Q1 2022 Trimble Inc Earnings Call
Thank you for standing by and welcome to the Trimble first quarter Destocking in 'twenty two results at this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.
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I would now like turn the conference over to Rob painter, Chief Executive Officer. Please go ahead Sir.
Welcome everyone before I get started our presentation is available on our website and we ask that you refer to the safe Harbor at the back.
Let's begin on page two with gratitude shout out to our team and our partners for delivering a record first quarter that exceeded our expectations.
The team delivered record levels of annualized recurring revenue of $1 47 billion revenue of 994 million and EBITDA of $253 million.
Every reporting segment met or exceeded expectations and backlog stands at one 7 billion or so.
Software teams exceeded expectations on delivering are our growth as we continue to transform our business models and we achieved record levels of recurring software bookings in many parts of the business on.
On the hardware side, our operations team secured components late in the quarter to solidify our strong performance.
Heatedly speaking the story of the first quarter is that demand remains healthy our strategy is working and we continue to execute in a very dynamic environment.
Against this backdrop, we are raising our organic annual guidance for the year adjusting for the impact of divestitures and currency.
As many of you know we think on a 343 operating cadence simultaneously balancing three months four quarters and three years.
We aim for the same balance on these update calls.
I'll start my commentary by addressing some of the specific topics you've been asking about in the three four zone, namely, Russia, and Ukraine supply chain inflation and market conditions.
Starting with Russia, and Ukraine, our first priority remains the safety of our teams for the business. We continue to pause all new sales into Russia, and Belarus, and our long term planning assumption is that our 2% of revenue from the region does not come back most of which comes from agriculture and survey hardware.
Given our current backlog, we are directing as much product elsewhere as possible and we do not anticipate a material change to 2022 company revenue.
And your Crane, we are highly motivated to help however, we can but the practicalities on the ground are obviously very difficult. We have donated to relief efforts through our foundation and have begun preparations for how we can help with the rebuild efforts.
As it relates to supply chain.
The short answer is that it isn't getting easier, but we also didn't expect it to get easier.
Inflation presents obvious challenges less so from our perspective, the price durability more so from an ability to price dynamically in a fast moving market.
Finally overall market conditions remained strong at the moment commodity prices are high global construction backlog is robust and U S infrastructure Bill spending is on the horizon, we have not yet picked up on discernible recessionary demand signals.
Turning now to the long term horizon and the three years in the 343 model.
We are a purpose driven company with a mission to transform the way the World works March 31st we announced a 1.25 billion revolving credit facility that links to of our sustainability commitments, namely reducing greenhouse gas emissions and increasing gender diversity at trimble.
While we continue to await approval of our science based targets. We also added ESG performance metrics to long term incentive compensation for our named Executive officers talk is cheap we are taking action.
Consistent with our 343 model I'll talk next about capital allocation and how we view ourselves as capital allocators on behalf of our shareholders I believe how we allocate our resources time people and money and how we balance that across short and long term horizons will ultimately determine how we are judged as operators.
In the first quarter, we executed $105 million of share buybacks in the quarter, we put our balance sheet to work to build inventory where possible. The biggest news, though is that we announced the sale of five of our businesses in the last few weeks, our precision tools business are weighing business, our timing business, our accessories business and one of our rail businesses.
This is in addition to seven businesses, we divested over the previous two years, we continue to focus our efforts on developing and growing our connected industry platforms and building our digital transformation capabilities.
We believe the best ongoing fit for these businesses lies outside trimble, yet I would be remiss not to step back and acknowledged that these are our long term colleagues and the results. They delivered over the years enabled much of the transformation you're seeing us today.
My gratitude to all of these colleagues and to all of our colleagues who worked tirelessly on this effort over the last few quarters, David will walk you through the numbers in his remarks.
Moving to page three let's talk about innovation and our platform strategy. We are building industry clouds to connect stakeholders and workflows across operational life cycles and construction. For example, we aimed to connect the complete project lifecycle to automate and optimize work establishing shared industry protocols.
And common data environment. So the diverse stakeholders can efficiently collaborate and work across the design build operate stages of project delivery.
Our strategy is already delivering innovative value today based on our strong foundation of technologies in areas, such as positioning and sensing mixed reality robotics autonomy data science and artificial intelligence through our partnership with Microsoft We are enabling designers engineers and contractors to collaborate.
With one another by interacting with richer data and more immersive models and Trimble is the only company in the world with direct access to Microsoft's Holo lens technology that we have integrated directly into our Trimble XR 10.
