Q4 2022 Trimble Inc Earnings Call
Speaker 1: growing through COVID and business model transitions.
Speaker 2: Total revenue in the quarter was 857 million, flat with last year, and towards the lower end of our guidance range. The delta between the ARR and the total revenue performance reflects a slowdown in hardware sales through our dealer partners, as dealers continue to sell through their inventory while processing mixed macroeconomic sentiment. For perspective, over the last three years, the sum of our civil, agriculture, and survey hardware and related software has grown at a 12% compound annual growth.
Speaker 3: which compares to 57.7% gross margin in 2019.
Speaker 4: EBITDA margin of 24.3% met our expectations in the quarter and ended at 25% for the year, up 210 basis points as compared to 22.9% in 2019.
Speaker 5: Finally, earning a share of $0.60 was exactly at the midpoint of our guidance for the quarter.
Speaker 6: Moving to slide three, let's look at the progression of our connect and scale strategy through the lens of our reporting segments, beginning with buildings and infrastructure.
Speaker 7: The big event for the team was our Trimble Dimensions User Conference in November where we had over 5,700 attendees from the global engineering and construction industry which provided a great forum to reconnect with their customers and partners.
Speaker 8: We launched many new innovations, including the Trimble Construction Cloud, powered by Microsoft Azure, which is an industry cloud built to streamline construction projects by connecting users, data, and workflow.
Speaker 9: We also announced extensions of our machine control technology platform to new OEMs and new machine types further expanding our reach to connect the physical and digital worlds.
Speaker 10: The highlight financial achievement in the quarter was delivering over 20% organic growth in ARR, in addition to record levels of ACV software bookings and record levels of cross-sell bookings.
Speaker 11: We also had a strong start for a newly acquired bid to win business where we've had some early cross-sell wins.
Speaker 12: As we previously discussed, we continue to allocate incremental capital towards our own digital transformation, as well as our go-to-market efforts, which are generating strong interest from our customers and partners, and demonstrating encouraging signs of internal productivity and efficiency.
Speaker 13: The work we are doing in this business will be highly leveraged across the entirety of the company.
Speaker 14: In geospatial, revenue is down further than expected as dealers moderated their inventory levels in the face of softening demand and macro uncertainty.
Speaker 15: Looking at the indicators, we see softness and residential, and while a portion of the expansion of infrastructure is getting consumed by inflation, underlying optimism remains in the market.
Speaker 16: For perspective, I look at the three-year kegger that I talked about on slide two in order to calibrate the long baseline performance.
Speaker 17: Strategically speaking, in 2022, we continue to launch new innovations in GNSS, 3D laser scanning, and handheld data collectors.
Speaker 18: And we achieved a double-digit increase in ARR as our business model strategy takes hold.
Speaker 19: In transportation, we delivered revenue and ARR growth in line with expectations.
Speaker 20: in addition to delivering the fourth quarter in a row of operating margin expansion.
Speaker 21: Connect and scale progression also came in the form of continued development of connected workflows, such as connected maintenance, connected locations, and engaged lane.
Speaker 22: The big story of course in the fourth quarter was the announcement of the Transporian acquisition. To refresh memories, Transporian operates a leading cloud-based transportation management platform powering a global network of 145,000 carriers and 1,400 shippers.
Speaker 23: The platform integrates with more than 3,000 systems and powered more than 25 million transactions in 2022. For me, this is the very definition of a Connect and Scale business.
Speaker 24: I had a chance to spend a few days in Europe with the staff on Seabird and the Transporean team in January , and my level of conviction of strategic and cultural fit has only increased.
Speaker 25: We are still working through regulatory approvals and we expect to close the deal in the first half of this year. We are excited to get to work together.
Speaker 26: In resources and utilities, revenue and air are growth were led by our positioning services, utilities, and forestry businesses.
Speaker 27: Our definition of utilities covers our work with electrical and water utilities, but our positioning services business can also be thought of as a utility. In this case, precision GPS is a utility.
Speaker 28: In October we announced that we crossed a hurdle of 34 million hands-free miles driven with General Motors in their supercruise program.
Speaker 29: Precise GPS technology enables a vehicle to maintain its lane position in various environments, and we are working on several other Tier 1 and OEM program opportunities.
Speaker 30: Moving to agriculture, revenue was flat year-over-year, and up to an excluding Russia and Ukraine.
Speaker 31: The three-year double-digit kegger growth on slide two is instructive for calibrating the long baseline growth of the agriculture business.
Speaker 32: With the product lens on Connect and Scale, we are now bundling our Guided's hardware, software, and our positioning services, providing both easier access to the technology and a better value proposition for our customers.
