Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Jerry Revich from Goldman Sachs. And I'm pleased to have with me Trimble's Executive Chairman, Steve Berglund. Steve has a few minutes of prepared remarks, then we're going to jump into Q&A. Steve, thank you very much for joining us. The floor is yours.

Good afternoon. Thank you for being here. Let me give you a quick review of Trimble. So statistically, and last year, we did almost $3.3 billion worth of revenue. EBITDA is currently running 22% to 23%. We have aspirations higher than that. Cash flow from operations is strong. Earnings per share is showing progression. As a company, we are -- we have a common theme. We manifest in different markets, but we have a growing underlying platform for the company. But the 3 primary areas are construction, agriculture, transportation. We have emerging areas such as utilities and rail, where we believe that technology can have a meaningful difference. But in effect, the unique characteristics of Trimble, the unique identifiers tend to be -- well, first of all, our, if you will, unifying thing really is to transform the way traditional industries work. We believe that in each of these industries, it's possible to have a transforming impact on the work process in -- through technology in each of these industries. So for construction, for example in a nutshell, what we're after is to reduce project costs by 25% through the holistic use of technology. In agriculture is -- it could be a bit arrogant, is to be a transformative development -- the first transformative element in agriculture since the beginning of the Neolithic revolution, not that our ambitions are profound or anything. But through the use of precision farming and the knowledge of where you plant the seed to -- within a centimeter or 2, you can change the way agriculture is done very fundamentally. And then in transportation, the objective there, for example, not the singular objective but one objective would be to do a better job of matching capacity and demand and significantly raising the utilization on long-haul trucking. So again, not looking for incremental improvements, and looking for step-function improvements in each of these industries. Now the other unique characteristics at Trimble. And you can see that, I think, by walking the show and contrasting us to maybe other exhibitors is the fact that we bridge the digital and physical world. We are providing sensors to many of the manufacturers in -- at CONEXPO. We are doing machine control. We are doing monitoring of all sorts. But then we are comfortable in that realm in terms of understanding the machine operation. But then we're equally comfortable in the digital world. So taking the data from the machine, and putting it into a model and taking the output from that model and directing the operations of that machine, for example, so digital and physical. And finally, a little bit more subtle, but really in a way, what you do is -- walking the show, you see a primary emphasis on field operations, the machine operating in the field. But there is an ability -- the capability today and in a way that hasn't been true historically of integrating what happens in the office and the field is -- so that there is a seamless unified operation at the enterprise level that doesn't differentiate between what happens in the field and in the office. In terms of our mix. Okay, we reported 4 segments. Compared to certainly 2015, which is our -- the last gotten downturn we saw as a company, we're much more robust, even balanced portfolio than we were in 2015. So you can see the split by segment. And then, okay, the software and hardware mix. We are now -- 57% of our revenue is coming from services or software or recurring, only 43% is from hardware, which is a radical difference from what it would've been certainly 10 years ago and even 5 years ago. And global, North America is 55%, largely because most of our recent acquisitions have been North America, the trend has been to grow faster internationally than in North America. So the points here, maybe in terms of where our revenue comes from, we have a very low, unfortunately, but silver lining of bad news is that we have a very low exposure to China, it's kind of 3% or if it's that. So the China market is not as important to us as it once was. Let me also point out, given all the talk about oil shocks and such is in '20 -- going into 2015, we were much more exposed to oil than we are today, kind of our exposure to oil in all forms. Today is something -- I'm going to shrug at the shoulders, it's less than 5%. It is not a meaningful factor for us. I'm not sure that's well understood at this point in time. So here are the reasons to invest in us. I think we've touched on -- and let me, in particular, point at the level of R&D. Our recent experience has been 14.4% of revenue, more than 2/3 or roughly 2/3 of that is in software. And our traditional formula as a company has been -- Trimble's success has been a function of innovation. We are a Silicon Valley-based company, and we're consistent with that profile. Plus in the context upon CONEXPO, because I think it's particularly important, plus our domain experience. Most of the people out in the floor can tell you how to do things like move dirt from one side of the road to the other. We are relatively unique in the context of the show in terms of being able to explain why the dirt is being moved from one side of the road to the other. We understand, for example in this context, what the contractor is all about, what the contractor needs, what their workflow is always about. We're not just providing a product, we're actually providing a solution. So let me also -- let me explain, I'm substituting for Rob Painter, the CEO, today. I left the CEO role after -- in Jan -- at the beginning of January after almost 21 years. But we're self-quarantining all the people who are at the shelf, and we decided that I was more expandable than Rob. So that's why I'm here today. So I'm happy to be here. That's it. Thank you.

