Trimble Inc (TRMB) — Q4 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. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which will relate to the corresponding period of last year unless otherwise noted. The Trimble 3-4-3 operating model simultaneously balances a view on looking forward 3 months, 4 quarters, and 3 years. As I think about framing today’s commentary on 2022, I think there is a parallel to look back 3 months at our fourth quarter, 4 quarters to look back at the year 2022, and 3 years back to 2020 when we began our Connect and Scale journey. COVID, supply chain disruptions, and net divestitures over these last 3 years have created a dynamic that makes it challenging to discern the signal from the noise in any given quarter, especially when looking at the year-over-year trends; whereas the long baseline reveals the definitive patterns of progression. As I reflect on the fourth quarter of 2022, let’s begin on Slide 2 with our key messages, which are consistent with the commentary from the prior quarter. Our key growth metric is annualized recurring revenue, which met our expectations and grew 16% to a record level of $1.60 billion. Congratulations to the team for delivering this record performance, which compares to $1.19 billion of ARR at the end of 2019. Total revenue for the year was a record $3.68 billion, up 7% over 2021, and up 6% compounded since 2019, growing through COVID and business model transitions. Total revenue in the quarter was $857 million, flat with last year, and towards the lower end of our guidance range. The delta between the ARR and total revenue performance reflects a slowdown in hardware sales through our dealer partners, as dealers continued to sell-through their inventory while processing mixed macroeconomic sentiment. For perspective, over the last 3 years, the sum of our civil, agriculture, and survey hardware and related software has grown at a 12% compound annual growth rate, with agriculture growing above and survey growing below this baseline. Gross margin finished at a record level of 61.8%, exceeding our expectations, reflecting software mix, the cumulative impact of model conversions, and abating supply chain disruptions. For the year, we achieved a 60% gross margin, a record annual level, up 170 basis points year-over-year, which compares to 57.7% gross margin in 2019. EBITDA margin of 24.3% met our expectations in the quarter and ended at 25% for the year, up 210 basis points as compared to 22.9% in 2019. Finally, earnings per share of $0.60 was exactly at the midpoint of our guidance for the quarter. Moving to Slide 3, let’s look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with Buildings and Infrastructure. The big event for the team was our Trimble Dimensions user conference in November, where we had over 5,700 attendees from the global engineering and construction industry, which provided a great forum to reconnect with our customers and partners. We launched many new innovations, including the Trimble Construction Cloud, powered by Microsoft Azure, which is an industry cloud built to streamline construction projects by connecting users, data, and workflow. We also announced extensions of our machine control technology platform to new OEMs and new machine types, further expanding our reach to connect the physical and digital worlds. The highlight financial achievement in the quarter was delivering over 20% organic growth in ARR, in addition to record levels of ACV software bookings and record levels of cross-sell bookings. We also had a strong start for our newly acquired Bid2Win business, where we’ve had some early cross-sell wins. As we have previously discussed, we continue to allocate incremental capital towards our own digital transformation, as well as our go-to-market efforts, which are generating strong interest from our customers and partners and demonstrating encouraging signs of internal productivity and efficiency. The work we are doing in this business will be highly leveraged across the entirety of the company. In Geospatial, revenue was down further than expected, as dealers moderated their inventory levels in the face of softening demand and macro uncertainty. Looking at the indicators, we see softness in residential, and while a portion of the expansion of infrastructure is getting consumed by inflation, underlying optimism remains in the market. For perspective, I look at the 3-year CAGR that I talked about on Slide 2 in order to calibrate the long baseline performance. Strategically speaking, in 2022, we continued to launch new innovations in GNSS, 3D laser scanning, and handheld data collectors, and we achieved a double-digit increase in ARR as our business model strategy takes hold. In Transportation, we delivered revenue and ARR growth in line with expectations, in addition to delivering the fourth quarter in a row of operating margin expansion. Connect and Scale progression also came in the form of continued development of connected workflows, such as Connected Maintenance, Connected Locations, and Engage Lane. The big story, of course, in the fourth quarter was the announcement of the Transporeon acquisition. To refresh memories, Transporeon operates a leading cloud-based transportation management platform, powering a global network of 145,000 carriers and 1,400 shippers. The platform integrates with more than 3,000 systems and powered more than 25 million transactions in 2022. For me, this is the very definition of a Connect and Scale business. I had a chance to spend a few days in Europe with Stephan Sieber and the Transporeon team in January, and my level of conviction in strategic and cultural fit has only increased. We are still working through regulatory approvals and we expect to close the deal in the first half of this year. We are excited to get to work together. In Resources and Utilities, revenue and ARR growth were led by our positioning services, utilities, and forestry businesses. Our definition of utilities covers our work with electrical and water utilities, but our positioning services business can also be thought of as a utility, in this case, precision GPS as a utility. In October, we announced that we crossed a hurdle of 34 million hands-free miles driven with General Motors and their Super Cruise program. Our precise GPS technology enables a vehicle to maintain its lane position in various environments, and we are working on several other Tier 1 and OEM program opportunities. Moving to agriculture, revenue was flat year-over-year, and up when excluding Russia and Ukraine. The 3-year, double-digit CAGR growth on Slide 2 is instructive for calibrating the long baseline growth of the agriculture business. With a product lens on Connect and Scale, we are now bundling our guidance hardware, software, and our positioning services, providing both easier access to the technology and a better value proposition for our customers. With a go-to-market lens on Connect and Scale, users and customers are at the center of our strategy. In pursuit of this strategy, we announced this week that we are taking a different approach to our go-to-market relationship with CNH Industrial. Moving forward, our distribution to aftermarket customers, after a 12-month transition period, will be done entirely through independent dealer partners, with the product bearing the Trimble brand. Less than 20% of our revenue in the Resources and Utilities segment goes through CNH to their dealer network today. We expect to maintain this revenue and address aftermarket demand and the needs of farmers through our direct relationships with our independent dealer network. This evolved approach to distribution will also enhance our ability to offer OEM brand-agnostic solutions to customers, to help them orchestrate their field operations with mixed fleets of equipment. Our new approach to aftermarket distribution will improve our ability to sell our full range of technology solutions to aftermarket customers, including guidance, selective spraying, variable rate application, water management, and our Connected Farm works center software solution. Our evolving strategy will also enhance our ability to cooperate with OEMs across the industry for their needs for factory-fit equipment. Let me now turn the call over to David to take us through the numbers.

