Innovative Industrial Properties Inc

NYSE:IIPR

Good day, ladies and gentlemen. Welcome to TomTom's First Quarter 2025 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.

Thank you, operator, and good afternoon, everyone. Welcome to our quarterly conference call. Over the course of today's call, we'll be reviewing the key operational highlights and financial results for the first quarter of 2025, together with our CEO, Harold Goddijn; and our CFO, Taco Titulaer. Harold will begin with an update on our strategic progress, after which Taco will provide an overview of our financial performance and outlook. After their presentations, we will open the line for your questions. As always, please note that safe harbor applies.

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

Thank you very much, Freek, and good afternoon, everyone. Thank you for joining us today. I will provide you with an update on our operational highlights and strategic progress, and then I hand over to Taco for a detailed look at the financials.

We had an encouraging start to the year with growing revenues and solid strategic progress. Benefiting from the investments we've made in our maps, the performance of our Enterprise business was particularly strong. The broadened capabilities and extended market reach that TomTom Orbis Maps provides have allowed us to build commercial momentum across a variety of sectors, including geospatial analytics, fleet management and the government sector. With our detailed fresh maps, customers can make better decisions. For instance, we are helping businesses to identify the best locations for new EV charging stations. We help to accurately assess climate risk and the consequences of that, and we develop mobility plans for large events.

And across the enterprise domain, there are many more use cases that our maps are supporting. Likewise, our Automotive business is well positioned to meet the evolving needs of carmakers. They are eager to move fast with software. They want to provide enhanced customer value while achieving a higher level of control over their software stacks. And we've been designing software with these exact demands in mind and are now ready to provide carmakers easy to integrate, easy to customize products that deliver excellent user experiences. In parallel, we also see the automotive industry moving towards higher levels of autonomy. Earlier this year, we introduced our 3D map layers. We are combining foundational and internally developed AI models and bring together different data sources and that produces maps that give cars a clear context to navigate complex environments.

Our 3D map layers contain a lane level representation of the road, including precise geometry, road markings. And on top of that, they provide 3D data on objects such as traffic lights and poles that are used for precise localization. We provide road-specific and dynamic information about speed restrictions, speed profiles and much more. With a strengthened market position, we are now focused on unlocking the opportunities ahead of us. While current trade tensions and the resulting uncertainty, the short-term outlook is less predictable, we remain confident in our long-term trajectory.

With that, I'm handing over to Taco for a closer look at the financials.

Thank you, Harold. I'll now share some insights into our financials and outlook and after that, we'll move on to your questions.

In the first quarter of 2025, group revenue was EUR 140 million, a marginal increase from last year's EUR 139 million. Let me briefly break down our top line performance by business. Revenue from our Enterprise segment grew significantly, climbing with 18% to EUR 42 million. This growth is the result of the continued commercial traction we're building and growing adoption of our Location Technology products across various sectors, as Harold already pointed to as well. We also saw growing adoption of our products within vehicles, which led our Automotive operational revenue to increase by 5% year-on-year to EUR 83 million.

However, because some of this growth was driven by products and contracts where a relatively large portion of revenue is deferred, our Automotive segment showed a short -- softer performance on an IFRS basis. Specifically, Automotive IFRS revenue declined by 4% to EUR 80 million. Taking Enterprise and Automotive together, revenues from our Location Technology segment grew by 2% to EUR 121 million. Lastly, the Consumer segment declined by 8% year-on-year to EUR 19 million. As a result of greater relative contribution of high-margin Location Technology revenue in our mix, our gross margin increased to 88% from 86% last year. Operating expenses for the first quarter were EUR 117 million, down from EUR 125 million in the same quarter last year. This decrease reflects the capitalization of costs related to our automotive driving-related maps layer.

