During my visit today at GPS-device maker, Garmin, I’ve talked with CFO, Kevin Rauckman on how the economy is affecting the Olathe, Kansas, company’s sales, how low the prices for GPS devices or personal navigation devices (PNDs) will come down, the Circuit City bankruptcy and much more.
Here’s an excerpt of our conversation.
How you see this holiday season for Garmin?
In the month of October we saw some trends downwards given the purchases from our major retailers… We’re watching very carefully and watching what’s the sell through of the PND products are in the 4th quarter. It’s still early to tell. We’ve seen improve trends in recent days but we have a global macro-economic pressure that is still going against us and not just in the U.S. As a matter of fact, the North American market is doing better than Europe. The U.S. market is still experiencing an 80% plus unit growth on PNDs, Europe is closer to 20% and in some cases it’s actually declining year over year… But without the doubt the economic environment is hurting us right now.
How low will the price be for a GPS device this holiday season?
If you walk in a major retailer you’ll see a low price point of about $149 and we have some specials periodically. Last year during the holiday season we sold at Walmart a price point of $124. So we’ll be at least in the $120s if not below that. And will there be $99 price point absolutely. Will they be ours, we can’t really comment.
Did Circuit City’s bankruptcy surprise you?
No, it didn’t surprised us. We’ve been working with them pretty closely over the last 6 to 8 weeks trying to manage that relationship. We knew that was probably going to happen… We do have exposure and we’re trying to reserve against some of that but not fully… If we wrote the whole portion off it will be 5-6 cents EPS. But we have some of that reserved already.
Inspite of the challenging economy, Garmin managed to gain market share. Can you explain?
Even though the economy is hurting us around the world, what we’ve seen most recently is that our market share has picked up. Our global market share is now over 35%, which is up from 31% a quarter ago, and up from the 20s a year ago. So during this period, Garmin is the strongest player, with the strongest balance sheet and stronger financially.
Do you expect a consolidation of the PNDs market?
There has been some competitors that already left the market. And now we’re hearing things that some of the smaller players aren’t going to be around much longer. In fact, in some cases they are not selling anymore. So without a doubt we are gaining share at the expense of some of the tier 2, tier 3 players but we are also gaining some share even from some stronger players like Magellan.
Talk a bit about the market for the entry level PNDs?
Our view on those who are coming at very low price point is that they can’t be making much money. So we have the scale. We have the largest number of PNDs that are manufactured around the world and we know what our profit margins are. And for those, coming and trying to gain a small part they are not making much money with very thin operating margins, probably in the single digit. Our view is that that can’t last very long and if we drop price to be competitive then that puts even more pressure on these new players.
What are some of the new players in the GPS market?
There really having been any new players. Most of the new entrants are the smartphone guys not the PNDs. The most recent PND was Telenav, this application provider on smartphone that announced a couple days ago that they are going to deliver a PND.
Will GPS enabled smartphones replace/cannibalize GPS only devices or PNDs?
PNDs will continue to grow. Many of our analysts don’t believe that and they have PNDs going down in volume. Our view is that this is a transition product, that smartphones will continue to have more and more navigation and you’ll see more consumers buying that. But it’s not a cannibalisation widely to the PND space. It’s really more of an incremental opportunity for us. So we’ll continue to sell PNDs while we are extending in the smartphone market for those consumers that are really mobile oriented and that want everything in one. But with the pricing we’re talking about, the PNDs will continue to sell well… Another thing is that the smartphone market is extremely large… with 250-260 million smartphones next year. We’re not even saying we want 5% of that market. We’re just saying the nuvifone will be able to pick up maybe a million the first year of those users that want everything all in one.
1 million nuvifone the first year seems quite optimistic, isn’t it?
1 million out on 260 million that doesn’t seem like it’s stretch. And if we have a differentiated product with location and navigation technologies that is better than anything else out there, so i think it will [work]. So the key is how agressive will the carrier be when they allow us to distribute to them.
Garmin is headquartered in tax-heaven Grand Cayman. Why?
When we went public in the year 2000, we had a unique company structure in our business… Our parent company has been a Taiwanese company up until that point. And we needed to create a holding company in order to list the company on the NASDAQ and so we needed to create a holding company where it is tax-free. Otherwise we’ll be adding a layer of tax as a holding company structure… And not to move profits offshore.
Would Garmin be more cost effective if it had outsourced its manufacturing versus doing it all in-house?
It’s interesting because when we’ve gone to other 3rd party manufacturers and ask them to price out our bill of materials and how much it will cost, we’ve never seen the savings. We feel that we have as low a cost of manufacturing as anybody in the world our navigation products. If you compare TomTom [which outsources its manufacturing] and Garmin… And if you compare their operating margins and ours, they are pretty consistent. We are the 2 high volume leaders. So we’ve never been able to have anyone price at a lower cost of manufacturing when we looked at that. If there was we would already gone to a third party and outsource. But there’s no cost advantage to do that.
Any other benefits/downside of Garmin’s vertical integration model?
The other advantage of vertical integration is the flexibility that we’ve been able to take advantage of. For example, the 4th quarter last year we had huge volume upside and we were able on the fly to get our production plan to scale up and get additional product within a matter of 30 days. And deliver products into the channel for the holiday season when many of our competitors didn’t have that luxury because they are working with outsourced manufacturing.
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