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FINANCIAL REVIEW
SUMMARY
In 2007, consumer demand for our products continued to be strong and we delivered group revenue of €1.7 billion, a year on year increase of 27%. The growth was led by sales of personal navigation devices (PNDs), of which we sold 9.6 million units.
Retail prices fell significantly during the year and as a result average selling prices (ASPs) for our PNDs fell by 37%. However, component cost reductions, cost engineering of our products, and the weakening of the US dollar against the euro enabled us to reduce costs at a faster rate than selling prices declined. As a result we increased our gross margin to 44%, an increase of 2 percentage points on 2006.
Operating expenses increased in line with the growth of the business, and we achieved an operating profit of €428 million, or 25% of revenue, compared with €340m in 2006. Net profit increased by 43%, to €317 million in 2007, up from €222 million in 2006.
Cash generated from operations was €535 million, an increase of 37% on 2006 (€392 million). We ended the year with cash of €463 million, an increase of €26 million in the year, having completed the purchase of a minority stake of 29.9% in Tele Atlas at a cost of €816 million and having raised net proceeds of €450 million from an equity placing. Net assets increased to €1,352 million from €551 million at the start of the year.
We delivered a 33% return on equity for the year (2006: 52%), measured as net profit over average equity for the year. Diluted earnings per share increased 40% to €2.66 from €1.90 for 2006. |
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| (in € millions) |
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2007 |
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2006 |
Change |
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| Revenue |
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1,737 |
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1,364 |
27% |
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| Gross profit |
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764 |
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579 |
32% |
| Gross margin |
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44.0% |
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42.4% |
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| Operating profit |
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428 |
|
340 |
26% |
| Operating margin |
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24.6% |
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24.9% |
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| Net profit |
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317 |
|
222 |
43% |
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| EPS (fully diluted in €) |
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2.66 |
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1.90 |
40% |
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REVENUE
In 2007, we achieved a record revenue of €1.7 billion, up 27% on 2006. The main driver behind this revenue increase was PND unit sales. Revenue from PNDs increased 28% and accounted for 93% of total revenue in 2007, the same percentage as in 2006.
Revenue from PDA and smartphone solutions decreased to €25 million, down 19% on 2006 (€31 million). Other Revenue increased significantly due to growth in map and content sales, accessory sales, and revenue from TomTom WORK. Other Revenue rose to €89 million in 2007, a 37% increase on 2006 (€65 million). |
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ANNUAL REVENUE (in € millions) |
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 |
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| Year to 31 December 2007 |
1,737 |
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 |
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| Year to 31 December 2006 |
1,364 |
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| Year to 31 December 2005 |
720 |
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| Year to 31 December 2004 |
192 |
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GROSS MARGIN PERCENTAGE |
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| Year to 31 December 2007 |
44.0% |
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| Year to 31 December 2006 |
42.4% |
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| Year to 31 December 2005 |
43.2% |
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| Year to 31 December 2004 |
44.3% |
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The revenue generated by TomTom WORK came from a strong increase in the number of Webfleet subscriptions, which more than doubled to 34,000 at the end of 2007 from 14,000 in 2006. |
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| (in € millions) |
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2007 |
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2006 |
Change |
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| Revenue |
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| PNDs |
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1,623 |
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1,268 |
28% |
| PDA/smartphone solutions |
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25 |
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31 |
-19% |
| Other |
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89 |
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65 |
37% |
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| Total |
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1,737 |
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1,364 |
27% |
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VOLUMES
The volume of PND units sold doubled in 2007 to 9.6 million units, up from 4.7 million in 2006. In the second quarter we introduced the TomTom One XL, which was our first ‘mid-range’ product. We now have three product ranges in our PND family: the entry-level TomTom One, the midrange One XL and the high-end GO series. |
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| Number of units sold (in 000s) |
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2007 |
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2006 |
Change |
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| PNDs |
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9,574 |
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4,687 |
104% |
| PDA/smartphone solutions |
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601 |
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343 |
75% |
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| Total |
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10,175 |
|
5,030 |
102% |
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AVERAGE SELLING PRICE (ASP)
The ASP of our PNDs is the result of a variety of factors, including the product mix, regional mix and market dynamics. For 2007, the ASP was €170, a decrease of 37% compared to 2006. The main driver behind this decrease was the reduction of component prices. This allowed for price decreases without compromising our gross margin. The increased importance of the North American market, where ASPs were lower, also had an impact on our ASP. |
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| Average selling price (in €) |
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2007 |
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2006 |
Change |
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| PNDs |
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170 |
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270 |
-37% |
| PDA/smartphone solutions |
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42 |
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91 |
-54% |
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GEOGRAPHY
In 2007, TomTom generated revenue in EMEA (Europe and South Africa), North America (US and Canada) and Asia Pacific (Australia, New Zealand and Taiwan). While all regions showed a strong increase in sales, the proportion of sales outside EMEA rose to 20% in 2007, up from 10% in 2006.
