Trimble Inc. ($TRMB)

All right. Good afternoon, everyone. This is Tami Zakaria, Head of Machinery, Engineering and Construction Equity Research at JPMorgan. It is my pleasure to introduce Trimble's CEO, Rob Painter, and SVP of AE CEO, Mark Schwartz, thank you, Rob and Mark, for joining us today. So Rob, I'll start with you, given we just came out of earnings. Maybe it would be helpful to hear from you a state of the union sort of speech in terms of what were the key highlights from the quarter and what are the things you're looking forward to for the rest of the year?

Well, good afternoon, and Tammy, thanks for hosting this conversation and hosting us here today. The message of Q1 actually is quite similar to the message we've had the preceding quarters, which is 1 of momentum, focus and clarity. Momentum in the form of the results. We can come back to that focus in the portfolio. We've made conscious choices with our capital allocation to invest and focus where we believe we've got the strongest rate to win. So over the last, let's say, 5 years, we've divested 24 businesses and really focused on our efforts on our construction and transportation franchises that also is like a clarity of purpose and the capital allocation we have against that. And then the momentum, so it was a beaten raise in the quarter, so we exceeded expectations. Strong performance across actually the 3 segments, reporting segments of Trimble. So we call it -- think of it as construction software in the form of the CO segment, construction hardware in the form of field systems and our transportation and lost business. So double-digit top line and -- sorry, top line revenue and ARR growth in that mid-teens level. So strong performance on the top line, continue to generate operating leverage against that as well. So really a nice quarter, nice start to the year, which we think sets us up well for rest of the year.

Perfect. So let's go back to the basics for a bit. We know Connect and Scale has been a core strategy. Can you refresh why the need connect and scale. And related to that, how does [ TCON ] fit into that strategy?

So to understand our strategy of connected scale presumes a baseline understanding of Trimble. -- which I'm guessing there's a mix of that in the room. So some of you, I know you very well. I've known you for a long time, there some new faces in the room. Term's a 48-year-old company, I'm only the third CEO in 48 years. That's a pretty remarkable feat in it of itself, particularly in a public context. That's given us a great deal of continuity in the strategy that leadership continuity also reflects some strategic continuity. So I'm 20 years working at term, I've grown up in the business in that respect, I am the ultimate insider who came into the role area of 2020. We pivoted the strategy to what we call connected scale in January 2020 because we had a recognition that -- of the old adage, what got you here won't get you there. We had spent the better part of, call it, 2000 through 2015, '16 time frame. Being very acquisition heavy, and we had been pursuing a strategy connect construction and connect supply chains throughout that time frame. And arguably, what we spent a lot of time doing was acquiring component capabilities across the industry life cycle continuum that we serve. When we pivoted to the Connect and Scale state, 1 level is actually very simple. We've got the right pieces, make them work better together. We're going to connect the data. We're going to connect people, those stakeholders. We're going to connect workflow, and we're going to connect the ecosystems. That's the connect. Scale is taking the actions to make -- ensure that we can efficiently and effectively grow and pursue a global opportunity to do that. So there's a longitudinal baseline progression in time that got us to that moment in January 2020 when we inflected to the Connect & Ski strategy that has served us well over the last 5, 6 years. And if I reflect on that, for a moment, if that's okay to reflect on the progression in that time frame. We made conscious decisions on the portfolio so that we exited a number of businesses. We made conscious decisions on the business model at Trimble. If I look at Trimble from 5 years ago to today, 5 years ago, we were 40-something percent software today, 79% software. So we're software and hardware and proudly so that ability for us to connect the physical and digital worlds, the heart is connecting the hardware and software of Trimble, so that we can connect work in the office and work in the field. So that's -- and that software percentage has gone up to 79%. We now sit at about 2/3 of our total revenue is recurring revenue. We closed Q1 at $2.43 in of ARR, it was up 13% year-over-year. That's pretty rare air territory to be operating at that scale. Over that time frame in the last 5 years, we increased gross margins from 58% to -- that's a structural transformation of the company. We continue -- we increased EBITDA over 500 bps over that time frame. And we continue to do so in a very asset-light manner. We run negative working capital, CapEx less than 1% of revenue. We that free cash flow that then we then have the ability to invest back into the business and/or pursue buybacks as well along that continuum. So Connected scale has been got quite a transformation for us as an organization. Actually, I think it was a natural progression in that transformation, and we see it in the results of...

