TomTom NV (OTCPK:TMOAF) Q1 2016 Earnings Conference Call April 19, 2016 8:00 AM ET
Bisera Grubesic - Head, Treasury and Investor Relations
Harold Goddijn - Chief Executive Officer
Taco Titulaer - Chief Financial Officer
Andrew Gardiner - Barclays
Marc Hesselink - ABN AMRO
Francois-Xavier Bouvignies - UBS
Hans Slob - Rabobank
Shyam Kumar - TT International
Sander van Oort - Kempen
Good day, ladies and gentlemen. Welcome to the TomTom First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host for today’s conference, Bisera Grubesic, Head of Treasury and Investor Relations. You may begin.
Thank you, Alex. Good afternoon and welcome to our conference call during which we will discuss our operational highlights and financial results for the first quarter of 2016. With me today are Harold Goddijn, our CEO and Taco Titulaer, our CFO. You can also listen to the call on our website and a recording of the call will be available shortly afterwards.
And as usually, I would like to point out that Safe Harbor applies. We will start today’s call with Harold, who will discuss the key operational developments, followed by a more detailed look at the financial results and the financial outlook for 2016 from Taco. We will then take your questions.
And with that, Harold, I would like to hand over to you.
Good afternoon and good morning. Thank you very much, Bisera. Welcome to our earnings call. We have started the year with a solid revenue growth driven by sports and business-to-business activities. We generated group revenue of €270 million, which is 6% higher year-on-year and we delivered a strong gross margin of 57%, which is 3 percentage points above last year. Taco will provide further information on the financial highlights and the financial outlook for 2016 later during his presentation. I will now discuss our key operational highlights for the quarter.
In consumer, we saw strong growth in our sports activity in the quarter. The sell-out amounts of our sports watches nearly doubled year-on-year and the new watches are winning numerous awards, which is not a proof point of our success in this segment. In PND market, we saw unit decline of 13% in Europe, whilst the North American markets declined by 22% year-on-year. Our market share in both regions improved slightly year-on-year.
Our Telematics business continued to perform well. The installed base reached 625,000 subscribed vehicles by the end of the quarter and delivered a 30% growth compared with last year. Automotives delivered a strong performance in the quarter and we announced many customer deals. PSA Group launched its new global infotainment platform, which is built on a full suite of TomTom products, maps, navigation and software and live services. We announced an agreement to deliver maps and navigation to the new Volkswagen Up! smartphone app and we extended our partnership with Fiat Chrysler and Toyota this quarter. We also extended HD Map and RoadDNA coverage in California and Nevada, enabling self-driving car testing in key regions of the U.S. Autonomous driving continues to push boundaries. At TomTom, we are excited to be playing a role in enabling the automotive industry to bring this closer to reality and RoadDNA is tracking considerable interest from the industry and leading carmakers.
Let me now briefly summarize our group strategic priorities on Slide 3. Our activities are organized around four customer-facing business units that leverage our brand capabilities and common technology assets to provide our customers with industry leading location-based products. We have made substantial progress with our core technologies across the group over the recent years. And this gives us confidence that we will position to capture growing opportunities in the area of consumer wearables, automotive driving, connected cars and Telematics. These areas all required technological and product expertise that TomTom is able to provide and form an important part of our growth strategy, product roadmap and investments for the foreseeable future.
We are determined to further build on our path of growth. This can be achieved through growth from more PND product sales while extracting value for the PND category. With the introduction of our own branded GPS Sports Watches and action cam, these diversified the consumer portfolio into the sports market and be able to continue to build on these innovative new products.
Our new mapmaking platform is essential for creating a stronger market position as well as for pursuing new opportunities in the Automotive and location-based services market. Our strategy in Automotive is working and that is reflected in the order intake growth over the recent years. Our product portfolio delivers scalable, efficient-to-develop products to our customers and is gaining significant interest in the industry. We believe that our mapmaking platform, together with our traffic and navigation software and our Telematics capabilities, will enable TomTom to pursue further growth with existing and new customers for the connected car Advanced Driver Assistance Systems and Autonomous Driving. We are committed to play a leading role in creating positioning technologies for HD maps for TomTom’s driving and both recent product launches and contract wins are important proof points that we are delivering according to plan.
The underlying industry dynamics for our fleet management business remained favorable. The combination of short return on investment for our customers and an under-penetrated market allow us to plan for long-term growth of our Telematics revenue. On top of this, we see new opportunities arising in the connected car services industry and navigation products and connected car services are complimentary and in combination form a strong product portfolio. Our business will continue to require high levels of investments in the new future and this is needed to support delivery of new business and sustainable future growth of TomTom.
