Earnings Call: Q1 2019

Apr 17, 2019

Good afternoon, and welcome to our conference call, during which we will discuss our operating highlights and financial results for the first quarter 2019. With me today are Harold Holdain, our CEO and Taco Titulaar, TomTom's 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. Thank you very much. Thank you, Bruno, welcome, ladies and gentlemen. Thank you for joining us today. We had a good start to today, winning our first 280 map deals came to the market, which gives us an early position in this growth market. Additionally, a number of driver navigation deals were announced. Revenue in our core activities was up by 29% year on year, totaling 1,000,000 for the quarter. Taco will provide further information on the financial highlights and the financial outlook for the year later during his presentation. I will now discuss our key operational highlights. As I said, we announced a number of deals, both for HD Map and for driver. It is important to be in operation and to build on an early user base. To achieve market leadership. It allows us to collect user feedback and sensitive data, which are both critical to further develop our product offer and for winning new Start. For driver navigation, we disclosed during the Geneva Motor Show that Nissan chose TomTom to provide Maps traffic, online search and eave, we were also awarded a multiyear global deal provide traffic services to Volkswagen, and that includes the Volkswagen brand, Audi, Porsche, Skoda, Lamborghini and Bentley. In addition, solutions to feed Chrysler Automobiles the Jeep Renegade and the Compass plug in hybrid electric. After quarter end, we announced that our full stack of navigation components was chosen by MG Motor to power their first ever car in India. The Connected Car MG Hector. The launch also marks the introduction of a new service which we call TomTom IQ Maps. And that is a mechanism based on machine learning to update the map areas that are most relevant to specific car. And this approach ensures that the map is always up to date where it matters and the cost for data communication is minimized whilst the system is always available also when it is out of reach of a mobile network. After quarter end, we completed the Telematics transaction with Bridgestone. The divestment of Telematics allows us to renew our focus on our automotive and enterprise customers, and we'll continue to invest in further improving the efficiency of our mapmaking platform and we will launch innovative products to enable automotive drive navigation, automated driving and Maps APIs. We expect to complete the $750,000,000 capital repayment to our shareholders in the second quarter of this year. 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 the outlook for the year and then we can go to the Q and 19, we reported revenue 1,000,000, which is 14% higher compared with last year. The increase is due to our location technology business, which grew with 29% year on year to 1,000,000. Location Technology currently makes up 61% of our group revenue. Let me go through the business says 1 by 1. Automotive revenue totaled EUR 65,000,000, that is a EUR 31 percent growth year on year, mainly as a result of new contracts that started at the end of 2018 and higher volumes from existing customers. The strong result is partially seasonal. For the full year, we expect Automotive to grow between 10% to 15%. Enterprise revenue was 1,000,000, 26 percent higher than the same quarter last year. Maybe due to the expansion of our partnership with Microsoft. For the full year, we expect to grow with around 20%. Consumer revenue decreased by 4% year on year to EUR 67,000,000. Also here, the relatively strong results is partly seasonal. For the full year, we guide for a 20% decline of this business unit. Gross margin was strong at 72% during the quarter, increasing by 4 percentage points year on year, reflecting the decrease in hardware sales. Total operating expenses for the quarter mainly as the result of higher R And D employee expenses in combination with our revised capitalization policy we now capitalize less due to our map making platform reaching its intended use. EBITDA decreased by 27% year on year to 1,000,000 with an EBITDA margin of 11%. Free cash flow before financing flow was EUR 7,000,000 in the same quarter last year. The year on year decrease was mainly driven by higher personnel costs, including higher bonus payments. The settlement of accounts payable, the timing of invoicing, resulting in a higher unbilled receivable balance. At the end of the quarter, the group had no outstanding bank borrowings and reported a cash position of EUR 207,000,000, which excludes 1,000,000 related to the locked box mechanism used in the divestment of telematics. The transaction with Bridgestone is based on the lockbox mechanism with balance sheet debt 30, June 2018. That means that cash flow generated since then are for Bridgestone. Our deferred revenue position is now EUR 291 1,000,000. Automotive and consumer maintained their annual trends with Automotive up with 60 $7,000,000 to now $195,000,000 and consumer down with $25,000,000 to now $86,000,000. Let's now continue to the next slide, so have a look on the automotive operational numbers. As you know, there's a difference between the revenue we invoice and the revenue 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 net change in the deferred and unbilled revenue positions. Automotive operational revenue increased by 12% year on year to 8 7,000,000 as it was impacted by timing of invoicing. For the full year, we expect operational revenue to increase with around 20%. I would now like to comment on 2019 guidance in the next slide. We are reiterating our full year outlook we expect group revenue of $675,000,000 of which $430,000,000 in location technology revenue. Location Technology revenue expected to grow by around 15% year on year due to the ramp up of existing Automotive contracts and the extension of a partnership in Enterprise. Consumer is expected