Good day, welcome to the second quarter 2017 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bisera. Please go ahead.
Thank you, operator. Good afternoon, welcome to our conference call, during which we will discuss key highlights and financial results for the second quarter. With me today are Harold Goddijn, our CEO, and Taco Titulaer, our CFO. You can listen to the call on our website, a recording of the call will be made available afterwards. As usually, I would like to point out that safe harbor applies. We will start today with Harold. He will discuss key highlights of the quarter, that will be followed by a more detailed look at the financial results from Taco. After that, we will take your questions. With that, Harold, I would like to hand over to you.
Thank you, Bisera, welcome. Our strategy is to build on our leading position in navigation technologies and to provide location, content, software, and services to business customers. We are developing a growing high margin and recurring revenue stream. Combined automotive licensing and telematics revenue grew this quarter by 18% year-on-year, which was ahead of our expectation. We continue to strengthen our network of customers and partners to support our position in autonomous driving and smart mobility. We have seen lower-than-planned hardware revenue this quarter, that is mostly because of disappointing sports sales. The wearables market has fallen short of expectations, because of this, because we want to focus on our automotive licensing and telematics businesses, we are reviewing strategic options for our sports business. This resulted in a non-cash impairment charge of EUR 169 million in this quarter.
Today, we announced that we aim to launch a share buyback program of up to EUR 50 million, that is equal to around 2.5% of the total issued share capital. This program reflects our confidence in our strategy and the future of TomTom. I'm very pleased to announce that we will propose to appoint Bernd Leukert to our supervisory board. Bernd is a member of the executive board of SAP, also a member of the supervisory board of the German Research Center for Artificial Intelligence. He has an impressive track record in software and product development, we're delighted that he is committing to our company. 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, starting with the impairment. The underperformance in sports resulted in a non-cash impairment charge of EUR 169 million in the quarter. There is no goodwill related to consumer left. The remaining goodwill on our balance sheet is EUR 255 million, of which EUR 192 million is related to automotive and licensing, and EUR 63 million is related to telematics. Let me now discuss the business unit and the rest of the P&L. The Q2 revenue was EUR 253 million. That is 4% lower compared to last year. Automotive licensing and telematics combined grew by 18% year-on-year. That is ahead of our expectations. Automotive was up 39% to EUR 48 million.
The increase was driven by the ramp-up of a new contract that went live last year. It was also driven by the success of our customers at the end market. Licensing revenue grew with 16% year-on-year to EUR 39 million. The year-on-year increase included the catch-up that was recorded in the second quarter of this year. Telematics revenue was flat year-over-year, EUR 14 million. Recurring subscription revenue saw an increase of 7%. Consumer saw a decrease of 20% year-over-year to reach EUR 126 million. Consumer products declined by 18%. Automotive hardware revenue declined with 31%. If you look at the gross result, gross result increased by 11%. Gross margin was strong at 63% and increased by eight percentage points year-on-year.
For the second part of this year, we expect gross margin to remain at the same level as what we saw in the first half. Our revenue, though, will be lower year-over-year. With the same gross margin, this will result in a lower gross result in our second half of the year. The operating expenses for the quarter were EUR 151 million. That is EUR 18 million higher compared with a year ago. Last year, however, included the one-off gain from a pending custom case. Excluding this one-off gain, operating expense for the quarter increased by 8%, mainly driven by higher expenses on our long-term employee incentive plan and higher amortization expenses. For the second half of the year, we expect the OPEX to be lower than in H1 and also lower than H2 last year. The biggest contributor to this decline is marketing.
EBITDA grew by 4% year-over-year to EUR 45 million. EBIT was EUR 9 million, excluding the impairment charge versus EUR 13 million last year. The net result, adjusted for acquisition-related expenses, impairments, and gains on a post-tax basis, was EUR 21 million, which translates to an adjusted earnings per share of EUR 0.09 on a fully diluted basis. This compares with EUR 23 million and an adjusted earning per share of EUR 0.10 in Q2 last year. At the end of the quarter, we reported a net cash position of EUR 82 million. We expect to generate cash in the second half of the year, even assuming the EUR 50 million share repurchase. Now let me go to slide four. As shown in the previous quarter, this slide is showing 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/or subscriptions, some of the revenue is deferred. Operational revenue in the quarter amounted to EUR 60 million, an increase of 43% compared to last year. The total deferred revenue on our balance sheet is EUR 220 million, and the main contributors are consumer, which is slowly declining and is now at EUR 125 million. You have automotive at EUR 86 million, and that position has doubled since last year. We expect automotive to continue to grow strongly also in the second half of the year. Slide five, the full year outlook. To conclude, I would like to give you an update on our outlook for 2017. As mentioned before, hardware revenues were lower than planned because of disappointing sports sales. As a result, we updated our revenue outlook. We now expect to deliver full year revenue around EUR 925 million.
