Earnings Call: Q3 2019

Oct 16, 2019

Good day, ladies and gentlemen. Welcome to TomTom's 3rd Quarter 2019 Earnings Conference Call. At this time all participants are in a listen only mode. You. Please note this conference is being recorded. I would now like to turn the call over to your host for today's conference, Bruno Proley, Investor Relations Officer. You may begin. You, operator. Good afternoon, and welcome to the conference call during which we will discuss our operational and financial highlights for the third quarter 2019. Me today are Harold Holdain, our CEO and Taco Titula, 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 Tom. We will then take your questions. As usual, I would like to point out the safe harbor applies. And with that, Harold, would like to hand it over to you. Thank you very much, Bruno, and welcome ladies and gentlemen. Thank you for joining us today. We generated group revenue of 1,000,000 in the third quarter, which is a limited decline in relation to same quarter last year. Automotive operational revenue continues to grow strongly, totaling $88,000,000 in the quarter, which is an increase of 23% compared with last year. Our gross margin further strengthened, resulted in gross profit growth and strong cash generation. Taco will provide further information on the quarter's financial highlights and the financial outlook for the year later during this presentation, and I will now discuss the key operational highlights technology companies. We announced during this quarter that we have further expanded our partnership with Microsoft. Our navigation technology is now integrated into the Microsoft Connected Eagle platform. And in combination, we can offer the full stack of an end user car experience, including data analytics possibilities for carmakers, that can generate data driven insights. It's a very promising partnership that we plan to continue to develop over the years Our mapmakers platform further matures during the quarter. We made a record 2,400,000,000 modifications to the map database in 1 month. Investments in machine learning, results in higher degrees of automation, faster cycle times and lower operational cost per modification. Increasing automation for our map made platform is a critical component of our strategy. We will spend less on maintaining and building the map and more on innovation and differentiating technologies and applications. We continue to make inroads in automated driving over 1,000,000 TomTom, Tom, Tom, Tom ADAS enabled passenger and commercial vehicles are now on the road, powered by our maps and that number has doubled since the beginning of the year. Left 1 and 2 enabled vehicle can drive more efficiently safe fuel, reduce emission and can more safely pilot their passengers on the road. We also launched our fully autonomous test vehicle to further advance our automated driving solutions. Camera rated into the vehicle to validate and test our autonomous technologies and services. In the quarter, we also launched the TomTom long distance electric vehicle routing API and the TomTom EV charging stations ability API that will help developers to build applications for electric vehicle drivers that will help to build reliable and stress free roots. We also launched a total map style, a new tool that allows developers to customize every element of map giving them full control over the look and feel of their map. This concludes my part of the presentation. I'm now heading off Taco. Thank you, Harold. Let me make a couple of comments on the financials and the outlook for the year and then we go to the Q and A. In the third quarter of 2019, we reported group revenue of 1,000,000, which is 7% lower compared with last year. Main reason for the lower group revenue is anticipated drop in consumer. Location Technology business, which represents roughly 60% of our group, revenue increased 4% year on year to 1,000,000. Let me go through the details 1 by 1. Automotive revenue was down by 7% to of EUR 55,000,000 in the quarter. The decrease is primarily due to accounting, with a large portion of our operational revenue extra buildup in a net movement of deferred and unbilled revenue, which led to a 23% increase year on year of automotive operational revenue. The increase in operational revenue reflects higher volumes in connection with contract which started at the end of last year. South of 10% for the full year and operational Enterprise revenue was up 21 percent to EUR 41,000,000 in the quarter, mainly due to the further integration of our partnership with Microsoft. For the full year, Consumer revenue was down by 18 as well as automotive hardware revenue. For the year as a whole, we expect the decline to be more than 10%. Gross margin was strong at year on year. The year on year improvement is mainly the result of a change in estimates of certain provisions, mainly related to the GPS weak number rollover issue and a larger share of software versus hardware in our revenue mix. Then OpEx, total operating expenses in the quarter was 1,000,000, an increase of 1,000,000 compared with the same quarter last year. Mainly due to the change in the estimated remaining useful life of our MAP database, which increased our amortization expense. Additionally, R and D expenses increased due to lower capitalization of tools and content as well as higher personnel costs support our growing location technology business. EBITDA decreased