TomTom N.V.

Thank you, operator. Good afternoon and welcome to our conference call during which we will discuss our operational highlights and financial results for the fourth quarter and full year 2018.

With me today are Harold Goddijn, our CEO, and Taco Titulaer, TomTom's 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 that Safe Harbor applies.

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

Thank you, Bruno. Thank you and welcome ladies and gentlemen.

2018 was the important year for TomTom as decided to divest Telematics to become a more focused location technology company with clearer priorities and simplified operating module. This resulted in a sale of Telematics to Bridgestone for a purchase price of €910 million.

We’re delighted to find in a Bridgestone a buyer that recognizes and respects the talent and skills in the team and intends to foster and grow the Telematics business further. At the same time we can focus on the remaining business and develop our location technology business to its potential.

The transaction with Bridgestone is subject to customary closing conditions including the relevant regulatory approvals, consultation with employee representative bodies and the approval of TomTom’s shareholders. We expect to close the transaction in the second quarter of 2019.

The majority of the proceeds of €750 million in total will be distributed to shareholders by means of a capital repayment combined with the share consolidation. We expect the capital repayment to be executed in the third quarter of 2019.

We continue to strike important partnerships in collaborations with our technology leaders and the recent extension of the partnership with Microsoft is now a proved point of the competitiveness of our product portfolio. Our location technologies and map data were chosen to power all of Microsoft’s consumer facing services and this is an extension on the 2016 agreement that covered the partnership for developer facing products and services.

At CES we announced a new collaboration with DENSO. Our HD Map will work in combination with DENSO’s in-vehicle sensors such as cameras and radars to power the localization, perception and path planning functions for a complete autonomous driving system.

On adaptation we will have a system in place that allows us to start collecting cloud sourced camera data for map maintenance and map creation purposes. Automotive operational revenue continues to show a strong growth totaling €370 million in 2018, a year-on-year increase of 31%.

The increase is mainly due to new contracts that started during 2018 and higher volumes from existing contracts. We expect automotive revenue to continue to grow.

The order intake exceeded €250 million in 2018. It was a good year, we converted most of the opportunities that were available to us, but as previously indicated there were fewer RFQs in the market compared to 2017.

The level of booking across previous years is good indication that we’re on the right path. In the next slide I’ll give you a short update on our strategic priorities.

To keep the positive momentum we’ll accelerate our investments in strategic areas whilst generating cash. The investment areas are of further improvement in the efficiency and sophistication of our map-making system.

Class leading products and services for the automotive market and that includes maps for automated driving and finally maps APIs for developer products. Following the developments of 2018 in the automotive market, we’re in active discussions with carmakers to develop in-vehicle continuous leasable software that we think end users will prefer to use over mobile phone device systems.

We’re excited with the progress we’ve made and excited with the opportunities that are ahead of us. This concludes my part of the presentation and I’m now handing over to Taco.

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

As you’re [aware] of divesting Telematics we’ve provided full disclosure on continuing discontinued entire operations including the reconsolidation between continued and discontinued operations. The consolidated statements of income and balance sheet is provided for continuing operations only, the net assets and liabilities of Telematics are presented in a separate line named assets and liabilities held for sale.

In 2018 we reported revenue of €687 million, which is 7% lower compared with last year. The decline is due to our consumer business.

Location technology revenue increased 12% year-on-year to €372 million. Let me go through the business one by one.

Automotive revenue totaled €245 million, a 25% growth year-on-year mainly due to new contracts that started during 2018 and higher volumes from existing customers. As already explained by Harold, automotive operational revenue increased by 31% year-on-year to €370 million and is now our largest operational revenue stream.

Enterprise revenue was €127 million which is 7% lower compared to last year. The decline is mainly caused by a revenue recognition one-off in 2017.

Consumer revenue decreased by 23% year-on-year to €350 million. Gross margin in 2018 was strong at 69% increasing by 9 percentage points year-on-year.

