EUR 850.00 For Business Accounts Only

Morningstar | TomTom Reported Strong 4Q 2018 Results; Sale of Telematics Will Close in 2Q; Maintaining EUR 8 FVE

TomTom reported a strong fourth quarter, beating our internal expectations on the top and bottom lines. Continuing decline in the firm’s consumer business was more than offset by strong growth in automotive and enterprise, along with the soon to be sold telematics business. Management provided strong revenue growth guidance, excluding telematics. However, the firm also plans to increase investments in its automotive business which would pressure operating margin in 2019. We do not expect to make material changes to our non-telematics TomTom projections going forward, and for now are maintaining our EUR 8 fair value estimate. While TomTom shares declined more than 5% in reaction to the fourth quarter numbers, we continue to recommend a wider margin of safety before investing in this no-moat, high uncertainty, and 3-star-rated name.

Total fourth-quarter revenue (including telematics) remained nearly flat year over year at EUR 218 million as the combined 27% growth in automotive and enterprise, and telematics, was offset by a 25% decline in the consumer segment. As the firm announced on Jan. 22, the telematics business, which grew only 4% in the quarter and 6% in 2018, will be sold to Bridgestone for EUR 910 million in cash of which EUR 750 million will be distributed as a special dividend to shareholders in the third quarter. The deal is likely to close in the second quarter. We were impressed with the 35% growth in the automotive segment as demand for in-car navigation and specific location-based applications appears to be increasing. According to management, the higher demand is not only due to new account wins but also because of some success of more upselling to its current clients. However, it is also having some difficulty retaining clients such Volvo. Plus, the firm does not expect to generate more revenue from Daimler and Audi as they will be using HERE Technologies, in which both automakers own a stake.

While we are pleased with such impressive growth in the automotive segment, we continue to have doubts as to whether such growth can continue over the next 12-36 months. As we mentioned on Jan. 22, we believe that the Renault-Nissan-Mitsubishi Alliance and Google deal is likely to result in TomTom’s automotive business losing connected navigation system market share to Google in the future, as Google Maps are included in that deal.

We think Google’s deal could also impact TomTom’s chances of playing a meaningful role within the advanced driver assistance, or ADAS, market as a part of autonomous vehicles. Firms such as Alphabet (parent company of Google) with its Waymo self-driving operating systems are more likely to work closely with a variety of OEMs and possibly prevent TomTom’s ADAS offerings from gaining traction in that market. According to some reports, this may already be happening as Waymo may be working with Renault-Nissan-Mitsubishi to create autonomous taxis.

We note that for the time being TomTom continues to sign new deals, including ADAS ones, from which it may benefit the next few years. For example, the firm will be integrating its HD Map to work with DENSO’s sensors in autonomous vehicles. The firm also continues to service OEMs including Hyundai, Mazda, and Toyota. And on the enterprise front, TomTom signed a deal with Microsoft where TomTom’s mapping technology will be used in more Microsoft products, including the Bing search engine and Microsoft’s virtual assistant, Cortana. This deal will drive growth in the firm’s enterprise revenue in 2019.

On the margin front, again, including the telematics business, gross margin of 70% during the quarter was an impressive 1,100 basis point improvement from last year given the firm’ larger percentage of revenue coming in from data and software. The firm had a breakeven quarter, which was significantly better than last year’s operating loss of nearly EUR 30 million.

In terms of guidance, excluding telematics, TomTom is expecting around EUR 675 million in total revenue (which will consist only of automotive and enterprise, along with the consumer segment). This includes 16% year over year growth in automotive and enterprise revenue, which TomTom now refers to as the location technology segment. With the firm increasing its investments to compete more effectively with companies such as Google and HERE, management expects lower operating margin in 2019.