Garmin Ltd Q2 2008 Earnings Call Transcript

Jul.30.08 | About: Garmin Ltd. (GRMN)

Garmin Ltd. (NASDAQ:GRMN)

Q2 2008 Earnings Call

July 30, 2008, 11:00 am ET

Executives

Kerri Thurston - Investor Relation Officer

Cliff Pemble - President and Chief Operating Officer

Kevin S. Rauckman - Chief Financial Officer and Treasurer

Analysts

Mark Sue - RBC Capital Markets

Amir Roslokowski - Lehman Brothers

Reik Read - Robert W. Baird

Paul Coster - JP Morgan

Yair Reiner - Oppenheimer & Company

Jonathan Goldberg - Deutsche Bank

Jeff Evanson - Dougherty Company

J. B. Groh - D. A. Davidson

Jeff Rath - Canaccord Adams

Peter Friedland - Soleil

Rob Sanderson - American Technology Research

Jim Duffy - Thomas Weisel

Operator

Good morning, my name is Bobby Jo and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2008 Earnings Call for Garmin Limited. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Kerri Thurston, you may begin your conference.

Kerri Thurston - Investor Relation Officer

Good morning. We would like to welcome you to Garmin Limited's second quarter 2008 earnings call. Please note that a copy of the press release concerning this earnings call is available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock.

Additionally, this call is being broadcast live on the Internet. Please note that this webcast does include slides which can be viewed during this call. An archive of the webcast will be available until August 30, 2008. A telephone recording will be available two business days following this call, and a transcript of the call will be available on the website within 48 hours at www.garmin.com/stock under the Events Calendar tab.

This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introduction, and future demand for our products, and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 29, 2007 filed with the Securities and Exchange Commission.

Attending this call on the behalf of Garmin Limited this morning are Dr. Min Kao, Chairman and Chief Executive Officer; Cliff Pemble, President and Chief Operating Officer; Kevin Rauckman, Chief Financial Officer and Treasurer. The presenters for this morning's call are Cliff Pemble and Kevin Rauckman.

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

Cliff Pemble - President and Chief Operating Officer

Good morning. As you've read from our press release this morning, Garmin achieved another record quarter of revenue. Financial highlights from Q1 include revenue growth of 23% to $912 million with double-digit growth in Automotive, Outdoor/Fitness, and Aviation.

Both North America and Europe experienced year-over-year revenue growth of 27% and 19% respectively. Gross margins for the quarter were 46%, which is down 2% sequentially and also down 5% year over year, but exceeded our earlier expectation. We also achieved strong operating margins of 26%.

Some notable business highlights for the quarter -- independent market research indicates we have strengthened our market share to 55% in North America and approximately 20% in Europe, which further solidifies our worldwide leadership position in the PND market.

Total unit shipments exceeded 3.9 million in the quarter, resulting in a year-over-year growth rate of 54%. Our Auto/Mobile segment growth continues to outpace overall market growth as brand awareness and product differentiation benefit Garmin.

The Outdoor/Fitness segment outperformed our expectations due to higher demand for new devices like the Edge and the Colorado series, along with a new Forerunner 405.

Finally, we completed the acquisition of our Belgian and Finnish distributors, the sixth and seven distributors acquired to date, in line with our strategy to improve European market share and presence.

As you have read in our press release, we continue to see challenges associated with macroeconomic conditions. Even in the face of weakening consumers spending, we were pleased to report double-digit revenue growth in three of our four business segment.

In Automotive and Mobile segment, revenues grew 24% as the market continues to expand and our products continue to gain market share. Aviation revenues grew 15% as the OEM market achieved strong growth that was offset by weakness in retrofit and portable products. Revenues from the Outdoor/Fitness segment grew 54% as customers embraced our compelling new products.

And finally, Marine revenues fell 11% year over year. Q2 of 2007 included pipeline sales of our new chart plotter lineup and thus was a tough comparison. But higher fuel prices and overall economic conditions weakened the entire higher marine industry and affected our results as well.

We would now like to update everybody regarding our view of in the current market and economy trends impacting Garmin's diverse business segments.

As has been widely discussed, the PND market is not growing as fast as in prior years as the market matures. However, the PND market remains one of the fastest growing categories with consumer electronics and we continue to see strong opportunities in the segment as the global market continues to expand, penetration rates climb, and replacement market begins to develop.

Garmin continues to experience strong market share in North America. According to (NYSE:NPD), our market share averaged 55% during the quarter. Year over year we experienced a 25% decline in ASP, which is in line with our full year expectations, but less than that experienced in Q1, which as you recall was caused by channel clearing and competitors leaving the market.

We have been able to largely offset the decline in ASP through component cost reductions and improved operating efficiency. As I previously mentioned, the marine industry has been negatively impacted by the economy and specifically by high fuel prices. We are seeing a similar impact to the aviation segment as demand for retrofit and portable products has weakened and some aircraft manufacturers are scaling back their production plans.

As I mentioned earlier, we recently completed the acquisition of our Belgian and Finnish distributors, which are the sixth and seventh distributor acquisitions we have completed to date.

We now own distributors covering approximately 70% of the European market and they are clearly helping to increase our market share and serve customers better than we were able to do in the past. Additionally, we expect to complete the acquisitions of our distributors in Austria and Portugal during Q3.

As mentioned in last quarter, we are establishing local offices in emerging markets, which have strong growth potential. On July 1, we launched the Garmin-owned Australian sales office to directly serve that growing market and are anticipating strong results in the second half of the year. We also established an office in China to better support our in-country distributor in this growing market.

