Earnings Call: Q4 2019

Feb 5, 2020

Good day, ladies and gentlemen. Welcome to TomTom's Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen only you. Please note that this conference is being recorded. Will now turn the call over to your host for today's conference, Bruno Pugoli, Investor Relations Officer. Please go ahead. 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 fourth quarter full year 2019. With me today are Harold Holdain, our CEO and Taco Titelag, 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 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. Yes, thank you very much, Bruno, and welcome to our conference call. We closed 2019 positive note with strong gross margin and cash the location technology business to continue to grow in the coming years. 2019 was an important year of TomTom. We finalized telematics divestment, and we are now more focused location technology business. Our advanced mapping platform technology helped us to claim a leading position in the emerging AG Map market and the enterprise business showed strong revenue growth. Taco will provide further information on financial highlights and financial outlook for 2020 later during this presentation, and I will discuss our key operational highlights and strategic priorities for the year. During our Capital Markets Day, we introduced automotive backlog as a new KPI to give you better visibility on our future automotive revenue development. The automotive backlog represents the sum of the total expected IFRS revenue resulting from all existing awarded deals the automotive backlog increased since the end of Q2 twenty nineteen from around one point 6,000,000,000 to around 1,000,000,000. Order intake and win rate were high we converted most of the opportunities that were available to us, including the first HD Map deals. We recently announced a series of new automotive deals via Chrysler to use TomTom as its global supplier for maps, navigation, traffic and other services for the new Uconnect 5 infotainment system. The brands are bought, offer Romeo, Chrysler, Dutch, Fields, Jeep luncheon and Ram trucks will all benefit from our products. Our ADAS map was integrated to Danwood predictive power control system, and that allows for certain driving functions in the truck to be automated on highways and inter urban roads. But automatically adapting speed and predicting gear shifting based on the road ahead, the technology delivers a safe and more comfortable ride most importantly, it leads to significant fuel savings of up to 5% per vehicle as well as lower CO2 emissions. The new deal with Subaru, was announced as for the 2020 Subaru Outback and the legacy U. S. Vehicle models, Subaira selected our global map as well as a navigation software and a new user interface was developed for an generation infotainment platform. In the next slide, I want to give you a short overview of our strategic priorities. For 2020 and beyond. We're all excited about the progress we've made so far and the opportunities that are ahead of us. And keep that positive momentum, we'll continue to invest in strategic areas whilst maintaining a positive free cash flow philosophy. We'll continue to advance our mapmaking capabilities, investments in software, machine learning and artificial intelligence will lead to higher degree of automation and that will result in faster cycle times, lower operational cost per modification and generally a more competitive mapping platform. Spending less money in maintaining and building the map allows us to spend more on innovation and differentiating technologies and applications. And that's a very critical component to our future success. In the automotive business, we are transitioning our vehicle integrated navigation system to an online service This will allow us to deliver much improved user experience. We will further strengthened our Maps APIs. They are successful. We have early traction, especially in the enterprise space All in all, we're in a strong position. We're in a stronger position than last year. We have a clear product roadmap, fantastic team, and a strong balance sheet. Top of that, we're generating cash. So we are ready to capture the opportunities that will open up over the years to come, both in the midterm and certainly in the longer term. This concludes my part of the presentation by handing over to Taco for more detailed overview of the financials. Thank you, Harold. Let me make a couple of comments on the financials and the outlook for the year and then we can go to the Q And A. In the fourth quarter of 2019, we reported group revenue of 1,000,000, which is 10% lower compared with last year. Main reason for the lower group revenue is the anticipated decline in consumer. Location Technology represents roughly 70% of our group revenue and increased 4% year on year to 100 and 1,000,000. Let me go through the details 1 by 1. Automotive, IFRS revenue was down by 6% to EUR 69,000,000 in the quarter, while operational revenue for Automotive increased by 20% to EUR 116,000,000. End price revenue was up by 24 percent to 1,000,000 in the quarter. Consumer revenue was down by 32 percent to EUR 46,000,000 in the quarter, reflecting a decrease in both consumer product as well as automotive hardware revenue. Gross margin was strong at 79% during the quarter, increasing by 12 percentage points year on year. This improvement is mainly the result of a larger proportion of high end margin software and content revenue versus hardware in our revenue mix. Total operating expenses in the quarter was 1,000,000, an increase of 1,000,000 compared with the same quarter last year. As explained in the previous quarters, the change in the estimated remaining useful life for our map database, increase our amortization expenses. Also, R and D expenses increased due to lower capitalization of tools and content, higher personnel costs incurred to support our growing location technology business and a million one time restructuring expense due to