Total OPEX for the year were €472 million of €45 million increase year-on-year, both the years were impacted by one-off items. In 2018, we reported a one-time gain of €22 million on litigation settlements, in 2017 operating expense included €41 million restructuring costs and asset disposals.

Excluding these one-off items the underlying operating expenses showed a modest year-on-year increase following a higher spend in our map activities. 2018 EBITDA increased by 63% year-on-year to €142 million with an EBITDA margin of 21%.

At the end of 2018 the group has no outstanding bank borrowings and reported the cash position of €252 million. Our deferred revenue position is now €281 million, automotive and consumer maintained their trends meaning with automotive up with €74 million to now €172 million and consumer down €25 million to now €91 million.

I’d now like to comment on the 2018 guidance in the next slide. We beat our guidance for 2018.

Revenue for total operations which includes Telematics totaled €861 million in 2018 more than 7% higher than the initial guidance of €800 million for the year. Both our automotive business as well as our consumer business outperformed our initial expectations.

As our operations improved, as our revenue derived data, software and services increased we’re also able to have a better gross margin for the total operations reaching 71% just above the 70% outlook initially forecasted. Adjusted net results for full year from total operation were a profit of €83 million which translates into adjusted earnings per share of €0.36.

This is a €0.11 above the initial outlook of around €0.25. Lets now onto our guidance for 2019 on the next slide.

In 2019 location technology revenue is expected to grow by around 15% year-on-year. The increase is explained by higher take rates and a ramp up of existing contracts in automotive business and recently announced extension of partnership with Microsoft which has posted the impacts for the enterprise business.

Consumer is expected to continue to decline with more than 20% year-on-year. We expect gross margin to be at least 70% in 2019.

In terms of OPEX and CAPEX, we’ve decided to accelerate spend by around 10% year-on-year to further improve the efficiency of our map making systems and advance our competitive position in a constantly changing market. Adjusted earnings per share will now also be adjusted for acquisition related amortization on a post-tax basis and we expect the adjusted earnings per share of around €0.15 in 2019.

And for comparison purposes the 2018 adjusted earnings per share from continuing operations in the new definitions totaled €0.32. Part of the year-on-year decline is explained by the continued decline of consumer business which has approximately €0.10 impact year-on-year.

We’re also introducing free cash flow as a percentage of revenue as a new KPI in our outlook this year. We expect to generate free cash flow before financing activities of around 10% of revenue.

Operator, we’d now like to start the Q&A session.

Thank you very much. My first question is on your automotive bookings and especially for 2019, could you give us some color on how do you think 2019 as a market overall, I'm not talking about time specifically.

But how is it trending versus 2018 and 2017 to get a sense of the dynamic that you see there?

Yes. We can see it's always difficult of course to make an exact prediction of the total value of RFQs that will come to the market, but we do believe that the total opportunities to which we can participate and pitch will be higher than in 2018.

And versus 2017, I mean which was a very good year, do you think it's going to be the same kind of magnitude or?

It's hard to say. So 2017 was extraordinary good year of course, with an order intake of €400 million.

So a good conversion rate, good success rate. It's hard to say, I think the total opportunities will increase compared to 2018 and there's potential for higher order intake than in 2018.

And if we look back a bit in 2018, I guess one of the big highlight is the Google Android Autos coming and getting some deals. Do you expect them to get further deal in 2019 or they are still relatively quiet or I mean you don't see that as pushing hard in 2019?

It was difficult to make general comments on that. What we do see is that carmakers are actively engaging with us to see what the future of in-car navigation infotainment should look like.

There is a willingness to explore new routes. There's a willingness to explore new business models and there's a willingness to explore new UX concepts that pay tribute to what's happening in vehicle.

And there is also a desire to stay control over the user interface. So we've noticed that that has led to a number of interactions with carmakers explorationary sessions to look at what's possible and I think we will come up with some interesting ideas in 2019.

