Trimble Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 12 speakers on the call.

Operator

Welcome to the Trimble First Quarter 2023 Results Conference. All lines have been placed on mute to prevent any background noise. I'd now like to welcome Rob Painter, Chief Executive Officer to begin the conference. Rob, over to you.

Speaker 1

On our website and we ask that you refer to the Safe Harbor at the back. Recurring revenue is our key top line metric at Trimble. Our team led by our Construction Software Group achieved 13% organic growth in the quarter, 100 basis points ahead of our expectations. We now stand at $1,650,000,000 of ARR and under $700,000,000 at the beginning of 2017. Kudos to the Trimble team who have worked so hard to execute on our transformation.

Speaker 1

EBITDA is our other key P and L metric and we delivered EBITDA of 27.2%, also slightly ahead of our expectations, which was driven by record gross margins of 64.2%. For perspective, gross margins in 2019 were 57.7% 56.3% in 2016. Free cash flow I recognize that consensus numbers and the trading algorithms both still focus on total revenue and EPS. While these figures are important, They are secondary in relevance to ARR and cash flow, which are much more closely tied to fundamental value creation. Revenue and margins were both above expectations we set with the investor community back in February.

Speaker 1

We believe the delta to consensus figures was simply a function of the challenge in getting our quarters mapped correctly against our annual guidance. As a result, we will be more prescriptive with our 2nd quarter commentary. With respect to the macro, like most companies, we're trying to find the signal through the noise. Despite the noise, what we sell to customers is quality, safety, transparency and environmental sustainability. The mid to long term secular tailwinds remains that are underserved and underpenetrated they will continue to digitally transform.

Speaker 1

Our strategy compels us to be mindful of our cost structure in the short term, while continuing to invest in our most attractive long term With respect to capital allocation, there is in the Q1, bringing the total to 16 since 2020. 2nd, our recent B2W and Rivett deals are both off to a strong start and performing ahead of expectations. 3rd, the investment we are making in our business transformation has initially been of ARR growing double digit in this climate as a proof point of high quality capital allocation. We are transforming our go to market motions to deliver bundled and connected solutions while building the systems and processes to efficiently and effectively scale our business. At the company level, we think about our rule of 40 as the sum of ARR growth and EBITDA margin, which represents our aspirational bar.

Speaker 1

Many of our software businesses have already cleared this hurdle, while others are steering this direction. Looking at our hardware businesses, This is where we have felt the whipsaw of supply chain availability and channel inventory stabilization, which continues to make quarterly comparisons of our numbers incomplete at best. To find the signal, you have to look at a multiyear view. Our largest hardware businesses in agriculture, civil construction and geospatial Collectively grew revenues at a mid single digit rate from the Q1 of 2019 through the Q1 of 2023. In the Q1, channel inventories continued to draw down, thus retail demand significantly exceeded wholesale demand.

Speaker 1

Moving to Slide 3, let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with Buildings and Infrastructure. Market backdrop generally remains healthy. In North America, we see strength in infrastructure and non residential construction such as data centers, renewable energy. Customer backlogs remain healthy and technology helps to address the skilled worker shortage. By the numbers, ACV bookings grew double digits in the quarter and ahead plan, while ARR grew in excess of the company growth rate.

Speaker 1

Our Trimble Construction 1 commercial offering is helping to grow new logo and cross sell bookings In our next with the lens of strategic progression, customer wins at England's National Highway integrated Trimble offerings. At ConExpo, our technology was present on 20 OEM booths, demonstrating the continued relative to our team excavator guidance and site serving demonstrates that we can continue to expand the size of the addressable market by virtue of reaching new machine categories. In Geospatial, the market backdental exposure, which presents a headwind. Managing channel inventory levels is a priority in this segment. By the numbers, revenue was ahead of our internal expectations in the quarter.

Speaker 1

Strategically speaking, we continue to see strong demand from U. S. State department solid growth. In resources and utilities, while commodity prices remain high by historical standards and input costs are moderating. Strategically speaking, we are on the path towards building out our aftermarket distribution in agriculture.

Speaker 1

We believe in giving farmers a choice in their technology platforms, and we believe in the power of independent technology dealers where we have the direct relationship. Well, there's a lot of we know how to build and manage a channel. I reference our SciTech model in civil construction and a similar initiative in our geospatial channel as case studies and excellence of channel development. In the quarter, we also announced advanced path planning technology, which takes us a step further on the path towards fully autonomous equipment for a variety of industries. In our positioning services business, we announced that Nissan has gone live with their most advanced driver assist system to date, which is enabled by Trimble positioning.

Speaker 1

We're taking a core Trimble technology applying it across new and existing verticals. By the numbers, we were largely unplanned this quarter. In transportation, the market backdrop is very dynamic with a softening freight market pressuring carriers to find new frontiers of efficiency, which technology can help address. By the numbers, we met our expectations in the quarter and we have delivered 5 sequential quarterly increases and operating income as a percent of revenue. Strategically speaking, we are making progress with our new NCAB technology platform, which delivers the open platform that our customers have been asking for.

