Thesis: Trimble, a provider of GPS gear for the construction, fleet management, and agriculture markets, will benefit as its end users increasingly use GPS data as a tool to boost productivity … or, in our Data Chain framework, “the conversion of data into wisdom”. Importantly, users in these markets are VERY early in the adoption of such tools, setting up strong growth potential for Trimble for years to come in spite of significant near-term headwinds.
Also compelling …
For 20+ years, collected all sorts of GPS technologies. 1999, board got tired of founder/technologist and decided they wanted to start making $$. Brought in a very focused mgmt team. Everything is very ROI driven. Prices they sell = $40k-80k. Nothing to do with cell phone. They’ll put systems on tractors so the tractor can drive around all nite without humans. Or survey work. Or solutions about helping folks know precisely where to dig.
Why are they so interesting? They’re selling into a group that are extreeeeemely analogists. Group has been around a long time but not until just recently have the users turned the corner. Still have to sell as ROI. Not “peer pressure” part of adoption curve yet.
Burning questions (December 2009):
#1) Will the E&C cycle improve in the next 2 years? And if not, do we want to be involved in Trimble NOW?
#2) Just how high of a priority is satellite navigation equipment for farmers? Do they amount to just toys?
#3) How much of the inventory that was built prior to this down-cycle has been absorbed by now?
#3) To what extent did rising commodity / crop prices drive Field Solutions results over the last several years?
#4) Why do Field Solutions products carry higher margins? Is this sustainable?
#5) Will Trimble successfully turn the @Road business around?
Where we can be wrong (December 2009):
#1) We may be farther ahead in the penetration of such gear than we actually think.
#2) The lack of recurring revenues may hurt Trimble disproportionately in the current cycle.
#3) Trimble tools become commoditized.
#4) Pull-in purchases will require market absorption.
Context: 2010E growth: 10% after (16%) in 2009. 3Q09, E&C (55% of revs) down 22%, Field Solutions (20% of revs) down 13%, Mobile Devices (15% of revs) down 2%.
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** SUPER QUICK 4 NODE REVIEW (as of 2008, so some #s are old …but thesis is not)
NODE #1: we’ve been talking about Data and this is a great example.
- When we think of data, we look for areas where:
(a) it can help drive revenues — maybe, something like BI, right?
(b) it can measure with more accuracy — improving quality
(c) it can automate and cut costs …do things faster too — ROI
- Trimble does the latter two. Every sale is ROI.
- INCREASED PRODUCTIVITY!!!
NODE #2: CYCLICAL EXPOSURE but early stages of penetration.
Their installed base is full of analogists. They’re still relying on ROI to sell….we haven’t hit the point of the S curve where things steepen b/c of peer pressure.
** NODE #3: (1) great mgmt team, (2) technological. They’ve collected various technologies (and integrated them well) for 25 years. In 1999, the board got tired of the founder and decided to make $$.
** NODE #4: Expect to grow revenues mid-teens, EPS 20%+. This qtr was 24%. Key here is that there IS exposure to US E&C and – yes – they are seeing weakness. 20% of revenues, down y/y. But Ag is crazy strong. Up 73%. E&C was up 11%.
- Ag: farmers benefiting from higher commodity prices …but being hit by high fuel/fertilizer costs.
- This is a nice kicker now … but i do want to make sure our investment doesn’t turn into a simple commodity price play.
- 5-10 years before they see replacement cycle driving growth.
- MGMT team – 21 acquisitions, no write downs. very focused on costs and margins. 21 separate P&Ls. 700 patents. deep understanding of users.
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Quick Look – January 2007
Trimble Navigation Systems – Quick Look
Trimble is a leading provider of advanced positioning solutions used in the Engineering & Construction markets, Agricultural Equipment (Agricultural Guidance and monitoring), GIS (geographic information systems), Fleet Management and Survey systems.
The company integrates various positioning technologies into its solutions including: GPS, laser, optical and inertial technologies. It combines these technologies with application software, wireless communications, and services to provide complete solutions to customers.
Trimble’s value proposition to customers: customers can collect, manage and analyze complex information faster and easier to be more productive, efficient and profitable.
**So what? Not sure if there is a monumental change occurring at Trimble, or if Trimble is a great company in a good market. I think it’s worth a deeper look -> to see if there is a monumental change occurring in Node #2.
**Potential Changes:
1) Market: According to Trimble, we are still early in adoption of advanced positioning solutions in Trimble’s target markets. So, are we approaching an inflection point? If so, why -> crisis vs. TPPA?
2) Market: Acquisition of @Road strengthens Trimble’s position in the asset tracking, fleet management and mobile resource management (MRM) market. Supposedly this market is set to explode. Other players here = Qualcomm and Sprint Nextel. Trimble (With @Road) is estimated to have about 20% market share (#2 or #3 in market behind Qualcomm). Don’t know market size/growth.
3) Leverage: Trimble has de-leveraged the balance sheet in recent years, driving EPS growth > rev growth. This is largely done today. Incremental change, though, anyhow (I think).
**Core belief: GPS adoption is still in the early stages.
**Market/Product:
Trimble estimates its TAM at $5bn+.
