Trimble Inc (TRMB) — Q3 2020 Earnings Call Transcript

Hello, everyone and thanks for taking the time to be with us today. Before I get started, a quick reminder that our presentation is available on our website, and we ask that you please refer to the Safe Harbor at the back. We'll start on slide 2 with the four key messages we want to convey today. First, the resilience of our team, the quality of our strategy and the strength of our financial model enabled us to outperform our own expectations in the third quarter. ARR grew 10% year-over-year to $1.26 billion, while quarterly revenue grew 1% year-over-year to $793 million. Expanding gross margins and execution on costs led to adjusted EBITDA margins of 26.8%. Our shift to a more hardware connected, software centric and recurring revenue business model is working. I want to express my gratitude to the Trimble team, who continues to perform strongly under these challenging conditions, as well as our customers and investors for your continued support and confidence in Trimble. Second, executing on the Connect & Scale 2025 strategy remains our focus. We are working to connect stakeholders and industry lifecycle data to improve and transform customer workflows. The business model transitions are an output of this strategy, not an input. Third, we continue to put organizational elements in place to enable the strategy. Most recently we have named James Dalton as our newest Board member; and we promoted from within to hire a Chief People Officer, a Chief Digital Officer, a VP of Talent & Diversity, Equity and Inclusion, and a Head of Sustainability. Fourth, our long-term conviction remains strong. We will balance cost containment and investment in innovation during the downturn. On one hand, we've reduced our cost base in transportation in the quarter. On the other hand, we continue to increase our investments in autonomy and digital transformation. We maintain our goal to exit this recession on a stronger competitive footing than we entered it; and on that note, we are in a more proactive mode of looking for acquisition opportunities, which will advance our Connect & Scale strategy. At the reporting segment level, a few strategic comments to make. In Buildings & Infrastructure, we saw better-than-expected results in civil construction machine control and guidance. In addition, our software businesses delivered a strong level of recurring revenue growth. In Geospatial, innovation is sparking demand. Our end customers have been getting back to work and catching up on project activity. In Resources & Utilities, the agriculture market has been resilient. In North America, for example, commodity prices have risen, while direct support payments to farmers remain well above historical averages. Markets such as Australia, Japan, and Brazil all performed well in the quarter. These overall favorable conditions combined with the compelling ROI on investing in precision agriculture have contributed to our growth in 2020. In Transportation, we took several meaningful steps, which we believe will position the business for better performance in the quarters and years ahead. We implemented a substantial restructuring in the business during the third quarter, which will lower our ongoing fixed operating costs. Further, we made business plan decisions that resulted in an inventory charge in the third quarter. With these difficult decisions behind us, we can now see the path for improved performance in 2021 as compared to the second half of 2020. At the macro level, market conditions have begun to improve in the transportation market with higher asset utilization, improved spot prices, and increasing capital investment. Overall, we are cautiously optimistic that market conditions will support sustained growth for Trimble through 2021. As we move from election mode to governing mode, we will follow decisions on stimulus measures, especially, infrastructure, and local government funding and policy decisions relating to trade and tax. Let me now turn the call over to David for a review of the numbers.

