Garmin Ltd.

Garmin Ltd.

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Garmin Ltd. (GRMN) Q4 2005 Earnings Call Transcript

Published at 2006-02-23 07:43:24
Executives
Dr. Min Kao, Chairman & CEO Kevin Rauckman, Chief Financial Officer Clifton A. Pemble, Vice President of Engineering Andrew Elkind, General Counsel Polly Schwertd
Analysts
John Bucher Noel Flatland Jeff Evanson JB Gruff, Neo Davidson Tim Duffy Ron Epson Jonathan Hill Rich Alea Peter Friedland Mike Rappaport Mark McKecknie* Corey Johnson Nicholas von Staakle
Operator
Good morning, my name is Towanda; I will be your operator. I would like to welcome you to the Garmin Ltd. Fiscal Year 2005 earnings conference call. Our lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Question and Answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two. Thank you. Miss Schwerdt, you may begin your conference.
Polly Schwerdt
Thank you. Good morning. We would like to welcome you to Garmin Ltd 2005 fourth quarter 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/stocks. Additionally, this call is being broadcast live on the internet and a replay of the webcast will be available until March 24, 2006. A telephone recording will be available for 24 hours after 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 Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market shares, product introductions, future demand for our products and our plans and objectives are forward looking statements. The forward looking events and circumstances discussed in this earning call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning risk factors is contained in our form 10K for the fiscal year ended December 25, 2004 filed with the Securities and Exchange Commission. Attending on behalf of Garmin Ltd. this morning are: Dr. Min Kao, Chairman and CEO, Kevin Rauckman, Chief Financial Officer, Cliff Pembie, Vice President of Engineering and Andrew Etkind, General Counsel. The presenters for this morning’s call are Dr. Min Kao, Cliff Pemble and Kevin Rauckman. At this time I would like to turn the call over to Dr. Kao. Dr. Min Kao: Good morning. From the Press Release issued this morning, you can see that we just finished another record year. We recorded our 15th consecutive year of (inaudible). Total revenue for the year increased 35% to just over $1 billion. EPS was up 51% ARP 32% excluding the effective of foreign currency. We delivered 55 new products in 2005. The results to our portable navigation devices was especially strong, resulting in a triple digit increase in the sale of automotive product line. Over 3 million Garmin products was shipped in 2005 raising our total to 14 million units shipped to date, the significant benchmark of the strengths of the Garmin brand. Our worldwide employees increased to over 3,000, R&D accounts for nearly a quarter of our total employees. We continue to expand our patent portfolio with 257 issued and 171 candidate applications. In an article published in the December 26th issue of BusinessWeek, the quality of Garmin’s patent portfolio was given a very high ranking. Since our formation of the Company, our strategy has been to grow our business through continuous product innovation and expansion of our target markets. (inaudible) we feel that we have achieved that target goal by delivering consistent goals every year. Some highlights of our 2005 achievements. In the aviation market in addition to the 7 new AR brands that was certified with G1000 cockpit. We won several additional programs. Most significantly, the Emory Light Jet is a very light jet. And we completed our first flight control (inaudible) was a very significant accomplishment, making us the only general aviation provider that can offer (inaudible) to a single highly integrated system. And we deliver ARPS 60,000 GNS quarterly 530, a very significant milestone in aviation industry. For Marine, we experienced strong success with (inaudible). We spill in (inaudible) for the entire US. In other markets, we retained our leadership position in a heavier market and continued the success of our leading fitness wearable product category. In the automotive market we introduced three products,(inaudible) with innovative features. All have been well received, and we won numerous programs in various markets. We look forward, we anticipate another year of excitement and success. We reported in our earning release beginning in 2006 we will provide results for four business segments internally we are also organized in our teams to align with these four markets with a goal to maximize growth opportunities of each market we serve. We will continue to invest heavily in R&D to take advantage of opportunities in both existing and new markets. We expect to introduce over 50 new products in 2006, many of which were introduced in the Consumer Electronics Show in Las Vegas with a very positive response. And we expect to introduce additional new products at the CES show in March. We have just purchased our second Taiwan facility in order to meet the anticipated increasing demand. The position of this facility also allows us to expand our R&D capacity in Taiwan. The demand for portable navigation devices continues to show a significant expansion. In order to capitalize on this opportunity, we are expanding our marketing and sales infrastructure including the acquisition of a new facility in the UK. We will continue to promote a Garmin brand through expanding modern and unusual marketing and advertising campaigns. In summary, we are pleased with our 2005 results. For 2006 our total revenue is expected to be at least $1.3 billion with double digit goal for every business segment. With that, I would like to turn the call over to Cliff Pemble who will present our product and profit strategy. Kevin Rauckman will then discuss our financial result and fiscal year 2006 budgets. Thank you.
