TomTom NV

AEX:TOM2

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to TomTom's Second Quarter 2024 Results Conference Call. [Operator Instructions] This conference is being recorded. I will now turn the call over to your host for today's conference, Freek Borst Investor Relations.

[Freek Borst, executive]

Thank you, operator. Good afternoon, all. Welcome to our conference call. Today, we will be discussing the operational and financial highlights for the second quarter 2024. With me today are Harold Goddijn, our CEO; and Taco Titulaer, our CFO. Starting off, Harold will discuss the quarter's operational developments. After that, Taco will provide insights into our financial results as well as our 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 very much, Freek, and welcome, ladies and gentlemen. Thank you for joining us today. As usual, I will go briefly over the key operational highlights and the progress, and then Taco will provide further information on the financials. We saw the commercial launch of TomTom's maps with global coverage in the first half of this year, and these maps are better in all dimensions, they're fresher, they're richer and easier to produce.

Orbis forms a solid foundation for the strengthening of our competitive position. We see now commercial traction in both Enterprise and Automotive business with early wins in both private and public sectors. Microsoft decided to adopt TomTom's Maps for their air location technology needs. And the product will be deployed across Bing, Microsoft 365, power BI and Azure S. The market will see this as a strong endorsement of our products and strategy, and this translates into a boost sales funnel converting.

I would also like to highlight our recent contract with the Australian government. Governments need to have access to location technologies to navigate crisis situations, perform security functions or planning purposes and much more. Now the public sector is relatively new to TomTom, but we can play here, thanks to our new maps and strategy, significantly expanding our addressed market.

[indiscernible] has been selected by more companies during the quarter. Qualcomm has chosen us to deliver maps in support of the new asset tracking platform. Moody's is integrating our vocation data into their insurance [indiscernible], and that's an analytical tool that helps financial institutions and ride-hailing company Bolt will use our new Orbis based traffic data to improve their operations worldwide. Overall, we are happy to see commercial traction in enterprise, with the conversion of our sales opportunities in contracts.

Short-term downward revision in car production volumes and delays in new model introductions have resulted in a less predictable market environment. However, our position in automotive is strengthening, the sales funnel is expanding. And with that, I'd like to hand over to Taco.

[Taco Titulaer, executive]

Thank you, Harold. I will now provide some insight into our financials and outlook. And after that, we will move on to your questions. In the second quarter of 2024, group revenue decreased by 3% year-on-year to EUR 152 million. Location Technology revenue ended at EUR 129 million, a small uptick on the last -- from the same quarter last year. I will briefly touch on revenue business-by-business, starting with Automotive.

Automotive operational revenue came in at EUR 89 million, a decrease of 2% year-on-year. This year-on-year decrease was partly driven by one-off included in the comparative year. Correcting for this effect, underlying Automotive operational revenue increased. Automotive IFRS revenue was EUR 87 million, representing a modest year-on-year decline. Our Enterprise revenue grew by 11% year-on-year, coming in at EUR 41 million. In part, this increase resulted from a newly signed contract to support the Australian government.

Owing to this specific nature of deals in the government sector, a large share of revenues recognized upfront, with the deal contributing meaningfully to revenues this quarter. Without the contribution from this deal, Enterprise revenue saw a limited sequential increase. Lastly, Consumer revenue decreased by 70% year-on-year to EUR 23 million, in line with our expectations and internal planning. Do note that last year, our consumer segment was remarkably strong, making this comparison more difficult. For the full year, we expect the Consumer business to contract with a little over 10%.

Second quarter gross margin was impacted by the release of nonrecurring engineering costs [indiscernible] customer programs. The main one being a Volkswagen Group, where we work the carryout to integrate our navigation so far. As such, the gross margin came in at 80%, below the 83% recorded in the same quarter last year. Excluding the effects of these nonrecurring engineering costs, our gross margin would have been comparable to the gross margin in the previous quarter.

