台灣國際航電 (GRMN) 2009 Q3 法說會逐字稿

Good morning and welcome to today's webcast.

This event will be recorded for future play back.

There will be a verbal Q&A session at the end of today's presentation.

The operator will instruct you on how to ask a live question at that time.

(Operator Instructions) We will pause for just a moment to initiate the recording.

Ladies and gentlemen, please stand by.

Welcome to the Q3 2009 earnings conference.

At this time, I would like to turn the event to Debbie Pollard.

Debbie, you may begin.

Thank you.

Good morning, we would like you to the Garmin Ltd.

third 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 the webcast does include slides which can be viewed during the call.

An archive of the webcast will be available until December 9, 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 will be tweeting throughout the call.

You can follow our tweet cast at twitter.com/Garmin.stock.

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

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 may differ materially as a result of risk factors affecting Garmin.

Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 27, 2008, filed with the Securities and Exchange Commission.

Attending today's call on behalf of Garmin Ltd.

are Dr.

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

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

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

Good morning.

As you've read from our press release this morning, Garmin announced solid third quarter results that included year-over-year EPS growth driven by strong margins.

During Q3, we experienced sequential revenue growth of 17% driven by growth in the automotive, mobile, and outdoor fitness segments.

We also delivered another quarter of strong growth in operating margins of 52%, and 30% respectively.

EPS was $1.02, excluding the effects of foreign currency, which is a 17% increase over third quarter of 2008.

And we generated $281 million of free cash flow resulting in a balance of over $1.8 billion of cash and marketable securities.

From a business perspective, we continue to lead in worldwide PND market share, as our North American market share grew to 60% from 57% in the second quarter, and 54% in Q3 of 2008.

We delivered 3.9 million units during the quarter, which is basically flat compared to prior year levels.

And we announced our Nuvi 1690, Garmin's first online PND that connects our PND customers with the power of the Internet.

I will share more details about this product in a moment.

Reviewing our Auto/Mobile segment, our revenue declined 13% versus the third quarter of 2008.

But increased 25% sequentially.

The average selling price increased from the second quarter by 19%, as our new products constituted a greater part of our sales mix.

The outdoor fitness segment resumed growth, posting an 11% year-over-year increase.

The segment posted record revenues of $132 million, with strong margins as we delivered a number of new products.

Revenues from our aviation segment declined 29%, versus last year, as the industry continues to struggle from the effects of the economic crisis.

And finally, revenues from the marine segment increased 3%, as demand for our products and promotional activities at retailers offset the ongoing weakness in the market.

I'm sure some of you are wondering about our current views on the economy, as we approach the end of 2009.

We continue to see signs of stabilization, based on the positive indicators we have highlighted in our consumer market segments.

We saw PND unit growth on a year-over-year basis in both the North American and Asian markets.

In addition to much improved trends in Europe, this, along with improving ASP's and margins on a sequential basis, led to strong operating income growth for the Auto/Mobile segment.

We expect to see our unit shipments increase 40 to 50% sequentially during Q4, but also anticipate pricing and margin to be in line with 2008 levels.

As for the other segments, we expect the outdoor fitness segment to be flat year-over-year, the aviation segment will experience ongoing weakness, as recovery of this industry lags that of the general economy.

But we expect to see stabilization trends during Q4 of this year.

In marine, we expect Q4 revenues to be down sequentially due to seasonality.

As we have mentioned in the past, we are focused on our long-term strategies and are confident we are headed in the right direction, as the overall economy emerges from one of the worst downturns in history.

We are confident that our investments in research and development and our introduction of new products will lead to increased market share and growth as our markets and the overall economy enter the recovery phase.

Next, I would like to highlight some recent product introductions starting with the Nuvi 1690.

This product is Garmin's first PND that provides on the go access to powerful Internet based services features through our nuLink online services.

nuLink provides a range of rich dynamic content such as local search powered by Google, nationwide page listing, realtime traffic, weather, current fuel prices, flight status, and much more.

The 1690 monitors the movement of the vehicle over the road network, and sends that information back to our servers where it is used to enhance the realtime traffic information for millions of our users.

The 1690 features CHOW our patent pending social network application that aggregates information from third party social networks into a common user experience on the PND, allowing users to share location-based information with their friends.

The 1690 also includes advanced features such as lane assist, Eco Route, Bluetooth hands free capability.

The 1690 is the first online PND to bundle significant periods of services with the device.

The US version includes two years of connected service, and costs just $5 per month after that.

I would like to mention that Garmin was recently named the top GPS device in a recent survey conducted by PC Magazine.

We're always pleased when customers respond favorably to our products and this survey affirms our leadership in the industry.