That first quarter. SP1 Perfect. I think you launched TC1 in the APAC region recently. What are some of the initial wedge products in that region? And what has to happen for cross-sell upsell economics to match North America in APAC?

So I'll get a start and then I'll let Mark contribute to this. He runs the ACO business. I'm really proud of what Mark and his team have done to transform the motions that we have in the ACO business and a lot of credit to him. The TC1, our Turbo Construction One, think of it as a commercial framework. We do a lot of things at Trimble software -- we see that as virtuous, the breadth and depth of what we have, we think is a very unique and provider base, the foundation of a right to win in the market. When we go to serve a customer, we want to make it easy for customers to do business -- that's the scale and connect and scale. And we see the world -- I see the world a lot through product bundles. TC1 is simply a commercial offering. We have over 20 prepackaged bundles that we can take to our customers. It's making it easier for the customers to consume the technology of Trimble that serves the needs that they have. And we're able to construct it and architect it in a way that we do so on a persona-based level. Because at Trimble, we serve architects. We serve engineers and we serve contractors, mechanical, electrical, plumbing, steel, concrete, those subcontractors to serve the general contractors. We serve owners -- and we have a number of solutions to serve each of those personas. We want to make it easy for those personas those customers to access our technology. So there's a set of product motions that in place that do that through the bundling. And I like to say, what do I like better than the bundle. It's the Rundle, -- it's the recurring revenue bundle. So we've changed those business models over time. You see that reflected in or progression I think about -- and of course, what we like better than the Rundle is the Trundle. It's a Trimble recurring revenue bundle, so right, the bundle, the Rundle, the Trundle. That's the business model. It's 1 thing to have the product motion, but business happens at the intersection, we think at product and go to market. So we've had to align the go-to-market motions to ensure that we could deliver that product motion at scale to meet the global opportunity, again, a lot of credit to the team for what they've done. We transitioned to having 1 selling organization, move to named account user model such that the sellers then are accountable and responsible to deliver everything that Trimble can do in order to help solve that customer's problems. And the challenges that customers face in this industry take the -- some form of doing the work better, faster, safer, cheaper and greener. So get the product motion right, get the go-to-market motion, right? That's where the magic happens. And that magic we see happening unlocking cross-sell opportunity. Because when you do as many things as we do as many capabilities that we can bring to bear for customers where you can really see that show up is bringing more of what we do to that customer. That's why when we look at the net retention ratio stacks, we pay so much attention to what kind of cross-sell driving. And at a company level, when we put out our last Investor Day model in December of '24, we articulated a path to over $1 billion of cross-sell we see within the ACO business and over $400 million in transportation. So where -- Mark, I'll transition to you to talk about the global rollout of that and where do we start and where we've gotten to most recently.

Yes. I mean Asia Pacific is the natural I would say, finishing spot for the digital transformation work that we had been going through since 2021, rolling out these systems processes, organizational design and technology to drive our go-to-market function. Why was Asia Pacific last and that rollout would be because that was where we had the least amount of global capabilities of software. Over the years, we've expanded our capabilities to be able to deliver and thus TC1 was the natural delivery mechanism to onboard at this time. So we've rolled that out now. Historically, in Asia Pacific, we would have been dealing with our engineering product lines like Tekla as well as SketchUp. So heavily design and engineering oriented. Recently, we've brought project management into Asia Pacific. And we have other capabilities the pipe. So we've shifted the contracting mechanism now to be TC1 and finish the organizational design in that area to help continue to grow the business with the same success we have seen in Europe and in America.

TC 1, is there a target to roll out a similar platform or strategy in fuel systems and transportation logistics -- or are those 2 segments not suited for that kind of strategy?

