TomTom NV

AEX:TOM2

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen. Welcome to TomTom's First Quarter 2024 Results Conference Call. [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, executive]

Thank you, operator, and good afternoon, everyone. Welcome to our conference call. Today, we will discuss the operational and financial highlights for the first quarter of 2024. With me today are Harold Goddijn, our CEO; and Taco Titulaer, our CFO. Starting off, Harold will discuss first quarter operational developments, after which Taco will provide a more detailed look at the financial results and outlook. 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, executive]

Yes. Thank you. Thank you very much, Freek. And good day, ladies and gentlemen. Thanks for being with us today. I'll give you a brief overview of the key operational highlights and progress, and then Taco will delve into the financial details.

Our revenue in the first quarter of 2024 was comparable to that in the same period of last year. While the Location Technology top line showed no significant growth, we made substantial progress in maturing our product offering and expanding our business development activities. The rollout of our new TomTom Orbis Maps proceeded as scheduled during the quarter, and we now have achieved geographical global coverage. We're offering a global mapping product. The new maps post advanced visualization capabilities and appealing design and feature much improved POI search and routing quality.

Introduction of the new maps has enabled us to broaden our market reach catering for a wider range of use cases in industry resulting in an expanded sales funnel and increased commercial momentum. We've observed a growing variety of use cases for our products and services. During the quarter, we announced partnerships with enterprise customers across diverse industries and sectors, supporting a wide range of applications. And these partnerships include ventures in railroad logistics, insurance technology, location-based marketing, electric vehicle charging and more.

Our new mapping platform allows easy integration of data from other users and producers of geographical data. And as previously communicated, the establishment of the Overture Maps Foundation with AWS, Meta and Microsoft has been instrumental in facilitating interoperability and define the specifications of our databases. We are very pleased to see some prominent companies joining us in our Overture cofounders during the quarter. Overture is now gearing up for the first release.

With the successful progress of both the Orbis rollout and the Overture initiative, we remain on track to achieve our strategic goals. And with that, I will pass forward to Taco.

[Taco Titulaer, executive]

Thank you, Harold. Now I would like to provide some insights into our financials and outlook for the year. After that, we will move on to your questions. .

Group revenue for the third quarter decreased by 1% year-on-year, coming in at EUR 139 million. Our Location Technology revenue came in at EUR 190 million comparable to the revenue in the same quarter last year.

Let me break down our revenue and discuss it business by business, starting with Automotive. Automotive IFRS revenue was EUR 83 million, a modest year-on-year increase of 3%. Automotive operational revenue decreased by 6% year-on-year to EUR 79 million. This decrease partly reflects lower car production at some of our customers. Further, a difference in phasing of ramp-ups and ramp-downs of certain car lines negatively impacted the quarterly Automotive operational revenue as well.

Our Enterprise business recorded revenues of EUR 35 million, a decrease of 4% year-on-year. We expect the gradual conversion our sales funnel to lead to increasing revenues later this year and in 2025.

Lastly, Consumer revenue was EUR 21 million, a decrease of 9% year-on-year. Gross margin in the first quarter was 86% comparable to the same quarter last year. First quarter operating expenses were EUR 125 million, an increase of 6% versus the same quarter last year. Quarter-over-quarter, we saw a decrease in operating expenses also when correcting for the EUR 10 million restructuring expense recognized last quarter. This decrease demonstrates our continuous efforts in keeping costs under control.

Free cash flow was an outflow of EUR 9 million this quarter compared with an inflow of EUR 10 million in the same quarter last year. First quarter free cash flow was affected by the annual bonus payments as well as payment of the charges related to the restructuring we announced in the fourth quarter of 2023. These restructuring-related payments are not separately adjusted for and are absorbed in our free cash flow. We ended the quarter with a net cash position of EUR 284 million, down from EUR 350 million at the end of the year. This decrease mainly reflects EUR 20 million cash out related to our EUR 50 million share buyback program. This program, which is aimed at reducing our share of capital was 64% completed by quarter end.

