Welcome to the Garmin Limited Fourth Quarter 2014 Earnings Conference Call. As a reminder, today's call is being recorded. And at this time, I would like to turn the call over to Kerri Thurston. Please go ahead.

Thank you and good morning, everyone. We'd like to welcome you to Garmin Limited's fourth quarter 2014 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the internet at www.garmin.com/stock. An archive of the webcast and the related transcript will also be available on our website. This earnings call will include projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, market share, product introductions, future demand for our products and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K, which will be filed with the SEC later today. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I'll turn the call over to Cliff.

Thank you, Kerry and good morning, everyone. As announced earlier today, Garmin reported fourth quarter revenue growth of 6%. And strong gross margin performance, which contributed to another quarter of pro forma EPS growth. Outdoor, Fitness, Aviation and Marine revenues increased 23% on a combined basis, which more than offset an 11% decline in Auto-Mobile. The non-Auto-Mobile segments represented 58% of our revenue in the holiday quarter. Gross margins improved, year-over-year, to 54%, driven by the revenue mix shifting towards our higher-margin segments and due to the recognition of higher margin revenues that were previously deferred. Operating margin declined slightly to 22%, as we made significant investments in advertising. These investments were consistent with our strategy to grow our share in the Activity Tracker market, through higher consumer awareness and improved representation at retail. Looking briefly at our full-year performance, we delivered four consecutive quarters of revenue growth and strong margin performance resulting in pro forma EPS growth of 18%. On a combined basis, our growth segments contributed over $1.6 billion in revenue for the year or 57% of the total and generated 69% of our operating income. Gross and operating margins improved to 56% and 24%, respectively, allowing us to generate over $3 of pro forma EPS for the first time since 2009. This is a major accomplishment made possible by our growth initiatives and the dedication of Garmin associates around the world. For the full year, we returned over $600 million to shareholders via our quarterly dividend and share repurchase program in 2014. Next, I'll review each of our business segments, highlighting 2014 performance, our 2015 outlook and a brief summary of long-term, strategic initiatives. Starting first in the Fitness segment, we reported year-over-year revenue growth of 60%. Activity Trackers led the way, but our core categories of…

Thanks, Cliff. Good morning, everyone. I would like to begin by reviewing our fourth quarter and full-year financial results, then move to comments on the balance sheet, cash flow statements, taxes and 2015 guidance. We posted revenue of $803 million for the fourth quarter, representing a 6% increase year-over-year, even with headwinds created by the weakening of the euro. Gross margin was strong at 54%, the 170 basis point increase from prior year driven by segment mix and favorable impact from deferred revenue. Operating income grew by 2% to $176 million. Operating margin was 22%, a decrease of 80 basis points from the prior year. This result of gross margin favorability, with 170 basis points, helps more than offset by operating expense growth of 15% or $33 million, due to increased spending in both advertising and research and development. With a pro forma effective tax rate of 19%, adjustments for the foreign currency gain, the tax benefit from the release of material reserves, pro forma EPS was $0.77. This represents a 1% increase, year-over-year. We shipped 5.1 million units during the quarter, up 14% from 4.5 million last year. Total Company average selling price was $157 per unit, down 7% from $169 in the prior-year quarter, primarily due to fitness product mix. Looking at full-year results, we posted revenue of $2.87 billion for the year, representing a 9% increase, year-over-year. Gross margin was strong at 56%, a 240 basis point increase from prior year, driven by segment mix and a favorable impact from deferred revenue. Operating income increased 20% to $691 million compared to $574 million in 2013. Operating margin was 24%, an increase of 230 basis points from the prior year. This is a result of gross margin favorability of 240 basis points that was slightly offset by operating…

[Operator Instructions]. And we will go first to Tavis McCourt with Raymond James.

I wonder if you could talk about the -- you mentioned deferred revenue be less of a positive impact in 2015. Talk about your expectations on the benefit of having 2014 versus what you expect in 2015? And then on Fitness, specifically, you mentioned a 25% growth rate, obviously, on top of a very big year this year. How should we think about the margins in that segment in 2015 relative to historic norms? Thanks.

