GARMIN LTD. Moderator: Debra Pollard February 20, :00 am CT

Transcription

1 Page 1 GARMIN LTD. February 20, :00 am CT Operator: Good morning, my name is (Mark) and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 fiscal year 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time, simply press Star then the number 1 on your telephone keypad. If you have already done so, please press the Pound sign now, then again press Star 1 one to ensure your question is registered. Thank you Ms. Pollard you may begin your conference. Debra Pollard: Good Morning, this is Debra Pollard with Garmin Ltd. We would like to welcome you to Garmin Ltd.'s Fourth Quarter 2007 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 Additionally, this call is being broadcast live on the Internet. Please note that

2 Page 2 this web cast does include slides which can be viewed during this call. An archive of the web cast will be available until March 21, A telephone recording will be available 2 business days following this call and a transcript of the call will be available on the website within 48 hours at under the events calendar tab. This earnings call includes projections and other forward looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introduction, 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 in the December 30, 2006 filed with the Securities and Exchange Commission. Attending on behalf of Garmin Ltd. 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; and Andrew Etkind, General Counsel. 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: Good morning. We're pleased to report news that Q4 was the best quarter in our history, ending another record breaking year of strong financial performance. During the quarter, total revenue increased 99% to over 1.2 billion dollars. EPS was up 70%, or 51% excluding the effects of foreign currency, which exceeded our expectations due to higher revenue generation as well as better than expected margins.

3 Page 3 Unit volume for the quarter exceeded 5.5 million units, just under the total number of units shipped for all of 2006 and represented approximately 45% of our total deliveries for We expect a strong seasonality trend to continue into 2008 and beyond. Our auto/mobile and outdoor fitness lines were both strong contributors to 4th quarter revenue growth. For our 2007 full year results, revenue increased 79% to 3.18 billion dollars. EPS was up 66 %, or 62% excluding the effects of foreign currency. We experienced strong revenue growth in all four business segments, unit volume for the year grew 127% to over 12.3 million units. Our worldwide employment grew to over 8,400 associates, including the addition of approximately 1,900 manufacturing associates during the quarter to meet the increased demand for our products. We also added over 100 engineers in our quest to drive future revenue growth through new and innovative product introductions. According to independent market research, Garmin has maintained a strong number one PND position in North America and a strong and improving number 2 market position in Europe. We were pleased to see healthy growth in all of our business segments in Automotive mobile experienced a 115 % revenue growth and better than expected margins as PNDs became one of the hottest product categories of the 2007 holiday season. Aviation experienced 27% revenue growth, thanks to positive customer response to our retrofit product offerings and additional G1000 cockpit wins. Outdoor fitness experienced 19% revenue growth in 2007 and particularly noteworthy was the fact that the outdoor fitness segment grew 43% during Q4 on strong sales during the holiday season. Marine experienced 22% revenue growth as revolutionary new cartography and our all new chart plotters drew customers into the Garmin family.

4 Page 4 To keep pace with the increasing demand for our products, we have committed to invest in people, facilities, and equipment to support our future growth. In Taiwan, our capacity currently stands at approximately 20 million units annually. We will continue to expand the capacity of our Lin Kou facility to support increasing PND demand. We will continue to expand engineering and office space in Taiwan as we look towards Asia as a new growth opportunity. In Europe, acquisitions of our distributors in France, Germany, Spain and Italy were completed in And we completed the acquisition of our distributor in Denmark in early And in the U.S., expansion of the warehouse distribution facility at our Kansas headquarters is expected to be complete in Q1 of We have started planning an expansion of our administrative headquarters and research and development facilities in Olathe in order to support future growth. Turning next to some product highlights at this year s CES show, we introduced several exciting new products. In our nüvi family we announced the nüvi 780, the newest member of the 700 series which includes expanded MSN Direct content like stock prices, news and local events. We also added a unique send to GPS capability that allows the customer to select destinations using Microsoft's live mapping site and send them wirelessly to their MSN enabled PND. We announced the nüvi 800 series, a new high end product line that features cutting edge speech recognition capabilities, text to speech, MSN Direct, Bluetooth Hands Free, an FM transmitter, an MP3 and audio book player, travel features and premium points of interest.

