Trimble Q2 2024 Earnings Call Transcript

Thanks, Kristen, for the question and good morning. So, let's break down a little bit there within the ARR growth, starting with like a congrats to the team. It really was a terrific post of a number for the quarter. About two-thirds of that growth is coming from existing customers and one-third from new logos. So, we really for the breadth and depth of the portfolio we have, there's a great ability for us to package cross sell and upsell, and that comes in the form of the Trimble Construction One offering where we now have over 20 pre-packaged offerings to serve specific Personas across the industry continuum.

If we look at the subsegment that we're serving within construction, where we see strong growth are in data centers, we see the onshoring and reshoring of work, renewable energy work. These end markets have been strong and probably data centers have been the strongest. We actually have also had some growth in residential. So even though there's weakness there, we've seen growth there. One thing that's unique to, Kristen, about the data set that we have, because we're managing over $1trillion of committed construction programs through our systems, over $0.5 trillion through the ERP alone, is there's a lot of data we can see. And so, in North America, we can see that jobs are up, hiring's up, that is, jobs are up. We can see that the volumes are up. We can see geographic strengths within states. Here in the U.S., we can see that states like South Carolina, Florida and Texas have been very strong. We can see states like New York and Louisiana have been weaker. So, we're able to get a good insight into the market and then differentially across the world, North America for sure is performing better than Europe and Asia Pacific. So, I hope that gives you some color.

Yeah, that's a great question, Kristen. We're still in the very early innings of monetization. We're paying a lot of attention to it. You talked about the GitHub copilot work, that's internal productivity. So, the lens I have on this is there's a set of work in AI that's for making us more efficient and productive inside our own house. That could be how we're doing customer support using the chat bots. It is the productivity through the code development. It's getting sharper about how we do our marketing efforts, leveraging AI. When we go more customer oriented, and those are the examples I had in the prepared remarks, and then we put a slide in the appendix with some hyperlinks so you can go look at some examples of what we're doing in the market. I'd give you two breakdowns on that. One is that we see it as some of this as part of continuous value delivery to our customers, that is, they're paying subscriptions. We typically get price increases every year. I think there's a reasonable expectation that we're providing incremental value, and in that sense it's part of the offering that we do.

The distinction I would make is when we have more breakthrough productivity or breakthrough value that we can provide customers, we think about, okay, what's the quantifying that value? And then what's our fair share of that capture? One example I can point out is within our Transporean business, as the team developed, has developed autonomous procurement and autonomous quotation capabilities, and when customers are using that instead of the traditional methods they've used and solutions they've used within Transporean, we're monetizing that at, I think, of two to three times -- probably to two times factor, poor execution because the result is that much better for customers. So that's one example of where we're monetizing, and I'd say we're still pretty early in it. And you're right that this is certainly evolving in the monetization side of things.

Hey, thanks for the question. Relative to the election, I mean, you typically hear that in these periods that people will do a bit of a pause to kind of see which way the wind's going to blow, and we'll see which way the wind blows. We believe we've taken that into account in the guide that we've put forward. And if you think about the guide, think about the visibility we have with the ARR business is much higher than we would have on the, say, the hardware business, which manifests more as a book and burn. So, we have visibility into the rest of the year, differential visibility. 60% of our revenue is now recurring as a company, 75% of our revenue overall as software services and recurring. It's certainly reasonable for us to, and all of us, I guess, to think about what the impact of the election might be on our business, whether that's around regulation or whether that's around tariffs, depending on which way this goes. But we believe we've got this taken into account.

Yeah. Thanks, Zane. Hey, the main reason for it really is the mix shift as our AECO business continues to grow at a faster rate than the field systems. And we have a little bit better first half, and those bookings start to flow through in the second half. And so, I think what you're seeing is then that mix shift, which obviously the gross margin on the AECO business is higher than the field systems. And so, you're seeing that sort of flow through in the back half of the year.

Sure. Hey, let me frame this in two ways. One, with the first half of the year, and then secondarily with the second quarter. Specifically for the first half of the year, the bookings growth in the Transporean business was in the mid to high teens. So, super pleased with that performance in context of what still is a freight recession. And so, the way then you can grow that bookings, it's coming through winning deals. And in the second quarter, the team won over 250 deals. Those deals come in the form of landing dozens of new logos and also doing land and expand plays within the existing customer base.

