台灣國際航電 (GRMN) 2010 Q4 法說會逐字稿

Good day and welcome to the Garmin Limited fourth-quarter 2010 earnings conference call.

Today's call is being recorded.

I will now turn the conference over to Kerri Thurston.

Ms.

Thurston, please go ahead.

Thank you and good morning, everyone.

We would like to welcome you to Garmin Limited's fourth-quarter 2010 earnings call.

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

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

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

An archive of the webcast will be available until March 30 of 2011, 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 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 of 2010, filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Limited this morning are Dr.

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

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

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

Good morning, everyone.

I will begin my remarks today with highlights from our earnings press release followed by more detailed comments for each reporting segment.

We're pleased to report that our fourth-quarter results included revenue growth and strong margin performance in outdoor/fitness, marine, and aviation.

As a group, these traditional market segments contributed 60% of our total operating income in the quarter, as the PND business became a smaller portion of our overall operating-income mix.

Due to the ongoing growth opportunities in these segments, and in auto OEM, we have redeployed R&D resources to further invest in these markets and allow us to more quickly capitalize on opportunities.

We sold 6.1 million units in the quarter, representing a year-over-year decline of 8%.

Auto PND unit volume was weaker, however, this was partially offset by increased volumes in auto OEM and outdoor/fitness.

Finally, we generated $175 million in free cash flow during the quarter, resulting in a cash balance of just over $2 billion.

Looking at the full-year highlights, our traditional business segments generated $391 million of operating income, which represents an increase of 20% over 2009.

The growth in these segments allowed them to contribute 61% of our operating income during the year.

We delivered over 16 million units, which is a decline of only 4%.

While the North American PND market weakened in the back half of the year, EMEA unit sales were stable, and APAC continued to grow.

Growth in other product categories partially offset the declines in PND.

According to our estimates, we maintained or grew global market share on an annual basis in each of our segments, with strong gains in fitness and marine.

And finally, we generated $738 million of free cash flow.

Over 70% of our 2010 free cash flow was returned to shareholders through our $1.50 per share dividend, and the repurchase of approximately 7.4 million shares of Garmin stock.

Reflecting on our consolidated results, our strategy of product and market diversification served us well during a difficult year.

I feel confident about our prospects for the future, and the direction in which we are headed, as we have established a solid foundation from which to invest and grow.

Next, I want to walk you through each business segment, highlighting 2010 performance, as well as providing an outlook for 2011.

For each segment, I will offer insights on our longer-term strategic initiatives that are key to our growth strategy for the future.

Starting with the marine segment, we're pleased to report year-over-year revenue growth of 12%, as market conditions continue to improve.

Operating income grew at an impressive rate of 21%, generating $67 million of operating income for the year.

According to our estimates, we continue to take market share in both the marine OEM and retrofit categories.

The OEM market is highly fragmented, with many brands in both categories, but each account provides incremental revenue and market share growth.

During 2010, some notable new accounts include Fairline, Gulf Craft, and Regal.

For 2011, we are targeting revenue growth of 10% in the marine segment, based on additional market share gains and improving economic conditions.

Recent OEM wins will start to contribute revenue in 2011, and we intend to build on this momentum to win additional opportunities during the year.

In the coming years, our strategic focus will include expanded product offerings that enable growth in the mid- to large-size boat category, investment in our relationship with Volvo Penta, which provides us an opportunity to expand our role in the marine OEM space, increasing our share of the OEM market by leveraging our complete line of marine products.

While we've had much success in recent years, this is a fragmented market and we will continue to work towards market leadership, account by account.

And finally, we will continue to expand the coverage and quality of our BlueChart cartography, and will focus on adding new content that will be relevant and exciting for boaters.

Turning next to aviation, we reported year-over-year revenue growth of 7%, and operating income growth of 24%, resulting in $72 million of operating income for the segment.

2010 was a pivotal year for the aviation segment, with the announcement of our G5000 integrated cockpit system, designed specifically for Part 25 business jets, which are mid- to large-size aircraft weighing more than 12,500 pounds.

We are pleased that our G5000 was selected by Cessna for the new Citation X business jet.

During the year, we added new retrofit certification for our G1000 cockpit system, the Cessna Citation Jet, and the King Air 200.

Owners of these legacy aircraft can transform their cockpit with a modern all-glass panel that includes advanced features, such as our fully integrated all-digital flight control and synthetic vision.

The recovery of the aviation industry has continued to lag the overall economy.

The General Aviation Manufacturers Association reports an 11% decline in shipments during 2010, which was a further decline from the already depressed levels of 2009.

We anticipate that the OEM market will remain soft during 2011, which impacts our growth outlook for this segment.

With that in mind, we are targeting revenue growth of 5% in the aviation segment.

Looking beyond 2011, we have a lot to be excited about.

