Trimble Inc.

Q1 2022 Earnings Conference Call

5/5/2022

spk11: Thank you for standing by and welcome to the Trimble first quarter 2022 results. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 in your telephone keypad. And to read the other question, press the hash key. If you require technical support at any time, please press star 0. I would now like to hand the conference over to Rob Painter, Chief Executive Officer, please go ahead, sir.
spk04: Welcome, everyone. Before I get started, our presentation is available on our website, and we ask that you refer to the safe harbor at the back. Let's begin on page two with gratitude and a shout out to our team and our partners for delivering a record first quarter that exceeded our expectations. The team delivered record levels of annualized recurring revenue of $1.47 billion, revenue of $994 million, and EBITDA of $253 million. Every reporting segment met or exceeded expectations and backlog stands at $1.7 billion. Our software teams exceeded expectations on delivering ARR growth as we continue to transform our business models, and we achieved record levels of recurring software bookings in many parts of the business. On the hardware side, our operations team secured components late in the quarter to solidify our strong performance. Tentatively speaking, the story of the first quarter is that demand remains healthy, our strategy is working, and we continue to execute in a very dynamic environment. Against this backdrop, we are raising our organic annual guidance for the year, adjusting for the impact of divestitures and currency. As many of you know, we think on a 3-4-3 operating cadence, simultaneously balancing three months, four quarters, and three years. We aim for the same balance on these update calls. I'll start my commentary by addressing some of the specific topics you've been asking about in the 3-4 zone, namely Russia and Ukraine, supply chain, inflation, and market conditions. Starting with Russia and Ukraine, our first priority remains the safety of our teams. For the business, we continue to pause all new sales into Russia and Belarus, and our long-term planning assumption is that our 2% of revenue from the region does not come back, most of which comes from agriculture and survey hardware. Given our current backlog, we are directing as much product elsewhere as possible, and we do not anticipate a material change to 2022 company revenue. In Ukraine, we are highly motivated to help however we can, but the practicalities on the ground are obviously very difficult. We have donated to relief efforts through our foundation, and have begun preparations for how we can help with rebuild efforts. As it relates to supply chain, the short answer is that it isn't getting easier, but we also... Once again, your line will be placed on music hold until the call begins.
spk10: After you state your name, please press the pound key.
spk04: We are a purpose-driven company with a mission to transform the way the world works. On March 31st, we announced a $1.25 billion revolving credit facility that links two of our sustainability commitments, namely reducing greenhouse gas emissions and increasing gender diversity at Trimble. While we continue to await approval of our science-based targets, we also added ESG performance metrics to long-term incentive compensation for our named executive officers. Talk is cheap. We are taking action. Consistent with our 343 model, I'll talk next about capital allocation and how we view ourselves as capital allocators on behalf of our shareholders. I believe how we allocate our resources, time, people, and money, and how we balance that across short- and long-term horizons will ultimately determine how we are judged as operators. In the first quarter, we executed 105 million of share buybacks. In the quarter, we put our balance sheet to work to build inventory where possible. The biggest news, though, is that we announced the sale of five of our businesses in the last few weeks, our precision tools business, our weighing business, our timing business, our accessories business, and one of our rail businesses. This is in addition to seven businesses we divested over the previous two years. We continue to focus our efforts on developing and growing our connected industry platforms and building our digital transformation capabilities. We believe the best ongoing fit for these businesses lies outside Trimble, yet I would be remiss not to step back and acknowledge that these are our long-term colleagues, and the results they delivered over the years enabled much of the transformation you see in us today. My gratitude to all these colleagues. and to all of our colleagues who worked tirelessly on this effort over the last few quarters. David will walk you through the numbers in his remarks. Moving to page three, let's talk about innovation and our platform strategy. We are building industry clouds to connect stakeholders and workflows across operational life cycles. In construction, for example, we aim to connect the complete project life cycle to automate and optimize work, establishing shared industry protocols and common data environments so that diverse stakeholders can efficiently collaborate and work across the design, build, operate stages of project delivery. Our strategy is already delivering innovative value today based on a strong foundation of technologies in areas such as positioning and sensing, mixed reality, robotics, autonomy, data science, and artificial intelligence. Through our partnership with Microsoft, we are enabling designers, engineers, and contractors collaborate with one another by interacting with richer data and more immersive models. And Trimble is the only company in the world with direct access to Microsoft's HoloLens technology that we have integrated directly into our Trimble XR10. Through our partnership with Boston Dynamics, we are at the intersection of the physical and digital worlds in robotics, where builders use our automated scanning solutions to capture as-builts throughout the asset operational lifecycle. Through our machine control and guidance technologies, we have been working on autonomy for over 20 years. We are innovating through progressive stages of autonomy with the most recent addition of horizontal steering controls for dozers and compactors, which deliver productivity and sustainability. Our strategy also leverages Trimble product innovation into differentiated go-to-market motions. We are evolving and enhancing our commerce model