Thank you, Rob. Let's begin on slide 3 with a review of third quarter results. Third quarter revenue was $793 million, up 1% on a year-over-year basis. Net of acquisitions, divestitures, and foreign exchange fluctuations organic revenue declined 1%. Gross margin in the third quarter was 58.8% up 180 basis points year-over-year driven primarily by improved revenue mix and also assisted by lower discounting and new products with higher margins. Adjusted EBITDA margin was 26.8%, up 380 basis points year-over-year, a result of both gross margin expansion and cost reduction. Cost reduction was driven by structural actions and temporary factors related to COVID-19. Operating income margins also expanded 360 basis points to 24.2%. Net income dollars increased by 26% on a year-over-year basis, while earnings per share increased by $0.12 to $0.60 per share. Turning to slide 4. Our third quarter cash flow from operations was $181 million, reflecting the strong cash flow generation of our business. Operating cash flow represented approximately 1.2 times non-GAAP net income in the quarter. Free cash flow was $165 million. We paid down over $150 million of net debt in the quarter, and the net debt to adjusted EBITDA ratio fell to 1.9 times. At the end of the quarter, we had $1.25 billion available on our revolving credit facility and approximately $184 million in cash. In addition, we have no scheduled principal payments on our debt until July 2022. Our liquidity and balance sheet remains strong. Next on slide 5, we highlight some of the key metrics that we follow. Annualized recurring revenue, which as a reminder includes the annualized value of term licenses was $1.26 billion in the third quarter, up 10% on a year-over-year basis. Organic growth of ARR was 6%. Excluding our Transportation segment, Trimble organic ARR grew at a double-digit rate in the quarter. Net working capital inclusive of deferred revenue represents approximately 1% of revenue on a trailing 12-month basis demonstrating the asset-light nature of our business model. We continue to proactively manage our costs while maintaining investment in key initiatives. Research and development on a trailing 12-month basis was nearly 15% of revenue. Two additional metrics that we follow are deferred revenue and backlog. Our deferred revenue was up 20% on a year-over-year basis through a combination of organic and acquisition-related growth and our backlog was $1.2 billion, up more than 10% versus prior year. These two metrics give us additional visibility into the future revenue trends in the quarters ahead. Turning to slide 6. Recurring revenues made up 37% of total Trimble revenue in the quarter compared to 35% a year ago. We experienced recurring revenue growth across a wide range of businesses. Even in a tough economic environment, these offerings are essential to the operation of our customers' businesses. Our non-recurring revenues, including hardware, perpetual software, and professional services, experienced a year-over-year decline of about 2% in the quarter. Performance in these areas was helped by strength in our Geospatial and agriculture businesses, offset by expected weak performance in Transportation. Overall, our professional service trends improved somewhat in the quarter from the beginning of the COVID crisis, but are still negatively impacted by lack of access to our customers' facilities and employees. In terms of geography, North America was down 5%, representing a sequential improvement when compared to the second quarter, which was down 17%. Revenues in North America were adversely impacted by the declines in our Transportation business. Excluding Transportation, revenue in North America grew over 2% year-over-year in the third quarter. Europe was up 9%, reflecting broad-based improvement in project activity across the continent. Asia Pacific was once again the best performer in the quarter up 16%. Agriculture was a bright spot in Asia Pacific in the quarter as Australia recovered from a multiyear drought and the Japanese government implemented increased direct support of farmers. Our business in China, while still small grew year-on-year in the third quarter as the country recovered from the easing of COVID-related shutdowns. Turning now to slide 8 for additional detail on each of the reporting segments. Buildings and Infrastructure revenue was up 1% on an organic basis. Revenue growth was strong in our software businesses. Segment margins were up nearly four percentage points due to higher margin revenue mix and cost control. Geospatial revenue was up 7% on an organic basis, driven principally by increased sales to OEM customers. Revenue from sales of systems to the surveying and mapping sector was essentially flat versus prior year, a meaningful improvement from the second quarter when revenues were down nearly 20% year-on-year. Margins were up over 11 percentage points due to a combination of higher-margin revenue mix, compelling new products, lower levels of discounting, and strong cost control. Resources and Utilities revenue was up 16% on an organic basis. We benefited from double-digit growth in each of our precision agriculture, positioning services, and agriculture software offerings. M&A growth also played a role in the segment growth in the quarter as the integration of Cityworks has added significant capability to our offerings for utilities and local governments. Margins expanded over 7 percentage points driven by improved revenue mix, strong profitability from M&A, and cost control. While top line results in Transportation were consistent with our expectations coming into the quarter, the business performed well below our long-term objectives. Segment revenue was down 21% on an organic basis, and margins declined over 10 percentage points. The drivers of revenue and margin decline are broadly consistent with those we highlighted in our last earnings call. The rate of revenue decline did improve in the third quarter as compared to the second quarter, as did customer retention. Profitability in the quarter was impacted by lower revenue subscription transition and M&A, as well as an inventory charge that we took in the mobility business. Turning now to our outlook for the fourth quarter. We continue to face significant uncertainty in market demand across the industry sectors we serve. With the rate of COVID-19 infection increasing in many countries, our customers face renewed risks of work restrictions stemming from governmental rules to curb the spread of the virus. And the pace of the recovery in the broader economy remains uncertain. As a result, we still don't have sufficient clarity in the end-user demand to enable us to give guidance. As we did last quarter, we will provide some color on the most important trends which will drive our performance. Starting with revenue. I'll remind you that our fiscal year 2019 had an extra week. The lack of the 14th week this quarter will adversely impact overall Trimble revenue growth by approximately $23 million or about 3%. In this quarter, we will enjoy less benefit from projects deferred at the onset of the pandemic last spring. Finally, the combination of lapping our Cityworks acquisition from the fourth quarter of 2019 and the recent divestiture of Construction Logistics resulted in less favorable inorganic revenue growth momentum. Considering all of these factors, we anticipate that total Trimble revenue will be down modestly versus prior year in the fourth quarter. Nevertheless, we expect that our recurring revenue businesses will remain robust with organic ARR growth in line with third quarter 2020 performance. Note again that Cityworks, which is principally a recurring term license business, was part of Trimble for much of the fourth quarter in 2019. From a segment perspective, Resources and Utilities revenue will continue to grow in the fourth quarter albeit at a more modest rate as we lap the strong fourth quarter of last year. Transportation revenues are likely to decline at a rate comparable to what we experienced in the third quarter. The Geospatial and Buildings and Infrastructure segments are likely to see revenue trends at about the company average. Turning to gross margins. We expect margins roughly flat versus prior year in the fourth quarter. The extra week in the fourth quarter of last year did boost margins and we won't have that positive impact in this quarter. Separate from this factor, though, we do expect gross margins to continue their strong performance driven by software mix, new products, and reduced discounting. Our operating expenses will grow modestly in the quarter, up approximately $20 million sequentially from the third quarter. With our improved performance outlook for the year, we anticipate higher incentive compensation and we are seeing a gradual increase in discretionary spending across areas where spending was unsustainably low due to COVID restrictions. Assuming the revenue and margin dynamics I've described, we expect to manage to decremental margins in the low to mid-30s. Finally, I will note that we project continued healthy cash flow generation. With our leverage now at our long-term target, we have reinstituted a modest share repurchase program. We will continue to employ a disciplined approach to capital allocation as we manage our capital structure and invest for the future. With that, I will turn it over to Rob to conclude.

