Trimble Inc.

Good day and thank you for standing by. Welcome to Trimble third quarter 2021 results. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the call over to your speaker today, Mr. Rob Painter, President and Chief Executive Officer. Please go ahead.

Welcome, 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. I'll begin on page two with the key messages we want to convey today. In the third quarter, our team once again delivered outstanding results and did so within an incredibly difficult supply chain environment. We exceeded our expectations and delivered record ARR of $1.36 billion, up 8% year-over-year and up 11% on an organic basis. Total revenue growth of 14%, EBITDA margin of 25.9%, and trailing 12-month operating cash flow of $784 million. We achieved record third-quarter levels of revenue in many of our businesses, with another exceptionally strong quarter in machine control and civil construction, guidance in agriculture, and survey and mapping. Our results demonstrate the strength of the underlying market recovery and the quality of our execution against our Connect and Scale 2025 strategy. Our results also demonstrate the quality of the Trimble team, and I want to give a special shout out to all our colleagues, led by Leah Lambertson, who are helping us manage through the supply chain challenges. On the basis of this collective strength, we are raising our annual earnings guidance despite a tightening supply chain environment. Let's start with market conditions, where the overall landscape remains robust. Construction backlog is healthy, especially in residential and infrastructure, translating to strength in our geospatial and buildings and infrastructure reporting segments. We remain optimistic that the infrastructure bill will ultimately be passed in the United States, which would bolster our long-term outlook in our construction and surveying businesses, starting at some point in 2023. We have been and are building product and go-to-market capabilities ahead of this opportunity. I'm especially proud of the role Trimble has played in leading policy advocacy in support of technology adoption, most specifically around advanced digital construction management systems, which provide state departments of transportation with access to funding to help them accelerate adoption of proven digital design and construction technologies. We will continue our commitment and support to the nation's Federal Highway Administration and state departments of transportation in their pursuit of achieving sustainable and state-of-the-art project delivery. In agriculture and forestry, commodity price strength continues to translate into customer buying power, and our backlog remains strong. We are tracking inventory levels of major ag products, which remain in a healthy position and provide some line of sight to continued farm financial strength, which we see as an important counterbalance to rising input costs. On the policy front, we have been advocating for a legislative proposal called SB 2750, Precision Agriculture Loan Program Act in the United States that provides low-cost loans to farmers to incentivize adoption of precision ag technologies. Outside the United States, we also see positive conditions, including ongoing subsidies, and we are beginning to see more policies that promote the use of technology to increase environmental sustainability. In transportation, we had another quarter of solid bookings growth, improved customer retention, and higher operating margins. In September, we announced a strategic relationship with Procter & Gamble, which will shape the development of an agile procurement collaboration platform and will in turn complement our existing set of supply chain-focused solutions. Success looks like expediting contracting and onboarding processes to increase the velocity of business transactions while enabling more efficient movement of freight. I'm also pleased to report that we were the first major technology provider to certify in Canada for the Canadian ELD mandate, evidence of the positive shift in product delivery in the business. On the downside, supply chain is especially disruptive to the operations of many of our trucking customers and will likely constrain our ability to see our execution progression flow through the near-term P&L. Let's turn to page three and talk about some notable progression of our Connect and Scale 2025 strategies. seen through the lens of the Trimble operating system, capturing strategy, people, and execution. To set context, our strategy is an industry platform strategy that manifests in bringing the best of Trimble together with ecosystem partners to transform industries that support how we live, what we eat, and how we move. On the heels of COP26, we are also convinced that we can have a profoundly positive impact on addressing climate change through the use of technology. As a proof point of our strategy, we are excited to have announced on October 27th the formation of a strategic partnership with Microsoft to build, market, and sell our industry cloud platforms and solutions that connect people, technology, tasks, data, processes, and industry life cycles. Our initial focus will be to build the Trimble construction cloud powered by Microsoft Azure. Importantly, we will also partner on joint go-to-market strategies to globally deliver these cloud innovations. As an additional strategic proof point, at our annual user conference for our Viewpoint construction management software business, we announced the transition of Viewpoint's branding to Trimble. At this user conference, we also launched Trimble Construction One, as shown on page four, which extends the capabilities of Viewpoint's current SaaS software suite with new and exciting capabilities from other parts of the Trimble software portfolio. In addition to the Viewpoint financial and operational management capabilities, Trimble Construction One incorporates Trimble's estimating and detailing solutions as well as Trimble's advanced project management offering in a single integrated package, which is now being sold by multiple Trimble divisions. Our direction is clear. We will continue to expand the capabilities of the Trimble Construction One platform for our civil and buildings customers to further connect the physical and digital worlds across construction field and office workflows. On people, we continue to be recognized as a top company culture, and Fast Company recognized us as a best workplace for innovators. In an increasingly competitive job market, melding Trimble's mission with our innovative culture is top of mind for our talent attraction and retention efforts. As evidence of the attractiveness of Trimble, in September we hired Jennifer Lin as Chief Platform Officer and Poppy Crum as our Chief Technology Officer, both world-class talent who see and believe in our vision and the potential of Trimble. On execution, we continue to innovate. Our MX50 mobile scanner launched in the third quarter, as did a beta release of SketchUp for iPad, and we continue to enhance the capabilities of our best-in-class high-accuracy correction services, which enable positioning down to centimeter levels globally. We are investing heavily in our own digital transformation, which will provide the system and process fuel to deliver our increasingly connected solutions in an efficient and scalable way. Before I turn the call over to David, I want to talk about how we are operating and leading in the current environment, which presents both volatility and unprecedented opportunity. For years, we have talked about our 343 operating model, three months, four quarters, three years. I see the role of Trimble leadership as being stewards of capital allocation on behalf of our shareholders, where we balance short-term realities with long-term possibilities. As we move towards closing out 2021 and into 2022, we will continue to support the incremental investments we are putting towards our digital transformation, autonomy, and infrastructure opportunities. We have high conviction that these investments will create new, sustainable, and differentiated long-term growth opportunities for Trimble, and we remain bullish on the long-term secular opportunity for digital technology to make our customers more successful, productive, and sustainable. we will have the courage to look through near-term supply chain disruptions and upfront costs of our digital transformation and to hold ourselves accountable to progressing our connect and scale strategy. David, over to you.

