Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Hi. Good afternoon, everyone. Welcome to the fireside chat with Trimble. I'm Jerry Revich from Goldman Sachs, and I'm delighted to have with me David Barnes, Chief Financial Officer. David, thanks very much for joining us.

Happy to be with you.

David, as a starting point, just for those that are newer to Trimble, can you talk about how do you see the company position in the industrial value chain and the company's top adoption curve opportunities over the next cycle.

Yes. Thanks, Jerry. We call ourselves an industrial technology company. Everything we do is about using digital technology to optimize the way critical industrial workflows are performed in the real-world in the field. We had our roots long ago as a hardware company. Today, we are about 60% software. And our strategy is all about integrating a whole wide range of point solutions, both hardware and software to optimize workflows in our targeted industries. And when I say optimizing workflows, I'm talking not just about productivity, but environmental sustainability and safety and predictability as well. And our belief is that we're part of this digitization of the world and the sectors we serve are historically underpenetrated with technology. So we believe that we have a line of sight to secular growth at above the rate of the economy as we prove the ability of digital technologies to change the way our end markets work.

And at this point, David, can you talk about your strategic priorities over the next business cycle you folks had? Really successful subscription acquisitions over the past couple of years. What in the next 3 to 5 years look like for Trimble? What are your folks harking to achieve organically and from a capital deployment standpoint?

Everything we do fits in the 2 broad strategic themes of Connect & Scale. Jerry, as you know, we have a broad range of point solutions, each of which is competitive in its own world in providing solutions to those personas, to those end users. The next frontier for Trimble is to bring those point solutions together in a way that's much more ambitious than we have in the past, to connect the solutions, connect the workflows, connect the end users using data to optimize the processes. So Trimble has been a very decentralized business with what I'll call loose coordination of independent operating entities, and we're working much more aggressively together, enabled by our own digital technology platforms to make the point solutions come together, and that's our point of differentiation because we have a broader array of solutions and deeper insights into what it takes to optimize these workflows than our competitors. So that's the Connect part of Connect & Scale. The scale part is putting our company in a position where we can grow effectively well beyond where we are today. Our decentralized structure has served us well, being very intimate with customers. But to achieve these next milestones. We need to be better together and have a more common and more scalable infrastructure. So that's the Connect & Scale strategy, and our capital is deployed in that direction. The investments we're making this year, and we are in a good market. We're amping up our investments in ways that will forward the Connect & Scale strategy. And the acquisition opportunities we're looking at are all, what I'll call, strategically accretive. So they're -- we're not looking to get in totally new markets. We're looking at acquisition opportunities that bolster our ability to optimize the workflows in the end markets that we know well. We've also done some pruning divestitures of businesses, which, in most cases, are very good businesses, but don't really fit well and add into the -- to our strategy, and we think there's a better home for them. So in that regard, we divested a good business that just didn't quite fit with where we're going. So that's our capital deployment strategy and we're working on that every day.

And part of the transition with e-Builder, Viewpoint acquisition, you folks acquired higher multiple businesses then Trimble was -- trade at the time. And obviously, those businesses have performed. What are your thoughts on subscription-type acquisitions that might be at a higher multiple than where Trimble is today?

Well, those 2 acquisitions you mentioned have performed incredibly well, generating even in a tough time in the economy, double-digit mid-teens ARR growth. So part of the story there is that I think one of the things we're uniquely good at, at Trimble is acquiring businesses and providing an environment where the former entrepreneurs and the leaders of those companies feel like they have a new platform to grow. And you're right, those were higher multiple businesses. And they worked because they benefit from and contribute to the strategy of optimizing workflow and connecting the businesses. So to answer your question, I could see making more acquisitions like that. Obviously, the multiples are kind of high these days or, I guess, a little lower today than yesterday. But the way we make a deal like that work is we have clear line of path to synergies, not just on the cost side. In fact, we're less focused than some acquirers would be on cost, but the revenue side of making subscription acquisitions that drive this connected workflow optimization. So yes, that's one of the themes that we're looking at in our M&A program.

