Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Welcome this morning for the Morgan Stanley TMT Conference in virtual format this year, I'm very pleased to have Rob Painter, CEO of Trimble with us. Before we get started with Rob, I do have a quick disclaimer to read. For important disclosures, please see morganstanley.com/research disclosures. So like I said, I'm very excited to have Rob here. For those of you that are following along on the webcast, I will say that we have 30 minutes. I've got about 2 hours' worth of prepared questions for Rob. But if there are questions that you want to make sure we get to, please submit them via the web, and I'll try to incorporate those as best we can.

So maybe Rob, I'll start off with maybe a little bit of a confession/set the stage a little bit is that, from my perspective, I've been aware of Trimble for a long time. I've been covering tech companies for longer than I'd like to admit, going back to pre-2000, and Trimble is what I consider to be one of the more story companies in Silicon Valley. Been around for a long time, done a lot of acquisitions, et cetera. But it's also one that has consistently flown a little bit under the radar because you guys work in an area that is -- tends to be very specific. You weren't out building social networks or other things. But Trimble is also very central and critical to the things that need to happen on a day-to-day basis, whether it's growing food, looking for resources, et cetera. And you guys enable a lot of that, that key really down-in-the-dirt type work, right? And so the things that you guys do are fairly amazing. That being said, is it's always been difficult for traditional tech investors to get a great handle on Trimble because of, like, maybe it's your end market exposures, et cetera. How do you think about the business? And like I said, you have exposure to a number of industrial themes that impact demand, such as commodity prices, infrastructure spend, macroeconomic impacts on construction. How do you think about navigating the line of questioning that you often get, I'm sure, from industrial analysts versus tech analysts? And how do you think about running the business?

Sure. Thanks for having us today. I see us as and identify as an industrial technology company. And so that is a little bit a betweener. Are you an industrial company? Or are you a technology company? The answer is, yes. And I really fundamentally see us as a secular play with a cyclical undertone as opposed to the, let's say, as opposed to the inverse of that. We have both, I'd say, industrial folks who cover us and pay attention to us and invest in us as well as straight technology investors. And so we really are kind of right in between those 2 worlds. I'd say, in the eyes of the industrial investor, those folks tend to start -- or they tend to sort of see the world through a filter of a cycle. They tend to think about units, machine units. And whereas in, let's say, penetration in market share, whereas, let's say, the technology-centric investors tend to look at, I'll say, the business model. And today, we're more than half software as a company. We have $1.3 billion of ARR at Trimble, which is almost, let's call it, 1/3 of -- more than 1/3 of total revenue that we have today. Technology investors are looking to see that software growth, the ARR growth, the ecosystems that we can draw is a different set of financial metrics that I'd say the technology investors look at, let's say, as opposed to the straight industrial. And I think more and more, to everybody's credit, they're starting to be able to see where the worlds converge, and I think that that's made us more visible. I mean, as you said, we're doing real work in the world -- in the real world and enabling these markets that we're serving to fundamentally digitize.

And when you -- and Rob, when you think about that work, like I said at the outset is that Trimble does a lot of really -- what I consider to be cool things. You guys have been doing autonomous vehicles for years and years and years. And not just like from a conceptual standpoint, they serve actual real function, and they're an important part of your customers' day-to-day operations, et cetera. And I give that as an example, among the interesting things that Trimble does. But what are the secular growth themes across your end markets as you define them? And what are some of those themes for you -- or I guess, yes, what are the central themes and secular ideas that you're driving your investment today? And how are you looking at those across different exposures and end markets?

Well, the fundamental theme is that digitization and really the connective tissue across the markets that we serve at Trimble is they tend to be large, global, underserved and underpenetrated by technology. And if we look at the fundamental problems and challenges that these industries have, they are of the nature of productivity, quality, safety, transparency and environmental sustainability. So that's the connective tissue across the markets that we serve that really provides a secular backdrop for the technology that we bring to bear in those markets. I mean if I look back at the Trimble's 42-year history, we were -- we've been in autonomy for the last couple of decades. We just called it machine control and guidance. We have been connecting the physical and digital world. We have a really pretty amazing coverage in these markets that we serve in the real world to be able to round-trip that data back to the office. We were IoT before there was the acronym IoT. And so we really see that the -- I'd say, the technology trends really are playing pretty nicely to what we've been doing for a very long time. And so when we look forward to the -- in time at the secular opportunity, we're excited about what the future holds for us and our ability to help transform the way the world works.

