Trimble Inc (TRMB) — Q2 2022 Earnings Call Transcript

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. I will lead the call today as David is at home on the back end of the COVID quarantine. Jim Todd, our head of FP&A is in the room with me, and the three of us will handle the Q&A. My commentary on revenue and ARR growth today will reflect organic performance, thereby excluding our acquisitions and divestitures and foreign currency movements. Let's begin on Page 2 with our key messages. Our team delivered a record second quarter, exceeding our own expectations. My congratulations to our team and our global partners. Annualized recurring revenue grew 15% and we now stand at $1.51 billion of ARR. Total revenue was up 6%, also ahead of expectations, as was gross margin of 59.7%, a record level for Trimble. This flowed through to exceeding our expectations on EPS. The Trimble operating system balances strategy, people and execution. We have been busy the last few months, demonstrating progression and proof points on many fronts. On strategy, we are seeing solid progress with our Trimble Construction One offering, which is a bundled offering of our construction software solutions currently targeted towards contractors. We tried to start with this segment of Trimble customers as we have the value proposition and momentum on our side. From this new baseline, we will expand to other personas in construction such as architects, designers, and owners, and we will roll out the offering on a more global basis. We will then extend this approach across our other applicable businesses. Our indicators are telling us that with Trimble Construction One, our win rates are going up, our sales cycles are becoming shorter and our average deal size is increasing. We also see progress in cross-selling efforts with more than 20% of our construction software bookings coming from cross-sell in the second quarter, which is increasing our share of wallet and penetration into our installed base. From a capital allocation perspective, we divested five businesses in the quarter, where the revenue profile was greater than 90% hardware that was not core to driving connected value in our industry clouds. This included product lines such as goods, safety best, land scales and rotating lasers. In the quarter, we made the decision to exit the Russian market and we repurchased $200 million of our shares. Our priority remains investing back into our business and pursuing acquisitions. Our acquisition pipeline is relatively full at the moment, and we have the firepower to act. On people, we were recently named a top company for leadership and global culture in a survey by Comparably. We also appointed Ron Bisio to oversee our transportation and logistics business. Ron is a 23-year Trimble veteran, and has led the growth and transformation of our survey business over the last few years. Ron is an excellent leader and his mandate is to execute our strategy faster. James Langley will redirect his focus to his biggest area of strength, which is his understanding of the needs of customers in the overall market. On execution, we continue to simplify our portfolio through actions such as reducing the number of part numbers and product offerings. We are building resilience for future products by designing more of our new hardware offerings to have dual sourcing capabilities on key components. With respect to our digital transformation, I am pleased with the cadence of delivery on the process and systems front, which we need in order to increase the velocity and scalability of our Trimble Construction One and cross-selling efforts. Our current technology stack is deployed in France and Benelux as a test market. Our most recent release gives our customers the ability to buy and add multiple products on a single contract, and gives our sellers the ability to sell across the breadth of our portfolio from a single go-to-market team. This release gives us visibility across the entire customer and prospect base, driving a true customer 360 view in one system and providing us accurate metrics and KPIs from a single source of truth. From here, we will continue to refine and add functionality and extend to other geographies, including North America, which will happen in the first half of next year. Changing gears, I have met with a few dozen customers, well more than 1,000 Trimble employees and many investors over the last few weeks, including a three-week visit throughout Europe. Our team believes in our connect-and-scale journey, and I am grateful that they are willing to challenge us to execute better and faster. Our customers are validating our direction. They are asking for help to unlock more digital insights and to integrate data and workflows across multiple products to drive even more value. They have efficiency and sustainability at the top of their agendas, along with access to qualified labor and inflationary pressures to manage in the near term. They are also asking us to be easier to do business with as they want to more broadly access our technology. On the investor front, the topic has been almost singular, that is the macroeconomic environment and recessionary clouds. Broadly speaking, market indicators and demand remain strong on an absolute basis. On a relative basis, it seems that our end markets are catching their breath and coming off a bit of a high point. Inflation is a top concern. In Engineering & Construction, we watch