TomTom N.V. (OTCPK:TMOAF) Q1 2022 Earnings Conference Call April 14, 2022 8:00 AM ET
Company Participants
Harold Goddijn – CEO
Taco Titulaer – CFO
Conference Call Participants
François-Xavier Bouvignies – UBS
Marc Hesselink – ING
Nigel van Putten – Kempen
Wim Gille – ABN-ODDO
Operator
Good day ladies and gentlemen. Welcome to TomTom’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s prepared remarks. [Operator Instructions] Please note that this conference is being recorded today.
I will now turn the call over to your host for today’s conference, Frigg Bors [ph] from Investor Relations. You may begin.
Unidentified Company Representative
Thank you, operator. Good afternoon and welcome to our conference call, during which we will discuss our operational and financial highlights for the first quarter of 2022.
With me today are Harold Goddijn, our CEO; and Taco Titulaer, our CFO. We will start today’s call with Harold, who will discuss the key operational developments followed by a more detailed look at the financial results and outlook from Taco. We will then take your questions. As usual, I would like to point out that Safe Harbor applies.
And with that, Harold, I would like to hand over to you.
Harold Goddijn
Yes, great. Thank you very much Frigg, and welcome ladies and gentlemen. Thank you for joining us today. I will briefly go over our key operational highlights and progress, after which Taco will provide further information on the financials.
We had a solid start to the year with all our businesses performing in line with our expectations. Deal activity in automotive this year continues to be strong with several high quality deals on the table. The automotive industry is increasingly moving to connected and advanced driver assistance services,, many of them take up a more active role in developing software.
We can team up with those organization to help execute their strategy. We feel we are well-positioned to play a significant role with maps, navigation software, traffic, and developer SDKs.
Our digital cockpit platform, TomTom IndiGo is a good showcase of our capabilities in connected software solution. It serves as a proof point of the richness and versatility of our offerings.
Tom IndiGo helps open the door for us and discuss providing products and services to next generation car lines. As for cars hitting the road with some TomTom services soon, we’re happy with the imminent launch of the Nissan Ariya. It’s the latest flagship electric crossover from Nissan and it is set to be launched with advanced infotainment and driver assistance features supported by our technology.
In Enterprise, the adoption of location technology is progressing as well. Firms are increasingly relying on location technology for the streamlining operations and improvement on their offerings.
We strive to capitalize on this and work closely together with new and existing customers. For instance, during the quarter we teamed up with Webfleet Solutions to offer comprehensive mobile offering for fleet managers and drivers.
In Automotive, we’ve teamed up with the NIH Consortium, which is a Foxconn initiative to help develop the next generation of electrical vehicles, autonomous driving, and mobility service applications. We will contribute our extensive knowledge in digital cockpit and navigation user experience for EV drivers.
Looking ahead, we are reiterating our financial guidance for 2022 and 2023. We closely monitor the current geopolitical and economic developments. We are however, confident in the strength of our business, financial position, and strategy and we are proceeding with investments as planned.
And with that, I hand over the floor and the microphone to Taco.
Taco Titulaer
Thank you, Harold. As Harold already mentioned we are monitoring the possible effects of the emerging uncertainties. Our latest estimates for automotive operational revenue growth is 10% compared with last year is down from 15% which we gave at start of the year.
Nevertheless, we are reiterating our guidance and proceeding with the expenses and investments as planned. We expect that the group revenue will be between €470 million and €510 million in this year. And Location Technology revenue is expected to be between €380 and €420 million.
Moreover, the planned increased expenses, which center around our application layer and the further automation of our matchmaking platform are expected to lead to negative free cash flow of around 5% of group revenue in 2022.
In 2023, we’ve received a return to revenue growth, with group revenues expected to be between €500 million and €550 million and Location Technology revenue between €425 million and €475 million.