With a go-to-market lens on Connected Scale, users and customers are at the center of our strategy.
In pursuit of this strategy, we announced this week that we are taking a different approach to our go-to-market relationship with C&H Industrial.
Moving forward, our distribution to aftermarket customers after a 12 month transition period will be done entirely through independent dealer partners with the product bearing the Trumble brand.
Less than 20% of our revenue in the resources and utility segment goes through C&H to their dealer network today.
We expect to maintain this revenue and address aftermarket demand and the needs of farmers through our direct relationships with our independent dealer network.
This evolved approach to distribution will also enhance our ability to offer OEM brand agnostic solutions to customers to help them orchestrate their field operations with mixed fleets of equipment.
Our new approach to aftermarket distribution will improve our ability to sell our full range of technology solutions to aftermarket customers, including guidance, selective spraying, variable rate application, water management, and our connected farm works center software solution.
Our evolving strategy will also enhance our ability to cooperate with OEMs across the industry for their needs for factory fit equipment.
Let me now turn the call over to David to take us to the numbers.
Thank you, Rob. Starting on slide four, I'd like to begin my financial commentary this quarter by discussing organic growth trends across the components of our business.
As Rob mentioned earlier, a recurring revenue business grew strongly year on year in the fourth quarter with ARR up 16%.
The strength of our recurring revenue offerings in a weakening and uncertain macroeconomic environment validates our focus on the continued evolution of our business model.
While our recurring revenue streams were strong in the fourth quarter, revenues of hardware and related software were down.
Organic hardware revenue was down 13% versus prior year and came in below our expectations.
The factors driving the slowdown in our hardware business in the fourth quarter were consistent with what we described in our third quarter call.
During the fourth quarter our dealers continue to reduce their inventory levels.
reflecting both our improving supply chain execution and uncertainty in the future economic outlook.
The drop in demand was most pronounced in our geospatial segment, as our surveying end customers ordered less than they did earlier in 2022.
Hardware backlog reduced sequentially during the quarter as expected.
From a geographic perspective, revenues were up modestly on an organic basis in both North America and the rest of the world with strong trends in Latin America.
But we're down in Europe and in Asia Pacific.
Year on year Europe trends were meaningfully impacted by the loss of business in Russia and Ukraine.
and we're up 1% organically excluding that impact.
With that as a backdrop, I'd like to turn now to our total financial performance for the fourth quarter and full year 2022.
Starting on slide 5, fourth quarter revenues of $857 million were flat on an organic basis.
and down 8% when including the impact of foreign currency and acquisitions and the visitors s so
Gross margin was up 400 basis points.
reflecting both the accelerating mix shift toward software and the positive net impact of our price increases and moderating cost inflation.
EBITDA margin was up to 20 basis points and operating margin was down 20 basis points.
As increases in our gross margin, largely offset higher spending against our Connect and Scale strategy, especially our digital transformation.
and higher spending on travel and trade shows.
diluted earnings per share were 60 cents.
Looking at cash flow, both cash flow from operations and free cash flow were as expected down year on year.
with the single biggest factor being the the amortization of R&D for tax purposes.
We did not repurchase any shares during the quarter and do not plan to restart our repurchases until we are well on the way to delevering following the issuance of debt to fund the Transporian acquisition.
Turning to slide 6 and results for the full year 2022, we achieve success across a number of critical dimensions.
Organic revenue grew by 7%.
Gross margin improved by 170 basis points, reflecting the positive impact of our ongoing mix shift.
Even though margin was 25%, even as we restored spending across a number of areas that had been constrained during the COVID pandemic, and as we accelerated investments against our strategy.
Cash flow is down year on year, principally as a result of an increase in our inventories and a change in US tax legislation, both of which we expect to normalize over time.
As we move to complete the transporion acquisition, we take this on with a strong balance sheet.
Working capital remains negative.
Our year-end net debt to EBITDA ratio stood at 1.4 times and the ratings agencies maintained our bond ratings and stable outlooks following the announcement of the transaction.
Turning now to our quarterly and annual results by segment on page 7.
Speaking to the fourth quarter, buildings and infrastructure achieved or GAC ARR growth of over 20% and recurring bookings growth in the high teams.
Sales of civil construction hardware were down year on year by just over 10% leading to organic revenue growth for the segment of 2%.
Dealers continue to reduce their inventory levels and end-market demand moderated.
Segment margins of 25% were down year on year, impacted by lower civil construction revenue, our Dimensions User Conference, subscription transition, and Connect and Scale investments.
