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Executives

Sandra Rowland - Vice President of Investor Relations

Dinesh C. Paliwal - Chairman, Chief Executive Officer and President

Herbert K. Parker - Chief Financial Officer and Executive Vice President

Analysts

David H. Lim - Wells Fargo Securities, LLC, Research Division

Ravi Shanker - Morgan Stanley, Research Division

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Michael Blasi

Harman International Industries, Incorporated (HAR) Q1 2014 Earnings Call October 31, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HARMAN Fiscal 2014 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, October 31, 2013.

I would now like to turn the conference over to Sandy Rowland, Vice President, Corporate Development and Investor Relations. Please go ahead.

Sandra Rowland

Good morning, and thank you for joining our first quarter fiscal year 2014 investor call. I'm joined in Stanford today by Dinesh Paliwal, our Chairman, President and Chief Executive Officer; and by Herbert Parker, our Chief Financial Officer. If you haven't done so already, I invite you to visit the investor section of our website, where you can download copies of our earnings release and the supporting slide presentation that we will be referencing today.

Before Dinesh and Herbert provide their remarks on the quarter, let me also remind you that certain statements during this conference call and question-and-answer session may be forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs, assumptions and current expectations. However, they are subject to a number of important risk factors and uncertainties, which are fully described in the press release that we issued this morning.

And now let me turn the call over to Dinesh.

Dinesh C. Paliwal

Good morning, and thank you for joining our first quarter fiscal year 2014 investor call. I'm joined in Stanford today by my colleagues, my Chief Financial Officer, Herbert Parker.

Earlier this month, we had a number of interesting things happen, which I will update you during this call. So let's start with, earlier this morning, we issued a very strong first quarter result. Revenue in the quarter was $1,172,000,000, and that's an increase of 17%. And all 3 of our divisions reported double-digit growth. Our performance on the top line resulted in strong bottom line performance as we finished the quarter with $123 million in EBITDA, that's an improvement of 14%, and earnings per share of $0.95, a 21% improvement from the prior year.

I'm also pleased with our cash performance this quarter. With a rigorous execution of working capital reduction, we generated $130 million in cash from operating activities. We are focused on effectively managing our working capital and converting our net income into cash so that we can continue to execute both on organic and inorganic growth initiatives.

For example, earlier this month, we expanded our Professional Division with the acquisition of Duran Audio. This investment is a prime example of how we are advancing our technology leadership position through research and development or by acquisition. This acquisition of Duran provides us with access to innovative electroacoustic and software-based directivity control technologies. These core technologies will become an integrated part of our professional audio product line going forward.

This is the second acquisition that we have completed in this calendar year in Professional Division. It follows our acquisition of Martin Lighting, which is off to a great start. We are realizing top and bottom line synergies, which I believe are ahead of plan.

This quarter, we also launched an additional restructuring program in Germany, which will continue to shift our footprint from high-cost to best-cost countries. The program will eliminate approximately 260 full-time positions in Germany and will yield savings of approximately $25 million beginning fiscal 2015 and subsequent years.

Now let me take a closer look at our divisions and review some recent notable achievements. Let's start with our Infotainment Division, which is highlighted on Page 6 of your slide deck. During the quarter, we secured new infotainment awards totaling $1.3 billion from automakers, including Volkswagen, Daimler, Geely and Ssangyong. As I indicated at our Investor Day in August, essentially all of these awards represent a competitor replacement, furthering our market share gain. We'll be supplying a global entry Infotainment system to a variety of Volkswagen models in high-growth markets like Brazil, Russia, India and Mexico. For Mercedes-Benz, we'll be providing a 4G LTE connectivity solution across all car lines globally. Finally, we'll be supplying an entry navigation solution for Geely Motors' SUV vehicles in China.

This quarter, we also successfully started production on new Toyota programs in Europe. In addition, after a successful multinational launch of the Mercedes S-Class featuring HARMAN's all-inclusive NTG5 infotainment system, Daimler has now started supplying this great vehicle in Chinese market, which I believe is becoming their top-selling market. In September, we entered into a global agreement with Mazda to integrate our cloud-based Aha solution on their bestselling model, the Mazda3. After launching on the 2014 Mazda3 this fall, drivers in Japan, United States and a number of Asian countries will be able to select audio content from more than 40,000 Internet channels and radios from around the globe, so much for paid subscription for XM and Sirius radio.

At the Frankfurt auto show in September, we demonstrated that we will continue to be a driving force in car innovations. Our technology was prominent in prestigious vehicles premiering, including BMW i3 electric car. HARMAN is the first company, I'd say, to develop and launch a customized infotainment system that includes features specific to electric vehicles, such as battery status, range assessment, charging station locations and many more. It is these types of innovation that attract the attention of leading research firms. For example, in September, technology intelligence firm ABI Research named HARMAN the top automotive Tier 1 supplier for connected infotainment solutions worldwide. The ABI report noted that HARMAN outpaced its competition due to technology leadership and global presence.

