Q3 2023 Trimble Inc Earnings Call
Thank you for standing by and welcome to the Trimble third quarter 2023 results call.
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 the star one again.
Operator assistance throughout the call. Please press star Zero, and finally, I would like to advise all participants this call is being recorded.
Do you.
I'd now like to welcome Rob painter, Chief Executive Officer to begin the conference Rob over to you.
Welcome everyone before I get started our presentation is available on our website and we ask that you refer to the safe Harbor at the back of our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which referred to the corresponding period of last year unless otherwise noted.
Simplification focus and execution are the themes of today I'll start with a review of the third quarter, then put a trimble lands in the current market environment. We see followed by an overview of how we are taking action to maintain our strategic and financial progression.
Let's begin on slide two with a review of the third quarter. The clear highlights were continue to air our growth and gross margin progression was translated into EBITDA progression are our stance at a record $1 94 billion up 25% and up 13% organically.
50% of our revenue is now recurring.
Gross margin finished at a record 65% a reflection of our connect and scale strategy translating into a more durable and attractive business model EBITDA at 28% is also a record.
The big strategic news of the quarter was the announcement of our joint venture with Agco in our agriculture business slide three reviews, our key messages to shareholders debenture positions us to simplify focus and Derisk, our business, while deleveraging and returning capital to shareholders as we discussed on our announcement quality impact on pro forma 2023 numbers. This trimble.
The 72% software and 55% recurring revenue we are proud to partner with Ericsson soda and his team at agco to be a global leader in mixed fleet smart farming and autonomy solutions, we expect the transaction to close in the first half of next year and I'd like to say that we're really pleased thus far with the internal and external reaction to our partnership.
In the quarter, we also divested our land folio, a business, which had approximately $10 million of revenue on a trailing 12 month basis. We have now divested 18 businesses over the last three years in pursuit of simplification and better focus to execute our strategy.
Looking at the business with the global macroeconomic lens, we see increasing signs of weakness in stress across many end markets and geographies exacerbated by interest rates war and geopolitical tensions these factors contribute to our updated view on the fourth quarter, which are embedded bearish and bullish signals on the bearish side we.
See the downturn in residential construction impacting our hardware businesses in both buildings and infrastructure and geospatial, while we see strength in major projects renewables and onshoring of manufacturing, we arent seeing enough Earth moving activity to overcome this dynamic, especially in Europe, and agriculture within resources and utilities, we see emerging.
Lines of weakness also notably in Europe.
We also expect some choppiness in the numbers as we execute our new distribution strategy in preparation for our <unk> joint venture.
In transportation I think it's safe to say that we are in a down freight market and we've seen some trucking and technology companies either go out of business or cut back their ambitions significantly.
On the bullish side, let's remember that we sell productivity quality safety transparency and environmental sustainability. This is a secular value proposition and buildings and infrastructure software bookings were up more than 30% demonstrable evidence that the strategy works and that the dollar volume of construction is healthy.
Our Trimble construction one business model framework is delivering results. We are releasing a series of customer persona based targeted offerings in our systems enhancement enhancements are providing new levels of visibility and insight into our customers.
Our machine control as a service offering also exceeded bookings expectations in the quarter.
And geospatial, we continue to innovate to drive the replacement cycle and our new business models contribute to ear are growing at a double digit rate within the surveying and mapping business.
Next week, we will hold our annual Trimble dimensions engineering and construction user conference, where thousands of industry participants will come together to learn and engage in our latest innovations.
Resources and utilities, our non AG businesses collectively grew ear are double digits.
Transportation to shake the shakeout in the industry will in time have the appropriate effective restoring the balance in capacity and demand and bringing more discipline to the competitive landscape.
Against this backdrop, we are taking action to protect our financial model, starting with a greater than $40 million run rate cost reduction initiative as we take action to simplify and better focus our company to operate efficiently and effectively. This is in addition to cost containment initiatives that we undertook in the third quarter, we will simplify by reorganizing our.
Our operating businesses and bringing corporate resources closer to customers. For example, we have incubated our industry cloud platform work at a corporate level. The last couple of years.
Now time to embed that within the business and sharp and capital allocation, we will focus by getting the right leaders in the right seats and scaling back some of our initiatives to enable the core to better deliver short and mid term outcomes David over to you.
Thank you Rob let's start on slide four with a review of third quarter results third quarter revenue of $957 million was up 8% in total and up 2% organically.
And foreign exchange rates increased revenue by 1%, while acquisitions net of divestitures increased revenue by 5%.
Subscription and recurring revenue continued to grow at a strong rate.
As Rob mentioned, a moment ago, the weakening macro environment adversely impacted customer sentiment and demand across all of our hardware and markets.
Gross margin in the third quarter was a record 65% up 410 basis points year over year, driven by an increasingly favorable business mix and the ongoing net impact of pricing and reduced input cost inflation.
Adjusted EBITDA and operating margins also expanded year over year due to the progression in gross margins and the benefit of cost reduction actions. We took early in the quarter.
Net income dollars increased by 4% and earnings per share grew year over year to 68.
Exceeding the high end of our prior guidance range. We are very pleased with our margin performance in the third quarter delivering strong bottom line results even in the face of a tougher macroeconomic environment.
Turning now to slide five I'll review in more detail, our third quarter revenue trends on this in the next few pages I will focus on organic growth rates, excluding the impacts of acquisitions divestitures and currency fluctuations.
<unk> was up 13% driven in part by strong bookings across our construction software businesses. Our digital platform work is enabling cross sell a bundled solutions.
Our nonrecurring revenue streams, including hardware and perpetual software contracted by 8% year over year and came in below our expectations. The macro environment worsened late in the quarter across many of our hardware and markets with weakening customer sentiment and propensity to invest.
The impact was especially visible in Europe, where macro trends are the most difficult.
From a geographic perspective, North American revenues were up 5% in Europe revenues were down 1%.
Operator: Thank you for standing by and welcome to the Trimble 3rd Quarter 2023 Results Call. 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 the star one again. For operator assistance throughout the call please press star zero and finally I would like to advise all participants this call is being recorded. Thank you.
Moving to slide six our cash flow from operations was $147 million with free cash flow of 134 million, both of which are up significantly versus prior year, our cash flow in the quarter benefited from lower purchases of inventory lower tax payments and higher profitability.
The working capital dynamics of our business remained strong with negative net working capital.
We entered the fourth quarter with $1 6 billion in backlog inclusive of AG committed backlog expected to ship before our AG JV transaction closes.
Operator: I'd now like to welcome Rob Painter, chief executive officer to begin the conference. Rob, over to you.
Robert Painter: Welcome everyone. Before we get started our presentation is available on our website and we ask that you refer to the safe harbor at the back. Our financial commentary today will reflect non-gap performance metrics including organic growth comparisons which will refer to the corresponding period of last year unless otherwise noted. Simplification, focus and execution are the themes of today. I'll start with review of the third quarter then put a Trimble lens in the current market environment we see followed by an overview of how we are taking action to maintain our strategic and financial progression.
We projected $1 1 billion of our backlog will be recognized as revenue within the next 12 months.
We ended the quarter with leverage measured as net debt to EBITDA of two nine times, reflecting the repayment of $115 million of net debt during the quarter and repayment of $270 million since the closing of the transport <unk> acquisition.
Note that we are ahead of our timeline to pay down our transport and debt with leverage going below three times one quarter ahead of the commitment we made when the deal was announced.
Finally, I'll repeat what Rob mentioned earlier during the quarter, we reached an important milestone with half of our revenue now coming from recurring revenue streams. The formation of our AG JV will further accelerate our business in the direction of majority recurring revenue, making our business, both more predictable and more resilient.
Robert Painter: Let's begin on slide two with review of the third quarter. The clear highlights were continued ARR growth and gross margin progression which translated into EBITDA progression. ARR stands at a record 1.94 billion, up 25% and up 13% organically. 50% of our revenue is now recurring. Gross margin finished at a record 65%, a reflection of our connecting scale strategy translating into a more durable and attractive business model. EBITDA at 28% is also a record.
Let's turn now to slide seven for additional detail on each of our reporting segments buildings and infrastructure revenue was up 6%.
Revenue growth was strong across our software businesses in this segment with double digit year over year, IRR and revenue increases at E builder viewpoint, Sketchup and tecla.
Robert Painter: The big strategic news of the quarter was the announcement of our joint venture with AGCO and our agriculture business. Slide three reviews are key messages to shareholders. The venture positions us to simplify focus and de-risk our business while deleveraging and returning capital to shareholders. As we discussed on our announcement call the impact on pro forma 2023 numbers moves Trimble to 72% software and 55% recurring revenue. We are proud to partner with ARR a consortia and his team at AGCO to be a global leader and mixed fleet smart farming and autonomy solution.
This broad based growth reflects the success and momentum of our connect and scale strategy evidenced by growing bookings, especially of larger and broader bundles.
Our civil construction business was down year over year at a high single digit rate as the demand environment weakened among dealers and end customers.
Geospatial revenue was down 2%, reflecting lower demand across many survey end markets, one bright spot for our geospatial business in the quarter was with a U S. Federal government customers, who continued to place orders well ahead of prior year levels and above our expectations earlier in the year resources.
Robert Painter: We expect the transaction to close in the first half of next year and I'd like to say that we are really pleased thus far with the internal and external reaction to our partnership. In the quarter we also divested our land folio business which had approximately 10 million revenue on a trailing 12 month basis. We have now divested 18 businesses over the last three years and pursued a simplification and better focus to execute our strategy.
Resources and utilities revenue was down 4%, reflecting both declining farmer sentiment and the impact of our distribution network changes.
Revenue declines were most pronounced in Europe, which makes up the largest portion of our AG hardware business.
Partially offsetting the weakness in hardware demand, we experienced double digit segment growth and positioning services Forestry and city works for.
Robert Painter: Looking at the business with a global macroeconomic lens we see increasing signs of weakness and stress across many end market and geographies exacerbated by interest rates, war and geopolitical tensions. These factors contribute to our updated view on the fourth quarter which have embedded bearish and bullish signals. On the bearish side we see the downturn in residential construction impacting our hardware businesses in both buildings and infrastructure and geospatial. While we see strength in major projects renewables and ensuring of manufacturing we aren't seeing enough earth moving activity to overcome this dynamic especially in Europe.
Financial results in our transportation segment showed progression in a number of areas.
Organic <unk> was up at a mid single digit rate and margins expanded for the seventh quarter in a row on the other hand, our mobility business in North America has not seen the uptick in bookings that we originally expected with planned chardan notifications in the quarter, our transportation segment <unk> momentum will moderate going into next year.
