Harman International Industries (HAR) Dinesh C. Paliwal on Q3 2016 Results - Earnings Call Transcript

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Harman International Industries, Inc. (NYSE:HAR) Q3 2016 Earnings Call April 28, 2016 11:00 AM ET

Executives

Yijing Brentano - Vice President-Strategy & Investor Relations

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Sandra E. Rowland - Executive Vice President and Chief Financial Officer

Analysts

Joseph R. Spak - RBC Capital Markets LLC

Ryan Brinkman - JPMorgan Securities LLC

Brian A. Johnson - Barclays Capital, Inc.

David Tamberrino - Goldman Sachs & Co.

David H. Lim - Wells Fargo Securities LLC

Paresh B. Jain - Morgan Stanley & Co. LLC

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Harman Fiscal 2016 Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. Please limit yourself to one question at a time As a reminder, this conference is being recorded Thursday, April 28, 2016.

And now, I would like to turn the conference over to Yijing Brentano, Vice President of Strategy and Investor Relations. Please go ahead.

Yijing Brentano - Vice President-Strategy & Investor Relations

Thanks, Scott. Good morning, and thank you for joining our third quarter fiscal year 2016 investor call. I'm joined in Stamford today by Dinesh Paliwal, our Chairman, President and Chief Executive Officer, and by Sandy Rowland, our Chief Financial Officer.

If you haven't done so already, I invite you to visit the Investors section of our website, where you can download copies of our earnings release and the supporting slide presentation that we will be referencing today.

Before Dinesh and Sandy provide their remarks on the quarter, let me remind you that certain statements during this conference call and question-and-answer session may be forward-looking in nature as defined in the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs, assumptions and current expectations, but are subject to a number of important risk factors and uncertainties, which have been fully described in the press release that we issued this morning.

Now, let me turn the call over to Dinesh.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Thank you, Yijing, and good morning, ladies and gentlemen. This morning, we reported our 12 consecutive quarter of top and bottom line growth, and delivered an impressive 26% year-over-year improvement in EBITDA. However, the results across the divisions were mixed.

Our Connected Car and Lifestyle Audio businesses continued to perform well and I'm extremely excited about the new award we have secured, particularly a breakthrough infotainment award for the entry market in the display audio category. I'll provide additional color on this in a minute.

At the same time, we continue to face some macroeconomic and transitional challenges in our Professional Solutions and Connected Services divisions. We have already taken decisive steps in our Professional Solutions division to better position us for growth and improve our cost structure. We are confident that we are taking the right actions to put us on a path for future growth in Professional Solutions and to restore margins to historic high levels of profitability.

For the total company, net sales increased 11% to $1.6 billion. Our performance on the top line and rigorous cost improvement efforts resulted in strong double-digit EBITDA. We expanded our operating margins and generated $198 (sic) [$189] million in EBITDA. I repeat, $189 million in EBITDA, again an increase of 26% and reported earnings per share of $1.36. EPS was up 11% compared to the prior year.

The overall results in our two largest divisions representing 75% of our company's revenue, that is Connected Car and Lifestyle Audio, were strong. Typically, our third quarter has the weakest margin in our automotive businesses. However, we were able to better align the timing of savings from our supplier base with the timing of annual price reductions.

On top of that, our quality initiatives helped to reduce warranty expense and we realized further leverage in scale in our automotive businesses. When you put together additional measures we have shown with operational excellence including procurement, savings and quality with greater scale, the result is an over 200 basis point expansion in EBITDA margin.

While I'm very encouraged by our performance on the bottom line, the top line in Connected Car was lighter than we anticipated. As the quarter unfolded, certain customers shifted out production schedules to allow dealers to adjust inventory levels. Let me be very clear: we're not seeing any drop-off in take rates. In fact, demand for embedded solutions continued to gain traction.

During the quarter, I spent a number of weeks discussing connected car technology with top executives at our OEM customer base here in North America, Germany, Japan and China. This is one common theme we always heard that they all emphasize the absolute requirement for an embedded solution that delivers a seamless, secure and personalized in-vehicle experience. They look to Harman as a proven partner and we are delivering on these increasing demands, with the most robust compute platform for embedded infotainment systems as well as unrivalled portfolio of audio brands and sound management solutions.

At the end of fiscal 2015, we had an industry-leading backlog of $23 billion and we have secured $3.5 billion of new automotive awards year-to-date. This is on top of the record $6.2 billion of new awards we announced last fiscal year. That's almost $10 billion of new automotive awards over the last seven quarters. I think that's clearly indicating a strong momentum towards what the theme we have been saying for a number of years.

I want to take a moment to remind you about the evolving nature of the infotainment market. At our Investor Day last August, you may recall we spoke about how the market breaks down. Roughly, 25% of cars produced today have an embedded infotainment solution. This is where we are already the market leader. Another 25% of the cars produced today have a display audio solution, which you can think of as a connected radio, but without any onboard navigation capabilities. The remaining 50% of the market ships from the factory with either a simple AM/FM radio or with no radio at all.

We agree with industry experts and automakers that this 50% of the market will migrate upwards to embedded solutions. Harman has been developing solutions for both of these categories, and for those of you who have attended CES or the Geneva Auto Show will know that Harman offers scalable platform solutions that cover the full range of automobile classes from luxury to entry models.

That's why I'm so pleased to share the news with you today that we have received our first major infotainment award in the display audio category. This win is significant for us for two reasons. First, the customer is new to Harman in the Connected Car category and the award is a competitive replacement. Secondly, this win underscores Harman's ability to effectively address multiple segments of the global market through our scalable platform strategy.

