Q2 2022 Trimble Inc Earnings Call
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Okay.
Good day and welcome to the Trimble incorporated financial results Conference call. Please note today's conference is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star followed by the number one again.
At this time I would like to turn the conference over to your host Rob painter, Chief Executive Officer. Mr. Painter, You May begin your conference.
Welcome everyone before I get started a presentation is available on our website and we ask that you refer to the safe Harbor at the back I will lead the call. Today is David is at home on the backend of a COVID-19, Jim Todd our head of <unk> is in the room with me and the three of Us will handle.
Q&A my.
My commentary on revenue and are our growth today will reflect organic performance, thereby excluding our acquisitions and divestitures and foreign currency movements.
Let's begin on page two with our key messages our team delivered a record second quarter exceeding our own expectations.
My congratulations to our team and our global partners annualized recurring revenue grew 15% and we now stand at 151 billion of a R. R.
Total revenue was up 6% also ahead of expectations Atlas gross margin of 59, 7% a record level for Trimble this flowed through to exceeding our expectations on EPS.
The terminal operating system balance of strategy people and execution, we've been busy the last few months demonstrating progression and proof points on many fronts on strategy, we are seeing solid progress with our.
Trimble construction, one offering which is a bundled offering of our construction software solutions currently targeted towards contractors.
Just to start with this segment of Trimble customers as we have the value proposition and momentum on our side.
From this new baseline, we will expand to other persona is a construction such as architects and designers and owners and we will roll out the offering on a more global basis. We will then extend this approach across our other applicable businesses.
Our indicators are telling us that with Trimble construction, one our win rates are going up our sales cycles are becoming shorter and our average deal size is increasing.
We also see progress in cross selling efforts with more than 20% of our construction software bookings coming from cross sell in the second quarter, which is increasing our share of wallet and penetration into our install base.
From a capital allocation perspective, we divested five businesses in the quarter, where the revenue profile was greater than 90% hardware that was not core to driving connected value and our industry clouds. This included product lines, such as soon goods safety best weighing scales and rotating lasers.
In the quarter, we made the decision to exit the Russian market, and we repurchased $200 million of our shares.
Our priority remains investing back into our business and pursuing acquisitions. Our acquisition pipeline is relatively full at the moment and we have the firepower to act.
On people, we were recently named a top company for leadership and global culture, and a survey by comparable.
We also appointed Ron Vizio to oversee our transportation and logistics business run at a 23 year Trimble veteran and has led the growth and transformation of our survey business over the last few years.
One is an excellent leader and his mandate is to execute our strategy faster.
James Langley will redirect his focus to his biggest area of strength, which is his understanding of the needs of customers and the overall market on.
On execution, we continue to simplify our portfolio through actions such as reducing the number of part numbers and product offerings.
We are building resilience for future products by designing more of our new hardware offerings to have dual sourcing capabilities on key components.
With respect to our digital transformation I am pleased with the cadence of delivery on the process and systems front, which we need in order to increase the velocity and scalability of our terminal construction, one and cross selling efforts. Our current technology stack is deployed in France, and Benelux as a test market.
Her most recent release gives our customers the ability to buy and add multiple products on a single contract and gives our sellers the ability to sell across the breadth of our portfolio from a single go to market team.
This release gives us visibility across the entire customer and prospect base driving a true customer 360 view in one system and providing as accurate metrics and keep your eyes from a single source of truth for.
Here, we will continue to refine and add functionality and extend to other geographies, including North America, which will happen in the first half of next year.
<unk> gears.
I have met with a few dozen customers well more than 1000 Trimble employees and many investors over the last few weeks, including a three week visit throughout Europe .
Our team believes in our connect and scale journey and I am grateful that they are willing to challenge us to execute better and faster.
Our customers are validating our direction. They are asking for help to unlock more digital insights and to integrate data and workflows across multiple products to drive even more value.
They have efficiency and sustainability at the top of their agenda, along with access to qualified labor and inflationary pressures to manage in the near term.
They are also asking us to be easier to do business with us they want to more broadly access our technology.
On the Investor front, the topic has been almost singular that as the macroeconomic environment in recessionary clouds.
Hardly speaking market indicators and demand remains strong on an absolute basis on a relative basis. It seems that our end markets are catching their breath and coming off a bit of a high point inflation is a top concern.
In engineering <unk> construction, we watch signals such as construction backlog the architectural billing index Dodge momentum index as well as signals from our own systems and agriculture, we look at equipment sales commodity prices inventory levels and farm income and transportation, we look towards freight demand capacity utilization freight rates and fuel prices.
These indicators remain net favorable on an absolute basis overall trimble is much more secular than cyclical in nature. After all productivity and efficiency are needed more than ever in challenging markets.
To help investors appreciate the resilience of Trimble, let's turn to page three and let the facts speak to the quality of the Trimble business model.
Over the last 10 years, we have moved our business from 20% to 55% software services and recurring revenue that represents over $2 billion. Today in these differentiated revenue streams that uniquely enable us to connect the physical and digital worlds over that same time period, we have moved from 361 million of <unk> to one.
