台灣國際航電 (GRMN) 2006 Q4 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Garmin, Ltd. fourth-quarter and fiscal-year 2006 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. (OPERATOR INSTRUCTIONS). Thank you. Ms. Schwerdt, you may begin your conference.

Good morning. We would like to welcome you to Garmin, Ltd.'s fourth-quarter and fiscal-year 2006 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. Please note that this Webcast does include slides which you can view during the call. An archive of the Webcast will be available until March 9, 2007. A telephone recording will be available for two business days after this call, and a transcript of the call will be available on the Web site within 48 hours at www.Garmin.com/stock under the Events Calendar tab.

This earnings call includes projections and other forward-looking statements regarding Garmin, Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products and our plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Ltd. this morning are Dr. Min Kao, Chairman and Chief Executive Officer; 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, Kevin Rauckman, and Cliff Pemble.

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

Thank you, Polly. Good morning. From the press release, you can see that we have finished a very successful year. We recorded our 16th consecutive year of business growth. Total revenue for the year increased 73% to just under $1.8 billion. EPS was up 64%, or 72% excluding the effect of foreign currency. Unit volume was up 80%. Operating margins only declined 160 basis points. Besides the significant shift of product mix to the low margin PND, which accounts for 62% of our total sales for the year. So we are very pleased with all these numbers.

Over 5 million Garmin products were shipped in 2006, raising our total to 19 million units shipped to date. And we delivered over 70 new products in 2006 across the four market segments.

Our worldwide employees increased to 4750. We added 1700 associates in 2006, including 250 in engineering; 950 in manufacturing, mostly for the new factory; and 175 in marketing, including customer support for our second call center to handle the increased call volume.

2006 was a year of expansion. We purchased our Jongli factory in Taiwan, bringing Garmin's total capacity to 11 or 12 million units. They are fully equipped and staffed.

In Europe, we are on track to occupy our new headquarters in April. And as a part of our expanded branding campaign, we opened our Chicago retail store before the holiday season to showcase Garmin's products and technologies.

So we are pleased that Garmin was recently named by Forbes magazine as America's best-managed company in the field of technology, hardware and equipment, and one of the 400 best big companies in America. We continued to expand our patent portfolio with 308 issued and 207 pending applications. Garmin was selected as constituent of the Ocean Tomo 300 Patent Index based on patent portfolio quality.

We made three acquisitions in the past three months. Dynastream Innovations, which is a leader in personal monitoring technology, especially in the field of foot pods and heart rate monitors for fitness products. It is also a leader in ultra low-power, low-cost wireless connectivity solutions, which will be used in many of our future products. The acquisition is a part of our strategy to strengthen and expand our fitness market.

Digital Cyclone, which is a leader in location-based weather services, for handset applications. This acquisition is a part of our strategy to expand Garmin's handset applications and weather products.

And EME, our former French distributor, which has now been renamed Garmin France. This acquisition is a part of our strategy to strengthen our market position in Europe.

We are excited about these acquisitions, and are working hard to integrate these operations to realize their potentials.

2006 achievements -- revenue for the automotive and mobile segment increased 170% year-over-year, driven by the strong sales of the nuvi and StreetPilot product lines. Gross margin remained unchanged at 44%. And operating margins actually improved 100 basis points, which we are very pleased.

Additional vendor car wins and auto dealer promotional sales continued to increase customer exposure to Garmin's brand and [P&E] products. According to independent market research, Garmin has maintained and [started] a number one position in North America, growing and started number two position in Europe.

Our expanded ad campaigns have enhanced our brand awareness both in the U.S. and in Europe. The outlook for the P&E market continues to be very positive, and we are projecting a revenue growth of 50% for 2007.

Moving forward, the outdoor fitness segment increased 20% year-over-year, driven by the expanded fitness product lines. Gross and operating margins improved 460 and 530 basis points, respectively. We believe Garmin has established itself as a leader of GPS and network devices in both running and cycling markets, which will continue to drive our future growth. We are anticipating a 20% revenue growth for the segment in 2007.

Moving forward, the marine segment increased 5% year-over-year. Gross and operating margins also improved 470 and 250 basis points, respectively. Significant investment in R&D was made in this business segment in 2006, so we anticipate the revolutionary new suite of marine products and cartography announced recently will drive 2007 revenue to grow 20%.

And finally, the aviation segment. Revenue for this segment was only up 2% year-over-year. Gross and operating margins also declined 150 and 500 basis points, respectively, due to delays in certain OEM programs and new product introductions. The good news is that 430 and 530 watt and the GMX-200 both began shipping in late 2006. We have also completed a certification of our first VLJ program, the Cessna Mustang. We anticipate this new product and other new certifications will drive a 20% growth in 2007. We continue to feel very optimistic about the long-term prospect of our aviation business.

Some operational highlights -- channel sellthrough in Q4 was very strong, and had inventories all clean by the end of the quarter. With our added production capacity and improved planning, we did not experience any significant component or product shortages in Q4. Raw materials and physical inventories decreased both in days and dollars by quarter end, as anticipated.

We continued to expand our marketing and sales infrastructure, including the position of our new European headquarters and the purchase of our French distributor. We were pleased that we were able to offset the significant PND price compression by material cost reduction, most significantly, the flash memory and LCD displays, and volume efficiency and also improved product mix.

