Welcome to TomTom fourth quarter 2021 earnings conference call. At this time, all participants are in listen only mode. We will be facilitating a question and answer session toward 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 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. Having now turned the conference over to your host for today, Freek Borst from Investor Relations. You may begin, sir.
Thank you, operator. Good afternoon, and welcome to our conference call, during which we will discuss our operational and financial highlights for the fourth quarter, 2021. With me today are Harold Goddijn, our CEO, and Taco Titulaer, our CFO. 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 outlook from Taco. We will then take your questions. As usual, I would like to point out that safe harbor applies. With that, Harold, I'd like to hand it over to you.
Yeah. Thank you, Freek, and welcome, ladies and gentlemen. Thank you for joining us today. I will go briefly over our key operational highlights and strategic progress, and then Taco will give you further information on the financials and the outlook. We look back on 2021 with mixed feelings. The global semiconductor shortages and other supply chain issues caused delays in car production that resonated throughout the entire industry. On the flip side, we recorded our best order intake in years, which contributed to a growing backlog of EUR 1.9 billion. Included in that backlog is the partnership with Volkswagen. We will launch an EV-centric navigation service for the VW brands, and it's a clear proof point that we're shifting from a traditional role as a supplier towards longer term partnerships with our customers.
I also want to highlight the launch of our TomTom IndiGO digital cockpit platform. The platform is designed to help car makers develop holistic and modern user experiences at a fraction of the time and cost that is normally associated with in-car software development. The platform has built-in functionality for modern workflows, early integration, and incremental upgrades. TomTom IndiGO will start shipping towards the end of 2022, beginning of 2023. We are seeing attractive opportunities to continue to build on a strong automotive backlog and a strong product and technology base. With the connected car becoming mainstream, we can also further harmonize our product portfolio. A cloud-first product range can be deployed both across automotive and enterprise markets. Our core products will be suitable for a wider range of use cases also in the enterprise space.
As a result, we see significant opportunities in the fast-growing enterprise market. We continue to invest in innovative map-making technologies, and we expect that will result in better and fresher maps. As we achieve higher levels of automation, we expect material efficiency gains to come through in 2023. A combination of growing revenue and the realization of cost efficiencies will set us up for strong free cash flow as of 2023, and with the ambition to reach 10% free cash flow yield over time. I'm looking forward to update you on our strategy on our Capital Markets Day in the second half of this year. This concludes my part of the presentation. I'm now handing over to Taco.
Thank you, Harold. I will provide some commentary on the financials and outlook. We'll then go to the Q&A. In the fourth quarter, we reported group revenue of EUR 115 million, 8% lower than the same quarter last year. Location technology revenue decreased 11% to EUR 91 million. Let me go through revenue business by business. Automotive IFRS revenue was EUR 47 million, representing a 21% decrease from the fourth quarter of 2020. Automotive operational revenue decreased 17% to EUR 71 million, slightly better than the development of car production volumes in Europe and North America. Enterprise reported revenue of EUR 44 million, a year-on-year increase of 4%. This increase is primarily due to the expansion of contracts from existing customers. During the fourth quarter, consumer revenue increased 3% year-on-year to EUR 25 million.
Previous quarter's sell-in was impacted by supply chain issues, leading to pent-up demand, which we were able to satisfy this quarter. In the fourth quarter, gross margin was 82% comparable to last year. Operating expenses were EUR 130 million, representing a decrease of EUR 52 million compared with the same quarter last year. This decrease is mainly associated with lower amortization as the Tele Atlas database that were acquired in 2008 was fully amortized last year. Excluding the impact of depreciation and amortization, operating expenses were roughly flat year-on-year. Increased research and development costs related to our application layer were offset by savings in sales and marketing. Free cash flow in the quarter was an inflow of EUR 57 million, compared with an inflow of EUR 34 million in the same quarter last year.
The improved free cash flow is mainly the result of timing of invoicing and faster collection from our customer. Lastly, our net cash position was EUR 356 million at the end of the fourth quarter. Now moving to the next slide. As mentioned earlier by Harold, we reported an automotive backlog of EUR 1.9 billion, an increase from the EUR 1.8 billion of last year. Our automotive backlog is the sum of total expected IFRS revenue from all awarded deals. As such, the backlog decreases when revenue is recognized and increases when new deals are awarded. Importantly, it also increases or decreases when customers revise their forecast for car production volumes. The increase in our backlog represents our second-best order intake, which was partly offset by customers' downward revisions of near-term car production volumes on existing deals.
