台灣國際航電 (GRMN) 2011 Q2 法說會逐字稿

Good day, and welcome to the Garmin Limited second quarter 2011 earnings conference call.

Today's call is being recorded.

I will now turn the call over to Ms.

Kerri Thurston.

Ms.

Thurston, please go ahead.

Good morning.

We'd like to welcome you to Garmin Limited second quarter 2011 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/doc.

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

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

An archive of the webcast will be available until September 6, and a transcript of the call will be available on the website under the Events calendar tab.

This earnings call will include projections and other forward-looking statements regarding Garmin Limited and it's 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-K for the year ended December 25, 2010, filed with the SEC.

Attending today's call on behalf of Garmin Limited 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 mornings call are Cliff and Kevin.

At this time, I'd like to turn the call over to Cliff.

Thank you, Kerri, and good morning, everyone.

Thanks for joining today.

As reported in our press release this morning, Garmin's second quarter results included 11% revenue growth in our traditional segments of Aviation, Marine, Outdoor and Fitness.

Total revenue was down 8%, driven by lower volumes and increased deferred revenue in the Auto PND market.

Our traditional segments contributed 46% of total revenue, and 81% of total Company income, which is evidence of the strength of our diversified business model.

We reported pro forma EPS of $0.63, down 26% from Q2 of last year.

A major contributing factor is the increased rate at which we are deferring revenues.

These revenues are part of our cash flow, with recognition deferred into the future according to GAAP rules.

Additionally, our EPS was affected by a one-time accrual for bad debt expenses, as well as higher than anticipated legal expenses in the quarter.

Kevin will provide additional information on the impact of these items in just a moment.

We sold 3.8 million units in the quarter, which is a 6% decline over prior year levels, driven primarily by lower unit deliveries in the Auto/Mobile, followed by growth in Fitness and Marine.

We generated $196 million of free cash flow during the quarter, resulting in a cash and marketable securities balance of $2.5 billion.

Next, we'll take a closer look at the second quarter performance, as well as a market and product update for each segment.

Looking first at the Marine segment, we posted revenue growth of 6%, which is below that of Q1, however, still in line with our expectations for the full-year.

During quarter, we launched the Echo series, which is a new line up of low-cost fish finders.

The Echo series has been very popular, capturing a meaningful share of the fish finder market.

Due to the release of the Echo series, the product mix shifted towards lower price points, affecting our margins in the segment.

But we expect margins to improve in the back half of the year, as the product mix normalizes.

At the beginning of the second quarter, we experienced a flattening of growth in the US market, which has been confirmed by other customers and partners serving the US market.

However, this softness was offset by gains in Europe and Asia.

Our full-year expectations for the Marine market remain intact.

Also during the quarter, we introduced products that bring new innovation to the Marine market, and enhance our ability to serve more boat platforms.

The first product I'd like to mention is the GDL 40, a pay-as-you-go weather marine receiver delivering useful realtime content from our server platforms, including radar, wind speed and direction, sea surface temperatures, wave height and more.

Boaters now have the ability to get the information they need, when they need it, without paying ongoing subscription fees when not on the water.

In addition, we introduced the GHP 12, an improved marine auto pilot that supports additional steering systems, making it an attractive solution for a broader range of power boats and sail boats.

Looking next at Aviation, revenues grew 13%, ahead of expectations, driven by strengthen the retrofit market.

Both new and legacy products contributed to the growth.

On the other hand, the OEM market conditions remain soft, as a result, OEM revenue was basically flat year-over-year.

Operating income increased 18%, as revenue growth outpaced the growth in operating expenses.

Operating income generated by Aviation represented 17% of our total operating income for the quarter.

As I mentioned the OEM market remains soft, and we do not expect to see market conditions improve this year.

Current economic conditions are unfavorable, and the political environment has returned to harmful finger pointing at a rare and valuable industry that creates domestic manufacturing jobs, and positive exports for the United States.

In light of this, it's very difficult to predict when the OEM market will recover.

But despite these challenges, we remain excited and our long-term focus is on growing revenues in the OEM market.

Should the market remain soft for an extended period, we are confident we can grow our share based on the value proposition of our integrated cockpit system.

New platform certifications are on track and we anticipate they will begin contributing revenue in 2013.

In the near term, we are certifying the G1000 into additional aircraft platforms, as a retrofit solution.

Most recently, we announced a G1000 retrofit solution for the SOCATA TBM 700, which is our fifth aircraft model approved for a G1000 field upgrade.

We have made our first delivery to the French Ministry of Defense, as part of a contract to equip 27 aircraft.

While the Aviation market contains a mix of good and not so good news, the trends so far give us confidence that we will meet or exceed our full-year revenue targets.

In our Outdoor segment, revenues grew 1%.

The European market was strong, but was offset by weakness in the US.

While this is below our full-year expectations, year-to-date performance exceeds our previously stated target of 5% growth.

And we remain confident that we will meet or exceed this target, driven by new product introductions, and our recent acquisition of Tri-Tronics, a leading provider of electronic dog training equipment.

We're excited to have Tri-Tronics in the Garmin family.

