台灣國際航電 (GRMN) 2007 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time I would like to welcome everyone to the Garmin, Ltd.

second quarter earnings 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.Thornton you may begin your conference.

Good morning.

We will we would like to welcome to you Garmin, Ltd.

's second quarter 2007 earnings call.

Please note that a copy of that 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 August 29, 2007.

A telephone recording will be available for two business days after this call and a transcript of call will be available on the website within 48 hours at www.garmin.com/stock under the events calendar tab.

This earnings call includes projections and other forward-looking statements regarding Garmin, Ltd.

and its business.

Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demands 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 30, 2006, 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, Holly.

Good morning.

From this morning's press release, you can see that we recorded yet another record quarter.

Total revenue and EPS again both exceeded our expectations.

Revenue for the quarter increased 72% to $742 million.

EPS was up 75% or 82% excluding the effect of foreign currency.

Unit volume was up 99%.

Revenue growth exceeded our expectations in three of our four business segments.

Over 2.5 million Garmin products were shipped during the second quarter, bringing our total to over 22 million units shipped to date, continuous evidence of the strength of the Garmin brand.

Our worldwide employees increased to over 6,400 during the quarter.

We added over 1,200 associates including 200 in engineering and over 800 in manufacturing.

Let me give a facility update.

We are continuing to experience strong demand for our products.

Keeping pace with this demand, we continue to expand our facilities.

In Taiwan, manufacturing facilities in (inaudible) and (inaudible) are now fully configured with annual capacity of approximately 12 million units.

And we have completed the purchase of a facility to meet our growing demands as well as our R&D and other office space requirements.

We anticipate production to begin there in August.

In Europe a condition of our French and German distributors provide us with additional distribution support in those countries.

The recently announced Spanish acquisition will allow us to continually spend our (inaudible) in Europe.

In the U.S., work has begun to expand the warehouse distribution facility at our Kansas headquarters.

Additionally, our (indiscernible) approximately 200 employees, are moving to a location nearby to allow for further expansion of R&D laboratories and office space in our headquarters here in Kansas.

We are pleased that our company continued to receive much noteworthy recognition during the quarter.

And we continue to expand our patent portfolio.

At the end of the second quarter, we have over 300 patents issued with another 200 pending applications.

For acquisitions, we are continuing to examine potential acquisition opportunities to broaden Garmin's product offerings and enhance our technology opportunities.

Recent acquisitions of our distributors in major markets is a part of our strategy to improve brand visibility and market share in Europe.

Some highlights for each of our business segments.

For automotive/mobile segment, revenue increased 99% year-over-year driven by continued strong sales of the nuvi and StreetPilot product lines.

Gross margins strengthened to 46% and operating margin improved to 29% as a result of component cost reductions, improved operating efficiency and favorable product mix.

PNDs continue to sell well and we have experienced strong sell through and have strong orders for products at all price points.

According to an independent market research, Garmin has maintained a strong number one position in North America and a strong and improving market position in Europe.

Our expanded ad campaigns continue to enhance our brand awareness in both the U.S.

and in Europe.

The outlook for PND market continues to be strong.

Now we expect this segment to grow at least 80% up from our earlier expectation of 50%.

For our aviation segment, revenue continued to exceed our expectations, up 39% year-over-year in Q2.

The strong growth continued to be driven by WAAS upgrades, WAAS products, the new GMX200, the G1000 cockpit.

Gross and operating margins for the segment both remained relatively stable.

During the second quarter, we began shipping our G1000 cockpit to Piper Aircraft, for their Saratoga aircraft, expanding our long-standing and mutually beneficial relationship.

In addition, (inaudible) has commenced its initial product testing.

So we remain optimistic over the long-term prospect of our aviation business and now believe this segment is positioned for revenue growth of 30% in 2007, up from our earlier projection of 20%.

For our marine segment, revenue increased 59% year-over-year.

Our customers responded enthusiastically to our new suite of marine products.

We are also pleased that margins for the segment has returned to historic levels as we expected.

Interest in our exciting new suite of products remains very strong and we anticipate continued strong sales well into the third quarter.

As such, we continue to expect the marine segment to grow 20% in 2007.

For our outdoor fitness segment, you may recall that the revenue for this segment declined 7% year-over-year in the first quarter due to a charge in comparisons because of the (indiscernible) and promotion deal in the first quarter of 2006.

Now we are pleased that the revenue for this segment started to increase, it increased 9% year-over-year during the second quarter as we anticipated.

Margins for this segment declined year-over-year as (indiscernible) product ahead of new product releases, but improved substantially as new product shipment began.

We now expect this segment to grow approximately 10% in 2007 due to the slight delays of our new product introductions.

So for our business outlook, as we look forward, we are optimistic about the remainder of 2007.

We feel that our drive for continuous innovation has positioned Garmin to take advantage of the PND market opportunities.

Retail channels for (inaudible) products continues to be very strong and we anticipate that enhanced product position, targeted advertising and promotion activities will drive continued growth through the remainder of 2007.

In respect to the greater than anticipated PND demand and current component supply environment, we are expediting component delivery and expanding manufacturing capacity.

While obviously we are pleased with the margin levels we achieved in the first half of 2007, based on the current component pricing environment and the likelihood of strong price compression during the holiday season, we do not anticipate this margin to be sustained through the remainder of 2007.

