Trimble Inc. (TRMB) Q3 2020 Earnings Report, Transcript and Summary

Good day and thank you for standing by. At this time, I would like to welcome everyone to the Trimble Third Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn the conference over to Mr. Rob Painter, Chief Executive Officer. Sir, please go ahead.

Hello, everyone and thanks for taking the time to be with us today. Before I get started, a quick reminder that our presentation is available on our website, and we ask that you please refer to the Safe Harbor at the back. We'll start on slide 2 with the four key messages we want to convey today. First, the resilience of our team, the quality of our strategy and the strength of our financial model enabled us to outperform our own expectations in the third quarter. ARR grew 10% year-over-year to $1.26 billion, while quarterly revenue grew 1% year-over-year to $793 million. Expanding gross margins and execution on costs led to adjusted EBITDA margins of 26.8%. Our shift to a more hardware connected, software centric and recurring revenue business model is working. I want to express my gratitude to the Trimble team, who continues to perform strongly under these challenging conditions, as well as our customers and investors for your continued support and confidence in Trimble. Second, executing on the Connect & Scale 2025 strategy remains our focus. We are working to connect stakeholders and industry lifecycle data to improve and transform customer workflows. The business model transitions are an output of this strategy, not an input. Third, we continue to put organizational elements in place to enable the strategy. Most recently we have named James Dalton, as our newest Board member; and we promoted from within to hire a Chief People Officer, a Chief Digital Officer, a VP of Talent & Diversity, Equity and Inclusion, and a Head of Sustainability. Fourth, our long-term conviction remains strong. We will balance cost containment and investment in innovation during the downturn. On one hand, we've reduced our cost base in transportation in the quarter. On the other hand, we continue to increase our investments in autonomy and digital transformation. We maintain our goal to exit this recession on a stronger competitive footing than we entered it; and on that note, we are in a more proactive mode of looking for acquisition opportunities, which will advance our Connect & Scale strategy. At the reporting segment level, a few strategic comments to make. In Buildings & Infrastructure, we saw better-than-expected results in civil construction machine control and guidance. In addition, our software businesses delivered a strong level of recurring revenue growth. In Geospatial, innovation is sparking demand. Our end customers have been getting back to work and catching up on project activity. In Resources & Utilities, the agriculture market has been resilient. In North America, for example, commodity prices have risen, while direct support payments to farmers remain well above historical averages. Markets such as Australia, Japan and Brazil all performed well in the quarter. These overall favorable conditions combined with the compelling ROI on investing in precision agriculture have contributed to our growth in 2020. In Transportation, we took several meaningful steps, which we believe will position the business for better performance in the quarters and years ahead. We implemented a substantial restructuring in the business during the third quarter, which will lower our ongoing fixed operating costs. Further, we made business plan decisions which resulted in an inventory charge in the third quarter. With these difficult decisions behind us, we can now see the path for improved performance in 2021 as compared to the second half of 2020. At the macro level, market conditions have begun to improve in the transportation market with higher asset utilization, improved spot prices and increasing capital investment. Overall, we are cautiously optimistic that market conditions will support sustained growth for Trimble through 2021. As we move from election mode to governing mode we will follow decisions on stimulus measures, especially, infrastructure and local government funding and policy decisions relating to trade and tax. Let me now turn the call over to David for a review of the numbers.

