Earnings Call: Q3 2020

Oct 14, 2020

Good day, ladies and gentlemen, and welcome to TomTom Third Quarter 2020 Earnings Conference Call. At this time Please note that this conference is being recorded today. I would now like to turn the call over to your host for today's conference, Megan Daniel, Investor Relations Officer. Please go ahead. Thank you, operator. Good afternoon, and welcome to our conference call during which we will discuss our operational and financial highlights for the third quarter of 2020. With me today are Harold Haddain, our CEO and Taco Tipla, our CFO. 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 from Tucker. We will then take your questions. As usual, I would like to point out the Safe Harbor replies. And with that Harold, I would like to hand it over to you. Thank you, Megan, and welcome, ladies and gentlemen. Thank you for joining us today. We were pleased with the upper trend that we saw in market conditions and that has continued over the last 3 months. It's mostly best reflected in our automotive business. Which has shown robust sequential operating revenue growth. And that's a trend which we expect to continue in the next quarter. Our employees have shown agility and commitment to the company in response to the pandemic, and the challenging environment has not slowed us down. In achieving our strategic priorities. We continue to invest in R&D, continuously developing and strengthening our portal portfolio, and we believe our ability to maintain course has also contributed to strong deal activity, which we have seen this year. I want to turn to the key operational highlights for the quarter for as you have seen, we announced a multiyear extension expansion of our deal with Uber our full suite of maps, traffic and maps APIs will help Uber to enhance the location enabled solutions and that ensures seamless mapping experience in Uber further as they will serve as a trusted map editing partner to us, Uber will collect on the ground insights from over 10,000 cities in which they operate and correct the database if needed. In Automotive, we announced that we will provide our full stack solutions of Maps navigation software and connected services to Maserati in vehicle infotainment system. This is a full stack implementation and includes an automated map updater over the air. During the quarter, we also launched Road Check. It's an industry first for automated vehicles, that contributes to safer driving. The product addresses a key industry challenge. It's a tool to define and control under which circumstances Car can safely operate in autonomous mode. This concludes my part of the presentation. I'm now handing over Taco for a closer look at the financials. Thank you, Harold. I'll make a couple of comments on the financials and outlook and then we'll go to the Q and In the third quarter of 2020, we saw continued operational improvements in both automotive car production and consumer spend. These improvements translated into increased revenue compared with the 2nd quarter as we reported group revenue of 148,000,000. Let me go through the revenue business by business. Our Location Technology business consists of Automotive And Enterprise and represents roughly 70% of our group revenue. Automotive reported revenue of reported revenue of EUR 66,000,000, a strong increase from last quarter, also supported by the start of of new software platforms. Car production volumes have continued to show recovery from the lows we experienced in April. This led to similar trends of growth in our operational revenue, which is reported, automotive revenue adjusted for the movement in deferred and unbilled revenue. Our automotive operational revenue grew sequentially by 24% to 59000000 Because we see the positive trend continuing in the fourth quarter, we expect that the sequential growth in automotive operational revenue will be similar to what we saw in 2019. Range. Enterprise reported revenue of $40,000,000, showing a modest decrease from last quarter. This decrease is based because of a weakening of the U. S. Dollar as most of our enterprise contracts are invoiced in U. S. Doors. We expect enterprise revenue to show a limited increase in the 4th quarter compared to the 3rd quarter. Our Consumer business reported 1,000,000 of revenue in the quarter, an increase of 1,000,000 from last quarter as consumers generally spend more over the summer holiday period. This was also supported by the return to more normal levels of retail activity following the lockdowns we experienced in April May. In the fourth quarter, we expect that consumer revenue will show a sequential decrease similar to 2019. That is a decline in the 20% to 35% range. Our underlying gross margin trend continues to improve as it benefits from positive mix effect of more software revenue, This positive effect was partly offset during the quarter by the start of the production of new automotive software platforms. Including the new Maserati platform, which lowered the 3rd quarter's gross margin. This means that the gross margin slightly down compared with the same quarter last year. However, this decrease is also, increased by one offs included in the gross margin in Q3 2019. If we exclude these one offs of last year, the trend would have shown a modest 2% point increase from last year. Our gross margin will trend to at around 80% on average. Total operating expenses decreased slightly from the same quarter last year to 180,000,000 and is reflected mainly in marketing and selling, general and administrative courses. Partly due to discretionary cost control measures. Free cash flow in the quarter was an expected outflow 20,000,000. We have a