Notwithstanding the good work and the progress in our Connected Car and Lifestyle Audio divisions, we did experience challenges in the performance of our other two businesses. First, in our Professional Solutions division, Brazil and certain European markets continued to be soft.

In addition, we had been rationalizing our channels to support the transition from a product-based approach to a solutions-based go-to-market structure. Last October, we introduced this structure, focusing particularly on end-to-end solutions for targeted vertical segments within enterprise and entertainment markets. To accomplish this, we have put considerable effort in aligning our internal resources, training or replacing our sales team, along with the distribution channel partners they work through.

We absolutely believe this is the right structure. However, it is a complex change and it takes time. While I'm not satisfied with this performance or the timeline, I believe we have built the strongest portfolio in the industry, our total solution approach allows us to cross-sell audio, lighting, video switching and enterprise automation.

On the cost side, we did complete the consolidation of our European manufacturing locations into single best class facility in Hungary. While the migration of two high-cost sites in Europe took an additional quarter to complete due to complexities of European labor laws, the plant in Hungary is now fully operational, manufacturing both mixers and lighting products. We expect to realize the benefits from these actions during fiscal year 2017.

In our Connected Services division, there are two factors impacting our top line. First, the aftermarket audio business that we moved from our Lifestyle division has a large exposure in Brazil and Russia. Second, in our engineering services business we had been prioritizing our organization on strategic customers with the highest growth opportunities in the verticals where we have competitive advantage, specifically automotive, mobile and communications, and enterprise. That is really at the expense of short-term revenue. We are walking away from smaller accounts that do not have the ability to scale up.

On top of that, we're investing in over-the-air update technology that we acquired from Redbend at an accelerated rate. Over-the-air updates is the foundation technology for the connected car, allowing automakers to quickly enable new features, fix bugs, upgrade firmware and offer a rich suite of end-to-end services. The legacy Symphony Teleca business we acquired continues to generate margins in the mid-teens, which is in line with our expectations.

As a result of some of these headwinds, particularly in our Professional Solutions division, as well as the impact from the earthquake in Japan, we are modestly revising our full year guidance. Our Chief Financial Officer, Sandy Rowland, will provide you with a more detailed walk in her remarks.

Let me take a closer look at our divisions and review some recent notable achievements. Let's start with our Connected Car division, which is highlighted on Slide 7 of our investor presentation.

In Connected Car, we continue to expand and diversify our customer base and add to our industry-leading backlog. In addition to the new display audio infotainment award I mentioned earlier, we won a new global platform expansion award for a European automaker to support higher take rates as well as a platform refresh for their 2017 vehicles. In addition, we received a follow-on award to expand the next generation integrated telematics program for Daimler.

Harman launched embedded infotainment solutions in a number of new vehicles from leading car companies including Audi, Volkswagen Group's SEAT and Fiat Chrysler Automotive Group's Maserati. In Japan, Harman launched an embedded infotainment system from Suzuki featuring Apple CarPlay. We also launched model refreshes and line extensions featuring our embedded infotainment solutions in several Porsche and Mercedes-Benz vehicles.

In March, we completed the acquisition of TowerSec. Their leading automotive cybersecurity solutions will be integrated into Harman's 5+1 cybersecurity framework. The acquisitions we have made including Redbend OTA, best positions Harman to be a leader in automotive cybersecurity and truly connected car.

Now, turning to the Lifestyle Audio division. Some of our recent notable achievements are highlighted on Slide 8 of the investor presentation. During the quarter, we secured new car audio awards from Lincoln, Toyota and Subaru. We also launched Harman Kardon and Bowers & Wilkins branded solutions with Fiat Chrysler Automotive's Maserati and Alfa Romeo, Revel branded solutions with Lincoln, and JBL Pro branded solutions with Ferrari.

In March, we inaugurated new global product development center in Suzhou, China. The facility is now our largest comprehensive R&D center for car audio products worldwide. Harman is the only car audio supplier to have full value chain capabilities in China including sourcing, R&D, engineering, production, technical support and distribution. And this will pay off big time in the long run.

Turning to consumer audio, I am pleased to share that Harman's award-winning AKG active noise-cancelling headphones will replace Bose on all Lufthansa business class seats around the world. This new and strategic multi-year agreement with Lufthansa begins in September 2016.

Finally, I should note that our consumer audio products were again recognized for their excellence in design and innovation, winning a record 23 Red Dot awards. Ladies and gentlemen, I remind you, consumer audio tightly supports our car audio growth and we are seeing them in tandem, and this is a great news for the company and our shareholders.

Now turning to the Professional Solutions division highlighted on Slide 9 of the investor presentation. During the quarter, new enterprise installations included NFL stadium in Tampa Bay, a new ship for Norwegian Cruise Lines, and corporate facilities across the globe for eBay and Société Générale. Our solutions also powered the Super Bowl 50 halftime show and 58th Annual GRAMMY Awards and several artist concert tours.

Now, turning to the Connected Services division, highlighted on Slide 10 of the investor presentation. During the quarter, we secured follow-on business to provide product development services for BlackBerry, Dell, Intel, British Telecom and Sony, among others. Harman continues to strengthen its partnership with Google in device management, software certification and system integration.

In addition, Harman continues to capitalize on its industry-leading OTA software update technology, winning a cross-car line award with a global auto maker. I'm extremely pleased to share with you now our backlog of OTA awards is just over $150 million and this is all software business. We are winning very rapidly in this space.

In conjunction with our services delivery platform, we introduced our automotive service provider program. This will facilitate the integration of a variety of enterprise and vehicle-centric applications and services, from leading providers for OEMs. We added 10 new data, workflow and content service providers for our open platform, which enables automakers to provide a wide range of context-based services, including real-time traffic and location-based services.

