Q1 2024 Trimble Inc Earnings Call
Operator: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Rob Painter, President and Chief Executive Officer. Rob, you may begin your conference.
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 that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw that question I got and press Star. One. Thank you I would now like to turn the conference over to Rob painter Press.
Robert G. Painter: Didn't and Chief Executive Officer, Rob You May begin your conference.
Robert G. Painter: 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. Our financial commentary will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year, unless otherwise noted. In addition, our P&L commentary will primarily emphasize our as-adjusted numbers, which exclude our agriculture business, better reflecting Trimble on a go
Robert G. Painter: Welcome everyone before I get started a presentation is available on our website and we ask that you refer to the safe Harbor at the back of financial commentary will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year unless otherwise noted in.
Robert G. Painter: In addition, our P&L commentary will primarily emphasize our ads adjusted numbers, which exclude our agriculture business better reflecting trimble on a go forward basis.
Robert G. Painter: Starting on slide four, during the first quarter, we continued to advance our connect and scale strategy, which involves digitally connecting workflows within targeted industry segments and creating scale across Trimble through shared technology platforms. Our strategy delivers outcomes in the form of unique value to our customers and Sustainable Value Creation to our shareholders. We want to convey three key messages today, starting with the solid performance in the quarter, where all three segments performed ahead of expectations, as detailed on slides 5 and 6. $2.03 billion of ARR grew 13% organically. As-adjusted revenue grew 8% organically.
Robert G. Painter: Starting on slide four during the first quarter, we continued to advance our connect and scale strategy, which involves digitally connecting workflows within targeted industry segments, and creating scale across jumbo through share technology platforms. Our.
Robert G. Painter: Our strategy delivers outcomes in the form of unique value to our customers and sustainable value creation to our shareholders.
Robert G. Painter: As-adjusted gross margins were a record 67.5%, as-adjusted EBITDA margin expanded 290 basis points to 27.9%, and free cash flow was strong at $227 million. We are confirming our previous full year guidance despite unfavorable currency moves, and we will provide an update on our next call as we build confidence in the months ahead. Key message number two is a strategic portfolio highlight. In the first quarter, we divested certain water monitoring assets, our 21st divestiture in the last four years. And on April 1st, we closed our PTX Trimble joint.
Robert G. Painter: We want to convey three key messages today, starting with the solid performance in the quarter, where all three segments performed ahead of expectations as detailed on slides five and six two point over 3 billion of <unk> grew 13% organically as adjusted revenue grew 8% organically as adjusted gross margins were a record 67 five.
Robert G. Painter: <unk> as adjusted EBITA margin expanded 290 basis points to 27, 9% and free cash flow was strong at 227 million. We are confirming our previous total year guidance. Despite unfavorable currency moves and we will provide an update on our next call as we build confidence in the months ahead.
Robert G. Painter: Key message number two is a strategic portfolio highlights in the first quarter, we divested certain water monitoring assets are 21 divestiture in the last four years and on April one we closed our PT X Trimble joint venture I'm proud to have established this precision AG joint venture with Eric Insider and his team at <unk>.
Robert G. Painter: I'm proud to have established this Precision Ag Joint Venture with Eric Hansotia and his team at AgCorp. This is a high-character team with a bold vision. These moves simplify and focus our organization and provide cash to strengthen our balance sheet and support our capital allocation strategy. Key message number 3 on slide 7 is that our new reporting segments are in place, which align with our new organizational structure. We provided historical data on the segments to our investors on April 12th.
Robert G. Painter: So this is a high character team with a bold vision. These moves simplify and focus our organization and provide cash to strengthen our balance sheet and support our capital allocation strategy.
Robert G. Painter: Key message number three on slide seven is that our new reporting segments are in place, which align to our new organizational structure. We provided historical data on the segments, where investors on April 12th it takes.
Robert G. Painter: It takes an enormous amount of work to effect change on this scale, and I'm grateful to our Trimble colleagues for their courage and dedication. The sum of these actions will simplify and focus our business, thereby enabling us to reset to a new and better baseline as we aim to perform to our full potential.
Robert G. Painter: An enormous amount of work to affect change on this scale and I'm grateful to our trimble colleagues for their courage and dedication.