This concludes my part of the presentation and I am now handing over to Taco.
Thank you, Harold. I would like now to comment on the financial results. Revenue in the quarter was €217 million, an increase of 6% compared with last year. Our sport automotive licensing and Telematics businesses grew strongly to upset the reduction in PND and automotive hardware revenue.
Now, to four business units. Consumer, the revenue was down 4% year-on-year to €117 million. This is a result of a strong growth in our sports activities. As already mentioned, we saw the sell-out amount for sports, which is doubling year-on-year. This growth is counterbalanced by lower PND and related content and services revenue and by lower automotive hardware revenue. Automotive had a strong quarter with €30 million of revenue. This is 26% revenue growth year-on-year driven by growth in maps and traffic revenue underpinned by the order intake of the last several years.
Our licensing revenue was €34 million in the first quarter, a 16% growth compared with same quarter last year. Do need to point out here that this is an increase from new customer wins, but also renewing and extending of existing customer contracts, which we commented on in the second quarter of 2015. Q2 2015 involved a €5 million catch-up, which will not be there in Q2 2016.
Telematics revenue was up by 19% year-on-year to €37 million. The recurring subscription revenue for the quarter increased by 28% year-on-year to €29 million. Our monthly subscription ARPU decreased slightly year-on-year owing to the impact of the acquisitions.
We delivered a strong gross margin in the quarter of 57%, which is 3 percentage points higher compared with 54% in Q1 2015. This year-on-year increase was mainly driven by higher proportion of content and services revenue in the quarter. OpEx for the quarter was €128 million compared with €150 million in the same quarter last year. This increase is driven by increased SG&A expenses, reflecting growth of our workforce and higher marketing to support our new and broader product range.
We expect the run rate for OpEx in 2016 overall to be up with approximately 10% versus 2015. We delivered a net result of €5 million this year, which translates in an adjusted earnings per share for €0.03 on a fully diluted basis. At the end of the quarter, we reported a net cash position of €50 million and cash flow used in operating activities for the quarter was €18 million, €5 million higher compared with last year. The cash flow used in investing activities during the quarter by €7 million to €31 million, mainly reflecting increased investments in map content, our map-making platform and cluster-specific investments.
Let’s now move on to our outlook for 2016, Slide 5. We are reiterating our guidance for the year. We expect revenue of around €1.05 billion. The adjusted earnings per share is expected to grow by about 10% to €0.23 and we expect the level of investments in both CapEx and OpEx in our core technologies to be higher than last year and particularly we are investing in advance content software for the automotive industry and in our new mapmaking platform.
That concludes the formal presentation – formal part of the presentation. I would now hand over for questions.
Thank you. [Operator Instructions] And we will take our first question from Andrew Gardiner of Barclays. Please go ahead. Your line is open.
Good afternoon gentlemen. Thanks for taking the question. I was hoping to get a bit more detail on the automotive side of the business, I was just sort of interested in an update on competitive dynamics and customer positioning and more specifically, I was wondering whether you have noticed any change in customer approach to sourcing since the announcement of the HERE sale to the three German automakers, yes has there been any sort of change in how the – these guys are approaching contract?
Yes. Andrew, thank you. Yes, there is growing number of trends, I think in automotive industry that are worth commenting on. I think first of all, it seems to us, it looks increasing evidence that NDS is a map format is taking hold. That’s important for us as a new industry standard. We are seeing as leading in that domain both in terms of map population, incremental updates and software. I think that’s a good trend for us. It also reduces the cost of switching for existing customers and all that is placed in our favor because we have to gain market share. We see that our full suite of technology is maturing and that leads to more contract wins. We also have seen a strong first quarter in terms of order intake and we will not disclose the exact number. We will do that later. But we are on track in winning customers. And we also see that there is quite some uncertainty about HERE that won’t last forever. But there is uncertainty and that means that it’s easier for us to get access to new customers and talk about future opportunities. So it will take time to exactly understand what HERE is going to do and how it will develop. But I think for the moment, it is – this is a good time for us to strengthen relationships, build new ones and win deals.
Thank you for that. Also just having sort of ticking up on some of sort of your final comment there, I am just wondering from a strategic perspective whether you see any shift, I mean there continues to be talk of other companies joining or investing in HERE, including some very big tech players Amazon and Microsoft have been talked about in recent weeks, would that type of activity change your view on needing to partner in this part of the market?