to remove friction, enhance the user experience, and enable value to be captured and exchanged through more granular interactions at the point of work. Value is increasingly tied to subscription payments and delivered on an API-driven services platform so that producers and operators can self-provision services and get real-time user feedback. As an example, our Trimble Construction One solution, as shown on page four, delivers a unified provisioning experience across more than 20 products and services and enables our divisions to sell persona-based bundles and discrete connected workflows. We are aggressively streamlining online experiences via self-provisioned subscription services that empower users to thrive and unlock new innovations for modern ecosystems and project stakeholders. This improves real-time collaboration and interactions at scale that help us address society's most urgent challenges. To enable this strategy, we are investing heavily in our underlying digital systems. Our initial pilots are already demonstrating value by improving the productivity of our sales teams as they serve common customers. As we continue to roll out functionality in the quarters ahead, we expect to be able to deliver our commercial offerings at increasing levels of scale, while generating new and impactful digital insights about our customers' journey. I will close with a comment on our plan at Investor Day in September. The three questions we hear most on investors' minds includes, one, the arc of our model progression, two, progress and proof points of our industry platform strategy, and three, the collective impact of the current market risks, namely recession, war, inflation, and supply chain. Your feedback over the coming months will be appreciated as we prepare for this update.
spk00: David? Thank you, Rob. Let's start on slide five with a review of first quarter results. First quarter revenue of $994 million was up 14% organically year on year. Changes in foreign exchange rates subtracted 2% to revenue growth, resulting in reported growth of 12%. The strong revenue performance was broad-based. Approximately two-thirds of our 14% organic revenue growth came from volume, with the remaining one-third driven by the impact of price increases we have taken in the past year. Software and recurring revenue increased as expected, and hardware revenue was better than expectations driven by the success of our operations team in getting more product through our supply chain. Gross margin in the first quarter was 57.9%, down 50 basis points year over year, reflecting higher product and freight costs in our supply chain, partially offset by increased pricing and improved software margins. Adjusted EBITDA margin was 25.5%, down 60 basis points year over year, driven primarily by lower gross margins, and to a lesser extent, higher operating expenses from our strategic investments and a return to normalized expense levels. Operating margin was 23.5%, down 10 basis points year over year. Net income dollars increased by 11%, and earnings per share increased by 7 cents to 73 cents per share. Our first quarter cash flow from operations was 153 million, and free cash flow is $139 million. Cash flow is down year over year in the quarter as we continue to build inventory and as a result of our incentive plan payouts following very strong performance versus our 2021 objectives. Deferred revenue grew 14%, reflecting continued strong growth in recurring revenue streams. The underlying working capital dynamics in our business remain strong, and we expect that our net working capital will remain near zero as the year progresses even in this difficult supply chain environment. Our net debt declined over $30 million in the quarter, and our net debt to adjusted EBITDA ratio remains around 1.0. Turning now to slide six, I'll review in more detail our first quarter revenue trends. ARR was up 12% in aggregate and up 14% organically. Our non-recurring revenue streams grew, with hardware up 11% year over year and perpetual software growing 8%. 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 software. From a geographic perspective, North American revenues were up 11%. In Europe, revenues were up 14%. Asia Pacific was up 5% year over year, and the rest of the world was up 31%. Next on slide seven, we highlight some of the key metrics that we follow. Organic ARR in buildings and infrastructure, geospatial, and resources and utilities all grew in the teens or above, while transportation ARR growth was in the mid-single digits and improved sequentially. Networking capital inclusive of deferred revenue continued to be negative despite the build in inventory during the first quarter. Research and development on a trailing 12-month basis was 14.5 percent of revenue, with approximately two-thirds of our R&D investments going into software development. Of our 1.7 billion in backlog, approximately 345 million represents hardware backlog, down modestly from year-end 2021 levels, but still well above our historical norms. Supply chain constraints continue to be very dynamic in nature, but our team made good progress in the quarter working around constraints and executing well in a challenging environment. Let's turn now to slide eight for additional detail on each of the reporting segments. Buildings and infrastructure revenue was up 18 percent 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 16 percent on an organic basis driven by strong performance in our survey and mapping business. Resources and utilities revenue was up 16% on an organic basis, driven by continued strength in agriculture in Europe, South America, and the United States. Financial results in transportation showed progression in a number of areas. Revenue was up 2% on an organic basis year over year, and organic ARR growth improved for the third quarter in a row. We continue to progress in the conversion of our transportation enterprise software business to recurring revenue models and make good progress on development of a new product in our mobility business, which we believe will improve both margins and competitiveness when it is launched later this year. We continue to project improved momentum in margins and ARR growth in our transportation segment in the fourth quarter. Turning now to slide nine, I'd like to provide our updated financial outlook for 2022. As Rob highlighted earlier, demand remains broadly strong across the end markets we serve. High inflation, rising interest rates, and the impact of the war in Ukraine