signals such as construction backlog, the Architectural Billing Index, and the Dodge Momentum Index, as well as signals from our own systems. In Agriculture, we look at equipment sales, commodity prices, inventory levels and farm income. In Transportation, we look towards freight demand, capacity utilization, freight rates and fuel prices. These indicators remain net favorable on an absolute basis. Overall, Trimble is much more secular than cyclical in nature. After all, productivity and efficiency are needed more than ever in challenging markets. To help investors appreciate the resilience of Trimble, let's turn to Page 3, and let the facts speak to the quality of the Trimble business model. Over the last 10 years, we have moved our business from 20% to 55% software services and recurring revenue. That represents over $2 billion today in these differentiated revenue streams that uniquely enable us to connect the physical and digital worlds. Over that same time period, we have moved from $361 million of ARR to $1.51 billion of ARR, a 15% CAGR. We believe this is the most resilient of our revenue streams, and it continues to grow at a healthy double-digit level. Finally, we have expanded EBITDA margins from 19.9% to 25.6% over this time frame, and we were doing this with an increasingly asset-light business model that operates with negative working capital. The overall point here is simple: if we enter a recession, we have never been better positioned to navigate. Our mindset in this environment, therefore, is to continue to execute our strategy. We are playing the long game, and we will also be prudent with managing our expenses. Our headcount since the beginning of the year has gone up by approximately 2% organically, and we will remain vigilant to allocate our capital and manage our operating expenses in line with our most compelling opportunity sets. Turning now to the quarter and our numbers on Page 4. I'll start by making the point that normal seasonality and year-over-year quarterly comparisons are a bit incomplete as the pandemic and supply chain shortages have altered historical patterns as have our recent divestitures and adverse movements in FX. Second quarter revenue was $941 million, up 6% organically. Revenue in the quarter was aided by strong performance through our supply chain as we were able to reduce hardware backlog and improve lead times across most of our hardware offerings. Gross margin expanded by 150 basis points to 59.7%, driven by a favorable mix shift towards software offerings and the net impact of pricing and cost. The year-on-year rate of product cost inflation eased modestly in the quarter and came in better than our expectations. As supply chain initiatives implemented over the last several quarters have allowed us to reduce our reliance on both expedited transportation and the expensive broker market for scarce parts. We are seeing meaningful improvement overall in the reliability of our supply chain, but significant issues remain, and we don't expect a fully normalized supply chain environment until well into 2023. We faced a number of critical part shortages that reduced our ability to meet customer demand in the second quarter, and those issues will continue to modestly constrain our revenue for the remainder of 2022. EBITDA and operating margins for the quarter were 24.2% and 22.4%, respectively. Operating costs grew versus year ago levels, driven both by the gradual normalization of travel expenses and by the planned investments we are making against our strategic growth initiatives. Net income and EPS were both lower than prior year levels, yet ahead of our expectations. Over the last 12 months, we have generated $470 million of free cash flow, and through the first half of 2022, we generated just over $173 million of free cash flow, both of which are below our long-term goal of generating cash flow in excess of our non-GAAP net income. The main two factors impacting second quarter cash flow are the build-up of inventory, driven by supply chain disruptions and tax payments related to the elimination of upfront tax expensing of R&D costs in the U.S. We expect both of these items to normalize over time. Meanwhile, we are operating with negative working capital. Turning to Page 5. The highlight metric is the 15% growth in ARR, which reflects strength in bookings, high net retention and the continued conversion of our perpetual software offerings. Hardware revenue grew at a rate of 3% versus a very strong second quarter a year ago, while perpetual software revenues were down modestly, driven in part by our ongoing model conversions. Geographically, North America revenue was up 8%. Europe was up 1%. The loss of business in Russia and Ukraine reduced Europe revenue growth by 5 percentage points. Asia Pacific was up 5% and rest of the world was up 22%. Looking at the highlighted metrics on Page 6, we have covered many of these already. I'll comment on our backlog, which stands at $1.6 billion of which approximately $240 million is hardware. Hardware backlog came down by approximately $110 million in the quarter, about half from divestitures and half from improving supply chain execution. Before the COVID-induced supply chain disruption, our hardware backlog was typically around $100 million, so we are still a good distance from normal backlog dynamics. We have also returned cash to shareholders through our share repurchase program with $445 million of share