Earnings Call: Q2 2020

Jul 15, 2020

You look for and good afternoon and welcome to our conference call during which we will discuss our operational and financial highlights for the second quarter of 25 With me today are Harold Houdain, our CEO and Taco Bell, our CFO. We will start today's call with Harold who will discuss the key operational developments followed by more detailed look at the financial results 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 over to Keith. Well, thank you, Claudia. Welcome, ladies and gentlemen. Thank you for joining. So the consequences of the pandemic remain a challenge for the global economy, but our revenue is now on the road to recovery from the lows that we experienced in April. We've seen a very good upward trend in the second half of the quarter, both for automotive and for retail products and we expect the second half of this year to be cash flow positive. We have put strict cost control control measures in place with that compromising our development engineering capacity. I'm very pleased to see also continue to recruit top talents to TomTom, who are helping us to achieve our strategic objectives. We saw a large volume of deal activity, combined with high success rate, especially in automotive, which will contribute to our future revenue. It's great to see that we have good traction with our online products for the automotive industry, and that's a clear sign that our customers see us as a partner for a truly connected future. And that online future is helping us to simplify and harmonize our product portfolio across multiple customer segments and deliver a better end user experience as a result. Let's now turn to the key operational highlights for the quarter. We've been awarded a global multiyear contract with traffic information and dynamic routing to Ford's sync platform. This contract further expands our footprint in North America and will contribute to further improvements of our traffic product. Together with Delphi Technology, he could demonstrate fuel savings of up to 10% passenger cars by combining Delphi's technology and our ADAS map to control gearbox and motor management. Vehicles were tested on a variety of real world driving conditions to validate the system fuel efficiency, and we expect this technology to contribute to the development of safer and more sustainable costs. Our enterprise business recently announced an extension of our global deals via Michelin to provide maps and traffic information services. And finally, we made improvements to our search API by significantly improving the number and quality of our PoIs. This concludes my part of the presentation, and I'm handing over to Thackerman. Thank you, Harold. Let me make a couple of comments on the financials and outlook, and then we will go to the Q And A. In the second quarter of 2020, we reported group revenue of 120 4,000,000, which is 41% lower compared with last year. Our location technology business, which represented roughly 75% group revenue in the second quarter decreased by 90% year on year to 1,000,000. The quarter started with factory and retail closures, impacting trading conditions for automotive and consumer. In May, the gradual reopening of automotive factories and the return to retail activity led to improving conditions, which continued throughout the quarter. June was by far the strongest month and contributed about half of the quarter's operational revenue in Automotive And Consumer. Operational revenue is defined as reported revenue adjusted for the movement in deferred and unbilled revenue. Let me go through the details business by business. Automotive reported revenue was down by 32% to EUR 52,000,000 in the quarter and operational revenue was down by 40 7 percent to EUR 48,000,000. Both of these decreases reflect the impact of the closure of automotive factories during the quarter as revenue is based on car production volumes. Enterprise revenue was up by 5% to EUR 42,000,000 in the quarter, reflecting increased revenue from new and existing customers. Operational revenue was 1,000,000, 7% higher than in the same quarter last year. COVID 19 has had a limited impact on our enterprise business due to the nature of contract, particularly longer term fixed fee contract and the nature of our B2B customers who are mainly active in the technology space. Consumer revenue was down by 68%, to EUR 30,000,000 in the quarter, and operational revenue was down by 76% to EUR 22,000,000. The closure of retail revenue is, executed by the strong reference, quarter. Gross margin was strong at 86 percent during the quarter, representing an increase of 19 percentage points year on year. This high gross margin in the 1st quarter in this quarter, sorry, can be explained by 3 things. Firstly, the ongoing change of higher location technology and lower consumer revenue will lead to a positive mix effect as consumer products have lower margins. Secondly, cost incurred for custom engineering work for some of the automotive customers is placed on the balance sheet. These costs are taken as a whole in the quarter when the car line reaches the start of production. This lowers the margin. In the current quarter, planned start reductions were postponed to the second half of the year, given the COVID situation. Last year, the second quarter included the impact of some large startup productions, making this quarter's margin higher by comparison. The third item that can affect the margin is normal movements in provisions such as warranty. You can see from our cash flow statement that we have a net release from all our provisions of EUR 3,000,000. Most of these will impact the gross margin positively. Total operating expenses in the quarter was the same quarter last year. The decrease is larger because the reference quarter includes catch up amortization of 1,000,000 relating to the first quarter of 2019 following the change in the estimated usual life the MAP database implemented in Q2 twenty nineteen. If we exclude the amortization on technology and databases, OPEC OpEx decreased by 11% to 1,000,000. The decrease, mainly selling general and administrative expenses, shows the effect of discretionary cost control measures taken The free cash flow was an outflow of EUR 54,000,000 in the quarter. This