台灣國際航電 (GRMN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Garmin third-quarter 2012 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Kerri Thurston.

Please go ahead.

Thank you, and good morning, everyone.

We would like to welcome you to Garmin Limited's third-quarter 2012 earnings call.

Before we begin, we would like to send our warmest thoughts to all those on the East Coast that have been, and will continue to be, affected by Sandy.

The Garmin family has made contributions to several organizations which are assisting with relief efforts throughout the region.

Looking now at the quarter, 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 Garmin.com/stock.

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

Note that this webcast does include slides which can be viewed during the call via our website and an archive of the webcast will be available until December 31.

A transcript will be available on the website under the Events Calendar tab.

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

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

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 31, 2011, 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 morning's call are Cliff and Kevin.

At this time I will turn the call over to Cliff.

Thank you, Kerri, and good morning, everyone.

As we announced earlier this morning, Garmin delivered revenue growth and strong margin performance resulting in pro forma EPS growth in the third quarter.

Consolidated revenues increased 1% year-over-year to $672 million, driven by gains in the Outdoor and Aviation segments.

Our traditional markets of Aviation, Marine, Outdoor, and Fitness contributed 43% of the total revenue mix, and 59% of the total operating income for the quarter.

Gross margins improved to 53% in the quarter.

Operating margins also improved to 24% from 22% in the prior year, as operating expenses were essentially flat.

Revenue growth, combined with improved margins, resulted in both operating income and pro forma EPS growth.

Operating income for the quarter grew 9% to $160 million, while pro forma EPS was $0.74; a 4% improvement over the prior year.

We sold approximately 3.7 million units in the quarter, which is up 7% year-over-year, as Auto OEM and Outdoor volumes increased.

In light of our third-quarter results, we are increasing our full-year pro forma EPS guidance.

We now expect our EPS to fall in the range of $2.75 on the low end, to $2.90 on the high end.

Kevin will provide additional insights later.

Next, I will walk you through the financial and strategic highlights for each segment.

In the Marine segment, revenue declined 7%, driven by weak conditions outside of the Americas, particularly in the European market.

In contrast, we experienced modest growth in the Americas.

Favorable product mix led to higher gross margin and gross profit, which more than offset the impact of lower sales.

The high-end boat market continues to struggle due to weak economic conditions around the world.

We anticipate these conditions will persist into 2013, dampening the near-term growth prospects in the Marine market.

However, we are not allowing the poor conditions to distract us from our growth strategy in the segment.

In the third quarter, we announced the acquisition of Nexus Marine, giving us an immediate presence in the sailboat instrumentation market, where Nexus is a highly respected brand.

Additionally, we continue to invest in new product development in order to gain share and to better position ourselves for growth when economic conditions improve.

In Aviation, we posted revenue growth of 3%, as improved OEM deliveries offset weakness in retrofit and portable products.

As we have highlighted in prior quarters, operating margin is trending below historical norms as we invest in aircraft certification programs that will reach the market in 2013 and beyond.

We currently have six announced cockpits slated for delivery in the coming year, which will generate new revenue and growth for the future.

Note that this morning's press release mentioned five programs that will be completed in 2013, but with the recent announcements factored in, the number is now six.

During the quarter, we announced two additional cockpit wins that highlight the progress we are making to expand our presence in the OEM market.

Just this week, Cessna announced that our G5000 integrated flight deck has been chosen for the upgraded Citation Sovereign, and earlier in the quarter, we announced a new relationship with AgustaWestland who selected the G1000H for the updated 119 model helicopter.

Both the Sovereign and the 119 are scheduled for certification in 2013.

I also want to mention that Garmin was ranked number one in product support by Aviation International News for the ninth consecutive year.

This is an incredible accomplishment, and highlights that outstanding product support is one of our strongest differentiators as we compete against incumbents in the segment.

I want to congratulate our Aviation Product Support team; the recognition by Aviation International News is certainly well deserved.

The outdoor segment continued to deliver strong results in the quarter, with 11% revenue growth and 17% operating income growth.

The improved results can be attributed to our golf lineup, our dog tracking and training portfolio, and our recently introduced fenix, which is a GPS-enabled watch for hunters, hikers, and outdoor enthusiasts who generally like to blaze their own trails.