5 Page 5 We also introduced the nüvi 260W, a value priced navigator featuring a wide 4.3 inch sunlight readable screen, text to speech and full North American map coverage including premium POIs. Finally, we introduced the nüvi 5000, the perfect product for customers seeking a larger display and advanced features such as an interface to a backup camera. The nüvi 5000 includes an easy to use touch screen interface, an advanced route planning feature, calculation of the most efficient route between multiple destinations and dynamic content via MSN Direct. In our outdoor fitness segment, we introduced two revolutionary products which further define our leadership in this segment. In the fitness market, we introduced the Forerunner 405, which features an all new form factor with an innovative touch sensitive bezel. The 405 tracks speed, distance, heart rate and location and can be used indoors with the addition of our speed and distance foot pod. The 405 works in conjunction with our Garmin Connect fitness website which enables setting and monitoring of fitness goals as well as sharing of location based fitness information between users. In the outdoor market we introduced an all new product named Colorado, which includes a brilliant, high resolution, 3 inch color display, and an innovative thumb driven UI we call the Rock-n-Roller. This product family includes versions with built in maps, including TOPO, inland lakes and coastal blue charts. The Colorado is the first product to include the Whereigo player from Groundspeak, which takes the enjoyment of Geocaching into the next level through a game-like multi media based user interface. And at our New York media event on Wednesday, January 30th, we announced the nüvifone, the newest product in our nüvi family which integrates wireless voice and data connectivity. The nüvifone is the first

6 Page 6 device of its kinds to integrate the most commonly used functions of connecting, communicating and navigating in an elegant mobile form factor. The premium features offered by the nüvifone include a personal navigator with on-board maps and premium POIs, a premium 3.5G phone with UMTS, HSDPA and Wi Fi data connectivity, a premium mobile web browser, a local search portal that seamlessly integrates with navigation functions, personal messaging using , SMS, and instant messaging. A camera with automatic location tagging and picture navigation capability and multi-media functions, including a video recorder, MPEG4 video player, and MP3. At least week's GSMA show in Barcelona, we had the opportunity to show the nüvifone to most major carriers across Europe and North America. We are very pleased with the positive feedback we've received from carriers and will be working in coming days to solidify relationships. We anticipate providing additional details at a later date. Turning next to our 2008 business outlook, while we've just finished an exciting year, we're even more excited about We do anticipate that 2008 will present increased challenges from competitors, as well as declining ASP and margins. But we also believe that we are prepared to take advantage of the growth opportunities in all market segments. For 2008 we anticipate overall revenue will exceed 4.5 billion dollars and EPS will exceed $4.40 cents per share. We look forward to introducing many innovative products again this year, which will allow us to take advantage of the growing interest in location based devices and services. We will continue to promote product awareness and build equity in the Garmin brand, we will maintain our focus on new acquisition opportunities, and continue to invest in people, facilities and equipment to support our

7 Page 7 growth. And finally, in the PND market, we will work hard to maintain our leadership position in North America and increase our market share in Europe through expansion of our distribution and direct relationships with major retailers. This concludes our business update. Kevin will now walk us through the details of the 4th quarter and full year results. Kevin Rauckman: Thanks Cliff, good morning everyone. I'll be presenting the 4th quarter and fiscal 2007 financial results, including business segment details, and we'll conclude with our 2008 outlook and guidance. As you saw from the press release this morning, we recognized revenue of 1.2 billion and net income of 307 million for an earnings per share of $1.39 per share. This was a 99 % top line growth and a 70 % EPS growth. It included favorable 8 cent EPS impact due to foreign currency gain of $19.5 million during the quarter. Gross margin of 41.8% was were better than expected due to stronger PND volume in the U.S. than in Europe., PND price erosion offset by our material cost reductions, ongoing operating efficiencies, and of course, product mix. We experienced more than a $100 million increase in our operating margins compared to the 4th quarter of '06. The operating margin of 25.7 % was down from 32.6 % last year, but much better than expected. Our gross margin was 810 basis points unfavorable with the year ago quarter, advertising was 30 BPS unfavorable to 4th quarter, other SG&A was favorable by 30 basis points and our R&D was 120 basis points favorable. As Cliff mentioned, we shipped over 5.5 million units during the quarter on the strength of our auto/mobile segment. And the average selling price across the business was $220 per unit, a 19% percent reduction below the third quarter of 2007, which was $271.