Our growth initiatives are focused on continued development of our G3000 and G5000 platforms with OEM partners, which will be the foundation of aviation growth in 2013 and beyond.

We're identifying and capitalizing on additional retrofit opportunities, like the planned certification of the G1000 into the King Air 300 and 350 aircraft.

Further expansion of market share in helicopter market, and we are preparing for opportunities created by the FAA's next-gen transformation of the National Airspace System.

This initiative represents an evolution from ground-based systems of air traffic control to the satellite-based system of air traffic management.

We are currently developing equipment and systems that will be part of this modernized air traffic control system.

In our outdoor/fitness segment, we reported year-over-year revenue growth of 19%, and operating income growth of 18%, resulting in $251 million of operating income for the segment.

Fitness revenues grew 42%, while revenues from the more mature outdoor segment grew 7%.

It's been an exciting year for our fitness team, with the delivery of the Forerunner 110, and the launch of the Edge 500.

Each of these products is targeted at the value-oriented consumer, and expands the addressable market for our products.

Concurrently, we delivered new high-performance devices that elite runners and cyclists expect from Garmin.

With the acquisition of MetriGear, we look forward to enhancing our participation in the cycling market by offering an innovative new power solution.

In 2011, we are targeting revenue growth of 5% in the outdoor segment, and 25% in the fitness segment, which will be reported separately beginning first quarter of 2011.

In the outdoor segment, we are pleased to be delivering a moderately-priced turn-key tracking solution that can be utilized in a variety of applications, providing an incremental revenue opportunity for Garmin.

In addition, we have numerous product updates coming throughout the year that we expect will be well received by the market.

In the fitness segment, our product pipeline is full of innovative products that will continue to deliver unparalleled value and function for both recreational and elite athletes.

Looking beyond 2011, we believe the outdoor and fitness segments will continue to deliver growth to our shareholders.

In outdoor, we plan to identify and capitalize on adjacent niche markets, as we have done over the past five years, with products like our dog tracker and golf hand-helds.

Additionally, we will focus on growing our global market share in the golf space, through continued innovation, like the recently released Approach S1 golf watch.

In fitness, we believe we are uniquely positioned to deliver the most innovative and useful products to the market, with a complete solution that includes devices, wireless connectivity, measurement sensors, and a well developed web portal.

We will continue to build Garmin connect capabilities by delivering a satisfying and complete user experience, including mobile applications that will complement both our devices and the web.

In conclusion, we believe we are poised to capture additional share of the cycling market in 2012 and beyond, upon the completion of our cycling power solution later this year.

Turning to the auto/mobile segment, our achievements included the launch of the nuvi 3700 series, which defined a new standard for PND devices by introducing features such as a high-resolution capacitive multi-touch display, contained in an elegant ultra-thin form factor.

We grew additional market share as third-tier players left the market during the year, thereby strengthening our global market share position.

2010 also marked the production launch of the Chrysler navigation solution, which is something we've been working on for quite some time.

I will discuss this and other OEM opportunities further in just a moment.

However, we also faced significant challenges in 2010, as revenues declined 19% in this segment.

Unit deliveries in North America were down for the year, but were partially offset by growth in Asia.

Unit deliveries in Europe were flat for the year, but revenues declined due to ongoing ASP pressure.

Looking specifically at the auto OEM highlights from 2010, we delivered our Garmin navigation solution to Chrysler in the third quarter, as 2011 auto production began.

More recently, we also began delivering Garmin navigation to Hyundai Australia for select vehicles.

Our contribution for both auto makers include the easy to use Garmin interface, lane assist, junction view, and numerous other features in an integrated dashboard.

The solution is cost effective, and provides an improved user experience, which has led to higher than industry [take] rates, exceeding 50% on the new Chrysler 300 model, which we're proud of.

Looking ahead, we expect PND unit deliveries to continue declining during the course of the year, and we expect revenue in the segment to be down approximately 20% over 2010 levels.

The revenue situation is driven by decreases in both unit volume, additional ASP pressure, and an increased level of deferred revenue, as PNDs bundled with lifetime maps continue to grow as a percentage of our product mix.

In the PND market, we will look for opportunities to profitably gain market share in both Europe and Asia throughout 2011, offsetting the revenue pressure we expect to continue in North America.

The auto OEM business will also provide some offset to declining PND revenues, as volumes associated with our Chrysler and Hyundai relationships increase.

Beyond 2011, we will be focusing on maximizing profitability in the PND industry as the market leader, expanding our auto OEM business through additional partnership wins, and delivering innovative OEM solutions through both a hardware and software approach.

Given our revenue outlook in each segment, we are projecting consolidated revenues of $2.4 billion to $2.5 billion in 2011, with gross margins stable to slightly increasing from 2010 levels, as traditional segments grow in their overall revenue contribution.