by 64% in the quarter to 1,000,000, and EBITDA margin of 10%. As explained during the 2019 outlook presented in February, we shifted CapEx to OpEx cash spending due to the maturity of our MAP products. Therefore, CapEx declined by 7 fold in comparison with Q3 2018 from EUR 28,000,000 in 2018 to EUR 4,000,000 in 2019. Free cash flow was an inflow of 23,000,000 mainly due to higher automotive operational revenue. In the quarter, we increased our cash position with 21,000,000. We now have 393,000,000 of cash and no debt. We expect our full year cash position 1,000,000 compared with 1,000,000 at the end of 2018. The increase is driven by Automotive was set by releases of deferred revenue in Consumer. Let's now go to the next slide on the automotive operational numbers. As shown before, this slide highlights operational revenue of automotive. Operational revenue is reported revenue plus the net change in the deferred and unbilled revenue positions. Automotive operational revenue increased by 23% year on year to million, due to the higher than expected volumes associated with contracts which started at the end of last year. For the full year, we expect operational revenue to increase by around 20%. And now let's go to next slide on the guidance. For 2019. We're updating our revenue guidance to around $700,000,000 for the group and to around $425,000,000 for location technologies. As reported revenue reduction relates primarily to IFRS 15 revenue recognition accounting. And noted today's operational cash flows are SCF guidance of around 9% of group revenue remains unchanged. The adjusted earnings per share is now expected to be around $0.20 partly due to a higher gross margin. During our Capital Markets Day, on 24th Stember, we gave a medium term outlook for location technology and introduced the automotive backlog as a new KPI, which behaved giving better visibility on our future automotive revenue. We expect the location technology business to grow its revenue to around 5 $500,000,000 by 2021, which represents a CAGR of around 10% for the period between 2018 2021. Our automotive backlog is currently around 1,600,000,000, which represents the sum of the total expected team awarded automotive deals. We will give an update during our full year results on the KPI time. From then on, we will update the market on an annual basis during our full year results. To conclude, I would like to comment on the free cash flow as a percentage of revenue, in the next slide. As previously explained, the year starts expected cash outflow, while cash inflows materializes in the second half of the year due to a higher volume of customer payments. This being the to generate free cash flow operator, we would now like to start with session. Thank you. And your first question comes from the line of Andrew Gardiner. Taco, I think I got one for you regarding the automotive business, in particular, the distinction between the reported and operational revenue. As you've highlighted, the net increase in deferred and unbilled was up quite a bit in the quarter, bigger than the changes that we've seen in previous this quarters. I'm just wondering, is this sort of element of the business these changes in the deferred and unbilled? Is that becoming more or less challenging for you guys to forecast as you've got sort of a broader customer base and these products are ramping into the market. Is that sort of materializing as you hit expected, or is it becoming more challenging to forecast? I think we in the market are still trying to get used to how to to forecast that. So if there are any rules of thumbs or trends that you're starting to see, it would be helpful to better understand. Thank you. Yes. On the one hand, we will see a lot more contracts that, for Amarra in accounting and that's, will create a bit of more stability. On the other hand, if you are further down the line with the contract, only a small change in the expected value of the contract can lead to quite a bit of, changes in what you could have reported and what should have been on the balance sheet. And so if a contract just started and you're in the 1st month, and we get via our account management in that the expected value of the contract goes up with 5% or down with 5% that will not have materially effect. But there's a certain point in the lifetime of the contracts that a small change will have, bigger effect We saw that last year in Q2 2018. We've seen, a lot of small ones in Q3 2019. I would say that we will get better in in predicting them. And, but we can't prevent them from happening. I see. But so the move in the third quarter is primarily related to what you just described sort of these small changes, but towards the end of a current contract and therefore an outsized move in terms of the the value that you're having to recognize. It's not related to say sort of I think the operational side of things you're talking about some of the newer contracts coming on, the biggest fluctuations you can expect to have in the mid or just over half of the lifetime of the contract. At the end of the contract, the total value of the contract will not materially changed. So, that's not likely to happen. But it's more that if you are kind of at your halfway point, then you will see bigger swings. Okay. Thank you. Thank you. We'll now take our next question and it comes from the line of Mark Hauflink. Your line is open. Yes. Thank you. Also, going back to