台灣國際航電 (GRMN) 2008 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the third quarter 2008 earnings call for Garmin Limited.

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.

Thurston, you may begin, ma'am.

Good morning.

We'd like to welcome you to Garmin Limited's third quarter 2008 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 can be viewed during the call.

An archive of the webcast will be available until November 28, 2008 and a telephone recording will be available two business days following this call, and a transcript of the call will be available on the website within 48 authors under the event calendar tab.

This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business.

Any statements regarding our future financial position, revenues, earnings, market shares, product introduction, future demand for our product 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 29, 2007, filed with the Securities and Exchange Commission.

Attending on behalf of Garmin this morning are Dr.

Min Kao, Chairman and Chief Executive Officer; Cliff Pemble, President and Chief Operating Officer; Kevin Rauckman, Chief Financial Officer and Treasurer; and Andrew Etkind, General Counsel.

The presenters for this morning's call are Cliff Pemble and Kevin Rauckman.

At this time I would like to turn the call over to Cliff Pemble.

Good morning.

As you've read from our press release this morning, Garmin achieved record third quarter revenues driven by double-digit consolidated revenue growth.

Financial highlights for Q3 include revenue growth of 19% to $870 million ,with solid double-digit revenue growth in automobile and outdoor/fitness segments.

We generate growth in both North America and Europe, where we experienced revenue growth of 29% and 10% year-over-year respectively.

Gross margins came in at 44%, which is down 150 basis points sequentially and down 260 basis points year-over-year, but exceeded our earlier expectations as ASP declines moderated and price reductions were largely offset by lower product costs.

We also achieved strong operating margins of 25%.

Some notable business highlights for the quarter include expansion of our worldwide leadership position in the PND market, with approximately a 54% share in North America and greater than 20% share in Europe.

Consolidated shipments exceeded 3.9 million units in the quarter resulting in a year-over-year growth rate of 43% across all of our business segments.

While the growth rate is down from what it was a year ago, this remains an impressive growth rate for any consumer electronics category.

The outdoor fitness segment continues to outperform our original expectations on the strength of our new products combined with increased interest in outdoor activities.

Turning next to segment highlights, in the automobile and mobile segments revenue grew 21% driven by strong unit growth and moderating price declines.

We continue to have the most popular lineup of products in the more rapidly US market.

According to NPD, Garmin has the top three PNDs in the country, as well as seven of the top ten, and our market share for the quarter was nearly three times that of our nearest competitor.

As previously mentioned, revenues from the outdoor/fitness segment continued to outperform our expectation with 35% growth, thanks to our strong product lineup and growth in the market and capturing market share from our competitors.

We also saw continued growth in our aviation segment.

Revenues grew 9%, as shipments to OEMs offset weakness in the portable and retrofit markets.

And finally, marine revenue fell 8% as the segment continues to be affected by high fuel prices and economic conditions, which has slowed the entire marine industry.

However, overall weakness was offset by improved market share and gains we are seeing in the OEM dealer-installed markets.

Many of you are wondering how we view the evolving economic situation.

As I noted earlier, the PND market has slowed year-over-year, with Europe slowing more dramatically.

We now estimate the US and European market sizes to be approximately 20 million units each, representing industry growth of approximately 60% in North America and 20% in Europe.

While these growth rates are down from that of a year ago and have been impacted due to the recent economic crisis, the PND market still growing at a healthy pace in comparison to other categories.

We are working diligently to manage our business with efficiency, as the market matures and is affected by negative economic conditions around the world.

Efforts include scaling operations and advertising to better match the market demand levels.

In addition, we plan to reduce inventory levels approximately $150 million by the end of 2008.

We believe these efforts will position us to grow our profitability in 2009, and enable us to leverage our strong balance sheet going forward.

While growth is slow, on a more positive note the pricing environment has tempered leading to a year-over-year blended ASP decline of 17%.

ASPs have remained stable or risen in our outdoor/fitness, aviation and marine segments on a year-over-year basis, while PND ASP declines continue but are in line with our earlier forecasts.

Reductions in product costs have occurred according to plan, which has helped us reduce the downward pressure on gross margins.

Our marine and aviation segments remain under strong pressure due to the unfavorable economic conditions and high fuel prices.

While these segments are not performing as as well as we had hoped, we are pleased with our results given the severe impact that the financial crisis has brought to these markets.

So far we have sustained growth in our aviation business, as we launched new OEM customers and increased content to existing customers.

In our marine segment, revenue growth is flat year-to-date, but we see opportunity to invest in new product innovations that will position us for growth and new opportunities as the economic cycle runs its course.

Turning next to product launches, in the third quarter we introduced two exciting new product families just in time for the holiday season.

The first of the product introductions was the nuvi 2x5T series, which adds free ad-sponsored lifetime traffic and Bluetooth hands-free connectivity, and represents an ideal combination of features at a value price point.

In the upper end of our product family, we introduced the nuvi 7x5T series, which delivers lane-assisted navigation with graphical junction views and 3D building information.

The 7x5T also includes versions with free ad-sponsored lifetime traffic, as well as a version with more premium content offerings from MSN Direct, including fuel prices, local events, news and stock prices.