net cash position of 346,000,000 at the end of the 3rd quarter. Let me go to the next slide, quarter on quarter development. The COVID-nineteen pandemic resulted in automotive factory closures during the year, as automotive revenue is based on the number of cars produced, this impacted our automotive operational revenue. We saw the biggest impact in April when most factories were under a total lockdown. As factories started to reopen, We saw gradual improvements within the second quarter. And you can see here that this trend has continued. The 3rd quarter showing a strong sequential increase in automotive operational revenue. As mentioned before, we expect that this growth will continue and that the increase in the fourth quarter will be similar to the trend we saw last year. However, we expect that most of this operational revenue uplift will be placed on the balance sheet and deferred to quarters, we expect that the continued improvements in automotive operational revenue, combined with seasonal cash receipts, will result in a positive free cash flow of around The next slide is the 2020 outlook. For the full year outlook, we expect that the group revenue will be around EUR 530,000,000, with a gross margin of around 80%. As explained on the previous slide, we expect a positive free cash flow of around $30,000,000 in the 4th quarter. This means that we will have a full year free cash flow of allowed inactive minus $30,000,000, translating into a net cash position of around $375,000,000 at the end of the year. While we have seen notable improvements to revenue over the last few months, we still believe that the economic circumstances remain too uncertain to resume our share buyback program. We will continue to assess the position as revenue and free cash flow generation improves. Operator, we'll now like to start the Q And A session. Thank you. Session. Your first question comes from the line of Francois Bouveni from UBS. Hi. Thank you very much for taking the questions. My first question is around your activity, deal activity, Arald, you mentioned in your opening remarks that the deal activity is strong. And given that we are more in, I mean, October and that you have 9 months visibility, I guess you have a pretty good idea of where the order intake and backlog, how is it trending versus maybe last year? So could you share with us a bit more color around the backlogs we expect in Q4, maybe not giving, obviously, the number, but just a trend increasing maybe? Or and can you explain a bit more as well the deal activity, what are you talking about? What kind of products, clients is doing well at the moment would be great. I'll have follow-up after, if I may. Thank you. Yes. First of all, thank you. Yes. As you know, order intake is always lumpy. It's a binary process. It can vary from quarter to quarter. But if I give you the general trend, and I think that's what you're asking for, we saw, particularly first half, very strong activity with a number of awards. We're very pleased with that. Over the summer months, this slowed down, and that is also to be expected. Nothing unusual that in that, I think for the last quarter, it's hard to predict where we'll end up. We're working on things but it's not sure whether that will be awarded this year and also not sure that it will be awarded to us, of course. But I think the overall activity level is still at a good level and probably stronger than what we have seen last year. Okay. And what kind of products is doing well, I mean, at the moment in your, in your deal activity for global maps, with global products, or is it a particular features that No, it's generic. It's just not a big change, I think we see more way to aid us type of content in the automotive industry. We saw a, obviously, Uber deals, it's not automotive, but still it was an important deal for us that came through. So that's all positive. And I think the biggest, plus for us was that we won also contracts for new technologies. That we will start shipping in 'twenty one, 'twenty two, we've said in earlier, discussions that we're fully moving towards online presence of all of our products and services, and that has been well received by the 3. And we've won early subscribers to that vision, earlier this year. So it's full steam ahead. Very happy also that it gives clear direction to all the engineering teams and the product teams, the route we've chosen is is, it's been validated by those early wins, and it gives law of direction and generally speaking, a move to an online life. And I think that's a bit further in line, that is going to be very important because we see further opportunities for simplifying our product offering. When everything is going online, we can really concentrate our efforts in that domain and that will help us to reduce complexity in, our overall product portfolio. To give you a bit more color on that. If everything is embedded, there are variants of different flavors, different operating systems, different screen sizes, and so on and so forth, all those products require significant localization and installation efforts, and those efforts often run-in the millions of euros per per contract. And we think that we can leverage the online technologies to reduce those costs concentrate more on core product activity development and that should should lead us to a better place and better future. That's interesting in your online comments. And I mean, how do you price that? I mean, to a customer, I mean, the value of the contract increase because of the online or because the MAP pricing may be going down. So it kind of offset this decline and basic you think the costs will decrease more than