Q4 2020 Trimble Inc Earnings Call
Yeah.
Ladies and gentleman, thank you for standing by and welcome to the Trimble fourth quarter.
And 'twenty and 'twenty results conference call at this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During this time, we will need to press Star then the number one on your telephone keypad to withdraw your question press. The pound key. Thank you now I would like to turn it over to Mr. Rob painter, Chief Executive Officer of Trimble.
Yes.
Hello, everyone 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 and addition, please note that we will be comparing against the 2019 debt had a 14th week and the fourth quarter.
Let's start on slide two with the three key messages, we want to convey today.
First the customer ROI of our technology and the strength of our financial model enabled us to outperform our own expectations and the fourth quarter.
The customer value proposition is rooted and productivity quality safety visibility and sustainability. We are pleased to announce the annualized recurring revenue or <unk> grew 9% year over year to $1 3 billion, while quarterly revenue grew <unk>, 4% year over year to $830 million.
Expanding gross margins and execution on costs led to adjusted EBITDA margin of 26, 1% and we finished the year delivering a record $672 million of operating cash flow.
Second executing the connect and scale of 2025 strategy remains our focus we are working to connect stakeholders across the industry life cycles, and the transform customer workflows, while simultaneously, making ourselves the easier to do business with the.
As leaders of the business and we take our responsibility seriously to be effective allocators of capital.
This and we will continue to invest disproportionately and our cloud and autonomy capabilities as well as on go to market efforts to support and enable our long term growth opportunities.
Third our long term market conviction remains strong we believe the secular trends of Digitization and provide long term tailwind and we maintain our resolve to exit this crisis on a stronger competitive footing than we entered it.
As we come into 2021, where both cautious and humble to recognize the market uncertainty and volatility while also confident that we're on the right track.
Comparisons against 2020, especially on a quarterly basis will be difficult if not irrelevant.
We will reinstate guidance on an annual level and David will walk you through the details.
In addition, we anticipate hosting an investor day, and the second half of the year the update stakeholders on our long term strategy and business model.
As I reflect back on our May 2018, Investor day, and put that into context of our fiscal year 2020, while revenue was clearly a setback with the pandemic. We are ahead and most all other aspects at.
And at the Investor Day, we targeted adjusted 2021, EBITDA at 23% to 24% of revenue we closed 2020 at 25, 3% EBITDA.
We targeted 2021 software services and recurring revenue mix at 55% of total revenue.
<unk> 2020 at 58% of total revenue.
We targeted the ratio of 2021 operating cash flow to non-GAAP net income at approximately one one times.
2020 at one two times operating cash flow to non-GAAP net income.
And July 2018 of our net debt to EBITDA ratio stood above three times and we said we would delever below two five times today, we stand at one six times we.
We see these has improved and important proof points that we are on the right strategic path that we can uniquely connect the physical and digital worlds to deliver value to our customers and that our asset light business model works.
Turning to my commentary on the fourth quarter, we beat our own expectations and buildings and infrastructure geospatial and resources and utilities, we hit our expectations and transportation.
Broadly speaking, we have seen signs of and emerging construction led recovery, we are experiencing favorable market conditions and agriculture, we set of innovation and go to market execution driving positive outcomes and at the end of the year. We benefited from government stimulus measures along with customers catching up on work David will walk us through additional segment details.
Turning to slide three and this shows connect and scale delivering customer ROI and transportation and agriculture and transportation are Trimble dispatch advisor solutions bring capabilities across our portfolio together to get the right load on the right truck with the right driver, thereby improving planning reducing empty miles.
Miles and improving utilization and.
And agriculture bloodshed agro is a large firm enterprise and Bulgaria that has adopted terminals connected farming ecosystem across 100 of their machines.
And this offering consists of our <unk> 750 connected display and the autopilot steering along with our auto sync data exchange functionality, the connected offering improves planning process automation and cost optimization.
I will close my commentary on slide four with and ESG update of topic of increasing importance to all our stakeholders.
As a purpose driven company our mission of industry transformation and our leadership culture provides a compelling ESG backdrop.
And the area of the environmental sustainability of highlight that the primary positive impact of Trimble on greenhouse gas emission reductions and other environmental measures happens through customer application of our technology for example, eliminating rework and construction, reducing fuel and water usage and all of our end markets and minimizing the use of herbicides.
And pesticides and agriculture.
We're also committed to developing science based targets to further our positive impact and the.
The area of people and social responsibility of highlight that we ranked in the top 10% of companies for diversity and the comparably survey and.
And I'm also very proud of the work of the Trimble Foundation, where we contributed a record amount of money to put to work for our philanthropic efforts finally, and the area of corporate governance of ratings of third party firms like MSCI are strong and we are committed to continuous improvement and our sustainability program day.
Moving over to you.
Thanks, Rob let's begin on slide five with the review of fourth quarter results.
Fourth quarter total revenue was $830 million on a non-GAAP basis of 0.4% year over year to.
To break that down currency translation added, 1% and acquisitions net of divestitures were essentially neutral.
Organic growth, excluding the impact of the extra week and the fourth quarter of 2019 was approximately 2%.