Turning next to the fitness market, we recently introduced a new cycling computer, the Edge 500.

This product weighs only two ounces and includes a high sensitivity GPS receiver for tracking location-based performance metrics, and an N Plus wireless receiver for compatibility with Garmin heart rate monitors and third party bike power meters.

The Edge 500 will track all of the metrics important to cyclists such as speed, distance, time, GPS position, elevation, calories burned, altitude, climb, and descent.

This information can then be downloaded to Garmin connect, our Internet-based fitness portal for analysis, charting and sharing.

The Edge 500 is a full-featured cycling computer value priced between $249 and $349, depending on the configuration.

To support our increasing presence in the overall fitness market, we recently extended our title sponsorship with team Garmin slipstream through the year 2013 which demonstrates our solid commitment to this important market segment.

In the marine market, we recently introduced our new planning software application called Home Port.

This application is compatible with Garmin's blue chart data and allows the Mariner to plan voyages, transfer trip data, track and way points between the PC and Garmin chart monitors.

Recently, we announced that Riegle boats selected Garmin to be the exclusive electronics provider for their 2010 line of luxury performance run-abouts, cruisers, and sport yachts.

Riegle will offer a range of products, including our advanced touch screen chart plotters, high definition radars, VHF radios and XM satellite radar.

In addition, Riegle will be among the first OEM's to offer factory installation of Garmin's GHP10V Marine auto pilot for use with the Volvo IPS propulsion system.

This offers Riegle's customers one of the most advanced auto pilot systems available on the market today.

Turning next to aviation, Garmin introduced two exciting integrated cockpit systems at the recent national business aircraft association convention.

The first system is our G3000 which is the first ever test screen control integrated flight deck for light turbine aircraft.

The G3000 incorporates multiple 14.1-inch, wide screen displays, which present primary flight information, and provide multi-function display capabilities.

These displays offer our advanced synthetic vision technology giving pilots a realistic view of terrain and obstacles around the aircraft, regardless of weather conditions.

In addition, these displays provide access to detailed maps, charts, terrain avoidance, flight planning, and realtime weather.

A major component of the G3000 system is the new GTC570 vehicle management system.

This device incorporates our patent-pending infrared technology, with an intuitive icon based user interface which will help reduce pilot workload.

The G3000 is a compelling next generation integrated cockpit system and has already been selected as the avionics platform for the Honda jet and the piper jet.

We also announced the retrofit G1,000 system for the citation jet which we anticipate will be available by mid 2010.

This certification will provide early model citation jet owners access to the latest integrated cockpit technology, bringing enhanced safety, features and functionality to the cockpit.

The G1000 for citation jet will include our advanced digital auto pilot, synthetic vision, wide air augmentation system approaches, integrated satellite weather and Garmin's safe taxi flight chart databases.

And finally, earlier in the week, we announced a new AERA series of aviation portable products which are multimode touch screen navigators that offer both automotive and aviation features.

The four models of the AERA range from the entry level to the mid-level offerings that will be suitable for a variety of pilots.

Just a few of the many features include terrain and obstacle data, XM weather, safe path fee and airport directories.

The AERA is also a full function automotive navigator offering advanced features like Bluetooth hands-free capability and lane assist with junction views.

I would like to provide an update on the launch of our Nuvi.

As announced in late September, we launched the G60 in the US on the AT&T network.

This represented a significant step forward in our smart phone strategy as we were able to deliver a unique product that garnered tier one carrier support.

The G60 was subsequently launched in Switzerland as a subsidized device through the carrier sunrise and in France, the G60 launched as an unlocked device.

The G60 is also selling in various markets throughout Asia.

The Windows mobile M20 launched in numerous Asian markets through both carriers and the retail channel.

Some of you are wondering about the sell-through of the G60 at AT&T.

To be Frank, the initial rollout of the G60 has been relatively slow.

However, there are several actions that we are taking to improve the overall sell-through.

First, we recently launched a large scale Nuvi phone ad campaign which we view as critical to establishing Garmin as a wireless brand, and to educate customers about the benefits of navigation included products.

Second, the G60 product will continue to expand distribution through Q4, as it becomes stocked in more and more stores around the country.

And finally, just this week, AT&T announced new pricing for the G60, which is now available for $199, through AT&T channels.

Looking to the future, we will continue development of a full family of location centric smart phones, which will include an Android device in 2010.

I would like to comment on recent developments in the mobile application space.

Some of you are wondering how these developments will affect the PND market going forward.

While these developments are interesting, we don't believe they will impact the market for PNDs any time soon.

Regarding the availability of pre-navigation, I would like to highlight a few key points.