Speaker 1

We launched new functionality in the quarter, including the 1st industry dwell time metrics for fleet management, which provides customers with additional metrics they can use to improve their operational efficiency. The biggest news for us in transportation was the closing of the Trans Orion deal on April 3. I've described this business as a perfect example of a platform play within our strategy. The Y comes in the form of a network of over 158,000 carriers and over 1400 shippers transacting approximately 55 Over 110,000 transports and over 100,000 dock scheduling appointments are managed on the Transporion platform. Slide 4 provides a summary overview of how we see the complementary aspects coming together to create a stronger franchise in the form of complementary capabilities, customers and geographic reach.

Speaker 1

The business model of Transporion is fundamentally based on an array of transaction fees. Since we announced the deal in December, demand in Europe has slowed And the mix has shifted towards a greater percentage of contract over spot transactions, which are monetized at a lower rate. Our guidance reflects what we believe is a derisked 2023 level of dollar denominated revenue, approximately 10% of total revenue. Also positive signals. Bookings are still expected to grow well over 30 Existent and our tax rate assumption improved and cross selling opportunities with Trimble are looking stronger than they did just a few months to go.

Speaker 1

Let me now turn the call over to David to take us through the numbers.

Speaker 2

Thank you, Rob. I'll start on Slide 5. We'll continue to see some of the key innovations coming into the quarter. I'll remind you that revenues were exceptionally strong early last year as we recovered from our supply chain challenges and work to bring down backlog. So our comps this quarter were differently attributable to reductions in dealer inventories.

Speaker 2

Gross margins were exceptionally strong in the quarter. As Rob mentioned, our 64.2% gross margins are a record in the history of Trimble, reflecting both an accelerated mix higher margin software and lower input costs for our hardware products. Gross margins in the Q1 benefited from a high level of term license renewals in high level in the coming quarters. While we continued to spend in the quarter against our strategic initiatives, Our strong performance on the gross margin line led to higher EBITDA and operating margins, up 170 and 120 basis points respectively, even in a tough environment and as we invest in our business. Cash flow in the quarter improved significantly year on year with both cash flow from operations and free cash flow in excess of non GAAP net income.

Speaker 2

Our improved cash generation reflects a reduction in cash out for hardware component purchases, we repurchased any shares in the quarter and we'll continue the suspension of share repurchases until we have paid down a meaningful portion of the debt raised to fund the Transporium acquisition. Turning now to Slide 6 for some perspective on the underlying drivers of our revenue trends. We'll take a break out on our financial statements. Going forward, our revenue will be broken out in 2 components. The first category is products, while the second category is subscriptions and services.

Speaker 2

Product revenue consists of hardware offerings and are non predominantly recurring. In presenting our revenue in this way, we are recurring and non recurring revenues. We think this new presentation is better aligned with our strategy going forward. 15% organically in the 1st quarter. The decline in product revenue this quarter reflects a tough comparison with the Q1 of 2022 when our supply chain was freeing up and we were working through extraordinarily high backlog.

Speaker 2

Our dealers reduced their inventory reductions accounted for roughly $40,000,000 or nearly half revenue was up 14% on an organic basis. To put our Q1 revenue performance into a longitudinal perspective, 2019 before the impacts of In this view, total revenue compounded at a 5% rate in the Q1 of 2023 versus 2019. From a geographic perspective, revenue was down 9% organically in Europe. Nearly half of the Europe revenue decline can be attributed to our decision to exit our Russia business. In North America and Asia Pacific, our revenues in the quarter were essentially flat, while revenue in the rest of the world grew 6%, driven by strong demand from agriculture customers in Latin America.

Speaker 2

Turning now to Slide 7. We ended the Q1 with ARR at $1,650,000,000 up 13% organically. Backlog of $1,600,000,000 was up slightly versus the prior quarter and down from $1,700,000,000 a year ago. Hardware and perpetual software related backlog was down $200,000,000 year over year driven by our dramatically improved lead times. Recurring related backlog was due to our growing bookings of recurring solutions.

Speaker 2

On a 12 month rolling basis, our software services and recurring revenue of $2,200,000,000 represents 62 percent of our revenue, up 700 basis points from year ago levels. As we neared the completion of the Transporion acquisition, we did so from a strong balance sheet position with net debt at approximately 1.1 times EBITDA. Turning now to results by segment on Slide 8. Our software portfolio in Buildings and Infrastructure had a strong quarter with ARR up organically by approximately 20%. Segment revenue to our civil construction customers, which are predominantly made up of hardware, We're down year on year in the quarter as expected as our dealers work down their inventories.

Speaker 2

Excluding the impact of dealer inventory changes, We estimate that our retail is low digit rate reflecting a favorable environment for infrastructure investment. In total, Buildings and Infrastructure saw 5% organic revenue growth with operating margins over 28%. Transportation segment revenues grew year on year organically in the quarter, while operating margins exceeded 15%. Importantly, ARR grew at a mid single digit rate in the quarter for this segment. The turnaround of our transportation business is underway and we are encouraged by the continuous improvement in ARR growth, revenue growth and operating margins.

