By Swen Lorenz :
With 42.8m miles of mapping data from 186 countries totaling 5bn inhabitants, TomTom remains one of the powerhouses of the mapping business. Over 70% of its 4,800 employees work in research and development. Recently, several of the world's top 10 car manufacturers chose TomTom as their partner for developing High Definition Maps ("HD Maps"), a vital component for assisted driving and autonomous driving.
The debt-free company has approximately EUR 250m in net cash. Trading at a share price of EUR 8.52, it has a market cap of EUR 1.11bn ( 130,827,296 shares outstanding post capital consolidation)and an enterprise value of EUR 860m. Cash flow is expected to come in at EUR 67m in 2019 (company guidance) and EUR 70m in 2020 (own estimate).
During 2018, the company reportedly received approaches from Cinven, CVC Capital, and Silverlake Capital. These were likely rebuffed because of the then still ongoing sale of the Telematics division. Following the successful sale of this division in early 2019 and the payout of EUR 750m to shareholders in May 2019, the company is now ready for a sale.
Potential strategic buyers include the "usual suspects," such as Apple ( AAPL ) or Microsoft ( MSFT ), given their existing interest in the mapping sector. They could also include less obvious candidates, such as Trimble ( TRMB ).
During 2019 and going into 2020, shareholders of TomTom have the prospect of a bid to look forward to. A premium of 48% compared to the current share price should be the minimum upside for investors, given that this would be a price worth paying purely based on cash flow. Strategic buyers might pay more.
If the company wasn't sold after all, it's likely the share will turn into a yield play given the steady cash flow and existing cash reserves. On the current valuation level, the company represents a cash flow yield on enterprise value of 8.1%.
The market is currently mispricing the stock for several reasons:
- The TomTom brand name is still widely associated with a dying, outdated business.
- The accounting for the newly built SaaS business is complicated and will leave some of the recent success "invisible" until a later accounting date.
- Following the lengthy, arduous but ultimately very successful sale of the Telematics business and the pay-out of an unusually high special dividend, there simply hasn't been enough time yet for investors to pick up on the changed situation.
- As an Amsterdam-listed, Dutch company, TomTom gets less attention than it would receive if it was a US-based company.
As an attractive bid target with the fall-back option of becoming a yield play, TomTom shares represent an attractive risk/reward ratio.
The world's last independent, global mapping specialist
TomTom is one of the "Big Three" mapping and location service companies in the world, besides Google Maps ( GOOG ) ( GOOGL ) and HERE (the former Nokia mapping business which is now owned by a consortium headed by German car makers).
TomTom data and technology are used by many of the world's leading car manufacturers, and even by some of those that own a stake in HERE. It is less known that TomTom is also used by Uber Technologies ( UBER ), Apple, and across the entire range of Microsoft products. Its 500m users worldwide feed data back into the database, leading to 1.5bn changes to the existing map system each month.
Since its founding in 1991, TomTom has built a highly specialized mapping operation. Approximately 70% of its team of 4,800 employees work in research and development to continuously push the envelope in how to collect and utilize mapping data. The heavy focus on research is a necessity at a time when the company is gearing up to provide services for the connected and autonomous vehicles of tomorrow while having to deal with the collapse of the business that it was originally founded on.
The core business's switch from B2C to B2B
TomTom isn't the kind of company that anyone would readily associate with good investment prospects.
The Dutch navigation devices once defined an entirely new market, to the point of all navigation devices being referred to as "TomToms" in some European countries. However, these device sales went into terminal decline once smartphones and applications such as Google Maps entered the scene. Revenue from the sale of TomTom devices was down at EUR 315m in 2018, compared to EUR 652m in 2013 (-52% in five years).
The share is trading approximately 85% below its 2007 high. Earnings per share came in at EUR 0.19 in 2018. With 2019 estimated earnings of EUR 0.15 per share and a p/e ratio of 57, this stock does not appear to be a bargain.
However, anyone who merely looks at the headline figures misses out on important, less obvious factors.
During the era of Personal Navigation Devices being bought by individual consumers, 80% of the revenue came from selling the actual devices, and just 20% came from subsequent data services. Revenue from device sales was booked in the moment of the sale - easily understandable to anyone.
With the ongoing switch from B2C to B2B (i.e., switching from selling devices to providing mapping solutions to car manufacturers and OEMs), the entire accounting model has changed. In its new set-up, the company is moving towards primarily selling data and software, for which it uses a different way of accounting. The revised business model of selling data is based on receiving the cash upfront for a (roughly) five-year usage contract but with revenue only getting recognized in the accounts as the years progress (i.e., deferred revenue). What has so far appeared on the company's books as revenue from multi-year data provision agreements is actually only a fraction of the total revenue that was secured.
Revenue in this division has nearly tripled since 2014, from EUR 116m to EUR 317m in 2018. Just under two-thirds of the company's revenue are now derived from data, software, and services.
The market for satellite navigation systems ("SatNav systems") for use in cars is still growing. It is true that between 2019 and 2023, automobile sales in Europe and the US are not going to grow massively (if at all). However, the percentage of cars sold that include some form of a navigation system is projected to increase from 33% in 2018 to 38% in 2023. This would be an increase by 2m units, from 14m to 16m units annually even if the auto market was stagnant.
