TomTom NV

AEX:TOM2

Earnings Call Transcript

[Operator]

Good day, ladies and gentlemen. Welcome to TomTom's Fourth Quarter 2024 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, and good afternoon, everyone. Welcome to our conference call. Today, we will be discussing our fourth quarter and full year 2024 highlights and financial results together with Harold Goddijn, our CEO; and Taco Titulaer, our CFO. First, Harold will discuss our strategic objectives for the coming year. Following that, Taco will provide further insights into our financial results, our automotive backlog and our outlook. We will then proceed to your questions. As always, please note that safe harbor applies.

And with that, Harold, I'd like to hand it over to you.

[Harold Goddijn, executive]

Thank you very much, Freek. And also on my behalf, a warm welcome, and thank you for joining us today. I will give you an overview of our 2024 progress, and then our strategic goals for next year, and then Taco will discuss the financial results.

So 2024 had mixed results for TomTom. The enterprise business showed positive momentum and the new mapmaking technologies providing value across a variety of use cases. We successfully entered new market segments, like the governments and security markets, and we strengthened our position with our traditional customers. Both Microsoft and Esri, and Esri is a formidable force in the geospatial industry, have now integrated our maps into their systems. And this adoption serves as a significant endorsement of our product, our strategy and it enables us to leverage new opportunities.

Our Automotive business has encountered difficult market conditions. Consequently, and due to the reduced expectations for near-term volumes, but also slower adoption of electrical vehicles than originally anticipated, our automotive backlog decreased to EUR 2.1 billion. At the same time, our competitive position has strengthened. The investments in our mapping platform and the application layer have positioned us well to enhance our win rate. Our solid, high-quality relationships with customers give us clear visibility on opportunities that are currently developing. We see that OEMs are responding to the need to go faster with software. They are demanding standardized applications that allow for customization at the UI level as well as much shorter development times. Our technology stack is developed with those emerging requirements in mind.

Now our products are undergoing extensive market validation. Both established OEMs and new market entrants are testing our full stack solution, achieving remarkably short implementation times. And this is possible because of standardization, standardization of operating systems, over-the-air updates and generally a more modern approach to software development.

Our objective is to streamline integration processes, reduce production cycles from 2 years to just a few months. Parallel to this trend, carmakers are now sourcing maps and applications that can support increased level of automation. We have used AI and more modern data pipelines to create a true 3D map that has been created to meet the current and future requirements for automated driving. We showcased this map for the first time at CES last month in Las Vegas, and it received overwhelmingly positive feedback.

With an enhanced and more competitive product, we are well positioned to secure a number of contracts currently available. As we advance in this direction and continue to strengthen our commercial traction within the enterprise business, I'm confident that this will facilitate top line growth and cash generation over time.

And with that, I'm handing over to Taco.

[Taco Titulaer, executive]

Thank you, Harold. I would like to take you through our financial performance, covering our results for the quarter, our full year performance and finally, an update on our automotive backlog and outlook. After that, we'll be happy to take your questions.

In the fourth quarter, we reported group revenue of EUR 142 million, a slight decrease of 1% year-on-year. Let's break this down by business. Automotive IFRS revenue was EUR 79 million, down 10% from last year, while operational revenue increased with 6%. Looking at the second half of the year, both, reported and operational revenue were more aligned, reflecting the volatility in the automotive industry. Enterprise revenue came in at EUR 43 million, showing strong growth compared to last year, and consumer revenue increased with 10% year-on-year to EUR 20 million. Our gross margin for the quarter was 87%, down 1 percentage point, mainly due to a high proportion of consumer revenue in our mix. Operating expenses were EUR 130 million, a EUR 7 million decrease from last year, primarily driven by a one-off restructuring charge of EUR 10 million in Q4 of 2023.