Turning next to product updates, in the second quarter, we began delivering the nüvi 800 series to our dealers and distributors. These devices feature cutting edge speech recognition capabilities that are activated by users through a push-to-talk wireless remote attached to the steering wheel.

The 800 family offers many other high end features, including MSN Direct, Bluetooth, mp3 and audio book players, travel features, and premium points of interest. The nüvi 800 is quickly gaining a reputation for offering the best speech recognition capability on the market today.

The newest addition to the nüvi family is the 500 series, which was announced last week. The nüvi 500 series are waterproof, multi-mode devices preloaded with both road and topographic maps, making them perfect for driving, cycling, boating, or walking.

The nüvi 500 uses our Garmin Connect photo portal, where users can select scenic destinations from millions of geo-located photos provided by Google's Panoramio. In addition, boating enthusiasts can add BlueChart marine maps, making the nüvi 500 the most versatile device on the market today.

In the Aviation segment, we recently have completed certification of our revolutionary new Synthetic Vision System. We believe this technology will transform the way in which critical attitude and situational information is presented to the pilot.

Synthetic vision provides accurate displays of terrain, flight hazards, traffic, flight path markers, and highway-in-the-sky symbology so that the pilot can maintain an unparalleled situational awareness even when flying in conditions of reduced visibility or darkness.

We are pleased to welcome Cirrus Design as our newest OEM customer. Cirrus chose to offer the most advanced integrated cockpit features in the Cirrus prospective system, including dual AHRS and air data and the Synthetic Vision System.

In addition, the Cirrus prospective cockpit offers several unique features designed to assist the pilot in high workload environments, including custom controllers and new autopilot functions.

In the Outdoor segment, we recently started delivering the new Oregon series of outdoor handheld devices, which combine a touch-screen interface with preloaded maps, making this the ultimate outdoor handheld.

This waterproof device also integrates our HotFix technology, which provides faster time to first fix even in challenging signal environments commonly found in the outdoors. The Oregon is compatible with our heart rate monitors and speed and cadence sensors and can exchange data with other Oregon and Colorado users over its wireless data link.

During the second quarter, Garmin became a title sponsor of Team Garmin Chipotle, which recently completed the Tour de France. We are excited to be associated with an elite cycling team dedicated to clean competition and rigorous drug testing.

The team is utilizing our Edge 705 for both training and racing, while the team bus and support cars are guided by the nüvi 770. The team exceeded expectations throughout the tour with numerous top ten stage finishes and Christian Vande Velde fifth place finish overall. We look forward to many future successes with this young team.

Next I want to provide an update on our progress on nüvifone development. As we stated in our press release this morning, the mobile network operator launch of the phone will not occur in 2008 as we earlier anticipated, but we look forward to US and European carrier announcements in 2009.

While we had hoped to have carrier launches in the fourth quarter, implementing carrier-specific requirements has taken longer than we anticipated. We continue to be very pleased with carrier interest in the device and we remain completely committed to bringing a device like no other to the mobile community.

Finally, while Kevin will provide details regarding our updated full year forecast, I did want to briefly touch on our revised outlook.

Our revised guidance calls for revenue of approximately $3.9 billion and EPS of approximately $4.13, which includes a 27 cent gain from our Tele Atlas shares tendered in 2008. While this falls short of earlier expectations, our revised guidance delivers 23% growth in revenues and 9% growth in EPS despite a weaker worldwide economy and increases in our tax rate. We will continue to focus on product innovation, which will drive growth in the years to come.

With that, I'll turn the call over to Kevin.

Kevin S. Rauckman - Chief Financial Officer and Treasurer

Thanks Cliff. Good morning, everyone.

I wanted to walk you through the details of our second quarter income statement results, giving you guys a little bit more detail on the revenue by geography and segments, talk a lot about the margins in our business, and finally end up with some additional financial details on the balance sheet and cash flow.

So on the second quarter income statement; we announced revenue of $912 million, net income of $256 million, and then earnings pre share of $1.19 per share. This represents 23% top-line growth and 21% EPS growth, including the gain on the TA shares. We did see a favorable 1 cent earnings per share impact due to the FX gain of approximately $900,000 during the second quarter. So excluding the FX gain, our earnings per share grew 18%.

Gross margin of 45.8% was better than expected due to the moderation of the ASP decline as Cliff mentioned, material cost reductions that we've continued to experience, and other operating efficiencies in our business. We did see a $3 million decrease in operating income compared to the second quarter of '07. However, our operating margin was 26.2% for the quarter, down from 32.5% last year but better than expected.

We achieved the 26.2% operating margin through gross margin being unfavorable year over year by 470 basis points. Advertising was favorable 120 basis points. Our other SG&A was unfavorable by 210 basis points. However, most of this increase, $15 million of the year-over-year increase was due to integration of our five European distributors since this time last year. R&D was also unfavorable at 80 basis points during the quarter.

Our unit shipments grew some 54% year over year as over 3.9 million units were delivered during the quarter on the strength of our Auto/Mobile segment. Average selling price was $233 per unit, 8% down from $238 in the first quarter and 20% below the second quarter of '07.

The non-GAAP measures that we recorded included net income excluding the effects of foreign currency. And the FX gain does not reflect the gain associated with the tender of our TA shares. This FX impact was 1 cent per share favorable during second quarter.

During Q2, we experienced 24% revenue growth within the Auto/Mobile segment while the unit growth in that segment was 65%. Marine segment revenues declined 11% compared to Q2 of '07. Our Aviation segment achieved a 15% revenue increased during the quarter. Our Outdoor/Fitness segment also experienced double-digit revenue growth of 54% compared to the second quarter of '07 with the Fitness category leading the way.

