Trimble Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Trimble fourth quarter and 2020 results conference call. At this time, all participants are in the listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this time, you will need to press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. Now, I would like to turn it over to Mr. Rob Painter, Chief Executive Officer of Trimble.

Hello, everyone. Before I get started, a quick reminder that our presentation is available on our website, and we ask that you please refer to the safe harbor at the back. In addition, please note that we will be comparing against the 2019 that had a 14th week in the fourth quarter. Let's start on slide two with the three key messages we want to convey today. First, the customer ROI of our technology and the strength of our financial model enabled us to outperform our own expectations in the fourth quarter. Our customer value proposition is rooted in productivity, quality, safety, visibility, and sustainability. We are pleased to announce that annualized recurring revenue, or ARR, grew 9% year-over-year to $1.3 billion, while quarterly revenue grew 0.4% year-over-year to $830 million. Expanding gross margins and execution on costs led to adjusted EBITDA margin of 26.1%, and we finished the year delivering a record $672 million of operating cash flow. Second, executing the Connect and Scale 2025 strategy remains our focus. We are working to connect stakeholders across industry life cycles and to transform customer workflows, while simultaneously making ourselves easier to do business with. As leaders of the business, we take our responsibility seriously to be effective allocators of capital. To this end, we will continue to invest disproportionately in our cloud and autonomy capabilities, as well as in go-to-market efforts to support and enable our long-term growth opportunities. Third, our long-term market conviction remains strong. We believe the secular trends of digitization provide long-term tailwinds, and we maintain our resolve to exit this crisis on a stronger competitive footing than we entered it. As we come into 2021, we are both cautious and humble to recognize market uncertainty and volatility, while also confident that we are on the right track. Comparisons against 2020, especially on a quarterly basis, will be difficult, if not irrelevant. We will reinstate guidance at an annual level, and David will walk you through the details. In addition, we anticipate hosting an investor day in the second half of the year to update stakeholders on our long-term strategy and business model. As I reflect back on our May 2018 Investor Day and put that into context of our fiscal year 2020, while revenue is clearly set back with the pandemic, we are ahead in most all other aspects. At the Investor Day, we targeted adjusted 2021 EBITDA at 23% to 24% of revenue. We closed 2020 at 25.3% EBITDA. We targeted 2021 software services and recurring revenue mix at 55% of total revenue. We closed 2020 at 58% of total revenue. We targeted the ratio of 2021 operating cash flow to non-GAAP net income at approximately 1.1 times. We closed 2020 at 1.2 times operating cash flow to non-GAAP net income. In July 2018, our net debt to EBITDA ratio stood above three times, and we said we would de-lever below 2.5 times. Today, we stand at 1.6 times. We see these as important proof points that we are on the right strategic path, that we can uniquely connect the physical and digital worlds to deliver value to our customers, and that our asset-light business model works. Turning to my commentary on the fourth quarter, we beat our own expectations in buildings and infrastructure, geospatial, and resources and utilities. We hit our expectations in transportation. Broadly speaking, we have seen signs of an emerging construction-led recovery We are experiencing favorable market conditions in agriculture. We see our innovation and go-to-market execution driving positive outcomes. And at the end of the year, we benefited from government stimulus measures, along with customers catching up on work. David will walk us through additional segment details. Turning to slide three, this shows Connect and Scale delivering customer ROI in transportation and agriculture. In transportation, our Trimble Dispatch Advisor solutions bring capabilities across our portfolio together to get the right load on the right truck with the right driver, thereby improving planning, reducing empty miles, and improving utilization. In agriculture, Slatja Agro is a large farm enterprise in Bulgaria that has adopted Trimble's connected farm ecosystem across 100 of their machines. This offering consists of our GFX 750 connected display, and autopilot steering, along with our auto-sync data exchange functionality. The connected offering improves planning, process automation, and cost optimization. I will close my commentary on slide four with an ESG update, a topic of increasing importance to all our stakeholders. As a purpose-driven company, our mission of industry transformation and our leadership culture provides a compelling ESG backdrop. In the area of environmental sustainability, I'll highlight that the primary positive impact of Trimble on greenhouse gas emission reductions and other environmental measures happens through customer application of our technology. For example, eliminating rework in construction, reducing fuel and water usage in all our end markets, and minimizing use of herbicides and pesticides in agriculture. We are also committed to developing science-based targets to further our positive impact. In the area of people and social responsibility, I'll highlight that we ranked in the top 10% of companies for diversity in the Comparably survey. I'm also very proud of the work of the Trimble Foundation, where we contributed a record amount of money to put to work for our philanthropic efforts. Finally, in the area of corporate governance, our ratings with third-party firms like MSCI are strong, and we are committed to continuous improvement in our sustainability program. David, over to you.