For our marine segment, as I just stated, we see continuous trends in the demand for our new suite of products, and hence expect to see continuous growth in the third quarter.

For our aviation segment, we continue to see strong growth from our existing and new products.

Work on various microjet and other simplification also continues for deliveries in 2008 and beyond.

For our outdoor fitness segment, we began delivering the Astro dog tracking device in July.

And this new product has been met with much enthusiasm by (inaudible).

New Rino and eTrex products featuring high chipset which will be released in the second quarter, will likely see good sales during the holidays and we also anticipate additional new outdoor and fitness product in the second half of 2007 with new features in technologies that should drive growth in the holiday season and beyond.

In summary, we are pleased with our overall results and are excited about the future opportunities.

At this time, I'd like to turn the call over to Cliff Pemble to provide our product updates.

Thank you, Min.

As has been our custom, we'll be going over a few product highlights this morning prior to Kevin taking the call for the update on financials.

On our automotive segment, for nearly two years the nuvi product has been the lead, leading the PND market for innovative features, ease of use and compelling form factor.

You might recall that during Q1 we introduced the nuvi 200 product family which is a value oriented navigator and the nuvi 200 has very much taken off in terms of popularity and is doing quite well for us.

During Q2 we expanded the value oriented nuvi 200 family by offering a widescreen version of the product.

These new widescreen products include high-end features such as a very bright 4.3-inch display and approximately 6 million points of interest.

A lot of the products in this category only offer 1.5 million points of interest so we're including higher end features even in this lower end category.

We anticipate that the widescreen nuvi family as well as the nuvi 200 family in general will be very popular in the back half of 2007.

Turning next to aviation, we're happy to report that Piper Aircraft is now delivering airplanes equipped with the G1000 integrated cockpit.

Also during Q2, Cessna increased deliveries of the Mustang VLJ and according to GAMMA, the General Aviation Manufacturing Association, Cessna delivered ten Mustang aircraft during the quarter.

We received positive feedback from Mustang customers on the G1000, and this complements the overall high praise Cessna's receiving from customers of the Mustang aircraft in initial quality.

There's also good news to report with other VLJ partners, as Min said, last week Embraer conducted the first successful Phenom 100 test flight.

And we congratulate our partner Embraer on this accomplishment and we're looking forward to working with them as the certification effort continues.

Recently our partner Quest Aircraft completed certification of the G1000 equipped Kodiak aircraft.

At some of you know, this is a small start up company that's been working diligently, and is one step closer to their dream of providing a aircraft which is well suited for humanitarian and missions organizations around the world.

We're very proud to be part of this effort of Quest.

We recently announced the expansion of our cockpit systems with the introduction of the G300, which is a cockpit display system designed specifically for the light sport aircraft market.

The G300 offers strong features and capabilities including our advanced attitude heading reference system, air data computer, and brilliant displays showing attitude, mapping and engine instruments.

We're pleased that the G300 system has been selected by our partner Cessna for its exciting new sky catcher light sport aircraft, which was overwhelmingly embraced by customers during the recent Oshkosh Air Venture air show.

Cessna announced that it received over 400 orders for this aircraft in the initial three days of the show.

On the retrofit side of the aviation business we continue to experience strong demand for our products.

Through July we performed over 6500 WAAS upgrades for customers of our GNS430 and 530 product lines.

In addition, we delivered a total of nearly 15,000 navigation systems with certified WAAS functionally.

Strong sales of our WAAS product complement other areas of strength in our aviation business, as demand for multifunction displays and transponder products was also strong during Q2.

In the outdoor market segment, we introduced new versions of our Rino, the GPS enabled family radio product.

The new Rinos include high sensitivity GPS for better performance when operating in dense foliage or other highly shaded environments.

In addition, we added a microSD card slot which allows users to expand the utility of their device with detailed maps of lakes, topographic information, streets, or to record detail track logs of places they've visited.

We added a high sensitivity GPS receiver to our existing Legend, Vista and eTrex models, which has been a popular request from our customers for quite some time.

In addition, we expanded the eTrex product family with new models, the Venture HC and the Summit HC.

These new products include a brilliant color display and high sensitivity GPS receiver but they're offered at a value price point.

We anticipate these new products will be very popular as we approach the fall hunting season season.

During Q2, we started deliveries of the Astro dog tracking system, which is a new product category for Garmin.

This exciting new product enables dog owners to keep track of their dog's activities while hunting.

In addition to displaying the location and track history of up to ten dogs, the Astro also provides all the great navigation features found in our traditional outdoor GPS products, making it a must have piece of equipment for hunters.

Retailers have been anxiously awaiting the arrival of this product and initial feedback on the device has been very positive.

That concludes my product update, and at this time I'd like to turn the call over to Kevin who will provide an update on our Q2 financials.

Thank you, Cliff.

Good morning, everyone.

I'll be presenting our second quarter and year-to-date financial results, including some information on business segment details and then conclude with our updated full-year 2007 outlook.

So first looking at our income statement for the second quarter, as Min mentioned, our revenue for the quarter was $743 million, and net income recognized of $214 million.

Therefore, the EPS for the quarter was $0.98 per share, much higher than expected.