Speaker 2

In the Resources and Utilities segment, revenue was down organically as expected. Trends were impacted significantly by tough comps with prior year. In the Q1 of 2022, our new revenues grew 16% organically as our supply chain freed up and we work to bring down backlog. On a 4 year basis, 1st quarter revenues were up at a compound annual growth rate of just over 6%. Segment margins were extremely strong in the quarter, reflecting lower input cost and the benefit of higher price realization.

Speaker 2

In the Geospatial segment, which is also heavily dependent on hardware, We saw revenue down 16% on an organic basis in the quarter, but modestly better than our forecast. More than half of the year on year organic revenue decline for the relates to dealer inventory dynamics as dealers reduce their overall inventory levels this year. Geospatial revenues grew organically by over 16 in the Q1 of last year as we brought down backlog, which has impacted many of our survey customers. I'll now turn to guidance on Slide 9, where we have a number of moving pieces. We are updating our annual guidance to bridge the addition of Transporium for the remainder of the year.

Speaker 2

We are also being more prescriptive with our view in the Q2 with the addition of Transporion. Let's start with the annual outlook pre Transporion We are confirming our baseline guidance view for the business, including our outlook for mid teens organic ARR growth and full year organic revenue growth of 2% to 5%. Incorporating Transporion, we expect the addition of approximately $135,000,000 in revenues over the balance of the end of the year. As such, we now expect full year revenue to be in the range of $3,835,000,000 to 3,935,000,000 We project that our ARR including Transporium will be approximately $2,000,000,000 at the end of 2023, one hundred basis points for the year versus 2022 coming down sequentially in the second quarter and then progressing up again in the second half of the 3% to 24%. Our guidance now favorable outlook on our tax rate from the Transporium acquisition.

Speaker 2

Our updated outlook for earnings per share is in the range of $2.52 to $2.72 reflecting a mid single digit percentage dilution from Transporium and related interest expense, which is in line with what we indicated in December. We continue to expect that Transporion will be roughly neutral to 2024 EPS and accretive thereafter. We affirm our free cash flow projection for the year of approximately one times non GAAP net income, reflecting in part our plan to reduce inventory levels. Shortly after the close of the Transporium acquisition, our pro form a net leverage stood at approximately 3.25 times with approximately $3,100,000,000 in net debt. The debt we raised in connection with our Transporion acquisition carries an interest rate of approximately 6.3%, in line with our expectations at the time the deal was announced.

Speaker 2

Given our current cash flow projections, we expect to end 2023 with leverage under 3 times. We said in our announcement of the Transporion acquisition that we expected to restore Levor Munce following the acquisition. Our updated projections suggest that we will be able to delever to our 2.5 times goal sooner than that original timeline. Turning to revenue growth with revenue between $962,000,000 $992,000,000 and EPS in the range of $0.55 to $0.61 We expect the impact of additional dealer inventory reductions in the second quarter will be about half the rate of the Q1 with stocking levels at or near normal levels by the end of June. We expect that our gross margin percentage will be lower and a higher share of Operating margins will also be down sequentially to approximately 22%, reflecting both lower gross margins and higher operating from annual salary increases.

Speaker 2

Looking at the back half of the year, we expect higher rates of ARR and revenue growth. We expect revenue to increase sequentially from the Q2 through the Q4. We project that the Q4 will be our best of the year across the key metrics of financial performance, including total revenue, ARR growth, organic revenue growth and operating margins. As it relates to our view on segment growth throughout the rest of the year, we expect all 4 of our segments to post improving sequential ARR and revenue growth through the balance of 2023. Buildings and Infrastructure will remain our fastest growing segment as we expect our recurring software businesses to sustain solid performance while our Civil Hardware business improves with more normalized dealer inventories.

Speaker 2

We expect our Geospatial segment to return to positive organic growth in the second half of the year, but remain modestly down for the full year. We expect resources and utilities to return to growth late in the second half of the year, driven by an expected pickup in our aftermarket channels. Over to you, Rob.

Speaker 1

When we think about our right to win at Trimble, we believe we can uniquely bring together users and connect workflow between the physical and digital worlds Across industry Continuance, connect and scale is our strategy. Our strategy is a platform strategy. Platform strategy is in turn a data strategy. If we are successful in our pursuits, we will collect one of the most complete data sets in and across industries, creating a flywheel of enhanced insights and data connectivity. AI has captured the world's attention, ours too.

Speaker 1

We believe our corpus of industry specific data will unlock and accelerate our long term value creation model. As I conclude my remarks, I want to take a moment to honor the memory of Sandra McQuillan, who passed away last week after a year's long and was a valuable contributor to our company's success. Sandra's insight, courage and support for our business will be greatly missed. She helped make Trimble a better company. She helped me to become a better leader.

