Trimble Inc (TRMB) — Q1 2020 Earnings Call Transcript

Good afternoon. COVID-19 is on the forefront of everyone's mind. Our presentation format will be different this quarter and is structured to address topics that seem to be top of mind among our long-term shareholders. As always our presentation is available on our website and we ask that you please refer to the Safe Harbor at the back. Before we start walking through the slides, we want to acknowledge that this is an extremely challenging and uncertain time for all of us and that everyone listening has their own unique set of circumstances they are dealing with. While these calls are designed for our investors our employees are also active listeners. In fact over 40% of our employees are shareholders. As such these updates speak to both audiences. In our current environment, we lead with a moral principle to support the health and safety of our community including employees, customers, and dealer partners. We also lead with a strategic principle to keep our business moving forward. We have customers and partners who rely on Trimble to keep their businesses running to move the goods of commerce, to feed the global population, to build and maintain our infrastructure, and more. With heartfelt gratitude and by the level of dedication and resolve from our over 11,500 Trimble colleagues, a worldwide network of dealer partners, and our customers. As a leadership team, we activated a comprehensive global business continuity plan in early March. The vast majority of Trimble is working remotely and we are in the process of defining when and how we gradually return to our office environments. The ongoing economic impact to Trimble will correlate to when and how we and our customers establish a set of new normal working conditions. While it feels like we can see the light at the end of the tunnel, the fact remains that there is still a great deal of uncertainty. The essence of our planning has been to plan for the worst-case scenario and hope for the best. We took early and decisive action and I'm incredibly proud of how our team has rallied together as one Trimble. We will get through this crisis. We are well-positioned to endure the macroeconomic shock and we will emerge stronger on the other side of this. While we are managing the short-term realities, we are also equally focused on executing our long-term strategy. Let's shift to the presentation. Slide two has the seven key messages we want to address today. As I've just highlighted our team has risen to the challenge and this is point one. Point two, our first quarter results exceeded expectations demonstrating the quality of the Trimble strategy and the financial strength in the first 11 weeks of the quarter, A big thank you to the Trimble team. Point three our balance sheet and access to liquidity remain emphatically strong. Point four, as we look to the past to inform the actions of today, the multi-year execution of our strategy and the transformation of our business model has established more resiliency than at any point in our history. Point five; we took early and decisive management actions including increasing liquidity and implementing broad-based temporary pay reductions to fortify the business. My commitment to our Trimble team is to restore pay as soon as possible. Point six, we are suspending guidance and we will be as transparent as we can with the puts and takes we are seeing in the market and in our business. Point seven, the cumulative actions we have taken enable us to stay true to our long-term strategy Connect & Scale 2025. Moving to slide three, the message here is that our business is essential and our team is leading. My opening comments addressed much of what is on this slide. Before I turn it over to David, slide four offers a few examples of how Trimble is helping our customers and communities during this time. In our transportation business our team is offering a free service to display and collect current truck stop status and amenity information. We are also offering free driver trip planning to suggest open truck stops and rest areas. Our leasing team has put together programs that are enabling customers to extend payment terms. In our communities I'd like to highlight our Cityworks team which is offering a web-based GIS-centric platform for local governments to manage their emergency response efforts. David?

