Closing Bell - Manifest Space: Space-Enabled Precision and the GPS Bet with Trimble CEO Rob Painter 3/21/24

Episode Date: March 21, 2024

Trimble, a leader in geospatial technology and player in the Internet of Things (IOT), is reaping the benefits of its initial bet on GPS 46 years ago. Trading at multi-year highs, the company is building on the momentum that stems from building hardware & software for construction, agriculture, transportation, and more. CEO Rob Painter joins Morgan Brennan to discuss Trimble’s portfolio and the role of space in software applications.

Trimble is a leader in geospatial technology and a player in the Internet of Things. It builds hardware and software and offers services to markets ranging from construction to agriculture to transportation. Trimble's forte? Space-enabled precision. So we would be a company that really plays off applications that are enabled by technology that's deployed from space, namely GPS. The superset of GPS is known as GNSS or Global Navigation Satellite System. So many countries have their own satellites these days. The US was the first and the first satellite launched

back in 1978. Our first GPS receiver was sold in 1984. And so when precision matters, like moving from that, let's call it meter level accuracy to sub meter down to centimeters, that's where Trimble shows up is really when precision matters, you want Trimble. Trimble CEO Rob Painter says the 46-year-old company's origins stem from an ambitious bet that GPS would have broader applications beyond the military. Today, shares of TRMB trade at a multi-year high as investors bet on the digitization of everything and the industrial tech companies delivering it.

On this episode, Painter breaks down the Trimble portfolio and the role of space in software applications on Earth. I'm Morgan Brennan, and this is Manifest Space. Rob Painter, CEO of Trimble. It's so great to speak with you today. Thanks for joining me. Hi, Morgan. Good to see you again. All right. So I just want to start at the beginning with the basics and just a little bit about what Trimble specifically does. Because when you go online, it says industrial tech company, hardware, software services. What does that mean? Yeah, we do a lot. Trimble's got a 46-year-old history with roots in

positioning technology. So we'll probably talk about space and how that applies to Trimble. So with that root in positioning technologies, we think a lot about the precision location. And what we've added over the years on top of that are software capabilities. So think modeling and engineering level capabilities, and then built the services and analytics around that. So the technology at Trimble today is connecting work in the field, in the office, hardware, software, work in the physical and digital worlds. And so it plays within an industrial IoT context. Got it. So how does space factor into this? So should we start talking about

global navigation satellite systems? So we would be a company that's really, plays off applications that are enabled by technology that's deployed from space, namely GPS. The super set of GPS is known as GNSS or global navigation satellite system. So many countries have their own satellites these days. The U S was the first and the first satellite launched

back in 1978. Our first GPS receiver was sold in 1984. And so when precision matters, like moving from that, let's call it meter level accuracy to sub-meter down to centimeters, that's where Trimble shows up is really when precision matters, you want Trimble. Yeah. And of course we know the entire world is becoming increasingly digitized. It's the internet of things for everything and anything, particularly when we start talking about industrial applications, which is again, this area where you focus. So what does that mean? What does that mean in terms of demand for your products and for your software and for your services? And how does that continue to evolve, especially in a generative AI age? Yeah, well, Morgan, today we manage over $1 trillion of construction through

our systems. We manage hundreds of millions of acres of farmland with Trimble technology, and millions of assets and vehicles on our roads today are managed by Trimble technology. So position is a very important aspect of that. We think about very highly accurate, precise positioning. We think about very accurate modeling technology that we put on that software that goes together with the positioning technology. You take that industrial IoT context, we're probably one of the few companies in the world that has such a profound reach into the physical world. And that ability to connect physical and digital work, hardware, software, office field is very unique to what we're doing at Trimble. And what it does for

our customers in these markets is driving productivity, quality, safety, transparency, and environmental sustainability to work. Got it. I want to get into some of those different subsets here in just a moment. But first, just to circle back on some of those applications, those space-based applications. Does that mean you're working with different satellite constellations? You're working with the government? You're working with commercial players? How to think about that and what those relationships in that business model looks like? Sure. There's a couple of ways to think about it. So the U.S. system is GPS, but many other countries have their own satellite systems. The Europeans have one called Galileo, the Chinese, the Indians, the Japanese, the Russians each have satellites up there in space. We are able to read all the constellations and that matters because the more constellations

you're able to read and to be able to see, the more precise the position. On top of that, when we work with, let's say, being able to read and access the satellite systems to get that precision, that still doesn't give you centimeter level accuracy. And so our brilliant genius engineers, they do work to deliver what's called corrections on top of that. That's correcting for errors in the ionosphere and the troposphere. And that's how you bring this down to centimeter level accuracy is through those corrections. And when you're doing work in markets like construction or agriculture, centimeters matter. And you need to be able to augment the signals that we already get to correct for those errors, whether it's, by the way,

