Trimble Inc. (TRMB) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. Thank you very much to everybody for joining us today, very pleased to have joining us from Trimble, Rob Painter. I'm James Faucette, the -- one of the analysts here at Morgan Stanley. Before we get started, I just have to quickly say for important disclosures, see our disclosure page at morganstanley.com/researchdisclosures or you can check on-site here for any important disclosures. So Rob, thank you very much for making the trip, and we appreciate you being here and to chat a little bit about Trimble.

Maybe I'll start with the question of the day. And just kind of -- it seems like all these conversations we're kicking off with the initial question of like, can you share with us kind of how you're expecting or what you're seeing from the impact from coronavirus, et cetera, and how you're thinking about the impact that it could have on your business, it has had on your business and is having and how you're kind of formulating what the impact could be going forward?

Sure. As I'm sure you've heard -- well, first, good afternoon. As I'm sure you've heard all day, it's complicated and it's dynamic, and there's a lot that we're learning every single day. From an -- there's an employee side that we start with, we've got a moral obligation to do right by our people and our communities and then at supply chain level, tracing the implications back, whether that's primary, secondary or really kind of tertiary implications through the supply chain and then okay, ultimately through the financials. What we -- what I'd anchor you is on December -- on February 12 on our earnings call, we talked about the impact within a Q1 context. And within a Q1 context, we quantified about 3 weeks of delay minus a couple weeks of buffer equal to about 1-week impact on the supply chain plus a degradation in the sales within the China market that was baked into our Q1 -- I think, our Q1 guide. And I think we are reasonably ahead of the curve of companies of talking about that Q1 impact. What we've seen in the days and, I guess, couple weeks that have unfolded since then is that it's clearly -- has clearly spread. And so we'll expect to have some negative ramifications out of that. The quantification of such is way premature for us to be talking about. And so at this point, I would anticipate the update on our next earnings call. To put a little maybe context behind it though, Trimble's revenue today is about 1/3 ARR. So we have $1.13 billion in annualized recurring revenue. Overall, our business is about half software, half hardware. If we're looking at the hardware-centric businesses of Trimble, we primarily sell through a global dealer channel. So we have thousands of dealers around the world. So I would say emphatically, our local dealers are open for business, Trimble is open for business. And having those local dealers in-region, there's no international travel to be done because they're, by definition, already local. So probably something that's helpful to know about our business model and what underlies that.

So in that, you implied or -- and you talked about back -- like you said, back in February about there being some impact on supply chain, et cetera. Does that -- does it make sense now to -- and have you started to try to remediate that? Or are you better off just -- and are components such that you're better off just waiting until availability improves through the natural course? And can you talk a little bit about any movement you're seeing on that side?

Well, remediation happens on a number of levels. In some cases, I think we were ahead of the curve on doing some upfront buys of commodities. So we early on thought that there might be a shock or, I'll say, a disruption to the system. I think a disruption has turned into a shock to the system, but a disruption to the system and so we're ahead of some component buys. From a supply chain perspective, again it's not typically the primary supplier that gets you at that tertiary supplier. We have very little finished goods manufacturing that happens in China, if we talk about China as an example. Rather diversified manufacturing base, a fair amount in Mexico, we have manufacturing in Sweden, manufacturing here in the U.S., a little bit in China on the finished goods side, so rather diversified in that respect. However, if you chase -- source trace components, okay, if it's boards out of China, displays out of Korea, that's where you really have to pay attention as they're -- of course, it's at one individual component that could gate something from shipping.

Got it. Well, listen, now we've kind of got that question out of the way, and we'll open it up to the audience here in a few minutes and maybe they'll want to revisit it, but I think it's probably more helpful and a better use of time to go and talk about the development of Trimble as a business, et cetera. And since you took over as CEO, you've put forward some organizational changes to align the different business segments under a more consolidated leadership than they had been, at least in the past. Can you give us an overview of how you're thinking about what this new organizational structure looks like, what you're trying to achieve, some of the changes you've put in place? And how -- I guess, most importantly, how are you thinking about how that can lead to more impact in execution?

