諾基亞 (NOK) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter NAVTEQ Corporation earnings conference call.

My name is Anne Marie (ph) and I'll be your coordinator for today.

At this time, all participants on in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance, please press star, zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Tom Fox, Director of Investor Relations.

Please proceed.

Good afternoon, everyone.

This is Tom Fox, Director of Investor Relations at NAVTEQ.

And welcome to our first-ever conference call to discuss financial results for the third quarter ended September 26, 2004.

With me today are Judson Green, President and Chief Executive Officer, and Dave Mullen, Executive Vice President and Chief Financial Officer.

By now, you should have received a copy of our earnings release, which was distributed earlier over the wire services and is also available from our Web site.

I would like to point out that this call is available by Webcast and is being recorded.

Following the call, replays will be available.

Information on the replay and the Webcast is available in the release and on the investor relations section of our Web site at investor.navteq.com.

Before we begin, I would like to remind you that some of the statements made during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations, assumptions and projections about NAVTEQ at the time that the statements are made.

The forward-looking statements are subject to certain risks and uncertainties that may cause the actual results to differ materially from our past performance and our current expectations and projections.

For a discussion of these risks and factors that may affect future performance, please review the reports filed by NAVTEQ with the SEC, in particular, the risks factors identified in our quarterly report on Form 10-Q for the second quarter ended June 27, 2004.

NAVTEQ disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or other events except as required by law.

We will begin with some opening comments from Judson.

Then Dave will walk you through a more detailed look at the quarter's financial results.

And finally, we will take your questions.

We will wrap up the call at 3:00 p.m.

Eastern Time.

And with that, I would like to turn the call over to Judson.

Thanks, Tom.

Good afternoon, everybody.

I'm very pleased that our first opportunity to report our performance to you comes on the heels of another quarter of record results for NAVTEQ.

As you can see from our earnings release, we achieved revenue of $97.8 million in the quarter, which slightly exceeded our strong second quarter performance and represents growth of 37% over the third quarter of 2003, led by particularly good sales performance in Europe.

Operating income grew 13% in the third quarter versus the same period last year.

Net income was down, due to a dull tax provision recorded this year, following the reversal of our net operating loss valuation allowance in 2003.

We had only a nominal tax provision in 2003, due to our history of operating losses.

Basic and diluted earnings per share were also down for the same reason.

Cash flow from operations was $71.6 million, year to date, compared to $43.9 million in the comparable year-ago period.

We ended the quarter with 74 million in cash and marketable securities on the balance sheet, which includes $3.6 million in marketable securities that are classified as long-term assets.

Basically, we believe that we are executing precisely on the plan that we set for the company, both financially and strategically.

One of the activities that I feel is important is to frequently visit our customers to better understand their needs and connect with the marketplace to identify future opportunities for the company.

During the week of September 20, I attended the Paris Auto Show where we staffed an exhibit showcasing our database.

The following week, I visited customers in Germany and Italy.

And during the week of October 18, I attended the World Congress for Intelligent Transport Systems in Nagoya, Japan and visited customers in the area.

Based on these visits, I would like to make a few observations.

First, the use of digital maps continues to expand significantly, especially in vehicle and consumer applications.

Second, the wider adoption of navigation systems continues to be an objective of the automotive OEMs, which will flow from innovative new navigation solutions in the vehicle as well as the declining costs of existing navigation systems.

Third, more and more attention is being given to using technology to improve vehicle safety in an effort to reduce fatalities.

I find this goal and the momentum behind it to be consistent among the European, North American and Asia Pacific markets.

And finally, our customers continue to demand higher quality data, additional specialized content and more geographic coverage.

2004 has been an exciting year in which we have seen all our key markets grow robustly, which has translated into substantial top-line increases for the company.

It has also been a significant investment year for NAVTEQ and we have made great progress against an ambitious slate of projects and initiatives, including the launch of the first national traffic service in the U.S. for use in vehicle navigation and the company's first foray into China.

We are focused on meeting the rapidly evolving needs of our customers by expanding our global footprint, offering more sophisticated map features and augmenting our portfolio of specialized content.

We believe this investment will enhance our competitive position and offer a more robust navigation experience for consumers and businesses in the years to come.

Our operating income margin declined in the third quarter compared to the year-ago period.

This decrease is primarily attributable to three factors.

First, increases in distribution business, which comes at a lower margin, but is an important part of our customer relationship strategy.