Both of these products have received excellent reviews and built on our award winning portfolio that received the top award in the 2008 J.D.

Power & Associates portable navigation device usage and satisfaction study.

This award highlights the strength of Garmin's product portfolio and form, features and UI.

We are also pleased to see that consumer reports ranked Garmin's flagship nuvi 880 as the best choice in their recent test of 49 models.

In addition, Garmin had six of the top ten units in the Consumer Reports ranking.

In addition to our retail PND business, Garmin has been diligently capturing opportunities in the auto OEM space, and I want to highlight a couple of specific relationships.

Suzuki is offering our nuvi as standard equipment in the 2009 SX4, which represents the first value-priced vehicle to offer navigation as a standard feature.

The Garmin nuvi is fully integrated into the dash through a flip-up mount, providing both in-dash utility and portability.

In addition, the system is integrated electronically into the audio system for high-quality voice prompts and bluetooth hands-free calls.

Some of you may have seen the advertising that is going on with Suzuki, which prominently features our nuvi, and we are very pleased with the relationship with Suzuki.

We have also developed a similar solution with Nissan that is being offered as optional equipment on a 2009 Nissan Rogue and Pathfinder.

In the aviation market, we began delivery of the new G600 retrofit PSD during the third quarter.

This unique product combines the best of two important cockpit functions, primary flight display and multifunction display maps.

During the third quarter, we also began shipping the new Prodigy Flight Deck to Embraer, which is based on our G1000 integrated cockpit system.

We are pleased to be part of Embraer light jet program, which is already generating a strong response from customers.

Aviation International News recently reported that Embraer has a combined order book of over 800 Phenom VLJs, all of which will be equipped with the G1000-based Prodigy system.

Many of you have questions concerning progress in our nuvifone program.

As we stated in the press release this morning, the nuvifone development remains on track for launch in the first half of 2009.

We have signed letters of intent and agreements with some key carriers around the world, and we will provide specifics closer to the launch date.

As we look at the competitive landscape in the smart phone arena, we remain excited by the breadth and depth of the LBS capabilities on the nuvifone, which are superior to any other device on the market today.

Finally, I wanted to provide you with an update on our full-year guidance.

While we remain convinced that we offer the most compelling and differentiated products across our market segments, we also recognize that some markets are slowing as a result of challenging economic conditions.

In addition, weaker international currencies add additional pressure on our revenues and margins.

In light of these factors, we are revising our full-year guidance to revenue of US$3.6 billion, representing growth of 13% over 2007; and EPS of $3.78 per share, including the gain from the sale of Tele Atlas shares, which is essentially flat over 2007.

I'll now turn the call over to Kevin, who will discuss financial results in detail, as well as the revised forecast.

Thank you.

Thanks Cliff.

Good morning, everyone.

I wanted to walk through in detail starting with the third quarter income statement.

We announced revenue of $870 million for the third quarter and net income of $171 million, so our earnings per share was $0.87 when we exclude the FX gain.

That is a 19% top-line growth during the period, and a 2% earnings per share decline when excluding foreign currency.

The unfavorable $0.05 EPS impact due to FX was a loss of $12.7 million, related to the FX during the third quarter.

Gross margins came in at 44.3%, better than expected, due to the moderation of the ASP decline in the quarter.

We saw significant material cost reductions and operating efficiencies across our business.

Gross margin would have been nearly flat sequentially without the effect of the weakening Euro.

Operating income during Q3 was flat, at $214 million compared to the third quarter of last year.

The 24.6% operating margin we posted was down from 29.4% last year, but still better than expected.

This was driven by gross margin coming down 260 basis points during Q3, and advertising down 50 basis points.

Our other SG&A was down 120 basis points; however, $9 million of the year-over-year increase in SG&A was due to the integration of our acquired European distributors.

R&D was also down 50 [bits] during the quarter.

Our units shipped grew 43% year-over-year, as over 3.9 million units were delivered during the quarter on the strength of our auto/mobile segment.

Average selling price was $226 per unit, down only 3% from the second quarter and 17% from the year-ago quarter.

The non-GAAP measures reported today include net income excluding the effect of foreign currency.

The year-to-date FX loss does not reflect the gain associated with the tender of our TA shares.

This impact was $0.05 per share unfavorable, as I've said before, during the period.

Looking next at the revenue by segment, during the third quarter we experienced 21% revenue growth within the auto/mobile segment, while the unit growth in that segment was up 54%.

Our outdoor/fitness segment also experienced double-digit revenue growth of 35% compared to Q3 of '07, with the fitness category leading the way.

Our aviation segment achieved a 9% revenue increase during the quarter.

Marine segment revenues declined 8% compared to Q3 of '07.

In total, as I mentioned, our revenues were up 19% for the third quarter.

During the third quarter, North American revenue was up 29% while our European business increased 9% during the quarter.

Our Asia Pacific region sales declined 21%, primarily due to timing of several sales programs during the period.

We do continue to expect healthy double digit growth in our APAC marks going forward.

Unit growth in North America exceeded that of Europe, as the North American PND market grew at 80% year-over-year on our unit basis.

