Telenav, Inc. (NASDAQ:TNAV) F3Q 2014 Results Earnings Conference Call April 24, 2014 5:00 PM ET
Alice Kousoum - Investor Relations
HP Jin - President and CEO
Mike Strambi - Chief Financial Officer
Josh Nichols - B. Riley
Good day and welcome to the Telenav Third Quarter 2014 Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Ms. Alice Kousoum. Please go ahead, ma’am.
Thank you, Nancy. This is Alice Kousoum, Telenav Investor Relations and I’m pleased to welcome you to Telenav’s conference call to discuss its third quarter fiscal 2014 earnings results. After the market close today Telenav issued a press release through Globe Newswire. The release is also available on the Telenav website at telenav.com.
During the course of today’s presentations, our executives will make forward-looking statements, including statements regarding among others, the company’s expected financial performance for the fourth quarter of fiscal year 2014, and full year fiscal 2014, anticipated sources and mixes of revenue, expected profitability, products and business strategies, and strategic relationship.
We wish to caution you that such statements are just predictions based on management’s current expectations or beliefs and that actual events or results may differ materially. We refer you to the documents we filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and other periodic filings. These documents identify important risk factors that could cause our actual results to differ materially from those contained in our forward-looking statements. We assume no duty to confirm, update or revise the financial forecast for the year or any forward-looking information in this call, as a result of new developments or otherwise.
Today, we will be discussing our results on a GAAP as well as non-GAAP basis. These non-GAAP results including adjusted EBITDA, also sometimes called pro forma results, exclude stock-based compensation expenses and assume that our preferred stock was converted for common stock on state of issuance for calculations of earnings per share. We use these additional non-GAAP measures as we believe they give useful operating information in addition to the GAAP results. A reconciliation of GAAP to non-GAAP financial statements is available on our press release and on our Investor Relations webpage.
As a reminder, we completed the sale of our enterprise business on April 1, 2013 and its net operating results are classified as discontinued operations. The following discussions, unless otherwise indicated are for our continuing operations and exclude discontinued operations relating to the enterprise business.
Let me now turn the call over to HP Jin, Telenav’s President and CEO.
Thank you. Thank you for joining Telenav’s third quarter fiscal year 2014 earnings call. With me on the call today is our Chief Financial Officer, Mike Strambi.
We achieved total revenues in the third quarter of $34.5 million in line with our guidance. Auto revenue was $18.3 million or 53% of total revenue. As you may have noticed in our press release today, we are very excited to announce extension of our Ford agreement through December 2017. This extension will allow us to build upon the success, we have achieved and continue to innovate and introduce new and broader services to delight the customers, the drivers for Ford cars. Our ongoing success in automotive is led by our relationship with Ford and we’re pleased to formally extend this collaboration.
As a reminder, in January we also announced a strategic partnership with the top five global auto OEM. Together with the Ford extension, we have established ourselves as the leading supplier of the embedded and connected navigations across all regions and platforms for global auto OEMs.
With our partners, we are leading the transformation inside the connected cars, with advanced cloud and personalization technologies. We are encouraged by our ongoing discussions with other auto OEMs as this win has established our reputation as the leader. Today more and more auto OEMs are moving to direct relationships with software and service providers as it allows them to deliver, the most innovative and consistent experience across all car platforms and the regions faster than before while saving significant overhead in managing marketable vendors.
Telenav is at the forefront of leading this change. Now let me provide you a few updates on our current layout with Ford. We expect to be embedded in all 24 in Lincoln models in North America in 2014. And we remain on track to launch with Ford Europe in the fall. We continue to see momentum in China with Ford. In the March quarter, China Ford revenue was 17% of total Ford revenue.
Now let me brief you on another growing segment, our mobile advertising business. We achieved record booking, up over 50% sequentially in the March quarter. Revenue of $2.9 million, was up 200% year-over-year and flat sequentially, comprised 8% of total revenue.
