台灣國際航電 (GRMN) 2010 Q2 法說會逐字稿

Good day, and welcome to the Garmin Q2 2010 earnings conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Ms.

Kerri Thurston.

Good morning, and we'd like to welcome you to Garmin Limited's second quarter 2010 earnings call.

Please note that a copy of the press release concerning this earnings call is available at Garmin Investor Relations site on the Internet at www.garmin.com/doc.

Additionally, this call is being broadcast live on the internet.

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

An archive of the webcast will be available until September 15th.

A transcript of the call will be available on our website.

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

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

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

Information concerning these risk factors is contained in our Form 10-Q for the quarter ended June 26, 2010, filed with the Securities and Exchange Commission this morning.

Attending on behalf of Garmin Limited are Dr.

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

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.

Good morning everyone.

As you read from our press release this morning, Garmin announced second quarter results that include revenue, unit, and per forma earnings per share growth.

We experienced revenue and unit delivery growth in all four business segments, highlighted by stronger than expected results in our outdoor fitness and marine businesses.

Margins remained robust for the quarter.

Consolidated gross margin was 54% and consolidated operating margin was 28%.

As a result, our per forma EPS for the quarter was $0.85, per share, which represents a 2% increase over Q2 of 2009.

We also generated $172 million in free cash flow during the quarter.

Our strong cash position enabled us to pay a dividend of $1.50 per share and we used additional cash to purchase 1.6 million shares of stock during the quarter.

Moving now to segment highlights, we are pleased to report that marine revenues grew 23% year-over-year, which was stronger than our previous estimates.

We see two factors behind our strong performance in the marine market.

First, industry trends continue to show signs of recovery as more people return to boating.

In addition, we continue to gain market share on the strength of our product lineup.

Throughout the remainder of the year, we will be focused on expanding our product offerings and gaining additional share in both the retrofit and OEM markets.

In July, we announced an exciting win that further illustrates the progress we are making in the marine OEM market.

Bayliner, a division of Brunswick, will feature Garmin Marine electronics in all of their navigation packages starting with the 2011 model year.

Bayliner manufactures 16 to 33 foot runabouts and cruisers that focus on value and performance, making Garmin a perfect partner.

We are excited about the new partnership and look forward to seeing Garmin products offered by Bayliner in the upcoming model year.

Moving next to aviation, revenue grew 1% year-over-year, driven by improvements in the retrofit and portable markets.

While year to date growth in the aviation segment now stands at 6%, the recovery of the industry continues to lag that of the broader economy, and in particular, the OEM market remains weak.

With that in mind, we remain focused on expanding addressable markets with additional helicopter and business jet certifications that will drive future growth.

We have recently completed two noteworthy aircraft certifications.

The first is the G500H glass cockpit for the Bell 206 series and model 407 helicopters.

In addition to displaying essential flight information such as attitude and air data, the G500H also provides integrated traffic, weather, synthetic vision, terrain warning, and obstacle avoidance functions.

We also announced the certification of the G1000 integrated flight deck as a retrofit solution for the Cessna 525 citation jet.

This is our first retrofit solution for our business jet, which delivers one of the most robust avionic systems in the market today.

CitationJet owners can transform their cockpit with a modern G1000 system that includes advanced features such as our fully integrated all-digital flight control and synthetic vision.

Turning next to the outdoor fitness segment, we achieved year-over-year revenue growth of 32%, which exceeded our expectations.

Once again, the segment posted strong operating margin performance, coming in at 44% for the second quarter.

The growth in this segment, combined with a strong margin profile, allowed it to contribute 31% of consolidated operating income for the quarter.

We continue to focus on expanding the footprint of our distribution and providing a broader set of product offerings to expand our addressable market, enabling further growth in the segment.

A primary factor driving growth in this segment is our broad product portfolio, offering something for every customer at key price points across the segments.

Products like our Edge 500 for cyclists and the Forerunner 110 for runners offer innovation and affordability, targeting value oriented consumers, while products like our Oregon series and Forerunner 310XT offer high end features that consumers in this market demand.

By offering a broad spectrum of products, we are able to attract a growing and wide customer base.

In the auto mobile segment, we experienced a 2% year-over-year revenue increase.

Volumes increased 4%, but were offset by declines in ASP.

While Q2 market research is not yet available, we believe our volume trends point to increased global market share driven by consolidation.

Operating margins were strong at 20%, considering the significant investments in R&D and advertising that were made in the quarter.

Given the evolving market trends, we now expect total industry unit volumes to be down slightly in 2010 due to the higher penetration rates and increasing competition from other platforms, such as the mobile phone and in dash automotive equipment.

We will continue to target market share gains, particularly in Europe and Asia, in order to outperform the industry.

We expect that this segment will continue to be a significant source of free cash flow in the near term.

