台灣國際航電 (GRMN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to this Garmin third quarter 2010 earnings conference call.

Today's call is being recorded.

At this time I would like to turn things over to Ms.

Kerri Thurston, Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Erin.

Good morning.

We'd like to welcome you to Garmin Limited's third quarter 2010 earnings call.

Please note that a copy of the press release concerning this earnings call is available at Garmin's Investor Relations website on the internet at www.garmin.com/stock.

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

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

An archive of the webcast will be available until December 3, 2010, and a transcript of the call will be available on the website, under the events calendar tab.

This earnings call includes projections and other forward-looking statements regarding Garmin Limited, and its business.

Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products, and forward-looking 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 our risk factors is contained in our Form 10-Q for the quarter ended June 26, 2010, filed with the Securities and Exchange Commission.

Attending this call on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Operating Officer, and Kevin Rauckman, Chief Financial Officer and Treasurer.

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.

Good morning, everyone.

I'll begin my remarks with highlights from our earnings press release, followed by more detailed comments by segment.

Our third quarter results included revenue and operating income growth in the Outdoor/Fitness, Marine and Aviation segments.

We sold 3.8 million units in the quarter, which represents year-over-year decline of 1%.

Auto PND unit volume was weaker, however this was offset by increased volumes in OEM and Nuvifone, and our other business segments also contributed with increased unit volumes.

In our Outdoor/Fitness division, we acquired one of the leading innovators of cycle power, MetriGear.

We are excited about the addition of MetriGear to the Garmin family, and I'll provide additional details on what this means for our Fitness division later in my remarks.

During the quarter, we redeployed Nuvifone R&D resources, effectively winding down our activities targeted towards handset development.

These resources are now focused on other growth segments of our business, including Auto OEM, Outdoor/Fitness and Mobile Applications.

Finally, we generated $195 million in free cash flow during the quarter, strengthening our balance sheet, and we repurchased 4.3 million shares of our stock.

Moving now to segment highlights, in our Marine segment we reported year-over-year revenue growth of 1%, which fell below our expectations, and represented a significant slowdown from the robust pace of growth reported during the second quarter.

The momentum that we experienced in the second quarter faded shortly after the July the Fourth holiday, and this experience was shared by many of our OEM and retail partners.

We expect weaker trends to continue in the fourth quarter, however, we believe our full-year results will be in line with our earlier projections.

Despite the weakness in revenue growth, we experienced healthy growth in operating income over Q3 of last year, driven by higher gross margins, as well as reduced expenses within the segment.

We remain focused on expanding our product offerings, and gaining additional share in both the retail and OEM markets, as we believe this segment offers strong, long term growth and profit potential.

Highlighting progress in the OEM category, Garmin was selected by the American Boat Builders Association as their preferred supplier of choice.

This selection improves our business relationship with the 13 member OEMs, who collectively produce more than 15% of all boats 16 feet or larger in North America.

Also in the quarter, we introduced our first sailboat-specific autopilot, which expands our addressable market in the Marine segment.

The GHP12 is designed primarily for sailboats 20 feet to 70 feet in length, and operates on the NMEA 2000 network, for easy installation and configuration.

Moving next to Aviation, revenue grew 4% year-over-year, driven by growth in both portable and OEM product lines.

Our operating income grew a respectable 40% on improved gross margins, and through operating leverage in the segment.

For the year, we have experienced growth in both OEM and retrofit product lines despite indicators which show that recovery of the aviation market lags that of the general economy.

We remain focused on opportunities, such as expanding addressable markets with additional retrofit product offerings, as well as expansion into the Part 25 Business Jet market.

At the recent NBAA trade show, we announced the G5000 integrated cockpit system, designed specifically for Part 25 Business Jets.

The G5000 meets the requirements of Part 25 operation, while offering all the features and ease-of-use that the aviation community expects to see from Garmin.

We are delighted that our new system has already been selected by Cessna for the new Citation 10 Business Jet.

The Citation 10 has a legacy of high performance, and this new model will exceed the credentials of its predecessor.

We believe the G5000 is a wonderful complement to this already impressive aircraft.

We also announced a new integrated cockpit for the King Air 300 and 350 series, with certification planned in the mid-2011 time frame.

This retrofit program expands our addressable market for integrated cockpit systems, and enables King Air owners to revitalize their aircraft with state-of-the-art avionics.

Finally, we were pleased to be selected by Federal Express for a significant retrofit program.

Over the next five years, FedEx plans to equip 250 Cessna Caravans with our G600 aviation suite.

This retrofit will be a welcome enhancement for FedEx pilots, and will help FedEx further leverage their investment in this workhorse aircraft platform.

Turning next to the Outdoor/Fitness segment, we achieved year-over-year revenue growth of 9%, which was sequentially lower than previous quarters, due to the stronger comparables we face from Q3 and Q4 of 2009.

This segment again posted strong operating margin performance, coming in at 47% for the third quarter, and operating income grew 28% on stronger revenues and gross margin.

Ongoing growth in this segment, combined with a strong margin profile, allowed it to contribute 41% of consolidated operating income for the quarter.

We are excited about the Outdoor/Fitness segment as we approach the holiday selling season, as our suite of product offerings is stronger than it has ever been.

We have a strong number of exciting introductions that I'll highlight shortly.

However, with the strong comparables of 2009, revenue growth will be below levels experienced in the first half of this year.

As mentioned earlier, during the quarter we acquired MetriGear, the inventors of an innovative new power solution for cyclists, known as Vector.

The Vector solution allows power to be measured at the pedals, which simplifies the installation, and enhances the utility of the information provided to the rider.