So if I start with strategy, because I see structure as an enabler of the strategy, from a strategy perspective, we're talking about, we call it, Connect & Scale 2025. Each of those words has meaning. From a connect perspective, we're talking about connecting the solutions within the life cycles we serve, connecting the stakeholders within the life cycles we serve. We're talking about bundling of the technologies that we have, whether that's the hardware and the software together or multiple software offerings we have, so making ourselves easier to do business with by our customers. We believe that by virtue of pursuing these more ratable business models and bringing more -- enabling more data to be brought from on-prem into the cloud, that, that's an option value that we get on in the future for creating a data strategy for Trimble. The pervasiveness of Trimble is pretty impressive across the end markets that we serve, and we believe that there's some real value and meaning to be had there by unlocking more of that data. So connectivity is really important part of the strategy. And when we say scale, this is having effective systems and processes that allow us to efficiently and effectively scale the business. When we looked at the scaling elements, one of the things we looked at is this organizational structure of Trimble. And so I moved from having 10 direct reports on the operational side to 5. It's my belief that by having increased focus on the end markets that we can increase the velocity of decision-making, we can increase the efficiency of the development that we're doing and simultaneously increase accountability to outcomes while improving the actual outcomes themselves. So I feel really good about the moves we made on the organizational side. The organization is responding, I think, very, very well. There's an energy around what we're doing here, the Connect & Scale, the company. And again, I see structure as an enabler of that. I recognize that Page 1 out of the new person playbook is reorganized. And this is one, I think, that was due. And again, we feel -- have good energy around it. And then we said 2025. So Connect & Scale 2025 and then 2025 sense is we -- I think our job is to manage and balance that short term and that long term. And in Trimble style, we believe in putting mistake in the ground around an end game vision and then backwards-integrating to that. And so the objectives we have are not small. And 2025 looked like the right time frame for us to put the stake in the ground around defining outcomes that associate with the connect and the scale element. And that now drives us to the decisions we need to make today, whether it's strategic decisions, capital allocation decisions, organizational structure decisions or take systems. So systems could be the underlying plumbing of the company and to really allow us to connect what we're doing and to make us easier to do business with from a customer and partner standpoint.

So when you look across those different businesses in your different reporting segments, particularly given how you combine management of the businesses now, one of the questions we often get is how much of your software revenue is tied or attached to Trimble hardware? I mean you brought up -- maybe it'd be helpful, you brought up on the AAR -- the ARR, excuse me, number that you're at right now. And how does that divide roughly between software and hardware? Or how do you think -- how should we think about those?

Yes. So Trimble is the -- well, today, we're about 55% software and services, 45% hardware. If we...

I mean I'm sorry, just to clarify. The services, is that all tied to software or some aspect of services tied to deployed hardware?

80% of it is tied to implementation of the software. We do have some discrete stand-alone professional services that we provide, particularly in the area of construction to help contractors learn how to use the processes and the technologies that the digital wave is bringing. So if we look at the overall revenue of -- or sorry, if we look at the overall software and services revenue, about 15% of that is associated with the hardware. So those hardware sales we have translate into about 15% of the software sales -- software services sales that we have divided by approximately 2 to get it to a total company to be talking about 8% of revenue. So a minority on an overall basis, but clearly greater than 0, where there's a connection and a hardware sale that we're making for -- could be a guidance equipment on a farm, could be machine-controlled guidance on heavy earthmoving equipment that we sell it as a system. That system, the brains of the system are the software, particularly the embedded software and also the user interface. And so there's an allocation of the value to software and to hardware. The predominant amount still goes to hardware with the minority going to software.

Got it. Now -- so that's the division. Looking at the specific segments, I think that most often, or maybe not most often, but the legacy reference that people had for Trimble was in the ag business. There's a lot of development there over a very long period of time. Can you talk a little bit about what's happening in the agricultural business? And I bring it up primarily because it's interesting, 4 or 5 years ago, we saw a lot of investor interest. And all they were basically doing is looking at ag commodity prices and saying, "Okay, if these are going up, then eventually Trimble should follow." And sure enough, I think that's kind of what happened to a greater or lesser degree. But can you give us a little background on that business? What's moving the needle and kind of what you're doing developmentally in software there?