We do expect that some of the expenses we have planned for 2022 to lead to a decrease in spending from 2023 onwards, leading to positive free cash flow generation. We expect free cash flow as a percentage of gross revenue of at least 2023.
And operator, we would now like to start the Q&A session.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
The first question comes from the line of François Bouvignies from UBS. Please ask your question.
François-Xavier Bouvignies
Hi, everyone. Thank you very much. I have two quick on if I may. Can you maybe first talk about the deals activity? So, despite some certainty around maybe the supply? How should we think about the activity in terms of deals out there? And how do you see your position in terms of market share? I know it’s a bit early in the year, but if you can give a bit of flavor of how the year started in terms of deals would be really helpful.
And second of all, I mean, you have been investing a lot in the application layer. When do you think we’re going to see some evidence or return on this year of disinvestment, and in a meaningful way? I mean, are we talking about something that is beyond 2023? Or is it something that we can see? Maybe even more this year or next year? You got some wins already a bit in the application. But I’m talking more like, you know, a significant deals, if you like that would really move the needle?
Harold Goddijn
Yes, thank you François. Yes, so deal activity is good, we think there is quite a few RFQs out this year, and that is positive, has been early to comment on win rate and resulting market share in the future, but the overall activity is good.
The supply situation is unlikely to influence the launch of new cars. What we see is that production volumes are somewhat depressed also compared to last year. But we see that most car makers have successfully managed the shortage of cars by increasing their margins and from what we hear from our customers. And what we read, of course, in financial press is that the carmakers are producing less, but profits have not been affected.
Yes, so second question, application layer. So, we — you can broadly separate our technology investments in two areas 114 database and the map, the map database and the other ones free application layer. We are well on their way to deliver on our ambition to increase level of automation in the map database. And we will think that will lead to cost reductions in 2023 already.
On the on the application layer, there’s also opportunity for further harmonizing the product portfolio and we can as a result of the applications going into cloud, simplifying our port offering, harmonize and streamline that, that product offering. So, we also expect there to — we don’t expect any investment increases there, and there may be roomies and for some harmonization when that new application layer will start to deliver significant revenue is too early to discuss that.
We feel good about to trajectory, we feel good about the products that are coming out of the teams. And we will think that will lead to significant opportunities in the enterprise world. And a strong and good momentum in building presence in the enterprise market, of course, more customers than we concurrently address and also potentially in more territories than we can currently address. Yes, so let’s leave it at that if it’s okay François.
François-Xavier Bouvignies
Yes. You mentioned, but also automotive I would imagine, I mean, is it less fit for this market? I just wonder why–
Harold Goddijn
No, no, automotive — so we see a harmonization between enterprise and an automotive in terms of the technology and products, there was a historically a big divergence between enterprise applications and automotive applications. And the reason for that is that the automotive applications remotely running embedded with embedded maps, embedded software, and all those go into the cloud. It’s a strong momentum there. And it means that we can simplify the product portfolio, harmonize it around cloud service and cloud-based applications that have applications both in the enterprise world and in the automotive domain.
François-Xavier Bouvignies
Okay.
Harold Goddijn
And for automotive, it’s a transition. So, it’s more — it’s not that we are opening up new market segment necessarily. But what you see is that the automotive industry is moving from embedded, also now online and online delivery of maps, routing, search, traffic, traffic is already online, but you see a significant shift towards cloud-based services over the last couple of years.
François-Xavier Bouvignies
Okay, thank you, Harold. And if I may have a quick follow-up, I mean, in terms of autonomous driving and Level 4 or 5, I know, it’s a maybe a far away, but nevertheless, the development is moving and you see different kinds of approach, the Tesla approach with a camera-based on the — you see that Toyota maybe as well, and on some — I mean, not Toyota, but development area of Toyota opening up for the camera-based approach.
