Q3 2020 Trimble Inc Earnings Call
In France call all lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you like to ask a question during that time simply press forward then the number one on your telephone keypad. If you would like to draw. Your question press. The pound key. Thank you if somebody says shirts.
Congress over since or Rob painter, Chief Executive Officer, Sir. Please go ahead.
[music] Hello, everyone and thanks for taking the time to be with us today.
Before I get started just a quick reminder, that a presentation is available on our website and we ask that you. Please refer to the safe Harbor at the back.
I will start on slide two 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 expectations in the third quarter.
Air grew 10% year over year to 1.26 billion.
Quarterly revenue grew 1% year over year to 793 million expire.
Expanding gross margins execution on costs led to adjusted EBITDA margins of 26.8%.
Our shift to a more hardware connected software centric in recurring revenue business model is working.
I want to express my gratitude to the trouble team who continues to perform strongly under these challenging conditions as well as our customers and investors for your continued support and confidence in trouble.
Second executing on the connected scale 2025 strategy remains our focus we are working to connect stakeholders and industry lifecycle data to improve and transform customer workflows.
Does this model transitions are an output of this strategy not an input.
Third we continue to put organizational elements in place to enable the strategy.
Recently, we have named James Dalton as our newest board member and we promoted from within to hire a chief people officer, a cheap digital officer, the VP of talent and diversity equity and inclusion and ahead of sustainability.
For our long term conviction remains strong we.
We will balance cost containment and investment in innovation during the downturn.
On one hand, we reduced our cost base and transportation in the quarter.
Other than we continue to increase our investments in economy 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 connected scale strategy.
At the reporting segment level, a few strategic comments to make.
The buildings and infrastructure, we saw better than expected results in the civil construction machine can drawn guidance. In addition, our software business has delivered a strong level of recurring revenue growth.
Geo spatial innovation is sparking demand our end customers have been getting back to work in catching up on project activity.
In resources and utilities, the agriculture market has been resilient in North America for example, commodity prices have risen well 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 contributed to our growth in 2020.
Transportation, we took several meaningful steps, which we believe will position the business for better performance in the quarters in 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, which resulted in an inventory charge in the third quarter with.
But 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 improve 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 in local government funding and policy decisions relating to trade and tax let.
Let me now turn the call over to David for a review of the numbers. Thank.
Thank you Rob.
Let's begin on slide three with a review of third quarter results.
Third quarter revenue was 793 million up 1% on a year over year basis net.
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% of 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 cope in 19.
Operating income margins also expanded 360 basis points to 24.2% now.
Net income dollars increased by 26% on a year over year basis, while earnings per share increased by 12 cents to 60 cents per share.
Turning to slide four third quarter cash flow from operations was 181 million, reflecting the strong cash flow generation of our business operating.
Operating cash flow represented approximately 1.2 times non-GAAP net income in the quarter three.
Free cash flow was 165 million.
We paid down over 150 million of net debt in the quarter and.
And the net debt to adjusted EBITDA ratio fell to 1.9 times.
At the end of the quarter, we had all 1.25 billion available on a 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 remain strong.
Next on slide five we highlight some of the key metrics that we follow and.
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.
Organic growth or they are was 6%.
Excluding our transportation segment Trimble organic air our 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 our 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 six 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 nonrecurring 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 call we'd 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 cobot related shutdowns.
Turning now to slide eight 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 system 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 city works has added significant capability to our offerings for utilities and local governments.
Margins expanded over seven percentage points, driven by improved revenue mix strong profitability from M&A and cost control.
Well topline results and 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.
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 but.
But the rate of COVID-19 infection, increasing in many countries our customers face renewed risks have worked 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 of 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 were will adversely impact overall trimble revenue growth by approximately 23 million or about 3%.
And this quarter, we will enjoy less benefit from projects deferred at the onset of the pandemic last spring.
Finally, the combination of lapping our city, where its acquisition from the fourth quarter of 2019, and the recent divestiture of construction logistics result in less favorable inorganic revenue growth momentum.