As Harold explained, we introduced these maps layers earlier this year and saw a positive response from the market, reflecting our confidence that they will support increased levels of vehicle automation over the coming years. We started capitalizing the engineering work associated with these layers as of this quarter. If we normalize for the effect of capitalization and amortization, underlying operating expenses were modestly higher. Free cash flow was an outflow of EUR 3 million compared with an outflow of EUR 9 million last year. This improvement mainly reflects a lower payout for personnel-related accruals as well as a favorable movement in our receivable position. At the end of the quarter, our net cash position was EUR 257 million compared with EUR 264 million at the end of 2024.

With that, let's turn to our outlook. Our first quarter performance was encouraging with our Enterprise business benefiting from continued commercial momentum and our Automotive business also performing well. Importantly, as a result of our investments, we are well positioned to capitalize on the structural market trends related to in-vehicle software, electrical vehicle adoption and self-driving advancements. We remain optimistic about these trends and our ability to unlock the opportunities associated with them. That said, it remains uncertain how current trade tensions and resulting market uncertainty will affect car volumes in our key markets. As such, we're navigating a less predictable short-term environment. Nonetheless, our guidance remains unchanged from the start of this year.

We're now ready to take your questions. Operator, please start the Q&A session.

[Operator Instructions] We will take our first question. Your first question comes from the line of Marc Hesselink from ING.

Yes. First question, maybe a bit of a high-level question. If you see that there's -- I mean, there's a lot of things going on in the automotive industry, also big changes like towards software-defined vehicles. Just trying to understand how this is going to change your business, how it's going to change your go-to-market, the relationship that you have with the automotive clients. I think a lot is going to change. Maybe if you also can explain a bit what do you think and what kind of time lines that the industry will really be changing from what it used to be?

Well, that's a good question, Marc. It's -- I think it's a process. Software-defined vehicles turns around for quite some time. Carmakers are trying to achieve it, but it's hard, especially when you have legacy products out there that you move -- that you need to move to a common architecture. But nevertheless, it's happening. We see movements in that direction, and we can see from the new entrants out what that will look like. So more standardization, better control of software, over-the-air updates, et cetera. The requirements that we see from carmakers are for faster development cycles, standard products, less risk, less engineering products cost to get those cars on the road. And again, the new carmakers are showing the way. Typically, we can now get a car up and running within 3 months of signing a contract. So that's a dramatic improvement from what it used to be in the past. Not everybody is there yet, but the trend is clearly in that direction.

And how will it change your business model? For a long time, you also had the stories about moving away from, yes, let's call it a license kind of fee that you get upfront towards more subscription model. Are those things being discussed?

Well, the most important change is an internal one. So we are -- we have been for quite some time, a more project-driven organization. That's as a result of the demand from our customers. But we can -- and we are moving into a product organization. So the products are leading, not the customer demands are leading anymore. And that gives us great opportunity for standardization, repeatability, time to value. So let's say if you define it as a line of code hitting an end user, will be reduced dramatically. So it allows for a more efficient operation, repeatability. And with that, we have more higher quality -- we can achieve higher qualities, shorter introduction times and repeatability. So it is a shift that has been coming.

We see standardization of operating systems happening as well. We see over-the-air update capabilities happening. It's been around for quite a while, but now it's kind of working or starts to work. It's still a challenge for many carmakers to do it correctly. But all those factors in combination mean that we are becoming rapidly a product-led organization. And our customers are increasingly now developers rather than who want to get their hands on the technology and customize and localize and with all that with high efficiency and in short periods of time. So it's a good time for us also to adopt our processes to that new reality, and it will make us a more efficient company going forward.

Okay. Great. And then probably a bit linked to it as well, but the second question is on -- you mentioned in the press release a good commercial and product development traction over the quarter. Does that mean that this trend is accelerating a bit, and so the success that you've seen, you launched the platform a bit more than a year ago and gradually, you've seen increasing traction. But do you see that accelerating a bit now? And so therefore, what is then expected towards the rest of the year and into the next year? How will this build up?

Well, there's a couple of things. So I think it's easier for us now to address new carmakers. So we've seen that coming up quite a bit in Asia predominantly, smaller series, but demanding on end user experience and short time of integration. We are well placed to address that market segment. And so we build up repeatability and we are training that muscle as an organization to get our stuff out there in a short period of time. And we see that the incumbents want to move to a similar model, but because of their legacy, it takes them more time still than the challenges, I would say.

