TMOAY - TomTom N.V. (TMOAF) Q1 2023 Earnings Call Transcript

2023-04-14 09:45:05 ET

TomTom N.V. (TMOAF)

Q1 2023 Earnings Conference Call

April 14, 2023 08:00 AM ET

Company Participants

Freek Borst - Investor Relations

Harold Goddijn - Chief Executive Officer

Taco Titulaer - Chief Financial Officer

Conference Call Participants

Marc Hesselink - ING

Presentation

Operator

Good day, ladies and gentlemen. Welcome to Tom Tom's First Quarter 2023 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. [Operator Instructions] 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. You may begin.

Freek Borst

Thank you, operator, and good afternoon, everyone. Welcome to our conference call, during which we will discuss our operational and financial highlights for the first quarter of 2023. With me today are Harold Goddijn, our CEO and Taco Titulaer, our CFO. We will start today's call with Harold, who will discuss 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.

And with that, Harold, I would like to hand it over to you.

Harold Goddijn

Thank you very much, Freek, and welcome ladies and gentlemen, good morning, good afternoon. Thank you for joining us today. I will briefly go over the key operational highlights and progress, after which Taco will provide further information on the financials.

We had a good start for the year. Location technology business continued to gather momentum and showed robust growth. We've been consistently outperforming the growth of car production volumes in our core markets for some time now and this trend continued in the first quarter. We reached a substantial milestone as well as we now power more than 10 million automated vehicles with our advanced driver assistance systems solution. Those systems are important to ensure driver safety and comfort. We are proud of being an important part of that.

There continuous to be a help for the [indiscernible] our software and our services beyond the automotive industry as well. For example, our navigation software development kit, which helps businesses integrate our services into their products is gaining traction in markets like fleet and logistics, ride-hailing and food delivery. Also in enterprise, we extended our partnership with SAP, our Maps APIs is now integrated with SAP HANA Spatial Services, the cloud based solution that helps companies access, combine and process geotech data. It enables SAP customers to use more advanced mapping services and in context and visualization to location data.

Looking ahead, we expect that our new Maps Platform, which we announced last year will enable us to make further inroads in the enterprise and automotive markets. The new maps will add significant value and create new opportunities for our customers and partners that will provide global coverage, rich attribution and fast data integration, thereby enabling a wider variety of use cases. We are on track for a phased launch across geographies and markets and will add features to support increasingly sophisticated use cases. In anticipation of the start of rollout, we have increased our sales and marketing efforts during the quarter.

And with that, I'd like to hand over to Taco.

Taco Titulaer

Thank you, Harold. Now I will provide insights on our Q1 financials and our outlook for the year followed by Q&A session. Our group revenue for the quarter was EUR141 million, a 10% increase compared to the same quarter last year. Location technology revenue saw 12% growth reaching EUR118 million.

Let's break down our revenue business by business, beginning with automotive. Automotive operational revenue reached EUR84 million in Q1 compared to EUR68 million in same quarter last year, making robust 2022 year on year increase. Our performance exceeded car production growth of approximately 11% in our core markets of Europe and North America driven by higher take rates and market share gains. Automotive IFRS revenue saw 34% year on year increase to EUR81 million. The increase can partly be attributed to the change in IFRS revenue recognition for the new Maps subscription contracts, which will be disclosed -- which we disclosed last quarter.

On the other hand, enterprise revenue declined by 70% year on year, settling at EUR37 million. This anticipated decrease is due to contract renewals at lower values. Consumer revenue remained stable year on year at EUR23 million. Our gross margin improved to 86% in Q1, up from 85% in Q1 of 2022, driven by a higher proportion of high margin software and content revenue in our overall revenue mix. Operating expenses decreased to EUR180 million, reduction of EUR11 million compared to the same quarter last year. Excluding depreciation and amortization, operating expenses dropped by EUR8 million. The reduction in spending stems from efficiencies realized in our geographical data R&D, partially offset by ongoing investment in our application layer and increased sales and marketing efforts.

Free cash flow for the quarter was positive at EUR10 million, a significant improvement compared to the outflow of EUR23 million in the same quarter last year. This figure excludes the one off proceeds from the sale of our equity interest in Cyient and restructuring related payments. The improvement in free cash flow is the result of a stronger operating result and lower investment in intangible assets compared to the same quarter last year. Our net cash position at the end of the quarter was EUR321 million, up from EUR304 million at the end of last year, benefiting from the warrant proceeds of the Cyient equity interest divestment.