repurchases on a trailing 12-month basis. We ended the quarter with net debt just slightly over 1x EBITDA, leaving us with the capital structure, which provides both resilience and ample dry powder to invest against our strategy. Turning now to segment trends on Page 7. We had a very strong quarter in Buildings & Infrastructure with 13% organic revenue growth and over 20% organic ARR growth. We had strong bookings and net retention across our software offerings in this sector. Our Civil Construction business, which has a meaningful hardware component, benefited both from strong demand and improving supply chain execution. In our Geospatial segment, we came into the quarter with an expectation of lower year-on-year organic growth due to the comparison with the unprecedented strength in the second quarter of last year. Organic revenue was down 5% reflecting both tough comps and some acute component shortages. Demand for our survey offerings remains strong, and the combination of growing bookings and supply chain challenges resulted in backlog remaining at an elevated level through the quarter. Resource and Utilities organic revenue grew by 15% in the second quarter, reflecting a significantly improved supply chain situation for most of our agriculture products. Transportation organic revenue was down 5% on a year-over-year basis and was below our expectations, driven primarily by lower hardware sales to North American customers. While the financial results for transportation have remained below our expectations, there were a number of positive developments in the quarter that position our business for improved trends in 2023 and beyond. ARR grew in the quarter at a mid-single-digit rate, representing sequential improvement in the rate of growth. Our churn of mobility customers was lower in the second quarter than in any quarter since late 2018. The performance of our ELD software is now very strong and customer satisfaction has improved significantly. We have announced our new mobility product to the market and are actively engaging with both existing customers and new logos. I'll now turn to our outlook for 2022 on Page 8. We are raising our guidance on ARR growth to 16% for the year as our conviction on the underlying drivers of growth has increased. For the metrics of total revenue and EPS, three factors lead us to project a more cautious outlook for the full year: FX, supply chain, and demand. This weighs approximately half on FX and half on supply chain and demand. The appreciation of the U.S. dollar over the last 90 days has obviously been significant. Fortunately, our cost base is quite global and creates a natural hedge, leaving us with only a modest residual exposure to foreign exchange on operating margins. While supply chains are demonstrably better, and we hold our previous conviction on gross margin improvement in the second half of the year, it only takes one component to prevent a product from shipping, and we are facing some critical component shortages that we believe will impact our geospatial and Resources and Utilities segments. On the demand front, we are seeing modestly lower-than-expected ordering across the transportation and agriculture sectors. Farmer sentiment has moderated in the face of high input cost inflation. Incorporating these factors, we expect revenue in the range of $3.76 billion to $3.82 billion, which reflects an outlook for the full year organic total revenue growth of 9% to 11%. Overall revenue growth and organic revenue growth are expected to improve sequentially from the second quarter through the third and fourth quarters, reflecting increased pricing and increased software and recurring growth. Note that the impact of our divestitures on our revenue will be approximately 5% in both the third and fourth quarters. If foreign exchange rates remain where they are now, we expect a negative impact on revenue of approximately 4% in the third quarter and 3% in the fourth quarter. Gross margins are expected to sustain the improvement we saw in the second quarter into the second half of the year, primarily driven by pricing but also by moderating supply chain costs. Our outlook for full year operating margins remains at 23% to 23.5%. The high point for both gross margin and operating margin for the year is expected to be in the fourth quarter. Our revised full year EPS range is $2.70 to $2.80. We expect the ratio of free cash flow to non-GAAP net income to come in around 0.7x for the year, impacted by the aforementioned R&D expensing change under the U.S. tax code and inventory dynamics. It is likely these factors will reverse, and we would expect to deliver free cash flow well above non-GAAP net income in 2023. Conclusion, the financial story for the second quarter was revenue, ARR and gross margin outperformance. For the year, the punchline is seeing through currency movements, divestitures and some choppiness in the macro environment to highlight that we are raising our view on ARR growth to 16% and guiding organic revenue growth between 9% to 11%. In the second half of the year, we expect to build on our second quarter momentum with sequential improvements in organic growth and gross margin through both the third and fourth quarters. Strategically speaking, the resilience of our business is stronger than ever. Our markets are inflecting with the adoption of digital technologies. This is our moment to connect at scale, and we remain committed to this journey.

