TeleNav (TNAV) Q3 2019 Earnings Call Transcript

TeleNav (TNAV)
Q3 2019 Earnings Call
May. 09, 2019, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Telenav third-quarter fiscal year 2019 financial results call. Today's call is being recorded. At this time, I would like to turn the conference over to Mike Bishop with the company's investor relations. Please go ahead, sir.

Mike Bishop -- Investor Relations

Thank you, Christy, and good afternoon, and welcome to Telenav's conference call to discuss the financial results of the third quarter of fiscal year 2019. Joining me today are HP Jin, president and CEO; Fuad Ahmad, interim CFO; and Hassan Wahla, co-president, automotive. After the market closed today, Telenav issued a press release and published a letter to stockholders on the Investor Relations section of its website. During the course of today's presentation, our executives will make forward-looking statements, including statements regarding, among others, the company's expected financial performance for the fourth quarter of fiscal 2019, anticipated sources and mixes of revenue, expected profitability, product and business strategies, and strategic relationships.

We wish to caution you that such statements are just predictions based on management's current expectations or beliefs and that actual events and results may differ materially. We refer you to the documents we file with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended June 30, 2018, and other periodic filings. These documents identify important risk factors that could cause our actual results to differ materially from those contained in our forward-looking statements. We assume no duty to confirm, update or revise the financial forecast for the quarter or any other forward-looking information on this call as a result of new developments or otherwise.

Today, we will be discussing our results on a GAAP, as well as non-GAAP basis. We will use these additional non-GAAP measures as we believe they provide useful operating information in addition to the GAAP results. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. We compensate for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenue calculated in accordance with GAAP, as well as considering whether we are likely to satisfy the criteria required to recognize revenue to convert deferred revenue into revenue and the cost that we will incur over time to provide the services related to that deferred revenue.

A reconciliation of GAAP to non-GAAP financial statements is available in our press release and on our investor relations web page. As a reminder, the comparative financial results being reported have been prepared in accordance with ASC 606, revenue from contracts with customers, and are not subject to audit until the end of our fiscal year. And with that, I will now open up the call for your questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And we'll go first to Josh Nichols from B. Riley. Your line is open.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

Yes. Thanks for taking my question. I know before that you mentioned that you're, as far as the rollout with GM, still relatively early stage with the company at single-digit penetration rates. What level do you think is achievable, though, over the next like 12 to 24 months as the company's offerings roll out across the globe?

HP Jin -- President and Chief Executive Officer

Do you want to take it or Hassan take it?

Fuad Ahmad -- Interim Chief Financial Officer

Hassan.

HP Jin -- President and Chief Executive Officer

Hassan, can you take that call?

Hassan Wahla -- Co-President, Automotive

Yes. So Josh, we don't give long-term guidance, but I think as we have mentioned in the past, at GM, we do expect that that has the potential to become comparable to Ford. So right now, we're a single-digit penetration at most OEMs. The overall penetration for navigation is closer to 30%.

Now GM does have a China component as well at SGM that's part of the equation, but there is still significant upside left in the next 12 months.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

And are penetration rates still in the 1% level?

Hassan Wahla -- Co-President, Automotive

I don't believe we said 1%.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

Single digit. Sorry, single-digit percent level.

Hassan Wahla -- Co-President, Automotive

Yes, single digit, yes.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

Yes. And could you walk me through the company -- in one of your recent decks included, I know that you are targeting 10% adjusted cash flow from operations -- margins once the company was scaled to hit $300 billion -- or $300 million, sorry, in billings. Could you walk us through the underlying assumptions for that as a high level regarding like gross margins, opex? And again, like is this something that you think is achievable more in like the 12- to 18-month time frame or more like the 24- to 36-month time frame based on the rollout that you're seeing now?

Fuad Ahmad -- Interim Chief Financial Officer

Hi, Josh. This is Fuad. Let me take that question. So obviously, we don't provide any guidance beyond one quarter ahead beyond Q4.

But I think the way to kind of think about it is that we expect the gross margins to remain in the mid-40s. I mean that's where we're seeing. That's what we've been experiencing given the -- what we have with our current OEMs. The company's aim is to keep operating expenses relatively flat.

That's the goal that we have internally, and that's something -- and you've seen in the past few quarters, we've been managing to achieve that with increasing billings and revenue. And I think we believe that the operating leverage that is -- that comes from that just manifests itself in adjusted cash flow from operations, so you're seeing that. So I think we expect gross margins to be around 45%. We expect -- we aim to keep opex relatively flat.

And as GM rolls up and as we see that revenue increase, you'll see that operating leverage kind of show itself in the bottom line, as calculated by adjusted cash flow from operation, which is the key metric that we manage.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

And what impact are you seeing regarding Ford's move to focus on SUVs and trucks as opposed to traditional passenger vehicles?

HP Jin -- President and Chief Executive Officer

Hassan? Hassan, do you want to comment on that one?

Hassan Wahla -- Co-President, Automotive

Yes, certainly. So Josh, so far, we haven't seen any negative impact with this move. Our overall volume at Ford from North America, where this transition is taking place, continues to go in a positive direction.

