Trimble - Q1 2023

Transcript

Operator (participant)

Welcome to the Trimble First Quarter 2023 Results Conference. I'd now like to welcome Rob Painter, Chief Executive Officer, to begin the conference. Rob, over to you.

Rob Painter (President and CEO)

On our website, we ask that you refer to the safe harbor at the back. Recurring revenue is our key top-line metric at Trimble. Our team, led by our construction software group, achieved 13% organic growth in the quarter, 100 basis points ahead of our expectations. We now stand at $1.65 billion of ARR, and under $700 million at the beginning of 2017. Kudos to the Trimble team who have worked so hard to execute on our transformation. EBITDA is our other key P&L metric, and we delivered EBITDA of 27.2%, also slightly ahead of our expectations, which was driven by record gross margins of 64.2%. For perspective, gross margins in 2019 were 57.7% and 56.3% in 2016. Free cash flow.

I recognize that consensus numbers and the trading algorithms both still focus on total revenue and EPS. While these figures are important, they are secondary in relevance to ARR and cash flow, which are much more closely tied to fundamental value creation. Revenue and margins were both above expectations we set with the investor community back in February. We believe the delta to consensus figures was simply a function of the challenge in getting our quarters mapped correctly, against our annual guidance. As a result, we will be more prescriptive with our second quarter commentary. With respect to the macro, like most companies, we're trying to find the signal through the noise. Despite the noise, what we sell to customers is productivity, quality, safety, transparency, and environmental sustainability. The mid to long-term secular tailwinds remains that are underserved and under-penetrated, and they will continue to digitally transform.

Our strategy compels us to be mindful of our cost structure in the short term while continuing to invest in our most attractive long-term opportunities. With respect to capital allocation, there is in the first quarter, bringing the total to 16 since 2020. Second, our recent B2W and Ryvit deals are both off to a strong start and performing ahead of expectations. Third, the investment we are making in our business transformation has initially been of ARR growing double-digit in this climate as a proof point of high-quality capital allocation. We are transforming our go-to-market motions to deliver bundled and connected solutions while building the systems and processes to efficiently and effectively scale our business. At the company level, we think about our Rule of 40 as the sum of ARR growth and EBITDA margin, which represents our aspirational bar.

Many of our software businesses have already cleared this hurdle, while others are steering this direction. Looking at our hardware businesses, this is where we have felt the whipsaw of supply chain availability and channel inventory stabilization, which continues to make quarterly comparisons of our numbers incomplete at best. To find the signal, you have to look at a multi-year view. Our largest hardware businesses in agriculture, civil construction, and geospatial collectively grew revenues at a mid-single digit rate from the first quarter of 2019 through the first quarter of 2023. In the first quarter, channel inventories continued to draw down, thus, retail demand significantly exceeded wholesale demand. Moving to slide three, let's look at the progression of our connect and scale strategy through the lens of our reporting segments, beginning with Buildings and Infrastructure. Market backdrop generally remains healthy.

In North America, we see strength in infrastructure and non-residential construction, such as data centers, renewable energy, and customer backlogs remain healthy and technology helps to address the skilled worker shortage. By the numbers, ACV bookings grew double digits in the quarter and ahead of plan, while ARR grew in excess of the company growth rate. Our Trimble Construction One commercial offering is helping to grow new logo and cross-sell bookings. Through the lens of strategic progression, customer wins at England's National Highways integrated Trimble offerings. At CONEXPO, our technology was present on 20 OEM booths, demonstrating the continued relevant excavator guidance and site surveying demonstrates that we can continue to expand the size of the addressable market by virtue of reaching new machine categories. In geospatial, the market back potential exposure, which presents a headwind. Managing channel inventory levels is a priority in this segment.

By the numbers, revenue was ahead of our internal expectations in the quarter. Strategically speaking, we continue to see strong demand from U.S. state departments showing solid growth. In Resources and Utilities, while commodity prices remain high by historical standards and input costs are moderating. Strategically speaking, we are on the path towards building out our after-market distribution in agriculture. We believe in giving farmers a choice in their technology platforms. We believe in the power of independent technology dealers where we have the direct relationship. We know how to build and manage a channel.

I reference our SITECH model in civil construction and a similar initiative in our geospatial channel as case studies and excellence of channel development. In the quarter, we also announced advanced path planning technology, which takes us a step further on the path towards fully autonomous equipment for a variety of industries. In our positioning services business, we announced that Nissan has gone live with their most advanced driver assist system to date, which is enabled by Trimble taking a core Trimble technology and applying it across new and existing verticals. By the numbers, we were largely on plan this quarter. In transportation, the market backdrop is very dynamic, with a softening freight market pressuring carriers to find new frontiers of efficiency, which technology can help address.

