台灣國際航電 (GRMN) 2009 Q1 法說會逐字稿

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Ladies and gentlemen, please stand by.

Welcome to the first quarter 2009 earnings call for Garmin Limited.

At this time I would now like to turn the event over to Kerri Thurston.

Please go ahead.

Good morning.

We'd like to welcome you to Garmin Limited's first quarter 2009 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 June 8th, 2009, and a telephone recording will be available two business days following this call.

A transcript of the call will be available on the website within 48 hours under the Events 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 share, product introductions, future demand for our products, 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 those risk factors is contained in our Form 10-K for the fiscal year, ended December 27th, 2008, filed with the Securities and Exchange Commission.

Attending today's call on behalf of Garmin Limited 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'd like to turn the call over to Cliff Pemble.

Good morning.

As you've read from our press release this morning, Garmin announced first quarter results that reflect the very difficult macroeconomic conditions facing the company.

As we noted in February, we expected 2009 to be the most difficult year in our history and it has definitely started out that way.

Against this backdrop, we do see positives in our financial performance.

While revenues fell 34% our consolidated gross margins were 45%, as higher margin business segments contributed a higher percentage of the revenue.

EPS, while down significantly, was $.25 per share excluding the effects of foreign currency, and we were able to generate $286 million of free cash flow and remain a debt free company.

From a business perspective we have continued to outpace the competition as our global PND market share increased 2% in fourth quarter to 37%.

And our North American market share remains above 50%.

Our Outdoor/Fitness segment posted year-over-year revenue growth of 13% driven by growth in the Fitness category.

We also increased our penetration at OEMs across the Marine, Automotive and Aviation segments as OEMs recognize the strength and value of our product offerings.

I'll discuss these in further detail in a few minutes.

Reviewing our business by segment, in the Auto/Mobile segment, our revenue declined 43% in the first quarter as retailers around the world have been reducing their inventory levels.

We experienced a steep but, we believe, temporary, decline in ASP as price protection was offered to major retailers to help clear inventories.

On a sell-in basis North American units declined 5% year-over-year, but the declines in Europe were much steeper at 32% year-over-year.

The Outdoor/Fitness segment continued to post growth with revenues up 13% over the prior year.

Our product lineup in both Outdoor and Fitness continues to outperform the competition resulting in further market share gains and penetration.

Revenues from our Aviation segment declined 31% in the quarter much as we anticipated going into the year.

The decline was across the entire product line impacting OEM, retrofit and portable products.

And finally revenues from the Marine segment declined 32% as we faced the ongoing downturn affecting the entire marine industry.

On the positive side we have secured a number of new OEM relationships which will help offset revenue declines in the retail side of the Marine business.

While the overall economic news has been mostly negative, we do see some positive indications.

For example, on the Auto/Mobile segment, it is important to note that retail sell-through in the North American market continues to grow on a year-over-year basis.

As retail inventory levels have reached a low point, we expect sell-in to the channel to trend more in line with sell-through.

This combined with improving ASPs will positively impact revenues and margins in this segment going forward.

We do expect the full year decline in units in Europe due to the market maturity and economic slowdown affecting that region.

As we look at the non-PND segments, we expect growth in the Outdoor/Fitness segment to slow for the remainder of the year due to the strength of this segment in 2008.

We remain excited about the new Forerunner products coming to market in the second quarter and additional product introductions throughout the year, which will help offset slowing growth in the category.

In Aviation and Marine, we will be focusing on stabilizing our revenues and margins as we continue to win new OEM partners and complete additional certifications of the G1000 as a retrofit solution.

In spite of the economic impacts on our business, our strategy remains intact.

We are focused on long term growth opportunities and product innovation to further extend our market leadership in navigation and communication.

Next I'd like to brief you on some recent product introductions.

We recently introduced a new family of nuvi products, the 1200 and 1300 series, with an updated form factor and new features.

The ultra slim design of this new product family is 25% thinner than the previous generation products making these devices even more portable.

These devices also offer pedestrian navigation enabled through our City Explorer maps, which can be purchased and downloaded by the user.

After downloading the nuvi can be used for navigating the public transit system in selected cities around the world.

In addition, we introduced the nuvi 1490T, which combines a five inch screen with a new slimmer form factor, and it's perfect for customers who wish to have a larger screen without sacrificing portability.

The 1490T offers premium features such as traffic, lane assist with junction view, and the ability to download City Explorer maps.

And finally, in the Auto/Mobile segment we are pleased to announce our OEM relationship with Chrysler.

Garmin has been selected to provide in-dash navigation for the 2011 model Jeep Grand Cherokee.

