Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Good morning. We're going to go ahead and get started. I'm Rob Mason, Senior Analyst here that covers Advanced Industrial Technology. That does include Trimble, which we're very glad to have here. So Phil Sawarynski, CFO with us. Phil is going to open with a few comments, and then we'll go right to Q&A. So I'll hand it off to you, Phil.

All right. Well, thanks, Rob. Good to be back here. I think, this is my second or third year in a row. So I'll talk a little bit, give you an overview, forward-looking statements. You've seen those before. Let me start with a quick overview of Trimble. Some of you may be familiar with Trimble, but let me just give a quick backdrop. So what do we do? So Trimble are -- what we do is we transform, we talk about transforming the way the world works and what does that mean? Well, we offer products and services in order to provide higher ROI to customers. When we think about ROI, we talk about safer, cheaper, greener. So safer, how can you run your operations in a better way to be safer. Cheaper? How can you be more efficient in your operations and what you do. Greener sustainability, we think about doing things right the first time you go through and so that saves greenhouse gas emissions, saves emissions. So talking a little bit about our history because we have been on a bit of a transformative journey. When I started with the company 16 years ago, we're a very product-focused company. We did a lot of acquisitions. We had best-in-class products. Over the years, we've transformed ourselves and particularly probably in the last 5 years, when we started with our Connect and Scale strategy. So we saw -- we had a significant amount of depth and breadth of products in the industries that we serve. And when we listen to our customers, what do they really want for us? Well, they want to bring together the workflows, the data, the stakeholders within these large industrial segments that we're in. And so, we started on this journey about 5 years ago, where we talk about Connect and Scale. So Connect, again, connecting the workflows, the data, the stakeholders on our platforms. Scale, how do we scale as a company as far as Trimble and so we're doing a lot of work in the digital infrastructure in the -- in our own world to be able to better serve our customers by seeing, who the customers are, what they're buying for us, which will enable cross-sell and upsell opportunities, but also lowering the friction as we think about our customers. In the past, when you have multiple salespeople selling multiple products into a customer, well, they want to deal with 1 Trimble. And so we've been on a journey, and particularly in our AECO business being the tip of the spear that I'll talk about in a second, where we've made a lot of transformations in order to be able to better serve our customers. The other thing we've done is transforming and simplifying the company. So we've made some portfolio moves over the past few years. We divested our ag business. We divested our mobility business in transportation. Prior to that, we had a series of businesses within Trimble that we divested as well. So we've really changed the makeup and the profile of the company as well. And so, the slide that you see up here, if I start on the left-hand side, this is the makeup so basically 3 segments that we report: transportation logistics, field systems, which is are -- has -- the bulk of the hardware is in our field systems business, but that business is still greater than 50% software services and recurring. AECO, which is largely construction software. And so those are the segments, and I think we've simplified and clarified a little bit of the story over time with the way we report now. The geography, you can see there heavily into North America. Some of that is because of the divestiture, our ag business had a bigger presence in Europe, and so some of that's just a manifestation of that. But really, I'd like to see the revenue by type. On the right-hand side, we're now 65% recurring. And the business is almost 80% software services and recurring at the company level. So we've really transformed the company over the years. So how do we think about our value-creation algorithm. And so first, we start with the strategy being in the right industries. We serve large global industries that are under penetrated in technology. At Investor Day, late last year, we talked about the addressable market at a company level, $72 billion of addressable market that's only 25% penetrated. In our AECO, which is our construction software business, just under $50 billion of addressable market that's only 20% penetrated. So we see the opportunity to grow in these markets and penetrating more as we think about global solutions. So the right strategy and the right markets. We talk about the business model. So in the business model, we're now high gross margin software growing faster than our hardware. We talked about our operating leverage over the longer term being in the 30% to 40%. So that high gross margin translating into op margin expansion. Capital allocation is really around an ROI framework. Where do we believe we have the highest ROI? Well, that starts with investing back into the business and our organic growth, whether it's go-to-market or innovation, and we see the highest value stream of revenue being the recurring revenues to the ARR. So to the extent that we can find opportunities, whether it's go-to-market or in the innovation to put the money back into the business, to continue to grow at the rates that we have been and what we put out in Investor Day, we see that as a first opportunity. We also look inorganic. So we've been running a tuck-in play. So we're buying small businesses integrate them quickly. We get a high ROI from those businesses that give us more capabilities for our sellers to go cross-sell and upsell to the existing customer base. We talked about at Investor Day, I mentioned 1/3 of our free cash flow over the long term is going back to shareholders via share buybacks. So returning capital back to the shareholders. So when you put that all together, and we think about the -- we look at ourselves as a compounder, where over time, we can see EPS growth in that low to mid-teens. So these are a little bit more of the quant of how we've transformed ourselves over the years. So with the latest guidance, you see ARR just under $2.5 billion at the company level. Revenue in a -- just short of $3.6 billion. But what's really interesting to me and really shows the transformation between 2019 and today as we used to be 1/3 recurring revenue, and now we're almost 2/3 of recurring revenue. When I look at the gross margins, over 70% now at the company level. And the EBITDA coming out of this year from a guidance standpoint is almost 29%. So 600 basis points of growth in the EBITDA. Negative net working capital or an asset-light business. So we continue to transform the business as we go forward and continue to execute on our connected sales strategy and look to deliver the results as we go forward. So I'll stop there because I know you have questions.

