Trimble Q1 2024 Earnings Call Transcript

Chad.

Sure. Good morning. I'm going to turn it to David Barnes. David is staying on with us to see this through to its conclusion. And so David, why don't you...

I'm going to turn it to David Barnes. David is staying on with us to see this through to its conclusion. And so David, why don't you?

Hey, Chad. So the process is that our 10-K was filed, as you know, in February, and the PCAOB selected EY's audit of Trimble for their review. As the EY team looked over their work papers on the internal control side of things, they concluded that the documentation that they and we had was not sufficient to meet the -- to meet the standards of the audit of internal controls.

Now, Chad, the thing I'd point out is the EY support of our financials is unchanged. This is just about the internal controls. No issues with our numbers. They have been identified by EY or us. What's happening is EY is going to go through enhanced audit procedures to confirm the numbers, and then we will issue an amended 10-K, which will enable us to issue the Q as well. This -- we've looked at companies have gone through this and it takes probably more than a month. Hard to predict the timing, it's inconvenient but we at this point have no reason to believe that our numbers will change and we're working cooperatively with EY to get through it.

So bookings in the quarter continued to be strong. So put together really a couple of years now of strong progression in the bookings. The bookings -- the ACV bookings were over 20% growth in the quarter. So we like what we're seeing in terms of the progression there. Within that, Trimble Construction One is clearly an offering that we've been talking a lot about over the last say year, year-and-a-half. The bookings grew faster than that within Trimble Construction One. So Trimble Construction One, we're continuing to increase the level of adoption through that as we've transformed our selling organization and the processes and the systems to go along with that. So I'll give you an example in North America. I think about 80% of our bookings were Trimble Construction One bookings within the quarter and those grew at a level of almost 2x the bookings level growth on a year-over-year basis. So strong progression, Chad.

Jason, the breakdown on that is about two-thirds, one-third; two-thirds existing logos, one-third new logos. So if we take new logos, what we see is that the offering is expanding the addressable market. In some cases, that's allowing us to go, I'd say, more on the small midsize end of the market with the offering. And then on the, let's call it, the mid to upper end of the market, we continue to see customers wanting to buy into an ecosystem. We think that's driving a good amount of the growth. Team is doing a great job executing.

Yes, good question. So on the macro side within AECO, what I would comment on is that we see good growth and onshoring, reshoring of manufacturing we see and you see that in Europe and North America. Renewables, data centers, these are strong growers in North America, and those bookings in the ARR growth supports that. Residential with interest rate environment is on the other side of that trade that -- that aspect of the market is a bit more -- is a bit more challenged.

We actually also, Jason, have quite a bit of data within our own systems. As you know, we're managing nearly a third of U.S. construction through our systems. And so we can see that hiring is up in the market here in North America in the non-residential space. We can see geographically that there's been the largest growth in the Midwest, followed by the southeast with Florida's, Carolina's and Georgia.

Hey, Jonathan. Good morning. It's Rob. Good question. We actually already see that in AECO, and so you can see the growth in the quarter, for example, was the 18% on the ARR as well as 18% revenue. If you look in Transportation and Logistics, you actually have the same phenomenon on total revenue up 4%, ARR up 4%. So it correlates to the amount of recurring that's in that. The one that will be disconnected and would remain so for, I think, a number of years would be Field Systems, which is predominantly a hardware business, I think, the recurring, as I call it, in the 20% range on that. So those will remain separated and thus leave a separation at the total company level.

Yes, good question as well. So another strong quarter of bookings growth. That's two quarters in a row of records for the business, a record Q4 and then a record with the Q1 as well. What I would say is a few things to add on to that. So the team began successfully cross-selling Transporeon solutions to existing Trimble Transportation customers here in North America, which exemplifies go-to-market synergies, and we think we're just getting started. Conversely, we've been selling some of our MAPS product solutions into the European market.

Those bookings growth were both with the shippers and carrier customers. And that's important because we continue -- the team's continuing to grow network participants on all sides of the transportation management platform, which effectively connects the buyers and the sellers of freight. Dozens of new logos were added in the quarter. I like what we're seeing from new product development as well with Autonomous Procurement and Autonomous Quotation. So I'd say a number of things coming together. The team's executing quite well and which is still a very difficult economic or difficult freight market economy, doubly so in Europe.

Hey, Jerry, it's Phil. And thanks. And good question, because I know there's a lot of moving parts in our outlook. So, yes, if you think about Q1, as I talked about, the term licenses are largely a Q1 dynamic. And that's that $50 million drop from Q1 to Q2. So if you look at the margin basis, I think it's around a 400 -- a little bit more than a 400 point drop.