Adjusted earnings per share of around EUR 0.25 remains unchanged. We expect the combined revenue of the automotive licensing and telematics business to grow to around 15% year-on-year compared to in 2017. We expect a level of investments that is both CapEx and OpEx to show a modest increase compared with 2016. This excludes acquisitions. Operator, we would now like to start with the Q&A session.
Thank you. If you wish to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from François Bourgès from UBS. Please go ahead. Your line is open.
Hello. Thank you for taking my question. I have a couple, if I may. The first one is on your OpEx trend, given what you announce on the sports revenue, and you expect the OpEx declining year-over-year in H2. How should we think about beyond 2017? Is it changing your plan of OpEx development, obviously, for the longer years? If I remember correctly, last quarter you said that the OpEx will be growing in the next few years, but nowhere near the 15% CAGR for the non-consumer business. I just wanted to have an update on this, given what you said on the sports. The second one is on the automotive market. How should we think about the reference for growth for this year for the overall market?
In the next two quarters, last two quarters, Q4 and Q1, you said that the overall size of the market would be higher than 2016. Just to have an update on this. Nothing related to your bookings, as I imagine you don't want to comment on that. I have a last one, if I may, just after that.
Yeah. Do you want to ask that last question as well, or?
Yeah. I can. The last one is on your HD maps discussion, as it's now in the market available. I just wanted to have a sense of when do you think you can start having them in your bookings, or anything about the pricing discussion with your customers. Any color around that would be very helpful.
Okay. I suggest I take the first question and then leave the comments about the order intake and the HD maps to Harold. OPEX. Indeed, OPEX was up with 11% in the first half. We expect OPEX to come down in the second half to be modestly up for the full year. The main driver of the decline that we expect in H2 is marketing. We spent EUR 80 million of marketing in 2016. We think that that number is going to be around EUR 60 million in 2017. We need to look at strategic options, as we said in our press release, for what we want to do with the sports business. With that, it is way too early to make any comment or give any color on the OPEX development beyond this year.
The order book for automotive, we won't discuss the order book, as you rightly said, this call. It's also true that the available business in the year as a whole is bigger than it was in 2016. That doesn't say anything about our win rate or where we are, but there are more contracts to be won or lost in 2017 than in 2016. If I look at HD Map, and the discussions there, it's still early days. I think noticeable developments are that Baidu will use our map-making platform for the creation of HD Map. That is important, because that gives a unified maps product, to software developers that can be applied for cars both in the Western world and in China. I think that is good news for software developers, that they have one standard that they can work towards.
We're also pleased that it is a good acknowledgement by Baidu about the state of our platform and tools for HD driving, for self-driving. Is the market developing? RFQs are coming our way for HD Map, not necessarily for Level 5 self-driving applications. Increasingly for Level 2 and Level 3 self-driving, autonomous driving, or assisted driving application. The applications that software developers and our customers are looking for are lane level guidance, but also more sophisticated adaptive cruise control, and other safety features that are based on our HD Map, including some applications for motor management, where fuel savings can be achieved by having a better understanding of the road ahead and shifting the gearbox and the power of the engine, in anticipation of what's going to happen. There is an expectation that that can reduce fuel consumption.
There is quite a range of applications developing ahead of Level 5 self-driving, which is good. We are quoting for those businesses and trying to win those businesses. We start to see the emergence of a market for highly detailed maps. I don't want to say anything about pricing. I think that's too early. We do see some applications being developed for these type of products.
When you say it's too early, does it mean that maybe you don't expect to sign any contract with HD Map in 2017, or? Just trying to understand what you mean by that.
The full specification of HD Map is designed to make self-driving at Level 5 a technical possibility. That we don't see happening before 2020, 2021. We do see a market for these type of products and derived products emerging, for applications that are going to happen earlier. For those businesses, we are quoting, and we hope to win some business as well. That will help to establish that product category, and we can develop it from there on.
