Q3 2024 Trimble Inc Earnings Call
Novi: Thank you for standing by. My name is Novi and I will be your conference operator today. At this time I would like to welcome everyone to the Trimble Third Quarter 2024 results conference call.
Novi: All lines have been placed on you to prevent any background noise.
Novi: and Phil Sawarynski.
Speaker Change: Welcome everyone. Before I get started, our presentation is available on our website and we ask that you refer to the safe harbor at the back.
Speaker Change: Our financial commentary will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of the prior year unless otherwise noted. In addition, our P&L commentary will emphasize comparables on an as-adjusted basis, which excludes our agriculture business.
Speaker Change: Let's start on slide 4. During the third quarter, we continue to advance our Connect and Scale strategy. The Connect aspect of the strategy guides us to digitally connect users, data, and workflows across stakeholders in the engineering and construction and transportation and logistics industries.
Speaker Change: The scale aspect of the strategy guides us to develop increasingly common back-end systems and shared technology platforms, while deploying more consistent processes around focused and accountable teams.
Speaker Change: Our strategy is working, and it is delivering unique, present, and future value to our customers, as well as sustainable value creation to our shareholders.
Speaker Change: In the quarter, we outperformed expectations at the top and bottom line, and we are raising our top and bottom line guidance for the year. Congratulations and thank you to the entire Trimble team.
Speaker Change: The numbers reflect hard and intentional work in the quarter, as well as over the last four and a half years.
Speaker Change: Three messages to convey here. First, we delivered ARR of $2.187 billion in the quarter, up 14% organically. This kind of growth at scale doesn't happen without an enormous commitment to our connected scale strategy.
Speaker Change: We also delivered a record gross margin of 68.5%. That compares to a gross margin of 57.7% in 2019.
Speaker Change: While the record numbers speak for themselves, it is important to recognize that this is a result of a journey we undertook a number of years ago and we are proud of our progress.
Speaker Change: Second, the structural improvement and the quality of the Trimble business model reflects focus and choice. Choice manifests as disciplined capital allocation. In the last four years, we have divested 22 businesses.
Speaker Change: In September, we announced our intention to sell our mobility business to Platform Science and to become a major shareholder in the combined business.
Speaker Change: We are playing in the zones where we believe we have the strongest right to win. As soon as we conclude the audit process with EY, we will return to share buyback, as we believe this is a high return on investment use of shareholder capital at our current valuation.
Speaker Change: As a reminder, we have $625 million remaining under our current authorization. Finally, the sum of our efforts over the last year is manifesting as a more simplified Trimble managed and led by a highly focused, engaged, and hungry team.
Speaker Change: Moving to slide 5. We cover the financial highlights from the quarter.
Speaker Change: 4% revenue growth exceeded our expectations as did EBITDA at a strong 27.1% and EPS at 70 cents, which performed above the high end of our guidance range.
Speaker Change: Before moving to comment on segment performance, I'll provide an update on the status of our financial audit procedures.
Speaker Change: During the August earnings call, I thought we were approximately a month or so away from being done. I was obviously wrong. In September, we held our annual shareholder meeting reflecting the progress made and the ongoing confidence we continue to have that our financial results will be the same as we previously reported.
Speaker Change: While our team and the EY team are making progress on completing the audit procedures, we now believe that EY will not complete their work in time for us to refile our financial statements ahead of NASDAQ's November 11th deadline.
Speaker Change: Procedurally speaking, what will happen first is a formality of a notice from NASDAQ saying we are subject to delisting. We then communicate this via 8k and a press release.
Speaker Change: After that, NASDAQ has a structured stay in appeals process for dealing with this exact topic. We feel confident that we are well positioned to be granted an extension, which would provide EY additional time to complete their work and for us to file our financials, thereby regaining NASDAQ compliance.
Speaker Change: Let's now talk about the business, starting on slide 7 with the AECO segment.
Speaker Change: Congratulations to the team for delivering another record quarter of ARR at 1.21 billion, higher than all but one of our industry peers.
Speaker Change: The team grew the business 18% organically, which is at the high end of growth of our scaled industry peers. And they are doing this in a profitable manner, achieving over 29% operating income for the segment in the quarter.
Speaker Change: We look at Rule of 40 as an instructive measure where we sum ARR growth and operating margins.
Speaker Change: We are operating at a rule of 47, delivering strong net retention and an attractive lifetime value to customer acquisition cost ratio.
Speaker Change: This provides us degrees of freedom on how we think about investing in the business to continue differentiating, as we do, with the breadth and depth of our offerings, including Trimble Construction 1.
Speaker Change: Our portfolio is also quite balanced, with each component of A, E, C, and O now operating above $200 million in ARR.
Speaker Change: I often describe this segment as the tip of the spear of our Connect and Scale strategy, and the strategy is definitively working in AACO. While we still have a lot of work ahead of us, the results of today give me confidence in delivering the results of tomorrow.
Speaker Change: Let's turn to slide 8 and talk about the field systems business.
Speaker Change: ARRGRA came from strong sales of our Catalyst solution, which delivers positioning as a service.
Speaker Change: Our machine control is a service offering and through ongoing growth in our traditional positioning services business. The team did this while delivering 33% operating income margin, demonstrating the ability to control costs in an unforgiving market environment.
Speaker Change: Strategically speaking, digital twins is a popular buzzword these days. In a terminal context, I'd like to think we were the original digital twin company.