As the market matures, replacement buyers are an important part of the consumer mix.

As such, we are focused on attracting the repeat buyers with innovative form factors and compelling new features.

In our recent nuvi 3700 series, these innovations included a capacity of multi-touch display with an accelerometer as well as traffic trends and myTrends advanced routing capabilities.

Finally, we continue to pursue in dash automotive opportunities.

While development cycles in the automotive industry are longer, one opportunity that recently came to fruition is the 2011 Jeep Grand Cherokee, which offers Garmin navigation as a premium option.

Next I would like to provide an update on our mobile handset initiatives.

We launched our Android-based A50 with T-Mobile in June and more recently with O2 in Germany and Asus in Australia.

Sales of our device at T-Mobile have been below our plan and we are working aggressively with the carrier on the appropriate positioning and pricing of our device in this hypercompetitive space.

We also launched the nuvifone A10, with KPN in Netherlands, Telenor in Denmark, Tele2 in Sweden, and Optus in Australia.

The A50 and A10 have received favorable reviews not only for their navigation capabilities, which is our forte, but for the ease of use and features we added on top of the Android operating system.

We recognize the hypercompetitive nature of the wireless industry and even some of the larger players experiencing margin and profitability challenges.

With this in mind we are focusing on fewer more targeted projects with a rationalized level of investment, given the current trends that we see in the industry.

We will continue to monitor sales at T-Mobile and other carriers to evaluate our long-term strategy.

Finally I would like to update you on our 2010 guidance.

On the topline, the revenue range has been lowered slightly to $2.8 billion to $3.0 billion, based on several considerations including lower sales of the nuvifone, anticipated softening of PND market, as well as unfavorable foreign exchange movements.

However, EPS and margin estimates remain unchanged from our previous guidance in light of better than expected performance during the first half of 2010.

This concludes my business update.

Next I'll turn the call over to Kevin who will walk us through the financial results in more detail.

Kevin?

Thanks, Cliff.

Good morning, everyone.

I wanted to jump right in and give you a more detailed look at our Q2, first beginning with the income statement.

If you could see that our revenue came in at $729 million, and net income of $135 million, for a pro forma EPS of $0.85 per share excluding our foreign currency loss during the period.

Our revenues increased 9% year-over-year and our gross margin was 53.7%, a 110 basis point improvement over 2009.

This increase was partially driven by a refined warranty estimate that contributed 290 basis points to our gross margin line.

The operating income increased 1% to $202 million compared to $199 million in the second quarter a year ago.

Operating margins of 27.7% were down slightly from 29.8% a year ago.

That operating margin change was made up of the following categories.

Gross margin was 110 basis points favorable.

Our advertising increased $9 million on a year-over-year basis and was 70 basis points unfavorable.

Our other SG&A line was up $12 million year-over-year and 80 basis points unfavorable.

And our R&D increased $16 million year-over-year, for 170 basis points unfavorable.

So the pro forma EPS of $0.85 per share represented a 2% increase year-over-year on revenue growth and strong margins.

The effective tax rate that we booked for the period was 18%.

Units shipped were up 8% year-over-year as 4 million units were delivered during the quarter.

This increase was driven by all of our business segments.

And the total company average selling price was $182 per unit, up 1% from a year ago, but down sequentially as our auto mobile contributed more revenue during Q2.

The auto mobile ASP decreased 1% compared to the prior year, down to $144.

Briefly, on the pro forma net income, the non-GAAP measures we reported represent net income per share excluding the effects of foreign currency translation.

This impact was $0.18 per share favorable during the second quarter and $0.02 per share favorable during the second quarter of 2009.

Looking at revenue by the four segments, during Q2 we experienced as I said a 2% revenue increase within the auto mobile segment due primarily to growth within the OEM and mobile handset business.

Our outdoor fitness segment continued to grow, with a 32% revenue increase compared to the second quarter with both outdoor and fitness categories contributing to the growth.

Our aviation segment revenues increased to 1% compared to Q2 2009, with growth in retrofit and portable products.

In our marine segment, revenues increased 23%, compared to Q2 2009, as the industry is recovering and we appear to be gaining market share.

So in total, our revenues increased 9% during the quarter.

Looking next at a split by geography, during Q2 all three geographic regions around the world posted year-over-year improvement, with Europe and Asia growing 14% and 37% respectively.

North America represented 62% of our revenue in the second quarter compared to 65% a year ago.

Europe increased from 30% to 31% and Asia from 5% to 7% in the same time period.

The auto mobile segment represented 61% of our total business during Q2, down from 65% in 2009, and our outdoor fitness grew to 20% of revenues in the quarter, a 4% increase from 2009.

While the auto mobile segment represented 61% of our total revenue, that segment represented only 44% of our operating income in the quarter due to the lower margin profile of the segment.