The company's existing relationships with car manufacturers and OEMs is a significant asset. There is prospective revenue of well over EUR 1bn that contracts are not yet signed for but which is deemed highly likely to come in over the coming years (unless car sales drop to zero). This tentative order book is equivalent to four times the 2018 revenue of this particular division.
It is upon this solid foundation of an existing business that TomTom is now looking to build a new line of revenue.
The rise of HD Map technology
In the past, SatNav systems were used to provide drivers information about their location and the best route. Put simply, SatNav systems used to be about telling the user the current location and how to get to the desired target location. Maps used during this era were two-dimensional. At a later stage, up-to-date information about traffic jams, construction sites and similar were added.
Over the past years, this industry has evolved towards "assisted driving," i.e., it now requires data that helps to make things easier and safer for the driver, such as telling them about dangers that lie beyond the next bend or automatically adjusting the chassis to the inclination of the street. In the future, even more, detailed data will be vital for getting the idea of autonomous vehicles off the ground.
The first generation of SatNavs worked based on maps that were precise to a level of having 30 feet to 300 feet in divergence from reality. For advanced driver assistance systems, a lot of additional information depth is required than just the outline of the roads. Once autonomous driving comes into play, maps will require not just a new level of depth, but also an altogether different level of precision that will range from 4 inches to 3 feet only. Some say that ultimately, maps with a precision level of no more than one-inch maximum divergence from reality will be required.
The jury is still out whether autonomous vehicles will happen quite as fast as some of the industry's PR hype suggests. It is clear, though, that for the two new, more advanced purposes of assisted driving and autonomous driving, maps have to be much more detailed. The need to have such data cannot be replaced by sensors attached to cars. Sensors can pick up what is happening in the environment of the vehicle, but they cannot look around corners, nor can they see through a lorry that is driving next to you. Sensors are one part of the equation for autonomous driving, but maps will remain a crucial second part.
Because of these developments, the subject of HD Maps, which is currently still a niche area, is bound to play a growing role in the mapping industry.
Everyone in this industry is currently holding their cards close to their chest. How they produce these maps, what actually goes into them (and what doesn't), and what exactly they will be used for are considered trade secrets.
However, there are already vital clues that help to assess TomTom's ability to compete in this area.
One of them is the company's recent agreement to deepen its contractual relationship with Microsoft. The software giant has signed a "long-term" contract that will see TomTom map data integrated into Windows, Bing, Azure, and Cortana. The agreement was signed with an understanding that the two companies will also intensify their collaboration in the area of autonomous driving and HD Maps.
In early March 2019, TomTom announced that it has been selected by "multiple Top 10 car makers" for its HD Maps. As the company has explained in a recent conference call, these agreements are not yet for significant amounts of revenue, and they will only start to go "live" in 2021. But they serve as lighthouse programs that indicate the company's strong position in the HD Map space.
On the whole, it does appear likely that TomTom's data and capabilities are a potentially very valuable asset in the race to enhance and develop assisted and autonomous driving.
Heavy R&D investments to stay in the top 3 of this market
TomTom would rapidly lose market share if it weren't for its ongoing investments in expanding and improving both its database and the services it offers.
An initial 2.5m miles, or 6% of its entire database, has already been mapped to HD-level detail. One additional priority the company has set in this regard is the HD mapping of key hubs of the likely autonomous driving future, i.e., suitable maps for Japan, South Korea, the US, and Western Europe.
The provision of suitable map data is a fast-evolving field. Not surprisingly, there is currently quite a merry-go-round of changing alliances. E.g., TomTom lost its client Mitsubishi to Google, just a few weeks before it gained Microsoft as a new cornerstone client.
I doubt there is anyone even within the industry who truly knows how this sector is going to look a few years down the road. Everyone will be hedging their bets.
It is clear, however, that those providers who already own significant amounts of data and do not need to start such an operation from scratch have a considerable head start. Google's map division gives the company a strong hand, though not everyone wants to be dependent on the search engine giant. HERE places good cards in the hands of mostly European car manufacturers, but a Chinese-led group that did try to buy into the company found its attempt blocked and could now try to look elsewhere.
Any new operator in this space would find very high hurdles to recreate such a specialized operation from scratch, and it would require years. There are other operators in this field, but TomTom is widely recognized as the one remaining major, independent player that has the wherewithal to provide HD Maps on a global scale. From this perspective, TomTom is the best and possibly only available target for someone keen on buying into this market. Never mind the financial angle of purchasing a reliable cash flow at an attractive valuation.
What is pointing towards a sale?
As a debt-free business with ample cash flow and exciting prospects, TomTom would have the option to remain independent and keep building its existing business. However, several factors indicate that the remaining company is likely to be sold sooner rather than later.
Instead of hoarding the expected net cash influx of EUR 854m from the sale of the Telematics business, TomTom paid out EUR 750m to its shareholders. This isn't a sign of a company that intends to invest heavily in its existing business and wants to take on much bigger competitors such as Google.
