The operator introduces the Trimble Third Quarter 2023 Results Call, and CEO Rob Painter discusses the company's highlights, including continued ARR growth and gross margin progression. He also mentions the joint venture with AGCO in the agriculture business and the impact it will have on the company's software and recurring revenue. The company is focused on simplification, focus, and execution, and is committed to deleveraging and returning capital to shareholders.

In the first half of next year, the company expects the transaction to close and is pleased with the reaction to their partnership. They have divested 18 businesses in the past 3 years for better focus. However, there are signs of weakness in various markets due to economic and geopolitical factors. This has affected their fourth quarter outlook, with strength in certain areas but weakness in others. The company remains confident in their value proposition and has seen success in their Trimble Construction One business model.

The company is releasing new targeted offerings and enhancing systems to gain better insight into customers. They exceeded bookings expectations in the quarter and are seeing double-digit growth in their surveying and mapping business. They will hold a conference next week to showcase their latest innovations. The company is taking action to protect their financial model by implementing a cost reduction initiative and simplifying their operations. They will focus on getting the right leaders in place and scaling back some initiatives to deliver short and mid-term outcomes. The third quarter results showed an 8% increase in revenue, with organic growth at 2%.

The company saw a 1% increase in revenue due to changes in foreign exchange rates and a 5% increase from acquisitions. Subscription and recurring revenue continued to grow, but the weakening macro environment negatively impacted customer demand. Overall, gross margin, adjusted EBITDA, and net income all increased year-over-year. However, non-recurring revenue, including hardware and perpetual software, decreased by 8% due to the tough macro environment. North American revenues were up 5%, but European revenues were down 1%.

In the fourth quarter, the company saw an increase in cash flow from operations and free cash flow, thanks to lower inventory purchases, tax payments, and higher profitability. They also have a strong backlog and low leverage, having already paid off a significant portion of debt from a recent acquisition. The company is also seeing a shift towards recurring revenue, with half of their revenue now coming from these streams. In their Buildings and Infrastructure segment, they saw strong growth in software businesses, but a decline in their Civil Construction business due to a weaker demand environment.

The geospatial revenue for the company was down by 2%, mainly due to lower demand in various survey markets. However, the U.S. federal government customers showed strong demand, exceeding expectations. The Resources and Utilities segment also saw a decline of 4%, primarily in Europe. On the other hand, the Transportation segment showed progress in some areas, with organic ARR growth and expanding margins. However, the mobility business in North America did not see the expected increase in bookings. The Transporeon top line trends remain below expectations due to a contraction in industry shipment volumes. The company expects the weakness in demand to continue in the fourth quarter and into the next year.

Trimble projects fourth quarter revenue between $890 million and $930 million, with 13% growth in ARR offset by a decline in hardware and perpetual software. This results in a full year revenue outlook of $3.76 billion to $3.80 billion. The decrease in revenue is primarily in the hardware businesses, but the long-term trend for all three core hardware businesses has been mid-single digit growth. The impact of higher gross margins and lower operating expenses is expected to offset some of the revenue decline, resulting in an EPS range of $0.55 to $0.63 for the fourth quarter and $2.58 to $2.66 for the full year. Operating margins are projected to be 24.5% to 25% in the fourth quarter, with Buildings and Infrastructure remaining the strongest segment and Geospatial segment revenues expected to be down at a low to mid-single-digit rate.

In the fourth quarter, the company expects gradual improvement in its core field survey business, but lower sales to the U.S. federal government will offset this. Geospatial margins will decrease due to a less favorable business mix. Resources and Utilities revenue will be flat or slightly down due to a weak demand environment and ongoing dealer network transition. Transportation segment revenues will also be flat or slightly down due to higher customer churn in North America. The company expects strong cash flow for the full year and plans to reinitiate share repurchases in the fourth quarter. Guidance for 2024 will be issued in February, with expectations for better organic revenue growth and continued double-digit ARR growth.

The company's bookings and net retention performance support their outlook, and they expect to hold or improve EBITDA margins with cost reduction actions. The company is on track to achieve their EBITDA margin goals and is focused on simplification, focus, and execution. The CFO is retiring in May and will be succeeded by the current Vice President of Corporate Development. The company is grateful for the current CFO's leadership during crises and the new CFO has been with the company for 14 years in various roles.

Phil has a clear goal to use his knowledge of the company to increase shareholder value. The line is now open for questions, and the first one comes from Jerry Revich from Goldman Sachs. Jerry asks about the outlook for ARR growth in the construction software portfolio, as the guidance has been revised. Rob and David explain that while there may be a slight slowing in ARR growth, bookings and ARR growth in the B&I segment remain strong. The main factor affecting ARR growth is FX, and there has been no fundamental change in the momentum of the B&I ARR business. Jerry then asks about the margin trajectory, given the performance in the quarter and the year-end outlook.

In this paragraph, David Barnes discusses the strong margin trends for the company and their goal to maintain or grow EBITDA margins in the coming year. He also mentions the impact of the creation of the Ag JV on the margin and how they are managing it. Lastly, he addresses the leading indicators within Transporeon and their expectations for the fourth quarter.

The speaker discusses the current state of the European transportation market, stating that it is stabilizing after a weak period. They note that while metrics such as transportation volumes and spot pricing are not improving, they have stopped getting worse. They also mention that certain end markets, such as construction equipment and paper and packaging, are down due to overall macroeconomic weakness. The speaker believes that the business will recover over time, and the company has seen 100% customer retention and holding market share. The second question asks about channel inventory across the businesses on the hardware side.

David Barnes and Rob Painter are answering questions about dealer inventory and the current macro environment. Barnes estimates that there was a $40 million inventory destock in the first quarter and a smaller one in the second quarter, but there may be a modest correction in the future. Painter notes that there are positive catalysts in North America, such as data centers and renewable energy.

