諾基亞 (NOK) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 NAVTEQ Corp earnings conference call.

My name is Rob, and I will be your operator today.

Throughout this conference, all lines will be on listen-only mode.

(OPERATOR INSTRUCTIONS) At this time, I would like to turn the conference over to your host, Director of Investor Relations, Mr.

Tom Fox.

Good afternoon, everyone.

This is Tom Fox, Director of Investor Relations.

And welcome to our conference call to discuss financial results for the quarter ended July 1, 2007.

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 web cast and is being recorded.

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.

Today's web cast also includes a power point slide presentation which you may access 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 futures financial performance and operating results, growth in unit volume, adoption rates, penetration rates, portable device sales, map update sales, new business of customers, new content and features, and the results of integration of acquisitions.

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 uncertainties that may affect future performance, please review the reports filed by NAVTEQ with the SEC.

In particular, note the risk factors set forth under item 1A risk factors in the company's most recent annual and quarterly reports.

NAVTEQ disclaims any obligation to with 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 a few closing remarks, and finally, we will take your questions.

During the question-and-answer session, we would ask that you limit yourself to one question and one follow-up.

If you have' additional questions, please re-enter the queue.

We will finish the call at 6:00 p.m.

eastern time.

I would now like to turn the call over to Judson.

Thanks, Tom.

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

We are very pleased to report a quarter of exceptional growth and profitability for the company.

We achieved record operating results with second quarter revenue of $202.3 million, growing 49% over the prior year, and operating income of $54 million, up 63% over the same period a year ago.

The revenue increase was driven by growth in unit volume, which was up 76% when compared to the second quarter a year ago.

Partially offset by a mixed shift to portable device map units, as that business continued to grow robustly.

Excluding the impact of foreign currency, and the revenue from the recent traffic.com and Map Network acquisitions, revenue grew 32% over the prior year.

Further, excluding the distribution business, which was down slightly in the quarter compared to the prior year, base business revenue was up approximately 39%, on a currency neutral basis.

Net income for the quarter was $40.9 million, or $0.41 per diluted share.

For the first six months of 2007, revenue of $362.3 million grew 40% over the first half of 2006.

Excluding the impact of foreign currency, and the two recent acquisitions, first half revenue grew 26% over the prior year.

Year to date operating income was $92.4 million, net income for the first half was $71.1 million, or $0.72 per diluted share.

Net cash provided by operating activities was $153 million for the first half of 2007, compared to $52.4 million in the first half of last year.

We ended the quarter with $390 million in cash and marketable securities, and no debt.

I am very pleased with the growth trends in the marketplace and our ability to execute against our strategies.

I feel that the company is in a strong position as we enter the second half of 2007.

Q2 results came in ahead of our expectations, and I think it is important to understand the primary reasons for that.

First, the portable device business grew briskly, coming in substantially ahead of our plan on a constant currency basis.

Volume growth far exceeded our forecasts in both major geographies, with our map units in Western Europe up more than 70% over last year, and North America nearly tripling.

A number of other areas of our business also performed quite well in the quarter, including wireless, and enterprise solutions, but the portable device business was the biggest contributor to the top line performance.

Second, total costs and expenses were roughly $10 million lower than our original plan on a constant currency basis.

Roughly half of this amount was due to lighter distribution costs related to the delayed launch of certain map update programs in the in dash business.

The other half was the result of a conscious decision to move several projects and initiatives from the second quarter into the second half of the year for a number of different reasons.

For example, we postponed certain geographic build-outs and content development in order to deliver on some near-term customer commitments.

And third, the strong Euro had a favorable impact on our results.

The average exchange rate in Q2 was $1.35 compared to the $1.27 rate used in our guidance.

This resulted in a $7.3 million benefit to revenue, and a $0.03 benefit to EPS compared to plan.

Compared to the average rate of $1.26 in the second quarter a year ago, the FX rate drove a $6.2 million increase in revenue, and a $0.02 increase in EPS over the prior year.

Turning to our Q2 revenue by geography, as indicated in the press release, revenue for the Europe, Middle East, and Africa region grew 39% over the prior year, aided by the strong Euro.

Even without the foreign exchange benefit, EMEA revenue grew 32%, which was it's strongest growth rate since 2004.

Revenue for the Americas grew 64% over the prior year.

Excluding the two recent acquisitions, America's revenue grew 30%.

Asia-Pacific revenue, which is derived from our Korean subsidiary, was $2.8 million in the quarter.