They're very much suited for the strategy. We'll probably call it something different I'm not wedded to the name, and I guess, Turboconstruction 1 wouldn't go over so well in transportation market. So we won't call it -- we won't call it that, but the essence of the bundled capabilities. We already have the ability to do within field systems with Mark's business. Half of our field systems segment is software already today. We're predominantly selling that through channel, our channel partners and a Mark's business predominantly selling that direct. If you're a customer of Trimble and you're buying from both, let's call it, both sides of the house, you don't care about an internal distinction. So you always work backwards from the customer, and we're having we think some pretty good success with that already within field systems. And I believe there's a lot of room to run for us. I would still say we're relatively early in the game. We're not at the beginning of it, but we're not yet in the and the transportation. I think that manifests is being also probably pretty reasonably early in the game. But we measured last year, more than 20% of our bookings were cross-sell bookings. So we're doing it already without and that side of the business without all the, I'll say, enabling mechanisms completely dialed in. And I'm okay with that -- actually, I'm encouraged by that because I can already see what we're doing without all of the cylinders firing.

Perfect. So I'm going to switch to a question that I've gotten a lot since your earnings call, and I thought it would be a great place to ask that question. So everybody gets to hear the answer -- so on the SketchUp Cloud platform, the partnership, who owns the data and the outputs created through the workflow and what specific guardrails are in place around data access, retention, model training and the whole line yards?

Yes. So I'll start, Mark, why don't you add to this as well. We see this as very virtuous what we've done and 1 of many things that you'll see from us in time. So if you have no idea what I'm talking about, right now, we launched a service inside of Cloud where you can create a sketch up model. If you don't know what SketchUp is, think of architecture and design model, a 3D model. So through natural language prompting, I can create a SketchUp model, beginning of a sketch up model cloud. Now to do that, I have to -- I have to have a Trimble ID. That means you're a Trimble customer and we know who you are. You create that model and Claude and you download it and you import it into our SketchUp design package. Like to make the model usable, you need to have it in an authoring tool and we are that authoring tool and SketchUp. To us, we see it as a path, at least early on, where we'd like to see us reaching new customers, a set of users that weren't using us before. The professional grade user of the SketchUp in this example, they're using SketchUp to do their work. It's not -- if you don't do your work or complete your work with the model, you need to collaborate on that model. set of stakeholders inside and outside your organization. You need to do professional grade analysis could be delight analysis, energy, energy modeling, structural detailing rendering that you can't do inside that -- so we see it as an entry path to what we think could create some new addressable market for us. And then through that Trimble identity, we know who the customers are. We can see what they're doing once the model into SketchUp. There's a natural sort of product-led growth path that we think we can take those users and customers on over time. And now if we go back to the data question, the model is the customer's model. Anthropic can see the natural link prompting that's happening inside of Claude. So in that respect, they see the queries there. We actually understand the context of it and what you're doing with that model once you bring it into our authoring tool, which is where we think the value is and anything out?

No. I mean, I would just add that the model creation is in a proprietary format that only works in SketchUp. And so when you talk about the data, what's actually being created is cloud with our MCP servers to create this file that's a proprietary Trimble format that then can only be used in a Trimble system, an authoring to take it the next step of the way. And so yes, again, we look at it as like reaching more customers in an underpenetrated market, learning more about what they're trying to do with the technology and the capability and then being able to interact with them and upsell other products once we understand what they're trying to do and how they're using digital construction technology to accomplish whatever task after. So for us, it's a great visibility mechanism. It's yet another way to get our technology out there. We still have plenty of moats and barriers up to help -- to help protect the core as we look and explore these new routes to market and new ways to reach more users.

Another thing, Tammy, if I can just add to that is, within the SketchUp tool itself and by the way, other software applications we have. There's a -- you can have a sketch up AI subscription today and add on subscription. So for that professional user, we see them using our AI capabilities within the tool they're already using as an extension of that. .

So a follow-up question on that. You talked about credits and tokens for SketchUp -- what are you learning from usage and credit consumption? Are users consistently exhausting credits? Is the number of credits being used coming down as the models get more efficient? And what does that imply for pricing and packaging down the line?