Cliff Pemble
Thank you Min. I’m really excited to talk about our product highlights for the fourth quarter as well as some recent product introductions that occurred since the beginning of the year. During the fourth quarter, we introduced the nuvi which is one of the most exciting on loaded products on the market today. The nuvi offers features not previously available to customers, such as travel guides with reviews of restaurants and hotel destinations as well as a language dictionary and translation tool. The nuvi recently won an editor’s choice award from PC magazine for its innovation and Garmin’s promotion of the nuvi at the 2006 CES show helped us earn recognition as one of the top 33 booths of the entire show. During first quarter we also introduced a new addition to our I series line the 3 pilot I2, this product includes all the features of the I series that is packaged with a monochrome display, making it an ideal offering as a promotional product or as a solid portable navigator for value oriented customers. Finally, we introduced the latest in our windows mobile lineup the IQM4. This product features pre-loaded maps and high sensitivity search star 3 GPS receiver. In addition, we’ve updated our Q application suite to provide finger touch operation, much like the C series and the nuvi. During fourth quarter, we announced some exciting promotional opportunities with major automotive OEM and rental car companies. In the UK Garmin was named the exclusive provider of portable navigation devices for all BMW and Mini dealerships. As far as this promotion, BMW will be offering both our Street Pilot C series as well as the nuvi to buyers of BMW and Mini vehicles. In Germany, Garmin landed wins with both Ford and Mercedes Benz. Ford is offering our I series and C3 products, while Mercedes is offering our C series products. In Taiwan, Garmin won a deal with Ford (inaudible) in which a Street Pilot C Series was given away with new vehicles sold before Chinese New Year. This program has been very popular with buyers and was promoted heavily by Ford. On the rental car front we secured relationships with Dollar, Thrifty and Enterprise in which a version of our Street Pilot C Series was offered to customers for daily rental fee. The rental business is an exciting opportunity to expose new customers to our easy to use products and to the Garmin brand. These new partners join an extensive list of opportunities we are serving in the automotive market and speaks highly of the capability of our products and the strength of our brand. We are proud to be affiliated with partners like BMW, Chrysler (inaudible), Dollar, Thrifty, Enterprise, Ford, Harley Davidson, Honda, Kenwood and all the others represented on this file. Going forward, the automotive market continues to offer significant opportunities for growth in our business. During 2006 we expect the T&D market to approximately double in size. To address this opportunity, we will continue in our strategy of offering products with a broad range of price points, appealing form factors and innovative features to suit the needs of every buyer. Our goal is to retain market leadership in North America, while increasing our market share in Europe. During fourth quarter we introduced exciting new additions to our FRS product line, the Rino 520 and 530. These products offer all the great features of our existing Rino product line and added 2.2 inch color TFD display, additional memory for uploading map information, turn by turn routing capability and higher transmitter power which allows communication at distances up to 14 miles. At this year’s CES Show, we announced an updated hand held product line called our X series. This new product line features a removable memory card which enables the user to expand the memory available for mapping. To complement this product line, we created a comprehensive set of preprogrammed maps for our customers which allow them to easily mapping content to the product without complication of using a computer. We offer pre-programmed cards with helpful information, detailed inland (inaudible) data, and also our blue chart marine data. The GPS Map 60 CX line and the GPS Map 76 CX line also feature a high sensitivity search star 3 receiver which will expand the utility products for our customers. We have also introduced a completely updated line of fitness products. The Forerunner 205 and 305 offer an improved watch like appearance and features a search star 3 high sensitivity GPS receiver. The 205 offers basic speed and distance capabilities, while the 305 has a heart rate center. The Edge 205 and 305 are totally new GPS solution for cyclists. This product is the first of its kind to combine GPS with bike specific features. 305 offers basic GPS speed and distance capabilities along with innovative features such as the virtual partner which helps user stay on a desired pace. The 305 has wireless heart rate and cadence sensors. Customers can expand the utility of Forerunner and Edge through our motion based web portal which allows users to share workout information with others around the world. In the marine market, we have been working on a new family of products that will hit the store shelves in March. This family of products includes new Fishfinders that can detect underwater objects in vivid detail and refresh that information at high speeds. In addition, we’ve expanded the number of marine products with preloaded map information for both offshore and inland boaters. Our new G2 Offshore Marine Cartography provides faster redraws, perspective view and improved cartographic presentation. In addition, we now offer a comprehensive set of photographs depicting harbors, marinas, approaches, and significant aids to navigation around the world. This new data allows Garmin customers to visualize and anticipate potential hazards long before they are actually encountered. For the US market, we have created an all new inland lakes map which includes detailed shore line and depth contour information for over 3,000 lakes across the Country. This map will be preloaded into our new GPS map 329 and 398 product line. Our new Fish Map Finder technology includes digital signal processing which provides highly detailed view of objects beneath the boat. This product can be interfaced with our GPS Map 3000 series of network chart plotters. In addition, we’ve updated the entire Fishfinder product line to include fast scrolling of information and improved performance in shallow water. Moving to the aviation segment, we continue to see strength in our G1000 Integrated Cockpit system. We are honored to have been selected as the integrated cockpit provider for Embraer Air, on their new Phenom Line jet which was announced at the recent MBAA trade show. In the piston market, Columbia Aircraft announced the selection of the G1000 Integrated Cockpit system for their 350 and 400 model aircraft which was recently given an editor’s choice award by Flying Magazine. This is a beautiful aircraft and is now complemented by an automotive style instrument panel designed by Garmin. In the retrofit market we introduced the GMA 347 audio panel which includes some of the great features found in our G1000 system, such as clearance recording, digital squelch control, and ability to accommodate additional audio input. Garmin continues to build strength in the OEM market with a host of world-class aircraft manufacturing partners. During the fourth quarter we delivered 333 G1000 systems to our partners. Also during the fourth quarter Raytheon began deliveries of the G36 and G58 aircraft which includes the G1000 with our new digital autopilot system. In addition, the G58 aircraft offers terrain warning system as well as our new weather radar system. At Cessna we are making steady progress in the development and certification of the Mustang integrated cockpit system. In the single engine area, Cessna recently announced the G1000 is now the standard avionics offering for the Skylane 182 and the Stationair 206 aircraft. In summary, I feel that we had a fantastic year for our product introductions and in forming new relationships with partners. During 2006 we expect to introduce between 50 and 60 new products that will continue to provide innovation and value to the market. At this time I’d like to turn the presentation over to Kevin who will be providing our financial update.