In total, our revenues grew 23% during the second quarter, which represents growth in our global PND market share. Our total revenues are up 28% on a year-to-date basis with the Auto/Mobile and Outdoor/Fitness segments leading the way.

During the second quarter, North American revenue was up 27% while our European business increased 19% during the quarter. Our APAC region sales declined 6% during the period due to the planned transition from our distributor in Australia to selling Garmin products directly in that country.

Unit growth in North America exceeded that of Europe as North American PND market grew at a 100% year over year. We experienced 65% unit growth from our PND products, with North America as I said leading the way at nearly 100%.

As the Auto/Mobile segment remained the highest growth business at Garmin, it now represents 69% of our total business during the quarter, up one point from second quarter of ’07.

Because of the stronger growth in North America during the quarter, - that geographic region represents 63% of our total quarterly business. Europe now accounts for 34% of our total revenue.

The low end unit sales of PND continued to account for approximately 80% of our total PND business. The low end revenues of the PND account for approximately 70% of the total Auto/Mobile segment.

During the second, quarter our Aviation and Outdoor/Fitness gross margins increased to 73% and 57% respectively due to product mix. Operating margin for these segments also grew on the strength of the gross margin with Aviation at 44% and Outdoor/Fitness at 38%. We continue to target long-term margins in these segments at 65% and 35% and 55% and 35% respectively for the Aviation and Outdoor/Fitness segments.

Q2 Auto/Mobile gross margin and operating margin were 39% and 20% respectively, down 100 basis points compared to the first quarter of ’08 when excluding the benefits we saw in foreign currency. Gross margin of 39% was in line with expectations and ASP declined 24% and cost declined 20% compared to the second quarter of '07.

Q2 Marine gross margin was on target at 56% compared to 58% a year ago. Operating margin was also in line as expectations of 34%. This was down from 42% at the same quarter last year when we benefited from new product introductions in this segment.

We continue to expect PND price declines of approximately 25% during 2008 offset by projected raw material cost reductions of approximately 20%. As a result, we expect our PND margins to decline from 39% in the second quarter to the mid 30% range in late 2008. However, due to increased volume in the second half of 2008 we expect to achieve sizable operating profit expansion within the Auto/Mobile segment.

Moving next to our operating expenses for the quarter, R&D increased $16 million year over year and was up 80 basis points to 5.9% of sales. We now employee over 1700 engineers and engineering associates worldwide.

Our ad spending increased only $1.5 million on the year-ago quarter, but on a percentage of basis, advertising was down 120 basis points to 6.4% of sales. We expect ad spending to decrease slightly in the third quarter, but then again increase in the fourth quarter holiday selling season.

Other SG&A increased 210 basis points to 7.3% of sales from 5.2% a year ago. As I said earlier, the majority of this increase was due to the integration of five European distributors that we have acquired since this period last year. We expect that our SG&A expenses will increase slightly in each remaining quarter of 2008, but we'll continue to monitor the business needs in each of these business functions.

Moving next to the balance sheet, we ended the quarter with cash and marketable securities of just over $1 billion. Our accounts receivable increased sequentially from the first quarter to $680 million on a heels of a much stronger sales quarter and accounts for approximately 60 days of sales at the end of the quarter.

Our inventory balances decreased to $656 million following the spring selling season, and our days of inventory metric decreased from 98 days at the end of the first quarter to 88 days at the end of the second quarter, primarily in our finished goods inventory.

So at the end of Q2, we have the following levels of inventory and days. We have $173 million in raw material, which account for 22 days of inventory, $57 million in WIP, 8 days of inventory, $458 million in finished goods, which was approximately 58 days of inventory, and finally we have $32 million in our inventory reserves at the end of the period.

As we've stated in the past, product availability continues to be a top priority for Garmin and has contributed to our success. However, given the shorter product lifecycles of PND products, we're still working to manage our inventory carefully and it's our goal to have adequate inventory to support our customer needs. But we intend to carry the right level and mix of inventory to minimize the risk of obsolescence.

Evaluating the retail channel inventory at the end of the second quarter, we believe that inventory in the channel continues to be lean as the sell-through of most of our products was strong in the second quarter.

Our cash flow from operations during Q2 was $88 million. CAPEX invested was $53 million. Free cash flow, therefore, was $34 million. The cash flow provided by investing was $146 million during the second quarter, which was made up of the $53 million of CAPEX, primarily due to the Taiwan product line purchases that we entered in the quarter, $209 million net redemption of marketable securities, and $10 million use of cash due to the acquisition of businesses and intangibles.

Our cash flow from financing was $223 million use of cash during the second quarter primarily made up of $228 million use of cash on our stock buyback and a generation of $5 million cash due to the issuance of stock options during the period. We earned an average of 3.6% on all cash and marketable securities during the quarter.

Touching next on equity, Garmin repurchased over 5.2 million shares during the period as I mentioned a $228 million use of cash. Subsequent to the close of the quarter, however, the company purchased the remaining 3.4 million shares under a Rule 10b5-1 plan. There remain 5 million shares available for repurchase and Garmin intends to be an active buyer of the shares as business and market conditions warrant.

Our diluted shares outstanding declined to 215.6 million shares due to the shares repurchased during the period.

And finally, giving a little bit more detail on our full year outlook, you notice we did bring down the revenue expectations to at least $3.9 billion for the year, which is a 23% top-line growth for 2008. We still expect our operating margins to come in at 25% for the year and our earnings per share excluding the FX of $4.13, which would be 9% growth rate for the year.