We are projecting operating income between $500 million and $560 million, with operating margins of 21% to 22%.

The decline in operating margins is a result of continued investment in the long-term growth initiatives that I have outlined for you today.

These factors, and an anticipated effective tax rate of 20%, result in a forecasted 2011 earnings per share range of $2.25 to $2.50.

Before moving to the financial review, I also wanted to highlight our dividend proposal for 2011.

At our annual shareholders meeting in June, we will ask for approval of a dividend of $2 per share.

$1.60 of this dividend will be paid in three installments, starting with $0.80 in June, with $0.40 to follow in September and December.

The remaining $0.40 will be paid in Q1 of 2012.

The total dividend allotment will be declared in Swiss francs, but will be paid in US dollars, leading to minor variations in the actual dividend payment, as currency fluctuates over time.

This concludes my remarks for today.

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

Kevin?

Well, thank you, Cliff.

As is customary, I would like to review several details about the fourth quarter and the full-year 2010 financial results, starting first with our fourth-quarter income statement.

We posted revenue of $838 million for the quarter, with net income of $133 million.

And our pro forma EPS was $0.83 per share, which excludes a large foreign currency loss.

Our revenue represents a decrease of 21% year-over-year.

Gross margin came in at 45.3%, which was a 70-basis point decline from the prior year.

And our operating margin was 22.1%, down 550 basis points from 27.6% last year.

The operating margin impact was created through 70 basis points unfavorable and gross margin.

Our advertising was 30 basis points unfavorable.

However, it was down $8 million on a year-over-year basis.

SG&A was 280 basis points unfavorable, up $8 million on a year-over-year basis, due primarily to legal settlements and related costs.

And our R&D came in 180 basis points unfavorable, which was flat on a year-over-year basis.

Our pro forma EPS of $0.83 per share represents a 42% decrease year-over-year, driven by declining revenues in margins, and a significant increase in our effective tax rate to 15%, which compares to 4.7% in the prior year.

Our units shipped were down 8% year-over-year as 6.1 million units were delivered during the quarter.

And our total Company average selling price came in at $138 per unit, down 14% from 2009.

This was driven primarily by the deferral of revenues related to bundled lifetime maps into our future periods.

Looking next at the full-year income statement, we posted revenue of $2.7 billion for the year, with net income of $585 million.

Our pro forma EPS was $2.83 per share, which excludes foreign currency losses and a one-time tax adjustment.

Our revenue fell 9% year-over-year, while the pro forma EPS decreased 20%, when excluding foreign currency and a $0.50 per share one-time tax adjustment.

This was due to declining margins and a higher effective tax rate of 15.8% for the full year, which compares to 12.9% in 2009.

Our gross margin of 50% was a 100-basis point improvement over the prior year.

Our operating income fell 19% to $637 million compared to $787 million in 2009.

The operating margin was 23.7%, down 300 basis points from 26.7% last year, driven primarily by gross margin, which was 100 basis points favorable.

Advertising were down 10 basis points unfavorable, and we declined our expenses by $10 million on a year-over-year basis.

SG&A was 170 basis points unfavorable, up $24 million on a year-over-year level, and R&D, 220 basis points unfavorable, increasing expenses $39 million on a year-over-year level.

Our pro forma EPS of $2.83 was a 20% decrease year-over-year on declining revenues, operating margins, and the increased effective tax rate I mentioned.

Units shipped were down slightly year-over-year, as 16 million units were delivered during the year.

The decrease in North American PND volume was partially offset by growth in other geographies and other segments.

Our total Company average selling price during the year was $168 per unit, down 5% from 2009.

Looking next at our pro forma net income, as you saw from the press release this morning, the non-GAAP measures that we reported represent net income per share excluding the effects of foreign currency translation and the impact of the one-time reversal of tax reserves during 2010.

This impact was $0.15 per share favorable during the fourth quarter, and $0.05 per share favorable from Q4 2009.

The full-year impact was $0.12 unfavorable in 2010, and $0.03 unfavorable in 2009.

There's been a mention of deferred revenue several times in our call so far.

We wanted to highlight, as we did in our press release, the impact of deferred revenue.

As the larger percentages of PND include lifetime map updates, we must defer revenue according to US GAAP.

This table summarizes the net impact of the deferral and amortization of revenue and related costs both in 2009 and 2010.

We have also provided an estimate of the net deferral for 2011, as we believe it will be significant, as PNDs bundled with lifetime maps grow as a percentage of our product mix.

Note that we are deferring revenue according to US GAAP, but we are collecting the cash each year, which is reflected in our statement of cash flows.

Looking next at a little bit more detail on revenue, during Q4 we experienced a 31% revenue decrease within the auto/mobile segment, as both volumes and prices declined.