But if you look at I guess, when you said in Q3 that it was a wake-up call for the industry. I mean, do you see as well a change of behavior since Google got some new contracts meaning that you feel your customers are also exploring more Android Auto than in the past because it's something that checks up in the industry?

Well, I think that what I said it's a wakeup call we see that translated now in interactions with the auto industry. And a question then is, what is the alternative, what can we do, what are the options.

Obviously, we can keep going in the way we are going, but are there other operating models for the auto industry together with the suppliers to come to a different way of delivering software into the dashboard. I think that's very exciting and I think that's happening because of what I described last year as a wakeup call.

Thank you and maybe one word on your HD map. How should we, I mean, how should we think about your contracts in HD maps?

Can you give us more clarity of should we expect big contracts in the auto bookings in HD map this year? What kind of business model and ISP should we look at for this HD map?

Yes, I think we will be very disappointing if we don't do deals in the HD map space this year. So we have a number of opportunities lined up.

I think it will happen this year for delivery towards the end of 2021, 2022 I think we will see TomTom HD map showing up in some systems for automated driving.

And do you think it's going to be meaningful contract sizes for your auto bookings like visible or it’s too early?

No that will be visible. That will be visible.

It will be relative to the traditional business. It will be a small number, but it's certainly meaningful and it's the beginning of a new line of products if you like.

And what we would like to see of course that that take-up will kind of develop along the lines what we've seen for traffic, where you have a relatively slow start with once you have, once it's accepted and it works then the adaptation rate will go up quickly and I think that will happen. I think we're in a good position to land some of those deals and to start translating our market, our product position also in a real market position.

And how should we think about the business model then? I mean if you get closer to signing some contracts.

Is it like subscription per kilometer per use? How should we think about that?

You should think about it as an annual fee for having access to that feet per vehicle.

Per vehicle and in terms of the ISP per car I mean, previously you said it was significantly higher. Can you give more color on that what does it mean, significantly higher?

Yes, I think it will be higher what you also will see is that initially it will end up in level 2 systems. And then depending on the technical advance more and more of that feet will be used and you get a higher level of fidelity in the map data and the reliability of the map data.

So I think it's difficult to say exactly where it will end, but I think it will be a significant feet per car per year that will grow quite quickly over the next years.

And do you see Google as well in this market with HD maps or not really?

Well, they seem to be taking a different route and that is more the Robo taxi approach, which is fundamentally different from what a car industry is trying to achieve. So in the Robo taxi context you're talking about reduced limited geographical area.

And also per car very high investment into a hardware technology and that's okay because as cars are getting used for a much higher intensity than a normal car. For the car industry you need to follow a different model because there's no way to charge to end-users for a little hardware.

So it needs to follow a different path. So I think for the immediate future I don't think, we don't see any signs that Google is entering that market space.

So I think we have a clear runway here for years to come. We know the only ones in HD map obviously is still a competitive market, but I think that we are designing our products along a different path than what you see in the Robo taxi sphere and those markers will stay separate for quite some time.

That's very clear. Thank you very much.

Yes good afternoon. It’s Peter Olofsen with Kepler Cheuvreux.

My first question is around the combined OPEX and CAPEX where we have seen the total investment trending up in recent years and based on your guidance there will be a further step up in 2019. Are you comfortable with the level foreseen for 2019 and will it stay at that level or may we see even a further increase beyond 2019?

And then, on enterprise where the extension of the Microsoft contract will drive further growth in 2019, how should we look at the revenue dynamics there? Will it gradually ramp during the year or will there be a meaningful impact in the first quarter?

I’d like to take those if it’s okay, Harold. Let's started with the latter enterprise that enterprise contracts are normally value based and then most of the time spreads out of the lifetime of the contract on a linear basis.

So to come back on that question you will see the benefits of the discussed tailwind already happening in Q1 in its full extent. And then it will find a new normal if you like.

