Garmin (GRMN)

Olathe, KS-based, Garmin, Ltd. (GRMN) is an original equipment manufacturer (OEM) of navigation and communication equipment that incorporate global positioning system (GPS)-based technology. End product markets include marine, recreation, automotive and aviation. The company's diverse portfolio of handheld, portable and fixed-mount GPS-enabled devices provides geographical location and navigation data using the GPS satellite system.

The GPS system consists of a constellation of 24 orbiting satellites and ground monitoring stations that are controlled and maintained by the United States Department of Defense (DoD). A GPS receiver can calculate accurately any worldwide position within 10 meters or less. The accuracy may be enhanced via a new supplemental system being developed by the Federal Aviation Administration (FAA), designated the Wide Area Augmentation System (WAAS), which incorporates additional satellites and ground reference stations. WAAS can increase the overall positional accuracy to within three meters throughout the U.S. and portions of Canada and Mexico, for properly equipped gear. Each satellite transmits low-power encoded radio frequency (RF) signals at two different frequencies one for military use and the other for civilian use. A GPS receiver must be in the line-of-sight of at least three different satellites to get a two-dimensional location (latitude and longitude) reading, or four satellites for three-dimensional positioning (which includes altitude data). Each of the satellites' relative positions from the receiver and the respective triangulation algorithms are used to determine the precise location of the receiver. Specifically, atomic clocks onboard the satellites supply key time-tag information required for calculating the time taken by the transmitted signal to reach the GPS receiver. The relative distance between the satellite and receiver can be computed, given this timing information and the known transmission velocity of the electromagnetic energy. Like wireless handsets, RF signals can penetrate (with some signal attenuation) clouds, glass and plastic, but not solid objects like buildings or hills.

In 2006, Garmin reclassified its reportable segments in order to provide better color of its operations. The new segments were referred to as auto/mobile, outdoor/fitness, aviation and marine, generating 74%, 11%, 9% and 6% of its 2007 revenue, respectively. All segments grew double-digits with the exception of auto/mobile, which grew triple-digits. Garmin launched over 60 new products in 2007.

Automotive products include the nuvi, Quest, StreetPilot, zumo (specifically for bikes) and GPS map families. Mobile products include the iQue and nuvi series as well as basic handhelds such as the eTrex, Foretrex, Geko and GPS series mapping handhelds such as the eTrex (Legend, Venture, Vista families), the GPSMAP series, and the two-way radio series (Rino). iQue is a fully integrated GPS product for use in a Palm operating system-based PDA. The StreetPilot 26xx series is a GPS display system that includes a touchscreen color display and remote control for automobile navigation. The company is a vendor to the MOPAR division of Chrysler, Dodge and Jeep, in which custom-designed in-dash GPS navigation systems are currently installed on several auto models. The new Roadtech Quest system is available on two Harley Davidson motorcycle models.

Outdoor/Fitness products include the Forerunner series for running and the EDGE series for cycling. Forerunner 201 is a GPS system with a recreational application that targets athletes and provides data on speed, training time, distance, lap time and other information. A new forerunner with a heart rate monitor was introduced recently.

The aviation segment consists of hand-held portable and panel-mounted avionics equipment, for use in general aviation aircraft. The product line includes GPS-enabled navigation, very high frequency (VHF) communications transmitter/receivers, VHF navigation receivers, instrument landing system (ILS) receivers, digital transponders, marker beacon receivers and audio panels. The G-1000 is a GPS-enabled, panel-mounted system that provides navigation, communication, altitude, terrain and other information on large, high-resolution displays for use in smaller aircraft. This product has been certified on 14 aircraft to date, including Cessna 182 and 206, Diamond DA40 and 42, Mooney Ovation2, Bravo and Columbia 400. Around 3000 G1000-enabled aircraft were sold to end customers in 2006. Aviation segment customers include Cessna, Cirrus, Columbia, Diamond, Embraer, Honda, New Piper, Raytheon and Tiger.