Thank you, Rob. Starting on Slide 4, I'd like to begin my financial commentary this quarter by discussing organic growth trends across the components of our business. As Rob mentioned earlier, our recurring revenue businesses grew strongly year-on-year in the fourth quarter, with ARR up 16%. The strength of our recurring revenue offerings in a weakening and uncertain macroeconomic environment validates our focus on the continued evolution of our business model. While our recurring revenue streams were strong in the fourth quarter, revenues of hardware and related software were down. Organic hardware revenue was down 13% versus prior year and came in below our expectations. The factors driving the slowdown in our hardware business in the fourth quarter were consistent with what we described in our third quarter call. During the fourth quarter, our dealers continued to reduce their inventory levels, reflecting both our improving supply chain execution and uncertainty in the future economic outlook. The drop in demand was most pronounced in our Geospatial segment, as our surveying end customers ordered less than they did earlier in 2022. Hardware backlog reduced sequentially during the quarter as expected. From a geographic perspective, revenues were up modestly on an organic basis in both North America and the Rest of World, with strong trends in Latin America, but were down in Europe and in Asia Pacific. Year-on-year, Europe trends were meaningfully impacted by the loss of business in Russia and Ukraine and were up 1% organically excluding that impact. With that as a backdrop, I’d like to turn now to our total financial performance for the fourth quarter and full year 2022. Starting on Slide 5, fourth quarter revenues of $857 million were flat on an organic basis and down 8% when including the impact of foreign currency and acquisitions and divestitures. Gross margin was up 400 basis points, reflecting both the accelerating mix shift toward software and the positive net impact of our price increases and moderating cost inflation. EBITDA margin was up 20 basis points and operating margin was down 20 basis points, as increases in our gross margin largely offset higher spending against our Connect and Scale strategy, especially our digital transformation and higher spending on travel and trade shows. Diluted earnings per share were $0.60. Looking at cash flow, both cash flow from operations and free cash flow were, as expected, down year-on-year, with the single biggest factor being the amortization of R&D for tax purposes. We did not repurchase any shares during the quarter, and do not plan to restart our repurchases until we are well on the way to de-levering following the issuance of debt to fund the Transporeon acquisition. Turning to Slide 6 and results for the full year 2022, we achieved success across a number of critical dimensions. Organic revenue grew by 7%. Gross margin improved by 170 basis points, reflecting the positive impact of our ongoing mix shift. EBITDA margin was 25%, even as we restored spending across a number of areas that had been constrained during the COVID pandemic and as we accelerated investments against our strategy. Cash flow was down year-on-year principally as a result of an increase in our inventories and a change in U.S tax legislation, both of which we expect to normalize over time. As we move to complete the Transporeon acquisition, we take this on with a strong balance sheet. Working capital remains negative. Our year-end net debt to EBITDA ratio stood at 1.4x and the ratings agencies maintained our bond ratings and stable outlooks following the announcement of the transaction. Turning now to our quarterly and annual results by segment on Page 7. Speaking to the fourth quarter, Buildings and Infrastructure achieved organic ARR growth of over 20% and recurring bookings growth in the high teens. Sales of civil construction hardware were down year-on-year by just over 10%, leading to organic revenue growth for the segment of 2%. Dealers continued to reduce their inventory levels, and end market demand moderated. Segment margins at 25% were down year-on-year, impacted by lower civil construction revenue, our Dimensions user conference, subscription transition, and Connect and Scale investments. Revenues in the hardware-centric Geospatial segment were down 12% year-on-year on an organic basis, driven principally by declining dealer inventory levels and softer end market demand across the surveying sector. Segment revenues were also pressured by lower shipments to U.S Federal customers, which vary meaningfully from quarter-to-quarter and can be difficult to predict. Segment margins remained over 25% despite these headwinds. Revenues in our Resources and Utilities segment were up 6% organically driven by growth from Cityworks and positioning services sold to agriculture customers. Our agriculture revenue was impacted by the loss of business in Russia and Ukraine, with an estimated year-on-year impact of minus 5% to the segment in the fourth quarter. Segment margins improved in the quarter sequentially and versus prior year, coming in just under 36%. Our fourth quarter results in the Transportation segment reflect