Yes, for sure. And look, since you've taken over as CEO, you put forward a strategy that you call Connect & Scale 2025. How does that fit into that overall secular theme? And what does the progress look like so far?

Great. So I'm only the third CEO in Trimble's 42-year history, which is just remarkable, great. This just doesn't happen anymore. So I'm following 2 20-year CEOs. I worked at the company for 15 years in a variety of different roles. I came up through the construction business, was CFO before coming into this seat, in January of 2020. So we launched the strategy last year. We call it Connect & Scale. I see it as a natural evolution of the business. I'd say, in Charlie Trimble's era, we really built a strong foundational positioning technology stack. Steve became our second CEO in 1999, and really took that underlying technology basis, and applied it to a market context, to really understand the workflow within a given industry. That took us more into software and really to deeply understand the markets that we serve. We've done over 100 acquisitions over the last 15 years to complement the organic growth in the company. And so when I step into and we step into the Connect & Scale strategy, Connect is, let's connect the data, let's connect the stakeholders, let's connect the workflow more deeply than we have in the past in these industries that we're serving. So that's what the connect part of the strategy is about. The Scale part of the strategy is really about addressing the underlying processes, systems and also people and culture, for this new era of digitization and connectivity. And then we said 2025 because, hey, we're playing a long game. So it's not about the quarter or the year. It's -- this is the long game opportunity we have. We're pursuing acceleration of the business model transformation. That's why we really, I think, more forward are putting ARR and cash flow, I think, is the metrics to really understand the performance of Trimble. And so if I look back then over the last 12-plus months and how I've seen the strategy launch, I think it's going quite well. Obviously, we've got the disruption of the pandemic. But in its own way, I think that created a basis for us to really strengthen the culture of Trimble and to strengthen our resolve. We came into this crisis with the first principle to say we will exit this crisis on a stronger competitive footing than we entered it. And that's really shaped our mindset to create not just a new normal, but a better normal. And so I think at a cultural level, it's accelerated. Certainly at a secular level, the awareness of digitization and the importance of that has accelerated. And so I think it strengthened our resolve to pursue the strategy.

So let's dig into some of the different segments and some of the things that you, I think, alluded to just now. And maybe we can start with Buildings and Infrastructure. The construction market was remarkably resilient throughout the pandemic, particularly for Trimble's business. What did you see in terms of how demand evolved versus what was feared? And maybe more importantly, what is your expectation now kind of on a run forward basis, at least for '21?

Well, there were definitely initial questions at the onset of the pandemic. Three of them were as follows: one, would the work be able to be safely done, would it even can continue. Second was looking at the various, say, subsegments of construction and understanding how those would be impacted in a different way. And then the third was really a lot around funding and would that hold up. On the first, construction was deemed an essential industry very early on. So projects came back online more quickly than we anticipated. In fact, in some areas of the country and the world, they actually accelerated a bit of the work because there was less traffic. So I live in Colorado, here in the U.S., and we saw that here locally just as a kind of an anecdotal example. On the second question, we did see shifts in the market. As we all know, residential logistics centers, data warehouses, data centers. These are subsegments that have seen increases in work, where we've seen, let's say, the straight general office commercial come down. And so there's been a shift in the landscape in the end markets of where the construction has gone, and we pay attention to that. And then on the last one, I'd say the funding held up better than we originally anticipated, whether that's local and state government funding. Certainly, in the U.S., the federal government with the stimulus and to backstop to an extent, has been helpful. We've seen other areas in the world, though, let's say, in the U.K., they move -- continue to move forward with the HS2, the big real project, where markets like that see construction actually as a fundamental part of the recovery. So those are some of the things that were on our mind initially and really all throughout last year. Okay. So we're now fast forward to where we are today and our view on the market. We still anticipate I'd say uncertainty to prevail, certainly through the first half of this year. We are essentially -- our overarching view is we need to see how do the vaccines roll out, what's going to be the nature of how additional stimulus measures pan out, and that will say a lot, inform us a lot in terms of the trajectory. But overall, we're in a, I'd say, a positive, optimistic spot about the recovery in a construction-led recovery, and certainly, our position within that.

