Garmin, Ltd.
Garmin Q3 Earnings Release Summary

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By platoish
November 2, 2006

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I thought it might be useful to summarize this quarter's earnings release and hopefully answer a few of the questions that are popping up. I missed the call this morning, but hope to catch a replay this evening. I'm sure Jim will also chime in with his thinking if he isn't participating in the market himself.

The Automotive/Mobile segment continues to be the horse that pulls this cart. They achieved triple digit gains over last year for the third straight quarter. Revenue for this segment was up 147% YoY and at $238M now accounts for 58% of the company's total revenue. This of course is something of a double edged sword because this segment also carries the lowest margins in their business. The operating margins in this segment actually improved 150 basis points to 25% which I thought was excellent news. However, the growing size of this business area, as well as some delays in shipments from the higher margin Aviation segment, caused overall operating margins to fall to 29.7% which represents a 140 basis point drop from Q2 and a 420 basis point drop from last year. I'm sure that these lower margins plus the revenue shortfall due to a lag in Aviation system sales are the major contributors to today's market reaction. The stock was pretty much priced for perfection and this type of reaction, though probably overdone, is not totally unexpected. I actually think the results of quarter show more positives than negatives.

The Outdoor/Fitness segment was also strong, growing 22% annually to a total of $70.7M which is a little over 17% of company revenues and is the second largest business area. They attributed this higher than anticipated growth to strong acceptance of their new Edge and Forerunner products. They anticipate this area will perform well in the fourth quarter due to strong Holiday sales.

The Marine segment grew 12% to $40.6M and they believe they will hit full year 2006 growth targets. The Aviation market softened in the quarter and revenue decreased 3% over the prior year to $58.8M. This was blamed on the delay of the WAAS roll-out. They expect this to become more of a 2007 revenue story now and I get the impression it is largely a timing issue. They have recently introduced some new products in this area and expect things to pick up in 2007.

Revenue was strong across all geographies. North America was up 62%, Europe was up 59%, and Asia was up 84%. Asia only makes up 6% of their business, but obviously offers some growth opportunities. Garmin's focus remains retaining their dominant position in the US, while gaining market share in Europe.

They sold 1.23M units in Q3 and now have their Taiwan manufacturing facilities built out to a 6M unit annual capacity. They have space to increase this to 11M if and when it is needed. They have really ramped up inventories in anticipation of a strong fourth quarter Holiday season. I hope they can move all that stuff. They have added Sears as a distribution channel to widen their reach.

Earnings growth was a little anemic (by their standards) because of the reduced margins and increased 19% in the quarter to $0.56 per share. Without forex effects, this number was $0.50. They now expect to earn in excess of $2.04 per share for all of 2006, neglecting foreign exchange impact. They expect an effective tax rate of 15.5%. The earnings numbers include a $0.04 impact from expensing of stock options. Here is a stock based compensation program I can live with. Free cash flow remained strong, coming in at $97.9M for the quarter. They are now sitting on a cash hoard of $888M.

They admit that the Auto/Mobile segment will see additional pressure on margins as these devices transition to mass market acceptance. They continue to introduce new products, add features, and strengthen partnerships with content providers. I think it was an overall good result with a couple of small disappointments. I look forward to comments and the required Jim Gillies update.


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