TomTom NV

AEX:TOM2

Earnings Call Analysis

Challenges in Automotive Market Showcased with Modest Growth in Enterprise Segment

In the third quarter of 2024, TomTom reported group revenue of EUR 141 million, a 2% decrease year-on-year, driven largely by the struggling automotive sector, which saw revenues fall to EUR 69 million from EUR 85 million. However, the Enterprise segment thrived with a 13% increase to EUR 42 million. Despite decline in consumer revenue by 16% to EUR 21 million, the overall gross margin improved to 87%. The company anticipates maintaining positive free cash flow for the year and lower boundary guidance for Location Technology revenue. Looking ahead, management expects increased activity leading to potentially significant revenue in 2026-2027.

Financial Performance Overview

TomTom reported a group revenue of EUR 141 million in Q3 2024, reflecting a 2% decline compared to the previous year. The automotive segment faced challenges owing to ongoing weaknesses in the global automotive market, resulting in operational revenue of EUR 69 million, significantly down from EUR 85 million year-on-year. Meanwhile, the Enterprise segment showcased resilience with a 13% increase in revenue to EUR 42 million, driven by growth in existing customer success with Location Technology products. Overall, the Location Technology revenues remained stable at EUR 120 million.

Automotive Segment Challenges

The automotive business faced a notable downturn due to delayed launches of new car models and a decrease in overall car production volumes, particularly impacting major clients such as Stellantis. Year-on-year IFRS revenue for the automotive sector showed a limited decline of 5%, totaling EUR 78 million. Analysts noted the impact of destocking and reduced demand, as OEMs adjusted their inventory amid weaker sales conditions.

Prospects for Enterprise Growth

Contrary to the automotive sector, the enterprise division's growth indicates a positive trajectory, with successful partnerships and the launching of innovative technologies. Notable collaborations include support for NextBillion.ai in route optimization and a contract with IVECO, to integrate TomTom's navigation in their trucks, including electric models. Such initiatives are essential for driving future revenue streams and enhancing customer retention in competitive sectors.

Consumer Revenue Decline

TomTom's consumer revenue fell by 16% year-on-year, amounting to EUR 21 million. This decline underscores the challenges the consumer segment faces in adapting to the evolving market landscape. The firm needs to focus on improving its offerings to reclaim market share in this sector.

Gross Margin and Operating Expenses

The gross margin experienced an increase to 87%, up from 83% in the same quarter last year, primarily due to a higher contribution from the Location Technology segment. However, operating expenses totaled EUR 126 million, slightly decreasing from prior year levels, attributable to reduced depreciation and amortization charges.

Cash Flow Position

TomTom reported a positive free cash flow of EUR 15 million in Q3 2024, compared to EUR 13 million in Q3 2023, with a year-to-date breakeven cash flow status. This improved cash flow situation provides a stable framework for potential future investments. At the end of Q3, the net cash position stood at EUR 270 million, up from EUR 258 million at the end of Q2.

Guidance and Future Outlook

TomTom maintained its guidance with expectations for full-year free cash flow to remain positive. They expect Location Technology revenue to stay at the lower boundary of their previous predictions. Despite facing headwinds in the short term, the company sees potential for recovery and growth, with significant deal activity anticipated over the next 6 to 18 months, targeting new revenue streams from deeper vehicle integrations and advanced safety features.

Long-term Market Trends and EV Adoption

While short-term challenges persist, TomTom remains optimistic about long-term trends within the automotive market, highlighted by expected advancements in automation and electric vehicle (EV) adoption. The company previously targeted navigation take rates of 50% by 2025, viewing these as closely tied to broader EV adoption. Ongoing shifts towards higher integration of mapping technologies within vehicles present opportunities for TomTom, particularly as they prepare for increased demand in 2026 and 2027.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the TomTom Third Quarter 2024 Results Conference Call. [Operator Instructions] 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, executive]

Thank you, operator, and good afternoon, everyone. Welcome to our conference call. Today, we will be discussing the operational highlights and financial results for the third quarter of 2024, together with Harold Goddijn, our CEO; and Taco Titulaer, our CFO. Harold will begin by discussing the operational developments. Following that, Taco will provide insights into our financial results as well as our outlook. We will then proceed to your questions. As always, please note that safe harbor applies. And with that, Harold, let me 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. I will take you through some of our recent developments and operational highlights, and then we hear from Taco about the financials. We are facing a slowdown in the global automotive industry. Near-term market conditions are challenging. Carmakers are reducing inventories in certain markets and are delaying new model introductions. Combined with an overall reduction in end user demand, this is affecting car production volumes. But despite these factors, we remain optimistic about the longer-term industry trends that call for deeper integration of our technologies into vehicles.

