Q1 2021 Trimble Inc Earnings Call
[music].
Thank you for standing by and welcome to Trimble first quarter 2021 earnings call.
At this time all participants are in a listen only mode.
On today's call there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.
If you recall any further assistance please press star zero.
Thank you.
I'd like to hand, the conference over to Bob Peter <unk>, President and Chief Executive Officer, you may begin.
Yeah.
Yes.
Welcome everyone before I get started a quick reminder, that our presentation is available on our website and we ask you to please refer to the safe Harbor at the back who will begin on page two with the key messages, we want to convey to day.
In the first quarter, we exceeded our expectations and delivered record error of 1.32 billion up 9% year over year total revenue growth of 12% EBITDA of 26% and trailing 12 month operating cash flow of $745 million.
Our results demonstrate the quality of our business model and an improving macroeconomic backdrop. They also highlight the strength of our connect and scale 2025 strategy from.
On the basis of this competitive strength and the nature of the opportunities we see in the market. We plan to scale up investments in targeted areas of the company at the same time, we are also raising our guidance for the year.
Turning to page three and the end market backdrop, the common threat across the industries. We serve is delivering products and services that connect the physical and digital worlds. The industries. We serve are large global underserved and Underpenetrated with technology as our end markets Digitize, we are able to connect the office and the field with our hardware and our software.
Offerings in a manner that delivers productivity quality safety transparency and environmental sustainability.
And buildings and infrastructure, we exceeded expectations in the business leveraging our strong market position and continuing the conversion of our business models.
The segment now stands at approximately 65% software related revenue.
In geospatial the business experienced the strongest year over year growth, we have seen since we created the reporting segment in 2017.
Global demand is healthy and the innovation that the team has delivered has strengthened our competitive position.
In transportation, we met the P&L expectations, we had for the segment in the quarter booking.
Bookings in our mobility business improved to their best level since early 2019.
Bookings in our transportation enterprise software business were strong with subscription bookings more than doubled the level of our first quarter 2020, we remain confident that we will deliver demonstrable improvement in revenue margins and <unk> trend in the second half of the year.
In resources and utilities, the commodity price backdrop is providing global tailwind to the business and we delivered growth well ahead of our expectations.
Let's turn next to page four for some proof points on the Trimble operating system, capturing strategy people and execution.
On strategy, we continue to execute on revenue transition opportunities particular design and engineering software business announced its shift to subscription that went into effect in March.
Different book better as our tagline and I think that sums it up well, which is to say it's more than just change its progress from mechanical electrical plumbing business also continued its subscription conversion and as mentioned we saw a strong level of recurring bookings and our transportation enterprise business.
Finally, I'd like to note that we closed the divestiture of the Manhattan Real estate software business early in the second quarter and we wish the team well in its new home.
On people I am pleased to report that we ranked number 15 out of 15000 companies and a 2021 best Global Culture Survey.
I also want to announce that our CTO, Tom Fansler retires at the end of the second quarter.
Two of our other business leaders, Ron and heavy and Brent Fosberg will assume new roles starting in the third quarter, Ron will operate as an entrepreneur in residence driving innovation efforts and Bren will act as our interim CTO I'm pleased to say that we promoted from within for Ron and <unk> current responsibilities for the E builder and overall construction businesses respectively.
On execution, we released our sustainability report a few weeks ago I'm incredibly proud of the work of the team on this important initiative. Our teams also continue to innovate we launched the civil construction estimating software package, we released the combination of our load right payload management system with our earthworks grade control platform.
We launched a new T F. Five data controller, and we released a new ethics 12 scanning total station, which is an update to our successful FX 10 instrument. The FX 12, now supports additional applications and tunneling and underground construction.
With respect to increasing investments in the business, we see connect and scale as being synonymous with an industry platform strategy, we want to play offense and invest now for the mid to long term opportunities that we see in the market, we see a generational opportunity out of our North America infrastructure, Bill and a strong commodity price backdrop and the agriculture.
For market, we will invest in product development and go to market efforts around infrastructure and will step up investments in our agriculture business, all while continuing to invest in our Trimble cloud platform and our autonomy efforts.
A quick update on our plans for an Investor day, we have concluded that an in person meeting at our Colorado facility, where much of our leadership team is based is the best way to facilitate that kind of in depth interaction that many of you want from an investor day, we will hold the meeting in the spring of 2022 by which time the environment for business travel should be greatly improved.
We also plan to hold one or two interactive virtual sessions with investors on specific topics abroad interest later this year and.
In closing I'm as confident and optimistic about trimble as ever we have the right team pursuing a compelling strategy in attractive markets it won't be easy and it won't be linear, but nothing worth achieving as David over to you.
