Garmin: Why it has to chase the nuvifone dream

Garmin just can't let the nuvifone concept go. The company said it is disappointed with sales of the nuvifone to date, but will be launching two more smartphones in the first half.

The larger question: Why?

While disappointed by sales of the nüvifone products to date, we are excited to be launching two next generation smartphones in the first half of 2010 and feel these devices will be well-positioned in this competitive market.

Also: Garmin nuvifone A50 Android and M10 Windows Mobile devices announced

The nuvifone got off to a late start and once it hit the market it didn't get much traction. After all, Garmin is trying to play a smartphone game dominated by the likes of Apple, Research in Motion, Samsung, HTC and a bevy of others.

So why does Garmin want to play the smartphone game? In some respects, it has little choice even though the financials are fine.

The company reported fourth quarter earnings of $1.38 on revenue of $1.06 billion, up 1 percent from a year ago. Pro forma earnings were $1.43 a share. For 2009, Garmin reported earnings of $3.50 a share on revenue of $2.95 billion, down 16 percent from a year ago.

As for the 2010 outlook, Garmin projected revenue of $2.9 billion to $3.1 billion, roughly flat with 2009. However, margins will fall from 49 percent in 2009 to 46 percent to 48 percent in 2010. Earnings per share will be between $2.75 a share and $3.15 a share.

With falling margins and a maturing personal navigation device (PND) market that's under pressure as companies like Google integrate GPS into phones, Garmin has no choice but to work new markets. The problem: Garmin's core auto market revenue was down 19 percent in fiscal 2009 to $2.05 billion.

Garmin has other hot segments. The company's outdoor and fitness products are doing well with revenue growing 10 percent in 2009 to $469 million. However, that growth isn't enough to offset the decline in the auto business.

Wedbush analyst Scott Sutherland said in a research report:

While PND revenue is expected to decline, management expects $100-200 million in nüvifone revenue and growth from its small in-dash OEM business. We would like to see traction on these two fronts offset the PND decline before becoming more constructive. Thus far, nüvifone has been a disappointment.

Simply put, nuvifone revenue has to pick up the slack. However, it's unclear whether Garmin has the chops to create a smartphone hit.

The other wild card: How much time does Garmin really have? Oppenheimer analyst Yair Reiner said in a note:

While we agree that a flood of free mobile navigation apps into North America and European could make things tough for the PND in 2010, this widely held view is looking somewhat overplayed.

If Reiner is correct then Garmin may have some time to find its footing with the nuvifone.