Trimble - Earnings Call - Q3 2020

Transcript

Speaker 0

day, and thank you for standing by. At this time, I would like to welcome everyone to the Trimble Third Quarter twenty twenty Resort Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the conference over to Mr. Rob Payneur, Chief Executive Officer. Sir, please go ahead.

Speaker 1

Hello, everyone, and thanks for taking the time to be with us today. Before I get started, a quick reminder that our presentation is available on our website and we ask that you please refer to the Safe Harbor at the back. We'll start on Slide two with the four key messages we want to convey today. First, the resilience of our team, the quality of our strategy and the strength of our financial model enabled us to outperform our own expectations in the third quarter. ARR grew 10% year over year to $1,260,000,000 while quarterly revenue grew 1% year over year to $793,000,000 Expanding gross margins and execution on costs led to adjusted EBITDA margins of 26.8%.

Our shift to a more hardware connected, software centric and recurring revenue business model is working. I want to express my gratitude to the Trimble team who continues to perform strongly under these challenging conditions, as well as our customers and investors for your continued support and confidence in Trimble. Second, executing on the Connect and Scale 2025 strategy remains our focus. We are working to connect stakeholders and industry lifecycle data to improve and transform customer workflows. The business model transitions are an output of this strategy, not an input.

Third, we continue to put organizational elements in place to enable the strategy. Most recently, we have named James Dalton as our newest board member and we promoted from within to hire a chief people officer, a chief digital officer, a VP of Talent and Diversity, Equity and Inclusion and a Head of Sustainability. Fourth, our long term conviction remains strong. We will balance cost containment and investment in innovation during the downturn. One hand, we reduced our cost base in transportation in the quarter.

On the other hand, we continue to increase our investments in autonomy and digital transformation. We maintain our goal to exit this recession on a stronger competitive footing than we entered it. And on that note, we are in a more proactive mode of looking for acquisition opportunities, which will advance our Connect and Scale strategy. At the reporting segment level, a few strategic comments to make. We saw better than expected results in civil construction, machine control and guidance.

In addition, our software businesses delivered a strong level of recurring revenue growth. In Geospatial, innovation is sparking demand. Our end customers have been getting back to work and catching up on project activity. In resources and utilities, the agriculture market has been resilient. In North America, for example, commodity prices have risen while direct support payments to farmers remain well above historical averages.

Markets such as Australia, Japan and Brazil all performed well in the quarter. These overall favorable conditions combined with the compelling ROI on investing in precision agriculture have contributed to our growth in 2020. In transportation, we took several meaningful steps which we believe will position the business for better performance in the quarters and years ahead. We implemented a substantial restructuring in the business during the third quarter, which will lower our ongoing fixed operating costs. Further, we made business plan decisions, which resulted in an inventory charge in the third quarter.

With these difficult decisions behind us, we can now see the path for improved performance in 2021 as compared to the 2020. At the macro level, market conditions have begun to improve in the transportation market with higher asset utilization, improved spot prices and increasing capital investment. Overall, we are cautiously optimistic that market conditions will support sustained growth for Trimble through 2021. As we move from election mode to governing mode, we will follow decisions on stimulus measures, especially infrastructure and local government funding and policy decisions relating to trade and tax. Let me now turn the call over to David for a review of the numbers.

Speaker 2

Thank you, Rob. Let's begin on Slide three with a review of third quarter results. Third quarter revenue was $793,000,000 up 1% on a year over year basis. Net of acquisitions, divestitures and foreign exchange fluctuations, organic revenue declined 1%. Gross margin in the third quarter was 58.8%, up 180 basis points year over year driven primarily by improved revenue mix and also assisted by lower discounting margins.

Adjusted EBITDA margin was 26.8%, up three eighty basis points year over year, a result of both gross margin expansion and cost reduction. Cost reduction was driven by structural actions and temporary factors related to COVID-nineteen. Operating income margins also expanded three sixty basis points to 24.2%. Net income dollars increased by 26% on a year over year basis, while earnings per share increased by $0.12 to $0.60 per share. Turning to Slide four, our third quarter cash flow from operations was $181,000,000 reflecting the strong cash flow generation of our business.

Operating cash flow represented approximately 1.2 times non GAAP net income in the quarter. Free cash flow was $165,000,000 We paid down over $150,000,000 of net debt in the quarter and the net debt to adjusted EBITDA ratio fell to 1.9 times. At the end of the quarter, we had all $1,250,000,000 available on a revolving credit facility and approximately 184,000,000 in cash. In addition, we have no scheduled principal payments on our debt until July 2022. Our liquidity and balance sheet remains strong.

Next on Slide five, we highlight some of the key metrics that we follow. Annualized recurring revenue, which as a reminder includes the annualized value of term licenses was $1,260,000,000 in the third quarter, up 10% on a year over year basis. Organic growth of ARR was 6%. Excluding our Transportation segment, Trimble organic ARR grew at a double digit rate in the quarter. Net working capital inclusive of deferred revenue represents approximately 1% of revenue on a trailing twelve month basis demonstrating the asset light nature of our business model.