8 Page 8 Looking next at the full year income statement, our revenue was nearly 3.2 billion at a net income of 855 million for earnings per share of $3.89. Top line 79% growth and bottom line 66% EPS growth were better than expected. It included a favorable 9 cent EPS impact due to the foreign currency gain of 23 million during the full year. Our gross margins for 2007 were 46% across the business, better than expected again due to the stronger PND volume in U.S., rather than in Europe. PND price erosions offset by our material cost reductions, again, operating efficiencies and product mix. When comparing our operating margin dollars year over year, we experienced more than a $350 million increase on that line. And the operating margins of 28.6 % were down from 31.2 % in 2006, again much better than expected. So for the full year, gross margins were unfavorable by 370 basis points, advertising as a percentage of sales was flat from 2006, our other SG&A was 40 basis points unfavorable, and our R & D was 140 basis points favorable. For the full year, we shipped over 12.3 million units across the business on the strength of our auto/mobile segment. ASP across the business was $258 per unit, which was a 21 % drop from the full year of The non-gaap measures that we reported include net income excluding the effects of foreign currency. As I just mentioned, this impact was 8 cents per share favorable during the fourth quarter and 9 cents per share favorable for fiscal year 2007.

9 Page 9 Looking next at revenue by segment, during Q4 we experienced triple digit revenue growth across the auto/mobile segment, while the unit growth in the auto/mobile segment grew 244%. Revenue within the aviation segment continued its strong growth with a 16% growth rate over the fourth quarter of 06. Our marine segment also extended its Q3 growth into the fourth quarter with a 32% revenue increase. Our outdoor fitness segment also continued its recovery as the growth within that segment was 43% during the holiday season. In total, our revenues grew 99 % during the fourth quarter which exceeded our expectations by over $200 million. For all of 2007, our auto/mobile segment grew 115% while units in that segment grew 210%. We ended the year with all segments growing revenue above 20%, with the exception of our outdoor fitness segment, which made a strong second half recovery and grew at 19% during the full year In total our revenues grew 79% during the year as we exceeded our expectations set out in the beginning of the year by nearly $700 million. During the fourth quarter, North American revenue was up 113% while our European business increased 74% during the quarter. Our Asian sales also grew 79% during the same period. Looking at our unit sales, North American unit sales during fourth quarter increased 226% on the strength of PND product sales. Our Europe unit sales also experienced triple digit growth at 116% percent, and our Asian units grew at a healthy 60%.

10 Page 10 Looking next at the full year by geography, our North American revenue for 2007 was up 89% while our European business increased 63% and Asia grew at a 66% rate. During 2007, North American unit sales increased 158% on the strength of PND product sales and our Europe unit sales also grew nearly 100% at 96%. As we've seen in the past, because of the explosive PND market, our auto/mobile segment represented 82% of our total during the fourth quarter. Within the auto/mobile segment, the North American market unit growth was greater than Europe, however both continents experienced 100% unit growth, quarter over quarter. Garmin's total North American market growth exceeded the growth in Europe during the quarter, and North America represented 68% of our total business. Moving next to our margins, the fourth quarter aviation gross margins and operating margins increased to their highest levels in the last couple of years, at 69% and 39%, respectively. The fourth quarter outdoor fitness gross and operating margin also increased to 53% and 35%, respectively. In our fourth quarter marine gross margin remained flat at 53%, however our operating margin with the segment decreased to 22% due to sequentially lower volume during the quarter. As I'm sure you saw this morning, our fourth quarter auto/mobile gross margin came in at 38% beating our expectations. The primary reason for the strength of the gross margin in this segment is that price compression was not

11 Page 11 as severe as earlier expected. We also experienced benefit from favorable product mix, as PND units sold in the U.S. were greater than in Europe. Operating margin within the auto segment was 24%, again higher than expected. Due to expected price competition of PND products during 2008, we expect that our auto/mobile segment will experience an ASP decline of approximately 20%, which will cause gross and operating margin compression during the year. On the operating expense line, R & D increased nearly $7 million quarter over quarter, but was down 170 basis points to 3.9 % of sales. We now employ over 1,400 engineers and engineering associates worldwide. Our ad spending increased by $42 million over the year ago quarter. On a percentage of sales, advertising was up 30 basis points at 6.8% of sales. We do expect our ad spending to decrease sequentially during the first quarter of 2008 by nearly $30 million as we do not plan TV advertising during this quarter, with the exception of the Superbowl ad that you saw a couple of weeks ago. Our other SG&A decreased 30 basis points to 5.4 % of sales from 5.7% a year ago. We expect that our operating expenses will represent approximately 16% to 17% of sales for the full year 2008, but only 12% to 13% during our fourth quarter 2008, as the holiday season becomes a more significant percentage of our year due to growth towards mass market sales. Looking next at our balance sheet, we ended the year with cash and marketable securities of over $1.1 billion. Our accounts receivable increased to $953 million and represents approximately 62 days of sales. However, we

