Telenav's (TNAV) CEO HP Jin on Q2 2016 Results - Earnings Call Transcript

| About: Telenav, Inc. (TNAV)

Telenav, Inc. (NASDAQ:TNAV)

Q2 2016 Earnings Conference Call

February 02, 2016 05:00 PM ET

Executives

Cynthia Hiponia - IR

HP Jin - President and CEO

Michael Strambi - CFO

Loren Hillberg - President and GM, Thinknear

Hassan Wahla - Co-President, Automotive Business Unit

Analysts

Greg Burns - Sidoti & Company

Michael Latimore - Northland Capital Markets

Steve Dyer - Craig-Hallum

Josh Nichols - B Riley and Company

Operator

Good day and welcome to the Telenav Second Quarter 2016 Fiscal Earnings Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Ms. Cynthia Hiponia. Please go ahead.

Cynthia Hiponia

Thank you. This is Cynthia Hiponia, Telenav’s Investor Relations and I’m pleased to welcome you to Telenav’s conference call to discuss its second quarter fiscal year 2016 earnings results.

Joining me today is HP Jin, President and CEO; Mike Strambi, CFO; Hassan Wahla, President of Automotive; and Loren Hillberg, President and GM, Thinknear. After the market close today, Telenav issued a press release through Globe Newswire. The release is also available on the Telenav’s website at telenav.com.

During the course of today’s presentation, our executives will make forward-looking statements, including statements regarding among others, the company's expected financial performance for the third quarter of fiscal 2016, anticipated sources and mixes of revenue, expected profitability, products and business strategies, and strategic relationships. We wish to caution you that such statements are just predictions based on management's current expectations or beliefs and that actual events and results may differ materially.

We refer you to documents we on file on the Securities and Exchange Commission, including our Annual Report on Form 10-K and other periodic filings. These documents identify important risk factors that could cause our actual results to differ materially from those contained in our forward-looking statements. We assume no duty to confirm, update or revise the financial forecast for the year or any other forward-looking information on this call, as a result of new developments or otherwise.

Today we will be discussing our results on a GAAP, as well as a non-GAAP basis. These non-GAAP results including billings and adjusted EBITDA, also sometimes called pro forma results, excluded stock-based compensation expense, and assume that our preferred stock was converted to common stock on the date of issuance for calculations of earnings per share. We use these additional non-GAAP measures as we believe they will give useful operating information in addition to the GAAP results.

There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. We compensate for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenue calculated in accordance with GAAP. As well as considering whether we are likely to satisfy the criteria required to recognize revenue to convert deferred revenue into revenue.

We provide visibility to investors to understand how we define billings by providing a reconciliation of billings to revenue calculated in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial statements is available in our press release and on our Investor Relations webpage.

Let me now turn the call over to HP Jin, Telenav's President and CEO.

HP Jin

Thank you, Cynthia. Welcome to Telenav’s second quarter fiscal 2016 earnings call. During the past quarter we were successful with our continuing effort in investing in connected cars and location based advertising with the goal of achieving long-term, sustainable and profitable growth.

In the second quarter we generated total revenue of $45.3 million, up 3% sequentially and up 14% year-over-year. Total billings were $48.4million, up 14% year-over-year. Our Deferred revenue was $13.9 million up 30% sequentially and 164% from a year ago. We also lowered our adjusted EBITDA loss to $4.1 million down from a loss of $6.4 million in the prior quarter. We ended the quarter, December quarter with the cash and equivalents of $110 million.

During the second quarter we achieved revenue from automotive and location based advertising comprising 85% of the total revenue, up from 72% in the year ago period. Both businesses have achieved high growth as we continue to diversify from our traditional carrier businesses. Total revenue from the automotive segment was $31.8 million, up 32% year-over-year. Total revenue from location based advertising was $6.7 million up 41% year-over-year. The losses in the ad business decreased to $1.9 million down from loss of $3.2 million in the first fiscal quarter.

