Trimble Inc. (TRMB) Earnings Call Transcript & Summary

So we -- and you're sitting there in 4 feet of snow. And we're hoping you'd have a nice backdrop in your background showing us what that looks like. But nonetheless, I think I'll turn it over to you. You've got some opening remarks, and then you'll turn it back to me for questions. So appreciate you being here, particularly under the circumstances and delighted that you have powered through the whole thing. So welcome, David.

All right. Thank you, Ann. Good morning or good afternoon for those of you in Europe. I'll be making some comments based on a presentation in which I believe you have access to. So if you're interested, pull that up. I'll start by just reminding you that we'll be making some forward-looking statements and the normal provisions that go with that are listed on Page 2 of my presentation. If you turn to Page 3, I'll give an overview of Trimble, for those of you who may not be as familiar with our business. We are an industrial technology company, using technology to transform and improve the way work gets done in a number of industrial businesses. We are a technology company that invests heavily in technology. Our R&D is just under $0.5 billion a year. What's unique about our portfolio is that we provide software that operates in support of the enterprises we serve, but we also have software and hardware that's in the field where the work is done in our core target markets. We are a very global company. We have customers and people in markets all around the world. If you look at our financial performance, we've grown meaningfully over the past 4 years. You can see that revenues were down just a bit in '20 versus '19. Obviously, that's COVID related. I'll say that essentially, all of that revenue decline occurred in the second quarter when the effects of the pandemic were the most dramatic and that we actually saw comparable year-on-year growth in Q3 and Q4 despite COVID. The most important measurement we use to assess the progress of our business is a recurring revenue because an increasing -- increasingly large part of our business is subscription revenue and other recurring models. And you can see that even in this very difficult COVID year, our annualized recurring revenue grew just under 10%, and is about $1.3 billion. Our margins have improved meaningfully year-on-year and stepped up quite a bit in 2020. That's the impact of the changing mix in our business. We're selling more and more software. And even within our hardware portfolio, we've seen a more differentiated higher-end offering that commands higher margins. So that's led our EBITDA margins and our EPS up meaningfully even in a tough year. If you go to Page 4, I think this picture gives you a brief insight into what's the nature of the work Trimble does. And I'll show 3 of our end markets. You've got construction on the left, surveying in the middle and agriculture on the right. And these are very traditionally low-tech businesses. There's a lot of data associated with them. And we use Trimble technology, principally rooted in our history of GPS and positioning technology to add data-driven precision to processes that have meaningful impact on the productivity and quality of the work that's done in the field. Turning to Page 5. I'll just comment a little bit on the evolution of Trimble. Trimble was started over 40 years ago in Silicon Valley, and its principal focus was the commercialization of global positioning technology, which was then relatively new. Evolved from GPS business to a positioning business, which is essentially taking GPS technology and making it functional and available in the surveying world. So adding position based precision to surveying. From there, we evolved to what we call a productivity business, which is precision agriculture, which is using this precise position to improve agriculture and then even putting GPS devices on the blades of bulldozers to improve the precision of construction. Our latest generation, the evolution of the companies from productivity to an integrated work process business. And I'll tell you a little bit about what exactly that means. If you turn to Page 6. As a business, we are heavily focused on connecting the workflows and the data and the stakeholders across a core number of industries that we serve. The span of what we do encompasses modeling to determine what is the design, what is the right plan to be implemented in the field. We provide enterprise systems that help our end customers monitor their businesses and what's happening in their projects. We provide solutions in the field that are used by people who are actually doing the physical work in the field. And then we provide systems to owners who own the end assets who keep track of all of that. What's unique about Trimble versus some of our peers or competitors is that we're heavily focused on customers that have a mixed fleet that have machines from many manufacturers and enabling them to integrate across their businesses and integrate their workflows. The customer ROI for Trimble solutions can be thought of in a number of dimensions. Like a lot of our competitors, our solutions provide task level productivity. But where Trimble is more unique is in providing system-wide productivity of connecting activities that were historically discrete to improve the overall outcome. And when we think about the overall outcome, it's not just productivity, it's quality, it's safety, sustainability and reliability of the process. Turning to Page 7. These pictures might give you a more tangible sense of the work we do. I'll start on the left side of the page. This is a diagram of the design of the Bird's Nest stadium in Beijing, the Olympic stadium. And you can see it's a very complex design. That design was achieved through Trimble's Tekla 3D BIM solution. And that solution is used not only to design the facility, but to enable precision fabrication and then to confirm that the system as designed was actually built. So without these