Earnings Call: Q4 2018

Feb 6, 2019

Good day, ladies and gentlemen. Welcome to TomTom's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, prepared remarks. Please note that this conference is being recorded. And I would now turn the conference over to your host for today. Bruno Priuli, Investor Relations Officer. You may begin. Thank you, operator. Good afternoon, and welcome to our conference call. During which we will discuss our operational highlights and financial results for the fourth quarter full year 2018. With me today are Harold Holdain, our CEO and Taco Tigallard, TomTom's CFO. We will start today's call with Harold. We 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, Bruno. Thank you, and welcome ladies and gentlemen. 2018 was an important year for TomTom as we decided to divest telematics to become a more focused location technology company with clearer priorities in a simplified operating model. This resulted in the sale of Telematics to Bridgestone for a purchase price of EUR 910,000,000. We're delighted to have found in Bridgestone a buyer that recognizes and respects the talent and skills in the team and intends to foster and grow the telematics business further. At the same time, we can focus on the remaining business and develop biologation technology business to its full potential. The transaction with Bridgestone is subject to customary closing conditions, including the relevant regulatory approvals, consultation with employee representative bodies, and the approval of TomTom's shareholders we expect to close the transaction 1,000,000 in total will be distributed to shareholders by means of a capital repayment combined with the share consolidation. We expect the capital repayments to be executed in the third quarter of 2019. We continue to strike important partnerships in collaborations with our technology leaders and the recent extension of the partnership with Microsoft is now a proof point of the competitiveness of our product portfolio. Our location technologies and map data were chosen to power all of Microsoft's consumer facing services and this is an extension on the 2016 agreement that covers the partnership for developer facing products and services. At CES, we announced a new collaboration with DENzo. Our HD Map will work in combination with sensors in vehicle sensors such as cameras and radars to power the localization, perception and path planning functions for complete autonomous driving system. On adaptation, we will have a system in place that allows us to start collecting crowdsourced camera data for map maintenance and map creation purposes. Automotive operational revenue continues to show strong growth totaling EUR 3 17000000 in 2018, a year on year increase of 31%. The increase is mainly due to new contracts, that started during 2018 and higher volumes from existing contracts. We expect Automotive revenue to continue to grow. The order intake exceeded EUR 250,000,000 in 2018. It was a good year. We converted most of the opportunities that were available to us but as previously indicated, there were fewer RFQs in the market compared to 2017. The level of bookings across previous years is a good indication that we're on the right path. In the next slide, I'll give you a short update on our strategic priorities. To keep the positive momentum, we will accelerate our investments in strategic areas whilst generating cash. The investment areas are a further improvement in the efficiency and sophistication of our map making system, class leading products and services for the automotive markets, and that includes maps for automated driving, and finally, maps APIs 18 in the automotive markets, we are in active discussions with carmakers to develop in vehicle continuous releaseable software that we think end users will prefer to use over mobile phone derived systems. We're excited with the progress we've made and excited with the opportunities that are ahead of us. This concludes my part of the presentation, and I'm now handing over to Taco. Thank you, Harold. Let me make a couple of comments on the financials and then we go to Q and A. As you are in process of divesting telematics, we have provided full disclosure on continuing, discontinued and total operations, including the reconsolidation between continued and discontinued operations in the appendix. The consolidated statements of income and balance sheet, is provided for continuing operations only the net assets and liabilities of Telematics are presented in a separate line named assets and liabilities held for sale. In 2018, we reported revenue of EUR 687,000,000, which is 7% lower compared with last year. The decline is due to our Consumer business. Location Technology revenue increased 12% year on year to 307 1,000,000. Let me go through the business 1 by 1. Automotive revenue totaled EUR 245,000,000, a 25% growth year on year, mainly due to new contracts that started during 2018 and higher volumes from existing customers. As already explained by Harold, automotive operational revenue increased by 31 percent year on year to EUR 370,000,000 and is now our largest operational revenues been. Enterprise revenue was EUR 127,000,000, which is 7% lower compared to last year. The decline is mainly caused by a revenue recognition 1 off in 2017. Consumer revenue decreased by 23% year on year to EUR 315,000,000. Gross margin in 2018 was strong at see 9% increasing by 9 percentage points year on year. Total OpEx for the year were EUR 472,000,000, a EUR 45,000,000 increase year on year. Both the years were impacted by one off items. In 2018, we recorded a one time gain of EUR 22,000,000 from litigation settlements and 2017 operating expense included a EUR 41,000,000 restructuring costs and asset disposals. Excluding these one off items, the underlying operating expenses showed a modest year on year increase, following a higher spend in our MAP activities. 