Second, the acceleration of database investment related to specific coverage and content projects, which I will touch on in a moment.

And third, non-cash stock-based compensation expense related to grants made under the company's 2001 stock incentive plan, which is described in our prospectus.

Even with the above items as well as the expenses related to our IPO, we expect the operating margin for the full year 2004 to be reasonably close to the full year 2003 margin.

Media units represent NAVTEQ geographic data that are delivered to the end user on physical storage media such as a CD or DVD.

Media revenue represented approximately 90% of our revenue in the third quarter.

Media units sold in the quarter increased 42% over the third quarter of last year.

This growth is driven by automotive OEM adoption of navigation systems in their vehicle models as well as consumer update of navigation on mobile devices.

We continue to experience broad-based pricing pressure from both our competitors and our customers.

The pressure is being felt in both vehicle and consumer applications, but is more pronounced with respect to mobile devices, which tend to have more limited functionality at a lower retail price, thus engendering more price sensitivity.

We are facing a challenging competitive environment.

As you know, our primary competitors combined their companies this past summer.

Based on our recent conversations with customers, we believe that the combined company has and is continuing to aggressively cut prices in an attempt to gain market share.

We are responding in a manner that that we think is prudent to compete for business and maintain our customer base without sacrificing profitability.

We continue to expand the scope of our map database by growing our geographic coverage including investment in the mapping of several new countries and territories this year.

We have already announced the availability of seven Eastern European nations by the first quarter of 2005, including Hungary, Poland, Croatia, Slovenia and the Baltic States.

In addition, we have begun to invest in the development of a NAVTEQ formatted digital roadmap of China through our joint venture called NAV2.

Earlier this month, it was my pleasure to join our JV partner at NAV2's official opening ceremonies in Shanghai.

We are excited about the opportunity that this new geographic market presents for both in-vehicle navigation and location-based service applications for mobile devices.

We expect the first vehicle navigation systems powered by NAV2 product to hit the road in China in the 2006-2007 timeframe.

The 2004 investment we have undertaken also reflects a broadening of our product portfolio.

Over two years ago, we started down the path of developing a North American traffic service as we saw an unfulfilled market need and an opportunity to increase the utility of in-vehicle navigation.

I am pleased to report that in September we launched our traffic service in 20 U.S. cities.

This launch represented a significant movement in our company's history and was made possible by the enormous efforts of our dynamic content team and numerous other NAVTEQ employees.

Working in partnership with XM Satellite Radio, we now stand at a unique position of delivering the first real time traffic data in the U.S. for use in vehicle navigation by a major automotive OEM.

Only a few days ago, Acura dealers began offering buyers of new 2005 RLs a service called XM Nav traffic, which is delivered to the vehicle by XM Satellite Radio and powered by NAVTEQ traffic.

You may have seen this mentioned in a recent Wall Street article.

The vehicle's navigation system software integrates the traffic data with a map display to indicate accidents and construction on major roadways and provide information on the pace of traffic flow.

After an initial one-year free trial period, RL drivers will have access to real time traffic information for a modest monthly fee.

Integrated real time traffic data will help to optimize travel times, reduce fuel costs and increase overall navigation system satisfaction.

We believe that this product has great potential to drive increased navigation usage and we look forward to partnering with other customers to make this service available to more consumers in the coming months.

I will conclude my comments with a special announcement regarding our focus on quality and a related development in our North America and automotive OEM navigation business.

DENSO, a leading navigation system supplier to Toyota Lexus and other OEMs switched a portion of its Toyota Lexus map database business to a competitor in September 2003.

We immediately began working very hard to recover that business that realistically expected such a recovery to take two to three years.

Based on the quality of our product and the hard work of the NAVTEQ team, I am very pleased to inform you that we will recover the lost Toyota Lexus business, effective with the introduction of the 2005 Lexus and Toyota models this fall.

This is an exciting development for us because we believe it underscores the importance of a high-quality map database in enabling a superior navigation experience.

With that, I am going to turn it over to Dave, who will review some of the third quarter numbers in more detail.

Thank you, Judson.

I'll try to provide some additional color on our quarterly financial results.

As Judson mentioned, third quarter revenue was 97.8 million, representing a 37% increase over revenue in 2003's third quarter.

The growth was driven by broad-based increase in unit sales of our data for use in European and North American vehicle navigation systems and continued growth in maps for use in navigation on mobile devices.