Robert G. Painter: Some of these actions will simplify and focus our business, thereby enabling us to reset to a new and better baseline as we aim to perform to our full potential as evidenced on an as reported basis. Our first quarter revenue was 73% software services and recurring and 58% recurring while on an as adjusted basis.
Robert G. Painter: As evidence, on an as-reported basis, our first quarter revenue was 73% software services and recurring, and 58% recurring. While on an as-adjusted basis, our first quarter revenue was 77% software services and recurring, and 63% recurring. Turning to the segments, let's start on slide eight with our AECOC.
Robert G. Painter: Our first quarter was 77% software services and recurring and 63% recurring.
Turning to the segments, let's start on slide eight with our ACO segment.
Robert G. Painter: Connect and scale is well in motion here, and it is working. Connect is about connecting users, data, stakeholders, and workflow across the industry lifecycle continuously. A right to win starts with the breadth, depth, and connectedness of our office. It ends by delivering solutions that connect the physical and digital worlds. Scale is about making Trimble easier to do business with and enabling efficient and effective growth. In the quarter, we moved our go-to-market team to an account-based selling model.
Robert G. Painter: Connect and scale as well in motion here and it is working connected about connecting users data stakeholders and workflow across the industry. The lifecycle continuum, a right to win starts with the breadth depth and connectedness of our offerings.
Robert G. Painter: Bookings by delivering solutions that connect the physical and digital worlds.
Robert G. Painter: Scale is about making trimble easier to do business with and enabling efficient and effective growth.
Robert G. Painter: In the quarter, we moved our go to market team to an account based selling model, we expanded our pre packaged trimble construction one offerings and we released our next version of assess systems transformation, which is providing us new insights into our customers.
Robert G. Painter: We expanded our prepackaged Trimble Construction 1 offerings, and we released our next version of Systems Transformation, which is providing us new insights into our customers. Mark Schwartz and his team delivered record first quarter bookings, an 18% increase in ARR, and margin expansion of 430 basis points. This business is a multi-year overnight. And we trust the new reporting structure now gives enhanced visibility to the quality of the business we have been transforming over the last few years.
Robert G. Painter: Mark Schwartz and his team delivered record first quarter bookings.
Robert G. Painter: An 18% increase in <unk> and margin expansion of 430 basis points. This business is a multi year overnight success and we trust the new reporting structure now gives enhanced visibility to the quality of the business. We have been transforming over the last few years to emphasize the point this is a scaled.
Robert G. Painter: To emphasize the point, this is a scaled $1.1 billion ARR segment operating as a rule of 40-plus business, in fact, a rule of 50-plus in the quarter. Market conditions remain favorable at the moment, with strengthened subsegments such as reshoring and onshoring of manufacturing, EV and battery plants, data centers, and renewable energy projects. The physical side of our business is largely conveyed in our new field systems reporting segment, with key highlights on slides nine and 10.
Robert G. Painter: 1.1 billing and Arrow our segment operating as a rule of 40 plus business in fact, a rule of 50 plus in the quarter.
Robert G. Painter: Conditions remained favorable at the moment with strength in sub segments, such as re shoring and onshoring of manufacturing EV battery plants, Datacenters and renewable energy projects.
Robert G. Painter: The physical side of our business is largely conveyed in a new field systems reporting segment.
Robert G. Painter: With key highlights on slide nine.
Robert G. Painter: This business is predominantly hardware, but that discrete word underplays the importance of this business to our strategy. Think of this as industrial IoT, the data collection node in the physical world that gives us the ability to connect the physical and digital worlds.
Robert G. Painter: This business is predominantly hardware, but that discrete word underplay the importance of this business to our strategy.
This is industrial Iot the data collection note in the physical world that provides us the ability to connect the physical and digital worlds.
Robert G. Painter: In this business, we are continuing to transform our selling models, moving towards hybrid models where we increasingly monetize aspects of the solution as recurring revenue. Thus, the segment revenue splits approximately 50-50 between hardware and software. On an as-adjusted basis, which excludes our agriculture business, Rombizio and his team grew revenue by 1% while increasing operating margins by 250 basis points to 26.9%. Software Services and Recurring Revenue are 48% of the business, and ARR grew 14%.