I'll start with the last part first. What I would expect to see from Trimble on a go-forward basis percentage of hybrid business models consumption-oriented models, which should hardly be a surprise to the audience. If you're not thinking about it not thinking. And the good news is it's not a hypothetical for us. We already deliver easily a couple of hundred million dollars of our revenue through some form of consumption where this transaction based we have a hybrid model, so that's sketch up AI as an add-on subscription with certain credits that come with it. We think about good, better, best tiers. That's actually been the starting point and the foundation where we drive customers to who want to use the AI features into the best version of the product that is on that named user license. It stands to reason though, over time, I expect to see more of the hybrid based in the monetization. For what we see so far through this, and it's early, so to draw any definitive conclusions, I think, would be misplaced. What we see right now is the credits are being consumed. So that's good news because they're being used. They're not being over consumed or under-consumed. Clearly, we want to track the direction of travel on that. We don't see it like the -- like in a good, better, best tier, by the way, which is not really charging on the token or credit. -- in a way, you expect like the gym membership, you're -- you got a lot of -- you've got a few people who show up all the time are not making so much on them, but you've got a lot of people that pay that membership and they're not there every day, like and it all works it all works out and a good, better, best tiering. I think you see some form of that, a Trimble form of that. If you go pure hybrid, there's a certain amount -- there's the nature of that activity, you can get like really good data, and it's the telemetry actually, which SUPERVALU to be able to track how people are using the product. And we'll learn and we'll figure out how to -- how we need to -- I would totally expect that we will see that pricing adapt over time.

So I want to move on to Document crunch. But before I do that, if anybody has any questions in the room, feel free to raise your hand, and we'll get a mic to you so you can ask your question. So regarding Document Crunch, which you acquired recently, I think it's an AI part risk management category, if I remember correctly. What is the integration workflow you plan to deliver inside TC1 and what is the rollout time line?

Yes. So -- the first order of business, of course, is integrating the group into the broader Trimble and getting the go-to-market motion running, which has been our focus through the M&A process. But now that we're kind of through that and that's off and running, we on the technology integration into the broader ecosystem. The first places we're looking at is to bring that contract intelligence through to our different stakeholders in the field, 1 through Trimble Connect and 2 through project site. So those user base is out in the field that need to interact with the contract and intelligence layer on top of the contract every day as they're dealing with compliance, payments, progress reports, change orders, all of that is relevant and interacted with through the field applications and collaboration. So that's where we're looking to enable first. And should be well on our way to having that out in the market inside of 90 to 180 days. We should see the first angling.

Understood. Just to dumb it down a little bit. Is it going to be an add-on bundle, trundle, bundle? Like what kind -- how would you layer it on to TC

So the visibility into the contract is think about that like today, we have collaborators that we don't charge for. So people that want to interact with the data we already have, but not create data and/or do the work. And so there's an element of users out there that will be collaborators. They'll just need to see the contract or see the risk associated with the contract that they're trying to comply with. When it comes to interacting with the contractor, interacting with the compliance layer and gaining intelligence for that, that's charged for today on a project basis.

Understood. And staying on AI, beyond document Crunch, what other sort of AI-first categories adjacent to execution workflows, are you most interested in building? Is it scheduling risk, cost forecasting? What are most AI friendly?

So the horizontal workflows that are less construction specific in nature are actually the easiest to enable. So as we think about scheduling, which even in construction, you're still dealing with can ban boards and GaN charts. That's fairly easy to enable in an AI-first way in a predictive way, especially when we have the proprietary set of how the data decisions are made to adjust schedules and adjust the forward-looking schedule and how you might react to different contractors moving around in a complex ecosystem. So I view that as 1 of the easiest for us to AI enable in the future. I also look at things like change order management and other derivatives of the contract or that operate off of the compliance layer of a contract to be also AI enabled. But I look at things that are more platform and less construction specific that can help really accelerate our capability set and be agent first.