Marine products include chartplotters, sounders and fishfinders (the GPSMAP, GPSMAP Sounder and Fishfinder series). The company is in the process of expanding the Chartplotter line to include inland and offshore marine cartography. Aviation products include portables (GPSMAP series), transponders (GTX series), audio panels (GMA series), panel mounts (GPS, GNC and GNS series) and multifunction displays (MX series, including radars). Marine customers include Allison Boats, Cigarette Racing Team, Cobalt Boats, Pro Sports Boats and Ranger Boats.

Garmin products are distributed through a hybrid sales channel system that utilizes a network of 3,000 distributors and retailers in over 100 countries. They are also sold directly to OEMs that integrate the GPS capability into their end product. Garmin did not have an OEM customer that accounted for more than 10% of 2007 revenue. The top ten customers have been accounting for 25-41% of total sales since 2002. In 2007, 65% of total revenue was generated in North America, 30% in Europe and 5% in Asia.

The firm manufactures its consumer products in Shijr, Taiwan and most of its aviation products in Olathe, Kansas. The addition of the Jhongli facility in Taiwan doubled manufacturing capacity and the total units coming out of Taiwan currently stands at 20 million. Management intends to expand operations in Taiwan, as Asia grows into a more important market and Taiwanese tax holidays continue to benefit the company.

New products are driving growth for the company

The global GPS-enabled equipment market is expected to continue growing at a double-digit pace over the next several years. Garmin's success stems from an aggressive product development strategy. The company launched 55 new products in 2005, 70 in 2006 and 60 in 2007. Management stated that new products were the primary drivers of growth across all segments.

Garmin is seeing continued strength in the portable navigation device (PND) product line, and the company has a host of products to meet this burgeoning demand

The auto/mobile market continues to strengthen, growing 115% in 2007, much better than management's revised expectations of at least 99% growth. The segment is expected to be up 45% in 2008. The auto segment has grown phenomenally from around 39% of total revenue in 2005 to around 74% of total revenue in 2007. It is typically the lower-ASP PNDs (below $500) that generate most of the PND volumes. The C330 used to be the highest-selling PND in the North American market, but management has taken this low-ASP product off the inventory. The company has increased focus on higher-ASP PNDs, although it continues to sell some products in the C5 series. The nuvi product line was again expanded in the last quarter, as the company announced new versions of the entry-level series incorporating additional features. Garmin also announced new products that combine the PND functionality with DTV. Some other products in the DTV category are currently under development, and management expects to launch them in the summer.

Auto deals further sweeten its growth opportunities

Garmin has entered into many exciting auto deals. Pursuant to these agreements, BMW offers UK customers Garmin's StreetPilot C-series and the nuvi products off-the-shelf Ford incorporates both the C-series and I-series products and Mercedes offers the C-series products. While PNDs are currently being sold through retail channels, Garmin has started selling some products through auto dealers of the Citroen, Peugeot, Mazda and Saab, among others in Europe. Garmin already has a leadership position in North America and the company is making strides in Europe as well. European revenue grew more than 63% in 2007 compared to 2006. Management stated that European units shipments doubled in the last quarter, when the overall market grew just 40%, which indicated market share gains. The company also has agreements with Dollar Thrifty, Honda and Sprint/Nextel. Dollar Thrifty rents out a version of the C-series along with its rental cars at a daily rental fee. This not only exposes the product to more users, but also brings a new revenue opportunity. The rental car market is another opportunity, where Garmin's C550 has been designed into the Where2 navigator. Avis and Budget Rent A Car co-developed the Where2, which is available to customers in 125 cities in the U.S., Canada and Puerto Rico at a daily rental of $9.95 or weekly rental of $49.95. In January, the company announced a deal with Vanguard Car Rental, which operates through National Car Rental and Alamo Rent A Car. These two companies together represent one of the largest car rental agencies in the world, with operations at more than 3,200 locations across 83 countries. The navigation unit for Vanguard is based on Garmin's C330, which has six million points of interest, including car rental locations for both National and Alamo.