Our annualized recurring revenue grew to 130 billion and the quarter of 9% year over year and was up 7% on an organic basis.
Organic <unk> growth, excluding the transportation segment was up 15%.
Adjusted EBITDA, which includes income from our joint ventures, and equity investments was 217 million with the margin of 26, 1%, reflecting both strong gross margins and continuing low operating costs.
Our non-GAAP tax rate of 16% down 300 basis points on a year over year basis.
Net income was up 16% and non-GAAP earnings per share in the fourth quarter were 61 cents of 15% year over year.
Fourth quarter cash flow from operations was 188 million of 64% year on year, while cash flow from operations for the full year was $672 million of 15% versus 2019 free cash flow, which we define as cash flow from operations minus capital expenditures was 100.
The $77 million for the quarter of 64% year over year and $615 million for the year of 19% versus 2019.
Note that on a trailing 12 month basis operating cash flow was approximately one two times non-GAAP net income.
Our strong cash flow results reflect the combination of higher profit and improved working capital efficiency with.
With the strong cash flow and the quarter, we continued to Delever and year end, our net debt to trailing 12 month EBITDA was one six times.
Our balance sheet is strong and provides us with the flexibility to consider a range of capital allocation options. We expect to continue to delever and pursue modest share buybacks, while having dry powder deployable for attractive acquisition opportunities.
Turning to page six I'd like to highlight one of the key drivers of our cash flow and the quarter working capital our working capital efficiency has improved over the last five years.
We ended the year with just over zero net working capital. This progress was driven by a number of factors, including the growth and deferred revenue from our recurring revenue businesses.
Reduced sales outstanding of accounts receivable and lower inventory levels.
Turning now to slide seven I'll review and a bit more detail our fourth quarter revenue trends as I mentioned earlier, our IRR was up 9% and the quarter. Our non recurring revenue streams also grew driven by a strong rebound and hardware sales and geospatial civil construction and agriculture.
From a geographic perspective, North American revenues were down 8% driven by declines and our transportation business.
Revenues in North America from businesses other than transportation grew 2%.
Europe revenues were up 9%, reflecting catch up on project activity slowed earlier in 2020 and fiscal stimulus measures.
Asia Pacific was the best performer and the quarter up 13% driven by strong performance in Japan.
Now turning to slide eight I'll review briefly our full year results.
Revenue for the full year, 2020 contracted 4% overall and 5% organically.
Gross margins for the year expanded 140 basis points and EBITDA grew 7% on a year over year basis.
EBITDA margins expanded 240 basis points to 25, 3% of.
Operating income grew 7% year over year, and operating income margins expanded 220 basis points to 22, 8% net.
Net income was up 12% and earnings per share were $2 and 23 of.
Of 12% year over year.
Next on slide nine we highlight a number of key metrics, which collectively give a good picture of the state of our business.
And I'll highlight a few metrics, which neither rob nor I have already mentioned.
And this year of strong margins, we spent over 15% of our revenue and research and development, reflecting our continued investment and areas of strategic importance during the downturn.
We ended the year with the backlog of $1 3 billion up 11% from year ago levels, our deferred revenue at the end of the year was $614 million of 13% from the end of 2019.
The health of our backlog and deferred revenue point to improved visibility for revenue growth heading into 2021.
Turning now to slide 10, let's go through the fourth quarter revenue details at the reporting segment level.
Buildings and infrastructure revenue was up 1% on an organic basis, excluding the impact of last year's extra week organic revenue for the segment would have been up approximately 4%.
Revenue growth was double digit and both of our Sketchup and civil hardware businesses.
Segment margins were up 90 basis points due to higher margin revenue mix and cost control.
Geospatial revenue was up 14% on an organic basis, driven principally by strong performance and our core surveying and mapping business.
Revenue was up and all regions aided by successful new products stimulus driven activity and healthy project tender levels as projects, which were delayed earlier in 2020 came back online.
Margins were up over nine percentage points due to a combination of higher margin revenue mix lower levels of discounting and strong cost control.
Resources and utilities revenue was up 10% on an organic basis, driven principally by our precision agriculture business revenue.
Revenue growth was strongest outside the U S with higher commodity prices stimulus programs favorable weather and a strong reception to our new products, all contributing to growth and the quarter.
Solid performance by our city works business, which was acquired and the fourth quarter of last year also contributed to segment revenue and the quarter margins expanded by over five percentage points driven by operating cost control.
Transportation revenue was down 22% on an organic basis ex.
Excluding the impact of the 14th week and the fourth quarter of 2019 organic revenues were down by about 19% operating.
Operating margins were down over eight percentage points on a year over year basis, our fourth quarter financial performance and transportation reflects many of the same factors we have discussed in prior quarters.
Customer attrition and our mobility business since late 2019 accounts for the majority of the adverse development and segment revenue and.
And margins on that front there is some good news as our product performance has improved and customer churn has declined sequentially and each of the last three quarters.
Note that the ongoing subscription transition and our transportation of enterprise software business to press revenue trends and the quarter and the Cubic's acquisition had an expected dilutive impact on segment margins.
