Garmin (GRMN) - History Counts in this Part of the World

7/27/2019 Garmin (GRMN) - History Counts in this Part of the World

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Garmin History Counts inthis Part of the World

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But in capitalist reality, as distinguished from itstextbook picture, it is not (price) competition whichcounts but the competition from the new

supply, the new type of organization ... competitionwhich ... strikes not at the margins ... of the existingfirms but at their foundations and their very lives.

Joseph A. Schumpeter,, , .

Source: Quoted from Only the Paranoid Survive (1996), Andy Grove 2


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This presentation and the information contained within it does not

constitute investment advice nor is it a recommendation or solicitation

Disclaimer

of an offer to buy or sell any financial security. This presentation hasbeen distributed solely for informational purposes, and actual resultsmay differ materially from statements, forecasts and estimates containedherein. Information contained within this presentation have been

obtained from publicly available sources which are believed to bereliable. No information has been verified and we assume no liability ifsuch information is incorrect. The opinions contained within thispresentation are subject to change at anytime. This presentation shouldnot e re ie upon to ma e any investment ecision. Pro essiona a vicefrom a registered financial advisor should be sought in making anyfinancial investment decision.

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Garmin (GRMN) is a leading, worldwide provider ofnavigation, communication and information devices

Background and Fundamentals

an app cat ons, most o w c are ena e yGlobal Positioning System (GPS) technology.

GRMN designs, develops, manufactures and

markets a diverse range of hand-held, portable andfixed-mount GPS-enabled products and other

,

products for the automotive/mobile, outdoor,

fitness, marine, and general aviation segments.

Source: Garmin.com 4


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Value investors are enjoying a 4.5% dividend,a high free cash flow yield, a historical pattern

Bull Case

of share buy backs and a high percentage ofGRMNs market cap in net cash

GRMN have a strong capital structure withzero long-term debt

e ex t o compet tors rom t e r mar et GRMNs high insider ownership stabilising the

stock price

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GRMNs non PND business will be able togenerate meaningful profits and cash to

Bull Case

offset the declining PND business

A strong balance sheet with a healthy cash

position GRMN have a history of organic growth and

measure o t-on acquisitions A strong pipeline of new products and

categories

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GRMNs Market Valuation

Stock Price $49.7

52 w/k Range $31-$53

EPS Multiple

2008 $3.48 5.51x

Shares Out. 194.97m

Market Cap $9.73bn

Dividend Yield 3.62%

2009 $3.50 8.77x

2010 $3.45 10.5x

2011 $2.67 14.91x

,

Revenues 2011 $2,690

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Automotive /

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Competitors

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Automotive/Mobile - Revenue for thesegment is declining by 15-20% year-over-

A Lot Has Changed Since 2007

year

GRMN have had significant difficulty in

broadening its revenue base materially ROE is depleting year-on-year, and the

v en payout rat o s ncreas ng to reta nthe shareholder base

GRMNs high dividend payout ratio is notsustainable over the long-term

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On average, 80% of drivers, drive fewer than40 miles per day; this means substitution to

Market OpportunityLow Ball PricingDiminished Market Opportunity

mobile devices is very meaningful

Tablets also now function as PNDs and are

facing a more aggressive form of Moore's Lawon a steeper line; the decline is accelerated;

(1)

these down, further steepening the line

GRMN is at a strategic inflection point

1. BTS National Household Travel Survey2. Deutsche Bank research notes

(2)

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Diminished Market Opportunity (Contd)

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The continued growth of social, mobile and localwill damage GRMN's subscriber base and weaken

Market OpportunityDiminished Market Opportunity (Contd)

the visibility of long-term demand GRMN cannot compete with the Apple ecosystem

and its multi-functional product offerings

GRMNs product offerings will have a narrowsco e and focus in a multi-functional world

(1)

GRMNs standardised solutions will not beappealing to most consumers reducing

monetisation opportunities

1. Deutsche Bank research notes

(1)

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Smartphone market penetration could easily exceeddedicated PND penetration today because of the price


1

. Overall, the PND market is smaller and more penetrated

Structural problems in the Auto PND market cannot be

avoided

GRMNs dividends will dilute its strong balance sheet if

earnings (GRMNs latest Q3 2012 results indicated a 63%dividend payout ratio with declining earnings on a QOQand YOY basis)

1. Deutsche Bank research notes 14


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TomTom have focused on software and serviceswhich have a better long-term trajectory


whereas GRMN have stayed focused onhardware where margins are being depleted

over time

GRMN have no exposure to higher margin areas likelicensing maps and traffic information like

competitors TomTom and Navteq

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GRMNs patents are trivial and obvious. Licensing revenues

GRMN Have No Material Proprietary

Advantage

costs are GRMNs third biggest product expense.

As of January 23, 2011, GRMNs worldwide IP portfolio

includes over 600 patents and 400 trademark registrations.

Trivial Patent Portfolio

(1)

Garmin was selected as a constituent of the 2011/2012Ocean Tomo 300 Patent Index which recognizes

companies with high intellectual property value.

1. GRMN CFO Kevin Rauckman, JP Morgan Technology, Media & Telecom Conference - May 16, 20122. GRMN 10K 2011

(2)

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PND Retail Inventory De-Stocking Since 2009

Executive overview from Dr. Min Kao, Chairman

and Chief Executive Officer:

The first quarter of 2009 represented Garmins most

challenging quarter since becoming a public

company in December 2000. Macroeconomic

factors have contributed to a significant slowdown

in consumer iscretionary spen ing w ic asbeen further exacerbated by ongoing channel

inventory reductions by our retail partners in

the PND industry.Source: GRMN 10-Q for Q1 2009 17


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PNDs are being de-stocked in the channel, and thisis logical as the market is getting smaller

Retail Inventory De-Stocking

(1)

Retailers are carrying less inventory on a year-over-year basis

PND prices are deteriorating at an alarming rate

Retailers are minimising PND exposure, as thiscate or is bein re laced b tablets

(1)

(1)

(1)

Retail shelf space for PNDs is rapidly decreasing asrevenue accrued per square foot becomes marginal,

and foot space is optimised to challenge the online

migration of sales1. Deutsche Bank research notes 18


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As physical businesses look to economise retail space, like Halfords (Halfords areone of GRMN's biggest customers in the UK) with 130 leases expiring within the

next 5 years, the company are very optimistic it can leverage its options to

Optimising Retail Space

.

space allocation based on footfall traffic and conversion models, average sales persquare foot etc.

Halfords and Dixons (another leading UK GRMN distributor) are struggling withtheir physical presence; they are both pivoting towards, and penetrating online

further diminishing segment margins; Dixons are also closing 100 physical retailstores.

GRMNs products are discretionary purchases, and are more likely to be threatened

(1)

(2)

. =

margins, BBY are also cutting 50 US big box stores and opening 100 small mobilelocations in the US in fiscal 2013, which will cut $800 million in costs by fiscal 2015

Putting this altogether for GRMN, these industry shifts are a function of continuedlow consumer confidence, which is causing a migration to value offerings, online

purchases, zero cost apps and extended PND purchasing cycles.http://www.zdnet.com/dixons-retail-to-axe-more-than-100-stores-3040155432/1. Halfords Preliminary Results - Financial Year 2012, 31 May 2012

2. http://www.zdnet.com/dixons-retail-to-axe-more-than-100-stores-3040155432/3. http://www.businessweek.com/ap/2012-03/D9TQ6RA00.htm

(3)

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Excess Retail Foot Space and Channel Inventory

Automotive/mobile segment revenue declined14.9% from the year-ago quarter, as the average

se ng pr ce mprovement was more t an o set yvolume declines associated with excess channel

inventory levels and timing of orders from one of

our major retail partners.