By the numbers, we met our expectations in the quarter, and we have delivered five sequential quarterly increases in operating income as a of revenue. Strategically speaking, we are making progress with our new In-cab technology platform, which delivers the open platform that our customers have been asking for. We launched new functionality in the quarter, including the first industry dwell time metrics for fleet management, which provides customers with additional metrics they can use to improve their operational efficiency. The biggest news for us in transportation was the closing of the Transporeon deal on April 3rd. I've described this business as a perfect example of a platform play within our strategy.

The why comes in the form of a network of over 158,000 carriers and over 1,400 shippers transacting approximately 55 over 110,000 transports and over 100,000 dock scheduling appointments are managed on the Transporeon platform. Slide four provides a summary overview of how we see the complementary aspects coming together to create a stronger franchise in the form of complementary capabilities, customers, and geographic reach. The business model of Transporeon is fundamentally a consumption-based model based on an array of transaction fees. Since we announced the deal in December, demand in Europe has slowed, and the mix has shifted towards a greater percentage of contract over spot transactions, which are monetized at a lower rate. Our guidance reflects what we believe is a de-risked 2023 level of dollar-denominated revenue, approximately 10% also positive signals.

Bookings are still expected to grow well over 30%, and our tax rate assumption improved and cross-selling opportunities with Trimble are looking stronger than they did just a few months ago. Let me now turn the call over to David to take us through the numbers.

David Barnes (CFO)

Thank you, Rob. I'll start on slide five. Coming into the quarter. I'll remind you that revenues were exceptionally strong early last year as we recovered from our supply chain challenges and worked to bring down backlog. Our comps this quarter were differently attributable to reductions in dealer inventories. Gross margins were exceptionally strong in the quarter. As Rob mentioned, our 64.2% gross margins are a record in the history of Trimble, reflecting both an accelerated mix toward higher-margin software and lower input costs for our hardware products. Gross margins in the first quarter benefited from a high level of term license renewals and high level in the coming quarters.

While we continued to spend in the quarter against our strategic initiatives, our strong performance on the gross margin line led to higher EBITDA and operating margins, up 170 and 120 basis points, respectively, even in a tough environment and as we invest in our business. Cash flow in the quarter improved significantly year-over-year, with both cash flow from operations and free cash flow in excess of non-GAAP net income. Our improved cash generation reflects a reduction in cash outflow for hardware component purchases. We didn't purchase any shares in the quarter and will continue the suspension of share repurchases until we have paid down a meaningful portion of the debt raised to fund the Transporeon acquisition. Turning now to slide six for some perspective on the underlying drivers of our revenue trends. We break out on our financial statements.

Going forward, our revenue will be broken out in two components. The first category is products, while the second category is subscriptions and services. Product revenue consists of hardware offerings and are non-predominantly recurring. In presenting our revenue in this way, we are recurring and non-recurring revenues. We think this new presentation is better aligned with our strategy going forward. 15% organically in the first quarter. The decline in product revenue this quarter reflects a tough comparison with the first quarter of 2022, when our supply chain was freeing up and we were working through extraordinarily high backlog. Our dealers reduced their inventories. Inventory reductions accounted for roughly $40 million, or nearly half. Services revenue was up 14% on an organic basis. To put our first quarter revenue performance into a longitudinal perspective, 2019, before the impacts of COVID and supply chain swings.

In this view, total revenue compounded at a 5% rate in the first quarter of 2023 versus 2019. From a geographic perspective, revenue was down 9% organically in Europe. Nearly half of the Europe revenue decline can be attributed to our decision to exit our Russia business. In North America and Asia Pacific, our revenues in the quarter were essentially flat, while revenue in the rest of the world grew 6%, driven by strong demand from agriculture customers in Latin America. Turning now to slide 7, we ended the first quarter with ARR at $1.65 billion, up 13% organically. Backlog of $1.6 billion was up slightly versus the prior quarter and down from $1.7 billion a year ago.

Hardware and perpetual software-related backlog was down $200 million year-over-year, driven by our dramatically improved lead times. Recurring related backlog was due to our growing bookings of recurring solutions. On a 12-month rolling basis, our software, services, and recurring revenue of $2.2 billion represents 62% of our revenue, up 700 basis points from year ago levels. As we neared the completion of the Transporeon acquisition, we did so from a strong balance sheet position with net debt at approximately 1.1 times EBITDA. Turning now to results by segment on slide 8. Our software portfolio in Buildings and Infrastructure had a strong quarter with ARR up organically by approximately 20%. Segment revenue to our civil construction customers, which are predominantly made up of hardware, were down year-on-year on the quarter as expected as our dealers worked down their inventories.

