Earnings Call: Q1 2021

Apr 14, 2021

Good day, ladies and gentlemen. Welcome to TomTom's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's prepared remarks. If at any time during the call you require audio assistance, feel free to press star 0 and a conference coordinator will be happy to assist you. Please note that this conference is being recorded. I will now turn the call over to your host for today's conference are Megan Daniel, Investor Relations Officer. You may begin. Thank you, operator. Good afternoon, and welcome to our conference call, during which we will discuss our operational and financial highlights for the Q1 of 2021. Are with me today are Harold Hedain, our CEO and Taco Titula, our CFO. We will start today's call with Harold, who will discuss are ready for the key operational developments, followed by a more detailed look at the financial results and outlook from Taco. We will then take your questions. As usual, I would like to point out that safe harbor applies. And with that, Harold, I would like to hand it over to you. Well, thank you, Megan, and welcome, ladies and gentlemen. Thank you for joining us today. I will briefly go over the key operational highlights for the quarter after which Taco will provide further information on the financials as well as the financial outlook for the year. We had a positive start to the year and we showed solid progress in product development and attracting new customers. We launched Tantal Navigation for Automotive which is our next generation cloud native but also full hybrid navigation solution. It's a unique product that is mostly in the cloud, but also provides for onboard map which makes for a reliable user experience are under all conditions also when the data connection is unavailable. With this release we're bringing the user experience to a new level And we are simplifying our operations. There's extensive support for electrical vehicle functionality and the new system offers are flexible delivery through easy use SDKs and APIs so that it can easily be integrated in any in vehicle infotainment system. The product will be deployed by multiple leading carmakers. The Mitsubishi Outlander showcases The new Mitsubishi new Mi Pilot which incorporates TomTom ADAS map specifically the information on road curvature and speed limits. This information allows the car's ADAS functions for actively adaptive vehicle speed, input to save energy and guide EV drivers to compatible available charging stations within reachable range and this will reduce travel time and reduce reigns anxiety. In the enterprise segment we closed new contracts and expanded our reach in both fleet Logistics and On Demand Mobility segments. We enjoyed a significant increase in the use of our MAPS APIs. Progress is particularly relevant when you look at the market opportunities we're targeting on the next slide. We see location becoming an essential part of an ever growing number of applications. By some estimates 12% of all applications have a location element. Whilst our roots are in vehicle based applications which is technically the most demanding application, will see their role in the future to enable a much broader set of customer requirements. We have early success in the enterprise sector with And we have managed to build a long list of AAA customers who rely on our content and technologies to bring location to their applications and platforms. We have a very talented technical team at work to improve the geographical coverage, attribution and freshness of our database on the one hand And build leading services like applications, APIs and SDKs on top of the data. And we see significant opportunity to accelerate those capabilities by using new sources and designing highly automated processes for quality control data ingestion Which eventually lead to a much richer database that we can build and maintain at lower cost. As a result we are building a rich set of products that offer our customers a powerful platform, the tools But also the freedom to innovate whilst staying in control of customer and application data. This concludes my part of the presentation. Thank you for your attention. I'm handing over to Taco. Thank you, Harald. I'll make some comments on the financials and outlook and then we'll go to the Q and A. 1st quarter we reported group revenue of 1 €31,000,000 Location Technology reported revenue of €105,000,000 a year on year increase of 15%. Increase was offset by lower revenue from consumer. Let me go through the revenue business by business. Automotive IFRS revenue was €63,000,000 an increase of 26% compared with the same quarter last year. The strong year on year increase in IFRS revenue is because Low comparative quarter. Q1 2020 included revisions to the estimated total contract value of some contracts to account for the impact of COVID-nineteen. Automotive operational revenue was 74,000,000 in the quarter a decrease of 8% year on year Mainly because of lower car production volumes. Automotive operational revenue is directly related to car production volumes. Enterprise revenue increased by 2% from the same quarter last year reflecting increased revenue from existing customers. In the Q1 consumer revenue decreased by 34% to 26,000,000 reflecting decreased demand as lockdowns across Europe continued. In the Q1 gross margin was 81% in line with expectations And reflects lower hardware revenue in our sales mix. OpEx were €121,000,000 a decrease of are €60,000,000 compared with the same quarter last year. The decrease is mainly because of lower amortization as the Tila Atlas database acquired in 2,008 were fully amortized in 2020. Excluding the impact of depreciation and amortization underlying OpEx showed a year on year decrease of around 8% as a result of cautiously managing costs. Increased gross margin and low OpEx resulted in a positive EBITDA margin of 6% an improvement are 10 percentage points year over year. The free cash flow for the quarter was an outflow of €4,000,000 Decline of €80,000,000 compared with the same quarter last year. There are 3 main