kind of integrated digital technologies, a structure like that could not be built. On the lower left, you see an example from civil construction, where the engineers and designers create a plan, which is implemented by a bulldozer and there's precision equipment provided by Trimble in the bulldozer that enables the operator to make sure that exactly what was designed. The dirt has moved as the design called for, and then that data flows right back to a model in the cloud where the designer and the owner can see that, in fact, what was designed precisely was built or if there are any deviations what they are. The middle column is about agriculture. So you've got a model that comes from the farmer and an agronomist of exactly how the field should be planted or sprayed and the Trimble technology, including the display on the tractor is used to guide the exact implementation of that plan. And then the data flows back up to the farmers so that they have a permanent record of exactly what was done in the field. You can see the theme. Transportation. Similarly, there are shippers and carriers, and there are a lot of truck drivers. And the Trimble solutions integrate this data to ensure that the plant has optimized and it's implemented exactly as designed. Turning to Page 8. I'll just give you a couple of comments on the scope and scale of our business. And I'll talk here about each of our 4 reporting segments. On the left, you can see geospatial. The principal customer there is surveying companies. And essentially, all of the significant North American surveying companies use Trimble technology as do many around the world. In construction, there are over 10 million users of Trimble Connect, which is the backbone that allows integration of the models from Trimble technology. There are millions of projects that are designed and created using Trimble technology, and we have a broad range of OEM relationships with customers involved -- OEMs involved in the construction business. In agriculture, there are over 350,000 Trimble displays in tractors and sprayers all around the world. There are over 100,000 customers using not just the hardware, but the Trimble provided precision service that allows row level accuracy in planting and over 155 million acres are planted using some form of Trimble technology. On the Transportation side, here again, kind of like geospatial, essentially all of the North American trucking companies use Trimble technology. They're worldwide. Over 1 million trucks with Trimble technology installed in the vehicle. And over 2 million assets where if the Trimble technology is in the truck itself. The network is managed from an enterprise basis using Trimble technology. So you can see in these core defined end markets, we are under present, and we have a huge benefit of scope and scale of our network. If you turn to Page 9, just a few comments on our technology base because, as I said, we are a technology business. We invest between 13% and 15% of our sales on research and development. We actually ended up at the high end of that range in 2020 because while the COVID related dynamics impacted our revenues, as I showed you earlier, didn't impact our spending and technology to grow our business. Our R&D spending, the majority of it goes against our software offerings. We are investing now heavily in data analytics to optimize these end customer processes, our cloud infrastructure and in autonomy where in construction and ag, especially, we are investing in more and more autonomous operation of machines. Turning to Page 10, just a few financial highlights, a couple that I haven't mentioned. In this difficult environment of COVID, our backlog grew over 10% to $1.3 billion. Our deferred revenue also grew, and that's artifact of our growing recurring revenue subscription business, and we really generated a lot of cash. So operating cash flow is about 1.2x net income, $670 million, and that facilitated a pretty meaningful delevering of our business in the year. So we came out of the COVID year financially, even stronger than when we went into it. I'll end on Page 11 with just a few comments on what I think investors should think about when they consider Trimble. The first is that we're heavily focused on a handful of end markets, specifically construction, agriculture and transportation, each of which is undergoing a digital technology-driven transformation. There are various stages of that in various parts of the world, but all of them are still seeing increasing digital transformation. Their network effects in our business, connecting already to a lot of work processes and a lot of customers, is critical to delivering system productivity, and that obviously is our unique advantage. We're positioned differently from some of our peers and competitors in a number of ways. Probably the biggest of which is that we are not just technology providers, but we have a very deep domain-specific expertise on what happens in these core end markets. We have people in Trimble who know an awful lot about agriculture, about transportation, about construction and their domain expertise is what drives the uniqueness of our solution. We're obviously a digital business with a lot of software-based solutions, but we're rooted in the physical realities of these industries we serve. We're particularly focused where customers have OEMs or equipment for many OEMS, they have a mixed fleet and it's the Trimble solutions that can pull all that together. We believe our end markets are compelling. It's been a rough couple of years with the pandemic and trade tensions. But long term, we believe there are secular trends that make these attractive markets to serve with a rich software mix and with a heavy focus on the needs of these vertical platforms. And I'll add that more than ever, Trimble is a connected company using common [indiscernible] technology platforms to address the needs that our end customers have. So -- and that concludes my prepared remarks. I'd be happy to take your questions.

