Trimble Inc.

Hello and welcome to Trimble First Quarter 2025 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. As a reminder, this call is being recorded. I would now like to turn the call over to Rob Painter, President and CEO. Rob, you may begin.

Welcome, everyone. Before I get started, our presentation and safe harbor statement are available on our website. Our financial review will focus on year-over-year non-GAAP performance metrics on an organic basis. In addition, we will focus on adjusted numbers that we believe more accurately portray the underlying performance of our business. This means we will exclude our divested agriculture and mobility businesses. We also adjust for the approximately $50 million of January 1st term license revenue that was recognized in the first quarter of 2024, but not in the first quarter of 2025 because January 1st of 2025 fell into the fiscal fourth quarter of 2024. We exited 2024 on a strong footing, strategically, operationally, and financially. The results of the first quarter of 2025 are further evidence of the strength of our business. To understand how we are positioned to navigate the uncertainty of the moment is to understand the quality of our performance in the first quarter, which can be expressed in three words, clarity, durability, and momentum. Clarity manifests as the simplification and focus we have brought to our business over the last few years. On February 8th, we closed the sale of our transportation and mobility business to Platform Science, further solidifying our strategic focus to compete and invest where we have a natural right to win. Starting with slide four, durability manifests through the quality of our business model, which we intentionally transformed over the last few years. Today, we are three-quarter software, two-thirds ARR, asset light, and operating with a strong balance sheet. We are in the business of selling productivity and efficiency outcomes to our customers, and our technologies are mission critical. While visibility and predictability into the future is far from perfect, it is definitively higher and better than at any point in our 47-year history. In the first quarter, as detailed on slide five, momentum manifested in a beat across the board. Revenue at $841 million was up 3% organically and up 10% after adjusting for the timing of January 1. ARR at $2.11 billion was up 17% organically and was ahead of expectations across our segments. EPS at 61 cents was also ahead of expectations. Congratulations to our team and our partners. Despite the strong start to the year and our current momentum, we are maintaining our guidance for the year. as we feel the prudent move is to inject a degree of conservatism into our outlook. Tariffs are modest in our software-centric business and have thus far been offset with pricing. We will all know more in three months and we will recalibrate at that point. One area of trouble where we are not cautious is in our AI journey, where we are moving with a clarity of purpose to better serve our customers while further strengthening our own business operations. We're not just talking, we are acting. In April, we held a virtual internal AI summit with nearly 2,500 internal attendees where we spent a day reviewing priorities and work in progress. In addition, we have OKRs throughout the company to drive execution and accountability to AI outcomes. Slide six provides a framework for how we think about internal and external applications of AI on one axis and delivery of cost efficiencies and revenue growth on the other axis. This framing helps us allocate capital with intention. For example, our product managers are leveraging AI to develop marketing and technical requirements documentation. Our marketers are beginning to generate sales pipeline with agents mining data from our CRM systems. Our sellers are leveraging AI for sales coaching. Our customer success teams are leveraging AI for case deflection, and our software engineers are programming and testing with AI productivity tools. We are also releasing AI capabilities into our customer-facing solutions, from natural language-prompted design to feature extraction out of 3D point clouds to automating invoices and even releasing standalone automation products to connect carriers and shippers. We believe we have a natural right to win in an AI-forward world, emphatically so given the unique scope and scale of Trimble in the physical and digital worlds. With that in mind, let's step back and share our view on the macros. In four words, opportunity coupled with uncertainty. On an absolute basis, the uncertainty of tariffs and trade policy puts sand in the gears and stokes fears of an economic downturn. Despite these fears, the business is resilient and we outperformed in the quarter. On a relative basis, we look at how our business is competitively positioned. In this respect, if we hit a downturn, We believe we can outperform and win market