New products from this acquisition are expected to be introduced in the back half of 2011.

During the quarter, we announced some exciting new products for the Cycling and Running market in time for the holiday season.

For the runners, we introduced the Forerunner 210 and 410.

The 210 builds on the simplicity of the successful Forerunner 110, adding training features and alerts.

The 410 builds on our best-selling Forerunner 405 product line, with improved touch bezel and significant software enhancements, including customization of training pages, and advanced workout capabilities.

And for cyclists, we introduced the Edge 800, which features a 2.6-inch color touch screen display.

The device can be customized with various mapping options to meet the needs of each customer.

It will track speed, distance, time, position, elevation, calories, climb and decent, and download all this data via our N+ wireless network to the Garmin Connect fitness portal for customer review and analysis, making this the most robust cycling computer in the market today.

In the Auto/Mobile segment, we experienced a 19% year-over-year revenue decline, driven by declines in both unit volume and ASP.

Looking back, the Q3 2009 ASP was positively impacted by the timing of new product releases, product mix, as well as strong map and accessory sales.

While the latest market research is not yet available, we believe our trends in unit volume were favorable to the overall market trends, pointing to increased global market share.

We experienced strong triple-digit revenue growth in OEM products, which helped to partially offset the decline in PNDs.

I will highlight some of the good news we see in the OEM market in just a moment.

As mentioned earlier, we redeployed our Mobile Handset R&D throughout the organization, which will help us bring new products to market faster, and will help us explore new market opportunities.

Garmin will expand its Mobile Handset application development, and will offer navigation and other applications through a variety of application stores.

Looking forward, we expect the PND market to continue contraction in the fourth quarter, driven by market saturation as well as substitute solutions.

While this is not an exciting news for investors, we are confident this business segment will continue to generate strong cash flow going forward.

We will continue to focus on maintaining our market share, on new opportunities and emerging markets, and growing our share of business with OEMs.

Last year, Chrysler announced the availability of Garmin navigation in the 2011 Jeep Grand Cherokee, and we are pleased to report that this relationship has been expanded to include additional makes and models in the Chrysler line-up, including the new Dodge Charger and many others.

We will be providing further details on the expanded relationship in weeks to come.

We also announced the extension of our relationship with Suzuki, who will offer our Nuvi 1690 connected navigation device in their 2011 Grand Vitara and SX4 SUVs.

Connected navigation provides drivers with access to all of the premium navigation service offerings, including realtime traffic, weather, fuel prices, and Google local search.

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

On the top line, the revenue range has been lowered to $2.65 billion to $2.75 billion, based on the softness in the PND and Marine markets.

However, the gross and operating margin ranges have been raised to reflect continued strong margin performance for the total Company.

The pro forma EPS range, excluding the impacts of foreign currency exchange, and one-time tax reversal, is $2.70 to $2.90 for the year.

This concludes my business update, and next I'll turn the call over to Kevin, who will walk us through our financial results in more detail.

Thank you.

Thanks, Cliff.

Good morning, everyone.

I'd like to start with the income statement for the third quarter.

As you saw in the press release, we announced revenue of $692 million, net income of $280 million, for the pro forma EPS of $0.70 per share, which excludes our foreign currency gain, and one-time tax adjustment during the period.

Revenues decreased 11% year-over-year.

Our gross margin came in at 49.7%, a 280-basis point decline from the prior year.

We announced operating margins of 24.1%, which were down from last year of 30.3%.

Our gross margin, as I said, was 280 basis points favorable.

However, advertising was flat as a percentage of sales, and down $5 million on a year-over-year basis.

SG&A costs were 50 basis points unfavorable, and down $4 million on a year-over-year basis.

And R&D was 290 basis points unfavorable, up $13 million over the year-ago quarter.

The pro forma EPS of $0.70 represents a 31% decrease year-over-year on declining revenues and margins, and an increase to 22% of our effective tax rate.

In the third quarter, we reversed significant tax reserves recorded for 2006 to 2008, based on the completion of review by various tax authorities, and the expiration of the statute of limitations.

This was a credit of $114 million, or $0.59 of diluted EPS.

Excluding the one-time tax reversal, we expect our full-year tax rate to be approximately 20%.

Units shipped during the quarter were down 1% year-over-year, as 3.8 million units were delivered during the quarter.

The total Company average selling price was $182 per unit, down 10% from a very strong ASP in 2009.

But, this ASP was flat sequentially, as pricing continues to stabilize in the Auto/Mobile segment.

The Auto/Mobile ASP decreased 15% compared to prior year to $149, from $175 a unit.

The Auto/Mobile ASP was up slightly on a sequential basis, from $144 a unit, to $149 a unit.

The non-GAAP measures that we reported represent net income per share, excluding the effects of foreign currency translation in the current quarter, and 2010 year-to-date, also using the impact of a one-time reversal of tax reserves.

This impact was $0.73 per share unfavorable during the third quarter this year, and $0.05 per share unfavorable for third quarter last year.

Moving next at a look at revenue by segment.

During Q3, we experienced a 19% revenue decrease within the Auto/Mobile segment, due to a significant year-over-year decline in ASPs, as we comped against a very strong Q3 in 2009, when we refreshed our full line of PNDs.

Our Outdoor/Fitness segment continued to grow with a 9% revenue increase when compared to Q3 of 2009, on the strength of our Fitness category.

Aviation segment revenues increased 4% compared to Q3 2009, as we continue to certify additional aircraft platforms.

Marine segment revenues increased 1% compared to Q3 2009, as our Marine industry recovery faltered.

