TomTom N.V.

Thank you, Operator. Good afternoon and welcome to the conference call during which we will discuss our operational and financial highlights for the third quarter 2019.

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.

Thank you very much, Bruno, and welcome ladies and gentlemen, thank you for joining us today. We generated Group revenue of €164 million in the third quarter, which is limited decline related to the same quarter last year.

Automotive operational revenue continues to grow strongly, totaling €88 million in the quarter, which is an increase of 23% compared with last year. Our gross margins, further strengthened, results in gross profit growth and strong cash generation.

Taco will provide further information on the quarter's financial highlights and the financial outlook for the year, later during his presentation and I will now discuss the key operational highlights for the quarter. Developing cutting-edge technology has helped us to build strong relationships with the leading technology companies.

We announced during this quarter that we have further expanded our partnership with Microsoft. Our navigation technology is now integrated into the Microsoft Connected Vehicle Platform and in combination, we can offer a full stack of an end-user car experience, including data analytics possibilities for carmakers that can generate data driven insights.

It's a very promising partnership that we plan to continue to develop over the years. Our mapmaking platform further matures during the quarter.

We made a record €2.4 billion modifications to the map database in one months. Investments in machine learning results in higher degrees of automation, faster cycle times, and lower operational costs per modification.

Increasing automation for our mapmaking platform is a critical component to our strategy. We will spend less on maintaining and building the map and more on innovation and differentiating technologies and applications.

We continue to make inroads in automated driving. Over 1 million TomTom ADAS enabled passenger and commercial vehicles are now on the road, powered by our maps and that number has doubled since the beginning of the year.

Level 1 and 2-enabled vehicles can drive more efficiently, save fuel, reduce emission, and can more safely pilot their passengers on the road. We also launched our fully autonomous test vehicle to further advance our automated driving solutions.

We built multiple laser scanners, cameras and radars into the vehicle to validate and test our autonomous technologies and services. In the quarter, we also launched the TomTom Long Distance Electric Vehicle Routing API and the TomTom EV Charging Stations Availability API, that will help developers to build applications for electric vehicle drivers that will help to build reliable and stress free routes.

We also launched the TomTom Map Styler, a new tool that allows developers to customize every element of Map, giving them full control over the look and feel of their Map. This concludes my part of the presentation.

I'm now handing over to Taco.

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

In the third quarter of 2019, we reported group revenue of €164 million, which is 7% lower compared with last year. Main reason for the lower group revenue is anticipated drop in consumer.

Location Technology business, which represents roughly 60% of our group revenue increased 4% year-on-year to €97 million. Let me go through the details one by one.

Automotive revenue was down by 7% to €55 million in the quarter. The decrease is primarily due to accounting, with a larger proportion of our operational revenue in the quarter, having to be deferred versus the same quarter last year.

There was a €20 million year-on-year extra build up in the net movement of deferred and unbilled revenue, which led to a 23% increase year-on-year of automotive operational revenue. The increase in operational revenue reflects higher volumes in connection with contracts, which started at the end of last year.

We expect Automotive, reported revenue to grow just south of 10% for the full year and operational revenue to grow with around 20%. Enterprise revenue was up 21% to €41 million in the quarter, mainly due to the further integration of our partnership with Microsoft.

For the full year we expect Enterprise revenue to grow with around 25%. Consumer revenue was down by 18% to €68 million in the quarter, reflecting a decrease in both consumer products, as well as automotive hardware revenue.

For the year as a whole, we expect the decline to be more than 10%. Gross margin was strong at 78% during the quarter increasing by 7 percentage points year-on-year.

The year-on-year improvement is mainly the result of a change in estimates of certain provisions, mainly related to the GPS week number rollover issue and a larger share of software versus hardware in our revenue mix. Then OpEx, total operating expenses in the quarter was €185 million, an increase of €69 million compared with the same quarter last year.

Mainly due to the change in the estimated remaining useful life of our map database which increased our amortization expense. Additionally, R&D expenses increased due to lower capitalization of tools and content, as well as higher personnel costs to support our growing Location Technology business.