Thank you, Rob. Let's begin on slide 3 with a review of third quarter results. Third quarter revenue was $793 million, up 1% on a year-over-year basis. Net of acquisitions, divestitures and foreign exchange fluctuations organic revenue declined 1%. Gross margin in the third quarter was 58.8% up 180 basis points year-over-year driven primarily by improved revenue mix and also assisted by lower discounting and new products with higher margins. Adjusted EBITDA margin was 26.8%, up 380 basis points year-over-year, a result of both gross margin expansion and cost reduction. Cost reduction was driven by structural actions and temporary factors related to COVID-19. Operating income margins also expanded 360 basis points to 24.2%. Net income dollars increased by 26% on a year-over-year basis, while earnings per share increased by $0.12 to $0.60 per share. Turning to slide 4. Our third quarter cash flow from operations was $181 million, reflecting the strong cash flow generation of our business. Operating cash flow represented approximately 1.2 times non-GAAP net income in the quarter. Free cash flow was $165 million. We paid down over $150 million of net debt in the quarter and the net debt to adjusted EBITDA ratio fell to 1.9 times. At the end of the quarter, we had $1.25 billion available on our revolving credit facility and approximately $184 million in cash. In addition, we have no scheduled principal payments on our debt, until July 2022. Our liquidity and balance sheet remains strong. Next on slide 5, we highlight some of the key metrics that we follow. Annualized recurring revenue, which as a reminder includes the annualized value of term licenses was $1.26 billion in the third quarter, up 10% on a year-over-year basis. Organic growth of ARR was 6%. Excluding our Transportation segment, Trimble organic ARR grew at a double-digit rate in the quarter. Net working capital inclusive of deferred revenue represents approximately 1% of revenue on a trailing 12-month basis demonstrating the asset-light nature of our business model. We continue to proactively manage our costs, while maintaining investment in key initiatives. Research and development on a trailing 12-month basis was nearly 15% of revenue. Two additional metrics that we follow are deferred revenue and backlog. Our deferred revenue was up 20% on a year-over-year basis through a combination of organic and acquisition-related growth and our backlog was $1.2 billion, up more than 10% versus prior year. These two metrics give us additional visibility into the future revenue trends in the quarters ahead. Turning to slide 6. Recurring revenues made up 37% of total Trimble revenue in the quarter compared to 35% a year ago. We experienced recurring revenue growth, across a wide range of businesses. Even in a tough economic environment, these offerings are essential to the operation of our customers' businesses. Our non-recurring revenues, including hardware perpetual software and professional services, experienced a year-over-year decline of about 2% in the quarter. Performance in these areas was helped by strength in our Geospatial and agriculture businesses, offset by expected weak performance in Transportation. Overall, our professional service trends improved somewhat in the quarter from the beginning of the COVID crisis, but are still negatively impacted by lack of access to our customers' facilities and employees. In terms of geography, North America was down 5% representing a sequential improvement when compared to the second quarter, which was down 17%. Revenues in North America were adversely impacted by the declines in our Transportation business. Excluding Transportation, revenue in North America grew over 2% year-over-year in the third quarter. Europe was up 9%, reflecting broad-based improvement in project activity across the continent. Asia Pacific was once again the best performer in the quarter up 16%. Agriculture was a bright spot in Asia Pacific in the quarter as Australia recovered from a multiyear drought and the Japanese government implemented increased direct support of farmers. Our business in China, while still small grew year-on-year in the third quarter as the country recovered from the easing of COVID-related shutdowns. Turning now to slide 8 for additional detail on each of the reporting segments. Buildings and Infrastructure revenue was up 1% on an organic basis. Revenue growth was strong in our software businesses. Segment margins were up nearly four percentage points, due to higher margin revenue mix and cost control. Geospatial revenue was up 7% on an organic basis, driven principally by increased sales to OEM customers. Revenue from sales of system to the surveying and mapping sector was essentially flat versus prior year, a meaningful improvement from the second quarter when revenues were down nearly 20% year-on-year. Margins were up over 11 percentage points due to a combination of higher-margin revenue mix, compelling new products, lower levels of discounting and strong cost control. Resources and Utilities revenue was up 16% on an organic basis. We benefited from double-digit growth in each of our precision agriculture, positioning services and agriculture software offerings. M&A growth also played a role in the segment growth in the quarter as the integration of Cityworks has added significant capability to our offerings for utilities and local governments. Margins expanded over 7 percentage points, driven by improved revenue mix strong profitability from M&A and cost control. While top line results in Transportation were consistent with our expectations coming into the quarter, the business performed well below our long-term objectives. Segment revenue was down 21% on an organic basis and margins declined over 10 percentage points. The drivers of revenue and margin decline are broadly consistent with those we highlighted in our last earnings call. The rate of revenue decline did improve in the third quarter as compared to the second quarter as did customer retention. Profitability in the quarter was impacted by lower revenue subscription transition and M&A as well as an inventory charge that we took in the mobility business. Turning now to our outlook for the fourth quarter. We continue to face significant uncertainty in market demand across the industry sectors we serve. With the rate of COVID-19 infection increasing in many countries, our customers face renewed risks of work restrictions stemming from governmental rules to curb the spread of the virus. And the pace of the recovery in the broader economy remains uncertain. As a result, we still don't have sufficient clarity in the end-user demand to enable us to give guidance. As we did last quarter, we will provide some color on the most important trends which will drive our performance. Starting with revenue. I'll remind you that our fiscal year 2019 had an extra week. The lack of the 14th week this quarter will adversely impact overall Trimble revenue growth by approximately $23 million or about 3%. In this quarter, we will enjoy less benefit from projects deferred at the onset of the pandemic last spring. Finally, the combination of lapping our Cityworks acquisition from the fourth quarter of 2019 and the recent divestiture of Construction Logistics resulted in less favorable inorganic revenue growth momentum. Considering all of these factors, we anticipate that total Trimble revenue will be down modestly versus prior year in the fourth quarter. Nevertheless we expect that our recurring revenue businesses will remain robust with organic ARR growth in line with third quarter 2020 performance. Note again that Cityworks, which is principally a recurring term license business, was part of Trimble for much of the fourth quarter in 2019. From a segment perspective, Resources and Utilities revenue will continue to grow in the fourth quarter albeit at a more modest rate as we lap the strong fourth quarter of last year. Transportation revenues are likely to decline at a rate comparable to what we experienced in the third quarter. The Geospatial and Buildings and Infrastructure segments are likely to see revenue trends at about the company average. Turning to gross margins. We expect margins roughly flat versus prior year in the fourth quarter. The extra week in the fourth quarter of last year did boost margins and we won't have that positive impact in this quarter. Separate from this factor, though, we do expect gross margins to continue their strong performance driven by software mix, new products and reduced discounting. Our operating expenses will grow modestly in the quarter, up approximately $20 million sequentially from the third quarter. With our improved performance outlook for the year, we anticipate higher incentive compensation and we are seeing a gradual increase in discretionary spending across areas where spending was unsustainably low due to COVID restrictions. Assuming the revenue and margin dynamics I've described, we expect to manage to decremental margins in the low to mid-30s. Finally, I will note that we project continued healthy cash flow generation. With our leverage now at our long-term target we have reinstituted a modest share repurchase program. We will continue to employ a disciplined approach to capital allocation as we manage our capital structure and invest for the future. With that, I will turn it over to Rob to conclude.