a higher degree of automation in our map making Moreover, our SG and A shows a year on year increase mainly due to a one time gain million, resulting from a litigation settlement during the fourth quarter of 2018. The free cash flow from continuing operations was an inflow of $48,000,000 in the quarter, which is 80,000,000 1,000,000 below last year. The lower cash generated from operations is mainly a result of higher personnel expenses and a one off cash in related to the litigation settlement in the fourth quarter of 2018. Our deferred revenue position is now 1,000,000 compared with 1,000,000 at the end of 2018. Automotive and consumer maintained their trends, which means automotive was up with $106,000,000 to now $278,000,000 in consumer is down with the net cash position of 1,000,000. We will execute share buyback of up to 1,000,000 which represents 4% of our total issued share capital. The share buyback program covers our long term incentive Our expectations are that the share buyback will be completed before Now let me comment on the guidance on the next slide. Group revenue for the full year totaled 1,000,004 percent above the initial guidance of 1,000,000. Our Consumer business outperformed our initial expectations as a result of replacement sales due to the GPS weak number rollover issue. Gross margin of the year came in strong at 74%. The adjusted net results for the full year from continuing operations of 1,000,000, which translates to an adjusted earnings per share of. Free cash flow as a percentage of revenue was 9% close to our initial outlook. Let's now move on to the outlook for 2020 in more detail We expect location technology revenue to be between $450,000,000 $475,000,000, year end 2020. We reiterate our midterm revenue guidance for the segment. To grow its revenue to around EUR 500,000,000 by 2021, which represents a CAGR of around 10% for the period between 20182021. Our expectations are supported by a growing automotive backlog of around 1,800,000,000 and the growth of our enterprise business. We'll continue to invest to improve our competitive position and capture market fees. Free cash flow for the year is expected to be mid to high single digits percentage of group revenue, which with a double digit SCF as a percentage of group revenue as a midterm target. The automotive backlog on the next slide During our Capital Markets Day, we introduced Automotive backlog as a new KPI with the aim of giving better visibility of our future Automotive revenue. Our automotive backlog increased since the end of H1 2019 from around 1,000,000,000 to around 1,000,000,000. The automotive backlog represents some of the total expected IFRS revenue resulting from all existing awarded automotive changes in the backlog are the result of revenue recognition during the period. In this case, the reported revenue in H2 bringing it down with 1,000,000, offset by an increase as a result of the combination of of the cumulative value of newly awarded contracts and a reassessment of the previously awarded contract. Which amounts to $325,000,000. The phasing of 1,100,000,000 backlog into revenue is shown on this slide, where you can see that twothree will be reported from 2022 onwards. We'll give an update on the automotive backlog on an annual basis during our full year results. Looking at the profile of our balance sheets, on Slide 9, as previously explained the nature of our technologies and product is changing. The quality of our products materially increase over the years and the value of our map database is more determined by the refreshed status. We will capitalize a lot less and what we capitalize will be for a shorter duration on our balance sheet, we will therefore amortize faster as well. In 2019, we had total D and A of EUR 2,000,000 to EUR 92,000,000 and this level of amortization will continue in 2020. We expect our intangible asset to be below EUR 200,000,000 by the end of 2020 as shown on this slide. As of 2021, the the, the annual amortization will be much lower and will continue to decline in the years after. I would now like to comment on our expected 2020 cash spend and particularly our R and D spend on the next slide. Our total cash spend in 2019 increased compared with 2018 with 14%. For 2020, we expect a more limited increase in our total cash spend. As mentioned by Harold earlier, we will continue to invest in R&D, especially in our a deliver great user experience for connected cars and to improve our map APIs. Operator, this concludes my remarks. We would now like to start with the Q And A session. Thank you. Session. And your first question comes from the line of Francois Vivini from UBS. Please go ahead. Your line is now open. The first question I had is on your orders. I already talked about the orders intake has been, solid in 19. I just wanted to have your view on what is driving that. Is it a market and that is growing fast? Or is it because of your market share? Any specific around that? And how do you see the order intake for 2020, although you don't disclose the order bookings anymore, just to have a qualitative comments around it. That would be my first question. Yes. So, Yes. So I think the, generally speaking, we have significantly invested in the last years in, in everything that has to do with the navigation on board. We have a couple of class leading products here, including traffic, and our navigation software is now a 3 year market leader. There's not that many players who can keep up the investment levels that are required for in car navigation, including the move to online. We've been doing that consistently. I think our customers are happy with the products they take from us. So we are happy that we haven't lost any customers. We get repeat orders, and generally speaking, we're winning market share. It's a combination of all that, that helps us to get stronger in that market. And I expect those trends to continue, especially now with, online navigation that is not easy to master you need to