Price: $8.60

Market Cap: $412MM

Net cash: $104MM

EV: $308MM

Price Target: $19.57 (12-24 months)

Summary

Telenav is a supplier of navigation software, primarily to automotive OEMs. The company has undergone a multi-year transformation from being exclusively a provider of navigation software to mobile operators (essentially all Sprint and AT&T) to one that is leveraged almost entirely to supplying a growing number automotive customers, which began with their Ford relationship initiated back in 2008. Revenues from mobile carriers remained over 90% of revenues through FY11 (June) until Ford first became a 10% customer in FY12. Today, with Ford rolled out globally, automotive represents approximately 75% of revenues (and an even larger percentage of billings, which we will discuss further below). The growth in automotive is at an inflection point primarily due to the coming ramp of business with GM that should cause revenues to more than double over the next two years and drive significant earnings and cash flows. Based on a modest multiple of 15x FY19 (June) earnings plus cash, we see the stock being worth more than double where it trades now over the next 12-24 months.

What makes Telenav particularly attractive now is this GM-driven revenue inflection, along with moving from loss-making to significantly profitable and free cash flow positive as can be seen in our estimates below. Note these numbers are for June fiscal years.

Automotive Business

While the company has two other business segments besides Automotive (Mobile Navigation & Mobile Advertising), we do not plan to discuss either here in any detail, as they are not material to our investment thesis. The Mobile Navigation business, while shrinking rapidly, is believed is be profitable given its high GMs and the lack of any meaningful investment there. Mobile Advertising became slightly profitable in the Dec ’16 quarter; we assume it is essentially breakeven going forward.

While the company has discussed at least 7 different automotive OEM customers that they’re working with (some by name, some not specifically disclosed), only one is material to current results (Ford), while the expectation is a second (GM) will become the second large customer over the next two years. Thus the bulk of our segment forecast is based on these two OEMs, with fairly modest contributions assumed from the others in aggregate.

Similar to Ford, GM will be rolled out worldwide across all GM vehicle models over the next two years. One key difference between Ford and GM is that the Ford solution is just an embedded (but not connected) solution, meaning it does not connect wirelessly for updates, etc. The solution being rolled out with GM is both embedded and connected, and thus a more robust, higher value (and higher ASP) solution. GM sold approximately 50% more units worldwide in CY16 than Ford. For these two reasons, GM is expected to eventually become a materially larger customer for TNAV than Ford is today.

The GM ramp is beginning in the first half of CY17 (2HFY17) with “half year” models in Europe. These are smaller model rollouts that are done in the first half of the year in Europe in addition to the primary model year rollouts that arrive in the fall, as is standard in the US. Relevant quotes from management on the timing of the GM rollout from the Q2FY17 earnings call on 1/31/17:

“Turning now to GM. We remain on track to launch our embedded and connected solution and anticipate that it will happen in the next couple of months. We also believe GM will launch entry-level embedded navigation in select lines of their vehicles for the European market in the first half of calendar 2017.”

“As we have said before, we anticipate GM will start to generate revenue in fiscal 2017 with global deployment to commence in fiscal 2018.”

“Steve Dyer, Analyst

And I guess as you look out a year from now, do you have any sense as to what percentage of the overall GM award will be ramped or I guess any more color around the cadence of that ramp would be helpful? I know you've said it's going to ramp faster than Ford did?

Michael Strambi, Chief Financial Officer

Yeah, I think we characterized that fiscal year '18, which aligns with model year '18 is still significant volume and that we reached almost entire penetration out there globally in model year '19.”

The following is how we arrive at our FY19 revenue build-up for the automotive navigation business:

Revenue vs Billings

One issue that has somewhat obscured the growth in the automotive business recently is the fact that various automotive arrangements require deferral of revenue (and costs) over an extended period of time, sometimes as long as 10 years, despite TNAV getting paid by auto OEMs paying out their vendors (primarily map providers) up front. Initially, as the embedded solution with Ford was rolled out there was no need to defer revenues and all revenue was taken up front as TNAV’s solution was installed in a new vehicle. But various arrangements (including Toyota and some with Ford in certain geographies) that now exist require revenue deferral due to an ongoing service commitment, i.e. TNAV is required to allow the vehicle to connect to their data centers for updates, etc under the auto OEM’s agreement with the car buyer. Again, this does not change the timing of cash flows or the profitability of these arrangements, but it does have a significant impact on the income statement as can be seen in the growing divergence between Revenue and Billings in the model above.

Management has communicated recently that they expect to adopt a new FASB accounting standard under GAAP that will allow them to substantially recognize all of these arrangements as revenues immediately, rather than deferring as they do now. From the Q2FY17 call:

“Starting with fiscal 2018, we anticipate that we will early adopt the FASB's new accounting standard, ASC 606, revenue from contracts with customers. We believe that in adopting this new accounting standard under GAAP, our reported revenue will more accurately reflect the economic substance of our transactions with our customers. Accordingly, starting with the first quarter of fiscal 2018, we do not anticipate continuing to report on the aforementioned non-GAAP measures.”

The “aforementioned non-GAAP measures” are billings, gross margin on billings, and adjusted EBITDA on billings. We assume in our model that starting in FY18 all automotive revenue is recognized up front and none is deferred. While this is by no means a certainty at this point, it would not materially change the investment thesis if this change did not occcur. If a substantial amount of revenue is still deferred it would bring down our revenue and earnings estimates but it should have no material impact (if any) on our projected cash flows. We would point out that out FCF estimates are simply based on net income and adjusted for the utilization of the company’s deferred tax assets, so substituing billings for reported revenue could get you to an adjusted EPS that tracks cash flow.

Risks

• GM does not ramp as expected. While the company has been working with GM for over three years (the original agreement was signed in January 2014) and the initial models with TNAV’s embedded/connected solution are currently rolling out in 1HCY17, there can be no assurance that this rollout won't run into issues. While we view this as low risk given TNAV has already successfully gone through a worldwide rollout of their solution with Ford, any issues could cause GM to slow down or abandon the planned rollout. This is by far the biggest risk to our bull thesis.

• Ford agreement expires at the end of CY17. There is always the potential that Ford does not renew the arrangement. We view this as unlikely given that Ford fairly recently launched their SYNC 3 platform with TNAV included over the last 12-18 months across all geographies. TNAV first had their embedded navigation solution installed in Ford’s SYNC 2 platform when it was rolled out beginning in model year 2012. With TNAV designed into the SYNC 3 platform, we view it as very unlikely that they’ll lose this business before the rollout of a new platform (SYNC 4?) from Ford at the earliest. Given the roughly 4-5 year cycle for SYNC platform changes Ford has demonstrated thus far (the original SYNC launched in 2007), we don’t expect to see a new platform (with potentially different software providers) until the 2020-2021 timeframe.

• Competition from Apple’s CarPlay and Google’s Android Auto. Ford has opened its SYNC 3 platform to these options, which could reduce demand for the embedded solution from TNAV. While the risk here is hard to gauge and not to be discounted, we’d note that free mobile navigation solutions from Apple & Google have long been available without meaningfully impacting the take rates of embedded in-dash navigation solutions.

Valuation