Overall we are very happy with the financial results achieved last quarter. Next I’d like to take this opportunity to update you on our connected car and location based advertising strategy. Let me start with the market opportunities. As evidenced at the CES 2016 the connected car is become a center of innovation with breakthroughs in big data intelligence, ADAS and autonomous driving. As the hundreds of millions of cars become connected the entire auto ecosystem from OEMs to service providers to drivers and its related business such as insurance and car ownership will be significantly impacted or disrupted. To capture these opportunities our vision is to build a connected ecosystem where OEMs, service providers and drivers all benefit significantly.

To achieve this vision our strategy is to leverage our strong relationships with global OEMs and big data intelligence to enable to support user experiences and new business models. Let me explain how we use intelligence to power better personalized driver experiences. What outcome of the disruption that is taking place is evolution of connected navigation from a user initiated system to a more proactive system that is constantly helping the driver without them asking for help. The underlying enabler for proactive assistance is the combination of intelligence about the driver and the intelligence about driving environment that is now possible due to the abundance of car sensor data.

At CES 2016 we demonstrated how our proactive system could help our driver before, during and after their drive to stay on time with the predicted assistance and stay safe from unexpected pitfalls of the road with intelligent aid. We received very positive feedback from our existing OEM partners including Ford, GM and Toyota and from many other prospected OEMs. This comment included feedback that our solution delighted the driver while offering OEMs clear differentiation as compared to generic CarPlay or Android Auto based experience.

At the core of our product strategy is creating a personalized experience that is optimized for the OEMs in car display and compute platform across their low, mid and high end cars delivered through either brought in or embedded software.

We are setting the foundation for executing on this strategy with a proliferation of our navigation offerings in our current Ford, GM and Toyota partnerships. The claims for these three platforms that launched in the U.S. last year continues to receive positive user feedback. Particularly for the performance of its nav features. We are working with Ford throughout the platform in other regions. With GM we have extended our service car remote link mobile company from the U.S. to Europe under two additional brands Opel and Vauxhall.

With Toyota last quarter we continued the U.S. rollout of our brought in scout GPS link solution to additional 2016 car models equipped with Entune Audio Plus including Ralph 4, Highlander, Avalon and the Ciana. Fueling on our connected navigation services we are currently working on new programs with our existing OEM partners to bring to life our vision of proactive personalized assistance using sensor based intelligence.

The second part of our strategy is the enablement of new big models. New big models allow Telenav and other ecosystem members select OEMs to open new markets and generate additional revenue streams. Using OSM as the map and content foundation for scout GPS link we have enabled Toyota to bring navigation to more cars at the lower cost. It also allows us to collect and synthesize data from scout GPS link users to continually improve our OSM maps.

We are pleased to announce that in the late 2015 Telenav signed an advertising agreement with GM. This agreement will enable GM to use our leading location based advertising platform to server targeted advertising within GM connected applications. While the revenue opportunity is relatively modest. This is a significant milestone for Telenav that will begin to converge connected cars and location-based advertising.

As our automotive business continue to grow beyond our agreements with the three of the top five automotive manufacturers. The opportunity for the convergence of our automotive and ad business will grow. The success we have achieved through connected cars, connect car services has brought more credibility to our location-based advertising platform.

In the December quarter over 20% of our advertising revenue was related to the automotive industry with the 6 of the top 10 global auto OEMs leveraging the Thinknear platform for targeted advertising for sales and maintenance services. Thus investments in Thinknear has built a vibrant growing business and the market awareness in the auto industry as the thought leader in bringing new business models to the connected car industry.

As we have evaluated the progress of our Thinknear business and recognizing the value it brings to our automotive opportunities we have decided to shift our focus from growth to profitability. We believe the March quarter typically seasonally down in revenue from the December quarter, which includes holiday advertising, will be the peak quarter of losses for this business going forward.

