Good day, ladies and gentlemen. Welcome to the TomTom Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's prepared remarks. At which time, if you would like to ask a question, you may do so by pressing star one on your telephone. If at any time during the call you require audio assistance, please feel free to press star zero and the conference coordinator will be happy to assist you. Please note that this conference is being recorded. I would now like to turn the call over to your host for today's conference, Bruno Priuli, Investor Relations Officer. Please begin. Good day, ladies and gentlemen, and welcome to the TomTom Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.
We will be facilitating a question and answer session towards the end of today's prepared remarks. At which time, if you would like to ask a question, you may do so by pressing star one on your telephone. If at any time during the call you require audio assistance, please feel free to press star zero and a conference coordinator will be happy to assist you. Please note that this conference is being recorded. I will now turn the call over to your host for today's conference, Bruno Priuli. Please go ahead.
Thank you, operator. Good afternoon and welcome to our conference call, during which we will discuss our operational highlights and financial results for the third quarter 2017. With me today are Harold Goddijn, our CEO, and Taco Titulaer, TomTom's 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. With that, Harold, I would like to hand over to you.
That's great. Thank you, Bruno. Welcome, ladies and gentlemen, and thank you for joining us today. I will start with an update on our consumer sports business. We communicated earlier that we would initiate a strategic review for our sports business. That review is ongoing, but in the meantime, we have reduced our cost and are now in maintenance mode. Our customers, both existing and new ones, will continue to be served. We've just launched major updates to our mobile app and website that have been very well received. Our costs are now aligned and given a short period of adjustment, we will return to black numbers by the end of Q4. The review for assessing our longer-term options is in full swing, and we expect to give an update at our full year results or earlier if possible.
The PND business is cash generative, and we will continue to provide a valuable platform for consumer insight and location data. By the end of this year, our consumer business will represent less than half of total revenue and less than 30% of our gross profit. Our strategy is to build on our leading position in maps, applications, and services where location is important. Year-to-date, combined revenue of automotive licensing and telematics grew by 17% year-on-year. As you can see, our business is shifting towards higher growth margins, better predictability, and more upfront cash. I'll start with a more detailed view on telematics. The telematics business reached 785,000 subscribers by the end of the quarter, and that is a 17% increase year-on-year. In the quarter, telematics was recognized as Europe's largest provider of fleet management solutions by research firm Berg Insight.
This is the third year running that we have led the European market. Telematics launched an open beta version of the new Webfleet 2018 application suite, and that offers a fresh, modern user interface in our main fleet management solution. In the connected car services segment, we announced a contract with LeasePlan. This is an important partnership. We can bring value to large corporate fleet owners with what we think are short times for return on investment. I'll now move on to automotive. Automotive had a very strong Q3. Revenue growth was over 50% year-on-year and year-to-date, we deferred a net amount of EUR 36 million of automotive revenue. For the whole year, we are expecting a 40% revenue growth year-on-year. 2017 is an important year for automotive, and this will continue in 2018. We're seeing a lot of RFQs coming in.
In most RFQs, we are asked for global brand and car model agnostic offering. This means that we're seeing more requests for system sales, where we can provide a best-in-class product and services offering, where we integrate traffic, online map update services, and more. We'll give an update on our order intake for 2017 early February, when we publish our full year results. This concludes my part of the presentation. I'm now handing over to Taco.
Thank you, Harold. Let me make a couple of brief comments on the financials. In Q3, revenue totaled EUR 218 million. Automotive licensing telematics combined grew by 18% year-on-year. Automotive revenue was up by 51% to EUR 47 million. This increase was driven by a combination of higher take rates and more customers versus last year. Our expectations for the full year have gone up to 40% growth year-over-year for this business unit. Licensing revenue was flat year-on-year with EUR 34 million, and telematics revenue was up with 8% year-on-year to EUR 39 million. The recurring subscription revenue for the year increased 7% to EUR 32 million. Consumer revenue decreased 29% year-on-year to just south of EUR 100 million. The majority of revenue, roughly 80%, is PND related.
Sports represents approximately 10%, and so does automotive hardware, also 10% of consumer revenue. Gross margin was very strong in the quarter with 65%. This is an increase of 5 percentage points year-over-year, as we see the continued growth of our recurring data software and service businesses and a decrease of dependency on hardware products. We expect gross margin to be north of 62% for the year as a whole. Total operating expenses for the quarter was EUR 147 million. That's EUR 3 million higher compared with a year ago. If we exclude the one-off restructuring charge of EUR 12 million, the OpEx declined with EUR 9 million year-over-year. We expect this trend of lower marketing expenses to continue during the last quarter of the year. Our OpEx in the fourth quarter is expected to be down with roughly 10% year-over-year.