As further evidence of our focus on innovation, I'm pleased to share that our patent portfolio count jumped from 4,900 to over 5,200. That's a net of 300 gain during this quarter, and that happens to be a new record for our company. And also, I'd like to say we continue to innovate very aggressively in the areas where it matters.

Now turning to the Lifestyle Division. Some of our recent notable achievements are highlighted on Page 7 of the slide deck. We won several new car audio awards during the quarter. Toyota, Lexus, BMW and other car companies selected our JBL, Mark Levinson and HARMAN Kardon audio solutions for a variety of their vehicle platforms. During the quarter, we also launched our cross-car line audio solution with BMW. Our HARMAN Kardon Logic7 systems are now available in BMW 4, 5, 7 series and X5 SUV models worldwide. In addition, we launched our first compact car segment solution with the new Kia Sportage, as they say in French, featuring Infinity-branded audio.

Shifting to our home and multimedia product lines. We continue to build tremendous momentum in this important category. We grew revenues 24% this quarter. As the IFA trade fair in Berlin, Germany, we introduced a total of 63 new products, including headphones, wireless audio and home and entertainment solutions. Among the highlights were the JBL Synchros headphones line, premiering JBL LiveStage signal processing technology; the new JBL wireless portable line; and a fully renewed HARMAN Kardon product line featuring state-of-the-art design and acoustics. I am pleased to say that this area of products are seeing tremendous success in the market already and are among the most innovative products we have launched in recent history and the market has ever seen.

Of the 63 new products recently launched, we have received 39 awards globally for innovation and for design, including 2 best product award from the European Imaging and Sound Association, also known as EISA. Both the HARMAN KARDON Onyx portable audio system and the AKG K935 wireless headphones were named the best-in-class product across the industry in all categories. Ladies and gentlemen, it's clear that our product lineup has never been stronger, and we are well positioned as we head into the holiday season.

Now turning to the Professional Division, which is highlighted on Page 8 of your slide deck. We capitalized on strong demand for our audio and lighting products for use at a wide range of live entertainment events and fixed-venue installations worldwide. In the developed markets, our professional solutions were again featured at high-profile events, including the Emmy awards and the MTV Video Music Awards and dozens of live tours by world-leading artists.

Our solutions were installed in a broad range of arenas, stadiums and other venues around the globe. Importantly, we continue to gain share in the emerging markets as our system solutions have been delivered for a growing number of facilities, such as the MTV studios in Mumbai. Our leading audio systems were also used at Brazil's week-long Rock in Rio, the world's largest music festival. And let me remind you that HARMAN has won 9 of the 15 new stadium venues for the 2014 FIFA World Cup soccer, which, outside of the United States, is called football.

Overall, I am pleased with our performance this quarter. Our fiscal year is off to a solid start, and we are focused on achieving the financial and strategic targets that we have established. Now I'll turn the call over to my colleague, Herbert Parker, who will give you additional color on our financial results.

Herbert K. Parker

Thank you, Dinesh, and good morning, everyone. First, let me walk you through our financial highlights for the quarter. As usual, most of our financial comments are provided on a non-GAAP basis, which basically excludes restructuring costs and other nonrecurring items. The reconciliation of our GAAP to non-GAAP results is included in the press release issued this morning.

This quarter, our revenues were $1,172,000,000, an increase of 17% compared to the prior year or 14% excluding the impact of foreign currency translation. We had strong growth in all 3 of our divisions. Revenue in our Infotainment Division was up 14% year-over-year as our recent SOP launches continue to gain traction and expand across car lines. Revenue in our Lifestyle Division increased 15% over the prior year. We continue to see strong sales growth in our home and multimedia product lines, and this quarter, we also saw strong pickup in our car audio business. Revenue in our Professional Division was up 37%. The increase is due to the expansion of our product portfolio into lighting, which was enabled by our acquisition of Martin last February and due to strong global demand for our audio products.

In the first quarter of fiscal year 2014, our gross margin and SG&A expense as a percentage of net sales were in line with the prior year quarter. Our gross margin decreased modestly from 27.9% to 27.6%, and SG&A expense decreased as a percentage of net sales from 19.9% to 19.7% for this quarter. Our consolidated operating income on a non-GAAP basis was $93 million compared to $79 million in the prior year, an increase of 18%.

Our net income was $67 million in the quarter or $0.95 per share compared to $55 million or $0.79 per share in the prior year. This equates to increases of 22% and 21%, respectively. I would like to also highlight our cash performance during the quarter as we generated $113 million in cash from operating activities. This improvement is primarily related to our stronger operating results and more effective working capital management.

Finally, I would like to provide you with an update of our stock buyback program. During the first quarter, we purchased 400,000 shares at a cost of $26 million, and during the month of October, we repurchased an additional 860,000 shares at a cost of $58 million. This means that, at the end of October, our diluted share count is approximately 69.4 million shares. And as of today, we have approximately $186 million remaining under the current board authorization, which we intend to complete during this fiscal year.