While we have more work ahead of us to improve the performance of this business. We continue to believe and the power of our connected transportation strategy and project. The steps. The team is taking now will yield improved performance later in 2021.
Turning now to page 11, I'd like to share with you our outlook for this year. We're planning efforts of settled on a 2021 financial outlook based on a number of key assumptions first we assume that public health initiatives are successful and enabling a broad reopening of constrained sectors of the economy by midyear 2021.
Second our plan is rooted in the assumption that the economy grows through the year with 2021, GDP at least recovering to 2019 levels.
Third our projections exclude the impact of future acquisitions or divestitures.
Our most important key performance indicator, we will continue to be a or are we expect organic AOR growth to end 2021, and the high single digit range with sequential improvement as the quarters progress.
Our growth and 2021 will be driven by the combination of organic growth of our existing recruiting offerings ongoing transition from perpetual software products and the gradual turnaround of our transportation business.
We project organic organic revenue growth and 2021 and the mid single digit range with an additional one to two points of exchange rates remain near where they are today that translates to a revenue range of 3.3, the $3 4 billion.
Note that our revenue growth and 'twenty 'twenty, one will be negatively impacted by approximately 150 basis points from our subscription model transitions and we anticipate that EBITDA and operating margins in 2021 will be higher than 2019, but lower than 2020.
Overall, our gross margin this year of projected to range remained stable of 'twenty 'twenty levels, but a number of factors are likely to cause EBITDA margins to come down somewhat compared to the historically high levels of 2020.
First the return to a more normalized level of incentive compensation and and the second half of this year higher travel costs will naturally cause operating cost to grow at a rate faster than revenue.
Second we are incremental E allocating more capital and both Capex and operating expense to the areas of focus and our connect and scale strategy, namely digital transformation cloud infrastructure and autonomy.
Third our margins will be negatively impacted by the accelerating subscription model conversions of 150 basis points.
I'll note that we project income from equity method investments to be approximately $35 million to $40 million and net interest expense to be about $65 million to $70 million with decreasing levels as the year progresses.
We project, our non-GAAP tax rate to be and the range of 16% to 17% and that our shares outstanding will be approximately $254 million.
Incorporating all of these factors, we expect non-GAAP earnings per share to be and the range of $2 25 to $2 45 for the full year.
From a cash flow perspective, we continue to project that operating cash flow and free cash flow will exceed net income as the favorable cash characteristics of our business will continue.
Nevertheless, cash flow will likely be flat or declined modestly from 2020 levels as we straw saw extraordinary improvement in working capital and late 2020.
A few words on the segment dynamics and this outlook generally we expect that each of our segments will mirror the trends and I've. Just described although I'll highlight a few factors specific to the individual segments.
And buildings and infrastructure, our hardware offerings, where most adversely impacted by Covid and the second quarter of 2020, So we expect growth and the second quarter 'twenty 'twenty one to be very strong.
Our geospatial and resources and utilities businesses have a lot of momentum now and we anticipate that momentum to generate strong growth through the first half of the year with more moderate growth thereafter.
And transportation, we don't expect to see meaningful revenue growth or margin improvement until late in 2021.
We don't intend to provide quarterly guidance at this point, but I'll offer a few comments on factors that will influence our revenue and margin performance as the year progresses.
Year on year growth and each quarter, we will obviously be impacted by Covid driven swings we've seen in 2020.
We expect to grow and all four quarters with the strongest growth rate in the second quarter. When we lap the worst period of the Covid crisis, we expect the operating and EBITDA margins will be relatively constant across the quarters, Rob back to you for closing comments.
As we wrap up I would like to thank the Trimble team and our global dealer partner network for their outstanding efforts throughout 2020.
We entered the crisis with and objected to exit the crisis on the stronger competitive footing.
And I'm proud of our accomplishments in 2020, and the progress and commitment we are making towards our connect and scale 2000, and twenty-five strategy. We enter 2021 with increased conviction and our ability fulfil our mission to transform the way of the World works.
Furthermore, I would also like to take the opportunity to acknowledge terminals inclusion and the S&P 500 as of January 21 of mine.
Millstone for terminals growth and global impact. Thank you to our customers, our global dealer partners and our employees past and present from making this possible. It has been a remarkable 42 year journey of the company and our best days are yet to come and operator, let's please go to Q&A.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad, we would like to limit.
Any questions. So if you would like to ask a question. Please ask one question out of them and one follow up.
First question is from Rob.
Wertheimer from <unk> research.
Good afternoon, everyone.
Hi, Rob.
The results continued to be very impressive on the margin side and.
And really among the better of companies, we follow kind of more of a strategic question and on the results of its just it seems like farmers continue to.
Adopt very quickly you know whatever tech offerings that are offered on and there's been a lot of take rate success with different.
The different products people and have put out.
And so a little bit on how you see the shape of that market evolving whether theres a lot from the acquisition pipeline that you want to do or need to do to create and increasingly integrated offerings and how strong your product pipeline is for the next couple of three years. Thank you.
Thanks, Rob.
So for it and we look at the primary products that we offer and the agriculture market today and.
And that would capture on.
Guidance it would capture of water management at Wynn.
