Earnings Call: Q1 2016

Apr 19, 2016

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. You. Please note that this conference is being recorded. I will now turn the call over to your hostess for today's conference, Ms. Sarah Grovesett, Head of Treasury And Investor Relations. You may begin. Thank you, Alex. Good afternoon, and welcome to our conference call during which we will discuss our operational highlights and financial results for the first quarter With me today are Harold Hudane, our CEO and Stacquel Titelard, our CFO. You can also listen to the call on our website and the recording of the call will be available shortly afterwards. And as usually, 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. And with that, Harold, I would like to hand over to you. Good afternoon and good morning. Thank you very much, Pizera. 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 1,000,000, which is 6% higher year on year, and we delivered a strong gross margin of 57%, which is 3 percentage points above last year. Paco 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 to sell out amounts of our sports watches nearly doubled year on year, and the new Watches are winning numerous awards, which is not a 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 on year. Our market share in both regions improved slightly year on year. Our telematics business continued to perform well. Installed based 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 and 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 navigation to the new Volkswagen app smartphone app and we extended our partnership with Fiat Chrysler and Toyota this quarter. We also extended HD Map and wrote DNA 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 Roche DNA is attracting considerable interest from the industry and leading carmakers. Let me now briefly summarize our group's strategic priorities on Slide 3. Our activities are organized around 4 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 will position to capture growing opportunities in the area of consumer wearables, automotive driving, connected car and telematics. These areas all require to signal technological and product expertise that TomTom is able to provide and form an important part of our growth strategy. For 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 GBS sports watches and action cam, we've diversified the consumer portfolio into the sports market and we aim to continue to build on this with innovative new products. Our new mapmaking platform is essential 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've leveraged our mapmaking 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, and 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 remained favorable. A combination of short return on investment for our customers and an underpenetrated 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. And 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 investments in the new future. Future, and this is needed to support delivery of new business and sustainable future growth from Tom. This concludes my part of the presentation and now handing over to Taco. Thank you, Harold. I would like now to comment on the financial results. Revenue in the quarter was EUR 2 17,000,000, an increase 6% compared with last year. Our Sport Automotive Licensing And Telematics businesses grew strongly till set the reduction in P And D And Automotive Hardware revenue. Now the 4 business units, consumer the revenue was down 4% year on year to 1,000,000. This is a result of a strong growth in our sports activities. As already mentioned, we saw the sell out amounts for sports, which is doubling year on year. This growth is counterbalance by lower P and D and related component services revenue and by lower automotive hardware revenue. Automotive had a strong quarter with $30,000,000 of revenue. This is 26% revenue growth year on year, driven by growth in MEPS and traffic revenue underpinned by the order intake of the last several years. Our licensing revenue was 34,000,000 in the first quarter, a 16% growth compared with same quarter last year. Do need to point out here that this is an increase, from new customer wins, but also renewing of and extending of existing customer contracts, which we commented on in the second quarter of 2015. Q22 2015 improved the EUR 5,000,000 catch up, which will not be there in Q2 2016. Telematics revenue was up by 19% year on year to EUR 37,000,000. The recurring subscription revenue for the quarter increased by 28% year on year to EUR 29,000,000. Our monthly subscription, ARPU decreased slightly year on year owing to the impact of the acquisitions. We delivered a strong gross margin points higher compared with 54 in Q1 2015. This year on year increase was mainly driven by higher portion of content and services revenue in the quarter. OpEx for the quarter was $128,000,000 compared with 1 $50,000,000 in the same quarter last year. This increase is driven by increased SG and A expenses, reflecting growth of our workforce and higher marketing to support our versus 2015. We delivered a net result of EUR 5,000,000 this year, which translates in an 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 50,000,000 cash flow used in operating activities for the quarter was EUR 80,000,000, EUR 5,000,000 higher compared with last year. The cash flow used in investing activities during the quarter increased by EUR 7,000,000 to EUR 31,000,000, mainly reflecting increased in that investments in map content, our map making platform and customer specific investments. Let's now move on to our outlook for 2016, Slide 5. We are reiterating our guidance for the year, we expect revenue of around 1,000,000,501,000,000. The adjusted earnings per share is expected to grow by around 10% to and we expect the level investments both CapEx and OpEx in our core technology to be higher than last year. In particular, we're investing in advanced content and software for the Automotive industry and in our new mapmaking platform. That concludes the formal presentation, formal part of the presentation. I would now hand over for, Please ensure the mute function on And 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 HEAR sale to the 3 German automakers. Yeah, has there been any sort of change in how these guys are approaching contract? Yes, Andrew, thank you. Yes, there is, you draw a good number of, trends, I think, in Automotive industry, they are worth commenting on. I think 1st 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 as a new industry standard. We have seen it 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 switching for existing customers and all of that is placed 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 1st quarter in terms of, order intake. We will not disclose the exact number. We'll do it later, but we are on