Overall, I am very pleased with the results from the quarter.

Thank you for your attention. And now Dinesh and I would like to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of David Lim with Wells Fargo.

David H. Lim - Wells Fargo Securities, LLC, Research Division

The question that I have is I want to focus on Infotainment. And Infotainment revenues were strong in the quarter, and regional production is likely to improve on a quarter-over-quarter basis. How should we think about the seasonality? If we use F Q1 as the base, it appears, in my view at least, HARMAN could easily exceed the Infotainment revenue guidance that you gave back in August.

Dinesh C. Paliwal

So David, that's interesting. And if that's the case, obviously, we'll find out in the next 3 quarters, that would be a good problem to have. So we've pondered on it seriously in the last few days. While we're very happy with our first quarter results, we really don't know how the rest of the 3 quarters will shape up. We all hope that everything will go as we expect. Obviously, as you pointed out correctly, the assumptions we used for the full year, Europe has performed slightly better than our assumptions, and that's what is reflected in our top line and our bottom line. So that's a good start. And the fact is, if these conditions prevail or get better, we definitely will come out better, to your point. But at this point, we thought it's not prudent for us to sort of come out with a full year revised guidance. I think that would be more appropriate -- just like what we did last year, when we had second quarter results coming out, that we will have half the year under our belt, we'll know full year much better. So I hope you'll appreciate that.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Got you. So when we look at F Q2, I mean, you're already pretty much 1 month into the quarter, how has customer schedules trended for you guys? I mean, was it as expected? Or any surprises? And generally, third-party forecasters are looking for flat year-over-year production in the current quarter. Are you seeing that pretty much as well? Or are there any kind of anomalies that you've seen so far?

Dinesh C. Paliwal

We have seen no anomalies. In fact, we dug in with our division president, Sachin Lawande, very much in details. We're seeing actually exactly as we had planned our second quarter, which will be a good thing if it turns out to be as planned. Because first quarter came better than planned, if second quarter comes in as planned, I think we'll be ahead of the game.

David H. Lim - Wells Fargo Securities, LLC, Research Division

Got you. And then final question is -- before I pass it on to the others here is, can you just give us some color on how the S-Class launch has progressed for you?

Dinesh C. Paliwal

It's progressing as planned, slightly better because this car, they needed it badly. Mercedes really needed to shake things up a little bit because they were losing market share to other competitors. This car is generally a fantastic car. Its screen, its -- the whole command center is just awesome. I would say probably one of the best right now in the industry, and they're seeing very glowing market share in North America and Europe and China, which all believe that Mercedes brand continues to be topnotch in optics. I think they will gain from it. And the more they sell, more we'll benefit. And not only that, I'm always looking long term. Mercedes S-Class being the flagship, this is -- this success will actually put pressure on Mercedes top management to bring back HARMAN for a larger scale of Infotainment across the car line.

Operator

And our next question comes from the line of Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

If I can maybe follow up on that Infotainment question and talk about the margins. Your Infotainment margin was pretty strong in the first quarter. We were expecting a ramp through the year. Can you talk about the trajectory of margins and how to think about that for the coming quarters?

Dinesh C. Paliwal

Again, Ravi, I appreciate. And I will say, as you have seen yourself, quarterly margins in Infotainment business can go up and down based on the launch cycles and sometimes, duplicative costs as we're launching. Or even -- to make it more interesting, as you know, we are constantly migrating a lot of our high-cost into the best-cost countries, so we have, sometimes, duplicative costs and what have you. So with that said, quarterly, I'm not so sure whether we can give you a very good trajectory right now. But fiscal '14, 10.5%, when we gave that, a lot of you felt that was sort of a push. All I can say, right now, it feels that it should be achievable.

Ravi Shanker - Morgan Stanley, Research Division

Okay. So you don't have -- I mean, is it hard to get visibility into the timing of those duplicative costs and the launch programs and so on and so forth?

Dinesh C. Paliwal

No, we do. We absolutely do. If I -- we definitely have timing, and the bookings of those costs or also some other things which makes puts and takes, can vary. Even by a week or 2, that can move the quarter from left to right. On an annual basis, I would say, Ravi, which is very important statement to make, the 10.5% EBITDA for this division, which will really move the needle for the company, I think that looks more secure right now than it did 4 months ago.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And just on that topic, Herbert, can you quantify any launch costs that you may have had in the quarter, which may have hurt numbers?

Herbert K. Parker

Yes, sure. It wasn't very significant. Around 300 basis points is what it was for that particular quarter.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And just a broader-picture question. I think when you guys first spoke about the scalable system and going away from the high end towards the middle of the market, I think you'd said that you're focusing more on the middle of the market and not so much the low end. But now you're winning business with Geely and some -- and really expanding to the emerging markets. Can you talk about if anything has changed in your view there in terms of going into the low end and if you kind of can't do that with the same level of margins you're talking about for the Infotainment business across the board?

