Earnings Call: Q2 2018

Jul 17, 2018

Good day, ladies and gentlemen. Welcome to the TomTom Second Quarter 2018 Earnings Conference Call. Are in a listen only mode. Please note that this conference is being recorded I will now turn the call over to your host for today's call, Bruno Pirelli, Investor Relations Officer. You may begin. Thank you, operator. Good afternoon, and welcome to our conference call through which we will discuss our operational highlights and financial results for the second quarter 2018. With me today are Harold Holdain, our CEO and Taco Titallard, TomTom, CFO. You can also listen to the call on our website and a recording of the call will be available shortly afterwards. As usual, I would like to point out that Safe Harbor applies. 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. And with that, Harold, I would like to hand it over to you. Thank you, Bruno. Welcome, ladies and gentlemen, and thank you for joining us today. Our positive start to 2018 carried through into the second quarter. Automotive continued to grow strongly and gross margin further strengthened and as a result of the year on year gross profit growth and strong cash generation. We further improved our map production system during the year, higher degrees of automation and machine learning resulted in faster cycle times and lower operational cost. We also significantly extended our map coverage and map quality. Taco will provide further information on financial highlights and the financial outlook for 2018 later during this presentation. I now will discuss the key operational highlights for the quarter. TomTom EV Electrical Services won the Best E Mobility Product And Services award at the Klepa Innovation Awards. Utectable vehicle services helped drivers to make informed decisions about when and where to charge our vehicles. We cover more than 45,000 charging stations with real time availability information globally. We're happy to announce that Microsoft Azure Maps are now offered for general availability. Our Maps APIs help Microsoft customers to access robust mapping capabilities that can be integrated in a wide range of application In June, the global consulting firm Frost and Sullivan named Thompson Telematics, by the European Fleet Telematics company of the year. Our connected car service solutions for leasing and rental companies and the complete overall of the web fleet system attracted praise for our products. Our telematics business continues to present double digit growth in subscriptions. We surpassed 848,000 fleet management, the connected car subscribers in the end of the quarter and as an increase of 11% year on year. This concludes my part of the presentation. I'm handing over to Taco. Thank you Harold. Let me make a couple of comments on the financials. In the second quarter of 2018, we reported revenue of 1,000,000, which is 21% higher sequentially, driven by both automotive and consumer. Year over year, the revenue was 9% down, driven by consumer and enterprise, partially compensated by the increase in automotive and telematics. Let me go and 20% up year to date. For the year, as a whole, we expect Automotive to grow with a similar percentage as we saw in the first half. Full year revenue expected to reach $230,000,000 versus $196,000,000 last year. Automotive is the main driver of our overall revenue guidance uptick from 800 to 1,000,000. Enterprise revenue was down by 22% in the quarter, and 16% down year to date. For the year, as a whole, we expect enterprise to decline with a high single digit percentage. This is a result of the H1 2071 off effects and a weaker dollar versus last year. Telematics revenue was up by 7% equal to its performance year to date, and we also expect this trend to continue for the rest of the year. The recurring subscription revenue year on year increased by 7% to 1,000,000. Consumer revenue decreased by 24% in the quarter and 25% in the first half. For the year as a whole, we expect the decline to be even a bit steeper, reaching close to 30%. Gross margin was again solid. And year to date, we are above 70% now. And that's the mix of our revenue in the second half of the year. We'll continue to lift gross margin. We feel comfortable in raising our gross margin guidance from close to 70% to at least 70% for the full year. Total operating expenses for quarter was EUR 141,000,000. We expect this to be the run rate for the remainder of the year. Year over year, we see a decline of marketing. The only other hand, we see growth in the money we spent on sourcing map content and our mapping platform. EBITDA increased by 26% in the quarter 28% year to date. EBIT in the quarter was 20 together with the $0.10 we reported in Q1, we have now $0.15 year to date, which makes comfortable with raising the guidance cash position with $34,000,000. We now have $155,000,000 of cash, and we have no debt. We expect the second half of the year to be even more cash generative. Last comment is about our deferred revenue position. Main trends here are in consumer and in the automotive lines. Consumer is down $20,000,000 to now $137,000,000 and Automotive is up with $65,000,000 to now $136,000,000. This trend will continue. On the next slide, we have Automotive. Automotive is our 2nd largest revenue stream behind consumer and Automotive is growing strongly. As already explained, we expect to grow this with close to 20% this year. There's a difference between the revenue we invoice and the revenue we