Now let's look at the full year results before we move on to Automotive backlog and our outlook. For the full year, we recorded group revenue of EUR 574 million, a 2% decline from 2023. Automotive IFRS revenue decreased 4% to EUR 328 million, impacted by industry headwinds and delays in new car model launches. These delays also affected operational revenue in automotive. Enterprise revenue grew with 9% to EUR 161 million, driven by higher product utilization from existing customers and continued traction with new customers. Consumer revenue declined 10% year-on-year, settling at EUR 85 million. Our gross margin remained stable at 85% for the full year. Operating expenses decreased by EUR 8 million to EUR 508 million, mainly due to lower depreciation and amortization costs. Free cash flow saw an outflow of EUR 4 million, influenced by lower operational revenue in automotive and higher-than-anticipated receivables at year-end.

With that, let's move to our automotive backlog. At the end of 2024, automotive backlog stood at EUR 2.1 billion, down from EUR 2.5 billion in 2023. This backlog represents the expected IFRS revenue from all awarded deals fluctuates as we recognize revenue from existing contracts, win new deals and as customers adjust their car production forecast. The decline in 2024 is fully attributed to the revised near-term production expectations for previously awarded contracts. To give more clarity on how this backlog converts into revenue, the majority of our 2025 automotive revenue will come from our current backlog. For the years beyond, revenue will be a mix of new deals and our existing backlog. And as always, we'll update our backlog annually with our full year results.

Now let's turn to our 2025 outlook. Looking ahead, visibility remains limited due to ongoing market uncertainty in automotive. We're cautious about near-term developments and volume growth, but we remain confident in our Enterprise segment, where we expect commercial traction to continue driving growth. For 2025, we expect Location Technology revenue to be between EUR 440 million and EUR 490 million and group revenue to be between EUR 505 million and EUR 565 million.

Our focus will be on delivering our product road map, driving cost efficiencies and achieving breakeven cash flow based on our midpoint group revenue guidance. Looking at the midterm, we remain optimistic. The rise of electric vehicles, advancements in self-driving technology and the growing demand for location-based solutions are all driving deeper integration of our technology. With our versatile product portfolio, we are well positioned to capitalize on these trends as they accelerate in the coming years.

Operator, we are now ready to take questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Wim Gille from ABN AMRO ODDO BHF.

[Wim Gille, analyst]

First, my questions are about the outlook for Enterprise and Automotive. When I look at enterprise, I see you have pretty good commercial momentum in the second half. And if I do a very simplistic 4x Q4, I already end up at EUR 170 million in enterprise revenues for 2025, so that would be without kind of new wins and new clients, and that's an increase of 6% for Enterprise. Is that also kind of the minimum growth that you would expect in Enterprise based on what we see today?

And then the second question is the implied outlook for the Automotive business. If I put in a simple -- put 5% to 10% growth, just to be conservative on enterprise in my model, I end up with a minus 17% to minus 5% on automotive on an IFRS basis. Can you give us a bit more granularity on how you look at this? Is this based on kind of a firm visibility on 2025, this is what we expect? Or is it more, there's a lot of uncertainty in the market, and we just want to be cautious here?

And then the last question would be on the commercial momentum in the Enterprise segment. Can you give us a bit more granularity on the sales funnel, how things are progressing there? What are you currently converting? Is it still OEM clients? Or are you also converting new clients? And are there any big fish in the sales funnel that could or could not convert in 2025?

[Taco Titulaer, executive]

Yes, Wim, let me take the revenue questions, and then I'll hand over to Harold to give a bit more color on the commercial developments in Enterprise. I understand your question. The only thing that I want to say at this point is that we expect enterprise to grow and the mix between Enterprise and the level of growth -- the mix between Enterprise and Automotive, and the level of growth in Enterprise, I don't want to comment on at this moment. Also relating to your question about automotive, what we've seen, especially in H2, huge fluctuations month-over-month on royalty reports, and it's also recorded in some way in the reported revenue versus operational revenue.

If you only look at operational revenue performance in Q4 and you compare it with Q3, there was a 27% increase sequentially. But that's, of course, on a very low base that we recorded on the third quarter. So the fluctuation in automotive is big. There's a lot going on with these OEMs. And that's not only the lower car production, but it's also the macroeconomic concerns that are going on. Fundamentally, we see the same level of interest and probably more interest than we have seen before for adaptation of our products, but we need to face these headwinds that we are currently facing. So I can't really comment further on what we expected, especially for Enterprise and Automotive or give a more precise split. Harold, do you want to comment on the commercial tractions that we make in Enterprise?

