Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining us for our first-ever virtual Growth Stock Conference. My name is Jonathan Ho, and I'm the research analyst here at William Blair & Company that covers Trimble. I'm required to inform you that a complete list of research disclosures or potential conflicts of interest is available at our website at www.williamblair.com. We have with us today David Barnes, the Chief Financial Officer of Trimble. And just as a quick level set and introduction. David, thank you so much for joining us today for our conference. For those that are less familiar with the company can you maybe just do a quick overview of Trimble, just to level set the audience and to give us a little bit of a sense of what Trimble does?

Sure. I'd be happy to. Good morning, everybody. There's a presentation that you should all be seeing, it starts with the normal safe harbor language, so I refer you to that. Quickly, I'll provide a overview, geared principally to people who may be less familiar with our company. But we are a provider of integrated technology solutions to some of the world's biggest and most rapidly digitizing industries, although those are in the early phases of digital transformation. We have invested heavily in technology, spend over 14% of our revenue on R&D. We're global. About half of our revenue, as you'll see, is in United States and the rest is around the world. We have a consistent track record over many years of growth. We're a very profitable business. We're very proud that we're cash flow generative. We are an asset-light business, and that has propelled both growth in earnings and cash flow. A couple of highlights on our investments. We principally serve 3 major vertical sectors. Those are the largest verticals we serve: construction and agriculture and transportation. All of those are undergoing significant transformation driven by digital technology, and we are a leader in helping our clients in those businesses transform the way they do work. There's a big network effect to much of what we do. In other words, the fact that we have many points of access throughout those industries. We have an advantage over smaller competitors. We're uniquely positioned to play a leading role in the digitization of these verticals for a number of reasons, in part because we have deep domain expertise, we really know how the end customers do their work. As you'll see, we have significant presence not just as a software provider in the digital side of things, but our technology solutions go all the way through from the digital to the physical worlds. We work in a mixed fleet environment. In other words, we anticipate that our end users have equipment for multiple OEMS, and we provide the glue that all makes it work together. And as a result, we are end-user focused and the productivity of those end users is our goal. The addressable markets we serve are very big. We believe there's meaningful opportunity for organic growth. And we believe that as we've successfully made acquisitions in the past, there are inorganic growth opportunities serving those verticals. We are principally a software and services business with a heavy piece of recurring revenue, and we think that is a good model and helps us withstand well some of these interesting and difficult times. So I mentioned, we serve 3 principal vertical markets. I won't go through all of this. It's construction, agriculture and transportation. Just comment briefly to give you some examples on exactly what it is that Trimble does for those customers. In the construction, the upper left, that's the Bird's Nest Stadium in Beijing. And Trimble technology was used to translate a very brilliant and difficult technical design to fabricatable drawings used in putting together this complex structure. Turned an artist's idea into essentially a big Lego model. Lower left, you can see how Trimble technology is used to take a design of a civil construction site and have it actualized by controlling the blade on the earthmoving device. So we think that's a good example of our connection from the digital to the physical world. In agriculture, we play a major role in smart farms and taking the good ideas of farmers and agronomists and making sure that those ideas are translated into reality as the sprayer or the tiller works in the field. And in transportation, we provide a complete suite of solutions for trucking companies and shippers to make sure that there's optimized routing load configuration. We provide support for compliance with logging devices. We provide an integrated set of services, hardware and software, to help those companies optimize their businesses. Looking at our business mix. This is data as of the first quarter of 2020. I'll start on the left with our reportable segments. I mentioned that we have 3 principal end markets, and those are buildings, agriculture and transportation. Our fourth segment is geospatial, which provides principally hardware used in surveying for a broad range of industries. In terms of the revenue model, hardware now makes up about 43% of Trimble revenues. The balance is recurring in software and services. And as you can see, we have, on an annualized basis, over $1 billion of recurring revenue. In terms of geography, North America makes up just over half of our business, Europe is the other largest market and we have some presence in Asia Pacific and the balance of the world, that green is principally Latin America and Brazil. Just a couple of final comments on our key metrics that we look at that we think are of importance and value to investors. This is data for the first quarter of 2020. So the ARR was $1.15 billion and that actually is 7% year-on-year growth, and this does incorporate part of the first quarter in which the coronavirus crisis had hit us. So we continue to see resiliency in our recurring revenue businesses. From a cash flow perspective, our cash flow trailing 12 months is up 7%, and that's driven, to a large extent, by our -- the nature of our business. Our net working capital, you can see on the lower left, for the first quarter, less than 3% of trailing 12-month revenue, which is an important part of our model. And then the final item I'll point to is on the lower right. Our subscription revenue growth, which is subscription as a subset of recurring revenue, and we saw very strong double-digit growth in our subscription revenue business. It's a core part of our strategy to grow our subscription business and to transform our perpetual license software businesses to recurring. So that remains a key part of our strategy. So Jonathan, that's a quick overview, and I'll take any question you have from there. Jonathan, I can't hear you.

