Today, ladies and gentlemen, welcome to TomTom's second quarter 2025 results 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 one on your telephone keypad, where you will hear an automated message advising your hand is raised. Please be advised if you are calling in via Microsoft Teams to ensure you press star one one from the keypad where the call is made and not from your Teams screen in order to enter the queue. Please note that this conference is being recorded. I will now turn the call over to your host for today's conference, Freek Borst, Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. Welcome to our quarterly conference call. Over the course of today's call, we'll be reviewing the key operational highlights and financial results for the second quarter and first half of 2025, together with our CEO, Harold Goddijn, and our CFO, Taco Titulaer. Harold will start us off with an update on our strategic progress, followed by Taco, who will present an overview of the financial performance and our outlook. After their prepared remarks, we will open the line for your questions. As always, please note that safe harbor applies. With that, Harold, let me pass it over to you.
Thank you very much, Freek. Good afternoon, everybody, and I appreciate you joining us today. As usual, let's start with the strategic and operational updates for the second quarter, and then I hand over to Taco for the financials. Over the past few years, we've made significant investments in our technology stack, investments that are now strengthening our competitive position. We've rebuilt our map-making platform from the ground up, and we've upgraded our application layer. This foundation has allowed us to introduce modular products that are easier to integrate, easier to customize, and easier to scale. They deploy faster, deliver a superior user experience, and help our customers achieve faster time-to-value. We are now bringing these solutions to market through a scalable framework, supporting our shift towards a product-led operating model. As part of this transition, we have realigned our organization and are reducing around 300 roles across TomTom.
These decisions are never easy, but we are confident that simplifying our structure, increasing agility, and sharpening our focus will better position us for long-term success. The timing of our product transition aligns well with a major industry shift. The Automotive sector is undergoing structural changes. Vehicles are becoming software-defined, and car makers are accelerating their software strategies. Our tech stack is built to meet these evolving needs, and our strategy is resonating. At Auto Shanghai, for instance, we had strong engagement with multiple Chinese OEMs. We're also seeing continued momentum in our enterprise business. There is growing demand across industry for location-based tools that optimize processes and support smarter decision-making. At the same time, we are expanding our portfolio to unlock more value for customers. Just last week, we launched the Model Context Protocol Server.
That's a tool that enables AI agents to generate accurate location-aware output by interacting directly with our data and our APIs. This is a great example of how AI is not just powering our operations, but it's also driving product innovation. In summary, we're now more focused, we're more innovative, and more aligned with the needs of our customers. With a strong foundation and clear strategic direction, we are well-positioned to capture long-term opportunities, even as near-term market conditions remain uncertain. While short-term headwinds impacted our top line in recent months, the progress we've made gives us confidence, and that's why we are raising our guidance. Taco will talk you through the details, and with that, I hand it over to you, Taco. Thank you.
Yeah, thank you, Harold. Before turning to the outlook, I'll start with some insights into our financial performance. We'll move on to your questions directly after my prepared remarks. The group revenue for the second quarter was EUR 146 million, down modestly from EUR 152 million in the same period last year. Location technology revenue totaled EUR 126 million, representing a marginal year-on-year decrease that was driven by a variety of transitory factors, as Harold already pointed to. To explain, let me briefly touch on performance business by business, starting with Automotive. Automotive operational revenue saw a year-on-year decrease of 13% to EUR 77 million. This decrease reflected lower car volumes at some of our customers and across the market more broadly, as well as the ramp down of some car lines to which we are supplying.
Automotive IFRS revenue came in at EUR 86 million, as the significant decrease in operational revenue was offset by a release of deferred revenue, as well as an upward adjustment of expected volumes under certain contracts, which increased total contract values and thereby benefited reported revenues. On a half-year basis, the trends of Automotive IFRS and operational revenue are much more aligned, as IFRS revenue typically shows a more stable pattern, while operational revenue can be influenced by periodic swings that are neutralized when looking at longer periods of time. Enterprise revenue was EUR 40 million, while we saw slight sequential growth at constant currencies. The weakening dollar impacted more than 75% of our enterprise revenue, offsetting this. Compared to the same period last year, revenue declined by 4%, largely due to contribution from the Australian government contract in Q2 last year.
