Trimble Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Third Quarter 20 24 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

Thank you. I would now like to turn the call over to Rob Painter, President and Chief Executive Officer.

Speaker 1

Welcome, everyone. Before I 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 the prior year unless otherwise noted. In addition, our P and L commentary will emphasize comparables on an as adjusted basis, which excludes our agriculture business. Let's start on Slide 4.

Speaker 1

During the Q3, we continued to advance our Connect and Scale strategy. The connect aspect of the strategy guides us to digitally connect users, data and workflows across stakeholders in the engineering and construction and transportation and logistics industries. The scale aspect of the strategy guides us to develop increasingly common back end systems and shared technology platforms, while deploying more consistent processes around focused and accountable teams. Our strategy is working and it is delivering unique present and future value to our customers, as well as sustainable value creation to our shareholders. In the quarter, we outperformed expectations at the top and bottom line and we are raising our top and bottom line guidance for the year.

Speaker 1

Congratulations and thank you to the entire Trimble team. The numbers reflect hard and intentional work in the quarter as well as over the last four and a half years. Three messages to convey here. First, we delivered ARR of $2,187,000,000 in the quarter, up 14% organically. This kind of growth at scale doesn't happen without an enormous commitment to our connected scale strategy.

Speaker 1

We also delivered a record gross margin of 68.5%. That compares to a gross margin of 57.7% in 2019. While the record numbers speak for themselves, it is important to recognize that this is a result of the journey we undertook a number of years ago and we are proud of our progress. 2nd, the structural improvement and the quality of the Trimble business model reflects focus and choice. Choice manifests as disciplined capital allocation.

Speaker 1

In the last 4 years, we have divested 22 businesses. In September, we announced our intention to sell our mobility business to Platform Science and to become a major shareholder in the combined business. We are playing in the zones where we believe we have the strongest right to win. As soon as we conclude the audit process with we will return to share buyback as we believe this is a high return on investment use of shareholder capital at our current valuation. As a reminder, we have $625,000,000 remaining under our current authorization.

Speaker 1

Finally, the sum of our efforts over the last year is manifesting as a more simplified Trimble managed and led by a highly focused, engaged and hungry team. Moving to Slide 5. We cover the financial highlights from the quarter. 4% revenue growth exceeded our expectations as did EBITDA at a strong 27.1% and EPS at $0.70 which performed above the high end of our guidance range. To give a quick snapshot of a few of these metrics without the mobility business, ARR would have grown 16% instead of 14% and revenue would have grown 5% instead of 4%.

Speaker 1

Before moving to comment on segment performance, I'll provide an update on the status of our financial audit procedures. During the August earnings call, I thought we were approximately a month or so away from being done. I was obviously wrong. In September, we held our Annual Shareholder Meeting reflecting the progress made and the ongoing confidence we continue to have that our financial results will be the same as we previously reported. Since then, has continued to perform additional audit procedures.

Speaker 1

There is only one right answer. We work collaboratively to provide them the information they need. While our team and the team are making progress on completing the audit procedures, we now believe that will not complete their work in time for us to refile our financial statements ahead of NASDAQ's November 11 deadline. Procedurally speaking, what will happen first is a formality of a notice from NASDAQ saying we are subject to delisting. We then communicate this via 8 ks in a press release.

Speaker 1

After that, NASDAQ has a structured stay in appeals process for dealing with this exact topic. We feel confident that we are well positioned to be granted an extension, which will provide additional time to complete their work and for us to file our financials, thereby regaining NASDAQ compliance. Let's now talk about the business, starting on Slide 7 with the AECO segment. Congratulations to the team for delivering another record quarter of ARR at $1,210,000,000 higher than all but one of our industry peers. The team grew the business 18% organically, which is at the high end of growth of our scaled industry peers.

Speaker 1

And they are doing this in a profitable manner, achieving over 29% operating income for the segment in the quarter. We look at rule of 40 as an instructive measure, where we sum ARR growth and operating margins. We are operating at a rule of 47, delivering strong net retention and an attractive lifetime value to customer acquisition cost ratio. This provides us degrees of freedom on how we think about investing in the business to continue differentiating as we do with the breadth and depth of our offerings, including Turnbull Construction 1. Our portfolio is also quite balanced with each component of A, E, C and O now operating above $200,000,000 in ARR.

Speaker 1

I often describe this segment as the tip of the spear of our Connected Scale strategy and the strategy is definitively working in AACO. While we still have a lot of work ahead of us, the results of today give me confidence in delivering the results of tomorrow. Let's turn to Slide 8 and talk about the field systems business. Revenue was in line with our expectations, down 2%. ARR outperformed growing 19%, demonstrating the intentional work of the team to move more of our value to the software aspect of our systems to do so in the cloud and to monetize as a subscription offering.

Speaker 1

ARR growth came from strong sales of our Catalyst solution, which delivers positioning as a service, our machine control as a service offering and through ongoing growth in our traditional positioning services business. The team did this while delivering 33% operating income margin, demonstrating the ability to control cost in an unforgiving market environment. Strategically speaking, digital twins is a popular buzzword these days. In a term of context, I'd like to think we were the original digital twin company. The job of a surveying and mapping professional is to create a digital model of the physical earth.

Speaker 1

Our reach into the physical world connected to our digital footprint and round tripped back to the physical world is what is singularly unique about our company. In the quarter, we released a new solution to enable this workflow. I'm really excited about this launch. It's called Trimble Reality Capture Service and what it does is link data captured in the field from terrestrial, mobile and aerial modalities then links it to Trimble Connect, which enables cloud based visualization and collaboration at scale. We think this will prove to be one of those only Trimble innovations and we are excited to see how the market adopts this technology and guides us to develop it further.