The operating income contribution of outdoor fitness, marine, and aviation segments were 31%, 16%, and 9% respectively.

In total, these segments contributed 56% of our second quarter operating income in 2010, and 63% of the year to date operating income.

Next a brief summary of our margin structure at Garmin.

In the second quarter, the auto mobile gross margin and operating margin were 46% and 20% respectively.

This represents year-over-year improvement in gross margins due to a decline in per unit costs, including the warranty estimate refinement offset by a slight ASP decline.

Operating margins declined 400 basis points due to the strong R&D and advertising investment during the quarter.

Q2 outdoor fitness gross margin was 65%, down from 68% last year, due to product mix.

The operating margin was 44%, a decline from 47% in the year ago quarter due to the gross margin impact.

Q2 marine gross margin came in at 66% compared to 59% in the year ago quarter as the products mix shifted to our high end chart plotters and networked marine solutions.

Operating margin was 43%, up from 36% a year ago driven by the strong gross margin.

And finally, our Q2 aviation gross margin was 70%, down from 74% in Q2 2009, but in line with our expectations.

Operating margin was 29% for the quarter.

This year-over-year decline is consistent with the gross margin impact.

Moving next to our operating expenses, Q2 operating expenses increased $37 million on a year-over-year basis from $153 million in Q2 2009 to $190 million in Q2 2010, and increased 310 basis points as a percentage of sales.

R&D increased $17 million year-over-year in Q2 and was up 170 basis points to 10.1% of sales.

We now employ over 2,400 engineers and engineering associates worldwide and remain committed to continued product innovation.

Our ad spending increased $8 million over the year ago quarter, an increase of 70 basis points as a percentage of sales from 5.1% to 5.8%.

This was largely driven by our advertising associated with our mobile handset initiative.

Other SG&A increased $12 million compared to the year ago quarter, an 80 basis point increase to 10.1% of sales.

This increase represented expenses associated with our redomestication to Switzerland as well as growth in both our product support and information technology areas.

Looking next at our balance sheet for the end of the quarter, we ended Q2 with cash and marketable securities of over $1.8 billion.

Our accounts receivable increased to $499 million as we exited the seasonally strong Q2.

AR accounted for approximately 61 days of sales, down slightly from 63 days a year ago.

Our inventory balances increased $3 million to $359 million, and increased work in process was offset by lower finished goods inventory during the quarter.

Our days of inventory metrics was up at 76 days at the end of Q2 compared to 68 days a year ago, however consistent with our expectations for inventory levels.

We ended June with the following components of inventory -- $94 million, in raw materials, or 18 days of inventory; $58 million in WIP and assemblies, or 12 days of inventory; and $246 million in finished goods, around 46 days of inventory.

Our inventory reserves at the end of the quarter were $40 million.

Garmin continued to generate strong cash flow across the business as cash from operations was $182 million during the second quarter.

We incurred CapEx of $9 million during the second quarter, which brought our free cash flow to approximately $172 million.

Cash flow from investing provided $41 million of cash during Q2, made up of the CapEx, $53 million net redemption of marketable securities, and $3 million purchase of intangibles.

Our financing activities used $334 million of cash during Q2.

We repurchased $37 million in stock, paid a $299 million dividend in April, and in the remaining of balance and cash and marketing securities, we earned an average of 1.2% during the quarter.

As I mentioned, in Q2 we paid our 2010 annual dividend at a rate of $1.50 per share, representing $299 million use of cash.

During Q2, we also repurchased 1.6 million shares of common stock for approximately $52.5 million.

Subsequent to the quarter, we repurchased an additional 3 million shares.

The repurchase plan for $300 million that expires at the end of 2011 now has $111.6 million available for purchase.

Other future uses of cash include the fact that we are evaluating a number of acquisition opportunities.

Finally, our tax rate for the quarter was 18%.

Our expectation for the full year rate will be between 15% and 18%.

Finally, I would like to provide an overview of our updated 2010 revenue guidance.

Cliff went over the entire guidance, but our revenue by segment will be the following.

We -- first of all have a revenue overall between $2.8 billion and $3 billion, with EPS unchanged, due to the great margin performance in the first and second quarter.

We've increased the revenue outlook for our outdoor fitness segment and our marine segment offset by a decline in the aviation and auto mobile forecast.

That ends our formal comments for the quarter.

I would like to open it up at this point for any questions.

(Operator Instructions).

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

Thank you very much.

Good morning Cliff, Kevin, Kerri.

Good morning.

Cliff, I wanted to ask you mentioned that now you are sort of looking at the overall PND market as sort of declining units for the year.

I was wondering if you could give us a little bit of color on where you see things from a geographic standpoint, and what leads you to that?

Is it greater weakness in Europe?

Is it tempering demand trends in the US?

Or any color along those lines would be helpful.