For anyone with experience in corporate gobbledygook, it is clear that media statements made by the Founder/CEO, Harold Goodijn, do read like he is actively inviting bids. Backing up this impression are reports that the company has actually already received three unsolicited approaches by private equity companies. These were rebuffed at the time, because of the ongoing sale of the Telematics division. It seems only logical that in the case of a sale of the entire company, the founders would yield a higher price if they sold these units separately.
Last but not least, the inner emotional world of the prominent founder is subject to regular gossiping in Amsterdam's financial and social circles, and speculation is rife that he is ready to sell. Indeed, it seems reasonable to conclude that his upcoming 60th birthday in April 2020, combined with a challenging, expensive reinvention of the business, makes for some powerful philosophizing about securing one's lifetime's work at an opportune moment.
The EUR 750m capital return was supposed to happen before mid-year and then took place four weeks ahead of the deadline. Ever since the capital return was carried out, the share price has been performing quite solidly. Might the company even be in a hurry to open up pathways for bid interest to come in?
Who could be interested in making a bid?
Virtually any private equity company is a potentially interested party given the existing order book and cash flow, and there are parties with a potential strategic interest. The following list is by no means claiming to be exhaustive:
- Apple (desire to be independent of Google).
- Microsoft (ditto).
- Trimble, the Californian satellite navigation developer, named by media reports last year as an interested party.
- Garmin ( GRMN ), a vendor of navigation hardware. Garmin currently is a client of HERE.
- Amazon ( AMZN ), who have an obvious use for high-quality data in their future delivery services.
- Private equity companies, three of which reportedly had approached TomTom last year with unsolicited bids for the entire company: Cinven, Silver Lake, CVC Capital Partners.
The obvious question to ask is if there might be interest from Chinese companies. There was Chinese interest in buying a stake in HERE, but this didn't succeed. TomTom could be another - and final - chance for potential strategic buyers from China.
Valuing the entire company
Following the sale of the Telematics division and the subsequent tax-free capital return, TomTom has become much more compact and, therefore, easier to analyze.
Among the factors that stick out are a remaining approximately EUR 400m intangible asset stemming from the 2008 acquisition of German Tele Atlas AG for EUR 2.9bn. The purchase led to intangible assets totaling EUR 872m appearing on TomTom's balance sheet, and these (mostly) need to be written off over 20 years, just over 9 years of which are now left. There are no indications that the remaining value of this acquisition is impinged in any way, and it seems likely that it will simply be written off as planned.
The company also has approximately EUR 192m in goodwill on its balance sheet. Compared to the company's equity and TomTom's ability to generate cash flow and earnings, these intangible assets seem modest and are unlikely to contain significant issues.
The valuation model used for the purpose of this report assumes increasing R&D expenses that are immediately expensed, mainly because of the ongoing efforts to increase the size of the HD Map database. It assumes EUR 250m in expenses R&D investments in 2019 (compared to EUR 220m the prior year), and EUR 260m for the years after that. The model also assumes ongoing CAPEX investments of EUR 55m per year; this assumption mirrors the company's own guidance. This analysis assumes that following an expected cash flow of EUR 67m in 2019 (which is also the company guidance), a base level cash flow of EUR 70m will be achieved from 2020 onwards.
Net cash of the company is currently approximately EUR 250m. The net cash reduces the company's enterprise value to EUR 860m.
A private equity firm that requires a 5% cash flow yield could bid EUR 1,650m for the company, equivalent to EUR 12.61 per share.
The fact that TomTom received no less than three unsolicited bids last year from private equity firms at a time when the share price was trading at roughly the same level, goes to show that experienced potential bidders do see a pathway to finding a bid that satisfies the needs of existing shareholders while making the deal worthwhile for themselves.
What are the risks?
There are a number of potential developments that could lead me to re-evaluate my investment thesis.
In the short term, a decrease in global auto sales is the most important risk to monitor. This would have to be a very significant drop in sales, rather than just a blip. In which case, cash flow projections would have to be lowered, and projected growth would move further into the future.
In the medium term, the risks to keep an eye on are:
- More clients than expected migrate to HERE and Google Maps.
- If HD Maps doesn't turn into a commercial success, significant R&D investments will have to be written off.
- Management could decide to use the ample cash flow and remaining cash reserves to pursue expensive pet projects; no shareholder can stop a group of founders that jointly control 44% of voting rights.
I will cover these aspects in future updates on Seeking Alpha.
Following the capital return, TomTom is now "in play"
When taking together the factors listed above, TomTom appears to be an attractive takeover target both for strategic buyers as well as private equity investors. This is likely to be the key driver for the share price going forward.
Investors who like companies such as UBER, Google, or Tesla ( TSLA ) because of the prospects in autonomous driving, should ask themselves if TomTom isn't a cheaper way to get a stake in this industry. Why dig for gold if you can sell shovels to prospectors?
TomTom shares are a buy for anyone interested in bid targets and yield plays. The stock is volatile, and daily trading volumes are in line with what you'd expect from a EUR 1bn market cap company where nearly half the shares are in the hands of the founders. Investors experienced with small caps that trade on international markets should take a closer look at this investment opportunity very soon.
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