諾基亞 (NOK) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 NAVTEQ Corporation's earnings conference call.

My name is Alexis, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS.]

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

Please proceed, sir.

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 quarter ended July 2nd, 2006.

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.

Today's call is available by webcast and is being recorded.

Information on the replay and the webcast is available in the release and on the Investor Relation section of our web site at www.navteq.com.

Today's webcast also includes a PowerPoint slide presentation, which you may access via the webcast.

At the conclusion of the call you may download a PDF version of the presentation in the News and Events section of our IR web site.

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.

Such statements may include, but are not limited to, expectations of future operating results, growth in unit volume or share of business, product release schedules for NAVTEQ and our customers, and receipt of payments from customers.

Forward-looking statements are subject to certain risks and uncertainties that may cause 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, note the risk factors set forth under item 1(a), risk factors, in the company's Annual Report on Form 10-K for the fiscal year ended December 31st, 2005.

NAVTEQ disclaims any obligation to update or revise any forward-looking statements except as required by law.

We will begin today's call with some opening remarks from Judson.

Then Dave will walk you through some additional details on the quarter.

Judson will add some closing remarks.

And, finally, we will take your questions.

We will finish the call no later than 6:00 p.m.

Eastern Time.

I'd now like to turn the call over to Judson.

Thanks, Tom.

Good afternoon, everybody, and thank you for joining us.

Before I walk through our Q2 performance, I would like to say that we have received valuable feedback from a number of analysts and investors over the past two years and, in particular, over the past few months in terms of how we might enhance our investor communications, which we appreciate.

After consideration of this feedback, we have decided to expand the information we provide in two important ways.

First, as Tom mentioned, we will provide a PowerPoint presentation for each conference call.

The presentation is designed to assist you in understanding our results and tracking our progress.

And, second, we will provide quarterly map units in the major business areas to assist you in understanding what is going on in the business.

Note that comparability of quarterly unit counts may be affected by the timing of the receipt of customer royalty reports.

We hope that this additional information will be helpful to you.

Now, in terms of our Q2 results, we achieved record revenue of $135.9 million which grew 11% over the prior year.

The revenue increase was driven by growth in unit volume, which was up 38% when compared to the second quarter a year ago, partially offset by a mix shift to less expensive portable navigation map units.

Operating income was $33.1 million compared to $37.4 million in the prior year.

Net income for the quarter was $23.8 million or $0.25 per diluted share.

For the first six months of 2006 revenue of $258.3 million grew 14% over the first half of 2005.

YTD operating income was $53.8 million.

Net income for the first half was $39.9 million or $0.42 per diluted share.

Net cash provided by operating activities was $52.4 million for the first half of 2006 compared to $42.5 million in the first half of last year.

We ended the quarter with $259.5 million in cash and marketable securities, and no debt.

While our business continues to grow, Q2 revenue and profitability fell short of our expectations.

Expenses generally came in as expected, but revenue was lower than our plan primarily due to three major factors.

First, the company recorded a $3.1 million reduction in revenue and a corresponding increase in the allowance for doubtful accounts due to delayed payments by a significant customer that is going through a restructuring.

We expect to resolve the payment issue favorably, but at this point in time we thought it was prudent to reserve against the receivable.

NAVTEQ's accounting policy is to treat this as a reduction in revenue, not as SG&A expense.

If the restructuring is successful, which we believe it will be, then we would expect to collect the full amount that we are owed.

If not, it may continue to be an issue for us in the back half of the year.

Second, car sales trends in the U.S. were unfavorable in the quarter, which reduced our revenue compared to plan.

Overall, car sales were down 5% compared to the second quarter of last year.

But, more importantly, the mix of car sales generally favored less expensive models with much lower navigation take rates.

In particular, we noted relatively poor performance at Nissan, Volkswagen, Ford, and GM, and much softer sales of mid and full-sized SUVs.

In addition, fleet vehicles again comprised an unusually large percentage of overall car sales in the United States.

Just to remind you, fleet vehicles are sold primarily to enterprises and rental car companies, and these vehicles are almost never equipped with In-Dash systems.

This is a continuation of a trend we first identified in Q1.

And, third, the delays in the expected launches of a number of new and potentially significant portable navigation products reduced Q2 revenue in Europe by approximately $3 million compared to what we had expected.

Q2 results would have been in line with our forecast if not for these items.

Turning to our Q2 revenue by geography, as indicated in the press release, European revenue grew 3% in the quarter.

Currency played no part in the change as the exchange rate was consistent YOY.

Revenue for the Americas grew 22% over the prior year.

Asia-Pacific revenue, principally derived from our Korean subsidiary, was $1.4 million in the quarter, which was lower than our plan due to the decision to get out of an unprofitable hardware business.