track in winning customers And we also see that there is quite some uncertainty about here that will not last forever, but there is uncertainty and that means easier for us to get access to new customers and talk about future opportunities. So, it will take time to exactly understand what he is going to do and how that will develop. But I think for the moment, it is this is a good time for us to strengthen relationships, build new ones and win deals. Thank you for that. Also just, I mean, sort of picking up on some of sort of your final comment there. I'm just wondering from a strategic perspective, whether you see any shift? I mean, there continues to be talk of other companies joining or investing in here, including some very big 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 that we really need to wait and there's white smoke coming out of the German factories to really understand what that consortium will look like and what is the appropriate reaction for it would be for us. And the question comes from Mark Hasselink of ABN AMB. Please go ahead. Your line is open. Yes, thanks. The first one is also coming back on the automotive 1. If you're looking now at market shares, what do you think that the share that you're taking market at the moment? And also there, is there, do you see some activity outside, TomTom or here? Now that with Android auto, you see that also there you and Diet using the Google Maps, what are you seeing on that front? And then secondly, you launched the now multiple geographies, the high definition map. How is that being used at the moment? Is that 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? Yeah. First question, what is our market share and order intake? So what percentage of available business are we winning? We it's difficult 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 on the percentage there. 2nd question is, Google and Apple going into the dashboard. Yes, we see that happening. We see that some car makers and head unit events are offering screen replication functionality for both Google and Apple. But 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 or pigments them to what could potentially be competitors. They want to keep a control and influence on what's happening in the dashboard. And I think everybody in the car industry is really busy organizing themselves and getting better at software. And I think that's in a favorable development for us. On the last item, what's happening to with row DNA and HD maps. So we do, we do a lot of stuff for the currency, you know, autonomous driving, but our core our road DNA and eye definition maps. Eye definition maps are maps that reflect all the lines and the barriers and the crossings in, 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 and we provide road to DNA and road DNA is a portal for localization. So the GPS signal alone is not accurate enough to determine the position, of a car on the road row DNA 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 carmakers are using our map testing them, integrating them in their software. We get feedback, for that, both on the map itself and row DNA. That is important for us. So we understand what the needs are and how those needs are developing, but those products are not in production yet in the sense that they are shipped with cars. So we don't get this moment sends or derived observations back from carmakers to maintain those maps. And detect changes and errors in the dataset that we provide, but 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 cars are out of date, where the maps are out of date. Okay. Thanks, Esky. Maybe as a follow-up, how do you see that product, so does the combination of ROWD and A and the high definition map? How does that compare to the competition at the moment? Well, so people are trying different things. I think, there are with our technology offers a number of advantages. We are capable of it very effectively. It works, it is you know, it is, it is forgiving for noise. All that is, of course, really important I don't think it's too at the time it's not to call for a winner. Everybody's working hard on refining the technologies and testing the technologies. But it is too early to call victory, but we are encouraged by the results and the feedback we get from our strategic partners. We will take our next question from Francois Bumini of UBS. Please go ahead. Your line is open. Yes, hello. Thank you for taking my questions. I have a couple ma'am. So the first one is on your take up market share rate. How do you explain it mean, what is the main driver behind it? Is it because Nokka here is in transition, for example, or is it press related product product related. So if you could give us some color would be great. The second one that I had is how can you give us a sense of the shape of revenues in 'seventeen? I mean, given that you have strong revenues in automotive, would be, would be interesting to see how you see it shaping. And the last one is, is your relationship with Spots again? I mean, it's been 9 months now that Nokka here has been bought. Are you I mean, how do you see this relationship going forward? Is there any like, descriptions in this strategic relationship or maybe from your point of view, are you less, I mean, more reluctant to work with them? I mean, Can you give us a review on this? So on the market share gain, is the product price related for this? I think it's I think always like our story. Our approach we've proven over the years that we're reliable partners in bringing products to market successfully We are building on our reputation. Our map quality has improved significantly over the last 3 years. Our customers like our real time map story, we are leading in traffic, re leading and routing. So there's a lot to go for. And I think all that is coming together now and there's more and more proof points that we're actually delivering according to plan. So 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'll hand over the, the revenue development line I do that to hand it over to Taco, but before that, I will give you some comments on the Volkswagen relationship. I think we have a good relationship with Volkswagen, but I think it's too early for us to judge how that relationship will develop coming years. I think we need to see what's happening with here, how they're going to play that, and then understand exactly what the future, will bring. I can't comment more than that on this. Yes, on the shape, the revenue mix, it's interesting to note that in the first caller, for the first time, I think ever, we saw content of 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 2 months ago that we telematics and automotive, will continue to grow. Licensing is expected to end up flat year over year for the full year. And consumer also flattish where we see in the decline in P and D, what