Revenues in the hardware-centric geospatial segment were down 12% year-on-year on an organic basis.
driven principally by declining dealer inventory levels and softer end market demand across the surveying sector.
Segment revenues were also pressured by lower shipments to US federal customers.
which vary meaningfully from quarter to quarter and can be difficult to predict.
Segment margins remained over 25% despite these headbands.
Revenues in our resources and utilities segment were up 6 percent organically driven by growth from CityWorks and positioning services sold to agriculture customers.
Our agriculture revenue was impacted by the loss of business in Russia and Ukraine.
with an estimated year-on-year impact of minus 5% to the segment in the fourth quarter.
Segment margins improved in the quarter sequentially and versus prior year, coming in just under 36%.
Our fourth quarter results in the transportation segment reflect improvement across a number of dimensions.
Organic revenue grew 5% driven by higher year-on-year sales of enterprise and maps software solutions.
Air R for the segment grew at a mid-single digit rate in the quarter.
Revenue trends in our mobility offerings improve sequentially from prior quarters, driven in part by higher sales to our largest OEM customer.
Operating margins of 14.5% were the highest since 2019 and reflect strong performance by our team in managing costs.
Let's turn next to our guidance for 2023 on slide 8.
The projections I will share with you today exclude the impact of our pending acquisition of Transporium.
Starting with ARR, we expect organic ARR growth at a mid-teens level in 2023.
Our strong outlook for ARR growth is grounded in the solid bookings momentum we achieved in 2022.
The potential for accelerated cross-cell is our digital transformation rolls out to a growing portion of our business and the essential role that our software plays in our customers' operations.
The outlook for revenue excluding future acquisitions and divestitures is 3.7 to 3.8 billion, reflecting an expectation of organic growth in the range of 2% to 5%.
As a reminder, the vestitures of businesses in 2022 will impact total reported revenue growth trends with the biggest impact in the first half of the year.
Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters.
and software and market demand in an environment of limited GDP growth.
We expect revenue from hardware and related software will be down in the low single digits organically for the year, offset by strong recurring revenue growth.
From a margin perspective, we expect that gross margins will improve by over 200 basis points.
as our business mix continues to shift in the direction of higher margin software.
We expect a modest increase in operating margins as we invest against our strategy in an environment where organic revenue growth is harder to come by.
I'll note here that our leadership teams have been working hard over the last several months to adapt our spending plans to the current economic climate.
Allocating capital against our strategic priorities is always a major focus for us.
and the need for sharp focus is never higher than in the time of week economic growth.
We are confident that we can continue to progress our strategy within the constraints of our operating plan.
Income from equity investments is expected to be relatively flat with 2022, and that interest expense is forecast at approximately 70 million.
Netting this out, we project to achieve earnings per share in the range of $2.66 to $2.86.
We expect that cash flow will grow significantly in 2023, driven in part by reductions in inventory levels.
We expect free cash flow for the year of approximately one times non-gap net income.
Our cash flow forecast for this year now assumes that amortization of our ND costs under Section 174 of the US tax code will not be repealed within a time frame that will allow us to recover the accelerated tax payments that we made in 2022.
While we believe that there is bipartisan support for this change,
We are less confident than we were a quarter ago that this legislation will pass soon enough to help us this year.
By way of reminder, this issue impacts the timing of tax payments and has an immaterial impact on our tax rate.
The Section 174 is repealed within the next several months, a free cash flow would benefit by approximately 150 million.
Note that our cash flow guidance excludes the impact of transactional costs relating to the pending transporium acquisition.
While we are not offering quarterly guidance, a few factors are likely to impact the sequential evolution of our financial results as the year progresses.
We expect organic revenue to be down in the first quarter and flat in the first half of the year, reflecting the strong growth and hardware and related offerings that we saw in the first half of 2022.
We expect organic revenue to be up in the mid to high single digits in the second half of the year.
Influenced by these revenue growth patterns, we've spec'd operating in EBITDA margins to be relatively flat in the first half of the year and up in the second half.
While we expect mid-teens organic ARR growth for the year, growth in the first half is likely to be slightly lower driven by planned churn from a small number of customers.
We expect ARR growth to improve sequentially through the year.
From a segment perspective, we expect organic revenue growth for the year in buildings and infrastructure, resources and utilities, and transportation segments with the strongest growth in buildings and infrastructure.
Revenues in the Geospatial Sagnet are expected to decline for the year with the highest levels of organic decline in the first quarter, as we lap strong numbers from the first quarter of 2022.