For the full year, we expect our gross margin to be around 85%, which is similar to last year. Operating expenses in the second quarter were EUR 126 million, making a decrease of 5% year-on-year. That resulted mainly from a one-off release in personnel expenses related to our short-term compensation plan. Additionally, we had lower depreciation and amortization charges. Then, free cash flow was an outflow of EUR 5 million in the second quarter versus inflow of EUR 3 million in the same quarter last. The decrease in free cash flow primarily reflects lower EBITDA, as well as some working capital tax. Payments related to the restructuring that we announced in the fourth quarter of 2023 also had a negative impact. These payments are not separately adjusted for and are absorbed in our free cash flow.

At quarter end, our net cash position stood at EUR 258 million compared to EUR 284 million at the end of previous quarter and EUR 350 million at the end of last year. The decrease in our net cash position was driven primarily by the cash out related to our EUR 50 million share buyback program. In the second quarter, we purchased 3 million shares for a consideration of EUR 18 million, thereby, completing the program. In all, we bought back 7.8 million shares and intend to cancel the majority later this year.

Having covered our results, let's move on to our outlook. We have revised our expectation based on developments we witnessed in the first half of 2024. In the Automotive industry, projections for car production volumes were revised downwards and new model introductions were delayed. To reflect lower Automotive operational revenues, we now expect full year revenues to come in at a lower end of our guidance. Consequently, we are adjusting our free cash flow guidance downward. We now expect full year free cash flow to be between 1% and 5% of group revenue.

In addition, as the market environment in Automotive has become less predictable, and we experienced lower-than-anticipated sales cycles, enhanced price, we will not be able to realize our financial ambition by 2025. We will provide guidance for 2025 with the publication of our full year 2024 visuals. To wrap things up, I would like to leave you with some of the key takeaways for today.

First, as Harold also mentioned, we see that our Orbis Maps is maturing, which is bolstering the strength of our product condition. The proof points are now there. Microsoft has adopted the new maps, we see momentum in Enterprise more broadly picking up.

In Automotive, as mentioned, predictability on the short term -- short to midterm has diminished. However, long-term trends, automated driving, advanced safety and electrification remain intact, even if delayed. As such, even though it will take longer for revenue growth and result in operating leverage to materialize, we are confident we are on the right track. And with that, we're now ready to address any of your questions. Operator, please start the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, analyst]

My first question is on Enterprise. As you said, quite some traction over the quarter, also some announcement with press releases during the quarter. You also say that the ramp-up is going a bit slower than expected. How do you mean that's slower? Is it -- you still expect an aggressive ramp but at a later stage? Or is it going to be more of a gradual growth business over the next few years?

[Harold Goddijn, executive]

Yes, hard to answer that, Marc. The -- what we're seeing is that, everything we'd hope for is happening. So by order, just addressable market more product and a better position in the market. It means that customers are taking what we're doing very seriously, listening carefully, trying things out and so on and so forth. So the fundamentals look good. Compared to our original planning, I think we -- our original ambition, I should say, that we articulated during the Capital Markets Day, we are clearly behind, in terms of translate it to revenue. But the -- I think the underlying arguments and business case are still intact, but it will take a little bit longer.

[Marc Hesselink, analyst]

Okay. And is it correct that also the reason why the sales side were a bit longer that you still had to finish some parts of your product. And I guess they are now fully in place. So should -- from now on the sales side to be a bit quicker? Or is it just something you underestimated that these sales cycles are low?

[Harold Goddijn, executive]

No. I think -- well, the launch of the global product was slightly delayed. So that was kind of the starting point for everybody to start looking at it in earnest. I think the total transition, and it is a complex transition, if you transfer your -- you start making maps in a new way. We've been the history of 35 years, mapmaking -- be it the old way, and we had, of course, a lot of software programs and software products connected to that map. All that is not a trivial task, but we are getting through that diligent and concentrated effort. More and more is coming available, reaching maturity across the board, both in maps platform and application software, but we're not quite there yet. There's still quite a bit of work to do, but it is progressing in line with our expectations.

[Marc Hesselink, analyst]

Second question is on Automotive. Clearly, the market is a bit slower. I mean there's no surprise, I think. But can you maybe talk a bit what's happening on the line, like what you're seeing on new RFQs, the dynamics there, competitive dynamics?

