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NAVTEQ Corporation (NVT)

Q2 2007 Earnings Call

July 31, 2007 5:00 pm ET

Executives

Tom Fox - Director of IR

Judson Green - President and CEO

Dave Mullen - EVP and CFO

Analysts

Jairam Nathan - Banc of America Securities

Jay Vleeschhouwer - Merrill Lynch

Bill Benton - William Blair

Maynard Um - UBS

Rob Sanderson - American Technology

Yair Reiner - CIBC World Markets

Rob Schwartz - Jefferies & Company

Peter Friedland - Soleil Group

Ben Radinsky - Bear Stearns

April Horace - Janco Partners

Ingrid Ebeling - JMP Securities

David Niederman - Pacific Crest Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to our Q2 2007 NAVTEQ Corp Earnings Call. My name is Rob and I'll be your operator today. Throughout this conference all lines will be on a listen-only. (Operator Instructions).

At this time, let me turn the conference over to your host, Director of Investor Relations, Mr. Tom Fox.

Tom Fox

Good afternoon everyone this is Tom Fox, Director of Investor Relations and welcome to our conference call to discuss financial results for the quarter ended July 01, 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, adoption rates, penetration rates, portable device sales, map update sales, new business with customers, new content and features and the result of 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 most recent Annual and Quarterly Reports. 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. We are very pleased to report a quarter of exceptional growth and profitability for the company, we achieved record operating results with second quarter revenue of $202.3 million, growing 49% over the prior year and operating income of $54 million up 63% over the same period a year ago.

The revenue increase was driven by growth in unit volume, which was up 76% when compared to the second quarter a year ago partially offset by a mix shift from portable device map units, as that business continued to grow robustly. Excluding the impact of foreign currency and the revenue from the recent Traffic.com and Map Network acquisitions revenue grew 32% over the prior year. Further excluding the distribution business which was down slightly in the quarter compared to the prior year base business revenue was up approximately 39% on a currency neutral basis.

Net income for the quarter was $40.9 million or $0.41 per diluted share. For the first six months of 2007, revenue of $362.3 million grew 40% over the first half of 2006. Excluding the impact of foreign currency and the two recent acquisitions first half revenue grew 26% over the prior year. Year-to-date operating income was $92.4 million, net income for the first half was $71.1 million or $0.72 per diluted share.

Net cash provided by operating activities was $153 million for the first half of 2007, compared to $52.4 million in the first half of last year. We ended the quarter with $390 million in cash and marketable securities and no debt.

I am very pleased with the growth trends in the marketplace and our ability to execute against our strategies. I feel that the company is in a strong position as we enter the second half of 2007.

Q2 results came in ahead of expectations, and I think it is important to understand the primary reasons for that. First, the Portable Device business grew briskly, coming in substantially ahead of our plan on a constant currency basis. Volume growth far exceeded our forecast in both major geographies, with our map units in Western Europe up more than 70% over last year, and North America nearly tripling.

A number of other areas of our business also performed quite well in the quarter including Wireless and Enterprise Solutions, but the Portable Device business was the biggest contributor to the top line performance.

Second, total costs and expenses were roughly $10 million lower than our original plan on a constant currency basis. Roughly, half of this amount was due to lighter distribution costs related to the delayed launch of certain map update programs in the in-dash business. The other half was the result of a conscious decision to move several projects and initiatives from the second quarter in to the second half of the year for a number of different reasons. For example, we postponed certain geographic build-outs in content development in order to deliver on some near-term customer commitments.

And third, the strong Euro had a favorable impact on our results. The average exchange rate in Q2 was $1.35 compared to $1.27 rate used in our guidance. This resulted in a $7.3 million benefit to revenue and a $0.03 benefit to EPS compared to plan. Compared to the average rate of $1.26 in the second quarter a year ago, the FX rate drove a $6.2 million increase in revenue and a $0.02 in EPS over the prior year.

Turning to our Q2 revenue by geography, as indicated in the press release revenue for the Europe, Middle East and Africa region grew 39% over the prior year, aided by the strong Euro. Even without the foreign exchange benefits EMEA revenue grew 32%, which was its strongest growth rate since 2004.

Revenue for the Americas grew 64% over the prior year. Excluding the two recent acquisitions, Americas revenue grew 30%. Asia-Pacific revenue, which is derived from our Korean subsidiary, was $2.8 million in the quarter.

I'd now like to spend a few moments talking about Q2 developments in each of the major businesses. I'll begin with the European in-dash business; which showed double-digit unit growth over the prior year due to an uptick in adoption, stronger than expected navigation take rate even in some of the more heavily penetrated segments, and the pick up of some new business with Mercedes-Benz on the C-Class.