Our top line revenue growth, therefore, was 72% with our EPS growth being 75%.

We did see an unfavorable $0.02 EPS impact due to foreign currency loss of $6 million during the period.

I think one of the highlights of the quarter was the fact that our gross margin came in at 50.5%, which was much better than expected, due to our stronger PND volume in the U.S.

and in Europe.

The PND price erosion was offset by material cost reductions operating efficiencies, and product mix within the period.

32.5% was our operating margin for the quarter, up from 31.1% last year, and again much better than expected.

The operating margin improvement was driven by about 50 basis points from our gross margin, actually our advertising spend during the period was flat with the second quarter of '06 on a percentage of sales.

And our other SG&A costs came in about 20 basis points unfavorable from last year.

Overall, even though we saw significant growth in our engineering teams, our R&D expenses were 110 basis points favorable with last year.

We did ship over 2.5 million units during the quarter on the strength of our auto and mobile segment, and the average selling prices for the full business during the quarter was $292 per unit.

That was 8% below the first quarter of this year.

As I mentioned, we also have to recognize non-GAAP measures, and in this case, we recognize non-GAAP measures on our net income excluding the effects of foreign currency.

As I mentioned earlier, this impact was $0.02 per share favorable during the second quarter of '07.

Looking at our revenue breakdown by segment, we first of all in total experienced triple digit revenue growth across our auto mobile segment, while the unit growth in that segment grew 173%.

Revenue within the aviation segment grew 39% exceeding our expected growth rate for the full year.

Due to the many new marine product introductions that we've already mentioned on the call today, our marine segment grew 59% during the quarter and our outdoor segment also recovered somewhat as the growth within that segment was 9%.

Overall, the revenues during the period were 72% during the second quarter, significantly above our earlier full-year target.

Sales of products introduced within the last 12 months contributed to 20% of our second quarter revenue, as we passed the one-year anniversary in the United States of the popular nuvi platform.

Overall, on a year-to-date basis, our revenues have grown 64% through the first half of '07.

Also, year-to-date, all four business segments have experienced revenue growth with auto mobile revenues up over 100% and our aviation segment up 32% over year-to-date 2006.

Analyzing our revenue by geography, during the second quarter North American revenue was up 95% while our European business increased 44% during the quarter.

Our Asian sales also grew 41% during the second quarter.

Our Q2 North American unit sales increased 129% on the strength of PND product sales.

However, our Europe units also grew over 73%.

On a year-to-date basis, North American revenue was up 79%, our European business increased 45% during the quarter and our Asian sales grew 33% during the period.

Again, year-to-date looking at units, our North American unit sales increased 110%, again, on the strength of our PND product sales and our European units also grew over 66% for the first half of 2007.

Because of the explosive PND market, the automobile mobile segment now represents 68% of our total business.

Within the auto mobile segment, the North American market unit growth was greater than European growth, however, both continents experienced 100% unit growth on a quarter-over-quarter basis.

In total, Garmin's North American market growth was stronger than in Europe during the quarter as North America grew to 61% of our total business.

Looking next at our margin analysis by segment, the Q2 aviation gross margin and operating margin remained relatively stable at 64% and 37% respectively.

Due to outdoor fitness gross margin increased to 57% during the period, as expected, and due to the higher volume during the second quarter, operating margin increased to 37%.

Our marine gross margin increased to 58% due to new product introductions during the strong marine selling season.

The operating margin within the segment increased significantly to 42% due to much higher unit volume and operating efficiencies during the quarter.

The auto mobile gross margin came in at 46% beating our expectations.

As I just mentioned earlier, the primary reason for the strength of the gross margin in this segment is that price compression and cost reductions virtually offset each other.

We also saw some benefit from favorable product mix as the PND units sold in the U.S.

were greater than those in Europe.

Our operating margin within the auto mobile segment was 29%, again, higher than expected.

Looking forward, with the exception of our auto mobile segment, we expect the short-term margins to be relatively stable despite some possibility of quarter-over-quarter variability due to the product mix and timing of new product introductions.

And due to the likelihood of strong PND price compression during the holiday season, we continue to expect that the auto mobile segment will experience declining operating margin during the remainder and the back half of 2007.

Looking briefly at the operating expenses in our business, our R&D increased over $4 million quarter-over-quarter in dollar terms but was down 110 basis points to 5.1% of sales.

We added over 200 to our engineering team during the quarter and now we employ over 1,200 engineers and engineering associates across the business.

Our ad spending increased by $23 million over the year-ago quarter but on a percent of sales, advertising was down 10 basis points at 7.6% of sales.

We do expect that our ad spending will decline sequentially during the third quarter as our Q2 TV ad campaign has recently concluded.

Later in the year, our fourth quarter advertising again will pick up and increase significantly over the third quarter as we prepare for the 2007 holiday season.

Other SG&A increased 20 basis points to 5.2% of sales from 5.0% a year ago.

We continue to expect that our total operating expenses across our business will represent approximately 17 to 18% of sales for the full year 2007.

We did end the quarter on our balance sheet with cash and marketable securities of $1.1 billion.

Our accounts receivable increased to $507 million due to strong May and June shipments and accounted for approximately 62 days of sales.