Thanks, Rob. Let's begin on slide five with the review of fourth quarter results. Fourth quarter total revenue was $830 million on a non-GAAP basis, up 0.4% year over year. To break that down, currency translation added 1%, and acquisitions, net of divestitures, were essentially neutral. Organic growth, excluding the impact of the extra week in the fourth quarter of 2019, was approximately 2%. ARR, or annualized recurring revenue, grew to $1.30 billion in the quarter, up 9% year-over-year, and was up 7% on an organic basis. Organic ARR growth, excluding the transportation segment, was up 15%. Adjusted EBITDA, which includes income from our joint ventures and equity investments, was $217 million, with a margin of 26.1%, reflecting both strong gross margins and continuing low operating costs. Our non-GAAP tax rate was 16%, down 300 basis points on a year-over-year basis. Net income was up 16%, and non-GAAP earnings per share in the fourth quarter were 61 cents, up 15% year-over-year. Fourth quarter cash flow from operations was $188 million, up 54% year-on-year. while cash flow from operations for the full year was $672 million, up 15% versus 2019. Free cash flow, which we define as cash flow from operations minus capital expenditures, was $177 million for the quarter, up 64% year-over-year, and $615 million for the year, up 19% versus 2019. Note that on a trailing 12-month basis, operating cash flow was approximately 1.2 times non-GAAP net income. Our strong cash flow results reflect the combination of higher profit and improved working capital efficiency. With the strong cash flow in the quarter, we continued to de-lever. At year end, our net debt to trailing 12-month EBITDA was 1.6 times. Our balance sheet is strong and provides us with flexibility to consider a range of capital allocation options. We expect to continue to de-lever and pursue modest share buybacks while having dry powder deployable for attractive acquisition opportunities. Turning to page six, I'd like to highlight one of the key drivers of our cash flow in the quarter, working capital. Our working capital efficiency has improved over the last five years. We ended the year with just over zero net working capital. This progress was driven by a number of factors, including the growth in deferred revenue from our recurring revenue businesses, reduced sales outstanding of accounts receivable, and lower inventory levels. Turning now to slide seven, I'll review in a bit more detail our fourth quarter revenue trends. As I mentioned earlier, our ARR was up 9% in the quarter. Our non-recurring revenue streams also grew, driven by a strong rebound in hardware sales in geospatial, civil construction, and agriculture. From a geographic perspective, North American revenues were down 8%, driven by declines in our transportation business. Revenues in North America from businesses other than transportation grew 2%. Europe revenues were up 9%, reflecting catch-up on project activity slowed earlier in 2020 and fiscal stimulus measures. Asia Pacific was the best performer in the quarter, up 13% driven by strong performance in Japan. The rest of the world, which includes Brazil and Argentina, was up 10% year over year, driven principally by strong demand from the agriculture sector. Now turning to slide eight, I'll review briefly our full year results. Revenue for the full year 2020 contracted 4% overall and 5% organically. Gross margins for the year expanded 140 basis points, and EBITDA grew 7% on a year-over-year basis. EBITDA margins expanded 240 basis points to 25.3%. Operating income grew 7% year-over-year, and operating income margins expanded 220 basis points to 22.8%. Net income was up 12%, and earnings per share were $2.23, up 12% year-over-year. Next, on slide nine, we highlight a number of key metrics which collectively give a good picture of the state of our business. I'll highlight a few metrics which neither Rob nor I have already mentioned. In this year of strong margins, we spent over 15% of our revenue in research and development, reflecting our continued investment in areas of strategic importance during the downturn. We ended the year with a backlog of $1.3 billion, up 11% from year-ago levels. Our deferred revenue at the end of the year was $614 million, up 13% from the end of 2019. The health of our backlog and deferred revenue point to improved visibility for revenue growth heading into 2021. Turning now to slide 10, let's go through the fourth quarter revenue details at the reporting segment levels. Buildings and infrastructure revenue is up 1% on an organic basis. Excluding the impact of last year's extra week, organic revenue for the segment would have been up approximately 4%. Revenue growth was double digit in both our SketchUp and civil hardware businesses. Segment margins were up 90 basis points due to higher margin revenue mix and cost control. Geospatial revenue was up 14% on an organic basis, driven principally by strong performance in our core surveying and mapping business. Revenue was up in all regions aided by successful new products, stimulus-driven activity, and healthy project tender levels as projects which were delayed earlier in 2020 came back online. Margins were up over 9 percentage points due to a combination of higher margin revenue mix, lower levels of discounting, and strong cost control. Resources and utilities revenue was up 10% on an organic basis driven principally by our precision agriculture business. Revenue growth was strongest outside the U.S. with higher commodity prices, stimulus programs, favorable weather, and a strong reception to our new products all contributing to growth in