Transport Ian topline trends remained below our expectations. When we bought the business driven almost entirely by a contraction in overall industry shipment volumes and a depressed spot market importantly, we have maintained our customers and our market share and with our transaction based recurring model, we are positioned to recover with an improvement.
Robert Painter: In agriculture within resources and utilities we see emerging signs of weakness also notably in Europe. We also expect some choppiness in the numbers as we execute our new distribution strategy and preparation for our agco joint venture. In transportation, I think it's safe to say that we are in a down freight market, and we've seen some trucking and technology companies either go out of business or cut back their ambitions significantly.
And the overall European goods economy, when the inevitable upswing takes place the transport and team has managed costs well in this tough environment and our operating margin since the deal closed remain in line with our original expectations.
Robert Painter: On the bullish side, let's remember that we sell productivity, quality, safety, transparency, and environmental sustainability. This is a secular value proposition. And building an infrastructure of software bookings is where up more than 30%, demonstrable evidence that the strategy works and that the dollar volume of construction is healthy. Our Trimble Construction One Business Model Framework is delivering results. We are releasing a series of customer persona-based targeted offerings and our systems enhancements are providing new levels of visibility and insight into our customers.
Moving to slide eight I'll now discuss our guidance for the fourth quarter and the full year.
Our third quarter results reflected a weakening demand environment, we expect this weakness to extend through the fourth quarter and into next year.
We now project fourth quarter revenue of between 890 and $930 million.
Our fourth quarter outlook reflects 13% growth in IRR offset by a decline in our hardware and perpetual software at a low to mid single digit rate.
Robert Painter: Our machine control is a service offering also exceeded bookings expectations in the quarter. In geospatial, we continue to innovate, to drive the replacement cycle, and our new business models contribute to ARR growing at a double digit rate within the surveying and mapping business.
This yields a full year revenue outlook of $3 76 to 380 billion.
A significant majority of the reduction in revenue outlook is and our hardware businesses with the biggest impact in civil construction hardware.
Robert Painter: Next week, we will hold our annual Trimble Dimensions Engineering and Construction User Conference, where thousands of industry participants will come together to learn and engage in our latest innovations. And resources and utilities are non-aggressives collectively through ARR double digits. In transportation, the checkout and industry will in time have the appropriate effect of restoring the balance and capacity and demand and bringing more discipline to the competitive landscape.
For perspective. It is helpful to look back to the pre COVID-19 period to determine the underlying long term trends of our hardware businesses. All three of our core hardware businesses geospatial agriculture, and civil construction have grown at a compound rate of mid single digit or better since 2019, and our fourth quarter.
Guidance reflects a continuation of this long term trend.
We projected the combined impact of higher gross margins and lower operating expense versus our prior outlook will offset much of the impact of our lower revenue forecast, resulting in an EPS range for the fourth quarter of 55 to 63.
Robert Painter: Against this backdrop, we are taking action to protect our financial model. Starting with a greater than 40 million run rate cost reduction initiative is we take action to simplify and better focus our company to operate efficiently and effectively. This is in addition to cost containment initiatives that we undertook in the third quarter. We will simplify by reorganizing our operating businesses and bringing corporate resources closer to customers. For example, we have incubated our industry cloud platform work at a corporate level the last couple of years.
Our updated full year guidance for EPS is $2 58.
To $2 66.
Fourth quarter operating margins are projected to be in the range of 24, 5% to 25% a meaningful improvement from year ago levels, but sequentially down from the third quarter driven primarily by mix.
Robert Painter: It's now time to embed that within the business and sharpen capital allocation. We will focus by getting the right leaders and the right seats and scaling back some of our initiatives to enable the core to better deliver short and midterm outcomes.
Within the overall outlook for the fourth quarter, we anticipate the following segment trends building.
Buildings and infrastructure will remain our strongest segment with organic revenue in the quarter accelerating from third quarter levels to the mid to high single digits, even in the current macro environment, we see strong demand for our software offerings, while our hardware businesses are expected to be down at a mid single digit rate.
David Barnes: David, over you. Thank you, Rob. Let's start on slide four with a review of third quarter results. Third quarter revenue of 957 million was up 8% in total and up 2% organically. Changes in foreign exchange rates increased revenue by 1% while acquisitions net of divestitures increased revenue by 5%. Subscription and recurring revenue continued to grow at a strong rate. As Rob mentioned a moment ago, the weakening macro environment adversely impacted customer sentiment and demand across all of our hardware and markets.
Geospatial segment revenues are expected to be down at a low to mid single digit rate in the fourth quarter gradual improvement across some areas of our core field survey business will be offset by lower sales in the fourth quarter to the U S Federal government.
Geospatial margins in the fourth quarter will come down sequentially from third quarter levels due to a less favorable business mix <unk>.
David Barnes: Gross margin in the third quarter was a record 65% of 410 basis points year over year driven by an increasingly favorable business mix and the ongoing net impact of pricing and reduced input cost inflation. Adjusted EBITDA and operating margins also expanded year over year due to the progression and gross margins and the benefit of cost reduction actions we took early in the quarter. Net income dollars increased by 4% and earnings per share grew year over year to 68 cents exceeding the high end of our prior guidance range.
Resources and utilities revenue are expected to be flat to down at a low single digit rate.
This fourth quarter outlook reflects both the adverse overall demand environment and the impact of our ongoing aftermarket dealer net network transition AOR growth in this segment will remain at a strong double digit level.
Transportation segment revenues will be flat or down modestly as the impact of higher customer churn in our north American mobility business offsets the growth across the rest of our transportation offerings.
David Barnes: We are very pleased with our margin performance in the third quarter, delivering strong bottom line results even in the face of a tougher macroeconomic environment. Turning out a slide five, I'll review in more detail our third quarter revenue trends. On this in the next few pages, I will focus on organic growth rates, excluding the impacts of acquisitions, divestitures and currency fluctuations. ARR was up 13% driven in part by strong bookings across our construction software businesses.
This outlook assumes no meaningful improvement in <unk> core European transportation market in the fourth quarter.
From a cash flow perspective, we expect full year 2023 free cash flow in the range of 530 million to $555 million exclude.
Excluding the impact of full year transaction related and restructuring related cash outflows of approximately 100 million this outlook.
Represents free cash flow of approximately one times net income.
David Barnes: Our digital platform work is enabling cross sell of bundled solutions. Our non-recurring revenue streams, including hardware and perpetual software contracted by 8% year over year and came in below our expectations. The macro environment worsened late in the quarter across many of our hardware end markets, with weakening customer sentiment and propensity to invest. The impact was especially visible in Europe where macro trends are the most difficult. From a geographic perspective, North American revenues were up 5%, and Europe revenues were down 1%.
With our strong year to date cash flow performance and with contractual certainty on the upcoming close of our AG JV transaction, we plan to Reinitiate share repurchases in the fourth quarter.
Consistent with past practice, we plan to issue guidance for 2024, and our fourth quarter earnings release in February.
At this point our outlook for next year can be characterized threefold.
First we expect that organic revenue growth trends will be better than those we post this year as our hardware business has stabilized following the declines of 2023 and as recurring revenue sources make up a growing proportion of our total revenue base.
David Barnes: Moving to slide six, our cash flow from operations was 147 million, with free cash flow of 134 million, both of which are up significantly versus prior year. Our cash flow in the quarter benefited from lower purchases of inventory, lower tax payments and higher profitability. The working capital dynamics of our business remain strong, with negative networking capital. We enter the fourth quarter with 1.6 billion in backlog, inclusive of ag committed backlog, expected to shift before our ag JV transaction closes.
We believe <unk> will continue to grow at a double digit rate.
Even in the context of a tough macro environment, our bookings and net retention performance continued to support this outlook third with the cost reduction actions. We are taking we expect to hold or improve EBITDA margins, even with the impact of the close of our AG co deal. This outlook leaves us on track to achieve the EBITDA margin goals we.
Forward in our Investor day last year, Rob I'll turn it back over to you I.
David Barnes: We project that 1.1 billion of our backlog will be recognized as revenue within the next 12 months. We ended the quarter with leverage measured as net debt to EBITDA of 2.9 times, reflecting the repayment of 150 million of net debt during the quarter, and repayment of 270 million since the closing of the transport and acquisition. Note that we are ahead of our timeline to pay down our transport and debt, with leverage going below 3 times 1 quarter ahead of the commitment we made when the deal was announced.
I want to end the call on the same things, we started with today simplification focus and execution.
The cost action in the organizational moves we discussed in addition to the forthcoming AG joint venture all drive simplification and enhanced focus on our connect and scale strategy on.
On execution, we humbly learned from our failures and successes. We also have the confidence and conviction to manage through this economic environment. We've done this for decades, we know what we need to do and we will stay focused on delivering productivity quality safety transparency and sustainability for our customers and we will continue to invest and innovate against our best growth.
David Barnes: Finally, I'll repeat what Rob mentioned earlier. During the quarter, we reached an important milestone with half of our revenue now coming from recurring revenue streams. The formation of our ag JV will further accelerate our business in the direction of majority recurring revenue, making our business both more predictable and more resilient. Let's turn now to slide 7 for additional detail on each of our reporting segments. Building an infrastructure revenue was up 6%.
<unk>, we will exit this economic downturn on a stronger competitive footing.
Finally, we are announcing today that David Barnes has decided that he will retire as our CFO in may <unk>.
El <unk>, our vice President of corporate development, and Treasurer and co head of Trimble ventures will succeed David David fill and our strong finance team will work together to ensure a smooth transition over that timeframe I'm very grateful for having had David steady hand over the last four years as we've navigated crises that neither of us ever envisioned.
David Barnes: Revenue growth was strong across our software businesses in the segment, with double digit year-over-year ARR and revenue increases, and a builder, viewpoint, sketch up, and tech life. This broad-based growth reflects the success and momentum of our connect and scale strategy evidenced by growing bookings, especially of larger and broader bundles. Our civil construction business was down year-over-year at a high single-digit rate, as the demand environment weakened among dealers and end-customers. Geospatial revenue was down 2%, reflecting lower demand across many survey end marks.
Character reveals itself in a crisis David character represents something we would all benefit from emulating.
Bill comes into the role having been a terminals for 14 years, having worked across a very diverse set of roles along the way those mandate for the role is straightforward to leverage his deep knowledge of the company to unlock shareholder value. Operator, we can now open the line to questions.
David Barnes: One bright spot for our geospatial business in the quarter was with our US federal government customers who continued to place orders well ahead of prior year levels and above our expectations earlier in the year. Resources and utilities revenue was down 4% reflecting both declining farmer sentiment and the impact of our distribution network changes. Revenue declines were most pronounced in Europe which makes up the largest point portion of our ag hardware business.
