台灣國際航電 (GRMN) 2009 Q4 法說會逐字稿

Good morning, everyone.

Welcome to the Garmin Limited fourth quarter 2009 earnings results conference call.

This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Garmin's Director of Investor Relations, Ms.

Kerri Thruston.

Ms.

Thurston, please go ahead.

Thank you.

Good morning and welcome again to Garmin Ltd.'s fourth 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 broad live on the Internet.

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

An archive of the webcast will be available until March 24.

A transcript of the call will be available on the website within 48 hours.

This earnings call will include projections and other forward-looking statements regarding Garmin Limited and its businesses.

Any statements regarding our future financial position, revenues, earnings, market share, product production, future demand for our products and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin.

Information concerning those risk factors is contained in our Form 10-K for the fiscal year ending December 26, 2009, filed today with the Securities and Exchange Commission.

Attending today's call on bahalf 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'd like to turn the call over to Cliff.

Thank you, Kerri, and good morning, everyone.

As you've read from our press release this morning, Garmin announced fourth quarter results that included year over year revenue growth and record EPS driven by strong margins and unit shipments.

We experienced our fourth quarter revenue growth since third quarter of 2008, and we are pleased with the ongoing improvements experienced throughout the back half of the year.

Revenue growth coupled with extremely strong margins allowed us to post pro forma EPS of $1.43 which represents record quarter for us.

Growth and operating margins expanded by almost 500 basis points over the prior year based on the benefit of cost declines and operating efficiencies offset by lower ASPs that are typical in the fourth quarter.

We also saw unit shipments grow 4% driven by increases in the PD&D category.

We are very pleased with our performance during the fourth quarter as well as for the full year, particularly in light of the economic challenges we faced during the past year.

I would lake to thank all Garmin associates as each one played a part in delivering solid performance through diligence, hard work, and by focusing on our business plan.

For the full year, we experienced top and bottom line improvements in every quarter since the low point of Q1.

The stabilization of the economy combined with growing market share, improved margins and lower effective tax rate allowed us to deliver 3% growth of our pro forma EPS, a significant achievement in light of the challenges we faced at the beginning of the year.

In addition, we generated over $1 billion of free cash flow, allowing us to continue to invest and innovate for the future.

Next, I would like to walk through each business segment, highlighting 2009 performance as well as providing an outlook for 2010 and beyond.

In the Marine segment, we experienced year-over-year revenue growth of 2% in the quarter.

Gross and operating margins improved sequentially and year-over-year to 65% and 36% respectively.

Highlights from the Marine segment in 2009 include broken market share allowing us to outperform our ompetitors, introduction of important new products such as our auto pilot, VHF and AIF solutions, our new GPS Map 6,000 and 7,000 series of chart blotters and GPS map 700 stand alone chart plotters.

These new products join an already strong portfolio and help us extend our reach into additional segments of the boating market.

Finally, I'd lake to highlight progress in the Marine OEM market during 2009, we announced relationships with several new OEMs including Regal, [BareLine] and Gulf Past.

Notably, these OEMs selected our equipment for their larger boats which is a strong indicator of our growing credibility in the Marine OEM market.

As we've look at the Marine segment in 2010, we anticipate that the industry will further stabilize and show growth as customers return to boating.

Given these expectations and our goal of continued market share gains, we believe our revenues will grow in the range of 5% to 10% during 2010.

In the coming years, our strategic focus will include expanding our OEM presence by leveraging our complete line of Marine products, offering a one-stop shop for OEM customers around the world.

Offering superior technology with particular emphasis on the larger boat market, and finally, we will continue to expand the coverage and quality of our BlueChart cartography and will focus on adding new content that will be relevant and exciting to voters.

Turning next to aviation.

In the fourth quarter, the steep drop in revenues experienced in the previous quarters moderated with revenues down only 4%.

Trends are improving as retrofit activity is picking up and new aircraft sales have stabilized.

Despite the soft market, our gross margins have remained strong at about 67%.

During 2009, we maintained our commitment to innovation by introducing new products that expand our addressable market.

These new products include the G3X and G500 glass cockpit systems designed for experimental and small aircraft.

The new air portable navigators with dual mode operation designed for use in both the aircraft and the car.

The GPS traffic products appealing to both retrofit and OEM customers and want to enable GPS navigation for the helicopter market.

The 2010 outlook for aviation is similar to Marine.

We expect the industry to further stabilize and will return to growth as the economy continues to recover.

With good addressable markets and expanded product offerings, we expect our revenue to grow approximately 5 to 10%.

Looking at longer term initiatives in the aviation segment, the G3000 our next generation integrated cockpit system will create opportunities in the mid range business tech market.

The G500, G600 and G3X electronic cockpit systems will expand opportunity for revenue growth at the lower end of the market for both retrofit and OEM applications.

Finally, we will expand our presence in the helicopter market and leverage the growing demand for new traffic products.

Turning next to the outdoor fitness segment, fourth quarter results were seasonally strong with 24% year-over-year revenue growth.