In the third quarter, we delivered our Alpha track and training system, which combines robust GPS tracking and mapping capability from Garmin with proven electronic training from our Tri-Tronics division.

Initial reviews and field tests have been positive, and we anticipate the product will do well throughout this hunting season.

Looking next at the Fitness segment, revenue declined 6%, though we were able to generate gross margin and operating income growth on a year-over-year basis.

As we have mentioned in the past, revenue and margin performance are linked to variability in our product cycle.

In both the second and third quarter of 2011, we experienced strong demand for the newly-released Forerunner 610, while discounts on the end-of-life Forerunner 305 drove additional volumes at the low end of the market, but negatively impacted margins.

This year we saw continued growth in our cycling and multi-sport product lines, however it was not enough to offset the year-over-year decline in running products.

During the quarter, we launched our latest running watch, the Forerunner 10.

Forerunner 10 is a value-priced watch at $129, and is an affordable and intuitive solution for runners, joggers and walkers of all levels.

Early response to the product has been positive with great reviews and strong initial orders.

We are confident that the Forerunner 10 will help us close the gap left by the Forerunner 305 at the low end of the market.

In our Auto/Mobile segment, revenue was flat.

However, strong margin performance and lower expenses in the segment resulted in a 16% increase in operating profit.

Market share also improved in the third quarter when compared to 2011.

We estimate our share in North America exceeds 70%, while European market share is in the low- to mid-30% range.

Our outlook in the PND market remains unchanged with units and value declining approximately 10% to 15% for the year.

While the broader market has continued to decline, share gains have allowed us to significantly outperform the market.

During the quarter, we introduced a new member of our diesel product family with a large 7-inch display designed specifically for trucks and RVs, where specialized needs drive higher ASPs and stronger margins.

We also updated our StreetPilot and NAVIGON mobile applications with public transit features providing mobile phone users with a complete solution for both automotive and pedestrian navigation.

These additional features serve to further differentiate our applications and drive consumer adoption.

Before turning the call over to Kevin, I want to provide a brief update on the auto OEM market.

We launched the next generation navigation solution with Chrysler, incorporating advanced features such as 3D mapping, trip planning, and multi-reviews.

These enhancements will be available in select 2013 Chrysler and Dodge models.

Also in the third quarter, we shipped our first fully-integrated entertainment solution to Suzuki for their 2013 FX4 Grand Vitara and Kizashi models.

We are excited to see these models reach Suzuki dealers in markets around the world, including North America, Europe, Australia, New Zealand and Russia.

Now Kevin will walk us through the financial results.

Kevin?

Thank you, Cliff.

Good morning, everyone.

I would like to begin by reviewing our income statement, then move to the balance sheet and cash flow statement, and finally concluding with comments regarding our full-year 2012 expectations.

As Cliff mentioned, we posted revenue of $672 million for the quarter, with pro forma net income of $146 million.

Our pro forma EPS was $0.74 per share, which excludes the foreign currency loss.

Our revenue represents an increase of 1% year-over-year.

Gross margin came in at 53%, which was a 180 basis points improvement from prior year.

I will discuss margin results in further detail by segment.

Operating margin was 24%, up 170 basis points, from the prior year.

The components of this were the gross margin favorability of 180 basis points, offset by an unfavorable operating expense impact of 10 basis points.

Total operating expenses increased by only $2 million in the current quarter, with a $10 million increase in R&D, offset by improvements in advertising and SG&A.

Each of these expense categories will be discussed further on a later slide.

Our pro forma EPS of $0.74 represents a 4% increase year-over-year driven by the increasing revenues and improved gross and operating margins.

Units shipped increased 7% year-over-year, as 3.7 units were delivered during the quarter.

According to US GAAP, we must defer revenue on certain products and this table summarizes the net impact of the deferral and amortization of revenue and related costs in third quarter 2012 and 2011.

In the current quarter, we deferred on a net basis approximately $20 million of revenues resulting in $0.07 of tax affected deferred EPS during the quarter.

In the third quarter of 2011, we deferred net revenue of $24 million, or $0.08 of tax affected EPS.

While we are deferring revenue according to US GAAP, we are collecting the cash at time of sale as reflected in the statement of cash flows.