Revenue segmentation by market (note: no mj %s in the percent contribution in recent years -> implying all areas growing at similar rates):
• Engineering & Construction – 68%
• Field Solutions (Agricultural) – 15%
• Mobile Solutions (Fleet Management) – 6%
• Advanced Devices (Other systems that don’t fit into above & are <10% of revs) – 11%
Trimble’s estimates of penetration levels by addressable market:
• Survey systems: ~35% penetration of GPS/embedded wireless equipment
• Construction machine control: <10% penetration
• Precision guidance for ag equipment: <20% penetration
• Fleet management of heavy industries: <10% penetration (excluding long-haul)
**Unfair Advantage:
• Expertise in 1) embedded short-range, local-area and wide-area/cellular communications, 2) information processing (ie. geo-referenced data), and 3) precision positioning technologies, including GPS, laser, optical, and inertial.
• Trimble has over 700 patents and 25 years’ experience working in the industry.
• Customer (user) oriented culture: Company prides itself on “getting its boots dirty” in the process of understanding customer needs.
• Targeting less competitive markets (ie. not consumer). Trimble’s target customers = civil engineering firms, construction contractors and farmers -> typically late technology adopters that aren’t well served by the market.
**Leverage:
1) Rev growth (CY03-CY06): 16%, 24%, 16%, 21% to $940mm
2) Rev growth (CY06-CY08E): 24% (including @Road), 15%
3) EPS estimates: $1.99 in CY06 going to $2.15, $2.58
4) Mgmt considered to be good operators – fwiw.
5) Mgmt’s targets: Rev growth of 12-15% and 2-3% improvement in OPM between FY06 and FY08 (FYI OPM were 14% in 2006).
6) Valuation: trading at 26x CY07 EPS and 22x CY08.
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Round 2 – November 2007
Description: Trimble makes GPS enabled farm, construction and fleet management hardware and software. Trimble targets everything but consumer, so from low to high ASPs, the ranking is as follows:
** Asset & Fleet Management (6% of revs)
** Agri. Guidance and Monitoring ( 15% of revs)
** Construction/Surveying (68% of revs)
** Advanced Devices at roughly 11%.
Here are some examples of what Trimble’s equipment would do:
** tracker of concrete trucks – not only tracks where the trucks are, but also when the concrete was mixed, the fullness of the drum, moisture level, etc.
** E&C
• Survey work for building roads & highways
• Survey work for subdividing property.
• -PS guided site preparation; foundation pouring, laser leveling; horizontal and vertical laser alignment to make sure the construction is plum. Wireless update back at HQ of where the product is and update vis a vis the blue prints; changes to plans can be communicated back to the site wirelessly.
** handheld solutions for mapping professionals
** handheld terminals for public safety – wireless handhelds for traffic patrol, parking enforcement, issuance of tickets
** vehicle asset mgmt – or fleet mgmt for service vehicles to maximize utility and downtime.
** Advanced Devices – the only segment of Trimble’s revenues that is not customer facing. They sell components to OEMs.
4 NODE REVIEW:
Node 1: What is the change?
Digital Demographic revolution Trimble deals with the commercial GPS market, Agriculture & construction mostly, where there are a ton of analogists. But as the competition around them uses technology to get ahead, more will need to migrate to the new way of doing things just to stay competitive.
Faster World – Trimble’s products cut down on manual transfer of data and the resulting errors that comes with the traditional way of relaying data on a construction site.
Node 2: Is there a monstrous market?
Trimble see their TAM at ~$5 billion. The company’s revenues are about $1 billion. My take is that this is a moving target as the market isn’t static… more applications that were done an analog way will be done using GPS automated equipment 5 years from now. Steve Berglund, CEO of Trimble has said that it should be a good 5 to 10 years before Trimble has to worry about the replacement cycle to generate their growth
The 2 big opportunities for Trimble are:
** deeper penetration of existing markets. Here’s a quick snapshot of the current penetration rates:
– Survey systems: ~35% penetration of GPS/embedded wireless equipment
– Construction machine control: <10% penetration
- Precision guidance for ag equipment: <20% penetration
- Fleet management of heavy industries: <10% penetration (excluding long-haul)
** initial penetration of emerging markets opportunity - Trimble's mix is NA centric and will have a ton of room to grow in the S. America/Asia Pac infrastructure build out.
NA - 60%
SA - 3%
EMEA - 25%
APAC - 12%
So as the world industrializes, there's more room for Trimble to expand outside their North American strong hold.
Node 3: Do they have a sustainable competitive advantage?
Trimble's unfair sustainable advantages are: an incredible management team (21 acquisitions and no write downs); operational discipline (extremely focused on profitability, 21 P&Ls inside company); some 700 patents; and a deep understanding of the end user and what they do from day to day.
Case and point is the AtRoad acquisition, which closed in May of 2007. AtRoad lost ~$2 million prior to being bought and the company was profitable within the first quarter of ownership by Trimble.
Node 4: Is there leverage in the model (operating/multiple)?
Trimble's margin structure is fairly stable. Management has expanded margins every year since Steve Berglund took over. - management is targeting 100bp operating margin expansion a year for the next 2 to 3 years. Trimble's multiple isn't cheap at 25x CY08... so some of this is being built in.
One longer term opportunity for margin expansion is the Mobile Solutions division, which is growing at above corporate averages on the top line and below average on EBIT contribution. The company believes they can get the division to corporate averages, if not above average margins over time.
Background Info:
*****HQ: California
*****Management:
CEO -Steven W. Berglund joined Trimble as president and chief executive officer in March 1999. With more than 20 years of industry experience, Berglund has a diverse background in engineering, manufacturing, finance and global operations.