As we mentioned before, the public sector is a relatively new target market that our Orbis Maps opens up for us. Deal flow in this sector tends to be somewhat binary, and when deals close, a relatively large portion of revenue is recognized upfront due to the structure of the contracts. This dynamic created a base-year effect in the second quarter. We continue to see good opportunities and remain committed to expanding our public sector presence. Lastly, consumer revenue declined by 15% year-on-year to EUR 20 million. During the second quarter, we realized a strong gross margin of 88%, up from 80% last year. The year-on-year increase in gross margin primarily resulted from the fact that substantial releases of non-recurring engineering costs were included in the cost of sales last year, related to the start of production for certain customer problems.
As we transition towards a more product-led operating model, we expect our gross margin to further improve. Our second quarter operating expenses were EUR 148 million, reflecting a significant year-on-year increase. This increase mainly had to do with the inclusion of a EUR 25 million restructuring provision related to the organizational realignment Harold also mentioned. As a result of the realignment, we expect a reduction in complexity and a greater efficiency to start benefiting our operating margin from next quarter onwards. On an annualized basis, savings from restructuring are expected to be up to EUR 35 million. If we normalize for the impact of the restructuring provision, operating expenses for this quarter were marginally lower.
The underlying decrease reflects the capitalization of our HD map development costs and lower amortization charges, partially offset by one-off reversal of some previously capitalized contract costs, as customers changed their program requirements and started to take up more modular in-vehicle software. Free cash flow was an inflow of EUR 14 million in the quarter, a sharp improvement from the outflow of EUR 5 million last year, driven by favorable working capital movements. Our net cash position at the quarter end was EUR 267 million, up from EUR 257 million last quarter and EUR 264 million at the end of 2024. Let me touch on our outlook. As Harold noted, some factors weighed on our top-line development in recent months. These factors remain present today. Despite this, our first half performance was ahead of our initial expectations.
As such, we expect our top line to reach the upper end of our initial guidance and are upgrading our outlook accordingly. We now expect a full-year group revenue of between EUR 535 million and EUR 565 million, while Location Technology revenue is expected to range between EUR 465 million and EUR 490 million. We're also raising our free cash flow to around 5% of group revenue at the midpoint of the guided range. The fundamentals of our business remain sound. We're beginning to see how the reduced complexity increases agility and sharpens the focus of our product-led model, positioning us well for the long-term success. We are now ready to take your questions. Melanie, please start with the Q&A session.
Thank you. We will now begin the question and answer session. If you have a question, please press star one one on your telephone keypad, where you will hear an automated message advising your hand is raised. Please be advised if you are calling in via Microsoft Teams to ensure you press star one one from the keypad where the call is made and not from your Teams screen in order to enter the queue. Please stand by while we compile the Q&A queue. Our first question comes from the line of Marc Hesselink from ING. Please go ahead. Your line is open.
Yes, thank you. My first question is actually on, so you've now announced a realignment following more of a technology transition, the change to the new platform. How can you picture maybe what's next on the technology side? Was this a big one-off change which is now behind us, or do you expect ongoing technology improvements, platform improvements, more of a unified platform for all of the clients, and maybe even in the future, you can have more cost savings because of the simplification in the long run?
Yeah, Mark. Thank you for asking the question. I think you're right. We are in that transition. It has not been fully realized. We continue to sharpen the product portfolio, sharpen the standardization, and that will continue to help us becoming a more efficient company. We also expect in the future that customers will move away from our legacy platforms to new technology stack, and that in itself will also help. We keep automating all sorts of functions in support, in billing, in contracting. This is a longer-term initiative that will further improve the operational efficiency of the organization going forward.
Okay. Is that something that you quantify, like how much is still linked to legacy cost?
No, I can't quantify that, but it is an important movement. A lot of people working on technology are involved in that standardization process, in that productization process, and it will increasingly deliver simplification and efficiency going forward.
Okay, great. My second question is actually on the growth profile. Obviously, a lot of things moving around at the moment as well. I think underlying, if you adjust for the U.S. dollar, you're now a bit on a mid-single-digit growth in the Enterprise side of the business. I would say with Automotive, if we go out of this uncertainty period, you're probably also somewhere around mid-single-digit growth. Is that a fair number for medium term on those numbers, or are there significant upside or downside risks to that?
I think the way to look at it, Mark, is that our, I think it's fair to say that our competitive position is strengthening, especially in Automotive. We see some evidence there as well of discussions with OEMs and potential customers that go really well. We feel good about that. The nature of the Automotive industry dictates that those, before that translates into invoicing and revenue, there's always a lag. There's quite some time between that. I think we're on the right track for sustained growth in the Automotive sector. At the same time, it will take some time before you see that materializing. On the Enterprise world, we're growing, certainly in constant currency measure. We're not growing as fast as I had hoped. Also there, there are some good indicators of stuff on the horizon.