Thanks Rob. Turning to slide five, non-GAAP revenue for the first quarter was $794 million in the middle of our guidance range despite greater-than-anticipated weakness in demand late in the quarter as the pandemic impact widened. I'll note that Q1 revenue reflects outstanding management of the supply chain disruption coming out of China. We exceeded our initial expectations in fulfillment of customer demand despite the fact that the shutdowns in China were more severe and longer-lasting than we anticipated when we issued guidance in mid-February. Total revenue growth for the quarter was minus 1% which included minus 2% from organic growth and approximately minus 1% from changes in exchange rates as the U.S. dollar strengthened during the quarter. Acquisitions added about 2% to revenue during the quarter. Our recurring revenue was strong with annualized recurring revenue or ARR up 7% year-on-year and up 6% on an organic basis. Note that this represents about a 1% acceleration from ARR performance in Q4 of 2019. Gross margins, operating margins, net income and EPS improved versus prior year and EPS came in well above our guidance range. Margins improved during the quarter for a number of reasons. Gross margins were higher year-on-year driven principally by an improvement in mix, as our higher margin software businesses performed relatively well during the quarter. Lower levels of discounting and the introduction of higher-end new hardware products also improved margins. As the impending weakness in the economy became apparent, we pulled back on discretionary spending, including travel and outside services and we reduced our rate of hiring. In addition, our expense relating to incentive and commission plans was reduced meaningfully during the quarter. Note that the temporary pay reductions Rob mentioned in his remarks did not take effect until the last week of Q1, so we will see the vast majority of that cost benefit beginning in Q2. Turning to slide six. We are showing here revenue and profit trends by segment, and I'll touch on the factors, which are expected to drive the sector businesses going forward. The Resources and Utilities segment had a strong revenue and profit quarter driven by demand in the agricultural sector for aftermarket products and correction services. Late in the quarter our OEM business was impacted by factory shutdowns, but end customer demand proved to be solidly resilient through the quarter. Revenue trends were aided late in the quarter by customers buying product in anticipation of shutdowns in distribution and manufacturing facilities. Our Buildings and Infrastructure segment had organic growth in the quarter driven by our civil business and growth in our recurring revenue offerings. The organic growth occurred despite March weakness in project starts and bookings. With some notable exceptions most ongoing construction project activity continued despite COVID-19-related work restrictions. The Geospatial business got off to a strong start in the quarter driven by new products and by the timing of dealer orders. March results were much weaker both because dealers drew down inventories and because demand began to weaken with the decline in oil prices and the implementation of shelter-in-place rules. Transportation revenue was weak in the quarter, driven in part by the factors we discussed in our Q4 2019 release. As you will recall, we have experienced challenges related to the implementation of the ELD mandate in our telematics business. Revenue trends weakened further in March as the COVID-19 crisis took hold. During the quarter we made significant progress in addressing product functionality gaps and partly as a result, we are seeing lower churn coming out of the quarter. Going forward we plan to accelerate the transformation to higher-performing hardware across our customers' fleets. While these steps will put continued pressure on margins this year, we believe they will position the business for stability later this year in growth as the market returns to more normal conditions.

Thank you, David. Let's move to slide 10. While we are suspending our second quarter and total year guidance, we also want to be transparent and talk about the areas where we have more and less visibility. David described a number of ways in which our business was impacted in March as the economic slowdown took hold. I'll expand on those comments and give you some thoughts on how we see our business trending in the second quarter. The overall performance of the quarter will correlate to the opening up of global economies and the return of more normalized demand patterns. The areas of the business model where we have the most visibility and confidence includes ARR, gross margins, and operating expenses. ARR represents approximately one-third of our total revenue. In the second quarter, we expect this to be up in the low single-digit range on a year-over-year basis. We'd also expect to see modest gross margin expansion as our revenue is increasingly weighted towards software-centric revenue. Relative to operating expenses, David covered the cost containment actions we took. In our non-recurring revenue businesses, new hardware demand and new logo software bookings growth has been depressed during the shelter-in-place time. We are digitally engaging with prospective customers and building our pipeline, but the fact remains that the rate of deal closure levels are below what we experienced at the beginning of the year. Looking at our reporting segments and taking a view of the puts and takes in the end markets, we have a point of view on the relative performance we expect across the segments. On a year-over-year basis, we expect revenue in all reporting segments to be down in the second quarter. We expect resources and utilities to outperform amongst the segments driven by our correction services and utilities businesses.

Hi, good afternoon, I guess. It’s afternoon your time as well as ours. So good to hear all of you. My first question is around the resource business and it really performed significantly better than we had anticipated or forecasted. Can you just talk a little bit about what actually happened there? And how sustainable the margins are there? Or whether it was a one-off rollout of some new product? Thank you.

So yes, there were a few factors that contributed to the outperform in the quarter, which includes some of the following. So it wasn't early planting season overall, which we think helped the business to some degree. To the credit of the team, the new product introductions that have come out in the last month seem to be doing well in the market and we think that that contributed. The other part that's in Resources and Utilities as a reporting segment is our correction services business, as well as a set of utility and local government businesses we have. Our correction services business had a very strong first quarter which we believe also correlated not only to the health of the business but the early planting season. And then our utilities business has been coming along nicely and the Cityworks acquisition that we completed a few months ago is off to a nice start. So a number of factors came together in the reporting segment to set up a next quarter.