They, like Garmin, have built a respected brand that represents quality, performance, and customer service.

With their eCollars and other products, we have an expanded product offering for our existing Astro customer base, and an opportunity to grow in new areas, such as the pet market.

We look forward to collaborating together to expand our leadership position, in both the tracking and training of sporting dogs and household pets.

Tri-Tronics will begin contributing revenue in the back half of 2011, and we anticipate they will add approximately $8 million to our overall outdoor segment revenues.

During the second quarter, we introduced a robust set of new products in the Outdoor segment, that will contribute to our growth story in the back half of the year.

These products continue in Garmin's tradition of serving in a variety of diverse needs, with something for every customer.

Our new products include the Montana Series.

These handhelds feature a 4-inch sunlight readable display with touch screen, and include advanced features such as multi-activity software, altimeter and compass.

The Montana 650 and 650t, include a ruggedized 5-megapixel autofocus camera, which allows users to capture high quality images in the field, without the worry of carrying a second camera device that could be lost or damaged in demanding outdoor conditions.

Our classic eTrex series has been updated by new and greatly improved line up of eTrex's handhelds, with enhanced displays, paperless geocaching capabilities, and much more for our entry level customers.

And finally, we introduced a line up of Rino 2-way radios with touchscreen, extended communication range, and new features such as weather alerting and polling capabilities, to enhance the safety and situational awareness.

Like the Montana 650 series, the Rino 655t also includes a ruggedized 5-megapixel autofocus camera.

In the Fitness segment, we reported 25% revenue growth driven by new product introductions, such as our Forerunner 210, 610 and Edge 800.

The high-end Forerunner 610, in particular, has exceeded our expectations, and remains in high demand.

Operating income grew only 3% year-over-year due to increased investment in advertising and R&D in the quarter.

In addition, SG&A costs increased, as the segment was allocated additional overhead costs, based on it's revenue and unit delivery contributions.

As we look to the future, our focus will be on innovation, in both form factor and function, driving global penetration and defending our leadership position in the GPS-enabled Fitness category.

Before moving on, I'd like to highlight the incredible performance of Team Garmin Cervelo at the recent Tour de France.

The team achieved their best ever Tour de France, as the number one team.

One of our cyclists, Tom Danielson, achieved ninth place in the individual standings.

We had an impressive showing during the long race, including a 4th of July Sprint stage win for American Tyler Farrar, and two stage wins for Thor Hushovd, who wore the yellow jersey for a full week early in the tour.

We are very proud of the accomplishments of the team, and their commitment to performance, through clean racing.

The publicity and good will that the team is generating is difficult to value, but I think you'll see the dividends in growth of our cycling computer sales, effecting our overall Fitness segment.

Finally in our Auto/Mobile segment, revenue declined 19%, as strong growth in OEM revenues was offset by the declining size of the PND market.

In addition, we deferred $62 million of revenue into the future, as the mix of bundled products is growing faster than we earlier anticipated.

The GAAP operating margin for the segment was 7%.

However, when considering the impact of deferred gross profit of $51 million, our gross margin would have been 18%.

This reinforces our belief that the segment will be profitable in the long-term.

Our market share has strengthened throughout 2011, with second quarter share of greater than 60% in North America.

In fact, [NPT], has reported a share of 64%, which is the highest in recent memory.

Share in Europe continues to grow, currently in the mid 20% range, based on our estimates of the total market size.

Also in the quarter, we announced our proposed acquisition of Navigon, which was recently completed after receiving final clearance from German competition authorities.

Navigon was attractive to Garvin, mainly for three primary reasons.

First Navigon is a contender in the OEM market, with a growing customer list and a well-respected technology base.

Secondly, their PND market share in Europe is approximately 7%, which further strengthens our position in that region of the world.

Finally, they offer a compelling mobile application, that has been well received in the various application markets.

We've already started efforts to combine our strengths, and leverage synergies that are possible through the combination of our PND businesses.

As a result of this acquisition, we anticipate emerging as an even stronger global competitor.

We expect that Navigon will add approximately $75 million in revenue in the back half of 2011.

Our market expectations for PND are unchanged from those provided in February of this year.

We continue to expect PND volumes to decline year-over-year in both North America and Europe, offset by some growth in emerging regions.

Garmin is currently bucking the trend in Europe due to our strong share gains, allowing us to post, both revenue growth and unit growth in this region, throughout the first two quarters of the year.

Within the PND category, we realized that we must have precision execution to maintain our global leadership across the spectrum of market share, technology and content offerings, while remaining profitable.

We are committed to doing just that.

From a growth perspective, our OEM business continues to develop, with Garmin gaining global recognition as a competitive vendor for both hardware and software solutions.

We look forward to sharing more with you from this segment, as the business develops.

Now that the first half of 2011 is behind us, we are updating our fiscal 2011 guidance.

We now expect to deliver full-year revenue between $2.5 billion and $2.6 billion, with the improvement driven primarily by acquisitions of Navigon and Tri-Tronics.

While slightly increasing our revenue range, we are reducing and narrowing our EPS range, driven primarily by accelerated deferrals of high margin revenues.

