Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Well, hello. My name is Clarke Jeffries, I'm a software research analyst here at Piper Sandler. Thank you for joining us. Very pleased to have Phil Sawarynski, CFO of Trimble Technologies joining us. Thank you for coming to Nashville.

Thanks for being here. It's my first time we were just commenting outside. So happy for the invite and happy to see hopefully a lot of new faces around as well as old faces, but glad to be here.

Yes, absolutely. Music City. So the last few years have been very eventful for the company. I think, it's been a lot to sink your teeth into in terms of my role as an analyst. But even to that, even prior to these most significant transitions, transactions, there was 22 divestitures since 2020 at the time of the Analyst Day. So maybe we could start off with an overview of the business here in 2025, what is Trimble about? And what is the opportunity for the company?

Great question. Maybe to get to the present, I'll start a little bit with the past. And if you're familiar with Trimble, I've been with the company now closing in on 16 years, I started the ag business. But when I think back about my tenure and even before that, the company was very successful. We had a lot of product innovation, both organically. So our ag business was built organically and a lot of inorganic. We have done a significant amount of acquisitions over that time. And we had an incredible amount of depth and breadth of product over that amount of time. And so as we built those circa 2020, Rob Painter is our CEO now, started as CFO. We saw the opportunity to engage in an evolution of where we're going as a company, and we call it Connect & Scale, and we can talk about that as we go forward. This is really our strategy where we had a significant amount of products. I would argue the most depth and breadth of product in the industries that we serve from a technology perspective. And what we want to do is bring those together as far as thinking about platform plays and ecosystem plays and the connectivity of workflows, the connectivity of data and data being just so important where we're at today and where we're going, particularly as we'll talk about with AI. And so with that transformation of the company also came some portfolio changes, as you mentioned. And we recently divested our ag business. We have a 15% stake in a joint venture with AGCO. We divested our mobility business, which is -- now we own a stake in the combined entity with Platform Science. And so I'd characterize this as a little bit more of us simplifying and focus on how we are operating going forward. And it really also changed the financial model when we think about that. Now we are almost 80% software related and almost 2/3 of that is recurring -- 2/3 of the company's revenue is recurring revenue, north of 70% gross margin. So the financial profile that we have in the business gives us a lot more visibility into our future. It gives us a lot of opportunity. And again, we can talk about Connect & Scale. I'm sure you're going to ask another question on that. But with a lot of the infrastructure things that we are doing in the back end from an administrative standpoint and how we can actually tap into the addressable markets we serve, really excited about where we're positioned.

Yes, absolutely. Certainly, the recurring revenue mix continue to accrete the product mix and the margin improvement. It's been all like a very eventful year to follow from the outside. But maybe when we talk about the three buckets that the business is organized in, I think from a practical standpoint, maybe you can just -- who are the main key customers across these different segments when you talk about the benefits of being involved in this deep portfolio, is there overlap across the segments? And just maybe let's profile these customers in AECO, Field Systems and Transportation.

Sure. Yes. So the three segments, AECO is primarily focused on construction software. And that's been -- taking a quick step back, when we did the ag divestiture, we looked at that, we had an opportunity to re-segment the business. And so now you're seeing a little bit different than what we portrayed in the past. But I think you're also seeing a lot more representative of more of the transportation, AECO pure software businesses. Field Systems is a combined software and hardware business. But AECO, construction software focused: A, architects; E, engineers; C, contractors; and O, owners. And then the Field Systems business is both hardware and software. And the ARR there has been growing really well. We're doing conversions in that business, but we're also developing new products that are out of the gate subscription. So when we think about those two segments, I would -- there's a lot of overlap in the customers. And we report that way for various reasons, one being -- one is more of a direct model, one is more through dealers in Field Systems. But the overlap in that connectivity, when we talk about Connect & Scale, that connectivity spans beyond the segments. And really, we really like what we're doing. We really like the competitive moat that we believe we have with the hardware and the software within those two. And then the third segment, you talked about was Transportation. This is really the movement of goods, primarily around more long-haul trucking. But we really like that business. As we mentioned, we divested the mobility business. So that's a pure software business now. And -- but yes, I think there's a lot more overlap as we talk with the customers and as we talk about the Connect & Scale strategy, I think, and our competitive, it's really critical, particularly as we think about Field Systems and AECO.