it could be errors that are happening with solar cycles that we have, or it's just through the errors that we see in the atmosphere itself. And then even down into, let's say, when you work inside of urban canyons, in other words, buildings, you can have the satellites blocked, the signals blocked. And so we apply mathematical algorithms to overcome that, to continue to drive down to that centimeter level accuracy. Of course, precision agriculture is one of those areas that's very much in focus. And I know we can talk about this technology and this capability. It's been around for a while, but it does seem like we're entering a new chapter, a

new era in terms of that. You've got a JV that's afoot with Agco along these lines too. I guess, walk me through what that opportunity looks like when we talk about precision agriculture, especially since I know, at least looking at the last earnings, it did seem to be a little bit of a drag. So when we look at the world going forward into the year 2050, the data would tell us that we're going to need to have 69% more calories to feed the world's growing population by that time. Think about climate change. Think about land that's available to grow the crops. We're going to need technology to help us solve for this problem of how we feed

the world's growing population. And good news is, is that on our own, we've had a very robust technology portfolio to apply to that. With the joint venture that we're establishing with Agco, we even get a richer and broader set of technology to bring to farming. So precision agriculture could be the steering and the guidance. That's getting that seed placed at a centimeter level accuracy. You do that, you increase the yield of the crop. At the same time, you can minimize the inputs that are put down. You can reduce herbicide by 80, 90% by using selective spraying technology. So that's bringing in the AI and the machine learning to detect the difference between the weed and the crop and only spot spraying that.

So through a whole breadth of solutions that we're continuing to connect together across the ecosystem, we're going to need to do this to feed this population. Now, in the short term and the midterm, of course, the market is a market that has cycles. There are ups and there are downs. And we've been on an up cycle for the last few years. And at the moment, the market's finding itself in a more challenged position economically. But in terms of technology adoption, it needs it as much as ever. So when you see like Deere, Inca deal with Starlink, does that mean that you're now competing with SpaceX or, you know, in terms of those capabilities with a different ag machine partner or is there room for everybody? I mean, I guess, how do you think about this? Is it a competitive landscape or is it a landscape in which there's going to be more

partnerships? Well, for sure, that's a competitive landscape, but I think it's a healthy, competitive landscape. There's a secular adoption of technology that's happening across all the markets that we serve, whether that's construction, ag or or transportation. These are markets that are large, global. They're underserved, underpenetrated, and there's profound needs to deliver productivity and sustainability. So there's room for a number of players in this market. When I think about SpaceX and what they're doing, they provide a means of the communication. There are multiple means to that communication. If you have terrestrial comms available, you wouldn't need satellite to make that redundant. If the nature of the work is that you could come back to the depot at the end of the day and through Wi-Fi, you could connect the machines and the assets. You wouldn't need satellite communications

on top of that. However, for that work where there is no ability to have reach out into the field, you're either having private 5G networks deployed on some farms in some regions of the world, or you look to partner with satellite communication companies who could provide that bandwidth and that pipe to deliver the data back and forth in the field. So it is one of many means of communication. And I think it's a pretty interesting one to see where this will go and where this will develop. Got it. You're also in the transportation and freight markets. You made an acquisition in 2022. I guess, walk me through what you're also in the transportation and freight market. You made an acquisition in 2022. I guess, walk me through what you're seeing there at a time where there has been so much talk about

the need for disruption in terms of how freight is matched, how it's moved around the country and moved around the globe. And yet we do have this freight recession coming out of the pandemic. We sure do. And I mean, it's been a volatile market these last few years. We're all, I think, very intimately familiar with the supply chain challenges that we faced, especially during COVID. And that has had a bit of a whipsaw back the other way. I think we're getting closer to finding stability in the freight market. So probably take a few more quarters to really find that. But I think we found the bottom of that market thus far. You know, if you look at the nature of the problems that we're trying to solve in the freight markets, absolutely, there's a need to connect those who give freight with those

who deliver the freight. So it's matching the carriers and the shippers, for example. And we can provide that insight and that visibility into the network. This is about optimizing the network. And this does bring aspects of location together with the software technologies and the modeling technologies to find that match. If you look at the number of empty miles that are driven by trucking companies, there's a pretty stunning number of how much empty freight moves in the world. Every percentage point of empty freight we can reduce brings much more profitability to our customers

as well as sustainability benefits. There's another interesting data point. We know in the US that trucking companies average over 80% driver turnover a year. Imagine that. Imagine trying to run a company, a business, and you lose 80% of your people every single year. This is what happens with trucking companies with their drivers. So we're applying technology to help drivers

