Earnings Call: Q2 2019

Jul 17, 2019

Thank you, operator. Good afternoon, and welcome to our conference call during which we will discuss our operational and financial highlights for the second quarter half year twenty nineteen. With me today are Harold Holdain, our CEO and Pappertibular, our CFO. We will start today's call with Harold who will discuss the key operation and development followed by the market table 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. Welcome, ladies and gentlemen. Thank you for joining us today. The positive revenue trend continued into the 2nd quarter. Location Technology was growing with 25% year on year and free cash flow from operation was an inflow of 1,000,000 for the quarter, Taco will provide further information on the financial highlights and the outlook for the year later during this presentation. I will discuss the key operations for this quarter. We finalized the telematics divestment to bridge stone and returned close to 9% of the net cash proceeds to shareholders. We received 1,000,000 from the operation, which amounts to a net gain in our P and L of 1,000,000 We're now a more focused company with clear priorities in the simplified operating model. Our formitude further during the quarter, we made a record 1,900,000,000 modification to the database in a single month, which is a a record. Investments in machine learning resulted in higher degree of automation, faster cycle times and lower operational cost per modification. For our technology customers, we launched much improved Maps SDKs for rep applications during the we are developers world Congress in Berlin. Our map SDK allows clients at Maps search, routing traffic, geofencing and other functionality to their website applications, allowing them to easily at store locations, route planners and other features. On the next slide, I'd like to take the opportunity to give you a brief overview on our wins in the year. As we look back on first half of the year, we're excited about the opportunities we see from automated driving, improved levels of car connectivity electrification, but also from MAP APIs. Automated driving technology is generating significant interest in new detailed maps that will help to transform the way we think about driving ADAS or advanced driver assistance systems are starting to become mainstream and will play a crucial role in preparing the technology higher degrees of automation, eventually leading to the autonomous car. Electrified vehicles are also becoming mainstream within the next couple of years, and need new data and software based services for root dependent range charge planning. We've made good progress in developing products that will strengthen our competitive position. In automated driving, we won the 1st 2 AG map deals that came to the market earlier this year and being operational, building on an early user base is important for us as it allows us to collect user feedback and send the data, which are both crucial to further develop our product offerings and for winning new contracts. We're currently progressing in our development roadmap, increasing automation and productivity of both ADAS and AG map making systems and we are growing our Rang Group, Nissan, FCA and MG. And we also launched a new service, Thompson IQ Maps, which is a mechanism that allows for seamless over the air map updates for in dash navigation systems. In Maps APIs, we extended and ensured our partnership with Microsoft, and we think that's a strong proof point of the competitiveness of our product portfolio. We also improved our APIs on our own developer portal. This concludes my part of the presentation, I'm now handing over to Taco for detailed overview and financials. Thank you, Harold. Let me take a couple of comments on the financials and the outlook for the year, and then we can go to the Q And A. Second quarter of 2019, we reported group revenue of 1,000,000, which is 12% higher compared with last year. The driver of this growth is the location technology business 25% year on year. To 1,000,000, which represents 55 percent of revenue. Let me go through the businesses 1 by 1. Automotive revenue was up by 21 percent to EUR 76,000,000 in the quarter. This is a combination of higher volumes from existing customers and NRE revenue, which is related revenue related to integration activities for our automotive customers. Is recognized in the P and L at the start of production of car lines. We expect Automotive to grow with close to 15% for the full year. We expect less NRE revenue recognition in the second half of the year, which will have a positive effect on our gross margin. Then enterprise revenue, it was up with 34 percent to EUR 40,000,000 in the quarter, mainly due to the expansion of our partnership with My shop. For the full year, we expect to grow with more than 20%. Consumer revenue was flat in the quarter at 1,000,000. Strong start of the year was a result of the replacement sales due to the TPS week number rollover issue, which impacted older generation devices and pulled forward demand for our P and E. For the year as a whole, we expect a slower pace of decline compared to our previous guidance, and it's now around minus 15%. Gross margin for the quarter was 67% compared with 70% in Q2 2018, The year on year decrease was caused by the starch production of various car models of our automotive customers, which triggers an uptick in revenue, but also the release of capitalized contract costs associated with customization and integration activities, this so called NRE. For the full year, we expect a gross margin of at least 17.70. That is Total operating expenses in the quarter was $225,000,000, an increase of 1 $1,000,000 compared with the same quarter last year, mainly due