Good afternoon, everyone. Is it afternoon? It is. All right. Thank you for joining us. My name is Chad Dillard. I'm the lead analyst here at Bernstein, covering the machinery sector as well as electrical infrastructure. Today, I'm really pleased to have Trimble on the stage with me. Joining me from Trimble is the CEO, Rob Painter.
Thanks for having us.
The format of today, we're just going to have a fireside chat. We'll begin with Rob just giving a real brief overview of Trimble. If you have any questions from the audience, there should be a link floating around. Enter in your question on Pigeonhole, and I'll make sure to get those questions answered. Maybe I'll pass it over to you, Rob, to give a quick intro on Trimble, then we'll dive right in.
Yeah. Feed the world, move the world, build the world. That's the why of Trimble. That's the purpose of Trimble. The company was founded in 1978 by Charlie Trimble. I'm the third CEO in the 47-year history of the company. We're applying technologies, really geospatial-centric technologies, in markets such as engineering, construction, and transportation, and logistics. We've had a big transformation in the business over the last few years, but we'll come to that. Today, traded on the S&P 500, very technology-forward.
Great. We were just talking before it started that you've been at the helm for five years, and it's been quite the journey. I'd love to kind of get your sense for how maybe you could describe to everybody just what the path has been and talk about what could potentially be next as the company evolves further.
Yeah. So I have a 19-year history with the company, grown up through many parts of the business, particularly in the construction technology side of the company, was CFO from 2016 to 2019. Sort of a unique vantage point coming into the role that I came into in 2020, an absolute privilege to be able to do this job and to be able to be at an event like this. Over the last five years, we've had a foundational transformation of the business. Just to put some quant around the last five years, we've moved from about 50% software company five years ago to 75% software. We moved from 1/3 ARR as a percent of total revenue to 2/3 percent. Today, we sit at over $2.1 billion of ARR that grew 17% organically in the first quarter. That's pretty rare territory.
We've had a structural improvement in the gross margins, 1,200 basis point increase in gross margins in the last five years, around the 70% gross margin mark today. That's translated into 500 basis points improvement in EBITDA over that time frame. We've spent a lot of time simplifying and focusing the business and the portfolio. We've done 23 divestitures over the last five years that maps against seven acquisitions over that same time frame. The simplification and focus, this has provided clarity into the business. Durability shows up in that business model. By the way, we're also very asset-light. That tends to sometimes be lost in the story around negative working capital, CapEx less than 1% of revenue. That's the durability meets the momentum that we have in the business. We see that playing through the results that we have in the company.
Coming out of that strength we had in 2024 played into a strong set of first-quarter numbers. Our strategy, we call it connect and scale, connect users, data, stakeholder across these industry life cycles we're serving, connect them in a way that's transformed our business models, like actually how we productize, how we've converted more to subscription models to enable that. Scale is fundamentally about making ourselves easier to do business with.
Now let me narrow it down to the last two years or so. Since then, you've made some radical changes on your go-to-market strategy, thinking about Trimble Construction One, your Salesforce reorganization, a few other things. I'd love for you to talk about some of the results that you're seeing and more specifically talk about what you can do now that you couldn't before.
Okay. So there's a few things we can unpack out of that. I'll narrow in on our AECO segment. We have three reporting segments today. That's been another part of our simplification, being able to simplify how we present to the external world. Actually, you could say how we run the business as well. Two of the three are engineering and construction focused. We call field systems as primarily the hardware-centric businesses we have at Trimble. AECO, if you don't know the acronym, architects, engineers, construction, and owners. When we think about these last couple of years, and I'll center on the AECO software business here for the next few minutes, think about, and by the way, this business is about $1.4 billion ARR, is about the guide that we have for that segment this year. A scaled business.
We believe the magic happens at the intersection of product and go-to-market. On the product side, we've greatly simplified how we think about the solutions we have. We do a lot of things at Trimble. We see that as virtue within the industries that we serve. At the same time, you have to make that accessible by the customers to unlock potential. I see the world a lot through bundles. Think solution offerings, think collections, think suites of technology, think pre-packaged offerings. We have a commercial framework we call Trimble Construction One. We have over 20 purpose-built, bespoke bundles that we can take to different personas within the market. That removes friction from a productization perspective. We intersect that with the go-to-market work.