The margin performance was outstanding as well with 69% growth and 54% operating margins.

The segment contributed $80 million of operating income, which represents 27% of our total operating income for the quarter.

Outdoor fitness was the only segment to show full-year revenue growth coming in at 10% over the previous year.

Margins were strong throughout 2009 and 65% growth in 45% operating margin.

During 2009, some of our significant accomplishments include the Dakota series of hand helds offering touch screen functionality at a value price.

The Forerunner 310XT which is designed for the serious athlete with features particularly appealing to tri-athlete market.

The Edge 500 which delivers GPS based cycling functionality at a value price and Approach Golf products which integrate GPS location capability with preloaded high resolution vector maps and courses.

Looking forward, we expect the outdoor fitness segment to continue to generate growth in the range of 5% to 10% during 2010.

We expect the outdoor market to provide stable revenues and profitability while the fitness market will generate additional growth.

We continue to see long term opportunities in this segment and we will leverage this potential through initiatives such as expanded distribution points for our fitness products and enhanced positioning with existing retailers.

We'll develop new products targeting the fitness and wellness consumer, expanding our opportunities beyond the serious athletes.

And finally, we plan to expand distribution of our innovative golf products by offering coverage for new markets and expanding the coverage in existing markets.

Finally, in the automotive segment, revenue showed signs of stabilization declining only 2% versus Q4, 2008.

Unit deliveries grew 3% but were offset by ASP declines of 6%.

Despite heavy promotion, growth in operating margins were strong at 39% and 23% respectively.

An improvement of 3% over the prior year in both cases.

While worldwide market share information is still being compiled, NTD information has shown that our North American market share remains steady during the fourth quarter despite heavy promotions by our competitors.

We believe this is clear affirmation of our overall strategy in the fourth quarter.

Full-year highlights include strong margin performance with growth in operating margins up 350 and 180 basis points respectively.

Key new product introductions such as the nuvi 1200, 1300 and 1400 series which are 25% thinner and offer pedestrian navigation and eco friendly readig capabilities.

The nuvi 1690 with new link connected services offering consumers an extended period of built in dynamic content services in both Europe and the United States.

The 465T which provides valuable utility for the trucking market.

The final highlight was at the global launch of the first generation of Garmin nuvi film handsets.

While we were disappointed with the sell through of our G60 and M20 devides, we were able to learn from this experience which will result in much stronger product offerings in the future.

As we began 2010, we expect P&D revenues to be flat to slightly declining with upside opportunity in the segment driven by mobile offerings and through OEM penetration.

Looking specifically at the P&D market, research estimates that the total market will grow slightly in 2010 from 39 million units in 2009 to 39.5 million units in 2010.

This estimate assumes ongoing growth in the North America and emerging markets, offset by declines in the European market.

We are forecasting 10% ASP declines as pricing pressure continues to subside as it did during the latter half of 2009.

These assumptions form the basis of our projections for the P&D market Overall, we expect revenues in this segment to be down 5% to up 5% with margins declining 200 to 300 basis points as ASP declines could slightly outpace cost reductions in our materials.

We continue to invest in this segment with the focus on the following strategic initiatives.

Meet form factors and advance features driving market share growth in Europe and emerging markets, connected services to enhance the user experience and differentiate our product offerings, carrier launches of the next generation of Garmin nuvifones which were well received at Mobile World Congress last week and expanding our revenues in the auto OEM segments.

Looking at the big picture for 2010, we anticipate consolidated revenue growth in the range of 0 to 5% for total revenue of $2.9 bilion to $3.1 billion.

This is comprised of revenue growth in the range of 5 to 10% for aviation, Marine, and outdoor fitness with the possible range of down 5 to up 5% in auto mobile.

Combining this with our margin expectations which Kevin will cover in more detail later, we expect the 2010 pro forma EPS to be in the range of $2.75 to $3.15.

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

Thanks, Cliff.

Good morning, everyone.

i'd like to begin with the fourth quarter income statement results.

Walking through the posting of Garmin's revenue of $1.1 billion this morning net income of $278 million.

Our pro forma EPS of $1.43 per share, which excluded foreign currency.

Our revenues grew 1% year-over-year and 36% sequentially during the quarter.

Gross margin of 46.0% was a 490 basis point improvement over prior year as margins improved in all segments.

Operating income grew 23% to $292 million compared to $237 million in fourth quarter of 2008.

27.6% operating margin was up from 22.6% last year.

We achieved those results through a growth margin of 490 basis points favorable.

Favorable advertising expense of 90 basis points although from the expense being down $9 million on a year over year basis, other SG&A was 120 basis points favorable down $12 million on a year over year basis.

In our R&D was 200 basis points unfavorable as we increased R&D spending $22 million on a year-over-year basis.

The $1.43 EPS pro forma was 54% increase yor over year on the strength of margins.

Also our effective tax rate during the quarter was 4.7%.

Our unit shifts were up 4% year-over-year at 6.6 million units were deliver erd during the quarter.