Dinesh C. Paliwal

So what we have done, coming in with scalable platform, frankly, we learned a lot about how market is working and where the price points are going. The ASPs were shifting, and it's actually a good thing. If we bring the ASPs down, then take rate is likely to go up. So what we have done, Ravi, is we took this platform approach, scalable approach, modular software approach and we actually truly created a soft -- an entry infotainment system that we have successfully launched at Tata in India. That's almost $0.25 billion award for us, and that's what is taking us back into Geely. And as a matter of fact, that is the platform we used in VW, Volkswagen global award. That was a very significant win for us to go in Brazil. Brazil is Volkswagen's largest market for entry cars, so we're going for Brazil, as a matter of fact, because of that great win. It was almost a $600 million award for entry. First time such big award for us. And by the way, margins are pretty good. Otherwise, we would not take it to dilute our backlog. So Brazil will be opening a new factory to further assist us to improve the margins. Because once we start to make the products in the country, then we will avoid all those prohibitive, silly import duties. So entry system, we today have a pretty robust offering. We'll continue to work on it as technology is shifting, moving, adopt many of these Google and Apple offerings as a part of our integrated offering, bring the further price points down. So that we are relevant in entry and mid while high we are well secured.

Operator

And our next question comes from the line of David Leiker with Baird.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I just want to follow up on the question on the launches, the pace of those launches. I think you have more launches in the next 3 quarters than what you have in the last couple of quarters. And just put in context where you think launch costs might go in the middle of going through that period.

Dinesh C. Paliwal

David, I'll give you a very -- pretty well-thought-out answer because we went through with Sachin and his team. Our R&D costs as we have planned for the year, I think, we're going to be well within that because the launch costs might go up here and there. At the same time, our push for the engineering cost reimbursement has started to pay off. As you heard me 3 or 4 quarters ago, that was not a one-off. It will never be one-off. We're creating a culture of recovering, rather than waiting for 3 years, and that's working. So all in all, I think, net-net, we'll come out, as a percent of sales, R&D line, with all these launches you mentioned, still within where we want to be and maintain 10.5% or higher EBITDA margin for the full year.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

And then in terms of the pace of that in terms of launches, you have more -- you'll have higher launch costs in the next couple of quarters than what you had in this quarter, wouldn't you?

Dinesh C. Paliwal

Yes, slightly, but not really significant. Because many of the launches are associated -- like BMW, it was not 1 launch. It's multiple launches. The first launch is always more expensive, like this electric car or entry system, which we just finalized. The launch costs start to exponentially come down because we are doing -- applying a lot of those learnings from the first launch. Unless it's a brand-new customer, brand-new geography, that's a different ballgame. So all in all, it's really not a concern to us.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then you launched, I think it was like 6 months ago, kind of a midyear, mid-cycle upgrade of your Toyota system. And it looks like you're doing the same thing with Europe here. Where are you seeing the take rates? And where do you expect the take rates to be on those vehicles relative to the old programs that you have?

Dinesh C. Paliwal

Take rates are running right around 30%. This is a good thing, these price points and the technology Toyota is also pushing. So that's a good thing. So about 30%.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. And that sounds like, I think, higher. I think you were talking 25% a couple of quarters ago, no?

Dinesh C. Paliwal

Yes. So it has gone up slightly, which is a good thing, and we are constantly working. If you recall, in one of the earnings call, we talked about that we've had -- we have been engaged with top leadership of Toyota, TMS and also TMC, Toyota Motor Co., really emphasizing the point that, "Guys, you should stop bundling the infotainment and car audio. And I think -- and also you should be putting more as a standard item. And if not a standard, offer it more as an option," which they weren't doing. And I think that, that thing is finally getting traction in the corporation. So 30%, I believe, is sustainable in these markets for Toyota.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Yes. I mean, Ford talks about that their -- over 90% of their vehicles have Sync in it, and it doesn't seem like any other automaker is really going down the road to push it that far.

Dinesh C. Paliwal

Right.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the last item I have. As you look at your initial flow of contracts that you got on the scalable system with Toyota and then Volkswagen and then the other ones behind that, where are you in the timeline of kind of rebidding or the next generation of those systems in terms of when you'd be in a position to talk about renewing those for the next-generation vehicles?

Dinesh C. Paliwal

Right. So Toyota is right up there. We are already in discussions with them. We have Chrysler coming up. We have also BMW Evo, entry Evo. We have General Motors. All the General Motors was awarded not too long ago, but they are already talking to us, what can we come up with. But that was our high to mid. They might be even looking at entry. So in terms of mid refresh, Chrysler is up there. That's a big one for us. And by the way, Chrysler is turning out to be a great success for Chrysler and for us, and the report from J.D. Power is not out, but that came out as a most glowing commentary on the recent launch of the technology. And right alongside is Toyota. So Chrysler and Toyota would be on our radar screen for rebidding and succeeding.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Yes. I noticed that all of those consumer report systems. . .

