Trimble Inc. (NASDAQ:TRMB) Q4 2023 Earnings Call Transcript

Trimble Inc. (NASDAQ:TRMB) Q4 2023 Earnings Call Transcript February 12, 2024

Trimble Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.58. Trimble Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Trimble Fourth Quarter and Full Year 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Rob Painter, Chief Executive Officer of Trimble, you may begin your conference.

Rob Painter: Welcome, everyone. Before we get started, our presentation is available on our website and we ask that you refer to the safe harbor at the back. Our financial commentary will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year, unless otherwise noted. Strategic progression takes place as a series of a thousand little steps, periodically punctuated by non-linear moves and events. Reflecting on the quarter and the year, 2023 represented a transformative year for Trimble. Within the portfolio, the Transporeon acquisition and the announcement of the agriculture joint venture with AGCO represent two of the larger moves in the history of our company.

Reflecting on our Connect & Scale strategy over a five-year timeframe, the structural improvement in the business is self-evident and is the result of methodical work over the last few years by our colleagues and partners. Annualized recurring revenue finished 2023 at a record $1.98 billion, up 13% organically, and represents the single biggest lever we have to increase shareholder value. This compares with ARR of $1.1 billion five years ago. Recurring revenue was 49% of our total revenue in 2023 and 53% in the fourth quarter versus 31% in 2018. Remaining performance obligations closed the year at $1.8 billion. Gross margin closed at a record 64.7% in 2023, up 470 basis points over 2022. This compares to 58% five years ago. This is definitive structural improvement.

EBITDA margin closed at a record 26.6% for the year. In dollars, we crossed the threshold of $1 billion of EBITDA. This compares to EBITDA of 22.6% five years ago. Operating leverage has been 44% over a five-year timeframe. We are running with negative working capital, and we closed with free cash flow of $555 million, up 60% over prior year. Our ARR and low capital intensity punctuate the difference between industrial technology and industrial. While the evolution of our financial metrics during our transformation have been compelling, the bigger takeaway is how this positions the company today for success now and in the future. Trimble has never been in a better position to help our customers succeed with solutions that address the growing intersection of the physical and digital worlds.

We are eager to leverage our strong market position and unique assets to drive continued profitable growth in software and technology-enabled services, to expand margins and to showcase our ability to increase the company’s overall returns through smart capital allocation. We believe this framework is the winning formula for a world-class industrial technology company, and we believe executing against this plan will allow Trimble to unlock and sustainably compound value for shareholders. With that structural context, let’s turn to Slide 3 and talk about our three-fold framework that guides our capital allocation priorities looking back on 2023 and forward into 2024. First, we remain committed to executing our Connect & Scale strategy. Over the last several years, our P&L investments have been heavily biased towards our software assets in architecture, engineering, construction and owners, which we refer to as AECO.

This focus is driven by the size and immediacy of the secular opportunity. Our transformation of AECO software represents the tip of the spear for the company and increasingly provides a template for how we will operate across all of Trimble. Looking at tactical proof points of progression, let’s start with our product strategy. Trimble Construction One, or TC1, can be thought of as a commercial framework around pre-packaged bundled offerings. In the fourth quarter, we doubled the number of these pre-packaged offerings by serving more users across more vertical segments. Nearly half of our AECO bookings in the fourth quarter were TC1 bookings. We come into 2024 with a strong portfolio, and we will learn, adapt and expand these offerings. As we connect more of our data and workflows, we will continue to expand these offerings, powered by the investments we have been making in our underlying systems and enhanced by our process transformation.

After a couple of years of hard work, we can now see a 360-degree view of our customer set, which unlocks marketing and selling insights to enhance our go-to-market motion with more advanced marketing and selling strategies that are more efficient and cost effective. We will continue to roll-out functionality in 2024 and we will expand the capabilities across more geographies and more of the product portfolio. And it goes further, because product, systems and process work have to link to an aligned go-to-market organization in order to turn possibility into a reality. As measured by cross-sell activity, more than 20% of 2023 annualized contract value, or ACV, bookings in AECO were cross-sell bookings. In the fourth quarter, this number accelerated to over 25%.