Speaker 1

Another strategic milestone came in the form of the renewal and extension of our 20 plus year joint venture with Caterpillar. Slide 9 provides additional details on the renewal. The most important element to convey is our shared vision to accelerate innovation and customer adoption of mixed fleet machine control solutions and construction ecosystem technology. For Trimble customers, the goal is simple, broader availability and access to our technology. A recent partnership announcement with John Deere has evidence that we intend to achieve this goal.

Speaker 1

Also, our ability to link machine control solutions to Trimble Construction 1 offerings is another only Trimble Proofpoint. Closing our segment commentary on Slide 10, transportation and logistics beat our top and bottom line expectations. Transporion delivered double digit ARR growth and MAPS delivered high single digit ARR growth. Excluding the mobility business, organic ARR growth in the segment was 9%. Operating margins of 21% were the highest we have achieved in many years.

Speaker 1

While the freight recession persists, the Transporion team delivered a record level of 3rd quarter bookings, which was also the 2nd largest in the history of the business. In a dynamic macro environment, the team has done a great job with solid execution and an advantaged business translating into profitable growth and consistent share gains. Strategically speaking, the big news of the quarter was our announcement that we signed a deal to sell our mobility business to Platform Science and that we intend to become a major shareholder in the business. Further details are covered on Slide 11. For the combined business, this will create a scaled and focused software business that has a unique combined breadth of solutions needed to compete in the current environment.

Speaker 1

For Trimble, we will maintain a commercial relationship with the ongoing business. And at a company level, this enables us to further simplify and focus our attention and efforts in the areas where we have the most compelling right to win. Before handing over to Phil, in the last call, I talked about how I see Trimble as an AI winner. In the quarter, we continued to progress our AI efforts, both internally and externally facing. In this call, I'll end with a perspective on the macro environment.

Speaker 1

Geographically, the bookings we see are North America as the strongest market and Asia Pacific, excluding India, as the weakest market at the moment. By end markets, construction and transportation overall represent our bookends. Construction sub segments such as renewables, mega projects and infrastructure remain relatively strong. Residential remains challenged as do transportation end markets. In all environments, we anchor to our unique value proposition.

Speaker 1

What we sell enables work to be done better, faster, safer, cheaper and greener. The business is there. We need to be showing up in the right market segments with the right solutions and the right go to market motions. Phil, over to you.

Speaker 2

Thank you, Rob. As noted before, my financial commentary will emphasize comparables on an as adjusted basis, which excludes our agriculture business, but will still include the mobility business. We believe that maximizing long term free cash flow drives shareholder value. Connect and Scale is our strategy, which we believe will continue to deliver recurring revenue growth, margin expansion and ultimately cumulative cash flow growth. Slide 12 highlights balance sheet and cash flow dynamics.

Speaker 2

Our cash flow continues to trend better than expected after considering M and A transaction impacts. 2024 year to date reported free cash flow was 389,000,000 That includes $87,000,000 of tax payments related to our gain on sale of the agriculture business as well as $66,000,000 in M and A related transaction expenses. Our conversion ratio through the 1st 3 quarters of 2024 without these items was well above our target of 1 times non GAAP net income. We have additional tax payments impacting future operating cash flow related to the agriculture JV gain on sale in our Q4 of 2024 and Q2 of 2025 since the tax payments are spread out over time. Our asset light model continues with capital expenditures about 1% of revenue and negative net working capital.

Speaker 2

Net debt to EBITDA stands at less than one times, well below our long term leverage target of 2.5 times. We invest over $1,000,000,000 in cash after paying down our term debt and the outstanding balances on our credit facilities. Our capital allocation focus remains the same where we invest and where we see opportunities for the highest returns. We continue to disproportionately allocate capital to our AECO business where a significant percent of our operating expense increases are in our sales and marketing engines to continue to drive ARR and revenue growth and ultimately margin expansion and free cash flow generation. On the merger and acquisition front, we expect to opportunistically pursue tuck in acquisitions, primarily in the AECO segment where we can quickly integrate and bundle within Trimble Construction 1.

Speaker 2

Our two recent acquisitions in AECO continue to demonstrate that our M and A playbook is working. The human resources application we purchased about a year ago was quickly integrated into our Viewpoint ERP and we have already over tripled the ARR and almost quadrupled the customer accounts for the product in that 1st year. The payments application we purchased in the Q2 is ahead of our initial integration plans into the Viewpoint ERPs and we are seeing bookings well in excess of our deal models. These growth opportunities are enabled by our connect and sales strategy via bundled product offerings that we put in the hands of our sellers. This playbook is a critical part of our acquisition strategy going forward.

Speaker 2

With that, let's turn to Slide 13 and talk about guidance for the remainder of the year. We have a 53rd week in fiscal 2024, which adds approximately $85,000,000 of revenue $50,000,000 of operating income, mainly driven by term license renewals on January 1, which falls in the Q4 of this year. We are holding our ARR growth at 11% to 13%, but are biased toward the higher end of the range with the AECO performance offset by the churn in our mobility business that we previously discussed. We are increasing the midpoint of our as reported full year revenue guidance by $15,000,000 from $3,630,000,000 to 3,645,000,000 dollars AECO revenue is slightly better than our prior guide due to the performance in the 1st 3 quarters. Field Systems revenue is also slightly up and transportation is unchanged.

