong sales of PND products introduced within the last year.

According to independent market research, Garmin has increased our PND market share in the U.S. to nearly 60% by the end of the third quarter.

And in Europe, independent research confirms that Garmin has now achieved a strong number two position in the overall market.

We believe that we are well positioned for future improvements driven by continued focus on both advertising and marketing efforts combined with our strong product portfolio.

The recent partnership with Hyundai highlights the continued acceptance of our popular nuvi product around the world.

With this recent announcement, we now have an additional 700 points of sale in North America.

So in response to our strong growth and positive outlook for this segment, we have again revised our growth expectations for 2006 from 125% growth up to a minimum of 140% growth in the auto/mobile segment.

Our outdoor/fitness business was also in growth mode, up 22%, driven by continued strong sales of the new products introduced this year.

We believed Garmin has established itself as the leader of GPS-enabled devices in both running and cycling markets and will continue to increase our R&D and marketing efforts to grow these new markets.

So in response to the continued strength within this segment, we maintain the we will be able to achieve at least 20% growth for this segment for the full year 2006.

Moving next to the marine segment.

Our marine segment was up 12% during the quarter.

As many of you know, Q3 is typically our weakest marine quarter during the year but we did see improvement this year due to the positive response to our new product offerings that were introduced earlier in the year.

So we continue to believe that the marine segment is on track to meet our 2000 guidance of at least 10% revenue growth for the year.

The aviation segment experienced another quarter of softness due to slower OEM production and the delayed introduction of certain retrofit products.

However, we are pleased to report that our 430 and 530 WAAS and GMX200 products are on track for fourth quarter introductions.

Cliff will provide more detail on these products during his remarks.

Additionally, we announced several exciting glass cockpit products and a new portable GPS map, 496 product, at the Oshkosh Air Show.

We expect to deliver the G600, G900 and the G1000 cockpit for kit planes in the summer of 2007 and anticipate significant long term growth potential from these products.

As a result of the 1% growth in this aviation segment year-to-date, we have revised our 2006 revenue growth guidance from 10% growth to flat on a year-over-year basis.

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

As we look forward, we're optimistic about the remainder of 2006 and the year 2007.

The total market for PND products is projected to at least double during 2006.

We also agree with independent research that indicates strong PND market growth will continue throughout 2007.

With our current product portfolio and expanded marketing and advertising campaign, we feel that we are well positioned to take advantage of this large growth opportunity.

Garmin continues to invest heavily in R&D as is evident in nearly 200 engineering associates that we have added during this 2006 fiscal year, and we now expect to spend over $115 million in R&D across our four business segments.

As a part of our expanded branding campaign, we are just days away from the November 11th grand opening of our new retail store on Michigan Avenue in Chicago.

This destination store will be the only retail space of its kind dedicated to giving customers a comprehensive GPS experience.

We welcome all of our shareholders and friends to come visit this exciting showcase during the upcoming holiday season and into the future.

Finally, based on our year-to-date performance and the strong demand for our products, we are increasing our outlook for the year.

And with that, I'd like to turn the call over to Cliff Pemble, our Vice President of Engineering, who will present a product update and I will return later to discuss financial results and updated 2006 guidance.

Thank you, Kevin.

To start today's product update, I wanted to provide an overview of our overall automotive product portfolio.

Garmin offers the most comprehensive line-up of automotive navigation solutions available on the market today and we offer products with a broad range of price points and capabilities.

According to NPD, our C330 continues to hold its position as the number one selling PND in the U.S. market.

In addition, our nuvi product line continues to set standards around the world for form factor, elegance, ease of use and desirable features.

We offer BlueTooth hands-free capability across a broad range of our products and we have established a leadership position in delivering realtime traffic information to our PND devices.

In summary, we feel that Garmin is well-positioned to offer a product for every customer going into the holiday selling season.

During the third quarter, we introduced an all new product to our nuvi family, the nuvi 660.

The nuvi 660 sets a new standard for elegance and capability.

It features a larger, brighter display and new features such as an integrated traffic receiver for avoiding traffic jams.

In addition, the nuvi 660 includes a built-in FM transmitter which allows users to hear directions, audible books or MP3s over the car's audio system.

The nuvi 660 was simultaneously launched in both the U.S. and Europe and we were able to quickly deliver units to fill retail channels.

The feedback we have been receiving on this product has been encouraging and we believe it will with a strong seller in this holiday season.

I also wanted to provide an update on the zumo which was introduced at the Moto GP event in July.

While other competitors have introduced products targeted at the motorcycle riders, the zumo is the first product designed to meet the stringent environmental requirements of the motorcycle market.

Using our expertise in ruggedized product design, we created an appealing product that also passes stringent requirements for vibration, temperature, waterproof, and exposure to fuels.

In addition, our unique user interface provides a better solution for operating the product with gloved hands.

The zumo has all the great features of our PND products like pre-loaded maps, BlueTooth headset and hands free operation, and compatibility with realtime traffic solutions.

In addition, it comes out of the box with mounting solution for both the motorcycle and the car making it the most versatile motorcycle product available.

Good news is that we've completed development for the zumo and have started mass production and we anticipate the products will arrive at dealers in the very near future.

Turning next to marine.

We've started deliveries of our GMR404 and 406 during the third quarter.

These new radar scanners offer stunning performance and value featuring a 72 nautical mile range and incredible target resolution.

Like all of our radars, the GMR404 and 406 perform all the display processing within the scanner unit and the results are transmitted over our marine network to the chart plotter.

Our chart plotter software is designed to fully integrate radar information into the user interface providing overlays on chart data as well as split screen operation allowing the use to see separate radar and cartography presentations.

The introduction of the GMR404 and 406 raises the visibility of Garmin within the marine market and will open doors to new opportunities for our marine network system.

During third quarter, we also introduced the GPS Map 278 which targets the European market by offering pre-loaded street maps of western Europe.

Customers can then add detailed charts of waters in their own region using our pre-programmed blue chart data cards.

And for 2007, we will be introducing an exciting line of all new chart plotters and fish finders and radar units.

More details will be provided at the upcoming Mets Marine trade show in Amsterdam.

Turning next to aviation, I have good news to report regarding our effort to incorporate WAAS navigation into our GNS430 and 530 product line.

We've completed all the required TSO testing, including software validation, and we have submitted all the required paperwork to the FAA for approval.

Flight testing is scheduled to begin early this month and we anticipate all certification activities will be wrapped up by the end of this month.

While we cannot precisely predict FAA approval times, we are grateful for the high level of support that the FAA has provided thus far and we anticipate a successful conclusion to the certification activities in the next few weeks.

I also have good news to share regarding the Mustang VLJ program.

As many of you know, Cessna received its type certificate for the Mustang which includes a full function G1000 avionics system.

The Mustang will be the first production aircraft delivered with WAAS capability.

In addition, the Mustang will be the first VLJ with fully integrated flight controls, enabled by our GFC700 flight control system.