Speaker 1

On behalf of the entire Trimble team, I extend our deepest condolences to Sandra's family and loved ones. Operator, let's open the line to questions.

Operator

And your first question comes from the line of Jerry Revich of Goldman Sachs. Your line is open.

Speaker 3

Yes. Hi, good morning everyone.

Speaker 1

Hi, Jerry. Hey, Jerry.

Speaker 3

I'm wondering, Rob, David, if you could just Talk about the cadence of ARR growth in buildings and infrastructure. It looks like that Might have slowed a touch in the quarter. Can you just talk about the drivers and then your outlook for total company ARR growth is to accelerate from 13% this quarter to mid teens the rest of the year. Can you just step through the drivers, please?

Speaker 4

Sure. Jerry, it's David. There is no fundamental change in the momentum of the business, recurring business in buildings and infrastructure.

Speaker 2

It happened to

Speaker 4

you and so if you're going to have churn that's when you have it and that in the year actually a little north of 20% for buildings and infrastructure ARR. So The momentum is solid.

Speaker 3

And David, so you're just to put a finer point on that, so you're For an acceleration in total ARR from 13% to 15% for the full year, just to put a finer point on that since Obviously, mid teens is a pretty wide range.

Speaker 4

Yes. You're right. Mid teens, I'll try not to be too specific, but it's north of 13. So yes, We project that ARR growth will accelerate for the balance of the year.

Speaker 3

Okay, super. And can I ask on Transporion, The margin profile at these lower sales level, how does that compare versus your expectations Previously and then I just want to make sure I caught you right that it was a 10% decline in the revenue expectations because just Three quarters of the full year revenue run rate does seem to be a touch higher than the revenue guidance for Transporium that we're seeing here?

Speaker 4

Yes. So first, the 10% refers to we'll have we project 10% less revenue than you could have extrapolated from the Directional indication we gave in December, it's still growing. It's just growing a little more slowly than we would expect. From a margin of 30%, I still think that's the long term trend, but we've lost a little bit of fixed cost leverage. Probably simplest way to think about that For the year, Gerry, is Transporium margins will be pretty close to the Trimble average this year and then higher as the business gets back to growth.

Operator

Your next question comes

Speaker 5

from the line of

Speaker 6

Hi, thanks. Good morning, everybody.

Speaker 7

And I understand that the mix is favorable as hardware decline and software continues growing. I guess my question is, is there anything we should think about Is that having taken a step function up, shifting mix of business?

Speaker 4

Yes. There's 2 big factors that drove Gross margin up significantly in the quarter. One is that, as you said, the mix shift is very favorable because our hardware business was down and the software business was up. But an equally important factor is that we're way past the hump of our inflationary cycle in our hardware businesses. In fact, Year on year expedited freight in the broker market for parts a year ago and we've got more price realization.

Speaker 4

So We have seen a pretty important improvement in the margins within our hardware portfolio.

Speaker 7

And then should we think about it as more R and D?

Speaker 4

Well, we're investing in our business. The guidance And on the script comments reflect, we don't think the gross margins will stay at the high level they were in Q1 for the rest of the year. Will be modestly below that, partly because the mix comes back to a more normalized mix as our hardware businesses get past the hump of dealer inventory reductions. But look, if you look at our operating expense, even for with the year's outlook, we will grow OpEx faster than revenue. We normally don't like against the digital transformation, the creation of platforms.

Speaker 4

So We are investing against the business even while we get through the notice.

Speaker 8

Okay. Thank you very much.

Speaker 7

And then just one last one on channel Has anything happened in the last 2 or 3 months to increase the headwind from destock? I'm thinking about the ag channel and moves OEMs are doing there. And maybe you could broadly just tell us when we're through the destock pulse, so I will stop there.

Speaker 4

Sure. I'd say the pace Of inventory destock is good by mid year. We're on the plan on destocking that we laid out a quarter ago.

Speaker 2

And Yes, I think that answers your question.

Speaker 7

Got it. Thank you.

Operator

Your next question comes from the line of Kristen Owen of Oppenheimer. Your line is open.

Speaker 9

Great. Thank you. Good morning. David, I wanted to follow-up on your comment about the reinvestment, specifically about the digital transformation. Rob, you closed the prepared remarks Talking about the data flywheel.

Speaker 9

So can you just talk to us about where we are in that journey? How you intend to make better utilization of that data and just, yeah, what stage we are in?

Speaker 4

I'll comment on an important milestone where we've put into production the digital backbone for our North America Live next week. And what that does, Kristen, is it sits in a sort of klugy way to date. And we've had success in the Kluge approach, but we're about to cross an important milestone in what we call digitally enabled Trimble Construction 1 with bundles that are more accessible and easier for our people to sell and our customers to consume. This is part of the journey we're on. We have additional rollout scheduled for our digital transformation that over the next couple of years will benefit the whole of our business.

