Harman International Industries' Management Presents at Credit Suisse 2012 Automotive & Transportation Conference (Transcript)

| About: Harman International (HAR)

Harman International Industries Inc. (NYSE:HAR)

Credit Suisse 2012 Automotive & Transportation Conference

September 5, 2012 1:45 pm ET


Robert Lardon - Vice President of Investor Relations


Christopher Ceraso - Credit Suisse

Christopher Ceraso - Credit Suisse

All right, so I guess, we had an introduction to some of these issues at lunch and I kind of like the way the schedule turned out. So we talked about some secular themes at lunch, safety, in-car connectivity, entertainment, fuel economy and we have a nice line up here after lunch of a bunch of suppliers that deal directly with those topics.

Starting with Harman, who is a real leader in the sector of in-car entertainment and connectivity and navigation as well as other businesses that they have in the kind of pure professional and consumer audio business. After that, we have got (inaudible) and then we wrap with BorgWarner who you probably all know is very dialed into fuel economy and emission. So kind of an afternoon of secular growth to keep you awake.

With that, I will turn it over to Bob Lardon, who is VP of IR for Harman. Thanks, Bob.

Robert Lardon

Yes, thanks, Chris. Well, I guess to say, 30 of you, I guess I know, so with that as an introduction, what I have done is, I have split the deck into two pieces for some of you guys that don’t know me and the firm as well as to address the three themes of connectivity, green and advanced driver assist systems that Chris had asked me to focus on.

So, this is a little bit of an overview of what we just accomplished in the past year. We will blast through those pretty fast and then we will move into some of these secular drivers of growth, it will appear in a moment.

We had a very good year. No question about that. Just sort of to sum it up, everything in our business, in terms of infotainment, as well as in our professional audio business and even the consumer electronics business to a large degree is really about innovation in technology. It is a business that faces a lot of competitive pressure, you have got particularly in the automotive space, very strong buyers that exert a lot of power relative to the suppliers in the space and therefore technology really comes today at the end of it.

We like to think that the infotainment business, in spite of its high R&D, is a unique business in the sense that it is differentiable, it does drive purchase behavior on the part of the consumer behavior and the OEMs recognize that and that’s why we feel very confident that we can march along in terms of our trajectory of expanding margins in what is a difficult business out of the 5% to 6% EBIT margin levels that we had, pretty downturn, I might add, which is a business that we inherited from four and half years, five years ago, to EBIT margins in the 10% plus range.

A couple of things really drove that. It was the fundamental restructuring of the business from a cost standpoint. To get cost right was one of our four strategic pillars. We had 86% of our manufacturing cost base in high cost countries, read that as principally, Germany and the U.S. We had 985 of our application engineering, software engineers, approximately 3,000 plus individuals also in high cost countries, again, Germany and the U.S.

Today, we sit at about 50-50 in terms of our manufacturing (inaudible) best cost countries, it's not just about cost it's also about being efficient for growth and that’s a big movement in the right direction and we also, on the application engineering are about 60% now high cost instead of 2% or 40% best cost countries.

You would expect that emerging markets with their higher growth rates, that those percentages will continue to favor the best cost split. So that’s one of the things in terms of getting cost right and also positioning for growth for the future.

The other thing that we did in the business was to transform how we build these systems. Arguably, we were the originator of infotainment with the acquisition back in 1995 of the Becker Radio Company, the premium company in Germany, sole supplier to Daimler since the 50s, basically to fancy radios and DVD players with stocks and turn by turn navigation to them and that really became the beginnings of what, today, we know as the sophisticated embedded infotainment systems.

So with that, basically, that basically that business had always been developed in a semicustom way, two and half years to three years, $50 million to $70 million per program and with their scalable platform which was a reinvention of how we build these systems where we modulize large sections of the component tree, but allow customization of the GUI, the graphical user interface and the human mechanical interface where the consumer really interfaces with the vehicle but not necessarily rewriting all of the software that underlies it, both middleware as well as applications.

That allowed us to reduce that R&D time from two and half years to three years to twelve months to eighteen months and also reduce the R&D investment from $50 million to $70 million roughly, down to about $15 million to $30 million. So these are some of the major transformational changes over the last four years that the new management team has conducted with Harman.