EBITDA decreased by 6% year-over-year to EUR 31 million and EBIT was a loss of EUR 6 million in the quarter. The net results adjusted for acquisition related expenses, restructuring charges, and gains on a post-tax basis was EUR 90 million, which translates in an adjusted earnings per share of EUR 0.08 on a fully diluted basis. This compares to EUR 12 million and an adjusted earnings per share of EUR 0.05 in Q3 last year. At the end of the quarter, we reported a net cash position of EUR 102 million. I continue on slide four, and to have a look on the automotive numbers. As shown in the last couple of quarters, this slide highlights the operational revenue of automotive. Operational revenue is the reported revenue plus the net change in the deferred revenue position.
As we sell products to automotive that include multi-year updates and our subscriptions, some of the revenue is deferred. Automotive operational revenue in the quarter amounted to EUR 55 million, an increase of 54% compared to last year. The total deferred revenue on our balance sheet is EUR 240 million. The main contributors are consumer and automotive. Consumer represents half of it, EUR 120 million, but is declining, and automotive represents EUR 94 million, and that represents a doubling since last year. In the year, so year-to-date, consumer released its deferred revenue position with EUR 30 million. On the other hand, automotive increased its deferred position year-to-date with over EUR 35 million. Consumer deferred revenue will continue to decrease while automotive will continue to grow, and that growth is even expected to be stronger in the quarters to come.
This effect will not be visible in the short term in the P&L, though best reflected in the balance sheet and the cash flow statements. The consequence of this change in nature of our business is that we're becoming more and more a software business. In Q3 2017, almost 65% of our revenue was derived from data software and services, which results in a more predictable income stream and provide higher gross margins. Let me conclude my comments on slide five. We're updating the guidance for the full year. Due to the continued headwinds in Consumer Sports, we now expect to deliver full year revenue of around EUR 900 million. The adjusted earnings per share of around EUR 0.25 remains unchanged. We now expect the levels of investment, CapEx and OpEx combined, to show only a marginal increase compared with 2016, and that is excluding acquisitions and restructuring charges.
Operator, we would now like to start with the Q&A session.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, that's star one to ask a question. We can now take our first question from Francois-Xavier Bouvignies from UBS. Please go ahead.
Hi, everyone. Thank you for taking my questions. The first one I had, it was on the consumer business and the sports revenue, sports division review. Can you narrow a bit the list of options you have after the third quarter? Is a sale still possible? Anything more around the work you've done in Q3, where you are now, and what could we expect at the end of Q4 when you update? The second one is kind of a housekeeping question, but on the automotive bookings, can you give a bit of sense of how the market is evolving? Still higher than last year for the markets, and your market share there, how is it going? Also your HD maps offering, any update on when we should see it in the bookings? The final one is on the telematics.
Just maybe if you look at Q3, you had a bit of a one-off, if I read correctly your release, positive. The underlying is still below what you reported in the last few years. Is it possible to update on the roadmap on these markets and should we expect an acceleration into next year or continuing low single-digit growth going forward? Thank you.
Okay. Thank you for that. Let's have a look at the sports business. We announced a strategic review. What we have done in the meantime is bring the cost down, and we're in maintenance mode now. That means that we are serving our customers and retailers, but we're not investing in new product, and we've cut our marketing expense right down. In the meantime, we continue to look at the options that are available to us. There's a lot of good assets in the business as well. We've been approached by a number of parties who've asked us to have a look at that business. That review is in full swing. I hope that by the full year results, we can give you further insight and further information and perhaps earlier, but we're not fully in control of that process.
Your second question was on automotive bookings. It's a potentially big year in automotive. There's a lot of business coming to the market, as I referred to in my opening remarks. We will give you an update how successful we've been when we do our full year numbers, as we said earlier. Last question.
Sorry, just to follow up on the automotive. On your market share position, do you feel that you are taking share or. The HD maps as well. I was just wondering if you saw any progress in the quarter or when we should see it coming through in your bookings.
I don't want to comment on market share before we give you an overview of the order intake. We feel good. We feel in a good position. That doesn't mean we're going to win everything, but the teams are confident. Those are binary decisions, so it's very difficult to say anything before it's been awarded or not been awarded. You need to forgive me that I can't elaborate more than what we've said so far. On HD maps, we see increased activities in terms of RFQs. There are now a number of RFQs coming to the market where we start seeing some meaningful volume, and that is for Level 3 automation. There's 5 levels of automation, and we start looking at Level 3, that is an uptick of where we were.