We've already collected on the $500 million balance, we've already collected on over $300 million of receivables during the third quarter so far.

Our inventory dollars at the end of the second quarter were up $7 million from the first quarter of '07, and our days of inventory metric decreased.

At the end of Q2, we now hold 67 days of inventory, which is down from 75 days at the end of Q1.

This is made up of the following components of inventory, $92 million in raw materials, which is 19 days of inventory, $50 million in WIP, which is 12 days, and $170 million in our finished goods inventory this represents 36 days of inventory.

We also ended the quarter with $22 million in inventory reserves.

A decrease in finished goods was planned as our Q2 demand for PND and marine products was very strong.

We are in the process of replenishing certain finished goods as we prepare for a large holiday season later in the year.

Consistent with past history, we expect our inventory balances to increase in dollar terms as we exit the third quarter later this year.

Finally, retail channel inventory continues to be lean and sell-through of most of our product is stronger in the second quarter.

Looking next at cash flow, our cash flow from operations during Q2 was $253 million.

We did spend $100 million on CapEx during the period and our free cash flow during Q2 was $154 million.

Cash flow from investing was $75 million use of cash, which is derived from the $100 million CapEx spend offset by $25 million of net redemption of marketable securities during Q2.

Cash flow from financing was a $10 million source of cash, which is comprised of proceeds from the options exercise during the period.

And overall we earned about 5.0% on all the cash and marketable securities balances during the second quarter.

I'd like to conclude my comments this morning with an update on our full-year 2007 outlook.

We do remain optimistic about the future success of our business, and we're increasing our earlier annual outlook for the year.

We now expect total revenue to exceed $2.8 billion, a 58% growth rate.

Our earlier guidance was $2.5 billion.

We now expect earnings per share to have grow at least 34%, up to $3.15 per share.

Our earlier guidance was $2.70 per share.

Our operating margins should come in at 27% for the full year across the business.

This remains unchanged from our earlier guidance as we continue to expect lower operating margin during the second half of 2007.

CapEx is now expected to be $150 million, up from $140 million earlier.

This amount is comprised of approximately $100 million of production equipment and the recent purchase of our third Taiwan factory, about $8 million from our U.K.

headquarters build-out and about $42 million of what we describe as maintenance CapEx across our business.

Q2 year-to-date CapEx that we sent so far is $112 million.

Our effective tax rate assumptions in the business remain unchanged at approximately 13% effective tax rate.

That concludes our comments for this morning.

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

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Bill Benton.

Good morning, guys.

First on the question on the distribution acquisitions that you've made, could you just give us a little color in terms of what kind of impact you expect that to have or I realize you only closed France so far but -- or at least in the 2K results, in terms of market share and the kind of margins impact you expect there?

You mentioned France is the only one that's closed.

Through the second quarter we have closed the Germany the first week in July.

I think the strategy, as Min mentioned in his comments, is that we really need to address the overall retail environment in Europe in a much more effective way.

And I think in the early, some of the early returns we've seen, although not all the market share data is out, we appear to have made some improvement in France at this point.

Germany, it's too early to tell because we just acquired the business.

But as we go through the remainder of the year we would expect Germany to improve market shares.

And then we've announced a Spanish deal, the Spain deal, that should occur in the early part of the fourth quarter, so we'll have about a quarter's worth of benefit to be able to gain share and improve financial returns on those businesses.

Okay.

And where do you think that -- Min discussed that you think your market share improved slightly there in the quarter at least, maybe notably.

Could you give us an idea where you think your market share was in the quarter there?

In Europe?

Oh, in Europe in total?

Yes.

Again, the market research data really isn't out, but in general, we feel like we're in the mid to upper teens still.

So we've made some progress in some countries and probably haven't done as well in other countries.

So we're seeing some improvement, but closer to the high teens at this point in Europe.

Okay.

And then just a final question, I'll turn it over, could you update us on your thinking on component costs?

I think you were looking for a 15% reduction there, and I think you were looking to exit the year at kind of 35% gross margins on the PND side, if you can offer us a little update on some of those details.

I would say overall those assumptions are pretty accurate.

And the 15% cost reduction is an annual number and we have experienced quite a bit of cost reduction in the first half.

We don't see -- we're seeing some pressure on certain components already, flattening out on some of those costs and in some cases an increasing amount on certain costs.

We would still generally say that 15% is the right number for the year on the cost side.

Then as you mentioned, the margins coming down, you mentioned mid-30s, that's about where we are as we exit the year in our mobile segment.

Great, congratulations on a great quarter.

Thank you.

Your next question come from Mr.

Ronald Tadross of Banc of America Securities.

Hi, this is Jim in for Ron.

Following up on the material cost reduction, if you are doing probably much higher than the 15% in the first half, are you kind of expecting the cost reduction to be lower in the second half?

Yes, I mean, that was my implication, is that -- by the way, we haven't seen more than 15%, we've seen healthy cost reductions but we're not going to see the same rate of cost reductions in the back half, according to our forecast.

Okay.

So if you're saying that -- so your cost reductions haven't been -- so (indiscernible) kind of in that 15 to 20% range?

In the market I think we have been seeing more like anywhere from 30 to 40.

On which component?

I mean, some --

On the PNDs.