the price increases? Is it how should we think about this online occurring on your I think the longer term effects is a further simplification of our product portfolio. That's really what we are. Trying to achieve, so get more concentration in the core products we're doing doing them really well. And then the integration costs typically will go down when services are delivered in online framework. We don't see a big impact on pricing as a result of go online. I think it's, generally speaking, a wash But we're excited, by the direction. It will deliver a much improved end user experience, which allows us to better compete with mobile 4 and a high level of end user satisfaction. Okay. That's very clear. Thank you, Rob. And maybe just on the you talked about Q4. You don't know going to get rewarded, but it's not only for Q4, but do you see any change in the competitive landscape? I mean, it's very dynamic in 3, the mapping, we see a lot of, startups or local startup, I should say, as so Google trying for maybe more into the contract in the last 3 months or So I mean, do you see any change on people you are or companies you are competing with? It's we haven't seen a big shift or big wins that we're not aware of. It's always a tricky environment. You're right. There's a lot of flux in the industry. But I think we, so far, we're holding course and everything is going according to plan. So no major shift in the competitive landscape that we are that we have seen in the last quarter. Okay. That's clear. And last one for me, and I will leave the floor to my peers. Around HD Matt you talked about ADAS content going up. Obviously, the pandemic creates some uncertainty around the road map for autonomous driving like you described last quarter. How is it going your HD maps? I mean, now we are 3 months probably your customers have more visibility, do you see the activity resuming for HD Maps? And how should we think about your the contracts compared to, for example, what you said last year at your Capital Markets Day that you were rewarded course, on a small value market of 60 percent of the deals. How is it evolving this HD map in your deal pipeline? Well, as I said, so AG Maps are applied in different ways, throughout the technology stack. But if I look at the market for self driving, the progress that we've seen there, I have to say that has this pointed this year. And I think there are 2 things playing a role here. First is, the complexity of self driving technology. And I think that has been underestimated to step from, let's say, 2.5, level 2.5 to is a little bigger than most carmakers had anticipated is our impression. And the second one is justification of the system cost. The total bill of material for self driving seems to be higher than originally anticipated and the ability for the mark to absorb those costs seems to be limited. So overall, has been disappointing in that domain. I don't think, carmakers are losing sight of the endgame. They're still working investing. And so is our tier ones and all the suppliers and working hard to make the technology better and cheaper and and democratize that. But net net, I think the developments in 2020 for us as a vendor as a system component for automotive self driving systems in large scale applications has been disappointing. And what can you do about that? I mean, do you do you intend to change, therefore, maybe the investment or the development of HD because you see that it's not very high demand at the moment. So are you want to continue to invest and see how it looks like in, let's say, 1 year's months time? Well, there are 2 levels of cost and investment going into creation of HD maps. One is the technology itself to produce them, what we call the pipeline. And there, we keep motoring. We keep investing in optimizing that pipeline, for creation of edge maps. And again, this is not just for AG Maps, but also ADOS features. So this is a combination of video processing, lighter processing, applying all machine learning, and visual recognition all that's a complete domain of technologies and pipeline that we were quite heavily investing in. And that is overall to make the, production of maps, ADAS Maps, AZ Maps, scalable, affordable, and to a high standard of quality. And that, that investment is continuing. If you look at the other side, So, the actual production of HD maps, we have slowed it down to an extent. Or we have not increased activity there. We're not extending our coverage at this stage. So we are We have a product for the major roads in, North America and Western Europe. Where we provide HD Maps of the industry for evaluation development as long as a force that will continue. But we are not accelerating the coverage. The main effort now is to reduce costs of production and maintenance of those maps. And that continues unabated. That's great. Thank you. I'll leave the floor to me, Pierre. Thank you. Your next question comes from Hi, yes, it's Mark. My first question on the, on the Uber contract. Could you explain a bit more? Was it a request for proposal from the company or was it because you're already in a continuous discussion with them an extension of that initial contract. Could you maybe share why this elected you? And what is extra versus the earlier contract that you had with Uber? Maybe does, for example, also includes the app that's being used by consumers? Yes. So, so location, location technology, obviously, is super important to Uber. And it and it's a big ingredient of the primary processes for allocation of trips, calculating capacity, if you improve there, only a little bit, it has a big impact on the bottom line. So in waiting times, customer