And we experienced 54% unit growth from our PND products, with North America leading the way.

At the end of the third quarter, the auto/mobile segment represents 72% of our business, up two percentage points from the third quarter of '07.

Because of the stronger growth in North America during the quarter, that geographic region represents 57% of our total quarterly business.

Europe accounted for 28% of our total revenue.

The low-end unit sales of PNDs continue to account for approximately 80% of the total units within that segment.

The low-end revenues of PND account for approximately 70% of our total revenues.

Moving next to margins by segments, our third quarter auto/mobile gross margin and operating margin were 38% and 20% respectively.

Gross margin would have been flat sequentially, excluding the effect of foreign currency.

Gross margin at 38% was in line with expectations, as ASPs have declined 26% and COGS declined 20% on a full year basis.

Our third quarter PND ASP was up in the US but slightly down in Europe due to the Euro weakness.

We continue to expect PND price declines of approximately 25% during 2008, offset by projected raw material cost reductions of approximately 20%.

As a result, we expect our PND margins to decline from 38% in the third quarter to the mid-30% range in the fourth quarter, assuming fourth quarter ASPs decline approximately 20% year-over-year during the quarter.

Our third quarter outdoor/fitness gross margin was 63%, up 11% over last year due to favorable product mix and an increasing ASP.

Operating margin also increased year-over-year to 44%.

We continue to target long-term margins in this outdoor/fitness segment at 55% and 35% respectively.

Third quarter aviation gross margin was 65%, in line with prior year but down sequentially due to changes in our warranty program.

This change also fell through to operating margin, which was 34% for the quarter.

We continue to target long-term margins in the aviation segment at [55%] and 35%.

Our third quarter marine gross margin was below the long-term target of 55% at 49%, due to the weakness in the marine industry.

In turn, operating margin was also low at 24% versus a long-term target of 35%.

Full year margins remain in line with these target of 55 and 35%, and we will manage the business to maintain those in the fourth quarter.

Moving next to operating expenses.

Our third quarter total operating expenses were down 4% or $7 million from the second quarter of this year.

R&D increased $12 million year-over-year in dollar terms, but as I mentioned earlier was up 50 basis points to 6.1% of sales.

We now employ over 1,700 engineers and engineering associates worldwide.

Our ad spending increased $12 million over the year-ago quarter and 50 basis points as a percentage of sales, from 5.3% last year to 5.8% in Q3 this year.

We expect ad spending to increase in the fourth quarter holiday selling season, both in absolute dollars and as a percentage of sales.

Other SG&A increased 120 basis points to 7.8% of sales from 6.6% a year ago.

The majority of this increase was due to the integration of the European distributors that we've acquired since this period last year.

We expect that our fourth quarter SG&A expenses will remain flat with the third quarter, but we do continue to moderate - monitor the business needs in these functions.

I want to reiterate that we have a debt-free balance sheet, so we continue to see strength on that front.

We ended the quarter with cash and marketable securities of just over $850 million.

Our accounts receivable was essentially flat on a sequential basis at $678 million, as sales fell only slightly from the second quarter.

Our accounts receivable accounted for approximately 68 days of sales.

Inventory balances increased $43 million to $699 million, as we prepare for the holiday selling season.

At the end of the third quarter, our inventory was made up of the following categories - $151 million in raw materials; $45 million in [width] and assemblies; $531 million in finished goods; and $28 million in reserves.

Product availability remains a top priority for Garmin and has contributed to our success.

However, given the shorter product life cycle of PNDs we are seeing, we are trying to manage our inventory carefully, with plans to reduce inventory by $150 million at the end of the year.

It is still our goal to have adequate inventory to support customer needs, but we intend to carry the right level and mix of inventory to minimize risk of obsolescence.

You often ask about retail channel inventory.

At the end of the third quarter, retail inventory has become more lean as retailers look to reduce their inventory exposure and delay cash expenditures.

I can review the cash flow statement briefly.

The cash flow from operations during the third quarter was $232 million.

We spent $31 million of capital expenditures.

Our free cash flow was quite strong during the third quarter, at $202 million.

Cash flow used in investing was $17 million during the third quarter, made up of the $31 million of CapEx; $18 million of acquisitions of businesses and intangibles, offset by $32 million net redemption of marketable securities during the third quarter; cash flow from financing for the $304 million use of cash; and we earned an average of 3.8% on all cash and marketable securities during the quarter.

I'm sure you noticed that Garmin repurchased over 8.1 million shares, using the $306 million of cash during the quarter.

We repurchased 6.6 million shares in the first half, using $318 million, for a total now purchased during the year of 14.7 million shares.

There remain approximately 200,000 shares available for repurchase under the June 2008 Board authorization.

In addition, this morning we announced that the Board has approved the repurchase of additional 300 million of shares to be repurchased between now and the end of 2009.

Garmin intends to be an active buyer of those shares, as business and market conditions warrant.

Our diluted shares outstanding declined to 208 million, due to the shares repurchased during the period.

And finally our new forecast for 2008 now includes revenue at $3.6 billion, representing a 13% year-over-year growth, and operating margins of 24%.