If I may, maybe for the benefit of the room, turn to sit in your shoes, this was a tuck-in acquisition. We have the breath and depth as a real strength of Trimble. I talk about that in terms of trillions, millions, millions have trillions of dollars of construction run through Trimble systems, tens of billions of freight run through Trimble systems, millions of users of our software around the world, hundreds of thousands of instruments and machines in the real physical world, physical world operate are managed by Trimble. That's pretty darn unique, that breadth and depth. We serve surveyors in the field. We serve the architects, the engineers, the general contractors and the owners across that project life cycle from the planning, feasibility phase, through design, bid, build, operate. So there's a breadth and depth that we have -- with the go-to-market reach we have and the bundling mechanisms we have, it stands to reason that we have a real opportunity for land and expand plays off of the capability that we have. So we aim to do -- we'd love to do 1/4 of the land and expand players. We've been shy of that. We've been probably closer to 3 of these a year. We really like -- we've been talking about this 1 more because we see this as creating a whole new category like we more that can be done with that. In the context of the trillions of construction that run through us, the tens of millions of projects that sit in Trimble collaboration, common and connected data environments and then the reach we have management. And so much of that contract management and AI-based risk management that sits at the core of Document Crunch touches that breadth of that capabilities. And you think about tens of thousands of customers that we think are applicable for this solution. And yes, we get excited about that and run it through the go-to-market motions. That's what I think you'd want to see from us is where can we create velocity out of new capability we can bring in. So this is just 1 of a very good one, but 1 of many land and expand players we want to run.

Any questions in the room? So I wanted to ask about AECO, which had another strong quarter, and I think you're targeting mid-teens ARR through 2028, right? 2027 -- so we're not too far from that. What are some of the leading indicators of any potential acceleration or slowdown in ARR from your seat?

Imactually the formula is pretty simple. We start with looking at the addressable market. The markets we serve are large, global, underserved and penetrating -- underpenetrated. The market itself has a sic secular adoption of no the digitization that's taking place at Trimble. You can see by read-through of peers that were generally growing. So that, to me, sort of confirms the secular. And construction, we think we all trust well understand multitrillion dollar industry. So it's a large industry. Most of us probably understand the data shows that this industry is a technology laggard which fits the narrative of the secular adoption of technology. So we like what we see there in terms of -- you got to be in the right market. Now when we get closer to the coal face of executing and looking at the ARR growth, okay, well, how are you going to grow ARR well, you got a book. So the -- so when we talk about ACV bookings, contract value bookings, what do you got to have to have the bookings, you got -- well, just -- you've got to have obviously the right product that I've walked through that we unique and different. And then at the go-to-market motion, we talk in terms of people, pipeline and productivity, people, you got to have the feet on the street. You still do have to have sellers out there working with customers. When you look at the pipeline, think of -- when we move to named account user model on the marketing side that looks like account-based marketing strategy, -- and I think we still have a lot of room to run in terms of the marketing specification of Trimble. We're not interested anymore being a house of brands. We want to be a branded house, Trimble first. That's what customers expect from us. So we are doing more work to get that Trimble brand out there that name recognition, supporting that brand, not the house of many brands that we have acquired over time. And we see that pipeline growing that and then process like we look for efficiencies. We look for significant productivity out of the team every year that measures double digit for what we expect, which we think is reasonable given the value proposition of offer and how much more technology enabled we've made that whole process along the way. So do that math. The market's there. You've got the formula to deliver, and we can put the feet on the street we can run plays like the tuck-in acquisitions that just give us the new, new thing to talk about. And now I haven't even said AI and then what happens when we can solve bigger problems for our customer.

So let's talk about Fuel Systems. The first quarter was very strong, and your full year guide sort of implies a moderation -- is that realism, -- is that conservatism? Do you see reasons to be cautious rest of the year? -- explain the implied moderate.