I think particularly in the enterprise, in the government sector, there's quite a bit of potential. We see also more traction in what we call the self-service segment of our operation, where developers independently find their way to our APIs and SDKs and start using them in their applications. That is, for the moment, still a relatively small part of our revenue, but we see good potential there as well.
Great, thanks. If you link the two, is the realignment of the cost purely a technological one, or does it also have to do with that maybe the revenue growth was a little bit less than you'd expected? At this stage?
No, this is really, really, I think the realignment is really a consolidation. We've been spending significant capital on that product transition that is now coming to an end. We start seeing the benefits from a simpler and better product portfolio. That triggered us to start looking at how we go forward with the workforce. It's in combination with improved developer productivity and new tools that are deployed. All that triggered us to have a hard look at the composition of our workforce. That resulted in the reorganization that we are discussing now. The goal is to get a simpler operation, more agile, faster, faster time to market, and faster time to value.
Okay, thanks, Harold. Thank you.
Thank you. Once again, if you have a question, please press star one one on your telephone keypad, where you will hear an automated message advising your hand is raised. We'll now move on to our next question. Our next question comes from the line of Tim Ehlers from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hi. Thanks, operator. Good afternoon, everyone. Thanks for taking my question. The first one would be about the restructuring. You mentioned that, unfortunately, you had to reduce your workforce by approximately 300 people. Could you maybe explain a little bit the new structure after that and where you took these cuts and where you maybe still want to grow in terms of employees?
We saw the, I think it's fair to say we're continuously adapting, optimizing the composition of our workforce. The restructuring took place mostly in the platform products organization, supporting functions in the back office. That's where most of the roles became redundant.
Okay.
Yeah, to.
Sorry.
Maybe I can add to that. It is not in the geographical data R&D line. There you will see notes in the coming quarters, you will see a little change there. It is mainly, as Harold said, in the application layer R&D line, and also in the sales and G&A line.
Okay, great. Very insightful. That would have been my next question. Okay, cool. Follow-up question, the cash flow and also the upgrade in the guidance. Could you explain a little bit where that comes from? I mean, where you had a very strong free cash flow generation in the first and the second quarter, thanks to working capital effects. Are the working capital effects also behind the increased guidance, and how should we look at it also going forward?
We based our guidance on the midpoint of the previous guidance. The previous guidance was lower, the midpoint at least. That is one effect. The other effect is that the restructuring will lead to an annualized saving of EUR 35 million. You could say that half of that will be realized in the second half of this year as well, because the added cash flow guidance that we gave for the full year excludes the restructuring charge.
Okay, clear. That's it from my side. Thank you.
Okay, bye.
Thank you. Once again, if you have a question, please press star one one on your telephone keypad, where you will hear an automated message advising your hand is raised. We'll now move on to our next question. Our next question comes from the line of Thijs Berkelder from AAOB. Please go ahead. Your line is open.
Good afternoon. It's Thijs Berkelder, ABN AMRO ODDO BHF. I have a question on potential future revenues. Can you maybe a bit more quantify what we should expect from the government sector in the, let's say, the coming 12 months, as well as can you maybe quantify Chinese car manufacturers? I would say there are hundreds of Chinese car manufacturers. Can you maybe give a bit more feeling for what kind of size manufacturers we're talking about or models?
Yeah, maybe I can. Let's start with your last question on the Chinese brands. We definitely don't talk to all 100 of them, but we talk to the big ones for sure. As Harold also mentioned, we were present at the Auto Shanghai this year and also last year. There's an ongoing discussion. What we like about those discussions is that they subscribe to our product-led strategy, and it's the way they work as well. That is fast sales cycles and fast products to value. That said, there is what you already mentioned. There are a lot of players, and they all want to get in at the same time. We need to be a little bit cautious on the potential of these new customers. It is definitely happening. It's not a question if, more a question when.
Today, the revenue that is generating from the Chinese export market is relatively low. It's a single-digit number of millions a year in the Automotive sector. In Enterprise, what we've seen is that the new Orbis Map is resonating very well with the governmental sector or the defense sector, if you like, for a number of reasons, because we can provide the map, and they can run it on their own server at their privacy. It's not that we need to control their access or what exactly which analysis they are making. There's a high level of privacy and independence on that. The range of these deals can be a couple of hundreds of thousands to double-digit millions. They tend to be for three years or so. The sales cycles are relatively new to us, and we need to invest in those sales cycles and to understand those better.
