Garmin profit strong but shares fall on price warning

BANGALORE Wed Feb 20, 2008 2:06pm EST

Garmin's Colorado 300 GPS device is seen in an undated handout photo. Navigation device maker Garmin Ltd posted a 70 percent rise in quarterly profit, beating Wall Street estimates, as revenue in its automotive and outdoor/fitness segments climbed, sending shares up 12 percent in trading before the bell. REUTERS/Garmin/Handout

Garmin's Colorado 300 GPS device is seen in an undated handout photo. Navigation device maker Garmin Ltd posted a 70 percent rise in quarterly profit, beating Wall Street estimates, as revenue in its automotive and outdoor/fitness segments climbed, sending shares up 12 percent in trading before the bell.

Credit: Reuters/Garmin/Handout

BANGALORE (Reuters) - U.S. navigation device maker Garmin Ltd (GRMN.O) posted a 70 percent rise in quarterly profit on Wednesday but warned that intense competition could cut prices by about 20 percent in 2008, sending its shares tumbling.

Margins in the coming year will be squeezed especially hard in the company's vehicle and mobile business, Chief Operating Officer Cliff Pemble said, referring to the segment that accounts for more than 70 percent of Garmin's revenue.

"We do anticipate that 2008 will present increased challenges from competitors as well as a declining ASP (average selling prices) and margins," Pemble said in a conference call.

Garmin shares, which were up more than five percent after the results were released, reversed direction after the comments and were down 10 percent at $62.51 in afternoon trading.

Shares of TomTom NV (TOM2.AS), which has been increasing its market share in the United States at Garmin's expense, closed down more than 2 percent at 37.90 euros in Amsterdam.

Garmin, which plans to launch a mobile phone in 2008, said it expects 2008 earnings to exceed $4.40 per share on revenue of more than $4.5 billion.

Analysts, on average, expect earnings of $4.41 per share, excluding special items, on revenue of $4.23 billion, according to Reuters Estimates.

The warning on selling prices took the shine off Garmin's fourth-quarter results.

Helped by strong holiday sales, net profit rose to $307.3 million, or $1.39 a share, from $180.3 million, or 82 cents a share, a year earlier, while revenue almost doubled to $1.23 billion.

Excluding special items, earnings were $1.31 a share.

Analysts on average had expected the company to earn $1.11 a share, before items, on revenue of $1.03 billion.

The company sold more than 5.5 million navigational devices during the quarter -- almost matching the number of units sold in all of 2006.

"The guidance is solid...but it appears that margins are lower than what we had previously modeled," Needham & Co analyst Richard Valera said before the conference call.

Garmin also said its board authorized the buyback of 5 million shares, representing about 2.25 percent of shares outstanding.

Garmin's shares have dropped about 35 percent since its third-quarter results in October, mainly due to stiff competition from TomTom and a sluggish U.S. economy.

TomTom will report fourth-quarter results on Thursday.

NUVIFONE ON THE HORIZON

Since its third-quarter earnings announcement, Garmin has

4 lost a bidding war for Dutch digital map maker Tele Atlas AS TA.AS to TomTom and unveiled its touchscreen "nuvifone", a mobile phone with navigational technology at its core.

Garmin, which expects to start shipping the nuvifone in the second half of the year, said it was in talk with carriers for the phone but did not divulge details in the call.

Needham's Valera said nuvifone is unlikely to have any material impact on results in 2008.

Garmin is facing a threat in its home market from TomTom, which has been undercutting the U.S. company on price.

TomTom, citing market research firm NPD, said it sold more units than Garmin in the United States in November to take 30.6 percent market share compared with Garmin's 29.3.

Garmin is trying to do to TomTom in Europe what TomTom is doing to it the United States, aiming to improve its 20 percent market share by acquiring European distributors.

Deutsche Bank analyst Jonathan Goldberg said TomTom may prove to be more aggressive than previously expected.

"In fact, they got a little too aggressive and ran out of products in the fourth quarter," he said.

"I don't think (Garmin) can surpass TomTom (in Europe), but I think they can narrow the gap and the process has already begun," he added.

(Editing by Pratish Narayanan)

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