Trimble Inc.

Good day and welcome to the Trimble first quarter 2023 results conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operative assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Rob Painter, Chief Executive Officer, to begin the conference. Rob, over to you.

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 slide two with our key messages. Annualized recurring revenue is our key top-line metric at Trimble. Our team, led by our construction software group, achieved 13% organic growth in the quarter, 100 basis points ahead of our expectations. We now stand at $1.65 billion of ARR, which compares to $1.2 billion when we began our Connect and Scale journey in 2020, and under $700 million at the beginning of 2017. Kudos to the Trimble team who have worked so hard to execute on our transformations. EBITDA is our other key P&O metric, and we delivered EBITDA of 27.2%, also slightly ahead of our expectations, which was driven by record gross margins of 64.2%. For perspective, gross margins in 2019 were 57.7% and 56.3% in 2016. Free cash flow conversion of 1.14 times was also ahead of our expectations. I recognize that consensus numbers and the trading algorithms both still focus on total revenue and EPS. While these figures are important, they are secondary in relevance to ARR and cash flow, which are much more closely tied to fundamental value creation. Revenue and margins were both above expectations we set with the investor community back in February. We believe the delta to consensus figures was simply a function of the challenge in getting our quarters mapped correctly against our annual guidance. As a result, we will be more prescriptive with our second quarter commentary. With respect to the macro, like most companies, we are navigating an economic environment with a heightened sense of uncertainty, trying to find the signal through the noise. Despite the noise, what we sell to customers is productivity, quality, safety, transparency, and environmental sustainability. The mid- to long-term secular tailwinds remain strong in the industries we serve. They are large global industries that are underserved and underpenetrated, and they will continue to digitally transform. Our strategy compels us to be mindful of our cost structure in the short term while continuing to invest in our most attractive long-term opportunities. With respect to capital allocation, there are three main points. First, we divested three small businesses in the first quarter, bringing the total to 16 since 2020. Second, our recent B2W and Rivet deals are both off to a strong start and performing ahead of expectations. Third, the investment we are making in our business transformation has initially been focused towards our software businesses. $1.65 billion of ARR growing double-digit in this climate is a proof point of high-quality capital allocation. We are transforming our go-to-market motions to deliver bundled and connected solutions while building the systems and processes to efficiently and effectively scale our business. At the company level, we think about our rule of 40 as the sum of ARR growth and EBITDA margin, which represents our aspirational bar. Many of our software businesses have already cleared this hurdle, while others are steering this direction. Looking at our hardware businesses, this is where we have felt the whipsaw of supply chain availability and channel inventory stabilization. which continues to make quarterly comparisons of our numbers incomplete at best. To find the signal, you have to look at a multi-year view. Our largest hardware businesses in agriculture, civil construction, and geospatial collectively grew revenues at a mid-single-digit rate from the first quarter of 2019 through the first quarter of 2023. In the first quarter, channel inventories continued to draw down, thus retail demand significantly exceeded wholesale demand. Moving to slide three, let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with buildings and infrastructure. The market backdrop generally remains healthy. In North America, we see strength in infrastructure and non-residential construction, such as data centers, renewable energy, and manufacturing, slightly offset by pressure on residential. Customer backlogs remain healthy, and technology helps to address the skilled worker shortage. By the numbers, ACV bookings grew double digits in the quarter and ahead of plan, while ARR grew in excess of the company growth rate. Our Trimble Construction One commercial offering is helping to grow new logo and cross-sell bookings, and our next wave of systems automation will be released in the next few weeks. Through the lens of strategic progression, customer wins at England's National Highways and the Norwegian Public Roads Administration demonstrate customers want integrated Trimble offerings. At ConExpo, our technology was present on 20 OEM booths, demonstrating the continued relevance of the mixed fleet. And our introduction of an all-in-one system for on-machine excavator guidance and site surveying demonstrates that we can continue to expand the size of the addressable market by virtue of reaching new machine categories. In geospatial, the market backdrop is generally the same as buildings and infrastructure, with a higher mix of residential exposure, which presents a headwind. Managing channel inventory levels is a priority in this segment. By the numbers, revenue was ahead of our internal expectations in the quarter. Strategically speaking, we continue to see strong demand from U.S. state departments of transportation, and we see product lines such as mobile mapping showing solid growth. In resources and utilities, while farmer sentiment has been dropping, the market fundamentals continue to be healthy. Commodity prices remain high by historical standards, and input costs are moderating. Strategically speaking, we are on the path towards building out our aftermarket distribution in agriculture. We believe in giving farmers a choice in their technology platforms, and we believe in the power of independent technology dealers where we have the direct relationship. While there's a lot of work ahead of us, feedback from current and prospective partners is positive. We know how to build and manage a channel. I reference our SciTech model in civil construction and a similar initiative in our geospatial channel as case studies and excellence of channel development. In the quarter, we also announced advanced path planning technology, which takes us a step further on the path towards fully autonomous equipment for a variety of industries. In our positioning services business, we announced that Nissan has gone live with their most advanced driver assist system to date, which is enabled by Trimble positioning technology. This is another example of connected scales. taking a core Trimble technology and applying it across new and existing verticals. By the numbers, we were largely unplanned this quarter. In transportation, the market backdrop is very dynamic, with a softening freight market pressuring carriers to find new frontiers of efficiency, which technology can help address. By the numbers, we met our expectations in the quarter, and we have delivered five sequential quarterly increases in operating income as a percent of revenue. Strategically speaking, We are making progress with our new NCAB technology platform, which delivers the open platform that our customers have been asking for. We launched new functionality in the quarter, including the first industry dwell time metrics for fleet management, which provides customers with additional metrics they can use to improve their operational efficiency. The biggest news for us in transportation was the closing of the Transporeon deal on April 3rd. I've described this business as a perfect example of a platform play within our strategies. The Y comes in the form of a network of over 158,000 carriers and over 1,400 shippers transacting approximately 55 billion euros of freight on an annual basis. Every day, over 110,000 transports and over 100,000 dock scheduling appointments are managed on the Transporion platform. Slide 4 provides a summary overview of how we see the complementary aspects coming together to create a stronger franchise. in the form of complementary capabilities, customers, and geographic reach. The business model of Transporion is fundamentally a consumption-based model based on an array of transaction fees. Since we announced the deal in December, demand in Europe has slowed, and the mix has shifted towards a greater percentage of contract over spot transactions, which are monetized at a lower rate. Our guidance reflects what we believe is a de-risked 2023 level of dollar-denominated revenue. approximately 10% below what we communicated in December. While this is disappointing, there are also positive signals. Bookings are still expected to grow well over 30% for the year. Market share is holding. Customer churn is almost nonexistent, and our tax rate assumption improved, and cross-selling opportunities with Trimble are looking stronger than they did just a few months ago. Let me now turn the call over to David to take us through the numbers.