Robert G. Painter: In this business, we are continuing to transform our selling models moving towards hybrid models, where we increasingly monetize aspects of the solution as recurring revenue.
Robert G. Painter: Thus the segment revenue split approximately 50 50 as hardware and software.
Robert G. Painter: On an as adjusted basis, which excludes our agriculture business from Vizio and his team grew revenue by 1%, while increasing operating margins by 250 basis points to 26, 9%.
Robert G. Painter: Software services and recurring revenue of 48% of the business and <unk> grew 14% evidence of our connect and scale strategy in motion in this segment.
Robert G. Painter: Although evidence of our Connect and Scale strategy in motion in this segment, market conditions remain mixed and overall slightly positive. We see strength in the same sub-segments as AECO, including infrastructure spend. On the cautious side, we see economic weakness in pockets of Europe and Asia-Pacific, most notably through lower OEM retail unit sales and continued weakness in residential construction. We are closely monitoring U.S. GDP growth, along with global interest rate dynamics, and how that will impact capital purchases. Closing our segment commentary on slide 10, transportation and logistics began the year with a solid performance. We closed the Transporian acquisition last April. Thus, it is excluded from the organic comparison in the first.
Conditions remain mixed and overall slightly positive.
Robert G. Painter: <unk> strengthened the same sub segments as ACO, including infrastructure spend on the cautious side, we see economic weakness in pockets of Europe, and Asia Pacific, most notably through lower OEM retail unit sales and continued weakness in residential construction. We are closely monitoring U S GDP growth along with growth global inch.
Robert G. Painter: Just rate dynamics, and how that will impact capital purchases.
Robert G. Painter: Closing our segment Terry segment commentary on Slide 10, transportation and logistics began the year with a solid start.
Robert G. Painter: We closed the transport <unk> acquisition last April thus it is excluded from the organic comparison in the first quarter.
Robert G. Painter: On the heels of record fourth-quarter bookings, the Transporion team delivered a record first-quarter booking. Chris Keating and his team reorganized their go-to-market strategy and recommitted to process excellence and organizational focus. They are also delivering innovation, most notably through AI-driven product releases and autonomous procurement and autonomous quotation, which have found product market fit. They predominantly deliver this bookings growth in a European region that continues to experience a freight recession, thus demonstrating that selling a winning value proposition and backing it up with innovation and process improvement can generate positive results, even in a tough market environment.
Robert G. Painter: On the heels of record fourth quarter bookings the transport on team delivered a record first quarter bookings, Chris Keating and his team reorganized their go to market strategy and recommitted to process excellence and organizational focus. They are also delivering innovation, most notably through AI driven product releases and autonomous procurement.
Robert G. Painter: Thomas quotation, which are found product market fit there.
Robert G. Painter: Are they predominantly deliver this bookings growth in our European region that continues to experience a freight recession, thus demonstrating that selling a winning value proposition and backing it up with innovation and process improvement can generate positive results even in a tough market environment.
Robert G. Painter: They also delivered a multi-hundred-thousand-dollar annualized contract value global cross-sell win, selling autonomous procurement to an existing enterprise software customer that is notably in North America. We've also begun cross-selling our map solutions into transparent European customers. We remain confident this is an exciting Trimble business with a compelling right to win and an attractive business model that enables a series of land and expand product-led growth opportunities. In the context of the bookings and ARR growth, we will continue to allocate capital to our go-to-market expansion.
Robert G. Painter: They also delivered a multi hundred thousand dollar annualized contract value Global cross sell win selling autonomous procurement to an existing enterprise software customer it is notably in North America.
Robert G. Painter: We've also begun cross selling our map solutions into transplant European customer base. We remain confident this is an exciting trimble business with a compelling right to win and an attractive business model that enables a series of land and expand product led growth opportunities.
Robert G. Painter: Context of the bookings in <unk> growth, we will continue to allocate capital to our go to market expansion.
Robert G. Painter: In the rest of the segment, the 4% organic revenue growth was driven by our Enterprise and Maps teams, which each grew double-digit. Excluding Transporeon, we have delivered consistent margin expansion since the end of 2021. Including Transporeon, the segment expanded margins by 480 basis points in the quarter. Before I turn it over to Phil for his first call as our incoming CFO, let me once again express my gratitude to David Barnes for his service and partnership over these last few years. Phil, it's over to you.