Let me provide you additional color on the flat revenue, while having over 50% growth in bookings. We are generating larger bookings over longer campaign durations, as advertisers integrate our solutions into their overall advertising strategies. We view this extended campaign [wise] as a healthier sign in the growth of the business. However it did result in a shorter, short revenue shift to future quarters. For example, our orders of over $100,000 almost tripled quarter-over-quarter. This is a result of our focus on Fortune 1000 brand especially in the auto, retail, restaurant and fast food sectors. We anticipate mobile advertising revenue to be 10% to 12% of the revenue in the June quarter.
We continue to innovate in our location-based targeting products. GeoCookie is focused on retargeting and was released in the March quarter. It is seeing early success in the new customer adoption. In the month of April to-date, the number of advertisers has doubled over the full March quarter. We’ll grow this product out in a larger scale over the coming months.
We are also strengthening our team. Today we announced appointment of two mobile advertising executives for Thinknear.
Brent Fraser who has joined as a Chief Revenue Officer, most recently served as Vice President of Global Sales for Proxi Digital, a division of Clear Channel; and Tom White, who is now Vice President of Ad Operations and Inventory formerly served as Vice President of CityGrid Media’s publisher network. These are important additions to our team as we continue to accept top talent to Telenav.
In January, we announced the acquisition of skobbler European-based navigation company with the highest rated OpenStreetMap-based GPS navigation apps in the world. I am pleased to say that this integration has gone smoothly. We believe OSM will ultimately be the best and the most detailed map of the world. And our investments are focused on enhancing the visibility of this map for navigation and other services.
We anticipate launching an OSM based Scout product on major platforms worldwide in mid 2014. In April, we announced an update to Scout for iPhone. Our product mission is to help reduce stress, improve productivity, and make life more fun for people on the go with the more and more personalized and intelligent services.
Our new update includes differentiated features as compared to Google and Apple maps that allow drivers to search ahead for restaurants, coffee shops or gas stations that are right along their route. The new update also provides intelligent suggestions for the right parking place around your designation upon arrival.
Most GPS apps like Google Maps, Apple maps don’t allow you search at all while you are in navigation session, those that do is not a fact that you are already headed somewhere which means it might suggest locations behind you. We developed our innovative solution to solve customer pinpoint based on insights from our usage data. For example, our data from that 80% of all searches while navigating are for gas, coffee, or food.
We have included a personalized dash board with community power suggestions to eat and drink based on the Scout user favorites which can change depending on the day of the week, time of the day and location. These new and innovative features demonstrate that consumers can be better served with respect to their driving need. We believe this enhancement in our Scout product will be well received and result in growth in our user base.
This type of the core improvement can be brought to our other technology offerings including our automotive product offerings to our auto OEM customers. We believe our continuing investment in understanding the need of drivers and the leveraging our personalized knowledge to meet their needs will yield many new differentiated offerings in the future.
As we continue to invest in longer term growth areas such as auto and location based mobile advertising, we remain focused on profitability and productivity improvement. For example, we recently took down real estate concept consolidation actions to lower costs. We continue to be optimistic in further optimizing our business operations.
In conclusion, Telenav continues its transformation from a business that was focused on our traditional mobile navigation model to a diversified company that has moved into a faster growing market such as automotive and location based mobile advertising. We have successfully navigated through a rapid revenue decline in mobile navigation as demonstrated by the fact that our revenue from growth areas is contributing more than 60% of total revenue in the March quarter.
As we see the dollar declines from a traditional navigation slowing and continue to see growth in our auto and advertising businesses, we believe we are nearing the revenue inflection point. We will continue to focus on these two strategic areas and drive to growth in total revenue while prudently managing our cost structure with the goal to bring Telenav back to profitability.
Let me now turn the call over to Mike Strambi our CFO. Mike?
Thanks HP. As a reminder, we completed the sale of our Enterprise business on April 1, 2013, and its net operating results are reported as income from discontinued operations net of tax as of fiscal 2013, and the remainder of our business is reported as income from continuing operations net of tax.