are, of course, impacting sentiment around the world, but we don't see meaningful signs that these developments are reducing current demand for our offerings. Our backlog of 1.7 billion, which reflects historically high levels of hardware backlog and growth in our recurring revenue offerings, gives us significant visibility through the balance of 2022. We continue to expect supply chain challenges into 2023, although we are increasingly optimistic that we will see component availability improve in the second half of this year. With that backdrop, I'll talk through our updated guidance. Our recently announced divestitures and the strengthening of the value of the U.S. dollar will both impact our financial results for the balance of 2022 So I'll focus first on organic trends. The key message here is that our organic outlook for ARR revenue and earnings have all improved. We are raising the midpoint of our organic revenue guidance by 30 million with an updated range of 3.99 billion to 4.07 billion. That revised view reflects an organic outlook for revenue growth of 10 to 12%. The midpoint of our organic EPS forecast is increased by six cents with a new EPS range of $2.85 to $3. We are raising our outlook for organic ARR growth to above 15%. Our full year outlook reflects our expectation that organic revenue growth will be in the mid-teens in our buildings and infrastructure and resources and utility segments where demand remains very strong and backlog is high. Geospatial organic growth is expected to moderate from the first quarter pace and be in the mid to high single digit range for the year against 27% growth in 2021. We expect that our transportation segment will see low single digit organic growth for the year with meaningful improvement by the fourth quarter when our initiatives to improve retention and grow ARR take hold. The table on page nine of our presentation bridges this organic outlook through the impacts of the changes in exchange rates and our upcoming divestitures. The U.S. dollar has appreciated significantly versus the Euro and other major currencies in the last 90 days. Assuming that exchange rates remain where they are now, we estimate the impact on our revenue from our last outlook of approximately 45 million. We expect that the divestitures will close in the second quarter and will reduce our 2022 revenues by approximately 145 million. Sixty percent of the revenue impact is in buildings and infrastructure, 30 percent in geospatial, and 10 percent in transportation. As a result, our updated full-year revenue guidance, incorporating the impact of divestitures and recent changes in exchange rates, is 3.80 billion to 3.88 billion. We now expect gross margins to be up approximately 100 basis points for the full year, with the majority of that improvement coming in the second half. This reflects our view that the pricing actions we are taking will more than offset inflation in the second half. Our outlook for full-year operating margins is increased to a range of 23% to 23.5%. Embedded in this outlook is the assumption that operating margins will be adversely impacted by our ongoing subscription transitions, as well as the investments we are making in support of our connect and scale strategy and the acceleration of ARR. In aggregate, these factors present a headwind to operating margins of approximately 200 basis points for the year. Our outlook for the margin impact of subscription transitions and strategic investments is unchanged from what we presented a quarter ago. The divestitures will reduce full-year EPS by approximately 11 cents, and recent changes in foreign exchange rates will impact our earnings per share outlook by about 3 cents, resulting in a revised full-year EPS range of $2.71 to $2.86. Hardware makes up the substantial majority of the revenue of the divested businesses, and as a result, the divestitures will not have a meaningful impact on ARR trends. Looking to 2023 and beyond, we expect that the divestitures will be accretive to both revenue growth and operating margins. More strategically, our business post-divestitures will be more centered on our platform strategy, and our mix of ARR and software will be higher. Forecast for income from equity investments and net interest costs is unchanged. Our tax rate guidance has increased to a range of 18.5% to 19%. From a cash flow perspective, we project the free cash flow will be approximately equal to our non-GAAP net income with stronger performance in the second half of the year. This forecast reflects our view that our inventory levels will grow modestly and that the U.S. Congress will take action to permit the continued upfront deduction of R&D expenses. If the legislation is not passed and R&D costs are capitalized for tax purposes, then our 2022 cash flow outlook will be adversely impacted by approximately $70 million. Note that the tax capitalization of R&D costs has no meaningful impact on our book tax rates, only the timing of cash payments. A few words on the quarterly dynamics we expect for the balance of this year. The supply chain issues have disrupted the normal seasonal patterns in our business. While the second quarter would normally be our largest quarter in absolute revenue, that is not what we expect this year. After the impact of divestitures and recent currency movements, we expect second quarter revenue to be down slightly versus the second quarter of 2021, which was unusually strong. Following the second quarter, we expect revenue to increase sequentially through the third and fourth quarters, reflecting gradual normalization in the supply chain, higher prices, and increasing software and recurring growth. From a gross margin perspective, we expect second quarter gross margins to be consistent with the first quarter and then to increase in the second half of the year as our additional pricing actions take effect. Driven by improved price realization and revenue mix, we expect gross margins will be approximately 250 basis points higher in the second half of the year compared to the first half, and operating margins will be approximately 200 basis points higher in the second half of 2022 versus the first half. We forecast second quarter earnings per share to be below second quarter 2021 earnings per share with double digit year on year EPS growth in the back half of the year, even after the impact of the divestitures. Most importantly, we have increased confidence in the drivers of our organic ARR progression for the remainder of the year. Rob, back to you.