We continue to proactively manage our costs while maintaining investment in key initiatives. Research and development on a trailing twelve month basis was nearly 15% of revenue. Two additional metrics that we follow are deferred revenue and backlog. Our deferred revenue was up 20% on a year over year basis through a combination of organic and acquisition related growth and our backlog was $1,200,000,000 up more than 10% versus prior year. These two metrics give us additional visibility into the future revenue trends in

Speaker 3

the quarters ahead. Turning to Slide six, recurring revenues made up 37% of total Trimble revenue in

Speaker 2

the quarter compared to 35% a year ago. We experienced recurring revenue growth across a wide range of businesses. Even

Speaker 3

in

Speaker 2

a tough economic environment, these offerings are essential to the operation of our customers' businesses. Our non recurring revenues including hardware, perpetual software and professional services experienced a year over year decline of about 2% in the quarter. Performance in these areas was helped by strength in our geospatial and agriculture businesses offset by expected weak performance in transportation. Overall, our professional service trends improved somewhat in the quarter from the beginning of the COVID crisis, but are still negatively impacted by lack of access to our customers, facilities and employees. In terms of geography, North America was down 5% representing a sequential improvement when compared to the second quarter, which was down 17%.

Revenues in North America were adversely impacted by the declines in our transportation business. Excluding transportation, revenue in North America grew over 2% year over year in the third quarter. Europe was up 9%, reflecting broad based improvement in project activity across the continent. Asia Pacific was once again the best performer in the quarter up 16%. Agriculture was a bright spot in Asia Pacific in the quarter as Australia recovered from a multi year drought and the Japanese government implemented increased direct support of farmers.

Our business in China, while still small, grew year on year in the third quarter as the country recovered from the easing of COVID related shutdowns. Turning now to Slide eight for additional detail on each of the reporting segments. Buildings and infrastructure revenue was up 1% on an organic basis. Revenue growth was strong in our software businesses. Segment margins were up nearly four percentage points due to higher margin revenue mix and cost control.

Geospatial revenue was up 7% on an organic basis driven principally by increased sales to customers. Revenue from sales of system to the surveying and mapping sector was essentially flat versus prior year, a meaningful improvement from the second quarter when revenues were down nearly 20% year on year. Margins were up over 11 percentage points due to a combination of higher margin revenue mix, compelling new products, lower levels of discounting and strong cost control. Resources and Utilities revenue was up 16% on an organic basis. We benefited from double digit growth in each of our precision agriculture positioning services and agriculture software offerings.

M and A growth also played a role in the segment growth in the quarter as the integration of CityWorks has added significant capability to our offerings for utilities and local governments. Margins expanded over seven percentage points driven by improved revenue mix, strong profitability from M and A and cost control. While top line results in transportation were consistent with our expectations coming into the quarter, the business performed well below our long term objectives. Segment revenue was down 21% on an organic basis and margins declined over 10 percentage points. The drivers of revenue and margin decline are broadly consistent with those we highlighted in our last earnings call.

The rate of revenue decline did improve in the third quarter as compared to the second quarter as did customer retention. Profitability in the quarter was impacted by lower revenue, subscription transition and M and A as well as an inventory charge that we took in the mobility business. Turning now to our outlook for the fourth quarter, we continue to face significant uncertainty in market demand across the industry sectors we serve. With the rate of COVID-nineteen infection increasing in many countries, our customers face renewed risks of work restrictions stemming from governmental rules to curb the spread of the virus. And the pace of the recovery in the broader economy remains uncertain.

As a result, we still don't have sufficient clarity in end user demand to enable us to give guidance. As we did last quarter, we will provide some color on the most important trends which will drive our performance. Starting with revenue, I'll remind you that our fiscal year 2019 had an extra week. The lack of the fourteenth week this quarter will adversely impact overall Trimble revenue growth by approximately $23,000,000 or about 3%. In this quarter, we will enjoy less benefit from projects deferred at the onset of the pandemic last spring.

Finally, the combination of lapping our CityWorks acquisition from the 2019 and the recent divestiture of construction logistics result in less favorable inorganic revenue growth momentum. Considering all of these factors, we anticipate that total Trimble revenue will be down modestly versus prior year in the fourth quarter. Nevertheless, we expect that our recurring revenue businesses will remain robust with organic ARR growth in line with third quarter twenty twenty performance. Note again that CityWorks, which is principally a recurring term license business was part of Trimble for much of the fourth quarter in 2019. From a segment perspective, Resources and Utilities revenue will continue to grow in the fourth quarter albeit at a more modest rate as we lap the strong fourth quarter of last year.

Transportation revenues are likely to decline at a rate comparable to what we experienced in the third quarter. The Geospatial and Buildings and Infrastructure segments are likely to see revenue trends at about the company average. Turning to gross margins, we expect margins roughly flat versus prior year in the fourth quarter. The extra week in the fourth quarter of last year did boost margins and we won't have that positive impact in this quarter. Separate from this factor though, we do expect gross margins to continue their strong performance driven by software mix, new products and reduced discounting.