Kevin Rauckman
Thanks Cliff and good to talk to everyone this morning. I’m as you can see from the fourth quarter financial summary, fourth quarter we posted solid financial results both at the top line where we experienced a revenue of just over $319 billion, a 45% top line growth and also strong bottom line growth of 38% earnings per share after the effect of foreign currency. There were a couple of unique items that did flow through our financial results, the one I just mentioned being the ($8.5) million foreign currency loss which effected our earnings per share of about 7¢, 87¢ per share after that foreign currency impact. It does also include the other impact of favorable tax rates during the quarter. We experienced 8.9% effective tax rate during the fourth quarter, about 9¢ EPS impact due to that favorable rate. You can see from the slides that our gross margins were better than expected due to the stable pricing during this period and also favorable product mix within our entire business. Operating margins came in at about 31%, which was down from last year, but better than expected. We also saw SG&A at about $44 million, which was due to higher than planned advertising within the European business .At the bottom of the slide you can see that our nits shipped to just over 1 million during the period. Incidentally, our average selling price during Q4 was about $310 per unit, which is flat with the fourth quarter of ’04 Looking next to our segments during the quarter, our fourth quarter segment revenue you can see we had strong revenue across both segments with both consumer and aviation. Our consumer growth actually doubled our aviation segment growth on the strength of automotive products. Automotive revenue overall grew well over 100% during the fourth quarter of 2005. When we look at the sales of our products that have been introduced within the last 12 months, we often use as a metric to determine how well the new products have sold, in Q4 the sales of these new products actually came at 60% of our total fourth quarter revenue. That compares very favorable with our historical rates. In fact, you may be reminded that during Q3 that number was 44%. So fourth quarter sales over 60% of that should go to new products. Turning to consumer growth during the period, our consumer segment now represents 81% of our total business. Looking at the revenue by geography, Garmin Europe actually outpaced our North American market growth and therefore represented 29% of our total business, up from 22% in the prior year. North American revenue was up 29% while our European business actually increased nearly 100% during the fourth quarter. Overall, as I stated, we experienced a 45% top line growth during the fourth quarter. For the year, we exceeded $1 billion in revenue, above our expectation due to the sizeable expansion in all geographies. Europe for the full year was up 61% over 2004. Looking next at our margins by segment, you can see that our fourth quarter consumer margins exceeded our expectations coming in at 47.7%, which was 100 basis points above Q3 of ’05. As I stated earlier, both pricing and product mix were the main reasons that our fourth quarter gross margins within the segment were stronger than expected. Fourth quarter consumer operating margins were down 230 basis points due to increased advertising during the period. Garmin invested $27 million in advertising during the period, about $5 million higher than expected Looking next at our aviation segment. Our aviation gross margin came in at expectations near the 55% level, very similar to the 64.7% during the quarter. This results were 100 basis points down from the third quarter of 66.5. Our aviation operating margin was down 300 basis points due to the reduction of gross margin and an increase in (inaudible) during the quarter. Looking next at our operating expenses, you can see that R&D was flat in dollar terms, but as a percentage of sales, (inaudible) of 6.3%. We did add 142 engineers to our team during the year including 47 engineering associates during the fourth quarter. We nearly doubled our advertising spending as a percentage of sales compared to Q3 up to 8.5% of sales. Garmin ads were seen and heard through print, radio, (inaudible) advertising and TV campaigns around the world. Our other SG&A stayed flat as a percentage of sales at 5.4%. Overall, our total operating expense is just about 20% of sales. Looking next to our 2005 financial summary, you see again our top, top line strong mode at 35%, just over $1 billion, bottom line 32%, gross excluding foreign currency. We also when we look at the full year experienced 11¢ EPS impact due to the foreign currency gain of $15.3 million during 2005. As I mentioned, we did have a favorable impact to the tax rate of about 9¢ per share on our full year basis also. Even without that, our earnings per share grew at 28%. Both margins came in as expected at 52.1% which is down 180 basis points from 2004. We achieved a 32.9% operating margin driven by the reduction in gross margin on the full year basis and increase in SG&A, again primarily due to the advertising spend during the full year. We invested over $69 million of advertising during 2005. On a full year basis, we exceed 3 million units shipped during the year. Our average selling price during full year was $339 per unit, which compares to $331 during full year 2004. Looking next at our 2005 segment revenue, we experienced consistent growth across all segments as we exceeded $1 million in sales. We grew the entire business right around that 35% consistently during the entire year 2005. Again as I mentioned, consistent revenue growth for each segment due to the 61% top line growth in Europe, Europe became nearly a third of our business, that’s 31% of our total revenue during the year. We do expect to increase our market share in Europe as Cliff mentioned during 2006. Looking next at our Balance Sheet, cash balances remained above $700 million, even after our $64 million dividend payment in December. You can see from this side our accounts receivable increased due to increased revenue and accounted for approximately 60 days of sales. As we continue increasing our business within our consumer and become more of a mass market, you’re likely to see pay out days around the 60 day level. We can look at dollars collected in 2006 on our AR balances at the end of the year, we have now collected 96% of that $171 million AR balance through today, so AR is in line with expectations. Our inventory dollars did increase on an absolute dollar basis, but came down on a Dave metric that we’ve given through the last couple of quarters. At the end of 2005, we now hold 114 days of inventory which was down from 121 at the end of the fourth quarter. Product availably continues to be a key strategy as we manage our inventory and our supply chain. Looking at specific inventory balances by the type of inventory, we enter the year at $65 million in raw materials, or 34 days of inventory, $28 million in WIP, and assemblies, 16 days of inventory and $121 million in finished goods, approximately 64 days of inventory. We did end the year with $15 million in inventory reserves. Although our retail channel inventory appears to be clean as sell through as most of our products was strong during the fourth quarter Q4 holiday seasons. Looking next at cash flow, cash flow from operations during the fourth quarter was $71.7 million. Free cash flow during Q4 was $65 million. On a full year basis, $219.9 million. (inaudible) at $6.6 million of capital expenditures during the fourth quarter and $27 million of CAPX during the full year of 2005. Cash flow from investing was $20 million of cash during Q4, made up of CAPX I just mentioned, purchase of marketable securities, purchase of intangibles and also the acquisition of motion based technology during the period. Cash flow from financing was at $48.5 million use of cash during the fourth quarter, primarily driven by the dividend payment that I mentioned earlier. We did post an effective tax rated of 8.9% during the fourth quarter. Our decision to repatriate subsidiary cash balances beginning in the 2006, created significant tax credits during the period. Our overall tax rate for the year 16.5% compares favorably to our 2004 rate of 19.4%. Going forward we expect our 2006 tax rate to be approximately 16% as we expect to repatriate nearly $200 million of cash to our parent company in 2006. Garmin Ltd. did pay out 50¢ per share dividend on December 15th, which was a $54 million use of cash. We had no share repurchases during the fourth quarter of 2005, although we do have approximately 2.3 million shares remaining available to purchase on our existing outstanding share repurchase plan. For the full year, Garmin did grant 831,000 stock appreciate rights during 2005. We also recognized approximately $900,000 of expense related to those cars during 2005. In conclusion, our full year guidance we have expectation of approximately $1.3 billion in revenue. Double digit growth across all four of our newly defined business segments. We expect 19% earnings per share growth up to $3.26 excluding the 7¢ per share of expensing of stock options under FAS 123R. We expect to spend approximately $5 million of CAPX including $10 for our new Taiwan facility that Min mentioned. $10 million of additional production equipment during the year, leaving approximately $30 million of maintenance CAPX across our business. We are continuing to look at an expansion of our European facility but it will likely be a lease, not a buy, so we’re still in negotiations on that deal so we have excluded that from any kind of capital expenditure forecast for 2005. We have assumed a stable outstanding share count of approximately $109 million, or 9 million shares, excuse me. Due to the alignment of our internal recording structure, we will begin providing results within these four business segments with our first quarter ’06 10Q filing. Than ends our formal presentation. We’d like to open it up now for questions as is customary, so please bring your questions to the front. Thank you.
