Status Update

Jan 9, 2018

Slides

Good morning, ladies and gentlemen. Welcome to TomTom's call regarding Accounting Standards IFRS 15 and IFRS 16. Call. Please note that this conference is being recorded. I will now turn the call over to your hostess for today's conference, Bisrat Grubstich, Head of Treasury And Investor Relations. You may begin. Thank you, operator. Good morning, everybody and welcome to our conference call regarding the adoption of IFRS 15 and 16 Accounting Standards by TomTom. With me today are Taco Picular, TomTom's CFO and Dirk Itma, Head of Group Accounting. You can also listen to the call on our website and the recording of the call will be available shortly afterwards. And as usual, I would like to point out that Safe Harbor applies. We will start today's call with Taco, who will provide an explanation of the new accounting standards and the directional impact hereof on our financial reporting. We will then take your questions. Before we start, I would like to underline that today's call is only related to the adoption of the new accounting standard. Therefore, we will only take questions in relation to this topic. Questions on any other subject for example, strategy, customers, financial performance, forward looking statements will not be taken nor answered in today's call. We highly appreciate your cooperation on this. Good morning, and welcome ladies and gentlemen. Thank you for joining us today. Let me start today's call with a short introduction. Today, we will provide an explanation of the new accounting standards and the directional impact hereof on Tonton's financial reporting. From the 1st January of 2018, Tonton will adopt IFRS 15, revenue from contracts with customers, and IFRS 16 leases accounting standards. The IFRS 16 standard is early adopted in order to have only 1 transition year. This transition will improve making transition adjustments to the opening balance and providing appropriate forward looking comments, reflecting a new accounting methodology. TomTom will apply the full retrospective implementation approach in 2018, with restatement of comparative figures for 2017. We stated comparative figures for 2017 will be made available on the 6th February, the day when we announced our 2017, full year results. I want to point out that both IFRS 15 and IFRS 16 only impact accounting. The standards do not change the underlying economics. For example, they have no impact on our net cash generated. Let me first highlight the structure of today's presentation. We'll first discuss IFRS 15, revenue from contracts with customers for each segment. This standard is expected to primarily impact the timing of revenue recognition of certain customer contracts, as well as certain revenue of hardware sales in telematics. Certain customer contracts in automotive that is. Subsequently, we will discuss IFRS 16 leases At the group level, this standard is expected to result in recognition of additional least tangible fixed assets and their corresponding lease liability on our balance sheet. Let me now turn to Slide 2 we have included the legend of the indication of the impact that's currently expected. We will use this legend throughout today's call, with the small impacts we mean delta of up to 1,000,000. With a medium impact, we mean a delta of between 1,000,000 and 1,000,000 and with a large impact, we mean a delta of EUR 25,000,000. Each impact is a with an increase or decrease sign. I would like to stress that the directional impact is an estimate It is non audited and thus subject to change. The numbers presented reflect the year 2017. Let's move on to the accounting effects of IFRS 15 at the group level. Indicative for 2017. This is on Slide 4. We have summarized this for the P and L, the balance sheet and the cash flow. Group revenue is expected to show a limited change or a small change. Gross profit is expected to show a medium positive impact This is mainly caused by Automotive, to an extent offset by Consumer, and the net result is expected to show a medium positive impact. Group assets are expected to show a medium decline, mainly due to a decrease of automotive customer specific intangible assets. And the group liabilities are expected to show medium increase. This mainly caused by higher liabilities from for telematics, partly offset by lower automotive liabilities. As we have mentioned earlier, group cash flow is not impacted and remains unchanged. Let's move on to Slide 5. As of the start of 2018, we have changed the name of our licensing segment, to enterprise. As it better reflects the nature of activities, customers and target markets. Automotive Managed Price generated revenues via licensing of content, services and software and some situations customization and or integration efforts are funded by customers, especially the revenue recognition for licensing of content is impacted. However, the impact is different on a contract by contract basis and not all contracts are impacted. Impact will be primarily on license of a map as a master copy. TomTom must assess whether there's a right to use the content as it exists at the point of time or a ride to have access to our content over a period of time. Overall, in 2017, we expect it to defer less revenue versus current situation as applicable under IAS 18. That's the current accounting standard for revenue recognition. Revenue and development costs associated with customization efforts that are paid upfront by our customers must be recognized at the start As these development efforts are sometimes quite significant, this can result in a material one off revenues and related costs in the quarter. Let me summarize the indicative impact for Automotive And Enterprise for the 2017 numbers. For the P and L, the revenue and the net results are expected to show medium positive impact. This is all due to automotive. For the balance sheets, the intangible assets and liabilities are expected to show medium decline, and this is also mainly ultimately Let's now move to Slide Telematics business provides a range of services for businesses with a fleet of connected vehicles. These services most often contain a telematics control unit, TCU, that enables collection of data from the