Let me remind you that our service delivery platform and our partnership program are the first of their kind in the industry. We're defining the cloud-based end-to-end service delivery platform for the connected car industry. In addition, Harman received recognition for its software engineering services capabilities from respected advisory firms, including Zinnov and HfS.

In summary, I am pleased with the performance of our Connected Car and Lifestyle Audio divisions and I'm also encouraged by the trends in the industry and the new business we have secured. Where we face challenges, we're taking aggressive actions. We will continue to focus on relentless execution across all of our divisions to deliver above-market top and bottom line growth.

Now, I will turn the call over to our Chief Financial Officer, Sandy Rowland, who will give you additional color on our financial results for the quarter.

Sandra E. Rowland - Executive Vice President and Chief Financial Officer

Thank you, Dinesh and good morning, everyone. Let me walk you through our financial highlights for the quarter.

As a reminder, most of my financial remarks are provided on an operational basis, which excludes restructuring, non-recurring and acquisition-related items. I want to point out that the majority of the difference between our GAAP and operational results is due to the noncash amortization of intangible assets recognized as a result of our recent acquisitions. The full reconciliation of our GAAP to our operational results is included in the press release that we issued this morning.

This quarter, our revenues were $1.6 billion, an increase of 11% compared to the prior year. Revenue in our Connected Car division increased 5% versus the prior year, primarily due to higher take rates. Revenue in our Lifestyle Audio division increased 11% compared to the prior year. The increase in net sales was primarily due to the acquisition of Bang & Olufsen's automotive business, higher car audio take rates and higher consumer audio sales.

Revenue in our Professional Solutions division decreased 4% compared to the prior year, mainly due to lower demand in Brazil and certain European markets as well as the channel rationalization to support a solutions-based go-to-market structure.

Revenue in our Connected Services division was $166 million in the quarter compared to $67 million a year ago. The increase in revenue was primarily due to the expansion of our services portfolio as a result of the acquisition of Symphony Teleca.

Total company gross margin increased 160 basis points to 30.4%. The improvement was primarily due to improved leverage of fixed cost on higher sales volume and lower warranty costs.

Connected Car and Lifestyle Audio gross margins both increased 370 basis points to 26.4% and 35.5%, respectively. Both divisions benefited from better leverage of fixed costs, lower warranty expenses as a result of better quality and supplier productivity.

As Dinesh mentioned earlier, we better aligned the timing of savings from our supplier base with the timing of annual price reductions from OEMs, resulting in strong margin performance this quarter.

Professional Solutions gross margin decreased 780 basis points to 33.7%, driven by discounts on older inventory and to partially offset foreign currency impacts at the distribution level. In addition, we incurred incremental costs associated with relocating manufacturing to Hungary and had reduced operating leverage as a result of lower sales. Connected Services gross margins were 28.7%.

Our SG&A expense as a percentage of net sales increased 30 basis points from the prior year to 21.3%. Connected Car SG&A increased 110 basis points to 13.6% due to higher information technology costs to support future business.

Lifestyle Audio SG&A increased 250 basis points to 22% due to higher research and development to support new car audio awards. SG&A expense in Professional Solutions decreased 190 basis points to 30.6% driven by tight expense control. Connected Services SG&A as a percentage of sales was 20.3%. And finally, Corporate SG&A as a percentage of sales declined by 60 basis points to 2.2%.

As you would expect, we are managing our expenses across all of our divisions and corporate functions tightly due to some of the macroeconomic headwinds. Putting it all together, our consolidated operating income was $148 million, compared to $114 million in the prior year, a 30% increase. EPS was $1.36 compared to $1.22 in the prior year, up 11%.

Now let me provide you with a few updates on capital allocation. In the quarter, we increased our borrowings under our revolving credit facility and used the cash to make the second payment for the Symphony Teleca acquisition in the amount of $216 million. In addition, we funded the TowerSec acquisition with $41 million of cash on hand.

On top of that, we were active in the market. We spent $25 million to repurchase approximately 309,000 shares. Year-to-date we have now repurchased approximately 803,000 shares at a cost of $75 million. We now have approximately $425 million remaining on our board-authorized share repurchase program, which runs until October 2017. In addition, we expect strong cash flow generation in the fourth quarter consistent with our historical trend.

Now let me walk you through our revised outlook. We now forecast fiscal 2016 revenue of approximately $6.825 billion. Of the $175 million shortfall compared to the guidance that we issued in August, approximately $100 million is related to Professional Solutions, $85 million is related to Connected Car and $60 million from Connected Services. Approximately $70 million in higher revenues in Lifestyle Audio partially offset these impacts.

Included in our outlook is a $30 million to $40 million reduction in our fourth quarter revenue as a result of supply constraints caused by the recent earthquakes in Japan. Approximately 80% of the impact is in our Connected Car division and the remaining 20% is in our Lifestyle Audio division.

Turning to EPS, we now forecast operational earnings per share of $6.20. We guided you to EPS of $6.50 back in August. As we discussed last quarter, our acquisition of TowerSec will be dilutive to earnings by approximately $0.05 as it is a bolt-on technology investment. The remaining $0.25 of the EPS shortfall is related to weakness in our Professional Solutions division.

While we are slightly behind in our Connected Services earnings targets, we expect that lower corporate costs and slightly lower below the line costs will offset the shortfall. We expect that both the Lifestyle Audio and Connected Car divisions will achieve the earnings targets that we established in August. Higher profitability as a percentage of sales in Connected Car will offset the shortfall in revenue.

In summary, our two largest divisions representing 75% of our company, Connected Car and Lifestyle Audio, continued to perform well. We are addressing the challenges in our two smallest divisions to better position these businesses for long-term sustainable growth.

