Good day, ladies and gentlemen. Welcome to the TomTom first 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 the 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, Alex. Good afternoon, welcome to our conference call, during which we will discuss our operational highlights and financial results for the first quarter of 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.
Good afternoon and good morning. Thank you very much, Bisera. Welcome to our earnings call. We have started the year with a solid revenue growth driven by our sports and business-to-business activities. We generated group revenue of EUR 217 million, which is 6% higher year-over-year, We delivered a strong growth margin of 57%, which is three percentage points above last year. Taco will provide further information on the financial highlights and the financial outlook for 2016 later during this presentation. I will now discuss our key operational highlights for the quarter. In consumer, we saw a strong growth in our sports activity in the quarter. The sell-out amounts of our sports watches nearly doubled year-over-year, The new watches are winning numerous awards, which is another proof point of our success in this segment.
In the PND market, we saw a unit decline of 13% in Europe, whilst the North American markets declined by 22% year-over-year. Our market share in both regions improved slightly year-over-year. Our telematics business continued to perform well. The installed base reached 625,000 subscribed vehicles by the end of the quarter and delivered a 30% growth compared with last year. Automotive delivered a strong performance in the quarter we announced many customer deals. PSA Group launched its new global infotainment platform, which is built on a full suite of TomTom products, maps, navigation, and software, and live services. We announced an agreement to deliver maps and navigation to the new Volkswagen app, smartphone app, we extended our partnership with Fiat Chrysler and Toyota this quarter.
We also extended HD map and RoadDNA coverage in California and Nevada, enabling self-driving car testing in key regions of the U.S. Autonomous driving continues to push boundaries. At TomTom, we are excited to be playing a role in enabling the automotive industry to bring this closer to reality, and RoadDNA is attracting considerable interest from the industry and leading car makers. Let me now briefly summarize our group's strategic priorities on slide three. Our activities are organized around four customer-facing business units that leverage our brand capabilities and common technology assets to provide our customers with industry-leading location-based products. We've made substantial progress with our core technologies across the group over the recent years, and this gives us confidence that we're well positioned to capture growing opportunities in the area of consumer wearables, autonomous driving, connected car and telematics.
These areas all require technological and product expertise that TomTom is able to provide and form an important part of our growth strategy, product roadmap, and investments for the foreseeable future. We are determined to further build on our path of growth. This can be achieved through growth from non-PND product sales while extracting value from the PND category. With the introduction of our own branded GPS sports watches and action cam, we've diversified the consumer product portfolio into the sports market. We aim to continue to build on this with innovative new products. Our new map-making platform is essential for creating a stronger market position as well as for pursuing new opportunities in the automotive and location-based services market. Our strategy in automotive is working, and that is reflected in the order intake growth over the recent years.
Our product portfolio delivers scalable, efficient-to-develop products to our customers and is gaining significant interest in the industry. We believe that our map-making platform, together with our traffic and navigation software and our telematics capabilities, will enable TomTom to pursue further growth with existing and new customers for the connected car, advanced driver assistance systems and autonomous driving. We are committed to play a leading role in creating positioning technologies for HD maps for autonomous driving. Both recent product launches and contract wins are important proof points that we are delivering according to plan. The underlying industry dynamics for our fleet management business remain favorable. A combination of short return on investment for our customers and an under-penetrated market allow us to plan for long-term growth of our telematics revenue. On top of this, we see new opportunities arising in the connected car services industry.
Our navigation products and connected car services are complementary and in combination, form a strong product portfolio. Our business will continue to require high levels of investment in the near future. This is needed to support delivery of new business and sustainable future growth of TomTom. This concludes my part of the presentation. I'm now handing over to Taco.
Thank you, Harold. I would like now to comment on the financial results. Revenue in the quarter was EUR 217 million, an increase of 6% compared with last year. Our sport, automotive licensing, and telematics businesses grew strongly to offset the reduction in PND and automotive hardware revenue. Now the four business units. Consumer, the revenue was down 4% year-on-year to EUR 117 million. This is a result of a strong growth in our sports activities. As already mentioned, we saw the sell-out amount for our sports watches doubling year-on-year. This growth is counterbalanced by lower PND and related content services revenue and by lower automotive hardware revenue. Automotive had a strong quarter with EUR 30 million of revenue. This is a 26% revenue growth year-on-year, driven by growth in maps and traffic revenue, underpinned by the order intake of the last several years.