Okay. Thank you. I think you ended nicely and leave a good segue into my first question, which is around your relatively new strategy of connect and scale. What I think Trimble, traditionally, I think of Trimble has been highly acquisitive, small acquisitions, completely decentralized, proud of the fact that you were decentralized and brands were running their own businesses. But under connect and scale, that's going to require much more integration. It's going to require perhaps, a complete organizational change and redesign of the organization to one that's more centralized, more maybe account managers, different kinds of selling. How do we get from here to there? And if you can help investors figure out what you want to be when you grow up? I think that, that will be helpful. And am I right, we're very early in this process, and it is a completely different way of thinking about the business away from decentralized to more centralized large account vendors calling on very key people in the organization, et cetera, et cetera. So if you could just help investors figure out that connect and scale strategy and how we get from here to there?

Sure. Well, Ann, you're right that the -- there are awful lot of acquisitions that have formed Trimble, and it's been part of the ethos of the company that we are many businesses which have operated with a high degree of autonomy. But I'll make a couple -- maybe 3 comments. One is that we have a very collaborative culture and the mindset even before this big push on connect and scale has been one of collective success. So even where we have any independent businesses with independent P&Ls, as a relatively new executive, Trimble having seen a lot of multi-business global companies, the sort of spirit of collective success has existed. We've also had a lot of spending over many years in common platforms. We call them horizontal businesses. So we have engineering functions that, for instance, develop these positioning technologies that are used across agriculture and geospatial. We've been developing those together. And so -- but I don't understate the changes you described it. What makes -- what's interesting is that one of the big drivers of this change of be acting more collaboratively as a collective company are the people who serve our clients. And I can give investors an example on the last trips I took in Trimble before the COVID shutdown was to the -- our sales kickoff meeting at our e-Builder business, which is our owner technology platform. And I talked to the folks who serve our customers and asked them what they're excited about and whether -- what's the focus of their plans? And it's about connecting better to Trimble the other -- the sister divisions, the technologies, it's the unique selling proposition in the marketplace. So it helps to do a big corporate transformation when the people who serve the clients, think it's an imperative. But that said, this is a big change, and we are -- you are right and in the, I'd say, the early stages of systematizing this change. We've had more ad hoc collaboration beyond the horizontal teams I've mentioned. But we are really big into this digital transformation, which is creating a common digital infrastructure for all of our businesses, which will enable us to look more like one Trimble than many companies to our customers and to our salespeople. But -- and as we make this change, I will say there are pieces of the autonomy of our businesses, which is customer intimacy, knowing the specific solutions that we will work to retain because there's no intention to corporatize everything in technology development and selling. There will still be separate pieces for each of our independent operating units. But there will be more in common. And so you can see in our organization structure, actually, the structure that Rob implemented when he took over as CEO, he'd greatly reduced the number of direct reports he had. We put it in place a new Chief Digital Officer, who is pulling together all the digital efforts, which we had separately in many pieces of the business within, for instance, our construction business. We are systematizing our more common go-to-market approaches. So this is a big change. It's one that there's, I would say, universal enthusiasm about across the company, at least the direction. There's naturally debate about the details of what should be brought together on what pace and should my solution be the Trimble solutions? Or should I have to adapt to some other model? And that's the debate that's going on now, but there's really no debate that this is the future of the company that connecting and scaling our business is what makes us unique and different. So we are in the early stages. This is a multiyear effort, no doubt, but we are underway.

