台灣國際航電 (GRMN) 2009 Q2 法說會逐字稿

Good morning.

We'd like to welcome you to Garmin Limited's second quarter 2009 earnings call.

Please note that a copy of this 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 this webcast does include slides which can be viewed during the call.

An archive of the webcast will be available until September 9th, 2009.

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 hours under the Events calendar tab.

In addition, this quarter we'll be tweeting throughout the call.

You can follow Jake's tweetcast at twitter.com/Jakesjournal.

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

Any statements regarding our future financial position, revenues, earnings, market share, 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 regarding these risk factors is contained in the Form 10-K for the fiscal year ended December 27, 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'll turn the call over to Cliff.

Good morning.

As you read from our press release this morning, Garmin announced second quarter results that showed significant sequential improvement along with very strong margins.

The quarter developed much as we'd anticipated, with strong seasonal performance in our Auto/Mobile, Outdoor Fitness, and Marine Segments leaving to a 53% sequential revenue increase.

Along with the revenue growth, we also delivered margin improvement with gross and operating margin of 53% and 30% respectively.

EPS was $0.83, excluding the effects of foreign currency, and we generated $246 million of free cash flow, leading to cash and marketable securities balance of over $1.5 billion.

From a business perspective, we continue to lead the worldwide PND market share as our North American market share grew to 57% from 53% in the first quarter and 54% in the year-ago quarter.

We delivered 3.7 million units as unit growth on a sell-in basis resumed in both North American and Asian markets.

We also continued to deliver new products to the market, which included new Marine and Outdoor Fitness products, reinforcing our technological reinforcement in this segment.

Reviewing our business by segment, in the Auto/Mobile Segment our revenue declined 31% versus the second quarter of 2008, but increased 68% sequentially The average selling price was down 28% year-over-year but increased from the first quarter as expected.

On a sell-in basis, North American units increased while we experienced decline in Europe.

The Outdoor Fitness segment saw its first quarter of year over year revenue decline in over two years.

The segment continued to post strong revenues and margins, but could not exceed the sales level achieved in 2008 when we delivered a large number of new products to the market.

Revenues from our Aviation segment declined 28% in the quarter as the industry continued to struggle with the current economic environment.

While the market remained weak, we did see sequential improvements in both revenue and margins.

Finally, revenues from the Marine Segment declined 15% caused by the downturn affecting the entire Marine Industry.

However, our 2009 results are much stronger than the market due to the strength of our Marine product line and we experienced a 58% sequential increase in revenues as the boating season began, leading to improved operating margins.

Many of you are wondering how we view the current economic climate.

While we're not seeing significant signs of economic recovery, we are starting to see some positive indicators.

As I mentioned earlier, we saw PND sell-in through the channel grow on a year over year basis in both North America and Asian markets, along with improving [SEs] and margins on a sequential basis.

We expect to see sequential increases in shipments as retailers stock their shelves for fall promotions and would anticipate stable pricing with some margin declines during Q3.

As we look to the non PND segments, we expect the Outdoor Fitness revenues and margins to be flat sequentially and we're well positioned to take advantage of sales opportunities with our strong lineup of new products.

In Aviation and Marine, we expect continued weaknesses due to the economic conditions, but it does appear we've hit a low point in both of these market segments.

While some of our competitors are backing away from research and development, we're further differentiating ourselves by introducing new products that we believe will lead to increased market share and growth as the market segments and the general economy enter a recovery phase.

We'll take a closer look at some of these products in a few minutes.

Next I'd like to review some recent product introductions.

We recently launched the Nuvi 465T designed specifically for long haul navigation and delivery trucks.

This device provides multiple truck profiles and features advanced routing and guidance with truck related road restrictions such as height, width, length, weight, and hazardous material.

The Nuvi 465T also offers a unique POI data base consisting of the National Truck and Trailer Services Breakdown Directory, which provides information related to repairs and services critical to drivers operating in unfamiliar locations.

In late second quarter, we began delivery of the Nuvi 1200 and 1300 series with an updated form factor and new features.

These devices are Garmin's first to offer pedestrian navigation via public transit, enabled by our City Explorer maps, which can be purchased and down loaded for $10 to $15 per city.

We also began deliveries of the Nuvi 1490T which features a [bright] 5-inch screen, a new slimmer form factor, and advanced features such as lane guidance, junction views, and Bluetooth handsfree technology.

Initial demand for this product has been strong, driven by customers who appreciate a larger screen navigator with advanced features.

Turning to Outdoor Fitness, we introduced three exciting new products in the outdoor lineup.

The Oregon 550 and 550T built on our popular Oregon test screen series by integrating a 3.2 megapixel autofocus camera and a 3 axis compass.

The waterproof digital camera can capture pictures in landscape or portrait orientation and geotag the photos for future navigation use.

It also offers 850 megabytes of built-in memory along with a micro SD card slot for ample storage.

The Foretrex 301 and 401 are the new line of wearable navigators incorporating a high sensitivity GPS chip set.

The 401 model incorporates an electronic compass, barometric altimeter, and wireless data sharing, as well as compatibility with Garmin's heart rate monitors and cadence sensors, resulting in a versatile GPS that can be used for multiple application.

