Q2 2021 Trimble Inc Earnings Call
Good day and thank you for standing by welcome to the Trimble second part of the Pizza Antoine Our results conference call at the time participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and so that's a good question. During the session you will need to press star 1.
Telephone keypad MTT advice of today's conference is being recorded and I would now like to hand, the call over to Rob painter, Chief Executive Officer, Jim.
Welcome everyone before I get started a quick reminder, that our presentation is available on our website and we ask that you. Please refer to the safe Harbor at the back I'll begin on page 2 of the key messages, we want to convey today.
In the second quarter, our team delivered outstanding results, we exceeded our expectations and delivered record error of 135 billion of 11% year over year total revenue growth of 29% EBITDA margin of 26, 4% and trailing 12 months of operating cash flow of $798 million.
We achieved record levels of revenue in many of our businesses with exceptionally strong performance in machine control and civil construction guidance in agriculture, and surveying and mapping.
Our results demonstrate the quality of our strategy and our business model on the basis of this strength, we are raising our guidance for the year.
Turning to market conditions. The overall landscape is generally robust construction backlog is healthy, especially in residential and infrastructure.
We remain optimistic that of an infrastructure bill will ultimately be passed in the United States, which would further improve our long term outlook and our construction and surveying businesses.
In agriculture, and forestry commodity price strength is translating of the customer buying power.
Transportation market strength of shifted back to carriers and this in addition to improved execution is translating into solid bookings growth.
As discussed last quarter, we are investing in product development and go to market efforts around infrastructure and are stepping up investments in our agriculture business, all while continuing to invest in our Trimble cloud platform and our autonomy efforts.
Our team is highly focused on executing our connect and scale of 2025 strategy, which centers on building leading industry cloud platforms. Our strategy differentiates at the intersection of the physical and digital worlds as an example, our hardware businesses allow us the capture data and execute work in the field while improving.
The efficiency and efficacy of workflows between the office of the field.
At Trimble, we develop our strategies with an endgame backwards. The mindset, we balance short term and long term deliverables with our 3 for 3 operating model 3 months for quarters..3 years. This is worth noting as quarterly Comparables are skewed with the COVID-19, and supply chain disruptions, we have to be able to see through the perform.
Thats of any given quarter and play the long game, which we continue to believe presents a compelling secular opportunity. We are focused on metrics such as backlog EBITDA and cash flow as much as we focus on revenue and EPS. The combination of these metrics presents a more holistic picture of our performance.
Let's turn next to page 3 for some proof points that the Trimble operating system, capturing strategy people and execution is producing results.
Starting with strategy, we continue to execute on revenue transition opportunities in buildings and infrastructure or structural steel concrete mechanical electrical and plumbing businesses are hitting their stride with their business model transformations.
<unk> Air our growth of new logo wins are evidenced that the team is expanding the addressable market.
The transportation, our recurring bookings were up significantly year over year also evidenced that the conversion is working on.
On the divestiture front, we closed the sale of Manhattan software in the second quarter and Iron solutions early in the third quarter. Since January of 2020, we have divested or exited 8 businesses.
We are focused on building our industry, leading and cloud connected technology platforms that enable customers to transform workflows by connecting Trimble from third party capabilities.
On people I am pleased to report that our leadership team was recognized by our employee base is 1 of the top of leadership teams and our global culture Survey.
We were also recognized as the top performing company for women and diversity.
And our engineering team ranked as the global leading team.
Route of my colleagues and our purpose driven culture is this team that is transforming the way the World works. In addition, we strengthened our board of directors with the announcement that Amgen does he will join our board in the next couple of weeks.
On execution, we continue to innovate during the quarter, we announced an autonomy partnership with horse.
We extended our machine control platform to soil Com Packers and we introduced our infrastructure Bem collaboration software in North America.
In addition, 1 of the proof points, we monitor is cross sell annual contract value.