Prior to joining Trimble, Berglund was president of Spectra Precision, Inc., a pioneer in the development of laser systems. Berglund spent 14 years at Spectra Precision in a variety of positions, including four years based in Europe. During his tenure as president, Berglund initiated the merger of five companies to form the Spectra Precision Group, of which he remained president. With global sales of approximately $230 million, Spectra Precision develops and manufactures surveying instruments, laser-based construction alignment instruments and machine control systems and software.
After joining Trimble, Berglund spearheaded the strategic acquisition of both the Spectra Precision Group and Tripod Data Systems, a leading developer of data collection software and hardware for the land survey, construction and Geographic Information System (GIS) markets. The acquisitions position Trimble as the world leader in advanced positioning technology, helping to define and transform the way position-centric information is used.
In the early 1980s, Berglund spent a number of years at Varian Associates in Palo Alto, where he held a variety of planning and manufacturing roles. Varian is a technology company specializing in microwave communications, semiconductor manufacturing equipment, analytical instruments and medical diagnostic equipment.
Berglund began his career as a process engineer at Eastman Kodak in Rochester, New York. He attended the University of Oslo and the University of Minnesota where he received a B.S. in chemical engineering in 1974. He later received his M.B.A. from the University of Rochester in New York in 1977.
CFO - Rajat Bahri - Rajat Bahri joined Trimble in January 2005 as chief financial officer. He will be responsible for the Company's worldwide finance operations including accounting, external reporting, tax, treasury and investor relations.
Bahri brings over 15 years of experience to Trimble in a broad range of significant finance roles while at Kraft Foods and General Foods. At Kraft, Bahri served in a variety of senior finance roles, both in the U.S. and abroad, including senior financial officer of several multi-billion dollar operations. Most recently, Bahri was the chief financial officer for Kraft Canada, Inc., a division in Kraft's second largest operating country.
Bahri received his Bachelor of Commerce from the University of Delhi in 1985 and an MBA from Duke University in 1987.
*****Rev Split - what they do:
E&C - 68%
Ag - 15%
Adv. Devices - 11%
Mobile/Fleet Mgmt - 6%
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BLOG – May 16, 2008
** TRIMBLE AG COMPS
We’ve talked about Trimble’s “tough” Ag comps for awhile now, so I checked their #s to see when they would start to face the tough comps. The point – it’s this coming June qtr. The numbers: Ag revenues grew 75% in March 2008, 62% in December 2007, 53% in Sept, 52% last June, and 18% last March.
This begs the question of whether management’s guidance for 2008 incorporates this dynamic. I’d be stunned if it didn’t! but it’s worth a quick check regardless.
- 2008 revenues are expected to grow 17% y/y.
- Ag now makes up 23-24% of revenues.
- The one Street model I’ve seen calls for Ag y/y growth of 55% in 2Q08 and 35% y/y in 3Q and 4Q.
So what? My first impression of the 55% Ag growth in 2Q08 is that it’s high considering the tough comp. However, when I look at it on a q/q level, last year from 1Q to 2Q Ag grew 9% q/q. (The year before, it fell 16% q/q). This year -- the 55% y/y growth in 2Q translates to a 3% q/q decline. That’s a bit more re-assuring.
All things considered, after looking at the numbers I think the Ag comps definitely merit attention as we head into the July reporting season. I’m willing to give management some benefit of the doubt here. But I’m not sure how much visibility they have on a qtr to qtr basis in this business.
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** MARCH 2009: FARMER THOUGHTS
ON THE FINANCIAL HEALTH OF FARMERS
From Dave
Conclusion: No change to my Monsanto thesis. Though, as I get to more in my 2nd post, I have a thought that Trimble’s agriculture products could slow at a faster rate than folks think. Maintain bunker-sized position there.
I pinged a friend of mine in the farmer community about the financial health of farmers. How bad is it?
Answer: it isn’t good. Here’s his quote: (caveat - he’s speaking from the perspective of an east coast dairy farmer, but with commodity prices down everywhere, and fertilizer costs high everywhere, I think his sentiment is pretty common).
“Fertilizer prices are up and Milk prices are down. Farmers still have to farm and the dairy farmer is suffering right now. We have some long time customers that are dairymen and they have always paid in an early cash discount program. Now we finally have their orders but a lot of these orders are still unpaid. We are trying to help these loyal customers by extending the discounted price to them and we are hoping that they will be able to pay at least half the bill on delivery.
Another thought on this is Tax purposes. From January till harvest the grain farmer has expenses and not much coming in till harvest time. After harvest some farmers will look over their books and decide if they should buy something for the farm or declare more of a profit for the year. In December you will see farmers purchase a “toy” like the sat-nav system”
So what? I find it interesting that he used the word “toy”. Again - he’s just one data point, but if farmers are struggling to pay for seed, I can’t imagine they’re buying much sat-nav equipment. Keep Trimble small…
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** APRIL 2009: TRIMBLE REVIEW (LONG - BUNKER SIZE POSITION)
From Dave
Conclusion: No change. Maintain bunker sized position. I wanted to review Trimble’s model and see what folks are expecting.
