TomTom NV

AEX:TOM2

Earnings Call Analysis

Progress in Technology, Cash Flow Focus

The company reported a robust quarter with gross margins improving to 85% in 2023 from 84% in the previous year, and it anticipates a gradual further improvement towards 90% over the coming years. Despite this, net earnings are not expected to be positive on an IFRS basis, although strong free cash flow is projected for the year. Importantly, the company hasn't altered its pricing strategy for the Orbis Map despite its enhanced detail. In the Enterprise segment, an expanded sales force and outreach to new potential customers have generated a significant sales funnel, with expectations for revenue growth to become apparent in the second half of the year. Automotive market share gains, particularly in China, are also contributing to optimism for future revenue growth. The guidance suggests a EUR 100 million increase in combined revenue for Automotive and Enterprise in 2025, with half of that expected from Automotive, bolstered by an already strong order backlog.

TomTom Sets Course for Steady Revenue Growth and Enhances Digital Mapping

In a year seen as pivotal, TomTom not only achieved revenue growth in its Location Technology segment, but also significantly enhanced its digital mapping capabilities with the commercial rollout of TomTom Orbis Maps. Initially available in Europe and North America, the platform showcases a massive 86 million kilometers of transportation networks and has been met with strong customer interest, signifying potential for future revenue growth.

Financial Highlights of Q4 2023 - Revenue Upturn Despite Consumer Sector Downturn

TomTom's fourth-quarter financials depicted a mixed picture: Group revenue increased by 3% to EUR 143 million, with the Location Technology segment growing by 7%. A notable 14% surge in Automotive IFRS revenue contrasted with a slight 1% rise in Automotive operational revenue. Meanwhile, the Enterprise sector showed minimal revenue change. On the downside, Consumer revenue slumped by 15%, which could indicate a shift in the company's revenue dynamics focusing on the higher-margin Location Technology business.

Increased Gross Margin and Elevated Operating Expenses

TomTom's gross margin in the fourth quarter edged up by 1 percentage point to 88%, attributed to a higher proportion of Location Technology revenue. However, operating expenses also rose to EUR 137 million, EUR 12 million more than the same quarter in the previous year, partly due to a one-time restructuring charge aimed at optimizing R&D activities.

Annual Performance: Revenue Up 9%, Driven by Location Technology and Automotive Sectors

For the year 2023, TomTom posted a 9% revenue increase to EUR 585 million, with Location Technology revenue climbing by 12%. A significant 32% leap in Automotive IFRS revenue signified market share gains and higher car production, despite a countering 16% drop in Enterprise revenue. There was also a notable decline in Consumer revenue by 16%, further hinting at a major strategic pivot towards B2B technology-driven sectors.

Robust Improvement in Free Cash Flow

TomTom's free cash flow representing a substantial improvement of EUR 63 million from the previous year to EUR 32 million, signals stronger financial health and operational efficiency. This improvement underscores the company’s growing ability to generate cash from its core operations.

Automotive Backlog Hits New Record, Signaling Future Growth

A key metric pointing to future revenue, TomTom's Automotive backlog, soared to an unprecedented EUR 2.5 billion. The backlog represents secured contracts awaiting revenue recognition and reflects the potential for sustained growth, although subject to the ebb and flow of car production forecasts from clients.

Outlook for 2024 and Beyond: Cautiously Optimistic with Strong Revenue Projections

Looking ahead, TomTom foresees revenue growth, particularly in Location Technology, projecting it to reach between EUR 490 million and EUR 520 million. Overall, the company expects Group revenue to potentially hit between EUR 570 million and EUR 610 million, with an emphasis on turning its sales funnel into signed contracts. Notably, the forecast for free cash flow improvement is set to exceed 5% of Group revenue, laying the foundation for a solid financial footing in the years to come.

Long-term Ambitions Unveiled: Setting Sights on Hefty Revenue and Cash Flow

By 2025, TomTom aims to reach a Location Technology revenue benchmark of EUR 600 million and achieve a free cash flow representing 10% of Group revenue. These targets reflect the company's confidence in its strategic direction and its emphasis on monetizing high-margin, technology-centric services.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to the TomTom's Fourth Quarter 2023 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. Good afternoon, everyone, and welcome to our conference call. Today, we will be discussing key highlights from the fourth quarter and full year 2023, together with Harold Goddijn, our CEO; and Taco Titulaer, our CFO. Harold will kick off the call, providing an overview of our operational highlights and strategic priorities for the year ahead. Following Harold, Taco will provide detailed insights into the financial results and outlook. After that, we will 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. Ladies and gentlemen, welcome and thank you for joining us today. I will provide an overview of our 2023 progress and strategic objectives for this year, after which Taco will delve into the financial details.

