諾基亞 (NOK) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2004 Navteq Corporation earnings conference call.

[Operator Instructions.]

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, sir.

Thank you.

Good afternoon, everyone.

This is Tom Fox, director of investor relations at Navteq and welcome to our conference call to discuss financial results for the fourth quarter and fiscal year ended December 31st, 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 on our web site.

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

Following the call, replays will be available.

Information on the replay and the web cast is available in the release and on the investor relations section of our web site at www.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 report filed by Navteq with the SEC, in particular the risk factors identified in our quarterly report on Form 10-Q for the second quarter ended June 27th, 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 quarterly and full year financial results.

Judson will then offer a few closing remarks and finally we will take your questions.

We will wrap up the call at 6 p.m.

Eastern Time.

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

Thanks, Tom, and good afternoon, everybody.

Our fourth quarter financial results bring to an end a very exciting and productive year for our company.

We posted record performance in terms of both revenue and operating income.

As you can see from our earnings release, we achieved revenue of $119 million in the fourth quarter, which exceeded our third quarter performance by 22% and represented growth of 46% over the fourth quarter of 2003.

For the fiscal year, revenue grew 44% to $391.9 million.

Operating income in the fourth quarter rose 44% when compared with the third quarter of 2004 and grew 166% over the year ago period.

Operating income for the fiscal year increased 48% to $94.6 million.

Net income and earnings per share were lower than 2003 for both the quarter and the fiscal year, principally due to 3 factors.

First, the effect of the $168.8 million reversal in 2003 of the valuation allowance on our deferred tax assets related to net operating loss carry-forwards.

Second, the recording of a full tax provision throughout 2004 and third, tax adjustments that resulted in additional income tax expense in the fourth quarter of 2004.

These tax adjustments resulted in additional expense of $3.8 million, or 4 cents per diluted share, related primarily to a change in Dutch tax law.

The new law, which was enacted on December 14, 2004, will reduce the statutory corporate tax rate in the Netherlands to 30% from 34.5% over the next 3 years, which is a positive development for Navteq.

The immediate impact, however, of the new law was a revaluation of the deferred income tax asset on our balance sheet, resulting in a decrease in the asset and a non-cash charge to income tax expense.

While the Dutch tax law change increased the company's effective tax rate in the fourth quarter, it is important to note that the new law will have the benefit of reducing the company's effective tax rate in future years.

Note also that the new law should have no impact on the company's cash position until such time as our net operating loss carry-forwards in Europe are fully utilized.

Cash flow from operations was $106.4 million for the full year compared to $65.9 million in 2003.

We ended the quarter with $103 million in cash and marketable securities, including $27.3 million that is classified as long term.

We continue to have no debt on the balance sheet.

2004 was an exciting year in which we saw the demand for navigation and location-based solutions grow robustly, which translated into significant revenue increases for Navteq.

Our strong results confirm that we are executing on the financial and strategic plans we have set for the company and provide great momentum as we enter 2005.

Several new or redesigned model year 2005 vehicles were launched with navigation in the last 4 months of 2004, including the Audi A6, Mercedes CLS, Citroen C4 and Jeep Grand Cherokee, and initial results indicate a positive reception from consumers.

As in previous years, we continue to observe increased OEM emphasis on navigation as a means to differentiate and promote new vehicles.

Moreover, it has been our experience that all new or redesigned vehicle models typically enjoy higher than average consumer take rates in their first few months of introduction and 2004 was no exception.

Dave will share some details on this in a few minutes.

Some of you may have seen that CNN recently ranked commercialized GPS technology as the 6th most influential innovation of the past quarter century, ahead of portable computers, airbags and ATMs.

Based on my experience at the recent International Consumer Electronics show in Las Vegas, it is easy to understand why this is the case.

New portable navigation and mobile phone applications using Navteq maps were among the most talked about products at the show.

Virtually all of the major mobile device makers and system vendors showcased their newest GPS-enabled products.

In fact, we demonstrated several of these devices and applications in our booth and were very pleased with the level of interest generated.

We appreciate the visits many of you paid to us during the 4-day event and we look forward to what is sure to be an exciting year for the consumer GPS industry.