It's been a privilege to serve Cessna on this exciting program and we look forward to success in this dynamic new market for jet aircraft.

Finally, during third quarter, we delivered the GPS Map 496 to the portable aviation market.

The product truly raises the bar for portable aviation products.

It is the first of its kind to offer pre-loaded street maps for either North America or western Europe and the package includes both aviation and automotive mounts which allow the user to easily move the product from aircraft to automobile.

in addition, the GPS Map 496 offers exciting new content for the aviation market including an AOPA airport directory and enhanced high resolution terrain database and our exclusive Garmin safe taxi charts which will provide enhanced situational awareness for pilots navigating on unfamiliar airfields.

That includes our product update.

Kevin will now present the detailed financial results.

Thank, Cliff.

First of all, in consideration of our August 15th two-for-one stock split.

I wanted to mention that all the per share amounts that I'm going present today are on a post stock split basis.

So I'm moving to the third quarter financial summary.

The revenue we achieved is 408 million, as I mentioned.

Net income of 123 million and an earnings per share during the period of $0.50 per share.

This drove a 62% top line growth and a 52% earnings per share growth when excluding the effect of foreign currency, and in this Q3 time period, we did experience a $0.06 EPS impact due to foreign currency gain during the third quarter.

Looking at gross margins, our gross margin came in at 48.8%, which was better than expected due to price erosion during the quarter offset by reduced product costs and favorable product mix.

Our operating margins were nearly 30%, which is down from last year but better than expected and the change year-over-year was caused by a gross margin 270 basis points unfavorable.

SG&A was down about, unfavorable by about 200 basis points, and our R&D expenses were favorable by about 50 basis points.

SG&A was much lower than Q2 '06 due to reduced advertising during the period.

Garmin typically invests heavily in TV ads during the June and December quarters.

We'll talk a little bit more about that later.

We did ship over 1.2 million units during the quarter.

Our average selling price during Q3 was $332 per unit which is a 2% reduction from the second quarter, 338.

Looking next at our segment revenues, we experienced double digit growth, revenue growth, within marine and outdoor/fitness segments and triple-digit revenue growth across the auto/mobile segment.

Auto/mobile revenue grew nearly 2.5 times the third quarter of '05 on the strength of our nuvi and C-series products and the total PND unit volume nearly tripled year-over-year during the third quarter.

Within the automotive/mobile segment, our year-to-date growth is now 168% and we expect a strong Q4 due to much higher holiday selling.

The outdoor/fitness segment continues to exceed expectations as this segment is up 22%.

Our marine segment's grown 9% year-to-date.

Overall, our revenues on a year-to-date basis have grown 64%.

And as I mentioned earlier, the sales of our products within the last 12 months on new products account for 61% of our third quarter revenue.

Because of the explosive growth in our automotive/mobile segment now represents 59% of our total business, growing from 39% of the total a year ago, but very similar to our second quarter results this year.

Within the automotive/mobile segment, our North America market contributed more than Europe due to the typical quarter-over-quarter decline we experienced in Europe during the third quarter.

Garmin Europe and North America market growth were nearly equal with North America representing 65% of our total revenues and Europe representing 29%, very similar to the third quarter of '05.

Looking next at the geography, revenue by geography.

Our North America revenue was up 62% during the period while our European business increased over 59% during the third quarter.

Our Asian sales also grew 84% during the period, so all three of our geographic regions have grown 50% or greater on a year-to-date basis.

And through the third quarter, we have now exceeded 2005 total year revenue as we recognized nearly 1.2 billion in revenue year to date.

Looking next at our margins by the four segments.

Our Q3 aviation gross margin declined from 66 to 64% as expected, and our aviation operating margins declined 39 to 32% due to larger R&D costs as a percentage of sales.

Our third quarter outdoor/fitness gross margins declined from 60% to 56% due to unfavorable product mix and lower component cost reductions during the quarter.

The operating margins also declined from 45 to 41, in line with gross margin change.

Q3 marine gross margins declined from 60% to 53% due to unfavorable product mix and certain price change as we anticipate new marine product introductions in the upcoming months.

The operating margins within this segment also declined from 42 to 34%, in line with the gross margin change.

Our third quarter auto/mobile gross margin remained flat at 42% for the third consecutive quarter, beating our expectations.

Favorable product mix helped sustain margins as we sold more units in North America where our gross margins are higher relative to Europe.

Operating margins actually increased during the third quarter 150 basis points, up to 25% of sales as we spent less on advertising during Q3.

With the exception of our auto/mobile segment, we expect our short term margins to be relatively stable despite the possibility of quarter variability due to product mix and the timing of new product introductions and I think you saw that during this third quarter.

We do, however, expect that our auto/mobile segment will experience declining operating margins due to reduced pricing and a continued transition toward mass market levels.

Looking next at our operating expenses.

The R&D investment during the quarter increased nearly $10 million year-over-year in absolute dollar terms but was down 50 basis points to 7.5% of sales.

We've added over 200 engineers during the 2006 time frame and now employ over 900 engineers and engineering associates.

We've decreased our advertising spend to 5.7% of sales compared to 7.7 in Q2 '06 but this reduced ad spending was still $13 million more than a year ago quarter.

The other SG&A increased 90 basis points to 5.9% of sales from 5.3% a year ago and we continue to expect that our overall operating expenses in total will come in at approximately 19% of sales for both the fourth quarter this year and the full year 2006.

We continue to see improvement in our balance sheet.

Our cash increased to 888 million at the end of the third quarter.

Our accounts receivable decreased to 250 million due to slightly lower revenue and accounted for approximately 62 days of sales.

I'm sure you all saw that our inventory dollars were up 106 million over the second quarter and our days of inventory metric increased.

At the end of Q3, we now hold 117 days of inventory, up from 91days in the second quarter.

Breaking our inventory down by type of inventory, we ended the Q3 with 85 million in raw materials which is 42 days of inventory.

We ended Q3 with 47 million in our work-in-process which is 16 days of inventory, and our finished goods increased up to 110 million for 59 days of inventory and we also went out of the quarter with $14 million in inventory reserve.

Increase in both raw materials and finished goods was planned as we prepared to respond to increased customer demands during the seasonally strong Q4 holiday season.

Retail channel inventory appears to be lean as sell-through of most products was strong during Q3.

We also, looking at cash flow, generated strong cash.

Our cash flow from operations during Q3 was 116.8 million.

We spent 18.9 million on CapEx during the quarter and our free cash flow generated during Q3 was 97.9 million.

Cash flow from investing was 89.2 million use of cash which is made up of roughly 19 million on CapEx and 70 million of net purchases of marketable securities.

Our cash flow from financing was at 39.4 million use of cash which is primarily caused by the 50.4 million use of cash related to our stock buyback plan as Garmin was buying back our own shares in the market during Q3.

From a return on cash, we earned an average of 4.5% on all cash and marketable security balances during the third quarter.

Just a couple of comments on tax rate and FAS 123.