Excluding the impact of dealer inventory changes, we estimate that our retail digit rate reflecting a favorable environment for infrastructure investment. In total, Buildings and Infrastructure saw 5% organic revenue growth with operating margins over 28%. Transportation segment revenues grew year-over-year organically in the quarter, while operating margins exceeded 15%. Importantly, ARR grew at a mid-single digit rate in the quarter for this segment. The turnaround of our transportation business is underway, and we are encouraged by the continuous improvement in ARR growth, revenue growth, and operating margins. In the Resources and Utilities segment, revenue was down organically as expected. Trends were impacted significantly by tough comps with prior year. In the first quarter of 2022, RNU revenues grew 16% organically as our supply chain freed up and we worked to bring down backlog.

On a four-year basis, first quarter revenues were up at a compound annual growth rate of just over 6%. Segment margins were extremely strong in the quarter, reflecting lower input cost and the benefit of higher price realization. In the geospatial segment, which is also heavily dependent on hardware, we saw revenue down 16% on an organic basis in the quarter, modestly better than our forecast. More than half of the year-over-year organic revenue decline for the segment relates to dealer inventory dynamics as dealers reduce their overall inventory levels this year. Geospatial revenues grew organically by over 16% in the first quarter of last year as we brought down backlog, which has impacted many of our survey customers. I'll now turn to guidance on slide 9, where we have a number of moving pieces.

We are updating our annual guidance to bridge the addition of Transporeon for the remainder of the year. We are also being more prescriptive with our view in the second quarter with the addition of Transporeon. Let's start with the annual outlook pre-Transporeon, where we are confirming our baseline guidance view for the business, including our outlook for mid-teens organic ARR growth and full year organic revenue growth of 2%-5%. Incorporating Transporeon, we expect the addition of approximately $135 million in revenues over the balance at the end of the year. We now expect full year revenue to be in the range of $3.835 billion-$3.935 billion. We project that our ARR, including Transporeon, will be approximately $2 billion at the end of 2023.

Basis points for the year versus 2022, coming down sequentially in the second quarter and then progressing up again in the second half of the 3%-24%. Our guidance now favorable outlook on our tax rate from the Transporeon acquisition. Our updated outlook for earnings per share is in the range of $2.52-$2.72, reflecting a mid-single digit percentage dilution from Transporeon and related interest expense, which is in line with what we indicated in December. We continue to expect that Transporeon will be roughly neutral to 2024 EPS and accretive thereafter. We affirm our free cash flow projection for the year of approximately one times non-GAAP net income, reflecting in part our plan to reduce inventory levels.

Shortly after the close of the Transporeon acquisition, our pro forma net leverage stood at approximately 3.25x, with approximately $3.1 billion in net debt. The debt we raised in connection with our Transporeon acquisition carries an interest rate of approximately 6.3%, in line with our expectations at the time the deal was announced. Given our current cash flow projections, we expect to end 2023 with leverage under 3x. We said in our announcement of the Transporeon acquisition that we expected to restore months following the acquisition. Our updated projections suggest that we will be able to delever to our 2.5x goal sooner than that original timeline. New growth, with revenue between $962 million and $992 million, and EPS in the range of $0.55-$0.61.

We expect the impact of additional dealer inventory reductions in the second quarter will be about half the rate of the first quarter, with stocking levels at or near normal levels by the end of June. We expect that our gross margin percentage will be lower and a higher share of hardware. Operating margins will also be down sequentially to approximately 22%, re-reflecting both lower gross margins and higher operating expense from annual salary increases. Looking at the back half of the year, we expect higher rates of ARR and revenue growth. We expect revenue to increase sequentially from the second quarter through the fourth quarter. We project that the fourth quarter will be our best of the year across the key metrics of financial performance, including total revenue, ARR growth, organic revenue growth, and operating margins.

As it relates to our view on segment growth throughout the rest of the year, we expect all four of our segments to post improving sequential organic ARR and revenue growth through the balance of 2023. Buildings and Infrastructure will remain our fastest-growing segment as we expect our recurring software businesses to sustain solid performance while our civil hardware business improves with more normalized dealer inventories.

We expect our geospatial segment to return to positive organic growth in the second half of the year, but remain modestly down for the full year. We expect Resources and Utilities to return to growth late in the second half of the year, driven by an expected pickup in our aftermarket channels. Over to you, Rob.

