Earnings Call: Q1 2018

Apr 17, 2018

Good day, ladies and gentlemen. Welcome to the TomTom First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer and the conference coordinator will be happy to assist you. Please note that this conference is being recorded. I'll now turn the call over to your host for today's conference, Bruno Violi, 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 first quarter 2018. With me today are Harold Holdain, our CEO and Taco Titula, TomTom, CFO. You can also listen to Albert applies. We will start today's call with Harrow, 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 over to you. That's great. Thanks very much, Bruno. Welcome, ladies and gentlemen, and thank you for joining us today. We started the year with a solid set of results, nearly 70% of our revenue is now derived from data, software and services, and that's boosting our gross margin. Automotive operational revenue in the quarter amounts to 1,000,000, and that is an increase of 42% compared to the same quarter last year. Taco will further provide further information on financial highlights and the financial outlook for 2018 later during this presentation, I will discuss some of our operational highlights for the quarter. We announced in the quarter that both Hyundai and Kia expanded their connected car services to include our own street and off street parking information, electrical vehicle services, and fuel prices. The services will be available on all new hyundai cars produced for Europe starting from November 2018. For Kia drivers, it will be available starting with the next generation, of Kia seat and gradually will be applied to the whole model range by 2019. We also announced the expansion of several of our connected car services. Our electrical vehicle service was launched in North America, we built a model for route based range calculation and availability of electrical charging points along the route or close to the final destination of an electrical car. This serves as key components in managing so called range anxiety for drivers of electrical vehicles. On street parking service was expanded to 100 European Cities, We calculate the likelihood of finding a parking space closer to destination and route drivers in the last mile, one of those roads where the likelihood of finding a parking place is statistically the highest. The service has the potential to reduce in city traffic resulting from drivers searching for a parking spot. In relation to ADAS and autonomous driving, we started collaboration with Electrobid and that's focused on demonstrating electronic horizon based functionalities, including features such as curves, speed warning, fuel efficient driving and range determination. The joint project will combine total auto stream, and Electrobid's EB Robynos predictor to establish an easy to use demonstrator for the automotive market. Our Telematics business continues to present double digit growth and we surpassed 826 1000 subscribers at the end of the quarter. This represents a 14% increase year on year. Telmantic Launches completely redesigned Web Fleet platform in the quarter. Web Fleet has been rebuilt with new features a fresh, fast user experience that includes advanced analytics. The new interface facilitates faster development and deployment of new applications, more powerful APIs for 3rd party application development. A new range of Fulphoproduct terminals were also launched in the quarter. 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. In the first quarter of 2018, we reported revenue 1,000,000, which is 10% lower compared with last year. And in line with the guidance for the full year. Automotive Enterprise And Telemedic delivered a combined year on year revenue growth of 4%. Automotive revenue was up with 11 percent to 1,000,000. The increase mainly came from the ramp up of existing contracts. Deferred revenue position of Automotive increased to EUR 128,000,000 at the end of the quarter that's a doubling year on year. This contributed to our strong cash generation during the period. Enterprise revenue in the quarter was $30,000,000 compared to $33,000,000 in the same quarter last year. And decline was mainly caused by weaker U. S. Dollar. Telematics revenue was up 7% to EUR 43,000,000, The recurring subscription revenue year on year increased by 8% to EUR 33,000,000. Consumer revenue decreased by 28 percent to EUR 69,000,000, close to 80% of our revenue is P and D related with the remaining revenue being split between automotive hardware, sports and navigation apps. Nearly 70% of our revenue in the quarter now comes from data, software and services. Gross margin was strong 70% increasing by 7 percentage points year on year at a constant currency rate for the U. S. Dollar and the pounds Q11 2018 gross margin would have been 67%. We provide more details on this in the press release. Total operating expenses, OpEx for the quarter was $127,000,000, which is $8,000,000 lower compared with same quarter last year. The decrease in R&D, SG And A And Marketing is driven by Consumer. The decline partly offset by increased investment in research and development in our navigation technology, including our map platform. EBITDA increased with 30 percent 30 year on year to 1,000,000. EBIT was EUR 7,000,000 positive. The net results adjusted for movement of deferred and unbilled revenue and deferred cost of sales on a post tax basis was 1,000,000, which translates in an adjusted earnings per share of This compares to a 1,000,000 loss and an adjusted earnings per share of minus in Q1 2017. At the end of the quarter, we reported a cash position of 1 month 1,000,000 and a deferred revenue position combined of 1,000,000. On the next slide, we As shown throughout last year, this slide highlights the operational revenue of Automotive. Operational revenue is the reported revenue plus net change in the deferred and unbilled revenue positions. As we sell products to Automotive, that includes multi year updates and and to our subscriptions, some of the revenue is deferred. Automotive operational revenue in the quarter amounted to 1,000,000, an increase of 42% year on year. This compares to 32% growth in Q1 2017, versus Q1 2016. Order intake from the past years will continue to