Our licensing revenue was EUR 34 million in the first quarter, a 16% growth compared with the same quarter last year. Do need to point out here that this is an increase from new customer wins, but also renewing and extending of existing customer contracts, which we commented on in the second quarter of 2015. Q2 2015 involved a EUR 5 million catch-up, which will not be there in Q2 2016. Telematics revenue was up by 19% year-on-year to EUR 37 million. The recurring subscription revenue for the quarter increased by 28% year-on-year to EUR 29 million. Our monthly subscription ARPU decreased slightly year-on-year, owing to the impact of the acquisitions. We delivered a strong growth margin in the quarter of 57%, which is 3 percentage points higher compared with 54% in Q1 2015.
This year-on-year increase was mainly driven by a higher proportion of content and services revenue in the quarter. OPEX for the quarter was EUR 128 million compared with EUR 150 million in the same quarter last year. This increase is driven by increased SG&A expenses reflecting growth of our workforce and higher marketing to support our new and broader product range. We expect the run rate for OPEX in 2016 overall to be up with approximately 10% versus 2015. We delivered a net result of EUR 5 million this year, which translates in an adjusted earnings per share of EUR 0.03 on a fully diluted basis. At the end of the quarter, we reported a net cash position of EUR 50 million. Our cash flow use in operating activities for the quarter was EUR 80 million, EUR 5 million higher compared with last year.
The cash flow use in investing activities during the quarter increased by EUR 7 million to EUR 31 million, mainly reflecting increased investments in map content, our map-making platform, and customer-specific investments. Let's now move on to our outlook for 2016, slide five. We are reiterating our guidance for the 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, and we expect the level of investments in both CapEx and OPEX in our core technologies to be higher than last year. In particular, we're investing in advanced content and software for the automotive industry and in our new map-making platform. That concludes the formal part of the presentation. I would now hand over for questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by 1 on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, that's star 1 to ask a question. We will take our first question from Andrew Gardiner of Barclays. Please go ahead. Your line is open.
Good afternoon, gentlemen. Thanks for taking the question. I was hoping to get a bit more detail on the automotive side of the business. I was just sort of interested in an update on the competitive dynamics and customer positioning. More specifically, I was wondering whether you've noticed any change in customer approach to sourcing since the announcement of the HERE sale to the 3 German automakers. Yeah. Has there been any sort of change in how these guys are approaching contracts?
Yeah, Andrew, thank you. There are a number of trends, I think, in the automotive industry that are worth commenting on. I think, first of all, it seems to us, it looks, and there's increasing evidence that NDS as a map format is taking hold. That's important for us. It's a new industry standard. We're seen as leading in that domain, both in terms of map compilation, incremental updates, and software. I think that's a good trend for us. It also reduces the cost of switching for existing customers, and all of that plays in our favor because we have to gain market share. We see that our full suite of technology is maturing, and that leads to more contract wins. We also have seen a strong Q1 in terms of order intake. We will not disclose the exact number.
We'll do that later, we are on track in winning customers. We also see that there is quite some uncertainty about HERE that will not last forever. There is uncertainty, and that means that it's easier for us to get access to new customers and talk about future opportunities. It will take time to exactly understand what HERE is going to do and how that will develop. I think for the moment, this is a good time for us to strengthen relationships, build new ones, and win deals.
Thank you for that. Just sort of picking up on some of your final comment there. I'm just wondering from a strategic perspective, whether you see any shift. There continues to be talk of other companies joining or investing in HERE, including some very big tech players. Amazon and Microsoft have been talked about in recent weeks. Would that type of activity change your view on needing to partner in this part of the market?
We'll need to see, Andrew. I think it's too early to comment. We really need to wait until there is white smoke coming out of the German factories to really understand what that consortium will look like and what is the appropriate reaction would be for us.
Understood. Thank you very much.
As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from Marc Hesselink of ABN AMRO. Please go ahead. Your line is open.