to continue its declining trend. In order to advance our competitive positioning and further improve the efficiency of our mapmaking platform, OpEx and CapEx combined will accelerate by around 10% year on year. To conclude, I would now like to comment on the seasonality of our free cash flow in the next slide. The year started with an expected cash outflow in the quarter due to seasonality of customer payments, cash inflow materializes in the remainder of the year. We reiterate our guidance Operator, we will now you. And your first question is coming from the line of Francoa Baveni from UBS. Please go ahead. My first question was on the HT Maps deal that you announced this quarter. How should we think about this deal if you can give us a bit more color about the ISPs. I know you mentioned that it would be higher, but maybe a bit more details around the exact number would be very helpful for us to get the sense of the content opportunity per car. You can get with HD? And do you expect more of this contract through the years? Yes. So the, I think the importance of what we have achieve with those 2 deals is that they are in itself more big in absolute volume, but there are lighthouse programs with 2 very large car manufacturers. And it's those are the first deals that are available and gives us an opportunity to translate what we think is our product position, which we think where we think we are ahead of competition to turn that into a market leadership position. So those are really, highly regarded carmakers, and we will start supplying those maps in 2021, it will be for a limited number of vehicles but we believe that this is an excellent opportunity, the platform to further grow within those 2 carmakers. But also in the rest of the market and being selected by other car makers for similar products and services. The, if I look at ASP, it's a bit early to say much about the ASPs. I think what we said in the past is that they are significantly higher than what we get, for instance, for for traffic information for SD Map products. But it will take some time for prices to at their natural levels and that will happen when, there is more volume in the market. But it is a, an annual fee. So typically, we used to charge for our products when the car leaves the factory. This time, it will be an annual recurring fee for those vehicles, which is considerably higher than what we, for instance, charge for traffic information. So it has the potential to grow into a significant business. The early signs are good but it will take some time before this develops into a sizable revenue stream. So it's not going to be really meaningful at the automotive bookings level this year? Should I should we think, yes? It will show up, but it will not be a massive amount. That's right. Yes. And how do you explain that you say that your HD Map is ahead, of the competition, why that? I mean, do you have some more granularity of why you are ahead? Is it like, I don't know, some regions that you are covering more than competition. I'm just trying to explain, you know, what is driving this? Yes. So the market now has a better understanding what an HD map should look like and what content should be carried in an HD Map to be useful to, for automated driving or for advanced ADAS functionality. The trouble is the, the pipeline, the building of those maps, doing that in a competitive automated way that is a big challenge, and, doing that repeatedly and consistently is more than easy task. And I think we are further in our prioritization or HD Map, than most of our competitors. We don't have full visibility, of what our competitors are doing. But the indication we get from the market is that our product is more mature, more stable and can be produced, with high degree of efficiency. And I think those 2 elements, a group product, and a more mature production pipeline, made those 2 customers choose for a TomTom product. And that is important here? Sorry. Sorry. So we could put you The next yes, so the next step will be to process camera information from those maps. That's a whole new level of sophistication. And that is, that is now within reach with those deals where we can start using a center information to them. Do change detection on AD mats. So signal when something has changed in the real world, and potentially fix those issues either automatically or fix them through human intervention at least have a cost effective change detection mechanism. That's the first thing we need to, achieve. And with those 2 deals, we are closer, closer to solve that puzzle than ever before. And when you say that you are head of the competition, apart from your traditional competitor here, is there any order in HD that you see in the market? It's as I said, there's no full transparency, there are a number of smaller, players and their startups even. Some of them reasonably well funded, it's not that easy, but I think it's hard to see how you can produce a fully functional pipeline and to do and we've got a lot of experience there. We have an inter we have a don't forget that we invested a massive amount in our transactional mapping platform that came to maturity in 2017, that mapping platform enables us to do all sorts of clever tricks and achieve a higher degree of automation for our Esne product. And we see our productivity and Esne mapmaking going up all the time. It's also a critical part of our HD Map production pipeline. And having that transactionality is, is important we are not aware that there are other mapmakers in the world who have such a transactional map making system. So that's the core element on top of which we build the the pipeline. If you don't have that, there's an awful lot of stuff you need to figure out before you can produce those maps cost effectively into a high degree of, automation and reliability. That's very clear. Last question for me. It's can you give us an update on the Google in the market, with regard to more maybe infotainment, given that the signed some few deals last year. I just wanted to