TomTom : Q4 investor call transcript

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TOM2.AS - Q4 2020 TomTom NV Earnings Call

EVENT DATE/TIME: FEBRUARY 04, 2021 / 1:00PM GMT

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FEBRUARY 04, 2021 / 1:00PM, TOM2.AS - Q4 2020 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 Megan Daniell TomTom N.V. - Investor Relations Officer

Taco J. F. Titulaer TomTom N.V. - Member of Management Board & CFO

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

Miki Sugimoto RWC Partners Limited - Investment Professional

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 Fourth Quarter and Full Year 2020 Earnings Conference Call. (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, Megan Daniell, Investor Relations Officer. You may begin.

Megan Daniell

Thank you, operator. Good afternoon, and welcome to our conference call, during which we will discuss our operational and financial highlights for the fourth quarter and full year 2020. 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'd 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

Yes. Thank you very much, Megan, and welcome, everybody, to our call. Of course, the past year was a challenging one.

And COVID-19 continues to impact people's lives and has disrupted the global economy. Dealing with the pandemic's consequences will remain a challenge for this year. Our Enterprise business showed resilience, and our Automotive operational revenue recovered since the lows experienced in the second quarter. We maintained an Automotive backlog of EUR 1.8 billion. Our 2020 order intake was strong and under normal circumstances, backlog would have grown. However, our Automotive customers have revised downward their forecasts for 2021 and 2022, which offsets the strong order intake.

Today, we announced an extension of our long-standing relationship with Precisely, formerly known as Pitney Bowes, and by providing our map information and traffic data, we will help Precisely enrich their location intelligence products. Precisely will also share some of the data and observed changes in the database back to TomTom in the context of our map editing partnership, a program we intend to roll out to more partners.

We further expanded our position in fleet and logistics by closing a new long-term agreement for our Maps APIs to Targa Telematics. And Targa will use the technology to help optimize the operational efficiency for their customers. Mitsubishi Motors has chosen our full stack navigation to 2

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power the new Eclipse Cross infotainment system. Furthermore, in 2022, new regulation will come into force that requires carmakers to integrate new functions, including intelligent speed assistance, and in anticipation, we have significantly improved our data sets and developed a new delivery mechanism to increase reliability, reduce latency for those critical safety systems.

Our traffic information revealed insights into the spread of and recovery from COVID-19. Journalists, researches, policy advisers and governments made extensive use of our traffic data, which we made available for this purpose free of charge. We received hundreds of requests for data, and I'm pleased we can support our communities in understanding the impact of the pandemic and the effects of the implemented policies.

We have, of course, not lost sight of our strategic priorities and longer-term objectives. We've kept investment levels up for our mapping and application platforms. I want to briefly discuss progress we've made and the plans we have for 2021 in the next slide. Our goal is to significantly improve our location platform, largely through automated processes. Progress has been made in 2020, and we are solidified in our resolve to make significant improvements to our data platform along the axis of geographical coverage, attribution, quality and freshness. And the aim is to make our data suitable for a much broader range of applications for more industries and in more geographical territories.

In parallel, we are significantly improving the quality and completeness of our online application platform to make it easier for customers to create value-creating applications on top of the database.

TomTom offers an exciting workplace for talent. Our culture is much appreciated, and we deploy a broad range of cutting-edge technologies to solve hard problems. In 2020, we were successful in hiring top talent from across the industry. We will make sure that we continue to coach and encourage our people to achieve great things by empowering them and providing them with growth and learning opportunities.

And it's thanks to our people that we could act quickly and decisively to deal with the impact of the pandemic and avoid negative impact on customer commitments. This concludes my part of the presentation, and I am handing over to Taco.

Taco J. F. Titulaer - TomTom N.V. - Member of Management Board & CFO

Thank you, Harold. I will make some comments on the financials and outlook. We will then go to the Q&A.

In the fourth quarter, we reported group revenue of EUR 125 million, that's 20% lower than the same quarter last year. In the fourth quarter, Location Technology reported revenue of EUR 101 million, slightly outperforming our expectations, but this was offset by weaker consumer revenue.