And for Buildings and Infrastructure, it's one of your more software heavy verticals. You've emphasized software's contribution. How much of that segment software revenue is recurring? And what has growth looked like for some of the software assets within the segment like Viewpoint and e-Builder?

Yes. So to give you a data point in Buildings and Infrastructure, about 40% of the revenue is recurring revenue. And if we look at the couple of the businesses, e-Builder and Viewpoint to be specific. In the fourth quarter, they had growth in ARR in the mid-teens in the quarter, so those businesses continue to perform very well.

And one of the questions a lot of times that we get that occurs to us is that even with recurring, how much of that ends up being tied to machinery in use? So if you went to a period either where it was idled or that there was a big surge in demand for equipment that you would see a movement in that recurring piece?

Yes, it's a good question. So the majority of the software revenue that attaches to say, the hardware, like the machine control guidance units today, the majority of that actually is sold more as a perpetual license. So from a question of how it might shape the arc of the recurring revenue, not much because of how we sell it and account for it today. But that's not the strategy going forward as we want to turn more of our hardware businesses into recurring businesses, whether that's the entirety of the offering or the software-enabled aspect because we see more and more of the value proposition and the value delivery happening through the software, whether that's the embedded or the application software itself.

Got it. Got it. All right. So let's -- there's a lot of other segments in the business. Construction, I always find in some of these other areas, really interesting, but I want to make sure we're moving along. And geospatial was also -- has also seen very strong performance for you. Between new products and a strong demand environment, how durable is the demand you're seeing in geospatial? And what do you think about its sensitivities, both positive and negative?

Well, big kudos to the team, and we've seen new product innovation deliver strong results, particularly in the back half of 2020. And some of that was catch up, but we've really seen new product categories. So a new GNSS receiver, a new category for us in the 3D laser scanning market have driven demand. And we had been talking about a product called the SX10 for the last few years as well, which really combines the best of a robotic total station and a 3D scanner into one instrument. So first, I'd say big kudos to the team. Now, hey, of the 4 reporting segments we have at Trimble, on a long-term basis, we do see this as the more -- most mature and most penetrated of the markets that we serve. So I'd say on a longer-term basis, we would expect the organic growth in this business to fall below, I'd say, the market potential of the other businesses. But hey, if we can continue to innovate and deliver, it would be fantastic if we could prove ourselves wrong on that dimension.

So how should investors think about the puts and takes with the spending priorities within the U.S. government in particular? It seems like every time there's a proposal for an infrastructure bill, people get very excited about like its potential for Trimble, and I imagine other industrials companies and then when it goes down into feed, people like, oh, like oh this is the end, so like how much does that actually move the needle for Trimble? And I guess, more directly, could an infrastructure build, maybe that's among those things proposed now provide incremental growth over the next few years?

Well, infrastructure build would be -- and we see it as good for the country. We'd see it as good for Trimble by extension so we can get more efficiency and productivity out of our taxpayer dollars. That's a good thing. We have an institutional view that construction is a way to create sustainable job growth. So in terms of the swiss army knife of measures available at the government level. This is one that I think the data shows is extraordinarily good one, and then map that against the state of the infrastructure and we know the data and let's say, the story around that and the opportunities to improve the infrastructure. And I'd say, beyond improving it is, okay, how do we make it greener going forward? How do we make it ready for a more autonomous future. So there's that aspect to infrastructure. I mean in the current plans we have, we're -- I'd say we're, I'd say, not planning for it. We've kind of been there, done that, in terms of trying to read the tea leaves, and what could happen. It does seem like it's legitimately on the table. And so certainly, we've got our level of advocacy for that and actually for the use of digital technology when it happens. Now if it does happen, and let's say, it happened this year, we wouldn't expect to see benefits in 2021. We would expect to see them more, as you said, James, 2022 and beyond. The other thing we look at, though, is beyond the federal government level is more states have taken control over their own destiny, are certainly more controlled, not full over their own destiny. And so many states over the last few years have raised gas taxes to help create the funding or created ballot measures to ensure more infrastructure funding. So we need to pay attention in the U.S., both at a state level as well as at federal level. And of course, it would be fantastic if -- we think for the country and for Trimble if we're able to pass something very meaningfully.