As many of you know, our traffic service was launched in the third quarter and was offered first through XM satellite radio on the 2005 Acura RL Sedan.

While we have no definitive read on customer satisfaction with the service to share with you, we are happy to report that several thousand Acura RLs have been sold with XM NavTraffic.

We are also proud to have added Sirius Satellite radio to our list of traffic distribution partners.

We are confident that this new relationship will help to further extend the reach of Navteq Traffic with a number of customer launches in the next few years.

While it may take several years to generate significant Traffic related revenue, we expect that the proliferation of the service will help develop the market for in-vehicle navigation in the U.S.

With the 2 premier satellite radio providers now having selected our service, we have begun to build real momentum behind Navteq Traffic.

Aftermarket device manufacturers that have or soon will deploy Navteq Traffic in their products using satellite radio include Alpine and Pioneer.

But by no means is satellite radio the only way to integrate real-time traffic information into the navigation experience.

We are actively exploring other means of transmitting traffic and other dynamic content to vehicles and location-aware devices.

The Navteq Global LBS Challenge kicked off in October 2004 at the CTIA show in San Francisco.

In this contest, Navteq and its co-sponsors offer cash and prizes to the developers of the best location-based services applications in 6 different categories as selected by a group of industry experts.

We developed this contest to drive the development of these applications and ensure that Navteq maps are well positioned to enable them.

The contest is in its second year and is co-sponsored this year by Microsoft, SiRF Technology, Telcontar, and ESRI.

Last year's grand prize winner and runner up successfully marketed their applications to wireless service providers in the U.S.

We received over 180 entry applications for this year's contest compared with just over 40 in the previous year.

The tremendous growth that we are seeing is very encouraging and a testament to the surging interest in mobile device navigation and location-based services.

We grew our database coverage and content investment by more than 20% in 2004 in support of our global customers.

In addition to the 7 Eastern European nations we announced in the third quarter, we released our first Hong Kong map and began investing in Russia and Brazil.

We completed critical large scale coverage enhancement projects in France and Italy that have greatly increased the level of map detail in these 2 countries.

These improvements will put Navteq in an even better position to compete effectively for map data business throughout continental Europe.

Our China joint venture, NAV2, sprang to life in the third quarter and its management team has been working diligently to support Navteq global customer efforts in China.

A China map product is available from NAV2 today, and we are working on a Navteq formatted version for release later in the year or early in 2006.

We completed a number of special content projects in 2004 that are driven in large part by our customers' insatiable appetite for ways to enhance the overall safety, convenience and enjoyment of the navigation experience.

We released richer lane information on selected German highways that will enable visual representations of certain complex intersections, including the number of lanes and associated turn restrictions.

We plan to release extended lane information on additional European and North American roadways in 2005.

We also released data on speed limits and special and variable speed situations on motorways throughout Europe and North America.

We now offer elevation contour data, which allows our customers to display the topography of a given area on the navigation system, and a world map layer that contains representations of bodies of water and national boundaries.

These are just a few examples of many new content initiatives that were rolled out in 2004.

As these examples demonstrate, we continue to focus 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.

And we are reinvesting in our business in order to enhance our competitive positioning and take advantage of opportunities we see in the marketplace.

I would now like to turn it over to Dave, who will review some of the 2004 numbers in more detail.

Thank you, Judson.

I will try to provide some additional color on our quarterly and full year results and offer some guidance on 2005 financial performance.

As Judson mentioned, fourth quarter revenue was 119 million, representing a 46% increase over revenue in 2003's fourth quarter.

Fiscal 2004 revenue was 392.9 million, an increase of 44% over 2003.

The growth was driven by broad base increases in unit sales of our database 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 66% of total revenue in the quarter and grew 50% over the same quarter in the prior year.

For the full year, European sales increased by 48%.

The quarterly and annual increases were driven by new business with Audi and DaimlerChrysler that Harmon/Becker won in late 2003, new distribution business with Audi and, to a lesser extent, the favorable impact of the strong euro, which provided a 4 point million dollar benefit in the quarter and a $17.6 million benefit for the full year when compared to the prior year.