[Harold Goddijn, executive]

Wim, so if I look at the funnel in Enterprise, it's wider than it's been before. It's deeper than it's been before, and that gives me confidence that we will continue on that growth trajectory for 2025 as well. So I think underlying things are looking pretty good actually. And if you look at the composition of that pipeline, again, it's a broad range of deal sizes. Obviously, the majority is relatively small, but there are a handful of opportunities that really have a potential to move the dial also in 2025 in terms of size. Now it's always difficult to predict when you win them and if you win them. So we are also a little bit cautious there. But I think, generally speaking, I'm happy the way that funnel is evolving in 2025. And I think we will continue to build on the basics and that solid base that we started to build in 2024.

[Wim Gille, analyst]

Very good. And I still want to follow-up on the automotive question because if I read in between the lines and I hear you talking, you basically say we don't know what's happening on a monthly basis at this point in time. OEMs don't know what's happening on a monthly basis at this point in time. And hence, we're just being very cautious here. So that begs the question, why give an outlook at all if we don't know. And I don't think anyone on this call needs to have a press release or TomTom to speak about OEMs this week.

[Harold Goddijn, executive]

Well, I think the moment we have in this call is probably peak uncertainty in terms of what's happening in the market. So on top of all the industry-specific questions and challenges, we have the geopolitical situation evolving in real time. So you're right, it's a little bit unclear, in that guidance, it's hard to say what's going to happen. I don't think very few people understand exactly where we will end at the end of this year. But still, we worry about the things we can influence. We don't worry too much about the things we cannot influence.

Our focus is on winning in automotive in future deals. There are some positive signs. We had a phenomenal start to the year at CES. A lot of demos, a lot of customers, a lot of buying signals we picked up. I think the overall trend for us is favorable with software vendors. So we see that carmakers want shorter -- less risk, shorter implementation times and are starting to embrace more modern software development principles like over-the-air updates that allow us to continuously enhance the end user experience.

All in all, we see, especially from Asia, requirements for implementation of in period shorter than 3 months, 3 months or shorter, and we pulled that off. We demonstrated and we can positively prove that within 3 months, we have a top-notch solution up and running at production quality. So those are the more fundamental trends that gives us a much better foundation to effectively compete in the marketplace. Those are the things we can influence. Those are the things we care about. We are, I think, in a very good position. I feel that we're stronger than we've ever been in the past in terms of product portfolio.

There's a ton of opportunities coming to the market in the next 18 months. Our focus is to win a significant portion of them and lay the foundation for future growth and kind of a real boost to efficiency, to productivity, modern software practices that will give us a much better chance to effectively compete with brought in navigation from companies like Apple and Google. So in that respect, it looks good. Strategically, our bets start to pay off. I think all the investments we've made in the last 5 or 6 years are starting to yield returns now. And from that perspective, it's an exciting time for us.

[Wim Gille, analyst]

To summarize, there's short-term uncertainty in automotive, but the outlook for automotive in the midterm is unchanged, if any it's even better. Momentum in enterprise is going great. And in this year, at peak uncertainty, you are still cash flow positive. What prevents you from using some of your cash pile to start a share buyback? Because obviously, the market is more focusing on the short-term uncertainty than the midterm opportunity. So I would say that this is actually the time to basically use that mismatch and start a share buyback again.

[Taco Titulaer, executive]

Thanks for the suggestion, Wim. We'll put it on the agenda to think about, but we don't have immediate plans for a share buyback at this moment. We have concluded one last year, and we will evaluate our position.

[Operator]

Our next question comes from the line of Tim Ehlers from Kepler Cheuvreux.

[Tim Ehlers, analyst]

First one is about the gross margin. As consumer is expected to decline further, I mean, Automotive is also somewhat declining, but Enterprise is improving. We should expect an improvement of the gross margin, right? And is there a top level at which you would say that's the level where it will stabilize considering all things are normal?

[Taco Titulaer, executive]

Well, you're right. We think gross margin will grow this year. We'll get closer to 90%. It will not reach 90%, but it will get closer to 90%. So we'll have a record gross margin for the full year. If and when a consumer further declines, we can reach the 90% or a little bit north of 90%, but it will take another couple of years. But I expect for the full year, like I said, anywhere between 87% to 89%. Let's settle for 88% for the full year.

