Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Okay. Good afternoon, and welcome, everybody. I'm Jerry Revich from Goldman Sachs. And I'm delighted to have with me from Trimble, David Barnes, Chief Financial Officer. David, thank you very much for joining us.

Happy to do it, Jerry. .

So we're going to run the conversation on the fireside chat format. If anyone on the webcast has any questions, you can just submit them via the webcast, and I'd be happy to ask questions on your behalf.

David, as a starting point, I'm wondering if you could just train for those that are newer to Trimble, the company's strategic priorities over the next cycle as we sit here today just to start off the conversation?

Sure. Well, Jerry as some of our shareholders know, we're on a journey. We have the grand ambition to transform the way the world works. And that's more than lofty words. We are actually really engaged changing the way many industrial processes, workflows function by bringing together technologies. We have a platform strategy that we're investing against aggressively that brings together our point solutions and external point solutions to make construction, transportation, agriculture and a few other vertical markets, much more efficient, greener, safer. So our strategy is all about these industry platforms and bringing the tools we already have to bear to really create breakthrough improvements in productivity for our end customers.

Super. And you folks have been active on the divestiture side recently. Can you talk about maybe 1 or 2 of the bigger divestitures? And why they're no longer fit to Trimble, David?

Sure. We see our job as leaders as capital allocators, and we're constantly reviewing our portfolio of businesses with an eye toward the strategy I described, which of these industry platforms and solutions that come together that share data to make end user workflows more productive. So we sold a number of businesses. They're almost exclusively hardware businesses, at least in this last round of divestitures. I'll give you an example. We sell tripods and vets use by surveyors. We had a laser accessory business, which is a little higher tech than tripods and vets, that is a competitive business that's more commoditized, that's more capital intensive. A couple of other businesses we sold. One is a timing business that sells principally the telecommunication infrastructure industry, and that's outside the focus of our strategy. So the core theme is not that these are bad businesses per se, but they don't fit within our strategic platform strategy. They require investment and focus, and we think our time and our financial resources are best focused elsewhere.

Are there more divestitures on progress?

I don't think we will ever be complete with divestitures. We're constantly reviewing the portfolio, but I think the magnitude of activity we had this year is a spike. And I think the divestitures going forward will be smaller in magnitude.

And David, the acquisition of Raven by CNHI came at over 5x your sales. As you mentioned, you folks are really diligent about allocating capital appropriately. How are you thinking about the ag business, if there's an opportunity to monetize it, call it, that market type rate?

Yes. First thing I'd say, we're very bullish on the ag business. If you look at the performance, it's been incredibly strong. We've had some margin pressure, and that's the artifact of the supply chain and the incredible demand we're seeing. There are a lot of synergies between the ag business and our other end markets. And we think that's a great business. And we think that's a great source of investment to fill out the industry platform for agriculture. So no, that's a core business in Trimble, and we're excited about it.

Okay. And in terms of M&A priorities at this point in the cycle, how active is the pipeline? And what are the parts of the portfolio that you folks are targeting for investment?

Well, the acquisition strategy is -- I'll come right back to the platform strategy in these connected solutions. So we are looking to fill in gaps to supplement the point solutions we have now. Jerry, a very good example would be AgileAssets, which is an acquisition we made just before the beginning of the year. That's a very compelling asset and program management business for Departments of Transportation. The synergies between that and our other businesses that can and do sell to those customers are very strong. So that's a good example of where we think we can acquire and add value to businesses. We're really focused on the existing end markets that we serve. So the vertical industries we think are really -- there's a lot further to go. I think it's unlikely that we would enter disconnected and dramatically new end markets. But there's plenty to buy out there that we think we can add value to. We're disciplined acquirers. The -- while the public multiples have come down, we haven't seen the private multiples come down as much. So that just means we need to be picky.

Okay. And in terms of the type of acquisitions where you folks have been most active and successfully, it has been really on the subscription side. Can you talk to us about subscription assets, specifically on the private market that of interest you folks because we've seen a correction in public market valuation for a subscription assets and growth assets broadly.