From a CFO's perspective, should we envision any significant changes to SG&A, for example? Will there be a change in the organizational structure? Will there be more investment in sales? Will there be more investment in product development to make products speak easier to each other? Any big changes that we should consider or investors should consider from an investment standpoint even compensation, will that that change? Will there have to be a big redesign of the organization internally to accomplish this?

I would say that the models have been evolving. And so for instance, you mentioned compensation. Increasingly in our compensation systems, we use metrics that reflect the future of our business. ARR, for instance, you might have noticed is the focus of our new bonus plan. It's also true that more people are bonused at a higher level. So rather than the 50 divisions, we have fewer plans. More people are bonused on the collective success. So that's one of the items you mentioned. In terms of how does it change the financial model of the business, I'd say the biggest impact you see is in the allocation of spending rather than the absolute dollars or percent of revenue. We are allocating more and more. If you look at the G&A side or CapEx, we do expect to see capital spending up this year. It's up modestly. It was pretty low in 2020. All of the increase and more is related to our digital transformation effort. In our SG&A area, we are investing in more and more common approaches rather than separate divisional approaches. We do think our margins will be down a little bit in '21 versus '20, but that's more the artifact of '20 being a very strange year with regard to travel and other expense drivers. But Ann, I think it's our -- we believe we can have high and improving margins secularly over time. We can be a cash-light business while we execute this transformation. It's just about focus on where we put our money.

Okay. Thank you. I just want to switch gears a little bit towards newer term. Hardware sales running about $1.3 billion of your $3.1 billion in total revenue. Perpetual, et cetera, running at about $500 million out of the total. Should we look to those businesses continuing to ramp down? And could those go to 0 eventually? And everything is software and subscription? Or just compare and contrast both hardware and perpetual, and how quickly those might change to becoming more subscription or software.

Well, look, I'll say, first, emphatically, that hardware is part of the -- or selling hardware as part of what makes us able to solve these customer problems, and I absolutely don't see a world in which we're not in the hardware business. In fact, I think it's possible you saw even in the fourth quarter, our hardware revenues grew. And hardware is a part of the portfolio. I won't comment on sort of the accounting of how things are recognized when you have hardware as part of a recurring offering. I'll say the accountants with very few exceptions, call you to recognize the hardware revenue when the solution or the hardware portion of the solution, when the solution is sold. But I do believe that more and more we will sell hardware as part of an integrated solution rather than as something discrete. And so net-net hardware will be a decreasing portion of our total business, but that's not to say it will shrink. I think it will just grow less rapidly than the rest of our business. With regard to perpetual software, we are aggressively moving to switch to recurring models, the hardware, where that's consistent with it, functioning best for the end markets. There's a portion of our perpetual software that is integrated with and sold with hardware, that's harder to convert. But even that, as you said, Ann, if we're selling hardware through a platform as a service, integrated offering, then there's a recurring -- that software becomes recurring. But look, there will be some of that. What we sell now is perpetual, a meaningful piece that unless the hardware is sold as part of an integrated recurring solution that will probably continue to be perpetual software indefinitely.

So if we were to come back in 5 years, what do you think the mix of business should look like between what is...

Yes, I'm going to -- I'll resist the temptation to lay out benchmarks in the model. And as you know, we're planning on an Investor Day late this year. Both Rob and I will have had over a year in our new roles and the pandemic will hopefully be fully behind us. But directionally, I would say, hardware will be a shrinking portion of our business and perpetual software will shrink as a percentage much more than hardware.

Okay. Thank you. Appreciate that. Switching gears a little bit. A lot of talk this week about an infrastructure bill, a lot of excitement around momentum building for that after the administration success last week. Can you talk us through each of your segments? And how an infrastructure bill might benefit any and all of the businesses independently?