Include the variable variable rate.
And then we.
Also of the weed seeker product.
So spot spraying optimization, and then I would and then there's the software that we have and so the strategy. We have is as the connected farm strategy and and agriculture. So it just from an organic view of our product portfolio. We are bullish on the opportunities and.
Agriculture to connect what we're doing together to create additional ROI for our customers what will build on top of that is.
And our autonomy strategy.
And we see autonomy of the series of increasing.
Levels of automation.
Over the coming quarters and years to move is really more and to that autonomous future. So we believe we can do a lot of this organically.
From an acquisition perspective, we're certainly open.
If there's acquisitions that can help us accelerate our development of our efforts and any of those and any of those areas.
Okay. Thanks, Robert you forget to give any metrics on the fee and spread out all of that.
It's been going and I'll stop.
And what we've seen strong double digit increases and the weeds seeker.
And the we'd seek or to beg your pardon me.
The site.
So yes, it is deemed a threat and stressed strong increases nowhere at the same strong increases and.
And I'm really I think we're going to see them really for for a while.
Initially saw that the take rate being very high and South America, and and we see that moving around the world.
Thanks.
Next question is coming from the line of Jason Celaeno from Keybanc capital markets.
Yes, thanks, guys.
And you gave the update on the transportation and package bookings were 80% of subscription, but I'm curious what was that mix at the beginning of the year, because you've talked about the accelerating.
On the English and here and.
And then mark.
More broadly speaking how should investors measure the progress of the different based on solutions you have and then why not give more metrics like this on a mark of nine basis.
So Jason this is Rob at the Big and so yes. So the at the beginning of the year, we were tracking closer to an inverse of that because were really.
Pretty early and the.
And the transformation of the of our enterprise business, so that bookings mix is pretty.
Actually exceeded our expectations of our quickly and has shifted to subscription offering and when we do that 80 20 comparison that set of TCP or total contract value of levels right. So we can do it on and Apple on Apple to Apple basis.
In terms of measuring the progress of the business and how we measure and look at the proof points and the business will certainly you hit on the first one right away which is the.
The ratio of the of the bookings because that's what were the strategy of the end game from a financial model perspective is to build a recurring offering and we're talking about the enterprise business because we already have that on our maps business, we already have that and our and our mobility business and we really also have that on our and our shipper of business. So really.
And it's an additive view of.
And of moving that of moving that direction and finally, you asked about additional measures or metrics that we could report and transportation.
I think the we.
And Investor Day, I mentioned in the prepared remarks that we're going to target for the second half of the year I think we'll just have to make sure we get the right ones to tell the right story I'm I'm as I think as much as anything showing proof points like the customer examples such the such as the example that was and one of the slides.
Is it the kind of demonstrable evidence that I want to be able to put continue to put forward to our investors.
Okay great.
Those were my two thank you.
And welcome.
Next question is coming from the line of.
And.
The weakness from JP Morgan.
Hi, good evening, and San Diego and just FYI.
And maybe Rob you can give us the rundown on them and.
<unk> and its just that.
Different application and is there and some.
Some of the trends Youre seeing and you usually give us an update on and they are part of Sketchup E builder viewpoint at that kind of just.
And a little deeper dive and that business and the IP like into 'twenty 'twenty one specifically.
Sure Hi, and it's good to hear from you.
So, let's start and be and I and if we run through.
If we run through the outlook and what we're hearing from some of the different constituents and throughout the throughout the chain and.
Start with.
The thing that the outlook is pretty good there are a few exceptions, but the outlook is pretty good if we look at the type of work infrastructure and residential backlogs are improving.
<unk> is down so that's going to relate to oil and gas multi sector, which picks up the commercial work that looks flat to down.
And not surprisingly retail's down and.
Elements, such as data centers and logistics centers.
And are up and.
And when we look at the public sector of the outlook is generally better than it was a quarter as the financing is on a stronger and it is on a stronger position.
In January of the Dodge Index was at its highest level since the pandemic started and now they did warn the recovery may be uneven in the coming months, which sounds about right.
And and at the OEM level I would say the signals are mixed so it's stronger and heavy equipment less so and the automotive space. So in aggregate that outlook is as a net positive on the E. R. R front.
And and DNI.
Really its very solid quarter really all of the teams executed and in.
And at an outstanding level, and the quarter and for the year and.
Net retention and businesses, such as E builder and viewpoint, there well over 100% and we had mid teens growth and viewpoint and E. Builder. So continued strong performance from those businesses and as operators.
Did I Miss anything in.
No I think you captured it on the lag.
Okay and.
And I'll quickly.
And just switching back to transportation can you just talk a little bit of bad.
And you know what happens if you cannot get that business back to the 20% margin target and what.
On the strategic alternative type of this.
Jim.
Would you be willing neuro and when you'd be willing to look at some portfolio cleansing and lower.
And it's too strategic to you you know you kind of if it takes longer to get back to 20% and.
Youre going to the right design and just curious on what the long time, a bunch of contingency plans are.
Yes, the oven.
The transportation business, we see of strategic win and we see it as attractive we think we've got a favorable.
Position on the favorable offering.
