台灣國際航電 (GRMN) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Garmin third-quarter 2014 earnings call.

Today's call is being recorded.

At this time, I'd like to turn the conference over to Kerri Thurston, Director of Investor Relations.

Please go ahead.

Good morning.

We'd like to welcome to you to Garmin Ltd.'s third-quarter 2014 earnings call.

Please note that the earnings press release and the related slides are available on Garmin's Investor Relations site on the Internet at www.garmin.com/stock.

An archive of the webcast and related transcript will also be available on our website.

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

and its business.

Any statements regarding our future financial position, revenues, earnings, market share, 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 filed with the SEC.

Presenting on behalf of Garmin Ltd.

this morning are Cliff Pemble, President and CEO and Doug Boessen, CFO and Treasurer.

Also joining us today is Kevin Rauckman, who continued to provide support throughout third quarter.

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

Thank you, Kerri, and good morning, everyone.

As announced earlier today, Garmin reported strong third-quarter results that included growth in revenue, operating income, and pro forma EPS.

Consolidated revenues increased 10% year over year with double-digit growth in each of our non-auto/mobile segments.

Aviation, fitness, marine, and outdoor revenues grew 24% on a combined basis and contributed 56% of total sales in the quarter.

Gross and operating margins were 56% and 25%, respectively, a year-over-year improvement driven by segment mix.

Operating income grew 16% with non-auto/mobile segments generating 70% of total operating income.

In the third quarter, we executed our previously announced inter-Company restructuring which resulted in $308 million of tax expense.

This one-time expense drove a GAAP net loss per share of $0.76.

After adjusting for foreign currency losses and one-time events, we generated $0.76 of pro forma EPS in the quarter, representing an increase of 10% over 2013.

A reconciliation of our pro forma EPS is provided in the appendix to these slides.

So next, I'll highlight segment specific results and initiatives.

Looking first at the fitness segment, revenue grew 43% on a year-over-year basis with strong contributions from activity trackers and running products.

We delivered gross and operating margins of 64% and 32%, respectively.

While gross margin increased from last year, the operating margin was essentially flat due to investments in advertising leading into the holiday season.

Even with these investments, we generated operating income growth of 38% in the quarter.

We recognize the competition isn't standing still and neither are we.

We continue to innovate and broaden our product portfolio.

In the third quarter, we launched Vivosmart, an activity tracker that also delivers smart notifications from an iOS or Android smartphone.

In addition, we announced the Forerunner 920XT, our next generation multi-sport product that incorporates advanced running dynamics and connected features, including smart notifications and live tracking.

Finally, we announced the Connect IQ software developer's kit.

This exciting initiative will allow developers and partners to build apps and customizations that will expand the utility and attractiveness of our devices.

We look forward to seeing all the possibilities to be explored through Connect IQ.

Turning next to outdoor, revenues increased 19% in the quarter with recently launched products in golf, dog tracking and training, and wearables contributing to the strong quarter.

Gross and operating margins remained strong at 65% and 42%, respectively, in the segment.

Due to the strong performance in the third quarter, we now anticipate outdoor will generate full-year revenue growth in the mid-single digits.

In addition, we will continue to explore and innovate in the outdoor segment to drive long-term growth in our current markets as well as other adjacent categories.

In aviation, we posted revenue growth of 19% with all product categories contributing to the strong performance.

Gross and operating margins remained strong at 73% and 29%, respectively.

Operating income grew 25% in the quarter, ahead of revenue growth, due to gross margin improvement.

We have continued to complete certifications that represent market share gains in both the business jet and helicopter markets.

Two recent examples are the Cessna CJ3+ with the G3000 system, and the Enstrom 480B with G1000H system.

Beyond OEM share gains, we are also pursuing additional aftermarket opportunities.

At the NBAA show last week, we announced a new standalone ADS-B solution for the business jet market that significantly reduces the cost and complexity of complying with the FAA next gen mandate.

This solution will be available for popular business jets like the Citation 560, the Beechjet 400A, and the Learjet 60 with others to follow.

