NAVTEQ Q1 2007 Earnings Call Transcript

May. 1.07 | About: NAVTEQ Corp. (NVT)
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NAVTEQ Corporation (NVT)

Q1 2007 Earnings Call

May 2, 2007 5:00 pm ET

Executives

Tom Fox - Director of IR

Judson Green - President, CEO

Dave Mullen - EVP, CFO

Analysts

Jay Vleeschhouwer - Merrill Lynch

Noelle Swatland - Lehman Brothers

Brandon Dobell - Credit Suisse

Maynard Um - UBS

Bill Benton - William Blair

Jairam Nathan - Banc of America Securities

Yair Reiner - CIBC World Markets

Azeem Ibrahmin - Deutsche Bank

Rob Sanderson - American Technology Research

Jeff Rath - Canaccord Adams

Rob Schwartz - Jefferies & Co

Peter Friedland - Soleil Group

April Horace - Janco Partners

Ben Ridinski - Bear Stearns

David Needleman - Pacific Crest

Presentation

Operator

Good day ladies and gentlemen, and welcome to the NAVTEQ Corporation First Quarter 2006 Earnings Call. My name is Tanya and I will be your conference coordinator today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Tom Fox, Director of Investor Relations.

Tom Fox

Good afternoon everyone. This is Tom Fox, Director of Investor Relations at NAVTEQ. Welcome to our conference call to discuss financial results for the first quarter ended April 1, 2007.

With me today are Judson Green, President and Chief Executive Officer; and Dave Mullen, Executive Vice President and Chief Financial Officer.

By now you should have received a copy of our earnings release, which was distributed earlier over the wire. Today's call is available by webcast and is being recorded. Information on the replay and the webcast is available in the release and on the Investor Relations section of our website at www.navteq.com.

Today's webcast also includes a PowerPoint slide presentation, which you may access in the News and Events section of our IR website.

Before we begin, I would like to remind you that some of the statements made during this call may constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations, assumptions, and projections about NAVTEQ at the time that the statements are made.

Such statements may include, but are not limited to, expectations of future financial performance and operating results, growth in unit volume, our share of business, penetration rates, product release schedules for NAVTEQ and our customers, the decline of our distribution units, and the results of the integration of acquisitions.

The forward-looking statements are subject to certain risks and uncertainties that may cause the actual results to differ materially from our past performance and our current expectations and projections.

For discussion of these risks and factors that may affect future performance, please review the reports filed by NAVTEQ with the SEC, in particular, note the risk factors set forth under Item 1A, Risk Factors, in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006. NAVTEQ disclaims any obligation to update or revise any forward-looking statements, except as required by law.

We will begin today's call with some opening remarks from Judson, then Dave will walk you through some additional details on the quarter, Judson will add a few closing remarks, and finally we will take your questions.

During the question-and-answer session, we would ask that you to limit yourself to one question and one follow-up. If you have additional questions, please re-enter the queue. We will finish the call at 6:00 P.M. Eastern time.

I would now like to turn the call over to Judson.

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Judson Green

Thanks, Tom. Good afternoon, everybody and thank you for joining us. I am pleased to report to you a very successful quarter for the company. Our revenue of $160 million set a new record for first quarter performance, and grew 31% over the prior year.

Excluding the impact of foreign currency and revenue from our recent Traffic.com and Map Network acquisitions, revenue grew 20% over the prior year.

Further, excluding the distribution business, which was flat in the quarter compared to the prior year, base business revenue was up approximately 25% on a currency neutral basis.

Operating income of $38.3 million increased 85% over the first quarter of last year and net income for the quarter was $30.2 million or $0.31 per diluted share.

Net cash provided by operating activities was $79.1 million for the first quarter of 2007, compared to $14.4 million in the first quarter last year.

The significant increase was due to growth in net income, the successful collection of accounts receivable, and the receipt of a large pre-payment from a customer.

After funding the Traffic.com acquisition, we ended the quarter with $348 million in cash and marketable securities and no debt. As indicated in the press release, European revenue grew 14% in the quarter, but was up 5% on a constant currency basis, and revenue for the Americas grew 61% over the prior year.

Excluding the impact of the two acquisitions, America's revenue grew 49%. Asia-Pacific revenue which comes from our Korean subsidiary was $1.9 million in the quarter, compared to $1.8 million a year ago.

While I am pleased with the Q1 results, the performance was somewhat unusual due to a number of factors that may not have the same impact on results for the balance of the year. Dave will discuss these factors in more detail in a few moments.

Nevertheless, there is much to be excited about in terms of the business fundamentals. And now I'd like to spend a few moments talking about Q1 developments in each of the major revenue areas.

Beginning first with In-Dash. The first quarter has typically been a seasonally weak period for the in-dash business. Our European in-dash revenue was down only slightly compared to the prior year. The decline was primarily due to timing differences in shipments of units, and a lower mix of distribution units compared to the prior year.

If not for the shipment delay, European in-dash revenue would have been up slightly in the quarter. We still expect revenue growth for this business on a full year basis.

Overall car sales in Western Europe were down 1% compared to first quarter last year. Car sales in Germany were actually 9% lower than the prior year, due to an increase in the Value-Added Tax or VAT, which became effective on January 1st and probably caused some car buyers to make their purchases in Q4 of last year.

