Trimble Inc.

Thank you for standing by and welcome to Trimble First Quarter 2021 earnings call. At this time, all participants are in listen-only mode. On today's call, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would like to hand the conference over to Rob Painter, President and Chief Executive Officer. You may begin.

Welcome, everyone. Before I get started, a quick reminder that our presentation is available on our website, and we ask you to please refer to the safe harbor at the back. I'll begin on page two with the key messages we want to convey today. In the first quarter, we exceeded our expectations and delivered record ARR of $1.32 billion, up 9% year-over-year, total revenue growth of 12%, EBITDA of 26%, and trailing 12-month operating cash flow of $745 million. Our results demonstrate the quality of our business model and an improving macroeconomic backdrop. They also highlight the strength of our Connect and Scale 2025 strategy. On the basis of this competitive strength and the nature of the opportunities we see in the market, we plan to scale up investments in targeted areas of the company. At the same time, we are also raising our guidance for the year. Turning to page three in the end market backdrop, the common thread across the industries we serve is delivering products and services that connect the physical and digital worlds. The industries we serve are large, global, underserved, and under-penetrated with technology. As our end markets digitize, we are able to connect the office in the field with our hardware and our software offerings in a manner that delivers productivity, quality, safety, transparency, and environmental sustainability. In buildings and infrastructure, we exceeded expectations in the business, leveraging our strong market position and continuing the conversion of our business models. The segment now stands at approximately 65% software-related revenue. In geospatial, The business experienced the strongest year-over-year growth we have seen since we created the reporting segment in 2017. Global demand is healthy and the innovation that the team has delivered has strengthened our competitive position. In transportation, we met the P&L expectations we had for the segment in the quarter. Bookings in our mobility business improved to their best level since early 2019. Bookings in our transportation enterprise software business were strong with subscription bookings more than double the level of our first quarter 2020. We remain confident that we will deliver demonstrable improvement in revenue, margins, and ARR trends in the second half of the year. In resources and utilities, the commodity price backdrop is providing global tailwinds to the business, and we delivered growth well ahead of our expectations. Let's turn next to page four for some proof points on the Trimble operating system, capturing strategy, people, and execution. On strategy, we continue to execute on revenue transition opportunities. Our Tekla design and engineering software business announced its shift to subscription that went into effect in March. Different but better is our tagline, and I think that sums it up well, which is to say it's more than just change, it's progress. Our mechanical electrical plumbing business also continued its subscription conversion, and as mentioned, we saw a strong level of recurring bookings in our transportation enterprise business. Finally, I'd like to note that we closed the divestiture of the Manhattan real estate software business early in the second quarter, and we wish the team well in its new home. On people, I am pleased to report that we ranked number 15 out of 15,000 companies in the 2021 Best Global Culture Survey. I also want to announce that our CTO, Tom Fanzler, retires at the end of the second quarter. Two of our other business leaders, Ron Antebi and Bryn Fosberg, will assume new roles starting in the third quarter. Ron will operate as an entrepreneur in residence, driving innovation efforts, and Bryn will act as our interim CTO. I'm pleased to say that we promoted from within for Ron and Bryn's current responsibilities for the eBuilder and overall construction businesses, respectively. On execution, we released our sustainability report a few weeks ago. I'm incredibly proud of the work of the team on this important initiative. Our teams also continue to innovate. We launched a civil construction estimating software package. We released a combination of our load-write payload management system with our Earthworks grade control platform. We launched a new TSC5 data controller. And we released a new SX12 scanning total station, which is an update to our successful SX10 instrument. The SX12 now supports additional applications in tunneling and underground constructions. respect to increasing investments in the business we see connect and scale as being synonymous with an industry platform strategy we want to play offense and invest now for the mid to long-term opportunities that we see in the market we see a generational opportunity out of a north america infrastructure bill and a strong commodity price backdrop in the agriculture market we will invest in product development and go-to-market efforts around infrastructure and we'll step up investments in our agriculture business all while continuing to invest in our Trimble Cloud platform and our autonomy efforts. A quick update on our plans for an Investor Day. We have concluded that an in-person meeting at our Colorado facility, where much of our leadership team is based, is the best way to facilitate the kind of in-depth interaction that many of you want from an Investor Day. We will hold the meeting in the spring of 2022, by which time the environment for business travel should be greatly improved. We also plan to hold one or two interactive virtual sessions with investors on specific topics of broad interest later this year. In closing, I'm as confident and optimistic about Trimble as ever. We have the right team pursuing a compelling strategy and attractive markets. It won't be easy and it won't be linear, but nothing worth achieving is. David, over to you.