The G1000 cockpit and retrofit markets are expected to remain strong in 2008

The G1000 cockpit solutions will remain strong in 2008. These products entered the very light jet (VLJ) market when the first integrated G1000 cockpit solution was used in Cessna's Mustang aircraft. Cessna has also chosen the G1000 for its 2008 model Caravan aircraft, which met with positive customer response. Garmin's VLJ partner Embraer has selected the G1000 for both Phenom 100 (VLJ) and Phenom 300 (LJ) programs. In Q107, Piper Aircraft selected the G1000 for its U.S. Saratoga aircraft, and the product started shipping in the second quarter. This aircraft will be equipped with the G1000. Quest Aircraft, a small startup company focused on providing aircraft for humanitarian and missions organisations has also certified the G1000 for its Kodiak aircraft. Cicada selected the G1000 for its TBM850and Honda for its Honda jet. Management stated that both the G1000 and retrofit markets were very strong in the last quarter, although it was seeing early signs of softness in the handhelds section. The softness could be related to high fuel prices or normal cyclicity, which would be clearer as we move through 2008. In 2007, management announced a big retrofit contract from King Air for its King Air 200 and B200 aircraft.

New products are the key to revenue growth in the outdoor/fitness and marine segments

Both segments witnessed double-digit growth in 2007, and management expects 2008 to be another year of double-digit growth. Last quarter, the company shipped new products in both the cylcing and running categories of the outdoor/fitness segment. Both the Edge 605/705 cycle computers and Forerunner 405/505 fitness watch have met with initial positive response, according to management. The new Colorado series of outdoor handhelds also started shippng in the last quarter. In the marine segment the company launched a full line of marine instruments that complement its already successful chartplotter series.

Garmin will introduce the nuviphone in the fourth quarter of 2008

The company announced the nuviphone at its New York Media event. This is a feature-rich 3.5G phone incorporating a PND with on-board maps and premium points of interest UMTS, HSPDA and Wi-Fi data connectivity a premium mobile web browser a local search portal that seamlessly integrates navigation functions SMS instant messaging and e-mailing a camera with automatic location tagging and picture navigation and multimedia functions such as a video recorder, MPEG 4 video player and MP3. Considering Nokia's announcement that all its phones would incorporate GPS by the end of 2008, the nuviphone should be of strategic importance. Management stated that the phone may be expected to generate 5-10% of sales in 2008 ($225-450 million per current revenue estimates), and operating margins in the 30% range. Management also stated that the phone met with favorable response from carriers across the U.S. and Europe, but did not comment on the position with any one of them. It is too early to tell to what extent and if at all the nuviphone could cannibalize on the existing PND business. In the meantime, an Internet telephone company, Nuvio Corporation filed a lawsuit against Garmin for using the nuvi and nuviphone names, saying this was an infringement on its cell phones that were referred to by customers as the Nuvio phone. The Nuvio CEO stated that the Nuvio phone generated revenue of $5-10 million in 2007, significantly less than what Garmin expects its nuviphone to generate in 2008. We remain positive about the prospects of the nuviphone, and will take a wait-and-see approach regarding the lawsuit.

Capacity is being expanded to meet the increasing demand

The two older Taiwanese facilities have a total capacity of 12 million units manufacturing 20 product lines. A third Taiwanese facility was purchased in Q207, which also brought additional R&D and office space. Management has discussed expanding the LinKou facility in 2008, as PND remains very strong. The company has not faced any component shortages this year, and management expects the strong beginning inventory and production facility expansion to enable it to meet the anticipated growth in the second quarter. Increased production out of Taiwan is also beneficial in terms of taxes, as the company continues to enjoy tax holidays with respect to production in Taiwan.

Garmin is a cash rich company, and continues to generate a significant amount of cash from operations

Garmin continues to have significant cash, even after completing a series of acquisitions. The company has around $599 million in cash and equivalents, $18 million in marketable securities and no long-term debt. The net cash position is $617 million, or $2.86 of net cash per share. Management continues to return cash to investors in the form of dividend and share repurchases, in addition to making strategic acquisitions. The company has acquired its European distributors in France, Germany, Denmark, Italy and Spain. Management stated that this strategy was not so much directed at increasing revenues as acquiring selling synergies. Management expressed satisfaction that the distributor acquisition strategy was paying dividends.