Geospatial trends through 2023 will continue to be impacted by reductions in dealer inventory levels and ongoing softness in demand in a number of the segments in markets.
Respect margins to be stable in building the infrastructure and resources and utilities.
we project growth and transportation margins, while geospatial margins will be down modestly for the year.
geospatial margins will be down modestly for the year. Back to you Rob.
Let me thank our colleagues, customers, and partners for their support and their work in our strategic and financial progression.
I'm proud to say that we continue to win culture and innovation awards, and proud to announce that we received approval of our emissions reduction targets by the Science-Based Targets initiative.
Our objective is a 50% reduction in scope one, two, and three emissions by 2030.
In addition, we released our first task force on climate-related financial disclosures report.
In 2022, our highlight financial metrics were ARR growth and gross margin expansion.
Our 2022 ACV bookings gives us confidence that we can continue to grow ARR at a double-digit rate in 2023.
Hardware demand remains the hardest revenue stream to predict.
While the signals are mixed, and even a bit confusing in the short term, the long-term secular attractiveness remains.
Our ability to uniquely connect the physical and digital worlds provides a guiding light for our business and remains the foundation of our right to win in our served markets.
We have surgically reduced our expense structure and moderated spending across the company to ensure discipline and focus in an uncertain environment.
What remains certain is our conviction to grow our business by focusing on our customers and continuing to execute our Connect and Scale strategy.
Operator, let's now open the line for questions.
Thank you. 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.
We'll go first to Jonathan Ho at William Blair.
Hi, good morning. I just wanted to maybe start out with the CNH aftermarket deal. Can you maybe give us a little bit more color on why it makes sense to do this now and what this could potentially do for the resources and utilities segment, particularly as you engage more with the independent dealers?
Good morning, Jonathan. It's Rob. So let me give you a break it down in three respects context.
strategy in next steps. For context, let's talk about connecting scale and our strategy means to connect users data and workflow and the users are at the center of our universe.
And in that, we believe we need to be closer to the customers, that user, that farmer. So when we talk to the customers, and we work with, by the way, over 100 OEMs today, and obviously the farmers.
themselves. What they're asking us to do is to help them manage a mixed fleet. And I've personally visited farmers in the last six months in Mexico, Chile, Brazil, Japan, Australia, Germany, and here in the US.
So the strategy is we go to market straights. We sell through multiple avenues today to reach our customers. We sell, we have a direct sales, particularly the enterprise farms. We sell through OEMs. We work with over 100 OEMs. And then we sell through a channel. And the channel breaks down into a triple channel that we already have today to reach the
from the two B state will be going from Trumbull straight to independent dealers. And those independent dealers will be capable of selling the full line.
of Trimble KET, which is more than guidance because we also do variable rate, we do selective spraying, we do water management, and we do software.
So, as we look forward to this, as we work through the transition, we need to sign up the dealers to be independent dealers directly with Trimble. We think it can expand the available set of products and capabilities they have to take to market.
We think that will help us be incrementally closer to the end users of the technology and in a context of customer success, which is part of our strategy. We think we can help customers and those users become more successful with the technology because when we're out there in the field,
talking to them, they are asking for help to integrate and manage a mixed fleet of technology as well as mixed fleet of equipment.
Got it. And then just as a follow-up, I think you've also referenced some additional investments that you'd like to make for that Connected Scales in the 2023 timeframe. Can you help us understand where those investments are going to go and again, maybe why that makes sense.
to make those investments now given the macro environment. Thank you.
Sure. So we've been investing in this strategy incrementally really for the last couple of years.
And demonstrable evidence of where we see the attractiveness of it and I'd say momentum for it is in the growth of the ARR. So the work we're doing up front really is touching more of our software businesses first, and particularly the recurring revenue businesses that we have.
So a post of 16% organic growth on ARR, the 1.6 billion, this is supporting growth, continued growth in that. And I think from a shareholder value perspective, this would be the most valuable revenue stream that we have at the company. The investments, they pick up systems, they pick up people, they pick up products.
is about net retention. That's the metric you look at for customer success. And the economics of net retention are very powerful. So I'm of a mind, we're of a mind that we continue down this path and if anything we continue down this path with more.
more conviction. And behind all of this is a strong balance sheet 24.3% EBITDA in the quarter. So we believe this is emphatically the right thing to do at this moment.
And behind all of this is a strong balance sheet, twenty four point three percent EBITDA in the quarter. So we believe this is emphatically the right thing to do at this moment. Thank you.
Thanks, Jonathan. We'll go next to Robert Hymer at Melius Research.