For the full year, we expect CAPEX to be $120 million. As discussed in our last earnings call, the tax rate is now 19% across our business and we expect an average diluted share count for the full year to be 214 million shares.

Looking at our segment revenue expectations, given the reduction in our earlier guidance to $3.9 million, we now expect our Auto/Mobile segment to increase 25% to $2.9 billion-plus.

Our Outdoor/Fitness segment, we've actually raised guidance there up to 30% growth for the year to little over $400 million. And as Cliff mentioned in his comments on both Marine and Aviation due to the economy and fuel prices, we expect Marine to be essentially flat and Aviation now to grow 15% for the full year.

So that ends our formal comments. At this point, we'd like to open it up for any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Sue of RBC Capital Markets.

Mark Sue

Thank you. The PND unit growth was less than those expected while ASPs were better. Maybe if you could help us understand the balance you are trying to strike between unit growth in ASP discipline and perhaps your assumptions of price elasticity in terms of -- relative to this economic climate that we are in?

Kevin Rauckman

Well, I think we have commented on the fact that the price decline went from 35% in Q1 to essentially 25% a year-over-year decline in Q2. We expect that to continue to come down as we go through the end of the year. It's likely that as we go through the Holiday season we could say ASP decline as well as 20% on a year-over-year basis. So from a striking a balance, I think that's always the challenge you is ot whether the appropriate price in order to generate incremental or elasticity of demand, the good thing that we see is that we did gain share during the period where the pricing was little bit more favorable. As we go through the year we still expect the unit demand to be – at market growth if not above through the rest of the year.

Mark Sue

Okay, that’s helpful. And then on the nuvifone, any thoughts on what's creating the delay, is it anything related to production or future sets that you might need to add or is it mostly price negotiations or is it the carrier that’s taking its time?

Cliff Pemble

I think the delays are really to try to accommodate carrier specific requirement which as you know are different than open market requirements, so that’s what we are working on right now.

Mark Sue

And any thoughts on what we should be assuming for nuvifone units in 2009, a range possibly?

Cliff Pemble

I think at this time probably I don’t have any guidance for you.

Mark Sue

Okay. And then just lastly Outdoor/Fitness, maybe if you could just talk about the sustainability of the strength that you are seeing there with the Colorado and also the Forerunner products?

Kevin Rauckman

Well I think, Outdoor/Fitness is what we call one of our mature markets. It’s a core market, very good segment that it does have much smaller base and probably limited growth potential. We do think the new products are driving the growth and causing people to embrace our products. And also there could be some factor that with the current fuel prices and the economic condition, people are looking for more green activities to do and Outdoor/Fitness is definitely one of those.

Mark Sue

Okay, that’s helpful. Thank you and good luck gentlemen.

Kevin Rauckman

Thank you.

Operator

Your next question comes from the line of Amir Roslokowski of Lehman Brothers.

Amir Roslokowski

Thank you very much for taking the question folks. Can you give a little bit, dig in a little bit about the Nüvifone delay, how much of the guidance revision should we consider is affected by the delay of the Nüvifone?

Kevin Rauckman

I think we never communicated that we have significant number of units or revenue in the fourth quarter, I think really what we are talking about here is maybe as much as 100 million of the 600 million that we dropped that literally is just due to the economic conditions that we’ve been watching and now that we are three months further into the year we had better visibility into the back half of PND and overall Auto/Mobile but to be honest with you it’s not a significant adjustment really on the full year.

Amir Roslokowski

Okay, that’s helpful. And looking at the guidance Kevin, looking at the lower growth, although it seems to suggest that units are or unit growth is primarily the driver for that your PND business, but we have seen this quarter it seems like North American units were fairly healthy, should we sort of consider the downward revision a revision to the outlook of the 100% unit growth in North America or are you facing sort of market declines in Europe, I just wanted to understand sort of the puts and takes there geographically?

Kevin Rauckman

I think if we look at our unit growth so far, we are still seeing about 100% unit growth in North America across two quarters, and actually our European business's unit growth has outpaced the market where at least 50% up year-over-year through the first two quarters. I think the overall unit expectations on the PND for Europe for the full year are approximately 30% growth. So we will likely see a decline in growth in both of those geographic regions as we go through the year, I mean a lot of it has to do with how big does the fourth quarter get for us and that's what we are trying to estimate here with our revised guidance.

Amir Roslokowski

Okay. And then I think lastly just digging in a bit into the inventory level, I mean we have sort of revised sort of unit expectations for the year. Inventories came down sequentially, but still are at fairly healthy levels. I mean how are the puts and takes there in terms of unit guidance coming in, but inventory levels remaining at a fairly healthy levels? Should we be concerned at these levels, could you give us a little bit more comfortability there?

Kevin Rauckman

Yeah, I think we have down place these potential risks that you all as analysts see in our business. I mean, clearly we targeted 90 days of inventory in our business even with a very rapid product lifecycle, and again in Q2 we are at 88, so we dropped the finished goods down where we think is a reasonable level of 58 days. When you look at the detail of inventory part number by part number, we have introduced many new products this year across the board and most of our inventory includes the new products. So we feel like there is very low risk of obsolescence. And then when you take into account the second half and primarily the fourth quarter demand, we feel like we have the appropriate net amount of inventory to support the market growth in the back half.

Amir Roslokowski

Great. Thank you very much for taking the question.

Kevin Rauckman

Thank you, Amir.

Operator

Your next question comes from the line of Reik Read of Robert W. Baird.