And in total, our revenues decreased 11% during the third quarter.

Year-to-date, our revenues are down 2% with growth across all segments, other than our Auto/Mobile business.

During Q3, North America and Europe declined, while Asia continued to post growth.

Our North America business represents 60% of revenue in Q3, compared to 65% in the third quarter of 2009.

Europe increased from 30% to 31% of total business, and Asia from 5% to 9% in the same time period.

The Auto/Mobile segment represented 64% of our total business during Q3 of 2010, down from 70% in 2009.

Outdoor/Fitness grew to 21% of revenues in the quarter, a 4% increase from 2009.

Looking next at our operating income by segment, while the Auto/Mobile segment represented 64% of our total revenue during Q3, it represented only 40% of our operating income in the quarter, due to the lower margin profile of this segment.

The operating income contribution of the Outdoor/Fitness, Marine and Aviation segments were 41%, 10%, and 9%, respectively.

So in total, these segments contributed 60% of our Q3 operating income in 2010, and 62% of 2010 year-to-date operating income.

We expect operating income to continue to be weighted toward our non-Auto/Mobile segments going forward.

Looking next at the margin results by segment, Q3 Auto/Mobile gross margin and operating margin were 41% and 15%, respectively.

This was a significant decline to 2009 levels, when we had extremely high ASPs and margins associated with the full product refresh.

Margins in the segment were also negatively impacted by the losses sustained in the Mobile Handset business.

We do expect improved operating margins in the fourth quarter.

Q3 Outdoor/Fitness gross margin was 66%, up from 63% last year, due to product mix.

Operating margins remain very strong at 47%, an increase from 40% in the year-ago quarter, due to the gross margin increased, and improved leverage of our operating expenses.

Q3 Marine gross margin was 60% compared to 54% in the year-ago quarter, as product mix shifted toward our high-end chart plotters and networked marine solutions.

Operating margin in Marine was 34%, up from 26% a year ago, driven primarily by strong gross margin.

And finally, the Q3 Aviation gross margin remained at 70%, up from 67% in Q3 of 2009.

Operating margin was 27% from the quarter, up from 20% in the year-ago quarter.

The year-over-year improvement was primarily driven by one-time bad debt accrual in 2009 that did not repeat in 2010.

Focusing next on our operating expense results, Q3 operating expenses increased by $4 million on a year-over-year basis, from $173 million to $177 million this year, and increased 340 basis points as a percentage of sales.

As I mentioned earlier, R&D increased $13 million year-over-year in Q3, and was up 290 basis points to 10% of sales.

We employ over 2,300 engineers and engineering associates worldwide, and remain committed to continued product innovation.

Our advertising spending decreased $5 million over the year-ago quarter, and was flat as a percentage of sales at 5.9%.

We will continue to manage advertising expense based on market dynamics in the various segments.

SG&A decreased $4 million compared to the year-ago quarter, and increased by 50 basis points to 9.7% of sales.

The decrease was driven by efforts to reduce costs, as revenues have recently declined.

Looking next at the balance sheet, we ended the quarter with cash and marketable securities of nearly $1.9 billion.

Our Accounts Receivable increased to $525 million, representing approximately 66 days of sales, which is down slightly from 71 days of sales in Q3 2009.

Our inventory balances increased $135 million to $494 million, as all categories of inventory grew.

Our days of inventory metric was up to 140 days at the end of Q3, compared to 81 days at the end of Q3 2009.

The inventory build-up was largely driven by lower than expected sales in Q3, and we've already taken steps to slow production levels, and ensure that our working capital is maximized as we exit the year.

We ended the quarter with the following number of days of inventory, $128 million in raw materials or 34 days, $43 million in wip or 12 days, $352 million in finished goods or 94 days, and we ended the quarter with $30 million in inventory reserves.

As you saw in the press release, we continue to generate strong cash flow across our business, as cash from operations was $204 million during Q3.

We spent $10 million on CapEx during Q3, and our free cash flow was $195 million.

Cash flow from investing used $13 million of cash during the quarter, which is made up of the $10 million in CapEx and $4 million net purchase of marketable securities.

Financing activities used $138 million of cash during the quarter, which is primarily made up of stock repurchases throughout the period.

And we earned an average of 1.2% on all cash and marketable securities during the third quarter.

Finally, I'd like to talk about use of cash and taxes.

During Q3, we repurchased 4.3 million shares of Common Stock for approximately $123.6 million.

The repurchase plan of $300 million expires on December of 2011, and now has approximately $77 million available for repurchase.

We also continue to evaluate a number of acquisition opportunities across our various business segments.

In the third quarter, we reversed significant tax reserves recorded for 2006 to 2008, based on the completion of review by various tax authorities, and the expiration of statute of limitations.

This was a credit of $114 million.

The normalized effective tax rate in Q3 was 22%.

The increase from 18% effective tax rate in the first half of the year was driven by an unfavorable mix of income among our taxing jurisdictions.

So excluding the one-time tax reversal, we expect our full-year tax rate to be approximately 20%.

This concludes our formal comments for the morning.

We're to the point now, we'd like to take any questions that you might have.

(Operator Instructions)

We'll go first to Mark Sue of RBC Capital Markets.

Thank you.

Maybe if we could -- just give us your thoughts on how we should think about the PND market for next year?

Do you think it's feasible that it could be down 19%, or is that a worst-case scenario?

And then, just separately, your thoughts on R&D reallocation.

How we might think of R&D planning next year?

Or if you could just comment on your overall operating margins for 2011, just kind of put some parameters there?

Thank you.

Thanks, Mark.