the quarter. Solid performance by our CityWorks business, which was acquired in the fourth quarter of last year, also contributed to segment revenue in the quarter. Margins expanded by over 5 percentage points, driven by operating cost control. Transportation revenue was down 22% on an organic basis. It's excluding the impact of the 14th week in the fourth quarter of 2019 organic revenues were down by about 19% operating margins were down over eight percentage points on a year over year basis. Our fourth quarter financial performance and transportation reflects many of the same factors we have discussed in prior quarters customer attrition in our mobility business since late 2019 accounts for the majority of the adverse development in segment revenue, ARR, and margins. On that front, there is some good news, as our product performance has improved and customer churn has declined sequentially in each of the last three quarters. Note that the ongoing subscription transition in our transportation enterprise software business depressed revenue trends in the quarter, and the Cubix acquisition had an expected dilutive impact on segment margins. While we have more work ahead of us to improve the performance of this business, we continue to believe in the power of our connected transportation strategy and project the steps the team is taking now will yield improved performance later in 2021. Turning now to page 11, I'd like to share with you our outlook for this year. Our planning efforts have settled on a 2021 financial outlook based on a number of key assumptions. First, we assume that public health initiatives are successful in enabling a broad reopening of constrained sectors of the economy by mid-year 2021. Second, our plan is rooted in the assumption that the economy grows through the year, with 2021 GDP at least recovering to 2019 levels. Third, our projections exclude the impact of future acquisitions or divestitures. Our most important key performance indicator will continue to be ARR, We expect organic ARR growth to end 2021 in the high single digit range with sequential improvement as the quarters progress. ARR growth in 2021 will be driven by the combination of organic growth of our existing recurring offerings, ongoing transitions from perpetual software products, and the gradual turnaround of our transportation business. We project organic revenue growth in 2021 in the mid single digit range with an additional one to two points of exchange rates remain near where they are today. That translates to a revenue range of 3.3 to 3.4 billion. Note that our revenue growth in 2021 will be negatively impacted by approximately 150 basis points from our subscription model transitions. We anticipate that EBITDA and operating margins in 2021 will be higher than 2019, but lower than 2020. Overall, our gross margins this year are projected to remain stable at 2020 levels, but a number of factors are likely to cause EBITDA margins to come down somewhat when compared to the historically high levels of 2020. First, the return to a more normalized level of incentive compensation and, in the second half of this year, higher travel costs will naturally cause operating costs to grow at a rate faster than revenue. Second, we are incrementally allocating more capital in both CapEx and operating expense to the areas of focus in our connect and scale strategy, namely digital transformation, cloud infrastructure, and autonomy. Third, our margins will be negatively impacted by the accelerating subscription model conversions of 150 basis points. I'll note that we project income from equity method investments to be approximately $35 to $40 million, and net interest expense to be about $65 to $70 million, with decreasing levels as the year progresses. We project our non-GAAP tax rate to be in the range of 16 to 17%, and that our shares outstanding will be approximately $254 million. Incorporating all of these factors, we expect non-GAAP earnings per share to be in the range of $2.25 to $2.45 for the full year. From a cash flow perspective, we continue to project that operating cash flow and free cash flow will exceed net income as the favorable cash characteristics of our business will continue. Nevertheless, cash flow will likely be flat or decline modestly from 2020 levels as we saw extraordinary improvement in working capital in late 2020. A few words on the segment dynamics in this outlook. Generally, we expect that each of our segments will mirror the trends I've just described, although I'll highlight a few factors specific to the individual segments. In buildings and infrastructure, our hardware offerings were most adversely impacted by COVID in the second quarter of 2020, so we expect growth in the second quarter of 2021 to be very strong. Our geospatial and resources and utilities businesses have a lot of momentum now, and we anticipate that momentum to generate strong growth through the first half of the year with more moderate growth thereafter. In transportation, we don't expect to see meaningful revenue growth or margin improvement until late in 2021. We don't intend to provide quarterly guidance at this point, but I'll offer a few comments on factors that will influence our revenue and margin performance as the year progresses. Year-on-year growth in each quarter will obviously be impacted by COVID-driven swings we've seen in 2020. We expect to grow in all four quarters with the strongest growth rate in the second quarter when we lap the worst period of the COVID crisis. We expect that operating and EBITDA margins will be relatively constant across the quarters. Rob, back to you for closing comments.