Source: GRMN 10-Q for Q1 2010 20


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The trend is for consumers to buy at the value-end of GRMN's PND range as consistent with

Low Ball Pricing

their main competitor TomTom This is having a negative impact on the blended

ASP Smartphone Apps are also open to wider

1

same pricing power as it does with hardwarePNDs; this has resulted in further pricing

pressure and cannibalisation of PND sales1. TomTom Q2 2011 Conference Call2. Deutsche Bank research notes

(2)

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The automotive/mobile segment is by

nature a lower margin business and the

Discounting Pricing Model

ompany as egun o see e mpac sexpected on gross margin due to falling

prices and a product mix shift toward lower

end PNDs.df

GRMNs mana ement believes that the trend to

(1)

lower gross margins for Auto / Mobile willcontinue due to ongoing price declines and

further product mix shifting towards lower

margin products.1. GRMN 10Q for Q2 2008 22


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GRMN are using more aggressive in-storepromotions as consumers remain very price-sensitive

Discounting Pricing Model (Contd)

GRMN President and COO, Cliff Pemble, We seethat customers are becoming increasingly sensitive

to price and we believe the economic factors are at

least partly responsible for this.

This has resulted in lower gross margins when

(1)

a opt ng t s ow-cost mo e

GRMN have been obsessed with discounting andshort-term promotions to retain and win new

business further eroding margins.1. GRMN Q1 2008 Conference Call 23


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The market opportunity for PNDs is smaller

PNDs are expensive in a low-cost consumer environment

PND Market Penetration

PND market penetration has matured across mostdeveloped markets

iPhones and iPads are depleting PND sales materially for

both GRMN and TomTom

There are little or no barriers to entry and exit

The proliferation of Android across mobile devices withzero cost PND offerings, have damaged GRMNs PNDrenewal purchase cycle, and existing sales of PNDs, maps

and traffic updates

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China is monopolised by local companies, GRMN,Mio and TomTom have negligible market share

Overseas PND Market Penetration

(1)

Overseas growth markets also have a high priceelasticity of PND demand implying low price points

Cheap PND products are penetrating the supplychannels in EM regions where volumes are relatively

small and locally dominated(1)

The market volume for dedicated PNDs aredecreasing worldwide and prices will have to drop

to satisfy the price elasticity of demand



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GRMN needs to match the low-cost model ofcompetitors as product differentiation is

Significant PND Pricing Pressure

marginal in the Auto / PND market The sector will become a legacy category

Market saturation and penetration will dampenGRMNs future earnings performance in Auto /

GRMNs reported ASP stabilisation in PND wasshort-term and has materially decreased when

aligned to lower overall PND revenue1. GRMN 10-Q for Q1 2009

(1)

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GRMN are facing growing competition risk asthe PND market pivots to discount retailing

Significant PND Pricing Pressure (Contd)

GRMNs high exposure to the US market,which has already saturated and has matured

has led to demand deceleration, and deepand obvious price competition in the US.

e eter orat ng earn ngs env ronment, aninevitable margin compression havecompounded pricing pressure for GRMN.

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End of life promotional efforts also

contributed to the lower gross margins in

Significant PND Pricing Pressure (Contd)

automotive/mobile. We expect gross marginsfor the automotive/mobile segment and the

overall company to improve throughout the

year. (1)

The reality is retail and online channels areclogged up with old PND inventory that GRMN

can only shift with significant discounting,

rebates and cashback schemes.1. GRMN CFO Kevin Rauckman - Q1 2011 Press Release 30

i i i


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TomTom were originally not participating in the high volume, low-marginbusiness in the US e.g. Walmart, Best Buy

GRMN and TomTom now have to permanently keep PND prices discounted

PND is a Low Margin Business

to gain any traction The installed base for standalone GPS devices is not growing so a low margin

profile is the only method of accruing additional demand as PND product

differentiation is weak. New products lack discernible improvements so the

customer experience remains muted. GRMN estimated the total global PND market size was 30m in 2011 and

would decline by 10% to 27m in 2012 (1)

Berg Insight estimated the total global PND market size was 33m in 2011andworldwide shipments of PNDs are forecasted to gradually decline to 23

million units in 2016. The number of mobile subscribers using a turn-by-turn

navigation app or service on their handset doubled in 2011, to reach 130m

worldwide. This number is forecast to grow at a compound annual growth

rate (CAGR) of 21.9%, to reach 340m users in 2016.

1. GRMN CFO, Kevin Rauckman Pacific Crest Global Technology Leadership Forum, August 11-14, 20122. Berg Insight

(2)

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GRMN N I i D li i M i ll


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GRMNs Net Income is Declining Materially

$900

$1,000

-40% Decline in 5 years

Net Income (m)

$300

$400

$500

$600

$700

Fiscal Year

$0

$100

$200

2007 2008 2009 2010 2011

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GRMN N t R d EPS C i


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EPS -30%Net Revenue -13%

$4

$5

GRMNs Net Revenue and EPS Comparison

$3,000

$4,000

$0

$1

$2

$3

2007 2008 2009 2010 2011$0

$1,000

$2,000

2007 2008 2009 2010 2011

The foundations of GRMN are materially impaired. GPS was a standalonefeature. Integration into everyday mobile devices aggregates GPS as an add-on

at a marginal cost to manufacturers.

Nonetheless, standalone devices will always outperform, initially, like a dedicatedMP3 player, but like other dedicated form factors in history, technology replacesthem (by enhancing their features and enabling improvements), and depletes thebusinesses producing them, unless they can fundamentally pivot their corporatedirection.

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PND W k


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GRMN traditionally explained PND weakness as a functionof tepid consumer demand

PND Weakness

e rea y s consumers are us no n eres e nstandalone PND devices from GRMN, TomTom or Magellan

The Auto OEM business has good opportunities, but

competition is deep and margins are weak The average purchase cycle for OEMs in-dash are 18-24

revenue from initial contract wins The long lead times between purchasing decisions also

leaves GRMN vulnerable to competitors and competing

technologies

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GRMN ASP i th PND M k t


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GRMNs ASP in the PND Market

Revenue declined at a rate of 13% in the quarter,

but was ahead of our expectations as ASPs

rema ne sta e. sta ty as een r ven yan improved product mix offset by declines in

pricing for comparable products on a year-over-

year basis.However, we remain focused on our goals of market

ea ers p an pro a y n e mar e an

expect to see improvement in both as the yearprogresses with ASPs stabilizing and the market

consolidating.

Source: GRMN Q3 10Q 2011 earnings call 35

Lower ASPs


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Lower overall PND demand cannot occur without anaccompanying lower ASP

Lower ASPs

The retail footprint exposure will become weakerand shelf space will be reduced for the PND

category as more technology sales migrate online

e.g. Halfords re-negotiating foot space for 100+stores , Best Buy mega stores closure etc.

This all together implies lower ASPs for GRMN andother PND competitors

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Pricing Pressure


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Pricing pressure was also a key factor inRIMMs and Nokias decline

Pricing Pressure

The GRMN brand, despite positive weightingcannot compete against Apple or Google

GRMN products have been shipped but havenot been sold to consumers; sell through

rates ave een wea an t s s re ecte n

the wide-scale discounting across GRMNs

product range.