In the near-term we are taking action to reduce our operating cost and are targeting to achieve breakeven on the cash basis for Thinknear by the end of calendar 2016. We believe the solid and improving financial performance of our location based advertising business, combined with our growing market leadership of our automotive business are key to our future success in becoming a global leader in connected car industry.

Near-term, these businesses also require investments to capitalize on growth opportunities, but we are taking balance approach to growth we understand the importance of achieving operating profitability and we continue to focus on cost optimization. I want to assure that we are more confident than ever about the market opportunity ahead of us and of our strategy to win.

Let me now turn the call over to Mike to discuss our results in more detail.

Michael Strambi

Thanks, HP. As a reminder, this portion of the presentation as well as HP’s remarks contain forward-looking statements. We encourage you to review our risk factors in our most recent Form 10-Q on file with the SEC which set forth risk and uncertainties that may affect these forward-looking statements.

As we continue to emphasize transparency we provided an additional disclosure in the press release issued earlier today highlighting the change in deferred revenue as well as the change in related deferred cost by business unit. We believe this additional disclosure will further provide inside into the company’s financial performance as deferred revenue and related deferred cost become increasingly relevant measures of our operating results. As a reminder, we anticipate that overtime deferred revenue will increase as our partnerships with the automotive OEMs continue to expand and drive growth, particularly as it relates to connected services.

Let me now discuss results for the second quarter of fiscal 2016 in more detail. Total revenue in the second quarter was $45.3 million, compared to $44.1 million of revenue in the prior sequential quarter and $39.8 million in the second quarter of fiscal 2015. Automotive revenue for the second quarter was $31.8 million or 70% of total revenue. Approximately flat sequentially and a 32% increase year-over-year. These results are consistent with our guidance, the flatness is due to the seasonality associated with certain auto plant production slowdowns typical of the holiday periods.

During the quarter, we earned $31.1 million from royalties on automotive compared to $31.4 million in the prior sequential quarter and $23.2 million in the second quarter of fiscal 2015. The increase year-over-year was primarily driven by continued success with Ford in North America and Europe. We also earned $700,000 in customized software revenue on automotive solutions that were delivered in the quarter.

As we have previously stated, customized software revenue will fluctuate from quarter-to-quarter based on the timing of customer deliveries and the manner in which we monetize such efforts, which can be earned via a lump sum payment or include within a per unit royalty fee.

Location based advertising was $6.7 million or 15% of total revenue. These results show a 38% increase sequentially and a 41% increase year-over-year. As HP explained, we believe the location based advertising business is an important part of our larger connected car vision. We have shifted our ad strategy to emphasize profitability over growth. We have developed a plan towards profitability targeting breakeven on a cash basis by the end of calendar 2016 for this business unit. As part of this effort, we are engaging in cost reductions in the organization and we expect the full benefits of these actions to be realized in the in the June quarter.

Combined with the typical seasonality of the business, we expect March to be the peak quarter of losses going forward for the location-based advertising business, but do not anticipate March quarter losses on an adjusted EBITDA basis to be significantly greater than the December quarter.

Total billings for the second quarter were $48.4 million, compared to $47.9 million in the prior sequential quarter and $42.7 million in the second quarter of fiscal 2015. For the December quarter, the company generated billings of approximately $3.2 million in excess of GAAP revenue recognized compared to the September quarter of $3.8 million. The sequential decrease was due to normal seasonality in the automotive business.

We define this new concept of billings and the increasing significance of the metric on the prior call, but feel it is important to reiterate. As a company, we define billings as GAAP revenue recognized plus the change in deferred revenue from the beginning to the end of the period. As we continue to increase our offering of various embedded and connected solutions for automotive customers, it is likely that the complexity of various accounting rules and required criteria may make revenue recognition more challenging in the years to come.

