台灣國際航電 (GRMN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Garmin LTD third quarter 2015 conference call.

(Operator Instructions)

As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Teri Seck Manager of Investor Relations.

Please go ahead.

Good morning.

We would like to welcome to you Garmin Limited's third-quarter 2015 earnings call.

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

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

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

Any statements regarding our future financial position, revenues, earnings, market shares, product introduction, future demand for our product 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 which is ailed with the Securities and Exchange Commission.

Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer, and Doug Boessen, Chief Financial Officer and Treasurer.

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

Thank you, Terri, and good morning, everyone.

As previously announced, Garmin third quarter revenue decreased 4% year over year.

Aviation, Fitness, Marine, and Outdoor contributed 61% of total revenues and 75% of the operating profit in the third quarter.

We continue to see our revenue base diversify broadly across our business segments.

Gross margin was 53%, and operating margin came in at 18.5%.

The reduction in margins from the prior year reflects a combination of factors, including downward pressure from unfavorable currency movements, a more competitive pricing environment, particularly in the fitness market, and continued investments in advertising and R&D.

These factors, combined with a higher effective tax rate, resulted in pro forma EPS of $0.51 in the quarter.

Throughout the year we have highlighted that the strong US dollar created revenue headwinds in geographies with weaker currencies.

In contrast, unit deliveries are up 4% for the quarter and 10% for the year, due to the contribution from growth segments.

While our primary yardstick is financial performance, we are encouraged by the underlying trends reflected in unit growth.

Doug will discuss our financial results in greater detail in a few minutes, but first I'll provide a few comments on each business segment.

Beginning with the Fitness segment, revenue grew 23% on a year-over-year basis, with the sequential acceleration driven by strength in activity trackers, multisport, and cycling products.

It's interesting to note that currency headwinds disproportionately impact the Fitness segment due to the geographical revenue mix.

These headwinds have softened revenue growth while unit deliveries have remained strong.

We believe this indicates that the underlying business case remains sound.

Gross and operating margins were 54% and 19% respectively.

Gross margin was impact by unfavorable currency movements and competitive dynamics in the market.

Operating margin was impacted by increased spending in R&D and global advertising.

We believe these investments are strategically important in order to maximize the opportunity in this high-growth segment.

We recently introduced a new family of Forerunner products which includes three models.

The Forerunner 230, 235, and 630.

Notably the Forerunner 235 is our first wearable to incorporate Garmin Elevate technology.

Garmin Elevate is a wrist-based heart rate sensor we specifically developed to serve a broad range of use cases from all-day heart-rate tracking to intense workouts.

All of the new Forerunners are compatible with our Connect IQ application framework enabling users to personalize their watches with a host of interesting watch faces, custom data fields, and useful applications developed by third parties.

We also recently introduced an exciting new activity tracker called Divo Smart HR, which also features Garmin Elevate technology for all-day heart-rate tracking and activity intensity monitoring.

Garmin Elevate technology, combined with an always-on-display and smart notifications, make the Vivo Smart HR one of the most capable activity trackers available on the market.

To support these products and many others, we have released a major update of Garmin Connect mobile.

This update features a completely new user interface, making it easy to view important activity information at a glance and providing even more customizations to fit individual needs.

All of these new products are shipping now, and we will soon launch a major new advertising campaign to support sales during the upcoming holiday shopping season.

Looking at Outdoor, revenue declined 5% year over year as the revenue mix shifted to geographies with weaker currencies.

Gross and operating margins were stable sequentially but declined year-over-year driven primarily by currency weakness in product mix.

The Phoenix 3 has been an exciting success story this year.

During the quarter we expanded the available choices for Phoenix 3 with new color and material options in time for the holiday shopping season.

Turning next to Aviation, revenue declined 5% as the industry has been impacted by lower oil praises and stock market volatility.

Gross and operating margins remain strong at 74% and 25% respectively, though operating margin declined on a year-over-year basis due to R&D growth supporting future revenue opportunities.

While the industry slowdown is disappointing, we remain confident in our improving position in the business jet category and look forward to completing development and certification of additional aircraft platforms as previously announced.

We remain confident in our market position and the opportunities for long-term growth.