To provide additional transparency on automotive revenue expectations, we give an indication of how the backlog will materialize in revenues over the coming years. Most of the recognized revenue for 2022 will be the outcome of the current backlog. Reported revenue for later years will be based on a combination of new deals and our backlog. We'll provide an update to our backlog on an annual basis with our full year results. This brings me to the outlook for the coming years, presented on the next slide. We have provided guidance for both 2022 and 2023. Although we see supply chain issues persisting into 2022, we expect automotive operational revenue to significantly increase with roughly 15%.
As our automotive product offering shifts towards a software as a service model, corresponding increases in automotive reported revenue are phased over a longer period of time. In enterprise, we renewed various customer contracts. Some of these renewals reflect lower usage, translating into a reduced contract value. This will impact our enterprise revenue as of the fourth quarter of 2022 and beyond. In summary, we expect location technology revenue will be roughly flat in 2022. Group revenue is expected to be in the range of EUR 470 million-EUR 510 million. In 2022, we will continue investing in our map making platform and application layer, leading to negative free cash flow of around 5% of the group revenue. We have good visibility on the return to group revenue growth in 2023, along with continued strong automotive operational revenue growth.
We expect group revenue of around EUR 500 million-EUR 550 million and location technology revenue between EUR 425 million-EUR 475 million in 2023. Higher revenue efficiency gains should lead to strong positive free cash flow generation from 2023 onwards. We expect free cash flow as a percentage of group revenue of at least 5% in 2023. Operator, we would now like to start the Q&A session.
Thank you. We will now begin the question and answer session. If you have a question, please press star and then one on your phone. If you wish to be removed from the queue, please press hash key on the pound sign. If you're using a speakerphone, you may need to pick up and answer first before pressing the numbers. Once again, if you have a question, please press star one on your telephone. The first question is from François-Xavier Bouvignies from UBS. Please go ahead.
Hi. Thank you very much. My first question is on the backlog, if I may, of EUR 1.9 billion. So maybe can you give us a sense of how much exactly was the impact on your backlog from the revision, the evaluation of some contracts? And more importantly, how is your market share doing? I know we talk that every quarter, but if we look at your guidance and, you know, the production of cars, you know, you used to, in the past, outperform significantly even on the operational, automotive revenue side. It seemed that, it's really slowing down, this outperformance, if any. You know, it raises a question on your market share dynamic here, you know?
I was just, you know, how you feel about the market share globally, and to explain this performance versus the production maybe that is less strong. Yeah, that would be my first question.
Okay. Thank you, François. Let me take your first question, and then I hand off to Harold for the market share and take rate question. A rough estimate is that it is close to EUR 1 billion. It's a bit less than that, but that's the order of magnitude.
Okay. That's clear. Thanks. On market share, Harold.
Yeah, market share. We have been on a good trajectory. We won a couple of significant accounts in the past couple of years. They have not materialized into sales, so we see that coming through accelerating the sales in 2023, when most of those contracts start to deliver invoice revenue. Difficult to say where we are absolutely in terms of market share. You know, I think 2021 was a good year with the, you know, further expansion into the German car makers with a significant deal with Volkswagen Group. As far as we can see, we haven't lost anything. You would expect that market share will continue to grow.
I think it's fair to say that the rate at which that market share is growing is slowing down a little bit.
Why is that, you think?
Well, I think it's mostly addressable market, where we are operating, what is available, and what comes up for grabs. Those are the main drivers.
Okay. Maybe on the investment side, so you seem to decide to invest more heavily in 2022. It's not the first time that you increase your investment. What can you say about, you know, the level of confidence about this return on investment and when are we gonna see these, you know, benefits would be very interesting.
Yeah. We are on this trajectory for some time, and we've touched upon the what it is we're doing. The key thing that will have a positive effect, impact on efficiency and cost base is automation of mapmaking. We are quite excited about what's going on. We are on this path for some time. We are again spending a considerable amount of money this year in getting that achieving high degrees of automation. We think we are now in a position that we can start planning for significant cost efficiencies coming through in 2023. It's not just the cost efficiencies, I think, that are important, but it's also product quality that will improve significantly as a result of those investments.