Five 1 billion of a R. R. A 15% CAGR. We believe this is the most resilient of our revenue streams and it continues to grow at a healthy double digit level.
Finally, we have expanded EBITDA margins from 19, 9% to 25, 6% over this timeframe and we were doing this with an increasingly asset light business model that operates with negative working capital. The overall point here is simple if we enter a recession, we have never been better positioned to navigate.
Her mindset in this environment. Therefore is to continue to execute our strategy. We are playing the long game and we will also be prudent with managing our expenses are head count since the beginning of the year has gone up by approximately 2% organically and we will remain vigilant to allocate our capital and manage our operating expenses in line with our most compelling.
Opportunity sets.
Turning now to the quarter and our numbers on page four I'll start by making the point that normal seasonality and year over year quarterly comparisons are a bit incomplete as the pandemic and supply chain shortages have altered historical patterns as have our recent divestitures and adverse movements in FX.
Second quarter revenue was $941 million up 6% organically revenue in the quarter was aided by strong performance through our supply chain as we were able to reduce hardware backlog and improved lead times across most of our hardware offerings.
Gross margin expanded by 150 basis points to 59, 7% driven by a favorable mix shift towards software offerings, and the net impact of pricing and cost.
The year on year rate of product cost inflation eased modestly in the quarter and came in better than our expectations and supply chain initiatives implemented over the last several quarters have allowed us to reduce our reliance on boat expedited transportation and the expensive broker market for scarce parts.
We are seeing we are seeing meaningful improvement overall and the reliability of our supply chain, but significant issues remain and we don't expect a fully normalized supply chain environment until well into 2023.
We faced a number of critical part shortages that reduced our ability to meet customer demand in the second quarter and those issues will continue to modestly constrained our revenue for the remainder of 2022.
EBITDA in Arbor operating margins for the quarter were 24, 2% and 22, 4% respectively.
Operating costs grew versus year ago levels, driven both by the gradual normalization of travel expenses and by the planned investments, we are making against our strategic growth initiatives.
Net income and EPS were both lower than prior year levels, yet ahead of our expectations.
Over the last 12 months, we have generated $470 million of free cash flow into the first half of 2022, we generated just over 173 million of free cash flow both of which are below our long term goal of generating cash flow in excess of our non-GAAP net income. The main two factors impacting second quarter cash flow are the buildup of inventory driven by supply.
Chain disruptions and tax payments related to the elimination of upfront tax expensing of R&D costs in the U S. We expect we expect both of these items to normalize overtime. Meanwhile, we are operating with negative working capital.
Turning to page five the highlight metric is the 15% growth in <unk>, which reflects strength in bookings high net retention and the continued conversion of our perpetual software offerings.
Hardware revenue grew at a rate of 3% versus a very strong second quarter of a year ago, while perpetual software revenues were down modestly driven in part by our ongoing model conversions.
Geographically North America revenue was up 8% Europe was up 1%.
The loss of business in Russia, and Ukraine reduced Europe revenue growth by five percentage points.
Asia Pacific was up 5% and rest of world was up 22%.
Looking at the highlighted metrics on page six we have covered many of these already I'll comment on our backlog, which stands at $1 6 billion of which approximately $240 million as hardware hardware backlog came down by approximately $110 million in the quarter about half from divestitures and half from improving sub supply chain execution.
Before the Covid induced supply chain disruption, our our hardware backlog was typically around $100 million. So we are still a good distance.
From normal backlog dynamics. We've also returned cash to shareholders through our share repurchase program with 445 million of share repurchases on a trailing 12 month basis.
We ended the quarter with net debt just slightly over one times EBITDA, leaving us with a capital structure, which provides both resilience and ample dry powder to invest against our strategy.
Turning now to segment trends on page seven we had a very strong quarter in buildings <unk> infrastructure with 13% organic revenue growth and over 20% organic or our growth, we had strong bookings and net retention across our software offerings in this sector.
Our civil construction business, which is a meaningful hardware component benefited both from strong demand and improving supply chain execution.
And our Geospatial segment, we came into the quarter with an expectation of lower year on year organic growth due to the comparison with unprecedented strength in the second quarter of last year.
<unk> revenue was down 5%, reflecting both tough comps and some acute component shortages.
A man for our survey offerings remains strong and the combination of growing bookings and supply chain challenges resulted in backlog remaining at an elevated level through the quarter.
Resource and utilities organic revenue grew by 15% in the second quarter, reflecting a significantly improved supply chain situation for most of our agriculture products.
Transportation organic revenue was down 5% on a year over year basis and was below our expectations driven primarily by lower hardware sales to north American customers.
The financial results for transportation and remained below our expectations. There were a number of positive developments in the quarter to position our business for improved trends in 2023 and beyond.
