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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. I'm Bill Robertson, Vice President of Finance for Visteon. Welcome to our Earnings Call for the Fourth Quarter and Full Year 2017. Please note this call is being recorded and all lines have been placed on listen-only mode to prevent background noise.
Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks, and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the slide entitled Forward-Looking Information for further details.
Presentation materials for today's call were posted on the Investors section of Visteon's website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so. Our Form 10-K was filed earlier this morning with the news release.
Joining us today are Sachin Lawande, President and Chief Executive Officer; and Christian Garcia, Executive Vice President and Chief Financial Officer. We have scheduled the call for one hour, and we'll open the lines for your questions after Sachin and Christian's remarks. Please limit your questions to one question and one follow-up. Again, thank you for joining us.
Now, I will turn it over to Sachin.
Thanks Bill. Visteon had a strong fourth quarter that capped off a successful 2017. On Page 2, let me briefly cover our consolidated fourth quarter and full year results for 2017. The fourth quarter is seasonally one of our stronger quarters. Despite a challenging vehicle production environment in North America, I’m pleased with our overall performance in the quarter across several key metrics.
We achieved sales of $797 million in the quarter, essentially flat over prior year. We delivered adjusted EBITDA of $102 million, a quarterly record for Visteon, and a 12.8% adjusted EBITDA margin was a 60-basis point improvement compared with the same quarter a year ago. The fourth quarter marked our 12th consecutive quarter of adjusted EBITDA margin improvement.
Adjusted free cash flow was $58 million. We won $2.4 billion in new business in the fourth quarter. The most new business, Visteon has ever won in a single quarter. This included significant wins in key product areas, which I will discuss in more depth later. Our full-year results were also noteworthy. Our electronic sales of $3.146 billion were an all-time high as was the adjusted EBITDA of $370 million.
Our new business wins for the year totaled $7 billion, increasing our backlog to over $19 billion at year-end. I'm very proud of the work of Visteon employees around the world to generate the strong results and help us finish the year on a strong note.
Moving to Page 3. On this page, I would like to discuss Visteon’s sales performance for full-year 2017 in-light of the market environment. Overall, global vehicle production volumes in 2017 increased just over 2% year-over-year, which was pretty much in-line with our expectations.
Regionally, the results were mixed, as increases in Asia-Pacific and Europe were partially offset by a year-over-year decline in production volumes in North America. In South America, the market in Brazil finally levelled off and started recovery in 2017, which helped drive the double-digit growth in the region.
Visteon's Top 5 customers saw their volumes grow by 1.7%, slightly below market growth. With respect to Visteon's sales, volume and new product launches drove an increase of $258 million or about 8% over 2016. This was offset by product roll-offs of $138 million or about 4% for an organic growth of nearly 4% or twice the growth of the underlying market.
The impact of annual pricing negotiations with customers in 2017 was similar to 2016 and combined with the low impact of currency reduced full-year sales by $81 million to $3.146 billion or a growth of 1.3% over the prior year. I am pleased with the overall performance in Visteon sales, despite the uneven performance of the market.
New product launches are starting to offset the impact of older products reaching the end of production. And as more of our backlog starts to convert into revenue, this offset will drive higher sales growth in the future as we have mentioned earlier.
Turning to Page 4. On this page and the next, I will give you an update on the two most significant product segments in cockpit electronics, instrument clusters, and audio infotainment. Both of these segments are undergoing significant transformation and Visteon is right at the forefront of these industry trends.
Starting with instrument clusters, the industry is quickly transitioning towards digital clusters with growing display sizes that enable dynamic information exchange using 2-D and 3-D graphics. The complexity and software content of this new all-digital clusters are significantly higher than the older generation devices they are replacing.
The dual requirements of rendering critical safety relevant information such as telltales combined with the need to render digital content such as maps and media cover art make these all digital clusters sophisticated computing devices. In 2017, we saw significant interest from automakers for 10-inch and 12-inch all digital clusters with 2-D and 3-D rendering capabilities.
The displays are continuing to improve both in terms of size and resolution, as well as other graphics capabilities. And we're starting to see demand for integration of camera-based driver monitoring features in these clusters. As you can see on the right of the page, we won almost $4 billion in new business and clusters in 2017. This is a second year of exceptional performance in the segment coming on the back of similar performance in 2016.