So just quickly to wrap up on geospatial. Is there much difference between spending on renewable versus oil -- traditional oil and gas?

Necessarily. I mean, renewable itself involves an element of construction. And in that respect, the underlying technology we have to survey and map is relevant. But I don't know that it's a one for one exchange of relevancy. I mean we used to have more exposure to oil and gas in the past at Trimble. Just think about if you're doing well head exploration, positions going to matter, and our technology was used regularly in that. We're going to continue to have a -- even in a renewable and green future, there's still going to be a large element of relevancy for oil and gas going forward. So we don't see it as a binary one or the other. So we just have to make sure that we're -- continue to stay relevant and find those market segments that fit for us.

Got it. And in geospatial, you mentioned, as we turn to ag, you mentioned like level of adoption, maybe it's a little bit more mature there. But what about within ag, you guys have developed a lot of key technologies, particularly around precision farming. What inning of adoption are we in of some of these technologies in ag from your perspective?

Well, there are multiple product categories in precision agriculture. And so the most mature of the product categories would be the GPS guidance systems. We've been doing those for almost 2 decades now. And if you look at -- because they call that middle innings of adoption. Now if you break that down geographically, it's more -- most penetrated in North America than Europe, and then a market like Brazil would still be in the early innings of adoption. So there's a geographic meets product answer to this. Now if you go from guidance and you look at -- you could look at water management, you could look at variable rate application, you could look at our software, you look at autonomy. And those are progressively in earlier innings of adoption and represent how we think about the precision agriculture market in totality as a platform.

And look, farmer segment right now seems like it should be very high with income subsidies and rising grain prices over the past year. What are you seeing in terms of that? What are you seeing in terms of their willingness to invest in technology right now? And what is the typical lag that you normally would associate with rising commodity prices and given growing season versus leading to incremental investment?

Well, there's definitely a correlation between farm income and willingness to invest in technology. So at the moment we've seen farm income is pretty -- has been pretty strong, and that relates to both the commodity prices as well as the level of government subsidies. Last year was a record year on the subsidy front in the U.S. So that does provide a favorable backdrop to the ag economy. Depending on which region of the world you're in, you may be doing pretty well right now if your currency -- local currency is depressed and you're selling on a spot market than prices in USD, you could essentially have a currency arbitrage to increase your profit. If you're in a market like Europe, we're seeing government incentives around green and the use of precision technology is allowing -- is maximizing yield while minimizing the inputs, right? That's good for the environment and good for feeding a growing global population. So that provides the backdrop. And then in terms of the, let's say, the correlation to that and when we see that flow through into the business, as you mentioned, there is a growing season and that growing season, right, work backwards from that, we do tend to have some seasonality in our business. In a market like Brazil, if you have 2 growing cycles a year, we could have 2 pops up in a market like North America with one, okay, we'll see a spring-loaded seasonality to that. So it's -- that tends to be where the correlation is with growing season.

Got it. Got it. And then quickly, just to wrap up ag, question we always get is, how are your solutions offered? And how do they compete or interface with machinery vendors like Deere, AGCO, et cetera.

Well, our focus is on serving the mixed fleet and serving the aftermarket. I mean, that's our fundamental orientation. And across our portfolio, we work with hundreds of OEMs, and we work on thousands of machine platforms. We tend to think of when we talk about agriculture, I think people tend to think about the tractor only. But think about what's behind the tractor, there's an implement. An average tractor might have 5 to 7 different implements that it uses. When those implement spray, they spread, they seed. And in that context, the farm truly is a mixed fleet. There's not just one color of the iron. And so our positioning is that of being the neutral technology provider whose first and only aim is to optimize the work on the farm. And so we'll take a farm productivity view and that orients how we compete. So with that I'll say, the basis of how we compete, we talked about the product and the technology that's around that. And then the moat, again, around that is a global distribution network that we have.

So let's turn to transportation. You've done some acquisitions there, particularly as it relates to shipping. Before we talk about capital and profitability, let's touch on transportation. How are you tracking your progress in returning that segment to growth? And what are your kind of longer-term opportunities you see for connecting more of the solutions?