Through our partnership with Boston dynamics, we are at the intersection of the physical and digital World and robotics, where builders use our automated scanning solutions to capture as built throughout the asset operational lifecycle.
Through our machine control and guidance technologies, we have been working on autonomy for over 20 years, we are innovating through progressive stages of autonomy with the most recent addition of horizontal steering controls for donors and contractors.
Which deliver productivity and sustainability.
Our strategy also Leverages Trimble product innovation into differentiated go to market motions, we are evolving and enhancing our commerce model to remove friction enhance the user experience and enable value to be captured and exchanged through more granular interactions at the point of work.
Value is increasingly tied to subscription payments and delivered on our API driven services platform. So that producers and operators can self provision services and get real time user feedback as an example, our trimble construction one solution as shown on page four delivers a unified provisioning experience across more than 20.
Products and services and enables our divisions to sell persona based bundles and discrete connected workflows.
We are aggressively streamlining online experiences via self provision subscription services that empower users to thrive and unlock new innovations for modern ecosystems and project stakeholders.
This improved real time collaboration anthon and interactions at scale that help us address society's most urgent challenges.
To enable this strategy, we are investing heavily in our underlying digital systems. Our initial pilots are already demonstrating value by improving the productivity of our sales teams as they serve our common customers.
As we continue to rollout functionality in the quarters ahead, we expect to be able to deliver our commercial offerings and increasing levels of scale, while generating new and impactful digital insights about our customers' journey.
I will close with a comment on our planned at Investor Day in September the three questions. We hear most on investors' minds includes one the arc of our model progression to progress and proof points of our industry platform strategy and three the collective impact of the current market risks, namely recession war inflation and supply chain here.
Feedback over the coming months will be appreciated as we prepare for this update David.
Thank you Rob let's start on slide five with a review of first quarter results first quarter revenue of $994 million was up 14% organically year on year changes in foreign exchange rates subtracted, 2% to revenue growth, resulting in reported growth of 12%.
The strong revenue performance was broad based approximately two thirds of our 14% organic revenue growth came from volume with the remaining one third driven by the impact of price increases we have taken in the past year.
Software and recurring revenue increased as expected and hardware revenue was better than expectations driven by the success of our operations team and getting more product through our supply chain.
Gross margin in the first quarter was 57, 9% down 50 basis points year over year, reflecting higher product and freight costs in our supply chain, partially offset by increased pricing and improved software margins.
Adjusted EBITDA margin was 25, 5% down 60 basis points year over year, driven primarily by lower gross margins and to a lesser extent higher operating expenses from our strategic investments and a return to normalized expense levels.
Operating margin was 23, 5% down 10 basis points year over year net income dollars increased by 11% and earnings per share increased by seven.
To <unk> 73 per share.
Our first quarter cash flow from operations was $153 million and free cash flow was $139 million.
Cash flow was down year over year in the quarter as we continued to build inventory and as a result of our incentive plan payouts. Following very strong performance versus our 2021 objectives deferred revenue grew 14%, reflecting continued strong growth in recurring revenue streams.
The underlying working capital dynamics in our business remains strong and we expect that our net working capital will remain near zero as the year progresses, even in this difficult supply chain environment.
Our net debt declined over $30 million in the quarter and our net debt to adjusted EBITDA ratio remains around 1.0.
Turning now to slide six I'll review in more detail, our first quarter revenue trends.
<unk> was up 12% in aggregate and up 14% organically.
Our non recurring revenue streams grew with hardware up 11% year over year and perpetual software growing 8%.
Our hardware growth was driven by strong performance in civil construction geospatial and agriculture.
Hardware growth contributed to perpetual software growth as some of our hardware offerings are bundled with software.
From a geographic perspective, North American revenues were up 11% and.
In Europe revenues were up 14% Asia Pacific was up 5% year over year and the rest of the world was up 31%.
Next on slide seven we highlight some of the key metrics that we follow organic IRR in buildings and infrastructure geospatial in resources and utilities all grew in the teens or above while transportation <unk> growth was in the mid single digits and improve sequentially.
Net working capital inclusive of deferred revenue continued to be negative despite the build in inventory during the first quarter.
Research and development on a trailing 12 month basis was 14, 5% of revenue with approximately two thirds of our R&D investments going into software development.
Of our $1 7 billion in backlog approximately $345 million represents hardware backlog down modestly from year end 2021 levels, but still well above our historical norms supply chain constraints continue to be very dynamic in nature, but our team made good progress in the quarter work.
Around constraints and executing well in a challenging environment.
Let's turn now to slide eight for additional detail on each of our reporting segments.