We deferred $64 million of net revenue into future quarters.

Our outdoor/fitness segment continued to grow, with a 15% revenue increase when compared to Q4 of 2009 on the strength of our fitness products.

Aviation segment revenues increased 11% compared to Q4 '09, as we continue to deliver into additional platforms.

Our marine segment revenues increased 9% compared to Q4 of '09, as our chart plotters did well in the quarter, and in total our revenues decreased 21% during the fourth quarter.

Looking next at revenue by geography, during fourth quarter North America and Europe revenues declined, while Asia continued to post growth.

For the full year, revenue declines were driven by the North American market, while Asia-Pacific grew, and Europe was stable.

North America represented 61% of total revenue in fourth quarter, compared to 67% in the year-ago quarter.

Europe increased from 28% to 31% of our total revenues, and Asia from 5% to 8% in the same period.

Looking next at revenue by segment, the auto/mobile segment now represents 68% of our total business during the fourth quarter, which is down from 77% in 2009.

Outdoor/fitness grew to 20% of revenues in the quarter, an increase from 14% in 2009.

On a full-year basis, auto/mobile revenue contribution declined from 70% to 62%, with the largest gain in outdoor/fitness, which contributed 21% in 2010 compared to 16% a year ago.

While the auto/mobile segment represents 68% of our total revenue during this seasonally strong fourth quarter, it represented only 40% of our operating income in the quarter, due to the lower margin profile of the segment.

The operating income contribution of the outdoor/fitness, marine, and aviation segments were 44%, 10%, and 6%, respectively.

So in total, these segments contributed 60% of the fourth-quarter operating income and 61% of the full-year operating income in our business.

We expect the operating income to continue to be weighted toward our non-auto/mobile segments going forward in the future.

Next, a look at our margins by segment.

In the fourth quarter, auto/mobile gross margin and operating margin were 35% and 13%, respectively.

This was a significant decline to 2009 levels due to the deferral of high-margin revenue, and the deleveraging of operating expenses as revenues declined.

Fourth-quarter outdoor/fitness gross margin was 66%, a slight improvement to the gross margin levels throughout 2010, but a decline from 69% last year due to a decrease in ASPs, as product mix shifted in the holiday quarter.

Operating margin within our outdoor/fitness segment was 48%, a decrease from 54% in the year-ago quarter, due to the gross margin decline, and the allocation of additional resources and costs to this high-growth segment.

Our fourth-quarter marine gross margin was 63% compared to 65% a year-ago quarter.

Operating margin was 29%, down from 36% a year ago, driven primarily by gross margin and the allocation of additional resources and costs to support our future growth in this segment.

And finally, the fourth-quarter aviation gross margin was 70%, which is up from 67% in the fourth quarter of '09.

Operating margin was 26% for the quarter, up from 18% in Q4 of '09.

The year-over-year improvement was primarily driven by gross margin improvement and reduced allocations of our SG&A costs.

Looking next at our total operating expenses within the business, fourth-quarter operating expenses were flat on a year-over-year basis at $195 million, but increased 490 bps as a percentage of sales due to the revenue decline.

R&D was flat year-over-year in the fourth quarter, but increased 180 basis points to 9% of sales.

Our ad spending decreased $8 million over the year-ago quarter, and increased by 30 basis points as a percentage of sales.

We will continue to manage advertising expense based on the market dynamics in our business.

SG&A increased $8 million compared to the year-ago quarter, and 280 basis points to 9.5% of sales.

The increase, as I mentioned, was driven by one-time legal settlements and fees.

Next, a look at our balance sheet, we ended the quarter and the year with cash and marketable securities of over $2 billion.

Our accounts receivable increased to $747 million, representing about 101 days of sales, consistent with the 2009 level of 108 days, exiting our seasonally strong Q4.

Of this balance, we have already collected $362 million.

Our inventory balances decreased $106 million to $388 million on a sequential level.

Our days of inventory metric were down to 119 days at the end of Q4, compared to 140 days we reported at the end of Q3.

We continue to take steps to slow production levels and ensure that working capital is maximized during 2011.

And we ended the quarter with the following number of days of inventory.

$103 million in raw materials, or 28 days; $44 million in whip and assemblies, or 13 days of inventory; $279 million in finished goods, or 77 days; and we ended the year with $38 million in inventory reserves.

We continued to generate strong cash flow across our business, as cash from operations was $185 million during the quarter and $771 million during the full-year 2010.

Capital expenditures were $9 million during the fourth quarter, and we generated free cash flow during the quarter of $175 million.

Cash flow from investing represented a $165 million use of cash during the quarter, made up of the following components.

The $9 million I mentioned in CapEx, and a $147 million net purchase of marketable securities.

Financing activities during Q4 were relatively small at $3 million use of cash.