Thank you for your attention. And now, Dinesh and I are happy to take your questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. And our first question is from the line of Joe Spak with RBC Capital Markets. Please proceed.

Joseph R. Spak - RBC Capital Markets LLC

Thanks for taking my question. Just maybe a couple quick ones on Connected Car. One, maybe just a little bit more detail as to the source of the revenue shortfall you mentioned? And then second, related to the timing of productivity versus price down, so you did a great job there this quarter. So is the implication that the magnitude of improvement over the next three quarters should not be as great? And is this sort of a more sustainable procedure you put in place on a go-forward basis as well?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Let me take that one. So, first of all, revenue shortfall in Connected Car. Frankly, we did not expect and we did not know when we announced our second quarter result in January that some of the OEMs, which happened ended up pushing the production out. Now, we hope all of that push will be realized in Q4, but that is to be seen. How much would that be realized and how much would that not be realized entirely?

As an example, North America FCA production was down 7% in the quarter and Chrysler actually stopped Chrysler 200 complete production. So those were the impacts which were not known at the beginning and that was one factor. Another factor is China. As we have quoted the luxury car sales seriously suffered in Q2 and we said, we expect momentum to shift, and momentum has shifted. We actually saw pretty good pickup in Q3 and we think it will continue in that direction, slightly get better in Q4, but still below our high level of growth we have seen in China. So it's the right direction. That's one part.

Second piece you asked about timing of aligning our productivity improvement due to supply chain to annual price reductions. This is something I call process improvement, which we like to stay with and hopefully repeat that. But that is really not a one-time. You have to spread it over the full year as we don't give the guidance quarter-over-quarter. However, I must remind, this Q3 was very strong performance from a profitability point of view, which we're very happy, but Q4 may come in right around 14%, just over 14%. That will still put us for full year profitability slightly ahead of what we guided the market for, which I am very happy about.

So that's pretty much what I wanted to say that the guidance was 13.6%. That is 13.6% guidance. And we'll probably come in higher than that both in absolute EBITDA and in percent margin. And that really is very important for our shareholders to know that cost control, the discipline of getting the orders we take and how we deliver is really sticking and margin expansion is constantly evolving quarter after quarter.

Joseph R. Spak - RBC Capital Markets LLC

Okay. That's helpful. Maybe just one quick one on Connected Services. I know it's a smaller part, but I just wondered at least I'm getting a little bit more familiar with. I think back originally you guided to close to 15% EBITDA margins. You haven't done that through the first – you've been below that for the first nine months. So is that just a seasonally stronger, a much seasonally stronger fourth quarter? Or is there something else going on there where it's just going to come in a little bit short this year?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

First of all, absolutely. That is what we expect in long term. Realize that we are integrating three or four businesses here. So business in the company called Symphony Teleca we acquired, that business is actually holding up per the plan. But we have moved Harman's aftermarket audio business, which is slow growth, lower margin, that used to be part of the Lifestyle Audio, and we transferred that. So that diluted down.

And on top of that, Red Bend over-the-air technology we moved and that's still a developmental. When we acquired the business, it was losing about $10 million and we actually accelerated the development, so it will be $15 million to $16 million drain on the bottom line for that reason. So when you add it all together, that affects the bottom line. However, we should still come out this business to be in double digit margin right around 13% EBITDA for the full year, which is below my expectation of 15%. But when you factor in $15 million, $16 million loss in Red Bend and lower margin in aftermarket audio business, it's holding up quite well in the core business of Connector Services.

Joseph R. Spak - RBC Capital Markets LLC

Okay. Thanks for all the color, Dinesh.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

You're welcome.

Operator

And our next question is from Ryan Brinkman with JPMorgan. Please proceed.

Ryan Brinkman - JPMorgan Securities LLC

Okay. Great. Thanks. What is the outlook now in terms of progression of margin at the Professional division? It seems like some of the softer margin in the quarter related to moves taken to actually increase margin in subsequent quarters, like migration of manufacturing to Hungary, et cetera. How quickly do you expect those migration cost to subside? Remind us of when the tailwind comes on from actually realizing the lower manufacturing costs? And then on the discounting of older inventory, are you primarily through that process? How do you see the claw back up to your targeted margins progressing?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Ryan, first of all, I should express my displeasure on this division. Having said that, this is actually very fixable. I mean, we have lifted a lot of mountains in our automotive, car audio and infotainment and we know the playbook how it works, so this is fixable. It has taken a little longer. Q4 has seasonal leverage, as always, so Q4 will be definitely much better than Q2 and Q3.

However, from the growth point of view, I'm not expecting so much of an improvement. It should come in right around where the growth was in Q3 that is still about 5% below last year's quarter. But the profitability will come back up. It should be as we have seen always in the high – it's in the teens. But, all in all, coming back to all the cost reduction actions we have taken, yes, you should expect $10 million to $15 million falling to the bottom line due to two of the high cost factories in Europe. We already moved them and this is all done behind us. It took us an extra quarter, but still we will see the profitability improvement in fiscal 2017.

The top line might take little more, one or two quarter extra than I anticipated I admit because the culture change of moving people from product-selling mindset to solution-selling mindset is proving to be a little harder than we thought. And that means we are training harder and we also not holding ourselves from replacing and finding people from outside, those who are good in solution selling. And we are seeing good signs. We're taking orders. You might have seen some of the enterprise orders we have recently booked. They're not converted into revenue are very encouraging, I'm very happy to see.

So all-in-all, it's going in the right direction. And you can count on that Sandy and I and the rest of the management team is truly focused on Pro because this is one area we know how to fix it and we'll fix it, so timing. So, fiscal 2017 should be a lot better than fiscal – fiscal 2017 should be a lot better than fiscal 2016.

