Earnings Call: Q2 2016

Jul 19, 2016

Good day, ladies and gentlemen, and welcome to the TopTom Second Quarter 20 16 Earnings Conference session towards the end of today's Please note that this conference is being recorded. I will now turn the call over to your hostess for today's conference, Pasera Gubastich, Head of Treasury And Investor Relations. You may begin. Thank you, Lisa. Good afternoon, and welcome to our conference call during which we will discuss our operational highlights and financial results for the second quarter 2016. With me today are Harold Foudeng, our CEO and Stackel Tittler, our CFO. You can also listen 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 and the financial outlook And with that, Harold, I would like to hand over to you. Well, thank you, Bizyra, and welcome ladies and gentlemen. Thank you for joining us on today's earnings call. Overall, we reported today a solid set of results in the 2nd quarter. Gross profit grew by 8 percent on flat revenue of 1,000,000. Gross margin continued to strengthen as we are growing recurring content and services business. Taco will provide further information on the financial highlights and the financial outlook for 2016 later in this presentation, and I will now discuss the key operational highlights for the quarter. In Consumer, we saw continued growth of our sport activity. Sports watch activations nearly doubled year over year. Also, Automotive hardware had a good quarter from stronger sales on the legacy platform. This platform, however, will go end of life at the end of next quarter. However, growth was offset by lower P and D revenue compared to last year caused by the decline of the market. Our market share improved in both Europe as well as North America but in the P and D market, we saw a unit decline of 18% in Europe, whilst the North American market declined by 22% year on year. Our market share in both regions improved slightly year on year. Our mapmaking platform is a essential for creating a stronger market position as well as for pursuing new opportunities in Neota motor and licensing markets. The platform, together with our traffic navigation software, will enable TomTom to pursue further growth opportunities with existing and new customers for connected navigation for advanced driver assistance systems and for autonomous driving. We are committed to play a leading role in autonomous driving and our product roadmap reflects our strategy to map the global road network with precise rote geometry data. In this quarter, we have launched HD Maps and Roche DNA coverage in 17 States across the United States. Our automotive order intake is on track, and we're especially pleased that Volvo Cars selected Tottenham as a supplier for maps for traffic and for software in its new infotainment system. Our Telematics business continued to perform well. The installed base reached 652,000 subscribers by the end of the quarter and that represents a 29% growth compared with the same quarter last year. This was achieved through a combination of organic growth and the acquisition of Feiner in Poland. The underlying industry dynamics for our fleet management business continue to remain favorable. We also see new opportunities arising in the connected car services industry In the quarter, we announced a collaboration with PSA Group whereby our fleet, web management service products will be available for connected Peugeot, Citroen, and DS fleet vehicles. And this concludes my part of the presentation, I'm handing over to Taco now. Thank you, Harold. Shall now begin a more detailed look at our financial results. We generated revenue of EUR 265,000,000 in the second quarter, flat compared to the same quarter last year. Consumer and licensing were down telematics and automotive were up. And let me now briefly discuss the business units 1 by 1. So in Consumer, the P and D and related business declined with similar pace as in Q1, market size was down with 60 percent combined market share strengthened in most regions. The sports category has already set by Harold continue to grow with double digit percentage numbers. And the port activation rate even doubled compared to last year. Finally, Automotive Hardware was strong on the back of high volumes of a number of legacy platforms that will go end of life starting this quarter. Automotive delivered a strong performance with revenue growth of over 30 percent to EUR 35,000,000 This increase is driven by higher volumes on existing contracts and ramping up of new contracts like the one explained by Harold, the PSA deal, Litensing revenue was 1,000,000 in the 2nd quarter, 14% lower compared with the same quarter last year, The year on year decrease results from a catch up we recorded in the second quarter of 2015 on content delivered in the first quarter of 2015. Excluding this catch up of licensing, revenue would have been flat. Then telematics revenue was up 14% year on year to EUR 40,000,000. Recurring subscription revenue for the quarter increased by 21% year on year to EUR 29,000,000. Our monthly subscription, the ARPU decreased year on year owing to the impact of the acquisition in Poland. For a whole group, I'm especially pleased with the gross margin in the quarter of 55%, which is 4 percentage points higher compared with the 51% Q22 2015. The year on year increase is driven by the higher proportion of content and services revenue in the total revenue of the quarter. Total operating expenses for the quarter were $133,000,000 compared with $134,000,000 in the same quarter last year. There were some one off effects, like positive outcome of a pending customer case and lower cost of our share based people incentive plan. Excluding one off effects, our operating expenses are trending up versus prior year, resulting from the investment needed to support our automotive order book. We expect the run rate for OpEx in the full year 2060 to be up with approximately 8% to 9% versus 2015. We delivered a net result of EUR 12,000,000 this quarter which translates in an adjusted