Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Hi, good morning, everyone, and welcome to our [ fire-less ] chat with Trimble. I'm Jerry Revich from Goldman Sachs, and I'm pleased to have with me David Barnes, Chief Financial Officer. David, thank you very much for joining us.

Happy to be here.

David, for those newer to Trimble on this webcast, can you talk about how you see the company positioned in the industrial value chain and the company's top adoption curve opportunities over the next cycle?

Sure. Well, I'll start, as you suggested, with sort of an introduction to those who might be new to Trimble and remind everyone, I'm relatively new to Trimble, 5 months-plus at the company, several of those months working out of my home office. But I'll comment on the strategy. I'll use some of my own words. But we talk about how our technology is used to transform the way the world works, which means really transforming the way ideas and concepts turn into actual physical outcomes. The unique aspect of the Trimble portfolio is that we're involved in both the physical and digital worlds. We are predominantly now a software and services company. But we have our hardware roots that really help build our domain expertise and putting designs concepts into practice. We're really focused around 4 key domain areas of Transportation; Resources and Utilities, our resources, mostly agriculture; Buildings and Infrastructure; and Geospatial and survey. So we're all about those 4 principal vertical markets. From an end-user perspective, the Trimble business is not about selling a particular brand or product but rather producing business results. And we'll talk about how I think that positions us in the cycle. All of the verticals we serve are traditionally underserved by digital technology, even today in the early stages of technology adoption. And the technology can have a huge impact on productivity, safety, product quality and environmental sustainability. So that's sort of the strategic background that was all true before this current cycle hit us. So where are we in the cycle? Well, obviously the downturn will impact many and most of our businesses. Probably all of our businesses will be affected adversely in the very short run. Longer term, though, I believe that some of the things happening in the market will play to our strengths and will result in a stronger Trimble coming out of this. A couple of things is that, one, our end-user markets, they're under pricing pressure, which means that they need to be more productive. They need to be more efficient. And we think the digital technology we offer helps them be more efficient. Second, we're going to see our customer bases consolidate. And generally, the Trimble applications are sold to the more sophisticated, better-capitalized clients. And so we think a shakeout in some of our customer industries might help us. From a competitive perspective, we bring scope, scale, a balance sheet. We're competing in many cases against relatively new startups that are more thinly capitalized. And so we think the scope of our business and our strength leaves us in a position to survive where perhaps some others won't. And then I'll just comment that the -- our strategic direction, which is all about Software as a Service, Solutions as a Service, is increasingly what the market needs. Customers are looking for CapEx rather than OpEx -- I'm sorry, OpEx rather than CapEx models. And the subscription offering set is ever more appealing to customers. So we don't like the fact that we're in this recession. But we think what we do and the way the market's moving converge pretty well.

Okay. Perfect. Thanks for framing the discussion, David. And in terms of the company's D&A historically has been pretty heavy on the M&A side to supplement the internal capabilities. How active is the pipeline today? And what are the parts of the portfolio that you're targeting for incremental investment?

Well, as you said, Jerry, M&A has been a key part of the growth strategy for Trimble. And strategically going forward, that will remain the case. Right now we, like a lot of other companies, are being very careful about capital allocation. So we are actually not pursuing really big acquisitions right now. We think it's prudent to see ourselves through the bottom of this cycle. And then it's also true that the sort of price expectations and with the market and the turmoil we're in, there are not a lot of deals to be had right now. But coming out of it, as I said, we believe we'll be financially strong. And we still have irons in the fire on deals that can make us stronger. We're really about the connected life cycle and Software as a Service offering in our -- the domains that I mentioned. The highest priority is in the Buildings and Infrastructure group. That's where we've made big acquisitions with Viewpoint and e-Builder, which are really part of our Connected Construction strategy. We think there's potentially more to do in the resources and agriculture area and in Transportation as well. The Geospatial area would be the least likely to attract M&A interest from us because it's a more mature business, and we think we have the portfolio that we need.