Having covered our results, let's move on to our outlook. The top line development was flat. In the first quarter, we did see encouraging signs from a product and business development perspective. We are reiterating our guidance that we gave at the start of the year. For full year 2024, we continue to expect group revenue between EUR 570 million and EUR 610 million and Location Technology revenue between EUR 490 million and EUR 520 million. Free cash flow is expected to be higher than 5% of group revenue. For 2025, we are also reiterating our midterm Location Technology revenue ambition of EUR 600 million and midterm free cash flow target of 10% of group revenue.

Operator, we are now ready to address any questions from our listeners, and thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Andrew Hayman from Independent Minds.

[Andrew Hayman, analyst]

Just a few questions for you. In terms of operational Automotive revenue, it was down 9% in the quarter, and you highlighted lower auto production volume and the phasing of some car lines. How comfortable are you that it is simply a phasing issue and not an issue with, let's say, a model that's important to TomTom?

Then maybe a second question on the Automotive side and looking a bit longer term. A couple of the stories that are getting a lot of attention at the moment or pushback on EVs is one. And then on the other hand, there's also a, let's say, a bit more excitement in -- with autonomous driving, particularly from Tesla. I was wondering, looking midterm, how you see those 2 factors impacting TomTom? And then maybe on Enterprise. The movement in deferred revenue is positive EUR 10.8 million, and you highlighted that, that's the timing of invoicing being a factor. But I was wondering what's behind that? Is that new clients that's pushing that up? Or is it a larger -- more business with an existing customer? Yes, that's it.

[Taco Titulaer, executive]

Yes. Let me address -- you said 9%, that is 6% down operating revenue Automotive. We think that later in the year, that the trend between market development and operating revenue will reverse and hopefully, at the fourth quarter, we can do better than the market that is at least where we expect the trends to develop towards. But indeed, this quarter, it was not good, that was related to a relative underperformance of the customers that we serve compared to the market as a whole, and had to do with timing of end of production and start of production on various contracts. So that is just more a timing thing and that the expectation is that, that will recover itself towards the second half of the year. EV and autonomous driving are 2 trends that will increase take rates for both. We see lots of development and business development. It's indeed true that the increase as a percentage of sales of EV is slowing down. Yes, it is not something that we can influence. I don't think it's structural either. This is a temporary thing. But again, both are beneficiary for the take rates as a whole. Your last question on deferred revenue with Enterprise that is just normal seasonal patterns of payment behaviors of large customers. I won't read too much into it.

[Operator]

We'll now move on to our next question. Our next question comes from the line of Wim Gille from ABN AMRO ODDO BHF.

[Wim Gille, analyst]

Yes. I got 2 questions. First, looking at the Enterprise decline in revenues. We've seen Enterprise revenues coming down for a number of quarters as the Apple contract was renegotiated already Q4 2022. So this is no longer an issue. So can you give us a bit more feeling on what caused the decline in Enterprise in this particular quarter? And how we should look at the remainder of the year? I know you have fair amount of discussions going on with the new Orbis map. But when will growth in Enterprise resume? Is that already Q2? Or is it more weighted towards the second half? And then with respect to the Automotive operational revenues, I had a bit of a bad connection with the previous person asking the question. So could you repeat the answer there. Basically, what I want to know is the decline of 6%, which is driven by a decline in car production and what part is driven by the phase out of the Renault, which is not fully compensated by the phase in of Volkswagen. And when would you expect the phase in of Volkswagen to be higher than the phase out of the Renault. Is it going to be Q2, Q3? Do you have any visibility there?