I would now like to spend a few moments talking about Q2 developments in each of the major businesses.

Beginning first with the European In-Dash business, revenue was lower than plan for two reasons.

First, while our formal update initiative, the renewal program for maps, has shown promising early results, the program has been slower to roll-out with some customers than we anticipated.

And, second, luxury car sales remained relatively soft in Q2 with Audi, BMW, and Mercedes Benz all reporting YOY decline.

Notably, sales of the Mercedes Benz E Class, which is an important model for us, were down 28%.

Navigation take rates continued to grow across Europe.

The dynamics with respect to portable devices remained the same.

Take rate growth is being impacted in the non-luxury B and C car classes.

We believe take rates in these value price segments are being held back by the relatively high price of In-Dash systems and a growing number of feature rich, attractively priced portable devices.

Despite this phenomenon, we still anticipate take rate growth in virtually every segment of the European car market for the full year.

Turning to North America In-Dash revenue, Q2 came in below our plan, primarily due to the car sales issues I mentioned earlier.

Adoption trends remain on-track to achieve our full year expectation of over 50%.

NAVTEQ enabled In-Dash systems were offered for the first time in Q2 on all the new Audi 67, Mercedes Benz GL class, and Mazda's CX7.

Navigation take rates in North America continued to increase, but growth was dampened in the low to middle segments where fleet sales are most prevalent and where In-Dash systems are more difficult for consumers to afford.

Finally, we were awarded several prices of the future In-Dash business in the quarter, some of which we are pleased to announce on today's call.

First, [Renault] selected NAVTEQ maps to enable its existing In-Dash systems in Europe.

This business begins this year and lasts through 2008.

Second, Jaguar, Land Rover, Volvo, and Astin Martin, collectively known as Ford's premium auto group, have selected NAVTEQ for the next generation In-Dash platform in Europe.

This is a five-year deal beginning in 2008.

Third, Ford and Ford PAG specified NAVTEQ maps in North America for their next generation In-Dash systems.

This continues our supply relationship with Ford, which has been in place for a number of years.

And, finally, we were awarded the Audi 3G navigation business in Europe, which is a five-year deal beginning in 2008.

Turning to the portable device business, not surprisingly our Q2 performance in the portables business improved significantly when compared to Q1, with map units up 40% sequentially.

However, the improvement in Europe was lower than we expected for two reasons.

First, the product launch delays, I mentioned earlier.

And, second, while Garmin and Sony have achieved solid share gains in Europe in a relatively short period of time, our other customers did not achieve the expected share gains in Q2.

TomTom maintained its 50% + share of integrated devices in Europe, and as a result we did not achieve our Q2 portable unit volume goal.

In North America, we saw very nice growth in maps for portable devices, and revenue came in ahead of our plan.

Based on data from the NPD Group, a retail research firm, Garmin was able to defend its near 50% leadership share in the U.S. with Magellan and TomTom battling for the number two position.

In terms of new business wins in the portable device area, we are supplying maps for Alpine's new Blackbird PMD, which was recently launched in North America, and we were selected by Philips Electronics to pilot its new P&Ds, which we expect to be launched in Europe in late Q3.

Turning to the wireless business for just a moment, you may have noticed that Verizon Wireless has begun a heavy print, television, and radio advertising campaign in the U.S. behind its new VV navigator service.

This downloadable application provides turn-by-turn directions and local search functionality for $9.99 a month.

Notably, the service is now featured on Verizon's new Motorola Ultima Razor V3M multimedia phone, which also offers music and video clips.

While subscriber counts remain modest we expect the advertising campaign to spur a meaningful increase in the second half of the year.

During the quarter, we also signed a deal with Trimbal Navigation.

Trimbal mobile solutions will now use NAVTEQ maps for its trim fleet family of fleet management and workforce productivity products.

We are proud of this new customer relationship, and we look forward to growing it in the future.

Turning to product news, during the quarter we released detailed city coverage maps for Spain, Portugal and Italy.

With these releases we now have detailed city coverage for 100% of the roads in Western Europe.

Detailed city coverage requires field verification of all road attributes, and is our highest level of map detail and quality.

We also released our first full coverage map in Poland.

Full coverage, as opposed to detailed city coverage, means that our map is a comprehensive presentation of the road network, but that not every road has been field verified by our personnel.

In terms of new content we announced our collaboration with Fodor's, a leader in travel guide.

For an additional fee, our customers may now incorporate Fodor's rich tourist information for countries in North America, Europe, and Asia as a way to differentiate their products and enrich the user experience.

On the dynamic content side, Palace, Magellan, and Alpine became the first customers to offer our traffic service via RDF, which uses the existing terrestrial FM radio infrastructure.