Thank you, Rob. Let's start on slide five with the review of first quarter results. First quarter revenue was $887 million, up 12% on a year-over-year basis. Currency translation added 3% and divestitures subtracted 1% for a total organic revenue increase of 10%. Gross margin in the first quarter was 58.4%. Margins were down 70 basis points year-over-year, driven primarily by product mix. Adjusted EBITDA margin was 26.1%. up 340 basis points, driven both by higher revenue and strong cost control. Operating income margins expanded 330 basis points to 23.6%. Net income dollars increased by 36%, and earnings per share increased by 17 cents to 66 cents per share. Our first quarter cash flow from operations was 228 million, demonstrating the continued strong cash flow generation of our business. Operating cash flow again exceeded net income in the quarter. Free cash flow was $218 million. We paid down $158 million of debt in the quarter, and our net debt to adjusted EBITDA ratio fell to 1.3 times. At the end of the quarter, we had the entire $1.25 billion available on our revolving credit facility and approximately $265 million in cash. With our strong balance sheet, we are well-positioned to continue to invest in our business both organically and through acquisitions that will accelerate the implementation of our strategy. Turning now to slide six, I'll review in more detail our first quarter revenue trends. As mentioned earlier, our ARR was up 9% in the quarter. Our non-recurring revenue streams also grew with hardware growing 17% and perpetual software growing 11%. Our hardware growth was driven by strong performance in civil construction, geospatial, and agriculture. Our hardware growth also contributed to perpetual software growth, as some of our hardware offerings are bundled with perpetual software. From a geographic perspective, North American revenues were up 9%. Excluding transportation, revenues in North America grew 15%. In Europe, revenues were up 16%. Roughly half of our year-up growth was driven by currency, with the balance coming from catch-up on project activities slowed in 2020, fiscal stimulus measures, and recovering demand in many end markets. Asia-Pacific had the best performance in the quarter, up 17%, driven by strong growth in Australia and Japan. The rest of the world, which includes Brazil and Argentina, was up 5% year-over-year, driven principally by strong demand from the agriculture sector. Next, on slide seven, we highlight some of the key metrics that we follow. Annualized recurring revenue was 1.32 billion in the first quarter, up 9% on a year-over-year basis. Organic ARR growth was approximately 7%. Excluding our transportation segment, Trimble ARR grew at a mid-teens rate in the quarter. Net working capital, inclusive of deferred revenue, was negative this quarter, representing approximately minus 1% of revenue, on a trailing 12-month basis. Research and development on a trailing 12-month basis was 15% of revenue. Our deferred revenue grew 12% on a year-over-year basis, and our backlog, excluding the impact of the real estate software business divested early in the second quarter, was $1.4 billion, up 17% versus prior year. While growing backlog is obviously an indicator of strong momentum in the business, I'll note here that backlog at quarter end was unusually high in part because Trimble, like so many manufacturers in this recovering economy, is experiencing shortages and extended delivery times for many key components of our hardware products. Our operations team is hard at work to expedite delivery of products which are in short supply, but we do expect to manage challenges with both cost inflation and extended lead times of select hardware product lines in the quarters to come. Turning now to slide eight for additional detail on each of the reporting segments. Buildings and infrastructure revenue was up 13% on an organic basis. Revenue growth was strong in both our building and civil construction businesses. Segment margins were up 760 basis points due to higher margin revenue mix and cost control. Geospatial revenue was up 22% on an organic basis driven principally by strong performance in our core branded survey equipment business. Margins were up 590 basis points due to strong revenue growth and cost control. Resources and utilities revenue was up 10% on an organic basis. We experienced double-digit growth in each of our precision agriculture, positioning services, and agriculture software offerings. Margins expanded 190 basis points driven by increased revenue and cost control. Top line results in transportation were consistent with our expectations. Revenue was down 6% on an organic basis year on year and margins declined 450 basis points. The drivers of revenue and margin decline are broadly consistent with those we have highlighted previously. Revenue and margins were roughly stable sequentially when compared with the fourth quarter of last year, and leading indicators provide encouraging signs for the recovery ahead. As Rob mentioned, bookings were very strong in both our mobility and enterprise software businesses. Our product performance is improving, and our sales pipeline is stronger than it has been in nearly two years. We remain confident that we are on track to improve performance later this year. Moving to slide nine, I'll provide an update to our outlook for the year. Given our outperformance in the first quarter, our growing backlog and increasing confidence in our business trends, we are raising our revenue forecast range by 100 million to 3.4 to 3.5 billion. I'll note here that the biggest risk we have to our revenue outlook for the next couple of quarters is the supply environment for critical hardware components. We expect that revenue growth will be strongest in the second quarter as we lap the worst period of the COVID lockdowns in 2020, with more moderate growth in the back half of the year, and especially in the fourth quarter. We continue to expect organic ARR growth in the high single digits with improving trends as the year progresses. From a profitability perspective, we continue to expect that EBITDA margins will come in between the levels of 2019 and 2020. Margins for the balance of 2021, and especially in the second half of the year, are likely to come down from the levels we achieved in the first quarter for a number of reasons. First, we expect some operating expense acceleration as the year progresses and the environment for business travel opens up. Second, we are accelerating investments that Rob mentioned earlier. These investments include spending on our digital transformation and cloud infrastructure and higher R&D on our autonomy projects and our agriculture product offer. And third, we are seeing growing cost pressure in our hardware cost of goods across a broad range of commodities. We are adapting our pricing and discounting strategies to reflect these cost pressures, but still anticipate some adverse impact on our gross margins. We continue to expect that software business model transitions from perpetual to recurring will impact revenue growth and operating margins by approximately 150 basis points. Our earnings per share outlook is raised to $2.30 to $2.50. This reflects the revenue and operating margin trends I mentioned earlier and a modestly higher tax rate outlook than we had anticipated a quarter ago. From a cash flow perspective, we expect cash flow from operations of approximately 1.1 times net income with free cash flow exceeding net income. With that, I'll turn it over to the operator for Q&A.

