Trimble Inc.

Thank you for standing by. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the Tremble second quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Mr. Rob Painter, Chief Executive Officer. Mr. Painter, please go ahead.

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. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which will relate to the corresponding period of last year, unless otherwise noted. Let's begin on slide two with our key messages. Annualized recurring revenue is our key top line metric at Trimble. Our team, led by our construction software group, achieved 14% organic growth in the quarter, beating our internal expectations by 100 basis points. We now stand at a record $1.88 billion of ARR, which compares to $1.2 billion when we began our Connect and Scale journey in 2020. ARR has doubled since 2018 and tripled since 2015. We are on track to achieve $2 billion of ARR by the end of the year, a remarkable figure made possible by the Trimble team, who continues to work incredibly hard to execute on our customer-driven systems, process, and business model transformation. We delivered EBITDA margin of 25.3%, also slightly ahead of our expectations, which was driven by strong gross margin of 64.2%. For perspective, gross margin was 56.8% in 2015 and 58% in 2018, EPS at 64 cents and year-to-date free cash flow conversion rate to net income of nearly 100% demonstrates the power and potential of our asset-light business model. Our revenue beat in the quarter is attributable to delivering a large federal government order in the geospatial business in the second quarter instead of the third quarter. For the year, we are holding our revenue guidance and raising EPS. Moving to slide three, let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with buildings and infrastructure. The market backdrop remains generally favorable. In North America, we see strength in infrastructure and non-residential construction. Customer backlogs remain healthy, and technology helps to address the skilled worker shortage. By the numbers, ACB bookings accelerated on a sequential basis, and we achieved a record level of bookings in the quarter. ARR grew over 20%. Our Trimble Construction One offering is achieving higher win rates, larger deal sizes, and shorter sales cycles. Further, it is helping to grow both new logo and cross-sell bookings. We are confident in our ability to maintain momentum as our most recent release of digital systems upgrades provide significantly enhanced visibility to even further drive cross-sell and up-sell. Strategically, we are pivoting more of our hardware offerings to adopt aspects of this subscription business model. For example, in building construction layouts, Our RI layout instrument is only available as a subscription. In civil construction, we have shifted more value to the software on the system's offering, thereby positioning us to reduce the upfront cost of a system and monetize over the life of the customer. In geospatial, the market backdrop is largely the same as buildings and infrastructure, yet serving a more highly penetrated customer base. By the numbers, revenue was well ahead of our internal expectations in the quarter. We continue to see strong demand from U.S. State Departments of Transportation, and in the quarter, our team delivered the aforementioned federal government order. Strategically speaking, we saw ARR growth in our Trimble Catalyst product line. Catalyst offers precision positioning as a service through a subscription offering. We passed a milestone this quarter with over 10,000 cumulative units shipped. We also expanded our product line in the reality capture space with the launch of our X9 scanners. We see reality capture as an important product category as it creates a key linkage between the physical and digital worlds which we can uniquely serve. In resources and utilities, farmer sentiment has been trending negative despite market fundamentals, such as commodity prices, largely continuing to be healthy. Our strategic focus in agriculture continues to be building out our aftermarket channel to gain dealer and customer intimacy, thereby providing farmers choice in their technology platforms. Where revenue was down, as expected, ARR grew at a double-digit rate. Our positioning services business continues to win customers in both on-road and off-road capacities, demonstrating our ability to innovate in the space of positioning technologies after 45 years in the business. We also took strategic steps to further ongoing ARR growth. In forestry, we launched a cloud-based log inventory and management system that enables us to move down market, thereby expanding the addressable market. And in utilities, the team delivered two of the largest software bookings in the history of the business. In transportation, the market backdrop remains challenging, with the soft freight market pressuring carriers to streamline their operations for cost savings, to increase asset utilization, and to increase the productivity of their non-driver workforce. Against this backdrop, the overall business both increased operating income margin for six consecutive quarters and grew organic ARR for the seventh consecutive quarter. In Europe, in our Transporeon business, we see early