earnings per share of $0.10 on a fully diluted basis. At the end of the quarter we reported a net cash position of EUR 58,000,000. Our cash flow used in operating activities for the quarter was EUR 33,000,000, EUR 5,000,000 higher compared with last year. The cash flow used in investing activities, excluding the effects of acquisitions, increased by 1,000,000 to 1,000,000. Mainly reflecting increased investments in customer specific automotive investments and other net and our map making platform. Let me now move on to our outlook for 2016 on Slide 4. We are reiterating our guidance for the full year we expect revenue of around 1,000,000, the adjusted earnings per share expected to grow by around 10% to 20 We expect the levels of investments, both CapEx and OpEx in our core technologies to be higher than last year. In particular, reinvesting in the advanced content and software for the automotive industry and in our new map making platform. That concludes the formal part of the presentation operator. We would now like to start with the Q And A session. Thank you, sir. From Francois Bouvignier of UBS. Please go ahead. The first one I wanted to talk about, maybe you can talk about the Google partnership with Fred Crissler. I mean, is it something anything for you guys and that Google and Apple are pushing more and more towards this market. Do you see any disruptions for you? That's the first one. The second one is on the Automotive Products portfolio, as we see more autonomous car penetration in the future, do you think there is an opportunity to change the way you monetize your maps And I would have a follow-up question, if I may, after. Yes. So it's not entirely clear, I think, what the partnership between, Google and Fiat Quest entails. Both Sears and Chrysler and Port customer of ours, we don't see any changes in their attitude and our opportunity to win business in their current car lines. What will happen in the, autonomous driving phase, we assume that this is a corporation for autonomous driving, but we don't have complete visibility of what it entails. So we need to wait and see how that will develop. On, second question, maps, I think, for autonomous driving, I think important developments and more clarity has come through in the last couple of months. We've spoken of, of course, on a continuous basis with the law of executives in the, with the carmakers, There was some doubt whether maps and high definition map will be needed for autonomous driving think that doubt has now gone away and I think universally, industry leaders that we are talking to believe that highly accurate maps will be part of the sensor set that will drive autonomous cars over the road. So there's more clarity that high definition methods will be needed. There's also more experience now people who or companies try to build those high definition maps from crowdsourced data. That's not that easy. We believe, and the industry believes that those high definition need to be made as we are making them using traditional methods in combination with cloud sourcing technologies. So, I think we are trending favorably there. But at the same time, we also need to observe that the autonomous Thomas driving car is quite some time out. And it will be a gradual development, And of course, we will be looking for revenue opportunities in the meantime to, capitalize on those high definition maps. And I think there are some opportunities in both in guidance as well as in ADAS type technology where we can start monetizing the additional detail that we are providing in those maps. Okay. Thank you. And The last one, it was on the OpEx in the coming quarters and even years, if it's possible. Mean, do you need do you see any change since last quarter or do you have more visibility or how you think you're going to invest in terms of OpEx and CapEx? And maybe that you will see more leverage in the coming quarters or years as automotive revenue connecting through? Yes. So what we said in the call already is that we envisage that our operational expenses will go up with 8% to 9% on a full year basis. Based on the reported number of 518 in 2015 that, as, as our OPEC increased with 4% in H1. That means that, the increase that we foresee in the second half is is above 10%. And that is, and that will be in all all lines, but, especially in the R and D line, After that, we will update the markets where we give a guidance on 2017. So that's not the right time now, but what we said already before is that that's the nature of order intake and automotive that you have to do things either bespoke engineering for the client integration work, additional, demands on features or coverage that might not have been fully covered by your current roadmap. Thank you very much. We'll now take our next question from Mark Hessling from ABN AMRO. Please go ahead. Your line is Yes, thanks. The first question is on the good update in Automotive in this quarter. It was mentioned that this was partly due to higher volumes and existing contracts. Does it imply that the take rates are moving up? And that they are higher than your initial expectations on what the people put into the order book. And the second thing is, the order intake and automotive, I think in the last quarter, you said, has been trending pretty well. Did you see that trend also continuing in the 2nd quarter specials with the FOVO contract, is the trend similar to last year or even even a bit higher growth in that? And finally, also on autonomous driving, you also already mentioned what something like the progress that people need to map. Can you elaborate a bit more on why exactly you need the high definition map for autonomous driving? I mean, related to that in the read some articles also on the Tesla accident, that if there would be a lighter or high definition map, this kind of accident could have been expenses, can you share your view on that one? Yes. So, I think the your first question is about, sales to existing customers. So we've seen slightly higher income from, licensing income from existing customers, typically because their sales numbers were slightly better than we had anticipated. And we see that coming through in our licensing income. I can't say that the attachments rates have gone up. I can't say it at this moment, but generally speaking, sales by our customers were slightly higher than we had anticipated at the beginning of the year. On the order intake, yeah, I think it's, things in the first half were okay. I mean, there was a big contract available. 