As we wrap up, I would like to thank the Trimble team and our global dealer partner network for their outstanding efforts throughout 2020. We entered the crisis with an objective to exit the crisis on a stronger competitive footing. I am proud of our accomplishments in 2020 and the progress and commitment we are making towards our Connect and Scale 2025 strategy. We enter 2021 with increased conviction in our ability to fulfill our mission to transform the way the world works. Furthermore, I'd also like to take the opportunity to acknowledge Trimble's inclusion in the S&P 500 as of January 21st, a milestone for Trimble's growth and global impact. Thank you to our customers, our global dealer partners, and our employees, past and present, for making this possible. It has been a remarkable 42-year journey as a company, and our best days are yet to come. Operator, let's please go to Q&A.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We would like to limit time. Any questions? So if you would like to ask a question, please ask one question at a time and one follow up. First question is from Rob Wertheimer from Mellius Research.

Hi, good afternoon, everyone. Hi, Rob. Results continue to be very impressive on the margin side and really among the better companies we follow. I come over a strategic question on the results. It seems like farmers continue to adopt very quickly whatever tech offerings they're offered. There's been a lot of take rate success with different products people have put out. My question is a little bit on how you see the shape of that market evolving, whether there's a lot in the acquisition pipeline that you want to do or need to do to create increasingly integrated offerings and how strong your product pipeline is for the next couple, three years. Thank you.

Thanks, Rob. So if we look at the primary products that we offer in the agriculture market today, that would capture guidance. It would capture water management. It would include the variable rate. And then we also have the weed seeker product, so spot spray optimization. And then there's the software that we have. And so the strategy we have is the connected farm strategy in agriculture. So just from an organic view of our product portfolio, we are bullish on the opportunities in agriculture to connect what we're doing together to create additional ROI for our customers. What we'll build on top of that is our autonomy strategy. And we see autonomy as a series of increasing levels of automation over the coming quarters and years to move us really more into that autonomous future. So we believe we can do a lot of this organically. From an acquisition perspective, we're certainly open if there's acquisitions that could help us accelerate our development and our efforts in any of those areas.

Thanks, Rob. Are you able to give any metrics on the CN spray, how that product has been going? And I'll stop. Thank you.

Well, we've seen strong double-digit increases in the WeedSeeker and the WeedSeeker 2 products. So, yeah, seeing strong increases, no worries, seeing strong increases and really think we're going to see them really for a while. We initially saw the take rate being very high in South America, and then we see that moving around the world. Thanks.

Next question is coming from the line of Jason Salino from key bank capital markets.

Yep. Thanks guys. Um, so you gave the update on the transportation enterprise bookings were for 80% of subscription, but I'm curious, uh, you know, what was that mix at the beginning of the year? Cause you've talked about, you know, accelerating, um, the transition here and then, um, More broadly speaking, how should investors measure the progress of the different business solutions you have? And then why not give more metrics like this on a more recurring basis?

So Jason, this is Rob. So yes, at the beginning of the year, we were tracking closer to an inverse of that because we're really pretty early in the transformation of our enterprise business. So that bookings mix is pretty fast. actually exceeded our expectations of how quickly it has shifted to a subscription offering. And when we do that 80-20 comparison, that's at a TCV or total contract value levels, right? So we can do it on an Apple-to-Apple basis. In terms of measuring the progress of the business and how we measure and look at the proof points in the business, well, certainly you hit on the first one right away, which is the ratio of the bookings. Because that's what we're, you know, the strategy, the end game from a financial model perspective is to build a recurring offering. And we're talking about the enterprise business because we already have that in our maps business. We already have that in our mobility business. And we really also have that in our shipper business. So really it's an additive view of moving that direction. And finally, you asked about, you know, additional benefits. measures or metrics that we could report in transportation. I think we have an investor day. I mentioned in the prepared remarks that we're going to target for the second half of the year. I think we just have to make sure we get the right ones to tell the right story. I'm, I think, as much as anything, showing proof points like the customer examples, such as the example that was in one of the slides. is the kind of demonstrable evidence that I want to be able to continue to put forward to our investors.

Okay, great. Those were my two, so thank you. You're welcome.

Next question is coming from the line of Anne Dweignan from J.P. Morgan.

Hi, good evening. It's Anne Dweignan, just FYI. And maybe, Rob, you could give us a rundown on the B&I business, just, you know, the different applications there and some of the trends you're seeing. And, you know, usually you give us an update on AR for SketchUp, eBuilder, Viewpoint, et cetera, just, you know, a little deeper dive into that business and the outlook into 2021 specifically.

Sure. Hi, Anne. It's good to hear from you. So let's start in B&I. If we run through the outlook and what we're hearing from some of the different constituents throughout the chain, I'd start with saying that the outlook is pretty good. There are a few exceptions, but the outlook is pretty good. If we look at the type of work, infrastructure and residential backlogs are improving. EPC is down, so that's going to relate to Oil and gas multi-sector which picks up commercial work that looks flat to down and not surprisingly retails down and Elements such as data centers and logistics centers are up when we look at the public sector the outlook is generally better than it was a quarter as you know, the financing is in a stronger is in a stronger position and In January, the Dodge Index was at its highest level since the pandemic started. Now, they did warn the recovery may be uneven in the coming months, which sounds about right. And at an OEM level, I would say the signals are mixed, so it's stronger in heavy equipment, less so in the automotive space. So in aggregate, that outlook is a net positive. On the ARR front in B&I, Really, it's a very solid quarter. Really, the team's executed at an outstanding level in the quarter and for the year. Net retention in businesses such as eBuilder and Viewpoint, they're well over 100%. We had mid-teens ARR growth in Viewpoint and eBuilder, so continued strong performance from those businesses and those operators. Did I miss anything, Anne?