report. The letter tends to be lower as we follow the new IFRS 15 accounting. And let me discuss that here as well. As a rule of thumb, for a large part of the automotive map contracts, we recognized 70% to 80% of the total contract value during the selling period and 20% to 30% during the service period. The 70% to 80% is spread over the month in the sell in period as a straight line revenue constraint. The lower of either cumulative invoice revenue or cumulative straight line revenue can be recognized. If the cumulative straight line revenue the difference between the 2 is added to the balance sheet as deferred revenue. Every quarter, we assess the expected total contract value of all our automotive customers. This can mean that we line revenue has narrowed as a result of an increase of the projections. On the slide, as shown before, we highlight the operational revenue of multimodal. Operational revenue is the reported revenue plus the net change in the deferred and unbilled revenue positions. Then the last slide, the outlook of 2018 already discussed But here to summarize, we are increasing our guidance for the full year due to a higher demand from our automotive customers, we now expect it to deliver full year revenue of around 1,000,000. And gross margin of at least 70%. Previous full year guidance was around EUR 800,000,000 and a gross margin close to 70%. OpEx is expected to be around 1,000,000. The both effects will increase the adjusted earnings per share to at least in 2018. Operator, we would now like start with session. Session. And we will now take our first question from Francois Bouvignies of UBS. Taking my question. The first one I had, was on the Apple News recent that they were building their own maps now. So I have a simple question really. If you were lose this customer views, what would be the impact on TomTom, both financially and operationally would be very interesting to know. If you were to lose it completely, of course, Francois, I can be very short on that, but we're not going to comment on that. But it is not, it is not in our interest, and it's not our strategy to do with this customer, obviously. Okay. And if we, for example, on the operational side, I mean, how important is the data from Apple, all the iPhones to for your, maps and life traffic. Is it something that it is really competitive advantage in your view? No one comment on that. Okay, okay. No, it's, I understand So the other question I had is on the automotive bookings. Just wanted to have some qualitative comments how do you see the booking trends, especially versus 3 months ago? Any change in terms of take up penetrations or ASPs, anything, you could point out? Yes. First of all, I think we are tracking according to plan. We don't give the actual numbers for order intake per quarter. The reason is that, that is it can be quite lumpy and it's not if Wuxi, what can happen over the year. So we'll give you a full update in, with the February results. Okay. And then the trend that you saw in the U. S, do you see that continuing with other customers or is too early to say? Well, that's really to say we're going hard to deliver the, to deliver that product, of course. We made good progress there. But we're not shipping, and we are not to the particular customer. We're not shipping yet. That will, that will take time before you can see that happening and translating into the top line. So the program is really important to plan. I mean, there's no it's all gone well. Okay. Okay. And maybe I had another question on the free cash flow for this year. I mean, last time you said that we could expect like SEK 80,000,000, if I remember correctly. How should we think now given the trend that you see in the automotive Steve and your cash flow generation, how should we think about the full year free cash flow? What we need said is that we estimated the free cash flow can be anywhere between $70,000,000 or $18,000,000 for the full year. We had an exceptionally strong H1, delivering close to $35,000,000 of free cash flow And we're even more optimistic about the second half. So there's definitely room for upside on the, on the previous number that we gave. So, it will be good if we end the year with a number starting with a 2, for our cash balance. Okay. And maybe as a last one on my side, how is it evolving your HD maps development Is there any contract that we should expect in the second half of the year? How do you see that trending? Yes. So the on the engineering side and on the, on the software side, things are going well. We have a number of, what we think are exciting cooperation agreements with the number of Tier 1 sensor makers to further develop those products. We feel that, standing where the market is going that has not yet translated in large awards for HD Maps. But, beginning of next year, a truck maker will start using AG Maps for motor management applications. Not strictly speaking an HD application or a self driving application, but to date, how we deliver there are directly derived from an HD Map product. And it has high accuracy on lanes, on curvature, on on traffic signs in order to operate powertrain of the truck So it can reduce fuel consumption by a significant amount. So that's a good application, good example of where a map of HD quality is actually going into production. I think the auto industry is moving forward with the level 2 and level 3 levels of automation. That means mostly that technology is now being prepared for driving