Early wins in construction and transportation increase our conviction that we are on the right track with our bundled offerings.
Turning to page for I'm excited to announce that earlier today, we launched the Trimble ventures, our corporate venture capital arm with the commitment of $200 million of capital.
Our objective is to co invest in series 8 through series D rounds, and emerging technologies as well as <unk> companies that will extend our industry platforms.
Our co heads of Trimble ventures include our Treasurer dos Arensky and run and heavy cofounder of R E builder business and.
In closing it was the second quarter last year, where we faced the initial and biggest uncertainty with COVID-19, while the virus and its variance remain highly concerning around the world I want to step back and reflect on it early principal we established which is we said we would emerge from the pandemic on our stronger relative competitive.
Adding than when we entered the pandemic our results demonstrate we are doing exactly this my gratitude to my 11000, plus Trimble colleagues and our global partners and customers with got this David over to you.
Thank you Rob let's start on 5 of the review of second quarter results second quarter revenue was $945 million up 29% on a year over year basis currency translation added, 3% and divestitures subtracted, 1% for a total organic revenue increase of 27% cash.
Customer demand was healthy rebounding across all of our end markets at a rate stronger than we anticipated.
Gross margin in the second quarter was 58, 2% gross margins were down 70 basis points year over year, driven by the shift in mix in our business with a higher percentage of hardware this quarter and the onset of product cost inflation given the disruptions we are seeing in our supply chain, partially offset by lower discounting.
Adjusted EBITDA margin was 26, 4% of 70 basis points driven by higher revenue.
Operating income margins expanded 110 basis points to 24, 2%.
As expected our operating costs were up meaningfully from the second quarter of last year. When we had unusually low compensation expense and a very tight focus on cost control in light of the Covid Lockdowns net income increased by 40% and earnings per share increased by 20.
To <unk> 72 per share.
Our second quarter cash flow from operations was 201 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 $190 million.
Our net debt decreased over $225 million in the quarter and our net debt to adjusted EBITDA ratio fell to 1.
At the end of the quarter, we had the entire 1.25 billion available on our revolving credit facility and approximately $484 million in cash with a strong balance sheet. We are well positioned to continue to invest in our business both organically and inorganically.
Turning now to slide 6 I'll review in a bit more detail, our second quarter revenue trends.
As noted earlier, our IRR was up 11% in the quarter with the organic <unk> growth of approximately 10%.
Excluding our transportation segment Trimble AOR grew at a high teens rate in the quarter Encouragingly AOR trends in transportation improved with segment organic air are approximately flat versus a year earlier, our nonrecurring revenue streams experienced strong growth relative to the second quarter of 2020 during which our.
Business was most negatively impacted by the COVID-19 shutdowns our hardware revenue grew 47% year over year, driven by strong performance in civil construction geospatial and agriculture.
From a geographic perspective, North American revenues were up 23% and Europe revenues were up 41%.
Currency fluctuations positively impacted growth in Europe by about 9% with the balance coming from catch up on project activity, which has slowed in 2020 fiscal stimulus measures and recovering demand in many end markets.
The Asia Pacific grew 19% year over year, driven by strong growth in Australia, and New Zealand the rest of World, which includes Brazil, and Argentina was up 49% year over year, driven principally by strong demand from the agriculture sector.
Next on slide 7 we highlight some of the other key metrics that we follow net working capital inclusive of deferred revenue was negative this quarter, representing approximately -2% of revenue on a trailing 12 month basis.
Our deferred revenue grew 14% year over year.
An important story this quarter is the growth of our backlog.
Total backlog at quarter end was approximately $1.5 billion of that total of approximately $300 million relates to unfilled orders for hardware products. This compares with hardware backlog of about $100 million at the end of the second quarter last year, which is a more typical level for our business.
In this time of both exceptionally strong customer demand and increasing supply chain pressures. Our operations team did an extraordinary job, which enabled a record year on year hardware revenue growth of 47%.