Ryan Brinkman - JPMorgan Securities LLC

Okay. Thanks. And then with all this focus on the softer Professional margin, I think maybe there's been less focus on the stronger margin at Connected Car this morning. So, can you give us some color? You gave us some color already, right, on the pricing versus efficiencies in answering Joe's question. You mentioned in the release though too, in the appendix, some tailwind from lower warranty costs and an increased supplier productivity. So can you touch on those latter two factors? And then just from a bigger picture perspective, how should investors think about the durability of the drivers of stronger margin at Connected Car during the quarter versus the durability of the drivers of softer margin at Professional?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Sure. Ryan, I'm glad that you reminded that because we did not want to let go excellent development in Connected Car to be washed away from Professional lack of expectation performance. Connected Car and Lifestyle both are performing extremely well. I remind all of us that it's 75% of the company, that's the core. Supplier productivity alignment, I think David Slump and his team, they have done a great job in bringing Six Sigma and tremendous discipline and working with our suppliers with IT. That's another area we invested in our IT division so that we can really see things happening with our suppliers. And lower warranty cost is actually a discipline also in quality. We have been doing a lot of work in project execution and quality improvement. So that is sustainable I believe.

Scale matters a lot in this business. So, car audio and infotainment have achieved the scale, and we are seeing margins really swelling that we saw 370 basis point improvement in gross margin for both divisions. Coincidentally, both divisions saw that. And R&D I think is getting a lot more efficient. And in this quarter particularly we did benefit slightly from the stronger investment from our customers. But again, I would not like you to think that this is one-off. It is not because the R&D reimbursement vary quarter-to-quarter. We always try to maximize. So 15.2% EBITDA margin, by the way, is the record EBITDA margin for any quarter for Connected Car. We do expect for full year to be around just 14% or slightly north of 14% EBITDA. That's still ahead of what we guided the market back in August. So this is very positive.

And last I say, look, we are going beyond what market we had been leading. We've gotten into successfully in display audio infotainment and we have won a sizeable business from a North American OEM replacing a competitor and adding a new logo in our business. So this is another very positive development for the company.

Ryan Brinkman - JPMorgan Securities LLC

Great. Last quick question on the Japan quakes. In your conversation with investors, do you think the lost production has the potential – in your conversation with your customers, do you think the lost production could maybe be made up in your early fiscal 2017 actually benefiting you?

Sandra E. Rowland - Executive Vice President and Chief Financial Officer

Thanks, Ryan. I think we actually – this is a situation that's very fluid, and we're actively monitoring it on a daily, daily basis. We think, at the end of the day, it's most likely a mixed bag. There will be some production that likely gets shifted into Q1. But on the other hand, if the shortfall is from some of the higher content materials and the OEMs take the decision to decontent a little bit, to keep production going, then that won't carry over and benefit us in Q1. So at the end of the day, our best estimate is that it's between $30 million and $40 million impacting Q4. We think it will be contained all within Q4, and should be a mix bag on how it splits out.

Ryan Brinkman - JPMorgan Securities LLC

Okay, that's helpful. Thanks.

Operator

And our next question is from Brian Johnson with Barclays. Please proceed.

Brian A. Johnson - Barclays Capital, Inc.

Yes. Good morning, Dinesh and Sandy. A couple of things back on Connected Car. They're kind of related. First is, you had a program that you signed back in late 2012 about a $2 billion program that you had talked about launching 2017 model year. Are we going to see any of that this fiscal year? Are we likely to see it next fiscal year, and what sort of product was that?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

So, first of all, that's a great program for us. It's one of a kind commercial development, and it's a large program, actually one of the largest program we've undertaken. It's going extremely well, and this will be launched, I mean a number of factors from the OEM side will dictate and a lot of changes being added to it. But we are on track. We do not mention future SOP timing. In fact, I've been hurt by saying and let OEM speak for it. And as we have said, Brian before that, this would have a very small impact in fiscal 2017. It'll start to ramp in 2018, so we are on track on that. The most important thing is going quite well, the program.

Brian A. Johnson - Barclays Capital, Inc.

Okay. Second, on this new embedded audio, display audio award, couple of questions. First, I think there's a lot of terminology in the industry around infotainment into sort of low-end and then sort of low midrange, which is – can still get you some functions on the screen, higher midrange with Apple CarPlay, et cetera, connectivity all the way up to pure embedded, high-end embedded. When you say display audio, kind of what feature sets are we talking about?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

So glad that you asked that question. That takes us back to our August Investor Day presentation. We described that at pie chart, draw a horizontal line to divide the pie into two, and then the top pie gets divided into another 25%, 25% percentile. 25% is the fully embedded infotainment system, that is your telematics, that's your navigation, multimedia and what have you. And then the other 25% is display audio, which I would like to describe in a simplistic word, that is really your radio with a large screen without inbuilt navigation capability.

The bottom half of the pie is really your very low end, traditional AM/FM radio or nothing at all. So what's happening, the growth is in the top-two quartile of the pie, the fully embedded and display audio. Display audio has further evolved into two basic display unit with some CarPlay capability. That's again, as I described, not in-built navigation capability but bring your own device and so that happens. And, yes, we are doing that.

So those two are fastest-growing and people say that no bright lines also between these two because what I think and that's based on what I'm hearing that the lines will further get blurred between display audio and fully embedded. But if you think and if you believe in what's going to happen in fully connected car, what will be required in semi-autonomous car, you will have lot more sense of fusion. You will have lot more safety, security, active safety, ADAS, telematics, full-blown navigation built into it, otherwise you cannot rely a car. So I think display audio will actually move more and more towards the fully embedded and this would be in phases because people who buy entry level car will perhaps start with that and they will demand from technology providers do you have a path to upgrade my system online once I have bought the car? And that's fair.