Let me close by turning to slide 9 and reinforcing how we progressed against our Connect & Scale 2025 strategy in the quarter. First, connecting solutions across our industry lifecycles. Two examples to share. In Construction, we released WorksOS, which integrates design data from the office with machine control data to deliver real-time progress and productivity updates for the entire jobsite. Slide 10 shows a visual of how Trimble is transforming workflows in construction by connecting the physical and digital worlds. This is how we bring together the office and the field with our hardware and software, in a unique Trimble way. Today, we put a constructible digital engineering model on the blade of construction equipment. With WorksOS, we can dynamically bring back surface data and view progress to plan. In essence, this workflow positions us to take the 3D constructible model and next add dimensions of cost and schedule to create a 5D model. From here we will integrate this enriched model into the construction ERP system with additional, financial and asset management views. The aggregation of all this data, coupled with artificial intelligence and machine learning algorithms is a further step towards an autonomous future. Back to slide 9 and another example from construction, we launched augmented reality into our Trimble earthworks machine control and guidance solution. Augmented reality is available in the cab of the excavator, which helps operators more easily understand 3D models, cut/fill information, slope data and other reference points. Second; delivering breakout innovation. Two examples to share. In Geospatial, our new GNSS receiver, the R12i, has been a market success. The innovation in the GNSS receiver is the integration of inertial technology that enables robust tilt compensation. What this means is that the surveyor can work productively and effectively in challenging environments. We are making our customers’ work easier. The second example is highlighted on slide 11. Our structural BIM software is used for many types of materials and projects. This past month, the team announced the winners of our 2020 BIM awards. On this slide you will see the winners for best infrastructure and best commercial projects. A closer look reveals that these projects deliver more than just incredibly detailed design visualization. What these engineering teams are delivering are the precise specifications needed to automate fabrication for each individual component, as well as instructions for assembling those complex designs in the field. This is what we call “Constructible Design” and these two projects are exemplary. Third; accelerating our business model transformation. In Construction, we sold our first Platform-as-a-Service offering in our civil construction business. We are delivering technology assurance for our customers while integrating construction cloud services and world-class support to keep our customers’ operations current and optimized. Fourth; we are taking actions that enable us to efficiently and effectively scale our business. Last week we closed on the divestiture of our construction logistics business; and in the third quarter we completed the acquisition of a business that further expands our positioning services network to now cover over one million square miles in North America. We are making decisions and investments in the area of cloud enablement, data management, and artificial intelligence that are connected in approach, which will enable us to scale to meet the opportunity ahead of us. With that, I’d like to thank everyone for taking the time to be with us today, and a special thank you to our global Trimble colleagues. Operator, let’s please go to Q&A.

[Operator Instructions] Your first question comes from the line of Gal Munda from Berenberg Capital. Your line is now open.

Hello. Thanks for taking my question. I've got the first one. Just wanted to follow-up on the strong ARR growth, which kind of continued in this quarter. And what I was wondering is, if you can talk a little bit more around the growth drivers of the ARR as in how much is the organic expansions and new customers you're seeing versus how much it is the business model transition of on one side having lower licenses. Yeah that's kind of my first question. Thank you.

Hi, Gal, welcome back.

Thank you.

As it relates to the ARR growth in the quarter, so 10% at a total company level around 6% at an organic level. If we exclude the Transportation business, we'd be in the double-digit growth on ARR including in the construction business, so in the Buildings and Infrastructure reporting segment. In terms of the breakdown between new customers and existing customers it's both is the short answer where we've seen growth. So we are figuring out a way to sell into new logo customers in this digital environment. So we take a business such as the SketchUp business ARR grew almost actually 50% -- more than 50% year-over-year. And that's clearly coming from an expansion of the addressable market and winning new logos seeing the same thing in the Viewpoint business. Having said that like compared to let's say a prepandemic level it is there is a greater weight towards penetration of existing customers at the total portfolio level and I think it's probably for the obvious reasons. Does that help?

That's very helpful. Thank you. And just as a follow-up, you mentioned your strategic -- one of the strategic levers is connecting the industry life cycles and you talked a little bit more specific about the construction. What I'm wondering is, when you start connecting those dots which previously were kind of best of breed versus now best of suite and you're becoming more of a suite of products, are you finding yourself -- how does that relate to the average contract size that you'd be seeing the sales cycles? And potentially, do you have a new buying center within those companies that you previously sold maybe one tool to someone else there?