And in terms of the e-Builder and Viewpoint businesses, at this point, based on the disclosures you provided on ARR growth, I think those businesses should be in the, call it, $350 million, $400 million revenue range at this point. One, is that right, given some of the complex accounting at Viewpoint? And two, how are you folks able to scale what these businesses do well with the rest of the bin portfolio. So David, you alluded to, the integration contributions, can you expand on that part of the conversation, if you don't mind?

No, I don't mind. So we resist disclosing detailed divisional financials for a number of reasons. So it would be probably competitively helpful to our competitors. But beyond that, I think, Jerry, you're going to see our business less and less defined by traditional divisions or point solutions and more and more of our effort, as I said, is connecting the offerings. And I don't want to get ahead of the marketing teams, but you will see less and less prominence to division names, even like Viewpoint and e-Builder as successful as those businesses are and more about them being the platform for Trimble. But let me provide a perspective on Viewpoint and e-Builder. And this is a space I know a little bit about. Before Trimble I was in the engineering and construction space myself. A big part of the strategy for both of those businesses is that they provide critical, cloud-enabled enterprise software that has a higher selling point than many traditional Trimble offerings. And they are a platform for bringing along other solutions in an optimized way. And I'll give you one little anecdote. The -- we're having some emerging success bundling, bringing together our Viewpoint enterprise software offerings with our civil hardware and software portfolio in a way that facilitates the real-time integration of data from a civil project into the contractor's enterprise system. So a CFO of that business, like I was, has an ability to know real-time what's the earned value, is the project on schedule, is the design being executed in the field. And the integration of those offerings is -- gives us a unique competitive platform that neither our civil hardware competitors would have or our enterprise software competitors would have. So that's a lot of the magic of e-Builder and Viewpoint is that they solve the needs of a more -- of a higher buying decision point, higher decision-maker in the organization and gives us more of an enterprise platform to sell our story of optimizing the workflows.

That's really interesting. And in terms of the opportunity set as a result? Is that a higher revenue opportunity for you folks? Is that a market share opportunity? You have ASP? Can you just help us understand?

There are a number of that. Yes. We -- here's how I think of the biggest opportunity, Jerry. We've looked at this in all of our end markets. We have a tremendous opportunity to sell the broader Trimble portfolio to customers we already do meaningful business with. So we look in construction, in transportation, it's the same story, numbers are slightly different. But in both of those cases, we can look at cases -- at customers that are -- that have another enterprise system and use our civil hardware and software or vice versa, and we know that if we provide a compelling value proposition for them, we can, in many cases, double or triple our ARR with that customer. And we have some isolated cases where that's occurred. I'll admit readily that we're in the early innings of this. But -- so I guess, yes, we would be taking share by having -- exploiting the already existing recurring revenue possibilities at our existing customers. Certainly, there are new customers that our strategy makes us accessible to one of the beauties of a recurring revenue model as it becomes available to customers maybe that wouldn't have made the commitment on a perpetual software offering. We're certainly seeing that in the SketchUp product line that I think, Jerry, you know about. But look, the biggest opportunity for us is using a connected offering and a common go-to-market to sell what customers are already buying that we offer business that we don't have by being easier to do business with and providing a more optimized solution.

So essentially, for the same price that they would be paying for machine controls separately they can pay the same price and get the benefit of connectivity and the data in real time. Is that the idea?

Yes. I mean the sort of pricing, we're still working through, but it's certainly, Jerry, a tiebreaker. Why wouldn't you buy the whole solution if it gives you a way to optimize your workflow in a manner that would be more cumbersome than separate traditional point solutions. I saw this when I was in the engineering and construction space, the technical decision-makers, historically, have made the decisions on what solution to buy to fit their particular needs and where you can really provide a credible path to optimizing the workflow, you naturally raise up the decision point to a decision-maker who might say to a designer, you might like tool x the most. But if you get the Trimble tool, everything works better together, and we'll have more predictable project delivery. And we think that's a very compelling argument for our customers.

All right. And in terms of the performance that e-Builder and Viewpoint, as you mentioned, mid-teens growth last year, that accelerated a bit in the first quarter. Can you talk about how much of that is rising user growth for existing logos? How much of that is new logo growth? And what are your win rates been like in competitive environment?