Having said that, the real volume, of course, is still with the incumbents and not with the challenges. So winning market share from incumbent carmakers remains a top priority. And I think we are well positioned to achieve that. But I also have to say that the decision timetables have been prolonged and extended because of challenges with planning the business over a longer period of time. So it's those 2 developments that we are seeing. So some good and some not so good, but I think over the midterm, we are well positioned.

Okay. Great. And then last question is on -- so your operational auto revenue was up 5% year-over-year. Could you maybe share what is the -- in the mix of your clients, what was the production volume change year-over-year as in how much extra growth did you have above the production levels?

Yes. If we look at the EU and North American markets, the markets that where we predominantly operate in, based on the data that we collected, we saw a decline of 5%. Our operational revenue went up with 5%. So there is a bit of a mismatch there, that the main -- there was some NRE in there from a release. But the main driving factor is, I think that year-over-year, we saw an increase in the average selling prices, not so much per product, but more in the bundling of the product. So longer terms and more combination of products per vehicle.

Okay. So the average...

So there's not so much the take rate, but it is the price per car that we charged.

Okay. Great. So that went up like, let's say, a high single-digit percentage next to the [ NRI ] that you just mentioned?

Yes. Yes. Yes.

We will take our next question. Your next question comes from the line of Wim Gille from ABN AMRO ODDO.

I hope you can hear me. I've got a few questions. First is on the HD/3D Maps. You're doing quite a bit of investments and you are now capitalizing those investments. If we look in the IFRS, there's basically 2 conditions that need to be met, a, needs to be new technology, but also b, there needs to be good visibility on sales. If I, let's say, remember well from the past, the proportion of SD Map in your mix is extremely high and the proportion of HD Maps is extremely low. So can you give us a bit more feeling on what is the visibility that you have on revenues in HD Maps?

And when should we see that filter through in the modeling? And then in relation to that, can you give us a bit more granularity and feeling on market shares? So looking at SD Maps, you have about 1/3 of the market and your competitors are predominantly here and a little bit Google. How is the competitive fields in high definition and how is your market position in this particular field? And also, what's the price differential per car looking at HD versus SD? Those would be my first questions.

Yes. Let me take the first question, and then we'll continue with the other questions as well. So the investments that we're making in our HD platform or 3D mapping capability will benefit both the maps that are used by the car as the maps that are used by the human. So it's a different way of collecting, merging, sanitizing content and creating map layers. So on the IFRS capitalization topic, this will both benefit the future revenue as short-term revenue coming from the traditional markets.

On the market shares, the market for automotive -- sorry, autonomous driving or highly automated driving is still nascent. So it's -- it is a feature that is deployed on the higher-end cars. There's not reliable objective data out there to come up with a percentage. But if I had to guess, our market share is quite similar to the market share that we have in SD today. But again, the volumes and the value of that market today in 2025 is quite small yet.

Yes. So I think the way to look at it is that the market is looking now for a new generation of self-driving technology. Our expectation is that those cars with -- it's driven by price and performance. So the performance is going up the level, the price levels are going down. That means that this technology will be built in into more cars and potentially also the volume segment that we're talking about. Those cars need different data than what we used to produce in HD. HD was problematic in the sense that it was difficult and expensive to produce. We could only do limited geographical coverage and the maintenance of the data was expensive.

So we have moved to a model where we do a fusion of a high number of observations from vehicles and satellite imagery and other data that we put together using AI models, and that is producing a quality that is sufficient, but much improved coverage, so we can cover the whole -- all the roads, not just the motorways. And it's providing much improved freshness, which is obviously important if you use it to drive the computer. So I think the opportunities are there are concrete. They are known. We are in a -- we have good visibility of the requirements and the time schedules. And I think we're competitively well positioned to win a significant proportion of those new maps and new deals.