Kevin will provide additional clarity in just a moment.

These factors, and an anticipated effective tax rate of approximately 12%, result in a forecasted 2011 EPS of $2 to $2.15.

That concludes my Q2 update.

And Kevin will continue with a more detailed financial overview.

Kevin?

Well, thanks, Cliff, and good morning, everyone.

I'd like to walk us through the Q2 financial results, first, beginning with the income statement.

So we posted revenue of $674 million for the quarter, with net income of $109 million.

Our pro forma EPS was $0.63 per share, which excludes a $15 million foreign currency loss during the period.

The revenues represent a decrease of 8% year-over-year.

Gross margin came in at 47.8%, which was a 590 basis point decline from the prior year.

Gross margin strength in the prior year quarter, was primarily related to the refined warranty estimate that reduced our cost by $22 million or 290 basis points.

Deferral of high margin, revenues associated with bundled product, accounted for an additional 200 basis points of gross margin decline.

Operating margin was 19.5%, down 820 basis points from 27.7% last year.

This margin was driven primarily by the gross margin down 590 basis points, advertising was 80 basis points favorable, and down $9 million on a year-over-year basis.

Our SG&A was 260 basis points unfavorable, and this was up, $12 million on a year-over-year basis, due primarily to bad debt accruals and legal expenses.

R&D came in 40 basis points unfavorable, but was down $2 million on a year-over-year basis, as our headcount declined slightly.

Pro forma EPS of $0.63 represents a 26% decline year-over-year, as revenue and margin declined.

Units shipped were down 6% year-over-year, as 3.8 million units were delivered during the quarter.

And our total Company average selling price was $179 per unit, basically flat from $182 last year.

The non-GAAP measures that we reported this morning represent net income per share, excluding the effects of foreign currency translation.

This impact was $0.07 per share favorable during Q2 of this year, and $0.18 per share favorable for Q2 of last year.

As Cliff mentioned earlier, according to US GAAP, we must defer revenue on certain products.

And this table on the slide summarizes the net impact of the deferral and amortization of revenue and related cost, in both the second quarter of 2011 and 2010.

In the current quarter, we deferred approximately $0.23 of EPS into future periods, compared to $0.08 in the second quarter of 2010.

Most of these revenues and costs will be amortized straight line, over a three year period.

It is important to note, that while we're deferring revenue according to US GAAP, we are collecting cash at the time of the sale which is reflected positively in our statement of cash flow, which I'll review in just a minute.

It's also interesting to note, that we have approximately $1 of deferred earnings per share on our balance sheet currently, assuming a 12% effective tax rate.

Moving next, to a little bit more detail on our revenue.

During Q2, we experienced a 19% revenue decline within the Auto/Mobile segment, due primarily to a declining PND market in North America.

This was partially offset by PND growth in Europe and Asia, as well as the OEM revenue increases we saw.

Our Outdoor segment grew 1%, and growth in this segment will improve in the third quarter with a launch of a number of our new products.

Fitness revenues remain strong and grew 25%, compared to Q2 of 2010 on the strength of high-end running watches and the cycling computers.

Aviation segment revenues increased 13%, compared to Q2 2010 with growth in aftermarket products.

And our Marine segment revenues, also increased at 6% compared to Q2 2010, as we gained market share during the quarter.

In total, our revenues decreased 8% during the second quarter, and for the year, our total revenues are up 2%.

During the second quarter growth of 12% and 31%, respectively, in Europe and Asia was offset by 21% decline in North America due to the declining PND market.

North America represented 53% of revenue in Q2 2011, compared to 62% in the second quarter last year.

Europe increased from 31% to 38% of total revenue, and Asia from 7% to 9% in the same time period.

The Auto/Mobile segment represented 54% of our total revenues during Q2, down from 61% in 2010.

Each of the other segments contributed between 11% and 12% of revenues.

While the Auto/Mobile segment represented 54% of our total, it represented only 19% of our operating income in Q2, due to the lower margin profile of the segment.

This compared to 44% in the second quarter of 2010.

Each of our other business segments contributed between 17% and 27% of operating income, with Outdoor leading the way, at 27% of total Op income due to the 44% operating margins in that segment.

Looking next at the margin breakdown by segment, Q2 Auto/Mobile gross margin and operating margin were 36% and 7%, respectively.

The year-over-year decline in gross margin was primarily driven by the 2010 warranty estimate refinement, and the deferral of $51 million of gross profit, at an 83% margin.

Operating margin in the quarter, excluding these deferrals, would have been 18%.

Auto/Mobile was also impacted by approximately $8 million of bad debt and legal costs that are not recurring in nature.

Our second quarter Outdoor gross margin was 65%, down from 67% last year due to the 2010 benefit from our warranty refinement.

Operating margin as I mentioned was 44%, down, from 48% in the year ago quarter due to the gross margin decline and a slight increase in operating expenses in this segment.

Our Q2 Fitness gross margin was 58%, down from 62% last year.

Like Outdoor, this is partially related to the 2010 benefit from warranty.