Rob Painter (President and CEO)

When we think about our right to win at Trimble, we believe we can uniquely bring together users and connect workflow between the physical and digital worlds across industry continuums. Connect and Scale is our strategy. Our strategy is a platform strategy. Platform strategy is in turn a data strategy. If we are successful in our pursuits, we will collect one of the most complete data sets in and across industries, creating a flywheel of enhanced insights and data connectivity. AI has captured the world's attention, ours too. We believe our corpus of industry-specific data will unlock and accelerate our long-term value creation model. As I conclude my remarks, I want to take a moment to honor the memory of Sandra MacQuillan, who passed away last week after a year's long, and was a valuable contributor to our company's success.

Sandra's insight, courage, and support for our business will be greatly missed. She helped make Trimble a better company. She helped me, to become a better leader. On behalf of the entire Trimble team, I extend our deepest condolences to Sandra's family and loved ones. Operator, let's open the line to questions.

Your first question comes to the line of Jerry Revich, of Goldman Sachs. Your line is open.

Jerry Revich (Senior Investment leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

Yes. Hi, good morning, everyone.

Rob Painter (President and CEO)

Hi, Jerry.

David Barnes (CFO)

Hey, Jerry.

Jerry Revich (Senior Investment leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

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

David Barnes (CFO)

Sure. Jerry, it's David. No fundamental change in the momentum of the business, recurring business in Buildings and Infrastructure. It happened new. If you're gonna have churn, that's when you have it. That in the year, actually a little north of 20% for Buildings and Infrastructure ARR. The momentum is solid.

Jerry Revich (Senior Investment leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

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

David Barnes (CFO)

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

Jerry Revich (Senior Investment leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

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

David Barnes (CFO)

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

Jerry Revich (Senior Investment leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

Sure.

Operator (participant)

Your next question comes from.

Speaker 11

Hi. Thanks. Good morning, everybody.

David Barnes (CFO)

Good morning.

Speaker 11

Interesting. I understand that the mix is favorable as hardware decline and software continues growing. I guess my question is there anything we should think about is that having taken a step function up, a shifting mix of business?

David Barnes (CFO)

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

Speaker 11

Should we think of that as being in more R&D?

David Barnes (CFO)

We're investing in our business. The guidance and of the script comments reflect we don't think the gross margins will stay at the high level they were in quarter one for the rest of the year. We'll be modestly below that, partly because the mix comes back to a more normalized mix as our hardware businesses get past the hump of dealer inventory reductions. Look, if you look at our OpEx even for the year's outlook, we will grow OpEx faster than revenue. We normally don't like it against the digital transformation, the creation of platforms. We're, we are investing against the business even while we get through the most do that.

Speaker 11

Okay. Thank you very much. Just one last one, on channel destock. Has anything happened in the last, you know, two, three months to increase the headwind from destock? I'm thinking about the ag channel and moves, OEMs are doing there. Maybe you could broadly just tell us when we're through the destock pulse, I will stop there. Thanks.

David Barnes (CFO)

Yeah. Sure. I'd say the pace of inventory destock is a bit by mid-year. We're on the plan on destocking that we laid out a quarter ago.

Speaker 11

I.

David Barnes (CFO)

Yeah.

I think that answers your question.

Speaker 11

Got it. Thank you.

David Barnes (CFO)

Sure.

Operator (participant)

Your next question comes the line of Kristen Owen of Oppenheimer. Your line is open.

Kristen Owen (Executive Director and Equity Research)

Great. Thank you. Good morning. David, I wanted to follow up on your comment about the reinvestment, specifically about the digital transformation. Rob, you closed the prepared remarks talking about the Data Flywheel. Can you just talk to us about where we are in that journey? How you intend to make better utilization of that data and just, yeah, what stage we are in?

David Barnes (CFO)

I'll comment on an important milestone where we've put into production, the digital backbone for our North America live next week. What that does, Kristen, is it sits in a sort of kludgy way to date. We've had success in the kludgy approach, but we're about to cross an important milestone in what we call, Digitally Enabled Trimble Construction One, with bundles that are more accessible and easier for our people to sell and our customers to consume. As a part of the journey we're on, we have additional rollouts scheduled for our digital transformation that over the next couple years will benefit the whole of our business. We're gonna see some tangible, much more tangible benefits from the investments we've been making on digital transformation.