Consequently, we believe that billings in conjunction with GAAP revenue will be important metrics to measure in assessing the growth and health of the business. In conjunction with this presentation of revenue and billings, I wanted to provide some further detail on the manner in which we recognize revenue from our automotive solutions. Each customer arrangement may vary depending on the manner in which the solution is provided to the end user. For example, we’ve receive a one-time royalty from GM from each remote linked application download on a per vehicle basis while with Toyota, we receive a one-time royalty for each vehicle outfitted with the Entune Audio Plus infotainment package, which includes our solution.

For our embedded navigation solution with Ford, we receive a one-time royalty as our navigation solution is reproduced and provided to Ford prior to vehicle production. We anticipate that during calendar 2016 as Ford transitions completely to its new Sync 3 platform the timing of title transfer will change through a convention based as vehicles are manufactured. And accordingly may result in a lag in revenue recognition on a region-by-region basis. We do not have visibility on the exact timing of when these changes will occur.

In the second quarter, our largest customer Ford comprised 66% of total revenue compared to 57% in the year ago quarter. Our second largest customer AT&T comprised 10% of revenue compared to 18% in the year ago quarter. Total gross margin for the quarter was 46%, slightly down from 47% in the prior sequential quarter and 51% in the same quarter last year. The expected decrease both sequentially and year-over-year was due to the continuing shift in revenue mix towards automotive and away for a mobile navigation.

Gross margin for automotive was 41% in the quarter compared to 42% in the prior sequential quarter and 45% in the same period last year. The decrease year-over-year was due to continued international growth and slightly higher Sync 3 content cost. Gross margin for mobile navigation was 73% in the quarter compared to 75% for the prior sequential quarter and 73% in the year ago period.

Gross margin for location based advertising was 44% in the quarter compared to 38% in the prior sequential quarter and 30% in the year ago period. This increase is due to the greater financial leverage achieved by having significantly grown the revenue base in the December quarter. Research and Development cost in the quarter were $16.7 million, compared to $18.0 million in the prior sequential quarter and $16.6 million in the year ago period.

Sales and marketing expenses were $6.5 million, compared to $7 million in the prior sequential quarter and $6.7 million in the year ago period. General and administrative expenses were $5.8 million, compared to $6.2 million in the prior sequential quarter and $5.7 million in the year ago period.

In addition, the company recorded a $2.1 million credit in the December quarter to reverse a previously established accrual a $1.5 million in connection with an impairment charge taken on excess space at our current Sunnyvale headquarters location as well as a $600,000 reversal of a related deferred rent accrual. As announced in the last call, the company will be moving our headquarters to Santa Clara in the spring of 2016 in an effort that is aligned with its continued ongoing strategy to optimize its cost structure.

We experienced a GAAP net loss for the second quarter of $6.6 million or $0.16 per diluted share compared to a GAAP net loss of $10.8 million or 27% per diluted share in the prior sequential quarter and a GAAP net loss of $2.7 million or $0.07 per diluted share for the second quarter of fiscal 2015.

Our performance relative to our guidance in the December quarter is attributable to healthy revenue growth in our ads business and continued cost optimization including our ability to leverage our lower cost development centers. The increase in net loss year-over-year is primarily attributable to the exploration of tax carry back credits offset by lower operating expenses in the December 2015 quarter. We generated an adjusted EBITDA loss of $4.1 million in the second quarter of fiscal year 2016, compared to a $6.4 million loss in the prior sequential quarter and a $4.8 million loss in the second quarter of fiscal 2015.

Turning to the balance sheet, we continue to be debt free and ended the quarter with approximately $110 million in cash, compared to approximately $112 million in cash as of September 30, 2015. Deferred revenue as of December 31, 2015 was $13.9 million, compared to $10.7 million as of September 30, 2015 and $5.2 million as of December 31, 2014. This increase is entirely attributable to the increase in billings related to our broadened offerings from our automotive business inclusive of our connected solutions and value added services, which were provided over an extended period of time.

