TomTom N.V. (TOM2) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our conference call. On today's call, we will discuss the operational highlights and financial results for the third quarter of 2026 with Mike Schoofs and Taco Titulaer. Mike will begin with an update on our strategic and operational developments. Taco will then provide further insight into our financials and an updated outlook. After their prepared remarks, we will open the line for your questions. As always, please note that safe harbor applies. And with that, Mike, let me hand it over to you.

Thank you, Claudia. So good afternoon, everyone, and thank you for joining our call. So I'll begin, as Claudia said, with a strategic and operational update on progress during the quarter before I hand over to Taco. So today, we announced changes that sharpen our focus on the markets where we see the strongest opportunities for growth. So we see significant growth potential in 2 specific industries, which is automated driving and location intelligence. Now let me start with automated driving. So there, AI is helping us to innovate faster to support higher levels of vehicle automation by also creating -- having built that on a foundation, which is highly scalable. In location intelligence for enterprises, AI is making it easier for customers to access our location data and derive insights from it, that intelligence layer. So to capture these opportunities, we have reorganized TomTom around 3 divisions. So the first is automated driving. The second is location intelligence for enterprises. And the third is navigation. And with this structure, we want to bring a better and sharper focus on these areas and allowing the 3 divisions to build on our shared product foundation from maps location technology and AI capabilities. The third division, navigation remains the backbone of Tom Tom. It's where most of our revenue comes from. We have the strong backlog and where customers rely on us to deliver high-quality location technology every day. On the organizational design by reducing management layers and bringing decision-making closer to the execution and to the outcome, we will be able to respond faster to customer needs and accelerate innovation. And unfortunately, these changes also impact approximately 200 roles, and we are committed to supporting these colleagues and our colleagues affected throughout the transition. Overall, these changes are designed to make TomTom more focused, faster and more scalable. And this will help to expand our customer base, strengthen our position in growing markets and drive sustainable growth over time. Now I would also like to give you a bit of an update on the commercial and the product progress, which is aligned to what I just explained. So we continue to extend the role of our location technology in AI applications. So earlier this week, we announced the cooperation with DeepRoute AI, covering our joint efforts on AI-based automated driving. So we have integrated TomTom location data into DeepRoute's AI automated driving stack and algorithm. And the combined solution uses our location intelligence alongside the sensor information, provided the road layouts, local rules and wider context needed to plan ahead and navigate unfamiliar roads. The integrated demonstration vehicle is being showcased in the Paris Motor Show and driven by existing partners and new partners. The second thing I would like to stress is that we expanded our partnership and collaboration with Microsoft further, bringing TomTom Location Intelligence to Microsoft Fabric and Microsoft Foundry through Microsoft IQ sharing preview. And this actually allows enterprises to combine our geospatial data with their own business data. It enables AI agents to better understand the real-world conditions and support more informed decision-making. So that's the second one, which is quite important, and that let us up in the location intelligence for enterprises. And also on the product side, we launched the TomTom Maps MCP serve in the Cloud Connected Directory. So this makes our maps routing and real-time traffic capabilities more easily accessible to AI and assistant and agents. And it also enables location-aware experiences without the need for complex integration. So it accelerates that adoption of location data and location intelligence. Now together, these initiatives strengthen our position as a provider of AI with the location intelligence and really drives into our future strategy where we want to accelerate in those ecosystems. So overall, we are really sharpening our focus on the areas where we see the strongest growth, and we have a differentiating factor as well based on our unique position on our independent structure, our technology stack and our data, which is auditable and traceable in highly governed industries. We are organizing the company to accelerate innovation and deliver faster to our customers, future and existing. And at the same time, we're making our location technology easier to access and integrate into AI applications and agentic applications. And the commercial progress we made during the quarter demonstrates the relevance of our technology across a broad range of use cases. Now with that, I'll hand over to Taco, who will take you through the financial results and outlook in more detail. Thank you.