I think in terms of the PND market outlook for next year, we're evaluating that.

I think there'll be some new research coming up shortly.

I think that 19% is more aggressive than what we believe the market conditions would be for next year, in terms of units, if that was your question.

We will see, of course, continued pressure on ASPs, which will impact our revenue.

In terms of R&D investment, we are committed to scaling our resource to the markets, and also pursuing new opportunities.

So, we would probably tend to see our R&D investment probably be flat to slightly down, in the coming year.

Okay.

So we should take all the Nuvifone R&D, subtract a little bit , and then reallocate that to the other growth

That's right.

That's helpful.

And lastly, just on cash generation, maybe your early thoughts of what cash generations might be for next year considering your working capital requirements?

Well, we haven't given any 2011 guidance, and you also asked earlier about operating margins.

I think maybe, let me address that first, and then talk about cash flow.

I think the operating margin this year will be between 24% and 25%.

We think that our gross margins, given some of the mix shift into some of the other segments outside of Auto/Mobile, will actually allow our gross margin to stay relatively neutral or flat.

And it just depends on when we come up with our final 2011 guidance in the next period, what happens to the Auto/Mobile market.

But we still expect very strong operating margin within our business next year, which, again, then will drive operating cash flow.

This year the numbers continue to stay at about $200 million of free cash per quarter, which we feel very thankful for.

I think the business will continue to generate a lot of free cash in the future.

We're not prepared at this point to give an exact number though.

Okay.

Thank you, gentlemen, and good luck.

Thanks, Mark.

Our next question comes from Jonathan Goldberg with Deutsche Bank.

Hi.

Good morning.

Thanks for taking my question.

First, just an accounting question.

What happened to shareholders' equity?

There's some readjustments there between paid in capital and retained earnings.

Yes.

That literally was an impact due to the redomestication from the Cayman Islands, our parent Company, into Switzerland.

And prior we never had treasury shares.

So, you really just look at the treasury stock and retained earnings, and we have a movement from retained earnings up into equity, as we increased our par value of our stock as a Swiss Company.

So, literally just a movement from retained earnings up into equity.

Okay, and then a more fundamental question.

What happens to your cost structure on the fixed cost, variable cost, breakdown for -- as PNDs decline?

Do we ever go through a period, if declines are so sharp, that you sort of see a very strong sharp crack in margins?

Or do you think you can sort of manage it down gradually?

I think to my earlier comments, and to Cliff's answer, we are looking at R&D for example, which has still been up year-over-year.

We look at that being flat to down next year.

So again, it depends on, if we get into a period where Auto/Mobile takes a steeper decline, we would have to take a look at our overall operating expenses.

And we are looking at that right now.

So even with that said, I think we can still generate strong operating margin in a period where revenue decline in one of our key segments.

My question was more around the COGS side of thing.

Is that still very flexible?

Oh, the COGS side.

Yes, I think we're flexible.

And I think given the mix shift that we're expecting into some of the higher margin businesses with Outdoor/Fitness, Aviation and Marine, I think our COGS, we can manage that very well, because so much of our COGS as you know, is of the variable variety.

Okay, great.

Thank you.

Okay.

Our next question will come from Amir Rozwadowski with Barclays Capital.

Thank you very much and good morning.

Good morning.

Just switching a bit into sort of near-term outlook.

I was wondering, Cliff or Kevin, what is the tenor of the conversations you're having with your promotional partners for promotions around the holiday season this year?

And in thinking about how much weight they're going to be putting behind the category?

That'd be helpful.

We still see strong activity in the promotional plans coming up for Black Friday.

So we're gearing up for supporting our retailers in their efforts.

And then, one of your competitors in the market has certainly made some commentary about expectations of strong share gains in North America, during the holiday season.

Are you seeing any abnormal pricing trends?

Or are you folks planning on taking a different approach towards your pricing environment, or your pricing promotions during the holiday season, Cliff?

Well there's going to be some very low cost deals out there that you will see.

And truthfully, that's a similar situation of what we saw last year.

And we would expect with those kinds of promotional deals as well as all of the advertising, that we would lose some share during the quarter.

But that said, we feel like we have strong promotions as well.

And I think it plays to the value and the brand, the value that we have with our products out in the market.

So are your expectations for generally seasonal fourth quarter in terms of units, Cliff?

Yes, I think sequentially, you'll see that kind of seasonality, very strong deliveries, during the fourth quarter as retailers are stocking up and anticipate good holiday shopping season.

Great.

Thank you very much for the color.

Thanks, Amir.

We'll go next to Thomas Lee with Goldman Sachs.

Hi.

Thanks for taking my call.

First question was, in terms of how you allocate your costs both fixed and variable among the different businesses, is that fairly straightforward?

I was just wondering if you could provide a little more color on kind of how you go about that process?

You're talking -- you're not talking about COGS at this point.

You're talking more about the operating expenses within our business?

I guess both.

Well, I think the cost of goods sold, is what it is, on the business segment.

Right.

It's on revenue.

On the operating expense side, it literally has to do -- we have pretty well-defined businesses, and we have specific teams that are working on R&D projects, within each of those segments and they get the full allocation.

Based on the non-direct expenses, there are some allocations that go to some of these other segment, or to each segment.

That's generally done on a percentage-of-sales basis.

Got you.

What of those non-direct expenses, is that a fairly small amount?

Can you give us a sense?

I don't think we're willing to quantify what that is, but it's a fairly small amount.

Because again, we have most of our resources that are directly allocated to the various projects and products, within each of our business segments.

Got you.

And then just on Auto/Mobile operating margin.

So along the lines of some of the prior questions.