We expect to have a negative revenue and EPS impact due to deferrals in the fourth quarter, but do not expect the impact to be as significant as the amounts that we deferred during the same period in 2011.

In total, our revenues increased 1% during the third quarter with Outdoor and Aviation contributing most of the growth.

During Q3, the Auto/Mobile segment revenues were flat as volume growth was offset by a slight decline in average selling price.

Volume growth was driven by market share gains and strengthening results with our auto OEM partners.

Our Outdoor segment posted the strongest revenue growth at 11%, due primarily to our GPS-enabled golf products, growth in our dog tracking and training portfolio, and strong consumer reception for our Phoenix product.

Business segment posted a 6% revenue decrease when compared to Q3 2011.

This slowdown resulted from a strong Q3 2011 when we were heavily promoting the Forerunner 305 as the product reached the end of its life cycle, and were also fulfilling orders for the Forerunner 610.

We hope to see improving results in Q4, driven primarily, or partially, by the launch of the Forerunner 10.

Aviation segment revenues increased 3% compared to Q3 2011, with growth in OEM, partially offset by a slowdown in retrofit and portable products.

Our Marine segment revenues decreased 7% compared to Q3 2011, as both the after-market and OEM market slowed down due to a global decline in the marine electronics market.

During Q3, both the Americas and APAC both posted revenue growth with a partial offset due to the decline in EMEA.

The decline in EMEA is the result of difficult macro economic conditions in most of the region.

For Q3 2012, the Americas represented 57% of revenue, compared to 53% in Q3 2011.

EMEA decreased from 39% of total revenue in Q3, to 33% in Q3 2012, while APAC increased from 8% to 10% in the same period.

The Auto/Mobile segment represented 57% of our total revenue during Q3 2012, down slightly from 58%.

Outdoor grew to 16% of revenues in the quarter, and increased from 14% in 2011.

Due to the improved profitability of Auto/Mobile in the third quarter of 2012, the operating income contribution of this segment increased to 41%, from 38% in the prior year.

In absolute dollars, our traditional segments of Aviation, Marine, Outdoor, and Fitness, contributed $95 million of operating income in the quarter, a 4% increase over third quarter of 2011, even as we invest heavily in future OEM opportunities in Marine and Aviation.

Looking next at margins, Q3 Auto/Mobile gross margin and operating margin were 43% and 17% respectively.

Gross margins were stable as deferred revenues became less of a year-over-year impact in the quarter.

Operating margin improvement resulted from decreasing advertising and SG&A expenses in the segment.

Q3 Outdoor gross margin was 69%, up from 66% in Q3 2011.

Operating margin was 46%, an improvement from 44% in the year-ago quarter, as improved gross margins were partially offset by a slight increase in operating expenses.

Q3 Fitness gross margin was 65%, up from 60% in the year-ago quarter when we were heavily discounting the Forerunner 305.

Operating margin was 33%, again up from 30% in the year-ago quarter, as improved gross margins were partially offset by increased advertising and R&D costs.

Q3 Marine gross margin was 64%, compared to 55% in the year-ago quarter, as product mix shifted toward higher-margin products and we participated in fewer promotional activities.

Our operating margin was 19%, down 21% a year ago as the gross margin improvement continued to be offset by increased R&D expenses to support our long-term marine OEM strategy and new product launches scheduled for next year.

And finally, our Q3 Aviation gross margin was 69%, up from 66% in Q3 2011.

The operating margin was 23% for the quarter, down from 27% in the prior year, as gross margin improvement was offset by increased R&D expense associated with the new OEM programs that will begin to contribute to revenue in 2013, as well as increased SG&A costs due to a bad debt credit booked in Q3 2011.

Q3 operating expenses increased by $2 million on a year-over-year basis from $197 million in Q3 2011 to $199 million to Q3 2012, an increase of only 10 basis points as a percentage of sales.

R&D increased $10 million year-over-year in Q3, and 130 basis points to 12% of sales, as head count increased and we continued to invest in OEM opportunities.

Our advertising spending decreased $5 million over the year-ago quarter, and decreased 80 basis points as a percent of sales to 4% in Q3 of 2012.

This was largely driven by decreasing cooperative advertising.

SG&A decreased $2 million compared to the year-ago quarter, and 40 basis points, to 13% of sales.