<unk> grew in the quarter at a mid single digit rate representing sequential improvement in the rate of growth or churn of mobility customers was lower in the second quarter than in any quarter. Since late 2018. The performance of our ERP software is now very strong and customer satisfaction has improved significantly.
We have announced our new mobility product to the market.
And are actively engaging with both existing customers and new logos.
I will now turn to our outlook for 'twenty, two 2022 on page eight.
We are raising our guidance on our our growth to 16% for the year is our conviction on the underlying drivers of growth has increased.
For the metrics of total revenue and EPS three factors lead us to project a more cautious outlook for the full year FX supply chain and demand.
This weights approximately one half FX and one half supply chain and demand.
The appreciation of the U S dollar over the last 90 days has obviously been significant.
Fortunately our cost base is quite global and creates a natural hedge leaving us with only a modest residual exposure to foreign exchange on operating margins.
While supply chains are demonstrably better and we hold our previous conviction on gross margin improvement in the second half of the year. It only takes one component to prevent a product from shipping and we are facing some critical component shortages that we believe will impact our geospatial and resources and utilities segments.
On the demand front, we are seeing modestly lower than expected ordering across the transportation and agriculture sectors.
Sentiment has moderated in the face of high input cost inflation.
Incorporating these factors we expect revenue in the range of $3 76 billion to $3 eight 2 billion, which reflects an outlook for the full year organic total revenue growth of 9% to 11%.
Overall revenue growth and organic revenue growth are expected to improve sequentially from the second quarter through the third and fourth quarters, reflecting increased pricing and increased software and recurring growth.
Note that the impact of our divestitures on our revenue will be approximately 5% in both the third and fourth quarters.
Foreign exchange rates remain where they are now we expect a negative impact on revenue of approximately 4% in the third quarter and 3% in the fourth quarter.
Margin and operating margin for the year is expected to be in the fourth quarter.
Our revised full year EPS range is $2 70 to $2 80.
We expect the ratio of free cash flow to non-GAAP net income to come in around 0.7 times for the year impacted by the aforementioned R&D expensing change under the U S tax code and inventory dynamics. It is likely these factors will reverse and we would expect to deliver free cash flow well above non-GAAP net income in 2023.
Collusion the financial story for the second quarter was revenue <unk> and gross margin outperformance for the year. The punch line is seeing through currency movements divestitures and some choppiness in the macro environment to highlight that we are raising our view on our our growth to 16% and guiding organic revenue growth between 9% to 11%.
Sent.
In the second half of the year, we expect to build on our second quarter momentum with sequential improvements in organic growth and gross margin through both the third and fourth quarters strategically.
Strategically speaking the resilience of our business is stronger than ever our markets are inflicting with the adoption of digital technologies. This is our moment to connect and scale and we remain committed to this journey.
Operator, let's open the line to questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please limit your questions to one question and one follow up.
Your first question comes from the line of Jason <unk> with Keybanc.
Great.
Thanks for fitting me in.
So rob the construction in one platform.
Here the strong performance.
I'm curious, though what are you seeing the most traction.
With no current customers potentially looking to upgrade and expand.
With some of the new net wins.
You talked about in your prepared remarks.
Good morning, Jason.
The majority of the growth I would say at the moment is coming from the existing customer base.
And that's actually pretty logical from our perspective, when we've done the work on our.
With within our own portfolio, we think there's enormous opportunity to cross sell and upsell within the customer base. So one of the things that the team has done an excellent job of moving existing customers.
To terminal construction one contract.
Offerings, such that they've got an on ramp to consuming more of the technology.
At a net new logo perspective, the team is winning.
New logos as well.
No.
<unk>.
It's showing some early signs of success, but the bulk the bulk and the majority is from existing customers at the moment.
Okay.
And then I think you mentioned at the beginning.
Logic or the premise that would.
Take this type of bundling suite style approach that some of your other segue.
Segments. Thank.
Thank you.
Yes, exactly Jason so the.
Peter.
Right now we're working in the actually the contractor persona within construction and.
It actually grow even within building construction, specifically, then we will look towards architects and designers as a persona rab of bundled offering with TC one suite targeted to them than a suite targeted to owners Trimble construction. One also apply to our civil business, where we can connect what we're doing in the field with office.
On a singular contract and then in parallel but at some level of play out a little bit more seriously.
Our transportation business and the agriculture business.
Absolutely consistent.
That we have across the business as we pursue this platform strategy.
Yes.
Okay.
Your next question comes from Rob Wertheimer with Melius research.
Hi, Thanks, and good morning.
Kind of a higher level question I mean, there's a lot happening in infrastructure construction may actually get going there is a bunch of kind of mega projects out there that were in the past and I Wonder if you could just kind of assess the strategic landscape for you and your competitors, whether the collection of offerings that you have and are now.
Kelly.
Is evolving as fast as your competition do you anticipate this to be.
Next two or three or four years that are highly dynamic on acquisitions to get a rich portfolio, where they want or.
Is that not necessarily a moment that need cyclical change radically I just really if you could just if that's how you're evolving versus your competitors and the construction landscape. Thank you.