If the market, let's say, deteriorates maybe worse than what you expect, where do you think our operating margins in the Auto/Mobile business could go to?

Can you give us a sense in terms of how you're thinking about that business from a floor perspective?

Well, I think we talked about earlier the 41% growth and 15% operating, but that actually factored in the Nuvifone business, which as we mentioned, we're leaving that.

So more normalized level of Q3 margin would have been still 42% gross and 21% operating.

So, we still expect in the near-term, for those margins to be around that level, 40% and 20% on gross and operating.

Got you.

And then just last question, if I may, on just your non-PND businesses.

Can you remind us what seasonality in both Marine and Aviation, and how do you expect those businesses to perform relative to historical seasonality?

Yes, sure.

Both Outdoor and Fitness would be the consumer discretionary revenue.

And they would be increasing from Q3 to Q4, as we go through the holiday season.

Marine, on the other hand, is very seasonal, and we have much lower revenues expected in Q4 with Marine.

And then as we get into the looking at Aviation segment, typically aviation is more linear throughout the year.

We should expect some slight sequential increase, just due to additional business that we've won on the OEM side.

So aviation should be up sequentially in Q4.

I think those represent the major numbers.

Okay, thank you.

Thank you.

Our next question comes from Rich Valera with Needham and Company.

Thank you.

I was hoping you could give a little more color on your increased investment in the application area.

What are you looking at doing beyond a basic turn-by-turn application?

It seems like it's been a pretty tough space for folks to make money, and just wondering what you're thinking about there?

Yes, Rich.

I think you're right.

The application market is a very tough area, so we don't want anyone to misunderstand that there's a huge opportunity there.

What we do wish to do, is leverage our content assets and our brand and overall application expertise, to be able to compliment our overall productlines.

And so, it would be more targeted investments on a limited scope.

Okay, that's helpful, and Kevin?

Just on tax rate for next year, should we think of it consistent with the 20% expected this year, or might that go up as more income shifts towards perhaps the US?

Yes, I think that trend-wise it will depend on the overall revenues in our business.

And in general though, I'd expect 20% in that range, could be slightly up, could be 22% somewhere in that neighborhood.

We don't expect at this point that it will be down in the lower ranges, where we were earlier in the year.

Okay, thank you.

Yes.

Moving on, we'll go to James Faucette with Pacific Crest.

Thanks very much.

First, just a question on Outdoor and Fitness.

Year-over-year, at least, you saw a much slower rate of growth in that segment than we have seen over the last little while, and you also indicated that in the prepared commentary, that fourth quarter Outdoor and Fitness probably wouldn't see the growth rate levels that we saw earlier in the year, at least.

Can you just talk about how we should calibrate our expectations for growth, in Outdoor and Fitness in the fourth quarter and going forward?

And if you can, just talk about maybe what impacted the growth rates positively, and negatively, for that segment in the third quarter?

First, let's step back and look at what happened in Q3.

And as we said, the Fitness category really drove, still drove, the growth of 9% in that segment.

And actually if you look at units, our Fitness units still grew at a 30% plus growth rate.

ASPs were actually down, because, we've told you all in the analyst community, we've told you that we've wanted to move from just a premium product, that we've moved down into the lower price points, with the Forerunner 110 and other products like that.

So just due to mixed shift and moving into those lower price points, our ASPs did come down.

Units were up very strongly still, in Fitness, and we also saw growth in just the Outdoor category.

Moving forward into Q4, as I said, it's still a holiday season, and we still expect double-digit number growth on Fitness.

Outdoor will be more moderated, probably close to flat, on revenue growth there.

But the combined segment will still see good growth in Q4.

And then again in 2011, we expect again solid revenue growth into the segment as well.

Great.

And then just wanted to ask a follow-up question, as it related to inventories.

You gave a rough outline of why there was the increase in inventories, but a couple of questions related to that.

First, where were the problem areas, if you will?

And second, how should we expect you to dispose of or take care of those inventory levels?

And I guess particular concern would be around potential impact on pricing, etc., going forward.

Well first of all, we factored in our inventory levels into whatever pricing and promotion we would have in Q4.

But the key problem area, was where we missed in sales in Q3, and that was in our Auto/Mobile segment, primarily PND products.

So as I said, we've adjusted our production plans, and we're working through the expectations in our working capital right now, to bring those inventories more in line with what we would see at the end of the year.

I think the nice thing is, we look at the retail channel, the retail inventories have not significantly ramped up.

They've been able to hold fairly steady throughout the year, at least as we have gone through the last Q2 and Q3.

So we feel like we can manage the inventory levels, as they stand today, and feel like we have the appropriate reserves on the books for that.

Great.

Thank you very much.

Thanks.

We'll go next to Yair Reiner with Oppenheimer and Company.

Great.

Thank you.

A question that was (inaudible) first on Garmin phone.

Can you give us a rough idea of how much contributed to 3Q?

And if you expect to have any revenues from the product in the fourth quarter?

Well the total revenue was roughly about $25 million, in terms of revenue.

And we would expect, I think just a small amount of revenues, as we go into Q4.

But essentially, since we've made a decision to move on, we will not be shipping many more units into the channel during Q4.

Got it.

And then, does the operating expense level of 3Q already build any cost savings you'll have from ending that project?

Or is there going to be a lower base level that we'll see starting in the fourth quarter?

Well, it has factored in, the fact that we have made a decision to break and move more into Mobile Apps.

And as Cliff mentioned, we're moving some of those -- many or those resources into our other business segments.