improvement across a number of dimensions. Organic revenue grew 5%, driven by higher year-on-year sales of Enterprise and Maps software solutions. ARR for the segment grew at a mid-single digit rate in the quarter. Revenue trends in our mobility offerings improved sequentially from prior quarters, driven in part by higher sales to our largest OEM customer. Operating margins of 14.5% were the highest since 2019, and reflect strong performance by our team in managing costs. Let’s turn next to our guidance for 2023 on Slide 8. The projections I will share with you today exclude the impact of our pending acquisition of Transporeon. Starting with ARR, we expect organic ARR growth at a mid-teens level in 2023. Our strong outlook for ARR growth is grounded in the solid bookings momentum we achieved in 2022, the potential for accelerated cross-sell as our digital transformation rolls out to a growing portion of our business, and the essential role that our software plays in our customers' operations. Our outlook for revenue, excluding future acquisitions and divestitures, is $3.7 million to $3.8 billion, reflecting an expectation of organic growth in the range of 2% to 5%. As a reminder, divestitures of businesses in 2022 will impact total reported revenue growth trends, with the biggest impact in the first half of the year. Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters, and softer end market demand in an environment of limited GDP growth. We expect revenue from hardware and related software will be down in the low single digits organically for the year, offset by strong recurring revenue growth. From a margin perspective, we expect that gross margins will improve by over 200 basis points as our business mix continues to shift in the direction of higher margin software. We expect a modest increase in operating margins, as we invest against our strategy in an environment where organic revenue growth is harder to come by. I'll note here that our leadership teams have been working hard over the last several months to adapt our spending plans to the current economic climate. Allocating capital against our strategic priorities is always a major focus for us, and the need for sharp focus is never higher than in a time of weak economic growth. We are confident that we can continue to progress our strategy within the constraints of our operating plan. Income from equity investments is expected to be relatively flat with 2022, and net interest expense is forecast at approximately $70 million. Netting this out, we project to achieve earnings per share in the range of $2.66 to $2.86. We expect that cash flow will grow significantly in 2023 driven, in part, by reductions in inventory levels. We expect free cash flow for the year of approximately 1x non-GAAP net income. Our cash flow forecast for this year now assumes that amortization of R&D costs under Section 174 of the U.S tax code will not be repealed within a time frame that will allow us to recover the accelerated tax payments that we made in 2022. While we believe that there is bipartisan support for this change, we are less confident than we were a quarter ago that this legislation will pass soon enough to help us this year. By way of reminder, this issue impacts the timing of tax payments and has an immaterial impact on our tax rate. If Section 174 is repealed within the next several months, our free cash flow would benefit by approximately $150 million. Note that our cash flow guidance excludes the impact of transactional costs related to the pending Transporeon acquisition. While we are not offering quarterly guidance, a few factors are likely to impact the sequential evolution of our financial results as the year progresses. We expect organic revenue to be down in the first quarter and flat in the first half of the year, reflecting the strong growth in hardware and related offerings that we saw in the first half of 2022. We expect organic revenue to be up in the mid- to high-single digits in the second half of the year. Influenced by these revenue growth patterns, we expect operating and EBITDA margins to be relatively flat in the first half of the year and up in the second half. While we expect mid-teens organic ARR growth for the year, growth in the first half is likely to be slightly lower driven by planned churn from a small number of customers. We expect ARR growth to improve sequentially through the year. From a segment perspective, we expect organic revenue growth for the year in the Building and Infrastructure, Resources and Utilities, and Transportation segments, with the strongest growth in Buildings and Infrastructure. Revenues in the Geospatial segment are expected to decline for the year, with the highest levels of organic decline in the first quarter as we lap strong numbers from the first quarter of 2022. Geospatial trends through 2023 will continue to be impacted by reductions in dealer inventory levels and ongoing softness in demand in a number of the segment's end markets. We expect margins to be stable in Buildings and Infrastructure and Resources and Utilities. We project growth in Transportation margins, while Geospatial margins will be down modestly for the year.