And finally the new Dakota family of products brings touchscreen functionality to the mid range price point for outdoor enthusiasts.

This compact product is perfect for the whole family and offers all of the must have features, including a three-axis compass, barometrical altimeter, and wireless data sharing on the Dakota 20 model.

At the recent 2009 Oshkosh Airshow, we introduced a number of new Aviation products.

Highlighting just a few, we introduced our new GPS traffic advisory systems, which feature patent pending technology known as CLEAR CAS.

This technology correlates both ADSB and traditional radar targets to provide the most comprehensive presentation of traffic to pilots.

By incorporating ADSB into the GPS family, Garmin is positioned at the forefront of the FAA's next generation modernization program.

The G500 is a new glass cockpit solution which brings the form and functional of the G600 to smaller aircraft at a value price.

The G500 provides attitude, air data, weather, terrain, and traffic information and can be upgraded to include our popular synthetic vision virtual reality display.

We also announced our first entry into the experimental and light sport aircraft market, the G3X.

Based on a building block design, the G3X is a customizable glass display system that incorporates a magnitude, attitude, air data, engine monitoring, and temperature probe to provide complete situational awareness for experimental and [LSA] aircraft.

On the Marine front, we announced a number of new products to further strengthen our position in this market segment.

These products include upgrades to our successful GPS map 400 and 500 series.

These new products include a high sensitivity GPS receiver for faster, more reliable satellite acquisition and improved digital design for faster map drawing and [tanning] speeds.

In addition, most of these new Chart Plotters are NMEA 2000 certified for plug-and-play system integration.

Next we announced the addition to the VHF radio lineup to target the OEM and IM boat market.

These products are designed for easy integration with our multi function display systems using space saving black box configurations.

The AIS model also features additional receivers, which allows the user to track and avoid other vessels equipped with AIS transmitters.

And finally, we introduced a new open array radar, offering increased power and high definition technology for improved accuracy and precision, which are highly desired feature for mid range and large size boats.

Finally, I would like to provide an update on the development of our Nuvifone.

As announced last week, we launched the G60 in Taiwan and look forward to additional launches throughout August in other Asian countries.

Our partner ASUS is also finalizing carrier launch details for the M20 in both Taiwan and Singapore.

In the United States, the G60 is currently in carrier field testing in anticipation of a Q4 launch.

The G60 and M20 will be available in parts of Europe during the back half of the year.

As we said before, we'll provide additional details as we near the launch date.

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

Thank you, Cliff.

I would like to walk through in more detail the stronger than expected financial results for the second quarter.

First, spending time on income statement, you saw this morning our revenue came in at $669 million and we posted net income of $162 million.

Our pro forma EPS is $0.83 per share, which excludes foreign currency.

Revenues grew 53% sequentially from Q1 to Q2.

However, year-over-year we experienced a 27% top line decline and 12% pro forma EPS decline when adjusting for both the foreign currency and the 2008 Tele Atlas gain that we posted last year.

Our effective tax rate was consistent with the second quarter at 19%.

Gross margins were very strong at 52.6%, which was a 680 basis point improvement over the prior year, as our gross margins improved in all four segments.

The operating income fell 16% to $199 million, compared to $238 million in 2008.

However, we posted 29.8% operating margin which was up from 26.2% from last year as revenues fell.

However, the gross margin as I said was 680 basis points favorable.

Our advertising expenses were 130 basis points favorable and they were down $24 million on a year-over-year basis.

Other SG&A was 250 basis points unfavorable, again, down $5 million on a year-over-year basis.

And we did see R&D increase about $2 million on a year-over-year basis, which posted a 250 basis point unfavorable on the operating margin line.

Pro forma EPS of $0.83 was an increase of nearly $0.60 sequentially on the strength of both sales and gross margins.

Units shipped declined 5% year-over-year as 3.7 million units were delivered during the quarter.

The decline was across all segments.

Our total Company average selling price was $180 per unit, which is down 23% from 2008, but flat sequentially.

Our financial results were much improved over Q1, but we continue to be impacted by the reduction in sales driven by our economic situation.

We'll continue to closely monitor the expenses in an effort to drive optimal results at current revenue levels.

The non-GAAP measures that we reported this morning represent net income per share excluding the effects of foreign currency and the 2008 gain on the sale of TeleAtlas equities.

This impact was $0.02 per share unfavorable during Q2 2009 and $0.25 per share favorable for Q2 2008.

Moving next to a little bit more detail on revenue, during the second quarter we experienced a 31% revenue decline within the Auto/Mobile Segment, while the unit volumes declined 4% in the segment.

Marine segment revenues declined 15% compared to Q2 of 2008 and our Aviation segment revenue declined 28% during the quarter.

The Outdoor Fitness segment saw a decline for the first time in two years, with revenues falling 9% compared to Q2 of 2008, with the category facing tough comparables in that quarter when we launched the Colorado, Forerunner, 405, and Edge 705 products.

In total, our revenue fell 27% during the second quarter as we continued to battle against weak consumer discretionary spending.

During second quarter, North America revenue declined 24% while our European business decreased 36% during the quarter.

Our APAC region saw sales begin to grow again with a 21% increase during the period.