to the increased amortization related to the Tela Atlas acquisition back in 20 8. I will come back on that when I discuss the outlook. Apart from a higher D and A, the R and D expenses increased due to higher personnel costs to support our growing location technology business. Then EBITDA decreased by 31% in the quarter to 1,000,000, and EBITDA margin of 15%. As explained, during the 2019 outlook presented in February, we shipped CapEx to OpEx cash spending due to the maturity of our map products. CapEx declined by 64% in the first half a year from EUR 42,000,000 in 2018 to EUR 15,000,000 in 2019. Free cash flow before financing, excluding the net cash inflow from the telematics transaction was an inflow of 1,000,000 in the quarter, which is flat year on year. The higher cash generated from operations was offset by higher tax cash out. Year to date, we increased our cash position with EUR 1000000 we now have EUR 372,000,000 of cash and no debt. The increase is mainly due to the net cash inflows the Telematics transaction after the capital repayment to shareholders. We expect a full year cash position to be well over 1,000,000. Our deferred revenue position is now EUR 297,000,000 compared with EUR 280 1,000,000 at the end of 2018. The increase is driven by Automotive Deferred revenue, offset by releases of the deferred revenue position in Consumer and in Enterprise. Let's now continue to the next slide to have a look on Automotive operational numbers. As you know, there's a difference between the revenue we invoice and the revenue we report. The latter tends to be lower in a growing business as we follow IFRS 15 accounting standards. As shown before, This slide highlights the operational revenue of Automotive. Operational revenue is the reported revenue plus the net change in the deferred and unbilled revenue positions. Automotive operational revenue increased by 26% year on year to 1,000,000, For the year for the full year, we expect operational revenue to increase with around 20%. I would now like to comment on the 2019 guidance on the next slide. We are updating our full year outlook. Let me reiterate some of the elements. We now expect group revenue to total 1,000,000, of which EUR 435,000,000 from location technology revenue. Location Technology revenue is expected to grow by around 17% year on year due to the ramp up of existing automotive contracts and the extension of the of a partnership in Enterprise. Consumer is expected to decline by 15% year on year. This is at a slower pace than initially anticipated as the GPS weak rollover is to pull forward prepayments. Gross margin of at least 70% in the year. In 2019, we expect a total D and A to amount to 1,000,000 of which nearly attuneds and EUR 10,000,000 due to the acquisition related amortization. For 2020, we expect roughly the same amounts 2019. As of 2021, we expect total D and A to drop to around 75,000,000 the acquisition related amortization will be will by then close to Nil. The acquisition related amortization is excluded from the adjusted earnings per share calculation. I would like now I would like to comment on the adjusted earnings per share and the free cash flow as a percentage of revenue the next two slides. The 2019 adjusted earnings per share outlook is unchanged at The share consolidation reduced the weighted average of diluted shares from 2000000 to 33000000 to 169000000 for the full year 2019. Although the effect of the expected increase of revenue on a lower number of shares was offset by a further shift from CapEx to OpEx due to the maturity of our MAP products, as well as a higher inbuilt revenue position. To conclude, I would now like to comment on the seasonality of our free cash flow in the next slide. The first half of the year was we saw an expected cash outflow due to the natural seasonality of our business. As the beginning of the year is marked by settlement of personnel other liabilities, while the second half sees a higher volume of customer payments. For the full year, we expect a free cash flow as a percentage of revenue to be around 9%. The slight decrease in the outlook is a result of a higher unbilled revenue position which impacts the timing of cash inflow. Operator, we would now like to start with Q And A session. Thank you sir. Session. You. And your first question from the line Yes, we can hear him. Good afternoon. Yes, good afternoon. A couple of questions from my side. First of all, on the, that's a change in the capitalization policy and the change in the amortization related to Tali Atlas, And then more regarding the timing, why here and now? So why didn't you make that decision back in the fourth quarter? Because now people have to digest, let's say, 2 big changes, I would say, in the accounting, in a short period of time. So why didn't you do this? Back in the fourth quarter in one big go, and also in the same line of thought, why didn't you decide to just amortize and impair the whole shebang this year rather than do it in 2 years? And why don't you do it now? That's kind of the first question. The second question, are still related to D And A. You mentioned during the prepared remarks that the D and A profile all the changes. So as of 2021, would amount to about EUR 75,000,000, but your CapEx is more closer to EUR 35,000,000. So should we just model for that gap between D and A and CapEx in 2021 to close in a matter of 6 years. Is that the way to look at it or will that reduce in a step by step or in a quicker way. So that is kind of the DNA questions then on the operational side, I think you're making great progress or at least you mentioned great progress in your SD map, moving from, let's say 59 1000000 kilometers in the last update to 67 now, and moving from 183 Countries to 194 So, and