Speaker 2

Correspondingly, the full year earnings per share midpoint is increasing by $0.09 to $2.83 from the prior $2.74 Our as adjusted EBITDA margin for the year is expected to be between 27.5% 27.8%, which is approximately an 80 basis point improvement at the midpoint from our prior guide. Free cash flow conversion for the year is approximately 0.75 times non GAAP net income, which includes $116,000,000 of taxes from the gain on sale from the agriculture JV as well as approximately $85,000,000 in full year M and A costs. Without these items, we'd be above the 1 times non GAAP net income for the year and an improvement from the prior guide. Let's move to our Q4 on Slide 14, which is consistent with our prior guide. I'll focus again on our as adjusted view, which excludes agriculture.

Speaker 2

Our outlook for ARR growth remains strong with continued expectations for 11% to 13% organic growth with a bias to the higher end. Our total company revenue is projected to be $925,000,000 to $965,000,000 which includes approximately $85,000,000 due to the 53rd week. On an as adjusted basis, excluding the 53rd week, our revenue is anticipated to grow in the range of 1% to 6% year over year. Non GAAP operating margin is expected to be in the range of 28.5% to 30% and adjusted EBITDA margin in the range of 30% to 31.5 percent for the 4th quarter. Our EPS forecast is in the range of $0.83 to $0.91 One more item I'd like to mention before turning it back over to Rob.

Speaker 2

As we think about the financial model going into 2025, it is critical to make the correct pro form a adjustments for the Ag and Mobility divestitures along with the 53rd week. I'll point you to the earnings supplement on our investor site where we consolidated the adjustments in one place. For 2025, we expect continued double digit organic ARR growth. Starting from a baseline of pro form a 2024 revenue, we continue to believe that with the shift to higher growth software, we are biased above the midpoint of the last Investor Day range of 5% to 8% organic revenue growth. We expect AECO to be above this range.

Speaker 2

Transportation is expected to be in this range after the divestiture of Mobility, which we are now expecting to close in the Q1 of 2025. We're expecting field systems to return to growth, but be below this range. Rob, I'll turn it back over to you.

Speaker 1

Thanks, Phil, and thanks to all our Trimble colleagues and partners for delivering a solid quarter and a 2024 year to date of strategic and financial progression. In the Q3, we held our Signature User Conference in Las Vegas for North American Transportation Business and our Signature User Conference for Transporion in Vienna. We were able to see over 2,000 customers and partners at these two events. The overall feedback was positive on the mobility divestiture as well as the direction of travel of how Connect and Scale translates to digitize and connect the transportation supply chain. In less than 1 week, we will be back in Las Vegas at our Trimble Dimensions Engineering and Construction User Conference, where we will host over 6,000 attendees who are coming to learn how to further digitize and transform their work.

Speaker 1

In closing, we look forward to seeing many of you on December 10 in New York City at our Investor Day, where we will unpack our business and show you why we are so excited about our ability to win across our business lines with the right combination of products, people and go to market strategies. It's a busy and exciting time to be at Trumbull. Operator, let's open the line to questions.

Operator

Your first question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.

Speaker 3

Good morning. Thank you for taking my questions. Congratulations on the nice results. Wondering, Rob, if we could start with just a little bit more color on the ACV bookings, what you're seeing in terms of cross sell and upsell opportunities within the TC-one portfolio? And then I'll have a follow-up.

Speaker 3

Thank you.

Speaker 1

Good morning, Kristen, and thanks for the question. ACV bookings across actually the entirety of the company were strong in the quarter. So we feel really good about that. That supports obviously the ARR growth that we've already had and as well as the ARR guide that Phil took you through. Inside those ACV bookings, if we're looking inside the AECO business, TC-one was another highly successful quarter for that commercial offering and where we're doing the prepackaged bundles.

Speaker 1

We see this that the strong majority of our bookings where we have TC-one available within AECO, which is primarily within engineering and construction applications, a strong majority are now TC-one bookings. And those bookings are up more than the company average. And so within that, you have cross sell and up sell happening. Similarly, in Transportation and Logistics segment, if we look at Transporion year to date, ACV bookings are up over 30% on a year over year basis. So really nice progression from the teams in the quarter.

Operator

Your next question comes from the line of Jay Raveesh with Goldman Sachs.

Speaker 4

Yes. Hi. Good morning, everyone. Hi, good morning, everyone. I don't think I can do a French accent to match my name there, but good morning and congratulations.

Speaker 4

Rob, thank you for sharing the preliminary comments on 25, broadly in line with consensus top line expectations. What's interesting is given the trajectory you're on for ARR growth and what you just said about bookings, it feels like to get to the high end of your organic growth range, you would have to have hardware top line that's down high single digits. And so I'm wondering, can we just flesh that out? Is that about what you're assuming? And is the idea, hey, look, there's uncertainty out there.

Speaker 4

Let's make sure when we provide the initial 25 outlook comments, we have enough leeway in case end markets are softer? Are there any discrete points that we should keep in mind relative to the outlook considering how strong momentum you have in ARR and bookings?

Speaker 2

Hey, Jerry, it's Phil. Let me take that and then Rob can add if he needs to. It's a great question. Appreciate it. The as we think about 2025, I mentioned in the prepared remarks AECO above that range.

Speaker 2

Transportation in that range, remember that's ex mobility. And then field systems being below that range. Now we still believe field systems will return to growth, but it will be sort of low single digit growth to get there. And a couple of the elements around field systems. So one is we talked about the Fed this year.

