May 2, 2007
TRANSCRIPT SPONSOR
Executives
Polly Schwerdt - Manager, IR Min Kao - Chairman and CEO Kevin Rauckman - CFO and Treasurer Cliff Pemble - VP, Engineering
Analysts
Stephanie Leung - Merrill Lynch Bill Benton - William Blair Jeff Evanson - Dougherty & Company. Rob Sanderson - American Technology Noelle Swatland - Lehman Brothers Yale Lionel - CIBC Jim Duffy - Thomas Weisel Partners Peter Friedland - Soleil Group J.B.
Groh - D.A. Davidson Jeff Rath - Canaccord Adams Rich Valera - Needham & Company Jon Braatz - Kansas City Capital Ingrid Ebeling - JMP Securities.
David Neiderman - Pacific Crest Securities. Brandon Dobell - Credit Suisse Stephanie Flynn - Merrill Lynch
Operator
Good morning. My name is [Kaposia], and I will be your conference operator today.
At this time, I would like to welcome everyone to the Garmin Ltd. First Quarter Earnings Call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
(Operator Instructions). Thank you Ms.
Schwartz, you may begin your conference.
Polly Schwerdt
Good morning. We would like to welcome you to Garmin Ltd.
first 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 www.garmin.com/stock.
Additionally, this call is being broadcast live on the Internet. Please note that this webcast does include slides which we can view during this call.
An archive of the webcast will be available until June 5. A telephone recording will be available for two business days 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 positions, revenues, earnings, market shares, products introduction, future demand for our products, and our plans and objectives are forward-looking statements. The forward looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin.
Information concerning these risk factors is contained in our Form 10-K for the fiscal year ended December 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; Kevin Rauckman, Chief Financial Officer and Treasurer; Cliff Pemble, Vice President of Engineering; and Andrew Etkind, General Counsel.
The presenters for this morning's call are Dr. Min Kao, Kevin Rauckman, and Cliff Pemble.
At this time, I would like to turn the call over to Dr. Kao.
TRANSCRIPT SPONSOR
Min Kao
Good morning. From this morning's press release, you can see that we recorded yet another record quarter.
Total revenues and EPS again both exceeded our expectation. Revenue for the quarter increased 53% to $492 million.
EPS was up 60% or 37% excluding the effect of foreign currency. And then unit volume was up 67%.
Revenue growth exceeded our expectations in both automotive and aviation segments. Over 1.5 million Garmin products were shipped during the quarter.
Bringing our total to over 20 million units shipped to-date with a continuous essence of the strength on the Garmin brand. Our Worldwide employees increased to over 5,200 during the quarter.
We added nearly 500 associates included 70 in engineering, 175 in manufacturing, 130 in marketing, including many product traders and customer support associates to handle the increased call volume. We continue to experience strong demand for our products, to keep pace with this demand we continuously expand our facilities.
In Taiwan, our current manufacturing capacity is approximately 8 million units. Over the next few months we will peered out our second facility to its full capacity brining in our total to approximately 12 million units annually.
In addition, we are exploring the possible purchase of extra facility in Taiwan to meet our growing PND demand in the need for additional office space. As we continue to expand our R&D booth and other support departments in Taiwan.
In Europe, we have completed that renovation and have moved into the new facility in South Hampton, UK. We look forward to using this larger facility to expand our opportunities in Europe and Africa.
In the U.S., planning's are not in place through expense of warehouse distribution facility at our Kansas headquarters to support the increased volume. And we are pleased that our company and our products continue to receive much noteworthy recognition, and we continue to spend our credit portfolio.
At the end of the first quarter, we had 301 U.S. and 34 foreign tenant issued and 194 U.S.
and 13 foreign tenant applications. We continue to make targeted acquisitions to broaden our strongest product offerings and enhance our technology opportunities.
In the last few months, we invested the total of approximately $100 million in acquisition of four companies. In addition to the three acquisitions that we reported during our last earnings call, we recently acquired Nautamatic Marine Systems.
We are excited about this acquisition as we believe this innovative talented marine autopilot technology will further expand in advance Garmin's marine product portfolio. There are some highlights of our achievement for each business segment.
Revenue for the automotive segment increased 110% driven by the combined strong sales of the nüvi and the StreetPilot product line. Gross margin remained solid at 43% and operating margin improved to 25%.
Newly released product has been well received, and have generated strong order backlogs. According to independent market research, Garmin has maintained a number one PND position in North America and a number two position in Europe.
We believe our expanded action plans have enhanced our brand awareness in both the U.S. and in the Europe.
Rental car wins and out of deal promotional sales continue to increase consumer exposure to Garmin's products. Recent ads by Avis featuring Garmin's products has generated awareness of our successful partnership with Avis.
So the outlook for the PND market continues to be very strong. Revenue growth in this segment likely exceeded our expectation of 50%.
For the Aviation segment, revenue was up 26%, ahead of our projected 20% mainly attributed by WAAS upgrades, WAAS-enabled visual feed products and the new GMS 200. Gross and operating margins also both improved year-over-year.
We are pleased to have delivered our first G900 Integrated Cockpit for the experimental chip [plane] market. Piper Aircraft also recently announced their plan to offer our G1000 in to their cockpit in their Saratoga aircraft, expanding our long-standing and mutually beneficial relationship.
We remain optimistic of our long-term prospect of our aviation business and continue to believe this segment is positioned for revenue growth of 20% in 2007. Revenue for the Marine segment was down just 13% due to timing of new product introductions.
And operating margins also declined, as we discounted older products, ahead of new product releases. But the good news is that channel inventories were very clean at the end of the quarter and retailers are now starting to stock and sell our new products.
Additional products scheduled for release in the current quarter have also generated strong bookings. We believe that, although the timing of the new product releases resulted in low revenue in first quarter, our 2007 new product lines have positioned this segment for a strong both in the second and third quarter of the year.
As such, we continue to expect the Marine segment to grow 20% in 2007. The revenue from the Outdoor/Fitness segment declined 7% due to challenging comparisons because in Q1 of last year we had significant pipeline fill of many new fitness products, and also a special promotional deal.