Okay. So in the ag -- in the agriculture business, really the frontier is in precision agriculture variable rate. So think by variable rate, controlling down to the individual nozzle on that implement that's behind the tractor. So we tend to think about, and I recognize if you think about Trimble, one often thinks about the guidance on the tractor. But now think about what's behind the tractor. What's behind the tractor, it sprays, it spreads, it seeds. And depending on the nature of the farm, the boom length, there's various boom lengths. So now being able to picture being able to control the individual nozzle, when you control the individual nozzle, you're controlling the amount of spray. So you eliminate overspray or underspray. You actually can get variable rates. So the prescription on a farm is differential depending on the weakness or the health of the soil on that farm and we can take that digital prescription for the farm and translate it down to the individual nozzle. That's not future as we do that today. That's an important extension of our strategy. Again, we have the historical strength on the tractor. The natural place for us to go was to the implement behind the tractor. We have the software today that we call farm management software. So think about managing the materials and the implements for that farmer. And then there's a service offering we have, we call it correction services. So to get centimeter-level accuracy, which you need on a farm, you need that centimeter-level accuracy, so you can actually get the benefits of the precision technology. For example, to optimize yield, you need to seed in the right place. You put the seeds too close together, they fight for nutrients, you get smaller growth. You put them too far apart, you're losing the opportunity to have gotten more yield off the farm. So that precision matters. To get that ubiquitous high-convergence accuracy on a farm, you have to actually augment the GPS or GNSS that's on the equipment. That's a Trimble offering is to provide satellite-based -- or land-based or satellite-based correction services to get that centimeter-level accuracy. That's a service that farmers subscribe to and construction workers and surveyors. So those 3 elements of the technology stack come together. So from the correction services to the software to the technology on the equipment itself to create that offering. So in the last couple 3 years, our technology -- the growth of our technology really has been in all of these dimensions. And so we've seen more growth outside of our historic guidance technologies. Give you an example, in the fourth quarter, we launched a product we called WeedSeeker 2 that's spot-spraying weeds. And what the value proposition farmers are getting out it is up to a 90% reduction, 9-0, 90% reduction in the use of herbicides because you're spot-spraying as opposed to effectively just painting the entire farm to kill the weeds. So that innovation we're seeing is both onboard and offboard on the farm, and we've remained quite optimistic about where we're going with that business. I'd also say that agriculture business a few years ago was predominantly a North American business. And today, actually north America is minority of the business. Our biggest market are in Europe, and we've got a nice-sized business now in Brazil. And so we've become much more geographically as well over the last few years. So geographic diversity, it's called solution diversity as well in that market.

So -- and just as a reminder, how big is ag roughly for you today? And when you are planning and strategizing, what do you think that business should roughly be able to grow for you going forward?

Well, broad strokes, when -- I'll reference what we talked about at our Investor Day a couple years ago, when we talked about the thematics of the key end markets, what we saw at a company level was a 6% to 9% at a company level organic growth, 8% to 10% within construction, 7% to 9% in agriculture and transportation and a 4% to 6% in our geospatial end market. Okay. So clearly, at the moment, that's gotten disrupted at one level by actions in trade, the trade disputes. Okay, then there's the COVID-19 topic. But over a long baseline and over a cycle, these have been numbers that we have achieved in these businesses and at the company. So we would remain optimistic about the potential of the agriculture business. I mean it comes -- you have to start -- we believe you have to start with the value proposition and what we're creating. And really, it's connective tissue across Trimble. It's productivity, quality, safety, transparency and environmental sustainability. Productivity sells, and we believe productivity sells in an upmarket and in a downmarket. So if we find ourselves in a more challenged environment here at the moment, we believe we can still prevail through that. And we look at the long baseline record of the company, and we've sold in up markets and down markets and come out of down markets reasonably fast.

So on the transportation segment, you've been very forthright in saying, there's been a little bit of -- you're expecting a little bit of a headwind on that business in 2020. Can you talk a little bit about like what has happened there? Maybe what you would -- if you could go back, what you might do differently? But more importantly, kind of how you expect that to recover? And then what kind of time frame we should be looking?