Thanks, Steve. Glad you're here. So let's dive into your Q&A. All right. In terms of -- as you look at the opportunities for Trimble today to participate in essentially, digitization of a number of industries that have been closer to analog for years. Can you talk about, is there opportunities that you see in terms of the addressable market? And more importantly, what parts of those opportunities do you think move forward sooner?

Sure. So first of all, we would see our addressable market as a company at something on the order of $50 billion. So sitting at our current revenue level of roughly $3.3 billion, we are not conceptually constrained by what we see in the marketplace. Now where we see the -- in terms of markets, where we see the growth -- our largest growth opportunities, I think, first of all, is construction. Construction, as an industry, is measured in the trillions of dollars. It is still, in our view, very early in its technology adoption cycle. So we see a tremendous amount of upside in construction. So even though it's something of a GDP-driven industry, we see lots of opportunity to innovate and grow within the construction industry. I think the other segment where we see inherent growth opportunities is in transportation. There are still a great many unsolved problems in transportation. So we see opportunities in transportation. Now from a nature of the revenue, okay, we are increasingly, as we have been, really for 20 years, we are increasingly adapting to the marketplace. So we are becoming more and more of a software company. And okay, buried in that is we are becoming more and more of a SaaS-oriented delivery as a service. Now the interesting thing is one of the things we've rolled out here at CONEXPO, introduced yesterday is really the concept of platform as a service, which includes hardware, which is for an owner or for a contractor, on a project basis, is providing all the hardware, all the software, all the services required as a bundle and basically providing it as a service. So we -- as of effectively now, we're offering that as an option to an owner. And along -- as part of that, we're selling it as a technology assurance program. Whatever the latest technology is, software or hardware, we will provide it as part of that contract. So I think both from a business model standpoint and then inherent product-driven market opportunities, we're seeing growth in a number of different areas.

And Steve, thinking back to 2015, '16 commodity downturn for you folks, obviously, it was a tough environment. Can you talk about the scenario planning that you folks have going on today, obviously, big oil price correction, issues in the credit markets? So what scenario planning have you folks done? And how are you thinking about setting up the organization?

So -- yes. So let me, first of all, kind of talk about the differences to 2015. So we took a hit in 2015. We've had in the last 20 years since 2000, we've only had 2 down years, 1 was 2009 and the other was 2015. So we've had 18 up years and 2 down years. So first of all, a little sense -- tend to be sensitive about being more cyclical because we are not really a cyclical company. We've got -- had 2 down years in 2009 with everyone else and then 2015, partly self-induced. The portfolio is significantly different today than it was in 2015. At that point in time, we had relatively lot -- overexposure, if you will, to agriculture, a disproportionate amount of our revenue and a disproportionate amount of our profitability came from agriculture. So when the commodity pricing downturn came, okay, we saw demand hit. And okay, that had a disproportionate effect on the company. As we saw earlier, our exposure to agriculture is much smaller today than what -- the relative exposure is much smaller today than it was then. At that point, our geospatial business was more -- was fairly heavily oriented to oil, particularly seismic exploration. That is no longer true. So I think it's a much more balanced portfolio in terms of the businesses we're participating in. Plus, we're much more, as you saw, 57% of our revenue is coming from software, which provides us a fair amount of capacity and so whatever relative to a downturn. So I think the -- we have taken pains to do some restructuring as a company, so it is a different portfolio than it was in 2015. So the learning points from 2015 are only semi-relevant today. Now in terms of the current environment. Well, I think we share -- we're sharing the experience with a lot of other companies, is kind of a day-by-day sort of experience. So I think in the quarterly conference call, we commented on, okay, our view on the coronavirus, and the impact kind of pointing, particularly, at the supply chain as well as market fallout in China. I don't really have anything new to say on that. I think we're kind of observing what's going on and are making -- yes. We are playing out scenarios. We are trying to understand what the implications are. I can say I can personally point to my experiences at Trimble in terms of significant downturns. 9/11, the market disappeared for 9 months on us. It was already a recession period, it disappeared for 9 months and then 2008, 2009. I think we are very confident on our cash-producing characteristics in a downturn. We understand what a significant drop in revenue would look like from a cash perspective, and we're pretty comfortable with it. So I think we have a balance sheet, and I think we have cash flow under all circumstances. Looking at 2009 as a downturn. It was -- yes, we got hit hard along with everybody else. But I think we -- our low point was something like an EBITDA of 15% to 16% in that period. So our worst case isn't all that bad. So I think we -- I think there is -- the current environment, at least as we see, okay, is certainly negative, but not in any fashion, particularly threatening. We can manage through it. We're taking steps to manage through it, but I think it's still on, particularly, the virus and all subsequent effects are still unfolding. So I think we're going to play it as it comes. But in terms of strength of balance sheet and our cash-generating characteristics, we're pretty comfortable that we can take a hard hit and keep on going. Not that I'm predicting a hard hit, but if it should come down to that, I think, we're prepared to manage through it.