Thank you, Rob. I'll start on slide five. First quarter revenue of $915 million was above our expectations coming into the quarter. I'll remind you that revenues were exceptionally strong early last year as we recovered from our supply chain challenges and worked to bring down backlog, so our comps this quarter were difficult. Our organic revenue decline in the first quarter is entirely attributable to reductions in dealer inventories. Gross margins were exceptionally strong in the quarter. As Rob mentioned, our 64.2% gross margins are a record in the history of Trimble, reflecting both an accelerated mix toward higher margin software offerings and the positive net impact of price realization and lower input costs for our hardware products. Gross margins in the first quarter benefited from a high level of term license renewals in several of our software businesses, so we expect some moderation from this high level in the coming quarters. While we continue to spend in the quarter against our strategic initiatives, Our strong performance on the gross margin line led to higher EBITDA and operating margins, up 170 and 120 basis points respectively versus prior year. We are pleased with our ability to drive high margins, even in a tough environment and as we invest in our business. Cash flow in the quarter improved significantly year on year, with both cash flow from operations and free cash flow in excess of non-GAAP net income. Our improved cash generation reflects a reduction in cash outflow for hardware component purchases and lower incentive compensation. Note that we did not repurchase any shares in the quarter and will continue the suspension of share repurchases until we have paid down a meaningful portion of the debt raised to fund the Transporium acquisition. Turning now to slide six for some perspective on the underlying drivers of our revenue trend. I'd like to call your attention to a change we have made in the presentation of our revenue breakout on our financial statements. Going forward, our revenue will be broken out in two components. The first category is products, while the second category is subscriptions and services. Product revenue consists of hardware offerings and our non-recurring perpetual software, while subscription and services revenue is predominantly recurring. In presenting our revenue in this way, we are being responsive to investors who increasingly think of our growth separately in recurring and non-recurring revenues. We think this new presentation is better aligned with our strategy going forward. Product revenue, including hardware and perpetual software, was down 15% organically in the first quarter. The decline in product revenue this quarter reflects a tough comparison with the first quarter of 2022, when our supply chain was freeing up and we were working through extraordinarily high backlog. Our dealers reduced their inventories as expected in the first quarter this year, and we estimate that dealer inventory reductions accounted for roughly $40 million, or nearly half, of our product revenue decline. Subscription and services revenue was up 14% on an organic basis. To put our first quarter revenue performance into a longitudinal perspective, it is instructive to look at the compound growth back to 2019 before the impacts of COVID and supply chain swings. In this view, total revenue compounded at a 5% rate in the first quarter of 2023 versus 2019. From a geographic perspective, revenue was down 9% organically in Europe. Nearly half of the Europe revenue decline can be attributed to our decision to exit a Russia business. In North America and Asia Pacific, our revenues in the quarter were essentially flat, while revenue in the rest of the world grew 6%, driven by strong demand from agriculture customers in Latin America. Turning now to slide seven, we ended the first quarter with ARR at 1.65 billion, up 13% organically. Backlog of 1.6 billion was up slightly versus the prior quarter and down from 1.7 billion a year ago. Hardware and perpetual software related backlog was down 200 million year over year, driven by our dramatically improved lead times. Recurring related backlog was up over 100 million year over year and up 40 million sequentially, due to our growing bookings of recurring solutions. On a 12-month rolling basis, our software, services, and recurring revenue of $2.2 billion represents 62% of our revenue, up 700 basis points from year-ago levels. As we neared the completion of the Transporean acquisition, we did so from a strong balance sheet position with net debt at approximately 1.1 times EBITDA. Turning now to results by segment on slide eight, Our software portfolio in buildings and infrastructure had a strong quarter, with ARR up organically by approximately 20%. Segment revenue to our civil construction customers, which are predominantly made up of hardware, were down year-on-year in the quarter as expected as our dealers worked down their inventories. Excluding the impact of dealer inventory changes, we estimate that our retail sales of civil construction offerings were up in the quarter at a high single-digit rate, reflecting a favorable environment for infrastructure investment. In total, buildings and infrastructure saw 5 percent organic revenue growth with operating margins over 28 percent. Transportation segment revenues grew year-on-year organically in the quarter, while operating margins exceeded 15 percent. Importantly, ARR grew at a mid-single-digit rate in the quarter for this segment. The turnaround of our transportation business is underway, and we are encouraged by