spk04: Belong, grow, innovate. These are the three core Trimble values. Against a challenging landscape in the context of ongoing change, I am proud of what my colleagues have accomplished, individually and collectively. I'm gratified to see that we have been named a top company culture and a top workplace for innovators. We are driven by a sense of purpose at Trimble, and we are proving that we can deliver financial results while showing up with compassion for our colleagues and our communities. The level of curiosity and openness to growth I see displayed at Trimble gives me confidence that we can continue to execute our strategy. Operator, let's open the line to questions.
spk11: Thank you. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad. Again, to ask a question, please press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question is from Jerry Rebic from Goldman Sachs. Your line is open.
spk05: Yes, good morning, everyone.
spk04: Hi, Jerry.
spk05: I'm wondering if you could just talk about the divestiture package. What are the anticipated proceeds, gains, and use of proceeds? I see you folks bought back more stock in the quarter. Is that the primary capital deployment plan from a short-term standpoint once the divestitures are finalized? Thanks.
spk00: Hey, Jerry. The divestitures haven't closed. We expect them to close in the second quarter. The proceeds will be a little over $200 million. I see that cash flow flowing into our overall capital allocation priorities. We are fortunate to have powder dry to do deals that will complement our strategy and growth, so that's the first priority. We are repurchasing shares. You probably saw we did a little over $100 million in the first quarter. Our thinking is that we will continue to at least offset the dilution from stock comp and probably go a little higher given our current leverage position. But the overall priority has not changed that our first focus on allocation of capital is to grow the business.
spk05: Okay, thank you. And then in terms of the second quarter guidance, you know, looking at The high end of the potential revenue outlook year over year implies sequentially sales performance that's worse than normal seasonality by a few points. I'm wondering, can you just expand on that? So I get the tough comps year over year, but sequentially we have ARR growing. We have sequentially deliveries of hardware that should be up. So I'm wondering if you can just expand, David, on where you actually see the supply chain disruptions and what's driving that sequential outlook, and I get the year-over-year comps.
spk00: Yeah, so the first and pretty obvious point is the impact of the divestitures and foreign exchange, which have a pretty meaningful impact year-on-year and sequentially. I think you're right to focus on ARR growth because we do see that as a more reliable barometer of the momentum of our business. There are a couple things that do impact Q2 and particularly when you're looking sequentially versus Q1 this year. The two I'd focus on are, one, the supply chain. We actually had a very, very strong Q2 of last year. We were making a big investment in our U.S. distribution center, which actually caused more shipments to get held up at the end of Q1 of last year and get shipped out in Q2. We kind of had the opposite phenomenon this year, where we had a very, very strong late quarter Q1 shipment pattern, you saw how strong our hardware shipments that actually drove our backlog down a little bit, which is a good thing. And we are seeing some latent effects of the shutdowns in China. So there are a couple of factors that make organic growth tough on the hardware side. With regard to software, the issue is on our term license business, which is a growing part of our recurring revenue stream. A lot of our recurring revenue contracts renew in Q1. The accounting standards have term licenses. All the revenue hits when or the majority of the revenue hits when the term begins. And so that really causes sequential trends to look worse than the long-term trends would be Q1 to Q2. Got it.
