Digital Map Maker Plots A Course To Your Car And Your Cell Phone

It's not as easy to get lost these days. Not with all the new global positioning devices in cars that make use of digital mapping data.

A growing number of new cars, especially luxury models, come factory-equipped with in-dash navigation systems.

Owners of new economy models and older cars don't have to rely on scribbled directions or road atlases anymore, either.

They can buy less-pricey portable navigation devices at retail. And they are doing just that as device makers step up advertising to build awareness.

Sales of portable navigation devices, known as PNDs, are growing nearly 100% annually, according to industry estimates. That's faster than in-dash units, which are growing in the low to mid teens.

"You're seeing an explosion of demand for these PNDs," said Marko Vucenovic, an analyst at FTN Midwest Securities. Even new-car owners often choose portable devices over factory-installed units because of the price.

Growth In Mobiles

This isn't news to Navteq NVT, one of two leading suppliers of digital map and location information for car navigation devices.

While its biggest business is providing data for in-dash units -- 62% of total revenue last year -- Navteq's fastest-growing segment is portable devices.

Navteq's PND business grew 118% in the second quarter over the same period last year. In contrast, data sold for factory-installed in-dash devices rose 17.3%, despite sluggish new-car sales in its core U.S. and western European markets.

The latter is largely due to new-car penetration rates that are still low -- about 10% of the 35 million new cars expected to be sold in western Europe and North America this year.

A smaller part of Navteq's sales comes from Internet mapping, such as AOL's MapQuest (a unit of Time Warner TWX) and Google's GOOG Google Maps.

Unit volume jumps are offsetting price declines for both in-dash and portable units, analysts say.

"This is a highly scalable business, so operating leverage tends to kick in as volume throughput increases," said Bear Stearns analyst Peter Barry.

In the second quarter, Navteq's earnings jumped 64% over last year to 41 cents a share. Revenue grew 49% to $202.3 million.

Analysts polled by Thomson Financial estimate full-year earnings will rise 31% and grow another 28% in 2008. They see earnings leaping 73% in 2009, a year when several low-cost navigation units are expected to roll out.

Navteq's chief rival is the Dutch firm Tele Atlas, which has agreed to be acquired by No. 1 GPS device maker TomTom, also based in the Netherlands. Tele Atlas is TomTom's main supplier.

In terms of market share, Navteq leads in North America while Tele Atlas wins in Europe, though Navteq actually derives more of its revenue from Europe, where the market is bigger and more mature but growing at a slower pace.

The pending merger has spawned rumors that Navteq might be acquired -- possibly by its biggest customer, GPS device maker Garmin GRMN, or another GPS firm.

"We don't comment on rumors," said Navteq's chief financial officer, David Mullen. But the TomTom acquisition "emphasizes the value of content in this space," he said.

GPS chips give just latitude and longitude, Mullen says. "That piece of information is not worth a whole heck of a lot unless you can put it in context," he said. "An accurate digital map, which we sell, puts it in context. We sell the data, and our customers write the software that manipulates the data."

The Tele Atlas and TomTom merger might even help Navteq, analysts say. Why? Some of Tele Atlas's GPS customers might think twice about buying software from a firm owned by rival TomTom.

Navteq is literally all over the map. Its roving geographic analysts have mapped 69 countries on six continents, covering about 12 million miles of roads.

While the core of its business is mapping roads, Navteq keeps adding more content, such as information on hotels and special events.

With its purchase of Traffic.com in March, it now offers real-time traffic information. Mercedes-Benz recently chose Navteq to feed real-time traffic data to its 2008 S-class models sold in the U.S. The cars began shipping in July.

Interactive content will become a key growth vehicle, analysts say. That goes for autos as well as hand-held devices such as cell phones.

Navteq's wireless business is still less than 1% of total revenue. But Mullen says it ultimately could become the firm's largest market.

"We envision a future with a map on every cell phone," he said.

Computer-enabled smart phones such as Nokia's NOK 6110 model can handle digital maps, but mobile makers haven't widely embraced the technology, Mullen says.

Verizon

Digital maps also can be accessed at central servers, as Verizon Wireless is doing with its VZ Navigator service.

VZ Navigator has about 1 million subscribers, each paying about $10 a month, says David Niederman, an analyst at Pacific Crest Securities. He figures data supplier Navteq's take is about $1 a month per subscriber.

"It's not a lot. But if you look at the potential for all mobile phones to be GPS-enabled over the next few years, that's an opportunity for Navteq," he said.

A government mandate could quicken the process, analysts say. It calls for mobile phones to offer 911 emergency service, just like landlines. One way carriers might comply is by installing GPS functions in handsets.

Once handsets are GPS-enabled, it would be easy to monetize that capability by providing other services, such as digital maps.

"Adoption, market penetration, technology: All of these elements are bearing on the growth of the industry," said Barry, of Bear Stearns. And since costs are steep to start mapping locations from scratch, there are barriers to entry.

"You might argue that once you create maps of the world, there is no need to do it a third or a fourth or a fifth time," Barry said.