Speaker 4

So we're going to see some tangible, much more tangible benefits from the investments we've been making on digital transformation. Kristen, I'll add a comment

Speaker 1

on the data strategy part of your question. And I start with the corpus of data At Trimble and Construction Ag, we manage over technology and over 180,000,000 acres of farmland and transportation. We manage a couple of 1,000,000 Vehicles fundamentally is about creating a digital model of the physical earth. So there's a, I'd say, a profound corpus of data opportunities. Our digital transformation, a big part of that is unlocking that data, getting it into the cloud.

Speaker 1

Once you've got it in the cloud, have opportunity to take data into information. And then when we're thinking about articulating, it's actually also quite fun. We're already developing and generative AI based solutions covering all of our end markets and covering a number of workflows within that. And I will still say we are very, very early in the journey. So if you take a market like agriculture With the Bilberry acquisition that we did on selective spraying, we're applying deep learning technology to be able to identify weeds and enable spraying at the plant level instead of at the field level is processing to automate invoicing processing workflows.

Speaker 1

In the geospatial business, we're working on already point cloud semantic segmentation. So then you can automatically extract and classify assets from large data sets and then our transportation business. We have video intelligence solutions that can detect fatigue and driver distraction and therefore improve the safety and we're just at the beginning of this.

Speaker 9

Follow-up question, which is really one about the competitive environment. I mean, you talked about some of the trends that we've seen on the technology side. And certainly over your tenure, you've seen a lot of shifts in that technology space. But I think the investor sentiment suggests that some of the recent

Speaker 2

announcements that you all have made and maybe

Speaker 9

some of those made by your partners, that you all have made and maybe some of those made by your partners suggest that there's a shift happening in the competitive environment. So Can you just speak to that any discussion of disintermediation or how you view your competitive positioning today? That would be helpful. Thank you.

Speaker 1

Most singularly unique about Trimble and I think forms the basis of our right to win in our markets is our ability to connect the physical and the digital world. So it's connecting work in the office with work in the field. That means connecting the hardware and the software. In terms about potential OEM disintermediation, I go to the customer. That customer is a farmer, it's a contractor, it's a trucking company.

Speaker 1

More often than not, they're looking for a neutral provider of tech and we don't see that fundamentally changing In the aftermarket and we hear more customers saying, how is this going to work for me if I have OEM proprietary technology, Multiple OEM for prior technology because remember they operate mixed fleets. How does that benefit a customer? That's what we hear feedback from out in the field and it gives me conviction that we're on the right path. Now does that mean that that will that OEMs Not, let's say, pursue a strategy, I'd say, of course not. We just have to win the physical and the digital world.

Speaker 1

That's why for the last 15, 20 years we've been creating a software ecosystem around that hardware that we have to create these integrated and connected workflows. Not to mention That's the technology side of it. And then you apply the go to market aspect of how you actually take this to market, how you actually monetize, what are the business models around it, what are the so I'd say, yes, there is certainly a different competitive environment that exists today versus 5, 10, 15 years ago, I think a lot of the, let's say, competitive world woke up to the attractiveness of these markets that we're serving that are large global underserved and under penetrated. So we feel good about where we stand in that environment, Kristen.

Speaker 10

Great. Thank you so much.

Operator

Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

Speaker 8

Hi, good morning. With the Transporion acquisition, can you give us a little bit more color on the impact to the growth rate And maybe what incrementally changed in the macro to cause that reduction in expectation? It's a little bit of a larger reduction than we would have thought just given the price paid for the company?

Speaker 1

So Jonathan, this is Rob. Good morning. From I'd say the effect growth of the business, the gross margins, the ARR Growth in the business, the bookings growth in the business, we see those as accretive to the business model of overall Trimble that doesn't change and then our view is continues to be look at the midterm and beyond and it will be even more significantly accretive given the nature of the platform and the density that the business has of carriers and shippers. To the second question on what changed in the macro view and I'd say, yes, absolutely, it's disappointing from my perspective as well. When we break down the underlying factors, We looked and saw a couple of things and maybe three things to mention.

Speaker 1

The first is The overall level of transactions has gone down in Europe. And when we look at the end markets, markets like CPG, retail, chemicals are 3 relatively big markets for the business. The transaction volume slowed more than we expected. CPG, I look at that one as one that people are still going to eat. So I don't lose a conviction that this is a temporary phenomenon in the business.

Speaker 1

The second Aspect, which really probably also relates to the 3rd is the spot prices have come down and the business differentially monetizes when spot rates are higher. So spot rates will come down if transaction volume comes down. The 3rd piece which connects actually though back to spot prices is the truck capacity went up in Europe and so if you follow new unit trucks hitting the market in Europe, that Capacity increased at the same time as the transaction slowed further pressuring spot prices. So those would be the 3 factors. But now let me not end on that note, let me end on the note that we expect to see 30% bookings growth in the business this year.

Speaker 1

When we look at prior out of each of those cycles, it's fundamentally transaction rates are As strong as ever, 40 new customers were onboarded onto the platform in the Q1 before weakness are there. And we believe it would be poised to bounce back when the markets improve.