By the way, when you simplify the offerings you take to market, that makes it easier for the sellers to actually sell, taking friction away from them. At the level of go-to-market transformation, we've moved to named-account selling models. In the past, we might have sent multiple salespeople in to talk to Dillard Construction. Today, we have one person who owns that account, Dillard Construction, who's tasked with bringing the best of Trimble to that. It's clarity in how we go to market. It's simplification in how we productize. It's simplification as well and expansion through the transition of business models, moving from those perpetual to the subscription. Everywhere we've done that at Trimble, we've seen expansion of the TAM come alongside of that. That's narrowed the valleys through any kind of transitions we've had as the expansion of the markets.
Further narrowed any kind of valleys because as we've moved into those transitions and moved to selling product bundles, we've actually been able generally to increase, let's say, the pricing and the value to the customers through that model. The intersection of product and go-to-market is everything and enabled by the underlying systems and processes and people.
Gotcha. I think you talked about excluding your architecture business. I think you have somewhere around 60,000 clients or so, 30,000 of which have either two or fewer instances of your software.
Good memory.
How do you think about expanding that, taking two to three, three to four, and then for that incremental dollar of revenue that you generate from there, what does that look like from returns or a margin perspective? Is it better than what it was before?
There's a few sort of questions within that question. I'll come at it this way. In the construction software business, we see $1 billion of cross-sell opportunity that sits within the portfolio. Clearly, that looks like moving customers from two solutions to three, three to four, four to five, and dot, dot, dot. We see an enormous greenfield opportunity as evidenced by the numbers that you articulated. The pattern recognition or the heuristics you can run against our own customer database, I'd say we've got the ability now to really access that, to understand a certain profile customer, how they benefit when they're using multiple technologies from Trimble. When you understand that pattern recognition, then you can just simply query how many other companies look like this. That's the underlying data.
From that analysis, that's called top-down analysis, then you understand how to create the product offerings to best suit that customer base. You can align your go-to-market practices. Also, the marketing side, not just the sales, but the marketing motions to go tap into that, how you actually reach and create pipeline. Those are all important factors of how you go after that large cross-sell and upsell opportunity. I look at the 19% growth, ARR growth we had in the first quarter. It's not 19% on a small base. It's 19% on over a billion, well over a $1 billion just in that segment alone. This is happening at scale. Now, ARR is like the scoreboard. What's the thing that happens before ARR? It's the bookings. We'll think about ACV bookings, annual contract value bookings that drive that.
Within those ACV bookings, the new bookings that drive the continued growth, we see about 2/3 of those coming from existing customers and 1/3 from our new customers. We can see it in the data that we have that the motions are working and allow us to start chipping away at that opportunity to serve the market to its full potential and unlock the value that the customers are asking us to deliver.
Gotcha. On that $1 billion , how do you think about the adoption curve and when you hit that full run rate of a $1 billion of cross-sell?
Okay. Now we'll be breaking into aspects of the time curve. We held an Investor Day in December here in the city, and we put forward a three-year model for the company where we believe we can continue to grow that top-line ARR in the teens for the foreseeable future given what we see in front of us. That is just working at a slice of that billion-dollar opportunity within construction. I believe by the time that we've unlocked the full potential of that billion is that there's another compelling set of numbers, especially in a data and an AI-forward world, given the unique corpus of data that we have access to at Trimble. Completing the thought probably from the last question too, at the business model level, we for sure think about the incremental margins that we can generate.
We seek to continue to deliver profitable growth as we grow that. Obviously, as the gross margin profile of the company has increased, that provides a set of degrees, I should say, of freedom. That is all baked into the incrementals that we set at 30%-40% range of incrementals over the next three years. Do that math, playing it forward, call it 100 bps -ish of gross margin and the same on the bottom line improvement as a baseline expectation.
Okay. So let's talk a little bit more about products. Let's stay with the AECO business. So you've talked about five core sets of software suites. Can you give some hard examples on how each of those deliver greater productivity for the customers that you serve?
Yeah. Let's first look at the quantum of what we're doing in this AECO software business. Repeating architects, engineers, construction owners, each one of those businesses independently is over $200 million of ARR. This is a pretty diverse set of businesses that we have that are each scaled capabilities on their own. I think that's important context to have. Okay. Before I go further, repeat the question.