[Taco Titulaer, executive]

Yes. So let's -- I think most questions are for me. But please Harold if you want to add. Enterprise decline, there isn't a single large customer who is building mapping capacity themselves. That contract is declining year-over-year, and that continues to decline. So the phase out is -- will continue for another year or so. So you see year-over-year decline sort of starting in Q4 of 2022 and this will continue into Q4 of 2025. It's a phased decline. So that explains why the year -- there is no year-on-year growth in Enterprise yet. To address your second question about when do we expect increase in Enterprise? We expect sequential increase in Enterprise to start in Q3. We expect year-over-year increase in Enterprise to start in Q4. To come back to Andrew's question, I think it is, I would say, 50-50, that is I can't comment on the specification you gave yourself, but I will not deny it either. But it is half the underperformance of our customers compared to the market and half the phase out and phase in.

[Wim Gille, analyst]

And where would we expect the phase in to compensate or be bigger than the phase out?

[Taco Titulaer, executive]

Yes, I know, yes, we expect that overall but the contribution of the new customer will be bigger than the most of the old customer. That effect will start to play Q4, Q1, the time frame.

But again, what I also said to you with Andrew, we think we -- in our estimates, we think that -- if you compare our operating revenue with market trends, so the market trend is quite stable. Q1, the expectations of the shareholders is that, that will continue to be the case in Q2, and then we see a little bit of improvement in Q3 and Q4, more improvement in Q4, but we think -- similarly, we think that operating revenue will improve for TomTom, and the expectation is that we could do better in the fourth quarter than the market.

[Operator]

We will now move on to our next question. Our next question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, analyst]

Yes. First question is on Orbis. You're seeing increased momentum in the sales funnel. I'm just wondering if this is mainly smaller clients? Or is it also some really big clients that just one time really moving the needle? Linked to that, on the Orbis, you're now moving all the traditional contracts, I think, to the Orbis platform. Can you provide an update like how much percent is already on the new platform? When do you expect this to be fully moved? And when it is fully moved, can you maybe talk about the impact both commercially and also from a cost level when that is done? And the second question is on the Overture initiative. Obviously, really big names in there. Just trying to get my head around on these deal have their own mapping teams and doing a lot of stuff themselves. They take a lot of data from the open source. What kind of layers would they then take from TomTom on top for you as an opportunity to really monetize it? Thank you.

[Harold Goddijn, executive]

Yes, Marc, thank you. Yes, the sales funnel is really a mixture of different sized companies. There's some very significant deals, both on the Automotive side and on the Enterprise side. But there is also a large number of smaller opportunities that are opening up because of the Orbis database and the new APIs and SDKs that you're publishing on top of that database. So it's really a mixed bag of bigger numbers and a little small numbers. So then moving customers from the existing platform to Orbis, that's not happening at scale. And I don't think that will happen. I think if you look at what's happening in the auto industry, a lot of our customers will continue to use -- that have started with Genesis, will continue on the Genesis database and continue to use that for a number of years into the future.

The switching of software and data in an in-car environment is notoriously hard. And at the end of the day, carmakers are not very interested in doing that once the car has left the factory. But what we do -- what we have achieved is that Orbis is now, let's say, internally our master database and all the changes that we achieve in upgrades and extensions of the data that we achieved in our Orbis mapping platform, we will go through automatically to a large extent, flow through to the legacy database, is Genesis database. In that way, we keep the Genesis database fresh. We keep it up to date. At minimal cost, mostly using automated processes, but all the innovation and new data types and the geographical expansion will really materialize on the forward-looking product in Orbis platform. Does that answer your question?

[Marc Hesselink, analyst]

Yes, it's clear. I think then it's fair to assume that a lot of the clients will they stay also when they renew the contract, they will stay on Genesis? Or is the renewal at a typical moment when they will shift to Orbis?

[Harold Goddijn, executive]

No. It's mostly tied to introduction, launching of new car models. And with some of our large customers, we are aiming to introduce Orbis Maps beginning of '25 for SOPs that are happening around that time frame or a bit later, I would say. So those are customers who are currently using the Genesis database, but where the Orbis database will feature in new car models.