In North America, revenue grew 38% in the fourth quarter over the year ago period and was up 37% for the full year, driven by sales to our vehicle OEM and mobile device customers.

The fourth quarter benefited from the recovery of the lost Toyota Lexus business which began in October.

On the mobile device side, we saw significant growth in unit sales to PDA and personal navigation device, or PND, manufacturers, which included new products from Garmin, Cobra, Lowrance and others.

Media units represent copies of the Navteq database that are delivered to the end user on physical storage media such as a CD, DVD or hard disc drive.

Media revenue represented approximately 88% of our revenue in the fourth quarter and 90% for the full year.

Media units sold in the quarter increased 38% over the fourth quarter of the prior year and for the fiscal year media units climbed 47% to approximately 4.2 million.

This growth is driven by automotive OEM adoption of navigation systems in their vehicle models, especially in North America, as well as consumer uptake of navigation on mobile devices.

Media units for use in mobile devices grew 115% in 2004 over the prior year.

Based on available data, we estimate in-vehicle navigation market penetration for 2004 at approximately 12% 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 new cars sold in a given period equipped with OEM factory-installed or embedded aftermarket 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 in the fourth quarter compared to the year ago period was up slightly in Europe, but down modestly in North America.

Overall, we performed distribution services on approximately 47% of our vehicle OEM related media volume in the quarter and roughly 51% of that volume for the full year.

As a result, distribution business made up approximately 21% of our revenue in the fourth quarter and 20% of our revenue for the full year.

Ignoring the effects of currency rate changes, the average selling price for media units of the Navteq database did not change significantly in the fourth quarter when compared to the year ago period and was down around 6% for the full year.

As anticipated, license fee reductions were partially offset by the increase in European distribution business.

As we've shared with you previously, we continue to experience pricing pressure from both our competitors and our customers.

This pressure is being felt in both vehicle and consumer applications.

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

On the vehicle side, system vendors are increasingly focused on the design of lower priced middle market navigation systems for mainstream vehicle classes.

While our product generally represents a relatively small portion of the overall system price, we have agreed to participate in this effort with modest price reductions.

These reductions are designed to accelerate market growth by encouraging the further adoption of navigation across all vehicle platforms.

Turning to costs, database creation and distribution costs were up 26% in the fourth quarter over the year ago period.

For the fiscal year, database creation and distribution costs grew 48%.

These increases were driven primarily by 3 factors.

First, growth in distribution unit volumes.

Second, increases in per unit distribution cost related to conversion fees charged by navigation system vendors.

And third, the investment in database coverage and content that Judson alluded to earlier.

Distribution related costs represented approximately 23% of total costs in the quarter and 24% for the full year.

Selling general and administrative expenses grew 24% in the quarter compared with the fourth quarter a year ago.

For fiscal 2004, SG&A expenses rose 35% over the prior year.

The increase was driven in part by additional sales and marketing expenses related to the support of new product initiatives, new customers, and other business development activities.

Our operating income margin rose to 27% in the fourth quarter compared to 23% in the third quarter and 15% in the year ago period.

Operating margin for the full year was up modestly to 24%.

Recall that 2004 results included a number of cost items that hindered further margin expansion.

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

Second, the conscious acceleration of database investment related to specific coverage and content projects, including those Judson mentioned earlier.

Third, expenses related to the IPO.

And finally, non-cash stock-based compensation expense related to grants made under the company's stock incentive plan.

Stock-based compensation related costs totaled $2.5 million in the fourth quarter and $7 million for the full year compared with $800,000 in the prior year's fourth quarter and full year results.

Our effective tax rate was 51% in the fourth quarter and 42.4% for the full year.

These rates are higher than normally would be expected due to tax adjustments in the fourth quarter that relate primarily to the legislation in the Netherlands that Judson described.

Finally, I would like to share with you our expectations for 2005 full year financial results for the company.

We expect revenue in the range of 475 to $500 million.

Strong volume growth driven by increased navigation penetration in the automotive market as well as in mobile devices is expected to be partially offset by pricing declines, which are an ongoing part of our business.

In the vehicle sector, we anticipate that the market penetration of navigation will increase by 1 to 2 percentage points in both Western Europe and North America.