Operator
At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Again, that’s star then the number one on your telephone keypad. Your first question is from the line of John Bircher.
John Bircher
John Bucher here. First an administrative one. When you file your K are you going to show the segment reporting in the new format?
Kevin Rauckman
As I mentioned the K will be based on the existing consumer and aviation segments. We will not post any four segment results until the first quarter of ’06.
John Bircher
Okay. Very good. And then, understand that the favorable tax treatment is due to the repatriation of dollars I guess as it flows through that new Dutch facility that you’ve put in place, that’s effectively lowering the tax rate. What do you view is the pro forma going forward tax rate that you have?
Kevin Rauckman
Again, we expect 2006 to be around 16% effective tax break, so pretty consistent with what we had at the end of the year 2005.
John Bircher
But that’s because you’re repatriating $200 million. I’m just wondering when you’re, I mean do you expect that repatriation to be an on-going thing that we should be using this on a going forward basis? Or once you’re done repatriating –
Kevin Rauckman
Again, this is going to be a consistent theme as we take our subsidiary cash and continue to repatriate every year. That’s not the entire answer for why the rate is what it is. Long term, we would expect you know our effective tax rate, and long term not being 2006 and beyond, we’d expect our effective tax rate to be closer to 20% because it kind of ramps up over time.
John Bircher
Okay. That’s helpful. So for pro forma tax rate on return, 20% is probably what people should use?
Kevin Rauckman
I would lean that way, yes.
John Bircher
Okay. And then, on the aviation side, in terms of the Turbine G1000 shipments, can you give an idea just how many you’re expecting in 2006? I’m guessing there’s some that are going to start in the fourth quarter especially with the Mustang. Can you give me any idea as to the volume level on that?
Clifton Pemble
John, I think Cessna does plan to deliver some number of Mustangs in the fourth quarter, but I think they’ll be ramping up production so I wouldn’t anticipate it to be very high. I don’t have a specific number off the top of my head, but I believe it’s a very low number.
John Bircher
Okay. Thank you. I’ll yield the floor and get back in the queue.
Operator
Your next question is from the line of Noel Flatland.
Noel Flatland
Kevin, I was wondering if you could talk a little bit more around the guidance you give for the auto and navigation division in particular the 60%. Can you talk a little bit about what that assumes for minutes and Ad P’s and also can you talk about some of the seasonality we should expect in the first quarter.
Kevin Rauckman
I think we’re not going to give specific guidance on units, but we would expect unit as Cliff mentioned, the overall P&D market is nearly double during this period, so there’s a lot of variables in that function. But in general units slightly higher than overall revenue growth is what we would expect in that number. And then the second question was, remind me again?
Noel Flatland
Could you talk about what kind of seasonality we should expect in the first quarter and also for aviation?
Kevin Rauckman
We’re not in the practice of giving quarterly guidance any more. Just expect the overall market to continue to grow. Sequentially, our business is going to be down for quarter Q1, because our strongest season is clearly the holiday season with the second largest quarter being the second quarter tied in with the consumer and marine selling season.
Noel Flatland
Can you just remind what it has been historically?
Kevin Rauckman
What again? Gross rate or?
Noel Flatland
The seasonal decline?
Kevin Rauckman
I don’t think we can look at past history to predict the future, but you know anywhere from last year I believe we were around 13% down. Again, I don't want to lean toward using that as a guidepost for the future.
Noel Flatland
Okay. And just one last question. You talked a lot about the increased focus on Europe and expanding your sales and marketing initiative to expand share. Can you outline some broad parameters around where you think SG&A as a percentage of consumer could go?
Kevin Rauckman
A lot depends on how fast the market grows, so that’s a roughly 30% level at $1.3 billion. We would expect that SG&A would be fairly consistent. It was flat for over a year.
Noel Flatland
As a percentage of sales?
Kevin Rauckman
A flat percentage of sales, yeah. Dollars obviously we’re going to expand advertising and other investments.
Noel Flatland
Okay. And do you have any comments, just on last question, on growth margins and consumers this year?
Kevin Rauckman
In 2005?
Noel Flatland
Yeah, and ’06.
Kevin Rauckman
’06. We really don’t want to comment on just gross margin other than we’ve given it kind of a broad operating margin at, at least 30% next year given our top line growth rate.
Noel Flatland
Will it continue to assume around 200 to 300 basis points for the overall Company decline every year?
Kevin Rauckman
A lot depends on how fast the market grows. But I think it’s probably not an unreasonable assumption. Again there’s a lot of variability between the four different business segments that we’re going to be announcing results on. Clearly automotive is driving a big part of that.
Noel Flatland
Okay. Thanks.
Kevin Rauckman
Thank you.
Operator
Your next question is from the line of Jeff Evanson.
Jeff Evanson
Good morning everybody. Congratulations on the quarter. Let’s see here. Cliff, I thought I heard you say that you though P&Ds could double in ’06, I don’t know if you were talking units or revenues and how does that compare with your revenue guidance of 60% year over year?
Cliff Pemble
The market projects that unit volumes have doubled in 2006 and our revenue growth projection assumes that the present continues to come down as the market expands.
Jeff Evanson
Should one assume that you expect to lose market share in 2006 in P&Ds?
Cliff Pemble
No.