These incremental billings relate to current offerings of our Toyota Entune Audio Plus, GM Remote Link and Ford Australia New Zealand Map Care Navigation Solutions. As a reminder, the company capitalizes and the first recognition of certain license map and POI content cost from third parties in the assembler manner as deferred revenue for its connected and value added automotive solutions where such items are recognized over the requested service period.

We have added a table in our reconciliation of non-GAAP financial metrics to enable the reader to understand the changes in deferred revenue and cost each quarter. It is important to also understand that as this deferred revenue and related deferred cost on these automotive solutions are recognized in the income statement as the underlying services are provided the company will also incur ongoing cost of revenue for network operations, hosting and data center and customer service support over time. We ended the quarter with 585 full time employees, a decrease from 599 at the September quarter end.

Let me now discuss selected highlights of our business outlook for the third quarter of fiscal year 2016. The full guidance is discussed in our earnings press release. Our expectations for the March quarter are as follows: total GAAP revenue is expected to be $44 million to $46 million, reflecting the effects of seasonality in the advertising business, a declining mobile navigation business and the expected recognition of approximately $1.5 million in customized software revenue.

Billings are expected to be $49 million to $51 million. GAAP gross margin is expected to be approximately 45%, GAAP operating expenses are expected to be $30 million to $31 million. GAAP net loss is expected to be $9 million to $10 million. Our adjusted EBITDA loss is expected to be between $6 billion and $7 million.

With HP, Loren, Hassan and I are available to take your questions. Operator, if you could please open the line for question?

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] And we’ll take our first question from Greg Burns with Sidoti & Company.

Greg Burns

Good afternoon. Just a question on some of the changes you are making with the ad business. First in terms of the GM partnership on the ad front is that in their mobile application that you are delivering ads or is that also in vehicle? And if it’s not in vehicle, what are you seeing from the auto OEMs in terms of them progressing towards serving up ads through their in-dash entertainment system?

HP Jin

Yeah, right now is all on the current agreement is for the remotely mobile ads. So that’s current situation and moving forward in terms of timing to bring the ad into cars that still TBD.

Greg Burns

Okay. In terms of the profitability versus growth change for the ad business. Now is that business going to be totally focused on trying to cultivate opportunities in the auto space like is it just going to be supporting the auto business or is it still going to be pursuing other opportunities outside the auto space?

Loren Hillberg

Hi Greg, this is Loren. We’ll continue to be pursuing the business that we’ve been pursuing today. We are going to be more focused on making that business a profitable business. At the same time and as HP outlined previously, we are starting to see a lot more synergy between the two business both in terms of the target customer set on the advertising side and the interest of the auto OEMs in understanding better the advertising ecosystem and the potential to take advantage of that in the car context as the GM agreement indicate. So it will be a little bit of a combination of both, but the idea is ultimately the purpose for the advertising business is really to continue to drive the overall vision of the company in connection with the automotive industry and driving up the synergies between those two parts of the business.

HP Jin

Let me tell you the reason we are working with the GM for this opportunity the reason they chose to work with us is because our reach to a lot of other users like mobile users, number one; number two also our relationship with a lot of advertisers. So that’s in order to have that we need to kind of reach both mobile and automotive segments to really have a significant value for the auto OEMs because regardless of their large size of the brands like GM or Ford or Toyota their inventory to start with is still very limited and for them to attract advertisers is very difficult, while we have hundreds of million users, we are usually serving and we have more leverage in working with advertisers and bring them to auto segments.

Greg Burns

Okay. And I guess in terms of getting that segment to breakeven on a cash basis is that kind of the near-term target or is it you foresee it being turning profitable following that with a little bit of additional scale.

Michael Strambi

So Greg this is Mike we’re targeting to achieve breakeven by the end of calendar year for the ads business.

Greg Burns

Okay I mean, I guess, I should have framed it as are you targeting to run the business at that kind of level or…?