Turning now to slide 8 for additional detail on each of the reporting segments building.
Building in buildings and infrastructure revenue was up 22% on an organic basis revenue growth was strong in both our building and civil construction businesses with hardware revenue across the segment upgrades of <unk>, 40% segment.
Segment margins were down 40 basis points due primarily to revenue mix.
Across our returning recurring software offerings in this segment bookings were strong up approximately 25% versus a year ago.
Geospatial revenue was up 48% on an organic basis, we saw a rebound in demand across nearly all of the end markets for our geospatial offerings and our new products are generating significant customer enthusiasm.
Operating margins were up 430 basis points due to strong revenue growth and the success of new products.
Resources and utilities revenue was up 32% on an organic basis revenue growth was strong in precision agriculture, and positioning services margins expanded 160 basis points.
Topline results in transportation met our expectations revenue was up 9% on an organic basis year on year. The drivers of revenue growth were improved trends in both of our mobility and enterprise businesses Mark.
<unk> declined 170 basis points on a year over year basis due to the increase mix of low margin hardware and increase operating costs, but margins improved sequentially over first quarter levels. We remain confident that we are on track for continued sequential improvement as the year progresses.
Turning now to our outlook for the full year, our performance in the second quarter and the strength of our backlog gives us the visibility and confidence to raise our outlook for the year.
I'll point out that supply chain constraints continue to present us with meaningful uncertainty is the availability of some critical components remains unpredictable the outlook I'll describe represents our best sense of this dynamic environment.
I'll also point out the comparisons versus the quarters of 'twenty 'twenty are difficult to draw of meaning from as the impact of the onset of Covid and the recovery following market reopening of created large swings last year, we will focus more on sequential evolution from the second quarter through to the second half.
We are raising our outlook for the full year revenue to between 355 billion and $3.6 5 billion.
Demand remains resilient across all of our end markets, but our hardware revenues will likely be constrained by our ability to source key components.
Note that this new revenue range incorporates our divestitures, including the recent divestitures of our Manhattan software and Iron solutions businesses.
Divestitures will reduce our revenue growth in 2021 by a little over 100 basis points, but are reflective of our increasing focus on platforms, which connect the workflows in our key end markets.
Sequentially, we expect the revenue in the second half will be well above 2020 levels, but below the levels, we realized in the first half of 2021.
The expectation of lower revenue in the second half versus the first half is entirely driven by constraints in our supply chain.
We expect to end the year with hardware backlog at level similar to the end of the second quarter.
Given our strong bookings trends across our recurring software businesses, we expect organic growth of approximately 10% for the full year.
We anticipate the second half gross margins will be down approximately 50 to 100 basis points below second half 2020 margins due to the net impact of product mix and cost pressures, partially offset by price increases.
We are implementing price increases across many of the product lines impacted by the recent inflationary spike.
But overall the net impact on gross margins will still be adverse year over year for both the back half and full year 2021.
We expect to experience the greatest gross margin pressure in the third quarter as we won't realize the full benefit of our price increases until the fourth quarter.
Our outlook for operating margins has improved as the leverage from higher revenue more than offsets the impact of mix shift increasing product cost inflation and the investments we are making in support of our strategy.
We now expect that operating margin for the full year 2021 will be comparable to 2020.
Note that our software business model transitions from perpetual to recurring or accelerating in the back half of this year.
These transitions will adversely impact operating margins by 150 to 200 basis points in the second half of 2021.
Our outlook for full year earnings per share has increased to $2.45.
To $2.65 per share.
From a cash flow perspective, given our strong performance in the first half of 2021, we expect cash flow from operations for the full year of greater than 1.1 times non-GAAP net income with free cash flow comfortably exceeding non-GAAP net income with that I'll turn it over to the operator for Q&A.
Thank you for sand there at this time for the participants the classic a question. Please press star 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
And now we have our first question from Jerry Revich from Goldman Sachs.