Thank you. So as a reminder, if you would like to ask a question, you will need to press star 1 on your telecom keypad. We'll pause for just a moment to compile the KDE Roster. And your first question comes from the line of Antignan of J.P. Morgan. Your line is now open.

Yes. Could you provide some more color on your gross margins through the remainder of the year and the impact of higher costs, whether those are just the inability to get supply or higher material costs going forward, just overall? I'd like to get a sense of what's more permanent versus what's temporary. And then could you dig a little deeper into your increased investments, particularly in agriculture and the digital, et cetera? I think those are probably not surprising, but just dig a little bit deeper into both of those, please. Thank you.

Hi, Anne. This is David. I'll take the first part of your question on gross margins. I'll say the environment for product cost has changed a lot just in the last month or two, and it's a fluid situation, so it's hard to make specific predictions. I will say that the product inflation that we're facing really only began toward the end of Q1, so the results that we just reported don't reflect the full impact we anticipate later this year. And you saw our gross margins declined year on year about 70 basis points. And probably just under half of that can be accounted for in product cost increases. But we're seeing increases across the board. Obviously, we're all reading about semiconductor tight supply and cost increases. But we're really seeing it across a whole broad range of commodities. in transportation, particularly air transportation that we use to get our products where we need them to go. So without getting too specific, I'll say that we do expect underlying cost of goods inflation for the balance of the year to be noticeably higher than it was in Q1. Now I'll comment that we're adapting, as I mentioned in the script, our discounting strategy and our top line prices And we hope to accommodate a meaningful portion of the impact of the cost increases. But nonetheless, we expect gross margins will come down for that reason in the remaining three quarters of the year. And then I'll turn over to Rob for your questions about operating expense and the investments we're making.

Hi, Anne. So I mentioned that connect and scale strategy is synonymous with a platform strategy. And the nucleus an agriculture market for us is the crop production workflow. So the investments, stepped up investments we're making in agriculture hit areas of that platform that include autonomy, includes our software, includes our correction services and continuing to build out the networks around that, and then finally localization efforts. It is the majority of our business these days is outside North America.

Okay, and just quickly a follow-up. How much demand is there really for the connected farm, for the entire software package across the entire enterprise? I think of farmers as wanting individual packages from different suppliers, and so I'm just curious what you're seeing out there in the marketplace from a connected farm perspective.

Well, our technology is on over 150 million acres of farm land, That's primarily the hardware, the guidance systems. We have about 20% of that same acreage covered with our software. So it's not, this isn't new. Let's say it's been in motion for a long time. I see that the delta of the 80% is a potentially addressable market. Obviously, we won't serve 100% of that. The other way to look at it, Ann, that's a software-hardware connection. The other way to look at it is from our correction services perspective. So we have well over 100,000 users of our correction services today, and the connected farm, that is an aspect. So when the scale part of connected scale is about making ourselves easier to do business with and bringing that software, the hardware, and the services together at the point of sale. So we think there is a demand for it, a market for it.