Jeff Evanson
Okay. That’s good. Specifically, in Europe with respect to P&Ds, you said you spent a lot of advertising dollars in Europe in Q4, there’s some data out there that suggests that you didn’t really take market share in Q4, I’m wondering what your thoughts are about your market share in Europe in Q4, and if you think you’re getting good yield on your advertising dollars at this point?
Cliff Pemble
I think there’s various sources of data out there. It’s our view that we did not lose share in the fourth quarter, specifically in Europe is what you’re talking about. As far as the investment in advertising, we spent considerable dollars both in the North American market and in Europe. And I think you can clearly see from the results today that we feel that was beneficial and we did get a good return on that investment.
Jeff Evanson
Okay. One last question. On the marine products, when do you expect the G2 cartography software to be available and did marine grow in this quarter year over year?
Kevin Rauckman
(Inaudible) No, marine was down in the fourth quarter. But I’ll let Cliff talk about the G2 question.
Jeff Evanson
Okay.
Cliff Pemble
The G2 charts are going to be available very soon in the March timeframe. The product’s already in production and we’re filling the channel now.
Jeff Evanson
Excellent. Okay. Thank you very much.
Operator
Your next question comes from the line of JB Gruff
JB Gruff
Hi Kevin, JB Gruff from Neo Davison
Kevin Rauckman
Hi there.
JB Gruff
Question on your expansion facility that you purchased. What sort of additional square footage does that give you? Can you give us a little bit of clarity on how much more capacity that gives you relative to Q4 where it looks like you’re pretty much running it full bore?
Kevin Rauckman
I think overall the square footage is a little over 22,000 square feet which is nearly double. We had about 250,000 in our existing facility. As far as capacity, I think you pointed out with 1 million units in Q4 that would be an annual run rate of 4 million on an annual basis and the capacity if you look at square footage it appears to be close to double but as Min mentioned we’re going not only use that for manufacturing but also R&D capacity. So, I think you could fairly say that we’re at least double the unit capacity by having that additional facility there.
JB Gruff
So, annualized rate you’re now doing 4 million you think with the additional you could do as high as 8 million?
Kevin Rauckman
Yeah, I think that’s a reasonable number but I don’t want to be held down to it.
JB Gruff
I won’t hold you down, I promise. And I’m guessing you paid cash for this?
Kevin Rauckman
Yes.
JB Gruff
And then as just sort of a housekeeping number, would you mind running through those margins again on aviation and consumer. I’m not on the webcast, the slide flipped before I could get to it.
Kevin Rauckman
The aviation gross margin for the quarter, 64.7, and the operating margin for the quarter was 40.2.
JB Gruff
Okay.
Kevin Rauckman
And then you have the consumer piece.
JB Gruff
Please.
Kevin Rauckman
47.7 and the 28.6 operating margin.
JB Gruff
And one last thing. Obviously big bump in SG&A, is that a fourth quarter thing or is that I mean are we to expect kind of a similar run rate? I know you don’t want to give too detail a guidance, but just in terms of modeling?
Kevin Rauckman
Well I think you know, as I mentioned, seasonality earlier, earlier question, definitely we’re going to continue to spend significant dollars in advertising and SG&A. But you shouldn’t expect on an absolute level that amount of $44 million in Q1 because of the seasonality of the business.
JB Gruff
That will follow typical seasonal sales patterns?
Kevin Rauckman
Right.
JB Gruff
Okay. Thank you very much.
Operator
Your next question comes from the line of Tim Duffy.
Tim Duffy
Thanks. Hello everyone.
Kevin Rauckman
Hi Tim.
Tim Duffy
Nice finish to the year. A few questions for you. You were running at full capacity it seems in Q4, was there some unmet demand? And, you know if so, could you quantify that possibly?
Cliff Pemble
In general, we talked about product availability and with as many products as we have, we’re looking at some unmet demand, but in general we felt like we were able to meet most of the customer demands during this period.
Tim Duffy
Okay. And you mentioned new products for 2006, kind of a consistent, I guess slight up tick in the number of new products you expect to be launched, from an overall sku count, in 2006 will there be kind of a consistent number with what we saw in 2005?
Cliff Pemble
As a tick up, we will introduce new skus and I’d say in general what you saw last year is a little bit of an increase for the number of skus that I’d say, 50-60 new products this year are likely increase this year as well, but there will be a retirement or an end of live for a lot of the existing skus.
Tim Duffy
Okay. And Kevin, you spoke to the gross margins, you saw some benefits from more favorable pricing and next can you elaborate on that a little bit more?
Kevin Rauckman
I think going into the quarter you could speculate given competition there could have been more cranking pressure, but what we experienced is fairly stable pricing through the fourth quarter and holiday season and a lot of the aggressive pricing really hasn’t hit until we get into the 2006 timeframe. Product mix we saw some of our higher price products continue to sell well even as we brought in the I series and some of the value or lower priced Pods.
Tim Duffy
And so the sweet spot in the P&D market still seems to be priced above where that I series is, is that fair?
Cliff Pemble
That’s a fair statement, yeah.
Tim Duffy
Okay. European business was very strong, can you provide any more detail on you know regions or areas of particular attraction?
Kevin Rauckman
Not at this time, no.
Tim Duffy
Okay. And my final question. I have been making a number of assumptions regarding the segments you’re about to report, are you prepared to give any clarity on the size of those segments for 2005 for comparison basis.
Kevin Rauckman
No. We’re not prepared to talk about those until we get into the first quarter filing of ’06. We’ve stated in the past that auto mobile is clearly number one. You know that aviation is already publicly stated. Number two was our outdoor fitness in the consumer segment and number three is the marine in terms of size.
Tim Duffy
Okay. I’ll let someone else ask a question. Thank you.
Operator
Your next question is from the line of Ron Epson.
Ron Epson
Good morning guys.
Kevin Rauckman
Hey Ron.
Ron Epson
Just a couple of questions. The I series, how does it do. Can you broadly speak about relative to the C series and some of the other products, how did it do? Dr. Min Kao: The C series has been the most popular product, however, the I series we have some strong sales in certain channels especially in certain countries in Europe and also it has entered into the channels in the US like Target, Amazon.com and also Wal-Mart. We appreciate the sales of the I series.