This decrease is primarily attributable to reduced commission expenses.

We have now anniversaried our major acquisitions in 2011 and are pleased to see this flattening of SG&A expense.

Moving next to the balance sheet, we ended the quarter with cash and marketable securities of over $2.7 billion.

Our accounts receivable increased sequentially to $509 million, but fell slightly on a year-over-year basis due to continued sales strength in the third quarter.

Accounts receivable accounted for approximately 65 days of sales when calculated on a trailing four quarters, compared to 74 days of sales in the third quarter of 2011.

Our inventory balances increased to $443 million on a sequential basis at the close of Q3 as we prepare for the seasonally strong fourth quarter.

Our days of inventory metric was 125 days, which was flat to the third quarter of 2011.

The dividend payable now reflects two remaining quarterly payments of $0.45 per share, which was approved by our shareholders on June 1 at the annual meeting.

Our deferred revenue balance has continued to grow; net of deferred costs, it represents approximately $1.43 of deferred EPS.

We continue to generate free cash flow across our business as cash from operations was $165 million during Q3.

CapEx was $9 million during the quarter, therefore we generated free cash flow during Q3 of $155 million.

Cash flow invested during Q3 was $104 million, which includes the $9 million of cap ex and $93 million of net purchases of marketable securities.

Financing activities were $87 million use of cash during Q3, due primarily to the dividend payment for September.

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

With our strong free cash flow generation year-to-date we are making good progress toward our forecast of $650 million, which will continue to fund our annualized dividend of $1.80 per share, or approximately $350 million use of cash.

We also continue to pursue acquisitions in adjacent niche markets and tuck-in technologies which fit with our core markets.

As have been Garmin's practices, the acquisitions will be evaluated by technology, value compatibility and strategic fit within Garmin.

Our tax rate for Q3 2012 was 13.7%, due to the revenue mix by geography and segment; we expect the full year 2012 rate to be approximately 13%.

And finally, given our strong EPS performance in Q3, we are again raising our full-year EPS guidance to $2.75 to $2.90.

This continues to incorporate some uncertainties regarding the European markets and consumer spending as we head into the holiday season.

This ends our formal comments for the quarter.

We will now enter a period for you to ask questions.

(Operator Instructions)

Mark Sue, RBC Capital Markets.

This is Ameet Prabhu calling on behalf of Mark Sue.

Your P&D market share has been stabilizing in the US and Europe.

In the US, it seems there may be a limited upside [growth].

But, maybe, could you discuss the share trends in Europe given the market's multiple smaller players, and some of them might have to exit the market considering the macro?

As you've stated, we do have very strong share in the US.

It is up over a year ago.

We're now in the low 70% range versus last year in the 60% range.

You're right, that the upside potential there is more limited.

In Europe, we're currently in the low 30% range in the big-five countries, and we do see opportunity to gain share from both the third-tier players who continue to show weakness and exit the market, as well as from the bigger player as well.

This is a follow-up on your cash flow.

Free cash flows have been strong and you built up cash this year.

But, could you maybe discuss cash contribution from the various segments, because I guess the concern is that as B&D units decline year over year and the contribution from your other segments increases, would that have any impact on your ability to generate free cash?

No.

Actually, we feel like our cash flow has been at, or about, expected.

And, if you look at just the operating income results, those are really by segment.

That's really what is driving that cash flow.

So, we still see -- you point out the Auto/Mobile, we still see strong cash flow generation from the Auto/Mobile segment as we do from all of the other business segments that we have.

So, moving forward, we would expect continued strong cash flow even in through 2013.

There may be some short-term or some nominal impact due -- on a negative level, just due to the deferred revenues that we discussed, as those move from being a headwind against us into a positive, as we go forward in 2013.

Good luck to you.

Thank you.

Simona Jankowski, Goldman Sachs.

Just first, a clarification overall.

I think you updated the EPS guidance, but I was curious if you might update, or comment on, the revenue guidance for the year, which you had given before.

And then, just some questions on the Fitness part of the business.

You commented on the gross margins improving partly because of the easy comps from a year ago when you had more discounting.

It was a bit surprising, because I would have assumed that the Forerunner 10 might have lower margins given that it is a lower-end product, so maybe you can just comment on how you see the mix shift impacting margins in Fitness going forward when you take into account the Forerunner 10 and then maybe any other upcoming end-of-life cycle discounting.