Rob Painter (President and CEO)

Kristen, I'll add a comment on the data strategy part of your question. I start with the corpus of data at Trimble. In Construction ag, we manage over technology and over 180 million acres of farmland. In transportation, we manage a couple million vehicles. Fundamentally, it's about creating a digital model of the physical earth. There's a, I'd say, a profound corpus of data opportunities. Our digital transformation, a big part of that is unlocking that data, getting it into the cloud. Once you've got it in the cloud, I have the opportunity to take data into information. When we're thinking about artifacting, it's actually also quite fun. We're already developing predictive and generative AI-based solutions covering all of our end markets and covering a number of workflows within that.

I will still say we are very, very early in the journey. If you take a market like agriculture, with the Bilberry acquisition that we did on selective spraying, we're applying deep learning technology to be able to identify weeds, and enable spraying at the plant level instead of at the field level. Image processing to automate invoicing processing workflows. In the geospatial business, we're working on already point cloud semantic segmentation, so then you can automatically extract and classify assets from large data sets. In our transportation business, we have video intelligence solutions that can detect fatigue and driver distraction and therefore improve safety. We're just at the beginning of this.

Kristen Owen (Executive Director and Equity Research)

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

Rob Painter (President and CEO)

Most singularly unique about Trimble, I think forms the basis of our right to win in our markets, is our ability to connect the physical and the digital world. It's connecting work in the office with work in the field. That means, connecting the hardware and the software of Trimble. Think about potential OEM disintermediation. I go to the customer. That customer is a farmer, it's a contractor, it's a trucking company. More often than not, they're looking for a neutral provider of tech. We don't see that fundamentally changing in the aftermarket. We hear more customers saying, "How is this going to work for me if I have OEM proprietary technology, multiple OEM proprietary technology?" Remember, they operate mixed fleets. How does that benefit a customer?

That's what we hear feedback from out in the field, and it gives me conviction that we're on the right path. Does that mean that OEMs would not, let's say, pursue a strategy? I'd say of course not. We just have to in the physical and the digital world. That's why for the last 15, 20 years, we've been creating a software ecosystem around that hardware that we have to create these integrated and connected workflows. Not to mention, that's the technology side of it, you apply the go-to-market aspect about how you actually take this to market, how you actually monetize, what are the business models around it? I'd say yes, there is certainly a different competitive environment that exists today versus five, 10, 15 years ago.

I think a lot of the, let's say, competitive world woke up to the attractiveness of these markets that we're serving that are large, global, underserved, and under-penetrated. We feel good about, where we stand in that environment, Kristen.

Kristen Owen (Executive Director and Equity Research)

Great. Thank you so much.

Operator (participant)

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

Jonathan Ho (Partner)

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

Rob Painter (President and CEO)

Jonathan, this is Rob. Good morning. From, I'd say, the effect growth of the business, the gross margins, the ARR growth in the business, the bookings growth in the business, we see those as accretive to the business model of overall Trimble. That doesn't change. You know, our view continues to be look at the midterm and beyond, and it will be even more significantly accretive given the nature of the platform and the density that the business has of carriers and shippers. To the second question, on what changed in the macro view, I'd say, yeah, absolutely. It's disappointing from my perspective as well.

Well, hey, when we break down the underlying factors, we looked and saw a couple of, a couple of things, maybe three things to mention. The first is, the overall level of transactions has gone down in Europe. When we look at the end markets like CPG, retail, chemicals, are three, you know, relatively big markets for the business. The transaction volume slowed more than we expected. CPG, I look at that one as one that people are still gonna eat. So I, I don't lose a conviction that, you know, this is a temporary phenomenon in the business. The second aspect, which really probably also relates to the third, is the spot prices have come down and the business differentially monetizes when spot rates are higher.

The spot rates will come down if transaction volume comes down. The third piece, which connects actually though back to spot prices, is that truck capacity went up in Europe. If you follow new unit trucks hitting the market in Europe, that capacity increased at the same time as the transaction slowed, further pressuring spot prices. Those would be the three factors. Let me not end on that note. Let me end on the note that we expect to see 30% bookings growth in the business this year. When we look at prior out of each of those cycles, it's fundamentally transaction rates are as strong as ever.

Forty new customers were on-boarded onto the platform in the first quarter before, and we believe it would be poised to bounce back, when the markets improve.

Jonathan Ho (Partner)

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

David Barnes (CFO)

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

Jonathan Ho (Partner)

Company as a whole.

David Barnes (CFO)

I'll focus on the outlook for the year. We expect net retention to be very strong, north of 100%, in the ZIP code of 110%. What gets us there, you know, our churn varies by business. In most of our recurring businesses, the churn's very low in the low to mid-single digits. SketchUp is structurally higher than that. Been pushing, you know, at high single digits through low churn and just with the breadth of our offering. We're really having traction in the building software portfolio of cross-selling Viewpoint and our Tekla Structures, and the MEP offerings. That's what gets net retention.