Our effective tax rate remained at 15.5% as expected and we anticipate that this rate will continue throughout the 2006 time frame.

And as required by FAS 123R, we expensed $3 million during the quarter as compensation expense due to the fair value of our shares within our stock option and stock purchase plan.

The $0.01 EPS impact was expected and we now forecast the full year impact to be $0.04 per share for FAS 123R.

And finally, in conclusion, we want to go over the updated guidance.

As you saw, we remain optimistic about the future success of our business and now expect at least 1.68 billion in revenue during the fiscal 2006 with double digit growth across all business segments expect aviation.

We've also increased our EPS outlook up to $2.08 per share, excluding the $0.04 impact for the expensing of stock options.

Again, this is a 52% growth rate over 2005.

We've also increased our revenue guidance for the auto/mobile segment, up to at least 140% growth for 2006.

Our revenue growth expectations for the outdoor/fitness and marine segments remain unchanged at 20% and 10%, respectively.

But we have reduced our aviation revenue growth expectations down from 10% to 0% for the year.

We still expect to spend 85 million of CapEx and have seen 45 million invested year to date.

So the remaining 40 million of capital expenditures is comprised of approximately 30 million for our U.K. headquarters facility and about 10 million of maintenance CapEx across our business.

We also see stable post-split outstanding share count at about 219 million shares.

So that concludes the overall formal presentation.

As this point, as is customary, we'd like to open up for Q and A so there is a Q and A line.

Please enter that queue.

[OPERATOR INSTRUCTIONS] Your first question comes from John Bucher from BMO Capital Markets.

Thank you, John Bucher.

Question for you, Kevin, on the outdoor -- excuse me, the automotive/mobile arena.

Margins actually went up year-on-year to 25%, and you indicated that short-term you expect them to be stable, and I think you attributed that to less advertising and a more pronounced mix towards North American market on a sequential basis.

But then you said you do expect declines in ASP and then future pricing pressure to cause overall margins in this category to come down.

And I'm just kind of wondering, you've got a year-on-year positive comparison on operating margins, and yet you're expecting them to come down.

Didn't you experience some ASP erosion annually from '05 to '06?

And why should they come down -- are you expecting just a heightened amount of margin, ASP pressure?

Just curious if you can kind of elaborate a little bit on the expectation for declining margins?

Sure.

I think a couple of your points, definitely the ASPs year-over-year, from Q3 to Q3, have come down.

We have been talking about this quite a bit throughout the year.

We have been able to benefit through most of the year on reduced component costs, or raw material.

So that's offset a lot of pressure just on overall price.

So I think as we go forward, typically we see in the holiday season a lower ASP depending on the product portfolio and what's available on the market so we are expecting the 42% percentage basis to come down in fourth quarter.

And the other factor is we expect the European market to grow relative to the U.S. market.

So we had a higher percent contribution of our auto/mobile in the North American market in Q3 but that will likely switch and we'll have more European content, European contribution.

So I think those couple of factors, we do expect that the 42% will come down during a very high growth revenue season.

I don't want to extend your horizon beyond what you're prepared to talk about today, but if that's what you expect for the fourth quarter, do you think that's going to continue on into '07, or could you potentially have a scenario where just like third quarter '05 to third quarter '06 trends were positive, that you could have a scenario like that in '07 as well?

I really don't want to give specifics other than to say that in general, we would expect it's a very competitive market, pricing will come down.

It's very hard -- so many moving parts in a gross margin scenario.

I think you can appreciate even the amount of competition that's changed in the last three to six months, who's in, who's not in, but in general I would say we're not going to see the margins go up.

They should stay flat or come down as we go forward into '07.

I'll ask one more question, then get back in the queue.

With respect to the aviation loss upgrade, so that could start in December, it sounds like, and the way to think about that, should we expect that there's -- it would appear two components to that loss upgrade.

Number one, it would appear that there's some 430/530 customers that may be delaying the purchases of avionics stacks based on the availability of WAAS.

So there's some potential lift there.

And then number two, you have this retrofit, this huge installed base of existing 435/30 users that are going to be sending in their avionics units for upgrade, and it looks like that should be probably something around $5 million a quarter or so over the next 18 months, something like that, is that the right way to think about the impact of WAAS on aviation?

Yes, John.

Definitely the two components you outline are correct.

We are hearing from the field that customers are waiting to purchase in order to get the WAAS unit installed in their airplane, and that we do have a sizable amount of interest in the upgrade that we've offered for existing units.

Then is that -- is the volume -- is that $5 million of quarterly revenue about right for the retrofit of existing units?

I don't think we're prepared to comment right now on the exact numbers.

We don't have them in front of us.

Okay.

Thank you.

Your next question comes from Ben Swinburne from Morgan Stanley.

Thanks.

Good morning, guys.

Kevin, wanted to ask you on the PND market, as it's trending in the fourth quarter and how you're looking at product positioning versus your competitors, it seems like Europe has become a lot more competitive on the pricing side and maybe retail outlets do a poor job of explaining to customers why they should buy one device over another.

How do you see, in the U.S. and Europe, maybe if you can speak specifically on each, how your products are positioned from a price/value perspective today versus your main competitor Tom-Tom.

Do you expect, if prices stay where they are, which I would argue is where Tom-Tom 1) sells at anywhere from $100 to $200 discount to the nuvi product, is that the right comparison from a product perspective and if you are faced with the decision of keeping prices where they are and ceding some share to maximize, does that maximize your earnings in the fourth quarter and going out into '07 or do you believe the elasticity is really what you should be focused on so you're going to bring, you would look to bring prices down to drive the volume?

And any call on those issues would be great.

Couple of points first off.

We've already taken price action both in North America and Europe as we enter the holiday season so, and we planned on that.

That's one of the reasons we've commented on what the overall margins are going to do.

Relative to Tom Tom, I think we're priced -- we're just -- all competitors in general, I think we're priced in the U.S. market pretty similarly.

In Europe, I think in the past we may have been a little bit above, but I think given some of our recent pricing actions, we're getting closer to our competitive pricing there.

I think the other thing, we're really -- we're expecting is an increased branding through TV ad campaigns that we're entering into both in the U.S. and in Europe.

That's going to help, I think, build the Garmin brand and awareness of the overall technology.

So I think it's probably trade-off, you asked about elasticity.

If we had to choose one versus the other, we do view this market as very elastic, so as price comes down it drives volume.

We have been pretty open to those types of trends in the marketplace to be able to drive top-line growth.

Do you see the one as a product on par with the nuvi so they should be priced similarly in the marketplace or do you believe your product offers more functionality and will be able to warrant a premium in the marketplace in the fourth quarter?

Ben, I think the one is definitely a strong product.

I wouldn't put it on par with the nuvi because the nuvi is still the standard setter when it comes to elegance, form factor, the finished product between the two, and offers much more functionality than the one offers.

Okay.

Thanks a lot, guys.

Thanks.

Your next question comes from Jeff Evanson from Dougherty & Company.

Good morning.