Okay, Simona, thanks for the questions.

The first question on revenue, you know we really came in very close to our expectations during the quarter in total revenue, and so we didn't believe that there was any reason to update our guidance.

So, we still hold to the $2.7 billion to $2.8 billion revenue for the full year of 2012.

Looking at the Fitness, clearly, the -- we did have some short-term impacts last year, as you mentioned.

The Forerunner 10, while it shipped -- began shipping in Q3, we're really expecting a much stronger contribution from the Forerunner 10 product in the holiday season in Q4.

So it had some impact, but a relatively small impact in -- on that product.

As far as the -- I think I mentioned $2.7 billion on revenue, so it is actually $2.75 billion to $2.8 billion on the total business' revenue guidance.

Just to clarify on the Forerunner 10, should we expect that to mix margins down into the fourth quarter then, for the Fitness segment?

I think as you naturally see our holiday selling, we have -- not only on the Forerunner 10, but just in general, we have lower price and lower cost on that product.

So, we will have some impact on margins.

We would say, overall, both the Fitness and the Auto/Mobile segments typically have a lower margins in the fourth quarter.

And any update on the Vector timing?

Simona, this is Cliff.

We are making progress on Vector.

We've been evaluating new design changes.

And, we do feel like things are looking promising and are sticking to our early next year, first quarter, or early second quarter deliveries.

Thank you very much.

Yair Reiner, Oppenheimer.

Congrats on the good quarter.

Thank you.

TomTom yesterday, when they reported results, suggested that they are seeing more muted seasonality.

Do you see the same going into fourth quarter?

And maybe you could just talk about promotional activity for the holiday season.

Typically, as you know, Yair, we see a sequential growth from Q3 to Q4.

And we are still expecting that.

But I would say, in general, there are some macroeconomic uncertainties, and primarily even the European condition -- European economic conditions, which is why we've tried to put in some level of conservatism in our fourth quarter.

So, sequential growth is normal, but maybe a little bit below what we would typically see.

Okay.

And then, you mentioned that auto OEM was strong in the quarter.

Can you give us a sense of how much that might have diluted auto margins?

We really don't break out, as you know, we don't break out the profitability by the sub-segments there.

Although we definitely have auto OEM operating margins which are below our mobile and our P&D margins at this point.

Okay.

And then just one other one if I could.

On Fitness, it was down year on year.

Do you expect it to go -- return to year-on-year growth in the fourth quarter?

We expect to turn around and be flat to up for the fourth quarter driven by the new product introductions.

Great.

Thank you.

John Bright, Avondale Partners.

Follow-up on a couple of questions, Cliff and Kevin.

First, regarding your guidance, do you have any impact from Hurricane Sandy or do you expect any impact associated with that?

Well, we don't currently anticipate a significant impact.

Our Q4 guidance takes into account some level of the global macroeconomic weakness and consumer uncertainty stemming from various sources, including the catastrophic effects of Sandy.

But, at this point, we feel like those will be pretty nominal.

And then, the discussion of auto OEM, maybe give us an outlook or a thought process today, for additional wins and how that progress is going.

We are making progress, John.

As you know, this market is -- has a long cycle in terms of product development.

But, we are working on some additional programs which we're not prepared to announce yet.

Understanding you're not guiding for '13, but you made some positive commentary, I think, in the Aviation segment regarding some wins you had in place.

Maybe you could -- or how should investors think about the financial impact Aviation in calendar '13?

I think what Cliff mentioned, the six certifications and the expansion that we're seeing, we're expecting this year to be 0% to 5%, even though there has been some difficult environment, difficult industries.

So, we would expect that, that would increase next year.

Where again, we're not to the point where we can give exact guidance, but we're optimistic about the Aviation business and the most recent wins that we've announced.

Okay.

And, on the health of the channel inventories, specifically in the Outdoor, Fitness segment, and then maybe overall.

We don't really see any significant impacts on channel.

It's -- the products have been moving as expected through the channel.

So, no expectations on any kind of sell-in versus sell-out discrepancies for Outdoor or for Auto/Mobile.

Final question on Marine.