Considering all of these factors, we anticipate the 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 robust with organically our growth inline with third quarter 2020 performance note again that city works, 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 lapped the strong fourth quarter of last year trip.
Transportation revenues are likely to decline at a rate comparable to what we experienced in the third quarter.
The Geo spatial in 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 Seth.
Separately separate from this sector, though we do expect gross margins to continue their strong performance driven by software mix, new products and reduce 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, we are seeing a gradual increase in discretionary spending across areas. We're spending was unsustainably low due to covert restrictions.
Assuming the revenue and margin dynamics I described we expect to manage the decremental margins in the low to mid Thirtys.
Finally, I will note that we project continued healthy cash flow generation.
With our leverage now that our long term target, we have reinstituted, a modest share repurchase program.
We will continue to employ a disciplined approach to capital allocation, 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 nine and reinforcing how we progressed against our connected scale 2025 strategy in the quarter.
First connecting solutions across our industry lifecycle us two examples to share.
Instruction, we released works, so us which integrates designed data from the office machine control data to deliver real time progress and productivity updates for the entire job site.
Slide 10 shows a visual and how trimble is transforming workflows and construction by connecting the physical and digital World. This is how we bring together the office and the field with our hardware software and a unique trimble way.
Today, we put a constructible digital engineering model on the blade of construction equipment.
With work so Wes we can dynamically bring back surface data and view progress to plan.
In essence, this worked well positions us to take the Threed Constructible model and next to add dimensions of cost and schedule to create a five d. model from.
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 as a further step towards an autonomous future.
Back to slide nine and another example from construction.
We launched augmented reality into our Trimble earthworks machine control and guidance solution.
Oh admitted reality is available in the cab of the excavator, which helps operators more easily understand threed models cuts fill information slump data and other reference points.
Second delivering breakout innovation.
Two examples to share.
Geo spatial our new GNSS receiver B R 12 by has been a market success.
The innovation and the GNSS receiver is the integration of inertial technology that enables robust till compensation. What this means is that the surveyor can work productively and effectively and challenging environments, we're making our customers work easier.
The second example, as 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 Bem Awards on.
On this slide you will see the winners for best infrastructure and best commercial projects.
Closer look reveals that these projects deliver more than just incredibly detailed design visualization.
What these engineering teams are delivering our the precise specifications needed to automate fabrication for each individual component as well as instructions for assembling this 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 and our civil construction business, we're delivering technology assurance for our customers, while integrating construction cloud services and world class support to keep our customers operations current an 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 then the third quarter. We completed the acquisition of a business that further expands our positioning services network to now cover over 1 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.
At an 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 acuity.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad again to ask a question. Please press star one on your telephone keypad and please limit your questions to one question and one follow up.
Your first question comes from the line of golf window from bearing Bird capital. Your line is now open.
Hello, Thanks for taking my question.
The first one is just wanted to follow up on the strong economic growth, which kind of continued in this quarter and what I was wondering if you can talk a little bit more around the.
Growth drivers of that era.
How much is it.
<unk> expense.
Expansions and new customers, who are seeing very soon.
It is kind of the business model transition on one side kind of having door licenses.
Yeah, that's kind of my first question. Thank you.
Hi, Gal, Hey, welcome welcome back.
Thank you.
As it as it relates to the air our growth.
In the quarter so.
10%.
Total at a total company level.
Around 6% on an organic level, if we exclude the two.
Transportation business, we'd be in the double digit growth on on air are including in the construction bids.
Business or in the buildings and infrastructure reporting segment.
In terms of the break down between new customers.
And existing customers that it. It's both is the short answer where we've seen growth. So we are figuring out a way to to sell into new logo customers and this and this digital environment.
So take a business such as the Sketchup business.
Our our grew almost actually 50% more than 50% year over year, and that's clearly coming from an expansion of the addressable market and and winning new new logos, saying the same thing and the viewpoint business.
Having said that like compared to let's say a pre pandemic level it.
It is there is a greater weight towards penetration of existing customers at the total at the total portfolio level.