Oh, yeah. Just maybe you can talk about some of the hard examples if you look kind of over the five software suites, just how it drives productivity.
Okay. If we take each one of those pieces, I tend to think of a shopping mall analogy is the one I'll tend to use. If you think of a shopping mall, you have anchor tenants in the mall, and then we have the retail fill-in, right? I think we can all get that visual. If you keep that visual, you have the kiosks that can be in the middle of the hallway in the shopping mall. That, to me, represents, in a way, the portfolio that we have. Okay. What do I mean by that? Okay. The anchor tenants, for us, that looks like ERP, construction ERP. It looks like construction project management. We are scaled in architecture and design. Conceptual design, actually, really is the capability through a product called SketchUp. We're scaled.
That ERP, by the way, comes from a business called Viewpoint that we had acquired a number of years ago. That's an important part of the whole nucleus of a Trimble Construction One offering. If I look in steel, detailing, engineering, design, analysis, Trimble Tekla Structures, steel and concrete. We have an anchor tenant in what we're doing for mechanical and electrical plumbing contractors, from design to estimating to 3D content to pricing engines that feed those estimating engines. This is an anchor tenant. For owners, we manage their capital programs. Over a $1 trillion of construction are managed through a capital program management that feeds that owner side. To me, those represent the anchor tenants. What our customers are trying to solve in construction are multifaceted. Ultimately, they're looking to do their business better, faster, safer, cheaper, greener. Construction runs on very thin margins.
What we know is the data will tell us that 80% of projects are late and 40% are over budget. In a room like this, if I ask people, "How many of you have ever done a construction project?" most hands will go up. I say, "Leave your hands up if that construction project was done flawlessly and on time and on budget." I almost never see a hand that stays up. There is a visceral appreciation usually for the challenges that this industry faces and what digitization can bring when you drive communication, coordination, and collaboration into this industry. We are helping it digitize, thereby delivering the productivity at the intersection really of sustainability. This is the value proposition you get. You are using our technology. This is not shelfware. These are systems of record. This is software that you are using all day, every day.
Very, very integral to how the business operates. Asterisk, doubly important if you're worried about a macro environment, then it helps to understand that we're the system of record, not the nice-to-have. That's what I call the value delivery on those anchor tenants. The retail fill-in, I call those smaller products that we have in each of that A, E, the C, and the O. That kiosk that I described in that shopping mall analogy, think of those as tuck-in acquisitions that we've done. Really, they may have been former companies to us. We've seen them as features that fit into the broader product suites that we take to market.
Got it. So of those five products, what are the beachheads? What drives the greatest pull-through?
On the cross-sell pull-through?
Yeah.
That one that's driven the most dollar amount of cross-sell pull-through has been at the intersection of ERP and project management. That's pulling through actually, they're both pulling each other through. For sure, ERP pulls project management through. ERP is pulling civil estimating through that. From a dollar perspective, where we've had the beachhead of the construction management system or that ERP, that's pulling in a great deal of products. Where we already have design, once you've designed something, guess what? You need to estimate it. When we have the design and the estimating capabilities, those pull together nicely. I'll give you one more because we've just been talking about the AECO software. From a customer standpoint, they're not going to care that you've got an AECO segment and a field system segment.
If you're a contractor, you can be working with both parts of our business. It is just Trimble to a customer. Think about a BIM. We call it a BIM -to -Field workflow. The models that can be designed today and engineered today, but designed today, if you're doing steel design in our models, it is accurate down to the level of the anchor bolt. This is not a pretty picture telling you what the design intent is of this hotel we are in. It is designed down to the level of the anchor bolt. Now overlay models of that precision for mechanical, electrical, plumbing, steel, concrete. You can eliminate the rework before it ever happens because you have built it virtually before you built it physically.
That same design specificity, when you come to do what's called the layout in this building, because every single thing, if you took the, if we could take the ceiling off, every single point in here is precisely positioned or it's meant to be precisely positioned. We can take with our field instrumentation that we have, those digital models, and we can bring them out to the field and do the layout and put everything exactly where it's supposed to be. When you do that, guess what? You're driving a job to be on time. Guess what? If you do that, you're driving a job to be on budget, thus the unlock in the productivity and eliminating the rework.