Let me now discuss results for the third quarter in more detail. These discussions, unless otherwise indicated are for our continuing operations.
Revenue in the third fiscal quarter was $34.5 million compared with $37.2 million of revenue in the prior sequential quarter and $55 million in the third quarter of fiscal year 2013. The sequential decrease was primarily a result of the expected continuing decline in our carrier business, coupled with a slight revenue decrease in our automotive business, primarily as a result of lower revenue from customized engineering services from Delphi. The year-over-year decrease was primarily a result of the expected continuing decline in our carrier business and a decline in our customized engineering services in our automotive business.
Revenue from our product business which primarily consists of the delivery of customized software and royalties earned from our navigation solutions with Ford and Delphi was $17.7 million in the third quarter, down from $18.4 million in the prior sequential quarter and $24.8 million in the year ago quarter.
The sequential decline was due to the reasons I mentioned earlier, related to lower revenue from Delphi. The year-over-year decrease was primarily a result of lower revenue from customized engineering services from Ford.
Revenue from our services business was $16.8 million down from $18.8 million in the prior sequential quarter and $30.2 million in the year ago quarter. The decrease in our services revenue was a result of the continuing pressure on our carrier business. Automotive revenue was $18.3 million, or 53% of total revenue, down from $19 million sequentially and $25.3 million year-over-year.
Mobile advertising revenue was $2.9 million or 8% of revenue, flat with the prior quarter and up almost 200% from the prior year. Mobile advertising revenue in the quarter was lower than expected. But as HP indicated, we are excited about our robust bookings growth which was in excess of 50% sequentially.
In the third quarter, Ford comprised 50% of revenue, compared to 46% in the year ago quarter. AT&T comprised 25% of revenue, compared to 23% in the year ago quarter.
Gross margin for the quarter was 59%, flat with the prior quarter and down from 61% in the same quarter last year. The year-over-year decrease in gross margin is consistent with our expectations, based on the combined effect of lower overall revenue in our shifting revenue mix towards automotive, which has lower margins, due to relatively higher map and points of interest content cost.
Research and development expenses in the quarter were $15.8 million, up from $14.3 million in the prior quarter, and down from $16.1 million in the March quarter of last year. The sequential increase in costs was primarily due to the recognition of two months of cost associated with additional headcount from the acquisition of skobbler.
Sales and marketing expenses were $8.9 million, up from $7.9 million in the December quarter and $7.9 million in the same quarter last year. The increase was due primarily to additional headcount hiring in mobile advertising. General and administrative expenses were $6.9 million compared to $6.8 million with the prior quarter and up from $5.3 million in the third quarter of fiscal year 2013. We experience a net loss in the third quarter of $7.6 million or $0.19 per diluted share compared to a net loss of $4 million or $0.10 per diluted share in the prior quarter and net income of $3.8 million or $0.09 per diluted share for the third quarter of fiscal year 2013.
The sequential and year-over-year decrease was a result of lower revenue and higher operating costs in the quarter. We generated an adjusted EBITDA loss of $6.8 million in the third quarter as compared to a $2.7 million loss in the prior quarter and $8.8 million profit in the third quarter of fiscal year 2013.
Turning to the balance sheet, we continue to be debt free and ended the March quarter with approximately $146 million in cash, cash equivalents in short term investments compared to a $176 million in the December 31st quarter end. The decrease in cash is primarily a result of the acquisition of skobbler for $19.2 million, $1.6 million in stock repurchases and the adjusted EBITDA loss of $6.8 million.
We had $6 million in restricted cash in the March quarter compared to $13.6 million in restricted cash as of the December 31, quarter end. The decrease in restricted cash reflects payments made to Ford during the quarter.
We ended the quarter with 733 full time employees an increase from 646 at the December 2013 quarter end. The increase in headcount was primarily a result of 87 additional employees we gained from our acquisition of skobbler.