What we see from those RFQs is that car makers are planning to start shipping those cars in 2020, 2021. The sourcing procedures, techno specifications, commercial conditions, the discussions we have with potential customers for those products and technologies are intensifying.
On the pricing on these HD maps, as you see the volume coming through, how should we think versus traditional? I don't expect you to give me the exact price, of course, but can you give us a sense of the increase you have versus your traditional maps with HD maps at the moment with your contract?
Again, this is early days. I think the interesting thing that we are seeing is that quotes are asked for on a yearly basis. There is per year, per car subscription fee for the HD map service. That is increasingly the way that the market is going and where we are asked to respond for. In other words, give me a monthly or yearly fee per car for providing me an up-to-date HD map. That is different from what we're doing now. Everything is wrapped up in the total price that we charge when a car is coming from the line, as it's a one-off fee. You can understand why it's happening, and it's because of procurement systems, financial systems, and so on and so forth. For connected cars and HD maps, we see a trend towards a yearly subscription.
The amount that we're looking at now is significantly higher than what we are charging for standard definition maps. The volumes are significantly lower, and that's the way to look at it at the moment. Does that answer your question?
Yeah. That's great. The telematics one, just maybe it would be nice to have an update because it's true that the growth has been slowing down a bit. I was just wondering, is it fundamental basically, or should we expect a recovery at some point?
Well, it's a bit early to say. I think underlying growth in volume is still good. 70% is what we've seen so far this year. Top-line growth is behind that. There are a number of reasons for that. It's too early to say whether there are a number of one-offs, let's say, why ARPUs have come down slightly. Whether they will repeat themselves in 2018 and beyond is not clear yet. We need to wait until when we make predictions for 2018. I think the interesting thing is that next to our telematics business, we're starting to see income coming through from the connected car services. The announcement we made today with LeasePlan, there is a significant one in that respect.
We see a desire from car service providers like lease companies, to have data available from the vehicle so they can know their business better and can offer new services and new products to their customers and other potential stakeholders like insurance companies. That's an interesting development. We've been preparing ground for that from a product perspective and a technical perspective. We've been preparing the ground from a commercial perspective as well, and this is the first significant announcement we can make in that respect, and I expect more to follow. That will provide a new type of income, in the years to come for a different customer and a different application. The way to look at the financial implications, it's hard to model that now, but you're typically talking about much higher volumes for these type of deals at lower ARPUs.
The fact that you see more connected cars, do you see a risk of disintermediation in a way that the barriers to entry are a bit lower, so given your high market share, you could see some dilution of market share given the easy access to the data?
Well, no. The reason for that is, that the car service provider, like lease companies and insurance companies are by definition multi-brand, multi-model, and there is no way you can get a data set out of vehicles that you can compare and that you can aggregate and dice and slice. For the moment And when I say for the moment, for the next five years, and maybe even beyond that, I think it's very difficult. You will still need to do an awful lot of work to get the actual data out of the vehicle and out of the platform, and we don't see at this moment a trend towards disintermediation. It is an important question. You have two sides to this puzzle. How do you get the data? That's one thing.
The next question is how do you unify the data and how do you make products and services and information out of that data? That second bit, of course, will never go away. There will always be a requirement for data aggregation, standardization, and turning that into meaningful information. That is the core of what Telematics is doing.
That's great. Thank you very much.
You're welcome.
We can now take our next question from Andrew Gardiner from Barclays. Please go ahead.
Good afternoon, Harold. Good afternoon, Taco. I had a question about some of the incremental detail you've given us in the press release regarding CapEx. Clearly, you've been guiding for the full year, but now you've actually sort of broken down some of the different buckets there to help us understand where you're spending. Can you sort of help us think forward into 2018? Perhaps not quantify it specifically. I know you're not giving 2018 guidance today, but just in terms of the moving parts in CapEx, where you see increased need for investment, where we might be able to see a sort of greater leverage from the investment levels that you've had over the last couple of years. That would be helpful. Thank you.
If I may, I will take that question. What you will see, especially in the mapmaking platform, that will be the driver of future automation. The aim for our transactional platform is to reduce the level of manual touch and to improve the cycle time and the time to market of changes. The more you can automate, the better that is. I expect that the mapmaking platform investments will continue to be the highest of this list, and I don't expect that to come down in the short term. Map content can also be a factor of investment, but that is related to, we see the mix of customers is improving, is changing. We get new customers in mix.
It can also be that their footprint is different than the existing footprint that we serve, and that can lead to additional one-off investment in certain areas or certain layers of the maps. That is reflected in the map content. Over a longer term, I'm not specifically pointing to 2018, but in the longer term, I expect the bulk of the CapEx to be seen in the mapmaking platform.