The increase was driven by our auto, mobile, and outdoor fitness segments.

The total Company average selling price was $159 per unit down 4% from 2008.

The auto/mobile ASP declined 6% compared to prior year to $139 from $148 the year before.

Looking next at the full-year income statement.

Our final revenue for the year was $2.9 billion, net income of $704 million and a pro forma EPS of $3.53 per share excluding foreign currency.

Revenues fell 16% year-over-year, but improved every quarter during the year.

While we did experience a 16% top line decline, pro forma EPS increased 3% when excluding foreign currency due to strong margin and a lower effective tax rate for the year of 12.9%.

Gross margin of 49.0 was a 450 basis point improvement over prior year.

margin improved in all segments.

Operating incomes fell 9% to $786 million compared to $862 million in 2008.

26.7% operating margin was up from 24.7% last year as revenues fell.

But as I said, our gross margins were favorable by 450 basis points.

Our advertising was favorable by 70 bits down $53 million on a year over year basis.

Our SG$A was 100 basis points unfavorable, down $13 million year-over-year and we increase our R&D $32 million which made the operating margin impact 220 bips unfavorable.

Pro forma of $3.53, a 3% increase year-over-year on the strength of margins.

The total units shipped in our business were down slightly year-over-year and 16.7 million units were delivered during 2009.

The decrease occurred across our segments in the the first half of the year.

Total Company ASP was $177 per unit down 14%.

The auto/mobile ASP for the year declined 18% compared to prior year $148 from $180.

Looking next at our pro forma net income, the nonGAAP measure that we reported this morning represent net income per share, excluding the effects of foreign currency and the 2008 gain on sale of Tele Atlas Equities.

This impact was $0.05 per share favorable during the quarter, $0.15 per share favorable for the fourth quarter of 2008.

The full-year impact was $0.03 favorable for 2009 and $0.06 unfavorable for 2008.

Next, moving to a little more detail on our revenue performance, during the fourth quarter, we experienced a 2% revenue decline within the automobile segment while the unit volume in that segment increased 4%.

Our outdoor fitness segment revenues grew 24% compared to the fourth quarter of '08 due to a strong holiday season.

Our aviation segment revenue declined 5% during the quarter, a significant improvement over the 28% decline during the fist three quarters of 2009.

Marine segment revenues increased 2% compared to fourth quarter of 2008 as we continue to take market share in this category.

In total, revenues grew 1% during the fourth quarter as we posted our first quarter of revenue growth since the third quarter 2008.

Full-year revenues declined 16% but we saw significant improvement in the back half of the year.

Moving next to the revenue by geography, during the fourth quarter, North American revenue increased 1% while our European business decreased 2%.

Our APAC region sales grew 25% during the period.

We experienced a 6% unit increase from our P&D products with North America and Asia growing offset by single digit describes in Europe.

Full-year revenues declined in both North America and Europe but geography should recover again in the back half of the year.

The auto mobile segment represented 77% of our total business turning to seasonally strong Q4, 2009.

Down from 79% in Q4 of 2008.

Outdoor fitness grew to 14% of our revenues in the quarter, a 3% increase from 2008.

On a Full year basis auto mobile now represents 70% of revenues, a 3% decline from 2008 however outdoor fitness grew to 4% year-over-year to 16% of our total revenues.

Focusing next on the operating income by each of our business segments, the auto mobile segment represented 77% of our total revenue during the seasonally strong Q4 2009 however, it represented 65% of our operating income in the quarter.

Similarly for the full year, the operating income contribution of the auto mobile segment were 59% versus revenue contribution of 70%.

The operating income contribution of the outdoor fitness segment grew to 27% in 2009, an 8% increase from the prior year.

Revenues in Europe were 26% in the fourth quarter, a 2% increase over 2008 levels.

Our fiscal year revenue percent was unchanged in North America at 67%.

Looking next at the margins by segment.

The fourth quarter auto mobile gross margin and operating margin were 39% and 23% respectively.

This represents year-over-year improvement as flowing ASP declines and a reserve associated with handset inventory were more than offsot by material cost reductions and operating efficiencies.

Our fourth quarter outdoor fitness gross margin was 69%, up from 56% last year as prices have remained stable while material cost have fallen.

Operating margin was 54%, an increase of 17 percentage points from the year ago quarter due primarily to the strong gross margins and operating leverage associated with our revenue growth in this segment.

Q4 aviation gross margin was 67%, stable to both the fourth quarter of '08 and third quarter of '09.

Operating margin was 18% for the quarter which is a significant decline from the prior year due to revenue declines and increased SG&A and R&D costs in the segment.

Q4 Marine growth margin was 65% compared to 52% in the year ago quarter as the product mix improved toward our high end networked solutions.

Operating margin was 36%, up from 26 last quarter and 23% a year ago.

The improvement was driven by gross margin strength in the segment.

Finally, on the expense side, operating expenses during the year were down $34 million from $692 million in '08 to $658 million in 2009, and decreased just slightly as a percentage of sales.