So Rob, the Construction One platform, nice to hear the strong performance. I'm curious, though, where are you seeing the most traction? Is it with current customers potentially looking to upgrade and expand or is it with some of the new net wins that you talked about in your prepared remarks?

The majority of our growth currently comes from our existing customer base, which makes sense given the work we've done within our portfolio. We see significant potential for cross-selling and upselling among these customers. Our team has effectively transitioned existing clients to Trimble Construction One contract offerings, providing them with a pathway to utilize more of our technology. The team is also acquiring new customers, showing early signs of success in that area. However, right now, most of our growth is driven by existing customers.

And then I think you mentioned at the beginning that the logic or the premise is to take this type of bundling sweet style approach to some of your other segments.

Yes, exactly, Jason. Right now, we're focusing on the contractor persona within construction, specifically in building construction, and we will then target architects and designers. We have a bundled offering with TC1, a suite designed for them, along with another suite for owners. Trimble Construction One will also be relevant to our Civil business, allowing us to link our field activities with office work on a single contract. Additionally, we will engage more serially with our transportation and agriculture businesses. This reflects the consistent mindset we have across the business as we implement our platform strategy.

Rob, I had kind of a higher-level question. I mean, there's a lot happening in infrastructure construction may actually get going. There's a bunch of kind of mega projects out there that were in the past. And I wonder if you could just kind of assess the strategic landscape for you and your competitors, whether the collection of offerings that you have and are now protecting scaling, is evolving as fast as your competition? Do you anticipate this to be the next 2 or 3 or 4 years that are highly dynamic on acquisitions to get a range portfolio where they want, or is that not necessarily a moment that needs to see people change radically. Just really if you could just assess how you're evolving versus your competitors in the construction landscape.

Let me provide you with a perspective focused on the mega project level and some of our largest customers. As you know, there’s a segmentation by the size of customer. I've had the opportunity to meet with several of these major clients recently, particularly those involved in significant projects in both the U.S. and Europe. It's clear to me that these large customers are keen to integrate various technologies into a unified data environment, and I believe we are uniquely positioned to offer that solution. Given our extensive work in construction, engineering, and construction, we think we have the broadest portfolio in the industry. However, we recognize that neither we nor our competitors do everything. Our approach is to operate as an open system that can consolidate data from various sources. Our technology supports a wide range of stakeholders, including architects, engineers, contractors, and owners. Digitization and sustainability are at the forefront of our customers' priorities. Currently, inflation and labor availability are significant concerns for these large clients and projects. Regarding the second part of your question about M&A and future market trends, I anticipate that construction technology will remain an active sector in the coming years, especially with the ongoing investment in infrastructure. I suspect that larger companies in the industry will continue to seek acquisitions. However, one must consider the companies available in the market; many are likely to be features rather than fully developed businesses, which may be better suited for Trimble or our peers. There aren’t many scaled technology firms in this industry. When we look at the combined scale of our buildings, infrastructure, and relevant portions of our Geospatial business, I believe we rank as one of the largest, if not the largest, construction technology companies globally.

And since you touched on inflation, are you seeing any impact on project pacing or delays or cancellations from that inflation, or is it just something people are evaluating? I guess I'll stop there, Rob.

We are experiencing some delays, though not necessarily cancellations. This observation is particularly relevant to the U.S. market, where the cost of raw materials has risen significantly. Consequently, funding from the infrastructure bill appears to be slower to materialize, as much of it is being consumed by inflation. As a result, we are witnessing longer delays in construction compared to previous times. Additionally, the Department of Transportation is taking a step back to reassess their approach and figure out how to navigate these challenges. In light of this inflation, we are successfully drawing attention to the value proposition of Trimble, which emphasizes being better, faster, safer, cheaper, and greener. I find this encouraging as project owners recognize the importance of technology.