Speaker Change: The job of a surveying and mapping professional is to create a digital model of the physical earth. Our reach into the physical world, connected to our digital footprint, and round-trip back to the physical world is what is singularly unique about our company.
Speaker Change: In the quarter, we released a new solution to enable this workflow.
Speaker Change: I'm really excited about this launch. It's called Trimble Reality Capture Service, and what it does is link data captured in the field from terrestrial, mobile, and aerial modalities, then links it to Trimble Connect, which enables cloud-based visualization and collaboration at scale.
Speaker Change: We think this will prove to be one of those only Trimble innovations and we are excited to see how the market adopts this technology and guides us to develop it further.
Speaker Change: Another strategic milestone came in the form of the renewal and extension of our 20-plus year joint venture with Caterpillar.
Speaker Change: Slide nine provides additional details on the renewal. The most important element to convey is our shared vision to accelerate innovation and customer adoption of mixed fleet machine control solutions and construction ecosystem technology.
Speaker Change: For Trimble customers, the goal is simple, broader availability and access to our technology.
Speaker Change: A recent partnership announcement with John Deere is evidence that we intend to achieve this goal. Also, our ability to link machine control solutions to Trimble Construction 1 offerings is another only Trimble proof point.
Speaker Change: Closing our segment commentary on slide 10, Transportation and Logistics beat our top and bottom line expectations.
Speaker Change: Transporian delivered double-digit ARR growth and MAPS delivered high single-digit ARR growth. Excluding the mobility business, organic ARR growth in the segment was 9%. Operating margins of 21% were the highest we have achieved in many years.
Speaker Change: While the freight recession persists, the Transforeon team delivered a record level of third quarter bookings, which was also the second largest in the history of the business.
Speaker Change: In a dynamic macro environment, the team has done a great job with solid execution and an advantaged business translating into profitable growth and consistent share gains.
Speaker Change: Strategically speaking, the big news of the quarter was our announcement that we signed a deal to sell our mobility business to Platform Science and that we intend to become a major shareholder in the business.
Speaker Change: Further details are covered on slide 11.
Speaker Change: For the combined business, this will create a scaled and focused software business that has a unique combined breadth of solutions needed to compete in the current environment.
Speaker Change: For Trimble, we will maintain a commercial relationship with the ongoing business. At a company level, this enables us to further simplify and focus our attention and efforts in the areas where we have the most compelling right to win.
Speaker Change: In this call, I'll end with a perspective on the macro environment. Geographically, the bookends we see are North America as the strongest market, and Asia Pacific, excluding India, as the weakest market at the moment. By end markets, construction and transportation overall represent our bookends.
Speaker Change: Construction sub-segments such as renewables, megaprojects, and infrastructure remain relatively strong. Residential remains challenged, as do transportation and markets.
Speaker Change: In all environments, we anchor to our unique value proposition.
Speaker Change: What we sell enables work to be done better, faster, safer, cheaper, and greener. The business is there. We need to be showing up in the right market segments, with the right solutions, and the right go-to-market motions. Phil, over to you.
Phil: Thank you, Rob. As noted before, my financial commentary will emphasize comparables on an as-adjusted basis, which excludes our agriculture business but will still include the mobility business.
Phil: We believe that maximizing long-term free cash flow drives shareholder value. Connect and Scale is our strategy, which we believe will continue to deliver recurring revenue growth, margin expansion, and ultimately cumulative cash flow growth.
Speaker Change: Slide 12 highlights balance sheet and cash flow dynamics. Our cash flow continues to trend better than expected after considering M&A transaction impacts.
Speaker Change: 2024 year-to-date reported free cash flow was $389 million. That includes $87 million of tax payments related to our gain-on-sale of the agriculture business, as well as $66 million in M&A-related transaction expenses.
Speaker Change: Our conversion ratio through the first three quarters of 2024 without these items was well above our target of one times non-GAAP net income.
Speaker Change: We have additional tax payments impacting future operating cash flow related to the agriculture JV gain on sale in our fourth quarter of 2024 and second quarter of 2025 since the tax payments are spread out over time.
Speaker Change: Our asset-late model continues with capital expenditures about 1% of revenue and negative net working capital. Net debt to EBITDA stands at less than 1x, well below our long-term leverage target of 2.5x.
Speaker Change: Our capital allocation focus remains the same, where we invest and where we see opportunities for the highest returns.
Speaker Change: We continue to disproportionately allocate capital to our AECO business, where a significant percent of our operating expense increases are in our sales and marketing engines to continue to drive ARR and revenue growth, and ultimately margin expansion and free cash flow generation.
Speaker Change: On the merger and acquisition front, we expect to opportunistically pursue tuck-in acquisitions, primarily in the AECO segment, where we can quickly integrate and bundle within Trimble Construction 1.
Speaker Change: Our two recent acquisitions in AECO continue to demonstrate that our M&A playbook is working.
Speaker Change: The payments application we purchased in the second quarter is ahead of our initial integration plans into the Viewpoint ERPs, and we are seeing bookings well in excess of our deal models.
Speaker Change: These growth opportunities are enabled by our connect and sales strategy via bundled product offerings that we put in the hands of our sellers. This playbook is a critical part of our acquisition strategy going forward.
Speaker Change: With that, let's turn to slide 13 and talk about guidance for the remainder of the year. We have a 53rd week in fiscal 2024, which adds approximately $85 million of revenue and $50 million of operating income, mainly driven by term license renewals on January 1st, which falls in the 4th quarter of this year.