We attribute the take rate increase to greater consumer awareness of navigation and the effectiveness of our take rate improvement program which helps car companies train their dealer personnel on selling in-dash systems.

Overall, cars sales in Western Europe were down about 1% compared to the second quarter of last year. Car sales in Germany; Europe's largest car market, were particularly weak again in Q2 and have declined 8% year-to-date compared to the same period in 2006.

In addition to the value added tax increase, which we told you about last quarter, Germans are now faced with proposed carbon tax legislation designed to curb emissions, and possible bans on driving in urban centers. We believe this may have had an adverse impact on car sales in Germany, as potential buyers wait to see what will happen with the legislation.

Adoption or the percentage of cars sold that offered in-dash navigation remains above 80% in Western Europe. We are now seeing better than expected adoption at the low end and what is referred to as the A segment.

Our assumptions have been that few of these higher volume compact models would adopt navigation due to its relatively high retail price. However, Fiat will extend its Blue&Me low-cost navigation platform to an additional A-segment model this year and Kia is now offering an in-dash system on it's A-segment Picanto.

The second quarter strength in both adoption and take rate n Europe is driving overall penetration that is tracking ahead of our original plan for the year. As a reminder, penetration is the percentage of car sold with in-dash navigation systems.

You may recall that last quarter we announced new business with Volkswagen Group in Europe that would begin this year. We actually began shipping in June ahead of schedule and the first model available with our map is the VW Touareg. Additional vehicles will follow later this year.

In the North American In-Dash business, we saw a double digit increases over last year's second quarter in both units and revenue. The growth was due to the substantial increase in adoption compared to the prior year. In Q2, in-dash navigation was launched for the first time on 10 models, including the Mitsubishi Lancer, Land Rover, LR2, Ford Taurus and Mercury Sable.

On a full year basis, we expect adoption of nearly 70% in North America compared to 51% in 2006. Overall car sales in North America were flat in Q2 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 second quarter of 2006, luxury car sales were down 11%, Minivans and pickup trucks were down 7%, and mid-size sedans sales dropped 4%. The only significant growth categories were the Compact car and SUV segments, which were up 7% and 8%, respectively.

But the increase in SUV sales was really driven by smaller models which were up 16% over last year. Take rates in North America are growing modestly. However, surging adoption does have a dampening effect on the overall take rate, at least initially as a number of smaller less expensive models offer the option for the first time. Penetration is tracking inline with our plan in North America. Map updates represented approximately 17% of our in-dash units in the quarter, which was below our plan.

Frankly some of our customers are not moving as quickly as we would like, but we still feel that we are making good progress and expect better performance in the second half of the year. With those RPM programs that have been launched fully and at the right price point it is not uncommon to see year-over-year update volume growth of 20% or more. We have been successful in winning update distribution business with our OEM customers that will enable us to retain our tier 1 position in many cases, and should partially offset the decline in distribution revenue arising from the gradual introduction of hard disk drive navigation systems over the next several years. With respect to the portable device business, as I mentioned a moment ago, this continues to be an area of remarkable growth for the company.

As a reminder, Q2 revenue generally represents customer royalty reports for the months of March, April and May. In Europe, a number of our customers launched new products in the quarter including Garmin, Medion, Sony and Navigon. In particular Garmin's new V200 series and Medion's new PND line performed well. Certain Medion's PNDs now offer voice recognition functionality that uses NAVTEQ voice data to enable the user to speak the destination rather than having to type it.

Nokia also began shipping the new 6110 Navigator which is the first handset to feature out of the box turn-by-turn navigation using NAVTEQ Maps. Unfortunately because this device was launched late in the quarter, it did not have any impact on Q2 revenue. We are also supporting Nokia on the N95 smartphone in a number of countries outside of Europe. PDA related products which have been declining for the past several quarters as expected accounted for just 2% of our European portable map units in Q2 down from 14% a year ago. In North America, we have seen a variety of new products from our major PND customer and consumer demand is surging.

Garmin introduced more affordable entry level devices and seems to be successfully defending its leadership share of the category, while Magellan has resurged in recent months behind several new products. LG also launched its first PND in U.S. using NAVTEQ Maps and the product has been well received at retail. It is difficult to know exactly how big this category could be in Q4, but we are optimistic that this will be a breakout year for PNDs in the U.S. In fact, during our recent meetings with the major consumer electronics retailers they indicated that they recognized the popularity of the category and planned to devote even more floor space and advertising support in the coming months.