Looking next at Marine, revenue was flat in the third quarter as the boating season ended and we passed the first anniversary of the July 2014 acquisition of Fusion.

Gross and operating margins improved as the mix shifted to new products with higher margin profiles.

Our investment in innovation has resulted in increased market share and industrywide recognition.

Garmin was recently honored as a manufacturer of the year by the National Marine Electronics Association.

We also won four product-specific awards in the auto pilot, multifunction display, and smartphone applications categories.

We intend to build on this momentum in the coming year with additional innovation and market share gains.

In the Auto segment, revenues were down 14% in the quarter, driven by the secular decline of the PND market as expected.

However, our worldwide market share remains stable and strong.

The PND market is an important part of our business, and we remain focused on delivering a superior in-vehicle experience.

The most recent example is babyCam, which was announced earlier this month.

BabyCam is a backseat monitoring system that streams wireless video to compatible Garmin PNDs.

This system provides front seat passengers the ability to safely monitor the well being of other passengers or cargo at a glance.

As previously announced, we have updated our full-year guidance and now anticipate revenues of approximately $2.8 billion, which includes approximately $185 million of negative currency impact due to the stronger US dollar.

Our revenue outlook has been adjusted in Fitness, Outdoor, and Aviation, which are the segments most impacted by the economic and competitive factors mentioned previously.

We expect gross margin to be approximately 53.5%, down slightly from previous guidance due to unfavorable geographic revenue mix and competitive pricing dynamics in the fitness segment.

Due to the revenue and gross margin revisions, we now expect operating margin to be approximately 18.5%.

Finally, we anticipate pro forma EPS of approximately $2.25, which also reflects a higher anticipated tax rate for the full year.

While it's disappointing to revise our guidance, we believe that the underlying business trends remain positive and our investments in R&D and advertising will create long-term opportunities.

That concludes my remarks.

Next, Doug will walk you through additional details on our financial results.

Doug?

Thanks, Cliff.

Good morning, everyone.

I would like to briefly review our financial results, then move to summary comments from the balance sheet and cash flow statement.

We posted revenue of $680 million for the quarter, pro forma net income of $97 million.

Pro forma EPS was $0.51 per share.

During the quarter we faced significant exposure to foreign currency fluctuations, which resulted in a revenue headwind of $52 million or 7% of revenue.

Gross margin declined to 53%, a 310-basis point decrease from prior year.

Operating margin was 18.5%, a 640-basis point decrease from the prior year.

Finally, effective tax rate increased to 27.7% in the current quarter, compared to a pro forma rate of 21% in the prior year.

This created earnings pressure of $0.05 per share.

We will discuss gross margin, operating expenses, and effective tax rate in more detail later.

Next, we will look at third quarter revenue by segment.

The Auto segment represented 39% of our total Q3 2015 revenue compared to 44% in the third quarter 2014.

We continue to diversify revenue base with Fitness increasing to 21%, our total Q3 2015 revenue.

Next, I would like to discuss gross margin.

This decreased to 53.3%, driven largely by the currency headwind, which reduced revenue by $52 million on a constant currency basis, as well as pricing dynamics in the Fitness segment.

Total corporate operating margin was 18.5%, due to gross margin pressure and increased R&D investment.

Looking next at operating expenses, third-quarter operating expense increased by $14 million or 6%.

This is a 330-basis-point increase to percent of sales.

Research and development increased $7 million year-over-year, or 150 basis points, to 15.6% of sales.

We continue to invest in innovation, increasing resources focused primarily on Aviation, Fitness, and Outdoor where we see long-term growth opportunities.

Our advertising expense increased $4 million for the prior-year quarter represented 5.4% of sales, a 70-basis-point increase.

Additional spending was focused on Fitness with investments in media, point of sale presence with key retailers and cooperative advertising.

SG&A was up $3 million compared to the prior quarter, increasing 100 basis points to percent of sales of 13.8%.

Increased spending was driven primarily by IT expenses and prior support [causes] as our customer base continues to grow rapidly.

Just a few quick highlights on the balance sheet and cash flow statement.

We ended the quarter with cash and marketable securities of over $2.4 billion.

Accounts receivable decreased both sequentially and year over year to $432 million.

Our inventory balance increased to $503 million to prepare for the fourth quarter and launch a number of new products simultaneously.