There are certainly some pockets of end markets that are stronger and others that are -- others that are weaker. There's been some strength coming back on the retail side, some of the building materials that side of the business has been lower for the business. The team also had some success getting traction here in North America as well, which we were pleased by. And then last thing I'll comment on is we've got more plays happening between the Transporean and Trimble transportation business. Still early in that, but I like what I'm seeing in terms of the teams working together. So, add that up and that's the color around the numbers.

Sure, Jerry. So, the growth is about two-thirds from existing customers and one-third from new logo customers. And you're right, the team has consistently been posting excellent growth, and this is excellent growth at scale. I mean, AECO alone is a $1.16 billion ARR business today, growing in ARR in the high teens, operating at a rule of 44 in the quarter. It was over a rule of 50 in the first quarter. Net retention is about 108% in the business. So, a lot of good things happening in the business. We believe we're winning because we have a unique value proposition. A value proposition is delivering productivity, quality, safety, environmental sustainability to our customers. It's helping them solve higher order problems for customers and abilities, especially when we have the TC -- where we have the TC1 offerings available as Trimble Construction One, it reduces friction in the buying process. It makes it easier for customers to do business with us. It's doing things with Trimble that you can uniquely do, that is connecting work in the field and work in the office. So, when we look at the base of the customers that we have, we're bullish in our ability to continue growing this business, especially when I look at that two-third, one-third split and two-thirds being from existing customers.

Hi. Good morning, Jonathan. So, we moved in the AECO business, we moved to named account selling model at the beginning of the year. It was definitely a huge change for the team and for the organization. And if you think about it, if you're going to, if you rewind, call it, five, 10 years ago, we might have sent multiple sellers into talk to a given customer. Today, that moves to having one person who's got accountability for that account, and then accountability to bring in the specialist behind her or him in order to best serve that customer and meet the breadth of needs. That's one thing to have a named account model that would be incomplete if you didn't have the product to go along with it. And that's where the bundled offerings TC -- Trimble Construction One, namely arms those account executives with the ability to offer customers unique value proposition. And then what's behind that are the underlying processes and systems. So, we've had a lot of, I'd say, growth around our sales operations or sales enablement motions. And then with the systems underneath that, we've, you know, the work and the investment we've made over these last years has upped our game in terms of licensing and entitlement engines, as an example, then we're getting more 360-degree views of our customers, which helps -- all of which helps enable the sellers to go do what they do at that named account level.

Yeah, so we're bullish on land and expand plays within the platform that we're offering. So, when we can attach new capabilities to the existing base of solutions and customers that we have, we think that's a winning motion. And we've seen that with the two acquisitions that both Phil and I mentioned in the prepared remarks about work in the field and as well as payments. It stands to reason that payments are going to link to an ERP. And guess what? We have the ERP through the viewpoint business. So that's the essential -- let's call it, value proposition or essential linkage. We also have the project management systems. The need to be able to pay subcontractors is a given in the industry with a natural place for us to be, and we think a winning motion. Phil, is there anything else you want to add to that?

No, that's pretty good. Thanks.

Yeah, we've seen the most strength in North America. Actually, Europe grew on an organic basis. That's going to be from the Transporean business, ex-Transporean, it's been a tougher market in Europe, but still holding up on a baseline. Differentially around the world, Asia Pacific was hardest for us in the quarter. I'd say think of a couple places. China continues to be a harder place for us to do business. In Japan, the weakness of the yen makes it more expensive to do business with us. And those have been a couple pockets of weakness. We're paying attention to what's happening in Australia, New Zealand, the state of the economy there. So, the Asia Pacific weaker, North America the strongest, those are the bookends. And that plays into our thinking in the second half of the year.

Yeah, good question, Rob. So, let's talk about the underlying technology itself. I mean, you go back 47-plus-year history started in positioning technologies, as positioning technologies have continued to evolve and innovate continuously over the years, we moved from -- or we got into what's called RTK positioning decades ago, and now we can deliver those same, which deliver corrections to create that highly accurate, ubiquitous, fast convergence for that high accuracy needs, which historically have been for us in agriculture survey, construction markets. We can now deliver those through satellites, so you get more global ubiquity of the coverage of that. And then we ask ourselves the question of where else would this high convergence, high accuracy signals be of value. Automotive markets were a natural extension for us. So same technology into a new market segment, whether that's your ADAS systems or on the path to autonomy or its redundancy and other positioning technologies or sensors, I should say, on the cars. So that's the context for it and for that market, and extending the technology into the automotive market. And automotive is a market that we do have some history in through navigation technologies.