In addition, we announced the availability of a number of avionics enhancements for our existing King Air retrofit certifications.

And finally, I'd like to highlight that the photo on this slide shows the G5000 retrofit solution as installed in our Beechjet 400A.

Our flight test program is under way and we anticipate final certification to be completed in late 2015.

Revenue in the marine segment grew 12% in the quarter driven by the third-quarter acquisition of Fusion.

As planned, we delivered higher gross and operating margins in the quarter which allowed us to generate 32% operating income growth.

We continue to focus on product innovation, highlighted by the announcement of our 2015 product lineup which includes new chart plotters, multi-function displays, radars, and auto pilots.

We believe these products further differentiate us from the competition, and should provide the foundation for another year of growth in 2015.

In our auto/mobile segment, revenues decreased 5% in the quarter as PND industry volumes continued to decline per expectations.

Profitability of the segment continues to be strong with operating margins of 17%.

In addition, we continue to build market share with NPD reporting our highest yet US market share for third quarter at 84%, an improvement from 78% in third quarter of 2013.

Recently, we announced our partnership with Honda on their 2015 Civic and CRV models to be delivered in Europe, Russia, and South America.

Garmin will be providing integrated navigation software with many of our signature features such as lane guidance, photoReal junction views, and predictive routing.

This program win highlights the quality and reliability of our industry-leading navigation solutions, which we will continue to leverage as we build market share in the infotainment industry.

Finally, with three quarters of the year behind us, we're revising our full-year guidance to reflect our outlook for the remainder of the year.

We now anticipate revenue of approximately $2.85 billion, at the high end of prior guidance.

In addition, we anticipate strong full-year margin performance with gross and operating margins at 56%, and 24%, respectively, consistent with prior expectations.

Our prior guidance called for a pro forma effective tax rate of 15%, which was based on a number of assumptions including the extension of the US R&D tax credit.

Since this tax credit has not yet been authorized by Congress, we've removed it from our assumptions until there's more clarity around this item.

So as a result of all these factors, we're increasing our pro forma EPS guidance to approximately $3.10, representing full-year growth in the high teens.

These expected strong results in 2014 further validate our strategy of diversification and multi-pronged growth.

Our 2014 results will provide the foundation upon which we can drive continued category expansion and market share gains to ensure long-term growth.

That concludes my remarks.

Next, Doug will discuss additional details of our financial results.

Doug?

Thanks, Cliff.

Good morning, everyone.

I'd like to begin by reviewing our financial results and provide summary comments on the balance sheet and cash flow statement.

We posted revenue of $706 million for the third quarter.

As previously highlighted by Cliff, our revenue represents a 10% increase year over year.

Gross margin was strong at 56%, a 160 basis point increase from prior year, driven primarily by favorable segment mix.

Operating margin was 25%, an increase of 130 basis points from the prior year.

This is a result of the gross margin favorability of 160 basis points, partially offset by operating expense growth of 11%, or $22 million.

Pro forma effective tax rate increased to 21%.

We'll discuss the tax rate in more detail later.

Adjusting for the foreign currency loss, tax impact of inter-Company restructuring, the tax benefit of the release of material reserves, pro forma EPS was $0.76.

This represents a 10% increase year over year.

We shipped 3.7 million units during the quarter, up 12% from 3.3 million last year.

Total Company average selling price was $192 per unit, down 2% from $196 third quarter of 2013, driven primarily by fitness product mix.

Next, we'll review how our third-quarter revenue breaks down by segment.

We experienced double-digit growth in four of our five segments.

Looking at the charts on this page, the auto/mobile segment represented 44% of our total revenue during third quarter of 2014, down from 49% in the prior year.

Fitness grew to 16% of revenue in the current period, compared to 13% in the prior year.

These charts illustrate our profitability mix by segment.

Our non-auto/mobile segments delivered 70% of operating income in the quarter, up from 64% in the prior-year quarter.

Looking next at year-over-year gross margin, total Company gross margin improved to 56% due to positive segment mix and stable or improving margins in most segments.

Total operating margin improved to 25% due to the increased gross margin performance.