Yes. I'll say that you're right. The focus of our acquisition energy recently has been mostly in the recurring revenue subscription model not just because we're wedded to that business model because that's -- when you get data from solutions into the cloud, you can bring the data together and optimize workflows. But I'll say there are hardware type companies that can add value to our industry platforms, and we don't dismiss those opportunities. But yes, I think the valuations, as you said, have corrected in the public markets. What we've seen is that the correction hasn't been as notable in the private markets. So -- but we're a big believer in these business models. We know -- we have acquisitions that we made before the recent run-up in multiples, but that have created an awful lot of shareholder value when you look at SketchUp and Viewpoint and e-Builder. We know how to run these businesses. We know how to bring them together and make them better than they could have been on our own. So that's a powerful theme that we'll continue to invest in.

Okay. And in terms of e-Builder and Viewpoint, it's just been really interesting to see high-teens growth in those businesses, year in and year out. What's your assessment of software penetration of the target markets as we sit here today?

Yes. I think it varies by the customer type. If you look at e-Builder's business, there are many of their customers that have either very crude technology or you might say not much technology at all. In the case of Viewpoint, the bigger contractors have some sort of enterprise systems, so the penetration is higher. We believe we have an important point of differentiation. But there's a lot of market to grow into for both of those solutions. And Jerry, I'll point out, we think less and less about divisions and products like e-Builder and Viewpoint and more about Trimble collectively. In fact, we're going to market now with an offering we call Trimble Construction One, which includes the capability of multiple products, and we believe that's the real power of our portfolio.

And that's really nice to hear because of the cross-selling opportunity set. Where are we in that cross-selling process to date?

We're in the process, but for those of you're participants who are baseball fans, we're in the early innings. So it's a noticeable chunk of our new bookings, Jerry, are under the name Trimble Construction One, far less than half. But from a cold start, a couple of quarters ago, we're making real progress. One thing I'll point out is that -- we historically have had a business and process infrastructure that makes cross-selling and bundles hard, and we're investing heavily in our own digital transformation so that it's easier, and we will -- that's a multiyear effort that we're well into. So right now, we're doing it the hard way, but we're doing it successfully going to these customers with a common sales force, with a common contract, to some extent, an integrated technology platform that enables them to access licenses for multiple products. So we're in the early innings. We got a lot further to go. But the early results we've seen give us really strong confidence that this is a big idea.

I mean that's really fast progress, from a cold start a couple of quarters ago to already ended up at 20%, 25% in. And I mean that's fast progress every quarter, very interesting. And the systems integration that you mentioned you have to do work now to cross-sell. How long will that remain an issue? When will the system get you to 80% of what you're looking for?

Yes. I think everyone who's been through a major business process and system implementation knows this is -- it's a long work. We're going at this in phases, focusing actually -- the initial focus of our efforts is our construction enterprise solutions and having a common go-to-market engine and a common platform for the customers. And we're well in that investment. We'll be -- we'll have a real market-making impact of that at some point next year. But Jerry, this is a multiple-year effort to get through all of our businesses, including our indirect channels, our hardware businesses. So I think this is probably consistent with what the other companies you cover have gone through. This is a long journey. We think in the next 12 to 18 months, we'll make an awful lot of progress in the first phase.

Got it. So essentially, the progress that you're making now is just a function of incentivizing folks in the right way so that they can put up with the systems challenges of cross-selling?

Yes. We've made some system improvements in our ID and licensing engine. So there's some technology that's helping us, but it's a bit gluey behind the curtain is the way I would put it. The interesting thing is that the energy of our go-to-market teams is very strong. They see that this breadth of our offering and the ability to bring connected solutions to our customers is a competitive advantage. So they're excited about going to market this way.

Okay. And Trimble Construction One, we look at it from an integrated standpoint now, who is the #1 competitor that you're most concerned with on that combined basis, David?

The interesting thing about the pieces of Trimble Construction One is that they're very diverse, and they have -- each has its own competitors. So without avoiding your question, Jerry, I'd say there's no specific competitor that goes the gamut. But if you think about the core elements of Trimble Construction One, it includes Viewpoint, which is our enterprise software solution for contractors; our MEP systems, which are estimation tools for contractors; our project management tools; even we're working to include our civil construction offerings in Trimble Construction One. Each of those has its own competitors. So -- and by the way, they have very vigorous competitors, and we win and lose against competitors in each of those pieces, but there's no one business that spans the breadth of what we're including in Trimble Construction One.

Got it. And in terms of the approach that's different for you folks, as a result, can you just talk about that. Is there any time you have a different approach than your competitors, I think is a better way of computing than on price? So can you expand about your approach to cross-selling within that context?