Okay now?

Now, I'm good.

All right. I needed to unmute myself. So David, just thank you for just taking some time to go through that presentation. One of the things that I think is interesting is that you've only recently taken over the CFO position here at Trimble and given this is clearly a complex business, I wanted to get your thoughts or impressions on how you've managed to get your arms around the business in a short time. And maybe -- what's maybe stood out to you? What struck you as being -- as something that's important that as you've been looking at the business, you see opportunity?

Well, I'll start by acknowledging, Jonathan, what you said is right. This is a complex business. We're in hardware and software and services across a number of verticals. But I have benefited a lot from the extremely impressive rhythm of business discipline that Rob Painter and Steve Berglund have developed to Trimble over the decades. So from quarterly business reviews, annual strategy reviews, updates on the business every month, at Trimble, we have figured out how to manage effectively a business that has a portfolio with a lot of complexity in it. And so being inserted into those processes really helped me get grounded in our products, our competitors, the nature of our strategic value. And I will be the first to say after 6 months, I'm still learning. But I can see why the Trimble process works. We have a management rhythm that allows us to effectively manage this very complex business.

Excellent. COVID-19 seems to be an unavoidable topic. So a few questions here. First, how do we compare and contrast the Trimble story relative to the last major downturn? I think you guys have clearly increased the software and recurring content components. But just wanted to get a sense for how the business is different relative to the 2008, 2009 time frame.

Sure. We're -- it's an interesting opportunity when you're a new CFO, and then you have a global economic situation like this. So not surprisingly, I asked myself exactly the same question you did is what happened to Trimble in the last recession and what could we learn from that? Trimble business is very different. So if you look back in 2008, the business was 90% hardware with heavy exposure to a small number of end markets, including oil and gas and the Geospatial surveying business. Now 1/3 of our revenue is recurring, which makes our business much more resilient. We're more diversified from an end market perspective and from a geographic market. We have much less exposure to energy markets. So the downturn is going to hit us and, to some extent, it's unprecedented. But the real big themes are, compared to the last recession, more recurring business and a more diversified business. And so we think that makes us more resilient than we would have been in 2008.

Got it. And just in terms of some of the customer behavior that you're seeing out there, are you seeing companies do things like electing shorter duration contracts or changing their buying patterns? What's been the tone out there?

The most noticeable change since before the crisis is that major long-term decisions by many of our customers have been deferred. So where there was a procurement process underway for a new ERP [Audio Gap] capital equipment often that's been [Audio Gap] clients looking for shorter duration. A very small minority of customer situations we've seen. We've seen customers wanting to delay payment. And where -- in those cases where we've agreed to that, we usually get something out of it. But -- so we've seen deferring capital or long-term decisions. But otherwise, the business has been pretty resilient. And I wouldn't say we've seen a marked change in customer behavior.

Got it. Got it. And similarly, on the supply chain side of things, how do you think about supply chain management and the impacts to things like cash flow that have come COVID-19?

Well, we -- so when COVID-19 hit in February -- actually, when we did our year-end earnings release, we thought it was a principally supply chain-based issue, and we have a, like many companies, a very global and integrated supply chain. And so we were certainly anxious that it would really disrupt our business, and we did see shortfalls, particularly where the product was coming out of China. I am amazed at the resilience of our supply chain team, and they've figured out how to keep it going. Actually, the supply chain impact through March and into the second quarter was much less than we had expected. So that piece of the business held up well. From a working capital perspective, as I mentioned, there are a very small number of customers that are seeing distress in their business and have asked for payment term changes, and we've accommodated those, getting something good for the long term at Trimble. We've offered more advantageous leasing terms for our hardware. But really so far -- not making a prediction forever, but so far, the working capital dynamics of our business haven't changed. The supply chain is proving more resilient, frankly, than we would have thought. So that piece of the business that we can manage is -- seems to be doing pretty well.

That's good to hear. That's good to hear. Can you talk also about how your distribution channel or the dealers have reacted in these times and how much visibility they can provide for both hardware and software types of projects?

Our dealers are independent businesses. And the one thing I've learned is that we have very close cooperative arrangements with these businesses, closer than they would have been in the last recession and that we have more visibility into their financial condition, their inventory levels. I will say there are spots in the world where the overall market and our -- a couple of our dealers are in tough shape. But the broad theme is that our dealers are financially healthy. We have worked with them. It's actually in our interest and theirs to keep inventory levels at the right place. We have been encouraging our dealers to take only the inventory they need to serve their demand. There was worry about supply chain disruptions, and it's a natural human behavior to sort of [Audio Gap] will be short, and so we worked carefully. There's a couple of dealers who are struggling but certainly if you look at the overall health of our network, it's very strong and the inventory levels are about where you'd want them to be, given the demand we see in the short term.