So if I say -- I'll use construction as the example. And you're right. I mean the connect part of the Connect & Scale strategy is absolutely to connect stakeholders data solutions across the industry life cycle, whether it's construction agriculture transportation utilities forestry. To give you an example in construction, we can see -- for example if I just take the Viewpoint business discretely which is the construction management system that system of record for the construction company we've had over $1.5 million of new ACV in the last 12 months. And this is really a customer pull. We're really early I would say in the Trimble push of the strategy. So customer pool essentially to create suites or bundles of solutions to connect into that system of record. So for example -- and construction telematics, the information on asset utilization that can augment job cost which is in the ERP. If we look at our structural business, fabrication management that ties into the material estimates which are in the back office software. If we look at the MEP or mechanical electrical plumbing business, we have there we see the integration of estimating, pricing, change, management job cost and procurement into that system of record. So we're seeing real examples where our customers are asking us to integrate the various Trimble technologies that they have. And we're starting to see a few more new logo wins as a result of being able to come in as a unified face to that customer. In terms of who we sell to in that new model a recent example with an ENR 400 customer who made a significant commitment to Trimble. I was with the CIO. So it starts to look more like C-level when we're up-leveling the sale to an overall Trimble sale. Clearly that correlates to the contract sizes. So let's say as opposed to three, 3 four separate contracts which could be in the tens or low hundreds of thousands each right it starts to become over on a total contract value basis they start to look more like $1 million type deals as where we're heading with it.

That’s great, very helpful. Thank you so much and congrats on a great quarter.

Your next question comes from the line of Richard Eastman from Baird. Your line is now open.

Thank you and thanks for the questions. Rob, just first off, I just wanted to ask maybe throw a little bit more color around the Transportation side of the business and maybe how you're viewing this quarter. It sounds like you took some structural costs out of the business in the quarter. But from a revenue and op margin basis, I mean clearly this would suggest maybe a bottom in both of those metrics. And do you see this business starting to form the basis of some growth in 2021 once we get through the year here from a revenue perspective?

Rick so I think it's pretty similar narrative to what we had last quarter. I'll start by saying we did meet the topline expectations we have so it's clearly below our long-term ambition. But just to establish I'd say credibility that we can hit the number that we put forward as a starting point there at the topline. What's similar to the narrative from last quarter that holds is we expect that the moves that we're making now we'll see the fruit of that in margin expansion into I'll say the second half of next year. We'll see that more in the second half of next year than the first half. The nature of the recurring revenue business is that it does take a while for that engine to get going. And when it gets going it becomes a cumulative game from that point. So, really a similar view and -- but I think you characterized it well upfront.

Okay. And then just as a follow-up my other question. Just when I look at the hardware revenue in the third quarter, obviously, lots of noise around the second quarter. But I'm curious it did improve double-digits kind of 13% sequentially. Is there any message in there other than the second quarter was really bad? But is there any message in kind of the double-digit sequential rebound on the hardware side of the business just as a basis for follow-on software sales?

Hey Richard, it's David Barnes. I'll offer up a couple of observations. Part of what we did benefit from is catching up on projects that got stalled or delayed in Q2. So, that helped. But that's not all of it. As Rob mentioned we've had a lot of innovation in the Geospatial area which is improving revenue trends and margins by the way. And so -- and we're seeing some -- it's hard to draw a trend in these noisy times, but some improvement in a number of our hardware areas that you're right bring software with it. So a bit of all three.

Okay, very good. Thank you.

Your next question comes from the line of Ann Duignan from JPMorgan. Your line is now open.

Hi, good afternoon. Maybe Rob you could provide some color on the fundamentals around the different end markets. You usually give us some good color in terms of how you're thinking about construction activity from a more macro standpoint particularly now that we most likely won't get a large infrastructure bill. And then similarly on Transportation at least what -- the fundamentals have improved. We've seen a huge increase in truck orders. So, I'm just wondering how you're feeling about the fundamentals specifically in both those industries. Thanks.

Sure. Hi Ann. So, I'll start with the Buildings and Infrastructure and do a little bit of a walk around the stakeholders. I think the logical place to start would be with the owners. And I'll use -- I'll start in the U.S. thinking about state DOTs or Department of Transportations as owners. And I would say the DOTs have been more resilient than we expected. And so that's been a good thing. So that would be a comment on a large owner segment. If I go next to architecture and when we look at the indicators the ABI is still below 50. Now, we saw September looks more encouraging than the numbers did in August. So, I think the ABI is helpful for macro health. But when we look at our actual architecture and design business it's meaningless because that's the business where we saw ARR up almost 50% year-over-year. If we go to civil construction and I'll stay in North America for a little bit. Civil contractors what we saw is a decrease in backlog with civil contractors, but an increase in backlog with civil engineers. And so that would suggest an initial recovery that could flow through to the contractors. If we look at our Viewpoint business where we could see the system of record for general contractors again confirm that some bookings are slowing and some of the velocity of hiring has been lower as compared to 2019. When we look outside the U.S., if we take construction PMI that shows a mixed view forward with the number of markets expecting expansion next year with I'd say an emphasis on Europe, when I quote construction PMI numbers. We also look at a basket of backlog at some of the largest construction companies in North America and Europe. And what we see there is that – and this is not surprising, we see that residential is doing well. Commercial's down. EPC and infrastructure have been down a little bit. So what we see, if I try to summarize that is, we see some of the end market work moving around. I would say, the numbers we see today are unambiguously better than what we saw in that March, April, May time frame. What's conflicting are the signals on sustained demand, and I think I would close on that, one by saying, what we do feel is that there is unequivocal demand for digitization and improved access to information. So we think at the secular level, we're in the right place. And if I go to Transportation, and I probably could start actually with some of the research you had we certainly saw that the Class eight unit sales well they're below last year, but they clearly improved in the last few months. So we do see some higher asset utilization improved spot prices and increasing capital investments. So Transportation does look like, it's in quite a bit better place at a macro level than it was a few months ago. I'll pause there, and see if I answered your question.