Buildings and infrastructure revenue was up 18% on an organic basis revenue growth was strong in both our building and civil construction businesses and organic <unk> was up in the high teens in the quarter.
T O spatial revenue was up 16% on an organic basis, driven by strong performance in our survey and mapping business.
<unk> sources and utilities revenue was up 16% on an organic basis, driven by continued strength in agriculture in Europe , South America, and the United States.
Financial results in transportation showed progression in a number of areas revenue was up 2%.
On an organic basis year over year, and organic IRR growth improved for the third quarter in a row.
We continue to progress on the conversion of our transportation enterprise software business to recurring revenue models and made good progress with development of a new product in our mobility business, which we believe will improve both margins and competitiveness. When it is launched later this year, we continue to project improved momentum in margins in <unk>.
Our growth in our transportation segment in the fourth quarter.
Turning now to slide nine I'd like to provide our updated financial outlook for 2022.
As Rob highlighted earlier demand remains broadly strong across the end markets, we serve high inflation rising interest rates and the impact of the war in Ukraine are of course impacting sentiment around the world, but we don't see meaningful signs that these developments are reducing current demand for our offerings are.
Our backlog of $1 7 billion, which reflects historically high levels of hardware backlog and growth in our recurring revenue offerings gives us significant visibility through the balance of 2022, we continue to expect supply chain challenges into 2023, although we are increasingly optimistic that we will see.
Availability improve in the second half of this year.
With that backdrop I'll talk through our updated guidance, our recently announced divestitures and the strengthening of the value of the U S. Dollar will both impact our financial results for the balance of 2022. So I'll focus first on organic trends. The key message here is that our organic outlook for a or our revenue and earnings have all <unk>.
Proved.
We are raising the midpoint of our organic revenue guidance by $30 million with an updated range of $3 99 billion to 4.07 billion.
That revised view reflects an organic outlook for revenue growth of 10% to 12%.
The midpoint of our organic EPS forecast is increased by <unk> with a new EPS range of $2.85 to $3. We are raising our outlook for organic <unk> growth to above 15%.
Our full year outlook reflects our expectation that organic revenue growth will be in the mid teens in our buildings and infrastructure and resources and utilities segments, where demand remains very strong and backlog is high geospatial organic growth is expected to moderate from the first quarter pace and be in the mid to high single digit range for the year.
Year against 27% growth in 2021.
We expect that our transportation segment will see low single digit organic growth for the year with meaningful improvement by the fourth quarter, when our initiatives to improve retention and grow a RR take hold.
The table on page nine of our presentation bridges this organic outlook through the impacts of the changes in exchange rates in our upcoming divestitures.
The U S dollar has appreciated significantly versus the euro and other major currencies in the last 90 days.
Assuming that exchange rates remain where they are now we estimate the impact on our revenue from our last outlook of approximately $45 million.
We expect that the divestitures will close in the second quarter and will reduce our 2022 revenues by approximately $145 million.
60% of the revenue impact is in buildings and infrastructure, 30% of geospatial and 10% in transportation.
As a result, our updated full year revenue guidance, incorporating the impact of divestitures and recent changes in exchange rates is 380 billion to $3 eight 8 billion.
We now expect gross margin to be up approximately 100 basis points for the full year with the majority of that improvement coming in the second half. This reflects our view that the pricing actions, we are taking will more than offset inflation in the second half.
Our outlook for full year operating margins is increased to a range of 23% to 23, 5%.
Embedded in this outlook is the assumption that operating margins will be adversely impacted by our ongoing subscription transitions as well as the investments, we're making in support of our connect and scale strategy and the acceleration of <unk> in aggregate. These factors present, a headwind to operating margins of approximately 200 basis points for the year.
Our outlook for the margin impact of subscription transitions and strategic investments is unchanged from what we presented a quarter ago.
The divestitures will reduce full year EPS by approximately <unk> 11 cents and recent changes in foreign exchange rates will impact our earnings per share outlook by about <unk>.
Resulting in a revised full year EPS range of $2 71.
To $2.86.
Hardware it makes up the substantial majority of the revenue of the divested businesses and as a result, the divestitures will not have a meaningful impact on AOR trends.
Looking to 2023 and beyond we expect that the divestitures will be accretive to both revenue growth and operating margins more strategically our business post divestitures will be more centered on our platform strategy and our mix of <unk> and software it will be higher.
Forecast for income from equity investments and net interest costs is unchanged our tax rate guidance has increased to a range of 18, 5% to 19%.
From a cash flow perspective, we projected free cash flow will be approximately equal to our non-GAAP net income with stronger performance in the second half of the year.