The global cluster market is about $7 billion in annual sales and these back-to-back years of strong new business wins put us in a great position to improve our global market share in this segment, which currently stands at 18% in 2017. A key highlight of our 2017 new business win performance was that over 60% of the wins were for all digital clusters. This compares with 37% in 2016.
Not only are we winning more than our fair share of the total cluster market, that also are performing everyone in the fastest growing segment within instrument clusters the all-digital segment. As a result, the average selling price of the cluster business won in 2017 is higher than that of cluster business won in 2016 by over 20%. 2017 was an outstanding year for Visteon in our instrument cluster business. And we are well positioned to continue this performance going forward.
Moving to Page 5. On this page, we will discuss our performance in the audio infotainment segment. The audio segment has been in decline for the past few years with the progression towards more digital and display-based content in the vehicle cockpit. As one of the leading suppliers of audio systems for the industry Visteon was facing significant headwinds in the space. Also, Visteon's market share in embedded infotainment has been small, based on the business that was inherited through the JCI electronics acquisition.
However, the audio infotainment segment in the auto industry is going through its own transformation, which was creating new opportunities for Visteon. Three new developments of changing the audio infotainment landscape in a significant manner. First, the success of smartphone projection technologies such as CarPlay and Android Auto, has created a new product category called display audio.
Display audio is quickly replacing traditional audio and entry infotainment systems as the default infotainment system in the cockpit. Next, the trend of equipping vehicles with connectivity to the Internet has created demand for the embedded infotainment to be a connected app platform. The traditional proprietary and closed infotainment solutions from current suppliers are no longer appropriate for the market.
And finally, the trend toward integrated domain controllers has created demand for integrating instrument cluster and infotainment on the single electronic control unit or ECU. Suppliers with strong cluster and infotainment solutions have an inherent advantage in offering these integrated cockpit domain controller solutions.
Our strategic initiatives in 2016 and 2017 have helped the company gain momentum in the audio infotainment segment. Our acquisition of AllGo Systems in 2016 has strengthened our hand in the display audio segment. The launch of Phoenix in early 2017, added to our capability in embedded infotainment by offering a web application platform or mid-to-high infotainment. And the SmartCore technology has been the leading solution for an integrated domain controller system for the cockpit, offering integrated instrument cluster and infotainment capabilities on a single ECU.
Visteon had a strong performance in audio infotainment in 2017 winning $1.5 billion in new business, compared with approximately $700 million in 2016. All categories, audio, display audio, and embedded infotainment saw significant growth year-over-year. We won two Phoenix Infotainment programs with the second win being a software only sale to upgrade an existing infotainment system for a vehicle manufacturer in Europe.
We also achieved two SmartCore domain controller wins for integrated cluster and infotainment with vehicle manufacturers in Asia. The strong performance in 2017 with new business wins, Visteon is gaining momentum in the audio infotainment segment. The pipeline of new business opportunities for infotainment and SmartCore looks strong and we expect our performance to continue to improve as we go forward.
Moving to Page 6, Visteon had a record $7 billion in new business wins in 2017 and this page provides a breakdown of this performance by product and region. It also offers a view into our backlog, which stood at $19.4 billion at the end of 2017, a growth of 18% year-over-year. Our 2017 performance of $7 billion in new business was up 30% from $5.4 billion in 2016. The main drivers were the outstanding performance in all-digital instrument clusters and audio infotainment that we discussed on the last two pages.
As we have mentioned on previous calls, one of our goals is to increase the average size of new business win, which ultimately drives improved profitability. In 2017, we increased the average size of a new award by approximately 25%. Our performance in 2017 was also very well distributed from a regional viewpoint. All regions were well represented, and I was particularly pleased with the improvement in North America, which grew 70% year-over-year in terms of new business wins.
As a result of the strong performance in 2017, our backlog at the end of the year was up 18% year-over-year reaching $19.4 billion at year-end. It should be noted that a significant portion of the backlog is made up of products that are growing faster than the market and is also oriented more towards regions that are growing faster in terms of vehicle production and sales.
Now, turning to Page 7, in addition to delivering on our financial commitments, we are also focused on ensuring the continued success of the company as the industry goes through its transformation. On this page and next, I would like to share our thoughts on the key trends impacting the industry as we look ahead at 2018 and beyond. As we have discussed previously, the cockpit electronics segment is going through a significant transformation.
Many of the trends such as these diversion of the cockpit, connected car, and ECU consolidation that are shown on the top of this page are already well underway. Visteon has done well in taking advantage of these trends in the past couple of years and the strategic actions we have taken in these areas will continue to position the company well going forward.