We expect earnings per share excluding foreign currency to come in at $3.78 per share.

CapEx remains at $120 million invested this year.

Our tax rate remains at 19%, and our average diluted shares throughout the whole period of 2008 is 211 million.

This assumes approximately 202 million shares in the fourth quarter of 2008.

So a little bit more detail on the segments.

We now expect our auto/mobile segment to produce $2.655 billion revenue this year, up 13%; outdoor/fitness, $425 million, which is up 25% year-over-year; our marine business remains flat at $204 million; and our aviation business will come in at $316 million, about a 7% increase over last year.

Thanks for your attention to the formal comments in our presentation this morning.

At this point, we would open it up for any questions that you might have.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Vivek Arya.

Thank you.

Good morning.

A couple of questions.

How should we think about the ending growth in 2009 US versus Europe?

Do you think there's a possibility that we could see negative PND volume growth next year?

If yes would that be a macro issue, a competitive issue, against smart phones, or do you think you are not getting people to update their devices as frequently?

I think it's probably a little too early to tell, especially given a big portion of our market will take place now in Q4.

So I think we are waiting to see how that goes, and we have long-term optimism that the category can still continue to grow meaningfully.

But again, we are looking towards Q4 to kind of see how things go.

And Cliff, how is your -- your strategy on the PND side is very different from what TomTom has, in the sense that they are really emphasizing their connected services, but you have in instead chosen to focus on the nuvifone as really your connected device capability.

How do you think about your strategy versus what TomTom is pursuing?

I think we've started a strategy with nuvifone that we think is unique and different, and definitely we are getting a lot of positive reactions to that.

We remain open to all product categories, though, so we haven't ruled anything out in the way we would go forward.

And just the last question.

If you look at just on the smart phone side, you have competitors like Apple (inaudible) who have set a $199 to $249 retail price point for smart phone devices.

Do you think that the nuvifone will be competitive in terms of the features and pricing against those devices?

We think so.

I think there will be a range of pricing, of course, depending on devices that are in the market, but we believe our device will be priced like other smart phones in the category, and will be embraced by carriers through subsidies.

And just the last question for Kevin.

Kevin, just a clarification on the guidance.

You said it excludes the impact of FX.

Is that excluding even for Q3 or is that just Q4?

I just wanted to make sure I understand.

Good question.

Anytime we give earnings per share guidance, it always excludes the foreign currency gain or loss that we recognize on the other income part of our P&L.

So it excludes that portion.

So the $0.05 you said you had [missed] for Q3, that is excluded from this?

That's correct.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Amir Rozwadowski.

Thank you very much for taking the question.

In terms of looking at your visibility into the fourth quarter demand trends, Cliff you mentioned certainly you have a lot of shipments - depending on a lot of shipments for fourth quarter.

Can you guys give us color in terms of linearity this quarter and how you saw selling trends moving into September, October?

And where you think your visibility stands sort of at this point going into the fourth quarter?

I think what we've seen just recently and the reason we dropped our numbers from our earlier guidance was October, we definitely saw a slowdown and saw behavior a little bit less than what we had anticipated going into the quarter.

We've been asked over the last several months what kind of experience are we having with retailers even in September, and it appears that the retail channel is wanting to limit their own risk and carry less inventory.

So we didn't see an big impact in September but we have seen a slowdown in October, and we feel like we put out a number that is something that is achievable, given a pretty big promotional program still at - back right in the rest of the fourth quarter.

Kevin, would you say that going into this holiday season, your visibility is better or perhaps less than prior holiday seasons?

I think we worked very carefully with all retail channels, and we have good feedback consistently.

What we point out is what we don't know is what the customer willing to do on some of these big programs around Thanksgiving.

So we have orders.

We have backlog.

We don't have everything wrapped up, but we never do every year.

So it's consistent with past years, it's just that we are looking at a real -- real pressures based on the economy and we try to factor that into our expectations.

And within that mix, your low-end and high-end mix, how should we consider the balance of low versus high-end for fourth quarter based on your guidance?

We look at kind of low and high and would not expect a significant change.

We are already filling 80% at fairly low prices, so we'll continue to see that level of sales in the fourth quarter, as we go forward.

And last question, if I may.

In looking beyond through 2008, I guess the factors that we are considering for how the demand environment shakes out is possibly a geographic expansion, replacement sell-in as well as higher penetration.

In looking at sort of your priorities for driving growth or unit shipments in 2009, which should we consider as sort of the leading factor still?

I think we consider all of those.

Yes, we are looking at every opportunity and everything you listed.

The one point on penetration is we are still at a relatively low penetration rate even as we exit this year.

At the end of the third quarter the US or North America penetration is in the teens, probably 15% and maybe a little bit above 20% in Europe.

So there is still room for growth, but as Cliff said we need to go after all opportunities.

Great.

Thank you very much for taking the question.

Thank you.

Your next question comes from the line of Mark Sue, RBC Capital Markets.

Thank you.

Given the current backdrop, how should we look at gross margins for the holiday level for the PND segment?

I ask because it still seems very fluid and if competition does increase, to what level would you respond?