Turning to the Wireless business for just a moment. Revenue grew dramatically in the quarter over the prior year but the absolute dollar contribution is still too small to be material. Off-board trends are extremely positive particularly with Verizon Wireless in the U.S. which continued to advertise the VZ navigator service across TV, radio and print media. With respect to coverage we released maps of nine new countries in the quarter including our first maps of India and Turkey which brought our coverage to 69 countries and territories around the world. The initial India map covers 53 million people and 64,000 kilometers of roadway. We mapped six of the largest cities in the country as well as the arterial road network connecting those cities. We paid particular attention to city centers, mapping those downtown areas to our highest level of quality. As you might expect the creation of our India map posed new and unique challenges to our geographic analyst due to the dynamic nature of India's road network. In fact, due to inconsistent and unpredictable nature of many of the roadways, our analyst gathered a significant amount of data on foot using handheld collection units.

During the quarter, we released full coverage maps for Poland, Czech Republic, Slovakia, Hungary and Slovenia. To remind you, full coverage means that the map includes all navigable roads, but not all roads have necessarily been field verified by NAVTEQ personnel.

We also released maps for Belarus, Botswana, Lesotho, Moldova, Namibia, Swaziland and Ukraine. And lastly, we enhanced our Australia map by adding a number of region-specific data elements such as postal codes, voice phonemes, speed camera locations and neighborhood zones.

I am pleased to announce two pieces of new business that we secured in the quarter. First, we signed a three-year agreement with PSA Peugeot that extends our relationship beyond Europe to South Africa, the Middle East and Russia. And second, in the area of dynamic content Mercedes-Benz has chosen NAVTEQ at its real-time traffic provider in the US for the 2008 S-Class which began shipping this month.

Real-time traffic will be a standard for the life of the vehicle and the service will use RDS technology, which delivers the traffic feeds to the vehicle's navigation system over FM radio. This award is a great example of NAVTEQ and Traffic.com are working together effectively to win new business.

Finally, with respect to our recent acquisitions, Traffic.com and Map Network, revenue from the two companies is tracking in line with our plan and integration costs have actually been lower than expected. In general, the integration has gone smoothly and we are on track to achieve the targets we set for the year.

Dave will provide more detail on the financial impact of the acquisitions in a moment.

At this point I would like to turn the call over to him.

Dave Mullen

Thanks Judson. I'll try to provide some additional color on our result. With respect to revenue, map license and related revenue comprised 91% of the total in the quarter. Advertising revenue represented 8%, and other revenue accounting for the remaining 1%.

Distribution revenue was down only slightly compared to the prior year and represented approximately 12% of our total revenue in the quarter. We performed distribution services on 36% of our in-dash volume.

The mix of distribution units in Europe was 53%, which was down from the prior year due to the mix of business between distribution and non-distribution customers and the introduction of hard disk drive navigation systems on more car models. The mix in North America was 17%, which was also down from the year-ago period due to the mix of business between distribution and non-distribution customers.

On board revenue represented approximately 82% of total revenue and 91% of map license and related revenue in the second quarter.

Second quarter map units grew 76% over the prior year, with in-dash maps up 17% and portable device maps up 118%. Excluding the maps for PDAs, which have been declining sharply for the past several quarters, our worldwide portable device map units grew a 146% over Q2 of last year.

Our two recent acquisitions contributed $16.9 million to revenue in the quarter. With respect to pricing, we've once again calculated what we call our market basket metric, which represents the change in the license fees paid to us from the second quarter of last year to the second quarter of this year by each of our top ten customers on their most popular NAVTEQ map product in Europe and the Americas.

The price change reflects base license fee reduction, as well as volume discounts and other considerations. For the second quarter the market basket price decreased by an average of approximately 9%, compared to last year's second quarter.

With respect to expenses database creation and delivery cost were up 44% over the year ago period, the growth was driven by increases in investment in our map database, as well as the consolidation of the full three-months of Traffic.com expenses.

In terms of the components of database creation and delivery cost, direct distribution cost represented approximately 20% of total database cost in Q2 and grew 7% over the prior year. Data collection and processing cost represented 70% of the total database cost, and grew 42% over the second quarter of last year. And other Database cost represented 10% of the total and were up from the prior year due to the consolidation of Traffic.com's cost of advertising unit, inventory and Map Network's direct cost.

SG&A expenses grew 45% in the quarter compared to the year-ago period, growth there was driven by the consolidation of a full quarter of Traffic.com's cost and increases in our sales and business development resources. Total amortization of intangibles including in operating expenses was $2.8 million in the quarter, compared to $0.9 million or $900,000 in last year second quarter. Traffic.com and Map Network added approximately $24.1 million to Q2 operating expenses. These expenses include amortization of intangibles but they exclude certain share overhead cost.

Total stock-based compensation expense in the quarter was $5.2 million, of which $2.5 million was related to stock options. Of the total expense, $4.3 million of that was recognized as SG&A.

