Good day, ladies and gentlemen. Welcome to the TomTom's third quarter 2021 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, please 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 host for today's conference, Claudia Janssen, Head of Investor Relations and Group Control. You may begin.
Thank you operator. Good afternoon, and welcome to our conference call, during which we will discuss our operational and financial highlights for the third 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 would like to hand over to you.
Yeah. Thank you very much, Claudia Janssen. Welcome, ladies and gentlemen. Thank you for joining us today. I will briefly go over the key operational highlights for the quarter, and then Taco will provide further information on the financials and the outlook for the year. The first nine months of 2021 have delivered both positives and negatives. I think Enterprise continues to perform solidly, but of course, the recovery of the Automotive segment disappointed because of industry-wide semiconductor shortages. Encouragingly, the way we engage with our customers is evolving from a more traditional supplier-customer relationship to a more partner-based approach. Car makers in particular are quickly developing software engineering capabilities, and we see more effective collaboration models that turn into long-term partnerships, customer intimacy, product software, effective and productive engineering collaboration, and most importantly, better products. We've also developed with our customers mutually beneficial data exchange programs.
We are structurally increasing those programs which now involve next to floating car data, large scale exchange of sensor-derived observations from vehicles, as well as map editing partnerships where we give customers direct access to our map database using friendly map editing tools. We are now at a point where we increasingly convert those data streams in our automated map making processes to ensure fresher and better maps. We extended, in the quarter, our longstanding partnership with Precisely, which is formerly known as Pitney Bowes, and we will continue to provide map and traffic data which Precisely incorporates into their location and enrichment products. In automotive, we saw the launch of the new Jeep Grand Cherokee and the Jeep Compass, which both feature our full-stack navigation with over-the-air updates and an array of connected services.
Fiat launched the new Ducato, which is Europe's best-selling light commercial vehicle, and that car utilizes our full-stack navigation, extensive connected services, ADAS. All those products in combination enhance safety, let drivers avoid roads that are not suited for the vehicle. We also launched a real predictive traffic service in the Ford Focus. Over the first nine months of 2021, deal activity for both Enterprise and Automotive has been strong, and we expect further significant wins for the last quarter of the year. This concludes my part of the presentation, and I'm handing over to Taco.
Thank you, Harold. I will make some comments on the report numbers and updated outlook, then we'll go to the Q&A. We reported group revenue of EUR 127 million for the third quarter, which is a year-on-year decrease of 14%. Location Technology decreased 10% year-on-year to EUR 95 million. Let me go through revenue business by business. Automotive IFRS revenue was EUR 52 million, representing a decrease of 21% compared with the same quarter last year. Automotive operational revenue, which is IFRS revenue adjusted for the movement in deferred revenue, decreased 17% to EUR 58 million. These year-on-year decreases are primarily related to lower vehicle production, which is a result of ongoing industry-wide semiconductor shortages. Enterprise reported revenue of EUR 43 million, a year-on-year increase of 8%. This increase is primarily due to the expansion of contracts from existing customers.
Consumer revenue decreased 24% year-on-year to EUR 32 million as overall demand for the category is decreasing. That said, the production and consequently the sales of our PNDs was also impacted by supply chain issues, implying that we could have done better if we had more product to ship. Gross margin for the third quarter was 81%, an improvement of five percentage points year-on-year. The third quarter of 2020 was negatively affected by the start of production of new software platforms in Automotive, which triggered the release of costs associated with non-recurring engineering.
This quarter, in 2021, there were hardly any incidentals, so the north of 80% gross margin is a good proxy of what is normal. Operating expenses were EUR 126 million, representing a decrease of EUR 53 million compared with the same quarter last year. This decrease results from lower amortization since the Tele Atlas databases that were acquired in 2008 were fully amortized last year.
Excluding the impact of depreciation amortization, operating expenses are roughly flat. Increased research and development relating to our application layer were offset by savings in sales and marketing. The free cash flow for the quarter was an outflow of EUR 14 million, compared with an outflow of EUR 20 million in the same quarter last year. This improvement reflects the timing of cash receipts from our customers. We reported a net cash position of EUR 302 million at the end of the third quarter. Now, moving to the next slide.