EBITDA decreased by 64% in the quarter to €60 million and EBITDA margin of 10%. As explained during the 2019 outlook presented in February, we shifted CapEx to OpEx, cash spending due to the maturity of our map products therefore CapEx declined by seven-folds in comparison with Q3, 2018 from €28 million in 2018 to €4 million in 2019.

Free cash flow was an inflow of €23 million, mainly due to higher automotive operational revenue. In the quarter, we increased our cash position with €21 million.

We now have €393 million of cash and no debts. We expect our full year cash position to be well above €400 million.

Our deferred revenue position is now €348 million compared with €281 million at the end of 2018. The increase is driven by automotive, offset by releases of deferred revenue in consumer.

Let's now go to the next slide on the Automotive operational numbers. 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 23% year-on-year to €88 million due to the higher than expected volumes associated with contracts which started at the end of last year.

For the full year we expect operational revenue to increase by around 20%. And now let's go to next Slide, on the guidance.

For 2019, we are updating our revenue guidance to around €700 million for the Group and to around €425 million for Location technologies. As reported revenue reduction relates primarily to IFRS 15 revenue recognition accounting and not of today's operational cash flows, our FCF guidance of around 9% of group revenue remains unchanged.

The adjusted earnings per share is now expected to be around €0.20 partly due to higher gross margin. During our Capital Markets Day on the 24th of September, we gave a medium term outlook for Location Technology and introduced Automotive backlog as a new KPI with the aim of giving better visibility on our future automotive revenue.

We expect the Location Technology business to grow as revenue to around €500 million by 2021 which represents a CAGR of around 10% for the period between 2018 and 2021. Our Automotive backlog is currently around €1.6 billion, which represents the sum of the total expected IFRS revenue from all existing awarded Automotive deals.

We will give an update during our full-year result on the KPI. From then on we will update the market on an annual basis during our full year results.

To conclude, I would like to comment on the free cash flow as a percentage of revenue in the next slide. As previously explained, the year starts with an expected cash outflow, while cash inflows materializes in the second half of the year due to a higher volume of customer payments, this being the usual seasonality in our cash flow.

For the full year, we reiterated our guidance to generate free cash flow of around 9% of revenue with our mid-term aim to deliver double-digit number. Operator, we would now like to start with Q&A session.

Taco, I think I've got one for you regarding the Automotive business in particular, the distinction between the reported and operational revenue. As you've highlighted, the net increase in deferred and unbilled was up quite a bit in the quarter, bigger than the changes that we've seen in previous quarters.

I'm just wondering, is this sort of element of the business, these changes in deferred and unbilled, is that becoming more or less challenging for you guys to forecast as you've got - , sort of a broader customer base, and these products are ramping into the market. Is that sort of materializing as you had expected, or is it becoming more challenging to forecast.

I think we in the market are, we're still trying to get used to have to forecast that. So if there are any rules of thumbs, or trends that you're starting to see, it would be helpful to better understand.

Thank you.

Yes, on the one hand, we will see a lot more contracts that form our IFRS 15 accounting and that will create a bit of more stability. On the other hand, if you're further down the line with the contract, only - a small change in the expected value of the contract can lead to quite a bit of changes in, what you could have reported and what should have been on the balance sheet.

And so, if a contract just started and you're in the first month, and we get by our account management in that - the expected value of the contract goes up with - or down with 5%. It will not have material impact, but there is a certain point in the lifetime of the contracts that a small change will have bigger effects.

We saw that last year in Q2, 2018. We've seen a lot of small ones in Q3, 2019.

I won't say that we will get better in predicting them and, but we can't prevent them from happening.

So the move in the third quarter is primarily related to what you just described, sort of these small changes, but towards the end of the current contract and therefore an outsized move in terms of, the value that you are having to recognize. It's not related to say, sort of, I think the operational side of things you're talking about the, some of the newer contracts coming on …

The biggest fluctuations you can expect to have in the midst or just over half of the lifetime of the contract. At the end of the contract, the total value of the contract will not materially change.