As we look forward, we are optimistic about our future. Double-digit revenue growth is anticipated across all business segments in 2007. The total PND unit in 2007 is projected to double in North American market and increase 60% in Europe.

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

In 2007, we expect to invest approximately $150 million in advertising to promote our product and the Garmin brand.

Now we have continued to increase our focus on sales and marketing. We will advertise effectively to increase awareness of the Garmin brand and maintain our goal of market share. We will focus on the development of new opportunities to [distributed] products and expose consumers to navigation and related technologies. We have continued to pursue, improve the product position and grow the offerings in new and existing (indiscernible) channels. We are committed to price (indiscernible) our property to both honor Garmin's superior quality and compete effectively.

And finally, we pride ourselves as a technology driven company. We will continue to invest heavily in R&D to take advantage of opportunities in new and existing markets. Innovation, ease-of-use, and rich content are keys to continued success. We anticipate adding over 250 engineer associates and investing in assets of $140 million in R&D this year. Our strong pipeline of new products is planned to be released throughout the year.

With that, I would like to turn the call over to Cliff Pemble. He will present a product update. Kevin Rauckman will then discuss our financial results and the fiscal year 2007 guidance. Thank you.

Thank you, Min. 2006 was an exciting and record-breaking year for our new product introductions. Today, I will be highlighting some of our recent achievements, and I will also provide some comments on 2007 activities.

We introduced several new products at this year's CES show in Las Vegas. Most notably was the nuvi 680, which is the latest in our premium PND lineup, and is the first product on the market to feature services provided by MSN DirectBand. This product receives real-time content relevant to the driver, such as traffic incidents with flow information, gas prices and current weather conditions for cities around the country. We also added an element of fun and spontaneity by including movie listings and showtimes with locations. Finding dinner and a show has never been easier now that the nuvi 680 is on the market. And the 680 comes out of the box with one year of these services included at no additional charge to the user. After one year, the service can be renewed for as little as $49.95 per year, or $129.95 for a lifetime subscription. The nuvi 680 offers more content and much lower cost of ownership than any other connected navigator, which is either currently available or announced. And we are excited to say that it is now shipping to Best Buy, and will be on the shelves shortly.

We also introduced the nuvi 370 and 670, which offer built-in street maps for both the U.S. and western Europe. These products feature integrated traffic receivers which are able to take advantage of free traffic services widely available across Western Europe. And the nuvi 670 is the first PND on the market to include a built-in FM transmitter, which is now legal in many western European countries. We also expanded our motorcycle product lines with the zumo 450, which is a value-oriented product offering full coverage maps without the Bluetooth function.

For our wireless solutions, Garmin offers a strong lineup of solutions and innovations in our product portfolio. We offer applications featuring onboard maps, stored locally on the device, and we offer maps and turn by turn functionality generated from our Garmin server. Our Garmin mobile XT onboard application offers compatibility with over 260 mobile handsets running Windows, Palm, and Symbian operating systems. Garmin Mobile XT is the first turn-by-turn application to offer rich, real-time content services at no additional charge to the user, including traffic services, fuel prices, weather conditions and nearby hotel values through hotels.com. Our Garmin Mobile off-board application continues to lead our competitors in turn-by-turn functionality and rich real-time content such as traffic and fuel prices. With the addition of our new DCI division, Garmin now offers a broad range of a subscription-based LBS applications for a wide variety of target user groups. And Garmin has been a leader in incorporating other wireless technologies into our products, such as Bluetooth hands-free calling, RDS-TMC traffic receivers, MSN Direct technology, and FM transmitters for broadcasting MP3 content and turn-by-turn directions.

Looking at our overall PND product portfolio, Garmin continues to lead other providers in breadth and depth of product offerings, providing a solution for nearly every customer at every price point, which is a business model that has served us well.

Moving next to accomplishments in aviation, we received certification approval for our GNS 430 and 530 products with a WAAS receiver. Shipments commenced in December of 2006, and we have seen strong demand for these products, both from new customers as well as existing customers who signed up for our attractive WAAS upgrade program. I will provide more on that later.

In our OEM business, we are pleased to support Cessna in the certification of the Mustang Light Jet, which is the first light jet to reach the market with a fully integrated cockpit system. Cessna began delivering the Mustang at the end of 2006, and will be ramping up deliveries during the early part of 2007.

As I mentioned earlier, response to our WAAS upgrade program has been overwhelming, with over 15,000 units scheduled for upgrades. I am pleased to report that the upgrade process has begun, and customers purchasing new GNS 430 W or 530 W units provide an opportunity to create pull-through sales for our other panel mounted equipment. The GNS 200 multifunction display is an attractive companion to the GNS 430 and 530 family, featuring a fantastic new color display, Jeppesen charts, and interfaces to most popular radar and TAWS systems available on the market. With these new product offerings, we hope to expand our base of over 70,000 430 and 530 products already serving in the field.

Finally, during 2007, we will be working hard developing the new G600 retrofit integrated cockpit system. The G600 has been receiving a great deal of favorable press for its innovation, great features, and industry-leading low-price. We believe the system will be a game changer for general aviation retrofit markets.

Turning next to our integrated cockpit development, we anticipate expanding the reach of our G1000 integrated cockpit system this year by adding three new OEM partners and four new aircraft platforms. In addition, we anticipate launching the G900 integrated cockpit system for experimental aircraft as well as the retrofit G1000 for King Air C90B platforms.