So I wanted to spend a little bit of time on your comments about Trimble Construction One and plan to roll it out into your broader construction portfolio. So how much of that portfolio do you plan to scale within Trimble Construction One? And then can you just talk about the road map? So I mean how many years are you planning to take to get that to scale? And just what sort of investment do you need to make to get there?

Yes, I'll provide part of an answer now, and I believe this will be a great topic for us to discuss in more detail at our Investor Day in early September. From the Trimble Construction One perspective, if you ask me how much of both the buildings and infrastructure segments I see applying to my goal, it's 100%. In reality, it might be slightly less than that. However, our ambition level is what is important to understand; we rarely see that almost everything in the business could fit into this mindset and approach to how we go to market. The reason I wouldn't say 100% is that we have some smaller customers, such as certain architects, who might only want to buy our SketchUp product, and they can do just that. We won’t require them to purchase everything else to use SketchUp. Wherever possible, our aim is to cater to customer preferences in both building and civil construction sides of the business. Regarding the rollout, I mentioned in the prepared remarks that we started with the contractor persona in construction. As we approach the end of this year and the first half of next year, we will begin rolling out to additional personas. This product rollout is closely linked to our ongoing digital systems transformation work, which is an important enabler. These initiatives are interconnected. The increases in investments we are making in our digital transformation, which exceeds $20 million incrementally each year, are closely tied to advancing Trimble Construction One and our recurring revenue business across all of Trimble. While TC1 is focused on construction, we will implement this approach in transportation and agriculture as well. To scale our efforts efficiently and effectively, we need these underlying systems projects to progress. I mentioned in the prepared remarks that we are making good progress with the early releases. We have a second release, but it is currently available only in France and Benelux. North America, where we generate the largest amount of revenue, will see this in the first half of next year. I hope to see acceleration in the business as we become more efficient and effective in delivering Trimble Construction One. In terms of the timeline, we are definitely on a multiyear journey, and I've discussed rolling it out to different business areas within Trimble. We are also focusing on our direct business, while about half of Trimble’s transactions occur through partner channels, which are indirect. We will also be enabling partners with our systems work over time.

And then just my second question, as we stress test the Trimble model for recessionary scenarios, can you just talk about the ebb and flow of recurring revenues, your software revenues in that sort of environment? And how we should think about that going forward?

Yes, the best data I can give you on that, Chad, will be on Page 3 of the presentation that went along with the script. And so when I look at that and we were thinking about the call, we thought it would be constructive to look at the percent of software in Trimble compared to 10 years ago, the amount of recurring revenue or ARR that we have compared to 10 years ago, as well as the margin and cash flow expansion over that time frame. We were a company that had $361 million of ARR 10 years ago. We stand this quarter at $1.51 billion in ARR. $1.51 billion in ARR, there's not a lot of companies that have that amount of ARR. That's continued to grow over a longitudinal basis has grown 15%. We grew 15% ARR in the quarter, we took the guide up to 16% for the year on the ARR. We believe it's the most resilient of the revenue streams that we have, which is quite logical compared to, let's say, the hardware businesses, which, let's say, in normal times because right now, we do have a backlog in hardware and normal times look something more like a book and burn business. So there is a cyclical undertone to the secular thesis on the hardware business. But this is a major shift we've had in our business over the last few years. And when we've also done the stress test, looking back, you could go back to 2001, we have looked at the financial crisis in the 2008, 2009 time frame. We looked at the commodity crash in the '14, '15 time frame as well as early COVID and we stress tested. We could go back and see how we stress tested on variability in the different end markets, as well as revenue streams. And that all informs the point of view we put forward on that ARR and the software side of the revenue.