Okay, I'll get back in queue. Thank you.

Thanks, Anthony, too.

And the next question comes from the line of Rob Werthemer of Milius Research. Your line is now open.

Thank you. Good afternoon. You know, it's funny, Rob. You actually touched on what I wanted to ask about in your prepared remarks and David did, too. It seems like with the infrastructure bill coming down the channels, You know, we get a lot of questions just on, you know, what that'll mean. And it seems like a bit of a potential coming out party for all the transformation the industry can do with digital construction. So I'd just love to hear any stories or any color you have on how you're preparing the organization to, you know, to either sell or, you know, to what your capabilities are versus what we all kind of know a couple years ago or, you know, how you see that opportunity to really showcase what, you know, what can be done for construction with what you have.

Thank you. Thanks, Rob. So we see it as a generational opportunity. And I'll focus on North America, but highlight that places like the UK are going with a construction-led recovery. We see markets like Japan promoting digital technologies. Australia has strong infrastructure development as well. In North America, I think about it from the value proposition of what the technology can do. We think about the funding. around that. And we mentioned that we would, in terms of respect to our own funding, we would step up investments in the area. And then we also think about policy. So from a value proposition perspective, with digital technology, we can build greener. We can build more inclusively. And we can build better while doing so cheaper. So it just makes sense to use the technology. What we're hearing from customers and stakeholders in the industry, actually is on the policy side as well, is a desire to streamline project delivery by promoting the digital technology. So really streamlining project delivery really seems to be the core of what the market is talking about. And from a funding perspective, I'll start with government level funding. And we do anticipate that the final amount will be well negotiated and it'll be different than than the proposed American Jobs Plan. Nevertheless, and we need to also reauthorize the surface transportation bill. So the jobs plan, in addition to the reauthorization of the surface transportation bill, we think that will be significant. We think it will be incremental to the current baseline investments in our highways, airports, mass transit, and our ports. Now, we think that won't pass until later in the year, and that benefits of that wouldn't be realized in 2022. So when we think about the investments in our business to get ahead of that, we think both at a product development level as well as a go-to-market level. So at a product development level, where we're going with the connect part of connect and scale is integrating the hardware, the software, the physical, the digital, the office, the field. being able to round trip that data to streamline project delivery. So we'll continue our efforts on that front. And at a go-to-market level, it's putting the resources and increase the level of resources and capabilities in place to actually execute against what we think is an attractive and important opportunity.

That's a great answer. Thank you. And just to highlight one thing you mentioned in there, do you feel like the customer is now well-educated in calling for this kind of product in a way that was different from a year ago or five years ago? Has that changed significantly? And I will stop there. Thank you.

It is changing significantly. I'd say we may not be at the point of calling it significant. It's certainly a meaningful amount of change. And I think about it from a few dynamics. I'll address owners, engineers, and contractors. At an owner level, think about the Department of Transportation as an owner. Talk about a state DOT as an owner. I do think there's increasing awareness of the technology. There's certainly increasing awareness of the concept of the digital twin and how this can play through the operations and maintenance phase. And if we use the technology during the design, engineering, and construction phase, how that can then be leveraged in the operations and maintenance phase. So I think there is increased awareness We see a few more projects that are promoting the use of technology. Actually, the Federal Highway Administration, they made an announcement recently to recognize as a digital as built as an important technology innovation. So that's helpful to see that coming from that perspective. In the engineering community, certainly it's in the interest of the engineering community to help be able to deliver the projects better and faster and for them to be able to win more of the work And at the contractor level, I see that's where we see the most level of proactive use and request for use of technology because the contractors are the ones who are really seeing the most tactical benefit of better, faster, safer, cheaper, greener in their day-to-day work. So they're winning more work. It's becoming more just the way that construction is done. So very positive on the contractor side. Thank you. Thanks, Rob.

Your next question comes from the line of Jerry Ravitch of Goldman Sachs. Your line is now open.

Hi, this is Ashok Siddhamohanan for Jerry Ravitch. You cited buildings and infrastructure margins expanded due to higher margin revenue mix and cost control. And so I'm wondering how you're thinking about the sustainability of buildings and infrastructure margins at these levels?

David, we have a meaningful hardware business in buildings and infrastructure, so that will be impacted by the hardware dynamics I discussed previously. And I'll also mention that overall for the company, we expect to see some operating expense pick up. I'll call some of it natural because with COVID, we had almost no business travel. We had lower incentive compensation, so that will normalize. And then the investments that we're making will be seen in the segments broadly. So those dynamics are going to put pressure on margins in all the segments, including buildings and infrastructure.