service, excellent software. So for Uber, it's really important to have good control over the software to run those systems. They are core part of their core IP and core technology base that makes Uber what it is. And And of course, they don't want to rely on standard stuff. They want to have a great deal of Inchoids to fine tune teach those, train those systems, make them better over time. Our relationship with Uber goes back a long time. We can provide them as all technology they need to do that, all that, that planning and all that really reliable, it's a function of the network, the navigation attributes, to speak profiles, traffic information, incident data, POIs, and so on and so forth. Platform has been growing and they have built it over the years. And there's now heavy usage of the platform as well. And hence the desire of Uber to continue that partnership and extended relationship and extended licensing contracts. It's a continuation of a partnership that's been in the making for account number exactly with probably 4 or 5 years. Always takes time for those technologies to mature, but there's now a solid body of technology running on top of our maps, our routing and data and traffic information. And it was a logical step to extend that but also deepen that. So, one of the things that we are keen about is that if there are errors in the map that we haven't detected ourselves, better or additions to the map that are relevant to certain customers or certain use cases, then we give Uber full control to added at and change those data. They've been certified and following all sorts of training programs and that helps us to keep the cost of maintenance down, but also improve the accuracy and impressions of our map. So almost, you see a type of partnership that works well in every dimension. So, it was a great result for us, but also I think for you, we were that we found a good way forward and start a next chapter in that to in that partnership. Okay. Thanks. And the consumer app of Ebras, is that going to use something or No, that is, that may be, but that's probably not on the charts, the driver apps the back office are all based on, on the Tantan Technology but the linking to the user information is typically done to a native, application like Google Maps or Apple Maps. Okay, clear. The second question is, I can remember from the previous quarter that you had to also adjust your backlog value a bit because some of the old automotive contracts given the COVID-nineteen impact became a bit less. What have you seen over the third quarter? And if your expectation there changed, then did you see any of that impact again in this quarter? Well, I think we're kind of struggling to see from the trees from the, from the wood here. There's a couple of things that are playing up here. Capacity issues for pure production during the lockdown period. We've seen movements in stock levels at car makers and inventory levels, we have seen movements in demand but it's not clear whether we have reached a new state, a new level for where we can start planning. It's difficult to weigh all those different elements for all carmakers, collectively. So we also don't know whether there's stand up demand that was kind of unfulfilled demand during the walk time period, whether that showed up all of a sudden in in September or whether it will show up in Q4. It's just a little bit early to say. How those different events and effects influence the underlying demand for new cars, And I think if I look a little bit forward to 2021, then, I have a hard time predicting what the overall economic outlook for 2021 will look like and how that will affect, carbon infracturing in 2021? I don't know. I don't think it's going to be a complete disaster. There's not what I think, but also I don't think that we will go back to the levels we have seen in 2019. But there's quite a bit of bandwidth in between that. And that bandwidth will have a significant impact on the calculation of our backlog as well. And we see that mix messaging coming from the carmakers as well. We're asking them, and they changed their outlook much more frequently and significantly than what we are used to in the car industry. And it's also kind of an indicator of a level of that we haven't seen before. But again, I'm not planning for disaster. I think it will be okay. But I also don't think that we will reach the volumes that we have seen in in the pre COVID period. And I think that there's quite a significant bandwidth in between those outlooks we learn with every month and every quarter, and maybe the forecast on carmakers will also show a trend to solidifying and less variation. Thank you. And then a final question, over the last couple of years, obviously a very gradual increase in the take rates. Now more recently, I see a big jump also in electrification, the sales of those vehicles. Do you also see that as a positive effect on your on the take rates? Is that something that's already visible for you? Well, I would do over estimated volumes. The volumes we see, there's all the signs are on green. Let's it. So massive investment programs, new cars, coming off the line now more frequently than what we have seen before and also, much higher end user acceptance of electric cars. And we see really the beginning of a significant shift, but it's the beginning. I mean, coming from very, very low numbers, I think we were used to 2% of the total manufacturing base was electric, but it's going up and it's changing and shifting, and it has a positive effect on the attachment rate. So one of the key things in, is, Ranger for vehicles. An accurate range prediction, has a positive effect, both