Good day, ladies and gentlemen, and welcome to the TomTom second quarter 2016 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, 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 hostess for today's conference, Bisera Grubesic, 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 Goddijn, our CEO, and Taco Titulaer, our CFO. You can also listen to the call on our website, 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 and the financial outlook for 2016 from Taco. We will then take your questions. With that, Harold, I would like to hand over to you.
Well, thank you, Bisera, 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 second quarter. Gross profit grew by 8% on flat revenue of EUR 265 million. 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. 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. 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.
Growth was offset by lower P&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. In the P&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 essential for creating a stronger market position, as well as for pursuing new opportunities in the automotive 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. Our product roadmap reflects our strategy to map the global road network with precise road geometry data. In this quarter, we have launched HD Map and RoadDNA coverage in 17 states across the U.S. Our automotive order intake is on track, and we're especially pleased that Volvo Cars selected TomTom 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. Excuse me. The acquisition of Finder in Poland achieved this through a combination of organic growth and the acquisition of Finder in Poland. The underlying industry dynamics for our fleet management business continued 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 product will be available for connected Peugeot, Citroën, and DS fleet vehicles. 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 million in the second quarter, flat compared to the same quarter last year. Consumer and licensing were down, telematics and automotive were up. Let me now briefly discuss the business units one by one. In consumer, the P&D and related business declined with a similar pace as in Q1. Market size was down with 16% combined. Market share strengthened in most regions. The sports category, as already said by Harold, continued to grow with double-digit percentage numbers, and the product 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% to EUR 35 million. 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. Licensing revenue was EUR 33 million in the second 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. Telematics. Revenue was up 14% year-on-year to EUR 40 million. The recurring subscription revenue for the quarter increased by 21% year-on-year to EUR 29 million. Our monthly subscription, the ARPU, decreased year-on-year owing to the impact of the acquisition in Poland.
For the 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% in Q2 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 EUR 133 million, compared with EUR 134 million in the same quarter last year. There were some one-off effects, like a positive outcome of a pending customs case and lower cost of our share-based people incentive plan. Excluding one-off effects, our OpEx 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 2016 to be up with approximately 8%-9% versus 2015.
We delivered a net result of EUR 12 million this quarter, which translates in an adjusted earnings per share of EUR 0.10 on a fully diluted basis. At the end of the quarter, we reported a net cash position of EUR 58 million. Our cash flow used in operating activities for the quarter was EUR 33 million, EUR 5 million higher compared with last year. The cash flow used in investing activities, excluding the effects of acquisitions, increased by EUR 3 million to EUR 30 million. Mainly reflecting increased investment in customer-specific automotive investments and our map-making platform. Let me now move on to our outlook for 2016 on slide four. We are reiterating our guidance for the full year. We expect revenue of around EUR 1,050 million. The adjusted earnings per share is expected to grow by around 10% to EUR 0.23.
We expect the levels of investment, both CapEx and OpEx, in our core technologies to be higher than last year. In particular, we're investing 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&A session.
Thank you, sir. As a reminder, please press star one to ask a question. We'll now take our first question from François Bouvignies. of UBS. Please go ahead.
Yes, hello, thank you for taking my question. I have a couple, if I may. The first one I wanted to talk about, maybe you can talk about the Google partnership with Fiat Chrysler. Is it changing anything for you guys that Google and Apple are pushing more and more to enter this market? Do you see any disruptions for you? That's the first one. The second one is on the automotive product 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? I would have a follow-up question, if I may, after.
Thank you. Yeah. It's not entirely clear, I think, what the partnership between Google and Fiat Chrysler entails. Both Fiat and Chrysler are important 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 space, we assume that this is a cooperation for autonomous driving, but we don't have complete visibility of what that entails, and we need to wait and see how that will develop. On second question, maps. I think for autonomous driving, I think there's some important developments and more clarity has come through in the last couple of months. We've spoken, of course, on a continuous basis with a lot of executives with the car makers.