We anticipate continued growth in navigation and mobile devices, led by significant PND growth in both major regions and increases in smart phone penetration, particularly in Europe.

We expect to continue to drive significant growth in profitability while investing in the competitiveness of our product.

We expect to drop roughly 35 to 40% of our incremental revenue to the operating income line and, as a result, we anticipate operating income margin expansion of around 200 basis points.

I should mention that these expectations assume mid year adoption of stock option expensing and related adjustments, which should increase our stock-based compensation expense by approximately $3.8 million over 2004 levels.

Our effective tax rate should be between 34 and 36% and we expect diluted earnings per share in the range of 90 to 95 cents.

In arriving at this guidance we assumed average diluted shares outstanding of 94.1 million and average U.S. dollar euro exchange rate of $1.30.

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

Thanks, Dave.

I would like to say that the results we have just shared with you 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.

In 2005 and the years that follow, we will continue to reinforce that leadership position by improving the detail, broadening the scope and enhancing the value of our database to make it easier for our customers to expand their global reach and pioneer new location-based solutions.

In doing so, we will continue to focus on providing value added technical, marketing and distribution services that help our customers make better use of our data, bring their 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, personal navigation devices 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 lines so that we might answer your questions.

Thank you, sir.

[Operator Instructions.]

Sir, our first question is form the line of Mr. Greg Cappelli.

Hi, Judson and Dave.

It's Greg and (indiscernible).

Just wondered if we could get you to comment a little bit more.

You mentioned the lower end auto model that some of the manufacturers want to concentrate on in terms of moving down price a little bit on those.

Can you just talk about are we looking at -- do they want to go from $1,500 perhaps on the higher end stuff to 5, 6, $700?

And if that is the case, can you give us some idea of what you have to do on your end?

You mentioned that there would be a price decrease in this area, but would you be talking significantly lower?

I think a couple of things.

You are right that -- and we see it as an encouraging development in the marketplace that more OEMs are seeking to move navigation systems into the mass market and that does require the price of the systems to come down.

And we still expect ultimately over the next 3 or 4 years those prices to be probably less than $1,000 at various price points, depending upon the system and depending upon the functionality.

As you know, we represent a relatively small percentage of that total system cost, but we are encouraging the movement toward this mass market.

And will be, as well as did in 2004, targeting price reductions up to 10% in our maps as we think about 2005 so that we can help stimulate this directional move.

Okay, understand.

Judson, you also talked last quarter about some success you had with training in certain areas with the dealerships and how much that could help going forward.

I wondered if you could comment if you're doing more of that, if it is helping right now.

I know that the U.S. adoption rate is something that is closely watched, but maybe if you could update us on those efforts.

Yes, what you're referring to is the fact that we do have, and we have had, success in educating the dealer network on take rate improvement programs.

And when these occur, we see, without being specific about a particular customer, our evidence tells us that we see improvements in take rates up to 40% as a result of doing this.

So directionally I would tell you that we are going to be applying some additional marketing resources in 2005 because we've determined that his is a good expenditure of funds and it obviously is appreciated by our customers when we can help them achieve the greater distribution that they seek to achieve.

Yes, I think, Greg, we've seen more of that in North America right now because of the jump in adoption that's going on in North America.

The adoption of navigation increased in 2004 from about 21% of car models offering navigation to 37% at the end of the year.

So a whole new group of dealers who hadn't previously sold navigation is now -- has the option available to them and has to learn how to sell it.

That adoption rate is expected to continue to move forward aggressively in 2005 to something in the high 40%.

So we think there'll be a strong appetite for it in the coming year.

Your next question is from the line of Jay Vleeschhouwer with Merrill Lynch.

Good afternoon.

Judson, you mentioned the CES show and perhaps you could elaborate on some of the observations of what you saw there.

Clearly, the proliferation of portable devices and other mobile devices was very much in evidence.

What's your thinking about the relative weighting or importance of portable devices and mobile devices over the next number of years?

Could there be a materially larger proportion of revenues coming from those devices than perhaps you might have counted on even just half a year ago?

Well, this is a very dynamic market, as you know.

I mean it is actually very exciting because things are evolving so very quickly.