the continuous improvement in ARR growth, revenue growth, and operating margins. In the resources and utilities segment, revenue was down organically as expected. Like our other hardware-centric businesses, R&U revenue trends were impacted significantly by tough comps with prior year. In the first quarter of 2022, R&U revenues grew 16% organically as our supply chain freed up and we worked to bring down backlog. On a four-year basis, first quarter revenues were up at a compound annual growth rate of just over 6%. Segment margins were extremely strong in the quarter, reflecting lower input cost and the benefit of higher price realization. In the geospatial segment, which is also heavily dependent on hardware, we saw revenue down 16% on an organic basis in the quarter, but modestly better than our forecast. More than half of the year-on-year organic revenue decline for the segment relates to dealer inventory dynamics, as dealers reduced their overall inventory levels this year. Geospatial revenues grew organically by over 16% in the first quarter of last year as we brought down backlog. Our geospatial business has felt the slowdown in residential home construction, which has impacted many of our survey customers. I'll now turn to guidance on slide 9, where we have a number of moving pieces. We are updating our annual guidance to bridge the addition of Transporean for the remainder of the year. We are also being more prescriptive with our view in the second quarter with the addition of Transporean. Let's start with the annual outlook pre-Transporean, where we are confirming our baseline guidance view for the business, including our outlook for mid-teens organic ARR growth and full-year organic revenue growth of 2% to 5%. Incorporating Transporean, We expect the addition of approximately $135 million in revenues over the balance of the year and approximately $175 million of ARR by the end of the year. As such, we now expect full year revenue to be in the range of $3.835 to $3.935 billion. We project that our ARR, including Transporean, will be approximately $2 billion at the end of 2023. We continue to expect the gross margins will expand in the range of 300 basis points for the year versus 2022, coming down sequentially in the second quarter and then progressing up again in the second half of the year. We expect non-GAAP operating margins to be in the range of 23 to 24 percent. Our guidance now assumes a more favorable tax rate than our last forecast based on a more favorable outlook on our tax rate from the Transporean acquisition. Our updated outlook for earnings per share is in the range of $2.52 to $2.72 reflecting a mid-single-digit percentage dilution from Transporean and related interest expense, which is in line with what we indicated in December. We continue to expect that Transporean will be roughly neutral to 2024 EPS and accretive thereafter. We affirm our free cash flow projection for the year of approximately one times non-GAAP net income, reflecting in part our plan to reduce inventory load. Shortly after the close of the Transporean acquisition, our pro forma net leverage stood at approximately 3.25 times, with approximately $3.1 billion in net debt. The debt we raised in connection with our Transporean acquisition carries an interest rate of approximately 6.3%, in line with our expectations at the time the deal was announced. Given our current cash flow projections, we expect to end 2023 with leverage under three times. We said in our announcement of the Transporean acquisition that we expected to restore leverage to below 2.5 times within 18 to 24 months following the acquisition. Our updated projections suggest that we will be able to de-lever to our 2.5 times goal sooner than that original timeline. Turning to the second quarter, the midpoint of our guidance reflects a return to organic revenue growth with revenue between $962 million and $992 million an EPS in the range of 55 cents to 61 cents. We expect the impact of additional dealer inventory reductions in the second quarter will be about half the rate of the first quarter, with stocking levels at or near normal levels by the end of June. We expect that our gross margin percentage will be lower sequentially in the second quarter due to lower term license revenue and a higher share of hardware. Operating margins will also be down sequentially to approximately 22 percent reflecting both lower gross margins and higher operating expense from annual salary increases. Looking at the back half of the year, we expect higher rates of ARR and revenue growth. We expect revenue to increase sequentially from the second quarter through the fourth quarter. We project that the fourth quarter will be our best of the year across the key metrics of financial performance, including total revenue, ARR growth, organic revenue growth, and operating margins. As it relates to our view on segment growth throughout the rest of the year. We expect all four of our segments to post improving sequential organic ARR and revenue growth through the balance of 2023. Buildings and infrastructure will remain our fastest growing segment as we expect our recurring software businesses to sustain solid performance while our civil hardware business improves with more normalized dealer inventories. We expect our geospatial segment to return to positive organic growth in the second half of the year but remain modestly down for the full year. We expect resources and utilities to return to growth late in the second half of the year, driven by an expected pickup in our aftermarket channels. Over to you, Rob.