With that Q1 results conference, let's move on to our outlook as presented in the next slide. We had a strong start to the year and are confident reiterating our guidance today, we continue to project positive free cash flow for 2023, supported by top line growth. Group revenue for the full year is anticipated to be between EUR540 million and EUR580 million. We expect robust growth in automotive revenue to counterbalance the projected declines in both consumer and enterprise revenues.

Location technology revenue is forecasted to range between EUR455 million and EUR485 million in 2023. It’s essential to highlight our commitment to achieving growth in a profitable manner. Our free cash flow is projected to be between 0% and 5% of group revenue for 2023. The guidance excludes charges related to the restructuring announced in June 2022. Total restructuring charge, EUR12 million was paid in 22 and EUR4 million in Q1 of 2023. We expect to pay the remaining EUR8 million over the upcoming quarters.

Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of [Harry Blakelock] (ph) from UBS. Please go ahead. Your line is open.

Unidentified Participant

Good afternoon. Thanks for taking my questions. So the first is just on full year guidance. So with Q1 reported, and the strong results that you kind of achieved. It now seems to imply limited sequential growth throughout the year. And that's in the context of the enterprise drag ending in Q4 and then auto production recovering as well. So it looks like you're kind of seeing a bit of a slowdown throughout the year. I was just wondering whether you could give some color on the reason behind that?

Harold Goddijn

Yes. So, if you look at our Q1 performance and you compare that with the consensus that was collected by ourselves from the analysts here. You see that we outperformed mainly in automotive. But also in consumer and we disappointed in enterprise. If you compare these results also with our internal plan, our budget, automotive was aligned with budget. So yes, it was up year over year, but it was projected to go up with these amount. So [indiscernible] for us not a trigger to increase overall guidance. What we see for the full year is that, the reported revenue that we saw in Q1 for automotive is a good indicator for the rest of the year. So I agree with you that it is fairly flat, maybe in Q3, a little bit softer in Q4, a little bit higher.

The reason for that is that, we saw some maybe catch up demand in the first quarter, higher production volumes. And yes, we rely on the data that we get from our customers and this is what it's telling us. So I don't think it's a slowdown in any way, but it's just more an out performance in the first quarter. In enterprise, it was slightly soft compared to budget, also compared to consensus that is a factor of the softer door than where we thought we were at the start of the year. And consumer, there is a slight over performance.

Unidentified Participant

Got it. One quick follow-up and then another question, if I may. The quick follow-up for that is, just in terms of the production growth that you're assuming in for the year. What level are you assuming to that -- for automotive?

Harold Goddijn

So based on an [education] (ph) of different sources, including our own sources, where we think on our core markets and it is the EU and North America, we project 7% increase for the full year. That is the market and this was 11% in the first quarter.

Unidentified Participant

Okay. And one last one, if I may. Just in terms of the market share gains, you made in Q1 in automotive. I wondered whether you could provide some color on what's been driving that and kind of any feedback you've got from customers why they're choosing your solutions over competitive?

Taco Titulaer

Well, so one is, for example, the contract that we announced last year is with [EU Nokia] (ph). That this market share gain, we were not providing them before. Also the decision by EU Nokia to make navigation no longer an option, but a standard element of the car that is produced that drives both our market share and our take rate. So EU Nokia is a big element of that outperforms compared to car production units.

Unidentified Participant

Great. [indiscernible]. Thanks, Taco.

Operator

Thank you. We will now go to our next question. One moment please. And your next question comes from the line of [Weng Gil] (ph) from ABN Amro Oddo BHF. Please go ahead. Your line is open.

Unidentified Participant

Good morning. Can you hear me?

Harold Goddijn

Yes, we can.

Unidentified Participant

Very good. And for me a few questions. First on the SAP HANA announcements that you made. Is this just a normal extension of an existing contract? Or are you really deepening the relationship and selling new functionality that allows you to increase your share of wallet within the SAP HANA ecosystem? So if you can give a bit more detail on kind of what's changed versus kind of, let's say, the existing contract that you have in place. Second is on the new map making platform. You are now live in the Netherlands for some of the functionality, can you give us a bit more feeling to what extent and what the speed is of the rollout, both regionally throughout Europe, as well as, let's say, when you expect to have the full functionality of the new base map or new map making platform available in Europe throughout the coming months or quarters.

And then lastly, I'd like to have a bit of feeling, how the discussions are going with automotive clients? Whether you expect any new sign ups on the back of the new map making platform already this year or if that is due to the lead times in this industry a bit more for 2023? Likewise for enterprise, which obviously is much shorter lead times than the automotive space? Thanks.