With respect to key models for navigation, sales of the BMW 5 series and X5 were somewhat depressed, probably due to a scheduled redesigned in the first quarter.

Sales of the Mercedes-Benz E-class were up 24% when compared to its weak sales in the first quarter of 2006. But the S-class was down 13% from the prior year.

The Audi A4, A6, and A8 were down in quarter as well, but the launch of the new Audi A5 actually drove an overall sales increase at Audi.

Adoption or the percentage of cars sold that offer navigation remains above 80% in Western Europe. Navigation take rates are growing modestly as we expected in virtually all vehicle categories.

In the North American in-dash business, we saw healthy double-digit increases in both units and revenue. The growth was due to the substantial increase in adoption compared to the prior year.

In Q1 alone, in-dash navigation was launched for the first time on 13 models, including a number of compact SUVs; such as the Jeep Wrangler, Ford Escape, Mercury Mariner, Mazda Tribute, and Mitsubishi Endeavor.

On a full year basis, we expect adoption of nearly 70% in North America. Overall car sales in North America actually declined about 2% in Q1 compared to the prior year. Consumers continue to demonstrate a preference for smaller; more fuel-efficient vehicles which generally have much lower navigation take rates.

Compared to the first quarter of 2006, luxury car sales were down 12%, Minivans and pickup trucks were down 5%, and even mid-size sedan sales dropped 8%. The only significant growth was in the Compact car and Compact SUV segments, which were up 7% and 16% respectively.

Take rates are growing modestly in most car segments. However, surging adoption does have a dampening effect on the overall take rate, as a number of smaller less expensive models offer the option for the first time.

With respect to portable devices, while the first quarter historically has not been a strong sales period for the consumer electronics industry in general, this years' first quarter was considerably better at least for our business.

We received a number of strong royalty reports, as our customers were apparently shipping to restock retail shelves in December and January, following a successful holiday shopping season. During which GPS devices were among the fastest growing consumer technology product sectors.

One point of clarification; it is important to remember that our portable device units reflect not only maps for PNDs, but also onboard maps for mobile phones and PDAs.

In Europe, Q1 map unit volume from a number of portable customers was higher than we anticipated. And Nokia began shipping its PND, the Nokia 330, ahead of schedule.

During the quarter, Nokia also announced the new 6110 Navigator phone with NAVTEQ data. This phone will ship with a navigation ready country map onboard every unit, and will be available in 60 countries around the world.

PDA related products, which have been declining for the past several quarters accounted for just 2% of our European portable map units in Q1, down from 14% a year ago and 67% in the first quarter of 2005.

Portables in North America also performed extremely well. We saw robust growth across a number of customers and early signs point to another terrific year for PNDs in the U.S.

Before I move on, I wanted to make you aware of the change in NAVTEQ’s business with TomTom. As many of you know, our map was chosen last year to enable one of TomTom’s new products, the TomTom ONE Europe, which began shipping in September 2006.

Recently, we were notified that beginning in Q3 of this year NAVTEQ maps will no longer be used on the TomTom ONE Europe. We have been assured that the decision to switch to our competitor had nothing to do with the quality of our database or our service.

With respect to the wireless business, we announced the winners of the fourth annual NAVTEQ Global LBS Challenge at the 3GSM Show in Barcelona in February and at the CTIA Wireless Show in Orlando in March.

We received 340 applications from interested developers in this year's contest, up from roughly 250 in the prior year and had a total of 25 semifinalist on both continents.

The semifinalists were evaluated by judges that included executives from wireless carriers and handset manufacturers, analysts from leading market research firms, and other industry experts.

Over 800 LBS applications have been submitted for consideration since the challenge began four years ago. It has been rewarding for us to play a leadership role in the evolution of the LBS space, and we look forward to the fifth installment of the challenge which will kick off at the CTIA Wireless Show this fall.

With respect to the integration of our two most recent acquisitions, IT and business systems integrations of the Map Network is substantially complete, and we are now working on integrating it's destination content into our Map database. As per Traffic.com the transaction closed on March 6.

We have made good progress on our integration plan, and to this point, we have not encountered any significant obstacles. We have taken immediate steps to rationalize overlapping administrative personnel and earn the process of integrating the Traffic operations infrastructure. We expect this to be complete by the end of the year.

Sales efforts have also been an area of focus, and we are leveraging the relationships and capabilities of both companies to win new business.

Traffic.com also made a recent announcement regarding a new relationship with the Broadcast division of The Associated Press, the world's largest news gathering organization.

The multi-year agreement provides Traffic.com with APs 10 second advertising inventory for radio and television stations across the U.S. broadening the geographic reach of our advertising packages and thereby increasing the appeal to national advertisers.

Turning to Coverage and Content news; we released Thailand during the first quarter, which brings our total navigable coverage to 60 countries and territories around the world.

During the quarter, we released a new Visual Content suite designed to enhance the navigation experience. Three-dimensional models of major cities and landmarks within those cities provide not only a more attractive visual representation of the road network, but also relevant navigation cues for the user.