Okay. Thank you, Taco. Just another one if I could. I was interested in some of the comments you were making, Harold, regarding the RFQs for level 3 systems. I'm just wondering if you can provide your perspective on how well prepared you think the industry at large is for that sort of shift towards increased autonomy. Not necessarily full autonomy, of course, but sort of the step up towards level 3. How ready do you think the OEMs or the tier 1s are for these systems? No question it's a very hot topic, but I'd be interested in sort of your perspective as to how the, to put it crudely, sort of the nuts and bolts all come together and sort of the readiness of the industry. Thank you.
Yeah, this is a hard question to answer. You understand that also if you talk about a timeline, 2020, 2021. We're trying to solve collectively very hard engineering challenges. Experience tells you that you cannot exactly predict by which time you have cracked it. The consensus is that by 2021, if I look at the roadmaps of different OEs, that by 2021, significant steps are going to be made towards higher levels of automation than what we're seeing today. It's there that the full spec of HD map comes to its full fruition. There are already derived functionalities that we are licensing today, at small scale, arguably, but we see that happening. The full spec and the full product potential will come to life in that timeframe that I just mentioned, 2021. Whether the industry will get there or not is a guess.
You will see some delays. You will see maybe some companies who are front-running that date. The overall ambition of most car makers is to make that step in all of their cars in 2021.
Okay. Thank you very much.
We can now take our next question from Maarten Denggriver from NIBC. Please go ahead.
Yes, good afternoon, gentlemen. Just a couple of follow-up questions on the automotive. When we talk about lane level traffic information, can you provide a bit more granularity on the markup in terms of pricing relative to normal traffic solutions? Not talking euros, but maybe some indication in terms of %. The second one is relating to the Mercedes-Benz contract. Two questions, actually. Was that order in before the acquisition by BMW or Daimler or not? The second one is, does it include also the more higher-end SUV types vehicles like the GLA, the GLC, the GLE, because I'm not really sure about that. The second question relates to the restructuring charge in sports. Is that all cash or is there also some non-cash element to that? The third question also relates to sports.
Hypothetically speaking, if you find no buyer for these activities and you still have to look for a different type of solution, and we'll look at it from today, how many months of revenue do you still have in the retail channel? Realistically, how long would it take for you to end supplier contracts that are necessary specifically for this category? Just to give us a sense of how long this activity could still possibly remain within TomTom. Thank you.
We're going to split the Thank you for the questions. I hope we wrote them down correctly.
I can repeat them
Taco to take on some of the other ones. Lane level traffic was your first question. Don't expect a revenue uptake from that. It is part of our core offering to stay competitive, have a game, is one of the ways how we capitalize on the enormous amount of probe data that we have. It will give us a competitive advantage, don't think about it. Think about it in terms of our overall position, number of cars connected, territories, and market share that you can cover, not in price per unit. I don't think that would be right.
Okay, got it.
It will strengthen our overall position. It's a bit of a future. It's not something that is really important, but we're working on it. It will happen over the next couple of years, especially when we have better position of the vehicles. Now it's in many cases, very hard to decide in what lane a car is in. We don't have that information, obviously that will change with self-driving cars. There we know exactly where those cars are. There's already use cases. For instance, in America, you have HOV lanes. They drive at a different speed than other lanes. There it makes sense to have that traffic information available, that's where we make it available first. It is an overall indication that we're progressing the quality and functionality of the product further than where we are.
I think the other exciting bit about traffic is the broader geographical footprint that we have now that is often, for OEMs who want to standardize or want traffic provider, the absolute amount of coverage you can offer is often an important factor in the decision whether to grant that contract to us or to someone else. On Daimler, I don't want to elaborate on that. It's a North American deal. It will go to A, C, B, and E-class vehicles for North America.
There's a big difference between those modules in volumes and the models that I mentioned. The SUV types are much higher volume than the standard models are. It makes a big difference if you have them or you don't have them.
Yeah. For the commercial, with the way we talk about the size of those deals is in the aggregate number. I don't want to talk about a specific contract, but we give you the aggregate number for order intake and the aggregate number, of course, for revenue, and I cannot possibly go any deeper than that. It's a significant contract, and it is important as well because it adds to our footprint in North America. We've seen over the years, consistent improvements of our North American database, both in Canada, USA, Mexico, and we're very happy with that. We come out tops in many independent tests for navigation. A lot has happened in addressing, in POIs. It's a very competitive product. We're shipping it now also with a lot of other leading North American car vendors. That's an important development overall.
We're happy that we could map that.