Perfect. Perfect. Again, if you have any questions, send those up to us, and we'll work them in. Phil, this business model transformation has been pretty profound. You can see the kind of the scoreboard there on a number of metrics. But I'm curious, particularly as the amount of recurring revenue has gone up, the level of visibility inside the business is going to -- how has that changed the way that you manage the business for the long term in terms of how you think about strategic growth investments, bets you're willing to make, just maybe relate if any, there's been any change there. It seemingly there would be, but I'm just...

Yes, it's a great question, and we really like the ARR business. That gives us a lot of visibility over at least the next couple of quarters, if not longer and the revenues that will be coming in. We know the margins related to that. So that allows us to figure out now where we can make those investments on the OpEx. So I mentioned the go-to-market. So is it more for you on the street? Is it building the pipeline by spending more marketing -- on marketing and innovation. So I'm sure we'll talk about AI. But where do we put the money into innovation because -- now what we think about is, obviously, the long-term model. We want to continue to drive that ARR growth. And as I mentioned, I think that's the highest value revenue stream that we can provide that delivers shareholder value. And so that gives us a lot more predictability about what we can spend now in order to be able to deliver the future numbers.

Well, maybe we'll just dive right into AI then. I'm not going to put you on the defensive first, but let's go ahead and tackle the question. Maybe I don't know if this being end up in an industrial conference, if there's as much appreciation for the debate that's out there. But certainly in the software world, there's questions around what AI could mean for some software businesses, disintermediation and the like. And my first reaction when I think of that in the context of Trimble to step back and think about the 2 verticals you address, construction, transportation, frankly, not on the cutting edge of adoption of technology that's the opportunity that you've leveraged. But how do you respond to that debate? How do you see that, the merits of any of those arguments?

Yes. So I like where we sit. We've been in these spaces for a long time. So when I think about AI, it's really an extension of what we've already been doing. This isn't like a new initiative for us. It's taking what we already have and actually making it better from a customer standpoint. These industries that we're in, as you said, they haven't been digitized. And so we continue to innovate to create attractive sort of applications to allow our customers to get better. But they're large -- they're complex industries as well. I think the domain knowledge is something that is maybe under appreciated, if you just think generically around AI, you've got to understand how customers are using products, what those workflows look like and then be able to, in the case of us being able to create agents, for example, they can look at private data, but also public data and be able to train those agents to deliver meaningful insights and results for our customers. They want to be more -- I mentioned the faster, greener, cheaper say, for sort of mantra. And I think the AI plays into all of it as we think about our customers, but I think we're in a good position to be able to, again, continue to iterate off the things we already have as opposed to thinking about this as sort of a new initiative because we've been doing this for a while. So I think again, the domain knowledge, the -- the fact that we've already been in here with our customers that we can work with them with their private data plus public data to train these agents. That being said, we're also humbled to this, and we keep an eye out, when I was at the -- or a few years ago, part of my role as we started up a corporate venture fund. And one of the mandates of that was to be able to see the new technology and being plugged into that ecosystem. So we're always watching to look at disruptors. We like our position, but we stay humble.

Yes. And maybe that's most evident has been in your AECO business. You talked about that being further along. The ARR growth there has been high-teens now for over 10 quarters, maybe more than that. But just -- and that's with clearly some choppiness in the construction markets as well. So just kind of talk about your ability to sustain that if construction markets get better, do they stay like they are, which has been somewhat uneven, but just kind of the prospects around that ARR growth in that particular segment.