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

I will begin with the European in dash business, which showed double digit unit growth over the prior year, due to an uptick in adoption, stronger-than-expected navigation take rates, even in some of the more heavily penetrated segments, and the pickup of some new business with Mercedes-Benz on the C class.

We attribute the take rate increase to greater consumer awareness of navigation, and the effectiveness of our take rate improvement program, which helps car companies train their dealer personnel on selling in dash systems.

Overall car sales in Western Europe were down about 1% compared to the second quarter of last year.

Car sales in Germany, Europe's largest car market, were particularly weak again in Q2, and have declined 8% year to date, compared to the same period in 2006.

In addition to the value-added tax increase, which we told you about last quarter, Germans are now faced with proposed carbon tax legislation designed to curb emissions, and possible bans on driving in urban centers.

We believe this may have had an adverse impact on car sales in Germany, as potential buyers wait to see what will happen with the legislation.

Adoption or the percentage of cars sold that offer in dash navigation remains above 80% in Western Europe.

We are now seeing better-than-expected adoption at the low end, in what is referred to as the A segment.

Our assumption had been that that few of these higher volume compact models would adopt navigation due to its relatively high retail price.

However Fiat will expand its Blue&Me low cost navigation platform to an additional A segment model this year, and Kia is now offering an in dash system on the A segment Picanto.

The second quarter strength in both adoption and take rate in Europe is driving overall penetration that is tracking ahead of our original plan for the year.

As a reminder, penetration is the percentage of cars sold with in dash navigation systems.

You may recall that last quarter, we announced new business with Volkswagen group in Europe that would begin this year.

We actually began shipping in June, ahead of schedule, and the first model available with our map is the VW Touareg.

Additional vehicles will follow later this year.

In the North American in dash business, we saw double digit increases over last year's second quarter in both units and revenue.

The growth was due to the substantial increase in adoption compared to the prior year.

In Q2, in dash navigation was launched for the first time on 10 models, including the Mitsubishi Lancer, Land Rover, LR2, Ford Taurus and Mercury Sable.

On a full year basis we expect adoption of nearly 70% in North America compared to 51% in 2006.

Overall car sales in North America were flat in Q2 compared to the prior year.

Consumers continued to demonstrate a preference for smaller more fuel efficient vehicles which generally have much lower navigation take rates.

Compared to the second quarter of 2006, luxury car sales were down 11%, minivans and pick-up trucks were down 7%, and mid-sized sedan sales dropped 4%.

The only significant growth categories were the compact car, and SUV segments, which were up 7% and 8% respectively.

But the increase in SUV sales was really driven by smaller models, which were up 16% over last year.

Take rates in North America are growing modestly.

However, surging adoption does have a dampening effect on the overall take rate, at least initially, as a number of smaller less expensive models offer the option for the first time.

Penetration is tracking in line with our plan in North America.

Map updates represented approximately 17% of our in dash units in the quarter, which was below our plan.

Frankly, some of our customers are not moving as quickly as we would like, but we still feel that we are making good progress and expect better performance in the second half of the year.

For those RPM programs that have been launched successfully, and at the right price point, it is not uncommon to see year-over-year update volume growth of 20% or more.

We have been successful in winning update distribution business with our OEM customers that will enable us to retain our tier one position in many cases.

And should partially offset the decline in distribution revenue arising from the gradual introduction of hard disk drive navigation systems over the next several years.

With respect to the portable device business, as I mentioned a moment ago, this continues to be an area of remarkable growth for the company.

As a reminder, Q2 revenue generally represents customer royalty reports for the months of March, April, and May.

In Europe, a number of our customers launched new products in the quarter, including Garmin, Medion, Sony and Navigon.

In particular, Garmin's nuvi 200 series and Medion's new PND line performed well.

Certainly Medion PNDs now offer voice recognition functionality that uses NAVTEQ voice data to enable the user to speak the destination rather than having to type it.

Nokia also began shipping the new 6110 Navigator which is the first handset to feature out of the box turn by turn navigation using NAVTEQ maps.

Unfortunately because this device was launched late in the quarter, it did not have any impact on Q2 revenue.

We are also supporting Nokia on the N95 Smart Phone in a number of countries outside of Europe.

PDA related products, which have been declining for the past several quarters, as expected, accounted for just 2% of our European portable map units in Q2, down from 14% a year ago.

In North America, we have seen a variety of new products from our major P & D customers and consumer demand is surging.

Garmin introduced more affordable entry level devices, and seems to be successfully defending its leadership share of the category.

While Magellan has resurged in recent months behind several new products.

LG also launched its first PND in the U.S.

using NAVTEQ maps an the product has been well received at retail.