Speaker 8

Got it. And just in terms of A quick follow-up. Can you give us a sense of what your dollar based net retention looks like for your ARR? We're just trying to understand sort of much of that ARR is coming from new versus existing customers? Thank you.

Speaker 4

Jonathan, you're talking about for the company as a whole?

Speaker 6

Company as a whole?

Speaker 4

Yes. I'll focus on the outlook for the year. We expect Net retention to be very strong, north of 100% in the zip code of 110%. What gets us there, our churn varies by business and most of our recurring businesses the churn is very low in the lowtomidsingle digits. SketchUp is structurally higher than that.

Speaker 4

I've been pushing at high single digits through Low churn and this is the breadth of our offering. We're really having traction in the building software portfolio of cross selling Viewpoint and our Tecla structures and MEP offerings and so that's what gets net retention

Speaker 1

into the edges. Jonathan, the thing I'd add to that is the nature of the technology at Trimble is that it's mission critical. You're using it Most of the day, it's not a nice to have on the shelf type software that you can easily get rid of.

Speaker 5

Thank you.

Operator

Your next question comes from

Speaker 5

the line of

Operator

Chad Gillett of Bernstein. Your line is open.

Speaker 6

Hi, good morning guys. In the Building Infrastructure business, I think you talked about, Rob, going from 13% to about greater than 20%. I was just curious about what line of sight do you have to that? Maybe you can talk about any key products are driving that? And to what extent are you seeing some of the cross sell driving some

Speaker 1

of that growth? Sure, Chad. Hey, this is Rob. So the 13% is at the company level of organic ARR growth we see going up through the rest of the year. If we go into Buildings and Infrastructure, specifically, the Buildings and Infrastructure grows, ARR has been growing faster about to grow throughout the year as well in buildings and infrastructure.

Speaker 1

When we go through the business reviews, one of the The thing that is, I'd say, great about an ARR business model is we closed in the quarter at 1 $65,000,000,000 of ARR. And by the way, that's a conservative view of ARR. We don't take the contracted ARR view at the end of the quarter, which would be higher. But We wake up on the 1st day of Q2 and we've got line of sight to $1,650,000,000 of revenue going forward for the next year and you can see that show up in the remaining performance obligations. And so when we look at the businesses, you can get a bit scientific about it because you can go and do a go get analysis.

Speaker 1

You understand the revenue you're walking in with whether a quarter or a year or a multi year period. You know the go get delta that you have to close in order to hit the ARR forecast. Against that delta, you look at a pipeline that you have a bookings pipeline and then it's a conversion ratio of that bookings pipeline to what can Hit short term ARR versus will become deferred revenue that's monetized over time. Now within that, if I take Buildings and Infrastructure specifically, cross sell and up sell are significantly driving business for us, the bookings business that we have. What we're seeing is that in Trimble through this Terminal Construction 1 offering, we're seeing cross sell between Viewpoint and Tecla.

Speaker 1

We're seeing it from our bid to win acquisition And the Viewpoint business, we're seeing it from Viewpoint and our MEP business. It's really just Really proud of the team, who's put in the work to define the business model offerings and to organize the go to market Efforts in the sales enablement behind that to actually execute on a vision. It's easy to have the vision. The work happens behind the scenes to bring it to life and the team continues to deliver proof points that we're on the right track here. We're seeing higher win rates in the deals in the market.

Speaker 1

We're seeing larger deal sizes when we go to market as one Trimble, we're seeing shorter sales cycles when we do it. So I like the setup, expect to continue to see strong Growth, buildings infrastructure and the construction software within that, that's the tip of the spear for the transformation at Trimble. We're putting really, I'd say, The strong, strong majority of our efforts behind making that business successful and using that as a template for the rest is ultimately we're taking dollars to the bank, not Percentages, these numbers continue to get bigger and bigger. So posting strong double digit growth on a larger Base, I think is worth noting. David, I think mentioned in his comments that we could expect to see $2,000,000,000 of ARR by the end of the year and billings and infrastructure would presumably be about half of that.

Speaker 6

That's helpful. My second question is about Just your 2 core channels, right? So you've got the OEM channel, aftermarket. First, can you just break down The mix between the 2, there, what was the growth in 1Q and what are you expecting through the balance of the year?

Speaker 1

So, Jay, do you mean at a company level or do you mean at a segment level?

Speaker 6

I mean company level to begin with, but if you can give that segment I'll be most curious about B and I and resource.

Speaker 1

Well, from a segment perspective, we Outside of resources and utilities, actually very little goes through OEMs. It's in the single digit Percentage in resource and utilities, of course, that's agriculture. And I think our business through OEMs was particularly strong. So it's about a

Speaker 4

third of our new segment and it's held up well. I'll say it's strong right now.

Speaker 5

Great. Thank you.

Operator

Your next question comes from the line of Jason Celino of KeyBanc.