Okay. And in terms of the growing subscription and software part of the story, can you talk about the opportunity that you folks have to accelerate the shift from perpetual license software to subscription, please?

Sure. We -- while we have a big and growing ARR base of business recurring revenue, we also have meaningful perpetual software businesses across our portfolio. So if you look in the buildings area, where we do software for mechanical and electro-plumbing contractors, that's largely perpetual now. We -- our structures design business out of Finland is principally a perpetual business. Even in Transportation, the ERP systems, we sell it principally Transportation. So really most of our software businesses still have a portion, if not a majority, that are perpetual software. And moving those models to subscription has been a priority, was a priority before the crisis. We think the idea is even more compelling now because customers, it's a much easier buying proposition for a customer to buy a subscription offering. We're hearing our customers say that when your access to your own IT staff and your own servers is harder to get to, the subscription offering is more compelling. So we are -- we were leaning hard and we're leaning harder into the subscription transitions on all of those perpetual software.

And in terms of the costs, if you will, of supporting both business models, can you talk to that point, David, to, you folks, correct me if I'm wrong, have taken that approach of, "Okay, we're going to let the customer choose what works for them. But as a result, we're going to have to keep supporting the perpetual business"? What does that mean for the cost structure?

Well, we are -- we're definitely very customer service-focused. And so sometimes, perhaps more than we ought to have had, we like to support the broad range of offerings in the past. I'll point out though that we are committed to the evolution to subscription offerings. So if you look at the SketchUp design business, your ability to buy that as perpetual software is about to end. So we do intend to sunset our legacy offerings across the portfolio. It will take a lot of time. So you are not wrong that it is costly to support both business models, and I'll talk about the cost and complexity in 2 areas. One is product development side and then the other is the business support side. And what I focus on is how do you order it, how do you provision it, how do you re-up your subscription. And it's true that the legacy Trimble business in many of our -- not all, but many of our software businesses were designed for one big transaction rather than a continuous ongoing relationship. So the product side, we are disproportionately investing in all of our subscription offerings and we're -- and just investing as we need to keep the perpetual offerings competitive and functional and changing our sales incentive systems to promote the business model that we want. On the back office side, initiative that I'm hoping to lead is to provide a common digital interface infrastructure for all of our subscription businesses. And what won't work is if we have each of our businesses, which do operate somewhat autonomously, develop their own solutions. We think we can provide a more compelling and efficient platform as we work together. But this is, you're right, it's a challenge. And I will say even in this tough environment, where we've cut costs, including we've cut the pay of most of our salaried people, we are not cutting our investments. In fact, we're accelerating them and enabling the future digital transformation.

And then that's a really interesting point in terms of the way each of these businesses have operated in the past in terms of doing their own back-office work essentially on the subscription services. What's the cost reduction opportunity? And over what time frame do you think you folks can get after it?

Well, I'll say coming in as a relatively new member of the Trimble team, one of the things I'm impressed with is the way the M&A process has worked and the way we've been able as a strategic acquirer to keep the identity and sense of purpose and the entrepreneurial focus of the businesses we've acquired. And a lot of big strategic acquirers struggle with that. Traditionally, the integration approach of Trimble acquisitions has been pretty light and the coordination or integration is more informal and social than it is structural with system. But as our CEO, Rob Painter, talks about our strategy to Connect & Scale 2025, we are realizing -- we're seeing more and more opportunities to better connect our businesses than the sort of loose and casual integration would dictate. And I'll tell you, if you talk to the people who sell our offerings to customers, I'll take an example of our new acquisitions in Viewpoint and e-Builder, they are -- their growth strategy is all about leveraging the Trimble product line, the Trimble network of customers and bundled offerings, interconnected offerings that help design customer value. So we will be more integrated than we've been in the past. I don't think we'll be like some strategic acquirers, where everyone's on the same ERP system 2 weeks after acquisition. Really though, Jerry, this isn't about cost reduction. The focus of our integration is around growth and enabling the business to bundle and connect product offerings and sell more efficiently to clients. We're -- we will see some cost efficiencies, but that's not the main driver.

