Cathie Wood appears to love positioning and workflow technology company Trimble (TRMB 1.59%). The stock is the largest holding in the ARK Space Exploration & Innovation ETF, , and a top five holding in the ARK Autonomous Technology & Robotics ETF. The common theme across Wood's funds is an investment in companies with disruptive technology and secular growth prospects. Trimble certainly offers that, and the recent results highlight the compelling value case for the stock. Here's why.
Trimble's disruptive technology
For those who don't know it well, here's a helpful primer on Trimble. It's a company whose origins lie in precise positioning technology for pinpointing a position on a construction site, a geospatial map, a fleet of transportation vehicles, or farming equipment in the field.
However, we don't live in a static world; we do live in a world where a mass of data is increasingly being generated (by technology such as Trimble's hardware and software) and analyzed to produce actionable insights in real time. For example, construction managers can receive precise real-time data on onsite activity, fleet managers can receive immediate data on trucking fleets, and farmers can use data to better predict where to plant, treat, and harvest crops.
As such, Trimble is increasingly becoming part of its customers' workflow -- a disruptive technology.
Annualized recurring revenue growth
The disruptive process described above implies that Trimble will likely grow its subscription and recurring services revenue faster than its hardware and perpetual software revenue. That's precisely what's happened in recent years, but this dynamic has created a set of metrics that are not always easy for investors to measure.
As you can see below, Trimble has grown its subscription and recurring services more than hardware and perpetual software in recent years. That's good news from a gross profit margin perspective as subscription and recurring revenue carries a near 80% gross margin (2022 figures), compared to near 48% for hardware and perpetual software (2022 figures).
However, Trimble's overall revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) growth look weak, and it's understandable if investors might be concerned by it.
That said, the critical number to follow with Trimble is its annualized recurring revenue (ARR), defined as annualizing the "subscription, maintenance and support and recurring transaction revenue for the current quarter and adding the portion of the contract value of all of our term licenses attributable to the current quarter."
Whereas revenue and earnings (EBITDA) are booked upfront, ARR is a more accurate measure of a company's long-run cash flow potential with a reliable recurring revenue stream. In addition consider when you look at subscription and recurring services in a period, you are looking at what was booked in the period. That's fine and a growing number obviously indicates good progress, but ARR is a better way to judge long-term growth potential.
| Trimble |
2020 |
2021 |
2022 |
Trailing Twelve Months |
|---|---|---|---|---|
|
Hardware and perpetual software |
$1,735 million |
$2,135 million |
$1,986 million |
$1,813 million |
|
Subscription and recurring services |
$1,254 million |
$1,365 million |
$1,548 million |
$1,695 million |
|
Total revenue |
$3,148 million |
$3,659 million |
$3,676 million |
$3,650 million |
|
Adjusted EBITDA |
$799 million |
$937 million |
$917 million |
$937 million |
|
ARR |
$1,296 million |
$1,409 million |
$1,604 million |
$1,883 million |
Data source: Trimble presentations.
Current trends
The second-quarter results saw ARR increase 14% compared to a year ago. Management reaffirmed its guidance for mid-teens organic ARR growth by the fourth quarter, although actual ARR is set to grow to about $2 billion (a 25% increase). This is thanks to the contribution of the Transporeon acquisition – a European cloud-based transportation management software company with 90% of its revenue recurring.
A breakout of its segment performance reveals some mixed trends.
Image source: Trimble presentations.
The largest segment, buildings and infrastructure, grew organic ARR at a whopping 20%. Investors shouldn't overlook the ongoing potential for infrastructure spending to boost Trimble's growth while the doom and gloom in the residential sector is masking that U.S. nonresidential spending has boomed this year.
Resources and utilities organic ARR grew double digits with strength in positioning and city works offsetting weakening sentiment toward spending by farmers. Transportation organic ARR grew mid-single digits as the slowing economy created difficulties for freight companies. But after a lowering of revenue guidance for Transporeon in the previous quarter, CEO Rob Painter said: "In our Transporeon business, we see early indications that the spot market might have bottomed out." That would signal improving conditions for freight companies.
Image source: Getty Images.
A stock to buy
Trimble's transportation and buildings and infrastructure segments tend to have far more recurring revenue as a share of revenue than the other two segments. So, if the former is bottoming and the latter continues to have excellent growth prospects driven by global infrastructure spending, then it's likely that Trimble will carry on growth ARR at a healthy rate.
That means free cash flow (FCF) will grow significantly. Indeed, Wall Street analysts have $656 million penciled in for 2023, putting Trimble on 20.6 times FCF -- an excellent valuation for a growth stock.
