Morningstar | TomTom Beats First-Quarter Expectations and Completes the Sale of Telematics; Maintaining EUR 8 FVE
TomTom started 2019 with better-than-expected first quarter top and bottom lines. Strength in automotive and enterprise revenue was encouraging, while surprisingly, the consumer business revenue decline was less than what we had modeled. TomTom also announced that it completed the EUR 910 million sale of its Telematics business to Bridgestone in early second quarter. While we consider TomTom’s first-quarter results impressive, in our view, this no-moat name likely will face significant competition from other firms such as Google, HERE, and newcomers including Lyft, which may place slight pressure on the firm’s top-line growth. Management maintained its full-year 2019 guidance. We continue to expect growth in automotive and enterprise to partially offset decline in consumer in 2019 and have modeled for TomTom to return to top-line growth and operating income in 2021. We are maintaining our EUR 8 fair value estimate on TomTom and continue to view the shares of this high-uncertainty name as fairly valued.First-quarter revenue (excluding Telematics) came in at EUR 170 million, up 14% year over year as growth in automotive and enterprise segments outpaced decline in consumer. The consumer segment, which includes revenue from the secular declining PNDs, was down only 4% as PND revenue or automotive hardware increased 12%. However, the firm does not expect this to continue as it guided for a full-year 20% decline in total consumer revenue. The automotive and enterprise segment revenue, or what the firm now refers to as Location Technology, increased 29% from last year. Various contract wins in late 2018 from which TomTom began recognizing revenue in first quarter drove the 31% growth in automotive. Enterprise sales increased 26% and were helped by TomTom’s partnership with Microsoft (announced in February), which allows integrates TomTom’s mapping technology in more Microsoft products, including Bing and Microsoft’s virtual assistant, Cortana.
Total gross margin for the quarter was 72%, up around 400 basis points year over year due to an increase in the higher-margin Location Technology revenue. The firm’s operating loss nearly tripled that of last year due mainly to a 58% increase in R&D as the firm continues to increase investments in automotive to play a meaningful role in the advanced driver assistance market and create opportunities to monetize its HD mapping offerings.
TomTom appears to be attracting OEMs to its HD mapping as according to the firm it has signed contracts with two of the top 10 or “very large car manufacturers.†While TomTom likely will not generate revenue from those contracts until 2021, it appears that it has its foot in the door, which may help it compete a bit more effectively against Google, HERE, or some of the newer players such as Lyft. We note that until then, the firm’s latest traffic agreements with Nissan and Volkswagen will help the automotive segment maintain revenue growth in the teens.
TomTom develops and sells of navigation and location-based solutions, which include among others, Portable Navigation Devices, sport watches, maps, traffic, navigation software and fleet management services. As of Dec 31 2014, Co. had four segments: Consumer business, which is focused on creating location-based products; Automotive business, which provides modular components, being maps, traffic and navigation software, to car manufacturers and head unit vendors; Licensing business, which sells TomTom map, traffic and navigation software as well as cloud-based products and platforms; and Telematics business, which provides fleet management solutions for commercial fleets of any size.
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