Thank you Rob let's start on slide five with a review of first quarter results.
First quarter revenue was $887 million up 12% on a year over year basis.
Currency translation added, 3% and divestitures subtracted, 1% for a total organic revenue increase of 10%.
Gross margin in the first quarter was 58, 4% margins were down 70 basis points year over year, driven primarily by product mix adjust.
Adjusted EBITDA margin was 26, 1% up 340 basis points, driven both by higher revenue and strong cost control.
Operating income margins expanded 330 basis points to 23, 6% net.
Net income dollars increased by 36% and earnings per share increased by 17.
To <unk> 66 per share.
Our first quarter cash flow from operations was $228 million demonstrating the continued strong cash flow generation of our business.
Operating cash flow again exceeded net income in the quarter free cash flow was $218 million we.
We paid down $158 million of debt in the quarter and our net debt to adjusted EBITDA ratio fell to one three times.
At the end of the quarter, we had the entire one 5 billion available on our revolving credit facility and approximately $265 million in cash with our strong balance sheet. We are well positioned to continue to invest in our business, both organically and through acquisitions that will accelerate the implementation of our strategy.
Turning now to slide six I'll review in more detail, our first quarter revenue trends as mentioned earlier, our IRR was up 9% in the quarter are non recurring revenue streams also grew with hardware growing 17% and perpetual software growing 11%.
Our hardware growth was driven by strong performance in civil construction Geospatial and agriculture. Our hardware growth also contributed to perpetual software growth as some of our hardware offerings are bundled with perpetual software.
From a geographic perspective, North American revenues were up 9% exclude.
Excluding transportation revenues in North America grew 15%.
In Europe revenues were up 16% roughly half of our Europe growth was driven by currency with the balance coming from catch up on project activity slowed in 2020 fiscal stimulus measures and recovering demand in many end markets.
Asia Pacific had the best performance in the quarter up 17% driven by strong growth in Australia and Japan.
The rest of World, which includes Brazil, and Argentina was up 5% year over year, driven principally by strong demand from the agriculture sector.
Next on slide seven we highlight some of the key metrics that we follow annualized recurring revenue was $1 three 2 billion in the first quarter up 9% on a year over year basis organic growth was approximately 7%.
Excluding our transportation segment Trimble IRR grew at a mid teens rate in the quarter net working capital inclusive of deferred revenue was negative this quarter, representing approximately minus one percentage of revenue on a trailing 12 month basis.
Research and development on a trailing 12 month basis was 15% of revenue or deferred revenue grew 12% on a year over year basis, and our backlog excluding the impact of the real estate software business divested early in the second quarter was $1 4 billion up 17% versus prior year.
While growing backlog is obviously an indicator of strong momentum in the business I will note here that backlog at quarter end was unusually high in part because trimble like so many manufacturers in this recovering economy is experiencing shortages and extended delivery times for many key components of our hardware products.
Our operations team is hard at work to expedite delivery of products, which are in short supply, but we do expect to manage challenges with both cost inflation and extended lead times of select hardware product lines in the quarters to come.
Turning now to slide eight for additional detail on each of the reporting segments.
Buildings and infrastructure revenue was up 13% on an organic basis revenue growth was strong in both our building and civil construction businesses.
Segment margins were up 760 basis points due to higher margin revenue mix and cost control.
Geospatial revenue was up 22% on an organic basis, driven principally by strong performance in our core branded survey equipment business.
Margins were up 590 basis points due to strong revenue growth and cost control.
Resources and utilities revenue was up 10% on an organic basis.
We experienced double digit growth in each of our precision agriculture positioning services and agriculture software offerings.
Margins expanded 190 basis points, driven by increased revenue and cost control.
Topline results and transportation were consistent with our expectations.
Revenue was down 6% on an organic basis year on year and margins declined 450 basis points the.
The drivers of revenue and margin decline are broadly consistent with those we have highlighted previously.
Revenue and margins were roughly stable sequentially when compared with the fourth quarter of last year and leading indicators provided encouraging signs for the recovery ahead as Rob mentioned bookings were very strong in both our mobility and enterprise software businesses, our product performance is improving and our sales pipeline is strong.
<unk> than it has been in nearly two years, we remain confident that we are on track to improve performance later this year.
Moving to slide nine I'll provide an update to our outlook for the year.
Given our outperformance in the first quarter, our growing backlog and increasing confidence in our business trends, we are raising our revenue forecast range by 100 million to three four to $3 5 billion.
I'll note here that the biggest risk we have to our revenue outlook for the next couple of quarters is the supply environment for our critical hardware components.