Thank you, Mike. I'll cover our financial performance and our outlook, after which we'll take your questions. In the third quarter of 2026, group revenue was EUR 129 million, a 6% decrease versus last year. This decline was in line with expectations and guidance. Let me briefly break down our top line performance. Automotive revenue came in at EUR 78 million for the quarter. That's a 2% decrease year-on-year. Automotive operational revenue was EUR 68 million, down 19% year-on-year. The decline was partly driven by a phaseout of customer contracts. In addition, the same quarter last year benefited from royalty reports received relating to earlier periods, creating a higher comparison base. Enterprise revenue was EUR 37 million, down 4% year-on-year. The decline was mainly due to the phase out of customer contracts, partly offset by new customer wins. Taken together, our Location Technologies segment generated EUR 115 million. Consumer revenue was EUR 14 million, down 24% year-on-year, reflecting the continued contraction of the P&B market and memory supply constraints. Gross margin improved to 90%, up from 89% last year. This increase was driven by the higher proportion of high-margin content and software revenue in our mix. Operating expenses were EUR 111 million, a reduction of EUR 3 million compared with the same period last year. As a result, our operating result was a profit of EUR 6 million. Our operating margin was 5% and came in above the level we anticipated, reflecting strong cost discipline. Free cash flow, excluding restructuring payments, was EUR 8 million. Net cash movement for the quarter was an inflow of EUR 5 million compared with an inflow of less than EUR 1 million in the same quarter last year. We ended the quarter with a net cash position of EUR 239 million with no outstanding borrowings. Let's look at the outlook for the full year. Looking ahead, we are updating our full year 2026 outlook. Revenue development is progressing in line with expectations, while profitability continues to benefit from strong gross margins and disciplined cost control. We are narrowing our revenue range and increasing our operating margin outlook, reflecting our performance year-to-date and the lower expected salary costs in the fourth quarter resulting from the organizational realignment announced to date. For 2026, we now expect group revenue of EUR 505 million to $530 million with Location Technology revenue of EUR 450 million to EUR 470 million and an operating margin of around 4%. This includes a restructuring charge of approximately EUR 50 million, which we expect to record in the fourth quarter. Excluding this one-off charge, we expect our operating margin to be around 7% for the full year. We estimate the annualized savings for the organizational realignment at approximately EUR 21 million. For 2027, we reiterate our expectations of Location Technology revenue growth supported by increasing gross margin and a more efficient cost base. We are well positioned to deliver profitable growth. And with that, we are taking the -- we're ready to take your questions. Operator, please start the Q&A.

[Operator Instructions]. We will take our first question and the question comes from the line of Marc Hesselink from ING.

I have a couple. Maybe to start, now with automated driving in a sort of a separate category next to the navigation for the auto clients, what does that say on the go-to-market for automated driving? Is that really a different business model than what you had in the past with navigation? Also maybe the way that it works in the P&L? I can imagine that in the past, that's really a price times quantity kind of story. Is that different -- going to be different with automated driving now that you have made this change?

Thanks for the question, Mark. I think -- so to a certain extent, it is automotive, right? So in automotive, you can clearly see convergence in some -- with some carmakers of what's happening in the cockpit and deeper in the vehicle with AD and navigation. But in many, it's also still separate. Now for us, the reason why we ring-fence both is because we want to grow faster in AD and more deliberate. And it's the same for location intelligence, by the way. We bring single-fighter leadership and a team that really wakes up and goes to bed with the same mission to drive innovation, delivery of those products in that growth market. And whereas I would say navigation is a bit of a different rhythm because we have a backlog and we deliver commitments, we also ring-fence that to make sure they don't get distracted. But there is convergence on some technologies where you see visualization in the infotainment system in the product stack that the teams need to work together as well. So I would say it's a mix. But the main reason why we do this with these divisions is to go faster and deliver faster solutions closer to our customers. So that explains now if you ring-fence AD, that team, again, has a very focused, laser-focused mission to deliver solutions in the whole AD ecosystem. And that ecosystem is quite extended, right? It's not just carmakers. It's also the AI algorithm providers, the chip providers, the Tier 1s and the OEMs. So there's a clear focus from the team into that target audience. Does that answer your question?

Yes, it does. The second question that I have is, if you look at the Microsoft contract or the collaboration that you expanded, again, how does that work, right? I think Microsoft is one -- it's a client, but it's also a platform that enables you to reach other clients. This extension, is that on both sides as you have a bigger contract with Microsoft now? Or is it really about the extension to go to via Microsoft to other clients?