Thank you for the presentation and at this time I would like to remind everyone in order to ask a question. Chris Star then the number one on your telephone keypad again to join the queue Press Star one on your telephone keypad and your first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Congratulations.
Thanks Jerry.
David Barnes: Partially offsetting the weakness and hardware demand which brings double digit segment ARR growth and positioning services for us three in city works. Financial results in our transportation segment showed progression in the number of areas. Organic ARR was up at a mid single digit rate and margins expanded for the seventh quarter in a row. On the other hand, a mobility business in North America has not seen the uptick in bookings that we originally expected.
Rob David I'm wondering if you could just talk about.
The outlook for <unk> growth for the construction software portfolio looks like.
Youre seeing a slowing into the fourth quarter based on the guidance revision can you just expand on what that means for the.
Our construction portfolio, specifically, where you're nearly 20% in the quarter what magnitude of slowing or are you seeing there.
Touch on other moving pieces, if you don't mind.
David Barnes: With planned churn notifications in the quarter, our transportation segment ARR momentum will moderate going into next year. Transporian top line trends remain below our expectations when we bought the business driven almost entirely by a contraction in overall industry shipment volumes and a depressed spot market. Importantly, we have maintained our customers in our market share and with our transaction based recurring model, we are positioned to recover with an improvement in the overall European goods economy when the inevitable up swing takes place. The Transporian team has managed cost well in this tough environment and are operating margins since the deal closed remain in line with our original expectations.
Hey, good morning, Gerry and thanks for the question, it's Rob I'll take it.
Actually the bookings for the software businesses and construction continued to be strong in the third quarter.
Our growth in and the P&I segment was over 20% for the quarter as well in Q3, so actually I see continued strength into the into the fourth quarter with our view on an IRR of growth in that.
That segment.
So I checked.
Really the narrative holds their FX is a bit of a headwind to the AOR growth that'll be posted at the top line. So adjusted for adjusted for that I think we remain on track.
David Barnes: Moving to slide eight, I will now discuss our guidance for the fourth quarter in the full year. Our third quarter results reflect a weakening demand environment. We expect this weakness to extend through the fourth quarter and into next year.
Hey, Jerry.
<unk> is in a growth, we're talking tens of basis points.
The Big story is that the <unk>.
David Barnes: We now project fourth quarter revenue of between 890 and 930 million. Our fourth quarter outlook reflects 13% growth in ARR offset by a decline in our hardware and perpetual software at a low to mid single digit rate.
Growth is sustained as Rob said bookings are really good.
There is no fundamental change in the momentum of our <unk> business.
Okay. So FX is the key driver then okay.
And then can we shift gears and talk about the margin.
David Barnes: This yields a full year revenue outlook of 3.76 to 3.80 billion. A significant majority of the reduction in revenue outlook is in our hardware businesses with the biggest impact in civil construction hardware. For perspective, it is helpful to look back to the pre-coated period to determine the underlying long-term trends of our hardware businesses. All three of our core hardware businesses, geospatial, agriculture and civil construction, have grown at a compound rate of mid single digit or better since 2019 and our fourth quarter guidance reflects a continuation of this long-term trend.
Trajectory given the performance in the quarter and exiting the year I know, we're not talking about 24 guidance, yet, but it feels like you've got a margin tailwind versus the run rate in the first half of 2023, so as we think about.
Puts and takes around what 24 might look like obviously, some end market challenges, but it feels like at least on a year over year basis, there should be some margin momentum I'm wondering if you.
Wouldn't mind, commenting on it.
Any other puts and takes we should keep in mind.
Yes sure Jerry.
Ill reiterate the comments.
In the prepared remarks.
David Barnes: We project that the combined impact of higher gross margins and lower operating expense versus our prior outlook will offset much of the impact of our lower revenue forecast, resulting in an EPS range for the fourth quarter of $0.55 to $0.63.
Our margin trends are very strong.
We think sequentially Q4 won't look quite as good as Q3, we had a.
The mix issue, both between software and hardware and within within the hardware part of our portfolio, but fundamentally our margin story is really good and we've taken actions to.
David Barnes: Our updated full year guidance for EPS is $2.58 to $2.66. Fourth quarter operating margins are projected to be in the range of 24.5% to 25%. A meaningful improvement from year ago levels but sequentially down from the third quarter driven primarily by mix.
Manager operating expense rate carefully actually that started earlier this year, Rob mentioned that we're going to move.
Moving even further here in Q4, our goal is looking into next year to be in a position, where we can maintain or grow our EBITDA margins and I'll point out that we're that includes the impact of the creation of the AG JV and if you go back to the financial remarks.
David Barnes: Within the overall outlook for the fourth quarter, we anticipate the following segment trends. Buildings in infrastructure will remain our strongest segment, with organic revenue in the quarter accelerating from third quarter levels to the mid to high single digits. Even in the current macro environment, we see strong demand for our software offerings while our hardware businesses are expected to be down at a mid-single digit rate. Geospatial segment revenues are expected to be down at a low to mid-single digit rate in the fourth quarter.
We had when we made that announcement, we said the accretion of the JV puts downward pressure of 70 basis points on our EBITDA margin, we're looking to cover that so yeah.
Yes margins are great story, obviously, the the top line on the hardware part of our business has been softer than we anticipated.
The margin story is even better and Thats.
David Barnes: Gradual improvement across some areas of our core field survey business will be offset by lower sales in the fourth quarter to the US federal government. Geospatial margins in the fourth quarter will come down sequentially from third quarter levels due to a less favorable business mix. Resources and utilities revenue are expected to be flat to down at a low single digit rate. This fourth quarter outlook reflects both the adverse overall demand environment and the impact of our ongoing aftermarket dealer network transition.
Something we are carefully managing looking into next year.
Okay Super and lastly, can you just comment on leading indicators within transport.
I don't know a few folks.
Visibility.
Based on.
That business in terms of customers prepared.
Shipping plans or anything along those lines and how are you thinking about.
Fourth quarter seasonally for that part of the portfolio.
Yes, so as you can imagine where we have visibility every day to a very significant portion of the European transportation market.
David Barnes: ARR growth in the segment will remain at a strong double digit level. Transportation segment revenues will be flat or down modestly as the impact of higher customer churn in our North American mobility business offsets the growth across the rest of our transportation offerings. This outlook assumes no meaningful improvement in transport in its core European transportation market in the fourth quarter.
I think I.
Characterize it as stabilizing after a very weak period over the last.
After the last three or four quarters, while since we since we bought the business and we're not declaring a turnaround yet, but if you look at the metrics of transportation volumes.
David Barnes: From a cash flow perspective we expect full year 2023 free cash flow in the range of 530 million to 555 million. Excluding the impact of full year transaction related and restructuring related cash outflows of approximately 100 million. This outlook represents free cash flow of approximately one times net income. With our strong year-to-date cash flow performance and with contractual certainty on the upcoming close of our AGJV transaction we plan to re-initiate share repurchases in the fourth quarter.
Spot pricing capacity utilization, not necessarily getting better, but it stopped getting worse. So.
<unk>.
We can see the stabilization in over time very hard to predict exactly when.
But over time, those will recover and with our transaction based <unk> model the business will recover with it so.
It's it's stabilizing its still the freight market in Europe, and I think in America, you characterize it is in recession, particularly some of the end markets actually.
We can see by by part of the economy.
David Barnes: Consistent with past practice we plan to issue guidance for 2024 at our fourth quarter earnings release in February. At this point our outlook for next year can be characterized threefold. First we expect that organic revenue growth trends will be better than those we post this year. As our hardware business is stabilized following the declines of 2023 and as recurring revenue sources make up a growing proportion of our total revenue base. Second we believe ARR will continue to grow at a double digit rate.
What's weak where theres fewer trucks on the road shipping goods, but construction equipment paper and packaging are way down versus last year, reflecting the overall macroeconomic weakness. So we think we've stabilized that's the basis of our fourth quarter and we'll plan for some improvement looking into next year.
But we'll be we'll be cautious given the given the magnitude of the drop that occurred over the last three quarters and Jerry if thats the backdrop when I look at the micro to complement that we have 100%.
David Barnes: Even in the context of a tough macro environment our bookings and net retention performance continue to support this outlook. Third with the cost reduction actions we are taking we expect to hold or prove EBITDA margins even with the impact of the close of our ag code deal. This outlook leaves us on track to achieve the EBITDA margin goals we put forward in our investor day last year.
Customer retention.
Our win loss ratios are holding so our market share.
Is holding in and the region I think that's important to keep in mind as well for the underlying health of the business.
Okay. Thank you.
Your next question comes from the line of rub with them I have from mainly its research your line is open.
Robert Painter: Rob will turn it back over to you.
Robert Painter: I want to end the call on the same things we started with today. Simplification, focus and execution. The cost action and the organizational moves we discussed in addition to the forthcoming AGJV venture all drive simplification and enhanced focus on our connect and scale strategy. On execution we humbly learn from our failures and success. We also have the confidence and conviction to manage through this economic environment. We've done this for decades. We know what we need to do, and we will stay focused on delivering productivity, quality, safety, transparency, and sustainability for our customers. And we will continue to invest and innovate against our best growth opportunities. We will exit this economic downturn on a stronger competitive footing.
Yes, Hi, I have two questions. If I may the first one is a little bit.
Micro gas, but could you look at channel inventory across the businesses on the hardware side.
Just do you have an estimate or a ballpark of how much channel inventory. There is to come out. If you do do you see a destocking and how long that might take and then the second question is really for Rob because your tone, obviously indicate a more negative macro environment kind of already here and I'm.
But curious if youre seeing that in todays construction market.
Whether thats more of a forecast thanks.
Hey, Rob it's David I'll take the dealer inventory question first we did see a very meaningful inventory destock in the first half of this year, particularly in the first quarter.
Robert Painter: Finally, we are announcing today that David Barnes has decided that he will retire as our CFO in May. Phil Sawinsky, our Vice President of Corporate Development, Treasurer, and co-head of Trimble Ventures, will succeed, David. David Phil and our strong finance team will work together to ensure a smooth transition over that time frame.
I recall I said, we we estimate it was about $40 million in the in the first quarter less than that in the second quarter, it's not really a factor in the back half of this year actually in some of our end markets dealer inventory went up by just a little bit in Q3.
Robert Painter: I'm very grateful for having had David's steady hand over the last four years as we've navigated crises that neither of us ever envisioned. True character reveals itself in a crisis. David's character represents something we would all benefit from emulating. Phil comes into the role having been at Trimble for four years. Phil has worked in years having worked across a very diverse set of roles along the way. Phil's mandate for the role is straightforward to leverage his deep knowledge of the company to unlock shareholder value.