Let me go through the revenue business by business. Automotive IFRS revenue was EUR 60 million, a decrease of 14% compared with the same quarter last year. Automotive operational revenue was EUR 90 million in the quarter, a year-on-year decrease of 23%. Sequentially, we achieved operational revenue growth of more than 50%. The sequential increase reflects the continued recovery of car production volumes during 2020 in combination with NRE invoicing.

Enterprise revenue increased marginally from the same quarter last year as revenue from new contracts was offset by unfavorable foreign exchange rate movement as around 80% of our Enterprise contracts are invoiced in U.S. dollars. In the fourth quarter, Consumer revenue decreased by 48% to EUR 24 million as retail closures and decreased demand following widespread lockdowns across Europe impacted revenue. In the fourth quarter, gross margin was 82%, benefiting from lower hardware revenue in our sales mix.

Operating expenses were EUR 181 million, a decrease of EUR 20m million compared with the same quarter last year. Please note that our research and development expenses included a restructuring expense of EUR 7 million in 2019. Excluding this, the year-on-year decrease is mainly the effect of discretionary cost control measures.

The free cash flow for the quarter was an inflow of EUR 34 million, in line with our expectations provided last quarter. The year-on-year decrease in free cash flow reflects lower operational revenue in both Automotive and Consumer. At the end of 2020, we reported a net cash position of EUR 372 million. We will use EUR 35 million during the course of this year for share buyback to cover our long-term incentive plans.

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On Slide 5, as Harold mentioned earlier, we reported an Automotive backlog of EUR 1.8 billion, stable when compared to last year. Our Automotive backlog is the sum of total expected IFRS revenue from all awarded deals. The backlog decreases when revenue is recognized during the year, increases with new revenue deals, and that can either increase or decrease when our customers revise their forecast of car production volumes. While we are pleased with the volume and quality of the deal activity this year, the positive impact of deals in 2020 was offset by our customers downwards revision of near-term car production volumes on existing deals. To provide more transparency on our Automotive revenue expectations, we provided an indication of the phasing of how this backlog will materialize over the coming years. For 2021, most of our recognized revenue will be the outcome of our backlog. In later years, it will be based on a combination of new deals and backlog. We'll give an update of the Automotive backlog on an annual basis during our full year results.

This brings me to the next slide, our outlook for 2021. For 2021, we expect group revenue to be between EUR 520 million and EUR 570 million, and Location Technology revenue between EUR 420 million and EUR 450 million. So based on our expectation that car production volumes in 2021 will not return to the levels that we were seeing in 2019. Our OPEX will significantly decline year-on-year from EUR 711 million in 2020 to around EUR 520 million in 2021. This decline is driven by the decline of total D&A from EUR 285 million in 2020 to between EUR 70 million and EUR 75 million. For 2021, R&D is expected to grow to around EUR 330 million, a 5% growth year-over-year, which I will further discuss on the next slide.

To conclude, we expect to generate free cash flow of around 6% of group revenue. Slide 7. As said, in 2021, we plan to increase our R&D cash spend. On the right-hand side of this slide, we indicate a trend for components of our R&D cash spend. Our overall spending on geographical data is expected to come down as automation levels increase. This will be the result of extra investments in our engineering in that area. We will increase our cash spend on our application layer, enabling faster software update cycles, ease of integration and flexibility.

In the last slide of this presentation, I want to discuss our mid-term outlook. We expect to grow our Location Technology revenue to around EUR 550 million in 2023. Growth is expected to come from new opportunities in Enterprise as well as further growth in Automotive following increased take rates. We have a target for free cash flow as a percentage of group revenue of around 10%.

Operator, we would now like to start 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) And I can see the first question comes from the line of Francois Bouvignies.

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

I have a couple. The first one is on your backlog that you mentioned to be EUR 1.8 billion. With the reason of order intake that seem positive, but it has been offset by the lower forecast from your customers going forward. So can you talk about your market share trends in 2020? I mean, where do you see it moving? And how much do you think you have in terms of market share in 2020 would be very helpful.

And about this lower forecast, I mean, if you look at the industry, Automotive seems to revised up their forecast quite aggressively, which is leading to shortage in semiconductors most likely. And the discussion we have with semiconductors is like the Automotive are changing their mind a bit late. So my question is, did you factor that in, in your backlog? Or is it something that you will maybe see a bit later? That's the first question. I have others, if I may after.

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