When we think about our right to win at Trimble, we believe we can uniquely bring together users and connect workflow between the physical and digital worlds across industry continuums. Connect and scale is our strategy. Our strategy is a platform strategy. Platform strategy is in turn a data strategy. If we are successful in our pursuits, we will collect one of the most complete data sets in and across industries, creating a flywheel of enhanced insights and data connectivity. AI has captured the world's attention. Ours too. We believe our corpus of industry-specific data will unlock and accelerate our long-term value creation model. As I conclude my remarks, I want to take a moment to honor the memory of Sandra McQuillan. who passed away last week after a years-long battle with cancer. Sandra was a dedicated member of our board and was a valuable contributor to our company's success. Sandra's insight, courage, and support for our business will be greatly missed. She helped make Trimble a better company. She helped me to become a better leader. On behalf of the entire Trimble team, I extend our deepest condolences to Sandra's family and loved ones. Operator, let's open the line to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Please limit your questions to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Jerry Rivich of Goldman Sachs. Your line is open.

Yes, how are you? Good morning, everyone.

Hi, Jerry. Hey, Jerry.

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

Sure. Jerry, it's David. There's no fundamental change in the momentum of the business, recurring business, in buildings and infrastructure. It happens to be the case that in the first quarter, that's when the term licenses renew. And so if you're going to have churn, that's when you have it. And that factor will abate. And we expect to end the year actually a little north of 20% for buildings and infrastructure ARR. So the momentum is solid.

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

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

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

Yeah, so first, the 10% refers to we'll have, we project 10% less revenue than you could have extrapolated from the directional indication we gave in December. It's still growing. It's just growing a little more slowly than we'd expect. From a margin perspective, we indicated that EBITDA margins would be about 30%. I still think that's the long-term trend, but we've lost a little bit of fixed cost leverage. Probably simplest way to think about that For the year, Jerry, Transborean margins will be pretty close to the Trimble average this year, and then higher as the business gets back to growth, or higher levels of growth.

Thank you, David. Sure.

Your next question comes from Robert Weissman from Milius Research. Your line is open.

Hi, thanks. Good morning, everybody. Good morning. You know, the gross margin breakout was quite interesting, and I understand that the mix is favorable as hardware decline and software continues growing. I guess my question is, is there anything we should think about is that having taken a step function up and you reinvested in R&D, or is it really more of a shifting mix of business?

Yeah, there's two big factors that drove gross margin up significantly in the quarter. One is, as you said, the mix. shift is very favorable because our hardware business was down and the software business was up. But an equally important factor is that we're way past the hump of our inflationary cycle in our hardware businesses. In fact, year on year, our input costs are down. We were heavily dependent on expedited freight in the broker market for parts a year ago, and we've got more price realizations. So we have seen a pretty important improvement in the margins within our hardware portfolio.

And then should we think of that as being sustainable in a way and then being consciously reinvested in more R&D?

Well, we're investing in our business. The guidance and the script comments reflect we don't think the gross margins will stay at the high level they were in Q1 for the rest of the year. We'll be modestly below that, partly because the the mix comes back to a more normalized mix as our hardware businesses get past the hump of dealer inventory reductions. But look, if you look at our operating expense, even with the year's outlook, we will grow OPEX faster than revenue. We normally don't like to do that, but we're investing against our business. Part of it's R&D. Part of it's against the digital transformation, the creation of platforms. So we are investing against the business even while we get through the noise of the supply chain.

and the the higher gross margins helps us do that okay thank you very much and then just one one last one um on channel d stock has anything happened in the last you know two or three months to increase the headwind from d stock i'm thinking about the ag channel and moves oems are doing there and maybe you could broadly just tell us when we're through the uh the d stock pulse so i will stop there okay sure um i'd say the uh pace

of inventory destock is exactly what we thought it would be a quarter ago, and we'll be essentially all the way through it by mid-year. We're on the plan on destocking that we laid out a quarter ago.

I think that answers your question, and that's true for our businesses in aggregate, so including the ag business.

Got it. Thank you.