First … by segment:
** E&C: 55% of revs. 2007-2010 growth: 17%, 0%, (16%), 8%. Last qtr was (24%) y/y. This qtr exp to be (23%).
** Ag: 23% of revs. 2007-2010 growth: 44%, 50%, (5%), 9%. Last qtr was 17% y/y. This qtr exp to be (10%).
** Mobile: 13% of revs. 2007-2010 growth: NM, 6%, 1%, 8%. Last qtr was (16%) y/y. This qtr exp to be (4%).
** Advanced Devices: 10% of revs. 2007-2010 growth: 17%, (1%), (1%), 2%
** EBIT Margins: 2007-2010: 19%, 19%, 16%, 18%. Last qtr was just 11%, down from 17% the year prior. By segment, EBIT margins in E&C in 2008 fell from 23% to 17%, in Ag they grew from 30% to 36%, in Mobile they fell from 8% to 7%, and in Adv Devices they grew from 14% to 20%.
The point: #1 –> The drop in margins was severe in 4Q – and management acknowledged that there is extremely low visibility, that the lack of recurring revenues makes life particularly troublesome, and that they were focusing on cutting costs and preserving their EBIT margin line. They say they’ve cut headcount by 10% since last April and that those measures should save $25mn in costs in 2009 – which looks to be about what is modeled into Street #s from what I can tell. For context, EBIT in 2008 was $250mn.
Point #2 is that to Ag remains a really really key lever in their model. If that continues to grow – with margins at 36% – it’ll continue to nicely support their NODE #4 model. However, to whatever extent this slows down, their model becomes that much more vulnerable.
I asked my farmer friend where in the priority list sat-nav equipment is, and he acknowledged that – yes – precision farming equipment falls below things like what crops to plant and that their extra dollar would go to biotech seeds before precision farming equipment.
Would I be stunned to see a 20% y/y decline in Ag in 1Q as opposed to the 10% folks are forecasting? No.
So what? I have no interest raising Trimble from our current bunker-sized position. My biggest considerations include:
- Lack of recurring revenues & very little visibility is a particularly bad combo these days.
- The one strong area of their business, I think, is more vulnerable these days given the financial condition of farmers.
- Management called China their single biggest opportunity. “The gov’t is taking action now”. I’d rather not hear about China opportunities, frankly.
- On their 4Q call – they made several references to the 2001/2002 recession. They used that to strengthen their competitive position – establish new businesses – expand into new areas.
On that last topic, the questions I have here include:
- Will this “recession” look **anything** like the one in 2002 when there was a sharp snap-back? I don’t know the answer, but I’m wary of anyone running their business with that type of expectation.
- How did Trimble fare – operating margin wise – during that last recession? Answer: Good & bad. In 2002, revenues fell 2% after growing 28% in 2001. EBIT margins were fine in 2002 at 14%. Interestingly, it was 2001 that saw weak EBIT margins – 0%. I checked old 10-K’s and that was caused primarily by the Agriculture business. First, there was a shift to lower priced products. Second, Trimble was investing a lot to get their AutoPilot program started. I would add, also, that in 2001 DATA and sat-nav gear was likely still a bit of a Futurist’s dilemma.
So – all things considered – I’d like to leave this position small. I do like management… I do like that they are very focused on the bottom line … and I do like their track record of consistently making $$. However, I think we are very much at the mercy of the economic cycle.
… separately: Apogee may help gauge just how atrocious the E&C market is right now. They report April 7th.
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** JULY 2009: TRIMBLE EARNINGS (LONG)
Pip lead in: patience… the fundamentals will not turn as quickly as one might want… still one of the most serious managements we know… great node #3 advantage
From Dave
Conclusion: No change. Maintain bunker sized position.
Revenue of $290mn fell 23% y/y and was $10mn shy of estimates while EPS of $0.31 missed the Street’s estimate by a penny. Guidance was cautious – and estimates will likely come down a tad. For 3Q, the company expects revenues of $270mn and EPS of $0.31, below the Street’s $280mn and $0.32. EBIT margins were 9.9% … down from 16.7% last year.
By segment, Engineering & Construction continues to take the brunt of the economic downturn:
- E&C (50% of revs): Down 31% y/y. EBIT margin 14%… down from 22% last year.
- Field Solutions (28% of revs): Down 11% y/y. EBIT margin 38% was roughly flat y/y. The company blamed the decline, in part, to tough comps. Last year, this segment grew 63% y/y. Fair enough. But on a qtrly basis, this division fell by 20% q/q. How does **this** compare to historic norms? Answer –> well, there isn’t a historic ‘norm’. Last year, Field Solutions grew 2% q/q. In 2007, it grew 9% q/q. In 2006, it fell 16% q/q and in 2005 it fell 29% q/q.
- Mobile Solutions (13% of revs): Down 8% y/y. EBIT margin grew to 12% from 7% last year due to lower COGS and restructuring costs. Encouraging…
- Advanced Devices (8% of revs): Down 26% y/y. EBIT margin held steady at about 21%.
Management suggested that E&C is showing signs of ‘stability’ but I’m not counting on that. Down 31% y/y is a big number.
So what?
Shares are up 12%, but there isn’t much new here that alters my thinking. When the transcript becomes available, I’ll check to see if they said anything substantive that could point to improving conditions.
The one question I’ve been thinking about is why Field Solutions products have such higher margins, a question that is particularly relevant in this quarter considering revenues fell 11% y/y but margins held at over 30%.
I haven’t been able to get in touch with the company to dig into this question, but after digging thru past transcripts, this is what I’ve learned:
** Observation: Field Solutions margins have always been higher, but it wasn’t always the case that Field Solutions margins were **well** ahead of E&C. In 2006, margins were 27% for Field Solutions vs 21% for E&C. In 2007, 30% vs 23%. It wasn’t until 2008 that the disparity grew dramatically … to 36% vs 17%.