We will need to see. And I think it’s too early to comment. We really need to wait until there is white smoke coming out of the German factories to really understand what that consortium will look like and what is the appropriate reaction for – would be for us.
Understood. Thank you very much.
[Operator Instructions] Our next question comes from Marc Hesselink of ABN AMRO. Please go ahead. Your line is open.
Yes. Thanks. The first one is also coming back on the automotive one, if you are looking now at market shares, what do you think that the share that you are taking in market at the moment. And also, is there – do you see some activity outside TomTom or HERE now that with Android outdoor, you see that also there you are now using the Google Maps, what are you seeing on that front. And then secondly, you launched the multiple – you increased the high-definition map, how is that being used at the moment, is it being used by partners, is it being used in general by a lot of players in the market, do you get data in return or do you get some returns already on that one, could you explain that a bit – in a bit more detail please?
Yes. So first question, what is our market share and order intake, so what percent of available business are we winning, se – it’s difficult to give you a number there. But we think it’s significantly higher than what our current market share is in shipments. We cover that we are winning market share at the moment. But I can’t put an exact number on the percentage there. Second question is Google and Apple going into the dashboard, yes we see that happening. We see that some carmakers and [indiscernible] are offering screening replication functionality for both Google and Apple. But we also are seeing that the penetration of built-in navigation in cars is going up at the same time. It’s still surprising that there is still a big market to win for built-in application. We see penetration rate is going up, not down. The car industry isn’t willing to hand over the keys of their infotainment system to what could potentially be competitors. They want to keep it control and influence on what’s happening in the dashboard. And I think everybody in the car industry is really busy organizing themselves and getting better at software. And I think that’s a favorable development for us.
On the last item, what’s happening to with RoadDNA and HD Maps, so we do – we do a lot stuff for the car industry and autonomous driving, but our core products are RoadDNA and high definition maps. High definition maps are maps that reflect all the lines and the barriers and the crossings in high level detail and position that is needed to understand where the car is and where it needs to go to for longer term planning. And we provide RoadDNA, and RoadDNA is reported for localization. So the GPS signal alone is not accurate enough to determine the position of a car on the road. RoadDNA is technology that helps achieving up to 10-centimeter accuracy, knowing where that car is and that is important for steering it and planning the movements of that car. We are working with a number of carmakers. They are also in development and research phase, as you can understand. A lot of carmakers are using our maps, testing them, integrating them in their software. We get feedback for that both on the map itself and RoadDNA. That is important for us, so we understand what the needs are and how those needs are developing. But those are not in production yet in the sense that they are shipped with cars. So, we don’t get at this moment sense of derived observations back from carmakers who maintain those maps and detect changes and errors in the dataset that we provide, but it’s definitely part of – our plan, of course, to close that loop and help with positioning would also get data back from the car to understand where the cars are out of date – where their maps are out of date.
Okay, thanks. And maybe as a follow-up, how do you see that, that product sort of the combination of RoadDNA and the high definition map? How does this compare to the competition at the moment?
Well, so people are trying different things. I think there are, with our technology, offers a number of advantages. We are capable of compressing it very effectively. It works. It is forgiving for noise. Although it is of course really important. I don’t think it’s – the time is now to call for a winner, everybody is working hard in refining the technologies and testing the technologies, but it is too early to call victory, but we are encouraged by the results in the feedback we get from our departments.
We will take our next question from Francois-Xavier Bouvignies of UBS. Please go ahead. Your line is open.
Yes, hello. Thank you for taking my questions. I have a couple if I may. So, the first one is on your take-up market share rate. How do you explain it? I mean, what is the main driver behind it? Is it because in [indiscernible] transition, for example or is it price-related, product-related? So, if you could give us some comments would be great? The second one that I had is like how – can you give us a sense of the shape of revenues in [indiscernible], I mean given that you have strong revenues in automotive would be interesting to see how you see it shaping? And the last one is your relationship with sports again. I mean, it’s been 9 months now that [indiscernible] has been abroad. Are you – I mean, how do you see this relationship going forward? Is there any, like descriptions in this strategic relationship or maybe from your point of view, are you less, I mean, more reluctant to work with them? I mean, can you give us color on this? Thank you.
