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Reports Fourth Quarter and Full Year Results 2006

Feb 22 2007

Reports Fourth Quarter and Full Year Results 2006
Record Quarterly Revenue and Earnings

Fourth quarter financial highlights
Compared with Q4 2005
- Revenue increased by 65% to €478 million
- 1.9 million portable navigation devices (PNDs) shipped, up 146%
- Reports Fourth Quarter and Full Year Results 2006
- Gross margin increased by 3 percentage points to 46%
- Operating margin increased by 3 percentage points to 26%
- Net profit increased by 67% to €80 million
- Fully diluted EPS increased by 66% to €0.68
- Cash generated from operations of €132 million

Compared with Q3 2006
- Revenue increased by 35%
- PNDs shipped increased by 62%
- Gross margin increased by 2 percentage points
- Fully diluted EPS increased by 10%

Full year highlights
- Revenue increased by 89% to €1,364 million
- 4.7 million PNDs shipped, up 178%
- Net profit increased by 55% to €222 million
- Fully diluted EPS increased by 51% to €1.90- Cash balances increased by €260 million to €438 million

Fourth quarter operational highlights
- Clear leadership of European market, market share of 50% during important quarter; Consolidated number two position in North American market; number of retail outlets increased by 4,000 to 20,000
- New TomTom ONE became world’s best selling PND
- Joint development announced with Vodafone to deliver a unique new advanced travel time
information system in the Netherlands

Outlook 2007
We expect that the European and North American market for PNDs will together grow to around 18 million units in 2007, up from over 10 million units in 2006. Full year 2007 revenues are expected to be in the range of €1.6 billion to €1.8 billion. We continue to target a gross margin of around 40% of revenue and an operating margin of around 20% of revenue.

TomTom’s Chief Executive Officer, Harold Goddijn said:
“In 2006 TomTom enjoyed its most successful year on record. We are the world’s largest car navigation company. We almost doubled our revenues to €1.4 billion which, coupled with tight cost control, helped us maintain healthy margins and to be strongly cash generative.

Last year personal navigation became part of daily life for millions of people. TomTom owners benefit from a reduced workload, less stress, and less time and distance travelled when they are driving to their destination. Personal navigation continues to transition from the early adopter’s phase into a widely accepted product category. Because of the large market and low penetration levels we see good opportunities for continued strong growth for TomTom.

At the core of our success is our ability to deliver the most innovative and best navigation solutions to our customers. We continue to be the leading provider of navigation devices in Europe with a market share of around 50%. In the US we grew our revenues two and half times during the year and this together with continued investment in retail and advertising enabled us to consolidate our number two position in the market. Tom Tom’s total focus on personal navigation is a significant advantage. We develop our own hardware and software in-house which results in tight integration in our products which gives our customers the best possible user experience. This, together with our scale, customer base and market reach makes it increasingly difficult for new entrants to succeed in this market.

New products and services, increasing affordability, and easy access to dynamic content will drive growth, faster and wider consumer adoption and competitive differentiation for TomTom. We look forward to another year of strong growth and profitability in 2007 for TomTom.”

Strategy
Over the last five years TomTom’s revenue grew from €8 million to €1.4 billion and we are the world’s largest car navigation company with an installed base of eight million users. We defined the personal navigation category and created a large market.

Product differentiation is key to success and we will continue to deliver new, innovative products and services to our customers. We will make access to the network easy and we will deliver superior, relevant content. We believe that accurate, real time travel time information is critical to drive personal navigation to the next level. We will also develop our other after market solutions to address our growing installed base.

Fundamentally better navigation is our vision and current and future TomTom customers will benefit from this.

Outlook 2007
TomTom operates in a growth market with relatively low levels of penetration and rapid product innovation and we expect another year of strong growth. We estimate that the European market for portable navigation devices will grow to around 14 million units in 2007, up from around 8 million units in 2006. In North America we estimate that the market will grow to around 4 million units, up from around 2 million units.

At this early stage in the year we are giving a range of estimates for 2007. We estimate that our volumes of PNDs will almost double to between 7 million and 8 million units and that we will deliver revenues of between €1.6 billion and €1.8 billion. We continue to target a gross margin of around 40% of revenue and an operating margin of around 20% of revenue. This includes a non cash accounting charge for share options of between €30 million and €32 million. Revenues are expected to be stronger in the second half owing to seasonality and to the timing of new product introductions. Revenues in the first quarter will be lower than in the fourth quarter of 2006. Investment in marketing will be highest in the second and the fourth quarters.

Operational review
The fourth quarter proved to be by far the largest quarter in volume terms. In the European market- based on external and in-house estimates - 3.4 million PNDs were sold to end-users out of a total of 8.2 million units for full year. In North America the seasonality was more pronounced with half of annual sales made in the fourth quarter.

We delivered a strong gross margin of 46% and an operating margin of 26% in the quarter. With market shares of 50% in Europe and 20% in North America, we can see the clear benefits of our scale and reach in the market. We also see a growing revenue stream from our installed base of more than 8 million customers who buy accessories and peripherals and access an increasing range of content and services through our content management portal, TomTom HOME. Our superior product quality and ease of use resulted in more than 150 consumer awards.

We continue to build our distribution in North America and we added 4,000 new outlets to reach 20,000 by the end of the quarter. We also entered the markets in Ireland, South Africa and Taiwan for the first time. TomTom products are now available in 25 countries worldwide.

We announced an agreement with Vodafone in the Netherlands which will enable our customers to plan journey times more accurately across all categories of roads in the Netherlands during the second half of 2007. The travel information service which we will provide will be far superior to the currently available services.