Operating expenses were flat year-over-year in the fourth quarter.

R&D increased $22 million year-over-year in Q4 and was up 200 basis points to 6.8% of sales.

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

Add spending decrease $9 million over the year ago quarter and decreased 90 basis points as a percentage of sales from 5.8% in Q4 to 4.9% in Q4 of '09.

We will continue to manage advertising expense based on the current macro economic conditions.

Other SG&A decreased $12 million compared to the year ago quarter and improved 120 basis points to 6%, 6.7% of sales from 7.9% a year ago as bad debt expenses declined.

Looking next at the balance sheet, we ended the quarter with cash and marketable securities of $1.86 billion.

Our accounts receivable increased to $874 million as we saw sales spike in the seasonally strong fourth quarter.

AR accounted for approximately 108 days of sale up from 77 days of sale in the fourth quarter of '08 when December was extremely weak.

Our cash collections have been strong so far in Q1, 2010.

Inventory balances decreased $63 million to $310 million as we reduced instrentry levels during the seasonally strong fourth quarter.

Our days of inventory metric decreased from 79 days at the end of the fourth quarter of '08 to 64 days at the end of Q4 '09, driven primarily by raw material reductions.

A breakdown of the amounts and days of inventory are as follows.

We held $81 million in raw materials or 15 days of inventory.

At the end of 2009, we had $32 million in assemblies or seven days and we also had $235 million in finished goods inventory, which represented 43 days.

We exited the year with $39 million in inventory eserves.

Garmin will continue to manage the supply chain appropriately given the seasonal and cyclical conditions sphassing our various segment.

It remains our goal to have adequate inventory to support customer needs but we do intend to carry the right level and mix of inventory to minimize risk of obsolescense.

As Cliff mentioned up front, cash flow during the period was very strong.

Cash throw from operations came from at $246 million during the fourth quarter.

We spent $14 million on CapEx during Q4 and free cash flow during the quarter was $232 million.

Cash flow from investing provided $11 million of cash during the quarter which is made up of $14 million of CapEx and $25 million of net redemption of marketable securities.

Our financing activities used $165 million of cash during the quarter just primarily $150 million of our dividend payment in December and $18 million of stock repurchases.

We earned an average of 1.5% of all cash and marketable security balances during the fourth quarter.

Looking next at our use of cash and taxes, in Q4, we paid 2009 annual dividend of $0.75 per share, which was $150 million use of cash during the period.

We also reresearched 590,000 shares of common stock for approximately $16.5 million use of cash.

The Board has now authorized a new repurchase plan for $300 million expiring on December 31, 2011.

We continue also to evaluate a number of acquisition opportunities.

And finally, our tax rate for the quarter was 4.7% and 12.9% for the year.

This was lower than anticipated due to a favorable mix of operating income among the tax jurisdictions and release of income tax reserves for which the statute of limitations has now expired.

However, we do expect the 2010 rate to be between 15% and 18% for the year.

I'd like to conclude with just a little bit more detail on the 2010 gaddance.

Again, we are moving back to providing annual gaddance for the full year.

Revenue growth we expect to come in at 0 to 5% growth driven by growth in all nonP&D segments and the possibility of growth in the auto/mobile segment driven largely by the nuvifone and auto OEM opportunities.

We expect our gross margin compression of about 100 to 300 basis points due to ongoing price declines, this will outpace product cost declines and the impact of nuvifone sales.

Operating income will come in between $675 million and $725 million with lower operating margins given our ongoing R&D investment during the year.

And finally, the net result we expect earnings per share of $2.75 to $3.15 driven by some margin compression and a higher effective tax rate in 2010.

That concludes our formal remarks.

As is customary, we'd like top up the phone lines for any questions you may have.

Thank you, Mr.

Rauckman.

(Operator Instructions.

We will take our first question from Amir Rozwadowski with Barclays Capital.

Kevin and Cliff, I was wondering, in talking about the developments in the P&D market over the course of 2010 you had cited some third party research then suggested some flattish units but it seems as though taking into account your ASP assumptions that you do think there are -- is an opportunity for growth in terms of your business.

I was wondering if you could talk us through some of the factors there and the puts and takes that would enable you guys to get unit growth in 2010?

I think definitely growing as a market in those areas that are still growing is maintaining our market share and growing market share in emerging markets.

Also growing our share in Europe where as you know we've been underrepresented in terms of total market share in terms of North America.

Are you assuming some level of impact from devices that are offering navigation such as smart phones as well or how should we think about the puts and takes there, Cliff?

Well, I think there's so many moving pieces to that question and what we're doing is relying on the research that's out there so that everybody can study for themselves.

But in general, the P&D market continues to be healthy and so far, you know, with all of the different moving pieces, the economy, the smart phone, we really haven't seen that kind of impact yet.

Great.

Thanks.

If I may, in terms of the commitment to R&D, we've certainly seen a significant ramp in your R&D as attributed to your nuvifone initiative.