European revenue represented 70% of total revenue in the quarter and grew 47% over last year's quarter, driven by sales to our vehicle OEM customers, in particular, new business with Audi and DaimlerChrysler that Harmon/Becker won late last year, new distribution business with Audi and, to a lesser extent, the favorable impact of the strong euro, which provided a $4 million benefit when compared to the prior year's quarter.

In North America, revenue grew 19% over last year's third quarter, driven by sales, again, to our vehicle OEM and mobile device customers.

These results were negatively impacted, on a comparative basis, by the loss of the Toyota Lexus business in the fourth quarter of last year, which we will begin to recover this month, and by slower than expected sales of navigation by certain automakers.

We saw continued growth in unit sales to the personal navigation device and PDA manufacturers, which included a new entry from Cobra, which was launched in September.

We expect full-year in-vehicle navigation market penetration for 2004 at approximately 11% for Western Europe and 5% for North America, compared to roughly 10% and 3% respectively in 2003.

Penetration is defined as the percentage of all cars sold in a given period, equipped with OEM or after market navigation systems.

Distribution business arises when we perform the services related to reproducing, packaging and shipping the individual database copies, typically CDs and DVDs, to the customer.

The mix of distribution units was up slightly in Europe, but remained relatively flat in North America.

Overall, we performed distribution services on approximately 53% of our OEM related media volume, which is consistent with the year-ago quarter.

Distribution made up approximately 20% of our revenue in the quarter.

The average selling price for media containing the NAVTEQ database held steady in the third quarter when compared to the year-ago period.

As base price reductions were offset by the mix shift from lower-priced CD products to higher-priced DVD products.

Distribution prices and the related cost increased in the quarter, due to significantly higher fees charged for data conversion by system vendors, which we are able to pass through to our OEM customers.

Database licensing and production costs were up 54% in the quarter compared to last year, representing 49% of revenue versus 44% in the year-ago quarter.

This increase was driven primarily by two factors.

First, the increases in distribution costs that I referred to earlier and second, increases in investment and database coverage and content.

SG&A expenses grew 34% over the same period a year ago, but increased only 1% sequentially in the quarter.

The increase was driven by additional sales and marketing expenses related to new product initiatives and business development activities.

We also saw the first full quarter impact of some non-cash stock-based compensation expense related to a restricted stock unit grant to our CEO in April and restricted stock unit grants to NAVTEQ management at the IPO.

Both grants were described in our prospectus.

Stock-based compensation related costs totaled $3 million in the quarter and $4.5 million year to date.

There was no stock-based compensation expense in last year's third quarter or nine-month results.

With respect to taxes, our effective tax rate was 38% in the third quarter, due first to a greater portion of our income coming from Europe where the statutory rate is lower and, second, the elimination of Japanese withholding taxes earlier than anticipated, due to the signing of a new income tax treaty between the U.S. and Japan that went into effect on July 1, 2004.

Despite the operating income increases in the third quarter over the prior year, diluted earnings per share declined when compared to the same period in 2003, due primarily to the recording of a full tax provision in 2004.

The company recorded only a nominal tax provision in the first three quarters of 2003, due to our history of operating losses at the time.

We want to make you aware of a proposed tax law change in the Netherlands that could have an impact on our tax expense.

If enacted, the law would reduce the statutory tax rate in the Netherlands and cause a revaluation of our deferred income tax asset as it relates to Europe.

As a result, we could incur a one-time charge to tax expense to reduce the value of our deferred income tax asset.

If the new law is enacted this year, our 2004 effective tax rate would increase.

The good news is that our effective tax rate in future periods would be reduced.

I want to emphasize that this change should have no cash impact on the company in the near-term until our European net operating loss carry-forwards are fully utilized.

Finally, we are currently in the midst of our annual budgeting process for 2005 and expect to be able to provide you with our view of 2005 performance early next year in the form of a press release and/or 8-K filing.

And now, I'd like to turn it back over to Judson for some closing comments.

Before we open up the floor for questions, I would like to say a few words about corporate governance.

We are pleased to announce that we have grown our board significantly since the IPO.

First, I will remind you that we added Scott Miller as an independent director.

Mr. Miller is a seasoned business professional and entrepreneur who serves currently as the president of the Six Sigma Academy, the original Six Sigma deployment firm provide Six Sigma training to companies worldwide.