Is there a floor in a 20% ASP accelerated 25% to 30%, or would that be unlikely?

I think we are expecting strong sales in the holiday season, 80% sequential growth from Q3 to Q4 on the PNDs.

Margins will probably be, as I mentioned mid-30s on gross margin, and we were at 38% at the end of Q3.

So by the time we exit the year, we should still get operating leverage with higher volume.

Our estimate right now would be mid-30s on gross and still close to 20% in the fourth quarter on PND.

Would you -- is there a floor where you would say we really can't cut price to stimulate demand, or does that --

Price points that we would just say we can't go below, and we want to make a reasonable margin.

We want to grow market share.

We want to take on the increased market penetration.

But yes, there is a certain point - we are not going to quantify what that is, but there is a limit.

Okay.

And Kevin, separately the provisions for obsolete inventories, it's usually $12 to $17 million in a given quarter.

I think it was just $1 million this time.

Any thoughts on why the reserve wasn't high at this time?

As I stated on various past conference calls, we look at the actual inventory that we hold, and we don't have a lot of old excess inventory that is not moving.

We have some SKUs, but mostly what we have in-house are products that we'll be selling very well through the holiday season.

So we literally look at the reserve on a SKU by SKU basis, and make appropriate reserves.

Lastly, Kevin, just on the nuvifone, is there a volume level that makes the profit -- that makes that segment profitable, or should we look at it in a different way in terms of how we look at our unit assumptions next year and profits for the overall company?

We stated in past conference calls and other conversations that we expect the nuvifone gross margins to be a little bit below our PND but pretty close, in the 30% to 35% range.

I think you should just model that into whatever you are looking at.

Thank you, and good luck gentleman.

Thank you.

Your next question comes from the line of John Bright, Avondale Partners.

Thank you.

Kevin, on your inventory, in the prepared remarks you talk about reducing inventory levels by $115 million by the end of the year.

Give us some of the thought process on how you are going to go about doing that, one.

And two, on the advertising spending, more focused advertising spending, very important to Garmin.

What -- how would you describe more focus in your advertising spending?

Okay.

Let me start first with the inventory levels.

I think what we are assuming here is that we are cutting down on the production volume during the fourth quarter, given the slowdown in the overall macro environment, and we don't anticipate any kind of staff reductions although we are eliminating some of these overtime and contract workers that we typically use in our Taiwan factories during the fourth quarter.

That is going to help us by cutting back on the production volume from what we had earlier anticipated.

And other than that, just working very diligently on a - product by product to have the right product, and then build the right product so that it's ready for the marketplace.

From an advertising point of view, we do anticipate a pretty substantial advertising increase.

We are doing TV ad campaigns currently in the US market and some other focused markets, and we'll continue to offer cooperative advertising with our major customers, and then there's the continuous print and radio media that we'll spend.

So I think we are committed to investing in advertising to drive demand in the near term, but we will watch it very carefully and try to get operating leverage within our business.

Last question.

You also talked about continuing material cost reductions, particularly in the PND market.

Maybe you can give us some color on specifically what materials you are getting the cost reduction from?

I think it's across the board.

We've seen about a 20% material cost reduction this year, which is right on track with what we've been saying all year.

So no major surprises there, but the key products products are the ones that make up the major part of our [bomb] and that is display, flash memory, chip sets, GPS chip sets, the licensing that we pay - license fees that we pay within our products.

Thank you.

Thank you.

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

Thank you.

If I can revisit the nuvifone gross margin question again.

I think when you introduced the phone, Kevin, you had been thinking about low 30% gross margins for nuvifone, and it would seem that the smart phone environment has gotten more price competitive since then, with things like the $199 iPhone among others, yet you seem to still have a similar gross margin target.

Is that due to component cost reductions since then, or is there any other factors that would enable you to keep those gross margin targets the same in what would appear to be a tougher environment?

I think the end user pricing for various smart phones that are on the market right now is hard to process because of the high subsidies that come along on some of those.

So what we are seeing in terms of what we can estimate real [ASPs] to the various competitors is that our nuvifone should be priced competitively, and the margin target that we gave you is where we feel comfortable.

Can you give us -- I'm sure you can't give us the actual subsidy number but can you give us a sense of how much visibility you have to what level of subsidy the carriers are willing to give you?

Apple gets a certain level of subsidy that may be higher than anyone else, perhaps.

Do you have a sense of what kind of subsidy level you can expect, and that you are basing your gross margin assumptions on?

Again you have to factor on what is the end user price, to really come up with the total picture, and certainly we are not ready to go there again in terms of providing details.

But to illustrate the breadth of situations going on out there, some countries you can get an iPhone for free and certainly we know Apple is not a charity organization.

So there are definitely higher levels of subsidies that go along with certain countries and certain products.

We recognize that brand and product strength factor into that in some of the cases that we are talking about, which is great, but we do feel we have a strong product and carriers are enthused about offering the product.

And Kevin, of the revision to the 2008 revenue guidance, can you give us a sense of how much of that was from currency?

What we've seen is about 100 basis points impact in the third quarter, down from our earlier periods, and we are already seeing that again in the fourth quarter.