First of all, free navigation still requires the purchase of a premium device and a service plan from the carrier.

With this in mind, navigation included, rather than free, seems to be more accurate way to describe the navigation offering, which is how a customer would likely view the bundling of navigation with the device.

Navigation has been included in smart phone devices for some time now through various carriers, and on various devices around the world.

Most smart phones rely on awkward maps which require network access and a premium data plan in order to access navigation functions.

Navigation will not be available to users who move outside of coverage areas, or if they don't wish to pay for a premium plan.

And finally, device limitations are still a major factor when using smart phones for navigation.

GPS performance, display size and readability, useability in the vehicle, power requirements for the device, and environmental limitations such as overheating are all factors that limit the useability of most smart phones in the automobile.

Garmin's PND and Nuvi phones offer the best navigation experience without the limitations common to most smart phone platforms.

And finally, I would like to comment on the availability of free maps.

Recently, one particular provider announced that they're using their own maps to power their search, mapping, and navigation applications.

While this is an interesting development, we would like to point out that maps of various quality levels, and prices from free to premium have been available for quite some time.

As the world leader in the market for navigation devices, we recognize that drivers depend on quality mapping data for accuracy, safety and efficiency when getting from point A to point B.

Quality maps require significant effort to create and must include important attributes such as turn restrictions the can only be collected through on the ground survey and detailed review.

While there is more than one source of free maps available today some free maps can result in a dead end for the customer.

At this time, Kevin will walk us through our Q3 financial results in more detail.

Thank you, Cliff.

Good morning, everyone.

I would like to walk through first of all the income statement, some revenue details, looking at margins for the quarter and taking a brief look at the balance sheet and the cash flow.

First on the income statement, you can see that for the third quarter, we posted revenue of $781 million, net income of $215 million, so our pro forma EPS came in at $1.02 per share, excluding foreign currency.

The revenue grew 17% sequentially during the third quarter.

Year-over-year we experienced a 10% top line decline, but a 17% pro forma EPS increase when excluding FX due to strong margins across the business.

Our effect tax rate during the quarter was 16.2%.

Gross margins exceeded expectations at 52.4%, which was an 810 basis points improvement, over the prior year, as margins improved significantly in our Auto/Mobile segment.

Our operating income grew 11% to $237 million, compared to $214 million, in 2008.

We posted operating margin of 30.3%, which was up from 24.6% last year, as revenues fell.

However, the gross margin was favorable, 810 basis points.

Advertising was 10 basis points unfavorable.

Which was down $5 million on a year-over-year basis.

Our other SG&A, 130 basis points unfavorable.

Up $3 million on a year-over-year basis.

And our R&D was 100 basis points unfavorable, up $3 million on a year-over-year basis.

So the pro forma EPS of $1.02 was 17% increase, as I said, year-over-year.

However, increased $0.19 sequentially on the strength of both sales and margin during the period.

Units shipped were up slightly year-over-year, as 3.9 million units were delivered during the quarter.

The increase was driven by Outdoor Fitness gains offset by small declines in Auto/Mobile and aviation.

The total Company average selling price was $202 per unit, down 11%, from 2008.

However, up 12% from $180 sequentially.

Net income excluding FX, as we typically show the non-GAAP measures that we recorded represent net income per share excluding the effect of foreign currency, and the 2008 gain on the sale of TeleAtlas Equities.

This impact waits was $0.05 per share favorable during the third quarter of 2009 and $0.05 per share unfavorable for Q3 2008.

During Q3, we experienced a 13% revenue decline within the Auto/Mobile segment while the unit volumes declined 2% in the segment.

Our Outdoor Fitness segment revenues grew 11%, compared to Q3 2008, with the delivery of a number of new products to the retail channel.

Our aviation segment revenue declined 29% during the quarter, consistent with the year to date performance in this segment.

Marine segment revenues increased 3% compared to Q3 of '08, as we continue to take market share in this category.

So in total, our revenues fell 10% during the third quarter, as we continue to battle against weak consumer discretionary spending, but this is significantly improved over the 27% decline of the second quarter of this year.

Looking next at revenue by the geography, different geography, during the third quarter, North American revenues declined 14%, while our European business decreased 4%, as we began to see significant improvement in Europe, and sequential growth outpaced North America.

Our Asia Pacific region, sales grew 8% during the period.

We experienced a 2% unit decline from our PND products with North America and Asia growing, offset by single digit declines in Europe.

So the Auto/Mobile segment represented 70% of our total business during the third quarter of 2009, down from 72% in 2008.

Outdoor Fitness grew to 17% of revenues in the quarter, a 3 percentage point increase from 2008.