We earned an average of 1.3% on all cash and marketable security balances during the fourth quarter.

We expect our strong free cash flow generation to continue in 2011.

We will use a portion of the cash flow to fund the dividend that Cliff discussed earlier.

At a $32 stock price, the annual dividend rate of $1.60 represents a yield of 5%.

We also plan to increase our focus on possible tuck-in technology acquisitions, which fit with our core markets or serve adjacent markets.

These acquisitions will be evaluated for not only proper valuation and technology, but also value, compatibility, and strategic fit within Garmin.

As you noticed, our tax rate for the fourth quarter was 15%, and 15.8% for the full year, when normalizing for the one-time reserve reversals in Q3.

We expect the 2011 rate to be between 18% and 22%, depending upon the mix of income within our segments.

And finally, I would like to give a little bit more information on the 2011 guidance.

2011 will be a transition year for Garmin, as the PND market continues to decline, and as you can see on the right side of this slide, we have four solid growth segments that we intend to invest in throughout the upcoming year.

The continued profitability of these segments will position us well, as we expect to return to growth across our entire business sometime after 2011.

This concludes our formal remarks.

We will now move to a period of question and answer.

Please direct your questions, if you have any.

Thank you.

(Operator Instructions)

We'll hear first from Yair Reiner with Oppenheimer & Company.

Please go ahead.

Thank you, and congrats on the good results.

First, on the revenue recognition and the deferred revenue, is there a possibility for you going forward to report non-GAAP results that would include the deferred revenue and the impact on the bottom line?

I think what we've done is we've given a footnote to what our US GAAP numbers are where we felt like it was becoming significant enough that we identified it, but we don't plan to make any changes to how we report in the future, no.

Got it.

And then in the auto/mobile, could you break out the contribution today from OEM, and you suggested on the prepared remarks that you expect OEM growth to offset some of the decline of the PND business.

Could you perhaps quantify that for us in both percentage growth terms and in dollar terms, if possible?

Yes, again, we don't plan to break out our auto/mobile segment with a separate auto OEM segment at this point.

I can tell you that the overall revenues in our auto OEM business are just under $100 million and they will be -- it will be a growth part of our business in -- under $100 million in 2010, but that will be a growth business in 2011.

But we don't plan to, again, break that out at this point.

Okay, and just one more quick one, if I could.

I think the guidance suggests that your operating expenses in 2011 will be more or less flat.

First of all, is that correct?

And, secondly, is it fair to assume that given the lower revenue run rate, you're going to be investing less in advertising and perhaps more in some other portion of operating expenses?

Thank you.

The first question, yes, the confirmation on the operating expenses at this point, given our guidance is roughly flat.

I think what we're looking at given the PND decline is to evaluate how we can manage those expenses going forward.

But at this point, that's baked into our guidance.

Second question was related to revenue run rate, right?

Advertising.

Advertising, yes.

A big part of our advertising, as you know Yair, it's related to volume.

So just naturally we're going to have some decline in our advertising spend, since it's related to cooperative advertising, and then we will evaluate the other media spend during the year.

Great, thank you.

Thanks.

We'll take our next question from Mark Sue with RBC Capital Markets.

Hi, this is Joe on for Mark.

Can you discuss your overall strategy around applications?

As the mobile device market expands, are there new targeted areas where you're focusing or investing that may help offset the decline in the PND business?

Yes, Joe, we are looking at other areas of mobile applications.

As you know, we launched an iPhone app for turn-by-turn around CES time, and we plan to follow up with some additional platforms for that as well.

We're also examining mobile apps in our traditional segments as well.

Our strategy there is to compliment our overall product line and web offerings so that our mobile apps fit within that overall strategy.

But, in general, I would have to say that for these mobile apps, they are incremental revenue, but they are not significant in terms of offsetting big declines in PND.

Okay, and on the auto OEM, can you provide some additional color on the scale and scope of your investment in this strategy?

I know that there are significant lead times.

Just what are the obstacles and opportunities as you see it in expanding your relationships?

The investment definitely is more significant, mostly on the engineering side of the business, as each program, each project requires some level of customization and integration into the OEM platform.

The advertising, the sales and marketing are obviously different because this is more of the B-to-B business, but in general, it is a high investment level business.

Thank you and good luck.

Thank you.

Moving on, we'll hear from Tavis McCourt with Morgan Keegan.

Thanks for taking my questions.

In terms of the overall operating costs being roughly flat year to year, should we think of that as a decline in the PND operating costs and then some marginal investments in the growth segments?

Essentially, that's what we're working with as we see it, a decline in our largest revenue business at this point.

We have reallocated resources to the growth businesses that we mentioned, the non-auto/mobile segments, but that includes auto, OEM, outdoor/fitness, marine and aviation.