The one change we're seeing.
Rob referenced this in his remarks.
Is that on the civil side, we're seeing the set point to the desired inventory level for our dealers has actually come down that reflects.
Higher interest rates, a higher cost of carrying inventory it reflects the.
Uncertainty about the demand market and frankly, our very good product supply so they need to hold inventory is less than it was so.
Operator: Operator, we can now open the line to questions. Thank you for the presentation, and 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.
That won't be helpful to us I think we will see a modest correction nowhere near like Q.
Q1, and Q4, we're talking in the $10 million to $20 million range.
Jerry Revich: Again, to join the queue, press star one on your telephone keypad, and your first question comes from the line of Gary Ritch from Goldman Sachs. Your line is open. Yes, hi.
But we think dealer inventories in aggregate are close to where they will be over the longer term.
Okay I'll take the second part Rob on the macro and what we're seeing there's a tail of geography is embedded within that.
Jerry Revich: Good morning, everyone, and David, congratulations. Thanks, Jerry. Rob David, I wonder if you just talk about the outlook for ARR growth for the construction software portfolio. Looks like you're seeing a slowing into the fourth quarter based on the ARR guidance revision. Can you just expand on what that means for the construction portfolio specifically where you're nearly 20% in the quarter. What magnitude of slowing are you seeing there and touch on other moving pieces, if you don't mind. Thank you.
Within the answers.
Roughly speaking take North America, Europe, and Asia Pacific.
Let's look at North America, you won't be surprised that.
Sub segments, such as the data centers, the renewable energy as the onshoring of manufacturing those are all positive catalysts the infrastructure Bill remains a positive catalyst.
The Astra Act on that one is when you compare the dollar volume within the <unk>.
David Barnes: Good morning, Jerry, and thanks for the questions. Rob, I'll take it. Actually, the bookings for the software businesses and construction continue to be strong in the third quarter. ARR growth in the B&I segment was over 20% for the quarter as well in Q3, so I actually see continued strength into the fourth quarter with the review on ARR growth in that segment. So, actually, I would say really the narrative hold their effects as a bit of a headwind to the ARR growth that will be posted at the top line, so adjusted for that.
<unk> associated with infrastructure Bill.
Compared to the dirt actually moved as what we see as inflation has been heating up.
A fair amount of that.
That additional spend and then residential.
For sure we see interest rates, having an impact.
The residential markets.
In Europe I would say you have the same factors that you have residential.
This is worse than what we see in the U S and Asia Pacific.
Two we see well not surprisingly, we see India being better we see China being worse, you connect the China economy to a decent amount of the Australian economy, and we see some of the residential construction.
David Barnes: I think we remain on track. Hey, Jerry, the changes in ARR growth were talking tens of basis points. The big story is that the growth is sustained as Rob said, bookings are really good. There's no fundamental change in the momentum of our B&I ARR business.
Being slower than that and that market to add those up.
You have our view on the present state of construction, let me be clear within within that.
As we have software businesses and we have <unk>.
<unk> businesses.
Jerry Revich: Okay, so FX is the key driver then.
I mentioned it during the.
During the first question.
Jerry Revich: Okay, and then can we shift gears and talk about the margin trajectory given the performance in the quarter and exiting the year. I know we're not talking about 24 guidance yet, but it feels like you've got a margin tailwind versus the run rate in the first half of 2023. So, as we think about the puts and takes around what 24 might look like, obviously some end market challenges, but it feels like at least on a year or a year basis, there should be some margin momentum. I wonder if you wouldn't mind commenting on any other puts and takes we should keep in mind.
And that we had 30% bookings increase and our construction software business in the third quarter, we had <unk> growing over 20% and BMI. So there is a different behavior happening within the software business and within the hardware business and the feedback.
And that we get from.
The market on that is that customers. They continue to have trouble finding qualified labor managing that labor labor they have.
Strong overall backlog, particularly in the Americas, so that backlog and that complexity in managing the work out in the field as a catalyst for the software adoption and that plays through into the numbers. We have so now when we take the president and we'll map to the future which is the other part of your question.
David Barnes: Yeah, sure, Jerry. I'll reiterate the comments in the prepared remarks. Yeah, our margin trends are very strong. We think sequentially Q4 won't look quite as good as Q3. We had that's a mixed issue both between software and hardware and within within the hardware part of our portfolio. But fundamentally, our margin story is really good. And we've taken actions to manage our operating expense very carefully. Actually, that started earlier this year. Rob mentioned that we're going to move even further here in Q4.
We're essentially saying we don't see it getting.
Better fundamentally better fundamentally inflicting, particularly on the residential and that's the one probably I shouldn't comment on most discreetly as our planning assumption at this point is assume into 2024 that it doesn't get better of course, if interest rates come down that'll be a positive thing next year.
David Barnes: Our goal is looking into next year to be in a position where we can maintain or grow our EBITDA margins. And I'll point out that that includes the impact of the creation of the AGJV. And if you go back to the financial remarks, we had when we made that announcement, we said the creation of the JV puts downward pressure of 70 basis points on our EBITDA margin. And we're looking to cover that.
And we know in places like here in the U S that we do need additional housing. So there is a dislocation.
Fundamental dislocation so as the interest rates are moderate I think it's reasonable to think that that will get better but for now our planning assumption I think the smart thing to do is just assume it doesn't.
Yes.
Thank you.
David Barnes: So, yeah, margins a great story. Obviously, the top line on the hardware part of our business has been softer than we anticipated, but the margin story is even better. And that's something we are carefully managing working into next year.
Your next question comes from the line of Rob Mason from Baird. Your line is open.
Hi, yes, good morning.
Just to go back to the expectations around overall <unk> like you said it did not sound like Theres much movement in your outlook around the P&I related.
David Barnes: Super and lastly, can you just comment on leading indicators within Transporion? I don't know if you folks have visibility based on that business in terms of customers prepared, shipping plants or anything along those lines. And how are you thinking about fourth quarter seasonally for that part of the portfolio? Yeah, so as you can imagine where we have visibility every day to a very significant portion of the European transportation market. I think I characterize it as stabilizing after a very weak period over the last after the last three or four quarters.
<unk>.
What about transportation should we expect that Thats still tracks up mid single digits distracted it's been on.
Hey, Rob, it's David Barnes I'll take that I.
As I mentioned in my prepared remarks that.
Bookings are coming in soft in our North American mobility business in transportation.
And we received notification of churn that will occur going forward.
So are we.
While our IRR has has been looking better recently.
Recently, we do think that will the churn we have in our north American mobility business will adversely affect transportation.
David Barnes: Well, since we since we bought the business, we're not declaring a turnaround yet. But if you look at the metrics of transportation volumes. Spot pricing capacity utilization, not necessarily getting better, but it stopped getting worse. So, we can see the stabilization and over time, very hard to predict exactly when. But over time, those will recover and with our transaction based ARR model, the business will recover with it. So, it's stabilizing. It's still the freight market in Europe.
<unk> growth.
In Q4 and going into next year by somewhere around 200 basis points now I'll emphasize that.
The rest of the transportation <unk> base is doing really well our maps business is growing at double digit rate, even transport and we're growing our enterprise business is growing actually our mobility business in Europe and in Brazil is good so.
The North American mobility business represents about a quarter of transportation.
And that the trends they are going to R. R.
David Barnes: And I think in America, you characterize it as in recession, particularly some of the end markets. Actually, we can see, you know, by by part of the economy. What's weak? Where there's fewer trucks in the road, shipping goods, construction equipment, paper and packaging, or way down versus last year, reflecting the overall macroeconomic weakness. So, we think we've stabilized. That's the basis of our fourth quarter and we'll plan for some improvement looking in the next year, but we'll be cautious given the magnitude of the drop that occurred over the last three quarters.
Going to be more adverse so.
The sort of core base outlook is for transportation <unk> growth to be adversely impacted by a couple hundred basis points going forward because of the churn dynamic in North American mobility.
Understood Okay.
Maybe just as a follow up then.
Understand you don't want to speak too too broadly about 2024, and this may just be somewhat of a transitory dynamic.
With the agco transaction coming up but just.
Just how should we think about it.
The ending of the CAH aftermarket agreement and the impact.
David Barnes: And Jerry, if that's the macro, if I want to look at the micro to compliment that we have 100% customer retention and our win-loss ratios or holdings or market share as holding in in the region. I think that's important to keep in mind as well for the underlying health of the business.
Relative to your efforts to try to.
To backfill that obviously I chose our solution but.
Until that transaction closes I'm, just curious how to think about.
Modeling net impact next year.
Jerry Revich: Thank you very much.
Hey, Rob it's a good question I'll take that one.
Rob Wertheimer: Your next question comes from the line of Rob Wertheimer from Malius Research, your line is open. Yeah, hi, I have two questions if I may, that the first one is a little bit microaggress, but could you look at channel inventory across the businesses on the hardware side? And just, do you have an estimate or a ballpark of how much channel inventory there is to come out if you do the CD stock and how long that might take?
<unk> continues to be an important customer and partner for Trimble and for the JV on an ongoing basis. So the the nature of the agreement when we.
Changed our approach to AG.
Distribution and made the announcement.
The change in the relationship with.
With that let's see NH aftermarket distribution, which we did earlier in the year, that's not a change from <unk>.
Rob Wertheimer: And then the second question is really for Rob because your tone obviously indicates a more negative macro environment kind of already here. And I'm a bit curious if you're seeing that in today's construction market or whether that's more of a forecast. Thanks.
As a customer and a partner it really we're saying we're going to as we work with the dealers in the future we need as part of our through our strategy to be able to work with the dealers directly to have more of that signal of what's happening in the market and being closer to the end customer so.
David Barnes: Hey Rob, David, I'll take the dealer inventory question first. We did see a very meaningful inventory destock in the first half of this year, particularly in the first quarter. I recall I said we estimate it was about 40 million in the in the first quarter, less than that in the second quarter. It's not really a factor in the back half of this year, actually in some of our and markets dealer inventory went up by just a little bit in Q3.
They have been an important customer and they are an important customer they will be an important customer going forward as well agco, obviously through the nature of the joint venture and say remember we serve the mix fleet.
And that means all colors of ironing, including.
Over 100 Oems that we work with today. So that's our view on the shape of the market now clearly.
David Barnes: The one change we're seeing in Rob reference this in his remarks is that on the civil side, we're seeing the set points that the desired inventory level for our dealers is actually come down. That reflects higher interest rates, a higher cost of carrying inventory. It reflects the uncertainty about the demand market and frankly are very good product supply. So the need to hold inventory is less than it was. So, you know, that won't be helpful to us.