Let me thank our colleagues, customers, and partners for their support and their work in our strategic and financial progression. I’m proud to say that we continue to win culture and innovation awards and proud to announce that we received approval of our emissions reduction targets by the Science-Based Targets Initiative. Our objective is a 50% reduction in scope 1, 2, and 3 emissions by 2030. In addition, we released our first task force on climate-related financial disclosures report. In 2022, our highlight financial metrics were ARR growth and gross margin expansion. Our 2022 ACV bookings give us confidence that we can continue to grow ARR at a double-digit rate in 2023. Hardware demand remains the hardest revenue stream to predict. While the signals are mixed, and even a bit confusing in the short term, the long-term secular attractiveness remains. Our ability to uniquely connect the physical and digital worlds provides a guiding light for our business and remains the foundation of our right to win in our served markets. We have surgically reduced our expense structure and moderated spending across the company to ensure discipline and focus in an uncertain environment. What remains certain is our conviction to grow our business by focusing on our customers and continuing to execute our Connect and Scale strategy. Operator, let’s now open the line for questions.

Hi, good morning. I just wanted to maybe start out with the CNH aftermarket deal. Can you maybe give us a little bit more color on why it makes sense to do this now and what this could potentially do for the resources and utility segment, particularly as you engage more with the independent dealers?

Good morning, Jonathan. It's Rob. Let me break it down into three parts: context, strategy, and next steps. For context, let's discuss Connect and Scale. Our strategy focuses on connecting users, data, and workflow, placing users at the center of our operations. We recognize the importance of being closer to our customers, particularly the farmers. When we engage with customers, including over 100 OEMs and farmers, they express a need for assistance in managing a mixed fleet. Over the past six months, I have visited farmers in Mexico, Chile, Brazil, Japan, Australia, Germany, and the U.S. Our go-to-market approach involves multiple sales channels. We sell directly to enterprise farms, through OEMs, and via a channel that includes our existing Trimble network for aftermarket sales, as well as sales through CNH dealers. We are transitioning from selling to CNH corporate to reaching independent dealers directly. These independent dealers will be able to offer the entire line of Trimble CAT products, which goes beyond guidance to include variable rates, selective spraying, water management, and software. As we progress through this transition, we aim to establish these independent dealers to work directly with Trimble, which we believe will enhance the range of products and capabilities available to them. This will bring us closer to the end users of our technology and aligns with our commitment to customer success. We are confident that by engaging with customers in the field, we can better support them in integrating and managing their mixed fleets of technology and equipment.