Unit growth in North America and Asia was offset by declines in Europe, and we experienced a 2% year-over-year unit decline from our PND products with North America and Asia growing, offset by the declines in Europe.

Auto/Mobile segment represents 65% of the business for the quarter, which is down from 69% in 2008.

Outdoor Fitness grew to become 16% of our total revenues in the quarter, a 3% increase from 2008.

Revenues in North America and Asia were 65% and 5% respectively, a 2 percentage point increase over 2008 levels as Europe declined more rapidly than the rest of the world.

The low end unit sales of PNDs accounted for approximately 80% of the total.

Our low end revenues of PNDs account for approximately 80% of the total.

This PND product mix compares to 80% and 70% respectively during the second quarter of 2008.

Moving next to margins, the second quarter Auto/Mobile gross margin and operating margin were 45% and 24% respectively.

This is a significant improvement sequentially and year-over-year as pricing improved during quarter-to-quarter and we also experienced material cost reductions and benefits from foreign currency fluctuations.

The second quarter Outdoor Fitness gross margin was 68%, up 11% over the last year due to both product mix and a decline in our material costs.

Operating margin also increased year-over-year and sequentially to 47%, which is up 9% and 12% respectively.

We posted strong Aviation gross margins at 74%, which is up 1% from the prior year and 5% sequentially, again due to product mix and inventory management improvements.

Operating margin was 32% for the quarter, an 800 basis point improvement from the first quarter due to gross margin improvement and increased revenue levels.

And finally, the second quarter Marine gross margin improved to 59% from 56% a year ago quarter as our product mix improved.

Operating margin was 35%, an improvement of 100 basis points from the year-ago quarter and 700 basis points from the first quarter of this year.

Large sequential improvement was driven by higher seasonal revenue levels.

Moving next to a little bit more detail in our operating expenses, Q2 operating expenses were down $27 million on a year-over-year basis from $179 million in Q2 2008 to $152 million in Q2 of 2009.

The fees increased 360 basis points as a percentage of sales due to the revenue declines in our business.

R&D increased $2 million year-over-year in dollar terms, but was up 250 basis points to 8.4% of sales.

We now employ over 1,900 engineers and engineering associates worldwide and we remain committed to protecting product innovation.

Our total headcount now stands at just under 8,500 associates worldwide.

Our ad spending decreased $24 million over the year-ago quarter and 130 basis points as a percentage of sales from 6.4% in Q2 2008 to 5.1% in Q2 2009.

We intend to continue to manage advertising expense based on the overall macro-economic conditions.

And finally, other SG&A decreased $5 million compared to a year ago quarter, but increased 200 basis points to 9.3% of sales from 7.3% a year ago with sales declines.

We expect to keep these other SG&A costs relatively fixed for the remainder of 2009.

Moving next to the balance sheet, we ended the quarter with cash and marketable securities of over $1.5 billion.

Our accounts receivable increased on a sequential basis to $519 million as we saw sales increase 53% sequentially.

Accounts receivable accounted for approximately 63 days of sales, which is down from 70 days of sales in Q2 of 2008.

Our inventory balance has decreased $30 million to $323 million as we continue to focus on inventory and production management.

Our days of inventory metric decreased from 73 days at the end of Q1 to 68 days at the end of Q2, primarily in the area of raw materials inventory.

At the end of the second quarter, we hold the following levels of inventory in major categorization.

$97 million of inventory in raw materials, which comprise of 19 days of inventory; $38 million in WIP and assemblies, which is 8 days of inventory; and $216 million in finished goods, which represent 41 days of inventory.

We do have $28 million in inventory reserves at the end of the second quarter.

While pleased with the cash flow benefit of our inventory reduction, net inventory will continue in Q3 as we move into a busier selling season.

We'll continue to manage the supply chain appropriately given the economic conditions, and it's our goal to have adequate inventory to support customer needs.

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

We did not see additional destocking in the quarter.

Sell-in appeared to trend with sell-through and we continue to believe that retailers will hold inventories at these relatively low levels for the foreseeable feature.

As we mentioned a couple of times on cash flow, we had very strong cash flow for the period.

Cash flow for the operations came in at $266 million during the second quarter.

We posted CapEx of $10 million during the second quarter and our free cash flow was $246 million.

Cash flow from investing was $234 million use of cash during the second quarter, including the $10 million from CapEx, $221 million net purchase of marketable securities, and $3 million of an acquisition of intangibles.

Cash flow from financing provided $4 million of cash during the second quarter due primarily to the issuance of employee stock purchase plan shares.

Overall, during the period we earned an average of 1.6% on all cash and marketable security balances.

And finally on the use of cash and taxes, due to our strong cash flow from operations during the first half of 2009, the board of directors has approved the 2009 annual dividend of $0.75 per share, which would be an approximate $150 million use of cash during the fourth quarter.

Other uses of cash, we continue to evaluate a number of acquisition opportunities, and currently we have authorization for stock buyback, which allows $256 million to be used in the repurchase plan through the end of 2009.

As I said, our tax rate for the quarter was 19%.

We currently expect this to be the rate for the year of 2009.

So that concludes a quick walkthrough of our financial results for Q2.

At this time, I would like to open the call up for questions.

Operator, do you want to begin taking questions?

(Operator Instructions).