Yeah, if I may take the last questions. On the restructuring and also Consumer Sports specific, as I already mentioned, is that the revenue coming from sports in the quarter was roughly 10% of the overall Consumer contribution. That's one. The other thing that we said is that if you would make a sports specific P&L, then you will have something that is not profitable currently. We aim, and we have conviction that we can go back to black numbers before the year ends. Any prediction on how much revenue or how much product are still in the channel or on our books, et cetera, I don't want to go into those details. I can say about the EUR 15 million restructuring or EUR 15.4 million restructuring, roughly EUR 3.6 is in the cost of sales, and those are inventory provisions.
The remaining is in the OpEx line, of which a bit north of EUR 8 million is severance accruals. We also have some fixed assets, right of EUR 1.5 million, to mention one non-cash element, et cetera.
Thanks for the additional color.
Again, if you would like to ask a question today, please press star one. We take our next question from Marc Hesselink from ABN AMRO. Please go ahead.
Thank you. Firstly, could you talk about the automotive growth path going into the next years? I think your visibility for next year is already pretty good, also for the year after. We've seen the growth number being pushed higher than you initially thought. What are you seeing for the next 3 years? Is it going to accelerate further? Second question is on your OpEx going also into the next years. Do you have the feel now that you take your cost measures in sports, also looking consequently at the cost in consumer in general, that your OpEx in the next few years, that it will change significantly, either on the upside or on the downside? The final one, you mentioned on the LeasePlan contract that you expect more to follow.
Would it be in the same category, so also lease companies, or can it also be strictly talking broader than that?
Harold, if you can take the last question, I'll do the first question.
The last one is easy, Marc. Yes, we expect more leasing companies to come through. Also, there's potential for other types of businesses to come in on that platform. We see it as a very promising activity that we're doing. It's not the first time that we're here. We started exploring and developing, I think, 2 years ago. I think the market sees data as important and an important tool for driving business, developing products and services. The car industry doesn't want to be left behind. There's a big issue in standardizing the data, getting the data in the first place, do something meaningful with it. Leasing companies are very well positioned to do that because they can bring real scale into those programs.
They can really industrialize it, do that on a large scale, throw resources at it in a way that the return on investment is higher as well, because you do all those investments over a larger installed base. We are pretty excited about the whole thing.
It is not the time to talk about 2018, but that probably doesn't satisfy your question. Let me give you two trends how we see 2018 is that, one is, I don't think we can repeat the 40% growth rate that we saw in 2017. Yes, growth, but not at 40% level. For the net addition, the ballpark number that you need to work with for the net addition of deferred revenue automotive is roughly EUR 50 million this year. I expect the net addition to deferred revenue next year to be even bigger than that. On the OpEx, our business model is changing and we defer it, cash will become a more important indicator of progress than it was before, also because of the IFRS accounting, where a lot of revenue is not seen yet.
The OpEx number for next year is, there will indeed be some relief coming from consumer. On the other hand, is also related to commitments that we have made in the automotive industry, either in CapEx or direct commitments, CapEx in previous year that we now find back in amortization. Overall, OpEx going up next year, not very likely. With that, I want to defer this question to February.
Can I have one follow-up on the deferred revenue part? Maybe that's too simplified, but if I do a calculation as to EUR 35 million, you're adding to that at something like 90% gross margin. Do a tax over that. That would add some EUR 0.10 to the EPS if you would be able to put it into P&L to correctly. Is that correct, or?
That is correct, yes.
Okay, thanks.
We can now take our next question from Marc Zwartsenburg from ING. Please go ahead.
Yeah, thank you. Couple of questions. To start with the sports category, can you give us, Harold, an idea of the loss that you roughly are going to make in 2017, just to get a feel for the swing, since you mentioned that you're going to be writing black figures as of Q4, to get a sense for the swing for next year? That's my first question.
No, I really can't do that, unfortunately. We haven't disclosed that number. We lost money, yes. We stopped the bleeding. By the end of the year, it's black numbers, then try to put it to history as soon as we can.
No, that's also what I'm trying to do because we already decided that we're going to phase it out and take another decision on it. Going forward, it is then important for us to know what roughly the loss and the bleeding has been, because then we can also properly adjust our models going forward. I think that's a big positive, stopping the bleeding.
Yes.
That's why I want to get a bit of feeling. This is a public call. The disclosure issue should not be a problem.
Yeah, no, I get that. I would like to wrap it all up. There's a lot of moving parts. I would like to wrap it all up in February 2018 when we give you information how to look at 2018 and how the different things are moving together and in combination. I don't want to give a number you add then to the net profit for 2018. I don't think that's right. There's more going on. I'm not sure we would really help you understanding how that exactly works. I would prefer, given that uncertainty, the flux we're going through, to give you the number in February 2018, so you have what you need for that moment.