We have the I'll say the coverage of.
<unk>.
Assets and this and the sector, which I think would be quite enviable from a cash.
Competitive standpoint, so from the 20% level, that's absolutely the target that we have is to get the segment back up to the I'll call. It the company level of profitability.
In terms of how we measure of that given how much of the business is recurring we'll also look at it from a life of customer lifetime value perspective sort of be cautious to be overly dogmatic about the 20%. So long as we're continuing to get the bookings and to grow the business and to get the attempt to grow the business and get that trajectory. So the firm.
First order of businesses to be able to show that demonstrable trajectory, which we said we would we feel like we'll be able to do and towards the later part of the year second half of the year.
And as we've got that trajectory I think that's going to give all of us the <unk>.
Confidence on what we're doing and we will look at measure of such as the lifetime value divided by the the customer acquisition.
Cost because thats, a very indicative measure of the business progresses, and and then from the broader let's say of strategic lens of it and we will continue to look at.
The open to looking at assets or partnerships that helped us further and accelerate the strategy.
Okay. Thank you that's helpful and get back in line and I appreciate that.
Next question is coming from the line of Colin Rusch from Oppenheimer.
Great. Thank you for taking our questions. The first question on for Colin.
To ask a little bit about some of the.
The increased spend that you highlighted for 2021 and.
The capex and Opex target and connect and scale the gentlemen.
The mission and cloud infrastructure and economy and.
And just wanted to see if you could provide a little bit more color, there and where you're seeing exactly the the opportunities to accelerate and how that connects back to sort of the connect and scale strategy.
Hi, Kristen it's David Barnes.
And so as you pointed out a meaningful portion of the increase and year on year operating expenditure will be really centered on the connect and scale strategy. So we have the are.
A major initiative underway to accelerate our digital transformation.
The.
There is technology and process changes that will enable us to fulfill the potential we have to sell integrated offerings to customers and we have of major push there. So are our capex, which was in the past years more focused on on.
And on facilities as of this year very much focused on digital transformation and cloud infrastructure, as well, which which will enable us to enhance our position as a world class provider of integrated cloud based services. So that's where the focus of our investment is.
Great and then I guess my follow up would be Rob you harken back to the 2018 analyst day.
And back at that time, I think you outlined the calculus of high single digit organic growth and 25% to 30% incremental margin, 20% operating margin.
And as they think about connect and scale and and maybe beyond the the 'twenty and 'twenty one timeframe.
Still the right formula that we should be thinking about for Trimble.
At a high level. It is kristen the what I would augment from of measurement perspective is a growth of that is our primary focus of the.
Of the measurements out there.
And that interplay between the <unk> and the <unk> and the overall growth is and is important so on.
The trade all day long.
The the topline revenue growth if it's if it's going if it's moderated because of our accelerating.
And that's one that I think needs to rise higher and the pecking order.
Okay. Thank you so much.
The exit.
From James Fawcett from Morgan Stanley.
Thanks for taking my question and congrats on the quarter and and the progress and maybe you wanted to touch again on the geospatial side and I know and in your prepared remarks, you kind of noted one of the drivers being retail demand in North America.
That seems interesting just given kind of preferences for where people live coming out of the pandemic and and <unk>.
Troy just residential construction more broadly can you maybe remind us how much of that business is exposed to residential construction and if you think that can be of lasting tailwind. If it's more near term and starts to normalize and just what your expectations are over the next year or so.
Sure and I'll start by up leveling to the the whole segment, where we saw the outperformance come from a combination of three things.
The demand catch up and work and the third is new products and.
And so in Europe.
I think there is and in anticipation of the construction led recovery tax incentives also helped I should add and North America residential and from the new product innovation perspective, our 12 by the.
The NSS receiver and the ex <unk> scanner, we think really led demand and all of our markets and North America, specifically and looking at residential.
We see that as a near to mid term catalyst and then I would.
I have and anticipation of normalization there if we were to see more infrastructure work, then clearly our mix wood wood shifts or balance with the residential and.
And and infrastructure work historically residential has not been a primary driver of of.
And the Trimble business. So it certainly is.
And on an accelerant and certainly from a percentage standpoint.
Got it and that's helpful and if I could just one follow up I guess of perpetual licenses started to recover at least crew and the quarter and some of the seasonally based just on timing of when those get renewed or should we think of that as more indicative of demand just broadly recovering and if some of the push outs and subscription growth.
Could also be and opportunity the more quickly convert to subscription based offerings.
Yes, Hey, James David part of what you saw with the perpetual business as we had meaningful slowdown in earlier quarters as you'll note. So theres some of that is catch up on on.
On the projects that were delayed.
Overall the the.
The perpetual sales will obviously be.
There will be pressure on that from the subscription transition so over time and many of our businesses the significant majority.
We will be selling recurring rather than perpetual licenses for those businesses, where a recurring model.
And is viable.
Got it thank you.
Next question.
And this is coming from the line of Chad Dillard from Bernstein.
Yeah.
Good evening guys.
Alright.
And so my question's on just like the the mid cycle revenues for the transportation business and how to think about that and that's coming cycle versus prior cycles.