We expect that revenue growth will be strongest in the second quarter as we lap the worst period of the COVID-19 Lockdowns in 2020 with more moderate growth in the back half of the year and especially in the fourth quarter.
We continue to expect organic growth in the high single digits with improving trends as the year progresses.
From a profitability perspective, we continue to expect that EBITDA margins will come in between the levels of 2019 and 2020.
Margins for the balance of 2021, and especially in the second half of the year are likely to come down from the levels. We achieved in the first quarter for a number of reasons first we expect some operating expense acceleration as the year progresses and the environment for business travel opens up.
Second we are accelerating investments that Rob mentioned earlier. These investments include spending on our digital transformation and cloud infrastructure and higher R&D on our autonomy projects and <unk>.
Agriculture product offerings and third we are seeing growing cost pressure in our hardware cost of goods across a broad range of commodities, we are adapting our pricing and discounting strategies to reflect these cost pressures, but still anticipate some adverse impact on our gross margins.
We continue to expect that software business model transitions from perpetual to recurring will impact revenue growth and operating margins by approximately 150 basis points or.
Our earnings per share outlook is raised to $2 30.
To $2 50.
This reflects the revenue and operating margin trends I mentioned earlier and a modestly higher tax rate outlook than we had anticipated a quarter ago.
From a cash flow perspective, we expect cash flow from operations of approximately one one times net income with free cash flow exceeding net income.
With that I'll turn it over to the operator for Q&A.
Thank you.
As a reminder, if you would like to ask a question you will need to press star one on your telephone keypad.
Well pause for just a moment chicken polo vacating Boston.
And your first question comes from the line is Ann Duignan of Jpmorgan. Your line is now open.
Ah yes.
Can you provide some more color on your gross margins through the remainder of beer and <unk>.
The impact of higher costs and whether those are just the inability to get supply are.
Higher material costs going forward.
Like to get a sense of what's from a permanent price just what's temporary and then could you dig a little deeper into your increased investments, particularly in agriculture.
And and the danger of a et cetera, I think those are probably not surprising that suggests that.
And taking a little bit.
Good day branch both of those please thank you.
Hi, Ann This is David I'll take the first part of your question on.
Gross margins I'll say the environment for product cost has changed a lot just in the last month or two and it is.
Fluid situations, so it's hard to make specific.
Predictions I will say that the product inflation that were facing really only began toward the end of Q1. So the results that we just reported don't reflect the full impact. We anticipate later this year and you saw our gross margins declined year on year about 70 basis points and probably just under.
Half of that can be accounted for in and product cost increases, but we're seeing increases across the board, obviously and we're all reading about semiconductor a tight supply and cost increases, but we're really seeing it across the whole broad range of commodities.
In transportation, particularly air transportation that we use to get our products, where we need them to go.
So without getting too specific I will say that we do expect underlying cost of goods inflation.
And for the balance of the year to be noticeably higher than it was in Q1 now I'll I'll comment that we're adapting as I mentioned in the script, our discounting strategy and our topline prices and we hope to accommodate a meaningful portion of the impact of the cost increases, but nonetheless, we expect gross margins.
Well, we'll come down for that reason.
The remaining three quarters of the year, and then I'll turn over to Rob for your questions about operating expense and the investments we're making.
So I mentioned that connect and scale.
Strategy is synonymous with a platform strategy in the nucleus and agriculture market for us as a crop as the crop production workflow so the investments step.
Stepped up investments, we're making in agriculture hit areas of that platform that include.
Our economy.
<unk> our software.
Includes our correction services and continuing to build out the networks around that and then finally, our localization efforts and is the majority of our business. These days is outside North America.
Okay, and just quick follow up.
Much and demand and so really as far as the connected farm for Dan tire software package across the entire enterprise.
I think the farmer in size, one thing individual packages from different suppliers.
I'm just.
Just curious what you are saying that there in the marketplace from a connected farm perspective.
Our technology is on over 150 million acres of farm.
Day, that's primarily the hardware the guidance systems, we have about 20% of that same acreage covered with our our software. So it's.
It's not.
This isn't new let's say it than it's been in motion for a long time I see that the delta of the 80 percentage potentially addressable market. Obviously, we won't serve 100% of that the other way to look at it and that's a software hardware connection the other way to look at it is from our correction services perspective, So we have well over 100000.
Users of our correction services today and the connected farm that has an aspect so.
When the scale part of connect and scale by making ourselves easier to do business with and bringing that software hardware and services together at the point of sale.
So we think there is a demand for it.
Market for them.
Okay I'll get back in queue. Thanks.
Jim.
Thanks Anthony.