spk05: Thanks.
spk00: Sure.
spk11: Thank you so much. Your next question from Jason Salino from KeyBank Capital. Your line is open.
spk08: Great. Hi. Good morning. Thanks for taking my question. So Rob, you mentioned record software bookings in several parts of the business. I'm curious, what areas did you see the strength and then how much of that is related to maybe internal execution versus you know, the current buying sentiment.
spk04: Hey, good morning. So the recurring software bookings were pretty broad spread across the business, so it wasn't concentrated in any particular segment, and I'd say that both at the ARR growth level in the first quarter as well as at the bookings line. From an internal versus external perspective, In the construction side of the business, so that'll show up in buildings and infrastructure, there I would attribute some more of the bookings growth to internal execution because that's where we have the initial launches with our new digital tools and the Trimble Construction One offering that we had the slide on. So that is where we could actually see a lift in the bookings, and I would call that internal execution of an offering that's there to meet the market demand for it. So I'd say most of it is, I would say, external facing, and then there's certainly an aspect of internal. And that gives me confidence because we're in early days of our digital systems enabling us to launch these bundled solutions. So I'm bullish on this portfolio.
spk08: OK. Perfect. No, that's good color. And then, David, on kind of the second half, gross margin improvement, you know, the confidence there, is this in part at all to some of the divestments being maybe more margin, or is it really just purely on the price realization of maybe something greasy? Thanks.
spk00: Yeah, I'll say that what we're divesting is hardware businesses, and they are on average lower gross margin than the rest. So, yeah, the divestitures help a little bit. but the much bigger driver is the dynamic of the mix of our business with a greater mix of software, and we'll see the positive impact of the pricing. We actually will be lapping some of the inflation, and we think we're going to benefit from some normalization of the supply chain. The way I characterize that is that we project we will be less reliant on the broker market for key components in the second half of the year than we have been for the last few quarters that will still be with us in Q2. So we're not in a normal world. We're in an inflationary world. But some of the spikes in input costs will be more manageable, and we'll get the full impact of the price increases that we've announced now, which take time to get through the backlog. So those factors plus the mix will improve our margins in the second half.
spk08: Great. Thank you.
spk11: Thank you so much. Our next question from Tammy Sakaria from JP Morgan. Your line is open. Hi, good morning.
spk03: Thank you for taking my questions. So I think last quarter you highlighted challenges around trade costs and aggressive broker pricing on key components. Have you seen any moderation here today?
spk00: I wouldn't say moderation, no. I would say more signs that we've hit the peak. and that we don't see acceleration in input costs. And then particularly looking to the second half, Tammy, where we expect to see moderation is in our reliance on the broker market, which is where a meaningful part of our cost inflation comes from. So you'll have a part that has a normal standard cost of $1 or $2 or $3 that's available in the broker market for many, many times 10, in some cases even 100 times the normal normal cost. So that's been driving a lot of our cost inflation, and we think that impact will be mitigated in the second half.
spk03: Understood. Thank you. And just one quick clarification question. I believe you said you now expect a higher organic revenue growth rate for the year. How much of it is volume versus price driven?
spk00: Most of it is volume. Our prices have firmed up a little bit, so we've been Like a lot of businesses, we've been struggling to estimate how much inflation will be. And so our price outlook is a little better than it was last time. But the bigger driver is that our business is really strong and our ability to execute it in the supply chain is a little stronger than we expected last time.
spk11: Got it. Thank you so much.
spk00: Sure.
spk11: Thank you. Our next question is from Jonathan Foe. from William Blair. Your line is open.
spk07: Hi, good morning. I just wanted to start with Construction One. How much of a lift does the platform provide relative to your traditional solutions when you think about selling through? And then how does that maybe impact something like net expansion over time?
spk04: Good morning, Jonathan. It's Rob. So the slide showed Trimble Construction One, a contractor offering. It's a persona-based offering, what will come next as an architecture and design persona offering, an owner persona offering. Within that contractor offering, the early signs we're seeing and we saw in Q1 play through for us is we saw really double-digit growth in what we call cross-sell bookings where we could see the velocity of bookings increase from that offering. We saw win rates increase. go up significantly. We saw the deal sizes be higher. We saw the sales cycles be lower. And all of that drove bookings up. So Jonathan, that for us is a really good sign that we're on a good path here. Got it.
spk07: Got it. And then just given sort of the backlog position that you have, Is all of the backlog non-cancellable, and are you seeing any evidence of maybe pull forward in demand, just given where lead times are? Thank you.