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PND Value Offerings


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TomTom have shifted to the lower-end value range because itunderstands standalone PNDs are a rapidly declining market

PND Value Offerings

harvest the remaining business in the industry

GRMNs automotive PND product pipeline is focused onrefinements rather than anything meaningful, so price

increases or even stable ASPs going forwards cannot be

justified

TomTom ave more traction in Auto OEM in- as , an t e

software and services market so can leverage pricing powermore flexibly in the PND / Mobile market. This is a market in

which TomTom sees itself having a more diminished role long-

term.

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Diminished Earnings Outlook


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Both GRMN and TomTom have reduced PND pricessubstantially and yet still cannot gain material

Diminished Earnings Outlook

ncreases n eman If they cant compete with a low-price model, this is

the clearest sign that the category is more or less

finished from an earnings perspective

Retailers are continuing to de-stock channels and

(1)

are carrying less inventory This is in a difficult environment of lower consumer

sales and where retailers are holding old stock with

weak sell-through rates.1. Deutsche Bank research notes 39

Penetration of GPS Capability in Cell Phones


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http://www.isuppli.com/Penetration of GPS Capability in Cell Phones

Source: iSuppli.com 40

Mobile Competition


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iPhone and Android devices, using the benefit of Moore'sLaw are lowering costs which are being shared with

Mobile Competition

(1)

The consumerisation of IT will reduce consumer apathy towider smartphone adoption and usage

Increasing battery life of mobile devices will enhance theseeffects

The extended battery life of mobile devices is already

(1)

providing material advantages to consumers in the Auto/

Mobile sector

PND pricing is already very competitive as Android poweredtablets offer PND functionality and significantly more at a

similar price1. Deutsche Bank research notes 41

Market Saturation Has Peaked


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New Auto/Mobile features are being bundled in PNDsas the market begins peak saturation

Market Saturation Has Peaked

Traffic connectivity and updates will be dominated byApple and Google Maps, as they have the largestinstalled base, and, therefore will acquire more data

from different sources GRMN will inevitably, therefore, lose significant traction

a s, smar p ones an o er a e s are compe ng n

this same space, as dedicated PND demand hasreached a plateau, the appeal of standalone PND

devices becomes largely redundant.

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Mapping Competition is Intensifying


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Apple are licensing TomTom mapping

Map licensing and rights are still going to be key, 90-95% of

Mapping Competition is Intensifying

1

The quality of superior mapping will largely depend on theintegration with points of interest and customer reviews;traffic and map updates. The open source crowd-sourcing

Apple feature will relegate GRMNs multiple offerings

GRMN have no place in this market

Smartphones are becoming obsolete after a year, and GRMN'scategories that are materially exposed to mobile substitution,cannot keep up pace with mobile competition andenhancements.

1. TomTom Conference call for Q1 2011 43

Rapid Adoption of Google Android


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The outlook for GRMNs automotive category isweak as more connected cars are onboarded

Rapid Adoption of Google Android

Tablets are emerging from $99 on the market Harman, the leading Auto OEM Infotainment

provider have already acquired an Android basedsoftware company, and have openly stated its

direction to inte rate its offerin s around A s.

(1)

Harmans acquisition of Interchain Solutionrapidly expands its Android-based Infotainment

and Telematics offerings

1. Deutsche Bank research notes2. http://investor.harman.com/releasedetail.cfm?ReleaseID=698596

(2)

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Rapid Adoption of Google Android (Contd)


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The installed base for Android is 300 millionphones with reasonable call and data plans

Rapid Adoption of Google Android (Cont d)

It is reasonable given current growth rates toforecast that Android will be embedded in 50%

of all phones in three years You also do not need a fully fledged PND to

In practice, anyone with an Android powereddevice can easily use Google Maps for

navigationSource: Deutsche Bank research notes 45

Growing the Installed Mobile User Base


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We also dont quite know yet how the major playersin mobile are going to monetise their platforms i.e.

Growing the Installed Mobile User Base

a vert s ng, su scr pt ons etc. We do know this is going to happen somehow but it

is sill unclear as to how this is going to exactly work

e.g. a razor-blade model, hardware at cost, servicesat a premium i.e. Amazon Kindle model etc.

Building the mobile user base is seen as key tosuccess here, and with mobile devices available at

every price point, this will deplete GRMNs sales

across the price spectrum46

Margin Deterioration


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This has resulted in providers cutting their marginsalmost completely as the case with the Amazon

Margin Deterioration

n e to ga n s gn cant user tract on This is materially negative for GRMN, as they will

face heavy price competition particularly at the

value end of their offerings where mobilesubstitution is already very high

Additionally, GRMN is a hardware company, andcompetitors are already selling hardware at cost

that can replace / substitute for demand across

GRMNs categories47

Tablet Competition


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Tablets are now at mass market prices whichis damaging standalone PND appeal

p

(1)

The mass adoption of the Android platform ispenetrating consumer markets at a very

alarming rate for GRMN The free Google traffic offering also leaves

no po nt o erent at on

Apple/Google connected device vs.standalone GRMN PND device?


Tablet Competition (Contd)


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Kindle Fire has captured 22% of tablet sales in the US,Amazon have stated.

p ( )

(1)

e mazon n e re ar ware so a cos mo e waccelerate the standalone PND market decline

This will come at the expense of more established playerslike GRMN and TomTom

GRMN have no traction in the new tablet sector

price point The Mini iPad and Google Nexus 7 will also enrich some of

these functions and increases the portability of tablets, and

the propensity to replace single-purpose PND devices.1. http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1730182&highlight 49

Impact of Moores Law on Pricing


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Moore's Law is driving the cost down of mobilehandsets and tablets

p g

(1)

These savings are being shared withconsumers in the form of lower prices and

more powerful hardware It will take deep levels of organisational

(1)

GRMNs premium PND introductions are facingdifficultly in gaining traction, as consumers

relegate standalone PND offerings1. Deutsche Bank research notes 50

Premium Features Offered as Standard to


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Live map and traffic updates are now

Mitigate PND Volume Declines

on oar e on s as stan ar rat er t an apremium feature

This signals the overall disinterest in thecategory by consumers as GRMN and

TomTom need to offer remium features as

standard


(1)

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Premium Features Offered as Standard to


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Mitigate PND Volume Declines (Contd)

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Live Traffic and Map Updates


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Recurring revenue streams from traffic liveservices and map subscriptions are already

challenged as the overall PND market sizedecreases, and competition from Apple Maps

crowd-source traffic updates emerges

Free App offerings are also compounding the

services

TomToms LIVE Services yearly renewal rate of

25% indicates subscription weakness1. TomTom 10K 2011

(1)

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GRMNs PND Revenue Deferral Policy


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GRMN have explained, like TomTom, that becausethe price differential is now muted between live

tra c serv ces vs. stan ar , on y a sma er amountof revenue now needs to be deferred into the future

The net effect of this will be to recognise the

revenue earlier at the point of sale for live servicesupfront, therefore, increasing current earnings

(1)

We still believe the material price differential to nonlive services PND offerings should require GRMN to

continue to defer future revenues

1. Garmin Q4 2011 Conference Call 54

GRMNs PND Revenue Deferral Policy (Contd)


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We believe that while being acceptableunder current US GAAP provisions this

inconsistency with historic revenuerecognition practices is unhelpful and

misleading

This will also give the impression that PND

will serve to temporarily mitigate or distortmarket reality

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GRMNs Business Quality


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Structural issues warrant a significant market discount inGRMN's market capitalisation

is decaying

The democratisation of IT in the form of mobile devices,harmonised on a single intuitive platform, has impaired

GRMNs customer experience

Altogether, these industry and consumer shifts have hadmaterial effects on GRMN

GRMNs impaired business model is not primarily a functionof its own negligence in the markets they serve; its apowerful combination of competitive forces correlated with

an acute obsession with the customer experience56

GRMN's Auto / PND Mitigating Strategies


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Acquire immediate competitors e.g. Navigon

Subsidise and discount roducts e. . Walmart

deep discounts, Best Buy budget offers,numerous rebates and cashback schemes

penetrating the retail channels and distribution

networks

with upgraded features e.g. PNDs with biggerscreens, rudimentary voice activation, Bluetooth,

multi-orientation displays etc.