No, I think you captured it all pretty eloquently. Maybe just switching back to transportation, can you just talk a little bit about what happens if you cannot get that business back to the 20% margin target? What are the strategic alternatives there? would you be willing or will you be willing to look at some portfolio cleansing or is the business too strategic to you? Even if it takes longer to get back to 20%, you're going to ride it out. I'm just curious over the long term what your contingency plans are.

The transportation business we see as strategic when we see it as attractive. We think we've got a favourable position and a favorable offering you know I think we have the I'll say the coverage of assets in this and in this sector which I think would be quite enviable from a competitive standpoint so from the 20% level that's absolutely the target that we have is to get this segment back up to the health code the company level of profitability and In terms of how we measure that, given how much of the business is recurring, we'll also look at it from a customer lifetime value perspective. So I'll be cautious to be overly dogmatic about the 20% so long as we're continuing to get the bookings and to grow the business and get that trajectory. So the first order of business is to be able to show that demonstrable trajectory, which we said we feel like we'll be able to do towards the later part of the year, second half of the year. And as we've got that trajectory, I think that's going to give all of us the confidence in what we're doing. And we'll look at measures such as lifetime value divided by the customer acquisition cost, because that's a very indicative measure of how the business progresses. And then from the broader, let's say, strategic lens of it, we'll continue to look at, be open to looking at assets or partnerships that help us further and accelerate the strategy.

Okay, thank you. That's helpful. I'll get back in line. I appreciate it.

Next question is coming from the line of Colin Rush from Oppenheimer.

Great. Thank you for taking our questions. This is Kristen on for Colin. Just wanted to ask a little bit about some of the increased spend that you highlighted for 2021. the CapEx and OpEx targeting Connect and Scale, the digital information, cloud infrastructure, autonomy, et cetera. And just wanted to see, you know, if you could provide a little bit more color there and where you're seeing exactly the opportunities to accelerate and how that connects back to sort of the Connect and Scale strategy.

Hi, Kristen. It's David Barnes. So as you pointed out, a meaningful portion of the increase in year-on-year operating expenditure will be really centered on the connect and scale strategy. So we have a major initiative underway to accelerate our digital transformation. There's technology and process changes that will enable us to fulfill the potential we have to sell integrated offerings to customers. And we have a major push there. So our Our CapEx, which was in the past years more focused on facilities, is this year very much focused on digital transformation and cloud infrastructure as well, which will enable us to enhance our position as a world-class provider of integrated cloud-based services. So that's where the focus of our investment is.

Great. And then I guess my follow-up would be, Rob, you hearkened us back to the 2018 Analyst Day You know, back at that time, I think you outlined a calculus of high single-digit organic growth, you know, 25% to 30% incremental margins, 20% operating margin. You know, as they think about connect to scale and maybe beyond the 2021 timeframe, you know, is that still the right formula that we should be thinking about for Trimble?

At a high level, it is, Kristen. What I would augment from a measurement perspective is ARR growth. That is our primary focus of the measurements out there. And that interplay between the ARR and the overall growth is important. So I'll trade all day long the top long revenue growth if it's moderated because we're accelerating ARR. And that's one that I think needs to rise higher in the pecking order.

Thank you so much.

Next is from James Fawcett from Morgan Stanley.

Thanks for taking our question and congrats on the quarter and the progress. I maybe wanted to touch again on the geospatial side. And I know in your prepared remarks, you kind of noted one of the drivers being retail demand in North America. And that seems interesting, just given preferences for where people live coming out of the pandemic and strong just residential construction more broadly. Can you maybe remind us how much of that business is exposed to residential construction? And if you think that can be a lasting tailwind, if it's more near term and starts to normalize and just what your expectations are over the next year or so?

Sure, and I'll start by up-leveling to the whole segment where we saw the outperformance come from a combination of three things, healthy demand, catch-up in work, and the third is new products. So in Europe, we think there's an anticipation of a construction-led recovery. Tax incentives also helped, I should add. In North America, there's residential, and from the new product innovation perspective, our R12I, GNSS receiver and the X7 scanner, we think really led demand in all our markets. In North America specifically, and looking at residential, we see that as a near to midterm catalyst. And then I would have an anticipation of normalization there. If we were to see more infrastructure work, then clearly our mix would shift or balance with the residential and infrastructure work. Historically, residential has not been a primary driver of the Trimble business, so it certainly has been an accelerant, certainly from a percentage standpoint.

Got it. That's helpful. And if I could just one follow-up. I guess as perpetual licenses started to recover, at least grew in the quarter, Is some of that seasonally based just on timing of when those get renewed, or should we think of that as more indicative of demand just broadly recovering? And if some of the pushouts and subscription growth could also be an opportunity to more quickly convert to subscription-based offerings?

Yeah. Hey, James. It's David. Part of what you saw with the perpetual business is we had meaningful slowdown in earlier quarters, as you'll note. So there's some of that is catch up on projects that were delayed. Overall, the perpetual sales will obviously be, there'll be pressure on that from the subscription transition. So over time, in many of our businesses, the significant majority, we will be selling recurring rather than perpetual licenses for those businesses where a recurring model is viable.