Got it. And then just as a follow-up, I think you've also referenced some additional investments that you'd like to make for that Connect and Scale in the 2023 timeframe. Can you help us understand where those investments are going to go? And again, maybe why that makes sense to make those investments now, given the macro environment? Thank you.

We've been gradually investing in this strategy over the past few years, and we see clear signs of its attractiveness and momentum through the growth of our Annual Recurring Revenue (ARR). Our initial focus has been on our software businesses, especially those that generate recurring revenue. We achieved 16% organic growth in ARR, reaching 1.6 billion. This growth supports our ongoing success, and from a shareholder value standpoint, it represents the most valuable revenue stream in the company. Our investments involve enhancing systems, hiring more people, and improving processes. This improves both our customer-facing operations and internal connectivity. The "Connect and Scale" initiative enables us to expand efficiently. We're concentrating on customer success, measured by net retention, which has compelling economic benefits. We are committed to continuing this approach with greater conviction. Moreover, we have a strong balance sheet, achieving a 24.3% EBITDA this quarter, reinforcing our belief that this is the right course of action at this time.

Hey, good morning, everybody. It seems like there's a lot of structural progress next quarter on margins on ARR, which is, I guess, continuing and the surprise, I guess, for us was just a bigger destock in the hardware than we would have thought. And so, I had a couple of questions around that. One is, were you able to see those elevated levels of inventory, previously dealers and for the normal after what you look in your outlook, or are they low? I mean, there's any characterization that I guess there's been a debate in construction in North America anyway, as to whether large projects will fill in, smaller projects go away. And that seems to be the case. But maybe your mix of your customers is more fragmented than the big ones. I'm just trying to look for context around why that decline happened and is continuing and how big it is.

Yes, hey Rob. Its David Barnes. First point I'll make is that the supply chain, the constraints, and then the removed constraints have really moved trends around in our shipments, in our dealer inventory, that were hard to predict and in some cases, challenging to understand. So just by way of reminder, we had unsustainably and undesirably high hardware backlog early in 2022. Our supply chain even today isn't fully freed up, but to the extent that it freed up, it happened very dramatically at the end of the second quarter. So we shipped a lot of product; you'll recall that the hardware revenue was way up at that timeframe. So dealer inventories did grow. And I'll say it took us a while to figure out how quickly the dealers were able to find customers for and deploy that inventory. And that happened exactly while some of the end markets that our dealers serve slowed, particularly in the geospatial side. There's probably the highest within Trimble level of exposure direct and indirect to residential home construction, which slowed. There's some anxiety about the general economic outlook. So these two things happened all together, freeing up our supply chains, very big backlog, lots of shipments, and I created the destocking that we talked about a quarter ago, and it has picked up. We're not through it yet. We think we have a pretty good sense of where our dealers want to be and where they will be over the sustained period of time. It's my guess that we'll have two more quarters, Q1 and Q2 of meaningful inventory reductions in our dealers and anything after that will be smaller. But the guidance we've given reflects that expectation.

And any guess on if those two quarters happen, or would dealers be lower than normal at that point, and they maybe don't have perfect visibility into the channel, I understand.

We still have some isolated cases of supply challenges in our Ag sector. However, I believe there may be reasons for dealers to hold slightly more inventory than they did before COVID, but not by much. Overall, supply is in a good position. As we consider the fluctuations from one quarter to another, we saw significant increases in the first half of 2022, followed by the decline we just reported. Rob presented a useful chart showing the multi-year trend, and we are still significantly above our previous levels. We believe that much of this is simply the noise related to the resetting of the supply chain, which is a larger influence than any fundamental changes in demand.

Hi, good morning, guys.