2023 marks a significant milestone for TomTom as we advanced towards our strategic goals. We've achieved revenue growth in Location Technology, we've bolstered profitability, and we've successfully launched our new Maps platform.

During the fourth quarter, we commenced the commercial rollout of our TomTom Orbis Maps. Initially targeting our primary markets in Europe and North America, we're now expanding geographic coverage and introducing new features to enhance the map further. Our new Maps now encompass an industry-leading 86 million kilometers of transportation networks, many new data types and are also powering our new SDKs and state-of-the-art map display solutions.

We are encouraged by the interest from customers and prospects in our Maps platform. They value the open nature, the standardized format and the enhanced coverage, richness and freshness of our Maps. An indicator of the rising interest was our notable presence at CES in Las Vegas in January, where we experienced a substantial increase in visits and engagement. We've developed substantial sales funnel with our new maps, and we aim to expedite the conversion of prospects into customers in the quarters and years ahead.

[ Of course, ] innovation remains the cornerstone of what we do, exemplified by our collaboration with Microsoft to develop an AI-based conversational assistant. We're investing in the potential of generative AI and are redefining the interaction model between drivers and their vehicles. Generative AI will offer more intuitive, safer and productive driving experience, and we are building this technology a standard in a digital cockpit, our open modular in-vehicle infotainment platform.

We will continue to harness the new technologies and capabilities to drive innovation and enhance efficiency. I'm delighted by the progress we've achieved in 2023. The priorities for 2024 entail capitalizing on the robust new activity with both the Automotive and Enterprise sector. And I'm confident that these efforts position us well for sustained revenue growth and enhanced cash generations for years to come. Thank you very much.

I'm handing over to Taco now.

[Taco Titulaer, executive]

Thank you, Harold. Now I would like to provide some insights into our financials. First, I'll talk about financial results for the quarter and our full year performance. Then I'll cover our Automotive backlog and outlook. After that, we will take your questions.

For the fourth quarter, we reported group revenue of EUR 143 million, 3% higher than the same quarter last year. Location Technology revenue grew by 7% from EUR 118 million to EUR 125 million. Let me go through the revenue business per business.

For the fourth quarter, Automotive IFRS revenues totaled EUR 88 million, having increased year-on-year by 14%. Automotive operational revenue for the quarter settled at EUR 83 million, 1% higher than in the same quarter last year. Further, our Enterprise business recorded revenues of EUR 37 million, improving marginally from the previous quarter.

Lastly, Consumer revenue was EUR 18 million, representing a 15% decrease year-on-year. Our gross margin was 88% in the fourth quarter, a 1 percentage point increase from the same quarter last year. This improvement partially resulted from a higher proportion of high-margin Location Technology revenue in our total revenue mix.

Operating expenses were EUR 137 million in the fourth quarter, an increase of EUR 12 million compared with the same quarter last year. This increase mainly reflects a one-off restructuring charge of EUR 10 million related to the further optimization of our R&D activities. Correcting for this impact of this restructuring, operating expenses increased by EUR 2 million year-on-year.

Having covered our fourth quarter performance, let me touch on the full year results before moving on to the Automotive backlog and the outlook. In 2023, we recorded Group revenue of EUR 585 million, 9% higher than in 2022. Location Technology revenue grew significantly year-on-year, rising 12% to EUR 491 million. Let me discuss underlying movements business by business.

Automotive IFRS revenue in 2023 saw a sharp 32% increase to EUR 342 million. This increase was driven by higher car production, higher take rates and market share gains. In addition, Automotive revenues were positively impacted by a change in the way we identify performance obligations for new Maps, subscription contracts resulting from the evolution of our Automotive products. If we exclude these effects, the year-on-year increase in Automotive IFRS revenue is estimated at 16%.

Automotive operational revenue showed a 16% year-on-year increase, outperforming the 11% growth of car production in the core markets of Europe and North America. Fueled by market share gains and take rate increases, we outperformed car production trends in our core markets in all but the last quarter of the year.

Our Enterprise revenue decreased by 16% to EUR 148 million as a result of some contract renewals, reflecting lower usage. With TomTom Orbis Maps now launched and market interest on the rise, we expect to gradually convert our extensive sales funnel over the coming period, as already mentioned by Harold.