This didn’t happen by accident. The acceleration comes from a packaging of solutions across business lines and is enabled by our digital transformation. We are winning on the breadth of capability. To put this into further context, the AECO teams delivered over 30% ACV bookings growth in 2023 and had a record fourth quarter. Slide 4 shows a number of quotes from our customers, who’ve continued to give us positive feedback about our direction. We are delivering lifecycle value and uniquely connecting workflows, all while making ourselves easier to do business with. As we come into 2024, we are moving towards an account-based selling model, which will further align ourselves to sell TC1 and cross-sell offerings. This capital allocation is working, and is built on our strategy around the construction continuum that has been accelerated by successful M&A over the last 10 years.

Back to Slide 3, the second of our three capital allocation priorities is to further simplify and focus our business. In the last four years, we have divested 21 businesses that did not meet the must-have threshold of a connect and scale business, namely the ability to further a connected industry solution while delivering compelling and sustainable financial results. In early 2024, we divested a small water metering business and a steeler business that we owned in Germany. We continue to look for areas where we can further simplify our portfolio, which goes beyond divestitures. We have reduced thousands of SKUs in the last couple of years and turned a number of standalone products into features within larger bundled solutions. In September, we announced our joint venture with AGCO, which naturally led us to rethink how we organize ourselves, which in turn unlocked an ability for us to further simplify and focus our teams.

In the second half of 2023, we undertook $50 million of run rate cost reductions, $10 million ahead of our commitment in November, recognizing that we needed to say no to more things so that we could further focus on the organization. Given the pending AGCO JV and the new organizational structure that officially went into effect in January, we reorganized the business under three pillars: AECO, Field Systems and Transportation and Logistics. This structure brings similar businesses together, enhancing our ability to achieve scale and growth. The new organization in place is already off to a good start, and hats off to the team for executing these changes seamlessly. Beginning with the first quarter, we will naturally re-segment our reporting results to reflect the way we view our business.

And when we do this, we will simultaneously be able to deliver an increased level of clarity on our business models that many of you have been seeking. Slide 5 provides an overview of the direction we are going with these three segments, while providing a bit of color on the software and recurring revenue centricity of each segment. Returning again to Slide 3, let’s talk about the third of our three capital allocation priorities, which is return the capital to shareholders. In September, when we announced the JV, we communicated our plan to pay down debt and return capital to shareholders via a buyback. In the fourth quarter, we executed $100 million of buyback. On January 30, our Board approved a new buyback authorization of $800 million, replacing the remaining authority under the prior plan.

We reiterated our intention to pay down $1.1 billion of debt and communicated that our near-term intentions on M&A are to focus on tuck-in opportunities. These capital allocation priorities sit against the backdrop of our day-to-day execution. They also sit within a context of what we are seeing in our end markets across the global economy. Geographically speaking, North America has been overall healthy. Europe remains quite challenged. The agriculture and transportation markets face macro headwinds, a result of commodity prices and overcapacity in trucking. The engineering and construction markets have proved to be more resilient, with puts and takes across sub-segments. Control what we control is the operating theme in place. We deliver an enduring value proposition in the form of productivity, quality, safety, transparency and environmental sustainability.

Record bookings in parts of the business such as AECO software and Transporeon, demonstrate the durability of the business. David, over to you.

David Barnes: Thank you, Rob. Slides 6, 7 and 8 cover the financial highlights for the quarter and the year. Organic revenue growth in the fourth quarter was plus 3% and for the year was plus 1%. Excluding the agriculture business, growth was 6% in the fourth quarter and 4% for the year. Standout metrics for 2023 include a 470 basis point improvement in gross margin and $555 million in free cash flow, enabled by profit growth and the success of our efforts to bring inventory levels down. With net debt at $2.8 billion, we remain ahead of the deleverage plan we put in place at the time of the Transporeon acquisition. We have paid down $268 million of the debt incurred to finance the deal. We ended the year with net leverage of 2.8 times, only modestly above our long-range target of 2.5 times.

