IE 11 is not supported. For an optimal experience visit our site on another browser.

TomTom blames price pressures in warning

Personal navigation device maker TomTom NV shocked the market with a profit warning on Tuesday, blaming weak pricing power and European retailers for stocking fewer of its products.
/ Source: The Associated Press

Personal navigation device maker TomTom NV shocked the market with a profit warning on Tuesday, blaming weak pricing power and European retailers for stocking fewer of its products.

Demand for such devices, which can give drivers turn-by-turn voice directions, has remained strong, but TomTom has faced stiff pricing competition from established players like Garmin Ltd. and non-brand-name Asian competitors such as Taiwan's MiTac International.

In addition, Nokia Corp. and other makers of cell phones have been incorporating GPS software into their devices, negating the need for standalone products.

Amsterdam-based TomTom is strongest in Europe, where it has about half the market for devices used in cars. But Europeans have been about three years ahead of Americans in adopting GPS devices, meaning that market is more mature and slower-growing, said Pacific Crest Securities analyst David Niederman.

The fast growth of GPS in the United States, meanwhile, has been disproportionately helping Garmin, based in the Cayman Islands with operational headquarters in Olathe, Kan. Compared with Garmin, Niederman said, TomTom has fewer products at each point up the price chain _ especially at the high end, where margins are fattest.

TomTom said its performance in the United States was actually ahead of expectations, were it not for the weak dollar.

"Demand seems to be holding up," Niederman said. "It's the pricing that's the issue."

It's not clear yet how TomTom's troubles will affect the rest of the industry, but there are signs the pricing pressures are broad.

Garmin officials in February said prices for automotive units, which made up more than 80 percent of total sales, would fall 20 percent this year in the face of tougher competition.

The company said it still expected annual revenues from auto devices to increase 45 percent but said the cost cuts would decrease gross profit margins by 40 percent.

Worries over the company's future have hammered Garmin's stock, with shares losing nearly half their value since the start of the year. On Tuesday, shares hit another 52-week low, down $4.23, or 8 percent, to close at $48.47.

Shares in TomTom fell 14 percent to 22.78 euros ($35.76) in Amsterdam.

TomTom said first-quarter revenue will be 260 million to 270 million euros ($408 million to $425 million), less than the 296 million euros it reported in the first quarter of last year. Operating margins will slip into the "low single digits," down from double digits in recent quarters, the company said.

The company, due to report earnings April 23, also said it would miss a 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.

He estimated that average selling price of TomTom's products in the first quarter was $190, below his expectation of $215. He also said TomTom sold fewer units in the quarter than he had forecast.

Chief Executive Harold Goddijn attributed the falling sales entirely to retailers wanting to work off excess inventory in expectation of new products, rather than any slackening in consumer demand. The company said it cut prices earlier than planned in response.

TomTom is awaiting approval from European competition authorities for its planned acquisition of digital mapmaker Tele Atlas NV for $4.3 billion.

TomTom launched a round of consolidation in the already-concentrated digital mapmaking industry when it began bidding for Tele Atlas last summer. Nokia followed with a $8.1 billion bid for Tele Atlas's only major rival, Chicago-based digital mapmaker Navteq Corp., in a deal that is also under antitrust review.

Experts believe that navigation will get better in the future as mobile devices automatically relay information from the field to instantly update digital maps and help motorists avoid traffic. Such a system will require close integration of maps and devices, giving a potential edge to companies that own the mapmakers.

After Nokia appeared to have the Navteq deal locked up, Garmin bid on Tele Atlas, forcing TomTom to bid higher or risk being left without a partner.

But after TomTom had increased its offer for Tele Atlas by almost 50 percent, Garmin signed a long-term deal with Navteq, guaranteeing access to its maps for the coming decade. Garmin then neatly dropped out of the bidding.

TomTom's share price has halved since November, and after Tuesday's fall its 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," analyst De Graaf said.

TomTom's Chief Financial Officer Marina Wyatt said she was "comfortable" that TomTom will be able to meet creditor's demands in financing the Tele Atlas buy.


Associated Press Business Writers Joshua Freed in Minneapolis and David Twiddy in Kansas City, Mo., contributed to this report.