Thank you, Rob. Let's start on slide five with a review of third quarter results. Third quarter revenue was $901 million, up 14% on a year-over-year basis. Currency translation added 1% and divestitures subtracted 2%, for a total organic revenue increase of 15%. Gross margin in the third quarter was 58.7%, down 10 basis points year over year, reflecting several factors, including higher product and freight costs in our supply chain, offset by increased pricing and lower discounting. Adjusted EBITDA margin was 25.9%, down 90 basis points year over year, driven by higher operating expenses and investments in the business. Operating margin was 23.8%, down 40 basis points year over year, but still up over 300 basis points versus the pre-COVID third quarter of 2019. Operating expenses last year were unusually low in a number of areas, including compensation expense. Net income dollars increased by 10%, and earnings per share increased by 6 cents to 66 cents per share. Our third quarter cash flow from operations was 166 million, and free cash flow is $156 million. Cash flow is down modestly year over year in the quarter, as we are purchasing inventory in response to strong demand and supply chain shortages. Operating cash flow is up 23% on a year-to-date basis, with a conversion ratio to net income above 1.1 times. Our net debt declined $88 million in the quarter, and our net debt to adjusted EBITDA ratio fell to 0.9 times. During the third quarter, we repurchased $100 million of common stock. At the end of the quarter, we had the entire $1.25 billion available in a revolving credit facility and approximately $513 million in cash. Our balance sheet is strong, and we are well-positioned 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 third quarter revenue trends. As mentioned earlier, our ARR was up 8% in aggregate and was up 11% organically on a year-over-year basis. The 11% rate excludes the impact of foreign exchange and our recent divestitures of iron solutions, Manhattan real estate solutions, and construction logistics. All three of these divested businesses had a recurring revenue component, but were in areas outside of our strategic roadmap. Our non-recurring revenue streams grew with hardware up 18% year-over-year and perpetual software growing 19%. Our hardware growth was driven by strong performance in civil construction, geospatial, and agriculture. Our hardware growth 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 11%. In Europe, revenues were up 18%. Asia Pacific was up 5% year-over-year, and the rest of the world was up 33%, driven principally by strong demand from the agriculture sector in Brazil. Next, on slide seven, we highlight some of the key metrics we follow, and I'll start with ARR. While total company ARR grew 11% organically on a year-over-year basis, ARR excluding transportation grew at a mid-teens rate in the quarter. Networking capital, inclusive of deferred revenue, continued to be negative, representing approximately minus 2% of revenue on a trailing 12-month basis, notwithstanding an acceleration in purchases of component inventory during Q3. Research and development on a trailing 12-month basis was 15% of revenue, and our deferred revenue grew 17% year over year. Our backlog at the end of the third quarter was $1.6 billion, up from $1.5 billion a quarter earlier, and up over 30% year over year. While growth on our backlog is an indicator of momentum in the business, it is also reflective of the shortages and extended delivery times that we are experiencing for many key components in our hardware products. Of our 1.6 billion in backlog, just under 340 million relates to our hardware offerings, up from about 100 million in hardware backlog a year ago, and 38 million higher than the end of Q2. We expect supply chain constraints for many key components to extend well into 2022. Let's turn now to slide eight for additional detail on each of the reporting segments. Buildings and infrastructure revenue was up 12% on an organic basis. Revenue growth was strong in both our building and civil construction businesses, and organic ARR was up in the high teens in the quarter. Geospatial revenue was up 23% on an organic basis, driven principally by strong performance in our core branded survey equipment. Margins were up 60 basis points due to both revenue growth and operating cost control. Resources and utilities revenue was up 23% on an organic basis. We experienced double-digit growth in each of our precision agriculture and positioning services offerings. Margins in resources and utilities contracted 330 basis points and were hardest hit by product cost inflation in the quarter. Financial results in transportation showed progression in a number of areas. Revenue was up 3% on an organic basis year over year, but grew less than we expected due to supply chain challenges both in our operations and our customers' businesses. Margins expanded 410 basis points year over year. Turning now to page 9 for our updated outlook for the full year. We are raising our expectation for full year revenue with a new range of $3.59 billion to 3.64 billion, representing growth for the full year in the mid-teens and single-digit year-over-year growth in the fourth quarter. End market demand is even stronger than we thought it would be a quarter ago, but supply chain constraints will likely cause our backlog to remain at or above the increased levels from the end of Q3. ARR growth at the company level is trending as we anticipated, driven by strong bookings and subscription transitions And we expect organic ARR growth of greater than 10% in the fourth quarter and a strong entry point going into 2022. Gross margins in the fourth quarter are likely to be about flat sequentially with the third quarter. An increasing mix of software will have a favorable impact on sequential gross margin trends, but this benefit will be offset by an anticipated decline in hardware margins. In aggregate, we now expect that the net impact of accelerating hardware cost inflation and our recent price increases will be modestly negative to hardware margins in Q4. Building off our strong third quarter results, our outlook for operating margins continues to improve, and we now expect operating margins for the full year 2021 will be above 2020. Operating margins in the fourth quarter of this year will likely be lower than the fourth quarter of 2020, driven both by higher hardware component costs year on year and by higher operating expense, as OPEX was unusually low in 2020, and we are now ramping up investments against our strategy. Our outlook for full-year earnings per share has increased to $2.61 to $2.69, representing growth of approximately 17 to 21 percent year-over-year. We continue to expect operating cash flow greater than 1.1 times net income and free cash flow greater than one times net income, reflecting the strong cash-generative aspects of our business model. I'd like to comment briefly on the outlook in the fourth quarter for our transportation segment. As Rob mentioned earlier, the leading indicators for this business are strong, with growing bookings of recurring solutions, sequentially improving customer retention in our mobility business, and increasing signs that our connected transportation strategy is resonating with customers. Nevertheless, factors related to the global supply chain and the extraordinary pressure on the transportation industry will negatively impact our business momentum in the short run. Our OEM business will be constrained by customer manufacturing challenges, and the aftermarket business will be slowed by the fact that trucking companies are reluctant to take assets off the road for technology upgrades at a time of high transportation prices and extraordinary asset utilization. We believe that these constraints will be resolved over time, and we remain confident in the turnaround of this business. but the pace of improvement of revenue, ARR, and profitability will be lower than we had earlier projected. With regard to 2022, we don't plan to give detailed guidance until our year-end earnings release, but we can characterize some of the drivers that we see now and their expected impact on revenue, ARR, and margins. Demand across our end markets remains strong, and we believe that strength will sustain at least through the end of 2022. Our customers' need for digital solutions to optimize their workflows has never been stronger, and these customers have the money and the desire to invest. We expect organic ARR growth to accelerate in 2022, building off the momentum we have now and aided by continued model transitions and the growing sale of connected recurring solutions. The supply chain environment remains our biggest challenge, and that challenge is predicted to be with us for several more quarters. From a cost perspective, we anticipate that inflation in our hardware businesses will be sustained through the first quarters of 2022, driven both by higher component costs and higher costs of getting products shipped to our manufacturers and distribution centers. It is the goal of our pricing strategy to offset the impact of inflation on our hardware gross margins, and that pricing strategy continues to evolve. Rob referenced in his remarks the investments we are making against our digital transformation. We anticipate that as we get through this investment cycle in 2022, and as our software businesses continue their transition to recurring revenue models, our operating leverage will be lower in 2022 than we expect over the longer term. The investments we are making in our digital transformation are at the core of unlocking the potential of our platform strategy, and we expect to end 2022 with business processes and systems that will accelerate our ability to transform the way we go to market and the way our customers do their work. With that, I'll turn it over to the operator for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw a question, press the PAM key, and please stand by while you compile the Q&A roster. Your first question is from Anne Eggman of JP Morgan. Your line is open.