During the third quarter of 2015 we generated free cash flow of $124 million.

Also in the quarter, we paid dividends of $97 million, repurchased $51 million of Company stock, with $192 million remaining for purchase through December 2016.

Finally, as I mentioned previously, our effective tax rate increased to 27.7% in the current quarter, compared to a pro forma rate of 21% in the third quarter of 2014.

Increased tax rate was primarily a result of forecasted income mix by tax jurisdiction, which is negatively impacted by the overall reduction in forecasted taxable income, and result in catch-up expense for the first half of 2015.

Our full-year effective tax rate is now expected to be approximately 21.5% due to the change in income mix by tax jurisdiction.

Consistent with last year, the full-year effective tax rate forecast assumes a passage of the R&D tax credit.

This includes our formal remarks.

Jonathan, can you please open the line for Q and A.

Certainly.

(Operator Instructions)

Our first question comes from the line of James -- from Morgan Stanley.

Your question, please.

James, you might have your phone on mute.

There.

Can you hear me now?

Yes.

Thank you.

I wanted to ask a couple of larger bigger-picture questions.

As we go into the end of this year and we start to think about 2016, how are you thinking about the appropriate levels of investment into efforts like fitness bands, et cetera?

Clearly that hasn't done as well as you would have thought, and you're still hopeful there and looking to invest, but when do you think about starting to rationalize that or reevaluate that first?

And second, I guess, is more of a backwards-looking question, but as we've gone through this year we have seen you revise your expectations related to -- and the impact from exchange rates a few times.

First it was just on the pure translation, and then later it's been on demand.

How are you feeling about where we're at from that perspective?

And do you think that the lower levels of demand, given the higher pricing in the US dollar, persists into 2016, or do you need to make pricing adjustments to address that better going into next year?

Thank you.

Yes, thanks, James.

In terms of 2016, it's certainly too early to comment.

But I would say that on this fourth quarter, is obviously very crucial in terms of gauging the overall market.

And we believe that at this point we have a very strong product lineup that will read a lot into our plans for 2016.

So our approach would be to plan our 2016 based on, of course, how we view the market towards the end of this year.

In terms of the revisions, and kind of commenting on where we're at, I think our situation with the currency is not so much an issue of lower demand or lower quantities.

But it really is pressure on the revenue side in the translation of currency.

We've had some particularly strong results in some of those currency affected areas, which is actually a good problem to have.

But from the pricing point of view, it's very difficult to change the pricing in a short-term basis.

So we're doing when we can in the short-term to increase prices where we have some ability to do that.

But the longer term solution is really with products, new products and innovation.

Thank you very much.

And then just last follow-up question from me.

Can you give an update on in-dash and specifically where we're at with Honda?

That seemed to be a good opportunity for you.

And where are you thinking about the rollout potential with that partner?

Well, Honda is current rolling out in North America now, so we're on quite a few platforms there including the Pilot, Civic, CR-V, and the Accord.

So we're excited about what's going on there and it is rolling out per plan.

Thank you.

Our next question comes from the line of Simona Jankowski from Goldman Sachs.

Hi.

Just had a couple of questions on Fitness as well.

Can you help us understand the relative impact to pricing and margins from FX versus the competitive elements?

I was curious if the products you just introduced, the Forerunner, the Vivo Smart, is that the lineup for the holidays or are there others in the pipeline?

And are you looking at expanding into adjacent categories as well?

Lastly, any thought on hedging?

I know you historically hadn't, but just given the moves we've been seeing, is that something that you are now considering?

Yes, this is Doug.

I'll talk about the breakout of the Fitness gross margin year-over-year decline.

About 360 basis points of that decline year-over-year is due to FX.

The remainder is due to the product mix change as well as the competitive pricing dynamics.

And as it relates to hedging.

Hedging is something where we've seen the fluctuations in the currency all through our corporate history, both from a favorable as well as an unfavorable.

We looked to put that in the past, but our current plans are not to hedge since there has been large fluctuation of currency that has already taken place.

In terms of the product lineup, Simona, we're basically in place now with our fourth quarter holiday plans with all of the introductions that we had planned for the year, so I think we're set.

Cliff, in addition to the holiday lineup, are you investing in adjacent categories within Fitness or Outdoor beyond the existing categories?