Can you give us a sense as to how much of that ramp in R&D next year will be geared towards the nuvifone or how we should think about the different puts and takes there?

As we said, R&D for the year was about 8.1%.

There was a fair amount of investment in the nuvifone category this year, and we will continue to grow that in 2010.

I would expect that R&D overall will continue to grow and it will be somewhere between 8 and 9% of sales.

Large part of that will be nuvifone.

It will also be our other businesses that we need to continue to take advantage of the competitive strength that we have there.

Thanks very much for the incremental color.

Thank you.

We'll take our next question from Tom Kucera with Avondale Partners.

Thank you.

This is Tom Kucera for John Bright.

First, I wanted to touch on if we can talk about the nonP&D segments and R&D investments there.

To what extent do you guys think you can expand your addressable market there organically by which I mean for example, getting into OEM Marine products or there's some other categories within Marine aviation outdoor fitness, you could expand that further and maybe could you quantify that some?

I think over the years we've been underrepresented in the marine OEM market and so over the past couple of years with our strong product line as well as internal focus, we've been working on expanding our presence in those Marine OEM opportunities.

So we would expect to see that continue in the coming year and the coming years.

I think we're doing it very well organically as evidenced by some of the wins that I mentioned in my remarks.

I think other areas, navigation, OEM we do have a strong presence there.

There's more opportunities in some of the other aircraft platforms that currently we're not represented in.

Outdoor fitness is predominantly a consumer market.

So we continue to rely on product innovation and new product categories to drive growth there.

Maybe could you contrast what you can attain organically in those areas versus what you might be looking for in M&A?

Well, again, I think our focus is growing organically in some of those areas.

We certainly could take a big jump in some kind of acquisition opportunity.

I think the chances of that and the risk of that from a competitive antitrust standpoint probably offset our ability to focus on organic growth right now.

Maybe one clarification, Tom, the 5 to 10% growth numbers that we represented in each of those segments really assumes organic growth during the year so although we do look at acquisition opportunities, we're assuming we can grow the markets in each of those categories.

Lastly, I want to touch on the nuvifone.

In terms of inventory, it looks like there was inventory reserves there.

I don't know if you can break out how much of those reserves were related to the nuvifone and also maybe comment on your inventory management strategy with the nuvifone and maybe contrast that to inventory management in other categories?

I think the largest part of that inventory reserve was due to the smart phone or the handset inventory reserves.

We took about $30 million of that actually hit our P&L during the year.

And represented the larger inventory reserve increase.

As far as channels, I think we're committed.

Maybe you want to talk about the sales channel there, Cliff.

I think serving that kind of sales channel with the carrier, you typically have to be ready to deliver.

And, I think, of course, we learned a lot from the experience from the G60 that we can apply going forward.

We did have to absorb some of that inventory that we prepared for the channel.

All right.

Thank you.

(Operator Instructions) We'll take our next question from James Faucette from Pacific Crest.

Thank you very much.

I wanted to touch on nuvifone.

Obviously, your initial launch as you've talked about having been disappointing, but feeling like you made big improvements in the products to come to market this year.

What are the critical things that you see take place for those new products to be successful?

And what kind of metrics or hurdles should we be looking at as we evaluate the performance of those products on the market?

Thank you.

I think our previous product the G60 was based on a custom version of Linix which we developed on our own.

It was a great learning exercise, but obviously in the period it took to us develop that product, the smart phone market made a lot of advances in terms of features and open operating systems, marketplaces, those kinds of things.

Going forward, our emphasis is on working with the Android platform as well as Windows Mobile.

And we believe by doing so, we're able to leverage all of the strength of those platforms and offer the kind of features that people are expecting in the devices.

But if I look at the product in terms of making that a success, I mean, what do you have to do to secure carrier distribution and advertising support, et cetera, and how critical are things like that going to be to the success of your nuvifone effort?

Distribution through carriers is the critical link.

We believe that we received a good response to our new product at Mobile World Congress.

The key is offering a differentiated product, which we believe we do.

We have a unique user experience.

We have unique features that bring location to the device in a way that other devices aren't doing.

It's more about navigation it's really about being able to utilize location in a useful way in a mobile device.

We feel like differentiation is the key.

Thank you.

(Operator Instructions) And we'll move to Mark Sue with RBC Capital Markets.

Thank you.

If the P&D market is healthy and resilient, why wouldn't you throttle back your efforts on the nuvifone?

It's a crowded market ad competition is cutthroat or is there a bit of stubbornness on your part and you feel that you are at a point of no return with the nuvifone?

We see opportunity in both, Mark, so we're investing in both.

Is there a point where you say we've tried our best and if our efforts are best -- R&D spend is best served in other areas such as outdoor fitness which seems to be growing at a faster rate?

As I said, we're still seeing opportunity in the smartphone area.

As I mentioned, at Mobile World and Congress we had good interest from carriers and other retailers of mobile phone products.

So we'll continue to look at things pragmatically, but at the moment, we feel like we're still offering a unique proposition that operators are interested in.