Speaker 2

We believe the Fed business still will be down next year, which provides a little bit of headwind. The other piece of that as we think about the cat JV evolution, we are going to part of the economics of that, we believe there are going to be some shift of the revenue to the factory fit. And so as we think about that long term with the channel evolution that we talked about and with going after the mixed fleets, call it past 2025, we believe that that will offset and more than offset any of the impacts on the factory fit. But for 2025 that revenue there's a couple of points of headwind because of that. And then if I actually talk about the profit related to that one of the other elements of the JV is we changed how we're pricing Trimble's pricing some of the products into the JV.

Speaker 2

And so what happens is even though there's a couple of points of headwind on

Speaker 1

the

Speaker 2

revenue, there's additional profit that shifts from the JV to Trimble. And then if you net net all of those puts and takes down to the EBITDA level, we believe that it's neutral for the rest of 2024 and it's neutral for 2025 on a profit standpoint. So that's a little bit more color I guess on the field systems. But we do see field systems growing let's call it low single digits next year.

Speaker 4

Thank you.

Operator

Our next question comes from Kristen Owen with Oppenheimer.

Speaker 3

Sorry about that, guys. Thank you for letting me ask my second question, my follow-up question here. And great segue, Phil, just it does relate to the Caterpillar relationship and the Deere Construction Partnership announced in the quarter. Can you just help us understand with respect to the Deere Partnership, what's covered under the scope of the agreement? Are you guys planning to go to market together?

Speaker 3

And, I'd like to understand how you think about this partnership in the context of that long standing relationship with Caterpillar, any channel risk, that you see with the Deere partnership there?

Speaker 1

Hey, Kristen, it's Rob. I'll take the question and thanks for the follow-up. Hey, I start with the lens of the customer, on this. And both the Deere agreement and the CAC agreement help us grow the adoption of technology in the industry. And so what that means for a customer is that they're getting their choice of machine and technology and support to best fits their business.

Speaker 1

And that's both with John Deere and Caterpillar. And if you take John Deere specifically, what we're doing at the product level is enabling 3 d upgrades on top of their platform, machine platform. At a go to market level, those upgrades can be enabled either through the John Deere dealer or through the Trimble network. At a competitive level or at a, let's call it, a channel potential channel conflict level, I would characterize it as a no. We see it as complementary.

Speaker 1

And that's because we're not adequately serving that demand or that opportunity today.

Speaker 3

Thank you.

Operator

Our next question comes from Rob Wertheimer with Melius Research. Please go ahead.

Speaker 1

Thanks. Good morning, everybody. My question, Rob, is maybe you could just give us a big picture take on where transportation and logistics stands with the subtraction of mobility? Does it change the connect and scales or change what you're offering to customers? And then your transporting results continue to improve and be very impressive.

Speaker 1

I wonder if you can talk about anything you're doing aside from seeing a rebound to strategically grow that business? Thank you. Thanks for the question, Rob. At a connected scale level within transportation and logistics, feels good as ever about the opportunity and the evolution of the business and the business model and the opportunity. I mean, clearly at a financial level to improve the metrics with the divestiture, I should say, of mobility, it will improve the metrics, the growth and the profitability metrics, and allow more, I'd call it, the goodness of the underlying portfolio to be seen.

Speaker 1

And I feel very good about the transaction that we're doing with Platform Science. I think together this will be a scaled business that is well positioned to compete in today's marketplace. And we will have an ongoing commercial relationship. And to me that's very important is that within that ongoing commercial relationship, call it 2 way relationship, that ability to move data and to plug into our platform and our ecosystem, we think can provide customers an ongoing differential level of outcomes. So good strategically, good at a capital allocation level, good at a focus level, helping us put more of our chips in the areas where we think we're best positioned to compete and where we have a right to win.

Speaker 1

From the Transporion business specifically, both we'll call it at a product level or maybe call it a strategic level across the whole portfolio, the teams have done a nice job bringing together some capabilities across both all of the businesses, both in the visibility side of things as well as in the freight marketplace. So like the moves the team are making to bring the businesses together, this is what we envisioned when we did the deal. And then in terms of the ongoing improvement in Transporion, I mean, in the control what you can control aspect of things, bookings to me is the number one thing on my mind. Can't control the underlying freight market, especially in Europe, which continues to be difficult, but we can control where we show up to compete. We are getting more than our fair share of wins with customers.

Speaker 1

These are some of the biggest logos in the world that we continue to win. I think the team is doing a really nice job. Those bookings wins of today, the nature of how bookings work in Transporion is they do take a decent amount of time to actually come to full fruition. They ramp up, so they don't just flip a switch immediately because this is a consumption based model in the form of primarily, I should say 2 thirds of the business models in the form of transactions on the marketplace. To see the real, say, improvement in the near term is in 2025, we need to see an improvement in the freight market to drive or to drive more transactions on the platform.

Speaker 1

A little bit cautious in Europe for 2025. So I would see that more as modest growth, ongoing modest growth and for Transporin in 2025. And I think everything we've been doing this year and I think the team will continue to do in the Q4 and the next year, we'll position that business to grow even faster coming out of next year.

Speaker 5

Okay. Thank you.

Speaker 6

You're welcome.

Operator

Our next question comes from Jay Revich with Goldman Sachs.

Speaker 4

Yes. Hi. Thank you for taking the follow-up. I want to ask about really interesting stats that you and Phil shared on improved performance on the business you acquired within TC-1 or the 2 businesses you acquired. Can you just talk about your M and A pipeline as it stands today?