The Infrastructure Bill is a positive factor, but inflation is eating into the spending. Interest rates are affecting the residential market in the US and Europe, but India is doing better and China is doing worse. The company has seen growth in its software business, but the overall construction market is not expected to improve significantly, especially in the residential sector, until 2024.

The speaker discusses the potential positive impact of lower interest rates on the housing market and acknowledges a current dislocation in the market. They also mention that their planning assumption is to not expect any improvement in the near future. In response to a question about ARR, the speaker mentions that while the transportation sector has been performing well, there has been softness in North American mobility and they expect a 200 basis point decrease in ARR growth due to churn.

The speaker asks about the impact of the ending of the CNH aftermarket agreement on Trimble's efforts to backfill it. The speaker clarifies that CNH will still be an important customer and partner for Trimble, but they will also be working directly with dealers to be closer to the end customer. The speaker also mentions that CNH has an ambition to have more of their own technology, but Trimble will continue to work with many farms and operate on their technology in the future.

The speaker discusses the disruption that has occurred during the change and joint venture with AGCO. They mention the impact on the R&D segment and estimate it to be in the low single-digit percentage. They also mention a shift in demand from this year to next year due to the new distribution strategy. The speaker then talks about bundling opportunities in the B&I business and the potential for upsell and ASP opportunities. They mention that customers are adopting Trimble One and the broader platform approach.

Customers are looking to work with Trimble in a more efficient way, focusing on system productivity rather than just task productivity. They want to do more business with Trimble and have expressed that the company needs to be easier to work with. The TC1 offering has led to a strong increase in cross-selling, and Trimble is working on creating persona-based bundles for different types of customers. The machine control as a service business is trending positively and can help customers in a cost-contained environment.

The company has seen higher adoption of their machine control service than expected, which has led to a decrease in top line revenue due to the subscription model. This transition to a subscription model has been successful in the software world and the company hopes it will expand their addressable market in the hardware world as well. They plan to release Civil Infrastructure bundles that include relevant software with the hardware, and may use a split subscription model where customers pay a nominal amount upfront for hardware and then a subscription for the rest.

Trimble plans to implement cost cuts of $40 million that will be fully in place by 2024. These cuts are all structural and will not affect variable costs. The company will continue to invest in software businesses that are showing strong growth, while scaling back on activities that are not meeting expectations. Trimble's approach is based on return on investment.

Trimble is implementing a strategic approach to move corporate activities closer to its businesses, such as industry cloud work, in order to better allocate resources between short, mid, and long-term goals. The company's software business has proven to be resilient, as it is essential and in high demand for customers looking to digitize and become more efficient. Bundled offerings and closer relationships with customers also contribute to the resilience of the business.

The speaker believes that as relationships with customers become closer, it drives continued usage of the technology over time. The company has seen success in retention, cross-selling, and up-selling, and believes there is still a lot of potential for growth within their current portfolio. However, the hardware business is less resilient and primarily sold on a one-time basis, but the company is working on expanding and combining hardware and software to increase resilience. The speaker also believes that the company's ability to connect the physical and digital worlds makes their hardware as powerful as their software.

During a conference call, a question is asked about Trimble's success in the B&I market. The CEO responds by stating that there is a lot of white space in the market and that the industry is experiencing a secular adoption of technology. He also mentions that their cross-selling efforts indicate a growth in wallet share, and their unique ability to serve all aspects of the AECO landscape sets them apart from their competitors. He also highlights the importance of their hardware components in both B&I and survey.

The survey is the starting point for creating a digital model and construction workflows. The company believes it is gaining market share in certain segments and with customers who prefer buying best of suite. They are holding their own with customers who buy best of breed, but have gained share in the construction ERP market and the architecture space. The transportation business has achieved its highest operating margin since before the ELD Mandates, with cost cutting efforts and the acquisition of Transporeon contributing to this success.

The speaker discusses the efforts to increase gross margins and grow operating margins within the company's transportation business. They mention a structural shift towards a more software-centric approach and becoming less dependent on hardware. The addition of Transporeon is expected to be accretive to margins if the market turns in the company's favor.

The decision-makers for B&I hardware and construction software vary depending on the size of the customer. In smaller companies, it is usually the C-level executives, while in larger companies, it is more segmented. As companies shift towards selling connected offerings, there is a shift towards account-based selling and working with different people within the organization. This shift has led to a multiple uplift in sales.

Trimble's ERP solution is typically purchased by CFOs, which allows the company to offer a bigger offering to their customers. The hardware weakness is mostly seen in smaller customers who may not be as penetrated at Trimble. The company's software is more applicable to civil contractors and multifamily construction, rather than single-family construction. The strength of Trimble's bundle has been mentioned multiple times throughout the Q&A.

The speaker, David Barnes, responds to a question about the impact of macroeconomic conditions on Trimble's software business. He explains that while the construction software business is seeing strong growth, the hardware side is more limited due to the narrow range of customers and the demand for technology to move dirt not increasing as much as anticipated. However, the need for productivity has grown and Trimble's software offerings are meeting this need. The speaker also mentions the company's goal to have over 70% of its business in software and 55% in recurring revenue.

The speaker discusses the importance of following the laws of mathematics in business, specifically in relation to churn in the Mobility segment. They also mention that the ARR products in the B&I portfolio will likely outperform hardware due to the cyclical factors in construction. The speaker expects broad outperformance in the ARR side of the business, from feasibility to operations and maintenance. The Q&A session then comes to an end.

The speaker is thanking the presenters and attendees for their participation in the conference and announcing its conclusion. They wish everyone a good day and give permission to disconnect.

This summary was generated with AI and may contain some inaccuracies.