This is Doug. I'll take the deferred revenue piece. In Q4, we had a benefit of about $0.04 of EPS. Now looking into 2015, we'll actually have some year-over-year headwinds, as a contribution of amortizations with deferred revenue will decline. Those deferred revenue headwinds have been factored into our 2015 percent down guidance that we gave for the Auto-Mobile segment, overall. And looking at the Fitness margins for 2015, there will probably be some slight pressure on the gross margin due to some product mix there. But overall, for our operating margins, we hope to be relatively flat year-over-year.

And we will go next to Robert Spingarn with Credit Suisse.

Cliff, I wanted to go back to the guidance and understanding that FX and deferred revenue, as Doug just said, play a role here and, perhaps pressuring the guidance slightly. But otherwise, you're flattish as you mentioned earlier. And you've got for growth segments against one that's declining. Where are they -- in the growth areas, where are the greatest levers among the segments separately for revenue and margin upside?

I think in terms of the Fitness market in general, as well is the wearable categories, is where we're looking to be able to increase in terms of mix of products with higher margins and sales growth.

Okay. And in addition to that, separate topic. But, there's quite a bit of cash building here on the balance sheet. You've got the buyback authorization and you're raising the dividend, it sounds like, about 6% or so. But, what other plans might you have for that cash?

Well, we continue to look for opportunities for tuck-in acquisitions. And of course, we do need a sizable amount of cash to run our business in terms of operating capital. So I think in terms of where we're today, we're slightly less in terms of our cash balance year-over-year and we've returned over 100% of our free cash flow in 2014 to shareholders. So we feel like we're in a good position.

Okay. And then just a clarification question, I'm not even sure if this may have been addressed. But within Marine, how do we think about the Fusion contribution in those numbers? Clearly, the fourth quarter growth was higher than the year.

Yes. Fusion will continue to add in the first half of the year, as we comp the year-over-year acquisition. But we'll flatten out. And in terms of product mix, it tends to be a lower margin contribution. But, they're very strong in terms of OEM and some aftermarket business in the entertainment side.

So the organic growth in Marine in the quarter was closer to 10%?

No. The organic growth is probably lower than that, as fourth quarter is typically our lowest season. But in the coming year, we expect it to have decent organic growth along with Fusion.

And we will go next to Simona Jankowski with Goldman Sachs.

I wanted just to ask you first on the deferred, again. So, I'm calculating about a $0.10 to $0.15 impact in terms of less contributions from deferred this year versus last year. Just wanted to check if that's in the ballpark of what's included in your guidance.

Yes. It's in the guidance.

Okay. And then, you significantly increased your advertising expense and I think you talk about that in reference to Activity Tracker as being strategic to Garmin. Cliff, can you expand on if you that's because you think that this is a very sustainable growth category going forward? Or is that just more of a network effect that you see here related to the number of users that you can get on the platform?

Firstly, we see it as a strategic growth platform going forward and market share is definitely something that's important to gain early in the game. But in terms of our overall advertising, if you look at where we're and where we landed in 2014, our dollar spend as well as percentage of sales is pretty much back to where it was in 2010. So we feel like it's about right going into 2015 and we're going to continue to maintain that level of pressure going forward.

And then just lastly on Outdoor, your guidance for flat revenues this year seems to imply that you're not expecting very much from the VIRB 2, recognizing that you are seeing some other categories declining. And I just wanted to dig into that a little bit. Is that because of the timing of when that product is coming out? Or just you're being conservative on the market share you think you can gain?

I think we're overall being conservative in market share and action cameras, although we believe that our product strategy will yield some growth year-over-year this coming year. I think the main thing we're facing in Outdoor is pressure in the mature traditional market segment, as well as the industrywide trends in golf, which are a negative. But we're positive about our wearables. We're positive about our dog tracking and training as well.

And we will go next to Brad Erickson with Pacific Crest Securities.

First, just want to come back to the VIRB 2 that was just referenced on that broader action camera market. Outside of marketing, point of sale etcetera, what do you think you need to bring more from a product perspective on this refresh in order to try and gain a better foothold in that market going forward?

Well, I'm not going to comment specifically on our product plans. But we do believe that our product, our existing VIRB as well as future products that we'll create, will speak clearly to Garmin customer bases and the kinds of activities that our products help our customers do. So, we're really focusing more on the Garmin aspect of action cameras and how they play with our products.