Speaker 4

What's the range of potential outcomes of how much capital we could deploy? There's similar acquisitions that fit over the next 12 to 18 months based on what you see? And if you can touch on the valuation parameters on these last two deals, if you don't mind.

Speaker 1

Well, Jean Georges, Jerry, it's Rob. I'll start and Phil can fill in. At M and A level, we do have a pipeline. Our priority is software acquisitions within software. We're primarily looking or we're looking first within the AECO segment, which I think would not be a surprise.

Speaker 1

We think where we have opportunities to do tuck in is that we can create high return on investment outcomes. And that's clearly important from a capital allocation perspective. At a dry powder perspective, we're sitting at still walk through about 0.8x net debt to EBITDA. We've got a target to be below 2.5. So there's call it, I'll call that 1,500,000,000 firepower should we say should we need it, but I don't anticipate putting that kind of capital to work.

Speaker 1

We are thinking a lot as well about the buyback as a big commitment we made and we stand behind that commitment on the buyback, especially with where we see the stock price today. So that's a balance we have, Jerry, is on the buyback and the M and A. Expect more of the tuck in type of moves, I would say, at a divestiture level. We do not expect any additional major moves to happen on that front. Hopefully that helps answer your question.

Speaker 4

It does. Thank you.

Operator

Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Speaker 5

Great. Thanks for taking my questions. Just 2 from me. Field Systems, really nice beat. Maybe can you just unpack the strength there?

Speaker 5

Was it more on the public sector side? Or did you see any deals close earlier than you'd initially planned?

Speaker 1

Hey, Jason, it's Rob. Did you mean field systems or the AECO?

Speaker 5

Field systems.

Speaker 1

Okay. So within field systems, actually at the revenue level, we ended where we anticipated to be in the quarter in field systems. What we see that's driving the business, there's the new product. We've got a set of new products that are coming out actually at Dimensions. Next week, we'll be making a number of new announcements both on the software and the hardware side of the business.

Speaker 1

So we continue to bring new products in geospatial or the survey market forward like the R980 that's improving the communications and the range on that in the machine control market. So it hits the civil construction. Our BX992 offering helps us reach a mid tier market in our correction services or we call them positioning services business. A technology called IonaGuard is correcting for errors in the ionosphere. This is through the solar cycle that's been ongoing and that's helping to ensure the accuracy of those signals and those corrections that we provide our customers around the world.

Speaker 1

So new product introduction is helping to drive the revenue. I'm especially pleased with the growth of the ARR in the segment in the quarter and that's coming from the machine control service as a offering as a service. It's in our positioning services business where we continue to win new OEMs in the automotive market. We literally sell positioning as a service with a product called Trimble Catalyst and are looking to do more bundling with the term licenses and the correction services that we have. So it's a good number of activities happening.

Speaker 1

The team is executing well in addition at the go to market with our channel partners around the world. So really a nice intersection with the product in the go to market and the business and then the team doing a nice job working at business models.

Speaker 4

Okay, great.

Speaker 5

Yes, I know the field systems there are some accelerating nicely on organic level, so that explains it. Maybe just keeping on kind of the organic ARR theme, this is the 2nd quarter in a row we've seen 14% growth at a corporate level. I think you're still guiding to 11% to 13% organic for the full year. Maybe kind of you just walk us through the implied deceleration there, any conservatism you have? Thanks.

Speaker 2

Yes. Hey, thanks, Jason. This is Phil. Yes. So if you remember, I mentioned this, we have the mobility headwind with a lot of the known churn that's going to happen at the end of this year.

Speaker 2

So my two comments were, 1, I said 11% to 13%, but biased toward the high end. We still see the continued strength in the AECO business, but where we're seeing some of the offset is that known churn around mobility in Q4. Got

Speaker 5

it. Thank you.

Operator

Our next question comes from the line of Kami Zakaria with JPMorgan.

Speaker 7

Hi, good morning, team Trimble. Hope you're doing well. My first question is, what's the conversation like among your customers post the Fed rate cut? Do you feel a sense of optimism? Could customer activity improve as we look to next year?

Speaker 7

Meaning could there be an acceleration in trends at some point next year? Any anecdotes you can share from last rate cut cycles, whether you saw any acceleration maybe at a lag or anything to call out there? Or is rate cuts historically a factor for you at all? So just curious how you think about this transition.

Speaker 1

Hey, Tammy, good morning. It's Robin. Thanks for the question. Well, I have to say we've, it depends on your timeline of Fed rate cuts because we've been in coming out of, I guess, a ZERP environment. We've seen more Fed rate increases over the last few years and got a long baseline to go back to see an environment anything like what we've been in, that is to say an inflationary environment that comes down.

Speaker 1

So it's hard to look back really in time and have anything that would, I think be especially helpful. I would point out that what is so different about our business today compared to Trimble of the past is a business of 75 more than 75% software and more than 60% recurring. So we have a fundamentally different portfolio and such a higher degree of visibility into our business than we've ever had in the past. From what we hear, and I would call it anecdotally, is increased level of confidence. And confidence that turns into certainty, certainty can turn into ability to make the capital commitments.

Speaker 1

So I'd call that anecdotal. Of course, more than half of our business is outside the U. S, more than half of our hardware business is outside the U. S. And so we not only pay attention to the interest rate environment in the U.