As previously mentioned, third-quarter operating expense increased by $22 million, or 11%, on a year-over-year basis, while increasing 30 basis points percent of sales.

R&D increased $11 million year over year and 30 basis points to 14% of sales.

We continue to invest in innovation and grow our Internet workforce with increasing resources focused on compelling new aviation, fitness, and outdoor products.

Our advertising expense increased $7 million over the prior-year quarter, represented 4.7% of sales, a 60 basis point increase.

Additional spending was focused on fitness and outdoor to support new product categories.

We will continue to manage advertising cost by segment with near-term focus on market share growth and wearables.

SG&A was up $4 million compared to the prior-year quarter.

Decreasing 60 basis points percent of sales, to 12.8%.

We continue to manage these costs closely to gain operating leverage when possible.

Our pro forma effective tax rate for third quarter of 2014 was 21%, compared to 15.7% in third quarter 2013.

The pro forma tax rates exclude tax expense associated with the inter-Company restructuring in 2014 and the tax benefit from material release of reserves in both 2013 and 2014.

The increased tax rate was primarily driven by unfavorable income mix by tax jurisdiction, expiration of some Taiwan tax incentives, and expiration of the US R&D tax credit.

We now expect our full-year tax rate to be 17% given the anticipated delay and approval of the US R&D tax credit.

We ended the quarter with cash and marketable securities of almost $2.8 billion.

Accounts receivable decreased sequentially to $470 million as a result of seasonally lower sales in the third quarter.

Year over year, accounts receivable was basically flat resulting in improvement in days sales outstanding.

Our inventory balance increased to $466 million on a sequential basis as we build inventory for the holiday season.

We continue to generate strong free cash flow across our business.

Excluding the $78 million cash tax payment related to the inter-Company restructuring, cash from operations was $220 million, and capital expenditures were $18 million, resulting in free cash flow generation of $202 million during the quarter.

We also repurchased $79 million of the Company stock during the third quarter, completing our current repurchase authorization.

With our dividend and stock repurchase activity during 2014, we will return approximately $600 million of cash to our shareholders.

This concludes our formal remarks.

Tim, can you please open the line for questions?

Thank you.

(Operator Instructions)

We'll go first to Andrew Spinola with Wells Fargo.

Thank you.

Just wanted to start out with a pretty high-level question on the activity band market.

Wondering now that you've been in the market for a couple of quarters, is there anything that has changed or has your view of this market changed in terms of sizing, opportunity, or where it's trending?

I'm just -- it's a big delta in your business and I'm just wondering how maybe your thoughts have evolved on the business?

Yes, Andrew, this is Cliff.

I think in terms of where we're at today in the market compared to where we thought we would be at the beginning of the year, we're pleased with where we stand today.

We believe that the market has grown a lot over last year.

There's still a lot of awareness that's being generated in the market.

So it is a nice additional market for us to be involved in and we do feel good about where we're at today.

Fair enough.

And one follow up on the auto margin.

I think, in my model, if I normalize for the deferred revenue impact, it was down a little bit more than I would have thought.

I think we've spoken previously about high-teens margins in the PND business and flattening OEM spending and then a ramp of the OEM revenue with contracts like Mercedes.

I'm wondering how you're thinking about that margin?

Do you still think that they can improve over time?

And what are the puts and takes that are impacting Q3 here?

Thanks.

I think as the PND volume declines and the mix of PND changes with the overall segment, definitely OEM and mobile will contribute more in terms of their margin profile.

In terms of the PND specific product category, we feel like those margin structures have been relatively stable in the product category and we feel like they're performing as we expected.

Thank you.

We'll go next to Simona Jankowski with Goldman Sachs.

Yes, hello.

Also a couple of questions on the fitness segment.

Wanted to just get your thoughts on what drove the decline there sequentially?

If that was an end demand function or inventory related?

And also wanted to get a little bit of context around the price cuts on the Vivofit we saw on Monday?

And then just looking forward into Q1, how are you thinking about potential competition from the Apple Watch and what, if anything, are you doing in terms of interoperability with HealthKit?