Speaker 5

Good morning. Your construction software business continued, but David, you mentioned seeing a little bit of additional churn in Q1 for some term It sounds like it's minor, but I don't know if you can clarify this well, Blake.

Speaker 4

Yes. I don't think it's additional versus any longer term It's just that the term licenses, it's actually a bit of a factor of our old technology that we're improving with our new digital infrastructure, but The terms all coincide on January 1. So if you're going to churn as a customer, you churn on January 1. So it's I call that a blip. That factor won't recur in any of the coming quarters and we think we are on the sustained trend of solid ARR growth for Buildings and Infrastructure, as Rob said, it was about 20% and we think it will blend the year a little more than where we were in Q1.

Speaker 5

Okay. So it sounds like this might be for some of your older solutions?

Speaker 4

I wouldn't say it's older solutions. It's solutions that are enabled by our older Infrastructure Technology, as we roll out our digital infrastructure, we can be more flexible in how our licensing models work and we won't have the situation where our terms all end in the same time, which isn't clear.

Speaker 5

Okay, perfect. And then on second quarter, how much Transporion is contributing? I realize that the full year is $135,000,000 but anything that we should know about seasonality or how that ramp through the year? Thanks.

Speaker 4

Yes. So it's US135 $1,000,000 for the 3 quarters and correspondingly you have a little more than a third in Q4.

Speaker 5

Perfect. Thank you. Welcome.

Operator

Your next question comes from the line of Tami Zakaria JPMorgan. Your line is open.

Speaker 10

Hi, good morning. Thank you so much for taking my questions. So my first Question is on the transportation segment. So we've heard some truck OEMs partnering with 3rd parties to install a single device that runs on an open platform and is developing apps for ELD, tools, telematics and stuff. So what are the risks or opportunities for Trimble?

Speaker 1

Hi, good morning, Tammy. Hey, it's Rob. Well, we've been Working in this space, as you know, for a long time, both predominantly in the aftermarket, but with 1 OEM in our Transportation business, a change to the business that we have with our OEM partner. Long term Or actually even mid to long term, the exact nature of the upgrades we're making on our technology and in the transportation business is to deliver that we've been looking for. Back to an earlier conversation we're having in the Q and A on mixed fleets, the same dynamic happens With trucking companies, most are operating multiple Truck OEMs within their fleet even different engine types, so you can have really quite different configurations, different Need here in Colorado and the mountains is a different machine or I'd say a different truck performed optimized is optimized better here than it is in a different part of the country.

Speaker 1

And so we continue to see customers out of the OEMs. When they have that openness, you can put in a Trimble or Trimble competitor technology and user interface on top of that. So I think it's an equalizer in the market.

Speaker 10

Got it. That's very helpful. Another quick one from me. Is there any seasonality we should expect from the 135,000,000 incremental revenue from Transporion or should we just ratably allocate over the next three quarters?

Speaker 4

Yes. Hey, Tami, it's David. There is some seasonality in the business. Historically, it's strongest in the 4th quarter. There's a lot of Goods that flow closer to the holiday season.

Speaker 4

But I don't there's also some underlying growth. So The way I would suggest you look at it, the way we look at it is, of the 135%, we will have roughly 30% in Q2, A third in Q3 and a little more than

Speaker 10

Thank you.

Operator

Question comes from the line of Josh Tilton of Wolfe Research.

Speaker 11

I just want to step back for a second. Can you maybe just helping Transporion revenue expectations, but you're reiterating the guidance for the rest of the business. Can you maybe just talk to the visibility that you have?

Speaker 4

Hey, Josh, David Barnes. I'll start. So the Transporion business model, as Rob mentioned, is transaction based principally, not a subscription. So Our software offerings, as Rob discussed earlier, are mission critical for our customers and are much less susceptible to any Short term trend, going transaction or ongoing level of business. Our view is that there's some puts and takes, but Aggregate demand, we do see some signs that in a few of our end markets, actually the overall Macro outlook is improving.

Speaker 4

Look at Geospatial, for instance, we assess our dealers for their sentiment. We talk some of their customers in the survey business, they're feeling a little better than they were. Input costs are abating. So overall, we're very confident with the outlook for the rest of the business that we articulated a quarter ago. Transporion is impacted by the particular macros of Europe and the end markets they serve.

Speaker 1

I can add a little color to that. I encourage you to separate the software businesses From the hardware businesses and that analysis, if you look at the software business, I submit there's $1,650,000,000 reasons to have and that's because that's the ARR. And again, that's not even a contract for those remaining performance obligations As well gives us visibility, we know the bookings we have, it's really a bit of a science to translate the bookings into The recognized revenues are our conviction and our predictability on that stream of our revenue is going to be The highest. And then I think you take separately the hardware businesses, which David walked you through. We've been through dynamics of the dealer Inventory stabilization, now let's look at the macros around it and I think that's a fair question to test our conviction on this.