Speaker 1

S, but globally as well. So I think it's a little bit early to tell to say anything definitive other than to say anecdotally we hear more confidence. And what if I think the one thing I am looking out for is and this is a North American example is if you look at the Bipartisan Infrastructure Law and you look at the amount of the money that's been deployed, only about a 25% plus or minus of the funds have been deployed to date. So I call that good news in terms of the ongoing funding availability for the bipartisan infrastructure. And then if you look at the cost of and let's take a U.

Speaker 1

S. Example, every mile of road is about $1,000,000 And if you look then within each of that within that mile of road build, over $900,000 of that approximately is the raw materials, including the subsurface materials as well as the asphalt. The minority ends up being the machinery and the labor. And to the extent that inflation comes down on the materials, that's a good thing that if we can build more road with that. So that's half an inflation coming down, but I think that correlates to the interest rates coming down.

Speaker 1

So that's the kind of thing that we're paying attention to or the derivative second, third order derivative impacts.

Speaker 7

Got it. That is very helpful. And second question, I'm actually looking forward to your Analyst Day, but any early thoughts on how you're thinking about your long term incremental margin target now that you have divested some of the hardware centric low margin businesses?

Speaker 2

Hey, Tamara, it's Phil. I can take that one. Yes, so obviously we'll get you into more detail at Investor Day. But last earnings call, I'll sort of reiterate what I said last earnings call, which was we're biased as we think about the long term model, we're biased above the midpoint of our prior Investor Day model, which was 5% to 8%. So that sort of gives you the revenue number.

Speaker 2

As we continue to grow the software business disproportionate to the hardware business, you would expect the gross margin expansion. And then we talked about the operating leverage last time of being 30%, 35%, so we're biased toward the high end of that. And then if you put that all together with some expansion at the EBITDA level, we said over the time we could expect probably 100 basis points of margin expansion. Again, that's over a multiyear view. But we can get into more details on the Investor Day as well.

Speaker 7

Wonderful. Thank you.

Operator

Our next question comes from Clark Jefferies with Piper Sandler.

Speaker 8

Hello, thank you for taking the question. It's been pretty encouraging to see as adjusted margin expansion during this year expand from a range of 100 to 200 basis points now to 200 to 250. I wanted to specifically ask about the margin expansion we've seen this year in transportation. I was wondering how durable do you see that multi 100 basis point margin expansion in transportation and logistics. I understand that with mobility, there will be a tailwind to margins next year, but even kind of as adjusted, what, how are you thinking about the underlying efficiency gains you can get in the transportation segment and what kind of op income expansion could we expect on a go forward basis?

Speaker 2

Yes. So, hey, Clark, this is Phil. Let me start and Rob can add any color. So as we think about as you said, as we got rid of or as we divested the mobility business going into 2025, that's been obviously a drag on our growth in our ARR growth this year. So we mentioned that before.

Speaker 2

So then when you have what's left is you've got the MAPS business which is performing well, continues to grow. I think we grew sort of high single digits ARR growth in Q3. Rob had already talked about the Transporium business and we're not forecasting right now for 2025 any meaningful change in the overall market. But he mentioned the bookings growth and it's been a healthy business on a growth. It's been double digit, call it, revenue growth and accretive on the OI.

Speaker 2

So when you think about those businesses continuing to perform at that level, I would expect additional growth and margin expansion from those businesses as we go forward.

Speaker 8

Perfect. And just one follow-up. Rob, you had kind of given this interesting disclosure about how much ARR is split between the A, the E, the C and the O. When we think about the ability to sustain, it seems like multiple years of 18% to 20% organic ARR growth. Has the composition of that organic ARR growth been fairly balanced over the years?

Speaker 8

And you give these comments around 30% ACV growth in the E and C segment kind of driven by TC-one. But are those segments kind of equally contributing over the years? And that's kind of part of the confidence in AECO growth above the midpoint of the kind of organic growth range next year?

Speaker 1

Hey, it's a good question. I would say more there is a variety of growth outcomes that we have within the A, the E, the C and the O. I wanted to point out that they're each above $200,000,000 to point out the balance we have in it. So we don't have a dependent an overdependency on one aspect of the portfolio. And I think that's important message to get across and that was the intent of that.

Speaker 1

With the growth rates specifically, actually our architecture and design business, I mean, kudos and shout out to the team, have for the last 3 to 4 years, let's say, well outgrown at an ARR growth level the rest of the portfolio. And we think it's probably the largest addressable market opportunity we have with the SketchUp product. We crossed the threshold last quarter of over 1,000,000 paid subscribers using the technology. It's the one that's got the largest customer reach in the world for Trimble. So that aspect of or that part of the business is growing the fastest.

Speaker 1

I think it will probably still continue to grow the fastest for the next couple of years. I'd say the growth within the E and the C parts of AECO are pretty similar and I don't see that changing over time over the next couple of years, excuse me. And then the O that sort of we call that the owner in the public sector. The public sector does grow at a lower rate than the private sector. We think one of the things that I think though it tends to be quite attractive within the public sector is net retention tends to be high, which is to say churn very low.

Speaker 1

So gross retention tends to be the highest in that side of the business. So well balanced, growth rates are differential, but not enough, I think to change our view here in the next couple of years of the growth opportunity for the business where we would see ARR continuing to grow in the teens.

Speaker 6

Thank you for taking the questions.

Speaker 4

Welcome.

Operator

Our next question comes from Chad Dillard with Bernstein.

Speaker 9

Hi, good morning guys.

Speaker 1

Hi, Chad.