He is also a former executive and board member of Hyatt Hotels Corporation.

We added two more prominent business leaders to our board of directors last week.

Chris Galvin joined as our non-executive chairman of the board.

From 1999-2003, Mr. Galvin was Motorola's chairman of the board and CEO.

He joined Motorola in 1973 and served that company with distinction and numerous senior executive positions over three decades.

He was elected president and chief operating officer of Motorola in 1993 and was promoted to chief executive officer in 1997.

He is a director of the Rand Corporation, a member of the Bechtel Corporation's Board of Counselors and the Board of the American Enterprise Institute, and is a trustee of Northwestern University among other distinguished memberships.

Mr. Galvin is a member of the NAVTEQ board's compensation committee and serves as chairman of the nominating committee.

We also elected William Kimsey to our board.

Mr. Kimsey has more than 30 years of experience with the public accounting firm of Ernst & Young and its predecessor, Arthur Young, including four years as its global chief executive officer from 1998 to 2002.

He brings a broad understanding of international business practices for regulatory requirements and acquisition management.

Mr. Kimsey is a director of Parsons Corporation, Accenture, Western Digital Corporation and Royal Caribbean Cruise Line.

He joined our audit committee as its chairman.

Finally, let me say that we have been overwhelmed by the level of interest in our company since our August IPO.

We have had the pleasure of speaking with many of you over the last three months and we hope to have the chance to meet many more of you in the future.

We thank you sincerely for your inquiries and we look forward to helping all of you better understand our business and the opportunities we see in the marketplace.

Our year-to-date 2004 results give us great confidence in the state of the market for geographic data and navigation related products and services and have reinforced our position as a leading provider of digital map data worldwide.

As we have discussed here, we are continuing to improve the detail, broaden the scope and enhance the value of our database to make it easier for our customers to expand their global reach and pioneer new applications.

We believe that our dedication to quality and consistency differentiates our product and helps create more satisfying navigation experiences for end users.

And we will continue to focus on providing value added distribution, technical and marketing services that help our customers make better use of our data, bring products to market more quickly and sell navigation products more effectively to consumers.

We believe that our commitment to customer-driven innovation and high-quality products will ensure that NAVTEQ maps power the next generation of in-vehicle navigation systems and location-based services.

This concludes our prepared remarks.

Thank you for your attention.

Now, I would like to ask the operator to open the line so that we might answer your questions.

Ladies and gentlemen, if you wish to ask a question, please press star, one on our touch-tone phone.

If your question has been answered or you wish to withdraw your question, please press star, two.

Again, to ask a question, the command is star, one.

And we ask that you limit to one question per turn.

We'll pause for a moment as questions queue up.

Your first question comes from Greg Cappelli of Credit Suisse First Boston.

Please proceed.

Hi, guys.

It's Greg and Brandon.

Congratulations on your first quarter out of the gate here.

Thank you.

Thank you.

Our first question is on the North American revenue growth that you talked about, being down kind of from the mid-40s last quarter.

I was wondering also, from some of the things you brought up, if you could just comment on, you know, with SUV sales a little bit softer in the U.S. over the past couple quarters, did that have an impact as well?

Greg, we haven't seen - there has been some softening in the SUV, but we haven't been able to specifically identify that as an issue.

What the migration seems to be is from large SUVs to smaller SUVs.

At least, that's what the market information is telling us.

But from our standpoint, that was not a big contributor in terms of our sales results.

The bigger issue, frankly, is that the domestic manufacturers haven't been as successful selling navigation as we thought they might be.

OK.

And then, yes.

Is that - is that a price point issue where you think they'll need to bring down the price a little bit more - or more quickly, I guess I should say.

We know it's coming down, but ...

I think our sales folks would tell you that they're not yet experienced at selling navigation.

This is a similar problem that we faced with virtually every car manufacturer when they first introduced navigation is their salespeople aren't used to selling it.

And once we work with them and we have a group of people that are - that are specifically assigned to this task, we find that the take rates and the acceptance of navigation works much better.

So, for many of the domestic manufacturers, this is an initial foray into navigation into navigation in 2004.

Got it.

OK.

And then, just on the - you mentioned competition.

I wondered if you could just comment on the GM deal - Tele Atlas.

Was that - I know they won some of the models there.

Is - was that deal actually done, you know, at about the same time the Toyota business was done as well with DENSO?