Great. And in terms of the 11% growth and perpetual softer revenue this quarter, I'm wondering if you can discuss which products drove the growth and prospects for that growth to potentially continue.

I'll say one thing. As I mentioned in my remarks, we sell a meaningful amount of perpetual software bundled with the hardware. So when hardware grows like it did in the first quarter, perpetual software grows. We are in the process of transitioning from perpetual to subscription. Rob mentioned in the presentation in one of our design software offerings, and that tends to precipitate perpetual software growth. So that was a piece of it. But, you know, overall, let's remember we're comparing with the first quarter of last year when we saw, particularly toward the end of the quarter, a lot of hesitancy and great uncertainty. So customers were starting to be reluctant to buy, and I think all those factors contributed to perpetual software growth.

Great. Thank you.

And your next question comes from the line of Chad Dillard of Bernstein. Your line is now open.

Hi, good afternoon, guys. Hello. So I want to dig into your guidance change on the revenue side. I just was hoping to get a little bit more color on the moving parts behind that from an in-market perspective as well as a regional perspective. And then also if I look at the typical seasonality, like it would usually imply like a $4 billion revenue number for the year. So I just wanted to understand, is that delta really all about the supply chain issues, or is there something else?

Yeah, hey Chad, this is David. I'll say first of all that comparing quarter to quarter last year is a tough drill because last year was so strange, and particularly as we recall last Q2, we saw a rapid contraction in demand in many of our end markets and then a lot of catch-up and pick-up later in the year. So that's going to factor in. As far as the end markets that are driving the results, you know, we mentioned in transportation we ended about where we thought we would P&L-wise, but bookings were up and obviously the transportation market has picked up in terms of the macros with asset utilization and pricing and the financial solidity of our transportation customers is better. So that's more a tailwind for future quarters than this one. But look, beyond that, in the other three segments, we exceeded our expectations. So that's why the outlook came up in part because Q1 was above where we thought it would be. And we think some of those trends will continue. And the caution I'll provide is that hardware is still a meaningful part of our business. And for all the reasons I mentioned with the supply chain challenges, that's creating the greatest level of uncertainty. So I don't know if that answers your questions about seasonality. We do think seasonality will be different in 2021 from 2020 for a number of reasons. And you're probably better off comparing with 2019 for a normalized year. That's helpful.

And just a question on gross margins and price cost. Just to be clear, will you be able to match your price with cost? And then if you just talk about just your ability to raise price in terms of contractual dynamics there as well.

Yeah, I'll say it's a very complicated formula. We have contractual with our customers and dealers that don't facilitate an immediate increase in price in some cases. So that's a factor. We have some protection on the supply chain side too, but those don't necessarily match up. So I think for Trimble and every company producing hardware, this is a rapidly moving situation. Our intention, obviously we will remain competitive. Our intention is to recoup. a meaningful portion of the increase in product cost, then I'll say we can't have a specific estimate with high confidence in that cost. But we believe we'll get a meaningful chunk, but not all of it. And that's why we expect to see some gross margin declines or continuing declines for the remainder of the year.

And this is Ralph. To add to that, if we exit the year, I think the exit path would be closer.

Yeah, that's right. I think if you If you look at what's happening in the world, the semiconductor side of things is going to take probably three or four, maybe five quarters to recover. Some of the other input costs are likely to abate sooner than that. For instance, air freight will get more reasonable once trans-oceanic air travel recovers. So there are a lot of moving pieces. You know, I don't think this is a long-term solution. change in the trajectory of our gross margins, but it will be with us for a few quarters.

Good. That's helpful. I'll check with you. Thank you.

Next question from Colin Rich of Oppenheimer. Your line is now open.

Hi. Good afternoon. This is Kristen on for Colin. Thank you for taking our questions.

Sure.

So nice to see some improvement in the backlog in transportation. We are obviously in a tight freight environment where carriers are making money but also needing to bolster their ability to keep up with demand and some of the labor shortages. If we look through the noise, can you talk about some of the underlying trends in that business as it relates to your portfolio and how we should think about a more normalized business trend into 2022 as we comp some of these unique headwinds?