Thanks for taking my questions.

Kevin, let's talk a little bit about backlog on PNDs.

You made that comment in your introductory remarks.

That focused on a certain product.

Can you give us a sense of the backlog?

Yes, I think it's not focused on a specific product other than overall PND.

I think as we entered into the fourth quarter and we've had -- our early indications through October were quite positive.

We've had a good start to the fourth quarter primarily due to high levels of backlog entering the holiday season.

So that was really my intention to bring that out.

And this is in your finished goods inventory number here?

Yes.

Very typically what we've done, if you've looked at the last couple of years, we have raised our inventory levels just to plan for a larger Q4 season.

That's what's going on here.

In fact, our -- our finished goods at 59 days is pretty close to right where we want to be.

We want to be able to have enough inventory to respond to customer and consumer demand, and if it picks up, we don't want to miss out on any opportunities.

What gave rise to this backlog?

Is it a component shortage?

No, as I said, we haven't really experienced any significant component shortages.

I think my intention on backlog is as we enter into the holiday season, many of our larger dealers and distributors get their orders in, planning for large shipments in the fourth quarter, so that's really what that entails.

Maybe this ties into -- seemed like there was a sense coming out of the investor day that revenue growth could be flat to down maybe a couple percentage points in Q3.

I think it was a little bit more than that.

What drove that surprise?

It seemed rather September related.

I think what -- I think quite honestly what happened there was we did take some price actions right at the end of the quarter, so when we ended the quarter, we had price protection to some of our dealers.

Those are netted against gross sales, so I think that brought down the sales level a little bit.

But we're not talking a material number here in the big scheme of things, probably talking about $10 million.

Okay.

Was there a -- could you speak to the level of returns in the quarter?

Pretty consistent with what we've seen in the past quarters.

No real change there on sales returns.

Okay.

Moving on to market share, you dodged, I shouldn't say that, you never addressed what your market share change was in Europe sequentially here.

What do you think happened in Europe market share in Q3?

Yes, I think we typically look at our own sell-in, and there's also sell-through numbers.

For example, GSK has come out recently with some data that suggest from a sell-through perspective, we've gained some share in a couple of countries.

I think overall our best estimate right now is still in the mid teens as far as overall European market share.

Okay.

And talk a little bit about PND price compression sequentially and also what you saw in terms of component costs, please.

As I mentioned, the ASP -- or maybe I didn't mention it but the ASP did come down a little bit on PND.

As you typically see, it has to do with product mix.

So I think --

Was it down 2 to 4%, something like that?

From Q2 to Q3?

Yes.

Probably a little bit more than that.

Yes.

It's 5 or 6%, roughly, in that range.

Okay.

And your component cost declined?

Yes.

Component costs, I think what we've seen there is we're still getting some component cost reductions, but quite honestly, certain components, like flash memory, have actually firmed up, where we were seeing significant cost reductions earlier in the year.

I think the overall industry there, much like we saw in Q4 of '05, we've actually seen a little bit of price increase in some cases there.

Okay.

How many units did you ship into Europe this quarter?

We've typically not given that number out other than to give total unit numbers.

I think there was some of that reported to a market tracking firm, so I thought maybe you would share it with us analysts and investors.

I don't think we've shared any -- we don't report any specific numbers to any outside firm.

Okay.

And then my last question, Cliff, could you talk a little bit about what's going on with the LPV upgrade delay?

What caused that, and do you really feel like December is an achievable -- I guess approval of the 430/530 upgrade?

Yes, so as you know, we've been working on that upgrade for quite awhile.

I think it was a huge task to upgrade the design from PSO C-129 to WAAS, and quite honestly, took more resources and effort than what we had estimated.

We -- as I mentioned, we have submitted all of the PSO paperwork now so we're over the hurdle when it comes to any issue of meeting requirements or anything like that, and now the remainder of the work is focused on flight testing and the final FAA/FCC that we're working on.

So we feel highly confident that the project is under control and will be able to start delivery this year.

I promise, my last question here, Cliff.

You have a number of new aviation products coming out in 2007.

Do you believe that the potential for FAA-related delays is high there as it's been on this LPV upgrade?

Well, we're breaking some new ground, particularly on one of the higher visibility products which is the new 600 PSC product so there is a lot of risk in those projects.

We believe, given our experience and leadership position in integrating cockpits that we're well positioned to be able to accomplish those but it's certainly not in the bag yet.

Okay.

Thank you.

Your next question comes from Ronald Epstein from Merrill Lynch.

Hey.

Good afternoon, guys.

Hey, Ron.

Kevin, you talked about margin compression in automotive for -- when we think about modeling that, what kind of bounds can we put on it?

Is it a couple hundred basis points?

Can you just give us a broad feel for what you think it may be?

Over the next quarter?

Over the next year?

Over the next quarter, and then the next year.

It's hard, it's very difficult to predict.

We were, quite honestly, we were surprised on the up side on how well we did in Q3, but I guess probably in the neighborhood, probably at the high end of 400 basis points, 300 to 400 is very likely.

Is that for the quarter or for the year?

Quarter.

And then when we think out into next year?

That's more difficult to see.

I don't have the crystal ball on that other than what my earlier comment was is we would expect generally trends to come down over time, but I'm not going to comment on how many basis points.

It's very difficult at this point.

Sure, sure.

And then in marine, the gross margin took a big hit, at least it appeared that way in the quarter.

Can you talk about what happened in marine?

Well, I think what we've been commenting on in general is we see some variability quarter to quarter.

In particular, when we bring out new products, which we did in the marine season in Q2, sometimes we'll keep some variability, and so that's really what we saw in Q3 on the marine side.

We did take some price actions, as I mentioned, as we were trying to anticipate the next go-round, and Cliff talked about that a little bit with some new products coming out at Met.

So it's a combination of both product mix and also some price actions that took place.

Okay.

Another question for Cliff.

What year to date, you've delivered 57 new products?

Is that right?

You guys were talking about doing 80 for the year?

Does that mean there's 23 new ones between now and the end of the year?

I think the number we gave was 70 for the year, and we're well on track to be able to meet and exceed that.

Okay.

The bulk of those are, what, in marine?

Is there any new PNDs floating around in that or --?

Well, zumo, as I mentioned, is just now going to mass production, so it's a fourth quarter product.

Then we have some mobile products targeted to smart phones that are coming out, our GPS 20, smart mount device.

Okay.

And have you guys thought about doing a nuvi that's maybe like a nuvi light?

We have lots of ideas and we're executing on all of them.

Okay, great.

Thank you.

Thank you.

Your next question comes from JB Groh from D.A. Davidson.

Hi, guys.

Kevin, just one housekeeping issue.

What was the number of shares you repurchased in the quarter?

Well, we had a -- not going to give you an exact number.

We had a 3 million share purchase plan approved.

We're roughly about a third of the way through on that.

Okay.

And then, Cliff, you briefly mentioned mobile 20.

Just from a personal standpoint, is that still going to be a November availability?