Dinesh C. Paliwal

You did, and weren't they great?

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Yes, they happen to be yours.

Dinesh C. Paliwal

Yes, but they're a great report. I love to see our consumers benefit from the technology.

Operator

And our next question comes from the line of Matt Stover with Guggenheim.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

I have 2 questions. The first one is -- I was on another call. Was there -- can you give us the R&D number and if there was a recovery in that?

Herbert K. Parker

This is Herbert. The R&D number we had for Infotainment was $50 million; Lifestyle, $15 million; and Professional, $8 million. It was the normal recoveries that we've done every quarter, nothing unusual.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Okay. If I look at kind of the progression and the thought on the margins, the revenue was really terrific. I was surprised, though, to see that the EBITDA margin -- the gross margins, rather, in every business were down versus the same period a year ago. And I would imagine that at some point this year, particularly in the Infotainment business, there should be some transition and improvement in that gross margin. And I'm wondering if you could talk about kind of what it is that contributed to the significant reduction in SG&A and when we should think about an improvement in the gross margins as being a driver of overall margin improvement.

Herbert K. Parker

I'll take that one. First, let me just address the gross margin, and I think, specifically related to Infotainment, I can take that one first. I think what you need to do first is to get the true incremental margin. Just take out the revenue growth that's related to the foreign currency translation. Because when you adjust that, you would see only about $56 million growth. And then when you look at the incremental margin, you would be looking at about 20% that we would have in that. There was a lot of other small puts and takes, but primarily it's the translation effect we got on the foreign currency that made it look like it was smaller than what it was.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Okay. And then on the SG -- and then when we think about that, Herbert, I imagine that there will be a period here where the gross margins themselves, just because of the mix of business that's flowing through in terms of custom and scalable, that sort of thing, it should transition. Would we think of that later in the year? Or how would you encourage us to think about that?

Herbert K. Parker

Well, I encourage you to look at it that our gross margin is pretty stable. It could go up more. But we're really focused on the operating margins. I mean we've got various strategies to improve our results, whether it's higher sales, better margins or more R&D recoveries or less SG&A. So I don't want to really get into our guidance on, particularly, the gross margins, but I can assure you that we're very confident in our 10.5% EBITDA guidance.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Yes. But I would think that, from a scalable standpoint, that there would be cost of goods sold that you would get scale on and not just R&D scale, in terms of the benefit of margin as you transition to scalable. Is that incorrect?

Dinesh C. Paliwal

We do -- yes, we do, Matt. That's correct. Because that's where the scale comes in. When you're negotiating a $1 billion deal, bill of material, all the components, whether it's the silicon or the memory or LTE or 4G connectivity module, or you're negotiating for $5 billion, it's a whole new ballgame. We learned that when we got almost a $0.5 billion connectivity business with Daimler. We really looked at various vendors, 4G, LTE connectivity module, and we got tremendous leverage because we have the volume. And they also knew, quietly they knew, which I cannot talk about, how many other customers are talking to us for a similar offering. So that's working. And same, I will say, apply to scalable. GM coming into scalable for almost $2.3 billion, $2.4 billion award, that really made big difference for our suppliers to come down to talk to us in a more reasonable fashion. And we are getting a lot of leverage on hardware and mind it, software and engineering reuse. It's a big deal. That was the whole basis of developing this platform, and we are happy in that position.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

So I'm correct in assuming that both gross margin and SG&A leverage should be contributors to future margin growth, right?

Dinesh C. Paliwal

That is correct. That is correct, yes.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

So are you just cautioning us from estimating better gross margins this year just because there's a big transition under process? Or...

Dinesh C. Paliwal

There is -- I would not call it a big transition. It is not because we are already delivering good business. I think what Herbert said, and I'll only repeat because that was so accurate statement, end of the day -- this company used to be so focused on contribution margin or GMs and without focusing on what the hell is going on below that, and that's unacceptable. That is called rigorous execution. So we are focused on all areas because you can only do so much on bill of material because market is what market is, so you buy, you negotiate. But what you can do is scale. It applies to all fixed costs, that's all your factories; and also make/buy decisions, what we make versus what we buy; and third, which is most important, is R&D and reusability. So I think, combining those 3, the most important thing becomes EBIT line, which is below gross margin. You have to now take care of your SG&A. So GM is one, which we are mindful of, and we try to push it up. But then we are really on focused how do we take SG&A down so that EBIT margin gets healthier every time. And it is going in that direction not just 1 quarter. It's been going on for 15 quarters in a row, without much of a change in direction.