Got it.

Okay.

Good luck, gentlemen.

Thank you.

We'll take our next question from Jeff Rath with Canaccord Adams.

Thanks.

Kevin, just some margin questions on the P&D segment, sorry, the Auto/Mobile segment, if I just look at the trends, the last three quarters of 2009, I mean, it looks like obviously ASPs have moderated down only 6% in the fourth quarter and it looks like gross margin performance has actually been quite strong.

So how do you -- when I listen to your guidance for that segment in 2010, you've kind of given us a bit of a range.

You're talking about some gross margin compression and ASPs down 10%.

Is there a change that you're anticipating vis-a-vis it almost sounds like you're -- in that guidance you're forecasting a reacceleration, if you will, or change of the current ASP trends.

It almost looks like ASPs are trending towards almost flat.

Is there a change in your pricing strategy?

Will you be introducing more low end products or trying to maintain your unit volumes in 2010 or is that just -- how are you thinking about that dynamic or is it driven by a mix regarding nuvifone?

Any additional color would be helpful.

Yes, Jeff.

There really is no major change in our strategy there.

If you look at the overall P&D market or auto/mobile segment market for the year, I think our gross margin's around 42%.

If you look at 2010, assuming some sort of decline of about 10% ASP, we still think we can hit a route of 40% gross margins, so there's not a major change or shift there.

However, we are factoring in a nuvifone.

We want to be successful as Cliff said, in both categories both the P&D and the smartphone.

Clearly, the nuvifone att his point doesn't have the same margin characteristics that the P&D does.

It's a little bit lower.

We're factoring both of those markets into our guidance this morning.

One follow-up.

In the fourth quarter, can you just again clarify was there any nuvifone revenue and backing out the nuvifone inventory writedown what would have been the auto/mobile gross margins?

Thanks.

So we had some of revenue on nuviphone but the impact on with the writedown of inventory was 280 basis points due to that category.

So that would have improved our margins by that amount without that writeoff.

So just if I'm clear, your gross margins ex-nuvifone writedowns for P&D's would probably have been close to 45, 46%.

That's correct.

Okay.

Thank you.

Thank you.

We will take our next question from Vivek Arya with Banc of America-Merrill Lynch.

Two questions.

First, Cliff, you announced a new share buyback.

I'm wondering why are you not more aggressive with your buybacks?

Because even in the recovery year of 2010, you're only guiding to flatter sales growth and earnings declines of 15%.

I'm just trying to see what kind of shareholders are you appealing to that kind of sales and earnings of performance.

It's not the growth, the general growth type of investors, and if it's a value type of investor, why not put a lot more money in buybacks and dividends?

I'm just trying to get an understanding of how you conceptually think about this issue.

I think I'll address that, Vivek.

Quite honestly, the fact of this buyback last year, is we were -- all year we were watching the economy and we were playing conservative, I think, on the use of cash.

Even though we had the opportunity to buy, we were more in tune to the market at attractive prices so we were buying at about a $30 price last year.

I think given the fact that we have very strong cash flow in the fourth quarter and we expect to generate strong cash flow with 2010, the Board's proving another buyback plan, I believe we will be more aggressive than that.

I can't give you any kind of indication on how much but I think that's what our plan would be.

Okay.

And secondly, again, on this smartphone topic, it gets a lot of attention, even though it's a very small part of what you do currently.

But you expect that to be a positive or a negative operating income contribution in 2010, and if it's negative, then at what point do you think it starts contributing positive operating income dollars to the business?

Thank you.

Well, given our current expectations of the market, we do not expect the operating margins of the nuvifone in 2010 will be positive.

They'll be slightly negative.

However, I think if we're successful in what we're attempting, and with carrier involvement, I think we can get close to break even point toward the end of the year.

We still need to have more value to be successful and that's really what goal is the next couple of years.

One last question, aside from the nuvifone, Cliff, do you see other areas you can invest in?

I think you mentioned OEM opportunities, are there other in-dash opportunities?

What are the areas where Garmin can invest and grow in, which are not crowded areas and where you already have a good, competitive advantage?

Thank you.

I think I mentioned all of those, Vivek.

But auto OEM is one area.

Continued innovation in the P&D area.

We still see opportunities for features and unique applications for P&Ds that will help sustain and grow the market.

All of our other core markets, outdoor, Marine, aviation, we're investing in expanded product lines, improved products, and new features that will help drive growth for us.

We're investing in all those areas.

Thanks.

Good luck.

Thank you.

(Operator Instructions) We'll move to Jeff Evanson Dougherty & Company.

Kevin, I'd like to get your thoughts around the 2010 guidance and where you feel the most variability is in that guidance?

I think always on our business model it's sales and margins.

So it's -- what is the market opportunity, the opportunity for additional growth about what we've guided to.

We tried to give a number this morning that we think is reasonable and something we can achieve.

I think the variability always is can we exceed that?

And does price, for example, on the P&D continue to come down 10% like I think it will and is it less or more than that?

