Trimble Inc.

Thank you for standing by and welcome to the Trimble third quarter 2023 results call. 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, press the star one again. For operator 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. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year, unless otherwise noted. Simplification, focus, and execution are the themes of today. I'll start with a review of the third quarter, then put a trimble lens on the current market environment we see, followed by an overview of how we are taking action to maintain our strategic and financial progression. Let's begin on slide two with a review of the third quarter. The clear highlights were continued ARR growth and gross margin progression, which translated into EBITDA progression. ARR stands at a record $1.94 billion, up 25% and up 13% organically, 50% of our revenue is now recurring. Gross margin finished at a record 65%, a reflection of our connect and scale strategy translating into a more durable and attractive business model. EBITDA at 28% is also a record. The big strategic news of the quarter was the announcement of our joint venture with AGCO in our agriculture business. Slide 3 reviews our key messages to shareholders. The venture positions us to simplify, focus, and de-risk our business while de-leveraging and returning capital to shareholders. As we discussed on our announcement call, the impact on pro forma 2023 numbers moves Trimble to 72% software and 55% recurring revenue. We are proud to partner with Eric Hansodia and his team at ADCO to be a global leader in mixed fleet smart farming and autonomy solutions. We expect the transaction to close in the first half of next year, and I'd like to say that we are really pleased thus far with the internal and external reaction to our partnerships. In the quarter, we also divested our land folio business, which had approximately $10 million of revenue on a trailing 12-month basis. We have now divested 18 businesses over the last three years in pursuit of simplification and better focus to execute our strategy. Looking at the business with a global macroeconomic lens, we see increasing signs of weakness and stress across many end markets and geographies, exacerbated by interest rates, war, and geopolitical tensions. These factors contribute to our updated view on the fourth quarter, which have embedded bearish and bullish signals. On the bearish side, we see the downturn in residential construction impacting our hardware businesses in both buildings and infrastructure and geospatial. While we see strength in major projects, renewables, and onshoring of manufacturing, we aren't seeing enough earth-moving activity to overcome this dynamic, especially in Europe. In agriculture, within resources and utilities, we see emerging signs of weakness, also notably in Europe. We also expect some choppiness in the numbers as we execute our new distribution strategy in preparation for our AGCO joint venture. In transportation, I think it's safe to say that we are in a down freight market, and we've seen some trucking and technology companies either go out of business or cut back their ambitions significantly. On the bullish side, let's remember that we sell productivity, quality, safety, transparency, and environmental sustainability. This is a secular value proposition. In buildings and infrastructure, software bookings were up more than 30%, demonstrable evidence that the strategy works and that the dollar volume of construction is healthy. Our Trimble Construction One business model framework is delivering results. We are releasing a series of customer persona-based targeted offerings, and our systems enhancements are providing new levels of visibility and insight into our customers. Our machine control as a service offering also exceeded bookings expectations in the quarter. In geospatial, we continue to innovate to drive the replacement cycle, and our new business models contribute to ARR growing at a double-digit rate within the surveying and mapping business. Next week, we will hold our annual Trimble Dimensions Engineering and Construction User Conference, where thousands of industry participants will come together to learn and engage in our latest innovations. In resources and utilities, our non-ag businesses collectively grew ARR double-digits. and transportation, the shakeout industry will, in time, have the appropriate effect of restoring the balance in capacity and demand and bringing more discipline to the competitive landscape. Against this backdrop, we are taking action to protect our financial model, starting with a greater than 40 million run rate cost reduction initiative as we take action to simplify and better focus our company to operate efficiently and effectively. This is in addition to cost containment initiatives that we undertook in the third quarter. We will simplify by reorganizing our operating businesses and bringing corporate resources closer to customers. For example, we have incubated our industry cloud platform work at a corporate level the last couple of years. It's now time to embed that within the business and sharpen capital allocation. We will focus by getting the right leaders in the right seats and scaling back some of our initiatives to enable the core to better deliver short and midterm outcomes. David, over to you.

