The Apple of Agriculture – Deere & Co | Summer Series

Bryce: [00:00:22] Welcome to the Equity Mates Summer Series proudly brought to you by Sharesies. Over 12 episodes, we're diving into some of the most interesting, exciting and well known companies from here in Australia and the US. Each episode we're also joined by an expert to help us unpack the key metrics the bull case and the bear case for each company. My name is Bryce and as always, I'm joined by my equity by Ren. How you going? Oh, I'm very good. 

Alec: [00:00:43] Bryce very excited for this episode. 

Bryce: [00:00:45] Absolutely. I did say at the top that we're joined by an expert and this is the one and only episode in this series that we're not joined by an expert. So pressure's on us. So fucking dear in company. Yeah. 

Alec: [00:00:56] We'll be playing the expert. 

Bryce: [00:00:57] I guess we'll be playing the expert. It's a fascinating company, dear and co listed over in the states and you can get access to the states with the Sharesies. This platform proudly supporting summer series two reasons we love Sharesies. The platform is easy and approachable, especially with auto invest, where you now can truly execute dollar cost averaging into US, Australian and New Zealand shares. So all the markets are available. Pick an order. The amount you want to regularly invest and auto invest will place the buys for you. You can choose a pre-made order or create your own DIY auto, invest with companies or exchange traded funds listed in those three markets Australia, the US and New Zealand. If you would like to sign up, you can use the promo code grow. Now we don't get any kickback from this. There's no commercial agreement with us. But you do get $10 into your account ready to invest promo T&C's apply you can hit shares Escondida you to learn more or download the shares is up today. Now we are licenced but we're not aware of your personal circumstances. All info in this show is education and entertainment purposes only. Any advice is general advice, but rent dear and company. Yeah. In a sentence. What if we got it? 

Alec: [00:02:05] The apple of agriculture? Oh. 

Bryce: [00:02:08] Hold on. The apple of agriculture. Anything more to add? 

Alec: [00:02:12] I think that really sums it up now.

Bryce: [00:02:14] Ah, what's a tech company so. 

Alec: [00:02:16] Well, yeah, they, they position themselves as a tech company. So I think Deere is the leading maker of farm equipment and machinery. And when we say leading, we will talk about its competitors. But we do remain leading. But it much like Apple is trying to transition away from a hardware business to a software and services recurring revenue business. It's just that Apple's hardware is beautifully designed music players and computers and phones and. 

Bryce: [00:02:50] Hey, there's nothing wrong with a John Deere tractor. 

Alec: [00:02:52] Well, and Deus Dias hardware tractors and combine harvesters and sprayers and the like. 

Bryce: [00:03:01] I don't know which side of the fence you sit on, but I think some of the farming machinery these days looks pretty swish.

Alec: [00:03:07] Oh, so. Well, you are from Wagga, so. 

Bryce: [00:03:10] I am technically the city of Wagga. 

Alec: [00:03:12] Townie. 

Bryce: [00:03:13] Townie. My parents do have farming roots though. Dad was a farmer. 

Alec: [00:03:17] Okay. 

Bryce: [00:03:18] Not that that makes any difference. 

Alec: [00:03:21] These are two city boys talking farming. 

Bryce: [00:03:24] Well let's get stuck in the history of Deere and CO was started by John Deere in 1837 so that makes this company 185 years old John Deere was a blacksmith and started making farm tools. You know you pitchforks you shovels you ploughs. The early innovation came with in the company when when they started moving from making products once they were ordered to actually manufacturing the products in advance and then selling them, which started to give them that competitive edge. And in the 20th century, Deere became synonymous with the big gasoline powered green tractors that you might often see driving around in farm paddocks as you're driving between major capital cities here in Australia or over in the States, as you're. 

Alec: [00:04:06] Driving, as you're driving between Wagga and Canberra. 

Bryce: [00:04:09] Yes, well we're in Coolamon even are in today. It is a $100 billion company with over 75,000 employees. So yeah, leading manufacturer of equipment and machinery in agriculture. 

Alec: [00:04:23] Now they've got a few key business lines, so they've got production and precision ag, which is the big ag stuff for tractors, harvesters is sprayers. Then they've got small ag and turf, which is, you know, John Deere ride on mowers, stuff like that. Yeah, a little bit smaller scale. 