What was already mentioned is that these decisions are often very binary. They happen or they don't happen. We don't have a long track record there, apart of course from the deal that we signed with the Australian government and a handful of other much smaller deals. The sales funnel is filling up nicely because there's a lot of interest from different countries and different governmental bodies for this product.
Okay, thanks.
As there seem to be no additional questions, I want to thank you all for joining us today.
Andrew Hayman
Oh, sorry. Question just popped up. Operator?
Yes, we'll go ahead with that question. Our next question comes from the line of Andrew Richard Hayman from Independent Minds. Please go ahead. Your line is open.
Thanks for taking my question. The cash flow was very good in the quarter, and a lot of that came in from the receivables. I was just wondering if you could provide some details as to why there was that, I think it's a bit over EUR 20 million drop in receivables this quarter. On the restructuring, you mentioned it a bit that in terms of the R&D side, it's the application side where the cutting is happening rather than the geographic R&D component. Is that because the geographic has come down quite noticeably recently, and you're now at the level which you need despite map-making becoming more automated? Sorry. Go ahead.
Do you want to first go through all your questions, or shall we start answering?
I just got one last one, so I can.
Okay, yeah. Go ahead.
Maybe you emphasized the product-led operating model, and just maybe to help me there, how were you, what was your, how did you describe your operating model before you moved to the product-led approach?
Perhaps I take the last question?
Yeah.
Okay. Three years ago, exactly around the same time, during our Q2 results, we announced a major restructuring in the mapping area. That's the geographical R&D part. That was on the back of us shifting from the, "old way of map-making" to the, "new way of map-making," and it's the new foundation of Orbis Map. That is, in a sense, not so much a customer-led to product-led transition. That's more a reassessment of how the new technologies and the new content that's available in the world can unlock faster and higher quality and lower-cost map production. That unit is in a state that it needs to further accelerate and will further accelerate. There's a huge opportunity out there, especially in the new applications that are now being developed in the automotive sector for, as we call them, HD mapping, so for the more autonomous driving and what have you.
There we see a lot of interest from our customers next to the traditional product use for the driver itself, the driver from A to B with all the services and traffic. The next step is also to create maps that will be used into the car for higher safety levels and more autonomous driving. There we want to double down our investments, and we're not making changes. The transition from being customer-led to product-led has the biggest effect in the application layer and also in the funnel, further down in the funnel towards sales, but also the support units. The more one product you deliver, the less support is needed and the faster you can deliver the product to the market. That's the reason why [MES] was excluded from this realignment, and we focused the alignment on the other three units.
This product-led versus customer-led, I think what we've seen in the past, in particular in the car market, was a broad range of operating systems and screen sizes and requirements and also software that had to run on systems that were not connected. That means that there's a lot of custom work for every development, large teams, sometimes multiple years in custom software design and development. That is now behind us. We see a standardization on the operating system. We see online connectivity and the willingness of car makers to also upgrade software during the lifetime of the vehicle. That means that we can move now to a product-led way of operating. We design a comprehensive software stack that can still be customized, but within the parameters of the product itself. You ship that. The time to integrate it is reduced from years to months.
During the life cycle of a vehicle, you can upgrade the software, which means that quality and bug fixing are also done in a completely different way, a more modern way, a more efficient way. You add all that together, and you look at a completely different way of designing and developing products and a more efficient process. At the end of the day, the biggest winner is the consumer because the quality of our products is going up dramatically, and it's now much easier to meet end-user expectations. What customers are used to on a mobile phone, they now also can get that in the dashboard of a car, plus all the other features. It's a better product, easier to, more cost-effective to make, more cost-effective to maintain, more cost-effective to integrate in the vehicle.
I also realized that I didn't answer your first questions on the cash flow movements. It's indeed so that our receivables were a bit lower. If you compare it to the start of the year, it was EUR 25 million lower. On the other hand, our payables were lower as well, but not with the same amount. On balance, it was favorable to us. I wouldn't read too much into it. At least I don't. The focus is that we think we can generate more cash during the year from what it was, break-even or zero free cash flow. If you take the midpoint of our revenue and you take 5% of that, you arrive at EUR 27.5 million of free cash flow. I think that's a bit of the midpoint of the bell curve of expectations. At the end, working capital is always hard to predict.
This is where we think we can land at at the year-end.
Good, thank you very much.
Thank you. As there seem to be no additional questions, I want to thank you all for joining us this afternoon. Operator, you may now close the call.
Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.