So that's not likely to happen, but it's more let’s say, if you are kind of high, halfway points, then you will see, yes, bigger swings.

Also, going back to Automotive and the Operational trends. What are you seeing underlying given that's - quite some, obviously some talks, that there are pressure on the automotive sector, probably take ratios still going up.

How do you see that's for your clients volumes and the take ratio, how did we develop over the quarter.

Well, I think longer term, so you see two movements, typically it has a bit of anti cyclicalism in the revenue numbers. We have seen, one effect is that the volumes of car shipments have been slightly reduced by carmakers and you can read the newspapers why that is but often those events also come with higher trim levels.

So if carmakers are struggling to get rid of their stock, they tend to increase the value with higher trim levels and navigation is an obvious one. So we see, when the market is weak you see lower car shipments, but generally speaking, slightly higher attachment rates.

And those are the effects I think that you - where that we have seen happening in Q3, this year.

And then maybe the outlook for the full year. So you increased the EPS guidance a bit for the full year, but if I'm looking to adjusted EPS that you made in the third quarter that's a very big chunk.

And to square that for the full year guidance I probably have to say that the increase in deferred revenue that you saw in enterprise needs to reverse in the fourth quarter, but maybe just - maybe to explain a bit like all the moving parts what are you seeing on the OpEx side €185 million that you reported in third quarter, is that going to be - similar in the fourth quarter, and in deferred revenue all the different parts of Automotive Enterprise and consumer, what are you seeing there for the fourth quarter, if you can help me to square to get to that €0.20 number.

Yes, let me take that, if I may. So the top line, Q4 will be the smallest quarter of the year, that is - that we will see sequential drop in consumer enterprise is expected to be relatively flat.

Automotive sequentially will go up, but the group revenue as total will be lower than what we've seen in Q3. Then gross margin - it will remain high but as we saw the one-off in Q3, we’ll probably not beat the Q3 gross margin number, but it will be in the high 70s.

For OpEx, OpEx is expected to increase from Q3 to Q4 and that is mainly driven by our R&D spend and that is a factor often - buildup of our workforce in that area and as also a reflection of an ongoing reduction in capitalization. So we'll see more cost taking directly.

Then on deferred, our deferred and unbilled revenue position, you're right that we probably, you'll see a release in Enterprise in the fourth quarter. So the total number, the net total number for the full year in Enterprise is expected to be just south of 20.

So anywhere between 15 million and 20 million release, consumer a release of 25 as well and automotive we now think that can increase with more than 120. So the Group addition to deferred and unbilled movement is roughly 80.

On the adjusted earnings per share we - if you all add that together, we expect our adjusted earnings and also our adjusted earnings per share to be negative in the fourth quarter. And that will leads to an adjusted earnings per share for the full year of around €0.20.

Yes good morning, afternoon sorry. First a small question on the automotive hardware, which showed a bit of a drop in this quarter.

What we should be reading into that, is that primarily the carving out which is coming at the end of his life or did something else happened there, that will be my first question. The second question will be on the deferred revenues.

So there is a quite a big change in the deferred revenues that you forecast for full year and 2019 with the net number of 80 million for full year versus 60 million that you basically reported in the second quarter. So if I - basically what changed in - is it this quarter or compared to the Capital Markets Day a few weeks ago, that this delta is there.

Can you maybe walk us through kind of what all the moving parts are in these discussions or in these discussions as you basically have with your accountant on this particular number. And also what is your current thinking about the deferred revenues in 2020.

And then I have a few follow-up questions, but let's start with these two?

Yes the first question is quite simple, that's indeed related to and legacy product that - we mainly have with Renault and - yes that is end of life so that - we continue to ship that but with smaller volumes. The deferred revenue this can have two factors.

Roughly one is, that there is a change in the contract terms and that leads to a different treatment of the deferred revenue, what you can report and what you can - you should defer. So there were some of these contracts that we have extended or updated or renew to contract.

And then some of these changes can lead to more deferrals. So to give you an example, if you have a short-term contract and you renew that to a long-term contract that, means that the accumulated invoiced revenue is certainly much larger than what's allowed - then the maximum, that you can report on because you're earlier in the contracts than before.