And the next question comes from the line of from whereas Jim Murren.
Yes, we can.
Rich your line is now open.
Thank you good afternoon.
It's funny, Rob you actually touched on what I wanted to ask about in your in your prepared remarks, and David the two it seems like with infrastructure Bill coming down.
Channels.
We get a lot of questions. Just on you know what that will mean, it seems like a bit of a potential coming out party for all the transformation of the industry can do with digital construction. So I'd just love to hear any story is there any color you have on how you are preparing the organization.
Marcello.
What your capabilities are versus what we all kind of know a couple of years ago or how you see that.
Opportunity.
Really showcase what.
What can be done for construction with point, yes. Thank you.
Thanks, Rob.
So we see it as a generational opportunity and I'll focus on North America, but highlight that places like the U K are going with other construction led recovery, we see markets like Japan promoting digital technologies from Australia has strong infrastructure development as well.
In North America, I think about it from.
The value proposition of what kind of what the technology can do we think about the funding are around that and we mentioned that we would.
With respect to our own funding, we would step up investments in the area and then we also think about policy. So from a value proposition perspective with digital technology. We can build greener, we can build more inclusively and we can build better while doing so cheaper. So it just makes sense.
To use the technology, what we're hearing from our customers and stakeholders in the industry actually is on the policy side as well as.
Our desire to streamline project delivery by promoting the digital technology.
So really streamlining project delivery really seems to be the core of what the market is talking about and from a funding perspective.
I'll start with government level funding and we do anticipate that the final.
<unk> will be well negotiated and it will be different than than the proposed American jobs plan never.
Nevertheless, and we need to also reauthorized the surface transportation Bill So the jobs plan. In addition to the reauthorization of the of the surface transportation Bill we.
We think that will be significant we think will be incremental to the current baseline investments in our highways airports mass transit.
And our ports now we think that won't pass until later in the year and net benefits of that wouldn't be realized in 2022. So when we think about the investments in our business to get ahead of that we think Bart Adam product development level as well as a go to market level. So in our product development level.
Where we're going with the connected part of connect and scale is integrating the hardware the software the physical the digital the office the field being able to round trip that data to streamline project delivery. So we will continue our efforts on that front and added go to market level, it's putting the resources and increase the level of resources and capabilities in place to actually execute.
Against what we think is attractive and important opportunity.
That's a great answer thank you and just to highlight one thing you mentioned in there do you feel like the customer is now well educated and calling for this kind of product in a way that was different from a year ago over five years ago and has that changed significantly and I will stop there. Thank you.
It is changing.
Significantly I'd say, we may not be at the point of calling it significant it's certainly meaningful amount of change and I think about it from a few dynamics.
<unk>.
Address owners.
Engineers and contractors at an owner level think about the department of transportation as an owner to talk about the state dot.
As an owner I do think there is increasing awareness.
Of the technology. They are certainly increasing awareness of the concept of the digital twin and how this can play through the operations and maintenance phase and if we use the technology during the design engineering and construction phase how that can then be leveraged in the operations and maintenance fee.
So I think there is increased awareness.
See a few more projects that are promoting the use of technology and I'm actually going to federal Highway administration.
They made an announcement recently recognized as a digital app built as an important technology innovation. So that's helpful to see that coming from from that perspective, and the engineering.
Community.
Certainly it's in the.
Interest of the engineering community to help failed to deliver other projects better and faster and for them to be able to win more of that work and then at the contractor level I see thats, where we see the most level of.
<unk>.
Proactive use and request for use of technology, because the contractors are the ones who are they are really seeing the most tactical benefit of better faster safer cheaper greener and their day to day work, so they're winning more work.
It's becoming more just the way that construction is done so very positive on the contractor side.
Thank you.
Thanks, Rob.
Your next question comes from the line of Jerry Revich of Goldman Sachs. Your line is now open.
Hi, This is a showpiece for the non hat on for Jerry Revich, you cited buildings <unk> infrastructure margins expanded due to a higher margin revenue mix and cost control and so im wondering how youre thinking about the sustainability of buildings and infrastructure margins at these levels.
Sure David.
We have a meaningful a hardware business in buildings and infrastructure so that will be.
Impacted by the hardware dynamics I discussed previously and also mentioned that overall for the company, we expect to see some operating expense pickup.
I'll call some of it natural because we hit with COVID-19, we had almost no business travel we had lower incentive compensation. So that will normalize and then the investments that we're making.
We'll be seen in the segments broadly so those dynamics.
We are going to.
Put pressure on margins in all the segments, including buildings and infrastructure.