So the large part of that, I'll put it into actually four buckets. Half of that or a little over half of that is because of the dynamic of the term license, if you remember, as the term licenses actually get recognized all upfront. So that's high margin revenue. And then as you move into Q2, the other two pieces are: one, we have our merit raises that take effect in April. And so that's about 100 basis points. And then another 100 basis points is some additional opex, primarily around the AECO business and the sales and marketing and R&D spend that we're -- we've talked about incremental spend there to continue to drive that growth engine. So -- and then the remainder is the term license to bridge that 400.

Transporeon will certainly help at the company level in terms of bringing up the ARR growth potential. The other side of that is the mobility business. And so the net of that gets to the guide that we put forward, Jerry.

At this point, no. No, we're maintaining the -- maintaining the outlook on that. It has -- I mean, it would buy us more than above to the mid, but we're going to leave that guide where we are right now.

You're welcome.

Yes. Hey, good morning, Kristen. Great question. Let me take that twofold. First, with the, call it the 100 bps of investment -- opex investment into the AECO segment that Phil referenced. More than half of that is at the sales and marketing level. So that's putting beat on the street sellers to go get the business that we think is there. About a quarter of it is in R&D as we continue to drive connectivity and interoperability between the solutions, driving workflow capabilities, as well as AI investments we're making into the products. And then the remainder is in G&A, which is really the systems investments and the systems investments which are enabling a lot of this to happen.

So then at the level, when we think about the return on investment that we're making to put into the business, we look at that lifetime value over the customer acquisition cost. And the easy heuristic is when we're at a ratio above 3, that's telling us to lean forward and invest into the business. We're well above that as a floor of our thinking. And so when we do that math, this is -- actually, it's pretty straightforward exercise to say we should be leaning in to investing in this business to go after the market, especially when we're delivering well above the Rule of 40 and in fact, above Rule of 50 in the [Technical Issues].

Yes, it's a great question. So on a multi-year basis, I would frame this market is the largest available TAM that we have to service. We know the multi-trillion dollar size of global construction. We're playing both in vertical construction, horizontal construction. We know it's a market that's large, global, underserved, underpenetrated, has challenges with productivity. At the intersection of productivity and sustainability, which our solutions positively affect, we see more and more customers wanting to buy into ecosystems. And our right-to-win, we think, begins with the breadth and depth of solutions we have across the continuum of the lifecycle.

Furthermore, if you subscribe to a notion that the world is becoming more data-centric, more data-driven, then you will like the touch points we have across this industry where we can, we believe, move from optimizing tasks to optimizing systems. So we think we're well and uniquely positioned to do so.

With respect to how we then think about existing versus new logos, within the existing customer base we have, we think that there's hundreds of millions of dollars of untapped ARR to mine through cross sell and upsell, given the breadth of that installed base that we have. With the systems investments that we're making, it becomes more efficient to go to market. Some of those investments are creating -- starting to create the ability for customers to self provision licenses, more e-commerce capabilities are starting to come to market. That, in turn, creates a more efficient go to market motion into the smaller end of the market. And so that, we think, would be another TAM that we can unlock through the nature of the business model and efficiency of which we go to market.

We for sure think that we can continue to win new logos along the way as customers and the market overall continues to adopt and continues to digitize. I would expect within that five years that the majority of that revenue would come through the existing base and there's land and expand motion. So that's the expectation I'd want to set there. So continue to feel very, very positive about the work in this business and the progress that we're making. And we'd like to think that we're just getting started.

Sure. Good morning, and thanks for the question. Well, you know, we certainly are following what the OEMs are reporting on their unit sales, both at a retail side and a wholesale demand level. And there's for sure a correlation within Field Systems, Field Systems business we have in the OEM. So we have OEM exposure, let's say, in Field Systems that we really don't have nearly as much of in the other two segments of the business.

What we would see through our own numbers is that the European economy is more challenged, and we've seen some of the prints out there on units in, let's say, European construction, although, interestingly enough, our Europe business and Field Systems performed quite well, relatively well in the first quarter. So it's not a perfect, let's say, R-squared on that correlation.

We're also fundamentally architected to serve the aftermarket and to serve the mixed fleet within that. So there's also another, I'd say, call it the mindset that we have is not to be driven by what are new unit sales, although we do obviously sell onto new units, as we see many, many hundreds of thousands of millions of machines that would benefit from having Trimble technology on it. Machine types like excavators remain low single-digit penetrated with technology. And so we think there's enormous opportunities to drive technology adoption into the base of machines that are out there. That's just the civil construction side of the business.