Hey, good morning everybody. It seems like there's a lot of structural progress in the quarter on margins on, which is, I guess, continuing and the surprise, I guess, for us was just a bigger D stock in the hardware than we would have thought. And so I had a couple of questions around that. One is, were you able to see those elevated levels of inventory previously at dealers and, you know, but in
is more fragmented than the big ones. I'm just trying to look for context around why that decline happened and is continuing and how big it is. Hey Rob, it's David Barnes. First point I'll make is that the supply chain, the constraints and then the removed constraints has...
has really moved trends around in our shipments and our dealer inventory that were hard to predict and in some cases challenging to understand. So just by way of reminder, we had unsustainably and undesirably high hardware backlog early in 2022. Our supply chain.
even today, isn't fully freed up, but to the extent that it freed up, it happened very dramatically at the end of second quarter. So we shipped a lot of product. You'll recall that the hardware revenue was way up at that time frame. So dealer inventories did grew and
I'll say it took us a while to figure out how quickly the dealers were able to find customers for it and deploy that inventory. That happened exactly while some of the end markets that our dealers serve slow, particularly the geospatial side. There's probably the highest within trimble level of exposure direct and indirect.
to residential home construction, which slowed. There's some anxiety about the general economic outlook. So these two things happened altogether, freeing up our supply chain, very big backlog, lots of shipments. And that created the de-stocking that we talked about a quarter ago, and it has picked up. We're not through it yet.
We think we have a pretty good sense of where our dealers want to be and where they will be over the sustained period of time. It's my guess that we'll have two more quarters, i.e. Q1 and Q2, of meaningful inventory reductions in our dealers and anything after that will be smaller, but the guidance we've given reflects that expectation.
Any guess on if those two quarters happen or would dealers be lower than normal at that point? That maybe don't have perfect visibility into the channel. I understand.
Yeah, well, um.
What I'll say is that we still do have isolated cases of supply challenges in our ag policy, which is one of them.
But I think at that point they'll be so that there may be some reasons for dealers to have a little more inventory than they would have had pre-COVID, not much though. The supply is really good. Hey Rob, the thing I remind you on is we look at this noise of one quarter to the other big increases in the first half of 22.
that's the bigger factor really than any fundamental change in demand.
That's perfect. Thank you.
We'll take our next question from Chad Dillard at Bernstein.
All right, good morning, guys.
Okay.
I just wanted to go back to the C&H agreement. I'm just thinking better understand the medium term organic growth potential or maybe you can talk about what needs to be done to set up the independence channel and when you expect that to be in place and just how much of your product portfolio.
you'll be able to sell within that channel versus how much you're able to sell with CNH.
Hey Chad, so this is Rob. I'll start with the quantitative framework. I had a chart on the second slide that showed over the...
Over the last 3 years, the cadre of the hardware businesses has been 12%. Those 3 businesses are survey civil construction and ag has been above that 12%. Growth over over the last 3 years and ag grew this year.
Ag, and it grew even more if you exclude Russia and Ukraine, which was we were selling quite a bit of kit and to into Russia. And so we'll start to lap that.
later this year, mid this year.
So, call that context in terms of the growth that we've had. And I'll give you some more context when we look at units. We look at pricing, we look at share of wallet, we look at market share. And we think we're holding our own on a global basis and probably growing and growing.
and Europe holding our own, and North America growing in Brazil. So, if we now turn to the C&H part of your question.
This is only for that we're talking about the aftermarket business.
that we have with CNH. And that business that we sell through CNH into the aftermarket today is primarily guidance. So an opportunity we have as we move to independent dealers. And remember we have independent dealers today. They're Trimble, full line Trimble dealers today in agriculture.
As we move the business that goes through C&H, that gives us an opportunity to expand the product portfolio to a set of independent dealers. Those independent dealers could very well be dealers we already work with today. It just will happen with a direct relationship with us at Trimble.
or it may be a fully new dealer. We have a 12 month transition with CNH on this part of the arrangement, and it's a very positive conversation I want to say that we've been having with the CNH team. So, optimistic here, it's the right thing to do. It's what our customers.
are asking for and it's time to get to work to set it up.
That's helpful. And then just my second question, I was hoping you give an update on the digital transformation. You know, what percentage are you done, magazine 23? Can you talk about some of the focus areas for this coming year? And if you quantify just like the incremental cost to execute, you're expecting for 23.