Robert G. Painter: And the rest of the segment the 4% organic revenue growth was driven by our enterprise and maps teams, which each grew double digit.
Robert G. Painter: Excluding transport, we have delivered consistent margin expansion since the end of 2021, including transport on the segment expanded margins by 480 basis points in the quarter.
Speaker Change: Before I turn it over to Phil for his first call as our incoming CFO. Let me once again express my gratitude to David Barnes for his service and partnership over these last few years.
Bill over to you.
Phil Sawarynski: Thank you, Rob. We believe shareholder value is ultimately a function of maximizing long-term free cash flow. Connect and Scale is our engine, which in the mid- to long-term aims to deliver cumulative, recurring free cash flow. Slide 11 highlights balance sheet and cash flow dynamics for the quarter. Free cash flow was strong in the quarter, coming in at $227 million, or 1.4 times non-gap net income.
Phil: Thank you Rob we believe shareholder value is ultimately a function of maximizing long term free cash flow connect and scale as our engine, which in the mid to long term aims to deliver accumulative recurring free cash flow.
Phil: Slide 11 highlights balance sheet and cash flow dynamics in the quarter free cash flow was strong in the quarter coming in at $227 million or one four times non-GAAP net income we continue our asset light model with capital expenditures less than 1% of revenue and negative working capital pro.
Phil Sawarynski: We continue our asset-late model with capital expenditures less than 1% of revenue and negative working capital. Pro Forma Net Debt to EBITDA after the close of the Agricultural Joint Venture stands at about 1. Post the close of the AGCO transaction, at the beginning of the second quarter, we have just under $1 billion in cash, even after paying down our term debt and the outstanding balances on our credit facilities. Our strong cash balance puts us in a good position to resume our share buyback activity after we issue the 10-Q.
Phil: Pro forma net debt to EBITDA after the close of the agricultural joint venture stands at about one.
Phil: Post the close of the Ecu transaction at the beginning of the second quarter, we have just under $1 billion in cash even after paying down our term debt and the outstanding balances on our credit facilities are strong cash balance puts us in good position to resume our share buyback activity. After we issued the 10-Q.
Phil Sawarynski: A few comments about capital allocation. Our priority remains the same, which is to invest back into our business where we see opportunities for the highest returns. For example, over the last few years, we have been investing in digital transformation, the fruits of which are being demonstrated in AECO. We continue to transform our processes and systems in AECO. And over time, we will expand this work throughout the rest of the company. As promised, we retired over $1 billion in debt in early April.
Phil: Now a few comments about capital allocation our priority remains the same which is to invest back into our business, where we see opportunities for the highest returns for example over the last few years, we have been investing in digital transformation. The fruits of which are being demonstrated in ACO, we continue to transform our processes and systems and <unk>.
Phil: And over time, we will expand this work throughout the rest of the company.
Phil: As promised we retired over $1 billion debt in early April in January we announced an $800 million share repurchase authorization and in the first quarter, we executed $175 million of buybacks on the merger and acquisition front, we will opportunistically pursue tuck in acquisitions with a bias toward the acos.
Phil Sawarynski: In January, we announced an $800 million share repurchase authorization, and in the first quarter, we executed $175 million of buyback. On the merger and acquisition front, we will opportunistically pursue tuck-in acquisitions with a bias toward the AECO segment, where we can land and expand with capabilities that fit inside the Trimble Construction 1 offering. As an example, we acquired a field human resources application in the third quarter of 2023 and doubled the customer account in the first few months under our ownership. This was enabled by our connect and scale strategy via bundled product offerings that we put in the hands of our sellers.
Phil: Segment, where we can land and expand with capabilities that fit inside the trimble construction one offerings. As an example, we acquired appealed human resources application in the third quarter of 2023 and doubled the customer count in the first few months under our ownership. This was enabled by our connect and scale strategy via bundled product offers.
Phil: <unk> that we put in the hands of our sellers, we intend to run the same playbook as we think about our acquisition strategy going forward.