In parallel, the evolution of ADAS towards autonomous driving has been making significant progress and the industry is now looking at offering Level 3 automation with features such as highway pilot and remote self-parking. In addition to the autonomous driving technology itself, Level 3 automation requires careful transition of the control of the vehicle between the human driver and the autonomous driving system. This is leading to our conversions between cockpit electronics and autonomous driving technologies.
As a leader in cockpit electronics technologies, and with the launch of our autonomous driving platform earlier this year, Visteon is in a unique position to address this new requirement. Going forward, we expect cockpit electronics to require new innovations in human machine interface to facilitate the evolution of autonomous driving. This new cockpit solutions together with the emerging Level 3 plus autonomous driving solutions is offering Visteon further opportunity to grow our business.
Now moving to Page 8. On this page, I would like to discuss the emerging innovations in cockpit electronics that we stressed upon on the previous page. The last significant change to occur in cockpit electronics, human machine interface was driven by the introduction of infotainment technology in the cockpit. This required the industry to move beyond hard buttons and knobs to touch screens, speech recognition, and haptic controllers.
Now there is another transformation of the cockpit electronics underway, driven by the emergence of autonomous driving. This time the changes are driven by the need to keep the driver informed about the state of the external environment, even while the vehicle is being controlled by the system, and to hand over the control of the vehicle to the human driver in a timely manner as required. This is driving cockpit capabilities such as virtual reality, digital instrument clusters, driver monitoring solutions, and augmented reality head-up displays.
These innovations are expected to be launched in the market by 2021 coinciding with the broader launch of Level 3 autonomous solutions. At Visteon, we are developing these new capabilities in a cluster and autonomous driving technology platforms shown on the right of the page. At CES, earlier this year, we demonstrated our next-generation cluster solution that integrated driver monitoring capability.
We also launched DriveCore, our autonomous driving platform, which provides us with an entry point in the very important area of technology for automotive for the future. As the industry moves towards autonomous driving, these cockpit electronics and autonomous driving technologies will become increasingly important in winning future business. I am pleased that we were able to make significant progress in 2017 in evolving our technology platforms to stay current with the market.
Moving to Page 9. On Page 9, we summarize our highlights for the fourth quarter and full-year 2017. For the fourth quarter, we delivered a strong quarter with $797 million in sales and a record $102 million in adjusted EBITDA, representing 12.8% of sales. We delivered our 12th straight quarter of year-over-year adjusted EBITDA margin growth, and we were awarded a record $2.4 billion in new business wins.
For the full-year, we achieved sales of $3.146 billion, which was up approximately 4% year-over-year considering volume and mix. Our adjusted EBITDA margin increased to 11.8%, 70 basis points higher than prior year. We won record 7 billion in new business increasing our order backlog to a record $19.4 billion.
We continue to perform exceptionally well in the instrument cluster segment winning almost $4 billion in new business. And we gained momentum in audio infotainment segment winning $1.5 billion in new business or more than twice the amount last year.
Our domestic sales in China continued to perform very well and were up by 21%, driven by new product launches. And we exited the year with strong technology platforms that are very well positioned to address the key trends in the industry.
Overall, it was a solid fourth quarter and full-year for Visteon. I’m pleased with how the entire team at Visteon continues to be focused on execution and operational excellence, which has delivered excellent financial results and ultimately value for our shareholders.
That concludes my overview comments, and now Christian will walk you through our financial results for the quarter and full-year.
Thank you, Sachin, and good morning everyone. On Page 11, we present our key financial results for the fourth quarter and full-year 2017 versus the comparable periods in 2016. The financials on this page reflect our ongoing electronics product group and exclude discontinued and other operations.
As explained on prior calls, our financial results in the prior year included businesses that were exited at the end of last year, and were classified either in the other product group or discontinued operations. We did not have nor expect to have any sales or adjusted EBITDA related to our other product group or discontinued operations.
Electronic sales of $797 million in the fourth quarter were down by less than 1% from prior year to drop in North America production volumes was offset by growth in other regions. Despite the modest decline in revenues, adjusted EBITDA for electronics was $102 million representing a 4% increase from fourth quarter 2016. Adjusted EBITDA margins were 12.8%, 60 basis points higher than prior year levels and largely reflects operating efficiencies across our organization.
