TomTom N.V.

Thank you, operator. Good afternoon and welcome to a conference called, during which we'll discuss our operational and financial highlights for the second quarter and half 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 from Taco.

We will then take your questions. As usual, I would like to point out the Safe Harbor applies.

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

Yes, thank you very much, Bruno. Welcome, ladies and gentlemen.

Thank you for joining us today. The positive revenue trend continued into the second quarter.

Location Technology was growing with 25% year-on-year and free cash flow from operation was an inflow of 16 million for the quarter. Taco with provide further information on the financial highlights and the outlook for the year later during this presentation.

I will discuss the key operational for this quarter. We finalized the Telematics divestments to Bridgestone and returned close to 90% of the net cash proceeds to shareholders.

We received €873 million from the operation, which amounts to a net gain in our P&L of €807 million. We are now more focused company with clear priorities and the simplified operating model.

Our mapmaking platform matured further during quarter. We made record 1.9 billion modifications in the database in a single, month which is a record, investments in machine learning results in higher degree of automation, faster cycle times, and lower operational costs per modification.

For technology customers, we launched much improved Maps SDK for web applications during, WeAreDevelopers World Congress in Berlin. Our Maps SDK allows clients to add maps, search, routing, traffic, geofencing and other functionality to their website applications, allowing them to easily add store locations, route planners and our features.

On the next slide, I’d like to take the opportunity to give you a brief overview on our wins in the year. As we look back on the first of the year, we're excited about the opportunities we see from automated driving, improved levels of car connectivity, electrification, but also for Maps APIs.

Automated driving technology is generating significant interest in new detailed maps that will help you transform the way we think about driving. ADAS or Advanced Driver Assistance System are starting to become main stream and will play a crucial role in preparing the technology for higher degrees of automation eventually leading to the autonomous car.

Electrified vehicles are also becoming main stream within the next couple of years and needs new data and software based services for route-dependent range charge planning. We've made good progress in developing products that will strengthen our competitive position.

In automated driving, we won the first two HD map deals that came to the market earlier this year and being operational, building on an early user base is important for us as it allows us to collect user feedback and tons of data, which are both crucial to further develop our product offerings for winning new contracts. We currently progressing in our development roadmap, increasing automation and productivity of both ADAS and HD mapmaking systems and we are growing up coverage.

In our connected navigation and electric vehicle solutions, we announced new deals earlier this year with Volkswagen Group, Nissan, FCA and MG, and we also launched a new service from IQ Maps which is a mechanism that allows for seamless over-the-air map updates for in-dash navigation systems. In Maps APIs, we extended and matured our partnership with Microsoft, and we think that's a strong proof point of the competitiveness of our product portfolio.

We have improved our APIs on our own developer portal. This concludes my part of presentation.

I'm now handing over to Taco for a detailed overview of the financial.

Thank you, Harold. Let me take a couple of comments on the financials and the outlook for the year and then we can go to the Q&A.

In the second quarter of 2019, we reported group revenue of €211 million, which is 12% higher compared with last year. The driver of this growth is the Location Technology business [technical difficult] 25% year-on-year to €160 million, which represents 55% revenue.

Let me go through the businesses one by one. Automotive revenue was up by 21% to €76 million in the quarter.

This is a combination of higher volumes from existing customers and NRE revenue, which is relate -- revenue related to integration activities for our Automotive customers and is recognized in the P&L at the start of production of car lines. We expect Automotive to grow with close to 15% for the full year.

We expect less NRE revenue recognition in the second half of the year, which will have a positive effect from our gross margin. Then, Enterprise revenue, it was up at 34% to €40 million in the quarter, mainly due to the expansion of a partnership with Microsoft.

For the full year, we expect to grow at more than 20%. Consumer revenue was flat in a quarter at €95 million.

Strong start of the year was result of the replacement sales due to the GPS week number rollover issue, which impacted older generation devices and pulled forward demand for our PNDs. For the year as a whole, we expect a slow pace of decline compared to our previous guidance and it's now around minus 15%.

Gross margin for the quarter was 67% compared to 70% in Q2, 2018. The year-on-year decrease was caused by the start of production with various car models of our automotive customers, which triggers an uptick in revenue with also the release of capitalized contract costs associated with customization and integration activities, the so-called NRE.