Looking ahead, we reiterate our revenue guidance. Although we anticipate full year revenue to come in at the low end of the range for both the group and Location Technology. Shortages of semiconductors continue to hamper car production volumes, which impacts automotive revenue.
For the year, we expect group revenue of around EUR 500 million-EUR 530 million and Location Technology revenue between EUR 400 million and EUR 430 million. As a result of lower than anticipated operational automotive revenue, we're adjusting our free cash flow guidance. We now expect full year free cash flow to be around 2% of group revenue. Though we had a cash outflow in the first 3 quarters of the year, we want to emphasize that our cash inflow this year is weighted towards the last quarter of the year due to the timing of various customer payments. Operator, we would now like to start the Q&A session.
Thank you. We will now begin the question and answer session. Your first question, sir, comes from the line of Marc Hesselink from ING. Please go ahead.
Yes, good morning. Thanks for taking question. First, on the collaboration that you mentioned, the close collaboration with the OEMs. What does that mean, that more strategic input? What does it mean for the position that you have on pricing and maybe also joint R&D? Does that change the unit economics of your business? My second question is-
No.
Yeah. Okay, Marc.
Please go ahead.
Yeah.
Please go ahead.
No, go on.
Okay, I'll take the first question first then. Sorry, there's a small delay on the line, so apologies. No, it doesn't change the unit economics necessarily. What it does do is, it improves the efficiency and the value creation. I think one of the key issues that we want to address is to get the end user experience for inbuilt navigation systems at a higher level, where it can successfully compete with mobile phone usage. We see a number of positive trends. First of all, there's more glass in cars, so the screens are getting bigger and more screens, and those screens have a completely different form factor from the mobile phone. Secondly, we see deeper integration with other systems in the vehicle, ADAS safety system and so forth. Thirdly, we see deeper integration because of electrification.
In order to come up with the right product, we see that more and more OEMs are kind of moving away slightly from the typical RFQ process, which is a horrible process. I understand why it's there, but it is not helping in efficiency, efficient collaboration, discovery, experimentation, integration of user feedback in the final product, A/B testing, that kind of things. A typical RFQ process cannot provide for those subtleties.
If you base your collaboration with a car maker on a different footing, more deeper integration, closer collaboration, allowing for discovery and innovation, that significantly reduces the cost on both sides. It reduces cost for car maker, reduces cost for us, and it will lead to better products and better end user experience. For us, it's important because we enter a more trusted longer-term relationship where it's not just all about money, but also about innovation, quality, and end-user satisfaction.
I think that's a relevant development for survival and growth of embedded navigation information systems in general. We seem to be particularly well-placed to be the trusted party with more and more car makers. Net-net, I see this as a long-term positive, not necessarily affecting the unit economics, but certainly affecting the value creation which we can achieve in collaboration with our customers.
Okay. Clear. The second question I have is actually quite some questions in one, and it's all about how do you expect this industry to normalize. First we had COVID and then we had also the second flag effect, the semiconductor shortages. Do you believe that the lost production over the last two years will be caught up at some stage? What did you see in the underlying trends of, for example, take rates as we go back to a normal situation with supply chains again?
Yeah
things will be higher again?
It's as hard for us as for anyone else, is the honest answer, to predict where this will go and what the net effect will be for the remainder of this year and even for 2022. The real answer is, there is historically a very low level of visibility. If you look at the macro, we see that delivery times for new vehicles are at their all-time longest. We see prices of secondhand vehicles at their all-time high. You would expect, and those numbers suggest there is undersupply, and to an extent, pent-up demand. When car makers can start to address that demand and not being knocked off course by component and supply chain issues is anybody's best guess.
Unfortunately, what we have not seen in Q3 and what we also are not seeing in Q4 is a easing of the situation for the remainder of the year. There's also nothing in the market reports, in the press releases from various players that are active, particularly in the semiconductor market, that suggests that the shortages will disappear anytime soon. We hope, of course, that in 2023, things will ease, and people will be able to deal with those issues in a better way. I think everybody is trying to figure out what it means for 2022, and when those shortages will stop compromising total production output.
Okay. What does that mean for your 2023 target? If I'm correct, that was more like a top-down approach of really looking at car volumes and take rates and then taking your share.
