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AutoNavi (NASDAQ:AMAP) reported its Q2 results Tuesday. Both revenue and non-GAAP EPS were in-line with Street consensus. However, GAAP EPS was lower due to increasing cost from share-based compensation.

Key highlights:

  • Revenue: $40.2 million, +22% y/y
  • Gross profit: $30 million, which translates to a gross margin of 75%
  • GAAP EPS: $0.17 per share
  • Non-GAAP: $0.26 per share

What I liked: Solid overall growth driven by robust mobile ramp up

Automotive Navigation revenue was $24.9 million, +9% y/y and 15% sequentially. The segment revenue growth was in-line with management expectations.

Mobile and LBS revenue was $11 million, +105% y/y and 11.5% sequentially, driven by strong pre-installation of AMAP's mobile app and mobile navigation in smartphones

Public Sector and Enterprise Application revenue was $3.9 million, a 7%y/y decrease but +8% sequentially.

Despite single digit revenue increase in auto navigation and public sector, net revenue of $40.2 million was solid (+22% y/y) driven by strong growth in mobile and LBS.

In Q2, AMAP continue to lead China's mobile app and navigation market with 25.7% market share, followed by Baidu (NASDAQ:BIDU) with 17.3% market share, and Google (NASDAQ:GOOG) with 11.7% market share. Investors should note that Google source its map content from AutoNavi, so technically speaking AutoNavi has 37.4% of China's mobile map market share. On the other hand, Baidu source its map content from Shenzhen-listed NavInfo, AMAP's main rival in China's duopolistic map content industry.

AMAP finished the quarter with 65 million users and 36 million active users. According to management, the company currently has over 70 million users and is on the path of reaching 100 million users by year end.

As I mentioned in my initiating note (view report), AMAP is the leader in China's mobile map and navigation market. The recent introduction of AMAP app for Windows and several Android upgrades, which include local merchant recommendation, bus stop directory and personalized achieve of favorite places may attract additional users, which expands monetization opportunities once AMAP's mobile user base reaches a critical mass.

What concerned me: Rising operating cost

Total operating expense increased 56% y/y with R&D increasing 41% y/y, sales and marketing increasing 96%, and G&A increasing 44%, driven by higher share-based compensation as AMAP tries to expand its technology and sales team.

ASP also declined in the auto-navigation segment primarily due to a shift in the product mix from high-end to mid-low end vehicles. According to management, low double digit decline in ASP will likely to continue in the upcoming quarters, which I believe makes the ramp up of mobile and LBS monetization increasingly critical.

Source: AutoNavi Q2 Recap: Accelerating Growth In Mobile Map