Telenav's (TNAV) CEO HP Jin on Q3 2018 Results - Earnings Call Transcript

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About: Telenav, Inc. (TNAV)
by: SA Transcripts

Telenav, Inc. (NASDAQ:TNAV) Q3 2018 Earnings Conference Call May 3, 2018 5:30 PM ET

Executives

Michael Look - Investor Relations

HP Jin - President and CEO

Mike Strambi - CFO

Hassan Wahla - Co-President of Automotive Business

Analysts

Josh Nichols - B. Riley FBR

Ryan Sigdahl - Craig-Hallum Capital Group

Operator

Good day, and welcome to the Telenav Third Quarter Fiscal 2018 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the call over to Mr. Michael Look, Investor Relations at Telenav. Please go ahead, sir.

Michael Look

Thank you, operator. Good afternoon, and welcome to Telenav’s conference call to discuss its third quarter fiscal 2018 earnings results. Joining me today are HP Jin, President and CEO; Mike Strambi, CFO; and Hassan Wahla, Co-President of our Automotive Business.

After the market closed today, Telenav issued a press release through GlobeNewswire and published a letter to stockholders on the Investor Relations section of its corporate website.

During the course of today’s presentation, our executives will make forward-looking statements, including statements regarding, among others, the company’s expected financial performance for the fourth quarter of fiscal 2018, anticipated sources and mixes of revenue, expected profitability, product and business strategies and strategic relationships.

We wish to caution you that such statements are just predictions based on management’s current expectations or beliefs and that actual events and results may differ materially. We refer you to the documents we filed with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the three months ended December 31, 2017, 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 forecasts for the quarter or any other forward-looking information on this call as a result of new developments or otherwise.

Today, we’ll be discussing our results on a GAAP as well as a non-GAAP basis. We use these additional non-GAAP measures as we believe they give useful operating information in addition to the GAAP results. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP.

We compensate for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenue calculated in accordance with GAAP, as well as considering whether we are likely to satisfy the criteria required to recognize revenue to convert deferred revenue into revenue and the costs that we will incur over time to provide the services related to the deferred revenue. A reconciliation of GAAP to non-GAAP financial statements is available in our press release and on our Investor Relations webpage.

I would now like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll take our first question from Mr. Josh Nichols with B. Riley FBR.

Josh Nichols

Just looking through the outlook and I have a quick question, could you provide a little bit more information about billings -- the guidance is for 55 million to 58 million but that’s down a little bit sequentially over the comparable period. Could you talk about just more if that’s demand focused or seasonality driven or any additional information would be helpful?

Hassan Wahla

Hi Josh, this is Hassan. I can take that. So during the March to June quarter as you may have seen from some of the public announcements that there is a brand new Focus launching in Europe, and typically when there are new models that are launching, there’s a slower production of the older units as they switch over to the newer ones. So primarily the decrease in billings in the next quarter is because of the new models launching in Europe and the changeover timing.

Josh Nichols

How long does that usually take until the new model is ramped and you could see billings go back to more normalized levels?

Hassan Wahla

Usually a couple of months, so my expectation is the following quarter, it should be back up to normal levels.

Unidentified Company Representative

The only thing I would add there is the September quarter is generally the seasonably weakest holding all other factors constant just given the summer months the fact that especially in Europe but even in the U.S. there are plant shutdowns for summer vacations and with model year changes often lining up for the fall, there’s a retooling of lines. So as Hassan indicated in the June quarter with respect to Focus in Europe, that’s starting arguably a little earlier than maybe what some other model line changeovers when they might be occurring. And so the effect of the commentary there is there’s a slight mix change as I had indicated on past call. The map relative to vehicles in Europe is higher, say relative to say North America or other regions and so in my guidance you’ll be able to note that with respect to the automotive business unit the underlying direct contribution margin or profit on billings is actually higher sequentially in the June quarter based on the guidance that we have provided for the automotive business unit.

Josh Nichols

And then I was going to ask, what was driving -- the ad revenue was down on a year-over-year basis, I know you’ve maintained that that’s kind of key to the company’s longer term vision. But I guess what’s going on given that the growth rate has decelerated and has now turned negative?

Unidentified Company Representative

So the March quarter is conversely to the auto quarter is the most challenging, the first calendar quarter of each year just because of the manner in which ad budgets are established and when the spending actually occurs, and so by virtue of that first quarter always being lower and the fact that new budgets are being established. There's more volatility or variability in what our expectations -- clearly that's the case with the first quarter relative to any other quarter in the year. Having said that we have very robust bookings in the quarter, such that we ended March with the highest backlog that we've ever had. So as respect to, revenue earned in the March quarter that was challenging for us but we’re cautiously optimistic for the remainder of the year. A key data point there being the fact that backlog is so much higher.