Garmin hangs on to cash, bows out of bidding war

TomTom, one of the major competitors in Europe, was the first to announce its acquisition bid for Tele Atlas, which is expected to give it some leverage in the map sharing/sourcing area. Although initially, management appeared unruffled as to the implications for Garmin, Nokia's $8.1 billion takeover of Navteq changed the situation. Garmin gets all its maps from Navteq, and is its largest customer. The only other viable map supplier would be Tele Atlas, which was being taken over by its rival TomTom. This prompted management to make a counter offer, which TomTom upped further, at which point Garmin withdrew from the bidding war. Garmin simultaneously extended its agreement with Navteq up to 2015, with an option of extending it further up to 2017, although the details of this agreement were not disclosed. The Tele Atlas acquisition could lay the path for TomTom's takeover by Google or Microsoft, although this is a matter of speculation. In the meantime, the extension of the Navteq agreement buys time for Garmin, either to develop its own mapping software, or become a target of the market consolidation itself.

On a cautionary note

While we believe Garmin's brand name should prevent market share erosion, rising competition and pricing pressures are impacting ASPs and margins. Since most of the growth is being driven by lower-margin PNDs for the auto market, the margin pressure is expected to continue. Competitor TomTom has announced price cuts, which is further increasing pressures.

The company is the largest supplier of PNDs in the U.S. market, with a 50% market share. It has already taken 20%+ of the European market. However, it is expected that most mobile phones will soon have a built-in navigation system, which will eliminate the need for a standalone device. Although the nuviphone is targeted at this section of the market, the company will have to travel along the learning curve. Nokia has announced that it will ship 35 million GPS-enabled phones at different price points in 2008. Other large cell phone manufacturers are likely to follow suit. Since Garmin's expertise is not in phones but navigation devices, the nuviphone could face challenges.

Each of the business segments experience tremendous seasonality, although the volume of the PND business overshadows the seasonality of the other segments. The PND business (auto/mobile) has 40-50% of sales in Q4, with Q1 declining around 50%, Q2 increasing 50%, and Q3 flat sequentially. The outdoor/fitness segment usually declines in Q1 from the holiday-driven sales in Q4, and thereafter increases every quarter. Aviation is driven less by seasonality than customer product sales, although typically, the second and third quarters experience strength. The segment should be up every quarter in 2008. Marine is also a seasonal business, with the latter half of the year softer than the former due to weather conditions.

Both product development and promotion costs remain high, indicating that revenue growth will only come at the cost of margins. In lieu of the large number of new product releases in 2007, management embarked on a massive advertising campaign. This negatively impacted the EPS by -$0.30, -$0.25 and -$0.18 in the March, June and September quarters of 2007. Advertisement expenses reduced the EPS by $0.18 in the last quarter, and management expects these expenses to remain high in Q2, due to TV ads in preparation for the spring selling season. Advertising is expected to remain a major expense, as most of the company's products are aimed at the consumer segment. Management indicated that R&D recruitment would continue, since innovation is very important for growth in the consumer space, although spending would be commensurate with revenue increases. Management also expects to spend $115 million on capex, primarily for adding capacity and equipment to support the expected growth.

Read full report on Garmin Ltd.

Company overview provided by

Company Products/Services/Markets:

Enter Company Products/Services Here

Strategy:

Describe Key Aspects of Company's Strategy Here

Competitors:

Enter Competitors Here

Industry Trends and News:

Enter Industry Trends and News Here

Acquisitions, Divestitures, Major Transactions, Spin-offs :

Enter Acquisitions, Divestiures, Major Transactions, Spin-offs Here

Management – Pros & Cons, Changes:

Enter Management - Pros & Cons, Changes Here

Buy Rationale:

Enter Buy Rationale Here

Sell Rationale:

Enter Sell Rationale Here