Since 2015, we’ve had 12 consecutive year-over-year quarterly improvements on this metric. Adjusted free cash flow for electronics was $58 million in the quarter, $21 million lower than the fourth quarter of last year, due to timing of working capital payments and higher capital expenditures. I will provide more detail on the full-year figures on the following pages.
On Page 12, we provide electronics sales and adjusted EBITDA for the full-year 2017 versus 2016. Electronics sales for the full-year were $3.146 billion or 1.3% higher than 2016 as higher volumes offset the impact of pricing. Overall, volumes and makes were up by 4%, compared to global production volume growth of 2%. As we have indicated during the course of 2017, we continue to generate strong revenues from China.
For the full-year, our China domestic sales increased by 21%, while China vehicle production volumes grew 2%. We’ve seen a decoupling of our sales growth from the market, driven by our new product launches and we expect China domestic sales to continue to grow at double-digit rate in 2018.
Our adjusted EBITDA for 2017 was $370 million, which if you recall is at the top end of our guidance. This represents growth of 7% from 2016, and reflects our continued ability to generate favorable cost performance in engineering, material, and manufacturing costs. This cost performance together with the flow-through of new business more than offset the impact of pricing and unfavorable currency.
Adjusted EBITDA margin was 11.8% for the year, and represents an improvement of 70 basis points, compared with 2016. Incremental margins, which are the amount of adjusted EBITDA generated for every dollar of increase in sales were over 60%, which indicates our ability to extract operational efficiencies, while at the same time invest in new technologies and execute on the new programs we have won.
Turning to Page 13. Page 13 provides our cash flow. Total adjusted free cash flow for the year was $148 million, lower than prior year, driven by the timing of working capital payments, which will in turn benefit our cash flow in the first quarter of 2018. In fact, our adjusted free cash flow for January 2018 is one of the highest in many years, and should dampen the cash outflow we typically experience in the first quarters of every year.
Capital expenditures came in at a little over 3% of revenues for the full-year, due to two reasons: plant investments took over a strong new business win rate, and higher capitalization of software development costs as we move towards platform and software-based technologies. Our returns on invested capital are high over 19% in 2017, and as such the best use of our cash is investing in ourselves.
Going forward, we estimate that our capital expenditures will be around 3% of revenues. Free cash flow for total Visteon for the year was $118 million, which is a good improvement from 2016 levels of $45 million as we have completed separation of our legacy businesses.
Cash and short-term investments at the end of the year were $709 million and debt was $393 million, which continues to put us in a net cash position in a debt-to-EBITDA ratio of 1.1 times. We have a strong capital structure that would enable us to compete effectively and invest in differentiating shading technologies, while returning capital to our shareholders.
Moving to Page 14. I would like to provide an update of our capital return activities. We have authorization from our board to repurchase a total of $900 million in two tranches. 400 million authorized in 2017, and 500 million authorized in 2018. For the 2017 buyback program, we have repurchased $200 million in 2017 at an average price of 101 for approximately 2 million shares.
We will be entering into a combination of open market in accelerated share repurchase programs for the remaining $200 million. In January 2018, our board has supplemented the 2017 authorization with an additional 500 million to be executed through 2020. As such, as of the end of December 2017 we have 700 million of outstanding share repurchases. This underscores the confidence we have in our long-term growth prospects and shows our commitment to delivering value to our shareholders.
Shareholder distributions will continue to be part of our capital allocation approach going forward, and as the company continues to generate cash, we expect that there will be more opportunities to further return capital to our investors.
And finally, last month at the Deutsche Bank Global Auto Industry Conference, we discussed how we’re leveraging our technology leadership position in cockpit electronics as the industry transitions into autonomous driving. In that conference, we provided our 2018 guidance, which we are reaffirming today.
We’re also reiterating our investment themes. First, our strong new business wins of $7 billion with the significant awards we had in infotainment and all digital clusters give us increased confidence in meeting our overall long-term growth objective. Second, in 2017, we delivered increased margins of 11.8%, while investing in new technologies and executing on our program wins, and we continue to generate adjusted free cash flow.
And third, we continue to be good storage of capital. We have executed on $200 million share repurchases in 2017 and we have 700 million remaining that we will execute between now and 2020.
Thank you. And let’s open it up for questions.
[Operator Instructions] Your first question is from the line of Ryan Brinkman with JP Morgan.