Thank you, Robin. Let's start on slide four with a review of third quarter results. Third quarter revenue of $957 million was up 8% in total and up 2% organically. Changes in foreign exchange rates increased revenue by 1%, while acquisitions net of divestitures increased revenue by 5%. Subscription and recurring revenue continued to grow at a strong rate. As Rob mentioned a moment ago, the weakening macro environment adversely impacted customer sentiment and demand across all of our hardware and markets. Gross margin in the third quarter was a record 65% of 410 basis points year over year, driven by an increasingly favorable business mix and the ongoing net impact of pricing and reduced input cost inflation. Adjusted EBITDA and operating margins also expanded year over year due to the progression in gross margins and the benefit of cost reduction actions we took early in the quarter. Net income dollars increased by 4%, and earnings per share grew year over year to 68 cents, exceeding the high end of our prior guidance range. We are very pleased with our margin performance in the third quarter, delivering strong bottom line results even in the face of a tougher macroeconomic environment. Turning now to slide five, I'll review in more detail our third quarter revenue trends. On this and the next few pages, I will focus on organic growth rates, excluding the impacts of acquisitions, divestitures, and currency fluctuations. ARR was up 13%, driven in part by strong bookings across our construction software businesses. Our digital platform work is enabling cross-sell of bundled solutions. Our non-recurring revenue streams, including hardware and perpetual software, contracted by 8% year over year and came in below our expectations. The macro environment worsened late in the quarter across many of our hardware end markets, with weakening customer sentiment and propensity to invest. The impact was especially visible in Europe, where macro trends are the most difficult. From a geographic perspective, North American revenues were up 5%, and Europe revenues were down 1%. Moving to slide six, our cash flow from operations was $147 million, with free cash flow of $134 million, both of which are up significantly versus prior year. Our cash flow in the quarter benefited from lower purchases of inventory, lower tax payments, and higher profitability. The working capital dynamics of our business remain strong with negative net working capital. We enter the fourth quarter with $1.6 billion in backlog, inclusive of AG-committed backlog expected to shift before our AG-JV transaction closes. We project that $1.1 billion of our backlog will be recognized as revenue within the next 12 months. We ended the quarter with leverage measured as net debt to EBITDA of 2.9 times, reflecting the repayment of $115 million of net debt during the quarter and repayment of $270 million since the closing of the Transporean acquisition. Note that we are ahead of our timeline to pay down our Transporean debt, with leverage going below three times one quarter ahead of the commitment we made when the deal was announced. Finally, I'll repeat what Rob mentioned earlier. During the quarter, we reached an important milestone with half of our revenue now coming from recurring revenue streams. The formation of our ag JV will further accelerate our business in the direction of majority recurring revenue, making our business both more predictable and more resilient. Let's turn now to slide seven for additional detail on each of our reporting segments. Buildings and infrastructure revenue is up 6%. Revenue growth was strong across our software businesses in this segment. with double-digit year-over-year ARR and revenue increases at eBuilder, Viewpoint, SketchUp, and Tecla. This broad-based growth reflects the success and momentum of our connect and scale strategy, evidenced by growing bookings, especially of larger and broader bundles. Our civil construction business was down year-over-year at a high single-digit rate as the demand environment weakened among dealers and end customers. Geospatial revenue was down 2%, reflecting lower demand across many survey and markets. One bright spot for our geospatial business in the quarter was with our U.S. federal government customers, who continued to place orders well ahead of prior year levels and above our expectations earlier in the year. Resources and utilities revenue was down 4%, reflecting both declining farmer sentiment and the impact of our distribution network changes. Revenue declines were most pronounced in Europe, which makes up the largest portion of our ag hardware business. Partially offsetting the weakness in hardware demand, we experienced double-digit segment ARR growth in positioning services, forestry, and city works. Financial results in our transportation segment showed progression in a number of areas. Organic ARR was up at a mid-single-digit rate and margins expanded for the seventh quarter in a row. On the other hand, our mobility business in North America has not seen the uptick in bookings that we originally expected. With planned churn notifications in the quarter, Our transportation segment ARR momentum will moderate going into next year. Transporium top-line trends remain below our expectations when we bought the business, driven almost entirely by a contraction in overall industry shipment volumes and a depressed spot market. Importantly, we have maintained our customers and our market share, and with our transaction-based recurring model, we are positioned to recover with an improvement in the overall European goods economy when the inevitable upswing takes place. The Transporium team has managed costs well in this tough environment, and our operating margins since the deal closed remain in line with our original expectations. Moving to slide eight, I will now discuss our guidance for the fourth quarter and the full year. Our third quarter results reflect a weakening demand environment. We expect this weakness to extend through the fourth quarter and into next year. We now project fourth quarter revenue between $890 and $930 million. Our fourth quarter outlook reflects 13% growth in ARR offset by a decline in our hardware and perpetual software at a low to mid single digit rate. This yields a full year revenue outlook of 3.76 to 3.80 billion. A significant majority of the reduction in revenue outlook is in our hardware businesses with the biggest impact in civil construction hardware. For perspective, it is helpful to look back to the pre-COVID period to determine the underlying long-term trends of our hardware businesses. All three of our core hardware businesses, geospatial, agriculture, and civil construction, have grown at a compound rate of mid-single digit or better since 2019, and our fourth quarter guidance reflects a continuation of this long-term trend. We project that the combined impact of higher gross margins and lower operating expense versus our prior outlook will offset much of the impact of our lower revenue forecast, resulting in an EPS range for the fourth quarter of $0.55 to $0.63. Our updated full-year guidance for EPS is $2.58 to $2.66. Fourth quarter operating margins are projected to be in the range of 24.5% to 25%, a meaningful improvement from year-ago levels, but sequentially down from the third quarter, driven primarily by mix. Within the overall outlook for the fourth quarter, we anticipate the following segment trends. Buildings and infrastructure will remain our strongest segment, with organic revenue in the quarter accelerating from third quarter levels to the mid to high single digits. Even in the current macro environment, we see strong demand for our software offerings, while our hardware businesses are expected to be down at a mid-single digit rate. Geospatial segment revenues are expected to be down at a low to mid-single-digit rate in the fourth quarter. Gradual improvement across some areas of our core field survey business will be offset by lower sales in the fourth quarter to the U.S. federal government. Geospatial margins in the fourth quarter will come down sequentially from third-quarter levels due to a less favorable business mix. Resources and utilities revenue are expected to be flat to down at a low single-digit rate. This fourth quarter outlook reflects both the adverse overall demand environment and the impact of our ongoing aftermarket dealer network transition. ARR growth in the segment will remain at a strong double-digit level. Transportation segment revenues will be flat or down modestly as the impact of higher customer churn in our North American mobility business offsets the growth across the rest of our transportation This outlook assumes no meaningful improvement in Transporean's core European transportation market in the fourth quarter. From a cash flow perspective, we expect full-year 2023 free cash flow in the range of $530 million to $555 million. Excluding the impact of full-year transaction-related and restructuring-related cash outflows of approximately $100 million, this outlook represents free cash flow of approximately one times net income. With our strong year-to-date cash flow performance and with contractual certainty on the upcoming close of our AGJD transaction, we plan to reinitiate share repurchases in the fourth quarter. Consistent with past practice, we plan to issue guidance for 2024 at our fourth quarter earnings release in February. At this point, our outlook for next year can be characterized threefold. First, we expect that organic revenue growth trends will be better than those we posed this year. as our hardware businesses stabilize following the declines of 2023, and as recurring revenue sources make up a growing proportion of our total revenue base. Second, we believe ARR will continue to grow at a double-digit rate. Even in the context of a tough macro environment, our bookings and net retention performance continue to support this outlook. Third, with the cost reduction actions we are taking, we expect to hold or improve EBITDA margins, even with the impact of the close of our AGCO deal. This outlook leaves us on track to achieve the EBITDA margin goals we put forward in our investor day last year. Rob, I'll turn it back over to you.

