Garmin navigates GPS, wearable computing curves via fitness devices

GPS pioneer Garmin appears to be innovating its way to better profit margins courtesy of its fitness business, which has been offsetting a declining automotive division.

Garmin, a leading GPS device maker, appears to be handling the eventual extinction of standalone navigation devices in automobiles well as it has boosted its research and development and garnered more of its profits from fitness devices.

The company reported third quarter earnings of 69 cents a share on revenue of $643.6 million, down 4 percent from a year ago. Wall Street was looking for earnings of 59 cents a share on revenue of $628.8 million.

In many respects, Garmin is a tale of two companies. Half the company is tethered to declining businesses such as automotive and mobile devices. The smartphone has swiped the role of the standalone GPS device in automobiles. Third quarter automotive/mobile sales fell 16 percent from a year ago.

That slack has been picked up by aviation, fitness and marine categories. For instance, Garmin's fitness business delivered third quarter sales of $81 million, up 25 percent from a year ago. Operating profit is also increasingly tied to the fitness category.

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In many respects, Garmin has been in front of the wearable computing movement---at least for cyclists and runners. The company has doubled down on its Forerunner GPS watch franchise and steadily improved its software and interface.

Garmin has done so well with its fitness products that it's actually raising its outlook even though the automotive business will remain challenged.

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But here's the catch. Garmin is going to face some serious competition. TomTom also reported earnings on Wednesday and noted that its running watches are likely to do well. TomTom is behind Garmin, but is running the same playbook: Use fitness to offset a declining auto GPS business. TomTom's issue is that it's late to the fitness game and has suffered as a result. The company's third quarter revenue fell 9 percent from a year ago and every division saw sales fall. 

Meanwhile, Garmin will have to deal with the smartwatch rollouts, which will inevitably track distance and pace to some degree. Players like Nike are also a threat.

Garmin's plan is to continue to improve its fitness devices for cycling, running, swimming as well as its outdoor rugged cameras. Garmin CEO Cliff Pemble also said on a conference call that the company would target adjacent fitness categories. When pressed for more information on those categories, Pemble ducked the question.

We're not at the point where we can offer any details in terms of what we have in mind there. But we continue to invest and look for new opportunities across all of our segments in adjacent product categories.

Add it up and Garmin knows it has to keep moving and advancing its software knowhow. Garmin's plan looks a lot more sustainable than previous efforts such as its ill-fated decision to launch a smartphone

CFO Kevin Rauckman said that Garmin has a long product roadmap and how they'll contribute to the bottom line.

We put a product roadmap together that makes an estimate of what our businesses are going to be at every -- you know, at every level within the segment. And is, you know, if we look out a year from now or even a couple years from now, we have an estimate of what each of our product categories are going to do, whether it's running or cycling or, you know, some of the new products like Vector. So we believe we've got a pretty good handle on what the new products are going to do and how they are going to contribute to the bottom line.