The navigation will be combined with Chrysler's U-Connect radio on a six and a half inch touchscreen display.

This is an exciting collaboration that started some time ago and we look forward to helping Chrysler rebuild and grow their business in the future.

We recently introduced two new products in our Fitness Category, the Forerunner 310XT was specifically designed with the triathlete in mind.

The 310XT is waterproof to a depth of fifty meters and has an optional quick release bracket, so it can be easily moved from bike to the wrist.

It also incorporates our N-Plus technology, providing wireless connectivity to a heart rate monitor, foot pod, power meter, third-party fitness equipment and the user's PC or Mac.

In addition, we introduced a new model in our Forerunner family, the 405CX.

Based on the feedback from our customers, the 405CX offers two primary upgrades, improved to caloric computations, and improved comfort.

The caloric computations are based on algorithms developed by exercise scientists and world class athletes providing improved accuracy.

Comfort has been enhanced through the choice of two form-fitting wristbands to accommodate both large and small wrist sizes.

We have made several important OEM announcements in early 2009.

On the marine front we have announced relationships with Edgewater Powerboats.

Garmin has been selected to be the exclusive navigation provider on Edgewater's full line of powerboats.

Next is Fairline boats.

Fairline is equipping their boats with the Garmin Marine Network, which includes our fifteen inch touchscreen Chart Spotter, Hi-Definition radars, VHF radios, and the recently released GHP-10V Autopilot.

This equipment will be standard on the 2010 Yacht Range.

And finally there is Gulf Craft, Inc.

We will provide a full range of products to Gulf Craft for the 2010 line of Silvercraft and Oriks brand Fiberglass boat yachts.

Our Aviation footprint continues to expand as well.

We have recently announced expanded relationships with Piper on the Meridian, a six seat turboprop aircraft and Cirrus on the vision SF50 personal jet which is in development and finally there's King Air.

We recently received supplemental type certification for Garmin's G1000 in the King Air 200 and B200 aircraft for the retrofit market.

Finally, turning to nuviPhone, we can report that we have made significant progress in the testing and certification of the devices in preparation for carrier and retail launches.

We remain confident in the appeal of location centric devices for the SmartPhone market and are actively working on distribution and pricing arrangements.

At this time I would like to turn the call over to Kevin, who will provide a more detailed look at our first quarter results.

Thanks, Cliff.

Good morning, everyone.

I wanted to walk down the financial results for the first quarter starting with the income statement.

You can see that we recognize revenue in Q1 of $437 million, net income of $49 million, which represents an earnings per share of $0.25 per share excluding foreign currency loss.

We see a 34% top line decline and a 64% earnings per share decrease excluding the FX.

Our effective tax rate did remain consistent with the first quarter of '08 at 19% during the period.

Gross margin came in at 44.9% which was better than expected due to the increased contribution of our higher margin Outdoor/Fitness, Aviation and Marine segments.

However, operating income fell 66% to $58 million compared to $173 million in 2008.

Our operating margins of 13.3% were down from 26% last year as revenues fell.

The gross margin was 330 basis points unfavorable.

Our advertising expense was 40 basis points favorable and down $15 million on a year-over-year basis.

Other SG&A, 470 basis points unfavorable as our costs in this area were flat on a year-over-year basis, and R&D was unfavorable by 510 basis points with an increase of $6 million year-over-year.

The unit shift during Q1 declined 13% year-over-year as the 2.4 million units we shipped were delivered during the quarter.

Strength in Outdoor/Fitness was offset by declines in all the other segments and our total company average selling price was $181 per unit, down 24% from the same period 2008.

However, this was up 10% from the $165 ASP we announced in the fourth quarter of '08, so clearly our financial results were primarily impacted by the reduction in sales both sequential and year-over-year.

We did decrease our operating expenses by $56 million sequentially, but this was not enough to offset the significant decline in sales.

However, we believe that the first quarter marked the low point for operating margins during 2009 and with increased sales volume during the remainder of the year profitability will improve.

The non-GAAP measures that we reported this morning include net income excluding the effect of foreign currency.

This impact was $0.01 per share unfavorable during the period and $0.02 per share unfavorable for Q1 2008.

During Q1 we experienced a 43% revenue decline within the Auto/Mobile segment, while the shipments declined in that segment 16%.

Our Outdoor/Fitness segment continued to grow with a 13% revenue increase when compared to Q1 of '08 with the Fitness category continuing to drive the growth.

Aviation segment revenues fell 31% compared to Q1 2008, with declines in all portions of the business, the OEM, retrofit, and portable products.