In terms of percentages, Europe is definitely declining a little faster than what we anticipate North America would do.

Keep in mind these are market research estimates, so I think that it's only as clear as the analysts and others that view the market can really give.

In Europe we see maybe down 9%, and in North America down maybe 7% for 2010.

So the total worldwide is currently forecasted to be down about 5%.

So the declines in Europe and North America offset by growth in Asia and Latin American markets.

That's helpful.

You cited a number of factors that caused the reduction in your sales outlook for the year.

I was wondering, which was the largest contributor there?

Is it a mix of everything, or is it the PND side, or perhaps Garmin phone not performing as well as you would have liked?

There is a generous mix of all those factors in the reduction that we took.

They all had enough of an impact that we felt like reducing the topline was appropriate.

Okay.

That's helpful.

If I may -- obviously we saw a pickup in the OpEx this quarter, material pick up on the year-over-year and sequential basis.

I was wondering if you could give us a little bit of color of how much of that OpEx was used to support the launch of the Garmin phone.

As you'd mentioned, you are going to be looking at more rationalized investment going forward.

Is there a metric you can provide us in terms of where you think that investment level would be on a go forward basis?

I can talk a little bit about Q2.

In general we put Q2 TV ad campaign in place, which was aligned with our handset initiative in the June and July timeframe, early July timeframe.

That number was somewhere in the order of magnitude of around $10 million from our end.

There is definitely one time expenses that we had hit the quarter that will probably not continue, but I think if you look at our guidance of roughly 24% of total operating expenses for the year, I think that's still definitely achievable for us.

Hopefully that helps you.

Great, thanks very much for the incremental color.

We will go next to Yair Reiner with Oppenheimer and Company.

Thank you.

Congrats on the good results.

In terms of the PND segment, are you seeing anything in terms of retailers' plans for the back half of the year that are also making you more cautious?

Or is it just overall demand trends in the market?

I think it's overall.

We still see a strong seasonality to this product category, so we are expecting to have a strong Christmas season as usual.

So I think it's mostly overall.

Okay.

Then, gross margin, you didn't change your gross margin targets for the year even though you've had two very strong quarters on that line.

Are you being conservative there, or what scenarios would it take to actually drive gross margins in the back half of the year to a level where 46% to 48% is really where we come out at the end of the year?

We are being cautious going into the back half.

As Cliff, said we are committed to a strong seasonality in the Q4.

But as you know, we typically have our lowest margins in that period too.

We have forecasted a decline in PND margins, especially as we go through the back half of the year, which is representative of our 48% gross margin at the high end.

Then if I could have a followup on the OpEx, so if we back in to a total OpEx for the year of somewhere between $670 million to $700 million, is that in the ballpark of what you are budgeting?

I think that's within range, yes.

Thank you.

Thank you.

We will go next to John Bright with Avondale Partners.

Good morning.

Kevin, was pricing down in aviation this quarter?

Pricing down in aviation?

Yes.

We typically don't look at ASPs on aviation, but in general, we didn't see an impact on pricing in that segment.

Okay.

On the auto OEM side of your business, how big is that today?

Unfortunately, we don't break that down, but we did see an increase in our business in the auto OEM category.

But it's just a component of our overall auto mobile segment.

That's all we can disclose at this point.

Well, if I think about looking forward, to the in dash opportunities, maybe characterize how big you think those opportunities might be over the next year or so?

And then how are you going to penetrate those further?

I think each opportunity is incremental, John.

So it takes a few wins to really start to build some visible momentum.

We are really pleased with the launch of the Jeep Grand Cherokee, as it does represent first real in dash win in the automotive segment.

But the other thing to keep in mind is that the development cycle of these opportunities is quite long, takes several years to go through the process start to finish.

So we would expect that the revenue would continue to grow over time during the next three to five years.

Okay.

Lastly on the marine segment, can you characterize the -- what you view as the value of the Bayliner OEM announcement this quarter?

Again, each opportunity is incremental, and the marine market is very much known for a lot of players in a fragmented industry.

So we view each one as an incremental step as gaining more share in the OEM market and each one is important.

Last question, this goes to Kevin.

Last quarter, I asked you, Kevin, whether or not you thought operating income would on an annual basis from outdoor fitness, aviation, marine, overtake auto mobile.

You have I think thus far first two quarters -- granted the last quarter was seasonally strong -- why don't you think that will be the case this year?

I think we still have large expenses going into the holiday season, with that -- it's still roughly a $1.8 million or $1.9 billion business on the topline for auto mobile, so we still aren't committed to investing heavily in that, but still are generating, like I said, 20% type operating margins.

We don't see a lot of change from the answer from a quarter ago.

Okay.

Thank you.

Thank you.

We will go next to Andrea James with Sidoti and Company.

Good morning guys.