The results speak for themselves. Our sales were up 16%, op income was up 47%, eleven consecutive quarters of both top line and bottom line growth. You saw the chart from Delphi that showed a similar type of thing and we are doing well in a recovering industry in spite of the somewhat slowing up that we have seen in the last year with it.

Our BRIC country sales were up led by China, at 42%. We have got an order backlog in infotainment and branded premium audio systems that’s probably three to four times that of the next nearest competitor at over $16 billion.

I mentioned innovation. We have got 4,400 patents and patents pending. That’s up, 37%. It continues to grow. We have got a very significant emphasis on that. The global footprint I talked about and strong balance sheet with $1.4 billion.

The business is split into three segments, infotainment division, lifestyle division, which is the premium branded audio business in automotive which we pulled out about a year ago, combined it with the other branded business which is home and multimedia to get synergies with the brands because it’s the brand awareness associated with the superior sonics that drives penetration and also allows us to work cooperatively with the OEM in terms of having joint co-promotes where we can take one of our portfolio of the brands with a leading musical artist that has high recognition and do something like this, in the sense of somebody would say, a Kia Soul is funky European type of vehicle.

We can marry one of our brands with a hip hop artist and say look this addresses exactly that demographic that you choose to pull into your showroom and drive sales of that car. No other Tier 1 supplier in our space can do that. You have got Bose as a strong number two player in the premium audio space, however, Bose's strength is it's one brand with a couple of hundred million in advertising put behind it.

Harman's strength is a portfolio of seven different brands that we can offer a measure of exclusivity to our OEMs and actually be more efficient in terms of how we spend those ad dollars at roughly a quarter of the number I mentioned for a competitor and yet with that and combined with the technology have the number one, clearly number one share of the market place that’s around 35% of the worldwide market.

The professional division is also a world leader in the market. It’s a highly fractionated market. It's about a 13 share for us as the worldwide leader. If you looked at the pie charts of the six segments that's comprise of things like radio and broadcast, tour sound, installed sound, what you find out is, half of the pie chart would be comprised of six to eight major players.

The other 50% of the pie chart, you would have 50 to 100 players. So there is obviously opportunity to collapse some of those players with our distribution, with our global manufacturing, our technology, and at the same time, what's a little different is that we are the only guy that actually plays a stronger role across all six vertical segments because we have everything from microphones to digital signal processing, on through the mixing board and then out the speakers with our JBL brand.

So leadership positions here are tied to the technologies, digital signal processing with Lexicon and BSS out of Europe, speakers, JBL, amplifiers, digital amplification, Crown, mixing consoles, both radio and broadcast as well as consoles in installed environments, with Studer and Soundcraftsmen. So this plethora of technology is something that we not only leverage for the position that we enjoy in the pro business but we also use that in the consumer business and have widely used it to support our leading market share in the premium branded audio.

I mentioned about the eleven quarters of growth in revenue. ROIC has been very good as well as EBITDA growth. Then the China plan, we are doing what we started basically with nothing in fiscal year '08 when we got here and you can see we are now approaching what looks like somewhere around $0.5 billion in China. That is part of our overall and a key driver to our BRIC growth rate.

We have also put a target out there, it's not a mistake, of $1 billion in China in fiscal year '16. So I think you can see that. We have pretty good trajectory going. What we would, for us, or impose upon management and the country managers is we expect them to grow three to four times GDP. Given this low base that we have, we think that’s not only a doable but we have shown that we are doing them.

This is the sort of a famous topic that we have can probably have a few questions about which is the order backlog. This is the backlog of awarded business. You can see the $16 billion is split $4.5 billion in premium branded audio. That’s a mid to high teens business EBIT, the infotainment business, which is a business that’s approaching 10%, and then we have split it out in terms of the infotainment portion, and the awarded audio portion in terms of how they spit out, in terms of renewal versus new business.

The way we calculate awarded business is very simple. It’s a measurement at a point in time. So if I were to measure it today, this is actually a measurement as of June 30, what that is business that has been awarded to us but we have not shipped yet. Then what we do is, we update that on the next quarter. So we take the awards that we have, the awards that we have won, subtract what we shipped during the quarter and it is just as simple as that.

Normally you are running a ratio of about 70% replacement, 30% net new. You would expect the leader in the category to have a high proportion of replacement to net new. That’s a very, very good thing in our business. It would be a bad thing if that went down. In fact, it's worked out very, very well for us and it has stayed relatively consistent, quarter-to-quarter, year-to-year. That’s a pretty good range.