I want to end the call on the same things we started with today, simplification, focus, and execution. The cost action and the organizational moves we discussed, in addition to the forthcoming ag joint venture, all drive simplification and enhanced focus on our connect and scale strategy. On execution, We humbly learn from our failures and successes. We also have the confidence and conviction to manage through this economic environment. We've done this for decades. We know what we need to do, and we will stay focused on delivering productivity, quality, safety, transparency, and sustainability for our customers. And we will continue to invest and innovate against our best growth opportunities. We will exit this economic downturn on a stronger competitive footing. Finally, we are announcing today that David Barnes has decided that he will retire as our CFO in May. Phil Serinsky, our Vice President of Corporate Development, Treasurer, and Co-Head of Trimble Ventures, will succeed David. David, Phil, and our strong finance team will work together to ensure a smooth transition over that time frame. I'm very grateful for having had David's steady hand over the last four years as we've navigated crises that neither of us ever envisioned. True character reveals itself in a crisis. David's character represents something we would all benefit from emulating. Phil comes into the role having been at Trimble for 14 years having worked across a very diverse set of roles along the way. Phil's mandate for the role is straightforward, to leverage his deep knowledge of the company to unlock shareholder value. Operator, we can now open the line to questions.

Thank you for the presentation. And at this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, to join the queue, press star one on your telephone keypad, And your first question comes from the line of Jerry Rich from Goldman Sachs. Your line is open.

Yes. Hi. Good morning, everyone. And David, congratulations. Thanks, Jerry. Rob, David, I wonder if you just talk about the outlook for ARR growth for the construction software portfolio. It looks like you're seeing a slowing into the fourth quarter based on the Here are our guidance revision. Can you just expand on what that means for the construction portfolio, specifically where you're nearly 20% of the quarter? What magnitude of slowing are you seeing there? And touch on other moving pieces if you don't mind.

Hey, good morning, Jerry, and thanks for the question. This is Rob. I'll take it. Actually, the bookings for the software businesses and construction continue to be strong in the third quarter. The ARR growth in the B&I segment was over 20% for the quarter as well in Q3. So actually I see continued strength into the fourth quarter with our view on ARR growth in that segment. So actually, I would say really the narrative holds there. FX is a bit of a headwind to the ARR growth that will be posted at the top line. So adjusted for that, I think we remain on track.

Hey, Jerry, the changes in ARR growth, we're talking tens of basis points. The big story is that the growth is sustained. As Rob said, bookings are really good. there's no fundamental change in the momentum of our B&I or our business.

Okay. So FX is the key driver then. Okay. And then can we shift gears and talk about the margin trajectory, you know, given the performance in the quarter and exiting the year? I know we're not talking about 24 guidance yet, but it feels like you've got margin tailwinds versus the run rate in the first half of 2023. So as we think about you know the puts and takes around what 24 might look like obviously some end market challenges but it feels like at least on a year-over-year basis there should be some margin momentum um wondering if you wouldn't mind commenting on uh any other puts and takes we should keep in mind yeah sure jerry um i'll reiterate the comments in uh in the prepared remarks uh yeah our margin trends are very strong uh we think sequentially q4 won't look quite as good as q3 we had

That's a mixed issue both between software and hardware and within the hardware part of our portfolio. But fundamentally, our margin story is really good. And we've taken actions to manage our operating expense very carefully. Actually, that started early this year. Rob mentioned that we're going to move even further here in Q4. Our goal is looking into next year to be in a position where we can, maintain or grow our EBITDA margins. And I'll point out that we're, that includes the impact of the creation of the AGJV. And if you go back to the financial remarks we, we had when we made that announcement, we said the creation of the JV puts downward pressure of 70 basis points on our EBITDA margin. We're looking to cover that. So, yeah, margin's a great story. Obviously the, the top line on the hardware part of our business has, has been softer than we anticipated, but the margin story is even better, and that's something we are carefully managing working into next year.