Michael Strambi

Well we’re not going to give guidance beyond that, but we expect that trajectory to continue so we do expect to be able to run that business profitably in the near-term passed that date.

Greg Burns

Okay, thank you.

HP Jin

I think the focus for the past has been more on growth, more aggressive growth has been our path in order to reach scale and market awareness to help in other auto businesses so now we believe we have reached certain scale with the good access of billings of inventories and also the deal with GM will help us to drive more. So given that kind of progress we decided to focus on more balanced growth, it’s not like just purely try to forget about growth, it’s profitable growth is our strategy.

Greg Burns

Okay, thanks. And then just lastly on the auto segment, could you just discuss the demand trends you’re seeing globally is there any markets particularly emerging markets that are showing any signs of weakness given what we’re seeing in the macro-environment?

Michael Strambi

I would just add it’s premature I understand there might be some perception of the cloud maybe out there in China in the short-term. I’ve spoken in the past that in any given quarter we can have variation and momentum that we see for a given region just by the manner in which they procure and fulfill their inventory levels. So it’s still our expectation that we will continue to see momentum across all regions through higher production volume and hopefully continued higher take rates on embedded NAV and connected once GM launches as well.

HP Jin

So just a color for Sync 3 so we launched in North America right the U.S. we haven’t launched in China other region. So as we go out then we expect better performance in terms of our tax rate.

Greg Burns

Okay, thank you.

Operator

[Operator Instructions] And we will now go to Michael Latimore with Northland Capital Markets.

Michael Latimore

Hi. I guess just following up on the Sync 3 comment, I mean have you seen any improved attachment rates in the U.S. because of Sync 3 at this point?

Michael Strambi

Yeah I would say it’s still early to gauge that because it’s been a short period and because of the manner in which they procure and fulfill the inventory. However what I commented earlier about this change in title transfer, which will converge to this production approach and that will occur on a region-by-region basis in 2016 and once that occurs our reported results around royalties on Sync 3 will be a clear indicator of the trend with regard to take rates. Our perspective is still that we are cautiously optimistic that we will see that trend of take rates continue to increase that’s the industry data indicates that as well. And so we’re optimistic on continued growth with Ford and eventually when GM launches.

Michael Latimore

Okay, got it. And then I think your guidance for the March quarter, billings I think you’re guiding about $5 million or $6 million higher than the revenue whereas that delta was $3 million this quarter. Is that growth in the delta largely because of Toyota continues to rollout or something else?

Michael Strambi

Yeah well that’s the major driver, absolutely. We revealed a few more models that we’re launching on and the fact of the matter is the last six months of calendar ‘15 Toyota was still pushing 2015 models off their lot. So we have indications that that growth rate that we’re expecting with Toyota will continue it will expand in the March and June quarters. So that’s what you see in that forward guidance. Also there is a little bit of seasonality we believe in the December quarter with the Ford New Zealand, Australia.

Michael Latimore

Okay. And then the delta between your EBITDA this quarter and operating cash flow. It looks like it was basically the delta between revenue and billings. Should we assume that kind of difference continues going forward? Operating cash flow to EBITDA.

Michael Strambi

Could you -- should you ask again Mike the…?

Michael Latimore

So your operating cash flow I believe was about little over $3 million higher than EBITDA positive and then that was the difference between billings and reported revenue this quarter. And I’m just wondering should the difference between operating cash flow and EBITDA say next quarter be also that move up the difference between billings and reported revenue?

Michael Strambi

Well, yeah I think that’s in Sync I mean we historically have looked at adjusted EBITDA is being a proxy for operating cash flow. And now with the effect of billings and correlated deferred cost right you have to look at two of those together as well that’s why we introduced that new table in the financials. So when you think about cash flow is adjusted EBITDA plus the effect of change in deferred revenue and change in deferred cost.

Michael Latimore

Right. And then just last do you expect to have any revenue related to any of these advanced safety initiative or super cruise control kind of initiatives this year?