Yeah. No, that's helpful. It's always good to get your perspective from what you're seeing kind of feet on the street. And then again, on Transportation more on the margin side, you had talked about last quarter, the lower margins and you gave us a contribution. I think it was 3% macro, 3% Kuebix and 3% subscription conversion and then the rest to get back to the 20% was going to be kind of self-help. Could you provide us any kind of qualitative – just where you think you are today in terms of how much of the margin was macro? How much was Kuebix? How much was subscription conversion? And then also how much of the margin decline was actually the restructuring and the inventory write-off?

Hey, Ann, it's David Barnes. I'd say, the factors that we talked about last quarter are similar. The new one is that, we updated our plan going forward on the mobility side of the business. And running through those numbers, we did take an inventory charge, which essentially explains all of the delta between the operating margin in the second quarter and the third quarter.

Okay. But I think you said, you took some restructuring charges also. Or was the inventory write-down the restructuring?

No, we did a workforce reduction. But Ann that shows up in the non-GAAP restructuring charges.

Okay. Okay. That's helpful. I appreciate that. Thank you.

Thanks, Ann.

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is now open.

Thanks so much. As you have worked through this restructuring on the T&L business and you're looking at some of the changes in the ELD offering, can you talk about kind of early returns and feedback from customers in terms of engagement and in terms of the receptivity? And how do you generally think that transition is going to progress? How long should we be thinking about this working through a transition period?

So, Colin, I'll start with the setup at the financial level and then pivot to the strategic level. At the financial level, I'll anchor that really a similar narrative from the last quarter is that we expect to see more of the flow-through improvement to the bottom line in the second half of next year than in the first half of 2021. So we're taking the moves now to position the business for long-term success long-term progression. At the – that's the financial answer. At the strategy level, the strategy we're pursuing in Transportation is that of a connected supply chain. That means connecting carriers and connecting shippers. So that isn't changing. In fact, it's progressing I think in a positive way. And on the carrier side that means connecting the driver, the truck, the fleet. And we believe that the three legs of the technology stack are telematics, which we call mobility; the back office which we refer to as our enterprise, business; and then our mapping business for the routing mapping navigation engine. And so we believe at the intersection of those three aspects that we can do something unique as Trimble in terms of connecting carriers. And then -- or in addition and in parallel is connecting the carriers to the shippers and that's why we got into the Kuebix business at the beginning of the year. And if I were to use a customer example we do feel like we're seeing some customers who want to work with us because we can be that one-stop shop because we can bring all these pieces together of the tech stack.

That's super helpful. And just adjacent to that the GM Super Cruise hands-free driving is actually getting pretty good reviews at this point. Can you give us a bit more color on that relationship how deep that is and if some of those reviews are helping open doors for you guys in the automotive market as folks look to push into Level four and Level five ADAS solutions?

Well yes I'd start by saying kudos to GM. They've been very good to work with. They've been supportive. And clearly the success they've had in their program has been a catalyst to open doors for us with other automotive OEMs with Tier one suppliers and has also been relevant to opening doors with across the heavy equipment OEMs and markets like construction and agriculture. And sort of the connection point with one of the acquisitions we announced in the third quarter with our positioning services business that was the acquisition that expanded our footprint in North America to now be over size to over one million square miles. And that really is for that to provide that ubiquitous high accuracy high quick convergence time accuracy to the customers.

Your next question comes from the line of Chad Dillard from Bernstein. Your line is now open.

So can you just provide a framework for how to think about the bundling opportunities in Building and Infrastructure? How much is bundled today versus where it could go over the next like one to three years? And what do you need to do in terms of distribution strategy to achieve this goal?

So I'll start with the -- well there's -- I'd say there's a it happens at the intersection of the product strategy and the go-to-market strategy. So at a product level this is about understanding our market segments understanding our customers understanding that buying persona the user persona. And so when we talk about our Connect & Scale strategy it's very much a customer success strategy customer life cycle customer success strategy. So it's very much driven by that customer persona to understand what the logical bundle of technology is. What we continue to I'll say work on is making that bundle easier to consume. So think of a good better best type framework. Just make it simpler is really a point of emphasis we have on the product side because we clearly do a lot of things. And that can manifest as complexity. I actually think elegance happens through simplicity of that product offering. At the go-to-market level this is -- again if -- you start with the customer segmentation. And so depending on the size of the customer let's take a mid to larger-sized customer opportunity that looks like having one single point of contact for the customers and then having the specialists that are under the wings of that person who owns the account. So we'll have both strategy. We'll have both the reps and partners selling the individual point solutions and then at a key account or strategic account level doing business in a different way. So there's not a one size fits all. So we I'll say position ourselves or manipulate ourselves to meet the opportunity and really meet the customer where they are.

Got it. That's helpful. And then just one thing that definitely stood out to me was just the margins to the positive side for the third quarter. And as we're trying to think through the puts and takes as we go into next year and I recognize you're probably not prepared to give guidance right now, but can you give a framework for thinking about how to think about some of the temporary costs that are coming back next year? And then just from like a margin perspective, do you see like what's in your backlog a mix supportive of similar margin levels that you received this past quarter?