Your first question is from the line of Amir Rozwadowski.

Good morning and thank you very much.

Hello, Amir.

I was wondering if you could talk about the demand environment in North America.

It seems as though you benefited from share gains versus your competitors.

So perhaps where you saw those share gains in terms of are there other competitors backing off the market?

And then where you think demand environment for North America plays out for the duration of the year?

Well, as we said, we still see PND unit growth in the North American market and we have seen an increase in market share.

And I think if you look at the latest research reports, Garmin has picked up a little bit here and there from some of the other competitors.

We try not to name names, but have 1 point here and 1 point there from some other competitors in the US market.

As far as the demand market, we still expect that PNDs will be relatively flat on a year-over-year basis between 2008 and 2009, and our opinion hasn't changed in the last quarter.

And then, Kevin, last quarter we had seen some of your retail partners contract the inventory that they kept in the channel.

I was wondering if you could give us an update in terms of has that grown since the demand environment has stabilized?

Do you expect some level of restocking to occur here?

And any update there could be very helpful.

Well, as we said during the formal comments.

We didn't see a big difference in the sell-through and the sell-in rate, so the level of inventories that we went into the quarters with the retail partners have been fairly flat.

And it clearly, when we have new products like the Nuvi 1200, 1300, 1400, we get into some initial stocking, and we've seen that in the last few weeks.

But I don't think there is anything usual about what we're experiencing in the market with our retail partners right now.

But you couldn't expect channel weeks of inventory to return to the levels that you may have seen this time last year?

We expect them to be about the same for the foreseeable future.

Great.

Thank you very much.

Your next question is from the line of Jeff Evanson.

Good morning, everybody, and congratulations on the surprisingly strong margins in the quarter.

I'll lead off with my focus there.

Kevin, could you talk about factors that might impact the sustainability of these GMs?

What was sustainable in the GM improvement this quarter and is there anything that might not be sustainable going forward?

Yes, I think the key factors on margins in Q2, we were -- we benefited from nearly every possible outcome there.

And from a stability perspective, in Q3, we would expect stable pricing.

So we did see some benefit in pricing during Q1 to Q2.

And the other thing we benefited from is foreign currency.

That's not likely to continue.

It's hard for us to forecast that.

But I think the other point in Q3 and thereafter would be the cost increases.

We expect component cost increases to hit us unfavorably during Q3.

So sustainability, we wouldn't continue to see 53% numbers or 52.6% numbers in Q3 or beyond.

They will come down.

Can you give me a sense of what the FX impact was?

In the quarter it was about 3 percentage points of sales is the benefit we experienced.

So again, that is a pretty big number.

One of the largest we've seen in prior periods.

Okay.

My next question is on ad spending.

Do you plan to keep cutting ad spending at the rate you cut it in the first half?

Do you plan to cut it in the back half and how will Nuvifone's launch impact your thinking on ad spending?

As you guys know, a percentage of our ad spending we've stated over and over is related to volume, and it's a cooperative advertising that we pay with our retailers.

But the other piece is the media spend, and we really didn't focus on any major media spend in the first half, but we plan to do an ad campaign in the back half.

So that will increase our ad spending slightly in Q3 and Q4, but especially in Q4, as we do plan to push the Nuvifone campaign as we launch that product.

So ad spending in general should come up from the Q2 levels, especially in Q4 this year.

I'll end it there and move into the queue.

Thanks.

Your next question is from the line of Rich Valera.

Thanks.

Just to follow-up on the gross margin questions if I could.

You said you expect to see some negative impact from increased material costs in the third quarter, Kevin.

Is there any way you could quantify that a little bit more, Kevin, to determine how much that will be.

We're really not prepared to quantify how much that is, but we've seen recently some cost increases in our major build material like flash and display costs.

Great.

And you can just give us your updated thoughts on your long-term gross margin targets and the auto Nuvifone category?

I think the 45% gross margin was much higher than we expect on the future.

We haven't commented on long-term margins, other than in general, pricing's stabilized and we expect mothers to come down from their current levels.

So think the mid-40s is probably about as good as it gets on PND.

Fair enough.

And just finally with respect to the expectations of Nuvifone contribution in the second half.

You previously talked about $100 million to $200 million contribution there.

Still a valid assumption?

Yes.

We still have high expectations.

I wouldn't rate the number any, but that's still within the range.

Okay.

Thanks very much.

Your next question is from the line of John Bright.

Thank you.

Kevin, staying with the gross margins on the pricing side of the equation, anything unusual happening there and why the confidence looking forward?

Well, I think we've been commenting for two quarters that we've seen some stability in pricing on a relative level, and we have as I mentioned new products that hit the market with the new Nuvi, and any time we bring out new products, it does help stabilize.

So I think that the fact that we've competed well, especially into the North America market with gaining share and also I just think the absolute pricing of the PND is much lower level than it was a year ago.

So there is not much further down we can go.

Many of our competitors are still not making solid margins at the current levels.

So I think those are all in our favor to keep pricing from dropping too rapidly in the future.

What has been the initial feedback on the current generation of Nuvifone?

Or have you had any feedback and if so, what is the current feedback so far?

As you know, Nuvifone just launched a little over a week ago in Taiwan.