These new premium priced Visual Content products are consistent with NAVTEQs single global database specification, which enables our customers to come to market quickly with new features.

The Map Network launched maps for the new Smithsonian consumer website, which you can view at gosmithsonian.com, and produced 3 million printed gosmithsonian guides.

For this project, we developed floor plans and exhibit layouts for all 16 Smithsonian museums including the National Zoo, and added adjacent city content through our relationship with the Washington D.C. Convention and Tourism Corporation.

We secured several pieces of new in-dash and portable business during the quarter. Three of which I am pleased to share with you today. First, Hyundai, the world's seventh largest automaker has selected NAVTEQ as its map provider for all Hyundai and Kia vehicle models offering navigation.

This is decision is especially noteworthy as Hyundai is only top 10 OEM to have never previously offered navigation in Western Europe or North America. The first vehicle to use our maps was actually our KIA model, which was launched in Europe in December.

Second; BMW agreed to launch a pan-European map update program beginning this month. More importantly, the DVD updates will be sold at 149 Euros across Europe. We are excited about this new program, and its potential to drive significant update volume in the second half of the year.

And third, Medion a leading consumer electronics vendor in Europe signed a multi-year agreement with us to supply maps for their entire navigation product line.

I would now like to turn the call over to Dave, who will review some of the numbers from first quarter in more detail.

Dave Mullen

Thanks Judson. We are quite pleased with our first quarter performance, and I think it's important to understand some of the reasons for that performance.

First, a strengthening Euro had a favorable impact on our results. The average exchange rate in Q1 was $1.31, compared to the $1.27 rate used in our guidance. This resulted in a $3.1 million increase in revenue and a $0.01 increase in EPS.

Compared to the average rate of $1.20 in the first quarter a year ago, the FX rate drove a $6.9 million increase in revenue and a $0.02 increase in EPS.

Second; we realized some residual benefits from the better than expected portable device sales in both principle geographies during last years holiday season in the form of royalty reports from our customers that outperformed our expectation.

As a reminder; our revenue recognition in the portable area is typically about one month in arrears from when our customers actually ship their products. Therefore, our Q1 results generally represent customer shipments to retail in December, January and February.

Third; due to a delay in executing an agreement with an internet customer, we recorded approximately $2.7 million of revenue in the first quarter that we expected to recognize in the fourth quarter of 2006.

And fourth; our operating expenses were approximately $3 million lower than anticipated, as several projects we began during the quarter rolled out a bit more slowly than we expected. This will result in an increase in spending for the balance of the year, relative to our earlier expectations.

In addition, I will remind you that our expenses will grow also as we fully incorporate Traffic.com spending in Q2, and ramp up on our investment in projects and initiatives we plan to complete by year end.

In light of our two most recent acquisitions and the evolving nature of our business, we've added two pieces of information to our revenue and operating expense report. First on the top line, we've provided a breakdown of revenue between license-related revenue and advertising revenue.

License revenue captures the vast majority of the business and includes distribution revenue. Ad revenue is principally derived today from Traffic.com's media and online business and the Map Network.

Second, we've added a new breakdown of database creation and delivery cost, which can found in the appendix to the results presentation. The database costs are now subdivided into three areas.

First, direct distribution cost which is the non-labor cost-of-sales related to our distribution services business. Second, data collection and processing cost, which represent the investment in building and maintaining our map and map-related content, traffic data collection expenses and software development expense required to manage our content.

This is the largest of the three areas and captures the vast majority of our product investment. And third, other database-related costs, which include radio and TV ad inventory costs and the Map Network’s direct costs.

Now with respect to the Q1 revenue statistics, license-related revenue comprised 94% of total revenue in the quarter, while advertising revenue represented 4% of the total. Other revenue accounted for the remaining 2%. Distribution revenue was basically flat compared to the prior year, and represented approximately 15% of our total revenue in the quarter.

We performed distribution services on 39% of our in-dash volume. The mix of distribution units in Europe was 54%, which was down from the prior year due in large part to the loss of some distribution business at one of our OEM customers to another non-map auto supplier.

The mix in North America was 25%, which was higher than in the year ago period, due to the timing of shipments to certain OEM customers. Distribution mix is likely to continue to trend down gradually on an annual basis, as non-vehicle revenue becomes a bigger piece of our business and hard disk drive navigation systems are introduced on more vehicle models over the next few years.

However, the success of our update initiative could partially offset this decline, as we distribute more map updates to the growing installed base of NAVTEQ map users.

On a full year basis, we are still expecting distribution business to represent a low to mid-teens percentage of revenue.

Onboard revenue represented approximately 87% of our revenue in the first quarter, with map units up 58% over the prior year. In-dash map units rose 8% compared to the same quarter a year ago, while Portable Device map units grew a 105%.

Excluding maps for PDAs which have been declining sharply for the past several quarters, our portable map units grew more than a 130% over Q1 of 2006. Traffic.com and Map Network contributed approximately $6 million to revenue in Q1.

As we did last quarter, we have calculated the change in the license fees paid to us from the first quarter of last year to the first quarter of this year by each of our top 10 customers, who together represent about two-thirds of our revenue, on their most popular NAVTEQ map product in Europe and the Americas.