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Market Opportunity

The In-Dash Car Market


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GRMN sees the OEM in-dash car market as providing

a meaningful replacement of revenues that will

nev ta y e ost n t e uto mar etThen in the Automotive area, we see the OEM as a

opportunity to leverage our strength in some of

these other markets, for example, being able todesign highly integrated systems into the dash of

a rcra oes ex en o es gn ng ow e

integrated systems, into cars and trucks. So we arefocusing on OEM, Automotive as a means to

offset the declines in the PND area.

Source: Cliff Pemble, President and COO - Garmin Q2 2010 Conference Call 58

Market Opportunity

The In-Dash Car Market (Contd)


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GRMN sees their current OEM market

weakness as a function of their lack of

traction as a Tier 1 supplier for completeinfotainment systems.

As Auto OEM develops and we can get intomore and more Tier 1s with our navigation

,

effectively replace a lot of lost revenue thatwe have seen over the last three to four

years.1. GRMN CFO Kevin Rauckman, JP Morgan Technology, Media & Telecom Conference - May 16, 2012

(1)

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The Reality of the In-Dash Car Market


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The market reality is consumers dont wantGRMNs infotainment offering, either as a Tier

1 offering or as an optional feature Consumers want a soft integration with their

existing technology and seamless inter-operability functionality

e t e nuv one, consumers across t espectrum do not differentiate mobile or in-

dash devices based solely on navigation.

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Market Opportunity

The Reality of the In-Dash Car Market (Contd)


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A retrofit and accessories industry has beendeveloping for the auto in-dash market, in the

nter m, unt pp e an oog e r ven ev ces are

fully integrated

Even without factory installed Apple or Google

offerings, GRMN have no traction in the in-dashmarket on an overall net basis

GRMN's capital allocation to the sector will bewasted

Consumers are not going to accept a GRMN

entertainment system vs. iOS or Android61

Apple Patents Steering Wheel Remote Control


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Source: http://www.patentlyapple.com 62

Apple Patents Steering Wheel Remote Control


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(Contd)

Source: http://www.patentlyapple.com 63

In-Dash Market Hardware vs. Software


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GRMN realises this reality and will attempt to pivot its perception in the OEM

market as a software provider rather than its traditional hardware base. GRMNs

efforts will be exhausted due to the phenomenal growth of Android and iOS,

an e r even ua n egra on n o e n- as .

Harman, the leader in the in-dash infotainment industry, have already stated

that software is the key in the in-dash market:

So we were ... one of the pioneers in integrated infotainment systems ...

However, we saw that there was a big shift occurring in terms of thetechnological content of next-generation solutions and this was in about 2001,

2002, when we invested in a fully object-oriented software solution ... The

reason why we had to do that was because the rest of the industry was

moving towards software-based solutions, where the hardware platformwas not what was driving most of the value. And we needed to do a

transition from a predominately hardware-oriented company to a

software company. And today, and I would say not today but over the last

five years, that's what we are in infotainment, we are a software company.

1. Baird 2012 Growth Stock Conference, Chicago, IL

(1)

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Permanent automotive dashboard solutionsfrom auto dealers will never feature GRMNs

Tier 1 offering to the extent that they will beable to capture meaningful market share

Margins as an optional Tier 1 provider aresignificantly lower at $200 per install(1)

. -

1. GRMN CFO Kevin Rauckman, JP Morgan Technology, Media & Telecom Conference - May 16, 2012 65



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This is a higher margin business that willexperience tepid growth in the short-term for

GRMN and deteriorate rapidly over thelonger-term

Sequentially gross margins will decreasewhereas operating costs will increase as

GRMN have already reported that in the AutoOEM business, margins are lower than any

other category, even PND.66



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New mobile phones are adopting bigger screens, higherquality screens, high sensitivity GPS connectivity, acoustic

enhancing in-dash capability and mobility Mobile technologies are moving too quickly for GRMN to

meaningfully adjust e.g. nuvifone was a complete failure in

the smartphone sector costing shareholders $100m There is significant mobile substitution as consumers

ncreas ng y em race smar p ones or e r nav ga on

needs A fully integrated in-built dashboard system will replace the

PND with multimedia, video, sound and downloadable

applications e.g. Ford Sync, GM OnStar1. Deutsche Bank research notes

(1)

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In-Dash Market Leadership


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This is going to be about software that GRMNdoes not have or the ability to develop

GRMN have no history or skills base in gainingwidespread consumer adoption of software

Its not just about satellite navigation, its aboutintegrating a connected entertainment system,-

across consumer devices. Therefore, GRMN's offerings will be relegated

like the nuvifone in the smartphone market68

In-Dash Market Leadership (Contd)


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Auto OEM will be dominated by Google and Apple.

You can already use Car-mode on the Samsung

Galaxy, and, therefore, this is a market about software This is reminiscent of the PC hardware model vs.

software and services, legacy hardware providers will

diminish unless they pivot e.g. IBM, HP etc. GRMN is a hardware company whereas the in-dash

market is about software; Harman, as the leader in

the infotainment market, already recognise thatcomponents are the commodities in the in-dash

market.

1. Baird 2012 Growth Stock Conference, Chicago, IL

(1)

69

New Generation Platforms


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Its software functionality and purpose that isimportant here.

Said differently, GRMN will merely be an assemblerof hardware in the Auto OEM in-dash market.GRMN doesnt even own the mapping, this is

licensed from Navteq. Technology adoption cycles are conventionally

quick.

Open source software, like Android, will completelyinhibit GRMN; this will be deja vu for GRMN and

akin to the nuvifone failure70

3G Data Download Issues


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You can now preload routes and cache it toreduce 3G reliance e.g. Google Maps

Increased memory in mobile devices willmake the need to rely on 3G data redundant

as full maps can be downloaded SD cards with 16GB and 32GB are now being

o ere as stan ar n mo e ev ces

71

PND Addressable Market Declining


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Increased competition has resulted in pricereductions, fewer customer orders, reduced

margins and loss of market volume for GRMN. The PND sector has a lower addressable market

going forwards

TomTom is undergoing a cost restructuringro ramme to re osition itself GRMN will have to

undergo a similar strategy to re-focus its business This will be short-term cost negative for GRMN

but will accrue value over time

72

PND Addressable Market Declining (Contd)


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Restructuring of GRMNs production facilities will beinevitable as GRMNs Taiwan factories have been

GRMNs growth products are lower volume with highermargins so less foot space will be required.

The PND replacement cycle is being stretched GRMNs PND volumes have declined materially and the

Average selling price declines continue to beattributable to the competitive environment in which

our automotive/mobile products compete.