In 2007 we saw first sales in Brazil, Japan (automotive), Latvia and New Zealand.
Sales generated in North America showed the biggest increase, and North America revenue more than doubled to €271 million in 2007, up from €106 million in 2006. Revenue in North America represented 16% of TomTom revenue, up from 8% in the previous year.
In EMEA, revenue increased by 14% to €1.4 billion, up from €1.2 billion in 2006.
Asia Pacific sales were up 126% to €70 million from €31 million in 2006. This increase was mainly driven by a strong performance in Australia.
GROSS PROFIT
The gross profit increased to €764 million, an increase of €186 million over 2006.
The gross margin for the year was 44% up from 42% in 2006.
The majority of our trade purchases are denominated in US dollars. During 2007, we benefited from the weakening of the US dollar against the euro. On average, the US dollar rate weakened by 9% which contributed 2.8 percentage points to our gross margin for 2007.
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OPERATING EXPENSES
Operating expenses in 2007 increased to €336 million, including €31.3 million (of which €29.2 million was non cash) of stock option charges (SOC), up from €238 million in 2006. As a percentage of sales, operating expenses (excluding SOC) increased by 1.7 percentage points to 17.6% in 2007 from 15.9% in 2006.
A €37 million increase in marketing expenses made up 37% of the overall increase in operating expenses. Selling, general and administrative (SG&A) expenses increased by €28 million, and research and development (R&D) expenses increased by €24 million. As a percentage of revenue, R&D expenses increased by 0.8 percentage points to 3.5% of revenue, marketing by 0.5 percentage points to 7.9%, and SG&A by 0.3 percentage points to 6.2%.
R&D Expenses
R&D expenses include R&D personnel costs, third party software and manufacturing design costs, patent creation and maintenance costs, depreciation of R&D-related tangible-fixed assets, and amortisation of technologies. Total R&D expenses increased by 66% to €60.2 million in 2007, up from €36.2 million in 2006. During the second quarter we took over an experienced team of close to 90 automotive engineers from Siemens VDO to form the core of our new automotive division which was set up to support our sales to car manufacturers and Original Equipment Manufacturers (OEMs). We also purchased the worldwide patent portfolio of Horizon Navigation Inc. to further strengthen our intellectual property efforts and to support research activities.
Operating expenses |
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| (in € thousands) |
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2007 |
% of rev |
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2006 |
% of rev |
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| R&D |
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60,194 |
3.5% |
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36,244 |
2.7% |
| Marketing |
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137,325 |
7.9% |
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100,812 |
7.4% |
| SGA |
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107,568 |
6.2% |
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80,033 |
5.9% |
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| OPEX |
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305,087 |
17.6% |
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217,089 |
15.9% |
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Marketing expenses
Marketing expenses include advertising expenses and any expenses directly attributable to our marketing teams, including personnel expenses. Total marketing expenses increased 36% to €137 million in 2007, up from €101 million in 2006.
New television advertising campaigns in Europe and North America were major investments during the year.
SG&A expenses
SG&A expenses include the costs of employees engaged in sales activities, customer support, back office and internal support activities, IT, legal, office and other general expenses. SG&A expenses increased by 34% to €108 million in 2007, up from €80.0 million in 2006, mainly as a result of the increase in staff.
STOCK COMPENSATION CHARGES
The Company offers a number of share based compensation plans to employees. Charges resulting from these plans are calculated in accordance with IFRS 2 “Share based payments”.
The equity settled plans result in a non-cash accounting charge and relate to the granting of share options. The final grants under this plan were made in early 2007. The charge for share options is recognised evenly over the vesting period of the share options granted. In 2007, this led to a charge of €29.2 million (2006: €21.3 million).