This forecast reflects our view that our inventory levels will grow modestly and that the U S. Congress will take action to permit the continued upfront deduction of R&D expenses.
If the legislation is not passed and R&D costs are capitalized for tax purposes than our 2022 cash flow outlook will be adversely impacted by approximately $70 million.
Note that the tax capitalization of R&D cost has no meaningful impact on our book tax rates only the timing of cash payments.
A few words on the quarterly dynamics, we expect for the balance of this year the supply chain issues have disrupted the normal seasonal patterns in our business, while the second quarter would normally be our largest quarter in absolute revenue that is not what we expect this year after the impact of divestitures and recent currency movements.
We expect second quarter revenue to be down slightly versus the second quarter of 2021, which was unusually strong.
Following the second quarter, we expect revenue to increase sequentially through the third and fourth quarters, reflecting gradual normalization in the supply chain higher prices and increasing software and recurring growth from.
From a gross margin perspective, we expect second quarter gross margins to be consistent with the first quarter and then the increase in the second half of the year as our additional pricing actions take effect.
Driven by improved price realization and revenue mix, we expect gross margins will be approximately 250 basis points higher in the second half of the year compared to the first half and operating margins will be approximately 200 basis points higher in the second half of 2022 versus the first half we forecast second.
Our earnings per share to be below second quarter 2021 earnings per share with double digit year on year EPS growth in the back half of the year, even after the impact of the divestitures. Most importantly, we have increased confidence in the drivers of our organic or our progression for the remainder of the year.
Rob back to you.
Belong grow innovate.
These are the three core terminal values against the challenging landscape in the context of ongoing change I am proud of what my colleagues have accomplished individually and collectively.
I'm gratified to see that we have been named the top company culture and a top workplace for innovators. We are driven by a sense of purpose at Trimble and we are proving that we can deliver financial results, while showing up with compassion for our colleagues and our communities the level of curiosity and openness to growth IC displayed at Trimble gives me confidence.
That we can continue to execute our strategy operator, let's open the line to questions.
Thank you we will now begin the question answer session.
A reminder, if you wish to ask a question. Please press star one.
Okay.
Again to ask a question. Please press star one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Our first question is from.
Jerry Revich from Goldman Sachs.
Your line is open.
Yes, hi, good morning, everyone.
Hi, Jerry.
I'm wondering if you could just talk about that.
What is your package.
Dissipated proceeds.
And use of proceeds can I see you folks bought back.
More stock in the quarter.
Deployment plan from a short term standpoint, once the divestitures are finalized.
Yeah, Hey, Gerry.
The divestitures have been closed we expect them to close in the second quarter. The proceeds will be a little over $200 million.
I see that.
Cash flow flowing into our overall.
Capital allocation priorities, we are fortunate.
Net to have powder dry to do deals that will.
Implement our strategy and growth so that's the first priority.
We are repurchasing shares you probably saw we did a little over $100 million.
In the first quarter, our artist thinking is that we will continue to at least offset the dilution from stock comp and probably go a little higher given our current leverage position but.
The overall priority is has not changed that are our first focus on allocation of capital is to to grow the business.
Okay. Thank you.
In terms of the second quarter guidance.
Looking at.
Hi.
Potential revenue outlook year over year implies sequentially sales performance, that's worse than normal seasonality, but by a few points I'm wondering can you just expand on that so I get the tough comps year over year, but sequentially.
We have.
Okay.
Sequentially deliveries of hardware that.
It should be up so I'm wondering if you can just expand.
Actually see the supply chain disruptions and what's driving that sequential outlook.
The year over year comps.
Yes, so the first in a pretty obvious point is the impact of the divestitures and foreign exchange, which have a pretty meaningful impact year on year and sequentially.
I think you're right to focus on a our growth because we do see that as a more reliable barometer of the momentum of our business. There are a couple of things that do impact Q2.
Particularly when you are looking sequentially versus Q1 this year.
The two I'd focus on are one the our supply chain, we actually had a very very strong Q2 of last year, we were making a big investment in our U S distribution center, which actually caused.
More shipments to get held up at the end of Q1 of last year and get shipped out in Q2, we kind of had the opposite phenomenon. This year, where we had a very very strong late quarter Q1 shipment pattern you saw how strong our hardware shipments that actually drove our back Doug backlog down a little bit which is a good thing.
And we are seeing some latent effects of the shutdowns in China. So there are a couple of factors that make.
Organic growth are tough on the hardware side.
With regard to software the issue is on our term license business, which is a growing part of our recurring revenue stream out of our recurring revenue contracts renew in Q1, the accounting standards have.