David, I wanted to follow up on your comment about the reinvestment, specifically about the digital transformation. Rob, you closed the prepared remarks talking about the data flywheel. So, can you just talk to us about where we are in that journey? How you intend to make better utilization of that data and just yeah, what stage we are in sort of that reinvestment journey for the back-end systems to support.

I'll comment on pacing. Rob can add on the data strategy. So we're about to cross an important milestone where we've put into production the digital backbone for our North American enterprise software business for the construction industry. So that will go live next week. And what that does, Kristen, is it systematically enables the TC1 bundles that we've been selling in a sort of Kluge way to date. And we've had success in the Kluge approach, but we're about to cross an important milestone in what we call digitally enabled Trimble construction one with bundles that are more accessible and easier for our people to sell and our customers to consume. This is part of the journey we're on. We have additional rollouts scheduled for a digital transformation that over the next couple years will benefit the whole of our business. So we're going to see some tangible, much more tangible benefits from the investments we've been making on digital transformation.

Kristen, I'll add a comment on the data strategy part of your question. And I start with the corpus of data at Trimble. In construction, we manage over a trillion dollars of construction projects. In ag, we manage over technology and over 180 million acres of farmland and transportation. We manage a couple million vehicles on the road, and that's even pre-Transborean. Our geospatial business fundamentally is about creating a digital model of the physical Earth. So there's a profound corpus of data opportunities. Our digital transformation, a big part of that is unlocking that data, getting it into the cloud. Once you've got it in the cloud, I have the opportunity to take data into information. And then when we're thinking about artificial intelligence, we've been playing in this arena for a while. It's quite exciting. It's actually also quite fun. We're already developing predictive and generative AI-based solutions covering all of our end markets and covering a number of workflows within that. And I will still say we are very, very early in the journey. So if you take a market like agriculture with the Bilberry acquisition that we did on Selective Spring, We're applying deep learning technology to be able to identify weeds and enable spraying at the plant level instead of at the field level. In our viewpoint business and construction, we're applying natural language processing to automate invoicing processing workflows. In the geospatial business, we're working on already point cloud semantic segmentation. So then you can automatically extract and classify assets from large data sets. And in our transportation business, we have video intelligence solutions that can detect fatigue and driver distraction and therefore improve safety. And we're just at the beginning of this.

That's really helpful and leads me to my follow-up question, which is really one about the competitive environment. You talked about some of the trends that we've seen on the technology side, and certainly over your tenure, you've seen a lot of shifts in that technology space. I think the investor sentiment suggests that some of the recent announcements that you all have made, and maybe some of those made by your partners, suggest that there's a shift happening in the competitive environment. Can you just speak to that, any discussion of disintermediation or how you view your competitive positioning today? That would be helpful. Thank you.

From a competitive standpoint, the thing that is most singularly unique about Trimble and I think forms the basis of our right to win in our markets is our ability to connect the physical and the digital worlds. It's connecting work in the office with work in the field. That means connecting the hardware and the software of Trimble. And I think in that respect, we're singularly unique. When I think about potential OEM disintermediation, I go to the customer. That customer is a farmer, it's a contractor, it's a trucking company. More often than not, they're looking for a neutral provider of technology to operate across a mixed fleet. And we don't see that fundamentally changing in the aftermarket. And we hear more customers saying, how is this going to work for me if I have OEM proprietary technology, multiple OEM proprietary technology? Because remember, they operate mixed fleets. How does that benefit a customer? That's what we hear feedback from out in the field. And it gives me a conviction that we're on the right path. But does that mean that that will that OEMs would not, let's say, pursue a strategy. Of course not. We just have to be able to innovate faster and show that value of the connection between the physical and the digital worlds. That's why for the last 15, 20 years, we've been creating a software ecosystem around that hardware that we have to create these integrated and connected workflows, not to mention That's the technology side of it. And then you, you apply the go to market aspect of how you actually take this to market, how you actually monetize. What are the business models around it? What are the data insights that you can unlock from this? So I'd say, yes, there's certainly a different competitive environment. that exists today versus 5, 10, 15 years ago. I think a lot of the, let's say, competitive world woke up to the attractiveness of these markets that we're serving that are large, global, underserved, and underpenetrated. So we feel good about where we stand in that environment, Kristen.

Great. Thank you so much.