2018 EBITDA increased by 63 percent year on year to 1,000,000, with an EBITDA margin of 21%. At the end of 2018, the group has no out bank borrowings and reported the cash position of EUR 252 1,000,000. Our deferred revenue position is now tuned in 1,000,000. Automotive and consumer maintained their trends, meaning with automotive up with 1,000,000 to now 172,000,000 and consumer down 25,000,000 to now 1,000,000. I would now like to comment on the 2018 guidance in the next slide. We beat our guidance for 2018. Revenue for total operations, which includes telematics, totaled EUR 861,000,000 in 2018, more than 7% higher than the initial guidance of EUR 800,000,000 for the year. Both our automotive business as well as our consumer business outperformed our initial expectations. As our operations improved and our revenue derived from data, software and services increased, we're also able to have a better gross margin for the total operations, reaching 71% just above the 70% outlooks initially forecasted. The adjusted net result for the full year from total operation was a profit of EUR 83,000,000, which translates into an adjusted earnings per share of This is above the initial outlook of around Let's now move on to our guidance for 2019 on the next slide. In 2019, location technology, revenue is expected to grow by around 15% year on year. The increase is explained by higher take rates and a ramp up of existing contracts in Automotive Business and the recently announced extension of partnership with Microsoft. Which has a positive impact for the enterprise business. Consumer is expected to continue to decline with more than 20% year on year. We expect gross margin to be at least 70% in 2019. In terms of OpEx and CapEx, we have decided to accelerate spend by around 10% year on year to further improve the efficiency of our map making system and advance our competitive position in a constantly changing market. Adjusted earnings per share will now also be adjusted for acquisition related amortization on a post tax basis. And we expect the adjusted earnings per share of around in 2019. And for comparison purposes, the 2018 adjusted earnings per share from continuing operations in the new definition totaled EUR 0.32. Part of the year on year decline is explained by the continued decline of the consumer business, which has approximately EUR 0.10 impact year on year. We are also introducing free cash flow as a percentage of revenue as a new KPI in our outlook this year. We expect to generate free cash flow before financing activities of around 10 percent of revenue. Operator, we would now like to start with Q And A session. Or the pound sign We have a couple of questions that came through, sir. Your first question comes from the line of Francois for Venus. Your line is now open. Please go ahead. My first question is on your automotive bookings and especially for 2019, could you give us some color on how do you think 2019 as a market overall? I'm not talking about sometimes specifically, but how is it trending versus 2018 2017 to get a sense of the dynamic that you see there? Yes, we can see, it's always difficult course, to make an exact prediction of the total value of RFQs that will come to the market, but we do believe that the total opportunities to which we can participate and pitch will be higher than in 2018. And versus 2017, I mean, which was a very good year. Do you think it's going to be the same kind of magnitude or? It's hard to say. So 2017 was an extraordinary good year course, needed an order intake of 400,000,000. So a good conversion rate, good success rate, it's hard to say. I think the total opportunities will increase compared to 2018 and there's potential for higher order intake than in 2018. Okay. If we look back a bit in 2018, I guess one of the big highlight is the Google Android autos coming and getting some deals Do you expect them to get further deal in 2019, or is there still relatively quiet or, I mean, you don't see that that's pushing hard into 2019? Well, it's difficult to make, to make a general comments on that. What we do see is that carmakers are actively engaging with us to see what the future of in car navigation infotainment should look like. There is a willingness to explore new routes. There's a willingness to explore new business models and there's a willingness to explore new UX concepts that bring big tribute to what's happening in the vehicle. And there is also a desire to stay control over the user interface. So We've noticed that that has led to a number of interactions with carmakers, explorationary sessions to look at what's possible And I think, we will come up with some interesting ideas in 2019. But if you look at, I guess, when you said, in Q3 that it was a wake up call, for the industry? I mean, do you see as well a change of behavior since Google got some new contracts, meaning that