What has been holding up the take rates from going 4% or 3% linearly to non-linear is there was no mechanism to over-the-air update technology. Only one car company in the Bay Area has started doing it, and by the way, we are doing that too, over-the-air update. So now with OTA technology we've acquired from Red Bend and we have already signed up more than six OEM worldwide to use that technology. This will expedite feature refresh, upgrade applications. That's why we signed up 10 providers for technology. So I think we are going to give users – they can now customize. They can start with something if they don't have enough fund to begin with. But the all mid to luxury cars would be going more and more fully embedded systems.

So I think as we go towards more and more autonomous driving, you will not see the bottom of the pie left that nothing. That nothing will not serve because that's the pressure everybody has. And that's what I thought I heard from all the OEMs I visited extensively: Germany, Japan, China, United States. And we're hearing the same thing. The high take rate – in fact our display audio award we have received, it had extremely high penetration rate. And I believe in it because that would be the base for the all entry systems going forward.

Brian A. Johnson - Barclays Capital, Inc.

So if you think – well, just a couple of specific questions then. Would this involve Bluetooth or some sort of Apple CarPlay or Android connectivity or at least smarts in the system?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Absolutely. Brian, absolutely.

Brian A. Johnson - Barclays Capital, Inc.

Okay.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

So display audio would have features built into it to support Google, iOS, other drivers, CarPlay, whether it's there or not, but the system would be able to switch and immediately interface with those devices as you bring in this. So these are smart systems, but they don't have full-blown 3D navigation, full-blown multimedia. But they're going to have lots of capabilities to grow into. But it will not be substitute to the high-end embedded system like what BMW and Audi, Mercedes, Lexus, Cadillac, Lincoln, many high-end cars will be providing to the consumers.

Brian A. Johnson - Barclays Capital, Inc.

Okay. But in terms of positioning, and let's say, because different investors have different views, that the idea of embedded GPS navigation we could debate or not. But let's assume that there are a number of consumers who just want to rely on their smartphone for that. I'm just trying to make sure that the display audio win that you have, you're calling it display audio, but from what I'm hearing it actually sounds like if I look back to page 70 of your Investor Day deck, almost a mid system minus GPS and app download, which is actually provided through the smartphone.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

I think you're absolutely right. As I said, this is basically your smart system without navigation. But this has all Bluetooth, hands-free capabilities. And you can bring your device and use it. It will scale up to that, whether it's a MirrorLink, whether it's a Google link, whether it's a CarPlay, whether it's a CarLife from Baidu and many others evolving. So those features would be available in display audio. And by the way, they're all already available in our fully embedded system. So this is aspirations. This is the step, first step for those who could never buy embedded system.

By the way, since you mentioned two or three times the different definition, I'm also hearing different definitions. In fact, some of the competitors are using cockpit, whether it's instrument cluster or anything else as loosely as navigation, or infotainment. That is not correct. In fact, those are the standard instrument clusters. They are merging. They're getting into similar space. That's where we're also driving it. But from a capability point of view, infotainment remains very clearly well defined.

Brian A. Johnson - Barclays Capital, Inc.

Right. Right. Okay. Okay. Thanks a lot.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Our next question is from David Tamberrino with Goldman Sachs. Please proceed.

David Tamberrino - Goldman Sachs & Co.

Hey. Thank you. And I appreciate you guys taking our questions. The first one from us is, obviously, your company's going through a bit of a soft patch in top line revenue and it's something that you've seen before, 2013 being the most recent time period where you saw a pause. I think our biggest question is when do you expect reacceleration in the Connected Car growth? You have a few larger contracts in place. And given your sizable backlog, is that something you should be seeing or we should be seeing as we're heading out of 2016 into 2017?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

David, first of all, thank you for asking a very good question. I really don't think that it's a soft patch which I'm worried about. I think overall this business of Connected Car will still be coming out for the full year right around 10% to 11% top line. And Lifestyle car audio business is also really firing on all cylinders. Most importantly, the indication I see, what is happening in order activity? And I'm very, very happy with that because that's the forward trend. That $23 billion was the backlog as of last year, fiscal 2015.

Since then, we have already booked $3.5 billion. And $2.3 billion of that came for Connected Car. And we're not done yet because Q4 is lining up to be, again, a pretty strong quarter for our order activity. So I think OEMs are coming in and placing large orders. They cannot avoid if there are some inventory issue here and there.

And take rates, that's the key point for you and I to talk about because if take rates were soft, I'll be worried, but I'm not. Take rates are holding up quite well. We're tracking very well what we guided. So between production and take rates, this quarter was 65% take rate and 35% production. So, even if production is modest development over the next couple of three years, take rate will start to get nonlinear.

I absolutely believe whether it's 2017. We're not giving guidance right now. But is it 2017, I don't know. But one thing for sure, every OEM is saying it's not going to take five years to get to 65% penetration. It may not happen first two years, but linear to nonlinear is going to happen anywhere from one cycle, one life cycle, that's two to three years, two years, maybe out. So that's my take on it, but we'll have more color when we give guidance for fiscal 2017 in August.

David Tamberrino - Goldman Sachs & Co.

That's fair and it's helpful. And then just touching on the new business wins, there's $3.5 billion that you've announced so far. It's tracking a little bit softer year-over-year. I think you just said the four quarters lining up to be a little bit stronger year-over-year. Is that because of the lumpiness in bidding activity or is this year just a little bit lighter from an RFP perspective from the OEMs?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

David, again that's a good question you asked to clarify a couple other things. Order activity is always lumpy. You should never expect every year to be the same. Last year, as an example, was the phenomenal and by the way, record year for the industry and record year for Harman. We booked $6.2 billion. No other company has ever booked that much. We were the first one to book that high, and we actually thought that next year might be just $2 billion or $3 billion. We already booked $3.5 billion, so we're very happy.

