Garmin: Curse of the Nuvifone and GPS Competition

On the surface, Garmin’s (GRMN) fourth quarter results could be summed up in one word: Wow. But there are cracks in the model and worries about falling prices abound. And those cracks were enough to spook investors.

These cracks–essentially worries about average selling prices–overshadowed a nice quarter. How can you argue with this: For the fourth quarter, Garmin reported earnings of $307.3 million, or $1.39 per share, up from $180.3 million, or 82 cents per share, a year ago. Wall Street was expecting earnings of $1.11 a share, according to Thomson Financial. Garmin said sales doubled, to $1.2 billion, from $611.2 million, beating analysts’ expectations for $1.1 billion. And the 2008 outlook was in line with lofty expectations. For 2008, Garmin predicted revenue will exceed $4.5 billion and EPS will top $4.40 per share.

But Garmin said on its earnings conference call that prices for GPS devices are expected to fall 20 percent in 2008. Meanwhile, Garmin’s fourth quarter average navigation device price was $220, down 19 percent from the third quarter’s average of $271.

Meanwhile, Garmin’s Nuvifone (see Jason O’Grady’s take) is expected to produce gross margins of about 30 percent, but that’s below the 40 percent that smartphone makers get. See a trend here? If wireless carriers are mired in a brewing price war doesn’t it stand to reason that other non-essential gadgets and services will take a hit? It’s doubtful that the Nuvifone can hold its pricing power for long.

As a person that never quite got the GPS gadget thing the news out of Garmin isn’t that surprising. GPS will be built into your cellphone. Why have a separate device? Want maps? Use Google. Now obviously I’m in the minority here since Garmin’s results were stellar–someone is buying this stuff. But there are signs the GPS glory days are coming to an end.

A few takeaways from the earnings call and analyst follow-ups:

Nuvifone doesn’t have a carrier yet. But Garmin COO Clifton Pemble said there “is a lot of interest from carriers in the industry.”

CFO Kevin Rauckman on the pricing environment:

I think, from a trend, you’ll see pricing maybe come up a little bit in Q1 from the very low Q4 holiday season, but then trend down as we go through the rest of the year into the holiday season of ‘08.

Nuvifone isn’t a savior. In a research note, Thomas Weisel analyst Jim Duffy wrote:

Gross margin for the nuvifone is expected to be in the low 30% range, below 40% plus levels of other smartphone providers, presumably due to low volumes in year one, and the absence of a carrier relationship. Given anticipated launch expense, operating margins for the nuvifone are expected to be below corporate averages (28.5% in 2007, estimated 23% in 2008.) Given modest revenue targets and softer than expected device margins, we remain cautious on the potential contribution to earnings from the nuvifone in 2008.

Comments

[herr_foofmeister]

As a person who never quite got "that GPS thing", you certainly have quite a few opinions concerning the health of a very profitable company in the discretionary consumer electronics business.
Garmin has consistently increased annual profits while pundits bemoan the business climate. It is normal for profit margins of electronic items to decrease as they become more popular with consumers, but Garmin hasn't hit that "wall" yet, in my opinion. We may well see an increase in sales that offsets the decrease in prices and a rebound in Garmin's share price when "people who don't get it" realize otherwise.