1. GRMN 10K 2010

(1)

73

GRMNs Auto / PND Market Decline


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GRMNs market size assumptions about the YOY PNDdecline may need to accelerate downwards, as the potential

The intense discounting in the tablet market furthercompounds PND pricing pressure and will accelerate thestandalone PND market size decline

GRMN are already forced to compete in the value end ofPND devices and will need to reduce Opex in line with

falling revenues

Gross margins are being effected by these negativeheadwinds as GRMNs ASP for PNDs are $130 with a 10%

operating margin

1. GRMN CFO Kevin Rauckman, Morgan Stanley Technology, Media & Telecom Conference February 27, 2012

(1)

74

GRMNs Auto / PND Market Decline (Contd)


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GRMN have not adequately addressed theseheadwinds in the PND market. In fact, they

have attempted to mitigate these multipleimpairments by creating applications on

mobile devices themselves, to ensure they

still have some traction in the entry level

.

The fact that GRMN created Apps on mobiledevices signals that substitution is real and

meaningful75

GRMNs Auto / PND Market Decline (Contd)


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Otherwise, why create an App with lowerASPs and margins and cannibalise your own

sales?

76

Apple Maps


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77

Apple Mapping Issues


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As we have seen with previous Apple issues e.g. signal faults, theturnaround and resolution of these issues are quick and

meanin ful.

Customers around the world are upgrading to iOS 6 with over 200

new features including Apple Maps, our first map service. We are

excited to offer this service with innovative new features like Flyover,

turn by turn navigation, and Siri integration.

We launched this new map service knowing it is a major initiative

-

1. Trudy Miller, Spokesperson for Apple

.

based solution and the more people use it, the better it will get.

We appreciate all of the customer feedback and are working hard tomake the customer experience even better. (1)

78

Apple Mapping Issues (Contd)


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Apple will spend more attention and focus on the mapping issue, thiswill become a key priority.

Googles buyout offer for Yelp signals the strength of local data Inter-operability is key, connectivity between devices will be the entry

benchmark

Apple Maps is essentially a beta version so it was going to have knownissues, and longer term these issues fade, as the service adapts to

customer feedback (Goo le Ma s beta had numerous issues initiall )

Overall this is going to be even more troublesome for GRMN as Applereinforces and doubles its efforts

Apple Maps are also likely to affect GRMNs traffic subscriptionbusiness, although it is difficult to gauge this impact right now

79

Entrance of Apple into Mapping


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There are100m business listings in iOS6 maps; this showsthat competition between Apple vs. Google is going to be

,

GRMN wont even be competition in the long term.

GRMN are, therefore, looking to de-emphasise the Auto /

Mobile category since much of their free cash flow andearnings have been derived from that segment, whereas

now com etition is obviousl the most intense here, vis--vis

Apple and Google. The Auto / Mobile category continues to

contribute materially to GRMNs operating income with 36%YTD 2012 whereas the next largest GRMN segment, Outdoor,

contributed 24% YTD 2012.

1. GRMN Q2 10Q 2012

(1)

80

Entrance of Apple into Mapping (Contd)


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The iPhone refresh cycles will continue to have a material impact onGRMN's businesses in the future

The unpredictabilit of new iPhone features and new Apple products canmaterially impair a number of GRMN's categories

StreetPilot (from the Navigon purchase) is also now facing more intensecompetition with the iOS6 refresh and Apple Maps

Siri is also part of the natural evolution from physical input, to

touchscreen, to voice control in mobile devices and everyday life. Thisincreases the natural affinity between technology and the customer

ex erience.

If Siri continues to build momentum by functionality and being obsessedwith the customer experience (Siri is already integrated into Apple Maps),this can be painfully damaging for GRMNs Auto / Mobile segment

Siri and destinations are going to be integral to one another; Siri

integration into the OEM in-dash is going to happen, it is a matter of time.

81

GRMN's Products Are Expensive


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GRMNs products are fully stocked in the supplychannels and are widely available online

However, many physical retailers are carrying lowlevels of GRMN inventory (outside of PND),reaffirming its niche status

GRMNs significant discounting on relatively newproduct lines is a worrying sign indicating increasing

pricing pressure

This is now impacting GRMNs operating profitmargins on growth categories and causing downward

pricing pressure

82

New Products Specifically Targeted at the

Value-End


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GRMN realises with the exponential growth ofe pp mar e w s ow cos ase, an

multitude of features, the GRMN form factor

devices need to pivot to more affordable price

points To somewhat mitigate this, GRMN are

introducing entry-level devices across its

categories to induce demand at the value end

of the price spectrum e.g. Forerunner 10, nuvi

2200 and 2300 PND models etc.83

GRMN are Becoming Irrelevant


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The App ecosystem will touch all GRMNcategories

GRMNs entry level products are the lowhanging fruit right now

GRMN lack the support infrastructure tocapture meaningful market share against

(1)

n ro an

The creative talent and developers arefocused on Apps and not a closed GRMN

hardware-centric system1. Deutsche Bank research notes 84

nuvifone Failure


85/237

GRMN introduced the nuvifone A10, A50 andM10 as location-centric mobile handset

models. In October 2010 Garmin and ASUS

announced that they would not introduce

any new co-branded handset models going1

(1)

The nuvifone failed because consumers arenot going to buy PND mobiles; navigation is

not a differentiator1. Garmin.com

85

Evolution of Mapping Technologies


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Paper Maps

PDA Maps

PNDs

In-dash On-boarded

Connected Devices86

l h d h k

Smartphone Link A Reactionary Response

(Contd)


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GRMN launched Smartphone Link in January 2012.Smartphone Link is an Android application which provides

.

The application lets GRMN PND users add live services,such as traffic information, traffic camera images, weather

and fuel prices to their navigation device via a

smartphone's mobile data plan. Premium content and liveservices are available through subscriptions.


Smartphone Link A Reactionary Response

(Contd)


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This shows mobile inter-operability is a meaningful issueor navigation Apps, PNDs and GRMN

GRMNs tinkering with Auto / Mobile is patchy and of lowquality in a key segment where in fiscal years 2011, 2010,

and 2009, Auto / Mobile represented approximately 48%,

54%, and 63% of GRMNs total consolidated revenues.

(1)

going to significantly impair and decay GRMNs core

business model

1. GRMN 10K 2011 88


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Reminder (Contd)

F F t R l t ( ) C i I t d


90/237

Form Factor Replacement (s) e.g. Companies Impacted

Mp3 CD PlayeriPods, Mobiles,

TabletsSony, Phillips

Mp3 Players

iPods, Mobiles,

Tablets Sony, Microsoft, Creative

Personal Planners Mobiles, Tablets Staples, OfficeMax

PDAs Mobiles, Tablets

Acer N Series, Dell Axim, HP

iPAQ, NEC MobilePro, Palm,Psion, Sony Clie

Portable DVD

Players, , ,

Portable USBStorage Mobiles, Tablets,Cloud SanDisk, Creative,Yahoo Mail, Hotmail

Radios Mobiles, Tablets Phillips, Sony

90

Customer-Driven Products

The Transition from Technology-Driven to


91/237

91

Commodity

Moving from High Technology to Consumer


92/237

Sources pp. 92-93: Norman, D. (1998). The invisible computer: why good products can fail, the personal computer is so complex, andinformation appliances are the solution. Cambridge, MA: MIT Press.Treloar, A. (1999). Products And Processes: How Innovation and Product Life-Cycles Can Help Predict the Future of the ElectronicScholarly Journal 92

New Earnings Call Language

The A to PND b siness is being re


93/237

The Auto PND business is being re-categorised as non-traditional by GRMN

management to de-emphasise its impact,and to give the impression of its

immateriality to GRMN's core business

All segments other than Auto/PND are now' '

calls

93

Q1 2010 Use of 'Traditional' on call 0

New Earnings Call Language (Contd)


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Q1 2010 - Use of 'Traditional' on call = 0 2 2010 - Use of 'Traditional' on call = 0

Q3 2010 - Use of 'Traditional' on call = 0 Q4 2010 - Use of 'Traditional' on call = 3

Q1 2011 - Use of 'Traditional' on call = 1 - ' '

Q3 2011 - Use of 'Traditional' on call = 4

94

Q4 2011 Use of 'Traditional' on call 5

New Earnings Call Language (Contd)


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Q4 2011 - Use of Traditional on call = 5 1 2012 - Use of 'Traditional' on call = 3

Q2 2012 - Use of 'Traditional' on call = 3

95

Why is this Important?