Rob Painter (President and CEO)

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

Jonathan Ho (Partner)

Thank you.

Operator (participant)

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

Chad Dillard (Senior Analyst, US Machinery)

Hi. Good morning, guys.

Rob Painter (President and CEO)

Hey, Chad.

Chad Dillard (Senior Analyst, US Machinery)

In the Buildings and Infrastructure business, I think you talk about, Rob, going from kind of 13% to about greater than 20%. I was just curious about, you know, what line of sight do you have to that. Maybe you can talk about, you know, any key products that are driving that and to what extent are you seeing, you know, some of the cross-sell driving some of that growth?

Rob Painter (President and CEO)

Chad. This is Rob. The 13% was at the company level of organic ARR growth that we see going up through the rest of the year. If we go into Buildings and Infrastructure, specifically the Buildings and Infrastructures grows, ARR has been growing faster for that to grow throughout the year as well in Buildings and Infrastructure. You know, when we go through the business reviews, one of the things that is, I'd say, great about an ARR business model is, you know, we're closing the quarter at $1.65 billion of ARR. By the way, that's a conservative view of ARR. We don't take the contracted ARR view at the end of the quarter, which would be higher.

You know, we wake up on the first day of the second quarter and we've got line of sight to $1.65 billion of revenue going forward for the next for the next year. You can see that show up in the remaining performance obligations. When we look at the businesses, you can get a bit scientific about it because you can go and do a go-get analysis. You understand the revenue you're walking in with, whether it's a quarter or a year or a multiyear period. You know the go-get delta that you have to close in order to hit the ARR forecast.

Against that delta, you look at a pipeline that you have, a bookings pipeline, and then it's a conversion ratio of that bookings pipeline to what can hit short-term ARR versus, you know, become deferred revenue that's monetized over time. Within that, if I take Buildings and Infrastructure specifically, cross-sell and up-sell are significantly driving business for us, the bookings of business that we, that we have. What we're seeing is that Trimble, through this Trimble Construction One offering, we're seeing cross-sell between Viewpoint and Tekla. We're seeing it from our Bid2Win acquisition in the Viewpoint business. We're seeing it from Viewpoint and our MEP business.

I'm just really proud of the team who's put in the work to define the business model offerings and to organize the go-to-market efforts and the sales enablement behind that to actually execute on a vision. It's easy to have the vision. The work happens behind the scenes to bring it to life. The team continues to deliver proof points that we're on the right track here. We're seeing higher win rates in the deals in the market. We're seeing larger deal sizes when we go to market as one Trimble. We're seeing shorter sales cycles when we do it. I like the setup. Expect to continue to see strong growth.

Buildings and Infrastructure and the construction software within that's the tip of the spear for the transformation at Trimble. We're putting, you know, really, I'd say, the strong majority of our efforts behind making that business successful and using that as a template for the rest is, you know, ultimately, we're taking dollars to the bank, not percentages. You know, these numbers continue to get bigger and bigger. Posting strong double-digit growth on a larger base, I think is worth noting. David, I think, mentioned in his comments that we could expect to see $2 billion of ARR by the end of the year, and Buildings and Infrastructure would presumably be about half of that.

Chad Dillard (Senior Analyst, US Machinery)

That's helpful. My second question is about your two core channels, right? You've got the OEM channel, aftermarket. First, can you just break down the mix between the two? There, what was the growth in quarter one, and what are you expecting through the balance of the year?

Rob Painter (President and CEO)

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

Chad Dillard (Senior Analyst, US Machinery)

I mean, company level to begin with, but if you can give segment detail, I'll be most curious about B&I and then resource.

Rob Painter (President and CEO)

From a segment perspective, Outside of Resources and Utilities, actually very little goes through OEMs. It's in the single-digit percentage. The Resources and Utilities, of course, that's agriculture. I think, you know, our business through OEMs was particularly strong, so it was about a third of our RNU segment. It's held up well, I'll say. It's strong right now.

Chad Dillard (Senior Analyst, US Machinery)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Jason Celino of KeyBanc.

Jason Celino (Director and Senior Research Analyst)

Good morning. you know, your construction software business continue. David, you mentioned seeing a little bit of additional churn in quarter one for some term licenses. It sounds like it's minor, but I don't know if you can clarify this a little bit.