There was some doubt whether maps and high-definition maps will be needed for autonomous driving, I think that doubt has now gone away. 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. There is more clarity that high-definition maps will be needed. There's also more experience now
People or companies try to build those high-definition maps from crowdsourced data. That's not that easy. We believe, the industry believes, that those high-definition maps need to be made as we are making them, using traditional methods in combination with crowdsourcing technologies. I think we are trending favorably there. At the same time, we also need to observe that the autonomous driving car is quite some time out, and it will be a gradual development. Of course, we will be looking for revenue opportunities in the meantime to capitalize on those high-definition maps. I think there are some opportunities both in guidance as well as in ADAS type of technology, where we can start monetizing the additional detail that we're providing in those maps.
Okay, thank you. The last one, it was on the OpEx in the coming quarters and even years, if it's possible. Do you see any changes 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 revenues are coming through?
Yeah. What we said in the call already is that we envisage that our operational expenses will go up with 8%-9% on a full year basis, based on the report number of EUR 518 million in 2015. That as our OpEx increased with 4% in H1, that means that the increase that we foresee in the second half is above 10%. That will be in all lines, but especially in the R&D line. After that, we will update the market when we give guidance on 2017, so that's not the right time now. What we said already before is that's the nature of order intake in 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 Marc Hesselink from ABN AMRO. Please go ahead. Your line is open.
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 in 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? The second thing is, the order intake in automotive, I think in the last quarter you said has been trending pretty well. Did you see that trend also continuing in the second quarter, especially with the Volvo contract? Is the trend similar to last year or even a bit higher growth than that? Finally, also on autonomous driving, you also already mentioned something like the progress that people need the map. Can you elaborate a bit more on why exactly you need the HD Map for autonomous driving?
Maybe related to that, I've read some articles also on the Tesla accident, that if there would be a lidar or a HD Map, this kind of accident could have been prevented. Can you share your view on that one?
I think your first question is about sales to existing customers. We've seen slightly higher licensing income from existing customers, typically because their sales numbers were slightly better than we had anticipated. We see that coming through in our licensing income. I can't say that the attachment rates have gone up. I can't say that at this moment. Generally speaking, sales by our customers were slightly higher than we had anticipated at the beginning of the year. On the order intake, I think things in the first half were okay. There was a big contract available. One of the biggest contracts available in the first half was Volvo. We won that, so that was nice. 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.
Autonomous driving, why do you need maps? 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 - a methodology that we are providing. We're doing both the map, and we're doing RoadDNA as a means to position that car correctly with a high level of accuracy on the street. It seems to us that there is now increasingly consensus that that is indeed needed. That was a positive for us this quarter. It's difficult for me, of course, to comment on what happened at Tesla.
We've got our own theories, but we don't have intimate knowledge of exactly what happened and what specifications of the lidar and radar and camera were, and whether this could have been prevented. 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 Volvo contract, because it's pretty far out that it's going to work, the 2019. What does that mean for your assumptions on such a contract? Do you have significantly 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 involves volumes, expected volumes, what Volvo expects to sell in the different markets. Based on those numbers, we come to a total estimate of the value of that contract. We have a pretty precise distribution. Of course, for a company like Volvo, there's also an element of uncertainty, whether those numbers will be hit or whether they will be exceeded. Generally speaking, we find that car makers have a pretty good way of estimating sales volumes. That's the way we typically tend to do this.
Okay, thank you.
Our next question today comes from Andrew Humphrey from Morgan Stanley. Please go ahead. Your line is open.
Hi there. Thanks for taking my questions. 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, 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 you have about 160,000 km mapped on high definition, which is clearly at this point, less than about 0.5% of your total mapping database. What kind of timeframe should we expect those maps to be, I guess, ready for those future driving applications? That feeds into my second question, really, which is on OpEx.
Again, 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, two, three years?
