Trimble Inc.

Thank you for standing by and welcome to the Trimble second quarter 2024 financial 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, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to Rob Painter, Trimble President and CEO, please go ahead. Trimble President and CEO, 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 will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year, unless otherwise noted. In addition, our P&L commentary will emphasize comparables on an as-adjusted basis. which excludes our agriculture business. Let's start on slide four. During the second quarter, we continued to advance our Connect and Scale strategy, which involves digitally connecting the workflows within targeted industry segments and creating scale across Trimble through shared technology platforms. Our strategy delivers outcomes in the form of unique value to our customers and sustainable value creation to our shareholders. We want to convey three key messages today. The strategy is working, the numbers reflect the execution, and the execution reflects our simplified and focused organization. Slides 5 and 6 detail some highlight metrics. $2.11 billion of ARR grew 14%. Revenue grew 1%. Gross margins were a record 66.5%. EBITDA margin expanded 40 basis points to 24.6%, and free cash flow was strong. Revenue in the quarter was 75% software services recurring and 60% overall recurring revenue, both records for Trimble, reflecting our portfolio transformation and continued organic makeshift driven by ARR growth. Based on the solid first half-year performance, we are raising our guidance for the year. Before we turn to the performance of the segments, let me provide an update on the status of our financial audit. By way of reminder, the need for EY's re-audit of our 2023 financials stems from concerns about the comprehensiveness and documentation of a number of our internal controls, especially around our IT systems. These concerns arose as EY prepared for a PCAOB inspection of their audit of Trimble. In April, EY began additional audit procedures relating to our 2023 financial statements using a more detailed substantive approach. We are working collaboratively with EY and have provided them with the substantial majority of the information they need. EY's work is nearing completion, and we expect it to wrap up within the next month or so. To date, the audit has not identified any issues which would result in a change of our financial statements. When EY's work is complete, we will reissue our annual report for 2023 and file forms 10-Q for the first and second quarter of 2024. Based on the work to date, we anticipate that the financial results will be the same as what we have previously reported. Let's get back to the business with a review of our segment results, starting on slide seven with our AECO segment. The team delivered another record quarter of ARR with a terrific 18% level of ARR growth. The AECO segment is the tip of the spear of our connect and scale strategy, and the strategy is working. We are succeeding in growing customer count with our innovative products and driving higher revenue per customer through our integrated platform offerings. The A represents architecture and design. Here, our SketchUp product surpassed one million subscribers, an amazing milestone delivered by the team. The E represents engineering. An example of the strategy at work here comes in the form of unique workflows that only Trimble can deliver, such as scan to BEM and fabrication workflows. The C represents construction. Here, our recent tuck-in acquisitions of field and payment solutions have shown us that we can run repeatable land and expand plays that deliver our customers fast time to value when they buy additional capabilities on top of our construction management system. The O represents the owners, both private and public sector. In May, we held a user conference in Cleveland where we launched Trimble Unity, a suite of asset lifecycle management solutions that uniquely connect Trimble capabilities. Across these AECO personas, we operate a common and connected data environment, namely Trimble Connect. Connect has now initiated more than 20 million projects since inception and had over 6 billion API hits into the platform in just the first six months of 2024. On the go-to-market side, we moved the team to a named account selling model earlier this year, and we are now lining up our digital marketing efforts to better enable our sales motion. In conclusion, the connect and scale investments we have made over the last several years have enabled us to grow and gain share. Our strategy resonates with customers looking for strong ROIs. Based on our second quarter results, our pipeline, and our solid bookings performance, we see our momentum continuing. We recently hired a chief revenue officer for this business, which we believe will help further enable and ensure our growth and success at scale in this 1.16 billion ARR business that is already operating well above a rule of 40 benchmark. The physical side of our business is largely conveyed in our field systems reporting segment, with key highlights on slide eight. Revenue was down, as expected, primarily related to the strength of prior year government-related sales. While end market conditions have been soft in some areas, we continue to perform well with strong product and channel positions. Nowhere is this more evident than in the more than 300 million of field systems ARR. The team has been doing a great job of converting relevant software and hardware models where we have the ability to leverage our strong market position and product offerings to deliver unique value to customers. This motion has expanded our addressable market, as evidenced by delivering 17% ARR growth, nearly matching the growth in AECO. I will illustrate this through three examples, starting with our Works Plus offering in civil construction. which offers machine control and guidance as a service. The team delivered a record quarter of bookings. Second, our positioning services business has expanded our unique ability to offer globally ubiquitous and high-accuracy signals from our classic geospatial and agriculture markets into automotive markets. The team delivered three design wins in the quarter to major automotive OEMs. And third, we launched the R980 GNSS survey instrument in the quarter with firmware configurations, field software, and positioning services available on a subscription basis, which expands the addressable market by lowering upfront costs, enabling more customers to adopt our premium solutions. Strategically speaking, Most of the solutions we sell in this segment act as a data collection node in the physical world that provides us the unique Trimble ability to connect to the physical and digital world. Closing our segment commentary on slide nine, transportation and logistics beat our top and bottom line expectations. Transporion delivered double-digit ARR growth, as did our maps business. Excluding the North America mobility business, organic ARR growth in this segment was 11%. While our mobility business has experienced the churn we anticipated, it is worth noting that the team delivered the largest bookings in the last few years in the quarter, which was one half a technology upgrade with Trimble and one half a competitive displacement. Our new Instinct platform is generating positive buzz in the market, and we are having good success selling video solutions. While the freight market remains in a recessionary environment, Our Transporium business continued to win new logos in the quarter, and we continue to innovate on all our solutions, some of which will be unveiled at our user conferences in September. In addition, we are moving down the path of product rationalization between the Trimble and Transporium businesses, as evidenced by consolidating our work on freight marketplace and visibility into one team each. We also began selling our mapping solutions into the Transporium customer base. The sum of these activities delivered 18.7% operating income, a solid 460 basis point increase. Before handing over to Phil to walk us through more of the numbers, I want to offer a perspective on why we see Trimble as an AI winner. Starting with our own internal usage, we now have over 2,500 engineers using GitHub Copilot and more than 5,000 Trimble colleagues using an internal version of Microsoft Azure OpenAI that we call Trimble Assistant. From a customer-facing perspective, we have beta and production releases of AI capabilities in a number of areas. In AECO, we automate the extraction of PDF data into submittal logs and into estimating engines. We also transform 3D BIM models into photorealistic renderings. In field systems, we focus on feature extraction from 3D point clouds. In transportation, our AI solutions include customer support, autonomous procurement, and autonomous quotation systems that match shippers with carriers. We've included several examples of Trimble AI in the appendix of the slides, complete with hyperlinks. Our thesis on AI is that the density of domain-specific data and insight will separate the AI winners and losers. With our unique scale that includes over $1 trillion of construction capital programs, tens of billions of dollars of freight transactions running through our systems, millions of global customers, and hundreds of thousands of instruments and machines in the physical world, we believe we have a compelling right to win and a defensible mode to continue building around our business. Phil?