Lastly, Consumer revenue decreased by 16% year-on-year, settling at EUR 95 million. For full year 2023, our gross margin was 85%, representing a 1% point year-on-year increase that mainly resulted from the previous mentioned change in our revenue mix.

Operating expenses decreased by EUR 32 million in 2023 to EUR 560 million. Normalized for restructuring charges, the year-on-year decrease in operating expenses was EUR 40 million. This decrease mainly results from reduced depreciation and amortization charges as well as the realization of efficiency gains being offset by [ inventory prices ].

Free cash flow for the year, excluding the charges related to the Maps realignment announced in June 2022, was EUR 32 million. This marks a sharp improvement of EUR 63 million compared to last year. This is driven by operating leverage resulting from marked revenue growth and a stable cost base.

Having covered our results, let's move on to the Automotive backlog. Our Automotive backlog rose to a record EUR 2.5 billion, up from EUR 2.4 billion at the end of 2022. Our Automotive backlog is the sum of the expected IFRS revenues from all deals that have been awarded.

Accordingly, the backlog decreases when revenue is recognized and increases when we win new deals. Its value also changes when customers revise their forecast of car production volumes. The increase in our backlog we saw in 2023 resulted from our robust order intake, partially offset by downward revisions of expected near-term car production volumes of some customers.

To provide added clarity on our Automotive revenue expectations, we give an indication of how the backlog will materialize in revenues over time. Most of the reported Automotive revenue for 2024 will be outcome of the current backlog. Reported revenue for later years will be based on the combination of new deals and our backlog. We will provide an update of our backlog annually with our full year results.

Our record Automotive backlog and the significant market interest in TomTom Orbis Maps supports our outlook and our ambition, as presented on the next slide. We delivered a solid set of results in 2023, meeting our upgraded guidance and making good progress towards our strategic goals. For next year, we are cautiously optimistic. We have a strong Automotive backlog and a substantial sales funnel for TomTom Orbis Maps.

Considering the typical sales cycle in the Enterprise segment, we anticipate a gradual increase in conversions to signed contracts throughout the year. Therefore, we expect Location Technology revenue to continue to grow to between EUR 490 million and EUR 520 million. Group revenue is expected to be between EUR 570 million and EUR 610 million.

Importantly, we also expect a further improvement in our free cash flow to more than 5% of Group revenue. Good to note is that the EUR 10 million cash-out related to the reorganization we announced in the fourth quarter of 2023, will be absorbed and will not be separately adjusted for. For 2025, we're reiterating the ambition we communicated at our 2022 Capital Markets Day. We aim to generate Location Technology revenues of EUR 600 million and free cash flow of 10% of Group revenue.

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

[Operator]

[Operator Instructions] Dear speakers, there are no questions for today.

[Freek Borst, executive]

All right. As it appears, there are no questions. I'd like to -- oh, I think there's a question now.

[Operator]

Yes, we just -- it just came through. And the question comes from the line of Andrew Hayman from Independent Minds.

[Andrew Hayman, analyst]

Just a few questions for you. The gross margin was very strong in the quarter, and that was mixed. But I mean the mix should be quite healthy going forward also. So I was wondering how you expect the gross margin to progress in 2024.

The second question just on the pricing environment for the Orbis Map. You're offering much more detail with these maps. Are you able to reflect that in the prices that you're getting? And then a third question, you expect -- do you expect to be profitable in each and every quarter in 2024? Yes, I'll leave it at there.

[Taco Titulaer, executive]

Okay. Yes. Thanks, Andrew. Let me cover the gross margin and the net results question, and then I leave the second question to you, Harold. Gross margin was indeed better, so 85% in 2023 and 84% in 2022. I think it will gradually improve further and eventually reach 90-ish. When that will happen is not completely clear, but let's say, roughly 1 basis point a year for the coming years.

On our net results, unfortunately, I don't think that we will be reporting black numbers on IFRS point of view. We do think that free cash flow will be strong this year, although also there, there will be seasonal patterns. Like the effects of the [ reorg ] that we announced in the fourth quarter of 2023 will be visible in the first half of the year. But as a year as a whole, we will be comfortably free cash flow-positive.

Harold, the question on the prices?

[Harold Goddijn, executive]

Yes, Andrew. As a result of the new maps interest, we have not changed our pricing strategy. We do believe that we are -- we have a stronger proposition, but that is not reflected in a change in our pricing strategy itself.

[Operator]

[Operator Instructions] And the next question comes from line of Marc Hesselink from ING.