Do you expect to actually recover some of the churn that you've experienced and then how.
How should we think about the impact of <unk>.
The mix shift.
Some of the mix shifted there.
Well I'll start with the the question around the cycle.
Because it tends not to be relevant and the trimble context.
And it tends to be the.
And I would associate that to and industrial are.
Straight industrial context, and the fundamental nature of the markets and the markets that we're serving as if they're large global underserved and underpenetrated by technology. So our correlation hasn't historically been very tight cycles. So I would really say see the trimble story as the sector as a secular story with the cyclical undertone and so there is the.
Cycle, obviously has an impact, but and secular first cyclical undertone from a from an expectation of of I think you asked about recovering.
Churn of recovering business and the transportation market and yes, we're very optimistic around that.
That's I mean, that's table Stakes and frankly, and we look at the pieces, we have across the technology landscape and transportation and we think were and are favored position and we've got over 90.
And 90% of the top 100 trucking companies use our technology, we've got over 1 million powered assets and there are managed and the Trimble network.
Look at the set of capabilities, we have we do telematics video ERP maintenance mapping routing navigation analytics now the visibility. So we have a strong set of capabilities I believe it brings scale.
To the to the market and when we look at connect and scale of applied and the transportation context, that's where I think we've become really unique because if we can sell of outcome and I look at the bundled offerings.
And then not only of bundled offerings, but where we can provide unique value by stitching together of our products and that's actually why we put that slide is an example of Trimble dispatch advisor because into the into the slides because that's an example, where we're pulling capabilities across our tech stack and two of uniquely.
Trimble at two of unique trimble offering so.
I hope that helps give you context, and let me know if I missed something.
Yes, that's helpful.
And then just the second question just on the at the 150 basis points. So the headwind from subscription transitions.
Can you remind us how does the compare versus 2020, and how should we think about that and contact with the next couple of years.
Are we at the peak in terms of like the overall comp basis back to the basis point impact.
Hi, Chad, it's David the 150 basis points is more than 2020, probably about half again more sort of closer to 100 basis points and that does reflect that and some of the businesses, where there's a clear near term opportunity to make the transition we anticipate making a major progress this year a little early to call.
<unk>.
The 22 on that so I'll resist the temptation, although we are at that point getting past the valley for many of the subscription businesses and.
And we'll see more revenue.
Uptick from that then we will this year.
Thank you.
Next question is coming from the line of Jerry Revich from Goldman Sachs.
Okay.
Hi, good afternoon, and good evening everyone.
You see the momentum on the subscription transition I am wondering if you could talk about.
Any parts of the transition plan that you folks might be accelerating.
And into 'twenty, one and given how strong the preference has been the one customers for subscription.
Perpetual license and.
David I'm wondering if you could share the revenue number that's associated with that margin point you.
Can you just made so if we had run rate revenue and 21.
How much higher would it be versus the.
The GAAP revenue guidance that you provided and once we get the.
The existing products and transition to subscription.
Hey, Jerry I'll do the second question first and then hand, it over to Rob So.
I think I've got your question right. The 100, and say 50 basis points of what we're saying there is that if we weren't doing the next round of transition of revenue would be 150 basis points higher and that nearly all flows to operating income because of the margin is very high.
And Gerry from from acceleration perspective within the business.
Look at buildings and infrastructure and transportation, so within buildings and infrastructure and we're talking about are our building construction business is accelerating the.
On the subscription transformation, there, we mentioned and transportation for example, the 80 20.
Bookings split subscription to perpetual.
We're seeing and the enterprise business right now so there I would I would call those the <unk>.
The model conversions that are accelerating and that's separate from businesses that you already know like the viewpoints and the filters and construction of that continued to demonstrate.
Strong growth and then the last thing I would mention is.
On the hardware side, we are and very early days, but early days of the.
Essentially it's the hardware and the service we call of Trimble platform as a service and.
And the civil construction space.
And and in terms of captain.
Capital deployment.
And you talk about your M&A pipeline as it stands today, obviously strong free cash conversion.
I'm wondering how deep is the pipeline because.
And unfortunately post the Ebola and bueller.
The point acquisition multiples for those types of assets that we have.
Up significantly so I'm wondering if you could.
And just comment on it.
The pipeline has subscription type businesses the net interest.
And on that opportunity set in light of the free cash flow if you don't mind.
Hey, Jerry I'd characterize our M&A pipeline as being open for business, we have the confidence to assert our strategy and and we've have the balance sheet to support it.
As it relates to the I'll say the opportunity of themselves within the pipeline.
I would say there decent I wouldn't say, they're like overly robust and on the other side there and it's also not non non existent. So I'd tell you, it's a decent pipeline.
And when we look at that pipeline.
And certainly have a bias and we think about the bias, where it's more than a bias the imperative.
As to support the connect and scale strategy.
The bias than with and supporting the strategy.
Certainly towards the software assets, but David also mentioned from account linking it to capital allocation, where we're spending on the digital transformation, we look at capabilities and cloud and we looked and capabilities and autonomy for example, and so autonomy is another area that I would put on that list and I wouldn't it doesn't classically differ.