Phil Sawarynski: We intend to run the same playbook as we think about our acquisition strategy going forward. Before I turn to guidance, an update on the expected timing of the release of our 10-Q filing. Our auditors, EY, informed us several weeks ago that their 2023 audit of Trimble was selected as part of the PCAOB's inspection of EY's work. During preparation for the PCAOB review, EY concluded that neither EY nor Trimble had sufficient documentation related to certain IT and other controls for revenue-related systems and processes.
Phil: Before I turn to guidance and update on the expected timing of the release of our 10-Q filing our auditors UI informed us several weeks ago that the 2023 audio of Trimble with selected as part of the PCA obese inspection of <unk> work.
Phil: <unk> preparation for the PCA Ob review you I concluded that neither <unk>, nor trimble had sufficient documentation related to certain <unk>.
Phil: And other controls for revenue related systems and processes.
Phil Sawarynski: While EY had deemed Trimble's controls over revenue effective at the time of the $10K filing, EY's subsequent internal review over the last few weeks has changed their conclusion. Unfortunately, the result is that our 10-Q filing will be delayed, and we will need to amend our 10-K to revise the internal control disclosures after the completion of EY's additional audit procedures. We've decided to delay our annual shareholders meeting until EY has completed its work.
Phil: While <unk> had deemed trembles controls over revenue effective at the time of the 10-K filing UI subsequent internal review over the last few weeks has changed their conclusion and.
Phil: Unfortunately, the result is that our 10-Q filing will be delayed and we will need to amend our 10-K to revise the internal control disclosures. After the completion of <unk> additional audit procedures.
Phil: We have decided to delay our annual shareholders' meeting until <unk> completed their work is first and foremost important to note and emphasize that our auditors have not withdrawn their 2023 financial audit opinion, we're committed to working with our auditors to close this out in an expeditious manner.
Phil Sawarynski: It is first and foremost important to note and emphasize that our auditors have not withdrawn their 2023 financial audit opinion. We are committed to working with our auditors to close this out in an expeditious manner. With that, let's turn to guidance for the second quarter and the remainder of the year. As Rob noted earlier, we are reaffirming all elements of our initial guidance for 2024, despite negative currency moves, with some puts and takes between quarters and with prudence, given that we are still early in the year and our global end market environments are dynamic.
Phil: With that let's turn to guidance for the second quarter and the remainder of the year as Rob noted earlier, we are reaffirming all elements of our initial guidance for 2024, despite negative currency moves with some puts and takes between quarters and with prudence given that we're still early in the year and our global end market environments are dynamic.
Phil Sawarynski: Several factors influence our outlook for the year. While we got off to a very strong start in the first quarter, some of our outperformance came from hardware and term license revenue in the first quarter that we previously anticipated would come in the second quarter or later in the year. With this dynamic in mind, we think the best way to understand our trends is by looking at the year through the lens of first half versus second half.
Phil: Several factors influence our outlook for the year, while we got off to a very strong start in the first quarter. Some of our outperformance came from hardware and term license revenue in the first quarter that we previously anticipated would come in the second quarter or later in the year.
Phil: With this dynamic in mind, we think the best way to understand our trends is by looking at the year through a lens of first half versus second half.
Phil Sawarynski: Overall, our outlook for the first half remains consistent with what we shared with you a quarter ago. We expect that as-adjusted organic revenue growth in the second half of the year will be consistent with the first half after adjusting for the impact of the extra week in the fourth quarter. Let's now move to our detailed guidance on slide 12. I will focus again on our as-adjusted view, excluding agriculture. Please note that we have also included slides in the appendix to our presentation that provide more information on our segment and corporate assumptions. Our prior guidance assumed that the Agriculture Joint Venture would close on April 1st, which is exactly what happened.
Overall, our outlook for the first half remains consistent with what we shared with you a quarter ago, we expect that as adjusted organic revenue growth in the second half of the year will be consistent with the first half after adjusting for the impact of the extra week in the fourth quarter.
Speaker Change: Let's now move to our detailed guidance on slide 12, I will focus again on our as adjusted view excluding agriculture. Please note that we've also included slides in the appendix to our presentation that provide more information on our segment and corporate assumptions.
Speaker Change: Our prior guidance assumed that the agricultural joint venture we closed on April one which is exactly what happened the as adjusted view removes agriculture and the historical periods, which enables looking at the growth dynamics of our current portfolio in a consistent way.