Magellan now offers NAVTEQ's RDS traffic on six of its PMDs, and Alpine will make the service available on its new Blackbird PMD later this summer.

We are seeing strong interest in RDS traffic, and we are in negotiations with several more potential customers.

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

Thank you, Judson.

I'd like to provide some additional color on our results.

As I do that, please note that for comparison purposes our fiscal second quarter had 91 days compared to 91 days in last year's Q2 and 92 days in Q1.

With respect to foreign currency, the average dollar/Euro exchange rate for the second quarter was $1.26 which was basically in line with the average rate in last year's second quarter.

Compared to the $1.20 rate used in our guidance the stronger Euro increased second quarter revenue by 3.8 million and EPS by $0.01.

Media revenue represented approximately 91% of our revenue in the second quarter, with total map units of 2.5 million.

Distribution business comprised approximately 18% of our total revenue.

We performed distribution services on 43% of our total In-Dash volume, which was down from 46% in the prior year.

The mix of distribution units in Europe was 61%, and in North America, 20%.

Both down slightly from the prior year.

The YOY declines in distribution were caused by the mix of business between distribution and non-distribution customers and to a lesser extent the introduction of hard disk navigation systems.

As we've said in the past, our distribution business is likely to trend downward in the future as non-vehicle and server based revenue becomes a bigger piece of our business and hard disk drive navigation systems are introduced on more vehicle models over the next four to six years.

We have calculated the change in the license fees paid to us from the second quarter of last year to the second quarter of this year by our top 10 customers in each of Europe and the Americas, who together represent about two-thirds of our revenue on their most popular NAVTEQ map product.

This percentage change represents base license fee reductions, as well as volume discounts and other considerations.

For the second quarter of 2006 license fees in our top 10 customers decreased by an average of approximately 7% compared to last year's second quarter.

In terms of our operating expenses, the second quarter was another significant investment period for the company.

Database creation and distribution costs were up 14% over the year ago period, but rose just 4% compared to Q1.

On a constant a currency basis the sequential growth would have been only 2%.

These costs were in line with our plan, except for the lower distribution costs associated with lower distribution volumes.

Distribution related and other direct costs represented approximately 21% of total company wide expense.

Selling, general and administrative expenses grew 33% in the quarter compared to the year ago period, but were actually down 4% compared to the first quarter, which was a heavier period for industry trade shows and other customer marketing activities.

The growth compared to last year was driven by increases in our business development resources and marketing expenses, as well as higher stock based compensation.

Q2 was the second quarter to reflect the full expensing of options in accordance with FAS 123R which we adopted on January 1st of this year.

Total stock based compensation expense was 4.5 million in Q2, of which 2.2 million was related to stock options.

Of the total expense 3.7 million was recognized as SG&A expense.

While first half spending was heavier than in prior years, we still expect the second half of the year to represent the majority of our full year spending.

In other words, you should expect sequential growth in total operating expenses for each of the next two quarters.

Our operating margin in the quarter was 24.4% compared to the 30.5% margin in the year ago quarter.

Our effective tax rate was 3.24% in Q2.

I should mention that during the quarter we utilized the last of our net operating loss carryforwards in Europe and will become a cash taxpayer there for the first time in 2006.

We are not yet a cash tax payer in the U.S.

With that, I'd like to turn it back over to Judson.

Thanks, Dave.

I would like to wrap-up the call this afternoon as I usually do by offering a few comments on our outlook for the business.

Our leadership position in the GPS technology marketplace remains strong.

While In-Dash revenue growth has moderated, our share has been steady for the past three years, and we have competed successfully for new business despite aggressive pricing by the competition.

We continue to believe the retail price of In-Dash systems remains the single largest obstacle to significantly higher penetration on both continents.

We now expect to see more competitively priced In-Dash systems available beginning in the 2008 or 2009 model years.

And we believe we are well positioned to benefit when retail prices decline.

We remain as excited as ever about the future of maps on portable devices.

I recently spent time visiting device customers in Europe and Japan, and I came away with great confidence in the long-term growth potential for mobile devices in general and PMDs, in particular.

From PMDs and smart phones, to multimedia devices and gaming consoles, we see location technology becoming an important part of the mobile devices we carry with us every day.

As we noted in our first quarter report, the popularity of portable devices is having a number of very favorable affects in the growth profile of our business.

But the increase in retail based revenue is causing Q4 to become a much more important driver of our full year results.

In addition, the nature of map building is such that our quarterly expenses bear little relationship to quarterly revenue.

Finally, before we take your questions, I would like to say that while we were disappointed in our Q2 results, we remain upbeat about both the market and our prospects for the balance of the year.

We have won several pieces of future In-Dash business.

We see a healthy pipeline of new portable products coming to market, and wireless solution are finally being marketed more heavily to consumers in the U.S.