Got it. Now let's talk about just your relative positioning. Some of the other companies that come up are Autodesk, Procore, Bentley Systems. We heard about your bundling and the five key product streams that matter. Could you contrast what you're offering versus those competitors? What differentiates you in terms of how you go to market and win?
Yeah. So I have big respect for all three of those businesses and the leaders of all three of those companies. We all know each other in the industry. In my opinion, we're more often peers than we are competitors. There's for sure an aspect of co-opetition. That's not just a cute word. I actually think it's very true that what we see in our world. You see it in many technology landscapes as well. What differentiates Trimble ultimately is the breadth and depth of what we're doing. We talk about delivering products and services that connect the physical and the digital world. This physical digital is something I think we all probably hear more and more about these days. I'd say the difference, we can actually do it. We got a $1.4 billion business in that construction software.
We got a $1.4 billion business in that field out in the field. Whether it's the surveyors, people doing mapping, geolocations, machine control guidance, and civil construction, we have a very unique ability to actually connect the pieces of Trimble across the full lifecycle, connecting the stakeholders. That is the thing that's the most unique. That, we believe, provides the ability to move customers from delivering task productivity to systems productivity. I'm going to stop and cough.
Yeah. There you go.
What we'll see is sometimes customers are asking us to work together, the peers or the competitors in the industry, to help them unlock movement of data. This interoperability of data and openness of data is a pretty big deal in the construction technology. Maybe it's true in every industry, but the one we live in, this in transportation, it is something that needs to be done is to be able to move that data. Because just like if for all of you who've done that construction project, you can imagine the ecosystem or the network of subcontractors who had to come together to help make your project turn into reality. That also mirrors the technology landscape. There's a fragmentation because there's so many different players that have to come together to make the magic work.
Let's talk about the macro. Just given everything that's happening, can you talk about how customers in your AECO business are navigating the uncertainty? Maybe you can contrast what you're seeing in large versus small customers, federal versus state and local and private customers.
On the call a few weeks ago, we said opportunity mixed with uncertainty. I really do think you can have both. To me, it's a legitimate juxtaposition. Excuse me, our customers by and large have backlog. If you take the U.S. as an example, we do business in 170 different countries. I could have 170 answers to this. If you take the U.S., think about the last few years. We've had the Bipartisan Infrastructure Law. We've had the CHIPS Act. We've had the Inflation Reduction Act. We have reshoring and onshoring that had already been happening before Liberation Day. This is a compelling backdrop. Our customers by and large, not everywhere, but our customers by and large have backlog, have healthy backlog. In many cases, finding labor is the bottleneck to actually working that backlog down. We see a healthy backdrop.
I'm giving you a U.S. example, but actually globally. That feels about right. Again, we grew 19% in the first quarter. I promise you that this isn't construction software. I promise you put in place construction is not growing 19%. It's growing in the low single digits. We see healthy backlog amidst that uncertainty. You take that uncertainty, I'll give you an example. What has that unlocked? That's unlocked more talk in this country of reshoring and onshoring. That's unlocked conversations in a country like Germany about EUR 500,000 of infrastructure spend that I haven't heard them talk about before. There are these Europeans talking about spending more in defense if the posture becomes one of more self-reliance. You're going to have to build to do a lot of that. We can help make that build happen more productively and more sustainably.
Thus, you can see opportunity within the uncertainty in the macro and from where we sit.
Gotcha. I guess here's what I'm trying to get at. How has Trimble's cyclicality changed? Let's just compare this to construction spending, for example, today versus two to three years ago, or maybe even 2020 was the last time we saw a sharp downturn.
The best data points I can give you are 2/3 of our revenue is recurring today. 3/4 of our revenue is software. It's a more durable business model than we've ever had. We grew our software business and construction software business in the heat of COVID there in the, it would have been around the second quarter of 2020. We grew in the second quarter of 2020. I don't think we're facing that moment right now. There is a durability in the business model. We have for sure looked at past cycles that we've seen in the world. Fundamentally, we see ourselves as a secular with a cyclical undertone. It'd be naive not to see any cycle in a market. Fundamentally, this is a secular digitization of technology. Back to the peers in the industry, most all of us have been growing.