autonomously on closed access roads. Or motorways, where the computer needs to do all the tasks of, accelerating braking, overtaking breaking in front of an exit. That is now a problem that seems to be, solved and go into production that's in the not too distant future. And for those type of applications, we are quoting HD maps as we speak. And how do you monetize this HD maps? Is it like on like traditional maps or you do it differently? No, it is different because those maps need to deliver need to be delivered in real time over the life cycle of the car. And that means that there is a yearly subscription fee to enable the functionality. Okay. And the value of the contract, do you have any idea or how is it compared to a traditional maps? I mean, the how more expensive it is to have the HD map versus a traditional map for your customers? Yes, that's a bit early. Currently, the, I think the market is looking, trying to figure ratos prices are exactly. I don't want to, elaborate on the exact pricing, but it is a significantly higher amount per car than what we charge for standard maps, navigation data maps. And that is also because it's an annual fee and annual subscription fee to the service. And when you say significantly higher, I mean, can you give us a magnitude? Because I mean, it could be two times five times, ten times, I don't know, I have no idea. So I just wanted to. Yeah, it is, you know, it's a lot higher what we charge for navigation data maps. But you need to bear in mind that the addressable market initially will be small as well. But the money, the fees we are talking about are significantly higher than what we're currently charging for maps and map update services or traffic services. We will now take our next question Yes, good afternoon, gentlemen. I just wanted to go back to Automotive growth, very strong. Can you elaborate a little bit on what is driving that? Is that the PSA Citrovan contract further ramping up? Is it an acceleration in take rates Is it a product sales mix change or more maps relative to traffic? Can you elaborate a little bit on that? And, I know you don't want to give an update on order intake but, to build on the previous question, can you take a little bit of what you're seeing in the RFQs and RFPs in this quarter relative to the previous quarter? And then the third question, I didn't really understand the drop in profitability in enterprise. And there's 1,000,000 less in sales, there's a 10,000,000 drop in EBIT. Last year, going from also on a yearly comparison, we had a 5,000,000 tick up in sales but we didn't see the same pickup in EBIT. So what's the difference this year? And the 4th and final question, a bit odd one. But what are the current roles of Corinne Beta Frans in Peter Haele and the founders within Consumer or TomTom as a whole? Are they still involved or not at all? Thank you. Okay. So first question, what is driving the uptick in automotive, revenue? That's a direct result of order intake in previous years. It's plain simple. So we have booked, we've purchased numbers in the past years, increasing total numbers of revenue growth of order intake. And you see that translating over time into revenue. That's what you see. Hey, Harold. Order intake can be sometimes you also announced smaller contracts. So I'm just trying to determine, is it take rates? Is it Is it a piece AC Turin? Is it sales mix? I appreciated that that order intake has been up with a little bit more granularity on that, please. No, there's mainly if I can add to that, this mainly take risks. So, the driving force is indeed the orders that we have secured 2 or 3 years ago. If you see in the rollout that most of the time due to the success of our application that the OEMs are getting more excited and then the take rate goes up. Okay. No significant change in the sales mix? No, no, I wouldn't say that on your specific question on profitability of our enterprise and automotive. If I can take that one as well, there are 2 things here. One is that Automotive And Enterprise, receives into company payment for, Maps software and services. Mainly from consumer. And that is on a declining trend, obviously, but the decline is going more rapidly over the last years. So the difference, the ballpark numbers where you need to think of is that on an annual basis, the contribution from consumer to Automotive And Enterprise is, is down from 1000000 to 1000000. The other thing is that we have staff and overhead costs like real estate and facilities and IT and HR and legal will have you These are allocated to the 3 business units based on either in, people key or revenue key. And also there, you see, a big drop in consumer and consequently an increase in automotive and enterprise or consumer has less people. It's their share or revenue contribution has also declined. And that is, that's helping consumer and that these costs are that part of the bill is taken up by Automotive And Enterprise. Okay. Okay. And maybe to go back to Automotive because I also had a question on the and RFPs in automotive relative to previous quarters? Is there any change in volume? Well, we're not going to comment on any specific per quarter. The reason why don't do that is that it's very lumpy. It can be seasonal. Things get, pulled forward or delayed and it's very hard to read any trends from that. What Harold already discussed is that we see that the target for our queues, is becoming more hybrid, meaning that next to ND Maps navigation