Yes, hi. Maybe you could talk a little bit more about the outlook for 2022 and what you see across the different segments. I know you said in some of your opening comments that you do expect an infrastructure build to pass. If that doesn't happen, would that influence your outlook for 2022 at all for buildings and also geospatial and then... the fundamentals in agriculture with, you know, we continue to see farmer sentiment decline on higher input costs, not just in the US, but also in Brazil. So maybe talk about some of the pluses and minuses that you're seeing out there as you look to 2022 and the end markets. Thank you.

Hi, Anne. Thanks for the question. This is Rob. So I'll give you kind of a walk around the end markets and and some of the positives and some of the potential gotchas that we're looking out for. And the things we're looking out for that could be to the negative would be around supply chain inflation and labor availability. And of course, all those things correlate. On the geospatial and construction side, we see strength in residential and infrastructure work right now. We see on the commercial side strength in sub-markets such as data centers and hospitals. We believe there's indicators that the residential work will drive light industrial work. As it relates to the infrastructure bill, and if it doesn't pass, we would see a benefit of the infrastructure bill really in 2023, so we really don't expect anything in 2022. Of course, there's a sentiment aspect that's hard to quantify, but we remain that optimistic, and I spent some time in Washington a couple of weeks ago to that end. And when I think about construction and I think about the labor side of it as a potential downside, you know, the benefit of technology is that it can make an inexperienced operator good. On a geospatial market, a robotic total station can turn a two-person operation into a one-person operation. On the ag side, what's positive are commodity prices. It looks like the harvest, early data on the harvest would suggest a lower harvest, which would hold up commodity prices, and then we index that against the ending stocks or the inventory. As you said, absolutely, input inflation, I think, is what's starting to dent the optimism on the farmer front. With that input inflation, though, I look at the value proposition of the technology. So a spot spray technology can reduce the use of herbicide And that's a really big deal, or the variable rate can reduce the use of the other inputs. And as we know, also has a positive environmental sustainability benefit. At a geographic level, the subsidy policies tend to be more consistent and higher outside the United States. So that tends to provide the ballast, let's say, to the overall market. But we're absolutely paying paying attention to all of this. At some point, right, this will have to have an impact. On the transportation side, what we see is strength in spot pricing. And, I mean, we even see it from our own rates on transportation, as David talked about, where they've gone up. A downside is driver availability in the market and availability of trucks coming out of the OEMs. So carriers are having trouble actually adding capacity And when I think about a technology lens on that, an average driver effectively uses around seven hours of their clock per day. Our strategy is to drive a more connected supply chain. That means dynamic schedules with the shippers and the receivers to better optimize wasted driver hours. We provide better routing and navigation solutions to create efficient trip management. Fundamentally, we want to get at more accurate order load information for the customers, and that can increase the network optimization. There's puts and takes, as always, Ann, and we think that technology has a role really in almost any market condition.