Speaker 1: [00:04:42] I would love to ride on mine. 

Alec: [00:04:43] Yeah. So for people unfamiliar, Bryce's first ever business was the sky's lawns. And ever since then, he has had an obsession with lawns to the point where the theory, the working theory is he only plays golf because it's the only sport with manicured grass. 

Bryce: [00:04:59] There is an element of that. 

Alec: [00:05:02] So big ag, small ag and then construction and forestry. 

Bryce: [00:05:07] Yeah, the big ag is the, the bulk of their sales by segment, 41% of sales coming from that part of the business. 30, 30% then coming from there small ag and 29% from construction and forestry. So. 

Alec: [00:05:20] They're a global business. 57% of their sales come out of the US and Canada. So North America, 22% from Europe, 10% from Latin America and 11% from. This is how they bucket it. Asia, Africa. Australia. New Zealand and Middle East. 

Bryce: [00:05:36] Other.

Alec: [00:05:37] It's a big I wouldn't yeah it's a lot there's a there's a wide range of people in there. There are half the world is in that bucket. 

Bryce: [00:05:47] Half the world is in that bucket. You mentioned at the top, Ren, that there are, I guess, dominance over competitors. So global business, but where are they sitting in terms of market share in tractors and AG? 

Alec: [00:05:59] Yes. So according to IBISWorld, now, we didn't pay for the report. 

Bryce: [00:06:02] So pretty.

Alec: [00:06:03] Expensive. Yeah. But we managed to pull out in the tractor and agricultural machinery market globally. John Deere or start Deere in CO have 43% of the market. Wow. So the biggest player there are really other there are really two other big players of note and then a number of smaller players. Both of them are house of brands. Now that means that they're a conglomerate with multiple brands rather than John Deere, which is the Deere brand front and centre. So John Deere $133 billion market cap, the next biggest Sienna industrial case. And you may have heard of a new Holland. 

Bryce: [00:06:42] Case and New. 

Alec: [00:06:43] Holland. Yeah. Yeah. So that's an American listed company, but it's actually controlled by an Italian family. Anyway, a $22 billion market cap also listed on the New York Stock Exchange. Sienna is the ticker. Some of the brands they have Case, New Holland, Styer Mill, a few others. You're nodding. 

Bryce: [00:07:03] Yeah, I know most of them.

Alec: [00:07:06] So that's one. And then the other one is AGCO. New York Stock Exchange as well. Ticker AGCO AG. So that's a $10 billion company. Some of the brands that it has, Challenger, Fendt, Massey, Ferguson, Vale, Terra. 

Bryce: [00:07:21] Less familiar with those.

Alec: [00:07:23] Yeah, well, it's a smaller company, so but I think that if is a big three in the space, $133 billion market cap, $23 billion market cap, $10 billion market cap. Deere is the £800 gorilla in the space. 

Bryce: [00:07:37] Absolutely. 

Alec: [00:07:37] But that's that's not really surprising to anyone. I feel like most people know that the. 

Bryce: [00:07:42] Business model for has been interesting. You mentioned at the start there and they are now trying to position themselves or definitely moving more into this the space of software and and software as a service. But up until that point, say before the past five years, you'd be looking at it at it as a hardware play, an industrial type company that just sells products through networks. 

Alec: [00:08:07] Yeah. And you would have looked at how many tractors and combine harvesters and everything it could sell. There would have been a little bit of recurring revenue from repairs and from the dealers. But really this was a business selling hardware and you would have looked at where's its sustainable competitive advantage or its moat and you would have said in its dealer network and you would have said it's I think it's got more than 2000 dealers in the U.S. I think it's come on, 5000 worldwide. And that was what Deere hung its hat on. Wherever you were. 

Bryce: [00:08:40] There's a. 

Alec: [00:08:40] Deer mainly in the States, wherever you are in the States, there was a dealer near you. It was really competitive to become a deal, a dealer dealer to become part of that network. And so you could charge a premium for it. People wanted to tractors because they knew they were the best. They knew they wouldn't break down. And so you had this brand moat, you had good dealers and you would sell. And we've got a clip from the CEO nine years ago, Sam Allen, and that's what he thought the competitive advantage was. 