Operating margin was 33%, a decline from 40% a year ago due to the gross margin decline, as well as the increased advertising costs and allocation of selling, general and administrative costs.

Q2 Marine gross margin was 56%, compared to 66% in the year ago quarter, as product mix shifted towards fish finders, and we also comped against the 2010 warranty benefit.

Operating margin was 30%, down from 43% a year ago, driven by gross margin decline and increased R&D and SG&A expenses.

As Cliff mentioned previously, we do expect Marine margins to improve in the back half of the year.

And finally, our second quarter Aviation gross margin was 69%, down slightly from 70% a year ago.

Operating margin was 30% for the quarter, representing a slight increase from 29% in the prior year.

Looking next at operating expenses, our Q2 OpEx increased by $1 million on a year-over-year basis from $190 million to $191 million in Q2 of 2011, increased 220 basis points as a percentage of sales.

R&D decreased, however, $2 million year-over-year, but was up 40 basis points to 10% of sales.

As I mentioned earlier, we have slightly reduced headcount on a year-over-year basis.

Our ad spending decreased $8 million over the year ago quarter, and decreased 80 basis points as a percentage of sales to 5% in Q2 2011.

This was largely driven by reduced co-operative advertising which is volume dependent, and a reduction in our media spend.

Other SG&A increased $12 million compared to a year ago, and increased 260 basis points, up to 13% of sales.

This increase represents approximately $8 million of non-recurring costs for both bad debt and legal costs.

Moving next to the balance sheet.

We ended the quarter with cash and marketable securities of $2.5 billion.

Our accounts receivable increased sequentially to $493 million, as revenues increased 33%.

Accounts receivable accounted for approximately 66 days of sales when calculated on a trailing 4 quarters, compared to 61 days of sales in the second quarter of 2010.

Our inventory balances decreased slightly to $386 million on a sequential basis, and our days of inventory metric was 106 days, a decrease from 119 in the first quarter 2011.

We do continue to take steps to insure that our working capital is maximized during the year.

We ended Q2 with the following amounts and number of days of inventory.

We ended Q2 at $153 million in raw materials or 38 days, $43 million in work in process and assemblies or 12 days, and $219 million of finished goods or 55 days, and the inventory reserves at the end of the quarter were $29 million.

We now show a $388 million dividend payable on our balance sheet, following our shareholder approval at the Annual meeting in June.

The first dividend installment of $155 million was paid on June 30, which occurred after our quarter-end.

We continued to generate strong cash flow across our business, as cash from operations was $203 million during Q2.

CapEx was $7 million during the quarter, therefore we generated free cash flow of $196 million.

Cash flow from investing was essentially breakeven during the quarter, due to the $7 million in CapEx, offset by a $7 million net redemption of marketable securities, and financing activities provided $2 million of cash during the second quarter.

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

We expect our strong free cash flow generation to continue throughout the year.

We will use a portion of the cash flow to fund our dividend that was approved at the June 3 meeting, the June 30 payment represented $155 million as I just mentioned, and an additional $78 million is scheduled for both September 30, and December 30 dividend payment.

We also continue to focus on acquisitions in adjacent niche markets or tuck-in technologies which fit our core markets.

As has been Garmin's practice, acquisitions are evaluated by technology, values compatibility and strategic fit with Garmin.

Navigon and Tri-Tronics are great examples of executing on this strategy.

Our tax rate for Q2 was 13.8%, and we expect the full-year rate to be approximately 12%.

Reduced effective tax rate is attributable to a change in methodology for uncertain tax positions reserves, following favorable audits in both 2010 and 2011.

And finally, I'd like to provide some additional detail around our updated guidance that we provided today, both by segment -- primarily by segment revenues.

We saw improvement in our Auto/Mobile segment, due primarily to the Navigon acquisition.

We also wanted to highlight the significant impact of the mix shift that we are experiencing toward bundled products.

Going into this year, we had forecast the deferral of approximately $0.53 of EPS.

However, given our current estimate of product mix, we now expect to defer approximately $0.92 of EPS, resulting in the reduced EPS guidance.

Without this change in product mix, our EPS would have remained at or above our earlier range.

This concludes our formal comments.

We will now open the conference call up to Q&A session.

(Operator Instructions).

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

Thank you.

Kevin, on the deferred revenue, how and when will we see that recognized?

How and when will we see that recognized?

Maybe you want to clarify your question a little bit?

So, so you're deferring that now, you're seeing cash now, when are we going to see that?

Okay, well, it's generally amortized over a 3 year period.

So we're seeing that product mix increase as I said, so we'll continue to defer.

And that will likely continue to increase for several quarters.

At some point in 2012, we'll see the turnaround effect.

And at this point, where -- we're -- the EPS, we'll start to see the EPS benefit, and we expect that will likely be sometime in the back half of 2012.

Okay.

On the cost front, in Auto/Mobile, where do you stand there?

Are there additional opportunities to lower your cost structure in that segment?

If you're referring to product cost, is that what your primary question is, John?

Yes.

Yes, okay.