Your next question is from Jason Salino of KeyBank Capital Markets. Your line is open.

Hi, this is actually Devon on for Jason. Thanks for taking our questions. First one I have is on construction. I'm just wondering if you could provide an update on, I guess, eBuilder and Viewpoint. I know that you guys rebranded, but any color on the AR growth and growth drivers there would be helpful.

Hi, thanks for the question. So the combined ARR growth between the two businesses was plus 17% year over year. So another great quarter of execution between the two businesses. As you noted with the rebranding, we are especially optimistic around the Trimble Construction One offering. We converted over 1,000 customers to the Turbo Construction One offering, sold dozens of new logos onto the offering in the corridor. It's bookings that creates ARR later down the road, but the value proposition and the awareness from the customers is quite encouraging. And we've seen that in the bookings for some time now, which now plays through the through the ARR expansion.

Great, that's helpful. And just one more, and staying on construction, and you're definitely encouraged to see the Connected Construction One platform, but just want to ask, you know, are you, in terms of like market opportunity, are you still mainly displacing these legacy systems and paper-based processes out there, or are you seeing, you know, meaningfully more interest from contractors and owners looking for a more connected solution?

There's both. It's a good question. From a market, overall market perspective, really the secular opportunity in construction technology, and by the way, I'd say this in our other end markets as well, is that these markets are large, they're global, they're underserved, and they're underpenetrated by technology. So the move to digitization provides a value proposition that delivers productivity, quality, safety, efficiency, transparency, and environmental sustainability. So there's a positive catalyst for technology to be adopted, and at some level, yes, that is replacing paper-based systems that exist, or let's say just the mental-based systems that exist. And we are seeing demonstrable interest from customers in the connected solutions that we offer. And I've had a chance to talk to a number of the customers personally, some that are showing us how they're already taking our technology and connecting the various solutions to improve their workflow. And one of the things they do is not only connect a Trimble workflow, but in a Trimble environment that can provide actually a common data environment, we can connect in an open and really agnostic way to the other technology that our customers use. Our customers operated, as you know, in the construction industry is fragmented. Therefore, the technology tends to be a bit fragmented as well. And so our ability and approach to connect Trimble and non-Trimble solutions is very top of mind for customers. And of course, COVID has also been a catalyst from a digitization perspective. So much of what we do can uniquely connect the work in the office and the field that connects the hardware and the software and ultimately that physical and digital. Great, great. That's great to hear.

Thank you.

Your next question is from Rob Wertheimer of Milius. Your line is now open.

Hi, thank you. And Rob, thanks for that answer. I'd actually like to follow up on a couple of the points you were making there, just on the future of digitization and construction. I wonder just, you know, this is a very large opportunity. Do you feel like there's an acceleration? Is there a tipping point where, you know, we're visible in the next two or three years or X timeframe where you have to be digital or you're not there? just a general sense on how fast that market is moving. And then do you think it's coalescing around two or three sort of platforms, yourselves being one of them, and that's kind of the construction one idea? Or is that too aggressive a statement and it's still a hodgepodge of a bunch of different assets? Maybe just asking you to assess the competitive platform dynamic as well. Thank you.

