Trimble Inc. (TRMB) Earnings Call Transcript & Summary

So my name is Jason Celino, and I am the vertical software analyst here at KeyBanc. I have the pleasure of introducing Trimble's CEO, Rob Painter. For those in the audience who may not be familiar with the Trimble story, Rob, maybe you want to say a few words on your background and what Trimble does?

Right. Good afternoon to all 5 of you who work here or maybe to some out there as well. Trimble is a technology company. I assume if you're here, you know enough to be dangerous We were founded 44 years ago by Charlie Trimble. Our technologies are at the intersection of the physical and digital the worlds, connecting the office in the field and today connecting the hardware and the software of Trimble. We're about 55% software, 45% hardware, serving markets such as surveying mapping, construction, agriculture and transportation. Yes.

With the segments in Construction and Transportation ag, Trimble plays at the intersection of digitizing the old world and new worlds. So where do you see the greatest digitation opportunities today?

So we see the markets that we're serving as really a secular growth thesis. The markets we're serving are large, global, underserved and underpenetrated by technology. In this case, I'm specifically talking about construction and agriculture transportation. If you work in the world of construction, you're fighting projects that are late in the budget. We see about 8% of projects are late, 40% are over budget. We're working [indiscernible] trying to probably [indiscernible] is maximizing the yield of your crop and minimizing the use of input. And to achieve that yield, we work in a lot of transportation. It's all about network optimization and utilization, eliminating empty miles and then getting the most productivity out of your drivers. COVID, I think, has been an accelerator of the digitization of these markets. I think we find ourselves at a pretty good point in time in serving these markets. If I had to stack rank them, I think the construction market is furthest along with its digitization. In the world of agriculture, though, I'd say it's right it's very close by, as precision agriculture continues to take off on its own secular growth path. And then we see really similar trends playing out in transportation. But construction is the largest addressable market that we serve today.

Okay. Perfect. And that might be a good segue to your Connect & Scale 2025 initiatives. Obviously, Construction and Transportation and Ag somewhat different industries. How are you tying them together? And how are you streamlining Trimble as well?

Yes. So over the history of Trimble, we've, for a long time, had a mission to transform the way the world works and a vision to deliver products and services that connect the physical and the digital worlds. We've built up a set of capabilities over the last 20 years, both organically and inorganically. Inorganically, we've acquired over 100 companies over the last 20 years. What Connect & Scale 2025 serves to do is to connect users, stakeholders and data across the industry life cycle continuum that we serve. So in construction, that looks like serving architects, engineers, contractors and owners across the life cycle from design to build to operate. And if you think about that as a 4x3 matrix, we've got a broader set of capabilities than we think any of our peers, our competitors in the engineering and construction industry. So what Connect aims to do is to connect, again, those users and those stakeholders. We look at the business model's transformation that we've been undergoing for some time. We look at how we go to market with simplified offerings, bundled offerings and the scale part of Connect & Scale is really fundamentally about making ourselves easier to do business with. There's a lot of process and systems transformation that underlies that to further enable the connection in the industry. We launched the strategy in January 2020, and I feel like, we're on a pretty good path with that, and we can see demonstrable evidence of that through the growth in the annualized recurring revenue.

Perfect. I don't know if we can use -- I don't know if you're a baseball fan. But when we think about this Connect and Scale initiative, obviously, it's got the 2025 number there. But how would you measure kind of the inning of where we're at, both from a technological platform standpoint and then maybe a go-to-market standpoint?