Let me close by turning to slide 9 and reinforcing how we progressed against our Connect & Scale 2025 strategy in the quarter. First, connecting solutions across our industry lifecycles. Two examples to share. In Construction, we released WorksOS, which integrates design data from the office with machine control data to deliver real-time progress and productivity updates for the entire jobsite. Slide 10 shows a visual of how Trimble is transforming workflows in construction by connecting the physical and digital worlds. This is how we bring together the office and the field with our hardware and software in a unique Trimble way. Today, we put a constructible digital engineering model on the blade of construction equipment. With WorksOS, we can dynamically bring back surface data and view progress to plan. In essence, this workflow positions us to take the 3D constructible model and next add dimensions of cost and schedule to create a 5D model. From here we will integrate this enriched model into the construction ERP system with additional financial and asset management views. The aggregation of all this data, coupled with artificial intelligence and machine learning algorithms is a further step towards an autonomous future. Back to slide 9 and another example from construction, we launched augmented reality into our Trimble earthworks machine control and guidance solution. Augmented reality is available in the cab of the excavator, which helps operators more easily understand 3D models, cut/fill information, slope data, and other reference points. Second; delivering breakout innovation. Two examples to share. In Geospatial, our new GNSS receiver, the R12i, has been a market success. The innovation in the GNSS receiver is the integration of inertial technology that enables robust tilt compensation. What this means is that the surveyor can work productively and effectively in challenging environments. We are making our customers’ work easier. The second example is highlighted on slide 11. Our structural BIM software is used for many types of materials and projects. This past month, the team announced the winners of our 2020 BIM awards. On this slide, you will see the winners for best infrastructure and best commercial projects. A closer look reveals that these projects deliver more than just incredibly detailed design visualization. What these engineering teams are delivering are the precise specifications needed to automate fabrication for each individual component, as well as instructions for assembling those complex designs in the field. This is what we call 'Constructible Design,' and these two projects are exemplary. Third; accelerating our business model transformation. In Construction, we sold our first Platform-as-a-Service offering in our civil construction business. We are delivering technology assurance for our customers while integrating construction cloud services and world-class support to keep our customers’ operations current and optimized. Fourth; we are taking actions that enable us to efficiently and effectively scale our business. Last week, we closed on the divestiture of our construction logistics business; and in the third quarter we completed the acquisition of a business that further expands our positioning services network to now cover over one million square miles in North America. We are making decisions and investments in the area of cloud enablement, data management, and artificial intelligence that are connected in approach, which will enable us to scale to meet the opportunity ahead of us. With that, I’d like to thank everyone for taking the time to be with us today, and a special thank you to our global Trimble colleagues. Operator, let’s please go to Q&A.

Hello. Thanks for taking my question. I've got the first one. Just wanted to follow-up on the strong ARR growth, which continued in this quarter. And what I was wondering is, if you can talk a little bit more around the growth drivers of the ARR as in how much is the organic expansions and new customers you're seeing versus how much it is the business model transition of on one side having lower licenses. Yeah that's kind of my first question. Thank you.

Hi Gal, welcome back. Regarding the ARR growth this quarter, it's 10% at the total company level and around 6% organically. Excluding the Transportation business, we would see double-digit growth in ARR, particularly within the construction sector, specifically in the Buildings and Infrastructure segment. The growth comes from both new and existing customers. We are finding ways to sell to new customers in this digital landscape. For instance, the SketchUp business saw its ARR grow by over 50% year-over-year, driven by an expansion of the addressable market and acquiring new customers, which is also true for the Viewpoint business. However, compared to pre-pandemic levels, there is a stronger emphasis on existing customer penetration across the total portfolio, likely for obvious reasons. Does that help?