Yeah.
If everything is back to normal, does it mean that the 2023 targets, that is still possible?
Yes. That would still be possible. You're talking 2023 in a particular market, I take it. If in 2023, we can leave all this behind us and things are back to normal and everybody has adjusted their systems, then indeed, we could be looking at some tailwind instead of headwind for 2023 going forward. It's also a question to what extent that pent-up demand will translate into extra production. Various ways to mold that. Nobody really knows. There will be an effect that the underserved market in 2021 and potentially 2022 will then strongly recover in 2023.
Okay. Very clear. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star 1 on your touch tone phone. That is star and one. We do have a question, sir. We're just taking their name for you. One moment. Anyone else wishing to ask a question, please press star one. We do have a question, and it's from the line of François-Xavier Bouvignies. Your line is open.
Hi. Good afternoon. I have a couple if I may. The first one is on the 2022. It's a bit of a follow-up of the previous question. Can you maybe give us a sense of how should we think about the automotive revenue growth for TomTom in 2022? I don't expect you to give a quantification here, but more like a qualitative, what are the main drivers that will be in 2022 on top of the production forecast from IHS that we are seeing for double-digit % growth on the production in 2022. How should we think about TomTom growth related to that, and what are the drivers looking to 2022? That's my first question.
Hi, François. It's Taco. Let me take that first question. We expect automotive to grow next year, double digits indeed. The exact number we need to see. That also depends, of course, for how we end the year. Best estimate is that it starts with a two, a double digit starting with two, but it's a bit too early for us to call it. That's based on our assessment of global data suppliers and the input that we get from our customers directly.
Okay. That's very helpful. Thank you, Taco. Maybe on the order booking side or your backlog, since now you disclosed there's a backlog. How should we think about TomTom's market share, and the market size this year? If I remember last quarter, I mean, the last two quarters you were talking about some strong year possibly, in terms of deals that could be signed. How should we think about the market share of TomTom? How you think you are competing with your competitors, i.e., HERE or Google, based on what you are seeing on your design wins?
Well, yeah. A couple of comments that we want to make is that, first of all, you've seen our product offering. We are expanding our product offering from traditionally only maps or only traffic, or a combination of traffic and maps, to more whole suite of offerings. If we compare ourself against HERE, then we tend to compare ourself only on the map business and not so much on navigation software and traffic, because on those areas, we see different competition. One of the trends that for us is happening is that we are taking definitely more share in the application layer, so more on the navigation software than we had before. That used to be, or still is, a very fragmented market with over 12 players.
A lot of the tier 1s used to operate there, and that's an area where we're probably the biggest market share player today. We are going from strength to strength. On the deal wins, if we look at the deals where we participate, we have a good ratio of where we win and where we not win. We also need to realize that we're not seeing everything, as some deals don't come to us because they're extension of existing contract. I think if anything, the win rate is stable or even going up over the last period.
Okay. That's helpful. What's on the software or application layer you mentioned, why do you think you are gaining market share? What is your assessment of the reason behind it?
We have a couple of class leading products, especially in navigation and traffic, and traffic services is an important one. We are typically better positioned to integrate our services in the application layer. We can do that faster, cheaper, better. As a result, you get a class leading end user experience. That's going well.
We spend a lot of time and effort in designing those navigation services, and that is also paying off. We're in the process of developing a new suite that's even easier to integrate, easier to customize. We'll launch some new important components in the product portfolio towards the end of this year. It is going well. We see that the movement to online service delivery is accelerating. That's good for us. Again, from an end user perspective, you get a better product.
From a production perspective, it's a lot easier to integrate and to build. It leads to simplification of our product portfolio. We see across the board, if you look at the product portfolio, it's going online. We are well on the way in that transition. That leads to better product simplification of the product portfolio, more common components, more common products, and simplification of the product portfolio. If you look at distribution between enterprise and automotive, all in all, there is room for simplification, both of our product portfolio and of our organizational structure. That is exactly what we need. I see that simplification accelerating over 2022 and 2023.
Thank you, Harold. Maybe the last one for me is on HD Map. Can you give us an update on where you are in this HD Map? It has been maybe delayed from your previous comments.