you feel your customers are also exploring more on the way other than in the past because it's something that checks up in the industry? Well, I think that while I said it's a wake up call, I think we see that translated now in interactions with the auto industry. So And the question then is what is the alternative? What can we do? What are the options? Obviously, we can keep going in the way we are going, but are there other operating models for the auto industry together with the suppliers to come through a different way of delivering software into the dashboard. I think that's very exciting and I think that's happening because of what I described last year as a wake up call. Okay. Thank you. And maybe one word on your HD map, how should we I mean, how should we think about your contracts in HD maps? Can you give us more clarity of should we expect big contracts in the auto bookings in HD Map this year? What kind of business model and ice should we, should we look at for this HD map? Yes, I think we, it will be very disappointing if we don't do deals in the HD space this year. So, I, we have a number of opportunities lined up. I think it will happen this year for delivery in 2000 towards the end of 2021, 2022, I think we will see TomTom AG map showing up in some systems for automated driving. And do you think it's going to be meaningful contract sizes for your 2 bookings like visible or an Oyster early? Well, no, that will be visible. That will be visible. It will be relative to the traditional business. It will be a small number. But it's certainly meaningful, and it's the beginning of a, you know, of a new line of products if you like. And what we would like to see, of course, that, that take up will will kind of develop along the lines, what we've seen for traffic, where you have a relatively slow start with once you have Once it's accepted and it works, then the adaptation rate will go up, will go up quickly. And I think that will happen. I think we're in a good position to land some of those deals and to start translating our market, our product position also in a real market position. And how should we think about the business model then? I mean, if you get closer to signing some contracts? Is it like subscription per kilometer per use? How should we think about that? You should think about it as an annual fee for having access to that feed. Per vehicle. Per vehicle. And in terms of the ISP per car, I mean, previously you said it was significantly higher. Can you give more color now? What does it mean, significantly higher? Yes. I think it will be higher. What you also will see is that initially it will end up in two systems. And then, depending on the technical advance, more more of that feed will be used. And you get a higher level of fidelity in the map data and in the reliability of the map data. So I think it will be, It's difficult to say exactly where it will end, but I think it will be a significant fee per car per year that will grow quite quickly over the next, over the next years. And do you see Google as well in this market with HD maps or not really Well, they seem to be taking a different route and that is more, the Robo taxi approach. Which is fundamentally different from what the car industry is trying to achieve. So in the robo taxi context, you're talking about reduced limited geographical area and also per car very high investment into a hardware technology. And that's okay because those cars are again used for for a much higher intensity than a normal car. For the car industry, you need to follow a different model because is no way to charge for, to end users for a little hardware. So it needs to be, it needs to follow a different path. So I think for the immediate future, I don't think we don't see any signs that Google is entering that market space. So I think we have a clear runway here for years to come. We know the only ones in HD Maps Office, obviously, is it's still a competitive market But I think that we are designing our products along a different path than what you see in the robo taxi sphere. And those markets will stay separate for quite some Thank you. We will now take our next question. And this comes from the line of Peter Olofsen. Your line is now open. Please go ahead. Yes, good afternoon. It's Peter Olofsen with Kepler Cheuvreux. My first question is around the combined OpEx and CapEx, where we have seen the total investment trending up in recent years. And based on your guidance, there will be a further step up in 2019. Are you comfortable with the level foreseen for 2019? Will it stay at that level? Or may we see even a further increase beyond 2019? And then on enterprise, where the extension of the Microsoft contract will drive the growth in 2019? How should we look at the revenue dynamics there? Will it gradually ramp during the year? Or will there already be a meaningful impact in the first quarter? I'd like to take those if it's okay, Harold. Let's start with the latter enterprise that enterprise contracts are normally value based. And then, most of the time, spreads out over the lifetime of the contract on a linear basis. So to come back on that question, you will see the benefits of, the discussed tailwind already happening in Q1. In its full extent, and then it will find a new, new normal, if you like. On OpEx and CapEx, there are 3 things happening here. 1, is that it's our