Actually, GM made its decision to go with GDT prior to Toyota's decision to come back to a stitch NAVTEQ GDT solution.

So, we do believe that they have a - several models.

We have many models as well with GM.

We expect to see a substantial increase in our GM business year over year.

But we actually are very quite proud and delighted with the Toyota decision because we think it speaks volumes about the importance of quality and, in fact, the quality and reputation of our database.

Excellent.

Thanks a lot.

And your next question comes from Jay Vleeschhouwer of Merrill Lynch.

Please proceed.

Thanks.

Good afternoon.

Judson, you mentioned your observation of penetration rates for this year in Europe and the U.S.

One of the other ways of looking at the market is, of course, the total number of vehicles or models with nav systems available.

How do you expect that number to grow this year and perhaps into next year and how concentrated is your business across those available vehicles?

Another thing about the market development I'd like to ask you about - and we saw some of this at the Paris Auto Show - is the segmentation of products that was pretty evident from the OEMs that they're offering a range of functionality.

How are you taking that into account in terms of any expectations about unit growth, take rates or, in fact, your pricing, based on that functionality segmentation?

Well, let me first of all say that each year we see more models offering navigation in both Europe and North America.

We see a substantial increase, actually, in U.S. because I think the adoption in Europe is in the 80% range.

I think, in the U.S., it's grown from about 20-30%.

This is a bumpy kind of curve, as you can imagine because, over time, we see more and more adoption.

Over time, we see new models introduced throughout the course of the year and with new model years.

But it's not a - it's not a straight line.

It just depends upon the players.

We do see and we saw at the Paris Auto Show that, you know, virtually every car on the floor now is featuring navigation as an option.

It has become a much more, I think important element of marketing by the automotive companies.

We've also - we also saw that there was a great diversity of models.

In fact, some representatives at the show said it was kind of the year of the small car.

And even the smaller cars were showing navigation.

So, we do see, over time, continued adoption, continued acceptance of this and continued efforts to use navigation as a point of selling and we think that will continue.

All right.

The other question, again, was about segmentation of products.

I'm sorry.

Repeat that question.

Sure.

What we saw, for instance, at the show from customers like Honda and Alpine and others were relatively simple systems all the way up to the full functional systems.

In other words, just different segments, different price points and capabilities.

Presumably (ph) you're designed into many or most of those, but - so the question is how are you thinking about that phenomenon in terms of unit growth and what it might mean to your average pricing?

Well, first of all, we like the idea that there are more and more solutions for nav systems and, as you say, different functionality and different price points.

We think that will, over time, help facilitate the growth of the whole business.

As you know, the turn-by-turn continues to be a benefit in Europe to a much greater degree than North America, but we are seeing less functionality models coming in, some built into the car, some more of a PND or PDA nature.

And, you know, we think - we encourage all of that.

It's hard for us to predict exactly how those market shares will work out in the future in terms of what will be the winning solutions.

But as we - Dave and I have said many times, we support the great majority of these and we encourage the adoption of different kinds of solutions by different car companies to get navigation more widespread in the industry.

For those of you who aren't as familiar with the European market as Jay is, there are several manifestations of an in-vehicle navigation system in Europe.

One is the full screen display with which most Americans are familiar.

And there is also a version called the turn-by-turn, which is, basically, has a display about the size of a radio control dial, which basically shows an arrow and some street names and the navigation is spoken.

But there's not a full map display.

That's called a turn-by-turn.

It typically has a lower selling price and is more popular in the lower-end market segments that Jay was alluding to.

That has not yet caught on in the U.S., although GM is introducing the first turn-by-turn version, I think, this year, of a navigation system.

But it will be an alternative for the lower-priced vehicles and we're happy, you know, our map functions in those systems as well.

And, excuse me, just one last question on the consumer side since you highlighted the growth there.

Are you already beginning to see upside to the run rate embodied in the terms of Garmin contract from earlier in the year?

Of the what contract?

The Garmin deal - or your - in terms of, you know, sales into the PND market are already beginning to see upsides to that - to that contract.

Well, I would say Garmin is our contract.

That contract is not a new contract.

It was a renewal of an existing relationship.

And as Garmin continues to experience success in the marketplace and they've had quite a bit of it, we enjoy that success along with them.

And just for future reference, just so everybody gets an opportunity, if you could limit it to one question.

Even if it's a very complex question, I think that would be fair to everybody involved.