This percentage change reflects base license fee reductions as well as volume discounts and other considerations. For the first quarter of 2007, license fees at our top 10 customers decreased by an average of approximately 9% compared to last year's first quarter.

Turning to expenses, database creation and delivery costs were up 18% over the year ago period. The growth was driven by increases in investment in our map database, as well as the consolidation of Traffic.com’s data related expenses beginning on March 6.

In terms of the components of database creation and delivery costs, direct distribution cost represented approximately 24% of total database cost in Q1, and grew 11% over the prior year. Data collection and processing cost represented 71% of total database cost and grew 17% over the first quarter of last year.

Other database costs represented 5% of the total and roughly doubled from the prior year. The increase is due primarily to the consolidation of Traffic.com's cost of advertising inventory and the Map Network's direct cost.

SG&A expenses grew 22% in the quarter, compared to the year ago period. Growth was driven by the consolidation of Traffic.com's results, increases in our sales and business development resources, and heavier trade show activity, including four major events in the quarter, CES, CTIA, 3GSM and CeBIT.

Total stock-based compensation expense in the quarter was $4.3 million, of which $2.5 million was related to stock options. Of the total expense, $3.6 million was recognized as SG&A.

Traffic.com and Map Network added approximately $9 million to first quarter operating expenses, including the amortization of intangibles. Total amortization of intangibles included in operating expenses was $2 million in the quarter, compared to 800,000 in last year's first quarter.

Our operating margin in the quarter was 24%, compared to the 16.9% margin in the year ago quarter. Our effective tax rate was 28.2% in Q1. This rate was slightly lower than the rate we assumed in our annual guidance, due to the mix of income among taxing jurisdictions.

We expect the effective tax rate for the full year to be between 28% and 29%. To remind everyone, we are now a full cash tax payer in Europe, but not yet in the U.S.

Effective January 1st of this year, the company adopted the provisions of FIN 48 accounting for uncertainty and income taxes. The company did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN 48.

With respect to our 2007 guidance, ignoring the potential impact of foreign exchange rates, we are still comfortable with the range of revenue and earnings per share that we issued back in February, including our estimates of the revenue contribution and earnings dilution from the two acquisitions and our expectation for operating margin expansion in the base business.

Obviously, the weaker dollar has a favorable impact on our year-to-date results, compared to the guidance rate of a $1.27. However, the rate is constantly changing and it's not our practice to update guidance based solely on changes in FX rates.

As a reminder, for each $0.01 difference in the annual average FX rate, there is a $3.1 million impact to full year revenue and a $1.1 million impact to full year net income.

While Q1 results were particularly strong, we do not feel it is appropriate to change our full year guidance at this time primarily for three reasons. First; a significant portion of the Q1 earnings performance was due to the timing of certain revenue and expenses that I described.

Second; car sales conditions in our primary geographies remain uncertain. In-dash business is our largest source of revenue, and with gas prices again rising sharply, we’d like to see evidence of improvement in the market place before changing our expectations.

In particular, we'll be looking at the kinds of cars consumers are buying to see whether SUV Crossover and Luxury car sales might recover.

Third; PND business is heavily weighted to the back half of the year in Q4 in particular. It's simply too early in the year to adjust our expectations in this area, one way or the other. Also, the loss of the TomTom ONE business which we did not expect represents a headwind that we'll need to overcome.

I would also like to point out that the full impact of the roughly 4 million shares issued for the Traffic.com acquisition in terms of weighted average shares outstanding will be reflected in subsequent quarters.

In terms of modeling the business for the remaining three quarters of the year, first quarter operating expenses were lighter than expected, and spending for the balance a year will be meaningfully higher as we invest to expand our coverage and deliver a number of content features to our customers by year end.

Of course, the second quarter will also be the first one that will reflect the full operating expense impact of the acquisition of Traffic.com.

And with that, I'd like to turn it back over to Judson.

Judson Green

Thanks Dave. I would like to wrap up the call this afternoon by offering a few comments on the business. Only a few years ago, NAVTEQ was completely focused on serving the automotive industry, with more than 90% of our revenue coming from these customers.

Over the past three years, our business has changed with the emergence of the portable navigation device, and we expect it will change even further as wireless opportunities take shape.

As the GPS marketplace has exploded with new devices and applications and our customer list has grown, we have been driven by a desire to not only respond to our customer's request for new content, features and coverage, but also to anticipate where they will want to go with their applications, and to be ready when they are with the right combinations of products and services.

With the addition of the Map Network and Traffic.com and our sponsorship of industry events like the LBS Challenge, we are evolving our business to satisfy the emerging demands of the mobile consumer, positioning NAVTEQ as a hub for an almost limitless amount of map and map-related location content, and developing the capabilities to offer our customers more options in terms of business models.

The changes do make the company more complex in some ways. But I feel these moves are critical to defending and strengthening our position in the value chain.

It is still early, but I am pleased with the progress we have made and I am excited about working to achieve our shared vision of the company’s future.

This concludes our prepared remarks, and thank you for your attention.

Now, I would like to ask the operator to open the line, so that we might answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jay Vleeschhouwer of Merrill Lynch. Please proceed.