For the full year, we expect the gross margin off at least 70%, 7-0 that is. Total operating expenses in the quarter was €225 million, an increase of €104 million compared with the same quarter last year, mainly due to the increased amortization related to the Tele Atlas acquisition back in 2008.

I will come back on that's when I discuss the outlook. Apart from a higher D&A, the R&D expenses increased due to higher personnel costs to support our growing Location Technology business.

Then EBITDA it is decreased by 31% in the quarter to €31 million and EBITDA margins were 15%. As explained during the 2019 outlook presented in February, we shifted CapEx to OpEx cash spending due to the maturity of our map products.

CapEx declined 64% in the first half of the year from €42 million in 2018 to €15 million in 2019. Free cash flow before financing excluding the net cash inflow from the Telematics transaction, was an inflow of €16 million in the quarter, which is flat year-over-year.

The higher cash generated from operations was offset by higher cash tax out. Year-to-date, we increased our cash position with €120 million.

We now have €372 million of cash and no debt. The increase is mainly due to the net cash inflow of the Telematics transaction after the capital repayment to shareholders.

We expect the full year cash position to be well over €400 million. Our deferred revenue position is now €297 million, compared with €281 million at the end of 2018.

The increase is driven by automotive deferred revenue, offset by releases of the deferred revenue position in Consumer and in Enterprise. Let's now continue to the next slide to have a look on the Automotive operational numbers.

As you know, there's a difference between revenue we invoice and the revenue we report. The latter tends to be lower in a growing business as we follow IFRS-15 accounting standards.

As shown before, this slide highlights the operational revenue of Automotive. Operational revenue is the reported revenue plus the net change in the deferred and unbilled revenue positions.

Automotive operational revenue increased by 26% year-on-year to 90 million. For the year -- for the full year, we expect operational revenue to increase with around 20%.

I would now like to comment on the 2019 guidance on the next slide. We are updating our full year outlook.

Let me reiterate some of the elements. We now expect group revenue to total €700 million, which €435 million from Location Technology revenue.

Location Technology revenue is expected to grow by around 17% year-on-year due to the ramp up of existing Automotive contracts and the extension of partnership in Enterprise. The consumer is expected to decline by 15% year-over-year.

This is at the slower pace than initially anticipated as the GPS week rollover issue pulls forward replacement sales, gross margin of at least 70% in the year. In 2019, we expect the total D&A to amount to €290 million of which nearly €210 million due to the acquisition-related amortization.

For 2020, we expect roughly the same amount as in 2019. As of 2021, we expect total D&A to drop to around 75 million.

The acquisition-related amortization will by then close to nil. The acquisition-related amortization is excluded from the adjusted earnings per share calculation.

I would like to comment on the adjusted earnings per share and the free cash flow as a percentage of revenue in the next two slides. The 2019 adjusted earnings per share outlook is unchanged at €0.15.

The share consolidation reduced the weighted average of diluted shares from 233 million to 169 million for the full year 2019. Although, the effect of the expected increase of revenue on the lower number of shares was offset by a further shift from CapEx to OpEx due to the maturity of our map products as well as on higher unbilled revenue position.

To conclude, I would now like to call upon the seasonality of the free cash flow in the next line. The first half of the year we saw expected cash out flow due to natural seasonality of our business.

As the beginning of the years marked by settlements of personnel and other liabilities while the second half sees a higher volumes of customer payments. For the full year, we expect a free cash flow as a percentage of revenue to be around 9%.

The slight decrease in the outlook is the result of high over higher unbilled revenue position, which impacts the timing of cash inflow. Operator, we would now like to start with the Q&A session.

A couple of questions from my side. First of all on the change in the capitalization policy and change in the amortization related to Tele Atlas and more regarding the timing, why here and now.

So why didn't you make the decision back in the fourth quarter because now people have to digest, let's say, two big changes I would say in the accounting in a short period of time. So why didn’t you do this back in the fourth quarter in one big go?

And also in the same line of thought, why didn’t you decide to just amortize and impair the whole [indiscernible] this year rather than do it in two years? And why don’t you do it now?

That’s kind of first question. The second question still related to D&A, you've mentioned during the prepared remarks that D&A profile post all the changes so as of 2021 would amount to about 75 million, but your CapEx is more closer to 35 million.

So should we just mobile for the gap between D&A and CapEx in 2021 to close in the matter of six years? Is that a way to look at it?