Yeah, thanks. The first one is also coming back on the automotive one. If you're looking now at market shares, what do you think that the share that you're taking in the market at the moment? Also there, do you see some activity outside TomTom or HERE, now that with Android Auto, you see that also there, you and I using the Google Maps. What are you seeing on that front? Secondly, you launched now multiple geographies, the High Definition Map. How is that being used at the moment? Is it being used by partners? Is it being used in general by a lot of players in the market? Do you get data in return, or do you get some returns already on that one? Could you explain that in a bit more detail, please?
First question, what is our market share and order intake? What percentage of available business are we winning? It's difficult to give you a number there, but we think it's significantly higher than what our current market share is in shipments. We're confident that we're winning market share at the moment, but I can't put an exact number on the percentage there. Second question is, Google and Apple going into the dashboard. Yeah, we see that happening. We see that some car makers and head unit vendors are offering screen replication functionality for both Google and Apple. We also see that the penetration of built-in navigation in cars is going up at the same time. It's still surprising that there is still a big market to win for built-in navigation. We see penetration rates going up, not down.
The car industry is unwilling to hand over the keys of payment system to what could potentially be competitors. They want to keep the control and influence on what's happening in the dashboard. I think everybody in the car industry is really busy organizing themselves and getting better at software. I think that's a favorable development for us. On the last item, what's happening, too, with RoadDNA and HD Maps. We do a lot of stuff for the car industry and for autonomous driving, but our core products are RoadDNA and High Definition Maps. High Definition Maps are maps that reflect all the lines and the barriers and the crossings in a high level of detail and precision that is needed to understand where the car is and where it needs to go to for longer term planning. We provide RoadDNA.
RoadDNA is a product for localization. The GPS signal alone is not accurate enough to determine the position of a car on the road. RoadDNA is technology that helps achieving up to 10 centimeter accuracy, knowing where that car is, and that is important for steering it and planning the movements of that car. We're working with a number of car makers. They're also in development and research phase, as you can understand. A lot of car makers are using our maps, testing them, integrating them in their software. We get feedback for that, both on the map itself and RoadDNA. That is important for us so we understand what the needs are and how those needs are developing. Those products are not in production yet in the sense that they are shipped with cars.
We don't get, at this moment, sensor-derived observations back from car makers to maintain those maps and detect changes and errors in the dataset that we provide. It's definitely part of our plan, of course, to close that loop, and help with positioning, but also get data back from the car to understand where the maps are out of date.
Okay. Thanks .
Welcome.
Maybe as a follow-up, how do you see that product? The combination of RoadDNA and the high-definition map. How does that compare to the competition at the moment?
Well, people are trying different things. I think with our technology, offers a number of advantages. We are capable of compressing it very effectively. It works. It is forgiving for noise. All that is of course really important. I don't think the time is now to call for a winner. Everybody's working hard and refining the technologies and testing the technologies. It is too early to call victory. We are encouraged by the results and the feedback we get from our strategic partners.
Thanks.
We will take our next question from François Boulognié of UBS. Please go ahead. Your line is open.
Yeah. Hello. Thank you for taking my questions. I have a couple, if I may. The first one is, on your takeup market share rate, how do you explain it? I mean, what is the main driver behind it? Is it because Nokia HERE is in transition, for example, or is it price related, product related? If you could give us some colors would be great. The second one that I had is, can you give us a sense of the shape of revenues in 2016? Given that you have strong revenues in automotive, would be interesting to see how you see it shaping. The last one is your relationship with Volkswagen. It's been nine months now that Nokia HERE has been bought. How do you see this relationship going forward? Is there any disruptions in this strategic relationship?
Maybe from your point of view, are you more reluctant to work with them? Can you give us a view on this? Thank you.
Yeah. On the market share gain, is that product related, price related? What is it? I think always like our story. Our approach, we've proven over years that we are reliable partners in bringing products to market successfully. We are building on our reputation. Our map quality has improved significantly over the last three years. Our customers like our real-time map story. We are leading in traffic, we're leading in routing. There's a lot to go for. I think all that is coming together now, and there's more and more proof points that we are actually delivering according to plan. It's really a combination of product quality, technology, roadmap, but also, we continue to build on our reputation of being a reliable partner and vendor.