Both end operating margins for this segment also declined as we began discovering some of the older products as we typically do ahead of new product releases scheduled for later in the year. We believe Garmin remains the leader in GPS-enabled devices for both the running and cycling markets, and the significant opportunities for growth remain.
We expect new products that will be introduced during the second half of the year will drive growth for 2007. Just a few operational highlights.
[Inaudible] 6th file 0.17 in Q1, and this is for the PND market, continue to be strong. So retail inventories were clean in other quarter.
In response to the greater than anticipated PND demand, we are countering expedited component deliveries in all expanded manufacturing capacity. We continue to expand our marketing and sales infrastructure to support our continuing force.
These activities include targeted additions to marketing and sales space, and the integration of our newly acquired French subsidiary to support mutual expansion in this country. And we are pleased to be able to offset PND pricing economies by virtue of this cost reductions.
Target efficiency and the product mix is driving in starting of the module segment, module performers in the first quarter. As we look forward, we are optimistic about the remainder of 2007.
Our drive for continuous innovation has allowed us to be in a position to take advantage of the continued strong growth occurring in the PND market. Currently we released new offerings for the segmented market at various price costs, and we anticipate spring season promotion activities and advertising will drive continued growth in second quarter.
For the marine market, we feel that our new suite of marine product is poised to drive strong growth in the second and third quarters. As these new products have generated a long interest and strong bookings.
For the aviation segment, we continue to see solid growth opportunities. Our new GMX200 and WAAS units continue to drive future revenue growth.
The recently announced Piper Saratoga is now certified. A shipment of this aircraft has already begun this month.
This application combined with the machine [AR90] retrofits expectation. Anticipated in the second half of the year, we will generate additional OEM revenue.
Work on various microjet and other specifications also continues for deliveries in 2008 and beyond. For our Outdoor/Fitness segment, we anticipate growth in the second half of 2007 tuned by the Astro dog-tracking device and in many new outdoor and fitness products that may be announced.
So, in summary, we are pleased with our overall results and are excited about our future opportunities. At this time, I would like to turn the call over to Cliff Pemble to provide our product updates.
Cliff Pemble
Thank you, Min. As it’s been our custom in the past, I will be reviewing product highlights from the first quarter starting with our automotive segment.
The nüvi 200, nüvi 250, and nüvi 270 were introduced in March at the CeBIT Electronic Show in Hannover, Germany and these new products targeted value-oriented customers unwilling to compromise on style and function. The nüvi 200 family features a bright colored TFT display and a touch screen with an internal antenna packaged in an ultra-thin case.
These exciting new products also include basic travel features and are compatible with our range of rich content including travel guides and our unique favors guide. The nüvi 200 family is offered in three versions, the 200 with regional coverage for Europe or the lower 48 states or the United States.
The nüvi 250 was for North American or European coverage and the nüvi 270, which offers Europe, plus North American coverage for world travelers. I am pleased to say that we have begun delivering the nüvi 200 to our major retail partners and so far it's been enthusiastically received by both North American and European markets.
We are working hard to fill strong back orders for this product family. During Q1 we began deliveries of the nüvi 680 and the StreetPilot c580, which is the first PNDs the future of dynamic content provided by Microsoft Direct.
In addition to offering real-time traffic alerts these PNDs offer other dynamic contents such as current fuel prices, weather and road conditions and movie listings. These products are bundled with the one year subscription to the content services of MSN Direct.
Nüvi 680 and StreetPilot c580 come with all the features, customers have come to expect from our PNDs, such as Bluetooth hands-free functionality. And in addition the nüvi 680 includes an integrated FM radiator to listing the MP3 music and turn-by-turn instructions to the cars audio system.
Within products around out the upper-end of our PND product's lineup and has been well received by customers. In addition to the nüvi 270, which I mentioned earlier, we added expanded map coverage options to our nüvi 300 and 600 product family.
The nüvi 370 and 670 offer preloaded coverage of Europe and the U.S. In addition they are bundled with traffic receivers that are compatible with traffic services in both Europe and the United States.
These products are true world travelers thanks to their extreme portability and traveler related features and worldwide traffic broadcast capability. Turning next to the aviation segment; we are pleased to report much better than expected growth in this segment due to the introduction of WAAS enabled GNS 430 and 530 product as well as the GMX 200 MFD.
During Q1, we provided WAAS upgrades to over 2,000 Garmin 430 and 530 customers and our backlog of upgrades remains strong. At the same time, we experienced strong demand for new WAAS enabled GNS 430 and 530 products.
Demand for the new GMX 200 MFD was also strong throughout the quarter, helping us exceed our growth target for the aviation segment. In the OEM market, we recently announced that Piper Aircraft has added the G1000 option on its Saratoga and 6X aircraft models.
We've enjoyed a close working relationship with Piper over the years and we look forward to expanding on that relationship with the G1000. During Q1, we also delivered the first G900X WAAS cockpit system for experimental aircraft.
Experimental aircraft are known for their passion in selecting, building and owning these aircraft. G900X fits nicely in the upper end of this market segment.
Please report that Cessna has recently resumed deliveries of G1000 equipped Mustang jet and we expect deliveries to continue smoothly throughout 2007. Finally, work continues to certify the G1000 on other aircraft models and platforms.
We'll provide update throughout the year with significant development. Turning next to the marine segment, we began deliveries of the GPSMAP 400 and 500 series of Chart plotters in the later part of Q1.
These products include an all new simplified user interface making them more useful and appealing to a broad range of customers. They also include our new satellite enhanced space map and are compatible with our G3 vision photography.
Additionally, the GPSMAP 400 and 500 are offered in versions with preloaded maps for the United States, Britain or Australia. Despite the slow start in our Q1 marine business, we remain optimistic about the growth potential for this market based on the strong demand for the 2007 marine product line up.
Also there in Q1, we began deliveries of our new GMR 18 radar systems. This entry level radar is compact in size yet strong in features and performance.
At 4 kilowatts it’s the most powerful 18-inch radar system on the market and is offered at a value price of just U.S. $1000.