I think with the exception of increased advertising, cooperative advertising during the holiday season, we should be able to hold the line pretty well on operating expenses as we go through Q4.

Great and just one final quick one.

What are channel inventories like for Outdoor/Fitness and for Marine?

Are inventories lean where you could have a nice build-up in the fourth quarter, or are they kind of right-sized right now?

Thank you.

I think they are generally at the right level here.

There's definitely going to be some increased shipments for Outdoor and Fitness.

Marine, I would say, is probably not as affected by the increase in seasonality.

Thank you.

All right.

Thanks.

Our next question comes from Jeff Rath with Canaccord.

Great.

Thanks, guys.

First question I had, was just around the embedded or OEM automotive opportunity.

How should we think about this business opportunity, in the context of the declining PND market?

Is there any context you can give us around unit potential, potential for more deals, overall mix shift, as we think about 2011, as far as maybe ASPs impact on margins?

Any context there would be helpful.

Thanks.

I think maybe I'd start, Jeff, just by saying that this business is definitely a long design cycle business.

And so some of the things that are visible in the market today, do take months, or in the case of a real Tier 1 or Tier 2 take years to develop.

So, I think in terms of the business going forward, you would see a gradual ramp-up of opportunities as we're getting design wins, and then executing on those.

In terms of units, I think you can look at the total production of cars, and realize that the consumer market, in terms of volumes, is much bigger than the unit opportunities in the cars.

But that said, we believe that there are good opportunities with mid-level margin expectations.

Not terribly high, because it's a very competitive market and it does also require a lot of investment on our part.

Just a follow-on question, if I can, around the Nuvifone.

Cliff, looking back when you decide to enter into that market, and now you've decided to exit.

I wonder if you could share with us, any thoughts on just what you learned, as a part of that attempt.

Well, there's obviously lots of things that you can learn in any situation.

I think we definitely saw how the smartphone market exploded.

And I think even for a lot of experts in the industry, the uptake of smartphones and the way consumers have embraced it, especially certain iconic type of products and brands, has been beyond expectations.

So it's a fast-moving market, very exciting market.

We felt, and still believe, that we created a great product.

In fact, our product is in use in our enterprise system, here at Garmin, by many of our associates, and it does a great job.

But obviously, it's a business with a lot of high stakes and requires big scale to be successful.

Got you.

And I guess the last question, Kevin, is just a financial one for me.

As your business segments start to mature, how should we think about your overall tax shields in some of these emerging markets?

As you become more generating cash and maybe less CapEx investments going forward, at least for some period of time, is there a potential for your consolidated tax rates to start to creep higher here?

Any commentary there would be helpful.

Well, on an earlier question we did address that.

We would expect that, again, depending -- a lot of what impacts the tax rate is the volume level.

And which is one of the things we talked about, in the various taxing jurisdictions.

So we do have some very strong tax holidays still in Taiwan, which are helping us, but those are all factored in the number.

So again, if the tax rate moves, I would expect it to be fairly modest, still from like 20%, up to maybe 22% in the next year.

Other than that, I think we've managed the taxation.

We do pay millions of dollars in taxes in every jurisdiction that we're in now, so just managing that, based on our volumes is the key.

And I'm sorry, the last question here is, Outdoor and Fitness.

Can you offer us what we should think about are your target gross margin and op margins?

I mean, that's been exceeding, I think those levels, for some time.

Can you remind us what your target margins there are?

Well I think our gross margin being in the mid 60s is still our targeted number.

And the fact that we've actually exceeded, recently, our operating margins at 47%, is a very high number.

I think we can still sustain operating margins in this business, depending on how competitive it becomes, on Fitness in particular, above 40% for the near-term.

But it's hard to know the exact number, based on some of the product mix shifts that we're going to experience.

Great.

Thank you.

Thanks.

We'll go now to Pablo Perez with MKM Partners.

Hello.

Yes, I had a couple of questions.

I wanted to start with the PND business.

When I looked at your guidance for the overall Company, the guidance for Q4 is a bit weak.

And so the question is, did you see, can you give us more color and explain what you seeing in sell-through, versus shipments into the channels?

And was there any indication that the channel for PND may have been pulling, or going down (inaudible) on inventory.

because of being conservative?

Or was it mainly an issue with sell-through of your products?

I think in terms of the channel behavior, Pablo, I think we have seen a sell-through decline, beginning about midyear, right around the first of July.

Previous to that, I think we've told the market that in North America, we've definitely seen continued growth in the market , which seemed to be a positive sign.

But it did round the top at about the end of Q2.

And the trends have been showing somewhere in the 5% to 10% sell-through decline, during the third quarter, and probably will extend into the fourth quarter.

I think in terms of whether we're pulling or drawing down inventories, I think in general, we feel like the channel inventory right now is about right.

We feel like the sell-in probably reflected the softer sell-through.

And we would expect seasonally to increase for fourth quarter, but keeping in mind that the trends are soft, in terms of overall sell-through right

Okay.

On a second question, one thing that seems to be a price point is your In-dash business.

And so, I was wondering how should we think as we model past this year, how In-dash should be offsetting declines in the PNDs.

Is there -- should we be thinking about a two-year time frame, when most of the PNDs could be taken over by In-dash growth?

Or is it too early to know how it's going to go?

I think that's pretty long-term.

We definitely aren't able to provide that kind of guidance at this moment.

I would say that while we see softness in PND, we still believe that there is utility and value in the PND solution, and we believe the market will seek its own level in terms of unit volumes.

And we still believe it's a very valid category.

Okay.

Finally, very quickly, you're reallocating R&D from the phone division to all of the parts of the Company.

