Markets

Garmin Stumbles Forward With Nuvifone

By David Phillips

Updated on: December 19, 2008 / 1:21 AM EST / MoneyWatch

Ten months after Garmin announced plans to enter the GPS (Global Positioning System) -- enabled smart phone market, the provider of satellite navigation and communication devices said its Nuvifone has received approval from the Federal Communications Commission. Good news for investors, as more than 70 percent of the company's current growth comes from sales of personal navigation devices (PNDs) in its auto/ personal mobile series of products -- where price is more important than brand to most customers.

Although total unit sales increased 43 percent year-on-year to 3.9 million units in the third-quarter 2008 ended September 27, gross profit margin for the comparable 13-week period of 2008 fell 260 basis points to 44.3 percent, hurt by softer average selling prices (down about 25 percent year-to-date) of its automotive/mobile products, according to the third-quarter 2008 FORM 10-Q regulatory filing:

Gross profit margin percentage for the Company overall decreased primarily as a result of the automotive/mobile segment remaining a significantly larger percentage of the Company's product mix during a quarter when this segment's margin fell by 490 basis points [to 37.7 percent]. The automotive/mobile segment is by nature a lower-margin business and the Company has begun to see the impacts expected on gross margin due to falling prices and a product mix shift toward lower end PNDs.

The Nuvifone is being tested on 1900 MHz and 850 MHz 3G bands. Management is targeting first half 2009 for the product launch. A word of caution, however, to readers banking on smart phone growth to offset erosion in pricing power in the automotive segment: the technology is no longer unique. AT&T already has six GPS-enabled smart phones on the market, including the Apple iPhone 3G, and original equipment manufacturers -- from Nokia to Dell -- are flooding the market with their own GPS-enabled devices, too. Multimedia player, FM radio, a mega-pixel camera, internet-based functionality -- in addition to a wide array of applications, fashion-conscious smart phone shoppers can pick the geometric style and color of their hand sets, too.

Garmin's core competence is in satellite navigation software -- not the marketing of cell phones. The company has yet to name an official carrier; but when it does, I suspect ramping up its promotional and advertising campaigns to build presence in an already crowded market will take a big bite out of margins, too.