We are witnessing growing interest in advanced safety features and automated driving technology. And to enable these strengths, vehicles will increasingly rely on highly detailed near real-time maps that support both the driver and the vehicle itself. And there are many other use cases where location technology plays a critical role. Think of life assets tracking logistics, location-based recommendations and social media and location informed decision-making for governments with TomTom Orbis Maps. We now have a platform that allows us to address all of these use cases and more.

And as a result, our Enterprise business is gaining traction. Let me give you some examples of recent wins. This quarter, we strengthened our partnership with NextBillion.ai, and that is collaboration to provide them with data and APIs that are needed for route optimization, scheduling and dispatch across various sectors. GfK also selected data to power the geomarketing activities. Standard & Poor Global Mobility use our maps and other data to enhance their automotive intelligence products with a focus on market sizing and customer loyalty analytics.

And furthermore, IVECO has chosen our technologies. Most of their trucks, including electric models will now come equipped with our full stack navigation solution complete with truck-specific routing technology. And these collaborations underscore how our products support a wide range of innovative application. And innovation is at the core of what we do.

On top of our unique platform, we're creating new and improved applications that make it easier to work with our maps and with our data. This quarter, for example, we launched our Premium Geocoding API as aimed at tackling one of the toughest challenges in the last-mile logistics, the last 100 meters.

This new API delivers precise location data, included nearby parking location, building entrances, floor numbers, elevators and more. And this means, couriers can make the deliveries at complex addresses with ease, leading to improved efficiencies and customer satisfaction. Thank you. I will now hand over to Taco to discuss the financial performance.

[Taco Titulaer, executive]

Thank you, Harold. I'll now share some insights into our financials and outlook. After that, we will move on to your questions. Group revenue in the third quarter of 2024 was EUR 141 million, a decrease of 2% compared with the same quarter last year.

With our Location Technology segment, we saw divergent trends in our Automotive and Enterprise business, let me touch on them both, starting with Automotive. As Harold already mentioned, we experienced a continued weakening of the global automotive industry in the third quarter. Combined with delays in the launch of new car models to which we are supplying, this had a negative impact on the performance of our automotive business, including the development of our backlog.

We will provide an update of our backlog with our full year results as it's too early to fully quantify the impact now. Automotive operational revenue for the third quarter was EUR 69 million, down from EUR 85 million in the same quarter last year. Automotive IFRS revenue saw a limited decline of 5% year-on-year coming in at EUR 78 million. In contrast, our Enterprise business showed good growth with revenue increasing by 13% year-on-year to EUR 42 million.

This can be attributed to the growing success that our existing customers are having with our Location Technology products as well as the continued commercial traction that Harold already pointed to. Overall, Location Technology remained stable year-on-year, totaling at EUR 120 million.

Lastly, as anticipated, Consumer revenue declined by 16% year-on-year to EUR 21 million. Due to the larger relative contribution of Location Technology in our revenue mix, our gross margin increased to 87% for the third quarter, up from 83% in the same period last year.

Third quarter operating expenses were EUR 126 million, showing a marginal decrease compared with last year. This decrease mainly resulted from lower depreciation and amortization charges. Free cash flow was an inflow of EUR 15 million compared with an inflow of EUR 13 million last year. The year-on-year increase in free cash flow is mainly a result of lower investment in property, plant and equipment.

At the end of the third quarter, our net cash position was EUR 270 million compared with EUR 258 million at the end of the second quarter. Having covered our results, let's now turn to our outlook. With free cash flow turning positive this quarter, our year-to-date free cash flow has reached breakeven. Accordingly, we reiterate our free cash flow guidance and continue to expect full year free cash flow to be positive.

We're also maintaining our full year guidance for group revenue and expect Location Technology revenue to land around the lower boundary of our guidance. And with that, we're now ready to address your questions. Operator, please start the Q&A.

[Operator]

[Operator Instructions] And now we're going to take our first question. And the question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, analyst]

First question is on Enterprise. I think nice traction with the smaller clients. And you also said that eventually you want to land also the larger clients, which have longer cycles. What still needs to happen for these larger clients to get involved as well? Is that they need more testing time? Do you still have to change things on your side? Maybe a bit like what are the important things -- important hurdles to win those kind of clients?

[Harold Goddijn, executive]

Yes. I think the product is there. product is raised and is established now. I think we have as a seal of approval from a number of leading technology companies are already using those maps. So mostly what you see is the internal organization, the client side. So typically, those transitions take place. They take a lot of time and effort that needs to be planned for and the urgencies to be there.