Hey. Hi Chad. So I just want to go back to the CNH agreement. I just think in better understand the medium-term organic growth potential and maybe you can talk about what needs to be done to set up the independent channel. And when you expect that to be in place, and just how much of your product portfolio you'll be able to sell within that channel versus how much you're able to sell with CNH. Hey, Chad, this is Rob. I'll start with the quantitative framework. We had a chart on the second slide that showed the compound annual growth rate of the hardware businesses has been 12% over the last 3 years. The three businesses are surveys, civil construction, and agriculture. Agriculture has been exceeding that 12% growth over the past 3 years and continued to grow this year, even more so when excluding Russia and Ukraine, where we were selling a considerable amount. We'll begin to compare that later this year, in mid-year. To provide some context regarding our growth, we will also discuss units, pricing, share of wallet, and market share, and it seems like we're maintaining our position globally and likely growing in Europe and North America while expanding in Brazil. Now, regarding the CNH part of your question, we are talking about the aftermarket business we have with CNH. Currently, the products we sell through CNH into the aftermarket primarily involve guidance systems. As we transition to independent dealers, we have existing Trimble dealers in agriculture. Moving the business through CNH allows us to expand the product range offered to a set of independent dealers, which may include current partners or entirely new dealers. We have a 12-month period for transitioning this arrangement with CNH, and the discussions have been very positive. We feel optimistic, as this aligns with our customers' requests, and we’re ready to get to work to establish it.

We have been gradually investing in this strategy for the past couple of years, and we can see its effectiveness reflected in the growth of our Annual Recurring Revenue (ARR). Our initial focus has been on our software businesses, particularly those with recurring revenue. We achieved a 16% organic growth on ARR, totaling 1.6 billion, which supports ongoing growth. From a shareholder value standpoint, this is our most valuable revenue stream. Our investments involve enhancing systems, hiring people, and refining processes, which enable us to grow efficiently. We're also focusing on customer success, where net retention is a key metric. The economics tied to net retention are very strong. We are committed to this strategy and, if anything, we are proceeding with even greater conviction. Additionally, we have a strong balance sheet, with 24.3% EBITDA this quarter, reinforcing our belief that this is the right course of action at this time.

Great. Thank you for the question. So I wanted to ask about the e-Builder, Viewpoint SketchUp contingency. This business is obviously doing quite well and a pretty stark contrast to some of the more conservative macro views that you've expressed. And even just on an ARR growth basis, really strong compared to some of the peers in the software space. We've talked about the macro, but I'm just wondering from a portfolio basis, if you can speak to the playbook with these businesses what's working in this environment? And just how do you intend to port those lessons learned over once the Transporeon acquisition closes?

Good morning, Kristen. This is Rob. I will respond to your question. You're right; that group of businesses is performing exceptionally well, beyond just e-Builder, Viewpoint, and SketchUp. It includes our Tekla Structures offering, mechanical electrical plumbing software, and project management software. The entire group is thriving. One positive aspect of the software side is that the recurring revenue is becoming more predictable. There is no significant gap between retail and wholesale, giving us a clear view of demand. This is also why we are examining the three-year CAGR trend in hardware to discern the signals amid the noise. What's working here is that our value proposition aligns with market digitization. During my recent travels, I met with a large European contractor who highlighted that digitization, data, and sustainability are their top priorities. These companies recognize the need to adopt technology to advance their strategies. Many of them have a solid backlog and rely on technology to complete their work efficiently. From a value proposition standpoint, we are seeing strong engagement with both our integrated and connected offerings, with Trimble Construction One resonating well with our customers, even in its early stages. We have witnessed record levels of cross-sell annual contract value bookings in building infrastructure during the fourth quarter. This indicates that our marketing efforts are translating into actual business. Customers are increasingly seeking to transition from optimizing individual tasks to optimizing entire systems. For this, they require more connected data and workflows. They express a preference for purchasing from a single company rather than piecing together solutions from various vendors. The simplicity of dealing with one company or a single account representative is appealing to them. This approach not only makes it easier to do business but also enhances connectivity, which ultimately helps them work more efficiently, quickly, safely, and cost-effectively, and it is resonating well. Yes, I appreciate the question. Regarding Transporeon, the positive news is that they already connect with 140,000 carriers and have around 1,400 shippers in their network, along with 3,000 integrations of PRP and management systems. Last year, the system processed $25 million in transactions. It truly operates as a platform company focused on connecting and scaling. They offer a range of interconnected capabilities and utilize a dedicated sales force, employing a land-and-expand strategy within that framework. There is strong net retention and growth within the business. I believe we can draw valuable insights from Transporeon for Trimble, just as we can integrate elements of Trimble into Transporeon's operations. This potential synergy is one of the reasons I'm excited about it, as I see it as an additive opportunity for us, similar to how the e-Builder and Viewpoint acquisitions enhanced Trimble. I envision similar prospects with Transporeon.