Thanks, probably for for obvious for the obvious reasons how does.
Is that help.
That's very helpful. Thank you and just as a follow up you mentioned.
Your strategic one of the strategic levers disconnecting the industry lifecycle, saying it took a little bit more specific about the construction what I'm wondering is when you start connecting those dots, which previously were kind of best of breed or is this now best of suite.
And you're becoming more of a suite of products.
Are you finding yourself.
How does that relate to the average contract size, which is seeing.
The sales cycles and potentially you know do you have a new buying buying center within those companies that you previously sold maybe one tool to someone else.
So if I take out the Argus construction as the.
These as the example, and you're right I mean that the the connect part of the connect and scale strategy is absolutely to connect stake.
Stakeholders data solutions across the industry lifecycle with us construction agriculture transportation utilities forestry.
Give you an example, and construction we can see for example, if I just take the viewpoint business discreetly, which is the construction management system that system of record for the construction company.
We've had over a million and a half dollars of new HCV in the last 12 months and this is really customer pull we're really early I would say on the trimble push of the strategy so customer pool.
To essentially to create to create.
Suites are bundles of solutions to connect into that system of record. So for example, and construction telematics.
The information on asset.
Elimination that can augment that job cost, which is on the ERP. If we look at our structural business fabrication management that ties into the material estimates, which are in the back office software, we look at the MLP or mechanical electrical plumbing business. We have there we see the integration of ESG.
Amazing pricing change management job cost and procurement into that system of record. So we're seeing real examples where our customers are asking us to integrate.
The various trimble technologies that they have and we're starting to see a few a a few more new logo wins as a result of being able to come in as a unified.
Space to that customer in terms of who we sell to and that new model.
Recent example, with an error in our 400 customer who made a significant commitment to trimble because with the CIO. So it starts to look more like sea level. When we're up leveling the sale to an overall trimble sales clearly that correlates to the contract sizes. So lets say as opposed to.
Three four separate contracts, which could be in the tens or low.
Hundreds of thousands each.
Right it starts to become.
However, our t. over a total contract value basis year. They start to look more like a million dollar type deals is as where we're heading with it.
That's really helpful. Thank you so much and congrats on a great quarter.
Thank you.
Your next question comes from the line of Richard Eastman from Baird. Your line is now open.
Thank you and thanks for the questions Rob.
Rob just first off I, just wanted to ask maybe through a little bit more color around the the transportation side of the business and maybe how you're viewing this quarter. It sounds like you took some structural cost.
Out of the business in the quarter.
But for me.
Revenue.
In op margin basis, I mean, clearly this.
Would suggest maybe a bottom in both of those metrics.
And you know do you see this business starting to form the basis of some some growth.
In 21, once we get through the year here from a revenue perspective.
Hi, Rick So I think it's pretty similar narrative to what we had last quarter I'll start by saying, we did meet the topline expectations. We have so its clearly below our long term.
Ambition, but just to establish I think credibility that we can hit the number that we put forward as a as a starting point there at the at the topline what similar to the narrative from last quarter that hold is we expect that the moves that we're making now.
We'll see the fruits of that and margin expansion and to the I'll say the second half of next year I will see that more in the second half of next year. Then then the first half of the nature of the recurring revenue business.
Is that it does take a while for that engine to get going and when it gets going it becomes a cumulative.
Game from from that point, so really similar view.
And but I think you characterized it well upfront.
Okay, and then just it just as a follow up my 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 you know any message in kind of the double digit sequential rebound on the hardware side of the business just as a as a basis for follow on software sales.
Sales.
Hey, Richard It's David Barnes I'll offer up a couple of observations.
Part of what we did benefit from is catching up on projects that got stalled or delayed in Q2.
That helped but.
But that's not all of it and as Rob mentioned, we've had a lot of innovation in the Geo spatial area, which is improving.
Revenue trends and margins by the way.
And so and we're seeing some it's hard to draw a trend in these noisy times, but but some improvement in a number of our hardware is that you're right bring software with it so that of all three.