Thanks for taking my question. And the question is about the bookings number, it was extremely strong in the fourth quarter, you know to the layman it would appear that you are well on track to exceed the 2017 and 2018 sort of combined $12 billion number, is that the way we should look at it or does it relate somehow to a different cadences, some wins you thought that might land in the first quarter of 2018, in fact in the fourth quarter of 2017, and what does this imply for your sort of, I think it’s 8.7% sort of organic CAGR through 2021 et cetera, are you potentially now in a position to be maybe ahead of plan?
Hi Ryan. First of all, yes, we are very happy with our record setting performance in 2017 with respect to new business wins. What I would say with respect to our longer-term revenue target is that this performance increases our confidence, first of all in achieving that target. With the wins that we have had in 2017 now, I would say over more than 60% of the 21 target of $4.7 billion in revenue is already in our backlog or already sourced. So, the way we should think of it is, that our confidence in delivering our 2021 revenue target is now significantly higher.
Having said that, our revenue outlook depends on a few other things such as vehicle production, our forecast, as well as currency. So, our target for 2018 for new business wins remains the same, roughly about $6 billion. The sales pipeline looks very strong. So, we expect to have another strong year, and as we always do, we will update our outlook for 2021 at the end of the year and provide you with an update at the next Deutsche Bank Conference. But overall, again a very strong year, we feel very good about our prospects in the 2020, 2021 timeframe, as we have said earlier in this year as well and I think it also positions us well in terms of being able to deliver a strong 2018.
Okay, great. Thanks. And then just lastly from me. We saw that earlier announcement that you had one that sort of design wins for SmartCore in Europe and without producing all of the associated hardware, and now today you’ve got this announcement of a software only Phoenix win, can you kind of talk about the implications of that, do you prefer to produce the associated hardware also or are you more attracted to a software or design approach because of the positive implications to margin and presumably return on invested capital?
Yes. Let me talk first about this win and then I will also invite Christian to talk about the margin. So, if you look at those sales cycle for a typical conquest infotainment win it’s usually more than a year. And so, we're very happy to have two wins in Phoenix within a year of the launch of the platform. So, this second win is for an European OEM and this is for the existing infotainment systems that they wanted to upgrade to be able to host web apps in our downloadable fashion.
So, we are providing the Phoenix runtime and the studio developer software to enable the OEM, and the third parties to create downloadable apps for this infotainment system. This is a software only sale and as such the business model relies on a royalty that that we collect on a per unit basis, and since this is an existing infotainment system, the initial start-up production is actually Q3 of this year.
So, I would say it’s a great validation of our software-oriented approach to our platforms, it represents an acceleration of revenue and as a software only business the margins are what you would expect from our software business. Christian would you like to add to that?
Yes, the only thing I would add Ryan is that, when you think about the software only, it actually provides us the ability to experiment with various revenue models, which we did not have without having this platform-based technology like Phoenix. It is also interesting to note that the hardware is based on somebody else, it’s a competitor’s hardware. So, it actually gives us the ability to port our technology on somebody else's platforms, which is kind of really interesting.
And the last thing I would add Ryan to your question whether we would prefer to offer software only or along with the hardware, it really is a choice that we don’t get to make in most of these cases. This was the OEM in most cases that decides that. We do expect a few other opportunities in this way where on account of the installed base of infotainment systems that lack the ability to offer an app environment there is a demand for the kind of software that we offer with Phoenix, but in the vast majority of the cases, we expect that the OEMs will want a complete system hardware along with the software pre-integrated like what we typically would do in normal business.
Very interesting. Thanks a lot.
Your next question is from the line of Joseph Spak with RBC Capital Markets.
Hi good morning. The first question I had is, on free cash flow, actually and it looks like it was a little lower, I think driven by higher CapEx, which I believe is related to just more capitalization of software development and I guess the question is, as you move from more and more towards a software base enterprise, should we think about CapEx running higher than the 3% of sales that it’s typically run at, and I guess is there a corresponding offset to R&D?
Joe this is Christian. So, in terms of the CapEx, just to give you the magnitude, of the increases that we had, we had about $25 million increase in CapEx year-on-year, but two-thirds are what you would consider normal CapEx, which is the plant equipment and so forth that we needed to support the new program wins that we’re having. And a third of that is also, a third of the increase is the software development cost that you talked about.
So, going forward, yes, the software development cost is actually helpful in our R&D, but if you recall when we guided in Deutsche Bank of what happens in 2018, we have - our engineering expense is expected to increase because of the incremental investments that we have in autonomous driving.
Okay. So, there might be some benefit, but then there is additional investment in [indiscernible].