Hi, good morning. Thank you so much. Hope everyone is doing well. So my first question is the gross margin grade expansion 200 to 250 basis points, how much of that is price cost tailwind? And how much of that is software versus hardware mix change? And are there any other factors driving this leverage this year?

Tami, it's David. The way to think about that is essentially all of the gross margin improvement is the evolving mix of our business. We are continuing to take price mostly in hardware, but at a lower rate so that's not really the margin driver. What's driving our margins up is we're becoming more and more of a software business, and those have higher gross margins.

Got it. So if prices keep coming down, input prices, could that be a source of upside to your gross margin rate?

There are several factors affecting our hardware gross margin. We've observed a positive outcome, as in the third and fourth quarters of 2022, our price realization exceeded our cost improvements for our hardware businesses. This has already been incorporated into our current run rate. We are still implementing moderate pricing adjustments in our hardware sector, which should provide some support for our margins, but the more significant factor is the shift in our business mix.

So one quick one. One is to back to the destocking comment. Can you talk about what sales to end users look like in the fourth quarter against the dealer destocking as to date sales to end users overall moderate, and fourth quarter versus the third quarter?

Yes. Let's frame it this way. Our dealer destocking had a negative impact of about 400 basis points on our organic revenue trends, resulting in flat reports. Without the dealer destocking, we would have seen an increase of approximately 4%. Specifically regarding hardware, our organic revenue was down 13%. You can infer, Tami, that there was some market softness, particularly in the Geospatial surveying market in Q4, which we believe is partly temporary. Last year, we launched many new products, and as is often the case with new releases, we experienced a spike in orders, supported by a clean supply chain. Now, we’re seeing a pullback for that reason. Overall, the end market sales trends to retail appear to be improving—although not as much as earlier in 2022, the general direction is upward. There are some weaker areas, particularly anything directly related to residential construction, which has clearly contracted. However, considering what's happening in infrastructure, we believe the overall direction of demand is positive. That said, with the dealer destocking and earlier customer ordering patterns in '22, we are experiencing a pullback for those reasons.

Hi, guys. Good morning. Just a couple of quick ones. So I think you mentioned churn in the first half impacting the ARR growth, what type of customers or what segment are you seeing these come from?

Yes, hey Jason, its David. We do expect churn from a handful of customers, principally in our Transportation segment. These are customers that made a decision to come off our platforms many quarters ago, and they're just now implementing them. So I see that as noise, not signal; our customer satisfaction and retention in transportation is on a secular positive trend. We just expect to see a number of these probably in the first quarter pull off. So that will reduce our ARR growth rate a little bit lower in Q1 from what we expect to see for the full year.

Okay. To simplify, your construction software portfolio seems to be performing well, but it's driven by completely different factors than the hardware destocking issue. Are you noticing any macroeconomic effects on this construction software portfolio? Thanks.

The short answer is no, not seeing an impact on the software portfolio.

Yes, good morning, everyone. Rob, I'm wondering if you could just talk about the progress on Trimble construction. One, what proportion of new orders does it account for now? And when we last caught up, you were seeing tripled-AASP versus base orders before. I'm wondering if that trend has continued?

Hey, Jerry, good morning. It was so, on TC1, the Trimble Construction One, the best evidence I can give you on the progress is that comes in the form of the record level of cross-sell and upsell that we had in the quarter on from an ACV bookings perspective. And the reality is not all of that is the Trimble Construction One branded portfolio. So there are some aspects where we can just sell across the portfolio, which I'd say, a subset really of TC1. That cross-sell is a percent of the total ACV bookings and Buildings & Infrastructure software was nearly 30%. So for us, that's a record dollars, record percentage level. And when we go through the business reviews, we look at almost every account to look at what they're buying and why they're buying it and looking at the competitive win ratios. What we're seeing is when we're selling the bundled offerings, whether it's less than the full TC1 offering or it's TC1, as we're seeing the sales cycles reduce. We're seeing the size of the bookings go up. We're seeing the win ratios go up as well. And so in aggregate, it looks to be a winning formula. And I would add to that, Jerry, that it's still relatively early in the game for us. And so with the sales kickoff meetings that we've been having in the last weeks, it is really a big emphasis to the team. So to get the offering out to the general contractors and then the next person is after that in architecture engineering owners and public sector and then geographically rolling that out as well and aligning the sales team behind that and then actually doing the sales enablement work underneath the covers, which is critical to help the sellers with their effectiveness. So I'd say, Jerry, lots in aggregate or in some, I think lots of good things happening on this front, and we'll keep updating you here every quarter.