To me, that's an evidence point, a data point therein of the secular adoption of the tools. Kind of put all that together, and we feel good about where we are. I did not finish answering your, I guess, your last question. You asked about large and small contractors. Sorry about that. For sure, we see differential levels. We have seen that of late and with public sector. We expected the U.S. federal sales for us to be lower this year. Guess what? That has played out. It is probably even a little bit lower still. We had that planned from the beginning of the year. I do not feel like we have to alter any, in this case, a guidance to adjust for that because I think we called that one pretty much right.
What we've seen is for some of our largest customers that represent less than 10% of our revenue, they've moved slower on the buying cycles. What's the word we're all using now? Uncertainty. They have moved slower in the buying cycles, but they haven't stopped buying cycles. I go back to the evidence of that as we see it in our net retention ratios. We see it in the ACV bookings that we talked about in the quarter as well. Some of those cycles have slowed. At the same time, on the other side of the market, we've seen the small and mid-market grow even faster than we expected. We got to where, in fact, we got ahead of where we expected, with one part a little bit down and the rest a bit up. This is always going to be true.
We're always going to have something that's doing a little bit better or worse than a plan within the business and across different geographies.
In your investor day, I think you have a slide that shows the addressable market of AECO growing by high single digits. If you look at how you're guiding your segment growth, it's kind of like mid-teens. What's driving the outgrowth? Are you embedding some share gains, or is there something else?
I think it's a little bit of all of the above. If you do the stack to a net retention ratio, and I assume if you're in the room, you understand net retention ratio, you're going to start with your gross retention, which is to say the churn, the starting point minus the churn. From there, you have pricing, and then you have cross-sell, and you have upsell to build to the stack of that net retention. We're getting the cross-sell and the upsell. That's a part of the outperform against the market growth. We've got segments within that AEC and the O. The A is growing above the average of the segment, above that 19. The O has been growing a little bit slower than that. The E and the C are right about that average.
Sometimes it's about what the mix of the product is that moves that number up. I think the execution from the team has been terrific. I go back to that. The magic happens at the intersection of product and go-to-market. You got to get the two right. It's hand and glove. I've certainly had learnings in my career of having one or the other and sub-optimizing a potential. The magic happens when you can get them both right, and you're designing the product to fit inside a go-to-market motion. I give our team a lot of credit for the execution against the potential.
What are the growth opportunities of Trimble Construction One on the international stage? Do you think you need M&A to accelerate that strategy, or can you do it more organically?
Trimble does business in 170 different countries today. We are emphatically global in our view. The AECO software business is close to 60% North America today. The global economy is not 60% North America. Absolutely see compelling opportunities around the world. We see India winning as the trade war or conflict, whatever you want to call it, with China. I think India looks to be the winner on the other side. That economy is a good economy. I think the Middle East is very underserved by us and the whole technology landscape today. There are really good opportunities there. Europe is the next, not surprisingly, biggest market for us. Of course, Europe is not Europe. I mean, the most advanced construction in the world happens in the Nordics.
Much of that nature of what they construct and how they construct it and how they apply technology to that is able to feed a lot of what we do around the world. Very bullish on the opportunities we have outside of the U.S. Now, we have different capabilities market to market. Not every technology we have is a fully global capability. Our hardware businesses tend to be extremely global. Our architecture and design software is extremely global. That steel, concrete design engineering package I talked about, that's extremely global. The ERPs are not. They tend to be very regional. My reframe would be back to that anchor tenant in the shopping mall and an attractive part of the nucleus of our bundled Trimble Construction One offering. I would see an opportunity to better serve that system of record, that ERP, let's say in Europe.
Now, we have a choice to want to build by partner in order to do that. I would not say that we need to do M&A. I might say we want to. I would just reframe the word is that in context of the market opportunity in front of us and the capabilities that we have, if there are attractive capabilities and markets that could accelerate our growth and our ability to serve that market and those customers, I want a posture to lean into that.
Okay. So moving over to your field systems business, the most recent renegotiation of your Caterpillar JV has probably unlocked some more opportunity for other partnerships. So I guess with that in place now, what can you do now that you couldn't before? And what would you say about the roadmap for that business given that change?