As Dave mentioned in his scripted comments, we witnessed over 100% growth in the sale of licenses for mobile devices so by any measure, that's robust growth and we don't see it slowing down.

What we do see is perhaps faster growth in Europe and North America with respect to PDAs and PNDs.

We still think that there has been growth in the phone and smart phone areas.

There will continue to be growth there, but it's just coming a bit after the PDA and PND growth.

So I think we see this as a very bright area.

It's hard -- I don't think we can today give you any new predictions of how big the market will be, but the signs are that it's going very well.

It was one of the many things that was the buzz of the show.

There were many examples of new devices.

We're aware of many other players that are in the process of developing solutions and devices and will be launching over the months and quarters to come.

So we continue to see -- I think in summary.

I would say we continue to see this as a major growth area and someday will be a significant part of our business.

But I'll stop at predicting exactly how big or try to compare it to the size of the vehicle business.

Dave, you mentioned that approximately half of the media units are being done with distribution services, particularly in Europe.

How high can that proportion go?

Do you see continuing proportionate increases underway in Europe?

Is that part of your assumption for 2005 and as well, perhaps, for the U.S.?

Actually, no.

We do not see a significant increase in the percentage of our business for which we do distribution.

When we look at 2005, we think it's going to stay right about where it is today.

Longer term, Jay, when systems move from optical media to hard disc, the need for distribution will, over time, diminish.

So we're not counting on it as a big source of growth in either 2005 or in the years ahead.

So that in part will limit some of the ASP increase that you've otherwise been getting from that distribution mix?

Yes.

Okay.

Judson, you talked about the growth of low-end systems, which is ultimately a good thing for the market, of course, because that expands you beyond the premium class of car.

The question I have is with respect to intrinsic systems costs, in other words, what are your customers at the systems level doing or assuming for any given system to do redesign and take cost out, besides just mix, such that that cost reduction can further bring down systems costs?

And to the extent that systems have been substantially greater of a price at the dealer level than perhaps the new portable devices has been, who ultimately absorbs what will presumably be a much lower markup in margin at the dealer level for Nav systems?

Well, that's a complicated question.

I'll make several comments and Dave can jump in if he'd like.

First of all, there are ongoing efforts, I think, across the board to try to take system costs out and to reduce the amount of hardware to the bare minimum in some of the embedded in-vehicle navigation systems.

And, as we've commented before, that's the natural evolution of new technologies in a car and that's continuing.

But I would say a couple of other dynamics are happening.

One is there are plans underway in a variety of corners of the world for perhaps different kinds of solutions, perhaps not just trying to incrementally take costs out of an existing system, but to engineer and develop and create new systems that have a lower price point to begin with.

And then, as you commented, another factor, if you will, is the influx of portable navigation devices.

And, as we've said before, these trends are overall positive for the development because it will encourage the continued, if you will, decreasing of overall system prices, it's creating a variety of different solutions using different amounts of content, different amounts of functionality.

Some of the portable navigation device solutions are not as sophisticated as the in-vehicle system, but again, as we're looking to the mass market and to open this up to a much greater degree in the vehicle industry, these are positive developments.

We also see that at the end of the day, we're not sure that one cannibalizes the other.

That, in fact, there will be a variety of solutions in the vehicle and it's not out of the realm of possibility that individuals will wind up having more than one navigation type solution from their cars and devices which they own.

So all of this, we think, is good.

How exactly it shakes out in 5 years is anybody's guess, but the fundamental pressures on reducing cost are there and are continuing and that's good for opening up this market and growing it to be much bigger.

Sir, your next question is from the line of Bill Benton with William Blair.

Good afternoon, guys.

If you could just touch upon -- just same question, I guess, on the maybe reduction in cost of the units or the pricing of the units.

Would you expect in the end to be a bigger percentage of the overall cost than you are today?

Is that a fair statement?

Yes.

Okay.

Penetration rate, I think you said, Dave, up 1 to 2% in both North America and Europe.

Is that basically where you ended the year in terms of penetration?

Yes.

Okay.

One to 2 percentage points, to be clear.

Europe went from about 10 to 12 and U.S. went from 3 to 5.