You have mentioned your Mobile Application strategy?

Is the R&D reallocation mostly for application development?

Or are we going to look at leverage in the OS know-how, that you have developed, to other organizations of the Company, or is this just mainly application development?

Actually, most of the reallocation went to other areas of the Company.

Mobile Applications, we see some specific opportunities there.

But as I mentioned, there's a reality to what the level of business can be.

So, we want to be conservative in our investment there, while increasing our investment in various OEM opportunities across the Company.

Thank you.

Next, to Jeff Evanson with Dougherty and Company.

Hello, everybody.

Hi, Jeff.

Cliff, as I guess as you've made the decision to exit the mobile business, I'm sure that was a hard decision.

And I guess I'd be curious to know, how is the Company thinking about its core strengths, weaknesses it might need to shore up, and its growth strategy going forward, including thoughts about any potential modifications to the management team?

If you could just talk about the thinking going on at the Company, that'd be great.

So, we still see good opportunities for growth in all of our traditional segments, Jeff, I think in every one of them outside the Auto/Mobile category.

We see clear opportunities, not only for incremental growth just based on new users coming into the market and replacement trends, but also adjacent kind of product categories that we've been known to develop over the years, so we're pursuing those.

We see strong opportunities in all kinds of OEM across our business, Aviation, Marine, and Auto/Mobile.

And we're investing in those, as well.

As far as management changes, there's really nothing that we're considering at this time.

And we are in the mode of building more management strength to our team, but as far as changes go, there is nothing.

You mentioned replacement cycle.

What kind of replacement activity do you think is coming through in the PND market right now?

Probably around 30%.

Okay.

All right.

Thank you.

Thank you.

We'll go to J.B.

Groh with D.A.

Davidson.

Thanks guys for taking my call.

Kevin, I had a question on cash flow deployment.

You did a couple small acquisitions here in the last few months.

Can you talk about, kind of the plans for cash?

It doesn't seem like there's a huge CapEx need right now.

Yes.

In fact, I didn't address that well enough in a prior question.

CapEx is not going to be a large drain on our cash flow.

It's never been a largely capital intensive business.

But I think given where we are in the maturing markets, we would expect CapEx to be $50 million or below in the next couple of years.

In terms of use of cash, I think you pointed out, we have acquired a couple of small deals, relatively small, in use of cash with our Norway distributor, and also MetriGear, the fitness company.

And we're are always looking for good tuck-in acquisitions technology-based, across all business segments.

So, that's still a key part of our strategy.

But other than that, as you've seen, we've been committed to stock buybacks this year.

We've also continued to pay a dividend.

I think depending on the potential changes on the treatment of tax on dividends, we'd still like to be a company that pays dividends back to the shareholders with a strong dividend yield.

The specifics of how, and how much, or when we pay a dividend, of how much, I think are dependent on some of those upcoming tax changes on the dividend payment.

Could you give us maybe a view as to what the capacity utilization is?

I mean, with the PND market going down, how does that look?

Well again, our unit volumes are really down only 1% year-over-year, so we're still consuming a lot of our capacity.

And as we've told you in the past, we have the ability to be very agile, in how we scale our resources, so we're not concerned about that.

Okay, thanks a lot for taking the time.

Sorry about the bad connection.

Blame it on iconic smartphone not made by you.

Thanks, JB.

We'll go next to Tavis McCourt with Morgan Keegan.

Hi guys, this is Tavis.

I want to dig a little bit more into the Outdoor/Fitness market.

Obviously the growth was a little slower this quarter, but it's been growing tremendously now for several years with high margins.

What I was wondering is, are there new categories that you can launch within this, to really drive more growth in the future?

It started out with more of an Outdoor business and you kind of kept on launching more and more subcategories over time, which have obviously proven to be quite successful.

Is there a strategy there to continue to do that, and kind of move beyond -- I don't know how you look at it now, whether in the Fitness category you've got running and biking.

But are there other things you can move into, that you can earn these types of margins on?

I think there's definitely other areas that we're pursuing.

I really won't comment on the specifics right now.

But in terms of the margin structure, I think we see the opportunity to move downmarket, which would probably be lower margin structure on the Fitness side.

And we also see adjacent kind of product categories, in both of these segments, Outdoor and Fitness.

These subsegments of the consolidated Outdoor/Fitness area, where we can grow new revenues.

And then, you may have mentioned this earlier in the call, and I missed it.

I think you said the PND ASP.

I don't know if you mentioned it, but can you talk about the ASP trend year-over-year?

Well, ASP trend year-over-year, I think we're still expecting down around 10% for the full year.

Okay.

I think as we mentioned several times, we had a tough comp in Q3 over Q3 last year.

But if you look at -- sequentially we did see ASPs come up a little bit in Q3.

But going into Q4, we should expect those to come down like they typically do in holiday season, but overall still down 10% for the year.

And do you expect any change in your strategy as this business matures, of being the price premium product out there.

Or does it make sense to get -- when you kind of look at various channels now, you got competitors that are relatively much lower prices now.

Does it ever make sense for you guys to get more price competitive, or are you happy with the way you're able to maintain margins as the category matures?

We face price competitors all through the cycle of this business.

So I don't really feel like the situation we're in today is any different than what we faced before.

Great.

Thanks a lot.

All right.

Thanks, Tavis.

We'll go to Scott Sutherland with Wedbush Securities.

Great.

Thank you and good morning, everyone.

Good morning.

Maybe just a couple follow-up questions.

Kind of back to the Outdoor/Fitness.

What do you see as potentially expansion in regional opportunities there?

And maybe touch on one adjacent market, the geocaching market, there's some new products there.