Right. But in terms of the guidance, we think 3% is a good number for CapEx as a percent of revenue going forward.
Okay. And then if we look at Slide 5, where you provided the information on infotainment in the backlog, so it looks like, if you look at sort of the mix shift right, a big move to sort of display audio, and it looks like that sort of evenly take in in terms of a mix percentage any way from regular audio and embedded infotainment, and so I would have thought from an ASP perspective those two might actually offset, but you're still saying that ASPs are up 10%. So, I guess within embedded infotainment are those ASPs higher as well year-over-year?
Yes. So, embedded infotainment ASPs are maintaining their pricing levels. So, what is really happening is that the display audio is significantly higher than the audio that it is replacing. And that is what is helping the average ASP go up by about 10% for the full amount. The way to think of it is, as you mentioned we are winning in all of the three segments.
This is a turnaround year, 2017 was a turnaround year for us in infotainment, and it’s really driven by the fact that we have made some investments in our platforms, and we have talked about Phoenix, it scales really well from entry infotainment all the way to mid-high and the strength that we have on account of the acquisition of AllGo in our smartphone projection capabilities, which are very important, not just for display audio segment, but also for embedded.
Okay. Thank you.
And your next question is from the line of David Lim with Wells Fargo.
Just a couple of questions. When we look at your $7 billion in win, can you parse out how much of that is conquest versus incumbent and then your win rate from a conquest perspective? And then I have another follow-up.
David this is Christian. In terms of conquest and incumbent, about 70% to 80% we would consider conquest and the rest would be incumbent.
And, can you give us an idea of your win rates on there, I mean is it more like a 30% or 40% win rate, when you do conquest bids? Or is it more than that?
I'm sorry. Let me rephrase what I said, I had it reversed. So, 30% is conquest and 70% would be incumbent, of the 7 billion that we won.
And regarding the win rate question David, so about 80% of the incumbent we win. So that’s roughly our win rate there and when it comes to conquest, our win rate is closer to 50%.
Got you. And then on the Phoenix software side, on the software side, I know that it is a little early, but on the royalty, can you give us a little bit more color, I mean, relative to likely units that you anticipate and are we talking about $10 to $20 per car, or is it something higher than that or lower than that, any kind of additional direction would be very helpful?
It really depends on the content. So, it’s hard to put a specific number. There is a lot of feature content that drives the royalty structure, but it is in the range that you just mentioned. It is, in this particular case, as we mentioned, there is an existing infotainment system. So, this is adding to the capabilities, especially with regard to the ability to download apps from the Internet and run them securely on the infotainment system.
As we go forward and there is additional features that Phoenix would deliver, including all of the base infotainment capabilities than the value of that software would increase, but in this particular case it’s in the range that you have just talked about.
Great. Thank you so much.
Your next question is from the line of David Leiker with Robert W. Baird & Company.
Hi, good morning. This is Joe Vruwink for David.
Hi Joe.
The old digital cluster win seem notable, I think you’ve discussed that market growing 25% to 30%, your new wins are growing 70%, how much of the growth today is barriers to entry that you sort of brought up the complexity of the product kind of boxing out or excluding a lot of legacy clusters suppliers versus technology or cost leadership you would say Visteon has, even against competing companies that do have a digital product, but it’s just not quite what you're offering?
So, Joe first thing I would mention here is that one of the key capabilities in our all-digital cluster - there are two in fact, one is the display, the other is the software. And when it comes to the digital display, Visteon has always had a very strong capability in automotive digital displays. We ship over $400 billion worth of digital displays every year. So, we have a strong capability in taking LCD panels and then creating them and bonding and fabricating the automotive displays and that have to withstand the conditions within the car and meet critical requirements. This was not something that most players in this space have as a vertically integrated capability.
So, that’s one element of that. The other is the software. And so, what has happened here with software is that besides having the key capabilities in terms of the technology, we at Visteon have critical mass in terms of supporting the specific vehicle architectures of a wide number of automakers in the world. So, we have now a broad-based platform that we can take to automakers that more than likely supports their requirements out of the box. That’s different from say with many other of our competitors that reduces the risk to the program, reduces our cost in developing that cluster, and this is one of the main reasons why we have won as much business as we have won.
This is the second year that in a row that we have won about $3.8 billion, $3.9 billion in clusters and when you look at the market, which is on an annual basis somewhere around $7 billion it represents a significant market share. So, we do expect however that as we go forward more of the automakers to transition towards our digital and again momentum is a very good thing, and this should put us in a good shape to win more of the business going forward in all-digital clusters.