data maps that are used by the driver himself or herself to drive from A to B. It is more and more also that the OEMs ask for that application to have also informed of HD mapping for, the highways. And that's a good trend because we are in a good position because we can offer both. And there are not a lot of companies that can offer both to the OEM segment. So so far so good, there's no change in, in outlook. And, we're excited to see the year develop. The 4th question about Corinne, Peter Frantz and Peter Taylor? Yes. What do you want to know there? Well, they used to be very involved in Consumer Peter, Peter, France and Peter were always about consumer product, the gooey, the interface, how to optimize that, but obviously consumers of much more or less relevance. I'm not even aware of their activity levels. Corinne is not the consumer anymore? So No, that's correct. So, Corinne has, has handed over a role of managing director to, Mike Scholes, who is running, that business unit at Mahogany. She's still involved with business, representing the company as a big influence topics within the companies in the area or HR education training. Peter France is also still very much involved special product side. Peter has been a less active recently but Korean and Peter Frans are still very much engaged. Thank you. We will now take our next question from Mark Zwartsenburg of ING. Please go ahead. Yes, thank you. A couple of questions left. To start with the Automotive guidance, Doug, you mentioned to see sort of growth throughout the module for the full year is what you saw in the first half. Does it mean that the phasing in the second half, the acceleration is a little bit I read it like this compared to the second quarter? And is that just a phasing effect from form order intake? Can you give a bit more color on the phasing of that? Well, we started the year. No, I wouldn't read it that way. So, we started the year with an implicit guidance that Automotive would grow with, up to 15%. With the new guidance, we have changed that to 20%. There was a specific release in Q2 from the balance sheet as the total contracts value of a certain customer has gone up due to more optimistic foresight. And that led to the 28% increase in Q2. But for the year, as a whole, we have increased our guidance and we haven't changed our forecast for H2. And then on the Consumer business, there you say, well, we expect a further or faster deceleration in the second half. What is driving that? Is that because you do less marketing? And how should we see that for next year? Would that be the run rate also going into 'nineteen? Well, also here, I think we haven't now here, we have not changed our guidance. So, we started the year with, indicating a 30% decline for consumer as a whole or close to 30% We stick with that guidance. H1 has been strong and that was also the result of a traditional Q2 is the driving season. So it is the most important caller, for consumer And in the second half, the decline will be a bit stronger than what we against during the first half. But for a year, as a whole, we stick with the guidance we gave at the start of the year. And that we estimate that the consumer would decline with roughly 30% for the Is that the run rate for years to come? As always, we will give a new update on, in February, what you need to bear in mind in 2018 specifically that the decline is also influenced by no sports revenue in the mix anymore in 2018, which was still there in 2017. Is there some caution building that in your second half guidance? Or is it really based on a bit of It's balanced. As always, very balanced, yes. And then on the cost base, I still and Maarten also referred to it, Adi, to understand what's going on in the EBITDA of Automotive And Enterprise. If I try to desolate a bit what consumer must have done in terms of OpEx decline, it seems to me that the year on year in the first half of OpEx down almost 1,000,000 or so in that range based on a stable gross margin. You just refer to a 10,000,000 lower intercompany payment from consumer, so to automotive. But then still there are obviously 3 things. It is intercompany payment for products as an intercompany payment for, corporate services. But the real driving factor is obviously the decision that we made last year to stop with our sports activities. And that has led to significantly lower marketing, but also less people on the consumer segment. Yes, there was one second point. The marketing is down $15,000,000 and I have ten fifteen-twenty 5 and I'm still missing quite a big chunk. Is there something else that I should be taking into account there in terms of cost allocation? No, no, it's just people, people as well, less people. Then on the OpEx looking a bit further out, you said the run rate of Q2 is a bit the market for the second half. How should we think about 2019. I know it's early, but still, we know roughly what we'll assume we'll do, and the decline will continue in Automotive based on the order book will start to further grow further. And the rest is not that exciting to be mutually wrong on it. But how should we think about the OpEx in 'nineteen? Well, Yes, the easy answer is obviously you have to wait for February, but let me give a bit of color here. So we're building our position in automotive and not only with the market share that we're taking for MD Maps had a traditional maps for the driver, but also for the future towards HD mapping. With, having a platform very