Term licenses all the revenue hits when are the.
The majority of the revenue hits when the term begins and so that really.
Causes sequential trends to look worse than than the long term trends would be Q Q1 to Q2.
Yeah.
Got it thanks.
Sure.
Thank you so much.
Next question from Jason <unk> from Keybanc capital Your line is open.
Great.
Hi, good morning, Thanks for taking my question.
So Rob you mentioned record software bookings in several parts of the business I'm curious what areas did you see the strength and then how much of that is related to maybe internal execution versus the current buying salmon.
Hey, good morning, so the recurring.
Software bookings were pretty broad spread across the business. So it wasn't concentrated in any particular segment and I'd say that both at the gross level in the first quarter as well as at the bookings the bookings line from <unk>.
Internal versus external perspective, and the construction side of the business. So that'll show up in buildings and infrastructure. There I would attribute some more of the bookings growth to internal execution, because that's where we have the initial launches with our with our new digital tools.
And the Trimble construction, one offering that we have this slide answer that as where we could actually see a lift in the bookings and I would call that internal execution.
Of an offering.
There to meet market demand for it so.
I'd say most of it is I would say external facing and then there's certainly an aspect of internal and that gives me confidence because we're in early days of <unk>.
Our digital systems, enabling.
Enabling us to launch these bundled solutions so.
I I'm bullish on.
On this portfolio.
Okay.
Okay No that's good color.
And then Dave.
David on kind of a second half gross margin improvement and the confidence there is if any is this in part at all to some of the divestments thing they need more margin or or is it really just purely on the price realization of 90 something crazy.
Yeah, I'll say that.
What we're divesting as hardware businesses and they are on average lower gross margin than the rest. So yes, the divestitures help a little bit but the much bigger driver is the dynamic of the mix of our business with a greater mix of software and we'll see the positive impact of the pricing, we actually will be lap.
<unk> some of the inflation and we think we're going to benefit from some normalization of the supply chain.
The way I'd characterize that is that we project, we will be less reliant on the broker market for key components in the second half of the year than we have been for the last few quarters and that will still be with us in Q2.
So we're not in a normal world, we're in an inflationary world, but the some of the spikes in input costs will be more manageable and we will get the full impact of the price increases that we've announced now which take time to get through.
Through the backlog so.
Those factors plus the mix will improve our margins in the second half.
Great. Thank you.
Thank you so much our next question from Tami Zakaria from Jpmorgan. Your line is open.
Hi, Good morning, Thank you for taking my questions.
I think last quarter, you highlighted challenges around freight costs and aggressive pricing on key components.
Are you seeing any moderation year to date.
I wouldn't say moderation no I would say more signs that we've hit the peak and that we don't see acceleration in input costs, and then particularly looking to the second half Tammy, where we expect to see moderation.
Is in our reliance on the broker market, which is where a meaningful part of our cost inflation.
Inflation comes from so you'll have a part that has a normal standard cost of a dollar or two or three that's available in the broker market for many many times 10 in some cases, even 100 times the normal.
The normal cost so that's been driving a lot of our cost inflation and we think that impact will be mitigated in the second half.
Understood. Thank you and just one quick for Ed.
Question I believe you said you now expect a higher organic revenue growth rates for the year, how much of it is volume versus price driven.
Are most of it is volume or prices have firmed up a little bit so we've been.
Like a lot of our businesses we've been.
Doug linked to estimate how much inflation will be and so our price outlook is a little better than it was last time, but the bigger driver is that our business is really strong and our ability to execute it in the supply chain is a little stronger than we expected last time.
Got it thank you so much.
Thank you. Our next question is from Jonathan fall.
From William Blair. Your line is open.
Hi, Good morning, I, just wanted to start with construction one how much of a lift as the platform provide relative to your traditional solutions. When you think about selling true and then how does that maybe impact something like net expansion over time.
Good morning, Jonathan It's Rob.
So the the.
The slide showed trimble construction won a contract our offering it's a persona base offering.
It will come next.
Protection design persona offering an owner.
Persona offering within that contract or offering the early signs we're seeing we.
We saw an acute in Q1 play through for us as we saw.
Really good double digit growth and cross what we call cross sell bookings, where we could see the velocity of bookings increase from that offering we saw when rates go up significantly we saw the deal sizes of be higher we saw the sales cycles a lower.
And all of that drove bookings up so Jonathan that for US is a really good sign that we're.
On a good path here.
Got it got it and then just given.
It's sort of a backlog position that you have.
It's all of the backlog noncancelable and are you seeing any evidence of maybe pull forward in demand just given where lead times are thank you.