So we factored in the US/euro currency movement at least another 100 basis points again in the fourth quarter to take that into account.

Okay.

And finally I wanted to clarify, did you say 202 million was the share count to expect for the fourth quarter?

Yes, I did.

Thanks very much.

Thank you.

Your next question comes from the line of Jonathan Goldberg, Deutsche Bank.

Hi guys.

I wanted to clarify, with your agreements with the carriers on the nuvifone, will it be subsidized?

We are not providing details at this time, so we'll announce that closer to the launch date.

Kevin, I just want to talk about PNDs.

Could you give me an estimate, last year what percentage of your business was -- what percentage of the auto units was turns business that sort of shipped or got ordered post black Friday?

I don't know that we can quantify that, but I do know that we have gotten into the quarter expecting about a billion dollars in sales across our business, and we did 1.2, so we definitely exceeded our earlier expectations.

So it will be somewhere between that number, $100 to $200 million in sales that came out as we went through the year.

I wouldn't say that was all after black Friday, but it had to do with consumer demand as we went through the quarter last year.

But a fair amount of orders came in sort of post black Friday, or as a result of black Friday?

Yes.

Are you assuming that kind of ramp for this year - post black Friday?

I think we feel like the new guidance that we have given has taken into account a weaker economy.

So we have many orders already in our backlog, but we are not being too aggressive on what the rest of the fourth quarter will do.

Okay.

And then just looking at the overall PND market, you are talking about 60% growth for US units this year, 20% in Europe.

That's down from triple digits in the US last year and - call it 80% last year in Europe.

TomTom yesterday had some pretty conservative but similar numbers.

To me it's a pretty sharp slowdown to go from 80 to 20 and from triple digits to 60.

Are we going to have 20% unit growth do you think next year in PND units in the US?

We are not prepared to give 2009 guidance, but I don't see any reason why we shouldn't see at least 20% unit growth next year.

So a pretty steep slowdown, though.

I think it's going to be a slowdown.

The benefit next year will - ASPs, as we have seen recently, are moderating.

We don't expect the pricing to come down nearly at the level as what we have seen this year.

So next year it will be a little bit different market, higher penetration rate as we go into the year, but still decent unit growth and less ASP declines next year.

And you are premising the moderation in ASP decline on what?

I think a couple of factors.

Number one, just the absolute price point is much lower than it was at this point last year.

I think the operating margins on many of our competitors are getting very thin, if not zero, so that will help us from having to be overly aggressive on price and I think some of the other competitors in the market are saying the same thing.

So I don't believe that it's anything unusual on what our expectations are on ASP next year.

Thank you.

Thank you.

Your next question comes from the line of Yair Reiner, Oppenheimer.

Good afternoon.

First, Kevin, can you walk us through how the dollar strengthening is negatively impacting gross margins?

It would seem at least from a component purchasing point of view, it should be a tailwind?

Well, we have quite -- I won't go through all the complexity but we have kind of a natural hedge in our business.

It has an impact on the sales side due to the weakening Euro, because approximately 25% of our invoices are on the Euro currency.

We do have a benefit from the manufacturing cost due to the US dollar movement in the period as it strengthens versus the Taiwan dollar, but the net impact is still negative when you compare the revenue versus the cost.

So I quantify that number at about 100 basis points during the third quarter.

Okay.

Looking at the - 2009, kind of setting aside the FX impact, given what you are seeing through the components pricing, competition, price erosion, do you now believe that gross margins in the PND business will be up or down or flat next year?

Well, I think we'll end the year at about mid-30s, as I said.

We could still see a slight reduction next year as prices come down, maybe a little bit more than cost but nearly the -- not nearly the same decline as we have seen in 2008.

again, we'll see a moderation of price.

We won't see a 20% comp decline.

It will be at or maybe a little bit below our ASP decline, but we should still see margins at about 30% next year in the PND business.

Okay.

Looking at your implied fourth quarter guidance for aviation, it looks like you are projecting a pretty big sequential dropoff.

I was wondering if you can help kind of explain that, and then explain whether it's a one-time impact and we should see a rebound in the first quarter of '09?

We are seeing, as we mentioned in the comments, some significant pressure on the aviation market, and there are a number of factors across our business because we serve so many different segments of that.

We are hearing people - reports in the field where people are saying that they are putting off buying decisions, and in some cases maybe not taking delivery of aircraft, but we do think that it's somewhat temporary.

Some people are even saying that after the election maybe there will be more clarity.

So there are some of those natural factors that are coming into people's minds as they pause a little bit right now due to the economic situation.

One final question, then I'll cede the floor.

In terms of CapEx, obviously over the last couple of years you have been building capacity.

Now it seems like you are at least approaching the point of topping off.

What should we model in terms of maintenance CapEx for the business?

Well, we guided to 120, and that did include some expansion of the production line in Taiwan.

The maintenance should be between $60 million to $70 million a year without any kind of facility expansion.

Great.

Thank you.

Thank you.

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

Hey guys.

On the nuvifone, what is a reasonable volume expectation for '09?

Well, we've said - I think we still maintain that over the first 12 months after we release the product, if we can get a million units out the door that would be acceptable to us.