Marine segment revenues fell 32% compared to the first quarter of '08.

In total our revenues declined 34% during the first quarter.

During Q1 all Geography slowed on a year-over-year basis due to the impact of the continued worldwide economic slowdown.

Unit shipments in North America were almost double that of Europe.

However, the North American PND market for Garmin still shrank by 5% in the first quarter on a sell-in basis.

The Auto/Mobile segment represents 59% of our total business during the Q1 2009, and this is down from 68% in 2008.

Outdoor/Fitness grew to 18% of revenues in the quarter, a seven percentage point increase from 2008.

Revenues by Geography were relatively stable as all Geographies experienced similar declines in revenues.

The low end unit sales of PNDs accounted for approximately 85% of the total.

The low end revenues of our PND's account for approximately 80% of the total.

So this 85%, 80% relationship product mix compares to 80% and 70% respectively during Q1 '08.

Looking next at margins by segment, our Q1 Auto/Mobile gross margin and Operating margin were 32% and 2% respectively.

Margins were negatively impacted by the ASP decline which was the result of price protection credits offered to our retail partners and significant channel inventory reductions.

Margins are expected to improve in Q2 as pricing rebounds and volumes improve.

Our first quarter Outdoor/Fitness gross margin was 61% up 8% over last year due to product mix and a slight increase in our average selling price.

Operating margins also increased year-over-year to 35% which was up eight percentage points, but down 2% sequentially due to lower volumes.

Q1 Aviation gross margin was 69%, up 5% from prior year and 2% sequentially due to product mix ,and the operating margin within our Aviation segment was 24% for the quarter primarily due to flat research and development costs on a lower volume.

Our Q1 Marine gross margin improved at 60% as product mix improved.

Operating margins, however, were down from the year-ago quarter at 28% and sales and unit volumes declined.

These margins are improved from our fourth quarter 2008 due to seasonality within the segment.

Looking next at our overall operating expenses, our Q1 operating expenses were down $9 million on a year-over-year basis from $147 million in the first quarter of '08 to $138 million in the first quarter of '09, but increased 940 basis points as a percentage of sales due to the revenue declines.

As I mentioned earlier, R and D increased $6 million year-over-year and was up 510 basis points to 12.6% of sales.

We now employ almost 1,800 engineers and engineering associates worldwide and remain committed to protecting product innovation in the future.

Our ad spending decreased $15 million over the year-ago quarter and 40 basis points as a percentage of sales from 5.7% to 5.3% in the first quarter of '09.

We will continue to manage our advertising expense based on the macroeconomic conditions.

Other SG&A was flat compared to year-ago quarter, but increased 470 basis points to 13.7% of sales from 9% a year ago as our sales declined.

On a sequential basis, other SG&A declined $23 million due to the fourth quarter bad debt expense incurred by the company.

Moving next to the balance sheet, we ended the quarter with cash at marketable securities of over $1.2 billion.

Our accounts receivable decreased on a sequential basis to $420 million as we collected on sales made during the holiday quarter.

Accounts receivable accounted for approximately 47 days of sales, down significantly over 2008.

Our inventory balances continued to decrease and came down $72 million to $353 million as we continue to focus on inventory and production management.

Our days of inventory metric decreased 79 days at the end of 2008 to 73 days at the end of Q1 primarily in our finished goods inventory.

At the end of Q1, we hold $137 million in raw materials which is 26 days of inventory, $35 million in width and assemblies for seven days of inventory, $209 million in our finished bids inventory of 40 days and we hold $28 million in inventory reserves.

While pleased with our level of inventory reduction, we anticipate it will increase in Q2 as we move into a busier selling season.

We will continue to manage the supply chain appropriately given our economic conditions and it is our goal to have adequate inventory to support customer needs.

However, we intend to carry the right level and mix of inventory to minimize risk of obsolescence.

Retail channel inventories become very lean as retailers continue to reduce our inventory exposure and conserve their cash.

We believe that channel inventory will not go lower than where we ended Q1.

Moving on to cash flow, we had another solid quarter of cash flow and saw $299 million cash from operations during the period.

We spent $13 million of CapEx and our free cash flow during Q1 was $286 million.

We also invested $66 million use of cash during the period, again $13 million of CapEx, $52 million net purchase of marketable securities, and $1 million acquisitions of business and intangibles.

Cash flow from financing was a $2 million use of cash during the period and we earned an average of 1.8% on all cash and marketable securities balances during Q1.

Finally Garmin, repurchased 117,600 shares during the quarter using $2 million of cash and reminder we repurchased 17.1 million shares during 2008 using approximately $672 million.