Okay.

So, quite a few things there.

I'll probably start with the seasonality question.

It is normal for this market to be seasonal, like every other market, and we feel like the sequential drop from Q2 to Q3 was within our expectations.

So we don't see anything there that stands out as a difference from what we've seen in the past.

In terms of the price cuts, those are normal pricing actions that we have planned around leading up into the holiday season and around our promotional activities.

And in terms of next year, we're not in a position to really provide specific guidance, but in terms of where we stand with our product positioning, we feel good about where we stand today, both in terms of what we're offering as well as the product road map that we have.

Thank you.

We'll go next to Mark Sue with RBC Capital Markets.

Gentlemen, maybe your thoughts on just how we should think about the subcategories of fitness and outdoor over the longer term?

Considering some parts, such as action cameras, have not worked, there's price stimulation going on in some of the Fitness categories.

Perhaps if you could relate your comments on your overall views of price elasticity of demand as pertaining to the holiday season?

And how we should balance and consider price declines to drive unit growth in both categories of outdoor and fitness?

Well, in terms of the subcategories of these two different segments, every segment has categories of products that have higher or lower margin profiles.

So we don't really view what's happening in outdoor in the action camera space, as well as fitness in the tracker space, as anything unusual in terms of what we see overall in these segments.

I think from an elasticity point of view, and I think you're probably referring specifically to the tracker market, I think the market's very new and so we, like many others, are learning in terms of what the seasonal demands are and what the elasticity will be.

We're promoting the category heavily and, as a result, we expect that we'll be able to perform well in the fourth quarter with our advertising.

Okay.

That's helpful.

And then, Doug, maybe a question for you.

Recognizing that we're still in the early stages of the transition, is there any preliminary framework in terms of free cash flow, returns to shareholders?

How we should be thinking about capital structure thus far?

The Company has commendably returned $600 million in cash a single year.

Should that change or should that be supplemented in the future?

Yes, this is Doug.

Yes, the way to look at it, it's pretty well consistent with our previous strategy we had.

This year, 2014, we'll return about $600 million between dividends and share repurchases to our shareholders.

We'll take another look at that in February, looking at our dividend and share repurchase in connection with our guidance for 2015.

But I'd say it's pretty consistent what we've look at in the past.

That's helpful.

Thank you, gentlemen.

Thank you.

We'll go next to Robert Spingarn with Credit Suisse.

Good morning.

Good morning.

I wanted to ask you, with the maintenance of your guidance and the trends in the auto/mobile market, how should we think about the implied declines in Q4 which are rather strong?

Obviously, against a tough comp, but of course that's the fourth-quarter seasonality as well.

So how do we think about the fourth quarter on the auto side?

Well, as the markets matured, the seasonality impacts of fourth quarter have been more muted.

So we're conservatively counting on a more muted response this year as well.

But it's all baked into the overall guidance that we provided.

Because that implication is a double-digit drop, which you really haven't seen.

So it sounds like there might be some conservatism there?

Again, we've treated this market conservatively over the past couple of years, recognizing that it can surprise in terms of overall demand.

But we feel like retailers are looking at the category very realistically and our guidance factors in that realistic view.

Okay.

And then just quickly on marine, if I could ask about the pricing environment, how competitive that remains?

And what the longer-term trend in margins might be, given where you've been in maybe more of the distant past?

So marine pricing is very competitive.

There's definitely several players that are promoting quality products at value prices, and some of the markets that we are penetrating, including the inland fishing market, is very competitive.

So we would expect that the pricing environment is challenging and, as a result, the margin impact is definitely a factor.

We would anticipate, as we roll out new products on a regular basis, that we should be able to bring our margins up incrementally from where they're at.

But because of the competitive environment, it may not be to the high levels that we've seen several years ago.

And just a clarification.

You mentioned Fusion was a driver of the sales growth there on a year, year basis.

Was it the full driver?

How do we think about Fusion relative to the rest of the business?

Yes, Fusion was definitely the biggest contributor to that growth.

Our other categories, our organic categories, were more flat year over year.

