GRMN

Garmin Ltd. (GRMN)

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Garmin (GRMN)

Q2 2011 Earnings Call

August 03, 2011 10:30 am ET

Executives

Kerri Thurston - Director of Investor Relations

Kevin Rauckman - Chief Financial Officer, Principal Accounting Officer, Treasurer, Treasurer of Garmin USA Inc, Director of Garmin International Inc and Director of Garmin USA Inc

Clifton Pemble - President, Chief Operating Officer, Director, President of Garmin International Inc, President of Garmin USA Inc and President of Garmin AT Inc

Analysts

Mark Sue - RBC Capital Markets, LLC

J. B. Groh - D.A. Davidson & Co.

Tavis McCourt - Morgan Keegan & Company, Inc.

Scott Sutherland - Wedbush Securities Inc.

Yair Reiner - Oppenheimer & Co. Inc.

Jeff Rath - Canaccord Genuity

Charlie Anderson - Dougherty & Company LLC

Joseph Longobardi - RBC Capital Markets, LLC

Paul Coster - JP Morgan Chase & Co

Richard Valera - Needham & Company, LLC

James Faucette - Pacific Crest Securities, Inc.

John Bright - Avondale Partners, LLC

Benjamin Bollin - Cleveland Research Company

Simona Jankowski - Goldman Sachs Group Inc.

Presentation

Operator

Good day, and welcome to the Garmin Ltd. Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to Ms. Kerri Thurston. Ms. Thurston, please go ahead.

Kerri Thurston

Good morning. We'd like to welcome you to Garmin Ltd. Second Quarter 2011 Earnings Call. Please note that a copy of the press release concerning this earnings call is available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. Additionally, this call is being broadcast live on the Internet. Please note that this webcast does include slides, which can be viewed during the call. An archive of the webcast will be available until September 6, and a transcript of the call will be available on the website under the Events Calendar tab.

This earnings call will include projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K for the year ended December 25, 2010, filed with the SEC.

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

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

Clifton Pemble

Thank you, Kerri, and good morning, everyone. Thanks for joining today. As reported in our press release this morning, Garmin's second quarter results included 11% revenue growth in our traditional segments of Aviation, Marine, Outdoor and Fitness. Total revenue was down 8%, driven by lower volumes and increased deferred revenue in the auto/PND market. Our traditional segments contributed 46% of total revenue and 81% of total company income, which is evidence of the strength of our diversified business model. We reported pro forma EPS of $0.63, down 26% from Q2 of last year. A major contributing factor is the increased rate at which we are deferring revenues. These revenues are part of our cash flow with recognition deferred into the future according to GAAP rules. Additionally, our EPS was affected by a one-time accrual for bad debt expenses as well as higher-than-anticipated legal expenses in the quarter. Kevin will provide additional information on the impact of these items in just a moment.

We sold 3.8 million units in the quarter, which is a 6% decline over prior year levels driven primarily by lower unit deliveries in the Auto/Mobile, followed by growth in Fitness and Marine. We generated $196 million of free cash flow during the quarter, resulting in a cash and marketable securities balance of $2.5 billion.

Next, we'll take a closer look at the second quarter performance as well as a market and product update for each segment. Looking first at the Marine segment, we posted revenue growth of 6%, which is below that of Q1, however, still in line with our expectations for the full year. During the quarter, we launched the echo series, which is a new line-up of low-cost fishfinders. The echo series has been very popular, capturing a meaningful share of the fishfinder market. Due to the release of the echo series, the product mix shifted towards lower price points affecting our margins in this segment. But we expect margins to improve in the back half of the year as the product mix normalizes.

At the beginning of the second quarter, we experienced a flattening of growth in the U.S. market, which is then confirmed by other customers and partners serving the U.S. market. However, this softness was offset by gains in Europe and Asia. Our full-year expectations for the marine market remained intact.

Also during the quarter, we introduced products that bring new innovation to the Marine market and enhanced our ability to serve more boat platforms. The first product I'd like to mention is the GDL 40, a pay-as-you-go marine weather receiver delivering useful realtime content from our server platforms, including radar, wind speed and direction, bay service temperatures, wave height and more. Boaters now have the ability to get the information they need when they need it, without paying ongoing subscription fees when not on the water. In addition, we introduced the GHP 12, an improved Marine autopilot that support additional steering systems, making it an attractive solution for a broader range of powerboats and sailboats.

Read the rest of this transcript for free on seekingalpha.com