Hey, Chad, it's David. I'll start by saying as you predicted, we're not yet in a position to really give a lot of clear thinking on next year. There's so much uncertainty, but if we start with the framework that the economy is going to grow back and I've seen a lot of projections that say go back in 2021 to where it will be in 2019 whether that's the U.S. or the world. And so we ought to -- hope to at least follow if not beat the overall economic trends. From a margin perspective, the megatrend driving our gross margins better principally is a revenue mix story and that looks to continue. So that will -- ought to support continued improvement at the gross margin level. We will see operating costs grow faster than revenue next year. Some of the cost reductions that we've had this year as I mentioned in my prepared remarks are not sustainable. We want to be meeting with our customers and some things that are just logistically hard to do. So how do those net out? We'll go into the year planning to try to hold margins at the operating line to close to where they are now with the gross margins going up giving us some cover for the operating expense going up a little bit. But that's just an early framework.

That's helpful. Thank you.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is now open.

Hi. Thanks for taking my question. One for Rob and this builds on maybe the last question. But you talked about some of the go-to-market changes with your Connect & Scale 2025 initiatives. You talked about one single point of contact for your larger customers and maybe a rep and partner model for your smaller customers. Where does this kind of sit today? And I guess how much more work would you need to do to maybe get to this level?

Hi, Jason. I mean, I'd have to say that we're in the first or second inning of the nine-inning game. We're definitely early in this journey. And I view that as a good thing, because we're able to get a lot of learnings. Some of the success that we've had thus far, I really see as more of a customer pull than a Trimble push to the customer. So it's really, I'd say, early validation that we're doing the right things when we're just listening to our customers and responding to what they're asking us to do. We have -- we named -- it's been about a year ago we named a Chief Data Officer. And one of the things that I find to be an exciting opportunity is how we can leverage the data at Trimble. Think artificial intelligence, but I mean you could just think of some basic analytics frankly to be able to compare the customers -- the customer sets we have across the different, I'll say, businesses or products and draw the overlapping circles to identify who's already using multiple Trimble solutions and to get a better sense of the bundles that could be logical for customers of a certain type. So just by mining our own data, we think there's a heck of an opportunity to point us that way and I would call that the marketing side of the go-to-market is to mine our own data and point us the way -- use that to point the teams that we talked about in the right direction. Overall, as a reporting segment, we're over on a TTM basis $1.2 billion of revenue in this business. It's a majority software business and we're operating at a scope and scale across serving a variety of stakeholders on a global basis. And we think there's -- I just want to emphasize, I think, there's a really great opportunity within the existing base that we have today not to mention then a strong value proposition to those that we don't serve today.

Okay, great. And then, next question. It looks like Europe saw some nice improvement in the quarter. But maybe with some regions, maybe going back in the lockdown, can you maybe speak to any more recent trends? Maybe, any positive engagement? And then, do you feel these businesses are better prepared at this time, since we just went through it maybe six months ago?

Hey, Jason, it's David. I'll tell you that what our teams are seeing is while you do see – you do see lockdowns in many countries around Europe they feel different from the first time around. And most of them are accommodating to project work, like what our customers do, that were for a while, sort of, out of operation in the spring. So you never say never, that it might tighten down. But surprisingly, our distributors and our end customers have been remarkably able to do their work even in this second wave.

Great. No. I appreciate that. Thank you.

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is now open.

Hi. Good afternoon and good evening, everyone.

Hi, Jerry.

I'm wondering if you could talk about the e-Builder and Viewpoint organic growth performance just, so we can see how the businesses performed through the downturn here. And if you could talk about bookings growth and the pipeline. I think, I heard you say Rob, Viewpoint growth reaccelerated. Can you just expand on those points?

Yes. To give you a couple of data points Jerry, if we look at Viewpoint and e-Builder in combination in the quarter, ARR was up in the high teens in the quarter. So, clearly, a nice progression. The net retention in both businesses was over 110%. So, clearly, good results from the businesses there. That's probably the most definitive news I could give you, good news, on the financials, so top line financials of the business. On the bookings side, Q3 was a solid bookings quarter for the construction software businesses. I'll take it -- up-level it in aggregate. It clearly was in the Viewpoint as well. So the recurring ACV is strong double-digits increase. Now some of that, of course, is Q2 business that didn't happen and moving into Q3. So I also want to be careful not to overstate that. But really just nice execution from the teams in those businesses.

And nice to hear about SketchUp, posting its second consecutive year of over 50% user growth. One of the big initiatives that you folks have cited over the past call it a year or so, is accelerating the push for the organization towards subscription. Can you talk about how much of the OpEx discussion, David, you spoke about earlier is around your efforts to maybe accelerate that shift into 2021? I bet the numbers that you're seeing from SketchUp and elsewhere in the subscription side are pushing the time line earlier than I think what we probably thought of at the Analyst Day, but maybe you can comment on those items if you don't mind.