Operator

[Operator Instructions] And our next question comes from the line of Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Continuing on the Infotainment theme. Could you maybe comment, because it's here both with Daimler and on the GM award, on how the pivot towards 4G is going? I know GM feels very strongly that 4G embedded in the cars is a better solution than competitors who use the smartphone integration as their link to the cloud. So I guess 2 questions. One, where do you see that going across other OEMs? And two, what do you, as HARMAN, bring to the table there that, perhaps, some of the other infotainment vendors don't have? And then kind of three, what's the implication as we go out for that?

Dinesh C. Paliwal

Well, it's a great question, by the way. I would say perhaps one of the most strategic question we ask ourself, "How would this roll out?" And the answer is pretty positive. We're seeing lots of inquiry and discussions with all OEMs. Daimler is actually not the first one in Europe. You may recall, we have been doing connectivity modules with BMW. We used to call it COMBOX. And now it's -- then we started with Joy [ph], that was Daimler. That was our first-generation connectivity. Now we won the new award to replace our first one. And of course, the GM has come in with a big way, which is a totally integrated system. And we are in the process, actually, with a fairly large company, which happens to be right outside of China, but it's not Japan. So you can imagine which company, we are bidding a fairly large connectivity business. So it is the direction. And again, coming back to, you asked a question and you also sort of highlighted the directionally answer. People are not going to buy cars if they're not totally connected. Because our solutions are evolving, we're investing in HARMAN cloud. A lot of our services and apps, our more integrated apps would be updated on a real-time basis, so we want connectivity. And we want total independence from the phone. We want end-to-end solution, including Aha, that is the HARMAN solution. We want HARMAN Insight, and we want all the upgradability. Because if you sell the system today -- today's system is not as connected and open as it's going to be in 2015 or '17, so we want to build in based on these connectivity modules already hooked so that all our application software can be downloaded. And also, there will -- hardware would be more challenging, not software because we -- I think we solved it because our leader for Infotainment, he's a master. He's a thought leader when it comes to software architecture innovation. You see hardware, hardware has to keep up with it because hardware cannot be just changed online. It has to be changed physically, and I think that's another area we're working with our suppliers, how do we help them design something which is easy to swap.

Brian Arthur Johnson - Barclays Capital, Research Division

So if you look at the 2 wins you highlighted here and in the Investor Day, was there -- where were the competitors on that? And kind of -- I know there's HARMAN Aha and the cloud-based services but you haven't -- was that the factor in doing the win? Was it the hardware? Was it the software integration?

Dinesh C. Paliwal

There are multiple things, obviously. We have to have a strong footprint on the ground. That's an important thing. And in fact, VW made that as a condition. They disqualified various suppliers if they did not have, in the country they're going to sell car and make car, unless we have a foothold of engineering, manufacturing and services. That's becoming a very big point for them. And obviously, China, competence is starting to play out big time, how strong you are, from your R&D, from design, from manufacturing, from serviceability. And China is everybody's focus point, so that's second. And third, integration continues to play big. And by the way, we will continue to emphasize because that's our strength, not only our own integration, I stress. We have been the first company to integrate the latest anything Apple or Google has launched, so customers actually pay attention to that, that HARMAN is the company to go to because they'll keep us current, they'll keep us relevant. So with that said, price, you end up getting a little premium for a few of these things. The thought leadership, integration capability, technology and global footprint, those things come in play.

Operator

And our next question comes from the line of Ryan Brinkman with JP Morgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Maybe just to start with another Infotainment cadence question. We've been expecting your Infotainment revenue, and particularly your margin, would inflect higher, but really more in F 2Q. That was our understanding when a large amount of scalable systems products would launch. But you inflected this quarter. So my question is, do you have incremental revenue and margin tailwind from scalable systems in F 2Q, relative to this quarter's elevated results? Or should we instead think that the contribution merely began sooner than we had supposed? And a separate...

Dinesh C. Paliwal

I think it's the latter because, if you remember, Ryan -- in fact, I remember you asking that, we had some discussion, that we started launching this programs, particularly Chrysler and Toyota and others, and we had anticipated that the ramp reaching to the high level might be crossing over between first and second quarter. It happened a little earlier, which is a good thing for us, and we're seeing all the signs that it will stay at that level or it might even get better.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

That's a great thing. And then I don't know there's been any Lifestyle questions yet. The revenue there tracked nicely better than we'd expected. Can you kind of help us with the delta? Was it attributable more to customer mix or to option take rates or maybe the launch of new business? And then if you could also sort of help with the trends within Lifestyle. How did car audio versus consumer do? I know you don't provide all the disclosures there. But I imagine that for the whole division to have done better, most of the improvement must have been on the car audio side, just given the size of the business, but you've also had momentum in consumer products. So can you help us out there, please?