Okay.

So at the end of the year you ended at that kind of level.

Right.

Or is it an average during the year?

I guess that's an average during the year, but that's, in essence, what we're saying for 2005.

Okay, so you probably ended the year with a level that you're -- you don't need a significant improvement in take rates from current levels to get to those kind of assumptions.

Fair statement?

Take rates?

That's probably true.

Okay.

And then in terms of seasonality of the business, appreciate the full year guidance.

Actually didn't expect it.

As I think about kind of laying out the year, January auto sales in U.S. obviously are a bit soft.

Any thoughts on how that kind of impacts the near term and kind of general seasonality?

I think that if you look at our historical quarterly results, you will see fluctuations from quarter to quarter.

We have analyzed those fluctuations statistically, and no statistically significant pattern of seasonality emerges.

And we think that is because the growth in the business has been so dramatic that it masks whatever seasonality there may be.

But historically, our first quarter has been the lightest quarter of the year in terms of revenue and you could speculate as to the reasons and we could speculate, but it is what it is in terms of the historical percentage of the total year's revenue.

Okay.

And just a final question, I guess your only competitor, primary competitor, announced that they had captured some business on Mercedes AMC class.

Is there anything that you can -- through Harmon.

Is there anything you can offer on that?

Sure.

Basically, DaimlerChrysler, as well as many other car companies, has always expressed a strong desire to implement a dual supplier strategy, which you can understand.

Up until 2 years ago, our competitor was the only supplier at DC in Europe because Bosch was the only system vendor and Navteq had 100% of the DaimlerChrysler business in North America.

In 2004, Navteq enjoyed virtually 100% of the business in both Europe and North America as Becker, Harmon/Becker replaced Bosch as the primary system vendor.

We never expected to receive 100% of the Europe business as Becker was required by DaimlerChrysler to compile TA and use the TA database for the introduction of the C Class in April of 2004.

Due to technical issues, Harmon/Becker was not able to release a product using the TA data during 2004.

However, those issues have been resolved and Becker is able to use the TA database for their product in the C Class for 2005.

So in summary, I would tell you that we anticipate that we will retain a majority of the business, a substantial majority of the business in Europe and virtually all of the business in North America.

And, of course, we currently have 100% of the after market business through Harmon/Becker.

So I would say in summary we still are the primary global map data supplier to DaimlerChrysler and Harmon/Becker and we enjoy very positive relationships with both companies.

Sir, your next question is from the line of Peter Friedland with Fulcrum Equity.

Hi, guys.

A few questions.

First, just can you comment on Philips and anything about what their plans are to do with your -- their equity stake?

Well, I understand the question.

We do not have any new information at this time.

And, as you can imagine, this decision rests solely with Philips and its affiliates.

So you're going to need to get that kind of information from Philips.

Okay.

Could you talk about pricing in the auto market versus the mobile device market on just a base license, where that's currently running?

And within mobile devices, my guess is that there's a big -- it's very variable depending on the product, like it it's a (break in audio) or a very low-end Bluetooth attachment or something like that.

So if you could talk about pricing?

I think, Peter, you understand that our pricing structure, we try to price the product on a uniform pricing scheme across all markets and it varies depending on functionality, geography and content.

We believe that our pricing is internally consistent across those markets, so a customer who wants to service the automotive market regardless of where they grew up is going to pay basically the same price for the same product.

If they want to reduce the scope of what they're using to put it on a mobile device, they would pay a different price.

And there's nothing that's changed about that particular scheme recently.

With respect to pricing pressure, I think we feel pricing pressure across the whole spectrum.

I don't think it's particularly different in mobile devices versus in vehicle.

All of our customers would like to have a lower price and it's a constant challenge for us to demonstrate the value of our products.

And I think over time those prices will converge because I think the devices themselves will converge.

Okay.

And then just lastly, you talked about distribution cost as a percent of -- I wasn't sure if that was a percent of total cost.

Is that how you're guiding?

That was a percentage of total cost.

Total operating expenses.

Okay, so your database licensing line as well as SG&A?

Yes.

Sir, your next question is from the line of Maynard Um with UBS.