Rob, I'm wondering if we could just pick up that discussion. So it's interesting because your guidance essentially has you exiting ARR organic growth at about 17%, entering the year at 14%. Can you just talk about what's driving the acceleration? And do you see that acceleration continuing into early '23? I know you folks have a pipeline measurement mechanism that gives you pretty good visibility. I'm wondering if you could just touch on what that pipeline looks like as we exit this year?

The main factors contributing to the growth in annual recurring revenue are bookings and net retention. As you pointed out, we anticipate an increase in ARR growth by the fourth quarter. Our net retention is currently above 100% across Trimble's different divisions. In terms of bookings, they've been performing solidly in the first half of this year, regardless of pricing considerations. It's important to highlight that our growth isn't solely driven by pricing on a common unit count. We are genuinely expanding our presence in both software and hardware. Looking ahead to 2023, I’m cautious about being specific regarding ARR growth forecasts. However, based on our pipeline visibility and calculations, we do expect to see double-digit growth in ARR next year. That's the best insight I can provide at this time.

And then just to shift gears a little bit here. Can you just update us on your plans for subscription transitioning from perpetual license as you folks are moving towards the platforms that you spoke to, Rob, in the prepared remarks? Can you just update us on the size of the businesses that you should be looking for to transitioning to subscription from perpetual license given the platform approach?

Yes, that's a good question, Jerry. Currently, Trimble's trailing twelve months revenue from perpetual licenses exceeds $450 million. When we break that down, most of it is linked to the hardware we sell. For example, when purchasing guidance or GNSS receivers, we are increasingly offering software unlocks to enhance the solution's capabilities. However, the revenue from standalone perpetual software is relatively small now. This can be attributed to our teams managing various transitions, particularly in the Tekla Structures business, which has adapted over the past year. This transition has affected our top-line revenue this year but has also contributed to the growth in annual recurring revenue from that team. Additionally, we plan to shift more of the software related to that hardware to a recurring model in the near to midterm. We believe we can continue adding value through firmware and software over-the-air updates, similar to what is seen in the automotive industry. So, keep an eye on that as we progress. Furthermore, we have discussed how we aim to transition more of our hardware offerings to a subscription model as we enhance our technology assurance to customers.

I wanted to actually piggyback on that last question and ask specifically about the recurring rates that you noted in Geospatial. I'm wondering is that coming on top of hardware sales? Can you talk about maybe what attach rates look like? And I'm just thinking about what the total addressable market could be for your recurring revenue streams in Geospatial just given the breadth of the hardware that you have in place.

Geospatial is the most hardware-focused of our businesses, which means it has the least software and the lowest recurring revenue in absolute dollar terms. The team has taken steps to increase the portion of software revenue that is recurring. Therefore, in percentage terms, annual recurring revenue is increasing in Geospatial, starting from a smaller base as we are still in the early stages of this transition. Consequently, this affects the overall company performance. The growth in total company ARR is primarily driven by our other business segments. You raised an interesting point about whether we could develop a more software-centric approach in this hardware-heavy business and enhance revenue opportunities in the future. I believe this is definitely possible. For example, we have a product called Trimble Catalyst, which functions as positioning-as-a-service. Its adoption has been quite promising, even in unexpected applications, including traditional markets like GIS. We recently transitioned a customer in Florida entirely to an as-a-service model, covering both hardware and software in what we’ve termed a white glove service. There’s certainly potential for our team to expand this approach. Additionally, we are simplifying our range of software products, moving from many to just a few, while adopting a microservices architecture. Features like photogrammetry and image recognition will be offered as microservices on our Trimble Business Center software platform within Geospatial. This strategy presents interesting opportunities for upselling and increasing recurring revenue over time. However, it is important to note that the addressable market for Geospatial will likely be smaller than in our other markets due to the nature of the underlying solutions.

So then just thinking about what the business models look like and maybe using Construction One as the first iteration of this, I mean, are you thinking that Construction One ultimately looks like a typical subscription model? Or should we be thinking about this as moving towards something that's more consumption based, like where you could flex up and down based on your needs, just thinking about the different models that you could approach with that platform?