Finally, we will continue to support our existing customers such as Cessna, Honda, Embraer, Diamond, Raytheon and Mooney as they develop and sell some of the most innovative aircraft available on the market today.

Turning next to the marine segment, we have been working hard to complete the entire line of next-generation chart plotters and fishfinders introduced at the 2006 METS show in Amsterdam. These new products offer a number of innovations in ease-of-use, cartography and graphics capability. We have included a new base map which offers satellite imagery overlays, and our new g2 Vision data cards provide 3D mapping views and detailed satellite imagery depicted from both above and below the waterline.

Our exclusive marine auto riveting function provides mariners with a suggested path that will conform to depth or obstacle avoidance criteria established by the user. All of this is complemented by a totally new simplified user interface and eye-catching industrial design. We are pleased with the positive response we have received so far, and look forward to starting deliveries in the early March time frame.

Just yesterday, we introduced yet another member of our marine network system, the GPS Map 5000 series. This product offers even simpler operation using only an integrated touchscreen and leveraging the industry-leading UI philosophy found in our automotive products. Offered in both 8-inch and 12-inch models, we anticipate this product will be available in early spring.

Over the years, we have been working hard to expand our presence in the marine market, and part of that strategy is to offer a full line of marine radar solutions. Our new GMR 18 targets value-oriented customers who are looking for an entry-level price point, but don't wish to sacrifice performance. The GMR 18 offers twice the power of competitive 18-inch radars, but is priced at under $1000. We also offer higher-end radars in a 24-inch dome configuration as well as 4-foot and 6-foot open array configurations. These radars offer industry-leading beam width for better target resolution and clarity. All of our radars feature built-in display processing and modern Ethernet connections to our marine network system for easy installation and reliable operation. We believe our marine product lineup is very strong, and we anticipate that this will drive growth in this segment during 2007.

Finally, we have expanded the application of GPS by introducing the new Astro Dog Tracking System. The Astro is the first dog tracking system to offer map-based tracking functions using a color handheld receiver and a wireless transmitter attached to the dog. Hunters can simultaneously track up to ten dogs at distances up to 5 miles. It features a high sensitivity GPS receiver for operation in dense foliage, and we have included additional sensors which alert the hunter if the dog is on point with meaningful game, or is just taking a break. We received a remarkable number of positive comments on the Astro, and look forward to delivering it in time for fall hunting season.

That concludes my product update. Kevin will now present highlights from our fourth quarter and 2006 financial results.

Thank you, Cliff. You have seen from the financial results this morning that we began to set new records due to the overall strength of our Company and the growing Garmin brand. During my part of the presentation, I will be walking each of you through the Q4 results, a quick summary of our full-year results, mention the balance sheet and cash flow statements, and then conclude with detail and expectations on the full year 2007 expectations.

So looking first at the Q4 income statement, our revenue again was $611 million, net income of $180 million. Our EPS was reported at $0.82 per share. That represents a 91% top-line growth and a 105% EPS growth for the quarter. The results did include a $0.05 EPS impact due to the foreign currency loss of $10 million during the fourth quarter of '06. And we also mentioned in our press release that we saw a favorable $0.07 EPS impact due to the credits that we achieved by reaching higher unit volume during Q4. So gross margins came in better than expected due to price erosion, offset by the material cost reductions, volume efficiencies in our factories and product mix. Overall, our operating margin was 32.5% of sales, which is up from 30.8% last year, and better than expected. This improvement in operating margin was driven by a 110-basis point unfavorable gross margin, 200 basis points favorable advertising expenses, 30 basis points unfavorable other SG&A, and 120 basis points favorable R&D expenses.

Garmin also invested nearly $40 million of its advertising during the fourth-quarter holiday season, which was $16 million more than during the third quarter of '06. As you recall, Garmin typically invests heavily in TV advertising, both during the June and the December quarters. And we will expect that to continue in the future.

We also shipped nearly 2 million units during the fourth quarter, and our average selling price during fourth quarter was $306 per unit, which is 8% below the third quarter and 1% below the fourth quarter of 2005. We are required to mention the fact that there are certain non-GAAP measures that we reported, which include net income excluding the effects of foreign currency. This impact was $0.05 per share favorable during the fourth quarter, but had no impact for the full year of 2006.

Looking at the segment revenue, we experienced double-digit revenue growth within our outdoor fitness segment and triple-digit revenue growth across the Auto/Mobile segment.

Our Auto/Mobile revenue grew nearly 2.75 times the fourth quarter of '05 on the strength of our nuvi and c-series products. And the total PND unit volume tripled year over year during the fourth quarter.

Within the Auto/Mobile segment, our year-to-date growth, as Min mentioned, was 170%, and we expect a strong 2007 as we either retain or grow our market share in this segment. The outdoor fitness segment continued to meet expectations as the revenue for the year was up 20%.

Our marine and aviation segments grew 5% and 2% year-to-date, respectively, and overall, our total-year revenues grew 73% during fiscal 2006.

In the past, we have measured the effects of the sales of new products that were introduced within the last 12 months, and during the fourth quarter, that number was 55% of our total fourth-quarter revenues.