Because we know this is not accurate


96/237

Because we know this is not accurate.On Fitness, from this se ment havin zero

contribution five years ago, to almost a littleover $300m in revenue in this segment. Many

people aren't even aware that Garmin started

about 20 years ago focusing primarily in twose ments, marine and aviation. These remain

still very profitable parts of our business and a

key part of our technology.

1. GRMN CFO Kevin Rauckman, JP Morgan Technology, Media & Telecom Conference - May 16, 2012

(1)

96

We therefore believe to label all categories other than

Why is this Important? (Contd)


97/237

We therefore believe to label all categories other thanAuto / Mobile as 'traditional' is disingenuous and does

, .

Question

Which brings me to a very interesting thing which is on the conference calls you talk

of your core business as aviation, marine, outdoor and fitness and not the PND, auto

OEM, which is traditional, right; which I kind of think is a bit counter-intuitive forsome of us, but, this for you is returning to the roots of the company?

Answer

I think we never really moved away, we were just addressing the market opportunities as

they came up, I mean the PND business 10 years ago, there was no PND business. So itwent from zero to, for us, to almost a $2bn dollar business in revenue. And then we've

been addressing these other vertical markets as they've came up. Fitness wasn't even

around 5 years ago, now its a $375 million dollar business.

1. GRMN CFO Kevin Rauckman, JP Morgan Technology, Media & Telecom Conference - May 16, 2012

(1)

97

Why is this Important? (Contd)


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How can Fitness be moretraditional than Auto / PND if its

only been around for 5 years?

98

Fitness


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Fitness

99

The Fitness Market

GRMN's fitness segment is a strong growth


100/237

GRMN s fitness segment is a strong growthsector earning materially greater operating

income on year-over-year basis GRMN's strong dominance in this new

emerging sector affords it the ability to

charge premium prices accruing greater

Strong product refinements and innovationanchors and augments its market leadership

position100

Kevin Rauckman GRMNs CFO:

GRMN's Fitness Market Growth


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Kevin Rauckman GRMN s CFO:

On fitness, in the last few years we havecome out of basically nowhere, from this

segment having zero contribution five years

ago, to almost a little over $300m in revenue

.

1. NASDAQ OMX 28th Investor Program London, June 26, 2012

101

Operating Income Increasing Materially

$500


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$450

$500 Operating

Income

$200

$250

$300

$350$400

Revenue

(m)

$0

$50

$100

2009 2010 2011

Fiscal Year102

Single purpose devices will become niche like every otherh h h d

Competition Expected in Fitness


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g p p ycategory that smartphones have penetrated

e ma or y o consumers w see mu -connec e ev ces

against GRMNs standalone, high price point offerings New designs and upgrades will only increase market share

incrementally for GRMN as they are already the leader in the

fitness category The overall fitness market is growing, however, although

new and existing competitors are doubling their efforts to

acquire meaningful market share This will inevitably impact GRMN as the current market

leader

103

GRMN's premium fitness product is the

GRMN's Premium Offering


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GRMN s premium fitness product is the910XT multisport GPS-enabled watch (1)

This provides swimming metrics and tracksdistance, speed/pace, elevation and heart

rate for running and cycling.

The features of this product are not unique

(1)

an are a so un e n pro ucts y a

number of other competitors e.g. Timex,Polar

1. Garmin.com 104

The Timex Ironman watch is multi functional

Branded Competition Timex Ironman


105/237

The Timex Ironman watch is multi functional This is an attractive feature in a cost

conscious environment It can also function as a cycle computer with

an additional bike mount The Timex Ironman can also track swimming

laps, distance, pace, stroke count and other

related metrics etc.

The Timex Ironman is also fully waterproof to

50 metres105

GRMN also introduced the upgraded FR70 low

GRMN's Value Offerings


106/237

pgbudget fitness watch.

GRMN expanded its line of products for cyclists in2011 with the introduction of the Edge entry-level

200 cycling computer.

GRMN also announced GRMN Fit, its first fitness Appfor the iPhone and Android phones that uses the

p one s to et users trac metr cs, suc as, spee ,

distance travelled, elevation and calories burned. In 2012, GRMN also announced the Forerunner 110

fitness watch targeting the value-end of the market


Fitness margins improved due to product

Fitness Margins


107/237

Fitness margins improved due to productmix which was heavily weighted toward new

highend models in the second quarter of2012 compared to 2011 when we were

significantly discounting products at the

end of their life cycle.

Source: GRMN Q2 2012 Press release 107

QuestionWhen you look at the fitness segment, can you talk about how you view

Advent of the Fitness App Market


108/237

y g , y y

competition from smartphones, seen a lot of applications there at CES, maybe

w ere you can r ve growt , s t new categor es or s st some g o a

expansion opportunities, or other areas that you drive growth here in the fitnesssegment?

Cliff Pemble, GRMN President and COO:

We definitely see what is going on with the smartphones in fitness, I thinkparticularly Bikes is a popular area to use a phone, we offer applications on

the phones as well, and we are beginning to get a sense of what that market is.

I would say that we feel that those applications tend to complement the

devices and people that maybe get introduced to fitness throughapplications, are interested in using a dedicated device if they continue to be

serious going forwards. So we have not really seen that, that has been a

major impact.

Source: GRMN earnings call - Q4 2011, February 22, 2012 108

Apps Are the Future


109/237

109

Smartphones are capturing the beginner

How is the App Market Evolving?


110/237

p p g gmarkets with zero cost Apps

GRMN's low-end products are under themost threat of being replaced by mobile

devices since the price points and entry

features make them more vulnerable as(1)

.

Apps are also replacing features wherefunctionality does not exist in current GRMN

or competitor devices1. Deutsche Bank research notes

110

GRMN's Entry Level Fitness Watches


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111

Apps target a wide spectrum of users

Rapid Expansion of the App Market


112/237

pp g p A s are also desi ned to be a ro riate for

beginners, specialised GRMN products mayalso require training e.g. geocaching

GRMN have to introduce value-end productsbecause they are niche, reducing ASPs

This is an attempt to widen GRMN's

addressable base and stem the impact of Appgrowth

112

Apps gain awards, spread by word-of-mouth

Mass Worldwide App Market Growth

(1)


113/237

y A s attract better marketin efforts and

better social traction and sharing Renewals and upgrades are easier and lower-

priced

This will deteriorate GRMN's categories and

(1)

reduce pricing and consequently earnings

power in the fitness segment


The response to the App ecosystem willb h k h il d i GRMN

Next Generation Competition


114/237

benchmark how agile and responsive GRMN

are to meaningful competition

It is almost impossible to increase ASPs andcapture increasing market share for GRMN

$0 App offerings will significantly affect

A large installed base will not protect thecategory without improvements in quality and

the customer experience

114

GRMNs mid-range product portfolio canl d b l d b t h

Next Generation Competition (Contd)

(1)


115/237

already be replaced by smartphones (1)

This is a material development and these willgradually replace/reduce the substantialaddressable base for GRMNs fitness category

GRMNs non-connected devices will bere egate

There will be a network effect with lowerusage and migration to smartphone Apps


(1)

115

GRMN recently launched a fitnessli ti GRMN Fit f iPh d

GRMN's Mobile Fitness App


116/237

application, GRMN Fit, for iPhone and

Android users that lets users track metricssuch as speed, pace, distance, time and

calories.