Can that drive some of the outdoor GPS products a little bit higher?

Yes, so emerging opportunities.

I'm not sure if you're thinking about categories or --

I'm sorry, international or regions, how you've done in the PND market, moving to Asia and other markets.

What do you see regionally as still penetration opportunities in Outdoor/Fitness?

Actually, we've seen strong growth in Asia, in the Fitness area.

Especially Australia, as we've been embraced by some of the major local retail chains focusing on the Fitness market.

We also see opportunities in South America and Eastern Europe, as growing as well.

So, we see definitely a lot of opportunities in emerging markets for Fitness, and across our business as well.

In terms of things like geocaching, we actually are very active in the geocaching area.

And typically our products have been highly embraced by geocachers .

We recently introduced a interesting geocaching tool called Chirp, which allows a new kind of cache to be hidden, and gives people the ability to find caches through a wireless beacon method.

So we're excited about that, and we think it could generate some additional excitement in the geocaching

Back to your In-dash OEM opportunity, in the Auto/Mobile.

This is the first time, I think, you've actually really highlighted the growth and the opportunities there.

You have close to 40% market share in PNDs.

Do you think you can get close to that, or have the opportunity to get close to that, in the In-dash opportunity?

Or do you see it smaller than that?

I think it's a pretty tough challenge to have that kind of market share in the In-dash.

There's a large field of entrenched suppliers into that market.

And very fragmented and different OEMs have their various preferred suppliers.

But we're replicating the model that we've done with some of our other business segments, where we chip away at opportunities, and we're able to win the trust of key providers, and thus get our product designed in.

I mean, maybe get in more detail.

You kind of see the early stage of design wins, that start a couple years in advance.

Do you think this is sizeable, maybe a 10% market share, for you guys, or are you willing to give some range at this point?

Probably not.

I think the opportunities tend to be by car models, and they tend to have long cycles as we've been saying.

And it would be difficult to project a share at this point.

Okay, thank you.

Our next question is from Woo Jin Ho with Bank of America/Merrill Lynch.

Great.

Thank you.

Cliff, as you enter the Apps market.

How should we think about pricing in the navigation application as it relates to overall PNDs?

Well, applications as you know, are very competitive.

And they range anywhere from almost free or small monthly type of fee, up to maybe $40 or $50 or beyond.

But those are below the ASPs of PNDs obviously.

Right, but are you going to price to essentially expand your end-user reach?

Or are you going to price to protect the PND pricing model that you have currently?

I think we'll be competitive.

There wouldn't really be a good point to protect PNDs, because the applications already out there.

And so any substitution is going to take place regardless of how we price.

Got it, thanks.

And in terms of the Aviation markets.

You announced the G5000, and now your OEM at the high end of Cessna's Business Jet portfolio, plus you have the G1000 bracketing the low end.

How should we think about the opportunity at Cessna number one.

And number two, can you discuss in greater detail the OEM design in pipeline?

Yes, so Cessna, as we've announced the Citation 10.

And that's going to be a 2013 offering.

That's really all of the announced business right now.

So I really can't comment on any others at the moment.

In terms of the other OEM pipeline, I would say it's strong at the moment, and we're very busy working on several opportunities.

Thank you.

And our final question comes from Ben Bollin with Cleveland Research.

Good morning.

Thank you.

When you look at the In-dash opportunity, with the auto OEMs, how does the gross margin and operating margin profile of that business compare with the traditional Auto/Mobile business?

I think it's definitely lower than what we've experienced in the other Auto/Mobile business.

The market's very competitive, and also requires significant investment in R&D to be able to bring these products to market.

So both the gross margin and the operating margin would be lower.

And can you quantify at all, how big -- you said it was up triple-digits in the quarter.

Can you quantify how much, or what percentage of revenue it represents for you thus far?

Well, we don't break it down other than I will say, the Auto/Mobile segment is still significantly a PND business for us.

And at this point to say the Auto/Mobile revenues are going to be under $100 million this year, and then as we experience growth in this business the next couple years, clearly that will be a larger part of the Auto/Mobile segment.

Okay, cost was another item that you've discussed a lot in the past.

Can you say what your major building material costs have done here in 2010?

What you've seen and any expectations you have going into 2011?

Yes, it's particularly on the PND.

We've talked about pricing being down about 10%.

Actually, our costs haven't quite tracked at that level.

They're in single digits.

We have seen cost reductions in total, but not quite into the 10% range at this point.

And any thoughts into 2011 on how that might trend?

Well, I think we always want to generate cost reductions across-the-board.

I think the difference between pricing and costing should be fairly neutral as we go into 2011.

But we're not prepared to talk about any specific numbers at this point.

Okay, and my last question.

Looking at gross margins in the Auto/Mobile business in 3Q, it was down sequentially in year-on-year, and the sequential ASPs actually improved.

What was the big driver to the sequential deterioration for gross margins in calendar 3Q?

Again, you're looking Q2 to Q3, or year-over-year?

Yes, Q2 to Q3.

I think it literally just had to do with the product mix of products, that we sold.

The Nuvi 1200, 1300, and 1400, and then also the lower-end Nuvi 205.

That mix shift changed just a little bit to drive the operating gross and gross margins down from Q2 to Q3.

It was about three percentage points essentially, if you factor out the warranty adjustment that we had in Q2.

Thank you.

Okay.

I think that ends the question and answer period.

So thanks, everyone, for your interest.

And we'll be talking further as we go through the rest of the year.

Thank you.

And once again, ladies and gentlemen, that concludes our conference.

Thank you all for your participation.