Trimble - A renewed look at Navigation Systems

I have to admit, I’d never heard of Trimble ($TRMB) until I saw it top the list on ARK-X, the Space Exploration ETF from Ark Investment. Ark always has a good reason to add names to their ETFs so, I really wanted to know more. Turns out I’ve known a number of their competitors - Garmin, Autodesk, Hexagon - but Trimble somehow never crossed my desk.

As I looked into the company, I liked what I saw and I think Trimble is at a point where they can take off. So here’s my take on them.

Company Snapshot

• Founded 1978, Sunnyvale California

• Navigation Systems and Work Process Improvement Technology (Hardware & Software); 1000+ unique and enforceable patents

• Strategic Alliances - CNH Global, Caterpillar, Nikon, Microsoft

• No. of Employees: 11,402

• Presence: over 80 countries; 40 global sales offices

• Market Cap: $20.32B

• Ticker: TRMB - Nasdaq (since 1990)

• Revenue: US$ 3.15B

• EBITDA: $799M; Margin: 25%

• FCF: $615M

• EPS: $2.23

The Investment Case

• Clearly defined end-users and industries; they know exactly where they can add value and they’re focusing on that.

• Solid Financial Metrics, with improvements over the last few years. Decent cash flow generation; FCF of $615M which was used in part to deleverage. Included in the S&P 500 in January 2021.

• Growing strength of Annual Recurring Revenue (ARR) through subscription-based software offerings - from 36% of total revenue in 2019 to 41% in 2020 at $1.3B.

• Partnerships with several industry leaders - Caterpillar, Nikon and Microsoft (holo-lens technology and cloud) but, they can cater to various OEMs which means customers can use them across their mixed fleet.

• My Price Target: $90 based on DCF

What to Look out For

• The Company has been on an acquisition spree. Almost 56% of their total asset base is Goodwill ($3.9B). Not all their acquisitions have panned out to the extent expected. Also, growing through acquisitions can actually slowdown growth as the Company tries to assimilate the new entity into their structure. They need to get this under control.

• Each vertical is treated almost as a separate business with a decentralized approach. The Company has adopted a new strategy called “Connect & Scale 2025”. While this will help the business become more integrated, they also expect that both Opex and Capex will increase in the interim. Trimble’s margins need to improve as it is (see Peer Analysis below). Increasing costs will mean they will need to work more on ARRs and higher margin software offering.

• Investor Day coming up in H2, 2021 where we will see the progress they’ve made and what they are aiming for.

A full analysis based on their 2020 financial results is below.

This article should not be considered investment advice. Please do your own due diligence or consult a professional before deciding to trade or invest. I may or may not have a position.

The Company

“Trimble Inc. provides technology solutions that enable professionals and field mobile workers to improve or transform their work processes worldwide.” - this is how the company describes itself, which doesn’t say much. 

Founded in 1978 by three ex-HP employees, the company was previously called “Trimble Navigation”. They provide hardware and software navigation based systems that assist people in three major industries - Real Estate and Infrastructure, Transportation, Agriculture. While they started out as a hardware-based company for GPS and survey equipment, the Company is now moving towards a software-based approach with SaaS as an offering.

A Global Company

Trimble is a global company operating in over 40 locations with over a million customers from 80 different countries. Manufacturing of many hardware products are outsourced and take place in the US, Sweden and China. Being a global company also comes with its challenges. The Company has significant exposure to various foreign currencies and need to navigate the local laws of each jurisdiction they operate in.

Management & Personnel

The Company has a solid top management, all with decades of experience. The current Executive Chairman, Steven W. Berglund was previously the previously the CEO & President of Trimble from March 1999 till January 2020. His successor, Robert G. Painter was previously the CFO of the company from 2016 to 2019, rising to this position from business development where he joined in 2006. There’s always something to be said about a Company that helps its people grow.

The current CFO, David G. Barnes, was an outside hire, coming from MWH Global in Jan 2020. Trimble maintains a good reputation as an employer in the market. I did some research and found a lot of positive reviews. With over 11,000 employees worldwide, that’s a commendable achievement.

The Business Model

The business model has been shifting over the last few years towards software subscriptions and service. I always admire companies who can pivot to keep up with the changing tides. Adapt or die, right?

Trimble has adapted well. Although product sales still tops their revenue pie at 58%, service and subscription is quickly gaining traction. This has lead to the Company increasing its ARRs by 8.6% in 2020.

Where does Trimble add value?