decision to invest more than we have done in the past in our map making capabilities in our capacity to continuously release software in our quality of our served like traffic. And with signing up important, automotive, but also increasingly enterprise customers at this our role and our job and our willingness to spend more in these areas. The second, the mix between OpEx and CapEx is, is it's a reaction of the fact that we have more and more platform approach where, our content and our software is continuously releasable. So before you have a more stacker approach where you say, well, I'm working on a new software release. And as long as I'm working on the software release, I capitalized it. And after that, I will and start to amortize us, these worlds will, become warm and that will mean that I expect that in, it already happened in 2018, but it will continue in 2019 and Prorials in 2020. That the mix between what is classified as OpEx and CapEx will continue to change, where more and more will be seen as OpEx. Then, another element that we need to take more that also the IFRS 15 and IFRS 16 accounting led to reclassifying some of the work and the cost that are normally seen as CapEx as now as contract assets These are released via the cost of sales line, but there's a bit of a technical, element in this. The second part of your question, Wael, is, if we foresee this trend to continue, as always, I would say, well, it's a bit early in the year to already start to talk about 2020. But on the other hand, we hope that if we can continue to sign up more customers that we also have the room to continue to invest more in our platform. But for a proper update, I'm afraid you have to wait 12 months. Okay. We'll do so. Thank you. And we will now take our next question And this comes from the line of Wim Kil. Your line is now open. Please go ahead. I've got a couple of questions. First, on the Automotive business, in order to have a bit feeling on how to compare the EUR 250,000,000 order intake versus the EUR 400,000,000 that we reported in 2017. Can you give us a bit of a feeling what the level of RFQs was in 2018 versus 2017, I. E. You reported a decline roughly a third in your own order intake, is that in line with the decline that we seen in the general market? And can you give us a bit of a feeling on how you feel your market share has developed in 2018, with respect to the order intake compared to 2017, that will be my first question. The second question is also on the orders in the automotive space. Here, international already announced that they, won 2 contracts, traffic contracts for Daimler and Audi as somewhere in January. Both companies were previously traffic, clients of TomTom. So can you give us a bit of a feeling what happened in in these two specific cases. That is my second question. And then my third question will be on the OpEx versus CapEx discussion. If I look at your accounts for the 4th quarter, I see only EUR 9,000,000 in CapEx in the 4th quarter. Versus a previous run rate the shift from CapEx to OpEx? Can I start with the last question? So Q4, yes and no. So yeah, indeed that is a reflection of our continuous, assessment on how to classify our spend. And it is also driven by industry standards, but also what we see, what's happening with peers is that there's strength if you move towards, and software as a surface, a product as a surface business then at a certain moment, then the mix between office and capital is changing. And we think we we're getting there. And in Q4, we have done a specific assessment, that led to to reclassification of some of the spend that affected especially Q4 I would not use the Q4 run rate, as a run rate for the full year because then four times 9, it doesn't bring you to 55 55 as we have guided for the full year, but it is indeed a clear indication of, of the new trends. Then on the order, yes, sorry. Yes, sorry. I'm talking, may I just to fully cloud side is. So I do understand the 55 Divided by 4 is, whatever, 13 in a bit. But if I look at kind of how you kind of positioned it in your press release, you compare the 55 to a number of 77,000,000, but that's not entirely correct because if I want to compare apples with apples, the 77 number in the old accounting or the old way of looking at your spend, would not have been 77, but would be closer to 97, excluding telematics, I. E, if I look at kind of the the underlying change in OpEx versus CapEx, the shift is probably more that you are shifting somewhere between $40,000,000 $50,000,000 from CapEx to OpEx in the new guidance. Is that a correct way of looking at it? Yes, that's correct, Wade. Yes. Thank you. On the order intake. On the order intake, your question was about the opportunity that was there in the market in 2017 2018. I think that the market opportunity was a lot bigger in 2017. So we have comparable win rates both in 2017 2018. I want to point out that we have gained market share in enterprise. I think that is the, the callout but they note most of 2018, our market share stayed relatively flat. Very good. And then, Daimler Naugherty? Yes. I think the I've read the news as well. We are still supplying Danler and Audi. But we, we are expecting indeed that in the future that the opportunity to sell our traffic products to those 2 cusp will be limited. I don't think they will go away completely. Our traffic quality is better and