Your line is open.
Hi, this is the shocks of them all head on for Jerry Revich can you talk about the <unk> growth for E builder and viewpoint and out of the growth what proportion was from new logos.
Hey, good afternoon of the total AOR growth for the combination of viewpoint and E builder.
The 17% in the quarter year over year as it relates to new logos, we had actually a strong performance in the quarter on new logo bookings. So it's a it's a good sign that the connect and scale strategy is bearing fruit inside of construction.
Okay and in resources and utilities 1 of your customers is acquiring a competitor can you talk about your views on the competitive landscape as it relates to the Trimble.
For the set context for the competitive landscape, let's start with the the macros in the agriculture market.
As we all know it's the the commodity prices are high.
And that is fueling positive farmer net income so there's a there's an attractive backdrop against that farmer sentiment is high new machine sales are.
Our strong so the place to start of.
As at the top level, what the market conditions that are positive and you see that playing through the results and the resources and utilities segment and the team did a really nice job in the quarter and really through the balance of this year from a competitive landscape perspective.
Actually what I want you to hear the teenage as an important customer of.
Trimble and so we expect that relationship to continue.
To go forward and of positive light and that's been that's.
That's consistent with the signals that we've received thus far.
Okay. Thanks for the color.
We have all of our next question from Jason <unk> from Keybanc capital markets. Your line is open.
Great. Thanks for taking my questions can you talk about the 200 million venture.
Venture fund.
We think of these as well.
Moon shots.
How does it fit in your connect and scale of initiatives and then with the with the business leader for me builder of kind of co leading edge is this going to be more targeted towards the consumption side. Thank you.
Okay.
Hi, Jason so the.
The.
I'll say the thesis behind Trimble ventures is 2 fold it's to accelerate.
Platform investments as well as the technology ecosystem. So from a technology ecosystem think about emerging technologies that could relate to augmented reality of it could be in.
It could be in block chain of it could be an I O I O T or autonomy.
And that plays across all of Trimble potentially.
And then from a platform perspective connect and scale is synonymous with an industry platform strategy and so I'll use the to enter tangibly, we want this venture fun.
To to.
The participate with companies, who can be part of the trimble platform and extend the customer value and value proposition and that also we can see playing across the breadth of the breath of Trimble, having Ron and heavier who comes from the E builder business.
We think of the great thing because you know.
He has a a lifelong entrepreneur who plugged into the bigger company at Trimble and we think he's got the right. The mindset in the network to help to help companies succeed in side of Trimble platform.
Okay, Great and then 1 if I can sneak in for David.
It sounds like the lower discounting as being able to offset some of the higher product costs, but it sounds like it's still out of kind of a negative.
Net.
With the mix I guess can you maybe provide a little more color on the level of discounting.
The change versus the the higher cost.
Yeah, Hey, Jason first thing I'd point out is that the significant majority of the impact both on the cost and pricing side isn't yet reflected in Q2, it's a much more of the impact is in the back half of the year.
We have been ratcheting down our discounting from the old prices already for a couple of quarters now.
And the way to think about it as debt.
That ongoing reduction of discounting was sufficient to offset the costs most of the cost increases we had in the quarter for the back half of the year, what's going to happen is that much more of the.
Cost increases, we're seeing for of hardware products, some of which by the way we believer the majority of which we believe are temporary in nature in there related to the dislocation of the overall supply chain, but those are kicking in.
In full force now here as we entered the third quarter we.
We are taking top line price increases across essentially all of our hardware offerings that are impacted by the cost increases.
Kick in gradually.
With slightly different approaches and timing from business to business overall, our outlook is that the top line price increases in the second half will offset most but not all of the cost increase but it will be reasonably close for.
For the full year.
Okay, great. Thank you.
Okay.
We have our next question from Colin Rusch from Oppenheimer. Your line is open.
Thanks, So much cash could you give us a bit more detail on the bundled offerings you know the.