So those are technicalities and the other one is that you. We - on a quarterly basis at least sometimes on a monthly basis we assess the total value of each and every contract.

And due to more insight, that's not coming from our accountant, but more from our account management. So our account parts to the OEM site et cetera, the total contract value changes that can lead to more deferrals today.

So that isn't related to operational performance in this quarter or maybe next quarter, but it's more the outlook that they have given for the year 2020 or 2021, if the term of the contract incorporates that. So on the IFRS 15, you need to do a quarterly reassessment of each and every contract that you have.

And is also, which is linked to the question that Andrew was asking, if you're in the halfway point of your contract, then small changes - in the total value can lead to big swings in what you need to certainly release or an extra defer. We saw that last year in our Q2 2018 numbers as well, when we released a lot of the previously deferred revenue and we announced or - the other way around.

And just for my understanding or reconfirming my current beliefs, is it fair to say that you're operational revenue, so your reported revenues plus deferred, or the net movement in deferred. That that number is pretty close to the number that you are invoicing to your clients, as a consequence also reasonably close to kind of the cash flow profile of the contract?

Yes, that's correct. So if you add the reported revenue, you do plus the net number that is deferred or unbilled, then it gets very close to the invoice.

You need to - the only mismatch then is timing on payment terms and payment terms can be.

Okay but this is going to be 60 days whatever but?

Yes.

It's closer to operational performance. So in that sense is it - might not better to kind of incorporated also into your outlook because in essence.

Group reported revenues are a pretty meaningless number because A) your group revenues, I think there is not a lot of investors that really care about what consumer or how fast consumer is declining. And B) we only care about your operational performance and whatever IFRS 15 kind of changes in terms of your and that I mean what we today see is kind of, there is a shift - of 20 million to deferred revenues.

So in essence you have an underlying upgrade of your revenue outlook for full year while it now reads like a downgrade if I read the press release. And that's kind of not fair to yourselves, because in essence, there is an underlying upgrade if you add the 20 million back in the outlook.

So wouldn't it be kind of a good idea to yes start your press release with the operational revenues in automotive, because that's by far the most important number in your press release.

So, yes it is now point two of our press release. So it was almost on the top of our press release.

So automotive operational revenue was the second point on press release but…

Correct, but - the first point is a pretty meaningless number.

Yes.

I mean that's more what I'm trying to refer to. But that's like what's well - something may be for offline, let's go to a few more follow-up questions that I have.

First is on the current discussions that you have with OEMs. As I understand it's a - we currently mainly discussing contract extensions at this point in time.

And the discussions that you have are about how to get fresh maps into the dashboard. So can you give us a bit more flavor of what the current thinking is within the OEMs and how that the concept of fresh maps is basically being embedded in your commercial discussions, let's put it that way?

Yes then, so the discussions, negotiations of our contracts are three-fold, so it's contract extensions of course, which is kind of normal there is quite a few discussions of our new contracts as well. And then there are discussions around contracts for HD Maps taking place, and they are also entering in a more serious phase there.

So we're busy with all the work and it’s going in line with expectations. I don't expect any surprises there.

So we feel good about the discussions that are currently taking place. What we have not yet selling is the real online version of our maps.

I think that's a little bit further out. So you - the quotations, we're doing now and the contracts we are negotiating now are really for embedded software for ADAS and for HD Maps and online, real online maps, that's something for 2020.

And if I read into that, is that also potentially going to give a boost to kind of your order backlog or is that too early to tell?

Yes that's a bit early to say to tell. We - as usual we go with new - with an update to the trading update in next year.

So it's a - we don't comment on that at this stage, but next year, you will get an overview, including new metrics that we've been talking about - during the Capital Markets Day.

Very good, and then during the Capital Markets Day, you also highlighted, let's say, the new product developments that you guys are doing in UX. How you showcased, a couple of example how you incorporate ADAS features into kind of the user experience and how that can potentially differentiate the user experience of an in-dash products versus the product that we currently have on our smartphones.