Our operating margin in the quarter was 26.7% compared to the 24.4% margin in the year ago quarter. Our effective tax rate was 29.6% in Q2, this rate was higher than the first quarter as we now expect a greater mix of full year income to come from the U.S. where the statutory rate is higher. To remind everyone, we are now a full cash tax payer in Europe, but not in the U.S.

Now with respect to guidance, we are revising our annual guidance today, primarily as a result of our strong first half performance. Further we are encouraged by the trends in the business including better than expected growth in portable device maps and solid performance in the in-dash area despite generally unfavorable car sales trends. But we are also mindful of the risks and uncertainties that remain in the balance of the year. We now expect full year revenue of $780 million to $795 million and diluted EPS of $1.45 to $1.50. On a full year basis these ranges assume an effective worldwide tax rate of approximately 29%, an average U.S. dollar euro exchange rate of $1.35 and average diluted shares outstanding of approximately $99.6 million.

In terms of other key assumptions underlying the guidance, we have factored in OEM in-dash penetration growth of approximately 1-2 percentage point in each of Western Europe and North America. On a full-year basis, we're still expecting OEM distribution business to represent a low teen's percentage of revenue and less than 40% of in-dash map units.

In the Portable Device business, we are assuming full year industry growth in portable device map unit for Western Europe and North America combined of around 90%. The increase in our forecast is driven by the first half trends and what we believe is typical seasonality in this business. It's important to understand two more things about the forecast. First, there are more than 80 PND vendors in our two primary geographies and this growth rate is a composite for all those players each of whom is growing at a different rate. And second, the forecast reflects not just map for PNDs but also maps for PDA's and particularly smartphones which are expected to become a more significant piece of the mix in the second half of the year.

Excluding the impact of the Traffic.com and Map Network acquisitions we expect base business operating margin expansion of around 300 basis points compared to our previous estimate of 100 basis points. With respect to the quarterly pattern of revenue and expenses I'd like to point out that unlike previous years we expect third quarter revenue to be slightly lower on a sequential basis primarily due to in-dash revenue seasonality and the loss of the TomTom ONE business in Europe. As Judson mentioned first half spending was lighter than our original planned contemplated, therefore Q3 and Q4 spending should grow sequentially in the mid to high single digits as we pursue the successful completion of the projects and initiatives in our improvised plan. This should result in a spending pattern that is more backend loaded than we had originally anticipated.

As you all know foreign exchange rates are difficult to predict. Any strengthening of the dollar against the euro in the second half of the year would have an adverse impact on our results compared to the guidance we've provided. For each once in a difference in average annual exchange rate there is a $3.3 million impact of full year revenue and a $1.3 million impact to full year net income.

With that I'd like to turn it back over to Judson to wrap up.

Judson Green

Thanks Dave. I would like to wrap up the call this afternoon as I usually do by offering a few comments on our outlook for the business. These are exciting times for our industry and our company. From the rapid growth of PNDs to the emergence of wireless applications, GPS and location technologies are becoming more and more part of our daily lives as mobile consumers.

Last week TomTom announced its intent to acquire Televés. We have been thinking carefully about how this impacts the company and our customers and fundamentally we do not expect this development to change the way we operate. We have always viewed NAVTEQ as having lots of competition but we expect that to continue in the future.

The fact is we have significant experience in the areas TomTom is promoting such as community map feedback. We have been receiving feedback from our customers and the end-user community for many years and we know how to incorporate that feedback, while maintaining our quality standards, by leveraging the knowledge and expertise of our field analyst and productions teams.

To us this transaction underscores the value of content in the location-based services space, and while we respect TomTom as a company, we are confident we will be able to compete very effectively with the combined entity.

Our goal at NAVTEQ has always been to help all our customers to be successful by offering them the highest quality maps and content, matched with unique value-added services and support.

I feel, our leadership position the GPS technology marketplace remains strong and I am optimistic about our ability achieve the targets and objectives we have set for the company.

This concludes our prepared remarks. So, thank you for your attention. Now, I would like to ask the operator to open the lines so that we might answer your question.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instruction). Sir, I have your first question today coming to you from Jairam Nathan from Banc of America Securities.

Jairam Nathan - Banc of America Securities

Hi guys. Just on your guidance as the question I had was, are you up to revenue guidance by close to $50 million while your net income guidance went up in the $24 million to $25 million range. If I take the $10 million the cost push out then probably it gives me a very, you would say, pretty low investment rate on a pre-tax basis. So, how should we think about that?

Dave Mullen

Well, I am not sure how to answer the question except to say that I think that it reflects the fact that not all incremental revenue is 100% margin. We have businesses where there are cost of good sold in terms of the traffic business and the mapped network business. We did mention that we thought our base business operating margin would expand by 300 basis points instead of a 100 basis points…

Judson Green

Which should get you…

Dave Mullen

Which should enable you to get there.