On your OEM efforts there, how large of an opportunity is the OEM business in the Marine segment, one, and then what, if any, are the holes that you have in your product offering?

John, we don't break out, obviously, auto OEM versus after-market and the same is true in Marine.

I would say though, that we've been underpenetrated in OEM for many years, and so we see it as a growth opportunity.

Keep in mind, though, that boat building is at some of the lowest levels it has been in many decades.

So, it is not the same opportunity that it was four or five years ago.

And regarding the holes in the product offering today?

I think we have most of those covered at this point.

We are investing heavily in R&D to fill some of those holes, as well as refresh our product line, which is some of the comments we made behind the margin compression there.

Thank you.

Charlie Anderson, Dougherty & Company.

Thanks for taking my questions, and congrats on the recent aviation design win.

Thank you.

So, I wanted to start with Auto gross margins; net of deferrals have been very strong this year compared to last year and I imagine price stability has something to do with it.

But I also wonder if you're seeing an uptick in maybe some of the app sales with Apple's issues on their product and maybe if some of those OEM gross margins are stronger?

Charlie, I think some of that is due to product mix in the P&D segment, which is driving the overall gross margin picture.

So that is probably the biggest factor.

In terms of the Apple situation, I think our app sales are pretty much steady.

Some uptick, but the result is really not significant.

We feel that consumers that are looking for premium navigation are not impacted or influenced by the availability of free solutions that are on the platforms.

Perfect.

And then, in terms of the guidance and what it implies for Q4, I think I'm showing at the midpoint kind of a high-single digit to revenue decline and you say Fitness is going to be flat to up.

I think that implies everything else pretty much down.

I wonder if you could correct me on that, if anything else is going to be up.

And, in terms of what is going to be down, kind of degrees by segment would be helpful.

Thanks.

I think, in general, your numbers are pretty accurate.

We are -- maybe the Aviation gets a slight growth in the quarter.

But, in general, flat to up on Fitness.

Outdoor will probably have a slight growth as well.

But, given the expectations on P&D, we're being conservative there.

We believe it is due to some of the conditions, especially, as I mentioned, in Europe.

And then, last question from me; in terms of Fitness, you mentioned in the press release there are growth opportunities.

We've seen a decline here, it is going to be up a little bit in Q4, I wonder if you could kind of highlight what some of those growth opportunities are for us.

Charlie, I think as we mentioned, the low end of the market has been left uncovered by us since the exit of the 305.

So, we feel like that is an opportunity for us to expand our sales again in that segment of the market.

And then, as we get closer to the Vector release, we do believe that is an opportunity for growth, as we're currently not represented in the power market.

Great.

Thanks so much.

Scott Sutherland, Wedbush Securities.

Sticking on that Fitness segment, you talked about the multi-sport and the cycling products, which are usually higher-end products.

Is most of that revenue decline attributed to the low-end products, and do you think you can gain back share from some of these smartphones or Nike solutions by introducing this new watch?

Scott, definitely those products in bike and multi-sport are definitely higher-end.

We still have a very strong presence in what we call the running market which is the Forerunner 610 and that's where the Forerunner 305 and now the Forerunner 10 live.

We feel like our share has been pretty much stable, some erosion due to the low-end solution, but we've done pretty well.

What the market has been asking us for, though, is something to replace those revenues on the low-end.

When you look at the Marine segment, I know -- I think you have -- a product cycles every two years.

What is the timing of the next product cycle there?

Well, we're pretty much there now, in terms of refreshing our product cycle.

The cycle in Marine is probably a little longer than two years, it tends to be two to three years.

But, we have been investing heavily and we will be refreshing our line in the coming year.

And lastly, just following on that revenue question for Q4.

It looks like you're guiding your EPS significantly lower.

You've outperformed the first three quarters of this year versus last year in each of those quarters and now you're guiding down the EPS.

Is there some spending or some margin inputs that we should take into account for this guidance?

First of all, yes, if you would look historically at what happened between Q3 and Q4 sequentially, we typically see a pretty significant drop in gross margins, so we're expecting the gross margins in the business to be below 50%.

And then, secondly, we're in a period, because of the holiday season, where we see a significant increase in advertising, so we will have some sequential growth in both media spend and cooperative advertising due to the higher volumes.