Jay Vleeschhouwer - Merrill Lynch

Thanks. Good afternoon. Judson, I would like to follow up on your comments regarding the evolution or growing complexity of the business, specifically a question about how you maintain technology differentiation.

Both you and [TIA] are clearly investing and heavily back in your databases, which seems entirely appropriate. But do you foresee some kind of a map database arms race or some other kind of a new competition around the services and content that you offer? That is question number one.

And secondly, in terms of the PND outlook for the year, do you have your own forecast what the market might do in ’07 or do you have any particular views about elasticity in the PND market? Clearly saw a lot of that effect in Q4. Thanks.

Judson Green

Well, the second question is easier to answer than the first one, because in fact it’s impossible for us to come up with a realistic forecast for PND’s for the year.

This is still a very popular and evolving consumer technology. There is still a mix shift in terms of the players who were coming in and out of the space. There continues to be differentiation with respect to the product and more product segmentation, and therefore we are going to see a lot of continued evolution there.

And I know that is a modeling challenge for many, but it's just not something that we can realistically and fairly do a good job until obviously the year rolls on and we get smarter from getting intelligence from our customers. But, it's very difficult from a corporate point of view at the beginning of the year to make such forecasts.

With respect to the first question regarding database and services. I think what guides us here more than anything else is listening to our customers. I think I have made reference to the fact that we have an almost limitless amount of things that we could do, and we have a pretty detailed process in place that takes us six months every year to refine what we might be doing and focus on what we think is the most important thing to be doing.

And what really drives the selection of what we offer up is what we think that the breadth of our customers need to compete in this evolving space, and we think we are well positioned to do that and we think we will continue to listen carefully and execute appropriately. But that's worth I don’t think there is anything else for me to say other than that.

Operator

Your next question comes from the line of Noelle Swatland of Lehman Brothers. Please proceed.

Noelle Swatland - Lehman Brothers

Hi guys, thanks. First just a clarification and then a question. Dave regarding your ASP commentary is it down 9% year-over-year? Is that excluding currency effects? And then my question is, can you talk a lot about the wireless opportunity and specifically Nokia? Can you give us some sense of the contribution in some of those wireless units in the quarter? Thanks.

Dave Mullen

Our market basket of price changes is currency neutral. So there are no impacts of FX on that. And with respect to the wireless contributions, at least with respect to the, I think you were asking, Noelle about the phones, and I think that that was not particularly meaningful in the quarter.

Judson Green

That's right.

Noelle Swatland - Lehman Brothers

Okay, thanks.

Operator

Your next question comes from the line of Brandon Dobell of Credit Suisse. Please proceed.

Brandon Dobell - Credit Suisse

Hi, thanks. I wanted to get a sense of contribution either from revenue or a unit perspective from the update opportunity, and how we should think of that relative to your distribution revenues or costs? If you see more and more updates will that impact that distribution line or am I thinking about that the wrong way, that it's not correlated to distribution?

Dave Mullen

It does impact distribution. Even if an OEM goes to a hard disk drive for their latest model, they still have an obligation to support their installed base, which is DVD or CD systems, and those will require distributions. So we are discovering as we get into the update business that there's actually demand for distribution on an ongoing basis, which we thought was going to go away. And it turns out that it's not going away as fast as we thought because of the update business.

It continues to be a meaningful, but we want it to be a more meaningful component of our in-dash volume. I think it represented about 17% of units during the quarter or update units. We have higher hopes for it than that, but that’s the growth that’s nice growth from a year ago.

Brandon Dobell - Credit Suisse

Okay. And then one quick if I could. Last year you talked a couple of times about new PND launches, the company is launching or devices that were somewhat meaningful. Anything on the near term horizon that you guys see from that perspective?

Dave Mullen

I don’t. Do you mean, in terms of a major new customer entering the PND market.

Brandon Dobell - Credit Suisse

Right. Obviously last year it was Sony with their [business] starts. Anything that you guys see, obviously I am not naming names but…

Dave Mullen

Okay, I don’t think we'd be able to comment on it. I think it should be obvious that it has been discovered as a product sector in consumer electronics. I think it was the most popular or second most popular consumer electronics category in Q4, and it's safe to assume that the consumer electronics giants are all interested in robust markets.

Brandon Dobell - Credit Suisse

Okay. Thanks.

Operator

Your next question comes from the line Maynard Um of UBS. Please proceed.

Maynard Um - UBS

Hi, thank you. First question, in trying to capture the value of the mobile opportunity for NAVTEQ, can you just share your thoughts on how you see the business model evolving in mobile handsets in particular. Do you see that as kind of being subscription based, per map fees or transaction based? And second question, in terms of the linearity for the rest of the quarter and the next three quarters, can you give us a sense of how we should think about that relative to your guidance? Thank you.

Dave Mullen

Okay I am not going to be able to help you much on the quarterly guidance, because as you know Maynard we don’t spend a lot of time on that. And I think history is about all you can look at, but you have to factor in the full impact of the acquisitions. Traffic.com did not close until March 6, so we only got 25 days worth of their results in the first quarter. We'll have the full impact of that for the balance of the year. And we've given guidance as to what we think those acquisitions will contribute for the year.