Ron Epson
Okay. Another question. I guess this is for Cliff. You’re developing I guess the G1000 for both the Phenom 100 and 300 for Embraer you guys are on the Mustang, are there other jets, I know you can’t be specific but are there other programs that are turbine powered that you can pitch the G1004 that you’re currently pitching it for not disclosing what they are?
Cliff Pemble
One program that has been disclosed is the V-Jet program for Simon Aircraft.
Ron Epson
Are there any bigger aircraft? The V-Jet’s a single engine. I guess what I’m driving at, are you guys thinking about or you know pitching for other jets that might be bigger than what you’re currently, I know you can’t say manufacturers or anything like that, I’m just getting a sense of what’s going on?
Cliff Pemble
Right now our specialty for our equipment is really the R23, class 3 and class 4 aircraft and with the Phenom we’re bridging into some R25, but I think that’s kind of the range we’re targeting where there’s really the most volume.
Ron Epson
Okay. And then I just one last question, with the expansion in the fabrication facilities, does that imply is it safe to think that you guys won’t be doing any significantly more outsourcing in terms of chip fabrication or anything else?
Kevin Rauckman
From a manufacturing level, we’re committed to for now we’re committed to doing our own manufacturing from the chip side. You know, we’ve already announced high sensitivity GPS surfs, so we’re going to continue to roll out new products with those features and functions in them, but no other business to report.
Ron Epson
Okay. And then, I guess one last question, back to Cliff. Back to my airplane question. I like those questions. The aircraft like the CJ1 I believe that’s part 23,right, and it’s bigger than a Mustang, is that the kind of thing that potentially we could see or (inaudible).
Cliff Pemble
Well again, Cessna is our partner and any announcements on any programs come from our partners first, certainly that class of aircraft is our target.
Ron Epson
Okay. Thank you.
Operator
Your next question is from the line of William Benton.
Jonathan Hill
Hi guys, this Jonathan Hill for Bill Benton. I have a couple of questions. Number one, in terms of your distribution, are you planning on pursuing more opportunities say in things like US dealers, similar to the channels you’ve done in Europe?
Kevin Rauckman
I think perhaps we’re going after as many opportunities as we can get in the P&D market, but if you look at where most of the growth has been, it still continues to be through the retail channel in the North American market, although there are certain promotional opportunities which Cliff highlighted with many partnerships we have in Europe that we’ll continue to go after but I would say just in general, that’s not where – your question is not where we’re going to see most of the growth in 2006.
Jonathan Hill
Okay, but in terms of the pricing environment and the competitive environment, how are you guys seeing things in terms of the increase in the number of players that are coming into the markets and how are you looking at pricing for 2006 as a result of that?
Kevin Rauckman
I think in Europe, we’ve seen more aggressive pricing so for one the European channel, the European market is becoming more competitive there. In the US market, we will continue to evaluate what happens there but generally we have a little bit higher pricing in the US that we’re able to secure, but at this point I don’t have any further details that we can talk about.
Jonathan Hill
Okay. Last question. In terms of the seasonality, have you guys seen continued momentum from the strong fourth quarter into the first quarter?
Kevin Rauckman
I think again, I talked about seasonality earlier. Just in general, we wouldn’t be laying out the gross numbers we have today if we didn’t see a large degree of growth in the P&D market in general and the overall business specifically.
Jonathan Hill
Okay.
Operator
Your next question is from the line of Rich Alea.
Rich Alea
Thank you, good morning. In your prepared remarks you mentioned that in the marine area that you expect to have several new products on the shelves I think in March. Do you expect them to have a meaningful impact in the March quarter from a revenue standpoint or is that mostly going to hit in the June quarter?
Kevin Rauckman
Well it is a major product rollout for all of our mid-range and high-end chart plotters, so we would expect that the initial channel fill is going to be significant for the marine market.
Rich Alea
Great. It’s helpful. And I know you don’t want to give away any competitive info on future projects but is there anything you can say about the pipeline of P&D products in ’06 with respect to any kind of successor to the C series or variations of nuvi type products?
Clifton Pemble
Well we continue to innovate and create new products. We are working on new product introductions as we speak and we should have more news for you to be able to see and hear shortly.
Rich Alea
Okay. And with respect to the cogs of the P&Ds, clearly you have to make some assumptions about you know prices coming down but presumably there’s also the ability to reduce your cogs, I mean is there anything you can talk about with respect to any assumptions you’ve made about how the cost of materials and components in PNDs will decline in ’06 relative to ’05?
Cliff Pemble
From a component perspective we’ve not seen a lot of movement, definitely a flash and LCD in particular have declined with raw material costs, but we expect consistent cost reductions, cost takeout within our own, within aviation and consumer manufacturing processes will help overall keep costs in line with the overall market. That’s kind of what our goal is in 2006.
Rich Alea
Great. And is there any way to quantify the impact of the numerous auto dealership agreements you’ve landed over in Europe and you’ve got this Taiwan deal which I guess actually a question there too did the Taiwan Ford deal actually continue past the Chinese New Year or was that sort of one off? Dr. Min Kao: They have extended the promotion but will probably end this month.
Rich Alea
And how about, just if you can in anyway sort of quantify or even qualitatively talk about the contribution you expect from these dealer relationships in Europe?
Kevin Rauckman
I don’t think we want to breakout anything specifically there in terms of how much that contributes, but in general, the dealerships, the promotional activity that we’ve seen in Europe is a little bit larger in Europe obviously than it is in the United States, so I’m not going to give you an exact number.
Rich Alea
Okay, fair enough. Thank you.
Kevin Rauckman
Thanks.
Operator
Your next question is from the line of Peter Friedland.
Peter Friedland
Hey guys, just one question. Within the auto business, can you just give us some idea for mix between the products, whether that’s percentages or if you could just rank them in order of volume?
Cliff Pemble
Other than what Min said, is that the C series continues to be a sweet spot and it is still leading the way in terms of volume, the I series did come in, in the fourth quarter and sell well particularly in Europe in certain areas of North America and nuvi primarily just a European products in the fourth quarter and just kind of ramping up in 2006 now. That’s kind of how I’d lay it out in terms of size.
