SNS Securities: “TomTom Has Turned the Corner in Terms of Growth“



Martijn den Drijver
Martijn den Drijver
Last week GPS Business News interviewed with Martijn den Drijver, Head of Equity Research at SNS Securities. Martijn den Drijver has been following the TomTom stock for several years and published several reports about the companyand he gave us his thoughts about the financial results of the Dutch company.

GPS Business News: Following the financial results of TomTom last week, you published a report about the company and upgraded your recommendation, what is your take on these financial earnings and what are your expectations?
Martijn den Drijver: I think that TomTom has turned the corner in terms of growth but that the most interesting period is still ahead. Telematics for SMEs as a market is still at the beginning of the life cycle whereas the connected car, ADAS and semi-autonomous driving will allow TomTom to gain market share from Nokia in Automotive because of its investments in an automated data gathering, compilation and distribution allowing for near real-time maps. PND and Sports watches merely generate the cash that is required to build strong positions in these long term growth markets.

GPS BN: For several years TomTom's revenue has declined, mostly due to the sales drop of PNDs, now it seems the PND market is somewhat stabilizing in Europe and becoming unsignificant in the US, at the same time TomTom's sport watches are now making significant revenue, is that the new driver of TomTom growth?
MdD: The Sports segment is interesting as the category is still very young with plenty of growth ahead while TomTom benefits from its manufacturing connections and solid brand. However, having said that, competition is fierce, meaning margin erosion is lurking, especially as the fight for distribution and consumer attention will have to be won from giants like Samsung, Apple and Garmin.

GPS BN: The Automotive business is growing, but yet did not reached profitability in 2014. When shall we expect that and when the numerous new auto contracts announced by TomTom (Volkswagen, Daimler, PSA) will transform into revenue?
MdD: TomTom will already benefit from these new contracts in FY15 but IFRS, the accounting standards, require TomTom to defer material portions of the revenue to future periods because the products sold include life time updates (maps) or are provided for free for the life time of the car (Traffic). TomTom will be receiving the cash but the deferral component, just as Renault's Carminat and Fiats Blue & Me systems are phased out, mean Automotive growth will be subdued. Based on contract signed today, we assume that TT can generate an EBIT profit in FY16 although it is modest. Further improvements will follow thereafter as volumes and revenue increase and costs increases are modest.

GPS BN: As TomTom is increasingly selling real-time traffic data licenses, there is a part of this revenue that is deferred to future years (due to IFRS rule), how big is that? What does it mean for the company?
MdD: The deferral component in Consumer (as it also applies to PNDs) is roughly 20-25% while it can be much higher in certain Traffic deals (60-65%). It means that accounting revenues reflect the fact that TT must still perform a service when it is no longer paid for that particular service, which explains why revenue according to the auditors must be deferred. But the company does get the cash in. This explains why we focus on cash flow generation and not on accounting earnings.

GPS BN: What is your forecast in terms of revenue and profitablity for TomTom in the next two-three years?
MdD: In our forecast we expect a revenue of 1,078 million in fiscal year 2018 with an EBIT margin of 11.3 percent (against 2.2% in 2014) and earnings per share of €0.57.

Continued...

Monday, February 23rd 2015


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