contribute to strong growth of our automotive business in the coming years. It will deliver growth to our recognized IFRS revenue that it will also continue to increase the deferred revenue position. Then the next slide on the outlook 2018. We are reiterating our outlook. We expect revenue of around EUR 800,000,000, a gross margin close to 70% and an adjusted earnings per share of around and OpEx and CapEx combined excluding potential acquisitions of around EUR 700,000,000. As mentioned in our Q4 and full year 2017 earnings call, we needed additional time to evaluate the impact of the new accounting, on our automotive contracts. We have now gone through all the contracts and I am giving an outlook for the revenue CAGR. We expect the combined revenue of automotive enterprise and telematics to grow at a CAGR of around 12.5 percent between 20162020. Operator, we would now like to start with Q And A session. We will begin the question and answer session. Session. We'll just pause for one moment We'll take our first question from Wimjal from ABN AMRO. Good afternoon. I have a couple of questions. First of all, if we look at the telematics business, results were actually quite in line for the quarter with, one exception is that the number of net additions in terms of number of users was only 17,000, which seems a bit light in a historical perspective. So can you be of explain what's happening there and if we should expect kind of a ramp up in the quarters to come. Then in terms of the adjusted in the guidance in terms of the CAGR that you are looking for in the coming years, it is now down from 15% growth to 12.5% growth. Can you explain to me how that works exactly with the accounting change? Is the balance going into deferred revenues? Or how should we look at that? And also give us a bit of a mix on how to look at it as in strong growth and automotive decent growth in telematics and stable enterprises? Or how should I look at that mix? Those would be my first two questions. Yes, Wim, thank you. Let me start with the second question. So the CAGR, so the CAGR, is based on 3 different revenue streams. One is enterprise, secondary telematics, and the third one is automotive. If you compare our estimates from 2016 end of 2016 with where we are today, there have been some changes. Let me start with enterprise. Enterprise back in 2016, had a stronger door than what we see today and that has its effect. It has it does not have its effects on the starting position. So it doesn't change the 2 16 revenue number for enterprise, but it has its effect, for the coming years because we work with an exchange rate that this materially lower. Then telematics, we've seen that telematics reported 4% revenue growth last year. We have indicated to the market with the full year results that we estimate that, that will repeat itself this year, slightly better, maybe 5% this year. But again, here, the assumptions that, that we had back in 2016 were probably more positive, because we relied then on 2015, 2016. And now that we know what 2017 has has delivered to telematics. And what we know, what we think 2018 will deliver, that has its effect on telematics modeling. Then on the positive side, we see automotive. Automotive in 2016 was one of the indications that we use to extrapolate revenue for Automotive was of course, order intake back in 2016, we were, were close to close the order intake of 300,000,000. The year after we realized 400,000,000 So when we had to do the calculation, the math again, early this year, we were probably a bit more optimistic about automotive but there's also some change in the nature of the contract, where in 2016, the reported revenue was very much coming from a traditional way of supplying Maps to the automotive industry. That does mean that it doesn't include map updates today and also in the near future, we see, close to 100 percent adaptation of that map update structure. That means that you need to defer more revenue than you used to, in the past. So it is due to the new accounting, but it's also due to the new deal structure. Again, the operational revenue, the expectation for operational revenue early 2018 is better than the operational revenue that we had in 2016, but the nature of contract has its effect on the reported revenue. Also tying into your comments about your first question, on telematics that is the result of the slowdown that we that we experienced last year. That's also continuing early this year. We have a list of actions that we're taking and rolling out. Our goal is to get back to double digit growth that is not foreseen for this year though. Okay. And, in telematics, are you guys winning market share, losing market share? How should I look at that? That is, that's a very relevant question. The fact of matter is that independent research is a bit lacking in this industry and so often very late. So it takes now close to 12 to 18 months before we get market share data from the research houses that the monotherities market based on that data, we're definitely losing market share. I think there is some consolidation happening in the market. That's true. So the number of spares is the list of players is getting shorter. That said, we are by far the dominant player in your Our next question comes from Francois Bouvignies from UBS. Hello, gentlemen. Thank you for taking my questions. The first one I had is on the Automotive. And maybe some qualitative comments on the bookings that you see this year. So if you remember correctly, you said in Q4 that you were seeing the number of deals lower in 2018 than 2017. So is it still the case? Or how is it evolving through the quarter? Is there any change to this statement? And also you said in Q4 that you were not losing customers and adding new one. And I wanted to ask you if it was still the case this year. How you feel about that? Can I have other questions? Yes, Francois, so, to the best of so we our salespeople and account people and market people trying to calculate as well as they can, this total addressable market for this year. And we expect that the total addressable market for 2018 is smaller than it was in 2017. That's all a hard number we can give you here. Things change during the year, new opportunities pop up. Other