So our transportation business, we have a, I'd say, a few different businesses within that, but primarily think long-haul trucking. We are predominantly North American, but we have a business in Brazil, Benelux, India as well. And there's really 3 legs to the technology stack that we provide in transportation. So we tend to be probably best known for what we do on highways, so think telematics on highway mobility. We do the back-office software for trucking companies. It's call a TMS, or transportation management system. And we do routing, mapping engines, truck-specific routing and mapping engines for these companies. That routing, mapping business that we have, we call it Trimble MAPS, has been a consistent and solid double-digit grower, recurring revenue business model, big contributor to the results in that segment. What we do in the back-office enterprise, it's a business that's a historic license perpetual sale business that we're starting to convert to a subscription business model. What we believe we'll see in the early stages in this is that it's a chance to expand the addressable market by going downstream to more mid-sized companies who don't want the, I'll say, the full, thick installation customized ERP-type implementation, who want something that's faster kind of a standard config, fast deploy model. And then we would see that going upstream to the larger customers. So we'll see -- expect to see -- I'm saying that because that's short-term headwinds we would expect to see in transportation as a result of a model conversion. That's the virtuous kind of headwind in which we've been demonstrating and what we would expect to see from a bookings perspective and ARR that you could see on the face of the financials. And then the technology we have on the telematics business and what we do on highway mobility, we had a catalyst for growth in the, let's call it, the '16, '17, '18 time frame with the electronic logging device mandate that had 2 implementation phases. One was in December of '17. The second, you had to be fully compliant in December of 2019, so just a number of weeks ago. And the short answer of what we saw in that is that it became disruptive for us and the lift was heavier to do the technology conversion in that market to have our customers meet the compliance. Our solutions are compliant. And we're building them to be feature complete to what functionality they had before. So the benefit of Trimble and being an incumbent player in the market is having the large installed base that we have and the length of the customer relationships that we have. And the challenge also has been that we had technology stacks that rank from, I'd say, old legacy technology stacks to the stuff that's brand-new. If you had the brand-new stuff, you're good. And if you had the old stuff, it's a little bit bland. Analogy is trying to put the iPhone or the new iPhone 11 operating system on an iPhone 4. That's tough to do for us. It's tough to do for customers. And so we made a commitment to make the technology work on the old technology as opposed to force the conversion and in other words, end of life. The old stacks that were out there, to the extent that there's a lesson to be learned or is there some tipping point when you're better off to say, "Okay, it's time to end of life," there are certain of those technology stacks that, I think, we would -- with the do-over would have said, "Let's end of life that, force a conversion over and count on the quality of that long-time relationship we've had to keep it in the Trimble ecosystem." So we understand the size -- we understand the scope of what we need to do to finish the -- to become feature complete for our customers. We're in close contact with the customers. And we have a number of new leaders in the business who are leading us through this next phase. So we know what to do. We're on top of it. What we expect to see is more benefit in the numbers in the second half of the year. And what we're doing, the investments we're making right now are to make sure that we preserve the franchise for 2021 and beyond. It's a recurring revenue business. So it's in our interest to make sure we're making the investments to hold to the long tail subscriber base that we have. So we think it's the right thing to do for our customers, the right thing to do for the shareholders of the business.

Got it. I want to make sure to see if there are any questions from the audience. We've hit on a few different topics here. One here in the front. Hold on just a sec because we're webcasting, we'll get you the microphone.

Sorry. Sure. Just when you talked about the technology transition challenges that the way you described your relationship, it sounds like your customers give you the benefit of time to get it right, albeit I'm sure difficult conversations. Are there any competitive new entrants in that space who have the kind of the cloud-native-type solution today that are taking share, taking advantage of that?

Well, there are definitely competitors in the markets, whether it's transportation or other markets, who are...

Specifically to EDL issue?

Yes, there are cloud-native competitors. When you have a mandate to put technology on all trucks, these hours of service mandate, you attracted a lot of capital into the market. So there's -- yes, there are definitely a number of competitors in the market. And I think I'll say that those customer relationships are on our side. So the disruption, if we have any disruption or disruption we've had, I don't put that to the competitive environment, I put that to -- on our ability to execute. And that's why I'm confident that as we get through this, we'll hold the customer base. It's one thing to be digital-native and not to have, let's say, technical debt behind you. When we look at the R&D we have with the relative market share that we would have as a business, we think we're differentially investing in R&D on an overall basis. Go back to the 3 legs of the technology stack that we have to serve carriers, nobody has the value proposition that we can deliver by connecting what happens on-highway and off-highway. And then the recent acquisition we did with Kuebix a few weeks ago, takes us to the shipper side of the equation. The end game of Trimble is to connect the supply chain and transform how transportation is done. To transform how transportation is done, we believe we needed to play on the shipper side of the equation. So the -- we have 1.3 million assets that we manage on the carrier side. The shipper side for us is very important. So the Kuebix acquisition helps us pick up over 20,000 shippers into the network. So that as we drive a digital freight strategy, this connectivity and the strategy is, we think, unique to Trimble, that a digital-native ELD provider can provide a point solutions as digital-native but actually misses out on -- isn't there for the broader strategy offering. And that's the Trimble differentiator.