I'd like to buy one.

Yes.

That's what we expect.

And how should we be thinking about, when I look at that, it looks more like a software product than a device.

How should we be thinking about the contribution margin for that product relative to your manufactured stuff?

Is it -- would you consider it a traditional software margin type of a product?

Well, it does have a significant hardware component with it.

The mount basically enables any Bluetooth phone that is not already GPS-enabled to have location capability.

So it really is a full GPS receiver built into the mount.

In terms of margins, this is a market much like the PND that we see a lot of competition from many players, including a lot of small players that are very desperate to have opportunities.

So the prices are actually quite low in terms of software application prices.

Okay, but so the mount actually has the receiver built into it?

Yes, it does.

Okay.

Thanks.

That's all I had.

thank you.

Your next question comes from Peter Friedland from Soleil.

Hey guys.

Peter Friedland.

Two questions.

First on the breakout of your inventory, it sounds, Kevin, it sounds like you quoted the Q2 breakout.

The numbers just don't add up to what's on your balance sheet.

No, I think, they should have added up to -- maybe I did.

Hold on a second.

Yes, I think you're right. 125 million in raw materials.

The days were right. 46 in wip, 176 in finished goods.

That's my mistake.

But the days were still right. 42 days of raw, 16 of wip, and 59 of finished goods.

Okay.

And then if -- going back for Q4 of '05, can you give us a rough breakout of the segment revenue for those quarters, just so we can be a little bit more accurate?

The breakdown of Q4 '05 in terms of the four segments?

Yes.

No.

We'll talk about that at our next earnings call.

Okay.

And lastly, it looks like your PND revenues dropped off a bit in Europe in Q3, probably more so than in the U.S.

What was the phenomenon there?

That's pretty typical.

We saw the same phenomenon last year, sequentially down from Q2 to Q3.

We had the same -- again, I'd say that's pretty typical.

We had a much stronger North American contribution, as I said.

There's nothing -- nothing unique there, I guess.

Well, I guess in the context of if you look at Tom-Tom was up a lot sequentially, and if you look at the PND unit numbers reported by Nastech and [inaudible], they were both up sequentially.

So just, I guess how do you put that in context?

I think there's -- you've got to take into account timing of sell-in versus sell-through.

We add a strong -- we add a strong Q2, and then typically August for us, and as we saw the same thing this year, August just basically goes away, from a sell-in.

It's a big holiday for the Europeans.

So, again, really no major change or shift this year than what we've seen in the past Q3.

Okay.

Thanks.

All right.

Your next question comes from Jim Duffy from Thomas Weisel.

Thank you.

Hello, everyone.

hey, Jim.

Just a clarification question.

Kevin, so the price action that you took at the end of Q3 on the automotive units, is that where you expect prices to stay for the holiday period or do you anticipate further steps in pricing?

I think we'll -- what we normally do on price is we take a major step, which we did in the very beginning of October, and then we evaluate how the demand is coming along throughout the quarter.

Often we'll add some additional promotional activities as we get into Black Friday or as we go through toward the end of the quarter.

Okay.

Things like rebates and things of that sort?

Yes, something like that.

Okay.

And then related to the bill of materials, I think I've heard you say in the past that your three largest components of bill of materials on the PNDs were screens, memory, and mapping.

Is that still the case?

Yes.

And then which of those areas do you see the most opportunity for further savings going forward?

Well, we hope all of them, but we think the display is still the largest, still the number one on the bill of materials, but approaching what some of the other costs are in the -- have been in the memory.

I'm sorry?

The display is still number one but it's come down significantly this year so it's approaching some of the actual costs for some of the other two or three or four costs on the bill of materials.

Oh, I see.

Okay.

I guess the difference in the cost used to be much greater on the display versus everything else.

That's not quite the --

So meaning the display used to be significantly more expensive than those other components, and that's now come down to be much more in line?

Right.

Okay.

And then maybe you're not prepared to talk about this, but as you look into '07, is it appropriate to think that the aviation business could return to historical 20% plus growth rates?

I think we won't give an exact number, but I believe given our results this year and what we see on the horizon given some of the new products we talked about, absolutely, we would expect a much higher growth rate on aviation next year.

Okay.

Don't forget the biz jets that Cliff talked about, the Mustang.

I think the Mus -- the VLJ market will be --

Yes, that seems like a big opportunity heading into the '07 time frame.

Then one more question if I can tuck it in.

At your analyst day, you put up a slide, and it was third-party data, I believe, but forecasting PND units for both the U.S. and Europe.

Is that still in line with where you're thinking the market opportunity will be, or given some of the strength that you've seen, would you expect those numbers -- ?

We don't see anything at this point on the horizon that would make us think that the high growth rates that were in that independent research have changed much.

We still see increased unit volume demand going toward mass market.

I think the PND category is proving itself to be a very significant category, not only this holiday season but as we go into next year.

Going into '07, do those numbers, those third party numbers make sense to you, or would you expect them to move one direction or the other?

Well, they'll probably move.

If you recall, even as we went into 2006, those numbers have actually increased.

Sure.

I'm not saying they're going to increase again but I would expect them to move some.

Okay.

Thanks very much.

Thank you.

Your next question comes from Bill Benton from William Blair.

Good morning, guys.

Hey, Bill.

Just wanted to check.

I think, as I recall, your expectations were 20% share in Europe by year end.

And I just want to ensure, is that still kind of the target?

That's still our target, yes.

Okay, and then just to confirm as well, did you say -- I think at one point you said that there were some the price cuts were reflected, maybe some of that in the revenue on the PND side in the margin at the end of the third quarter.

I think you just mentioned that the price cuts took place at the beginning of October so I just want to make sure, what is currently reflected in the financial statements with regard to the price protection?

Well, we're required because of -- if it's price protection related, which is what we give to our dealers and distributors when we make price changes, if they have any inventory left in stock, we have to account for how much is there, and then we take a credit, I guess, give them a credit, take it against our financial statement.

So some of that -- some of that price change that occurred right at the beginning of October we actually represented in our Q3 results.

Okay, okay.

And then in terms of your 20% growth outlook in outdoor/fitness, I guess year to date that would suggest that -- that actually looks a little conservative with regard to your fourth quarter expectations.

I would guess -- am I looking at some, you guys haven't given out all the pieces, obviously, of the segments, but it does appear at though year to date expectations would suggest that may be, and the trends suggest that may be a little conservative?

I think we've seen 22% year to date.

It implies an 18% growth rate in Q4 which I think is still reasonable.

It may be off a couple of percentage points, but it's not far off, given what we did last year, because we have strong outdoor/fitness season last year in Q4 '05.

I think it's reasonable.

Okay.

And then on the R&D front, that had picked up quite a bit sequentially, and I think you noted there was lower operating margins on the aviation side, which I suspect maybe some of that was going toward.

I'm trying to get a sense of, were there one-time items in there, or is that -- I think you mentioned 115 million for the year, so maybe that is a sustainable level we should think about going forward?