Reik Read

Follow up a little bit on that question. It just seems like the working capital metrics have become a little bit more challenge, you are seeing a decline in cash flow from operations. Do you expect that to start to unwind a little bit in the back half of the year and what are the things that you are doing to try and manage that?

Kevin Rauckman

Well, I think unwind, if you mean are we trying to offset some of the trends we have seen. I think just in the first half, you can see our AR, accounts receivable, typically we see a big increase in AR in both the second and the fourth quarter. So it's nothing unusual there as the use of cash. Inventory, again as I mentioned, we feel like we have the appropriate amount of inventory. Payables has been a little bit of use of cash, but I think we will see a turnaround in that in the back half of the year. So in general, our free cash flow, our cash flow from operations will follow the -- attract the seasonal trends we see in our business. We still expect to generate very solid cash flow from operations in the second half.

Reik Read

And I understand what you are saying about the seasonality, Kevin. It just seems like from a trend perspective, the DSOs are climbing and I am just wondering if there is something that is happening there or is something that you guys can do to manage that a little bit?

Kevin Rauckman

We were doing best we can managing the cash collection from our retail partners, retail customers. We don’t -- we look at the risks of collectability and we feel like there is very low risk there. In fact what we had, one or two small write-offs due to bad debt even in a somewhat weakened economy. So we are pretty comfortable with our AR at this point.

Reik Read

Okay. And then just a quick question on the guidance, the 25% operating margin. Is that including the Tele Atlas gains?

Kevin Rauckman

Well again, the Tele Atlas gains were about in the operating margin, so no. That’s the one that allows…

Reik Read

Okay. And then just a quick question on the PND side of things. It looks like the expenses maybe were a little bit higher than expected. Is that the case and what's the long term target there as a percentage of sales just in the PND auto space?

Kevin Rauckman

Well, I think we talked about 39 gross and 20 operating, I think we can still see some leverage as we see a pretty sizable volume increase particularly in the fourth quarter in that segment. So I mentioned our gross margins even with maybe a 20% ASP decline will get down into the mid 30s and we are hopeful that we can still retain a similar operating margin as we go through the rest of the year.

Reik Read

Okay. Thank you.

Operator

Your next question comes from the line of Paul Coster of JP Morgan.

Paul Coster

I wonder if you could share with us any statistics you might have on the upgrade cycles for the PND segment? How long before people particularly replace the devices and what are the factors that go into that?

Cliff Pemble

I think that details on that are probably similar, it's a little bit hard to come by and so most of what we see is more anecdotal. We have been seeing a large increase in our database sales, so we know the customers are upgrading databases and refreshing their units and we think empirically from general consumer markets that people would probably tend to keep a device like this for somewhere in the two to four year timeframe before it becomes practical to buy a newer model with better features and lower cost.

Paul Coster

You don’t have any stats runs for instance what percentage of your PND sales might be to existing Garmin customers just as a measure of brand royalty?

Kevin Rauckman

Yeah, I don’t think we have any stats that we can share with you.

Paul Coster

Okay, got it. Do you have a sense as the number of weeks the channel inventory in North America for the PND category?

Kevin Rauckman

Well, I think it really depends on the retailer, but in general we haven’t seen a change there because we get very good data from the major customers like BestBuy, CircuitCity, Wal-Mart, and Target all that inventory on hand that we really depends on each specific retailer which we are not at liberty to comment on.

Paul Coster

In terms of the categories of channel, can you talk about which are manifesting better strength than others?

Kevin Rauckman

In the churn growth, the retail versus Internet?

Paul Coster

Retail versus Internet and for that matter sort of big box consumer electronics verus budget kind of outlets and so?

Kevin Rauckman

Garmin would still be one of the top sellers on the internet, for example , on Amazon.com, but still a majority of our units are sold around the world through the brick-and-mortar, through the retail store.

Paul Coster

Got it. Last question. In acquiring these distributors in Europe what impact does that have on gross operating margins?

Kevin Rauckman

Well in the near term we have been able to I think in some cases raise prices or hold prices without seeing a reduction in price because of the taking out of the middle-man so to speak. And operating margin I think we have seen increase, as I mentioned $15 million of increased SG&A from year-over-year because we now own those businesses. But depending on how much benefit we are able to get out of gross margin determines how much of an impact on the operating margin we have. Let say operating margin is probably is not much impact, but maybe a little bit of benefit on the gross line.

Paul Coster

Thank you very much.

Kevin Rauckman

Thank you.

Operator

And your next question comes from the line of Yair Reiner of Oppenheimer & Company.

Yair Reiner

Good morning. First question is on the PND gross margin. Sequentially looks like ASPs were flat, but gross margins came down. Can you explain how that happened?

Kevin Rauckman

Well I think if you – what I tried to communicate in Q1 we had about 300 basis points benefit due to the foreign currency see in Q1 and we didn’t really see as much, nearly as much in Q2. So its more normalized margin would have been closer to 40% in Q1 and we had 39% in Q2. So I think ASPs as you suggested was actually flat during the quarter.

Yair Reiner

And I guess input cost also quarter-on-quarter were essentially flat or slightly up?

Kevin Rauckman

I am sorry, say it again?

Yair Reiner

The cost per unit was essentially flat or slightly up quarter-on-quarter?

Kevin Rauckman

On an absolute basis, that’s about right, yeah.

Yair Reiner

Okay. But I guess you expect input cost to I guess continue declining in the back half of the year?

