Trimble Inc. — 2024 Q1

I'm going to turn it to David Barnes. David is staying on with us to see this through to its conclusion. And so David, why don't you?

Chad, so the process is that our 10-K was filed, as you know, in February and the PCAOB selected EY's audit of Trimble for their review. And as the EY team looked over their work papers on the internal control side of things, they concluded the documentation that they and we had would -- was not sufficient to meet the standards of the audit of internal controls. And Chad, the thing I'd point out is the EY support of our financials is unchanged. This is just about the internal controls. No issues with our numbers have been identified by EY or us. What's happening is, EY is going to go through enhanced audit procedures to confirm the numbers and then we will issue an amended 10-K which will enable us to issue the 10-Q as well. This -- we've looked at -- companies have gone through this and it takes probably more than 1 month, hard to predict the timing. It's inconvenient but we, at this point, have no reason to believe that our numbers will change and we're working cooperatively with EY to get through it.

So bookings in the quarter continued to be strong. So put together really a couple of years now of strong progression in the bookings. The bookings -- the ACV bookings were over 20% growth in the quarter. So we like what we're seeing in terms of the progression there. Within that, Trimble Construction One is clearly an offering that we've been talking a lot about over the last, say, 1 year, 1.5 years. The bookings grew faster than that within Trimble Construction One. So Trimble Construction One, we're continuing to increase the level of adoption through that as we've transformed our selling organization and the processes and the systems to go along with that. So I'll give you an example, in North America, I think about 80% of our bookings were Trimble Construction One bookings within the quarter and those grew at a level of almost 2x the bookings level growth on a year-over-year basis. So strong progression, Chad.

Jason, the breakdown on that is about 2/3, 1/3, 2/3 existing logos, 1/3 new logos. So if we take new logos, what we see is that the offering is expanding the addressable market. In some cases, that's allowing us to go, I'd say, more than the small, mid-sized end of the market with the offering. And then on the, let's call it, the mid- to upper end of the market, we continue to see customers wanting to buy into an ecosystem. We think that's driving a good amount of the growth. Team has done a great job executing.

Yes, good question. So on the macro side within AECO, what I would comment on, is that we see good growth in onshoring, reshoring of manufacturing, we see -- and you see that in Europe and North America. Renewables, data centers, these are strong growers in North America and those bookings and ARR growth supports that. Residential, with interest rate environment is on the other side of that. Trade, that aspect of the market is a bit more challenged. We actually also, Jason, have quite a bit of data within our own systems. As you know, we're managing nearly 1/3 of U.S. construction through our systems. And so we can see that hiring is up in the market here in North America in the nonresidential space. We can see geographically that there's been the largest growth in the Midwest, followed by the Southeast with Florida, Carolinas and Georgia.

Jonathan, it's Rob. Good question. We actually already see that in AECO. And so you can see the growth in the quarter, for example, was the 18% on the ARR as well as 18% revenue. If you look in transportation and logistics, you actually have the same phenomenon -- total revenue up for ARR up [ 4% ]. So it correlates to the amount of recurring, it's in that. The one that will be disconnected and would remain so for, I think, a number of years would be field systems, which is predominantly a hardware business. I think they recurring, as I recall it, in the 20% range on that. So those will remain separated and thus, leave a separation at the total company level.

Yes, a good question as well. So another strong quarter of bookings growth. That's 2 quarters in a row of records for the business, a record Q4 and then a record with the Q1 as well. What I would say is, there's a few things to add on to that. So the team began successfully cross-selling Transporeon solutions to existing Trimble Transportation customers here in North America, which exemplifies go-to-market synergies and we think we're just getting started. Conversely, we've been selling some of our maps solutions into the European market. Those bookings growth were both with the shippers and carrier customers.

Jerry, it's Phil. And thanks and good question because I know there's a lot of moving parts in our outlook. So, yes, if you think about Q1, as I talked about the term licenses, are largely a Q1 dynamic and that's that $50 million drop from Q1 to Q2. So if you look at the margin basis, I think it's around 400 -- a little bit more than a 400-point drop. So the large part of that, I'll put it into actually 4 buckets, half of that or a little over half of that is because of the dynamic of the term license. If you remember, as the term licenses actually get recognized all upfront. So that's high-margin revenue. And then as you move into Q2, the other 2 pieces are, one, we have our merit raises that take effect in April. And so that's about 100 basis points and then another 100 basis points is some additional OpEx primarily around the AECO business and the sales and marketing and R&D spend that we're -- we've talked about incremental spend there to continue to drive that growth engine. So -- and then the remainder is the term license to bridge that 400 points.

Well, so the Transporeon will certainly help them at the company level in terms of bringing up the ARR growth potential. The other side of that is the mobility business. And so the net of that gets to the guide that we put forward, Jerry.

At this point, no. No, we're maintaining the outlook on that. It has -- I mean, it would buy us more than above to the mid but we're going to leave that guide where we are right now.

Kristen, great question. Let me take that twofold. First, with the, call it, the 100 bps of investment -- OpEx investment into the AECO segment that Phil referenced. More than half of that is at the sales and marketing level. So that's putting feet on the street, sellers to go get the business that we think is there. About 1/4 of it is in R&D as we continue to drive connectivity and interoperability between the solutions driving workflow capabilities as well as AI investments we're making into the products. And then the remainder is in G&A, which is really the systems investments and the systems investments, which are enabling a lot of this to happen.

Yes, it's a great question. So on a multiyear basis, I would frame this market as the largest available TAM that we have to service. We know the multitrillion dollar size of global construction. We're playing both in vertical construction, horizontal construction. We know it's a market that's large, global, underserved, underpenetrated, has challenges with productivity at the intersection of productivity and sustainability, which our solutions positively affect. We see more and more customers wanting to buy into ecosystems and our right to win, we think begins with the breadth and depth of solutions we have across the continuum of the life cycle. Furthermore, if you subscribe to a notion that the world is becoming more data-centric, more data-driven, then you will like the touch points we have across this industry where we can, we believe, move from optimizing tasks to optimizing systems.