Well good morning, Rob.
Let me give you a perspective, yes, it's more the FTA high at the Mega project level.
And with some of the largest customers because as you know I mean, theres a segmentation by size of customer I met this largest customer level.
I've actually had a chance to meet with a number of them recently and to meet with customers are working on some of these mega projects both in the U S and throughout.
And throughout Europe .
There's no question from my perspective, the customers these big customers on the big projects.
Are looking to bring the multiple technologies they have together at Ferro com.
Data environment, and I think we're uniquely positioned to be able to deliver a common data environment, we take a view that with.
As much as we do in construction engineering and construction and we think we've got the broadest portfolio in the industry. The reality is we don't do everything nor do our competitors or our peers. So our mindset is that of an open system being able to bring in data from disparate sources together.
We are informed by that through our own set of technology that we have that can serve the architects through the engineers through the contractors through the owners and our customers are.
Pudding.
I'd say digitization at the top of their agenda theyre, putting sustainability at the top of their agenda at.
At the moment inflation is I'd say, a major concern as is labor availability for these large customers and these large projects so and now if I put that into context of the second part of your question around M&A and where might the markets go.
Over time.
Well I would expect construction tech has been a rather active field over the last few years and with the money going into infrastructure I would expect to see continued investment into the space I would suspect.
All of us the bigger companies in the industry will probably be reasonably acquisitive. Then I think you have to put that again in context of.
The companies that are out there I think there's a lot of businesses out there that in reality are probably features rather than businesses that are better fit for triple R. R.
Our peers are.
Tremble, there's not a lot of scaled technology companies in this.
This industry, if we look at the combined size of our our buildings and infrastructure and really the relevant parts of our geospatial business I would submit that.
We're one of the largest if not the largest construction technology companies in the world.
Right.
Okay. Thank you and since you touched on of inflation are you seeing any impact on project pacing.
Or delays.
Delays or cancellations from that inflation or is it just sounds like people are evaluating and I guess I'll stop there. Thanks.
I would say we are seeing a few delays.
I'm not so much cancellations, but more delays for the albeit U S centric.
When I say this.
We do see the cost of the raw materials, having gone up significantly. So now there is more money that is starting to it looks like the flow out of the infrastructure Bill at.
At the moment, a good amount of that is getting chewed up through inflation and so we've seen them the money as it's being let.
As a longer delay or a longer lag to put in place construction than we've seen in <unk>.
In the past and we think it's.
Yes, I'd say some of the.
And this uptick ticket Doj department of transportation stepping back a bit and doing some reassessment of more working trying to figure out a work through it now but that inflation.
Into its own context of the value proposition of Trimble, which is better faster safer cheaper greener.
We are getting these project owners have to pay attention to the value of technology. So I am encouraged by that.
Thank you.
Your next question comes from the line of Chad Dillard with Bernstein.
Hi, good morning, guys.
Hey, Chad.
So I wanted to spend a little bit of time on your comments about trimble construction, one and plan to roll it out.
And to your broader construction portfolio.
So how much of that portfolio do you plan to scale within Trimble construction, one and then can you just talk about the roadmap. So I mean, yes.
How many years are you.
Planning to take to get that scale.
Just what sort of investment do you need to make to get there.
Yes, so I'll give you.
I'll say a part of an answer now and then I think this will be a good topic for us to have time to go into more detail at our Investor day.
In early September .
Chad from a terminal construction one perspective, if you asked me if youre asking me what how much of the portfolio of I'll say built in our buildings and infrastructure segment I would see it applying to Michael.
My goal is 100%, okay, maybe in reality it's.
Something a bit less than that but in terms of ambition level I think thats, what you would want to understand is.
That we really see that almost everything in the business could apply.
And this mindset and this approach to how we go to market.
The part that would be a back off of saying, 100% is hey, we have some small customers take some architects for example.
It will only want to buy our sketchup product and they can just buy our sketchup product, we're not going to make them buy everything in order to use in order to use sketchup. So wherever it can apply to customer sets and our goal is to do that both in the building construction side as well as the civil construction. The construction side of the business and then in terms of the role.
Cloud I talked about.
In the prepared remarks, the rollout to different personas and we started with the contractor persona.
And construction.
As we come into let's say the first half of next year, but I would say the end of this year and in the first half of next year, we'll start to see those additional personas rollout and then the thing that goes along in parallel with that work of I'll say the product royalty persona is the underlying digital CIS.
Systems transformation work that work that we're doing and that really is an enabler of these very much linked so when we talked about the increases in investments, we're making into our digital transformation and that run rate has been as over let's say over $20 million incremental a year that is very much associated with driving.
Thermal construction, one and with our recurring revenue.
Businesses across all of Trimble. So we're talking about TC one is the construction of one but we will have this approach in transportation and agriculture to really efficiently and effectively scale to work we need this underlying systems.
Projects to come along and so I talked about that in the prepared remarks that I think we're making nice progress.