Automotive and the operational trends, What are you seeing underlying given that's quite some obviously some talk that the pressure on the automotive sector probably take rates are still going up. How do you see that for your clients, the volumes and the take rates? How did they develop over the quarter? Well, I think longer term, so you see 2 movements typically there's a bit of anti cyclism in the in the revenue numbers. We have seen one effect is that the volumes of car shipments have been slightly reduced by carmakers, and you can read the newspapers why that is. But often those, events also come with higher trim levels. So if car maker is are struggling to get rid of their stock. They tend to increase the value with the higher trim levels and navigation is an obvious one. So we see, when the market is weak, we see lower car shipments, but generally speaking, slightly higher attachment rates. And those are the effects I think that you that we have seen happening in in Q3 this year. Maybe the outlook for the full year. So you increased the EPS guidance a bit for the full year. But if you're looking to add the adjusted EPS that you made in the third quarter, that's a very big chunk and to square that for the full year guidance, I probably have to say that the increase in deferred revenue that you saw in enterprise needs to reverse in the fourth quarter. But maybe just maybe to explain a bit like all the moving parts, what are you seeing on the OpEx on that $85,000,000 that you reported in 3rd quarter, is that going to be rather similar in the 4th quarter? And in deferred revenue, all the different parts of automotive enterprise and consumer, what are you seeing there for the fourth quarter that can help me to square and to get to that $0.20 number? Yes, let me take it, if I may. So the top line, Q4 will be the smallest quarter of the year, that is, that we will see sequential drop in, in consumer enterprise is expected to be relatively flat. Automotive credentially will go up. But the group revenue as total will be lower than what we've seen, in, in Q3. Then, then gross margin, Then gross margin is, is will remain high, but as we saw the one off in Q3, we'll probably not beat the Q3 gross margin number, but it will be in the high 70s. For OpEx, OpEx is expected to increase from Q3 to Q4. And that is mainly driven by our R and D spend. And that is a factor of a buildup of our workforce in that area, and it's also a reflection of ongoing reduction in capitalization. So we see more costs taking directly Then on deferred our deferred and then built, revenue position, you're right that we probably will see a release, in the in enterprise in the fourth quarter. So the total number, the net total number for the full year in enterprise is expected to be just south of 20. So anywhere between $15,000,000 $20,000,000 release, consumer release of $25,000,000 as well. And Automotive, we now think that, that, can increase with more than 1 month 20. So the group, addition to deferred and unbilled movement is roughly 80. On the adjustments per share, we if you all add that together, we expect our adjusted earnings and also our adjusted earnings per share to be negative in the 4th quarter. And that will lead to just earnings per share for the full year around Thank you. Your next question comes from the line of Yes, good morning. Afternoon, sorry. First, a small question on the automotive hardware, showed a bit of a drop in this quarter. What should we be reading into that is that primarily the car may not which is coming at the end the second question will be on the deferred revenues. So there's quite a big change in deferred revenues that you forecast for full year at 2019 with a net number of EUR 80,000,000 for full year, versus EUR 60,000,000 that you basically reported in the 2nd quarter. So if I basically what changed in, in, let's say, this quarter or compared to the Capital Markets Day a few weeks ago that this delta is there. Can you maybe walk us through kind of what all the moving parts are in these discussions, or in these discussions that you basically have with your accountant on this particular number? And also what is your current thinking about the deferred revenues in 2020? And then, I have a few follow-up questions, but let's start with these 2. Simple. That's indeed related to an legacy product that we mainly have with with Renaud and that is end of life. So that we'll we'll continue to ship that, but with smaller volumes. The deferred revenue, this can have 2 factors. Roughly one is that there's a change in the contract terms and that leads to, a different treatment. Of the deferred revenue, what you can report and what you can you should defer. So there were some of these contracts that we have, extended or updated or renewed a contract And then, some of these changes can lead to more deferrals. So to give you an example, if you have a short term contract and you renew renew that to a long term contract, that means that the accumulated enforced revenue, is suddenly much larger than what's allowed under the, than the maximum that you can report on, because you're earlier in the contract than before. So those are technicalities. And the other one is that you, on a quarterly basis, at least, sometimes on a monthly basis, we assess the total value of each and every contract. And, due to more insight that's not coming from our accountant, but more from our account