Speaker 9

So I wanted to go back to your early thoughts for 2025. Just trying to understand like what sort of macro environments embedded in that outlook? I guess like more specifically just thoughts on how you're thinking about construction and how it layers into your field systems guidance? And then secondly, I mean it sounds like the AECO business is growing faster, the mobility side or the transportation side. And so like what does that mean for 5 as

Speaker 5

well? Hey, let

Speaker 1

me start with the macros and Phil can fill in the some of the margin dynamics. And at a macro level, I wouldn't expect really any meaningful change from what we know now. I mean after all, January 1 will just be the day after December 31. So it's hard for me to say that I see big meaningful changes in the market. We've seen the North American economy stronger than the European economy.

Speaker 1

I would expect that to continue. We've seen sub segments such as data centers, renewable energy, on shoring and manufacturing to be strong and stronger than residential. If interest rates continue to come down, I think that could be a positive inflection to the residential end market, so we're paying attention to that, because we know that that's under built and that will come back over time. In the field systems side, we certainly look at what the OEMs are saying and they're projecting units down in construction and agriculture and that's incorporated into our thoughts on field systems. Now we still expect it to grow next year but to be below the company average on growth and so that's taken into we're trying to take that into account.

Speaker 1

And transportation and the macros, I think that 2025 could start to look better for the macros in North America. There do appear to be some green shoots coming to get supply and demand and a better balance. In Europe, I would expect more of the same as a default thinking. So we're not expecting to see an inflection and a meaningful inflection in the number of transactions per customer that would impact that would positively impact the transporting business were to be wrong in that and the economy were to be better. So some of those macro thoughts make it into the revenue.

Speaker 1

I don't know if we called it guidance yet, but I'll call it revenue. Early revenue thoughts that Phil put forward. Phil, do you want to fill in the rest?

Speaker 2

Yes. Thanks, Chad. So I would say again, we weren't this wasn't intended to be a guide, the full guide for next year. It's just to give you a preview of how we're thinking about the year on the revenue basis. But I think you could roughly apply the construct that I talked about earlier around the growth and the gross margin expansion, the op leverage.

Speaker 2

And you can use the revenue growth rates that I alluded to which is ACO being the top, transportation being in the range and field systems being lower. And I think you can get to a rough model there. But certainly at an Investor Day and as we go forward, we can give you more detailed view on that for 2025.

Speaker 1

And I also would this is Rob again. I point out that we have the earnings supplement. I would encourage everyone to make sure you're looking through that because there are moving parts that we need to make sure that you're taking into account moving part. One will be the mobility divestiture, assuming it happens, which we assume in Q1. We've got the we'll have the agriculture that will lap in Q1, so that's the as adjusted and then the 3rd big one is the 53rd week that we've got here in 2024.

Speaker 1

And so it's just it's really important to understand these pieces and work from the right baseline. Otherwise, it can look off, especially with the 53rd week and the divestitures. And so we're thinking about it very much on an organic basis, excluding that 53rd week when we make this commentary.

Speaker 9

Okay. That's super helpful. And then second question, just want to get a better sense on the roadmap for rolling out the rest of TC-1 from like a, I guess, onto the owner side of the house and then also from a geographic standpoint. Where are you on that? When do you expect to see those that strategy kind of fully played out?

Speaker 9

And then how do you think about the incremental addressable market that you're able to reach from that?

Speaker 1

Hey, Chad. Hey, great question. Okay. So within AECO, the primary place where we're selling it today is with the E and the C part of the portfolio, where we sell to the engineering and construction customers by the way, by the way, it could be mechanical, electrical, plumbing, steel, concrete contractors, the general contractors who do both vertical and horizontal work, those are the primary customer set where we're selling it today. Anywhere where those customers can use architecture and design product SketchUp, we are selling it into those bundles.

Speaker 1

For pure architects and only architects and only designers, they're not really buying TC-one, they're buying they're just buying the product that they need. Okay, so within the engineering construction part of AECO, primarily as you know, it's been already out in North America. TC-one is a framework commercial offering. We've got over 20 prepackaged sub offerings within that to target the personas. Then we're I'd say early in the European rollout and really not in Asia Pacific in a meaningful way, especially Southeast Asia, not in any meaningful way.

Speaker 1

I would anticipate next year that we really see Europe rolled out and I would say probably partially so in Asia Pacific. We've got to have some of the underlying systems worked on to help enable that, which rolls out geographically. Then you asked about the O and bringing that owner and public sector into that and we'll start to see more of that next year. Now, the owner and public sector actually already has its own form of TC-one. We call it Trimble Unity, where we brought together multiple capabilities we have around enterprise asset management and digital project delivery.

Speaker 1

And so that has come together in the form of a suite of technology to serve asset life cycle management, which we think is actually super unique. So what we'll do is continue to pursue the asset life cycle management within the owner and public sector, have the linkages to TC-one. To the extent of whether it is or isn't called TC-one, I'm a bit indifferent. I'm more focused on that we're delivering the outcomes to the the outcomes to the customers. The other thing I want to take a chance to point out is, next year, you'll see more linkages to the machine control and guidance market where we have an as a service offering linking that into the TC-one bundles for civil contractors.

Speaker 1

And if you take a capability like we have with B2W, I think estimating and tracking field progress for civil contractors, That makes a lot of sense to link to the construction ERP that civil contractors buy from us, to link that to the machine control and guidance that they can buy from us, to link that to the project management that the in project controls that they buy from us, not only to link the technology to link the workflow. And these are the things that we can uniquely do at that intersection of the physical and the digital. So I look forward to seeing more rollouts next year. When you ask about the addressable market, what we have seen consistently through the rollouts of the bundles is that we are expanding the size of the addressable markets. We're expanding the reach we have in the customers as we move into more of an as a service offering.