1 of the biggest contracts available in the first half was full, but we won that. So it was nice. So I we are on track. And at the end of Q3, we will give you an update how the order intake is developing compared to last year. I'm almost driving. So why do you need maps? Why well, the reason why you need those maps is they're not by itself sufficient to guide a car, but you do need exactly where the car is on the road. For that positioning, you need that map and you need a high precision location methodology that we are providing. So we're doing both the map and we're doing rogue DNA as a means to position that car correctly with a high level of accuracy on the street. And it seems to us that there is now increasingly consensus that that is indeed needed. So that was a positive for us, this quarter. Yeah, it's difficult for me, of course, to, comment on what happened at Tesla, you know, we have got our own theories, but we don't have intimate knowledge of exactly what happened and what's the specifications of the lidar and radar and camera were and where this could have been prevented. So I don't feel it's right for me to comment on that specific case. Okay, that's clear. Maybe a follow-up on the FOVO contract because it's pretty far out that's going to work for 2019. What does that mean for your assumptions on such a contract? Do you have significantly higher, higher attachment rates or, how do you build that up? Well, the assumptions are, based on the quote we've given and the quote obviously, it involves volumes, expected volumes, what Volvo expects to sell in the different markets. And based those numbers, we come to a total estimate as a value of that contract. So we have a pretty precise distribution And of course, for company level, there's also an element of uncertainty, whether those numbers will be hit or whether they will be exceeded. But generally speaking, we find that carmakers are pretty good way of estimating, sales volumes. So that's the way you typically tend to do this. Our next question today comes Andrew Humphrey from Morgan Stanley. Just a couple if I may. One is looking broadly at high definition maps. Clearly, the developments that we're seeing in the industry are kind of manifold and you're indicating that autos manufacturers are increasingly coming around to the view that those are an essential part of future driving applications. I wonder if kind of maybe you can ask the question from the supply side. You've said that you're looking to develop those maps gradually. I think you're at the point today where have about 160,000 kilometers mapped on high definition, which is clearly at this point less than about half a percent of your kind of total mapping database, what kind of time frame should we expect those maps to be I guess kind of ready for those future driving applications, and sort of that feeds into my second question really, which is on OpEx again. I mean, you've clearly highlighted the investments that you're making there in R&D this year. Can you give us any clarity on how that will track into 2017, whether we should expect continued increases in investment in those technologies over the next, say, 2, 3 years? Yes. So first on that production, So we are following, so there's 2 different schools of thinking in autonomous driving. 1 is generally supported by the car makers who want to bring the autonomous driving or automated driving functions for some motorways and then go to country roads to eventually go into cities and there's no school for which things more about enclosed areas. So you have a small area that you completely map and then you start driving autonomously and from there out you expand. And that's more the way that Google is is attacking the problem. And when you say closed areas, you need to think about industrial states or shopping centers or or logistical distribution centers or what have you, in any case, really controlling environment much better. We're following the requirements of our key customers, which are the car makers. We are building high definition maps for, connecting roads, motorways. We did in North America and Europe. We think we'll be ready by the end of this year, beginning of next year, to have the major road network covered. And that's great because it gives everybody something to test against, to work against, into consideration. And for us also, it's great to, gain experience not only in the specifications of the product, but also how we can produce them cost effectively. And producing those type of maps cost effectively is an area of continued investment. There are new technologies available that weren't available only 2 or 3 years ago that have to do with image deep learning, neural networks, that gives us very significant cost advantages building and creating those maps. So we are now supporting the 2 highest road classes, and you're right, as soon as you enter, bring in and other road class, the number of miles you need to cover is gross, significantly. But in the meantime, we're also learning how we can produce and make and maintain those maps much more cost effective than we've ever been able to do using very advanced, image recognition and deep learning and neural network. So it's a bit of a it's a bit of a tradeoff. We've got some time to figure it all out. We've got some time to figure out how we bring in crowdsourced data into the whole equation. But it's clear to us and to the whole industry that we need to be really cost effective and rely on high levels of automation to be able to do this in a cost