indications that the spot market might have bottomed out. Despite a difficult economic backdrop in Europe, churn is effectively zero, competitive win rates increased, and the business is demonstrating an ability to manage the cost structure in line with the revenue environment. We have early examples of success with bringing the organizations together and making some product roadmap decisions to streamline product development work. Moving to slide four, connect and scale is a platform strategy. which in turn is fundamentally a vertical industry data strategy. No surprise then that we have been deploying artificial intelligence across Trimble for some time now, both for internal benefits and customer-facing applications. For example, a trial program with over 200 engineers using AI-assisted programming demonstrated upwards of 25% improvement in productivity. We have also extended AI into our sales process, where we are applying AI to the call scripts of our sales reps to coach them and then further again to identify cross-sell opportunities. On the customer-facing front, we are improving our best-in-class positioning accuracy in harsh environments using AI-based error modeling and machine learning on many years of atmospheric data. We are deploying AI and video intelligence solutions in transportation to detect driver fatigue and distraction and for selective spraying applications in agriculture. In our construction software business, we are automating invoices converting PDF data into usable accounts payable data. We've already processed over 350,000 invoices worth over $1 billion. Compelling use cases, and we are just beginning. Let me now turn the call over to David to take us through the numbers.

Thank you, Rob. Turning now to slide five, second quarter revenue of $994 million grew 3% organically. Revenue was above our expectations coming into the quarter, driven by the earlier-than-expected shipment of the large order of geospatial equipment to the federal government that Rob mentioned earlier. Excluding that, revenues for the quarter were in line with our projections. Our total company revenue growth versus prior year was driven by recurring software, both organic and from the addition of Transporeon. Gross margins were strong again in the second quarter, with non-GAAP gross margins of 64.2%, tying the record levels of the first quarter. Our gross margins in the second quarter reflect favorable price-cost dynamics, strong growth of recurring software revenues, and a higher margin mix within our product offerings. EBITDA margin of 25.3% in the second quarter was up 110 basis points year over year, benefiting from our strong gross margin performance. Operating and EBITDA margins continue to grow versus prior year, even as we lapped strong year-ago revenues, and as we continue to invest in our digital transformation. Cash flow in the second quarter improved on a year-over-year basis, even taking into account Transporean deal-related expenses. Our improved cash flow performance was the result of lower purchases of inventory, lower tax payments, and higher profitability. Our capital allocation priority remains debt repayment, and we made progress through the quarter on reducing our leverage. Turning now to slide six for some additional color on our revenue performance. Product revenue, which includes both hardware and perpetual software, was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter. The year-over-year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022 when our supply chain was freeing up and we were working through high hardware backlog. As expected, dealers reduced their inventories in the quarter. We expect some modest amount of additional dealer inventory reduction over the balance of this year. Our subscription and services revenue, which includes SAS, term licenses, maintenance and support, recurring transactions, and professional services, was up 13% on an organic basis, largely driven by strong bookings and net retention performance across our buildings and infrastructure software businesses. From a geographic perspective, revenues in North America, Asia Pacific, and the rest of the world were up organically by 3%, 11%, and 18% respectively. Rest of world revenue growth was driven by strong demand for precision agriculture products from customers in Brazil. Revenues in Europe declined organically by 4% as adverse macroeconomic factors impacted many of our businesses. Turning now to results by segment on slide 7. Our software portfolio in the buildings and infrastructure reporting segment continued to perform well with organic ARR growth of over 20%. Bookings of recurring software offerings in the segment grew at a mid-20s percentage rate, despite the challenges of transitioning the North American software businesses onto our new digital infrastructure during the quarter. These large system implementations are never easy, but our teams powered through the transition while still keeping our growth momentum going. With this latest release of our digital transformation, we now have over one-third of our buildings and infrastructure ARR transacting through a connected system, which will facilitate the acceleration of our connect and scale strategy. Segment revenues of products for civil construction customers were