Jairam Nathan - Banc of America Securities

Okay. And my other question was on pricing, given the whole the TomTom, Tele Atlas transaction, how should we think about pricing going forward? Does it get more saner?

Judson Green

At this point I would say it’s too early to say what impacts this may have on pricing. I think to do that at this movement with this news being so recent, is just speculation. So, we really don't know what impact this may have.

Jairam Nathan - Banc of America Securities

Okay, thanks.

Operator

Okay. You are going to go to Jay Vleeschhouwer from Merrill Lynch

Jay Vleeschhouwer - Merrill Lynch

Thanks. Judson, I would like to ask the pricing question in a different way, almost independent of the TomTom news. You have already experienced for many years feature-based pricing across your auto and PND product line.

And could you describe how you see feature-based or segmented pricing plain out anyway over the next numbers of years, as you add in more content, and data, and attributes anyway. Do you think that pricing could get worse before it gets better based slowly on attributes and content or how do you see curve progressing then over the next number of years for each of the two businesses?

Secondly, for Dave or for Judson, on the investments and expenses side, since the year is more backend loaded then you had originally thought, how was that affecting that timing and availability of whatever new product and services you are investing in? Is there some pushback perhaps to 2008 of some of the new attributes or other services that you were meeting to develop?

Judson Green

Okay. On the first question, I think Jay you are very familiar with our pricing strategy. It's a function of number of different things, including geography and content and functionality and volume discounts. Although the pricing strategy itself evolves over time, and there have been tweaks to it in the past, there will be tweaks to it future. But, fundamentally as we look to the future, the only thing I could tell you is I think we see more and more content being introduced into the whole navigation market.

As we’ve talked before variety types of study content, which we reported on before that we are building on behalf of our customer, as well as an ever increasing number of and types of dynamic content. So, that to me speaks well to the model that we have, which does recognize content as a major driver of what the price points will be.

Beyond that I really can't forecast or speculate on what might happen, other than to tell we think we've got a robust pricing strategy and that content is going to play an ever increasing role in the strategy as we look to the future.

Dave Mullen

With respect to your second question in terms of the impact of delayed spending on our delivery to the new content while some projects may slip slightly in terms of the timeline, we don’t anticipate any material deviation from our customer commitments which are the most important thing driving that additional content.

Jay Vleeschhouwer - Merrill Lynch

Thank you.

Operator

Thank you. We are going to go to Mr. Bill Benton calling in from William Blair.

Bill Benton - William Blair

Hi, afternoon guys. First, I just wanted to maybe another pricing question, I apologize. But as you think about growing your PND business would you say you are more focused on market share gains or price stability?

Dave Mullen

But do you have to trade off?

Bill Benton - William Blair

I am just trying to figure out the relative emphasis.

Dave Mullen

We are interested in whatever delivers us the greatest profitability I think.

Bill Benton - William Blair

Okay, I figured it though.

Dave Mullen

You do, I understand the question and you take each opportunity and you view it in light of its overall impact on the profitability of the business.

Bill Benton - William Blair

Alright, would it be fair to assume that change in control causes are fairly standard in your customer contracts or for the industry in general?

Judson Green

I have no idea Bill, off the top of my head what is the wording in all of our contracts.

Bill Benton - William Blair

Okay, I didn’t knew it. Okay, and just a final question, just on PND growth. You said 90% is your new overall target. Are you able to offer us any color in terms of how you are thinking about the North America peace event and what your expectation is for growth there?

Dave Mullen

I think we said that it was -- we thought it was at least 2x.

Bill Benton - William Blair

Yes, at least 2x. Okay, great guys. Thanks again.

Operator

Thank you. We are going to go to Maynard Um from UBS.

Maynard Um - UBS

Hi, thank you. Just related to the projects you are investing in; how long do these projects typically last or, maybe ask the different way we typically haven't seen any significant decline in database licensing introduction cost sequentially. Will the conclusion of those projects result in decreases as we go forward. And then I have a follow-up.

Dave Mullen

I don't expect that they will, no.

Maynard Um - UBS

Okay and then just related to I guess the announcement by your competitor; how quickly can a PND vendor actually switch map suppliers and any early feedback presume you've been reaching out to your competitors and customers? Thanks.

Judson Green

Well I think in the PND space it's much easier to switch than it is in the automotive sector just because of the complexity of the applications and poor maps, so I think that's pretty well known. Your second question was with respect to feedback from customers I would say on that front, we have spoken to all our of our major customers some of whom are also the customers of our competitors and I would say most of them are still digesting what this transaction means, it's not at all clear I think it surprised many people, so I don't know that I have any conclusions other than we obviously have talked to our major customers and they are trying to figure out themselves what the implications are.

