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Sales Drop as Garmin Navigates Poor Economy

Posted on Monday, Jul 13th 2009

Even as Garmin (NASDAQ:GRMN) remains the company of choice for US consumers buying GPS devices, the recession and its impact on discretionary spending have hit the manufacturer hard, as was evident in the company’s Q1 results. Revenues and earnings not only fell significantly, but also missed analysts’ estimates by quite a margin.

Q1 revenues of $436.7 million fell 34% over the year and missed the Street’s expected $532 million target. EPS fell a whopping 67% to $0.24 and missed the Street’s expected $0.42 per share.

By segment, revenues fell 43% in the automotive/mobile segment, 32% in the marine segment and 31% in the aviation segment. Only the outdoor/fitness segment saw growth as revenues increased 13% over the year.

By region, North American sales fell 36% while European sales were down 32% over the year. Asian revenues fell 33% over the year.

The company attributed the steep decline to “macroeconomic factors”, i.e., the slowdown in consumer discretionary spending has been aggravated by ongoing channel inventory reductions by Garmin’s retail partners in the personal navigation device industry.

Last year Garmin announced its plan to enter the cellular market by launching the Garmin-ASUS nüvifone G60 by the end of the first half of this fiscal. However, in view of the company’s current performance, they have delayed the plan to the second half of the year. The nüvifone is being developed with Taiwan-based Asustek Computer Inc., and will feature location-based services, such as turn-by-turn driving directions, traffic warnings or search engines for nearby restaurants and stores. 

Meanwhile, Garmin is focused on a long-term growth strategy of product innovations to further extend their market leadership in navigation and communication. The company recently introduced a new family of nüvi products with an updated, slimmer form factor and new navigation features, one of which enables users to explore maps which can either be purchased or downloaded.

In addition to upgrading its products, the company is also looking at strengthening its relationships with OEMs. Recently it expanded its tie-up with BMW Motorrad and has developed a motorcycle-friendly GPS navigator which combines Garmin’s navigation technology with BMW-specific features such as a customized mount and a preloaded BMW dealer database. The company announced similar tie-ups with Chrysler in the automotive segment, EdgeWater Powerboats and Ferryline Boats in the marine segment and Piper in the aviation segment.

While Garmin may be making the right moves, as long as the economy is still struggling, it might be too optimistic to hope for the stock’s quick recovery. The stock reached all-time lows of $14.40 in November of last year and has since risen to be trade at $23.09 with a market capitalization of $4.62 billion. The company still has a long way to go to regain its lost peak value.

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80% of the smart phones to be shipped this year will be equipped with GPS. In addition, the smart phone market is expected to grow at 25% – according to ABI Research. This is a challenge that stand-alone PND makers have to face.

A smart phone’s GPS functionality would serve the basic navigation needs for a lot of potential PND customers. At least for the not-so demanding times such as hiking in mountains or deep woods. Given the consumer’s careful spending in these tough times, Garmin’s after market PND sales will take a dent from consumers who might not want another device.

While terrestrial users might think twice to spend money to buy a dedicated PND, one might still be inclined to have a robust, built-for-the-job device from the likes of Garmin or Magellan for aviation and marine needs. This goes against the revenue reported in these segments! What am I missing here?

Tom-Tom seems to not want to get into the smart phone war with its own device. It still wants to benefit from the trend. It offers a software solution – an iPhone app – that provides turn-by-turn directions on some of the smart phones. This comes at a monthly subscription price tag of atleast $10.

As Garmin’s President and COO Cliff Pemble said in a recent conference call “Smart phones are really complicated devices and bringing one to market that’s built totally from the ground up on a custom Linux platform is not an easy task.” Garmin needs to get its phones right because it has chosen not to go the software solution route. Should it put some eggs in the apps basket as well?

However, it must be noted that Garmin has a few solutions that work alongside some GPS-enabled smart phones, and a products that work with BlackBerry® devices wihtout GPS capabilities. Presumably this approach did not go very well.

Garmin could also benefit by investing early in smart highway technologies – including real time traffic information and optimal route planning. The collaboration with auto manufacturers is significant in this respect.

Nalini Kumar Muppala Monday, July 13, 2009 at 12:16 PM PT

I agree, smartphones are an enormous threat to Garmin’s future.

Sramana Mitra Monday, July 13, 2009 at 4:02 PM PT

Nalini, do u know the status of TomTom iPhone app? Is it already out? There was some confusion as to what Apple allows and doesn’t allow when it comes to GPS applications. See the following statement that comes with the SDK:

“Applications may not be designed or marketed for real time route guidance; automatic or autonomous control of vehicles, aircraft, or other mechanical devices; dispatch or fleet management; or emergency or life-saving purposes.”

This would apparently disqualify any full fledged GPS app such as TomTom.

PS: If the above is true, Apple’s rationale *could* have been to keep this lucrative market to themselves.

Saad Fazil Tuesday, July 14, 2009 at 2:16 AM PT

It is still not out. But according to NYT it is coming. http://www.nytimes.com/2009/07/08/technology/08gps.html

Apple demo’ed TomTom app during Apple’s key note speech at WWDC 2009. That says it.

Nalini Kumar Muppala Tuesday, July 14, 2009 at 11:10 AM PT

One thing to consider with sales for a company like Garmin is that in their automotive segment, which saw the largest revenue drop by percentage, they are selling machines that last a considerable amount of time (hopefully). When everyone was buying a GPS for their car, revenue was higher. But now that many people have a GPS, it is harder to convince the average consumer that both cars need a GPS, or to replace a GPS that still works. Many people who have one already are going to move it from car to car, or are going to wait until it doesn’t work anymore before buying a new one.

I know from personal experience the value of having a GPS. Until I bought one, I was getting lost constantly. I got my Garmin Nuvi GPS, and it has more than paid for itself in saved gas and not having the stress of being lost. But convincing me to replace that GPS would be very difficult-I’m used to the way it works, and as the typical user of such a device, I don’t want to start trying to figure out how to navigate a new one.

If Garmin started making upgrades available for existing GPS devices, programs similar to iPhone apps that could be downloaded to the device, that might bring in extra revenue.

One last consideration as to the recent change in Garmin’s revenue should be the recent publicity of our aging GPS satellites and the effect they might have on the GPS systems sold. An article here describes what might happen if our GPS system is not fixed before it starts to fail around 2010. This may be one thing concerning those who would buy automotive GPS systems.

Ilene Silverman Wednesday, July 15, 2009 at 1:41 PM PT