Okay. Okay very good thank you.
Your next question comes from the line of.
And did men from JP Morgan Your line is now open.
Hi, good afternoon.
Maybe if you could provide some color on that fundamentals around the different end markets. You know usually you give us some good color in terms of how you're thinking about construction activity from a more macro standpoint, particularly now that we most likely won't get a large infrastructure bill and then somewhere.
Early on transportation at least.
You know what.
Mental tandem food you know we've seen a huge increase in truck order. So I'm just wondering how you're feeling about the fundamentals specifically in both those industries. Thanks.
Sure Hi, and so I'll start with the buildings and infrastructure adds to a little bit of a walk around.
The stakeholders I think the logical place to start would be with the owners and I'll use any I'll start in the U.S. thinking about state Deo teaser department of transportation as owners and I would say the duties have been more resilient than we expected.
I'm. So that's been that's been a good thing so I'd be a comment on a on a large owner.
Segment.
If I go next to architecture, and we look at the at the indicators. The Abbey is still below 50, and now we saw September it looks more encouraging than the numbers dead in August.
So I think that would be helpful for macro health, but when we look at our actual architecture and design business. That's meaningless because that's the business, where we saw air are up almost 50% year over year over year.
Go to civil construction and I'll stay in North America for a for a little bit.
Civil contractors, what we saw as a decrease in backlog with civil contractors.
But an increase in backlog with civil engineers, and so that would suggest that an initial recovery that could flow through to the contractors.
You look at our viewpoint business, where we could see the system of record for general contractors again confirm that some bookings are slowing and some of the velocity of hiring has been lower as compared to.
2019, when we look at.
Outside the U.S., we take construction PMI that shows a mix of you forward or what the number of markets expecting expansion.
Next year, I'd say, an emphasis on Europe, and when I quote construction PMI numbers. We also look at a basket of backlog and some of the largest construction companies in North America, and Europe, and what we see there is that and this is not surprising we see that residential is doing well commercials down as CNN for sure.
Sure have been down.
Have been down a little bit.
So what we see is if I try to summarize that as we see some of the end market work moving around I would say.
The numbers, we see today, our unambiguously better than what we saw in that March April may timeframe with conflicting or the signals on sustained demand.
And I think I would close on that went by saying what we do feel that there is unequivocal demand for Digitization improved access.
10 information so we think that the secular level. We're in we're in the right place.
And if I go to transportation.
And probably could start actually with some of the research you had we certainly saw that the class eight units sales were below last year, but they clearly improved men.
And in the last few months, so we do see some higher asset utilization improves spot prices.
And increasing capital investments. So transportation does look like it's quite a bit better place at a macro level than it was a few a few months ago.
I'll pause there and see if I answered your question.
Yeah No. That's helpful. It's always good to get your perspective on 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% cubic's 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 quality.
Qualitative just where do you think you are today in terms of how.
How much of the margin was macro how much was cubic's interest can subscription conversion and then.
As to how much of the margin decline was actually the restructuring and the inventory write up.
Hey, Dan its David Barnes I'd.
I'd say the factors that we talked about last quarter 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 in the third quarter.
Okay, but I think you said you took some restructuring charges also or was the inventory write downs that restructuring.
No we did.
Workforce reduction, but and that shows up in the non-GAAP restructuring charges.
Okay. Okay. That's helpful. I appreciate thank you thanks, Jim.
Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is now open.
Thanks, so much as you.
Work through this restructuring.
The channel business and are looking at some of the changes and the LTE.
Offering can you talk about you know kind of early returns and feedback from customers in terms of the game.
Trent and in terms of the rest of the receptivity.
And I generally think that transition is going to progress how long how long should we be thinking about this we're going through a transition period.
So call and I'll start with the the set up at the financial level, and then to get to the strategic level at the national level.
Oh anchor that really it's similar narrative from the last quarter is that we expect to see more of the flow through or improvement to the bottom line in the second half of next year than in the <unk> than in the first half of of 21. So we're taking the moves now to position the business.