TomTom : Q1 2022 results call transcript

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EDITED TRANSCRIPT TOM2.AS - Q1 2022 TomTomNV Earnings Call

EVENT DATE/TIME: APRIL 14, 2022 / 12:00PM GMT

APRIL 14, 2022 / 12:00PM, TOM2.AS - Q1 2022 TomTom NV Earnings Call C O R P O R A T E P A R T I C I P A N T S

Harold C. A. Goddijn TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO Taco J. F. Titulaer TomTom N.V. - Member of Management Board & CFO

Freek Borst TomTom N.V. - Investor Relations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Francois-Xavier Bouvignies UBS Investment Bank, Research Division - Technology Analyst Marc Hesselink ING Groep N.V., Research Division - Research Analyst

Nigel van Putten Kempen & Co. N.V., Research Division - Analyst

Wim Gille ABN AMRO Bank N.V., Research Division - Head of Research & Equity Research Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Welcome to TomTom's First Quarter 2022 Earnings Conference Call. (Operator Instructions). Please note that this conference is being recorded today. I will now turn the call over to your first host for today's conference, Freek Borst from Investor Relations. You may begin.

Freek Borst - TomTom N.V. - Investor Relations

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 it over to you.

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

That's great. Thank you very much, Freek, 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 taking up a more active role in developing software. We can team up with those organizations to help execute their strategy. We feel we are well positioned to play a significant role with our maps, navigation software, traffic, and developer SDKs.

Our digital cockpit platform, TomTom IndiGO, is a good showcase of our capabilities in connected software solutions. It serves as a proof point of the richness and versatility of our offerings. TomTom IndiGO helps open the door for us and discuss providing products and services to the next-generation car lines. As for cars hitting the road with TomTom services soon, we're happy with the imminent launch of the Nissan Ariya. It's the latest flagship electric crossover from Nissan, 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 of operations and improvement of 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 a comprehensive mobile offering for fleet managers and drivers. In Automotive, we've teamed up with the MIH 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 J. F. Titulaer - TomTom N.V. - Member of Management Board & CFO

Thank you, Harold. As Harold already mentioned, we are monitoring the possible effects of the emerging uncertainties. Our latest estimate for Automotive operational revenue growth is 10% compared with last year. It is down from 15%, which we gave at the start of the year. Nevertheless, we are reiterating our guidance and proceeding with the expenses and investments as planned. We expect that group revenue will be between EUR 470 million and EUR 510 million in this year, and Location Technology revenue is expected to be between EUR 380 million and EUR 420 million. Moreover, the planned increased expenses, which center around our application layer and the further automation of our mapmaking platform, are expected to lead to a negative free cash flow of around 5% of group revenue in 2022. In 2023, we foresee a return to revenue growth, with group revenues expected to be between EUR 500 million and EUR 550 million, and Location Technology revenue between EUR 425 million and EUR 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 group revenue of at least 5% in 2023.

Operator, we would now like to start with the Q&A session.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). The first question comes from the line of Francois Bouvignies from UBS.

Francois-Xavier Bouvignies - UBS Investment Bank, Research Division - Technology Analyst

I have 2 quick ones, if I may. Can you maybe first talk about the deal activity. So despite some uncertainty 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, that would be helpful.

And second of all, I mean, you have been investing a lot in the application layer. Harold, when do you think we're going to see some evidence of return on this investment 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 this year or next year? You got some wins already a bit in the application, but I'm talking more like significant deals, if you like, that would really move the needle.

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

Yes. Thank you, Francois. Yes, so deal activity is good. We think -- there's quite a few RFQs out this year and that is positive. It's a bit 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 carmakers 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 the 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: one for the database --the map database, and the other one for the application layer. We are well underway to deliver on our ambition to increase the level of automation in the map database, and we do think that will lead to cost reductions in '23 already.

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, simplify our product offering -- harmonize and streamline that product offering. So, we also expect there to -- we don't expect any investment increases there and there may be room, even, for some harmonization.

When that new application layer will start to deliver significant revenue is -- it is too early to discuss that. We feel good about the trajectory. We feel good about the products that are coming out of the teams, and we do think that will lead to significant opportunities in the Enterprise world and a strong -- and good momentum in building presence in the Enterprise market, across more target customers than we can currently address and also potentially in more territories than we can currently address. Yes, so I would like to leave it at that, if that's okay, Francois?

Francois-Xavier Bouvignies - UBS Investment Bank, Research Division - Technology Analyst

Yes. You mentioned Enterprise, but also Automotive, I would imagine, I mean, or is it less fit for this market? I just wonder why...

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

No, Automotive, it also applies to Automotive. So, you see -- so we see a harmonization between Enterprise and Automotive in terms of the technology and the products. There was historically a big divergence between Enterprise applications and Automotive applications. And the reason for that is that the Automotive applications were mostly running embedded, with embedded maps, embedded software. All that is going into the cloud. It's a strong momentum there. And that 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. 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 was already online. But you see a significant shift towards cloud-based services over the last couple of years.

Francois-Xavier Bouvignies - UBS Investment Bank, Research Division - Technology Analyst

Okay. 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 maybe far away, but nevertheless, the development is moving and you see different kinds of approach. The Tesla approach with a camera-based only, you see that Toyota maybe as well. I know some -- I mean, not Toyota, but a development area of Toyota opening up for the camera-based approach. How HD Map fits today to these autonomous driving developments? I mean, how are you seeing the need for HD Maps? And I'm asking because it's been a few quarters, you talk a bit less about that. I know since the COVID, you had some delays of projects and maybe that will take a bit longer. But nevertheless, how's HD Maps development -- when you look at the OEMs' road map for automation, full automation or even Level 4, or 3, or 3, plus if we see? How is the HD maps opportunity status for TomTom?

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

Yes so the -- if we look at the level of automation, then you have to come to the conclusion that full automation Level 5 is still far out. At the same time, what you see is that automation, let's say, the step-by-step incremental level of automation that we call ADAS is really taking off. So, it looks like the automotive industry found a path to the self-funding way of -- to increase levels of automation. The ADAS functions are typically paid for, so the big difference between the moonshot approach, that's obviously taking up enormous amounts of capital -- and the automotive industry is very successful in a more gradual approach in bringing 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 dub ADAS plus, of which HD Maps are a part.

Operator

The next question comes from the line of Marc Hesselink from ING.

Marc Hesselink - ING Groep N.V., Research Division - Research Analyst

Good afternoon. I have 3 questions. Firstly, the Foxconn MIH Consortium, can you explain that maybe a bit more in depth. How significant can that be? What can be the impact on volume for your market shares? Or is that still a bit too early to say what's that going to be? The second...

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

Yes Marc -- sorry, go on.

Marc Hesselink - ING Groep N.V., Research Division - Research Analyst Yes. No, no, please, go ahead. Please.

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

Yes. So, if you look at that MIH initiative, that is business development. So, they are pioneering 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 Foxconn and others have pioneered in the electronics space. Different, but they are trying to apply some of the business principles also to car making. And 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 - ING Groep N.V., Research Division - Research Analyst

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 to TomTom or will all the others also be at the table?

Harold C. A. Goddijn - TomTom N.V. - Co-Founder, Chairman of the Management Board & CEO

Well, 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 other 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.