With respect to the business model in wireless; the answer is all of the above. For off-board solutions where the map resides on a central server and the customer accesses it, the consumer accesses it when they wish to, that is typically a subscription product that's what the VZ navigator product is.

For the Smartphone business, where the handset has more processing capacity, storage capacity and screen display. Therein you have the capability of having the map on board in its entirety and the application on board in its entirety, and that typically would be a licensing model. Now that model will probably evolve longer term into a hybrid model where the base map is on the phone, but you're downloading additional content from a central server, which may be on a subscription or transaction basis.

So, each of those models is in place. So I think the right way to think about it is to think about how our customer gets paid and that's probably how we'll get paid.

Operator

Your next question comes from the line of Bill Benton of William Blair. Please proceed.

Bill Benton - William Blair

Hi, afternoon guys. Just a quick question on the TomTom ONE situation. I know you said it wasn't so much of a quality issue. From your standpoint can you tell us what you think it was that may be has caused that decision. And if you could just maybe comment on the overall pricing environment in general? I'm not saying that was pricing, but in general what the pricing environment in the PND market looks like right now?

Judson Green

Well I think the answer to your first question is that, it was explained to us that it was not related to the quality of our database nor our level of services nor our relationship, but was more likely a set of compelling commercial terms that they were presented with which they wanted to accept.

I think I would answer your second question by saying that, the pricing environment has always been competitive, and I think it’s going to remain that way. We’ve got some concern about the pricing environment. We hope that if there are situations or isolated instances that we see more aggressive pricing that in fact they are isolated. But I don’t think we see much change from what we’ve seen historically over the last two or three years.

Bill Benton - William Blair

Okay, so no incremental degradation there.

Judson Green

I can't. No, I don’t think so. I would say in general we are going to continue to see a competitive pricing environment.

Operator

Your next question comes from the line of Ronald Tadross of Banc of America Securities

Jairam Nathan - Banc of America Securities

Hi this is Jairam Nathan for Ron. Just a couple of questions. On a revenue basis, was the vehicle in-dash revenues up on year-over-year basis or was it down?

Dave Mullen

In-dash vehicle revenue?

Jairam Nathan - Banc of America Securities

Yeah.

Dave Mullen

It was up.

Jairam Nathan - Banc of America Securities

It was up. Okay. And I [thought] that your distribution gross margins in dollars were much better than normal. Is that right?

Dave Mullen

I think there was a deterioration in the profitability of the distribution business from last year.

Jairam Nathan - Banc of America Securities

Okay. And on the TomTom ONE, can you give us any idea of what the revenue or revenue impact would be?

Dave Mullen

Not from an individual customer, no.

Jairam Nathan - Banc of America Securities

But was it one of your biggest programs?

Dave Mullen

The revenue [wasn’t] equal, but they were not a 10% customer.

Jairam Nathan - Banc of America Securities

Okay. Thank you.

Operator

Your next question comes from the line of Yair Reiner of CIBC World Markets. Please proceed.

Yair Reiner - CIBC World Markets

Thank you. Congrats first of all on the great quarter. A question after the follow up on the distribution cost. If I am looking at the model correctly, it looks like the distribution costs have remained relatively flat over the last number of quarters.

As revenues from that side of the business continues to decline, should we look forward to some kind of restructuring or how much ability do you have the kind of right size that business as volumes decline?

Dave Mullen

The lion share of the cost in that line items are directly variable with revenue.

Yair Reiner - CIBC World Markets

So, why have margins been declining in that part of the [business]?

Dave Mullen

The price pressure on distribution, it's generally viewed by customers as a commodity or available from a number of different people who view it as just reproducing disks. And so you get more price pressure and some of that is mix.

Yair Reiner - CIBC World Markets

Fair enough. One follow-up in the in-dash part of the business. Can you give us a sense of how the in-dash updates performed during the quarter? They were obviously very important in the fourth quarter of last year.

Dave Mullen

Well, I think we answered that question just moment ago. And I think we said that about 17% of our total in-dash units were updates, which is up probably about 10% or so as a percentage from last year. So I think last year at this time it was 13% or 14%.

Operator

Your next question comes from the line of Rob Sanderson of American Tech Research, please proceed.

Judson Green

Rob?

Operator

I'm sorry, he has disconnected. Your next question comes from the line of Jeetil Patel of Deutsche Bank.

Azeem Ibrahmin - Deutsche Bank

It's actually Azeem here for Jeetil. Can you talk a little bit please about the inclusion of December revenues in your Q1 results? I understand that you are taking the royalty reports and booking the revenues from, whenever you receive the royalty reports [one] month in advance.

Can you try to quantify for us please, how much of the Q1 results reflect was coming from December or to say it another way, can you help us understand what the January, February, March numbers kind of look like, just so we can get a sort of run rate idea of what your calendar year Q1 revenues would look like? That's the first question.

And then the second question, could you also just describe a little more in the U.S. Do you think that the sort of upside came mainly from the PND segment or was also the in-dash unit much better than what you thought it was? Thank you.

Judson Green

I think both of them contributed to our results. I think we are pleased with what happened in both areas. With respect to your first question, I'm unable to quantify that at this point of time. I have no idea how much of our revenue came in December versus January or February.