Speaker Change: We are holding our ARR growth at 11-13% but are biased toward the higher end of the range with the AECO performance offset by the churn in our mobility business that we previously discussed.
Speaker Change: We are increasing the midpoint of our as-reported full-year revenue guidance by $15 million from $3.63 billion to $3.645 billion. AECO revenue is slightly better than our prior guide due to the performance in the first three quarters.
Speaker Change: Field Systems revenue is also slightly up, and transportation is unchanged.
Speaker Change: Correspondingly, the full year earnings per share midpoint is increasing by $0.09 to $2.83 from the prior $2.74.
Speaker Change: Our as-adjusted EBITDA margin for the year is expected to be between 27.5% and 27.8%, which is approximately an 80 basis point improvement at the midpoint from our prior guide.
Speaker Change: Free cash flow conversion for the year is approximately .75 times non-GAAP net income, which includes $116 million of taxes from the gain on sale from the Agriculture JV, as well as approximately $85 million in full-year M&A costs.
Speaker Change: Without these items, we'd be above the one-times non-GAAP net income for the year and an improvement from the prior guide.
Speaker Change: Let's move to our fourth quarter on slide 14, which is consistent with our prior guide. I will focus again on our as-adjusted view, which excludes agriculture.
Speaker Change: Our outlook for ARR growth remains strong, with continued expectations for 11-13% organic growth, with a bias to the higher end. Our total company revenue is projected to be $925 million to $965 million, which includes approximately $85 million due to the 53rd week.
Speaker Change: On an as-adjusted basis, excluding the 53rd week, our revenue is anticipated to grow in the range of 1% to 6% year-over-year.
Speaker Change: Non-GAAP operating margin is expected to be in the range of 28.5% to 30% and adjusted EBITDA margin in the range of 30% to 31.5% for the fourth quarter. Our EPS forecast is in the range of $0.83 to $0.91.
Speaker Change: One more item I'd like to mention before turning it back over to Rob.
Speaker Change: As we think about the financial model going into 2025, it is critical to make the correct proforma adjustments for the ag and mobility divestitures along with the 53rd week. I'll point you to the earnings supplement on our investor site where we consolidated the adjustments in one place.
Rob: For 2025, we expect continued double-digit organic ARR growth. Starting from a baseline of pro forma 2024 revenue, we continue to believe that with the shift to higher growth software, we are biased above the midpoint of the last investor day range of 5-8% organic revenue growth.
Speaker Change: We expect AECO to be above this range.
Speaker Change: Transportation is expected to be in this range after the divestiture of mobility, which we are now expecting to close in the first quarter of 2025.
Rob: Rob, I'll turn it back over to you.
Rob: Thanks, Phil, and thanks to all our Trimble colleagues and partners for delivering a solid quarter and a 2024 year-to-date of strategic and financial progression.
Rob: We were able to see over 2,000 customers and partners at these two events. The overall feedback was positive on the mobility divestiture as well as the direction of travel of how Connect and Scale translates to digitize and connect the transportation supply chain.
Rob: In less than one week, we will be back in Las Vegas at our Trimble Dimensions Engineering and Construction User Conference, where we will host over 6,000 attendees who are coming to learn how to further digitize and transform their work.
Rob: In closing, we look forward to seeing many of you on December 10th in New York City at our Investor Day, where we will unpack our business and show you why we are so excited about our ability to win across our business lines with the right combination of products, people, and go-to-market strategies.
Rob: It's a busy and exciting time to be a Trimble. Operator, let's open the line to questions.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We ask that you please limit your questions to one question and one follow-up.
Speaker Change: We will pause for just a moment to compile the Q&A roster.
Speaker Change: The first question comes from the line of Christian Owen with Oppenheimer.
Christian Owen: please go ahead. Great, thank you for taking the time.
Christian Owen: Good morning. Thank you for taking my question. Congratulations on the nice results. I'm wondering, Rob, if we could start with just a little bit more color on the ACV bookings, what you're seeing in terms of cross-sell and up-sell opportunities within the TC1 portfolio, and then I'll have a follow-up. Thank you.
Speaker Change: Good morning, Kristen, and thanks for the question. ACV bookings across actually the entirety of the company were strong in the quarter, so we feel really good about that. That supports
Christian Owen: Obviously, the AR growth that we've already had, as well as the AR guide that Phil took you through. Inside those ACB bookings, if we're looking inside the AECO,
Speaker Change: business. TC1 was another highly successful quarter for that set that commercial offering and where we're doing the prepackaged bundles.
Christian Owen: We see that the strong majority of our bookings, where we have TC1 available within AECO, which is primarily within the engineering and construction.
Christian Owen: applications. The strong majority are now TC1 bookings.
Christian Owen: and those bookings are up more than the company average. And so within that, you have cross-sell and up-sell happening. Similarly, in the transportation and logistics segment, if we look at Transporian on year-to-date, ACV bookings are up over 30%.
Christian Owen: on a year-over-year basis, so a really nice progression from the teams in the quarter.
Speaker Change: Your next question comes from the line of Jay Raviche with Goldman Sachs.
Jay Raviche: Yes, hi, good morning everyone. Hi, good morning everyone. I don't think I can do a French accent to match my name there, but good morning and congratulations.
Jay Raviche: for AAR Growth and what you just said about...
Christian Owen: bookings, it feels like to get to the high end of your organic growth range, you would have to have hardware.