effective way. And that's where our efforts are geared to In the meantime, we obviously giving the task had, we're also looking at ways to commercialize products that we have available now, and there are various ways of doing that. And indeed, we have sold or licensed to at least one customer, some datasets that were produced for highly automated driving. So that's very encouraging. So can I kind of infer from that as far as OpEx because it's concerned that? And I don't want to put words in your mouth, so correct me if I'm wrong. But it seems like there's been a lot of investment going into the platform in the last couple of years for real time updates of mapping databases in 6Q. Even though kind of coverage on high definition maps needs to increase exponentially, is it then fair to assume that we expect similar exponential increases in OpEx? Well, it's again, and macro alluded to that. We want to give you more guidance or more information about the OpEx levels that we need to sustain, but we give guidance for 2017. This is not the moment and we're learning all times well and what is needed. But, I think we'll come through with further information later on. Okay. Thanks very much. We'll now take our next question from Mark Zwartsenburg of ING. Please go ahead. Your line is open. Thanks for taking my questions. A couple of financial ones. Help us perhaps with the expected tax rate for the full year. Is my first question. Then on the hardware sales and telematics, Can you give us a bit of flavor, the combination of the hardware and subscription revenue? How we should look at read the hardware declining subscription growing and how we should read that to the future, that on telematics, then Another question on deferred revenues. You mentioned them in the press release. What has been the impact on this quarter's gross margin, the negative impact from still deferring the revenues in the quarter. And what would have been the impact on EPS if the deferred revenue was still included? And then all account receivables is going up quite a bit in the quarter. Can you give us any color on that? What is driving that? And then on the fall for contract, can you give us a bit more detail on take rate assumptions because you mentioned mainly based off volumes, but, can you give us any feel for the in car penetration within the contract? What we should assume there? And that's it. Thank you. Yes. So I'm not sure if I have them all. Rodan, all your questions, Margaret, the effective tax rate, yes, that is a difficult one. As you also saw on the in this Q2 that we received some money back from filings we did over the previous years. What we tend to do is that when we do our corporate tax filing, we take a very cautious approach because if you, at the end, have pay more, then you also have to pay interest, all that outstanding amount for the time that it takes to have your filing completed. So, and then you so we received some money back and that you had a positive influence on the tax line. And if the EBIT is at the level there it is now, then the this can have enormous swing factors. But the rule of thumb is that you need to work with roughly 10% for the effective tax rate. Whether we assume the full year given that you had quite some money coming in than somewhere in 3rd or 4th quarter? I would have to for the second half. Okay. So that's what you also assume in your guidance of the $0.23? Then deferred. So we have deferred revenue in all the businesses that we operate in. But now not so much in telematics, by the way, but it is the big chunk is in consumer, then in licensing and then in automotive. Consumer, we expect that we will see still a net addition to the deferred revenue for this year, but as of next year, we will see a net release for automotive. This has been growing. This year and that will continue to grow in the years after that. And in licensing, it's quite stable, but there you have very much seasonal patterns where we have some big customers paying the full year in advance in a certain point in the year. So that brings me to the question you were asking. The, we had a benefit of the release in deferred revenue in this quarter. Of roughly $0.03 similar to what it was in, in Q1. As well, by the way. So benefit on new EPS, you mean mid on the margin on the gross margin? No, that is, so I'm looking at Visa. I will come back with that. That's a bit too detailed. I don't have that in front of me. Okay. I mean, there was a small benefit in the 2nd quarter from a release of on net release also on deferred revenues? No. So we continuously have release of deferred revenue And we continuously have additions to, and at least the net effect that will influence the earnings per share. So the as we had a net release, in the year over year, that in the second quarter that affected our earnings per share with $0.02. Okay. Thanks. The accounts receivable, I wouldn't read too much into that. That is just timing, where contracts are signed within the quarter. Has an effect if that happens in June or in May, that is the So we, that just means that we have some more deals going out in June compared to last year. Sounds good. Yes, that's good, but that also that can also mean that in May, it was different, right? So that has to be more interactions in there. So for the whole quarter, I wouldn't read too much into it. And then the fall for contract, I think what makes a full contract is the volume of cars times take rate times the ARPU. So the price that you can get per car And the price that you can get per car is then, again, we are a combination of software services and content the content is highly influenced by the region where you sell your map, because in some regions, the map is more expensive than in other regions. The, the take rate assumptions, that are in the contract is not for us to disclose. But any It's client, confidential information. Okay. And then on the telematics on the hardware versus license? Transcription? Yes. So what you need to bear in mind that last year, we saw a