All of those growth businesses for 2011 are receiving more of our internal resources to grow those segments.

Should we think about any kind of substantial change in the margin structure of those businesses or just growth in line with the revenue growth?

I think it's slight.

For the 2011 period, as I mentioned, we believe it's a transition year as we reallocate some of those resources.

So if you look at our overall operating margin, they come down the 21% to 22% range total business.

That's below where we are today.

So, yes, there will be a slight short-term impact in that.

And then I think if my numbers are correct, the inventories are slightly higher than they were last year at this time.

Should we expect a little more seasonality in Q1 than typical because of that, or is that reading too much into it?

I think you are correct.

On a days basis, we have more days from a year ago.

As you recall, we went out of the last two years in the fourth quarter, there was quite a bit of inventory, which not only in our business, but also in the dealers and distributors business, had some destocking impact.

I think seasonally we would expect Q1 to be pretty -- one of our lowest quarters in terms of revenue.

But no major changes from year-over-year in that regard.

Okay.

And then can you talk about how you are allocating the corporate shared expenses between segments at this point, maybe a rough estimate of how much those are, and are they split equally?

Are they split based on percentage of revenues or percentage of operating income, any guidance there would be?

I think it depends on which expenses we're talking about, but, in general, our methodology is to allocate many of the overhead, the admin, the SG&A costs based on a percentage of sales.

So what we're seeing is, as I think you already pointed to, that will have a short-term impact on the margin structure of these other growth businesses as they get a larger piece of the overall operating expenses within our business.

And can you talk about what the actual size is of those shared expenses?

No, we are not prepared to disclose that type of an impact.

Okay, and one last one, I promise.

On the deferred revenue impact, the table you gave I think provided the increase in deferred revenues year-over-year and in each quarter and for the full year.

But isn't there the offsetting impact of previous deferred revenue being amortized to the income statement every quarter at this point?

Yes, this is actually -- these numbers that I showed are actually net of that allocation.

Oh, okay.

Yes, we've already taken that into consideration.

And how far along on that penetration are we in terms of what percentage of PND sales at this point are with lifetime maps, just so we can get a sense of -- is this a one more year of this impact before it's all penetrated, or does it take a few years?

Yes, we're still using roughly a three-year product life assumption into these numbers, and we know that 2011 will increase in its impact to our P&L.

2012 will actually still have an impact, but it won't be as significant in the out years, as we kind of forecast.

A lot of it depends on what the consumer does and how much -- how many they buy bundled or unbundled with lifetime maps.

We think we'll have less of an impact net of the future amortization.

So 2011 is probably the peak of what it appears and then it improves in 2012 and 2013.

Great.

Thanks a lot.

Thanks.

(Operator Instructions)

We'll hear next from John Bright with Avondale Partners.

Thank you.

This is Tom Kucera for John Bright.

I actually wanted to follow up a little bit on the deferred revenue question, and maybe just more broadly looking at the PND margin.

There's a lot of dynamics here.

There's this change in composition in deferred revenue.

There's sort of continued price contraction and the thought that the market is declining.

Do you guys have maybe a thought as to what sort of operating margin target you're looking at?

Optically, I guess it declined year-on-year.

And maybe a thought as to how --- as that business shrinks, how you could manage those operating margins.

I think it is difficult to predict.

I think we're still -- we ended Q4 at 13%, which was the low point in the year.

For the full year, we had a 20% operating margin within our auto/mobile segment.

I don't believe we'll continue at 20%.

As we already talked about, we'll see some decline due to revenue deleveraging throughout 2011 and probably in the future years.

We're not really prepared to give a target of operating margin within each of our segments, but just the expectation that it will decline during the upcoming year.

Or maybe to put it another way, do you have confidence that this business can remain sort of operating income profitable at a much smaller level?

Yes, I think -- we're focusing on the non-PND segments because they're generating so much more operating income, but we still forecast that the PND business is still a -- it's a business that is generating positive cash flow in the future, yes.

Thank you.

And if we can touch on aviation and marine, it sounds like you're assuming a much better underlying market or maybe at least a better underlying market for marine than you are for aviation.

Is that fair in terms of the economic environment?

Yes, Tom, this is Cliff.

I think the marine market will rebound a little quicker than aviation because it's more of a consumer-related item and a bigger market.

But we do see both markets trending upward as the economy improves, although aviation will be slower.

Got it.

And last thing I wanted to ask, on fitness, what are your thoughts on market share in that business, looking at 2011?

Yes, I think the market is somewhat fragmented by different product categories, and where we're strongest is in the running market, in the GPS-enabled running market, where we believe we're the number one player.

I'm not really prepared to give you an exact number right now, but that is where our focus has been.

In the heart rate non-GPS area, I think that's dominated by other players, and we only have a small percentage of market share there.