Yes. Let's talk about Connect & Scale. Could you maybe sort of describe the strategy in aggregate and maybe some specifics of how this really works? If you're a construction entity, what's the benefit of having the Field Systems, the sort of sensor to software experience? And it seems like it's a differentiated approach in the market. So I'd love to just -- let's go deep on Connect & Scale for a market.

Yes. So Connect & Scale, think about Connect is the connectivity of the workflows, connectivity of the data, connectivity of the stakeholders as we think about an ecosystem. So you have multiple stakeholders in a particular project. If we want to use that as an example. And we still live in a physical world. And so what we think is and what we've seen is that connection between the digital and the physical is something that is a differentiator for us and is unique about Trimble, because we can use our scanners on the Field System side, for example, to pick up the environment and the reality today in an accurate fashion. That can then be transferred into a digital model, which then becomes a source of truth. So when we think about the connective tissue, let's say, for all of this, we talk about our Trimble collaboration tool, which is Trimble Connect. And that -- where you can actually ingest 3D models from the field. We can use that. And so we think about the stakeholders that are actually part of that, it's not just about a contractor making themselves more efficient. It's about the contractor engaging with the architect, with the engineer, and with the owners. So if you think about the ADC, the CDO, we have that connective tissue with Trimble Connect. And that allows that source of truth for everybody to be working on the same model and the same work, which I think is really important because now that's -- you're really talking about a full ecosystem as you think -- as we connect the data and the workflows there. And so we're really solving high order issues and inefficiencies from that perspective. But going back to the connectivity between the field and the office, we really like that part of the business, because we are the ones that are collecting data with our equipment. And that data is what actually feeds into Connect, which is what feeds into this ecosystem to allow all the stakeholders to actually participate in the decision-making. It also gives us, as we think about AI by having that data and then by us actually collecting it, allows us to apply AI tools to that data to allow our customers to have faster decisions, more efficient decisions, know how to proactively manage their business instead of reactively. So we think we're really well positioned with that digital, physical, office-to-field connectivity that we have, that's I think is very unique to Trimble.

Yes. I think I've heard it a couple of times at this conference. It feels like in software, the real -- the real differentiator going forward in this world of AI is, are you a creator of data. Are you creating something that isn't within the realm of foundational models or the corporates of the Internet? Are you providing something new as a data ingest point? So certainly fascinating. And I think the construction space overall, we've seen it's been one of the slowest to digitize. And I think it's largely because of this fragmented industry, a lot of different stakeholders, a lot of different sizes of organizations, and it's a lot more complicated than a lot of horizontal software apps have to deal with. But maybe wrapping up this kind of background, let's talk about some long-term financial outcomes and investors should be benchmarking the company again. You had an Analyst Day relatively recently, maybe you can talk about some long-term financial targets in the kind of new Trimble structure.

Yes. So Investor Day, we did late last year, I think it was December of last year. And we put out a very simple framework, which was 3, 4, 30. $3 billion of ARR, $4 billion of revenue, 30% EBITDA margins in the 2027 time frame. So that's a really simple where we're guiding to where we are going in a multiyear context. I really like to start, our first half performance was really strong and basically across the board, even in a freight recession or a freight, at least a downturn in the freight market. The Transportation business performed, AECO business performed very well, and it's been -- had continued to perform. The Civil business has been really strong with the project backlog, in Field Systems. So as I think about what we put out in Investor Day back in December with that 3,4, 30 and how we started this year, really pleased with the progress and getting off on the right foot at least so far.