Yes, it's a good question. One I frequently get. So I always start with talking about the addressable markets. I mentioned it earlier within AECO at Investor Day, we said $49 billion of addressable market, that's only 20% penetrated. So to me, that gives us a lot of opportunity to grow, and it's about execution, a lot of things we're doing to be able to tap into that market with some of the digital things that I talked about is how do we get a better view of our customers, the 360 understand what products they're using, what they should be using, be able to go after the cross-sell and upsell. So regarding the cross-sell and the upsell we also talked about within the AECO a billion dollars of opportunity to just sell products to the customers that we have today. And so we see that as a big opportunity for us to continue to grow. So to me, it's around us continuing to execute in the market, and that's the opportunity we have to continue to grow.

Yes. Just around that incremental $1 billion on the cross-sell, upsell within AECO. What kind of regionally you're in different phases of how your commercial approach has evolved, kind of update us on where that stands, where it's more mature, where there's still you're still ramping some of the commercial actions and that's obviously having some impact on the cross-sell, upsell, I would imagine.

Yes. And it is because you have to be able to, again, unlock. So part of our strategy and what we're doing is creating a single framework contract for our customers. And what that allows them to do, whether they buy 1 product, 2 product, we have natural bundles that we come out of the gate with that makes sense for those customers. But they can start with 1 product and then if they want to add to other products, we make it easy and this is, again, reducing the friction to be able to sell to those customers. So as far as stages, let me talk. So company-wide, AECO in North America was where we really started and we did that intentionally. That was the biggest opportunity for us, where we had more depth and breadth of product to be able to run that playbook. So we started there within AECO, we're rolling out to -- we've rolled out a lot of products into Europe and now into APAC. So we're continuing to roll out that go-to-market strategy around the framework contracts and the infrastructure and creating the personas to be able to do the cross-sell and upsell. There's still more products to go. And as you can imagine, it's not just a single big bag once you roll that out, you're done. There's a lot of other things we want to continue to do enhancements. We're working on things like more -- a better digital marketing experience around how we can more personalize campaigns to our customers. We look at e-commerce, we're doing a lot of work on that to be able to allow customers to buy on their own and to self-serve. So there's still more work to do around AECO. And then if I up level to the company, really, there's work to do in our field systems. I mentioned 50% software services occurring. That's a little bit different go-to-market. It typically goes through a dealer channel. And so we're updating systems there to be able to do a little bit more of the cross-selling within the field systems. But certainly, we're doing more conversions. And so, we want to be able to manage those subscriptions and have customers to be able to manage their subscriptions easier. And then I think about transportation and logistics, it looks more similar to AECO. And so, that is another one, where we're going to continue to roll out the tools to be able to tap into the $400 million of cross-sell and upsell that we identified within the transportation and logistics segment. So the point is this is going to be a multiyear journey, but it's also going to be a continuous journey as I think about it.

Yes. And earlier this year, I know you talked about having good success with small or medium-sized enterprises, particularly as maybe larger enterprises, their decision-making with all the noise in the macro more elongated. So pivoting there. How are you set up to really attack that type of customer from a commercial standpoint, from a product portfolio standpoint? Does it translate just as well as it does with larger enterprises at current time?

Yes. So you're right. We have seen really good success around the SMB, small medium businesses and we do think that our products are applicable and -- but the start point may be a little bit different based on the price point and the affordability. So for example, one of the things that we came out with almost a year ago or dimensions, I think exactly a year ago, is what we call our project site, which is our project management software, and we came out with a free version of that. And what that does is we wanted to get people that were maybe using spreadsheets or basic tools to be able to manage their projects, to be able to use something that's more bespoke and makes sense for the industries that they're in, in construction. And so that was 1 to be able to reduce, let's say, the economic barrier, get them used to the technology and then there's a path basically, there's a limitation. It's kind of a try it before you buy it, where then you can buy into a version that's monetized. But we also look at it as an opportunity to add new accounts that we can run a cross-sell and upsell playbook with other products. And again, this goes back to the persona as when we look at who you are and the size of your business and what products you should be using, what the affordability factor is, and then we create a motion within the sales teams to be able to go and address that market and bring things to you as a customer that resonate with you and make sense from how you run your business and affordability.