Yes. Well, I'll say we did see a booking slowdown when COVID hit. And I think it's probably also the case that our win rate dipped a little bit. There was a lot of competitive activity at that time, didn't last long. But -- so while our ARR kept chugging along, new bookings were a little slow. That has really come back. We've sharpened in many ways our offering, and we're getting increasingly good at selling this connected more bundled offering, and our win rates are very high now. We have good competitors. We're capable out there, but we've seen after the COVID -- brief period of COVID softness in winning new work, we're seeing an uptick. And Jerry, the majority of our new bookings are with existing customers. Either cross-selling new solutions that the customer didn't have or upselling the capability, more modules, more features. We love new logos, but the highest profit incremental new sales are to our existing customers, and it's just sort of the normal logic the customers who know you and like you are fertile ground for selling more. So that's where the majority of our bookings have come. And that's what our strategy is about. We're going to seek out new customers, but the really big opportunity is to sell more of our portfolio to the customers we already know.

And in terms of the product vitality at e-Builder and Viewpoint. How do you quantify that? What's the health of the pipeline, can you give us your perspective?

Yes. It's very good. We're leaders in those spaces. There are competitors, but we are absolutely in a strong leadership position, and we're able to compete head-to-head with some hot growth companies out there. I take a lot of comfort from the win rate data that shows that we're -- we can compete with any solution. And then -- so in those areas, our competitive offering is very strong. And we have some really unique ways that we can push the product development process because of the breadth of our portfolio. I could talk about this in a number of businesses, but I'll go back to the bundling of civil technology, and Viewpoint is a really unique example of it. Viewpoint's traditional competitors would struggle to offer.

And how far away are we from that bundling, moving the needle for you folks?

It's budging the needle now. The -- I'll say, Jerry, a couple of things have to happen for this to be transformational in our financial performance. One is that there needs to be a really strong digital backbone that connects these offerings just something as simple being able to go on mytrimble.com, see all of the recurring offerings you have in one place, you can buy more, you can renew your license, so our digital transformation initiative is geared to that. And Jerry, that's a multiyear endeavor. We really port on the calls and the investment of that right in the heat of the pandemic, and we're making progress, but we've got a lot of work to do there. So that's sort of one front. Second front is what I'll call the more technical linkages between the system to enable the data to pass from 1 solution to another. And we're certainly -- we're probably furthest along in that regard in the construction portfolio. And then the last element is the go-to-market. Jerry, as you know, we -- most of our go-to-market resources have been in our divisions. And so we've had -- we have a good spirit of collaboration across the company, but it's not systematized. So you're seeing more and more of our selling resources and the client-facing resources being common across divisions. This is a long journey. I do think we're winning business now, a meaningful business that we wouldn't win with the old approach to working, but we're definitely in the early innings, and this will be a multi-year endeavor.

And David, you alluded to SketchUp. So before the transition, that was a $60 million revenue business on perpetual license basis. And you folks have since then spoken about post the transition 2 consecutive years of 50% plus user growth. So can you put it into context for us? What's the revenue run rate now? And as we think about the opportunity for the rest of the portfolio, just put into context what performance has been like here.

Sure. I'll keep my reluctance to give divisional specific numbers, but you're about right where we started, and SketchUp went through the revenue valley, which, as you know, is what happens when you go from perpetual to a recurring model, but we're on the back end of that. In most markets, the perpetual versions of SketchUp are not available. And we are past the point. And Jerry, I'll just leave it with you that revenue is more than it was when we started and ARR has been growing and you cited the user growth numbers, which -- this is a powerful story of how a recurring revenue model opens up new markets. And we are seeing very rapid ARR growth in the SketchUp business. And we have new technology, new ideas within SketchUp that fit this connected workflow theme I just mentioned to you that we make SketchUp actually in -- sold in concert with our Geospatial scanning solutions and even more compelling proposition. So the SketchUp business is very healthy. We've turned the corner on the revenue transition. We're meaningfully more revenue than we did when we bought it, and we have a really strong ARR growth machine.