Michael Strambi

No.

Michael Latimore

Got it, okay. And what about the IC [ph] as you guys highlighted this predictive assistance service I guess. And you said you’re getting good receptivity I guess, if you do win some business with that would that be able to occur on models coming out in the say next year or so or would that be built into some cars that would be out there I don’t know three or four years from now?

Loren Hillberg

It’s hard to say whether the next year or the year after. And I think that definitely can happen before the years. So it’s still premature to give definite date.

Michael Latimore

Okay, thank you.

Operator

We will now go to Steve Dyer with Craig-Hallum.

Steve Dyer

Thanks, good afternoon guys thanks for taking my questions.

Michael Strambi

Hey, Steve.

Steve Dyer

A couple of quick things, just kind a parsing the free cash flow/EBTDA conversation a little further. So by my math free cash flow was just under negative $1 million like negative $900,000 this quarter. If I look at your GAAP guidance for next quarter as well as your billings guidance. Is it feasible that you can get up to overall free cash flow breakeven in the March quarter or is that still a quarter out yet?

Michael Strambi

Yeah just for start I’m not following 900K. So you really have to look at the increase in deferred revenue on a gross margin basis as a proxy for cash flow. So adjusted EBITDA was minus 4 and you apply 40%, 50% gross margin in the number were in the table you come to something more in the $2 million plus range.

Steve Dyer

For negative free cash flow?

Michael Strambi

Yeah in December quarter, and I have put that table in it.

Steve Dyer

So but with that said you should still be basically either March or June quarter based on your billings guidance in your deferred revenue I will towards for free cash flow breakeven right?

Michael Strambi

No I don’t think that’s the right way to think about it, if you look at my billings guidance so the incremental billings was about $5 million in the March quarter. So if you apply a 40%, 50% gross margin to that say $2.5 million and then you add that back to my adjusted EBITDA guidance that would give you -- that would be a way to view the cash flow and that would take you down to something like minus 4 to minus 5 in the March quarter.

Steve Dyer

Okay we can follow up more offline. As it relates to General Motors do you have any more granularity around sort of the timing or the cadence or the magnitude of that launch later this year?

HP Jin

Hassan you want to comment on that one?

Hassan Wahla

Yes certainly. So I think as we have stated previously for GM we are looking to launch our embedded connected solution towards the second half of this year and the initial launch is going to be limited models for North America only and that is on track still and we expect the rest of the world to be coming next year.

Steve Dyer

Okay. And is that initially that was going to be a rev rec more like Ford is that in other words one time upfront is that still your understanding or is there any possibility that that is more of a Toyota model?

Michael Strambi

Yeah so we’re still working through that so just to recap that embedded connected solution with GM will be mix of embedded and of embedded and embedded in connected and we’re hopeful that the embedded might be able to recognize upfront. There is a variation there since most of the GM vehicles are going to have a modem in the vehicle that there is a free trial associated with that embedded potentially and that has implications for rev revenue. And then of course for the mix that is embedded and connected that might have a plan associated with it and we think there’d be an amortization period assigned to that. So we’ll have a better grasp of this once we have an idea exactly how GM is going to offer this, but there is a potential that there could be some extended amortization associated with that revenue.

Steve Dyer

Okay. Your guidance for $1 million plus in basically MDR [ph] software revenue in the March quarter is that for an existing customer or a new customer?

Michael Strambi

Existing.

Steve Dyer

Existing, okay. Is that a bigger revenue opportunity or is that just kind of pack on to something you’re already working on with them?

Michael Strambi

No this is in connection with existing product offerings that we have spoken to, we’re just not being specific with regard to which customers any of these relate to.

Steve Dyer

Okay. And then lastly from me and I’ll hop back in the queue I know it’s with Toyota it’s really early days we can see obviously the deferred revenue growing any sense where it is offered as an option any sense as to how take rates are running whether it’s absolute numbers or sort of above or below your expectations or is it just too early to say?