I hand over the revenue development line, I hand it over to Taco. Before that, I will give you some comments on the Volkswagen relationship. I think we have a good relationship with Volkswagen. I think it's too early for us to judge how that relationship will develop over the coming years. I think we need to see what's happening with HERE, how they're going to play that
Understand exactly what the future will bring. I can't comment more than that on this. On the shape, the revenue mix, it's interesting to note that in the first quarter, for the first time, I think ever, we saw content service revenue being larger than hardware revenue in the mix. It's also reflected in the gross margin that we report of 57%. That is a proof point. What we said earlier in the year, two months ago, that we see telematics and automotive will continue to grow. Licensing is expected to end up flat year-over-year for the full year. Consumer also flattish, where we see a decline in PND, what is composited by the growth of our success in the sports segment.
Okay. Your sports segments, can you give us an update on 2016? What is your target here?
We provide an update on that on a yearly basis, what the actual revenue is. What we can say as an indicator is that the sell-out, which we track because we see the activations of users using our product, has gone up. It has doubled year-over-year, Q1 compared to Q1 last year. It's an indication of growth. We don't want to provide at this point exact numbers, we're looking at double-digit growth, and I mean high double-digit growth.
Great. Thank you very much.
We will take our next question from Saul Rubin of Haitong Securities. Please go ahead. Your line is open.
Yes, hello. Just with respect to the gross margin. It's better today than it has been for a while. You talk about the revenue mix change driving that. I just wonder, as we go forward, should we expect the gross margin to continue to rise from here?
Two months ago, when we gave guidance, we guided towards a two or three basis points increase of a gross margin. Two months later, I think we can be a bit more bullish, more two or three to four basis points increase compared to last year. On the other hand, due to the success of our order intake, we will see also some additional OPEX. Bottom line, the effect is neutral. Gross margin with the change of our product mix, the change of the business units. There are three things here. One is that we decided to put a bit more on boats compared to planes. It's longer in our position. The other thing is that with broadening our lineup in consumer, widening the number of SKUs, there is also underlying trend that we need to keep a bit more inventory.
The third one is that we bought some product forward. Although this is all according to plan.
About extracting value from the PND business as it declines, which I guess means you will continue as long as you generate cash from that business. I just wondered whether a point is reached at which you do think about exiting the business and in particular the U.S. business, which is a relatively small part. Are we getting close to the point where you might evaluate the situation such that an exit from that business in the U.S. may be better for the company?
No, I don't want to speculate on that. At this point, that's not what we're planning to do. That's it. I can't make comments for the future for what we're going to do either in PND or in North America at this stage.
Okay, thank you.
We will take our next question from Hans Slob of Rabobank. Please go ahead. Your line is open.
Yes. Good afternoon. Two questions. First is on automotive. Should we expect that sales growth for automotive will accelerate in the course of 2016, also as the large PSA contract is now on stream? That's my first one. Second is on your wins in automotive are very impressive. More clients are dual sourcing. Given the long lead times of contracts, should we also expect OPEX and CapEx growth to continue also in 2017 based upon the strong order intake?
Yeah, Hans, thank you for asking that question. You know my answer on these questions, especially on the latter one. On the first one, we guided for automotive that we'll see high teens growth. As we had 26% in the first quarter, that means that it will not accelerate during the rest of the year. Q4 last year, for example, we also already saw automotive turning the corner and starting to grow again, et cetera. Anyway, this is all according to plan. There's no change in guidance. Q1 was a bit stronger than what we see in the rest of the year as a percentage growth. On OpEx and CapEx, what I said on the growth margin, that we expect growth margin to be a bit stronger in 2016. I think OpEx will be a bit higher in 2016.
CapEx, I don't expect any growth, compared to preview or a higher number than what we gave earlier in the year. For 2017, you need to wait 10 months, then we'll give you an update on that.
Okay, cool. Thanks a lot.
As a final reminder, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from the line of Shyam Kumar of TT International. Please go ahead. Your line is open.
Hi, Harold. Thanks for that. Just in terms of the order book for automotive, can you just help me understand, is that pretty much all from navigation capability demand from the OEMs, or is there also demand within there for ADAS and autonomous functions starting to come through now in the order book?