Hey, guys.

Nice quarter.

Most of my questions have already been answered.

But in terms of internet revenue, it appears that you've signed Google -- Google apparently signed both yourselves and Tele Atlas.

Can you talk about the internet revenue, your expectations there should that ever become a meaningful part of your revenue?

I think that's transaction-based.

And just for clarification, what was the change rate that was used in the fourth quarter?

The average rate for the quarter or the quarter end rate?

The average rate for the quarter.

The average rate for the quarter was 129.

The average rate for the year I think was 124.

The 129 for the year compares to 113 for 2003.

With respect to the internet, the revenues from our internet customers represent, I think, for the year something like 3 to 4% of total revenues.

So it's not a significant component of our total.

We believe that that has a distinct possibility of increasing as the internet portals start to look at providing their data to mobile consumers.

And our pricing model is set up for us to participate in that, hopefully enhance revenue.

But that is not expected to be significant in the near term.

By the way, Maynard, with respect to exchange rates, I mentioned earlier that the strong euro provided a benefit -- a revenue benefit in the quarter of 4 million.

I meant to say 4.9 million, so I misspoke.

Sir, we have another question from the line of Jay Vleeschhouwer with Merrill Lynch.

Thanks.

Dave, a balance sheet question for you.

Your accounts receivable and deferred revenue appear to have both been down sequentially.

Can you comment on that?

Our accounts receivables are in frankly great shape.

Our DSOs are down an average of 6 days from year-end 2003 and 6 days from end of the third quarter.

So they're in great shape.

Deferred revenue, I don't know what the change in that was particularly, but it's not a necessarily a predictor of what's going on in our business.

Most of that was from advance payments from our customers that are basically earned and my guess is that's what caused the reduction.

Okay, so there was no customer in the quarter that contributed any kind of a large upfront payment, any sort of transaction of that kind?

This was all organic or real runtime business.

Right.

If you look back earlier in the year in one of our MD&As, we describe an advance payment, a substantial advance payment from a customer and that customer has been working off the advance.

Did that customer consume that advance at a faster rate in the fourth quarter than in the preceding quarters?

Not particularly, no.

Sir, your next question is from the line of Godfrey Gill (ph) with QO Capital (ph).

Very, very quick question, just a point of clarification.

Did you say that the adoption rate in North America on the automobile side went from 21 to 37%?

Right.

Okay.

And then you said 1 or 2 points on top of that, percentage points on top of that?

No.

Adoption -- just to clarify our terminology, adoption is the percentage of cars sold that offered navigation as an option.

That doesn't mean people took it, that means that it was offered.

So when you take it, then that becomes penetration rate because penetration is the number of cars that actually had it on there.

Got it.

So what's happened is in Europe, the adoption rate is well north of 80%, so well north of 80% of all the cars that are sold offer navigation as an option.

So it's a mass market option now in Europe, albeit an expensive one.

In North America it is only now starting to be introduced to the mass market cars and 2004 was the first significant step towards that.

The model year introductions -- 2005 model year introductions in September and October, a substantial number of new vehicles offered navigation as an option, which is, to us, an exciting trend.

Is there a way to quantify kind of the rollout of this dealer education program and kind of how broad and sweeping it is through your dealer base?

How do we think about that because you've thrown out some pretty impressive take rate numbers on that.

It is hard to predict.

We certainly offer it to all of our OEM customers and some of them are more enthusiastic about it than others.

Why wouldn't somebody be enthusiastic about that?

Too many other things on their plate.

Sir, we have a question from the line of Adam Wright with Kynikos Associates.

My question, I know you mentioned pricing earlier, I think you actually it seemed like, just in terms of you alls body language or tone it seemed pricing pressure competition from competitors not from the -- I'm sorry pricing pressure from competitors as opposed from OEMs seemed to be worse last quarter than in this quarter.

Was there any change or just par for the course fourth quarter?

Pretty much par for the course.

No change there.

Okay, thanks.

Sir, we have a question from the line of Greg Cappelli.

Hi, guys, just a quick follow-up.

Implied in the guidance for this year, are we looking at -- excuse me, on the pricing front again, around down mid single-digits.