Our current authorization allows for $256 million to be repurchased through the end of December 31, 2009, and Garmin intends to be an active buyer of those shares as business and market conditions warrant.

As I mentioned earlier, our tax rate for the quarter was 19% and we currently expect this to be the rate for the full year 2009.

That's the financial summary for our first quarter at this point.

Customary we'd like to open up the lines for any questions that you might have.

Anita, would you like to go ahead and queue the first question?

(Operator Instructions).

Your first question is from the line of Vivek Arya.

Sir, your line is open.

Can you hear me now?

Yes, go ahead.

Good morning.

As we go later in the year and order becomes bigger part of the mix, do you see pressure on gross margins?

For example, last year gross margins peaked in Q1 and then they were almost down 700 bips by the fourth quarter.

Yes.

We would anticipate that margins in the fourth quarter at the end of the year would typically cycle down.

However, in the near term in Q2 and Q3, we don't anticipate as much movement there because as we mentioned we think ASPs will come up and rebound slightly in Q2 and Q3, but the typical seasonality of what we see at fourth quarter will come down throughout the year.

All right.

And secondly, how do we get a sense of channel inventory?

I know that absolute inventory is coming down, but sell-through has not been that encouraging.

So is it possible that the channel is actually well-stocked already and what metrics do you actually use to measure where you are in channel?

Is it weeks of forward inventory, how do you measure where we are in the channel?

Well, actually let me clarify or correct one statement just to make sure everyone is clear.

From a sell-through basis, we actually have seen growth in the North American market on PND, so even though sell-in was disappointing because of the reduction in the channel inventory sell-through has increased.

So what we typically do is we measure from our major retailers, consistent both inventory levels and sell-in versus sell-through, so we have pretty good visibility there and we have seen a pretty significant reduction during the Q1 period as many of these national retailers have cut their inventory, in some cases, as much as in half during the period.

We believe we're at the low period and we should see see-in and sell-through track pretty closely the rest of the year.

I see.

And in the last year if you look, sales are down, but OpEx is down only 6%.

You're obviously investing in R&D, but marketing spending is going down.

So how do you draw the right balance between increasing R&D versus increasing marketing and what metrics do you use to see if that's the right mix?

Well, I think that's a challenge that we have throughout the year, but we've tried to do everything we can to minimize increases in the various in our business and that included advertising clearly and our marketing expenses.

As I mentioned we have held marketing or other SG&A flat year-over-year.

One thing we're not planning on doing is cutting our R&D.

We really view that that's still important for the, as we mentioned, product innovation and future technologies, so we'd like to manage the advertising and other SG&A lines best we can and as I mentioned, those numbers came down, overall operating expenses came down $56 million from Q4 to Q1.

So we've done about as good of job we could do given the current economic environment.

And just the last question, just a longer term strategic-type question.

Is the future of Garmin in Auto B and D, or is it in SmartPhones with embedded GPS capability and if it is in SmartPhones, are you dedicating enough resources to that effort and then can we -- and when can we actually see the products out in the market?

Thank you.

Well, this is Cliff.

We believe that all these markets, you know, are good, valid markets going forward.

We're investing in new areas of those as we mentioned in the OEM side to be able to have penetration in that market and, of course, we've been investing in the SmartPhone side, as well, to be able to participate in that market as well.

For our R&D growth that we've mentioned, much of that growth is actually in the Mobile and Automotive areas in order to be able to sustain those markets going forward.

So, Cliff, just a quick follow-up on that, the nuvi phone was announced I think sometime last year.

What has been the reason for the delay?

Is it technical?

Is it carrier testing, relationships?

If you could just give us some color around that.

Well, I think SmartPhones are really complicated devices and bringing one to market that's built totally from the ground up on a custom Linux platform is not an easy task.

We certainly haven't performed to our expectations, but we believe we have a very unique device and we still have a lot of interest in the device from carriers.

So we're working hard right now to complete a certification and we believe that we're getting close to the end.

Thanks and good luck.

Your next question is from the line of Jeff Evanson of Dougherty.

Mr.

Evanson, your line is open.

Sorry about that.

Good morning, everybody.

Morning.

I guess couple questions here.

Cliff, you mentioned that North American sales were up year-over-year.

Was that units or dollars?

Which market are you talking about, Automotive?

Yes, Auto/Mobile.

So I believe we said that sell-in to the channel in North America was down 5%.

No.

Sell-through, Cliff.

Sorry.

Yes, so sell-through is -- we're seeing trends up in the range of around 20%.

Okay.

And how much benefit do you think you got from Circuit City being in liquidation mode?