That's very helpful. Thank you. As a follow-up, you mentioned one of your strategic approaches is connecting the industry life cycles, and you specifically discussed construction. I'm curious about how connecting these elements, which used to be best of breed and are now becoming a suite of products, impacts the average contract size and sales cycles. Furthermore, do you find that you have a new buying center within those companies where you previously sold just one tool?

If I use construction as an example, the connection aspect of our Connect & Scale strategy is focused on linking stakeholder data solutions throughout the industry life cycle, which includes construction, agriculture, transportation, utilities, and forestry. For instance, in construction, looking specifically at our Viewpoint business, which serves as the construction management system for companies, we have achieved over $1.5 million in new annual contract value in the past year driven by customer demand. We are still in the early stages of implementing our strategy, where customers are seeking to create suites or bundles of solutions linked to that management system. For example, in construction telematics, the data on asset utilization can enhance job costing found in ERP systems. In our structural business, fabrication management integrates with material estimates recorded in back-office software. In the mechanical, electrical, and plumbing sector, we are seeing the merging of estimating, pricing, change management, job costing, and procurement into that main management system. Our customers are actively requesting the integration of different Trimble technologies they possess, and we are beginning to secure additional new customers due to our unified approach. Recently, we engaged with an ENR 400 customer who made a significant commitment to Trimble. My discussions with their CIO indicate that we are advancing our sales efforts to a more C-level engagement, which influences the size of our contracts. Instead of having three or four separate contracts, each potentially valued in the tens or low hundreds of thousands, we are moving towards total contract values that resemble $1 million deals.

That’s great, very helpful. Thank you so much and congrats on a great quarter.

Thank you and thanks for the questions. Rob, just first off, I just wanted to ask maybe throw a little bit more color around the Transportation side of the business and maybe how you're viewing this quarter. It sounds like you took some structural costs out of the business in the quarter. But from a revenue and op margin basis, I mean clearly this would suggest maybe a bottom in both of those metrics. And do you see this business starting to form the basis of some growth in 2021 once we get through the year here from a revenue perspective?

Rick, I think the situation is quite similar to what we reported last quarter. We met our topline expectations, although they fall short of our long-term goals. I want to emphasize that we can achieve the numbers we set as a starting point. The narrative from last quarter remains: we anticipate that the actions we are taking now will lead to margin improvement, more noticeably in the second half of next year compared to the first half. The nature of our recurring revenue business means it takes time for things to ramp up, but once they do, it creates a cumulative effect. So, I see it quite similarly to how you described it initially.

Okay. And then just as a follow-up my other question. Just when I look at the hardware revenue in the third quarter, obviously, lots of noise around the second quarter. But I'm curious it did improve double-digits kind of 13% sequentially. Is there any message in there other than the second quarter was really bad? But is there any message in kind of the double-digit sequential rebound on the hardware side of the business just as a basis for follow-on software sales?

Hey Richard, it's David Barnes. I'll share a few observations. One factor in our performance was catching up on projects that were stalled or delayed in Q2, which certainly helped. However, that's not the only reason. As Rob mentioned, we have seen significant innovation in the Geospatial area, contributing positively to our revenue trends and margins. Additionally, while it's challenging to identify a clear trend during these uncertain times, we are witnessing some improvement in several of our hardware sectors, which you correctly noted come with software attached. So, it's a combination of all three factors.

Okay, very good. Thank you.

Hi, good afternoon. Rob, could you share some insights on the fundamentals across the different end markets? You typically provide valuable perspective on construction activity from a broader macro viewpoint, especially now that a significant infrastructure bill seems unlikely. Additionally, regarding Transportation, I've noticed the fundamentals have improved, particularly with a significant rise in truck orders. How do you assess the fundamentals in both of these industries? Thanks.

Sure. Hi Ann. I'll begin with the Buildings and Infrastructure sector and discuss the stakeholders involved. A good starting point would be the owners, particularly focusing on state Departments of Transportation as owners in the U.S. I would say the DOTs have shown more resilience than we anticipated, which is a positive indicator. Moving on to architecture, the ABI remains below 50, but September showed more encouraging trends compared to August. Therefore, while the ABI gives us a sense of macro health, it doesn't reflect our architecture and design business, where we've experienced nearly a 50% year-over-year increase in ARR. Focusing on civil construction within North America, we've observed a decline in backlog among civil contractors, while civil engineers have experienced an increase, suggesting early signs of recovery that might benefit contractors. Regarding our Viewpoint business, general contractors are indicating a slowdown in bookings and hiring velocity compared to 2019. Looking beyond the U.S., the construction PMI presents a mixed outlook, with several markets, especially in Europe, anticipating growth next year. Analyzing the backlog of some of the largest construction firms in North America and Europe reveals that while residential projects are flourishing, commercial projects have declined, and both EPC and infrastructure have also seen downturns. In summary, while some end-market activities are shifting, the current numbers are certainly better than what we saw in March, April, and May. However, there's a conflicting message regarding sustained demand. We do believe there is clear demand for digitization and better access to information, which positions us well in the long term. Now, turning to the Transportation sector, recent reports indicate that Class Eight unit sales are below last year's levels but have improved over the last few months. We are witnessing higher asset utilization, improved spot prices, and increased capital investments, indicating that Transportation is in a significantly better position than it was a few months ago. I'll stop there and see if that addresses your question.