I'm just trying to -- you said that you offset most of your price reductions with cost reductions.

Right.

I'm wondering are your price reductions in that 15 to 20% range?

That seems much better than the other players.

If you look at the ASP across the auto mobile segment, it's come down.

About 25%.

But it is not, it's (indiscernible)

Right.

25%, you said?

Yeah, 25.

And my other question is on CapEx, and so is the, I know $100 million of the CapEx this year is driven by the capacity expansion in Taiwan.

How should we think about it going forward?

Is this kind of a bulge and then comes down later?

I think if you look at our history when we need facility, larger facilities we get a period where we spend more on CapEx and other years we don't.

So it is really hard to predict, but I think we've invested heavily this year on both the U.K.

and our Taiwan factories.

I would not expect 150 next year.

We would forecast a much lower number, although I'm not going to quantify what that is at this point.

And my last question's on D&A.

D&A it seems to be, it kind of was up in first quarter, came down sequentially, can you give us an idea of what should we look at for the year?

Are you talking about depreciation and amortization?

Yeah.

I think our forecast, probably assume about a $60 million depreciation and amortization number for the year.

Okay.

All right.

Thanks.

Thank you.

Your next question comes from Ben Radinsky of Bear Stearns.

Thanks.

Great quarter.

First, could you talk about the unit growth number you mentioned in automotive?

I believe it was 173% and compare it versus the March quarter?

No, I don't have the number in front of me.

I can probably go back and compare that, but it's, I think overall it's pretty -- the trends were pretty much the same driven by a strong PND market in North America.

Okay.

It's roughly that same number.

Okay.

When is the C330 going away?

We expect that the C330 will exit shipments at the end of the year.

Okay, great.

Can you talk about shelf space, prospects for Q4?

What are your plans with retailers, how much support are you getting?

I think we're getting a lot of support from retailers.

A lot of them are expanding their shelf space in general and they're adding offerings by Garmin.

So is it something where most stores are going to have a nuvi 200, a nuvi 300 and a nuvi 600 or are you getting more support than that?

We're getting support across the range of the products.

Retailers are generally picking up a low end, mid-range and high-end products and sometimes more than one in each segment.

Okay.

And then last one for me, can you give us a G1000 unit number?

And if not, can you talk about take rates and the Mustang?

I know it's a small sample size but just give us a feel for how take rates are going in general with the G1000?

Yeah, I can probably address the Mustang issue while Kevin looks for the other data for you.

But Mustang is an exclusively Garmin cockpit so take rate is 100%.

Okay.

And then more broadly?

More broadly, I think if you look at some of the other players, Diamond for example, for a period, when we first started offering G1000, they did offer more than one solution and we believe the take rate of the Garmin solution at the time was very close to 100%.

I think at this point it's fair to say it probably is 100% at a company like Diamond.

We're just starting deliveries at Piper so it's probably too early to say, but my understanding is that those aircraft are very popular as well.

Okay.

And can you just give us that unit number, Kevin did you find that?

We're not prepared to have the Q2 unit but we can send that to you later in terms of the number of new cockpits shipped during the period.

Great.

Thanks very much.

Again, great quarter.

Thank you.

Your next question comes from Yair Reiner of CIBC.

Good morning and I'll add my congratulations also.

The first question, on the PND side, could you talk a little about your second half product portfolio, should we expect to go into the second half with the same products or are there going to be significant new product introductions in the back half?

We still believe there will be additional products that will go into the fall resets at major retailers.

And should we expect some of the new functionality we're seeing from some other guys such as voice recognition, maybe some of that kind of the feedback loops that we've heard your competitor talk about, we've seen some of the smaller players in the market experiment with?

At it we wouldn't comment on the features of our new products.

Okay.

On the outdoor and fitness, it sounds like now you're kind of ready to launch a new series of products relatively soon.

A quarter ago, you thought that it might not happen until the latter half of the year, maybe even next year.

Just kind of a sense of what might have changed in the interim?

I can't quite recall what we said before.

We've been planning this product rollout for summer time frame in order to address the fall hunting season and we expect to have additional products available into next year as well, which maybe is what you're thinking about.

Thank you.

Your next question comes from Jeff Rath of Canaccord Adams.

Great quarter guys.

A lot of my questions have been asked.

I was wondering if you care to comment on the proposed acquisition by Tom Tom of Tele Atlas and generally how you think about obviously Tom Tom's map source or map share program and the changes that the acquisition might mean as far as product offerings and any color there would be helpful.

Thanks.

Well, at this point we really can't comment on the proposed acquisition of Tom Tom and Tele Atlas.

It's too early to determine what the longer term impact of an acquisition of this nature would be.

But obviously we're well aware of it and we're studying what may occur in the marketplace.

In terms of the Tom Tom map share, we really again would not choose to comment on the technology and offerings from one of our competitors.

Thanks very much.

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

Good morning, thanks for taking my questions.

Kevin, when you talk about 15% component cost reductions, are those simply list price reductions exclusive of volume discounts you might be getting or is that inclusive of volume discounts?

That's inclusive, that would be our net costs, inclusive of any volume discounts.

Okay.

Last year your auto mobile sales were down sequentially from Q2 in Q3.

Yes.

Do you expect that same type of pattern this year?

