BANGALORE (Reuters) - Garmin Ltd’s efforts to revive waning sales of its once popular personal navigation devices will only bear fruit in the second half of next year, as many consumers have turned to free navigation apps on their smartphones and tablets.
Shares of the No.1 U.S. navigation device maker fell as much as 5 percent to $29.75 on Wednesday, after the company forecast full-year profit below estimates. Rival TomTom’s shares closed almost unchanged in Amsterdam.
Garmin expects the North American personal navigation device market to decline 25 percent this year and the European market to shrink by a high single digit to 10 percent, just weeks after TomTom forecast a 15-20 percent drop in the global market.
Garmin and TomTom have struggled to fend off competition from Google Inc and Nokia, which offer free navigation on mobile devices.
To offset the slump in demand, Garmin has bundled its personal navigation devices with high-margin live traffic and mapping services.
However, this has come at a cost as the company is not able to recognize the revenue from the added services up front, denting its margins.
Garmin’s mix of bundled products is growing faster than it had expected and it could see a positive effect in the latter half of 2012 at the earliest, Chief Executive Min Kao said on a conference call with analysts.
“This means there is a piece of revenue and profit that basically Garmin has already won and got the cash for, but can’t show on their profit & loss account until all that service has been rendered,” Oppenheimer analyst Yair Reiner said.
In the second quarter, Garmin deferred $62 million of its revenue which otherwise would have added $51 million in gross profit.
Garmin began facing this issue two quarters ago when it first started shipping large quantities of PNDs with embedded lifetime traffic and it is going to hurt them going forward, Reiner said.
Switzerland-based Garmin forecast adjusted earnings of $2.00-$2.15 a share, on revenue of $2.5-$2.6 billion for the full year.
Analysts, on average, were expecting the GPS device maker to report earnings of $2.48 per share, before items, on revenue of $2.52 billion, according to Thomson Reuters I/B/E/S.
“The real disappointment was with the bottom line and the main driver for that weakness was unusually weak profitability for the PND segment,” Reiner said.
In the latest quarter, Garmin’s core segment that makes PNDs for cars and mobile devices saw revenue fall 19 percent to $363 million, while its fitness segment that makes navigation equipment for runners, cyclers and golfers saw revenue rise 25 percent to $78 million.
Reporting by Supantha Mukherjee in Bangalore; Editing by Viraj Nair