reflects low operational revenue and higher working capital usage. At the end of Q2 2020, we reported a net cash position of EUR 373,000,000. We will not provide guidance at this outlook, sorry, we will not provide guidance at this time as market conditions develop we will reassess this position and also whether to resume our share buyback program. What we can say is that we expect our revenue continue its recovery path in the second half of the year. In OpEx, our expenses in R&D are expected to increase quarter on quarter However, we will continue to control our discretionary spend. The recovery of revenue combined with our OpEx expectations and seasonal customer receipts means that we expect to have a positive free cash flow in the second half of twenty twenty. Operator, we would now like to start the Q and you. You. Our first question comes from the line of Francois Bouvignies from UBS. Your line is open. Please ask your question. Hi, gentlemen. Thank you very much for taking my questions. I have a couple. And the first one is on your comments around the deal activity Arold, I mean, every year, you give comments and qualitative comments around this kind of deals and how is the order intake for the year and backlog And if I look at your comments for H1, it seems fairly positive or constructive compared to previous years. I was just wondering how should we think about for the full year deal activity, not only H1, but how do you compare it versus the previous years? And more importantly, why is it you see it better? Is it because of a market share is it because of the penetration of Indash going? What is driving these high volumes? Well, the yes, thank you, Francois. The, the order intake is always lumpy, especially It depends on it's black and white. Deals are available or not. You win them. You lose them. But we but at the same time, 1st half, it went well, better than typically, for comparable periods. And we wanted to share that with the community that despite all the doom and gloom that we're seeing in production land and car land, business is going on as usual. And actually on the order intake side, has been strong and better than years that we typically see at this stage in the calendar, I would say. Now you're saying, again, asking me what second half will look like is a tough one. I just don't know. And, so it's difficult also to say something about the whole year and the order activity and the order intake. And I'm not going to do that, but I do want to share that, the first half was good. Not only, in terms of volume, but also strategically. So another OEM signed up, which is important and also strategically important because we started to get contracts for online technologies. And that is very significant for us because the world moving to online is important multiple ways. And one opportunity we see is that by going online, we can really simplify, unify our technologies, make them available to, different customer segments we can start reducing the complexity associated to, deals in the automotive industry, the branching and the forking, the maintaining of legacy systems. There is now a clear trend to, to go online and that's a good one. So, I'm happy with what we have achieved in the first half of year and looking forward to the second half. But, positively, I don't I can't say much what that second half is likely to look like. And should we think that this strong activity is a market overall or is it also mainly driven by your high win rate, I. E. Market share gain? I think it will result in mark share gains over time when those contracts come online. So happy with that. They're not necessarily linked to a larger addressable market, although the market will grow with a higher percentage of, electrical vehicles in the mix because electrical vehicles will all have location technology on board 100 percent attachment rate. That's something you still don't see in, petrol cars or diesel cars. So there, the Texas rates are relatively low still, And if the EV vehicles take a meaningful proportion to total production volumes, then the total attachment rate of locations technology in vehicles will improve will go up. Okay, that's very clear. Thank you, Harold. The second one is on the HD Maps. I mean, you usually give some comments this quarter, you're a bit more quiet on this side. I know that last quarter, you said that you may be some push outs because of what's going on with the pandemic. Could you give some update there Well, we don't see an acceleration. We haven't seen an acceleration in agency demands in Q2. And carmakers still hesitant, not clear by the volumes, not clear by the introduction date, So we are very active with AG Maps. We have a number of RFQs outstanding. But it is it's a bit disappointing if we talk about take up and clarity that we're getting from the market at this stage. And do you think it could be structural with the issue of HD Maps? I don't know because it's too expensive. Or because the industry is not fully ready, or is it mainly due to short term uncertainty because of the crisis? I can't say that. Difficult for me to judge. I don't think the pandemic is helping. But I see nervousness with carmakers to add at scale all the hardware and all the kit that is needed to get it to work and their ability to charge that here. Thank you. We look at the, you know, revenues for this year. You mentioned that the trough basically 4, as it recovers slightly, I mean, reported revenues? Yes. So I think that's both and Q4, we'll, we will be able to report higher numbers than we've seen in Q1 and Q2. The operational revenue will, will see a stronger recovery And we also think that the operational revenue was more skewed towards Q4. So Q3 will be better than Q2 in operational point of view, but Q4 will be even better than Q3, again, operational revenue. Great. Thank you very much. Yes, so on to your first question, yes, reported revenue will be higher. In Q3 and Q4. That is our current expectation. Thank you. Our next question comes from the line of Mark Eslink from EFA. Your line is open. Please ask your question. First question is also coming back on that commercial traction comment. You've seen success both on the outside and enterprise side, but if you mentioned it in this release, is