Or will that reduce in the step-by-step or in a quicker way? So that there is kind of the D&A questions then on the operational side, I think you're making great progress or at least you've mentioned great progress in your SD Map moving from let's day 59 million kilometers in the last update to 67 now, moving from 183 countries to 194.

So and also you've made 1.9 billion automatic changes versus 1.5 billion in the previous guidance. So can you tell us where do you think you stand vis-a-vis the competition on the SD Maps and the significant operational improvements that you are making in that area?

And can you also give us a bit of feeling on the progress you’re making on the HD maps, which obviously is much more important for the future? And then I've got two more follow ups, but let's start with these two first.

So dive into the D&A questions. And indeed, as of 2021, we expect D&A to decline to 35.

CapEx this year is expected to be roughly 35. If all things are equal, which never happens, obviously, but then you could also say that CapEx is 35 in 2021.

The gap between these two will narrow indeed, but not completely close, because there's also something in between related to IFRS-16. And that is to are -- those are lease liabilities over 50 million.

So over time, our D&A will move down, but not completely to the 35. The discussions on accelerating the amortization of our Tele Atlas acquisition were started early this year, that's also why in Q2 you see the accelerated amortization, also from Q1 in there.

They took several months to conclude and we've concluded in Q2. Yes, with hindsight and things could also always be at a different time, but this is what it is.

We discussed, we started this discussion at start of Q1 and it took several months to conclude. And that was agreed that we need to reduce the useful life of the assets from 20 to 12 years or from 10 to 2 years and also write it all off in one go in Q2.

Is there any reason why the accountant didn't allow you to do so? Because, I mean, you're just cleaning up the balance sheet, which I think is a good thing, but it doesn't add any value to kind of make it in two years?

Or is it just what the accountant told you to do and we have to live with it?

We think that this is the right decision, and we take advice of our counsels which means that we stand with our decision to do this in two years.

Thank you.

Okay, then yes, I think you're right on the SD Map good progress. In terms of both coverage, but also productivity total spend on maps is now declining, but we get more coverage faster at low price per kilometer, if you like.

So, we're happy with that we see further improvements on the horizon in SD mapmaking. The level of automation is increasing, and yes, we're quite happy about those results they've been planned for.

We finally start to see significant improvements as a result of investments in technology in the last three to four years. So you asked me, how are we doing compared to competition?

Difficult to say, we don't have full transparency. But we do believe that we have an efficient operation here and probably the most efficient mapmaking platform.

There is, although there are no hard numbers to support that obviously because competition is keeping that hidden obviously for commercial reasons. But we think we're doing well.

Map quality is good, coverage is increasing and the level of automation keeps going up. On the HD Map, it's a different process.

The process itself leads itself, lends itself for a high degree of automation higher than in SD Maps actually, and we working to a process where we can fully automatically process those maps. We're not there yet.

There is still quite a bit of manual labor involved, but we're ironing that out, that won't happen overnight, but we do believe we can reach a state where HD Map production can be automated to a very high degree. And that is important because we're now covering the major roads and the close access roads.

There will also be demand to expand that coverage it's adding a lot of kilometers, and we need to be ready to be able to process this in a highly automated way in order to control cost. But again, there, I'm kind of happy that we, where we are, but there is more to be done especially on the HD Map production cycle.

And regarding the HD Map production cycle, when would you expect that to finish, i.e., when will you...

So, there are two elements, so, there is the initial HD mapmaking process where you cover roads for the first time, that is within reach, but the next level of sophistication will be updating that map and updating that map based sensor data, video data that we can get out of the car and from other sources. And that is a bit further down the road.

So all in all, it's all the investment that in production technology that will come to zero anytime soon. I fully expect that over the years to come we will continue to invest in production, in production engineering.

And then my last question would be on the Azure. The migration to Azure has been completed as I understand, but if I look at Bing Maps and whatever, I still see your competitor listed in the footnotes.

So when do you think Microsoft will be ready to have the TomTom products on its entire platform? And in relation to, let's say your integration with, within Azure, can you also tell us a bit on what you see in terms of adoption amongst the developer community.

Also at the conference that you attended in Berlin recently, do you see any progress on the number of developers that are linking into the platform.

I think, if you look at the partnership with Microsoft, we have two important initiatives underway. First is powering Azure's location technology with our maps APIs.

That's done. The Azure Maps APIs are based on TomTom technology wrapped around the APIs.