Sure. I'll start by saying that given the political dynamics in the U.S. and where things stand, we don't believe that anything that Congress does will have a meaningful direct impact on our business this year, just because of the timing it will take for some legislation to pass. And then even if the legislation passes, it takes some time to see that in the field. Now I will say that a passage of a large infrastructure bill will surely improve the sentiment in our construction and surveying geospatial businesses. So that's where we'll see -- we might see some uptick just because those customers are planning for a more robust future. And that would have some modest impact this year. We're likely to see a bigger impact in 2022. It's very hard, I would say, impossible for us to quantify what that would be because we -- as you can imagine, Ann, we follow this, and there seems to be no clear picture on how bill big this will be, exactly what it will support. Is it just roads or broader in transportation or utility infrastructure? And we also don't know -- we believe that it's likely that there will be a focus in this next infrastructure round on the adoption of digital technology to improve productivity and sustainability, that would help us. But where we'll see the impact is in our construction and geospatial businesses. We think it's likely, other than the sort of positive sentiment factors is likely to kick in, in 2022. And we just don't yet have an ability to quantify that until we know more about what it will be.

Yes. Well, we'll talk us through that. Geospatial, I guess, I understand. Okay, no matter what we get in terms of an infrastructure bill, even if it's just roads and highways, even if it is extension of the grid or an investment in 5G, whatever. So anything related to surveying. I mean, I think we can appreciate that, that business will probably benefit coincidentally and probably first out of the gate. On the construction side, talk us through where specifically, particularly if it was more infrastructure-related more highway in. You've got a lot of constituents on the construction side. Would it be mostly on the telematics on equipment like the Caterpillar joint venture, I don't necessarily see architects benefiting. I don't necessarily see electrical contractors benefiting. I don't necessarily see building owners benefiting. So talk us through on the construction side, where an infrastructure bill might provide some upside?

Well, I'll caveat it by saying it does depend on exactly what's in the final bill. And who knows, there could be buildings. There could be something in an infrastructure bill that will involve modernizing or updating facilities, schools or something that could be bigger in vertical construction. But I'll say a few areas. I think the civil part of our business, the hardware and software that helps civil contractors manage their business optimally, will be the biggest positively impacted. And as you also know, our e-Builder business sells project management to owners, including government authorities. And to the extent as public infrastructure that's being invested in, that would be a catalyst for that business. I'd also say there's some potential in businesses beyond construction. So if a major focus of the infrastructure bill is in water infrastructure. We sell technology that help water utilities manage and optimize their business, detect and manage leakage, that could be a catalyst as well. So -- but I think the surveying and the civil construction business is where we'll see the earliest and biggest impact.

Okay. Switching gears to the resource and utilities business particularly agriculture. Last year, that business did extraordinarily well in the spring because farmers actually turned on the equipment and used it. And so while it was recurring revenue, was it recurring revenue paid by the hour as opposed to pay by the month? Can you talk about what percentage of your resource and utilities business is actually recurring and pure recurring revenue as opposed to semi-recurring or not recurring?

Well, I'll say -- I'll start by saying that all recurring revenue in our business and probably any business, there's some portion of the market that will endeavor to turn it off and they're not using it. So there's a little more of that. I mean, you can see from the data we publish, it's -- recurring is a small part of the resources business. But what I can say is that the emphasis on precision agriculture is driving our business. And this is the positioning services, which are the -- that's what most of our recurring revenue in resources and utilities is. That's core to the offering. It enables the farmer to know precisely where the tractor is to -- in the planting and spraying process. And this technology is growing in adoption, not only in markets like the United States, but in Latin America, we saw very significant growth. And we think it's now not a nice feature, but an essential factor in how farmers run their business. So it will grow. Obviously, if you look at our numbers, the substantial majority of resource and utilities business today is hardware and the guidance technology itself. I do think we will see in the ag business, a more and more growth of recurring revenue model.

Okay. I want to switch gears to transportation and actually talking about hardware. The last time I attended a user's conference on the transportation side, I listened to customers talk about wanting to bring their own devices. They didn't want to have yet one more tablet in the cab. So can you talk about that dynamic, I think more specifically, in transportation, I don't hear is much better than the other businesses, but this whole notion of bringing your own device and whether the slowdown in hardware sales, particularly in transportation is driven by customer choice as opposed to your choice to offer hardware as subscription. And then talk about the problems you've been having in transportation? And what specifically has to happen in order to get that business back to company average margins?