Because of the explosive PND market, our Auto/Mobile segment now represents 73% of our total business, growing from 50% of the total business a year ago in fourth quarter of '05. Within the Auto/Mobile segment, the North American market unit growth was very similar to the European growth, as sales in both of these continents experienced 100% unit growth sequentially from the third quarter of '06. Garmin Europe and the North American market growth were nearly equal, with North America representing 54% of our total revenues and Europe growing to 32% of our total business.

During the fourth quarter, North America revenue was up 86% while our European business increased 109% during the quarter. Our Asian sales also grew 59% during the period. All three of our geographic regions grew 65% or greater on a year-to-date basis. We exceeded our earlier expectations for 2006 by nearly $100 million as we recognized $1.77 billion of revenue during 2006.

Looking next at our margin by segment, the fourth-quarter aviation gross margin increased from 64% in the third quarter to 67% as expected, and our aviation operating margins increased from 32% to 38% due to an increase in revenue during the period. Our fourth-quarter outdoor fitness gross margin remained at 56% during the period, and our operating margin was also stable at 40%.

Fourth-quarter marine gross margin remained at 53% during the period. However, the operating margin within this segment declined from 34% to 27% due to the sequential decline in revenue from the third quarter.

Q4 Auto/Mobile gross margin increased from 42% to 46%, beating our own expectations. Favorable product mix, significant material cost reductions and volume efficiencies helped increase this margin. The $0.07 impact that I mentioned earlier on the EPS was primarily within this Auto segment. Operating margin actually increased 600 basis points for the Auto/Mobile segment up to 31% as revenue growth outpaced our operating expense growth.

With the exception of our Auto/Mobile segment, we expect short-term margins to be relatively stable despite the possibility of quarter-to-quarter variability due to both product mix and the timing of our new product introductions during 2007. We do continue to expect that our Auto/Mobile segment will experience declining operating margins due to reduced pricing and a continued transition toward mass-market levels, and those expectations and assumptions are built into our overall 2007 guidance that I will go over here in just a few minutes.

On the operating expense side, our R&D increased over $11 million year-over-year in dollar terms, but was down 120 basis points to 5.1% of sales. As Min mentioned, we added over 250 to our engineering team during 2006, and we now employ 970 engineers and engineering associates. Our ad spending increased by $12.6 million over the year-ago quarter. However, on a percentage of sales advertising decreased to 6.5%.

Our other SG&A line increased 30 basis points to 5.7% of sales from 5.4% a year ago. We continue to expect that our operating expenses will come in at approximately 17% of sales for the full year of 2007.

I'd like to spend a little bit of time on the full-year results, full-year income statement first. As I mentioned, revenue was $1.77 billion, net income of [$514] million, and an earnings per share of $2.35. This represents a 73% top-line growth, 64% EPS growth. When you strip out the FX gain of $15 million we recognized in '05, earnings per share actually grew 72% for the full year. Our gross margin was 49.7% full year, which represents a 240 basis point decline from 2005 due to our Auto/Mobile segment becoming a much greater component of our business during the full year. We do expect this trend to continue during 2007.

Overall year, 31.3% operating margin, which is down 160 basis points from '05. However, it is better than we earlier expected in our guidance. We did ship over 5.4 million units during the year, and our average selling price across the entire business for 2006 was $326 per unit, which was a 4% decline from 2005.

For the full year 2006, because of the triple-digit growth within our Auto/Mobile segment, that segment has now grown to become 62% of our total business. The outdoor fitness, aviation and marine segments now make up 16%, 13% and 9% of our total business, respectively.

While all geographic regions grew more than 65% during the year, Europe was the fastest-growing at 88%, and became one-third of our total business for the full year of 2006.

Moving next to the balance sheet, after Garmin paid a $108 million dividend in December, we ended the year with a cash and marketable securities balance of nearly $820 million. Our accounts receivable increased during the period to $403 million due to strong November and December shipments, and accounted for approximately 60 days of sales. However, we have already collected on over $275 million of the $400 million of receivables during year-to-date 2007.

Our inventory dollars were down $62 million from third quarter '06, and our days of inventory metric decreased. At the end of 2006, we now hold 79 days of inventory, which is significantly down from the 117 days we reported last quarter. The 79 days are made up of $85 million in raw materials which are 23 days; $42 million in WIP, which is 12 days of inventory, and $161 million in finished goods inventory, which is 44 days of inventory. We also held $17 million in our inventory reserves at the end of the year.

The decrease in finished goods was planned, as we responded to our increased customer demand during the seasonally strong fourth-quarter holiday. And as Min mentioned as well, retail channel inventory appears to be very lean as the sellthrough of most of our products was very strong during the fourth quarter.

On cash flow, we recognized cash flow from operations of $113 million during the quarter and $362 million for the full year. CapEx was $47 million during Q4, and $93 million for the full year. Our free cash flow during the fourth quarter came in at $65 million or $269 million for 2006.

Cash flow from investing was a $28 million use of cash during Q4. Cash flow from financing was $100 million use of cash during Q4, made up primarily of our $180 million dividend. And overall, on the cash balances, cash and marketable securities, we earned nearly 5% interest income during the fourth quarter.

I am sure you all saw that we had a much lower effective tax rate during the period, which was 9.6% or 13.5% for the full year. Incremental revenue and net income during fourth quarter and the tax incentives related to our latest Taiwan facility and production line expansion were the primary drivers of the lower tax rate.

Because of the lower tax rate in the fourth quarter and full year, we now expect that our effective tax rate during 2007 will actually be 15%, which is below our earlier expectations.