understand that contrary to what you see in a mobile phone in a car, the navigation system needs to work online, but I need also it needs to be an offline full back position if you're car parking garage or if or even if, connectivity is not available at all, that means you need to be able to deliver a hybrid experience that gives the optimum user experience in an online situation, and a, let's say, somewhat degraded, but still acceptable performance when there's no connectivity. That's not easy. I think we're leading the pack. I think our customers are seeing that They're generally happy with the product roadmap. And I think on the strength of that product roadmap, I believe that in, in vehicle infotainment, we can continue to win market share. For the 2020 order intake as a whole for the market, do you see that as a as a a, like, a better year than, than than 2019, 2018? Or how do you see the addressable market to some extent? Yes, it's hard to predict what the available market is It's, I don't want to say anything about the size the available market in 2020, I think that wouldn't be right. We don't know enough about it at this stage to give you an accurate What we do see, however, is a slight change in attitudes with automotive customers and they're more looking for more strategic and longer term partnerships rather than, the best prize on the latest set of RFQs in our eyes. And I think that's driven by the insights and the requirement to work more collaborative and more efficiently, to provide a much better user experience than what we've never past, when things were changing rapidly. So I think there's some positive trends there. That will help us to establish those longer term partnerships and solidify them in 2020. What do you mean? I mean, is it like the contracts are longer or concretely What does it mean this change? Well, so I think traditionally what we have seen is that the order that contract you win in the automotive industry very much RFQ request for quotation driven and mostly driven by where our purchasing department has the latest, in the last say, in which software developer selects it to power the next generation. That mobile has some problems, most importantly, is that you need a carmaker and start all over again with a complete new software stack, new integration, new level of risk, and a level of capital disruption goes with that. I think the trend now starts seems to start heading for more longer term partnerships where you work in a more collaborative fashion to, deliver location component in an VI system on a longer term scale, more as a partner than as a vendor. I think that is we've been waiting for that change. I think that change is overdue, but we now see the first signs that that's actually happening. Okay. That's interesting. And on HD Maps, I mean, you talked briefly about the 1st years of HD Maps. Should we expect what is it like the truck or is it like for cars now? Because this one was Yes. So the first one was indeed for trucks and we made a reference to that deal, in our comments earlier. It's very much an AD Map product produced in a slightly different way. We now have one deals for passenger cars as well, in 2019. That was an important one to get confirmation that what we think is the right product is actually meeting market expectations. Okay. And can you have a sense of the pricing versus a traditional map? I'm not asking the price, but just the magnitude of of the average selling price, for example? Well, I think what we see for the first time is that carmakers are a want a subscription model with us. So you get a first contracts we have signed are a certain amount of money per year subscription for a fairly long period of time. So you get a more recurring revenue stream out of HD Maps. That's what we're seeing so far. Is a word of caution, of course, and that is that the, the full automated driving is taking longer. But what we do see is more and more higher levels of automation to vehicles that start to benefit from AZ Maps. I think the most important significant development we're seeing is there is kind of the what we've got cruise control and steroids, where the car not only keeps its speed, but it keeps its speed dependent on the maximum speed, traffic conditions, car can overtake can prepare for leaving the motorway and so on and so forth. And for those level 2.5 applications, AG Maps are now requested by a number of carmakers. Okay. And last one for me is HD Maps. Do you expect the contracts to be meaningful in 2020 for you in terms of size? Of your bookings? For 2020, the invoice revenue will not be meaningful. Bookings, hopefully, will continue in 2020 revenue will follow in later years. Thank you. Your next question comes from the line of Mark Hessling from ING. Please go ahead. Your line is now open. Thank you. My first question would be on the, on the FCA contract that you announced earlier this this month or last month. Could you talk a bit more about, so what is the scope increase versus the initial FCA contract that you had there? I'm talking about not only a larger number, of course, but it's also clearly that you increase the software part that you put into and the functionality that you put into. And related to that, is that extra functionality that you're adding? Is that something that, is it more or less a blueprint for other contracts for other clients going to the future? Well, the so we had traditionally, strong relationships on the Italian side. And the fear there's been a customer for us for a very long time, but we've never really managed to increase our footprint in Detroit. That has changed dramatically with this contract that we signed some time ago. So for us, only it's a major breakthrough, in the North American market. Was one of the big 3. It was crucial to do for us to win. We did win it. Not only did we, get the mandate But we've also been asked by SCA to, bring, have a bigger impact, better input and responsibility for the end user experience. So what