Our operating expenses will grow modestly in the quarter, up approximately $20,000,000 sequentially from the third quarter. With our improved performance outlook for the year, we anticipate higher incentive compensation and we are seeing a gradual increase in discretionary spending across areas where spending was unsustainably low due to COVID restrictions. Assuming the revenue and margin dynamics I've described, we expect to manage to decremental margins in the low to mid-30s. Finally, I will note that we project continued healthy cash flow generation. With our leverage now at our long term target, we have reinstituted a modest share repurchase program.

We will continue to employ a disciplined approach to capital allocation as we manage our capital structure and invest for the future. With that, I will turn it over to Rob to conclude.

Speaker 1

Let me close by turning to Slide nine and reinforcing how we progressed against our Connect and Scale twenty twenty five strategy in the quarter. First, connecting solutions across our industry lifecycles. Two examples to share. In construction, we released WorksOS, which integrates design data from the office with machine control data to deliver real time progress and productivity updates for the entire job site. Slide 10 shows a visual of how Trimble is transforming workflows and construction by connecting the physical and digital worlds.

This is how we bring together the office in the field with our hardware and our software in a unique Trimble way. Today, put a constructible digital engineering model on the blade of construction equipment. With WorksOS, we can dynamically bring back surface data and view progress to plan. In essence, this workflow positions us to take the three d constructible model and next to add dimensions of cost and schedule to create a five d model. From here we will integrate this enriched model into the construction ERP system with additional financial and asset management views.

The aggregation of all this data coupled with artificial intelligence and machine learning algorithms is a further step towards an autonomous future. Back to slide nine and another example from construction. We launched augmented reality into our Trimble Earthworks machine control and guidance solution. Augmented reality is available in the cab of the excavator which helps operators more easily understand three d models, cut fill information, slope data and other reference points. Second, delivering breakout innovation.

Two examples to share. In Geospatial, our new GNSS receiver, the R12i, has been a market success. The innovation in the GNSS receiver is the integration of inertial technology that enables robust tilt compensation. What this means is that the surveyor can work productively and effectively in challenging environments. We are making our customers work easier.

The second example is highlighted on slide 11. Our structural BIM software is used for many types of materials and projects. This past month, the team announced the winners of our twenty twenty BIM awards. On this slide, you will see the winners for best infrastructure and best commercial projects. A closer look reveals that these projects deliver more than just incredibly detailed design visualization.

What these engineering teams are delivering are the precise specifications needed to automate fabrication for each individual component as well as instructions for assembling those complex designs in the field. This is what we call constructible design, and these two projects are exemplary. Third, accelerating our business model transformation. In construction, we sold our first platform as a service offering in our civil construction business. We are delivering technology assurance for our customers while integrating construction cloud services and world class support to keep our customers' operations current and optimized.

Fourth, we are taking actions that enable us to efficiently and effectively scale our business. Last week, we closed on the divestiture of our Construction Logistics business and in the third quarter we completed the acquisition of a business that further expands our positioning services network to now cover over 1,000,000 square miles in North America. We are making decisions and investments in the area of cloud enablement, data management and artificial intelligence that are connected in approach, which will enable us to scale to meet the opportunity ahead of us. With that, I'd like to thank everyone for taking the time to be with us today and a special thank you to our global Trimble colleagues. Operator, let's please go to Q and A.

Speaker 0

And A. Your first question comes from the line of Gal Munda from Berenberg Capital. Your line is now open.

Speaker 4

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

Yeah. That's kind of my quick first question. Thank you.

Speaker 1

Hi, Gal. Hey. Welcome welcome back.

Speaker 4

Thank you.

Speaker 2

As

Speaker 1

it relates to the ARR growth in the quarter, so 10% at a total company level, around 6% at an organic level. If we exclude the transportation business, we'd be in the double digit growth on ARR including in the construction business, so in the Buildings and Infrastructure reporting segment. In terms of the breakdown between, new customers, and existing customers, it's both, is the short answer, where we've seen growth. So, we are figuring out a way to, to sell into new logo customers, in this, you know, in this digital environment. So we take a business such as the SketchUp business, ARR grew almost actually 50%, more than 50% year over year, and that's clearly coming from an expansion of the addressable market and, and winning new new logos, seeing the same thing in the viewpoint business.

Having having said that, like compared to, let's say, pre pandemic level, it is there is a greater weight towards penetration of existing customers at the total at the total portfolio level and I think it's probably for for obvious, for the obvious reasons. Does that help?

Speaker 4

That's very helpful. Thank you. And just as a follow-up, you mentioned your strategic one of the strategic levers is connecting the industry life cycles, and you talked a little bit more specific about the construction. What I'm wondering is when you start connecting those dots, which previously were kind of best of breed versus now best of breed, and you're becoming more of a suite of product, are you finding yourself you know, how does that relate to the average contract size that you're seeing, the sales cycles, and potentially, you know, do you have a new buying buying center within those companies that that you previously sold maybe one tool to someone else there?