David Barnes (CFO)

Yeah. I don't think it's additional versus any longer-term trend. It's just that the term licenses is actually a bit of a factor of our old technology that we're improving with our new digital infrastructure. The terms all coincide on January first. If you're gonna churn as a customer, you churn on January first. It's I call that a blip. That factor won't recur in any of the coming quarters. We think we're on the sustained trend of solid ARR growth for Buildings and Infrastructure. As Rob said, it was about 20%, and we think it will lend the year a little more than where we were in quarter.

Jason Celino (Director and Senior Research Analyst)

Okay. It sounds like this might be for some of your older solutions.

David Barnes (CFO)

I wouldn't say it's older solutions. It's solutions that are enabled by our older infrastructure technology. As we roll out our digital infrastructure, we can be more flexible in how our licensing models work, and we won't have the situation where our terms all end at the same time, which isn't..

Jason Celino (Director and Senior Research Analyst)

Okay. Perfect. You know, second, how much Transporeon is contributing. You know, I realize that the full year is $135 million, anything that we should know about seasonality or how it might ramp through the year? Thanks.

David Barnes (CFO)

Yeah. It's $135 million for the three quarters, and correspondingly you'll have a little more than a third in fourth quarter.

Jason Celino (Director and Senior Research Analyst)

Perfect. Thank you.

David Barnes (CFO)

Welcome.

Operator (participant)

Your next question comes to the line of Tami Zakaria from J.P. Morgan. The line is open.

Tami Zakaria (Executive Director)

Hi. Good morning. Thank you so much for taking my questions. My first question is on the transportation segment. We've heard some truck OEMs partnering with third parties to install a single device that, you know, runs on an open platform and is developing apps for ELDs, tolls, telematics and stuff. What are the risks or opportunities for Trimble?

Rob Painter (President and CEO)

Hi. Good morning, Tami Zakaria. Hey, it's Rob. Well, we've been working in this space, as you know, for a long time, both predominantly in the aftermarket, but with one OEM in our transportation business, you know, a change to the business that we have with our OEM partner. Long term, you know, or actually even mid to long term, the exact nature of the upgrades we're making on our technology in the transportation business, is to deliver they've been looking for. Back to an earlier conversation we were having in the Q&A on mixed fleets. You know, the same dynamic happens with trucking companies. Most are operating multiple diff or, yeah, multiple truck OEMs within their fleet, even different engine types. You can have really quite different configurations.

You know, different need here in Colorado and the mountains, is a different machine, or, I'd say a different truck perform optimized, is optimized better here than it is in a different part of the country. You know, we continue to see customers come out of the OEMs. When they have that openness, you can put in a Trimble or a Trimble competitor, technology and user interface on top of that. I think it's an equalizer in the market.

Tami Zakaria (Executive Director)

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

David Barnes (CFO)

Yeah. Hey, Tami, it's David. There is some seasonality in the business. Historically, it's strongest in the fourth quarter. There's a lot of goods that flow closer to the holiday season. I don't... There's also some underlying growth. The way I would suggest you look at it, the way we look at it is, of the $135, we'll have roughly 30% in second quarter, a third in third quarter, and a little more than.

Tami Zakaria (Executive Director)

Right. Thank you.

Operator (participant)

Question comes to line of Josh Tilton of Wolfe Research.

Josh Tilton (Senior Vice President and Equity Research Analyst)

I just wanna step back for a second. Can you maybe just help me Transporeon revenue expectations, but you're reiterating the guidance for the rest of the business? Can you maybe just, you know, talk to the visibility that you have?

David Barnes (CFO)

Hey, Josh. David Barnes. I'll start. The Transporeon business model, as Rob mentioned, is transaction-based principally, not a subscription. Our software offerings, as Rob discussed earlier, are mission-critical for our customers and are much less susceptible to any short-term trend going transaction or ongoing level of business. Our view is that there's some puts and takes, but aggregate demand, We do see some signs that in a few of our end markets, actually the overall macro outlook is improving. Look at Geospatial, for instance. We assess our dealers for their sentiment. We talk to some of their customers in the survey business. They're feeling a little better than they were. Input costs are abating.

Overall, we're very confident with the outlook for the rest of the business that we articulated a quarter ago. Transporeon is impacted by the particular macros of Europe and the end markets they serve.

Rob Painter (President and CEO)

I can add a little color to that. I encourage you to separate the software businesses from the hardware businesses in that analysis. If you look at the software business, I submit there's $1.65 billion reasons to have, and that's because that's the ARR. And again, that's not even a contract of those remaining performance obligations as well gives us visibility. We know the bookings we have. It's really a bit of a science to translate the bookings into the recognized revenues. Our conviction and our predictability on that stream of our revenue is going to be the highest. I think you take separately the hardware businesses, which David walked you through. You know, we've been through dynamics of the dealer inventory stabilization.