management. So our counterpart at the OEM sites, etcetera, that the total contract value changes that can lead to more deferrals today. So that isn't related to operational performance in this quarter or maybe next quarter, but it's more the the outlook that they have given for the year 2020 or 2021, if the term of the contract incorporates that. So on the IFRS 15, you do need to do a quarterly reassessment of each and every contract that you have. And the hand is also linked to the question that Andrew was asking. If you're in the halfway point of your contract, then small changes of the total value can lead to big swings in what you need to suddenly release or, extra deferred. We saw that last year in our Q2 2018 numbers as well, when we had we released a lot of the previously deferred revenue, and we now saw, at the other way around. Okay. And just from my understanding, or reconfirming my current beliefs, is this fair to say that your operational revenues, so your reported revenues plus the deferred or the net movement in deferred, that that number is pretty close to the number that you are invoicing to your client as a consequence also reasonably close to kind of the cash flow profile of the contract? Yes. No, yes, there's a yes, the correct. So if you add the reported revenue, you do plus the, the net number that is deferred or unbilled, then you get very close to the invoice. You need to, the only mismatch then is, timing on payment terms and payment terms can be, okay, but it's going to be 60 days, whatever. But, it's closer to operational performance. So in that sense, is it might not better to kind of incorporate it also into your outlook because in essence, group reported revenues are a pretty meaningless number. Because, a, your group revenues, I think there's not a lot of investors that really care about what consumer or how fast consumer is declining. B, we only care about your operational performance and whatever IFRS 15 kind of changes in terms of your I mean, what we today see is kind of there's a shift from of EUR 20,000,000 to deferred revenues. So in essence, you have an underlying upgrade of your revenue outlook for full year, while it now reads like a downgrade if I read the press release. And that's kind of not fair to yourselves, because in essence, there's an underlying upgrade if you at the $20,000,000 back in the outlook. So wouldn't it be kind of a good idea to start your press release with the operational revenues in Automotive because that's, by far, the most important number in your press release? Yes. So it is now 0.2 over press release. So it was almost on the top of our press release. So automotive operational revenue was the 2nd point press release. But Correct. But the first point is pretty meaningless number. I mean, that's more what I'm, what I'm trying to refer to But that's like what's, let's say, something maybe for offline. Let's go to a few more follow-up questions that, that I have. First is, on the current discussions that you have with OEMs. As I understand it, we're currently mainly discussing contract extensions at this point in time. And the discussions that you have are about how to get fresh maps into the dashboard. So can you give us a bit more flavor of what the current thinking is within the OEMs and how the concept of fresh maps is basically being embedded in your in your commercial discussions. Let's put it that way. Yes. So, negotiations about contracts are threefold. So it's contract extensions, of course, which is, kind of normal. There's quite a few discussions about new contracts as well. And then there are discussions around contracts for HD Maps taking place. They're also entering in a more serious phase there. So we're busy, with with all the work and it's going in line with expectations. I don't expect any surprises there. So we feel we feel good about the discussions that are currently taking place. What we have not yet selling is the real all line version of our maps. I think that's a little bit further out. So you did the quotations we're doing now and the contracts we're negotiating now are really for embedded software for ADAS and for HD Maps. And, online real online, maps, that's something for 2020. And if I re into that. Is that also potentially going to, give a boost to kind of your order backlog? Or is that too early to tell? Yes, that's a bit early to say to tell. As usual, we we come with new with an update to the trading update, in next year. So it's we don't comment on that at this stage, but next year, we'll get an overview including new metric that we've been talking about during the Capital Markets Day. Very good. And then during the Capital Markets Day, you also highlighted let's say the new product developments that you guys are doing in UX, and you showcased a couple example, how you incorporate ADAS features into kind of the user experience and how that can potentially differentiate the use experience of an in dash products versus the product that we currently have on our smartphones. How are Automotive responding to that new product? And is it fair to say that, they are more open today about having these discussions with you versus, let's say, a year ago. And when can we see the inflection point where this product is basically ready to be sold? Yes, you can see a clear nice engagement from the automotive industry. I think the, especially the car designers don't like the way the proliferation of