Garmin Q2 Revenue Growth Hit by Lower-than-Expected Sales of Nuviphone

"We launched the Android-based 850 with T-Mobile in June [in the U.S.] and in Germany and Australia,” said Clifton Pemble, Garmin chief operating officer. “Sales at T-Mobile have been below plan, and we're working with the carriers on appropriate positioning and pricing of our device in this hypercompetitive space.” The company has been encouraged by sell-through in foreign markets, including pockets of Australia and Europe, but it recognizes that the wireless industry is highly competitive, “and even some of larger players are experiencing margin and profitability challenges,” Pemble said. “With this in mind, we're focusing on fewer, more targeted projects given the current trends we see in the industry.” He said the company will continue to monitor sales at T-Mobile and other carriers to determine a long-term strategy.

In response to an analyst’s question about whether a recent price cut on the Garminfone to $99 and lower-than-expected sales might signal an end of the company’s mobile phone line, Pemble said, “We're looking at a more limited set of product models and roadmaps going forward in order to focus our efforts, and we'll rationalize our investment based on that. This is a long-cycle business, so we can’t comment on future plans at this time.” He said the company is working with carrier partners “to further message the device and train sales people."

While Garmin is having a tough time penetrating the wireless market, other smartphone makers are enjoying more success, CFO Kevin Rauckman said. “We see signs that smartphones with navigation are having an impact on PND buyer decisions,” he said. “From the data we're observing, there’s no doubt that ‘included navigation’ -- even if it doesn’t match what we think is good in terms of features and functionality -- is probably good enough” for people buying smartphones with navigation as a bonus, he said. A benefit of the popularity of the smartphone navigation feature may be step-up sales opportunities, Rauckman said. “There’s a good chance that as people experience navigation introduced in smartphones, they may look to expand their horizons and look at a dedicated device,” he said.

Garmin lowered its 2010 revenue projection to $2.8 billion from $3 billion based on “lower sales of Nuvifone, anticipated softening of PND markets and unfavorable foreign exchange markets,” Pemble said. Earnings-per-share and margin estimates remain unchanged, because of better-than-expected performance in the first half of 2010, he said. Garmin’s Q2 revenue grew 9 percent overall, the company said, driven by growth in the outdoor fitness and marine businesses. Marine revenue grew 23 percent year over year, Pemble said, because of economic recovery and people “returning to boating.” Garmin will continue to seek opportunities to increase revenue and market share opportunities like a recent OEM deal with Bayliner, a division of Brunswick, which is installing in-dash navigation units in its line of runabouts and cruisers. “Throughout the rest of the year we will focus on expanding our product offerings and gaining additional share in retrofit and OEM markets,” Pemble said.

Garmin’s outdoor fitness line accounted for 31 percent of consolidated operating income for Q2, Pemble said. In the aviation business, revenue inched up 1 percent to $65 million, driven by improvements in retrofit and portable markets, Pemble said, saying the recovery of the aviation industry continues to lag that of the broader economy. The company will continue trying to expand into related markets including helicopters and business jets, he said.

Garmin said its automotive/mobile business had a 2 percent increase in revenue to $447 million. A unit-sales increase was offset by declines in average selling prices, Pemble said. “We believe volume trends point to increased global market share driven by consolidation,” he said, saying Garmin forecasts total industry unit volume to be down slightly in 2010 from a “higher penetration rate and increased competition from other platforms such as mobile phone and in-dash automotive equipment.” The company’s strategy to improve market share focuses on replacement buyers and “attracting the repeat buyers with innovative form factors and compelling new features” like the Nuvi 3700 series phones’ capacitive multitouch display with accelerometer, traffic data and advanced routing capabilities, he said. The company will also pursue additional OEM opportunities like a recent deal that offers Garmin navigation units as an option on 2011 Jeep Grand Cherokee vehicles. Pemble sees the automotive OEM business as a way to take advantage of its strength “in being able to design highly integrated systems into the dash of aircraft by installing highly integrated systems into cars and trucks.” He said focusing on OEM automotive is a way to offset declines in PNDs.

The overall PND market will see a decline in unit sales for 2010, Pemble forecast. “Europe is declining faster than we anticipated,” 9 percent, he said, and North America is expected to be down 7 percent. Those drops are expected to be offset by growth in Asia and Latin America, Pemble said.