Earnings Call: Q1 2020

Apr 15, 2020

Good day, ladies and gentlemen. Welcome to TomTom's 1st Quarter 2020 Earnings Conference participants are in a listen only mode. We will be facilitating a Q And A session towards the end of today's prepared remarks. And the conference coordinator will be happy to assist you. Please note that this conference is being recorded. I'll now turn the call over to your host today. Today's conference, Claudia Jensen, Head of Investor Relations. You may begin. Thank you. Thank you, operator. Good afternoon, and welcome to our conference call during which we will discuss our operational and financial highlights for first quarter of 2020. With me today are Harold Kuren, our CEO and Taco Titler, our CFO. We will start call with Harold, who will discuss the key operational developments, followed by a more detailed look at the financial results from Tyron. 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 you. Thank you very much, Claudia. Welcome, ladies and gentlemen, and thank you for joining us today. The start of 2020 has brought unprecedented times to all. Of our company. Thacker will provide further information on financial highlights later during this presentation, and I will now discuss our response to the pandemic and our key operational highlights for the quarter. The, COVID-nineteen impact our automotive and consumer revenue, but we do not expect a material impact on our enterprise business. Automotive revenue arises principally from vehicle sales and they are sharply impacted by factory closures. Consumer revenue is impacted by a steep decline in demand, and that is caused by a combination of, closed retail stores retail is reducing inventory and people not driving. Recovery will depend on how quickly economic normality is restored. Including vehicle production and end user demand, which is currently uncertain. Giving the nature of our business nearly all of our employees can perform their work from home with health and safety of our employees and partners as a highest priority We acted fast to enable remote working and that has enabled us to sustain our engineered development activities and customer service levels. Our employees have responded well to the new situation. We are maintaining productivity and we are fulfilling customer commitments. The year has started well for Automotive Enterprise orders, including new business expansions of and extensions of existing contracts, and we believe that our investments to improve our location technology products are delivering to plan. Because of our strong debt free balance sheet, we have the resilience to maintain our course despite the current uncertainties We are of course carefully looking at our cost base and avoiding expenses where possible. In the next slide, I will give you a short overview of operational highlights for 2020. As I mentioned, we're excited is the progress we've made in both winning new deals and expanding on existing partnerships. One of the deals we could announce today is for our MAP's API business in an expanded collaboration with Verizon. Verizon is integrating our MAP's APIs in SDKs in location service offerings and that powers a broad range of applications and a substantial developer community. Related to our automotive driving automated driving activities, we announced earlier in the quarter a successful demonstration of fast high definition map milling methods, in a joint effort with Tiota and DENzo. At the outbreak of the pandemic, we opened up our traffic reports and APIs to governments, researchers, financial analysts and journalists to better understand the effects of the walk downs in the various geographies. The data were widely used and reposed on. This concludes my part of the presentation. I'm now handing over to Taco. Thank you, Harold. Let me make a couple of comments on the financials and outlook and then we'll go to the Q And A. In the first quarter of 2020, we reported group revenue of 1,000,000, which is 23% lower compared with last year. The lower group revenue is mainly due to the impact of COVID 19, anticipated decline in consumer. Location Technology business, which represents roughly 70% of our group revenue, decreased 11% on year to 1000000. Let me go through the details 1 by 1. Automotive reported revenue was down by 24% to EUR 50,000,000 in the quarter and operational revenue was down by 2% to EUR 85,000,000. The year on year reported revenue decline is as a result of higher deferral rates in a quarter in combination with lower operational revenue following factory closures. For some automotive customers, revenue is recognized over time based on the estimated total contract value, which has decreased based on the anticipated impact COVID. This has led to higher deferral rates. Enterprise revenue was up by 10% to million in the quarter, reflecting increased revenue from new and existing customers. Consumer revenue was down by 40 percent to 1,000,000 in the quarter. Retail closures and factory closures during March accelerated the anticipated decline in consumer, reflected by declines in both consumer products as well as automotive hardware revenue. Gross margin was strong at 78% during the quarter, an increase of 6 percentage points year on year. A result of larger proportion of high margin software and