TomTom feels smartphone competition

Dutch navigation device maker TomTom reassured investors by keeping its 2010 outlook intact in the face of stiff competition from free navigation on smartphones.

Its shares erased early gains of as much as 4.9 per cent after it reported that revenue of 362 million euros (£305 million) in the second quarter was supported by increased sales of content and services, offsetting slowing growth in North America.

TomTom's business model and that of its main competitor, Garmin, have come under pressure after Google and Nokia began offering free navigation features on their GPS-equipped smartphones earlier this year.

TomTom Chief Financial Officer Marina Wyatt acknowledged that the market for personal navigation devices (PND) was under strain.

"The PND market or segment .. is not the most exciting product right now," Wyatt said.

"When you are thinking of your consumer electronics purchase it is just not the most exciting thing on the market," Wyatt told Reuters, adding that the sector needed more innovation.

Net profit rose 69 per cent to 34 million euros (£28.5 million), while revenue fell 2 per cent from a year earlier, broadly in line with analysts' forecasts and helped by lower financing costs.

TomTom has responded to the threat from Google and Nokia by shifting its business mix toward high-margin, value-added services, making its PNDs a smaller portion of total income.

TomTom said the North American PND market gained 27 per cent during the second quarter to 3.3 million units from 2.6 million in the previous quarter.

Nomura analyst Stuart Jeffrey said this growth lagged the 50 per cent and 83 per cent growth seen in 2009 and 2008.

"Some of this weakness could be owing to rising smartphone growth in North America, where Android sales featuring free Google navigation are especially strong," Jeffrey said keeping his "neutral" rating on the shares.

Further visibility into the changing competition within the global navigation market will come when Garmin, which is putting its focus on navigation-based smartphones, reports quarterly results on 4 August.

TomTom shares were up 1 per cent at 4.86 euros by 0922 GMT, pulling back after hitting a week-high and underperforming a 2 per cent rise in Amsterdam's blue chip index.

TomTom kept its 2010 outlook for flat revenue and earnings per share from 2009, when revenue was 1.48 billion euros and earnings per share at 0.47 euro.

Wyatt said the stronger dollar was negatively impacting margins and that this would be more evident in the third quarter. Gross margin dropped to 51 per cent from 54 per cent in the previous quarter.

"Normally margins would be up in this quarter but they are down due to the weak euro to the dollar," Wyatt said, adding that this effect would continue in the third quarter.

TomTom has high hopes of a new open software architecture, which will be available in September in 33 countries in its recently announced GO 1000 LIVE device.

The introduction of the new device is an attempt to stop the trend of dropping average selling prices, which has eased during the second quarter and is expected to continue, Wyatt said.