How HD Map fits today to this autonomous driving developments, I mean, how are you seeing the need for HD Maps? And I’m asking because it’s been three quarters, you took a bit less about that. I know since the COVID, you had some delays of project and maybe that’s going to take a bit longer, but nevertheless, how HD Maps development when you look at the OEMs roadmap for automation, full automation or even Level 4 or 3 or 3 plus, if we see, how HD Maps opportunity status is for TomTom?
Harold Goddijn
Yes. So, the — if we look at the level of automation, then you have to come to the conclusion as full automation Level 5 is still far out. At the same time, what you see is that automation said a step-by-step incremental level of automation that we call ADAS is really taking off.
So, it looks like the automotive industry has found a path to the self-funding way of — to increase levels of automation. The ADAS functions are typically paid, so the big difference between the moonshot approach that’s obviously taking up enormous mass of capital in the automotive industry is very successful in a more gradual approach in being higher levels of automation into the vehicle.
And we see that also in the deal — activity that’s going on, there’s an increased level of demand for ADAS level safety features. And that includes HD Maps, high definition maps for cruise control, automated overtaking, speed control, and so on and so forth. So, there is an increased level of activity in — what you could also have ADAS Plus, of which HD Maps are a part.
François-Xavier Bouvignies
Thank you very much.
Operator
Thank you. The next question comes from the line of Marc Hesselink from ING. Please ask your question.
Marc Hesselink
Yes, thanks. Good afternoon. I have three questions. Firstly, the Foxconn NIH Consortium. Can you explain maybe a bit more in depth how significant can that be? What can be the impact on volume for EU market shares? Or is that still a bit too early to say what’s that’s going to be? The second–
Harold Goddijn
Marc–
Marc Hesselink
Yes, no, please go ahead.
Harold Goddijn
Yes, so if I look at that NIH initiative. That is business development. So, it is defined here a new way of manufacturing, bringing in a network of suppliers and participants to make the manufacturing part of automotive companies look more like what they — what Foxconn has pioneered in the electronics space, different but they are trying to apply some of the business principles also to car making. That’s an interesting concept. And we want to be part of that, we want to see how that goes. We want to see what the take up is, what the potential is? No immediate business to be expected, but strategically important to be at the table to see what’s going on and help influence that business model going forward.
Marc Hesselink
So, does that imply that your products are going to be completely compatible with whatever these guys are going to produce? And is that then exclusive for TomTom or will all the — will be at the table?
Harold Goddijn
But we have a very comprehensive product portfolio now. Perhaps deeper than any of our competitors, it starts with IndiGo as a platform product. New SDKs that make it simple and easy to integrate, navigation functions and all location-based services, better ADAS content and ADAS software. So, we can bring a full package of infotainment and ADAS functionality as part of a complete solution.
So, in other respects, we’re very well-positioned. That’s a part as well that’s missing. I don’t think there are many other companies you can offer that other than companies like Google. And it offers a fast capital-light way to develop great end user experiences. And I think there’s a missing bit part in that ecosystem. We can provide that and we want to closely follow what’s going on in that space and understand that space and work on developing business opportunity as a result of that.
Marc Hesselink
Okay, that’s clear. Second question is on the progress that you’re making on the map automation push in this year, which should result in lower content costs for the years after? How is that — going — is that push going as planned? And is there still maybe a bit of execution risk in the coming year or you’re fairly confident on that?
Harold Goddijn
So, we’re confident in the progress we’re making. It is not just about costs, it’s also about a better product, a product that’s richer, covers more countries, and can answer more use cases for the pressure [ph], automatically maintained in many cases, we can’t automate everything, but a lot portion of mapmaking can benefit from much higher level of automation than what we have currently — what we are currently achieving. And we are on track to deliver that technology. And we also anticipate that the benefits of the technology will come through in 2023 in two ways that apart, but also a more efficient way of producing it.
Marc Hesselink
Thanks. And the final question is on the — what are you seeing on the competitive landscape? Is it broadly similar to the [indiscernible] changes in that landscape? And then maybe related to that, what are you seeing it from OpenStreetMap? Is that something that that carmakers are seriously considering? Thanks.