And then just on the 15% market share reference in the prepared remarks around Activity Trackers, within this pretty strong growth guidance you've given around Fitness, what's the underlying assumption there for where you think you could get market share wise in fitness in 2015?

Well, we're not prepared to put out a specific number on market share, but we're pleased with the initial market share that we've obtained in our first year in the market and we believe that we should be able to grow from that position with our product line plans that we have as well as our advertising plans.

And we will go next to Jeremy David with Citigroup.

On Fitness, wanted to touch the on your GPS fitness watch business. It seems like the competition there is increasing. TomTom said on their call last week that they would double their GPS watch business revenue to €100 million in 2015 and the Fitbit Surge appears to be handling quite well, as well. So how do you think of the competitive landscape in your traditional GPS fitness watch category? And is that factored in your guidance for Fitness growth of 25% year-over-year in 2015? Thank you.

Well there is no question that there is increased competition in the running area. That's absolutely true. Keep in mind that some of these newer players are growing from a small base, so it's definitely easier to turn in large growth in the initial phases. But we believe that our product line is solidly entrenched in the running community and we also believe that we have unique differentiators over this competition that's entering the market. So we feel good about where we stand today and we also feel good about our product roadmap for the coming year and beyond.

Okay. And if I can have a follow-up on the impact of currency in your guidance, what would your revenue guidance have been if not for the lower euro? So let's say, the exchange rate stayed at €1.33. And if the euro continues to depreciate further, how much of a headwind is that for you?

Let me give you a little bit of an insight on that. So, we assumed a euro rate of €1.15 in our 2015 guidelines, our guidance. We anticipate that would probably be at a headwind of about $100 million of revenue, which translates, when you factor into the gross profit as well the expense impact of it, probably on an EPS of somewhere between $0.15 and $0.16 for the year.

And we will go next to Charlie Anderson with Dougherty & Company.

I wondered if you could talk about the underlying assumptions you're making for the Activity Tracker market. I think it roughly doubled in 2014. Just in terms of the overall market, what are you thinking in 2016?

We feel like the overall market will continue to grow at a robust rate, although probably not doubling. We think maybe in the 40% to 50% range.

And then and this is always a struggle every year. You have products that are unannounced, you have newer products that you've announced but haven't hit yet. I wondered if you could talk a little bit about the contribution of that category of products in the guidance, maybe this year versus other years?

Well new products always account for a strong part of our overall growth strategy. We don't break it down, but we believe that our pipeline of newly introduced products combined with our existing products are going to give us strong results.

And then last question from me. I wondered if you could talk about auto OEM. Are you expecting that to be up or down in 2015? And then just stepping back, what milestones do you feel like you need to hit to want us to continue to aggressively invest in that category?

I think our outlook for 2015 is pretty much in-line with what we saw in 2014. We did experience growth in 2014, but we believe it will even out a little bit in 2015 as some programs roll-off and other new programs are spinning up. We believe we're making some progress, with recent wins like we talked about in the remarks. And we believe that going forward; we should have some additional wins that we'll be able to announce.

And we will go next to Ron Epstein with Bank of America Merrill Lynch.

It's actually [inaudible] calling in for Ron today. Can you provide more color in the sales mix that weighed down Aviation margins of the quarter? And will this weaker sales mix continue through 2015?

I think in the fourth quarter of this year, we experienced a different product mix than what we did last year. Last year, we were filling the channel and supporting our Partners with deliveries. And it included a lot of software components that were unusually high at that time. So this year, that was a different mix and it brought our margins down somewhat. We believe for the year in 2015, that the gross margin structure should be fairly similar to 2014.

And then as a follow-on, can you talk about how we should think about R&D spend in Aviation in the next few years, as you have new products getting certified and you've got market share gains?

Well we continue to pursue new OEM platforms, as well as new aftermarket platforms. And we would expect that the R&D investment would continue to grow over the long term, roughly in-line with sales.

And we will go next to James Faucette with Morgan Stanley.