essentially have a better lifestyle, like helping them being able to actually get paid for moving freight by reducing empty miles, optimizing the routes to get them to the right place at the right time, minimizing the wait times that they have and making the work overall safer and better at the same time. Has there been a meaningful, like I imagine you're able to measure it, the productivity increase that your technology is bringing to those that are using it? Yeah, absolutely. I mean, you can you get double digit productivity increases by the adoption of the technology. We have a technology that does video monitoring and you can have video monitoring that's either forward facing or driver facing. When we look at driver facing

video monitoring, our KPI for measuring success there is saving lives of drivers. So being able to detect driver fatigue is a pretty big deal for our customers. Okay. I do want to talk about building and infrastructure too, because it does seem like construction has been pretty strong and we keep hearing about how we're on the cusp of, or you're starting to see the early innings, particularly here in the US, of this secular growth story with all of the investment that's being made into infrastructure and semiconductor manufacturing and supply chain nearshoring and reshoring and go on down the list. Yeah, we for sure see this, Morgan. If you look at whether

it's the bipartisan infrastructure law or you look at the Inflation Reduction Act, there's a generational amount of spend that's coming into this country to improve our underlying infrastructure and our global competitiveness in a number of markets. Now, that's the good news. I'd say the bad news has been that inflation, when we've had the inflation, that's eaten up a lot of the incremental spending. As we see inflation coming down, our belief set is that we'll be able to see more number of projects unlock. What we can already see today is that the strong majority of our customers here in North America have very, very healthy backlog of the general contractors and the subcontractors whom we work with to supply technology today. We for sure see very positive

movement and backlog in work such as data centers and renewable energy and the reshoring and onshoring of manufacturing. We've had a lot of logistics centers work that's been on. And we continue to see growth in subsegments such as medical. And that's all in addition to the infrastructure work. Now, residential has been quieter, but we're not as exposed to residential. These other markets and these mega projects have been a very positive catalyst for our customers. And our customers, what they're telling us is they're having trouble finding labor. They're having trouble finding skilled labor. They need technology to, they need to apply technology to help them get the work done

and help to bring those workers who are unskilled to make them skilled quickly and to make them productive quickly. And this has been a very positive secular trend for us. And we see that through the results that we have in the business. Got it. So you've recently announced an organizational, a new organizational structure. I guess, walk me through that, the implementation of that. And at a time where more than one analyst has suggested that that's going to shift your model towards an even more software-centric business. I guess, what does this mean for the strategy for the company, where you're going long-term, your vision,

and then of course, how the role some of these space-based technologies and capabilities are going to play in it? Yeah, so let me give you a data point of the about $3.7 billion of revenue we do. We closed last year with $2 billion of recurring revenue. That $2 billion of recurring revenues grew 13% organically. We've got record gross margins that we've produced in the company that are up over 670 basis points from five years ago. We closed 2023 at the record level of EBITDA 26.6%. We crossed over a billion dollars of EBITDA for the year. We do that with a very capital light business model. We run generally run negative working capital

and low CapEx requirements. So the business is producing, even though there's no shortage of the macro challenges that we face in some of the end markets and some of the geographies, we're doing pretty well controlling what we can control and delivering that value proposition about better, faster, safer, cheaper, greener to our customers. So now enter the resegmentation of the business and where we're going with that and the why. We talked about the joint venture that we're establishing with Agco,

and that alone was a precipitating factor for us to rethink how do we segment the company? How do we talk about the company? And given how much of the business model has shifted to software over the last few years, and we've been on this journey for a number of years, it really became evident to us that we need to present ourselves in a more simplified and focused way. And so what we'll do going forward is we'll present our, we call them AECO architect, engineer, construction, and owner. So that construction software business, that'll be one segment. We have field systems. That's the hardware of Trimble applied in geospatial markets and civil construction and survey mapping applications. And then we'll have our transportation and logistics business.