Harold Goddijn
Now, we don’t see significant changes in the competitive landscape. So, on the OSM side I think there’s been efforts going on for over five years to use OpenStreetMap in car solutions, but so far they have failed to play the role in that high quality tariff application. And there are good reasons why that is the case, consistency, vandalism. But also the type of content that you need to have to power those high quality high impact applications is not there. So, we keep an obviously close eye on what’s going on there. But so far, we have not seen adaptation of that map in those high quality applications if you like.
Marc Hesselink
Okay. That’s very clear. Thanks.
Operator
Thank you. The next question comes from the line of Nigel van Putten from Kempen. Please ask your question.
Nigel van Putten
Hi, good afternoon. I was late in the call. So sorry, I might ask some questions that have already been answered into prepared remarks. But first off, you alluded that car makers are producing less yet profits have been affected. Now, if I’m correct, you’re only exposed to the number of cars produced. So, how is that looking? I think last quarter, you set to 40 — for your addressable market with high teens? What is the outlook for automotive production now and how do you see sort of automotive operational revenue versus debt for the year? That’s the first question. Thanks.
Harold Goddijn
Yes, Nigel, thank you. Early in the year we estimated that our operational revenue would grow at 15% — 1 5. Two months later, also due to the input that we received from industry analysts, but also from our account managers. We have changed that to 10%.
So, operational revenue off automotive is expected to grow with 10% year-over-year. That didn’t have an effect on our guidance. guidance is, of course, IFRS reported. There’s a mitigating effect in the translation from operational revenue to IFRS revenue in automotive. And on the other hand, consumer and enterprise have both a strong start off the year, a bit stronger start off the year then than we planned for. So, all know it’s a bit of a wash.
Nigel van Putten
Yes, got it. Actually, that’s a nice segue into my next question. That is, of course, the guidance for the year has been on IFRS revenue. But if you look at sort of operational revenue for location technology as a whole, is that still — is that also flat for the year? Or should we expect that to be down relative to 2021?
Taco Titulaer
No, we have reiterated the — sorry, what’s the question, operational revenue for–?
Nigel van Putten
Yes, so because location–
Taco Titulaer
Location technology as a whole?
Nigel van Putten
Yes, as a whole. Yes, because I mean, specifically referring to quite negative movement in deferred liabilities.
Taco Titulaer
We don’t go to that level of detail. But we — there is, of course, some tailwind in enterprise related to the much stronger dollar than what we saw at the start of this year. So, enterprise will — as we see now will overperform our earlier predictions, and automotive will underperform our earlier predictions. Altogether, it’s kind of their–.
Nigel van Putten
That’s clear. Just moving down to P&L then to OpEx. Not — let’s say last year, the first quarter was the low point and then increased as the year progressed. How should we model that this year?
Taco Titulaer
For OpEx.
Nigel van Putten
Yes, OpEx. I think you’ve got to quite specifically for 510. Now, if I annualize the first quarter, I get above that. And then if I look at history, then actually I think I should have probably modeled sequential growth or increase in OpEx. So, just making sure that–
Taco Titulaer
I think the best estimate is where we are in Q1, maybe a bit of decline towards the end of the year, but yes.
Harold Goddijn
So, it will not see the same pattern as we saw last year.
Nigel van Putten
Okay, that’s great. Thanks. Last question on automation. Follow-up on Marc’s question. To what extent is that in house you’re developing, I think last quarter, you said it, it has to do with computer vision, cloud technology, AI, machine learning. Now, do we have all that capability in house? Or do you, for example, partner with Qualcomm, which I think you already doing? They have like a hardware software set that you can apply to your mapmaking just to get a feel how you’re going to achieve those savings in automation?