Or not benefit but of that measure, how much benefit do you think you got just from Circuit City being in liquidation mode?

We don't believe that there was much impact there.

Okay.

Yes.

We didn't get any benefit.

No, but North American units did.

I think what you saw there is what typically would have been sold through at Circuit, moved to other retailers.

We don't really view there was much benefit there.

No.

I know your quarter didn't benefit.

Your quarter was actually hurt by it.

I'm questioning the overall North American market growth, but I understand it's difficult to read through.

We're looking at the sell-through data from major retailers that are active in the market now, not the ones that aren't active, and just taking into account the people that are in the market today, the growth is still there excluding Circuit City, so we still feel like the market is growing.

Okay.

And then, Cliff, you made comments about the EU market which obviously, you know, was weak and you attributed that to the level of penetration in the EU.

When do you think we'll achieve that penetration level in North America or do you think penetration can go a lot higher in North America compared to the EU?

Penetration questions are kind of tricky because everybody has been debating what the right penetration is in Europe for a long time and even today people will say that there's markets that are underpenetrated there.

Typically the US market has been about a year, a year and a half behind that of Europe and, of course, everything is complicated right now by the economic conditions, so it's hard to say what the ultimate penetration number or the right penetration number is.

Okay.

Kind of a question both for Cliff and for Kevin.

You are at a run rate to spend between $225 million and $230 million on R&D this year.

Are you comfortable that that's the right level?

We feel like we need to increase over the -- we had this 206 million last year, so the number you laid out is pretty close to what we would expect and yes, we believe that's the right number.

If we had a different economic environment, we might even spend more, but we're trying to be as rational as we can in today's market and still grow for future.

So when I look at this Q1 spending level of about $55 million, I should not assume that there's any real seasonality in that number like it was being elevated in Q1 for some product work you're doing?

No.

There's no unusual seasonality.

We would expect to have moderate or very slight growth in that throughout the rest of the year.

All right, okay.

And then my last question, Kevin, you know, this I think would be a great time to get some kind of sense about fixed versus variable costs in the Auto/Mobile segment.

These are very rough calculations, but I'm coming up with something like maybe $50 million to $70 million per quarter in fixed costs in Auto/Mobile split between costs of goods sold and SG&A.

Can you give us any color on that?

I think we generally don't go into that level of detail, but I think you can see from what we did not only in the Auto/Mobile but across our business that we do have quite a few variable costs and I just commented on that earlier.

A lot of that's advertising.

Cooperative advertising, for example, is volume dependent and then there's other decisions that we've made recently just given a relatively flat to slightly down market, that we're not going to invest in those areas.

So clearly still a lot of variable costs, but I think, like you said, the operating margins in Q1 should be the low point.

We would expect those to increase Q2 and then beyond throughout the rest of the year.

Sure.

One quick follow-up question.

How much do you think ASPs were down in the quarter and how much of that was due to the kind of one time items of price protection and re-adjusting what's the products in the channel?

I would say we would typically would have expected our PND to slightly come up, but they actually were down a little bit.

So I think that was one of the impacts on sales, but traditionally we have price protection every period, so nothing really abnormal over what we would have seen, for example this, Q1 of '08.

We do, in early trends in Q2, see ASPs coming back up, so to our point earlier about ASPs rebounding, I think we've got five weeks or so of data to support that.

Can you give us some kind of magnitude on that impact?

You know, I think for the year we still expect ASPs within the PND to come down about 15%.

Clearly that's been above that in Q1, so they should moderate as we go through the rest of the year.

15% seems reasonable.

Okay.

Thanks a lot.

Your next question comes from the line of Amir Rozwadowski of Barclays Capital.

Thank you very much and good morning, gentlemen.

Good morning.

Just talking about sort of the end demand market; recognizing that you folks are still seeing growth in the North American market, I was wondering as we progress through the year do you expect the North American market to continue to ebb in terms of end demand growth or do you expect perhaps a re-acceleration in growth as we progress through the year?

I think if you look at some of the market research that's out there, you can sense that the overall unit growth in North America is up 18% to 20%, and I think we have more difficult comps in first half of the year than we do in the back half of the year.

So if you look at at least some of the research that's out there, you would suggest that the back half, you might get a little bit higher growth on a overall year-over-year basis.

It's very difficult to be able to have certainty about that right now.

That's helpful, Kevin, and then perhaps more broadly, as we've seen sort of some of the trends in Europe and perhaps in North America with channel tightening, do you see the same level of support for the overall category from your retail partners as you've seen in the past or how should we think about that level of support?

I think we're still seeing very strong support from our retailers.