The backlog revenue segmentation is this. There is an old slide similar at our analyst day, last October that really talked about the business we inherited that had very little margin, the business that we negotiated more directly and also had the benefit of change which was $434 million cost permanent takeout program and also had the benefit of improving recovery in the automotive sector and both of those slices were custom business, it’s a typical way we developed this and business that was now scalable, as I mentioned before.

What has happened since is that the scalable portion of the business is rapidly being adopted by the OEMs like Fiat (inaudible) for globally, like Toyota Europe, Toyota North America, recently GM, I think you read about that near $1 billion award. So it’s a rapid adoption of this approach and at the same time, it's given us a new, shall we say, arrow in our quiver where, when we go to some of our existing OEMs, and say, look, we would like you to also consider the scale of our approach.

Reduced lifecycle time, greater flexibility, et cetera, et cetera, and in the instance where someone says, no we really want to stay with the semicustom approach. It's given us the ability and additional leverage to command a price m\premium whereas before we might not have been able to do so as much.

Therefore, all of the semicustom business that we would take effective as of fiscal year '12 forward we have publicly stated we will not take it unless it approaches a 10% margin which essentially is in the same range as the scalable approach.

This chart shows how that plays out. So you have got custom systems, pre-fiscal year '12, you can see their contribution to the overall segmentation by margin and then you can see the buildup of scalable with the new custom systems coming in, the latest being in excess of $2 billion award with BMW, which is custom. So we will continue to have a mix of scalable and custom. Scalable will probably continue to be growing much more rapid as a percent relative to that mix but there will be custom there but custom need not any longer be viewed as a mid single digit op margin business.

This is another slide that came our of the ER supporting slide deck. When you go through the K, it talks about revenue receipts and because of our dominance with the German luxury OEMs, the BMWs, Mercedes, Audis, Porsches of this world, people always say, well what's your exposure to Europe. You have got a lot of revenue in Europe and we see slowdown, as Chris pointed out in a question earlier at lunch, how does that impact Harman.

So what we did is we broke out this not by revenue receipt, point of origin of revenue but broke it out by end-use demand, where the cars are actually being shipped to, where the demand is generated from, where those cars are sold to give you a sense and what is the sensitivity or the potential exposure of Harman in Europe and you can see in the EU5, it's 30%. This is enterprise wide.

So it's across all divisions. If you were to scale it, you would scale it roughly the way the enterprise with that amongst the three segments in terms of infotainment, lifestyle and pro audio of which three quarters are about 20% of the total is in the strongest and most resilient market of Germany and that’s something just that we want to highlight and put it out in terms of how sensitive we are to a downturn there.

As it now exists, we have not seen from our OEMs in terms of the next six months, and that’s the visibility we have, any change in the demand at this point in time. We have been saying that ever since the Greek situation raised its head about a year ago. So it's sot of pounding the same drum and the same. There has been no real change in that and what little change there has been to us, and to specific models that we have, in the specific markets, we have more than made up for it with either increased penetration or increased conquest of other people's business share gain.

This brings me to a segue around technology. It's just a scaling of how the patent portfolio has grown over the last few years. You can see it’s a very high emphasis and again it gets back to key areas of audio signal processing, navigation, safety, security, green energy, social media in cars.

So the three of those are the secular growth drivers that Chris asked me to address which, now if we could play the video, bear with me for three minutes. I think this will make some of this stuff real as we move into the technology things.

Well, thanks. I hope that gave you a little bit of a demonstration to make how some of these technologies are real today. This video is a shorter version of one that we just showed last week and put together at IFA, one of the world's, as you probably know, largest electronics shows worldwide, similar to CES that we have here in the States.

For the three major secular themes driving growth that Chris asked me, if we could focus on, I assume you will have some questions on this. Connected, green and safe. So I will go through each of them and just a couple of slides each and then be prepared for your questions.

This should be no surprise. The drivers of innovation in infotainment keep evolving. The first couple is what we have for many, many years, okay, in terms of what would be called entry level radio, DVD, CD player type stuff, moving to radio to portable media, as that’s changed to navigation and now this whole motion of connectivity.

The main drivers for the connectivity are us, right. Connect me at work, connect me to home, connect me to business, office, family, et cetera, et cetera. You would need this connectivity regardless of where I am. The car becoming simply another Starbucks on wheels, if you will, a point of conversation.