Christian Owen: that is down high single digits. So I am wondering, can we just flesh that out? Is that about
Christian Owen: assuming and you know it's ideal hey look there's uncertainty out there let's make sure
Christian Owen: When we provide the initial 25 Outlook comments, we have enough leeway in case end markets are softer. Are there any discrete points that we should keep in mind relative to the Outlook considering how strong momentum you have in ARR and bookings?
Christian Owen: Hey Jerry, it's Phil. Let me take that and then Rob can add if he needs to. It's a great question, appreciate it. As we think about 2025, I mentioned in the prepared remarks, AECO above that range.
Christian Owen: but it will be...
Christian Owen: elements around field systems. So one is, we talked about the Fed this year. We believe the Fed business still will be down next year, which provides a little bit of headwind. The other piece of that, as we think about the cat JV evolution,
Christian Owen: We
Christian Owen: Part of the economics of that, we believe there's going to be some shift of the revenue.
Christian Owen: to the factory fit. And so as we think about that long-term with the channel evolution that we've talked about and with going after the mixed fleets, call it past 2025, we believe that that will offset and more than offset any of the impacts on the factory fit.
Christian Owen: If I actually talk about the profit related to that, one of the other elements of the JV is we changed how we're pricing, Trimble's pricing some of the products into the JV.
Christian Owen: And so what happens is, even though there's a couple points of headwind on the revenue, there's additional profit that shifts from the JV to Trimble.
Christian Owen: And then if you net-net all of those puts and takes down to the EBITDA level, we believe that it's neutral for the rest of 24 and it's neutral for 25 on a profit standpoint. So that's a little bit more color, I guess, on the field systems. But we do see field systems growing.
Christian Owen: Let's call it low single digits next year.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Kristen Owen with Oppenheimer.
Kristen Owen: Sorry about that, guys. Thank you. Thank you for letting me ask my second question, my follow-up question here. And great segue, Phil, it does relate to the Caterpillar relationship and the Deere Construction Partnership announced in the quarter.
Speaker Change: Can you just help us understand, with respect to the Deere partnership, what's covered under the scope of the agreement? How are you guys planning to go to market together? And I'd like to understand how you think about this partnership in the context of that long-standing relationship with Caterpillar, any channel risk that you see with the Deere partnership there.
Speaker Change: Hey Kristen, it's Rob. I'll take the question and thanks for the follow-up. Hey, I start with the lens of the customer on this and both the deer agreement and the cat agreement help us grow the adoption of technology in the industry and so what that means for a customer
Speaker Change: is that they're getting their choice of machine and technology and support to best fit their business.
Christian Owen: And that's both with John Deere and Caterpillar. And if you take John Deere specifically, what we're doing at the product level is enabling 3D upgrades on top of their platform, machine platform. At a go-to-market level, those upgrades can be enabled either through the John Deere dealer or through the Trimble network.
Christian Owen: At a competitive level or at a, what's called a channel, potential channel conflict level, I would characterize it as a no. We see it as complimentary. And that's because we're not adequately serving that demand or that opportunity today.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Rob Rotheimer with Melius Research.
Speaker Change: Please go ahead.
Rob Rotheimer: Thanks. Yeah, thank you. Good morning, everybody. My question, Rob, is maybe you could just give us a big-picture take on where transportation and logistics stands.
Rob Rotheimer: with the subtraction of mobility. Does it, you know, does it change the connecting scales? Does it change what you're offering to customers? And then your Transporian results continue to improve and be very impressive. I wonder if you can talk about anything you're doing aside from seeing a rebound to strategically grow that business. Thank you.
Speaker Change: Thanks for the question, Rob. He had a connect-and-scale level within transportation and logistics.
Christian Owen: with divestiture, I should say, mobility.
Christian Owen: and allow more, I call it, the goodness of the underlying portfolio to be seen.
Christian Owen: And I feel very good about the transaction that we're doing with PlatformScience. I think together this will be a scaled...
Speaker Change: business that is well-positioned to compete in today's marketplace and we will have an ongoing commercial relationship and to me that's very important as that within that ongoing commercial relationship.
Rob Rotheimer: call it a two-way relationship. That ability to move data and to plug into our platform and our ecosystem, we think, can provide customers an ongoing differential level of outcomes. So good strategically, good at a capital allocation level, good at a focus.
Speaker Change: level, helping us put more of our chips in the areas where we think we're best positioned to compete and where we have a right to win. From the Transforium business specifically,
Speaker Change: both caught at a product level, or maybe called a strategic level across the whole portfolio. The teams have done a nice job bringing together some capabilities across both all of the businesses, both in the visibility.
Christian Owen: side of things as well as in the freight market place. So like the moves the team are making to bring the businesses together, this is what we envisioned.
Christian Owen: when we did the deal. And then in terms of the ongoing improvement in Transporion, I mean, hey, in the control what you can control aspect.
Christian Owen: Bookings, to me, is the number one thing on my mind. Can't control the underlying freight market, especially in Europe, which continues to be difficult. But we can control where we show up to compete. We are getting more than our fair share of wins.
Christian Owen: with customers. These are some of the biggest logos in the world that we continue to win. I think the team is doing a really nice job.
Christian Owen: Those bookings, winds of today, the nature of how bookings work in Transporian is they do take a decent amount of time to actually come to full fruition, they ramp up so they don't just flip a switch immediately because this is a consumption-based
Christian Owen: model
Christian Owen: in the form of primarily, I should say, two-thirds of the business models in the form of transactions on the marketplace.
Christian Owen: To see the real, say, improvement in the near term is in 2025, we need to see an improvement in the freight market to drive.