Great and in terms of the 11% growth in perpetual software revenue. This quarter I'm wondering if you can discuss which products drove the growth in our prospects for that growth.
We continue.
I'll say one thing there is as I mentioned in my remarks, we sell a meaningful amount of perpetual software bundled with the hardware so when hardware growth like it did in the first quarter perpetual software.
Grows.
We are in the process of transitioning from perpetual to subscription Rob mentioned in the.
In one of our design software offerings and that tends to precipitate perpetual software growth. So that was a piece of it.
But overall, it's remember we're comparing with the first quarter of last year when we.
We saw particularly towards the end of the quarter a lot of hesitancy and great uncertainty, so customers, where we're starting to be reluctant to buy and I think all of those factors contributed to perpetual software growth.
Great. Thank you.
And your next question comes from the line of Chad Dillard with Bernstein. Your line is now open.
Hi, good afternoon guys.
Hello.
So I wanted to dig into.
Our guidance change on the Robert Hi, just.
Hoping to get more color on the moving parts and that from an end market perspective, as well as that ratio perspective.
And then also.
Look at typical seasonality.
Usually imply like a $4 billion revenue numbers per day for the year.
I just wanted to understand.
That's helpful.
All about the supply chain issues or is there something else.
Yeah, Hey, Chad. This is David I'll say first of all the comparing quarter to quarter last year is a tough drill because last year was so strange.
Particularly as you recall Q2, we saw a rapid contraction in demand in many of our end markets other than a lot of catch up and pick up later in the year. So.
So that's going to factor in as far as the end markets that are.
That are driving the results.
We mentioned in transportation, we ended about where we thought we would P&L wise, but bookings were up and obviously the transportation market has picked up in terms of the macros with asset utilization and pricing.
The financial solidity of our transportation customers is better so thats.
That's more of a tailwind for for future quarters than this one but look beyond that and the other three segments, we exceeded our expectations. So that's why the the outlook came up in part because Q1 was above where we thought it would be and we think some of those trends will continue and the caution I'll provide is that.
Hardware is still a meaningful part of our business and for all the reasons I mentioned with the supply chain challenges, that's creating the greatest level of uncertainty. So I hope that answers your questions about seasonality, we do think seasonality will be different in 2021 from 2020 for a number of reasons and you're probably better off comparing with 2019.
For a normalized year.
That's helpful.
And just a question on gross margin and price.
<unk> cost just to be clear or will you be exiting the year will you be able to match.
Natural price.
And then can you just talk about cash.
Our ability to raise price.
Contractual all day long for as well.
Yes, I'll say, it's a very complicated formula.
We have contractual arrangements with our customers and dealers that day.
<unk> facilitate an immediate increase in price in some cases. So that's the factor we have some protection on the supply chain side too.
But those don't necessarily match up so I.
I think for Trimble and every company producing hardware. This is a rapidly moving situation.
Our intention obviously, we will remain competitive.
Our intention is to recoup a meaningful portion of the increase in product cost and I'll say, we can't have a.
Specific.
Estimate with high confidence in that cost, but we believe we will get a meaningful chunk, but not all of it and that's why we expect to see some gross margin.
Declines are continuing declines for the remainder of the year.
This is Rob just to add to that as we exit the year I think.
Yes, yes.
That's right I think if you if you look at what's happening in the world. The semiconductor side of things is going to take.
Probably three or four maybe five quarters to recover some of the other.
Input costs are likely to abate sooner than that for instance, airfreight will get more reasonable once our trans oceanic air travel recovers.
So there are a lot of moving pieces.
Don't think this is a long term.
Change in the trajectory of our gross margins, but it will be with us for a few quarters.
Okay. That's helpful I'll get back from here. Thank you.
Alright.
Next question from Colin Lewis.
Your line is now open.
Hi, Good afternoon. This is Christian on for Colin Thank you for taking our questions.
Sure.
And so nice to see some improvement in the backlog and transportation and we are obviously in a tight freight environment, where carriers are making money, but also needing to bolster their ability to keep up with demand and some of the labor shortages.
If we looked at the noise can you talk about some of the underlying trends in that business as it relates to your portfolio and how we should think about a more normalized business trend into 2022, as we comp some of these unique headwinds.
Kristin.
I'll just point out the obvious that some of the factors that have been driving our trends are.
Somewhat unique to Trimble in terms of the issues, we had post the ELD mandate coming into effect.
And we did have some product performance issues and so the.
The pullback in IRR was the consequence of that.
There's no doubt that the macros in the transportation business are dramatically better than they were three to four quarters ago and Thats helpful.
Our our trends our business trends won't change linearly in right away with the changes in the macro environment that the customers.