So from I'll start with the second part, the incremental cost is about 100 bits to the bottom line consistent with what we've had this year as well. So that's the cost side of the equation.
on the focus side of the equation. You know, the digital transformation, there's a meta theme. It's more than a system.
transformation for us. So, you know, I think about people, I think about process, I think about systems, and the systems themselves, and then we think about the go-to-market aspects of the digital transformation. And it's primarily focused right now on supporting our software businesses, particularly the software businesses within buildings.
leading indicator for the growth of the ARR. We look at net retention as a key metric as well with inside that go to market. We look at the organization of the sales team itself and the go to market. So in France Benelux, we put the construction sales team together.
software team as one organization. We've mostly done that in North America.
as well. And so it's getting the sales team aligned to sell a consolidated offering of Trimble Construction 1. And then with Trimble Construction 1, it started out as a general targeted to general contractors. And then we will be releasing more persona based bundles. Remember, we sell to owners in the public sector, we sell to architects.
engineers. So we have targeted
portfolios to sell to those personas with a go-to-market team, a sales team, that comes more and more together as one organization to be enabled and equipped to sell everything that we do. On the system side, in the second quarter, we'll have a next, I'll say, big release of the systems.
The systems are meant to increase the efficiency and effectiveness of our own sellers. And it moves this closer and closer to having commerce capabilities, e-commerce capabilities from an external, with an external lens. On the people side, we continue to invest in customer success, and on the process side, we continue to invest in developing the playbooks.
for how we go to market, starting with that software business, but then the next wave after that goes into software and other parts of Trimble and then into the hardware that we sell through our dealer channels. And I was asked, we got asked a question earlier in the call about visibility into dealers and their...
We'll go next to Kristen Olin at Oppenheimer.
Great, thank you for the question. So I wanted to ask about the eBuilder viewpoints, SketchUp, contingency. This business is obviously doing quite well and a pretty stark contrast to some of the more conservative macro view that you've expressed. And even just on an ARR growth basis, really strong compared to some of the...
that the Transporian acquisition closes.
Sure. Good morning, Kristen. This is Rob. I'll answer the question. So you're correct. That contingent of businesses is doing very well and it's even more than any builder viewpoints. Getcha up with some of our tech-less structures offering our mechanical electrical plumbing.
software as well, or project management software, really the whole contingent is performing. I'll say one thing that is nice on the software side and the recurring revenue is certainly you get a higher degree of predictability. There is not a wholesale in between the retail and so you get a clear view of the demand.
which is why, by the way, on the hardware side, we're looking back at the three-year trend on the kegger so that we can see the signal through the noise. In terms of what's working with it, I would say it's the value proposition meets the digitization of the market. So call it the secular.
in Colorado and digitization and data and sustainability are at the top very top of the agenda of those customers and they know they need to adopt technology in order to further their strategies. Most of these many most of these companies have solid backlog and they need technology to help them get the work.
done. From a value proposition perspective, we're hearing strong resonance with the, I'd say both the integrated and connected offerings and triple construction one, it certainly seems to have resonance with the customers that we're talking to, even in its early form that it is.
that we see that. And as evidence of that, we had a record level of cross-cell ACV bookings and building infrastructure in the fourth quarter. So that tells me that there's not just marketing resonance. It actually has resonance in terms of turning into business. So the value proposition. This is something I'm not paying attention to. And as you know, we are hurting again absolutely,
It's around a connected offering. So customers increasingly are looking to move from optimizing tasks to optimizing the system. And to do that, they need to have more connected data and more connected workflows. We're hearing customers say they, because this is where they want to go, they want to buy it from one.
company as opposed to having to stitch together multiple, say, multiple vendors on their own. They like the ease of dealing with the one company or even the one overall account representative. So there's an aspect of ease to doing business with us meets a level of connectivity with
how you see maybe some of that value proposition or combining the offerings, how you see that bleeding into the transportation business once that acquisition has closed.
Yeah, sorry, I forgot about that. Great, thanks for the question. So on Transporian, I'd say the great news of Transporian is they already have that through the 140,000 carriers, the 1400 shippers in the network, 3000 integrations with ERP and warehouse management systems and already...
a dedicated sales force. There's a land and expand play within that. There's strong net retention. There's strong gross retention in the business. So actually I see as much that we can take from Transporian to Trimble as much as we I think that we could take aspects of Trimble into
the Transporiant business. So it's one of the many reasons I'm excited by that is because I think it will be DNA additive to us as we're, and I know you know this, as we're e-builder and viewpoint acquisitions were additive to us at Trimble to take the best of and take it to other model transitions.
that we've done and I see the same thing in store with Transporium.
that we've done and I see the same thing in store with Transporium. That's super helpful. I'll leave it there. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star one. We'd also like to ask you to limit yourself to one question and one follow-up to allow everyone an opportunity to ask a question. Thank you.