opportunities are postponed, carried over to next year. But the general feeling we have is that it will be smaller. Now it doesn't say much about our win rate, difficult to predict give you guidance there. That's not part of the guidance, but I think the overall addressable market for 2018 is lower than it was last year. And then the for the second question, K, repeated, please. I'm not sure I got it. And I was just you said in Q4 that you didn't lose any customers and you added even new ones at Yes, but just wondering if you feel the same about this year, how is it looking? Yes, again, difficult to say. Those are buying re events. I can't give you any further information there. But it's true that in 2017, we didn't lose customers and we made some wins So I hope that pattern will continue, but I can't give you any guidance there, obviously. Okay. Thank you. And then on the HD maps, maybe, do you see maybe the first contracts coming coming this year? Or how should we think about the timeline? Well, this year, we will launch a or one of our customers will launch a product that is dependent on HD Map. It's not high volume, but it's kind of indicative of things happening. So in this bigger case, our maps are used in a truck. And then the map is used for, cruise control. And the idea is that if you know exactly what the route looks like and where you need to stop and where you have curves and what have you, you can optimize the power management of truck and that results in, actually quite significant fuel reduction, especially in hilly terrain. And numbers quoted by our customer are ranging to going up to 5% fuel savings. So there we use an AG map. It has the maximum speed data, it has the crossings, the stop signs of the, it has the traffic lights to curves, and all those information is used, to manage the adaptive crew control of powertrain. And that is also the type of application that we're looking for when we're talking to more advanced adaptive cruise control. So that is an example where we're going through the different levels of automation. And I think it's fair to say that the bulk of the locations will multi level 5 fully automated driving in the short term, but will be level 2 and up level 3 and gradually moving up to higher degrees of automation going forward. And as a question, maybe on if you could clarify on the confusions with the Reuters news, saying that you were hiring to look for opportunities. I just wanted to have your comment on this and maybe clarify if there is anything you can do? Yes. So I'd like to stress, normally, rumors, we don't comment on. At this time, it was very specific. The share price started to move, so we had to come out with a statement but the effect of the matter is that as rumors were not based on fact and not true. Some client to repeat that here. That there was nothing of that nature going on. Okay, thank you. And the other question I had is on your gross margin. And then the deferred revenue. So if you look at the gross margin in Q1, it seems quite strong, even, I mean, also because of the currency But don't you feel that the 70% goes to 70% for the full year is a bit too conservative at this stage? Especially given the mix that is getting more and more positive through the year? Yes, I'll take that question. Yes, so I don't want to make Q1 So we're very happy with Q1. Q1 was a good quarter, on the Milled pool elements of the EBITDA, cash generation, and indeed, also including gross margin. Gross margin was helped by currency, that we give detailed splits of that in our press release. But that said, this was a strong gross margin. You could ask the same question about just earnings per share of $0.10, that is also a strong start to the year. And if you compare that with the full year guidance, there might be room, to for upside. But we want to take the coming months to do proper assessment of how we see the year progressing and we've given an update in July with our H1 results. Okay. And on the deferred revenue I mean, when you talk about these adjusted net results, I mean, if you look at the net move, you had like 1,000,000. If I remember correctly, you said in 4, that you would expect the EUR 17,000,000 number of EUR 24,000,000 to double in 2018. The first, I mean, do you, is it still the case? And if it's the case, how should we think about the phasing? Because for us, it's very complicated to forecast. Obviously, we don't have any visibility on when you're going to get this. So given that you have 1,000,000 already in Q1, how should we think about the next quarters? But you're referring to 20,000,000 So in 2017, in 2017, I think a 1,000,000 of net deferred And you said in the conference call that you expected this number to double, is that in 2018, is that right? For the full year. I will stay with that statement, yes. And you said more than double and you had $21,000,000 in Q1 already, versus 24 in the full year 2017. So I was just wondering how should we think about the phasing? I mean, you are obviously in a very strong, start of the year. Yes, that's true. But, there are a couple of things. So consumer, the, the really, we expected, I expect the release to grow not significant, but it will grow quarter off crawler. And the other thing is that within enterprise, there was that's related to timing of, of payment and outstanding invoices. If you compare the net effect in Q1 2017 with the net effect in Q1 2018, there's a 1,000,000 difference And that is just timing. I couldn't call seasonality because we compare Q1 with Q1, but it has to do with timing. So we stay with the statement. Again, Q1 is a strong start of the year. I don't want to make it smaller than at the that we need a bit of more time to do a proper update of our outlook. Okay. And in terms of phasing, I mean, should we expect a particular with I mean, if you look at last year, you had in Q3, a big release in the net move, it should be should we think about the same pattern this year? Yes. All right. Okay. Thank you very much. I will leave the floor to others for the question. Thank you. Okay. Thank you. As there's no additional 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. Thank you. This concludes today's presentation. Thank you for participation. You may now disconnect.