Well, I'll completely, because I see quite conflicting stuff in the market on this. To be fair, what is difficult then to understand if we say there's a loss and we write black figures, that we just have this delta next year. Is there anything else that I'm overlooking then that should be taken into account?
Well, if I can add to that, there are other trends as well, right? Consumer in itself is not only sports. As we have reported the half year numbers, that it is more or less break even consumer as such.
Yeah.
If you then work out what sports is not contributing, that you would add the rest to PNDs and automotive hardware.
Yeah.
The latter two categories will decline in 2018 as well, right?
Yeah, that's my second question.
Yeah. Harold kind of expected you to have that second question, a follow-up question, and then we go into a much more disclosure than we already have done before. We don't want to do that.
Okay. Yeah. Maybe on PNDs. Can you give us any indication of the declines in PNDs currently in Q3 and how that compares to the previous quarters?
Well, I can tell you what we see in the market is that the decline is roughly 25%, and that is on the standard PND. It's not specialized products for caravans and motorcycles and larger screens. The classic PND is declined with 25%.
Right.
Our market share is fairly stable to up. Sometimes means that, the ASPs are fairly stable as well. Over longer periods, you can expect our decline also to be 25%, if the prices are stable and the market share is stable. Per quarter, that can change because sometimes we sell a bit more into the channel, or sometimes we sell a little bit less in the channel. The PND transitions are going according to plan.
Is the trend rather stable in terms of decline, or is it accelerating a bit?
No, it is right on stable. It's what I said. It is 25% in Q3, and it was also what we've seen year to date, so also in Q2 and Q1.
Okay. For next year, on the PND business, do you expect that you can still manage out costs quickly enough to keep up with the revenue decline or will you eat in a bit on the margin? Can you give us an indication on that?
That is the plan, yes.
Manage out the cost in line with the top line, because that would still
Yeah
Imply quite a significant cost reduction in the P&L business.
Yeah.
That's manageable.
We plan to do that.
Okay.
We can do that also from people perspective. We have a lot of flexibility in allocating people and employees to different parts of the business. There's a lot of growth in other areas. By making that easy, we have also more options to keep everything aligned. We're pretty confident that the consumer business will contribute a significant amount of cash next year.
On the OpEx line, can you give us an indication what we should expect in terms of cost increases in the automotive business? What kind of investments you need on the OpEx line there?
Well, there's not a huge amount for ongoing contracts. For contracts, there is a variable part that we call NREs, non-recurring engineering charges. That is all manageable. Some customers have asked us to expand coverage in certain areas where our map is under development, we're doing that. I think the biggest investments and adjustments, both in engineering, is probably going to come from the HD map. The HD map, there's a lot of work going on in optimizing the processes. Our goal is to have a fully automated process for creating HD maps. We think we can get there. There's quite some manual work at the moment. If we can do this fully automated, then it becomes a much more manageable and industrial process. We need to spend some money in getting there over the next few years, and it's mostly software engineering charges.
Otherwise, there's no big swings from where we are today other than that the map is continued to increase in quality. We're doing that. We are kind of in control over that OPEX expenditure. We don't need to do big things in order to win the next deal or something like that. That's not how we look at the business.
If you pencil in, say, mid-single-digit growth for your automotive OPEX, then that will be okay.
I beg your pardon?
If you put in, say, a single-digit increase in your OPEX for automotive, that will be already okay.
Oh, we don't want to go there.
I don't know.
Let's bundle all the 2018 questions and let's re-ask them in February.
It's now budgeting time, I thought.
Yeah. We're looking at exactly the same spreadsheet as you are.
Yeah, exactly. That's why I'm asking.
The other thing is, we don't have it yet.
Okay, I'll send over mine then later today.
Yeah. Maybe we can compare.
Okay, that is done. Then a final one, on the RFQs, Harold, it sounded a bit like that the bigger volume RFQs are still coming in in Q4 and going forward. Is that correct, that so far it's been more the small stuff and that the really bigger ones are now coming in? Is that how I should take your remarks?
Well, I'm a bit careful here because what we have seen is some delay from original planning from the automotive customers. You never know how long that is. The plan was to have more clarity by Q3. That is kind of pushed out to Q4. Whether they will happen in Q4 or in 2018, we can also not say that with the absolute level of certainty. There is a fair amount of flux in the timelines of the customers, of the OEs.
It's correct to say that in the first half or first three quarters, it was quite small and that everything comes together in Q4 or Q1 next year, and that the RFQs in terms of amount, like you referred to previously, is still high, and that's why you're convinced about it?