Super, and lastly, can you just comment on leading indicators within Transporeon? I don't know if you folks have visibility based on that business in terms of customers prepared shipping plans or anything along those lines, and how are you thinking about fourth quarter seasonally for that part of the portfolio?

Yeah, so as you can imagine, we have visibility every day to a very significant portion of the European transportation market. I think I characterize it as stabilizing after a very weak period over the last three or four quarters, well, since we bought the business. We're not declaring a turnaround yet, but if you look at the metrics of transportation volumes, spot pricing, capacity utilization, not necessarily getting better, but it's stopped getting worse. So, we can see the stabilization, and over time, very hard to predict exactly when, but over time, those will recover, and with our transaction-based ARR model, the business will recover with it. It's stabilizing. It's still the freight market in Europe, and I think in America you characterize it as in recession, particularly some of the end markets. Actually, we can see by part of the economy what's weak, where there's fewer trucks on the road shipping goods, but construction equipment, paper and packaging are way down versus last year, reflecting the overall macroeconomic weakness. So we think we've stabilized. That's the basis of our fourth quarter and we'll plan for some improvement looking into next year, but we'll be cautious given the magnitude of the drop that occurred over the last three quarters.

And Jerry, if that's the macro, I want to look at the micro to complement that. We have 100% customer retention and our win-loss ratios are holding, so our market share is holding in the region. I think that's important to keep in mind as well for the underlying health of the business.

Super. Thank you.

Your next question comes from the line of Rob Werthermeyer from Malleus Research. Your line is open.

Yeah, hi. I have two questions, if I may. The first one is a little bit micro, I guess, but could you look at channel inventory across the businesses on the hardware side and just do you have an estimate or a ballpark of how much channel inventory there is to come out if you do COD stock and how long that might take? And then the second question is really for Rob, because your tone obviously indicates a more negative macro environment kind of already here. And I'm a bit curious if you're seeing that in today's construction market or whether that's more of a forecast. Thanks.

Hey, Rob. It's David. I'll take the dealer inventory question first. We did see a very meaningful inventory destock in the first half of this year, particularly in the first quarter. You probably recall I said we – We estimate it was about 40 million in the first quarter, less than that in the second quarter. It's not really a factor in the back half of this year. Actually, in some of our end markets, dealer inventory went up by just a little bit in Q3. The one change we're seeing, and Rob referenced this in his remarks, is that on the civil side, we're seeing the set point to the desired inventory level for our dealers has actually come down. That reflects Higher interest rates, so higher cost of carrying inventory. It reflects the uncertainty about the demand market and, frankly, our very good product supply. So the need to hold inventory is less than it was. So, you know, that won't be helpful to us. I think we'll see a modest correction, nowhere near like Q1 and Q4. We're talking, you know, in the 10 to 20 million range. But we think dealer inventories in aggregate are close to where they will be over the longer term.

I'll take the second part, Rob, on the macro and what we're seeing. There's a tale of geographies embedded within the answers, so roughly speaking, take North America, Europe, and Asia Pacific. Let's look at North America. You won't be surprised that subsegments such as the data centers, the renewable energies, the onshoring and manufacturing, those are all positive catalyst. The infrastructure bill remains a positive catalyst. The asterisk on that one is when you compare the dollar volume within the dollars associated with infrastructure bill compared to the dirt actually moved is what we see is inflation has been eating up a fair amount of that additional spend. And then residential, for sure, we see interest rates having an impact. in the residential markets. In Europe, I would say you have the same factors, but you have residential is worse than what we see in the US. In Asia Pacific, we see, well, not surprisingly, we see India being better. We see China being worse. You connect the China economy to a decent amount of the Australian economy, and we see some of the residential construction being slower. that in that market so to add those up and you have our view on the present state of construction now let me be clear within within that as we have software businesses and we have hardware businesses I mentioned it to the during the during the first question and that we had 30% bookings increase in our construction software business in the third quarter We had ARR growing over 20% in B&I. So there's a different behavior happening within the software business and within the hardware business. The feedback that we get from the market on that is that customers, they continue to have trouble finding qualified labor, managing that labor. They have strong overall backlog, particularly in the Americas, and so that backlog and that complexity in managing the work out in the field is a catalyst for the software adoption, and that plays through into the numbers we have. So now we take the present and we map to the future, which was the other part of your question. We're essentially saying we don't see it getting better, fundamentally better, or fundamentally inflecting, particularly on the residential, and that's the one probably I should comment on most discreetly as our planning assumption at this point is assume into 2024 that it doesn't get better. Of course, if interest rates come down, that'll be a positive thing next year. And we know in places like here in the U.S. that we do need additional housing. So there is a dislocation, a fundamental dislocation. So as the interest rates moderate i think it's reasonable to think that that will get better but for now our planning assumption i think the smart thing to do is just assume it doesn't thank you your next question comes from the line of rob mason from bed your line is open yes good morning um just to go back to the expectations around overall arr then like you said it didn't

Did not sound like there's much movement in your outlook around the B&I related to ARR. What about transportation? Should we expect that that still tracks up mid-single digits, the track that it's been on?