Yes, [ David ].

[ David Raso ]. For the Transportation business, what inning do you think we're in on the adoption in transportation? Also, Verizon rolling up with Fleetmatics and Telogis, how have you seen the industry dynamic change over the last 4 years since they did those deals? And then lastly, I'm curious, if you don't mind giving us some perspective, the margin differential that you see between ag, construction and transportation.

Okay. So I think in terms of what inning we're in, I think, first of all, it comes down to a definition of terms. So in terms of kind of the telematics end of it in terms of where is my truck and even what's the status of my truck, particularly with ELD and all the rest of it. Okay, we're -- call it, what, something seventh inning or something there. But when it comes to some of these more profound issues in terms of managing the fleet and starting to get into issues of transparency in terms of, okay, doing a better job of matching capacity and supply, which is a huge needle mover for the industry. Okay, we're -- okay, call it, second inning or something like that. It is -- nobody has actually put together the data necessary to really solve that problem. And parenthetically, let me just point out in terms of that -- those that have -- Trimble actually is sitting on a large portion of the data that's required. And in terms of the competitive realm, tying it all together, yes I mean, Verizon acquiring -- doing those 2 acquisitions is interesting. So far, it has not been, particularly -- okay, being a little maybe complacent here or projecting too much complacency. But that has not been a significant factor for us competitively. What is more interesting is the level of what's occurring in kind of the start-ups in terms of starting to solve some of these problems of transparency. And late in the year, late in 2019, we acquired a company called Kuebix. It was relatively expensive for the revenue we got, but it puts us in a very good place in terms of actually being an innovator in terms of solving these problems. So I would say, kind of the industry combinations of the larger players so far has not been, particularly, what I would call, challenging in some way. I think this kind of big raw innovation is where the action is in. And again, with the acquisition of Kuebix, we're making sure that we don't get left behind there or that we are -- let me say it more positively, we are setting ourselves up to be a leader in the innovation, continuing leadership in that. And oh, the margins. Yes. So the margins have been challenging, more challenging than we would like, certainly in the Transportation segment for a couple of reasons. There's this paradigm of you more or less give away at -- basically no gross margin or very low gross margin, the hardware to establish the footprint on the truck. And you regain it through subscriptions over a period of time. So there's a temporal effect here of where we are in that cycle. So that has actually been a challenge to margins. I think the -- the whole ELD conversion, okay, has been -- again, kind of something of a front-end, okay, mandated. There's been a lot of productive activity, but it has been relatively constant. If you look at the drivers of the business, our expectation is still that -- okay, the Transportation segment, margins will continue to converge on the Trimble average, and Trimble -- we expect that as a result, the Trimble average will increase. So yes, we are not certainly not satisfied with the Transportation segment margins. We're -- we fully intend for them to continue to improve.

If that is the paradigm and I assume with players the size of Verizon, that paradigm probably doesn't change anytime soon on sort of a -- give the hardware away and make it back on subscription? Is that a fair assumption? Or...

Yes. No, I think that is the paradigm. Now -- I mean, the other stake in -- the conceptual stake in the ground that, I would say, is I trump it in the context of construction, we're both physical and virtual, digital. Hardware matters to us in agriculture. It matters to us in construction. It really doesn't matter to us in transportation. We're agnostic really on the device itself. What we're really -- what we -- our contribution in transportation is on the data and analytics and decision-making side. So we're -- our core identity is not that of a hardware provider in transportation, it's just the means to an end. And at the moment, it's kind of uncomfortable.

Does that mean the majority of your transportation revenues that are software are not on your own hardware on those trucks?

I'm going to deflect on that one. So I don't, for sure, know the answer. But I think we do, do our own hardware. We -- but we're also getting hardware from third party. And I guess, I'm reinforcing what I said because I don't know instantly the answer to it because it's not actually important -- it's not for us strategically important. We will make the make-buy decision and do that, but yes. But I think in terms of -- we're not committed to try to make gross margins on hardware, the hardware is a means to an end.

And Steve, on that note, so [ Cowen ] put up greenhouse because they had supply chain issues. So I think for some extent, they're a supplier for you folks. Can you comment on if you're seeing supply chain issues in your business?