I feel like we're in the early innings of this journey. When we launched the strategy, we talked about the Connect and Scale, we said 2025, I wanted to abstract, I'm rewinding a couple of years now. I wanted to abstract away from the quarter and the year, right, in a world that drives us to so much short-term pressure -- we believe we have to balance the short term and the long term. It's like we balanced local and global initiatives as well. So 2025, to me, was a market to be able to abstract and push ourselves to think longer term. And I will say that's just a step on the journey towards. So it's not like this will be all wrapped up at a pretty bow in 2025. And so in that sense, I would say we're in the early innings of this journey. What's important to me along any journey though, is to have, I'll say, milestones on that journey. Milestones in terms of proof points of customer value delivered proof points of, I'll say, employee engagement around the strategy and then executing on that transformation work. And so we really are conscious, like we -- we use OKRs, objectives and key results to really help ourselves focus on taking that in game and working that backwards to the present so that we have clarity of purpose and intention with the work that we do. There is a go-to-market aspect of this. There's a productization aspect of it that you could even say it's just the fundamental underlying technological backbone. We actually believe in some parallel progress in all of these. So I don't think that they're purely serial efforts. So the go-to-market offering, we talk about Trimble construction One at the moment. I talked about it on the earnings call Friday and early success we're seeing in that. I would say that that's ahead of the technology platform that's enabling that and we need that technology platform to help us scale and grow this faster. It's important to me, though, to be in the market now with it so that we get the learnings and we figure that's working, what's not working and how to adapt that so that we can in an agile way, adapt a technology platform to help us accelerate that.

Okay. Perfect. And I do want to talk about the Construction One platform. But before we move on, we've seen very successful software companies like Adobe and Autodesk, do these model transitions. And -- Trimble is not necessarily a model transition but a business transformation. So how should investors think about like the resulting ROI or measure the performance or the mile markers that we can look at?

Sure. There's always a set of leading indicators and lagging indicators. And when you see a quarterly report, we all know you're seeing really more set of lagging indicators. I'll start with the number $1.51 billion. That's the ARR that we have at Trimble. It's a pretty rare ARR. We have $2 billion of software services and recurring revenue. that's pretty rare -- rare air, and we're serving them in vertical markets, construction, ag, transportation fundamentally are the result of this. That's even further rare air when you break it down to that level. that $1.51 billion grew 15% last quarter. That $1.5 billion was a little over $300 million 10 years ago. So like we've been really working at for a long time. So I'll start with that scoreboard at the end. We took our guidance up a notch for ARR to exit where we felt like we could exit the year on an organic basis. So that's the scoreboard, that's the lagging indicator. On that -- progress to that, we look at things like net retention. You want to have net retention that's -- that's going to be the sum. It's essentially more share of wallet and pricing, less churn and customers. We look at ACV and no contract value bookings. I think about rule of 40. So we have that tension between do you want growth or profitability, let's say, okay, false question, it's an and. We want growth and profitability. Now what's the balance of that? And I think that rule is 40 is instructive as we look at where we're making those incremental investments. I think the ultimate measure is customer lifetime value divided by customer acquisition cost, and so look for a ratio that's there over 3. And if you have that, you have a healthy ratio there, that says to us keep investing in the sales and marketing efforts to drive that customer value and customer growth. That's a small subset of it, of the metrics. I guess one thing that I should say, in context of the connect and scale on the Trimble Construction One offering is within that -- the ACV bookings and the ARRs that cross-sell and the upsell is a huge metric for us because we believe we have so much opportunity to mine from within the existing Trimble customer base and platform.

Okay. Interesting. We'll definitely keep an eye on the ARR then. Well, time flies. I do want to hit on the Construction One platform. First of all, what is it? And then second of all, what is the traction you're seeing that you talked about on the last quarter?

So I see the Trimble Construction One as a go-to-market offering that comes out of the industry cloud that we're building. And both of these are very early. So Trimble Construction One is a go-to-market offering. Think about a bundle targeted to a customer persona. The customer persona that we target at the moment is the contractor. We will move next to a general contractor. We will move that next to a civil contractor to a persona of an architect and designer or an engineer. We'll move that persona to serve owners. So it's a tailor-made suite of a Trimble offering, that aspects of a field and office software, hardware capability. What we see from selling Trimble Construction One at the moment is we're reducing the sales cycles. So sales cycles are becoming shorter. Our win ratios are going up and our bookings dollars are going up, all at the same time. Our sellers are able to sell a richer value proposition. Let's make it easier -- because our customers are asking for this, make ourselves easier to do business with me. Don't give me multiple salespeople to come sell multiple products at Trimble, I don't need that. I want to do business with you. I want to do more with you. I see the breadth and the differentiation you have in the market, bring it to me. So it's really if we're listening to the customers is what's getting us to this point.