important European customers now also have, American OEMs and Asian OEMs in the mix that means that our global footprint needs to be excellent everywhere, not only in Europe, but also North America. So the requirements for deeper and wider coverage, is there. And next to that, for with the emerge of HD mapping and autonomous driving, we need to continue to reduce cycle time reduce the latency of our map quality and that needs fast, big investment in engineering and automation. That is the new normal for automotive and enterprise combined. And that's trends that we've seen, starting in this year in 2018. On the other hand, I agree. So the cost in other elements, in the other segments, mainly consumer, there is, it's forward that, that will go down further. So marketing spend will go down further. And then the investment in R&D should you gradually go up a bit further from here? And then how we should think about it? Yes. Naya and the SG and A is also, depends on which segment you're looking at, but for consumer as of all, the spend will go down. Yes. And then on all a bit the strategic thinking about the cash position, you have EUR 155,000,000 on the balance sheet, you have quite some excess cash, but also you don't know what the future will bring in HID. But can you share us a bit maybe, Harold, what you're thoughts are strategically why you need to maintain and want to keep all options open towards the future in terms of thinking about keeping the cash position and what kind of perhaps unforeseen investments you might need in that direction? Is it to share us your thoughts perhaps there? Yes. So we're looking at it position, every year. We come and the general meeting is a good moment to discuss what we're going to do with that cash. Taco just said that he wants to and we want to end the year with about $200,000,000 in cash on the balance sheet. So I think that's a good number. What we're going to do with that cash is, again, up for discussion in the in the digital meeting, but it's good to have a bit of firepower. We get more and more clarity all what's needed for self driving technology. The market is moving forward. I think we are looking good in that space. And it will and it's good to have a level of flexibility that would allow us to go faster if we think that is appropriate. Would that be along the lines of investments or more like buying a sort of technology that you might want to have? It's either way. I don't know the answer. What I do know is that it's getting clearer what it is we need to do, how far we are, you know, with the technology, we're quite excited about the progress we've made in all of new stuff that's been developed in the, of last 2 years in the sense of, computer vision technologies and processing data machine learning that's all coming to a level of maturity now where it is ready for prime time and and customers can see that. We're also a little bit driven by the speed of our customers, obviously, But when the time is there, we want to be able to pull the trigger and go as fast as we need to go to take a leading position in HD mapping. And in that context, I think it's wise to keep a little bit of firepower. And then the final one, Taco, can you give a bit of an indication for the deferred revenues you expect to see in the P and L in the second half. Is that $35,000,000 to $40,000,000 or more or less? The rule of thumb is that consumer declines deferred revenue with $5,000,000 every quarter automotive increases, with $15,000,000 to $20,000,000 every quarter. And enterprise has a more seasonal, shows a more seasonal pattern. Okay. So my number is not that wild. Taking my questions. Thank you very much. We will now take our next question from Wim Gyle of ABN AMRO Bank. Please go ahead. Yes, good afternoon, Vimp Hilla, ABN. A couple of questions. First of all, if I look at the telematics uptake from new users, you did 17 K in the first quarter to 22 K in the second quarter. It seems a bit that you are kind of on a slow start in that area. Is there any kind of specific reason for that? Because as we assume that kind of you guys increase your skill, should be able to onboard more accounts in that area and it should accelerate on that space a little bit. The second question is on Automotive. I mean, I'm duly aware that in the year over year comparison, operational revenues and automotive are growing, on a year over year basis. But if I look back in the past three quarters, You did about EUR 76,000,000 in the fourth quarter of 2017, EUR 78,000,000 in the first quarter of 2018 and only EUR 71,000,000 in the second quarter of 18. So how should I look at that? Is it kind of, something that should grow on a quarter by quarter basis as the adoption increases or is this a bit of a lumpy seasonal element in here as well? Given the fact that it's kind of a nascent business line, give a bit more feeling on our look at this number. Third question is on Google Maps. They announced quite a spectacular price increase, a couple of weeks months ago and they implemented this week. What did you see in terms of engagement on the enterprise segment Do you see kind of a noticeable increase in inquiries? And how should I look at that also taking into account that Microsoft Azure is now available. Should we see kind of an inflection point in the enterprise revenues, that we haven't seen for a while. Those would be my first three questions. And then I've got some more follow ups. Let me start with Terminix? Yes, Vin, so