Speaker 1

So if I take I'll see. I'll use construction as the as the example. And you're right. I mean, the the connect part of the connect and scale strategy is absolutely to connect stakeholders, data, solutions across the industry life cycle whether it's construction, agriculture, transportation, utilities, forestry. To give you an example in construction, you know, we can see, for example, if I just take the Viewpoint business discreetly which is the construction management system, you know, that system of record for the construction company, We've had over a million and a half dollars of new ACV, in the last, twelve months.

And this is really customer pull. We're really early, would say, in the Trimble push of the strategy. So customer pull, to essentially to create to create suites or bundles of solutions to connect into that system of record. So for example, in in construction telematics, the information on asset utilization, that can augment job cost, which is in the ERP. If we look at our structural business, fabrication, management, that ties into the material estimates, are in the back office software.

If we look at the, MEP or mechanical electrical plumbing business we have, there we see the integration of estimating pricing, change management, job cost and procurement, into that system of record. So we're seeing real examples, where our customers are asking us to integrate the the various Trimble technologies that they have. And we're starting to see, you know, a few, a few more new logo wins as a result of being able to come in as a unified, face to that customer. In terms of who we sell to in that new model, recent example with an e n r 400, customer, who made a significant commitment to Trimble, was with the CIO. So it starts to look more like c level when we're up leveling the sale to an overall Trimble sale.

Clearly, that correlates to the contract sizes. So let's say as opposed to, three, four separate contracts, which could be in the tens or, low hundreds of thousands each, right, it starts to become, you know, over a t over a total contract value basis, you know, they start to look more like million dollar, type deals is is where we're heading with it.

Speaker 4

That's really helpful. Thank you so much and congrats on a great quarter.

Speaker 1

Thank you.

Speaker 0

Your next question comes from the line of Richard Eastman from Baird. Your line is now open.

Speaker 5

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

Speaker 1

Well, hi, Rick. So I think it's pretty similar narrative to what we had last quarter. I'll start by saying we did meet the top line expectations we have. So it's clearly below our long term ambition. But just to establish, I think, credibility that we can hit the number that we put forward as a starting point there at the top line.

What's similar to the narrative from last quarter that holds is we expect that the moves that we're making now, we'll see the fruits of that, and margin expansion into the, I'll say, second half of next year. We'll see that more in the second half of next year than the first half. But the nature of the recurring revenue business, is that it does take a while for that engine to get going. And when it gets going, becomes a cumulative, game from that point. So really similar view, and, but I think you characterized it well upfront.

Speaker 5

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

But is there any message in kind of the double digit sequential rebound on the hardware side of the business just as a basis for follow on software sales?

Speaker 2

Hey, Richard, it's David Barnes. I'll offer up a couple of observations. Part of what we did benefit from is catching up on projects that got stalled or delayed in q two, so that helped. But that's not all of it. As Rob mentioned, we've had a lot of innovation in the geospatial area, which is improving revenue trends and margins, by the way.

And so and we're seeing some you know, it's hard to draw a trend in these noisy times, but but some improvement in a number of our hardware is that you're right, bring software with it. So a bit of all three.

Speaker 5

Okay. Okay. Very good. Thank you.

Speaker 0

Your next question comes from the line of Ann Duignan from JPMorgan. Your line is now open.

Speaker 6

Hi, good afternoon. Maybe Rob, you could provide some color on the fundamentals around the different end markets. Usually, you give us some good color in terms of how you're thinking about construction activity from a more macro standpoint, particularly now that we most likely won't get a large infrastructure bill. Then similarly on transportation, at least, you know, what the fundamentals have improved, you know, we've seen a huge increase in truck orders. So I'm just wondering how you're feeling about the fundamentals specifically in both those industries.

Thanks.

Speaker 1

Sure, hi Anne. So I'll start with the buildings and infrastructure and just do a little bit of a walk around, the stakeholders. I think the logical place to start would be, with the owners. And I'll use in the I'll start in The US thinking about state DOTs or Department of Transportation as owners. And I would say the DOTs have been more resilient than we expected.

So that's been a good thing. That'd be a comment on a large owner segment. If I go next to architecture and we look at the indicators, you know, the ABI is still below 50. And now we saw September it looks more encouraging than the numbers did in August. So I think the ABI is helpful for macro health.

But when we look at our actual architecture and design business, it's meaningless because that's the business where we saw ARR up almost 50% year over year. If we go to civil construction, and I'll stay in North America for a for a little bit, civil contractors, what we saw is a decrease in backlog with civil contractors, but an increase in backlog with civil engineers. And so that would suggest an initial recovery that could flow through to the contractors. If we look at our viewpoint business where we could see the system of record for general contractors, again confirm that some bookings are slowing and some of the velocity of hiring has been lower as compared to 2019. When we look outside The U.

