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Last updated on April 17, 2014 at 1:21 EDT

Device Maker TomTom Issues Surprise Profit Warning

April 9, 2008

In a surprising announcement made Tuesday, personal navigation device maker TomTom NV warned its profits would be less than expected due to pricing power weakness and European retailers stocking fewer of its products.

The company’s devices, which provide turn-by-turn voice directions to drivers, have seen continued strong demand but are under pricing pressures from established competitors like Garmin Ltd and other Asian suppliers such as MiTac International in Taiwan.

Additionally, Nokia Corp. and other makers of mobile handset devices have been incorporating GPS software with similar features into their products, reducing the need for standalone products such as those made by Amsterdam-based TomTom.

The company is strongest in Europe, where it owns about half the market for devices used in cars. However, Pacific Crest Securities analyst David Niederman said Europeans are three years ahead of Americans in adopting GPS technology, therefore the market is more mature and slower-growing.

The fast growth of GPS in the United States market, meanwhile, has gone disproportionately to Cayman-Islands based Garmin, which has operational headquarters in Olathe, Kansas.  

Niederman said TomTom has fewer products at each point in the price chain compared with Garmin, especially at the high end where margins are higher.

During its announcement, TomTom said its performance in the U.S. was actually ahead of expectations, but was hurt by the weak dollar.

“Demand seems to be holding up,” Niederman told the AP. “It’s the pricing that’s the issue.”

Although the industry-wide implications of TomTom’s struggles are not yet clear, there are signs the pricing pressures are broad.   In February, Garmin officials said prices for automotive units, which comprise over 80 percent of total sales, would fall 20 percent this year as a result of tougher competition.  The company still expects a 45 increase in annual revenue from auto devices, but said the cost cuts would decrease gross profit margins by 40 percent.

Worries over the company’s future have pounded shares of Garmin’s stock, which have lost nearly half their value since the beginning of the year. On Tuesday, shares hit a 52-week low, closing down $4.23, or 8 percent, at $48.47.  In Amsterdam, shares in TomTom fell 14 percent to 22.78 euros ($35.76).

In its profit warning, TomTom said first-quarter revenue would be 260 million to 270 million euros, less than the 296 million euros it reported during the same quarter last year. The company said operating margins would dip into the “low single digits,” down from double digits in recent quarters.

TomTom is scheduled to report earnings April 23, and said it would miss full-year sales growth of at least 20 percent in 2008.

“This is a full-scale profit warning,” Petercam analyst Eric de Graaf wrote in a research note about the company.

De Graff estimated that average selling price of TomTom’s products in the first quarter was $190, below the $215 expectation. He added that TomTom sold fewer units in the quarter than he had forecast.

Rather than weakened consumer demand, TomTom’s CEO Harold Goddijn attributed falling sales entirely to retailers working off excess inventory in expectation of new products. In response, the company said it cut prices earlier than planned.

TomTom is currently awaiting approval from European competition authorities for its $4.3 billion acquisition of digital mapmaker Tele Atlas NV. The company launched a round of consolidation in the industry when it began bidding for Tele Atlas last summer. Nokia followed suit with an $8.1 billion bid for Tele Atlas’s only major rival, Chicago-based digital mapmaker Navteq Corp. (NVT).  That deal is also under antitrust review.

Experts believe that navigation will improve in the future as mobile devices provide instant updates from the field, helping motorists avoid traffic.  Such systems require close integration of maps and devices, and provide competitive advantages to companies that own the mapmakers.

After Nokia locked up its Navteq deal, Garmin initially bid on Tele Atlas, which forced TomTom to bid higher or risk being left without a partner.

When TomTom increased its offer for Tele Atlas by almost 50 percent, Garmin secured a long-term deal with Navteq, guaranteeing access to its maps for the next 10 years, and then dropped out of the bidding for Tele Atlas.

TomTom’s share price has halved since November, and after Tuesday’s decline the company’s market capitalization is less than the price it is paying for Tele Atlas.

“With profitability down so much, servicing the debt for the planned Tele Atlas acquisition could even become problematic,” De Graaf told the AP.

Marina Wyatt, TomTom’s CFO, said she was “comfortable” that TomTom will be able to meet creditor’s demands in financing the acquisition.

On the Net:

Tom Tom

Garmin Ltd.

MiTac International

Nokia Corp.

Pacific Crest Securities