As I said, let's wait. We are not creating chaos. We wait until February 2018, give it a number, and we give you as much color around the number as we possibly can.
Okay. You sounded quite convinced. I thought that maybe there's already some in the bag, and it sound quite promising. That's how I took your remarks.
Okay. Thank you.
All right. Well, thank you very much.
We can now take our next question from Francois Meunier in New York from Morgan Stanley. Please go ahead.
Hello, gentlemen. It's been a while I've not been on your call. Hopefully, I will ask interesting questions. The PND market, of course, is not doing so well this year again. What is the scale of TomTom in the U.S. or North America today and probably in 2018? Is it worth keeping investing in that market, or is it better to shut it down? Just retract from that particular market and just concentrate on maybe Europe, just to save a bit of money. That's a question. As an owner of the company, Harold, what do you think would make sense of maybe spinning off completely the PND business, just so that maybe it's a bit clearer, like in terms of cost, what is allocated to the maps and what's allocated to the hardware?
If someone comes around and wants to make a bid on one of the other business, that would be quite easy. The third question is not about 2018 budget. It's really about the Level 3 maps you were talking about before. If I look on the internet, the new Audi A8 is already Level 3. I'm a bit confused that you're saying there is not a new type of RFQ coming up for 2021, 2022, while there is already a Level 3 car on the market. Also, I understand you like to talk about the price of those maps per car, but to some extent, is it better to look at it as kind of an overall price? Basically, if you have prices today, you have units times ASPs, it's maybe, I don't know, EUR 20 million or something.
When it moves to HD, you have a much higher price per map, but because the units are very low, then maybe it's also EUR 20 million. If you could elaborate on that when you discuss with OEMs, how they work, how do you charge? Is it really per car, or is it more like a software type of deal? Thank you.
Yeah. Okay, telematics first. Telematics is mostly a European play. Let's be clear. I think it's about 90% of the revenue telematics generates in Europe. We have a presence in North America. It is not very big, but it's grown quite nicely. It's not costing us anything. It just keeps us in the game there. I don't see any benefit of closing that. We stay close to the market, understand the developments. You never know. I don't think it's distracting management from what they need to do in their core markets. I'm quite happy with what's going on there. I think for your other question, do you want to spin it off or not? It's an interesting question. What we
Sorry, the question was for PND, I think, not telematics.
PND? Yeah, right.
For PNDs, yes. It's interesting as well, I just let you talk.
Yeah. Okay. It's a wrong answer, but it's an interesting answer. Sorry, I didn't get that. I thought you were referring to the telematics market.
No, it's okay.
Yeah. Okay. For PNDs, it's slightly different. PND is quite a complex business to sell. We would need to accept a discount if we want to sell that. I don't think that's the right thing. It would be a huge distraction. I think it's better to run it as we're running it, and I think we, at the moment, are the best owner of the asset. It will decline, and we need to review what's going on there. I'm confident this is the right thing for us to do, own the PND business. I really believe we're the right owner. There are some intangible benefits as well, staying close to end users, understand their preferences. It's important. Next question, Level 3 maps. Yeah, Level 3 maps. Audi is claiming to be a Level 3 car. I don't know whether that's true or not.
What we internally define as Level 3 is probably a higher level of automation than what Audi is providing today. I don't know the details of what an Audi car can do and what it cannot do. What I do know is that HD maps are coming into play with those higher degrees of automation. The request for those type of maps, for these type of applications, we see volume coming through according to the RFQs in 2020 and 2021.
Okay. What about the pricing? Is it really per car, or is it more like a kind of a license fee, like a software?
It will be a service fee per car per year. I think that's the most likely outcome.
Okay. In terms of units times ASPs, because it's fewer units, higher price, is it the kind of same size of contract, quote-unquote?
Well, initially, the units will be lower, but the take rate will be much higher, right? If you have a certain brand and model that will go with Level 3 or Level 4 eventually, the take rate will be close to 100% for that model. Also, when the car makers are asking for a quotation, they give a much broader, wider range of volumes than you would typically see in normal cars. That's also an indication that they don't exactly know how many of those cars will be sold, the price. There's still quite a bit of work going on to narrow that down. Lack of experience means also that the projections have a wider range than what you typically see in more established car markets, where they're quite accurate in their planning and projections.
Okay. Good luck for those negotiations.
Thank you.
Okay.
We can now take our next question from François-Xavier Bouvignies from UBS. Please go ahead.
Thank you. Just a last one because we didn't talk about licensing. Just wanted to have a quick word on this licensing, especially given what you saw in Q2. You talked about Microsoft and Baidu. You seem very excited about these opportunities. Can you give us maybe an idea on when Baidu, for example, will come through in your P&L in licensing, and Microsoft as well? Maybe the outlook for licensing would be great given the trend that we're seeing. Thank you.