It is difficult to know exactly how big this category could be in Q4 but we are optimistic that this will be a breakout year for PNDs in the U.S.

In fact, during our recent meetings with the major consumer electronics retailers, they indicated that they recognized the popularity of the category and plan to devote even more floor space and advertising support in the coming months.

Turning to the wireless business for just a moment, revenue grew dramatically in the quarter, over the prior year, but the absolute dollar contribution is still too small to be material.

Offboard trends are extremely positive, particularly with Verizon Wireless in the U.S., which continued to advertise the VZ Navigator service across TV, radio, and print media.

With respect to coverage, we released maps of nine new countries in the quarter, including our first maps of India, and Turkey, which brought our coverage to 69 countries and territories around the world.

The initial India map covers 53 million people and 64,000-kilometers of roadway.

We mapped six of the largest cities in the country, as well as the arterial road network connecting those cities.

We paid particular attention to the city centers, mapping those downtown areas to our highest level of quality.

As you might expect, the creation of our India map posed new and unique challenges to our geographic analysts due to the dynamic nature of India's road network.

In fact, due to the inconsistent and unpredictable nature of many of the roadways, our analysts gathered a significant amount of data on foot using hand-held collection units.

During the quarter, we released full coverage maps for Poland, Czech Republic, Slovakia, Hungary and Slovenia.

To remind you, full coverage means that the map includes all navigable roads, but not all roads have necessarily been field verified by NAVTEQ personnel.

We also released maps for Belarus, Botswana, Lesotho, Moldova, Namibia, Swaziland and the Ukraine.

And lastly we enhanced our Australia map by adding a number of region specific data elements such as postal codes, voice phonemes, speed camera locations and neighborhood zones.

I am pleased to announce two pieces of new business that we secured in the quarter.

First, we signed a three-year agreement with PSA Peugeot that extends our relationship beyond Europe to South Africa, the Middle East and Russia.

And second in the area of dynamic content, Mercedes-Benz has chosen NAVTEQ as the realtime traffic provider in the U.S.

for the 2008 S class, which began shipping this month.

Realtime traffic will be a standard feature for the life of the vehicle and the service will use RDS technology which delivers the traffic feed to the vehicle's navigation system over FM radio.

This award is a great example of how NAVTEQ and traffic .com are working together effectively to win business.

Finally with respect to our recent acquisitions, traffic .com and Map Network, revenue from the two companies is tracking in line with our plan, and integration costs have actually been lower than expected.

In general, the integration has gone smoothly and we are on track to achieve the targets we set for the year.

Dave will provide more detail on the financial impact of the acquisitions in a moment.

At this point, I would like to turn the call over to him.

Thanks, Judson.

I will try to provide some additional color on our results.

With respect to revenue, map license and related revenue comprised 91% of the total in the quarter.

Advertising revenue represented 8% and other revenue accounted for the remaining 1%.

Distribution revenue was down only slightly compared to the prior year, and represented approximately 12% of our total revenue in the quarter.

We performed distribution services on 36% of our in dash volume.

The mix of distribution units in Europe was 53% which was down from the prior year due to the mix of business between distribution and nondistribution customers an the introduction of hard disk drive navigation systems on more car models.

The mix in North America was 17%, which was also down from the year-ago period, due to the mix of business between distribution and nondistribution customers.

On board revenue represented approximately 82% of total revenue, and 91% of map license and related revenue in the second quarter.

Second quarter map units grew 76% over the prior year, with in dash maps up 17%, and portable device maps up 118%.

Excluding the maps for PDAs, which have been declining sharply for the past several quarters, our worldwide portable device map units grew 146% over Q2 of last year.

Our two recent acquisitions contributed $16.9 million to revenue in the quarter.

With respect to pricing, we once again calculated what we call our market basket metric, which represents the change in the license fees paid to us from the second quarter of last year, to the second quarter of this year, by each of our top 10 customers on their most popular NAVTEQ map product in Europe and the Americas.

The price change reflects base license fee reductions, as well as volume discounts and other considerations.

For the second quarter, the market basket price decreased by an average of approximately 9% compared to last year's second quarter.

With respect to expenses, database creation and delivery costs were up 44% over the year-ago period, the growth was driven by increases in investment in our map database, as well as the consolidation of a full three months of traffic.com expenses.

In terms of the components of database creation and delivery costs, direct distribution costs represented approximately 20% of total database costs in Q2, and grew 7% over the prior year.