Actually if you look at the sequential historical trend between Q2 and Q3, we generally across our business have seen about a five to 6% decline from that -- from Q2 to Q3.

At this point, we don't see anything that would change our outlook on what the Q3 may hold.

Okay.

The marine sales are obviously very impressive this quarter from a year-over-year growth rate of about 59%.

And yet I don't know that we're really seeing that kind of strength in the marine category more broadly.

Could you talk about how sell-out in marine might compare with sell-in figures?

I think at this point we have every reason to believe, Jeff, that the sell-out is good with our new marine products.

We hear constantly from the store level that as soon as some of our new products hit the shelves they walk out as customers are waiting for them.

We think we have a very popular product line and customers are responding.

Great.

Congratulations on that.

Okay.

Thanks a lot.

Thanks, Jeff.

Your next question comes from Mr.

Ron Epstein of Merrill Lynch.

Hey, good morning or good afternoon guys.

Just a quick couple quick questions, one for Cliff.

When we look at the G1000, how many new platforms are out there that you guys haven't disclosed that are under --

Gee.

Can you give us a feel?

I know you can't give us a number, but I mean --

We are working with new customers.

I probably don't want to comment on the number because that will lead to a lot of other speculation but we are -- we do have a pipeline of new customers that haven't been announced as well as new platforms that haven't been announced as well.

Okay.

And is it reasonable to expect that there will be a G2000?

Right, I mean, where am I going with this, something that could be used in a higher certification class airplane, like a CJ2 or CJ1?

Yes, so, the Phenom 300 is actually an aircraft that kind of crosses into that class 4 part 23 and part 25 type of arena.

So our product line is evolving to be able to address some of that segment.

In terms of what we call it and in terms of model numbers, I really can't comment but we are constantly innovating the G1000 line and coming out with new features to help our OEMs.

Then a strategic question, maybe I don't know this is for Min or Kevin or whoever.

When you look at, and maybe it's another way to comment on the Tom Tom potential acquisition of Tele Atlas, when you think about it from a strategic perspective, what strategic implications do you think it has for the industry, one.

And two, do you think there will be any anti-competitive issues there?

Again, relatively recent news over the last seven or eight days.

And I guess I'd rather just comment on Garmin's position.

We've had a long-standing relationship for example with NAVTEK as our primary map supplier.

We don't, just given the news that occurred last week, we don't expect that's going to change in the foreseeable future.

And the other thing that I want to point out is Garmin has seen pretty substantial increases in number of units in the PND market, so we feel like we're a market leader in that navigation space, which gives us some hope that as we look at whomever is going to supply mapping, that we'll be able to acquire maps at market pricing.

So I think, again, from our perspective, not a whole lot has changed.

Obviously strategically there's a lot of speculation out there what's going to occur.

But we really don't want to comment on it this morning.

Thanks, Kevin.

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

Hi guys, could you just give your current thoughts on sizing for the PND market, both in U.S.

and in Europe for this year?

I think the U.S.

market is the one -- the market that's growing faster as several of us mentioned and we've seen close to 300% unit growth.

So I think our best estimate, last year the market size was close to, I think 2.6 million.

The U.S.

market could be as high to 9 to 10 million units this year.

And from the European market size, I don't think our ideas there have changed much, somewhere between 15 and 16 million would be the market opportunity there.

And as far as your current volume, PND volume, what was the rough split for Q2 versus Europe and the U.S.?

You mean the overall total, the total auto number?

Yeah.

Yeah, we're not going to make that number public, we give total units and not break it down by segment.

Okay.

Then one other question.

What about the non-U.S., non-Europe PND, is that a meaningful number at this point?

And when do you think it might be, if it's not?

Not meaningful at this point.

I mean, our overall Asian and Asia-Pacific business is around 4% of revenue and similar on the unit side.

When it's going to be more significant, I think that overall market's going to be growing quite rapidly over the next year or two or three, but hopefully so will the U.S.

market at that point.

Great.

Thank you.

Thank you.

Your next question comes from Aaron Husock of Morgan Stanley.

Thanks for taking my call.

Just a follow-up first on the component cost side of things.

I mean, the increases we're seeing out there in terms of pricing in the market are relatively substantial with two gig NAN pricing, up more than %200 off the mid May load, looking at spot pricing and kind of constant news about shortages of some small size LCD panels or touch screen materials.

Do you think your component costs could actually be up in the second half of '07 compared to the first half of '07?

For the second half of the year, the component pricing is pretty challenging, (indiscernible) is challenging.

We experience price increase of the fresh memory like you just indicated, but also we are (indiscernible) material (indiscernible).

So overall for the second half of the year, we don't expect much of the price component cost reduction at all.

Do you still actually expect a reduction, kind of comparing the second half to the first half, not looking year-over-year, just looking half over half?

We have not done real detailed analysis because the pricing environment changes all the time and we continue to see price reduction of certain components, but for the most part I think the increased price of the fresh memory is kind of hard to be compensated by the reduction of other components.

Okay.

Okay, great.

And then just can you talk about the impact of the distributor acquisitions on your guidance?

Is there any way to quantify what part of the increase in sales guidance for the year and EPS guidance for the year comes from those acquisitions?