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

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

So, Jonathan, this is Rob. Good morning. I'd say if I look at the financials of the business, whether that's the overall growth of the business, the gross margins, the ARR growth in the business, the bookings growth in the business, we see those as accretive to the business model of overall Trimble. That doesn't change. And then our view continues to be look at the midterm and beyond, and it will be even more significantly accretive given the nature of the platform and the density of that the business has of carriers and shippers. To the second question on what changed in the macro view, and I'd say, yeah, absolutely. It's disappointing from my perspective as well. Hey, when we break down the underlying factors, we looked and saw a couple of things, maybe three things to mention. The first is the overall level of transactions has gone down in Europe. And when we look at the end markets, markets like CPG, retail, chemicals are three relatively big markets for the business. The transaction volume slowed more than we expected. CPG, I look at that one as one that people are still going to eat. So I don't lose a conviction that this is a temporary phenomenon. in the in the business the second aspect which really probably also relates to the third is the spot prices have come down and the business differentially monetizes when spot rates are higher so spot rates will come down if transaction volume comes down the third piece which connects to actually the back to spot prices is that truck capacity went up in europe and so if you follow new unit trucks hitting the market in europe that capacity increased at the same time as the transaction slowed, further pressuring spot prices. So those would be the three factors. But now let me not end on that note. Let me end on the note that we expect to see 30% bookings growth in the business this year. When we look at prior economic cycles in the business, this business has accelerated out of each of those It's fundamentally a transaction-oriented business. There's no loss of customers. In fact, the win rates are as strong as ever. Forty new customers were onboarded onto the platform in the first quarter before we owned it. So the underlying fundamentals of the quality, I would say, of the business are there. And we believe it would be poised to bounce back when the markets improve. Got it.

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

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

Company as a whole.

Yeah. I'll focus on the outlook for the year. We expect net retention to be very strong, north of 100%. in the zip code of 110%. What gets us there, our churn varies by business. In most of our recurring businesses, the churn is very low in the low to mid single digits. SketchUp is structurally higher than that. But we generate the positive net retention pushing at high single digits through low churn and upsell and cross-sell of new offerings. As Rob mentioned, the uniqueness of the breadth of our offering, we're really having traction in the building software portfolio of cross-selling viewpoint and our Tecla structures and MEP offerings. And so that's what gets net retention into the high single-digit range, 100 plus high single digits.

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

Thank you.

Your next question comes from the line of Chad Gillard of Fernstein. Your line is open.

Hi. Good morning, guys.

Hey, Chad.

So I want to go back to an earlier question about ARR and the building infrastructure business. I think you talk about, Rob, going from 13% to about greater than 20%. I was just curious about what line of sight do you have to that? Maybe you can talk about any key products that are driving that, and to what extent are you seeing some of the cross-sell driving some of that growth?

Sure, Chad. Hey, this is Rob. So the 13% was at the company level of organic ARR growth that we see going up through the rest of the year. If we go into buildings and infrastructure specifically, the buildings and infrastructure grows, ARR has been growing faster than that company average. And we can expect that to grow throughout the year as well in buildings and infrastructure. You know, when we go through the business reviews, one of the things that is I'd say great about an ARR business model is, you know, we're closing the quarter at $1.65 billion of ARR. And by the way, that's a conservative view of ARR. We don't take the contracted ARR view at the end of the quarter, which would be higher. But, you know, we wake up on the first day of the second quarter and we've got line of sight to $1.65 billion of revenue going forward for the next year. And you can see that show up in the remaining performance obligations. So, when we look at the businesses, you can get a bit scientific about it because you can go and do a go-get analysis. You understand the revenue you're walking in with, whether it's a quarter or a year or multi-year period. You know the go-get delta that you have to close in order to hit the ARR forecast. Against that delta, you look at a pipeline that you have, a bookings pipeline, and then it's a conversion ratio of that bookings pipeline to what can hit short-term ARR versus will become deferred revenue that's monetized over time. Now, within that, if I take buildings and infrastructure specifically, cross-sell and up-sell are significantly driving business for us, the bookings of business that we have. What we're seeing is that We're bringing on new logos as we go to market as one Trimble through this Trimble Construction One offering. We're seeing cross-sell between Viewpoint and Tekla. We're seeing it from our bid to win acquisition and the Viewpoint business. We're seeing it from Viewpoint and our MEP business. It's really, I'm just really proud of the team who's put in the work to define the business model offerings and to organize the go to market and the sales enablement behind that to actually execute on a vision. It's easy to have a division. The work happens behind the scenes to bring it to life, and the team continues to deliver proof points that we're on the right track here. We're seeing higher win rates in the deals in the market. We're seeing larger deal sizes when we go to market as one tremble. We're seeing shorter sales cycles when we do it. So I like the setup. I expect to continue to see strong growth. Buildings infrastructure and the construction software within that, that's the tip of the spear for the transformation at Trimble. We're putting really, I'd say, the strong, strong majority of our efforts behind making that business successful and using that as a template for the rest of the organization. And I think the last thing I would say is you know, ultimately we're taking dollars to the bank, not percentages. You know, these numbers continue to get bigger and bigger. So posting a strong double-digit growth on a larger base, I think, is worth noting. David, I think, mentioned in his comments that we could expect to see two billion of ARR by the end of the year, and buildings and infrastructure would presumably be about half of that.

That's helpful. My second question is about just your two core channels, right? So you've got the OEM channel aftermarket. First, can you just break down the mix between the two? And then secondly, more specific to OEM, can you just talk about what you're seeing there? What was the growth in one queue and what are you expecting through the balance of the year?

Sorry, Terry, do you mean at a company level or do you mean at a segment level?