Financial review

Revenue
Revenue for the fourth quarter was €478 million, an increase of 35% sequentially (Q3 2006: €353 million) and 65% year on year (Q4 2005: €289 million).

Revenue from PND sales represented 93% of total revenue in the quarter (Q3 2006: 95%; Q4 2005: 91%) and increased 32% compared to the third quarter, mainly driven by strong sales of the ONE, our value-line product.

Revenues in Europe represented 90% of total revenue for the quarter (Q3 2006: 88%; Q4 2005: 90%), revenues from North America were 7.3% of total revenue (Q3 2006: 7.9%; Q4 2005: 9.1%) and revenues from the rest of the world were 2.4% of total revenue (Q3 2006: 3.7%; Q4 2005: 1.2%).

Revenues from software solutions for PDAs and smartphones were € 11 million for the quarter, up from € 3 million in the third quarter due to the roll out of our NAVIGATOR 6 software application for PDAs and smartphones.

Other revenues increased to €25 million for the quarter up from €14 million in the third quarter and up 150% year on year (Q4 2005: €10 million). Map downloads increased following the launch of our latest map upgrade programme. Sales of accessories grew on the back of the introduction of the RDS-TMC receiver which enables users to receive traffic information direct to their device.

Volumes and average selling prices
In the fourth quarter we shipped a record volume of 1.9 million PNDs, a 62% increase sequentially (Q3 2006: 1.2 million) and a 146% increase year on year (Q4 2005: 0.8 million).

The average selling price of PNDs for the quarter was €230, a decrease of 19% sequentially and a decrease of 32% year on year (Q3 2006: €285; Q4 2005: €337). The sequential decrease was due to the strong take-up of the new ONE together with price reductions on the GO range early in the quarter.

Channel inventory

Channel inventory owned by retailers at the end of fourth quarter was stable compared to the end of third quarter. Sell through by retailers in the quarter was very strong and increased by over 70% compared to the third quarter.

Gross margin
The gross margin for the quarter was strong at 46%, a sequential increase of 2 percentage points. High volumes of the new version of the ONE and reductions in product costs were the main reason. Movements in the US dollar rate versus the Euro had a negligible impact on the gross margin increase.

Operating expenses
Operating expenses for the quarter increased by 74% to €92.6 million sequentially (Q3 2006: €53.2 million) and increased 65% year on year (Q4 2005: €56.1 million).Operating expenses (excluding stock compensation expenses) as a proportion of revenue for the quarter were 18% (Q3 2006: 14%; Q4 2005: 18%). This sequential increase was driven by the expected seasonal increase in marketing expenditure.

Research and development (R&D) expenses for the quarter increased sequentially by 48% to €12.8 million (Q3 2006: €8.6 million) and increased by 333% year on year (Q4 2005: €3.0 million). They represented 2.7% of revenue up from 2.4% in the previous quarter. The increase in R&D expenses resulted from greater investment in new product development and growth in R&D resources.

Marketing expenses were, as planned, seasonally higher due to spend to support the holiday season at €44.6 million (Q3 2006: €15.5 million), an increase of 188% and an increase of 24% year on year (Q4 2005: €35.9 million). They represented 9.3% of revenue, up from 4.4% in the previous quarter.

Selling, general and administrative expenses for the quarter increased by 20% to €28.6 million sequentially (Q3 2006: €24.0 million) and increased 106% year on year (Q4 2005: €13.9 million). The increase can be explained by the growth of our company in general. They represented 6.0% of revenue compared to 6.8% in the previous quarter.

Non-cash stock compensation expenses for the quarter increased by 27% to €6.5 million sequentially (Q3 2006: €5.1 million; Q4 2005: €3.3 million). They represented 1.4% of revenue, unchanged from the previous quarter.

Financial income and expenses
Financial income and expenses consisted of a charge of €11.3 million compared to a gain of €3.3 million in the third quarter of 2006 and a gain of €3.8 million in the fourth quarter of 2005.

The charge in the fourth quarter mainly resulted from the weakening of the US dollar against the Euro which impacted forward foreign exchange contracts taken out in accordance with our foreign currency management policy when the dollar was stronger.

Included in financial income and expenses is an amount of €2.3 million of net interest income.

Tax
Income tax increased by 9% to €34 million compared to the third quarter of 2006 (Q3 2006: €31 million) and increased 49% compared to the fourth quarter of 2005 (Q4 2005: €23 million). The effective tax rate for the quarter was 29.7% (Q3 2006: 30.1%; Q4 2005: 32.0%). In 2007 the effective tax rate is expected to decline to around 27%, due to the reduction in the Dutch corporate tax rate.

Cash flow
Cash generated in the fourth quarter was strong despite tax payments of €73 million. In the fourth quarter €132 million of cash was generated from operations driven by a strong operating profit and effective working capital management.

Balance sheet

At the end of the quarter, we had shareholder’s equity of €551 million, up from €463 million at the start of the quarter as a result of the strong net profit. We ended the quarter with inventory of €123 million, up from €109 million in the third quarter. Inventories are clean and as a percentage of annual revenue decreased from 14% at the end of 2005 to 9% at the end of 2006. Cash and cash equivalents at the end of the period amounted to €438 million. Trade receivables at the end of the fourth quarter were €266 million, up from €253 million at the start of the quarter.

We increased our warranty and intellectual property related provisions to reflect the growth of the business. Other accruals and liabilities increased reflecting the growth of the business.

Click here to open the pdf file: Reports Fourth Quarter and Full Year Results 2006

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