The JV with AGCO is pending regulatory approval, and we continue to expect that the transaction will close in the first half of this year. For modeling purposes, we have assumed that the deal closes early in the second quarter. With debt paydown following the AGCO JV transaction close, our leverage will be below 2 times. Slide 9 covers revenue trends by geography and business model. $1.98 billion of ARR is the standout highlight, up 24% year-on-year and up 13% on an organic basis. Product revenues, which are non-recurring and predominantly our bundled hardware and perpetual software, were down 3% year-on-year. Excluding agriculture, product revenues were down less than 1%, reflecting the stabilization of these businesses now that dealer inventories have come well down from their peak in early 2022.

Dealer inventories are now broadly in line with dealers’ business outlook, and our sales trends going forward are expected to track underlying demand trends. By geography, growth in North America reflects the relative strength that Rob referenced earlier. APAC revenues were strong, driven by growth in Australia and India. Revenues were down organically in Europe, reflecting challenging macroeconomic conditions across many the end markets we serve there. Slide 10 breaks down performance at the segment level. In Buildings and Infrastructure, the highlight in the quarter was the strong performance of our recurring revenue offerings. Bookings in our AECO software businesses increased over 30% year-on-year, driven in part by the strong cross-sell and TC1 performance, which Rob mentioned earlier.

Aided by the bookings performance, segment ARR grew year-on-year by just under 20%, with net retention over 110%, and at the highest levels this business has seen. Segment revenues of non-recurring offerings, principally machine control for civil construction customers, were relatively flat year-on-year, resulting in total segment revenue up organically by 10%. Segment margins were up by 290 basis points year-on-year, driven both by fixed cost leverage and by the mix shift toward higher margin software offerings. In Geospatial, revenues grew organically by 1%. Our && revenue in this segment breaks down across three broad categories: field sales to end users, government business, and OEM business. Sales of our core survey and mapping products to end users returned to meaningful growth in the quarter, reflecting a healthier state of dealer inventories and improving underlying market conditions.

Offsetting the strong end user growth, component sales to OEMs were down as we lapped some unusually large shipments a year ago. Segment margins were up by 180 basis points, driven principally by lower component input costs versus year-ago levels. In Resources and Utilities, organic revenue for the quarter was down year-on-year by 4%. Excluding sales of products to agriculture customers, Resources and Utilities revenues were up by approximately 10%. Segment operating margins were lower year-on-year by 160 basis points, driven principally by lower revenue. In Transportation, revenue was up 1% organically. Segment organic ARR was up mid-single digit as growth in our transportation enterprise software and MAPS businesses offset the anticipated impact of churn in our North American mobility offerings.

Transporeon remains an inorganic comparison, and the highlight in the quarter for Transporeon was achieving a record level of bookings, up over 20% versus prior year. We were encouraged by the sales performance of the team in light of the difficult macro dynamics in Transporeon’s core European market. Segment margins increased year-on-year by 610 basis points, reflecting the higher margins of Transporeon and margin progression in the balance of the segment. Let’s move now to 2024 guidance on Slide 11. I will focus on our performance, excluding our Agriculture business and including on a go-forward basis, our more limited exposure to Ag, as a 15% owner of the JV and a supplier of products to the JV. For the sake of completeness, we show on Page 11, two views: a reported view with the Ag business included through the first quarter of 2024; and an as-adjusted view without the agriculture business, which will ultimately be operated within the JV.