This is Justin Pellegrino on for Rob. I just wanted to look at the equipment side and what does a typical downside in the equipment side look like versus where we're at now? Are we most of the way into a normal downturn? Just any color there would be I think helpful.

Thanks for the question. Well, we certainly are following what the OEMs are reporting on their unit sales, both at a retail side and a wholesale demand level. And there's for sure a correlation within Field Systems business we have and the OEM. So we have OEM exposure let's say, in field systems that we really don't have nearly as much of in the other 2 segments of the business. What we would see through our own numbers is that the European economy is more challenged and we've seen some of the prints out there on units in, let's say, Europe, in construction, although interestingly enough, our Europe business in field systems performed quite well, relatively well in the first quarter.

Rob, thanks for the question. You're right about the original thesis of it is, we didn't, let's say, create our model fundamentally around bringing the European applications into North America. We saw that as additive opportunities and we for sure saw that we could do it. We just didn't predicate the deal on that being the fundamental thesis. So yes, hey, good news or that's the, the example, the customer I talked about in the prepared remarks, it's a multi-hundred thousand dollar ARR win that we have. And it actually is using the autonomous quotation product that we talked about earlier as well. So not even, let's say, the -- let's call it, the older or existing application capabilities we had in the business, it's actually a new one and so we find that very interesting to think about.

Yes, it's a good question, Rob, and Phil can chime in after I set this up. And you're right, there was an ag [indiscernible] there in the numbers that you see. But in addition to that, we think about transitioning more of those hardware models into an element of recurring revenue. And that will naturally have a gross margin impact. So think about a system that might have sold for, let's call it, $40,000 system and that for us from a, I'll call it accounting perspective, has an element of hardware and software that's in that. And let's say that, that traditionally was splitting, we'd call it, $25,000 of hardware and $15,000 of software, so $40,000 sale. That might now convert to $25,000 and for the hardware upfront and a subscription of $5,000 a year. And in that case, that will have near-term headwinds to the gross margins. Now we're not flipping a switch and going 100% that direction, Rob. But you can see from the ARR growth that was 13% ARR growth in the first quarter, that it is a model that we are moving towards. So on a longer-term basis, that could be 200 to 300 basis points of a headwind.

No, I think that's right, Rob.

Yes.

Yes. Josh, it's Phil. So I'll answer -- your second question is the easy one. Yes, you are thinking about it correctly. Our 53rd week encompasses January 1, 2025 and a large portion of our term licenses renew around that date. And so you are correct in thinking that the 53rd week roughly $70 million of the $85 million there are the term licenses that renew. On your first question, yes, the -- there is an element of choice in this within AECO that we've had and we continue -- we'll continue to have that's largely in our structures business. And some of it has to do with the complexity and the horsepower around the offering itself where it's challenging to move that more into the cloud. So you will see that dynamic going forward, at least for the foreseeable future.

Correct. It's a limited subset of the total AECO offerings.

Josh, it's Rob. I'll take this one. I think it's a really good question. It's not just business as usual. It really does change how we're thinking about the business, how we're running it in some of -- at least the value creation opportunities that this unlocks. This does simplify and focus the company and I think provides a great new baseline for us as we move forward in executing the strategy. If we look at the AECO assets in that segment as an example, this is a business that is now operating at over $1 billion in ARR. It's a scaled ARR software business. This mandate in the business enables the team to take, let's say, the processes and the systems capabilities across a broader swath of the business than what we were doing previously.

Yes. No, I like the question. And I used the words in the prepared remarks about a multiyear overnight success. This journey is 1,000 little steps. We launched Connect & Scale of January 2020. I think what we have now creates a new baseline. But let's also look at the facts in -- the fact base, I should say. In 2018, we had $1.1 billion of ARR. We closed Q1 at $2.03 billion of ARR. In 2018, we were 31% recurring revenue as a business, as-adjusted in Q1 were 63% ARR. We had EBITDA of 22.6% in 2018. We closed Q1 at 27.9%. Structurally, our gross margins in 2018 were 58% in Q1, adjusted to 67.5%. Over the last 5 years, we produced 44% operating leverage.

This is Rob. I'll take that one. So it was a -- it's a multi-hundred thousand dollar ARR, it's over $400,000 ARR in that example that I used, so therefore, the ACV is over the $400,000 -- yes, $400,000 as well. In terms of the go-to-market motion, it's the -- think of it as a named account seller who is responsible for the account in North America, bringing in a sales engineer or sales specialist from Transporeon, who knows the depth of the functionality to be able to, I'd say, be conversant with the customer and the value proposition and how to use it. And that's actually very similar, Tami, to Trimble Construction One when we're selling a breadth of offerings, we'll often have what we -- now we do have named account sellers. And then we can bring in the specialists -- technical specialist to really know the depth of a given solution to make sure that customer can get the most value out of that. Did that answer your question?

Okay. So hey, on the -- what's the multiyear targets, we're going to have an Investor Day in December. And Phil mentioned that in his prepared remarks. I think we have been saying second half of the year but we're narrowing that to December. So that's the formal update. I appreciate that in the interim there will be questions of how do we think about that progression of the business and the model. And I think that we can continue to provide color in the next couple of calls. But what we already know is the baseline and I want to highlight that. We know we have a baseline from the quarter on -- or you can actually say, take the year, where we're guiding at the -- for the level of EBITDA for the company between 26.5% and 27.5%. We've talked about the ARR growth. They're guiding 11% to 13% organic.