So we do not have a lot of visibility at this point.

With our field testing efforts and beta users, the feedback has been positive.

And the trial tests that are going on now in the United States, that pushes towards an end of the year launch.

What about the comments that came out of Taiwan on the Android version for February 10th?

We really do not have any specifics to offer on that at this time.

Thank you.

Your next question is from the line of Jonathan Goldberg.

Hi.

Thanks for taking my call.

I'm just wondering, on mapping costs, you have reached the volume triggers for your step discounts from MapTech yet?

We do not give details with MapTech other than they are volume dependent and we've seen cost reductions on a year-over-year level just like we have on many of our other build materials.

So I think we're in line to put our earlier expectations we're on, that otherwise [continue] those mapping cost.

And when you say 80% of PND units and revenue came from the low end, how are you defining that?

We moved from price point definition more into the actual category of products.

Anything that is Nuvi 700 and above would be the high end, and anything below that would be considered the low end.

So all of the Nuvi 200 and 300 products would be at the low end.

A compression though -- of the ones that are not high end, it seems like the average price of that point has fallen considerably.

That's true.

But I think that's driving the year-over-year reduction on PND pricing.

But I think given where we stand today, we see some stability at those levels.

Last question, what will you do if you have $69 PND for Christmas?

How would you respond to that?

There is likely to be some competitors that would try to drop and sell at that low level.

We haven't always followed because we feel there are certain prices that are too low and you cannot make any money at.

So we weren't too far off from that last year in the 2008 grid so we would -- we have a plan in place with our retail partners to price our Nuvi products at what we think are reasonable pricing.

And we'll let some of the other guys go low and lose money on a per unit basis.

Thanks, Jonathan.

Thank you.

Your next question is from the line of Mark Sue.

Thank you.

Kevin, do you feel there is no longer a correlation between revenues and advertising which gives you comfort in maintaining the new lower levels of advertising spend?

Is some of that because the brand is stronger, is some of that because you're gaining small share from the smaller players, any thoughts on the correlation between your revenues up down the road and your planned advertising spend?

I think there's been very little change there.

About 50% of our ad spending is closely tied to revenues.

That's the cooperative advertising I mentioned earlier.

The other 50% is somewhat dependent on when we make the call to invest heavily in TV ad campaigns, increased media spend.

So definitely a portion of the ad spending is very much tied to volume and about half is not.

Okay.

And then, Kevin, what should we assume for Nuvifone now that the launch is here in Taiwan and also heading into Hong Kong and Singapore?

What should we think about in terms of the units overall for this calendar year and also maybe it's just for North America?

Any thoughts there?

Yes.

It's probably more detail than we're willing to give.

In my earlier question, someone asked -- between $100 million and $200 million in revenue total and I think that's as much as we're willing to give right now.

And they're making more progress I imagine with the North American carriers?

As Cliff mentioned we're in final testing there, and as soon as there's something to announce, we'll have news will come out on that.

Thank you, Kevin.

Good luck.

The next question is from the line of Vivek Arya.

Thank you.

A couple of questions.

Kevin, it appears your PND ASP was down 28% to 30%, which is below your target of 15% declines, and also below what TomTom reported recently.

And so the question is, at what point do you see the ASP declining and getting to your target range of only 15% year-on-year declines?

Well, again we believe that pricing should be stable for the next period and likely into Q4 given some of the newer products that we've rolled out and are hitting the channel now.

In our internal plan, we expect to be somewhere between the 15% and 17% to 18% range on a year-over-year level.

So we've seen some significant price reductions year-over-year on the first half, but again we should see stability in the back half.

But what caused the ASPs to be down below your expectations in the second quarter?

Actually, they really haven't.

They're pretty close to right where we expected.

They were sequentially up from Q1, so they came very close to what we expected going into the quarter.

Next thing is on PND gross margins, I believe long term gross margins could be in the 30% to 35% range.

Is that still the target or do you see any upside or downside factors?

I think mid 30s is still a reasonably target that we would expect in 2010 and beyond.

To be honest, it's very difficult to forecast that.

But that would be our own expectation.

All right.

One last question.

Cliff, what is the risk to your PND business from these Verizon SmartPhones with embedded GPS capabilities that are introduced from TomTom and Navigon applications accessories for the iPhone?

Blackberry has its own GPS location.

Is that a long-term threat for your PND business or is it just hype at this stage?

It's hard to say long-term.

What we would comment on is some of the solutions aren't even available it the market yet.

Navigon is there but TomTom is not.

And looking at those solutions, we feel like they still suffer from all of the limitations that we believe we're addressing in products like Nuvifone.

So at this moment, we do not really see that effect to a large extent.

If it does become an effect, does it hurt your replacement business and -- or does it hurt your first customer business, and then correspondingly, what is the impact on ASP because of these new introductions?

Well, I think it's hard to say which it would affect more.

I think it could affect either one because a replacement customer might want to try a Nuvifone or a new customer might want to try a Nuvifone.

But in terms of ASP affect, I think the PND market is maturing, so I don't know that that will have been have a big impact on the ASPs.

Terrific.

Thank you.

Thank you Vivek.

Your next question is from the line of Thomas Lee.

Hi.

Can you hear me?