Well, there is an aspect that pushes earlier than what we talked about at Analyst Day. Clearly, the composition of revenue is ahead of where we talked about at the Analyst Day. And we've had a pandemic that certainly influenced the composition of that as we've seen the recurring revenue perform through. So I would say the context of the moment validates to us that we're heading in the right direction. The secular really I think given a -- creates a tailwind for us. When we talk about Connect & Scale, I've talked more about the Connect side in these calls. On the Scale side, it's important that we look at the systems and the processes that we have across the business. We named a Chief Digital Officer in the third quarter. I'm really happy to have this in place and I think it's going to provide us great leadership across the organization on this journey. We are investing. So when we look at the CapEx spend and you can see that flow through on the free cash flow, clearly, we will put CapEx behind this, because we do need the underlying architecture to enable additional conversions in the business to happen. We need the underlying architecture to enable the -- I'll call it to enable the bundles to transact at a scalable level. So there might -- I think it won't -- while these things I think will happen faster than we talked about at Analyst Day, I also would want to have a little bit of caution in terms of where the slope goes because we need to continue to create the enabling architecture to scale this opportunity.

Okay. Thank you.

Thanks, Jerry.

Your next question comes from Rob Wertheimer from Melius Research. Your line is now open.

Hi, everybody. I had a couple of kind of strategic questions, if I may. On the construction side on automation, would you say that you're finding yourself a little bit more in competition with your OEM partner customers or finding yourself as a more valuable partner or maybe some of each as you broaden out your potential reach? That's really my first question, just how that dynamic is shaping up as different people make different investments and facets of automation?

Hi, Rob. I think it's a little bit of both is the honest answer. And I think you could -- the easiest segmentation happens at the size of the organization. If you're a Tier 2- 3-sized OEM it clearly -- we believe it would clearly make more sense to work with a scaled technology provider then to try and create those investments in-house. And we start always by talking about the mixed fleet. So mixed fleet is so fundamentally important. So an autonomous site isn't going to work if you have proprietary -- multitudes of proprietary equipment running around on a site together not communicating with one another. In fact, when we look at the strategy we have in autonomy, yes, we have positioning technologies and a strategy that's very relevant to the autonomous -- an automated movement of equipment. But that has very little value without a deep understanding of the work that has to be carried out. So we think that by understanding the physical world in which these machine operates that we have the ability to develop the optimal plans for the tasks at hand and to really be that brain for the site or the farm. And we think that that's a really important aspect of the Trimble strategy. So to be that operational center for the mixed fleet is an important aspect of the strategy. And then -- and then when we get into the tech stack, what we've talked about for years is machine control and guidance that we do in civil construction what we call steering and guidance in agriculture. We call it automation. Well that's autonomy. It's sort of between Level 1 and Level 2 autonomy. And we keep working up that automation spectrum towards Level 3. We look at specific workflows that will make sense, machine types and workflows that would lend themselves to an autonomous work situation that will make sense. And then we think we've got a full spectrum of cloud perception, optimization and control technologies that are relevant here.

Okay. Thank you. Fascinating area. The other question I'm sorry for the clarification, but for the decision you made in transport that -- the decisions and inventory write-down to the extent you're able, can you just clarify you exiting product lines anyway? Are you exiting just a product and replacing it? And then just how do you feel about customer traction there and ability to sort of ramp back up with truck production? Thanks. I’ll stop.

Hey, Rob, it's David Barnes. So as you look at the revenue line you can see that the volume of business we're serving is going down. So the restructuring in part simply recognizes that the business has contracted and smaller than it was. A lot of the strategy we're working through to improve customer retention and customer satisfaction is about streamlining the product offering, replacing old technology with more supportable technologies going forward. So when you support fewer platforms, you need less resource over time. The inventory write-down specifically was about products that were committed to when the business was bigger and more healthy and we've worked through our strategy with regard to customer targeting and pricing. And we've recognized that the inventory valuation -- we've updated it to reflect that plan. So we're not – we haven't exited any businesses per se. We're optimizing the business that we've got and as Rob said, aiming for the inflection point where on all the key metrics of ARR and revenue growth and margins we can get momentum toward what a good business looks like in Trimble in the second half of next year.

Okay. So for clarity you're not like exiting a kind of business you're just I don't know if 80-20 is the right way to state it for you guys, but trying to serve the customers with a less diverse product set or such and that's what led to the right time.

No that's right. No we haven't exited any business. We're still serving the customers' needs just doing it more efficiently with products that are fit for the future.

Perfect. Thank you so much.

Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is now open.

Yes. Hi, thanks. Thanks for squeezing on here. So I wanted to follow up on subscription transition talk and just get a better idea for on a relative basis where B&I is in that transition relative to the software aspects of your other segments. And then digging into B&I, specifically I was wondering if you have noticed any interplay between the subscription transition and maybe the size of the customers that are signing on, presumably get the large customers to sign on first that drives some of the subscription transition and then by network effect some of the smaller stakeholders start to sign on as well and maybe that accelerates the transition further. Are you noticing any sort of interplay there?