Audio Clip: [00:09:08] I'd like to say part of it is our 176 year history. And some people would also say that can be an Achilles heel. But I do think our values keep us well grounded. Clearly, one of our competitive advantages is our great dealer network. And we're really good at developing dealers and strong dealers, and it's a source of sustainable competitive advantage. We do a really good job focussing on productivity, uptime and load of low total cost of ownership. That's our value proposition to the customer and we try not to deviate from that. 

Alec: [00:09:43] And so Bryce five years ago, if we were looking at this company, we would have looked at it as an industrial and we would have looked at it like a Boeing or a Caterpillar or, I don't know, like a Ford. We would have said how many big hunks of steel with paint on it can it? 

Bryce: [00:09:58] So this is true, but Ren 2000. The reason we're saying five years ago, because 2017 was an inflexion point for Deere where they really started to ramp up their tech stack with the acquisition of a company called Blue River Technology. Now, Blue River, we're a leader in applying machine learning to agriculture. Now, why is this?

Alec: [00:10:21] Because Ally is going to hate the world. 

Bryce: [00:10:22] That's it.

Speaker 1: [00:10:23] No Blue. 

Alec: [00:10:24] River. We're really leaders in computer vision, which is the eyes of machine learning. So if you think about AI and machine learning as the brain, what we need to do to really enable machines like farm equipment is give them sensors, give them eyes, give them smell. Probably not smell. 

Bryce: [00:10:44] Touch and feel. 

Alec: [00:10:45] Yeah. You know, we're pretty good at making machines move. We've really nailed wheels. Yeah, Boston Dynamics really. Boston Dynamics are pioneering legs, and some of the things they are doing with robots is pretty cool. But giving machines eyes is really important when we're talking about this. And, you know, the classic example here is if you want to have an artificial intelligence sprayer and you only want it to spray pesticide when a plant actually needs it, you need to give the machine some way to know if they need to spray, if there's a way they're spraying. And this is where computer vision comes into play. And Blue River were real leaders in this space. Do you have acquired them? And we'll talk about some of the products that we've seen rolled out in the past few years. But Deere started to think about themselves as a technology company a little bit before this. And you can say that's an idea. We're on the forefront of some pretty basic technology in hindsight, but back in the day, so like I've never driven a tractor before, but apparently it's incredibly hard to drive a truck to straight in an open field, which makes sense. Yeah. And so, you know, they were on the forefront of basic guidance technology and stuff like that in like the late nineties, early 2000, and they really built out their tech stack from there and we'll get into that. But with Blue River Technologies acquisition in 2017 and some of the developments in the year since, Deere have really tried to reposition themselves as a technology company. The way they talk is as a technology company, they launched this smart industrial strategy in 2020, and now they're really trying to build out their software subscription revenue. And so the way we have to analyse them sort of changes a little bit. 

Bryce: [00:12:36] So the Smart Industrial Strategy in 2020 came through and then in 2021 they made another acquisition in Bear Flag Robotics, which was a self-driving tractor Start-Up for $250 million. And subsequently, that has led to this year the introduction of a self-driving tractor at the annual Consumer Electronics Show. Yeah, so you go consumer electronics. John Deere is showing up. 

Alec: [00:13:02] In consumer electronics in Las Vegas. This is where the show is. And there is nowhere more appropriate to launch a tractor than in the middle of the Las Vegas strip. 

Bryce: [00:13:13] It's fascinating. 

Alec: [00:13:14] But I think I think it's I mean, that was definitely a PR move. I think the day that they launched the self-driving tractor at the Consumer Electronics Show, their share price is up 6% on the day when the S&P 500 and say and industrial were flat. So, you know, this was their play to get in front of people like you and I, city boy.

Bryce: [00:13:38] Yeah, well, it works. It works. We did an episode unpacking it on the dive, our business news podcast. So if you're looking for more information on the autonomous tractor, go and check that out. But Randy's been discussing the tech stack and it comes in sort of five components and has really been building since sort of early 2000. The first component was they're sort of hardware and software element. You know, you're talking integrated displays into tractors and just sort of basic display mechanics, then guidance. You've spoken about helping tractors stay on track, I guess auto path, helping them turn automatically. Then there's the connectivity and digital solutions part of their tech stack that's allowing farmers to open gates, turn on water supplies, you name it, with their phones. 

Alec: [00:14:26] Yeah. And really to track a lot of things, this is like farm management systems. Yeah. 