And it's interesting, right, [ Chris ], from an accounting standpoint, if we're at a point where the user growth is up 50% plus for 2 consecutive years, that means we've got a natural ARR tailwind over the next 1 to 2 years as the accounting catches up to reality, right?

That's right. I mean -- and by the way, in these businesses, sort of hard to retrain our brains as finance people, but we recognize that ARR growth is the one to measure. And when revenue suffers at the expense of ARR growth. That's still a value accreting thing, and we've been -- have been and still are very aggressively pushing nonrecurring software revenue models to a recurring basis where that makes sense for the customer and is part of optimizing the workflow. So in a number of businesses, we've mentioned that our revenue and margin trends will be about 150 basis points, worse in 2021 than they would be if we didn't have model transitions underway. But that doesn't dissuade us at all because we know it's accretive to value over the longer term.

No doubt. And in terms of the transition in Tekla, I know it's early, but can you talk about what market reception has been like for the subscription product?

Yes, it's very early. So we announced the transition to a subscription model in Tekla just about 7 or 8 weeks ago. The early signs are good. We're selling the recurring model. Customers like it. We did experience which you often see in businesses like this when you announce that you're doing a recurring offering. Some customers prefer to buy the perpetual and sort of do that last time buy. But overall, the reception is good. The customers of that product are following the path of so many of our other businesses and are themselves embracing a cloud-based -- and there's some term-based models in that, but they're embracing a renewing model, and we're very encouraged.

And would you say reception is SketchUp level good?

SketchUp's different product with a different user base. The SketchUp has higher churn than some of our other software businesses with dramatic user growth. So I don't think the formula in Tekla will be just like Tekla. But look, it's -- we're too early to connect dots and draw a line out into the future. It just -- it looks favorable. I'll put it there.

All right. That sounds good. And in transportation, so you're undergoing a transition there as well. This subscription and you're farther along than Tekla. Can you just talk about what the experience has been like there? And what new user growth has been under the new offering?

Yes. So the transportation business can be thought of as a number of different point solutions. We have the mobility, telematics based business that is essentially all subscription and has been for a while. The enterprise business, which is what you're referring to, is undergoing the transformation from perpetual to subscription. And the quarter just ended, we had bookings in that enterprise transportation software business that were more than double what they were in the first quarter of last year, and most of that was pre-pandemic. So we're getting really good uptake on the -- that recurring business. And the transportation market has improved dramatically from a very tough spot when the pandemic first hit. And we have there -- it's sort of like the other end markets. I was talking about, we have a sort of connected solution and a breadth of offering. It's a compelling part of our story for those customers. So we're optimistic. Actually, the transportation business has seen a meaningful revenue hit from the transition, and that's one of the reasons why revenue growth and margin are what we would like them to be longer term. But we're happy with that trade-off. Because we believe that the recurring model for our transportation enterprise business will be very strong.

And was the bulk of the margin headwind that you're citing for the enterprise, is the bulk of that in the transportation segment? So in other words, are we meaningfully underreporting transportation margins?

Transportation margins are really low for a number of reasons. And I'll say the -- well, let's talk about what I'll call the virtuous reason, so the pressure on margins that sort of long-term helpful for the strategic value we're creating. I just mentioned the enterprise software transition, which is probably 250 basis points margin. So yes, that's meaningful. We also have the impact of the Kuebix acquisition, which we made a year ago, which is dilutive at this point. We bought that business just as the pandemic unfolded, and we are certainly behind them some of the transactional metrics that we have established for that business, but the strategic proposition of the Kuebix business being part of an integrated offering that differentiates us is still very positive. So those are 2 big causes of margin pressure that we think will fix themselves over time. But Jerry, the other ones are somewhat unique to Trimble. And as you know, we had a lot of churn in our telematics business. We have the confluence of a new standard for electronic logging, and we had a lot of product performance issues at a time when there were a lot of new competitors with new offerings. And so we had some unhappy customers, and that's been a very difficult process for transportation team. The good news there, Jerry, is that there's some green shoots. I mentioned this in our call, but bookings have been very strong even in the telematics business, which has been weak. Customer satisfaction overall is improving. Our churn is on a long-term downward trend. Actually, we had -- in the quarter, we had enough bookings that we actually had positive or over 100% net retention some of that is probably going to be tough to sustain every quarter in the near term. But our customers are happier. Our integrated offering is compelling. And it's going to take us a while to get those numbers back where we want them to be, and we've said numerous times that we don't expect meaningful progress in the metrics that you all look at like ARR and revenue and profit until the end of this year and probably Q4. But we do believe that these early indicators give us more confidence that we're heading the right way.