For those customers the potential for follow ons or anything.
Around the end.
Total end markets.
A really the lately from the way you just Wanna get of sensitive more of the attraction is.
Kind of salary.
Hi, Colin it's Rob I have good afternoon.
So we work backwards from.
The connect and scale strategy in the platform strategy, and we think about the bundled offerings and how they can be in service of delivering greater value proposition to our customers. The primary of places where we're seeing the fruits of the early fruits of the efforts are in construction and to a lesser extent and transportation.
And we are measuring that success of will measure of cross sell a C. V are internally, we will measure of new logos.
For for proof points that we're creating success or listening to our customers and our customers are telling the stuff. This is.
How they want to do business with us and that they want to see us connect and many of the point solutions that we have together to provide really workflow productivity.
So I'm quite encouraged that we're heading the right direction here with the connect and scale and I'm encouraged that the potential really across a great deal of our portfolio.
Okay. That's helpful and then we'd love to get a better sense of the December.
This infrastructure built the gist of getting released.
Over 100 billion in and my earmark for the roads and bridges.
How does that potentially it's different for trimble versus hospitals, and what you were expecting.
And part of the first bring it on on the Watson.
Yeah, Great question. So we continue to see this as a generational opportunity to increase the competitiveness of the infrastructure in the U S and for the use of Trimble technology to help us build that infrastructure better faster safer cheaper and greener. There is a real value proposition to the technology being deployed against these of these projects now lets talk.
About the funding aspect of it.
The way we see it is that we have had a baseline spend on surface transportation and that came in the form of continuing resolution last year.
So now fast forward to 2021, the surface Transportation Reauthorization Act at all.
<unk> set the new level of baseline funding that has more than 23% ahead of the.
The previous debt.
Continuing resolution level, the 23% of head.
Inside of that that also contain an advanced digital construction management system provision and that provision encourages the use of digital technology, So thats very favorable.
To us.
And then on top of that that's the bipartisan infrastructure investment of jobs Act.
And that is set to provide an additional 550 billion over 5 years and infrastructure spending across segments, such as roads airports ports public transit and rail and so then if we just look at road and bridges alone that would be of 46% increase from the fast Act baseline. So we are.
Building solution capabilities around this opportunity and we're staffing to support what we see is as an attractive opportunity in front of us because this is a fundamentally different level of funding of that we believe if passed.
We will have a meaningful positive impact to our engineering construction related businesses.
That's super helpful. Thanks, so much.
Youre welcome.
We have our next question from Chad Dillard from Bernstein. Your line is open.
Good evening guys.
Omni channel so.
To dig into the agriculture investment that you talked about at your increasing can.
Can you just give a little more color on that and could you just spring quarter, what the priorities are for that business right now.
So when we look at the agriculture business and think about the the priority investments our leadership for going on decades now has been in the guidance side.
Side of the business, so think of the controls and guidance.
We will continue to invest in that business to keep us as the leader and guidance technology. So we're increasing our level of investment there and think of positioning <unk>.
Acknowledges think about ubiquity of coverage around the world with the positioning of correction services, we have the fast convergence that we can provide the farmers to get that high level accuracy think about position under canopy.
To provide better outcomes for farmers for positioning so we will continue to invest in the in the guidance side of the business.
If I move next to the precision side of the business. Thank flow control's variable rate, which we see of the next really growth frontier within the agriculture market and we've been investing in the us for a long time. The Mueller acquisition. We did a few years ago really brought us forward into the space.
And we continue to see attractive opportunities there and then the 2 other areas I would put would be autonomy.
Our autonomy efforts.
We are developing really in the core part of Trimble that serves construction end markets in agriculture end market. So we could eliminate redundancy and duplication of efforts by.
By serving multiple markets, so Everton and autonomy are important to us.
And by way of example, the the horse relationship that was announced as it puts credibility behind the the efforts we have there and then finally I would look at the software side.