No, they're really -- I mean, if you think about that, there's not a large impact.

This is literally the guidance increases are due to the North American market growing more rapidly than we had earlier indicated.

Keep in mind, we were selling to these distributors but in a two-tier, two-level distribution model before, now we're just going direct.

It does not have significant change on the revenue side.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Felix Oberdorfer of Fortis.

Yes, good morning.

Can you just once again talk about specifically the reason behind your guidance upgrade to 8% automotive growth from (indiscernible) earlier, maybe just specify your market growth, those changes, and maybe also if there's any change assessments in market share for '07, either for Europe or for the U.S.?

Thank you.

Yeah, I think it's primarily, as I just mentioned, it's primarily due to the strength of the American PND market, which is why we're raising guidance.

Going into the year we talked about retaining a 50% market share in the United States and we still feel like that's where we're at, it's just that the market appears to be growing much faster than earlier thought.

And then European market, we're still in the upper teens with income shares.

But the market size does not appear to have changed significantly from our earlier expectations.

Okay.

Thank you.

Then just one follow-up.

You said you expect price compression intensifying in the second half.

Is that -- is it your own (inaudible) so take advantage of price elasticities or is it merely a reaction on what you believe competitors will do?

This is just what we believe from what we have heard from our retailers.

So basically believe from what competitors will do?

Yes.

Market dynamic.

Thank you very much.

Thank you.

Your next question comes from J.B.

Groh of D.A.

Davidson.

Good morning, guys, congratulations on the numbers.

Cliff, maybe could you just talk about, there's been some new entries into the personal jet market and could you talk about the prospects there what your thinking is, thinking specifically of one large turboprop manufacturer that's recently come out with a jet?

Yeah, could you maybe highlight who that is?

Cirrus.

Yes.

I think come out with a jet gives me a different image than announce a jet.

But definitely they're working on programs as are many others, Eclipse unveiled a new single-engine jet at Oshkosh.

So we see this activity as being very typical of what's going on in the last few years.

Again, I can't really comment on which specific platforms and which specific customers we're working with.

I think in the past you've given -- you've stated that you have X number in the works but you're just going to do that -- it's a change in policy, you're not going to do that anymore?

No, sorry, we can provide that information later, we need to go back and make sure we have all the models and everything straight.

Because some of the manufacturers have very complex modeling schemes.

Sure.

I understand.

You guys mentioned margin pressure in the second half.

I look at what you've done in the first half and the guidance and it seems like traditionally I think you've said you expect a couple hundred basis points in margin compression year-over-year.

Given what you said, it seems like the margins would have to come down a little bit more than that in the PND to make your numbers.

Is that a safe assumption?

You know, at this point we're -- we don't have all the data points for what the end of the year's going to be but it's our best estimate that, yeah, to what you just summed up, we're expecting a much lower PND margin by the end of the year given the price points that we're -- selling versus the cost reductions that we're likely to see in the back half of the year.

And has that thinking changed incrementally in the last eight day?

Probably not.

Okay.

And then lastly, obviously you got a lot of cash in the balance sheet that is second to none.

Can you talk about maybe your strategy with what to do with cash, the dividend of course has increased but --

Well, I think our cash balances are second to others.

But it is nice to have flexibility.

I think our strategies really haven't changed much.

Obviously you saw the announced dividend, increased dividend due to excess cash that we feel we have on the balance sheet so therefore, we're going to pay back to shareholders.

Obviously, we're in an acquisition mode, so acquisitions are clearly part of our strategy, as are expansions of our business as needed.

And finally, we'll be opportunistic with share repurchases, or share buyback of our own stocks.

Those are the major uses of cash and that really hasn't changed much.

It looked like there was no share repurchases in the quarter; correct?

That's correct.

Hey, thanks for your time, congratulations.

Your next question comes from [David Nederman] of Pacific Crest Securities.

Good morning.

Hoping you could talk a little bit about your long-term view on the PND market in regards to just penetration of the overall base of cars and circulation, your competitor has talked about 50%-type numbers.

What are your thoughts on that?

I think we're not going to quote a number but we do feel like the penetration at the current stage is quite low.

And so there's quite bit of room for continued growth.

Primarily in the PND space, we think that the technology hasn't hit its maturity yet.

Clearly the U.S.

market, as I mentioned several times is growing faster this year than Europe but there are many millions of cars and drivers that have still not adopted the navigation technology.

So we feel that that's going to continue for several more years.

Whether it hits 50% or 40%, 60%, it's hard for us to be able to sit back and know what that number is at this point.

Great.

And also looking at without talking about future products, but looking at the incremental technologies that people are talking about out there in the market, whether it's Wi-Fi positioning or dead reckoning, do you see that as a big driver following the next few years for penetration?

Yeah, for those specific things you mentioned, David, I would say no, those are kind of incremental features and there's some debate as to whether or not they add the utility that people are looking for.

We think it still comes back to core utility, ease of use and great form factors are really driving the market.

Great.

Thanks a lot.

Your next question comes from Ingrid Ebeling of JMP Securities.

Hi.

Thank you.

Again, congratulations for a great quarter.

Just a quick clarification on the gross margins for the PND segment.

You did mention that you were expecting 35% by the end of the year, and that's not for the entire year, I assume.

That's correct.