spk04: We haven't seen any discernible signs of cancellation in the backlog, Jonathan. And, hey, from the competitive market standpoint, it's not like there's many places to go. I mean, everyone has a supply chain challenge to work through. But hey, I think the real story is it's the efficacy of the value proposition you get from Trimble technology is what's making the backlog sticky.
spk08: Thank you.
spk11: Thank you so much. Next question from Colin Rush from Oppenheimer. Your line is open. Hi, good morning. This is Kristen on for Colin.
spk02: Thank you for taking my question. I wanted to ask about geospatial, several quarters in a row now of strong growth. You did talk about sort of comps getting tougher in the back half of the year, but that's a segment that just continues to surprise to the upside. I'm wondering if you can provide some additional detail on the drivers there, any sort of specific end markets or applications and how we should think about sort of attach rates for ARR following those hardware sales.
spk04: Good morning, Kristen. It's Rob. So first, I'd shout out to all of our colleagues in geospatial. They just continued a terrific run in the business. I'll give you a few comments. First, on the innovation side, and this is where the team deserves a lot of credit. So the number of new product introductions has really helped our global distribution channel grow. be able to message out into the market. So whether it's a tilt compensation on our GNSS products, laser scanner has been doing quite well for us, mobile mapping business has been doing well, so has monitoring and business unit. At an in-market level where we've seen strengths are in departments of transportation, so think infrastructure, think defense, actually is also doing reasonably well. The net of all that is we believe we're gaining market share in the business, and then I'd compliment that by also talking about the go-to-market side, and the team's done a really nice job of working with our global dealer channel to drive the business forward.
spk02: That's really helpful, Rob. Thank you. And then I wanted to follow up on just sort of a longer-term question. You're tracking well ahead of the 55% software recurring revenue target that you outlined. Granted, the last Investor Day was a number of years ago, but well ahead of that target, even with the outside strength that you've had in hardware the last several years. So now with the divestitures, that's pointing even higher. You know, what's sort of the right settling point under this new Tremble model, and how should we think about that going forward in terms of your long-term operating margin outlook?
spk04: Well, from a percent of the business, okay, the divestitures alone, think of that as 350 plus or minus basis points increase in the mix, in other words, more software mix. The thing that's always difficult with the percentages, Kristen, is if the hardware business continues to do well, and I think it will on the heels of coming infrastructure spend, we would expect that to benefit our hardware businesses, especially in the engineering and construction side of Trimble. So that, by the math, I think that that would throttle that increased expansion in the percent of software. And ultimately, obviously, we take the dollars to the bank, not the percentages. If I were to say all things equal, what we've seen over a long baseline now is our recurring revenue is growing faster than our perpetual. It's been growing faster than our hardware. So take that baseline. And if we're already in the, you know, now post-investiture in the high 50% of that mix, that's naturally moving towards a 60, you know, a six in front of it. So 60 plus percent. We look at the growth in ARR. David mentioned raising our view on ARR during the year. And then that's before any, let's say, impact of future acquisitions and how that may further the mix. So six in front of it is where it's trending. And as we move towards Investor Day, I think we can sharpen the pencil on that. Your other question around operating leverage, I mean, certainly it's our long-term view as you as you get through model transitions, that the nature of the gross margins in the business and a recurring revenue business, a software business for that matter, are such that we should be able to increase the operating leverage over time. So our historical baseline had been plus or minus 25%, and that looks like something heading towards a 30%. Something with a three in front of it is where we think about the long-term model. Kristen?
spk02: Thank you so much. Congrats on the nice results.
spk04: Thank you.
spk11: Thank you so much. Our next question from Rob Mason. Your line is open.
spk01: Yes, good morning. Thanks for taking the question. I wanted to know, Robert, David, in the parts of the business where you have OEM exposure, how is the OEM versus aftermarket relationship? growth rate comparing and specifically, how are you seeing OEM production schedules trend? Are they loosening up? They're under their own production constraints, but are they loosening up or just directionally how that part of the business is trending versus the aftermarket?
spk04: I think there's a little bit of a mixed story on that, Rob. certainly seen some areas of the portfolio where production is increasing and we're seeing our business increase. And then I've seen others where it remains a bit challenged. So I have to say it's a little bit of a mixed view, not a totally consistent view. My read through of OEM reports this quarter has suggests that they're seeing tight supply chains as well for the rest of the year. And as you know, we primarily orient ourselves around the aftermarket and serving the mixed fleet. And what we're seeing in the aftermarket is continued strong uptake and adoption of the technology, and that really is the growth catalyst for the business.