So I'll start with B&I and where we think we are on the software transition. I would describe that more in middle innings maybe early middle innings on the software transition. In Transportation, I would say we're in the probably solid middle innings on that business maybe in the late middle innings on that one. Our enterprise business which is the back-office software, we are executing a transition to a subscription model in that business. The rest of the businesses really already are subscription and Transportation. So that's a little further ahead mathematically than B&I would be. I'd say Geospatial is a very small aspect of it. So it might be early but it's a lower dollar amount. And then the Resources and Utilities reasonably far along. And one of the strategies we have Blake is also looking at hardware businesses and rethinking the business models on some of those. So while you're asking about software I just also want to comment that I think if we take the civil construction business we launched what we call Trimble Platform-as-a-Service in the quarter and that's a new way to monetize the business, where think of it as a bundle of the machine control hardware with the software with ongoing support and service providing technology assurance for the customer. So we can upgrade functionality over the lifetime of that. So we're really taking a fresh look at all the business models we have. And then when you ask about the interplay with subscriptions and customer sizes, the one that we talk about the most is actually at the owner level. And our belief set is that if we can – when the owners and I'll say, some of it's hearts and minds and some of it is the owner business that we have whether that's a Department of Transportation or the owners that – the capital programs that we manage through our e-Builder business, where we manage hundreds of billions of dollars of committed construction volume, we see that as a mechanism or a catalyst to promote the use of technology into the field. And then at some level I guess you could say once you've done that you could look at the general contractors as the catalyst win the GC, win the subcontractor and think about the waterfall as such.

Really appreciate the answer there. And one follow-up if I could just on M&A. Any portfolio gaps in B&I that exist, particularly in light of the WorksOS launch, which seems pretty compelling? And then could you maybe contextualize the divestiture of the construction Logistics business in light of WorksOS? Is it that you're trying to focus more on the owner or contract or subcontractor and maybe away from the smaller inputs in the stakeholder chain? Or what was sort of the strategic driver behind that?

I'll start with the divestiture of the construction logistics business. It's a business we've had for a long time. It was arguably our first foray into telematics many years ago. From -- I'll say from a financial standpoint or maybe even a governance standpoint, I think as management we're paid to allocate capital efficiently. And when we look at how to allocate capital in the construction logistics business, it was a business that's reasonably concentrated and penetrated. And we felt that when we look at the landscape of it that it was -- its future was best served to be part of Command Alkon was the buyer. It's the future of the business and therefore I think the future of the individuals who work in the business. And we wish that business great success. It's better served combined with Command Alkon. So I think, we at a strategic level to allocate capital optimally either needed to be a buyer or a seller. And the nature of the market was such that we thought it was better to be a seller on the construction logistics business. It doesn't change the conviction of our view on the connected strategy nor as a signal of a shift of any intent whatsoever. And then you asked on the acquisition side, I would -- rather than maybe be specific about where we might see gaps, I would say we think about making acquisitions that advance our Connect & Scale strategic imperative. So on the connect side, we certainly look across that life cycle and across the stakeholders and we'll think about where we have additional opportunities to serve. In many cases that may be tuck-in and there's businesses out there. There's a long tail of activity in construction tech that -- I'll say construction tech businesses which arguably are -- their long-term futures to be a feature inside of a larger company such as Trimble. So there could be some aspects of that that really help us tighten the workflow or bring additional data elements that are -- that we think could be compelling. So that's how we think about the acquisition side.

Understood. Really appreciate the comment. Thank you.

And your next question comes from James Faucette from Morgan Stanley. Your line is now open.

Great. Thanks. I just want to follow up quickly on the M&A commentary Rob as well as just the product portfolio. Where are we from divestitures and examination of the portfolio standpoint? Is there more to be done there? How do you feel like you're looking now? And as far as the acquisitions et cetera -- the acquisitions that you are doing, you would think about doing is there -- are they largely in kind of the business and pricing model that you want to get to already? Or is there going to be some transition period do you think for a lot of them as you pull them into the business?

Let me start on the divestiture question and I'll probably have to ask you to repeat the acquisition one. I didn't quite make all of that out. On the divestiture side, we continue to look at the portfolio. And so if the axes -- if the two axes are strategic fit and financial performance we have a point of view of our own portfolio. The time has to be right for us and I'd say a potential buyer. I don't want to signal that there's, major trunks or branches of the Trimble business that wouldn't be there. I just think we're doing the right -- we'll go back to my comment about -- I think we're paid to allocate capital efficiently and effectively. And we're looking at the -- in the context of the opportunities that we see in front of us, in construction and agriculture, transportation, and our core survey business, where do we have opportunities to continue to win, to gain a relative market share, and to effectively execute the strategy. And where -- if we feel, in any of those that we're in a suboptimal position okay well that would certainly say something about strategic fit. I just want to say, we are being diligent in the exercise. It's an ongoing effort. And I think it's something that we should always be on an ongoing basis, be looking at. So that's a divestiture answer, but I missed the acquisition question.

Sorry, I wasn't clear there. I was just asking, if the acquisitions that you are doing or looking at, are those businesses already kind of in subscription model structure, in terms of go-to-market. Or are there likely to be transition periods to move them over to that et cetera, especially where it makes sense?

Okay. Got it. That's fair. Good question. I'd say that could look like two flavors. One would be I would call it, a software-centric acquisition. And the second would be really more, autonomy related. And the more autonomy ones, from an accounting perspective, are likely to show up in hardware. Now how they monetize over time okay, that we'll say remains to be seen. So those would be the two vectors that we think about James. And on -- for the software ones, we don't have a dogma that says it has to be a subscription business already, all things equal, that's a good thing. All things equal, if it's already in a transition, that's better than not being in one at all. But we don't make that a, hard cutoff criteria for acquisition screening.

Great. Thanks a lot.

Thanks, James.

And there are no further questions at this time. I would now like to turn the call over to our presenters, for any closing remarks.

Thank you very much everyone for joining us on the call. We look forward to speaking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you so much for your participation. You may now disconnect.