When mgmt talks about margins, they typically just state that revenue growth is the key determining factor. That is, higher revenue growth drives higher margins because both businesses have some fixed costs. So, with Field Solutions growing revenues so well in 2007/2008, margins are higher.
** Thought #2: The other thing that management references occasionally when talking about margin growth in field solutions involves new products. But that is just occasionally. The bigger factor – at least according to their public remarks – have to do with the revenue growth.
So what?
The follow-on question here is: will Field Solutions margins be able to hold up if revenues continue to fall? Answer: if the key reason that Field Solutions have higher margins is **only** because revenues have been growing faster, then the answer would be no. However, the fact that they held margins steady while revenues fell 11% this qtr suggests something more might be at play. With earnings behind us, I will see if I have better luck contacting management…
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** Feb 2010: TRIMBLE RESULTS (LONG)
From Dave [Pip: for our value oriented friends - this company has a great long term oppty and an exceptional Node #3 unfair advantage and an addiction to making money… and it scores out in our apples:apples dcf process as inexpensive relative to most of our holdings… the near term has not significantly turned… plenty of time to do the work you might require… happy to help… dave@coburnventures.com]
Conclusion: Macro conditions are still weighing on results, but business seems to be moving in the right direction. The BIG question on my mind: to what extent is a recovery in Trimble’s business dependent on a recovery in end markets like construction? At first glance, the improvement in their business seems to be the result of international growth. I view this as a mild positive because it hints (still low conviction) that Trimble’s business might be able to recover without a full-fledged Engineering & Construction boom in the US.
The results: revenue edged up 4% y/y to $278mn, ahead of analyst forecasts of $269mn. Non-GAAP EBIT margins improved to 12.2% … up from 10.7% a year ago.
By segment, E&C was up 8%; Ag was down 2% (tough comps), Mobile was down 5%. The company attributed the E&C uptick to growth in Asia and even Africa. By Geography, 50% of the revenue came from North America, 23% from Europe, 19% from Asia-Pacific and 8% from rest of the world. North America was down 7%. Europe grew 3%. AsiaPac grew 40%. And RoW grew 15%.
So what?
That internat’l growth is interesting and merits more thought. I’ll dig in. And, I’ll also start working on a model as we discussed in Toronto.
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Trimble Model January 2010
** Conclusion: Useful exercise. I’m a bit more positive about Trimble. To be clear, the company is still very much dependent on macro conditions and a recovery – to some degree – in construction and farmer spending. And for that reason, my conviction about business turning around in 2010 is only modest. However …. considering the easy comps and the growth that is taking place in Asia, if there *is* a recovery (even minor), these hurdles seem doable. I’m aiming to set up a call with the company to get a sense of some of the strengths and weaknesses in their business these days. But here are my takeaways from constructing a model…
** Headline estimates:
- Revenue growth (08-11E): 9%, (15%), 11%, 14%
- EBIT margin (08-11E): 19%, 15%, 18%, 19%
- EPS (08-11E): $1.56, $1.04, $1.30, $1.58
- PE: 19x 2010 EPS. 15x 2011 EPS.
** Margin drivers:
Here are the line items behind the margin fluctuations… (2008-2011E)
- Gross Margin: 51%, 51%, 52%, 52%
- SG&A: 22%, 26%, 24%, 23%
- R&D: 11%, 12%, 12%, 11%
** Revenues by segment, and growth from 2008-2011E
- E&C: 50% of revs. 0%, (22%), 12%, 12%
- Ag: 25% of revs. 50%, (3%), 5%, 15%
- Mobile: 15% of revs. 6%, (7%), 11%, 12%
- Advanced: 10% of revs. (1%), (16%), 6%, 7%
** Sequential growth by segment.
One thing to take note of is the seasonal ebbs and flows among Trimble’s two major segments (E&C and Ag). To be clear, I never want to rely too much on q/q trends to predict the coming year because we’re dealing with small sample sets (ie, a review of the last 5 years) and because every year is different! However, it does offer one more prism through which to view the 2010 expectations.
First: here is the 5 year q/q average growth for E&C and Ag.
E&C:
- 1Q: 6% average with a range of outcomes that ranged from (12%) to +14%. For 2010, the Street expects a q/q decline of about 6-8%.
- 2Q: 14% average with a fairly consistent range of outcomes in the mid-teens. For 2010, the Street expects a 15% q/q increase.
- 3Q: (5%) average with a range from a 10% decline to a 1% growth. For 2010, the Street expects a 2% growth.
- 4Q: (5%) average with a fairly consistent range of down 2-3% each year. But 4Q08 was down 30%, which skewed the average a bit lower. For 2010, the Street expects 2% growth.
So what? The 2010 expectations are broadly in line with what historic norms have been. Ditto for Ag…
Ag:
- 1Q: 75% average with a range of outcomes that ranged from 60% to 95%. Big spending qtr for farmers! This year, growth is forecast to be about 75%…
- 2Q: (11%) average with a historic range from (30%) to flat. This year, the Street is at (15%).
- 3Q: (24%) average with a fairly tight range in the mid (20%s). This year, the Street is at (28%).
- 4Q: 2% average with a range of +10% to (10%). This year, the Street is at 5%.
** Revenue growth by geography
Conclusion: This leaves me more positive…
Here is rev by geography and growth for the past three years:
- US: 50% of revs. 19%, 6%, (15%).
- Europe:22% of revs. 40%, 2%, (25%).
- Apac:17% of revs. 30%, 24%, 5%
- Other:12% of revs. NA, 17%, (20%).