On OPEX and CAPEX there are three things happening here. One is that it's our decision to invest more than we have done in the past in our map making capabilities, in our capacity to continuously release software, in our quality of our services like traffic and with signing of important automotive but also increasingly enterprise customers it is our role, and our job, and our willingness to spend more in these areas.

The second, the mix between OPEX and CAPEX is, it's a reaction of the fact that we have more and more platform approach where our content and our software is continuously releasable. So before you have a more staggered approach as we are working on new software release and as long as we are working on the software release it capitalizes them that will start to amortize this.

These rules will become one and that will mean that I expect that it already happened in 2018, but it will continue in 2019 and probably also in 2020 that mix between what is classified as OPEX and CAPEX will continue to change where more and more will be seen as OPEX. Then another element that we need to take more that also the IFRS 15 and IFRS 16 accounting led to reclassifying some of the work and the cost that are normally seen as CAPEX is now as contract assets.

These are released via the cost of sales line but there is a bit of a technical element in this. The second part of your question is, if we foresee this trend to continue.

As always, I would say well it's a bit earlier in the year to already start to talk about 2020. But on the other hand we hope that if we can continue to sign up more customers that we also have the room to continue to invest more in our platform.

But for a proper update I am afraid you have to wait 12 months.

Well that's all. Thank you.

Yes good afternoon, Wim Gille from ABN. I have got a couple of questions.

First, on the automotive business, in order to have a bit of a feeling on how to compare the €250 million order intake versus the €400 million that we reported in 2017, can you give us a big of a feeling with the level of RFQs was in 2018 versus 2017 i.e., you reported the decline of roughly a third in your own order intake. Is that in line with the decline that we have seen in the general market?

And can you give us a bit of a feeling on how you feel your market share has developed in 2018 with respect to the order intake compared to 2017? That will be my first question.

The second question is also on the orders in the automotive space. Here International already announced that they want two contracts traffic contracts for Daimler and Audi somewhere in January.

Both companies were previously traffic clients of TomTom, so can you give us a bit of a feeling what happens in these two specific cases? That is my second question and my third question will be on the OPEX versus CAPEX discussion.

If I look at your accounts for the fourth quarter I see only €9 million in CAPEX in the fourth quarter versus a previous run rate of high 20. So is it correct to assume that the fourth quarter results already fully reflect the shift from CAPEX to OPEX?

Can I start with the last question? So, Q4 yes and no.

So indeed that is a reflection of our continuous assessment on how to classify our spent and it is also driven by industry standards is also what we see what's happening with peers is that there is a trend if you move towards so for as a surface, as a surface business then at a certain moment then the mix between OPEX and CAPEX is changing and we think we are getting there. And in Q4 we have done a specific assessment that led to re-classification of some of the spent that affect especially Q4.

So I would not use the Q4 run rate as a run rate for full year because four times nine it doesn't bring you to 55 as we have guided for full year. But it is indeed a clear indication of the new trends.

Then on the -

Sorry, just to fully clarify this so I do understand this 55 divided by four is whatever 13 and a bit, but if I look at kind of how you kind of positioned it in your press release, you compared a 55 to a number of 77 but that's not entirely correct because if I want to compare apples with apples the 77 number in the old accounting or the old way of looking at your spent would not have been 77 but would be closer to 97 excluding Telematics i.e., if I look at kind of the underlying change in OPEX versus CAPEX. The shift is probably more that you are shifting somewhere between €40 million and €50 million from CAPEX to OPEX in the new guidance.

Is that a correct way of looking at it?

Yes, it's a correct way to see it.

Thank you.

On the order intake your question was about the opportunity that was there in the market in 2017, 2018. I think that the market opportunity was a lot bigger in 2017.

So we have comparable win rates both in 2017 and 2018. I want to point out that we have gained market share in enterprise.

I think that is the call out, but in automotive 2018 our market share stayed relatively flat.

Very good, and then, Daimler and Audi?