[Marc Hesselink, analyst]

The other question on the Overture, those clients.

[Harold Goddijn, executive]

Yes. So Overture is a -- so there's a couple of things happening in Overture, very important for the industry. We're trying to set standards. Then is no sense for mapmaking and there is no intra-operability. If you look at the requirements now in the future, it's -- to keep up with those demands and use cases, you need to have more partners contributing to the data. To facilitate that, we publish a standard base map, which is really quite bare. But it's an important canvas on which other companies can match their own content. And that can be an HD layer or it can be UI data set, or it can be visual aspects, 3D buildings, photorealistic data that you can all attach the map in a way that makes it easy and cheap to do that. With the base map itself, you can't do that much. .

A lot of essential attributes are missing there. So if you want to have industry strength, routine or search or not, and then that base map in itself is not going to help you. You will need to upgrade to commercial version of that map. And of course, we are concentrating ourselves in standardizing OSM data, making it quality controlled and making it ammonia, so works everywhere, then we have all sorts of data related to addressing, related to POI, related to the road conditions and speeds and all that kind of stuff. There's a whole stack of data on top of that, that in combination will make the map that can be used in real-world applications.

[Marc Hesselink, analyst]

Okay. And those clients will then pick and choose a few layers from TomTom at their own layers. And that's at the end of..

[Harold Goddijn, executive]

There's possibility. That's a possibility. It depends a little bit on the type customer and the size of the customer. You need to be a sizable company for you to -- if you want to do a lot on the layer level yourself. So the majority of our customers will take the final product that they can license from us, but other customers who like a large ride-hailing company, they want to augment that database with what they have learned from their drivers and their customers, like pickup [indiscernible] how buildings or cafes or restaurants are referred to by customers. That's knowledge that a ride-hailing company will accumulate in the Orbis structure and Overture standardization and classifications, how you do all that, makes it really simple to actually do that and achieve that. You call it conflation, this is notoriously difficult in the industry, and we're making that easy for the industry as a whole. On top of that as a whole range of open source tools. We published a database in a format that has wide industry support and a lot of developers who know how to work with that format. There's a lot of open source tools that can help you to lower your overall cost of ownership of a location platform. I think that's one of the key elements of the commercial story is that this will grow and it will grow faster than the other map ecosystem and that there is already widespread support for the data format, and that will only accelerate and accumulate over time, which eventually will lead to a far superior mapping platform than anything else that is out there. And that is one of the key elements for customers -- potential customers to go through to moan in considerable amount of pain, if you want to switch from location platform that is a -- that's a big decision typically for a company and -- but the idea that you are on a winning platform that will grow and as well supported by industry, both on the data side and on the tooling side, that is very appealing in a very strong sales argument.

And certainly, over time, and that argument will grow in strength, and if we provide more proof points and show that more customers are taking that effort to change from location provider that, again, will help us to faster convert our sales funnel and for our sales force to become more effective.

So we are in the early days. I think what's important for us as a team is that we see that the strategy that we had designed it in 2019 is working. We see the effects certainly in the pipeline, the discussions we have with sales funnel and a variety of customers that we're talking to, to whom we have never spoken in the past, all our key indicators, leading indicators for us, that strategy that we have developed over the last and implemented is working. So from that perspective, we are on track. Strategically, it is working as we had hoped and expected. So now I'd say, yes, it's a matter of converting all those opportunities that are opening up to real contracts going forward. But I think both in the auto industry as well as in the Enterprise segment, that strategy is clear, resonates, and I definitely believe it will give us an edge going forward for years to come.

[Operator]

We will now move on to our next question. [Operator Instructions] Our next question comes from the line of Nicholas Kolokotronis from Van Lanschot Kempen.