<unk> will have an ambition set.
To have more of their own technology, and we know that and you know that through the acquisitions.
That they've done so.
Time that will be I would say it a topic, but lets remember that.
We have hundreds of thousands of units out in the machine we have many many farms who operate on.
David Barnes: I think we'll see a modest correction. No, we're near like Q Q1 in Q4. We're talking, you know, in the 10 to 20 million range. But we think dealer inventories in aggregate are close to where they will be over the longer term.
Trimble technology, and we believe we will continue to do so.
In the future. So there will be some disruption as we go through the change for sure and we expected that that's been <unk>.
Largely in the numbers, we have had and certainly part of the conversation we had with agco.
Robert Painter: And I'll take the second part Rob on the on the macro and what we're seeing there's a tale of geographies embedded within that within the answer. So roughly speaking take North America, Europe and Asia Pacific. Let's look at North America. You won't be surprised that sub segment such as the data centers, the renewable energies, the ensuring and manufacturing. Those are all positive catalyst. The infrastructure bill remains a positive catalyst. The the a strict on that one is when you compare the dollar volume within the dollar associated with infrastructure bill compared to the dirt actually moved is what we see is inflation has been eating up a fair amount of that of that additional spend.
That was the joint venture.
Is there a way Rob to isolate how much there was some reference to the distribution transition in the third quarter, how much impact that's causing the R&D segment today.
I would measure it in.
Say some millions of dollars like so call it in.
Low single digit percentage of the disruption, but I also think that that could very well be a timing topic.
In fairness to.
C N H C.
<unk> dealers in this case, yes. They are two announcements this year.
One win at the beginning of the year, when we talked about changing the arc of the of the relationship and the second OSB JV announcement, and so I think.
Robert Painter: And then residential. I'm for sure we see interest rates having an impact and the residential markets in Europe. I would say you have the same factors, but you have residential is is worse than what we see in the US and Asia Pacific. To we see well not surprising that we see India being better we see China being worse you connect the China economy to a decent amount of the Australian economy and we see some of the residential construction being slower in that in that market to add those up and you have our view on the present state of construction.
It is reasonable to assume that some of these dealers have taken a step back and paused and said Hey, what does this mean and where do we go there is demand out there in the market customers use our customers use our technology. So we believe through our new distribution strategy.
<unk> distribution strategy that we can capture.
And meet that meet that need out in the marketplace. It just may shift from.
I'd say this year into <unk> into next year.
Makes sense. Thank you.
Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
Robert Painter: Let me be clear within within that. As we have software businesses and we have hardware businesses, I mentioned it during the first question that we had 30% bookings increase in our construction software business in the third quarter. We had ARR growing over 20% in B and I. So there's a different behavior happening within the software business and within the hardware business, some of the feedback. The fact that we get from the market on that is that customers, they continue to have trouble finding qualified labor, managing that labor.
Hi, good morning.
Just wanted to I guess.
Better understand sort of your commentary around the bundling opportunities in the P&I business can you maybe help us understand maybe what the customers are saying as they're starting to adopt trimble won and some sort of your broader platform approach and maybe what that means from an upsell and ASP opportune.
City perspective.
Good morning, Jonathan Good question.
What we hear from let's talk about what we're doing and what we hear from.
From the customers.
What we what we hear from customers is that.
Robert Painter: They have strong overall backlog, particularly in the Americas and so that backlog and complexity and managing the workout in the field is a catalyst for the software adoption in that place through into the numbers we have.
<unk>.
Similar to my remarks earlier is that.
They are looking to work with us in a differential way they are looking to move from delivering task productivity system productivity, they're looking to manage the volume of work.
Robert Painter: So now we take the present and we've mapped to the future, which was the other part of your question. You know, we're essentially saying we don't see it getting better, fundamentally better or fundamentally inflecting particularly on the residential. And that's the one probably I should comment on most discreetly is our planning assumption at this point is assume into 2024 that it doesn't get better. Of course, interest rates come down. That'll be a positive thing next year.
That they have and the complexity.
They are in.
They're looking at us and saying we want to do more business with your terminal.
Part of the consistent theme has been make yourselves easier to do business with and Thats for a terminal construction one is as part of that.
As part of delivering that.
And what we see from the data as we continue to grow the cross sells so we look at the cross selling on a year over year basis, and it's a strong double digit increase in the amount of cross selling and so we can manifest that cross selling through or think of it as the TC one offering <unk> as a framework agreement.
Robert Painter: And we know in places like here in the US that we do need additional housing. So there is a dislocation and fundamental dislocation. So as the interest rates moderate, I think it's reasonable to think that that will get better but for now our planning assumption, I think the smart thing to do is just assume it doesn't.
Rob Wertheimer: Thank you.
Essentially makes it easier.
By more Trimble solutions together in that in that bundle and then where we go further with those bundles as defining those at a persona based level of customer persona base level that is to say a steel fabricator could use and benefit from a set of trimble solutions different than the mechanical contractor different then.
Rob Mason: Your next question comes from the line of Rob Mason from bed. Your line is open. And yes, good morning. Just to go back to the expectations around overall ARR. Like you said, it did not sound like there's much movement in your outlook around the B and I related ARR. What about transportation? You know, should we expect that that still tracks up in its single digits detract that it's been on?
The general contractor different than than the architect and so the persona based bundling offerings create bundles specific to those personas.
And at our best we can offer.
Alright, or SAR fullest manifestation of this we can offer a good better best offering within those within those personas and work still I would say quite early in this journey and so thats one of the many things that gives me conviction that we.
Rob Mason: Hey Rob, David Barnes, I'll take that. I mentioned in my prepared remarks that bookings are coming in soft in our North American mobility business and transportation. And we receive notification of term that will occur going forward. So our while our ARR has been looking better recently. We do think that will the term we have in our North American mobility business will adversely affect affect transportation, ARR growth in Q4 and going into next year by some around 200 basis points.
We've got runway to work with here in the business.
Got it and then just as a quick follow up can you give us a bit more color on how the machine control as a service business is trending and how those deals sort of work and weather.
This can help customers into more cost constrained environment. Thank you.
Thanks for the thanks for that question, Alex actually I, probably should've mentioned that during the call.
Rob Mason: Now I'll emphasize that the rest of the transportation ARR base is doing really well. Our maps business is growing ARR at double digit rate, even transport and we're growing ARR or enterprise businesses is growing ARR actually a mobility business in Europe and in Brazil is good. So the North American mobility business represents about a quarter of transportation ARR and that the trend fair are going to are going to be more adverse. So the sort of core base outlook is for transportation ARR growth to be adversely impacted a couple hundred basis points going forward because of the trend dynamic in North American mobility.
Actually I have seen.
A higher level of adoption of the machine control and serve as a service than was in our original expectations, so actually that create.
A negative delta to the topline revenue as you know right through for a subscription as opposed to perpetual.
Sales so the adoption in the third quarter actually related to year to date has been ahead of the expectations.
That we have for the business.
For sure if you think about.
Proxy in the software world, what we've seen through the transitions. We have made is not only do you make the technology more affordable and doing so you expand the size of the addressable market and we've seen that time and time again.
Rob Mason: Anderson. Okay.
Rob Mason: Maybe just as a follow-up then, I understand you don't want to speak too broadly about 2024, and this may just be somewhat of a transitory dynamic with the ag code transaction coming up, but just how should we think about the ending of the C&H aftermarket agreement in the impact relative to your efforts to try to backfill that. Obviously, the act goes a solution, but until that transaction closes, I'm just curious how to think about modeling that impact next year.
In the markets we observed in software as we've made these transitions I'd like to believe that that's possible.
Outcome as well and in the hardware World is that we can expand the size of the addressable market and you think about the cost environment that.
Where that where enter that was certainly but we see that we're in and we see that as a positive.
Catalyst.
And that market, but I think even more interesting than that is once you're monetizing at a subscription.
Level on the machine control side, we believe it becomes much easier to package the relevant software offerings along with it.
Rob Mason: Hey, Robert. That's a good question. I'll take that one. Hey, C&H continues to be an important customer and partner for Trimble and for the JV on an ongoing basis. So the nature of the agreement when we changed our approach to Ag distribution and made the announcement of the change in the relationship with a C&H aftermarket distribution, which we did earlier in the year, that's not a change from C&H as a customer and a partner.
As well and so.
That's.
A preview of where some of our next releases will go into civil infrastructure.
Bundles that capture relevant.
<unk> software along with the hardware and then you asked about the business model that goes along with it specifically, where we've had two versions of it.
One you could go straight subscription on the entirety of the offering and the other one is you do a split with the hardware and the software which is to say you do a nominal amount upfront for some of the hardware.
Rob Mason: It really was saying, we're going to, as we work with the dealers in the future, we need as part of our, through our strategy, to be able to work with the dealers directly to have more of that signal of what's happening in the market and being closer to the end customer. So they have been an important customer. They are an important customer. They will be an important customer going forward, as will ag co obviously through the nature of the of iron, including over 100 OEMs that we work with today.
And then you monetize the rest of the subscription I think we're going to see us do more of the ladder over over time, you can create some.
A better aligned economics with the dealer channel in between when you have that upfront.
A nominal amount of hardware being sold upfront and actually also helps our cash flow ourselves as trimble and the customers have seem to be.
Billy and different to the <unk>.
Two offerings. So that's what I think will lean more into that one going forward.
Rob Mason: So that's our view in the shape of the market. Now, clearly, C&H will have an ambition set to have more of their own technology, and we know that and you know that through the acquisitions that they've done. So in time, that will be a topic, but let's remember that we have hundreds of thousands of units and out in the machine. We have many, many farms who operate on on Trimble technology, and we believe will continue to do so in the future.
Thank you.
Okay.
Your next question comes from the line of Charles <unk> from Bernstein. Your line is open.
Hi, good morning, guys.
Okay.
So I just wanted to double click on the cost cuts that you've highlighted in your prepared remarks $40 million.
So first of all are you expecting that to hit full run rate in 2020 for a second can you give a little bit more color on how it's allocated.
Third.
How much is structural versus variable.
Rob Mason: So there will be some disruption as we go through the change for sure. And we expected that that's been largely in the numbers we've had, and certainly part of the conversation we have with that go when we established the joint venture. Is there a way, Rob, to isolate how much there was some reference to the distribution transition in the third quarter? How much impact that's causing in the R&U segment today? I would measure it and I'd say some millions of dollars, like so call it in the low single digit percentage of the disruption, but I also think that that could very well be a timing topic.
So the.
So it's all structural is the first answer on the number.
Our expectation is that we come into 2024 with that.
With that in place.