We're seeing some improvement actually in positioning as some of the smaller and weaker players are leaving the market.

So, in general it still seems like there's good support for the category and, of course, everybody, you know, is just uncertain about the economic conditions right now, which is causing people to want to try to keep inventories low and so forth.

But on that premise, Cliff, should we think that the channel inventory levels should return to levels that the channels enjoyed in the past or to still, maybe there's sort of an uptick, but still sort of caution around the inventory?

As we said, we think we've hit a bottom point in terms of channel inventory and we don't really anticipate that there's going to be a big uptick in that.

There may be some slight improvement as retailers realize that maybe they're a little short and losing sales to others, but until the consumer really comes out and shows that they're spending, I think retailers will be cautious.

That's helpful.

And then lastly, if I may, obviously you folks added a bunch more cash to your coffers this quarter, and I know you had spoken about sort of the share repurchase.

Is that the primary use of cash?

Is that how we should think about things there?

Well, as I mentioned in my remarks, I think we still have over $250 million left for that, and we will consider buying, and that's one area, and I think given the strong cash flow during the period the Garmin board hasn't approved anything but we would still look at a dividend this year and then finally we're also in the current market evaluating other acquisition opportunities.

So I think all three of those are on the table.

So it's not just one or either or.

Great.

Thank you very much for the incremental color, Kevin.

Great.

Thank you.

Your next question is from Mark Sue of RBC Capital Markets.

Channel inventories, what is that in terms of weeks in Europe?

And is there anyone particularly flooding the channels at the moment, any competitor that comes to mind, and as you give us your response, can you also give us your thoughts on whether or not major price stimulation will be required to kind of flush out the inventories in Europe.

I think in general the weeks and the days of inventory that our retailers, that our customers have held in many cases have come down, I think I said, as much as half.

Some retailers are only holding three or four weeks of inventory.

Some are holding five or six, but that's significantly down from where it was at the end of fourth quarter.

In terms of the pricing, I think we commented on that earlier, but I believe we actually expect in the near term some ASP increases in Q2, part of that driven by just the dynamics in the market, but also we're anticipating selling in new product, the 1200, 1300, 1400 nuvi families that Cliff mentioned will in the near term will help us in that regard.

And then on the nuviPhones, same question I asked on the conference call.

Are the carriers waiting for Garmin or is Garmin waiting for the carriers, and any thoughts on units for the second half?

At this point the carriers are definitely waiting for the device to be completed.

As I mentioned, we're in a certification, so we hope that we'll be able to complete that soon, and in terms of units maybe Kevin can comment.

I think units, we're looking at about the same number as we had mentioned in our last conference call, so no major shift in terms of in units and revenue.

We would expect between $100 million and $200 million revenue for the year, obviously back half.

And you get the sense you're winding down all the customization required for certification or is there still work to be done?

The work is largely in place.

I think it's a matter of going through the testing and different things that have to go on in a certification.

Okay.

Thank you and good luck, gentlemen.

Thank you.

Your next question is from John Bright of Avondale Partners.

Thank you.

Kevin, staying with the Auto/Mobile segment, how difficult now is it to get the attention of Auto OEMs right now?

Well, interestingly Auto OEMs are looking for ways to listen say the their products right now, and are looking towards the future for their industry and so they're very interested in talking to players who can provide them innovation and help them differentiate their product line.

How far along, Cliff, would you say that some of these discussions are?

We saw the Chrysler announcement, but are we thinking that there's good possibility for additional announcements this calendar year?

Well, don't really want to comment on what may be coming in terms of announcements.

You know, we did announce already that the 2011 Cherokee will be delivering and that will actually start in early 2010 as an advanced 2011 model year, so we're excited about that.

I think everything in the auto industry is a long time to market as you know, although again automakers are looking for ways to change their business models so that they can come on the market faster, so we would anticipate in the future that product innovation will come much quicker to the market.

And as far as an app store, an application for an app store, a lot of discussion about app stores now on some of the other SmartPhones.

Is this something that Garmin has considered, will consider looking forward?

We offer a lot of content and capability that can come along with our product, and we have typically offered things unique to our product directly from our website.

So we anticipate the ability to be able to offer those kinds of things specific to our product on the nuviPhone line.

Shifting to Aviation and the Marine segments, I think there was some positive commentary talking about on the Auto/Mobile segment that the inventory levels reached their low point.

How do you see the Aviation and Marine segments respectively as inventories are concerned and do you think those segments reached the low point?

For Marine, the marine industry has actually been in a decline for quite some time.

So a lot of retailers have already been focusing on their inventory and we don't believe that there's really an issue in that channel like what you see in the more dynamic Auto/Mobile segment.