So what? Notice the growth in AsiaPac. In 4Q09, it grew 40% y/y. When I look ahead to 2010, if I plug in 30% growth for Apac, 7% in the other regions will get us to the Street’s 11% estimate.
** Conclusion?
To be clear, Trimble is still very much dependent on macro conditions and a recovery – to some degree – in construction and farmer spending. And for that reason, my conviction about business turning around in 2010 is only modest. However …. considering the easy comps and the growth that is taking place in Asia, if there *is* a recovery (even minor), these hurdles seem doable. I’m aiming to set up a call with the company to get a sense of some of the strengths and weaknesses in their business these days.
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** TRIMBLE RESULTS – MAY 2010
Conclusion: There isn’t much to take away from this one yet. I’m awaiting a transcript to get at some of our burning questions. But at first glance, the results were good – not great – and guidance ok. I see nothing that tilts me materially any more positively or negatively and I think it makes sense to keep Trimble a relatively small position.
As a reminder, our thesis: Trimble, a provider of GPS gear for the construction, fleet management, and agriculture markets, will benefit as its end users increasingly use GPS data as a tool to boost productivity … or, in our Data Chain framework , “the conversion of data into wisdom”. Importantly, users in these markets are VERY early in the adoption of such tools, setting up strong growth potential for Trimble for years to come in spite of significant near-term headwinds.
Revenues of $319mn beat the Street’s $311mn and grew 10% y/y. EPS of $0.34 beat by 3c. EBIT margins of 18% were up from last year’s 16%. For 2Q, the company maintained previous guidance, which – fyi – some on the Street are considering a negative given Trimble’s 1Q beat.
By segment:
• E&C: 50% of revs, up 23% y/y
• Ag: 30% of revs, down 3% y/y
• Mobile: 11% of revs, flat.
• Advanced: 9% of revs, up 15%
So what? The E&C recovery is a step in the right direction, though – I’ll note that it comes off *very* easy comps. E&C was down 34% y/y in 1Q09. So – cyclical recovery? I’ll take it. But my point is that the 23% growth should not be interpreted as something more secular …or as a return to 20%+ trendline growth.
Additionally, the Ag business remains pressured as farmer cash flows remain under pressure. The 3% y/y decline is *not* the result of tough comps – as may have been the case 9-12months ago.
So … again … it’s good to see some stability and a return to growth. But business is not yet humming. AND …. I’ll note that Trimble shares have rallied such that 2010 PE is 24x and 2011 is 20x. If the recovery gains steam, I envision some upside to estimates, but we’re not seeing that yet.
Maintain current position. I’ll come back w/more after the transcript becomes available.
Shares up 5% on the news.
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Trimble Follow-up July 2010
Call with Willa in IR – 408/481-7838
** TRIMBLE NODE #3 FOLLOW-UP
I spoke with Willa (IR) at Trimble to get the company’s take on some burning questions of mine.
Conclusion: Informative call. I found Willa’s openness and willingness to be pretty frank about some sensitive topics refreshing. If *that* is indicative of the broader culture at Trimble, it’s a positive, and it’s also consistent with the thoughts we’ve had about their management team for years now. However, some of her answers leave me incrementally more negative about the business.
My primary questions involved NODE #3 by segment:
- E&C: Not much change here. The NODE #3 advantage here consists of brand, distribution, and technology. Trimble’s partnership with Caterpillar helps too. Relatively limited # of competitors – Topcon, Leica. Trimble prices 10-20% above competition. Topcon had previously been aggressive on pricing, but even they have raised prices a bit. My sense: still some NODE #2 macro pressure, but NODE #3 seems like a pretty rational market right now.
- Field Solutions: Ag and GIS. GIS (eg, forestry, utilities) is a small, niche market in which Trimble has 80% share. Very little competition. In Ag, Willa suggested that the competitive landscape is more ‘interesting’. If I were to put on my behavioral analyst hat, I’d say her tone was cautious. John Deere is the 800lb gorilla. Here, Willa said if we asked her 4-5 years ago, she would have said that the JD would dominate as more and more equipment gets integrated into the tractors. But 90% of sales are still in the aftermarket… which is surprising to Willa (and is a positive). At any rate, she says the JD has the marketing and distribution power, but Trimble can out innovate and has a technologically better solution.
My thought: I asked what “out innovate” meant and she mentioned the GUI and software that sits on the equipment and the ability for the computers in the tractor to talk to one another: “the connected farm”. But, frankly, it seemed a bit dubious.
She also mentioned Raven (another competitor) and said that originally, Raven specialized in flow control and Trimble did guidance, but the two of them are kind of meeting in the middle and share similar roadmaps now.
All things considered, I have a thought that Trimble’s NODE #3 position in Ag is decent – they are a leader – but to call the advantage “unfair and sustainable” seems like it might a stretch.
- Mobile – @road business. Willa explicitly said that this is the business that will someday be commoditized and that Trimble is trying to extend the business into other areas. She said some customers are simply looking for “dots on a map” as opposed to the sophistication Trimble offers (ie, “here is the amount of idle time for your truck and the amount of fuel you’re consuming while it’s idle”). There was a fairly high profile customer loss (I think AT&T) who seems to have wanted “just” the GPS positioning of its trucks and left Trimble for a cheaper competitor.