consent revenue versus hardware in our revenue mix. Total operating expenses in the quarter was 1,000,000, an increase 46,000,000 compared with the same quarter last year. Of this increase, 1,000,000 related to the increase amortization expense resulting from a change in the estimated usual life of the map to database implemented from Q2 2019. The free cash flow from continuing operations was an inflow Inflow is driven mainly by cash inflow from a stronger collection of receivables during the quarter combined with a lower payout of variable employee expenses compared to last year. Our deferred revenue position is now EUR395,000,000, compared with EUR 369,000,000 at the end of 2019. Automotive deferred revenue increased by EUR 37,000,000. Releases in both end price and consumer partly offset this increase. The deferred revenue balance in Automotive is now at EUR 315,000,000 At the end of the first quarter of 2020, we reported a net cash position of EUR432,000,000. The share buyback program announced at the end of 2019 began in the beginning of March. As a precautionary measure in the current economic environment, this problem was suspended at the end of March, until further notice. By that date, we had purchased approximately 2,000,000 shares for an amount of 1,000,000. I would now like to comment on the outlook. As previously communicated, given the uncertainty in the market, we have withdrawn our full year to 2020 guidance. Automotive and Consumer revenue were both negatively impacted in the first quarter, and we expect this trend will worsen in the second quarter. We plan to continue executing our long term strategy and associated R and D activities. But we will take some measures in the SG and A area. Overall, we expect that 2020, the free cash flow will be negative We'll provide updated guidance when we can reliable, estimate the duration and consequences of the current situation. With our Q4 press release, we reiterated our mid term guidance for our Locust Technology revenue and our free cash flow. At this point, it is too early to make amendments to this midterm guidance. Operator, we would now like to start with Q And A session. Yes, sir. Session. If you are asking, if you are using a speaker phone, you need to pick up the headset first before you. And we have a couple of questions that came through sir. And we'll now take our first question. This comes from the line of Francois Walvins. Your line now open. Please go ahead and ask your question. Thank you very much gentlemen. And at the couple, and maybe one for Harald and 1 for Tycho. The first one for Harald is, you mentioned in the release and your as well that you had a good start of the year in terms of orders. So I just wanted to know what kind of products you're talking about? I mean, do you think you are gaining shares just to get more color around this kind of a good start of the year, would be very helpful. That's my first question. Yes, if I was thinking much. Yes, we've seen a substantial interest in our new navigation products for the automotive industry. So traditionally, we serve, our technology was mostly embedded. We're in the process of moving all of our services online for online delivery for connected vehicles. But importantly, also with an offline fallback facility, that technology is maturing nicely And, and we found traction in the market for those products. And that has resulted in some deals in the first half in the first quarter of this year. And that is, we're very happy about that. And it's a confirmation that we are on the right track with our product development roadmap. But it's not just in automotive. We also saw seeing some activity in enterprise business as well. I think the importance of the Verizon deal is not to be underestimated. It's a breakthrough view for us. Verizon has been a customer, but they're now taking our APIs instead of about map content. I think that's an important one as well. And we see further traction for our API enterprise business, especially on the West Coast, but we're very encouraged by that as well. All that in combination with long term strategic accounts, traction again in automotive, take up of our new technology products that will be ready somewhere next year before which we are writing orders already gives us all the confidence that we need to continue, our investments in the areas that are we that we think are strategic. Now the COVID situation, of course, is a tough one because we don't know how long it's going to take. And and how long it will take to fully recover from the current, from the levels of business that we've seen before the pandemic, but the underlying business is solid and sound. And that has made it also decide to keep going where we're going, avoid costs where we can, but not compromise our ability to deliver against the product roadmap our strategic priorities. That's very helpful. Just follow-up on that before asking Taco. My second question is, in terms of enterprise, I mean, it's always very difficult to model like the long term. It seems that in the last few years, you had very successful with Microsoft and Verizon and couple of new deals. My question is, what changed you know, in the last 2 years after this acceleration of this within enterprise, what makes you, you know, getting more deals in your