on the peace of mind, but also all the bill of material of the car. And it has a positive effect on bill of material because you don't have to put excess capacity to, reduce that, range anxiety. So there's a very, very important drive to get a range prediction and EV routing sorted. And provide drivers with, accurate views on actual range, real life range, not the sales brochure type of range that we're used to, but what it means in reality for me as a driver. And we will see, implementations of those technologies most likely in 100% of of the EV vehicles. That's our expectation, maybe 90%. But I have a hard time to believe that this will not be a standard feature in most if not all electrical vehicles. And that ties in very neatly in the location technology, in the navigation, in the mapping, in the routing, in the elevation data, in weather data, and so on and so forth. So we're assembling a complete suite of technologies to, anticipate that demand we are already the train has left the station, as you can imagine. So you are shipping EV routing products already, but a significant body of investment of research going into improving those products. And collecting all the relevant data that are needed to come to a higher degree of accuracy. Net net, yes, positive growing a percentage of electrical vehicles, that means higher attachments rates than what we are used to. But the real effect on our P and L now is still limited. Okay, very clear. Thank you. Your next question comes from the line of Wim Gail. Your line is open. Yes, a very good afternoon, Vinkeller ABN. A couple questions. For starters, how did you mention during the call that, if you look at the bigger picture, the developments for HD Maps has been, quite, or somewhat disappointing, for you. However, if I look at the Robo taxi world, predominantly Waimo, but also the big Chinese guys, they are progressing quite fine. In fact, they are moving to kind of next levels, so, which will synotate autonomous driving also for consumers. So how should I look at this divergence in the, in the technology red race, with the tech guys continue to advance while the OEMs are falling a bit behind. Is there going to be a problem, for your strategic positioning further down the road. That would be my first, my first question. The other question I would have is another kind of change that we see or which we saw in the quarter, if you look at the IVI operating systems, traditionally, that market was dominated by line Linux and Blackberry, but we see that Android is making some inroads in that area. Despite the fact that they don't have any safety certificates and what have you. Is the fact that Android is making inroads into the operating system of the IVI units? Is that going to be a issue for you from a strategic point you or would you say that for you, that doesn't really make a big difference given the products that you have in the market? And the last question I would have is, in the press release on the UberView, you mentioned that you process close to 2,000,000,000 net changes a month? On top of my mind, you were already processing 2,000,000,000 net updates a month when you presented the lost numbers due in the Capital Markets Day. So what is kind of the is this like a more of a rounding thing, or is the other productivity gains, if you will, are those plateauing at the moment? Yes, Bim, things, make quick notes. So on the map added, so I don't forget. So first, some thoughts around robo taxis. So robo taxis typically operate in a, confined geographical area, but are using all the road types, in that geographical area. So you, so from a map made perspective, you cover, defines predefined geographical area in its entirety. The second element is that in robo taxis, the pressure for biller material is a lot less high, because they are capital goods amortized of long period of time, a lot of kilometers. So it's okay to stuff those cars with a ton of senses in computing power. And it doesn't have a big impact on the economics. So the technology that's used there and the economic conditions are kind of opposite of what Carne Street needs. Carne Street is looking for, all the roads, North America. And so you get long stretch of road initially, the highways, the closed access roads, completely covered. And secondly, there's a high pressure on the bill of material. So it needs to run-in a limited footprint and terms of storage, processing power, internal software. So you're really trying to solve a different product problem there in the automotive space. Our technology is mostly geared towards, the automotive customer base. We are playing around a little bit in the Robo taxi market, but it's very it's not a clear technology standard there. There's not a clear route forward, but we have we have our toe into that market, but you don't see it for us as a critical part that we need to play in because the problems we need to solve for volume applications and technologies deployed there are of a different nature. 