Good morning.

Can you tell us how wireless affected the auto mobile operating margin and what it would have been without the wireless segment?

We don't break that down, but definitely the margin structure in the handset business is much lower than in the auto OEM, in the PND business.

So it impacted us negatively clearly on the operating margin line, but even with that still posted strong operating margins within the overall segment.

Okay.

Then, just trying to get a sense of how many handsets are still in the channel.

We're estimating you shipped about 77,000.

Am I looking at that right and can you talk a little bit about sellthrough?

I think we shipped some number more than that.

Sellthrough, as we mentioned, with T-Mobile has been below our plan.

So there is more in the channel in North America.

Internationally, the opportunities there are country by country, and typically those are smaller markets.

So the sell in has been a smaller number than what we do here in North America.

But at the same time, the sell out in some of those markets has been really encouraging.

So I think it's a mixed story in terms of sell in and sell out, depending on the market.

Thank you.

I guess another question would be too -- you guys have cut the prices.

Have you seen some sort of response to the price cuts -- is that working?

I know it's been a short amount of time.

It's probably too early to tell.

I think the retail momentum that is out there means that any changes that you make take sometime to filter through and really understand the data.

Finally, just a question about the acquisitions.

Can you give us any color on that comment?

I think we talked about this over the last couple of quarters.

There is opportunities in each one of our segments where we feel like we can acquire technology that would be hopefully easy to integrate into our business or relatively easy to integrate into our business.

Generally not talking about large acquisitions, but newer smaller focused acquisitions that can help us gain market share in the various segments we operate in.

Thank you.

Thanks.

We will go next to Vivek Arya with Bank of America Merrill Lynch.

Thank you.

Good morning.

Cliff, I have sort of a longer term question -- what do you think is Garmin's -- how do you look at Garmin's longer term operating model?

The non PND segments are doing very well.

PNDs remain a drag, so this year I think you're guiding to roughly flat, flattish year-over-year sales growth.

And this is a cyclically -- this is a year where there is actually cyclical recovery.

Over the next few years, how do you think about driving topline growth in the business?

We see our core businesses -- our marine, outdoor fitness, and aviation -- providing steady growth throughout those periods as the economy continues to recover.

We should see increased momentum, particularly in those aviation and marine areas as people return to those markets.

And there is also quite a good number of opportunities in marine and aviation where we are underpenetrated such as the OEM segment and in particular business jets in aviation and OEM boat builders where we are focusing heavily on expanding our presence.

So the core markets are definitely seen as driving growth in the longer term.

And then in the automotive area we see the OEM as a opportunity to leverage our strength in some of these other markets -- for example, being able to design highly integrated systems into the dash of aircraft does extend to designing highly integrated systems into cars and trucks.

So we are focusing on OEM automotive as a means to offset the declines in the PND area.

So if you look at all those things combined, would you expect 2011 to 2012, when do you think we could see sales growth from Garmin?

I don't think we are ready to give guidance out that far.

But we have a lot of moving pieces in our business contributing, and some declining as we noted today.

So we will have to address the future guidance when the time comes.

Got it.

Just one clarification on the gross margins and warranty refinement, I think there was some few hundred basis points impact in Q1, and there was some more in Q2.

Just wanted to make sure that the guidance that you are giving for the full year -- that already incorporates the new warranty assumptions.

Absolutely, yes.

Yes, it does.

Okay.

Great.

Thanks and good luck.

Thanks.

Next to Tom Lee with Goldman Sachs.

Thanks for taking my call.

Just a few questions from my side.

I'm just curious on the market share side, did you notice any -- were there noticeable share shifts in the quarter.

Specifically, did you perhaps make a more conscious effort to maybe take more share in the US?

I think what we saw is actually -- we don't have the most updated data from the market analysts, but it appears that we gained share in the North American market on PND and also in the European market in the PND category.

Did that impact pricing in any way, maybe relative to our expectations at the beginning of the year?

Maybe I thought that the mix may have been -- would have been better, so I thought pricing could have been maybe more flattish on a sequential basis.

Actually, pricing did not move a lot.

It just went down a few dollars on a sequential basis.

So pricing has not been a major concern for us at this point.

As Cliff and I both mentioned, as we go to the back half of the year, we generally see a little bit more pricing pressure, but primarily just due to the promotional activity during the holiday season.

At this point, we are still within single digits probably what we expect our PND year-over-year ASP to decline.

And then just on the commentary around the PND market, specifically in the US, just curious -- are you seeing is some of your -- the change in tone on the market in the US, is any of that driven by particularly any of the strength we are seeing on the Android front given they have from a navigation perspective, maybe the biggest competitive threat on your side?

As I mentioned, we do see signs that smartphones with included navigation are having an impact on PND buyer decisions.