Yeah. First on map production. There's two different schools of thinking in autonomous driving. One is generally supported by the car makers who want to bring autonomous driving or automated driving functions first on motorways, then go to country roads to eventually go into cities. There's another school of thought which thinks more about enclosed areas. You have a small area that you completely map, and then you start driving autonomously, and from there out, you expand. That's more the way that Google is attacking the problem. When you say closed areas, you need to think about industrial estates or shopping centers or logistical distribution centers or what have you. In any case, where you control the 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 do this 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. That's great because it gives everybody something to test against, to work against, take specification into consideration. For us also, it's great to gain experience, not only in the specifications of a product, but also how we can produce them cost effectively. Producing those type of maps cost effectively is an area of continued investment. There are new technologies available that weren't available only two or three years ago that have to do with image recognition, deep learning, neural networks. That gives us very significant cost advantages, building and creating those maps. We are now supporting the two highest road classes.
You're right, as soon as you enter, bring in another road class, the number of miles you need to cover grows significantly. In the meantime, we're also learning how we can produce or 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 networks. 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. 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 towards.
In the meantime, obviously, given the task ahead, we're also looking at ways to commercialize products that we have available now. There are various ways of doing that. Indeed, we have sold or licensed to at least one customer some data sets that were produced for highly automated driving. That's very encouraging.
Can I kind of infer from that as far as OpEx is 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 situ. Even though kind of coverage on high-definition maps needs to increase exponentially, is it then fair to assume that we shouldn't expect similar exponential increases in OpEx?
Well, it's again. Taco alluded to that. We want to give you more guidance and more information about the OpEx levels that we need to sustain when we give guidance for 2017. This is not the moment, and we're learning all the time as well on what is needed. I think we'll come with further information later on.
Okay. Thanks very much.
We'll now take our next question from Marc Zwartsenburg of ING. Please go ahead. Your line is open.
Yeah, thanks for taking my questions. A couple of financial ones. Help us perhaps with the expected tax rate for the full year. That's my first question. 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 and read the hardware declining, subscription growing, and how we should read that to the future? That on telematics. Then another question on deferred revenue. 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? What would have been the impact on EPS if the deferred revenue were still included? On account receivables, it's going up quite a bit in the quarter. Can you give us any color on that? What is driving that?
On the Volvo contract, can you give us a bit more detail on take rate assumptions? You mentioned that was mainly based on volumes, but can you give us any feel for the in-car penetration within the contract, what we should assume there? That's it. Thank you.
Yeah. I'm not sure if I
Have them all.
I wrote down all your questions, Marc. The effective tax rate, yeah, that is a difficult one. You also saw 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 to pay more, then you also have to pay interest on that outstanding amount for the time that it takes to have your filing completed. We received some money back, that had a positive influence on the tax line. If the EBIT is at the level where it is now, then this can have enormous swing factors. The rule of thumb is that you need to work with roughly 10% for the effective tax rate.
If we assume that for the full year, given that you had quite some money coming in, then somewhere in the third or the fourth quarter it goes wrong.
I would do for the second half.
That's what you also assume in your guidance of EUR 0.23.
Yeah.
Okay.
Deferred. We have deferred revenue in all the businesses that we operate in. Not so much in Telematics, by the way, but the big chunk is in Consumer, in Licensing, and 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. 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 at a certain point in the year. That brings me to the question you were asking. We had a benefit of the release in deferred revenue in this quarter of roughly EUR 0.03.
Similar to what it was in Q1 as well, by the way.
Some benefit on your EPS, you mean, but on the margin, on the gross margin?
No. I'm looking at Bisera, let's see.
Yeah, we'll come back with that after.
Yeah, that's a bit too deep. I don't have that in front of me.
Okay. There was a small benefit in the second quarter from a net release of some deferred revenues.
No. We continuously have release of deferred revenue, we continuously have additions to, the net effect that will influence the earnings per share. As we had a net release in year-over-year, in the second quarter, that affected our earnings per share with EUR 0.02.
Okay. Thanks.