So if you're looking at product costs, as we've mentioned, ASPs were relatively flat, but on the cost side we would expect a year over year cost reduction of approximately 5% across the board in our business including Auto/Mobile.

Okay, and then the last question, maybe more for Cliff, is on the competitive front within the Fitness segment as well as in the Outdoor segment, are you seeing any increased competition from the likes -- everyone has talked about Nike and TomTom, or are you seeing it in any other areas?

Yes, I don't think we can say that we're able to recognize noticeable competitive pressure right now, in the Fitness and the Outdoor markets.

I think though, that the Fitness market is very dynamic and there are new players coming in, so it remains to be seen, in terms of what impact that could have going forward.

For the Outdoor market, I feel that the US market right now is just -- the economy is just really slow.

It's not good.

So we probably feel that that's part of the impact in slower Outdoor sales.

We also have a pipeline of new products that have been introduced, and waiting for delivery here in the third quarter, that will hopefully increase our sales going forward.

Thank you.

Thanks, John.

We'll take our next question from James Faucette with Pacific Crest.

Please go ahead.

Thank you very much.

I wanted to ask on your deferred revenue, can you give us an idea as to what portion of the PND or Automotive units right now are having revenue deferred on them?

Well, I think that we're not really prepared to quantify how much that is.

But we do see an increasing amount of our PNDs that are being bundled, which is the reason for the change in our guidance primarily.

So we're not making that public, but it is increasing, as we've gone through the last couple of years.

You may, and just to remind you another analysts and shareholders, we began deferring in 2009 at a relatively low rate.

That increased in 2010, and we still seen that increasing as we've gone in through 2011.

So on that deferral, I guess, maybe an associated question, are you increasing the proportion of the sales price, in addition to the number of units that are subject to that?

Or is the percentage of the sales price if you will, been held relatively constant over that period?

Yes, there's a lot of variables that go into the deferral, and it is quite complex.

But in general, I would say, the amount that we're deferring on a bundled product has remained about the same throughout 2011.

Okay, great.

And then, just wanted to ask, I know that specific financial details weren't released on the acquisitions, but can you give us an idea of -- with the Navigon acquisition in particular, closing in the September quarter, can you give us an idea of how much we should expect cash balances in particular, to decline as the acquisitions have closed?

You want to know how much we paid for the acquisition?

(Laughter).

Well, I'm not asking for specifics on that.

I'm just wondering, you can bundle it together however you want, I just want to know what -- how we should expect the cash balances to be impacted?

I would say, relatively -- we obviously paid a price for the Company, which we are really excited about.

From a cash balance perspective, I would say it's fairly neutral.

The amount of revenues that Cliff mentioned was roughly $75 million US dollars over the last 5 months of this year, however, pretty flat on a -- on a net income perspective.

So really, the only difference there is the amount of cash we paid for the Company, and we're not prepared to disclose that amount.

Okay.

Thank you very much.

Yes.

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

Sir, your line is --

Hi, this is Joe Longobardi.

I'm on for Mark.

You highlighted share gains and better than expected performance in Europe as relates to the PND business.

What can you attribute the share gains to?

And do you expect to maintain that share in the mid 20%s, or further expansion through the back half of the year?

Yes, I think our product is very popular, in terms of its features and ease of use.

And we're seeing some improvement in Europe, as we focus our efforts on retailer relationships, and offering products and features that appeal to each individual market.

So, yes, we are continuing to work hard on that.

We expect to continue to increase our share, and maintain that going forward.

Okay.

And as it relates to free cash flow generation, what are the primary uses of your future cash going forward?

Are you going to be -- continue to look at acquisitions, and would you be interested or would you consider further increases in the dividend going forward?

As we mentioned during our formal remarks, yes, the acquisition strategy is still intact, and we are looking for additional opportunities there.

But the primary use of cash will just be, I think, working capital should be relatively neutral.

So it's gets down to dividends and other uses, potentially share buybacks, but I would say dividend is the primary use for the cash in the near term.

Thank you, and good luck.

Could I just ask one?

It's Mark Sue, sorry, jumping in here.

Could I just ask one last question on the mechanics of the GAAP accounting?

If we -- should we basically be thinking mathematically of taking $0.15 to $0.35, and kind of adding that to our calendar 2012 estimates?

Or maybe how we should think about the number change for calendar 2011, and then calendar 2012?

No, I think it's difficult to just add it to 2012, because as I mentioned, we're looking at a 3 year amortization, and again, there's lots of variables based on the bundling of our products with Lifetime Maps, with the actual amount that we deferred.

So it's not as simple, as just adding to 2012.

As you know, we haven't given any 2012 estimates at this point, but I would caution you into just adding that into 2012.

Should we -- 2012 being higher in EPS versus 2011 at least?

Well, again, I think there's some forecasts that we've evaluated internally.

And it would suggest that the turnaround effect, when we start to get some positive benefit on the EPS, it would occur late in 2012.

And that's about as good as we can do right now, from a timing perspective.

Okay.

Thank you, gentlemen, and good luck.

Thank you.

(Operator Instructions).

We'll hear next from Simona Jankowski with Goldman Sachs.