Makes sense. It never hurts to be a bit conservative on that side.

That's right.

Relative to your OEM exposure, how should we be thinking about that? I mean that used to be a much larger portion of the business. But I just want to get a sense for how do you think about the OEM side, both from a COVID standpoint and from a company exposure standpoint?

Yes. So you're correct, OEM business used to be a much bigger part of the Trimble portfolio. It's now about 15% of our revenue. It varies across the OEM sectors. As you will know, some sectors like automotive businesses in many parts of the world have been entirely shut down. That's true in some of the other markets we serve. There are a interestingly a few pockets of strengths. But overall, the OEM business has been principally driven by factory shutdowns. And we're seeing them come online and -- so it's hard to predict. If you look at heavy equipment demand in transportation, for instance, you can see the data, it's meaningfully down. And it's very hard for us to project how far that will pick up or how quickly that will pick up. Certainly, our modeling presumes that the bulk of the OEM business will be tough in the quarter or 2 ahead.

Got it. Got it. And maybe just kind of hammering home the point around software and recurring revenue. I mean my sense around the types of software that you guys sell is that this is not something that just gets turned off in a situation where backlogs are getting a little bit thinner or there's a lot of pressure on the client. Can you maybe talk about the dynamics there and the visibility that comes from the software that you do have?

Sure. Well, I'll say that it's -- as the new CFO, it's good to have the recurring revenue model that we have. And I salute the folks at Trimble who've driven the growth of that business. We are watching that carefully, as you can imagine, every week. But the software -- recurring software that Trimble provides, there's a lot of variety to it, but the vast majority of it is needed if you're in business as a company and if you're doing work on your budgets, whether you look at in the construction business or in transportation or in agriculture. So you can't save money by turning off your ERP system. Or if you're doing projects -- construction projects, you can't not have your project management software going. So the short story is what we said in our Q2 earnings release are -- the customer retention, which is the positive side of churn, that hasn't moved since before the crisis. We've seen very stable trends in the retention on a recurring business and no clear signs that, that will change soon.

Excellent. Excellent. Can you talk a little bit about your RTK or real-time kinematics business? Maybe what is this for those in the audience that are less familiar with RTK? And what kind of potential do you see with the potential nationwide system?

Yes. Well, so for those of you who use GPS in your car, on your running watch, I would -- I'll tell you that there are limitations in the accuracy of an uncorrected GPS signal. And for precision applications, principally in agriculture where the biggest market is, for now, you need centimeter-level accuracy for -- to control a modern farm. And so the RTK business, it's a satellite-based correction business. We sell it as a service. It's recurring. And we do now have -- and there are base stations in the network. We do now have coverage over the bulk of the United States. It is essential for particularly organic farmers or farmers that are really focused on optimizing the efficiency of their farms. There are applications in construction. There are applications in the automotive business for lane detection. And this is an important part of our autonomy initiative. And it was very strong in the first quarter. And we believe it has application in a number of verticals. And we're a leader, and now the network effect of having coverage over the North America is important to our growth plan. So the near-end driver of revenue is in agriculture, but it has application well beyond that.

Got it. Got it. Maybe taking a look at the cost side of the equation. Where -- isn't there an opportunity for you to maybe save some costs and, at the same time, trying to balance that without harming your growth initiatives as you guys go through a review of the portfolio?

Yes. So on cost, I will say we were aggressive when the nature of the global pandemic became apparent to cut costs. And -- but when we did that, we were absolutely determined not to jeopardize the long-term strategic growth of the company. So we took a number of steps. Our biggest cost, unsurprisingly, is payroll, and we decided we would cut our payroll costs without a large-scale layoff because we see the recession is temporary. So we reduced 10% of our payroll across the company, and we did it by no reductions for the lowest-paid frontline workers and very significant reductions at the top executive level and everybody else is in between. But we did reduce our payroll by 10% without doing any wide-scale layoff. So -- and to our pleasant surprise, we've got a more engaged workforce than ever. We've got people who are motivated and excited about being part of a company that wants to retain our health while we get through this crisis. We've taken a big reduction in discretionary spending. Obviously, nobody is traveling, but a lot of other kinds of discretionary initiatives have been put on hold. What we haven't put on hold is anything that touches digital transformation, the improvement of our subscription businesses, our transitions to subscriptions, the tools we use to support those businesses. So that's been our posture, which is leaning in on growth initiatives while being very tight on payroll and other discretionary costs. We are very eager, of course, to restore the temporary pay reductions, and we need to see a bit more clarity on where the economy and the markets are. Longer term, though, I think like every business, we are learning what you can do without. Some of our small, very inefficient offices, we may never return to after the back to work phase of the process is well underway. I think we'll be more judicious in travel. We're going to learn hard from the productivity that we've benefited from. But again, I would emphasis, we are not and will not cut our investments in things that will really help transform Trimble to what we want it to be 5 or 10 years from now.