Okay. Perfect. Yes, I think in construction, we haven't seen too many of these pure-play platforms. So how, from a technological standpoint, have you been working on this?

Well, so we've been working for a while on it. I would say -- you could break this into a few, let's say, components on how we've been working on it. There's at the individual product level. There's actually the cloud -- enabling cloud technologies here. So we announced a relationship with Microsoft last year that helps us accelerate the work we're doing to transition more and more of the businesses to the cloud. They've been a very good partner in that respect. We're working on the plumbing of Trimble. This is customer identity, licensing and entitlement systems, like the underlying kernels, the foundation to be able to actually go and deliver this at any scale. We've got our latest systems, we're testing in France and Benelux right now. So we're able to get that feedback from our go-to-mark teams and from the customers that work on the enabling aspects of the technology meets the, I'll say, the product road map. I talked about rolling it out to different personas. We'll also roll it out to different regions of the world, just chipping away at it.

Yes. So when I think about what you can take from the Construction One platform and reapply it to areas of transportation and agriculture, one, is all that plumbing, is that transferable to any other industries? Does it have to be built? And then from a product standpoint, do you have enough in those other 2 verticals to have a platform?

Yes. So if you're going to have a platform, to me that also implies -- that means ecosystem. That means you can work with Trimble and non-Trimble data. We do a lot of things at Trimble. We still don't do everything that our customers do. So that's a mindset that we have with how we approach building the cloud ecosystem, open -- a level of openness that we think is unique. Yes, the answer to your question, we do believe that we can rinse repeat this to other big vertical markets at Trimble. The vast, vast majority of the plumbing, we believe applies the mindset of packaging the offerings and target personas very much applies. In transportation, we serve 99% of the top 200 trucking companies are Trimble customers. In the world of agriculture, we have technology in over 175 million acres of farmland. We work with hundreds of OEMs. We've hundreds of thousands of aftermarket kits in the field. We think there's a profound ability to connect to Trimble technology in these markets. Hardware, software, office, field, physical, digital, looks like connecting carriers and shippers in the world of transportation across a life cycle from plan to procure to execute. In the world of agriculture, your stakeholders, of course, are the farmers, but it's your retailers, your [ import ] providers, your agronomists, and there, they move from a plan, execute, harvest life cycle.

Perfect. Now some good stuff there. Since we're kind of on this construction topic, maybe a couple of industry questions. Inflation impact on the construction industry, up for debate on whether it's a positive, negative or neutral impact. Based on where you're sitting, I mean, how do you think it's playing out?

Probably neutral at the moment. So here's the thing. If you're deploying Trimble technology, you're buying better, faster, safer, cheaper, greener. So if you have an inflationary environment, our technology is deflationary. We have markets that have tight labor conditions. We make an inexperienced operator good, or a good operator great, using the technology in the field. In that respect, it's a very positive catalyst. We have -- there's $1.2 trillion -- reasons for me to feel good about the trajectory of our business in North America, and that's the size of the infrastructure bill. It's $522 billion incremental over the next few years. That's a positive catalyst for growth. Now at the moment, with the level of inflation we -- our customers are experiencing, the markets are experiencing, that's eating up a lot of that increase in funding. And so that's naturally not a good thing in terms of the -- we call it the units, in terms of number of projects being let. We're seeing them come out slower to market, and we're seeing the processes take longer at the moment. So that's a little bit of the counterbalance, but ultimately, we're selling productivity. And in that sense, we're -- I think we are getting some more attention from the Department of Transportation at the moment who are realizing that, okay, how we actually going to deploy this money efficiently and effectively.