Operator

Thank you. We are going to go to Rob Sanderson from American Technology.

Rob Sanderson - American Technology

Thanks, congratulations on a great quarter guys. Just a quick housekeeping first, your comment on base business off margins in the second half, just to make sure I am getting this right. We have about a 350 basis point drag from the acquisitions this quarter?

Dave Mullen

I am not sure what a drag means but our guidance on the basis point expansion was for the full year not for the second half.

Rob Sanderson - American Technology

Right, I will make a follow of that up later. Then on the balance sheet, intangible assets as you pull in these acquisitions increased about $200 million or something year-over-year and one; could you give us the amount of amortization as usually disclosed in the 10-Q and then the second part of that is and for us to get a better picture of what normalized earnings in the business is really look like, shouldn't we be looking at your earnings net of amortization of this intangible?

Dave Mullen

I think that's up to, if you are looking at cash flow it's probably useful to do that. I think each of the analyst probably looks at this in a slightly different way depending on what you measure. I am just I am looking back at the script to see what we told you about amortization. The total amortization of intangibles that's in our second quarter results was $2.8 million in the quarter and that is up from $900,000 in last years second quarter. So what you see in the quarter that's a full quarters worth of amortization from acquisitions which is the first time that showed up, so that should be a more or less consistent number going forward.

Rob Sanderson - American Technology

Okay, Dave and then just a follow-up on the total depreciation on your cash flow statement I guess the big jump there has been in the actual depreciation one and not the amortization one?

Dave Mullen

I am trying to let's see, its up about $0.5 million from Q1 and we did acquire a fair amount of fixed assets in the Traffic.com deal so that's where the majority of that increase is coming from and again that represents a full quarters worth of depreciation.

Rob Sanderson - American Technology

Great, thank you. Thank you, gentleman.

Operator

Okay. Thank you. We'll go to Yair Reiner from CIBC.

Yair Reiner - CIBC World Markets

Hello. First of all I have my congratulations to a great quarter. Second, in your conversations with your many customers, I mean, are you getting a sense there is going to be opposition in the market to the TomTom, and Tele Atlas combination. And secondly, have customers come to you seeking assurances that -- you obviously can be in very position, you are not going to take advantage in any kind of crude way of potentially your strength moving forward?

Judson Green

Again, we have had some general conversations with our customers, I don't know if it's appropriate for me to share what we have discussed with each of our customers about the future. I think what is paramount to our customers is to know how we are reacting to this, and I think in that vain I would say that we are very focused on customer satisfaction, as we have been for years. We are very focused on our roadmap and the specific commitments we have made with respect to delivering new products and new geographies. And we basically think that the single best thing we can do is exactly what we have been doing, which is to focus on quality, focus on our customers, and focus on delivering what we say we are going to deliver and that time I must say has resonated very well.

Yair Reiner - CIBC World Markets

Fair enough. One question on the mix. Your assumption is that in the back half of the year, lots of growth in the PND segment will come from the lower-end models. How should we think of that impacting your pricing, if at all?

Dave Mullen

Pricing, it doesn’t really impact pricing. It has an impact on which products or which of our map products the customer picks. Typically, in a low-end device they are taking maps with less geography, less content and alike. I mean, probably the biggest impact on our business in the portable space is the loss of the TomTom business in the last two quarters of the year.

Operator

Thank you. We now are going to go to Rob Schwartz calling from Jefferies.

Rob Schwartz - Jefferies & Company

Just a clarification first, the 90% target you gave for PND growth, I want to make sure that that was units and not revenue. And second, may be you could talk about what went in to that, you said you built it up in the bottom up, but I am wondering what your assumptions are about mix in PNDs between the low-end units and high-end units?

And then finally, in your discussion with vendors -- I am sorry with retailers, which you've discussed, I am wondering if you are seeing a pattern about when their makes would be stocking their shelves? Do you think they will be stocking earlier this year versus last year?

Dave Mullen

Your first comment was correct. That was a unit projection not a revenue projection for PNDs, PDAs and smartphones, if not just PNDs.

Rob Schwartz - Jefferies & Company

Right.

Dave Mullen

With respect to the second question, are we assuming more low-end versus high-end, that’s more granularity then we’re really comfortable talking about in this form. Third, I don’t think we yet have any visibility with respect to stocking for the holiday season. As you know were sort of one step removed from the retailer and the PND, OEMs like Garmin and Magellan and TomTom are probably in a better position to give you insight into that since they are dealing directly with retailers.

Rob Schwartz - Jefferies & Company

And if I may follow-up, have you seen patterns than that you could talk about, with some granularity about uptake of traffic and some of the Point Of Interest data. Are you seeing something in the PND devices where there they are installing more Point Of Interest to fit your strategy?