On the on the early releases, we've got a second release, but hey, its only in France, and Benelux right now, we'll get to North America in the first half of next year and of course, North America is where we have the largest amount of.
Of revenue so there we expect to really.
My hope and our plan is that we see acceleration in the business.
As we can be more efficient and effective and actually delivering trimble construction. One so hope that gives you a little perspective Chad.
How many years.
I think we're on a we're certainly on a multiyear journey.
In fact, I talked about rolling out to different businesses within several different industries within Trimble right. Now. We're also focused on the direct side of our business.
We also have about half of trimble that transact through partner channels. They are indirect channels and we'll be doing partner enablement on the systems work as well over time.
Okay.
That's helpful and then just.
Second question as we stress test the Trimble model.
For recessionary scenarios can you just talk about the ebb and flow of recurring revenues your software revenues.
That sort of environment and how we should think about that going forward.
Yes, the best data I can give you on that Chad will be on.
Page three of the presentation that went along with the script and so when I look at that.
And we were thinking about the call we thought it would be constructive to look at the percent of software in Trumbull compared to 10 years ago. The amount of recurring revenue our IRR that we have compared to 10 years ago as well as the margin and cash flow expansion over that over that timeframe.
We were a company that had $361 million of IRR 10 years ago, We stand this quarter at 151 billion.
151 billion in <unk> Theres not a lot of companies that have about amount of IRR. That's continued to grow well over a longitudinal basis has grown 15% we grew 15%.
<unk> in the quarter, we took the guide up to 16 for the year.
On the IRR, we believe it's the most resilient of the revenue streams that we have which is quite logical compared to let's say the hardware businesses, which.
Let's say a normal time, because right now we do have a backlog in hardware in normal times look something more like a book and burn.
Business. So there is a cyclical undertone to the secular thesis on the hardware business, but this is a major shift we've had in our business over the last few years.
And when we've also done a stress test looking back you could go back to 2001, we have looked at the financial crisis and the 2008 2009 timeframe, we'd looked at commodity crash in 2014 and 15.
Time frame as well as early Covid and we stress tested it could go back and see how we stress tested on variability and the different end markets as well as revenue streams in and that all informs and other point of view, we put we put forward on that <unk> and the software side of the revenue.
Great. Thank you.
You bet.
Your next question comes from the line of Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Hey, Jerry good morning.
Rob I'm wondering if you could just pick up that discussion. So it's interesting because your guidance essentially has you exiting.
Our organic growth at about 17% entering the year.
14%.
Can you just talk about whats driving the acceleration and do you see that acceleration continuing.
Into early 'twenty, three I know you folks have.
The pipeline.
Mechanism that gives you pretty good visibility on that I'm wondering if you could just touch on what that.
Pipeline looks like as we exit this year.
Yes, the the drivers of the AOR growth are going to be bookings.
And net retention as the two major aspects.
Aspects of the IRR growth.
So youre right Gerry.
Yes by the math, we would see expect to see it tick up.
Let's say in the fourth.
By the fourth quarter and the IRR in the air and the growth excuse me of IRR.
Net retention is running I'd say, well over 100% across the Trimble businesses and then the underlying bookings.
<unk>.
Ben I would say.
Solid to quite good in the first half of the first half of the year. Both the five we look at.
Before pricing and after pricing view on that so I think that's one thing that's probably important to communicate is our growth is not just coming from pricing on a on a I'll say a common unit count.
So we are actually driving penetration.
And to the business really both software and hardware as well when I when I say that okay. So as it relates to coming into 2023, and our view on <unk> growth.
I would be I would hold off on.
Commenting on any specificity for 2023 view on IRR growth, but what I can say is that we would expect.
To your point Jerry in terms of the visibility in the pipeline and the math is we'd see double digit growth next year in that in that <unk> and I think thats the best way I could answer it at this point.
Okay.
And then just two.
Shifting gears.
A little bit here can you just update us on your plans for subscription.
Transitioning from perpetual license.
Folks are moving towards the platforms that you spoke to Rob in the prepared remarks.
Can you just update us on the size of the businesses that you should be looking forward to transitioning to subscription from perpetual license.
Given the platform approach.
Yes. Good question Jerry So when we look at the if we look at a TTM.
Revenue on Trimble at the moment, we've got over $450 million in perpetual licenses at the moment now for within how we break that $4 50 down the majority of that is associated.
West.
The hardware that we sell so if you are buying let's say some of the guidance or some of the GSS receivers are increasing and we sell.
Software unlocks to increase capability.
Within the within the solution.
And then from a I'll call. It a straight up perpetual software Standalone set of revenue that's actually quiet.
Becoming quite small today alright.
And Scott I'd say, it's kudos to our.
Our teams having gone through.
A lot of the transitions most recently in the Tecla structures business has been one of the ones. That's done the conversion over the last 12 months, which is part of what's throttled. Some of the revenue topline revenue. This year, but also had been part of the acceleration of the overall.
