Momentum in Harman’s Lifestyle Group Offsets Infotainment Decline

Growth in Harman’s lifestyle and multimedia businesses offset declines in the European infotainment market in fiscal Q3, due to improvements in product mix, said CEO Dinesh Paliwal. The company’s home and multimedia units of the Lifestyle division over the past five to 10 years have been a “loss maker,” or at best turned in low single-digit margins, Paliwal said, but new product designs and architecture changes led to operating margins of 8 percent for the first three quarters, “a record high,” he said.

According to Paliwal, Harman is building momentum with its “innovative and easy to use” home and multimedia products, and the company is extending distribution in developed and emerging markets. He cited partnerships with wireless carriers in the U.S., including 1,000 Sprint stores and relationships with AT&T and Verizon Wireless. “That will just multiply our distribution channels and our touch points,” he said. The company shipped more than a million wireless portable audio devices, including the Flip Bluetooth music system, in the past two quarters, he said, which he said was a record in the industry and for Harman.

That trend is expected to continue, he said, although not at the same pace. Even 50-100 basis points improvement year over year would be a “great thing,” Paliwal said, “because nobody in this space makes money.” Mentioning Bang & Olufsen, Sony, Denon and other competitors struggling to turn a profit in the lifestyle market, Paliwal said “it’s us and Bose who are able to because we have a unique brand and a unique design."

Companywide, gross profit in the quarter was 25.7 percent compared with 26.8 percent in 2012 due to lower margins in the Infotainment division, said Chief Financial Officer Herbert Parker. In Lifestyle, gross profit margin improved by 210 basis points over 2012 due to severe neodymium cost impacts in 2012. Last year Harman had a gross impact of $78 million from higher neodymium costs and a net of $24 million, Paliwal said, “which means we did a helluva good job in terms of offsetting it or charging it back to our customers.”

This year, Harman is reporting minimal impact from neodymium costs due to falling prices of the rare earth metal used in magnets and the company’s ability to find substitute materials and designing more efficient products that require less neodymium, Paliwal said. Neodymium “is a non-issue for us,” he said. Prices are “still pretty high” compared to three or four years ago before they “shot up 1100 percent,” he said, saying it still commands a 500 percent premium over previous levels. “We have designed it out, or we have efficient design or we have done pricing agreements with our customers … so we don’t allow this to affect us,” Paliwal said. Q4 won’t have “any significance related to neodymium,” he said.

Harman has added a “fifth pillar” to its strategic growth plan to diversify its portfolio, Paliwal said, citing the purchase of lighting and video company Martin in the Professional division as an example. On the infotainment service business it announced last quarter, Paliwal said there’s no third-party market data for the infotainment services but Harman believes it’s a “highly profitable and more than $1 billion market opportunity.”

Harman has begun production on the next-generation flagship infotainment system for Mercedes-Benz S Class vehicles, which combine high-end Harman 3D navigation systems and wireless connectivity. The system also includes Harman’s multi-seat entertainment platform that allows every passenger to share personalized content, Paliwal said. Production for the higher volume C Class vehicles, including Harman infotainment and navigation, will begin at the beginning of calendar 2014. Harman also showed a Siri-enabled embedded system with Ferrari at the Geneva Auto Show, he said.

In the first five months of fiscal 2013, Harman has filed more than 300 new patents, a company record, bringing the total company count to 4,600, Paliwal said.

Harman purchased iOnRoad in April and has integrated the company’s augmented reality into its infotainment platform, Paliwal noted. The acquisition will accelerate the rollout of safety functionality on scalable and custom platforms, he said.

Harman posted fiscal Q3 revenue of $1 billion and raised its guidance for the year to $3 per share from $2.70-$2.90. Operating profit in the quarter was $38 million compared to $60 million in fiscal Q3 2012, the company said. Harman shares closed up 8 percent Thursday at $47.83.