Dinesh C. Paliwal

Sure. I think you asked a great question. Let me try. And Ryan, if I miss a few of your parts question, please come back. So the division performed extremely well. I'm very happy. Car audio, really, it turned out to be a better quarter for car audio than we had the quarter before, which is good because that's something we've been pushing hard. The car take rates going up means better profitability because this is a good mid-teen EBIT margin business for us. So car audio was almost 10%, 9%, 10%. Home and multimedia was also in the -- with a zip code starting with 2, so that's not a bad thing to have. And I expect the home and multimedia to have, again, another stellar quarter in Q2 because that's traditionally a strong quarter. Now coming back to margins, so yes, mix does play. So if home and multimedia outgrow car audio business, then your margin effects is a little bit diluted as a percent margin. But for the EPS point of view, it's very positive, it's very accretive. So we are happy to see any one part grow. At the same time, we are, Ryan, very mindful of pushing the margins of home and multimedia close to 10%. We did deliver, last year, 8%, so we hope that we can improve. So that was the second piece. Third piece, we are also bringing the same playbook we used for Infotainment scalable platform in the car audio platform. Sachin, when he was running the division, already started pushing that we need to come up with pre-configured number of speakers and based on amplifier solutions so that customers would have an easy way to sort of decide what goes in which model and at the same time, take a lot of cost out. That not -- doesn't necessarily mean we change prices too much, but prices can also be brought down, like we have done in Infotainment, so take rate goes up. But our percent margin will continue to stay healthy or even grow.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, that's really helpful color. What about the revenue strength at car audio this quarter? Was it more because of the mix of customers? Or was it more about better option take rates?

Dinesh C. Paliwal

It's more so the launches that we were driving. Let's take the example of BMW. So BMW, now HARMAN Kardon is shipping with 3, 5, 7 and X5. So that's helping. That's HARMAN Kardon. And the Mercedes is doing quite well for us, and Toyota is doing quite well. Toyota JBL pickup has been nice. So Toyota is a take rate thing. Toyota's take rate is starting to work. And Lexus, we're seeing some success, which we haven't seen before. Lexus is selling Mark Levinson. And by the way, Ryan, first time I've seen that, in China, Lexus is actually selling their cars with Mark Levinson logo right next to Lexus logo, just like Ferrari's logo. That's incredible. It's never been done for any brand whatsoever, HARMAN or non-HARMAN. So we are very excited. If that trend starts to become a trend, that would mean people will use Mark Levinson, HARMAN Kardon, JBL outside, and that would really help. But that doesn't surprise me because Chinese, as we have said, they love to own a piece of an iconic American brand. So I think that's the research they did, and they're happy to do it. So more and more, I'm very bullish on car audio business. That should continue to grow like in the same range as Infotainment. Over time, that would improve profitability.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Great. And then on the acquisition, I suppose we'll be able to glean acquisition-related spending from your cash flow statement in the 10-Q when we get it. But ahead of that, is there anything you can share on that Duran Audio business from a financial perspective, for example, what you might have paid, what multiple that, that might represent, what the firm's turnover is, et cetera? Or if you're bound now by a nondisclosure agreement, maybe just speak a little....

Dinesh C. Paliwal

No, we can share that. So we just closed that a couple of weeks ago. This is a bolt-on technology acquisition, Ryan. We paid $25 million for this asset. We got lots of patents and the great brainpower. And the revenue is just about $10 million, but it's a very profitable business and lots of prospect list. Particularly, this solution will allow us to do what we have never done. That means unique applications in difficult places like tunnels, we will start to win big business because they directivity control so they can do all kind of disaster announcement or any other traffic announcement from end-to-end tunnel using this technology. And now we'll deploy that for our stadiums and for a lot of other device -- for other installations in our JBL loudspeaker business. So this should give tremendous synergy. So in terms of -- it's very small compared to Martin Light.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, very interesting. Just last question, last year, in the December end quarter, which is coming up, we saw some pretty unprecedented production cuts from different German automakers to address inventory issues they'd been experiencing at that time. The European market seems so much more stable now than it did back then. But I'm curious what you're seeing in terms of customer orders thus far during F 2Q. I think they typically provide you with like a pretty decent 9-week window. They don't always stick to that. But do you have any indication that we might see some atypical shutdowns this year around the holiday season, even if not to nearly the same extent as last year?

Dinesh C. Paliwal

We don't expect atypical shutdowns end of this year. It should be more of a normal year, what we used to have, unlike last year, Ryan. And also whatever insight we have in our production releases, they are pretty much in line with what we have planned. So it's all good.

Operator

And our next question is a follow-up question from the line of David Leiker with Baird.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Just 2 last questions here. Herbert, as you're moving your production lines around, you mentioned your -- particularly in Infotainment, duplicate costs. Is there a way to quantify that? And then just share how long you're going to continue to have those duplicate costs before they run off.

Herbert K. Parker

Yes. David, I quantified it at 300 basis points for this quarter. But I think that you will not see any type of big exponential increases going forward because the savings that we will start to realize will offset these duplicative costs in the future.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I thought that 300 basis points was launch costs related, not footprint change related?

Herbert K. Parker

Sorry?