They combine the hardware with the software or as they like to put it - “the digital and physical worlds”. They cater to 4 verticals -

1. Building and Infrastructure - Construction and civil engineering, JV with Caterpillar (earth moving equipment)

2. Geospatial - Surveying, geographic information systems

3. Resources & Utilities - Serving customers in agriculture, forestry and utilities. They provide nation for tractors, better irrigation systems and automated pesticide and seeding solutions.

4. Transportation - Capabilities for long-haul trucking & freight shippers to create a connected supply chain. They don’t just help with navigation but also transportation management and fleet maintenance. They create integrated solutions which save costs by mapping out routes and predictive modelling.

Trimble has a host of products that serve these business verticals. Let’s look at a couple of examples. Say you want to construct a building. You can design your building with the Trimble system. This 3D model can enable precision fabrication and map out the entire project. The information is then imported into the guidance control systems that is attached to the actual machinery, e.g the earth-moving equipment which will then precisely remove the soil guided by your design. There’s a constant feedback loop as well for the engineers and the architects to monitor the data. It’s a much more efficient way to work and reduces project times significantly.

The company started out with GPS and other positioning hardware technology. This has now been augmented with superior software technology. They are serious about their ability to compete investing about half a billion dollars in R&D in 2020 (~15% of Revenue) with no intentions of slowing down. They have over 1000 unique, enforceable patents and have forged partnerships with industry leaders in technology.

One such partnership was done with Microsoft in 2019. The Trimble XR10 is a hard hat with a built-in HoloLens2. It can be used on construction sites to access model data in real time. It completely changes the way the industry will operate.

The Company’s basic aim is to provide “integrated work processes” through their four business verticals. The industries they serve are traditionally quite low-tech and their mission is “to add data-driven precision to processes that have meaningful impact on the productivity and quality of the work that's done in the field.”

Connect & Scale 2025 Strategy

The idea behind this strategy is to accelerate digital transformation and integrate the company. I’ve already mentioned their half a billion dollar R&D investments. CapEx spending will revolve around increased investments in cloud infrastructure, analytics and autonomy while OpEx will include increased spending on people and organizational improvements.

Part of the strategy will revolve around making organizational changes so there are fewer silos. The Company has also improved their compensation structure and bonuses are linked to performance targeting an increase in ARR.

So in the interim, we can expect the Company’s costs to increase but this should eventually drive more recurring revenue and better margins.

Financial Analysis

There’s no denying that Trimble has been on a growth trajectory. High on the Company’s agenda is driving the Annual Recurring Revenue through services and software subscriptions, instead of perpetual licenses.

Income Statement

The Company saw a 4% dip in overall revenue in 2020, which was expected given that they are a global company and many larger IT projects may have been deferred because of Covid-19. However, this also means that projects will not have been cancelled altogether so the Company will likely see these pipeline projects come back in the next few years. In fact the company’s back log is now $1.3B, which are the projects in the pipeline that should materialize over the next couple of years.

1. Buildings and Infrastructure (39% of Y2020 Revenue; -2.16% YOY)

   1. Segment margin improved from 25.4% to 27.5% in 2020

   2. Driven by higher software sales

   3. Opportunities exist in North American residential construction and an overall construction-led recovery in Europe, including tax incentives

2. Geospatial (21% of Y2020 Revenue; +0.17% YOY )

   1. Segment Margin up from 20.4% to 28.3% in 2020 driven by uptake in software products and controlled costs.

3. Resources & Utilities (20% of Y2020 Revenue; +10.25% YOY)

   1. Segment Margin up from 29.6% to 35.1% in 2020 driven by improved market conditions in the agri sector, stabilized commodity prices and government stimulus.

4. Transportation (20% of Y2020 Revenue; -19.16% YOY)

   1. They’ve experienced serious Segment Margin compression from 15.9% in 2019 down to 7.8% in 2020. The cause: “reduced hardware upgrades & subscriber declines, attributable in part to challenges with the electronic logging device transition in the trucking industry”.

   2. It would seem like trying to convert people from using perpetual licenses to subscription offerings has been difficult. Some of the margin compression was also a result of their Kuebix Acquisition in 2020. (more on acquisitions below)

   3. Trimble’s target still remains achieving 20% segment margin, although they haven’t given us a timeframe. The management is optimistic about achieving this target through a further integration in their products - linking up their fleet management systems with the cloud and data analytics.

Assets

The company is known for its acquisition sprees. As I mentioned earlier over 56% of the total assets is Goodwill ($3.9B), which is a significant number. I’m not a big fan of accumulating Goodwill. Here are there acquisitions for the last 3 years:

• 2018: 6 acquisitions for a total consideration of $1.8B including e-Builder & Viewpoint - cash transactions valued at $485.5M and $1.2B respectively.

