Citron Research Reports on Garmin (NASDAQ:GRMN)


Can Garmin navigate their way out of the dead end they’ve driven into ?

Today marks the day that Nokia is shipping their first navigation based phone in to the US

Some have already called this new unit the “PND-Killer”
This announcement prompts us to look deeper into the future of navigation leader Garmin.  While we’re reluctant to join a pinata party here, the company’s own comments at Wednesday’s Barclay’s investors’ conference as delivered by its CFO are particularly important for any investor, long or short, looking to establish an opinion on where management is “driving”.

The Landscape

The rapid pace of change has quickly crushed many former giants of technology into buggy whip makers.  Whether it be the Hayes modems or the Palm Pilots, companies that focused more on their core products as high margin gadgets, rather than the functional benefit of those products to consumers, have left a trail of lost brands and more importantly lost profits.  Will Garmin face the same fate?

2009 was the first year of revenue decline in the history of navigation device maker Garmin.  Yesterday at the Barclays Technology Conference, investors were able to get a snapshot of management’s thoughts….and we have decided it lies at the crossroads of denial and complicity.

The presentation was made by CFO Kevin Rauckman.

Mr. Rauckman spent the first half of his presentation discussing their marine and aviation business and he used the phrase “very difficult” for both businesses.  He went on to state that both boat and airplane production is down globally and the company hopes for an uptick in the coming year.  Mr. Rauckman also names the competition by name in the space.  OK, marine and aviation are only 14% of the business… lets move on.

The presentation turns to the bright part of Garmin’s business — outdoor fitness.  While this is only 17% of their revenues, the company has 70% market share, so the growth is limited….but this too is a sideshow to the main event.  Note: in the presentation he also listed the competition in outdoor fitness by name.

Where the Rubber Hits the Road

Garmin’s core business that comprises close to 70% of its revenue is automotive/mobile.  This is where the company is living in denial.  Mr Ruckman attempts to demonstrate Garmin’s strength in this category by stating that even though sales are down quite a bit, they have increased gross and operating margins, by controlling operating expenses.    That might work for one or two quarters but is that how you compete in technology?  The company admitted to cutting back advertising and not dropping ASP as the reason the past year was not a disaster.

When discussing the long term prospects of the company, we heard the chilling admission:

“Long term gross margins depend on the success of the Nuvifone” — Kevin Ruckman.

It is the opinion of Citron that if your long term margins are dependent on your biggest failure and your competition is Google and Apple…. it might be time to re-evaluate.  In yesterdays conference Garmin admitted to dedicating most of their $160 million in R&D for the year developing what we now know as the Nuvifone.

Danger! Road Out Ahead

We challenge any reader to find a single positive review of the Nuvifone.  Here is a sampling of what is out there:

Frank Dickson, vice president of research at In-Stat:
“I can’t help but think they’re going to get a butt-kicking,”
“Nuvifone feel unpolished and half-baked”
“Straight-up, you’ll be entirely more productive with an Apple or Google-powered handset than the G60, and you’ll have a lot more access to web-based applications and a web browser that’s actually functional. It may hurt, but it’s the truth”
“Unfortunately, Garmin spent almost two years bringing this phone to market, and it feels like a 2007-era device. At $299 with a two-year contract after a $100 mail-in rebate, the nuvifone G60 simply isn’t competitive.”,2817,2353741,00.asp

Oddly enough, even though Mr. Ruckman listed every competitor in marine, aviation, and fitness….he couldn’t manage to actually say the words “Google” and “Apple” which threaten their core business. It gets worse…in a recent search Citron has found that Apple in a job listing has stated  “We want to take maps to the next level”

The reality, obvious to everyone except Garmin management and its analysts, is that smartphones are going to rapidly absorb the functionality of navigation exactly as they absorbed the functionality of the PDA from Palm’s earlier gadgets.

Kim of iSuppli says …”By 2011, he says, GPS navigation will be available in 100% of smartphones.”

Apple is already selling an iPhone navigation app from Tom-Tom and others will surely soon follow.  Meanwhile, Google announced navigation for its Android platform operating system for smartphones (such as the new Motorola Droid) at the compelling pricepoint of “free”.  (Google will of course monetize this with local advertising integrated into the map functionality.)

Who’s Driving this Bus ?

Given the obvious, that the personal navigation device as a standalone gadget is going the way of the PDA and the standalone modem, couldn’t management be expected to focus on the smartphone market as though their company’s life depended on it?

Perhaps they could have been forgiven for delivering a terrific phone to market a few months late, or a mediocre one with first-mover advantage a year ahead of competition.  But to deliver such an inept, non-competitive and overpriced product a year late (even though the phone hardware was outsourced) is an unforgivable strategic blunder, and has to call into question whether management has any credibility to claim they are competent to compete in the smartphone space at all.


Garmin is now driving like it’s lost — competing against TomTom, Magellan and other device makers on the low-end commoditized part of the business.  Just walk into Best Buy or Costco and see the price cutting.  With navigation functionality rapidly moving to smartphones, they have to compete against Google and Apple on the innovation side of the business, while Nokia looms on the commoditization front.

All the while, new navigation phones are being launched, while they sit with their 2007 Nuvifone that has been a disappointment to all.  We urge readers to drop into any AT&T store and ask how Nuvifone sales are going.

The reality is that two years ago, navigation was the “killer app”.  But now it’s just “another app”, with a price point heading rapidly towards “free”.  Realistically, with its strong cash position and current quarter EPS Garmin is not going to zero any time soon.  But it is amazing that sell side analysts are so impressed with the company’s ability to manage costs and make numbers in the next quarter with the company’s future so threatened.

Citron asks how long the market will confer a 9x multiple to Garmin’s future earnings when the company can’t describe a credible path to sustainable core earnings even a year or two down the road from here.