To be able to move forward on that one and then within a subset of the allocation.
Here's how I'd want to portray it as we look at the portfolio of activities and businesses that we have.
You take our software businesses, particularly the <unk> businesses that are posting the rule of 40 role of 50.
In some cases beyond our we've got that growth, we're going to continue to invest and grow the expenses.
Rob Mason: In fairness to C&H dealers, in this case, there were two announcements this year, one when at the beginning of the year, when we talked about change in the arc of the relationship, and the second was the JV announcement. I think it is reasonable to assume that some of these dealers have taken a step back and paused and said, okay, hey, what does this mean? And where did we go? There's demand out there in the market.
And that's where we're driving the bookings, which drives the <unk> growth and we look at the lifetime value to the customer acquisition cost as a strong measure of where to allocate capital.
On the flip side, we look at activities that have been a little further out in their nature of where the shape of the market adoption.
As a scaling back where the world is scaling back on let's say some of the ambitions set that we have and so we'll look there. So it's very ROI based.
Rob Mason: Customers use our, in customers use our technology. So we believe through our new distribution strategy, through the vantage distribution strategy that we can capture and meet that need out in the marketplace. It just may shift from this year into next year. Thanks, sir. Make sense. Thank you.
And the.
And our approach and it's very strategic based because this is not going to be just a kind of a peanut butter approach will move activities that we've had at the corporate level closer to the businesses. For example, the industry cloud work that we've been doing and we've been I think we did the right thing.
Jonathan Ho: Your next question comes from the line of Jonathan Ho, from William Blair. Your line is open. Hi, good morning. Just wanted to, I guess, better understand sort of your commentary around the bundling opportunities in the B&I business. Can you maybe help us understand, you know, maybe what the customers are saying as they're setting going to adopt Trimble One and some sort of your broader platform approach, and maybe what that means from an upsell and ASP opportunity perspective. Good morning, Jonathan. Good question.
To incubate that.
At the company excuse me through the corporate level for the last couple of years now we can get that embedded into our business and then sharpen the allocation within the business between the work we do within the short mid and long term.
That's helpful.
And then second question is just trying to understand how resilient.
P&I business is to a slowdown maybe you can break it up into two parts software versus hardware.
So so far it sounds like.
Robert Painter: What we hear from, let's talk about what we're doing and what we hear from the customers. What we, what we hear from customers is that similar to my remarks earlier is that they're looking to work with us in a differential way. They're looking to move from delivering task productivity to system productivity. They're looking to manage the volume of work that they have and the complexity there, they're in. They're looking at us and saying we want to do more business with you, Trimble.
Based on bookings is relatively resilient.
Love to understand.
How long the contract duration is.
Think about that and then on the hardware side.
Just trying to think about cyclical attitude there.
Okay.
Chad the way I'd think about the software side is.
It certainly has proven thus far to be more resilient.
Resilient.
With the software that you're using a terrible, but I would say the same thing on the hardware, but the software or our.
Our customers uses its mission critical software, it's not sitting on a shelf as a nice to have.
So I'd say as long as they've got customers have the backlog.
Robert Painter: You know, it's in the part of the consistent theme has been, you know, make yourselves easier to do business with, and that's where Trimble Construction One is part of that, as part of delivering that. And what we see from the data is we continue to grow the cross cells. So we look at the cross-selling on a year-over-year basis, and it's a strong double-digit increase in the amount of cross-selling. And so we can manifest that cross-selling through think of it as the TC-1 offering.
And the work and the customers have a need to digitize and customers have a need to become more productive and more efficient.
Then that's a good setup for the resilience of that business and I think we can.
Trust, we can agree that that is a.
Megatrend happening within many industries is the digitization of the of the work the other thing that drives resilience.
And our view is.
Robert Painter: You know, TC-1 is a framework agreement essentially makes it easier to buy more Trimble Solutions together in that bundle. And then where we go further with those bundles is defining those at a persona-based level, a customer persona-based level. That is to say a steel fabricator could use and benefit from a set of Trimble Solutions different than the mechanical contractor, different than the general contractor, different than the architect. And so the persona-based bundling offerings create bundles specific to those personas.
When we have been selling them when we are selling the bundled offerings. When we're when we're working with customers in a broader and bigger way, we think that that has us closer to.
To the to the customers. This is the relationships become closer and we think that that.
It drives continued usage of the.
The technology over time, so what a perfect are resilient.
Thanks.
Certainly.
That can certainly be challenged at what point.
Does that.
What would it take for that to inflect, but we haven't we haven't seen it and we look at from our grocery tension and when you look at the net retention ratios.
Robert Painter: And at our best, we can offer, or at a sort of fullest manifestation of this, we can offer a good, better, best offering within those, within those personas. And we're still, I'd say quite early in this journey. And so that's one of the many things that gives me conviction that we've got runway to work with here in the business. Got it.
Look at the cross sell upsell opportunities. We have we think we're sitting on many hundreds of millions of dollars of opportunity just within the portfolio.
That we that we have so that makes me optimistic about the setup that will have now while the numbers grow in percentage terms as much overtime, while law law of large numbers.
Robert Painter: And then this is a quick follow up. Can you give us a bit more color on how the machine control of the service business is trending and how those feel sort of work and whether this can help customers in a more cost-conjuring environment. Thank you. Thanks for that question. I was actually probably should have mentioned that during the call. We actually have seen a higher level of adoption of the machine control as a service than was in our original expectations.
<unk> kicks in at.
At some point.
We're approaching.
Well not just approaching $1 billion.
We're almost at $1 billion of IRR, just within the P&I segment segment alone so posting 20% IRR.
Robert Painter: So actually that creates a negative delta to the top line revenue as you know right through a subscription as opposed to a perpetual. Sales. So the adoption on the third quarter actually really gets you to a year to date. It has been ahead of the expectations that we have for the business. For sure, you know, if you think about proxy in the software world, what we've seen through the transitions we've made is, you know, not only do you make the technology more affordable in doing so you expand the size of the addressable market and we've seen that time and time again.
Our growth and 30% bookings growth is pretty special in the team deserves recognition for that the hardware businesses.
Back to the brutal facts are that it is less.
Less resilient to hardware as a book and burn business.
Very little of it today is sold on a subscription.
Basis, and yes, we would like to do more of that over over time.
Now we also are in control of some of our own resilience that as an expansion to machine types. It's geographic.
Robert Painter: In the markets we've served in software as we've made these transitions. I'd like to believe that that's a possible outcome as well in the hardware world is that we can expand the size of the addressable market and you think about the cost environment that we're that we're in or that we certainly we see that we're in and we see that as a positive catalyst in that in that market. But I think even more interesting than that is once you're monetizing at a subscription level on the machine control side, we believe it becomes much easier to package the relevant software offerings along with it as well.
It's geographic penetration.
Combining the hardware and the software that we have a terminal to drive resilience into that so.
I think we're just victim to the <unk>.
<unk> around us I also think there is a lot we can control with within that and.
And net that out by saying I don't think that hardware is ultimately as resilient as the software.
However, I think it is as powerful as the software because what we can uniquely do at Trimble is connect the physical and digital worlds that ability to connect to work in the office and the field and the hardware and software is special unique and different.
Yes.
Great. Thank you.
Before we continue on to the next question. Just a reminder, if you would like to ask a question enjoying the queue. Please press star one on your telephone keypad and in the interest of time, we'd you request to please limit to one question and one follow up.
Robert Painter: And so, you know, that's a preview of where some of our next releases will go into civil infrastructure bundles that the capture relevant tremble software along with the hardware. And then you asked about the business model that goes along with it specifically we've had two versions of a one you could you go straight subscription on the entirety of the offering and the other one is you do a split with the hardware and the software, which is to say you do a nominal amount upfront for some of the hardware.
Your next question comes from the line of Christian <unk> from Oppenheimer. Your line is open.
Great. Thank you good morning, I appreciate you taking the questions.
Robert Painter: And then you monetize the rest of the subscription. I think we're going to see us do more of the ladder over over time you can create some better aligned economics with the dealer channel in between when you have that upfront. It'll have a nominal amount of the hardware being sold upfront and actually also helps our cash flow ourselves as as as Trimble and the customers have seemed to be reasonably indifferent to the two offerings. So that's what I think we'll lean more into that one going forward. Thank you.
I wanted to follow up on some of the P&I commentary and just given some of the success that you've noted and becoming easier to do business with.
I'm wondering if you can speak to market share versus wallet share gains how much of the growth are you experiencing is coming through customers just using more trimble products versus maybe any shift in the competitive landscape or are you merely just tackling white space there.
Hi, Good morning, Kristen, it's a good question and thanks for that.
I'd say the reality is is that there is a lot of white space in the market and we look at the peers.
The construction technology space and many of them are also continuing to grow and so I look at the map of the collective growth of peers in the industry and to me the only way the math works on that is that there is a secular adoption of.
Charles Dillard: Your next question comes from the line of Charles Dillard from venting your line is open.
The technology as the industry digitizing and we know it.
Charles Dillard: Hi, good morning guys. So I just want to double click on the cost cuts that you have highlighted in the prepared remarks of $40 million. So first of all, are you expecting that to hit call run rate in in 2024? Second, can you give a little bit more color on how it's allocated? And then third, how much is structural versus variable?
Greater than a trillion dollar industry and construction that has historically been underserved and underpenetrated.
Technology, and the trends around that or a positive catalyst for the adoption of technology. So let me start with acknowledging that now within that we see is from the cross selling that we're doing that to me is a metric correct would call that the wallet share.
David Barnes: So the, well, so it's all structural is the first answer on the number that our expectation is that we come into 2024 with that with that in place. To build a move forward on that one. And then within the subset of the allocation. Here's how I'd want to portray it as we look at the portfolio of activities and businesses that we have. Jeff. You take our software businesses, particularly the ARR businesses that are posting the real of 40, the real of 50, and in some cases beyond where we've got that growth, we're going to continue to invest and grow the expenses in that where we're driving the bookings which drives the ARR growth.
That says.
We are doing something that's unique and different and we think that nobody else can do that quite like we can we have technology that serves.
Across the ACO landscape architects engineers construction.
And the owners that's quite that's quite different and Thats just the software, but now bring in the hardware components that we have in there and not just the hardware that Tim with with <unk>. The hardware Thats within survey because a survey are ultimately is creates a digital starts to workflow by creating a digital model, but this alert and then turning that very often into.
A set of construction.
Workflows from there on the market share topic, we do believe that we're gaining share within certain market segments, and certain market segments and certain customers and I qualify that with the worst certain.