Yes. And in terms of -- just to expand the point on e-Builder and Viewpoint and the legacy Buildings and Infrastructure businesses, the cross-selling opportunities, can you talk about the level of integration that you have in the organization now? When Rob and I last connected, he spoke about potentially moving a few product line to sell through the e-Builder organization. Can you just expand on that cross-selling opportunity broadly?

Well, that's right. So under the e-Builder and Viewpoint management teams, we have added legacy Trimble product offerings that connect with them. So particularly under e-Builder, some of the project management tools we had that were independent in Trimble are now managed by -- with the e-Builder team. Staying on the Viewpoint side, the real estate business is more closely connected now to Viewpoint. But I think the more meaningful connection is that both e-Builder and Viewpoint are part of the consolidated Buildings and Infrastructure group under one leader. And so they have regular meetings. They are much more aggressively coordinated on business development and selling activities, which hasn't been the case before the recent reorganization. As I mentioned, we are ramping up the digital interconnectedness of our civil construction offerings with the Viewpoint portfolio. So if you're a contractor, customer and you have the Trimble suite of software, you can get a more streamlined real-time sense of where projects are going, which I know is incredibly valuable, and we've been in the construction business before. So the new organization structure is encouraging speed of communication between our businesses, including e-Builder and Viewpoint. And by the way, I would add those teams, their sales groups are the most excited. When you ask them, "Where you're winning against your competitors, how are you winning," in almost every case, they talk about leveraging the breadth of the Trimble portfolio and offering and customer relationships. So that process is underway and it will continue.

That's really interesting. And the e-Builder and Viewpoint businesses have obviously performed really well in their own right. But to what extent have they pulled with them, if you will, the legacy Trimble businesses? What has been the dollar amount of it, just to quantify that last point, David?

Yes. I don't know that I can quantify it for you. I'll say one of the biggest benefits is what I'll call the intangible benefit. So e-Builder in particular is what I'll call a SaaS-native business, always been run like a subscription company. And every week, every month, the rest of the Trimble business is learning how to go to a subscription model, learns how the business processes should work from the e-Builder folks. Viewpoint was a perpetual software model and has aggressively moved to subscription. And so they teach the rest of the company how you make those transitions. But then as I mentioned, there are more -- well, here's another case. E-builder is very strong with a lot of end customer groups, including state departments of transportation. And those relationships have enabled our civil construction teams to have access to customers that wouldn't have heard anything otherwise. So I'm not in a place where I can quantify exactly how much has been formally bundled together and pulled through. But the informal linkage is surely meaningful already and is growing.

And David, in terms of increasing the breadth of responsibilities for the e-Builder and Viewpoint management teams by rolling in existing products, how much has the addressable revenue footprint, if you will, for the e-Builder and Viewpoint management teams expanded as a result of those tuck-ins, if you will?

It's not -- it hasn't multiplied geometrically. So take e-Builder example, the Trimble product line that they've taken responsibility for, the market size is a clearly smaller than what e-Builder was already addressing, but the linkages are high enough that more can be made of that product offering. Same on Viewpoint. I mean they're both addressing huge markets. In the case of e-Builder, it's project management for owners. e-Builder would -- management would tell you their usual competitor is not a software business, but it's doing things in an unautomated way. Viewpoint serves mid- and large-sized contractors, and it's obviously a massive business. So their core businesses are still the majority of the addressable market they're facing.

And in terms of the growth that we've seen out of e-Builder and Viewpoint, what proportion of that growth has been new logo growth, if you will, versus rising users per existing logo?