has a different geographical coverage as there are certain, the countries where we offer traffic and there is no competing offer from here. So I think we'll continue to supply those customers, but not 100% anymore. And this will reflect within your outlook? Yes, it's reflected in our outlook. All right. Thank you. And we will now take our next question. And this comes from the line of Martin Doctor. Dendro Ver. Your line is now open. Please go ahead. Yes, good afternoon. Martin Andrive, NRBC. The first question is on Automotive and the outlook. I know it's a combination of Automotive And Enterprise, but assuming a significant growth for Enterprise, it seems like your outlook for growth in 2019 for automotive is subdued, I would say. Let's say 10%, 12% Is that just due to lumpiness of contracts? Is that due to a loss of contract and loss of share of wallet? It can't all be due to the accounting of the accounting of such contracts. So that would be my first question. The second question is about the map making progress process. You say, you indicated you're going to invest in further efficiency, the current platform has reached maturity. What exactly are you going to invest in and what's going to be a effect in terms of the speed and freshness? And when will it take effect and what will that do to OpEx? And a more difficult question, related to that is how do you think you stack up versus here at the moment and what you're in relation to what you're going to do? How do you stack up? Third question, has there been some sort of impairment in the fourth quarter because D and A was high? I know it's usually very high in the fourth quarter. But it was really high in this particular quarter. So maybe you can give some guidance as what to expect for D And A in 2019, just to make to get that clear. And my 4th question and final question is, there has been a few new entrants and much talked about in that box, Deepgram Deepgram. I know they're not in automotive, but they're making some noises about automotive. But where do you see these competitors? Do you see them as a real at? And what are you doing to deal with that? Can you comment on that? Thank you. Okay. Let me let me take the financial ones. So if I still remember them, the amortization in, or DNA in, 2018 was 1141. D and A, especially in Q4, was indeed a bit higher than the run rate that we saw throughout the year. It was 4:2:1. So, but that's not, that's quite normal because the, in Q4, you do deep assessment of all everything on your balance sheet and that sometimes tends to, lead to, a bit more DNA. But I don't think it is out of the order. I mean, at the end of Q2, we had 35, and now we had the end of Q4, we had 41 So it's not significant early difference. In 2019, we expect our G and A to, to be lower trending with also decline in investments, so that we expect that to be roughly 130. Okay. And in the D and A in 2017 was 1 from 60. So yes, 160 in 2017, 1, 41 in 2018, and then 130 in 2019. Going back on your question on, the difference between IFRS revenue, automotive and operational revenue, What you need to bear in mind is indeed what's happening on the balance sheet. So, deferred revenue was at theendof2017 50,000,000 for Automotive. That's grew to 72. So that's an increase of 22,000,000 We expect that the increase will, be bigger in absolute in 2019. So that it will be at least $30,000,000. So that also has an effect. Okay. But there's no contract loss already taken into account in the guidance for 2019? No, no. Okay. All right. The other question was with regards to the map making process? Yes. So what you see in the map making process is that, so map making used to be very labor intense activity. Where you had to go out and collect data, process the data. The nature of map making is changing fundamentally more and more data is available in open source format. And it is our ability to process and harmonize the data quickly, and cost effectively that is driving the efficiency of that map making process. There are new technologies becoming available, image recognition, artificial intelligence that are both used both for traditional making, but also for high definition map making, where you can achieve fantastic improvements in efficiency But of course, you need to invest in engineering and in software capabilities. So the trend you see in mapmaking is that more and more is automated. And we are reducing, labor manual manual labor we are shifting to software engineering to automate more tasks of mapmaking Now what you see as a net result is that, our maps are getting richer, cover more geographical area. Productivity is going up significantly. Foresee and attribution maps is also going up. So it's a bit of a, you need to achieve that higher levels of automation and efficiency in order to keep up with customer expectations as well. But is this a 1 year program? Is this a 3 year program? This will never stop. There will always be, ways to improve, to go faster, to be more efficient I think we have a big, chunk of work behind us in laying the foundation of a transactional map making system fairly unique in the industry. That's there, but the real efficiency gains, can still be achieved by further automation, of the process of mapmaking itself And the last question on the subject, how do you think you stack up versus here? Are you trailing? Are you used to are you in fronting this No, I