that also on both sides, Or is it then any of the 2 more and more particular? No, it's on both sides. So both in, in enterprise and in automotive. Okay. Thanks. And then your position today in North America, we've seen the success with previous Quarter Verizon and this quarter 4th. What's your feeling on your relative position in that market? And do you have to feel that because of the recent wins that you are now even in a better position going forward also to show to other North American clients? Yes, we I'm kind of happy what we have achieved there. We have a number of, very big names. In our client portfolio. It's really good to see that the private team that we've managed to pull that off So you look at Uber and Microsoft, Apple, to name a few, those are leading companies. And we seem to have the right mix of, of products and people and connections to be successful in that space. We've recently managed to extend that success also into the automotive industry, with FCA wins in our Ford as well. That's an important it's important for us because we like it or not, most innovations come from the West Coast, that's where we learn the most from our customers. That's they ask us to keep up and move fast. It has a very positive effect on, our visibility of the tech, gives us access to talent also on the West Coast. So I'm happy that we are where we are and we can build from that position further. I'm convinced of that. Great. Thanks. And if coming back on that, if, in automotive, you see that lead times are pretty long and then also still stayed quite a long time before the outage actually go into production. Is it possible that in the enterprise side that then this all moves a bit quicker that people move towards a platform that you actually see the revenues coming in. Well, also in enterprise, you need to have, patients. So, it takes some time to be for, between the sales cycles along and also before technology is actually used can also take quite a while. But I wouldn't say, the sales cycles in enterprise are debt different It's starting to change now with the bigger uptake of our APIs. So we see a larger community of developers using our APIs. And that goes much more gradual and faster. But also there, you need to there's a sales cycle time in terms of, developing the applications. And then the applications themselves need to gain traction and all those applications that are powered with our technology make it or are scaled as well. So, it's also, you don't count them overnight success or explosion of sales. It's a gradual step by step approach that we're building. We don't have strength to strengths. We have a much larger community of developers now using our APIs. Some of those developers will turn into big accounts in the future. Great. Thank you. Our next question comes from the line of Vam Rilla from ABI Ambrell. Your line is open. Please ask your question. I got 3 questions. First is if you look at the discussions that you have with your Automotive clients, obviously, they're a bit stuck at the moment between on the one hand, ongoing developments for electric vehicles and robo taxis, especially Waimo crews and upkeep, etcetera, were all making quite a decent progress on autonomous driving in their own fields, whereas simultaneously these OEMs are also scrambling for survival at this point in time. So What is your current feeling on how they look at their own roadmaps? Are they, still on track with the launches of the new models that they have been planning for years? Or do you see a lot of push outs where OEMs are basically considering to push out product launches and real innovations. Because of the uncertainty that we currently, that we currently face. And in relation to that, during the Capital Markets Day, gave quite a decent guidance on the midterm future, especially on the automotive side. Where there was basically an inflection point in 2021, where we could be seeing an acceleration of growth because adoption rates are going up, because of all these aforementioned trends in electrification, etcetera, etcetera. Is that inflection point still going to be there, or would it be likely that that inflection point will be pushed out a year because of COVID. So that will be my first question. The second is more on exit rates. Obviously, you've shown great improvement during quarter with June being significantly better than May and May being better than April. But in terms of year over year comparison on an operation level. If I make my calculations, I would argue that in June Automotive revenues, had an exit rate of roughly speaking, minus 20%. Is that a correct calculation? Is that in line with what you guys are looking at? And what should we be expecting in terms of run rate, for June as an exit rate on the consumer side because there, obviously, we have 2 factors playing a role being retail closures and also the difficult comparable base. So how should I look at an exit rate or normalized exit rate for June, on the consumer side? And then lastly, on the commercial activity, you've been quite successful, both in terms of the number RFPs and orders in the market as well as your win rate. Is it fair to assume? And understand that there's multiple things influencing the order book, but is it fair to assume that we will see a significant double digit increase in the order book by year end? Yes, thanks, Irvin. So the yes, automotive industry, as you rightly say, the inbox of the Automotive CEO is Rodafool. And it's not easy to, to plan as a number of industry developments who contribute to that. You put COVID into the mix and you have a fairly fluid situation. The I don't get the impression. So my impression is that CarMax is seeing this as a temporary dip. And their longer term planning, their strategic choices are not really influenced by this pandemic. Although the cash balances are. So there may be kind of a hard choices between what they can and cannot afford. But I don't see a strategic shift in the priorities as such. And I see more and more carmakers investing in software development capabilities as well. I think the EV train has left the station I don't think there's any carmaker now who is not taking a series and is not pulling out models in the coming years. So I think that's going. And that will