Morningstar | TomTom Better-than-Expected 2Q Results; Maintaining EUR 9.20 FVE; Shares Remain Undervalued. See Updated Analyst Note from 17 Jul 2018
TomTom reported strong second-quarter results as the firm beat our internal expectations and consensus on the top and bottom line. Automotive and telematics remained impressive but were offset by another disappointing performance in enterprise, plus the continuing secular decline in PNDs. TomTom management increased its revenue, gross margin, operating margin, and non-GAAP EPS guidance as it expects the better-than-expected second-quarter numbers to be followed by continuing growth in automotive and telematics for the rest of 2018. We only slightly adjusted our projections and are maintaining our EUR 9.20 per share fair value estimate on TomTom. While the stock traded up nearly 8% today, last month's news surrounding Apple's maps app strategy has kept the price to fair value estimate of TomTom around 0.85, which puts the stock in 4-star territory. Given the potential upside of 17% based on our fair value estimate, we continue to view this high-uncertainty no-moat name as an attractive investment.Total second-quarter revenue dipped 9% over the prior year to EUR 231 million. While we saw continuing strength in the higher-margin automotive and telematics as they grew nearly 7% and 28%, respectively, such growth was negated by a 22% decline in enterprise and continuing decline in the consumer segment. According to management, the impressive growth in automotive revenue was driven mainly by an upward contract adjustment for one of its clients. We expect revenue generated in this segment to stabilize a bit as the firm continues to sign agreements directly with car OEMs for its navigation app. TomTom is also making progress in monetizing its mapping data with agreements with companies such as Alteryx, an analytics firm, and trivago, an online hotel search service provider. With better-than-expected results in the automotive segment, the firm increased its full-year total revenue guidance by EUR 25 million, or 3%, to EUR 825 million.
Telematics revenue grew 7% year over year, driven by increase in revenue generated from subscribers, and hardware and other services. While TomTom's subscriber count was up 11% from last year, revenue per subscriber declined 6%. As the firm remains focused on bringing larger fleets onboard, we think it is offering more volume discount pricing, driving down the revenue per subscriber. Plus, usage in more aftermarket connected cars is also contributing to the decline.
We were disappointed to see Enterprise revenue decline for the fourth straight quarter as the firm continued to have tougher year-over-year comps. We expect Enterprise revenue growth to return in 2019, although at only low single digit rates.
Gross margin expanded 802 and 200 basis points sequentially and year-over-year, respectively, as non-hardware share of revenue continued to increase, led mainly by the Automotive and Telematics segments. With sales and marketing cost control going forward, partially offset by higher R&D, TomTom is likely to maintain around EUR 141 quarterly operating expenses for the second half of this year. We continue to expect a profitable 2018 for TomTom with operating margin of around 2.4%.
Looking ahead, TomTom’s top line faces the risk of completely losing the Apple account as Apple plans to release a new version of Apple Maps using in-house data only, possibly eliminating third party sources such as TomTom. The new version of Apple Maps is set to launch this fall and if Apple and TomTom’s current contract is close to its former in length, the contract would be nearing expiration from its 2015 renewal. While TomTom does not disclose revenue from Apple, we are bracing ourselves for further dip in revenue. However, management’s latest revenue guidance does indicate that the contract is not likely to expire in 2018. Plus, we believe there is also the possibility that Apple will renew the contract with TomTom, although it likely will be a smaller one.
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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