get a sense of how you see them this year. Do you see more Google competing in some deals, a bit more than last year? We don't see it, but that doesn't mean nothing is happening. We don't see it because we're not privy to those discussions, obviously. But, I don't expect them to go away anytime soon. So, it's definitely something we need to worry about. It's something and I've said this before, it's something we need to address, and it's something we cannot address on our own. It also requires different way of collaboration in the car industry itself. What we see is an increased level of collaboration and willingness to discuss those new operating models. And if we can get there, then I have no question in my mind that we can offer products that are better suited to the business model of OEMs, but also better suited to end user needs. Instead of bringing a mobile phone paradigm into the dashboard, I think what the market needs is truly dedicated software for use in, in the dashboard and that will behave differently than the software on your mobile phone. So there are the 2 opportunities to do something, meaningful, and we have ideas that we are currently developing. We are developing products we're talking to customers, and we see, there's interest in our thinking in our vision, but it is, you know, it's still a lot needs to happen. And the auto bookings market this year, you still see it like higher than last year? Is there any change to that? Yes. No, we haven't changed our outlook or the sentiment hasn't changed I think we were really happy with the early win in the HD space. And again, not necessarily because of the value, but more as a leading indicator and a kind of approval by the market of the road we have taken and confirmation that we are with our products and are thinking on the right track. Think that was you can never you hope for those things to happen, but you cannot predict them. It happened in Q1, so it really feel good about that. On the traditional SD Met business, traffic information, we our sentiment hasn't changed, and we think that the it should be possible to increase the order intake this year, but it remains a, compared to last year, but that remains spectitive and subject to actually winning those deals. Your next question is coming from the line of Mark Hessling from ING. Please go ahead. Yes, thanks for taking the question. Actually, my first question is also a follow-up on that, on that HD Maps 1. What do you think will be the steps ahead from now? Will other OEMs also decide on which ATM that they are going to use? Is it going to be this ecosystem that's reinforcing itself in the coming years with more data and so So a little bit more extra detail on what you already said on that point, please? Yes, we are aware of more obviously aware of more deals, for similar applications. So you need to think about level 2 plus So, also referred to as adaptive cruise control on steroids, maps are needed for that, it will offer to the end user, the possibility to drive fully automated from close access ways, roads. So the driver will still be in control, but but the car could potentially drive for long periods of time, autonomously as long as it doesn't leave the, motorway. So it's really an exciting technology. We think it will reach prime time and market maturity around 2022. And we see that the other technologies are coming into place to deliver on that promise. And there is no doubt that other car makers will start picking that up in the same way, and we see RFQs coming our way. Now having 2 leading carmakers in our camp, will make it relatively easier to also win, those other deals. We have something to refer to other carmakers have given us their blessing, and hopefully, we can we can start seeing those maps being in operation in the real world as well. We've seen something similar, of course, with traffic information. We were the first to look at traffic information, based on flow data first with, when we didn't have the GPS probe data, we saw us look at the network, at the mobile network to see if we could derive data to calculate flow. And then we move to probe. And you could see that by adding more customers and any more probe data maturing the software, you come into a cycle where your product gets better and better, and it's very difficult for competition to catch up. Something along those lines can happen in HD Maps as well. And hence, it's very important for us that we get this early information, that we are on the right track with our technology and with our products. So what does it do on balance? It's we'll make it easier for other carmakers to also choose for our technology and it will give us a way to test harden our products in the field and detect new use cases and user requirements before competition can do that. Those and then on top of that, we hope to be able to build an early base of sensor data that we can use for, change detection and automated map. Correction. So in summary, again, no, Northern Easy territory will take some time. But happy with the progress we've made Okay. Clear. Can you share maybe the feedback of those initial to, what did they say? Why did it choose you? Yes, I think it's, it's a So, because volumes are low and these are lighthouse programs, the cost element, although always important, was certainly not the decisive factor here. The decisive factor has been the maturity of the product and our ability to provide data for testing to work with engineers to identify issues, resolve those issues, build trust, at the engineering level, and may come up with a with a product that they could believe in, and that is, and I think we've done a good job there. Okay. And then my final question, and I guess it's partly related. So the higher employee expenses, which you already elaborated a little bit in the introduction. Is these these expenses, is this partly due to people working exactly on this point? Or do you also need to work on more the older products where you have to customize for new clients and that kind of