There's no one-time items.

We've been continuing to recruit and as I said, we've hired 200 engineers this year and many of them have been in the aviation segment which is one of the reasons that our operating margin came down a little bit more on aviation than it did the other segment.

The 115 is actually just continuing at a consistent growth rate throughout the fourth quarter.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from Noelle Swatland from Lehman Brothers.

Thanks, guys.

One clarification, then a question if I could.

Can you just remind me what you said with respect to your advertising plans for the fourth quarter?

Yes, we typically have our June and December quarters are the big quarters for TV advertisement, so I would expect you'd see a sequential -- significant sequential increase in our advertising for Q4 or right in that -- I think we've got 1,800 TV spots planned in the U.S. and we have a sizable number of TV ads in Europe, so you should see an increase in Q4.

Can you give us any -- sorry, just a follow-up.

Can you give us any sense relative like second half versus first half?

On advertising?

Yes.

I think previously you had said it should roughly double.

Is that right?

No, I don't believe I said that.

I think we've spent around -- just a second.

I think we've spent, what, 55 million, 52 million in the first half, 52 in the first half.

So we'll be -- probably be 65, somewhere in that neighborhood, in the back half.

Keep in mind our advertisement is not just TV.

It's both.

It's TV and cooperative advertising and other print media as well.

Okay.

And then just I guess just one last question, just around the third quarter.

You had said that there was some component constraints I think that had sounded like they had limited some of your shipments this quarter, and you had talked previously in the call about 10 million price concessions in the quarter.

I think there was some thought that maybe with sell-in of some of your new product that could actually help the revenues again this quarter, flat to up a little bit.

If you look at kind of where the finished goods are and where receivables were, kind of down, it looks as though something had changed there in September.

Did the market maybe weaken a little bit seasonally in the quarter than you hadn't anticipated or was it these component constraints that kind of limited some of the upside there?

Thanks.

First of all, let me clarify.

We really -- component constraints were not an issue in Q3.

So other than what I've already stated, in fact, that Europe was sequentially down, from an accounts receivable, we did ship -- we did ship product a little bit more linear than we typically do, we did in Q2, for example, where we shipped a lot of product at the last month.

But I don't think you can really read anything else into that.

Could you -- okay.

Last question.

Could you give us -- I think in the past you've given us a total unit target for the Company for '06.

I don't think we've ever quoted it, but you know that we've -- we've done around 3.4 million already this year.

So I think you can probably back into what a unit number is.

But it's close to 5 million or maybe a little bit north of that.

Thanks.

Thank you.

Your next question is a follow-up question from John Bucher from BMO Capital Markets.

Thank you very much.

At the analyst day, you indicated that you were spending more time on acquisitions or scouting out prospective acquisitions.

Anything to report there?

We haven't heard anything since then.

Did you have some deals that fell through?

And then last question, on your hosted services that you're providing for Sprint, I recognize that no matter what sort of trend changes you saw there it's going to be a small percentage of the overall revenue but can you talk about any trend changes on the hosted side and whether you're still actively involved promoting this with other carriers?

Thanks.

Okay, John, I'll address M&A, then I'll have Cliff talk about the hosted services question.

I think in any kind of evaluation mode, you're always going to have some deals come and some deals fall off so definitely we've had some that we have evaluated that haven't worked out, but we definitely have other transactions that we're looking at.

So there's not a whole lot to report there but as soon as there is news, if any news, then we will bring it to your attention.

Yes, and John, on the spread.

We are seeing some uplift in terms of our mobile application subscription rates, but as you pointed out, this is still a very small phase.

So I wouldn't read anything into that in terms of revenues, but through some focused efforts we've been able to partner with Sprint who has promotional programs and things like that which have helped.

In terms of promoting it elsewhere, yes, we're working on actively promoting it both domestically as well as internationally.

Thank you very much.

Your next question is a follow-up question from Ben Swinburne from Morgan Stanley.

Thanks, guys, for taking this call.

I just wanted to come back to the third quarter PND numbers.

In Europe, it looks like you had indicated earlier in the quarter that you were -- the share was sort of flat for you guys, maybe even increasing, and that seems to be the evidence we have seen from various industry sources.

Is the -- did the category sales levels come in in the third quarter a little lighter than you would have thought overall?

I know it's -- we're all sort of triangulating a bunch of different data sources to get there but it seems like even if I adjust for the 10 million price protection, Kevin, it still seems like the PND revenues were a little lower than where I would have thought and that may have been a September issue.

Are you talking about overall or just in Europe?

In Europe.

Again, I can't say it any other way other than I don't think we were surprised at what happened in Europe because we typically see a reduction sequentially from Q2 to Q3, so probably basically the same answer as what I gave earlier.

Do you think your share increased sequentially from 3Q to 2Q in Europe?

That's a harder one to determine.

Again, you've got to triangulate based on sell-in and sell-through but we still feel like we retained, if not maybe raised a point or two on the sell-through in Europe in Q3.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Rich Valera from Needham & Company.

Thank you.

Rich?

Yes.

Can you guys hear me?

Hello, can you guys hear me?

Hello?

Kevin?

Can you hear me?

Okay.

Anyway, just -- Cliff, I was wondering if you could comment on your thoughts on the Nokia 330 which was just announced.

Any thoughts on the positioning of that product in Europe in terms of price and functionality?

So the product doesn't appear to offer the capability that's different than what the market is at today.

It is a larger product, you know, set of hard keys and various things [inaudible].

Price-wise, it's on the expensive side compared to where the market currently is at.

So generally, again, we always like to say that we don't underestimate competition, but at this moment, that's all we really know [inaudible].

Great.

Kevin, in the outdoor/fitness category, we don't have the year-over-year comparison there for the fourth quarter.

Is there anything you can say about the expected sequential trajectory for 3Q to 4Q in outdoor/fitness?

I would assume --

Definitely.

It's similar in trend, or in direction to Auto/Mobile.

Those are the two segments that sequentially go up from Q2 to -- Q3 to Q4, excuse me, but I would expect it in the 15 to 20% range, sequentially up.

Okay.

That's helpful.

Thank you.

Your next question comes from Peter Barry from Bear Stearns.

Good afternoon.

Hello.

Kevin, you mentioned in your remarks that the retail pipeline looked pretty clear.

You have pretty decent visibility in that regard.

Could you give us a sense of how it looks relative to this time a year ago?

Are there any similarities, any significant differences, that you've seen or are fearful of?

I think when we look at backlog and some of the trends and I guess grassroots type of information that we're hearing back from the dealers and distributors, I think we're very similar to last year.

I think we're expecting a significant sequential uptick in revenues and the products appear to be very well received and moving through the channel pretty quickly.

So I'd frame it as pretty similar to last year.

And did this sell-in last year give you a pretty decent read on what the sell-through eventually was?

That's a little bit more difficult question.

It can.

It's not 100% accurate.

In general, we have pretty good information on sell-in and sell-through from the major retailers, specifically in the U.S.