Accounts receivable, I wouldn't read too much into that. That is just timing, where contracts are signed within the quarter. It has an effect if that happens in June or in May. That just means that we had some more deals going out in June compared to last year.
That's good.
Yeah, that's good, that can also mean that in May it was different, right? That has to be
Okay.
put in perspective, no.
Okay.
For the whole quarter, I wouldn't read too much into it. The Volvo contract, I think what makes the Volvo contract is the volume of cars, times take rate, times the ARPU. The price that you can get per car. The price that you can get per car is then, again, we're a combination of software services and content, and content is highly influenced by the region where you sell your map. In some regions, the map is more expensive than in other regions. The take rate assumptions that are in the contract is not for us to disclose.
But any-
It is client confidential information.
Okay. On the telematics, on the hardware versus license subscription revenue.
Yeah. What you need to bear in mind that last year, we saw a very strong Q2. Telematics revenue went up with 13% sequentially, then declined with 9% in Q3. A big effect last year was the high volume of hardware. At Telematics, we sell directly to the very big customers and to the very small customers. The customers in between, we work with value-added distributors, and they can, at a certain moment, buy more hardware for us, because they want to have more in inventory or not. When that sells through, that is, we can only see that later.
An indication for the next quarters that subscription revenues might be a bit weaker.
No, 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're not aiming for a sequential decline this year. Telematics, as a whole, went up with 17% in H1. The guidance for the full year is that we'll go up with roughly 20%. That implicitly says that we expect some stronger revenues in H2, so stronger annual growth rates in H2.
Okay. Thank you so much.
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? Can I ask on the PSA contract, just because it's, I guess, the first time you guys are actually. Can you just give us a sense of how impactful this could be on revenues and margins as a trend in terms of not just this contract, but potentially other contracts that could come in the next sort of 12, 18 months please, and just sort of flesh that out please?
Sorry, are you referring to the WEBFLEET-
Yes, exactly. Yeah.
It is new. It is kind of innovative. The way it works is that there is already a TCU, so a telematics unit, built into the car. All the cars that leave the factory effectively. PSA is looking to generate revenues on this connectivity, on this capability. We put a standard connection on top of that, so every driver, owner of a PSA car who wants to have WEBFLEET as a service, can easily connect without having to install additional hardware, and that is the relevance. For us, it is an important way to market our services. We do not know exactly how big this is going to be. It is a trend, and it is technology that is only open for the telematics players who have good international coverage, a good international distribution, and a good international presence.
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 industry, because the smaller players cannot offer those services on top of the open interface. I think it is important, it is interesting. What it will do in the short term is probably not that much. In the longer term, I think it will be an important marketing and distribution tool for us. There is indeed interest from other car makers to do similar services.
Very good. Also in terms of, you recently announced the Moscow contract to help design the traffic flows. Can you just give us a bit more information about 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 contracts along those lines, please?
The value that we can bring is a huge amount of data and technologies to query that data. 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. We have a lot of insight in traffic patterns in the city, and we have built it inside over a number of years. We have also a lot of historical data. That is a very unique database, and a very unique set of capabilities. We are marketing those services, to help those cities understand those traffic flows. We are working, we are doing that independently, but we are also 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 a good cause. We already have a unique database, and it's a scalable model. We're trying this in other cities as well. We had some success in Berlin and Zurich. There's a couple of North American cities who are interested in similar services. We continue to work through the commercials and try to see how we can productize those services so we can scale them up.
Are these the kind of ongoing contracts or is it kind of short to one year, you get Moscow where it needs to get to and how does it work?
No, those are typically contracts that are for four or five years. 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. 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 automotive fleet?
I think ADAS is around a quarter. We are doing those contracts already. The fact that we have our HD Map 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 databases and build those databases in a much more cost-effective way. I think we've started. It is a trend. I think it's a good step up towards self-driving, autonomous driving at various levels. I think 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. Well, thank you all very much, operator, you can close the call now, please.
Thank you. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.