Yes.

Hi.

Thanks for taking my call.

Just wanted to follow-up on the previous ASP question.

I was wondering, did you see any price protection perhaps late in the quarter?

And I guess specifically on maybe some of your 200 series product line, given that you just shift some new products I think late in the quarter?

That was actually one of the benefits in our margin results, was the fact that we had much less price protection as a percentage sales.

So we didn't experience anything late in the quarter.

So there wasn't anything unusual on that front.

And I guess going forward, is it possible that we could see price protection come into play later in the year?

I guess what gives you the confidence that what you saw I guess in Q1 and Q4 of last year -- that is not likely to repeat itself in the back half of this year?

Yes, we really do not expect there to be a huge shift in the amount of price protection as we go through the back half of the year.

Got it.

Okay.

And then just on the gross margin improvement, can you just help quantify the magnitude I guess in terms of what the breakout of that improvement did?

Did half of it come from FX and perhaps the other half in component cost benefits?

Can you just give some context around some of the different -- the level of impact each of the factors played?

Yes.

We won't be able to go through all of those details.

I did mention that about 3 percentage point benefit was related to FX.

The price protection definitely helped us, and overall cost reductions were very strong.

So those were the four major areas that we benefited from.

But I can't break out each one, story.

What did cost decline in a year-over-year basis in Q2?

Because I think your expectation for the full year was to down only 10%.

We exceeded that.

But again, we cannot break out the year-over-year cost reduction.

It was stronger than that though.

Got it.

Okay.

Thank you.

Thank you.

Your next question is from the line of Reik Read.

Good morning.

With respect to the ASPs, you mentioned the Auto/Mobile is up.

Can you quantify that in any way?

And given that the overall ASP was flat, can you tell us what the off-set might have been?

You mean the off-set in -- we didn't have an off-set because the margins were strong.

But in general, the ASP on PND came up in the single digits sequentially.

But we didn't see double digit increases, but we did see single-digit increases from Q1 to Q2 on ASP.

And I guess, Kevin, what I meant there was the overall company ASP was flat sequentially and I'm wondering what the offset would be if PND was up?

It's primarily -- I think that answers most of it, because ASP in total was essentially flat.

So we look at Outdoor Fitness down slightly to offset that.

But there was not a lot of other movement in the other segments.

Okay.

And you just commented that you got some confidence that price protection would not hit you in the back half of the year.

Can you give us an understanding of what -- where that confidence is being derived from?

I think just in the discussions with our customers on what the pricing is going to do in the next few months and then going into the holiday season.

So then I think -- don't forget the fact that we just rolled out some new products.

And we know what those prices are.

And they won't decline as fast as some of the older products.

Okay.

And then just one longer-term question.

Can you just discuss what the auto market might look like from in dash, in car, what that opportunity might present for you guys in the next 2 to 3 years.

Well, as we've been saying for a while, we're working hard to try to get opportunities in that space and we've already announced some -- for example, the 2011 Jeep Cherokee that is a design in opportunity.

So we are focusing on that business and trying to grow it into the future.

Okay.

Great.

Thank you, guys.

Thank you.

Your next question comes from the line of Yair Reiner.

Thank you.

Congratulations on a nice quarter.

First, for the PND segment, you're forecasting volumes to increase in the third quarter, which is at odds with I guess the seasonal pattern we've seen in the last couple of years.

So I wanted to get a sense of what is driving that, and will Q3 be a new normal baseline for the Company?

Well, we're in the process of still filling channels with some of our new products, and the other dynamic will be that later in the third quarter we'll see sell-in for fourth quarter promotions.

Got it.

And I guess turning to Europe, I was hoping maybe you could give us some sense of how the year-over-year growth trends for the market are shaping up there.

Europe has traditionally been about a year ahead of the US market and is there anything to learn from how Europe is acting these days?

Well, in general I think we believe we've held market share in there.

So we've seen pretty strong declines year-over-year on units and especially in the PND market.

What we do see is relative strength in North America, but Europe is definitely weak in the PND segment right now.

Can you give us a sense quantitatively of the volume decline there in the market?

I think it's -- it would be south of 20% decline year-over-year on units in the PND markets.

Great.

And just one final question.

Looking out to 4Q, based on what you're seeing for the third quarter, should we expect the typical seasonality from the PND segment and across your other businesses?

Yes.

I think the seasonality that we expect in Q4 would be pretty consistent with what we typically see and there would be a much larger Q4 for Auto/Mobile and probably not as much movement on the Outdoor Fitness as you would normally see to the number of products we have currently in the market.

And Marine comes down in the back half, just relative levels and Aviation should stay relatively flat as well.

But seasonality on the Auto/Mobile, we would expect some improvement sequentially from Q3 to Q4.

Great.

Thank you.

Thank you.

Your next question is from the line of Jeff Rath.

Thanks, Kevin.

Maybe I can start just as a beat this gross margin question up a little bit more.

Kevin, on the gross margins, is there any other variable there that was worth calling out with regards to product mix?

And more specifically, I know that you had launched I think it's a 3-year product where you could purchase map renewals for three years.

Is there any other products, in particular in the Auto/Mobile segment that might help explain the strength there that's come in with a different strength margin profile than traditional PNDs?