vehicle. The TCU hardware revenue is not considered a distinct performance obligation under IFRS 15, and as such, the hardware revenue cannot be recognized at the moment we ship the hardware revenue. Instead, the revenue must be allocated over the expected service period. As a result, we must book deferred revenue instead of immediate revenue recognition. On the other side, we will recognize a contract, as asset instead of recording console sales. Both the deferred revenue as well as the contract assets will be released over 5 year period to the income statement. Let me now summarize the directional impact for telematics for the 2017 numbers. For telematics, we expect a small increase in revenues as releases from historic TCU sales will be higher than deferred TCU revenue in 2017. Net liabilities are expected to show a medium increase. Now moving on to Consumer. Consumer sometimes contributes to Marketing Development Funds and co op advertising of its customers to stimulate sales. Under the new accounting rules, such payments will be reduced from revenue, As this will lower both revenue and the OpEx, this will not impact the bottom line. This concludes our comments on IFRS 15. And we now continue on, some high level comments from IFRS 16 on Slide 9. The effects of IFRS 16 to total are relatively straightforward as the main impact is driven by these complex for buildings and cars. IFRS 16 will require almost all leases of companies to be on the balance sheet of the lessees. The current lease expense will be broken down in amortization or D and A expense and an interest expense. That can be seen on Slide 9. On Slide 10, we briefly explain the indicative impact for TomTom for the P and L and the balance sheet. For the P and L, the EBITDA is expected to show a medium positive impact as the lease expense will be classified as D And A And Interest. Operating lease expenses for 2016 were 1,000,000. The net result will show a small positive impact This is because the calculated interest costs in the earlier years of the contracts are higher versus the later years of subcontracts. On average, our lease contracts are in the later, in the latter stage of the contract period. The balance sheet is expected to show a large impact. This is due to the recognition of both a lease asset as well as a lease liability. Our off balance operating lease commitments at the end of 2016 were 1,000,000. The cash flow total cash flow is not impacted and remains unchanged there will be a reclassification between cash from operation and cash from financing activities, but again, the overall total cash flow is not impacted. To conclude, I would like to note that any forward looking statements, if applicable, will only be provided using IFRS 1516 accounting standards, linking into the changes to our planning and budgeting processes. Operator, I would now like to Please ensure the mute function We will now take our first question from Francoise from UBS. Please go ahead. Hi, thank you guys for taking my question. I have a couple, if I may. The first one is the given the shift that you have in your revenues within businesses, you target 15% CAGR for the non consumer businesses, does it change these targets, the, or is it still as same, given the accounting changes on the revenue side, given that it's non consumer. So even if it's small at the group of early move consumer, do you change it for the rest? The other question I had, it's from what I can understand, the timing of the contract are important in this IFRS 15. So it's very important to know where you kicked in the transformation phase where you incur more the cost in the early days with no revenues. So you may have some loss making contract in the beginning So I just wanted to confirm with that. And can you update us where are you in new order intake recognition? I mean, example, in 2017, did you recognize 2014, 2015, where are we in that? And the last one I had, it's on your capitalization of cost. Should we expect an increase of capitalization cost with this change? Thank you very much. Thanks, Francois. I will take two questions that you asked about CAGR. That's the first one. As I mentioned in my introduction remarks, this is a question about forward looking statements. Today's call is not about that. So we will, we'll start that question until, to come out with our quarterly results in February. The second question you asked about order recognition, as you may know, order intake is not a anything recognized on balance sheet on P and L, etcetera. So for that, that question would also, yes, I'll leave it with that. For the other two questions, I'm handing over to Derek. Yes, you asked whether contracts can be loss making at the start of the contract. If I rephrase your question, I would say that the IFRS 15 really needs to be determined on a contract by contract basis but potentially it could be that more costs need to be taken upfront. Your other question was, will there be an increase in CapEx I think there would be no increase in CapEx. It will either be flat or show a small decline. Okay. Thank you very much. That's clear. We will now take our next question from Mark Kesselink from ABN AMRO. Please go ahead. Yes, thanks. My make question actually hopefully no impact on the cash flows. So is that something that you will be, you will be talking about in the future given that this is the only part that didn't change because of the accounting standard? So obviously not asking for that number, but just effectively we'll talk about the free cash flows in your forward looking statements at a later stage. Mark, I'll take that question as well. Any question as I said about forward looking statements or planning, etcetera needs to be parked until 6th February. Thank you. Okay? And then the other part, just the fact that in general, you have will have lower deferred revenue, Is that something that in part, you obviously give a lot of attention to the legal part to explain that? Is that something that are you therefore a little bit happy with this change so that it becomes more clear that we, that you want because they will lower deferred revenue? Well, lower deferred revenue. If you look at telematics, the, the total amount of deferred