Peter Friedland
Okay, so you can call those as you said at number one, two and three in terms of unit volume?
Cliff Pemble
Yes.
Peter Friedland
Okay. Alright, great. Thanks very much.
Cliff Pemble
Thank you.
Operator
Your next question is from the line of Mike Rappaport.
Mike Rappaport
Good morning and thanks for another great quarter. Could you give us a split on the aviation side between OEM and aftermarket?
Kevin Rauckman
Normally, what we said in the past, I think and clearly with the success of the G1000, the OEM contribution has continued to increase. I think the number I would say is somewhere around 30% and growing with everything else being aftermarket.
Mike Rappaport
Do you have a (inaudible) as you’re shifting it today?
Kevin Rauckman
I think we’ve stated publicly in the past that with many of the deals we don’t want to make the specific deals known, but sitting around $40,000 per plane, with the autopilot obviously that increases. That’s roughly the number that we’re experiencing right now.
Mike Rappaport
Okay. And how much is that going to increase when you go to a turbine fit up with presumably with two sides, radar and all that?
Cliff Pemble
At least $100,000 per plane.
Mike Rappaport
Okay. And could you discuss again what you see as your best use of cash going forward, you generate so much of it?
Kevin Rauckman
I don’t think the story is going to change. We continue to continue to look for acquisition opportunities, we are committed to dividend. I mentioned the stock repurchase plan and you can see it from this morning that we are also committed to investing in our business with facility expansions in Taiwan and also in Europe and even in the US if we need to in the future. So those will continue to be the four major uses of cash.
Mike Rappaport
So no changes there. On the, you made a comment on your prepared remarks about the amount of the AR at the end of the quarter that you had already collected. Could you give me that again?
Kevin Rauckman
I said, we’d you mean how much we actually collected in 2006?
Mike Rappaport
Yeah, to date.
Kevin Rauckm
96% with the AR we had at year end, we’ve already collected in ’06.
Mike Rappaport
Okay, that’s the end of my questions. And thanks again for a great year.
Kevin Rauc
Thank you.
Operator
Your next question is from the line of John Bucher.
John Bircher
Thank you. Just a quick follow-up. On the portable automotive category, just trying to get a feel for what are the sensitivity factors on margin there? You’ve got everything in that category from the $1,500 model 7200 that I see just became available down to the sub-$300 I series. I’m guessing it’s not necessarily ASP, you know lower ASP doesn’t necessarily low margin. Is it really volume that drives the ultimate margins here? It looks like pricing remains pretty stable throughout the holiday period. And if it’s some other attribute, if you can just touch on what typically drives the margins for the wide diversity of products you’ve got in the portable automotive category.
Cliff Pemble
Hey John. I think the key drivers are really the embodiment which includes the memory configuration, the display, those are some of the components that we have in those product lines.
John Bircher
You can’t elaborate any further?
Cliff Pemble
What specifically. Could you follow up with your question?
John Bucher
In general, should we assume that lower ASP doesn’t necessarily mean lower margins or is that not the case since it does appear that the higher ASP products have more display and more storage?
Cliff Pemble
On the lower end there’s probably always more price pressure to satisfy the market so I wouldn’t assume that the lower end are necessarily same margin as the higher end.
John Bircher
I was just trying to get to the point you mentioned that you had favorable product mix and that accounted for the better than expected margins as well as stable pricing. We saw the stable pricing, I guess I’m just wondering from a favorable mix standpoint, did you not expect that the C series was going to be such a significant percentage of the overall mix in this category?
Cliff Pemble
I think (inaudible) was going to be, the I series has done well, so we’re not talking about a lot of variability there. And the other thing is the 2700 was another product that I think did better than expected. That’s at the high end of the price curve so those are two major factors that played out in the consumer margins.
John Bircher
Okay, do you expect compared to the other reporting segments do you expect that we’re going to see the greatest variability of profit margins from quarter to quarter in this particular, this new segment.
Kevin Rauckman
Absolutely.
John Bircher
Okay. Well that will make it challenging for us. Thank you.
Operator
Your next question is from the line of Corey Johnson.
Corey Johnson
Hello?.
Operator
Corey, your line is open. Your next question is from the line of Nicholas von Staakle.
Nicholas von Staakle
Hello
Operator
Nicholas, your line is open. Your next question is from the line of Mark McKecknie.
Mark McKecknie
McKecknie, yes thank you. I’m here but my question has been asked and answered, congrats on a solid quarter.
Kevin Rauckman
Thanks Mark.
Mark McKecknie
Thanks. (inaudible) Don’t have the person’s name Can you hear me?
Kevin Rauckman
Yes (NO Name): I had a couple of questions. One was can you be a little bit more specific about what you expect in terms of consumer ASP declines of P&D markets for 2006?
Kevin Rauckman
We don’t have an exact number other than just to given the fact that the automotive and the mobile segment is definitely the highest and fastest growing, so we will just say that our ASP’s will likely continue to come down, but we’re not prepared to quantify how much that is, there’s just too much variability in that market right now.
No Name
Okay. And then, on your inventory days, I think it’s around 115 days or so
Kevin Rauckman
Right
No Name
Is that about what your target is, or is your target different from that level?
Kevin Rauckman
114 is the exact number and we’ve quantified the fact that inventory dollars are going to continue to go up, but they should continue to come down although given the fact that product availability continues to be critical in a growing mass market that’s kind of how we’re managing that, how we’re managing our overall inventory, so I think we’re pleased with 114 till we see some reductions possibly but there is not a lot of significant amount of improvement that we’re going to be able to see in the future.
No Name
Okay. You know Europe that we’ll see basically, can you talk about what your share is like there versus tom tom, do you think you were able to gain share versus down there?
Kevin Rauckman
I think at this moment some of the retail (inaudible) that we rely upon (inaudible) have data from the previous quarter which I think you’ve seen and we don’t know if we’d change.
No Name
Last question is, can you give us some idea I don’t can you give us some idea of what the ASP will buy segments to the American consumer?
Kevin Rauckman
No, we don’t think that. We’ve not made that public. It will be available at the end of the first quarter though.
No Name
Oh, it will be. Okay, great. Thanks very much.
Kevin Rauckman
Thank you.