Development of those APIs will continue obviously, but that transition has happened. On the Bing side, that's not yet the case.

That will take more time before the, their own location services platform. The Bing platform will run on TomTom content, but we're working on the preparation for that.

So if you say the transition to Azure has been finalized, I don't know exactly what you mean by that. But it's, this is not yet the case for the Bing mapping platform that will happen over, that will happen in the future.

Good, thank you.

The adoption is, it's, we're happy with the progress. It's small and it's still a relatively small user base.

It takes time to build up this community, but we see good interest and good wins. So we like what we're seeing, but to develop it in a sizable business will take time, and that is fully to be expected those are products that are part of other people's applications.

Those applications need to be built and need to be redesigned to accommodate our APIs. But the beauty, of course, is that it is a sticky product.

We continue to grow, and hopefully, those developers will stay with us for a very, very long time.

Firstly, the change in the guidance. Can you talk a little bit about some underlying things?

Firstly, your gross margin guidance is unchanged; however, in the line there is more consumers and maybe a bit more of the NRE what you already explained. I would say that normally that would be negative for the mix.

So does it mean that there's an underlying improvement in some of the elements? And also relating back to that, related on the P&L, your, you gave the bridge on the underlying EPS given that I think the unbilled revenues is more of a timing issue than anything else.

So can we read that the underlying improvement of your EPS guidance is €0.10? Or is that because the OpEx and CapEx is also just accounting changes, is that fair to say?

Okay, then second question is on what you're seeing in Automotive in the order book, and I know you don't give the order book on a quarterly basis anymore, but could you say something as a trends? Is your book-to-bill still well above one or what are you seeing there?

And also you have a small increase in the guidance on Automotive. Is that, so what's happening there, as in what's the reason for the increase on that number?

Is that there is a higher adoption rate or probably anything else?

Yes, so, let me take the first part of your questions. On the gross margin the NRE was not unexpected.

The factors that cause an increase of our revenue and the decrease of our gross margin, that was not expected. So we stand with our guidance for the gross margin of north of 70%.

We only mentioned it to explain why the gross margin in Q2 was lower than this year than the gross margin in Q2 last year. So, this was more than what was an expected was the tailwinds that you saw in consumer that’s true.

So, indeed, if we sell more hardware relatively in the mix that could have some pressure in gross margin. But, well, the guidance for the full year over gross north of 70% simply still stands and apparently we have enough headroom there to continue with that guidance.

On the adjusted earnings per share, it is indeed, yes, we had 15 and we ended up with 50. There are some elements in there that are posted like the share consolidation and the business performance other things are more timing of cash flow when we received cash in that and split between CapEx and OpEx.

So hard to say what would it have been if everything would not have happened but indeed is true that the business performance also articulated in our guidance has been stronger than at the start of the year. Then I forgot, what was your last question?

Automotive?

Order intake.

Yes, it's a combination of things, one we see that you have an small increase in the revenue guidance for automotive, so what is driving that is that high uptake also maybe in the light of that over the last couple of years I think actual revenues that you report in automotive has been more than every year than we initially thought. So the momentum has been stronger than initially guidance getting from that.

You see if we see something similar again today and so I would like to understand what's in there under the radar there.

Well, I don’t think there is anything on the radar apart from the fact that the take rates of our ports end up higher than initially expected. So, it's not related to unforeseen large customer programs because we see those coming some years in advance but it's just related to actual take rates.

So, the royalties that we collect is a factor of our market position, product sales that also take rates within and I think especially the latter of the last two to three years continues to be higher than earlier indicated and that we also receive from the currency and what we can report.

Okay. And then the automotive order book is that something you can say about it and it's still round of one and book to bill or?

Order intake is developing according to plan. As you know we don’t give detailed information about the absolute value of the intake until later.

But we are doing what we're supposed to be doing.

Okay thanks. And maybe as a final question.

Your cash position is guided to be well over about 400 million again, it's a bit of a recurring theme but I guess anything you can say about that or you want to keep that large position or?

No for now, we're going to once again so we -- it's only two months ago, less than two months ago that we gave back 750 million to our shareholders. But indeed, the status now is that we won't keep that position for moment when we have a separate investment or when there are opportunities in the market that we want to pursue.

As there are no further questions, I would like to thank you all for joining us this afternoon. Operator, you can close the call.