Demands for the GMR 18 is strong and we are ramping up deliveries to meet this demand. GMR 18 rounds out an entire family radar solutions from Garmin.
We now offer a broad range from low price point of the GMR 18 to the high performance of the GMR 406, which is our six plate open array radar. I would like to close with the word about our open GPSMAP 4000 and 5000 series plotters.
These new products complete our 2007 marine product lines offering larger higher resolution displays. 4000 series offers a traditional keypad driven user interface and 5000 series incorporates a rugged touch panel that can serve in a variety of applications from work boats to luxury cruisers.
All these products leverage our new G2 vision cartography and our plug-and-play compatible with all of Garmin's marine network component such as our radars, XM weather data receivers and our high resolution digital founders. We're finalizing the development of 4000 and 5000 and anticipate that mass production will begin later this month.
This time I'd like to turn the call over to Kevin, who will provide an overview of our financial results.
Kevin Rauckman
Thanks Cliff. It's great to talk to everyone again this morning and as you can see from the press release and Min's early remarks, we are pleased to be to able to review with you the financial results for the first quarter which have records into both revenue and earnings per share.
So, I going to walk through the income statements, I typically do review in number, more details sales and margins results, look at the balance sheet, cash flow and then finally include with few comments on our expectations for the full-year 2007. So, looking at the first quarter income statement the revenue was $492 million, net income came in at $140 million, which has generated an EPS of $0.64 per share plus 53% top line growth and 60% earnings per share growth for the quarter.
We did recognize a favorable $0.05 earnings per share impact due to $13 million foreign currency gain during the first quarter of '07. Gross margins, up 48.3% were better than expected due to the stronger PND volume in the U.S.
than in Europe. PND price erosion was offset by material cost reductions, volume efficiencies and product mix.
Our results on the operating margin line were 28.1%, which was down from 31.1% last year a lot better than expected. And when breaking that down we saw out of the 300 basis points down, we saw gross margin represented 220 basis points unfavorable, advertising was 30 bps unfavorable, our other SG&A was 140 basis points unfavorable and our R&D was 90 basis points favorable to the operating margins.
We also shipped over 1.5 million units during the quarter on the strength of our auto/mobile segment and the average selling price during Q1 was $317 per unit, which is actually 4% above the fourth quarter of '06 of $306. Net income excluding FX, we believe that the non-GAAP measures that we reported this morning include net income, exclude the effects of foreign currency, so excluding the effects of foreign currency this impact was $0.05 per share unfavorable during the first quarter.
Looking next at revenues per segment, we experienced triple digit revenue growth across the auto/mobile segment, while the unit growth in that segment grew 167%. Revenue within the Aviation segment grew 26%, exceeding our expected growth rate for the full year.
Our Marine and Outdoor Fitness segments were down 15% and 5% respectively during the quarter as expected. However, due to the new marine products that Cliff just outlined, we expect our Marine segment to accelerate during the second and the third quarters of this year, and also expect our Outdoor/Fitness segment to show improvement during the second half due to the introduction of several new products.
Overall, our revenues grew 53% for the quarter, above our 41% full year target. Sales of products introduced within the last 12 months as we often report, increased 45% of our first quarter revenue.
Looking next at revenue by our geographic regions. During the first quarter, North American revenue was up 59%, while our European business increased 45% during the quarter.
Our Asian sales also grew 21% during the period. When looking at our North American unit sales, those increased 86% on the strength of the PND product sales; however, our Europe units also grew over 50% during the first quarter of 2007.
Because of the explosive growth of the PND market, our Automotive/Mobile segment now represents 64% of our total business, growing from 46% of the total business a year ago. Within the Automotive/Mobile segment, the North American market unit growth was greater than our European unit growth; however, both continents experienced over 100% unit growth quarter-over-quarter.
In total, Garmin's North American market growth was stronger than in Europe during the quarter as North American grew to two-third of our total business. Looking next at the margins by the various segments, our first quarter Aviation gross margin and operating margin remained relatively stable at 65% and 37% respectively.
Q1 Outdoor/Fitness gross margin remained at 65% during the period, as expected. But due to the lower volume during the period, operating margin declined to 35%.
Our first quarter Marine gross margin decreased to 49% due to channel clearing in preparation for the upcoming marine selling season, and the new products that we have just been introduced. The operating margin within this segment was 26% due to lower volume during the quarter.
As I mentioned earlier, Q1 Automobile gross margin came in at 43% beating our expectations. Keep in mind that Garmin recognized a year end benefit during the fourth quarter of '06 related to volume rebase with our suppliers, which drove up our fourth quarter margins abnormally.
Primary reason for the strength of the gross margin in this segment is a greater mix of units being sold in the U.S. relative to Europe during the first quarter.
Operating margin of 25% within the Automobile segment was anticipated. With the exception of our Automobile segment, we continue to expect short-term margins to be relatively stable, despite the possibility of some quarter-over-quarter variability due to product mix and the timing of the various new product introductions.
We continue to expect that our automobile segment will experience decline in operating margins due to reduced pricing and continued transitions for mass market levels. Our operating expenses, our R&D increased over $8 million quarter-over-quarter in dollar terms, but was down 90 basis points, 6.8% of sales.
We added 70 to our engineering team during the quarter and now employ over 1,000 engineers and engineering associates throughout the company. Our ad spending also increased by $11 million over a year ago quarter, and on a percentage of sales basis advertising increased to 6% of sales compared to 5.7% a year ago.
We expect ad spending to grow sequentially during the second quarter due to the upcoming global TV ad campaign that's ready to kick off within the next few weeks. Other SG&A increased 140 basis points to 7.4% of sales from 6% a year ago.
However, we continue to expect that our operating expenses in total will represent approximately 17% of sales for the full year 2007. Looking next at our balance sheet, we ended the quarter with cash and marketable securities balance of $912 million, despite cash that was spend on the closing of three acquisitions during Q1.