In terms of what way?

Just new product categories.

So other than, say, Fitness watches or Outdoor devices.

Are there any adjacencies that we may not be thinking of that are on your internal road map?

We always have things on our internal road map, and we don't share those publicly.

But one of the recent examples, of course, in the Automotive area was babyCAM and we intend to continue to do that across all of our segments.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Mark Sue from RBC.

Maybe just some further details on the competitive dynamics and pricing in Fitness.

Who was actually cutting prices and how does Garmin respond in a market where price elasticity of demand is quite high?

And you are also at a disadvantage of your prices being higher because of the FX.

So maybe how we should think about how you spend the market share loss and also how you might reverse that, since everyone has new products.

We're just trying to get a sense of how you might be able to improve those metrics going forward.

Thank you.

I think a couple of things, Mark.

In terms of the pricing, last year we were selling our basic entry level tracker, the Vivo Fit at $129.

This year, in terms of product lifecycle and overall market, the situation has changed to where that's a sub-$99, or sometimes even sub-$79 product.

Of course, we have other products that have filled in towards the upper end, but the situation is different this year than last year.

In terms of FX, we aren't really at a pricing disadvantage because of FX.

It doesn't make our prices higher, but it makes it -- the impact is on the revenue we recognize in US dollars once the currencies are translated.

So that's really the factor.

And then the other thing I would mention is that the overall Fitness market also includes running.

And the running market dynamics have changed in the past year due to the advent of the wrist-based heart rate being a key feature that customers want.

And consequently, our product line, and so we started introducing our products at Forerunner 225 and now 235 have been a little softer in the market because of the absence of that feature.

As it relates to your balance sheet, you have a very healthy balance sheet and your stock currency is actually quite depressed.

If we look at next year, and we look at all the positive trends that are going to happen as it relates to new products, new market entry, any thoughts on doing a big ASR at this point, adding some debt on the balance sheet so we can retire quite a bit of stock [treasury] and make up for some of the EPS that we lost as we started the year?

No, at this point in time, you're right, we do have a very strong balance sheet as well as still have significant cash flow.

But as we look at that, our stock buyback situation, we will continue to monitor that depending upon the different conditions that are out there.

That's helpful.

Thank you and good luck.

Thank you.

Thank you.

Our next question comes from the line of Jeremy David from Citigroup.

Your question, please.

Good morning.

Thanks for taking my question.

Congratulations on the introduction of your Elevate wrist-based heart monitor technology.

How accurate is that technology versus other wrist-based heart-rate monitoring technology available in the market today, if you could compare that and maybe [earnship] versus other technologies.

And then I want to do a clarify, when the new Forerunner 235 and the Vivo Smart HR, when we're expecting to see the ramp of these products?

Feel like it's more Q1 than Q4, based on (inaudible) you've used in the press releases, but I wanted to check that with you.

In terms of the heart-rate technology, Jeremy, you know that we are a Company that comes from the technical running side of things.

So heart-rate accuracy is very important to us.

One of the things that we did with our new technology is ensure that it works very well for both the demanding athlete as well as the less- demanding requirements of all-day tracking.

So we feel very good about the accuracy of our solution.

We feel like it's very versatile and allows us to widely deploy it across our product line.

In terms of ramp-up of the new products, these products, as I mentioned in my comments, are available, they are shipping now, and they should be -- the Vivo Smart HR should be available the first of November at Best Buy, and the 235 is also shipping now.

So we think that they will have a meaningful impact on our Q4.

Okay.

That's very helpful.

Thank you.

If I can have a follow-up, you mentioned currency headwinds for several quarters now.

If I look at your revenue breakdown by regions, all of the growth is coming from inside of the US.

APAC is performing very strongly, up double digits year-over-year, but the US revenue was down 10% year-on-year.

There was no currency impact there.

So, first, what are the drivers of growth in APAC?

And why are sales in the US pretty weak?

Well, we've been doing very well in APAC in some countries like China and Taiwan, particularly with wearables.

That's a big growth area there.

But one thing I would like to highlight is that last year, in Q3, the Americas region had its strongest performance of the year, up 12%.

So we are comping against a little stronger performance in the Americas region as well.

Great.