very strong Q2 So, telematics revenue went up with 13% sequentially. And then declines at 9% in Q3. And a big effect last year was the high volume of hardware. At telematics, we sell directly to, to the very big customers and to the very small customers. But the customers in between, we work with value added distributors And they can, at certain moment, buy more hardware for us, because they won't have more inventory or not, And when that sells through, that is we can only see that later. An indication for the next quarter that subscription revenues might be a bit weaker. No, yeah, that is very hard to draw that conclusion from what you saw here. What I can give you as an indication is that last year, we saw a sequential decline and we are not we're not aiming for a sequential decline this year. So telematic, as a whole, went up with 17% in H1. The guidance for the full year is that we will go up with roughly 20%. So it implicitly says that we see we expect some stronger, revenues in H2 so stronger annual growth rates in H2. Our next question today will come from Shyam Kumar from TT International. Please go ahead. Your line is open. Hi. Can I just ask on a couple of new contracts? So can I ask on the PSA contract just because it's, I guess, the first time, you guys are you're going? Can you just give us a sense of how impactful this could be on revenues and margins as as a trend in terms of not just this contract, but potentially other contracts that could come, in the next 12, 18 months, please? And just sort of flesh that out, please. Are you sorry, are you referring to the the web fleet? Yes. Exactly. Yes. Yes. Yes. Yes. Yes. Yes. It's new. It's kind of innovative. There is a So the way it works is that there is already a TCU, so telecoms unit build into the car, all the cars at least factory effectively. And PSA is looking to generate revenues on this productivity, on this capability, and we put a standard connection on top of that. So every driver owner of a PSA car who wants to have fleet as a service, can easily connect without having to install additional and that is the relevance. For us, it's an important way to market our services. We don't know exactly how big this is going to be. But it is a trend and its technology is only open for the telematics players who have good international coverage, good international distribution and a good, international presence. So it will help to if this trend continues, it will lower the cost for customers to take those services. And we believe it will help some level of concentration in the 3 because the smaller players cannot offer those services on top of the open interface. So I think it's, it's important. It's interesting What it will do in the short term is probably not that much. And the longer term, I think it will be an important marketing and distribution tool for us. And there is indeed interest from other carmakers to do similar services. Okay, very good. And Also in terms of, you recently announced the Moscow contract to help design the traffic flows. Can you just give us some more information about that sort of that sort of smart city contract, how impactful a contract can be? What exactly is your value added to the city of Moscow? And scope for further contract along those lines, please? Yes. So the value that we can bring is amount of data and technologies to query that data. So we know where traffic is. We know where congestion is taking place. We can indicate hotspots. We can help tuning traffic lights. We can do that on a static way, we can do it dynamically. So we have the law of inside in traffic patterns in the city. And we built it inside over a number of years. So we have also a lot of historical data. That's a very unique database and a very unique set of capabilities. So, we're marketing those services, to help those cities understand those traffic flows. We're working. Do we do that independently, but we're doing that in connection and together with engineering companies who specialized in advising cities to manage their traffic flows I wouldn't say it's a huge business for us, but it's very interesting. It's for good calls. We already have a unique database and it's a scalable model. So we're trying these notices as well. We have some success. We had some success in Berlin and Zurich There's a couple of North American cities who are interested in similar services. So we continue to work through the commercials and try see how we can productize those services so we can scale them up. And are these the kind of ongoing contracts or is it kind of short 1 year, you get Moscow where it needs to get to and how does it work? No. Those are typically contracts that are for 4, 5 years. So you want to continuously monitor what's going on and want to continuously measure the effects of traffic rules you put in place and traffic lights and whatever there is to influence traffic flows in the city in and around the city. Okay, perfect. And one last one, just back on Automotive and the order book. At what point do you think you start getting contracts flowing into your order book based on demand for ADAS type services from the automated, please? I think A, this is around the quarter and we are doing those contracts already. The fact that we have our, HD maps is helping us. The fact that we are collecting all the attributes now based on image recognition and deep learning is helping us to maintain those database and build those databases in a much more cost effective way. So I think there is, we started. It is a trend. I think it's a good step up towards self driving and autonomous driving at various levels. So I think there is a it's another product in the automotive portfolio that is maturing rapidly now. Thank you very much. Thank you, Shyam. I would like to thank you all for joining us this afternoon. If you have any follow-up questions, please don't hesitate to give me a call. And, well, thank you all very much. And operator, you can close the call now, please. Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.