view? Well, it's a number of things. They partly, I think we're good partners. We work well with our partners, collaborative, commit to I think that's an important part of the success. But I think fundamentally, it's the underlying technology that gives our customers the confidence that they're choosing the right partner. Those are important deals. They're lasting for a long time. It's not easy to switch So you need to deal with partners that are transparent, reliable, but they're also deploy modern software technology principles and have a kind of a modern stack. And I think our mapmaking platform is one of the things where we have a lead that inspires confidence. There's real end user benefit from that to be gained as well. You add it all up and we are successfully expanding our business, both in in America and in the and globally in the automotive industry. And with an automotive, I mean, do you think you are gaining market share And at the moment, yes? Yes. Yes, yes. Yes. Okay. And HD Maps, any Yes. As you mentioned, it keeps going and we keep working and we announced that some, R and D work with, Tios and Denzo, where we do online, all the spots immediate map making, based on video and cameras on board cars. So very, very cool stuff that's happening and where we are maturing the pipeline and so on and so forth. But The introduction of fully automated cars has been pushed further out. So the applications that CarMax is looking for now are closer to, more an increment of what we're already doing with cruise control and lane guidance and that's kind of things where AG Maps will start playing a role. But the fully automated driving car is going to take longer than we all had hoped. But the business for HD Maps will continue to develop gradually over the next 2, 3 or 4 years. That's great. Thank you, Aaron. And maybe tackle quickly on the free cash flow guidance that you gave, I mean, mean, just that it's going to be negative in 2020. I understand there is a lot of uncertainty and totally, yes, understand. Could you run through the different scenarios, that you may experience in 2020? So without giving like a clear target just to help us run through the drivers of the free cash flow for 2020 would be great. Yes. So as Harold already explained is that, the enterprise revenue is relatively not affected by COVID, for consumer, it is different because this relate to end user demand, people, driving less and not going on holiday or less less than normally. And retail closure is also limiting the accessibility of our products. For Automotive, there's a direct correlation between, factory closures. The royalty reports that we receive are coming from factory. So when cars are being shipped out of the factory, the OEMs report those royalties to us, and, yeah, in a period where factories are closed, our revenue stops. And if factories are producing on lower capacity, our revenue is lower. So the molding for Automotive is directly correlated based on the number of weeks that these factories are closed or not operating at full capacity. Yeah, that's all I can say about it. And we can, you can move every year, every single scenario you like obviously. But we, yeah, we are hopeful that, during Q2, we see an uplift again the automotive production volumes. Okay. And any range you could give for cash flow, like a range, even if it's wide, could you provide that or? I don't want to go there at this point. No. Okay. Okay. That's clear. But to respect, for example, Q2 to have a big negative in Q2 and then unknown later? Or is it going to be more like unknown through the year, but not necessarily bad in Q2 if you understand where I'm going? Well, Q2 is we'll see negative cash flow and Q4 will probably see a positive cash flow and the Q3 is a bit of a question mark. Okay. You said Q2 negative, right? Sorry, I didn't catch it. Just negative. Yes. Okay. Okay. That's it. Thank you very much for your answers. Thank you. And we'll now take our next question. And this comes from the line of Yes, thanks for taking the question. And firstly, I would like to come back on that strong order intake, the strong momentum that you've seen since start of the year. And on the other hand, you also have the negative effect of, where you have to adjust your backlog a little bit because of the lower car volumes. Could you indicate what currently is stronger? So is your backlog still growing since the beginning of the year? Or is it decline at the moment. Sorry, I didn't get your question. Could you repeat that, please? Yes. So If I'm correct, there are 2 things driving the backlog. 1, actually, the order intake, which you already elaborated on, but pretty strong. But there's also a negative effect on the backlog, if I'm correct, that because there are lower volumes at the moment, you also have to, decrease the expectations of car volumes in the future. What is a stronger trend at the moment? The former. Yeah. So growing the order intake is, is is a lot bigger than the reassessment of the current order. And the big push behind it, is that new contracts or the extension of the contracts or the extension of the contract? Which 2 of those? All of the year both. Yes. So order intake is strong. That leads to a growing, backlog order book. Yes. So there are so if you look at the backlog there are 3 elements. 