Yes, I think I have read the news as well. We are still supplying Daimler and Audi, but we are expecting indeed that in the future that the opportunity to sell the traffic products to those two customers will be limited.

I don't think they will go away completely. Our traffic product is better and has a different geographical coverage as there are certain countries where we offer traffic and there is no competing offer from here.

So I think we'll continue to supply those customers of that 100% anymore.

And as far reflected in your outlook?

Yes, it's reflected in our outlook.

Thank you.

Yes, good afternoon, Martijn den Drijver, NIBC. The first question is on automotive in the outlook.

I know it's a combination of automotive and enterprise, but assuming a significant growth for enterprise it seems like your outlook for growth in 2019 for automotive is subdued I would say let's say 10%, 12 %. Is that just due to lumpiness of contracts?

Is that due to a loss of contract and loss of share of wallet? It can't all be due to the accounting of such contracts.

So that would be my first question. The second question is about the map making progress process, you indicated you are going to invest in further efficiency; the current platform has reached maturity.

What exactly are you going to invest in and what's going to be effect in terms of the speed and freshness and when will it take effect and what will that do to OPEX? And a more difficult question related to that is, how do you think you stack up versus here at the moment and in relation to what you are going to do.

How do you stack up? Third question, has there been some sort of impairment in the fourth quarter because RDNA was high and I know it's usually very high in the fourth quarter.

But was it really high in this particular quarter so maybe you can give some guidance as what to expect for RDNA in 2019 just to get that clear. And my fourth question and final question is, there have been a few new entrances and that has been much talked about in books, I know not in the automotive although they’re making some noises about automotive but where do you see these competitors?

Do you see them as a real threat and what are you doing to deal with that? Can you comment on that?

Thank you.

Let me take the financial ones if I still remember them. The amortization in RDNA in 2018 was 141.

RDNA especially in Q4 was indeed bit higher than the run rate that we saw throughout the year. It was 41.

So but that's quite normal because in Q4 you do deep assessment of everything on your balance sheet and that's sometimes tends to lead to a bit more RDNA. But I don't think it is out of the order I mean at the end of Q2 we had 35 and now we have at the end of Q4, we have 41.

So it's not significant early difference, in 2019 we expect our RDNA to be lower trending with, but also decline in investments so that we expect that to be roughly 130. And in the RDNA in 2017 was 160, so we had 160 in 2017, 141 and 2018 and then 130 in 2019.

Going back on your question on the different between IFRS revenue automotive and operational revenue. Yes, what you need to bear in mind is indeed what’s happening on the balance sheet.

So deferred revenue was at the end of 2017, €50 million for automotive that grew to €72 million. So that’s an increase of €22 million.

We expect that the increase will be bigger in absolute in 2019. So that will be at least €30 million.

So that also has an effect.

But there's no contract loss already taken into account in the guidance for 2019?

No.

The other question was with regard to the map making process?

Yes. So what you see in the map making process is that, so map making used to be very labor intense activity where you had to go out and collect data, process the data.

The nature of map making is changing fundamentally. More and more data is available in open source format and it is our ability to assess and harmonize that data quickly and cost-effectively that is driving the efficiency of that map making process.

There are new technologies becoming available, image recognition, artificial intelligence. They're used both for traditional map making but also for high-definition map making where you can achieve fantastic improvements in efficiency.

But of course, you need to invest in engineering and in software capability. So the trend you see in map making is that more and more is automated and we are reducing manual labor.

We are shifting to software engineering to automate more tasks of map making. Now what you see as a net result is that our maps are getting richer, cover more geographical area, productivity is going up significantly.

But at the same time the demand for accuracy and attributes in maps is also going up. So it's a bit of a need to achieve those higher levels of automation and efficiency in order to keep up with customer expectations as well.

But is this a one-year program? Is this a three year program?

This will never stop. There will always be ways to improve to go faster, to be more efficient.