Got it. Got it. And then taking a look at some things that are maybe coming down the pipe like a bipartisan passage of a stimulus bill. How do you think about the potential for infrastructure spending to maybe have an impact on Trimble's business? Any sense of timing or any sense of where we are in that process?

So as we look at infrastructure, and I'll focus a little bit on America, although there's a global element to this, but there would seem to be a bipartisan interest in infrastructure. The infrastructure in the U.S. is -- needs reinvestment, and it's important for the productivity of the economy and then it has a stimulative effect on economic growth. Where we're cautious though is that a lot of the public infrastructure revenue sources have meaningfully dried up in the recession. So when you look at state departments of transportation that are funded with gas taxes, with the highways almost empty, their revenue is way down. So our view is that it's logical and likely that some sort of stimulus will come through, but the first application of that stimulus needs to be to refund what was already anticipated but which is challenged because the local revenue sources have been reduced. So if and when there's a major stimulus -- infrastructure stimulus from the government, that would obviously have a meaningfully positive impact on our business. But we're a little cautious about how quickly that will happen and how much that would just replace what otherwise we wouldn't have expected to happen or generate real meaningful economic activity beyond that. It's just hard to call at this point.

Yes. It makes sense. We're all trying to figure it out without our crystal ball here. A little bit more of a high-level question. Both of -- I guess, in terms of the senior management, have you taken a look at how you think about pruning the strategic portfolio and maybe the thought process around some of the recent divestitures that you have made?

Yes. So as you -- Jonathan, you mentioned when we started, we are a complex and highly diverse business. And as the new leader on the executive team, it gives me an opportunity to ask new questions on that front. I will say a lot of -- in many of our markets, it is precisely the diversity of our offerings, the connection of the physical to digital, the hardware and the software, it gives us competitive advantage, and we certainly wouldn't want to impede that. But we are actively looking at our portfolio and particularly where there are businesses that are less strategically accretive to the rest of our business, either in the wrong vertical or aren't really part of this connected workflow strategy that we talk about and particularly where the financial performance is weak, there are -- we're looking at better homes for those businesses. And as you noted, we've sold a couple of them. There are others that are underway. Rob Painter has said that we're actively looking at about 5% of our portfolio, trying to figure out whether they really do fit. So it's pruning. It's -- Rob's words are, "We're not looking at taking limbs off the tree." But pruning makes a lot of sense, and that's something that I think will be -- will help us focus on the businesses that really do drive strategic connection across the company.

Got it. Got it. And maybe along the same vein of a longer-term question. When you think about Trimble 10 years from now, will people primarily be talking about Trimble as a software and SaaS company? Or are the hardware elements going to really always be a critical element that's part of the Trimble story?

Well, as I showed, we're 43% hardware. So we're a meaningful majority in software and services. It's our view that the recent trends will continue, which is that the software and services and particularly recurring software will grow. We're certainly accelerating the transition of our perpetual software businesses to recurring models. So I can anticipate that continuing. But if you ask me, will we not be in the hardware business? I'll say, we'll definitely be in the hardware business in 10 years. And in fact, the happy way to shrink the hardware portion of total revenue is to grow the rest. And it's our anticipation this connection of the digital to physical, which entails being in the hardware business, we believe it's at the core of our competitive advantage. And it's my view that -- so it differentiates from a lot of our software-only competitors, and we will have a meaningful hardware business in 10 years.

Great. Great. One -- maybe one last question. How do you manage all the complexity in the business, all the moving parts? And is there a way to simplify the business? I think you've gone through some of the processes and controls that have been implemented. But how do you think about that going forward? And is there room to maybe bring some new ideas to the table?

Yes. Well, Rob Painter, when he became CEO a few months ago, did implement a new organization structure, and he reduced the number of direct reports that he has. As I mentioned, we have a really good -- I'm very impressed as a new executive. We have a really good system of running this complicated business. That said, we have a lot of diversity in our business processes and systems that, in my view, is not helpful. The strategy is about Connect & Scale. We have an awful lot of -- we've had a very light touch on the integration of companies we've acquired. And I think there are things we can do to bring the business processes around the company together in a more effective way that will liberate our teams who serve clients and make this Connect & Scale vision more realizable. It will make the business less complicated to manage. So as CFO, I'm spending a lot of time and effort trying to think that through. How do you keep the entrepreneurial energy of these various businesses we have while making it easier to connect them and scale them for the future.

Okay. Well, David, we've reached the end of our allotted time. So I want to thank you again for coming on board and having this fireside chat with us. Hope you enjoy the rest of your conference. Take care, everyone, and have a good rest of the day.

Thanks, Jonathan. Thanks, everybody

Take care.