You know, Kristen, I'll just point out the obvious that some of the factors that have been driving our trends are somewhat unique to Trimble in terms of the issues we had post the ELD mandate coming into effect, and we did have some product performance issues, and so the pullback in ARR was a consequence of that. There's no doubt that the macros in the transportation business are dramatically better than they were three to four quarters ago, and that's helpful. Our business trends won't change linearly and right away with the changes in the macro environment that the customers that we serve experience, so it's not at all surprising to any of us that we have some lag. But I'll say there are a number of factors that that give us confidence that we're on the road back to better trends in transportation. Just I'll highlight a few. Our churn is trending down on a secular basis. There are bumps quarter to quarter as individual customers implement decisions they made some time ago. But the data surely points to a better trend there. Rob mentioned the bookings. Even beyond the bookings, our sales pipeline is looking up versus where it was a quarter or two ago. The performance of our products is improving, so our teams have done a great job of resolving the product issues. And I think we're seeing broader customer receptivity to the strategy of the integrated supply chain. So we have a lot of work to do in transportation, Kristen. So we're not changing the outlook that things will get better immediately, but we do look to see improved trends toward the back half of the year and especially the fourth quarter.

That's helpful, Culler. Thank you. And then if I could ask a longer-term question, maybe dovetailing on a question that was asked earlier, I wanted to ask about your appetite for M&A at this stage. Historically, we think about a few points, contribution every year to revenue growth balance sheet is in great shape. You guys are generating a ton of cash flow. But as you're thinking about planning for these generational opportunities in infrastructure and ag, as you've called out, can you talk about the M&A pipeline? Are there opportunities for more sizable investments and maybe what's on the Trimble wish list?

The short answer, Kristen, is yes, that the pipeline is more active at the moment. And certainly our areas of interest are going to be where we have the most strategic opportunity to grow and to build a platform strategy, whether that's in a construction, agriculture, or in, let's see, in some of our other vertical-focused markets. So, yeah, we feel pretty good about where we are, and as you said, the balance sheet's in a great place to be able to help us facilitate that.

Great. Thank you so much.

And your next question from James Fawcett of Morgan Stanley. Your line is now open.

Hi, team. This is Eric on for James. Thanks for taking our question. Maybe if we can touch more on the demand impacts of the supply chain issues you're seeing. Are you seeing any element of forward ordering, and maybe that was captured in your comments around the backlog earlier, or even just buying ahead of demand? potential supply chain constraints in any areas of the business, or is visibility, I guess, improved would be another way to say that.

Hey, Eric. I'll say it's a little hard to quantify when orders come through exactly whether they're for current demand or they're seeing the supply chain tighten up. I think it's a mixture of both. Our backlog I mentioned is now up to $1.4 billion, a meaningful increase year on year. I'd say the increase year on year for the hardware piece is a mix of healthy demand in markets and some customers ordering before they otherwise would have. But I'll say inventory at our dealers is really low. And I think most of what you're seeing is the fact that the end markets are really healthy and projects are picking up and customers need the product.

Got it. That's extremely helpful. Thank you. And then maybe just touching on geospatial, you know, it continues to be very strong and definitely benefiting from the construction recovery you guys have mentioned. How much of an element, though, I know you've had some product releases and refreshes, do you, I guess, attribute to maybe some of that refresh cycle versus the broader macro demand?

This is Rob. There's absolutely an aspect that correlates to the replacement cycle and new products that we have. Whether that's on the handheld side with TSC5 or on the GNSS receiver side with R12i, those would be replacement examples where we're able to bring in a new instrument or tool that's able to make the customers more productive. We've got a tighter integration of our software workflows into the hardware. So we've seen customers who are orienting their field survey crews around a Trimble workflow. So it's almost like the tail wagging the dog where that software is driving the demand for the hardware. There's also examples of, I would call them new categories. So take our laser scanner, 3D laser scanner. It's an instrument called the X7. That's a market segment where we didn't historically drive as much business, so that's not a replacement market for us. That's a new new. And then I would say on the go-to-market side, the team's done an excellent job on a global distribution basis of getting our dealers in a better, healthier state and really understanding their own local go-to-market execution. So definitely a mix of both, and really the team's done great work.

Awesome, thanks, and congrats on the quarter. Thank you. Thank you.

Next question from Richard Isman with Baird. Your line is now open.

Yes, good afternoon. Thank you. Just a quick question around the OPEX number, the $308 million number in the quarter. Could you just maybe speak to the cadence of what OPEX looks like, you know, as we move through the second to the fourth quarter? I mean, we've got some puts and takes, obviously, but trying to get a sense of how much the COVID-related expenses or penalties, I guess, however you want to call it, come back into the number. You spoke a little bit around investments there. Maybe just define that a little bit, but that's what I'm trying to look for a little bit of guidance as to how that number plays out for the next few quarters.