And your next question comes from Brett Manderfeld of Piper Jaffray.

Please proceed.

Hi, guys, and my congratulations as well.

Of course, it's a two-part question.

Looking at the database cost, the sequential increase, is that fairly evenly split there between distribution and then just the overall database build?

And then, secondly, as a $48 million quarterly run rate, should we be looking for that kind of number as we look into the fourth quarter and beyond?

Thanks.

The $48 million run rate for ...

On the database costs.

Yes, I would think - I'm looking at my notes to find out what percentage of that was distribution cost.

But of our total operating expenses in the quarter, distribution costs were 25%.

And that's up from about 18% in Q3 of last year.

So, distribution is playing a bigger role from a cost standpoint.

The margins are, obviously, considerably smaller than they are when we just sell a database license.

So that is - that is a big factor and it counts for more than half of the increase in database costs.

And I'm looking here for my - for my notes on the portion that is 39 - OK.

Distribution costs were 39% of the database costs in the third quarter, compared to 30% in the third quarter of last year.

So, there - as I mentioned, there was two factors contributing to that.

One is an additional distribution cost and the second is increased database investment.

It's hard to predict, Brett, you know, how much additional distribution business we're going to have.

You know, our view, at least in the near-term is it should be fairly constant.

We don't see any big wins or losses on distribution ahead in the near-term.

And relative to the database investment, that should be relatively flat, but increasing slightly, quarter to quarter.

Flat, but increasing slightly.

Yes.

OK.

And it looked like, you know, obviously, you've added several new European countries.

Should we expect you to add more in Europe and/or what kind of timeline should we be looking for in terms of hitting India and Russia, among others?

Thanks.

Well, we are - we haven't finalized our exact plan for 2005, but I would say we will probably do several countries in 2005.

And I think we've already begun working in Russia.

Beyond that, I don't think we're prepared to be more specific.

But it will be a - it will be a similar number.

Perhaps a little bit less than '04 that will be what we do in '05.

Great.

Thank you.

Brett, I found my notes and there was a 16.9 million increase in database costs year to year.

Distribution was 9.3 million of that.

Actual increase in the database and the related technology was a little over six million.

And your next question comes from Jeetil Patel of Deutsche Bank Securities.

Please proceed.

Congratulations, guys. (inaudible) and I had a question with respect to the North American market.

Can you maybe give us a breakdown of maybe what the North America would look like if you excluded the tough compare with Toyota and Lexus in the year-ago period?

Second, just, if you look at the market, obviously, you talked about - seems like maybe the dealer - maybe the OEMs and the dealers are so ramping up in terms of how to sell the solution.

What do you think the training kind of timeline in terms of how long does it take the OEMs and dealers to finally get on board and kind of understand what the market dynamic looks like and how to best sell it into the consumer market?

Any sort of flavor there.

And, you know, on top of that, how much do you think price coming down, of the actual system, will play a role in actually helping to kind of drive penetration into the North American market?

Well, I - with respect to those questions, obviously, the big three and the middle market manufacturers absolutely believe price has a big impact on, you know, take rates.

And those prices will continue to decline.

The acceptance of nav can vary.

Our evidence is mostly anecdotal.

When Ford introduced the navigation on the Navigator two years ago, the first 90 days, the take rate was 5%, which was very disappointing.

We sent our take rate improvement program team into work with their marketing group and with the dealers and, in the next 90-day period, the take rate went to 30%.

And it's simply educating the people who sell the cars on how to sell navigation as an option.

So that, you know, in our experience, that has paid for itself.

Our efforts in that area has paid for itself with each manufacturer we've worked with.

But in many cases - you take the Chevrolet and the Ford brands and some of the Chrysler brands - this is the first time that navigation is offered.

And as you might imagine, the salespeople aren't quite as up to speed as they will be a year from now.

I think I'd add that, with respect to GM, Chrysler and Ford, it's not just training the dealers, but I think, clearly, these car companies weren't as aggressive in this area as the European and Japanese companies.

And I think you're going to see a lot more activity in the next three to four years.

They're still learning what this does in terms of their sales.

They're still, you know, learning what this does in terms of overall consumer satisfaction and loyalty.

And I think we see a lot of activity now bubbling up that will come to fruition over the next three or four years as they now push this out to more and more models.

I think that's just a, kind of a natural evolution of the business.