In 2007, we adopted a performance-based share plan which replaced the 2005 share option plan. The charges for the performance-based share plan are determined by an option pricing model that simulates the expected result of performance criteria approved by the Supervisory Board. The performance criteria selected are earnings per share (EPS) growth, and total shareholder return (TSR). In 2007 TomTom recorded a charge of €2.1 million in respect of this plan (2006: €0 million).
FINANCIAL INCOME AND EXPENSES
We recorded a net gain of €2.8 million in financial income and expenses in 2007, compared to a net charge of €24.7 million in 2006. Exchange rate results resulted in a charge of €16.3 million for 2007 compared to a charge of €32.3 million in 2006. This charge arose from foreign exchange contracts put in place in accordance with our foreign exchange policy which is approved by our Supervisory Board. Contracts are put in place to cover our committed and anticipated exposures in non-functional currencies. The charge is the sum of positive and negative results on our hedging portfolio. The weakening trend of the US dollar-euro exchange rate in 2007 compared to 2006 was the main driver for the negative effect on our financial income and expense line.
We revalue all hedging contracts to market value at the end of each period, whether or not they have matured, as well as cash and other assets and liabilities denominated in other currencies than our functional currency. The 2007 result therefore consisted of both realised and unrealised results.
As a result of the higher average euro interest rates and our higher average cash balances, net interest income increased to €19.1 million compared to €7.6 million in 2006.
TAXATION
The total income tax charged to our income statement was €114 million and relates to all jurisdictions in which we have a fiscal presence.
In absolute terms, the tax charge increased 22% compared to the previous year (2006: 93 million), mainly as a result of higher profits. Our effective tax rate decreased by 3.1 percentage points to 26.5% compared to 2006 following the decrease in the Dutch corporate tax rate from 29.6% to 25.5%.
NET PROFIT
The net profit increased by 43% to €317 million in 2007 from €222 million in 2006.
LIQUIDITY AND CAPITAL RESOURCES
In 2007, we generated €535 million of cash from operations, an increase of €143 million on 2006 (€392 million). Working capital decreased by €29 million, mainly due to increased liabilities and accruals towards our suppliers in combination with strong cash collections and tight inventory control. The inventory value at the balance sheet date was €131 million, an increase of €8 million on the value at the start of the year (€123 million). As a percentage of sales, the inventory value at year end decreased by 1.5 percentage point to 7.5% of annual sales as we continued to find ways to operate our inventory more efficiently.
We invested €32 million in technology fixed assets, including the worldwide patent portfolio of Horizon Navigation Inc., to support our worldwide development activities, while investments in general fixed assets were €17 million, or less than 1% of sales.
In the fourth quarter of 2007 we purchased a 29.9% minority stake in Tele Atlas. We spent €816 million, excluding banking fees, to purchase these shares. We raised cash in the same period from an equity issue which delivered €450 million of cash net of fees.
Overall, our cash balance increased by €26 million to €463 million at the end of 2007. |
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| Cash flow (in € millions) |
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2007 |
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2006 |
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| Net cash from operating activities |
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441,113 |
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291,507 |
| of which working capital: |
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28,957 |
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9,982 |
| Cash flow used in investing activities |
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-866,567 |
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-28,570 |
| Cash flow from financing activities |
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453,417 |
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1,113 |
| Net increase in cash and cash equivalents |
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27,963 |
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264,050 |
| Effect of exchange rates |
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-2,425 |
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-4,626 |
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| Cash and cash equivalents at end of period |
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463,339 |
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437,801 |
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The impact of the participation in Tele Atlas on our balance sheet was significant and shows in the increase in Non-current assets (+ €817 million) which includes the investment in Tele Atlas. The increase in Capital and reserves (+ €450 million) results from the share issue in December 2007. Total assets increased by €1,067 million to €1,970 million. |
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| Balance sheet (in € millions) |
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2007 |
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2006 |
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| Non-current assets |
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915,319 |
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59,170 |
| Current assets |
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1,054,272 |
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843,798 |
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| Total assets |
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1,969,591 |
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902,968 |
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| Capital and reserves |
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1,352,350 |
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550,790 |
| Non current liabilities |
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42,413 |
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10,982 |
| Current liabilities |
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574,828 |
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341,196 |
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1,969,591 |
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902,968 |
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The smart choice in personal navigation