From from that team what I'd also want to say areas. When we look at the software.
That is associated with that hardware.
It is our intention.
And I'd say, the near to midterm to move more of that to a recurring basis. Because we do think that we can continue to provide value to our customers through.
Without this firmware the software over the air updates.
What you see in some other industries like automotive for example, so I'd say watch out for that over over time and for us to update.
As we move further along with that and then Hey, we've also talked a little bit about on our hardware businesses, where we want to move more of those towards a subscription offering as we can provide technology assurance to our to our customers.
Super we'll look forward to you folks charging for heated seats.
Thanks for the update.
Yeah.
Okay.
Your next question comes from the line of Kristen Owen with Oppenheimer.
Hi, good morning.
Wanted to actually piggyback on that last question and ask specifically about the recurring rates that United in Geospatial I'm wondering is that coming on top of hardware sales can you can you talk about maybe what attach rates look like.
And then just thinking about what the total addressable market could be for your recurring revenue streams and geospatial just given the breadth of the hardware that you have in place.
Well good morning Kristen.
So good morning.
Geospatial is the most hardware centric of the businesses that we that we have and we started.
Therefore, it has the least amount of software at least amount of recurring revenue on an absolute dollar level.
What the team has done is they have moved more of the some more of the software revenue that is in the business to recurring so I'd say on a percentage basis.
<unk> is growing nicely and geospatial as it's growing off a smaller base and earlier in the transition so theres a little bit of the percentages if I'm only looking at that segment.
As a result of that math that dilutes at the total company level. So it's really the other businesses that are driving the total company.
<unk> dollars forward, but you asked a good question, which is okay. Given the amount of hardware that we have in that business.
Could that look more.
Software centric in the future and have more unlocks and I would say definitively yes.
And one example is we have we call it.
A softer <unk> SaaS product.
Trimble catalyst and it's think of it as positioning as a service that's probably the best way to describe it.
And we're seeing some really interesting levels of adoption.
This positioning as a service in some applications that we wouldnt have expected to see before in some cases, it's in traditional markets like a gis.
Market, where it's taking up we also have seen.
So giving you just a couple of examples I wouldn't say this is across the business but.
And we've got a customer in the state of Florida, where we did a competitive.
Switch and we move that customer entirely too and as a service basis everything hardware and the software everything correct to think of it as like a white glove.
Service.
To that customer so I do think that there's opportunity for the team to do that and actually one of the things that I think is really interesting that the team and very good that the team is doing as we're consolidating the number of I'll say software products. We have so we're going for many and to really just a couple.
And we're taking a mindset of micro services.
Architecture mindset, so capability, such as photogrammetry or image recognition.
<unk> taken a micro service that sold on our terminal business Center.
Software platform within geospatial and so I think that does make for some interesting upsell on recurring revenue opportunities overtime now besides that addressable market I think kristen will be lower than what we have.
In our other markets just by nature.
We still have the underlying fundamental solution.
Yes.
Very helpful.
So then just thinking about what the business model look like and maybe using construction line.
As the first iteration of it.
Are you thinking that the construction line ultimately looks like a typical subscription model or should we be thinking about this as moving toward something thats more consumption base like where you could flex up and down based on on your needs just thinking about the different models that you could approach with that platform. Thank you.
I think yes, that's a terrific question Kristen and the short term it will look more like a typical subscription model, but I will say, we have a couple of the businesses that haven't really are more on a consumption basis today it could be consumption on a seasonal base.
<unk>, let's say on a on a farm cycle basis.
Our tech cost structures business, we have customers, who will buy for the duration of a project.
That is something closer to consumption I think if we were to fast forward.
I don't know pick a number 10 years I think what comes after the typical subscription model does start to look like.
Consumption in the.
On a longitudinal basis and at that point then you have to ask are you really should you be talking about recurring revenue at that point or is it total revenue into the metric shift.
Over over time, so it will have a little bit of that consumption.
But the vast majority of them in the next few years will look like a typical subscription.
Typical subscription model.
Thank you.
Your next question comes from the line of Jonathan Jonathan Ho with William Blair.
Hi, Good morning, I, just wanted to maybe start out with your thoughts around the pricing actions that you're taking is there a way you can provide us with a little bit of color in terms of the absolute levels as well as realization.
Given some of the inflationary pressure in FX pressures that your customers are facing.
Good morning, Jonathan.
So.
50 50.
<unk> is the answer we think its 50% price, 50% I'll say underlying unit volume, we think that weighted.
Ed.
Bit higher on pricing probably in the first half of the year and we will wait a little bit more on the unit volume in the second half of the year. There is some differences in the different businesses AG construction and whatnot.
But theres a bit of a false precision that you can have here in trying to totally quantify.
But that's the best direction I can give you is about about half and half.
Got it and then just in terms of your comments about being much more secular play than cyclical can you talk a little bit about some of these conversations that you had with.
Large customers and their prioritization of Trimble over maybe more of a more traditional cyclical acquisitions.