Speaker 9

That's helpful. Thank you.

Speaker 1

You're welcome.

Operator

Your next question comes from the line of Josh Tilton with Wolfe Research.

Speaker 6

Hi. This is Arseniy Matovich on for Josh Tilton from Wolfe Research. Just first question, really great results in transportation and AECO, I guess, within transportation record bookings in from Transporion despite the European freight rates. Can you maybe go into what's driving that? Is it better consumption than expected, better new logo wins with larger customers being added?

Speaker 6

And then moving on to AECO within AECO TC1 specifically, what's going on there as well from a high level? Are there better expansions from existing customers? Are there new logo wins with improving win rates? Anything you can share there? And then I just had a brief follow-up.

Speaker 6

Thanks.

Speaker 1

Hey, good morning. This is Rob. I'll start within Transporion. The bookings were the record bookings both for the quarter. It was a record 3rd quarter level of bookings.

Speaker 1

It was the 2nd highest quarter ever bookings, put it more longitudinally to the year, about 30% increase year to date on a year over year basis. Those bookings are primarily coming from new logos, and then increasing the there's a land and expand play we have within the portfolio because there's a broad set of capabilities that the platform can deliver. And so that cross sell of the rest of the capabilities is also driving a level of bookings. I'd say in that business, I'm most pleased with the level of the new bookings and we were able to meet a good number of existing as well as new logo customers at our user conference just a few weeks ago in Vienna. And the customers are looking for both by the way the carriers and the shippers are looking for efficiencies that the platform can unlock.

Speaker 1

They're looking and we're seeing nice growth within the autonomous procurement and autonomous quotation product lines within the business. This is AI at work generating revenue and actually being monetized, which I am really pleased to see. So we've got a differential set of products and capabilities and outcomes that we can deliver to the customers. We're primarily selling to the shippers. We bring them into the network, and then they fulfill and execute through the carriers that are in the network.

Speaker 1

At the TC-one level, let me just make sure I understood your question. Are you looking for color on what's driving that growth or what else we're doing within ASCO?

Speaker 6

Right, exactly. Is it expansion? Is it new logo driven? Is there anything with better competitive wins with a more cautious budget environment for some competitors that are offering more expensive solutions? Anything to get into there?

Speaker 1

Yes. So let's start with the bookings. The bookings were right at or probably actually slightly above the level of the ARR growth in the quarter. That informs the view forward that Phil talked about in his prepared remarks. We have an enormous ability to cross sell and upsell within the existing customer base that we have.

Speaker 1

And so that's where we do see the majority of the growth that we have in the business. And we are winning new logos. We have a differential offering. And the more we can link the bundles and the workflows together, we're seeing that generate new logo wins for us. The team has done just a really just I think a terrific job throughout the year, actually throughout the last few years, but let's just say throughout the year to date both at a product level, a go to market level and the underlying systems level.

Speaker 1

So at a product level, I think delivering defining and delivering the TC-one bundles, linking the workflow, establishing a marketplace where we can do integrations and have and sets of APIs to be able to integrate the technology that we have. Defining the bundles, we're seeing good success when we link ERP and project management, when we link ERP and estimating, when we link design and estimating. So we're following what the customers in the market are telling us to define the product set to take to market. At a go to market level earlier in the year, we moved to a named account selling model, and it's working. And then at a systems and process level, sales enablement, sales operations, getting 360 degree views of our customers, underlying marketing transformation to drive the pipeline.

Speaker 1

The pieces are coming together nicely in the business and then linking that to one of the earlier questions. This gives us the ability to take this across the rest of the world from what we've already been doing in North America and part of Europe, fully into Europe and then into Asia Pacific.

Speaker 6

Got it. That's very helpful. Thank you. And just a follow-up, is there any way you can provide more color on what changed from the last earnings call when you provided the expectation of completing the audit review in September? And is there anything, I guess, that you could share that would help investors better understand that timing change?

Speaker 6

Or is there any new target? Like could we expect maybe this to be completed before the Investor Day or just anything that you could provide additional color on there? Thank you.

Speaker 2

Yes. Hey, Arseniy, this is Phil. Let me start. So look, this is the number one priority for us. We're trying to work through this.

Speaker 2

E and Y has been performing incremental audit procedures. They're really focused on completing this but in a very thorough and detailed manner. And so I think back when we thought it was a few weeks away, we underestimated sort of just the breadth and depth of the audit as it went forward. So I think that was on us. But they're doing the work.

Speaker 2

The team is the Trimble team is very focused on this. We've pulled in outside resources throughout this process. But what I will reiterate is Rob's comment that throughout these many months, we pulled many, many data samples and we still have not seen anything that would indicate a restatement of any of our financial statements that to date the financial statements that we filed we believe are correct. So we're continuing to work hard with them. Again, we're trying to get this complete as soon as possible.

Speaker 2

But unfortunately, it's just one of those we just can't control the timeline. And so all we can do is put our heads down and work really hard and be very responsive to the UI requests and try to get this behind us as soon as we can.

Speaker 1

And I would think the answer is yes, we would anticipate having it done before Investor Day.

Speaker 6

Got it. Thank you very much. Congrats on results.

Speaker 1

Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Trimble Q3 2024
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