Yes, it's a good question. It's a fair question. It's the strongest performance I've ever seen in the business. I'm 20 years at working at the company. So hats off to the team and field systems delivering and delivering on a global basis across the portfolio, most particularly within the civil construction space, just outstanding performance. Not only is the work going well on the channel side and that reach to market on the product side, continue to create new relationships with OEMs, continue to extend capabilities on new machine types. . Continue to extend reach through third parties who we opened up the ecosystem here where there's some functionality that we're not getting too fast enough ourselves that we've got partners that can help us, all of those have us in a position where the data we see says that we're increasing our market share so that we are outgrowing the market like the team is executing well. So play that forward through the rest of the year. I think about it in 2 respects, hey, on a longitudinal basis over the last few years has been a strong CAGR in the business and that strong in this case, we that mid- to high single digit. We had that segment has a couple of hundred basis points of headwind with model conversions that we're still working through in field systems. We're through that by and large, an AECO and in the transportation business. I look out at the rest of the year. And I'd say, I've been doing this for a few years now. I think it's a mistake to raise a guidance after a first year to be very cautious when you do so. So we modest raise of that guide. So it was less than the beat. So that's Tammy's question is relevant to say, okay, why is that prudence and caution in the market. And my answer is I want to ensure we've got freedom to operate the business and not get ahead of ourselves -- what happens with interest rates. So let's see what happens in the [indiscernible]. That is really the story. No pull forward in demand from the first quarter. We didn't see that.

And Trimble technology outlets, you've talked about it at the Analyst Day, too. How many do you have now? What's the end target? And why this strategy now.

So the -- yes, you work backwards from the market opportunity, and we believe there's an opportunity to better reach customers meet them where they are. I would say, virtually every contractor in the world operates some operates a mixed fleet, a rainbow color of iron, and you mean very, very few companies, I don't know. It depends how you define the equipment, I would argue you have never met a customer who operate on 1 brand. So to meet the customers where they are, we believe it's a natural extension of the strategy to work with more partners around the world. So to meet their like some of the dealers that we've signed up have been John Deere dealers or a Komatsu deal or a case dealer, probably more of them than not have been John Deere construction construction dealers. And by -- by signing them up, we're meeting the demand for those that John Deere equipment, if it's a John Deere dealer again, meeting that customer where they are buying, and we're seeing success in that conversion to Trimble machine control technology. And we're very open for the customer to have multiple choices. We're not the only choice on the market. We believe we the best value proposition. So I'm open because we're confident like we want to be in that mix and meet again, meet the customers where they are. I think we've press released probably 10 to 12 of them. We've got more than -- but that's the number of dealers, but they have hundreds of like retail locations as well. So we call them technology outlets. They're not selling everything we do. We're going brand-just for that brand Equipment with the ones that we sign up.

So transportation and logistics, the freight markets are finally looking up after almost 3 years. Are you seeing green shoots? And do you see this as the start of possibly a new up cycle in freight markets?

Well, it's actually been 4 years of a freight recession. So we have seen spot rates higher in Europe and North America we've seen capacity exit the market to put all those factors together and it looks like there's some indications in the market that we haven't seen in a few years. I think after a few years of condition to say, I want to see a few more months or quarters stitch together before I'd be willing to lift an arm let's see but it's -- there are some indicators we haven't seen in a while. So let's end on that optimistic.

Before we end 1 question, a quick one. Given where your stock price is, any updated thoughts on capital allocation?

Yes. Great. question. It's both an easy and a difficult question. Our default policy on capital allocation starts with a belief that we're paid to put capital to its highest and best use. We've got guardrails around that. We want to maintain investment grade. We've said publicly, we want to put at least 1/3 of our free cash flow to buy back. So now you're within that frame, but we went through the math earlier and where we produce cash flow guide would have us, call it, over $800 million or $800 million plus or minus $1 million of free cash flow this year. We just -- we did an acquisition. We talked about document crunch. So we'll preserve some freedom of movement on acquisitions, particularly the tuck-ins. But managing attention because I can do the math on the free cash flow yield on ruble shares today. and it's -- there's for sure a healthy tension of looking at more buyback in the first quarter reflected that. We did over $300 million in buyback in the first quarter, and that would be -- that would be well ahead of the, we call it an annual target in 1 quarter. So I think it was a recognition that there's value there for shareholders.

Awesome. Thank you so much, Rob. Thanks, Mark.

Thank you, Tim.

Thank you.