Garmin doubled our dividend during 2006 and paid out $108 million, as I already mentioned. We still have 1.8 million shares remaining within our share repurchase plan. We continue to grant stock appreciation rights broadly to our employees, and completed the second grant during December 2006. Our annual [SAR] grants account for approximately 1% of our outstanding share count. And as we have mentioned in the past, compensation expense related to FAS 123R accounted for $12 million, or roughly $0.05 per share, during the full year of 2006.

And finally, I would like to end on talking about the full year 2007 guidance. We do remain very optimistic about the future success of our business, and we are prepared to provide the following guidance. Our revenues for 2007, we expect to exceed $2.5 billion, a 41% growth. We expect earnings per share to grow at least 15%, up to $2.70 per share. Operating margin should come in at 27%. It would be a 430 basis point decline due to lower Auto/Mobile margin during the year and a greater mix of revenue from the Auto/Mobile segment.

We expect to spend $65 million of CapEx during 2007, which is comprised of $25 million of production equipment, $8 million to complete the UK headquarters build out, and approximately $32 million of maintenance CapEx across our business. We anticipate a 50% revenue growth from our Auto/Mobile segment, 20% revenue growth from each of the remaining business segments. And we are assuming that we have a stable post-split outstanding share count of approximately 219 million shares.

Looking at the operating margins within our segment, as we have communicated in the past, we expect that the Auto/Mobile margins during 2007 will come down significantly. However, the outdoor fitness, marine and aviation segments will remain relatively flat year-over-year.

So in summary, Garmin feels like we have a strong business model which remains intact. We are looking to solid growth in all of our business segments in 2007. We have an efficient and improving supply chain, efficient and flexible manufacturing capabilities, strong balance sheet, continue to invest in R&D; we're going to continue to invest in advertising and our own Garmin brand; and continue to innovate ahead of competition. So we look forward to another good year in 2007.

At this point I'd like to open up the call to any questions you might have.

(OPERATOR INSTRUCTIONS). John Bucher.

John Bucker with BMO. Well, I see you guys squeaked by again on another quarter. I guess the question is first surrounding the original expectations that you had on the fourth quarter with respect to Auto/Mobile segment. You'd indicated before that you came in far better than you thought in terms of profit margins there. And you, I think, alluded to bill of materials savings, and a number of other factors there. And as you look to 2007, you still say -- you've been very upfront in saying, at least equally as upfront as you were earlier this year and at your analyst day that you are going to see declining operating margins due to mix and transition to mass-market levels. And you just finished the call off by saying that you expect Auto/Mobile margins to come down significantly. I guess I am wondering -- are you being overly conservative there? Could some of these same efficiency gains as volumes ramp -- materialize in 2007? And what are you assuming in terms of bill of materials decline in your 430 basis point decline that you mentioned here and 27% operating margins? Thank you.

Well, I think we -- as far as the Q4 results, we saw, like you said, improvement due to volume. But we did get additional credits, just due to kind of hitting a next step function on volume. So across the board, that is why we pulled that out separately, because we did not want everyone to think that this was a go-forward business model. But at the beginning of the year, do we know what our margins are going to be at the fourth quarter of 2007? No. We have an outlook, but business conditions change quite a bit during the year. So we typically come in conservative at the beginning of the year when we lay out our expectations for the full year.

We do fully expect that the pricing erosion that we are going to be seeing in the market will outpace any kind of bill of materials savings during the full year 2007, which is why we are expecting overall operating margins to come down into the 27% range.

Okay, and I guess I will just ask a question on acquisitions. Even with the significant CapEx investment that you made during the quarter, you still have got greater than $800 million in cash and cash equivalents. As you look to deploy the cash strategically, should we expect more acquisitions like the Digital Cyclone acquisition, which it would appear is somewhat unique, in that it sort of moves you into the geo-reference content and application space? Can you just talk about sort of the general level of activity that you currently have now as you have in the past with respect to due diligence you are performing on potential deals? Thank you.

I think 2006 was a busy year, and early 2007 is a busy year for acquisitions. And we are always evaluating opportunities. So that is the nice thing about our -- I guess our financial strength right now. It gives us quite a bit of flexibility. And [if we run] into a company that we feel we can integrate seamlessly or fairly seamlessly and can help us significantly on the technology side, we will go after it. So I can't really comment on any specific deals, but we are always evaluating other opportunities. The fact that we spent nearly $100 million in cash on our acquisitions here just recently -- I think we will continue to evaluate other companies, but I would not expect that the level of activity will continue. To do three more would be quite a bit to handle here in the near term.

Noelle Swatland, Lehman Brothers.

Just a question here -- first, a clarification and then a question. First, you had mentioned that the $0.07 favorable impact was largely in the Automotive segment. Can you just kind of give us a sense of what the net impact was on the improvement quarter over quarter? And then my question is, just in thinking about a starting point for the year, you had mentioned that inventories were very -- and sellthrough was very clean going into the first quarter. So that would assume, I would imagine, normal seasonality in the first quarter, if you could just comment on that for the overall company?

Yes, let me take that question. I think if you exclude the $0.07 impact, I think actually Auto/Mobile segment would have been very close to what we recognize all year, which is about 42% gross margin. So that is really still the baseline number we would experience. And going forward, we -- you know, if volumes continue to pick up, we are likely to see those kinds of -- those credits and rebates across the entire bill of materials throughout the year of 2007.