And if Q1 was supported by the early planting, does that mean that the margins have peaked for the year despite everything else that's going on but seasonally we would expect Q1 margins to be the strongest?

Yes that's a good point, Ann and that would be correct.

Okay. Regarding Buildings and Infrastructure, how limited is your visibility on the hardware side of that business considering the current situation with construction, equipment, production, and sales? I know you've mentioned it as a risk in one of the later slides. Could you clarify where you see the greatest risk to your business in Buildings and Infrastructure? Thank you.

There is definitely less visibility into the hardware sector compared to the recurring revenue from software in our reporting segment. From a customer sentiment perspective, we are receiving mixed feedback. On the positive side, at the start of the first quarter, our customers had backlog and the sentiment was strong. However, as the virus emerged, projects slowed down or were put on hold, which negatively impacted us by the end of the quarter. In the coming weeks or months, as our customers return to work, we anticipate that the hardware aspect of the business will follow suit. That said, we are also hearing concerns about future work in 2021. We note a shift in sentiment regarding certain end market projects; for instance, commercial work and energy-related projects might face challenges, while projects like hospitals or data centers could perform better. Therefore, we expect the mix of work to change as well.

So if I have to rank order your customers in B&I, the construction equipment probably the weakest sentiment maybe your contractors next given the projects just stopped. And then maybe the later cycle the architects, et cetera may be a little bit less impacted at this point is that a fair characterization? And I'll leave it there. Thank you.

That's pretty close. In the software businesses, the work we do is essential. It's an ERP system, and you are either in business or you aren't. The technology continues to be fundamental and in use. Next, I would categorize construction equipment, particularly contractors, and lastly, the OEM-related revenue, which I would rank at the bottom of the list.

Okay. Appreciate the color. I’ll get back in line. Thank you.

Yes. Hi, and thank you for the question. It's interesting you're offering some new utilities to some of your customers to help deal with coronavirus in various ways, whether it be on the trucking side or just on the safety side. I'm a little bit curious, I mean, it's a tough saying that it's obviously an opportunity to potentially reach new customers. So is that expanding your reach? Is it mostly to existing folks that you have? Is it offering new features that they wouldn't have otherwise seen them? And can you just give a little bit of a sense of how much that helps you expand?

Well, the apps themselves are available to any company. So we didn't make a distinction of a customer not a customer. Now you'll probably get more value out of it if you are an existing customer and you're integrating into the bigger workflow. So I suspect there is a degree of let's say visibility or reach to potentially new customers but I should say it wasn't initiated as a marketing effort.

Yes. I didn't mean to imply I'm sorry. And then the second question I guess is just on defensiveness. Again, this is a little bit of a real-time test and how bad things can get. And I'm curious if it gives you a sense of how much trucking activity is down you probably do? And just whether you lose firms or customers or individual licenses? So, just a sense of the defensiveness as to how far the market to fall in trucking might be interesting. Thanks. I'll stop there.

That's a good question, Rob. The trucking market in North America is certainly facing challenges right now, and we see the same data you do regarding new Class eight units, inventory levels, and spot market rates. The macro environment for trucking companies looks tough in the near to midterm. However, when we look back at Q1, there were also some positive aspects. Looking ahead, the macro situation appears more negative at this time. Regarding the defensibility of the business, we believe this will actually strengthen Trimble. We have a solid value proposition and a balance sheet that allows us to continue investing in this business. Recently, we've seen some competitive companies exit the market or significantly reduce their operations. Therefore, from a competitive standpoint, we will maintain an offensive approach. We believe we have a winning strategy and trust in our team's ability to execute it. We will not waver in our business strategy pursuit, and we are confident that we will emerge from this situation stronger. A key focus for us is to ensure that we position ourselves to exit this crisis on a stronger competitive footing than we entered.

Okay. Thanks, Rob.