It seems from the data we are observing that it really depends on the customer group that impact is most noticeable in.

But there is no doubt that included navigation, even if it doesn't match what we think is good in terms of features and functionality, is probably good enough for people that are looking at device with the included features.

Has the tone of retailers -- has that impacted the tone of retailers now than say three or six months ago?

I think there are some retailers that maybe ask questions about that.

But the truth is most of them are not highly concerned about that factor.

We don't see this as a step function kind of response in the market at all.

And there is also a good chance as people experience some of the navigation getting introduced to it in the smartphone, that they may wish to expand their horizons and maybe look at a dedicated device, whether it's for one of our core markets or even for a second vehicle with the PND.

Last question, just on the R&D trajectory, is that likely to stay at these levels from an absolute basis?

Or can we see that, should we be looking that to perhaps come down a little bit in the back half of the year?

The R&D level should stay relatively even with the Q2, maybe come down just a little -- we are still looking at R&D to be between 9% to 10% of sales for the year.

Okay.

Thank you.

Next to Mark Sue with RBC Capital Markets.

Thank you.

This is Joe [Gabarti] for Mark.

If you could, can you discuss our strategy as it relates to the Garmin phone?

What else do you plan to do to stimulate demand, and can we expect future devices?

Or could this be the end of the nuvifone line?

We are working with each of our carrier partners to further message the device and train salespeople.

For example, here in North America we have been sending our own trainers out to stores to help with the education process and we've gotten great support from our partners on that.

Of course, you've noted prices and trying to position the device properly in the channel.

So all these are factors that we are considering.

As we mentioned in our remarks, we are looking at a more limited set of product models and road maps going forward in order to focus our efforts, and we will rationalize the investment based on that.

We're fully committed to our partners in the space and this is a long cycle business so we really can't comment in terms of our future plans at this time.

Okay.

Just within PNDs, are we beginning to see an upgrade cycle as it relates to the new form factor that you guys have introduced?

We introduced the [903760] product at the end of Q2, and we did see some sales in June and we are still seeing a good pick up on sales on that product.

It's a beautiful device and it's been pretty popular so far.

Yes, that's part of the back half sales expectation for the PND market.

Thank you.

Good luck.

We will go next to Jonathan Goldberg with Deutsche Bank.

Thanks for taking my call.

Just first question, on the outdoor business, you guys have done a very good job of building gross margins there.

You have really high gross margins relative to other consumer electronics categories.

How long is that sustainable for?

Are you seeing any changes in the competitive landscape?

How long can you keep defying gravity there?

Keep in mind that the outdoor fitness market is definitely a niche market compared to the broader consumer electronics category, and there is definitely domain knowledge and brand issues associated with how consumers behave in that particular market.

So while it's true -- it is an interesting situation, we see some downward pressure in margins going forward.

But we don't think it's like what we see in the really hypercompetitive spaces like automotive PND.

Going to auto segment you guys have good pricing data it sounds like.

But just our checks -- some of our data points out on the web and in stores are showing that there seems to be a continuing slide in prices in the overall market, [think comp] on [SG] numbers on the pricing front.

What is normal seasonality for this time of year for pricing?

Which way is it usually going?

And are you worried that the price declines we saw for promotions around Dads and Grads in June have continued into July and August beyond the end of the quarter?

It's interesting -- I'm not sure there is a normal trend.

Last year, for example, we introduced the nuvi 1200, 1300, and 1400 products and hit the market in a big way in the third quarter which drove our ASPs actually up sequentially in Q3.

The beautiful thing about our PND business is the fact that we're quite diversified and we have a full line of products from the very low end to a much more higher price point like the 3790 that I just mentioned.

So at this point we are not expecting unusual pricing pressures in the third quarter.

As I mentioned, as we get into the holiday season, we will be there with good pricing and promotional pricing through the big box retailers.

Is it normal to see older prices decline -- prices for older models declining more sharply this time of year?

Are you doing that deliberately?

If you look at our nuvi 2x, 200s -- those prices are pretty low.

I don't expect anything unusual at this point.

Thank you.

Next to Ilya Grozovsky with Morgan Joseph.

I wanted an update on the expectations for the phone business.

I think last quarter you guys said that you thought it could do somewhere between $100 million to $200 million this year, what's the new number?

We are looking probably -- due to the results so far probably something under $100 million in revenue for the year.

Okay.

Thank you.

Next to Scott Sutherland with Wedbush Securities.

Great, thank you, good morning.

Good morning.

Fist of all, can you talk about the warranty reserves -- are you seeing anything different between the different consumer segments -- marine, outdoor fitness, and auto mobile that we should think about?

The adjustments we made -- we feel like at the end of the second quarter, we have the appropriate amount of reserves for our business going forward.

Those actually impacted all of the consumer product segments, less so on the aviation, but definitely impacted favorably the auto mobile, outdoor fitness, and marine segments.