What we believe this is going to enable us to do for our investors is to be able to have more transparency and visibility, clarity, simplicity into the underlying business models that serve that. And that's one of the pieces of feedback I've certainly gotten over the last couple of years is people want to make have it easier to see the goodness of the business model we have. And by segmenting like this going forward, I think it'll enable us to be able to tell that story better for for Trimble. Got it. So I'm going to bring this full circle here. What does the commercialization of space, what does the ever growing space economy as it emerges and starts to take shape in a more meaningful way, how does all of this play into what is going to be possible in terms of the applications, in terms of the data, in terms of the software and services that you're going to be able to offer to those different end users over

the coming years? I think Trimble is a perfect example of a company that exists arguably only because of investments, policy investments in space and space-based technology. We don't have GPS, you don't have Trimble. I mean, that's the origin story of Charlie Trimble back in 1978. You know, when Charlie founded the business, Charlie was working at Hewlett Packard and the company decided not to pursue a Loran positioning, which was used in marine applications. And they later decided not to pursue something called GPS. And Charlie and some colleagues bought IP and know-how to start this company in a garage. And when they started the company, there actually wasn't a satellite launch, but there wasn't an ability to use that because it was still applied to military applications. But Charlie had a vision of GPS as a utility. Turning a vision into reality is really hard work. To think about where we were 46 years ago to the company we are today, that to me is inspiration of what is possible in the space economy. I think that we really

represent a terrific application of that. And we know how pervasive GPS is in our lives. We talked about transportation, we talked about agriculture, we talked about construction, but we use this in automotive markets to get that precise positioning within a lane. Those ADAS systems are enabled by precise position that we can deliver to that. We do deformation monitoring to do around plate tectonics to be able to recognize what is moving and what's happening with earthquakes or mountains moving up, such as Mount Everest, to be able to measure these. These are only possible through space-based technology.

So as we move forward and we think about that, Morgan, I think about communications. You go back to the SpaceX question you asked me, that ability to have higher bandwidth, back and forth bandwidth between the work in the field and the office. I think that's extraordinary what we'll be able to have over time with the satellite constellations. And there's many of them that are emerging. So I think it's an exciting time. I think that communication, that real-time communication, and we didn't talk much about the AI and the machine learning aspects, but if you think about getting closer to the edge, you know, that work that's done on our farm or our construction site, that ability to apply AI algorithms at the edge, where the work is happening, when it's happening in real time.

I think that these are the kind of things that are going to be unlocked by the space-based technology that we know of today. And then there's the things that we don't even know of. And I think that's, you know, I'm mindful of that as we have, we know GPS as it of today. And then there's the things that we don't even know of. And I think that's, you know, I'm mindful of that as we know GPS as it is today. This is nobody expected, or I think had a full vision for what could be possible when that first satellite went up in 1978 and look where we are today. So I just think that we live in exciting times

with exciting progressions and technology. And we'll continue to invest in the markets that we serve. And we'll be excited to be part of the new applications that can come along over time. It does seem like a really exciting time right now. In terms of the AI compute and edge computing and applications for AI, is that something that you're working on right now in real time? When would you expect to see some of that really truly applied in a meaningful way? Well, the good news is, is it's not just pitching futures because we already do that today. You know, we've been doing AI and machine learning for many, many years. We didn't brag about it. So maybe we

should have been telling our story a little bit better. It's really the, it's the generative AI we're getting the press today. So, you know, we, so that ability to detect the weed versus the crop, that's AI. We have abilities when we collect data out in the field to be able to extract what's called feature extraction, to be able to turn data and information for our customers. We're automating processes with our construction ERP software and having less touch points and automate, that's all AI and machine learning. As I think about the application that we're talking about out in the field at that edge, I still think we haven't even touched the potential. Like, for example, one of the things we do at Trimble is we do what's called machine control

and guidance in civil construction. So we're putting GPS on the blade of a grader, a dozer, or an excavator. So we know where the dirt is at any point in time. We have this profound awareness of where that job is in terms of its progress. We increasingly have the ability to map that data of the work that's happening in the field with the project plan or with the job costs that comes out of the ERP. That real-time ability to adjust the amount of machines I'm putting out on that project or the workers that I'm putting to that work, that profound ability to connect that field in the office, that physical digital.

That's what I'm really excited about. And we have such access to data and machines and instruments in the office and the field that I think we're pretty uniquely positioned. And when we talk about generative AI, I think the thing that we'll increasingly see over time is that vertical market knowledge will be important, right? If most large language models are scraping the entirety of the internet,

that tells me that everybody has the potential to work with the same set of data. But what's the unique data that we have to work with at Trimble and 46 years into this business with the millions and of data. But what's the unique data that we have to work with at Trimble and 46 years into this business with the millions and billions and trillions of data points and customers that we have access to? I think that's what is really unique to be able to unlock the insights. And you're going to see more and more from us in this space. Okay. I'm looking forward

to that. It also probably explains part of the reason why your stock is trading at fresh 52-week highs recently as well. Investors are certainly wrapping their arms around all these possibilities and capabilities and what you're putting up financially. It's great to speak with you. Rob Painter, CEO of Trimble, thanks for joining me today. Thanks, Morgan. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime.

I'm Morgan Brennan.