Garmin Ltd raised its forecast for the year as it starts to gain from its move to add high-margin services to its staple personal navigation devices (PNDs), which have seen a freefall in sales over the past few years.
Shares of the No. 1 U.S. navigation device maker rose as much as 9 percent in morning trade to $37.20, their highest in a year-and-a-half. They have fallen about 70 percent since their heydays in 2007, when they traded above $125.
Garmin and its European peer TomTom, known for their personal navigation devices (PNDs) that once used to be must-haves for car and truck drivers, have seen their flagship products lose out to navigation-enabled smartphones amid slowing consumer spending.
To counter the threat, both the companies have been looking at other avenues for growth. On Tuesday, TomTom announced a restructuring plan and said it would focus more on its auto and mapping services.
Garmin has started bundling its personal navigation devices (PNDs) with high-margin live traffic and mapping services, a move that is beginning to pay off for the money-bleeding segment.
For automotive, the Street was looking for gross margins of around mid-30s but they came in at almost 44 percent and that generated the bulk of gross margin upside, Oppenheimer analyst Yair Reiner told Reuters.
For the year, Garmin now expects gross margin of 47-48 percent, up from its earlier outlook of 45-46 percent.
It forecast pro-forma earnings of $2.30-$2.40 a share, up from its prior view of $2-$2.15 for the full year. Revenue is expected to be at $2.6 billion.
So far, the Switzerland-based company has not been able to recognize revenue from the added services up front and this deferral of revenue has dented its margins in previous quarters.
However, deferred revenue for the third quarter was lower than what the company had feared, boosting margins during the period.
They changed their accounting on how they book revenue on PND this quarter, so they'll be recognizing more revenues and profits up front than they have been recognizing in the previous quarters, said Morgan Keegan analyst Tavis McCourt.
The EPS beat was largely due to the change in accounting as the Street did not expect the change.
For the third quarter, gross margins were 52 percent, compared with 50 percent last year.
Third-quarter net income was $150.4 million, or 77 cents a share, down from $279.6 million, or $1.44 a share, a year ago.
Pro-forma earnings were 71 cents a share.
Revenue fell 4 percent to $667.0 million. Auto segment revenue fell 13 percent to $384 million.
Analysts expected earnings of 50 cents a share on revenue of $618.1 million, according to Thomson Reuters I/B/E/S.