Kevin Rauckman

No, if we look at the trends that we have seen year-to-date, we have actually on an average prices come down about -- this is across the business, this is not just PND. Our prices come down approximately 22%, and our cost come down approximately 20%. So as we said earlier, we still expect our input costs, raw material costs to continue to come down about 20% on a year-over-year basis. Pricing, as we said, should moderate towards the back half of the year.

Yair Reiner

Okay. When I look at your full year guidance for the PND side, it seems to assume that you are going to basically maintain your current unit growth rate of about 65% or so for the balance of the year. And given the tough comps you have versus the second half of 2007, do you have in that growth, and is there something beyond North America and Western Europe that’s going to help contribute to that growth in the second half?

Kevin Rauckman

Well I think first of all, we wouldn’t, given the number; we weren’t confident in that number. So I think we feel fairly confident that we are going to be able to meet or exceed those numbers, the new numbers we rolled out this morning. I think it’s primarily the growth is still going to be coming from North America and Europe, however Australia should also provide some pretty good growth in the back half now that we own that distributor and have better control over that market, still a growth business. And to be quite honest, even though it’s a low base Asia should potentially still drive some pretty strong growth.

Yair Reiner

Okay. Just a couple of quick questions on the Nüvifone. First, how do the delays now with the carriers impact R&D for the back half of the year and the follow up there is that, it seems like to have the adequate scale to compete in that market, you have to have I would say probably list 1 million phones sold per year. Is that kind of your internal target and if you don’t get there in 2009, is that when you start kind of rethinking your long-term commitment to that market?

Min Kao

I will address the R&D first of all, maybe Cliff want to comment on the unit volumes. But in general we – the announcement today on the delays really has virtually nothing to do with the R&D. We already had plans to develop the product. We are working very diligently to try to get to conclusion there, but from the financial trend there shouldn’t be any difference there on the R&D cost. Do you want to address the unit volumes?

Cliff Pemble

Yeah I think we would probably tend to agree with you on the unit volumes and it’s within a range of what have we are thinking as well

Min Kao

Good, thank you. I'll get back in queue.

Cliff Pemble

Thanks.

Operator

Your next question come form line of Jonathan Goldberg, of Deutsche Bank.

Jonathan Goldberg

Thanks for taking my call. A quick question on Europe. I know you guys have been working pretty hard there, marketing, pricing pretty aggressively, but you also don’t seem to have made that much progress in terms of market share. It seems a little bit better but not as much as we would have expected. We've seen TomTom weaker than expected there. What is going on in that market there? Is it just that we've reached steady state in that market and there's not that much growth left?

Kevin Rauckman

I guess I probably differ on the categorization of the European market share growth. We've seen a year ago, a year and a half ago when we started acquiring distributor there our market share was low teens if not like 11, 12% at where at least 20% now in the European market. So we've have seen – we feel like we have seen sizeable growth there and again as I mentioned our unit growth is exceeding the overall unit growth of the European market. So I think we are, that's what we are seeing. Another data point that might be helpful is on the ASPs we've actually seen a recent benefit due to the acquisition of the some of the distributors, our ASPs actually came up a little bit in Europe in the recent quarter on the PND market.

Jonathan Goldberg

Okay, and then on marine and aviation, it seemed at least in the past quarter in Q2 marine took a bit hit, aviation was slowing but not as bad. Why are the two markets different or are they just going to be the same now?

Cliff Pemble

I think marine, we mentioned that there was a very difficult comparable that we had in Q3 of 2007 when we introduced our new chartplotter lines, so we had tremendous growth in Q2, of 2007 and was a difficult comparable for this year. But even with that in mind we do believe that fuel prices and the general economy are affecting marine a lot. In the aviation side comparing and contrasting we are seeing the impact of high fuel prices and economy in our retrofit and portable business as we mentioned. But that is offset by a really strong OEM presence that we have in aviation. And so far in Q3 the OEMs have not been or at least our OEM business has not been so impacted by the economy; we do see some aircraft manufacturers cutting their production schedules going forward. So that's a part of our revised guidance that we have in the aviation growth.

Jonathan Goldberg

Okay, thank you.

Kevin Rauckman

Thank you.

Operator

Your next comes from Jeff Evanson, of Dougherty Company.

Jeff Evanson

Good morning, thanks for taking my questions.

Kevin Rauckman

You are welcome.

Jeff Evanson

I was wondering if you could talk, Kevin, about what type of buying patterns you saw in the quarter in the PND category? Was there any shift in retailer buying in the month of June?

Kevin Rauckman

Are you looking at seasonality month to month?

Jeff Evanson

Exactly

Kevin Rauckman

Yeah, I think Well, we've commented earlier on several different occasions, April was the weakest month during the quarter, may picks up with a lot of the promotional activity due to the Mother's Day, Father's day, dad's and grads season, and then June, I think June came in maybe just a little bit below expectations but still sequentially up from May. So that's the way the quarter rolled out.

Jeff Evanson

Okay. And I just want to clarify; you did say that you feel that retailer inventories are about consistent with a year ago?

Kevin Rauckman

I think just consistent with what we've continued to track on a quarter-by-quarter basis. We don't see a lot of build up of inventory in the channel at this point. I mean, given the fact that particularly in North America we are still seeing 100% unit growth. There's not a lot of excess there.

Jeff Evanson

Okay. I am trying, if you could the unpack the statements around the Asia Pacific change in distribution or Australia change in distribution?

Kevin Rauckman

Yeah, what we experienced in Austria is we had moved from an independent distributor and now we've transition and now own, have our own physical location in Sidney. And what happened in Q1 it was a by ahead of some inventory there from our distributor to be able to sell into that channel during the Q2 when we were in a transition mode. And so from a, I think it could be as much as.