Christian Owen: for Transparent in 2025. And I think everything we've been doing this year, and I think the team will continue to do in the fourth quarter and the next year, we'll position that business to grow even faster coming out of next year.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Jay Revich with Goldman Sachs.
Speaker Change: . Please find out more at michaelpainter.com.
Jay Revich: based on what you see, and if you can, touch on the valuation parameters on these last two deals, if you don't mind.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Bonjour, Jerry. It's Rob. I'll start and Phil can fill in. Hey, at the M&A level, we do have a pipeline. Our priority is with software acquisitions. Within software, we're primarily looking, or we're looking first.
Speaker Change: within the AECO segment, which I think would not be a surprise. We think where we have opportunities to do tuck-in is that we can create high return on investment.
Speaker Change: outcomes, and that's clearly important from a capital allocation perspective.
Speaker Change: at a, what do you call it, dry powder...
Phil: Net debt EBITDA. We've got a target to be below two and a half. So, you know, there's you know, there's call it Call that a billion and a half, you know a firepower should we
Speaker Change: Should we need it? But I don't anticipate putting that kind of capital to work. You know, we are thinking a lot as well about the buyback as a big commitment we made, and we stand behind that commitment on the buyback, especially.
Speaker Change: with where we see the stock price.
Speaker Change: today. So that's a balance we have, Jerry. It was on the buyback and the M&A. Expect more of the tuck-in type moves, I would say, at a divestiture level. We do not expect any additional major...
Speaker Change: moves to happen on that front. Hopefully that helps answer your question.
Speaker Change: It does. Thank you.
Speaker Change: Our next question comes from the line of Jason Salino with Key Bank Capital Markets.
Jason Salino: Great. Thanks for taking my questions, just two from me. You know, field systems, you know, really nice beat. Amy, can you just unpack the strength there? Was it more on the public sector side or did you see any deals close earlier than you'd initially planned?
Speaker Change: Jason, it's Rob. Did you mean Field Systems or the AECO?
Jason Salino: field system.
Jason Salino: Okay, so within field systems, actually at the revenue level, we ended where we anticipated to be in the in the quarter and field systems.
Speaker Change: what we see that's driving the business there's the new product we've got a set of new products that are coming out actually at Dimensions
Speaker Change: Next week we'll be making a number of new announcements both on the software and the hardware side of the
Speaker Change: of the business. We continue to bring new products in geospatial or the survey market forward, like the R980 that's improving the communications and the range on that, and the machine control market, so it hits the civil construction.
Speaker Change: Our BX992 offering helps us reach a mid-tier.
Speaker Change: market in our correction services or
Speaker Change: A technology called IonaGuard is correcting for errors in the ionosphere. This is through the solar cycle that's been ongoing, and that's helping to ensure the accuracy.
Speaker Change: of those signals and those corrections that we provide our customers.
Speaker Change: around the world. So, new product introduction is helping to drive the revenue. I'm especially pleased with the growth of the ARR in the segment in the quarter, and that's coming from the machine control service as a excuse me, offering as a service.
Speaker Change: New OEMs in the automotive market. We literally sell positioning as a service with a product called Trimble Catalyst.
Speaker Change: and are looking to do more bundling with the term licenses and the correction services that we have. So there's a good number of activities happening.
Speaker Change: The team's executing well in addition at the go-to-market with our channel partners around the world So really a nice intersection With the product in the go-to-market and the business and then the team doing a nice job working at business models
Speaker Change: Okay great yeah I know the field systems ARR has been accelerating nicely on organic level so that explains it.
Speaker Change: Maybe just keeping on kind of the organic ARR theme, you know, this is the second quarter in a row We've seen 14% growth at a corporate level
Speaker Change: I think you're still guiding to 11 to 13% organic for the full year. Maybe Kenny, you just walk us through the implied deceleration there or any conservatism you have, thanks.
Speaker Change: Yeah. Hey, thanks, Jason. This is Phil. Yeah, so if you remember, I mentioned this. We have the mobility headwind with a lot of the known churn.
Speaker Change: that's going to happen at the end of this year. So my two comments were, one, I said 11 to 13 percent, but biased toward the high end. We still see the continued strength in the AECO business, but where we're seeing some of the offset is that known churn around mobility in Q4.
Speaker Change: Oh, got it. Thank you.
Speaker Change: Our next question comes from the line of Tammy Zakaria with J.P. Morgan.
Tammy Zakaria: Hi, good morning Team Timberlake, hope you're doing well.
Tammy Zakaria: My first question is, what's the conversation like among your customers post the Fed rate cut? Do you feel a sense of optimism? Could customer activity improve as we look to next year?
Tammy Zakaria: a factor for you at all. So just curious how you think about this transition.
Tammy Zakaria: Hey Tammy, good morning. It's Robin. Thanks for the question. Well, I have to say we've, it depends on your timeline of Fed rate cuts, because we've seen, we have, we've been in, you know, coming out of, I guess, a ZERP environment, we've seen more Fed rate increases over the last few years, and you've got to have a long baseline to go.
Tammy Zakaria: I think be especially helpful.
Tammy Zakaria: I would point out what is so different about our business.
Tammy Zakaria: today compared to Trimble of the past as
Tammy Zakaria: a business of more than 75% software and more than 60% recurring. So we have a fundamentally different portfolio. We have such a higher degree of visibility into our business than we've ever had in the past.
Tammy Zakaria: From what we hear, and I would call it anecdotally, is an increased level of confidence.