First off on what other impact, I think we've identified the major ones already, which I identified as lower price protection, FX benefit, cost reduction during the period.

So those are the major ones.

In relation to the question on lifetime maps which we began to sell in 2009, they continue to be a significant portion of our revenue, a high margin.

And so they definitely benefit and fall into product mix.

But nothing really unusual about the sales of those maps in Q2 versus Q1.

Okay.

You're not willing to quantify the impact of that product on maybe margins all?

It's not worth calling out, I guess?

Not at this point.

All right.

Maybe just moving on to the Nuvifone impact, and I understand your wait to see how it rolls out.

But as we think about that as a major new product category for Garmin, how should we think about, now that you have it on a joint venture basis, how should we think about the net impact to the overall P&L?

Presumably -- do you expect Nuvifone in aggregate when you net out marketing expenses and contribution margins?

Do you think that impact will be positive or negative at least in the initial stages of your entrance into that market?

Any color would be helpful.

Well, I think if you talk about initial stages, in terms of 2009, given the level of volume we would expect and the R&D cost we invested and even the advertising campaigns, it would not be positive margins this year.

The question is what happens next year.

And it's too early for us to tell on how much of an impact it will hit in 2010.

We'll give you more guidance or details as the product rolls out and we introduce new products in the future.

Okay.

And then just the final question I have is on the Aviation Segment.

And maybe, Cliff, you could jump in here and help me out.

Looking at that segment and trying to get some sense as to how demand performs in a down economic period, it seems historically that that segment benefits from an order backlog, but then it makes it a light cycle type of dynamic where the demand characteristics of that fall off a little bit later and might linger longer with regards to general recovery and consumer.

So any color you can give us on the thinking of that particular market segment for Garmin?

How do you think about that relative to the current economy?

Thanks.

Well, the segment is definitely challenged because of the economic situation and all of the attention surrounding automakers and their use of private aircraft.

I would say there were significant drops in the market as reported by Gamma in the second quarter.

Year-to-date, business jet shipments are down almost 40%.

And in terms of how the market recovers, we probably do not have any different view than what you articulated because it is a long cycle industry.

I would say though that we benefit from some of the product lines that we are on.

For example the light business jets that we're won have performed pretty well in the sales environment we're in.

And that's helped cushion some of the other reductions that wee seen in some of the other aircraft categories.

Thanks very much.

Thank you.

Your next question is from the line of Jim Duffy.

Thanks.

Most of my questions have been answered.

A couple of quick ones.

Kevin, is there any difference in the pricing dynamics you're seeing between North America and Europe?

No.

I think what we've seen over the last couple of quarters is that Europe and the North America market on price have really come into line with each other.

There is not as much of a difference as there used to be.

So not a big swing either way there.

What about pricing direction?

They're both of -- you would expect they both hold stable into the third quarter?

Yes, we do.

Okay.

And then have you disclosed the marketing budget plan for the Nuvifone launch?

No, we have not.

And do not intend to give details on that other than as the product is launched later this year, we will spend advertising dollars and media dollars in that area.

How about the timing of that spend, Kevin?

Does some of that hit in the third quarter or should we expect to see it concentrated in the fourth quarter?

Concentrated in the fourth quarter.

Thanks very much.

Thank you.

Your next question is from the line of Gab Groh.

Kevin, are you there?

This is J.B.

I've never been called Gab before.

But there's a first time for everything.

You guys did a good job on the margins.

Have you identified other cost savings measured that you can implement and other things you can do and how would you characterize where you are on that front in terms of low-hanging fruit versus stuff that you have to reach for?

Well, I think the fact that we dropped our operating expenses $27 million year-over-year is a pretty telling statement on our ability to scale the business based on market demand.

So I think the low hanging fruit is gone, but we're still doing everything we can on a day to day basis to hold costs in a relatively consumer discretionary environment.

So it's just simple blocking and tackling that remains?

Yes.

More of the same.

Holding our SG&A dollars flat, and we're still intending to grow R&D as we hire additional engineering talent.

And advertising will be up and down depending on whether we do media spend or not.

And then what will be your use of the cash flow?

And you did some acquisitions of distributors and that sort of thing, but what else is out there in terms of on the acquisition front or other uses of cash?

I would say we talked about the dividend this morning as an announcement.

Clearly we've already focused on $150 million use of cash.

Acquisitions would be the number two focus, and then also stock buyback, depending on market conditions.

Those are the three areas that are going to use up the cash.

Okay.

Thanks for your time.

Congratulations on the quarter.

Thank you.

Your next question is from the line of Tavis McCourt.

Thanks guys.

This is Justin Patterson on behalf of Tavis.

Congratulations on the quarter.

First with respect to components, it looks like the supply of displays is tightening in the market.

Beyond impacting your margins for the back half of the year, is there any risk you may see some unit volume slippage due to component constraints?

We're working very hard with our suppliers to make sure that doesn't happen.

It is true it is a more constrained supply environment at this moment, so we are seeing those dynamics in the market.

Okay.

Then on Nuvifone, you mentioned that it was in carrier testing in the US right now.

Could you give us a sense as to exactly how long it's been in the carrier testing at this point and possibly the number of carriers that it's being tested at?