The forms of connectivity in the vehicle, I won't get too technical about this, but it can simply be looked at in terms of four chunks. You have got native connectivity applications. These are things like e-mail, calendar, context. Sort of the basics.

In this situation, the client is in the head unit for seamless integration as we have discussed and demonstrated in the video. Then you have got downloadable apps and these aren’t mutually exclusive, of course, running on the infotainment system. Downloadable from home via USB.

That’s actually something that we are doing today with Toyota Touch & Go in Europe. That’s one of our major scalable platforms where if you go to the Toyota site, you get authenticated and then it allows incremental updates to your system in the form of apps and actually features and functionality that gets you from a base Touch & Go system up towards more of their premium system called the Touch & Go Plus.

So it’s a way to build incremental, what we call, professional revenue in the sense of it’s a B2B revenue model that can be recurring and the issue there is really around safety. Obviously, cloud based allows you to do this in a more safer thing and also the way we construct the hardware in the future and the software, is to partition how we run the apps, from how we integrate key car functionality and that provides a safe barrier and that’s something that we are doing now and we will continue to do.

You get smartphone integration. That’s obviously a hot topic. Basically what out OEM systems, embedded systems do is one thing in all systems whether they are premium entry systems or mid level systems or very high end systems and what that is, is to leverage what the smartphones do best. They are great media servers but they don’t play music very well. They don’t play through a nice audio system and they typically play compressed audio MP3 files.

In our systems, what we do is, we take that media server, we run it through our system, we have our own proprietary algorithm called Sound Doctor, its one of the TMs that we have, where we basically, like a zip file to draw the analogy, uncompress that and basically fill in the gaps. So it’s an advanced form of digital signal processing algorithms again taken from our work, typically in the pro audio world that we are taking here.

So you are taking e-mail, SMS, calendar, phone through the system. We support all major platforms whether it's Android, iOS, and then it allows for independent update cycles on the part of the OEM as well as the consumer in terms of apps. Cloud computing is, of course, the hot topic and most of that video was focused in terms of what is possible when the pipes are big enough and the limitation is not what we do within the car and not what we do in terms of connecting the car.

The limitation today, is really, who is going to run all the servers, what's the revenue sharing model, who is going to own the content, how do we serve hyper localized ads to the cars on an opt-in, opt-out basis, who shares in that because certainly with a car you have got a unique situation. If you are sitting in front of your desk and up pop ups an ad served to you, that’s a captured audience but it's captured within a very limited period of time.

In a car, you have got a very high value audience. You have got a person in a car, moving, trying to get to a specific place. You know where they are. If they opt-in and they are stuck in traffic, it’s a simple is, hey, you are stuck in traffic, it's 12:30, here is a discount at lunch at a nearby restaurant. Then it obviously gets much more sophisticated than that.

So it’s a whole area around the connected car space that lends itself to recurring revenue models. They are not figured out yet. So let me be clear about that. But if you are a leader in this space and this broader ecosystem, as we have talked about earlier in some of the other presentations, then you can begin to participate in additional revenue models that, by the way, are not built into our (inaudible) guidance because it is on the comp.

It's not our, shall we say, philosophy to bet on the comp. So what we always put out financially is conservative but these would be ads in terms of what you have already seen from a financial in terms of projections.

Main ability, though, of the cloud computing is it minimizes maintenance, the testing can be done on the cloud and you can also do things around minimizing driver distraction in terms of the functionality.

I think if there is one theme that’s happening in infotainment to remember is that you are moving from a world that’s device centric to content centric. That’s a very, very profound shift. Its been enabled by a number of things and the bottom thing is basically the expansion of bandwidth as you move from 2G, where you have got two tenths of the megabyte per second bandwidth and other things like the basic telematic services circuits like OnStar, you know, eCall Breakdown, my vehicle is stolen to 3G, that’s basically, (inaudible) now where you have got real time mapping, allows for dynamic traffic, live updates of Google, Facebook, as we currently do in some of our vehicles.

Then, as you move to the long term evolution, the LTE, the 4G and wherever that evolves to, which is really access to the cloud. Now you are being able to dynamically load content and transmit content back and forth. Now you have an ongoing dialogue between people in the car, the cloud, the type of content they want and the content now, as you figure it, whether you access it at home, to plot your mapping and then go back to the cloud to bring it down whether its music, maps, or what have you and of course allowing mobile office and media streaming.