Harold Goddijn
Yes, we have most of those skills in house, but it’s also that the supporting technology, the software is available to performance franchise are getting better, and also get a production grade. So, it’s a bit of a mix of platform technologies that can be deployed from them open source, some of them is commercial packages, real progress in understanding what’s possible limitations. And we have in those areas, build up competencies of last two years that you know, to develop those systems and get those systems operational.
Nigel van Putten
Okay, that’s great. Thank you very much.
Operator
Thank you. The next question comes from the line of Wim Gille from ABN-ODDO. Please ask your question.
Wim Gille
Yes, very good afternoon. I got a few questions. First, can you give me a bit more feeling on the deal with Maxwell technologies that you mentioned in the press release. So, what’s in it for you, for them, and for your customers?
Second question is to come back to kind of the investments that you’re doing in both the application level layer as well as the map layer. Can you remind us a little bit on the amount of cost savings roughly speaking that we should be penciling in for 2023 compared to 2022?
On the OpEx side, whether that’s a net or gross number, and with respect to the — let’s say application layer, you’re investing both in the automotive part as well as in the enterprise part. Looking at the enterprise part and your current customer bases is almost entirely driven by uncompiled naps.
Whereas you are looking forward to compete in more against the solutions that Google is currently offering to their clients, which essentially means that you need to go more towards an API based or cloud-based system.
So, how far are we and how far the Microsoft contract already signed a few years ago already bring you down this journey? And how confident are you that your products that you’re developing today will be sufficiently includes to actually convince clients to move from Google to your application?
And how should we look at the phasing of the revenues within enterprise? Obviously, your Apple contract was renegotiated. So, you will see a bit of a dip in Q4 on the revenues, but as of when should we expect new customers to basically make up the gap that Apple was leaving there? Thanks.
Taco Titulaer
Wim let me start and then I’ll hand over to Harold for the difficult questions. Marks are is satellite imagery, we use that for two reasons. One is as a second third source to make maps, so when you met collections, you serve parties, we do use our mobile imagery. And then we can complement that with satellite images to see what we want to correct it this core funnel.
And the other use case is that we actually implemented in our applications. So, if we ship a map, it’s forms another layer. And that people can change their viewing, they want to look at random map or do they want to look at photos?
On the cost savings, the numbers that you can work with are the numbers in our press release on the second page. Based on that you can assume certain level of cost savings. More details I don’t want to give at this point. As you know, we are planning to host Capital Markets Day. Date isn’t confirmed yet, but this will be either end of Q3 or early Q4.
And be sure that we will give a lot more detail on the benefits that we see for next year. And then I want to hand over to you Harold for the was questioned about to where we are on the journey or for offering more API based maps instead of uncompiled maps.
Harold Goddijn
Yes, so. Wim there is also going in line with plans and expectations. We have currently a version one of the navigation SDK that we are testing with customers in better programs. We’ve signed up an automotive client as well, for the navigation SDK, which is also a sign of good sign for us. We will in the coming months, launch that navigation SDK publicly. That is an important product for us because we are kind of a right to play in that space.
Our navigation is class leading in many ways to routing in terms of traffic information. We — our customers like what we have done so far. It provides them a great level of flexibility. Great level of — and the developer productivity as a result of that — of using that SDK can go up massively. So, typically takes a day before you have an application up and running.
And that is, of course new for us. And it will be a core in our flagship product in our developer product portfolio. It’s the first one to go to market and we’re very excited about the We they’re happy with the first customer feedback that we have received and it will be an important products in our portfolio going forward.
Typically, it takes some time before that turns into volume But we expect to start seeing some positive results from the navigation as U.K. in 2023 and beyond.
A bit difficult to share how fast that will go and how significant revenue is the important point for us is that we that we plant a flag here. We have a corner stone Lighthouse product out there, around which we will further develop our capabilities and develop our market.
Unidentified Company Representative
Thank you. Since there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you may not close the call.
Operator
Thank you. This concludes today’s presentation. Thank you for participating. You may now disconnect.
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