Yeah. In the quarter, we've seen some negative impact from the exchange rate. You've seen that. A large proportion of our licensing income is dollar denominated. With Microsoft, we're going into execution fairly quickly. I expect to be live with APIs that are licensed through the Azure platform in Q4. There will be hardly any volume in Q4, but at least the product will be available as of then. That's my expectation. From there, we need to grow that business. That's typically a business where it's quite expensive to acquire customers, but once you have them, they tend to use the service more and for quite a long period of time. We'll need to see how that develops. Generally speaking, we're excited about those products.
We think we can reach a reasonably large audience at low cost with a high-quality service, especially if you look at some of our APIs are world-class in the areas of routing and traffic. Also, the other APIs for geocoding have matured really, really nicely in the last few years. That partnership with Microsoft is developing nicely. We're excited about the prospect of bringing it live. Baidu is a different story. That is a technology share. The initial income in the first three years will be very small. It's more a remuneration for engineering efforts and what have you. The potential income is generated when we start licensing maps, or Baidu starts licensing HD maps for China. It's important for us that we have this deal because we will be able to offer a unified product across multiple continents, especially for China, that's fairly unique.
Software developers who are working on self-driving cars will have access to HD maps of a uniform spec and uniform quality. That will help us to both win in North America, Europe, but also in China. Don't expect big revenue coming through in the next two to three years.
Okay, thank you.
We can now take our next question from Shyam Kumar from Kepler Cheuvreux. Please go ahead.
Hi, Harold. Just three quick questions. Just to belabor the point, just on sports, I get the point it's going to be breakeven or back in the black here Q4 this year. I guess if volumes take a step down next year, is there room in the cost to kind of make sure that we stay in the black or at least in breakeven? That's question one. Just on Telematics, maybe you could finish the thought you were saying in response to Francois's question on scope to dispose that possibly, and also just in terms of the ARPU fall, just to understand the dynamic there between lower roaming charges, net hardware, and the mix effects in terms of the connected car.
Yeah. The answer to your first question, will you stay in the black or at least breakeven if you continue to sell sports watches next year? The answer to that question is yes, we will.
Okay, good.
Don't expect ongoing losses in that part of the business in 2018 going forward. Yeah, telematics is an interesting one. We're kind of on the crossroads here, we see wider implications for the complete product portfolio that we're doing. Telematics itself was quite a, and is quite a specific service. It's aimed at fleet managers who own 5 to 2,000 cars, something in that range, and you have to operate the fleet effectively. We're now shifting more towards, or a part of the business, an additional part of the business is directed to connected car. Connected car has wider implications.
We have some initial traction in that marketplace. It will be great if we can find out a good way to broaden the overall product portfolio, where we can address the needs of car makers, car service providers in a broader sense with the broader and richer product portfolio. I see opportunities for synergy in that space coming our way.
Okay. When you say opportunity, do you mean what in terms of developing your own product portfolio or merging your business with someone else's?
No, I see enriching our own product portfolio for navigation and location-based services with connected car services.
Okay, fine. Then just that point in terms of the ARPU.
Yeah, the ARPU for those type of services is low, lower than what you're used to from us in telematic services. Significantly lower, the volumes are significantly higher. That's the way to look at it.
Okay. I guess just in terms of the lower ARPU rates you guys are seeing at the moment year-on-year, how much of that is due to less hardware in the mix, less roaming charges coming down versus the mix shift towards connected car?
Yeah, we've seen two events, one-off events. Well, one one-off event, that is the abolition of roaming charges, we've had an effect on our pricing, because part of the pricing was country or roaming dependent. We couldn't do that anymore, and we didn't want that anymore, and as a result, the overall ARPU has come down. I don't know exactly the effect of that, it's something between EUR 0.25-EUR 0.50 per month per car.
Okay.
Something around along those lines. There is one effect. The second effect is that we see less hardware sales because increasingly hardware is becoming a part of the subscription fee.
Okay.
That has a quite significant effect on the top line.
Okay.
Bigger effect on the top line, not so much, of course, on the subscription part or the recurring part.
Okay. That's all from me for now. Thank you.
Thank you very much.
As we have no further questions, I would like to-
Sorry, there are no further questions on the line, so I'd now like to turn the call back to the host for any additional closing remarks.
Thank you, operator. I would like to thank you all for joining us this afternoon. If you have any follow-up questions at a later time, please don't hesitate to give us a call. Thank you all very much. Operator, you can close the call, please.
Thank you. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.