Green themes, they are fairly basic in terms of what are the drivers here. Reduced carbon emissions, a legislation around the world, increases in gas mileage or (inaudible) whether its 54.5 or 50, it really doesn’t matter. The theme is the same. So what do we do?

We have in our GreenEdge, which it expands not only within the vehicle but also in our pro and consumer products, its basically increasing the audio output with lowest distortion and maintaining acoustic transparency. That sounds easy. It's actually not easy to do. We have a lot of patents around that. Basically you are delivering twice the performance at about half the power.

When we demonstrated this at the Detroit Auto Show, we actually put a consumption meter with a non-green vehicle and then we put in the green technology basically through the switch and it shows that the vehicle running on with the green technologies that we have was actually improving its MPG by two to three miles per gallon which is very, very significant because if you think about going from 30 to 33, that’s a 10% just in this type of technologies alone and its things like amplifier in a chip using digital amplification, miniaturizing it.

It doesn’t require analog heat sinks and cooling and all that type of stuff and yet you have very, very high power. Redesign of speakers, magnet structures because you want to reduce how much mass you have move. That’s an energy consumer, et cetera. It's related to designs for lighter vehicles but not only just lighter vehicles. Everyday vehicles where, as part of the fleet mandate of reduce mileage, it benefits everyone but certainly it is an imperative as you relate to electric and hybrid vehicles.

The green ranges, the green automotive solutions is also evolving. Moving from the hardware where you have high efficiency head units with low standby consumption of just a couple of watts to applications like eco-assist and energy management to services such as booking or reserving my charging spot or checking remotely my charge status of my vehicle on my smartphone to what is not there today, which is a green eco system that Randy alluded to at lunch which a couple of things.

There is actually the technology behind putting in place a good smart grid and then there is the cultural willingness to want to do it. He sort of touched on that. So one of the examples is this thing that we have called Eco-Assistant Rangemanager. So it really draws from a number of technologies in the infotainment space and green space as well.

It is something we call electronic horizon. So what you have is a three dimensional model of upcoming route that maps on an X,Y,Z, axis curvatures, height profile, upcoming crossings, speed limits, traffic, if you are stuck in traffic, you are consuming gas, stop/yield, et cetera, and it tries to map all of that data against what we call a free-wheeling model of vehicle.

What would it be like if the vehicle was just gliding along not consuming any energy, just basically the passive energy of its rolling resistance and based on that it selects or advises what's your best, so called, eco routing is. So this is another notion around green that’s not just simply higher efficiency amplifiers and transducers but actually how in a form of driver assist you are now integrating green aspects into driver assist as well.

So these three secular themes are not independent or mutually exclusive of one another. There are obviously a lot of overlap in them.

The active safety, we look at it, it's an imperative. We don’t want to be the company that simply responds to NHTSA legislation around rear view camera, child safety act, et cetera, but really as a technology leader view this as because of that leadership role, as a mandate for us to actually drive it with some of the technologies.

So we can talk about rear view camera but you guys know it. We can talk about surround sound, and you know that, although I will add parenthetically that there is a couple of ways to do surround sound. You can take a variety of camera's, buy an off the shelf solution, where the algorithms to create the computer graphic generated view of the car. So if there is a camera 30 feet above the car is generated in a separate CPU. That’s one way that is commonly done.

What we are doing, is rather than just simply taking the video ports into the head unit which we do in some vehicle we are actually, with these increasingly more powerful CPUs in the head unit, that are dual and multi-core processors, running with more powerful CPUs, the algorithms in the head units. It simplifies the buy and it simplifies the integration and you get a more powerful result on that.

So that’s something we are doing around surround sound because in truth we don’t buy the cameras but we do run the algorithms in a number of instances and I think the trend is to do more of that by the OEMs, more certainly positioned for that and pushing that forward.

While I admit navigation is a little more sophisticated, and here what we have is a couple of different things driving it. It's to provide real time or in real time lane assistance. So you have got image processing which would be this traffic sign recognition and lane detection, where you then marrying that with database information from the nav data from head unit or it can be served down from the cloud to provide real lane assist and I don’t want spend the time with another video here but these orange arrows on the bottom, basically if we have the video what you would see is that as the car is driving along, the arrow is dynamic.