[Tim Ehlers, analyst]

And then one question with regards to ADAS Maps and technology. I mean, expectations are that adaptation of the technology will take longer than expected and the rollout is slower. But do you still see some traction there? And do you see that first customers are looking into it a bit more, which could eventually give you somewhat of a mitigation towards the overall decline in automotive?

[Taco Titulaer, executive]

You're referring to the ADAS adoption. Yes, ADAS is definitely a driver for future growth. We've mentioned that a couple of things in play when you see the opportunity that -- we have in automotive is, of course, the market share win and which customers we serve. The second pillar is the car production volumes. The third one is take rates. So if carmakers produce cars, they don't deploy our technology on all those cars, but those percentages go up when these cars are more hybrid or even fully electric. And ADAS is playing more and more role.

You see at the high-end cars that ADAS is a key feature that enables more margin for the car producers, and that's driving further penetration. It is also a good development for a competition point of view, where you see that a lot of the basic features of navigation -- driver navigation can also be fulfilled with people driving with their smartphone. But the real ADAS features where the application communicates not only with the driver, but also with the machine, with the car is important and drives deeper integration and that's a position where we can benefit from.

[Tim Ehlers, analyst]

Can you already see that traction? So it's not something that you expect to happen in the midterm, but it's also something that you already see to some extent.

[Taco Titulaer, executive]

Yes. One simple one is, of course, ISAs, sort of this Intelligent speed Assist, where we enable cars to have very accurate picture of the maximum speed limits all across Europe, but it goes beyond that. It goes also with driver assistance so that the car gives signals that you are driving too fast because there's a steep curve ahead or you need to keep your lane, et cetera. And eventually, it can help with Level 3 or beyond types of driving solutions.

[Tim Ehlers, analyst]

Then one last one, with regards to your automotive customers. Do you currently see variations when it comes to geographies? I'm thinking especially about U.S. customers, but also Chinese. And could you maybe comment a bit on the dynamics you see across those geographies?

[Harold Goddijn, executive]

So I think the Asian, particularly Chinese manufacturers are still very optimistic about their chances to gain market share. They have come a long way in terms of product quality, and the speed of innovation is truly impressive. And I think the European and American carmakers are really in catch-up mode and it's clear that they also need to move and start working in different ways. And that drive for modernization, especially on the software side, is clearly visible.

[Tim Ehlers, analyst]

I wanted to ask if your competitive position within those geographies is the same across the globe or does it differ?

[Harold Goddijn, executive]

I don't think there's much difference in appeal or a competitive position. Obviously, we cannot play in China proper. It's for -- with China manufacturers, it's only for export markets. But there, we see a healthy level of interest and progress as well in brands that want to work with us. The design is in and are actually driving around already with TomTom technology. So made a lot of progress there in 2024, enhanced the size of the team, local team. We developed a number of strategic partnerships there with local software providers that are involved in customizing our -- integrating our technology stack into the vehicle.

So all in all, I'm pleased with the progress we've made in that part of the world. I think in Japan, things are looking up, good traction there. So generally speaking, and I said it in my introductory remarks, we feel that our competitive position is strong and probably stronger than it's ever been in the past.

[Operator]

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

[Marc Hesselink, analyst]

My first question is on the product. You already said that you've invested heavily over the last couple of years into the new platform, the OS platform. What's next? Are there still a lot of things that you want to add on top of the platform, a lot of extra functionality? Or it's also maybe the possibility to invest a bit more and then even further increase the efficiency? A little bit of the strategic things that you want to change maybe this year, but also in the coming years.

[Harold Goddijn, executive]

Marc, I think the focus now is for us to harden the software, mature it, focus more on nonfunctional requirements, cost to serve, robustness, response times and so on and so forth. I think the feature set is there. It's all well developed. We have it running in commercial vehicles. Now is the -- a period started where we need to make sure that we get all the benefits of over-the-air updates that we reduced time to value. Historically, it's always been hard to get improvements in the software distributed across our customer base because they all work in a different way, different operating systems and different things. So the commonality was not quite there. This time, of course, the focus is to maintain and guard that commonality, so all of our customers can benefit from future developments, stability improvements and so on and so forth.