I do think that at some point in the near future, we do see an inflection point where EV vehicle sales will take up faster than what we have seen so far. Yes, the exit rates that you're referring to. I think I'll hand it over to to tackle, see if he can shine some light on the specific numbers. When you look at the overall order book for how we want to finish that at the end of this year, Again, VIMA find it difficult to make further comments and that the first half was good. And what the whole year will pan out I really want to, we need to see that. But there's quite some stuff in the pipeline that we can win or that we cannot win or can be postponed. I don't know. We'll see, but, so far, it's been a strong first half year for contracts and new contracts. I can't say much more than that. Yes. So on the, the rates of decline that we saw, at the end of the quarter, both for automotive and consumer, these decline rates were lower than we saw for the whole quarter, as you said yourself, obviously, I think automotive probably start with the high 3 or 4. So it's we're our numbers are a bit less optimistic as yours. And for consumer the comparison is very difficult, as you said, as well as we had the weak number rollover last year. And also June is more, traditionally, more a stronger month in the quarter anyway. So, but the year on year decline is probably 50% or so in concierge. At the end of the quarter. That's including the great results of last year. So I had that question. We think for the red, so on planning, for planning point, if you If you leave our curve, if you well, if you continue the improvement in consumer, And in 1 or 2 months, the WNRO effect will, will be gone down from the 2019 numbers. So that didn't have a big effect as of September anymore. We think that we can have, and, we're trending towards 25% decline, 25% to 30 decline in Consumer for the rest of the year. Yes, for the rest of the year. Okay, that's fair. Fair. Thank you for that. And then maybe as a follow-up or based on the strategic choices that carmakers have been forced to make, etcetera, and also the model launches that they are planning, is it still fair to assume that a lot of things being equal, that inflection point that you showed during the Capital Markets Day somewhere around 2021, where growth rates in the industry, should accelerate based on higher take rates. That that inflection point is still close? Well, as I remember, we gave a CAGR for the current period that we were in and we gave CAGR beyond that, the time. I don't want pinpointing inflection, moment on that year. But based on the deal activity that we've seen in the first half of the year and also the content of the RFQs and RSVIs that we are receiving, also on the OEM side, they are working with higher take up ranges. Very good. And then the last question from my end will be on Google. Obviously, it's been quite a while before when they announced the, the deals with Volvo and with Renon, Volvo, we've now seen that car coming to the market, so that has been launched, but it's been fairly quiet on that front, from what I know, Nissan. So what are you seeing in terms of your discussions and the volumes, that they are planning to do with you guys? Is there any sign that, you or your contract with or the volumes that you are shipping to to non Nissan will come to an end soon, or is that, still not, something for the near future? Well, I think the renault situation is different from Volvo because it's in renault cars only use 4 percentage of cars will be equipped with the Google solution. This is the high end of their range. There's a very significant portion of business still be done there in the volume segment. Okay. And is there any sign that they will be shipping any Google, equipped cars anytime soon? I haven't seen anything from them recently. That's not for us, I'm afraid to comment on. That's yes, no, I don't feel feel that we should do that. Fully fair. Thank you very much. Yes. Thank you, Ebim. Thank you. Our next question comes from the line of Francois Bouvigny from UBS. Your line is open. Please ask your question. Hi, again, sorry. I just had another one. I thought that wanted to ask you. It's on Apple. I mean, if we look at Apple, they did their developer event and the announced that the map is done in the U. S. Basically and now they are starting to roll out in Europe, including the UK. If we look at, it's been 3 years since they announced that they will do their own map. And when I look at your track record, do you renew the contract with Apple in 2015. So it's been 5 years now, and maybe you sign even before you announced it. So maybe at least 5 years. And if we look at the average length of the contract, I mean, I think we are around 5, 6 or 7 years. So my question is since they are rolling out, we didn't see impact from Apple on your enterprise business at also impact from this in the next future, is that because the contract coming to an end and we should expect some impact that the fact that they create their own maps. Just trying to now it's been 2 years since then on that you never explained if there is any impact on you. So I just wanted to ask you. Yes. Again, it's a commercially sensitive topic. We have a long term relationship with Apple, that nature of this relationship is changing, as you rightly, comment, but it's too early to say if how that relationship will end or what shape that relationship will take in the longer term future. So I am very difficult to comment on that. It's commercially sensitive. We all know what Apple is doing. We still have very good relationship. We're sharing a lot of data. And information. I think that relationship is intact. And I think there will be opportunities for a understanding that relationship, but it will be of a different nature than it used to be. Okay. And just to be clear, the fact that they finished the U. S, for example, do they still use some term maps in the U. S? Or it's now over? No. In the U. S, they don't use our maps anymore. They're still relying on of the content that we have provided their mapping system has completely moved to their proprietary mapping effort. Okay. That's that's very clear. Thank you very much. Questions. Since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call.