Okay, great. Thank you.
We will now take our next question from Marc Hesselink from ABN AMRO. Please go ahead.
Yeah, thank you. My first one is also a follow-up on the available business in automotive. Far, I understand you cannot give an exact success rate, what do you think? You're taking your share fair of the market. Are you winning share? Is it too early to tell on that one?
No, I think it's too early to tell, but what I can tell you is that we feel good about our product portfolio and the state of our technology. We can see that we're motoring in that space, and on the application side, definitely there is a bit of a, I think we look strong there, given recent announcements of products and what have you. I think on that, especially on the application side, we're looking strong. We have confidence that we will further progress our standing in the automotive world, and continue to grow that business. I can't say much more at this stage. Other than that, we feel good about where we are with our product portfolio.
Okay, that's clear. The second question is more on general on the space, like the ecosystem on autonomous driving. Obviously, you're announcing quite some partnerships. Your competitor HERE has been announcing a lot of partnerships. How do you see this market evolving now? Is it going to be like a two-player kind of market? Or a winner-takes-all kind of market What is your view on that one? Who will be the driver of this ecosystem? Will be the software players or the car companies? What is your updated view on that one?
Well, I think the car industry is still coming to terms with the challenges ahead of them. We see all sorts of developments, partnerships happening. We see a great level of excitement. It's a hot space now, the car tech space in general. As usual, it's far too early to declare who's going to win, what the structure of the industry is going to be. I don't think it will be a one winner takes all market. There are still different opinions about the technologies that need to be applied. Fundamental architecture of that software and how that all is going to work. There's still a lot to fight for, and a lot to be explored and decided. It's too early. What we see is a couple of general trends, so software developers believe that maps will be inevitable.
You need one, otherwise it's getting too complex to keep those cars safe. I think that's a big lesson that we've learned in the last two years. There is progress about what a self-driving car can do. It's also true that we haven't cracked the problem completely. There's still a lot to be invested and to go for in this space. That's true for everybody who is exposed to this market.
Okay, clear. The final question is on Baidu. You mentioned, I think in the press release when you announced the Baidu's contract, that there will not be extra costs related to it. Baidu is going to use your platform, and I think you're going to use their knowledge on artificial intelligence. How does it work? Is this purely an R&D, working together that you both take your part, the share of the cost? Or is also revenues in there because they're using your platform?
No. We are providing enabling technology to create HD maps, so databases and database structures and technologies and tools. Baidu will populate the databases through bringing camera observations in and doing editing on the database. We can generate a license fee when HD maps are sold in China to certain customers. It's a fairly well-defined partnership. It's not going to generate massive amounts of money in the short term. I think the important message we're giving here is that there is a product that you can use both in Europe and in North America and in China. TomTom is setting the specification standard for that product. I think that's the core message that we want to get across to our partners in the car industry.
Okay. Thank you.
We will now take our next question from Andrew Humphrey from Morgan Stanley. Please go ahead.
Hi. Thanks for taking my questions. I've got a few, if I may. The first is on the consumer business. Clearly it's too early to kind of talk in detail about what your strategic options might be, but I think in the past, you've indicated that part of the reason for keeping a U.S. PND business alive was to provide some shared overhead, for what you viewed as an opportunity on the consumer side. Does that change in the light of today's announcement? My second question is on telematics. I think last November you talked about opportunities in the leasing space with replacement vehicles or insurance fleets. Any more color on that would be great. My third question is around the Bosch agreement.
I'd like to ask how the localization technology you're looking to develop with Bosch compares to your own technology in that department and what you previewed last November. Finally on the buyback. Clearly we are certainly in the early innings of an arms race in terms of developing technology around autonomous driving and mapping, which has the possibility of requiring multiple years of spending. Any color on how that plays into your thinking with regards to the buyback would be great. Thank you.
We said on the sports side that we are evaluating strategic options. We're not doing that on the PND side. PND side is different. It's very much aligned with our technologies. It's cash generative. We have a strong position there. We're generating cash from that product category, and I think that TomTom is by far the best owner of that asset going forward. Nothing is changing there. We have to face the reality that PND remains a declining product category, and that's fine. We can live with that. Telematics leasing, connected car. You can, broadly speaking, separate telematics product portfolio in 2 different product categories. 1 category for fleet management, where you sell your products to a business that's operating a fleet. The other category is connected car services, where you sell your products and services to OEMs, dealers, leasing companies.