Revenues in North America were 64% of total, a 3 percentage point decrease over 2008 levels, as Europe posted stronger results than North America during the quarter.

Moving next to margins, Q3, our Auto/Mobile gross margin and operating margin were 48% and 29% respectively.

This represents improvements sequentially and year-over-year as pricing improved quarter to quarter, and we also experienced material cost reductions and benefits from foreign currency fluctuations.

The third quarter Outdoor Fitness gross margin was 63%, flat to last year, as price and material costs in the category were relatively stable.

Operating margins fell to 40% in the third quarter, from 44% in the year-ago quarter.

This decrease was driven by increased SG&A costs within the segment.

Q3 aviation gross margin was 67%, up 2% from the prior year, and down 7% sequentially, due to product mix.

Operating margins were 20% for the quarter, which is a significant decline sequentially, and from the prior year, due to both lower revenues and increased SG&A costs.

And finally, the third quarter marine gross margin was 54%, compared to 49% in the year-ago quarter, as product mix improved toward our high end network solutions.

Operating margin was 26%, an improvement of 200 basis points from the year-ago quarter, but down 1,000 basis points sequentially driven by the lower seasonal revenue level.

Looking next at operating expenses, our third quarter operating expenses were up $2 million, on a year-over-year basis, from $171 million in the third quarter of '08, to $173 million in the third quarter of 2009.

And increased 260 basis points as a percentage of sales, due to the expense growth and revenue declines.

R&D increased $3 million year-over-year, and was up 100 basis points to 7.1% of sales.

We now employ over 1900 engineers and engineering associates worldwide and remain committed to continued product innovation.

Our total head count now stands at almost 8,600 associates worldwide.

Ad spending decreased $5 million over the year-ago quarter, but increased 10 basis points as a percentage of sales, from 5.8 to 5.9%.

We will continue to manage advertising expense, based on the macro economic conditions but we will see significant sequential increases this fourth quarter, with the Nuvi phone ad launch and holiday advertising.

Other SG&A increased $4 million compared to the year-ago quarter, and 130 basis points, up to 9.1% of sales, from 7.8% a year ago, as expenses increased while our sales declined.

We expect these costs to decline in the fourth quarter, as third quarter did include some one-time accruals.

Moving next to the balance sheet, you can see that we ended the quarter with cash and marketable securities of over $1.8 billion, our accounts receivable increased on a sequential basis to $574 million, as we saw sales increase 17% sequentially.

Our accounts receivable accounted for approximately 71 days of sales, up slightly from 68 days, in the third quarter of 2008.

Inventory balances increased $50 million, to $373 million, as we prepared for the seasonally strong quarter.

Our days of inventory metrics decreased from 91 days at the end of the third quarter of '08, to 81 days at the end of the third quarter of '09, driven by finished goods reductions.

The days and levels of inventories are as follows.

$107 million held in raw materials which represented 22 days of inventory.

$40 million of inventory in whip and assembly at 9 days.

$245 million in finished goods inventory, which represents 50 days.

And we held $19 million in inventory reserves at the end of the third quarter.

We will continue to monitor the supply chain appropriately given seasonal, and cyclical conditions, facing our various segments.

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

Important to note that we did not see additional destocking in the quarter and sell-in of inventory appeared to trend with sell-through.

We continue to believe that our retailers will hold inventories at these relatively low levels for the foreseeable future.

Next, to cash flow, strong cash flow performance, first cash flow from operations of $293 million of the third quarter.

We spend CapEx of $12 million during the period so therefore our free cash flow during Q3 was $281 million.

Cash flow from investing was $258 million use of cash, which represents the $12 million CapEx, $242 million net purchase of marketable securities, and $4 million acquisition of intangibles.

Cash flow from financing provided $2 million of cash during the quarter, due primarily to the issuance of stock options.

And we earned an average of 1.5% on all cash and marketable security balances during the third quarter.

And finally, 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 to be paid in December.

This represents an approximate $150 million use of cash during the third quarter.

We will continue to evaluate a number of acquisition opportunities as a possible use of cash.

And finally, our tax rate for the quarter as I mentioned earlier was 16.2%.

We currently expect that the rate for the entire year of 2009 will come in at approximately 18%.

That ends my formal comments for the day.

At this point, we would like to open it up to questions to our investor community.

(Operator Instructions) Your first question comes from the line of Richard John.

Richard, your line is open.

Your next question comes from the line of Vivek Arya.

Thanks, good morning.

Cliff, the disadvantages that you mentioned on the free map option, how difficult do you think it is for Google or others to overcome those disadvantages?

Well, I think their model is all forward navigation, which has all of the disadvantages that I mentioned to you.