Those are typically the most important elements that lead to quite long implementation times and decision cycles. I think the credibility of the platform is no longer an issue. I think it's fair to say that we've seen as a forward-looking modern location platform technology provider now. And it is a matter of mostly internal priorities on the customer side.

[Marc Hesselink, analyst]

Great. And my second question is on Automotive. Given the weakness in the end markets, our discussions on pricing. I hear quite a lot that the OEMs are pushing on their supply chains to lower prices, especially on the EV side. Is that something that's also visible for you?

[Harold Goddijn, executive]

We know it's tight. There is price pressure undeniably. We are well protected with longer-term contracts against that. So like-for-like, I think if you -- if there's no innovation taking place, you will see pressure over time. But at the same time, we see that the requirements or maps are going up. They are deeper integrated in automation and the electrical EV functionality now tightly integrated in the vehicle and those functions typically command a higher value. So I'm not so worried for price pressure, but I acknowledge that we need to throw in more in the equation to get the same value per vehicle than, let's say, 2 or 3 years ago.

[Marc Hesselink, analyst]

And final question is on -- if you look at the move in price for the short term, we see the weakness in automotive and the push out in some of the EV adoption. And then you also mentioned the more longer-term positive of higher safety features and where you also require a map -- when were those things inflect, like do you think that the -- what you're currently seeing for the long term is going to be offsetting some of the more near-term weakness is this? Is that something that -- is that visibility for you when that can get inflect? And when do you expect that?

[Harold Goddijn, executive]

Yes. I think we've pretty good visibility what's coming, what's up and coming in the next couple of years. I think there is a -- broadly speaking, I think around '26, '27, there will be kind of a next generation of automation into the mainstream volume brands that require maps to deliver more information than what we currently deliver.

So higher fidelity, a deeper integration in the vehicle, you will see all sorts of functionality that is linked to mapping and automated driving coming on stream. I think in the next 6 to 18 months, we will see quite a lot of activity on the procurement side. and then a -- typically, this will lead to revenue in second half of '26 -- additional revenue in the second half '26-2027. That's kind of my internal planning.

So I see a role of [ RIs, RFQs ] coming with -- it's quite clear where that is leading us. I think we're well positioned to play a role. I think we have a very competitive product now, and I think that's recognized by the market. So I expect in the next, again, 6 to 18 months, quite a bit of deal activity taking place that will lead to shipments in '26, '27.

[Operator]

Now we're going to take our next question. And the question comes from the line of Wim Gille from AAOB.

[Wim Gille, analyst]

This is Wim Gille from ABN ODDO. I got 2 questions. First of all, if we look at, let's say, the backlog you're going to give us a new version at the end of the year. I get that. And there's 2 moving components there, which is, on the one hand, let's say, the new expectations from the OEMs regarding their future sales.

Then there's the order intake and then there's the revenues. Specifically looking at the order intake, what's the current activity that you see? And how are the win rates looking for you? Is this going to be a good year for order intake or a bad year? And is there -- given the current term in the market a bit of a wait-and-see approach on that end?

The second question I would have is that most of the OEMs are in a sort of an existential fight. Does that change their narrative and their views on how they look at Google Automotive Services? Is that potentially a solution for them? Or is it the opposite that they would actually say we need to get the product from TomTom here in order to differentiate ourselves even further?

And then lastly, if we look at the operational results that we see in Automotive this quarter with a minus 19%. There's a lot of moving parts. Some of it is market-driven like in general, low OEM volumes, your customers, predominantly Stellantis being a big one, not doing very well.

And then the pushout in EVs, but there's also the more, let's say, company-specific thing. One is product phasing with Volkswagen moving in and Renault-Nissan partially moving up. which is a temporary thing and the destocking effect. So can you try to give us a bit of an indication on what is kind of a structural underlying trend versus what is specific to this quarter?

[Taco Titulaer, executive]

Yes. On your question of the -- let me take the question about the operational revenue and then maybe you can comment on the deal activity. But it's true, which I mean you almost answered your own question yourself. But there are various components. You have these -- the end market that is softer together with destocking, especially in the U.S. that has an effect on our production levels.

I think there are also a certain effect of true-ups so a certain royalty reports we provide in our accounts and then later, we get the true usage reports and they can be lower. So some parts of what happened in Q3 is also a related effect what already happened earlier in the year. So I -- so if you look ahead towards Q4, I still think that there continues to be pressure on the operational revenue but not as severe as what we've witnessed in Q3.

