TomTom shares surge on strategy shift

By Roberta Cowan

             

AMSTERDAM (Reuters) - TomTom, the Dutch navigation equipment and digital map maker, is switching focus away from the cash-bleeding personal navigation devices that made it a household name to its auto and mapping services to restore growth and profits.

             

"We have started a restructuring program which will focus our organization on the areas where we see the greatest potential for growth, of which Automotive and Content & Services are clear examples," said Chief Executive Harold Goddijn.

             

Best known for its personal navigation devices (PNDs) used by car and truck drivers, TomTom also sells real-time traffic services through its internet-connected devices and smartphone apps, mapping data to businesses, as well as navigation units which are built into cars, including various Renault, Fiat and Mazda models.

             

TomTom's biggest division, and biggest bleeder of sales and profits, is the consumer PND unit, with growth at the other units is still far from offsetting losses at PNDs. The firm has struggled for months to overcome slumping demand in PNDs as consumers opt for free or cheap navigation software as well as cooler gadgets like smartphones and tablet computers.

             

To the relief of investors, who have seen TomTom's shares plunge from a high in 2007 of 56.326 euros to a Sept 23, 2011 low of 2.4 euros, TomTom finally said on Monday it will focus on driving growth in more promising areas including in-built navigation systems for cars, as well as mapping and live traffic services, while it scales back its consumer unit.

             

The company launched a restructuring program initially targeting 50 million euros in costs cuts over 2012, including job cuts, and said sales in all of its business units outside of consumer PNDs grew in the quarter, sending shares skyward.

             

At 1012 GMT TomTom shares were trading up 19 percent to 3.6 euros, the biggest gainer in a slightly positive Amsterdam market.

             

TomTom's automotive navigation business, which accounts for a fifth of group sales and reported a 43 percent rise quarterly sales, is the fastest growing division and offers investors some hope for growth. The licensing unit, which sells content and services for routing, traffic congestion, weather as well as mapping data, reported a surprise 27 percent increase in third-quarters sales driven mainly from higher sales to web and telecoms companies.

             

Goddijn told Reuters on Monday that TomTom won't sell its troubled PND unit, but added that the firm needs to be "less dependant" on the consumer PND market and move into higher growth business and service markets.

             

TomTom expects the PND market to contract in North American by 25 to 30 percent and in Europe by 10 percent this year.

             

The company said its market share in Europe remained stable at 45 percent, while it grew in North America to 25 from 21 percent in the quarter.

             

"We had anticipated greater weakness in the Consumer side given weak end markets, but both the major European and North American end markets were stronger and TomTom gained 4 points of market share in North America," said Youssef Essaegh, analyst from Barclays Capital in a research note.

             

The CEO also declined to elaborate on the restructuring program outside of the targeted 50 million in cuts, but said the firm will make more specific announcements later this quarter.

             

"The PND business is important and will remain an important part of our business and revenue, but the market size in absolute terms is shrinking and we need to adapt our costs, some of which are variable and some aren't," Goddijn said.

             

Analysts expect cuts to come from overheads, research and development, marketing and the offshoring of more jobs to low-cost countries.

             

TomTom reported a 10 percent fall in third-quarter sales at 336 million euros, dragged down by the consumer PND unit, which reported a 23 percent fall. But overall sales beat analysts expectations for 303 million euros.

             

TomTom said the proportion of users subscribing to live traffic services increased to 28 percent from 21 percent in the same period last year, and that its automotive, licensing and business solutions units posted higher quarterly sales.

             

"TomTom reported a very solid quarter. The PND market did decline further, but not as much as expected," SNS Securities analyst Martijn den Drijver said.

             

TomTom also said it cut its operating expenses for 2011, and now expects operating expenses to be around 540 million euros, excluding impairment and restructuring charges. It also said it sees full year capital expenditure of about 80 million euros.

             

TomTom expects to report full-year results toward the upper end of its guidance for sales of between 1.225 billion euros and 1.275 billion euros and earnings per share (EPS) of between 0.25 and 0.30 euros excluding one-off charges.

             

Goddijn also told Reuters the traditional boost in sales around the Christmas holidays is becoming a thing of the past.

             

"We are seeing less seasonality trends and we expect that to continue in the fourth-quarter, and although we expect to see a boost in (PND) sales, it will be less pronounced than in previous years," Goddijn told Reuters on Monday.

             

In July, TomTom booked a 512 million euro impairment charge after a profit warning in June where it lowered its full year expectations, to reflect the dismal outlook for consumer PNDs.

             

On Monday, TomTom reported a 50 percent rise in third-quarter net profit to 29 million euros, up from 19 million euros a year earlier, due in part to a currency gain mainly attributed to the depreciation of the euro against the U.S. dollar, and lower restructuring charges.

           

TomTom, whose founders have a majority stake in the company, competes in the PND market with Garmin and in the commercial digital map market with Google and Nokia Oyj.

             

(Editing by Mike Nesbit and Chris Wickham)