Garmin Ltd. (NASDAQ: GRMN) is starting to show more cracks in its story against the world of bundled GPS and personal navigation services in smartphones.  The GPS leader turned in quarterly results that showed revenues were down 21% to $838 million in its fourth quarter.  Thomson Reuters had estimates of $865.41 million, so Garmin fell short. Diluted earnings fell to $0.68 EPS from $1.38 in fourth quarter, while its pro forma earnings fell 42% to $0.83 EPS from $1.43. We are using the pro forma figures for the comparison and that compared to estimates of $0.88 EPS.  Garmin missed by a nickel.

What is happening is what you will see below on a segment and regional basis.  North America continues to slide in a post-saturation market as Garmin units are gradually being replaced by the free or near-free services offered in Google Inc. (NASDAQ: GOOG) and Apple Inc. (NASDAQ: AAPL) smartphones.  TeleNav, Inc. (NASDAQ: TNAV) has been spotty in growth but it remains a pressure mechanism as well with an AT&T Inc. (NYSE: T) contract extended recently and with the launch of the App for Verizon Communications Inc. (NYSE: VZ) on the iPhone.

Automotive/Mobile revenues fell 31% to $559 million.  Its Outdoor/Fitness revenue rose 15% to $171 million, aviation revenue rose 10% to $71 million, and the marine revenue rose 9% to $37 million. The breakdown is also one of geography.  North America was down about 30% to $537 million, while Europe down 4% to $235 million and Asia was up 46% to $66 million.  Unless everyone out there becomes a fitness guru worried about getting lost, or becomes a boating enthusiast and aviator, the core auto-guidance system business is one that is facing secular pressure that is not going away.

Margins are contracting as well. Gross margin fell to 45% from 46% and operating margin fell to 22% from 28%.  At the same time, Garmin’s effective tax rate rose to 15.0% from 4.7% in fourth quarter 2009.

Garmin did manage to generate $175 million of free cash flow in the last quarter and it ended with a balance of cash and marketable securities of over $2 billion.

Guidance is cautious as well.  Garmin noted, “We expect revenues to decline in 2011 as the growth in the outdoor, fitness, marine and aviation segments, as well as auto OEM opportunities, is offset by ongoing declines in the PND market. We anticipate gross margins to be stable and operating margins to decline slightly from the strong margins generated in 2010. The operating margin declines will be primarily driven by ongoing investment in the business. These factors and an anticipated effective tax rate of 20% result in a forecasted 2011 earnings per share range of $2.25 – $2.50.”

After going back to review our “Garmin stories on earnings” there is one thing that has been present in each of the past reports and which remains present ahead: Secular trends are working against the company.  Management needs to go hire one of the ex-tobacco executives who knows how to properly drive growth in a period of what will otherwise be a long-term slide in revenues.

Trimble Navigation Limited (NASDAQ: TRMB) has not offered any indications as of yet, but Garmin closed at $32.14 and shares are indicated lower by 5% or more in the early pre-market hours.  The pressure has been mounting and will only continue.

JON C. OGG

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