Harold Goddijn

Thank you, it's Harold here. So the SAP HANA extension is indeed an extension of new functionality that we're introducing there. So that is a bigger contract and then more intense and a deeper integration into the platform. New maps, yes, it's happening, it's on schedule. We're happy about the proposal of new platform. The first maps that will become available are covering the United States, Great Britain and the Netherlands. They look good and extensive user testing -- end user testing will commence shortly. Those maps are currently in alpha release for internal scrutiny. And there is still quite a bit of work to do to iron out some edge cases as you would expect, but it is just work we need to get to go through. And we're confident that we will start launching the new map in selected markets and selected use cases in Q2 of this year.

And then for the rollout for rest of the world, we'll follow shortly after that. And I think it looks good. We have issued sample data to some of our key customers for evaluation purposes. So that's happening as well. Then automotive clients and the interest in the new mapping platform and whether that leads to new contracts or not. It's a bit early to be honest, but what we do see a significant interest in the new platform. And also what we see is some OEMs planning to become partner in the Overture foundation. And I think the -- what our customers say is, they like the idea, they like the idea of having a standardized base map to which they can themselves also put information, that's a functionality that's not really readily available right now. They see that as a good path forward and there is significant interest also from what you would expect as more conservative OEMs, that's what we see.

Enterprise, shorter lead times, but also we now need to be really ready with the commercial launch. It's not quite there as I said, but also their traction for the SDK, the navigation SDK and the navigation SDK provides a seamless path to integration of the new map platform and just you can start with the old maps. And then overtimes switch seamlessly to the new maps platform. And we see that's a valued property of the navigation SDK and we see traction for that SDK in enterprise markets. Again before that, it takes time to be integrated, needs to be rollout. So it's important that we close those deals, significant impact in revenue will take a bit longer, but that's also in line with our expectations.

Unidentified Participant

Maybe I said two small follow ups. First on the SAP HANA, obviously, it's a huge ecosystem. So is this something that we will see in the enterprise revenues going forward? And if so, which quarter will the new contract or the improved contract terms commence? And secondly, if you look at enterprise and I appreciate it’s difficult to give a bit of feeling about timing, new contracts and what have you. But is it fair to assume that based on your current expectations, we should be able to see year over year growth in enterprise again as of the fourth quarter of 2023?

Harold Goddijn

Yes. So, yes, that's what we expect. Growth together as of Q4 in the enterprise segment is what we are planning for. Coming back on this SAP contract that's available now. It's [indiscernible] platform. But we need to see, of course, how it's taken up by the SAP customers and how it will be used in practice. That's [indiscernible] yet and we will get that clarity over time.

Unidentified Participant

So is it more kind of a contract based on API calls or [Multiple Speakers]

Harold Goddijn

[Multiple Speakers] it's volume based. Yes, indeed.

Unidentified Participant

Thank you very much.

Operator

Thank you. We will now go to the next question. One moment, please. And the next question comes from the line of Marc Hesselink from ING. Please go ahead. Your line is open.

Marc Hesselink

Thank you. The first question is actually a little bit of dynamics that you're seeing in the industry. You're launching your new map platform. Also some stories out that maybe some of the German OEMs are looking to making a deeper partnerships with maybe the likes of Google and Apple, what are the things that you're hearing? What kind of moves are people making? And what does it mean for your relative position versus here and Google and maybe even Apple?

Harold Goddijn

Yes, it's a good question. So I think key part of our strategy and our planning is that, the world needs a mapping platform next to Google. Google has a phenomenal product, it's used on mobile phones extensively, but there are also limitations versus business model in the data consumption and whatnot. And the world needs a platform on which it can innovate, can bring data together and obviously, our strategy is to become that alternative. You need more than the standard API, if you want to integrate with self-driving maps, those maps if you want to integrate the data you're collecting yourself as a user, they need more flexibility and more -- and that itself will enable innovation. Our strategy is to become over time a clear alternative to what is there and become in that free market segment the leader in location technology. I think that resonates. Our customers tell us that too. They want to have choice, they want to be able to innovate, they like what they see our intent. And I can see that in the interaction with our customers [indiscernible] we get, type of interaction we're having that this is met with considerable support. Does that answer your question, Marc?