We are historically very much navigation-focused, and that's great because it's a very difficult use case. There's a lot more out there, and our maps and technology are less suitable for instance, let's say visualization. We can close those gaps by deploying those more modern software-driven map development programs. The third dimension is freshness. By having these automated processes in place, we expect that the time between a change in the real world and the time that's reflected in the application will reduce significantly. Net-net, we will end up with a better product that we can build more efficiently and that can serve more use cases.
That's why it's important that we do what we're doing in 2022 and not slow down, but keep going, keep pushing. Towards the end of 2022 and beginning of 2023, those effects will become visible in both product quality and cost efficiency. There's another level of investment that's taking place, and that is in harmonization of our product portfolio. We had two distinct product development lines, one for automotive and one for everything that's not automotive. But because automotive is getting online now, we have a cloud-first approach to also automotive products, there's an opportunity to share the technology base for broader products that are also suitable to sell in the enterprise market.
As a result of that, we think that our quality and our competitiveness in the enterprise market will also improve. That is important because we see that that's a fast-growing segment, and we see opportunities to grow our presence and our top line also in the enterprise space. The enterprise space has been growing but slowly, and we think that there's opportunity for accelerating that growth in the midterm.
Mm-hmm. That's clear. Thank you, Harold. Since I follow you, I mean, it's been a while now. It was more about investing than cost savings, if you like, or gains. I think it was part of your strategy to invest. It's the first time I hear you know, talking about operational leverage and efficiency. My question is there a change you want maybe to run the business? I mean, are you changing something or are we gonna see this efficiency gain offset by further investment down the line like it was in the past to, you know, to continue expand, if you see what I mean. Are you changing a bit? Yeah.
We are changing. This is technology-driven. You have to bear in mind that mapmaking is a, you know, labor-intensive activity. It's a big commitment to build and maintain a map that spans the globe. In that area, we see indeed a breakthrough in the technologies we're using to build those maps. The elements here are the availability of much more data that's in the open source. A lot of data that we are now collecting from vehicles that used to be GPS only, but it's more and more rich sensors that also produce video images, pictures, traffic signs that are hitting our servers.
The way we build those maps is much more extracting data from signals that are hitting our servers. In the old days, we had to go out and find the information or collect the information or produce the information ourselves. Now it's about extracting features from an enormous amount of data that's hitting our servers. The technologies that enable that are computer vision, cloud technology in general, AI, machine learning. All that stuff is now coming together to do a significant proportion of map production in a more automated way. It's not everything. There are still some labor-intensive activities that, where we don't have the solution for automation, but in a significant proportion of the map operation, the emphasis is on software-driven mapmaking systems.
We are on this for quite some time. This is not new. There's more and more proof points that we are on the right track and can indeed look forward to significant improvements in efficiency in 2023. That's where the plan is based on. It also means that the organization is going through tremendous change. We have been able to attract an awful lot of talent, also in difficult times during the corona crisis. The last 2 years, we've been able to attract talent from class leading tech companies. A lot of engineers like the stuff that we're doing. It's cutting edge, it's impactful, it's important work with real world consequences and impact.
That's what helps us to transition also our capabilities from pure mapmaking to also building a world-class software engineering capability. You add it all up, the strategy is for top line growth, cost efficiency. As I said also in my introduction remark, that has to lead to much stronger cash flow going forward. You know, there's a reason we gave also some guidance for 2023. We need to get over the hump in 2022, but in 2023, we expect cash flow of around 5% or higher than 5%. The goal is to stretch that to at least 10% going forward.
How long it will take us to get there, I can't give you a date, but we will drive the operation of this company more like a tech software firm with higher growth, operational leverage, and stronger cash flow. Those are the key ingredients that we're working towards.
Great. Thank you very much, Harold and Taco, for your answers.
Thank you for your question. We have the next question from Marc Hesselink from ING. Please go ahead. Your line is open.
Yes, thank you. First question, and sorry if I missed it, I'm dialed in slightly too late. If you look at the automotive growth and then more the operational growth in the coming years, the impact of deferred revenue, do you think that it is going to increase? Therefore, the growth that you show on the operational growth is going to be more than what you see in the IFRS line?
My second question would be on IndiGO. You announced that you had the first client. Can you say a bit more about that? Is that already a significant volume? What does it mean for the ASP, yeah? Do you typically stack that then with your other products? Is there like a spillover effect that because this product, you can also sell more of the other ones? A bit of extra background on that one, please.