[Marc Hesselink, analyst]

I have a couple of questions. And I think they are a bit related, so I'll ask them at the same time. You're positive on the traction in Enterprise. They are also linked to the meeting that you had at CES. Can you maybe explain a bit how that sales funnel looks like? And what kind of discussions are you currently at? And how long would you expect that from the current funnel discussions to, see signed orders and then after that, see it coming into the revenues?

The second one is linked to the market share expectation that you have in Automotive. I think over the last couple of years, including '23, nicely won market share. For the coming periods, maybe it's a bit mixed. I think you're still winning some market share especially going into '25, but also maybe the rental contract losing some share. How do you see those 2 moving together?

And then the third one is, I think, linked to the first 2, the midterm ambition to get to the Location Technology outlook. How do you see that -- building that product? Because you need a quite significant step up in '25. And where do you see the risks and opportunities in those step-ups?

[Taco Titulaer, executive]

Do you want to comment on the sales funnel...

[Harold Goddijn, executive]

Yes. So Marc, let me comment on the sales funnel. So we have with -- our new maps are richer, more coverage, more attributes and are capable of [ outing ] to more business problems and business opportunities and use cases. So the potential market for Orbis Map is larger in the potential map for our legacy product.

In the beginning of our Orbis development -- towards the end of our Orbis development, we've, of course, reached out to existing customers with a view to prepare them for switching from the legacy product to the new product. And simultaneously, we have -- or a little bit later actually, I should say, towards the end of the year in Q4, we started to reach out to customers that are not existing customers because we didn't have the right product.

We have in '23 significantly expanded our sales force and our sales capabilities in the Enterprise market and started to reach out to customers that were not on our existing customer panel. And that last activity, also there, you can make splits in the type of customers we're addressing. But net-net, we got in contact with a large number of new logos, new companies that we have not been working with before, who showed interest in the application of our new product. And that accumulated a very significant sales channel of valuable sales funnel, I should say. Now it's time for us in 2024 to start converting that.

We know, of course, from experience that the sales cycles are long. But nevertheless, we see some very encouraging signs. Also coming back from CES at Vegas, I thought the feedback we received was very positive. It was very busy. We had double the amount of visits this year as compared to last year. Positive feedback in terms of the strategy, so the open-source component and standardization is what people like and customers like as well as the actual product and how it's been put together.

So yes, I think there is a significant opportunity ahead of us. I think we will start to see that materializing in wins throughout the year. It will take a bit longer before you see it in the P&L. But in the second half of this year, we should start to see some green shoots in terms of revenue. And we need to lay the foundation for continued and accelerated growth needs in this segment for 2025.

So that's the way we look at it. Then market share Automotive -- yes, market share Automotive, I think we've done well last couple of years. I think we're doing well in China. It's a number -- quite a big number of new logos for China export. They don't currently amount to a large sum of money in the order backlog, but still, there is potential for significant growth from that segment in the years to come.

And furthermore, market share wins will be also linked to new logo wins also in 2024. So we need to see what that will yield. But again, given the response we had in CES and various key customers I've been talking to, I see further opportunities to increase our acquisition strengthening in the Automotive segment.

[Taco Titulaer, executive]

Yes. Maybe I can comment to that as well. So if you look at the industry analysts, their projections for the market development in this year and the year to come then for both years, and they expect so-called flat growth, so minimal growth of only low single-digit percentage.

If you compare that with our operational revenue development that we plan, then that will also be kind of the case for 2024 for us, but we expect margin -- higher increased operational revenue in 2025, indicating market share wins. So those are -- there are deals that are -- we already signed but will come to market in 2025.

[Marc Hesselink, analyst]

And I think you gave a good indication on the third question, the building blocks to get to the '25 guidance. If I look to the backlog split over the coming years, and it sort of suggests that '25 Automotive is going to be high single-digit growth. So it like really is very significant -- is that correct, one? And two, so a very significant step-up in Enterprise then in '25 relative to that whole ambition?

[Taco Titulaer, executive]

Yes. Rounded numbers and what you could get from our guidance for 2024 and 2025 is that we expect roughly a step-up of, again rounded numbers, is EUR 100 million from 2024 to 2025 for both Automotive and Enterprise combined. Half of that is expected to come from Automotive. It is for a large part fueled by the backlog that's also shown on the slide that we have provided, where you saw a breakdown of the development backlog for the coming years. For Enterprise, that increase needs to come from bringing in those new logos.

[Freek Borst, executive]

As it appears 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]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.