It's a mix. So it's relatively evenly split. Certainly, right now the mix is skewed toward growing scope with existing users because it's very hard to get to the new logo customers. But we have seen in both of those businesses, the net retention well over 100%, which means that as they renew, they take on more and more functionality from the system. The clients get very linked and hooked on the technology platform. And so we've had great success adding to them. We think looking, particularly in the near term, the existing customer growth is more fertile ground than the new logo growth. And hopefully, the new logos would become a little easier to get at when the market opens up a bit.

And obviously, this is an environment where we're probably not seeing a lot of orders being placed. But can you talk about for your subscription services, what the cadence of inquiry levels has been like now that folks have hopefully stabilized their operations and have seen the value of subscription offerings? How busy is your sales team today compared to a month ago in your subscription business?

Yes. I'll say a couple of things. In total, we haven't seen the pipeline shrink in any meaningful way, i.e., active customers that were in a procurement have changed their mind and decided not to buy anything, just to definitely keep going with whatever they had before. That's not happening. What we are seeing is that implement -- decisions are getting delayed and pushed out. And we're hopeful that maybe the time will come when there's enough confidence that all of those projects can be restarted. We are -- but the -- to your question, in fact one of the forward-looking metrics we look at is how many active sales contacts do we have between our salespeople and a client-buying authority. Those are meaningfully down since the crisis hit. And that's partly because some of these discussions typically happen at the customers' offices. And often, they're distracted with other work. So definitely, new logo bookings are a small fraction of what we had expected they would be and what they were before the crisis. But the salespeople are busy, not as busy as they were but busy talking to customers. But the rate of deal closure is low now, and we think it will be low for a while, particularly until the work restrictions are eased.

And in terms of you mentioned the logos part is not robust, what about the sales leads for rising users at existing firms? Any upward bias, considering potentially they might need more licenses in a work-from-home environment versus previously, is that a certain dynamic that's playing out?

Yes. Certainly, much more healthy than the new logo business. In some cases, we're seeing usage of our products increasing. One of the ways in which our software is used is for remote monitoring of activity and projects. And obviously, that's more compelling now in the world of social distancing. So we've had some success in completing or continuing the process of selling to existing customers and upgrading. But there's some moderation there, too, given the uncertainty in the project outlooks and their own financial profile. So it's down but not down as much as the new logo side. That's where it's really slow.

And in terms of one of the benefits of Trimble's presence in both hardware and in software is you can do really interesting things with all the data that you're aggregating in the field. Can you talk about what you're seeing in terms of operating rates across your hardware businesses? Have you seen for trucking, for heavy civil applications, have you seen utilization rates of your advanced products ramp up over the course of April, the advanced products in construction and truck obviously, just the telematics? What can you tell us about the usage rates as we've gone through the month of April and into May for those end markets?

Yes. For many of our products, we can tell real time exactly who's using them. When the stay-at-home orders kicked in, there was a pretty meaningful and immediate drop in usage across several of our platforms. The rate of uptake varies over the portfolio. So the heavy machinery did come back after the initial sort of shock of the stay at home. And what we're seeing is that there were some markets around the U.S. and around the world where construction activity was halted. But generally, those were very short. And most of that activity came back. We actually, in the e-Builder portfolio, for instance, it was quick -- quickly the case that there were more users on our system after the shutdowns occurred again because they enabled remote monitoring. In Transportation, the assets that are involved in distributing food to grocery stores are busier than ever. And any truck being used to move oil and gas or coal around or ship cars, those stopped moving and are still very low. So it's a mixture. The productivity tools that enable remote working have been very strong.

And David, just to help us get a read on the heavy machines, the utilization levels, how much, based on your data, are heavy machine utilization levels up from early April lows? And can you tell how much oversupply there is in the field, if you will? In other words, how much are utilization rates down year-over-year for heavy construction machinery?

Yes, I haven't looked at the data in about 2 weeks, but they were back reasonably close to where they were in early March with heavy machinery, so only modestly below.

That's a really positive...