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

The 300 basis points, in my understanding, was that was launch costs related.

Herbert K. Parker

Launch and warranty. We put the two together.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. What about the cost for footprint changes?

Herbert K. Parker

Warranty and launch costs. I didn't get your question. Did you say...

Dinesh C. Paliwal

No, his question was duplicative costs. Duplicate cost is not manufacturing. It's more of engineers in both places. So it's inclusive in that.

Herbert K. Parker

Yes, got you. Sorry, David.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. I'll follow up on that. And then, lastly, on the Professional side, I think in some of the past quarters, there was some delays in timing of new contracts and startup of production. Can you just talk about this data that industry and what you're seeing in terms of projects coming up for availability and how they're moving through that pipeline?

Dinesh C. Paliwal

Right. Pro has been a lot of wait and see, wait and see, wait and see, to a point where -- very similar to what happened in North American auto industry. You can only wait for that long before your car breaks down, and we are starting to see that the inquiry level is pretty robust right now, which is very encouraging, and not only in North America. We're seeing that in Asia, Europe. It's still a challenging environment because it's flat, therefore, there's not a whole lot of new things to see. But Brazil was a great success. I mean, 9 out of 15 stadiums HARMAN won against Japanese, against Germans, against other Americans. It was an outstanding success. And that word goes around so people see why HARMAN is winning, because of the total solution approach. So David, I feel good about progress made. This is one personal challenge I've had, when can we take that business to double-digit growth. I'm not there yet. We haven't solved that, but at least, we can start to dream that we will go high-single digits soon.

Operator

And our next question comes from the line of Michael Blasi with Voyant Advisors.

Michael Blasi

Could you -- do you have the number for what Martin generated as far as revenue goes in the quarter?

Dinesh C. Paliwal

No, the --we do. Of course, we do have it. But Michael, we do not actually give out that level of granularity. We give actually division level because we have, within divisions, multiple strategic business units. So lighting would be a business unit, just like loudspeaker and mixing. And so at this point, that's the granularity we give.

Michael Blasi

Got it. The last one here is, can you confirm that, that R&D number was $72 million in total? I think it's what I got. And that is, on my calculations, around 6.1% of revenue.

Dinesh C. Paliwal

Let me just confirm that. Let me just look at that.

Herbert K. Parker

74 -- it was $74 million in total because you also have a little bit of corporate, yes.

Michael Blasi

All right, $74 million. So that's a little bit lower, I think, that I had expected based on the comments on the Q4 call. I think you'd said...

Dinesh C. Paliwal

Again, you should not take R&D percent based on 1 quarter because, as we have talked earlier, the launch costs and R&D push quarter-to-quarter can be different. We have been pretty consistent, for a number of years, saying that R&D percent of sales you should always look at on an annual basis because we are a systems business. Sometimes, activity is hyper in 1 quarter and rather relatively smooth and low in another quarter. So that would be my -- what I'd say. But I think, what you should expect that with all the efficiency gains we are getting and all the leverage we are getting, our target is right around 6.5% of sales, we're -- on a sustainable annual basis. And last year, we were higher than that, so I think we are well underway there.

Michael Blasi

So it's 6.5% this year versus -- I think it was 7% you discussed previously. Is that correct?

Dinesh C. Paliwal

Yes, something like that. That's correct, yes, so 6.5% or 7%. But the number also depends. I would not say no to any of my division presidents if they come to us and say, "Hey, I've got this cutting-edge new technology idea, which we need to create the skunk work. It may cost a few million dollars," we go for it. And we explain that -- listen, we're an R&D company, if you look at 300 patents we added this quarter. So this is all end result of being at the top, promoting the idea that people should not hold back inventions, come out, disclose, file the patent. That becomes our future potential monetization activity. At the same time, it helps us sell more new products. So R&D, I would not hold back if I had to even go to 7%. But I think we can be well below 7% this year and also coming years.

Operator

And there are currently no further questions over the phone lines. I will turn the call back to you now.

Dinesh C. Paliwal

Very good. So ladies and gentlemen, first of all, I thank you. And I repeat, as I said, we, the management here, are very, very happy with the first quarter. It was a strong quarter. I hope our shareholders, our community of buy side, sell side, both are very happy with what we have done. This is a net result of continuous hard work people have done, and I would say 1 word defines this company. We are technology-driven company, and technology leadership continue to differentiate us from the rest of the pack. And that's why we are able to sort of request for higher prices, and we do get sometimes, and more and more.

And we are deepening our business in high-growth developing markets and the developed markets both, and we are as focused as we have always been in execution. Working capital would be our focus, and I'm personally targeting for the team here that we should come between 90% to 100% conversion of the earnings into cash. That would be a great success if we come close to that.

So with that said, we have another 3 quarters ahead of us, a lot of hard work. If markets remain as they are and Washington doesn't screw around, I think we'll be just fine. Thank you, all.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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