Our field systems business, just to set the context for that, if I may, it's about a $1.4 billion business. It kind of is like a third, a third, a third of survey and mapping technology, of civil construction, machine guidance technology, and then what we call advanced positioning technologies. We can sell the, they're called corrections that provide centimeter-level accuracy, for example, of position. It's a software business. In the civil construction business, we have a joint venture with Caterpillar. Actually, in the survey business, we have a joint venture with Nikon. In the building construction business, we have a joint venture with Hilti. As you know, in agriculture, we have a joint venture with AGCO. Caterpillar, we've had over a 20-year joint venture with Caterpillar. Super proud of that relationship that we've had for decades now.
About every seven years, we reformed or renegotiated, reworked the joint venture agreement to reflect the game on the ground at that point and the strategic priorities of the mother companies in that. It is kind of a healthy exercise. It is something that we have done a few times over the years. In this latest rev of it, we have one simple principle. We always kind of try and work backwards from a set of principles. The principle is increase the level of technology adoption in the market. Okay. With that in mind, just speaking for ourselves at Trimble, we are very much oriented to serve the mixed fleet. I would say picture any civil contractor that can come to mind to you and do this when you are driving down the road and you see a contractor's working. They operate mixed fleets. Our strategy is to serve the mixed fleet.
Okay. If you agree on a goal to increase the adoption of technology in the market, it stands to reason you need to work better with all OEMs. You need to have broader sets of product capabilities to reach the entirety of the market because there's still low penetration. You need to be able to take it to market. It should sound like a familiar formula because I'm getting to that product meets the go-to-market. On the go-to-market side with serving the OEMs, if you took, were you at Bauma, by the way?
I was.
Okay. Okay. At Bauma, our technology was on over 20 OEM booths. I'm not just talking about partnership. We were on 20 different OEM booths. These OEM relationships, excuse me, are very important to us. I'd like to think they're very important to the OEMs as well because they're looking to make sure they play well into the technology ecosystems that their customers have. That forms the basis of why we would have those relationships. The nature now of post the latest turn of the joint venture gives us more degrees of freedom in how we work with those OEMs so we can better service the opportunities that they have. We can meet them where they are on their own technology journey. That's a good thing. From a productization standpoint, we think there's a huge market that's underserved in more mid-machine types.
Think of the BCP that you would know. Small mid-machine types, small mid-contractors. We think that we have differential technology where we can meet the needs of those that may be more interesting to us. I think we have degrees of freedom on the productization side. On the go-to-market side, when we work with those OEMs, and we've announced, I think, four of these so far with Komatsu and John Deere dealers, the dealers, the ability to serve technology to them at their dealerships so that they can put, for example, a John Deere dealership, the ones that we've signed up, I should say, our technology there at that dealership, kind of at the coalface on that John Deere brand of equipment.
It's opened up degrees of freedom in how we can better serve those customers and those dealers for the mixed fleet to increase the adoption of the technology.
When I think about the mixed fleet and I pair that with scale, it naturally leads my mind towards the rental channel. I guess what opportunity would Trimble have through scaling its technology on the rental side?
Okay. We definitely have rental customers. By the way, as you know, the OEM dealers, many of them have very, very important rental. The dealers have very important rental businesses. Of course, there is independent, fully, right, independent rental markets. Further, depending where you are in the world, there are markets like the U.K., which is extremely rental-driven. I am sure you know this, many of you as well. There are markets where you want to be more forward with rental because that is how business is done, more so than buying or leasing equipment. In markets like the U.K., you are going to have a different set of rental outlets or firms that you want to move with than maybe, I would say, the U.S. or Australia. It is an interesting and compelling market.
Where we think we can do well in rental is that they often want portability of the technology. If the rental company values portability of the technology, which means they do not want to put it on every single piece of equipment, and they want to be able to continue to use it, let's say, after maybe the machine is turned, that is in our favor to do that. That is not true equally around the world, but it is an important market segment. I think about that at go-to-market more than I do not think it is necessarily a different product that you need to take to the rental market. It is like an additional channel of how you reach them. Now, when we work with the OEM dealers and they have their own rental, you are there by definition. Your question plays more to the truly independent rental houses.