Out of the agriculture business and the bundling it's more than just the bundling, but if we look at the software capabilities within agriculture, it's really that the operational dashboard.
The operational management system for of farm and we believe deeply in the connection of what we're doing in the office of the field the software the hardware the physical the digital making it easier for the farmers to buy the software of the services and the hardware together, so there's efforts and that in that from.
That's helpful.
And then can you tell me think through the the Inc.
Incremental margins in the back half of the year.
My very rough back of the envelope math it sounds like it could be a little bit negative. So can we just talk walk through just the puts and takes on net price.
Quantifying materials logistics cost and then how quickly do you think you can.
Raised price and push that through to your customers.
Hey, Jed its David.
Let me offer a few observations so as you think about the dynamics in the back half.
<unk>.
It's safe to say that the cost impact will hit faster than our price increases. So I said we would.
We would offset most but not all of the costs.
The increase with the pricing in the back half and just the logic of that says gross margins will be under more pressure in Q3 and Q4.
Another dynamic impacting the gross margin line is the the mix of the business, we saw a pretty big spike up with 47% hardware of growth, which comes in at lower gross margins and that will abate a bit.
So that those of the key drivers on the gross margin line Opex is going up for the reasons that Rob mentioned and a few others in part we're restoring normal seed of compensation.
The base and bonus compensation were really really unusually low last year.
And we're hitting our targets this year, so that accounts for about half of the Opex increase the we expect.
And the remainder is a function of the investments Rob mentioned and the other costs that debt.
As our as our revenue grows.
Margins will be impacted have been impacted will be impacted by the subscription transition.
Transition.
It'll be a little more than 150 basis points in the back half of the year. So all of that complicated math gets you to a point, where we now think operating margins for the full year will be roughly comparable to the 'twenty 'twenty and you might recall last time, we said they would be between 19 and 20, but with the bigger revenue than we anticipated last time.
We're getting more fixed cost leverage so hopefully that the points you to most of the most of the items you need that.
Right. Thank you.
We have our next question from meta Marshall from Morgan Stanley. Your line is open.
Hi team. Thanks for taking our question. This is Eric on for me to maybe if we could just dive a bit into the bounce back youre seeing in your perpetual software business I'm wondering if any of the strength of our some of those products are tied to hardware products and if so to the.
The point could there be some headwinds for that business day of hardware is seeing supply chain bottlenecks.
Yeah, Hey, Eric David.
Youre right the meaningful majority of our perpetual software.
Is sold together with hardware.
So that's been a good news story.
We do by the way continue to anticipate that hardware revenue will grow just year on year, just not as much as it did in the second.
Quarter end.
We do anticipate lower sequential revenue in the back half versus the front of house, so that will have a direct.
Correlating impact on perpetual software.
Got it that's helpful and then if I could squeeze in another 1 as we think about some of the perpetual sales coming back and I know ultimately longer term. The goal is to convert as much of the portfolio to subscription as possible is there a strategy around some of these products, but around still sold on a perpetual basis or do they kind of fall in the category.
Lori of the.
We continue to be purchased on a perpetual basis.
Eric This is Rob.
I'll give you an example in our civil construction business. So we have an offering we called Trimble platform as a service where you can.
The technology assurance by subscribing to the machine control and guidance.
The solution and when we sell that debt cells with the salt with software that comes along with it and actually a richer software offering also can bundle some off of software.
With that we have examples.
A few of they're not needle movers, but some examples and agriculture, where some of the large enterprise farms are buying what we referred to as everything as a service. So we do have examples in the business where the.
Let's call them, whether it's a 1 time sale or what would look like perpetual.
Can become ratable with it.
And it works. So we believe it works so long as you're providing a compelling value proposition and the root of the compelling value proposition and construction is around technology assurance. So we will continue to push that forward, we've been really in North America and civil construction and that will now start to go out to more of a global.