Yes, absolutely. Especially the subscription offering, it seems like something that's just been very, very successful in bringing to market, especially in Field Systems. Let's maybe talk about AECO, because I think construction software may be where investors have the most experience in terms of public comparables and when maybe what a vertical software company looks like in construction. But you've been able to have high teens ARR growth in that segment for years at this point and 30% operating margins. And so, when you did this re-segmentation, I think people had this aha moment of, this is a top three construction software company operating with these kind of margins. How has the business been able to achieve that with the high growth rates in ARR? And what's the biggest growth contributor in more recent history, but also maybe looking forward to the next few years?

Yes. It's a great question. And where I would start with is the addressable market. So, Investor Day at the company level, we said $72 billion of addressable market that was only 25% penetrated. If I double-click into AECO, as said $50 billion of addressable market, that's only 20% penetrated. So there's $40 billion out there for us to go and apply. The people that aren't using the technology, that should be using it today. And so that gives me a lot of confidence that the market is there for us to go after. And quite frankly, when you probably look at some of our peers, everybody is growing and growing in different ways if you look at volume versus pricing, for example. But at the end of the day, there's a market out there for us to go after. Now if I take another click on that and I look at AECO, specifically around the cross-sell and up-sell opportunity, we put out there $1 billion. I mean, with the existing customers that we have today, we believe there's the opportunity to sell another $1 billion worth of product to them, just the existing customers we have today, not even looking at new logos. So that gives me a lot of comfort in the market there, that the customers are there. And then, we talked about the execution, because I think that's really where we're -- you're seeing a lot of the success of Trimble and with the evolution is how we are executing. So when we re-segmented some of the things I'll point to two things. One is we reorganized and so we now have a singular sales organization within the AECO business that are account-based sellers. We're selling two accounts as opposed to individual products. Now we do have folks there that are product experts obviously. But we're really focused on looking at the customer, understanding how they're using the products, understanding what they should be using from Trimble and being able to cross-sell and up-sell those -- the products. We talked about our Trimble Construction One offering. And so Trimble Construction One is more, the term is more of a blanket term around all of the things we're doing with Connect & Scale and having a singular construction platform. But what's important about that is we create a framework contract that is a singular contract for the customers that allows them to add additional capabilities on to their existing capabilities and lowering that sales friction and the purchasing friction. If I go back to where I started the conversation with where we were years ago, we may have had different products and different salespeople talking to the same customer selling individual products under individual contracts. Now we've really, really reduced the friction and changed the conversation with the customers as well by having more higher order and high-level discussions around really optimizing how you run your business. And that interconnectivity of multiple products and how the data and the workflows actually work through a Trimble on Trimble advantage is really compelling as you think more holistically at the system level, versus a bespoke product level. And so we've seen really good traction where we've -- out of the gate, we're selling the vast majority of our products are bundles rather than individual products as we -- with the new bookings. And a lot of our customers are buying -- actually, the majority of our customers have at least sort of two to four products or two or more products. So the strategy is really working. The execution is there. There's an opportunity for us to continue to run with the addressable market with the cross-sell and up-sell. The re-org is an enabler. And then, the last part of it is really the infrastructure that we've been building is bringing all that information together so that our sellers can actually have the visibility into all the products we're selling our customers, we can create sales plan around those customers in order to unlock that cross-sell and that up-sell opportunity. So it's multifaceted, but I think it really comes down to is the execution on the plan. The strategy, I think, is sound, we've been demonstrating it's continuing the execution.

Yes. That was a very great overview of really the kind of internal changes to promote the cross-sell. I wanted to ask about the productization maybe before we switch to Field Systems or Transportation. TC1 has been something, I think, comes up on every earnings call. It's a very prominent productization, bundled choice. Can you maybe talk a little bit about the brief history on the productization benefit? And are there some other levers that are down the road in terms of distributing the bundling strategy to more regions, sort of aligning maybe what you've done in maybe North American AECO to sort of the global org. I love to have some context there.