Now onto our outlook. Our business outlook for the June quarter is as follows. Total revenue is expected to be $33 million to $35 million. Automotive revenue is expected to be approximately 50% of total revenue. Mobile advertising revenue is expected to be 10% to 12% of total revenue. GAAP gross margin is expected to be 54% to 55%. Non-GAAP gross margin is expected to be 56% to 57% and represents GAAP gross margin adjusted for the impact of the amortization of capitalized software and developped technology of approximately $1 million.
GAAP operating expenses are expected to be $34 million to $35 million reflecting the inclusion of approximately $1 million in costs associated with the closure of our Boston office and other real estate commitments. Non-GAAP operating expenses are expected to be $30.5 million to $31.5 million and represents GAAP operating expenses adjusted for the impact of approximately $3.5 million of stock-based compensation expense.
GAAP net loss is expected to be $9.5 million to $10.5 million. GAAP diluted net loss per share is expected to be $0.24 to $0.27. Non-GAAP net loss is expected to be $6.5 million to $7.5 million and represents GAAP net loss adjusted for the impact of the tax effect of approximately $3.5 million of stock-based compensation expense, and approximately $1 million of capitalized software and developed technology amortization expenses.
Non-GAAP diluted net loss per share is expected to be $0.16 to $0.19 and represents GAAP net loss per share adjusted for the impact of the tax effect of approximately $3.5 million of stock-based compensation expense and approximately $1 million of capitalized software and developed technology expenses.
Adjusted EBITDA loss is expected to be $9.5 million to $10.5 million, and represents GAAP net loss adjusted for the impact of approximately $3.5 million of stock-based compensation expense and approximately $2 million of depreciation and amortization expenses, other income and expect, and income taxes. And weighted average diluted shares outstanding are expected to be approximately 39 million shares.
For the fiscal year ending June 30, 2014, our business outlook is as follows. Total revenue is expected to be a $149 million to a $151 million. Automotive revenue is expected to be approximately 50% of total revenue. Included in this is royalty revenue which is expected to grow 30% to 35% year-over-year. Mobile advertising revenue is expected to be approximately 8% of total revenue.
GAAP gross margin is expected to be approximately 59%. Non-GAAP gross margin is expected to be approximately 61% and represents GAAP gross margin adjusted for the impact of the amortization of capitalized software and developed technology of approximately $3.5 million.
GAAP operating expenses are expected to be a $123 million to a $124 million. Non-GAAP operating expenses are expected to be a $111 million to a $112 million and represents GAAP operating expenses adjusted for the impact of approximately $11.5 million of stock-based compensation expense.
GAAP net loss is expected to be $21 million to $22 million. GAAP diluted net loss per share is expected to be $0.54 to $0.57. Non-GAAP net loss is expected to be $9 million to $10 million and represents GAAP net loss adjusted for the impact of the tax effect of approximately $11.5 million of stock-based compensation expense and approximately $3.5 million of capitalized software and developed technology amortization expenses.
Non-GAAP diluted net loss per share is expected to be $0.23 to $0.26. It represents GAAP net loss adjusted for the impact of the tax effect of approximately $11.5 million of stock based compensation expense and approximately $3.5 million of capitalized software and developed technology amortization expenses.
Adjusted EBITDA loss is expected to be $15 million to $16 million. It represents GAAP net loss adjusted for the impact of approximately $11.5 million of stock based compensation expense, $7 million to $8 million of depreciation and amortization expenses, other income and expense, and income taxes. Weighted average diluted shares outstanding are expected to be approximately 39 million shares.
With that, HP and I are available to take your questions. Operator, if you could please open the line for questions.
Thank you so much. (Operator Instructions). We'll take our first quarter from Josh Nichols with B. Riley.
Josh Nichols - B. Riley
Hi, everyone. I noted that there was a pretty big cash drop of $30 million for the quarter. Now looking back, I do see that $19 million was related to the acquisition and there was also buyback, so it comes out to about a $9 million cash burn for the quarter.