Hey, Richard. It's David. First thing I'll say is that in terms of what I'll call costs generated by COVID. We didn't have much. The impact of COVID on our costs was really negative. You know, we had some costs in our cleaning our facilities and that kind of thing, but it was relatively de minimis. So we had sort of artificially low costs in a number of areas. With the revenue coming down, our incentive comp naturally reduced. We stopped traveling, canceled events. And we really cut back on a lot of discretionary spending that wasn't core to the strategy. So that's coming back. And as you look at the operating expense growth going forward, I'll put it in a handful of buckets. First of all, some of our OPEX is overseas and the U.S. dollar is weakened. So just the FX impact sort of takes up our accounts for about 20% of our OPEX increase that we expect for the balance of the year. About 60% of the increase is what I'll call go back to normal as travel comes back, as incentive comp comes back, as we start hiring. We didn't even have a salary increase last year, so that's a normal part of things. And then about 20%, the remaining 20% of the year-on-year OPEX increase will be accounted for in higher spending in the investment areas that Rob mentioned. There are a couple other things that are puts and takes. You've got some other headcount ads and divestitures, but hopefully that gives you a broad bucketing. And we do think year-on-year OPEX, which was about flat in Q1, it won't be flat in the remaining quarters. Okay.

Okay. Yep, yep. Can't be. Okay. And then, Rob, maybe you could just shed some color on the BIM piece of buildings and infrastructure, either geographically or perhaps by end market. In other words, does the commercial market look firm to up versus education market, government market? Maybe just sift through that just a little bit as to where the strength was and should continue to be.

Sure. So infrastructure and residential backlogs are solid. Healthcare, data centers, logistics centers, utility and fiber optics work, that's all good. You know, and you can look at indices such as ABI and Dodge, and they're up. We look at OEM units. Those have been pretty good from both the construction and agriculture side even mining in places like South Africa and Australia where we have some exposure of those have those have been good so that call it that general commercial work office buildings that's low education is actually it's bigger market than you might one might realize and so it's still lower but it's still a large number and so that's doing that's doing okay geographically speaking actually, it's a pretty broad-based strength. So Japan was strong, Australia strong, North America strong, Western Europe and the Nordics are strong. And we see it play through both in software. I guess I'm giving you some software answer, but we see it playing through in hardware. So for instance, when residential work We don't actually have as much exposure residential on the building software side, but it helps us on the civil side and it helps us on the geospatial business. So in civil construction, we see more of the smaller building construction product type equipment. Some of that equipment is using technology or concrete screeds for foundation work. In geospatial, it's survey work. So, yeah, that's hopefully that gives you a sense of what's going on.

Yeah. And in the 13% core growth for buildings and infrastructure, how much headwind was absorbed there from the SAS conversions and the growth right there in that segment?

Good chunk. Probably a couple points. Yeah.

Okay. A couple. Okay. Okay, great. Thank you. And nice start to the year for sure. Thanks, Rick.

Next question from Goldman Affair and Verge. Your line is now open.

Yeah, hi. Thank you. Thanks for taking my questions. The first one, guys, is just around the guidance for the rest of the year and the way you're thinking about just to expand on the shortages issue. David, you mentioned that you expect semi-shortage, for example, to take three to five quarters to really play out. Is there a way where you kind of factored in a level of conservatism into your guidance for the rest of the year at this stage because you don't know whether the demand can be met with the supply that's available? And is there any sort of conservatism coming from that side where you don't think that's going to be an issue in meeting the demand?

It will definitely, I think, be a constraint. And as you think about the $100 million range between the bottom and the top end of the revenue guidance, the uncertainties around hardware supply account for the majority of that. So I think the scenario in which we're at the lower end of the guidance range is characterized by increasing tightness in markets for key components, and the higher end is one in which we're able to work through the constraints. So this is a hard one to call. It's somewhat unprecedented. Talking to my colleagues who've been doing this work for decades, and none of them have seen anything just like it. So we have a very adept operations team. It's one of the strengths of Trimble, of being flexible and figuring out how to handle bumps in the road like we have now. So there's you know, we're looking at this component by component and product by product, and I'll concede that there's meaningful uncertainty, and that's what's driving the range in our guidance.

That's really helpful. Thank you. And then just as a second question, I'd like to spend a little bit on the guidance that you're still providing in terms of the business model transition, which at this stage is still around one and a half percentage points headwind to your growth. If we look kind of forward and maybe into 22, 23? Like, how long does this persist for you and how material it is going forward as well? Is there a way to think that maybe 22 and then 23 incrementally becomes less of a headwind but still is a headwind? Is that the right way to think about it?