Is that your expectation?

Yes.

I don't know that we've specifically quantified it, Greg.

We don't think it'll be more than 10% is probably the right way to say it.

Okay, got it.

And then in the U.S., would the snapback in growth -- you had mentioned obviously Lexus, did that make up -- did that account for all of that snapback in growth or was there something else in there as well?

When you say snapback --?

You had a quarter, last quarter, where it was -- where the trend decelerated in the U.S. and you talked last quarter at that point about it being mostly Lexus.

I just wondered if that completely made up for the delta (ph) this quarter versus...?

No, no.

We experienced growth across the board.

Okay, so that was just 1 part of it.

And then the last question is, Dave, you talked about this.

I think it's interesting.

The distribution business will eventually go away when you go to hard drive systems or when the industry goes to that.

Give us your best guess as to the timeline of that happening.

This is really hard to do, Greg.

The first systems will be introduced in this coming model year, the 2006 model year, but because it typically doesn't happen until a model is retooled or redesigned, it could be 2009, 2010 before hard disc represents a significant portion of the total navigation system market.

While the technology will introduce now, by the time you get it out there, it takes a while.

Okay, so this is not something that's going to happen in the next year or so.

I should mention, by the way, and you may not have focused on this, but we're on a 13-week quarter for the first 3 quarters of the year.

So we generally have about 90 or 91 days in the quarter.

In the fourth quarter, because it ends on the calendar year-end, we had 96 working days in -- or 96 days in the quarter and that probably contributes a little bit to the boost in revenue.

Sir, we have a question from the line of Bill Benton with William Blair.

Another quick follow-up and it may be difficult to answer, but I'm trying to figure out what percentage of your sales come from the dealer saying I want this many cars of this type with a navigation system in my lot versus the customer actually saying I'm ordering a blue whatever with this interior and a navigation system driving the decision.

No idea.

Okay.

Well, I guess what I'm trying to get at, you think the dealer is making the decision in terms of most of your sales today in terms of what's driving them?

I think the OEM...

...consumer obviously.

I think it depends upon the OEM, it depends upon the dealership.

There's a wide variety of practice.

I would point out that it's not just dealer decisions, though, because if you've noticed, there are more and more national advertisements that feature navigation, either as the prime point of the ad or at least indirectly or subtly it shows the screen.

So I think there's a fair amount of consumer demand that's coming in and saying, "Hey, I've heard about this, I've experienced it in my neighbor's car and I want it."

So I think that's going to continue to build as we go forward.

Yes, I was just trying to get a sense if dealers were ordering a greater percentage of their vehicles -- obviously the take rates' going up.

But if the dealers were ordering a greater percentage of their vehicles to put in stock on their lots with Nav systems.

They probably are over time.

We don't have any data to answer your question analytically, but there probably are because if the consumers are coming in and asking about it, they're responding to make sure they move their inventory as quickly as they can.

Right.

It certainly makes sense.

Sir, we have a question from the line of Stephen Angeli (ph) with Wellington Capital Management.

Yes, hi.

Can you give any color on what you see out there in the marketplace for the decline in the prices of the actual GPS units, say at the dealer level or the OEM level in terms of how much they're charging the customer as an option?

I know there are different segments; there's premium, it's going to be different in a Lexus than it is in a Ford.

But if you could just kind of touch on how you're seeing overall prices decline of the total unit year-over-year '04 versus '03 and if there is any difference in the prices between Europe and North America in those declines.

I don't know that we have a quantitative response to your question.

And I would say that, as we were talking before about all the market forces and over time this price is going to be coming down, when it comes to the in-vehicle embedded systems, we actually are not seeing a significant decline year-over-year in the cost of the systems.

That is, they're being a little slow given the popularity of this option.

And given the popularity of this technology they're being a little slow to bring it down.

I was saying earlier, though, there are other market forces that are coming up with lower options.

These are new solutions for the car and portable navigation devices.

And you put all that in the blender, as we look out to the future, this is inevitably going to come down.

But it's coming down a little slower in the in-vehicle embedded systems than we would love to see.

Sir, we have no further questions at this time.

Okay, thank you, everyone.

Thank you very much.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.