Now at the, you mentioned General Motors Super Cruise program, yes, it's exactly the same topic that we're talking about with additional OEMs. I believe it's probably less than a dozen today that we have design wins with. And then there's certainly a pipeline that's bigger than that. When you think about the design win, it can take you a long time to get to that design win. Once you have the design win, you've got a pretty long lifecycle. Actually, I would say a very long lifecycle, multi-year, call it plus or minus seven years over that design win. And if you kind of apply some software metrics to it and you think about a lens of lifetime value over customer acquisition cost, it's a good business to be in once you can win that OEM.

It's actually very slow to get to revenue. It's good news and bad news. Bad news being it's very slow to get to being able to recognize that revenue. The good news is that we can recognize that revenue over a long period of time. So, I'd say to date, over these last few years, as we've been getting these design wins, it's had more cost associated with it than revenue and gross margin. So, it's been upside down for a few years. We're getting to a point of accumulative base as we start to recognize that revenue. And it will look better over the next few years as that cumulative base steps up. It's the nature of the revenue recognition over multiple years that 17% ARR growth in field systems has a little bit of that automotive segment, but that's not the fundamental thing yet that's growing it. And also, good news is, I would say that's the kind of visibility we can have years forward in field systems that we would have never had historically.

Hey, Tammy. It's Phil. Thanks for the question. So, I mentioned this in my prepared remarks, but we've had some churn that we've already talked about in the North American mobility business, and that really starts to manifest itself in the second half. So, a big portion of the second half drop that you see is really due to that. But as Rob said earlier, we're still seeing the performance around the Transporean business, the maps business that's offsetting some of that. But that's really the headwind that you see in the second half is that churn that we previously disclosed.

Yeah. Hey, Tammy, it's Phil again. So, yeah, so as we talked about this from a capital allocation standpoint, we continue to pivot our resources toward the AECO business and in particular that sales and marketing, which ultimately drives the ARR growth and the revenue growth in the future. And so, we see that continuing as long as, you know, we have the pipeline and the bookings. And the nice thing about, you know, rule of 40 plus business there is if we do see slowdowns, we can easily pivot our opex and still maintain a rule of 40. But as long as we continue to see the growth and the opportunities there in that business, I think you'll see us continue to allocate our resources toward that.

Hey, good morning and thanks for the questions. I'll start with, this is Rob, and I'll start with the AECO topic. So, yeah, we have talked about the ARR growth, the two-third, one-third split coming from cross sell versus the new logo. I think the additional color I can add to your question is as follows. We spend a lot of time segmenting the market, whether that's on the -- or call it the end markets. It could be residential, non-residential infrastructure. It's also on the customer types. We think about where we serve the architects and designers, the engineers, the construction companies and the owners. There's segmentation there. There's also a level of segmentation in terms of the size of the customer. So, think about mid-market customers. Think about large enterprise customers, and then lower down, think about the small, medium sized businesses. One of the areas where we've been able to pivot is where we've seen a little bit more weakness on the midsize customers. We pivoted our motions and our teams into the small and medium sized business market here in North America. So, we've got the data and the ability and the products and the go-to-market model aligned to go find the business where it is. And I think that's one of the things that's differential about us.

So, we have a broader product offering, serving the broader ecosystem, serving more participants in that, serving it more globally than our peers in the industry, and then being able to move our motions up or down market, depending on where more of the activity is taking place. We also have a channel. We've had a channel at Trimble, I mean, Trimble's history. We've got decades of managing Trimble, if we look in the AECO business, probably 10% to 15% of our bookings and the quarter came through our channel. So that's also a motion that we've had for a long time.

And on the transport side, you asked about spot rates in Europe. They are, I would say, just marginally better. They're not better enough to be really moving the needle yet, but you're right to look at that. We do as well, and we'll continue to pay attention to that. So, we believe that the current rates are built into our guide. If the market were to move quicker and spot rates go up, then that would be upside for us.