Bryce: [00:14:31] So water levels in dams or whatever it might be. Yeah, like moisture in soils, all those sorts of things. Then there's the automation in Machine IQ, which was the acquisition we spoke about in 2017. That's say in Spray, which which Ren spoke about there. And then now they're really building out fully autonomous tech stocks. So what this really is leading to is an a fully autonomous, efficient farming landscape. Yeah.

Alec: [00:15:00] And I think it's important to think about because it's not like technology. I think it's important to put all of those technological developments on a broader timeline because the story of farming since Deere was first created in the 1800s, it's integrating technology to become more. Efficient and, you know, like from mechanical tractors to autonomous vehicles, like it is just one long continuum and it's all about becoming more resource efficient and being able to farm larger areas. And it's a long and continuous story which just happens to be at the forefront of and have been at the forefront of it for the last hundred and 50 years. And so we get really excited about the end goal of imagine an autonomous farm and what that would look like, but that might be decades away. But there's still heaps of really interesting stuff happening now beyond the splashy, fully autonomous tractor that they launch at a Consumer Electronics Show. One recent one that did have launch that I think gives people an insight into what integrating this technology into the hardware looks like today is, say, in spray. So this is traditionally you would get a sprayer, you would drive it through a field and you would spray pesticide on all crops because you had no way to figure out what crops needed it, what didn't. So the most efficient way to do it was just to spray everything but deer have been developing, say, in spray technology and really integrating Blue River technologies, computer vision. So you can enable the machine to look at a crop as it's driving through a field, recognise if it needs to be sprayed with pesticide and then only spray those crops that need it. 

Bryce: [00:16:46] Think about the speed it must need to do that. Phenomenal. 

Alec: [00:16:51] So Deere launched maybe a couple of years ago now say in spray select which was grain on brown so it could it was colour detecting technology and it could recognise grain weeds on brown fields so fallow ground where nothing's planted. When you're when you're preparing a field to plant, you could drive a sprayer through with this technology. It could say weight and it would spray, but it wouldn't spray the whole field so that you're using less pesticide than you would otherwise, which is saving you money and hopefully increasing efficiency as well, getting the same result. That's great. But then they've launched say in Spray Ultimate, I think late last year, earlier this year, which has grain on grain. So now the technology can actually detect the difference between a weed and a crop. And so it's been used on corn, soybean, cotton and the company report it's reduced herbicide use by up to 80%. It can recognise the difference. Wow, that's pretty cool. 

Bryce: [00:18:00] Wow, that is amazing. 

Alec: [00:18:01] And so then they talk about how they do it. So across the boom, which is big arms of a sprayer, I guess you call it there, multiple cameras using this computer vision technology that's plugged in with their machine learning software to recognise plants and to distinguish wades from crops, and then they automatically activate the sprayer nozzles all within 200 milliseconds. There are 36 cameras mounted across this burn, so they're covering more than 195 square metres at once. And then all that data is also being fed back into the farm management system. The John Deere Operations Centre is what they call it. That data is building like a weed map. Yeah. And shows you wade density and allows you to then analyse and make decisions based on that as well. 

Bryce: [00:18:46] Amazing. It's pretty cool. It is amazing. 

Alec: [00:18:49] To buy it at this is talking far. 

Bryce: [00:18:51] Less expensive but Wren Deere aren't the only ones doing this. Some of their major competitors are playing catch up in the in the tech space. AGCO In September 2021, acquired from Addicks, they're a farm robotics and automation company with precision livestock farming aspects to the business. But in 2021, precision planting. Interestingly, a company that AGCO acquired at the same time that Deere acquired Blue River in 2017, they announced an agreement to acquire creative sites Media, which is a software and app development company. I'm imagining to start combining all these areas of the business together and then Case New Holland also in 2021, acquired Raven to improve their autonomous and precision agricultural capabilities. So it's all happening. Yeah, it is all happening.

Alec: [00:19:42] So Bryce, let's take a break and then let's get to the key numbers and then we'll play the expert and we'll talk about Apple case, the bear case and what the future holds. 