The model and then if we look at the software that goes along with the hardware that you were just asking about we also see opportunities that even for hardware that continues to sell as of 1 time sale that those that perpetual software that goes along with it much of that does we think have an opportunity to go ratable overtime.
All of them now.
Thanks.
That's on the quarter.
Thank you Sir.
We have our next question from Gal Munda from Darensbourg.
Your line is open.
Yeah, Hi team thanks for taking my questions.
The first 1 was just maybe touch a little bit on the dynamics of the bookings growth versus the era of growth.
When I look at the when I look at your split and the commentary around different segment results.
Both of them building <unk> infrastructure and.
And transportation, you, noting that bookings are growing faster than the than the air or what's driving the dynamic is it is it is it kind of maybe on transportation still returned the debt.
Kind of leaking out of dark, whereas the duration or is it just the fact that it's kind of more upfront licenses the kind of.
Hi.
Yeah.
Hey, Gal good afternoon, it's Rob the.
The bookings growth ahead of AOR growth actually I see as very virtuous.
And the and the business and the bookings of of course going to.
Precede.
<unk>.
So I look at the bookings growth that we're having as proof points that.
The strategy is working.
Both the strategy for individual products, we have.
Proof points that the macros are there of the fundamentals are there for the underlying businesses proof point that the bundling efforts.
Our working proof points that we're driving new logo growth I havent proof points as well Gallagher.
Specific example, when we've seen we keep seeing when we have models that transition from perpetual to subscription that were increasing the size of the addressable market. So our architecture and design of business. For example had yet another quarter of over 50% <unk> growth.
Net 6 quarters in a row.
That doesn't happen unless you are expanding the size of the addressable market in those growth rates exceed what we what we had before the the model conversion. So that's going to show up in of booking growth before it shows up in air are that's exactly how I would want to see this.
Play out in the in the business. So I'm very encouraged by seeing that dynamic.
Okay perfect. So that there is the upside today are actively in the exactly.
Okay. So the timing of when that bookings growth translate tend to the error. So you've connected the dots correctly.
Absolutely okay.
That makes sense and then last quarter, when we talked a little bit about the supply chain issues and the headwind to the growth.
We're saying you know the reason why.
You didn't raise the guidance more of last quarter was because of that.
Is that now you've obviously raised the guidance quite significantly after the first half.
How much.
Is this still kind of providing you know how much is it putting brakes on your growth how much could you grow is supply wasn't an issue, but kind of demand would allow you to grow cost of it and you think you are can you quantify that still.
Hey.
All of its David.
Let me start with a couple of perspectives.
Demand was more robust in Q2 than we thought a quarter ago.
We also were able to squeeze more out of the supply chain than we thought we would a quarter ago.
I'd point you to the.
Comments, we made about our hardware backlog so in a normal year hardware backlog at the end of Q2 would be about $100 million. That's what we had a year ago, we actually saw it creep up as the supply chain issues began to show themselves. In Q1. It was about 200 million now were at $300 million. So.
The simple way to think about it is that an awful lot of that 300 million of the 200 increment above the normal level is what customers want the.
That our supply chain isn't letting us get to them.
And I'd love to say, we're going to get through all of that in the back half of the year, but if you look through the guidance comments, you'll note that we're projecting net we think we'll end the year with backlog somewhere about where it is now so where our lead times on some products are longer than we or our customers would like and we're working through it.
But it's it's.
Its a interesting situation, we're not unique in facing these challenges we've worked through it much better than we thought but it will be of.
It will constrain the growth, we otherwise could have in the back half.
That's really helpful. Thank you so much for your perspectives.
We have our next question from Rob Mason from Baird. Your line is open.
Yes. Good afternoon. Thanks for the question.
First question was just around your operating expenses you had noted.
You go into the back half of the the year the second half of 1.
150 to 200 basis points around your growth investments as the those are.