Phil Sawarynski: The as-adjusted view removes agriculture from the historical periods, which enables looking at the growth dynamics of our current portfolio in a consistent way. Our outlook for ARR growth remains strong, with continued expectations for 11-13% organic growth for the year. This is driven primarily by the expectation of mid- to high-teens growth in AECO ARR. However, our total company full-year organic revenue growth outlook remains in the 4-7% range. This is driven by AECO growth in the high-teens to low-20s, field systems growth flat to down in the low single digits, and transportation revenue flat to up in the low single digits.
Speaker Change: Our outlook for AOR growth remains strong with continued expectations for 11% to 13% organic growth for the year.
Speaker Change: This was driven primarily by the expectation of mid to high teens growth in ACO <unk>. Our total company full year organic revenue growth outlook remains in the 4% to 7% range. This is driven by ACO growth in the high teens to low twenties field systems growth flat to down in the low single digits and transportation.
Speaker Change: <unk> flat to up in the low single digits.
Phil Sawarynski: As a reminder, our 2024 fiscal year includes 53 weeks, which increases full year and fourth quarter revenue by approximately $85 million, of which approximately $70 million is in the ACO segment. Excluding this extra week of revenue growth, NAECO is expected to be up in the low to mid-teens. Our margin outlook for the year is also unchanged, with the non-GAAP operating margin expected to be in the range of 24-25% and the adjusted EBITDA margin in the range of 26.5-27.5%.
Speaker Change: As a reminder, our 2020 for fiscal year includes 53 weeks, which increases full year and fourth quarter revenue by approximately $85 million of which approximately $70 million is in the ACO segment. Excluding this extra week revenue growth in ACO is expected to be up in the low to mid teens.
Speaker Change: Our margin outlook for the year is also unchanged with non-GAAP operating margin expected to be in the range of 24% to 25% and adjusted EBITDA margin in the range of 26, 5% to 27, 5%.
Phil Sawarynski: This represents year-over-year improvement on both measures of between 100 and 200 basis points. AECO margins are expected to be up approximately 300 basis points for the year and by about 50 basis points excluding the extra week. This margin expansion reflects both the strong growth in our construction software businesses with high gross margins while continuing to invest in support of future growth opportunities. For field systems, margins are expected to be down approximately 100 basis points due to changes in customer and product mix.
Speaker Change: This represents year over year improvement on both measures of between 102 hundred basis points.
Speaker Change: Ico margins are expected to be up approximately 300 basis points for the year and by about 50 basis points. Excluding the extra week. This margin expansion reflects both the strong growth in our construction software businesses with high gross margins, while continuing to invest in support of future growth opportunities.
Speaker Change: In field systems margins are expected to be down approximately 100 basis points due to changes in customer and product mix.
Phil Sawarynski: Finally, in Transportation, we expect margins to continue to improve, with margins up approximately 100 basis points for the year, with continued margin expansion in our Enterprise, MAPS, and Transporting business. Our EPS forecast of $2.60 to $2.80 is unchanged and continues to reflect the benefits of capital redeployment of the proceeds from the joint venture transaction. We've already paid out all of our prepayable debt, and we continue to anticipate that we will execute on up to $800 million of share repurchases over the course of the year.
Speaker Change: Finally in transportation, we expect margins to continue to improve with margins up approximately 100 basis points for the year with continued margin expansion in our enterprise maps and transport businesses.
Speaker Change: Our EPS forecast of $2 60 to $2 80.
Speaker Change: Is unchanged and continues to reflect the benefits of capital redeployment of the proceeds from the joint venture transaction, we've already paid down all of our pre payable debt and we continue to anticipate that we will execute on up to $800 million of share repurchases over the course of the year.
Phil Sawarynski: Relative to our prior guidance, EPS will benefit from lower net interest expense due to the increased cash on our balance sheet offset by lower equity income. From a cash flow perspective, we continue to expect full-year free cash flow of approximately.85 times non-GAAP net income. However, our outlook does not assume a change as it relates to expensing research and development for tax purposes.
Speaker Change: Relative to our prior guidance EPS will benefit from lower net interest expense due to the increased cash on our balance sheet offset by lower equity income.
Speaker Change: From a cash flow perspective, we continue to expect full year free cash flow of approximately eight five times non-GAAP net income.