As far as the Q1 expectation, I want to be very clear -- we do not expect Q1 -- we are not going to give any Q1 guidance -- but we don't expect Q1 to be up over Q4 like it was last year. We think that given the timing of the new products that we had in Q4 and the strong holiday season, we should see a decline from Q4 '06 to Q1 of '07. So I want to make sure everyone has the right expectation there as we go into 2007.

Is there a range, Kevin, historically that you could just point us to?

Well, again, I can't -- if you typically have looked at our history other than last year, it is normally in the 15%, maybe 20% range, somewhere in that level of decline from Q4 to Q1.

Year-over-year reference will be a major [fair] impact, because of year-over-year.

Bill Benton, William Blair.

Congratulations on another strong quarter. I hate to keep asking about this credit, because obviously, it is real and continuing here. But 340 basis points it looks like, on the fourth-quarter numbers -- is that attributable to primarily -- is that all classes of the bill of materials here? Or are we really talking about maps and certain classes of the bill of materials?

I would equate it to broadly. It is very similar to what we have had occur on our own business with our customers. When our customers hit another level of volume, we sometimes can get better discounts on price. But I think it is very similar to what we saw, but it is not just one level. It is across the board.

Okay. And then presumably, I guess your comment on clean inventory channels is consistent with what you had obviously shipped early in the quarter here, and what you are seeing early in the quarter in terms of shipments. Is that a fair statement?

That is a fair statement.

Okay. And then you talk about doubling the U.S. shipments this year on the Automotive side, 60% in Europe and you're talking 50% of revenue growth. Wondering if you could give us maybe a little bit more color in terms of your market share expectations embedded within your guidance versus ASP erosion? Can you give us a little color around that, whether you expect to obviously gain more market share in Europe, maybe lose a little in North America?

I can give you a little bit more color. I think on the North American market would be to retain or achieve at least a 50% market share as we go forward. The European market, it is very difficult to tell exactly what our market share is. We don't believe we hit 20%. I think we are still under 20% in Europe. So our assumption embedded in our guidance are to get above that 20% level as we go into '07.

But as far as price erosion, I think we have seen price come down quite a bit on a like-for-like product. I would still expect 25% to 30% price erosion on the current products that we have that we are shipping to the market.

Great, guys. Well, congrats again.

Jeff Evanson.

Thanks for taking my questions. Congratulations on the quarter. Kevin, could you talk a little bit about how your go-to-market strategy is going to change in the European Union, and how we might see that impact some of the financial metrics next year?

Well, I think in one sense, the Garmin France or the EME acquisition we think is going to help us in the French market. But in general, I think we need to be much more aggressive and going after the retail channel either directly or indirectly. We have made a lot of changes, I guess, in 2006 that we feel are already starting to have an impact, with our organizational changes, working more closely with our distributors in those markets, and being aggressive on price where we need to be able to push the Garmin products through the channel, through the retail channel. So again, we have made some recent changes in the last couple of months, and we think they are starting to have effect. And hopefully, they will have a very positive effect as we go through the full year.

Was distribution cost basically loading up about 10% in Europe? So that is what you have saved now there?

Well, that is just one market, though. And again, the European market is quite fragmented. There are definitely some savings, but it is not across the board.

Sure, I understand that. And then you said that the operating margin guidance was down 430 bips for '07. What do you expect gross margins to be down in '07?

Well, I mentioned that we would have approximately 17% operating expenses. So if you back into it, we think our full-year gross margin will be end up somewhere around 44%, which is quite a bit lower than what 2006 was. But again, we are expecting pretty solid revenue growth, too.

Peter Friedland, Soleil Group.

First, can you give some additional color on mix within the PND segment for the quarter? Nuvi 600, 300, c-series, etc.?

Well, I think in general, the nuvi and the c-series were pretty even on unit shipments across the total Company. I think in Europe, it was more skewed toward nuvi, because that has been the key product. Within the nuvi, I'm not going to comment on any specific units, other than some of the higher priced units definitely sold well. And that offset some of the costs or the overall price erosion that we saw in the fourth quarter. So we saw a pretty strong mix of both low, medium and high price points that sold for the fourth quarter.

Okay. And then you mentioned 25% to 30% price erosion in PND, but what about ASP in terms of your '07 guidance? So as you assume the ASP goes down the same rate, or that your mix will help you guys out?

Mix will help us out. Overall ASP will not go down at that same level.

Okay, and the same question, just more color on PND -- gross margin guidance for '07?

Yes, I'm really not going to comment on overall segment gross margins at this point for 2007. However, other than to say that the three segments non Auto/Mobile are pretty flat, so, on gross margin and operating margin. So the decline we are expecting to see is almost entirely in the Auto/Mobile segment.

Jeff Rath, Canaccord Adams.

Congratulations. Most of my questions have been asked. But I wonder if you could give us some color on your retail store strategy -- what are your first thoughts there? It's obviously a new initiative for you. Do you have any thoughts as to '07 and any expansion of that, any margin impact? Any color you can give us as to how you are thinking about that initiative? Thanks.