And so if you think now, in different form, in the last seven quarters, four quarters of 2015, three quarters of this year, we have booked $10 billion business. I mean, our second biggest competitor has not even booked $5 billion. So we have amazing momentum going in that direction. That makes me very confident that we're on a very good path. As long as we keep costs low and continue to innovate, which we are doing, and by the way, we should not forget, our Connected Car business will grow because we have invested in services business, in end-to-end service delivery, over-the-air update, cybersecurity.

Other competitors have lot to catching up to do because these are the requirements towards autonomous driving towards higher penetration rate. So I'm very convinced that we're going in the right direction. Quarter-to-quarter fluctuations, I don't like it, I understand, but we have to live with it.

David Tamberrino - Goldman Sachs & Co.

I appreciate that, Dinesh. And just lastly from us. On the share buybacks, it looks like you had a little bit of activity during the quarter, and when you look at where the share price is today, it's simply probably pretty attractively priced, I guess, in your view on a return. With the $425 million you have left, and a pretty strong cash flow quarter coming up, is there any upsize opportunity for you to increase the quarterly gains of buybacks?

Sandra E. Rowland - Executive Vice President and Chief Financial Officer

Obviously, that's something that we look at from quarter to quarter, and one thing we'll let you know is we plan to be active in the market in Q4.

David Tamberrino - Goldman Sachs & Co.

I appreciate it. Thanks for your time.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

And also you know that we still have $425 million board authorized repurchase program.

Operator

Thank you. And our next question is from David Lim with Wells Fargo Securities. Please proceed.

David H. Lim - Wells Fargo Securities LLC

Hi, good morning. So I just wanted to dive into the North American OEM. Can you give us a little bit more color on maybe when we could expect that to flow through? Is that more of an FY 2018-2019? And any kind of size relative to some of your other wins and how big this can be? And is it global? Or is it just North America? Additional color would be very helpful.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Sure. We obviously have some constraint from the OEM. Otherwise I would've given you a lot more. And I hope that by August we will be allowed to say more. But it is a global business. It's actually a little more than half of what we booked in this quarter. So that's already a pretty good size. And we expect – so that's about $700 million to $800 million already as a size. But it has further opportunity to grow another few hundred million dollars worldwide. So we already got the umbrella contract done. We just have to do some local parts.

And in terms of its SOP, we're not allowed to give timing. But this is a pretty fast development. It's a scalable platform. And we'll be able to use a lot of technology from the platform we use. It's based on our Orinoco, which you saw we launched at CES 2015. We're happy that platform has taken on and taken off. So this would be well fiscal 2018 or beginning fiscal 2019. I cannot judge on it. But this is good. And on the back of this success, I think we have a number of other similar pursuit in the works.

David H. Lim - Wells Fargo Securities LLC

All right. Then one follow-up question, Dinesh. It seems like the Professional division has become like a weight vest on an Olympic sprinter, if you will. Do you see – can you sort of dimensionalize the margin from last year? I mean was there – was the inventory like a 200 basis point headwind to the quarter? If you guys could sort of bridge us that would be great. And another follow-up behind that is, would you guys ever consider maybe spinning off the Professional division? Thank you.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

So there are a number of things. And I think Sandy and I will answer. So let me take first part here. A little bit of color on this business. Two, three years ago we had almost $0.5 billion worth of Professional Audio business. We are growing about 3%, 4% a year. And we were generating 15% to 16% EBITDA margin. And at that point we clearly saw that there was a need to create a bigger solution audio-video switching, lighting and automation to tie it all together to create a total solution.

The businesses we acquired, they came in significantly lower profitability. And the footprint was in very high cost countries whether United States, Switzerland, Denmark and UK. So that actually diluted the margins in the first place. And now we had to do the work while we were integrating the IT systems, the payrolls and what have you, we had to build the sales force so that we can sell not products but the total solution. That's going on.

So we do expect once we are done with this sales channel rationalization, which means not only retraining our sales people, bringing some new people and also adjusting to new distribution channels including going direct in some markets and we are doing that, by the way, we should hit mid-single digit to even high in two years, three years' time growth, but that – most important thing is profitability. Profitability already next year I would like to see coming into 14%, 15% – 15% profitability for the whole division because we will have this factory consolidation already coming in.

In addition, we have identified some more cost rationalization, which we will drive in fiscal 2017 already. So if I can sort of speak ahead of guidance, fiscal 2017 we expect right around mid-teen EBITDA margin, 14%, 15% around that if everything goes. And 2017 we should be looking at 16%, 17% even, because we will have some more cost reduction rationalization. I would like to invite our CFO to also weigh on some of the inventory and some of the other things.

Sandra E. Rowland - Executive Vice President and Chief Financial Officer

Yeah. David, I'll bring us back to the quarter. When you look at the year-over-year margin performance, there were three major factors that impacted the margin. First, we continued doing some discounting, not only to clear out some older inventory, but we needed to support our global distribution partners. Some of those partners are still impacted by currency impacts due to the continued strong dollar. And then the second point is leverage. Once we get the top-line going in this business, we get very good leverage on the top line. And the third factor was we did incur some incremental costs this quarter that were largely associated with migrating our footprint out of the UK and Denmark into our site into Hungary.