Dave Mullen

I think on Point of Interest it's probably a little too early. On traffic, we are pleased with the uptake, but again, it's very early in the life and that probably won't have a big impact until next year. I think it's just a little late for that to get incorporated on a widespread basis for the holiday season.

Rob Schwartz - Jefferies & Company

Thanks for taking my question.

Operator

Thank you. And we are going to go to Peter Friedland from Soleil Group.

Peter Friedland - Soleil Group

Hi. Did you say if you added 10% customers during the quarter?

Dave Mullen

We didn’t, but we have two 10% customers, Garmin and BMW.

Peter Friedland - Soleil Group

Okay. And as far as the one months reporting lag in the PND business, can you quantify that all relative to calendar quarter numbers for both Q2 and Q1, just so we have an idea how to model it going into Q3?

Dave Mullen

You mean how much came in after the quarter?

Peter Friedland - Soleil Group

Well, if Q2 didn’t include June?

Dave Mullen

Right.

Peter Friedland - Soleil Group

If you compare that to Q2…

Dave Mullen

I am sorry, ask this question again Peter. I am sorry.

Peter Friedland - Soleil Group

So, if you compare March, April, May with April, May, June. So, how much of a negative was that in Q2 or was it a negative just…

Dave Mullen

No, it's the same basis, last year as it was this year. So, it's consistent year-over-year.

Peter Friedland - Soleil Group

Okay. I'll just…

Dave Mullen

Was I clear on it or...?

Peter Friedland - Soleil Group

Well, it's not a year-over-year question. So, in other words if you reported 3.1 million units for Q2, how does that compare with the actual calendar unit number for April, May, June?

Dave Mullen

Well, if I was to say that then I'd be giving you insight into our next quarter and I just don’t think it's appropriate for us to do that.

Peter Friedland - Soleil Group

Okay. Fair enough.

Operator

Thank you. We are going to go to Ben Radinsky from Bear Stearns.

Ben Radinsky - Bear Stearns

Hey, good afternoon, good quarter. Two quick questions; can you update us on the actual penetration numbers I don't think that you mentioned on in your script?

Dave Mullen

We talked about in generally I think they are tracking, year-to-date they are tracking with what we anticipated for the full year which was basically one or two percentage points on each continent increase in penetration.

Ben Radinsky - Bear Stearns

Okay and then historically you've mentioned that the 2008 model year was going to be a big year for uptake in in-dash navigation. Are there any new progresses that you can talk about?

Judson Green

No, I think we mentioned the Kia and the Fiat. I think what you're referring to in your question is the ultra low cost line feed which will have some impact '08 model, you are going to have a much bigger impact in the '09 model year which would be the second half or last part of '08 which is we are. And we think that trend is firm because of the logic that goes into having a lower price point, but we don't have, we're not at this moment prepared to make any forecast or predictions about what exactly that means over the next two or three years.

Ben Radinsky - Bear Stearns

Okay and then the last one from me, you mentioned VZ Navigator I was hoping that you could either give some color or granularity on either that program or on out board navigation in general?

Dave Mullen

We'd love to give you color on it but Verizon is pretty sensitive to what's going on there. I'd just say we're pleased with what's happening I think they are too but that's as much as we are permitted to say about it.

Ben Radinsky - Bear Stearns

Thanks very much.

Operator

Thank you. We are going to go to April Horace from Janco Partners.

April Horace - Janco Partners

Hi, thanks for taking the question, and I wanted to say congratulations on what I though was a great quarter. With having a 90% increase in units year-over-year from '06 to '07 how do we think in terms of continued growth in that particular sector in '08 as well as beyond just North America and Europe?

Judson Green

This is one of the toughest questions that we get which is because of the newness of this category and because this is tied up in holiday shopping patterns and consumer behavior and alternative devices and alternative electronics. I wish we could tell you but we don't have a crystal ball on this and in fact as Dave said a minute ago we are actually one step removed in that context because some of the bigger PND players might give you better information about what they see happening.

I think we can say that we have witnessed a little bit to our surprise how popular this technology has become there is some that believe that this now maybe the fastest growing consumer electronics category and we are also continuing to hear positive signs from as a result of that from the retailers who were saying, hey this is an opportunity for us. But how that translates into actual sales even through the end of this year let alone '08, '09 we just don't know and we can't give you any better information that we already have.

April Horace - Janco Partners

And then with respect to the increase in revenue guidance, I was wondering if you could give us some sort of indication as to how much FX might have might have been baked into that number. And then also can you give us a sense as to when we might see the timing of more ultra low cost in-dash units announcements would be?