We'll move to our next question from Tammy Zacharia at JP Morgan.
Hi, good morning. Thanks so much. I hope everyone is doing well. So my first question is the Gross Margin Great Expansion, 200 to 250 basis points. How much of that is price cost tailwind and how much of that is software versus hardware mixed change and are there any other factors?
a lower rate so that's not really the margin driver. What's driving our margins up is we're
We're becoming more and more of a software business and those have higher gross margins.
God, if prices keep coming down, input prices, could that be a source of upside to your gross margin rate?
You know, there's a number of puts and takes in our hardware gross margin. We've already seen a benefit, so in the third and fourth quarter of 2022, we got to the point where for our hardware businesses, our price realization more than offset our costs.
improvements. So that's sort of baked into the run rate now. We are continuing to take pricing at a moderate level in our hardware businesses.
So that ought to help our margins just a little bit on the hardware side, but the by far bigger story is the next shift.
Got it. So one quick one, I wanted to go back to the destocking comment. Can you talk about what sales end users look like in the fourth quarter against the dealer destocking? sales end users overall moderate in fourth quarter versus the third quarter?
Yes, so let me frame it up this way.
If we look at our dealer D stocking, I would say it had a negative approximately 400 basis point impact on our organic revenue trend, so we reported flat. We would have been roughly up 4% without the dealer D stocking.
So if you look specifically at hardware, our hardware revenues organically were down 13.
So I think you can infer, Tammy, that there was some end market softness, particularly on the geospatial surveying market in Q4, which partly we think is temporal. We had a lot of new products last year, and as in many businesses, when you have new products, you get a...
spike in orders and we had a clean supply chain to deliver those through. So we've got a bit of a pullback for that reason. You know, fundamentally, I would say the secular end market sales to retail trends feel up, maybe not up as much as they were earlier in 22.
But the general direction is up. There's some soft areas, including anything tied directly to residential construction that is clearly contracted. But on the balance with what's happening in infrastructure, we think the secular direction of demand is up. But with the dealer destocking and the customer ordering patterns earlier in 22, we're seeing a pullback for those reasons.
Got it. Very helpful. Thank you.
Weíll go next to Jason Salino at KeyBank Capital Markets.
Hey guys, good morning. Just a couple quick ones. I think you mentioned churn in the first half impacting the ARR growth. What type of customers or what segment are you seeing these come from? Yeah, offshore sings. Yeah.
Yeah, hey Jason, it's David. We do expect churn from a handful of customers, principally in our transportation segment. These are customers that made a division to come off our platforms many quarters ago and they're just now implementing them. So I see that as noise not signal.
our customer satisfaction and retention in transportation is on a secular positive trend. We just expect to see a number of these probably in the first quarter pull off. So that will reduce our ARR growth rate a little bit lower in Q1 from what we expect to see for the full year.
And then, maybe if I were to really simplify it, your construction software portfolio seems to be executing quite well.
completely different drivers and the hardware detoxing elements. So are you seeing any macro impact on this construction software portfolio? Thanks.
So, right answer is no, not seeing an impact on the software portfolio.
Excellent. Thanks.
Thanks.
Our next question comes from Jerry Rovich, a Goldman Sachs.
Yes, hi, good morning everyone. Rob, I'm wondering if you just talk about the progress on Trimble Construction 1, what proportion of new orders does it account for now? And when we last caught up you were seeing triple the ASP versus base orders before. I'm wondering if that trend has continued.
Hey Jerry, good morning. So on TC1, the Trimble Construction 1, the best evidence I can give you on the progress is that it comes in the form of the record level of cross-sell and up-sell that we had in the corridor from an ACV Bookings perspective.
And the reality is, is not all of that, is the term bowl construction one branded portfolio. So there's sub aspects where we can just sell across the portfolio, which I'd say is a subset really of TC1.
That cross sell is a percent of the total ACV bookings and buildings infrastructure software was nearly 30%. So, for us, that was record dollars, record percentage level. And when we go through the business reviews, we look at.
almost every account to look at what they're buying and why they're buying it and looking at the competitive win ratios. What we're seeing is when we're selling the bundled offerings, whether it's less than the full TC-1 offering or it's...
TC1 is we're seeing the sales cycles reduce. We're seeing the size of the bookings go up. We're seeing the win ratios go up as well. And so an aggregate looks to be a winning formula and I would add to that Jerry that it's still relatively early.
in the game for us and so with the sales kickoff meetings that we've been having in the last weeks, it is really a big emphasis to the team. So to get the offering out to the general contractors and then the next personas after that in architecture engineering, owners and public sector and then geographically.