Got it. Thank you.

Next question is coming from the line of Chad Dillard from Bernstein. Good evening, guys.

Hi.

So my question is on just like the mid-cycle revenues for the transportation business. and how to think about that in this coming cycle versus prior cycles. Do you expect to actually recover some of the churn that you've experienced? And then how should we think about the impact of the mix shift, some of the mix shift in there?

Well, I'll start with the question around cycle, because it tends not to be relevant in the Trimble context. you know, it tends to be, you know, I would associate that to an industrial, a straight industrial context. And the fundamental nature of the markets and the markets that we're serving is that they're large, global, underserved, and under-penetrated by technology. So our correlation hasn't historically been very tight to cycles. So I would really say, see, the Trimble story is a secular story with a cyclical undertone. So there is, the cycle obviously has an impact, but it's secular first, cyclical undertone. From an expectation of, I think you asked about recovering churn or recovering business in the transportation market, yes, we're very optimistic around that. I mean, that's table stakes, frankly. When we look at the pieces we have across the technology landscape in transportation, and we think we're in a favored position. We've got over 90% of the top 100 trucking companies use our technology. We've got over a million powered assets that are managed in the Trimble network. I look at the set of capabilities we have. We do telematics, video, ERP, maintenance, mapping, routing, navigation, analytics, visibility. So we have a strong set of capabilities. I believe we bring scale to the market. And when we look at Connect and Scale applied in the transportation context, That's where I think we've become really unique, is if we can sell, I'll come look at the bundled offerings. And not only bundled offerings, but where we can provide unique value by stitching together our products. And that's actually why we put that slide as an example of Trimble Dispatch Advisor into the slides, because that's an example where we're pulling capabilities across our tech stack into a unique Trimble offering. So I hope that helps give you context and let me know if I missed something.

Yeah, no, that's, that's helpful. Um, and then just second question, just on the, the 150 basis points. So we've had one from subscription transitions. Um, can you remind us, how does that compare versus 2020 and, you know, how should we think about that in the context of the next couple of years? Are we already at the peak in terms of like the overall kind of basis back to a basis point impact?

Hi, Chad. It's David. The 150 basis points is more than 2020, probably about half again more, so we're closer to 100 basis points. And that does reflect that in some of the businesses where there's a clear near-term opportunity to make the transition we anticipate making major progress this year. A little early to call 22 on that, so I'll resist the temptation, although we are at that point, getting past the valley for many of the subscription businesses, and we'll see more revenue uptick from that than we will this year.

Thank you.

Next question is coming from the line of Jerry Urevich from Goldman Sachs.

Hi, good afternoon and good evening, everyone. Nice to see the momentum on the subscription transition. I'm wondering if you could talk about any parts of the transition plan that you folks might be accelerating heading into 21, given how strong the preference has been among customers for subscription versus perpetual license. And David, I'm wondering if you could share the revenue number that's associated with that margin point that you just made. So if we had, you know, run rate revenue in 21, how much higher would it be versus, you know, the GAAP revenue guidance that you're providing once we get, you know, the existing products transitioned to subscription?

Hey, Jerry, I'll do the second question first and then hand it over to Rob. So, I think I've got your question right. The 150 basis points, what we're saying there is that if we weren't doing the next round of transitions, our revenue would be 150 basis points higher. And that nearly all flows to operating income, because the margin is very high.

And Jerry, from an acceleration perspective, within the business, I look at buildings and infrastructure and transportation. So within buildings and infrastructure, we're talking about our building construction businesses accelerating the subscription transformations there. We mentioned in transportation, for example, the 80-20 booking split, subscription to perpetual that we're seeing in the enterprise business right now. So there I would call those the model conversions that are accelerating. And that's separate from businesses that you already know, like the viewpoints and e-builders and construction that continue to demonstrate strong growth. And then the last thing I would mention is on the hardware side, we are in very early days, but you know, early days of the, essentially it's the hardware as a service. We call it Trimble Platform as a service in the civil construction space.

And in terms of capital deployment, can you talk about your M&A pipeline as it stands today? Obviously strong free cash conversion. I'm wondering how deep is that pipeline because, you know, unfortunately post the eBuilder and ViewBuilder and ViewPoint acquisitions, you know, multiples for those types of assets have moved up significantly. So I'm wondering if you just comment on if the pipeline has subscription type businesses in it and just expand on that opportunity set in light of the free cashflow, if you don't mind.

Hey Jerry, I characterize our M&A pipeline as being open for business. We have the confidence to assert our strategy and we've, have the balance sheet to support it. As it relates to the, I'll say the opportunities themselves within the pipeline, I would say they're decent. I wouldn't say they're like overly robust and on the other side they're, you know, it's also not non-existent. So I'd say it's a decent pipeline. And when we look at that pipeline, I mean, we certainly have a bias. You know, we think about, well, a bias, it's more than a bias. The imperative is to support the connect and scale strategy. The bias then within supporting the strategy is certainly towards software assets. But David also mentioned, you know, from linking it to capital allocation, where we're spending on the digital transformation. We look at capabilities in cloud. We look at capabilities in autonomy, for example. And so autonomy is another area that I would say put on that list, and it doesn't classically define as software.

