While the map database has been a scarce asset ever since TomTom acquired Tele
Atlas in 2008, the company has struggled to monetise this asset. For sure, its
relatively modest market share compared with Here did not help. More recently,
investments in a new map making platform weighed on earnings and cash flow
generation.
However, we think the situation is set to improve, and we look for meaningful
operating leverage. First, double-digit growth in combined Automotive and
Licensing sales will help. We think TomTom generates a gross margin of at least 80%
on the incremental revenues. Second, we believe the increase in investments will
level off, resulting in a high drop-through of incremental sales and gross profit into
EBITDA as well as improving conversion of EBITDA into free cash flow.
In recent years, one key area of investment has been TomTom’s a new map-making
platform. This new platform allows for the automated processing and validation of
changes as well as for real-time publishing of incremental map changes. With the
increasing use of map data in ADAS, there is an ever increasing need for maps to be accurate and up-to-date. In the past the validation of changes was time-consuming,
and fresh maps were typically released only once per quarter. In addition to
providing the required accuracy and freshness, the improved data validation and
fusion process has also made it cheaper to maintain the database. As map
requirements will continue increase, we do not expect spending to decline.
However, with TomTom having switched over from its legacy platforms to its new
platform, we think the largest step-up in R&D investments is behind.
All in all, we estimate a 14% sales CAGR for 2016-20E will translate into an EBITDA
CAGR for that same period of 22%.
To be able to offer high-quality real-time maps and real-time information on traffic
and road conditions, TomTom and HERE may increasingly have to rely on data
collected by cars (e.g. through sensors). As such, part of the data a car manufacturer
will source from the map vendors will be based on its own inputs. We suspect that
large OEMs in particular will seek to use this in their negotiations with TomTom and
HERE. In this context we would highlight the agreement that Mobileye and Here
have signed earlier this year. Its REM technology allows Mobileye to extract
landmarks and roadway information from crowdsourced, real time data that is
collected from vehicles that are equipped with cameras and Mobileye’s EyeQ chip.
The resulting Roadbook data will be sold to Here, with the revenues to be split by
Mobileye and the OEMs. In addition to Here, Mobileye has signed an agreement
with Japanese mapping company Zenrin. Furthermore, Mobileye has publicly stated
it is in discussion with at least one other map maker, and given Mobileye’s strong
market position, we would not be surprised if TomTom follows Here and Zenrin. As
for TomTom’s business model, the introduction of autonomous driving could result
in an increase in the price of the map, but the positive earnings impact of this
increase might at least be partly offset by the price paid to car makers and
companies like Mobileye that provide some of the data to build and maintain the HD
map and RoadDNA.