TomTom NV : Better mix saves 3Q, but 2017?
A revenue mix less reliant on hardware allowed TomTom to report gross margins of
>60% last week, supporting the company’s decision to keep its FY16 EPS guidance
of 23c unchanged despite the lower revenue outlook (€980m vs. €1.05bn).
Addressing the key culprit of 3Q weakness – the faster-than-expected PND declines
within Consumer – we do not foresee an imminent rebound and question whether
growth within the sports category will ever provide a full offset given tough
competition. Momentum within Telematics and Automotive (although lower than
what consensus was expecting) shows management are massaging the revenue mix
well, and should support continued gross margin expansion. However, there is also
the need for continued investments to accelerate TomTom’s value proposition for
the Automotive industry. This is where we differ from the market – we do not
penalize the need for additional R&D, but we do question the rate at which such
investments will translate into operating leverage, forecasting more moderate EBIT
margin growth in 2017/18. Beyond the question of timing, we still believe TomTom
has a key part to play in digital map making and autonomous driving, and look
forward to the Technology Day next month for deeper insight into such innovation.
We continue to believe our PT of €6.25 is fair, placing shares on a more reasonable,
but still premium multiple of 25x/22x 2017/18e P/E. We remain Underweight.