My last question, if I look at your free cash flow for the year, so far, first three quarters of 2015, you have spent more on dividends than generated free cash flow.

How should we think about dividend growth going forward and dividend sustainability?

Thank you.

I think our cash flow situation, of course, has been impacted by all the factors that we have mentioned, particularly the reduction in revenues due to currency as well as the increased tax rate.

So this is not the ideal situation that we would have planned.

And of course, we plan for higher levels of cash flow generation in the future with new product introductions and as things normalize around the currency rates.

Thanks for answering my questions.

Appreciate it.

Thank you.

Our next question comes from the line of Charlie Anderson from Dougherty & Company.

Thanks for taking my questions.

I wonder if you could take a stab at how Fitness grew on a constant currency basis in the quarter, and then sort of that exit rate for the year would be helpful.

And then secondly on Fitness, you are spending more on advertising.

I wonder if we should think about a certain number for percent of sales as you go forward, if there's a change there versus the past, what that number might be?

In terms of the growth on a constant currency, we kind of headlined our overall situation on a consolidated basis, but we haven't been focusing on that on the individual segments.

We feel like the situation is going to quickly clear as we exit the year because, if you remember, the currency took a major nose-dive, the international currencies did, around the first of the year.

So a lot has changed between then and now because we're introducing new products, we're adjusting pricing.

So to comment on constant currency, things start to get a little bit intermingled and difficult to isolate.

In terms of advertising, we are spending at a higher level strategically in Fitness, and we will continue to do so in the future in order to take advantage of the opportunity.

So I would expect that in the coming year that we would have an increased level of advertising over historical levels, probably similar in terms of percentage of sales, as to where we are today.

Great.

My follow-up relates to Aviation.

It was a couple of years ago you guys won a number of new platforms.

We haven't seen a lot of new platforms be announced the last couple of years.

I wonder how that pipeline looks today as we close out the year and we've MBA in a month or so.

Well, we still are working on some new platforms that haven't yet reached the market.

As you know, the Honda Jet and the Cirrus SF50, those have been programs that are still in the works.

And of course we're constantly working on new business, but at this time we don't have anything to report.

Thanks so much.

Thank you.

Thank you.

Our next question comes from the line of Tavis McCourt from Raymond James.

Thanks for taking my question.

Cliff, my product question is on the Auto business and kind of the aftermarket specifically.

This year you've launched a lot of enhancements to the classic PND line, whether it was the babyCam or Dash Cam or some units with forward- collision warning, lane-departure warning.

As more technology gets baked into cars at the OEM level, it would seem to create an opportunity for aftermarket sales.

What I'm getting at is, have you done any advertising around these new features or any sense of the demand levels for them yet?

Is that part of the advertising increase in Q4?

Or is the advertising increase corporate-wide really just focused on the Fitness side of the business?

I think specifically for Auto we have done some appropriate level of advertising around some of these new features that you mentioned.

But as you know, the category is mature and has been in secular decline, so we're judiciously investing there, based on the opportunity.

In terms of where we're focused strategically, the Fitness market and to some extent Outdoor categories are where we're focusing our advertising spend.

Got you.

And then, Doug, you mentioned specifically $52 million of FX headwind this quarter, although, like you said, I suspect it's kind of tough to nail down exactly because of price changes and things like that.

Then you mentioned, I think, $185 million on the year.

What is that implied headwind in Q4?

And I suspect in Q1 that gets pretty de minimis, but just wanted to make sure of that.

Yes.

So basically we had $148 million year-to-date of headwinds.

So $185 million is the amount difference from that standpoint.

And, yes, as we move into Q1, as Cliff previously mentioned, some of the exchange rates hopefully will kind of be more level year-over-year from that standpoint.

But, yes, we'll have to see how the currencies move over the next three months or so.

And from a cost perspective, does the change in the Taiwanese dollar the last couple of months impact you guys positively or negatively?

Impacting us positively right now as it's been swinging weaker, so that's reflected in our overall results.

Great.

Thanks very much.

Thank you.

Thank you.

Our next question comes from the line of Ben Bollin from Cleveland Research.

Good morning.

Thanks for taking my call.

First question I had for you is when you look at the sustainability of these investments you're making, you commented advertising probably runs a little hotter into next year.