Yeah
with the COVID. Any revival there, or how do you feel?
Yeah
About HD Map?
It's alive and kicking. We had some wins this year for HD. I think we are now one of the largest vendors in terms of market share of HD Map from what we can see. That has gone well, but the overall take rate is not where we had expected to be, to be quite frank. In terms of market share, it's going in the right direction.
What is the take rate?
Well, the number of cars that are fully reliant on the take rate in terms of moving up to level three and a half, four, fully supported by lane level maps, is still very much a niche part of the market.
Mm-hmm. still not significant at the revenues or booking level?
No. Well, it is and it isn't. It's not significant in terms of revenue, not this year. We'll see an uptick in 2022. In terms of market share and technology, if it will happen, we're very well positioned to capture the momentum.
Makes sense. Thank you very much.
I'm happy about that. The other thing is that the new technologies are becoming available now to produce those maps in a more cost-effective way, in a more automated way. That's also very significant. I think the first version of the maps we built were all mobile mapping car-driven. That's expensive, and you get low frequency. That's good enough for the type of applications we're talking about now. To take us to the next step, you need much more sources and high-frequency sources. We're getting those now, and it's very exciting to work on those new signals to produce those maps at scale in a highly automated way.
Yeah, it's interesting what you're saying because, it was supposed to be my last question, sorry, I'll squeeze one in quickly. The automation, how much can you get in terms of cost improvements versus non-automated maps? Did you quantify the benefits of this automation that is going through?
No, I can't do that at this stage. I can do that in 2022. We are working really hard to really optimize and to really fully capitalize on those new ways of mapmaking. I've said it before as well, there's a whole new class of open source data. There's a whole new class of sensors. There's a whole new class of data that are hitting our servers continuously in continuous streams, that asks for a different way of looking at mapmaking. I'm talking not about an evolution, but more about a revolution.
That's very exciting to work on that. We have a good basis. We've been talking about it for years now. We spent a considerable amount of money on building the transactional mapmaking system. That will be the core of our automation efforts going forward. We feel that from a market perspective, technology perspective, a capability perspective, we are in a very good position to truly leverage those new data sources and create something that is better, has better coverage, is fresher, and is a more accurate representation of what's happening in the real world.
Great. Thank you, Harold. I will stop here.
You're welcome. Thank you.
Thank you. Ladies and gentlemen, as a reminder, it is star one on your touch-tone phone to ask a question. Your next question comes from the line of Wim Gille. Please go ahead.
Yes, a very good afternoon, everybody. Wim Gille from ABN AMRO. I got a few questions as well. First, let's say on the order book development. I think we've alluded to and discussed kind of the, let's say, order intake, and kind of the commercial successes that you have in that area. That's going to be a good year in terms of order intake or in terms of the quantity as the win rate. Obviously we also have the other side of the, or one of the other components that eventually dictate the order book, which is the fact that the OEMs might reassess their volumes going into the future, which might have an impact on the order book as well. Can you give us a bit of a feeling where you think that this will basically end up?
Is that let's say positive contribution on the order intake large enough to offset the changes that you might see in terms of the deviation from the original plan. That would be my first question. The second question, as you mentioned quite a few quarters that you're taking share in the software part, which obviously is good because it grows your total addressable market. Obviously what it requires is connectivity, and to have cars on the road that are actually connected. If you look at new car launches into 2022, 2023, what is the percentage of cars that is actually connected? Where you basically can offer a navigation software experience which is equivalent to or better than the smartphones.
Also in relation thereof, the idea was always that you would reduce the spend on expanding the geographic layer through automation, and that you would increase the spend on the application layer, basically coming up with new product innovations and basically improving time to market there as well. I haven't seen it filtering through in the P&L just yet. It's been relatively stable for, what is it, the past eight quarters. Can you give us an indication on when we actually see that shift happening in the P&L?
Ok`ay. Let me take the first question on the backlog. We reported EUR 1.8 billion with the Q4 numbers. If we do a preview of what we can report in February, we will deduct from that EUR 1.8 billion, roughly EUR 235 million, let's say, of automotive revenue. You add the order intake. There is a potential that is a higher number than EUR 235. You need indeed to correct, and the third driver is the correction or an assessment of what is then remaining in the order book. Up until now, we haven't seen major reassessments from our customers. Sometimes lines are pushed out a little bit. That will run a half- year longer at maybe the first period had a slightly lower number, but overall the volumes will stay intact.