Okay, and last question I wanted to touch on was on SG&A.

And I didn't hear if you gave an exact number on this, but without that legal settlement, would that have comped flat to down year-on-year?

Yes, it would have been roughly flat, yes.

All right.

Thank you.

Okay, thanks.

We'll take our next question from J.B.

Groh with D.A.

Davidson.

Good morning, guys.

Good morning.

Hey Kevin, I had a question on the deferred, it's probably in the filings somewhere, but what's the amortization period on a map typically?

How we defer?

Yes.

We're deferring over a three-year period and then we amortize, yes.

So is it like a straight line, or does it --?

Yes.

Okay, okay.

And then I saw some stuff on some blogs about the 4G build out and how that could maybe present some problems for GPS.

Maybe, Cliff, you could talk about that a little bit?

Yes, I think there's some activity going on now with new 4G systems, and there's some potential that those systems could cause some impact to GPS operation.

We're working with the right governmental and industry level people to be able to mitigate that and make sure it's not a factor.

But I think like everything there's lots of information in the world, lots of different uses for GPS, and all those have to be sorted out in order to make sure that the new system is no impact.

So there will be -- the goal is to have compatibility there, of course.

Okay.

Yes, absolutely.

GPS is a national asset, so we don't really foresee that that's going to be changed on the 4G system.

Okay, good.

And then, Kevin, I don't think you've ever broken out the outdoor and fitness, what those chunks are just for modeling.

I'm assuming that will be in the filings, but can you just kind of ball park for us what the --?

Yes, we will start -- as we mentioned, Cliff mentioned I think, that we are going to be breaking those out, outdoor and fitness discrete segments in 2011.

Since we didn't do it in 2010, I can tell you that the outdoor is still the largest segment and that fitness has been growing more rapidly.

Fitness is somewhere between 40% and 45% of that total segment.

We'll give absolute numbers as we report in Q1.

Okay, that's helpful.

All right, thanks a lot.

Thank you.

We'll take our next question from Jonathan Goldberg with Deutsche Bank.

Good morning.

Good morning, Jonathan.

My question is can you just talk a little bit about sustainability of the margins in outdoor and fitness?

Compared to any other consumer electronics categories, they are pretty good.

How long do you think you can keep that up for?

I think our product categories are still in the technology, innovation, growth side of the business and are higher-end products, so we believe that overall the market should be able to sustain higher margins there, as we have introduced lower end products to expand the market.

You've seen our ASPs come down and our margins come down a little bit.

But we feel like that's generally sustainable over time, and at this point we don't believe that competitive factors are an impact in terms of our margin structure.

Great.

Are you seeing any signs of new entrants in any of the various sub-categories?

Yes.

I think we saw the announcement by Nike over at CES, entering with a new sports watch, which we expected.

We've experienced competition in this space up till now as well, though.

Timex and others are involved in the categories, and so it's an area that's attractive to a lot of people, but we believe we have strong products and sustainability.

Okay.

Thank you.

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

Hi.

Thanks for taking the call.

One clarification, just on PND units for the quarter, roughly what percentage were they, if you could provide that?

What percentage of --?

Of the total units.

Of the total units?

Yes.

We've shipped -- we don't actually break those out, but it's a pretty similar relationship to our overall revenue.

Okay.

6.1 million and a large percentage of that is in the PND market.

We don't break the PND numbers out publicly.

Got you, got you.

Got it.

And then just on your expectations for free cash flow for this year, I think you talked about you expect to generate strong free cash flow this year.

Do you think it will grow versus last year's level?

How should we think just in terms of that trajectory?

Well, I think if you look at our operating profit, our cash flow from operations, because of the decline in the PND market it will be difficult for us to grow our free cash flow, our cash flow from operations.

We think we can manage working capital to help offset some of that, and, of course, the deferred revenue actually helps on the cash.

But from an operational cash flow, it should not increase, no.

Got you.

How about for -- any sense in terms of for 2012?

Is the expectation for that to grow?

That's probably too far --

We believe 2011 is a difficult year from a growth perspective, but we have good growth opportunities across our business, and I think the PND transition will, hopefully by the time we get to 2012, will help us and we should start to see growth in that area.

It's way too preliminary to be able to give any kind of numbers for 2012 though.

Fair enough.

And then just embedded in your revenue guidance, just curious to get your thoughts in terms of what unit assumptions you're using for PNDs.

I think TomTom recently said they expect the market to be down 10% to 15% in units.

Is that roughly kind of in line with what you're thinking?

Yes, that's our expectation, too, is roughly a 10% global unit decline.

I think what we expect to see is a little bit more than that in North America, probably close to that in Europe, and then we still expect to see some growth in Asia-Pacific, Latin America, and some of these emerging markets.

Overall, I think 10% seems to be pretty reasonable to us as well.