• 2019: 4 acquisitions for a total consideration of $247M, the largest one being Cityworks (enterprise asset management for utilities and local government)

• 2020: 3 acquisitions for total consideration of $205M, the largest one being Kuebix (transportation management system)

Liquidity & Cash Flows

2020 Cash Balance was $237.7M which isn’t sizable compared to their peers (see peer comparison below). However, the Company has a committed line of credit of $1.25B which provides an adequate cushion.

Trimble has been trimming down their net working capital gradually over the last few years, from 5.3% in 2016 to near zero in 2020. Their Cash Cycle shows an improving trend over the last few years with better control over inventory and receivables collection.

The Cash Flows are relatively strong. In 2020, FCF improved by almost $100M, up 19% over 2019 to reach $615M. While it’s true that the company had a lower level of Capex in 2020, trying to actively conserve cash, this is still a good level to grow. Furthermore, with margins improving, overall cash flows will improve. But, Trimble has also said that they will be increasing their Capex & Opex spend over the next few years as they scale further so, it’s like we will see a temporary decrease in FCF.

Contractual Obligations

Trimble’s contractual obligations put their cash flows into perspective. With FCF of $615M, and obligations of $578M, they are left with $37M of cash. I understand that this is not a very accurate comparison but you get the picture. So, despite the amount of FCF, they are still tight. Their growth plans will probably need to be financed by their line of credit to a certain extent.

Debt Profile 

Trimble has total debt of $1.3B as of YE2020 down from $1.6B in 2019. The company has been successfully deleveraging over the last couple of years. They’d set a target of Net Debt to EBITDA of 2x and successfully reached 1.6x by the end of 2020. The Debt Profile is a mix of Senior Unsecured Notes, Term Loan and Revolving Credit Facilities They have a line of credit available to them for $1.25B, which provides adequate cash cushion should they need it. They have debt obligations of $256M due in 2021 which they should be able to repay comfortably given their cash flow trajectory.

Trimble’s Senior Notes have been given a long term rating of Baa3 by Moody’s which is an investment grade rating. They have not revised the rating downwards despite the pandemic - a time when most companies around the world have been downgraded.

Stock Chart

Trimble doesn’t pay dividends but they have an approved stock repurchase program since 2017. They’ve been gradually buying back stock driving the price upward but, the real upward movement came during the bull market run of 2020. Stock purchases:

• 2020: 1.9M shares @ avg. $43.40/ share (Total: $81.6M)

• 2019: 4.7M shares @ avg. $38.51/share (Total: $179.8M);

• 2018: 2.4M shares @ avg. $37.53/share (Total: $90M)

Analyst Price Target: $58 to $86

Covered by 15 Analysts including JPMorgan, Goldman Sachs, Baird, Melius, Keybanc, Morgan Stanley, Oppenheimer

Holdings

2021 Guidance

• 4Q2020 saw an EPS beat despite the dip in revenues and the global pandemic

• EPS guidance for 2021: $2.25 to $2.45 (up from 2020 EPS $1.56)

• 2021 non-GAAP Revenue Guidance $3.3B-$3.4B

• Cash flow from operations > 1.1X non-GAAP net income; free cash flow >1X non-GAAP net income

Industry & Competition

Because Trimble caters to different verticals, it’s a bit of a challenge to get into a detailed industry analysis. We would need to cover a number of different industries. So, I did decided to do a peer analysis instead, which always seems to give me some sense as to how the company is doing.

Peer Analysis

I compared a few different metrics to see how Trimble stacks up. Trimble most direct competitor is Hexagon from Sweden and you can see that the numbers and margins are quite similar for the two businesses. I would say Trimble still has some work to do to increase their margins.

While Trimble’s stock is relatively cheaper than their peers, their P/E is still trading at quite high multiple, similar to most growth stocks. P/B & P/S are are decent levels. This just tells you that the company need to push for better margins, which they have recognized and are aiming towards.

Competitive Edge

• Their unique enforceable patents and technology creates a barrier to entry

• Highly skilled engineering global workforce

• Partnerships with Industry leaders like Caterpillar, Microsoft, Nikon

• They are able to cater to customers who have a mixed fleet i.e., machines from different manufacturers. This enables customers to integrate their businesses and their workflows.

Conclusion

The Company is changing and their strategy towards improving margins and focusing on recurring revenue. They have the technology and a clear strategy for growth. I also like how they’re managing their debt and cash. The only problem is their penchant for acquisitions. I like the story behind these numbers and I’ll be following the company to see where it goes.

I took a position in the company after reading about them. However, this is not a recommendation or investment advice. Please do your own due diligence and/or consult a professional.