The last couple of quarters, you talked about reduction of inventory on the PND side of the business -- is that in alignment now or are you seeing more changes there?

I assume you mean between sell in and sell through, correct?

Correct, you saw some adjustments.

Are you stabilized now, in equilibrium?

The retailers are holding less inventory, and I think we've seen that two years in a row where we come out of the holiday season and we have destocking going on in the channels.

We are tracking pretty carefully on the big retailers and feel like we have handle on the sell in and sell through, and tracking pretty closely to one another.

Lastly, what do you see as the Asia Pacific opportunity, and do you see any opportunity from marine M&A disruptions.

Marine M&A disruptions?

[Ray] marine out there, did you see gains from that or think that the market share gains are ongoing?

Understand.

We believe that are really ongoing.

Kind of ignoring the drama around that, I think our product line and the relationships we are building are really what is driving the market share growth in that segment.

Thank you.

Next to James Faucette with Pacific Crest.

Wanted to ask a couple of questions -- first on the outdoor segment, what -- is there something that you can attribute to the success of that segment or the upside either from a product or geographical standpoint?

First of all, the fitness line is definitely a high growth segment for us right now as we introduce more products and also expand our distribution in that market.

The products we introduced recently such as our Forerunner 310XT, Forerunner 110, they're all in very high demand and are gaining a lot of momentum in the industry.

On the outdoor side, that's more of a mature market, but are we expanding the product categories that we offer there such as the Gulf products, which is contributing, as well as we refreshed like most product line over the past year or two.

As a result we are seeing uptick because of that.

All combined, we think it's a very interesting category.

Great.

Then turning back to the nuvifone, I took from some of your prepared comments and maybe a couple of the followup questions that you had done at least some scaling back of the investments that you are making in the nuvifone.

Am I understanding that correctly, and if so, can you quantify about where we should expect that spend rate to be versus previous quarters?

I think the real commitment is that we are trying to focus our investment -- we are still committed to the category.

We haven't really -- we're not going to able to quantify how much that means, other that taking into account our overall guidance for the year.

Nuvifone is part of our overall R&D investment, our overall advertising investment which hits our 24% operating expenses, and I think you need to take that into account when you model us in your analysis.

Great.

Then finally the last question, also I guess related to nuvifone -- I know you said you are committed, but you're trying to focus your efforts there.

What are your key -- do you have key metrics in terms of gauging the success or at least continue to put money and resources into that, whether it be sales or share or any of those things that you can share with us?

I think that we actually been pleased with the written reports and analysis that's gone on with people evaluating our device.

There is a lot of people out there that looked at the device and recognized it has a lot of strength.

I think the navigation messaging maybe overpowers some of the other good aspects of the phone and the Android operating system and the features we've added on top of that.

With that said, as we mentioned in the comments and several of the questions, the results that we are seeing are below expectations.

So to answer your question, I think in terms of our metrics, it's not where we wanted it to be.

Okay.

Great.

Thank you very much.

Thank you.

We will go next to J.B.

Groh with D.A.

Davidson.

Morning, guys.

I just had a clarification on warranty issue.

Could we weight that according to the sales in the segments?

I'm guessing that's how the impact sort of hits you across the different segments.

I think it's each of the three consumer nonaviation segments.

I think auto mobile probably got a little bit more, but in general you can weight them closely to that.

With very little deviation.

Okay.

When I look at your sales forecast for marine, it looks like you have a pretty drastic drop off.

I mean obviously in Q2 is a good seasonal quarter for marine, but you are not starting to feel the Bayliner stuff in Q2, are you?

That seems like it wouldn't happen until later on down the road.

As you know, J.B., the marine business is much heavier weighted seasonally from Q1 and Q2, and then it drops off in Q3 and Q4.

Sequentially, we do expect a reduction in Q3, but still showing growth in each of the Q3 and Q4 periods.

So Q2, maybe just good product introduction and good pricing.

And a strong marine season.

Okay.

Thank you.

We will go next to Paul Coster with JPMorgan.

Thank you.

Kevin, a quick question on R&D.

It sounds like you added some resource this quarter.

Is there any change in what the R&D resource is focused on?

In terms of the different business segments, you mean?

Yes, and perhaps proportionate to your businesses, is there any area that's getting sort of more than proportionate investment?

I think we have continued to go through our product road map and invest heavily in each of the four business segments.

There is not one that was an outlier in the quarter.

Okay.

The other question I have is where is your cash held?

What percentage is domestic, and what is held abroad?

If you can give us sense of jurisdictions and if there's any constraints that imposes upon you in terms of dividends, buybacks, or any other matters?

At the end of the second quarter, as you know, we went through a swift redomestication.