Even so, there are a number of uncertainties that could negatively impact our second half results, including the delay customer payment issue, car sales trends in both Europe and the U.S., and the growth of portable device revenue in the fourth quarter.

As you know, it is our intention to update our guidance if and when we feel with a reasonable degree of confidence that changes in our business will result in performance that differs materially from the guidance we have provided.

In our judgment, we do not detect any such changes that would cause us to update the guidance we issued in February under this policy.

This concludes our prepared remarks, and thank you for your attention.

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

[OPERATOR INSTRUCTIONS.]

Your first question comes from the line of Jay Vleeschhouwer with Merrill Lynch.

Please proceed, sir.

Thanks, good afternoon.

First, Judson, I'd like to ask you about what you described as the biggest obstacle to automotive adoption?

Do you anticipate that it might be another couple of model years before we see a significant reduction in that respect, how large a reduction do you have in mind versus where we are today?

And how that might affect your own pricing relative to the new systems pricing?

And perhaps a closer question, you alluded to price competition, can you elaborate on what you're seeing, particularly North America as TA gets ready to roll-out the new commercial database for North America?

Okay.

The – I think we've been frustrated that the retail prices of In-Dash systems have not declined over the last two or three years, as we would have expected and many people expected.

And our consensus is that the reason that has happened is that the OEMs, specifically the car companies, have enjoyed the popularity of these devices.

These are highly popular devices with consumers.

They've enjoyed the profit margins on these, and as a result the options, and they're still largely options, have remained in the, let's say, $2,000, 2,000 Euro range.

From talking with many car company executives, research firms, a variety of people in the industry, I think this is going to change.

We believe that they will fall, particularly in the '08, '09 model years.

And the range that we're imagining is that it would be in the $750 to $1,000 or 1,750 and 1,000 Euros.

We've even seen some limited evidence that certain players are targeting even lower retail price points, and what they have in mind, obviously, is the potential for taking this enormously popular consumer technology and really getting it to the point where they can push it forward in the mass market, particularly in the C, in the B segments of cars, and really turn it into a mass market option.

So we think, in short, to answer your first question, they enjoyed the profit margins but they, at the end of the day have also noted the enormous popularity of portable devices, and those price points and their functionality.

And in the end, at least our understanding and belief is that they're going to compete vigorously to come-up with lower priced options so that they can either win back customers or be able to generate a winning share of that mass market segment.

And I think, you know, as I say, there's a number of players, we won't be specific about which ones, who are working very actively on this.

Obviously, if we're talking about lower retail priced systems we may be talking about less geography, less content, less functionality, simpler functionality, and, therefore, there would be an impact on our pricing because what we want to do is make sure that these, this technology, in fact, does turn out to be mass market technology and ultimately could be in all the cars.

I did mention that we're seeing a lot of pricing competition, particularly lately, we think, which is, you know, probably driven, I don't know, probably driven by attempts to win market share.

But the fact of the matter is we still are optimistic about the overall navigation market.

We think there's going to be a lot of competition from the standpoint of lower priced retail systems, less than 1,000, and more and more impressive portable devices of various kinds.

And, of course, as we've said consistently our end goal is to make sure that every consumer one way or the other has at least one device that they can use.

Thank you.

Your next question comes from the line of [Brandon Doughbell] with Credit Suisse.

Please proceed.

Brandon?

Can you hear me?

Now we can.

Okay.

Sorry about that.

First, thanks for all the information.

It sure makes our life a lot easier.

I wanted to talk a little bit about the PMD business.

If you look at the YOY growth in map units, let's call it 70% second quarter, and thinking about your assumptions for the year, given what's going on in Europe and North America, how do you guys get comfortable with the range that you've thought about for PMD volume guidance?

And kind of the timing on when those volumes show-up, given the uncertainty around what your spending might look like in Q4?

And how does, the device guys deal with that uncertainty?

Well, I think in short, as we've said consistently, this is, this whole PMD phenomenon is a relatively new phenomenon.

It's, I think, still an uncertainty to us all.

And I say 'us all,' meaning I think you can talk to any player in the market and they're not quite sure exactly what's going to unfold over the next 12 to 24 months.

We've been talking about this in terms of the impact on our seasonality and the importance of Q4, which increasingly is going to be important for us.

There's a lot of activity going on right now, so you have some established players but you've got players from different categories.

Some of the big consumer electronics giants that are just getting going.

You've got a number of new entrants, and you've got yet more entrants that are coming in.

This is another consequence of this relatively new market being an important part of our business in that several product launches, as I mentioned, that we thought would hit were delayed for a variety of reasons.

And that's a natural kind of consequence of having new players.

They've got to figure out a lot of things.