But when you look at R&D, it's increased in absolute terms, total dollars, for the last several years, and growing again as a percentage of revenue this year.

Should that pattern persist, or how should we think about the R&D growth on a look-forward basis?

Then I have a follow-up.

Well, certainly has increased in the past years, and part of that is that the product lines have become more complicated than they used to be in the past.

It used to be that we could sell a device that was engineered kind of as a stand-alone unit.

But today we not only have to do the device, but we also have to do the cloud and the mobile application.

So the development has become more complicated, and thus requires more investments, just kind of the reality of the current state of the market.

But that said, we do wish to leverage our R&D investments, and over time try to equalize that with the opportunity, but it would definitely be at a higher level than what we've seen historically.

Okay.

The second part, lots of discussion about the emphasis and the push into the fitness business.

If you look at the margin performance in Fitness, in the quarter it was essential at the corporate operating margin level.

Obviously there's some implicit mix shift towards the Fitness wearables.

But as you see a larger percentage of sales from Fitness wearables, and capabilities improve, do margins get better in that business?

Or how should we think about the margin performance within Fitness over time?

Well, certainly it would be our goal to try to bring it back towards where it was, but I think it is the state of the new reality in the market, there's a lot of emphasis on fitness, a lot of competition out there.

And so I would not expect to be able to certainly quickly or maybe even ever be able to get back to the very high levels that we had when the product mix was only specialty products.

Thank you.

Thank you, Ben.

Thank you.

Our next question comes from the line of Will Power from Robert W. Baird.

Thanks for taking the question.

A couple of questions.

First on the Outdoor segment.

Not a lot of commentary there yet.

I think in the release you alluded to growth opportunities in 2016.

So I guess I wondered if you could elaborate on that, what do you think might help grow that category for you next year?

And I guess along those lines, any updates perhaps on the golf market, camera market, et cetera?

In terms of Outdoor, the opportunity there is particularly in wearables, and also dog products have been doing very well.

So, again, next year we would intend to leverage those categories to be able to sustain and possibly even grow the overall category of Outdoor.

In terms of cameras, we've just recently introduced the VIRB X and VIRB XE.

And we've taken an approach there of being more of a niche player, particularly appealing to the other segment customers in our product line, particularly Marine and Aviation.

And we feel reasonably positive about how that has been going as more of a niche category.

We've had a lot of good feedback from those markets, and it's been getting specialty distribution that seems to be good.

Okay.

And the second question, coming back to Aviation a bit, it feels like visibility is limited, and there have been some macro headwinds.

Are there any green shoots on the horizon that you see at this point from a macro standpoint?

Or, I guess you referenced stock market and energy prices as being a limiting factor.

Has that continued to be the principal headwind?

Along with that, I guess I'm curious how do you frame your energy market exposure?

How big of an issue is that?

In terms of the macro side, we don't really see anything in the near term that reverses the trends.

I think Aviation tends to be a long-term play.

So, as a result, as the macro conditions ebb and flow, it tends to impact the market, and the market reacts over a period of months or years.

But in terms of the oil side of things, the biggest impact for us has been on the helicopter side, particularly where the oil services companies and, of course, the providers of equipment to those in both the OEM and aftermarket have been challenged in that environment.

And the other secondary factor is the oil-producing countries.

The people there probably aren't buying as many aircraft or retrofitting as many aircraft in that environment.

But that will equalize over time.

Oil prices tend to go up and down.

So it's not something we're particularly worried about in the longer term.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Brad Erickson from Pacific Crest Securities.

Thanks for taking my questions.

Following up on Fitness, it seems like your unit growth here in Europe has been, obviously, a lot better than in the US lately.

Is that something you see continuing or will those growth rates converge as we look out into 2016?

Well, I think it's probably hard to predict how the different markets perform.

Europe and the international scene is probably a year or two behind in terms of the overall adoption of fitness- and wellness-based products.

But they're in a little more of a growth curve at this moment.

Got it.

And then just on the aviation front, can you just talk about just briefly the cadence of kind of the new certifications you have coming out over the next year, or year or two, perhaps?

And how that compares to this past year or two?

Yes, I think the past couple of years we've definitely seen a lot of new platforms, particularly in late 2013, 2014, and early 2015.