Yes, that's a great question, Kristen. In the short term, it will resemble a typical subscription model. However, we do have a couple of businesses that currently operate more on a consumption basis. This could be seasonal consumption, for example, aligned with farm cycles. In our Tekla Structures business, we have customers who purchase for the duration of their projects. This is closer to a consumption model. If we look ahead, say in 10 years, what follows the typical subscription model may actually start to resemble consumption over a longer period. At that time, we will need to consider whether we should still refer to it as recurring revenue or if it should be classified as total revenue as the metrics evolve. So, while we will have some consumption aspect, the majority in the coming years will resemble a typical subscription model.

I just wanted to maybe start out with your thoughts around the pricing actions that you're taking. Is there a way you can provide us with a little bit of color in terms of the absolute levels, as well as realization, just given some of the inflationary pressure and FX pressures that your customers are facing?

Jonathan, so 50/50 is the answer. We think it's 50% price, 50%, I'll say, underlying unit volume. We think that weighted a bit higher on pricing, probably in the first half of the year, and we'll wait a little bit more on the unit volume in the second half of the year. There's some differences in the different businesses, ag, construction and whatnot. But there's a bit of a false precision that you can have here in trying to totally quantify this, but that's the best direction I can give you, is about half and half.

And then just in terms of your comments about being much more secular play than cyclical, can you talk a little bit about some of these conversations that you had with large customers and their prioritization of Trimble over maybe more traditional cyclical acquisitions? And yes, I guess what are you hearing from customers when it comes to preserving their budget spend with Trimble?

We've heard from customers that as we transition from CapEx to OpEx, we're reaching a new set of clients that we weren't able to before. In particular, our SketchUp product has shown impressive growth, achieving over 45% year-over-year ARR growth for eleven consecutive quarters, which is beyond my expectations. The team has done an excellent job. Additionally, our Tekla Structures business has also moved to a subscription model, allowing us to attract different customers. This shift expands our addressable market, which is very appealing. For the largest companies, we were already working with many of them, and they appreciate being able to tie technology costs to specific jobs, facilitating the billing process. Some customers find value in the flexibility to adjust licenses as needed, especially as we transition to named user licenses. This flexibility is a significant concern for them. Furthermore, regarding our Trimble Construction One initiative, some of our larger clients in Europe are seeking a unified set of terms and conditions and a single contract for purchasing Trimble services. A few of these major clients are aiming to act more like one entity and challenge traditional methods of making technology decisions for individual projects, focusing instead on enhancing overall corporate efficiency and effectiveness. As we enhance our subscription offerings, it simplifies the process for them to utilize a broader range of Trimble technology. My discussions with clients over the past weeks have made it clear that this is the direction they want us to pursue.

So I wanted to understand your organic growth guide a little better. I think you lowered your guide by about 1% which seems relatively modest when contrasting that to your comment about moderation in several end markets. So can you help us bridge the two? Is it that your backlog is supporting your growth outlook this year, but you're seeing new order growth that is expected to be delivered after this fiscal, you're seeing more of a sizable slowdown?

I'll start, and David, if I miss anything, feel free to chime in. There are a couple of factors to consider regarding that inflection point. Reflecting on three months ago, we had come out of the first quarter quite strong. At that time, agriculture in Europe was performing well, which coincided with our decision to exit the Russia business. Currently, the Ukraine business is effectively shut down due to the war. Between these two, that's a loss of $65 million in revenue. Three months ago, I believed the market was strong enough to absorb that $65 million, and I was reviewing the backlog. However, looking at the situation now, I realize I may have been a bit too optimistic. In terms of the agriculture business or, more broadly, the Resources and Utilities segment, we still anticipate double-digit organic growth in the second half of the year. It's important not to overlook this point in my remarks. We maintain our expectation of double-digit growth in agriculture, but one significant difference from my previous commentary is that I see less capacity for the Russia business to be integrated into our overall system. Additionally, a large portion of our business in Russia and Ukraine was centered around agriculture. Regarding your question about backlog, we are still experiencing a backlog that is approximately $140 million ahead of where we would normally expect it to be when looking historically. I believe we will finish the year with a higher backlog level than we anticipated three months ago, although this varies across different businesses at Trimble, which is related to supply chain issues. David, did I cover everything?