Yes. So, on a market share, again, it’s the product-related, price-related. I think it’s – I think OEs like our story. Our approach – we have proven over years that we are reliable partners in bringing products to market successfully. We are building on our reputation. Our map quality has improved significantly over the last 3 years. Our customers like our real-time map story. We are leading in traffic. We are leading in routing. So, there is a lot to go for. And I think all that is coming together now and is more and more proof points that we are actually delivering according to plan. So, it’s really a combination of product policy, technology, roadmap, but also we continue to build on our reputation of being a reliable partner and vendor. I hand over the revenue development line. I do that hand it over to Taco, but before that, I will give you some comments on the Volkswagen relationship. I think we have a good relationship with Volkswagen that I think it’s too early for us to judge how that relationship will develop over the coming years. I think we need to see what’s happening with here, how they are going to play that and then understand exactly what the future will bring. I can’t comment more than that on this.
Yes. On the shape, the revenue mix, it’s interesting to note that in the first quarter, for the first time, I think ever we saw content and service revenue being larger than hardware revenue in the mix. It’s also reflected in the gross margin that we report of 57%. So, there is a proof point. What we said earlier in the year, 2 months ago that we see Telematics and automotive will continue to grow. Licensing is expected to end up flat year-over-year for the full year and consumer also flattish, where we see the decline in PND what is compensated by the growth of our success in the sports segment.
Okay. And your sports segments, I mean, can you give us an update on 2016 what is your target here?
Yes. So, we provide an update on that on a yearly basis what the actual revenue is. What we can say as an indicator is that the sellout, which we track because we see the activations of users using our product, has gone up, has doubled year-over-year, Q1 compared to Q1 last year. It’s an indication of growth. We don’t want to provide, at this point, exact numbers, but we are looking at double-digit growth and are being – I mean, high double-digit growth.
Great, thank you very much.
We will take our next question from [indiscernible] of Haitong Securities. Please go ahead. Your line is open.
Yes, hello. Just with respect to the gross margin, it’s been – it’s better today than it has been for a while. You talked about the revenue mix change driving that. I just wonder as we go forward, should we expect the gross margin to continue to rise from here?
No. So 2 months ago, when we gave guidance, we guided towards 2 or 3 basis points increase of our gross margin. 2 months later, I think we can be a bit more bullish, so more towards 3 to 4 basis points increase compared to last year. On the other hand, due to the success of our order intake, we will see also some additional OpEx. So bottom line, the effect is neutral. Gross margin, with the change of our product mix, the change of the business units contributing to our revenue, we will see increase indeed of the coming years.
Okay, thank you. And second question, you talked about the inventory being higher in the first quarter. And I just wondered whether that’s – I understand the...
Yes, there are three things here. One is that we decided to put a bit more on boats compared to planes and so there is little more in our position. The other thing is that with broadening our line up in consumer, widening the number of SKUs, there is also underlying trend that we need to keep a bit more inventory. And the third one is that we bought some product forward although this is all according to plan.
Okay very good. And my final question, you talked about extracting value from PND business as it declines, which I guess means you will continue as long as you generate cash from that business. And I just wondered whether point has reached at which you do think about exiting the business and in particular, the U.S. business, which is a relatively small part. Are we getting close to the point where you might evaluate the situation such that’s an exit from that business in the U.S. maybe better for the company?
No, I don’t want to speculate on that at this point. It’s not what we are planning to do and that’s it. I can’t make a few comments for the future for what we are going to do either with PND or in North America at this stage.
Okay, thank you.
We will take our next question from Hans Slob of Rabobank. Please go ahead. Your line is open.
Yes. Good afternoon. Two questions, first is on automotive, should we expect that sales growth for automotive will accelerate in the course of 2016 also as the large PSA contract is now on stream, that’s my first one. And second is on your wins in automotive are very impressive, more clients are dual sourcing, but given the long lead times of contracts, should we also OpEx and CapEx growth to continue also in 2017 based upon the strong order intake?
Yes. Hans, thank you for asking that question. You know my answer on these questions but especially on the latter one. But on the first one, we guided for automotive that we will see high-teens growth. So as we had 26% in the first quarter, that means that it will not accelerate during the rest of the year because Q4 last year for example, we also already saw automotive during the quarter and starting to grow again, etcetera. But anyway, the – this is all according to plan. There is no change in guidance, but Q1 was a bit slower than what we seen the rest of the year as a percentage growth. On OpEx and CapEx, while I said on the gross margin, so that we expect gross margin to be a bit stronger in 2016, I think OpEx will be a bit higher in 2016. CapEx, I don’t expect any growth compared to previous year or a higher number than what we gave earlier in the year. And for 2017, yes you need to wait ten months and then we will give you an update on that.
Okay. Thanks a lot.
[Operator Instructions] Our next question comes from the line of Shyam Kumar of TT International. Please go ahead. Your line is open.