Lots of good things happening on this front, and we'll keep updating you here every quarter. We'll go next to Rob Mason at Baird.
Yes, good morning. First question I just wanted to clarify comment from earlier. I think around the cost for connecting scale, there was mention of 100 basis points. Is that what is built into the 23 guidance or was that the cost for 22 and then maybe just as an extension of that question?
to the, you know, maybe what year one year two economics will look like on those.
Yeah, hey Rob, David Barnes, I'll try both. On the Connected and Scale discrete investments, spending on that 22 versus 21 was about 100 basis points around $40 million embedded in our guidance for 2023.
is a deceleration in the rate of growth. So we'll spend somewhere in the order of another 20 or a little more than that, million dollars incremental, 23 above 22.
We still have more work to do and we believe this is a Hyper-earity investment with regard to the the model options I'll say the menu that we presented the investor day is still out there This topic is tied with digital transformation
our ability to sell hardware and software bundles together in recurring basis.
is heavily dependent on the roll out of our digital transformation. We're doing it in a somewhat kuji way now, but the bulk of that opportunity is ahead of us and all the options that we showed at the investor day are still options we're considering.
And Rob, I'm going to add just a bit of context to on top of the connect and scale investments, because it's a capital allocation call. And so we've taken downspend and other parts of the company in part to help fund what we're doing here. So we've thought a lot about the cost management aspect of our model. If we look over the last three.
over that time frame. So a third of total revenue growth, a sixth of the ARR growth. And so it's very much in context of how we're thinking about allocating capital at Trimble and where we're putting it to work.
Well, maybe as a follow on to that, Rob, you know, Transporian, you know, following that completion of that, you will be in somewhat of a deleveraged mode, but how much flexibility are you giving yourself or, you know, to be able to do a transaction like, I guess, a rivet or, you know, something along those lines, I guess.
you know, on the capital allocation side to supplement, connect, and scale. Let's say from a flexibility, if we're talking acquisition and deployment of the balance sheet, I would say here in the next 12 to 18 months, not a lot of flexibility because our primary commitment is to de-leverage. So certainly anything at scale.
I would say we've limited some flexibility of the balance sheet. Now, if it's not at scale, and so if it's a, whether it's a rivet size acquisition or it's Trimble Ventures, where we've put single digit millions to work in that aspect, I would say we do retain some flexibility with caution to stay close to.
Making sure we understand our model and that we're taking a relatively conservative view of the balance sheet now map to the P and L. Let's not forget that in twenty twenty two thirty eight percent of our total revenue is now recurring one point six billion that's grown. We believe we'll grow double digit again next year. So.
our P&L has more visibility than it's ever had in it, therefore the business model's got more resilience, and so, and we maintain the investment grade. So I look at those factors all together, and I'd say there's, you know, there's flexibility on a smaller size of capital deployment, not a lot of flexibility on transformative size deals.
transformation. How is the progress for revenue being transacted through the connected digital platform tracking versus your expectations and where did that shake out as a portion of revenue for FY 22 at the investor day I believe 2% of revenue had or had been expected to be the target as communicated so was that met or exceeded and do the projections shared at your investor base still stands.
We're just about to roll out the next phase to our North American, principally to our North American software businesses.
and with further rollouts from there, but we're moving forward.
Got it. That's helpful. Thank you. And then just one follow-up. Has anything changed from the time Transporium was announced that would maybe alter the expectations for revenue and even initially communicate at the announcement of the acquisition or everything all good there.
Yeah, look, we communicated the financial parameters there. We still don't own the business. Obviously, we're talking to them, but we have no update to our outlook. And we'll update that outlook once the transaction closes at some point in the first half of this year.
Thank you guys. And that does conclude our question and answer session. I'd like to turn the conference back to Michael Labo for closing remarks.
Thank you everyone for joining us on the call. We look forward to talking to you next quarter.
And this concludes today's conference call. You may now disconnect.
is doing very well and it's even more than the builder viewpoints get you up. It's from our tech instructors offering our mechanical electrical plumbing software as well or project management software. Really the whole contingent is performing. I'll say one thing that is nice on the software side in the recurring revenue is certainly you get a higher degree of predictability. There is not a wholesale in between the retail and so you get a clear view of the demand which is why by the way on the hardware side we're looking back at the three-year trend on the kegger so that we can see the signal through the noise. In terms of what's working with it I would say it's the value proposition meets the digitization of the market. So call it the secular aspect of digitization a chance to meet with. A number of construction companies during my travels over the last last months.