That last category is new. We see good potential there. We have signed a couple of deals there that have great potential. Volumes are high, but ASPs or ARPUs are much more competitive. It's high volume, low price. We started to ship in that category, and that needs to ramp up. It needs to take some time to embed it and get the operations right and what have you. The first results are there, and the first contributions to the top line from that connected car business are starting to come through in the P&L. It will take some time before it starts to become a material income stream. Lastly, the Bosch agreement is about Sorry, there's 2 more questions. 1 is about a Bosch agreement, and Bosch have developed a radar technology that is an advancement, an innovative radar technology for self-driving.
What we are doing together with Bosch is creating, let's say, a fingerprint of the road of that radar image that we align with our HD Map, where the HD Map is the ground truth. By having that radar overlay over the HD Map, the radar in the car can accurately help the positioning of the car, where it is, and the directions traveled, and so on and so forth. We are helping Bosch to get that product aligned and created. The availability of that product will help Bosch also to sell it in the automotive industry, both as a sensor and a methodology for positioning. Lastly, autonomous driving, the HD Map itself, how is it going? How much money do you think you need for that, if I understand your question correctly?
We've always said that it's difficult to create that HD Map, but it's different than a standard map. Most of it, we are working hard to develop the technologies that can help us to create that map to a large degree of automation. That's where R&D and research is coming in through a combination of computer vision and artificial intelligence. We think we can achieve a very high degree of automation for the creation of that HD Map. It's really a technology innovation game rather than a brute force game.
Okay.
We feel good about the progress we're making there.
Okay. Maybe just to follow up on that then, I think that's something you've touched on in the past in mapping. I guess, when you're signing agreements today, particularly on the automotive side, are you able to incorporate elements of those agreements that allow you to start harvesting that data around the HD Map more efficiently? Are you waiting on cheaper LIDAR, newer technologies to become available before you can start doing that in earnest?
No, there is a kind of a marketplace starting to emerge, driven by the desire of car makers to license the data, do something meaningful with the data they collect from vehicles. That's one development. There are also active negotiations going on of building a closed loop technology that will find its way into production vehicles. A bit too early to comment on that, but we see that as an essential part of the equation, where you have a large fleet of relatively cheap sensors collecting, processing data, and validating databases that have already been published and constructed. We see that as an integral part of the challenge.
Okay. That's very helpful. Thank you.
We will now take our next question from Henk Slotboom from The IDEA!. Please go ahead.
Good afternoon. Thanks for taking my question. I'm not the expert on TomTom. He's walking the Vierdaagse with his TomTom watch. The question I had relates to the impairment. Could you shed some background information on the timing of an impairment? Normally, we tend to see these kinds of impairments at the end of a fiscal year, and this comes somewhere during the half year. Could you please tell me, provide some color on that?
Yeah, sure. Indeed, you do that annually, but you do it also if there's a triggering event. We started with our sports business in 2011, and since then, we have seen growth year-over-year to reach over EUR 100 million at the end of 2016, with a growth level of more than 50%. That said, we were not able to make profit at those levels, and we knew that we had to grow our business further to at least EUR 200 million to start to be break even or to start to make profits. In our expectations for 2017, we didn't think we would reach that level already in 2017, but we would get there somewhere in 2018. When we saw the first quarter results coming in, they were not great, but we thought that that would be more a temporary event.
After a marketing campaign in Q2, and still no growth year-over-year, we decided early July that we couldn't go on this way. That in itself was the so-called triggering event that led to the review of the impairment model and led to the full impairment of the goodwill at the end of Q2.
Okay. Thank you very much.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Shyam Kumar from Kubera Partners. Please go ahead.
Hi, Harold. Thank you very much. Just a couple of questions. In terms of the auto revenue growth of 39%, which is very good, can you, beyond your end customers' volumes, which I know you commented were strong, can you kind of break out what's driving this high level of growth in terms of take-up rates, the extent to which take-up rates themselves are increasing? What is driving that increase in take-up rates, please? Whether it's car companies offering navigation and traffic as standard, or the extent to which it is end customers choosing to take on products such as lane departure warnings that require the map and traffic, please.