Yes, good morning. First question, I wanted to clarify a comment from earlier regarding the cost for Connect and Scale, specifically about the mention of 100 basis points. Is that reflected in the '23 guidance or was that the cost for '22? Additionally, can you discuss where you've settled on the model you plan to implement for the hardware-software bundles as you transition those conversions? There were several options presented at the Investor Day, so could you share what the year 1 and year 2 economics will look like for those?

Yes. Hey, Rob. It's David Barnes. I'll try to address both points. The spending on Connect and Scale discrete investments in 2022 compared to 2021 was about 100 basis points, or around $40 million. Our guidance for 2023 reflects a slowdown in growth, so we expect to spend around another $20 million, which is a little more than that, leading to an incremental $1 million, for a total of $23 million above $22 million. We still have more work ahead of us and see this as a high-priority investment. Regarding the model options, the menu we presented during Investor Day is still relevant. This topic is closely associated with digital transformation, and our ability to sell hardware and software bundles on a recurring basis significantly depends on the rollout of our digital transformation. Although we're currently approaching it in a limited manner, the majority of the potential is still to come, and all the options we discussed with investors remain under consideration.

And Rob, I want to provide some additional context regarding the Connect and Scale investments, as this is a capital allocation discussion. We have reduced spending in other areas of the company to help finance our current initiatives. We have given considerable thought to the cost management aspect of our model. Over the last three years, our organic annual recurring revenue has increased by over 12%, while total revenue has grown by 6%. The gross margin dollars have increased at a faster rate due to a shift towards more software-centric offerings. Additionally, our total headcount has grown organically by 2% during this period. A third of our total revenue growth is linked to the growth in ARR. This is all part of how we are strategizing our capital allocation at Trimble and where we are focusing our investments.

Well, maybe as a follow-on to that, Rob. Transporeon following that completion of that, you will be in somewhat of a deleverage mode, but how much flexibility are you giving yourself or to be able to do a transaction like, I guess, a Rivet or something along those lines, I guess, on the capital allocation side to supplement Connect and Scale?

From a flexibility standpoint regarding acquisitions and balance sheet deployment, I would suggest that over the next 12 to 18 months, we have limited flexibility due to our main goal of reducing leverage. For larger scale transactions, our balance sheet flexibility is constrained. However, for smaller deals, such as an acquisition like Rivet or investments in Trimble Ventures with single-digit millions, we do have some flexibility, albeit with caution to ensure we understand our model and maintain a conservative approach to our balance sheet. It's important to highlight that in 2022, 38% of our total revenue was recurring, amounting to $1.6 billion, which we expect to see double-digit growth in the coming year. This gives our P&L more visibility than ever, enhancing the resilience of our business model while we maintain our investment grade. Considering all these factors, I would say there is limited flexibility for significant capital deployments, but more flexibility exists for smaller investments.

We'll go next to the analyst at Wolfe Research.

Hi. This is someone on for Gal. Thanks for taking my question. I wanted to follow up on a previous inquiry regarding digital transformation. How is the progress for revenue being transacted through the connected digital platform tracking against your expectations? And what was that amount as a portion of revenue for FY '22? At the Investor Day, I believe the target was set at 2% of revenue. Did that meet or exceed expectations, and do your projections indicate that your investor base still supports the anticipated portion of revenues to be transacted through the digital platform in the future? I have a brief follow-up. Thanks.

The short answer is yes. Yes, with the 2% our business in Europe, and that's live and working, and we're just about to roll out the next phase to North American principally to our North American software businesses and with further rollouts from there. But we're moving forward.

Got it. That's helpful. Thank you. And then just one follow-up. Has anything changed from the time Transporeon was announced that would maybe alter the expectations for revenue and EBITDA initially communicated at the announcement of the acquisition or everything all good there so.

Yes. Look, we've communicated the financial parameters there. We still don't own the business. Obviously, we're talking to them, but we have no update to our outlook, and we'll update that outlook once the transaction closes at some point in the first half of this year.