ThermoDx is, was growing, I think, in 2 scripts and 12% we'd like to see that number to grow and go faster. There's a couple of things that are happening. We've just renewed, the whole back end, and that is, that's a good thing. It also create space now for innovation. If you go through those big technology transitions and invariably innovation suffers a little bit because you're replacing old for new that's behind us successfully transitioned to a more productive platform And I think that in itself will be positive for our customers, but also for further innovation and market penetration. And I hope that that number will will grow a bit faster than what we have seen in the past. The second, element telematics is that we've done a lot of groundwork for what we call connected vehicle. So not a pure telematics operational solution, but more connected car solution for leasing companies, insurance companies and others. And a lot of work has been done there. There's quite a lot of exciting, contracts that are either been signed or on a virtually signed and that will gradually lead to a, faster growth and acceleration in the connected car space. One caveat there is that the ARPU in the connected car space is lower than what you've seen in telematic solutions. But I think in the mix, we should be aiming for an acceleration in growth in telematics business. I think, Taco, if you can take the question about ceosmotive growth in the development of that over time. Yes. No, I wouldn't read too much into it. Again, there is, the quarterly assessment of all the contracts has an impact as well. And it can also be related to just with operational availability of certain mobiles and commercial promotions, etcetera. So everything is going according to plan there. And then last, VIN on Google Maps. Yes, we are obviously aware that Google increased our prices significantly. It was a global developer is very emotional time, they didn't felt that they were treated well in many cases and invariably that leads to exploring other opportunities. We have seen, significant increase in our own API store, we believe that also through Microsoft Azure platform, there's an increase in, interest in the APIs and what we have to offer and we think that will lead to a growth for our MAP APIs in the future. Now it needs to be a little bit cautious because it time for those transitions to happen. You need to be designed in and those applications then need to start working, but we see increased levels of traffic both on our own API store as well as in the API store. That's part of the Azure environment. Very good. Then a couple of questions. On the OpEx side, I'd like to go back to the automotive space. I mean, assuming kind of more or less stable gross margin in Automotive And Enterprise, which is very high anyway. It appears that the OpEx in Automotive And Enterprise increased somewhere to the tune of 1,000,000, for this half year alone. You already gave us 1 piece of the puzzle, which is a 1,000,000 increase by internal transfers, but can you give us the other pieces of the puzzle as well in terms of what the additional overhead allocated to the automotive team is plus the the investments that you're making, because you're expanding outside of the European Union, more into kind of other areas as well. What and is that a kind of a permanent thing, a sticky thing, or is are there also kind of one off costs involved for onboarding new clients essentially? Well, if you look year over year, the, intercompany explains actually most of So again, transfer pricing has had a 5,000,000 negative effect So that means that the money that they get from consumers, $5,000,000 on an annual basis, that's $10,000,000. And the OpEx allocation has also gone up with, with approximately 10,000,000 in the first half. So that's to get our, $50,000,000. And are these trends to be extrapolated? As consumer continues to dwindle or is most of the overhead now already? No, not the magnitude easily. So you can't the reduction in size in consumer from, is a one off it will continue to decline, maybe, but you will not see these big shifts. This is just, made bigger because the difference between where we are now today with consumer compared to last year is, is at maximum last year, at the same time, consumer had a lot more people and a lot more revenue. So that is influencing those allocation keys. Very fair. And then, last small question. You bought out a minority stake in TomTom Africa. I think in the annual report, you also I think close TomTom South Africa, but Tom Tom Africa is also in South Africa. So I mean, I know it's a very small market for you guys and the capital employed is like $2,000,000 or so, but what are you doing there and why? This we this joint venture position was created 10 years ago we had a minority shareable positioning of, they still have them to 24% It was always in our interest to, gain full control. But, it took some time to agree on the price we were very happy that that finally happened. So we now have full control and we can, we believe we can accelerate with our plans for Africa. Alright. Let me check the last. I think, yes, that was it on my side. Thanks. There are no questions Okay. Since there are no further questions, I would like to thank you all for joining us this afternoon. If you have any follow-up questions, please don't hesitate to give us a call. Operator, you can close the call. This concludes today's presentation. Thank you for participating.