Their focus next: to start moving this business toward enterprise accts – phone co’s, utility co’s, companies with 1000+ trucks – and working with them to help manage the data once they have it. So … integrating the location data into the company’s database and giving them a solution that is specific to their workflow. She suggested that someday, the competition will likely come from Oracle and SAP, but today the market isn’t large enough for them to care.
So what? I “get” the move into an enterprise’s back office, but it seems like a very different market than what Trimble is used to and one where they lack a competitive advantage.
** TRIMBLE FOLLOW-UP: RECURRING REVENUE
Question: what % of Trimble’s revenue is recurring?
The vast bulk of the @road business is recurring – so, about 10-12% of revenues there. And about 10% of the remainder of their business has a software element and generates recurring revenues. So this gets us near 20% of total.
Looking ahead, the promise here involves the “Connected Site”. This is important to watch. It’s inside Trimble’s E&C business and can effectively be thought of as ERP for a construction site with which a construction manager can manage an entire project on a laptop without having to go into the field. This is a brand new space, it’s all software / recurring, and it’s just launching now.
The company won’t talk about how large of a % of revenues they expect it to be in 1-2-3 years, but they are definitely featuring it as an exciting new opportunity.
So what? We knew the company’s recurring revenue stream was limited, but we wanted clarity on how much of it is … and how this might change going forward. The key to watch is this Connected Site segment.
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** TRIMBLE RESULTS – JULY 2010
Conclusion: No drama in the #s, but I have lingering questions / concerns about this one and think we should keep it as a small position. My top considerations: #1 — I have a thought that cyclical factors are dominating the business more than our secular drivers are. Nothing so terrible (or unique!) about that …but I want to keep it in perspective… especially with regard to their two big segments, E&C and Field Solutions. My bigger consideration is that competitive forces in NODE #3 may force the company to extend into areas in which they have less of an advantage … particularly in Mobile.
As a reminder, our thesis is that Trimble will benefit as its end users increasingly use GPS data as a tool to boost productivity … or, in our Data Chain framework , “the conversion of data into wisdom”. Importantly, users in these markets are VERY early in the adoption of such tools, setting up strong growth potential for Trimble for years to come in spite of significant near-term headwinds.
Headline results: Revenues of $333mn beat the Street’s $324mn and grew 15%. EPS of $0.42 was 2c ahead of the Street. Guidance was inline with consensus.
Among our burning questions and where we can be wrong considerations that are most relevant to this set of results:
Q: Will the E&C cycle improve in the next 2 years? And if not, do we want to be involved in Trimble NOW?
A: Trimble’s E&C segment was the biggest positive, growing 28% y/y with margins improving to 18% from 13% last year. The good news: this was ahead of expectations and suggests that the cycle is improving. However, let’s remember that the comps were exceedingly easy and the absolute revenue figure of $188mn still falls 11% below the levels of two years ago. So … more progress to make here. (Note: Caterpillar reported results last week and called for 25% y/y revenue growth. Also encouraging.)
Q: Will Trimble successfully turn the mobility segment around?
A: This is the biggest negative in the quarter and speaks to the challenge that I presented in my Trimble follow-up work a few weeks ago. Here, revenues fell 2% y/y and EBIT margin fell from 9% to 1% y/y. I don’t like the direction this business is going. Trimble lost a key customer (I mentioned this previously, AT&T – who opted for a cheaper competitor) and the company suggested to me last month that of all its segments, this is the most at risk of becoming a commodity. Their strategy? To extend the sale into a company’s back office to help manage the data once they collect it (that is – instead of just tracking the fleet, they’ll help a customer make sense of the data).
I don’t know if they spoke of this new effort on the call – but I see this effort as more of a yellow flag than anything.
Q: To what extent did rising commodity / crop prices drive Field Solutions results over the last several years?
A: I think we can remove this Q from our list of questions. My conviction is growing that – while there is a secular DATA / Digital Demographic Revolution tailwind helping this business – the business is mostly tied to macro conditions and that the exciting years of 2007-2008 were moreso the result of commodity prices than secular DATA drivers.
As a reminder, this segment grew 9% in 2006, 44% in 2007, and 49% in 2008 before falling 3% in 2009.
Note: in 4Q06, corn prices shot from 250 cents per bushel to 370. In 2007, they grew to 450 before heading to 700 in 2008. They then fell back to the 350 range by early 2009. The point is that this surge coincides extremely nicely with the pop that Trimble’s Field Solutions business experienced.
This quarter was lackluster. Revenues came in slightly shy of expectations – flat y/y with steady EBIT margins in the high 30%s. Nothing overly dramatic ….but note that, here, Trimble’s ‘tough comps’ had fully anniversaried after 1Q. So, the flat revenue growth is off a 2Q09 that – in itself – fell 11% y/y.
Conclusion? All told, a mix set of results. Keep position small. I’ll follow up with the company to learn more about the new products / extensions the company mentioned to me last month – namely the Mobile division’s attempt to sell into the back office and also the Connected Site portion of E&C.
…shares are flat on the results.
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Trimble Follow-up – September 2010
** Context: I wanted to follow-up with the company to (a) get a better understanding of (a) the competitive landscape, particularly in E&C and Ag and (b) get a reminder of some of the use cases that underlie its ROI value proposition. So, I chatted with Willa in IR again….
** Conclusion: This is a good refresher …though, it doesn’t make me any more positive or negative. I thought Willa’s responses were sensible and they left me thinking that Trimble’s NODE #3 position as a leader in this market is secure … though not as “unfair” as it once was.