There is really no way to overcome those, unless you want to load the maps on to the device.

But are they offering some caching of that map content, also?

Well, there is some limited amount of caching, but again, I don't think that covers every user in every situation.

I think when you really need navigation, you really need it.

And it is not available to you, it is a disappointment.

Next, what is your strategy for growing the top line in 2010?

If you assume that the macro conditions sort of stay the way they are today, so they don't worsen but they don't really improve that meaningfully.

Do you think in that kind a macro environment, you can grow top line next year.

At this point, we expect, given the strength of PND, we don't believe that the PND market is dead.

I think some people disagree with that.

But we still feel like there is growth once the economy turns around a bit more, we with see some positive trends now so we will have at least flat to possible growth in the Auto/Mobile segment with the PND combined with Nuvi phones.

And the Outdoor Fitness market continues to perform very well.

We expect growth there.

Marine, I think continues to be weak.

We don't see any major trends that will turn it around in 2010 at this point.

But aviation, we would expect at some point and hopefully in the near future that production levels will increase an we can see some top line growth out off our aviation segment.

And just lastly, Kevin, do you expect Q4 EPS to be up or down sequentially, and then same question, just roughly for 2010, do you expect EPS to be up, down, flat, versus 2009?

Thank you.

We're not giving any formal guidance for the fourth quarter so we really can't comment on up or down on EPS.

I think you heard Cliff's comments about sequential growth on our PND market, about 40 to 50% up from Q3 to Q4, however we do expect pricing to come down in the fourth quarter which is very typical during the holiday season.

2010, we will just have to wait to give further guidance, or at least basic information on that as we go through the end of the fourth quarter and into 2010.

Your next question comes from the line of John Bright.

Thank you.

Kevin, on the Nuvi phone, the first introduction, the G60, what have you learned at this short point in time, number one?

And then number two, you talked about an Android phone in 2010.

I think the rumors out before talking about something maybe in February.

Is that still the process and the time line?

And then lastly, for Cliff, as far as a Garmin navigation application, has there been any change in the strategic thought associated with that, at Garmin?

I will go ahead and address your questions, John.

I think in terms of what we learned on the Nuvi phone, definitely going from kind of a start-up mentality to introducing a wireless device at a major US carrier was a huge accomplishment, so we learned a lot out of that process.

We think we know a lot better now in terms of what it takes to certify a really challenging network.

In terms of Android, we don't -- we are not publishing a time line on that.

At this moment, we believe it will be sometime during 2010, as we mentioned.

And then in terms of the applications, we really haven't changed our view on that.

We're still focused on the Nuvi phone platform going forward as our strategy.

Your next question comes from the line of Rich Valera.

Thank you.

With respect to the new Nuvi phone pricing, can you comment if you still expect similar margins that you've talked about before, sort of the mid-30s type of gross margins on that, or who has absorbed that price cut?

Well, I think in general, we would expect margins below that I think in the mid-20s is where we had started.

And I think with the price drop, we won't get specific details on who is paying for that, but I think you would expect in the near term, on the G60 that margins would be below what we earlier stated.

Keep in mind that--?

Operator, can you mute that line, please?

We had some disturbance there.

As I was saying, I would expect that margins will not be impacted significantly in the fourth quarter due to the fact that it is a relatively small percentage of our revenue mix in the fourth quarter from the Nuvi phone.

Operator, do we have any further questions?

Operator, do we have additional questions?

It looks like there are no additional questions at this time.

We had Amir next in the queue, I believe.

Is Amir still online?

Amir, your line is open.

-- guidance for--.

Go ahead.

Hello?

Yes, is this Amir.

Yes, pardon.

Go ahead.

If we take a look at the unit guidance for Q4, the 40 to 50% growth, it seems as though comparatively to prior years, it is not as steep a sequential increase, as we've seen in prior years in terms of units, and given what seems to be strong unit performance in Q3, I was wondering if you could reconcile that in terms of what is happening in the end market at the moment?

I think a few comments.

The market today of course is more mature than it was back when we saw those dramatic Q4 kind of increases.

So I think it is a little bit different market psychology right now, and we still believe that we will have strong sell-in and sell-through during Q4.

I think the other point is the North American market, if we still do see strong sell-through on a year to date basis, we're still up year-over-year, on the number of units that we sold into the channel, but also sell-through is tracking very similar, as I said in my formal comments.

Okay.

But we shouldn't interpret that as there is any reduction in the channel inventory or anything along those lines?

I think retailers are still not as aggressive as they were two or three years ago, obviously.

So we still face some of those issues that again, we see them much more committed this year, than what they were last year, given all of the economic troubles that we were facing.

Your next question comes from the line of Thomas Lee.