trolls and buttons and warning signals, various places of the dashboard, it's getting messy, it's getting difficult to integrate. So the message we're presenting resonates in terms of, this is what future systems will look like. Uncluttered, easier to read more consistent, and, you know, and in a more modern way. Add to debt, lane level navigation. So current products are based on a point to point navigation of node to node navigation. But we're close off, introducing lanes as well. We derive those lanes for our AG map making efforts And with the album of camera in the car, you can exactly see in which lane the car then is, and that makes guidance a whole lot, clearer. And it's really a step up from where we are today in clarity and, and, yeah, and easy to read. So there's a lot of interest in that. And we have confirmation from the car industry that this is the technology and the user interface design that they are looking for and aspiring to. Are for the first time visible in your revenues? Is that a 2020, 2021 discussion? No, no, that's not a 2020 thing. No, now, unfortunately, things don't go that quickly in the car industry. Now that will take longer, but we will be able demonstrate a full suite of applications in early 2020 during CES that were we'll be behind doors, but they will have a more integrated view of what we think the future of the cocktails will look like. Very good. And then we move away also from a PowerPoint stage and be able to show some moving, and working applications in that domain. Helpful. Thank you. And then, on 1,000,000,000,000, Obviously, we saw the vehicle and the technology during the Capital Markets Day. I think it's fair to say that, having a, a fully autonomous vehicle in house functioning well, which has been developed in house from the ground up is, I think an achievement not a lot of companies have made. So what can you tell us about your first, interactions or first data points that you got from the 1,000,000,000,000. So how many kilometers is this vehicle driving? What are your future plans? Are you going to deploy more of these cars in the future to come? And will you also be able to drive them outside of Germany in the future? Yes. So it's important to stress that we're not building our own self driving technology for the for with the view to commercialize that. That's not the aim. The aim is a year to test AG Maps, ADAS features, user interface concepts, to be able to share those insights and test with our key customers, for demonstration purposes and brainstorm purposes and joint development purposes, And also for our own developers, of course, to see how the products we are developing are behaving in a real world environment. And that is critically important because otherwise you are dependent on hearsay and information you can from suppliers and Tier 1s, which is not the best way of, progressively improving and harden your technology. The other thing that we learn, of course, by developing and driving 1,000,000,000,000 is what sensors are doing. So we get a firsthand, view on accuracy problems with sensors, how sensors are developing, and how we can use those sensors also to create data to find map problems and eventually build those self healing maps that we've been talking that. So it's really you need to see it in the, in the R and D context and not so much in, in the, how well is the self driving technology itself formally. That's important. It's important as well that we understand how that works and how and we're very happy that we've gone that far. We have now a license for Germany, and we're applying for licenses in other countries. So we can take the car also to the head offices of our key accounts and use them for demonstration and for research. Very good. Maybe a last question from my end What can you tell us about the HD Map trucking product that is live now? Is it still going according to plan? And what will be the next HD mapping products or application that will go live, at a client? Yes. So the trucking product is behaving well. And also in the field, and it results in a real life, fuel savings. That's a key metric for truck builders. It's the total cost of ownership for a truck operator that is the most important driver. So that works, and we see also interest in model truck makers to apply the same thinking and same technology. So that's encouraging. And then, we also won 2 map deals for AG Maps 1 from a Japanese manufacturer and another one from a North American manufacturer and that will go live probably in 20 20, 2021, and we are fully delivering those products and testing them and hardening them. So they are ready for commercial applications around that timeframe. Yes. I don't it will be low volume, but nevertheless, very important test cases for real life commercial applications. And will that also include, the rotor grams and the auto stream functionality? Or is it more still a longer Yes. In one case, it will evolve for Otterstream. The rotorgram functionality is to follow after that. And to be clear, the road around functionalities, the ability to derive map data from the in built sense in the vehicle and use them for mapmaking and a map checking. Very clear. Thank you very you. There are currently no further questions coming through. Since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call. Thank you. That does conclude today's presentation. Thank you for participating. You may now disconnect.