Speaker Change: This.
Speaker Change: Outlook does not assume a change as it relates to expensing of research and development for tax purposes.
Speaker Change: Excluding the impact of acquisition deal expenses, and the 50 <unk> week, our free cash flow forecast for the year is roughly one times non-GAAP net income note that we expect free cash flow in the second quarter to be the lowest of the year second quarter cash flow is normally seasonally low and in the second quarter, We will see high acquisition related expenses related to the <unk>.
Phil Sawarynski: Excluding the impact of acquisition deal expenses and the 53rd week, our free cash flow forecast for the year is roughly one times non-GAAP net income. Note that we expect free cash flow in the second quarter to be the lowest of the year. Second quarter cash flow is normally seasonally low, and in the second quarter, we will see high acquisition-related expenses related to the closing and transition costs for the agriculture joint venture, as well as higher cash taxes. I'll finish by offering a few comments on how our guidance for 2024 breaks out by quarter.
Speaker Change: <unk> and transition cost for the agriculture joint venture as well as higher cash taxes.
Speaker Change: I'll finish by offering a few comments on how our guidance for 2024, it breaks out by quarter as we discussed.
Phil Sawarynski: As we discussed, our guidance overall assumes that, excluding the 53rd week, our as-adjusted organic growth is relatively consistent between the first half and the second half of the year. For the second quarter, we expect revenue between $845 million and $875 million, which reflects adjusted organic revenue approximately flat year-over-year. As adjusted organic revenue growth year over year in all three segments is expected to be lower than in the first quarter. In AECO, these dynamics reflect the timing of the term license sales, which although considered as part of our ARR calculation, are recognized up front under the accounting rules and positively impacted the segment in the first quarter.
Speaker Change: <unk> overall assumes that excluding the 50 <unk> week, our as adjusted organic growth is relatively consistent between the first half and second half of the year for the second quarter, we expect revenue between $845 million and $875 million, which reflects as adjusted organic revenue approximately flat year over year.
As adjusted organic revenue growth year over year in all three segments is expected to be lower than the first quarter.
Speaker Change: And ACO. These dynamics reflect the timing of the term license sales, which although considered as part of our AOR calculation are recognized upfront under the accounting rules and positively impacted the segment in the first quarter.
Phil Sawarynski: To illustrate this point further, within AECO, we recognize approximately $85 million of term license revenue in the first quarter, and in both the second quarter and third quarter, we expect term license revenue in AECO to be approximately $30 million, due in large part to the normal timing of the term license renewal. Then, in the fourth quarter, that term license revenue will increase again above first-quarter levels due to the inclusion of the 53rd week of January 1st, 2025 in our 2024 fiscal year, which is when many of the term licenses were new.
Speaker Change: To illustrate this point further within ACO, we recognized approximately $85 million of term license revenue in the first quarter and in both the second quarter and third quarter. We expect term license revenue in <unk> to be approximately $30 million due in large part to the normal timing of the term license renewals.
Speaker Change: Then in the fourth quarter that term license revenue will increase again above first quarter levels due to the inclusion of the 50 <unk> week in January one 2025, and our 2020 for fiscal year, which is when many of the term licenses renew.
Phil Sawarynski: Our ARR measure evens out the lumpy nature of term license revenue, and we believe it is the best measure of growth in AECO. It's important to note that term license revenue is highly profitable, so the profitability in our AECO segment and at the company level will be highest in the first quarter and fourth quarter and lower in the second and third quarters. In the field systems segment, we had strong sales of geospatial technology to government customers in both the second quarter of 2023 and in the first quarter of 2024, which we did not expect to repeat in the second quarter.
Speaker Change: Our AAR measure evens out the lumpy nature of term license revenue and we believe it is the best measure of growth and ACO.
Speaker Change: It is important to note. The term license revenue is highly profitable so the profitability in our ACO segment and at the company level will be highest in the first quarter and fourth quarter and lower in the second and third quarters in the field systems segment, we had strong sales of geospatial technology to government customers in both the second quarter of 2023.
Speaker Change: In the first quarter of 2020 for which we do not expect to repeat in the second quarter.
