Garmin, TiVO On The Decline

Google recently signed an audience research deal with TiVo while at the same time making things difficult for personal navigation device (PND) maker Garmin, since Google’s Android smartphones provide navigation applications free. For the first time in its history, Garmin posted a year of revenue decline as more and more smartphones are being sold with add-on navigation tools.

Garmin (NASDAQ:GRMN) is the leader in the worldwide PND market with a 33.7% market share and annual revenue of $3.49 billion. About 66% of the company’s revenue comes from PNDs. While 2008 revenue increased 10% over the year on a 38% increase in unit sales to 16.9 million, Garmin’s year-to-date revenue of $1.89 billion was down 23% from year-to-date revenue of $2.45 billion in 2008. Two years ago, I had first discussed such a turn in the road where the PND functionality is absorbed into an increasing number of smartphones, meaning that some of Garmin’s would no longer be needed.

In the company’s third quarter results, reported on November 4, Q3 revenue was $781 million, down 10%. By segment, Automotive and Mobile revenue was down 13% to $546 million and Aviation revenue was down 29% to $58 million. Outdoor and Fitness revenue increased 11% $132 million and Marine revenue increased 3% to $45 million.

By region, North America declined 14% and Europe 4% while Asia improved by 8%. Despite the declines, Garmin continues to lead the PND market with a 60% share in North America and a 20% share in Europe.

Net income was $215 million or $1.07 per share compared to $171 million or $0.83 per share last year. Gross margin improved to 52.4% from 44.3% last year but declined from 52.6% in Q209. The company generated $281 million of free cash flow, resulting in a cash and marketable securities balance of just over $1.8 billion at the end of the quarter.

In October, Google announced plans to include free turn-by-turn directions in the Google Maps application on its Android smartphones. Following this, Garmin slashed the prices of its navigation devices by about 40% to 42% on Black Friday. Garmin had started selling navigation applications for RIM’s BlackBerry and devices running on Microsoft Windows Mobile OS. Recently, after a long-drawn-out development cycle, Garmin also launched its own smartphone with navigation software called the Nuviphone on AT&T. But with the Google move, the Nuviphone is nothing short of an anticlimax.

Last week, Garmin said that its Black Friday sales were in line with estimates in terms of margins, ASPs, and units sold. The company expects about 10% unit sales growth in 2010 and for ASPs to decline by 10%. It expects to end 2009 with $1 billion in operating cash, which will be used for dividends and acquisitions. In August, Garmin had tried to buy UK marine electronic products supplier Raymarine to gain European market share, but the talks failed. However, recent reports suggest that Raymarine is now looking for a buyer.

Garmin is currently trading around $30 with market cap of about $6 billion. It hit a 52-week high of $38.78 on October 12.

TiVo (NASDAQ:TIVO) entered into an audience research deal with Google whereby it will license and integrate TiVo television viewing data into its measurement of audiences for ads sold through the Google TV Ads platform. TiVo also announced a long-term partnership with Virgin Media, the UK’s single largest cable system serving nearly 4 million customers in Great Britain. TiVo is also building a new keyboard remote control that should allow users to get more out of its broadband service.

On November 24, TiVo reported a third quarter loss of $6.7 million or $0.06 per share compared to loss of $900,000 last year. Q3 revenue was $56.86 million compared to $64.45 million last year. Analysts expected a loss of $0.06 per share on revenue of $49.7 million.

Service and technology revenue was $47.1 million, with service revenue at $37.7 million and technology revenue at $9.4 million, up from the prior quarter due to increased development work on TiVo’s mass distribution deployment. Gross margin declined to 46.6% from 53.7%. The company generated $2 million of cash from operations and ended the quarter with $245 million in cash. Q2 analysis is available here.

TiVo-owned subscription gross additions declined 22% to 34,000 from 44,000 last year as churn increased to 1.7%. At the end of the quarter, TiVo-owned subscriptions were 1.5 million. TiVo-owned average revenue per subscription declined to $7.65. TiVo-owned total acquisition costs were $5.8 million and subscription acquisition cost (SAC) was $171, roughly flat with last quarter.

This quarter, the U.S. District Court for the Eastern District of Texas imposed damages and contempt sanctions of about $200 million against EchoStar for its continued violation of a permanent injunction. This takes TiVo’s total damages awarded to date to about $400 million.

For the fourth quarter, TiVo expects service and technology revenue of $43 million to $45 million, below analyst estimates of $46.2 million. Net loss is expected to be $13 million to $15 million and adjusted EBITDA ranging from a loss of $5 million to $7 million. The stock is currently trading around $10 with market cap of about $1 billion. It hit a 52-week high of $12.78 on October 26, which was also a five-year high.

TiVo expects its mass distribution trends to improve next year after Comcast moves in additional markets, the RCN high-speed Internet and digital cable TV service goes live, and DIRECTV deploys TiVo’s high-definition service. Whether the company will be successful in reversing or stopping its subscriber losses is something to be seen; but for both Garmin and Tivo, reinvention seems to be the key to growth.