12 Page 12 have already collected on over $695 million of receivables during the first quarter of Our inventory dollars were basically flat, with Q3 '07 and our days of inventory metric decreased. At the end of 2007, we now hold 77 days of inventory, down from the 99 days we reported at the end of the third quarter of '07. This can be broken down in the following areas, $130 million in raw materials, which represents 19 days of inventory. $58 million in work in process and assemblies, which represents 9 days; $343 million in finished goods, which is 49 days of inventory, off set by $26 million in inventory reserves. The reduction in raw materials and finished goods was planned, as we produced and shipped a record number of units during fourth quarter. Finished goods of 49 days is within our typical range of inventory needed to support the various distribution channels that we serve. We remain committed to proper inventory planning as we enter However, we expect that our business will experience even stronger seasonality during the year, and as such, we intend to more effectively level our production requirements and inventory levels throughout the 2008 year. We believe that our retail channel inventory continues to be lean as sell through of most of our products was strong during the 2007 holiday season. On the cash flow statement, we generated cash flow from operations of $126 million during the quarter, capital expenditures were $28 million, and therefore free cash flow during the fourth quarter was $98 million.

13 Page 13 Cash flow from investing was a $118 million use of cash during the quarter, which is made up of $28 million of capital expenditures, $45 million net purchase of marketable securities, and $45 million acquisition of business and intangibles. Cash flow from financing was a $5 million use of cash during the quarter. And we earned an average of 3.7% on all of our cash and marketable securities balances during the quarter. For the year, cash flow from operations was $682 million, and we generated $525 million of free cash flow. You probably saw this morning that our effective tax rate during the quarter was 11.7 %, and 12.6% for the full year of '07, lower than our earlier expectations. Incremental revenue and the net income during Q4 and the tax incentives in Taiwan were primary drivers of the lower rate. We know expect an effective tax rate of approximately 12% for the full year Garmin did purchase 57,000 of our shares back prior to the share repurchase expiration at the end of 2007, and I m also sure you saw this morning that we announced a new 5 million share, two year re-purchase plan that will expire at the end of The approved share re-purchase reflects our continued confidence in Garmin's strong cash generation ability and business prospects. Given the current Garmin share price, we intend to be active buyers in the market thereby increasing share holder value.

14 Page 14 We continued to grant stock appreciation rights broadly to our employees during 2007 as we granted nearly 2.9 million SARs last year. Our annual SAR grants account for approximately 1.3% of our outstanding shares. And finally, we're providing full year 2008 revenue and EPS guidance for the first time this morning, as Cliff mentioned earlier. We expect our total revenue to exceed $4.5 billion, a 42% growth rate. We expect EPS to grow at least 16% to $4.40 per share. Operating margin should come in at 23% for the year, this does represent a 600 basis point reduction, however operating margin contribution will increase by over $150 million during Our capital expenditures are expected to hit $115 million, a significant portion of this amount will include manufacturing capacity expansion in Taiwan due to the purchase of new production lines. And as I just mentioned, our global effective tax rate is expected to be 12%. All four of our business segments will again experience double digit revenue growth. The auto/mobile segment will continue to lead the way and revenue is expected to grow 45% during The aviation revenue growth is expected to be 30%. Both our outdoor fitness and marine segments are expected to grow by 25%. These 2008 expectations are conservative in nature, but factor in the macro economic trends that have existed since the beginning of We remain confident in our competitive position and business model, but do not have a crystal ball obviously into the remainder of While we continue to operate within a growth cycle that defines the navigation industry, we have considered the global economic environment within our 2008 expectations.

15 Thank you, everyone, for your attention this morning. GARMIN LTD. Page 15