Bryce: [00:19:50] Love it. Well, the new deer is listed on the New York Stock Exchange. The ticker is day A and you can access the US stock market, plus the Australian and New Zealand markets on the Sharesies platform with no investment minimum, you can use promo code GROW when you sign up to the Sharesies platform for $10 in your account ready to invest. We don't have any kickbacks from that. It is publicly available for anyone to use. This is not product advice and investing comes with risk promotion, tease and say supply. But we will take a quick break and we'll be right back. All right, Ren. So let's have a look at the numbers. Market cap of $133 billion, up 29% year to date. Incredible outperformance. S&P 500 is down 20% year to date. This is an amazing story. But not only that, it is up almost 200% over the past five years. 

Alec: [00:20:42] Yeah. So if we turn to its revenue, $48 billion in revenue. Five years ago that was $26 billion. So it's up about 85% in the past five years, which is really impressive if we turn to its profit, $7 billion in profit five years ago, $2.2 billion in profit. So up about 223% in the past five years. Now, if we just pause there for a moment, five years ago, it made $26 billion in revenue and made $2.2 billion in profit off that. This is about, what, bit on a 10% profit margin? Yeah. Now, five years later, $48 billion in revenue, $7.1 billion in profit. So that's about a 15% profit margin. Yeah. So it's a growing it's revenue and improving its profit margin at the same time. 

Bryce: [00:21:31] You'll love to see that. 

Alec: [00:21:32] So we're seeing some good signs from this business and. 

Bryce: [00:21:34] As a result, the share price is booming. So we're going to play experts. I'll sit on the Equity Mates side. You'll sit on the expert side. And we're going to have a look at key metrics. We're going to have a look at bull case, bear case, and then what the future looks like for autonomous farming and Deere. So as always, we got to start with key metrics where we are right now.

Alec: [00:21:57] That we're talking about as a software business. We're not looking at things like machines sold or dealership numbers, although those are important. The two most important metrics when you're looking at the new and improved technology enabled Deere are connected machines and engaged acres. 

Bryce: [00:22:17] So connected machines, I assume, is how many machines actually are now getting the tech connected, correct. 

Alec: [00:22:24] Yeah. Yeah. So it's all about in the same way that Apple cares about how many iPhones are in the field because they can sell us shit like. Like cloud subscriptions. Yeah. Do you care about how many tractors are out there hooked up to their technology because they can sell auto parts and science, right? Well, and then how many suppliers are out there so they can sell sales price? Yeah. So yeah, they're currently at 440,000 connected machines by 2026. So not too far away, four years, three, three years. Now they want to be at 1.5 million connected. 

Bryce: [00:22:58] So they want to be putting on an extra million. In the next four years. 

Alec: [00:23:03] Three years. 

Bryce: [00:23:04] Three Years. 

Alec: [00:23:04] That's number one connected machines. And really that is because if they're a connected machine, they're a vehicle to sell an ongoing subscription to. Yeah that's one number two is engaged acres and that is how many fields are hooked up to the it's called John Deere Operation Centre but it's like their farm management system have sensors. They're tracking and collecting data. They're currently at 315 million engaged acres and they want to get to 500 million by 2026. 

Bryce: [00:23:36] Would we be assuming that of their three segments, construction and forestry, small ag and then big ag, let's just call it that, yeah. The Big AG, was it 40% of sales or whatever it was? You would imagine that this starts to become more and more of a penetrating in terms of group sales like it's the it feels like a lot of the technology here is really leaning into that, the production and precision of farm tech. 

Alec: [00:24:01] Yeah. So it's definitely the fastest growing segment in Q4 that grew at 59% revenue growth, 59% in production and precision ag, big AG, as we're calling it, small ag and turf growth, 26%, construction and forestry growth 20%. And then financial services grow at 2%. Yeah, so that's definitely the fastest growing division. It's the main one we've analysed. I think if you know, if we're having a conversation about construction equipment, we would be talking about a whole different competitive set when you're talking about Caterpillar coming out. So and Deere being, I would say smaller forestry. I think they do okay in small ag and turf. They're strong. I think a lot of the technology that would trickle down. 

Bryce: [00:24:44] Where I was going with that is probably in the next question is that that part of the business would really form the bull case for this company, I would imagine. 

Alec: [00:24:54] Given that I'm playing the expert. Yes. But like you might you might get another expert who says that technology is going to disrupt Caterpillar, going to become number one in construction as well as farming. Like there's plenty of ways to make a bull case. 

Bryce: [00:25:10] So the any other metrics that you'd keep an eye on, we've got connected machines and engaged acres. 