Yes, I guess what are you hearing from customers when it comes to preserving their budget spend with trimble. Thank you.
Yes, so one of the things we.
Here from customers relative to the business model.
When you have the when you move from Capex to Opex.
Our set of customers that you can reach that you werent previously, reaching so one of the things we've seen.
When we transition the model and then our Sketchup product and I'll say, a shout out to that team or their own 11 quarters in a row of over 45% year over year.
Our growth.
Far exceeding what I thought was possible they've done a terrific job in our telco structures businesses Thats move to subscription we're seeing that we're getting customers that we werent before so it is I would say.
Increasing the size of the addressable.
The market, that's a very attractive thing, okay, so with the largest companies.
We were already working with many of these companies what they look one of the things they like about is the ability to attach.
The cost of the technology to the specific jobs. So the billing out of technology. So there are some customers who are attracted to that.
For that reason.
Some customers like the ability if they can flex licenses up or down depending on because we're moving more and more to named user licenses, if they can flex up or down.
That provides value to our customers and that'll be something that and that is something thats on the top of their mind.
The things in addition, we see is.
When we move to Trimble construction lineup, let's say that let's talk about the frame agreement part of this is in our customers of these big customers and I have met within Europe or looking to have just one set of terms and conditions in one contract one frame agreement for them to be able to buy.
Trimble and we see some customers not all but some customers of the big customers.
Looking to essentially act more like one company and really challenge some of their old paradigms of where technology decisions are made on the individual projects versus trying to drive, let's say more corporate efficiency and effectiveness.
And so as we moved for them as we've made the subscription offering it makes it easier for them to consume a larger amount of Trimble technology. So.
<unk>.
Felt quite validated with the.
Customers on that I've met with over the last two weeks that this is very much the direction they want us to go.
Thank you.
Your next question comes from the line of Tami Zakaria with Jpmorgan.
Hi, good morning, Thanks for taking my question.
I wanted to understand your organic growth guide a little better.
Thank you lowered your guide by about 1%.
Which seems relatively modest Glenn.
Contrasting that to your comment about moderation in several end markets.
So can you help US bridge. The two is is that your backlog is supporting our growth that youre seeing new order growth that is expected to be delivered after this with goldman being more sizable slowdown.
Well good morning all.
Start and David if I leave something out you can jump in on on this.
A couple of dynamics on that inflection.
If I look back two three months ago.
We had come out of the first quarter.
Well quite strong out of the first quarter.
And if I take a market like European agriculture in Europe .
<unk> had done quite well at the beginning of the year that at the same time that we made the decision to exit the Russia business.
Ukraine business is effectively shut down at the moment given given the war between the two that $65 million of revenue. It was my belief that.
Three months ago that the market was so strong that it could absorb that $65 million when I was looking at.
The backlog.
I'd say three months later I was a little too optimistic.
On that and if I look at the AG business for the second what a work session up level to the segment the resources and utilities segment.
We still expect double digit organic growth in the second half of the year.
Really don't want that point to be lost through my commentary. So we're maintaining a view of double digit organic growth.
In agriculture.
And to me the Delta from the commentary of a few months ago as one of the deltas that I see less ability for that Russia business to just get absorbed into the system in which which I should also say the majority of our Russia, Russia and Ukraine business.
<unk> was agriculture strong majority of it now connect to the other part of your question.
On the backlog, we still are running backlog.
I'd say, a good $140 million ahead of where we would typically see backlog. If we're looking back on a longitudinal basis I think we will end the year with a higher level of backlog than we expected.
Three three months ago different by some of the different businesses in <unk> and <unk>.
Simple and that connects to the commentary around supply chain, David did I leave anything else.
No I'll, just sort of what where you set of numbers.
If you look at the midpoint of the revenue guide down $50 million half of that is currency as Rob said the rest is the mix of demand and supply there is actually in a context of an improving supply chain overall there are some new.
Component supply issue that we actually didn't anticipate a quarter ago that will change.
Our resource business and geospatial, so as Rob said that.
That demand has not expired and we're just going to end up for those products with a little more backlog than we expected and then there is some residual demand.
The AG business in Europe has been really tough for all the reasons, Rob mentioned theirs.
Not only high inflation, but things had epic.
Our heat with lack of productivity there are issues with constrained availability of fuel so.
Sentiment in the AG business globally is definitely was a quarter ago and we see it more in Europe .
The demand part of the guide.
<unk> is quite small.
Got it Thats helpful.
How quickly can you remind us your exposure.
The residential market across the four segments and whether youre seeing any slowdown in the resident and market.
Well, Okay transportation, no exposure agriculture resources and utilities excuse me.
<unk> exposure.
In the geospatial and the P&I businesses are kind of up level those to engineering and construction.
Yes, we do have exposure to.
To residential.
Of an existential exposure and what I'd want to say is while residential inflected, let's say negative or worse over the last.
A couple of months on an absolute basis, it's still a very high number and so what we haven't seen any meaningful inflections and down our <unk> business and our business from residential at this point.