But the reason for that is that last year we were doing a lot of sell promotion on some end of life products, particularly our 700 series of chart plotters.

So as a result of those factors, we were more or less flat year over year, but we felt good based on the strong performance we had last year with end of life.

Okay.

Thanks, Cliff.

Thank you.

We'll take our next question from James Faucette with Morgan Stanley.

Thank you very much.

A couple of questions from me.

A, first, Cliff, you guys have over the years talked about that you'll evaluate your investment in the in-dash and OEM market on a year to year basis.

And just wanted to get a sense from you how you're feeling about the penetration that you're gaining and the share wins that you're having there and whether it makes sense to continue the level of investment that you've been putting into that segment?

And then my second question is, we've seen impact or we've seen a strong US dollar over the last quarter or so.

Can you talk a little about how you think that's been impacting your demand for products across the different categories and what amount of headwind that might be creating?

Thanks a lot.

Yes, James, so in terms of auto OEM, we view this as a long-term investment.

We've been pleased with the progress that we've made so far.

The progress is admittedly incremental, but it's a very, very challenging market with a lot of incumbent suppliers.

But we still believe that we have value that we bring to the table that automakers are interested in, as evidenced by some of our recent wins.

So I think as far as what we're doing there, we're still approaching the market with a pragmatic kind of investment and growing it as we go.

In terms of the dollar impact, I think the biggest impact there is going to be the potential revenue headwind that occurs with the strengthening dollar.

In terms of demand, there's typically some second order effects that occur as pricing is adjusted over time, but we feel like the most immediate impact will be the revenue impact.

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

Yes, good morning.

Thanks for taking my questions.

First, on outdoor, you had a pretty big leap up in Q3 here, and I think what's implied in the guidance is you'll be somewhat flat in Q4 versus you're typically up 20% or so sequentially for the holiday.

So should we read into that that basically you made a lot of the holiday shipments, call it, in Q3 here and you don't have that big follow through like you normally have in Q4?

I think one of the bigger impacts that we've had, Charlie, is the release of new products, particularly the BF-6, and we're also doing very well in the other wearable categories of the market.

And dog products are also doing very well, this is hunting season time.

So those are things that impacted us in Q3, and we would anticipate Q4 is a little more consistent with last year in terms of overall revenue levels because that seasonality is winding down.

And then a question on the comment that you made in the release about adjacencies.

I think it was specific to outdoor.

Should we think about that as incremental beyond just refreshing the VIRB and you looking at categories where there's well established player like you've done recently, call it with the VIRB and Vivofit?

Or are you looking at some, call it, brand new categories where you would almost invent a new type of a device?

Well, we don't have specifics, but I would say that our profile is that we always are looking for adjacent categories within each of these segments to help grow them incrementally.

We'll take our next question from Rich Valera with Needham & Company.

Thank you.

Cliff, question on the overall growth rate or rate of decline of the PND market.

It seems the market rate of decline has been slowing.

And just wondered if you would care to say what you think that market might do as we move into next year or beyond, if that rate of decline might bottom and actually if that market could flatten?

If you could answer that one first?

Thanks and then I have a follow up.

Yes, so we don't have projections yet formulated for 2015.

We're really looking at how Q4 performs to really put all of our views together there.

I would say, though, that you're right in terms of where we are today versus last year and the years before, that we do see some moderation in the bigger markets, particularly the Europe market has been flatter.

Some countries are doing very well.

In fact, even show some value-oriented growth in the market.

Whereas other countries are not doing as well, but on balance it has moderated a lot.

In the US market, there's definitely been some moderation from our more conservative views, but still, it's decelerating at a rate that's faster than what Europe is.

I'm curious, how do you think about perhaps the balance between your share gains, which, I guess, at 85% I'm wondering how much further -- how much more share you think you can get versus the moderating market?

Do you think at some point those balance out?

Or how do you see those two conflicting dynamics of you maybe not being able to gain as much share but the market stabilizing?

Yes, obviously, there's not as much runway from 85% to 100% as what there was from 50% to 85%.