[Harold Goddijn, executive]

So yes, so the -- so we have to see two things, a short-term downward provision of progression numbers, and also some delays in new products [indiscernible] in peek days. Now a delay in SOP does not necessarily be a problem if you are the incumbent, but if you are winning market share, of course, then the transition from old supplier to a new supplier, it will take more time, and that's hitting our top line in this case as well, with two of our customers introducing later than the other was anticipated. So it's a combination of those two effects. If I look at the -- our position in the market and our credibility in the market, I think every -- all the signs are on green, and we're talking to more customers, a lot of customers that we have not been speaking to for some time. There are great opportunities opening up for contract wins. The engagements we have are healthy at the right seniority level within the company as well. So I'm happy with the credibility we have gained, the interest in the Orbis Maps, but also the interest in the Overture foundation, and what it means for the long-term shape of the location industry. So, compared to a couple of years ago, we're playing at a higher level, more strategic, more opportunities opening up. I think what we're also witnessing is renewed interest in everything that has to do with self-driving and then not be Level 5 perhaps, but there is now a greater degree of consensus and technological maturity in the lower levels of self-driving, L2, L2+, L3, where -- and we noticed a significant interest for our next generation of ADAS and self-driving products. So there as well, I think the trends are looking favorable. It's a little bit frustrating, of course, that this year is slower than we had hoped for in terms of sales, especially in the bargains. But I think, fundamentally what we've seen is -- and the feel we have in product team and the sales team is that our relative position strengthening going forward.

[Marc Hesselink, analyst]

Clear. And final question is on the free cash flow guidance. Actually you -- downward -- pushed down on the guidance range for revenue, but the free cash flow is actually quite a bit lower. Could you maybe help me to understand that? Is there also some big items that maybe shift into next year to explain the relatively big decrease in the free cash flow relative to the revenue?

[Harold Goddijn, executive]

Well, it's a very leveraged business. So a small [missing] top line can result in a significant miss in -- relatively speaking, in the cash flow line that is, I think, what you see. I don't think there's anything cynical here. It's just revenue that is coming in slower and at a lower range of our earlier expectations and that results in a weaker-than-anticipated cash conversion.

[Operator]

Our next question comes from the line of Andrew Hayman from Independent Minds.

[Andrew Hayman, analyst]

Yes. I was just looking at one of your recent presentations in May. And there you showed your direct peers as being Google here, Mapbox, Zenrin and then some local players. You were just talking a little bit about the competitive dynamics, but maybe, a little bit more detail would be interesting. And maybe to give it something specific. I saw that Mapbox announced that they had some business from Toyota recently. Why would they choose to do business? Why would Toyota choose to do business with Mapbox versus you? I mean, in the past, you've had a relationship with Toyota.

And then similarly, you note -- we see that BMW and VW are coming through as clients. In some ways, that's quite surprising. You would expect them to be predisposed to use here. So what do you -- what's the trigger for them to go with you? Is it the fact that they start with traffic, for example, and then that opens the door to sell them additional aspects of your offering? And then maybe just tied to this, are the auto companies a bit resistant to be tied too closely to one map company, and they are quite happy to use multiple sources or shift occasionally between the map-providers?

[Harold Goddijn, executive]

Indeed, if you identify the competitive environment of these companies you just mentioned, so it's here, Mapbox, Google, and then depending in some countries, we have strong local competition. We all have a slightly different business model, slightly different product offering. And -- but by and large, we're fishing in the same pond with a slightly different approach, I think, to technology, product and integration. So, I think what we are -- our focus is clearly on having a superior map. I think that's the foundation on which -- that is an important part of your competitive position, and not only the quality but also the costs that you make to produce those maps. We think we are class-leading in that combination of net content per dollar. And I think that will carry us through midterm, long-term challenges, because if you have that well organized, you have a strong capacity position regardless of what's happening. Second, we are building very much a standardized technology and navigation SDK, that we use internally, that we license to our customers for them to integrate our maps and technology and routing in traffic. And so that's very much the path we are taking. Now if you look where the relative strethat's of our competitors are, you mentioned Mapbox with -- deal with Toyota. Mapbox has a strong position in rendering the way you display the map on the screen, but they're not so competitive in that content. So what you often see is that the Mapbox has a contract for rendering, again, using other people's data in automotive use cases. So yes, and then I don't want to say too much about competition, you need to ask them. But I think, as I also said in my introduction is that the feeling is, that we are on the right track in terms of that position and not only -- and mostly because of the kind of engagement we see now with major carmakers by our technology stack and our product strategy.