David H. Lim - Wells Fargo Securities LLC

Got you.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

David, the last piece of your question was on spin-out, I don't want to miss out anything. Look, we review our portfolio with our board of directors on a very regular basis. We believe this is a great business, total solution, end-to-end enterprise and entertainment. No other competitor I know of has the capability we have. Once we fix the cost base, once we fix the go-to-market channel strategy, I really think this is a great business, will generate a ton of cash, doesn't have too many hang-ups of project execution risk what we all face in other parts of businesses. So I think it's relatively simpler business once we address those two issues, which we are in the middle of. And we like this business, but you know what, I don't talk on behalf of board, we review every year, everything openly.

David H. Lim - Wells Fargo Securities LLC

Great. Thanks for the color, I appreciate it.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Yeah. You're welcome.

Operator

And our next question is from Adam Jonas with Morgan Stanley. Please proceed.

Paresh B. Jain - Morgan Stanley & Co. LLC

Good morning, everyone. This is Paresh Jain. Actually good afternoon almost. This is Paresh Jain in for Adam Jonas.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Hi, Paresh Jain. Go ahead, please.

Paresh B. Jain - Morgan Stanley & Co. LLC

Dinesh, just one question. I'll stick to one here. There does seem to be some shift in the way you're thinking about display audio or smartphone-only solution versus embedded. Historically, expectations were for a smartphone solution to be delivered primarily through embedded. But it seems like you're sounding a bit more bullish on penetration of these solutions as standalone products. And just to clarify, the display audio win is for the product that was unveiled at CES in 2015, right?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

That is correct.

Paresh B. Jain - Morgan Stanley & Co. LLC

Okay. And your thoughts on being more bullish on penetration of smartphone solution as standalone products?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Well, we have always been consistent so I'll repeat what we have always said. We have said, 50% of the car market has either basic AM/FM radio or nothing at all. That will move towards fully embedded system what we are world leader at, or some sort of a hybrid, which is – the name industry has given it is display audio. In fact I don't even like it, because it's not the audio, it's actually infotainment and that has capabilities pretty much what you would expect in a entry system what we have been doing without in-built navigation.

We have always said that that's the entry system. We have been doing entry systems. But this time it is a system which does not have a built-in navigation, which you can bring your own device. We have always been consistent on that. And I'll repeat what I said earlier in the call, I believe towards semi-autonomous and autonomous driving experience, display audio is not your answer, full stop. This is the beginning. This is what you get people started with and then they can grow the system or the first-generation car you buy either you upgrade it, which we will develop our service offerings, or you will buy a next car, which has a lot more embedded. That has been a very consistent explanation from me and my management team. And we still believe that's where it's going. The good thing is we're playing in both sides because our existing customers, the Germans, Japanese, Americans are asking that they want both solutions because no car would be left behind, either entry car or mid and high and we have solution for all three; entry, mid and high.

Paresh B. Jain - Morgan Stanley & Co. LLC

Understood, thanks for the color.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

You are very welcome.

Operator

Thank you. And our next question is from David Leiker with Baird. Please proceed.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Hi. This is Joe Vruwink for David.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

Hi. How are you?

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Good. Good. A question on your connected car launches in the quarter. We're seeing new Fiats in Europe and new Chrysler vehicles in the U.S. launch with the next generation of Uconnect. In your own launch highlights this quarter, Fiat or Chrysler weren't listed. So can you maybe give us an update on when your new generation of systems will launch?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

So, first of all, let me just say that Fiat-Chrysler continues to be a very strong customer of Harman across infotainment, telematics and audio. And we are expanding in the family in multiple areas. And I have said that always in the consistent manner that this is one customer where we have four or even five suppliers of infotainment, at least audio we are the largest one. And infotainment we are also large, but there are other three or four suppliers.

So how they distribute the business like you just saw us launching Maserati, which we're very happy about, and a few other vehicles are coming out with Harman very soon with our infotainment. So, expansion, we will see. We are waiting for them to decide. At the same time, R1 which is the new program, that will be up for bid in next year, including minivan, Harman is well positioned with the technologies we are demonstrating to Chrysler-Fiat and we will wait and see what happens.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

So I guess the question would be at CES this year they introduced the new generation, I think it's the sixth generation of Uconnect. And it seems like that's starting to get in the market. It sounds like your launches are still continuing and it's going to be on that original program and just spreading across more vehicles. Has there been any developments in that sixth generation of Uconnect for Harman?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

In this case, particularly, they have been expanding and adding technology. So further expansion – like Maserati, the classic example. Maserati has a lot of feature functionality, which an initial Uconnect did not have. And it's been very well received, very successful launch of Harman infotainment. So they have been doing that, launching some of the program in the existing car lines, some in the new car line, and they're doing the same thing with some of our competitors. As I said, it's a big group and they have four or five infotainment suppliers.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

So really no change from your viewpoints?

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

No change. As I said, we are well-positioned for the new generation R1 program, which will be up for bid I think in next 12 to 18 months' time, and we are well positioned for that. In the meantime, the expansion program as they happen car-by-car and model-by-model, that'll continue to happen and we'll get our share. Our competitors will get their share.

Joe D. Vruwink - Robert W. Baird & Co., Inc. (Broker)

Okay. Thank you.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

You're welcome.

Operator

And I believe that's all the time we have today for questions.

Dinesh C. Paliwal - Chairman, President & Chief Executive Officer

All right. Well, this was very healthy conversation and I thank you all for joining us today. And thank you to our shareholders, our owners of the company, investors, our analyst community for your support and the work you do to communicate Harman's story. As I said, we had a mixed quarter. On one hand, 75% of our company's business which comes from Connected Car and Lifestyle, we're doing very well, a very strong order book. And other two businesses, one is under integration, the Services business, which we feel we had a good handle on. Professional, we have some work to do, but we have taken deceive actions, some more to be done, but nothing is in a blank spot here. So thank you, again, for your time and we remain very excited to continue to create shareholder value in our company.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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