As for Aviation, it's a very limited market in terms of its overall reach.

So again probably not an inventory concern there with the exception of some OEMs are trying to sell aircraft that have already been built, but that's more limited issue.

Do you still anticipate an introduction of a nuviPhone in the first half of the year announcement?

I think first half, of course, is quickly drawing to a close and so we're focusing more on the second half.

We would anticipate that some devices will hit the market in various locations throughout the second half, some earlier, some later.

Thank you.

Thank you.

Your next question is from the line of Reik Read of Robert Baird.

Cliff, on your comments of the pricing 15%, is that for the full year or is that by the fourth quarter?

That's for the full year, Ike.

Okay.

And then just with respect to the comments on these issues have been temporary, can you talk about what's changed and in this five weeks of data that you have what you're seeing there?

Well, I think what we've seen so far is that we typically would have a seasonal increase from Q1 to Q2 and I believe that you should expect to see a similar trend like we did -- we've seen in the last few years, so we're in the spring selling season.

We're obviously at a lower base coming off of Q1 but we've seen I think the pricing trends that would suggest that what I just stated at 15% for the full year makes sense.

Unit increases and sales increases as we go through the "dads and grads" and spring selling.

And is this going from down 24 to down 15, is that a function of mix primarily or is there something else behind that?

Well, we talked about price protections that we gave in Q1, so some of those have moderated and then also the mix of new products, introductions into the channel on Q2.

It's a combination of both.

Okay.

And then just back on the inventory, you guys have mentioned I think a couple of times that you don't think it will go lower, sell-out is now 20%.

Does that suggest that sell-in has to really start accelerating and that's why you've got some of these favorable comments?

I think that's part of it but, you know, we're also focusing there on the North American market because the European market is not -- we don't see the 20% sell-out, so you have to factor in both global business.

We're cautiously, I think, optimistic in the US that we'll continue to see some increases in unit sales as we go into the Q2 and beyond.

Okay.

And then just on the Marine and the Aviation side of things and you addressed this a little bit in the press release, but both weaker than expected but the gross margins generally better than expected, which I would consider unusual given that the leverage.

Is that primarily mixed that's doing that or are there some other things and how sustainable is that?

It's primarily mix.

Typically the leverage you would speak of would come in the operating margin.

You can see that our operating margins in those segments were down, just due to the reduced volume.

So I think it's primarily driven by mix in those two segments.

Okay, great.

Thank you.

Your next question is from Scott Sutherland of Wedbush Morgan Securities.

Great, thank you and good morning.

Good morning.

Want to follow up on my question earlier on the OEM opportunities in the auto market.

We're seeing obviously some of the smaller players in the PND market having a tough time, but there's new players coming at the OEM opportunity.

Do you see partnership or do you see them more as competitors?

Well, we're already partnering with key players in the automotive industry such as Kenwood and Panasonic, which we have announced before.

So we believe that having a strategy that allows our technology to be integrated with that of others is a good way to gain exposure.

Do you see maybe more of the telematics type spurns in the major parts suppliers to the car companies against those and others like that?

Yes.

I think, you know, that approach is not anything new.

I think the telematic players have been trying to sell solutions into the vehicle.

I think what customers still like and relate to is what's provided by, you know, the PND type of product which is good in car experience and that can be built right into the vehicle as well.

Telematic solution is a little more difficult because it's typically off board and has a lot of limitations in term of operation.

In Auto/Mobile can you quantify the impact you saw from the price protection on an ASP basis, maybe how many basis points the impact is and also on the segment margin basis what it could have been without the abnormal price protection?

No.

We're not prepared to quantify other than, you know, the 32% growth margin number was impacted.

I think we would have probably seen the high 30% range without some of those credits on the Auto/Mobile segment and the operating margin was not only impacted by that but lower sales as well as R&D investment in the nuvi fund.

So all of those I think were factors in a pretty low operating margin in that segment.

Okay.

Lastly, can you talk about component pricing, build materials?

Do you see it down 10%, 15% this year?

Do you see it down kind of with ASP declines and anything going down quicker than others?

Well, I think in the first quarter we did see pretty decent cost reductions.

The average cost reduction in Q1 was about 21% down.

However, I think going forward just recently we've seen some Flash Memory increases, pricing increases.

We're still expecting about a 10% year-over-year average cost reduction throughout the 2009 period.

Okay, great.

Thank you.

Thank you.

Your next question is from the line of Paul Coster of JPMorgan.

A couple of questions.

First of all, on the ASP recovery, I just want to make sure I understand this, the new products are going to help contribute towards that, but the new products span a value as well as sort of the high end of the market.