you see here, what we pioneered with Fiat Chrysler is that the a large part of the responsibility for user experience and user interaction was, with Tom, Tom. So we've not only engineered the whole thing, but we did extensive market research and testing and, to make sure that the offer solution is fit for purpose in the North American context as part of the wider IVI software system that everything is well integrated. And I'm very, very pleased the way that worked, both in terms of product, but mostly in terms of collaboration. It was a very collaborative effort, very efficient software development and I've seen a lot of smiling executives all around. So I think that's a good blueprint for us to, have a more meaningful role and more responsibility for what the end product looks like. We're very excited. We're going to launch, and, I think in 4 or 5 months from now, the first vehicles will go into the market. We have high expectations. And for us, this was a critical, a critical deal to establish our footprint in the North American market. Okay. And the blueprint part for other clients, not looking at the numbers, but the license fee that you get per car, is that significantly higher than you used to get for the old vehicle check? Well, it's a different contract. I'm not in a position to, discuss, commercials, but it's a full stack product, including map updates, including services, traffic information, EV routing, EV charging points, and availability, it's complete software stack that we deliver, and maintain with significant proportion of online services that come with that package. So both in terms of volume, strategic positioning, quality of the product. This is a very critical deal for us. Okay, clear. And second question would be on the, as well, the automotive revenue, should you guys have picked up the market, they will be and more or less flattish year over year in 2020 because partly because this contract is coming online in the second half of the year. But still, I would like to get a little bit of feel what's not happening on the operational revenues because if I'm correct, then the that the third part is expected to be a bit lower this year than last year. So then we implied that operational revenues for Automotive would be down year over year, which accounts really square with mean, at least some FCA contract coming online with the comment on the higher take rates, which pushed up the backlog. Could you explain me the moving parts there, please? Yes. So let me first answer your question on the, Sorry, Mark. I'm just taking my numbers in front of me. The deferred revenue of Automotive increased in 2019 with 115. If you and the expectation for next year is that it will increase again, with 100 and 5. So the, the part that is deferred goes goes up with 105 that's indeed a bit lower than what we've seen in, in 2019. The IFRS revenue, the increased guidance that we've given is, that enterprise would go up fee this year and automotive with 10%. Does that answer your questions? Yes. Partly, I mean, it shows that where you will be at the end of the year, but still it seems rather low growth from the auto operational revenue perspective. Given the two points made before that the FCA contract coming online and also the higher So SCA will, the start of production will be in the second half, twenty twenty. Which you normally see is that, that we'll start with one car line, etcetera. So the full revenue effect will not really materialize in 2020. Okay. Clear. And then, on the cost side, the cash cost side, the oil explained, it will be up, but not as much as before. Is there a bit more magnitude that you can give to that number? Yes, we can. So the, the OpEx had a total OpEx, including and, excluding CapEx, was 746 in 2019, we expect that that would grow to roughly 7 80 with a fairly flat DNA number and a further decline in our CapEx number of, that the CapEx is expected to climb with another 10,000,000 Okay, clear. Thank you. Thank you. Your next question comes from the line of Arpine from ABN AMRO Bank. Please go ahead. Your is now open. Yes, good afternoon. First of all, on the backlog, you showed quite a healthy increase in the second half of about SEK 200,000,000. I understand that there's a bit of a split between new order wins that we will likely hear about 2 years from now, and a bit of contracts, kind of, reassessments, if you will. Can you give us a bit of feeling what type of contracts you have won in this particular number? So are we talking about HD Maps or ADAS or SD, is it more related to services, etcetera? And my second question would be on, IVI. During the Capital Markets Day, you already mentioned that you are planning to play a bigger role. I think we've seen the first signs of an increased presence of you guys in IVI software, if you will, with the Subaru contract and also, to a lesser extent, but also included in the FCA contract. So can you give us a bit of a feeling, what are the critical roadblocks that you or milestones that you need to accomplish to kind of you get your product lineup in this particular space up to speed, and can you share us with us what the customer feedback has been so far in terms of the discussions that you had with Those were my two first questions. Yes. On the new order, Yeah, I would say everything you mentioned, but with the exception from HD mapping deals. We closed some of those, but that was in the H1. Was nothing that we lost, by the way, but there was nothing to win in H2. But the nature of the order intake was, a combination of mapping and ADAS, traditional mapping ADAS and services. And with existing clients or also new clients? Existing clients, yes. Fair. And then with respect to the role that you intend to play in about IVI software? Yes. I mean, yes, so, I'm sure you've followed the industry where the car executive started to make comments about the complexity of the software landscape. And we've seen some dramatic, problems in 2019 with major car lines and major product