Any sense for us how much your addressable market expands now that you're able to work with multiple OEMs?
Oh, it's a great question. Actually, from a mechanical standpoint, the addressable market, I would see as the same size because it's the same amount of machines. It's really, to me, it's less about the size of the market, but the insight in your question is how much more quickly can we reach it by virtue of that. We had that in mind when we put the goalpost out at the investor day. I wouldn't see that as a fundamental inflection. What might be equally or more interesting for me to add on to that is that subscription conversion that we've done in our software businesses. It's been really, really successful for us. We're pursuing that in our hardware businesses as well. We have an offering in our hardware, one of them, that we call Works Plus.
Think of it as the machine control and guidance, or think of it as hardware as a service or guidance as a service. This is one where we're seeing that we're expanding the size of the addressable market because you're making it more affordable and accessible to access the technology we have. We're seeing where we're competitively displacing folks out there, true competitors in that business because economically, it's easier for them to do when they move to the as-a-service model than if you had to make that big, huge CapEx outlay right up front. It's a value proposition where we're delivering, we call it it's technology assurance that we deliver to the customer so we can keep sensors up to date, the latest and greatest, so they get a better value proposition on that.
Now, think about if you've turned the hardware into a service, how much easier and more compelling it is for us to attach software capabilities we have around that. In this respect, we think about machine, site, and enterprise. You want to win at the machine, yes, that's good. What's better than winning at the machine? Win at the site, the job site. What's better than winning at the job site is win at the enterprise because the enterprise could be configured at multiple job sites. Now you're taking the full technology stack of Trimble and helping customers unlock these multiple levels of value.
Okay. So we've got some audience questions. I'm going to slide over here. Considering your market share in construction ERP in North America being 35%-40%, I believe, where do you see new logo wins coming from?
At the moment, we see them moving down market. I think the mid-size contractors, I would not say the smallest of the small, but we will continue to develop revs of the technology to take us further down market. As you go down market with that motion, you also need to have a go-to-market motion that scales with that, right? If you are going into a small market, you cannot put a person on a plane every time you do that. You might have more inside sales that you need to do that. You need to map the two together. We are still doing very well at that mid-large market winning logos. The cross-sell, up-sell, the bundles help do that. It is the more—I hate to call it down market because that sounds derogatory—just smaller side of the market.
Yeah. Next question. Can you provide more details about SketchUp? How much ARR and what rate is it growing in your three-year targets? What are the margins of this business?
Each pillar of that AECO is over $200 million ARR business. SketchUp is the main product in their architecture and design suite. Gosh, we've had, and it's growing faster than the segment average. Do that math. That means over 19%. We're on probably five years, so call it 20-plus quarters of more than 25% growth. The business and the leaders of that business have done just a terrific job working the opportunity on a global level. We have direct selling or e-commerce selling at the enterprise level. We sell direct. We have channel partners around the world as well. It's a multi-tiered, just an ecosystem of how we take that technology to market. On many levels, we're able to integrate things that we do in that conceptual design with SketchUp into the rest of the technology stack that we have.
It's a terrific business. Over a million paid users of the technology, tens of millions of registered users. It shows up in if you have kids in high school here in the U.S., they're probably using it at school. There is a strong EDU reach that we have in that. There is an extremely rich content database, a 3D warehouse that we have, and just start to think about, okay, what could be possible... with all that content.
Got it. Let's talk about AI. What can you tell us about your AI adoption in terms of internal as well as external processes? Has it helped you gain more share of wallet? Can you elaborate examples? Maybe just even before that, just lay out your roadmap.
I'm impressed that it took you 43 minutes to ask AI. You're probably supposed to ask that in the first 43 seconds. Okay. I have a two-by-two. We had this in our call a few weeks ago. On one axis, I see internal and external uses of AI, and on the other axis, cost and revenue-generating activities. And there's four unique kind of motions that if you think about on that two-by-two. From an internal perspective, I guess if I kind of go across the quadrants, we think external facing could look like better serving our customers. Think the chatbots and the customer support. Okay. AI's help. By the way, the thematic here is efficiency and productivity internally and unlock differentiation on the customer-facing side. That's the short answer. The longer answer is we see the productivity in code development from our R&D team.