Hey, Rob. It's David Barnes. I'll take that. I mentioned in my prepared remarks that bookings are coming in soft in our North American mobility business and transportation. and we receive notification of churn that will occur going forward. So while our ARR has been looking better recently, we do think that the churn we have in our North American mobility business will adversely affect transportation ARR growth in Q4 and going into next year by somewhere around 200 basis points. Now, I'll emphasize that The rest of the transportation ARR base is doing really well. The MAPS business is growing ARR at double-digit rate. Even Transporian, we're growing ARR. Our enterprise business is growing ARR. Actually, our mobility business in Europe and in Brazil is good. So, the North American mobility business represents about a quarter of transportation ARR, and the trends there are going to – going to be more adverse. So, the sort of core base outlook is for transportation ARR growth to be adversely impacted by a couple hundred basis points going forward because of the churn dynamic in North American mobility.

Understood. Okay. Maybe just as a follow-up then, I understand you don't want to speak too broadly about 2024, and this may just be somewhat of a transitory dynamic. with the AGCO transaction coming up, but just how should we think about the ending of the C&H aftermarket agreement and the impact relative to your efforts to try to backfill that? Obviously, AGCO is a solution, but until that transaction closes, I'm just curious how to think about modeling that impact next year.

Hey, Rob, that's a good question. I'll take that one. Hey, C&H continues to be an important customer and partner for Trimble and for the JV on an ongoing basis. So the nature of the agreement when we changed our approach to ag distribution and made the announcement of the change in the relationship with that C&H aftermarket distribution, which we did earlier in the year, That's not a change from CNH as a customer and a partner. It really was saying, as we work with the dealers in the future, we need, through our strategy, to be able to work with the dealers directly to have more of that signal of what's happening in the market and being closer to the end customer. They have been an important customer. They are an important customer. They will be an important customer going forward, as will Agco, obviously, through CNH. the nature of the joint venture and say, remember, we serve the mixed fleet, and that means all colors of iron, including over 100 OEMs that we work with today. So that's our view on the shape of the market. Now, clearly, C&H will have an ambition set to have more of their own technology, and we know that and you know that through the acquisitions that they've done. In time, that will be, I'd say, a topic. But let's remember that we have hundreds of thousands of units out in the machine. We have many, many farms who operate on Trimble technology, and we believe we'll continue to do so in the future. So there will be some disruption as we go through the change, for sure. We expected that. That's been largely in the numbers we've had and certainly part of the conversation we had with that go establish the joint venture is there a way Rob to isolate how much there was some reference to the distribution transition in the third quarter how much impact that's causing in the R&U segment today I would measure it and I'd say some millions of dollars like so call it in the low single-digit percentage of the disruption, but I also think that that could very well be a timing topic. In fairness to CNH dealers in this case, there were two announcements this year. One at the beginning of the year when we talked about changing the arc of the relationship, and the second was the JV announcement. I think it is reasonable to assume that some of these dealers have taken a step back and paused and said, okay, what does this mean and where do we go? There's demand out there in the market. Customers use our technology. So we believe through our new distribution strategy, through the Vantage distribution strategy, that we can capture and meet that need out in the marketplace. It just may shift from, I'd say, this year into next year. Makes sense. Thank you.

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

Hi, good morning. Just wanted to, I guess, better understand sort of your commentary around the bundling opportunities in the B&I business. Can you maybe help us understand maybe what the customers are saying as they're starting to adopt Trimble One and some sort of your broader platform approach and maybe what that means from an upsell and ASP opportunity perspective?

Good morning, Jonathan. Good question. What we hear from, well, let's talk about what we're doing and what we hear from the customers. What we hear from customers is that Similar to my remarks earlier is that they're looking to work with us in a differential way. They're looking to move from delivering task productivity to system productivity. They're looking to manage the volume of work that they have and the complexity therein. they're looking at us and saying, we want to do more business with you, Trimble. Part of the consistent theme has been make yourselves easier to do business with, and that's where Trimble Construction 1 is part of that, as part of delivering that. What we see from the data is we continue to grow the cross-sells. We look at the cross-selling on a year-over-year basis, and it's a strong double-digit increase in the amount of cross-selling and so we can manifest that cross-selling through think of it as the tc1 offering you know tc1 is a framework agreement essentially makes it easier to buy more trimble solutions together in that in that bundle and then where we go further with those bundles is defining those at a persona based level a customer persona based level that is to say a steel fabricator could use and benefit from a set of Trimble solutions different than the mechanical contractor, different than the general contractor, different than the architect. And so the persona-based offerings create bundles specific to those personas. And at our best, we can offer, or at our fullest manifestation of this, we can offer a good, better, best offering within those personas. And we're still, I'd say, quite early in this journey. And so that's one of the many things that gives me conviction that we've got runway to work with here in the business.

Got it. And then just as a quick follow-up, can you give us a bit more color on how the machine control as a service business is trending and how those deals sort of work and whether this can help customers in a more cost-controlling environment? Thank you.