Our accounts receivable decreased to $334 million due to strong cash flow from our December sales, and accounted for approximately 62 days of sales at the end of the first quarter. We have already collected on that balance on over $184 million of receivables during the second quarter through the month of April.
Our inventory of the dollars were up $12 million from the end of the year, and our days of inventory metric decreased again. At the end of Q1 we now hold 75 days of inventory down from 79 at the end of the fourth quarter.
The 75 days is made up of the following components of inventory, $81 million in raw materials, which represents 20 days; $43 million in WIP and assemblies which make up 11 days of inventory, and $176 million in finished goods which is 44 days. We do still have $18 million of reserves on the books.
The small increase in finished goods was [planned], and as we began to ramp up inventory towards fulfilling a higher second quarter demand for PND and the new marine products. Retail channel inventory appears to be very lean as sell through as most of our product was strong during the first quarter of '07.
We also generated considerable cash during the period. Our cash flow from operations was $168 million, is at $12 million on capital expenditures during Q1 and our pre-cash flow was $156 million.
Cash flow from investing with 31 million use of cash during the period, which is made up of $12 million of CapEx, a couple of million on the purchase of intangibles, $52 million on net redemption of our marketable securities and about $69 million for the purchases of the three acquisitions Digital Cyclone, EME in France and Nautamatic, the new marine company. Cash flow from financing was a $5 million source of cash during the first quarter, which is from the proceeds from the options exercised during the quarter.
And overall an all cash balances as we have originally is 4.9% on cash and marketable securities balances during the period. Few more comments on few other items.
Our effective tax rate you will notice actually became down to 13.1% lower than earlier expected. We continue to see increased benefits related to our Taiwan tax holidays, which are driven by both higher capital expenditures and higher production volumes coming out of our Taiwan factory.
No shares were repurchased during the period under our outstanding share repurchase plan. However, we still have 1.8 million of authorized share to purchase under the plan.
And just for your information, the stock options that were expensed during the first quarter, impacted earnings per share by about $0.02 per share. On conclusion, we remain very optimistic about future success of our business, and we are at this point, reiterating our earlier annual guidance for 2007.
We expect total revenue to exceed $2.5 billion for the year, a 41% growth rate. We continue to expect earnings per share to grow at least 15% to $2.70 per share.
Our operating margins still come in at 27% for the full year a 430 basis point decline due to the lower auto margins during the year and a greater mix of revenue from our auto segments. The only change on the guidance for this period, now we expect a much higher capital expenditures of $140 million for the full year, which was up from our earlier guidance of $65 million.
The $140 million of CapEx is comprised of $100 million of production equipment and the purchase of a third Taiwan factory that Min mentioned. $8 million from the final U.K.
headquarters' build out and then $32 million of maintenance CapEx across our business. And then just for your information we intend to provide a formal update to our fiscal 2007 financial expectations during our next earnings conference call at the conclusion of second quarter in 2007.
That ends my formal comments for the morning and we now want to open up our time with any questions that you might have. Thank you.
Operator
(Operator Instructions). Your first question is from Stephanie Leung with Merrill Lynch.
Stephanie Leung - Merrill Lynch
Hi, everyone. If you could provide for the G1000 and update to the C9100 and 300 and how that's progressing whether or not up to your plans so far?
Cliff Pemble
Yes, Stephanie, so far things are going very well. The first aircrafts our understanding is it's in production right now, and flight testing should commence shortly.
As far as our end goes we believe everything is on-track.
Stephanie Leung - Merrill Lynch
Okay. And then I saw that I guess the Eclipse have switched out of the (Aberdeen) product.
I was wondering if you could provide more color as to why the G1000 wasn't chosen?
Cliff Pemble
Well, I think you probably have to ask Eclipse directly on that, I don't think that we can provide any color on it.
Stephanie Leung - Merrill Lynch
Okay. Thank you.
Cliff Pemble
Thank you.
Operator
Your next question is from Phil Benton with William Blair.
Bill Benton - William Blair
Hey actually Bill. Good morning guys.
First question is really on the outdoor/fitness side, I don't think right now you're reiterating marine, you didn't say anything, but I guess from the full year revenues outlook there. And I was wondering if you could offer us a little bit a color in terms of the timing of the product introduction in that segment or versus maybe prior year's, what might be happening there now?
Kevin Rauckman
I think we mentioned the extra down tracker that comes out in the back half of the year. There are some other products that are being developed right now, but from the timing perspective it's all going to be in the second half, for eight products that will have any major impacts on the outdoor/fitness segment.
Bill Benton - William Blair
That’s fair. There are more backend loaded than in prior years in that segment?
I guess
Kevin Rauckman
That's a good caveat classification, yes.
Bill Benton - William Blair
Okay. And did you reiterate the revenue outlook in that segment or are you just kind of?
Kevin Rauckman
We didn't make any changes to our overall segment. I would say if there is any one segment that's at risk, it's probably the outdoor/fitness segment for the year, clearly PND or automobile and aviation are exceeding our expectations so far, marines off to a slow start, but we feel like it will catch up in the second and third quarter, outdoor/fitness is back half as I said, but likely at rest on the 20% growth for the year.
Bill Benton - William Blair
Okay. And then with regard to the gross margin on the auto side, it's obviously are very good and it appear do we have a premium in a marketplace relative to your peers that may be sustained a little bit longer and then maybe some of us expected.
Now you since I think lowered some of those, what kind of I guess the question is, do you agree with that characterization that may have helped the gross margin in the quarter, and what, kind of premium do you expect to be able to maintain in the marketplace relative to your peers, kind of, fussy question?
Cliff Pemble
Yeah, I am not sure we will be able to answer a premium, how long that last. Clearly in the U.S.
market, we saw greater strength there and, as you know, we make better margins at this point in the U.S. versus the European market so that did help sustain gross margin for the period.
I am not going to be able to comment on premium pricing over the competition. Other than to say that pricing is coming down.
I mean we see that we have commented between 25% and 30% on an annual basis, look at the auto segment.
Bill Benton - William Blair
And then just a quick final question, could you offer us any color in terms why do you think your market share was in Europe on in this mid quarter and where do you see that, I know you typically say you wanted to get to north of 20%, can you give us any color on that outlook?