I think we have a big chunk of work behind of us in laying a foundation of a transactional map making system which is very unique in the industry. That's there but the real efficiency gains can still be achieved by further automation of the process of map making itself.

And the last question on this subject, how do you think you stack up versus here, are you trailing, are you in front in this particular task?

No, I think in terms of efficiency and speed I think we are leading. We see that also in the recent contract bin of the Bing Maps.

We see that with other deals as well. The speed of which we can do things and the transactional nature of a map making platform and the quality of the data are all in - we are in a very good shape and we don't lose anything because of map quality is to contrary when we win it's often because the way how we deliver maps.

How fast we can react, flexibility of introducing new sources that customers often care about. So it's a very flexible cost-effective and fast system and I think that's what our customers like.

And the last question on competitive pressure or what you see with map books, deep map and other new entrance?

Yes. You see those happening.

You see the open source activities as well and of course we follow that closely. We see if there are lessons to be learned and how we need to react and move.

So we definitely keep an eye on it. We know always competing and we’re also collaborating.

I think in terms of the core at the map and HD map, we are very good shape and we don't need to be worried about anybody. But we also can't sit still and pretend that the world is not happening.

So it is a dynamic place. Its competitive world, but I think our team and our policy and our technologies are all in good health and very competitive.

Thank you, that's it for me.

Yes, thank you. My first question is on automotive.

I think in the last couple of years, throughout the years the result of automotive has been much stronger than we thought at the beginning of the year. Can you explain what has been driving that?

Have take rates been increasing faster as the volumes been higher and also taking that into account for the guidance that you gave on automotive for full year 2019. What kind of assumptions do you imply there especially now with obviously a bit of a slowdown in automotive sales numbers?

The second question is again coming back on extra investments just understand it correctly, the opportunities that you see why you do that extra investment is that something that you need to do for first year competition or is it something that opens up new possibilities to generate extra revenue? Or is it will be a driver of extra growth going forward or is it something you simply have to do to keep up your products?

The third question is on to square the free cash flow guidance that you're giving with the profitability especially now that you say that the DNA will be lower in 2019. My coverage is that implies that you, again it's a very large number of deferred revenues to make up for the difference, is that correct or the income from the deferred revenues be higher than it was in 2018?

Thank you.

First, automotive. Automotive obviously indeed you're right.

So when we started 2018 we had a more modest outlook for automotive than the 25% which we delivered. I think the biggest driver for this acceleration concerned take rates, so not so much car volumes or market share gains of our customers, but especially the take rates tend to be higher.

We have used the data take rates also when we constructed the 2019 guidance. So we're not using the take rates that we initially thought realistic when we designed the order intake.

On the free cash flow it's indeed you're right so there's a mismatch between IFRS net result and what's happening in deferred and unbilled revenues. As already indicated is that there's a big increase in deferred revenue expected in automotive of 100 million plus if you like.

On the other hand consumer will see a decline of roughly €25 million. So the net result is that deferred revenue in 2019 is expected to grow with €75 million and that’s together with the difference between amortization and CAPEX creates the bridge to IFRS net result towards free cash flow.

On the opportunities that we see have there are both quality improvements and new opportunities. On the quality improvement level you could think of the fact that we are the dominant supplier of traffic throughout Europe.

That comes with high responsibilities on availability 24/7 and also on quality. And the two times nine, three times nine quality levels that you need to uphold.

That means that we need to make investments to create that. Other areas where we’re investing is to have continuously releasable software as a product for our automotive market available and that also requires new specific investments.

Thanks. Then I have one follow-up.

I think when I was at CES it was very much the story that all the level two functionality that was going very quickly now. But that level three was far more difficult also from a regulatory perspective and maybe being pushed out a bit.

What would that do for your business? Is the level two already enough for you to sell your HD maps or would it also mean that your opportunity is being pushed out?

No. I think the maps are used also at level two, level two and a-half everything that sits between two and three starts using a map so that opportunity is still there.

That's clear. Thanks.