2nd question about Android, I think it's it can be a little bit confusing, but Android and Google are different things. So Android is the open source operating system that runs on top of Linux, and we see that operating system making inroads in all sorts of devices, consumer devices, mobile phones, obviously, tablets, all sorts of, hardware as part by the end of operating system. And that is because it's free of charge. There's no license fee there and it's very well supported by the, silicon industry as well. So it's a tone of hardware and a tone of experience in integrating and running Android on top of kind of vanilla flavor hardware. And we really encourage the automotive industry to go that route as well, because it makes life easier for everybody. You have a much richer environment, you have hardware, sexual layers, you can go faster at lower cost and make, and have lower integration costs as well. So I think it's a good thing for the industry, if there is some level of standardization that will make it easier to deliver end user experiences that meet the expectations of today and tomorrow. Then second production of maps, yeah, you have the 2,000,000,000 number. It's a, it's a kind of a useful indicator because it gives you a flavor of the, the throughput and the amount of processing that's happening and keeping those maps up to date And we have internal metrics as well, cost per change and the weight of a certain change. Is the change, has an effect on the real quality and how the end user experiences it. So, I wouldn't put too much wage on that single number, but what I can tell you is that we're making we're feeling good about process progress we're making on our map made technologies. And we see efficiency improvement coming through everywhere. I spoke about HD, image recognition, all those technologies, we are really seeing significant improvements in throughput and reduction in cost per modification. That is, in itself, good news But it's also a necessity. It's not that we are so there's a real urgency to make further improvements there because the requirements are going up all the time. People are more accurate maps, better maps, more detail, more attributes, bigger geographical coverage. So improving efficiency for us is a, is a key driver of our strategy. And we think we can make further progress, significant progress in building that efficient map making platform. We alluded also map adding partnerships, what we're doing with Uber. We do it as other companies as well, that also helps us to find high value changes in the database that we can then process at low cost. So there's a big, big effort and a lot of focus on making that platform efficient, high throughput and deliver value for money. Good. And maybe as a bit of a follow-up on your remarks, which is very consistent with kind of the things we've heard in the past that, if you look at robo taxis that they are essentially solving a different puzzle versus the OEMs, which need to have, autonomous driving, which is working on every road and every jurisdiction in the heavy circumstance. Which is different from a robotaxi. But given the fact that if you look at kind of the the simple picture, if I mentioned for you, the, let's say, problem set that the OEMs that you solve is quite a bit more complex, than, the problem set that the, the OEMs as for the technology or double taxi guys needs to solve. So how come, the you, but also again, technologies for that matter, are not that well embedded in the aeroblitaxi world. Why do these guys do everything themselves and why they try to invent the wheel themselves, rather than, basically rely on the market standards with you and here at Michijay. Well, that is because they are, systems that are in development. They can use different technology. The technologies that deploy don't need to scale. If I go driving around with a lidar and I just record all data storage, on a hard disk of, god knows how many megabytes, or on a disc of how many megabytes. That's not a problem. I don't have to do much in order to create that map. Because it's very it's not compressed or the need for compression is not really there. There are other programs that are much more urgent for those robo taxi guys. And because those are close proprietary systems, the additional cost of scanning a neighborhood or city are not prohibitive. If they had to do that for the whole world, you would be, trying to solve a different problem, but that's not the state where the industry is these days. Helpful. Then maybe, lastly, obviously, you announced the partnership with Micro softer already quite a few quarters ago. Can you give us a bit of an update on where you stand in terms of the number of API calls, and also maybe some of the recent news around, let's say, the progress that that Microsoft is making into the automotive space? I don't have the actual API calls. But what we can see is, is further deepening of the relationships. So the traffic is going up. The use cases are expanding, removing into the Bing mapping platform now that will also drive a lot more traffic and interaction. So I would say that that relationship, the partnership with Microsoft is on track and developing in line with our expectations. They have a kind of an independent activity in automotive. They're coming from a different angle and that is provide to provide a cloud platform to collect vehicle data, interact with customers, do data analytics and so on and so forth. They can do it independent from us or any other had unit vendor We are aware of their plans. We are aware of their commercial success. We collaborate where possible there's a good exchange and collaboration there, but there are different products. So you have a cloud based data analytics platform and a more embedded or in car location technology platform that we are providing. And there are ways to connect those 2 systems, obviously. But, yeah, I think important I said at a commercial level, that's all well. And we have a fairly good picture on what's happening in the marketplace. Thank you very much. Thanks. Since there are no further questions, I'd like to thank you all for joining us this afternoon and operator if you can please close the call. Thank you. Ladies and gentlemen, that does conclude today's presentation. Thank you all for participating and you may now disconnect.