Hi, Robin. Thanks for the the question. From a tipping point perspective and an acceleration perspective, well, I think the numbers would prove the acceleration of the adoption of technology. And if we were to get an infrastructure bill, which, by the way, we're talking about that in a US context, but we see a construction-led recovery really globally in many markets. And so HS2 is a really nice project in the UK. Grand Paris and Paris The rail project is expected to be a very large project. There's large projects happening in Saudi and Australia continues to have some big development. So we see the fundamentals and the macros providing an ability to accelerate it. I think really the move to digitization, COVID, I really do feel has accelerated that, you know, kind of perhaps has inflected You know, so many of our customers were unable to actually go out to the field like they used to be able to do, or they realized the need to be cloud connected and cloud enabled when they weren't going to their offices as frequently. And we think that's helped us drive more bookings in the business to the cloud offerings. And as it relates to a tipping point, that's a really good question. That's a bit of a crystal ball. I think one of the catalysts that could create a tipping point would be if we see more more of this driven from owners, and I'll say as well as regulators, and maybe I really mean policy when I say that. So from an owner perspective, that's actually the premise of why we did the eBuilder acquisition, because who fundamentally has the most at stake when a project's late or over budget? Of course, it's the owner, and so we help them manage their capital programs. From a policy and a regulatory perspective, You know where we have a point of view is you know, we think that would take the US infrastructure bill as an example, and this is a generational opportunity to increase the competitiveness of the United of the infrastructure in the United States. And we can deliver that infrastructure 2030% cheaper through the use of technology, so it just makes sense, and so, if more of this if we can increase the level of awareness awareness. I'm certainly an advocate that there's a policy measure here or certainly encouragement measure. And that's why I talked about that Digital Construction Management Act because it provides an incentive for DOTs to adopt technology. So I'd say we're all staying tuned for that one if there's something that sort of fundamentally creates an acceleration on the tipping point part of it. And then you asked about platforms, Rob. And on the platform side, I think it is logical to think that there would be some coalescing around a few platforms. I mean, as you said, the industry is rather fragmented. We're not the only technology platform out there. Actually, I think there needs to be interoperability between those technology platforms, and that very much shapes how we build our technology. It is an underlying fundamental belief that we have.

Thank you.

You're welcome.

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

Hi, good afternoon. I wanted to maybe start out with some of the supply chain issues. Can you talk a little bit about maybe what the increases in lead times look like for your customers? And have you seen any potential losses just given the extended backlog and potentially delivery times?

Hey, Jonathan. It's David. The lead times vary a lot by product. But historically, our lead times have been very short, measured in a few days. And there are many times that. So weeks, and in some cases, many weeks or a few months. And sort of that's the math of the backlog that you're seeing. As far as the competitive dynamics, In a very few isolated cases, we can identify where we've lost business to a competitor that can supply more quickly. Typically, they are competing at the lower end of the market. And in some cases, those customers have come back. But I think generally, our competitors are experiencing at least similar pressure to what we have. And we don't believe that this has had an adverse impact on our share trends. In fact, in our hardware businesses where we can see numbers that are published by our peers or competitors, there's evidence in many of those segments that we're gaining share. We also haven't seen a meaningful amount of orders being canceled because the lead times are extended. So it's something we're watchful for. We're lucky, as Rob said in his comments, to have a really capable company operations team that has done a remarkable job getting supply in this very difficult environment.

Excellent. And then just as a follow-up, just given the strength in your ag business, I'm wondering, are you seeing a change in the types of products that you're selling into that market, especially relative to historically when it was sort of focused on guidance systems? Are you seeing sort of that broader digital transformation happening in this segment as well? Thank you.

Hey, Jonathan, it's Rob. I'll take that one. I'd say the product mix is relatively stable at the moment. What I would say we're doing a better job of is connecting the software and the hardware and the correction services into the offerings that we have, so more of that bundling at a point of sale and making ourselves easier to do business with. We have picked up some new OEM customers along the way. And then we've seen some strength in, you know, particular strength in various geographies. So, you know, in the corridor, Brazil was very strong for us. Russia was also very strong for us. So there's, I'd say there's pockets, geographic pockets, where we're able to increase the penetration. But in terms of a discernible shift in the overall mix of the portfolio, not really at this point.

Great. Thank you.

Your next question is from Jerry Revit of Goldman Sachs. Your line is open.

Yes, hi. Good afternoon and good evening. I was wondering, Rob, if you wouldn't mind expanding on the recurring bookings growth you folks outlined in your prepared remarks in transportation. I think it's the most positive tone you've struck in transportation in a while. Can you just unpack that? What part of the business is driving the recurring growth and You know, what do the churn rates look like on the legacy business where we're working through the headwinds? Thanks.

Sure. Hi, Jerry. Thanks for the question. Within the transportation business, you know, I've historically talked about three legs on the stool of the technology stack, the first being that we provide mapping, routing, navigation engines, Second, that we provide the back office technology for trucking companies. And third, that we provide the field mobility tools for companies. In terms of the booking, and then those are the three historic legs of that stool. And then over the last couple of years, we've moved as well to address the shipper side of the market, whereas historically the strength is on the carrier side. So on the carrier side of the business, where we see the bookings growth is in a couple places. So first, in that back office ERP systems, we call it a transportation management system, we're moving that business to a recurring model. So there's a model conversion that's happening in there. And we have seen evidence that we're increasing the size of the addressable market, which means we're reaching some customers that we hadn't previously reached. And that's translating into 20% plus bookings growth on a year-over-year basis in that part of the business. What we're seeing as well on the mobility side, which is really more the ELD part of the business, is we have seen some life there, both through through two things. One, increasing penetration and existing customers as some of our existing customers, actually many of them, are adding capacity given the market. In fact, they would like to add more capacity. In many cases, aren't able to actually get the vehicles or the drivers to do it. But that's one area where we see growth. And the others is we do see some logos coming back to us, which has been a really good sign for us. Still a long way to go, but I'm just liking what I'm seeing from the team and the pace of the team and the trajectory and that Canadian ELD certification was a nice proof point that we're not just talking about these things, that we actually also are delivering. That mapping, routing, navigation business has had many, many years of double-digit recurring revenue growth, which means bookings continue to grow strong, and they continue to do a great job quarter in and quarter out, and add it up, and that got to the commentary and the script. Oh, you asked, Jerry, about the churn rate as well? Yeah, on the churn rate side, I characterize it in net retention, and net retention was above 100% in the quarter, which is obviously a great sign for us.