Line of software.
Okay. Thank you.
You bet.
Next question is from Richard Eastman from Baird.
And I just wanted to circle back if you wouldn't mind and.
Good afternoon for the way.
Just wanted to circle back to.
The recurring revenue in the quarter it looks like it was down a couple of ticks year over year.
Is that is that the function of the transportation business.
Yeah, Hey, Rick organic IRR was actually up a little bit.
We have true of.
Of the business, but yeah, organics improved a little bit and and when you define organic are you pulling out transportation.
Nope I'm pulling up the business.
Hey, Rick if you just be careful youre looking at the 14th week impact because the recurring revenue you just take that piece of the P&L.
<unk> has an 8% impact.
Okay, Alright, and then thats going to be the difference from the organic in the quarter was up low singles.
And then for 'twenty one.
Did I catch on your comments the recurring revenue is expected to grow high single digits.
Yes, so organic was up seven and the Q4 and we said we'd end the year our guidance is.
High single digits, so faster than we are now sequentially improving through the year.
For all of the reasons I mentioned organic growth of our existing offerings, the transitions and and improvement of transportation.
Okay and then.
As we look out to <unk>.
The revenue guide and your.
Adjusted Op income guide and EPS Guide I guess at the <unk>.
Mid point of view of revenue guide and EPS guidance, what kind of walk up to this maybe low low double digits.
Incremental.
And what that's absorbing here and I'm, sorry of the probably of a repeating what you said already that's absorbing as.
And almost $50 million of.
Profit from the SaaS conversion headwind.
And then the balance of that.
It would be just the expense re inflation and the business.
You've got the.
You've got the key factors so the the.
Conversions of there and then Opex as I mentioned is growing faster than revenue. Some of that is just replacing cost that sort of naturally came out during the COVID-19 period. So we will.
We will have higher incentive compensation expense, we anticipate that we'll begin to travel later in the year.
A lot of the things, we do normally including the hiring were really low and.
And we are investing as Rob said and the <unk>.
Cloud and.
Digital transformation, and then I'll add debt.
And part of the Opex increase is FX because of the U S. Dollar weakened so over half of our business is outside the U S. So that naturally causes opex to grow.
Okay, I guess, you and just one last question I apologize the simple business.
Inventories and the channel look there is there Rob.
Is there better.
The book to Bill or just the sell through is the <unk>.
All through greater than the sell in into the channel on the civil side of the hardware side.
Inventories are low and very much on okay. Okay very good excellent. Thank you for the time.
Next question is from the line of from Jonathan Ho from William Blair.
Hi, Good afternoon, just wanted to start out with I guess, you made the comment that youre coming out of the downturn stronger and you've been investing 15 per cent into R&D, which is above the typical average net can you maybe give us. Some examples of how this has been driving share gains and where are you seeing this.
Show up the most in terms of that competitive position.
Hi, Jonathan I see it and a few I see it and a few areas and why.
Non.
Would be through innovation and so the example, we talked about and geospatial is with the <unk> and the <unk> seven and sort of right demonstrable evidence that the investment and R&D is producing.
New products, and we've seen that and AG with lead seeker and as as an example, we've seen it and buildings and infrastructure with the with the model with the model conversions.
Out of innovation happening actually happening there.
And creating some derivatives of opportunities in areas such as analytics.
For for example.
And the.
The other place where I see us coming out of the stronger us from an organizational culture perspective.
Okay, that's hard to let's say measure as it relates to share gains or the other aspects of but I really think when you look at our employee engagement.
And of very strong.
Place, we look at the retention of our people and we're doing well there we'd look at.
And I talked to use an example, and the prepared remarks around how.
And how we've ranked and.
And diversity and inclusion.
Of course, so we see the culture.
And Ah and a strong place.
And then from a share gain.
Aspect, how all of this relates to let's say share gains and our and our competitive position.
I have to admit it's notoriously difficult to be very specific on share gains and our markets. It's just really not of lot of.
Good good data. So you can't really can't find like the singular report that's going to tell you of all of this so certainly we're looking at our results compared to competitive.
Results, we see how we look at our win loss ratios and the businesses that we have and they indicate to us debt.
We're maintaining or gaining share across the business.
Excellent and then.
And then just as a follow up you outlined the number of customers and your example that are buying a broader solution set how do we think about AOR growth relative to either new or new customer acquisitions or upsell, just given and you can sell a broader suite of solutions today.
Yes, it's a good question Jonathan.
And we'll keep including examples from from now on to show you. These proof points around connect and scale and can example, we didn't put in.
The the deck this quarter.
And it could start of construction example, so we sold two of and Anr 400 customers.
And our bundled offering.
Last year and and both of those examples we were able to increase <unk>, 30%.
With each of those customers and by virtue of of creating a essentially a one trimble offering making it a lot easier to do.
Business with Us I mean, that's the kind of.
That's the best of the evidence as it were of where we're going and why were and why we're doing this we see.
We see where we've always connect and scale.
And us and ability to better connect the products, we have to streamline the customer experience and handoffs between the products and the workflows that expands the value proposition of our offering and <unk>.
Increases the and improves the user experience of of.