Sure. By the way, I'll acknowledge that this notion of connected industry platforms is not unique to Trimble. So we have competitors principally from the software space that are using similar language and in some cases, partnering to create broader platforms. What's really unique about Trimble, and this is true not only in construction but in agriculture and transportation and the other industries we serve, is that we span the physical and the digital, the surveying, hardware -- the hardware and civil construction that controls the blade of the machine, the guidance on the tractor in the field. So spanning that and having that technology through to the enterprise software, the program management, bringing it all together, we believe, is a tie-breaking advantage in the creation of these connected industry platforms. So it's the breadth of our portfolio that's the most unique, and the way we're bringing this together to solve end customers' problems.

Can we talk about the Tekla transition? You folks had a really strong software revenue quarter. It feels like the Tekla's subscription transition is playing out well. Can you talk about what level of user growth you've seen with the business client transition there?

Yes. So Tekla is our structural design software offering, and we bit the bullet and went through the transition. We've stopped selling perpetual licenses both to new customers, and we've stopped selling additional licenses to existing customers. Our -- if you look at our total user base, still over half of them are on the maintenance and support, and we're converting them. But Jerry, we're seeing sustained growth in users. That transition has gone very well. We're really excited about it. The principal model is term license for that business. And we saw -- we do a lot of our term license business initiating on January 1. So part of the strength you saw in Q1 was due to that model transition and selling new term licenses in Tekla. But we're really excited about the growth of that business and the transition -- model transition is ahead of expectations.

And maybe just to put a finer point on it, you folks have been able to deliver 50%-plus growth in the subscriber base on SketchUp for 3 years straight post the transition. Is that how we should be thinking about Tekla?

I think SketchUp is a different business. It has a huge addressable market of almost a consumer or near consumer business, Tekla is different. So I think it's probably unreasonable to think that any software business can generate the sustained very high growth in recurring revenue that we've seen in SketchUp. And the Tekla business is headquartered in Finland. I was talking to my colleagues there this morning that's close to the conflicts that we've got a lot of business in that part. So that's not helpful trend for them. But I think the fundamental offering is very strong, the ability to include that capability within the Trimble Construction One platform over time will give us new growth momentum.

And revenue -- the software revenue for you folks was up about $40 million year-over-year in the quarter. And considering the business we're selling perpetual license a year ago, is that the ample samples growth that you're seeing with the mall conversion? Is that $40 million increase representative of growth in the user base?

I think that's a little higher than the user base, Jerry, because as we work with our customers to convert to term licenses with target January 1st start up, just the way term licenses are accounted for, you recognize the license value at the initiation of the contract. We saw a spike in Q1 that can't reasonably be expected to sustain. And Jerry, you follow our guidance. Our organic growth rate, we project will be a little lower in Q2 than it was in Q1, and that's the reason. But there's -- the sustained trend, as you said, is growing user base and particularly growing ARR. We look increasingly the right measurement for our software businesses. It's not so much accounting revenue, but it's ARR. And as you probably saw, we experienced sequential improvement in ARR growth, frankly, better than we expected, and we think that's the best indication of the momentum of the business.

Got it. Yes, the performance in Tekla is pretty clear. And David, SketchUp, just coming back to your comments from a moment ago it sounded like the high growth rate we've seen in the first 2 years of the transition, it sounds like that high growth rate has continued into year 3, is what I talked about in your comment a moment ago.

Yes. And as I said, for all the reasons I mentioned earlier, we're sort of reluctant to get into product or divisional detail. But yes, SketchUp is really on a tear. The ARR growth is very high. That's a result of a lot of things. You may have seen our new release of SketchUp for iPad. One of our engineers demonstrated to me, it's just incredible how much technology for conceptual design can be delivered in a mobile device. That product offering has been featured by Apple in some of their announcements. It was mentioned in the last big user conference. So that's a growth catalyst. We're getting even better at the basics of keeping churn down in that business is hard work. So we just continue to see really extraordinarily strong ARR growth in that business.

Very good. In transportation management systems, that's another area where you folks are undergoing transition. Can you talk about how that's going, David?

Yes. I mean I'll put it in context by saying the enterprise software business we have represents little under 20% of that segment. So it's not the principal driver of our results within transportation. But I'll say we have a really important business model transformation going on there. And it's not just perpetual software to recurring revenue models. But it's also moving from a perpetual highly customized offering with heavy professional services to a more standardized offering. And so these transitions are challenging and we're through it. But the last quarter, we had the best ever bookings of recurring revenue. We have the best experience of transitioning legacy perpetual customers to recurring. So that business is good. It's hard work. It's got all the normal challenges of a transformation and -- but that business is one of the drivers of our optimism that the second half, and particularly the fourth quarter will show really improved momentum in margins and ARR growth.