They've got to figure out, you know, the software integration, the delivery from the OEM manufacturers.

And then you get into the marketing and the retail logistics.

And it gets to be a complex thing.

So the good news is that all of that activity is good for the market, it's good for us as a supplier to the market.

We continue to see fundamental good research from consumers that they like this trend.

And I think pretty much everybody is getting more bullish that this is not a short-term phenomenon but it's going to be around for a few years, if not forever.

And with respect to the growth, you know, YOY, you know, we haven't – I don't believe we have a back forecast of what's going to happen in '07 or in '06.

We're actually pleased with the growth that we've seen.

You're right to point out that we had close to 70% quarter over quarter growth, but exactly how that's going to shake-out for '06 over '05 or '07 over '06 we just don't have any more specifics that we could honestly and fairly share, because we're just not sure ourselves.

Okay.

I'll take my one question, and I'll get out of queue.

Thanks.

Your next question comes from the line of Bill Benton.

Please proceed.

Hi.

Just a quick question, I guess.

Could you give us your thoughts maybe on how you see the timing in B shipment rolling out in terms of the holiday season?

Do you think some of your partners are looking to ship in kind of the Q3 period or do you think it's really still more Q4 focused?

And, Dave, if you could – if I could just ask, the deferred revenue dropped sequentially.

And I didn't know if you could offer maybe a little bit of color on that?

Okay, with respect to the timing of PMD shipments, I think if we use last year as a benchmark that it's more likely in Q4 than in Q3, although some people will do it earlier, but I think most people the bulk of the shipments will be in Q4.

You know, new product launches do result in channel fill, and I think that's an opportunity for us whenever they occur, as Judson said, we expected some to occur in the second quarter, and due to a variety of factors they were postponed by our customers.

So that will, you know, depending on when that happens that will have an impact, but last year it was primarily in Q4.

With respect to the deferred revenue, again, deferred revenue is generally not a predictor of much of anything on the revenue line.

In this case, we have a minimum annual license fees for contracts that are, typically the payments for those typically occur, the billings and payments typically occur in the first quarter and then they're earned over the course of the balance of the year.

Okay, great.

Thanks.

Your next question comes from Scott Merlis of Thomas Weisel Partners.

Please proceed.

Good afternoon.

Scott Merlis here.

How are you?

Great.

Appreciate the slides.

So as we look out towards the second half, what are the two or three factors that give you the most confidence in terms of there not being a material change in the business that requires a change in the guidance?

Are you getting, for example, are you, you know, I guess you have very good visibility on the cost side, but is there, as we approach the end of July here, is there anything that's giving you lead indications of relative health in either In-Dash, or relative to stability in In-Dash, or acceleration in PMD for the second half?

Well, there's – I wish we had specific lead indications for the second half, but obviously the second half is going to be a function of the economy.

It's going to be a function, it's going to be impacted by gas prices.

It's going to be impacted by interest rates, it's going to be impacted by consumer confidence which probably rolls into the strength of the retail holiday period.

And, you know, those – we're not any more expert in any of those issues than anybody else.

I would say that our, I think our optimism about the future is still rooted in some fundamentals that, you know, might be overcome by some of the things I just mentioned.

But the fact of the matter is when we do our marketing research of consumers we find that the satisfaction level of map devices and systems of all kinds is very high.

The intention to, the intent to repurchase is very high. the willingness to recommend to friends and family is very high.

And when we look at, let's take the vehicle sector, the overall adoption rate is increasing in the U.S., it's stable in Europe, and the take rates are still moving up, which we think is good.

And with respect to the portable devices, the thing that is, I think important and shouldn't be forgotten is that now you have dozens, literally dozens and dozens of entrants into this sector of the navigation market.

And we think that's a lot of smart people that realize that this is a popular technology and, therefore, there's going to be a lot put into that.

That, with that comes more marketing and advertising.

So now you're generating, you're getting more and more generation of consumer awareness and, you know, getting it in front of consumers more often.

And what that functionality is, and that's a good macroeconomic driver.

But beyond those macroeconomic things we do not have a crystal ball on exactly what's going to happen in the second half.

Right.

But you still, you said you still expect take rates to improve this year, correct?

Yes.

So does some of that happen at the beginning of the new model year, around September, when there are new models with new option packages and features?

I think that's a fair statement because if you have the launch of a new model typically there's more hype around it, there's more awareness from the sales force.

There's more oomph behind it.

And, therefore, that would be a logical time to see some positive benefit.

Yes, Q4 has always been a very robust quarter for us in the In-Dash segment, and which we attribute a lot to the introduction of new models and buyers who are less, perhaps less cost sensitive than they are at other times during the year.

And, finally, can we just review the launch delays for the new portable devices in Europe?

Maybe a little deeper on that?