Please go ahead.

Hi, thanks so much.

Just a follow-up first, and then my question.

The follow-up is just on the units.

Would you able to break down the PND units specifically, rather than the overall units?

We've generally not given a breakdown of units by PND, as we talked about roughly 3.8 million total units.

Clearly, the PND is still a large part of the Auto/Mobile, still a large part of our overall business, but we're not prepared to give the exact number.

And then, in terms of the question, just curious in terms of your assessment of the overall PND market?

I think you commented it's pretty much unchanged since your views in February.

And in the meantime, we've obviously had quite a bit of a weakening, in both in the economy and demand for consumer electronics.

And certainly, TomTom, did revise down their view of the overall market.

So can you just expand on, why their views might differ, is it related to the share gains you've seen in Europe?

I think, Simona, our view hasn't changed.

I think at the beginning of the year, we probably were more conservative about what we expected to see in the market.

We weren't as, didn't have as rosy an outlook, that would require us to change our view at this point.

So the outlook that we had at the beginning has been holding true.

And so as a result, we didn't need to change our outlook on PND going forward.

Okay.

So then in terms of just North America, from the overall market perspective, I think they had assessed it down 30% this year.

Is that consistent with how you see it?

Yes, I think our view is probably somewhere in the 25% range for market size declines in North America.

And in Europe, we are still seeing on, in total, a high single digit to about 10% kind of decline still going on there.

But because of the share gains that we've experienced in Europe, our overall unit volumes are up there, as we mentioned 6%.

Very helpful, thank you.

We'll move to our next question from Rich Valera with Needham.

Thank you.

With respect to your full-year gross margin guidance of 45% to 46%, it seems like that implies a pretty sharp decline on the Auto gross margin in the back half of the year, since I think your other categories are all going to be sort of flat or up from the second quarter.

So I was wondering if you could add any color on what drives that pretty significant decline in Auto implied in your full-year gross margin guidance?

Well, you are correct.

We are predicting a lower gross margin on the PND and Auto/Mobile segment overall, and very customary, was what we typically see, especially going into the holiday season.

So I think we'll see a slight reduction in margin in Q3, and then a larger reduction in Q4 as we go -- as we have the Auto/Mobile.

We did mention that we expect some benefit on those Fitness and Marine margins, as we come into the back half of the year.

Those should come back up, and improve a little bit in the back half.

And Aviation I think, will be retain pretty close to that existing margin right now.

Great.

And with respect to your Auto OEM business, I was wondering if you could talk about where that is relative to your expectations entering the year?

And if you can give us any updated color, in terms of the size or growth rate of that business?

Yes, I think right now, it's tracking to our expectations.

We experienced strong growth in the first half of the year, as the key programs that we've been delivering on with Chrysler has been a big part of the growth story there.

In the back half, that will of course, comp against last year, so we would expect the growth to flatten out.

And overall, the growth in that segment has been in the 25% to 30% range.

We haven't quantified the dollars there.

It's essentially north of $100 million type of range, but we don't give specifics in terms of where it currently is, and where it's going.

Okay, that's helpful.

Thank you.

We'll hear next from Yair Reiner with Oppenheimer.

Yes, a question on the acquisitions.

You said it's going to add about $80 million of revenue in the second half of the year.

About how much does it add to OpEx?

And overall, are those acquisitions going to be dilutive in the near term to corporate margins?

I think in general, you should assume about a $30 million OpEx increase, due to the combination of those 2 businesses.

We do, as I mentioned earlier, we're expecting roughly neutral on EPS due to the Navigon acquisition this year.

They will be accretive next year, and Tri-Tronics will be accretive immediately in 2011.

Okay.

And in terms of Navigon, can you give us a sense of how the revenue is going to be distributed between OEM and non-OEM business?

Yes, we really don't want to break out anything further granularity, the -- this Navigon business, other than we're excited about all three parts of their business, the Mobile, OEM, and the PND component.

Got it.

And then, one last question on the PNDs.

Can you give us a sense of how kind of early talks are going for the holiday season, and the type of support you expect to see for the category, come December and November?

Thank you.

I think Q4 is shaping up, again, really according to the plan we had in place at the beginning of the year.

Retailers are committed to the category.

In fact major resets are going to be happening here in August and September, in preparation for the back half of the year.

So we feel like everything is running on track to what we expected.

Thank you.

We'll take our next question from Scott Sutherland with Wedbush Securities.

Great.

Thank you, and good morning.

Hi, Scott.

A question, another question on the deferred revenue.

So in your guidance, you already assumed that you're deferring revenue on things like Lifetime Maps, but since the adoption is higher, can you about talk more the per unit dynamics?

Obviously, if someone chooses a bundled solution, it would displace maybe a one-time software sale?

Yes.

As I mentioned early, we aren't planning to give any further detail on that, other than that mix of bundled -- and there's also more than just lifetime maps.

There's traffic, and some other components of our business that are more long-term in nature, that we have to defer revenues on.

But that mix of product that is bundled now has increased, which is why we changed our numbers this morning.