Interesting. And there's a pretty big tail in the transportation industry in terms of small customers that not quite the same extent to SketchUp, but you see a lot of similarities. So it sounds like based on how quickly that business is going to be contributing given the size, it sounds like you folks have really good momentum in new sign-ups.

Yes. We're winning -- on that piece of the business, we're winning new customers. So that's really encouraging. It's targeted more historically at the higher end of the market. As I said, more of that portfolio historically was pretty customized, and we think is the right direction for us. But we think there's -- we really like our transportation strategy. The results don't -- we want or what our investors want. And we've got a turnaround underway, but as a foundation under that turnaround, we really believe in the potential of a connected Trimble transportation platform, just like I said, for construction. And we think the enterprise software, the mobility, the map solutions, what we're doing to bridge the gap between shippers and carriers all can come together give us a really unique competitive offering.

Okay. And in terms of the issues that you're alluding to there, they're all people that issue, right? Yes, you didn't have any issues in enterprise software, correct?

No. I mean if you look at the delta between where we used to be in terms of ARR growth and margins and where we are now, clearly, the big gap is the mobility business, which is the onboard computer, there's a display and a software and recurring service that the trucking company uses to manage its fleet. That industry was disrupted by a regulatory change a couple of years ago and a lot of new competition. And so we lost a very significant part of our customer base, and that's driven the results down. So Jerry, I would agree with your statement that the delta between performance years ago and the struggles we're having now really is focused on the mobility business, and we're making progress in turning that around, but that's a tough challenge that we're -- we know our investors want us to show the results, and we believe we'll have good results to show by the end of the year.

And David, in terms of sustaining the ARR growth or returning to ARR growth and people that are in mobility. Can we talk about that? Because right now, a big chunk of that business for you folks is on devices that were installed on an aftermarket basis. And so given the focus on software, can you just talk about what you folks are doing to drive ARR in that business, considering the fragmented nature of aftermarket installs of hardware?

Yes. Look, our focus in that business even more than the others is the other industry verticals is the software and the connected solutions. You're right, we sell hardware, the onboard computer and the display, and that's kind of because we have to as a part of the solution. We have a relationship with a very big OEM in that business for factory fit onboard computers. And the focus of our strategy is to provide the solution that optimizes the carrier's workflow. And if that solution can be achieved with standard hardware provided by somebody else, that's just fine. We have -- the hardware revenue we might lose in that scenario was relatively low margin. And we really believe that what we bring to bear is the knowledge of how to optimize the workflow. And over time, we think we will be less and less hardware dependent.

And so how do you drive the lead generation to displace the fact that you're less hardware-dependent?

Yes. Look, we sell to the transportation companies directly. And if they have onboard the truck that they bought an onboard computer that works, if there's an industry standard display that they already have, that's fine. We're happy to work with them in whatever solution allows them to optimize their network. And we believe we're the most competitive supplier of technology that will help them optimize their -- the way they run their fleets, minimize the empty miles, they're under an awful lot of pressure with driver shortages, very high fuel prices. It's critically important that they optimize their networks. And we're eager to provide the software and the knowledge, and we'll figure out how to work with whatever hardware framework presents itself.

So you're winning business on other people's hardware today?

Not much. So that's a very small product. I guess I'm saying we're strategically open to that. Right now, we sell hardware and software together because that's the way the industry works. But our dependence in terms of our margin and our profitability has already declined dramatically. The hardware is more commoditized in that business than it is in others. And so that sort of reflects where our focus is.

Okay. Is there an opportunity for Trimble Transportation One integrating all these systems?

Absolutely, yes. I won't promise that that's the brand, but a connected transportation platform that brings together the mobility solution, the enterprise solution, the mapping, the networking of carriers to shippers, bringing that all together in a way that improves utilization and profitability for our transportation customers, that's where we're going.

And can we shift gears and talk about hardware, geospatials, heavy civil resources. How do you view the product vitality of your hardware portfolio in geospatial? You folks have had significant margin improvement with a new product rollout within the past, call it, 18 months. What's the vitality look like across the hardware pieces?