Garmin Fit also maps and automatically

(1)

.

This shows the migration to the iPhone andAndroid is real and meaningful

1. http://www.garmin.com 116

Data transmission and sharing is a lot easier over mobilesthan watches; smartphones can sync real-time rather than

Growing Demands for Data and Analysis


117/237

t a atc es; s a tp o es ca sy c ea t e at e t a

is for inter-op not single dedicated devices Devices are now cohesive; multi-sporters demand one

device that can transition quickly without compromising

on features; the waterproof feature is a known issuethough for mobile devices. This can be mitigated with

appropr ate covers t at are a or a e, w e y ava a e

and tested. Data will not become an issue as it is now; multi product

maps will be completely downloadable and 4G mobile

technologies will enhance on-demand data.117

Fitness Device Competition


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118

Mobile Fitness App Competition

RunKeeper EndomondoSmartRunnerAdidas miCoach


119/237

Nike+ Running MapMyRun Runmeter CardioTrainer

runtastic Couch-to-5K Strava Run My Tracks

119

Nike+ is also more appealing to consumers who are moredesign conscious and stylish. GRMN have imitated this part of

Fitness Competition


120/237

the Nike+ strate with new desi ns to the Forerunner roducts

Nike+ is easily updateable, GRMN updates do not have thesame convenience

GRMNs fitness strategy is centred on encouraging buyers toadopt newer models; Nike+ are focused on gaining user

traction whereas GRMN are purely concerned with accruing

revenue b fre uent new roduct introductions which is also

having the unintended consequence of clogging the supply

channels with old GRMN fitness inventory). New competitors like Fitbit are also fragmenting the fitness

market and providing new alternatives instead of GRMNs

fitness products120

GRMN Connect has logged 2.5 billion miles of activity GRMN have 2 5 million users

GRMNs Flagship Connect

(2)

(1)


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GRMN have 2.5 million users

Nike+ have already registered 694 million miles ofactivity

Nike+ have 5 million users

This shows Nike+ is penetrating the market, especiallyat the entry level despite GRMN having better

(3)

(4)

attachment rates.

The Nike+ community will grow and be moreengaging, with Facebook and Twitter integration

1. http://connect.garmin.com/

2. http://gbr.garmin.com/summertraining/en/garmin-connect.html3. http://nikeplus.nike.com/plus/4. NIKE 10-Q for Q1 2012 121

Branded Fitness Competitors


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122

MOTOACTV All-in-One Fitness Trainer


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123

MOTOACTV All-in-One Fitness Trainer (Contd)


124/237

124



125/237

125



126/237

126

Branded Fitness Competitors (Contd)


127/237

127



128/237

128



129/237

129



130/237

130



131/237

131

Nike+ On the iPod nano

Nike+ right out-of-the-box iPod nano


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132

Nike+ Fuelband is widely penetrating the entry levelfitness market, as well as, Fitbit, at the lower price points

Nike+ is a Growing Concern for GRMN


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om om co-op w e s rea , mean ng u compe on

This is the entry price where the mass market is

GRMNs Forerunner 110 at the same price point does nothave the same level of features or functionality

Nike+ competition is getting stronger, they have a strong

product catalogue, which reinforces the Nike+ offering

Nike+ have a wide global reach. This lends the companysignificant credibility, which will translate into strong

material growth and market share gains.

133

Whats new in Running is the rise of digital technology andservices. Runners are technology-oriented athletes who recognize

genuine innovation. Digital speaks to them because it helps them

NIKE Q4 2012 - Conference call

d h f l


134/237

train, compete and measure their performance. Digital services can

motivate them and connect them to other runners. Today running isa social activity and digital is helping drive participation rates

through the roof all over the world.

Most of our new performance innovation starts in the Running categorybefore it expands into other categories and brands. So when we create

- . . .

launching a long-term platform for growth. Then we expand on the

platform using the brand to develop apps . . . events and servicesthat add value and opportunity. And we bring it to life in destination

retail where consumers can get the full NIKE Running experience.

Thats the future of connecting with athletes and consumers.

Source: NIKE Q4 10Q 2012 - Conference call 134

GRMN's Software Deficiencies

New platforms and software technologies are being adoptedwhich are simplifying and enhancing the overall customer


135/237

GRMN are now also focused on a simplification of its productlines

GRMNs current software updates are limited to bug correctionand minor refinements

Basically, GRMN devices are hardware-centric and softwaresop s ca on s genera y marg na

Once GRMN hardware has been shipped, great software ideasare rarely added to the existing product lines, whereas Apps aresoftware-driven and are constantly being updated with newfeatures and improvements enriching the customer experience

135

GRMN Forerunner and competitor fitnesswatches can also be used for cycling

Cross-Utility of Devices = Cannibalisation


136/237

There is obviously a cannibalisation problem here

Additionally, with weatherproof cases for cyclingand smartphone protectors, iPhones and Android

devices have gained significant traction in cycling

for under $20 from Amazon

1. http://www.amazon.com/iOttie-One-Touch-INCREDIBLE-BlackBerry-Revolution/dp/B007FHCR20/ref=pd_cp_cps_2

(1)

136

The key fitness metrics of distance, time and calories burnedare already available in simple bicycle computers without the

Fitness Competition

.


137/237

accessories can also display heart rate and cadence and thesefeatures are readily available at affordable price points.

GRMN cant develop an ecosystem to compete with eitherAndroid or iOS.

GRMN have reported lower gross margins in fitness due to a,

problem for GRMN despite a growing fitness market

This is actually more likely due to discounting whichtherefore attracts low-end purchases or end of cycleproducts.

137

Fitness margins improved due to productmix which was heavily weighted toward new

GRMN's Obsession with Discounting

g en mo e s n t e secon quarter o


138/237

g -en mo e s n t e secon quarter o

2012 compared to 2011 when we weresignificantly discounting products at the

end of their life cycle.

Source: GRMN Q2 2012 Press release 138

GRMN's Obsession with Discounting (Contd)

GRMN have been obsessed with discounting andshort-term promotions to retain and win newus ness ur er ero ng opera ng marg ns


139/237

us ness ur er ero ng opera ng marg ns.

This extends from the Auto/PND segment to fitnesswhere offline retail and online channels are clogged

with old inventory

This is a worrying sign for GRMN as a market leader in

discounts as a permanent strategy

As fitness products are discretionary purchases,consumers are anticipating GRMNs discounts and are

delaying purchases 139

GRMN's Cashback Websites


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Source: http://www.garminfitnessredemption.com 140

This particular cashback offer extendedacross Australia and New Zealand

GRMN's Cashback Websites (Contd)


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476 stores in Australia 118 stores in New Zealand


Partial List of Distributors


142/237


The cycling market is very penetrable andGRMN does not command the same level of

The Cycling Market

l d hi i thi k t i it d ith


143/237

leadership in this market, as is it does with

fitness watches

Substitution to mobile devices is real and

meaningful as well as cross-substitution of- .