1, if you look at the delta of the backlog, there are 3 elements. 1 is the reported revenue in the period. Quite more. And then you have the reassessment of the future revenues and then you have new order intake. Now the last one, the new order intake is by far the biggest. Okay. That's clear. Then on automotive operational revenue, to get a little bit of feel to help us with our own modeling. What is the run rate rough numbers post COVID and pre COVID? Are we down like 50% or what kind of magnitude should we think at the moment? For automotive? Yes, for the operational revenues in Automotive? Well, the way to think about it, operational revenue is that when factories are closing down, the whole thing stops. So all car factories or nearly all car factories that are producing cars with our software and content stops producing cars in, March, at some point in March. And that has a direct impact on our billings. When so there's no talk that car factories will start producing again, albeit at a lower level. We've seen news from, makers who are either preparing to bring their machines and their production lines online. Or are committed to do so already. So we expect that manufacturing will start not in April, even at some factories, that in made it will continue. We don't expect those factories to run at full capacity. That they will slowly ramp up their capacity. We don't know to what extent the whole supply chain is effective. It's not just our component that go in, but also a lot of other manufacturers need to bring their, supply chain online. So there will be a gradual restart of production capacity. Once that is at, full capacity, then we need to look at the end user demand effects that come into place. And those are harder to predict and what the economy will look like in 2021, of course, is still all defining question. So from a financial perspective, 2020 will not be good. Let's face it. It is impossible to call this a good year. But on product development, on order intake, long term outlook, we still believe that 21 when we hope everything is back to normal. But what the state of the overall economy will do to car demand is of course the $1,000,000,000 question that we cannot answer at this stage. That's very clear. Thanks. And the final question is the part that actually you asked the feasibility on enterprise. It seems to have a good start of the year and a nice contract with Verizon. What kind of growth rate rough number should we think for the full year? Well, I think the revenue that we report in Q1 was good indicator for the further quarters in the year. So it's quite stable sequentially as well. Year over year, we, we see a bit of the increase, compared to the increase that we saw also Q1, Q1. So, 41,000,000 in Q1 that is the run rate. And maybe at the end of the year, we are a couple, 1,000,000 higher but it will be it will start with a 4. Great. Thank you. Thank you. And we'll now take our next question. And this comes from the line of Gao. Your line is now open. Please go ahead and ask your question. You have questions that have been asked before, but my line got cut off a few times earlier in the call. First of all, on the wins in with OEMs, you're referring to, new or contract extensions, but more importantly, also new deals. With both new applications as well as new clients, I. E, new OEMs. Can you give us a bit more granularity on where you have been winning these contracts without naming the actual client, obviously, but can you give us a bit of feeling on what type of product? Is it mainly the new software application that you've launched earlier in the year, or is it, Maps, is it traffic, Europe versus U. S? So that we have a bit more feeling on what it's actually, which corners you're actually winning at this point in time. Secondly is on enterprise. Obviously, a lot of questions already about the growth, but indeed it appears that you've past the inflection point here, growing double digit rate in Q1 already coming from a strong or a high base. So what's been driving this growth? Is it, the Horizon extension and some other kind of new deals, or is it existing clients that do more work? Is it in compiled maps or is it net APIs, and maybe on the map API, I've got a few follow-up questions, but let's start with these two questions. Difficult to give you a lot of detail, but I think the most important thing for us, and I think for Tom Tom, is that those that we see significant deal flow now on the new technology. And that is, I referred it earlier in the Q And A session. So we have in fact, we have 2 type of cost We have West Coast customers who kind of pooling us ahead in terms of our technology. And then we have a more conservative automotive customer base. With, embedded applications, broad variety, little standardization, and generally speaking, high cost to serve per contract. Now what we're seeing now is the new technologies car makers are moving online as well. They've now kind of come to the view that it is harder and harder to deliver a good end user experience if you're only running embedded software. So we have initiated the change more than a year ago. This time that we switch gear and put all of our efforts on online delivery of our products. And that is that was in time. We are now sufficiently