To stay out of trouble with Rob, Rob Painter, I'll just point back to what we said in the quarterly conference call and what we said on the effects of the supply chain. We're big. We were actually quite early, I think, in terms of saying. There are a -- the virus is causing issues on the supply chain, we are seeing issues in the supply chain. But I wouldn't want to be that specific.

I am curious in the difference between construction, ag and transportation. Obviously, we all would love to just have the software part of it. It's the best margins, best return on capital. It sounds like in transportation, you don't see the -- a moat around the business by having the hardware. Is that not fair to say about construction and ag, where having that hardware is a little more important? Not just it has better margins. But...

Yes. No, I will be declarative, it is much more important on agriculture and in construction. I'd invite you to visit our booth, and okay, we can -- but it is -- in our realm, particularly in construction and agriculture, there isn't hardware or there isn't software, there is a bundle. And okay, really, the hardware is a platform on which to pile on software, so yes. So I think it's an integral equation on our part. So yes, we don't really make the distinction. And I think that is -- makes us unique. I think that gives us a significant advantage, in fact.

And Steve, can we talk about the e-Builder and Viewpoint for a minute here where you didn't own the businesses back in '09 and took right in '16? Can you talk about how those enterprises performed in those recessions? And talk about the resiliency of the business as you see it.

Yes. So again, reference point is Viewpoint and e-Builder. We acquired both of them in 2018. Both of them, software companies in construction. e-Builder, I think, is a very, very clear -- during the Great Recession, they were a much smaller company at that point in time, but they grew significantly during the last significant downturn. And part of it is their customer base tends to be government, it tends to be health care, it tends to be -- I think, historically, industries that may not be affected quite so much by economic downturns, plus the value equation is very strong. Viewpoint, much the same. So I think there's a contrarian story for both of them in terms of their performance on downturns, which is when the going gets tough and you need to get better, tighter control of your operations, tighter control costs. Okay, I would propose that e-Builder -- both e-Builder and Viewpoint, for example, are -- enable tighter control, tighter accountability and those sorts of things. So we'll see, but I would argue that both of them can be probably contrarian in a downturn. And our -- so far over the last 2 years, now both of them have significantly outperform -- have been higher performance than we anticipated in their acquisition model. They've exceeded our acquisition model coming in. So -- and the other thing with Viewpoint, in particular, and I think we're feeling the demand. We're feeling the demand real-time in the booth here at CONEXPO is contractors, this is maybe the point of nexus for construction in terms of the demand for integration. And Viewpoint is -- provides a backbone for us, for an information integration across the enterprise, across the workflow. And what we're seeing is honest to goodness, strong demand to integrate other elements of Trimble together with Viewpoint to kind of create new solutions, to kind of improve visibility, improve accountability, improve the kind of control. So yes, I think both those represent potentially, we'll see. Well, hopefully, we won't see because there won't be a downturn. But if there is a downturn, we'll see. But I think both of them have characteristics of being kind of contrarian to the narrative.

And so with a SketchUp transition to subscription, the tailwind up being significantly larger than what you folks thought by making it available on a subscription basis than sort of perpetual license. Any other businesses within the portfolio that could have similar tail in -- towards new users once you offer subscription as an option?

So I think we're in the process of kind of testing the proposition. So yes, we were -- SketchUp, we went cold turkey in terms of -- well, virtually cold turkey in terms of flipping the switch. And what we saw were somewhat surprising outcomes, which is, okay, we saw a higher uptake. But I think, as I said, we introduced kind of this idea of a bundle -- bundled platform as a service. And so far, maybe not across the full spectrum of construction contractors but through a large number of them, what we're seeing is high enthusiasm. So I think the model, it won't be universal. But I think in certain businesses, in certain customer segments, I think, there is a -- an opportunity for to actually gain, if you will, market share. At the same time, the accounting consequences tend to be a little irritating. But I think we're -- and I think this is a theme Rob is carrying forward very, very strongly in terms of kind of addressing the alternative business model. So I think you can expect to see more of it from us. But so far, the effects are really quite positive.

Yes. And top 1 or 2 businesses that you're most excited about to offer as an option?

Well, I think construction simply because it's not for every contractor, it's not for every project. But for a section of us, I think, the simplicity it brings, so I think construction. And then, well, I would say, on an ongoing basis, transportation is logically in that realm as well. So I think all of our businesses have opportunities, but if you're limiting me to 2, those would be my 2.

Sure. Great. Thank you. Please join me in thanking Steve for joining us. Thank you, Steve.

Thank you.