Yeah. I was very busy finding the answer to your first question, so I missed the second question, but I'll leave that to Harold to answer. To answer your first question, the addition to the deferred revenue in automotive that we expect in the coming 2 years, in absolute terms is relatively stable. So, that as a percentage, it goes down, but in absolute terms, it's roughly EUR 50 million. Okay. On IndiGO, first contract has been signed. Very excited about that. We expect the end of 2023 to start shipping that product. Don't expect huge numbers. It will take time before you will see that.
It is a significant win, and it opens the market. I think it adds credibility, robustness to the product offering that will help us to sell this also to other potential customers. There's a side effect also working with IndiGO. IndiGO is designed to make software integration easier. Of course, that matters also for our own products, our own navigation services. The costs for integration are significantly lower than when you have to start from scratch and design and adjust your software to different operating systems and screen sizes and whatnot.
All this is taken care of in IndiGO as a framework, and it makes it for us much easier and faster also, and cheaper to bring our software services to life.
Maybe as an idea, the reason that you started to develop this, is this a sort of pull from your client? You're in discussions with your client, and they ask you to add this to the product stack? Or does it work a little bit the other way around? You think that clients need this and therefore you started developing this.
Well, it's kind of interesting. It's a bit of both. We have, of course, interaction with customers, and we had some broad interaction with a large car maker. You know, we had a bit of a workshop on how would you do it? If you had to start from scratch and you had to bring software into the vehicle, what would you do? That was the question that we got asked. What would you do to make this faster and efficient? We came up with this product concept of IndiGO, TomTom IndiGO. We liked it so much that we started to develop it, but we developed it at our own risk. It wasn't a customer-driven development.
It was a original software product coming from our own people. The fact that we did find a customer so quickly after the launch of the product seems to suggest that we're onto something significant.
Yes, and also beyond that, because you had quite a big launch event. Can you share a bit the initial feedback from maybe other clients?
Yeah. This is an industry first. There is no comparable product offering. It was well received. We got seven webinars and customer events and whatnot. Then really a lot of interest and also people are looking into it in detail. We won a prize for this product as well, which helps also to give it more weight and credibility. I think generally speaking, the industry recognizes that this is something that is needed. I think it was well received generally speaking. I haven't heard much negatives about the whole concept. It helps us also to get the discussion with our customers and for project work at a different level.
We have this. It helps us also to have a more strategic approach to partnerships and software development for the cockpit.
Okay. Thanks. Final question I had is the comment in the press release that you see a bit more shift towards a software as a service model. Is that a shift from your automotive clients, that they instead of going from a license model where they pay up front, that they really want to make that shift? Because I remember from the past that was always a very difficult switch for your clients. Or is this related to other products?
No, it is more in the IFRS treatment. If you have a product that is continuously updated and refreshed
You need from IFRS point of view to treat it as a software as a service. In essence, that's what it is as well. From cash point of view, the payment treatment is still very much that it is paid fully up front. Clear. Okay. Thank you.
Thank you for your question. As a reminder, if you wish to ask a question, please press star one. We have one question from Miki Sugimoto from Redwheel. Please go ahead. Your line is open.
Thank you. Good afternoon. This is Miki Sugimoto from Redwheel. I just wanted to confirm, for this year auto outlook, perhaps I misheard, but, the operational revenue, you're looking for 15% year-on-year increase. Also separately, I wondered what you have assumed for the general market auto production for this year. That's my first question.
Your first question is our operational increase of automotive revenue?
The operational revenue. Yes.
Yeah.
Yes.
It will increase with 15%.
Okay. What auto production are you assuming for industry in general in Europe and U.S. for this year?
Yeah, a similar number, so, in the high teens.
Okay. If I may go to the next question, and again, just confirming what the previous person asked, is that the software recognition is purely accounting treatment and it's nothing to do with the way the OEMs are paying to TomTom?
No.
No. Okay.
No.
Okay.
The OEM like to pay at time of production and add it to the full amount in the bill of material.
Okay. If you could have a little bit more color on the new EV centric map that you new win with VW. Just wonder what the key differences are. Is it in the, I guess there would be new features, then perhaps there may be higher ASPs, or the way you update it is different. A little bit more color would be very helpful. Also in terms of.
Yeah.
Sorry, just one more thing is that.
Yes.
Would it be applied to most of the VWs, EV, or what would be the sort of the take-up or the usage within their model? Thank you.