And since you brought up platforms, so I remember back when you took the infotainment platform at Harman, and that was really the turning point to getting infotainment into the Japanese automakers, obviously they value performance, but they are also reliability cost sensitive, do you think Visteon is near a similar milestone where his first win with the Japanese automaker really opens up that industry as a totally incremental opportunity?
Yes, we have Joe a few firsts when it comes to all-digital clusters. We had the first 12-inch all-digital cluster win with the Japanese OEM, which is a significant step. I think this is, this would really enable us to build and demonstrate our capability in Japan in that market, which is a difficult market for most non-Japanese suppliers to crack into. And it’s a significant win which means that will definitely going to put us on the map, which should help us with more business wins in the future.
Great. Thank you.
Your next question comes from the line of Anthony Deem with Longbow Research.
Hi, good morning.
Good morning.
Couple of questions for me. First, of the $1.5 billion of wins in the audio infotainment in 2017, are you able to specify the values for the two Phoenix wins and that the SmartCore wins?
It was really hard to hear your question; can you please repeat?
Oh, yes. I apologize. So, I was wondering if you could specify the values for the two Phoenix wins and SmartCore wins out of the 1.5 billion of new business wins in audio infotainment this year?
Yes. We don't typically provide specific values of two business wins. These are things that we normally would not be allowed to share by our OEM customers. So, we try to stay away from that.
Okay. I understand. And then just my last question, the shift to all digital clusters is really ahead of stride in 2017, and I'm just wondering since all the digital clusters require more computing resources and it seems the interaction between the cluster and infotainment is a trend, can you talk to the potential for the additional SmartCore new business wins in 2018 beyond and really has the bit presence dramatically increase or do you see this more as an opportunity for gradual increase in wins because of long lead cycle and transition into a single ECU? And thanks for taking my questions.
Yes. You are absolutely right. This move towards all digital clusters really drives demand for increased computing resources, including processors, memory, and software. And the need is really driven by the sort of the drive towards rendering digital content in the clusters and information that comes typically from an infotainment system. As we see more of these types of observations that is also a big sort of a driver behind the integration of infotainment and the cluster because it is a lot more effective to have those two systems run off of a single electronic control unit or ECU to be able to share that information seamlessly between the two displays.
Now, as we have - I think in my prepared script mentioned that the momentum in cockpit domain controllers is also picking up and the pipeline of new opportunities for 2018 is very robust. In fact, it has never been greater. So, we are very optimistic about having more success with SmartCore that integrates infotainment and cluster on the single ECU as we go forward here in 2018 and beyond.
Your next question is from the line of David Tamberrino with Goldman Sachs.
Great. Good morning. Just looking through your pricing for the full year and kind of backing into the fourth quarter, it looks like it was running about negative 3.5% maybe for the quarter, I think that’s a little bit worse than what we saw in the third quarter. Are those concessions concentrated with any particular product lines or geographies and what type of run rates should we be thinking about going forward?
So, David this is Christian. Let me take that one. Pricing as you know David is an interesting dynamic in the auto industry. The impact of pricing in any quarter is depending on the negotiations that we have with individual OEMs and the program they relate to us. Of such there could be a lot of unevenness between quarters. Now having said that, if you look at the entire year, the impact was $86 million or a little bit above 2.5% of revenues, which is in-line with our historical rate. So, I think we should just look at that in that fashion.
Okay. So, no incremental pressure to be thinking about. Sachin, obviously you guys launched DriveCore and CES so far, you signed up one manufacturer, what have you seen so far from an interest level and how do we go about monetizing this platform over the next couple of years?
David, very good question and let me try to describe to you the way we see the opportunities in autonomous. So, if you look at the industry and some of the things that you are hearing in media there are really two directions that the industry is taking. On one side, there is this push towards fully autonomous perhaps in more limited domains intended for applications such as robot access and for freight movers and trucks that have a point-to-point limited by sort of a specific geo-fenced area. So that’s one initiative.
The other initiative is targeted more towards consumer car owners and in this area the goal is to upgrade the current level, one level to ADAS capabilities into Level 3 more automated driving. So, at Visteon we're really focused on working with our traditional long-term customers in enabling and upgrading Level 1, Level 2, into Level 3. Now, the key features there that we expect to be of initial interest would be highway pilot and remote self-parking.