Tammy Zakaria: And so confidence, to the extent that turns into certainty, certainty can turn into ability to make the capital commitments.
Tammy Zakaria: So I call that anecdotal. Of course, you know, more than half or half of our business is outside the U.S., more than half of our hardware business is outside the U.S., and so we not only pay attention to the interest rate environment in the U.S., but globally as well.
Tammy Zakaria: confidence. And what if I think the one thing I am looking out for is
Tammy Zakaria: And this is a North American example.
Tammy Zakaria: is if you look at the bipartisan infrastructure law and you look at the amount of the money that's been deployed, you know, only about a 25% plus or minus of the funds have been deployed to date. So I call that good news in terms of the ongoing funding availability for the bipartisan infrastructure.
Tammy Zakaria: And then if you look at the cost of...
Tammy Zakaria: and let's take a U.S. example that every mile of road is about a million dollars.
Tammy Zakaria: And if you look then within each of that.
Tammy Zakaria: Within that mile of road build, over $900,000 of that approximately is the raw materials.
Tammy Zakaria: including the subsurface materials as well as the asphalt. The minority ends up being the machinery and the labor. And to the extent that inflation comes down on the materials, that's a good thing if we can build more road with that.
Tammy Zakaria: So that's half an inflation coming down, but I think that correlates to the interest rates coming down. So that's the kind of thing that we're paying attention to are the derivative, you know, second, third order derivative impacts.
Speaker Change: Got it. That is very helpful. And second question, I'm actually looking forward to your analyst day, but any early thoughts on how you're thinking about your long-term incremental margin target now that you have divested?
Tammy Zakaria: and some of the hardware-centric, low-margin businesses.
Tammy Zakaria: Hey, Tim, it's Phil. I can take that one. Yeah, so obviously we'll get you into more detail on Investor Day, but last earnings call, I'll sort of reiterate what I said last earnings call,
Tammy Zakaria: We're biased, as we think about the long-term model, we're biased above the midpoint of our prior investor-day model, which was 5% to 8%, so that sort of gives you the revenue.
Tammy Zakaria: And then if you put that all together with some expansion at the EBITDA level, we said over the time we could expect probably 100 basis points of margin expansion. Again, that's over a multi-year view.
Tammy Zakaria: But we can get into more details on the Investor Day as well.
Speaker Change: Wonderful. Thank you.
Tammy Zakaria: Our next question comes from Clark Jeffries with Piper Sandler.
Clark Jeffries: Hello, thank you for taking the question. You know, it's been pretty encouraging to see as-adjusted margin expansion during this year.
Clark Jeffries: You know, I was wondering, how durable do you see that multi-hundred basis point margin expansion in transportation and logistics?
Clark Jeffries: I understand that with mobility there will be a tailwind to margins next year, but
Tammy Zakaria: Even kind of as adjusted, how are you thinking about the underlying efficiency gains you can get in the transportation segment and what kind of off-income expansion could we expect on a go-forward basis?
Tammy Zakaria: Yeah, so hey Clark, this is Phil. Let me start and Rob can add any color. So as we think about, as you said, as we got rid of or as we divested the mobility business going into 2025,
Tammy Zakaria: Q3, Robert already talked about the transporium business, and you know...
Tammy Zakaria: We're not forecasting right now for 2025 any meaningful change in the the overall market But he mentioned the bookings growth
Tammy Zakaria: and, you know, it's been a healthy business on a growth. It's been double-digit, call it revenue growth, and accretive on the OI. So when you think about those businesses continue to perform at that level, I would expect additional growth and margin expansion from those businesses as we go forward.
Speaker Change: Perfect. And just one follow-up, you know, Rob, you would...
Speaker Change: you know, kind of given this interesting disclosure about how much ARR is split between the A, the E, the C, and the O.
Speaker Change: You know when we think about the ability to sustain, you know, it seems like multiple years of 18 to 20 percent organic ARR growth Has the composition of that organic ARR growth been fairly balanced over the years and
Tammy Zakaria: You give these comments around 30% ACV growth in the E&C segment, kind of driven by TC1, but are those segments kind of equally contributing over the years and that's kind of part of the confidence in AECO growth above the midpoint of the kind of organic growth range next year?
Speaker Change: Hey, it's a good question. I would say...
Tammy Zakaria: Mourn
Tammy Zakaria: There is a, how do I say this, there's a
Tammy Zakaria: I wanted to point out that they're each above $200 million to point out the balance we have in it, so we don't have an over-dependency on one aspect of the portfolio.
Tammy Zakaria: And I think that's an important message to get across, and that was the intent of that. With the growth rates, specifically, actually, our architecture and design business
Tammy Zakaria: And kudos and shout out to the team for the last three to four years. It's a well outgrown at an AR growth level, the rest of the of the portfolio. And we think it's probably the largest addressable market opportunity.
Tammy Zakaria: we have with the SketchUp product. You know, we crossed the threshold last quarter of
Tammy Zakaria: using the technology. It's the one that's got the largest customer reach in the world for Trimble.
Tammy Zakaria: So that part of the business is growing the fastest. I think it will probably still continue to grow the fastest.
Tammy Zakaria: for the next couple of years. I'd say the growth within the E and the C parts of AECO are pretty similar, and I don't see that changing over time.
Tammy Zakaria: over the next couple years, excuse me. And then the, oh, that serves, we call that the owner in the public sector. The public sector does grow at a lower rate than the private sector.