Yeah. No, that's helpful. It's always good to get your perspective from what you're seeing kind of feet on the street. And then again, on Transportation more on the margin side, you had talked about last quarter, the lower margins and you gave us a contribution. I think it was 3% macro, 3% Kuebix and 3% subscription conversion and then the rest to get back to the 20% was going to be kind of self-help. Could you provide us any kind of qualitative – just where you think you are today in terms of how much of the margin was macro? How much was Kuebix? How much was subscription conversion? And then also how much of the margin decline was actually the restructuring and the inventory write-off?

Hey, Ann, it's David Barnes. I'd say the factors that we talked about last quarter are similar. The new one is that, we updated our plan going forward on the mobility side of the business. And running through those numbers, we did take an inventory charge, which essentially explains all of the delta between the operating margin in the second quarter and the third quarter.

Okay, but I think you said, you took some restructuring charges also. Or was the inventory write-down the restructuring?

No, we did a workforce reduction. But Ann that shows up in the non-GAAP restructuring charges.

Okay. Okay. That's helpful. I appreciate that. Thank you.

Thanks, Ann.

Thanks so much. As you have worked through this restructuring on the T&L business and you're looking at some of the changes in the ELD offering, can you talk about kind of early returns and feedback from customers in terms of engagement and in terms of the receptivity? And how do you generally think that transition is going to progress? How long should we be thinking about this working through a transition period?

Colin, I'll begin by discussing our financial setup and then shift to our strategic approach. Financially, we expect to see more of the flow-through improvement impacting our bottom line in the second half of next year compared to the first half of 2021. We are making strategic moves now to position the business for long-term success. On the strategic side, our focus in Transportation is on creating a connected supply chain, which involves linking carriers and shippers. This approach is evolving positively. Specifically, it involves connecting drivers, trucks, and fleets. We believe the three key components of our technology stack are telematics, which we refer to as mobility; our back-office operations known as enterprise business; and our mapping technology for routing and navigation. We think that by integrating these three areas, Trimble can offer unique solutions for connecting carriers. Additionally, we aim to connect carriers to shippers, which is the reason we entered into the Kuebix business at the start of the year. From our customers' perspective, we're noticing a strong interest in partnering with us because we can provide a comprehensive solution that combines all these technological elements.

That's super helpful. And just adjacent to that the GM Super Cruise hands-free driving is actually getting pretty good reviews at this point. Can you give us a bit more color on that relationship how deep that is and if some of those reviews are helping open doors for you guys in the automotive market as folks look to push into Level four and Level five ADAS solutions?

Well yes I'd start by saying kudos to GM. They've been very good to work with. They've been supportive. And clearly the success they've had in their program has been a catalyst to open doors for us with other automotive OEMs with Tier one suppliers and has also been relevant to opening doors with across the heavy equipment OEMs and markets like construction and agriculture. And sort of the connection point with one of the acquisitions we announced in the third quarter with our positioning services business that was the acquisition that expanded our footprint in North America to now be over one million square miles. And that really is for that to provide that ubiquitous high accuracy high quick convergence time accuracy to the customers.

So can you just provide a framework for how to think about the bundling opportunities in Building and Infrastructure? How much is bundled today versus where it could go over the next like one to three years? And what do you need to do in terms of distribution strategy to achieve this goal?

I'll start by saying that the intersection of our product strategy and go-to-market strategy is crucial. On the product side, it's about understanding our market segments and customers, as well as their buying and user personas. When we discuss our Connect & Scale strategy, it essentially focuses on customer success and the customer lifecycle, driven by that customer persona to determine the logical technology bundle. Our ongoing effort is to make that bundle easier to consume, adopting a good, better, best framework. Simplicity is a key emphasis in our product offerings, as we have a lot to offer, which can create complexity. I believe elegance comes from simplifying our product offerings. On the go-to-market side, we begin with customer segmentation. For mid to large-sized customer opportunities, this involves having a single point of contact for the customer, along with specialists supporting that account manager. We have strategies where both representatives and partners can sell individual solutions, but at the key account or strategic account level, we conduct business differently. There's no one-size-fits-all approach; we adapt ourselves to seize opportunities and effectively meet the customer where they are.