I agree with you that it is probably more likely than not that there might be a reassessment, although we don't have any data to support it at this point. We haven't heard from our customers that they're moving to the next platform earlier or as scheduled, and in between, the volumes will be lower. Where we are now, I will be positive about the backlog with that caveat that the reassessment that tends to take place in December and January hasn't happened yet, and we need to have a look on what kind of effect that has.
And just-
On the last question.
Sorry, before we move on. Essentially, Q3 and Q4 were hampered by severe supply chain issues, factories are basically not producing on the right levels. Car registrations are down, what is it, 25%-ish? If we would assume that these are lost revenues, et cetera, what will be the impact on your order book?
Yeah, that's hard to say because what you don't know is what will happen with the programs that we're serving. The contracts are not time-bound in any way. It is model related, and what we get as input is indication on what the time period is and the total volumes. What could also happen is, and what we already kind of received as feedback, that the model can be later introduced or will serve longer in the market. I understand your question, but I'm hesitant to do that calculation because it gives the wrong signal.
Very clear.
On the mix between geographical data and application layer. Well, what you see happening is that the application layer is growing, although perhaps not as fast, but it is growing. The geographical data layer isn't declining yet as much to really create that shift. Harold spoke about it already.
That will take a little bit more time. This higher quality, lower cost, lower latency as well. Latency is also a clear benefit of the automation and the new technology. I expect that a significant new start of cost in geographical data, we will start to see that in 12-18 months from now. Good. The percentage of connected cars, looking at the pipeline of your customers, how is that evolving?
Wim, for electrical vehicles, it's 100%. Also for combustion engines, we see nearly all new programs have some form of connectivity on board.
Okay. That basically means that it could accelerate quite fast in that sense.
Yeah, it can. I think the carmakers have got the message now. If you don't have connectivity, it's not possible to compete. You don't get the dynamic information, you can't find the electrical charging points, you don't get the traffic information. If you don't have those things, then you cannot deliver a competing end user experience.
That is indeed very clear. Maybe a follow-up question on what you mentioned, because basically you say the relationship with our clients is changing on the back of the changing nature in the market in itself. We don't have to fill in 1,000 pages of lawyer mumbo jumbo and RFQ. We have, instead, a partner relationship where we, jointly with our customers, are developing new products, new platforms, et cetera. You don't enter into any kind of competitive bidding per program anymore, but how does a client, let's say, choose you or your competitor in this process? How does that work?
Do they work together with you exclusively, or are you working in some sort of consortia type of stuff, where they basically add a few components and you might be in there together with HERE, where HERE is doing the map and you're doing the navigation software, et cetera? How does that work?
Don't get me wrong, the RFQ is still there. You still need to pitch. You're still in a competitive environment, and that's to be expected. No one is signing up to one single supplier for the rest of his life. That's just not the way the world works. The way these RFQs are now constructed is more reasonable. You said it was traditionally feature-driven, so you got a long list of spreadsheets with tick boxes and God knows what, and you had to deliver all those things, then that was the end of it. Then you would forget about that product. You ship and forget. That's what we call it. That doesn't work, and what you now see is a more shared goal that is more to do with the Net Promoter Score.
Power score, end user satisfaction, where you have a lot more flexibility in collaboration with your customer to make solutions that are actually hitting the spot head on. If that works, we are particularly well-positioned to play that role. Because of our heritage in consumer products, our focus on end user design, industrial design, we've done that as well. We have a strong heritage in all those things. We understand what it takes to make successful end user products. We have the right technology stack. In those contexts, our relative competitive position is improving. If we then do a good job, then the chances that you will be reselected are higher than when you come from far. You build intimacy with other engineering teams and suppliers and all the rest of that.
You have a different incentive to make those collaborations work than in the olden days. That doesn't mean that competition is not there anymore, not involved anymore, but we at TomTom are particularly well-positioned to win in that context.
Very good. Thank you very much.
You're welcome. Thanks, Wim.
Thank you.
Okay, since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.