S, if we take construction PMI, that shows a mixed view forward with a number of markets expecting expansion next year with I'd say an emphasis on Europe when I quote construction PMI numbers. We also look at a basket of backlog at some of the largest construction companies in North America and Europe. And what we see there is that and this is not surprising, see that residential is doing well, commercial is down, EPC and infrastructure have down a little bit. So what we see, if I try to summarize that, is we see some of the end market work moving around. I would say, what the numbers we see today, are unambiguously better than what we saw in that March, April, May time frame.

What's conflicting are the signals on sustained demand. And I think I would close on that one by saying what we do feel is that there is unequivocal demand for digitization and improved access to information. So we think at the secular level, you know, we're in the we're in the right place. And if I go to transportation, and probably could start actually with some of the research you had. We certainly saw that the Class eight unit sales, well, they're below last year, but they clearly improved in the last few months.

So we do see some higher asset utilization, improved spot prices and and increasing capital investments. So transportation

Speaker 7

does look like it's in a quite a

Speaker 1

bit better place at a macro level than it was a few a few months ago. I'll pause there and see if I answered your question.

Speaker 6

Yeah. No. That's helpful. It's always good to get your perspective from what you're seeing kind of feet on the street. And then again on transportation more on the margin side, you had talked about last quarter the lower margins and you gave us a contribution, I think it was 3% macro, 3% cubic and three percent subscription conversion.

And then the rest to get back to the 20% was going to be kind of self help. Could you provide us any kind of qualitative just where you think you are today in terms of how much of the margin was macro, how much was cubics, how much was subscription conversion? And then also how much of the margin decline was actually the restructuring and the inventory write off?

Speaker 2

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

Speaker 6

Okay. But I think you said you took some restructuring charges also or was the inventory write down the restructuring?

Speaker 2

No. We did a workforce reduction, but then that shows up in the non GAAP restructuring charges.

Speaker 6

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

Speaker 1

Thanks, Ann.

Speaker 0

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is now open.

Speaker 8

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

Speaker 1

So, Colin, if I I'll start with the the the setup at the financial level and then pivot to the strategic level. At the financial level, I'll anchor that really similar narrative from the last quarter is that we expect to see more of the flow through improvement to the bottom line in the second half of next year than the '21. So we're taking the moves now to position the business for long term success, long term progression. At the that's the financial answer. At the strategy level, you know, the strategy we're pursuing in transportation is that of a connected supply chain.

That means connecting carriers and connecting shippers. So that, that isn't changing. In fact, it's progressing, I think, in a in a positive way. And on the carrier side, you know, that's that that means connecting the driver, the truck, the fleet. And we believe that the the the three legs of the technology stack are telematics, which we called mobility, the back office, which we refer to as our enterprise business, and then our mapping business for the the the routing, mapping, navigation, engine.

And something unique, as Trimble in terms of connecting carriers. And then or in addition and in parallel, it's connecting the ship account if I if I were to, use a, you know, a customer example, you know, we we do feel like we're seeing, some customers who, wanna work with us because we can be that one stop shop, because we can bring, all these pieces, together, of the, of the tech stack.

Speaker 8

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

Speaker 1

Well, yeah, I'd start by saying kudos They've been very good, to work with. They've been, supportive and clearly the success they've had in their program, has been a catalyst to open doors for us with, other automotive OEMs, with tier one suppliers, and has also been relevant, to opening doors with the heavy equipment, OEMs and markets like construction and agriculture. And sort of the connection point with the, one of the acquisitions we announced in the third quarter, with our positioning services business, that was the acquisition that expanded our footprint in North America to now, be over sized to over 1,000,000 square miles. And that's, that really is for that to to provide that, you know, ubiquitous high con high high accuracy, high quick convergence time accuracy to, to the customers.

Speaker 8

Thanks so much, guys.

Speaker 0

Your next question comes from the line of Chad Dillard from Bernstein. Your So can you just

Speaker 9

provide a framework for how to think about the bundling opportunities and building an infrastructure? You know, how much is bundled today versus, you know, where it could go over the next, like, one to three years? And, like, what do you need to do in terms of distribution strategy to achieve this goal?

Speaker 1

So I'll start with the well, there's the I'd say there's a see, it happens at the intersection of the product strategy, and the go to market strategy. So, at a at a product level, you know, this is about, you know, understanding our understanding our market segments, understanding our customers, you know, understanding that buying persona, you know, the user persona. And so when we talk about our connect and scale strategy, it's very much a customer success strategy, customer life cycle, customer success strategy. So it's very much driven by that customer persona to understand what the logical bundle of technology is. What we continue to say to work on is making that bundle easier to consume.

So think of a good, better, best type framework. Just make it simpler is really a point of emphasis we have on the on the product side. Because we clearly do a lot of things, and the that can manifest as complexity. I actually think elegance happens through simplicity of that product offering. At the go to market level, this is, know, again, if you start with the customer segmentation, and so depending on the size of the customer, let's take a mid to larger size customer opportunity, that looks like having one single point of contact for the customers, and then having the specialists that, are under the the wings of that of that person who owns the account.

So we'll have a both strategy. We'll have both reps and partners selling the individual point solutions, and then at a key account or strategic account level, you know, doing business in a different way. So there's not a one size fits all. We, say, position ourselves or manipulate ourselves to meet the opportunity and meet the customer where they are.