Dave Mullen

Well, with respect to, I'll let Judson answer the second question, but with respect to the first one, our original guidance assumed a 1.27 rate for the full year, we now assume the 1.35 rate for the second half of the year. So, you could multiply that $0.08 difference by the sort of assumed second half revenue that goes into our annual revenue guidance and calculate how much of that has been driven by FX.

April Horace - Janco Partners

Okay thanks, and then timing of ultra low cost in-dash units.

Judson Green

As I said a minute ago, I would say it's really model year '09, which really than impacts the lead '08. And, I think there might be somewhat meaningful numbers to identify again things in the automotive industry move very slowly and we think this is a great idea, we are hearing good things about it, but this is the kind of thing that’s going to take a few year to build, but I think it will really become noticed with the model year '09 which is the second half of '08.

Dave Mullen

And I would add that our customers are system vendor customers have a very strong bias for controlling their own announcements of new product introduction. So, even though we might know about things coming, we have to be circumspect about jumping the gun on it.

April Horace - Janco Partners

Okay great. That’s all I got, good, great quarter.

Judson Green

Thank you.

Operator

Thank you. We are going to go to Ingrid Ebeling from JMP Securities.

Ingrid Ebeling - JMP Securities

Hi. Thank you, again congratulations on a great quarter. I was wondering if you could provide a little bit more clarification on the operating margin expansion in '07 or I think it was for full year versus '06 including the acquisition. And kind of moving forward do you feel is the integration of Traffic.com and the Maps Networks has got a little bit of had a plan in terms of profitability and what kind of financial leverage we could see in 2008 once we get a full year these acquisitions baked in. Could we see a 200, 300 point increase in year-over-year? Thanks.

Dave Mullen

I would say first with respect to the acquisitions, we think that they are operating generally in line with what we expected, not particularly better, which we haven't necessarily improved the profit picture dramatically. I think we're pleased with how that's operating.

In terms of being able to do dramatic margin expansion next year beyond what I think we anticipate, I think it's early for us to really reach that conclusion yet. We haven't even started that process, and I certainly wouldn't want to promise if we could do it without really having -- can't do it more dramatically. I think we're pleased with the progress we're making. Obviously, what happens in 2008, there is a lot of things that go into that. So, it's probably a little early for us to be talking about what we think we can do there.

Ingrid Ebeling - JMP Securities

Okay. And the deal that you won with Mercedes-Benz, the S-Class with the full time or real time traffic, is that a revenue generator from Traffic.com, that's beyond advertising revenue?

Dave Mullen

Yes, that's a license fee arrangement.

Ingrid Ebeling - JMP Securities

That’s great. Thank you, and congratulation again.

Operator

Thank you. And so I have your last question today coming to you from David Niederman from Pacific Crest Securities.

David Niederman - Pacific Crest Securities

Good afternoon. Last quarter you talked about receiving some incremental ADAS revenue that was a bit of surprise. I was wondering if you can provide an update to that. Are you seeing any acceleration there in ADAS?

And secondly, when you talk about increased retail space that will be devoted to PND this holiday season, do you get the sense that will entail incremental brands on the floor or more models from the same number of brands. Thank you.

Judson Green

With respect to the ADAS, I think you may be referring to the fact that with respect to ADAS type content we do have the ability to charge incrementally for that. So, we are recognizing that, it's not a significant amount in '07, but it does exist. With respect to the pace of that, it's been like my comment about the ultra low-cost line. We think this is a real opportunity for us, but it's going to be over many years that this is realized. It's in our opinion a very good direction for the car companies to go, and they're excited about it for a lot of different reasons. But, it's something that's been in the works for more than a decade and I think it's going to roll-out over the next decade.

So, I don’t have any headlines as to what '07, '08 or 09 is going to look like with respect to ADAS. And with respect to the retail space, this is just anecdotal, it's not scientific, but I do think to the extent that any of the retailers decide to expand over the prior year their retail space, so yes that will be more models. I think that's right.

I think they've got to decide who they are betting on, because there are so many players in the space that they have to take into account a number of different factors, including the power of the brand of that particular PND manufacturer and the amount of marketing that they are going to put in to and not to mention a diversity of price points, which I think we've learnt from them, listening to them that that has been very helpful. Not just to stock the shelves with the lowest price point product, but to have a whole range of product, so that you give consumers the opportunity to go and look at a variety of things and potentially buy up from what their expectation was. So, I do think we believe anecdotally there will be more space and there will be more models.

David Niederman - Pacific Crest Securities

Thanks a lot.

Operator

And sir I have no further questions for you at this time.

Dave Mullen

Okay. Thank you everyone for joining us. Have a good evening. Good night.

Operator

Thank you, sir. Thank you again, ladies and gentlemen, this brings your conference call to a close. Please feel free to disconnect your lines now at any time.

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