Thank you, Rob. As noted before, my financial commentary will emphasize comparables on an as-adjusted basis, which excludes our agriculture business. 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. Slide 10 highlights balance sheet and cash flow dynamics. On cash flow, we are trending better than expected after considering the transaction-related impacts. Reported free cash flow in the first half of 2024 was $300 million. That includes $50 million of tax payments related to our gain on sale from the Ag JV, as well as $54 million in M&A related transaction expenses. Our conversion ratio in the first half of 2024 without these items was well above our target of one times net income. We will have additional tax payments impacting future operating cash flow related to the Ag JV gain on sale in our third and fourth quarters of 2024 and second quarter of 2025 since the tax payments are spread out over time. Our asset late model continues with capital expenditures less than 2% of revenue and negative net working capital. Net debt to EBITDA after the close of the AGJV stands at less than one times, well below our long-term leverage target of two and a half times. We have just under $1 billion in cash after paying down our term debt and the outstanding balances on our credit facilities. We intend to resume our share buyback when practical. Our capital allocation focus remains the same. We invest where we see opportunities for the highest returns. We continue to disproportionately allocate capital to our AECO business, where the bulk of our operating expense increases are in our sales and marketing engines to continue to drive ARR revenue growth and ultimately margin expansion. On the M&A front, we expect to opportunistically pursue tuck-in acquisitions, primarily in the AECO segment, where we can quickly integrate and bundle within Trimble Construction One. We acquired a field human resources application in the third quarter of 2023, and we also recently acquired a payments offering branded as Trimble Pay that has been integrated with Viewpoint. And for both, we are seeing bookings well in excess of our deal models. 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 is a playbook that is delivering results and is a critical part of our acquisition strategy going forward. With that, let's turn to slide 11 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 fourth quarter of this year. We are increasing the midpoint of our as reported full year revenue guidance by $10 million from $3.62 billion to $3.63 billion, which also overcomes foreign currency headwinds. We are also increasing the full year earnings per share midpoint by $0.04 to $2.74 from the prior $2.70. AECO revenue is slightly better than our prior guide due to the first half performance and strong bookings in the prior quarters. Field systems revenue is down slightly, and transportation is unchanged. We maintain our strong ARR growth range from 11% to 13%, driven primarily by the expectation of mid- to high-teens growth in AECO, offset largely by the previously disclosed churn in our North American transportation mobility business. Our EBITDA margin for the year is expected to be between 26.7% and 27.2%. Free cash flow conversion for the year is updated to be approximately 0.75 times net income, which includes $116 million of anticipated tax on gain from the JV I noted earlier, as well as approximately $75 million in full-year M&A costs. Without these items, we would be above one times net income for the year and an improvement from our prior guide. Let's move to our third quarter guidance on slide 12, which is consistent with our prior guide. I'll focus again on our ads-adjusted view excluding agriculture. Our outlook for ARR growth remains strong with continued expectations for 11% to 13% organic growth despite the North American transportation mobility headwind I mentioned earlier. Our total company revenue is projected to be $840 million to $880 million. On an ads-adjusted basis, our revenue is anticipated to grow in the range of flat to up 4% year-over-year and is showing improvement relative to the second quarter, mainly due to strong government sales in the second quarter of 2023. Non-GAAP operating margin is expected to be in the range of 22.5% to 23.5%, and adjusted EBITDA margin in the range of 24% to 25% for the third quarter. Our EPS forecast is in the range of 58 cents to 64 cents, which is, again, consistent with our prior guidance. I would also like to point out that we included a new supplement in our materials that is available on our investor relations website. This is to provide a summary of our results along with assumptions behind our guidance model in a readily available format. One more item I'd like to mention before turning it back over to Rob. As we think about the financial model in a multi-year context, I refer to our investor day numbers from September 2022. Our long-term target model projected that revenue would grow in the 5 to 8 percent range organically. Normalizing for the benefit of the extra week in fiscal year 2024, we believe with the continued shift to higher growth software, we are biased above the midpoint of this range. We also had forecasted operating leverage in the range of 30 to 35 percent. Given the mixed shift to software with higher gross margins, we would expect operating leverage going forward to be at or above the high end of this range. Thus, we see the potential to expand operating margins in the range of 100 basis points or more annually. We look forward to providing more details and an update on our long-range financial plan at our Investor Day in New York City on December 10th. Rob, I'll turn it back over to you.