[Unknown Analyst]

First one under Orbis. Can you give us a bit more color on how you expect the typical sales cycle to look like under the new maps in terms of both time frame and the time that it's going to take for the testing process and the eventual conversion to sales? And my second question is on the funnel of Orbis. So it's building up well. Can you comment on what are your communications with the companies in the funnel and at what stage in the sales cycle you are on average with these companies? And if you could comment separately on large accounts versus small ones?

[Harold Goddijn, executive]

Yes. So Nicholas, thanks for the question. So first question about conversion. Now what does that look like, and how long is it take. It's a bit of a mixed bag. So customers who know us from the past, who we have been dealing with in the past and to whom we introduce our plans and strategy to say, yes, I get it. I understand it and I like it doing -- does take that much to convince those type of customers, and we can substantiate the statistics and analytics and all the rest of that [indiscernible] objectively better than anything else that is available. So that's an easy sell. That doesn't mean that everybody starts to run to convert, but it does mean that when they're up for renewal or they're up for new introduction or new launch or new program, the default choice is for Orbis and it doesn't require little of extra work for us. So there's one extreme. So customers understand there's no redoing. They can see the results and they are taking interest in the metrics that we are now starting to share with those customers. On the other -- on the flip side, there is a type of customer that we know can use data, but to whom we are unfamiliar. There it takes longer. There you need to go through another different type of sales cycle where you have to introduce yourself first and that takes longer. You need to introduce yourself and then you need to introduce your strategy and then you need to introduce your product, and that takes longer. But also there, once we are engaging and when there is a sales opportunity or product replacement opportunity, it's fair to say that also those style of customers show a interest in what we're doing. And there, again, in that environment, at least strategically, those customers understand what we're trying to do and like that idea, the direction of travel. But it takes more time to convince and you need to provide more proof points. I think there's a couple of large customers who will start converting and introducing Orbis on their own platforms. Double in itself being an important proof point for everybody else to get easily convinced that Orbis has reached maturity and is ready for prime time. So that's kind of where we are in terms of that all journey, commercial journey.

[Operator]

We'll now move on to our next question. Our next question comes from the line of Maarten Verbeek from The Idea.

[Maarten Verbeek, analyst]

It's Maarten Verbeek from The Idea. Firstly, you mentioned that in Enterprise, a large enterprise client was starting to build its own map and that would give some negative pressure on your Enterprise revenue. To get a bit of feel of the underlying development for Enterprise, how much sales do you expect to lose from this client compared to last year's level in the next 2 years?

[Taco Titulaer, executive]

Yes, Maarten, I fully understand your question, but I can't comment, on it. Apart from what I already answered to is that we expect a sequential increase in our Enterprise revenue as of Q3 and a year-on-year increase in our Enterprise revenue as of Q4. More details, I can't provide, also client confidentiality.

[Maarten Verbeek, analyst]

And also to get a bit of feel for the underlying free cash flow. Last year, you took the almost EUR 10 million restructuring charge. You stated that would be consumed in the first half of this year. Is it still the case? And could you also give some kind of inform us how much you have used, how much you've spent of that provision in the first quarter?

[Taco Titulaer, executive]

Yes. The lion's share of that was paid out in the first quarter.

[Maarten Verbeek, analyst]

And more or less the remainder will be executed in the second quarter.

[Harold Goddijn, executive]

There's always a long tail for individuals. But indeed, I think after the second quarter, 90% of that will have been paid.

[Maarten Verbeek, analyst]

And lastly, since you expect some tough quarters in Automotive. According to your backlog, the breakdown you expected revenue of Automotive to be in the neighborhood of EUR 350 million for this year. Has that changed now we have entered into April?

[Taco Titulaer, executive]

No, it hasn't. Of course, there is some lost revenue in Q1 that will not be recouped later in the year, but there's also a fair amount of revenue that will come later. So overall, by the couple of million below where we thought it were the middle of the bell curve could end up, but it is still within that range. And so the EUR 350 million is a very fair estimate.

[Freek Borst, executive]

All right. Since it appears 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.