David Barnes: And we look at the lifetime value to the customer acquisition cost as a strong measure of where to allocate capital. On the flip side we look at activities that have been a little further out in their nature or where the shape of the market adoption is scaling back where the world is scaling back on that some of the ambitions that we have. And so we'll look there. So it's very not going to be just a kind of a peanut butter approach.
So you could characterize customers.
Simply put as some who buy on best of breed or some who buy best of suite when customers are buying best of suite.
Say, we're gaining share with those customers because we can offer.
Increasingly a better native integration of that data and the workflow across the industry.
Lifecycle and receive positive feedback and uptake for customers, who are wanting to buy.
David Barnes: We'll move activities that we've had at the corporate level closer to the businesses. For example, the industry cloud work that we've been doing. We've been, I think we did the right thing to incubate that. The company, excuse me, threw the corporate level for the last couple of years. Now we can get that embedded into a business and then the work we do within the short, mid and long-term.
<unk> from from companies I'd say for those who buy best in breed I'd say, we hold our own over overall, but even within that I could say I could double quick within that within the.
Charles Dillard: That's helpful.
Construction ERP business I'd say, we're clearly have gained share in the markets that we that we serve.
Look in the architecture space with the Sketchup product, we're going on multiple years now.
Very very strong double digit.
Robert Painter: And the second question is just to try and understand how resilient the B&I business is to slow down. Maybe we can break it up into two parts. It's software versus hardware. So software sounds like, you know, based on bookings, it is relatively resilient but would love to understand how long the contract duration is and how to think about that. And then on the hardware side, you start to think about the SQL's amplitude there.
Growth and that to me would suggest we're gaining share and the share in the conceptual modeling.
That's really helpful. Thank you Rob.
Shifting gears a little bit.
<unk> talked about the macro environment some of the headwinds facing the transportation business.
But at 18, two operating margins. This is the highest segment operating margin that you've printed since before the E. L D mandates.
Robert Painter: Chad, the way I think about the software side is it certainly has proven thus far to be more resilient. You know, hey, with the software that you're using in trouble, but I'd say the same thing on the hardware, but the software our customers use is it's mission-critical software. It's not sitting on a shelf as nice to have. So they as long as they've got customers have the backlog and the work and the customers have a need to digitize and customers have a need to become more productive and more efficient.
And I'm wondering if you can talk a little bit about maybe what's working on on the cost side of the equation for that business. How much of that is uplift from transport ion versus some of the hard work that you guys have been doing over the last couple of years. Thank you.
Good question.
Two fold answer firstly, I'd say within the call. It the run rate business, we have within transportation and then second is the transport.
Dynamic within the run rate business that we have we've been working steadily to two.
Robert Painter: Then that's a good setup for the resilience of that business. And I think we could, I trust we could agree that that is a mega trend happening within many industries as the digitization of the work. The other thing that drives resilience in our view is when we have been selling them and we are selling the bundled offerings when we're working with customers in a broader and bigger way, we think that that has us closer to the customers as the relationships become closer. We think that that drives continued usage of the of the technology over time.
Grow the increase the gross margins.
That we have in the business and I think the to me the path that I think about <unk>.
Growing operating margin to I go straight to the structural topic around that at the gross margin level.
<unk>, which implies both having the right product with the right value proposition that get the right price and then you've got the right set of Cogs that associated with that it's becoming more software centric and transportation I want to be less dependent on the hardware in fact in a more long term basis and being more.
Robert Painter: So what the perfect resilience, you know, that can certainly be challenged at what point does that you know, what would it take for that to reflect, but we haven't seen it and we look at, from our gross retention, we look at the net retention ratios, we look at the cross-sell-up sell opportunities, we have, you know, we think we're sitting on many hundreds of millions of dollars of opportunity just within the portfolio, that we, that we have, so that makes me optimistic about the setup, that we'll have now, well, the numbers grow in percentage terms as much over time, well, law of large numbers, you know, likely kicks in at at some point, you know, we're approaching, you know, we're not just approaching a billion dollars, almost at a billion dollars of dollar, we're just within the B&I segment, segment alone, so, you know, posting 20% ARR growth and 30% bookings growth is pretty special, and the team deserves the recognition for that, the hardware business is, hey, the fact that the brutal facts are, that it is less, less resilient, you know, the hardware is a book and burn business, very little love it today is sold on the subscription basis and, yes, we will would like to do more of that over time. Now, we also are in control of some of our own resilience, that is the expansion to machine types, it's geographic, it's geographic penetration, it's the combining the hardware and the software that we have a triple to drive resilience into that, so I don't think we're just victim to the environment around us, I also think there's a lot we can control with within that, and I'll net that out by saying I don't think that hardware is ultimately as resilient as the software, however, I think it is as powerful as the software, because what we can uniquely do a comfortable is connect the physical and digital world, that ability to connect the work in the office and the field and the hardware and software is special, unique and different.
Our hardware agnostic on the telematics side of the business, where as hardware differentiate.
Truly differentiates throughout the rest of Trimble, it's less so.
<unk> with the onboard computer and.
That side of the business. So that's a structural shift where it's when we can.
When we're really manifest more software forward, that's a structural increase in the gross margin that can slow down.
And to the to the profitability of the business and then the other way you do that as Youre getting the gross margin where they need to be.
It is also managing the operating.
Expenses, along with that so which the team.
He's done a tip.
Pretty good and certainly steady job of increments that.
Forward for many quarters now as you noted now you layer in transport on top of that and that is accretive to the margins within the segment and so if we do our job.
And if the market will.
Sure.
Do us some favors here and start to turn next year, then that would again be.
Positive catalysts for the margins in the business.
Thank you so much.
Thanks Kristen. Your next question comes from the line of Jason <unk> from Keybanc capital markets. Your line is open.
Operator: Great, thank you.
Operator: Before we continue on to the next question, just a reminder, if you would like to ask a question and join the queue, please press star one on your telephone keypad, and in the interest of time, we do request to please limit to one question and one follow up.
Christian: And your next question comes from the line of Christian on from Oppenheimer, your line is open. Hey, thank you, good morning, appreciate you taking the questions. I wanted to follow up on some of the B&I commentary and just given some of the success that you've noted in coming easier to do business with, I'm wondering if you can speak to market share versus wallet share gains. How much of the growth are you experiencing is coming through customers just using more trouble products versus maybe any shift in the competitive landscape, or are you merely just tackling white space there.
I don't know a different approach on the go to market side of how we sell and who we sell to add our at our customers. So you know.
Directly you might've had a.
He could have had a virtual design and construction department deciding on some technology then they're <unk>, they're gonna use you can feel crude deciding.
Which hardware machine control our survey kit they Wanna use it out in the field as we move to these bigger offerings. You know the nature of that is actually the dollar amount becomes higher even you know even as we move this to from the perpetual over too.
Christian: Like the morning Christian, it's a good question and thanks for that. The reality is that there is a lot of white space in the market and we look at the peers in the construction technology space and many of them are also continuing to grow. And so I look at the map of the collective growth of peers in the industry and to me the only way the math works on that is that there's a secular option, of the technology as the industry digitizes.
A subscription basis, and we see it from the uplift when we see one more converting customers are already or subscribing to us and now they're taking out a bigger part of the portfolio, we see where we get a multiple uplift will naturally as those dollar uplifts go higher you starting very often to work with a different.
Uhm set of people within the within the organizations and within our customers now although that level often has already been using and bend the customer at that ERP level. Because he was typically buying the ear P. It's going to be more of a CFO type who's buying buying that so now when you think about it.
Christian: You know, we know it's a, you know, greater and a trillion dollar industry and construction that has historically been underserved and under penetrated with technology and the trends around that are a positive catalyst for the adoption technology. So let me start with acknowledging that now within that what we see is from the cross selling that we're doing. That to me as a metric metric would call that the wallet share that says we are doing something that's unique and different than we think that nobody else can do that quite like we can.
We're able to go to that that persona with the bigger offering that's a different sales motion for us and so I actually we see that as a very positive.
Thing for us is changing the nature of the economic buyers when we are offering well we'll solution.
Well the I guess my my quick follow up here. It's the hardware weakness were saying is or is it mostly with the smaller customers in.
Christian: You know, we have technology that serves the, you know, across the AECO landscapes, architects, engineers, construction and the owners. That's quite, that's quite different. And that's just the software, but now bring in the hardware components that we have in there. Not just the hardware that's in with with B and I have it the hardware. It's within survey because the survey ultimately is, you know, creates a digit starts to work flow by creating a digital model to this alert and then turning that very often into a set of construction workflows from there on the market share topic.
May not be as penetrated at trimble, either on the hardware and software inside.
Oh, I see what you're <unk> I see.
See what you're asking.
That's a good question I I have to I have to say, let me think more about that and come back with them more data.
Fact based answer on that you know we've been looking more at the.
Nature of the end markets that are being served and those who do more residential work or infrastructure work now mind you.
Christian: We do believe that we're gaining share within certain market segments and certain market segments and certain customers and I qualify that with the word certain. I would say you could characterize customers simply put as some who buy on best of breed or some who buy best of sweet when customers are buying best of sweet. I'd say we're gaining share with those customers because we can offer increasingly a better native integration of that data and the workflow across the industry.
Many contractors do both kinds of work if you're if you're a civil contractor you are apt to be buying.
More trimble software, that's going to be fit your business, if you're doing residential construction, you're doing more single family construction, you're not you're not buying trimble ERP, it's too big.
For you if you're doing that kind of residential construction by the time, you're doing multifamily. There is a set of additional technology becomes more applicable so I'd probably I'm answering your question now as I talk outside say that out loud.
Christian: We live cycle and we see positive feedback and uppick for customers. We're wanting to buy sweeps from companies. I'd say for those who buy best of breed. I'd say we hold our own overall, but even within that, I could say I could double-click within that within the construction ERP business. I'd say we're clearly gained share in the markets that we that we serve. I look in the architecture space with the sketch up product. You know, we're going on multiple years now. Very, very strong double digit ARR growth and that to me would suggest we're gaining share in the share and the conceptual modeling.
Robert Painter: That's really helpful. Thank you, Rob.
Okay, Great now thanks for the color.
Your next question comes from the line of Joshua Tillson from Wolfrey search your line is open.
Hey, guys. Thanks for for Sneaking me in here. My My first question is kind of a high level, one, but I think you know brown numerous answers to questions in the queue and how you talked about the strength of the bundle that you guys have it feels like with the macro getting worse like you know we hear about it and other software sector.
That was the time when customers want to go all in on the bundle and kind of achieve their software goals save some money and driving Roy. So I guess my question is like why aren't we seem that offset some of the other weakness a little bit more and maybe when should investors expect to see you know maybe the environment benefit demand for the attract.