So Rob, I want to ask, you mentioned the Kuebix acquisition, is that Trimble has a long history of being quite acquisitive and through -- and finding different opportunities. How are you thinking about where to allocate resources across your portfolio? And how are you thinking about acquisitions versus divestitures, et cetera?

Yes. I mean our fundamental role as operators of the business is to allocate capital. Okay, let's define that as time, people, money, so putting all of those to the highest use resources that meet the strategic and financial aims of the company. So if you're not meeting that strategic and financial aim, okay, then that has a divestiture consideration associated with it. We said on the call that we're looking at about 5% of the portfolio, so-called of the revenue of Trimble that would make that list for further thought. We had announced 3 business exits we made since September, when we were on the call a few days ago or a couple of weeks ago. That's how I would address the divestiture or exit side. From the focus perspective and where we go with the allocation of capital, okay, so our historic baseline is about half of cash to acquisitions, it's about 1/3 to buyback and what's called the delta and the CapEx. And we're well able to fund the internal growth of the businesses and we're an asset-light business. So when you have $1.13 billion of ARR and you look at our working capital, include the deferred revenue, it's less than 3% of revenue. The business model produces cash flow. Cash flow was up over 20% year-over-year last year. And that probably isn't highlighted enough. So that cash flow and the ARR are really important metrics to pay attention to. And so as we look at the strategy and saving on the capital allocation side of acquisitions, really centric to the core markets that we're serving, so we want to be focused. We're not looking for new green shoots of industries. We think there is ripe opportunity organically and inorganically within the core franchises that we serve today. And so that's where we want to stay -- very much where we want to stay focused. I would -- it probably goes without saying, but okay, the software deals versus hardware, certainly software and recurring models, we do pay attention to the types of business models that we're pursuing. But we first are looking for the strategic fit. So this isn't a financial engineering exercise. It's really about how do we drive the strategy forward. And when we're looking at acquisitions, it may have an element of geographic reach or an element of workflow capability that would have us making moves.

So last question for me, and then just in the last minute or so that we have to wrap up, it's interesting because there's been a lot of talk over the last 4 or 5 years about autonomous vehicles and cars, et cetera. But as you kind of highlighted in ag, Trimble already does a lot in this area in ag, construction, et cetera. And at the end of last year, you also announced an alliance with Qualcomm to work on high-accuracy positioning systems. Do you see an opportunity for Trimble in the autonomous driving consumer vehicle market? Or what role could you play potentially there?

Okay. So in 29 seconds, yes. So there's -- I think consider off-highway and on-highway capabilities, consider selling, let's say, positioning technologies, components versus bigger solutions. So those are the, let's say, the axes. From an off-highway perspective, think about what we do in civil construction and agriculture. It's a series of automation continuing up in automation curve. We were doing autonomy, we just didn't call it autonomy, we called it guidance and control. So continuing to move up workflow capabilities is definitely on our mind. And within the reorg, we put our autonomous capabilities together into one organization. And we'll take those to market in an off-highway sense through the end markets that we serve. On-highway, this would be relevant to the Qualcomm announcement. We're working with Tier 1s and OEMs as well. The primary interest there is in -- I talked about this correction services and the centimeter-level accuracy for the farmer, that has a role to play for -- starting with lane detection to understand absolute position. So think about the positioning stack in an autonomous context, snow is on the road, you can't see the lanes, so the camera is not going to help you. If there's not a car in front of you, the lidar or radar is not helpful to have a relative distance of what's in front of you. So that absolute position has a role. As a company that got its start in positioning 41 years ago, we have something to contribute there on-highway. You go into that tunnel, you lose absolute position, but dead reckoning becomes an important capability. And that's also deep in the Trimble technology stack. So on an on-highway context, I think, is a part of a full positioning stack is where we're likely to play in the short term. In on-highway, I see us more in the full automation stack. And we get wrapped up in the autonomy and thinking about stuff moving around town, I'd ask you to also think about that construction site that's got autonomous equipment running around it. That stuff running around needs to know what to do. We're already there. We have the work -- we create the plans and manage the plans and manage the sites and manage the businesses. And we think we're the brains behind these operations as well.

Great. Rob, thank you very much, and appreciate you and the rest of the Trimble team being with us today. Have a good day.