We were still a Cayman company at the end of Q2, and about 50% of our cash, maybe just a little bit more than 50% of our cash was held outside the US.

So about $1 billion of that and the other $800 million is in the US.

Does that have any bearing upon your buyback or dividends policy?

No, we are really not constrained.

We have enough cash to further our buyback plan, pay dividends, and even acquire companies.

So we have the appropriate amount of cash at the right locations.

Okay.

Thank you very much.

We will go next to Rich Valera with Needham and Company.

Good morning.

Over the past couple of years, you've shown mixed seasonality for auto into Q3.

I'm just wondering what your thoughts are, if you would be willing to give any color on the sequential trajectory of auto in Q3 versus Q2.

As I mentioned couple of questions back, Q3 last year was a little bit unusual because of some large new product introductions on the 1200, 1300, and 1400.

We saw strong sequential growth.

We do expect that the PND would come up slightly, but we're not willing to give any kind of numbers by segment in Q3.

Okay.

That's helpful.

I know this has somewhat been addressed already, but as far as the overall gross margin for the year, it seems like it implies a pretty steep drop off in the fourth quarter, probably steeper than what you saw last year.

I was wondering if there is any change in the competitive dynamics you are expecting in the fourth quarter or really pricing and discounts as usual?

Or any color on what you are expecting in the fourth quarter from a pricing perspective.

The short answer is no.

There is not any major changes.

The one thing to point out we mentioned in the formal remarks we are heading into a period where there is FX pressure on margins because of the strong US to euro dollar relationship a year ago and where we stand today.

That has a headwind against us.

But other than that, we're not expecting anything unusual in terms of promotion or pricing going into the holiday season.

That's helpful.

Thank you.

We will go next to Ben Bollin with Cleveland Research.

Good morning.

My first question -- when you look at your build and material trends, you talked about favorable pricing?

Could you quantify the type of year-over-year decline you might have seen in your build materials in Q2 and give an expectation on what you have for 2010?

Going into 2010, we expected over the -- focusing primarily on PND right now, our prices to come down about 10% and our build and material costs to come down 10%.

It looks like now that we are expecting similar numbers on price, maybe a little bit less, in the single digit less on price.

At this point costs have not come down as much as we had anticipated.

So we have low single digit declines at this point.

When you look at channel inventory levels with your big partners, where would you say that stands right now -- have you seen any big shifts in the last couple of quarters?

We ended Q1 with a much lower inventory at the retail level as they sold off their excess inventory from the holidays and we haven't seen a big shift in Q2 at this point.

So we did so some channel fill with new products but in general the sell-in and sellthrough is not as drastic as we saw in Q1.

Last question -- when you look at nuvifone, you quantified or said certain regions have seen relatively better sellthrough than what you've seen in the US.

Could you spell out what regions those are?

And second part, if this strategy continues or if the execution continues as it has, at what point do you decide whether or not you want to persist with the strategy as it is?

As I mentioned, each market, each carry, each customer is a story by itself.

We have seen some positive sellthrough in places in Scandinavia and Europe as well as Australia and parts of Asia.

But again, keep in mind that each one of those markets is probably quite a bit smaller than what it is here in North America.

So the situation in North America really influences the overall situation quite a bit.

In terms of at what point we might make some decision, I think we are really not ready to address that.

At this point we are working closely with our carrier partners to sell through the device and to help it perform in the way that we feel it should.

Thank you.

We will go next to Reik Read with Robert Baird and Company.

Could you guys just talk about -- going back to the pricing, do you expect the ASPs to come up with the 3700 being introduced or available?

Well, we have a pretty diverse product mix.

Last year we did saw a sizable ASP increase.

I would say we would be -- sequentially we could be up a little bit because of the sellthrough of the 37, 60, and 90, but then we get back down into Q4 where we will see our ASPs come down due to the timing of the holiday season again.

Okay.

And you mentioned a second ago, Kevin, that cost not down maybe quite as much as you expected.

Can you talk a little bit about what is that, does that have to do with just component pricing going up?

And then as part of that can you talk about availability and lead time of components?

I think the whole worldwide component situation is quite a bit tighter this year than it was last year, and because of that, we are seeing pricing pressure in some components as well as lead times on the components have gone up significantly -- for example, memories, and displays, and some of those key things.

We are committed to a safety stock policy.

So we have been able to buffer that somewhat.

And as components suppliers do bring on more capacity, because they do see opportunities now, we should see that situation stabilize.

Okay.

Then did you guys disclose the amount you spent on the redomestication?

I think just during the quarter we spent about a couple of million dollars of SG&A.

Great, thank you.

Thank you.

At this time, there are no further questions.

I will turn the call back to Ms.

Kerri Thurston.

Thanks, everyone, for joining us this morning.

We will talk to you again soon.

This does conclude today's conference call.

We thank you for your participation.