Hello, can you hear me?

Yes, go ahead.

Okay.

Sorry.

So I just wanted to follow up on the unit question earlier, so your guidance, your Q4, I guess, your guidance for Q4 implies either the market is likely to be down -- the year-over-year declines are likely to accelerate and I was just curious, or that you perhaps are -- it implies that you expect to lose some market share next quarter.

And I just wanted to get some additional color in terms of year-over-year, what do you expect US and Europe to do, for the market?

And do you expect to either gain or lose share next quarter?

First of all, we believe that the expectations that we have going into the fourth quarter are very similar to what we set out at the beginning of the year, so we haven't seen a major change in either the market size or the market share.

In fact we believe that we actually have more market share now than we did at the beginning of the year.

Roughly 60% share in the US and 20% share in Europe.

So just from a year-over-year look, clearly the number of units in total are going to be a little bit down but not materially and I think they will continue to track very consistently with what we've seen throughout the year which is about a flat PND market, maybe down 5%, in total, for the year.

Your next question comes from the line of Ilya Grozovsky.

It is Ilya Grozovsky from Morgan Joseph.

Thanks.

You had said in the past that you thought that the Nuvi phone would contribute about 100 million to $200 million in revenues in 2009.

Can you sort of update us on that expectation, and where do you think your Nuvi phone revenues will be for next year, just a ballpark number?

I think for the fourth quarter, we would not expect that high of a number now, due to the relative slow rollout.

I think given the fact that the pricing has come down recently, we have folks that will move units a little bit faster in the fourth quarter.

Next year, we haven't really given any formal expectations, but with the expansion of the product family that the Nuvi has to do better and has to contribute more from the top line as we approach 2010 and also introduce the Android unit.

Your next question comes from the line of Scott Sutherland.

Great.

Thank you.

A couple questions.

First of all, can you talk about the gross margin drivers in more detail versus your expectations for it to drop from the Q2.

And maybe as you look into Q4, do you think any adjustments occur there?

Do you think it is going to drop more materially from these higher margins you've had recently?

In the third quarter, we were -- year-over-year, the level continued to benefit from the foreign currency that actually, in year-over-year, impacted us about positive 4 percentage points, which is very favorable, as the euro continued to strengthen versus the US dollar.

We also saw significant product mix benefits with the introduction of a Nuvi 1200, 1300, 1400 product and the rollout of the connected PND to the 1690.

Those all helped in our margins.

And finally cost reductions continued to be a big part of the margin improvement on a year-over-year.

As we go through the fourth quarter, we expect pricing to come down, as both Cliff and I have said, so I think the margins will not be 52% like they have the last two quarters, they will without a doubt come down, probably into the low to mid-40s.

So a lot of it will depend on what happens to price and cost as we go through the fourth quarter.

Your next question comes from the line of Jonathan Goldberg.

Hi, sorry.

I was just wondering if you could talk a little bit about the PND market in general.

Do you think this is going to be something like digital camera markets where we have digital cameras in all phones but the digital camera market is still growing?

Do you think we will have a scenario like that where PNDs may be sort of a vibrant niche market?

I think in the past, we've actually used that analogy.

There is all kinds of different needs and different kinds of consumers, and no one solution can really take over the whole market in our view.

We still believe that the PND offers significant advantages for the specific utility that the customers are asking it to perform, which is in car navigation.

Okay.

And then just talking about the guidance again, just to clarify a little bit, you're talking about 40 to 50% sequential growth in units.

That's correct.

More than normal seasonality.

But you expect sort of normal seasonal declines in pricing?

How would you -- first, did I get that right?

And just a housekeeping question.

What was the sequential decline we saw in Q4 of last year?

Yes, first of all, what we're talking about is units.

And then from a -- I think we saw, we had 30, 28 to $30 units ASP increase in the third quarter, as we introduced new products that really helped our pricing.

Typically we do see a pretty substantial ASP decline in the fourth quarter.

This year, we still feel very comfortable that a full year ASP decline in PND will be 15 to 20% for the full year which is below where we stand today.

So I think pricing is definitely moderating, but on an absolute level, we will be below our third quarter ASP for the PND market.

Your next question comes from the line of Yair Reiner.

First one, quick clarification.

Is it 40 to 50% sequential increase in units, or 50 to 60 as you have on the slide presentation?

40 to 50%.

Okay.

The slide presentation says 50 to 60.

I just wanted to make sure.

The second thing is, the sequential increase in ASP's in the PND segment was fairly astonishing and I don't think we've ever seen that in the third quarter or any quarter that I recall.

Beyond product mix, is there anything else going on there?