interactions being delayed because software issues that are, kind of demonstrate the complexity of what the industry is trying to achieve here. That is seen as a problem increasingly also by the car executives, and they're looking for a more effective way of bringing software and dashboard, and we think we can play a role there. That's what also drives for us to, to come up with the IVI concept, which is, on one hand, a simply location in the underlying technology. On the other hand, provides a much better integration and user interface, not only for traditional navigation, but also some integrated safety features like that support, that corner overtaking, other ADAS functionality, like adaptive speaker flow and what have you. So there's a clear need to achieve a level of simplification, but also sophistication in order to bring software in the, in the dashboard. What we are doing, we're playing a role here in, we've developed a couple of lighthouse products IVI, one of them, we are marketing that actively with our customers. We're doing workshops. We're trying to understand the level of appetite and, influence our key customers want to have on the development of the roadmap I think the feedback we've collected so far is positive, both at CES is what we see in one on ones. And it's a clear view from TomTom, what the future of IVI can look like. And we are very, excited to develop that thinking in the portfolio in 2020. Together with some of our leading customers. And in terms of the software development from a technological perspective, are you guys already, where you need to be or are there more, investments to be made to make this product line up, or basically live up to the expectations of the car executives? Well, there is a minimum viable product, but you need to continue to invest in stuff continuously. There is, it's quite relentless, but we would be ready for commercial introduction in 2022 and it's 2021. That's the timeline we have in mind that is within the realm of possibilities, but it's, it's not just that we a lot of what we're doing and we have been in over the last couple of years will contribute to that, to the design vision. And I think we're making good progress. There's a lot of excitement and a lot of, enthusiasm to keep going in this direction. Very good. And some of the order intake that's, that you already reported to date, does it include the IVI stuff that we just discussed? Or is this still more in a let's say, yeah, marketing phase, if you will, and not yet embedded in order intake. It's all in the order intake. This is clearly a pre RFI pre RFQ work that we are now commissioning to, together with some of our key customers. Very good. On the share buyback. You mentioned that you're going to do a 50,000,000 share buyback, but you're not going to cancel any share. So it's to offset the dilution from share based payments. If I look back at my cash flow statements, to 2012, you have a cumulative share based compensation of about SEK 30,000,000. So I do understand that you have an ongoing dilution of about 1,000,000 shares based on share performance plans, but the gap still seems a bit big for me. So can you maybe explain to me a little bit better what the gap is that we are looking at? Or are you already kind of front loading, if you will, on treasury shares in order to be able to kind of offset the dilution that you expect for future years? You're correct is that, the, the run rates, for at least this year and what we've seen in the last couple of years is roughly 1000000 shares. So the, the backlog where we are today is 5,000,000, 5,400,000. And we have less than 1,000,000 3 shares left from our previous share buyback. So, by the end of Q2, these numbers. So if you look at the current treasury shares, less than 1,000,000 the backlog over 5,000,000 adding another 1,000,000 this year, if you multiply the 5,000,000 times the share price roughly of today of 1,000,000 that you end up the 50,000,000. Fair and the backlog of 5 and a half mile or sorry, a different approach to the thing, how long is your typical vesting period? In other words, how do we get to 3 years? So how do we get to a backlog of 5,500,000 if the run rate is 1,000,000 shares a year? Yes, there are some, there's a combination of RSUs and options. So you can have options that, can be exercised after 3 years, but they have a longer tenure of 7 years. So they are exercisable, but they are not being exercised. Yes. That's fairly, that's good. Last question from my end. You mentioned, Harald, in the prepared remarks, that you had an excellent win rate. Can you let's say, quantify that, or can you give us a bit more feeling on market share developments based on your internal calculations in 2019? No, I don't have those numbers also because the course, the German, kind of what's happening there is we're not very transparent to us. What we do know is, especially on the software side, our market share, we now have the largest vendor of, navigation software for embedded systems in the auto industry And we can also see that a lot of companies who used to have an offering in that space are no longer offering that. So there is a level of consolidation take place and we are the prime beneficiary of debt. What we do know is, our market share and traffic high 85% market share in Europe and about 40% market share in North America for embedded systems. So that's good. And the investment in creating modular software components that can be used to cost efficiently build a good product have really started to pay off with a significant market share win, but also consolidation, as I said earlier, it's kind of good to see that it's really happening, and that is, I think it's supposed to trend for us. Very helpful. Thank you very much. Thank There are no further questions. Please continue. Since there are no further questions, I would like to thank you all for joining us afternoon. Operator, you can close the call. Thank you. This concludes today's presentation.