But we feel like we're in a very strong position in the market.

We feel like a lot of the smaller players have exited the US market.

So that leaves us in a strong position there.

And in Europe, we have increasing gains there and we're in the mid-30%s range in terms of market share and growing.

So we see some offsetting effect there.

Great, thank you.

Just one on tax rate.

Not sure if you're willing to comment on that, but any thoughts at this point on tax rate for next year or is that just too early?

It is too early for us.

We'll be giving that guidance to you in February.

Fair enough.

Thank you.

Thanks, Rich.

We'll take our next question from John Bright with Avondale Partners.

Thank you.

Could you give us an update on the action camera market, more specifically?

Your inventory levels today as well as maybe any ballpark timing of new products in 2015?

Yes, so the action camera market, as we updated you in Q2, it's been a market for us that's new revenue, a new opportunity.

Obviously, I think our views at the beginning of the year in terms of our potential for success were higher than where we've ended up today.

But it's still a category where we feel like we have differentiators and, thus, we're continuing to invest at a pragmatic rate to be able to develop new products and continue to grow share in the market.

In terms of inventory, we feel like that situation is manageable at this point.

It's, again, a product category that's not huge compared to PND, so consequently, I think all of that's manageable.

In terms of new products, we're constantly working on our product road maps.

We don't have anything specific that we would share at this time in terms of action cameras, but we are continuing to invest.

The second question is around auto OEM.

The Honda win, I think you mentioned on the call it was software only.

What were the hurdles that you overcame for that win?

And is this giving you any momentum in that marketplace?

Well, I think in terms of hurdles, a company, any auto company, but particularly one like Honda, is very particular about their suppliers and they're looking for quality and stability and value in what they're offering their customers.

And so, we were able to meet those objectives that they were looking for and we feel like it speaks to the overall quality of our solutions and our reputation in the industry.

As far as momentum?

I think momentum, it always helps when you're collecting a large number of very prestigious brands that you're serving, so in our case we're also in Daimler.

We work with BMW, now Honda.

So we feel very good about the customer list that we have and in addition to the ones that we've had for a while now, like Chrysler.

Thank you.

Thank you.

We'll take our next question from Jeremy David with Citigroup.

Hello, good morning, thanks for taking my questions.

Couple questions on fitness.

Fitness revenue missed consensus numbers in Q3.

I don't think you're changing your view for the year.

You're still guiding to 50%, 55% year-over-year growth.

But should we infer maybe the three was just too bullish in Q3 and is going to be more of a hockey stick in Q4?

Or as your views change a little bit, maybe at the margin, on that guidance for the year you've given a quarter ago?

Yes, I think normally, as I mentioned before, the market is seasonal.

So people are winding down some of their purchasing that goes on in the spring and early summertime, so Q3 is seasonal and it does not surprise us what we saw in terms of the overall quarter.

I would remind you in terms of Q4 and our outlook there, we're factoring in the impacts of last year's successful launch of the Forerunner 620 and 220, and so there's some year-over-year comparisons that are stronger there.

Okay.

And you talked a little bit about the fitness band category.

But I think you've given numbers on the Q2 call around the size of the category and your market share.

I think at the time you said you think the category is about 10 million units and that you reached 10% market share in Q2.

What's your thinking now, exiting Q3, around the category size and your market share?

We feel like there's really no change in terms of our outlook on the category size, in terms of our market share.

We do see positive indications that our share is increasing, somewhere in the mid-teens range.

Okay.

And finally, on the Connect IQ initiative you've announced, it looks like you're going to develop your own ecosystem just like what Pebble did with their watch.

What led you down that path?

Are you looking potentially to participate in a bigger ecosystem like Android Wear?

Should we think about emerging wearable ecosystems like Android Wear for you?

Is that an opportunity, is a threat?

Any commentary on that would be helpful?

Thank you.

I think Connect IQ is in response to a lot of requests that we get from customers and partners who want a way to be able to expand the utility of our wearable devices but don't currently have a way to do that.

So Connect IQ provides that opportunity for people to be able to expand the utility beyond just was we offer in our markets.