And the second question, can you talk a little bit about how the in dealership PND programs have, how successful they've been to date?

And can you just remind us which dealerships you're in right now both in North America and what you're looking for for Europe?

Yeah, I think the overall adoption of the dealer versus at the retail level hasn't changed substantially.

We've never quantified how much that is, but it's still a significant majority or the majority of the units that we're selling are primarily the big box retailers, internet dealers and distributors, and the like.

We've been successful at selling into dealers like Ford and BMW, for example, that's just to name few.

There's many more where that came from, but I can't quantify how much of our units come from that dealer network.

Great.

And in terms of the growth in Europe and the PND market, is it really a function of the retail channels or just overall market demand in general, why it's not keeping up the pace with the U.S.?

Is it because it's a little about the more of a mature market?

Historically we've seen about a 18-month lag from the North American to the European market.

So the European market being about an 18-month period ahead.

So just looking at overall market size, Europe is a much larger number, so, therefore, the -- because they have a higher penetration rate, we're not seeing as many units grow this year.

Okay.

Great.

Thank you and congratulations.

Your next question comes from Jon Braatz of Kansas City Capital.

Good morning guys.

Kevin, last year you made a couple acquisitions, Dynastream being one and the firm in Minneapolis, I can't recall the name.

I suspect they didn't contribute much financially over the last six months but what are they contributing sort of operationally in terms of their technologies?

What are they bringing to Garmin that maybe you didn't have?

And does some of their technology, will some of their technology allow you to expand into markets beyond GPS and navigation?

If you could just talk a little bit about those two acquisitions, I'd appreciate it.

Yeah, Jon, I think to answer your question, definitely the two acquisitions give us the ability to go into areas that we weren't before.

For example, DCI, the company in Minneapolis, gives us better access to the mobile applications space on wireless carriers and they do quite well in their weather-based products which has synergy obviously with navigation and GPS.

For Dynastream, they were experts in personal monitoring technology, heart rate monitors and feet and distance monitors.

Again, these are areas that aren't necessarily location-based, they're really measuring distance, velocities and heart rates and things like that which complements our overall fitness line.

Would it be safe to say that maybe we will see something in the near term that will take Garmin outside of the more conventional areas?

And Kevin, secondly, am I correctly they did not really add much financially to the numbers?

Well, yeah, first of all, it's not materially.

We're seeing some improvement but it's not enough to move the needle.

Okay, thank you.

Your next question comes from Mr.

[Herb Bookbinder].

Hi guys, Kevin, can you just comment briefly on the difference in margins, in operating and gross margins in the U.S.

versus Europe and Asia, particularly for PND?

Because you said mix was a factor in this quarter, shipping more in the United States.

Could you give us an idea of the margin differential right now?

Yeah, I think we won't tell you -- won't be able to tell you the exact difference but we've generally seen about a 25% price difference, higher in the North American market than in Europe.

And substantial operating margin benefit in the North American market over Europe.

Again, a lot of this gets back to pricing, the maturity of the market, where we are in the overall cycle of the adoption of the technology.

But I can't give you exact difference.

Is this difference widen here lately or have you always had this much of a premium in the United States?

The gap has been pretty consistent over the last couple years.

Okay.

The improvement, is it more of an improvement in the operating margin side than it would show on the gross margin side?

Or is it about equal?

It's about equal.

Okay.

All right, thank you very much.

Keep up the good work.

Your next question comes from Noelle Swatland.

Hi, congratulations on a great quarter.

I had one or two clarifications.

Can you give a sense roughly in the PND business, how should we think about the improvement in margin and what really drove the margin improvement sequentially?

Say you had 100% basket to allocate among say mix, favorable cost, et cetera, just to give us some idea if it was more volume driving it or what it was.

I think we've seen, as I mentioned in my comments, we saw prices not come down as fast as we earlier thought.

Even though we did see price compression.

For whatever price we did see, we also saw pretty healthy cost reduction.

So if I had to categorize between those two plus product mix, it was much like it's been in the past, it's pretty equal across those three categories of impacts to the gross margin.

Okay.

And then just in terms, I know you talked a little bit about gross margins for the business exiting the year, can you talk a little bit about what the margins tend to do sequentially into the third quarter in PND?

Well, I think we'll see a trend.

We were at 50% across our total business, and we're at 46% of the PND or auto mobile segment, you'll see a sliding scale.

So the third quarter margins we should see a decrease due to some of the pricing that we have in -- we have planned in place, plus the fact that the costs are somewhat challenging.

And then another sequential drop in the fourth quarter, that's how we're modeling our business right now.

So we should just stick to something similar to what we saw last year?

That's correct.

Okay.

And then just lastly, on the market assumptions that you guys outlined, can you give us a sense of where you feel like the first quarter was and now where the second quarter is, just in terms of total units, that drive you to your full-year numbers?

I think I'd rather you rely on the independent market research that's available rather than me quote a number to you.

Okay, cool.

Thanks very much you guys.

Okay.

Well, everyone, at this point we acknowledge there's more questions out there, but we're beyond our one hour.

If there are remaining questions, we'd like you to give Polly Schwerdt a call with any kind of follow-up.

Thanks everyone for your interest in our call today, we look forward to updating you later in the year.