** PART #1 – E&C
** Competitive landscape: We know that Trimble competes primarily with Topcom & Leica. And we knew that Trimble is priced 10-20% above competition. And we know that in the past, Trimble has said that “technology” is the advantage… as is reputation and distribution.
So … my questions:
#1: For context: what are market shares for the top participants? Answer: High 30%s for Trimble. Topcom is in the low 30%s. Leica high 20%s. However, Leica just did a large acquisition which might take them into the high 30%s.
#2: What does “technology advantage” mean? … and, specifically, what does the end user see because of this advantage that they’d not see with the competition? Answer: Willa walked through a timeline, of sorts. She said that initially, Trimble was first to commercialize these types of GPS products. So, that was the NODE #3 advantage years and years ago.
- Then, accuracy became the lead feature. That is, the ability to get measurement right down to the centimeter level. However, over the past few years, the leaders have been able to match.
- So, today, rugged-ization is a big one. The ability to stay calibrated in the field and designing products that can maintain this in rugged environments is key, she says.
- GUI – domain, knowledge, workflow. This has been attained through experience. Trimble understands the business and understands the software necessary to develop a well-designed product and GUI.
- Breadth: broadest product line. Trimble can offer products all throughout a project’s lifecycle. So … from optimization and scenario planning to the inputting of 200 factors that will tell you exactly how to build a road from point A to point B (including things like regulatory issues to be aware of).
- Connected site: This is the new battle-ground (says Trimble). I covered it in my last Trimble note, but Connected Site effectively just means that a piece of software is going into – like – every piece of equipment on a project site. So, if bull dozer A is turned off, the project mgr back at the office will be able to tell and redeploy. Here, Leica and Topcom: slide-ware looks the same as Trimble’s, but with the JV w/Caterpillar – Trimble has product actually shipping whereas others do not.
My take: all this makes sense and has me thinking that Trimble’s position as a leader is secure … though, the NODE #3 is perhaps not as ‘unfair’ as it once was.
** Use cases: What use cases are driving business (or – are you trying to sell)? And how is that changing?
Answer: this hasn’t changed all that much over the years. I mean, the #1 value proposition is still increased productivity, and “asset utilization” is still the means by which they aim to do it.
Willa stressed that asset utilization is the #1 focus for the construction manager who is working with extremely slim margins as it is. They have to be able to work their assets as effectively as possible – from their machines to their people. Trimble sells (a) Time saving. (b) Labor saving. (c) Rework saving. For instance, on part (c), … if you grade a road just an inch “off”, there will be water collection issues which will result in ‘rework’ costs.
Also relative to use cases, Willa said the Connected Site is the holy grail. As I said when I spoke with her in June, I think this is a legitimate burning question for our pre-determined game plan: how large is the user crisis for the connected site? It’s important not only b/c Trimble is the only one shipping solutions, but it’s also a much-needed recurring revenue stream.
** PART 2: FIELD SOLUTIONS
As a reminder, this is comprised of both GIS – for which Trimble has 80% share and no real competitors – and Ag.
#1: What % of Field solutions is GIS? Don’t break it out. Several years ago, it was 50/50 – but as Ag took off, it shrunk. I suspect it still makes up 25%+ of Field solutions revenue (with a similar margin profile).
#2: Inside Ag, what is market share for top participants here? Trimble has about 50% market share. Deere (in the guidance segment) – about 20-30% share. Then Raven.
#3: When we last talked, Willa said John Deere has a marketing advantage but Trimble has technology advantage? Again, what does “technology advantage” mean and what does it get the end user?
- A better GUI with better ease of use.
- Ease of integration into the tractor (in after market sales).
- BUT …. MORE THAN ANYTHING, Willa says most farmers have mixed fleets, so they have all different kinds of equipment the field and want equipment that can go into all types of tractors. Deer *does* have after market equipment, but they were late to enter.
#4: Is Trimble priced above competitors here too? Answer: No. It’s a much more price sensitive market; a bit more cut throat. So they’ll price down.
#5: With regard to Raven, on our last call, Willa said Raven started with flow control and Trimble started at guidance and they’re both now kinda meeting in the middle. What does that mean?
- Guidance: this means just driving the tractor. So, Trimble will plug its gear into the hydraulics so it goes in a straight line – reduced input costs for fertilizer – make sure the tractor goes EXACTLY where you want it to.
- Flow control: this would involve distributing fertilizer precisely where you want it after its coordinates are programmed into the computer. So … in *that* portion of the field, spit this much out. But don’t fertilize when we get to *this* coordinate. Etc..
Today, yes, Trimble has both.
Oh … here’ s a cool use case in Ag that speaks to the “technological advantage” Trimble claims to have. They actually have a product that drives over a plant and detects the shade of green to determine how much nitrogen is in the plant and whether it needs fertilizer. Holy cow. Nice use of data, huh?
CONCLUSION? To be clear, there isn’t any *single* silver bullet here that makes me think that Trimble is leaps and bounds ahead of Topcon … Leica … Raven … or John Deere. But after hearing more about the product breadth and all the various use cases of data, I’m left thinking that the company’s position in NODE #3 in these two important segments is secure.
All things considered, I think our thesis as well as our burning questions and where we can be wrong considerations are intact. The company sells a very effective “productivity / Do More With Less” proposition. But macro conditions will likely continue to dominate. The two *new* questions to consider:
- Is Connected Site a legitimate “holy grail”?
- Even if Trimble’s NODE #3 position is secure in what effectively resemble oligopolies, will everyone play nice pricing-wise?