Operator
Your next question is from the line of Tim Duffy.
Tim Duffy
Thanks. Follow up here as I’m playing with my model. So as I look out to your guidance kind of 20% year to year growth in revenue, and I wonder is there opportunity for leverage on the operating expenses or if you believe there is?
Kevin Rauckman
You know at the levels we gave, comes with revenue and operating margins and then EPS. We were expecting the high 20’s, roughly 30% growth, we’re expecting that SD&A will roughly stay flat as a percentage of sales. R&D could be little bit of leverage there, but in general, putting aside both of those categories.
Tim Duffy
Do you have to grow SD&A and R&D that much?
Kevin Rauckman
Well we believe that R&D is critical to the future of the Company, so we’re, yet on a dollar basis, we’re committed to growing that and then given the increase from the T&D market in automotive we feel that we have to spend SD&A dollars to have more advertising and compete there as well.
Tim Duffy
Okay. Thank you.
Kevin Rauckman
Thanks.
Operator
The next question is from the line of Corey Johnson.
Corey Johnson
We’ll try again, can you guys hear me now? Let me ask you about retailers. Kevin when you were out here in San Francisco, you talked about the internet being much more (inaudible) than it has been in the past. Who are the top retailers in Q4 and what percentage of that was in the internet?
Kevin Rauckman
What percentage of that was what?
Corey Johnson
On the internet, Amazon was one of those people, maybe that would tell us something.
Kevin Rauckman
Well I think it would typically layout the top. Specifically other than to say that for the internet has continued to be a strong part of the business. But still, the major retailers that we talked about in the past continue to be the major retailers, you know, (inaudible), Best Buy and Circuit City and they’re being the top, the big box retailers that we sell into.
Corey Johnson
There’s been talk of Wal-Mart and you mentioned Wal-Mart earlier in the call. Have you been in any physical locations in Wal-Mart or just on the internet? Wal-Mart.com?
Cliff Pemble
Definitely both. We’ve got a physical and internet. Both.
Corey Johnson
Great. This maybe just bookkeeping, but other use of cash of $3.5 million. What was that?
Kevin Rauckman
Hold on a second, let me go back to that.
Corey Johnson
Thank you.
Kevin Rauckman
You’re talking about within the investing or the financing?
Corey Johnson
In the operations section for (inaudible)
Kevin Rauckman
What specifically are you looking for?
Corey Johnson
There was another use of cash, it wasn’t (inaudible) what it is?
Kevin Rauckman
You want to follow up with me later. Specifically, I can’t tell which one you’re looking at. Looking at the Other?
Corey Johnson
I can follow up with you later. Thank you. That’s all I have, thank you very much.
Operator
Your next question is from the line of Nicholas von Staakle.
Nicholas von Staakle
Yes hello, Nicholas von Staakle, can you hear me now?
Kevin Rauckman
Yes.
Nicholas von Staakle
Oh, great. Thanks for taking my question. I have a question regarding the competitive landscape in the US specifically. Have you noted any changes in the fourth quarter?
Kevin Rauckman
We’ve been able to retain our leadership as the overall P&D provider in the US market, so overall, no.
Nicholas von Staakle
Okay. Second question. Do you have any automotive products already in the market in Asia and if so, could you give your best guess of the approximate size of the Asian market in terms of units in ’05? Dr. Min Kao: We’re so involved that market in Asia is quite small because of the lack of map data in that region.
Nicholas von Staakle
Do you think that map data in sufficient quantity will become available for you to start addressing this market? Dr. Min Kao: I think in all countries.
Nicholas von Staakle
Which ones do you see kind of coming in first? Dr. Min Kao: We are seeing some data available in Taiwan, China is coming and we see very limited amount of data for Malaysia and Singapore and other countries like India (inaudible) behind.
Nicholas von Staakle
Okay. And Thailand? Dr. Min Kao: Thailand is coming. Actually we’ve been selling some product in Thailand.
Nicholas von Staakle
But that’s ’06. Dr. Min Kao: No, actually we’ve been selling product in ’05.
Nicholas von Staakle
Okay. And your best guess on the unit size of that market across the countries which you just mentioned? Dr. Min Kao: I can not give you’re the numbers.
Nicholas von Staakle
Okay, fair enough. Dr. Min Kao: Thank you.
Nicholas von Staakle
Third question if I may. Have you experienced any shortage on components in Q4? Dr. Min Kao: We don’t’ have any significant shortage of components, but the major challenge which we and all the manufacturers face is that many of the components start as LCD display and (inaudible),four months, so any time when you have the up start, it demands you respond by getting components.
Nicholas von Staakle
And the margins that you’ve indicated for the business units, are there any adjustments you have to make, or can we take them as they are?
Kevin Rauckman
You mean within the 2005 results or 2006 expectations?
Nicholas von Staakle
For the Q4 results. If there are any accounting changes that you can already anticipate for going forward. I do understand that you will split it up differently, but are there any things that you may be able to highlight already?
Kevin Rauckman
No, I think they’re pretty much as stated.
Nicholas von Staakle
Okay. And then, finally last question if I may? How are you going to manage the auto business going forward? Will you management for gross margin as tom tom indicated they’re doing, or how do you think about that, without giving any indication on the margin itself?
Kevin Rauckman
I think the way we’re going to manage that is it’s the high growth business and we will we’ve often stated that you shouldn’t just be looking at gross margin dollar but you should be looking at overall gross margin contribution or operating margin contributions, so that’s how we’re going to continue to manage the business.
Nicholas von Staakle
And then finally, I did not understand the comment you made on manufacturing your own chips? Did I get that right?
Cliff Pemble
I think the question and maybe we injected the term chip set when it was referring to our factory facility and we don’t do any manufacturing of chip sets ourselves. We always rely on outside partners for that. The manufacturing we do is for assembled units.
Nicholas von Staakle
Okay, perfect that’s what I understood. Great. Thanks very much.
Kevin Rauckman
Thank you.
Operator
You have no further questions. Will there be any closing remarks?
Kevin Rauckman
No I think other than to say, thank you for participating and we’ll talk to you again next quarter. Goodbye.
Operator
This concludes today’s conference. You may now disconnect.