It is going in front of the car and expanding out in terms of what lane you need to be in, what turn around, you can imagine how this is beneficial when you have got a lot of traffic, multi lane highways, as well as also roundabouts where you have got maybe six or seven ways to peel off. It's actually a visually dynamic in real time guidance of where the car needs to be.

Wrapping up here. This then takes another level of sophistication. It's what we call situational human mechanical interface and optimized head unit interface is really key to reduce driver distraction. Again, we don’t want to be responding to driver distraction. We want to be leading the efforts to curb driver distraction. What we call, eyes on the rod, hands on the people, and other people have used the same nomenclature.

So what you have here is that the HMI, the human mechanical interface, is adapting to the use case. Use cases are things such as, I drive the same way basically I have to go to work, pretty much the same way everyday. That’s a very specific thing. What's the most ecological way, the fastest way, this or that or I want to take a trip on the weekend that’s scenic, that obviously has different parameters. Then you can profile the human mechanical interface to adapt to lifestyle, age group, demographics, and here is an example of human mechanical interface.

As you can see that here we have got, it's in German, but we have people wanting to send e-mails that you have voice to text and text to voice readout. You have got a calendar going on. You have got phone calls that you need to make.

You have got your AHA radio, the acquisition of the content aggregator that we made that’s aggregating internet radio, various blogs, internet radio, bunch of different streams and then if you move one more, we have now adapted the human mechanical interface for, this is the same box, right and here is your navigation, here is your dynamic lane thing showing, you have got traffic on route, there is a traffic jam here and there.

You will stuck in this traffic at least for 15 minutes, here is the three dimensional route of the view with the Z-axis, you are going up and down hills, what have you. So that’s just another change. This basically is almost infinite in terms of how you can customize that for yourself.

There are three things that really make this possible. It's what we call the multi-modal model of input. So you have got Haptic, which is how the switch gears feel and as you get close to them, it provides sensor to make without taking your eyes off the road, a more intuitive thing to move around. You have got, obviously, voice in that and that’s expanding. Then you have got gesture recognition which is an evolving technology at this point in time with the goal of being best performance and best experience.

That’s sort of the summary in terms of where at this point I want to end in terms of this technology discussion.

Okay, Chris?

Question-and-Answer Session

Christopher Ceraso - Credit Suisse

Okay. So you want to sit up there, you have to got the mic?

Unidentified Analyst

So, okay, maybe where we left it seems that one area that tends to fall short in these types of instances where you are really starting to get into driver assist and trying to mitigate distraction is the voice recognition doesn’t work right. If the window is open, it falls short. Where are we in the quality of voice recognition? What's Harman's role in making that better and do we really need to get to a new level before true hands on the wheel availability works all the time?

Robert Lardon

Yes, I think that’s a good question. If we chunk it up in a couple of different things on voice recognition. Obviously, the main supplier of voice recognition is Nuance. I think it is worth noting that we sold our own internal, what we called our speech unit, to Nuance, that probably gives you a little bit of an idea of the level of technical competence we have since the world leader bought our 50 engineers in that.

You might say, well if you have that much competence, why did you sell it? It didn’t make sense for us to have a specialist niche little unit where speech recognition is not our main core competence. Nuance, this is what they do. There are others coming on stream now with evolving technologies and the level of R&D that they can put in to that development of speech far exceeded what we could do in terms of, it wasn’t the one thing that we were doing there.

So what you have got is, what Harman has, is it has access to our old engineers, which are with Nuance with greater resources and also they have the experience curve that no one else has, right. They know the Harman systems well. They know our protocols, how we work together.

So we like to think that the voice recognition software that we can access because of that unique arrangement is a little less off the shelf, a little bit more advanced than perhaps some people because it's all about how does it integrate with the overall infotainment system. So that’s one aspect.

The other aspect of the voice recognition is, certainly we have talked about Siri, We all have these phones. It works sometimes but it's not that great. It will improve but at the same time, you also, to get a better user experience need to integrate it with a good embedded system that allows for that.

I will give you a simple example. You are in the car, and you are using your Siri, Siri is not the best in terms of the types of embedded microphones it has in it. It certainly isn’t the best in and of itself in terms of the little speaker it has in it, right. When you begin to integrate that in an embedded environment where you have small miniaturized speakers around the car in various locations in the visor and the door pillars, what have you, everyone in the car can have a cogent and easily understood conversation with the person on the other end.