Was that a 3 million hit, did you say?

Yes.

And, but I guess I need to review when the delays might be over?

Is it different for different models, or it's tough to say, or?

Yes, there are, there were five or six that were originally planned for Q2, and I would say that in each case the customer encountered either supply shortages or technical difficulties that caused them to put the introductions off, and I think our feeling is that the majority of that volume is likely to be in Q4.

There will be some Q3, late Q3, but the majority will probably have an impact in Q4.

Okay.

So in terms of the shortfall to your plan would you take factors one and three?

Didn't hear the question?

Sorry, I got cut-off.

Scott?

Scott?

I apologize, sir.

We'll take our next question which will come from the line of Maynard Um with UBS.

You indicated kind of the impact of the $3 million.

Did you say that was also from customer restructuring?

Was that the delay?

There was a $3.1 million charge to revenue that we took related to customer restructuring.

There was a separate $3 million associated with delayed product launches of portable NAV devices.

Okay, and so with that customer restructuring you said, you also said that you don't see any changes to make you alter the guidance.

Is this because of an offset from currency, or would you say you're more optimistic than you were before with respect to the back half?

And then, if I could quickly just for my understanding on the PMD side, how much lead-time is there typically between the time a map ships to a customer and when your customer ships to retail?

Thanks.

All right, let me – I think that, first, with respect to the guidance, when we look at, when we forecast what's going to happen in the balance of the year, there are any number of assumptions that go into that determination.

And they're too numerous to articulate here, but we combine all of that.

And with each of those things there are obviously risks and opportunities and uncertainties associated with them, but, you know, we come out with a view which we view is, you know, our best composite view of what we think is going to happen.

And that's what was behind the statement that we made.

With respect to the time lag on shipment, I don't think we know definitively the difference.

I would, I'm going to guess that the difference is 0, and the reason I say that is that we only know about the shipments when the customer sends us in a royalty report.

And typically they send us a royalty report when, in fact, they've sold the device to a retailer.

So I don't think there's much of a lag at all.

Great, thank you.

In fact, it might be a negative lag.

By the way, I just want to make one other point, we did not cut Scott Merlis off because he asked more than one question.

Somehow there were technical difficulties.

Your next question comes from the line of Brett Manderfield with Piper Jaffray.

Please proceed.

Yes, Dave, related to the client that is going through the restructuring, is that $3.1 million, is that coming from just one quarter, and should we take that as, would that be kind of an ongoing negative $3 million on a per quarter going forward basis?

It, that charge relates, obviously, to an old receivable.

The customer is still a customer and is still, you know, a viable business and selling merchandise.

And, you know, depending on what happens there could be a future impact beyond that 3.1 million.

I think we're trying to be conservative with respect to how we're treating it, but it obviously is dependent on them successfully completing their restructure.

And let me ask that a different way, is that 3.1 million is that, say, from a 12-month time period that you've been dealing with this customer or is it a 1 month?

Or how should we think about that?

You know, a receivable is built-up over time and then it gets old, and then you reserve against it.

So I'm not sure I can answer your question definitively.

I would tell you that it is not – it's a significant customer for us, it's not a top 20 customer for us.

Okay, that's helpful.

Thank you.

Your next question comes from [Noel Slotland] with Lehman Brothers.

Please proceed.

Hi, guys.

My first question is actually a clarification question, if I could?

Just in regards to your, the sequential uptick that you predicted in PMDs this quarter, do you have a sense of what the uptick looks like in the more traditional integrated device market, excluding the PDA type market?

Like more traditional being, say, the Garmin's and the Sony's of the world?

Yes, I understand your question.

We do not track units separately, so I don't think we have a view independent.

We view them – we consider them all the same kind of units from our perspective.

Okay.

And just sequentially then you said 'total units' in that two categories was up 70% or 40%?

68% was the YOY increase in portable map units.

Okay, and then…

Q2.

Right, Q2 '06 over Q2 '05.

Okay.

And then just in terms of thinking about the second half operating expenses, is it fair to assume given the marketing and the push to expand the awareness of the category, would it be more concerted to assume say low double digits second half versus first half then?

I'm not sure I understood the question.

Would you ask it again, please?

Sure.

Just on your operating expenses?

Right.

I know you guys have said that heavier first half and easy in the second half.

But given the fact that you have a big focus on expanding the category, and both in Europe and the U.S., is it sort of maybe low double digit increases in operating expenses second half '06 versus first half '06?

I wouldn't want to speculate on that.

That's more detail than we typically give.

Okay, but still long-term guidance is 15 to 20%, that doesn't change?

Right.

And if you could just remind us, is Q3 the normal seasonality that you typically see in the business?

In Q3?

Uh-hum.