share. Weak competitors will reduce investment or exit the market, and we have the ability to run cross-sell and up-sell plays if new logo generation becomes more difficult. At our investor day in December, we talked about $1.4 billion of cross-sell opportunities in the portfolio. We also have the balance sheet to continue to take subscription models to market in our software and hardware offerings, thus delivering more affordable access to our technology. In summary, this leadership team has successfully managed through challenging environments by applying a simple and consistent principle. Position ourselves to exit periods of challenge on a stronger competitive footing. Year to date, the opportunities have outweighed the uncertainties. Across end markets and geographies, we see pockets of strength. At the same time, we see pockets of modest weakness. In the last few weeks, I have met in person with dozens of global customers and partners in seven countries. Most of them were level-headed and taking a wait-and-see approach. We have seen modest softness in the public sector in the U.S. and slightly longer sales cycles with enterprise customers. On the other hand, Germany's announcement of infrastructure spend has been a positive. We see global strength in customer segments, such as small to mid-sized construction companies, and in industry segments, such as data centers, renewables, and mining. With that context, let's talk about each of our segments. starting with AECO and a quote from an engineering customer who said the following, With all these technologies connecting together with AI and Internet of Things, having all your solutions under one platform just makes sense. This sentiment is indicative of the success we are having with Trimble Construction 1 and our cross-selling efforts. In the quarter, ARR outperformed, up 19% to a record $1.29 billion. ACV bookings remained strong, growing in the mid-teens. Indicators we pay special attention to include ACV bookings, pipeline, net retention, and the lifetime value to customer acquisition cost ratio. All these indicators are healthy at the moment. In the last weeks, we have launched the 2025 versions of our BIM and engineering and architecture and design solutions, both of which are bringing new AI features to market. Moving to field systems, I'll start with a quote from a customer talking about the value proposition of our machine control and guidance as a service offering. The Trimble offering allows me to sleep better at night. With a subscription, budgeting equipment costs on bids is easier and it makes us more competitive. I don't have to worry about outdated software or communication between systems or that the technology we just spent thousands of dollars on is now obsolete. That's a subscription advantage that is irreplaceable. The business outperformed in the quarter, with particular strength in civil construction and advanced positioning. The subscription offering in the quote contributed to 25% ARR growth in the segment to a record $358 million. An interesting and important fact is that 50% of our customers who bought machine control as a service in the quarter were new logos, once again affirming that smart business model transformations expand addressable markets. In early April, our field systems team was at the Bioma Trade Show in Munich, where our technology was present on more than 20 OEM booths, signifying the importance of Trimble in the ecosystem and demonstrating our commitment to serve the mixed fleet. Moving to transportation, I'll start by quoting a longtime customer who said, we are impressed by the high quality of work and expertise that Trimble brings to our digitalizations. This quote is indicative of the fundamental transformation happening in our served industries, which transcends economic cycles, thus providing context for continued growth in an underlying freight recession. ARR and transportation grew 7% to a record $459 million. The split of revenue in this business is 40% Europe, Middle East, and Africa, 57% North America, and 3% rest of world. And our systems are mission critical. which we believe provides a downside ballast if China-U.S. trade further deteriorates. With respect to KPIs in the segment, they are the same ones we think about in AECO, including ACV bookings, which exceeded our expectations in the quarter and which we expect to grow double digits this year. For market health, we look at tender rejection rates along with spot pricing for more real-time market conditions, and both are relatively steady. In the Transporium business, we can also see pretty clear industry segment trends. For example, in Europe, we can confirm what appears to be somewhat self-evident. The automotive segment is down while retail and construction materials are up. In summary, clarity, durability, and momentum in the form of a strong start to the year give us confidence and conviction to stay the course. Phil, over to you.