But essentially, the bundled, you've already been assuming the deferral of that, so it's the one-time software sales of that displaces that you lose out on, since it's being deferred now?

It's actually -- we're having -- yes, we're having to defer both pieces, both the standalone lifetime maps that we sell, which are over a -- deferred over the product life cycle, as well as those bundled with PNDs, the maps bundled with PND.

Okay.

On the Fitness segment, again, congrats on the Tour there.

But can you talk about maybe what the global opportunities are, and how you're regionally penetrated there, is it just Europe and North America?

And do you see -- still see some regional opportunities in that segment?

Yes, I think each region has it's own dynamic.

Europe has been strong for both running products and cycling products in particular, whereas North America has been strongest in the running product category, with some growth in biking.

We do see growth in Asia as well, and places like Australia and other countries that are embracing bike products as well.

But those markets, like all of our other markets are typically smaller than the other 2 regions.

Okay, great.

Thank you.

Thank you.

We'll take our next question from Paul Coster, JPMorgan.

Yes, thank you.

I feel like I'm beating a dead horse here on the deferral point.

But Kevin can you just confirm the reason why its been difficult for you to predict the deferrals?

Is it the mix shift was a surprise to you?

And do you also sense the deferral peaks in the next couple of quarters?

Yes, I think to answer both those questions, yes, the percentage of customers who are choosing to buy PNDs bundled Lifetime Maps has increased, more than what we originally thought going into the end of the year.

And in terms of the peaking, I mentioned earlier, that the prices that we're deferring or the amount of revenue we're deferring really isn't increasing per unit, but we do expect that we get a benefit or a turnaround in the mid point or the back half of 2012, before start to see some earnings per share benefit there.

And the delta here has all been associated with the PND Auto segment, not with any of the other segments?

That's correct.

Yes, that's correct.

Okay.

Thank you.

We'll take our next question from Charlie Anderson with Dougherty & Company.

Good morning.

Thanks for taking my questions.

Hi, Charlie.

If I look at the Fitness segment, you guys grew 25% year over year, but the operating income was only up I think 3%.

As the growth rates start to slow there a little bit, I wonder sort of when we see operating leverage?

I know there was sort of one-time benefits a year ago, but if you could just kind of talk about the growth rate of your profitability in that segment, that would be great?

Yes, I think we do -- we were selling through some end of life products in second quarter which did impact our gross margin.

From an operating expense perspective, we're expecting our total business to flatten out on a year over year level.

Essentially, our operating expenses should not be increasing as we go through the back half of the year overall.

And we did have -- as we mentioned some one-time, more one-time costs in the Q2 perspective.

The other thing is that as you know, Charlie, we do allocate a percentage of our operating expenses based on sales.

And that as Fitness has become, is really a fast growing segment at 25%, it gets a larger percentage of some of our operating expenses, which do impact our operating margin.

Got it.

And then on Aviation, wonder if you could kind of just talk broadly about some of the trends you're seeing there, in terms of ordering patterns?

And then also, just update us on your progress toward Part 25, that would be great.

Yes, I think Charlie, we don't really disclose things like bookings, or that kind of thing.

So we are not really prepared to talk about ordering patterns per se.

But in terms of our performance in the quarter, as I mentioned the retrofit market was particularly strong, indicating that people are stepping up to equip their aircraft.

And that strength was across our product line, not just in new product introductions.

So we felt very positive about the results in the retrofit side.

The OEM side, as we mentioned is flat.

And that's a little more longer term predictability, because aircraft makers are scheduling their builds, and we can kind of see into the future that we don't really see any turnaround like I mentioned in my comments.

But that said, we are continuing to make progress in Part 25, working on some programs, and as I mentioned those are on track.

We would expect those to appear in the 2013 time frame, in terms of our revenue contributions.

Great.

Thanks so much.

We'll take our next question from Ben Bolin with Cleveland Research.

Good morning.

Thank you.

If you look at that $8 million in bad debt and legal, the one-time, could you explain a little bit about what that was, why it's different, or why you were surprised by that?

Well, we have 1, on the bad debt, we had one distributor in particular that went through Chapter 11, that was not anticipated in the quarter, and that impacted about $5 million.

And then the rest was related to some defense of some patent infringement cases which are now behind us.

And so, we -- between those 2 major costs, we were able to identify those as non-recurring in nature.

And if you look at the deferred revenue itself, how much was actually recognized for Q2 that had been deferred previously?

We don't break that down.

You mean the amount that we amortize, for prior periods, is that what you're asking?

Right, which was recognized as the revenue in the quarter.

Yes, we just give the net number which is the $62 million of sales, or $44 million of net income.

But we don't break down the amount amortized by prior periods.

Okay.

And the last question, you talked about the Marine and Fitness profitability normalizing in the back half.

For both of those, are you saying that back half margins normalize to kind of comparable period year-on-year?

Or does the back half offset some of the softness that you saw in Q2, so that the full-year gets that much better?

No, we're actually just saying that sequentially, we should see some improvement as we go through the back half of the year, both on Marine and also on Fitness.

Okay.

Thank you.

Thanks.

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

Thanks for taking my question.