Date collection and processing costs represented 70% of total database costs, and grew 42% over the second quarter of last year and other database costs represented 10% of the total, and were up from the prior year, due to the consolidation of traffic.com's costs of advertising unit inventory and map networks direct costs.

SG&A expenses grew 45% in the quarter, compared to the year-ago period.

Growth there was driven by the consolidation of a full quarter of traffic.com's costs, and increases in our sales and business development resources.

Total amortization of intangibles including operating expenses was $2.8 million in the quarter, compared to $0.9 million, or $900,000 in last year's second quarter.

Traffic.com and Map Network added approximately $24.1 million to Q2 operating expenses.

These expenses include amortization of intangibles, but they exclude certain shared overhead costs.

Total stock-based compensation expense in the quarter was $5.2 million, of which $2.5 million was related to stock options.

Of the total expense, $4.3 million of that was recognized as SG&A.

Our operating margin in the quarter was 26.7%, compared to the 24.4% margin in the year-ago quarter.

Our effective tax rate was 29.6% in Q2, and this rate was higher than the first quarter, as we now expect a greater mix of full-year income to come from the U.S., where the statutory rate is higher.

To remind everyone, we are now a full cash taxpayer in Europe, but not in the U.S.

Now, with respect to guidance, we are revising our annual guidance today, primarily as a result of our strong first half performance.

Further, we're encouraged by the trends in the business, including better-than-expected growth in portable device maps, and solid performance in the in dash area, despite generally unfavorable car sales trends.

But we're also mindful of the risks and uncertainties that remain in the balance of the year.

We now expect full-year revenue of $780 million to $795 million and diluted EPS of $1.45 to $1.50.

On a full-year basis, these ranges assume and effective worldwide tax rate of approximately 29%, and average U.S.

dollar-Euro exchange rate of $1.35, and average diluted shares outstanding of approximately 99.6 million.

In terms of other key assumptions underlying the guidance, we have factored in OEM in dash penetration growth of approximately 1 to 2 percentage points in each of Western Europe and North America.

On a full-year a basis, we're still expecting OEM distribution business to represent a low teens percentage of revenue, and less than 40% of in dash map units.

In the portable device business, we are assuming full-year industry growth in portable device map units for Western Europe and North America combined, of around 90%.

The increase in our forecast is driven by the first half trends and what we believe is typical seasonality in this business.

It is important to understand two more things about the forecast.

First, there are more than 80 P7D vendors in our two primary geographies and this growth rate is a composite for all of those players, each of whom is growing at a different rate.

And second, the forecast reflects not just maps for PNDs but also maps for PDAs and particularly smart phones which are expected to become a more significant piece of the mix in the second half of the year.

Excluding the impact of the traffic.com and map network acquisitions, we expect base business operating margin expansion of around 300 basis points compared to our previous estimate of 100 basis points.

With respect to the quarterly pattern of revenue and expenses, I would like to point out that unlike previous years, we expect third quarter revenue to be slightly lower on a sequential basis, primarily due to in dash revenue seasonality and the loss of the TomTom 1 business in Europe.

As Judson mentioned first half spending was lighter than our original plan contemplated and therefore Q3 and Q4 spending should grow sequentially in the mid to high single digits as we pursue the successful completion of the projects and initiatives in our revised plan.

This should result in a spending pattern that is more back end loaded than we had originally anticipated.

As you all know, foreign exchange rates are difficult to predict.

Any strengthening of the dollar against the Euro in the second half of the year would have an adverse impact on our results compared to the guidance we've provided.

For each $0.01 difference in the annual -- average annual exchange rate, there is a $3.3 million impact to full-year revenue, and a $1.3 million impact to full-year net income.

With that, I would like to turn it back over to Judson to wrap up.

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.

These are exciting times for our industry and our company.

From the rapid growth of PNDs to the emergence of wireless applications, GPS and location technologies are becoming more and more a part of our daily lives as mobile consumers.

Last week, TomTom announced its intent to acquire Tele Atlas.

We have been thinking carefully how this impacts the company and our customers, and fundamentally, we do not expect this development to change the way we operate.

We have always viewed NAVTEQ as having lots of competition, and we expect that to continue in the future.

The fact is, we have significant experience in the areas TomTom is promoting, such as community map feedback.

We have been receiving feedback from our customers, and the end user community for many years, and we know how to incorporate that feedback while maintaining our quality standards by leveraging the knowledge and expertise of our field analysts, and production teams.

To us, this transaction underscores the value of content, in the location-based services space.

And while we respect TomTom as a company, we are confident we will be able to compete very effectively with the combined entity.