is compensated by the growth of our success in the sports segment. Okay. And your sports segments, I mean, can you give us an update on 16, what is your target here? Yes. So 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 sellout, 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, but 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 been, 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? So, 2 months ago, when we gave guidance, we guided towards 2 or 3 basis points increase of a gross margin 2 months later, think we can be a bit more bullish, so more towards 3 to 4 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. So bottom line, the effect is neutral. Gross margin, with the change of our product mix, the change of the business units Yes, there are 3 things here. One is that we decided to put a bit more on boats compared to planes. So there's a little more, in our position. And the other thing is that, with broadening our lineup in consumer widening the number queues, there is also underlying trend that we need to keep a bit more inventory. And the third one is that we bought some product forward, although this is, 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. And 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. Maybe 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. And that's it. I can't make a few comments for the future for what we're going to do either in BND or in North America at this stage. We will take our next question from Hans Lob 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 SD large PSA contract is now on stream. That's my first one. And second is on while your wins in automotive are very impressive, more clients are dual sourcing. But given the long lead times contracts, should we also expect OpEx and CapEx growth to continue also in 2017 based upon strong order intake? Yes, Hans, thank you for asking that question. You know my answer on these questions, but especially on the latter one. But on the first one, we guided for automotive that, we will see high teens growth. So, as we had 26% in the first quarter, that means that it will not accelerate during the rest of the year. Because, Q4 last year, for example, We also already saw automotive turning the corner and starting to grow again, etcetera. But anyway, this is all according to plan. There's no change in guidance, but Q1 was a bit slower than what we see in the rest of the year. As a percentage growth on OpEx and CapEx, while I said, on the gross margin, so that we expect gross 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 prefigure or a higher number than what we gave earlier in the year. And for 2017, Yes, you need to wait 10 months and then we'll give you an update on that. Our next question comes from the line of shyam Kumar of TT International. Please go ahead. Your line is open. Hi, Hal. Thanks for that. Just 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 autonomous driving except for test licenses, but the amount of of money involved there is really small, to be honest. ADOS is firmly on the radar. It's firmly also in the order intake. So that's coming through. That's happening. So, all sorts of safety functions derived from map data are starting to get integrated on a larger scale now in more cars. So 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, and 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, and we think we will get some traction in that part the business as well. Perfect. And also in terms of, I guess, the timeline for autonomous and more highly automated driving. I went to there was a Goldman's conference in New York where they had this car's 2025 lots of big suppliers, Tesla, mobile. Those kind of characters were there. And it seemed like the timeline has have 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. And 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 it 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. It will be a gradual improvement and self driving to 100% self driving. I think getting that last percent right is all is critical and probably the hardest thing to achieve. And that's also when you get the full benefit for the highly detailed maps that we are providing. And the need for those HD Maps when the cars are semi autonomous is less and more important. At the same time, there will be intermediate products also from us that will help guidance So 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 a level that we have not seen before in terms of accuracy and clarity. So 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 percent of, 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. But I'm also not a 100% sure of all the developments. And of course, car makers treat this type of information also as trade secrets and commercially sensitive. So there's not 100% transparent see in, in who will be 1st and what will happen exactly. Okay. And I guess in terms of Okay. Okay. That's fine. Thanks, Harold. We will take our question from Sandovalon of Kempen. Please go ahead. Your line is open. 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 region that need to go to the new platform. So, and then as a bit of a follow-up on the financial implications, are we still confronted with some double running which negatively impact the cost level this year? And could we maybe expect some lower cost savings in the years to come from the new platform? Yes, Selma, it is implemented in most, for most territories, I would say, 90% of territories are running now than you have making platform. And, there are very few to the malls. Australia has won because it wasn't position. Yes, last year, we bought a mapping company last year. So we haven't transformed them, but it's now our mainstream product it's in full use, retuning it, we're getting rid of the, of the, let's say, it is a full production. We are tuning it. We're getting better results every day from that platform. And that is good, before we get the full benefit. So this whole platform is really designed to to lay the foundation for automated map making. Map making is still very laborious job. We want to have much higher degrees of automation going forward. And having the platform is kind of foundational because if now we can start the automation of mapmaking itself. And that is really exciting obviously, because that has a promise of reducing mapmaking cost and improving quality in fresh insolvent by a factor. That's not where we are today. We're not much more efficient than we used to be. But we will build on that, efficiency soon And 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. So that will give, advantages And then the real advantage is to, of, automation will come through in 2017 and beyond. 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 operator you can close the call. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.