So in Field Systems, survey and mapping is an important business for us, and I would say we disconnect that from the unit sales coming out of the machinery manufacturers. And there, a surveyor fundamentally creates a digital model of the physical world. That work could be an oil and gas workflow. It could be cadastral survey, it could be in a residential application, it could be international parks. There's a wide variety of applications in that market which would be independent of machine units. Hope that helps provide some color.

Yes. Good morning, Rob, and thanks for the question. You're right about the original thesis of it is, we didn't, let's say, create our model fundamentally around bringing the European applications into North America. We saw that as additive opportunities and we for sure saw that we could do it. We just didn't predicate the deal on that being the fundamental thesis.

So, yes, hey, good news or that the example, the customer I talked about in the prepared remarks, it's a multi-hundred thousand dollar ARR win that we have. And it actually is using the Autonomous Quotation product that we talked about earlier as well. So not even, I'd say the -- let's call it the older or existing application capabilities we had in the business. It's actually a new one. And so we find that very interesting to think about.

What's most unique about what we have in special about the North America installed base, it's carrier-centric is the nature of our customers. So when we look at capabilities to bring into North America on the carrier side, that would look like Autonomous Quotation. And it's really creating automation around spot transactions. So that's something that makes sense for our sellers to be able to introduce to the existing customer base.

In addition, we've talked before about Engage Lane in North America and the marketplace in Europe. We brought those organizations or those teams together into one team to create a global, what's called global scale, global opportunity around that. So that's another example. And then the third example is real-time visibility. We're doing that as one business now, not separately in Europe and North America. And so that would -- those would be additional capabilities then we want to penetrate here into the North America, and yes.

Yes, it's a good question. Rob and Phil can chime in after I set this up. And you're right, there is an Ag there in the numbers that you see. But in addition to that, we think about transitioning more of those hardware models into an element of recurring revenue, and that will naturally have a gross margin impact. So think about a system that might have sold for, let's call it, $40,000 system, and that, for us, from, call it, an accounting perspective, has an element of hardware and software that's in that.

And let's say that, that traditionally was splitting, let's call it $25,000 of hardware and $15,000 of software. So $40,000 sale. That might now convert to $25,000 for the hardware upfront and a subscription of $5,000 a year. And in that case, that will have near term headwinds to the gross margins. Now, we're not flipping a switch and going 100% that direction, Rob, but you can see from the ARR growth that was 13% ARR growth in the first quarter, that it is a model that we are moving -- that we are moving towards. So on a longer term basis, that could be 200 basis points to 300 basis points of a headwind.

Phil, do you want to add anything to that?

No, I think that's right, Rob.

Yes. Hi. Good morning.

Yes. Hey, Josh, it's Phil. So, your second question is an easy one. Yes, you are thinking about it correctly. Our 53rd week encompasses January 1 of 2025, and a large portion of our term licenses renew around that date. And so you are correct in thinking that the 53rd week, roughly $70 million of the $85 million there are the term licenses that renew.

On your first question, yes, there is an element of term licenses within AECO that we've had, and we'll continue to have. That's largely in our structures business. And some of it has to do with the complexity and the horsepower around the offering itself, where it's challenging to move that more into the cloud. So you will see that dynamic going forward, at least for the foreseeable future.

Correct. It's a limited subset of the total AECO offerings.

Yes. Hey, Josh, it's Rob. I'll take this one. It's -- I think it's a really good question. It's not just business as usual. It really does change how we're thinking about the business, how we're running it, and some of the value creation opportunities that this unlocks. This does simplify and focus the company and I think provides a great new baseline for us as we move forward in executing the strategy.

If we look at the AECO assets in that segment as an example, this is a business that is now operating at over $1 billion in ARR. It's a scaled ARR software business. This mandate in the business enables the team to take, I'd say, that the processes and the systems capabilities across a broader swath of the business than what we were doing -- than what we were doing previously.

If I look within Field Systems, as an example, there, this is the first time in decades that we've had our survey business and our civil construction business under one leadership. That is providing a sharper focus and frankly, a level of accountability to sharing R&D capabilities. Being more thoughtful about our positioning technologies and how we're using them across the business, it's driving better outcomes in terms of attaching things like our positioning services business to the hardware that we sell in survey and civil construction.