also you made SEK 1,900,000,000 automatic changes versus SEK 1,500,000,000 in the previous guidance. So can you tell us where do you think you stand vis a vis the competition, on the SD Maps and the significant operational improvements that you're making in that area? And can you also give us a bit of feeling on the progress you're making on the HD maps, which obviously is much more important for the future And then I've got 2 more follow ups, but let's start with these 2 first. You did a DNA? To dive into the, the DNA questions. Indeed, as of 2021, we expect D and A to, decline to $75, CapEx this year is expected to be roughly which never happens, obviously, but then, you could also say that CapEx is 35 in 2021. The gap between these 2, will narrow, indeed, but not completely close because there's also something in which being, related to IFRS 16. And that is our those are our lease liabilities of 15,000,000. So over time, our DNA will, come down, but not completely to the, to the 35. The discussions on accelerating the the amortization of RT Lavalin acquisition, we started early this year. So that's also why, in Q2, you the accelerated amortization also from Q1, in there. They took several months to conclude and we have concluded it in Q2. Yeah, with hindsight, things could also always be at a different time, but this is what it is. We've discussed we started the discussion, at start of Q1, and it took several months to conclude. And it was agreed that we were to reduce the useful life of the asset from 20 to 12 year, or from 10 to 2 years and not write it all off in one go in Q2. And is there any reason why the accounts didn't allow you to do so because, I mean, you're just cleaning up the balance sheet, which I think is a good thing. But it doesn't add any value to kind of make it in 2 years? Or is it just what the accountant told you to do and we have delivered it? We think this is the right decision and we take advice of our accounts, obviously, but we spent with our decision to do this in 2 years. Thank you. Okay, Vigna. On the, yes, I think, you're right, on the ZMAP, good progress, in terms of, both coverage, but also productivity, total spend on maps is not declining, but we get, more coverage faster at lower price per kilometer, if you like. So we're happy with that. We see further improvements on the horizon in SD Met Making, the level of automation is increasing. And we're quite happy about the, about that, those results. Have been planned for. We finally start to see significant improvements as a result of, investments in technology in the last 3, 4 years. So you asked me, how are we doing compared to competition? Difficult say, we don't have full transparency, but we do believe that we have an efficient operation year and probably the most efficient Metbank platform. There is, although there are no hard numbers to support debt, obviously, because competition is keeping that hidden, obviously, for commercial reasons, But we think we're doing well. Met 40 is good, coverage is increasing, and the level of automation key going up. On the HD map, it's a different process. The process itself leads itself lends itself for a high degree of automation higher than an SD Maps Chilepa. And we're working to a process where we can fully automatically process those maps. We're not there yet. There is still quite a bit of manual labor involved, but we are earning that out that won't happen overnight, but we do believe we can reach a state where HD Map, can be automated to a very high degree. And that is important because we're now covering the major roads and the close access roads There will also be demand to expand that coverage that's adding a lot of kilometers and we need to be ready to be able to process, there's an highly automated way in order to, control cost. But again, there, I'm kind of happy that we where we are, but there's more to be done especially on the HD Map production cycle. And regarding the HD Map production cycle, when would you expect that to finish? I, when will you Well, there are 2 elements. So there is the the initial AG map making process where you cover roads for the first time. That is within within reach, but the next level of sophistication will be updating that map and updating that map based on sends a data, a video data that we can get out of the car. And from other sources, and that is a bit further down the road. So all in all, it's not an investment that will in production technology that will come to 0 anytime soon I fully expect that over the years to come, we will continue to invest in production engineering. Good, good. And then my last question will be on Azure. The migration to Azure has been completed, as I understand, but if I look at Bing Maps and whatever, I still see your competitor listed in the food notes, So when do you think Microsoft will be ready to have the TomTom products, on its entire platform? And in relation to, let's say your integration within Azure, can you also tell us a bit on what you see in terms of adoption amongst the developer community, also the conference that you've landed in Berlin recently. Do you see any progress on the number of developers that are linking into the platform? Yes, I think if you look at the partnership with Microsoft, we have 2 important initiatives on the a first is powering a 0 location technology with our Maps APIs. That's done. Or the Azure Maps APIs are based on Tantan Technologies or a wrapper wrapped around the, our APIs. The value of those APIs will continue obviously, but that transition has happened. On the Bing side, that not yet the case. That will take more time before the their own location services platform, the Bing platform will will run on TomTom content, but we're working on the