Given the new top OEM manufacture and the acquisition of skobbler pushing back profitability and if you look towards fiscal year ‘14 or ‘15 and ‘16 even. Do you have a target that you guys might be looking at for cash burn rate over that period?
So at this point in time, we are not providing any guidance for fiscal ‘15, our typical cadence is to do that on an annual basis, and so that will be coming up on the July earnings call.
Josh Nichols - B. Riley
No problem. And I was think regarding the mobile advertising platform and Thinknear, I was wondering how the pricing might relate to any other mobile advertising platforms, differences in ROI. And then if there is anyone else who is really doing this GPS based platform and if there is any specific patented technology surrounding this?
So, we have related to the overall pricing, we believe we have -- we don’t disclose exact pricing but because of our capability of location targeting, the overall margin is above industry average. So we can start premium for all our service today. And of course in terms of ROI because of targeted, we believe we have better ROI for our advertisers and advertiser look at many other matters as well to measure the ROI. One of them is we are working with (inaudible) another partner to really measure even next financial transaction to the retail stores net ROI. We have done some early test on that one, and the result has been very positive.
Regarding patent, we are always filing a lot of patents in this area as well. So, we don’t have anything granted to that but we’re aggressively filing many patents in this location based targeting area.
Josh Nichols - B. Riley
Okay. And last group of questions I had was actually regarding the customized engineering and replacement orders. It looks like that revenue can be a little bit lumpy. And when I am looking at it, it looks like there was a bit of a shortfall, Delphi has typically been around like 5% of revenue but looks like it dropped off to about 3% this quarter for the first time. I was wondering one, if you could provide a little bit more information on what some of the revenues related to as far as there is map updates or work that software engineers may have to do to actually integrate your software? And then also a little bit about your relationship with Delphi as far as the number of models you may have with them and then what you think about potential future growth on that aspect?
Sure. So with regard to Delphi, the entire revenue this quarter was essentially the loyalties that we receive on automobiles that are outfitted with our navigation. And so the decline that you saw in the March quarter as compared to December was due to the fact that the December quarter had some significant customized engineering that we delivered that was specifically for emerging markets. So with regard to our Delphi relationship, we are actually on three models today in North America which includes the Chevy Traverse, the Buick Enclave and the GMC Acadia. And then with regard to emerging markets, I think we are in six countries on two models. And I think it’s the Chevy Blazer and the Silverado pickup. So, the royalty base quarter-over-quarter was relatively stable but again the December quarter had customized engineering.
Josh Nichols - B. Riley
Okay. So that would be about I guess like 2% of total revenue, so recurring was…
Yes, in that quarter.
Josh Nichols - B. Riley
Do you have any additional or like what are your plans going to be to Delphi for the next like couple of years as far as --they have a good number of vehicles, you probably be included into?
Yes. So right now we’re really kind of only on that in North America, the mid level SUV with General Motors. So we don’t anticipate that that cadence will actually change that much since that’s really the model portfolios that we’re on with them right now. And that’s the significant volume in North America model as compared to emerging markets. So, beyond kind of the current cadence, it’s hard to estimate significant growth on those models.
But in general to give you a high level perspective on this, so we normally prefer to work with OEMs directly so that’s the relation we have looked for on top OEMs, because there is a significant benefit for OEMs to deliver most innovative latest technology and consistent strength across all their platforms and regions. So that’s the kind of our main focus. Of course, we also work with the Tier 1s like Delphi and others, actually the leading providers. So, we are kind of doing both but with the primary focus on direct relationship with OEMs.
Josh Nichols - B. Riley
Okay, thank you.
(Operator Instructions). And this does conclude the question-and-answer session. I’d like to turn the call back to Ms. Kousoum for closing remarks.
Well thank you everyone for joining us on our call today. And we look forward to speaking with you next quarter.
That does conclude today’s presentation. Thank you for your participation.
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