Thank you. The solution that we are licensing to VW is both for electric vehicles and for combustion engines. It is across the whole range of all their cars and all their brands. There's a few exceptions. I think China is not included, but otherwise it encompasses the whole product portfolio of the VW Group. We mention EV-centric because EV, electric vehicles, play such an important role in the Volkswagen product portfolio and Volkswagen strategy. EV services are. You know, there's still a lot of development going on there. We haven't cracked it completely. How we calculate range, how we optimize for charging, where do we charge? How fast can we charge?
How long do we need to charge to optimize your road? What is the impact of weather, of hills, of traffic jams? What is the impact of all those events on the consumption model? There's quite a bit of algorithmic work going on there and machine learning to distinguish those patterns and achieve a higher accuracy in planning and range calculation. The second element is how do you present all this to the end user? How do you give the end user the interaction and the confidence that what it is he can see, and how does he interact with all that, to get it to you know, to make it all meaningful. There's quite a bit of work.
It's harder than you think at first sight, to be honest. There's quite a bit of variables. The usability and user experience bit is also not to be underestimated.
Okay. May I ask, roughly, for this particular contract to start be recognized in revenue, this would be more like 3 or 4 years down the line with the usual car model development or?
No, this will happen faster.
Maybe if I can chip in, commercially, the product will launch in 2023. From operational point of view, we expect to receive meaningful revenue in the year after. From an accounting point of view, we have to wait until 2025.
Okay. My other final question would be more about ADAS for the OEMs and of the new wins that you have seen this year, how much of these ADAS features is included or have you seen?
Yeah, we saw. I can't give you the exact percentage, but there is a big drive to, especially in Europe, to get Intelligent Speed Assistance enabled in cars. It becomes a requirement in 2023, where the car makes you to display the maximum speed that is allowed. We have some class leading products in that space, and we see good demand for those. That's accelerating our ADAS product and the percentage of ADAS in the overall revenue mix.
Okay. Okay, thank you very much. That's really helpful.
Thank you.
Thank you for your question. We have the next question from Wim Gille from ABN ODDO. Please go ahead. Your line is open.
Yes, a very good afternoon. I've got two questions. First, during the call, you mentioned that your enterprise business is growing underlying, but that, let's say from a revenue perspective, we don't see that, not yet. Meanwhile, on the outlook, we also see that you have to renegotiate some of the contracts, most notably with your largest client in the enterprise business, which will take a fair chunk out of the revenues in 2023. Can you give us a bit more granularity or feeling where we are with respect to those, let's say, discussions that you have with new clients, and how should we model the enterprise business going forward?
When should we finally see some real tangible growth in that area? The second question was more on the investment side. You mentioned quite a bit of product still to be developed in 2022, hence a higher OpEx in that year. Most of these, you know, projects will cease to or come to an end in 2022 and hence that the OpEx in 2023 will come down. Can you give us a bit more plan feeling on where OpEx on an absolute level in 2023 will end up based on your current modeling and guidance? Thanks.
Yeah, let me take the second question and then I'll hand over to Harold to answer the enterprise question. To put things in perspective, OpEx last year was EUR 500 billion. We expect OpEx to grow to roughly EUR 510 million this year. That is on the back of a decrease of D&A. The cash spend will be higher. D&A will decline from roughly EUR 75 million- EUR 55 million. There's an incremental decline of D&A of EUR 20 million with a stable CapEx number and an increase of OpEx of EUR 10 million. You see EUR 30 million extra roughly in OpEx this year.
The year after, in 2023, we think the D&A will modestly decline further to, let's say, EUR 50 million. But we expect the total OpEx number to reduce to around EUR 470 million. If you look at the detail of that EUR 470 million, then most lines will go up, apart from the geographical data line, where we see the most significant reduction. The reduction in OpEx, overall reduction, will be driven out of that line, the geographical data. I hope that answers your question around OpEx. Harold, on Enterprise.
There's a lot going on in the enterprise space as well. I can split that in two different type of customers we are engaging with. You have typically the larger enterprises who take uncompiled maps from us. There's a number of discussions going on which will hopefully lead to new contract wins with new customers as well. Second is the broader enterprise market, where we will launch some new products also already in 2022, where we also see good opportunities to further grow our API and SDK business.
I think a bigger push for enterprise sales, we're preparing that now, and I think that will start to become visible to the market, you know, in the end of 2022, beginning of 2023, you know, where we'll launch some new products and new services as well.
Thank you.
Thank you for the question. With any other question, I will hand over the conference to you, sir.
Thank you. Since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you may now close the call.
That concludes the conference for today. Thank you for participating. You may all disconnect.