Those are some of the critical factors.

I will say probably -- I have a good handle on the operating expenses within our business, but the tax rate's the other variability during the year and we've guided to between 15% and 18% right there for 2010.

All right.

So in the past, you've mentioned P&D ASPs as one of the metrics that's challenging to project that's still the case here.

And then what beyond P&D, ASP and tax rate?

I would think frankly a recovery in aviation and the success of the nuvifone would be two of the biggies?

Those are two that drive the top level sales, so yes, those are are definitely factors in the 2010 guidance and the success of our business segments, yes.

Okay.

I guess I only get one question so I'll hop back in the queue.

All right.

Thanks.

We'll take our next question from Yair Reiner with Oppenheimer & Co.

My first question is about channel inventories.

Can you give us a sense of where they are, and consumer products, P&D, outdoor fitness and Marine?

Channel inventory in each of the segments.

I think channel inventory in some outlets is a little bit higher coming out of the fourth quarter.

In general, we feel like the sell through is good, and actually has improved over last year's levels.

So we don't see a particular problem with that, but there are some outlets that do have more inventory coming out of the fourth quarter.

The other segments I wouldn't say -- it's generally not much of an issue.

It's really the map market that we watch very carefully which is the P&D category.

In terms of gross margins, I guess you're indicating there's room for them to compress in the P&D segment.

In the other segments, you also saw a pretty nice expansion this year.

Do you think that that is sustainable as you look out over 2010?

And to what extent could potential strengthening of the dollar against the euro play into how gross margins play out over 2010?

Yes, I think the nonP&D segments that I have, pretty good sustainability on the margin structure of our business.

We're not expecting those to decline, in general operating margins in the, let's say the Marine and outdoor fitness should be around 35%.

Aviation business we think we could approach 30% this coming year operating margin in that segment.

The FX, the currency rate is something that we watch carefully, it moves quite volatile in the last couple of years.

We did have some benefit in both the Q4 -- primarily in Q4 area but we're looking at the US versus euro exchange rates being one of the factors in the impact on margins.

Clearly with the way the year started that has a little bit a head wind on our margin.

But we'll just have to see how the year goes.

Great.

Thank you.

Thank you.

Our next question comes from Tavis McCourt with Morgan Keegan.

Thanks, guys.

Justin Patterson for Tavis.

Looking at advertising expense for 2009 it looks like you reduced it by about 25% year-over-year.

Can you give us a sense of however you expect that to track in 2010?

I think it'll stay roughly the same on a percentage of sales basis.

I think we'll see a slight increase given the fact we're looking at 0 to 5% sales growth for the year.

I think part of the reason that we did what we did is we took our TV ad campaigns down early in the year last year when the economy was extremely weak.

We're not planning on a TV ad campaign during Q1 this year so we're going to evaluate as we go through the year.

I would expect on an absolute dollar basis that our ad spending will go up.

Combination of increased media on our core markets and then also some nuvifone investment.

Then with respect to nuvifone, I know in the past, you've talked about $100 million to $200 million being your initial expectations for that.

As we head into 2010, is that kind of the baseline range I should use and thinking about revenues for that business?

Yes, $100 million to $200 million, that's -- Justin, that's roughly our target.

We're still kind of in a ramping up mode behind what we had anticipated doing in 2009 but expect 2010 to be better.

Okay.

Thank you.

Thank you.

Our next question comes from Jonathan Goldberg with Deutsche Bank.

Hi.

Just real quick.

What is your -- at least qualitatively what's your utilization of your plants in Taiwan right now?

How are you thinking about that in regards to a declining P&D market?

Would you consider shutting down some of that capacity as needed?

The key question is decline in P&D market.

We're saying that we're not looking at units, we're actually looking at flat to slight increases in unit volume.

We don't plan to do anything major there.

We have the capacity what we need.

Typically what we do is we scale up or scale down with our labor force and our production line based on volume.

So, I think we're in good shape now going in 2010 for what we need to support the business.

I was asking in regard to some of your commentary in the press release about this being a maturing category with time over next few years, how do you think about the capacity?

I think we would react to the market conditions.

We take some action about 15 to 18 months ago.

It would appear that as demand was coming down, we took that action quickly from the amount of labor and workers that we had and now we're going to go back up and support that business.

I think we've proven over a 20 year history that we scale up and stale down, to support whatever business we're in, whatever market we're in.

Thank you.

Yes.

Our next question comes from Scott Sutherland with Wedbush Securities.

Thank you.

Good morning.

Scott.

Question on your first question on your auto/mobile business, looking at slight unit growth, about 10% ASP decline, to get to some slight growth to the higher end of your guidance there it looks like the other stuff like nuvifone and device OEM market needs to grow a bit.

Can you talk about maybe as you exit this year and look at the following year what percentage of your auto/mobile is the device OEM -- I'm sorry, the auto OEM and the nuvifone market?

I still think the majority of our expectation in 2010 and we have to talk about 2011 else.