Let's look at the macros around it, and I think that's a fair question to test our conviction on is take agriculture. We see farm income being healthy this year. We take North America construction, and we see the infrastructure bill being providing a tailwind to the, to the business. Those are the kind of factors that go into our view for the rest of the year and certainly then would become the things that we have to watch and that we'll update you on again next quarter.

Josh Tilton (Senior Vice President and Equity Research Analyst)

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

Rob Painter (President and CEO)

I think there is. Let's, you know, what we've built or our strategy is fundamentally to connect you in construction. We work with architects, engineers, contractors, and owners across the life cycle from design to build to operate. We have a business that focuses on architects, and the design, mechanical, electrical, plumbing, steel, concrete contractors. We have visibility into the trades. Inside of MEP, we can look at the digital supply chain to connect an estimate and a design model actually out to the components that you ultimately buy and transact as you create those estimates. In the construction side, we both, you know, we obviously work in civil construction as well as building construction. Our Viewpoint. It's the system of record, it's the ERP.

We know what kind of businesses our customers are in, and we can get a meta view of the employees they have, of the backlog that they have, of the work that we're doing. Then on the owner side, even though I'm describing that as the last one in the chain, the owners actually are at the beginning of the chain. We have a set of businesses that are managing capital programs and asset management and permitting. I think Trimble has a more unique view as compared to any other peer that we have in the industry, given how we serve specific personas across the industry life cycle. We can see activity at a level of specificity that I think would be quite unique.

Operator (participant)

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

Rob Mason (Senior Research Analyst)

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

Rob Painter (President and CEO)

I'd characterize it as neutral. Neutral to perhaps a little in the market is quite positive. We are having success, a good early success of signing up dealers who want to work with Trimble, both existing dealers and new dealers who see good business opportunities here. You know, if you think about what's unique about what we can do in ag from an aftermarket perspective, as we have kits available for 10,000 different machines. That's pretty darn unique to be able to do that. When I spend time out in the field with dealers and with the farmers, they're looking for support. Like, I mean support from technology.

We're getting very good feedback that we need to work with you, we want to work with you because you know how to. You know technology, you know how to support it. You're on the machine types. Oh, by the way, Trimble, you have the full portfolio, a broader technology portfolio. We don't just do steering and guidance. You know, we do implement controls, we do water management, we have software, we have selective spraying. Those have been the positives that are, I'd say, so far, creating good progress for us as we transition the channel. To your question about proof points so that as an investor and analyst, you can track the progress of that.

Let us take that as an action item of how we can provide multiples, in revenue and margin progression against what we're, against what we're saying. Let us take that as a, as a topic for what additional disclosure would make sense going forward.

Rob Mason (Senior Research Analyst)

That's helpful. Just as a follow-up around Transporeon, obviously, it's European-centric, how should we think about your ability and maybe pace of the ability to increase North America in particular, I guess, and, you know, how would you network outside of Europe versus what they have done in Europe?

Rob Painter (President and CEO)

Sure. actually, I'll start in Europe. we had, prior to the acquisition, we had a relatively small carrier business, so mobility business for carriers. We will combine that business with Transporeon. That will make sense, one, because Transporeon obviously works with shippers and carriers. We think we can get a stronger European carrier business, if those businesses are working together, within Europe, third parties with Trimble technology and bring, you know, it's a modest amount of cost synergy to the business within Europe. Within Europe, it's been really interesting to see some of the phone calls that we've got, some of which have. They've been positive because they're already working with us in forestry.

We need help with the transportation for the same thing with building construction, where you're looking for visibility to understand when that construction supply chain components are gonna show up to a job site. We're encouraged at some early inquiry that we've received within Europe. Now let's go the obvious place to go given the centricity of revenue that we already have in North America. The teams are actively working together to bring, I'd say, a couple aspects of Transporeon technology around automated procurement, autonomous procurement into, you know, some of those quick win type opportunities. I was in Brazil in January, and you know what we discovered there is we have or Trimble already has a telematics business or mobility business in Brazil.

Transporeon has a small operation in Brazil doing freight audit. That becomes something that we can connect together, given the geography we're already in. Together, I'd say the new geography, those tend to be slower and harder and would not, in this environment, be my first priority of where to allocate capital.

Rob Mason (Senior Research Analyst)

That's helpful. Appreciate the response. Thank you.

Operator (participant)

Thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's conference. You may now disconnect.