Maybe as a bit of a follow-up on the market share discussion. In the past, you mentioned the number that you are in active dialogue on HD mapping. And I understand that this new technology, you have a bit of a mix between HD mapping and 3D mapping. But regardless, how many of the OEMs are you discussing this new technology? And are you piloting this new technology? Is that a similar number as the roughly 6, 7 of the top 10 OEMs that you had in the past on HD mapping?

Yes. I think what is new is that this new product gives us also access to customers that are currently not sourcing from us or not sourcing map data from us. That's where the biggest opportunity is obviously in swinging of market share in our 3D product could prove to be instrumental in achieving that.

Very good. And then the other question that I have is on the Enterprise segment. Obviously, the momentum is quite good with revenues up 18%. Do understand obviously the weakness of the dollar in recent days is not going to help in that sense. But can you give us a bit more feeling and granularity on where you are in, let's say, the process of pushing Orbis Maps and selling the new maps in the new client base? So past quarters, you were mainly converting OpenStreetMap clients into paid clients for TomTom.

So what types of clients are you currently in discussions with? Is that still mainly OpenStreetMap or are you also targeting technology and Google Maps [ do this ]? And can you also give us a bit more insight in, let's say, the types of clients and the larger clients that we have discussed in the past? So in the past couple of quarters, you are basically winning a lot of smaller clients and smaller deals. But how are, let's say, the larger deals in the sales funnel progressing at this point in time? And is there a possibility that we've seen some action on that front in 2025, 2026?

Yes. So I think, Wim, so -- yes, so the overall picture is that we're gaining traction in the Enterprise segment. We see that because the pipeline is growing. We see that conversion times or the sales lead times are shortening. It's still quite long, but it's going faster now. And we see that we can win a combination of large accounts, but also making progress with smaller accounts, but there the volume matters, of course. So we -- and it's good to have a combination of a lot of smaller accounts and bigger accounts. So a couple of things stand out, I think, and are worth mentioning. The government sector is proving for us a fertile hunting ground. We have not really been present with our Genesis Maps in that segment, but there are significant opportunities for governments for planning, security for our maps.

And we have a particularly strong point that we are based on the specification of the Overture Foundation and governments like that. So they want a quality control product but also a level of openness that gives them a clear path to integrating other source of information. And Orbis Maps does exactly do that. So you not only have a quality control managed map that is rich in high quality, but there's also a defined way of integrating the other information. And for a lot of government information, this is a critical element of their needs. So that is going well. And there's quite a few large opportunities, I would say, between EUR 5 million and EUR 15 million contract value.

And then there is a long tail of smaller opportunities in that government segment as well. Then we are doing well in fleet logistics. That's a bit how -- we have a right to play there based on the navigation assets, and ride-hailing is also going well. Our traffic product is selling well. We see good traction there. Yes. So it's kind of a mixed bag and quite a wide distribution of products and markets that we are now addressing with Orbis Maps. We've seen Microsoft starting to use it, as we're starting to use it, that makes it also easier for other parties to commit to our platform because those 2 companies, in particular, know what it is when you talk about maps. They have a lot of experience themselves. And that does give us kind of an implicit seal of approval.

We will take our next question. Your next question comes from the line of Tim Ehlers from Kepler Cheuvreux.

I hope you can hear me. There's a weird beep in the background. But let me just start. So my first question would be about automotive. I think the results were clearly better than people were anticipating, especially given the current atmosphere in the automotive space and the uncertainties given the tariffs. So have you spoken to key customers and what's the message there? So could there be a potential negative effect coming in the second quarter when automotive volumes are down further due to all this chaos and nobody really knows what's happening? Can you maybe give some color there, what you're currently hearing in the industry?

Yes, it's a tough one. I don't think anybody has a clear picture. Everybody is -- all our customers are kind of struggling to understand how to react, what to do in the short term, what to do midterm and what to do long-term. It's a very volatile environment. I think the tariffs will be able to survive. I don't think that is going to have a very material impact on our revenue. But there's a whole degree of uncertainty about the wider economy as well. So we don't know exactly how it's going to play out. We've done some sensitivity analysis on our customers. I think our exposure is relatively limited. But it is really tough to make predictions of what will happen in Q2, Q3 and Q4. I think we need to wait and see and accept that we can't influence the things we can't influence.