We Havent and I gave an example in the civil construction business over the last number of years and we've moved towards putting more and more of the technology on excavators since the largest machine count in the world lowest level of penetration.
That has translated.
Over the last couple of years and two more work being done on the bigger residential developments just don't as one single family House, Okay, Youre not going to I don't think youre going to use.
My guess is youre going to not many people are using the technology yet.
But you take the larger developments and they are starting to use technology for site preparation and the vertical construction side of our business.
I'd say, it's a minor level of exposure that we have a geospatial business you know our survey or most surveyors do multiple types of work so.
I Wouldnt say theres, many that only do one type of work like they only do residential I'm not aware of surveyors.
Who would at least many surveyors, who would only do that an anecdote.
Talking to one of our dealer partners in Florida. He told me that they were seeing residential go down in Florida, but at the same time the entertainment business. The theme Park work was going.
Way up and completely offsetting what they were seeing as a down.
On on residential so the work that does move around we clearly need to pay attention to it both in Europe as well as here in the states and then pay attention regionally as well as we've seen the movements.
On residential work, but our contractors are busy they've got the backlog. They are working through it. So to me it's going to be a question of what happens to the.
Size of the backlog in these different end markets that are served we obviously you know we.
We we think about residential we think more about infrastructure, we think about commercial work, we think about segments such as EPC.
And follow the trends in all of these.
Got it. Thank you for your lines and have a great weekend.
Thank you.
Your next question comes from.
The line of Eric Lapinski with Morgan Stanley .
Hi, Good morning, Thanks for taking my question and congrats on the quarter, maybe if I could ask you a question just on the transportation business, we didn't touch too much on that it looks like the performance for the subscription businesses is definitely improving but you did note reduced hardware sales in North America, I guess I'm, just wondering is that related to any mix within the portfolio.
So just where youre seeing.
Traction with solutions or improvement and then <unk>.
You have talked about selling some of that hardware.
Part of our bundle in the past just wondering if that has any factor too.
Yes, good morning, and good question to clarify here. So the hardware sales. Yes. This is hardware primarily that's associated with a telematics essentially telematics subscription we call. It our mobility business. So you buy an onboard computer that's enabling technology for the <unk>.
Call it the long tail subscription.
And we sell on a per truck basis, we felt we have an OEM business as well as in aftermarket business. We are primarily an aftermarket business.
One of the inflections down we saw in the hardware business was one of our OEM partners, taking less volume in the quarter than we anticipated.
And that's been fluctuating up and down because as we know from both ourselves but in this case, an OEM partner <unk>.
They've got their own supply chain fluctuations independent of Trimble. So that was one inflection on the hardware.
For the quarter and then in the aftermarket.
I would say that was lower than we had anticipated as well we have launched an updated.
Let's say offering I talked about it in the prepared remarks.
And we've got our biggest user conference and.
About a week and a half.
That starts which is our I'd say, our best venue to rollout what we're doing in that business. So I'd say we're.
Maybe a couple of months few months behind where I thought we might be at this point and driving new business, but we are seeing the pipeline pick up around it and then you noted the important point, which to me is the thing I didn't want it to be lost in the commentary is that of IRR and the sequential growth in the in the.
There are.
And it's.
What's a good growth in IRR and sequential growth.
If you look at the growth from the.
From the first quarter and then the growth into the second quarter on the IRR. That's to me is the most attractive revenue stream, what's the most attractive revenue stream, we have in trimble at the most attractive stream therefore within transportation.
And that's where we've got to keep our eye on is continuing to drive.
That <unk> forward and in the business our eyes are very much on that both at the discrete product selling level in this case, let's say a telematics subscription but also.
Warm of that Trimble construction one for.
For our transportation customers for them to be able to buy multi.
Multiple.
Solutions, so even in absence of having a frame around it that Mike is I would say is well positioned as trimble construction. One is at the moment it is not.
Like you have to wait to go and sell quote unquote, the house and transportation and so.
We've got customers today, we'll buy.
Our enterprise ERP solutions, plus our mobility solutions plus video plus our final mile solutions, plus our mapping solutions plus our maintenance solutions. So we have customers who are buying all of that today from us.
Like our other businesses, we think that there is an attractive.
The opportunity to upsell and cross sell within the base will talk a little bit more about it at Investor day, but you know more than 90% of the top 200 trucking companies in North America are trimble customers.
Today turmoil transportation customers.
The majority of those.
After the very very strong majority of us are not buying everything they could be buying from us. So we need to continue to work at the go to market and product level to get the I'll say deliver the most customer value. So that we can.
Increase the level of penetration into that market segment.
Yeah.
Got it. Thank you that's very clear.
There are no further questions at this time I'll turn the call over to the speakers for any closing remarks.
Thank you all thank you for attending the call. We look forward to talking to you next quarter.
Trimble will be having an investor day on September 7th and hope you can make it. This concludes today's conference you may disconnect at this time.
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