Our goal at NAVTEQ has always been to help all of our customers be successful, by offering them the highest quality maps and content matched with unique value-added services, and support.

I feel our leadership position in the GPS technology marketplace remains strong, and I am optimistic about our ability to achieve the targets and objectives we have set for the company.

This concludes our prepared remarks.

So thank you for your attention.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) Sir, give me a moment while I gather up your first question.

I have your first question coming to you from Jairam Nathan from Banc of America Securities.

Hi, guys.

I just -- on your guidance, the question I had was -- are you up to date on your guidance by close to $50 million, on your net income guidance went up in the 24, $25 million range, and considering the $10 million -- if I take the $10 million cost -- the cost push out, then probably it gives me a very -- I would say a pretty high -- a very low investment rate in all on a pre-tax basis.

So is that -- how should we think about that?

Well, I'm not sure how to answer the question, except to say that I think that it reflects the fact that not all incremental revenue is 100% margin.

You know, we have businesses where there are cost of goods sold in terms of the traffic business, and the Map Network business.

We did mention that we thought our base business operating margin would expand by 300 basis points, instead of 100 basis points.

Which would get you there.

Which should enable you to get there.

Okay.

And my other question was on pricing.

Given the whole TomTom transaction, how should we think about pricing going forward?

Does it get more saner?

At this point, I would say it is too early to say what impact this may have on pricing.

I think to do that at this moment with this news being so recent, is just speculation.

So we really don't know what impact this may have.

Okay.

Thanks.

We are going to go to Jay Vleeschhouwer from Merrill Lynch.

Thanks.

Judson, I would like to ask the pricing question in a different way.

Almost independent of the TomTom news.

You have already experienced for many years feature-based pricing across your auto and PND product line, and could you describe how you see feature-based or segmented pricing playing out anyway over the next number of years, as you add in more content and data and attributes, anyway?

Do you think that pricing could get worse before it gets better, based solely on attributes and content or how do you see that curve progressing then over the next number of years for each of the two businesses?

Secondly, for Dave, or for Judson, on the investments and expenses side, since the year is more back-end loaded than you had originally thought, how is that affecting the timing and the availability of whatever new products and services you are investing in?

Is there some push-back perhaps into 2008, if some of the new attributes or other services that you were meaning to develop.

Okay, on the first question, you know, I think, Jay, you're very familiar with our pricing strategy.

It is a function of a number of different things, including geography, and content, and functionality, and volume discounts.

And we, although the pricing strategy itself evolves over time, and there have been tweaks to it, in the past, there will be tweaks to it in the future, but fundamentally, as we look to the future, the only thing I can tell you is I think we see more and more content being introduced into the whole navigation market.

As we talked before, a variety of types of static content which we reported on before that we're building on behalf of our customers, as well as an ever-increasing number of types of dynamic content.

So that to me speaks well to the model that we have, which does recognize content as a major driver of what the price points will be.

Beyond that, I really can't, you know, forecast or speculate on what might happen, other than to tell you we think we've got a robust pricing strategy, and that content is going to play an ever-increasing role in that strategy.

As we look to the future.

With respect to your second question, in terms of impact of delayed spending, on our deliveries of new content, while some projects may slip slightly in terms of the time line, we don't anticipate any material deviation from our customer commitments, which are the most important thing driving that additional content.

Thank you.

Thank you.

We go to Mr.

Bill Benton from William Blair.

Good afternoon, guys.

First, I just wanted to -- maybe another pricing question, I apologize, but as you think about growing your PND business, would you say you're more focused on market share gains or price stability?

Do you have to trade off?

I was just trying to figure out the relative emphasis.

Well, we're interested in whatever delivers us the greatest profitability, I think.

Okay.

I figured --

You do -- I understand the question.

And you take each opportunity, and you view it in light of its overall I think impact on the profitability of the business.

Great.

Would it be fair to assume that a change of control clauses are fairly standard in your customer contracts or for the industry in general?

I have no idea, Bill, off the top of my head, what is the wording in all of our contracts.

Okay.

And just a final question, on PND growth, you said 90% is kind of your new kind of overall target, are you able to offer us any color in terms of how you're thinking about the North America piece of that and what your expectation is for growth there?

I think we said that we thought it was at least 2X.

At least 2X.

Okay.

Great guys.

Thanks again.

Thank you.

We're going to go to Maynard Um from UBS.

Hi, thank you.

Just related to the projects you're investing in, how long do those projects typically last?

Or maybe asked a different way, we typically haven't seen any significant declines in database licensing and production costs sequentially.

Will the conclusion of those projects result in decreases as we go forward?