Nothing is coming through for autonomous driving except for test licenses. The amount of money involved there is really small, to be honest.
Okay.
ADAS is firmly on the radar, is firmly also in the order intake. That's coming through. That's happening. All sorts of safety functions derived from map data are starting to get integrated on a larger scale now in more cars. That's happening as well. The last development I'd like to point out in automotive is also that we are getting closer with our telematics products into the automotive industry. That is not for fleet management typically, but for connected car services. We've started to build in the flexibility on that platform, in our telematics platform, to service those type of use cases. We're starting to go out with those products and show them to the automotive customers, we think we will get some traction in that part of the business as well.
Perfect. Also, in terms of, I guess, the timeline for autonomous and more highly automated driving, there was a Goldman's conference in New York where they had these cars 2025, lots of big suppliers, Tesla, Mobileye, those kind of characters were there. It seemed like the timeline had shortened in terms of what people thought maybe a year or 18 months ago, in terms of when these kind of capabilities will be brought into the car. I guess also with the Tesla autopilot having caused a bit of a splash as well of late in terms of some excitement around there, in terms of the sort of seeming autonomy there. What are your views on the timeline and when that might start feeding through into your backlog, please?
I find that difficult to say at this stage. I think it will be a gradual path to more autonomy in the car. It will not be a big splash.
Yeah.
It will be a gradual improvement to higher levels of automation. There is, of course, a big moment in time where you go from 99% self-driving to 100% self-driving.
I think getting that last % right is obviously critical and probably the hardest thing to achieve. That's also when you get the full benefit for the highly detailed maps that we are providing.
The need for those HD maps, when the cars are semi-autonomous, is less and not as important. At the same time, there will be intermediate products also from us that will help guidance. Even if those maps that we're now producing are not used for autonomous driving, they will be used for better visualization, increasing situational awareness, and lifting the whole navigation experience to a level that we have not seen before in terms of accuracy and clarity. Also for the maps that we're producing, we see a gradual introduction, where they will start to become visible, but they're not necessarily used to the 100% of where they were designed for in the beginning. Now, timing, difficult. Personally, I don't think that 100% self-driving car will be down the road before 2020.
I'm also not 100% sure of all the developments and, of course, car makers treat this type of information also as trade secrets and commercially sensitive. There's not 100% transparency in who will be first and what will happen exactly.
Okay. That's fine. Thanks, Eskil.
We will take our next question from Sander van Oort of Kempen. Please go ahead. Your line is open.
Hi, good afternoon. Sander van Oort, Kempen. Quick question on the new map making platform. Maybe you can update us on the status where we are today. Is it already fully implemented or is it still some regions that need to go to the new platform? Then as a bit of a follow-up on the financial implications, are we still confronted with some double running costs, which negatively impact the cost level this year? Could we maybe expect some lower cost or cost savings in the years to come from the new platform? Thank you.
Sander, it is implemented for most territories. I would say 90% of the territories are running now on the new map making platform. There are very few that are not. Australia's one, because it was an acquisition last year. We bought a mapping company last year, so we haven't transformed them. It's now our mainstream product. It's in full use. We're tuning it. It is a full production. We are tuning it. We're getting better results every day from that platform. That is good. Before we get the full benefit. This whole platform is really designed to lay the foundation for automated map making. Map making is still a very laborious job. We want to have much higher degrees of automation going forward. Having that platform is kind of foundational, because if now we can start the automation of map making itself.
That is really exciting, obviously, because that has a promise of reducing map making cost and improving quality and freshness of the map by a factor. That's not where we are today. We're not much more efficient than we used to be. We will build on that efficiency soon, then we will see real cost benefits and quality benefits and timing benefits coming through in 2017 and beyond. This is a transition year. We're adapting our processes. We will change the organization. We have much more flexibility in how we can organize our work and our workforce. That will give advantages. Then the real advantages in terms of automation will come through in 2017 and beyond.
Okay, thank you.
Thanks, Sander. That was the last question for today's call. I would like to thank you all for joining us this afternoon. If you have any follow-up questions at a later time, please give us a call or send us an email. Thank you all very much. Operator, you can close the call.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.