I think the beauty of our business right now, especially in the U.S. market is that we have -- not that we have no additional retailers to go after, but the current distributors and dealers that we have, have sold very well. [Min] mentioned Best Buy and Circuit City in particular. They have just had incredible strength in the overall PND category. So much of our assumptions are just to continue to feed the channel, with both a -- as I mentioned, a low, medium and high price point solution to hit as many of the different consumer needs out there. But as far as expanding our retail channel, we feel like we are in pretty good shape in the U.S. market.

European-wise, I think that we can do much better, and that is what I mentioned earlier -- we have made some recent changes that we think will help us address the overall European retail.

I guess, Kevin, I didn't ask the question properly. I'm talking specifically to the Garmin-branded store. How do you see that? Is that something that has you thinking about opening a few more stores in '07, or --?

Yes, I misunderstood. Yes, the Chicago store on Michigan Avenue has only been open about three months. And I think it has accomplished what we had hoped for, and that is it has allowed consumers to touch and feel and have a high user experience within the store; they may buy there. They may go out and buy elsewhere. But we want to get the general public to be able to understand the technology better, and build the Garmin brand, and also sell some units. So again, it's just one store out of all the thousands of points of sales that we have. But at this point, we don't have any plans to open a second, third, and fourth store.

Great. And just one follow-up question, if I may on the $0.07 credit. Is that something that was associated typically with a milestone unit shipment, volumes or measurements for the fourth quarter? Or is that a $0.07 credit that is cumulative targets for the full year? And how do you expect those targets to work on those credits to work in 2007?

I will just say briefly that it is more related to a target for the full year.

Brandon Dobell, Credit Suisse.

In the PND segment, I guess more of a go-to-market strategy question -- thinking about the breadth of products and incremental differences between the two or three nuvis and the two or three c-series -- what has been the retailer feedback from that kind of a breadth versus let's say a good, better, best or a two-product strategy? And do you think more retailer shelf space will allow you to have more varied units on the shelves at one time? Or is it really going to stick with kind of three units, but then online, you have a lot more available?

We see a couple things happening there. One is that retailers are expanding their shelf space for PND. They're definitely recognizing the value of the PND product line to their overall business. So there is more opportunity for products on the shelf at major retailers. The other factor is that not every retailer is the same, and a lot of times, they like to differentiate themselves and offer something that the competitor does not offer. So by having multiple products with differentiating features, it gives us a way to appeal to all kinds of retailers that can offer something unique to their customer base.

Okay. Any sense for what kind of shelf space growth would be embedded in your '07 50% revenue guidance for PND?

Well, I think it is all rolled up, right? I mean we just generally have our Auto business forecast embedded into our overall guidance, including any shelf space expansion.

Over in aviation -- maybe a context question. If there's 20% expectations for revenue growth, and I would imagine the OpEx in that business does not change an awful lot -- maybe help us understand why not a whole lot of margin expansion expectations for the coming year? Is there something going on with the mix of revenues within aviation, or is there going to be more marketing associated with getting those products out the door?

Well, I think as I mentioned, there is always variability quarter to quarter based on shipment levels, but I think at a 20% growth level, I think the overall operating margins that we experienced in the full year 2006 should not change materially. We are going to continue to invest in R&D, as we talked about, which often impacts the auto operating margin a little bit more because of the amount of dollars that we have to invest to be able to get the products to market. So those are a couple of -- a little bit more information on why we expect the margins to be where they are.

But within aviation specifically, is there something else going on from an R&D spend or a marketing spend that would keep those operating margins relatively flat and pretty good revenue growth here?

Well, other than, I think, without giving you the specifics, investing in future technologies, which are R&D. So even though aviation is definitely not the same mix of our other product lines, we still -- sometimes we spend as much as a third of our total R&D dollars in aviation; that is what is going on there.

Okay. And then a final quick one, in terms of the impact from buying the distributor in France on your '07 numbers, either from a revenue perspective or an inventories perspective, how should we think about that? I guess more broadly, if you continue that strategy, how can we get some clarity here on what that does to your financial model from a guidance perspective?

Yes, I think we -- it is embedded in our 2007 guidance. So from a revenue, we have already accounted for it in our overall $2.5 billion business next year. Inventories -- obviously, we own that business, so we would hold the inventory -- drive a little bit more inventory increase, but I don't think it is going to be a material mover in the overall business model.

Rich Valera, Needham & Company.

Maybe this is for Cliff. Cliff, I think you mentioned that there were 15,000 WAAS upgrades queued up. I was wondering if you could give us a sense of how much revenue you could get per WAAS upgrade, and what's the timeframe you would expect those to occur over?

Yes, the timeframe -- I will start with that first. It is going to be really challenging for the aviation industry to absorb all of these new upgrades, because that is a lot of airplanes to tear into. The resources in the field at various avionics shops are going to be packed to do all of those. So we would anticipate it is going to be done over the course of 2007, and maybe looking some into 2008, depending on how well things go.

I believe the upgrade was advertised at $1500, if I am correct, and Kevin seems to think that is the right number. And so for existing customers, basically $1500 upgrade then to the new WAAS capability.

And Kevin, what was your total advertising spend in 2006? And I missed the number you had mentioned for (multiple speakers).

Well, we spent $115 million roughly for 2006.

And for 2007, was it $140 million?

We said $150 million is what our expectation is there. The $140 was the R&D number.

Congrats.

(OPERATOR INSTRUCTIONS). Jon Braatz, Kansas City Capital.