Well, it's really nice to hear about the inflection there. And, you know, in buildings and infrastructure, I know you have really good visibility on the prospective pipeline and bookings. Can you talk about if you've seen an acceleration in those lead indicators that you track for eBuilder and Viewpoint given the labor shortages, et cetera? Could we actually see ARR accelerate further from the strong rate that we're running at in 3Q?

So, yes, actually, we do think we can accelerate the level of ARR growth, actually, across the company, and then that being the biggest contributor, really, to that growth. It absolutely is something that we have a line of – a reasonable line of sight to the current bookings growth. You know, as we plan the business forward, we'll think about in any given quarter or a year, for that matter, what's, quote, unquote, in the bank, and then what's the go-gets. we think about that go get then you can measure the pipeline you have and then you measure the qualified leads you have against that so you kind of just keep working backwards from that equation and then do you have the horsepower to go and positively affect that pipeline and to and to turn it into a booking which eventually turns into the revenue in addition Jerry another catalyst for us coming into next year is our structures business so the old Tecla business the steel concrete business so that in the summer we stopped selling perpetual licenses and so in fact we sold more perpetual this year than we had anticipated and and now that we're off the almost entirely off the perpetual that just by the math will provide a catalyst for AR our ACB bookings which will turn into ARR so that alone would be a catalyst to ARR growth in that business looking into next year. Thanks, Rob. You're welcome.

Your next question is from Weston Twink of Piper Sandler. Your line is open.

Hi. Thanks for taking my question. Actually, I have two, if you'll allow it. First, just the geospatial segment. It's been growing really strongly, and I'm just wondering if you could help us just get a feel for those trends through next year. How sustainable is this rate of growth?

Hi, this is Rob. Yeah, thanks for the question. Big kudos to the geospatial team. The latest innovation that went to market in the third quarter was the MX50 mobile mapping system, and that's on the heels of just really many innovations over the last few quarters between the X7 laser scanner, the R12i GNSS receiver really nice run for this the business has a pretty good amount of backlog associated with it as we look forward into 2022 you know we think that you know we do have the wind at our backs and that we can continue to grow the business now the stunning growth that we've had in that business in 2022 or 2021 excuse me No, I don't see that that one progresses. You know, we said a few years ago that this was, you know, we thought of it as our most mature of the businesses that we have. And, you know, it has proved more than once lately to be one of the fastest growers within Trimble on a year-over-year basis. So really a lot of excellent innovation. And as well, our go-to-market team has just done an outstanding job with the channel management around around the world. And I would expect that to temper back somewhere closer into the company average of the six to nine organic range as we go into next year. I would take that as a starting point.

That's very helpful. Thank you. And then the other question I had, you mentioned the COP26 conference, the discussions around there. And with all the severe weather events this year and how it's impacted your customers, I'm wondering if you could maybe discuss just some of your broader revenue opportunities with respect to climate change adaptation, you know, specifically thinking about some of your agricultural construction infrastructure customers and maybe outline, you know, broadly speaking, how that revenue opportunity could ramp.

Oh, thank you for that question. I'm excited and I'm actually quite inspired by the ability for Trimble to play a fundamentally positive impact or a fundamentally positive role in impacting climate change. Now, the truth of the matter is that our products and our technology has had a positive environmental sustainability benefit for as long as we've been around. And it's been a byproduct of the productivity and efficiency that our customers generate. What I see as an opportunity is that comes more and more to the forefront. In some cases, it's as our customers have more reporting to do themselves. Whether they realize it now, some of them do, or whether they don't, we see that coming and then we see an ability to be able to move into that space. If you take agriculture as an example, we do have a small business in ag. that essentially runs a carbon marketplace. We get calls from customers or potential customers asking for help in certifying the offsets that they're buying. So think about our, we tend to talk about our agriculture business, but we also have a nice forestry business. These are two places that are hugely important in this conversation. And so as big companies are making their own commitments and buying offsets, They don't want to buy bad offsets and so you know We're encouraged by the types of calls that we're getting because it's giving us conviction of where we take our our product roadmap to positively impact this and if I think about the construction space our Our structures business so the steel part of the structures business Well, we did an announcement a couple weeks ago of something that I think is pretty compelling as we can as we continue to from a design perspective, essentially to design for sustainability, to understand the carbon load that a building has during that design and engineering phase. For many years, we've had a pre-designed product to help you understand, let's say, the energy consumption profile of a building. And as the users of the buildings, and let's say if there becomes regulatory pressure on this to design, with carbon in mind. The constructible models that we provide at Trimble have a profoundly positive ability to impact designing and maintaining and operating with sustainability in mind. So we're actually putting some resources to this because I see, and all of us at Trimble see, our board sees some really interesting opportunities that At some point, we'll turn into commercial opportunities. Now, do they turn into commercial opportunities as something discrete and separate, or are they part of the existing technologies we have? I would say there, I don't know. But boy, you follow what's going on, and I've got to believe that there's some material business for us to have here.

That's really helpful, and thanks for all the effort in that category, for sure. Thank you.

Thank you.

Your next question is from Chad Dillard of Bernstein. Your line is open.