We haven't seen any discernible signs of cancellation in the backlog Jonathan so.
From the competitive market standpoint.
It's not like theirs.
Many places to go I mean, everyone has a supply chain Chan.
Challenge to work through.
But I think the real story is that the efficacy of the <unk>.
Proposition you get from Trimble technology is what's.
I'm, making the backlogs sticky.
Thank you.
Thank you so much.
Next question from Colin Rusch from Oppenheimer. Your line is open.
Hi, Good morning. This is Christian on for Colin Thank you for taking the question.
Wanted to ask about GSA.
Several quarters in a row now of strong growth you did talk about the comps getting tougher in the back half of the year.
That's a segment that just continues to surprise to the upside I'm wondering if you can provide some additional detail on the drivers there any incident.
End markets or applications, and how we should think about.
Attach rates for Aon.
Following that type of ourselves.
Good morning, Christine it's Rob So first I'd shut out.
All of our colleagues in geospatial. They just continue the terrific terrific run.
And the business.
I'll give you a few comments first on the innovation side and this is where the team deserves a lot of credit.
The number of new product introductions has really.
It helped our global distribution channel.
To message out and to the into the market so whether it's a tel compensation.
On our GSS products laser scanner.
<unk> has been doing quite well for us mobile mapping business has been doing well.
So as monitoring.
And that business unit.
At our end market level, where we've seen strengths amaranth departments of transportation, So think infrastructure.
Thank God defense actually is also doing reasonably reasonably.
Reasonably well the net of all that is we believe we're gaining market share in the business and then complement that by also talking about the go to market side and the team has done a really nice job of.
Working with our global dealer channel.
To drive the business forward.
That's really helpful. Thank you.
And then I wanted to follow up on just sort of a longer term question, you're tracking well ahead of 55% top player recurring revenue target that you outlined.
At the last Investor day, with a number of years ago, but well ahead of that target even with the outside strength that you've had in hardware. The last couple of years and now with the divestitures, that's pointing even higher.
Let's turn to the.
The right settling point under this new Trumbull mindful and how should we think about that going forward in terms of your long term operating margin outlook.
Yeah.
Well from a percent of the business okay. The divestitures.
Don't think of that is 350, plus or minus basis points increase in the mix in other words more some are software mix.
The thing that's always difficult what the percentages Kristen as.
If the hardware business continues to do well and I think it.
Well on the heels of coming infrastructure spend.
We would expect that to benefit our hardware businesses, especially in the engineering and construction side of Trimble so that.
By the math I think that that would.
Throttle that increased expansion in and the percent of software and ultimately obviously, we take the dollars to the bank not percentages have already say all things equal what we've seen over a long baseline now as our recurring revenue is growing faster than our perpetual has been growing faster than our hardware so take that baseline.
If we're already in.
Now post divestiture in the high 50% of that mix. That's naturally moving towards is 66 in front of it so 60 plus <unk>.
<unk> when you look at the growth in <unk>, David mentioned, raising our view on air.
During during the year and so and then that's before any let's say impact of future acquisitions and how that may further further the mix.
So fix in front of it is where it's trending and you know as we move towards Investor Day, I think we can sharpen the pencil on that yeah.
Your other question around operating leverage.
And certainly it's our long term view as you as you get through model transitions that the nature of the gross margins in the business in a recurring revenue business software business for that matter.
Are such that we should be able to increase the operating leverage over over time, So our historical baseline and there had been plus or minus 25% of it and that looks like something heading towards a 30% something with a three in front of it as where we think about the long term model Kristen.
Thank you so much congrats on the nature of it.
Thank you.
Thank you so much our next question from Rob Mason.
Your line is open.
Yes. Good morning, Thanks for taking the question.
I wanted to know.
Robert David in the parts of the business, where you have OEM exposure how is.
That was the OEM versus aftermarket.
Growth rate comparing.
And specifically.
How are you seeing OEM production schedules trend are they loosening up their under their own production constraints.
But are they loosening up or just directionally, how that part of the business is trending versus the aftermarket.
I think there's a little bit of a mixed story on that Rob.
Certainly seen some aspect some areas of the portfolio, where production is increasing and we're seeing our business an increase and then I've seen others, where it remains it remains a bit challenged so I have to say, it's a little bit of a mixed view not not a totally consistent view.
My read through of.
OEM reports this quarter has.
Suggest that they're seeing tight supply chains as well further for the rest of the for the rest of the year and as you know, we primarily orient ourselves around the aftermarket in serving and serving the mixed fleet.
And what we're seeing in the aftermarket has continued strong.