And then I have a follow-up.

I don't expect that they will, no.

Okay.

And then just related to, I guess the announcement by your competitor, how quickly can the PND vendor actually switch map suppliers, and any early feedback presuming you've been reaching out to your competitors' customers?

Thanks.

Well, think in the PND space, it is much, much easier to switch than it is in the automotive sector, just because of the complexity of the applications, and formats so I think that is pretty well known.

Your second question was with respect to feedback from customers, I would say on that front, we've spoken to all of our major customers, and some of whom are also the customers of our competitors.

And I would say most of them are still digesting what this transaction means.

It is not at all clear.

I think it surprised many people.

So I don't know that I have any conclusions other than we obviously have talked to our major customers, and they're trying to figure out themselves what the implications are.

Thank you.

We're going to go to Rob Sanderson from American Technology.

Thanks.

Congratulations on a great quarter, guys.

Just a quick housekeeping, first.

Your comment on base business op margins in the second half, just to make sure I'm getting this right.

Are we -- did we have about a 350 basis points drag from the acquisitions this quarter?

Our -- I'm not sure what a drag means, but our guidance on the basis points expansion was for the full year, not for the second half.

Right.

Okay.

Maybe I will follow that up later.

And then on the balance sheet, intangible assets, as you pull in these acquisitions, increased about $200 million or something year-over-year.

And one, could you give us the amount of amortization that is usually disclosed in the 10-Q and then the second part of that is for us to get a better picture of what normalized earnings in the business really look like, shouldn't we be looking at your earnings net of amortization of this intangible?

I think that is up to the -- if you're looking at cash flow, it is probably useful to do that.

I think each of the analysts probably looks at it in a slightly different way, depending on what you measure.

I'm just looking back at the script to see what we told you about amortization.

The total amortization of intangibles that is in our second quarter results was $2.8 million in the quarter.

And that is up from $900,000 in last year's second quarter.

So what you see in the quarter is a full -- that's a full quarter's worth of amortization from acquisitions, which is the first time that that showed up.

So that should be a more or less consistent number going forward.

Okay.

David, and then just a follow-up on the -- the total depreciation on your cash flow statement, I guess the big jump there is then in the -- it is the actual depreciation line, and not the amortization line?

I'm trying to -- let's see.

It is up about a half a million from Q1.

And we did acquire a fair amount of fixed assets in the traffic.com deal, so that is where the majority of that increase is coming from.

And again, that represents a full quarter's worth of depreciation.

Great.

Thank you.

Thank you, gentlemen.

Okay.

Thank you.

We will go to Yair Reiner from CIBC.

First I would like to add my congratulations to a great quarter.

Second, in your conversations with your many customers, I mean are you getting a sense that there is going to be opposition in the market to the TomTom and Tele Atlas combination?

And secondly, have customers come to you seeking assurances that you're obviously going to be in a very strong position and you're not going to take advantage in any kind of crude way of potentially your strength moving forward?

You know, again, we've had some general conversations with our customers, I don't know if it is appropriate for me to share what we've discussed with each of our customers about the future.

I think what is paramount to our customers is to know how we are reacting to this, and I think in that vein, I would say that we're very focused on customer satisfaction, as we have been for years, and we're very focused on our road map, and the specific commitments we've made with respect to delivering new products, and new geographies, and you know, we basically think that the single best thing we can do is exactly what we have been doing, which is to focus on quality, focus on our customers, and focus on delivering what we say we're going to deliver, and that, I must say, has resonated very well.

Fair enough.

One question on the mix.

The assumption is that in the back half of the year, a lot of the growth in the PND segment will come from the lower end models.

How should we think about that impacting your pricing, if at all?

Pricing, it doesn't really impact pricing.

It has an impact on which products, which of our map products the customer picks, typically in a low end device they're taking maps with less geography, less content, and the like.

I mean probably the biggest impact on our business in the portable space is the loss of the TomTom business in the last two quarters of the year.

Thank you.

Thank you.

We're going to go to Robert Schwartz of Jeffries.

Just a clarification first.

The 90% target you gave for PND growth, I wanted to make sure that is units and not revenue.

And secondly, maybe you could talk about what went into that, you said you built it up from the bottom up, and I'm wondering what your assumptions are about mix and PNDs, between the low end units and high end units, and then finally, and your discussions with vendors I'm sorry with retailers, what you discussed, I'm wondering when they will be stocking their shelves.

Do you think they will be stocking earlier this year versus last year?

Your first comment was correct.

That was unit -- that was a unit projection, not a revenue protection.