So, what we are doing now is, we are very focused on developing a very cost-effective solution based on DriveCore that meets the requirements of highway pilot and self-driving. And so, this is where we would expect as we make more progress in releasing these capabilities, and launching these features would expect to see more business opportunities with OEMs that we have started engagement in.
The interest is extremely high. We are just as cautious in terms of who we work with and who are the right partners for us as much as anything because again there is a lot of activity in this industry in this regard, at the same time resources are limited. So, we are carefully sorting through the opportunities and making sure that we're partnering with the right set of OEMs. And we will update you as we go along, but so far, we have talked publicly about [indiscernible] and we were in discussions with a few others in parallel at the same time.
Okay. That’s really helpful. And maybe just lastly, to switch over to software only Phoenix Infotainment win, can’t recall if you noted this already there was an incumbent on someone else's hardware, is that on a display audio or an embedded infotainment platform?
No. It was an embedded infotainment system. It was provided by another supplier to them, and what we have effectively done here is to give them a platform that allows them to support downloadable apps and that is really where we see the industry head for embedded infotainment and Phoenix is one option for them to be able to get to that solution fairly quickly.
That’s fair. How many developers do you have live on that Phoenix studio platform today?
I would say our infotainment development team, because we have it all under one global steam, I would say that’s probably on the order of a couple of hundred developers at this point-in-time.
Okay. Thanks for taking our questions.
Thank you.
And your next question is from Colin Langan with UBS Securities.
Thanks for taking the question. Just looking at margins, I think you’ve talked about getting to 14% over time, guidance for this year is relatively flat, I mean what are the drivers that really now at this point depending on the inflection in the sales backlog or do you still see more cost opportunities? I know in the past, you’ve talked about you were kind of higher than average on SG&A you are now in-line, so what is the opportunity left from margin?
Colin this is Christian. If you think about the opportunities between where we are right now, a little short of 12%, 11.8% to the 14%, there are really three buckets. One is, cost efficiency as you’ve pointed out. The other one is shift to software platform-based offerings that has a creative pressure on our margins, and the third is fixed cost leverage as we get bigger, higher revenue base.
If you think about the margin progression from where we are to the 14% target that we’ve communicated. The fixed cost leverage will happen towards the backend of that as we get, as we translate or generate the revenues from our backlog. So that would come in later, the other one is the shift to lower software and platform-based offerings is still quite nascent. And if such, the improvement in margins for the first few years before that five-year plan of 2021 will be coming from cost efficiencies.
Okay. I mean, so do you still see a pretty meaningful cost opportunity at this point?
Yes. When you think about the incremental margins that we are looking at between the 11.8% to 14% it’s - the incremental margins are around less than 20%, right. So, as such we still believe that there is cost of efficiencies that we could generate from our current fixed cost structure.
And are you still above average on SG&A relative to your being benchmark peers or do you think that part of the equation [indiscernible]?
So, if you think about what happened this year for SG&A we had a modest increase in revenues. However, SG&A was flat, right. So that means we continue to see leverage on top of that. So, we believe that we can continue to - even at a flattish SG&A level as we increase our revenues than our SG&A as a percent of sales would actually come down.
Got it. And just lastly, how should we think about the cadence wins for SmartCore, Phoenix, and then DriveCore, I mean it seems like SmartCore I think it added two this year, two the prior year, Phoenix to this year, should we - should they start to accelerate or is this sort of [indiscernible]?
Hi Colin, this is Sachin. So, as I said, the cycle of - the sales cycle I should say for infotainment is usually more than a year. And so now you would expect that we would start to see a pickup in activity with respect to infotainment new business activity and new business wins. The same for SmartCore. SmartCore we have seen a sort of continuous increase in momentum with automakers and the pipeline in both infotainment and SmartCore looks pretty strong.
So, I would expect that we would see a pick-up in new business activity for those two products. With respect to DriveCore, again, it’s relatively new for us and for the industry. So, there is a lot of discussions that need to happen and business models that need to evolve. So, I would say that that is still in a pre-business development phase. I would expect more sort of a pickup to occur perhaps later in the year or early next.
All right. Thank you very much.
And with that, thank you Sachin, thank you Christian, and thank you to all for calling into the Visteon fourth quarter earnings call. I will be available later today to take any questions. So, please feel free to contact me. And at this point, we will end our call. Thank you.
This concludes Visteon's fourth quarter and full-year 2017 earnings call. You may now disconnect.