143

GRMN is a believer in single purpose devices;only niche consumers desire high price point,

GRMN vs. The Consumer

t d l ifi t h l


144/237

standalone specific technology

Most consumers desire easy-to-use,connected, multi-functional devices whereas

GRMN advocate distinct, non-connected

Competition will drive lower price points;GRMN offerings at lower price points offer

redundant features and technologies144

GRMNs Discounting to Clear Old Inventory


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145

Google Maps Enters the Cycling Market

Google have recently introduced cycling maps We knew this was in development as reports

surfaced about Google mapping cycling routes


146/237

surfaced about Google mapping cycling routes

Google understands that pursuing novelty andtesting the periphery have the possibility to yield

substantive results

1. http://googleblog.blogspot.co.uk/2010/03/biking-directions-added-to-google-maps.html 146

Google Cycling Maps


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Source: http://www.transport.act.gov.au/bike_directions.htm 147

MapQuest Cycling Maps


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Source: http://www.cyclelicio.us/2011/mapquest-bike-directions/ 148

GRMNs Flagship Bicycle Accessory

GRMN have delayed the

release of their flagshipVector pedal-based

manufacturing issues


149/237

manufacturing issues.

The product is expectedto retail forapproximately $1,500.

The product carries anexceptionally high costand will therefore only

appeal to the very seriousand avid cyclist as the

price point is veryprohibitive to

mainstream cyclists.

149

New Competitors Have Already IntroducedSimilar Pedal-Based Power Systems


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150

Many cities are developing and investing in their cycle networksand off the success of the London, Berlin and Barcelona schemes

the effects could be uneven for GRMN.

Cycling Networks in Major Cities

The enhancement of appropriate infrastructure would increase


151/237

The enhancement of appropriate infrastructure would increase

cycling traction among consumers, but progress is slow and limited

The reality is, that in major cities where cycling schemes already

exist, they are gaining traction and the rental bikes dont have

accessory gadgets. With material traffic safety concerns, navigatingsafely to destinations is the most important factor. Gadgets can be

a angerous s rac on, espec a y n u up c y areas.

Additionally, the vast majority of usage across cycle networks

involves the average cyclist who adopts the rental bike or an

ordinary bike with accessories no more than front and back lighting

and a bell.

151

GRMN is an aspirational product carrying apremium price

Operating Headwinds

Losses from the Application market are going to be


152/237

Losses from the Application market are going to be

material and stem GRMNs fitness market growth

In order to mitigate App market losses, GRMN will

need to segment their fitness offerings further,continuing to introduce new products and

significantly discount entry level fitness products in

an attempt to sway, potential, or existing fitnessApp users.

152

Revenue growth in our fitness segment was14% compared to the year-ago period as

Putting it Altogether

strong first quarter results related to the


153/237

strong first quarter results related to the

launch of new products were muted in the

second quarter as we compared against

strong performance in 2011 driven by

products and the launch of new products.

Source: GRMN 10Q for Q2, 2012/ 153

Field Research

Street interviews @The LondonCycle SuperHighway

Multiple research points across the


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p p

SuperHighway on multiple days at varioustimes

154

The primary concern is safety and trafficawareness

Field Research - Findings

Not everyone is tech centric and a lot of cyclists


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Not everyone is tech centric and a lot of cyclists

want to detach themselves from technology

overload

There was a high penetration of rental Cycle

except for front and rear bicycle lights

The No. 1 additional device is a smartphone forthe MP3 player

155

Not everyone is cycling and running outdoorsbut they are also doing these activities in gyms

Field Research - Findings (Contd)

Most treadmills and in-door cycles already


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Most treadmills and in door cycles already

have electronic tracking features with basic

statistics installed so additional devices are

redundant

core data had significant traction where

electronic devices were used on cycles e.g.

Sigma Cycling Computers

156


Some consumers did use fitness devices, notfor cycling, but for running e.g. Forerunner,Polar


157/237

iPhone bike mounts with screen protectorswere incredibly popular where smartphone

devices were used in cycling ost cyc sts were trave ng m n ma

distances so only carried money and theirsmartphones

157


Most cyclists are not serious enough to consider GPS devices andcannot see the utility of them matching their needs

smartphones, which was reported to work fine and was functional


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GRMN Edge did trigger interest among the more serious, nichecyclist, however, this commitment did not translate into actual

purchases

RunKeeper was the most frequently used App for runners Nike+ had hi h brand awareness

Concerns were raised about the potential battery life of smartphones

when using cycling Apps for long distances There was a strong preference for the iPod Touch if cyclists and

runners didn't want to purchase expensive smartphones but wanted

to use Fitness Apps

158


Why buy hardware when it is going to be obsolete in a year? Therewas a strong preference for free Apps or 99p Apps with free

updates.

Users want multi-functional devices, they don't want to be carrying


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all sorts around especially when running or cycling There were a significant amount of runners using smartphone

armbands in wet weather conditions; additionally, there was a very

low penetration of GRMN or competitor products A high percentage of runners are jogging while carrying their

iPhones and other smartphones

We found this to be unusual given the cost of damage that may beincurred

However, this indicated the extent to which users did not want to bedetached from their iPhones and other smartphones when outside

159

The London Cycle Scheme bikes dont haveany additional accessories, other than front


and back lights


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g

Most cycling was either as a function to savemoney, simply as a route to A-B, as a means

of exercise or as a leisure activity. e cross-usage o smartp ones n cyc ng s

gaining penetration. Bike lights are the most popular cycle

attachment.160

Cheaper varieties of cycle computers capturingthe core metrics of speed, distance and calories


have the most traction.


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The accessories market is an enabler andpromoter of mobile technology

The additional responsibility of storing and,

smartphones absolve cyclers of this

responsibility. GRMN products were perceivedto be for the elite market, therefore inferring

niche status. 161

Marine


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162

The marine segment accounted for 8% of GRMNsoperating income YTD 2012

Marine Outlook

(1)

High gas prices have inhibited growth


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Marine sector combo units from manufacturers, suchas, Raymarine have cannibalised sales across the

marine industry

GRMN sees the marine outlook as weak for the lastsevera years c ng a verse macroeconom c con ons

impacting sales

GRMNs failed Raymarine transaction stalled marinegrowth, which GRMN cannot acquire organically

1. GRMN Q3 2012 Press release 163

The GPSMAP 700 series, a mid-range chart plotter featuring a 7widescreen touch screen display offering all of the key functionalitythat value oriented customers are looking for.

Marine Outlook (Contd)

(1)

GRMN is introducing low price point portable devices in marine and


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all of its segments to widen its product mix, in order to mitigate thethreat of low price point mobile tablet devices

This will not occur without ASP declines

Response to our new marine product offerings remains positive, andwhile the second quarters typically strong marine buying seasonwas mute ue to g ue pr ces an poor weat er, the third

quarter showed some solid improvement over the same quarter in

2005. GRMN have cited high fuel prices as an impediment to marine

growth for almost the last 7 years

1. GRMN Press release, Q1 20102. GRMN Press release, Q3 2006

(2)

164

GRMNs Permanent Discount Strategy

Persistent discounting and rebates permeatesall of GRMN's business segments


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165

GRMNs Permanent Discount Strategy (Contd)


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168


Documents

Garmin (GRMN) - History Counts in this Part of the World