[Operator]

[Operator Instructions] Our next question comes from the line of Maarten Verbeek from IDEA.

[Maarten Verbeek, analyst]

It's Maarten Verbeek from The IDEA. I would like to get back to the longer than anticipated sales cycles within Enterprise. When TomTom presented its full year results, so roughly half a year ago, it mentions that it takes some 6-month from first contact to first revenue. So how much has that changed? Is it now an expectation of 9 months or even 1 year? And attached to that question, you also gave some insight about your sales funnel with how many mid to large size customers you were on speaking terms for signing up a new contract. Could you give an update with respect to your sales funnel?

[Taco Titulaer, executive]

Well, on the first comment, what we said, I think the first -- the time between people engaging with us and asking for sample products at the time, you have a contract and can receive revenue coming in, that will take 6 to 9 months, I would say. I think there are various ways to make first contact, but of course, it takes often some time to find the right individual and also to have the right use case in place to provide sample data. And as Harold already said earlier is that first, a lot of players out there was a prerequisite that we have a global map before they would do their due diligence and going to keep. So I think the product has become more mature, more ready for testing and adoption and that will enable these sales cycles to happen. And your second question, what was that? It was on...

[Maarten Verbeek, analyst]

Funnel. Sales funnel. You -- roughly a year ago, you gave some insight with how many mid- to large- customers you were on speaking terms for signing up a contract.

[Freek Borst, executive]

Now even with the customer like Microsoft or with any other customer, the potential can be a lot larger than the initial contract. So it can start small with one use case in certain regions, et cetera, and then our time that cooperation develops and deepens, et cetera. So in the funnel, in a number of prospects we are engaging with, you talked about hundreds of candidates, and some are relatively small, and some have the potential to grow to bigger prospects over time. But it's hard to call. This is -- we have in our clientele, we have some large customers that relatively take a small portion of our product stack and the other way around as well. So it takes time to develop that cooperation.

[Operator]

We will now move on to our next question. Our next question comes from the line of [Tim Ellis] from Kepler Cheuvreux.

[Unknown Analyst]

I have a question with regards to the free cash flow, just to get better feeling on the moving parts there and also on the outlook for the year. Could you give some insight on the working capital movement that we can expect? Is that something -- you've seen in the first 6 months, that was unusual and not necessarily planned? Or was it just a normal seasonal pattern and the working capital is moving as you would expect it to in the beginning of the year?

[Taco Titulaer, executive]

No. So I find it probably one of the most hardest to plan to predict elements of the financial statements. And so we look at normal metrics, DSOs and we look at our historical platforms, but time over time, things change slightly differently, and they can come in a little bit later, or a little bit earlier in the quarter. I don't think there's anything structurally or fundamentally different than normally. So I wouldn't read too much into it.

[Unknown Analyst]

Okay. And then also just for a better understanding on the profitability and eventually the free cash flow then. So if we would exclude the one-off costs that occurred in Q2. You mentioned that the gross margin would be approximately the same as in Q1. Did you see any other effects on the profitability other than the operational leverage that you mentioned, which eventually [led ] you to lower the guidance.

[Harold Goddijn, executive]

Yes, to start with gross margins. Gross margin was 80% to correct for certain one-offs in our cost of sales. Normal gross margin will be 85% or 86%. That's also the run rate, which we plan our full year's guidance for the full year. So that is the main element. And there are some one-offs related to restructuring, but we don't treat them as funnel. We don't exclude them on my numbers. So back to the free cash flow. We expect free cash flow to be positive in the third and the fourth quarter, where they have been active in the first and the second quarter.

[Unknown Analyst]

Okay. Great. And then you mentioned in one of the previous analyst calls that the goal is to go towards 90% gross margin...

[Freek Borst, executive]

Yes, there's a factor of consumer becoming a smaller part of the mix. And so consumer has hardware, and so the cost of sales is higher there, meaning that consumers' gross margin is probably 45-ish-percent. So the less consumer in the mix, the higher the gross margin [indiscernible].

[Operator]

[Operator Instructions]

[Freek Borst, executive]

As 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.