Yes. Now I'll say on construction, what we're seeing is that most of the projects that were underway are going to continue through completion. And actually our civil business is very strong in Q1, which reflects a really good order backlog from our customers. So what appears to be more of a risk is new product -- new project commitments. And if you look at ABI index that architects use, depending on how public funding goes, the risk is probably even greater. I mean clearly there's a short-term disruption with the stay at home. And that hit us at the end of March and is continuing to have an impact. But what we're focused on is the longer-term outlook. And it could have more of an impact late in 2021 if projects are canceled or new projects don't start up at the pace that they were before.

Yes. And David, I'm wondering if you could expand on your point on transportation assets capacity utilization. So when you look at that mix of trucks that are used for vocational applications, as you described them, versus to distribute food and you look at that picture in totality, how -- where do utilization levels stand compared to those early March levels? Or what's your assessment of how big, based on the dashboard that you see, is that vocational piece that's under pressure?

I would say the recovery has been much less noticeable in the transportation market than what I just mentioned in civil construction. The real impact of the weakened economy is in a number of sectors. As I mentioned, buying capital goods, cars, moving energy around. That is just still meaningfully down without a clear path yet to coming back to normalized levels.

All right. And David, one element that stood out from your results was how well your correction services performed within your ag platform. Can you talk about what drove the strong demand for your products? Is it the pickup in the adoption rates of the sub-1-inch level of accuracy? So are you seeing essentially an accelerating adoption curve towards precision ag in this environment?

First thing I'd say is that we, too, were surprised at the robustness of demand of the ag sector in total, including correction services. So the business outperformed our expectations going into the year. There clearly were some timing issues. The harvest season in Northern Hemisphere market was earlier than prior year so that helped both equipment and the correction services. On the hardware side of things, there was some buying ahead of expected fully in factory shutdowns so that helped drive that business. But to your question about precision correction services, I think there's -- embedded in the good trend, there is a secular change, which is that a lot of aspects in farming require increased accuracy in the area of farming for organic crops. And more sustainable growing methods really place a premium on that kind of accuracy in controlling the tractor and the implements behind the tractor. We've expanded our network, so the coverage is much more ubiquitous. So I think -- don't want to get overexcited, and we do think the Resources and Utilities sector revenue will be down in Q2. But we were really pleased with how strong that business was, and we think some of those trends should continue to play out in the coming years.

And David, in the past, your correction services business has been a subscription basis. So if that's still the case, and presumably nobody's going to cancel the subscriptions that just grew significantly in the first quarter, so at least that part of the portfolio, I would presume is a nice tailwind for the business. But I just want to fact check that with you in terms of that pricing on a subscription basis versus upfront to make sure that still holds.

It is a subscription business, the -- some of the subscription terms are attuned to the growing season for farmers. So they don't have to buy for the whole year if they're only going to use it for the growing season. So the seasonality part that I mentioned clearly could cause more growth in correction services in the quarter than you'd expect to continue. So maybe you could say it's a slightly more lumpy recurring business than the traditional annual or 3-year subscriptions that we see in this sort of software business.

And David, as we think about opportunities for you folks in hardware, it's really nice to see how well the Geospatial business has performed from a margin standpoint on the back of a new product introduction. Across the hardware portfolio, do you have any meaningful new introductions coming that could also have a better built-in margin profile?

Yes. The new products that you referenced, the GNSS station and the scanner, our new products, were very well received in the market and they're profitable for the company. So that helped us on a number of ends. And supply has still been tight. Those were -- those product lines were impacted by the early COVID impact in China. So that story hasn't fully played out. Those are really the most meaningful hardware introductions we've got going on right now. But they are introducing -- they're giving us access to new markets that really weren't accessible. So as an example, the scanner product line has proved very helpful to police departments and crime scene investigations. That's a market that Trimble perhaps wouldn't have thought as much about a few years ago. So as -- even as we disproportionately invest our R&D in our software businesses, from what I can see, our hardware leadership position is growing, and we don't expect that to slow down. And I guess I'll add one thing. Maybe one big idea is hardware, is better linking hardware and software and solutions and what the civil group is doing in platform as a service, a new offering we rolled out at the construction show in Las Vegas. But taking hardware and guidance hardware and software and the workflow modeling and including automation and help driving radically new solutions for customers that can be accessible as an OpEx basis in the subscription. That's sort of a big idea from the very early on.