Tammy Zakaria: One of the things that I think tends to be quite attractive within the public sector is net retention tends to be high, which is to say churn.
Tammy Zakaria: very low, so gross retention tends to be the highest in that side of the business.
Tammy Zakaria: So, well-balanced, growth rates are differential, but not enough, I think, to change our view here in the next couple of years of the growth opportunity for the business where we would see ARR continuing to grow in the teens.
Speaker Change: Thank you for taking the questions. You're welcome.
Speaker Change: and Phil Sawarynski. Thank you. Thank you.
Speaker Change: Our next question comes from Chad Dillard with Bernstein.
Chad Dillard: All right. Good morning, guys.
Speaker Change: Hi, Chad.
Chad Dillard: And then secondly, I mean, it sounds like the AECO business is growing faster, the mobility side or the transportation side. And so, like, what does that mean for incremental margins or the gross margins in N25 as well?
Speaker Change: Hey, let me start with the macros and Phil can fill in some of the margin dynamics. At a macro level, I wouldn't expect really any meaningful change from what we know now. I mean, after all, January 1st will just be the day after December.
Speaker Change: 31st, so it's hard for me to say that I see.
Speaker Change: big meaningful changes in the market. You know, we've seen the North American economy stronger than the European economy. I would expect that to continue. We've seen subsegments such as data centers.
Speaker Change: Renewable energy, on-shoring of manufacturing to be strong and stronger than residential. If interest rates continue to come down, I think that could be a positive inflection to the residential and market, so we're paying attention.
Speaker Change: to that, because we know that that's underbuilt and that will come back over time.
Speaker Change: In the field system side, we certainly look at what the OEMs are saying, and they're projecting units down in construction and agriculture, and that's incorporated into our thoughts on field systems. Now, we still expect it to grow next year, but to be below the company average.
Speaker Change: And so that's taken into, we're trying to take that into account.
Speaker Change: I think that 2025 could start to look better for the macros in North America. There do appear to be some green shoots.
Speaker Change: coming to get supply and demand and to better.
Speaker Change: Balance.
Speaker Change: In Europe, I would expect more of the same as a default thinking. So we're not expecting to see an inflection in...
Speaker Change: meaningful inflection in the number of transactions per customer that would impact the That would positively impact the transportation business were to be wrong in that and the economy were to be better So the sum of those macro thoughts make it into the revenue
Speaker Change: I don't know if we call it a guidance yet, but I'll call it revenue. Early revenue thoughts that Phil put forward. Phil, you wanna fill in the rest?
Speaker Change: and you can use the the revenue.
Phil Sawarynski: growth rates that I alluded to, which is AECO being the top, transportation being in the range, and field systems being lower, and I think you can get to a rough model there. But certainly at an investor day, and as we go forward, we can give you a more detailed view on that for 2025.
Speaker Change: And I also would, this is Rob again, point out that we have the earnings supplement. I would encourage everyone to make sure you're looking through that, because there are moving parts that we need to make sure that you're taking into account.
Speaker Change: One will be the mobility divestiture, assuming it happens, which we assume in Q1. We've got the
Speaker Change: We'll have the agriculture that will lap in Q1, so thus the as-adjusted, and then the third big one is the 53rd week that we've got here in 2024. And so let's just...
Speaker Change: It's really important to understand these pieces and work from the right baseline, otherwise it can look off, especially with the 53rd week and the divestitures, and so we're thinking about it very much on an organic basis, excluding that 53rd week when we make this commentary.
Speaker Change: Great question. Okay, so within AECO, the primary place where we're selling it today is with the E and the C part of the portfolio, where we sell to the engineering and construction customers, by the way. By the way, that could be mechanical, electrical, plumbing, steel, concrete contractors, the general contractors who do both vertical and horizontal work. Those are the primary customer set where we're selling it today.
Speaker Change: Anywhere where those customers can use architecture and design product, SketchUp, we are selling it into those bundles.
Speaker Change: For pure architects and only architects and only designers, they're not really buying TC1. They're just buying the product that they need. Okay, so within the engineering construction...
Speaker Change: part of the ECO. Primarily, as you know, it's been already out in North America. TC1 is a framework commercial offering. We've got over 20 pre-packaged
Speaker Change: sub-offerings within that to target the personas.
Speaker Change: Then we're, I'd say, early in the European rollout and really not in Asia-Pacific in a meaningful way, especially Southeast Asia, not in any meaningful way.
Speaker Change: I would anticipate next year that we really see Europe rolled out, and I would say probably partially so, in Asia-Pacific. We've got to have some of the underlying systems.
Speaker Change: work done to help enable that, which rolls out geographically.
Speaker Change: Then you asked about the O and bringing that owner and public sector into that, and we'll start to see more of that next year. Now, the owner and public sector actually already has its own form of TC1. We call it Trimble Unity, where we brought together multiple capabilities.
Speaker Change: we have around enterprise asset management and digital project delivery. And so that has come together in the form of a suite of technology to serve asset lifecycle management.
Speaker Change: which we think is actually super unique. So what we'll do is continue to pursue the asset lifecycle management within the owner and public sector, have the linkages to TC1, the extent of whether it is or isn't called TC1, I'm a bit indifferent. I'm more focused on that we're delivering the outcomes to the customers.
Speaker Change: The other thing I want to take a chance to point out is next year you'll see, we'll see, you'll see, we'll see more linkages to the machine control and guidance market where we have an as-a-service offering, linking that into the TC1 bundles for civil contractors.