Speaker 3

Got it. That's helpful. And then just one thing that definitely stood out to

Speaker 9

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

Speaker 2

Hey, Chad. It's David. I'll start by saying, as you predicted, we're not yet in a position to really give a lot of clear thinking on next year. There's so much uncertainty. But if we start with a framework that the economy is gonna grow back, and I've seen a lot of projections that say it'll go back in '21 to where it will be in 2019, whether that's The US or the world.

And so we ought to hope to at least follow, if not beat the the overall economic trends. From a margin perspective, you know, the the megatrend driving our gross margins better principally is a revenue mix story, and that looks to continue. So that will support continued improvement of the gross margin level. We will see operating costs grow faster than revenue next year. Some of the cost reductions that we've had this year, as I mentioned in my prepared remarks, are not sustainable.

We'll want to be meeting with our customers and some things that are just logistically hard to do. So how do those net out? We'll go into the year planning to try to hold margins at the operating line to close to where they are now with the gross margins going up, giving us some cover for the operating expense going up a little bit. But that's just an early framework.

Speaker 3

That's helpful. Thank you.

Speaker 0

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is now open.

Speaker 10

Hey, guys. Thanks for taking my question. You know, one for Rob, and this builds on maybe the last question, but you talked about some of the go to market changes with your Connect and Scale 2025 initiative. You know, you talked about one single point of contact for your larger customers and maybe a rep and partner model for your smaller customers. You know, where does this kind of fit today?

And I guess how much more work would it would you need to do to to maybe get to this level?

Speaker 1

Hi, Jason. I mean, I'd have to say that we're in that first or second inning of the nine inning game. We're we're definitely early, in this journey. And I view that as a good thing, and we're able to get a lot of learnings. Some of the success that we've had thus far, I really see as more of a customer pull than, than a Trimble push to the customer.

So it's really, I'd say, early validation that we're doing the right things when we're just listening to our customers and responding to what they're asking us what they're asking us to do. We have we named been about a year ago, we named a chief data officer. And one of the things that I find to be an exciting opportunity is how we can leverage, the data at Trimble. Or well, think artificial intelligence, but, you know, I mean, you could just think of some basic analytics, frankly, to be able to to to compare, the customers the customer sets we have across the the different, I'll say, businesses or products, and draw the, draw the overlapping circles to identify, who's already using multiple Trimble solutions, and to get a better sense of the bundles, that could be logical for customers of a certain type. So just by mining our own data, we think there's a heck of an opportunity, to point us the way.

And I would call that the marketing side of the go to market is to, you know, mine our own mine our own data, and point us the way point use that to point the teams that we talked about, in the right, in the right direction. You know, overall as a reporting segment, we're over on a TTM basis, 1,200,000,000.0 of revenue in this business. It's a majority software business and we're operating at a scope and scale across a serving a variety of stakeholders on a on a global basis. And we think there's I just wanna emphasize, I think there's really great opportunity within the existing base that we have today, not to mention then a strong value proposition to those that we don't serve today.

Speaker 10

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

Speaker 2

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

Speaker 10

Great. No, I appreciate that. Thank you.

Speaker 0

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is now open.

Speaker 11

Hi, good afternoon and good evening everyone.

Speaker 4

Hi, Stuart.

Speaker 11

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

Speaker 1

Yeah. To give you a couple of data points, Jerry, if we look at Viewpoint and e Builder in combination, in the quarter, ARR was up in the high teens, in the quarter. So clearly a nice progression. The net retention in both businesses was over a 110%. So clearly, good results from the businesses there.

That's probably the most definitive news I could give you, good news on the financials, top line financials of the business. On the bookings side, Q3 was a solid bookings quarter for the construction software businesses. I'll take it up level it in aggregate. It clearly was in the viewpoint as well. So the recurring ACV is strong double digits increase.

Now some of that, of course, is q two business that didn't happen moving into q three. So I also wanna be careful not to overstate that, but really just nice execution from from the teams in those businesses.

Speaker 11

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

Speaker 1

Well, there is an aspect that pushes earlier than what we talked about at analyst analyst day. Clearly, the the composition of revenue is a is ahead of where we talked about, at at the analyst day. And we've had a pandemic that has certainly influenced the composition of that as we've seen the recurring revenue, performed through. So I would say, you know, the the context of the moment validates to us that we're heading in the right direction. You know, the secular, really, I think, is in creates a tailwind for us.

When we talk about connect and scale, you know, I've talked I've talked more about the connect side in these calls. On the scale side, it's important that we look at the the systems and the processes that we have across the business. We named the chief digital officer in the in the third quarter. Really happy, you know, to have this in place and I think it's gonna provide us great leadership across the organization on this journey. We are investing.