Okay. Great. So -- but there's nothing you have felt from that in the first quarter?

I don't think we have seen anything unusual in Q1. I think nothing that we have seen is related to what's currently going on.

Okay. Great. That's very helpful. And then the second question would be about the gross margin. So you already made quite a step forward with 88%. How shall we look at that developing further? So if we look at Enterprise and Automotive gaining more share of the total revenue, so you have positive mix effect. I mean you already said that you could go to the 90%. Could that happen earlier than later?

Yes. So you need to think of Automotive and Enterprise together are running on a gross margin that is north of 90%, but Consumer is north of 40%, anywhere between [ 40% ], 45%. So the smaller the part of Consumer in the mix, the sooner the group revenue will go over 90%. So will gross margin be ever over 90%? Yes. When that exactly will happen, I don't know, but it will not be in 2025.

Okay, clear. Great. And then one last one about the R&D capitalization. So the amount you capitalized in Q1, should we consider that the run rate going forward, at least for this year, so something around EUR 7.5 million per quarter?

Yes. Our advice is to put EUR 30 million in the model for the year.

We will take our next question. And your next question comes from the line of Andrew Hayman from Independent Minds.

Yes. Just on Enterprise, the comparison base gets tougher in the second quarter. But when we look at Q1, is that a base off of which you think you can build on going forward? Then second, on the auto side, I was curious, you've been -- I mean, it's clearly a difficult environment, but you're quite clear that with the 3D maps, you've had an enthusiastic response from the market. Have you actually been signing contracts this quarter or is it more that you're seeing the interest come through? And then finally, on the senior executive team at TomTom, in a lot of ways, it's very stable at TomTom with the 4 founders, Alain De Taeye and then the finance team has been consistent. But if I look at the product side, there's been considerable change from when I look back at the Investor Day in 2022. If I look at, let's say, 8 of the people that presented there, 4 have moved on, and that includes the CTO, the Chief Product Officer and the VP Product Manager. Is that something that concerns you?

Let me take the first question, and I'll leave the last question to Harold. But Enterprise, yes, I think Enterprise has been running at EUR 40 million plus rate since Q2 last year. I think that is also the trend going forward. Please bear in mind that 75% of our Enterprise revenue is dollar-denominated. So that will have an effect if dollar continues to weaken. But you're right that this is the level that we can -- you can model on. For Automotive, I think the discussions that we're having on 3D maps is they are very deep, and they're not only with purchasing, but also with engineering and with C-level people and with CTOs, et cetera, and they're very intense, and that gives us confidence that we are on the right track with our product development. Has that led to any significant deal signatures in Q1? The answer is no, but it doesn't mean that we have lost any either. But this is -- I mean, you can't put your finger on when deals will happen or not. But discussions are very intense and frequent and the signals that we're receiving are positive. On the management, CPO, CTO...

Yes, perhaps I can give you a bit of a feel for that. So we have seen considerable change in the last year. So we have moved in mapmaking from a mostly or heavily manual process to a much more automated process. We have moved our technology stack from a project organization more to a product organization with considerable changes that have required. We've gone from onboard to online technology. So we've seen a very significant change in the type of people that we need in order to get through those transition. And I think that is reflected also in composition of the senior management team also on the product side.

So to give you an example, we've hired a number of executives from large tech companies that are familiar with high-volume transaction services, highly reliable secure online services. All those skill sets or a number of those skill sets have been brought in with the joining of a number of senior executives in the technology team. I'm happy we've been able to do that, and I'm happy to see the results from all that, really makes us now a significantly different company to what we looked like 4 or 5 years ago.

As there seem to be no additional questions, I want to thank you all for joining us this afternoon. Operator, you may now close the call.

Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.