In terms of how we're positioning that, we're not putting that up against the big open players that are out there.

That's not our objective at all.

But we do feel like there's a strong desire for people to be able to customize their watches and to be able to expand the utility.

We'll take our next question from Brad Erickson with Pacific Crest Securities.

Good morning.

Thanks for taking my questions.

First, on aviation, understanding that you have some new products, sounds like, to continue helping to drive growth, can you provide an update, just how you're feeling about that market as a whole here as we look out over the next few quarters?

I think in terms of our outlook, we're really only providing consolidated guidance for 2014.

But aviation is a market where it's a very long investment cycle, and we continue to invest in the market in order to be able to bring new opportunities and revenue and growth in the future.

But at the moment, we feel like we're positioned well and we feel like momentum is good.

Got it.

And then just on the fitness business, you've obviously talked this year about spending in the second half to improve positioning, both in terms of marketing, promotion, et cetera, as well as at point of sale.

Can you give an update as to how that's going and how far along you are in that process at this point?

Well, we've been running some TV campaigns here in the US and we'll start in Europe as well.

So that's driving some additional investments there.

We've been focused for the year on improving our point of sale and that has also increased some of our marketing expenses.

We feel like we're positioned well at this point and there's more work to do as we go into 2015.

But a lot of improvement so far in 2014.

Got it.

That's helpful.

Thank you.

Thank you.

We'll take our next question from Jonathan Ho with William Blair.

Hey, guys.

Just wanted to get a little bit of thought around the aviation business and maybe your thoughts around how sustainable the growth rates are in that business, just given the general macro environment and the new platforms that you're adding on?

Again, I think our outlook at this point is good for the near term.

As I mentioned in the previous question, we continue to invest in opportunities that will lead to long term, sustained growth.

In terms of the industry, we feel like there's some signs of incremental growth off of the lows that we've been seeing.

Some aircraft categories are actually recovered and doing very well, others are still very depressed but they're at least off of their lows.

So we feel like right now the overall environment is better than it has been.

Got it.

And then, can you guys give us maybe a sense of how the retailers are thinking about the wearable space as you start to go into the fourth quarter?

Maybe the amount of promotion activity or advertising spending support that you have to provide?

And just maybe a general sense of how they're viewing the category, relative to your expectations?

I think they're positive about the category.

They see it as an opportunity for growth.

It's really in line with the expectations that we had.

Many retailers are investing in more floor space and advertising in the category.

So at this point, I would say that their reaction and their response to this is what we expected.

Great.

Thank you.

Thank you.

We'll take our next question from Tavis McCourt with Raymond James.

Hey, thanks for taking my questions.

First, on the big picture fourth-quarter revenue guide, you put up 10% to 12% top-line growth the first three quarters of the year, I think the guidance implies about 5% for the fourth quarter.

And I understand relative or typical conservatism, but I wonder if you could quantify to what degree, if any, currency or a lower contribution from deferred revenues has an impact on the fourth quarter?

And then, secondly, on deferred revenues, it looks like the balance sheet deferred revenues are down about -- will be down about $90 million or so for the full year.

Is that a reasonable run rate that we should expect going forward in terms of the decline of deferred revenues in the balance sheet or is it still too difficult to predict?

This is Doug.

Regarding -- first, I'll talk about deferred revenue here in the third quarter.

That gave us a benefit of about $0.06 in the third quarter.

Looking at the fourth quarter, we would expect a benefit of about $0.05 on EPS there.

And then looking out toward the future into 2015, what we'll do there is probably have a little bit of headwind in there.

We won't expect as much of a contribution in 2015 as we would have in 2014.

And all of the forecasts we have given you does impact -- does consider as all the currency changes we do have.

Thanks, that's very helpful.

And a follow up, Cliff.

On the auto OEM business, when you're winning these software module deals, what is the design cycle for that?

In other words, when you announce a Honda win for the 2015 product line in Europe, when was that award actually won?

Is this a long cycles as the hardware side of the infotainment business, or can you win deals reasonably quickly when selling the turn-by-turn nav app only?