Got it. That's helpful. And then just one thing that definitely stood out to me was just the margins to the positive side for the third quarter. And as we're trying to think through the puts and takes as we go into next year and I recognize you're probably not prepared to give guidance right now, but can you give a framework for thinking about how to think about some of the temporary costs that are coming back next year? And then just from like a margin perspective, do you see like what's in your backlog a mix supportive of similar margin levels that you received this past quarter?

Hey Chad, it's David. I'll start by noting that, as you anticipated, we're not in a position to provide clear guidance for next year. There's a lot of uncertainty, but if we assume the economy will recover, many projections suggest we'll return to 2019 levels by 2021 in both the U.S. and globally. We should aim to at least keep pace with or exceed overall economic trends. Regarding margins, the primary factor improving our gross margins is the revenue mix, and that trend is likely to continue, supporting ongoing improvements at the gross margin level. However, we expect operating costs to grow faster than revenue next year, and some of the cost-saving measures we've implemented this year won't be sustainable. We aim to meet with our customers more, which poses logistical challenges. Our plan for the year is to maintain operating margins close to current levels, with increasing gross margins providing some relief for slightly rising operating expenses, but this is just a preliminary framework.

That's helpful. Thank you.

Hi. Thanks for taking my question. One for Rob and this builds on maybe the last question. But you talked about some of the go-to-market changes with your Connect & Scale 2025 initiatives. You talked about one single point of contact for your larger customers and maybe a rep and partner model for your smaller customers. Where does this kind of sit today? And I guess how much more work would you need to do to maybe get to this level?

Hi, Jason. I would say we're just beginning this journey, and I see that as a positive because it allows us to gather valuable insights. The success we've experienced so far is more a result of our customers pulling us in rather than us pushing our offerings. This early feedback indicates that we're on the right track by actively listening to our customers and addressing their needs. About a year ago, we appointed a Chief Data Officer, and I find it exciting how we can utilize data at Trimble. We can think about artificial intelligence and basic analytics to compare our customer groups across different products and identify those already using multiple Trimble solutions. This helps us understand logical bundling opportunities for different types of customers. By analyzing our own data, we believe there's significant potential to guide our go-to-market strategy. In terms of revenue, we're currently generating $1.2 billion on a TTM basis in this segment, which is primarily software-based, and we serve a variety of stakeholders globally. I want to stress that there's a great opportunity within our existing customer base, in addition to a strong value proposition for potential customers we haven't yet reached.

Okay, great. And then, next question. It looks like Europe saw some nice improvement in the quarter. But maybe with some regions, maybe going back in the lockdown, can you maybe speak to any more recent trends? Maybe, any positive engagement? And then, do you feel these businesses are better prepared at this time, since we just went through it maybe six months ago?

Hey, Jason, it's David. I'll tell you that what our teams are seeing is while you do see – you do see lockdowns in many countries around Europe they feel different from the first time around. And most of them are accommodating to project work, like what our customers do, that were for a while, sort of, out of operation in the spring. So you never say never, that it might tighten down. But surprisingly, our distributors and our end customers have been remarkably able to do their work even in this second wave.

Great. No. I appreciate that. Thank you.

Hi. Good afternoon and good evening, everyone.

Hi, Jerry.

I'm wondering if you could talk about the e-Builder and Viewpoint organic growth performance just, so we can see how the businesses performed through the downturn here. And if you could talk about bookings growth and the pipeline. I think, I heard you say Rob, Viewpoint growth reaccelerated. Can you just expand on those points?

Yes. To provide you with some information, Jerry, when we look at Viewpoint and e-Builder together for the quarter, annual recurring revenue increased in the high teens. This indicates strong progress. The net retention for both businesses exceeded 110%, which reflects positive results. That’s likely the most conclusive update I can share regarding the financials, specifically the top-line figures. As for bookings, Q3 was a solid quarter for bookings in the construction software sector, and this includes good performance from Viewpoint as well. The recurring annual contract value saw a strong double-digit increase. However, it's important to note that some of this growth stems from Q2 business that carried over into Q3, so I want to be cautious not to exaggerate that. Overall, there has been commendable execution by the teams in those divisions.

And nice to hear about SketchUp, posting its second consecutive year of over 50% user growth. One of the big initiatives that you folks have cited over the past call it a year or so, is accelerating the push for the organization towards subscription. Can you talk about how much of the OpEx discussion, David, you spoke about earlier is around your efforts to maybe accelerate that shift into 2021? I bet the numbers that you're seeing from SketchUp and elsewhere in the subscription side are pushing the timeline earlier than I think what we probably thought of at the Analyst Day, but maybe you can comment on those items if you don't mind.