Just a clarification, Kevin, when you mentioned you expect some of the impacts to deferred revenue to normalize in the back half of 2012, is what you're saying, you expect the -- what is amortizing off the balance sheet at that point, to equal what you are deferring?

No, we're actually saying, that the EPS impact on a year over year basis, will start to be beneficial to us, as we go into the back half of 2012, is our best estimate at this point.

Okay.

And then secondly, I'm not 100% my numbers are correct here, but it looks like SG&A was up pretty significantly sequentially, in year over year, X advertising.

Is that correct, and if so, what is the drivers of that?

Just -- you're saying SG&A only?

Yes.

Yes, it was up significantly, it was about $8 million of that impact or increase year over year was these legal and bad debt expenses.

Okay.

So that would have been much closer to your Q2 2010 number, without those.

Right.

And then the $30 million you indicated for the OpEx associated with the acquisitions, was that for the full back half of the year, or on a quarterly basis or annualized?

That was the full back half or the Q3, Q4 impact.

Combined?

Combined total, yes.

Right.

Thanks a lot.

Thank you.

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

Groh with D.A.

Davidson.

Good morning, guys.

Just a couple clarification points.

Kevin, is that $8 million on your segment reporting basis, is that all in Automotive and Mobile, or is it spread out amongst the different segments?

Those primary costs were almost exclusively in the Auto/Mobile segment.

Okay, okay, that's good.

Okay.

And then it seems to me that sort of the product development effort has kind of been stepped up here.

Can you give us an indication, I think you used to, on terms of the contribution from new products?

No, we've discontinued giving that detail probably a year ago.

I think --

Yes.

I think the point to be made though, is that we have dozens of new products that are being introduced, and we still have a significant percentage of our revenues coming from new products every year.

But we didn't believe -- don't believe that that's a metric that we needed to share with everyone, just because of where we stand in the various segments that we serve.

Right, right, okay.

And then, can you talk to, in terms of Navigon, is the seasonality of that business, does it sort of line up with the Automotive Mobile?

Well, in general, it's pretty close to that, yes.

Okay.

All right, thanks a lot.

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

Hi, guys.

First question here, is just on Auto/Mobile segment.

As you -- the industry continues to shrink by volume and by revenue, can you share with us what you're doing to make sure that the cost structure that was previously dedicated to PNDs, is either rationalized or spread?

I don't know if it's color you can give us, on utilization rates on your factories?

Or what steps are you taking to protect the consolidated operating and gross margins, against sort of broader margin pressures, as that business continues to shrink?

And then I had a follow-up, thank you.

Yes, I can probably take that, Jeff.

I think as the volumes in our factories have come down, we have scaled our workforce to match the volumes that our business is experiencing.

So that part is already taken care of.

In terms of product development and R&D expenses, we are -- as the market evolves, we are, of course, matching our product road map to be responsive to the conditions in the market.

So that we're focusing on the most important product introductions, and investing our efforts in those.

And for the resources that are left over, we've been shifting some of those to other market segments, as we have growth needs in the areas where we're investing, such as OEM development across markets like Automotive, as well as Marine and Aviation.

I guess, as a follow-up to that, Cliff, and this might just be -- require some clarification on my part, as you are no longer expanding capacity in PNDs, how does that effect your tax ability, as it relates in those regions?

Is this something which has a tax holiday based on CapEx, that eventually kind of amortizes, and potentially you're facing higher tax rates in certain jurisdictions?

Is that -- any color you can provide, would be helpful.

Sure.

I think -- we talked about a 12% tax rate this year.

And there's a lot of moving parts to the tax rate, based on the profitability on the various regions that we're in.

But in general, if we're in a period where we are seeing increasing revenues or increasing units, that definitely helps our overall tax rate.

If we're in a period, where the revenue or units are declining, it tends to put more pressure on tax rates.

In 2011, though in particular, we've had some reserves that we're able to, after going through tax audits we're able to give up, so that's actually helped our rate.

If we were to see another year, next year, where there might be some declining revenues that might push -- that would likely push up our tax rate overall, so in general, long term, the next 2 or 3 years, we would expect our tax rate to come in between 12% and 15%.

Again, depending on the regional profitability, on the different countries we serve.

Great.

And just one follow-up, if I can sneak one in there.

Cliff -- or sorry, Kevin, you talked about the deferral now expected to be, I think it was $0.92 a share for the full-year 2011.

Are you able to share with us, and maybe I've missed it somewhere, what that equivalent deferral would have been in 2010 for the full-year?

Just so we can get an idea of how that -- the rate of change there?

Yes, I have to go back and look at the full-year 2010.

We can give that to you offline, Jeff.

Okay.

I do have it, Jeff, I just don't have it right in front of me.

Okay.

All right.

Thanks very much.

All right.

And it appears that is all the time we have today for questions.

I'll turn the conference back over to Kevin Rauckman for any additional or closing remarks.

Okay.

Just to wrap up, thanks everyone for contributing to our call, and we'll look forward to catching up with everyone next quarter.

Thanks very much.

That does conclude today's conference.

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