Cliff Pemble
I think you are still on the mid-to-upper teens as the market share in the European market and we feel like we were able to had at least 50% share in the U.S.?
Bill Benton - William Blair
Okay. Great thanks guys.
Cliff Pemble
Thanks.
Operator
Your next question is from Jeff Evanson from Dougherty & Company.
Jeff Evanson - Dougherty & Company
Good morning. Thanks for taking my questions.
Cliff Pemble
Yes Jeff.
Jeff Evanson - Dougherty & Company
Well, I will follow-on with some more PND questions, could you talk a little bit about what you saw with automobile ASP compression in the quarter and maybe how that compared between Europe and North America?
Cliff Pemble
I think overall ASPs on the automotive segment came down, I think it was around 4% for the period. And clearly we saw the more average selling price reduction in the U.S.
than we did in Europe. But keep in mind pricing is higher there so that's not a surprise.
We also took some price actions during the period. So, I think that's how I categorize it in total.
Jeff Evanson - Dougherty & Company
To me it seems you kind of did your automobile with one arm tag behind your back, because you didn't really have much benefit from the nüvi 200 series. Could you talk about a little bit of how much of that product line might have fallen into Q1?
And how the GM's of the nüvi 200 line compare with the c-300 line?
Kevin Rauckman
You're absolutely right, the nüvi 200 had very, very minimal impact. We released the product, I think, in the last week of the quarter, so it virtually had no impact on Q1.
Clearly, it's a lower price point, and it's one of the reasons we've said what we've said about the PND is that pricing is becoming more aggressive both in the U.S. and Europe.
Margins are definitely at the lower end of our overall PND or auto segment on the nüvi 200, but I am not going to get into comparing margins on that versus c-330.
Jeff Evanson - Dougherty & Company
Okay, my last question is on aviation. Cliff, could you talk about how many WAAS upgrade you did in the quarter, and when is it that we should expect to see G600 revenue?
Cliff Pemble
We did about 2,000 WAAS upgrades during the quarter. And we continue to have a strong backlog of WAAS upgrades that remain to be done, although it will remain to be seen how many of those actually materialize.
We are experiencing basically a capacity in the field in terms of being able to install and certify the systems because of the sharp capability that's out there. As far as the G600, we don't expect any contribution from the G600 during 2007.
Jeff Evanson - Dougherty & Company
Okay, great. Thank you.
Operator
Our next question comes from Rob Sanderson with American Technology.
Rob Sanderson - American Technology
Hi, good morning. Thanks for taking the questions.
Just a clarification Kevin on the talk of I think you said 25% to 30% ASP declines in auto. Is that on a like unit basis, or do you think considering the mix shift, as you grow your presence in the lower end?
Kevin Rauckman
Yeah, that's on a like-for-like product basis Rob.
Rob Sanderson - American Technology
And what would you expect in terms of, I guess there remains to be seen just to how the demand skews. But at this point what do you expect the impact on mix could be on the overall blend or how should we think about that?
Kevin Rauckman
I think the ASPs on that segment would be closer to between 15% and 20%. It’s very difficult for us to predict that at this point, based on both product mix within the segment and also geographic mix between the U.S.
and Europe, and that's our best estimate at this point.
Rob Sanderson - American Technology
Great, thanks. And then one final, just on your foreign exchange benefit from the quarter.
On the EPS guidance for the year of 270, what implications of currency do you have in your assumptions there?
Kevin Rauckman
[Which could] FX from our $2.77 EPS was zero.
Rob Sanderson - American Technology
So, we are looking at stronger currency that we can kind of build up from 270 on the currency impact.
Kevin Rauckman
I am still using $0.59, which is the number that we reported excluding FX then yes.
Rob Sanderson - American Technology
Got it. Thanks a lot.
Kevin Rauckman
Thank you.
Operator
The next question is from Noelle Swatland with Lehman Brothers.
Noelle Swatland - Lehman Brothers
Hi guys, just two quick questions. The first just with respect to some of the favorable components pricing we saw notably in flash this quarter, can you talk about some of the benefit if any you saw in the first quarter and how we should think about that in the second quarter and through the year?
Kevin Rauckman
I think definitely we saw flash prices come down, but that wasn't the only component. I think we have stated earlier, we do not leave overall material or raw material component cost reductions are going to keep pace with price.
Our best estimate at this point remains about 15% on an annual basis. And yeah, we did experience some benefit in Q1 on flash.
Noelle Swatland - Lehman Brothers
And do you expect that to accelerate a little bit more in the second quarter, in the terms of the full benefit, given the lag I guess of about month, month and a half or so?
Kevin Rauckman
I don’t think we expect it to accelerate.
Noelle Swatland - Lehman Brothers
Okay.
Kevin Rauckman
It continues to benefit, but not accelerated.
Noelle Swatland - Lehman Brothers
Okay. And then just in terms of figuring out some of the one-time impact in the first quarter and kind of that push out in the marine.
Can you give us some qualitative things to think about in terms of modeling the overall business and the segment moving in, in the second quarter?
Kevin Rauckman
Well, without giving an absolute number, I think the historical sequential growth that you've seen between Q1 and Q2 seems pretty reasonable to us. That’s been anywhere in the greater than 30% range on sales.
I think that’s seems reasonable to us given the new marine product that Cliff outlined and also continued strength on PND. So, Q2 will definitely ramp up significantly from Q1 and on sales.
And we're also as I mentioned spending quite a bit of incremental dollars on TV ads for the second quarter. So, that’s another data point to keep in mind.
I think marine will also because of the new product will sequentially grow quite a bit. But in total business which is driven by marine and PND that’s going to be up 30% plus.
Noelle Swatland - Lehman Brothers
And then just to clarify the Aviation business, I think you had said they would also be pretty decent, so it could be flattish to growth there sequentially and Outdoor/Fitness maybe flat ahead of the stronger second half?
Kevin Rauckman
Yeah I think yes that both of those numbers [form] Aviation and Outdoor/Fitness .