The logical question after that is, do you drop that productivity to the bottom line, or do you use it to continue to invest to stay ahead? Right now, we want to posture more to continue to develop on there while still generating the op leverage that we've committed to. Customer support, I talked about that. We see it accelerating our sales and marketing motions as well. In the agentic approach, this isn't just talk. It's real of how we can better prepare our sellers, how we're generating marketing motions. We've done a lot of work underneath the covers of Trimble in the last few years, like the wiring, the plumbing of the company that's allowing us to unlock insights to then automate motions. It's recording the phone calls. Sometimes it's not our own technology. Sometimes it's third-party.
We record all the sellers' phone calls, and you provide coaching algorithms back to them. Then we discovered once you did that, you could run another query on that and discover the cross-sell and up-sell opportunities that came through the conversation that the seller did not pick up in real time. That has unlocked real revenue. The stuff is real. It is pretty exciting and compelling on, I will call it, a lot of these, the internal facing. The really fun stuff, probably to talk about in an audience like this, is where we see customer value. Think about those design packages and moving more to natural language prompting for design. That is not a fairy tale. You can actually start to do that. I think rendering in the same design packages, we call it SketchUp diffusion. In the ERP, it is automated invoice processing.
We're taking what took days or days down to minutes for a very tedious workflow that a customer has. In our field systems business, we collect an unbelievable amount of data, like about 80 petabytes of data that we've collected on behalf or our customers have collected using the tools. Data is not the problem these days. It's information. Feature extraction out of large data sets that could be if you're doing an our mobile mapping data collection on a do an asphalt profiling, okay, pull out the cracks in the road and then they're geolocated. You know where they are. Now think, once you've done that, what could you do?
You could feed that to what we do with State Departments of Transportation to feed their asset inventory systems and their maintenance systems to then do the work orders out to the crews in the field. That is like a slice of what is already happening at a customer-facing level.
Where is it easiest to deploy AI across the A versus the E, the C, the O?
Yes.
All of it.
All of the above.
Gotcha. Okay. Let's see. Oh yeah. So how is your Salesforce segmented by size of customer? Do you sell direct through the channel? Are there more software upgrades to sell into existing client base?
Our transportation business and our AECO business are almost not entirely, but almost exclusively direct selling. Our field systems business is almost entirely through a global channel. That is the distinction that matters there. With the sellers, they are named account direct sellers, I should say, named account model. That segmentation has a region and a size primarily. You can do some segmentation as well on industry, but it is more size and location as the primary basis. Their charge is to bring the Trimble house to best serve that customer. That is the direct side and the unlock.
Okay. Let's actually hop over to margins. Right now, you're doing somewhere around about 70% gross margins, targeting on your medium-term outlook somewhere in the mid-70s. I think there's an aspiration of getting towards 80% by the middle of the next decade. I guess what would you need to change in your business? Just walk me through the bridge to get to those goals.
We said by 2027, we think we can be about 74% gross margin. In the next 10 years, closer to that 80%. We believe that can happen organically just by running our plays. And the just is to say the mix differential, the growth within the portfolio. The software is growing faster than the hardware. But that mix alone, that should lead to continued structural improvement. I sort of anchor that to the moving from 58% to 70% gross margins over the last five years. It is not a fairy tale make-believe. We have actually done it. Continue to run and execute. There is not an act of God required or something inorganic to do this.
Gotcha. So just good old-fashioned growing the software business, fashion, hardware.
Yes.
Okay. All right. So probably have one last question. I guess through the lens of returns, talk about how you decide to allocate capital between investment, R&D plus CapEx versus acquisition. How do you think about just hurdle rates and the payback periods in the world of construction software?
Okay. In 45 seconds, here we go. I believe shareholders pay me, pay us as management to be capital allocators. That means put capital to its highest and best use. First, of course, we want to invest organically back into the business. That's not a problem. We've got bookends. We want to continue to maintain investment grade. We've said we want to put about a third of free cash flow at a minimum back into stock buyback. Now you're double-clicking down to the inorganic. We favor the tuck-ends over transformational. We favor the software businesses where we have the strongest weight to win across the portfolio. We measure those returns through an ROIC lens and then an EPS accretion lens. Nailed it.
Boom. Thanks, Rob. Appreciate it.
You betcha. Thank you.