I think the carrier certification cycle can be quite long.

It can be several months.

And definitely the Nuvifone has been in the cycle for -- since the springtime.

In terms of number of carriers, we would not really comment but we are very busy now with our activities.

Okay.

And finally just on warranties.

It looks like expenditures for the quarter declined sharply sequentially.

Should we view this as a sign that the refurbished market is beginning to slow somewhat?

No.

I think we'll lead into taking some trend on that.

I think we do see costs fluctuate based on actual claims that come in.

So I don't think you can make a trend out of that.

Okay.

Great.

Thanks.

Thanks, Justin.

The next question is from the line of James Faucette.

Thank you very much.

I just wanted to touch on a couple of things first.

Firstly, on the gross margin you indicated that you got 300 bips of benefit from the FX move during the course of the quarter.

And I'm just wondering if you're thinking about that as being at least somewhat permanent, if exchange rates do not move, and/or do you think that will erode quite quickly as everybody else adjusts prices as well?

That's my first question.

My second question is you indicated in the presentation that you thought that Marine and Aviation probably bottomed in the first quarter.

So from that standpoint, as we go into the seasonally weaker quarters particularly for Marine, do you think we'll be able to stay above the levels we saw in the first quarter?

Thank you very much.

First of all, that's the reason we quantified it, because we do not see that that type of benefit you can continue and that's not something you should model if that's what you're trying to do.

Clearly that moves in both directions and we have to take it as it comes, so to speak.

On the Marine piece, we would not expect that Marine revenues will continue at the current rate.

They will decline as they typically do in the second half.

I think the main point there is competitively we're not losing ground.

We're actually gaining ground we believe, and hopefully we'll still see some decent sellthrough on the Marine product in Q3 and Q4.

Great.

And just to clarify though, as we go through Q3 and Q4, obviously we'll be down on a seasonal basis, but do you think we can return to the levels or below what we saw in December of last year and March of this year?

Or in your comments you indicated that you thought that we had seen the bottom and it was due to macro-economic conditions.

I guess I'm just trying to get a feel for how much was macro versus seasonal there?

I think if you look at the year-to-date, the year-to-date numbers, we are not going to continue to see Marine be down at 23% which was our year-to-date number.

We should see, based on easier comps in the back half, we should see the percentage decline or percentage change come down.

Thank you very much.

Your next question is from the line of Paul Coster.

Thank you.

So the data points is coming out of some of the more developed European PND auto market do suggest that market might have stalled or might not be a growth market any more in terms of unit volumes.

And I'm wondering, have you done any market research that proves otherwise or suggests that North America might be different in some way?

That's the first question.

No, we have not done market research, but we're obviously concerned about the European market.

We want to get back to growth levels but I think it's more mature than the North American market is at this point.

And you mentioned you had a design win with the Chrysler Grand Jeep Cherokee in 2011 and it's depicted as a product win.

I'm wondering, are you working with any of the other auto OEMs as a platform provider for a multitude of products across a range of vehicles?

Or should we think about your opportunity in that market as sort of product specific design win opportunity?

We're not constraining our future approach to any particular method.

At this time we really do not have any guidance to give you in terms of where we're focusing.

But we're not ruling anything out.

Okay.

Maybe one last question.

Your R&D, is it proportionate to your product mix or is it focused on specific product lines and specific developments?

So if you could give us some color there.

I think what we've seen in the past 10-Q, 10-K filings is that we do have a strong investment in the Aviation business relative to the sales there, but there's still a large percent of our R&D is the Aviation industry.

But other than that it's across the board spending on Outdoor, Auto, and Marine business.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Amir Rozwadowski.

I have a clarification.

You had said earlier in the call that you thought that the auto business would be flat in the second half.

Were you meaning in terms of revenues or units?

No, I meant units on a year-over-year basis.

Okay.

Looking -- to imply in addition to that as least 15% at least ASP reduction on a year-over-year basis.

Okay.

Thanks.

Thank you.

Your next question is from the line of Brian Blair.

Hi.

Can you just talk -- you've covered everything, but you can just talk a little bit about this -- the retailers' activities right now relative to 2008?

And just maybe compare and contrast what they're doing in terms of taking orders and just trying to get a little bit of detail.

They were very conservative heading into last year's holiday season, and I just want to get some compare and contrast in that regard.

Thanks.

Well I think we've seen the inventory situation in the channel obviously go through a correction as the economic conditions have evolved.

And I think they are still working on that somewhat conservative model.

So this year they're being a little bit more cautious in terms of inventory and all of those things.

But there is definitely still demand there.

In some cases, we know the customers are unable to find the product they want because retailer have been too conservative.

So we anticipate there will be strong sell-through in the Q4 holiday season.

And are they taking orders now at the same timeframe they would take orders if you go back to August of 2008?

Because it seems like last year, they were waiting until the last minutes to take some orders and that's what I'm trying to get a little bit more of a sense for?

I think we're probably viewing it as they're giving us orders.

But indeed, we're getting firmed up commitments for the Q4 at probably a little earlier stage this year than what we saw last year.

Okay.

Great.

Thank you very much.

Thank you.

That will be our last question for today.

Thank you for joining us.

And Kevin and I will follow up as appropriate.