And before we transition to the hardware discussion, I just want to round out the subscription conversation. In the past, you folks have spoken about $400 million of perpetual license software products that could and will be transitioned to subscription. Can you talk about what are the next major platforms that are up after Tekla? And how back-end loaded is that $400 million relative to your transition plans?

Well, the numbers have moved around a little bit. We -- if you look at last year, we had about $400 million of perpetual software. There's about $100 million of that, that's in businesses and models that are obvious candidate for near-term transition, and we've already talked about some of them. Tekla was in the transportation business. Also our MEP or mechanical electrical plumbing offerings or subcontractors in those areas. We are really leaning hard into the transitions on all of them. And it's our goal in the next year to 18 months to 2 years to be on the other end of those transitions on all of that. So that's sort of $100 million out of the $400 million. The balance of the $400 million of perpetual software, an awful lot of that is sold in a bundle with our hardware. And Jerry, that's a harder change to make and will take longer. But we are already in the market, in the civil construction space with what we call platform-as-a-service, which is a recurring payment that includes the hardware and the software technology assurance. There are other parts of our business where we're getting into the solution-as-a-service business. We need to retrain ourselves and our customers and our dealers to make all of that work. And the way I would put it, Jerry, I think a lot of that business will be recurring over time. But that's a -- that's not measured in quarters, that's measured in many years, and we'll be at that for a long time because it's a real fundamental model shift in how business is done. But I think the logic of having the data in the cloud of having a recurring offering that lowers the upfront capital expense that ensures you always have the right version, whether it's hardware or software. That's compelling in those -- most, if not all of those offerings, too, but it's a bigger lift to figure out how to switch those models.

Yes. And putting the pieces together, obviously, value-enhancing to make the transition, but we want to be calibrated for the accounting [ port ] as well. So based on the cadence of product transitions towards subscription. When do the comps get to a point where we're looking at margin tailwind from an accounting standpoint like the SketchUp, for example, when do we get to that point for the portfolio as a whole?

I would say in part -- well, first of all, on the accounting side, the world of accounting doesn't always catch up with newer business models. So when you sell platform-as-a-service, the way the accounting works is that you recognize the hardware -- an allocated piece of that is hardware and typically, you recognize that when it's shipped. So the accounting won't be dramatically impacted by that model shift. But look, we've been seeing -- we're on a secular trend of upward momentum in our gross margins. And that's where you really see the big impact of the recurring revenue business models. You might have noticed, we took a dip down a little bit in the last quarter from year-on-year levels. And part of that was because our hardware business was so strong. But, Jerry, to answer your question, this is a sort of permanent feature of our model, but more and more of our business is migrating this way. And over time, we will see margins grow. I'll just point out that we had really high margins in 2020. And in part, that was driven, I suppose some of your other portfolio companies had a similar situation where there are a lot of things that are very hard to spend money on last year, including travel, and we cut back on some of our compensation plans and that kind of thing. So that's a temporary depressor on margins this year. But over time, as more and more of our business is in software and recurring, I think it's logical to assume that our outlook for margins will improve.

And David, as we switch the discussion to hardware, you folks have been very transparent on the struggles that the people in that business has had with the lower price competition and everything else. Can you talk about how you're thinking about your broader hardware portfolio, where do you see risk to that part of the portfolio and given how attractive the performance has been for your software businesses, what's the appetite to ramp up investment for next-generation hardware products. Can you give us your thoughts on those 2 areas, if you don't mind?