Marc Hesselink

Yes, it does. Maybe then as a bit of a follow-up, like those stories that are out there that maybe sounds like German OEMs, which are hopefully with you but with your competitor, but I'm thinking about maybe getting closer to using software from [indiscernible]. Is it something that you also hear? I mean do you see that kind of movements in the industry?

Harold Goddijn

Yes, we've seen, of course, the announcement of Mercedes. It's not a customer of ours, it's customer of Europe, obviously. But it does put out a strong signal that we as an industry need to work hard to create that alternative. We're not completely there yet, but the route to having a competitive and competing platform with the associated services and SDKs is now truly within reach.

Marc Hesselink

Okay, great. Thanks then. Second question is more financial. Your EBITDA in the quarter was actually quite a bit better than I expected. And there will be moving parts in the coming quarters. But is the sort of level of EBITDA that you had in the first quarter? Is that something that you can also achieve in the coming quarters?

Taco Titulaer

Well, Yes, EBITDA is a factor of EBIT and DA. I think DA will be fairly stable. But I don't think that the EBIT will be as strong in the rest of the year. So the answer is, no. We had the -- sort of the OpEx that we recorded in the first quarter will go up in the quarters that we have in front of us Q2, Q3, Q4. So there was a release in the OpEx, but it's also a factor of the merit, the new merit that will kick in by the end of Q1 and further also in Q2, Q3, Q4. So EBITDA for the rest of year, the other quarters will be lighter, lower.

Marc Hesselink

Okay. Clear. And then maybe to go a little bit further down to the free cash flow and also related to your guidance. If I make the calculation even including a bit more cost in the coming quarters, I tend to get a little bit above the 5% also taking into account that you now actually are receiving some interest on your cash position. Is that something that you take into account for your guidance? And you will continue to receive that interest?

Taco Titulaer

Yes, sure. That is part of -- so we have offer -- we have roughly EUR300 million in cash or long term deposits. The split between cash and longer term deposits is then one-three, two-thirds or two-thirds of that is in long term deposit. On those deposits, we get 3% yields roughly 3% plus. And that's part of our free cash flow. It's nice, but it will not significantly change anything.

For the free cash flow, we continue to focus on 0% to 5% based on where we are now. It might be closer to 5% than 0%. Yes.

Marc Hesselink

Okay, clear. Thank you.

Operator

Thank you. [Operator Instructions] We will now go to your next question. And your next question comes from the line of [Martin Verbeck] (ph) from [Idea] (ph). Please go ahead, your line is open.

Unidentified Participant

Good afternoon. It's Martin Verbeck of The Idea. Firstly, you have a softer interest in the signs. We do see that in the cash flow statement. However, when I compare that amount to your book value, there is a difference. So I was just wondering if you had a financial impact in your P&L account selling this interest?

Harold Goddijn

The answer is no, the whole transaction doesn't influence the P&L. The difference between the book value that you see on the balance sheet, the balance sheet of the 31st of December 2022 is that we booked -- as we compared it to the market value [indiscernible] stock. So we just took share price at that time. In the meantime, the share price went up in the first quarter. So that compares the difference between the EUR50 million proceeds and the EUR30 million which you see in the book value. But it doesn't didn't have any impact on our P&L.

Unidentified Participant

Okay. Thank you. And then on consumer, surprisingly good performance, this first quarter flat. Do you have some particular reasons why it was so strong and secondly you also guided for consumer that you expected it to be 10% lower decrease compared to last year. Do you still reiterate that or had it come with more positive on consumer?

Taco Titulaer

No, I think we -- I'll let Harold on the first question, but for the guidance, it's indeed that we stick to roughly EUR90 million for the full year.

Harold Goddijn

Yes. Then on sales, so we have -- so sales of [indiscernible]. But we are now addressing a more hardcore group with more specialized users where the demand decrease is lower, I think about truck drivers and specialized products that are still in demand in the market. And that decline is partially offset by some growth in downloadable applications for smartphones that are paid for.

Unidentified Participant

Okay. Thanks. And lastly, in the fourth quarter due to IFRS changes regarding revenue recognition and automotive, you had some EUR9.6 million additional revenue. How much was that in the first quarter of this year?

Taco Titulaer

Well -- the delta. So the delta between reported revenue of automotive and operational revenue was EUR3 million roughly. I think for the full year, the delta is expected to be something like EUR10, on a normal basis that would have been EUR40 million or so. So the delta is then EUR 30 million.

Unidentified Participant

Okay. Thank you very much.

Freek Borst

Ladies and gentlemen, 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.

Operator

Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.

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