Harman Launches Infotainment Services Group, Seeks Higher Margins

On the heels of a fiscal Q2 that “did not meet our expectations,” Harman is launching an infotainment services business to generate a consistent revenue stream that’s not dependent on automotive production cycles, CEO Dinesh Paliwal said on the company’s earnings call Thursday. The infotainment services business along with restructuring initiatives will reduce operating costs, provide recurrent revenue and drive two to three times higher margins, Paliwal said.

Paliwal said economic headwinds and a slowdown in the automotive sector in Europe hurt Harman during Q2, and that’s expected to continue for the first half of the calendar year. Harman customer Audi had a 42 percent revenue drop in December, Paliwal noted. Harman fiscal Q2 sales fell 6 percent to $1.056 billion from the year-ago 2011 quarter, the company said. With a “higher margin order backlog,” Harman expects fiscal 2014 and 2015 to be strong years for the company, Paliwal said. The company expects service business to grow fivefold within the next five years from current levels of roughly $100 million.

Among the restructuring initiatives Harman is planning are employee layoffs, including 500 jobs in “high-cost countries,” that will result in annual operating savings of $30 million-$35 million beginning in fiscal year 2014, according to Chief Financial Officer Herbert Parker. The company expects to record a restructuring charge of about $30 million-$35 million in the second half of fiscal year 2013, Parker said. In addition, the company is evaluating the shutdown of an undisclosed manufacturing site in Europe, which would eliminate another 500 jobs, Parker said. Paliwal noted that the company has been building capacity for infotainment car audio including three factories in Mexico, 11 production lines in Hungary, three factories in China and now, the company needs to “go after” the high-cost factories that “aren’t relevant anymore."

Harman Infotainment Services will leverage the installed base of more than 15 million Harman infotainment-equipped vehicles on the road today, Paliwal said. The group will offer 4G/LTE connected head-unit upgrades for vehicles currently on the road; cloud-based services to the car using including Harman’s Aha platform; and customer relationship management services for car makers using vehicle-specific aggregated data, Paliwal said. The scalable platform will allow consumers, who are holding on to their cars longer, to keep their entertainment systems “current and connected,” he said. Harman Infotainment Services will be a standalone global business run by a general manager and with a separate profit and loss, Paliwal said.

The services business will have multiple components, Paliwal said, including a “classic” head unit upgrade, multiple subscription-based and one-time paid services that will be downloaded from Harman’s cloud service, from OEMs or from car dealers, he said. “Or it could be via USB stick or from your own computer,” he said. The company will offer “a lot” of software-based services that will be enabled by step-up hardware, he said. “Imagine the car that was bought three years ago,” Paliwal said. “It’s still a great Audi or a great BMW, but it’s totally antiquated when it comes to technology. We're going to be the first company to have a solution” for that “and we have the secret sauce,” he said. “We know exactly what the wiring harness is, what the connectors are, what the head unit design is.”

Paliwal said the services business will be “retail in many aspects” and it will distribute through various networks including dealer networks, “Auto Zone-type” and other car aftermarket shops. He said car companies will likely want to be able to offer the services and welcomed any validation from Audi or Daimler “even if you have to give up a little of the value chain.” Paliwal called it “semi-OEM” business, which he said is an opportunity to address a growing trend in certain markets where dealers are selling barebones vehicles that can be updated later. He cited a model in China where car dealers for Daimler, Toyota and BMW, for instance, “are selling the car designed for our system or a competitive system, but to be able to make a sale, they sell a car without anything,” he said. Dealers tell the customers to come back in six months when they can afford add-ons, and they sell to the customer at a discounted price, Paliwal said. “They're going direct and the OEMs getting cut out,” he said.

For Harman, aftermarket business “should generate higher margins,” Paliwal said. It would also give the company better control over inventory and forecasting, he said. That, combined with the services business, could enable Harman to “come up with pretty neat cost-effective bundling of a light, footprint-based, head unit that low-end cars could never imagine,” he said. Harman plans to announce a paid services program for retail in coming quarters, Paliwal said.

The cloud-based Aha platform is gaining traction, Paliwal said, with 10 leading car makers from Asia, Europe and North America set to offer Aha by the end of the year. Harman expanded its connected radio platform to the entry-level segment during Q2, Paliwal said. “For the cost of basic radio,” the OEM can add smartphone connectivity, Harman’s Aha radio, turn-by-turn navigation, voice prompts and other features, he said. The solution can be cost competitive while profitable, he said. At CES, Harman introduced its Android-based open-source application environment, which Paliwal said was the first Android-based infotainment system. Also at CES, Harman showed interactive head-up displays combined with smart connectivity, augmented navigation, gesture control, high-speed networking and driverless features.

On its outlook for fiscal 2013, Harman forecast global revenue between $4.175 billion and $4.250 billion and operational earnings per share between $2.70 and $2.90. Harman shares closed 9 percent lower Thursday to $44.80.