So when we look at the the CapEx spend and you can see that flow through in the, you know, in the free cash flow, you know, clearly, we will put CapEx behind this, because we do need the underlying architecture to enable, additional conversions in the business to happen. We need, the underlying architecture to enable the, I'll call it, to enable the bundles to transact at a scalable level. So, there might know, I think it won't, while these things I think will happen faster than we would talked about at analyst day, I I also would wanna to have a little bit of caution in terms of where the slope goes because we need to continue to create the enabling architecture to scale this opportunity.

Speaker 5

Okay. Thank you.

Speaker 1

Thanks, Jerry.

Speaker 0

Your next question comes from Rob Wertheimer from Melius Research. Your line is now open.

Speaker 7

Hi, everybody. I had a couple of kind strategic questions, if I may. On the construction side and on automation,

Speaker 2

would you say that you're finding yourself a

Speaker 7

little bit more in competition with your OEM partner customers or finding yourself as a more valuable partner or maybe some of each as you broaden out your potential reach? That's really my first question, just how that dynamic is shaping up as different people make different investments and facets of automation.

Speaker 1

Hi, Rob. I think it's a little bit of both, is the, is the honest answer. You know? And and I think you could the easiest segmentation happens at the size, of the of the organization. If you're a tier two, three, size OEM, it clearly or we believe it would clearly make more sense to, work with a scaled technology provider than to, you know, than to try and create those investments, in house.

And we start always by talking about the mixed fleet. So mixed fleet is so fundamentally important. So an autonomous site isn't gonna work if you have proprietary, multitudes of proprietary equipment running around on a together, not communicating, with one another. In fact, when we look at the strategy we have in autonomy, yes, we have positioning technologies, and a strategy that's very relevant to the the autonomous and automated movement of equipment. But that has very little value without a deep understanding of the work that has to be carried out.

So we think that by understanding the physical world in which these machine operates that we have the ability to develop the optimal plans for the tasks at hand. And it really be that brain for the site or the farm. And we think that that's a really important aspect So to be that operational center for the mixed fleet, is an important aspect, of the strategy. And then when we get into the tech stack, what we've talked about for years is machine control and guidance, that we do in civil construction, what we'll call it steering and guidance in agriculture.

And we call it automation. Well, that's autonomy. It's between level one and level two autonomy. And we keep working up that automation spectrum, you know, towards level three. We we look at, specific workflows that'll make sense, machine types and workflows, that would lend themselves to an autonomous work situation that will will make sense.

And then we think we've got a full spectrum of cloud perception, optimization and control technologies that are that are relevant here.

Speaker 7

Okay. Thank you. Fascinating area. The other question, I'm sorry for the clarification, but for the decision you made in transport that the decisions and inventory write down, to the extent you're able, can you just clarify, are you exiting product lines anyway? Are you exiting just a product and replacing it?

And then just how do you feel about customer traction there and ability to sort of ramp back up with truck production? Thanks. I'll stop.

Speaker 2

Hey, Rob. It's David Barnes. So as you look at the revenue line, you can see that the volume of business we're serving is going down. So the restructuring in part simply recognizes that the business has contracted and is smaller than it was. A lot of the strategy we're working through to improve, customer retention and customer satisfaction is about streamlining the product offering, replacing old technology, with more supportable technologies going forward.

So when you support fewer platforms, you need less resource over time. The inventory write down specifically was about products that were, committed to when the business was bigger and more healthy, and we've worked through our strategy with regard to customer targeting and pricing. And we've recognized that the inventory valuation, we've updated it to reflect that plan. So we're not we haven't exited any businesses per se. We're optimizing the business that we've got.

And as Rob said, aiming for the inflection point where on all the key metrics of ARR and revenue growth and margins. We can we can get momentum toward what a good business looks like in Trimble in the second half of next year.

Speaker 7

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

Speaker 2

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

Speaker 7

Perfect. Thank you so much.

Speaker 0

Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is now open.

Speaker 12

Yes. Hey, thanks. Thanks for squeezing me on here. So I wanted to follow-up on subscription transition talk and just get a better idea for on a relative basis where B and I is in that transition relative to the software aspects of your other segments. And then digging into B and I specifically, I was wondering if you have noticed any, interplay between, the subscription transition and maybe the size of the customers that are signing on?

Presumably, you get the large customers to sign on first that drives some of the subscription transition and then find network effects, some of the smaller stakeholders start to sign on as well. And maybe that accelerates the transition further. Are you noticing any sort of interplay there?

Speaker 1

So I'll start with B and I and where we think we are on the software transition. I would describe that more in middle innings, maybe early middle innings on the software transition. In transportation, I would say we're in probably solid middle innings on that business, maybe in the late middle innings on that one. Our enterprise business, which is the back office software, we are executing a transition to subscription model in that business. The rest of the businesses really already are subscription and transportation.

So that's a little further ahead mathematically than BNI would be. Think geospatial is very small aspect of it. So it might be early but it's a lower dollar amount. And then the resources and utilities reasonably far along. One of the strategies we have, just Blake is also looking at hardware businesses and rethinking the business models on some of the so while you're asking about software, just I also wanna comment that, I think, we take the civil construction business, we launched what we call Trimble platform as a service in the quarter.