The growth is obviously a function of contract wins, generally speaking, in the past. We've given you those numbers of order intake over the last 3 years, if I'm correct. That is what's driving it. For us, the biggest driver is market share. We're doing a little bit better than we anticipated, and that is mostly because car sales are strong with a combination of higher take-up rates. We had some very favorable news from Peugeot. They had a car of the year. Those things help to sell more, and it makes everything a little bit easier. Those are the two big drivers. Where take-up rates are exactly in our customer base at the moment, we don't have a reliable number for that, but we think it's growing to about 30% across the range of all cars.
That's a very rough number, and it's not been verified and cannot be independently verified either. I'll make a point to have a look what the take-up rates are according to industry's analysts and where they expect them to go.
What's driving the increase in take-up rates? Is it some of these new applications we talked about, the Level 2 type stuff, or what is driving it, please?
What it is driving is a higher take rate. Customers are asking for it. The availability and the equipment levels are being pushed down to the mid-range. The technology's getting better. Traffic and dynamic routing are increasingly seen as essential tools in a car because it's getting better. It does help save time. People start to expect good quality routing and traffic information in the car and rely on it more. I think those are the key drivers. Connectivity is becoming standard as well. That's not just driven by navigation, although we have a big part in that because of traffic information, but there is a general trend towards connected car for multiple purposes. We're benefiting from that because the additional cost to bring navigation services into the vehicle are going down as a result of that. It's getting easier.
Technology's better, easier to integrate, maturing rapidly. Demand is there, and especially dynamic routing is increasingly seen as a must-have.
Just in terms of HD Map, you mentioned that there were potential RFQs. In terms of the amount of actual roadways you have mapped with an HD Map, it's, I guess, relatively low. I guess what I'm trying to understand is, I understood your point on the technology, but as RFQs come through and you have to deliver the HD Map, how populated does the HD Map have to be in terms of coverage to start winning, to deliver on potential RFQs, and how are you going to get there, please?
We do have extensive coverage of HD Map. We have the major roads-
Yeah
The closed entry roads. Highways, motorways, where the technology will be deployed first. We've covered that for North America and Western Europe.
You can do meaningful applications today with HD maps that are available in those key markets, where we cover 100% of the highest road classes. There's really something that we have on offer and that car makers can buy. We see RFQs coming through where there are requirements for HD maps, as I said in my earlier remarks. The product is there, it's working, it's good, and it will increasingly be deployed in kind of applications that will come in before full self-driving will be a reality.
It was a strong number, plus 16%. I understand that there was some catch-up payments, are there any interesting underlying dynamics driving that growth, new verticals, new need for mapping, Internet of Things, or is it just phasing of revenues from your current customer base?
No, I think what you see is real. There's bigger application from our key customers. We disclose those lists. I think the next growth needs to come from the online services that we are developing now with Microsoft for the Azure platform. All that is on schedule. We expect to launch that after the summer. Don't expect anything big in the second half of this year in terms of revenues, but we're laying the foundation for additional revenue stream location-based services that was not available to us before that Microsoft deal. We are excited about that. The technologies we are deploying there are maturing rapidly. All that is really exciting, not just for us counting the money, but also for the engineers. A lot of new opportunities, a lot of innovation happening there, that keeps everybody excited and innovating.
Yeah, I like what we're doing in that space. I think when we give our guidance for 2018, we will start to be able to give a little bit of color on the opportunity from that type of services.
Okay. All right. Thanks, Harold.
We will now take our next question from Sander van Oort from Kempen. Please go ahead.
Yes, thanks for taking my questions. Two, if I may. First of all, on the partnerships you signed more recently, to what extent are these unique partnerships or have both parties also the opportunity to maybe team up with other industry players at a later stage? The second question, also related to a former question, which you commented that not all nuts have been cracked for autonomous driving today. I was wondering, is it TomTom that needs to solve these challenges internally, or is it just a matter of finding the right partner to find the right solution and get to the next stage? Thank you.
Yeah. Most of those partnerships are non-exclusive, that wouldn't make sense either. I think there's very few people in the position now to place bets. That's not how it works. People want to work together, but also keep their options open. I think that's healthy and good, that is kind of a pattern we see in this industry for a long time. Self-driving is not a reality yet, there's still a lot needs to happen. Things need to happen on our side. Things need to happen on the OE side. Things need to happen on the Tier 1 side. Things need to happen on the regulatory side. Still a complex puzzle we're putting together here. There's a significant amount of resources committed now to making this technology a reality.
Okay, thank you.
We will now take our next question from Marc Zwartsenburg from ING. Please go ahead.