Thanks for the question. Thanks for that question. Actually, we probably should have mentioned that in the call. We actually have seen a higher level of adoption of the machine control as a service than was in our original expectations. So actually, that creates a negative delta to the top line revenue, as you know, right through a subscription as opposed to a perpetual. Sales so the adoption in the third quarter actually really because it's a year to date has been ahead of the expectations That we have for the business For sure, you know if you think about a proxy in the software world what we've seen through the transitions we've made is not only do you make the technology more affordable in doing so you expand the size of the addressable market and we've seen that time and time again and in the markets we've served in software as we've made these transitions. I'd like to believe that that's a possible outcome as well in the hardware world, is that we can expand the size of the addressable market. And you think about the cost environment that we're in, or that certainly we see that we're in, and we see that as a positive catalyst in that market. But I think even more interesting than that is once you're monetizing at a subscription level on the machine control side, we believe it becomes much easier to package the relevant software offerings along with it as well. And so that's a preview of where some of our next releases will go into civil infrastructure bundles that capture relevant Trimble software along with the hardware. And then you asked about the business model that goes along with it specifically. Well, we've had two versions of it. One, you could go straight subscription on the entirety of the offering, and the other one is you do a split with the hardware and the software, which is to say you do a nominal amount upfront for some of the hardware, and then you monetize the rest of the subscription. I think we're going to see us do more of the latter over time. You can create some, I'd say, better aligned economics with the dealer channel in between when you have that upfront. a nominal amount of the hardware being sold up front and actually also helps our cash flow ourselves as Trimble and the customers have seemed to be reasonably indifferent to the two offerings. So that's what I think we'll lean more into that one going forward. Thank you.

Your next question comes from the line of Charles Dillard from Bernstein. Your line is open.

Hi, good morning, guys.

So I just wanted to double-click on the cost cuts that you have highlighted in your prepared remarks, $40 million. So first of all, are you expecting that to hit full run rate in 2024? Second, can you give a little bit more color on how it's allocated? And then third, how much is structural versus variable?

Well, so it's all structural is the first answer on the number. Our expectation is that we come into 2024 with that in place to be able to move forward on that one. And then within the subset of the allocation, here's how I'd want to portray it as we look at the portfolio of activities and businesses that we have. You take our software businesses, particularly the ARR businesses that are posting the rule of 40, rule of 50, and in some cases beyond, where we've got that growth, we're going to continue to invest and grow the expenses. And that's where we're driving the bookings, which drives the ARR growth. And we look at the lifetime value to the customer acquisition cost as a strong measure of where to allocate capital. On the flip side, we look at activities that have been a little further out in their nature or where the shape of the market adoption is scaling back, where the world is scaling back on, let's say, some of the ambition set that we have. And so we'll look there. So it's very ROI-based in our approach. And it's very strategic-based because this is not going to be just a kind of a peanut butter approach. We'll move activities that we've had at the corporate level closer to the businesses. For example, the industry cloud work that we've been doing, and we've been, I think we did the right thing to incubate that at the company, excuse me, through the corporate level for the last couple of years. Now we can get that embedded into a business and then sharpen the allocation within the business between the work we do within the short, mid, and long term.

That's helpful. And then second question is just trying to understand how resilient the B&I business is to a slowdown. Maybe we can break it up into two parts, software versus hardware. So software sounds like, you know, based on bookings, it is relatively resilient, but I would love to understand just like how long the contract duration is and how to think about that. And then on the hardware side, just how to think about the signals amplitude there.

Chad, the way I think about the software side is it certainly has proven thus far to be more resilient. You know, hey, with the software that you're using at Trimble, but I'd say the same thing on the hardware, but the software our customers use is it's mission-critical software. It's not sitting on a shelf as a nice-to-have. So I'd say as long as customers have the backlog and the work and the customers have a need to digitize and customers have a need to become more productive and more efficient, then that's a good setup for the resilience of that business. And I think we could, I trust we could agree that that is a mega trend happening within many industries is the digitization of the work. The other thing that drives resilience in our view is when we have been selling and when we are selling the bundled offerings. When we're working with customers in a broader and bigger way, we think that that has us closer to the customers as the relationships become closer. We think that that drives continued usage of the technology over time. So will it be perfectly resilient? That can certainly be challenged. At what point does that, what would it take for that to inflect? But we haven't seen it. And we look at, from our gross retention, we look at the net retention ratios, We look at the cross-sell, up-sell opportunities we have. We think we're sitting on many hundreds of millions of dollars of opportunity just within the portfolio that we have. So that makes me optimistic about the setup that we'll have. Now, will the numbers grow in percentage terms as much over time? Well, law of large numbers likely kicks in at some point. We're approaching... we're not just approaching a billion dollars, almost at a billion dollars of ARR just within the B&I segment alone. So posting 20% ARR growth and 30% bookings growth is pretty special, and the team deserves the recognition for that. The hardware businesses, hey, the brutal facts are that it is less resilient. The hardware is a book and burn business. Very little of it today is sold on the subscription Basis and yes, we would like to do more of that over over time Now we also are in control of some of our own resilience that is the expansion to machine types. It's geographic It's geographic penetration. It's the combining the hardware and the software that we have at Trimble to drive resilience into that. So I don't think we're just victim to the environment around us. I also think there's a lot we can control within that. And I'll net that out by saying I don't think that hardware is ultimately as resilient as the software. However, I think it is as powerful as the software, because what we can uniquely do at Trimble is connect the physical and digital worlds. That ability to connect the work in the office and the field and the hardware and software is special, unique, and different.