The outlook for ARR growth remains strong, driven by momentum across our AECO software businesses. We expect full year organic growth rates in the 11% to 13% range, off our year-end 2023 levels of $1.98 billion. As-adjusted organic revenues are expected to grow for the year in the 4% to 7% range. Please note that our fiscal 2024 will include 53 weeks, and the extra week will increase full year and fourth quarter revenues by approximately $85 million. On an as-adjusted basis, we expect margins to improve, with EBITDA margins between 26.5% and 27.5%. This represents margin improvement year-on-year of between 100 basis points and 200 basis points. The margin improvement will come from a combination of improved software mix and the impact of the cost actions we took coming out of 2023.

From a cash flow perspective, we expect full year cash flow of approximately 0.85 times non-GAAP net income. Excluding the costs relating to our AGCO JV transaction and the impact of the 53rd week, free cash flow is estimated to be approximately equal to non-GAAP net income. Our base cash flow forecast assumes no change in tax legislation. A bill moving through the U.S. Congress will, if enacted, restore the immediate expensing of R&D for tax purposes. If passed, this legislation would improve incrementally our cash outlook for 2024 by approximately $130 million. Our EPS forecast for the year reflects the beneficial impact of our planned deleveraging following the close of the AGCO JV and up to $800 million of share repurchase. We expect EPS for the year in the range of $2.60 to $2.80.

I’ll finish by offering a few comments on how our guidance for 2024 breaks out by quarter and by segment. We expect organic revenue growth to be strongest in Buildings and Infrastructure. Software businesses in Buildings and Infrastructure are expected to grow in the mid to high teens with product-related businesses up slightly, leading to organic revenue growth for the full year of between 11% and 13%. Buildings and Infrastructure organic growth includes approximately $70 million from the 53rd week. We plan to accelerate model conversions from perpetual to subscription software, tied with hardware in our civil construction business. Geospatial revenue is expected to be down slightly on an organic basis, with growth in field sales and survey offset by lower sales to U.S. federal customers where business tends to be lumpy from year-to-year.

We will also accelerate model conversions from perpetual to subscription software in our survey and mapping business. Resources and Utilities as-adjusted organic growth will be up in the high-single digits, led primarily by continued growth in our positioning services business. Transportation revenues are expected to be up in the mid-single digits for the year and relatively flat on an organic basis, with growth in Transporeon offset by lower North American mobility revenue. We expect reduced hardware revenue in mobility, as we are intentionally pivoting that business away from lower-margin hardware sales to OEMs, instead focusing on the higher value-added data flows. From an operating margin perspective, we expect to grow margins year-over-year in the Buildings and Infrastructure and Resources and Utilities segments.

Transportation margins will be up slightly, while Geospatial segment margins are expected to be down year-over-year due to changes in customer and product mix. For the first quarter, let’s turn to Slide 12 for additional color. On an as-adjusted basis, we expect organic growth between 2% and 6%, and EBITDA margin between 26% and 27%. Buildings and Infrastructure is expected to drive most of the organic growth in the first quarter, with low-single digit growth in Geospatial. As-adjusted Resources and Utilities is expected to post high-single digit revenue growth in the first quarter. During the first quarter, we expect to see softness in Ag. Weakness in the global ag market is certainly a factor, but the bigger driver is the expected impact of the transition in our distribution strategy.

Transportation revenues in the quarter are expected to be down modestly on an organic basis. Overall, we expect sequential improvement in Transportation segment organic growth rates as the year progresses, driven by gradually improving end market conditions and the inclusion of Transporeon in our organic trends, beginning in the second quarter. As Rob mentioned earlier, we are moving to implement a new segment reporting structure that reflects our updated organization and the way we will evaluate our businesses and allocate capital going forward. Our plan is to publish more details on our new segment reporting structure later in the first quarter, with financials going back two years and the perspective on how our 2024 annual guidance cascades to the new segments.

We will have a separate conference call with investors to review that information when it is available. Rob, I’ll turn it back over to you.