Yes. So they're all intertwined. But maybe on the simplest form, just start there is, again, this is a framework contract. You sign a Trimble contract, whether it's one product, whether it's five out of the gate, it gives the opportunity to continue to add new capabilities, the very low sales friction from that perspective. We started in North America, as you said, and we wanted to build the infrastructure, the ecosystem. We thought that from a prioritization standpoint, that's where our largest footprint is, I wanted to start there. We're continuing to add capabilities as we think about the full technology stack. So I talked a little bit about the sales team and the organization. But as we talk about more and more digital marketing and campaigns there, leveraging AI within our internal opportunities to continue to drive sales and marketing efficiency, but more importantly, the growth. And so, that's where we're -- we've been focused a lot of our investments are. Now we're continuing to roll it out to the other businesses. So I mentioned Transportation Logistics being another software segment. I expect a very similar playbook to be run. So we've demonstrated the success in AECO. We have continued opportunities in AECO. We run it within T&L, is a similar motion. We brought together those businesses under one leadership in one organization. So you're seeing that playbook being replicated. You're seeing some -- You're going to see some of the efforts within the Field Systems as we -- as I mentioned before, there's a blurry line between the two segments and how those interconnect because in a lot of cases, they're the same customers. And they're looking for the workflows. And so that information come out of the data collection, the hardware and the other software offerings within Field Systems. And then the geographic expansion, as you said, we started in North America. We're rolling out into Europe and then expect APAC and eventually globally. But it's going to be the same motion as we think about it. We want to lower the friction with the customers. We're going to be -- give the sales team the full visibility into these customers and how they should be selling. We run our customer success folks to have the access to understand the telemetry of how people are using our product to make sure that they're successful in their use of products. It reduces churn, reduces the -- improves the interaction with us and our customers, which at the end of the day is really what we're focused on, is we want our customers to be successful. And so all of this stuff really starts with that.

Yes. Well, let's maybe turn to Field Systems, because I think AECO and transportation, even touching on the TC1 as strategy that might go to Transportation. This feels really like the base level of fitness. This is taking your recurring revenue segments and making them punch harder and be more successful. Field Systems is a product shift. It's very interesting, because the last few quarters, this is a 75% non-recurring segment. The last five quarters, ARR growth accelerated even peaking in the mid-20s. It felt like something was flipped overnight to make the productization move a lot faster in Field Systems. So can we talk about what's changing in Field Systems as the highest non-recurring segment, how is packaging and productization changing there?

Great question. And so, what we're doing is very intentional. And that is, we are -- and I'll put it into three buckets, if I think about the recurring revenue growth. One is the conversions, which is we're taking existing perpetual licenses that we have been selling, converting those into terms or pure subscriptions. And that's some of the -- what we talked about at Investor Day around a 200 to 300 basis point headwind as we convert those. So that's one element of the ARR growth. The second element is, we -- I mentioned this earlier, but the -- a lot of the new products that are coming out of the gate is subscriptions. And we've seen really good success. We had a product that's called Catalyst, which is you can use your cell phone with a low-cost antenna and get high-accuracy GNSS from that up. That came out of the gate as a subscription. It's very successful. It actually unlocked an addressable market for us. Because of the price points with the subscription, we're able to find these more price-conscious whether it's regions, geographies or customers and have an attractive and compelling product there for them at a price that they're comfortable with. And so we saw really good traction there. Another thing that we're doing within Field Systems is we're attaching what's called our satellite-based corrections to get high accuracy based on the satellite versus the terrestrial network. And we've been doing effectively what we call 100% attach, all the GNSS systems that come out are going to have that. And so what ends up happening, the customers get to use that, they see the benefits of it and then they buy that as a pure subscription as a renewal. And so, we had a lot going on, and which why we saw a lot of the accelerated rates. We're starting to lap ourselves, which is why we're talking about sort of mid-teens but at the end of the year, which is a little bit lower than what we've been. But it's more because we've had such accelerated growth and we're lapping ourselves with some of these discrete decisions that we made over the last year or 2 years.

So -- and maybe we could talk about how are the JVs and the partners kind of responding to this? I think maybe traditionally or historically, they like to get paid with a big lump transaction upfront. And so maybe you can think -- you could talk through what's the approach to JVs in Field Systems? How strategic are these partnerships? And are they approaching this sort of hardware as a service or these other monetization models well? Or is there going to be some teachings that you're going to have to do to the ecosystem to get them to work with you on those new monetization models?