spk01: Is it fair to say the OEM portions, though, do show growth? this year? Yes, absolutely. Okay. Um, and just as a follow-up as well, you know, Rob, the, the portfolio has obviously changed over, um, certainly the last 10 years or last time that we entered any type of significant recession and who knows what lies ahead, but can you just discuss some of the businesses that have come into the portfolio since then and, and how, um, you might think about, again, I'm thinking about some of the BNI software in particular, how they have performed historically in periods when it's gotten tougher, just kind of the durability around the recurring revenue elements there.
spk04: Yeah, no, it's a good question. So let me give you a historical comparison on the business mix and why we see our portfolio today being so much more resilient than in the past. And I'll give you a comparison of 2012 to our 2021 numbers. In 2012, the percent recurring revenue we had was about 18%. In 2021, it was 34% of our business, and that correlates to that 1.47 billion of ARR that we exited Q1 with. Overall software and services were 32% of our revenue in 2012, 55% at the end of 2021. If we looked at the operating income In 2012, 76% of our operating income came from two of the segments, geospatial and resources and utilities, and that was 53% in 2021. So the messages is the portfolio has become much more balanced across the end markets that we serve over the last years, much more software-centric, much more recurring within that, so that gives us visibility and predictability into the model looking forward. If I look at the, you asked about buildings and infrastructure in particular, that as a business has absolutely transformed over the last 10 years. Today, well, gosh, we're approaching three quarters of our segment as software today in buildings and infrastructure, and that would have been almost entirely hardware if you go back to the past. And then, you know, when we've looked at a baseline as well over time of how we've performed in times of recession or difficult economic environments, we only have a small number of years where we've ever actually seen revenue go down in time. You know, we were in that first COVID year in 2018. we were down about 4% in revenue. We look back to the financial crisis. We look back to 9-11. We look back to the commodity price collapse. There's just four years we can look back to where we ever had a revenue decline. And so I map that against what today is a much stronger and more resilient business model. And that's what gives us It's one of the many things that gives us confidence and conviction to continue to invest in our business.
spk11: Let's proceed to the next question from Chad Dillard from Bernstein. Your line is open.
spk09: Hi, good morning, guys. Hi, Chad. So I was hoping we could dig a little bit more into Viewpoint and eBuilder. Just what has the revenue growth been over this last quarter? What are you seeing in terms of order levels? And how are you thinking about those businesses in terms of 2022? ARR growth in the mid-2022.
spk04: to upper teens in those businesses, the viewpoint business. I know we had a record first quarter rankings. We look at the intersection of, well, if I actually look at the viewpoint business specifically, the Trimble Construction One Contractor Club, our viewpoint business is a major component of that offering. And so a good amount of the cross-sell Sales that we produced or booked in the first quarter were a result of that part of the portfolio. So continue to see really good things out of those businesses. We continue to see customers who are asking us to connect the data flows that we have resident in the contractor management system, which is what the B-Point business provides, to be able to connect that to what's happening in the field, to be able to connect that to subcontractor systems What we see in the eBuilder side of the business, which is really serving capital program management for owners of the construction projects, is we increasingly have customers who are also using our CityWorks software for enterprise asset management. And now with our recent acquisition of Agile Assets, think about the operational maintenance phase, of work and the management of that. We have customers who are asking us to integrate the data and the workflow between these packages. So it really, from my perspective, is confirming that we're on the right path with Connect and Scale and our industry platform strategy.
spk09: That's helpful. And then just moving over to transportation, I just wanted to get your latest thoughts on your views on the path to normalization And, you know, maybe you could kind of, like, break it down to two discussions, you know, one on the volume side and then two on we can control more, you know, any potential, like, restructuring the cost base. And ultimately, I guess, you know, kind of do you still think this is a core business? Yeah.