<unk> and adoption of the technology and that really is the growth catalyst for the business.
Is the.
Is it fair to say the OEM portion so do show growth this year.
Volume yes.
Okay.
And just as a follow up as well Rob the portfolio has obviously changed over.
Certainly the last 10 years or last time that we entered any type of significant recession and who knows what lies ahead, but can you just discuss some of the businesses that have come into the portfolio. Since then and how you.
You might think about again I'm thinking about some of the the P&I software in particular, how they have.
Performed historically.
Periods, when it's gotten tougher and you just kind of the durability around the recurring revenue elements there.
That's a good question. So let me give you a historical comparison on the business mix and why we see our portfolio today being so much more resilient.
And then in the past and I'll give you a comparison of 2012 to our 2021 numbers in 2012.
The percent recurring revenue, we had was about 18% in 2021 that it was 34% of our business and that correlates that 1.47 billion of IRR that we exited Q1 with overall software and services were 32% of our revenue in 2012, 55% at the end of 'twenty two.
One.
If we looked at the operating income and 2012, 76% of our operating income came from two of the segments geospatial in resources and utilities and that was 53% in 2021. So the messages as the portfolio has become much more balanced across the end markets that we saw.
Served over the last years much more software centric much more recurring within that so that gives us visibility and predictability into the model looking forward.
If I look at the.
You asked about buildings and.
In infrastructure in particular that is a business that's absolutely transformed.
Over the last 10 years, you know today.
Well gosh.
Cash approaching three quarters of our segment of software today in buildings and infrastructure and that would have been almost entirely.
<unk> if you go back.
To the to the past.
And then when we've looked at a baseline.
Baseline as well over time of how we've how we've performed in times of.
Five recession or are difficult.
Economic environments, we only have a small number of.
Of years, where we've ever actually seen revenue go down in time, we were in that first COVID-19.
Year end 2020, we were down about 4%.
In revenue, we look back to the financial crisis, we look back to nine 911.
We look back to the commodity price collapse Theres just for four years, we can look back to where we ever had.
<unk> decline, so I map that against.
What today is a much stronger and more resilient business model and that's what gives US one of the many things that gives us confidence and conviction to continue to invest in our business.
Let's proceed to the next question from Chad Dillard from Bernstein. Your line is open.
Hi, good morning, guys.
Hey, Jim.
I was hoping we could dig a little bit more into viewpoint and E builder just.
What is the revenue growth been over this last quarter. What are you seeing in terms of.
Order order levels, and how you're thinking about those businesses and in terms of 2022.
Our growth in the mid to upper teens in those businesses. The viewpoint business I know we had a record.
First quarter.
<unk>.
We look at the intersection of Wi Fi actually look at the viewpoint business specifically.
The teeth determined construction one contractor club our viewpoint business is a major component of that offering so.
A good amount of the cross sell.
Sales that we produce are booked in the first quarter were a result of that part of.
The portfolio. So continue to see really good things out of those businesses. We continue to see customers, who are asking us to connect the data flows.
That we have resident in the contractor management system, which is what the viewpoint business provides developer connect that to what's happening in the field to be able to connect that to subcontractor systems, what we see on the builder side of the business and just really serving capital program management for owners.
The construction projects as we increasingly have customers who.
Are also using.
Our city works software for enterprise asset management, and now with our recent acquisition of agile assets.
With that I think about the operational maintenance phase.
Work in the management of that whereas we have customers, who are asking us to integrate the data and the workflow between these packages so.
It really.
From my perspective is confirming that we're on the right path with connect and scale in our industry platform strategy.
Yes.
That's helpful.
And then just moving over to transportation just wanted to get your latest thoughts on your views on the path to normalization.
And maybe you can kind of like break it down to two discussions.
One on the volume side.
Then two on we can control.
Any potential like restructuring the cost base.
And ultimately I guess.
Do you still think this is a core business.
Hey, Chad David I'll say, we did.
Take action this quarter to cut our costs.
<unk>.
Reduced our facility footprint and.
Made a made a.
<unk> in a piece of the transportation team.
As I think about the path forward I do believe we have strong visibility.
To the key metrics, improving particularly late this year and the metrics I focus on our growth and our margins but.
But if you look at the pieces of the business. We've got a model transformation going on in the enterprise software business. We're seeing good receptivity on a recurring revenue model offerings with with customers, we are converting existing customers and winning new logos in that business. So that's a good outlook, it's hard to see it in the revenue line as these.
And as always are but in terms of booking at a or our momentum we feel really good there on the mobility side of the business the real progress we've made.
In the last quarter is proving out a new product, which will be released later this year in the second half.