Just a couple of questions. One, a follow-up on Aviation. Your 10% revenue outlook for this year is a little lower than we saw in 2014 and maybe a little lower than you've talked about in the past. Just wondering if you can talk about what may be pressuring the growth rates in the Aviation? And I guess I wanted to go back, once again, on the margin question, particularly as it related to fitness. If you could just give a little more color about the reasons that you think that you will see a better gross margin and operating margin in Fitness for 2015 than we saw, at least at the latter part of 2014? Thanks a lot.

Yes. So in terms of our growth rate on Aviation, 2014 was a pretty big year. Where we had new Part 25 platforms hitting the market and those are higher-end systems. So, the growth was higher. Going into 2015 of course, we're comping against those and some of the newer platforms that we have in 2015 are in the part 23 category, which is the lower end business jet market. So we tempered our growth a little bit from last year. I believe we said it would be initially 10% to 15% in our 2014 guidance and this year we're targeting around 10%. In terms of our Fitness margin, if I understood your question correctly, what is the possibility that the margin would be lower? And at this point, we feel like we've factored in all of the dynamics of the market, including the promotional activities that we have planned later in the year. So we feel like with that in that in mind, as well as the product mix of new products coming into the market, that our margins should be relatively flat. Slightly pressured but overall, pretty much in-line with what we've seen.

This is Doug again. We see the gross margin, actually, probably getting pressured downward due to some of the product mix with the vivo family probably having not as high of an overall gross margin as some of the other type of purpose-driven type of products that we have. So we're seeing it probably down in 2015 compared to 2014.

But to be clear, you expect operating margins on Fitness to rebound back into the mid-30%s from the high 20%s that we saw in Q4?

I expect 2015 to be maybe slightly depressed compared to with 2014, just because of that gross margin pressure we have. But relatively comparable operating margins for Fitness for 2015 versus 2014.

[Operator Instructions]. And we will go next to Will Power with Robert Baird.

I got a couple of questions. First, strong Q4 numbers of the Fitness category. I wonder if you could talk about, at least on the revenue side, I wonder if you could talk about sell-in versus sell-through, what you think you saw in Q4 there? And then secondly, on the Marine side of the business, you talked about some the pricing pressure and that impacting margins. How should we think about the Marine margin outlook for 2015, given the pricing dynamics?

In terms of our sell-in and sell-through in the fourth quarter, we feel like it was well matched. And we feel like coming into the first quarter, that channel inventory is adequate at the moment. So we don't see any particular concerns there. In terms of Marine, we would expect that the pricing environment that we're facing is going to continue. We do believe that with our new products that we've introduced, that we should be able to match or improve our overall operating margin and our gross margin.

And we will take a follow-up question from Tavis McCourt with Raymond James.

A couple more questions that weren't asked. First, can you remind us if there is any additional cash payments over the legal restructuring happening in 2015? And how much those would be?

This is Doug Boessen. So, yes, there are some additional payments relating to inter Company restructuring that will probably be in the second quarter. And those amounts, if you remember, we had about a $307 million expense that we took for that. We paid about $78 million or so in the period and so we anticipate, probably Q2 somewhere around $185 million or so.

And then in terms of the 15% market share stat on the Activity Tracker, Cliff, are you seeing meaningful differences by geography, or is it relatively similar? And to dovetail that into the question about in Q4, it looked like Asia-Pacific was exceptionally strong. And wondering if that was the reason or if there's other dynamics happening in that region for you?

Well each geography has its own characteristics when it comes to this market. There are, indeed, stronger geographies when it comes to fitness tracking and we did see a very significant uptake of our products in Australia, particularly. We feel like that the U.S. market is also very good. And Europe because of its fragmented nature country by country is probably behind the others.

And in terms of your market share by geography, is it reasonably consistent? Or is there opportunities for you to bring the share up where it may be in the better geographies for you?

Well Europe really is -- and I was speaking in terms of the overall market dynamic. In terms of our share, it's relatively consistent with what we outlined.

And the Asia-Pacific strength in Q4, is there anything specific of a reason for that?

Well again, Australia has been particularly strong.

And that does conclude the question and answer portion of today's conference call. I would like to turn it back over to Kerri Thurston for any comments and closing remarks.

Thanks everyone, for joining us today. Doug and I will be available for follow-up calls this afternoon which we have scheduled with many of you. Thanks and have a good day.