For PNDs, PDA'a and smart phones and that is not just PNDs.

Right with respect to the second question, are we assuming more low end versus high end, that is more granularity than we're really comfortable talking about in this forum.

Third, I don't think we yet have any visibility with respect to stocking for the holiday season.

We're, as you know, we're one -- sort of one step removed from the retailer, and the PND OEMs like Garmin, and Magellan and TomTom are probably in a better position to give you insight in that since they're dealing directly with retailers.

Are there any patterns you can talk about with the granularity about the uptake of traffic and some of the point of interest data?

Are you seeing something that is in the PND devices where they're installing more point of interest to fit your strategy?

I think on point of interest, it is probably a little too early.

On traffic, we're pleased with the uptake, but again, it is very early in the life and that probably won't have a big impact until next year.

I think it is just a little late for that to get incorporated on a widespread basis for the holiday season.

Thanks for taking my questions.

Thank you.

We're going to go to Peter Friedland of Soleil Group.

Did you say if you had any 10% customers during the quarter?

We didn't but we have two 10% customer, Garmin and BMW.

Okay.

And as far as the one month reporting lag in the PND business, can you quantify that at all relative to calendar quarter numbers for both Q2 and Q1, just so we have an idea of how to model it going into Q3?

You mean how much came into after the quarter?

Well, if Q2 was -- didn't include June.

Right.

If you compare the Q2 --

I'm sorry.

Ask the question again, Peter, I'm sorry.

If you compare March, April, May, with April, May, June, so how much of a negative was that in Q2 or was it a negative?

Just so we all --

No, it is the same basis last year as it was this year.

So it is consistent year-over-year.

Okay.

Was I clear on it or --

Well it is not a year over year question, so in other words if you're -- you reported 3.1 million units for Q2, how does that compare with the actual calendar unit number for April, May, June?

Well, if I was to say that, then I would be giving you insight into our next quarter, and I don't -- I just don't think it is appropriate for us to do that.

Okay.

Fair enough.

Thank you.

We're going to go to Ben Radinsky from Bear Stearns.

Good afternoon.

Good quarter.

Two quick questions.

Can you update us on the actual penetration numbers?

I don't think you mentioned them in your script.

We talked about them generally.

I think they're tracking year to date, they're tracking with what we anticipated for the year which is basically one or two percentage points on each continent, increase in penetration.

Okay.

And then you know historically you've mentioned that the 2008 model year was going to be a big year for uptake and in dash navigation, are there any new progresses that you can talk about?

No, I think we mentioned the Kia and the Fiat.

I think what you're referring to in your question is the ultra low cost line fit which will have some impact '08 model year.

It will have a much bigger impact in the '09 model year which would be the second half, or last part of '08, which is where -- and we think that trend is firm, because of the logic that goes into having a lower price point but we don't have -- we're not at -- we don't have -- we're not at this moment prepared to make any forecast or predictions on what exactly that means over the next two or three years.

And then the last one for me, you mentioned VZ Navigator, I was hoping you could give some color or granularity on either that program or on outboard navigation in general.

We would love to give you color on that, but Verizon is pretty sensitive to what is going on there.

We're -- I would just say we're pleased with what is happening.

I think they are, too.

But that is as much as we are permitted to say about it.

Thanks very much.

Thank you.

We're going to go to April Horace from Janco partners.

Hi.

Thanks for taking the question and I wanted to say congratulations on what I thought was a great quarter.

With having a 90% increase in units, year-over-year, from '06 to '07, how do we think in terms of continued growth in that particular sector in '08, as well as beyond just North America and Europe?

You know, this is one of the toughest questions that we get, which is because of the newness of this category, and because, you know, this is tied up in holiday shopping patterns, and consumer behavior, and alternative devices, and alternative electronics, I mean I wish we could tell you, but we don't have a crystal ball on this, and in fact, as Dave said a minute ago, we're actually one step removed, in that context, because some of the bigger PND players might give you better information about what they see happening.

I think we can say that we have witnessed a little bit to our surprise how popular this technology has become.

There is some -- you know, there is some that believe that this now may be the fastest growing consumer electronics category.

And we're also, you know, continuing to hear positive signs from the -- as a result of that, from the retailers who are saying, hey, this is an opportunity for us.

But how that translates into actual sales, through -- even through the end of this year, let alone '08-'09, we just -- we just don't know, and we can't give you any better information than we already have.

And then with respect to the increase in revenue guidance, I was wondering if you could give us some sort of indication as to how much FX might have been baked into that number, and then also, can you give us a sense as to when we might see the timing of more ultra low cost in dash units announcements would be?