Thanks, Rob. A few items to cover before turning to the slides. On April 25th, we filed our 2024 10-K with no changes to the financials that we presented earlier this year. In addition, we recently announced a change in our auditors for the 2025 fiscal year. We're excited to welcome KPMG as our new auditor. We thank E&Y for their service, and I want to offer a particularly large thank you to the Trimble team for all the hard work and dedication throughout, and we are looking forward to a successful transition. Turning to our operations, let's start with tariffs as they stand today. The total impact adds approximately $10 million per quarter to our cost of goods in the field system segment. We've already implemented surcharges to offset this, thus we expect no impact to profitability. We are managing discretionary spend and directing capital to the most attractive market opportunities, such as data centers and infrastructure, while continuing to invest in the transformation and growth of our core business. We bought back $627 million of shares in the first quarter and have the remaining $373 million of authorization available. We continue to believe that repurchasing Trimble stock is an attractive opportunity for capital deployment given our share price today. With respect to M&A, we are primarily focused on small tuck-ins with opportunities for fast integration where we can quickly cross-sell and up-sell our customer base, yielding a rapid return on investment without deploying significant capital. Let's review the first quarter of 2025, starting on slide seven. As we noted previously, we have approximately 50 million of term license renewals that are recognized on January 1st. These happened in the first and fourth quarters of 2024, but not in the first quarter of 2025. The right way to look at the business progression is to normalize for this dynamic. Unless otherwise noted, I will be talking about our as-adjusted numbers, which remove the effects of the recent divestitures which we further adjust for the January 1st term license renewals. As reported, numbers along with the reconciliation are provided in the appendix. Organic revenue was up 10% and ARR was strong, up 17% to a record $2.11 billion. Gross margins expanded 180 basis points to 69.9%, which shows our continued model progression despite the greater hardware mix with the field system's performance. We achieved EBITDA margins of 25.9%, which is a 100 basis points expansion year over year. Reporting earnings per share was $0.61 for the quarter. Moving to the balance sheet and cash flow items on slide 8, our reported free cash flow for the quarter was $149 million, which represents a conversion rate of one times net income. Our balance sheet is strong, with $290 million of cash and a leverage ratio of less than 1.3 times, which is well below our long-term target rate of 2.5 times. From a liquidity standpoint, we are asset and working capital light and have the full $1.25 billion of availability on our revolving credit facility. Let's shift to a segment review of the numbers before we close with guidance, starting with AECO on slide 9. AECO delivered a record $1.29 billion of ARR, posting 19% ARR growth for the quarter. Operating income at 27.3% increased 50 basis points year over year. We continue to expect the segment to expand margins by about 100 basis points for the full year. The business continues to operate well above the rule of 40 and was greater than the rule of 45 in the first quarter. Next, field systems on slide 10. Revenue was up 6%, and ARR growth up 25% for the quarter, where we continued to successfully execute our business model conversions. Our civil construction business was particularly strong, and ARR was driven by positioning services and sales of subscription offerings. Overall, dealer inventories went down for the quarter for our businesses and are sized appropriately for the demand, taking into account the uncertainty in the market. Operating income at 29.7% increased 280 basis points, driven by the increasing higher margin recurring mix. Finally, transportation and logistics on slide 11. Revenue and ARR were up 6% and 7% respectively for the quarter. The segment is now greater than 90% recurring revenue following the divestiture of the mobility business. We made good progress bringing the global transportation teams together in the first quarter, as we execute our Connect and Scale strategy, which allows us to access the $400 million of cross-sell, up-sell opportunities within the segment. Operating margins of 21.2% are expected to improve in the next three quarters as we continue to execute the strategy. Let me turn to guidance on slide 12. We are maintaining our full year as reported 2025 guidance with the midpoint at $3.42 billion of revenue and $2.87 of earnings per share. We're also maintaining our organic ARR growth as adjusted guidance midpoint of 14%. With the macro uncertainty Rob mentioned, we are de-risking our guidance by modestly reducing our organic revenue growth, driven mostly by non-ARR revenue and field systems, and to a lesser extent, transportation. This is offset by the revenue benefits we see with the change in foreign currency exchange rates, along with the first quarter outperformance. We will revisit our guidance with second quarter results when we expect to have greater clarity. Looking at the calendarization, the fourth quarter of 2025 benefits from January 1st in the quarter, which is expected to bring approximately $60 million of high-margin term license revenue. We provide an updated view of this calendarization in the earnings supplement on our investor site. On an as-adjusted basis, our EPS guide implies low to mid-teens EPS growth year-over-year which is consistent with our long-term model. From a cash flow perspective, our full-year view is updated to be 0.9 times net income after adjusting for the $253 million cash tax payment for gain on sale of the Ag JV and approximately $35 million in M&A costs. Relative to the prior guide, we are expecting higher cash taxes and one-time items. We continue to expect that we can deliver free cash flow greater than non-GAAP net income over the long term. For the second quarter guidance on slide 14, we expect as-reported revenue to be in the $815 to $845 million range and EPS of $0.59 to $0.65, which is consistent with the numbers we provided earlier in the year. We expect organic growth in the second quarter to be in the 2% to 6% range. With that, I'll turn it back to Rob.