Cliff, I have a couple of questions. You made a comment on the G600. Are we still thinking that is sort of a second half revenue item?

I think our aviation guidance actually does not include much, if any contribution from the G600. We believe it will be very late in the back half of the year. But we're trying to be conservative, and are not including that.

Okay. Would -- it is a back half, late in the year -- the fact that the aviation industry is upgrading WAAS -- that probably would not have any influence on their ability to work on the G600, let's say, in the fourth quarter?

In terms of capacity?

Yes.

Yes, I don't think it would have much impact, no.

Okay. Second question -- your acquisition up in Canada, the Dynastream, will that allow you -- does that provide you with a platform, should I say, that may be able to take you beyond fitness products, maybe into some other area that you are currently not working in? Is there some application elsewhere beyond strictly leisure products?

Yes, so there are really two market areas that Dynastream can help us out in. One is fitness, which we already participate in, and it is the traditional athlete kind of market. The other is the emerging health and wellness kind of market, which is growing a lot of interest from healthcare providers and companies who are trying to encourage people to become more healthy, become more fit. And it is a little bit different kind of market than strictly fitness. So we believe Dynastream can help us in both of those areas.

Can you provide us with any more details on what you may be doing or exactly what the applications might entail?

No, I think the whole market segment of health and wellness is really emerging and dynamic. So I really cannot provide any specifics at this time.

John Bucher, BMO Capital.

I think in the commentary, you mentioned that on the aviation, you were expecting three new OEMs on the G1000; the slide doesn't -- it just says new OEMs, but I thought I heard you say three new OEMs. Could you say -- are those OEMs that have never been announced or associated with the G1000 platform?

And then final follow-up, can you -- given unit volume shipments for the G1000 for the fourth quarter, and any expectations for G1000 unit shipments in 2007?

The three new partners that I mentioned are new to Garmin. One that has been announced so far is the Quest Company with the Kodiak platform they expect to deliver this year. The other two are not public at this time.

As far as the fourth-quarter shipment, Kevin, do you have -- (multiple speakers)?

I don't think we have that for you at our fingertips. I believe for the year, our total field population is something over 3000 units in the field right now. And going into '07, we would anticipate that that is going to be growing healthily as we add new partners and a sales increase in the aviation area.

As far as the certification of new aircraft and the like, obviously you have given us a 20% growth number, which is fairly specific in today's terms for providing segment guidance. But you are well beyond any major certification hurdles for platforms that are in the pipeline?

Every platform is unique and they're all challenging and technically risky but I believe that over the past few years now that we have been doing this, we have gotten much better at it, and it is going much smoother for all of our partners on all the platforms.

Ben Radinsky, Bear Stearns.

Can you give us a look at Q4 market share in North America and how pricing shaped out with one specific competitor really coming in at low price points?

I think the data we look at -- independent data, we have seen that we were able to achieve over 50% market share at the end of the year, November, December. In terms of the one competitor with a low price, I think the results speak for themselves. We still had a very strong quarter. And the overall number of units did not decline -- in unit the market share didn't decline. If at all, they stayed stable or came up a little bit.

In terms of your guidance for '07, can you talk about your rental car income? And maybe if you could just dig a little deeper and talk about the economics behind that and perhaps capital investment costs?

Well, hopefully many of you saw the ads last night on TV or recently on TV from one of our rental car companies. But in general, I would say that the numbers from that business are included in the overall expectations for the unit sales as we go into 2007. So we are not really prepared to break those out as a part of our Auto/Mobile segment. But still a large part of our units are still sold through the retail channel though.

And the economics of that? My impression was that you actually own the units, and there was a revenue share model?

No, these are primarily just unit sales to the rental car agencies, where they take the units, and then they are able to charge a $10 or whatever fee per use per day.

Okay and then the last one for me, would it be possible to just run through the biggest component costs now that the year is done and talk about maybe where you have the biggest risk when it comes to your gross margin for '07?

I can lay out the overall top four or five components. There has really not been a major change there in the last half of the year. But the LCD displays, still number one. The Mapping [cards], the flash memory, the GPS chipset, and then the other -- those are the top four, so components for the bill of material. As I mentioned earlier, we think that the price erosion in the market at the retail level is going to exceed the bill of material cost savings we'll experience throughout the full year 2007.

And I know this is hard to forecast, but in the first quarter, have you had any component issues?

As far as availability?

Yes.

No.

Herb [Buckbinder], Wachovia Securities.

Kevin, actually, my aviation question was answered. But you think you might be being a little bit conservative on the margins in aviation projected for 2007?

Actually that was kind of asked earlier, but I think the fact that we are saying they're going to be flat, I think is still a pretty reasonable estimate for the full year. I don't think we are overly conservative there.

Is aviation still the highest margin segment you have right now?

Absolutely. I mean the full year came in right around 65%. And I think 65% is the right number going forward.

Rich Valera, Needham & Company.

Kevin, you'd mentioned that you thought your ASP declines would be less than the 25% to 30% price declines. Would you care to hazard how much less they might be?

I would say it -- if we talk about a 25% to 30% growth overall on a like-for-like product, given the product mix, our total business, I would think is closer to 12% to 15% down for the full year on ASP.

I think that concludes our question session. So thanks, everyone, for your interest, and we will look forward to updating you after the first quarter. Thanks a lot.

This concludes today's conference. You may now disconnect.