Hi, good evening, guys. Hi. So I actually want to go back to Trimble Construction 1, and I was hoping you could give a little bit more context on kind of where it belongs in the product portfolio. I guess my first question is just on, you know, just how much, you know, overlap does it have versus your current product offering? And then maybe you could talk about at least like your initial sales, you know, whether you're seeing more come from conversions versus new customers. And then secondly, to what extent does this new platform, you know, expand the opportunity to bundle?

Chad, so this is Rob. I'll take the question. So where to start? Our Terminal Construction One offering essentially right now can take what we do at Viewpoint And at Viewpoint, years ago, we moved from selling, I'll call it an ERP, only an office-based solution, to moving to selling a combined team and field solution. So think project management and field mobility tools, and we called it Viewpoint One, and then we called an OTF office team field offering. So it moved from a point solution to a bundled Viewpoint solution, and now that next step is into Trimble Construction One with the first release of it. That brings in... many aspects of our MEP business, so mechanical electrical plumbing business, where we're able to bring in detailer and estimator workflows into the product offering. And then from there, we have a basis where we can continue to expand across other architectural and engineering workflows and products that we have. So by and large, it's taking what we do already and having a better packaging around that, making it easier for our customers to consume the technology. From a technology perspective, it's better integration, tighter integration between the solutions that we have. Our customers have been asking for this, and so we're really excited to be able to start delivering upon it. I'd say it's just the start. It's version one of Trimble construction one. There's many other capabilities that we believe we can bring into that, both from a civil perspective as well as a vertical construction perspective. And the nature of the conversions we have thus far are predominantly with the existing customers and moving them over. But we did get, I think it was a few dozen new logos during the quarter on Trimble Construction 1. It's very much a persona-based growth platform. You know, we think about personas in architectural engineering persona. We think about a contractor persona. We think about an owner persona. And as we migrate over time, we'll be able to get more and more, I'll say, specific and targeted to delivering construction, terminal construction one to those individual personas. So I'd really say the start of much more to come. And the more that we connect the data, the users, and the workflow across this, that begets the opportunity to move into richer data AI opportunities. And there it gets then another level of exciting. So the more we can connect what we've got for our customers, the more that will create solutions down the road.

Great. Thanks for that. I mean, just second question, more so on your hardware business, just trying to understand the progression of price-cost. I mean, maybe you can just, like, walk us through, like, what the price-cost balance was, 1Q, 2Q, 3Q. I think you said 4Q. It's negative. And then, I guess, most importantly, you know, where do we go from here to here? If I remember correctly, there's a portion of your business that is under a kind of, like, longer-term contracts. And, you know, when do those anniversary get up for renegotiation.

Hey, Chad. Let me give you some perspective, and I'll sort of ground my comments in what we mentioned last time. In this very uncertain world, we were estimating that for the full year 2021, we'd have inflation in aggregate of about 6% of our $600 million in COGS, so that's $36 million. We're definitely running north of that. we're probably about 10 million more in product and freight inflation than we were anticipating. And we've adopted our pricing strategy all year in response to our best guess of where things are. You're right, there's some latency in when you can make a decision and implement the strategy. And it really differs by business and customer. In some cases, we can implement a price increase by smarter and less discounting. Some cases, there's a surcharge that's possible. In some cases, you have to wait for a list price. But I would say our pricing momentum has kept up with the inflation outlook that we started with. But we're running behind because inflation's hotter than we believe. So your understanding is correct. We're behind inflation now. even though pretty much the full impact of our price increase came through in Q4, will be modestly negative, not hugely modestly negative. Going forward, it's a very tough world to guess cost inflation. And we think it's not going to get better soon. We're optimistic it won't get a lot worse. We have some more work to do on the pricing front. But I would say in aggregate, it is still our view that over time we can offset the inflation cost impact with pricing. It's just going to take us into next year to do that.

Thank you.

Your next question is from Colin Rush of Oppenheimer. Your line is now open.

Hi, good afternoon. This is Kristen on for Colin. Thank you for taking the question. Just wanted to follow up on some of the commentary around the connection scale and sort of the acceleration of that spend into 2022. Just wondering if you can provide an update on sort of the internal processes that you're going through, where you stand in those, and any metrics around identifying what that opportunity set is based on the multi-product customers.

Well, hey, Kristen. This is Rob. From, let's say, to put context around where we're spending the money, our own digital transformation. And we believe through that digital transformation that that will in turn lead to an ability to scale our revenue growth, particularly the recurring revenue growth and the growth of bundled offerings. We do believe there'll be an infrastructure bill that comes. And even if it doesn't come, we believe there's a fundamental ability for us to play a positive impact within infrastructure to have it be built better, faster, safer, cheaper, greener. So we have been putting more resources to that, which we in turn think will help us grow the business. We take both a short-term and a long-term view when we come to extensive questions around how we actually come to that answer. And we believe it's the right thing to do for the business. I think I only answered half your questions, so sorry. Tell me what else we can help with. Just for the upside, what's...

The internal processes, where you are in that process of identifying where you can create synergies internally, how you're going to market more efficiently, just sort of connecting the internal data backbone, an update there would be really helpful.