Yes, good afternoon. Rob, could you share your thoughts on the second quarter, particularly regarding the revenue outlook for all four business groups, which you mentioned would be down year-over-year? Additionally, could you clarify if there are any of the four business groups expected to experience sequential revenue growth in the second quarter?

Okay. So, if we think about the businesses sequentially in the second quarter, the short answer is, it wouldn't change my answer. I mean historically, you would expect to see construction especially civil construction coming on stronger in the second quarter given the summer season for construction. But we don't see that happening this in the second quarter. Otherwise, if you took a market let's say Resources and Utilities which is ag-centric, you would expect to see that seasonally decline in the second quarter if I use that as a sort of a contra example.

Yes. Regarding Geospatial, given the sequential decline in oil and gas exposure, and considering the transportation aspect you mentioned, I have a question. In your remarks, Rob, you mentioned that it seems like there’s light at the end of the tunnel. Does that imply that you believe we might be nearing the bottom? What signs are you observing that led you to that conclusion?

We maintain close communication not only with our dealer partners globally, but also with our end customers and prospects, along with the pipeline we have in various businesses. For instance, in Asia, we are beginning to see business rebound in certain areas. Specifically, in China, which currently represents a small fraction of Trimble's revenue, we have noted signs of recovery. Similarly, in the Nordics, business activity is also starting to pick up. This geographical perspective contributes to our optimistic outlook, as we believe we are seeing a light at the end of the tunnel. In North America, local governments are beginning to discuss returning to work and easing some restrictions, which certainly affects our perception of the situation as we notice people starting to go back to work. This could stimulate demand on the other end of our communication channels.

I understand. Can I ask one more question? I wanted to revisit the point you made about entering the second quarter with $1.2 billion in backlog. I missed the rest of your comment. You mentioned something about $250 million, but the strong backlog doesn't account for cancellations. It seems like you're mainly experiencing project delays. Is that correct?

Hi Rick, it's David Barnes. Yes the $250 million is the backlog of our leading up the recurring business. And the point I made is that amount is higher than it was a year ago. And now we haven't seen any meaningful cancellations yet. There are as you inferred some delays but nothing in our backlog is being canceled of any consequence.

Okay. Very good. Thank you.

Hi. Thanks for taking our question. Just one for me. So I know you mentioned utility and construction are still performing. Just wondering if you could provide any color on other industries and geographies that you are seeing that are kind of underway back to normal level towards the end of I guess, April and thus far in May that you're seeing?

The markets that are starting to recover include some Asian markets, particularly China, and the Nordics in Europe. For example, in Q1, Brazil showed strong performance, especially in our agriculture and transportation sectors. There are various areas performing well globally. I believe I missed the initial part of your question about utilities; could you please repeat that?

Yes. That was just kind of looking an example that are kind of performing pretty well in first quarter but I guess are you seeing other industries that are I guess on their way back to normal level thus far in the second quarter?

I would like to address that from a business model perspective. The annual recurring revenue increased by 7% in the first quarter, clearly outperforming the rest of the portfolio. The businesses related to this are significant to note, specifically the construction-related annual recurring revenue we have. The correction services business delivered exceptional performance in the quarter, and we are optimistic about its current standing. These are a couple of key areas I would highlight.

Great. Thank you very much.

You’re welcome.

Hi, good afternoon and good evening everyone. I'm glad you're all doing well.

Hi, Jerry.

Rob your comments about gross margin expansion really stood out to be considering what I would imagine would be pretty significant declines in perpetual license sales. Can you just expand what level of perpetual license sales declines you're seeing in April? And how you folks are able to essentially guide to improving gross margin in this environment that really stood out to me? Thanks.

If we consider three revenue streams, the first is recurring revenue, the second includes software, perpetual software, term software, and professional services, while the third is hardware. ARR is clearly the top performer. Additionally, the web tables we have provide details on gross margins by these types of revenue, with ARR typically showcasing the highest margins. In the recent quarter, ARR grew by 7%. Conversely, the hardware business experienced an 8% decline compared to the previous year and has the lowest gross margin among our revenue categories. The perpetual software and professional services also saw a decline in the quarter, and we expect that trend to continue through March and April, albeit not as severely as hardware, likely in the low single-digit range. Furthermore, within the software category, we generated about $80 million in term license revenue over the trailing 12 months, which is categorized as software rather than recurring revenue. This segment is growing well and remains profitable. The mix of these factors contributes to our gross margin expansion, which was a significant factor in our earnings per share performance for the quarter.