There is an element pushing us forward earlier than discussed at Analyst Day. The revenue composition is ahead of what we anticipated. The pandemic has certainly affected this, but we’ve seen strong performance in recurring revenue. This context confirms that we are moving in the right direction. Additionally, the ongoing trends create a favorable environment for us. Regarding our Connect & Scale strategy, I have mainly focused on the Connect aspect in previous calls. However, it’s crucial to assess the systems and processes we have throughout the company. In the third quarter, we appointed a Chief Digital Officer, which I believe will provide excellent leadership for our journey. We are investing in this area, and you can see the impact of our CapEx spending reflected in our free cash flow. We will invest in CapEx because we need the foundational architecture to facilitate further conversions in the business. We need this architecture to allow our bundles to operate at scale. While I expect these developments to occur sooner than what we predicted at Analyst Day, I want to remain cautious about the pace, as we must continue to build the necessary infrastructure to scale this opportunity effectively.

Okay. Thank you.

Thanks, Jerry.

Hi, everybody. I had a couple of kind of strategic questions, if I may. On the construction side on automation, would you say that you're finding yourself a little bit more in competition with your OEM partner customers or finding yourself as a more valuable partner or maybe some of each as you broaden out your potential reach? That's really my first question, just how that dynamic is shaping up as different people make different investments and facets of automation?

Hi, Rob. I believe it's a bit of both. The easiest way to segment is by the size of the organization. If you're a Tier 2-3 OEM, it clearly makes more sense to collaborate with a larger technology provider rather than invest in those capabilities internally. We always start by discussing the mixed fleet, which is fundamentally important. An autonomous site will not function effectively if there are multiple types of proprietary equipment operating together without communication. Our strategy in autonomy includes positioning technologies and automated equipment movement, but this is of little value without a comprehensive understanding of the tasks to be performed. By grasping the physical environment in which these machines operate, we can develop optimal plans for the tasks and serve as the central brain for the site or the farm. This operational center for the mixed fleet is a crucial part of our strategy. As for our tech stack, we've discussed for years our machine control and guidance systems in civil construction, referred to as steering and guidance, and in agriculture, known as automation. This represents a form of autonomy that falls between Level 1 and Level 2, and we are progressively moving up the automation spectrum towards Level 3. We identify specific machine types and workflows that would be suitable for an autonomous work environment and believe we have a comprehensive array of cloud perception, optimization, and control technologies that are important in this area.

Thank you. This is an interesting area. Regarding your decision in transport and the inventory write-down, could you please clarify if you are exiting any product lines? Are you discontinuing a product and replacing it? Additionally, how do you view customer traction in this area and the potential to increase truck production? Thank you.

Hey Rob, it's David Barnes. As you look at the revenue line, it's clear that the volume of business we're handling is decreasing. The restructuring acknowledges that the business has contracted and is smaller than before. Much of our strategy to enhance customer retention and satisfaction involves streamlining our product offerings and replacing outdated technology with more maintainable options moving forward. Supporting fewer platforms means we will need fewer resources over time. The inventory write-down was specifically related to commitments made when the business was larger and healthier. We have refined our strategy concerning customer targeting and pricing, and we've updated the inventory valuation to align with that plan. We are not exiting any businesses; rather, we are optimizing what we have. As Rob mentioned, we aim for the inflection point where we can gain momentum in key metrics like ARR, revenue growth, and margins to develop what a successful business looks like for Trimble in the second half of next year.

Okay. So for clarity you're not like exiting a kind of business you're just I don't know if 80-20 is the right way to state it for you guys, but trying to serve the customers with a less diverse product set or such and that's what led to the right time.

No that's right. No we haven't exited any business. We're still serving the customers' needs just doing it more efficiently with products that are fit for the future.

Perfect. Thank you so much.

Yes. Hi, thanks. Thanks for squeezing on here. So I wanted to follow up on subscription transition talk and just get a better idea for on a relative basis where B&I is in that transition relative to the software aspects of your other segments. And then digging into B&I, specifically I was wondering if you have noticed any interplay between the subscription transition and maybe the size of the customers that are signing on, presumably get the large customers to sign on first that drives some of the subscription transition and then by network effect some of the smaller stakeholders start to sign on as well and maybe that accelerates the transition further. Are you noticing any sort of interplay there?