Thank you.

Next question is from Richard Eastman from Baird.

Hey, I just want to circle back, if you wouldn't mind. And good afternoon, by the way. Just wanted to circle back to the recurring revenue in the quarter looks like it was down, you know, a couple ticks year over year. Is that a function of the transportation business?

Yeah, Rick, organic ARR was actually up a little bit. We had, I'm not sure of a business, but, yeah, organics improved a little bit.

And when you define organic, are you pulling out transportation?

Nope, I'm pulling out the business you need it. Hey, Rick, just be careful you're looking at the 14th week impact because the recurring revenue, just take that piece of the P&L, that has an 8% impact.

I see. Okay. All right, then that's going to be the difference. So organic ARR in the quarter was up low singles. And then for 21, did I catch in your comments that recurring revenue is expected to grow high single digits? Yes.

Yeah, so organic was up seven in the Q4, and we said we'd end the year. Our guidance is high single digits, so faster than we are now, sequentially improving through the year for all the reasons I mentioned, organic growth of our existing offerings, the transitions, and an improvement of transportation.

Okay, and then as we look out to your revenue guide and your – you know, adjusted op income guide and EPS guide, I guess, you know, at the midpoint of your revenue guide and EPS guide, we kind of walk up to this maybe low, low double digits incremental. And what that's absorbing here, I'm sorry, I'm probably repeating what you said already, but what that's absorbing is, you know, almost 50 million of profit from the SAS conversion headwind. And then the balance of that would be just, expense reinflation in the business?

Yeah, you've got the key factors. So the conversions are there. And then OPEX, as I mentioned, is growing faster than revenue. Some of that is just replacing costs that sort of naturally came out during the COVID period. So we will have a higher incentive compensation expense. We anticipate that we'll begin to travel later in the year. A lot of the things we do normally, including hiring, we're really low. And we are investing, as Rob said, in cloud and digital transformation. And then I'll add that part of the OPEX increase is FX because the U.S. dollar is weakened. So over half of our business is outside the U.S., so that naturally causes OPEX to grow.

Okay, I get you. And just one last question. I apologize. The civil business... How do inventories in the channel look there? Is there better, you know, is the book to bill or just the sell-through, you know, is the sell-through greater than the sell-in into the channel on the civil side, the hardware side?

Inventories are low.

Okay. Okay. Very good. Excellent. Thank you for the time.

Next question is from the line of Jonathan Ho from William Blair.

Hi, good afternoon. I just wanted to start out with, I guess you made the comment that you're coming out of the downturn stronger and you've been investing 15% into R&D, which is above the typical average. Can you maybe give us some examples of how this has been driving share gains and where you're seeing this show up the most in terms of that competitive position?

Hi, Jonathan. I see it in a few areas. One, would be through innovation and so example we talked about in geospatial is with the r12i and The x7 so right demonstrable evidence that the investment in R&D is producing new products and we've seen that in AG with weed seeker as As an example, we've seen it in buildings and infrastructure with the with the model with the model conversions and A lot of innovation actually happening there and creating some derivative opportunities in areas such as analytics, for example. The other place where I see us coming out of this stronger is from an organizational culture perspective. Okay, that's hard to, let's say, measure as it relates to share gains or the other aspects. But I really think when we look at our employee engagement, it's in a very strong place. We look at the retention of our people. We're doing well there. We look at, you know, I talked, used an example in the prepared remarks around how we've ranked in diversity and inclusion. Score, so we see the culture in a strong place. And then from a share gain perspective, Aspect how all this relates to let's say share gains in our in our competitive position. It's I have to admit It's notoriously difficult to be very specific on share gains in our markets. It's just really not a lot of Good good data. So you can't you really can't find like the singular report that's going to tell you all of this So certainly we're looking at our results compared to competitive Results we see how we look at our win-loss ratios and the businesses that we have. And they indicate to us that we're maintaining or gaining share across the business.

Excellent. And then just as a follow-up, you outlined a number of customers in your examples that are buying a broader solution set. How do we think about ARR growth relative to either new customer acquisitions or upsells, just given you can sell a broader suite of solutions today?

That's a good question, Jonathan. And we'll keep including examples from now on to show you these proof points around Connect and Scale. Like an example we didn't put in the deck this quarter is that I'll use a construction example. So we sold two ENR 400 customers a bundle offering last year. And in both of those examples, we were able to increase ARR 30% with each of those customers by virtue of creating essentially a one-trimble offering, making it a lot easier to do business with us. I mean, that's the evidence, as it were, of where we're going and why we're doing this. We see where we're going with Connect and Scale, giving us an ability to better connect the products we have to streamline customer experience and handoffs between the products and the workflows. That expands the value proposition of our offering. It increases and improves the user experience of the products. And along the way, we'll enhance our customer success operations to drive a deeper intimacy with our customers. And we believe that's going to provide our customers better value. They'll get that productivity, quality, safety, visibility, and sustainability out of using our solutions. And that's going to unlock ARR potential. I'll close by saying, as we've prepared our plans for the year and looking at our strategies and our connected strategies, we're looking at the ARR opportunity from cross-selling and up-selling and bundling. And we believe there's a lot of opportunity within our house.