You know, more and more, dealer education is a part of it, but I think it's just kind of the natural growth of this and they were behind the other car companies in this regard.

The other thing that should contribute to an increase in nav penetration in the U.S. is the fact that the 2004 model years, the - excuse me - the adoption rate was about 20%.

In the 2005 model year, which is just now coming out, it's almost 35% in terms of adoption rate.

And based on what we know about the 2006 model year, it will jump to about 46 or 47%.

Now, that's preliminary because these care companies often change their mind in one direction or the other by the time the models are actually released.

But based on what we understand now, that's what's likely to happen to adoption in the U.S. market.

Just as a follow-up, you know, you - on the - are you, at this time, sending in your take rate teams to kind of work with some of the OEMs and dealers bases to help, kind of help the education process along and do you think that has a meaningful impact as you get into '05?

And secondly, do you think that the foreign automakers, obviously, incorporating a nav system and maybe being a little more aggressive, as you pointed out in Japan and Europe, do you think that helps to drive the market from the domestic OEM side of the business.

Well, the second question, that clearly is the case because, I think, as this has become more of a successful and expected feature on the European and Japanese models, yes, there is a - there is a follow on kind of effect.

And so, that is what we're seeing.

With respect to take rates, where a OEM allows us to come in and, in some cases they do and in some cases they're not interested in this, but as Dave pointed out earlier, when we can go in and influence this, it makes a difference.

So, it really depends upon the car company, whether we're involved in this kind of thing or not.

And your next question comes from Maynard Um of UBS.

Please proceed.

Can you talk a little more about the DENSO deal and kind of the decision process that they went through?

Was that primarily a function of pricing quality, that sort of thing?

And then also the opportunity there?

Well, I don't know that I can give you the insides of how Toyota and DENSO made their decisions.

I can tell you what the - what the result was.

My understanding is that they had an inordinate number, an unacceptable number of customer concerns regarding the quality of the database without NAVTEQ data.

And they - so, we entered into a dialogue.

As I said earlier, we thought this transition might take two or three years.

In fact, we were pleased that they moved very quickly and we think it's because of the better build on our database with respect to quality and maintenance and content and coverage.

So, I think now, we would expect to be their supplier from some time to come and we're very pleased to be back in the fold.

Is it fair to assume, then, that the auto market is then less price sensitive and more sensitive, I guess, to quality?

I'm sorry.

Repeat the question, please.

The auto market is less sensitive to pricing in terms of, you know, their desire to have quality over the pricing.

Well, I think, I think, clearly, there will always be some sensitivity to price.

But to your question and to your point, I do think quality has a lot to do with it.

I think, more and more, the car companies are realizing that a big driver of overall car satisfaction and consumer loyalty is the experience with the nav system.

And they're learning that from their own dealers and from their own call centers, et cetera.

And this is a good example of that.

They moved very quickly and worked very hard to make this change much quicker than we thought.

And we think it is because of what they were hearing from their consumers.

If I'm not mistaken, in terms of some of their ratings on J. D. Power, they slipped in their ratings and that got their attention big time because, particularly, Toyota Lexus is very oriented toward quality and very oriented toward their reputation and they were very concerned about the impact of flipping in the ratings.

So, I think, to your question, yes.

Quality has a lot to do with who will be successful in this area.

And can you just give us a sense of the opportunity in terms of the number of car models that you'll be taking back?

It's three models.

We had lost three models and we've, based on the October business, we've gotten those back.

We're already seeing volume from DENSO as a result of that.

Great.

Thanks, guys.

And your next question comes from Peter Friedland of Fulcrum.

Please proceed.

Hey, guys.

I'm going to ask two questions, since everyone else is.

The first one just on guidance.

Can you give - any kind of guidance for Q4 or color for Q4 would be helpful.

And then, secondly, when you're offering a merged database solution, do you get - is your ASP lower or is the automaker paying, basically, two database suppliers, so it's costing the automaker more?

Well, with respect to Q4 guidance, as you know, Peter, we don't have a plan to offer quarterly guidance and we concluded that, if we talked about our annual 2004 guidance at this time, we'd be setting a precedent and would be setting expectations that we'd be doing quarterly guidance.

So, we're not doing that at this time.

With respect to the merging of data, that is a unique and, we hope, temporary situation with DENSO in transition.

Nobody else does merge data and, as a result of that, I don't think it's appropriate and we wouldn't do this with respect to any customer to talk about what prices are for individual customers.