Does this spell a shift in that mix of low end back towards high end or do you think it's going stay at around about the 85% of unit volumes in 2Q?

We don't expect that the 85%, 15% is what we would define low and high really is going to move much throughout the year.

So it's primarily, you know, any time you see a new product brought to the market we tend to have a little bit of increase in ASP, so that's the main point there.

Can you talk a little bit about the customer concentration.

Are there any in customers, but more specifically with PND group in mind in North America.

How much of your business is sort of concentrated in the discounts as in big box retailers?

We haven't really seen a major move there from what we saw at the end of fourth quarter, obviously, Circuit City.

We're not selling to them, but the big guys that we've talked about in the past that we've mentioned in our 10-K that Best Buy was the one, our largest customer exceeded 10% of our sales last year, so they continue to be a large customer as does Wal-Mart and Target and then the discounters like Sam's and Costco continue to be a large part, but there hasn't been a big shift mix-wise between the big box retailers and like the online distributors.

Okay.

And my last question is, you know, the competitive market seems to be -- competitive landscape seems to be getting better in many respects, but then again Motorola and even Best Buy with their Insignia brand seems to be coming into the market.

What are we to understand from those two brands and have you seen any impact from them?

I think the response there is you just look at the global market share and the gains we still have retained, as Cliff said, over 50% market share.

We've not seen any loss of share, so even with some of those changes in the competitive landscape Garmin's done quite well in the current economy.

Got it, okay.

Thank you.

Thank you.

Your next question is from the line of Thomas Lee of Goldman Sachs.

Hi, thanks for taking the call.

So just a few quick questions, I guess, starting with Kevin on the OpEx front.

Just curious.

I know you mentioned that R&D you still expect to invest there, but even if things were to deteriorate further on the SG&A front, does that include advertising as well as, I guess, other sales and marketing?

Can we assume that Q1 is going to be kind of the low point for the year or do you think that that could potentially go even lower if, let's say, things were to get worse?

Well, we'll watch that very carefully but we do believe that Q1 was the low point.

From an OpEx we would see slight increases in Q2 to go with the increases in sales that hopefully get better leverage there on the operating margin.

We do expect as I said several mentions op margins to increase to a much higher rate in Q2 and beyond.

Got it, okay.

And then do you depending on -- so the trajectory should be similar to kind of from a seasonality perspective what we've seen and maybe in prior years, if, obviously, the market --

With the exception of on the other SG&A line where we've acquired several European distributors in past years we'd like to be able to kind of hold other SG&A flat or slightly up.

Advertising will be, as I mentioned earlier, somewhat variable depending on sales and then R&D is slightly --

Got it.

On the other SG&A line, I think you said on the last call, roughly $70] million a quarter.

Is that still the number to think about or --

That's currently our forecast for the year, yes.

Got it.

And then just on the margin trajectory for the Auto/Mobile business, obviously was a tough quarter and I know you said that this in Q1.

Is it going to be the bottom from a margin perspective, but as we think about the trajectory into Q2, Q3, is it going to be more of a gradual increase from that 2% level or can we expect a pretty meaningful snap back in Q2 to maybe whether it's double digits, mid-teen type levels?

I think you can expect increase up into the double-digit range in Q2.

Okay.

That's helpful and then I guess the last question, similarly, I guess, on the Marine and Aviation margins, can we assume that the margins that we've seen in both on a growth and operating side in Q1, are those kind of the margins that are likely to hold through the rest of the year or is that potentially trend down?

No.

I believe that especially on the aviation, those should be pretty stable, hopefully a little bit higher on Aviation; and then Marine, there's a little bit more seasonality in Marine.

So Q2 will be an increase sequentially and it will be marine sales drop off and when sales come down later in the year, our margins will decline over current levels.

So we're probably looking at mid-20% to 30% operating margins within Marine.

And then for Aviation, is that mid-20% as well or --

Yes.

I think Aviation, we should be at the low point, but it should be mid-20% to 30% range as well.

Got it.

If I could just one last one, on the Auto/Mobile-side, exiting the year do you think any sense in terms of what the margins could be assuming your forecast still hold?

Do you expect gross margin to be kind of that low 30s and then op margins could it get to 20% or is that probably a stretch?

20% for the full year is probably a stretch.

Or I mean for Q4.

Q4, that's a stretch, yes.

Okay.

Got it.

All right.

Thank you.

I think that's all we have for now.

We appreciate everybody's questions and we'll be in touch in the future.

Thanks for your attention today.

This concludes today's conference call.

You may now disconnect.