reasons for the year on year decline. The first is less cash collections in the quarter because of lower opening trade receivable balance when compared with the opening balance in Q1 2020. Secondly, we had a low operational gross profit in the quarter. Finally these decreases were partly offset by lower variable personnel expenses in the quarter. We reported a net cash position of 3 are €52,000,000 at the end of the quarter. Net cash decreased as a result of lower free cash flow and because of purchases of shares made under the share buyback program. During the quarter we purchased over 2,000,000 shares for a total consideration of 17,000,000. The program has a remaining repurchase amount of €60,000,000 which we expect to complete in the 2nd quarter. On the last slide the outlook 2021. We are reiterating our full year outlook. For 2021 we expect group revenue to be between €520,000,000 €570,000,000 and location technology revenue between €420,000,000 €450,000,000 We will continue to see year on year declines in our OpEx driven by the decline of total D and A are from €285,000,000 in 2020 to between €70,000,000 €75,000,000 in 2021. Excluding D and A our R and D OpEx is expected to grow to around €330,000,000 for the full year. We started the year with a cash outflow. There's some seasonality in our cash flow which is weighted to the second half of the year particularly the last quarter of the year. This is due to the timing of certain customer payments. We are reiterating our guidance to generate free cash flow of around 6% of group revenue for the year. Operator, we would now like to start the Q and A session. Thank you. We will now begin the question and answer if you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Your first question comes from the line of Mark Hesselsink from ING. Please ask your question. Yes, thank you. Three questions. Firstly, the enterprise client that you won over the quarter. Could you explain a bit more like why did you won this contract? And was that being the alternative to Google? Or was there Anything particular why you were chosen for this one? Second question is the launch of the tunnel navigation for automotive. How will this ramp in your business? How many clients are already taking this? And How do you expect it to evolve over the coming years? And the third question, the semi shortage in the automotive chain, You're being paid when the car is being produced. So how is this impacting you? And do you see it yourself? Or is this More something that you should see in the sector and you expect it to impact you as well, but you're not really seeing it yourself. Thank you. Yes Mark, thank you. Yes, so the customer in the enterprise Sector I was referring to is in the Mobility on Demand sector. I can't disclose the name. But in mobility on demand it's very important that you have control over your core technology to allocate drivers To cars and passengers and whatnot. Those are hard mathematical problems. You need to have a good tool set and good data to tackle that. And those companies typically spend an awful lot of time Energy on optimizing those algorithms because they do have a direct effect on service levels, customer perception and so on and so forth. So we can provide those Companies with the tools they need to build those services and to optimize their operations. And the tools we're providing is of course the maps and navigation attributes but also speed profiles traffic information, routing algorithms, POIs and so on and so forth. And that is Combination of those data and tools is what we believed Pull this particular customer over the line into the TomTom family. 2nd question about Automotive Navigation. So fairly unique. We are now according to our own estimate the largest vendor of software in vehicles. And we have built a of course it's our heritage. We have invented the category at the time navigation category. We build on our heritage. This is the last iteration Which provides a hard problem, which solves a hard problem for carmakers and that is availability. So So everybody wants to go online that's fine. What do you do when an online connection is not available And that can happen when the car is out of reach in the parking garage or in areas where there is no mobile phone coverage whatsoever. And you still want that card to work properly. And this hybrid solution offers a very elegant solution to this problem and we're very happy that 2 of our customers have decided to move to this next generation Last question, if I understood it correctly Mark is how did chip silicon shortages in the automotive supply chain affect Is that a correct interpretation of your question? Yes. If you're actually seeing that, yes. Yes. So we have seen it. It's anecdotal. We don't have hard numbers, but we have seen reduced demand and shortages compared to the original plans from our OEM customers As a result of 2 effects combined effect of a pandemic that is there for longer and more severe than we had originally anticipated at the beginning of the year, But also chip shortages, how exactly how big the problem is, is not that easy to distill. It's anecdotal. We know it's happening, but we don't know how severe the effect is. But yes, it did have a negative impact on the number of cars that were produced during the quarter. Okay. Maybe a short follow-up on the navigation for automotive. You have 2 clients using it. How do you expect this to ramp for other clients? And given that it's a superior solution, do you expect quick adoption by those clients? Yes. Typically carmakers will go for the latest and the greatest. So I see a good future for this line. The early sign up by the customers I referred to will help us also, of course, to harden see it operating in the wild, which will help both from a product design development perspective as well as credibility perspective. So I see a good future and I expect that over time this line of In our navigation portfolio, we'll overtake all our other products in the automotive space. How long that will take is less certain. There is inertia. You