It's easier in the U.S. than it is in Europe.

We're getting better data as we move forward in the European market.

But in any event, the demand environment looks to be as good, if not better, than it was a year ago?

I think it's very similar, yes.

On the ASP front for PNDs, could you give us a sense of what you're looking at as you look out over the remainder of this year, and just as importantly, if you will, in '07, what the pricing climate might look like both in North America and Europe?

Well, I think the ASP is a little bit of a misnomer because of the fact that we've got over 100 different products, and we've got, in the PND market, we have several different price points, as you know.

I think if you take a look at the ASPs on an equivalent product like a C-330 that's been selling for almost two years now, we see price declines of around 25%.

The other factor is a brand-new product like a new V660 that Cliff spent some time on.

A brand new product has a higher price point.

Those all reflect into our overall ASP within the business.

So we definitely have product mix that impacts that ASP number.

Europe, I would say in general, is probably 15, 20% below the pricing in the U.S. for North American markets.

Now, your comments, the $332 ASP captures a blend of the entire product line, correct?

That is correct.

So relative to that number, are we looking at like 5 or 10% assumed declines over any 12-month period of time?

Well, I think we've seen a similar number to that as I think I commented on earlier, not only in total but at the automotive/mobile.

I think as you look at the PND, that's 60% roughly of our total business.

That's what's driving a lot of that.

I think the ASPs overall are coming down, but I don't think you should put too much stock in a one blended ASP.

You really have to look at our overall pricing in each of the four business segments.

Okay, final question from me.

Ad spending, given, one, the influx of meaningful competitors on the PND front, and certainly the seasonal factor.

Your $55 million in the second half gives you about a 6.2% ad spend to revenues versus, what was it, 7.7% in Q2 last year?

Should we read anything into that?

Advertising and brand building are still a very high priority, I assume.

Absolutely.

If we're going to spend over 100 million, could be as high as, say, 115 million in advertising this year, that's significantly higher than a year ago.

So we're definitely in the brand building mode.

That's it for me.

Thank you very much.

thank you.

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

Hello, Adam?

Adam Benjamin, your line is now open for a question.

That question has been withdrawn.

Your next question comes from Annette Blackwell from Whitman Capital.

Hi, this is Doug Whitman at Whitman Capital, and with Dave.

I was just trying to -- I'm a little confused on the inventory question and going back, so if you can just give us a little clarification on the third quarter inventories.

We've got total inventories of 333.5, and obviously would be happier if the days are lower.

And I'm just a little confused, because I've got 145 days.

Are we missing something here in the way you guys compute inventory days?

Yes, I don't know how you calculate it.

We typically look at a 12-month rolling forecast and we look at forward-looking, not backward-looking, because obviously the inventory we have on hand is to support future growth and when you are in a growth business like we are that's growing 65, 64% a year, it doesn't make sense to look back, so I don't know if that's the difference.

Okay, so you're not using normal accounting, you're using kind of a growth projection?

Well, I don't know about normal accounting but there's two different ways to look at days of inventory, backward or forward.

We, again to my earlier point, we look at forward-looking because it's supporting future growth.

Okay, so when you run the company, you look at what you expect the outlook to be?

Yes.

Okay.

That makes sense.

Thank for the clarification.

Thank you.

Your next question comes from Rob Sanderson from American Technology Research.

Hi, good morning.

Thanks for taking my question.

A couple of quick housekeeping, then a follow-up.

On the housekeeping side, did you provide a unit number in the automotive segment?

I think I may have missed that if you did.

No, we didnt.

I'm sorry, Rob.

Is that something that you could provide?

No, we've never given segment unit data.

Okay.

That's fine.

Then on the -- on the taxes, thinking about next year, I think last quarter there was some discussion about 19% maybe being a good longer term target.

Do you think that's a good estimate to be using for '07 at this point, or do you think it might be a little lower than that, or what are your thoughts on taxes?

I would say overall a little bit lower.

We have seen a few tax changes in some of our legal entities that I would say 15.5 will be increasing next year.

I would probably put it closer to 17, maybe 18, but not as high as 19.

Okay, and then 19 maybe just good for longer term in the out years, something to think?

All right.

Thanks.

Just some comments or questions on channel.

Your comment on retail channel inventory being lean, how regularly do you get updates from your distribution and retailers, and is that something that's just a sort of a grassroots effort or is there more of a formalized way to get view on visibility in the channel and sell-through?

Yes, I think it depends on the retailer, anywhere from daily to monthly depending on who we talk about.

Some of these are very formalized reports that we can go out and get off the web, and others, it's more of a grassroots type of a discussion with them.

So I think -- we think we have pretty good visibility, especially with the larger customers.

Yes, okay.

Great.

That's helpful.

Then finally on the channel development effort in Europe, how far along would you say you are into that initiative?

I know it's been a big work in progress and you're showing some good success there, but how far along would you say you are, and what kind of share do you think you can -- would be a reasonable target into '07 in the European market?

Well, I think we've stated in the past, I think we still firmly believe that we should have a higher market share in Europe than we do today, so for our targeting 20% at -- by the end of the year going out of the year, we want to see even higher going forward.

Obviously I'm not going to quote a specific number.

But I think in some cases we have made progress, in some of the European countries, because as you know, Rob, it's so fragmented, and each country is quite unique.

I think we've seen maybe some countries that have done better recently and others that have done worse.

So I think that's our goal is to try to improve it across the board in terms of channel fill and channel strategy.

It it's really hit the big geographies and the big retailers and distribution first and then fill out as you go, so would you say you're 75, 80% of the way there in terms of getting the relationships going in the key markets, or is there still further to go on penetration?

I think there's further to go on the penetration.

Thank you very much, guys.

Thank you.

Your next question comes from [Anthony Meribito] from Fidelity.

Yes, hello, gentlemen.

I have a more fundamental question.

I'm pleased with the great numbers that you've put forth and everything, but I'd like some explanation as to why the stock is down 14 -- over 14% this morning and the volume sales are over five times normal.

Does somebody know something that we all don't?

That's a good question.

I think we are pleased with the results.

I think it appears that expectations were higher than what we've posted as far as results.

For the second or third quarter in a row, we've met or exceeded EPS expectations and raised guidance, so I don't know if I could comment any further on that.

There's no explanation for what's happening this morning?

I don't believe we're the right ones to ask.

I think you've got to talk to the people moving the market.

Okay.

Thank you.

Your next question comes from [Tas Turner] from [Traffilit.]

Hi, guys.

Just in looking at your Q4 guidance and I understand the incremental spend in the sales on the SG&A line but it appears that there's an acceleration in the operating -- in the decline in the operating margin.

Is that something that will continue through 2007?

Well, I think most of that, if you look at what we've implied in terms of operating margin, we're still looking at a 29% operating margin for the year.

But we're also planning on a lower gross margin percentage basis in Q4.