Hi. Thanks for that. Just in terms of the order book for automotives, can you just help me understand, is that pretty much all from navigation capability demand from the OEMs or is there also demand within that for ADAS and autonomous functions starting to come through in the order book?
Nothing is coming through for autonomous driving except for test licenses. But the demand of money involved there is really small, to be honest.
ADAS is firmly on the radar. It’s firmly also in the order intake, so that’s coming through, that’s happening. So, all sorts of safety functions derived from map data are starting to get integrated on a larger scale now in more cars. So, that’s happening as well. And the last development I would like to point out in automotives is also that we are getting closer with our Telematics products into the automotive industry. That is not for fleet management typically, but for connected cars services. We have started to build in the flexibility on that platform in our Telematics platform to service those start of use cases. We are starting to go out with those products and show them to the automotive customers. And we think we would get some traction in that part of the business as well.
Thanks. And also in terms of I guess the timeline for autonomous and more highly automated driving and I went to visit a Goldman’s conference in New York where they had these Cars 2025, obviously the big suppliers Tesla [indiscernible] those kind of characters were there and it seemed like the timeline had shortened, that’s what people thought maybe 1 year or 18 months ago in terms of when these kind of capabilities will be brought into the car and I guess also with the Tesla autopilot having caused a bit of a splash as well as of late until some excitement around there in terms of doing this sort of seeming autonomy there, what are your views on the timeline and when that might start feeding through into your backlog, please?
I find that difficult to say at this stage. I think it will be a gradual path to more autonomy in the car is there will not be a big splash. It will be a gradual improvement to higher levels of automation. There is of course a big movement in time where you go from 99% self drive to 100% self driving. I think getting that last percent ride is obviously critical and probably the hardest thing to achieve. And that’s also when you get the full benefit for the highly detailed maps that we are providing and the need for those aging maps when the cars are semiautonomous is less and more as important. At the same time, there will be intermediate products also from us that will help guidance. So even if those maps that we are now producing are not used for autonomous driving, they will be used for better visualization, increasing situational awareness and lifting the whole navigation experience to a level that we have not seen before in terms of accuracy and clarity. So also for the maps that we are producing, we see a gradual introduction where they will start to become visible. But they will not necessarily use to the 100% of what they were designed for in the beginning. Now timing difficulty, personally I don’t think that 100% self-driving car will be down the road before 2020. But I am also not 100% sure of all the developments and of course car makers treat this type of information as trade secrets and commercially sensitive, so there is not 100% transparency in who will be first and what will happen.
Okay. And I guess in terms of – okay, I felt that’s fine. Thanks Harold.
We will take our next question from Sander van Oort of Kempen. Please go ahead. Your line is open.
Sander van Oort
Hi, good afternoon. Sander van Oort with Kempen, quick question on the new mapmaking platform, maybe you can update us on the status where we are today, is it already fully implemented or is it still some regions that need to go to the new platform. So and then as a bit of a follow-up on the financial implications, are we still confronted with double running costs which negatively impact the cost level this year and could we maybe expect some lower costs or cost savings in the years to come from the new platform? Thank you.
Yes. So it is implemented in most – for most territories, I would say 90% of the territories are running now in new mapmaking platform. And there are very, very few, Australia is one because it was an acquisition, yes last year we bought that mapping company last year, so we haven’t transformed them. But it’s now our mainstream product. It’s in full use. We are tuning it. We are getting rid of the, let’s say the – it is in full production. We are tuning it. We are getting better results everyday from that platform. And that is good. Before we get the full benefit – so this whole platform is really designed to lay the foundation for automated mapmaking and mapmaking is still very laborious job. We want to have much higher degrees of automation going forward. And having the platform is kind of foundational, because now we can start the automation of mapmaking itself. And that is really exciting obviously, because that has a promise of reducing mapmaking cost and improving quality of freshness of the map by factor. That’s where we are today. We are not much more efficient than we used to be, but we will build on that efficiency soon and then we will see real cost benefits and quality benefits and timing benefits coming through in 2017 and beyond. This is transition year reducting our processes. We will change the organization. We have much more flexibility in how we can organize our work and our workforce. So, that will give advantages and then the real advantages still of automation will come through in 2017 and beyond.
Sander van Oort
Okay, thank you.
Thanks, Alexander. That was the last question for today’s call. I would like to thank you all for joining us this afternoon. If you have any follow-up questions at a later time, please give us a call or send us an e-mail. Thank you all very much. Operator, you can close the call.
Thank you. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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