* Q2 adj EPS $0.83 vs est. $0.51
* Q2 sales $669.1 mln vs est $670.5 mln
* Q2 margins of 53 pct not sustainable
* Cuts Q2 operating costs 15 pct
* Shares rise 24 percent (Adds details, analyst comment, updates share movement)
By Savio D'Souza
BANGALORE, Aug 5 (Reuters) - No. 1 U.S. navigation device maker Garmin Ltd's (GRMN.O) quarterly profit blew past market expectations as PND sales picked up and expenses fell, but said the margins in the quarter were not sustainable.
"We expect cost increases to hit us unfavorably during the third quarter, so in terms of sustainability, we couldn't continue to see 52.6 percent numbers (in gross margins) in the third quarter or beyond," Chief Financial Officer Kevin Rauckman said on a conference call.
The company's stronger gross margins in the second quarter were helped by currency fluctuations, product mix, stable prices and raw material cost reductions.
One-time factors like currency and lower costs meant that the margins in the quarter were not sustainable, said Oppenheimer & Co analyst Yair Reiner, adding that the company's gross margins over the first two quarters of the year were more indicative of its health going forward.
Garmin said it expects margins from its personal navigation devices (PND) to be in mid-40s, while they are expected to be flat sequentially in the non-PND segment.
Shares of the company rose to an intra-day high of $33.77, before paring some of those gains to trade up $5.22 at $32.40 in late afternoon trade on Nasdaq.
Reiner said the short positions in Garmin's stock were fairly high as a number of investors had positioned themselves to benefit from the decline in the stock's value.
The company's shares, which had lost 80 percent of their value in 2008 when they hit a high of $95.58, have gained more than half their value so far this year.
"I haven't spoken to an investor in six months who thinks there is a long-term story here," said Deutsche Bank analyst, Jonathan Goldberg.
Garmin said units sold in the second quarter fell 5 percent to 3.7 million, while the average selling price (ASP) of $180 declined 23 percent year-over-year and were flat sequentially.
With retailers restocking inventory and the pressure on Garmin to offer price protection easing, analysts were expecting PND unit shipments and ASPs to see a significant sequential rise. [ID:nBNG510227]
J.P. Morgan analyst Paul Coster said ASPs were down to record lows and came in below his estimates, which meant that Garmin was locked in price-based competition.
Two weeks back, Garmin's chief rival, Dutch navigation device maker TomTom (TOM2.AS), beat market expectations as it sold more devices at higher prices than expected. TomTom said it saw signs that markets had bottomed even as conditions continued to be "challenging." [ID:nLM618397]
Garmin's third-quarter shipments are expected to rise sequentially with stable pricing with some margin declines as retailers stock shelves for fall promotions, Chief Operating Officer, Cliff Pemble said.
Oppenheimer's Reiner said the rate of contraction of the PND market was no worse than expected and that Garmin's results negated fears that the fall in growth and prices for PNDs would eat into its profits.
Second-quarter net profit fell 37 percent to $161.9 million, or 81 cents a share. Excluding items, profit was 83 cents a share, compared with analysts average expectations of 51 cents a share, according to Reuters Estimates.
Reiner, who has a "perform" rating on Garmin's stock, said the beat was driven by cost cuts and lower manufacturing costs, which boosted margins. The company chopped operating expenses by 15 percent to $152.5 million in the quarter.
Sales fell 27 percent to $669.1 million from a year ago, but were up 53 percent sequentially.
Sales fell 24 percent in North America, where its market share grew to 57 percent. Sales in matured European markets fell 36 percent, even as it held on to its 20 percent market share. Asia sales rose 21 percent.
Garmin did not provide much color on the pricing and carrier announcements for the nuvifone -- its navigation-enabled smartphone built along with Taiwanese PC maker Asustek (2357.TW) and pitted against the likes of Research In Motion's RIM.TO BlackBerry and Apple's (AAPL.O) iPhone.
The company said the nuvifone G60 phone was in carrier testing in the U.S. and that it expects a launch in the fourth quarter in that country.
Garmin is betting on the smartphone to turn its fortunes, but the multiple delays before a launch in Taiwan late last month could have dented its chances in the hyper-competitive market. [ID:nLS717457]
"Ultimately I just don't think it matters. I don't think the nuvifone has much potential," said Goldberg. (Editing by Jarshad Kakkrakandy and Anil D'Silva)