We still have a couple of platforms that are publicly announced out there that are yet to be certified late this year, early next year.

But in terms of new business, of course, we can't comment on those at this time.

Got it.

And then finally, and I apologize, I think you may have already addressed this, but I missed it.

The operating results obviously leading to lower cash flows than we thought a few quarters ago.

Can you talk about how this might impact the dividend and, more broadly, how the Board thinks about changes to the dividend in light of weaker operations?

Thank you.

Well, I think dividend is a high priority for us, particularly to be a reliable long-term payer of dividends.

So that's really our number one priority in terms of our overall uses of free cash flow.

For us, at higher levels of cash flow, we also want to consider other investments, like acquisitions and buybacks, that will tend to fill those in based on our available cash flow in order to make sure that we're able to manage our cash appropriately.

Got it.

That's super helpful.

Thanks.

Thank you.

Thank you.

Our next question comes from the line of Ron Epstein from Bank of America Merrill Lynch.

Your question, please.

Hi, good morning, everyone.

This is actually Kristine Liwag calling in for Ron.

Hi, Kristine.

When you think about the target customers for new products that you're rolling out in Fitness for activity trackers and baby monitors versus your traditional customers for high-end niche fitness watches and power meters, how much do you think the overlap is between the two groups?

Between new customers and existing customers?

I mean buyers of the newer products that seem to be a little bit more targeted to mainstream, versus your legacy portfolio that's more of a niche activity tracker for marathon trainers and things like that.

Yes, I think that running has traditionally been viewed as a niche.

I think there's definitely a social movement going on now with increased activity, including running.

So a lot of people are starting to be interested in it and pick up on it.

And a lot of people that are coming to the market, of course, are people that have been exposed to Garmin in some way.

So we feel like we do have broad brand recognition and the ability to serve those customers as they get interested in it.

Sure.

And also, I understand that advertising dollars will pick up.

You've mentioned that a few times.

But then will you also have a shift in strategy, especially, as I mentioned, it seems like you're moving a little bit more towards the mainstream customer?

Well, absolutely.

We're advertising those products where we see the biggest market opportunity, and that's particularly in the areas of activity trackers, Fitness and some of our wearables in Outdoor.

Sure.

And last question from me, from my understanding, and please correct me if I'm wrong, Aviation products are largely manufactured in Kansas, while a lot of your consumer electronic parts are really in Taiwan.

If there's a strategic decision to unlock value and split up the Company, how easy is that to do on an operation and manufacturing perspective?

And then a follow-up to that would be, Cliff, how often do you and the Board discuss portfolio shaping?

Portfolio shaping?

Yes.

Okay, understand.

I'll address the first question you mentioned about unlocking value.

That's something that's not on our radar right now.

We view all of our segments as strategic components of our overall portfolio and something that we aren't considering.

In terms of portfolio shaping, I'm assuming what you mean by that is the strategic direction of our product portfolio.

And that is something that we review on a regular basis with our Board and is something that we review internally on a constant basis within our Company with each segment.

Okay, great.

Thank you.

Thank you.

Our next question comes from the line of Rich Valera from Needham & Company.

Cliff, in terms of your -- you mentioned sort of a plan to improve the operations of the Company relative to the recent poor results.

And it wasn't clear to me if there was any new elements to the plan, if you have made any sort of strategic decisions as far as how you are going to approach the market based on the recent downturn?

Or is it kind of more of the keep investing in new products and new adjacencies and go after the market that way?

I just wanted to know if there's anything new or different in the way you're approaching the market, based on the recent results.

Yes, I think the recent results are obviously challenging, because, on the financial yardstick point of view, we, of course, are experiencing pressure.

But as I mentioned in my comments, on the unit side of things, our unit deliveries are up, and we're seeing success in markets around the world.

So it really isn't a time for us to strategically peel back on some of those things.

In fact, it's probably a time to increase so that we can create more innovation out there and over the long term, as I mentioned before, be able to reset the pricing in the market around new products and new innovation.

Great.

That makes sense.

Thank you.

Thank you.

Thank you.

This does conclude the question-and-answer session of today's program.

I would like to hand the program back to Doug Boessen, Chief Financial Officer.

Thanks, everyone, for attending today.

Appreciate it.

Take care.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.