Robert Painter: I'm going to shift gears a little bit. We talked about the macro environment, some of the headwinds facing the transportation business, but at 18 to operating margins. This is the highest segment operating margin that you've printed since before the ELD mandates. I'm wondering if you can talk a little bit about maybe what's working on the cost side of the equation for that business. How much of that is uplift from transporean versus some of the hard work that you guys have been doing over the last couple of years.
Abundantly you guys know.
Yeah, Hey, Hey, Joshua David first of all I'd say that we are seeing that in the software business where.
Rob mentioned 30 plus percent bookings that our construction software business are are still really strong going at or near 20 per cent. So that business is benefiting from the clear path to value Rob mentioned, a labor constraints that are construction customers have an software <unk>.
Robert Painter: Thank you. Good question. I'd give you two full answer first. I'd say within the call of the run rate business we have within transportation and then second is the transporean dynamic within the run rate business, that we have, you know, we've been working steadily to grow the increase the gross margins that we have in the business. And, you know, I think, to me, the path that I think about with growing operating margins, I go straight to the structural topic around that at the gross margin level.
Acknowledged be needed.
Hardware side is more.
Pulling out it wouldn't be an eye or hardware is sold the civil contractor. So let's say more narrow range of customers then by our software and the sale of our hardware for that segment is is driven by not to use Rob Sir moving dirt and while the infrastructure dollars are going up.
You take the inflation and back that out labor and materials cost inflation, the actual amount of <unk>.
Being moved has not risen much overtime.
And that's the fundamental driver of R B and I hardware business so that.
Robert Painter: And then you got the right set of cogs that associate with that. It's becoming more software-centric in transportation. I want to be less dependent on the hardware. In fact, in a more long-term basis, you know, be more hardware agnostic on the telematics side of the business, whereas hardware differentiates truly differentiates throughout the rest of Trimble. It's less so the case with the onboard computer in that side of the business. So that's a structural shift.
The demand of the actual for technology to moving the Earth isn't hasn't.
Hasn't grown as much as we had anticipated but the need for productivity is has grown in our software offerings are geared to meet that need and that's where we're seeing the growth and Josh just as a place into seeing it I think you're also asking about playing into the the full Senate terrible financial model appointment references after you know.
We announced the <unk> joint venture and we said pro forma going forward, we'd be over 70 per cent software and 55% recurring so the the law of the math I think should start to play through a little bit more as well.
Robert Painter: That's where it's when we can, when we're really manifest more software forward, that's a structural increase in the gross margin that can flow down to the profitability of the business. And then the other way you do that, as you're getting the gross margin where they need to be, and it's also managing the operating expenses along with that. So, which the team has done a pretty good and certainly steady job of incrementing that forward.
Super Helpful. And then just a quick follow up I wanted to maybe to the extent that you guys can provided just any more color you can give us on the journey. The mobility segment. It feels like when we talked about it in the past it felt more like it was isolated to that specific order and now maybe it's feeling just a tad more structural any more detail you guys can broke.
Robert Painter: So, for many quarters now, as you noted, now you layer and transport it on top of that, and that is a creative to the margins within the segment. And so, if we do our job and if the market will do us some favors here and start to turn next year, then, you know, that would again be a positive catalyst for the margins in the, in the business. Thank you so much.
That is there.
I'd say not not structural.
That would be the tip of the dancer on the mobility right.
[noise] Super helpful. Thank you.
In the interest of time I'll final question today comes from the line of clock Jeffries from parts of Sandler Your line is open.
Jason Celino: Next question. Your next question comes from the line of Jason Salino from Keybank Capital Markets. Your line is open. Great. Just one from me. You know, this follows up on one of the other questions. You know, when we think about B&I hardware and construction software, who are the typical decision makers by your customers, like are they separate budget decisions, you know, how tight are those purchasing decisions between two. I don't know if that's a good way of thinking about it.
Hello. Thank you for taking the question Yeah, an interesting time I'll keep it to one I think David May have answered a part of this but I wanted to kind of further clarify.
When you think about the B and I portfolio and the relationship between a dollar growth and moving dirt is it fair to say that a lot of the a R. R products you can still capture opportunity when projects are going through engineering and procurement that stop at that shovel ready stage due to the.
<unk> cost wanting to understand as we think about maybe the next 12 months and cyclical factors in construction are are versus hardware and whether if more projects come into this sort of paradigm, what part of the portfolio might outperform.
Jason Celino: Hey, Jason, thanks for the question. I'd say it depends on the size of the customer between the hardware and the software and not surprisingly, the small to mid market, you know, we're doing more with the sea levels of our customers. And then I'd say the bigger the customer, the more it's segmented across the company who has both who's the economic, who's the economic buyer. Let me say something that I think strategically your question unlocks is the nature of moving from selling more point solutions to selling connected offerings.
I'd expect broad outperformance of really across the board on the air or side of the of the business from the.
From the feasibility work to the design to the engineering to the procurement through the.
Jason Celino: Because what we do see happening as increasingly as you should make that shift from the point solutions to the connected offering, you're doing more account based selling. It is a fundamentally different approach on the go to market side of how we sell and who we sell to at our customers. So, you know, historically, you may have had a, you could have had a virtual design and construction department deciding on some technology.
Through the Earth moving itself the software aspects of that that are involved in that excuse excuse me enter the operations and.
Maintenance so the overall dollar amount of work is is there.
Okay.
Thank you very much.
Sure.
This does bring us to the end of <unk> for today I would like to thank God speakers for the presentation and thank you all for joining US. This now concludes today's conference enjoy the rest of your day you may now disconnect.
[music].
Jason Celino: Then they're going to use, you could have field crew deciding. King, which hardware machine control or survey kit they want to use out in the field. As we move to these bigger offerings, you know, the nature of that is actually the dollar amount becomes higher, you know, even as we move this to from the perpetual over to a subscription basis. And we see it from the uplift when we see where more converting customers are already subscribing to us and now they're taking on a bigger part of the portfolio.
Jason Celino: We see where we get a multiple uplift. Well, naturally, as those dollar uplift go higher, you're starting very often to work with a different set of people within the within the organizations and within our customers. Now, although that level often has already been using and been the customer at that ERP level because who's typically buying the ERP is going to be more of a CFO type who's buying buying that. So now, when you think about it, we're able to go to that that persona with the bigger offering.
Jason Celino: That's a different sales motion for us. And so actually, we see that as a very positive thing for us is changing the nature of the economic buyers when we are offering. Well, the, I guess my quick follow up here is the hardware we've missed your thing is it mostly with the smaller customers who may not be as penetrated at Trimble, either on the hardware or software side. Oh, I see what you're asking. That's a good question.
Jason Celino: I have to have to would say, let me think more about that and come back with a more data, a fact-based answer on that. You know, we've been looking more at the nature of the end mark, instead of being served in those who do more residential work or infrastructure work. Mind you, many contractors do both kinds of work. If you're a, if you're a civil contractor, you are apt to be buying more Trimble software that's going to be fit your business.
Jason Celino: If you're doing residential construction, you're doing more single family construction. You're not, you're not buying a Trimble ERP. It's too big for you if you're doing that kind of residential construction. By the time you're doing multi family, there is a set of additional technology that becomes more applicable. So I probably am answering your question now as I talk out. Say that out loud. Okay, great. No, thanks for the color.
Joshua Tilton: Your next question comes from the line of Joshua Tilton from Wolf Research. Your line is open. Hey guys, thanks for sneaking me in here. My, my first question is kind of a high level one, but I think, you know, throughout numerous answers, questions and the Q&A, you talked about the strength of the bundle that you guys have. It feels like with the macro getting worse, like, you know, we hear about it in other software sectors, like now is the time when customers, you know, want to go all in on the bundle and kind of achieve their software goals, save some money and drive an ROI.
Joshua Tilton: So I guess my question is like, why aren't we seeing that offset some of the other weakness a little bit more and maybe when should investors expect to see, you know, maybe the environment benefit demand for, you know, the attractive bundle. Hey, Josh and David. First of all, I'd say that we are seeing that in the software business where Rob mentioned the 30 plus percent bookings in our construction software business. Air are still really strong going at it near 20 percent.
Joshua Tilton: So that business is benefiting from the clear path to value. Rob mentioned labor constraints that our construction customers have and software technology being needed. The hardware side is more, I'll point out it within B&I, our hardware is sold to civil contractors, so it's a more narrow range of customers than buy our software. And the sale of our hardware for that segment is is driven by to use Rob sir moving dirt and while the infrastructure dollars are going up if you take the inflation and back that out labor and materials cost inflation.
Joshua Tilton: The actual amount of dirt being moved has not risen much over time and that's the fundamental driver of our B&I hardware business so that the demand of the actual for technology to moving the earth isn't hasn't grown as much as we had anticipated. But the need for productivity is has grown and our software offerings are geared to meet that need and that's where we're seeing the growth. Josh, just as it plays into seeing it, I think you're also asking about playing into the full financial model.
Joshua Tilton: On one point of reference is after we announced the ag code joint venture, we said pro forma going forward we'd be over 70 percent software and 55 percent recurring. So the law of the math, I think should start to play through a little bit more as well. Super helpful and then just a quick follow up. I want it to maybe to the extent that you guys can provide it just any more color you can give us on the chair and the mobility segment.
Joshua Tilton: It feels like when we talked about it in the past it felt more like it was isolated to that specific order and now maybe it's feeling just the tad more structural anymore detail you guys can provide us there. I'd say not not structural. It would be the the answer on the mobility trend. Super helpful guys. Thank you.
Operator: Any interest of time.
William Jeffries: Our final question today comes from the line of clock Jeffries from Pipe Sandler. Your line is open. Hello. Thank you for taking the question. The uninterest of time.
William Jeffries: I'll keep it to one. I think David may have answered a part of this, but I wanted to kind of further clarify. When you think about the B&I portfolio and the relationship between dollar growth and moving dirt. Is it fair to say that a lot of the ARR products you can still capture opportunity when projects are going through engineering procurement but stop at that shovel ready stage due to the input cost.
William Jeffries: As we think about maybe the next 12 months and the cyclical factors in construction, ARR versus hardware and whether if more projects come into this sort of paradigm, you know what part of the portfolio might outperform. I'd expect broad outperformance really across the board on the ARR side of the business, from the feasibility work to the design, to the engineering, to the procurement, through the earth moving itself, the software aspects of that that are involved in that, excuse me, and through the operations, and maintenance, so the overall dollar amount of work is there.
Operator: This does bring us to the end of our Q&A session for today, I would like to thank our speakers for the presentation and thank you all for joining us.
Operator: This now concludes today's conference, enjoy the rest of your day, you may now disconnect.