Jeff Evanson

About 60,000 units? About 80,000 units?

Kevin Rauckman

Not that much. 7 or $8 million difference between Q1 and Q2, which really net on a low impact Asia Pacific base related in fact the sales trend. I think just a short term one quarter issue that we now own a distributor, it was shipping, it was actually pretty strong growth in that country, in that continent, in the second half.

Jeff Evanson

Did you feel this transition was completely behind you by the end of Q2 or we see some effect in Q3?

Kevin Rauckman

That’s behind us. We essentially started shipping some Garmin location on July 1.

Jeff Evanson

Okay. Back on PND is related to the components, did you overall component build material decline sequentially?

Kevin Rauckman

Sequentially from Q1 to Q2 yes.

Jeff Evanson

And then, could you talk a little bit about the increase in the build material sequentially outside of the components that some of that was FX, but..?

Kevin Rauckman

Well, that’s FX and then we have other cost of sales which include warranty cost, freight and duty, obsolescence those kinds of cost.

Jeff Evanson

Okay. And you think specific within that list or is it all kind of a up a little things?

Kevin Rauckman

That’s not.

Jeff Evanson

Alright. I didn’t notice an increase in the provision for doubtful accounts anything you can share with us there?

Kevin Rauckman

It is – its just down a couple of refocus and risk and as I said we really had virtually no line up, but we have set the account for possible write offs later in the year and also this increase sales as we go through the year.

Jeff Evanson

Okay, and then my last question I think you pretty much address this but just noting the decline in automobile operating profit, can you take that can back up in Q3 or should are we really waiting to Q4 for that to start to grow year-over-year?

Kevin Rauckman

I think its more of a Q4, that typically is a seasonality of our business is relatively flat Q2 to Q3 as total business. So I would expect most of the operating profit increases to occur in the fourth quarter.

Jeff Evanson

Okay.

Kevin Rauckman

They can be sized or as I mentioned just due to the leverage on the volume.

Jeff Evanson

Thank you.

Kevin Rauckman

Thank you.

Operator

Your next question comes from the line of J. B. Groh of D. A. Davidson.

J. B. Groh

Hi guys.

Cliff Pemble

Hi David.

J. B. Groh

Hi guys. Had a question on Aviation. Cliff kind of answered it a little bit I think. Was big driver the margins there, typically I think of the handheld being the best margin, but it sounds like there was some impact on fuel prices. So is it OEM that shorting there or is it handheld or is it new product in the last three, four and six, but was there anything in this quarter they accounted for that nice margin increase?

Kevin Rauckman

I think its just still strength in the margins across the OEM business, we don’t necessarily see pricing pressure going on there that would impact the gross margin, but just in general the demand is weaker because of the economy.

J. B. Groh

So, it was OEM that drove the margin in the quarter?

Cliff Pemble

Yeah, OEM is really significant part of our aviation business. Yes.

J. B. Groh

So that’s probably, fairly sustainable?

Cliff Pemble

Yeah again depending on the impact OEMs on economic conditions as I mentioned we aren’t, some of that start to come through now and especially in the lower end airplanes the mid upper range airplanes and the light jets that seem to be impacted.

Kevin Rauckman

I think you probably start over is a 73% sustainable, as I mentioned in my comment we think a more normalized number is 65% gross margin and we could beat that, but I wouldn’t expect 73% every quarter.

J. B. Groh

So that turns out to mid or low 40s on a operating basis?

Kevin Rauckman

Yeah.

J. B. Groh

Okay. And then on the platforms we are competing the old Columbia and now in the series, what sort of takes rates are you seeing versus a competition in those instances where you are now option where year ago you want?

Cliff Pemble

I think its near 100%.

J. B. Groh

Wow, okay. And then Kevin just housekeeping item, how much currency shows up in that other line with the Tele Atlas?

Kevin Rauckman

You mean how much of the total FX piece was related to Tele Atlas

J. B. Groh

And you peer foreign currency line it like $0.8 right.

Kevin Rauckman

Yes, it was a big chunk, a large component of that was related to the gain on the Euro, during the period that we the share. So a majority of that is Tele Atlas related.

J. B. Groh

So the Tele Atlas currency impact, shows up in the foreign currency line, it doesn't show up in the other line?

Kevin Rauckman

Yes.

J. B. Groh

Okay. Thank you.

Operator

Your next question comes from the line of Jeff Rath of Canaccord Adams.

Jeff Rath

Just a couple of follow-on questions if I may. I guess, Kevin, just wonder if you could give me some color. In this macro environment with the consumer under a lot of pressure, how does – how do you as a management team and what type of feedback are you getting from the channel as far as they are planning for the fourth quarter? I mean, are they – because clearly it appears to be a weakening environment. Are the retailers messaging their sort of Christmas holiday season planning a little bit differently? Are there more contingent planning in there? What kind of feedback are you getting from them? And then when you package all of that information up in light of what’s the environment is from your perspective, how do you then package that up to us or the investment community? Any color would help.

Kevin Rauckman

Yeah, I think we continue to work very closely with the major retailers and at this point we don’t see major differences there. We have, we’ve already worked out some very detailed plans on promotion and point of sale and all the different deals that we are would do during the holiday season. So we have -- I feel like we have very good visibility to going into the season what's expected, how many SKUs, the shelf space and, like I said, some of the programs. What we don’t have is what kind of sell-through is going occur during the fourth quarter, but that's why we are pretty good at estimating what that needs to be as we manage our business and so that’s how we wrap up the input we get from the major retailers and then lay out new guidance to you guys.