stuff? Yes, it's a combination of all of the above. It's not certainly not something in But we do see, across the range, a couple of things, including shortages of people increasing salaries, that's an important factor that we addressed in 2018 in terms of being a avenue this paid package. We also see that more and more of our services are going online. Which is a change. We need different people. At the same time, we achieve higher degrees of automation. In a lot of the work that we're doing. And although our investment in and our cost for mapmaking has gone up, the output has gone up much faster than the, than the expenses. So having a broader customer base also means that we need to have a broader map coverage. We're doing all that. In areas where we haven't been that strong. We have improved dramatically in coverage, quality, freshness, And so that is a, we're really gaining some level of operational leverage there. But on the other hand, a broader range of customers and vehicles in which we're present unfortunately also means that we have more engineers working on those programs. I think the next step for us is to figure out how we can get scalability in that engineering function, and we need that. We need more scalability in product development. And we are thinking of ways to achieve that. We have a plan we're trying to roll that out. Thank you. Your next question is coming from the line of Wim Gillett from ABN Emerald. Please go ahead. Yes, good afternoon. And two more questions on HD and then on to enterprise. First, on HD, did I hear correctly that you stated that you expect the first revenues of those 2 contracts those lighthouse contracts already as early as 2021. And can you give us a bit of feeling based on the discussions that you have with the OEMs and the model introductions that they are planning for the coming 5 years, whatever, when we should be able to see more real substantial volumes in level 2 and level 3 autonomous driving coming through in the market. So that's on the timing. 2nd question on HD is that you have one product already on the market, which is that trucking example that you gave. Is that one alive? And also, does that incorporate out of stream including capturing sensor data and camera data, etcetera? Or is this more of a standalone kind of testing product, if you will? And then the final one on the API, but then we'll get this more first. Yes, yes, Vince, thanks for, for those questions. So I think end of 2021, beginning of 2022 is what we have as time line for the introduction of those there's SG Maps that can slip as we know, but that is for the moment, what we're looking at. The truck product is alive and expanded to other territories. And also, there are opportunities as well as truck makers to use our data in the same way. But those are very much stand alone services, non connected. So it's a little bit old fashioned. The functionality is great. And from what we understand, significant fuel savings have been achieved using this system, but it needs to be updated on a regular basis is the data. So every 6 months or every 12 months, there's no automated mechanism to either update those maps or collect in a systemic way, data from the truck So we have we don't have any joy from a feedback loop there. At this stage. Maybe that will change in the future because it makes sense, but that's not always the reason why things are happening. Autustream is not in the market yet as a commercial product and is not used by, that truck maker. So far. We think there will be opportunities for UltraStream with, some of the customers we have signed contracts with, but that's not given yet. And for for, people who don't know what order stream is. Order stream is our delivery mechanism for a streaming service, for HD Map content where we can stream information and locally cash that information So cars always have access to the relevant data and the latest data. Good. And on the kind of more meaningful volumes in autonomous driving based on kind of the discussions that you have with the OEMs? Yes. So, Yeah. So this activity, the normal in that respect to business as usual, so there's quite a little activity in RFQs and in, proof of concept technical documentation, engineering meetings and so on and so forth. So we see a, a healthy level of activity in that space. Very good. And then the last question would be on the API, a similar one to the one I asked previous quarter. Obviously, somewhere in the summer Google decided to increase pricing in the its own enterprise products by effect of 14, that pissed off a lot of developers, and you wisely it's going to take time before people start using kind of other potential sources, especially in combination with kind of the fact that you are now part of Azure as well. What kind of activity level or what kind of movements do you see for kind of your or the interest in your API on that respect? Yes, we see yes, so we I have to say we started from a small base, but we see aggressive growth in revenue, but small, from a, as I said, from a small base. And when So high level of activity with test accounts and developers kicking the tire And then also in actual usage, should we see increases, but again, from a relatively small And is it kind of too early to say or would it be kind of, can we expect further growth, I would say, in the enterprise segment. Obviously, in 2019, we have the tailwind from Microsoft, from the Microsoft contract. But more looking into 2020, 2021, what should we be expecting in the enterprise segment if the activity that you are just referring to continues? If the gross continues as it's going now and again, I don't have a crystal ball, but we it will start to show up and it's will start to be meaningful in terms of revenue in the years ahead, but it will take some time to get that and we really get the robustness of that business model and this overall size of the opportunity out there. But it's clear that the world wants choice and wants to have alternatives. So that is encouraging. Thank you very much.