Got you.

And then last question, I think it may have been asked earlier, so I apologize, but just in terms of the quarterly trajectory of your operating margins, I know the full year guidance 20% to 21%, but is that likely -- first half could be below 20% and then ramp through the year?

Is that kind of how we should think about the margin trajectory throughout the year?

I think if you look at our past history, we tend to have higher gross margins in the first half, and we did have a benefit of warranty last year of about $40 million in the first half 2010.

But in Q1, because of the relative size of our sales, we would expect operating margins to be below our full year number, on 21% to 22%, and then improving throughout the year.

Got it.

Okay.

Thank you.

Thanks.

Moving on, we'll hear next from Woo Jin Ho with Bank of America Merrill Lynch.

Great, thank you.

In terms of the fitness segment, Cliff, how are you thinking about the development of this market in 2011?

You are forecasting 25% on the year-on-year basis, but is it still a niche market in your mind, or is it more of a mainstream category?

And can you balance those comments out with the margin comments that you made earlier, the gross margin comments you made earlier?

I think the overall category is still somewhat in the niche category, although obviously the volumes there are bigger than aviation and those kinds of things, but it's nowhere near what a PND market is, that kind of thing.

So, that's why we feel that the margin structure and the overall competitive position in the market will allow us to sustain our margin structure there.

Is there a potential for an inflection possibly in the second half given the growing competition, or the potential of competition to grow with the market itself?

Inflection in growth in the market?

In terms of units, yes.

Yes, I think it depends on how many people want to get fit.

But I think that the way we see it it is probably more of a linear growth kind of a market, even with the entrance of new players.

Got it.

In terms of the avionics, or the aviation business, you're forecasting 5% growth in 2011 off of a pretty challenging 2010, though you were still up 7% on a year-on-year basis.

I'm curious, is this more conservatism, especially given that the underlying market itself is improving?

Yes, it depends.

I think if you listen to the OEM makers, they are still somewhat concerned about 2011, although the view has improved since the passage of the tax bill in late last year, which does spur some interest in buying new aircraft.

But I think in general the market is a long book bill kind of market and takes a while to see revenues come through that are generated by new interest.

There's still quite a few aircraft that are available for sale both on the used and the new market.

So, as a result, I think we are still working through some of the inventory/economic issues that we faced throughout the year.

But I think with that in mind, we still are cautiously optimistic because we have new product categories coming, new products, as well as seeing a full year of products like the Phenom and other high-end aircraft that we're a part of.

Great, thank you.

And we'll take our final question today from Charlie Anderson with Dougherty & Company.

Good morning.

Thanks for taking my questions.

I wonder if you could speak to the dividend policy.

Your business has been down the last couple of years, but then the dividend's going up.

So just -- if you could give me commentary around that relationship, how you're determining the size of dividend relative to the trends you're seeing, that would be great.

Okay, sure.

I think -- we did pay a dividend last year, as Cliff mentioned, in 2010, and we were watching to see what was going to occur around the tax bill.

As you know, we got some good news late last year that the tax rates are going to stay relatively low.

So we felt as a company, and given our excess cash, that we would pay back the shareholders at roughly a 5% dividend yield based on current pricing, (inaudible) price, and so we feel like given the fact that we don't have -- we're not expecting EPS growth.

We still feel like this is a good way to pay back the shareholders.

And if we look at our future cash flows, not only on the PND business, but across our growth businesses that we've already identified, we believe that the cash will continue to be strong generation of that in the future.

But not only do we have a strong cash balance with no debt today, we feel like that's going to grow, and that gives us a little bit more confidence to pay consistent dividends as long as the tax rates stay down where they are today.

So you would look to continually raise?

Is there true relationship to the trend of the business?

How should I think about that?

I don't think you should read that into our comment, but I think that -- we're $1.60, which is above the $1.50 from last year, just signals that we feel comfortable with the cash balances today.

We'll comment later on whether we want to raise, but I don't think you can read that in today.

Got it.

And then you guys mentioned that non-PND was 61% of operating income for the year, and that will go up, I think, in '11.

I wonder what order of magnitude if you were to think about operating income mix in 2011, where does it shake out PND versus non-PND in your mind?

I don't think we're -- I don't think -- I could probably look that up.

I don't think we're prepared to talk about -- it's obviously growing, but I don't want to name a number without looking at that.

Okay, thanks so much.

Thanks.

That does conclude our question and answer session for today.

I'll turn the conference back over to Mr.

Kevin Rauckman for any additional or closing remarks.

Okay.

Well thanks, everyone, for your interest in the company and for participating in our call.

We look forward to working through 2011 and looking forward to your interest in our company.

Thanks very much for joining us.

That does conclude today's conference.

Thank you all once again for your participation, and have a wonderful day.