spk00: Hey, Chad. It's David. I'll say we did take action this quarter to cut our costs significantly. We've reduced our facility footprint and made a reduction in a piece of the transportation team. As I think about the path forward, I do believe we have strong visibility to the key metrics improving, particularly late this year. And the metrics I focus on are our ARR growth and our margins. But if you look at the pieces of the business, we've got a model transformation going on in the enterprise software business. We're seeing good receptivity on our recurring revenue model offerings with customers. We're converting existing customers and winning new logos in that business. So that's a good outlook. It's hard to see it in the revenue line as these transitions always are. But in terms of booking and ARR momentum, we feel really good there. On the mobility side of the business, the real progress we've made in the last quarter is proving out a new product, which will be released later this year in the second half. We've got that in beta test with a major customer, and the outlook is really good. That new product will provide more features, make us much more competitive with some of the competitors who we've lost business to. It'll also be better from a margin profile perspective. So the progress we're making there is allowing us to hang on to more of our existing products customers, and we believe we've got a really compelling offering for new logos. So we think that'll help us in the back half of the year. We also have a maps business in our transportation segment that is very strong, is growing really well in the United States and in Europe, really posting excellent numbers. So I put all that together, and I know we're in a show-me mode here, but we think we've got a couple more quarters where we're where we're getting the engine going and then by the fourth quarter we do believe that that will have will be on a path to really demonstrable improvement as as relates to your broader question about transportation in our portfolio you know if you think about our mission of transforming the way the world works using digital technology and connected platforms to optimize critical workflows transportation really fits very well into that theme, and we think we can make this a very good business.
spk09: Thank you.
spk11: Thank you so much. Our last question is from Meta Marshall from Morgan Stanley. Your line is open.
spk06: Hi, Dean. This is Eric on for Mita. Thanks for taking our question. Maybe if you could help us better understand some of the dynamics in Europe as we think about the broader Russia-Ukraine impact. It sounded like you're not seeing much sign of disruption there, but I'm wondering, as that region maybe is impacted, are you seeing it pick up in other areas? Obviously, global food needs to be supplied from somewhere, so I'm wondering if you're seeing somewhat of a positive impact. offset within the business from that in other regions.
spk04: Hi, Eric. Good morning. It's Rob. Hey, let's just start at Europe. Europe growth in the quarter was 14%. That would have been higher yet because that haircuts for FX, so in the high teens growth rate. So demonstrable, let's say, evidence that Europe produced in the quarter, and that was reasonably broad-based across all of our across all of our segments. Let's talk about Russia and Belarus, Ukraine, and the dynamic. And I'll focus first really on Russia, Belarus. So yeah, at this point, we don't anticipate the revenue coming back. That business is largely agriculture and geospatial oriented. So now let's talk about the agriculture aspect of that business. Yeah, the fact of the matter is that the that 13% of the world's calorie production is now off of the market. The fact of the matter is that with the fertilizer that comes out of that region, and now I see the lack of fertilizer coming out of that region, you would expect to see lower yields of crop around the world. That does provide the backdrop for what we see in commodity prices. Look at corn around 8, soy over 16. that food's going to need to be produced somewhere. It doesn't happen overnight, as we know. There's obviously a growing cycle to that. We would look at markets. So I think about Brazil. I think about Canada. I do think about North America, Australia. And as we have a global footprint, we certainly turn our attention, incrementally turn our attention to those markets. Now, in the short term, the reality is that we have a lot of backlog. in our agriculture business. And so in the short term, and I'll define short term as 2022, we don't see a material change to our revenue because we can direct that backlog elsewhere. It's really looking more forward after that. And then if I take Ukraine specifically, we are doing everything we can to help our dealers in the region. It's really inspiring to see a number of our employees and partners continuing to find a way to actually make some of the business And so we'll do everything we can to help our customers and partners and the people in that region. And let's hope that that crop can come back online before too long.
spk06: Got it. Thank you. That's really helpful. And then if we could just go back to the supply chain dynamics. I mean, obviously, you did find better component availability towards the end of the quarter. I'm curious, was that Was that you having a willingness to kind of buy on the spot market where available, or did you actually see some regular suppliers having better availability of supply? I guess just trying to understand if it's more spot or kind of normal supply-related.
spk00: Eric, I'll say it's very unpredictable. Everybody in the supply chain is hand-to-mouth. The numbers we posted for the first quarter reflected In part, the fact that on a number of really constrained key components that were the gateway for us delivering full kit to our dealer customers, a bunch came in. So I think what happened was, you know, we're holding nothing back. They're holding nothing back. Just some constraints loosened just in the last few weeks of the quarter. So it's very hard to predict. And, frankly, we ended up – we ended the quarter – stronger than we expected to, and that was just driven by the availability of some key components we're waiting on. It doesn't reflect really any change in our approach or strategy. It's just the way product flowed in.
spk06: Okay, great. Thank you so much, and congrats on a good quarter in a really tough environment. Thanks, Eric.
spk11: Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time. Please continue.
spk00: Thank you, everyone. We appreciate your time today, and we'll look forward to talking to you next quarter.
spk11: That does conclude our conference for today. Thank you for participating. We all disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-