preparation for that. So if you say the transition to Azure has been finalized. I don't know exactly what you mean by that, but it's this is not yet the case for the Bing mapping platform that will happen over, that will happen in the future. Good. Thank you. The adoption is, you know, it's, it's, we're happy with progress. It's still a relatively small user base. It takes time to build up that community, but we see good interest, and good wins. So we like what we're seeing, but to drive this in a sizable business will take time. And that is fully to be expected. Those are products that are part of other people's applications those applications need to be built, they need to be redesigned to accommodate our APIs. But the beauty of course is that it's a sticky product continue to grow and hopefully those developers will stay business for a very, very long time. Thank you. Thank you, sir. Your next question, it comes from the line of Mark Happel Inc. Your line is open. Please go ahead. Yes, thanks for taking questions. Firstly, change in the guidance. Can you talk a little bit about some underlying things? Firstly, are your gross margin guidance unchanged? However, in the line, there's more consumer and maybe a bit more of NRE, which you, what you earlier explained, I would say the noise that would be negative for the mix. So does it mean that there's an underlying improvement in some of the elements? Also related to that or I'll lay down the DP and L, you're gifted bridge on the underlying APS, given that I think the unbilled revenues is more of timing issue or anything else. So can we read that the underlying improvement of your EPS guidance is $0.10 or is that, a little bit of the OpEx to CapEx, it's also just accounting changes. Is that fair to say? Okay, then. And the second question is on on what you're seeing in automotive, in the order book, and I don't I know you don't get the order book on a currency basis anymore, but could you say something for trends? Is your book to bill still well above 1 or are you seeing there? And also you have a small increase in the guidance on automotive, is that what's happening there? I said, what's the reason for the increase on that note that there's a higher adoption rate? Or anything else? Yes. So, let me take the first part of your questions. On gross margin, the NRE was not unexpected. The fact that caused an increase of our revenue and a decrease of our growth margin that was not expected. So we stand with our guidance of a gross margin of north of 70%. We only mentioned it to explain why the, the gross margin in Q2 was lower than this year than the gross margin in Q2 last year. So this was not an, what was unexpected was the, the tailwind that we saw in Consumer. That's true. So indeed, if we sell more hardware, relatively in the mix, that could have strong pressure on gross margin. But well, the guidance for the full year of a gross margin north of 70% simply still stands. And apparently, we had enough headroom there to continue with that guidance. On the adjusted earnings per share, it is indeed, we said 50 we ended up with 15, there are some elements in there that are posted like the, the share consolidation and the business performance, other things are more timing of when we receive cash indeed and a split between CapEx and OpEx. So, yeah, it's hard to say what it would have been if everything would not have happened, but indeed it is true. That the business performance also articulated in our uplift, our guidance uplift, has been stronger than at the start of the year. Then I forgot what was your last question? Automotive. The order intake, yes, so combination of things. So one, we see that the, that you had a small increase in the revenue guidance for out of market. So someone is driving that, is that higher uptake, also maybe in the light of that over the last couple of years, I think the actual revenues that you reported in Automotive has been more than every year than you initially thought. So that momentum has been stronger, I think, than you initially guided in the beginning of the year. It seems that we see something similar again today. And so I was like to understand what's in the de rate in there. Well, I don't think there's anything on the radar, apart from the fact that the take rates of our products and to end up higher than initially expected. So it is it's not related to unforeseen large customer programs because we see those coming years, in advance. But it's just related to actual take rates. So the royalties that we collect is a factor of our market position car sales, but also take rates within, and I think especially the latter, over the last 2 to 3 years continues to be higher than earlier indications that we also receive, from the car industry. And what we can report. Okay, clear. And the automotive order book is that something you can say about it? Is it still of 1 book to bill or? The order intake is developing according to plan. As you know, we don't give detailed information about the absolute value of the intake until later. But we are doing what we're supposed to be doing. Okay, thanks. And then maybe as a final question, your cash position is going to be rolled over 400,000,000 again. It's a bit of a recurring theme, I guess, but anything you can say about that or you want to keep that large position or Yes, for now, we want to get so we, it's only 2 months or less than 2 months ago that we, gave back $750,000,000 to our shareholders. But indeed, the status now is that we want to keep that a position, for moments when we have to accelerate investment or, when there are opportunities in the market Thank There are currently no questions at this time, sir. As there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call.