revenue will increase if you go from the old accounting standard to the new accounting standard. So as telematics, we'll start to defer the TCUs, the hardware, so that they will have a significant effect on the absolute deferred revenue. Going forward, apples to apples, it is indeed so that you defer less But the one off effect again is that the deferred revenue position will materially grow once we go off to the new accounting center. But we'll therefore imply that the EPS number that you will that you, that you will report going forward that it is more of an through EPS number than it used to be in the previous reporting. Well, I, yeah, I don't know exactly what you mean we're true, but, as always, we will disclosed the deferred revenue position, and we tried to help our analysts and investors by, making clear what part of our revenue is deferred in each period. The only thing is that deferred revenue was mainly a topic for our consumer business and for automotive. And now, it will also be, significant for telematics as well. And that's, that's kind of new. But again, the telematics is, as you look at the size or at least linked to the size of the installed base. So you do fear for a period of 5 years, and as the installed base is still growing, but the growth is very stable. That means that the effect of, the new accounting rule is quite minimal because you every, period, you defer almost the same as you release that's quite a difference from Consumer, for example, where we have seen, in 2017 that there's a net release and a significant net lease, meaning, over 10,000,000 And also, for automotive, there's a significant increase also near more than 10,000,000 those effects are a lot bigger than what we see in telematics. We will now take our next question from Mark Swattenberg from ING. Please go ahead. Yeah, thank you for taking my questions. Tharko Bizra, I had bit of issues with the fastest of the slides and the delays there, but I'm going to probably ask a few questions to clarify what was going on on the slide. I think 2 or 3 The impact from IFRS, I think you showed first a slide where you saw the group impact. And I can't go back to that slide, but is it true that that slide says that the impact on gross profit and net result from IFRS 15 is medium positive on 2017. Is that correct? That's correct, yes. So indeed, what March says is on the deferred revenues, the part you divert will going forward be less than it used to be. So there's less revenues that need to be deferred over the automotive contracts, for instance. Is that correct? Well, if you restate 2017 according to new accounting, this is the effect A major positive? No, not a major positive, a medium positive. Yes, okay. Medium in your with $5,000,000 to $25,000,000 on the consensus EBIT, that's a major positive extra question. So that's how we should see it. But it is, it is, again, it is cash, it's completely cash neutral. No, fair enough that you're bringing the operational leverage forward. Yeah. Can you explain me what was the old situation and exactly in automotive in a contract? How much you deferred and what you now have to do for it. Can you explain it in a very simple words perhaps again, sorry for asking that? Yes, that is a bit of a difficult question as this depends really on a contract by contract basis. So on a contract by contract basis, we have looked at all contracts in 2017. And then for example, if there is a startup production of a contract, then you can take your revenues related to the customization efforts on that specific software immediately. And also the expenses on customization efforts needs to be taken immediately. Those kind of one off effects at the start of a contract can have a big effect on an annual before if some big contracts go live Dean. So you see, for example, you could potentially see less cost as these have been fully amortized start of production of a contract that went live in 2016. So then costs are not in 2017. So it's really on a contract by contract basis that we determined this and then the effect of 2017 is positive, medium positive for 2017. But to so if you have the start of a new contract and let's isolate 1 new contract, then you say, okay, dependent a bit on how it starts, but normally generalizing this, a new contract will be negative or positive in 1 year when it starts. Just to get a feel for new contract and mobile. And again, it depends on the contract and what kind of deal we have that specific situation. Some could potentially be negative at the start of production. Others could be positive. Okay. And is this one off from the from customization a big one in 2017? Because I need to have a bit of a proxy going forward. What will happen to ongoing contract when there's no new one? Well, it's difficult to say. I understand your question, but it's just very hard for us to give that answer because, every deal is different. And if there's customer specific work where we are remunerated for then indeed, whatever we agree upfront, that revenue is taken at the start of shipments, first shipment or started production, but also the related costs are taken directly. So that doesn't really mean that, that is highly profitable from that moment. So, whatever you need to do specific for that contract. So it seems that the new contract is normally more negative because you have the cost immediately and perhaps the revenues later. Still you have a big positive over 2017. That means apart from the new contracts, the old contracts are far more profitable or Am I wrong here? The thing is that there is no general rule in automotive. And so I can't give you that specific guidance. The what you need to take so if you have a contract the value, let's say, for an automotive contract is 10, the amount of, specific work we have to do for an OEM is always a fraction of that amount because most of the calls, most of the value we deliver to our customer our sun calls, it's software and it's content that is already available to all. There can be specific work And sometimes we are remunerating for that or sometimes the customer doesn't want to pay for that and say, it's part of the whole deal. And how should we deal with this going forward and in terms of