That we serve experienced so it is not at all surprising to any of us that we have some lag.
But.
I'll say there are a number of factors that that give us confidence that we're on the road back to better trends in transportation just I'll highlight a few.
Our churn is trending down.
On a secular basis, theyre bumps quarter to quarter as individual customers implement decisions. They made some time ago, but.
The data is shirley points to a better trend there Rob mentioned the bookings.
Beyond the bookings our sales pipeline.
Is looking up.
Versus where it was a quarter or two ago.
Performance of our products is improving so our teams have done a great job of resolving the product issues and I think we're seeing broader customer receptivity to the strategy of the integrated supply chain. So we have a lot of work to do in transportation Kristen, but so I'm not we're not changing the outlook that things won't.
We will get better immediately, but we do look to see improved trends.
The back half of the year, and especially the fourth quarter.
That's helpful color. Thank you and then if I could ask a longer term question, maybe dovetailing on a question that was asked earlier.
I wanted to ask about your appetite for M&A at this stage and historically when we think about a few points contribution every year to revenue growth balance sheet is in great shape, you guys are generating a ton of cash flow, but as youre thinking about planning for these generational opportunities in infrastructure and I guess you've called out.
Can you talk about the M&A pipeline.
Are there opportunities from our sizeable investments and maybe what's on the Trimble wishlist.
The short answer Kristen as is yes.
Pipeline is more active.
At the at the moment and certainly are areas of interest are going to be.
Where we have the most strategic opportunity.
To grow and to build a platform strategy, whether thats in a construction agriculture or in let's say in some of our other vertical focused market. So we feel pretty good about where we are unless you said the balance sheets.
And a great place to be able to help us facilitate that.
Great. Thank you so much.
And your next question from James Faucette of Morgan Stanley. Your line is now open.
Hi, Steven this is Erik on for James Thanks for taking our question.
Maybe if we could touch more on the demand impacts of the supply chain issues. You're seeing are you seeing any element of forward ordering and maybe that was captured in your comments around the backlog earlier.
Or even just buying ahead of potential supply chain constraints and any areas of the business.
Or is visibility I guess in Peru would be another way to say that.
Hey, Eric I will say, it's a little hard to quantify when orders come come through exactly whether they're for current demand or they are seeing the supply chain tighten up I think it is.
Sure of both.
Our backlog.
Mentioned as is.
Now up to $1 4 billion, a meaningfully meaningful increase year on year I'd say the increase year on year for the hardware piece is a mix.
<unk>.
Healthy demand in end markets and some <unk>.
Some customers ordering before they otherwise would have.
But I'll say inventory at our dealers is really low.
And.
I think most of what Youre seeing is the fact that the end markets are really healthy.
And projects are picking up and customers need the need the product.
Got it that's extremely helpful. Thank you and then maybe just touching on geospatial.
It continues to be very strong and definitely benefiting from the construction loan.
Recovery you guys have mentioned.
How much of an element, though I know you've had some product releases and refreshes do you I guess attribute to maybe some of that refresh cycle versus just the broader macro demand.
This is Rob there is absolutely an aspect that correlate.
To the replacement bank replacement cycle, and new products that we have.
Whether thats on the handheld side with TFC five are on the GSS receiver side with 12.
Those would be replacement examples where we're able to bring in.
New instrument or tool that is able to make the customers more productive we've got a tighter integration of our software workflows into the hardware. So we've seen customers who are orienting their field survey crews around a trimble workflows. So it's almost like the tail wagging, the dog where that software is driving the demand for the hardware. There is also new Theres also.
Examples of.
I would call them new categories. So take our laser scanner three day laser scanner instrument called the X seven.
That's a market segment, where we didn't historically drive as much business. So that's not a replacement market for us that's a that's a new new.
And then I would say on the go to market side. The team has done an excellent job on our global distribution basis.
Getting our dealers in a better healthier states in really understanding around local go to market execution. So.
Currently a mix of both and really the team has done great work.
Awesome, Thanks, and congrats on the quarter.
Thank you.
Okay.
Next question from Richard Eastman with Baird. Your line is now open.
Yes. Good afternoon. Thank you.
Just a question around the Opex number is the $3 8 million number.
In the quarter could you just maybe speak to the cadence of what Opex looks like as we move through the second through the fourth quarter.
Got some puts and takes obviously.
But trying to get a sense of how much.
The COVID-19 related expenses.
Or penalties I guess, however, you want to call it.
Come back into the number you spoke a little bit around investments there.
Maybe just define that a little bit, but that's what I'm trying to look for a little bit of guidance as to how that number plays out.
For the next few quarters.