I think if you look historically, Q3 has been reasonably close to Q2 in terms of revenues.

It tends to be seasonally a little slower in Europe because of the holiday season in August.

That's offset somewhat by the fact that, you know, you're starting, it's just the starting of a holiday rampup in the retail marketplace for the portable units.

Noel, if you look at the appendix to the slide presentation you'll see the actual unit counts going back the last six quarters, you'll be able to get a better sense of it.

Okay, great.

Thanks.

Your next question comes from the line of Robert Schwartz with Jefferies & Company.

Please proceed.

Hi, gentlemen.

This is [Steve King] in for Robert Schwartz.

Was wondering if you could help us a little bit to understand the nature of the price competition you alluded to, particularly towards the end of the quarter?

I'm assuming it was more about PMDs than In-Dash which, you know, tends to be much longer development cycle?

And, so, but that's really the question.

And then, you know, related to that is you mentioned that your price for top end customers averaged 7%.

Can you give us a feel for was In-Dash greater than the 7, and PMD is less, or was there any noticeable difference between those two segments?

Well, first of all, the metric that you referred to in terms of the price decline is a market basket approach that includes both vehicle and consumer.

And so, therefore, we don't break-out any more specifics about one versus the other.

However, back to your first question, the price, the increased price competition that I was talking about really is across the board.

I wouldn't say that it's limited to PMD.

I'd say it's throughout the entire navigation market.

And so we are going to, you know, have been and will continue to respond based on what we believe is the quality of our product and the value of the services that we offer.

But we've noted this trend, and that's why we shared it with you.

Okay.

Well, I appreciate the help on that.

You know, I guess the – we're just, you know, we're trying to figure out in terms of the revenue growth.

You know, I guess if you break-down the numbers and look at guidance we need to see a significant acceleration in the back half clearly.

You know, if we look at it on a constant currency basis, in the first half we're probably looking at a mid-teens or maybe slightly better revenue growth.

Are we going to be seeing, you know, I assume that because of the increased importance of PMDs, that that sort of acceleration that is embedded in your guidance is going to be a result of, you know, PMDs being more important in the mix, or are you seeing that acceleration in In-Dash, as well?

I think clearly PMDs are the more important of our mix, particularly, in the second half of the year and, more specifically, in Q4.

Okay.

Thank you.

Your next question comes from the line of Peter Barry with Bear Stearns.

Please proceed.

Afternoon, gentlemen.

Hello.

Hi.

Before I ask my question just may I ask two points for clarification?

Dave, guidance has been 5.90 to 6.15 on the top line, and the $1.21 to $1.28 after $0.10 for compensation, options, on the bottom line?

Is that still correct?

That was our guidance in February.

Okay.

And your comment about Q3 revenues being comparable to Q2, I assume that will not apply this year given the unique impacts on the June quarter?

I think historically, all I was commenting on was historically.

I don't really want to comment on what, you know, our quarterly revenues are going to be going forward.

One, because I'm not certain what they are, and, second, it's generally not our policy to spend a lot of time on quarterly numbers, at least prospectively.

And now my question, if I may?

Given Tom's admonition, I was trying to figure out how to make this a two-part question!

That was very clever!

Well done.

But I think you stole the clarification idea from Noel.

A two-part question that probably has no relationship part one to part two.

One, two major PMD manufacturers seem to be at odds as it relates to North American volumes this year.

One is up 2 million and one is meaningfully above 2 million.

I might ask you your opinion in that regard?

And can you unequivocally state that TA did not take market share in the June quarter?

Well, let's see.

With respect to the viewpoint, you know, I don't think that we know any more than those two customers about what's going to happen in the PMD space in North America in terms of the market growth.

Those folks are far more tuned into it because they work directly with the retailers, than we are.

It's interesting that they have somewhat divergent views, but both of them are anticipating substantial growth, which from our standpoint is optimistic.

And I don't think that we can weigh in on that.

Even if we did I don't think it would have any credibility compared to them.

With respect to our competitor taking market share, I think the only way we can comment on that is to say we haven't had any customer losses in that period, but it's entirely possible that as our customers gain or lose market share or theirs gain or lose market share that you are de facto market share gainer or loser as a result of that.

But I don't – I think the real question is the things that we can control we have not, I don't believe, lost customers to our competitors.

Thank you for your forbearance on my question asking!

Your next question comes from Jeetil Patel with Deutsche Bank.

Please proceed.

I do have questions, so I'll just state them up front.

On the PMD side you talked about the unit growth numbers, can you give us a sense of whether the nonintegrated PMD segment is actually growing or declining within the context of those numbers on a YOY basis?

Second, as it relates to the distribution side, kind of multiple parts to this, but the new OEM wins that you talked about earlier do they basically take advantage of your distribution capabilities or are they going to in the hard disk drive offering?