No, I’ll summarize what you said in numbers, Rob. If you look at the midpoint of the revenue guidance, we are down $50 million, with half of that due to currency, as Rob mentioned. The rest is impacted by a mix of demand and supply. While the overall supply chain is improving, we are facing some new component supply issues that we did not anticipate last quarter, which will affect our resource business and Geospatial. As Rob said, the demand is not diminishing; we will just have a bit more backlog for those products than we had expected. There is also some ongoing demand to consider. The agricultural business in Europe has been challenging, with high inflation and extreme heat leading to decreased productivity. There are also issues with limited fuel availability. Consequently, the sentiment in the global agricultural sector is noticeably worse than it was a quarter ago, particularly in Europe. However, the adjustment in demand for our guidance is relatively minor.

And quickly, can you remind us your exposure to the residential market across the four segments, and whether you’re seeing any slowdown in the revenue end markets?

Transportation and agriculture have no exposure, and neither do resources and utilities. In the geospatial and B&I businesses, as well as engineering and construction, we do have some exposure to residential, but it's not critical. Although residential has shown a negative trend recently, its overall numbers remain high. We have not experienced significant declines in our business from residential so far. For instance, in the civil construction sector, we've increasingly integrated technology into excavators, which are widely used in larger residential developments. While single-family homes may not see much technological adoption yet, larger projects are beginning to implement technology for site preparation. Our exposure in vertical construction is minimal. Most surveyors engage in various types of work, not just residential. One of our dealer partners in Florida mentioned a decline in residential activity, but this has been offset by a rise in entertainment and theme park projects. Work patterns can shift, and we need to be vigilant about these changes in both Europe and the U.S., as well as regionally. Our contractors remain active and have a backlog to work through. The focus will be on the size of the backlog in different markets. We consider residential along with infrastructure, commercial work, and segments like EPC while observing trends across these areas.

Congrats on the quarter. Maybe if I could ask you a question just on the transportation business since. We didn't touch too much on that. It looks like the performance for the subscription businesses is definitely improving, but you did not reduce hardware sales in North America. I guess I was just wondering, is that related to any mix within the portfolio of just where you're seeing traction with solutions or improvement? And then you have talked about selling some of that hardware as part of a bundle in the past. Just wondering if that has any factor too.

The hardware sales are primarily linked to our telematics subscription, which we refer to as our mobility business. Customers purchase onboard computers that serve as enabling technology for long tail subscriptions, and we sell these on a per truck basis. We operate both an OEM business and an aftermarket business, with our primary focus being the aftermarket. One of the challenges we faced in the hardware sector was an OEM partner taking less volume than we had expected for the quarter, and this has varied due to independent supply chain fluctuations. Additionally, the aftermarket sales were also lower than anticipated. We recently launched an updated offering, which I mentioned earlier, and we are preparing for our largest user conference in about one and a half weeks, which will be a key opportunity to showcase our developments. Currently, we seem to be a few months behind where we hoped to be in generating new business, but we are noticing an increase in the sales pipeline. It's important to highlight the growth in our Annual Recurring Revenue (ARR) and its sequential growth; this is the most appealing revenue stream we have at Trimble, particularly within our Transportation segment. We must remain focused on advancing ARR in the business. We are actively looking at discrete product sales, such as telematics subscriptions, and our Trimble Construction One solutions, which allow transportation customers to purchase multiple offerings. Customers today are buying our enterprise ERP solutions alongside mobility, video, final mile, mapping, and maintenance solutions. There is significant potential for upselling and cross-selling within our existing customer base. At the upcoming Investor Day, we will discuss that over 90% of the top 200 trucking companies in North America are currently Trimble Transportation customers, and most of them are not utilizing our full range of solutions. Therefore, we need to enhance our go-to-market approach and product offerings to deliver greater customer value and improve our market penetration.

Thank you all. Thank you for attending the call. We look forward to talking to you next quarter.