Josh Nichols -- B. Riley FBR Inc. -- Analyst

Thanks. That's it for me. I'll jump back in the queue.

Operator

[Operator instructions] We'll go next to Steve Dyer from Craig-Hallum Capital.

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

Hey, guys. Matt Wegner on for Steve Dyer. Thanks for taking our questions. Good to see the buyback there in the quarter.

What is kind of your expectation or what's baked into the expectation for the higher share count next quarter?

Fuad Ahmad -- Interim Chief Financial Officer

So you might have seen in the past couple of days some insider exercising their options. So essentially, that is an acknowledgment of those shares becoming part of the outstanding.

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

Got it. OK. That makes sense. Just kind of switching over to the award.

Good to see the expansion with Toyota there on the -- I think that's the first award in a handful of quarters. How do you kind of think about that OEM going forward and just kind of -- just high level there?

HP Jin -- President and Chief Executive Officer

Hassan?

Hassan Wahla -- Co-President, Automotive

Sure. So for Toyota, it's not a new award. We've just launched on the Corolla. So right now, with our brought-in Scout GPS Link, we are now on most of the high-volume vehicles at Toyota.

So we have a good relationship with Toyota, and we actually have two products. One is the brought-in navigation, and the other is -- we're giving hybrid search or cloud-based search to their embedded navigation system. So both of those products are now available on nearly all of the Toyota vehicles.

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

OK. Thanks for the kind of color on that. Switching over to billings. Just on the Q4 guidance, it looks sequentially down there.

Just any color on that? And what's kind of baked into that expectation?

Fuad Ahmad -- Interim Chief Financial Officer

Sure. So essentially, I think the bottom line is we'll still continuing to see strength in the auto segment, again, driven really by the continuing ramp-up at GM. What's kind of making the sequential a little down is primarily because we had almost $4.7 million up in our e-billings in Q2 and we have virtually none in Q4. So from a royalty perspective, which is really the key element, the quarter is strong, but that just has a onetime sporadic billing that occurs.

So that's primarily the reason. Also, in Q3, we were able to recognize approximately $2 million of NRE billings that were previously slated for Q4. So that's really the reason.

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

OK. And just as a follow-up on that, those $2 million of NRE billings, you were kind of not expecting that. Was that revenue? And I was thinking that you weren't expecting just billing.

Fuad Ahmad -- Interim Chief Financial Officer

No. No, it's billings. They're just billings. We were able to meet certain obligations with an OEM sooner than we had anticipated, so we were able to bill those sooner than we had thought.

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

OK. Perfect. That's all for me. I'll jump back in queue.

Thanks.

Fuad Ahmad -- Interim Chief Financial Officer

OK.

Operator

[Operator instructions] And seeing no further questions, I'll turn it back to Mike -- oh, I'm sorry, we did get a question. Henry Garcia, your line is open.

Unknown speaker

I'm just an individual investor. I'd like to know what your thoughts are on the rollout of 5G and how will that impact your system. Thank you.

HP Jin -- President and Chief Executive Officer

Well, the 5G -- I'll take this call. Thank you. The 5G is going to make the -- basically, the data pipe to be significantly higher and then potentially much lower cost. So I think the multimedia infotainment system will be significantly enhanced with, for example, augmented reality and others.

Especially when you go to the semi-autonomous driving, a driver can get hands off the wheel, then those infotainment system become much more powerful with 5G.

Hassan Wahla -- Co-President, Automotive

Actually, HP, I can add one more thing. The other thing we expect as with 5G, that the latency will be much lower. So for safety functions such as in a vehicle-to-vehicle communication, 5G is going to be a much better way for vehicles to talk to each other. So as we talk about building the world's largest network of connected cars, right now, the cars talk to our cloud.

So if there's a car that, all of a sudden, is breaking hard, it comes to our cloud, and then we're able to take that information and share that with other cars in the area. With 5G, the latency is much less than on the current networks, so this will enable us to actually have vehicle-to-vehicle communication. So in case there's an accident or bad road conditions, the vehicles can talk to other vehicles that are close by with minimal latency.

Unknown speaker

I'll get back into the queue.

Operator

And seeing no further questions, I'll turn it back to Mike Bishop for any closing remarks.

Mike Bishop -- Investor Relations

Thank you. We appreciate your continued support of Telenav. Next week, we will be attending several events with the investment community this quarter, including the B. Riley FBR conference in Los Angeles on May 22 and the Cowen technology Conference in New York on May 30.

We look forward to seeing many of you at these events. That concludes today's conference. Operator?

Operator

[Operator signoff]

Duration: 16 minutes

Call participants:

Mike Bishop -- Investor Relations

Josh Nichols -- B. Riley FBR Inc. -- Analyst

HP Jin -- President and Chief Executive Officer

Fuad Ahmad -- Interim Chief Financial Officer

Hassan Wahla -- Co-President, Automotive

Matt Wegner -- Craig-Hallum Capital Group -- Analyst

Unknown speaker

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