Josh Nichols

And then again just looking at the guidance, I mean you have bookings, billings -- they’re coming down, whenever I am looking at billings, but you have revenue increasing, and it looks like you’re anticipating a jump in auto revenue. What's the revenue driver since I believe board is largely deferred still at this point, is that correct?

Unidentified Company Representative

Yes, board for the most part is deferred. We have some solutions from prior years that continue to be amortized. I think specifically, the question you're asking, the actual automotive revenue was 5.8 million in the March quarter and the guidance that we’re providing suggest a range of 6 million to 7 million, so we’re talking about $500,000 to $600,000 at the midpoint level. And as you might expect with every incremental quarter just by virtue of passage of time products by which there is amortized revenue recognition, our GM product 2 solution, our Toyota solutions. Every incremental quarter even if you'd only added one unit would be an increasing level of revenue, so those are two primary drivers.

Josh Nichols

Thanks. And I was going to ask, I did see that you reaffirm that you’re still expecting to generate positive EBITDA on billings for next fiscal year. I know you don’t talk about guidance or the specifics, so could you just talk about some of the basic underlying assumptions that went into putting that statement out?

Unidentified Company Representative

Sure. So the primary driver, of course, we’ve been talking about this for a few years now, is the ramp, which will be the third model year with the General Motors embedded-connected solution where we expect to be offering our solution on significant unit volumes in fiscal '19. So that is a critical driver. We’ve also seen continuing increases in our Ford unit volumes and our judgment around Ford is predicated on much of the EVI information that we’re saving. So we are cautiously optimistic about our business with Ford going forward. I would add that we expect to deploy on significantly more models with Toyota on the more advanced moving maps solution.

The primary model that we’re on today, model year '18, is the Camry vehicle, where we have seen significantly higher take rate than what we had seen in the prior version of the initial solution we offered with Toyota. And so we’re cautiously optimistic that we’re going to see continued success on that moving maps product as it launches across more models in fiscal '19. And then of course we’ll have a greater impact from the Panasonic Chrysler solution that launched in China this past year. So collectively, on the top line and non-GAAP gross profit on billing, so is our principal drivers. And then we will continue to be keenly focused on managing our operating expenses, which is very key variable to be able to manage, to be able to achieve that target.

Josh Nichols

And then last question for me. I mean obviously a big announcement from Ford that the company is going to shift its North America lineup to be approximately like 90% SUV and truck focused. Could you talk about what the potential impact to TNAV might be or at least, the puts-and-takes for your thoughts about it, the pluses and the minuses?

Hassan Wahla

So Josh, it’s Hassan again. I can handle that. So as the Ford management team has stated publicly and also based on the discussions we’ve had with Ford management team. This is meant to be a growth strategy. So their goal is that by getting rid of some of the lower performing sedans, where the sales were already decreasing, and going towards the SUVs and CUVs where the sales are increasing -- they've not only changed the mix, but they increased the overall volume. So of course higher volumes are better for everybody. Secondly, if you look at right now based on the analysis we have done of navigation attach rates on sedans and CUVs versus -- or actually sedans versus SUVs and CUVs, certainly the SUVs and CUVs tend to be better equipped and have higher attach rates. So while there are still some challenges as possible challenges as Ford does this transition. We’re cautiously optimistic that this will be good for Ford and good for Telenav.

Operator

Thank you. [Operator Instructions] And we’ll take our next question from Mr. Steve Dyer with Craig-Hallum Capital Group.

Ryan Sigdahl

Hey guys, Ryan Sigdahl on for Steve. So you guys mentioned that in the mobile ad business that the March quarter is the most challenging quarter, which caused the decline, but that the backlog was at a record. But guidance for fiscal Q4 implies another year-over-year decline. What am I missing there?

Unidentified Company Representative

So, arguably we stubbed our toe there a little bit in the March quarter and we’re taking a little more of a cautious approach as respects to the guidance that we’re giving to the June quarter. We’re hopeful that we can beat that target, but we feel better where we’re at here on April 30th and certainly where we were earlier in the quarter -- earlier in the March quarter. The challenge with regard to visibility at any point earlier in the year is you’re starting to build a backlog that will carry the rest of the year, so it's much easier to be giving guidance on the ads business, in July and October than it is earlier in the year. So I would just say we’re taking a little more of a cautious tone to that and are hopeful that we can beat those guidance numbers.

Unidentified Company Representative

Let me just clarify this a little more, the campaign length we have in the backlog is longer than before, the beginning of the year maybe is also longer, so that’s the reason that allocation of those campaign into next quarter, we cannot allocate all into that quarter. That’s the reason, why you don’t see biggest jump in this quarter.

Unidentified Company Representative

I would just say we usually have -- later in the year we’ll have more -- a greater period of time from the current annual ad budget to be able to provide guidance from the backlog number, whereas in April there’s of that. So again we’re taking a little bit of a cautious tone there.