To what extent is FX a factor, and I guess next question is, when you look into the fourth quarter, do you expect a sequentially steeper sequential decline from the 3Q levels or sequential decline that is more on level with what you saw in the fourth quarter of 2008?

Thank you.

Just to clarify the first question, Yair, FX related I just want to make sure I have the question correct, related to which period?

Is he gone?

Okay, I will address.

It I think what you asked is foreign currency, what kind of benefit we had.

So we continue to see the euro strengthen even as we go into the fourth quarter.

So that will continue to be a benefit to us.

However, I think the key thing in the fourth quarter on price, just has to do with normal seasonality, marketing programs, discounting, price protections that we give to our retailers so we do expect sequentially that our ASP will come down with normal levels from Q3 to Q4 very similar to last year just in terms of trend.

Your next question comes from the line of Ben Bollin.

Good morning.

Three items I wanted to touch on.

The first, if you look at the level of channel inventory that you do see out there and the visibility you're getting from retail partners, could you say where that stands in either the number of weeks, or how it compares to what you've seen in prior years?

Second item, looking at kind of the promotional strategy, in 4Q, where do you see kind of the low end of price points materializing from yourself or from competitors or how do you think those promotions are stretched across the different units in the stores, are there more absolute units, less units relative to prior years?

And then lastly looking at replacement trend, have you seen any shift from pre-existing customers replacing more or any changes in that replacement trend?

Thanks.

As I mentioned earlier, we haven't seen a significant shift in the channel inventory.

In most cases, and there is obviously some variability, we see about six to eight weeks of inventory that many of the retailers carry.

Some of are below that.

Some of are above but that's about the average.

So again we look at the North American, but we shipped in what they sold out has not changed.

The trend has not moved a whole lot.

So not any kind of channel filling or anything going on.

Just normal shipments in meeting customer demand.

From the promotional strategy, I think Garmin would have price points very similar as to what we are expecting from last year.

We will be selling some products in the 99 to 119 level at the Black Friday specials.

There may be some competitors who would be below that but we don't plan to go below that price point at this point.

So ASP's as I mentioned, we still have some pretty good data points on what to expect in the fourth quarter holiday.

And finally on replacement trend, Cliff mentioned the fact that we are seeing more mature markets, so I think as we go forward, replacement market will continue to develop, we will see more and more of our units being purchased that are not first time users but second and third time users.

I don't know that we can quote a number at this point on how many units are replacements versus new.

But it will continue to increase.

Your next question comes from the line of James Faucette.

Thank you very much.

I just wanted to go back on the Nuvi phone.

I guess two questions relative to that.

I can appreciate that it is kind of a pricing and strategy process right now particularly on your initial launch, but I'm wondering, should we, as you look to roll our additional phones next year, a couple of things.

Firstly, are you talking about, Kevin, when you talk about gross margin, maybe below where you talked about before, should we think about those extending into next year, or do you think with the introduction of new phones, you can bring those back up to the targeted range?

Firstly.

And then secondly, I think in the past while you haven't given a revenue target, you had talked about in, 2010, potentially shipping as many as a million units.

Is that still the kind of production levels and shipment levels that we should be thinking about for 2010 (inaudible)?

I would first of all just set the expectation on Nuvi phone margins that we will not see increases back up to higher levels.

I don't expect margins to be up anywhere near where our PND margins are.

Just due to the smart phone market and pricing and competition there.

So I just would set the expectation there.

As far as 2010, number of units, we still feel like given the G60 and also the products that we plan to roll out, we would hope to be able to still hit that million units for next year.

Okay.

Great.

Thank you.

Your next question comes from the line of Tavis McCourt.

Thanks.

This is Justin Patterson on behalf of Tavis.

Just looking at kind of the arguments you outlined earlier for the advantages of a PND, versus say some of these more free map devices, can we perhaps think of an advertising campaign, or anything like that to really tout those benefits versus some of these disadvantages that the other devices have?

I think there is always creative fodder for advertising campaign.

I do think our customers get it.

And truthfully with the awareness of navigation that is increasing, it seems like exponentially, there is a potential net positive for the overall category, because as people experiment with various solutions, they basically realize that the best experience and the most reliable experience is either PND or Nuvi phones.

Secondly, I noticed you broke out deferred revenues on the balance sheet this quarter.

I don't believe you've really highlighted that in the past.

Is that more related to the connective PND product, the Nuvi phone, or something else?

No, we brought that out because of the level of increase in the account that we got through 2009.

You may recall we started selling lifetime map, beginning in 2009, so a portion of those revenues, and generally, that has been at $119 per unit, for the lifetime map, a portion needs to be deferred because we can't take it over the -- all up front.