Sure. I'll start with where your question began, which is in the mobility business in transportation. And when you think about hardware in the mobility business, you're talking about an onboard computer under the trunk and a display in the cab. And increasingly, those hardware offerings are becoming more and more standardized and commoditized. And Jerry, the -- sort of irrespective of our issues with customer retention. The margin potential of that kind of hardware already was declining. And our strategy in that transportation business is to be more hardware agnostic. And so hardware as a percent of our revenue and even more percent of our profit is down in that business, and that's okay because we believe, over time, where the real value is created and where the high-margin opportunities are in transportation, are in the software and the data that optimizes the customer workflow. So that's for transportation. But your question was broader than that. And I'll say a few things. My view is that what's unique about Trimble is an ability to connect the physical and the digital world. We believe that's a big part of how you actually optimize these end customer workflows. And so having a compelling hardware portfolio is a critical part of the strategy that enables that value to be created. So I actually believe that our other end markets are actually quite different from transportation, that our hardware is highly differentiated, that the hardware is critical to collecting the data, which we can connect to optimize the end customer workflows. We do predict that software over time will likely be a growing part of our offerings, but that maybe doesn't mean that hardware doesn't grow too, it just doesn't grow as fast as the software and the other parts of the mix. And we have had -- obviously, in the quarter, we had a really terrific hardware business. Some of that is the markets reopening. But some of it is the nature of what we sell, and we have a really strong competitive advantage, and we're getting increasingly good at recovering that in margin and price. So my view is that the hardware offerings that we sell are part of the strategic direction and the magic of Trimble and really earn a permanent part in our portfolio. And I think I infer from your question, we have some of our OEM partners and customers that are, obviously, investing more in digital technology in their businesses, and that's been going on for a long time, and that's sort of logical. But we believe that we can compete effectively in that environment with our hardware in the aftermarket and our solutions.

And David, on that note, any interesting new product releases for you folks on the heavy civil side or on the agriculture side? And how do you quantify product vitality for those product lines?

It's hard to quantify, but I'll say, you didn't mention it, but in the Geospatial area, we've had really dramatic and groundbreaking product introductions that are -- they are competitive in the way that they really have an immediate and dramatic impact on customer productivity. So particularly in this environment, we're struggling to keep up with demand. But I'll say in the other end markets, we are making hardware advances that we believe will increase our competitive position. And I'll speak specifically about autonomy. We're probably under-appreciated provider of autonomous solutions. We focus less on the on-road, although we do have offerings that serve the on-road autonomy market. But where the most of our focus is, is in off-road, in construction and in agriculture, where we're helping to make the job of the operator more precise, more safe, require less skill and we are -- we've announced some things with some OEMs that you may have seen that have increased our sort of visibility in our presence in the world of autonomy, and that's a really exciting area for us, and it's both hardware and software.

And on the Geospatial side, can you expand more? You had mentioned demand is outstripping supply? Can you say more about the new offering? And to your point, the margins have performed really well for that part of the business as well. Is that a function of just better built-in margins on the new product?

Yes. So we introduced last year a new total station that -- I don't pretend to be a surveying expert, but it doesn't require the poll to be level. There's inertial technology built into it. It turns out that has a dramatic impact in many situations for a surveyor to be effective and accurate. So that's an area. We are introducing this year new product controllers and display. We have a new scanning station with greater range and precision. In Geospatial, Jerry, I think one of the underappreciated aspects of that business is that we've increased our presence too and our capability in some vertical markets. So one I'll highlight is forensics. So crime investigation and our scanning stations that allow police forces to scan a crime scene in an accurate, incredible way that make sure that the bad guys can get prosecuted, who would have thought that's a market for a surveying company, but we're doing a meaningful amount of business. And there are other end markets, vertical end markets that are like that. So I'll say, Jerry, that one of the reasons our hardware margins look as good as they do, is that we have highly differentiated products that are unique and can command a price premium. But I'll also credit my colleagues with being really commercially smart about pricing. And we had a lot of things going on when I joined Trimble a little over a year ago that have really come to fruition and have paid off in terms of being very smart and aware and true of how we do discounting and how we make sure our prices capture the value of the products we're offering, and that's really helped our margin to be very strong.

Okay terrific. We'll look for your products next time we watch CSI.

All Right.

David, thank you very much for joining us. I really enjoyed the conversation. Thank you, everyone, for making time. Appreciate it.

Thank you, Jerry. I enjoyed it very much.