With respect to -- I will let Judson answer the second question, but with respect to the first one, our original guidance assumed a $1.27 rate for the full year, we have now assumed a $1.35 rate for the second half of the year.

So you could multiply that $0.08 difference by the sort of assumed second half revenue that goes into our annual revenue guidance, and calculate how much of that is being driven by FX.

Okay.

Thanks.

And then timing of ultra low cost unit -- in dash units.

As I said a minute ago, I would say it is really model year '09, which really then impacts the late '08, and you know, I think there might be somewhat meaningful numbers by then, but again, things in the automotive industry move very slowly.

And we think this is a great idea.

We're hearing good things about it.

But this is the kind of thing that is going to take a few years to build.

But I think that it will -- it will really become noticed with the model year '09 which is the second half of '08.

And I would add that our customers, our system vendor customers have a very strong bias for controlling their own announcements of new product introductions, so even though we might know about things coming, we have to be circumspect about jumping the gun on it.

Okay.

Great, that's all I've got.

Great quarter.

Thank you.

We will go from Ingrid Ebeling from JMP securities].

Hi.

Thank you.

Again, congratulations on a great quarter.

I was wondering if you could provide a little bit more clarification on the operating margin expansion in -- so far in '07, or I think it was for full year, versus '06, including the acquisition.

And kind of moving forward, do you feel the integration of traffic.com and the Maps Network has gone a little bit ahead of plan in terms of profitability and what kinds of financial efforts we could see in 2008, you know, once we get a full year baked in, could we see a 200, 300 point increase baked in year-over-year?

Thanks.

Well, I would say first, with respect to the acquisitions, we think that they are operating generally in line with what we expected.

Not particularly better, in other words, we haven't necessarily improved the profit picture dramatically.

I think we're pleased with how that is operating.

In terms of being able to do, you know, dramatic margin expansion next year, beyond what I think we anticipated, I think it is early for us to really reach that conclusion yet.

We haven't even started that process.

And I certainly wouldn't want to promise that we could do it without really having gone through it more dramatically.

I think we're pleased with the progress we're making.

Obviously, what happens in 2008, there is a lot of things that go into that, so it is probably a little early for us to be talking about what we think we can do there.

Okay.

And the deal that you won with Mercedes-Benz S class with the realtime traffic, is that a revenue generator from traffic.com that is beyond advertising revenue?

Yes, that is a license fee arrangement.

Thank you.

And I have your last question today coming to you from David Niederman from Pacific Crest Securities.

Good afternoon.

Last quarter, you talked about receiving some incremental ADAS revenue that was a bit of a surprise and I'm wondering if you can provide an update on that and are you seeing any acceleration there in ADAS?

And secondly, when you talk about increased retail price, that will be devoted to PND this holiday season, do you get the sense that will entail incremental brands on the floor or more models from the same number of brands?

Thank you.

With respect to the ADAS, I think you may be referring to the fact that with respect to ADAS type content, we do have the ability to charge incrementally for that.

So we -- we are recognizing that, it is not a significant amount in '07, but it does exist.

With respect to the pace of that, you know, it is kind of like my comment about ultra low cost line fit, we think this is a real opportunity for us, but it is going to be over many years that this is realized.

This is in our opinion a very good direction for the car companies to go, and they're excited about it, for a lot of different reasons but it has been something that has been in the works for more than a decade and I think it is going to roll out over the next decade and I don't have any headlines as to what '07-'08-or '09 are going to look like with respect to ADAS.

And with respect to the retail space, this is just anecdotal.

It is not scientific.

But I do think with additional -- to the extent that any of the retailers decide to expand over the prior year, the retail space, that yes, that will be more models.

I think that is right.

And I think they've got to decide who they're betting on, because there are so many players in the space, that they have to take into account a number of different factors including the power of the brand of that particular PND manufacturer and the amount of marketing that they're going to put into it, not to mention a diversity of price points, which I think we've learned from them, listening to them, that that has been very helpful.

Not just to stock the shelves with the lowest price point product, but to have a whole range of product, so that you give the consumers the opportunity to go in and look at a variety of things and potentially buy up from what their expectation was.

So I do think we -- we believe anecdotally there will be more space and there will be more models.

Thanks a lot.

And sir, I have no further questions for you at this time.

Okay.

Thank you, everyone, for joining us.

Have a good evening.

Good night.

Thank you, sir.

Thank you, again, ladies and gentlemen.

This brings your conference call to a close.

Please feel free to disconnect your lines now at any time.