Rob Painter: Thanks, David. We were busy in the fourth quarter preparing ourselves to come into 2024 with a running start. We were with over 10,000 customers at Trimble user conferences in September, October and November. We recommitted to our capital allocation priorities, undertook cost reduction, prepared to reorganize the company and made our numbers for the quarter. We plan to host an Investor Day later in the year to discuss the evolution of the business and to provide investors with more financial detail, including updated targets. I will end by taking a moment to welcome Ron Nersesian and Kara Sprague to the Trimble Board, two fantastic additions. Operator, we can now open the line to questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Kristen Owen from Oppenheimer. Your line is open.

Kristen Owen: Hi. Good morning. Thank you for taking the questions. I wanted to start with maybe the Q1 guides. It sounds like there’s some moving pieces in there. And when I look at this outline that you provided on Slide 12, it looks like Ag is really the driver between the revenue growth numbers there and maybe what we would have expected. So, if you could help us just understand what the underlying growth in the JV assets looks like in the Q1? And just any other moving parts that we should be considering for the 1Q guidance? Thank you.

Rob Painter: Good morning, Kristen. This is Rob, and thanks for the question. So, coming into Q1 and thinking about the guide at the company level, what I would want you to hear is the momentum we have with the ARR and the overall business and the stabilization of the supply chains throughout most of the hardware businesses, which reflects in the total year guide. With respect to the first quarter specifically within the current Resources and Utilities segment, some of this is a quarterization topic, and then when we double click within that, within the Ag business specifically, there’s two dynamics to consider: one is, at the overall market level, so call it market sentiment; and then the other is, within the transition of the relationship.

So, at the overall Ag market level, you can see that from some of the market statistics from farmer sentiment in the U.S. and Europe, and what we’ve seen from some of the OEM posts on their numbers and unit expectations coming into the year. So that’s part of the topic. And then, the other one is called more the aftermarket side. We’re in the transition with the prior corporate relationship we’ve had and into the new JV relationship. And in that time of transition, there’s a natural gap. And so, we never expected, as we’ve been making this distribution transition, that it was going to be a perfectly linear transition. So, we really think about it at the annual level, not at just a quarter-to-quarter comparison to really track the progress. So, the work is well underway from the integration planning between the teams, from signing up dealers in the aftermarket.

So, before you get that revenue in the aftermarket, we’ve got to be signing up the dealers. And so, it’s like comparative to looking at bookings and software business that you got to get the booking before you get the ARR. So, I hope that color helps you, Kristen.

Kristen Owen: Yeah, thanks for that, Rob. The other question that I have is a little bit longer term sort of post this AGCO JV. When we look at some of the momentum that you outlined, particularly around like the TC1 platform, how do you use that as a framework in some of the other areas of the business going forward? If you can outline any areas where maybe you’re seeing growth with existing customers, how that’s driving that cross-sell revenue? And as you go through these model transitions in some of the field services business, how you can use the success that you’ve seen in TC1 in those areas?

Rob Painter: Yeah. I’m glad you asked that question, because the work that we’re doing around TC1 and currently within the B&I segment, soon to be, you’ll hear me talking about it with AECO moving forward, architects, engineers, construction and owners, and the digital transformation work that we’ve been undertaking, people, process, systems work over these last few years, it’s really been vastly proportionate to this construction — overall construction software part of the business. And really, we see it as the template for the rest of the company. We see it as the tip of the spear. There’s a lot of work that’s gone into it. There’s also a lot of learnings that have come along with it, and I mean that in a very good way. The success of what we see in those bookings is demonstrable proof-point, that the strategy works.

So, as we think about taking that into other parts of the business and we look forward, let’s say, into the future field systems part of the company, what we saw is — in the quarter is, that we’re growing ARR at a double-digit clip in those businesses. And so, we can already take some of the ideas and frameworks around TC1 into other parts of the business. For example, bundling of our correction services — positioning services with the hardware products that we have. We’ve been undergoing some model transitions in some of the hardware businesses, where we can separate value between the underlying hardware and then have a subscription or a term license on top of that. So, it’s a — there are things that happen in parallel. It’s not perfectly serial, but for sure on the AECO software side of the business, that is a great template for us, and it has certainly been working so far.