Jeff Rath

I guess a different way to think about it is, in this environment today is materially more uncertain than it would have been the same time last year. So when you think about the expectations and the cushion that you are going to build into that yourself, given the uncertainty, would it be save to say that you are building more of a cushion this time than you would have been at the same time last year, relative to that feedback?

Kevin Rauckman

I would say in general, yes, but I am not going to be able to quantify how much that is. It's just the sentiment around the economic environment, that, yes, factored in what we think the business is capable of doing what the market growth is and that’s in general I would say I agree with that, yeah.

Jeff Rath

Okay. Just two more product oriented questions and maybe, Cliff, if you could answer one or three with regards to the Aviation. You mentioned Synthetic Vision as sort of a major innovation in the electronics packages there. Can you help me understand the FCC – I am sorry, or the FAA environment around approving that type of capability in the cockpit and are there any major gating factors in that regard?

Cliff Pemble

Absolutely, we spent a lot of time getting our system approved with many, many flight tests and evaluations by multiple outside pilots including FAA pilots and industry pilots. So it's a huge effort. And Synthetic Vision is something that's been talked about for years in the industry and to finally get it to market through all of those gates I think was a significant accomplishment.

Jeff Rath

Okay. And I guess the final question is again on product related question. In previous years, a part of the package of information you provided us on the product side was sort of a new product count, how many new products you have brought out year-to-date. You seem to have steered away a little bit from sort of an absolute number. And now with the nuvifone there is clearly a lot of R&D dollars that have gone into that. When you are thinking about your R&D spend going forward, you obviously have lots of resources. Can you give us any color as to where you might be, in a general way, where you might be looking to spend money? Are you spending more money, say on the content and map side now than you might have in light of industry consolidation? Any color on how you are thinking about your R&D spend. It seems like you are moving away from just new products for new products sake, any color would be helpful.

Kevin Rauckman

Yes, so I think we did mentioned few calls ago that our focus is on quality products and really desirable products for the market and I think as various markets mature and as technologies emerge, the complexity of those products and the effort it takes to bring them to market increases. So we are not focusing on just the number of products we produce but really on creating products that are desirable and embraced by the customer. So we are spending money on that. Innovation and devices and content and services are all things that we are investing in.

Jeff Rath

Okay, thanks very much.

Cliff Pemble

Thank you.

Operator

Your next question comes from the line of Peter Friedland of Soleil.

Peter Friedland

Can you just comment on Q3 seasonality, what we should expect both in the PND business and volume and revenue and then in the total business?

Kevin Rauckman

As I mentioned earlier, I would say we don't see anything significantly different this year as what we've seen in the past on a business trends and seasonality. Typically, we would see Q3 be down about 5% across the business from Q2 to Q3. And PND roughly flat, which is what we – or close to what we experienced last year. So that's about as much as I can give you at this point.

Peter Friedland

Great thank you.

Operator

Your next question comes from the line of Rob Sanderson of American Technology Research.

Rob Sanderson

Yeah thank you. Thanks for taking the question. I am just trying to reconcile from the comments and results from PND segment. You're maintaining even increasing share in the U.S. Your primary competitor is not achieving their share gain targets in this market. Garmin is gaining in Europe. And your competitor is losing share there as well. So you've got – Garmin has more exposure to the faster growing market and seems to be gaining share in both regions, but the PND unit growth you're reporting is lower than that what was reported by your competitor. So how do we reconcile these, what seem to be conflicting data points? Is it just a function of sell in versus sell through or how should we be thinking about this?

Cliff Pemble

I think there would definitely be some sell in factors affecting the various sets of numbers that you're comparing and certainly half of that equation would have to ask others what their specifics are. But for us, we think our numbers represent true market demands at this point and we also thing that our market share reflects our growing position.

Rob Sanderson

Alright. Thanks for that, Cliff, we'll try to follow up off-line. Thank you.

Cliff Pemble

Okay.

Operator

Your next question comes from the line of Jim Duffy of Thomas Weisel.

Jim Duffy

A quick questions, first could you please elaborate a little bit on the carrier specific requirements for the nuvifone? Were they technical or marketing and Market timing related? Perspective there would be helpful, thanks.

Cliff Pemble

I think really all of those thing we are referring to are technical related item. When we announced the nuvifone I think it wasn't clear at that particular point what the carrier interest would be and certainly since that time we've been delighted and very pleased with their response. But getting the device, transitioning the device from an open market type design to one that's specific to carriers does require a lot more work in various areas including features and RF performance and various other things.

Jim Duffy

That’s helpful thanks. A quick question for you, so your businesses has become a lot more complex, key to the financial performance executing across a number of different initiatives. Are you comfortable with the current depth and breadth of your management team or do you see some room to add incremental talent?

Kevin Rauckman

We feel that we have been very strong leadership in each of the departments and what may be a little bit lacking is second line managers. Over the past few years whenever we have expanded our infrastructure quite a bit, so at this time we continue to develop our second line managers, that is our major task.

Jim Duffy

Has recruiting been a big challenge for Garmin to keep pace with the growth?

Kevin Rauckman

Yeah, always a big challenge.

Jim Duffy

Okay thanks very much. Good luck.

Cliff Pemble

Thanks Jim.

Kevin Rauckman

I think that's, that ends the Q&A time so thank you all for your attention. We look forward to updating you as the business progresses throughout the year. Take care.

Operator

This does conclude today’s conference call. You may now disconnect.

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