Yeah. Thank you for taking my questions. Had some phone issues, maybe some questions are asked, I'll ask them anyway. To start with telematics, can you give us your view on what the growth prospects are for this business in, say, the medium to longer term? Also, when can we expect, say, that we see a higher growth path again coming back into your business? On the growth side, also, how do you see this business developing in terms of investments that are needed to keep the product up to standard and to cope with competition, et cetera? That's my first question.
I think the underlying industry dynamics and characteristics are still very favorable for telematics services. Our customers are making money, short return on investment. We are by far the leader now in Europe. We are operating across all European countries, in all languages. I think we have a good opportunity in connected car services, what I explained earlier. We need to figure out how we can go back to growth. I think it's possible, to faster growth. We're still growing, of course, we don't grow with 30% rates anymore, and that's not good. I think the market can grow faster than the rate that we are currently growing at. There's a couple of things that are specific. We made big investments in the platform. That's mostly a transition from Flash technology to more modern HTML technology that gives us all sorts of advantages.
It's also true that in the time when you're working hard on those transitions, that innovation tends to slow down before you go faster again. We're sitting towards the end of that period. We have launched now a version of the new platform that's been well received. I think, by the end of this year, that transition will be completed, and then we have all the ducks in a row again and innovation will go faster as a result of that. That's one thing. The other thing is that we've made considerable commitments to the connected car platform technology over the last two years. We start to sign up customers at the end of 2016, and we now see a period where we start to roll out those technologies to our customers, and I expect that will accelerate in the coming period.
I think that will have positive influence on growth numbers again, I also feel that we need to do more. What it is exactly, I don't want to elaborate on that. I think there is a bigger opportunity than what we can show today in our growth numbers.
Would that require significant investments to deliver that?
I think the big investment relative to the size of telematics has been made in the transitioning the applications from Flash to HTML. Most of the technologies from the platforms or from the acquisitions we've done the last couple of years have been absorbed. It's not 100% done, but the bulk of the work to bring everything in line on one platform is behind us, with the exception of Finder. Also there, Finder is the Polish acquisition we did last year or two years ago.
December 2015.
December 2015 to be exact. Also Finder has started to stop selling the legacy platform and start selling now the new platform that's based on HTML5. There's a bit of a transition, a bit of cleaning the kitchen. Whether it explains it completely or not, I'm not 100% sure. I think we need to get those growth numbers up in the second half and also in 2018.
In terms of acquisitions, now that you do this share buyback, should we also read that as no acquisitions in telematics or are they so small that it could still fit in the current strategy there or are the targets just too expensive that you've given up on that?
We're not paying silly money and the valuations are high, there is still consolidation taking place and there are opportunities to buy that kind of small-ish, medium-sized companies at reasonable prices. If those opportunities happen, we'll quite happily do that. There's enough financial room to do that. That's not a change in strategy. It's getting harder to find those targets, to be totally clear. They're offered to us every now and then, but it's not getting easier.
Clear. On the PND side, how do you look to the PNDs in the sense that how long can you, given current declines, still remain cash positive in this business?
Quite some time. There's a couple of things happening. The PND market as a whole is declining, so that's clearly a negative. Within a category, we see some niche products that are growing for motorcycles and trucks and that kind of stuff, and that's quite profitable. We see that ASPs are going up, we also see that our market share is going up. We do that with relatively little investment. We can do that because we are benefiting from all the other developments we're doing for location-based services, for car industry, and I'd like to see this as just another vertical in our product portfolio.
At some stage.
That is fairly well aligned. It brings us something other that is quite valuable, which is a softer benefit. That is direct contact with an end user, who tells us what works, what doesn't work, what they like, what they don't like. I think that's valuable for us as a company to have that, so we don't have to rely on our automotive customers who have their own interpretation of what customers want. I think it's good to have that direct link for better understanding how the market works, what people are expecting.
Yeah.
Most importantly, it's cash. We're generating cash there.
Exactly. It's still financed as part of your mapping R&D, so to speak, but at some stage you will hit, say, a sort of threshold that you get the sort of tipping point that, given the declines, that it is difficult to remain cash positive on that front or still allocate enough costs to PNDs. Is that point, say, one year or two years or three years from now, or can you give a sort of an indication when you might hit that? Because I can imagine that if it turns cash negative, that you have to take also as a decision perhaps on PNDs.
I don't want to speculate on that. I don't think that's very helpful.