Yes. So one of the things we also want to do, maybe a step back, is for us, we want to focus on our core as well as a company. And our core is to deliver the best location data and best location intelligence in a scalable way, at quality, at scale and with the highest freshness. And that feeds into location intelligence for enterprises, feeds into AD and navigation. Now that's where we want to be the best and we're investing. And we want to scale through partners. And Microsoft is a good example. So Microsoft is building capabilities. And I'm not talking about the 2-way contracts. I'm talking to how we can scale through Microsoft because they have the reach, and they also have the fabric, the data lake. So what we do there is to make sure that our location data and location intelligence is available in the marketplace to be consumed by their customers, which gives us a bigger reach, right? That's the step now. There's many more steps in how you can expand with Microsoft, but that's what we're doing now in terms of specific areas like logistics with use cases. And you can see a further path to expand that where you say, okay, there's more and more data being used and at scale as well. But this expansion is that we make our data available in the marketplace towards their customers and then we go to market together. That's in this stage.

And how is that then different than what you had before with Microsoft?

Well, yes, that brings me a little bit -- so I don't want to go too deep in detail, but Microsoft has also changed over the -- well, I'd say, past months and quarters in terms of how they're structured, especially with Copilot and AI. And our current collaboration is more on the Bing side, and it moves to Azure. But fabric and foundry is a very big strategic bet for Microsoft, which is fairly new, I would say. And the way we're structured today is more on the Bing side and specifically also on Azure. This is a new territory where they're expanding, and we want to be part of that expansion together. So that's the difference.

Okay. That's clear. And then a final question. You said expectations still to grow again in '27. If you then split that into those 3 building blocks, you said automotive driving and as well as location intelligence are growth areas. But I think into '27, you're also still going to benefit quite a bit on the navigation side with contracts that are going to ramp up. Is that correct? Should the growth come from all the 3 categories?

Yes. Maybe I can take this, Christian. So if you talk about growth, there's a difference between order intake and revenue reported. What you will see next year and the main driver of the growth is indeed still coming from the navigation segment, where we will launch certain programs. or the SOPs of certain car lines. The distinction between what exactly automated driving is and the navigation is not that black and white. Often, it's a bit of a hybrid on a revenue point of view, not so much on the product point of view. There, it's more clear. But from a revenue point of view, it is often mixed. There are certain features that are required for safety, et cetera, that both benefit the car as the driver itself. But for the growth that we expect for the Location Technology segment as a whole is the main driver here is coming from navigation for next year. But again, the order intake is much more fueled by the other 2 segments.

[Operator Instructions]. Your next question comes from the line of Andrew Hayman, Independent Minds.

Yes. In terms of this new division, will you be changing your reporting structure at all?

No, we will not. And that is also quite linked to my previous answer is that the -- if you want to break up revenue in either automated driving or navigation, it is quite artificial. It's not that clear. Again, you can make the distinction from a product point of view, but not so much from a revenue point of view. So in very simple terms, automated driving and navigation combined is what we call the Automotive segment and location technology is what we call the Enterprise segment.

Okay. And then maybe looking out a bit, I was listening to an interview you did recently, Mike, you highlight that TomTom has the strength of being independent and has a strong tech stack, and it's a trusted partner, both on data accuracy and dealing with regulated sectors. And I mean, over -- if we look over the history of TomTom, you've had some very strong partnerships, whether it's Google, Apple or Renault, but they haven't always lasted. And my impression is it's not that you haven't necessarily performed in those partnerships, but those clients wanted to bring some of that technology internally. And we can already see the next batch of partnerships coming through such as SVW. But do you have a sense looking, let's say, 5 years out, who your key partners will be?