And that's pretty resilient performance for the perpetual license business as well. Okay. And then in terms of the subscription offering so you spoke about accelerating the shift, can you just update us on the performance in terms of bookings growth in the transportation management system so far this year? And can you talk about relative to I think the $500 million target of subscription opportunity you have within the existing portfolio with integrator approach here? What's the cadence on translating that from perpetual license to recurring? Thanks.

In the transportation management system product line, over half of our bookings in the first quarter were from subscriptions, which exceeded our expectations. We offer both subscription and perpetual options, and having a subscription model is beneficial for customers in a tight cash environment as it allows for an operational expenditure model. This approach also expands our addressable market to mid-sized carriers through conversion. Looking at other areas, in Buildings and Infrastructure, we have a mechanical, electrical, and plumbing business and a steel and concrete structure business, both generating over $100 million in revenue, which we believe have significant potential for subscription conversion. We launched a subscription offering called Accubid Anywhere in our MEP business, and it has started well. While several other divisions at Trimble have subscription elements, they currently make up a small part of the business. We're focused on laying the groundwork this year to accelerate our progress for next year. Not all of these initiatives will lead to increased annual recurring revenue immediately, but we believe this is the moment to expedite these conversions. We're reallocating resources and adjusting priorities to bring these offerings to market faster, as it's essential for the long-term health of the business. In times of uncertainty, decisiveness is critical, and we're taking significant action to move forward more quickly.

And Rob, sorry, just a clarification. So transportation management you had mentioned that half of new bookings are subscription, but when you combine them subscription and perpetual what was the year-over-year growth that you achieved as a result?

From an overall bookings perspective, if we take a step back to look at software bookings, particularly separating January and February from late March to now, new bookings are significantly lower overall, down more than 50% in recent weeks. This trend aligns with what we're hearing in the market. In the short term, new bookings are indeed facing challenges. However, you might not see the impact immediately reflected in current revenue or in the second and third quarters. The key factors will be the duration of this downturn and the speed of recovery, which will influence our performance in 2021. It's important to note the overall bookings situation. Specifically regarding the transportation management system bookings, when we record a booking, we aim to equate it to a perpetual booking to better understand the underlying drivers. Therefore, it’s beneficial to review this over a multiyear span to draw parallels with what a perpetual booking would look like for business planning purposes.

Okay. Thank you.

Good afternoon. This is Kristen on for Colin. Thank you for taking our question. Just a few operational questions. First, I was wondering if you could talk a little bit about your supply chain in Mexico on the hardware side just remind us how much third-party manufacturing exposure you have in that region? And what you're hearing from your suppliers as they remain under those stay-at-home orders?

Yes. I would say that a significant portion of our contract manufacturing is based in Mexico, significantly more than in China. While components do come from China, a large amount of manufacturing occurs in Mexico. The short answer is that we have been operational. In some cases, we have actually gained more capacity from contract manufacturers as other companies have temporarily closed or weren't deemed essential, which has allowed labor resources to shift to support Trimble products. This has been particularly beneficial for sectors like agriculture, especially in the first quarter where we surpassed expectations. We have one operation in Guadalajara that is currently under a stay-at-home order, so it isn’t operational at this time. However, we had prior knowledge of this situation and were able to build some inventory, and fortunately, the demand in that area has also decreased, which has mitigated any significant impact. Overall, where it counts, we have been fully operational.

Okay. Great. And sort of speaking to the inventory point, I wanted to ask about your dealer channel and how much of that was under essential services? I think you mentioned some pre-buy activity ahead of those stay-at-home orders. So any commentary that you can provide on inventory build? Or what you're seeing in the dealer channel right now?