Yeah, there's two ways I'd think about it, Gal. And where it would be less of a headwind is that's a bit of a law of large numbers with 1.3 With over 1.3 billion of ARR, that'll overcome, I'll say, headwinds. And we still have over 400 million on a TTM basis of perpetual software. So there's still available businesses for us to think about, some of which we are actively working on and some of which we're not. And we want to just see how things go and what will make really sense for the business. So in that sense, you're right, there'd be less of a headwind. The other side of it is as we look at other business models, so say, for example, hardware, and say take in the machine control guidance business where we offer, we call it Trimble Platform as a Service. So to have technology assurance by buying the machine control technology, we're bundling that with software that allows us to connect that physical digital field and the office. And if we're successful in driving that conversion, you know, that may show up as more, you know, term type revenue. It depends on the accounting works, but it could create some more ratability. And if it does, in that case, that could provide a headwind instead of the tailwind that I just described.

That's interesting. And just to check, you said that could happen on the machine control and guidance. Would it be potentially something that you consider on transportation as well? You know, some of the competitors kind of going down that route. Is that something that even on ELD sites would work?

Yeah, and we're largely already offering that today, bundling the hardware and the software together in that monthly service. The nature of how some of the accounting works is it requires you to recognize the hardware revenue up front, but you might radically have the cash flow depending on how the contracts are structured. I'll give you an example in Really around our survey business, we've used it with a couple of customers to do a competitive swap on a fleet of equipment by experimenting with the Rattable business model. We've got one of our larger agriculture customers that's doing an everything as a service arrangement with us. Those are small pockets and anecdotal examples. but just want to show and demonstrate that we're not just talking about experimenting with all our business models. We're actually doing it.

Awesome. Thank you so much, and congrats for great results.

Thanks, Kyle.

And the last question comes from the line of Jason Celino of KeyBank Capital. Your line is now open.

Hey, guys. Thanks for taking my question. You know, good segue, but to Gal's question on the pace of the transition or transitions, you know, in software, we've seen a few strategies for incentivizing customers to move to these new pricing offerings. You know, maybe you could categorize these as a carrot and also a stick, you know, school of thought. Maybe could you speak to how you guys are doing it?

Yeah, hi, Jason. This is Rob. I'll start. It's more of a carrot than a stick. So our belief is that we can create more customer goodwill with the approach of the carrot. And so the carrot that we can offer, I'll use that machine control example, the fundamental value proposition around technology assurance, so staying current on the sensors, staying current actually on the firmware, that embedded software, you'd be surprised at how many customers can have outdated versions of the firmware. And when we can have a deeper insight actually into the customer and help and drive customer success, I believe that's giving them a better value proposition and a better ROI on their investment. The classic one, as you know, as you move from perpetual to subscription is to move IT operations off center for a customer, and that's providing them a value proposition that I would characterize as a carrot. And then one more I would mention, Jason, is I think a smart, we think, a smart way to provide the carrot is to increase, I'll call it increase the value of the offering when you move to the subscription. So in some cases, we're offering both the perpetual and the subscription offering. However, when you buy the subscription offering, you're getting a richer set of functionality. And we'll start to only develop additional functionality in the cloud because you have to make that break at some point. And we think that by providing the better value offering, that that is consistent with the carrot approach as opposed to the stick. Now, that doesn't mean that we'll do both offerings forever. At some point, you do have to wind it down. But thus far, we've given ample opportunity you know, time to our customers to, to, to consider their own choices.

Okay. So, so similar question then, um, for your, for your Salesforce and your partners, um, are, are you, are you running any incentives to influence them to, to go for the, for the subscription offerings?

Yeah. Follow the money. And it's, I mean, it's amazing what you can see if you, change our own sales compensation to selling the perpetual versus the subscription. When we make it more attractive to sell the subscription offering, the results correlate, no question. And at the dealer partner level, many times we'll use our balance sheet to make them whole at a cash level because they may be running their businesses more on cash flow. And in that sense, you don't want to provide, at least initially, you don't necessarily want to provide a negative incentive to that. So, yeah, you have to connect the go-to-market efforts absolutely to the product strategy.

Okay. Great. That's it for me. Thank you. Thank you, Jason.

Thanks, Jason.

And there are no further questions at this time. I would like to hand it over to Mr. Michael Leva.

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

And this concludes today's conference call. Thank you everyone for participating. You may now disconnect.