Yes. What I'd like to do is separate a little bit, because the JVs, as I think about the JVs, they're a little bit different on what we do. And so like a lot of it's more technology-based than go-to-market base. And so, if I just focus maybe on the second part of your question on the distribution, really excited. We've had -- we have several elements. So you mentioned we have some partnerships and some things we sell through OEM distribution, but what we've done, particularly with our relationship with our JV there is, we have a shared vision, which is we want the customers to adopt higher level technology. So when you start with serving the customers, you work backward, how best to do that, there's things that are going to go on in the factory fit and have been going on from that perspective that come out of our JV. But one of the focus that you've probably seen recently as we've been announcing what's called TTO, which are Trimble Technology Outlets. And really from a lot of our customers, they've got mixed fleets and they have different brands and they want to standardize on the technology. And so we're really focused on that. And this is why we're signing up other logos and other brands because ultimately, if you're a contractor, you own your own fleet, you may have actually different brands. And really what you want to do is standardize your workflow, standardize how you actually operate -- and that's what we're trying to unlock. And what you're seeing with some of the evolution and some of the relationships is us being able to go after and serve our customers better from that perspective. And then from the dealers, as we sign these up, to your question, yes, there's an education and some working around the subscription offerings as we work through that. But some of the dealers that we have as well in distribution are already Trimble dealers and we've worked closely with them for many, many years. And there's some training, but they're embracing the models well. And we're seeing really good success. One other thing I'll point out with -- you mentioned some of the hardware subscriptions, that we're actually, again, seeing that, that actually unlock some additional addressable market for us. And in fact, half of our bookings with our Works Plus subscription, which is the hardware -- the combined hardware subscription are actually new logos and customers that we haven't been worked with in the past. So we're seeing the benefit. It's not just about converting a customer. It's actually about us increasing our addressable market and accessing customers we may have not been able to access in the past because the price points and the entry points are easier to overcome.

All right. Well, last few minutes here, I do want to touch on Transportation. You did have a major transaction there. And as you point out, it's a little bit of a freight recession in that post-COVID, we've had some normalization about volumes, pricing and dynamic. But at a high level, what can go right for transportation? And I think the Analyst Day pointed out that we can get great incremental margins out of this business, but it seems like there's more to unlock on the top line. So maybe we could just talk about what are you hoping that could go right -- is it bundling? Is it productization? Is it even go-to-market focus? I'd love to just touch on that.

Yes. So look, we're really optimistic around our Transportation business. We like the set up. The business is -- I talk about execution. The business has been performing in a down freight market, quite frankly. We're really setting ourselves up for is when the market comes back, and that's what we -- I think you're alluding to at Investor Day. We combined the businesses under one team. So as I mentioned, we're -- look at the AECO playbook and what we're doing there. We're looking to replicate that in T&L. Ultimately, in the short term, what we're trying -- what we're looking to do with the systems and people in the org is to unlock that $400 million. We put out there $400 million of cross-sell and up-sell opportunities within Transportation & Logistics business. And so we want to set up the structure to be able to really go after that. And that's what we're aggressively looking at in the short term. And then long term, when the market comes back, as you talked about, particularly in our Transporeon business, is it's more of a volume business. So we monetize based on the number of transactions and the number of shipments that are procured through the platform. And so, as the market comes back, naturally more volumes are going to flow through the system. And that volumes at really high incremental margins at that point, because there's no additional touch points from a sales perspective. It's just more volume flowing through the system. So what we control today is not necessarily the market itself, but what we can control is our ability to go out and sign up more customers both on the shipper side and the carrier side, add more density to the platform, continue to perform in the environment that we're in and then hopefully accelerate when the market comes back, because of the model that we put in place.

All right. Well, Phil, we're out of time, but absolutely great to have you in Nashville and looking forward to hearing more.

Great. Thanks all.