Okay. Just you mentioned field systems, the other major segment of your business a minute ago. But that's a business that certainly performed well in the third quarter be planned and grew, I think, 8%, again, above plan. Just kind of talk about what drove the strength there because that's also -- does have a little more product-centric, more hardware there. But it sounds like that's those products have been seeing good uptake in civil construction, in particular, concerns on government funding, again, not apparent in that business. So maybe just kind of walk us through the dynamics in field systems right now.

Yes, good call out. So the civil construction has been performing really well in that segment. And there's a couple of things that we're doing within civil construction. So I think 1 is the execution is there. So just a big kudos to the team for being able to execute in the marketplace. We made some changes as normal with our JV with Caterpillar. And within that, what we're really focused on is the customer and the customer particularly that has a mixed fleet that wants to standardize in Trimble technology. And so one of the things we've done is we've -- we're now signing up and working with dealers from other logos to be able to serve -- better serve those customers that have the mixed fleets and give them more options as far as the ability to buy Trimble technology in the aftermarket. So the team has done a really good job. It's still a relatively small part of the business. So I don't want to make it seem like a big part of that inflection was because of it. But it's something strategically that we really like and we see the team executing on. The other thing I'd call out just over on the field Systems business, we had 18% ARR growth and it's a significant number now within the Field Systems segment. And so the team has been performing really well from those. Now some of it is -- I put it into 3 categories. 1 is just the performance and growing the existing subscription base in the ARR business. Some of it are -- we're coming out with more and more products that are just out of the box subscription. So there's less of that conversion and transformation that we have to do. But we're also intentionally putting products in there, their subscription that are embedded with some of our hardware products in order to be able to create renewal rates in the future. So there are some things there that we did intentionally that are helping to grow that. And we expect that to moderate over the years as we start to lap ourselves, but the business has really performed well from the conversion standpoint and the ARR growth as well.

Just given that, that is more kind of construction project focus data centers, of course, have been a strong area. Just maybe talk about the pockets of strength and/or weakness within what you're seeing across construction broadly?

Yes. Well, the good news is one of the things we really look at is the project backlog, which is still -- it was still healthy overall. So -- and of course, data centers and a lot of the money that's behind that is going to be a tailwind. There's infrastructure behind that as you think about energy that has to support that. The IIJA, there's still a lot of money. I think the last I saw in August numbers were somewhere in the 40% range has been outlaid. So there's still money to be sent there. There's obviously -- in Europe, there's been infrastructure bills being passed, which we would think would be a tailwind for us. The macro uncertainty is one that it's a tough one with the just the trade talks with geopolitical items, and it's less directly impactful for us. We mentioned on our earnings call that we were pretty bearish going into the year. So we sell to the government, by the way, still in field systems, the U.S. government. And that -- we weren't very, again, bullish on that number for this year. We anticipate with the administration change that was going to be a low number. So the good thing is it's not -- there's not much really baked into the forecast. We said low single-digit millions in the back half of the year. But the bigger impact is really the sentiment on our customers and the uncertainty. And so we're -- to the extent that we can see more stabilized markets, I could see that being a bit of a help, but maybe not necessarily, where we're at today because I think it's a little bit better than where we started the year. But it could easily go the other way. I think is my point is that's where things we could see some customers being a little bit reluctant, particularly on the capital. I think it's less around the ARR business, but more around that hardware, which is more book and burn type business, if there was just a little bit of a retraction, that could be a bit of a headwind.

Yes. You mentioned kind of the machine control focus, again, trying to get after that mixed fleet that can be often an aftermarket type fit, but there's -- there is an OEM opportunity, I guess, there. I mean we're seeing maybe signs that there could be some uplift in construction equipment as you look out. Is that -- how would you -- would that be a needle mover for Trimble in that regard, I guess?

Yes, I'd say net-net, if there's more -- if there's more machine sales, that's just more of a upbuilds more of an opportunity for us as we think of the aftermarket. But we mentioned Vermeer apparel driving we're doing -- applying our technology to other -- with other OEMs versus maybe you think about traditional earthmoving equipment. So -- we've always done that, and I think we've always been partnering and whether it was in our ag business or in our construction business, we've always wanted to serve the mixed fleet and want them to standardize on the Trimble technology regardless of what color of equipment they end up buying. And again, a big thing of what we're doing with the Trimble technology outlets that we're coming out with which are some of the other branded dealer channel that we're just trying to lower the friction and be able to make it a lot easier for our customers to have those mixed fleets to be able to access the Trimble equipment and standardize on the Trimble technology.