Whether that will continue, this was asked earlier, it's very difficult to predict, but I think it has to do with the auto/mobile segment and overall margin, margin scenario there.

So most of the operating margin again would be related to the gross margin line.

I think the operating expenses will come in pretty close to flat on a percentage of sales.

So will operating margin -- will the operating expenses as a percent of sales be similar in 2007?

We haven't commented on that, but I guess I don't have any reason to believe that they wouldn't, because we're still expecting solid growth in many of our segments next year.

We haven't given any specific 2007 guidance at this point.

Okay, thank you.

Thank you.

Your next question comes from Brian Modoff from Deutsche Bank.

Yes, coming back to the inventory again, can you in terms of your finished goods, can you give us any idea where the significant increase is?

Is this mainly PNDs and the outdoor, or is there some other parts of the business?

Can you break it down for us a little bit in terms of what areas were -- were subject to the largest increase?

PNDs and outdoor, you got it.

I mean it's mostly PND.

Were the bulk of the sequential increase?

Yes.

And this driven by orders from customers, or anticipated orders?

Both.

Both real orders and anticipated orders.

Okay.

Thank you.

Thank you.

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

Thanks, guys.

Sorry about that before.

Just had a question about the StreetPilot C-300 series.

That still remains a pretty significant portion of your PND business.

Just curious what the impact of that is as that gets phased out in terms of the gross margin line, and then when you expect that to kind of fully phase down and ramp out.

Thanks.

Well, the C-series, or C-330 in particular, is pretty much phased out already in Europe, and it will be phasing out, I think, over the next several quarters in the U.S.

Clearly the lower price point, it has a lower -- relatively lower margin compared to some of our higher price points, so that's how it impacts the overall PND margin line.

Would you be able to comment just as a percentage of your total PND mix what it represents today and where you expect it to be at end of the year?

I will just comment that the nuvi is our number one seller, and we expect it to continue to be the number one PND product as we go forward, but I'm not going to comment on between now and the end of the year on the C-series.

Great.

Thanks.

Thank you.

Your next question comes from [Louie Toma] from [Longtrell Investments.]

Hi, guys.

Just a couple of questions.

Can you just talk about the margin differential in Europe versus the U.S. just so I can try to get an understanding of how that impacted your margins?

Well, I think just relatively speaking, we thought -- I mentioned earlier roughly 15 to 20% below on price, and there is a different mix of product.

I just said the C-series has basically gone away.

We sell several different price points of the nuvi in Europe, so overall it's definitely lower margin but I'm not going to be able to give you an exact number of how much lower in Europe versus North America.

Okay.

That's all I had.

Thank you.

Your next question comes from Kalpesh Kapadia from C.E. Unterberg.

Hi, gentlemen.

Talking about price elasticity, you mentioned that this market is very price elastic, and your largest competitor has taken proactive price action and from what I hear from you is that you -- you reacted in Q3 being the market leader.

Agree that nuvi has nine different features and you are selling on features, but Tom Tom 1 with one single feature that is most important, navigation, is priced right.

What is your strategy to tackle that at some sort of nuvi light or that kind of product?

Well, Kalpesh, we actually took action to reduce the price of nuvi in Europe so that it is on par price wise.

There's really no difference there at all.

But we still believe the nuvi is a stronger product, offers more features, it's easier to use, offered at the same price.

So how do you see the segmentation in terms of pricing in the U.S., which is your stronghold?

Are you going to take proactive action and price your product and segment them correctly, or are you going to react to Tom Tom again?

I think the market in the U.S. is not as chaotic as in Europe, and we are the brand leader in the U.S.

We do offer a broad range of products at multiple price points, premium category and [inaudible] so we have a very comprehensive presence here in the U.S.

And next question on C-330, there was a question asked earlier.

Your 5CD start-up, C-500 CD starter, pretty similar to 300.

So why wouldn't you phase out C-series and then just focus on 5 series which is pretty similar in features?

Actually, that's not correct.

The 5-series does have more features than the 3-series.

Better receiver, better display, and in the 550, it has greater traffic capability.

There is feature differentiation.

The C-series, the C-330 has emerged as the value leader in the market.

NPD, it is [inaudible] 5-series is step-up, premium product [audio difficulties].

Where do you see the price elasticity in the market with different price, the $300, $200 What is the magic price point in the U.S.?

That's a good question.

I think most of our experience at this point is under $500 in terms of seeing the increased volumes there.

At this point, I don't think it's clear to us where it's going to go and the prices continue to trend down over time.

So I -- I don't think we have to --

Thank you.

Thank you.

Your next question comes from Steve Lidberg from Pacific Crest Securities.

Good morning.

Two questions.

First of all, with regards to channel inventory, can you talk a little bit how it changed sequentially from Q3 to Q4?

Did it actually -- I'm sorry, Q3 from Q2.

Did it actually decline and then on a -- I guess a weekly sell-through basis, or how you guys measure that.

Secondarily, looking at the value-added features of the PND device, namely real-time traffic information, price information with regards to fuel, what kind of level of interest are you seeing in those -- that future set?

Thanks.

Well, I'll address the first question.

When we exited Q2, we had introduced several new PND products in particular so I think we probably had sell-in on the channel.

Nothing -- I wouldn't categorize it as significant, but I would say in general there may have been a little more channel inventory, all this new product, nearly all new product.

I think the North American market in particular sold very well in Q3, and the channels were pretty clean as we exited Q3 and as I mentioned earlier had strong backlog going into Q4.

Europe, because of its sequential decline from Q2 to Q3, I think we ended the quarter also with pretty clean inventory in the channels.

Do you target a certain number of weeks that you're looking at in terms of product on shelves?

At the retailers, no, we're just -- every retail distributor is a little bit different.

We work with each one individually to find out what they require.

Okay.

In terms of your question on traffic, we definitely see growing interest in traffic information delivered to the device.

As I mentioned in my remarks, we offer comprehensive solutions for our products across the range and both in the U.S. and Europe.

For example, in the U.K., we offer a nuvi with a lifetime traffic subscription, and in France it's the same story.

Here in the U.S.. our C550 as well as our new, nuvi 660 offer built-in traffic receiver, and definitely we see it as a differentiator in the market and customers are stepping up.

Any sense of uptake or penetration of devices, penetration rates?

Well, it's a little bit hard to say.

In Europe, in the couple of cases I mentioned, the traffic is bundled with the unit, and lifetime -- several countries in Europe, the traffic is just free.

So if you have a traffic receiver, the customer can always receive that.

Here in the U.S., it is a subscription-based model, and so far most of our products that have been delivered to the market are still operating under a free bundled service for 90 days.

So we don't have a firm sense yet, but we do see the customers are asking for it, and are willing to step up to buy those products that have the receiver bundled in.

Fair enough.

Thank you.

There are no further questions at this time.

Okay.

Thank you again, everyone, for your questions.

I think this ends the call.

We look forward to updating you as usual at the end of the 2006.

Take care.

Bye.

This concludes today's conference call.

You may now disconnect.