Hey, Richard stated first thing I'll say is that in terms of what I'll call cost generated by COVID-19, we didn't have much.
The impact of COVID-19 on our cost was really negative.
We had some costs in our.
Cleaning our facilities and that kind of thing, but it was relatively de minimis.
So we had sort of artificially low costs in a number of areas.
With the.
Revenue coming down our incentive comp naturally reduced.
Stopped traveling canceled events and we really cut back on a lot of discretionary spending that wasn't core to the strategy.
So that's coming back and as you look at the.
Operating expense growth going forward I'll put it in a handful of buckets.
First of all some of our Opex is overseas and the U S dollars weakens. So just the FX impacts sort of takes up our accounts for about 20% of our Opex increase that we expect for the balance of the year about 60% of the increase is what I'll call go back to norm.
Immel.
Travel comes back as incentive comp comes back because we start hiring.
We didn't even have a salary increase last year. So that's a normal part of things and then about 20% the remaining 20% of the year on year Opex.
Increase will be accounted for and higher spending in the investment areas that Rob mentioned there are a couple of other things that are puts and takes you've got some other head count adds in divestitures, but hopefully that gives you the abroad.
Broad buckets, and we do think year on year, Opex, which was about.
About flat in Q1, it won't be flat in the remaining quarters.
Okay. Okay.
Okay.
Rob maybe you could just shed some color.
On the <unk> piece of buildings and infrastructure, either either geographically or perhaps by end market in other words.
Does the commercial market look firmed up versus education market government market, maybe just.
Through that just a little bit as to where the strength was and should continue to be.
Sure so infrastructure in residential backlogs are solid.
<unk> care day.
Data centers logistics centers utility in fiber optics work that's all good.
And you can look at indices, such as Abi and Dodge.
Theyre thereof, we look at OEM units those have been pretty good from both the construction and agriculture.
I'd, even mining in places like South Africa, and Australia, where we have some exposure.
Those have those have been good.
That call at that general commercial work office buildings, that's low education's actually.
It's a bigger market than you might one might realize and so.
It's still lower but it's still a large number and so that's doing okay. That's doing okay geographically speaking.
So it's pretty broad based strength.
Japan was strong Australia strong.
North America strong in Western Europe, and the Nordics.
Our strong and we see it play through both in software and I guess I'm, giving you a some software answer but we see it playing through in hardware. So for instance, when residential work picks up we don't actually have as much exposure in residential on the building software side, but it helps us on the civil side and it helps us on the geospatial business. So.
In civil construction, we see more of the smaller building construction product type equipment.
If some of that equipment using technology or concrete screens for foundation Mark.
<unk> and survey work so yes.
Yes, that's okay.
What's going on.
In the 13% core growth for buildings and infrastructure, how much headwind was absorbed there from the SaaS conversions and the growth rate there.
In that segment.
Good chunk.
Probably a couple of points.
Okay. Okay.
Okay, great. Thank you and nice.
It starts to the year for sure.
Thanks Robert.
Next question from Goldman.
Your line is now open.
Yeah.
Yes, hi, Thank you thanks for taking my questions.
The first one is just around the guidance for the rest of the year and the way you're thinking about.
Expand on the shortages issue.
David You mentioned that you expect semi shortage for example to take three to five quarters to really play out is that a way where you can where you kind of.
Factored in a level of conservatism into your guidance for the rest of the year at this stage because you don't know whether the supply can actually be Matt.
Sorry demand can be met with the supply that is available and is there any sort of conservatism coming from from that side. We don't think that's going to be an issue in meeting the demand.
It will definitely I think be a constraint.
And as you think about the $100 million range between the bottom and the top end of the revenue guidance.
Uncertainties around hardware supply account for.
Majority of that so I think the scenario in which were at the lower end of the guidance range is characterized by increasing tightness in markets for key components and the higher end.
One in which the.
We're able to work through the constraints. So if this is a hard one to call. It somewhat unprecedented talking to my colleagues have been doing this work for for decades, and none of them have seen anything just like so we have a very adept operations team thats one of the strength of.
Of Trimble of being flexible and figuring out how to handle bumps in the road like we have now.
So there's we're looking at this component by component and product by product and I'll concede that theres meaningful uncertainty and that's what's driving the range in our guidance.
That's really helpful. Thank you and then just as a second question.
I'd like to spend a little bit on the guidance you're still providing.
In terms of the business model transition, which at this stage, it's still around one five percentage point headwind to your growth.
If we look kind of forward.
<unk> and maybe into 'twenty two 'twenty three.
How long does this persist for you Matt.
And how material it is going forward as well.