And then super importantly, at a go-to-market level, the similar competency within this is selling -- simply put, selling hardware through a global dealer channel. So we're bringing more efficiency in how we go to market. That is to say, we have one leader in Asia Pacific, one in the European region, and one in the Americas. So three leaders from these regions overseeing the scope of what we do in survey and civil. Previously that would have been six people instead of three. So that for us, providing better and more consistent management at the dealers.

And then it enables a different way to think about capital allocation, where we can put some of those resources into helping dealers plan their long-term business health and their strategies to complement the work they're doing in the short-term, and to help them identify the market opportunities and make the number. Transportation arguably had the least amount of change and there it would feel probably a bit more like businesses as usual.

Yes. No, I like the question and I used the words in the prepared remarks about a multi-year overnight success. This journey is 1,000 little steps. We launched Connect and Scale at January 2020. I think what we have now creates a new baseline. But let's also -- let's also look at the facts in the fact base, I should say. In 2018, we had $1.1 billion of ARR. We closed Q1 at $2.03 billion of ARR. In 2018, we were 31% recurring revenue as a business, as adjusted Q1 were 63% ARR. We had EBITDA of 22.6% in 2018. We closed Q1 at 27.9%. Structurally, our gross margins in 2018 were 58% and Q1 adjusted to 67.5%. Over the last five years, we produced 44% operating leverage. We haven't just decided that this is the direction that we're going. We've been working on this for a number of years.

So now, as we take this as the baseline, I think one of the -- probably one of the better things that as an outcome of the re-segmentation is that transparency and that visibility to the investment community, which is what you're highlighting. It is very obvious to see in that AECO business now. This is a scaled ARR business, operating well above Rule of 40, growing ARR in the high-teens, produced 37.4% operating income in the first quarter. I'm emphatically positive and proud of the team and what they've accomplished on that.

So I look forward in a three-year timeframe. We're looking -- we talk about ARR and free cash flow. To me, those are the big bookends and not the only bookends, but they're two of the biggest bookends that we have to drive value. So I'd say in the three-year timeframe, we should be looking for continued ARR growth. We should be able to continue to progress the structural gross margins as software, I would expect, would outgrow hardware over that timeframe. That structural gross margin improvement is an enabler of an ability to drive operating leverage. We drive operating leverage. That means we're driving increased levels of EBITDA.

And then, as Phil said in his prepared remarks, I think cumulative free cash flow is the game and the long-term game. And so we'd be looking to continue to progress the free cash flow and the business relative to the net income that we have. That's the quantitative framework I'd have around that. Hope that helps.

Yes. Thanks.

Hi, Tami. Good morning. This is Rob. I'll take that one. So it was a -- it's a multi-hundred thousand dollar ARR. It's over $400,000 ARR in that example that I used. So, therefore, the ACVs over the $400,000 -- yes, $400,000 as well. In terms of the go-to-market motion, it's the -- think of it as a named account seller who's responsible for the account in North America, bringing in a sales engineer, a sales specialist from Transporeon, who knows the depth of the functionality to be able to, I'd say, be conversant with the customer and the value proposition and how to use it.

And that's actually very similar, Tami, to Trimble Construction One, when we're selling a breadth of offerings. We'll often have -- well, we -- now we do have named account sellers, and then we can bring in the specialists -- technical specialists, who really know the depths of a given -- let's say, given solution to make sure that customer can get the most value out of that. Did I answer your question?

Okay. So, hey, on 2020 -- the multi-year targets, we're going to have an Investor Day in December. And Phil mentioned that in his prepared remarks. I think we had been saying second half of the year, but we're narrowing that to December. So that's the formal update.

I appreciate that in the interim, there will be questions of how do we think about that progression of the business and the model. And I think that we can -- I think we can continue to provide color in the next couple of calls. But what we already know is the baseline. And I want to highlight that. You know, we know we have a baseline from the quarter on -- or you could actually say, take the year of where we're guiding at the -- for the level of EBITDA for the company between 26.5% and 27.5%. We've talked about the ARR growth. They're guiding 11% to 13% organic.

So if you apply the -- if you take the EBITDA that we have and you continue to play forward, the growth we expect and apply operating leverage on that -- it's not that hard to see that. We could look at about 100 bps of gross margin improvement a year, and that, that could look like 100 bps on the bottom -- on the bottom line on a year-over-year basis. And if that plays through, then you can get to a 2027 in a plus or minus frame. And then we'll put the finer points and the details around that in December for 2027 or wherever we decide to set the next multi-year mark.

You're welcome.