Speaker Change: Take a capability like we have with B2W, think estimating and tracking field progress for civil contractors.
Speaker Change: That makes a lot of sense to link to the construction ERP that civil contractors buy from us, to link that to the machine control and guidance that they can buy from us, to link that to the project management.
Speaker Change: that the in-project controls that they buy from us. Not only to link the technology, to link the workflow. And these are the things that we can uniquely do at that intersection of the physical and the digital. So I look forward to seeing more rollouts next year. When you ask about the addressable market, what we have seen...
Speaker Change: Consistently through the rollouts of the bundles that we are expanding the size of the addressable markets. We're expanding the reach we have into customers as we move into more of an as-a-service offering.
Speaker Change: That's helpful. Thank you.
Speaker Change: You're welcome.
Speaker Change: Your next question comes from the line of Josh Tilton with Wolf Research.
Speaker Change: Hi, this is Arsani Madhavicham for Josh Tilton from Wolf Researches.
Speaker Change: First question, really great results in transportation and ACO, I guess, within transportation record bookings and from transport on despite the European freight rates.
Speaker Change: Can you maybe go into what's driving that? Is it better consumption than expected? Better new logo wins with larger customers being added? And then moving on to AECO, within AECO, TC1 specifically, what's going on there as well from a high level? Are there better expansions from existing customers? Are there new logo wins with improving win rates? Anything you can share there? And then I just had a brief follow-up. Thanks.
Speaker Change: Hey, good morning, this is Rob. I'll start with Transporion. The bookings were the record bookings, both for the corridor as a record.
Speaker Change: Third quarter level of bookings, it was the second highest quarter ever bookings, put it more longitudinally to the year, about 30% increase year-to-date on a year-over-year.
Speaker Change: basis. Those bookings are primarily coming from new logos and then increasing the, there's a land and expand play we have within the portfolio because there's a broad set of capabilities that the platform can deliver. And so that cross-sell
Speaker Change: of the rest of the capabilities is also driving a level of bookings. I'd say, in that business, I'm most pleased.
Speaker Change: with the level of the new bookings we were able to meet.
Speaker Change: to the customers. We're primarily selling to the shippers. We bring them into the network, and then they fulfill and execute through the carriers that are in the network.
Speaker Change: At the TC1 level, let me just make sure I understood your question. Are you looking for color on what's driving that growth or what else we're doing within? Right, right, exactly. Is it expansion? Is it new logo driven? Is there anything with better competitive wins with a more cautious budget environment for some competitors that are offering more expensive solutions?
Speaker Change: and I thank you.
Speaker Change: get into there.
Speaker Change: Yeah, so let's start with the bookings. The bookings were right at or probably actually slightly above the level of the ARR growth in the quarter. That informs the view forward that Phil
Speaker Change: ...talked about in his prepared...
Speaker Change: and his prepared remarks, we have an enormous ability to cross on upsell within the existing customer base that we have. And so that's where we do see the majority of the growth that we have in the business.
Speaker Change: and we are winning new logos. We have a differential offering and the more we can link.
Speaker Change: the bundles and the workflows.
Speaker Change: together we're seeing that generate new logo wins for us. The team has done just a really just I think a terrific job throughout the year, actually throughout the last few years, but let's just say throughout the year to date both at a product level, a go-to-market level, and the underlying systems level. So at a product level
Speaker Change: I think defining and delivering the TC1 bundles, linking the workflow, establishing a marketplace where we can do integrations and sets of APIs to be able to integrate the technology that we have, defining the bundles. We're seeing good success when we link ERP and project management, when we link ERP and estimating, when we link design and estimating. So we're following what the customers in the market are telling us to define the product set to take to market. At a go-to-market level, earlier in the year we moved to a named account.
Speaker Change: selling model and it's working and then at a systems and process level, sales enablement, sales operations, getting 360-degree views of our customers, underlying marketing transformation to drive the pipeline.
Speaker Change: The pieces are coming together nicely in the business, and then linking that to one of the earlier questions, this gives us the ability to take this.
Speaker Change: across the rest of the world from what we've already been doing in North America and part of Europe fully into Europe and then into Asia Pacific.
Speaker Change: Got it. That's very helpful. Thank you. And just to follow up, is there any way you can provide more color on what changed from the last earnings call when you provided the expectation of completing the audit review in September? And is there anything, I guess, that you could share that would help investors better understand that timing change? Is there any new target? Like, could we expect maybe this to be completed before the investor day or just anything that you could provide additional color on there? Thank you.
Speaker Change: Yeah, Harrison, this is Phil. Let me start. So, look, this is the number one priority for us. We're trying to work through this. E&Y has been performing incremental audit procedures.
Speaker Change: They're really focused on completing this, you know, but in a very thorough and detailed manner And so I think back when we thought it was a few weeks away. We underestimated sort of the just the breadth
Speaker Change: and depth of the audit as it went forward. So I think that was on us, but during the work, the team is
Speaker Change: The Trimble team is very focused on this. We've pulled in outside resources throughout this process.
Speaker Change: The financial statements that we filed we believe are correct, so
Speaker Change: We're continuing to work hard with them. Again, we're trying to get this completed as soon as possible. But unfortunately, it's just one of those we, as Trimble, can't control the timeline. And so all we can do is put our heads down and work really hard and be very responsive to the UI requests and try to get this behind us as soon as we can.
Speaker Change: And I would think the answer is yes, we would anticipate having it done before Investor Day.
Speaker Change: Got it. Thank you very much. Congrats on the results.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.