And this is a phenomena, it's not a phenomena unique to this year, it happens every year. By the time we get the reports, our year-end books are closed and we typically would record it in the following year. It's just that the growth in the PND business year-over-year has had a more pronounced effect this year that it might have last year.

Azeem Ibrahmin - Deutsche Bank

Would it fair to say that the fourth quarter of '07 therefore we should expect a similar amount of the December numbers for the fourth quarter of '07 to be pushed out in to your 2008 financials?

Dave Mullen

Probably, yeah.

Azeem Ibrahmin - Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Rob Sanderson of American Technology Research.

Rob Sanderson - American Technology Research

Hi, thanks, sorry got bounced there earlier. I think you may have been talking about this, just now at the previous question. But when you provided full year guidance back in February, you were talking about a lower proportion of full year revenue to come in the first quarter. But even if we back out the effects and the catch-up on the internet contract here, it doesn’t play out in your full year guidance that way. So do you see any specific factors that influence seasonality this year or is it just an effort to reflect conservatism given uncertain outlooks particularly in the automotive end markets?

Dave Mullen

Well you didn’t mention one other thing that will have an impact and that is the Traffic.com acquisition. The full impact of that isn't felt for the balance of the year. We only got 25 days. And the second is, the TomTom business, which really has an impact in Q3 and Q4, that's in Q1 but won't be in Q3 and Q4.

Rob Sanderson - American Technology Research

Okay, right. And then on the TomTom business our analysis is kind of pointing to something like a 10% to 15% of their units for Q4 and Q1. Is that the ballpark you willing to get into?

Dave Mullen

I don't have visibility on their units.

Rob Sanderson - American Technology Research

Or that’s the [ONE] represents of their total shipments?

Dave Mullen

Right. But I don’t know what their total shipments are.

Rob Sanderson - American Technology Research

Okay, got it. And then I want to follow. European auto in-dash, you mentioned timing of shipments in your comments. Can you elaborate on that or something maybe slipped from Q1 into another quarter or what was that from?

Dave Mullen

Yeah, in the distribution business where we ship when the customer orders product. And if they order a product on the 30 of March, it’s in our first quarter. If they order a product on the 3 of April, it’s in the next quarter.

So there can be differences, and sometimes the orders are good sized orders. And in this case, we were expecting one that would have come in right at the end of March and it didn't come until April.

Operator

Your next question comes from the line of Jeff Rath of Canaccord Adams. Please proceed.

Jeff Rath - Canaccord Adams

Thanks. Most of my questions have been answered. Just a question, if you will, on your geographic coverage. You announced that you are at your 60th country here. You're presently breaking out revenues in just a couple of buckets, and most of that clearly your revenue is being driven from the United States and Western Europe.

I was wondering if you would care to elaborate on your expectations going forward of your geographic revenue splits. Do you see any areas, now that you’ve got 60 countries under coverage, how do you think about the lag time before those other countries will start to pick, and any particular countries that you are seeing some really interesting activities? Thanks.

Dave Mullen

It’s a really good question. We record geographic revenue based on who the billing entity is, the legal billing entity within our organization. It turns out that many of our what we call World Market countries, which are other than Europe and North America are typically build by our European legal entity and so that’s where the revenue show up.

I would say that beyond our two principal geographies, we are very excited about the opportunities that seem to be arising in Asia. But as you point out it will take some time for that business to ramp up. It’s not a meaningful car market yet, but it’s growing very quickly.

It’s a huge cell phone market, but you need capability in terms of the phones to really make a meaningful impact. But we think that, that market could be as exciting as our two principal geographies, but it will probably take four, five years for that to really come to fruition.

Jeff Rath - Canaccord Adams

Just a second again longer term oriented question. If you’re looking at different end market applications as you diversify your business, you’ve clearly got one that’s developing now in the wireless and that might be, it gets somewhat confusing off-board, onboard with wireless.

But if you were to weigh say the ADAS opportunity, which is still not revenue generating today versus the wireless opportunity, and particularly the handset and Smartphone opportunity, which do you think is the bigger revenue opportunity for your company? Thanks.

Judson Green

Well I’d say we are excited about both of them. I think just given the magnitude, hundreds of millions of phones, whether it’s an onboard or off-board model it just seems like this is a natural application for location-based content, and the whole environment of location-based service applications that we have been hearing about for years, we think is going to happen.

So it's hard for us to know exactly where that's going to go in five years, but we think it's not out of the realm of possibility that you would have some sort of location-based content, including potentially maps on virtually every phone at some point in the future. We just don’t know how to predict that.

With respect to ADAS, we actually are realizing a minimal amount of revenue from that today. It is real, it's been something that has been worked on for many many years, and that probably has a slower growth profile.

But if it continues to deliver in terms of helping a variety of applications in the automobile and delivering greater safety and security and functionality, that's the kind of thing that also could have an enormous potential over many years.

That's going to have slower growth curve I think than the wireless opportunities, but we are excited about both of them.

Operator

Your next question comes from the line of Rob Schwartz of Jefferies.