Sure. I'll say just as regard to the evolution of hardware in the offering, the technology that the transportation companies need to run their business, particularly in this new world of ELD is pretty sophisticated. So my guess would be, we're a long way off from the trucking companies relying on their drivers to use their Android device or whatever they happen to have on their own. But our strategy is to optimize the workflow and the process in transportation. And we sell hardware because it's -- historically, it's been critical to achieving that vision. I think you're right that if you think of the hardware and the transportation business, there are 2 devices. There's the onboard computer that sits in the engine. It tracks exactly where the truck is and how fast it's going, and then there's a display that the driver uses as an interface. Increasingly, for regulatory purposes, they have to show the display to the inspector to show that they're complying with the hours of service requirements. So there, we are seeing the hardware being commoditized. And over time, we are happy to work in an environment where the onboard computer is provided by the OEM. We're working with some of the OEMs and in some cases, we collaborate with them to provide that technology, but if it's their own, that's okay. And if the trucking company has their own generic display that does work, then we're happy to make our money, providing the service and providing solutions that integrate all of that to optimize the workflow. I do think transportation is of our end markets, the one where it's most likely that hardware will make up a shrinking portion of our business. Now with regard to the turnaround plan and that you mentioned, most investors will know that we had a very strong business in transportation, leading up to the implementation of the ELD mandate, the electronic logging mandate. And that change represented both an opportunity and a challenge for Trimble, and we're now in the challenge phase and have been for the last 4 quarters. We implemented this new technology requirement across a very wide base of hardware, some of that are very old hardware and the demands of the new solutions overwhelmed a lot of the hardware we had in the field. So we have been working on improving the solutions, incenting our customers to migrate toward hardware bases that are more sustainable and we're making progress. We have happier customers. The product works better than it did. We have seen over time our churn decline quarter-over-quarter, and we anticipate that with 1 or 2 customers, there couldn't be a bump here and there. But we do think we are well on the way to having a business that looks more like we wanted to with growing and not shrinking ARR and improving margins. That said, we're a few quarters from being able to say that we've got evidence that shows that all of those metrics are moving the right way. We're not -- certainly not encouraging investors to inspect a dramatic turnaround in the first half of the year. But there's a lot of blocking and tackling around this, and we feel good about the progress of it. And we also feel very good about the thesis of transportation. It's sort of similar to agriculture and construction and that you have a lot of inefficiency built in because there's lack of data connectivity. And we have the broadest offering serving that business providing not just the telematics or physician services but navigation, enterprise solutions for the shipper or in the carrier. And we think as we bring those solutions together, we can provide a compelling proposition that no one can -- that our competitors can't match. So we feel really good about the business from a strategic standpoint. There's a lot of tactical work to be done, and the team is very focused on that and making progress.

So in a nutshell, are you saying that the drag on margins currently is almost entirely blocking and tackling that it's temporary, it's throwing money at the problem? It's investing in people and software solutions and patches or whatever? And that those will dissipate? Or is it more structural than that? Will there be higher costs in that business going forward because of what's happened?

I don't think I'd go that far. There are costs and causes of drag on margin that were and should be temporary. And so that's dramatically increasing customer support, increasing R&D to fix the bugs. There's -- you can also see it on the gross margin side as we have aggressively promoted solutions that are more sustainable. So I mentioned that we are incenting our customers to migrate toward more supportable technology. So that's been a drag. And some of those factors should ease. I will say, though, that if you look back a few years ago at the economic drivers of the transportation business, a lot of it was pretty high-margin sales of hardware. And as I just mentioned, that the future doesn't look like that past. We have some other drivers that are a drag of our earnings now that we think will get better. We're doing a subscription transition in our enterprise business. So that has the same impact, that it does in every business that goes through the transition from perpetual to a recurring revenue model. So that's impacting transportation. We also made an acquisition of Kuebix, which is an early-stage business in the -- on the shipper side of things, and that acquisition is still dilutive, although the strategic benefit looks really good. So once we get past the valley in the transportation conversion, once we fully hit stride on the Kuebix business, which was obviously impacted by the pandemic and that slowed us down. But we do think that those and some other factors will improve our margins over time.

Okay. I think we're out of time with that. So we'll leave it there. So I appreciate you being with us this morning, and good luck out there.

Thanks, Ann. Appreciate it.