Speaker 1

Take agriculture, we see farm income being healthy this year. We take North America construction and we the infrastructure bill being providing a tailwind to the business. So those are the kind of factors that go into our view for the rest of the year and certainly then would become the things that we have to watch and that we'll update you on again next quarter.

Speaker 11

Super helpful. And then maybe one more for me. I know you guys got a lot of questions on building and infrastructure. I'm going to ask one more, although it's maybe a little unusual. A lot of your construction peers believe that it's kind of hard to know exactly which markets are stronger and which are weaker given their customers' portfolios are very diversified.

Speaker 11

So first of all, I guess, we really appreciate the disclosure on the residential versus infrastructure strength. But I guess my question is like, is there something unique your business that gives you the visibility into which markets are performing better or worse than maybe your peers don't have?

Speaker 1

I think there is. What we've built our strategy is fundamentally to connect you and Construction, we work with architects, engineers, contractors and owners across the lifecycle from design to build to operate. So we have a business that focuses on architects and the design, mechanical, electrical, plumbing, steel, concrete, contractors. So we have visibility into the trades and inside of MEP we can look at the digital supply chain to connect an estimate and a design model actually out to the components that you ultimately buy and transact as you create those Estimates, in the construction side, we both we obviously work in civil construction as well as building construction. And our Viewpoint Software, it's the system of record.

Speaker 1

It's the ERP. So we know what kind of businesses our customers are in and we can get a meta view of the employees they have, of the backlog that they have, of the work that we're doing. And then on the owner side, even though I'm describing that as the last one in the chain, the owners actually are at the beginning of the chain and we have a set of businesses that are managing capital programs and asset management and permitting. So I think Trimble has a more unique view As compared to any other peer that we have in the industry, given how we serve specific personas across the industry life cycle. And so we can see activity at a level of specificity that I think would be quite unique.

Operator

Your next question comes from the line of Rob Mason of Baird. Your line is open.

Speaker 6

Yes, good morning. Thanks for taking the question. Rob, you talked about the work that you'll be doing this year to transition some of your ag channel to more independent dealers. How can we track your progress or what markers should we be watching, I guess, leading up to that transition of the channel, and would you expect this year to be neutral Positive or negative on 2023?

Speaker 1

I'll try this as neutral. Neutral to Perhaps a little in the market is quite positive. We are having success, good early success of signing up dealers who want to work with Trimble, both existing dealers and new dealers who see good business opportunities here. If you think about what's unique about what we can do in ag from an aftermarket perspective as We have kits available for 10,000 different machines. That's pretty darn unique to be able to do that.

Speaker 1

When I spend time out in the field with dealers and with farmers, They're looking for support like and I mean support from technology. And so we get very we're getting very good feedback We need to work with you. We want to work with you because you know how to you know technology, you know how to support it. You're on the machine types. And by the way, Turnbull, you have The full portfolio, a broader technology portfolio, we don't just do steering and guidance.

Speaker 1

We do implement controls, we do water management, we have software, we have selective spring. And so those have been the positives that are, I'd say, so far creating good progress for us as we transition the channel. To your question about proof points as an investor and analyst you can track the progress of that. Let us take that as an action item of how we can provide modules and revenue and margin progression against what we're saying, but let us take that as a topic for what additional disclosure would make sense going forward.

Speaker 6

That's helpful. That's helpful. Just as a follow-up around Transporion, obviously, it's European centric. How should we think about your ability and maybe pace of the ability to your fees in North America in particular, I guess? And How would you build a network outside of Europe versus what they have done in Europe?

Speaker 1

Sure. So actually I'll start in Europe. So we had prior to the acquisition, we had a relatively small carrier business, so mobility business for carriers, we will combine that business with Transporium, that will make sense. 1, because Transporium obviously works with shippers and carriers, we think we can get a stronger European carrier business If those businesses are working together within Europe, 3rd parties with Trimble technology and brings, let's say modest amount of cost synergy to the business within Europe. And within Europe, it's been really interesting to see some of the phone calls that we've got some of which have been positive because they're already working with us in 4th Street.

Speaker 1

We need help with the transportation for the same thing with building Construction, where you're looking for visibility to understand when that construction supply chain components are going to show up to a job site. So we're encouraged at Some early inquiry that we've received within Europe. Now let's go the obvious place to go given the centricity of revenue that we already have in North America. And so the teams are actively working together to bring, I'd say, a couple aspects of Transporion technology around automated autonomous procurement into the some of those quick win type opportunities. I was in Brazil In January and what we discovered there is we have our Trimble already has Telematics business or mobility business in Brazil, Transporion has a small operation in Brazil doing freight audit.

Speaker 1

That becomes something that we can connect together, given the geography we're already in. So together, I'd say the new, new The geography, those tend to be slower and harder and would not, in this environment, be my first priority where to allocate capital.

Speaker 6

That's helpful. I appreciate the response. Thank you.

Operator

Thank our speakers for today's presentation and thank you all for joining us.

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Earnings Conference Call
Trimble Q1 2023
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