No, not speculating, given the current declines, just model technically.
Yeah, it is declining, it's going slower than it has been. There may be some pleasant surprises there. I don't know. We'll see. We keep a close eye on the profitability. It should not distract us. It should run its own course. For the moment, I think we're the right owner, and there is considerable benefit of playing in that space for us, although it is less strategic, of course, than it used to be in the heydays of personal navigation.
Yeah. Sure. Maybe on the back of saying we are the best owner, but you're now looking for perhaps an exit for sports category in one way or the other. What if a potential buyer comes along and says, "Okay, the sports category, but also the PNDs, we're interested in a package deal." Would you be open to such a scenario?
Every proposal that the market is making to us, we will listen to, evaluate it. I don't see that happening. I see the likelihood of that scenario not as highly realistic. If someone has a plan, we will listen, but I don't expect that to happen, in all fairness.
Okay. On the sports category, you say we're in a current strategic process. Is there also an option possible in such a scenario to just close it, because you seem quite confident to close it somewhere this year, because you would provide us with an update on the Q3. I think also your outlook has part of it on the OPEX guidance, some indication that you might not invest more into marketing, for instance.
The fact that you're quite confident in closing it, does it also mean that if you don't find a buyer or whatever carve out a new owner would be interested, that if that doesn't, in the end, go through, that you might also consider just closing the business and taking a charge against perhaps a cash inflow from working capital, that you say, "Okay, we can close it at a minimum amount, and we stop with the business." Is that also a possible scenario?
Well, what we said is the business not developing according to plan, and we don't see a reasonable path to profitability. The conclusion is that we needed our options now, but we will need this quarter to figure out what that is. I think I'm quite confident that by Q3, we will have a much better picture what that evaluation has yielded. I don't want to go much further than that. I don't think that would be helpful.
Okay.
What we're signaling today is that the market is disappointing. We need to look at it. We can't carry on as we are going at the moment.
Sure. Can I ask how many people work, for instance, for the sports category in total, for the wearables?
We haven't disclosed that number. I would make it up as we go. I don't think that would be right.
That's not useful. One on the order book. Can you give us an update on your success in, because you mentioned that there are more RFQs this year in the market. Can you give us perhaps a bit of an update how successful you are on that front and whether the RFQs are still there, and whether you're perhaps on track to meet last year's order book or any color you can give there?
I can't give you any color. The general picture is that the total number of orders available is bigger than it was last year.
That's still the case?
Beg your pardon?
That is still the case, currently?
Yeah, that is still the case. There's more to win or to lose in this year than last year. We are obviously involved in those RFQs. We think they will be decided this year. We come with an update, looking at Taco. Normally we do it, I think it's Q3.
No, what we said at the start of the year is that we would go to annual updates.
Annual updates. We said we go to annual updates, I think that's better as well, because those deals are quite lumpy, and they happen or they don't happen. Often they are postponed or don't fall exactly in the period that you thought they would fall. At the end of the year, we give you an update what the order book is.
Okay. That is why I'm asking, because these things can change, and they might disappear from the RFQs. That's still unchanged, and we get an update at the end of the year. That's how I should read the answer.
Yeah.
Okay.
Yeah.
The final question on the share buyback. Can you perhaps share with me the rationale to announce it at the H1 figures?
There are three reasons. Number one is that with this, we want, as a company, as a management team, give a signal to the market that we very much believe in our strategy and our future. The second is that when we look at our cash generation in the coming short-term period, that even when we consider the buyback of EUR 50 million worth of shares, we still think we generate cash in the second half of this year. The third reason is that there is this availability as we have this ESOP plan, the employee share option plan, and we have ongoing commitments to future transactions. We can build a pool of shares that can create a hedge for future execution of those options, and that will be done in a tax-efficient way.
How many dilution, what kind of dilution is currently on the current share price on the balance sheet?
If you would divide the EUR 50 million by the share price of yesterday's, it was 2.4% dilution.
It's exactly the amount of the share buyback. It's matched.
No. Oh, you mean the number of options that are outstanding?
Yeah.
That is a bit higher. That's higher. There are 6.3 million options outstanding at this point. That is roughly 2.7%.
Okay. Very good. Thank you very much. Those were my questions.
Yeah, you're welcome.
Thank you, Marc. I would like to thank everybody for joining us in this afternoon. We will end the call. I would like to ask the operator to close the call.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.