modeling? Because now I have the feeling that we get some guidance on 2017, which has no relation whatsoever as a proxy for 'eighteen, 'nineteen, 'twenty, whatsoever. But how can we deal with that going forward? Because I'm a bit in the dark. What would be going forward the way of modeling this? Should I take 2017 as a proxy or not? Or Yes, for sure. Yes, 2017 is the new accounting standard and that is the new way of looking at things. And we hope to give as much clarity as possible that we can do and that's also in our liberty to do with, what we can tell about the customer specific arrangements. Should I take that there's a good proxy for 'eighteen? Or am I wrong? So that's the thing, yes? So we should also going forward have some tangible Mark, I don't really understand your question. Do you do you No, you're telling me that 2017 that everything is is contract specific. So going forward, everything contract specific. So what should I do for 'eighteen? Can the impact then all of a sudden be negative? So if I put in a big positive for 2017, do I have a big negative for 2018? Now I have no clue now. I think the other hand is all fine with that. Okay. For Automotive, there are 2 differences. Right? So you have, in general, the revenue recognition used to be units based. And so if you start producing, you have, you have royalty reporting, And you have several thousands of cars that come to market and you do the times of certain price and that is the revenue that you get from that customer. The new accounting rule will be more time based. So you look at the overall contract periods, and you make an estimate of how many cars will be shipped with your products and you spread that out over that period. So that can be flattened out. On the other hand, there's a specific treatment for customer specific work, nonrecurring engineering. In the past, we used to capitalize that work, And we took that, costs through our coastal sales, when we start to ship for that, car line or for that OEM. The new treatments that will be different than the customer specific work, will be taken at once at the start of production, but also the revenue related to that will be recognized directly. So those are the 2 main difference, big changes is that, one, the automotive contract will be valued. It's more similar to what we already do with enterprise. So the context that we have with the enterprise customers are more, won't be for usage. And that's also the approach more and more that we look at Automotive, but then we make an estimate of period 3, 4 or 5 years and say, well, we think we will ship, 1,000,000 maps over periods of 5 years. Let's spread that over that period times certain ASP. Okay. So on the first part where you say it's now time based. Actually, you're taking more of the revenues already forward. That's why you have less deferred revenues. Is that correct? Well, it is more, it's it is, yeah, but it is also yes, that's correct, but it's also you need to be, the normal trend was also that in the, in the final years of the contracts or the end of the contract there could be a difference here. So the curve the curve is going to change. Okay. I'll understand that. Then an then yeah. Oh, yeah. The the total amount of deferred revenues, can you give us the old number and what will be the impact versus the new accounting on 2017? Mark, that's a question for us, for 6th February. The old number is the number that we reported on the 31st December 2017 and that's more public information at this point. Right. Okay. And if we isolate your medium impact on an EPS level 2017. So just the accounting impact, what will be the positive impact on EPS? We can't do that now, Mark. No, but without giving, say, the Q4 is away, just simply accounting, is that possible or is it No, I don't want to go there. We will now take our next question from Andrew Gardiner from Barclays. Please go ahead. Good morning. Thanks for taking the question. Just had another sort of follow-up on the prior discussion. This distinction within auto of sort of unit versus time accounting, Under in terms of how these contracts are negotiated, are they generally a, sort of a a flat number for the life of the contract. And therefore, you can recognize it equally over time with sort of no risk in the out years of the contract or my understanding had been and perhaps this was incorrect that there was always an underlying unit assumption there anyway. So does is there the potential that if the automaker you're working with perhaps doesn't sell what they think they're going to sell or what you think they're going to sell. Is there a risk sort of in the latter stages of a contract that you may cause some sort of revenue recognition problems or cost recognition problems? Yes, yes, you're right, Andrew. So part of the RFQs is also a forecast that we received from the OEM of how many units they will ship. And that is also our the basis for us to, calculate the total value of the contract. And it often happens that, that changes, for the bad or for the good. And, Derek, maybe you can comment on that how we correct for that then. If, Alex, on a periodic basis, we need to assess whether our estimate of the total contract value is still accurate. If we see during the contract that the value will increase or decrease, we need to book a catch up, a cumulative catch up contract to date of that effect, that could have an impact on a quarterly result in a quarter. Okay. Understood. Thank you. And I you may not want to sort of comment on this, but I presume your view is that over time as the number of contracts grow and relative to where we are today sort of perhaps sort of earlier stages in the automotive business that over time, this all will will probably smooth out? Yes. Yes. Okay. Thank you very much. This will be effective indeed. Thanks, Andrew. And this was the last question for today's call. I want to remind everybody that there is a recording of the call as well as the slides of today's call. Those are available on our website If there are any further questions, you can reach out to our IR department. For now, I would like to thank you all very much and operator, you can close the call. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.