Alec: [00:25:15] I just want it. So just for context, so engaged acres currently 350. 10 million. From what I could find the next biggest in terms of farm management systems. There's a company, climate field view. Field view is the software. They've got 200 million acres. I think they're about second. So in terms of the amount of machines, the number one, in terms of the amount of acres, in terms of the amount of fields, the the tracking, the number one. So I've got a real head start in this space now, and they don't really split it out in an helpful way in their financials. But if you wanted to then look at what matters. It's what's their revenue per connected machine, what's their revenue per engaged iCar. How does that change over time? You know, are they cross-selling? Are they is the average revenue per user increasing? But I couldn't find that number, those numbers when I was looking. 

Bryce: [00:26:09] And so do they have subscription at the moment? Yeah. Yeah, right. So it's not just a one hit you buy, say, in spray and the tech is there and then an upgrade comes. But your. So there's elements of you have to subscribe month on month to get access to this software. Yeah. 

Alec: [00:26:26] Yeah. So let's, let's move to the bull case because I've got some alerts on it that. 

Bryce: [00:26:30] Yeah, all right. What is the bookcase? That's. 

Alec: [00:26:34] It's much of what you said. It's an ecosystem play and the operating leverage that comes from a software business. So, so let's start with the ecosystem side of it and then get to the subscriptions spreaders for fertilisers, tractors to plant, sprayers to spray your crops, harvesters to actually harvest the fully grown crops, all different pieces of machinery. And in theory, you could have all bought them from different companies. You could have out of New Holland Harvester and Deere Tractor. And as long as you knew how to use both of them, in theory, you're all good. Yeah, but more and more, as software becomes important, as farm management systems become important, as platforms to aggregate data become important, you're not going to want to have different equipment because you're going to want all that data feeding into one system and you're going to want one set of software to be able to control it all. So in the same way that we've seen Apple's ecosystem become a real moat for them, we're going to see the same in other forms of equipment and in this case, in agricultural equipment. And so Deere, with the leadership position, with the head start in software, they have a chance to really lock people into the ecosystem and then they can build switching costs because then all of a sudden you're not just going from a deer tractor to a new horned tractor, you're going from a tire operating system to a new Holland operating system. You've got to replace all your equipment, but importantly, you probably lose a lot of historic data as well. And so you can build incredibly high switching costs if you can lock people into a hardware and software ecosystem compared to just selling them hardware. So that's number. 

Bryce: [00:28:25] One. Nice. So we know what happened to the Apple share price once investors got a whiff of increasing revenue coming from subscription so to John Deere have targets for subscription revenue. 

Alec: [00:28:42] Well this comes number two. So if you lock people into the ecosystem, then you can sell them services, subscriptions and importantly, then you can cross-sell them more and more as well. And so did you ask, do they have a target? They do have a target. They're aiming for 10% of their sales, their revenue to come from recurring services revenue, subscription revenue, rather than hardware sales by 2030. So 10%. So the. It's not a big part of their business now. Yeah, 48 billion in revenue. So if they're aiming for 10%, you know, hopefully that revenue number grows. But they're thinking like between, what, five and $6 billion in subscription revenue by 2030. 

Bryce: [00:29:23] Still a lot of tractors.

Alec: [00:29:25] Yes. So but I guess they're also still very reliant on hardware sales by 2030. So if you're building a model of this business, you're relying on them to keep selling, to keep selling hardware in the same way you're relying on Apple to keep selling iPhones.

Bryce: [00:29:40] So 10%, it feels moderate. To be honest, I don't know it either. You know, if I shoot that over, shoot that, then investors are going to love it. Where does that sit relative to, you know, Apple, who's probably a bit further down the track in terms of their percentage of revenue coming from this subscription model. 

Alec: [00:30:01] So in 2021, Apple had 22% of their revenue from services. So from Apple TV, Apple Music, Apple Arcade, all of those monthly subscriptions, iCloud, all of that. Now, the estimates are that gross margin in their services business is between 65 and 70%. Wow. And you compare that to Deere's gross margins of, I think about 20% in 2022. The operating leverage that you can build in your business is pretty high. And what we mean by that is operating leverage. The higher operating leverage, the more of each incremental dollar you make flows directly down to the profit line. So it doesn't get eaten up in cost of doing business or anything else. And so for a company like Apple, you sell the phone once, but then for each incremental subscription you can sell, you have really high operating leverage there because there's not heaps more costs for Apple to add another Apple TV subscriber. So that revenue that they get from when price signs up goes straight to their profit line because they've already made the content, they've already built the system and they just wanna get more subscribers. In theory, that's what does as well. They sell the truck too, once they've built a whole bunch of different software to sell, and then each additional piece of software they sell flows almost directly down to their profit line. So that's operating. 