down at a mid-single-digit rate in the quarter, reflecting strong shipment momentum a year ago. In the geospatial reporting segment, We experienced organic revenue growth driven by the $18 million shipment to the federal government mentioned earlier. Excluding this one shipment, segment revenues in the quarter were down at a mid-single-digit organic rate, an improvement from the performance in the first quarter. This segment is most impacted by the downturn in residential home construction in North America and Europe. We expect to return to organic growth on an ongoing basis in the fourth quarter. In the resources and utilities segment, revenues were down year on year, and fell modestly short of our expectations, driven by our agriculture business. While our sales to ag OEM customers grew versus prior year in the second quarter, revenue from our aftermarket channel was down. Three drivers helped contextualize the aftermarket revenue decline. One, we are lapping a tough comp versus 2022 when our revenue surged as our supply chain freed up well ahead of the OEM supply chain. Second, the changes we announced a quarter ago in our aftermarket distribution network have, as expected, impacted our short-term revenue trends as we and our dealers refine our plans going forward. And third, we are seeing the impact from a softening of farmer sentiment, especially in Europe. We continue to see strong demand trends from ag customers in Brazil, and our positioning services business grew globally at a double-digit rate as we accelerated our cross-sell effort. In the transportation segment, we delivered 6% organic revenue growth driven by our North American Enterprise and MAPS businesses. Our mobility businesses in Europe and Brazil also grew revenue and ARR at a double-digit rate. As Rob mentioned earlier, operating margins improved sequentially once again. Our triple transportation team has made good progress in turning this business around, and while there's more work ahead of us, we are pleased with the progress. I'll note here that segment results now include the Transporian business. Transporian performance was largely in line with our expectations for the quarter, notwithstanding a tough macro environment in the European transportation industry. Moving now to slide eight, we ended the second quarter with ARR of 1.88 billion, up 14% organically. Remaining performance obligations, or RPO, our backlog, stood at 1.6 billion at the end of the quarter. RPO related to recurring offerings grew by over 100 million year-over-year as a result of our strong bookings performance. Product RPO came down as expected year-over-year, reflecting our improved lead times. With this high level of RPO, we have significant visibility into our revenue in the coming quarters. On a 12-month rolling basis, our software services and recurring revenue of 2.3 billion represents a record 64% of our revenues. up 800 basis points from year-ago levels. We completed the acquisition of Transporian in the second quarter and reduced net debt by $150 million from the closing of the acquisition through quarter end. We plan to continue to delever and, as anticipated, expect to finish the year with net debt less than three times EBITDA. Turning now to our guidance on slide nine, the midpoint of our guidance for full-year revenue remains the same as we issued last quarter. Our revenue guidance range has narrowed to $3.845 billion to $3.925 billion, which represents organic revenue growth in the second half of the year in the mid to high single digits. We continue to expect ARR to grow at a mid-teens rate for the year. Our expectation for gross and operating margins has increased from prior guidance by 50 basis points, reflecting the strong performance in the second quarter and a heightened focus on margins and cost control. The end result is an increase in the midpoint of our earnings per share guidance range by 3 cents. We now expect full-year EPS in the range of $2.57 to $2.73. From a segment perspective, our expectation for full-year growth in the buildings and infrastructure segment has improved following strong performance in the second quarter. Our forecast in resources and utilities is down modestly from the outlook of a quarter ago, reflecting weakening macroeconomic conditions in the agriculture sector. The outlook for transportation and geospatial is unchanged from last quarter. For the third quarter of 2023, we expect organic revenue growth in the range of 0 to 5%, which corresponds with a revenue range of $945 million to $985 million. We expect gross margins of 100 to 150 basis points lower than the second quarter, reflecting a less favorable business mix. We expect third quarter operating margins will be similar to second quarter levels. We project EPS in the range of 56 cents to 64 cents. From a segment perspective, we expect geospatial revenues to be down organically at a mid to high single digit rate, as we won't have the positive impact of the large federal order this coming quarter. Resources and utilities revenue is expected to be down at a mid single digit organically. Revenue in buildings and infrastructure and transportation are expected to continue to grow organically in the third quarter at rates comparable to or better than we experienced in the second quarter.