So we're now entering a phase of productizing everything and hardening it, but the development efforts are mostly -- I wouldn't say it's never completely done, but I would say 95% behind us. And it's now really productization, making sure that we reduce that time to value. That's the most critical element, I think, longer term. Longer-term health requires us to make sure that all our customers are on a common platform and benefit from improvements in the technology stack, not only on the maps side, but also on the application side. And that's a big target for this year, to make sure that our contracts reflect that and that we, together with our customers, work towards a system where we do get that commonality, upgradability and continuous improvements.

We need to move away from the ship-and-forget mentality that has plagued our industry for a long time. I think we are now entering an era also under pressure from the new entrants, quite frankly, where everybody starts to understand we can't afford it anymore. We need to adopt that modern way of working. We're ready for that. We've designed our technology stack with those principles in mind.

And I think when I put all that together in combination with a more modern mapping architecture, that gives us the confidence to say we feel well positioned to improve our win rate and get a significant portion of those contracts that are coming to the market in 2025, '26 and let them come our way. So it feels like there's a lot to play for in the next 18 months. There's a lot to gain. And I think as an industry, we are slowly but surely moving forward to a more modern way and collaborative way of working when it comes to software in the vehicle.

[Marc Hesselink, analyst]

The second question is coming back on automotive. I fully understand that the short term is very, very low visibility. And you're also developing more on the R&D phase for the more longer-term projects with your clients. And you already talked about a bit in previous questions, but maybe just your thinking on how this will develop in the longer run in the industry. The mapping business within the automotive, is it going to grow in line with production growth? Or do you see very significant quick uptakes in those adoption rates, pricing differences, also the shift between maybe the OEMs who is going to be the winner and who is the loser, maybe also new payment system, not pay per car, but more on a per brand maybe basis. I mean a lot of things are moving, I think, in automotive at the moment. If you just can share a bit what you're hearing, what you think and what will impact TomTom on the longer term?

[Harold Goddijn, executive]

Well, yes, I can. I think there's a couple of things. So first of all, standardization is taking place and shorter implementation times, and I alluded to that in my previous comments. So that's a good thing for us, and we're ready. Second, we see a new renewed interest in self-driving. It seems to me and it seems to us that a new set of capabilities are being prepared coming to the market '26, '27 that will improve the level of the current system significantly in terms of self-driving capabilities. I'm not talking completely self-driving, but certainly Level 2, perhaps even Level 2+ or up to Level 3, it seems that there is a new wave of technology deem matured in the last couple of years is now ready to enter the marketplace. And as a result, we see a renewed interest in HD Maps and everything that comes with that. I think that's a significant development.

And thirdly, what I would like to say is the integration of mapping and UI. One of the things we showed at CES was some glimpse into the future how self-driving systems and map data can work together to give a much better information to drivers and give drivers comfort in the actions of the robot in the car and make that -- visualize that and make that predictable. That was one of the areas of our demonstration that took a lot of interest. A lot of conceptual work was demonstrated there, which really started meaningful discussions about where that technology will lead us in the coming years. I think it's a little bit further out. I think 3 years from now, but we're laying the foundation for that and creation of map content that is suitable to enable those use cases.

So I think those are the, in the automotive world, the longer trends -- longer-term trends. I think there is a growing resistance from carmakers to enable and facilitate bots in navigation. And the reason for that is that those cars go black. Nobody knows what's happening as soon as a course or a navigation is enabled. So we see active efforts from carmakers to stop that happening or reduce that happening. So there's renewed interest also in usage, in end-user experience. So those are the kind of the macro trends that we're currently seeing.

I think big emphasis on EV and charging transactions, payments in cars for -- to enable charging and perhaps other things when we have it. So a lot of progress on the EV side to reduce range or charge anxiety, whatever you want to call it, a lot of progress in that domain. So those are the kind of the high-level trends, I would say, are currently playing in the automotive industry.

[Freek Borst, executive]

As there are no further questions, I would 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 disconnect.