Bryce: [00:31:24] So their margins aren't quite reflective at the moment of a tech company? 

Alec: [00:31:28] No, their margins are right in the world of large scale industrials, yet net so not gross margins, they're about 15%. We were saying earlier, Ford is about 15, so 14%, Caterpillar, about 12 and a half percent. So they're right in that ballpark. Yeah, I tried to pull Boeing as well, but Boeing made a loss last year, so Arrow.

Bryce: [00:31:53] So the bull case revolves around its ecosystem, you know, building that operating leverage and increasing recurring services revenue sort of through to 2030. 

Alec: [00:32:07] Just to put a bow on bolt before we got to bear. I think what you'd be looking at is those key metrics, connected machines, engaged acres as those increase, what that is doing to incremental revenue and trying to figure out a revenue per additional icon revenue per additional machine until they actually report on some of that stuff, you'll have to do the work yourself and then looking at profit per incremental acre, profit per incremental machine. And then you can start to look at the difference between the two and start to figure out, well, what's the operating leverage here? And, you know, for the last five years, profit has grown meaningfully faster than revenue. The bull case would hinge on that trend continuing.

Bryce: [00:32:52] Well, that's the ball. Now, we've got to turn to the bear case because, well, always important to think about the bear case, and this one revolves around competition. 

Alec: [00:33:04] I think the innovator's dilemma is the basis for the bear case here. So you're familiar with it now. So it is a pretty groundbreaking book, but it spoke about why large companies that invest huge sums of money in research and development often still get disrupted by new players and, you know, companies that try and stay on the forefront of technology, but they still are unable to innovate and keep up with the market. And they get disrupted. And time and time again in industry after industry, we see that that big established players invest billions of dollars in R&D and they still get disrupted. Yeah, right. And so the question is why? And there's a number of reasons, and it's a good book. But for the purposes of this story, with DIA and the Bear case, it's often because they're really set in their ways. And it's really hard. Even if you're investing and researching new technology, it's really hard to turn a company and focus it on the new thing. And like the most recent example of that would be electric vehicles and how hard it has been for. Established car companies to make that switch, because in reality, there's so much working capital, so much knowledge and expertise, so much experience tied up in the old way of doing things. You could say the same for dealers, like they are trying to integrate technology into the existing way of doing things. They're not trying to radically change the way farming is done. They're just trying to take the farmer out of the seat of the tractor or out of the sight of the combine harvester and replace it with a computer. The the question is, is there a better way to do these things? And if there is, will it be Deere that comes up with it? Yeah. Is there a different way to integrate technology into farms? Is there a better way to farm outside of just replacing a farmer with a computer? And if the answer to that question is yes, the bear case would hinge on Deere not being the one to come up with it, because sure, they might be trying to get 10% of their revenue by 2030 from services, but 90% is still selling big hunks of steel. So that's number one. Like, for example, we spoke about Sainsbury earlier. There are nine other companies, the from Research Report. We could find nine other companies in the smart spraying space with several of them commercialising products that have computer vision and can do this grain on grain spraying where they can set up where they have the artificial intelligence to separate crop from weighed and only spray weights. So it's not an idea is out here alone in doing this there are plenty of other companies in the space so that for the first part of the bear case. Yeah, you're right. Competition and the Innovator's Dilemma. 

Bryce: [00:35:53] And then the second part, Ren could revolve around what is known as the right to repair move. 

Alec: [00:35:59] Yes. Yeah. Have you? Yes. So this isn't unique to India, like. 

Bryce: [00:36:07] Right in the thick of it. 