I mean, company level to begin with, but if you can give like segment detail, I'd be most curious about BNI and resources.

Well, from a segment perspective, outside of resources and utilities, actually very little goes through OEMs. It's in the single-digit percentage. And the resources and utilities, of course, that's agriculture, and I think we've set about 25.

Yeah, it was a little higher than that in 2022, because actually our business through OEMs was particularly strong. So it was about a third of our new segment. And it's held up well, I'll say. So our business with OEMs is strong right now.

Great. Thank you.

Your next question comes from the line of Jason Salino of KeyBank. Your line is open.

Great. Thank you, gentlemen. Good morning. Your construction software business continues to be one of your better performing segments. You know, a lot of questions today so far. But, David, you mentioned seeing a little bit of additional churn in Q1 for some term licenses. It sounds like it's minor, but I don't know if you can clarify this a little bit.

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

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

I wouldn't say it's older solutions. It's solutions that are enabled by our older infrastructure technology. As we roll out our digital infrastructure, we can be more flexible in how our licensing models work, and we won't have the situation where our terms all end at the same time, which isn't convenient for us or even for some of our customers. So that's one of the things that we'll improve.

Okay, perfect. And then on second quarter specifically, I think, Is there any way to clarify how much Transparen is contributing? You know, I realize that the full year is $135 million, but anything that we should know about seasonality or how that might ramp through the year?

Thanks. Yeah, so $135 million U.S. for the three quarters, a little less than a third of that. Around 30% will be in Q2, and correspondingly, you'll have a little more than a third in Q4.

Perfect. Thank you. Welcome.

Your next question comes from Tammy from JP Morgan. The line is open.

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

Good morning, Tammy. Hey, it's Rob. Well, we've been working in this space, as you know, for a long time, both predominantly in the aftermarket, but with 1 OEM in our transportation business. You know, hey, I'd say in the short term, we don't see a change to the business that we have with our OEM partner. Long-term, or actually even mid to long-term, the exact nature of the upgrades we're making on our technology and in the transportation business is to deliver the open platform that customers in the aftermarket have been looking for. Back to an earlier conversation we were having in the Q&A on mixed fleets, the same dynamic happens with trucking companies Most are operating multiple truck OEMs within their fleet, even different engine types, so you can have really quite different configurations. Different configurations perform better at different parts of the country. What you would need here in Colorado and the mountains is a different machine, or I'd say a different truck is optimized better here than it is in a different part of the country, and so we continue to see customers looking to integrate mixed fleets. When you have that open platform that can come out of the OEMs, when they have that openness, you can put in a Trimble or a Trimble competitor technology and user interface on top of that. So I think it's an equalizer in the market.

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

Yeah, Tami, it's David. There is some seasonality in the business. Historically, it's strongest in the fourth quarter. There's a lot of goods that flow closer to the holiday season. But there's also some underlying growth. So the The way I would suggest you look at it, the way we look at it is of the 135, we'll have roughly 30% in Q2, a third in Q3, and a little more than a third in Q4.

Got it. Thank you.

Next question comes from Josh Tilton of Wolf Research. Your line is open.

Hey, guys. Thanks for squeezing me in here. I just want to step back for a second. Can you maybe just help us understand why, in light of the current macro, you're only reducing Transporeon revenue expectations, but you're reiterating the guidance for the rest of the business? Can you maybe just talk to the visibility that you have in the rest of the year, and what gives you confidence in hitting the back half numbers?

Hey, Josh. David Barnes. I'll start. So the Transporeon business model, as Rob mentioned, is transaction-based principally, not a subscription. Our software offerings, as Rob discussed earlier, are mission critical for our customers and are much less susceptible to any short-term trend in customers' ongoing transaction or ongoing level of business. Our view is that there's some puts and takes, but the aggregate demand we see for our business has not changed over the last 90 days. We do see some signs that in a few of our end markets, actually, Overall, macro outlook is improving. Look at geospatial, for instance. We assess our dealers for their sentiment. We talk to some of their customers in the survey business. They're feeling a little better than they were. Input costs are abating. So overall, we're very confident with the outlook for the rest of the business that we articulated a quarter ago. Transporian is impacted by the particular macros of Europe and the end markets they serve.

I can add a little color to that. I encourage you to separate the software businesses from the hardware businesses in that analysis. If you look at the software business, I submit there's 1.65 billion reasons to have conviction in our view of the rest of the year, and that's because that's the ARR. And again, that's not even a contracted ARR, which would be higher than that. 1.6 billion of backlog or those remaining performance obligations as well gives us visibility. We know the bookings we have. It's really a bit of a science to translate the bookings into the recognized revenue. So our conviction and our predictability on that stream of our revenue is going to be the highest. And then I think you take separately the hardware businesses, which David walked you through. We've been through dynamics of the dealer inventory. stabilization. Now let's look at the macros around it. And I think that's a fair question to test our conviction on is take agriculture. We see farm income being healthy this year. We take North America construction and we see the infrastructure bill being providing a tailwind to the business. So those are the kind of factors that go into our view for the rest of the year and certainly then become the things that we have to watch and that we'll update you on again next quarter.