These are things that smartphone in and of itself does not necessarily do. So what we like to say is that our embedded systems take what smartphones do well and leverage those capabilities and expand them, whether its music, whether it’s a Siri assistant but in truth, we are not in the business crisp of wanting to be in the speech recognition, per se, business.

Our business is to work with those providers whether its Nuance or others and basically set the requirements out and work how we integrate the assistance both with hardware as well as software in the car but I think its clear that its getting better and better all the time.

Christopher Ceraso - Credit Suisse

Okay, we are running out of time. Maybe we will see if there is any questions in the audience? Mike?

Unidentified Analyst

You mentioned traffic sign recognition in your slides (inaudible). Are those technologies that that Harman has had in-house or is it relating to outside or third party suppliers?

Robert Lardon


Unidentified Analyst

And this is growing in the active safety world as you add (inaudible)?

Robert Lardon

Yes, absolutely, because we all know that it’s a key growth driver. We have been involved in this from the get go there. I want to give you one simple example that not everybody understands. If you think about dynamic headlights. Everybody would assume that Harman has nothing to do with dynamic headlights and at first glance you would be correct in perceiving that.

If you turn the steering wheel and you are going around the turn, the headlights move, right. It's an electrical mechanical thing. Just turn the wheels, it sends a signal, and my headlights move but in the more advanced systems what happens is this.

Let's imagine you are going up the hill, okay So your headlights are aiming this way, right. You are up the hill and at the cresting of the hill, the headlights are still up. So you don’t have the benefit of the steering wheel to now tell you I need to swing the headlights left or right or put more LEDs on or less LEDs as the newer systems do.

So what it does is, you are taking the data from the navigation system. You are interpolating that data. You know you are on a hill, right. You know where the car is on the hill. You know the speed of the car. You know when it is going to get to the crest of the hill and with that data we are running the algorithms that then take that headlight and actually bring the headlight down, whether its electromechanical or in LED firing on or off depending on the later cars. So that, as you crest the hill, the whole headlight is swinging down.

So that’s a little known example of a form of advanced driver assist system that actually is fully integrated and relies upon the types of stuff that the infotainment system does and yet that would not necessarily be intuitive unless I mentioned how that one works. Does that give you an answer to the type of stuff we are doing?

Christopher Ceraso - Credit Suisse

Just the one last one?

Unidentified Analyst

Any other example of where you are pulling more intelligence from the car into the infotainment system.

Robert Lardon

Yes. What I would urge you guys to do is go check out the latest, say 7 series BMW. That’s what we call NBT, next big thing. It’s the BMW acronym. It’s a big award that we won at this conference. Right, Chris? Going back three years ago. We just delivered it.

We also announced an excess of a $2 billion award called NBT-Evo, next big thing evo, which has functionality above and beyond what you as a consumer can just test today, which is a 3D Google representative map of the Earth in addition to the other navigation tricks.

So the NBT-Evo which will come out in our fiscal '15 does feature functionalities I can't even talk about. I just used this one that’s out there as a reference because it is probably the latest state-of-the-art out there.

So what’s happening in this area is that there is nothing in sight that indicates any diminishment on the part of the consumer and on the part of the OEM. Because of the ability of resistance to differentiate purchase decision about how far can you go with these types of features and functionality and the minute you open up the cloud and you have got access to this level of content, and this type of dynamic conversational exchange between cloud and car and vice versa, it really opens up a tremendous amount of opportunity such as how do we combine cloud sourcing data with the vehicle, right.

Because we all know that real time traffic updates today are not very good, right. Because you are taking data regardless of the various service providers and you don’t have the level of data in terms of points of data which are much, much larger and actually infinite, if you will, in a cloud sourcing model, if you take it all the way out.

So those types of things are coming. Peer to peer, car to car, type systems, car to cloud, multiple cars in a family, bought back and forth. So all of these things, are basically, here today technologically and rapidly expanding and I think will be adopted. But, again, I can't talk about the specifics of the functionality that we have already won awards on that.

Unfortunately you guys won't see it for another couple of years out there but check some of the latest vehicles that we are on today. It is a good representation of what is available.

Christopher Ceraso - Credit Suisse

Terrific. Thank you very much, Bob.

Robert Lardon

Thanks, guys.

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