developed in our products that we're winning significant deals on the technology. Longer term, this is very important because the cost to serve will go down. We get more uniformity in our product offering the difference in what we need to build for Maps APIs and automotive applications will get narrower. There will more commonality in our APIs and our protocol offering. And that prepares us with less variety, more uniformity, and generally speaking, better product. And the fact that we won those contracts in the beginning of the year for that all line delivery of our portfolio is very encouraging because it will prepare the way for a better products, more mature, better user experience, lower cost to develop more, benefit of the scale we have in Automotive And Enterprise will come through as a result of that. So we're very happy that, that we have those early proof points. We believe that will help other OEMs to follow the same trajectory And as a result, we will be looking at a business that will be simpler and with a more uniform product portfolio going forward. Does it also make you more effective in, basically competing against Google in this particular case? Absolutely. The that we started that development was a, you know, Magona sugarcoat. It was a direct reaction to developments in the market. OEMs had to follow through as well. They've long been, preventing us from delivering our products online because of cost they now accept that there's no longer a strategy they can stick to and need to follow the mainstream in order to satisfy their end customer with experiences that are compatible to what you get on the mobile phone. Now we started that development. It's taken up there's good proof points that it's all working. And now we also have the commercial proof points that carmakers are coming to us for online products as well. Very good. And then maybe on APIs and enterprise, At the Capital Markets Day, you already alluded to the fact that API is kind of let's say, future revenue stream for enterprise, at least it's a new area for you guys, during the Capital Markets Day, the revenues you generated from MetAP APIs was still relatively limited compared to the revenues you're generating on in compiled Maps. So, Gaye, can you give us a bit of feeling where you are now in that transition, when can we expect MAP API to become a meaningful revenue stream? Okay, maybe share some data points, how many map API calls do you get on a monthly basis and at which rate is this growing? Yes. So the, I think we're doing very well in the enterprise business, and there's proof for that with the deals that we did with, Microsoft, of course, who are using our APIs for their location technology products. The new contact with Verizon is an approved point But there's a long way to go, especially in the independent developer route, that's where we're lacking strength. We need to improve there. And that's one of the areas that we have on our to do list is to also make affordable offerings that are compelling for the independent and, developer community. We have a little bit of traction there. That's clearly an area where we can and will improve. Very good. And then maybe on, lastly, the widely publicized view of that contract, basically, developers on the Harmony OS platform can access your APIs now. Do you see any traction on the developer community on that particular platform? I cannot answer this question. I need to refer that to Huawei to answer that. That's commercially sensitive. So I'm not in a position to answer that. All right. I understand. And then maybe lastly, with respect to HD Maps, is there any indication or do you have any feeling on whether or not this crisis, which obviously is leaving deep scars in the automotive industry, if this crisis will have an impact on the OEMs roadmap towards autonomous driving and in a similar fashion, will it impact the roadmap for HD Maps and Can you just remind us on kind of when the first, let's say, level 2 vehicles will enter the market in generating meaningful revenue streams on the HD Map side. Well, I think the I think you can't underestimate what happened to the crime industry at this stage. And fighting for CarMax to fight our way back out to position the holder in at the moment is priority number 1, 23. There's limits it bandwidth now to, to think about the wider longer term strategic implications of what has happened. I think it will take some time before the for the dusty settle and then to analyze what the impacts are on the longer term roadmap and product development cycles for carmakers. But it's clear that this comes at a bad moment when there's a wall transition going on already in the car industry and this is not helping. We can only hope that production will resume relatively quickly. I think there is indications that that will happen. It will take a couple of weeks maybe months for the whole supply chain to get adjusted to the new normal, but then we will start to get visibility on end user demand and on the more longer term strategic implications. I think it's a bit too early to call at this stage. Thank you very much. That came through at this time. You may continue. Since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call. Yes, ma'am. Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.