We have nothing at this point that would change that number.

Okay.

And then as far as working capital, what are you looking at for '08 and '09 as far as negative working capital?

I don't know that I can quota number for the full year other than we are expecting, as I mentioned, the inventory to be reduced.

That will help us on working capital.

As we go into next year, I think you'll see less of a drag on our cash flow from operations due to inventory because we are really trying to manage that the best we can, but we still expect strong cash flow from operations as we go all the way through 2009.

Lastly, what's the current interest rate you are getting on cash?

We mentioned 3.8% was what we achieved in the third quarter.

Is that still the right number or does that come down?

It's come down some, but I'm not prepared to quantify what that is right now.

Okay.

Thank you.

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

Thanks.

Hi everyone.

Hello.

A big picture question.

So there is a lot of evidence that we are moving beyond the period of hyper-growth in PNDs, you mentioned the penetration rates in the US and Europe.

In Garmin's crystal ball, how do you see this market evolving, looking out two to three years, and then how are you planning the business accordingly to be well positioned to capitalize on the new dynamics in the market?

Well, I think we continue to look at expanding opportunities, as we mentioned earlier, both in terms of existing markets as well as emerging markets.

I think with the turmoil going on in the auto OEM space, there's some potential upside to PND, as people who are perhaps not buying new cars and not equipping them with expensive equipment may be more inclined to purchase a navigation device for their vehicle.

So we are focusing on features, on content, on services, and emerging markets going forward.

Is your principal strategy in this category a market share gain in PNDs, or is there some sort of category-changing dynamic you expect that you are positioning yourself for?

Well, again market share maintaining market share is very important to us, and we intend to continue to focus our goals on where we are at and the markets going forward, and again taking advantage of emerging opportunities.

Okay.

And Kevin a question on the advertising spending, and the philosophy there, you said in the fourth quarter a - as a percentage of sales, is that on a sequential basis or on a year-to-year basis?

It's on a sequential basis and - actually, it's on both.

We probably spent around $80 million in advertising in the fourth quarter, which is significantly increased from the third quarter, due to our TV campaigns.

Okay.

And looking out to '09, do you expect advertising to be a source of leverage for the business, or would you expect to continue at a similar rate as a percent of revenue?

We haven't given '09 guidance, but we would the expect advertising to be growing at about the same rate of sales.

We might get a lit bit of leverage but we honestly haven't put into play what our specific strategies are on advertising into 2009 yet.

We play that a quarter or two in advance of what we really need to commit to.

Very good.

Good luck with this Holiday season.

Thanks.

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

Good morning.

Cliff, we've seen new smart phones like the Apple phone and the [Andra] phone, both generate a lot of enthusiasm through their developer communities, generating apps for those handsets.

I can see a lot of opportunities for Garmin.

I'd be curious to know what you are contemplating on that front?

I think our initial focus is to provide a lot of the functionality and apps that a lot of the developers are focusing on right now, but integrating them into nuvifone in such a way that is seamless across the device.

I think going forward we'll be open-minded in terms of offering devices that will have open platforms, but initially our focus has been to offer a turnkey [LBS].

Okay.

And then Kevin, a couple of questions for you.

Okay.

I'd be curious to know how big a percentage of auto/mobile (inaudible) is OEM this year, and what you think it can be next year?

How big can that opportunity be for you?

It's a very small number this year.

Cliff talked about Suzuki and Nissan, but it's definitely only in single digits as part of our total auto/mobile segment, and I think what you will see in the future, it will take us a couple of years to get - planning for revenue there because of the long development cycle for some of these new products in-dash.

I wouldn't expect 2009 to have a meaningfully larger number on a percentage of our total auto/mobile segment.

2010, we could see a nice increase as we get into more business there.

So in '09 could it break double-digit percentage of mix there?

I would say probably not at this point.

Okay, that's helpful.

My second question is a follow-up to your comment that you made at least about 20% unit growth in PNDs in '09.

By my calcs, that's an acceleration from what I'm seeing for Q4 year-over-year growth.

Do you have some kind of a recovery you are making into your '09 thinking at this point?

Again, very difficult from visibility to have any sort of expectation with what the economy is going to do, but I think we are playing that out to both market share gains and also the fact that penetrations are still unreasonably low levels, and the fact that we are going to be seeing more of a replacement market as we get into year two or year three after some of the (inaudible) in the PNDs.

Okay.

Thank you very much.

Your next question comes from the line of Scott Sutherland, Wedbush Morgan Securities.

Great.

Thank you.

Good morning.

Good morning.

Following up on the last question, looking at your guidance for the auto/mobile, it looks like down year-over-year [post] Q4.

When you look at '09, and not getting into guidance, what do you see as pivot points?

Do you think that you guys need a recovery in consumer demand?

Do you think it's just less price pressure, some of the smaller players maybe get whittled out of the market?

Do you see a recovery in revenue in that segment?

I think we need both.

We need a stronger economy, and I think we need less competitive pressure as we see a shake out after Q4.

Okay.

You guys talked about your advertising spend, and talked about the channel whittling down on inventories.