Great. Thank you. Before we continue on to the next question, just a reminder, if you would like to ask a question and join the queue, please press star 1 on your telephone keypad. And in the interest of time, we do request to please limit to one question and one follow-up. And your next question comes from the line of Christian Owen from Oppenheimer. Your line is open.

Great. Thank you. Good morning. I appreciate you taking the questions. I wanted to follow up on some of the BNI commentary. And just given some of the success that you've noted in becoming easier to do business with, I'm wondering if you can speak to market share versus wallet share gains. How much of the growth are you experiencing is coming through customers just using more Trimble products versus maybe any shift in the competitive landscape, or are you merely just tackling white space there?

Good morning, Kristen. It's a good question, and thanks for that. I'd say the reality is that there is a lot of white space in the market, and we look at the peers in the construction technology space, and many of them are also continuing to grow. And so I look at the map of the collective growth of peers in the industry. And to me, the only way the math works on that is that there's a secular adoption of the technology as the industry digitizes. And we know it's a greater than a trillion dollar industry in construction that is historically have been underserved and under-penetrated with technology and the trends around that are a positive catalyst for the adoption of technology. So let me start with acknowledging that. Now, within that, what we see is from the cross-selling that we're doing, that to me is a metric where I would call that the wallet share that says we are doing something that's unique. different and we think that nobody else can do that quite like we can you know we have technology that serves the you know across the AECO landscape the architects engineers construction and the owners that's quite that's quite different and that's just the software but now bring in the hardware components that in there and not just the hardware that's in with with B&I but the hardware that's within survey because a surveyor ultimately is you know creates a digital starts the workflow by creating a digital model for physical earth and then turning that very often into a set of construction workflows from there. On the market share topic, we do believe that we're gaining share within certain market segments and certain market segments and certain customers. And I qualify that with the word certain. I would say you could characterize customers simply put as some who buy on best of breed or some who buy best of sweet when customers are buying best of sweet I'd say we're gaining share with those customers because we can offer increasingly a better native integration of that data and the workflow across the industry lifecycle and we see positive feedback and uptake for customers who are wanting to buy suites from companies. I'd say for those who buy best of breed, I'd say we hold our own overall. But even within that, I could say I could double-click within that. Within the construction ERP business, I'd say we clearly have gained share in the markets that we serve. I look in the architecture space with the SketchUp product. We're going on multiple years now, a very, very strong double-digit ARR growth, and that to me would suggest we're gaining share in the conceptual modeling.

That's really helpful. Thank you, Rob. I'm going to shift gears a little bit. We talked about the macro environment, some of the headwinds facing the transportation business. But at 18-2 operating margins, this is the highest segment operating margin that you've printed since before the ELD mandates. So I'm wondering if you can talk a little bit about maybe what's working on the cost side of the equation for that business, how much of that is uplift from Transporeon versus some of the hard work that you guys have been doing over the last couple of years. Thank you.

Good question. I'd give you twofold answer. First, I'd say within the call it the run rate business we have within transportation. And then second is the transport on dynamic within the run rate business that we have. You know, we've been working steadily to grow the increase, the gross margins that we have in the business. And, you know, I think the to me, the path that I think about with growing operating margins, I go straight to the structural topic around that at the gross margin level, which implies both having the right product with the right value proposition that gets the right price, and then you've got the right set of cogs that associate with that. It's becoming more software-centric in transportation. I want to be less dependent on the hardware. In fact, in the more long-term basis, it would be more hardware agnostic on the telematics side of the business, whereas hardware differentiates, truly differentiates throughout the rest of Trimble. It's less so the case with the onboard computer in that side of the business. So that's a structural shift where it's when we can, when we really manifest more software forward, that's a structural increase in the gross margin that can flow down to the profitability of the business. And then the other way you do that is as you're getting the gross margin where they need to be, it's also managing the operating expenses along with that, which the team has done a pretty good and certainly steady job of incrementing that. forward for many quarters now, as you noted. Now you layer in Transporeon on top of that, and that is accretive to the margins within the segment. And so if we do our job and if the market will do us some favors here and start to turn next year, then that would, again, be a positive catalyst for the margins in the business.

Thank you so much.

Thanks, Christopher. Your next question comes from the line of Jason Salino from KeyBank Capital Markets. Your line is open.

Great. Just one for me. This follows up on one of the other questions. When we think about B&I hardware and construction software, who are the typical decision makers by your customers? Are they separate budget decisions? How tied are those purchasing decisions between the two? I don't know if that's a good way of thinking about it.