Super helpful. And then maybe one more for me. I know you guys got a lot of questions on building and infrastructure. I'm going to ask one more, although it's maybe a little unusual. A lot of your construction peers believe that it's kind of hard to know exactly which markets are stronger and which are weaker, given their customers' portfolios are very diversified. So, first of all, I guess, you know, we really appreciate the disclosure on the residential versus infrastructure strain. But I guess my question is, like, is there something unique to your business that gives you the visibility into which markets are performing better or worse than maybe your peers don't have?

I think there is. What's, you know, what we've built in our strategy is fundamentally to connect users' data and workflow across industry continuums. In construction, We work with architects, engineers, contractors, and owners across the lifecycle from design to build to operate. So we have a business that focuses on architects and the designers. Let's say in engineering and construction, we work with mechanical, electrical, plumbing, steel, concrete contractors. So we have visibility into the trades. And inside of MEP, we can look at the digital supply chain to connect an estimate and a design model actually out to the components that you ultimately buy and transact as you create those estimates. In the construction side, we both, you know, we obviously work in civil construction as well as building construction, and our viewpoint software, it's the system of record. It's the ERP, so we know what kind of businesses our customers are in, and we can get a meta view of the employees they have, of the backlog that they have, of the work that we're doing. And then on the owner side, even though I'm describing that as the last one in the chain, the owners actually are at the beginning of the chain. And we have a set of businesses that are managing capital programs and asset management and permitting. So I think Trimble has a more unique view as compared to any other peer that we have in the industry, given how we serve specific personas across the industry life cycle. And so we can see activity at a level of specificity that I think would be quite unique.

Much appreciated. Thank you guys so much.

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

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

Well, we would see the transition this year, I guess I would characterize it as neutral, neutral to perhaps a little positive. I can tell you qualitatively the feedback we're getting in the market is quite positive. We are having success, good early success of signing up dealers who want to work with Trimble, both existing dealers and new dealers who see good business opportunities here. You know, if you think about what's unique about what we can do in ag from an aftermarket perspective, as we have kits available for 10,000 different machines, that's pretty darn unique to be able to do that. When I spend time out in the field with dealers and with the farmers, they're looking for support, and I mean support from people who know technology and how it works, not support from iron, but support from technology. And so we're getting very good feedback that we need to work with you, we want to work with you, because you know technology, you know how to support it, you're on the machine types. And oh, by the way, Trimble, you have the full portfolio, a broader technology portfolio. We don't just do steering. and guidance. We do implement controls. We do water management. We have software. We have selective spraying. And so those have been the positives that are so far creating good progress for us as we transition the channel. To your question about proof points so that as an investor, an analyst, you can track the progress of that. Let us take that as an action item of how we can provide more quantitative color around that. Obviously, you'll see the face of the financials and revenue and margin progression against what we're saying, but let us take that as a topic for what additional disclosure would make sense going forward.

That's helpful. That's helpful. Just as a follow-up around Transporean, obviously it's European-centric. How should we think about your ability and maybe pace of the ability to leverage that platform and penetrate other geographies, North America in particular, I guess. How would your approach necessarily need to differ, if it would, to build a network outside of Europe versus what they have done in Europe?

Sure. Actually, I'll start in Europe. We had, prior to the acquisition, we had a relatively small carrier business, so mobility business for carriers, we will combine that business with Transporian. That will make sense. One, because Transporian obviously works for shippers and carriers, we think we can get a stronger European carrier business if those businesses are working together. Within Europe, we have underlying technology that we can replace third parties with Trimble technology and bring a modest amount of cost synergy to the business within Europe. And within Europe, it's been really interesting to see some of the phone calls that we've got, some of which have been positive surprises from forestry companies saying, hey, actually, I need help because they're already working with us in forestry. We need help with the transportation and logistics. How can we connect this with forestry? We've heard the same thing with building construction where you're looking for visibility to understand when that construction supply chain components are going to show up to a job site. So we're encouraged at some early inquiry that we've received within Europe. Now let's go outside of Europe, and North America would be the obvious place to go given the centricity of revenue that we already have in North America. And so the teams are actively working together to bring, I'd say, a couple aspects of Transporean technology around automated procurement or autonomous procurement into the U.S. market or North American market this year. Some of those quick win type opportunities. I was in Brazil in January and what we discovered there is we have, or Trimble already has a telematics business or mobility business in Brazil. Transborean has a small operation in Brazil doing freight audit. That becomes something that we can connect together given the geography we're already in. So where we're already in, geography, that's an easier play to bring capabilities together. I'd say the new, new geography, those tend to be slower and harder and would not, in this environment, be my first priority where to allocate capital. That's awful. Appreciate the response. Thank you.

As there are no further questions, I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's conference. You may now disconnect.