It's still in the P&D category and we do have as Cliff mentioned several hundred million that could be factoring into 2010 on revenue on the nuvifone.

OEM at this point is a relatively small part of our business so we did have it growing.

We don't break out segment down any further than what we've already given today.

I think we would see growth on auto OEM growth in nuvifone and as we said, roughly flat market on the P&D.

Same questions on the competitive front.

You mentioned competitive gains and aviation and Marine.

Obviously we've seen demise of some competitors there.

How much more do you think can you gain from that issue and maybe in outdoor fitness are you seeing any increased competition there from other device and consumer electronic companies?

As I mentioned before, we see opportunities in both aviation and Marine, aviation and platform that we're currently not represented on as well as in Marine, our share and solid opportunities and these areas.

In outdoor, it's driven basically on new applications particularly in the fitness area as well as some new applications in the outdoor area.

In general -- again, what we said before, is we feel these markets are very good markets for us.

Thank you.

The next question from J.B.

Groh with D.A.

Davidson & Co.

Kevin, I had a question on -- maybe if you explained this before, I apologize, but the strength in the outdoor fitness margins in Q4.

You talked about it being on an annual basis being -- still being pretty strong.

What was there in Q4 in particular other than holiday maybe some new products what explains that very strong gross marine and outdoor fitness in Q4?

First of all, outdoor fitness it's not price sensitive.

The prices did not come down like we see in a typical P&D market.

So our margins expanded that way.

Primarily on the operating level it's just the fact that volumes are so much higher.

We get that volume leverage on the operating margin line and we head off and see to some of our other segments.

So that's the key driver but it also points to just the success of just the innovative products we brought to the market with the new running and cycling products that have been very popular and they make great holiday season buys..

Just a housekeeping item.

Do you have the D&A number for 2010 that's embedded in your guidance?

We don't expect the D&A number to really move a whole lot during 2010.

I think we had about $90 million in 2009.

I put it somewhere between $90 million and $100 million for 2009.

Thank you.

Thank you.

We'll take our next question from Thomas Lee with Goldman Sachs.

Thanks for taking my calls.

I just had a question.

First question was just on your P&D unit forecast for this year.

I think you said flat to slightly up.

It seems like you maybe slightly temper that.

That in the past you thought the market could grow 10%, so I just wanted to confirm that.

Secondly if you could get some color in terms of where you think relative to your prior expectations where you're seeing potential softness heading into this year?

I think this is a dynamic market.

So we still feel that there's opportunity for growth as I mentioned in the North American markets as well as the emerging markets.

Europe is a year and a half to two years in terms of its cycle.

We do expect to see some declines there, so overall, the picture is flat to slightly up.

And then you expect the US to grow, is that fair?

That's correct.

Got it.

Then just on the gross or operating margins for your auto/mobile business, as you think maybe three to five years down the road obviously the markets are already kind of maturing.

What do you see as the steady state margins for that business?

Do you have any sense in terms of where you think the floor could be?

Well, we were above 42% for last year, and we're still looking at roughly 40 and 20 as the pricing declines moderate.

If anybody can say what that number's going be three years our from now.

I think they're kidding themselves.

We don't see the decline or the margin compression continuing at the same rate as it has the past two to three years.

I think 40 and 20 is still pretty reasonable to us.

Even as as the market starts to mature and you start to see unit declines at some point, you think you can maintain the 40 and 20 range?

We believe so.

Got it.

Just the last question on your outdoor fitness.

You had a very strong quarter.

It seemed like you exceeded your guidance by a wide margin.

I think your guidance previously was flat year on year and I just want to -- if you can give a little bit of color in terms of what drove this?

And then as a follow on I think you are only guiding 5 to 10% growth in this business this year.

Why, -- why couldn't it grow faster than that given the strength that we saw in Q4?

I think we do have high hopes for that segment.

There is a conservatism in our number and financially we're -- (inaudible) is the one category that grew extremely fast last year.

So we have a higher cost to go up in 2010, which makes it more difficult to show extremely high growth.

But we fell as -- again, more positive and optimistic on this segment.

Got it.

Okay.

Thank you.

We'll take our final question from [Elliot Grodozky] with Morgan Joseph.

Hi, thanks, guys.

I just had a question about what are you guys seeing in terms of the dynamic in the fourth quarter with smartphone and the Google efforts?

How's that, if any, impacting your business?

Again, there's so many moving pieces in the market, it's probably hard to isolate any one and say how much impact it had.

I think in general, we've demonstrated good results in fourth quarter which we're pleased with.

I think that with all of the awareness surrounding navigation, I think truthfully there's some benefit that we received because everybody's thinking about it and looking for solutions that might suit their needs.

Okay.

Thanks.

Thank you.

And we have no further questions.

I would like to turn the call back over to our presenters for any additional or closing remarks.

Thank you all for joining us today.

Kevin and I will be available for follow-up throughout the day today and the rest of the week.

Thank you.

Thank you for your participation in the Garmin Ltd.

fourth quarter 2009 earnings call.

That concludes today's event.