Michael Strambi

Hassan you want to comment? I don’t have, I haven’t seen enough data yet, I think we will have a better grasp after March because we’ll be up in most of these models.

Hassan Wahla

Yes Mike so, so far the Toyota numbers for the Entune Audio Plus, which has our scout drive solution [indiscernible] and with the forecast that Toyota has given us.

Steve Dyer

Okay, all right. I’ll hub back in the queue thanks guys.

Michael Strambi

Yeah.

Operator

We will now go to Josh Nichols with B Riley.

Josh Nichols

Yeah hey. So I mean couple of big announcements from Ford I mean they want to make the Sync standard for started 2017 model years. And they’re partnering with AT&T to provide 4G LTE in the vehicle and looks like they’re going to try and ramp that pretty aggressively. How do you interpret that as far as Ford’s move from just an embedded navigation solution to an embedded connected solution similar to GM where you might be able to start generating nice recurring revenue base overtime?

HP Jin

I mean that’s what you have noticed it’s a validation of industry trend for all OEMs will be rolling out embedded modem to ultra-embedded navigation embedded connected navigation and other connected services. So that’s a general trend and I think even Toyota announced something similar related to that. So as they progress may progress in that direction definitely we are in best position to benefit from those this trend because we have deployed not deployed we developed solutions for GM already and we can leverage that as a way to support the other OEMs including Ford.

Josh Nichols

And then real quick on the deferred revenue I’m going to guess is pretty much all that $5 million of deferred revenue growth this coming quarter going to come from Toyota pretty much?

Michael Strambi

No as I’ve indicated in my prepared remarks and has been the case in prior quarters as well, there is three primary contributors to that metric. And again that’s Ford Australia, New Zealand region. Toyota of course and then GM remote link. All of those we're having to amortize the underlying revenue over an extended period of time.

Josh Nichols

Right but the GM Remote Link revenue wasn’t that much and was kind of fading little bit quickly if I recall and the Ford revenue was kind of more of a one-time thing that had to be amortize over a number of years. So I would think wouldn’t the bulk of the $5 million.

Michael Strambi

Yeah maybe we should take it offline, but we generally expect that all three of those to continue to increase. We indicated on this call that remote link is expanding into Europe. And so we would expect an upward lift in those attach rates both in the U.S. and in Europe. Similarly with regarding to Sync for Ford Australia and New Zealand we’re cautiously optimistic that we’ll continue to see an uptake in navigation solution there. And then of course, Toyota is what now launching across all these models. So the growth rate for Toyota will be higher absolutely, but we’ll continue to GM remote link and Ford will be a significant component each quarter.

Josh Nichols

Okay, good to hear. And then lastly even excluding like the one time relocation expense OpEx did make a significant improvement sequentially, it was down like $1 million, $2 million. Any details you can provide surrounding where the cuts were made and what the company’s focus is?

Michael Strambi

Sure so we touched on it briefly in the call. Our total headcount decline and we continue in our cost optimization efforts to leverage some of the lower cost development centers that we have in Romania and in China. So we’re being opportunistic when we have some normal attrition that we might backfill there. Those are primary drivers, another significant driver in the quarter you might not think too much about it just having lot of employees take vacation in the quarter and that actually does have a significant impact, benefit to the P&L each December quarter.

Josh Nichols

Great and thanks.

Michael Strambi

And the inverse of that in the March quarter. That’s reflected in my guidance as well on OpEx.

Josh Nichols

Okay, thanks. That’s it from me. We’ll talk more on.

Michael Strambi

Yeah.

Operator

That does conclude the question-and-answer session. I will now turn the conference back over to Ms. Cynthia Hiponia for additional or closing remarks.

Cynthia Hiponia

Thank you everyone for joining us today. We look forward to updating you on our next call.

Operator

Ladies and gentlemen this does conclude today’s conference. We thank you for your participation.

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