Thank you.

Next question is from the line of Gal Munda from Barenburg Capital.

Thank you for taking my questions. I appreciate it. Guys, the first one, I would just like to ask you about this trend of the billing. You've basically seen deferred revenue going ahead of ARR again, which kind of indicates the backlog is building up. And in terms of that, I just wanted to see what's driving it. Is there any change in duration of the contract or anything, or is it just a natural backlog buildup?

Yeah, Gal, it's David. The biggest driver of deferred revenue and backlog is the growth of our recurring businesses. It's not a contraction. Yeah, it's not a meaningful change in the duration of contracts.

Awesome. Thank you so much. And then, The other question I had is considering the fact that obviously professional services are under pressure in a year like this, like 2020 was, how are you thinking coming back from 2020 in terms of the professional services? Some companies have basically, you know, it's definitely helped your gross margins in general. But my question is, like, do you reassess how much services you have to provide in order to kind of protect that margin? Or are you quite happy for that revenue to come back as fast as it can? Thank you.

Hi, Gal, this is Rob. I'll start and maybe David will want to add. I think pro services might be a tale of two halves in 2021. First half, second half, look at the first half. I think that will probably mirror much of what we saw last year where it's difficult to, in many cases, get in to do the implementation. And we've done better and we're learning how to do it. But there are businesses that we have where the pro service is significantly challenged as as a result. From an impact on Trimble gross margins, we don't have that much pro-serve, so it's not a fundamental driver of the gross margin at Trimble. I'm looking and thinking more about the revenue impact it would have than, let's say, a margin profile impact at a company level. David, did you see someone?

Yeah, I think the only thing I'd add is that some of this is by design or reflecting the mix shift of the business to more standardized offerings that require less professional services. But that said, you know, what Rob said, some of our professional services business was highly constrained because we couldn't get access to the customers. So it's a mix of both.

Yeah, that's very understandable. Thank you so much. Great results and good luck. Thank you.

Thank you.

Next question is from the line of Blake Gendron from Wolf Research.

Yeah, good evening. Thanks for squeezing me on here. My question was around just heightened investment levels for this digital transformation. I'm wondering, you know, if we can delineate both on the CapEx side and maybe from an R&D perspective, how much is kind of due to this digital transformation? Then as we model it in the out-year, should we think of it over a fixed amount of time, or are you essentially going to scale these investment levels with the receptivity of a cloud solution across the portfolio? Thanks.

Yeah, hey, Blake. It's David. This is definitely a multi-year effort, and I'll say of the OPEX increase that you can interpolate from our guidance, somewhere around 100 million year-on-year, about a quarter of is in the broad category of the strategic investments, which is cloud infrastructure, digital transformation, and autonomy. And we've got a lot of conviction around this. This is not all entirely incremental. We started this effort. It was more within divisions or pieces of the business, and now it's a company-wide effort. What we're doing is developing playbook with standard processes that enable cross-selling and a common digital experience across the business. We're course correct to see how well it goes. We've got a phased implementation process, but I do see this investment extending beyond this year.

Understood. That's helpful. And then within that, as we think about something like data security, Obviously, it's going to be important for your customers as they consider the move to the cloud. It's also going to be a fairly big cost, I would imagine, no matter what cloud application or cloud platform you're running. So how do you think about data security in terms of internalizing those costs versus maybe outsourcing those costs and kind of partnering with third parties here? Well, there's no question that...

that we're spending more on cyber security. These are the kind of existential issues that all of us in technology businesses face as we manage our customers' systems of record. So it's incredibly important that we are world-class in the area of cyber security. Our spend is really OpEx. It's not CapEx-oriented today. It's primarily... our own teams, but we will use third parties to do intrusion detection, for an example, that's best practice. So we follow best practices, what you want to do with external firms. Of course, we use a lot of external technology, but you pay for that on an Alpex basis. It's not capitalized. The last thing I would say around the area of cyber is as many threats as it provides, we also see it as an opportunity to distinguish ourselves and the scope, the scale, the breadth of Trimble, we see as an advantage here because this is something customers are increasingly having to look at and our ability to manage at scale and at this level of sophistication outstrips the ability of a smaller company to keep up and actually draw parallel to things like GDPR. These are expensive endeavors, and our scale helps in that aspect of it. Awesome. Awesome.

Thanks for the time.

We have no questions at this time. Michael, you may continue.

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

This concludes today's conference call. Thank you all for participating.