Noelle Swatland - Lehman Brothers
And then just lastly a clarification on the SG&A spending into the second quarter. What does that typically look like in terms of the ramp in the first quarter?
Kevin Rauckman
Well, advertising typically ramps up quite a bit. I think we will be over 7% of sales on advertising due to the TV ad campaign.
R&D continues to grow because we'll continue to hire new engineering associates throughout the period. I think because of the strong sales in Q2, as a percentage of sales R&D is going to come down, but it continues to go up couple of million, $3 million or $4 million probably next quarter in Q2.
Noelle Swatland - Lehman Brothers
Thanks very much.
Kevin Rauckman
Thank you
Operator
Your next question is from [Yale Lionel] with CIBC
Yale Lionel - CIBC
Hi. Most of my questions have been answered, but one question on full year guidance.
It looks like you are building capacity because you see more demand building, tax rate is looking better for the year, gross margins we saw it in the quarter. I was hoping if you could give us some color about your decision not to change guidance for the full year at this stage?
Kevin Rauckman
It's pretty much our self historical way of dealing with the year. I think because there is so much change, we really don't have visibility into the back half of the year yet.
We prefer to wait till we get to the first half, and give a more formal update. We try to set trends and say that 41% lives our average expectation.
We exceeded that 53% for the year. So in general we're positive on the outlook, but it's difficult to say how much we would change guidance until we get in to the second quarter.
Yale Lionel - CIBC
Fair enough. Thanks very much.
Kevin Rauckman
Thank you
Operator
Your next question is from Jim Duffy with Thomas Weisel Partners.
Jim Duffy - Thomas Weisel Partners
Thank you, good morning.
Kevin Rauckman
Hi, Jim.
Jim Duffy -Thomas Weisel Partners
Can you guys provide a little bit of color on Europe. There was a little bit of deceleration in that business?
Can you speak to the general inventories there and was it a situation. While coming out of Q4 there was some inventory overhang in the channel that maybe caused the shipments to decelerate in to Q1?
Min Kao
No, we believe our channel inventory in Europe is quite clean. I know that according to our recent independent research, we have not gained market share lately.
But we believe this ultimately because in Q1 we did not discount out our older products, ahead of the new product releases, because we didn't have much inventory.
Jim Duffy -Thomas Weisel Partners
I see. Okay.
And then your inventory seems pretty lean coming into Q2, are you comfortable with the levels of inventory you have in each of the different component categories or are there some areas where you wish you had more inventory?
Kevin Rauckman
Yeah. I think we're either too lean or too much.
Jim Duffy -Thomas Weisel Partners
Right.
Kevin Rauckman
I think there are some components that are in shortages but we are doing the best we can to mange that. And we are also taking action to try to build up capacity to handle the increased demand.
But in general I think we have been through these periods before, we are being very proactive to try to manage the supply chain, and we'll do the best job we can to hit all the targets that we have from PND.
Jim Duffy -Thomas Weisel Partners
Very good. Final question here, cash balances are building, how does the pipeline for acquisitions look?
Are there some interesting properties out there, not necessarily mentioning any specifics, but have you been pleased with your research efforts on the corporate development front?
Kevin Rauckman
I think it's taken quite a bit time to pull these companies in, but we are very pleased and continue to evaluate opportunities to acquire business and technology that would support Garmin's overall efforts to grow our businesses. So we're still in evaluation mode on other businesses, we are not saying we are done.
So that's kind of where we stand today.
Jim Duffy -Thomas Weisel Partners
And your competitors have become acquisitive as well. Has it become competitive from evaluation standpoint or any commentary you can provide there, that would be helpful?
Kevin Rauckman
We are bidding on these businesses against our competitors.
Jim Duffy - Thomas Weisel Partners
Yeah. When you get into those situations due to prices often times gets to a point where they are more attractive?
Kevin Rauckman
If you look at the four companies that we have been able to acquire, I would say no on all of those. We haven't been in a [yet more friendly with them].
Jim Duffy - Thomas Weisel Partners
Okay. In other situations, has that been the case, you walked away, or?
Kevin Rauckman
Not generally. No.
Jim Duffy - Thomas Weisel Partners
Alright. Thanks very much.
Kevin Rauckman
Thank you.
Operator
Our next question comes from Peter Friedland with Soleil Group.
Peter Friedland - Soleil Group
Hi. Could you give a breakdown in the PND business geographically between Europe and the U.S.
and then also between the major products nüvi versus c-Series?
Kevin Rauckman
I can give it to you in general terms. I think, in general, the U.S.
in terms of number of units in PND is larger than in Europe for Q1. I am not going to be able to give you absolute numbers, but that's the general number.
And then for me, for breakdown on, what I would classify as kind of low, mid, and high price points we have seen, even though the margins were, again we have seen a move to the mid range and then down into the lower end, probably around both of 50% of what I would call the low end pricing and 50% on the mid and the upper pricing is where we stand today.
Peter Friedland - Soleil Group
Okay. And then any update on what you guys are thinking about in mobile?
Cliff Pemble
Not at this time.
Peter Friedland - Soleil Group
Great. Thank you
Kevin Rauckman
Thanks, Peter.
Operator
Your next question is from J.B. Groh with D.A.
Davidson
J.B. Groh - D.A. Davidson
Hi guys.
Cliff Pemble
Hi J.B.
J.B. Groh - D.A. Davidson
You mentioned some positive impacts from flash, was there any other billed materials items that helped you out in the quarter, LCD, I am guessing that your licensing fees drop as the volumes go up?
Cliff Pemble
We have had some favorable pricing on some other key components as well, although not as dramatic as what we saw in the area of last year. In terms of licensing fees, as the volume builds and the contribution increases for certain of our suppliers, definitely there is more incentives and we've already included some of those in our total '07 guidance so far.
J.B. Groh - D.A. Davidson
Okay. And so there was some impact that in the fourth quarter with that rebate that you received?
Cliff Pemble
Yes.