And that's a new way to monetize the business where think of it as a bundle of the machine control hardware with the software with ongoing support and service providing technology assurance, for the customers so we can upgrade functionality, over the lifetime, of that. So we're we're we're really, you know, taking a fresh look at, all the business models we have. And then when you ask about the interplay with subscriptions and customer sizes, you know, the one that we talk about the most is actually at the owner level. And our belief set is, that if we can, win the owners and I'll say some of its hearts and minds and some of it is the owner business that we have, whether that's a Department of Transportation or the owners that the capital programs that we manage through our e Builder business where we manage hundreds of billions of dollars of committed construction volume. We see that, as a mechanism or a catalyst, to promote the use of technology, into the field.

And then, you know, at some level, I guess you could say once you've done that, you could look at the general contractors, as the catalyst, win the GC, win the subcontractor, and think about the waterfall as such.

Speaker 12

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

Or what was sort of the strategic driver behind that?

Speaker 1

I'll start with the divestiture of the Construction Logistics business. It's a business we've had for a long time. It was arguably our first foray into telematics many many years ago. You know, from a I'll say from a financial standpoint or maybe even a governance standpoint, I think as management, we're paid to allocate capital, efficiently. And then when we look at how to allocate capital in the construction logistics business, it was a business that's reasonably concentrated and penetrated.

And we felt that when we look at the landscape of it, it was its future was best served to be part of what Command Alcon was the buyer. It's the future of the business and therefore I think the future of the individuals who work in the business. And we wish that business great success is better served combined with Command Alcon. So I think we at a strategic level to allocate capital optimally either needed to be a buyer or a seller and the nature of the market was such that we thought it was better to be a seller on the construction logistics business. It doesn't change the conviction of our view on the connected strategy nor as a signal of a shift of any intent whatsoever.

And then you asked on the acquisition side, I would rather than maybe be specific about where we might see gaps, I would say we think about making acquisitions that advanced our connect and scale, strategic imperative. So, on the connect side, we certainly look across that life cycle, and across the stakeholders and we'll think about where we have additional opportunities to serve. In many cases that may be tuck in, and there's businesses out there, there's a long tail of activity in construction tech. I'll say construction tech businesses, which arguably are, you know, their long term future is to be a feature inside of larger company such as Trimble. So, you know, there could be some aspects of that that really help us tighten the workflow or bring additional data elements that are that we think could be we think could be compelling.

So that's how we think about the the acquisition side.

Speaker 12

Understood. Really appreciate the time. Thank you.

Speaker 0

And your next question comes from James Faucette from Morgan Stanley. Your line is now open.

Speaker 3

Great. I just want to follow-up quickly on the M and A commentary, Rob. You as well as just the product portfolio, where are we from divestitures in in examination of the portfolio standpoint? Is there is there more to be done there? Or how do you feel like, you know, you're looking now?

And and as far as the acquisitions, etcetera, the acquisitions that you are doing, you you would think about doing, is there are they largely in in kind of the business and pricing model that you wanna get to already, or is there gonna be some transition periods, do you think, for for a lot of them as you pull them into the business?

Speaker 1

Well, let me start on the divestiture question, and I'll probably have to ask you to repeat the acquisition one. I didn't quite make all of that out. On the divestiture side, we continue to look at the portfolio. And so if the axis, if the two axes are strategic fit and financial performance, we have a point of view of our own portfolio. The time has to be right for us and I'd say a potential buyer.

I don't want to signal that there's major trunks or branches of the Trimble business that wouldn't be there. Just think we're doing the right we'll go back to my comment about, you know, I think we're paid to allocate capital efficiently and effectively. And we're looking at, you know, the in the context of the opportunities that we see in front of us in construction and agriculture, transportation and our core survey business, where do we have opportunities continue to win, to gain a relative market share and to effectively execute the strategy. Where if we feel, in any of those that were in a suboptimal position, okay, well that would certainly say something about strategic fit. Just wanna say we are being diligent in the exercise.

It's an ongoing effort. And I think it's something that we should always be, on an ongoing basis, be looking at. So that's a divestiture answer, but I missed the acquisition question.

Speaker 3

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

Speaker 1

Okay. Got it. That's a good question. I'd say they they could look like two flavors. One would be, I would call it a software centric acquisition.

And the second would be really more autonomy related. And the more autonomy ones from an accounting perspective are likely to show up in hardware. Now how they monetize over time, okay, that we'll say remains to be seen. So those would be the two vectors that we think about James. And for the software ones, We don't have a dogma that says it has to be subscription business already.

All things equal, that's a good thing. All things equal, if it's already in a transition that's better than not being in one at all. But we don't make that a hard cutoff criteria for acquisition screening.

Speaker 3

Great. Thanks a lot.

Speaker 4

Thanks, James.

Speaker 0

And there are no further questions at this time. I would now like to turn the call over to our presenters for any closing remarks.

Speaker 2

Thank you very much, everyone, for joining us on

Speaker 1

the call. We look forward to speaking to you next quarter.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you so much for your participation. You may now disconnect.