And then -- so those are the two major impacts on what are driving our EPS assumptions in Q4.

I guess, put in a different way, you typically see a sequential increase from Q3 to Q4, and it looks like you're guiding flattish to down-ish from Q3 to Q4.

Is there something else on a sequential basis that we should be taking into account?

No, nothing else, other than just looking at the top line and our expectations across the various segments that I just laid out in an earlier question, no.

Okay.

All right, great, thank you.

Andrew Spinola, Wells Fargo.

Just when I'm looking at your Q3 Auto revenue, it just -- knowing what we know about the P&D market, it seems like you had some pretty good strength in the OEM business.

Is there any color you can give, whether it is something as simple as sequential growth, so we have an idea of how that impacted Q3?

And also, if there was any one-time, maybe unusually higher-than-normal OEM revenue because of the Suzuki shipments, any color there would be great.

Andrew, definitely our OEM is growing because of our Chrysler relationship as well as now Suzuki.

As we mentioned before, we don't break out OEM versus P&D, so we're not prepared to give much color beyond that.

In the P&D market, though, one condition that we faced last year is that the channel was very lean, and so this year the channels have been recovering.

And, we believe we have outperformed the market to some extent, because the channel is getting back to more normal levels.

And then, the second factor associated with our better performance in P&D is that we are taking market share.

Got it.

Is there anything one-time in nature to Q3 because of the initial shipments to Suzuki, or is that a sustainable level going forward?

I think that is a sustainable level going forward.

Great.

And, just one other question.

Just on the insider sales recently, I would assume, opens up potentially a window for share repurchases.

And I don't know if it is one-for-one or anything like that.

But, is there any opportunity possibly to move forward with share repurchases?

Well, at this point, we have no approved buyback program.

It is something that we could consider in terms of the use of cash.

But, at this point, we don't have anything to announce.

It does -- it definitely gives a little bit more flexibility, but we don't have anything that we can really discuss at this point.

Got it.

That's it for me.

Thanks.

James Faucette, Pacific Crest Securities.

Just a couple of questions from me.

First, can you talk a little bit about the retailer strategy for the holiday season around your core consumer products like P&D, Fitness, and Outdoor?

Where are you seeing retailers being more aggressive, or how retailers are bearing from what your plan was coming into the year?

And then, you mentioned in the last answer a little bit about P&D inventories, in particular, coming back up to maybe more normal levels, or at least that's what I understood you to say.

Can you talk about how you're thinking about the ongoing decline in sell-through rates and what you're thinking about going into next year?

Thank you.

Yes, James.

In terms of the retailer commitment and activities going into Q4, it is largely what we have seen in last year.

There is going to be major promotions at all of the major retailers, including floor displays and Black Friday advertisements, and Garmin is also doing a TV campaign as well.

So we really don't see a lot of change in that respect.

Some of our other product lines are getting more attention during this holiday season, so there will be a lot of activity around golf and sports as well.

So we believe that those will be also popular products in the fourth quarter.

In terms of the ongoing P&D decline, we would, at this point, expect to see the market continue to be in a secular decline position for 2013.

We haven't forecasted that as of yet.

But, right now, rates are running in the range of 15% to 20%, depending on the market, and we would see that continuing into 2013.

Great, thank you.

(Operator Instructions)

Yair Reiner, Oppenheimer.

Just a quick follow-up on advertising, it was down year on year in 3Q, both in absolute terms and as a percentage of revenue.

For the fourth quarter, can you give us a sense of what it is going to look like on a year-on-year basis?

Yes, it was down primarily due to cooperative advertising.

We did have a little bit of a decline in media spend as well.

And, as we said in our formal remarks, that put us down closer to 4% of sales.

Typically, we would see that up between 5% and 6% of sales during the fourth quarter.

So that is what we would expect in Q4.

And are you going to have any major TV buys?

As Cliff just mentioned, we do have plans to do a TV ad campaign during the holiday season, yes.

Thank you.

I'm showing no further questions at this time.

I will now turn the call back over to management for closing remarks.

Okay, thanks, Stephanie.

And thank you, everyone, for contributing and for listening in.

We look forward to finishing the year strong and updating you at the next quarterly conference call.

So, have a great day.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

You may all disconnect and have a wonderful day.