J.B. Groh - D.A. Davidson
Okay. And then, in the instances where there is a choice on navigation equipments and G1000, I think there is only one general aviation OEM where you can go with the competitor, can you characterize what sort of share you're getting in those instances?
Cliff Pemble
There has actually been few situations where the G1000 was brought in as what they would call an option.
J.B. Groh - D.A. Davidson
Right.
Cliff Pemble
And in the past case, we definitely saw pretty much 100% take rates for the G1000. Piper is just now spending up the G1000 as an option on the Saratoga and it's success and it remains to be seen what will be the take rate there.
But as Min mentioned, they have already started delivering airplanes to customers that were thrilled with that.
J.B. Groh - D.A. Davidson
Okay, thank you.
Operator
Your next question is from Jeff Rath with Canaccord Adams.
Jeff Rath - Canaccord Adams
Hi guys. A different way of asking a similar question, the volume benefits that you really showed up in the fourth quarter of last year, how should we think about that from a seasonal aspect this year with possibly your unit volumes in PND ahead of schedule?
Is setting up that we could see similar kind of sort of a positive hit to margins for the fourth quarter again this year?
Kevin Rauckman
No, I think, we are planning on billing, and what we did in Q1 is upto do the best out of estimating what those volume discounts would be. So, I think you have to think a bit more about linear benefits throughout the year, as appose to one big bang at the end of the year.
Jeff Rath - Canaccord Adams
Okay. Second question, I guess, it is sort of a different way of looking at demand elasticity, when you are looking at the trade off between price discounts and advertising spends, as far as your ability to drive your modeling units, how is that tilting as you are going down this path to a mass market and how do you think about that trade off?
Thanks.
Kevin Rauckman
I think we generally think about prices, we try to be mean to be at or near what the market is bearing so that is it's kind of driven by the overall industry of the market. Discounts, we have are pretty stable with the major retailers that we have both in the U.S.
and Europe. So, we have discounted programs, and then periodically we add even special deals, try to push demand in a short-term basis.
And then advertising, the way we look at advertising is more growing the normal brand. So, we know that periodically and right now we consider periodically twice a year with the second and fourth quarter ad campaign we need to have additional TV focus and TV awareness to try to build the overall brand.
So that's probably is the best way we could, say we look at those three pieces.
Jeff Rath - Canaccord Adams
Okay. Just a last one here.
If you could, when you are looking at your geographic footprint and that's the footprint in which you sell into as far as your end markets, are there any geographies out there that you view are very prospective maybe not this quarter or next quarter but any color you can give us there?
Kevin Rauckman
I think, the only other color, I would say the U.S. and Europe are the largest but there is still other markets lets say in Asia that were not developed and you maybe even classify as emerging over the next several years.
But other than that I can't add any other comments.
Jeff Rath - Canaccord Adams
Alright, thanks.
Operator
Your next question is from Rich Valera with Needham & Company.
Rich Valera - Needham & Company
Thank you. Kevin, I just wanted to review your, did you say you expect OpEx as a percent of revenue to be about 17% for the whole year?
Kevin Rauckman
That’s correct.
Rich Valera - Needham & Company
So, that would trend down I guess over the next few quarters and it was about 20% in the first quarter?
Kevin Rauckman
Yeah, it will be below that in the second quarter we expected. Typically that's driven by how much the sale growth is in the current period.
Second quarter, if you look historically, we've been, of course, 18%, sometimes 19%. But I think because of the higher volumes we're expecting in both Q2 and Q4, I think for the full year 17% still makes sense.
Rich Valera - Needham & Company
Great. And then with respect to the auto gross margin, I think in your prepared remarks you said, you saw that sort of stable in the near-term, would you care to say is it of how long the near-term is.
Any sort of sense of where you might exit the year in terms of auto gross margin?
Kevin Rauckman
Let me reiterate that, I didn’t mean to imply stable, other than what we saw in Q1. I think margins will be coming down in the second quarter both on move to the lower price point selling at the lower volume the nüvi 200, and the newer products that comes out well impact that.
Definitely the margins will come down in the second quarter on gross level.
Rich Valera - Needham & Company
Okay. And any to the extent over the next few quarters is that sort of the, with the step long on, in terms of mix but sort of getting the component.
Tail win, do you think you are still pay above 40% sort of near-term or is there any?
Kevin Rauckman
We still think that trend continues from Q2, Q3 and in the year in Q4 even lower. So, it will continue to come down, and that's our best estimate at this point.
Rich Valera - Needham & Company
Okay. Thanks guys
Operator
Your next question is from Jon Braatz with Kansas City Capital
Jon Braatz - Kansas City Capital
Good morning, Kevin. Kevin I'm looking at an avionics website.
And it shows that the Garmin 600 looks like it's available. Is that indeed the case or are we ahead of schedule there?
Kevin Rauckman
No, that is not the case.
Jon Braatz - Kansas City Capital
Okay. It looks like it is, and it certainly could be a mistake.
Cliff can you tell where we stand on that in terms of when we might be expecting revenue from the G600?
Cliff Pemble
I would not expect revenue until 2008.
Jon Braatz - Kansas City Capital
2008, okay. Is that somewhat behind schedule?
Cliff Pemble
It has fallen a bit behind schedule, yes.
Jon Braatz - Kansas City Capital
Okay. Is there any particular reason?
Cliff Pemble
Well all of this aviation business, I would like to say it really is rocket science.
Jon Braatz - Kansas City Capital
Okay
Cliff Pemble
There are very complex certification and design work. We are trying to fit a product into a market that is dominated by aircraft that are anywhere 15 to 50 years old.
Jon Braatz - Kansas City Capital
Right.
Cliff Pemble
So, accomplishing that and the design is very challenging. But we're making good progress, we're showing work [anchorage] of prototypes, we are starting to fly them, and we feel very good that by early 2008 we will be able to feel the product.
Jon Braatz - Kansas City Capital
Okay. And Kevin you mentioned earlier that there is a new Global TV spend program.
Is there a new theme or is there anything different about this advertising program and maybe some of the other things you have done?