So I'll start with B&I and where we think we are on the software transition. I would describe that more in middle innings maybe early middle innings on the software transition. In Transportation, I would say we're in the probably solid middle innings on that business maybe in the late middle innings on that one. Our enterprise business which is the back-office software, we are executing a transition to a subscription model in that business. The rest of the businesses really already are subscription and Transportation. So that's a little further ahead mathematically than B&I would be. I'd say Geospatial is a very small aspect of it. So it might be early but it's a lower dollar amount. And then the Resources and Utilities reasonably far along. And one of the strategies we have Blake is also looking at hardware businesses and rethinking the business models on some of those. So while you're asking about software I just also want to comment that I think if we take the civil construction business we launched what we call Trimble Platform-as-a-Service in the quarter and that's a new way to monetize the business, where think of it as a bundle of the machine control hardware with the software with ongoing support and service providing technology assurance for the customer. So we can upgrade functionality over the lifetime of that. So we're really taking a fresh look at all the business models we have. And then when you ask about the interplay with subscriptions and customer sizes, the one that we talk about the most is actually at the owner level. And our belief set is that if we can – when the owners and I'll say, some of it's hearts and minds and some of it is the owner business that we have whether that's a Department of Transportation or the owners that – the capital programs that we manage through our e-Builder business, where we manage hundreds of billions of dollars of committed construction volume, we see that as a mechanism or a catalyst to promote the use of technology into the field. And then at some level I guess you could say once you've done that you could look at the general contractors as the catalyst win the GC, win the subcontractor and think about the waterfall as such.

Really appreciate the answer there. And one follow-up if I could just on M&A. Any portfolio gaps in B&I that exist, particularly in light of the WorksOS launch, which seems pretty compelling? And then could you maybe contextualize the divestiture of the construction Logistics business in light of WorksOS? Is it that you're trying to focus more on the owner or contract or subcontractor and maybe away from the smaller inputs in the stakeholder chain? Or what was sort of the strategic driver behind that?

I'll start with the divestiture of the construction logistics business. It's a long-standing part of our company and our initial venture into telematics years ago. From a financial and governance perspective, management is tasked with allocating capital efficiently. When evaluating the construction logistics business, it became clear to us that it was a relatively concentrated and penetrated market. We determined that the best future for this business would be under the ownership of Command Alkon. This decision also reflects positively on the employees of that business. We wish them great success as they integrate with Command Alkon. Strategically, to optimize capital allocation, we needed to decide whether to buy or sell, and given the market conditions, we believed selling the construction logistics business was the right choice. This decision does not alter our commitment to our connected strategy or indicate any shift in our intentions. Regarding acquisitions, instead of pinpointing specific gaps, we're focused on pursuing acquisitions that further our Connect & Scale strategic objectives. On the connect side, we're looking across the lifecycle and among stakeholders to identify where we can provide additional value. Many of these opportunities may involve smaller companies in construction tech, which we see as potentially becoming features within a larger organization like Trimble. These acquisitions could enhance our workflow or add valuable data elements that align with our vision. That's our approach to potential acquisitions.

Understood. Really appreciate the comment. Thank you.

Great. Thanks. I just want to quickly follow up on Rob's comments regarding M&A and the product portfolio. What is our current status on divestitures and portfolio evaluation? Is there more to be done there? How do you feel about the current outlook? Regarding the acquisitions you are making or considering, are they mostly aligned with the business and pricing model you aim to achieve, or do you anticipate a transition period for many of them as you integrate them into the business?

Let me begin with the divestiture question, and I'll likely need you to repeat the acquisition one because I didn’t catch all of that. Regarding divestitures, we are continually reviewing our portfolio. If we consider the two factors of strategic fit and financial performance, we have our perspective on our own portfolio. The timing needs to be right for both us and a potential buyer. I want to clarify that there aren’t significant parts of the Trimble business that wouldn't be included. I believe we are taking the right approach; we have a responsibility to allocate capital efficiently and effectively. We’re assessing opportunities in construction, agriculture, transportation, and our core survey business to identify where we can continue to excel, increase our market share, and effectively implement our strategy. If we find ourselves in a less than optimal position in any of these areas, it would impact our view on strategic fit. I want to emphasize that we are being thorough in this process. It's an ongoing effort that we should consistently engage in. So that addresses the divestiture question, but I didn't catch the acquisition question.

Sorry, I wasn't clear there. I was just asking, if the acquisitions that you are doing or looking at, are those businesses already kind of in subscription model structure, in terms of go-to-market. Or are there likely to be transition periods to move them over to that et cetera, especially where it makes sense?

That's a good question. I would say there are two main types of acquisitions we consider. The first type is software-centric acquisitions, and the second type relates more to autonomy, which from an accounting standpoint, will likely fall under hardware. How these acquisitions will generate revenue in the long run is something we will have to observe. For software acquisitions, we don't strictly require them to already operate on a subscription model. Ideally, a subscription model is beneficial, and if a business is already transitioning to one, that’s even better. However, we don't enforce that as a strict requirement in our acquisition evaluations.

Great. Thanks a lot.

Thanks, James.

Thank you very much everyone for joining us on the call. We look forward to speaking to you next quarter.