James, I'm going to take a different tangent on this one, and I want to start with a customer perspective. So in the trucking industry, profit margins are thin. And if you're an average carrier, in the transportation market is called long-haul trucking market, you run about 15% empty miles, right? Empty miles is not a good thing, right? That's inefficient. So if you take a truck fleet of about 1,000 trucks, every 100 basis points of improvement we can make in empty miles for that company, that can save them 1 million miles of wasted empty miles, that can enable a couple of million dollars of gross margin improvement. Connected to sustainability, and that saves about 3 million pounds of CO2 emissions. So that's the nature of the customer problem on the carrier side. On the shipper side, if you look at the largest shippers and I'll use a North American example. A large shipper could save upwards of $70 million a year if they're not using intermediaries to place loads. So that frames how we think about the customer problem at the carrier side and at the shipper side, that problem creates an opportunity. So you apply the Trimble lens to this. And we think that there's enormous opportunities to connect together more of the solutions in transportation, both at the -- that can bring transformative value to our customers. So both at the carrier side, whether that's what we do in field mobility or ERP and mapping routing navigation. And we believe when you can connect the carriers and shippers together that you can solve even greater challenges in the industry. And so that's the backdrop, the context of how we're competing in the market. And then from where we go from here in the business, we've said that at the second half of this year we expect to see margin improvement come back into that business.

So let's talk about margins. You've consistently improved operating margins over the past 5 years or so. Are you now at a level for the business as a whole, not for transportation specifically, but for Trimble as a whole that you have to think about what is the best operating margin balance? Or is there room to expand more with growth and higher-margin software products and other areas of efficiency. So how are you thinking about that trajectory over the medium to long run from where you are at?

Yes, it's a great question. I mean, I might be on capital allocation as this is fundamentally what shareholders pay us as operators to do. Long-term profitable growth is the endgame objective that we have. And hey, we look at our portfolio, we've constructed an asset-light business model. We had 0% working capital in the fourth quarter. We're spending less than 2% of revenue on CapEx. So when we think about that balance of growth and profitability, it's always been quite central to our planning efforts. Of course, it's not an or, it's an and, right? So the ergo profitable growth is the objective. When I look -- when we look at the business where we are today, I also think the measures are important. So I think in the short to midterm, increasingly, I want us to focus and talk about ARR and cash flow as measures of progression in the business. And those will be in complement, let's say, to the top line revenue and the margins. We have to balance those, right? We could optimize margins and growth in the short-term but actually not be doing the right thing for the business in the mid to the long-term by moving more to the recurring business model, right? So we have to look at all of them together and find the optimization within that. So that very much shapes how we think. Now fundamentally, we look at the opportunities in front of us and take that long-term view. We do believe we have opportunities to continue to grow and scale the business profitably as we do so. And certainly, we understand the math of increasing software content in the business, so I could better answer that quick because we're short on time here.

That's all right. Just last question for you, and that is, Rob, you mentioned 100-plus acquisitions. Certainly, that was a big part of the previous 20 years and that management. Where is M&A as part of your strategy today? And are you seeing interesting assets? And are valuations steeper and richer than you'd like right now?

Well, hey, I've been part of this for 15 years. So the stripes don't change. I think we still continue to see acquisitions as a part of the -- I'll say as a part of the strategy. It's not the strategy. We're not acquiring for the sake of acquiring or acquiring for growth. We're acquiring where we see opportunities to extend and complement the capabilities we have in the industry life cycles and/or the other access tends to be looking at geographic coverage or gaps that we might have. So that still continues to be part of our calculus and part of our strategy planning. And so I would expect to continue to be reasonably active as we move forward in the future. Ultimately, it's about finding the right asset at the right valuation. And yes, that is a little bit trickier now is to navigate the market as multiples did expand and therefore, multiples and expectations expanded. And so we've got to be, I'd say, rigid in the planning and the thinking and trade that off against balance sheet and OpEx in order to get to the right place.

Well, Rob, thank you very much for joining us today. It's -- like I said at the outset is that Trimble is -- plays a critical role in that day-to-day moving and development of the economy. And I also have to confess is that even though you've been there for 15 years, I already have it in my head that you're going to be CEO for 20. So that's a pretty good career.

Edit at this part of the transcript. James, thank you.

Thanks.