We've got that in beta test with with a major customer in the outlook is really good that new products will provide more features make us much more competitive with some of the competitors, who who we've lost business to it will also be better from a margin profile perspective.
So the progress, we're making there is allowing us to hang onto more of our existing customers and we believe we've got a really compelling offering for new logos. So we think that'll help us.
<unk>.
In the back half of the year, we also have a maps business and our transportation.
Segment that is very.
It's very strong is growing really well in the United States and in Europe really posting excellent numbers. So I put all that together and I know we're in a show me mode here.
But we think we got a couple more quarters, where we're where we're getting the engine going and then by the fourth quarter, we do believe that.
That will have will be on a path to really demonstrable improvement.
As it relates to your broader question about transportation that our portfolio you know as you think about our mission of transforming the way the world works using digital technology and connected platforms to optimize critical workflows transportation.
It really fits very well into that theme and we think we can make this a very good business.
Thank you.
Yes.
Thank you so much our last question is from meta Marshall from Morgan Stanley . Your line is open.
Hi, Jim This is Eric on for meta Thanks for taking our question maybe if we could just.
Could help us better understand some of the dynamics in Europe , and as we think about the broader Russia, Ukraine impact it sounded like you're not seeing much signs of disruption there, but I'm wondering.
As you.
That region may be as impacted or you're seeing it pick up in other areas to kind of.
Global food needs to be supplied from somewhere so I'm wondering if you're seeing somewhat of a positive offset within the business from that in other regions.
Hi, Eric Good morning, It's Rob Hey, let's just start it at Europe by Europe growth in the quarter was 14% I would've been higher yet because that haircuts for for FX. So in the high teens growth rate. So demonstrable, let's say evidenced that our Europe produced in the quarter and that was.
It's a reasonably broad based across all of our across all of our segments.
Let's talk about Russia, and Belarus, Ukraine, and the dynamic and I'll focus first really on Russia, Belarus. So yes at this point, we don't anticipate the revenue coming back that business is largely.
Agriculture, and geospatial oriented so now let's talk about the agriculture aspect of that business. Yeah. The fact of the matter is that.
The 13% of the world's calorie production is now off of the market.
The fact of the matter is that with the fertilizer that comes out of that region and now I would say the lack of fertilizer coming out of that region, you would expect to see lower yields.
Around of crop around the world that does provide the backdrop for what we see in commodity prices are going to look at corn around ades soy over over 16.
That food is going to be need to be produced somewhere it doesn't happen overnight as we know there's obviously a growing cycle to that and we would look at a market. So I think about Brazil, I think about Canada, I do think about North America and Australia.
And as we have a global footprint, we certainly turned our attention.
Incrementally turn our attention to those markets now in the short term.
The reality is is that we have a lot of backlog.
Our agriculture business and so in the short term and I'll define short term is 2022 we don't see a material change to our revenue because we can direct that backlog.
Square, that's really looking more forward after that and then if I take Ukraine specifically.
And we are doing everything we can to help our dealers in the region, it's really inspiring to see a number of our employees and partners continuing to find a way to actually make some of the business go and so we'll we'll do everything we can to.
To help our customers and partners and the people in that in that region, and let's hope that that.
That crop can come back online before too long.
Got it. Thank you that's really helpful.
And if we could just go back to the supply chain dynamics.
I mean, obviously you did find better component availability towards the end of the quarter I'm curious was that just.
Was that you, having a willingness to kind of buy on the spot market, where available or did you actually see some regular suppliers.
Having better availability of supply I guess, just trying to understand if it's.
More spot or or kind of normal supply related.
Hey, Eric I'll say, it's a.
Very unpredictable everybody in the supply chain is hand to mouth. The numbers, we posted for the first quarter reflect.
In part the fact that on a number of really constrained key components that were the gateway for us delivering.
Full kit to our dealer customers a bunch came in so I think what happened was you know we're holding nothing back they're holding nothing back just some constraints loosened just in the last few weeks of the quarter. So it's very hard to predict.
And frankly, we ended up we ended the quarter stronger than we expected to and that was just driven by the availability of some some key components. We're waiting on it doesn't reflect really any change in our approach or strategy. It's just the way product flowed in.
Okay, great. Thank you so much and congrats on a good quarter in a really tough environment.
Thanks, Eric.
Thank you once again, if you wish to ask a question. Please press star one on your telephone keypad.
There are no further question at this time please continue.
Thank you everyone. We appreciate your time today, and we'll look forward to talking to you next quarter.
That does conclude our conference for today, Thank you for participating.
[music].
Okay.