OK.

Well, then just respect to Q4, broadly speaking, is - should - is it a - I mean, it's our view that it's a seasonally strong quarter because you've got strong sales of mobile devices, navigation-related mobile devices.

And you've got the next - the new model year vehicles ramping.

So, it should be a seasonably strong quarter.

I mean, can you just - can you comment on that?

I think that we would agree with your seasonality comment that, historically, the fourth quarter has been the robust quarter of our year in terms of revenue.

I think the other thing that Judson commented on in his comments was the fact that we would expect our operating margin from the year, on a percentage basis, to be reasonably close to what it was in 2003, despite the fact that we have substantially more distribution business and distribution expenses, despite the fact that we will have about $6 million in non-cash stock-based compensation that we didn't have last year and despite the fact that we have about $2 million worth of IPO expenses that we didn't have last year.

We do think, you know, and increased database investments, we do think that our margins will end up relatively close to where they were last year.

And you could infer from that that our fourth quarter might be better than our third quarter.

OK.

But we have to do that to get there.

Very good.

Thank you.

And as a reminder, ladies and gentlemen, if you wish to ask a question, please press star, one on your touch-tone phone.

Your next question comes from Bill Benton of William Blair.

Please proceed.

Good morning, guys - or afternoon, I should say.

First question is are you able to offer, I guess, any sort of early insights on how the real time traffic application is expected, I guess, to impact the take rates?

Well, it's a fair question, but unfortunately, we can't give you any early insights.

This is just now getting launched and we obviously are beginning with one car model.

So, I think we're going to need several months of experience before we'd have some idea about this.

We can only talk to you anecdotally about what we hear from Honda and Alpine.

I think there is a few hundred cars that are now on the road, but it's going to take time to build up some reaction and this will - we've said all along that this whole real time traffic product and - will increase the value and the utility of the nav system, but it will be felt over the next three to five years.

It's going to take time for it to really impact the market.

OK.

And just one quick other one.

Garvin, obviously, indicated this morning that it had at least a very strong backlog, I guess, going into the fourth quarter.

And their indicating lots of strength in the automotive navigation space.

As you think - obviously, they're portable - as you think about it kind of from your own economics and just the market in general, where do you see kind of the portable versus in-vehicle situation shaking out, both in North America and Europe and how you see the economics from your point of view.

Well, there are different, there are different products for different car segments and there are different price points that would accrue to us, based on the solution that's involved.

And we've said before, it really is a function of what functionality the system has, what coverage they use, what content they include.

We're actually excited to see more solutions - more diverse solutions come into the marketplace because, again, we deal with a great majority of the players and regardless of which price segmented product turns out to be a winner, we expect to be involved.

And so, it's hard for us to predict.

I think there is a, clearly, a different experience from an in-vehicle built-in system from the Garmin system.

The Garmin system is absolutely excellent.

But the built-in systems that can take advantage of all the sensors in the car are excellent as well and provide probably a better solution - or a better experience, I should say, than other portable devices.

Our price point doesn't materially change if there are PNDs in the car versus an in-built solution.

And again, what we're trying to do is encourage all of the players in as many different solutions as possible because ultimately, we'd like to see that navigation systems become standard in all cars.

That will take many years, but we think this technology has the potential to go that far someday.

OK.

Understood.

Thanks, guys.

And your next question comes from Roman Argenikoff (ph) of Massachusetts Financial Services.

Please proceed.

Hi.

I have a question about increase in database and licensing expenses quarter over quarter.

So I see 3.7 million increase from the previous quarter.

Could you please tell me what it consists of?

From the previous quarter?

I'm not sure I can - I'm not sure what I can - I can have those numbers at my fingertips.

I'd be happy to follow up with you separately to give you more color on that, but distribution cost is one contributor.

I'd like to look and see at the detail what the additional is.

We did not do a comparison of Q2 to Q3.

OK.

Maybe you could tell me what was the sequential revenue growth in your distribution business.

Sequential growth.

OK.

Have it.

Wait, one second.

We'll dig it out.

Let's see.

Distribution revenue was the question, right?

Yes.

OK.

All right.

Let's see.

It was down just slightly.

Down slightly.

Yes.

Maybe half a million dollars or something like that.

OK.

Thank you very much.

OK.

And you have no further questions at this time.

OK.

Thank you, everyone, for your participation.

Thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect and have a great day.