Is there a way to think that maybe 'twenty two and then 'twenty three incrementally becomes less of a headwind, but still is a headwind is that the.
The right way to think about that.
Yes, Theres two ways I think about it.
Or it would be less of a headwind as that's a bit of a law of large numbers with one three with over $1 3 billion.
That will overcome headwinds.
Headwinds and we still have ever over $400 million on a TTM basis perpetual software. So they are still available.
<unk> for us to think about some of which we are actively working on and some of which we're not.
We wanted to just see how things go and what will make really sense for the business.
So in that sense, you're right there'll be less of a headwind.
The other side of it is as we look at other business models. So say for example hardware.
They take and the machine control and guidance business, where we offer we call at Trimble platform as a service so their cap technology assurance.
By buying the machine control technology, we're bundling that with software.
That allows us to connect that physical digital field.
The office.
And if we're successful in driving that conversion that may show up as more term type revenue depends on the accounting works, but it could create some more ratably and if it does in that case that could provide.
A headwind instead of the tailwind that I just described.
That's interest and just.
You said that.
That could happen on machine control and guidance would it be would it be potentially something that you consider non transportation as well.
There's been again down that route is that something that even though the size could work.
Yes, we're largely already offering that today bundling the hardware and the software together in that monthly service the nature of how some of the accounting works is it requires you to take the recognize the hardware revenue upfront, but you've made ratably have the cash flow depending on how the contracts are structured I'll give you. An example in geos really around.
Our survey business, we've used it with a couple of customers to to do a competitive swap on a fleet of equipment by experimenting with a ratable business model. We've got one of our larger agriculture customers doing and everything as a service arrangement with us, but those are small pockets and anecdotal examples.
But just wanted to show and demonstrate that we're not just talking about experimenting with.
All our business business models, we're actually doing it.
Awesome. Thank you so much Inc.
That's for great results.
Okay.
And the last question comes from the line of Jason from Me now.
Keybanc capital your line is now open.
Hey, guys. Thanks for taking my question.
Good segue, but.
The Gallup question on the pay from the transition.
Our transitions and software we have seen a few strategies for incentivizing customers to move to these new pricing offering.
Maybe you could categorize these as a carrot and stick.
School of thought maybe could you speak to how how you how you guys are doing.
Yes, Hi, Jason This is Rob I'll I'll start it's more of a carat.
<unk>. So are our belief is that we can create more customer goodwill.
With the approach of the carrots, and so the carrot.
We can offer argues that machine control example, the fundamental value proposition around technology assurance sustained current on the sensors.
Staying current actually on the firm or that embedded software you'd be surprised at how many customers can have outdated versions.
The firmware and when we can have a deeper insight actually into the customer and help and drive customer success I believe that's giving them a better value proposition a better ROI on their investment the classic one as you know as you move from perpetual to subscription is to move it operations off center for.
Our customer and thats, providing them a value proposition that I would characterize.
As a carrot and then one more I would mentioned Jason is I think a smart we think a smart way to do that.
To provide the carrot.
The increase the I'll call it increase the value of the offering when you move to the subscription so in some cases, we're offering both the perpetual and a subscription offering however, when you buy the subscription offering you're getting a richer set of functionality and we will we will start to.
Only develop additional functionality in the cloud because you have to make that break at some point and we think that for by providing the better value offering that that is <unk>.
Insistent with the carrot.
Approach as opposed to the stack now it doesn't mean that we will do both offerings forever at some point you do have to wind it down.
Thus far we've given ample time to our customers to consider their own choices.
Okay.
So similar question then for your for your sales force and your partners.
Are you are you running any incentives influence them to go.
For the subscription.
Subscription offerings.
Yes follow the money and it's I mean, it's amazing.
Amazing what you can see if you change our own sales compensation to selling the perpetual versus the subscription when we make it more attractive to sell the script subscription offering the results correlate.
No question.
And at the at the dealer partner level, many times, we'll use our balance sheet.
Make it make them whole at a cash level because they may be running their business is more on.
Cash flow.
And in that sense, you don't want to provide at least initially you don't necessarily want to provide a negative incentives to that so yes, you have to you have to connect the go to market efforts absolutely to the product strategy.
Okay.
Great. That's it from me thank you.
Thank you Jason Thanks, Jason.
And there are no further questions at this time I would now.
I'd like to hand, it over to Mr. Michael Leyba.
Thank you very much for joining us on the call everyone. We look forward to speaking to you again next quarter. Thank you.
And this concludes today's conference call. Thank you everyone for participating you may now disconnect.
Okay.
[music].
Yes.
Yes.
[music].
Yes.
[music].
[music].
[music].
[music].