know as well as I know that design cycles are notoriously long in the automotive world. But definitely, yes, over time this will overtake everything else that we're doing. Okay. Thank you. You're welcome. Your next question comes from the line of Francois Bouvignies from Eviette, please ask your question. Hi, thank you very much. My first question was a follow-up actually on this navigation for automotive and cloud native solution. So how do you price and how do you sell this product in terms of business model? It would be very interesting How the value is compared to the old products? And maybe, yes, how do you price that to the customer would be very helpful to understand. The second question is on the automotive market. We are post in the pandemic or fully post pandemic area. So I I was wondering how you see the market in terms of deals available for the market as a whole from a credit Perspective and how you see the position there because we see a lot of like we talk every quarter, the newcomers and especially Google. Do you see them getting some market share over you In the near future or at the moment as we speak. So that's my second question. And I have the last one I will ask after maybe, if you don't mind. I'm making a quick note, Francois. Yes, sorry. Pricing, let's start there. So we have a lot of customers who have products in the automotive industry. Not every client is taking the full stack of what we're doing. So some customers take traffic information, other customers take maps and other customers take the whole full stack, which is a combination of software services content, integration services were needed. And I think part of strategy is to include and stack those services in those products to a full stack navigation product, which we can for which we can come on better prices and for which we have better pricing power. So as a result of the success of this version of our software, We hope that we can convince more of our clients to go full stack for the TomTom solution. And that will have positive effect on unit price. So value per car shipped which is a good thing. If I look at the overall type of money that's available for full stack solution, I don't expect the total value to go up significantly. I think that has been stable for quite some time. What I've said and what we see again Is that the overall price is relatively stable, but we need to throw in more stuff in order to justify that price. So there's a constant battle to deliver more services, better user experience. And in return, we see have good ability to hold on to pricing and pricing that. So I think that's the way to look at it. But a good product and a good software product which delivers a good user experience Is the most important thing we can achieve in order to improve pricing power. And we see positive Results of this move to full hybrid and full stack. And, Arald, just if I may, I mean, how much is Full stack, I mean, of your products. I mean, can you give any numbers around that to get an idea of Maybe what the opportunity is in terms of percentage of your customers today. I mean, could be in value or units, whatever you have would be helpful to know. I don't have that, but I can definitely have a look if that's the type of information we can make available. I don't know to be honest. I have a number in my head. I think I kind of But I can't disclose it at this stage. I need to have a look at that. Okay. So it's definitely true that not all of our clients are taking the full stack. Just to give you an example, we have in traffic Information in Europe about 80% market share. In North America, we have about 40% market share in the automotive sector. There's more much more market share than we have in full stack solutions. Thank you. All right. Thank you. Yes, post and are we post pandemic? I really don't know. To be honest, when we started the year, I had hoped that we would be post pandemic now. We're not. And I think the general expectation is that that will happen before the summer, but I'm not going to bet the shop on that to be honest. And we still see negative impact for our business on Of the results of the pandemic. I think for the workforce it's starting to be difficult. I think we got through it are really well and our people showed a lot of resilience and engagement has been Through ordinary and collaboration has been really good. But now I think we are entering a period where it starts to get less cool to work from home. And I think we need are now to go and prepare for a period where we start seeing each other, where we have a free flow of ideas, exchange of information, When we start seeing customers and so on and so forth. So I really hope that it's that in a couple of months from now, we can see that happening. That's important. It's important that we get more detail on what our customers are thinking and doing and how they're planning. And it's important also that car sales will go up. I think there is pent up demand. I think we can see a strong recovery when everything is back to normal. And I can't wait for that moment to happen, But we're not in that period yet. And in terms of deals available, I mean, and your position in terms of winning You know rate in a way? Yes. Difficult to say. I'm always careful. I don't want to It's lumpy, you win or you lose, you never know. If I look at the overall opportunity this year, I think there's Significant amount of business available. I think we're well positioned, But I prefer to give you information on our win rate Yes, when the deal is done, won or lost. It's not a good way of looking at the business on Yes, quarter to quarter which deals you win, it's just not the nature of the work we're doing. So I think are comfortable giving regular updates about the overall product and order backlog and whatnot, But it's much harder to give you a steer on our ability to win those deals. There's enough around this year. That's not a problem. We're working hard. We're firing on all cylinders. I think we're building a good reputation for product for service for being