Your Connect and Scale effort has been kind of the underpinnings of a lot of this transformation that's happened. You're multiple years in now. But -- it sounds like you still see a lot of runway to make investments and fully leverage this as we think about maybe over the next year or so, what would be some of the priority areas where you might apply more investment. Again, I think with the gross margin expansion that you've had that just makes that decision tilt more in the favor of towards more investment to go after that growth because it converts so well. But just where would be some of the priorities?

Yes. As we go through our planning process, one of the things we always talk about is where are these opportunities to maintain and sustain the growth that we already have and how do we shore that up and if nothing else increase the confidence. And then we also talk about incremental investments to say, can we actually -- are there opportunities for us to grow faster at a higher pace. So we're always having those discussions as we think about the capital allocation and the highest ROI. And we believe, again, that, that ARR revenue stream is the highest ROI for us. And so, when we see those opportunities, we will continue to invest in that. And I mentioned before, the go-to-market the innovation, primarily the AI and putting money into that. So you really think about this, right, as a long-term investment and setting ourselves up. For that long term on the growth. The other side of things is we talk about a lot of the infrastructure is we want to be able to also -- we're doing some work in investments on the actual infrastructure and how we operate internally, because as we continue to grow the top line, we want to be able to scale internally to be able to support that. So that's probably a bit of an unseen part of the investments, but it's something, as we think long term, to really set ourselves up with -- as we continue to grow the revenue that we're not growing our G&A, for example, at the same pace.

Where have you found opportunities to apply AI to your own operations internally just along those lines?

That's a good question. Maybe I'll put it into sort of 3 buckets. There's an obvious, let's call it, let's say, a discrete one, which is we use -- our coders they'll use software, basically to auto generate code. And I think over 90% of our software developers are using some tool to be able to do that. I think about -- I'll put another bucket, it's like more general. And I use myself as an example. I'm able to bring in a lot of materials around the company. As you can imagine, there's a lot, but I can synthesize that very quickly using AI tools to be able to summarize documents or actually even search internally to find information. So I can get to things a lot faster. And what does that do? That allows me to actually spend more time on more strategic decisions or even driving more tactical execution opportunities. So I see that around the company, where maybe people are getting more efficient, it's a little bit less tangible to measure that efficiency because it's more anecdotal. But you can see it in so many different places in the company. And then I say there is the other thing that we're looking at is -- I think about our third-party vendors or our software is who's actually -- who's making the investments in their software. And so -- we recently hired a new CIO, and one of the things he's looking at is sort of our whole vendor and where our third-party purchases. And where are those opportunities, who actually can deliver more ROI for us. So should we be using the same vendor should we be using another vendor, that's actually embedding the agents and the AI into their technology where we can actually take advantage of it. And so that's another initiative that we're looking at. And I just draw the parallels to how Trimble actually sells to our customers and the efficiency and the productivity, and we look at that our vendor base as well.

Yes. maybe in the little bit of time we have left, just touch on priorities for capital allocation. It's been a heavy buyback year, but it seems you had some excess cash and that's where it went. But as we think on a go-forward basis, the free cash flow profile of this business is quite attractive. How do you plan to manage that or distribute that?

Yes. So I think what you're referring to is we had -- when we sold the ag business, we had significant proceeds from that, and we committed to doing -- we paid off debt and then the remainder was used for share buybacks. So that was the big amount at the beginning of the year. As we go forward, I mentioned 1/3 of the free cash flow going back to shareholders via share repurchases. But if I think about the decision-making on the capital allocation from a balance sheet, the first is using the cash to reinvest in the business on the organic growth. And then beyond that, we look at inorganic opportunities. And so we've been running this tuck-in play, where we -- again, it's not a big capital outlay, but we can do a lot more frequency and the added capabilities put that in the hands of the sellers, create some cross-sell and upsell opportunities within that. We've been running that. We really like that playbook. And then I think about are there bigger opportunities within inorganic and we'd be tend to be focused on the construction software. It will be similar, if we did something larger, and look at something like a viewpoint, which is -- a customer base a sticky product that we can again run the cross-sell and upsell opportunities for something like that. And then again, at any given time, we look at it through an ROI lens, and do we pivot more toward share repurchases or some other opportunity, but where is the highest ROI that we can provide for our shareholders.

Perfect. We'll pull up there. We're out of time. There is a breakout session upstairs in the Chestnut room. So, if you have any questions, follow up.