And David earlier, we spoke about the company's focus to move towards subscription. Can we talk about the other side of the spectrum? What parts of the business do you expect to stay as perpetual license? Any big parts of the portfolio that we should think about, where subscription is probably not the way it's going to play out?

Yes. Of course, it's driven by customer needs. There are -- I don't know, I would say nothing's forever. And as an executive who's had to oversee IT departments, the idea of running data centers is increasingly unpalatable for most corporate buyers. So instinctively, I do believe that most of the buying pressure over time is moving towards the subscription model. There are some businesses that are harder to move, where you have very large computational demands. So in the structures design business, that's going to take longer than some of our other businesses. But look, the enterprise software business, so what Viewpoint does for contractors, I can see a day when that's all in the cloud. For the Transportation business, the enterprise systems, you've got a lot of pretty traditionally minded customers that would be reticent with their ERP system in the cloud. So that will take longer. But I think -- we serve customers that are in places that don't have Internet access, whether it's construction and agriculture, where those will be slower to adopt. But I personally think that's where most of the business is going.

Very interesting. And if we look at the machine controls hardware part of the equation in construction applications, that's another area where penetration rates are pretty low for the advanced machine controls. Can you talk about what the adoption curve looks like? Is that accelerating at all? Or I should say, was it accelerating pre-COVID? And what are you seeing in terms of attachment rates as the bans are being lifted? Or are you seeing people thinking harder about automating machine controls at this point?

Yes. So it varies by geography and by implement as you -- by the kind of machines as you would guess. But even in the U.S. and Australia, advanced markets like that, on bulldozers, it's probably 50%. So there's a lot more to go. And if you look at excavators, for instance, even in the developed markets, the automated machine controls, we estimate to be less than 10%. And there's a lot of excavators around the world. And right before the COVID-19 shutdown, I had an opportunity to visit our laboratory in Dayton, Ohio, where we're developing and demonstrating some of these technologies. And actually, part of the CONEXPO, the Las Vegas construction show demonstration was people in Las Vegas controlling autonomously earthmoving equipment in the field in Dayton, Ohio. And in an environment where everyone was worried about this new pandemic, there was a lot of energy and focus on this. As the construction industry is under pressure, it's harder to get really skilled operators of this equipment. So I think the pressure was already there. And with the current environment, it will only accelerate, and we are really excited about this technology.

And David, at CONEXPO, you folks and Caterpillar also announced that one of the joint ventures would be splitting up essentially. Can you just put the Caterpillar relationship into context for us? How should we think about what's going to be part of the joint venture structure going forward and how the companies are working together going forward?

Yes. Sure. Well, Trimble and Caterpillar continue to have a very deep relationship. And in fact the joint venture around machine control was not impacted by that decision. The one you're referencing is the joint venture Trimble and Cat had in the area of telematics. And fundamentally, we were interested in different things. The focus of the Caterpillar system in telematics is machine maintenance. And for Trimble, it's about workflow optimization. So while that venture worked well for both partners, we think there's probably benefit on both sides to be working in a different way. But the machine control relationship that we have with Caterpillar continues. And we're working -- some of the exciting new products that were released in CONEXPO are the product of the work we're doing together with Caterpillar.

Okay, good. David, that's all the time that we have here. Thank you so much for joining us virtually. And everyone on the line, thank you for participating. Have a nice day, everyone. Thanks.

Thanks, everybody. Bye-bye.