Thanks.

Yes, there's probably a mix of scenarios there, and in some cases it's been a shorter cycle in terms of award to market.

In other cases, it can be a very long cycle, depending on how much new design work is going on in the hardware side of the equation.

Remember, our software has to run and be involved in an overall system and so, consequently, there can be a lot of factors that impact the time to market.

Got you.

Thanks a lot.

Thanks, Tavis.

We'll take our next question from Will Power with Robert Baird.

Great, thanks.

Yes, good morning.

I guess a couple of questions.

First, on the fitness band market and distribution, maybe you can update us as to where Vivofit is in terms of distribution?

Is it in all the channels that you'd like it to be in?

And really a similar question for Vivosmart.

I know you started with a Best Buy exclusive.

Where does that now stand in terms of reaching all those channels?

In terms of Vivofit, we feel good about where we're at with the channels.

I think we're in pretty much every channel that we would expect to be in at this point, and there's new channels that are being opened up for this category that wouldn't otherwise be carrying an electronic product in more of our traditional markets.

So there's some expansion that goes on there.

In terms of Vivosmart, its does just roll all of exclusivity now, so it's expanding to new channels and that's happening at a good rate.

I think there's been a good response to the product and so there's a lot of retailers that want to carry it around the globe.

Okay.

And do you think you'll be able to get that into most channels through the quarter here, by the end of the quarter?

Yes, it's rolling out now.

I think, really, it's going to be limited more by product quantity availability than it is by channel.

Okay.

And then maybe a bigger picture question.

As you head into 2015, you've got new competition from Fitbit, Apple, this is on the watch side of the equation, I wonder if you could just characterize how you think about the competitive climate there?

And then one of the things a lot of the new competitors there are doing is enabling wrist-based heart monitoring.

I know I think traditionally you all preferred the chest strap, thought that's more accurate.

I wonder how your thinking there is evolving, just as the competitive climate there changes?

And whether that's something important to get into the portfolio?

There's no question this category's drawing a lot of interest from people.

It's a category that we really pioneered and innovated in over the years, so there's many new players getting into that and we would expect many more that aren't necessarily visible at this moment.

In terms of our product road map and aligning that with what's available and announced to be available from competition, we feel good about our positioning.

And in terms of specific features like the wrist-based heart rate, that's definitely a new innovation which is maturing in terms of its technical capabilities.

We definitely see differences in terms of accuracy for certain kinds of athletes who are interested in that.

But we also see opportunity where the technology is maturing and is something that we would be offering in our product lines as well.

Okay.

Thank you.

Thank you.

We'll take our next question from Ron Epstein with Bank of America.

Hello, good morning.

It's actually Kristine Liwag calling in for Ron.

Good morning.

For the aviation business -- good morning -- you saw 19% growth in the quarter.

Is there any way you could parse out how much of that growth is from share gains and new program ramp ups in business aviation versus cyclical recovery in your legacy general aviation business?

We've not typically broken it out.

I would say, though, that some of the trends that I mentioned earlier in the OEM market are carrying over to the retrofit market, where we're seeing retrofit equipment demand increasing as people are getting back to flying.

They're updating their aircraft.

They're getting ready for things like the next gen mandate.

So we feel good about what's happening in the industry across the board.

Great.

And I have a follow on on the auto OEM side of the business.

Can you quantify the number of active campaigns you're currently pursuing and your win rate?

And then for the contracts that you have not won, what are the key recurring themes you're hearing from your customers?

We've not ever broken out our sales funnel, so I probably won't comment on the dynamics of that.

Okay.

Great.

Thank you.

Thank you, Kristine.

And at this time, there are no other questions in queue.

I'll turn it back to Kerri Thurston for any closing remarks.

Thank you all for joining us today.

Doug and I will look forward to following up with many of you after this call and over the next few weeks as we launch some travel and most importantly, based here in Kansas City, we wouldn't want to leave this call without saying, go Royals.

Thanks everyone, bye-bye.

That concludes today's conference call.

We appreciate your participation.