Kevin Rauckman
Yeah, we are looking at production on that right now, and there will be a – some new creative idea that will brought to the campaign
Jon Braatz - Kansas City Capital
When should we expect to see that on our local TVs.
Kevin Rauckman
I think the timing is May.
Jon Braatz - Kansas City Capital
May?
Kevin Rauckman
In to late May.
Jon Braatz - Kansas City Capital
Okay, so shortly.
Kevin Rauckman
Shortly.
Jon Braatz - Kansas City Capital
Okay. Thank you Kevin.
Kevin Rauckman
Thank you.
Operator
Next questions is from Ingrid Ebeling with JMP Securities.
Ingrid Ebeling - JMP Securities
Hi. Thank you.
Pretty much all of my questions have been answered, but wondering if you could quantify the backlog of aviation customers compared to 2000 you did in the first quarter. Did we see a real big spike in Q1 or can we kind of expect to see linearity throughout the year, because I understand they do take quite some time and there is some shortage of labor to get it done?
Cliff Pemble
Yeah. Ingrid.
I think you can probably expect a more linear fulfillment rate and a lot of upgrades in this point forward. As I mentioned and as you reiterated, the sharp capability out in the field is that capacity is really trying to absorb all of these.
But we do still have a very strong list of back orders out there for the upgrades. So, we remain hopeful, optimistic that those will occur in 2007.
Ingrid Ebeling - JMP Securities
Okay, great. And will the 4000 and 5000 series in the Marine segment be available, I heard going into production in May.
So that would quicken up there in June, is that correct?
Cliff Pemble
Yes. We expect production by the end of this month and should be out in the fields around sometime in June.
Ingrid Ebeling - JMP Securities
Okay, great. Thanks a lot.
Great quarter.
Cliff Pemble
Thank you.
Operator
Your next question is from David Neiderman with Pacific Crest Securities.
David Neiderman - Pacific Crest Securities.
Good morning. As you look at PNDs and the proprietary content that you guys have been adding, when do we see or do we see introduction of premises that really are head and shoulders above competing products as far as proprietary content?
What is the impact and the timing of that been like?
Cliff Pemble
Well, I think, we already have products that heads and shoulders above others in terms of proprietary content. In terms of topping our own content that’s out there, obviously doing that is major effort.
But we will continue to add content that's exciting and enticing for people that the market is asking for.
David Neiderman - Pacific Crest Securities.
Thanks.
Cliff Pemble
Thank you.
Operator
The next question is from Brandon Dobell with Credit Suisse
Brandon Dobell - Credit Suisse
Hi thanks. I wonder if you could talk a little bit about the retail environment U.S.
versus Europe, in particular. Do they think about their gross margin requirement, their gross margin target differently?
And as volumes grow, does that behavioral change. Are you thinking about Circuit City or Best Buy or somebody over the UK.
How do they think about what they want from you guys from a margin perspective? And then from an advertising perspective same kind of question today.
There are more or less requirements in European relationships for [COAP] advertising or do you see that changing as this category starts to hit more of the mass market?
Kevin Rauckman
I think on the margin side, we have dealt with many of these big box or national retailers for many years and our relationships are pretty strong. I think they way think is margin hasn't changed a whole lot.
I think what they are looking at right now is to grow this market, because it's at a inflection point in the U.S. in particular.
But we can see significant volume upsides. In fact that’s one of the things we experienced in Q1.
So it is a partnership where we were trying both as supplier and as retailer, and go after that market as it's growing quiet rapidly. In Europe I think we do see lower margin expectations, in general, but there is still advertising and [COAP] and deals that are being made to be able to drive volume.
But it's a little bit more matured market in Europe. And as we've said over and over again, it's a fragmented market.
It's not in the same realm as the Best Buy and Circuit City, in general, because every country has their own unique retail environment.
Brandon Dobell - Credit Suisse
Okay. So I guess the implication there would be lower margin expectations in Europe, with the introductions of some of these lower priced products, but you don't feel the same kind of margin compression with ASP compression as you would in the US, is that fair?
Kevin Rauckman
Well, I think they are already at a lower price point. No I didn't mean to imply that the margins or the pricing isn't still going to be coming down.
Brandon Dobell - Credit Suisse
Right.
Kevin Rauckman
In fact, it’s just the opposite. Pricing will continue to come down in Europe as well.
Brandon Dobell - Credit Suisse
Okay. Then as you would think about the different price points to retailers, and Europe seems to be moving towards kind of a three segment strategy.
Is the U.S. ready for that kind of lower, middle, high retailers on board of that kind of an outlook or is it just still have the best devices on the shelf and will see what happens?
Kevin Rauckman
No, I think the low, middle, and high still is prevalent in the market and will remain the segmentation in that market.
Brandon Dobell - Credit Suisse
Thanks.
Kevin Rauckman
Thank you.
Operator
(Operator Instructions). Your next question is from [Stephanie Flynn] with Merrill Lynch.
Stephanie Flynn - Merrill Lynch
Hi guys. I just had a follow-up question.
Kevin you mentioned that the Outdoor forecast was at risk, I'm wondering if you could provide more color as to what those risk factors could be?
Kevin Rauckman
Well, I think it just had to do with the timing of the new products in the second half, and I guess generally we see strength in the four runner product on Fitness side. I think Edge which is a cycling product has been a little bit weaker than we earlier thought, that's about all the additional color that I can offer at this point.
Stephanie Flynn - Merrill Lynch
Okay. And then in Marine, I know you mentioned that the revenues were impacted by the timing of new products.
Was there any impact as a result of kind of the slower Marine market that's going on right now?
Kevin Rauckman
Yes, there has been.
Stephanie Flynn - Merrill Lynch
Can you quantify that or provide more color on that
Kevin Rauckman
I don't think we can quantify it at this point.
Stephanie Flynn - Merrill Lynch
Okay, thank you.
Kevin Rauckman
Thank you.
Operator
At this time there are no further questions.
Polly Schwerdt
Thank you for joining us today. We will talk to you again next quarter.
Operator
This concludes today's Garmin Ltd. first quarter earnings conference call.
You may now disconnect.
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