So that will probably be more single digit and not double digit. On the order intake, so the backlog moves is indeed also what you said, there are 3 components: one is the reported revenue in the given year, second is the order intake and the third is the adjustments that we have to make for volumes in the future.

Now the contracts that we have with automotive are fixed on price, but not on volume. So what is happening or what we expect that will happen is that there will be adjustments on the expectations, the OEMs see for the future. One overall car production, but also in the mix between internal combustion and EV and EV tends to have a higher correlation with take rates of navigation.

So if there's less EV in the mix, that also has some relatively effect on the attachment rate. So there will be an adjustment that for now, that is too early to call that exactly to a name that precisely because normally, the sequences that by the year end, you get all the updates of all our customers and then we can make a more accurate picture.

On the deal activity, deal activity tends to be back-end loaded, and there's a lot happening in Q4. So also for there, it is early, but we also see there that it is -- on the one hand, it's transitioning more to -- the use case is transitioning more to the vehicle next to the driver that needs digital mapping for navigation into the vehicle, but also more and more the vehicle itself for safety features and autonomous driving.

So the type of request and the type of the [indiscernible] is changing. I don't hear or feel that there is a market share story going on, but there is there, we're witnessing some delay in decision-making. That is true. But the overall size of the order intake, that is also early to say there is a lot pending at this moment, and it also highly depends if it falls into December or January for it to quantify the overall size.

[Wim Gille, analyst]

And in terms of win rate?

[Harold Goddijn, executive]

Yes, win rate, I think we're doing well. Everything -- all the discussions and all the meetings we have, there is good support for the strategy team, the way we were -- I feel we're on a good trend, and we are in a good position to win market share in the next 6 to 18 months. There's a lot going on. Then your question about GAS, yes, it's -- and Google Automotive Services and how that is affecting the market.

It's not so easy to say, to be honest. I think if this trend will -- is sustained that you see deeper integration in the safety features, I think we have an advantage. So the Google product is obviously a consumer product derived from Google Maps and not specifically [indiscernible]. So I think we have an edge there. ADAS and HD and those type of functionality that typically carmakers increasingly demanding. So I think we're looking good. We're confident, team is confident. As I said, lot of activity going on. We need to focus the prices that are out there that we're doing. And I feel confident that we can lay a solid foundation in the business in the next 18 months.

[Operator]

[Operator Instructions]

And the question comes line of Nikos Kolokotronis from Van Lanschot Kempen.

[Nikos Kolokotronis, analyst]

So obviously, there is a lot of uncertainty in the automotive market at the moment. And also with regards to the adoption of electric vehicles versus the ICE platform. So at your 2022 CMD, you guided for navigation take rates of 50% by 2025. So I was wondering if you could provide some more color on how you're tracking these numbers in Q4? And what do you expect in 2025?

[Taco Titulaer, executive]

Yes, fundamentally, I think take rates are on an upward trend. What the exact number is today, I don't know. I think it takes a little bit of time to have all the data in front of us. But the relatively mix of EV versus internal combustion engines makes a difference. And so EV is -- it sounds like it's coming more a story of when and not if, and it starts to be -- it looks like it's a little bit more delayed and it will have an effect on adoption rates indeed or take rates. Well, the exact number is, I can't say precisely. Yes, it's still going up.

[Nikos Kolokotronis, analyst]

Perfect. And my second question is on the cash flow side of things. Because if I look at your trade receivables, they fell to EUR 60 million approximately in Q3 and that number looks quite lower compared to levels we've seen in the last 2 years or so. So I wanted to check with you whether we should expect some reversal into Q4? Or there is something more long term, perhaps in the terms with your customers or whatsoever?

[Harold Goddijn, executive]

No. No, there's nothing to expect -- for Q4.

[Nikos Kolokotronis, analyst]

So you mean no reversal, we should expect flattish more or less trade receivables going forward?

[Taco Titulaer, executive]

So I'm not sure if I understand your question correctly. Could you -- so your question was about the cash flow?

[Nikos Kolokotronis, analyst]

Yes. On the trade receivables, specifically because they fell to EUR 60 million in Q3, which seems quite low comparing to historical trends. So I was wondering if you expect that trade receivables will continue being at these levels or they will pick up again?

[Taco Titulaer, executive]

I think it will be around EUR 60 million by year-end.

[Nikos Kolokotronis, analyst]

Around EUR 60 million. Okay. Perfect.

[Harold Goddijn, executive]

As there are no further questions, I'd 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 all disconnect.