As you look at Q4, some of your big box stores and some of your partners out there, what kind of advertising do you see them promoting?

Do you think navigation will be one of the top categories they will push out there?

We absolutely do.

It's still - the PND and navigation is still one of the fastest-growing categories, they are still putting money in of their own.

In-store merchandising, point of sale is very important.

Cooperative advertising with fliers every week is important, and then we are augmenting that with our own TV ad spending.

Great.

Thank you.

Your next question comes from the line of Paul Coster, JPMorgan.

Hi.

This is actually Sam (inaudible) on behalf of Paul.

Just a couple of quick questions.

Would you have any estimate on how many or how much your sales right now is replacement and how much is new sales, and obviously replacements going up in a couple of years?

This is a difficult number to nail down, but we believe that the replacement market at this point is around 20% of our sales.

We maintained that pretty much all year.

That could be picking up some in the next 12 months as - again as the market starts to mature and we move from hyper-growth into steady growth.

And then you talked about the economy having to recover, and then some of the smaller players being shaken out.

On the second point, of some of the weaker players, is there something that Garmin will be doing in terms of the pricing strategy to kind of catalyze that, or do you think that th normal course of these price declines, given the financial situation that they are in, will kind of take care of that and you'll be able to gain market share?

Yes.

We think it the fact that many of our competitors we believe are selling at very thin margins, and we are going to be reasonable in our prices, and as I mentioned we already have that plan in place for the fourth quarter promotion, but clearly there is just not going to be as many PND suppliers next year because of the profitability in that segment for some of these guys.

And then just lastly on the nuvifone, I know you don't want to say whether or not you are going to have a subsidy yet, but if you were to have a subsidy, what exactly will be the service?

Like BlackBerry or an Apple iPhone you are looking at kind of the data access for web and email, is it going to be web and email and then you have a specialized GPS realtime server or something?

What I guess would make the carriers want to give you the subsidy?

We are not providing details right now, so we'll give those closer to when we launch the device to the carriers.

Thank you.

Thank you.

Your next question comes from the line of J.B.

Groh, D.A.

Davidson.

Thanks.

I think in the past you have given a percentage of sales from new products.

I didn't hear that.

I don't know if I missed it or if you didn't give it.

Is that something you're willing to give out?

We really deemphasized that because so many of our products now are new and innovative, so it's a big number, but we haven't quantify that.

Since your product life cycle is shortened up, you're not giving that anymore?

Yes.

Okay.

I think I heard you say 202,000 shares outstanding for --

A million.

Yes.

Okay.

And then lastly on the margins on outdoor and fitness, those are very strong on an operating basis.

Is that mostly driven by what is going on with new product development and what sort of plans do you have to sustain those and develop other great products in that area?

I think it's the new fitness products in particular and even some outdoor, but it is driven by increased - pretty strong volume and also the new product introductions we brought to the market.

How much more can you do there?

You have come out with some stuff that I don't think people would have thought of would have been applications.

What else are you working on in that area that you can talk about?

We'll have to share details later.

Okay.

You know we can't tell you about -

I know.

Thanks for your time.

Your final question comes from the line of Dan Bolan, (inaudible) Research.

Good morning.

My first question, when you look at your retail partners, what's your take right now as to the emphasis they are placing on the category in terms of the number of points of sale, the shelf presence or the absolute SKU expansion, the number of products they are featuring, and how would you say it compares to last year at this time?

Without a doubt, as I mentioned, it's a hot category.

It will still be one of the pushes for the holiday season.

When you look at shelf space and number of SKUs, clearly there's more SKUs now this year than there were last year, and those have ramped-up throughout the year.

And they are committed to the advertising and promotional activity within the stores, trying to drive foot traffic, drive the number of consumers through the store.

So I absolutely, most of the retailers are committed.

It depends on which retailer we are talking about, but most of them are really wanting to sell this product this year.

My second question, when you look at replacement in general, what would you say the average life of a PND device is now?

Where do you see that going over the next year or so?

I think it's probably difficult to really quantify that.

I think our estimates are somewhere in the three to five-year category, depending on the product.

I think the products have come down in price, but the product life probably shortens naturally because people are probably more willing to purchase a new unit as features change and capabilities are enhanced.

But that's our general view right now.

And my last question.

When you look at the holidays thus far, not necessarily even the visibility you are getting from customers, but when you look at the promotions that you are seeing and the emphasis other competitors are placing on their holiday sales, how would you say that the promotional environment this holiday will compare with what you saw last year at this time?

I think there's a lot of deals lined for black Friday, so you are going to see very strong promotional emphasis on PNDs for the holiday.

Is that the nature of your question in terms of surrounding the sales activity or were you referring to advertising?

Yes.

In terms of the absolute rebates or promotions that competitors are placing on the devices relative to last year at this time?

Well, again we probably don't know exactly what competitors are doing.

We know what we are doing and we have a strong line up of great promotions.

Thank you.

Pretty consistent with last year, too.

Okay.

I think that is the end of the Q&A.

Thank you all for your questions.

We look forward to talking to you in the future.

Thank you for your participation in today's teleconference.

This concludes today's conference.

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