Alec: [00:36:07] Right in the thick of the, quote unquote, free the tractor movement. Yeah. So basically, as more and more companies integrate software into their hardware based washing machines with Internet of Things, connected devices, Apple with the walled garden ecosystem, or Deere with the Internet of tractors, connected devices. These companies are really protective over their software, and they don't want people to be able to access it and use it. And they also don't want people to be able to repair their hardware. You know, like as soon as you break your iPhone screen, you take it to the repair in the shops, you void the warranty. Yeah. Yeah. So the right to repair basically says this is unfair. The technology companies are doing this and we should have once we pay for a product, we should have the ability to change it, to repair it without having to pay exorbitant amounts of going to an apple shop or a dealer. Authorised dealer at a hacker convention earlier this year, Deere's smart tractor software was jailbroken. It was like a big demonstration of it can be done and there are right to repair laws coming. So in the EU, I think they were first announced in 2020. In the UK, I think there was something similar introduced in 2021. There is a movement not specific to agriculture but generally around the right to repair. The question when we're thinking about this is an investment is if Deere is pinning its hopes to expensive software subscriptions, locking people into the ecosystem, making them use Deere authorised dealers to get repairs, is that model going to be disrupted by new laws that say you can go to any farm supply dealer to get repairs or you can sideload third party software and use other farm management systems rather than John Deere's Operations Centre. You cannot can you upload that data somewhere else and use someone else's software? Like those are the questions that will get asked if this movement picks up. Yeah, because then it might be well they have great tractors, but their software is second rate and a pure play software company might come into the space and integrate. So I guess that's the question. It's probably it probably wouldn't make it a core part of your bear case. Now, it would be the watch out because, like, you'd have to adjust your assumptions. Yeah, yeah. 

Bryce: [00:38:36] Nice. So bull case. Bear case. This is an exciting one to think about from the point of view of where does it look and where does it land in ten years time? If it does hit, it's engaged acres, if it's connected equipment, if it gets that recurring services revenue, what is Deere in ten years? 

Alec: [00:38:55] Yeah, look, we're only playing experts, so I'm not going to say that I've done the financial modelling. I would say bigger. Yes, but I think in terms of the way to talk about what farming could look like in ten years. They think that most straight line crops in America will be farmed autonomously in the next ten years. And so, you know, that's rows of soybeans, rows of corn being formed by their machinery, by farmers that spend more time sitting in front of a computer than later sitting on a tractor and that are all paying the monthly recurring revenue for that. They also see a lot of opportunity to extend into other verticals. And one that you write a lot about these days is there are a whole bunch of agronomy businesses that essentially give consulting services to farmers and, you know, they test soil and they make recommendations about what you should do to certain fields to make sure that there's enough nutrients in the soil, all of that stuff, what should be planted where and Deere think that they can really crack into that space with all the data that they're collecting. They can start making those recommendations. It's not just about having software in their machines for farmers, but it's then about like, how else can they extend into other parts of the farming economy and how else can they provide value to farmers with this just massive amount of data that they're collecting on those farms? Yeah. 

Bryce: [00:40:30] Fascinating business, though. The autonomous tractors don't come cheap. I think the latest figure was half a million dollars for the one that was released at the. 

Alec: [00:40:40] It's a business expense. 

Bryce: [00:40:42] Business expense, but love it. Ren, thank you for playing expert emphasis on clang. Yes, it was. It is a fascinating company, one that we've had on the radar for a while. We have unpacked it on the drive at business news show. So gone. Check that. 

Alec: [00:40:58] Out. And if we should say if someone thinks they could have played expert better than us. Yeah, we try to find an expert in Australia or anyone overseas who would talk to us to be an expert here. It doesn't feel like many Australian investors are interested in this company. 

Bryce: [00:41:14] It was hard to find. So we would love to hear from an expert to talk about this maybe in the new year as well. 

Alec: [00:41:19] So I'd also love to do a deep dive on some of these other industrials, like Caterpillar is one that I find like a fascinating company. It's like these industrial players that have such a stranglehold on the industry. Yeah, yeah. They have so much market. Yeah, so much market share and huge industry. That is fascinating. 

Bryce: [00:41:36] Yeah. Well, we'll leave that for some series 2023 to 4, potentially 2024. But that brings us to the end of our episode. Thank you to Sharesies for supporting Equity Mates Summer Series 2023. If you'd like more information, head to sharesies.com.au or download the Sharesies app. If you want to sign up to the Sharesies platform you can use the code GROW. We don't get any commission from that. It is publicly available but you do get $10 into your account ready to invest T&Cs apply. But then we'll leave it there and we'll be picking it up next episode. 

Alec: [00:42:12] Sounds good.