Ryan Sigdahl

Switching gears a little bit, you mentioned billings will be down sequentially versus fiscal Q3 in your guidance due to the new focus in Europe but with GM ramping I would have assumed that would have offset some of that transition and retooling, so do you expect GM to be up, GM billings to be up quarter-over-quarter in Q4?

Unidentified Company Representative

So, we’re not going to give specificity with regard to GM until we have actual results and a little more history but generally speaking you're thinking about it the right way. Every sequential quarter we expect certainly with the near-term at sight to be able to see GM increase for the reasons you just established, you deploy on more vehicles, we’re starting to get to the point where we are delivering SD cards. As a point of clarity, General Motors, the title transfer occurs a little earlier in the process. So certainly that is the case in June and will be the case in every quarter expect to be the case in every quarter throughout fiscal '19 as more models and more regions are added. So you’re definitely thinking about it the right way.

Ryan Sigdahl

Okay. And then last one for me on OpEx, if you exclude the restructuring cost, it looks like it’s been going up about 1 million bucks kind of quarter-over-quarter here. I know you added some headcount this year, and you’re getting ready for some of that new business that’s ramping up. But how should we think about that next year? I mean, are you getting to a point where we’re exiting this year at a good run rate or we’ll, we need to layer on more costs next year? A little help there. Thanks.

Unidentified Company Representative

Sure. I don’t want to get too far ahead of myself with regard to fiscal '19, because we’re still in the planning stages. And yes, we did increase headcount this past year, I would tell you on a full-time-equivalent basis, that didn’t really change significantly. So we’ve been successful in leveraging some of the lower costs economies in Romania, in China, where we have some of our development activities. And so we’re able to source skilled labor a little easier. We have less relative turnover to what we have here in the U.S.

And so with that, a principal driver of OpEx increasing is just the overall cost of compensation increases each year. And should we be successful winning another customer award, there could be some incremental additional costs there. But we’ve been successful in leveraging some of our core technology such that there is less and less customization with every incremental customer reward. So my line of sight right now, I wouldn’t expect a significant increase in those costs into '19 holding everything constant other than the traditional compensation increases or some change in the scope, which will be a positive for us. Some change in the scope of some of the solutions that we're offering to incumbent or new perspective customers.

Operator

Next we’ll hear from Mike Latimore with Northland Capital Markets.

Unidentified Analyst

Hi. This is Rishi for Mike Latimore. Thanks for taking my call. Excuse me, if you've like answered some of my questions. I joined a little late. So when will you see the significant effect from the Ford's car portfolio changes?

Unidentified Company Representative

Yes, I think you missed that answer. So Hassan, you can repeat the answer.

Hassan Wahla

Certainly. So the answer that I gave earlier was that really as the mix changes, we are expecting -- Ford has communicated that this is a growth strategy. So the overall volumes they expect them to increase. And also as they move towards SUVs and CUVs, that is also where we are seeing higher navigational attach rates. But I think Ford announced that this is not happening until some times next year. So overall we’re cautiously optimistic that this will be good for Ford and good for Telenav, but we’re not expecting any immediate effect.

Unidentified Analyst

And do you expect similar changes with GM as well?

Hassan Wahla

Well I think based on public statements made by GM recently, they have stated that they've remain dedicated to the sedan market. They’re seeing a demand for it and their ongoing costs are low, so based on what they have stated in response to Ford's announcement I would say no. But it's difficult for us to estimate what -- how their plans may change.

Unidentified Analyst

Just one last question, so what percentage of your revenue is tied to lower end model cars?

Unidentified Company Representative

We don't really break out what percentage our navigation comes from lower end cars versus higher end cars, since that is proprietary information. But there is a lot of public information available that shows that SUVs and CUVs, even if they’re not very high end, you can just go on cars.com and do a search for the EcoSport and look at how many are available in North America for sale, and how many of them have navigation versus a comparable sedan would be Focus, and you'll see that the attach -- the overall vehicles being sold with navigation, it's a much higher percentage.

Operator

Thank you. And now I’ll turn the call back over to Mr. Michael Look for additional comments.

Unidentified Company Representative

Let me make another two comments really to the Ford situation. So, the strategy is to grow the business from their side, of course there’s execution uncertainty, so it depends on execution then outcome may be different, but I just want to give you another color on it. The third one is about portfolio, so we have Ford, we have GM, we have Toyota as our customers. So, in the low end sedan sector we do have a good cover just because Ford chopped that volume, the volume maybe picked up by others, like Ford -- sorry GM or Toyota which will be feel good for Telenav. So additional color for that.

Michael Look

Great, well thank you very much everyone for joining us today. We look forward to seeing you in the coming months. So have a nice day. Thank you.

Unidentified Company Representative

Thank you.

Operator

And that concludes today’s conference call. We thank you for joining.