Yeah, so from the internal perspective there, actually I like the progress we've made. You know, through our annual program, strategy exercises we do. Each of our major franchises have defined there what connect and scale means to them. In our industry, cloud strategies or platform strategies, the relationship with Microsoft we think is a really big deal for us and where we take the business going forward. We've got demonstrable success on digital transformation efforts with some of the underlying plumbing that we're putting in place, so things like common identity licensing entitlement engines, which really are just the, I call it the must-haves, table stakes for where we're going as an organization. Most of our businesses have identified where they see cross-sell, up-sell opportunity within, I'll say, common customer personas. So I like the work that we're doing in preparation. I wish it could come faster, but these things do have a bit of a natural course they take.

And then if I could, the follow-up to a previous question related to sort of the hardware sales versus ARR growth. I'm just wondering, given the strength that you've seen in hardware over the last, call it year or so, how we should think about that as a precursor for ARR growth. Thank you very much.

Well, most of the ARR that we have is independent of the hardware. Where I would say there's a potential precursor is we talked before about our machine control and guidance business and civil construction that obviously has hardware and software associated with it and where we've moved to a recurring offering there. So to the extent that that inflects and we see more adoption of that, and we have been seeing more adoption of that, regardless of how the accounting is treated on it from a practical perspective, it does become more recurring and have an ability to drive that. In addition, the more we connect that hardware and the software that we have overall, there I think we see a large installed base of customers who have our hardware that would benefit also by connecting, let's say, to office software to combine with the field hardware. So I do think there's an opportunity there, Kristen.

Your next question is from Matt Marshall of Morgan Stanley. Your line is open.

Hi, team. This is Eric Anfermita. Thanks for squeezing us in. Maybe just to follow up on that last question, when we think about some of the incremental investment you're planning over the next year, you know, has going through this process of connecting more of the assets, whether they were acquired over time or kind of built separately, at all impacted your appetite for M&A? Just wondering if that is a factor.

No, I'd say it hasn't impacted it at all. You know, we will look at acquisitions where we think it can accelerate the strategy and have a positive impact on connected scale and building out our industry platforms. We also think more these days about partnership, and I think Microsoft is a good example of that. There's multiple paths to get to this strategy.

Thank you. And maybe if I could squeeze in one more. You talked about the high teens growth in Viewpoint eBuilder, but when we look at overall subscription growth, somewhat flattening organically. Can you help us understand what areas of subscription grew somewhat slower? Is that mostly related to the transportation segment, or are there any other factors?

Transportation segment.

Got it. Thank you.

Your next question is from Ed Maggie of Barenberg Capital. Your line is open.

Hi, guys. This is Ed Maggie on for Galmunda. My question relates to the Microsoft partnership with Construction One. How much of this is technology partnership versus go-to-market efforts? And then what is the estimated timing for GA for this? We'd love to hear some examples of new products that could follow after. Thanks.

Oh, yeah, this is Rob. I'll take the question, and thanks for the – and thank you for the question. It's both technology and go-to-market, and then from a GA perspective on the – well, on both of those intersecting, you know, think – I think next year, mid to late next year, would be the time to think about GA. And then before then, from a technology perspective, we get, I'll say, incentives and help to move technology that we have, so to help us accelerate the velocity and the development efforts. So we get some help on the technology side there. Nature of relationship does give us a better pricing on the cloud cycles that we consume. And then, you know, yes, the idea is to build the construction cloud powered by Azure. And in doing so, we believe there are some unique and novel things that we can bring to that construction cloud and just think about the breadth and depth of what we do at Trimble. And now map that at a go-to-market perspective. I mean, you've got tens of thousands of sellers between Microsoft and the partner network on top of the sellers. that we have on a global scale. And you quickly get a sense of why I am very excited about the opportunities to help us with reach and scale as a result of this relationship. And we do think that there's some really interesting technologies to combine between the two companies. I'd say, yeah, stay tuned for more on that in time.

Excellent. We'll hold it there. Thanks for taking the question, and congrats on the quarter. Thank you.

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

Yes, good evening. Thanks for taking the question. I'll try to be real quick here. I just wanted a clarification first. The commentary around connect and scale investments for this year, could you confirm, did you say that you thought you would be back on model with respect to incremental margins in 2023, or did I hear that correctly, or

Hey, Rob, it's David. So I think I'd characterize our comments as sort of broad outlook to 2022, a little talk about 2023. But just to add a little more color, we are in an investment mode in the areas that Rob talked about in digital transformation, in autonomy, and in our major accounts go-to-market activities. which are all really critical to take advantage of the strategic opportunity we have. And those are likely to result in OPEX growth next year ahead of revenue growth. So, you know, I think we'll have, if you look back at the 2018 investor conference and the objective stated was operating leverage in the 25% to 30% range, I think we'll be in that range, but in 2022 at the lower end. And then I think it's logical to expect that we'll have some of the positive benefit of that beginning in 2023. But I'll be cautious about making a firm prediction now.

Sure, sure. Maybe the follow-on to that is there was some news in the quarter around where you do have some autonomy exposure, a customer there planning to ramp some of the technology they leverage from you. How should we think about when that does happen, if it happens? Is that more step function, or is that more linear with, I guess, their volumes around that? I'd say more linear with volumes. Okay. Very good.

No questions at this time. I would like to turn the call back to Michael Leyva for further comments.

That concludes our call, everyone. Thank you very much, and we'll talk to you next quarter. Thanks, everybody.

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