Kristen Owen: Thank you for the time.

Operator: Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich: Yes. Hi. Good morning, everyone.

Rob Painter: Hi, Jerry.

David Barnes: Good morning.

Jerry Revich: Rob, why don’t we just talk about, given the organizational change, obviously you laid out the restructuring savings and opportunities, can you comment on just beyond restructuring? How has the P&L responsibility shifted at all? It sounds like there are more changes beyond just cost savings. I’m wondering, if you could just expand on that. You alluded to cutting back, I think, on some lower ROI projects. Can you just talk more about the opportunities of the realignment beyond cost savings?

Rob Painter: Sure, Jerry. Thanks for the question. I’ll give you a couple examples. At the AECO leadership, Mark Schwartz is looking after that segment for us now. And at the field systems level, Ron Bisio is looking after that. So, two examples of where we reoriented leaders. Ron’s history is long — baseline history of Trimble is within our hardware businesses and dealer channel expertise. And so, we have all of that consolidated under Ron now, across all the hardware-centric businesses we have. Mark Schwartz has spent the bulk of his Trimble career in that AECO software space, and has just done a terrific job picking up the baton here and taking the business forward. And actually under his leadership, the growth has been accelerating in the business.

So that’s on the people side of the realignment. A couple of examples on the cost side. Jerry, we took a couple of lenses to this. One was we looked at some bigger areas where we saw that the revenue potential was pushing out from more near to mid term to mid to long term. So, Autonomy is an example of that, where we took, I’d say, a bigger chunk view of — a realignment view on that, and did a reprioritization of capital allocation. The other one was a fair amount of the cloud investments we were making, platform investments we were doing at the corporate level, and what we decided to do was move those closer to the coalface, closer to the business, so it manifested — given that AECO is the tip of the spear for the transformation work, move that closer to the AECO leadership, where you have to make those capital allocation trade-offs.

They are closer to the coalface. And what I see is some organizational efficiency that comes out of that. So, those are a couple examples on the cost side, when we really took a look at saying, how do we get simpler? How do we get more focused? We’ve got to execute at a sharper clip. And I think Q4 was evidence that those moves are working, and as we come into Q1 and come into 2024, I’m confident that we’ve got the right org in place working on the right things.

Jerry Revich: Thank you, Rob. And separately, can I trouble you folks just to flesh out the performance of Transporeon for us? Exiting the fourth quarter, what was organic growth, logo growth, retention rates? You mentioned bookings were good. Can you just expand on some of the quantitative numbers on the performance entering ’24?

Rob Painter: Sure. Happy to do that. So just as a reminder, that business model is mostly a transaction model, a consumption model. And so, let’s say, at the macro level, the European — and it’s still predominantly European-centric business. The economy hasn’t improved. I think, we understand that about Europe when I say that, so that’s a headwind to some of the transactions, and there’s less spot as compared to contract, which is unfavorable to the business model. Within that, though, we think about control what we can control. So, I’ll give you some numbers. Gross retention in the business is essentially 100%. I exclude Russia, where we elected not to do some business, and to get out of that business in Russia, ARR in the high-single digits, operating margins above 20%, and at the deal model level that we had, which means the team is doing a good job working the cost line.

The fourth quarter itself was a record bookings in the company’s history. At new product introduction level, we have new products such as autonomous procurement, which are driving that book — part of the reason that’s driving that bookings growth beyond the value proposition that we already delivered to the customers. And at a product integration level, our global teams are working together to come to a single — just one single feature for real-time visibility, bringing the MAPS technology, we already had at Trimble, into the Transporeon business, for example. So those are a few statistics, quantitative and qualitative for you, Jerry.