Yes. It's sometimes a challenge to measure market share in the industries we serve, but we look at all the data we can find. And all the data we have says that we are gaining share across those hardware categories. And in part, that's driven by innovation and product differentiation. So in geospatial, we feel very strongly about our competitive offering. We are ahead of the market in terms of products that really enhance the productivity and geospatial of surveyors and people doing mapping, and we don't see that competitive gap narrowing. So we're really excited about that business. I think it's unreasonable to expect that it will grow organically at 2x or 3x or 4x the rate of the economy as it has the last 2 years, but we're projecting continued growth and continued sustaining or improving market share.

And what about heavy civil and the ag products?

Yes. Look, there too, we're supply constrained, not demand constrained, where we have unhappy customers. It's not anything to do with our offering, but more that we can't get it to them fast enough. So we have a very strong product portfolio in civil. One of our points of differentiation is this connected platform and site management and enabling our end customers to optimize the way they do their work and their productivity. And we have a very strong competitive proposition. So we're growing really fast. I think we've talked about those industries. You can look at the segments they're in, growing at strong double-digit rates, and it would be growing faster if we didn't have all that backlog that we're struggling to get through the supply chain. So I think those are very strong markets. As we look at civil construction, we haven't really seen any meaningful project activity coming out of the Infrastructure Act in the U.S. But that will pick up and that will be a growth catalyst. And on agriculture, commodity prices are historically high, inventories are really low, farmers are highly incented to produce as much as they can and are eager to invest in technology that makes them more productive. So we're certainly cognizant that there's some clouds on the economic horizon here, but we don't see it in the demand for those hardware products.

And David clearly for agriculture, one way that Trimble's sales can move up significantly is within existing hardware is if you see higher specifications of RTK sub half-inch level of accuracy. Can you talk about what you're seeing in terms of take rates for that highest level of precision product that you're selling today versus a year ago in your major markets?

Yes. We are seeing very robust growth in our correction services businesses, which is what you're referring to. It's the technology that enables the guidance to be at the level that you can get the farm machine exactly where it needs to be. That is growing at or above the rate of our overall ag business. So the penetration is increasing. I wouldn't say it's dramatically slow but it's growing. And the more and more pressure there is on farmers to improve their output, improve their productivity, reduce their reliance on highly skilled labor, the more the precision corrections demand will grow. So that's a really exciting business, and it's high performing, and we're really excited about its growth prospects.

And David, are we seeing investment technology by your customers and on the ag side, CNH buying Raven, AGCO doing some acquisitions as well. Can you talk about your product pipeline and partnerships with the OEMs? Are there any significant products coming up? How are they working with you post these fairly significant investments?

Yes. I think the overall theme of OEMs in construction and agriculture, investing in precision technology. This is not a new theme, and it's something that we think about in our strategy sessions. As you think about the Trimble offering and we have a meaningful OEM business that we do, we partner with CNH, which bought Raven, as you noted. We have a very strong relationship. That relationship continues. But we -- our solutions are heavily focused on the aftermarket, which is important for customers that have a mixed fleet, which is most of them. And even where they don't have a broadly mixed fleet, they typically have assets of multiple different generations, and they want consistent technology to optimize the workflow. So it's our view that there's a very strong demand from the end customer for aftermarket precision technology solutions that optimize the way they do their work. And that creates real value for us, for the customers and, frankly, for the OEMs. So we have very constructive relationships with OEMs, even as they invest in their own technology platforms, and we think both can continue and be successful side by side.

And David, are you able to get new product adoption with those partnerships? You have a number of really interesting products within Trimble, like GreenSeeker and WeedSeeker that have not ramped up distribution. And I'm wondering, is there an opportunity for those products or others? And what has been the nature of those discussions with OEMs?

Sure. So I think the OEMs will invest more in technology for their factory-fit solutions, particularly. But they, like every business, are responsive to the needs of their customers. And as unique solutions like WeedSeeker, like the Trimble aftermarket solutions, are desired by their customers. We expect that we will have productive relationships with them indefinitely. So that's the way it's working. And so this isn't totally new, and we've grown our business very rapidly within the context of the OEMs investing in technology. And we think both can occur at the same time. So yes, we have constructive conversations with OEMs in the industries we serve even while they're investing. I think that will continue to be the case.

Super. Well, David, thank you so much for your time and insights. And thank you, everyone, for joining. Have a great day.

Thank you, everybody.