think in terms of efficiency and speed, I think we are leading. You see that also in the recent contract win of the Bing Maps, you see that with our deals as well. The speed at which we can do things and the transactional nature of our map make platform, the quality of the data are all in we are in a very good shape and we don't lose anything because of map quality is to country when we win as often because the way we how we deliver maps and how fast we can react flexibility of introducing new sources that customers often care about. So it's a very flexible cost effective and fast system. And I think that's what our customers like. And then the last question on, competitive pressure or what you see with Mapbox, Deepmap and other new entrants? Yes. It is you see those happening. You see the open source activities as well. And of course, we followed it closely. We see if there are lessons to be learned and how we need to react and move. So we definitely keep an eye on it. We're not always competing. We're also collaborating, I think in terms of the core HD Map and HD Map, we are in very good shape and we don't need to be worried about anybody. But we also can't sit still and pretend that the world's not happening. So it is a dynamic place. It's a competitive world. And that I think our team and our products and our technologies are all in, in good health and very competitive. Thank you. And we will now take our next question. And this comes from the line of Mark Hasselink. Your line is now open. Please go ahead. Yes, thank you. My first question is on automotive. I think in the last couple of years, Throughout the years, the result of automotive has been much stronger than thought at the beginning of the year. Can you explain what has been driving that? Have take rates been increasing faster? Has the volumes been higher? And also taking that into account for the guidance that you gave on 8 motor for full year 2019. What kind of assumptions do you imply there, especially now with that we see maybe a bit of a slowdown in automotive sales numbers? The second question is again coming back on extra investments. Just just to understand it correctly, the opportunities that you see, why you do that extra investment? Is that something that you need to do to to, for 1st year competition? Or is it something that opens up new possibilities to generate extra revenue? Yes, is it will be a driver of extra growth going forward, or is it something you simply simply have to do to keep up your products? The third question is on the, to square the free cash flow guidance that you're giving with the profitability, especially now that you say that the D and A will be lower in 2019, in on my workplace that implies that you again, it's a very large number of deferred revenues, to make up for that, to make up for the difference. Is that correct? The inflow from deferred revenues be higher than it was in 2018? Okay. 1st, automotive. Automotive looks indeed, you're right. So when we started 2018, we were we had a more modest outlook for automotive, than the 25 sense, which we delivered. I think the biggest driver for this acceleration constant take rates. So not so much, car volumes or market share gains of our customers, but especially the take rates tend to be higher. We have used the updated take rates also when we, constructed to 2019 guidance. And so we're not using the take rates that, that we initially thought realistic when we designed the order intake. On the free cash flow, it's indeed, you're right. So there's a mismatch between, IFRS net result. And what's happening in deferred and unbilled revenues has already indicated, is that there's a big increase in deferred revenue expected in automotive. Of 100,000,000 plus, if you like. On the other hand, consumer will see a decline of roughly $25,000,000. So the net result is that deferred revenue in 2019 is expected to grow with 75,000,000. And that's, together with the difference between amortization and CapEx, creates the bridge to IFRS net result towards free cash flow. On the opportunities that we see ahead, there are both, quality improvements and new opportunities. On the quality improvements level, you could think of, the fact that we were the dominant supplier of traffic throughout Europe, that comes with high responsibilities on availability 20 fourseven that also on quality, and two times nine, three times nine quality levels that you need to uphold. That means that we need to make investments to, create that. Other areas where we're investing is to have continuously releasable software. As a product for our automotive market available, and that also requires new specific investments. Okay, thanks. And then I have one follow-up. I think when I was at CES, it was really much the story that all the level 2 functionality that was going very quickly now, but that level 3, was was far more difficult also from a regulatory perspective and was maybe being pushed out a bit. What would that do for your business? Is the level 2 already enough for you to sell your HD maps, or would it also mean that your opportunity is being pushed out? No, you I think the maps are used also at level 2, level 2.5, everything that sits between 23 start using a map so that opportunity is still there. Okay. That's clear. Thank you. And this concludes today's presentation. Thank you for participating. You may now disconnect.