Creasing, which should we think that those are still scaling up as we exit the year and presumably those would carry over into next year.
That's the 1 question and then Relatedly just around your compensation normalizing. After the measures you took last year I'm just curious if theres anything around the the incentive side that we should think about.
Perhaps resetting of resetting at a different level of lower level.
The next year as well.
Yeah, Hey, Rob it's David.
Let me, let me frame this a little bit if you if you sort of go through the outlook. We gave on gross margins and operating margins Youll see that.
We expect for the year operating expense to be up about $130 million plus or minus for the year.
About half of that.
Is relating to restoring compensation to a normal level and we are.
We are.
Beating our own benchmarks, so that will improve.
Debt increases comp in a way that would likely normalize next year.
For the remainder of it is partly just the normal cost of growth and then about 20% or so of the $130 million is relating to the growth initiatives are.
Will probably look to Rob for commentary, but I will say I think using rubs word. This is the long game and we're engaged in.
A multi year effort to create an exploit these platforms the digital transformation, where we have underway the spending by no means will be over that's not what we're signaling. This year, we will be spending against those initiatives.
Next year and thereafter.
I see okay.
Just.
Maybe a follow up around the geospatial business in particular, obviously very strong rebound off of last year, but noticing.
Noticing that across the industry as well and historically I know, Rob you've talked about that perhaps being the most penetrated vertical for error you sell into from a technology perspective. So I'm just curious if there is.
Is there anything changing around the technology side I know you yourselves of that have some new products there, but is there anything changing in the industry around the technology.
Or is there possibly.
Your customers are for channel trying to get out in front of.
What may be coming from and infrastructure side.
Yes, good question, Rob I.
I see 3 things happening in the market I see the new product introduction I see channel excellence and I see positive macros. The team did an outstanding job in the quarter they've done an outstanding job really over the last couple of years couldn't be more proud of what this.
Group of colleagues is doing because they are defying the.
The messaging I've I've had in the past about the the nature of growth potential in the market and I can follow the numbers I fault that are that are published we are outgrowing our competitors and peers in the market and this in this business now will eventually lap lap this and those numbers will get will get hard.
On the new product introduction side.
I'd say a couple of things you know, yes, we have been mentioning.
Many of the products of the team and the cadence of that they've had.
Here over time and that does.
Let's say create a replay of the replacement cycle opportunity. So whether we're talking our ex 7 laser scanner, we've got a new mobile mapping system. They are our 12 I'd G NSS.
System, the TSA 5 handheld data collector.
Are all driving excellent business and this business was actually well positioned in context of supply chain constraints because of when you have new products coming to market you are buying components well ahead of that so that's the new product introduction side. The second on channel excellent really kudos to the to the sales.
<unk> leadership in channel development team.
Team, who works with our global dealer partners all of them I think are becoming more and more professional and how they how they run and manage their businesses and how they think about segmenting markets and addressing opportunities and then finally, the macros I'm clearly macro of such as residential and infrastructure are driving very positive.
The benefits for.
For this business, we saw oil and gas do better in the quarter and.
So in places like Texas.
They were buying I'll say they were buying again, so we saw some growth in that in the quarter as well.
We look at those macros, Rob and not only for the current sales of the survey mapping products within geospatial, but we look at the correlation of how that might connect to the.
The civil construction products that would be downstream of that from a workflow perspective, and so that gives us conviction in.
In hope of an infrastructure bill getting passed that that could that debt that is a sign of an early sign of potential in our other some of our other businesses.
Okay very good.
That's good insight thank you.
Youre welcome.
Okay.
And now once again for the participants if he would like to ask a question. Please press star 1 on your telephone keypad.
There are no further questions at this time I'll turn the call over back to Michael Leyba of Investor Relations.
Thank you everyone for joining us for the call. We look forward to speaking to you again next quarter.
Ladies and gentlemen. This concludes today's presentation. Thank you for participating you may now disconnect.
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