The products and <unk>.
Along the way and it will enhance our customer success operations to drive of deeper intimacy with our customers and we believe that's going to provide our customers better value of they'll get that productivity quality safety visibility and sustainability out of using our solutions and that's going to unlock.
There are potential I'll close by saying.
As we prepared our plans for the year and looking at our strategies and our connected strategies and we're looking at the <unk> opportunity from cross selling and Upselling and bundling and we believe theres a lot of opportunity within our house.
Thank you.
Next question is from the line of from Gal Munda from Baron capital.
But taking my questions I appreciate it.
The first one I would just like to ask you about this trend of the billings the.
Basically see and deferred revenue growing ahead of.
And there are again, which kind of indicates the backlog is building up and in terms of Todd I was just one of them.
Wanted to see what's driving it is the.
Any change and duration of the contracts of anything or do you just the natural.
The backlog buildup.
Yes gallon David the.
Biggest driver of deferred revenue and backlog is the growth of our recurring businesses.
It's not true.
Sure.
It's not a meaningful change and the duration of contracts.
Awesome. Thank you so much and then the other question I had is considering the fact the publicity of professional services are under pressure and the year like the like 2020 was.
Do you think and coming back from from 2020 and tons of the professional services from <unk>.
And basically it's definitely helped your gross margins in general, but my question and it's like can you.
<unk> do you reassess how much services you have to provide in order to kind of protect the margin or you're quite happy for that revenue to come back as fast as income.
Okay.
Hi, Joe This is Rob I'll start and maybe David will want to add.
I think per services might be a tale of two halves and 2021 first half second half look at the first half I think that will probably mirror of much of what we saw last year, where it's difficult to in many cases get in to do the implementation and we've done better and we're learning how to do it but there are <unk>.
<unk> that we have or the pro serv is significantly challenged.
As a result.
From a impact on Trimble gross margin.
And we don't have that much pro serve so it's not really.
Not a fundamental driver of the gross margin of Trimble Im looking and thinking more about the revenue and.
Packed it would have than let's say of margin profile impact at the company level. David you see some of them. Yeah. I think the only thing I'd add is that some of this is by design of reflecting the mix shift of the business to more of a standardized.
Offerings that require less professional services, but that said.
And what Rob said some of our professional services business was highly constrained because we couldn't get access to the customers. So it's a mix of both.
Yeah, that's right.
Thank you so much great results and good luck.
Thank you. Thank you.
The next question is from the line of Blake Gendron from Wolfe Research.
Yeah, Hey.
Good evening, Thanks for squeezing me on here.
My question was around just the heightened investment levels for this digital transformation.
And wondering if we can delineate both on the Capex side and maybe from an R&D perspective, how much is kind of due to the digital transformation and as we model it out and the <unk>.
And what your should we think of it over a fixed amount of time or are you essentially going to scale. These investment levels with the receptivity of the cloud solution across the portfolio. Thanks.
Yeah, Hey, Blake it's David.
This is definitely a multi year effort.
And I'll say of the Opex increase that you can interpolate from our guidance somewhere around 100 million and year on year about a quarter.
And is in the broad category of the strategic investments, which is clouded infrastructure and digital transformation and.
And autonomy.
And we've got a lot of conviction around this this is not.
Not all entirely incremental we started this effort it was more and more within the divisions are pieces of the business and now it's the companywide effort.
What we're doing is developing playbook.
And with standard processes that enable.
Cross selling and a common digital experience across the business of course.
Correct to see how well it goes we've got a phased implementation process, but I do see this investment extending beyond this year.
Understood. That's helpful and then within that as we think about something like data security and obviously, it's going to be important for your customers as they consider the mood of the cloud. It's also going to be a fairly big cost I would imagine no matter what cloud application of our cloud platform you're running so how do you think about data security and in terms of internal.
And those costs versus <unk>.
Maybe outsourcing those costs and kind of partnering with <unk>.
And third party tier.
Well Theres no question that.
That we're spending more on cyber security.
These are the kind of existential issues that all of us and technology businesses.
Face and as we manage and our customers' systems of record. So it's incredibly important that we are world class and the area of cyber security or.
Our spend is really opex and it's not capex oriented today.
It's primarily.
And teams, but we will use third parties to do and intrusion detection now.
Now for an example of oriented the best practice, So we followed best practices.
What you want to do with external.
And the firms of course, we use the out of external technology, but where you pay for that on on on Opex.
So it's not capitalized the last thing I would say around and the area of cyber is.
As many threats as it provides and we also see it as an opportunity to distinguish ourselves and the scope of the scale of the breath of Trimble, we see as an advantage here because if this is something customers are increasingly having to look at them and our ability to manage at.
And at scale and at this level of sophistication outstrips the ability of a smaller company to keep up and actually draw parallel of things like GDP are.
And these are these are expensive and endeavors and are our scale helps and that and that aspect of it.
Awesome awesome, thanks for the time.
Yes.
We have no questions at this time, Michael you May continue.
Thank you everyone for joining us on the call and we look forward to speaking to you again next quarter.
Thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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Jim.
Yes.
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Yes.
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Jim.