At this point in the quarter, we are observing a significant reduction in inventory levels. There were some parts of the channel around February when buying occurred in anticipation of the upcoming shutdowns. It's challenging to determine the specifics of these purchases. However, looking at current inventory levels, we believe the dealers are managing their stock responsibly. It is important for us that our dealers remain healthy and have sufficient liquidity, so we are positive about the overall inventory levels across all our businesses. Regarding the essential nature of our businesses and its effect on dealers, globally, they have mostly remained operational. Trimble continues to support a growing population, and it is planting season. Many construction projects are still active, and our customers rely on us and our dealer partners to deliver. Transportation companies also depend on us to facilitate the movement of essential goods, and they have largely stayed open. Even during the complete shutdown in Italy, we experienced year-over-year growth in the first quarter due to the strong performance of our team at the beginning of the quarter, especially in the Geospatial and agriculture sectors.

Thank you so much.

Hi. This is John Weidemoyer for Jonathan. Thanks for taking the question. I just have one. Can you talk about your level of optimism regarding the potential for infrastructure stimulus spend?

Sure. Regarding infrastructure, we have a mixed perspective. Looking at a global scale, the U.K. has issued a notice to proceed on the HS2 project, and China has announced significant infrastructure plans. In the U.S., which I believe is your main focus, our infrastructure is aging, indicating that it’s a matter of when, not if, issues arise. We are cautiously optimistic that funding developments will occur in the U.S., possibly in the upcoming relief package, although that has not yet materialized. Many states have raised their gas taxes recently, allowing them to better manage their circumstances. However, we must also consider some challenges, such as the FAST Act expiring on September 30, which requires renewal or extension. State tax revenues are struggling, and a federal backstop would be beneficial. Additionally, the American Transportation Infrastructure Act of 2019 still faces bipartisan disagreements on funding. While there are several negative or cautious factors, the clear need for infrastructure investment in the U.S. makes it a logical component of a relief package, even though we have yet to see that happen.

Thank you. That’s all. Appreciate it. That’s it.

Hi, team. This is Eric on for James. Thanks for taking our question. Maybe just touching on a piece that may not be as topical, but understanding you're taking maybe a slower approach to acquisitions for now. But I'm wondering has the current environment sparked your interest in any new potential growth areas or opportunities you could look to be more active in the future?

In the current environment, our initial focus has been internal. We are aiming to shift more rapidly towards the subscription model. We previously mentioned some of our software businesses, and I want to highlight the announcement made at CONEXPO regarding the launch of Trimble Platform as a Service, which integrates our machine control guidance with our construction productivity software to link the office with the field. We believe this is a distinctive offering. This is our primary area of focus. Regarding the extent to which we are utilizing our financial resources, it's important to recognize that transitioning from a perpetual to a subscription model does pose short-term challenges to our profit and loss statements and cash flow. Additionally, we are prepared to swiftly adapt to market changes, whether that involves different regions or end-markets. A pertinent example is from our agriculture business in Brazil, where our team organized a virtual trade show in the first quarter that attracted over 3,000 attendees, showcasing their creativity and ability to leverage available resources. Now, when it comes to external growth through acquisitions, I would say there won't be any significant change in our approach at this time.

Got it that’s helpful. And then maybe just kind of sticking on some of the bundled subscriptions offerings, how are those being structured where there's kind of hardware and from like thinking through a replacement cycle side? Is there a cadence built into those offerings? And maybe like just how we should think about that?

That's a good question. For example, in agriculture, we bundle our guidance hardware with our office software or field software alongside our correction services, allowing farmers to achieve the centimeter-level accuracy they need. This approach focuses more on minimizing friction in the purchasing process rather than just accounting and technology replacement. Instead of requiring three separate transactions, it can be completed as one transaction at the point of sale. In civil construction, our Trimble Platform as a Service offering, announced at ConExpo, includes a technology assurance component. For instance, with a new GPS or GNSS receiver, we can upgrade the customer's on-site equipment to provide the latest features. Technology assurance plays a significant role in our strategy as technology improves annually, not only in sensors and hardware but also in firmware and software. Maintaining connectivity to the machine is crucial for updating firmware and display software, which we achieve through our telematics product lines, also integrated into this offering. From an accounting standpoint, there's an aspect known as SSP that breaks down the value into its components, determining what appears on the profit and loss statement.

Got it. That’s helpful. Thank you.