How are automotive responding to that new products and is it fair to say that they are more open today about having these discussions with you versus let's say a year ago. And when can we kind of see the inflection point where this product is basically ready to be sold?

Yes, you can see a clear nice engagement on the automotive industry I think the, especially the car designers, don't like the way the proliferation of controls and buttons and warning signals various place of the dashboard is getting messy, is getting difficult to integrate. So the message we're presenting there, resonate in terms of this is what future systems will look like uncluttered, easier to read, more consistent - and then in a more modern way.

Add to that, lane level navigation, so current products are based on point to point navigation of node to node navigation, but we close of introducing lanes as well. We derive those lanes for our HD Map making efforts and with our camera in a car, you can exactly see in which lane the card then is and that makes guidance a whole lot clearer - it's a really step up from where we are today in clarity and yes and easy to read.

So there is a lot of interest in that, and we have confirmation from the car industry that this is technology there and the user interface design that they are looking for an aspiring to.

And then why would you say that these products are for the first time feasible in your revenues, is that a 2020/2021 discussion?

No, no that’s not a 2020 thing. No, unfortunately things don't go that quickly in the car industry.

No it will take longer, but we will be able to demonstrate a full suite of applications in early 2020 during CES that will probably be behind doors, but they will have a more integrated view of what we think the future of the corporate will look like.

Very good.

And then - we move away also from the PowerPoint stage and be able to show some moving and working applications in that domain.

Helpful thank you. And then on Trillian obviously, we saw that that the vehicle and the technology during the Capital Markets Day.

I think it's fair to say that having a - fully autonomous vehicle in-house functioning well which is being developed in-house from the ground up is. I think an achievement, not a lot of companies have made.

So what can you tell us about your first, yes interactions or first data points that you got from the Trillian. So how many kilometers is this vehicle driving, what are your future plans, are you going to deploy more of these cars in the future to come and will you also be able to drive them outside of Germany in the future?

Yes. So it's important to stress that we are not building our own self driving technology for the - with a view to commercialize.

That's not the aim, the aim is, here to test HD Maps, ADAS features, user interface concepts, to be able to share those insights and test with our key customers for demonstration purposes and brainstorm purposes and joint development purposes and also for our own developers, of course, to see how the products we are developing are behaving in a real-world environment and that is critically important because otherwise you're dependent on hearsay and information you get from suppliers in Tier 1s, which is not the best way of exclusively improving and hardening your technology. The other thing that we learn of course by developing and driving Trillian is what sensors are doing, so we get a first hand view on accuracy problems with sensors, how sensors are developing and how we can use those sensors also to create data to find Map problems and eventually build self-healing maps that we've been talking about.

So it's really, you need to see it in the R&D contracts and also much in - you know in the, how well is the self-drive technology itself performing that's important, it's important as well that we understand how that works, and how - we very happy that we've gone this far, we have now a license for Germany and we are applying for licenses in other countries. So we can take the car also to the head offices of our key accounts and use them for demonstration and for research.

Very good. Maybe a last question from my end.

What can you tell us about the HD Map tracking product that is live now, is it still going according to plan and what will be the next HD mapping product or application that will go live at a client.

Yes, so the - tracking products are behaving well and also in the field and it results in real life fuel savings. And that's a key metric for truck builders, it's the total cost of ownership for a truck operator that is the most important driver, so that works, and we see also interest from other truck makers to apply to same thinking and same technology, so that's encouraging.

And then we also one - two Map news for HD Maps one from a Japanese manufacturer and another one from a North American manufacturer and that will go live probably in 2020, 2021 and we are fully delivering those products and testing them and hardening them. So we are ready for commercial applications around it - around that timeframe.

So, end of 2020?

Yes, I don't - it will be low volume, but nevertheless, very important test cases for real life commercial applications.

And will that also include the Roadagrams and the AutoStream functionality or is it more still…

Yes, one case it will evolve AutoStream the Roadagram functionality is to follow after that. And to be clear, the Roadagram functionality is the ability to derive Map data from the inbuilt sensors in the vehicle and use them for mapmaking and Map checking.

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