And overall just that distribution business is about 100 million in fees a year, and I guess how long does it take to transition out?

And is it more like 25 million a year that kind of comes out of the numbers as we look at the next four years, five years?

And, second, do you have to carry the costs of distribution until you finally get out of that segment of the business all together?

And that's pretty much it.

Okay.

I told you were there multiples!

Yes, we're trying to pay attention here.

On the – you had two areas of questions.

On the first one related to PMD unit growth, you referred to nonintegrated PMDs.

PDA is smart phone.

Yes, that's right.

Specifically, your question was are they…

Are they growing or declining there?

As you look at the underlying numbers?

I, the last time I looked at this I think the PDAs were declining at the expense of the PMDs, and I think we would, I mean I think that's what we suspect will happen in the future.

With respect to distribution, that's a harder question to answer.

First of all, the industry's transition to hard disk drive will probably take longer than what we might have originally expected.

I say 'longer,' it could take five, six, seven years.

So it's in process, it's happening, but it's probably going to take a little longer than we originally anticipated.

I would also say that the conversation gets more complicated because it's conceivable that even though a particular OEM might turn to an [HDD] In-Dash map system, it's still conceivable that they, that we might have a portion of our distribution business in terms of the distribution of disks.

Those disks could be used either as the mechanism to update the hard disk drive system, or potentially as a backup or potentially as a comfort factor for consumers who feel more comfortable having something tangible as opposed to just thinking that something happened in their engine and they're not quite sure what happened.

So, I mean the whole conversation of this evolution of our distribution business gets more complicated.

We still see over time it diminishing but probably not immediate.

And do you have to carry the distribution costs in your model?

Yes, I would say that the lion's share of the distribution costs are variable, so the answer is no.

So as your percentage of distribution revenues decline we should envision that your percentage of costs related to distribution to decline, as well?

Yes.

I think we can take one more question, if it's there.

Your final question will come from the line of Bennett Notman with Davenport & Company.

Please proceed.

Thank you for letting me squeak in at the buzzer here.

Two questions.

One is, you know, the 7% sort of market basket price decline that you spoke to does not seem, you know, to imply any more price pressure than what you've seen in the past.

Is that something that we should expect to be a bigger decline in coming quarters or has the price pressure just started to manifest itself?

And the second question, I still am not sure I fully understand how the restructuring of the customer sort of flows back to you as, you know, a revenue deduction?

You know, this is something they took product from you and now they don't pay, but yet they continue to be an ongoing customer?

Or is it just specific to a certain program they had?

Or sort of how does that exactly work?

Well, on the first point, the metric on pricing that we share every quarter is the fact of a metric that reflects the past not the future.

So when I referred to price pressure that's, that has more to do with some period of time in the future, not even necessarily '06, it could be anything from '07 to beyond 2010.

So with respect to how that's going to manifest itself, we're not sure but clearly the environment is, or the pricing pressure has intensified.

And as I had mentioned I think in my earlier comments we're going to react the way we do in terms of focusing on our quality, the services that we provide, and the overall values that we can bring to our customers.

So, other than that I can't predict what may or may not happen with respect to pricing.

And with respect to the restructuring that we're talking about, it is, you know, the allowance is triggered by late payment in amounts owed to us and the restructuring has nothing to do with receivables, obviously, it has to do with their working capital, their cash flow, how they've managed the business, and they have, are in the process of going through restructuring which includes management changes and additional capital investment.

So those things oftentimes take several months to sort out, so that's what that particular case is about.

Yes, I would say that some companies would not reduce the revenue in this case.

We clearly earned the revenue.

And some companies would simply charge SG&A for the bad debts.

Our policy has always been to reduce revenue because we think that's probably a more conservative way to go.

But there are, I'm sure there are different ways to handle it from an accounting standpoint.

But is this a situation where they've owed you some money that for some reason they're not going to pay, yet they continue to be a customer and are creating new receivables with you?

Or, and I guess I'm not understanding why they didn't pay the first one or why you would continue to do business with them if they haven't paid prior debt?

Well, we think they're a viable company.

They're clearly selling our product, and reasonably successfully.

I think they ran into a rough spot where they got ahead of themselves on their spending.

And it's going to take them awhile to get out from under that, if they can raise some incremental capital I think that they'll be in good shape.

And if that were to occur is there a possibility that you then get paid this money and then you could re-recognize the revenue at some future point?

I don't like to think of it that way, but, in essence, yes, that could happen.

Okay, great.

Thank you for your time.

Thank you.

Ladies and gentlemen, this concludes the question and answer session.

And, in turn, I would like to thank you for your participation in today's conference.

This now concludes the presentation.

You may all disconnect, and have a wonderful day.