a reliable partner to our automotive customers As well as to our enterprise customers. And I think that when it comes to nominations all those things will play in favor, but we can only do that when we've actually won that nomination. Okay. That's very clear. And maybe if I can One last one is, I asked you this question last year, if I remember correctly. It's around enterprise. And In the last 2 years, you have been very active, I would say, and maybe more than people expected and maybe yourself because you compete much more with Google in this market than in automotive. And you have been winning few deals Recently in the last 2 years and you announced furthermore with this new mobility demand So I'm going to ask you some question really. Do you see any structural change In the last 2 years, it seems that the business is accelerating for you. So just trying to understand What is behind that? 1st, if it's true, if you feel that way as well. And second of all, why is that? Is it because of TomTom Product, is it because of Google? Anything you can share would be very helpful about your insight. And I will stop here. Thank you very much. Yes sure Faso. Look location is terribly important and it's becoming more and more important And there's a lot of applications and services that we in one way or another depend on application on location. And that's not going to stop. Now of course Google is formidable competitor with a distinct business model which makes it are hard to compete, but where we can compete significantly where we can make a real difference is in 2 areas. 1st of all we are providing a much more flexible service. If you want Google services you need to take our APIs and that's what it is and you can't do anything. For a lot of companies that's just not good enough. They need a lot more flexibility What we call they need freedom to be able to innovate and they need to be in control because they're often Yes, we're part of primary processes that have a direct impact on customer experience, operational efficiency And profit as a result. So you need to be able to offer that level of have flexibility. And the second thing where we have a distinct business model is that we don't care for Application data or customer data. We're not competing. We're not using this information to compete or gain market The insight to compete at a later stage and that gives a peace of mind. And that allows us to strike deals and have relationship with our customers That are difficult to develop if there's always a hidden agenda or a possibility for hidden agenda. So those are 2 big Parts of where we can differentiate and how we can compete. Now the third element is that we want to build a much better product And I think we can. There's a lot happening in underlying technology, in cloud technology, in computer vision, In availability of all sorts of sources that we can use to build and maintain that map deeper collaboration with our Customers who are willing to share their data with us at a platform level want us to offer an alternative to The companies we just mentioned. So our ability to process that, get a handle that information is increasingly available, harmonize, standardize, do the quality control, deploy those new technologies that will make it easier to Collect data from vehicles, from smartphones and so on and so forth. The combination of that should take us into a world where map making becomes A more automated process. We have achieved a high degree of automation, But it's mostly automation of manual tasks and we are going into an area where it's the other way around. Where there's so much Data and sources available that can be integrated that really ask for a rethink of how we put data together in the database and that should help us to build a database that's richer in content fresher It covers more geographies and it can as consequence be used for a lot more applications than we can serve today. That is where we're working And I'm happy with the progress we're making. That's it. Great. Thank you, Harald. Thank you. Then one on your touch tone phone. Your next question comes from the line of Anna Janli Evers from Areia Nanro Bank. Please ask your question. Hi. It's Anne Van de Beijer from ABN AMRO Bank. I'm calling on behalf of Wim Schiller, I cannot make it today. Apologies for that. I looked at the results and I think also from previous discussions, You have a very strong balance sheet. Sort of what does your ideal balance sheet looks like? And moreover, also in terms of the expected costs in a post COVID world, how would you see sort of your expenses evolve in the coming year, 1.5 years ahead? Thank you. Yes, thank you. On the balance sheet, yes, we're in the middle of a buyback program of Which 2 thirds has been completed and 1 third is still to go. We'll take stock after that has happened, There are no immediate plans after that. So, well, it's our ideal balance sheet. We're quite comfortable with the situation that we're in now. And again, we don't have any immediate plans to launch another buyback Or schedule dividends or anything like that. On the cost structure, as a like for like you see material decline compared to last year that is very much related to the fact that last year we were not in the pandemic Phase over at least 2 thirds of that quarter we were still in the clear and there were quite a lot of Marketing and travel and other things going on. So that is That explains the reason why OpEx was low in the Q1. As Harold already explained While answering some of the other questions is that as a company we will start to ease policies around marketing activities and travel, etcetera. So we expect in the coming period that the cost will go back to more normal And that will start to have an effect as of Q2. But everything in line with our previously made expectation on cash generation and our free cash flow yield. Operator, if there's no further questions, I would like to thank you all for joining us this afternoon. And operator, we may close the call. Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.