Rob Schwartz - Jefferies & Co

Just one clarification and another question. I think you used to give a breakout of the server-related and advertising revenue and other. I don’t know if you could do that.

You mentioned that some of your projects were delayed, and I know you are not in the habit of giving quarterly guidance on expenses. But may be you could help us understand when those projects are likely to be picked up, and are they likely to start? Have they already started in Q2 or are they likely to be second half in maybe the Q4 events?

Dave Mullen

I don’t know whether I can give that kind of precision. I understand why you are asking Rob. I think the $3 million that we didn’t spend in the first quarter, we expect to spend later in the year, and I can't give you any more precision on it than that.

Unfortunately I'd like to be helpful, but I don't even know exactly how that would spread for the balance of the year. I think you'd probably be safe spreading it evenly, but I don't know.

With respect to the onboard versus off-board. In our remarks, we've mentioned that the onboard was 87% of our revenue and the off-board and other was 13%.

Rob Schwartz - Jefferies & Co

So, that's where the server would be on-board then?

Dave Mullen

Yes sir.

Rob Schwartz - Jefferies & Co

Thank you.

Operator

Your next question comes from the line of Peter Friedland of Soleil Group. Please proceed.

Peter Friedland - Soleil Group

Hey guys, could you just clarify the non-core NAVTEQ operating expenses for the quarter for Traffic.com and TMN?

Dave Mullen

You mean what are they, Peter?

Peter Friedland - Soleil Group

Yes, just specific numbers so it's helpful just to model out Q2 and beyond?

Dave Mullen

$9 million was what we said was the first quarter.

Peter Friedland - Soleil Group

Okay, so $9 million and that's basically one month?

Dave Mullen

Well, yeah, its 3 months from Map Network, its 25 days from Traffic.com.

Peter Friedland - Soleil Group

Got it.

Operator

Your next question comes from the line of April Horace of Janco Partners.

April Horace - Janco Partners

Hi. Thanks for taking my question. Real quick, you had talked once that PND growth this year was going to be another 50%, but now having the time lag of this December royalty payment, can you give us any color as to how to model that out for the rest of the year? Is it still 50% or do we take some portion out or add some portion into '08 or '07?

Dave Mullen

I don't think our point of view has changed in terms of what we think the growth in the market will be.

April Horace - Janco Partners

Historically each quarter of the PND revenue is increasing or at least the number of map units is increasing. Do you expect any volatility come Q2?

Dave Mullen

In the consumer business I think we're all sort of on pins and needles as to what's going to happen in the marketplace. We follow the same kind of statistics that I am sure you do with the NPD data and in Europe, the GFK data to kind of tell us what's happening there.

So I don’t know that we have any insight into what's going to happen in the second quarter. Probably the garments and the TomTom's have a better view of that than we do. We are always the last to know.

Operator

Your next question comes from the line of [Ben Ridinski] of Bear Stearns.

Ben Ridinski - Bear Stearns

Hi good afternoon. What do you plan on doing with all the cash building on the balance sheet?

Dave Mullen

We have kind of three objectives. The first is that we want to have what I would say an appropriate balance of cash for emergencies or flexibility or whatever.

In our surveys, the [Medion] cash balance of companies with our market capping our revenues in the public space is about $400 million. We are fast approaching that, we should be there by the end of the year, if not sooner.

We want to make sure that our internal opportunities, which are abundant are appropriately funded. And then I think that we have an appetite to look at perhaps external growth opportunities through M&A transactions. And to the extent that we satisfy those three things, I think we would look at some point to returning excess cash to shareholders.

Ben Ridinski - Bear Stearns

Okay, and then just one housekeeping question. Can you tell us who your 10% customers were for the quarter, and if possible what percent they were?

Dave Mullen

We had two 10% customers for the quarter BMW and Garmin.

Ben Ridinski - Bear Stearns

And what percent were they?

Dave Mullen

We don't disclose that. We’d only disclose that on an annual basis.

Operator

Your final question comes from the line of [David Needleman] of Pacific Crest.

David Needleman - Pacific Crest

Good afternoon, could you please provide the penetration rates for North America and Europe for in-dash? And secondly we've seen a couple of announcements recently OnStar and MapQuest announced its service where by subscribers can send or carry it directly to their cars and their PCs and that kind of mirrors and as we saw it earlier from BMW with Google. Just curious as to what steps NAVTEQ is taking if any to ensure that these internet routing solutions don't do end runs and provide dynamic routing for non-dynamic routing pricing? Thank you.

Judson Green

On the first question David, we actually don't provide penetration rates on a quarterly basis, because of the nature of in-dash units and revenue, it's simply not representative of the progress or growth in the business. So we report those on an annual basis, we'll do so again at the end of the year.

With respect to the OnStar Solution, they are a customer of ours, they have been one for sometime, and the arrangement that comes to them by MapQuest, is we are part and partial to that solution and participate in it, in a way that is not internet pricing.

Operator

Ladies and gentlemen this now concludes the Q&A session. I’d like to turn it over to management for closing remarks.

Tom Fox

Thank you all for joining us, have a good evening.

Operator

Thank you for your participation in today's conference. This now concludes the presentation. You may disconnect. Have a great day.

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