Hey, Jason, thanks for the question. I'd say it depends on the size of the customer between the hardware and the software. And not surprisingly, in that small to mid-market, we're doing more with the C-levels of our customers. And then I'd say the bigger the customer, the more it's segmented across the company who's the economic buyer. Let me say something that I think strategically your question unlocks is the nature of moving from selling more point solutions to selling connected offerings. Because what we do see happening as increasingly as you should make that shift from the point solution to the connected offering, you're doing more account-based selling. It is a fundamentally different approach on the go-to-market side of how we sell and who we sell to at our customers. Historically, you could have had a virtual design and construction department deciding on some technology that they're going to use. You could have a field crew deciding which hardware machine control or survey kit they want to use out in the field. As we move to these bigger offerings, the nature of that is actually the dollar amount becomes higher even as we move this from the perpetual over to a subscription basis. We see it from the uplift when we see when we're converting customers who are already subscribing to us and now they're taking on a bigger part of the portfolio. We see where we get a multiple uplift. Naturally, as those dollar uplifts go higher, you're starting very often to work with a different set of people within the within the organizations and within our customers now although that level often has already been using and been the customer at that ERP level because who's typically buying the ERP it's going to be more of a CFO type who's buying buying that so now when you think about it we're able to go to that that persona with the bigger offering that's a different sales motion for us, and so actually we see that as a very positive thing for us, is changing the nature of the economic buyers when we are offering a simple solution.

Well, I guess my quick follow-up here is the hardware weakness you're seeing, is it mostly with the smaller customers who may not be as penetrated at Trimble, either on the hardware or software side?

Oh, I see what you're asking. That's a good question.

I would say let me think more about that and come back with a more data, a fact-based answer on that. You know, we've been looking more at the nature of the end markets that are being served and those who do more residential work or infrastructure work. Many contractors do both kinds of work. If you're a civil contractor, you are apt to be buying more Trimble software that's going to fit your business. If you're doing residential construction, you're doing more single-family construction, you're not buying a Trimble ERP. It's too big for you if you're doing that kind of residential construction. By the time you're doing multifamily, there is a set of additional technology that becomes more applicable. So I probably am answering your question now as I say that out loud.

Okay, great. No, thanks for the call.

Your next question comes from the line of Joshua Tilton from Wolf Research. Your line is open.

Hey, guys. Thanks for sneaking me in here. My first question is kind of a high-level one, but I think, you know, throughout numerous answers to questions in the Q&A, you talked about the strength of the bundle that you guys have. It feels like with the macro getting worse, like, you know, we hear about it in other software sectors, like now is the time when customers, you know, want to go all in on the bundle and kind of achieve their software goals, save some money and drive an ROI. So I guess my question is like, why aren't we seeing that offset some of the other weakness a little bit more? And maybe when should investors expect to see you know, maybe the environment benefit demand for, you know, the attractive bundle that you guys sell.

Yeah. Hey, Josh, it's David. First of all, I'd say that we are seeing that in the software business where Rob mentioned the 30 plus percent bookings in our construction software business. ARR is still really strong, going at or near 20%. So that business is benefiting from clear path to value. Rob mentioned labor constraints that our construction customers have and software technology being needed. The hardware side is more, I'll point out that within BNI, our hardware is sold to civil contractors, so it's a more narrow range of customers than by our software. And the sale of our hardware for that segment is driven by to use Rob's term, moving dirt. And while the infrastructure dollars are going up, if you take the inflation and back that out, labor and materials cost inflation, the actual amount of dirt being moved has not risen much over time. And that's the fundamental driver of our B&I hardware business. So that, you know, the demand of the actual, for technology to move in the earth isn't hasn't grown as much as we had anticipated, but the need for productivity has grown, and our software offerings are geared to meet that need, and that's where we're seeing the growth.

And Josh, just as it plays into seeing it, I think you're also asking about playing into the full Trimble financial model. One point of reference is after we announced the Agco joint venture, we said pro forma going forward would be over 70% software and 55%. Recurring so the law of the map, I think should start to play through a little bit more as well.

Super helpful and then just a quick follow up. Um, I wanted to maybe. To the extent that you guys can provide it just any more color you can give us on the churn and the mobility segment. It feels like when we talked about it in the past, it felt more like it was isolated to that specific order. And now maybe it's feeling just a tad more structural. Uh, any more detail you guys can provide us there.

I'd say not structural. That would be the answer on the mobility term.

Super helpful, guys. Thank you.

In the interest of time, our final question today comes from the line of Clark Jeffries from Piper Sandler. Your line is open.

Hello. Thank you for taking the question. Yeah, in interest of time, I'll keep it to one. I think David may have answered a part of this, but I wanted to kind of further clarify. When you think about the B&I portfolio and the relationship between dollar growth and moving dirt, is it fair to say that a lot of the ARR products you can still capture opportunity when projects are going through engineering and procurement but stop at that shovel-ready stage? due to the input cost, wanting to understand as we think about maybe the next 12 months and the cyclical factors in construction, ARR versus hardware, and whether if more projects come into this sort of paradigm, you know, what part of the portfolio might outperform.

I'd expect broad outperformance really across the board on the ARR side of the business from the from the feasibility work to the design, to the engineering, to the procurement, through the earth moving itself, the software aspects of that that are involved in that, excuse me, and through the operations and maintenance. So the overall dollar amount of work is there.

Thank you very much.

This does bring us to the end of our Q&A session for today. I would like to thank our speakers for the presentation and thank you all for joining us. This now concludes today's conference. Enjoy the rest of your day. You may now disconnect.