That's a good question. So I think, first of all, the existing partnerships that we have are quite important because some of those partners also have a very strong strategy and vision into what's happening around AI and the technology. So that there is quite a good foundation to build on, and Microsoft is a very strong example, but there's more. But when you look at new potential partners, it's -- I would say, a lot of our existing partners, which are -- where we have kind of a stable and static revenue monetization model, we're looking more and more in opening that up as well in a flexible way because they're building solutions in an agentic world which also will expand their business, and we want to do that together. That's -- I would say that's the second category. And the third, we see a lot of new partnerships on the horizon, especially in the AI ecosystem in automotive, but also in enterprises with LLMs across the globe that are looking for a very strong partner in location data and location intelligence. And the key thing is what we've seen, of course, is some of our -- in the history of partnerships, some of our still current and older partners, they tended to bring things in-house, but I see the opposite effect where more and more of the big technology players are focusing on their core and their strength, and they rely more and more on partnerships because they don't want to duplicate or waste their resources and time on things that somebody else can do better. And that's a trend I really see across the board in enterprise, but also especially in automotive, where you can also see that in the narrative of carmakers that are saying more and more speaking the language of partnerships because they don't have the means and we've seen with a lot of examples around the globe that we're building up software houses in-house with tens of thousands of people and that they came back from a difficult journey. So you see a trend that more -- there's recognition of staying in your swim lane and partnering with each other to create a cascading effect. And I think that's quite promising with what I've seen in existing partnerships and especially potentially the new ones.

And do you see those business models still evolving because one of the pressures you have is your partners are quite big. So sometimes I think getting properly paid for the work that you do is a challenge.

Yes. So we have to stay open-minded as well -- you can already see that in the AI models and consumption that's changing also as we speak, right? So it's not -- it's hard to put a stake in the ground and say this is exactly how it will look in 5 years from now because it's evolving every day in terms of people that want to have predictability in their consumption. So there's different -- let's say, we have kind of a portfolio on how we can monetize into license deals with our partners. But you cannot have -- there's not one size fits all, right? So you have companies that want to grow and have predictability that the companies more established. They know exactly what they use and what they have. So those are different conversations, and we cater for all of them. But I think one of the things I see is that we also want to grow together and we -- especially with partners that have potential to be very well positioned in the future that we are open-minded to grow together instead of saying, well, we just do something for now and it's kind of fixed. I'm more open to see how we can explore new areas, new industries together and have a different go-to-market model. And again, one of the examples in Microsoft. way we build solutions, test them in the market together and then see how we evolve that further. So we need to iterate. And I think that's one of the changes as well back to what we announced today in terms of organization. It's what we need to do in what we see in the whole, let's say, ecosystem out there is that we need to move faster and iterate faster instead of saying we build it, we finish it and then we deploy it. It's a whole new territory that we need to be much more agile. And we know how to do that to a certain extent in certain verticals, but we need to expand on that much faster. That's also one of the reasons why we changed our org design.

Okay. And then if we maybe just looking at, as an example, one partnership with Stellantis. I mean, I see that they're also now working quite closely with Wavy, which has a map-like approach. Does that worry you at all? Or for example, can you counter that by highlighting just how useful it is to also have the map within the autonomous driving approach?

Yes. So -- and that's why I call AD also an ecosystem. So I don't see a clear company saying, well, I've figured it all out, have a fleet on the road and I can go from Level 0 to Level 3 or Level 4. There's a lot of companies that can say that. The closest one right now is Tesla in the Chinese domestic players are trying to get close to them as well. Now -- so I see it as an ecosystem play where systems need to work together, the sensors, the hardware, the software, the algorithms and the location data and the map in the cloud and on edge. And to get to higher safety, it's not about, well, let me do that on my own because it's not going to work to get to higher safety, there is a collaboration and partnership model with everyone. And to answer more specifically on your question about map to a lesser extent, I haven't covered across anyone beyond the marketing. But when you sit around the table on the tech stack, there's nobody who will not use a map in their driving stack for AD. -- map is always on the table. Now there's a difference between is it a full HD map, which is not used anymore that term. It's more SD+, HD Light, SD Pro. And it's more about attributes and features to get to a complete model with longer drives, more kilometers without disengagement from the steering wheel. So that's the discussion, but the map is always on the table.

[Operator Instructions]. Your next question comes from the line of Johan Van Der Veen from ABN AMRO ODDO BHF.

I had a little bit of difficulty myself. But regarding Location Technologies, I would like to ask regarding the phasing out of the customer contract. Could you give a little bit of dynamic there going into Q4? How much revenues are still there?