They have to stretch that out over the life of the product.

So that is really what that represents.

Okay.

Your next question comes from the line of Stuart Goldberg.

Good morning, guys.

Along those lines, you answered the deferred revenue question, but other accrued expenses, can you break that out for us, as far as what the increase was there for it, and can you walk us through, on the accrued sales program costs dropping $13 million, how that reversal worked, where did that reversal go?

First of all, on the accrued expenses, those are warranty-related, and from a Q2 to Q3, increases.

As far as the marketing programs go, we really didn't see a lot of price protection, which is where -- a big number in that area, typically in the past, because of the release of new products.

So we look at what kind of declines or rebates that we give, and those numbers were expected to come down just due to the new product introductions.

So sales programs primarily related to price protection during the period.

And where did it go?

What do you mean where did it go?

You reduced an accrual by $13 million.

It had to be offset to something.

It is favorable to our margin.

So it is the line on the gross margin in that regard.

Thank you.

Your next question comes from the line of Mark Sue.

Thank you.

Cliff, recognizing that a smart phone with navigation included is not as functional as a pure PND, are there more dramatic things that Garmin can do to maintain the separation of the market, the actions that you spoke about today, it seems more tactical in terms of cutting price and increasing marketing, so I wonder if there are more strategic things that you can consider over time?

Well, I think we mentioned that in some of the comments.

But definitely as you pointed out the tactical items, which are one thing but we still are focusing on what we believe is the core advantages of our solution, which is GPS performance which works well in the intended environment, in the car, and some of the operational performance that takes place in the car that are limitations for other devices, such as temperature and power consumption, and so forth.

But beyond that, the feature integration is still an area where we're focusing significantly on to make the location a part of every application of the device, not just part of a few applications there, just navigation.

Do you think this focused market for PND, the way you describe it, actually grows next year?

I think these markets are really dynamic and there is a lot of research out there to try to prognosticate what will happen next year and the years beyond.

It seems like most expert consensus is that the market will be up next year, somewhere in the range of 5 to 10%.

But again, because of all of the dynamics, I think that is an educated guess.

Your next question comes from the line of Jeff Evanson.

Good morning, everybody.

After many, many quarters of concerns about high inventory levels, I'm actually wondering if maybe I shouldn't be concerned about low inventory levels.

Could you tell us about how you feel about where you're positioned with finished goods inventory going into Q4?

Well, you did notice that our base did come down.

And even though our inventory was up, it is very typical as we approach the holiday season, so I think if anything, we are on the low end, not the high end.

And in some cases, there is some component shortages that could impact us, but at this point, we have been able to manage those pretty well through the channel.

So we kind of agree with your general question.

All right.

And then Kevin, could you tell us how much ad spending there was in the quarter on the Nuvi phone?

Well, we're not going to break -- we won't really break that down.

It was a very small amount, because most of what you're going to see on the Nuvi phone has just started the beginning part of October.

We generally don't break it down by product like that.

Okay.

Thank you.

Thank you.

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

Groh.

Good morning, guys.

Maybe a different angle of that question, Kevin, is you may have given this, what is your kind of ad budget for the year or for Q4, with regard to the overall Company?

Well, we're definitely going to see a sequential increase.

We would expect advertising to be between 6 and 6.5% of sales depending on the success of the sales in the quarter so we will see an absolute dollar increase of at least $15 million is what we're expecting and most of that has to do with the Nuvi phone ad campaign as well as our typical holiday advertising which you should start to see here in about a week or two.

So that 6 and 6.5 is just for the full year or just for the quarter?

That's Q4.

And then could you maybe -- I may have missed this, but could you address some of the other -- bill of material costs and how those changed, and what the favorable impact was to the margins there?

I think we continued to see some cost declines, component cost declines across the board.

I think one of the other factors that is probably hidden from the investor is that we get design efficiencies as we bring out new products, like I mentioned, the new Nuvi 12, 13, and 14.

So part of it is just an absolute cost decline and part of it is the designing, a lower cost component into our new products, which help our margins.

And so things like memory and those sorts of things do you expect to sort of stabilize rate there -- you buy most of that stuff spot, don't you?

We generally do.

I think flash continues to be a little bit of a challenge.

We have seen price stabilization if not increases over the last couple of months.

Other than that, we still see cost declines throughout most of the rest of our bill of materials.

Okay.

Thank you, Kevin.

Thank you.

I think that is the last of our questions at this point.

There are no further questions.

Operator, would you like to close the call?

Ladies and gentlemen, this does conclude today's presentation.

We do apologize for the audio technicalities that were experienced during today's event.

We are investigating the issue.

You may now disconnect from the call.