Phil Sawarynski: Transportation revenues and organic growth will be modestly lower in the second quarter, primarily reflecting reduced low-margin hardware sales in our North American mobility business. At this point, we expect the total company third quarter revenue will be similar to second quarter revenue, with fourth quarter revenue, the high point for the year, assisted by $85 million in revenue from the 53rd week. Operating and EBITDA margins for the year are expected to follow these same trends. We look forward to providing you with more details on the drivers and economics of these segments at our Investor Day event in December. Rob, I'll turn it back to you.
Transportation revenues and organic growth will be modestly lower in the second quarter, primarily reflecting reduced low margin hardware sales in our north American mobility business.
Speaker Change: At this point, we expect the total company third quarter revenue will be similar to second quarter revenue with fourth quarter revenue the high point for the year assisted by $85 million in revenue from the 50 <unk> week.
Speaker Change: Operating and EBITDA margins for the year are expected to follow the same trends.
Speaker Change: We look forward to providing you with more details on the drivers and economics of these segments at our Investor day event in December.
Bob I'll turn it back to you.
Bob: Thanks, Phil when.
Robert G. Painter: When we think about our right to win at Trimble, we believe we can uniquely bring together users and connect workflow between the physical and digital worlds across the industry continuum. Connect and scale is our strategy. Our strategy is an industry platform strategy, and our platform strategy is, in turn, a data strategy. If we are successful in our pursuits, we will collect one of the most complete data sets in and across industries, creating a flywheel of enhanced insights and data connectivity, thereby enabling our customers to transform how they work, while building a competitive moat around our business.
Bob: When we think about our right to win a trimble. We believe we can uniquely bring together users and connect workflow between the physical and digital worlds across industry continues connect and scale as our strategy. Our strategy is an industry platform strategy. Our platform strategy is in turn a data strategy. If we are successful in our pursuits, we will collect one of the most complete.
Bob: Datasets and across industries, creating a flywheel of enhanced insights and data connectivity, thereby enabling our customers to transform how they work while building a competitive moat around our business. Thanks to all our trimble colleagues for delivering a solid start to the year and for demonstrating resilience and conviction as we continue to transform how we work.
Robert G. Painter: Thanks to all our Trimble colleagues for delivering a solid start to the year and for demonstrating resilience and conviction as we continue to transform how we work so that we can transform how the world works. Operator, we can now open the line to questions. Thank you.
Speaker Change: So that we can transform how the world works operator, we can now open the line to questions.
Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. If your first question comes from the line of Chad Dillard with Bernstein, please go ahead.
Speaker Change: Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to Mr. I. Your question simply press Star. One again, if you are called upon to ask your question and our listening via loud speaker on your device. Please pickup your handset and ensure.
Speaker Change: That your phone is not on mute and asking your question.
Speaker Change: Your first question comes from the line of Chad Dillard with Bernstein. Please go ahead.
Hi, good morning, guys.
Speaker Change: Okay.
Charles Albert Edward Dillard: So I guess my first question is, I just wanted to dig in more on the financial controls issue. I was hoping you could give a little bit more detail on, you know, just, I guess, like, what happened in terms of the IT and the impact on revenue recognition. And then, I guess, like, to what extent, you know, at least right now, do you think this could potentially impact the income statement? And just, like, how are you thinking about the timing of a resolution?
Charles Albert Edward Dillard: So I guess my first question just wanted to dig in more into the financial controls.
Charles Albert Edward Dillard: Issue I was hoping you could give a little bit more detail on.
Charles Albert Edward Dillard: It's like what happened in terms of any impact on <unk>.
Charles Albert Edward Dillard: Recognition.
Charles Albert Edward Dillard: And then I guess to what extent at least right now do you think it could potentially impact the income statement and just like how are you thinking about the timing of that resolution.
Robert G. Painter: Sure. Good morning.
Charles Albert Edward Dillard: Sure Good morning, I'm going to turn it to David Barnes David is staying on.
Robert G. Painter: I'm going to turn it to David Barnes. David is staying on with us to see this through to its conclusion. And so, David, why don't you?
David G. Barnes: With us to see this through to its conclusion and so David once you're sure Hey, Chad.
David G. Barnes: Hey Chad, so the process is that our 10-K was filed, as you know, in February, and PCOB selected EY's audit of Trimble for their review. As the EY team looked over their work papers on the internal control side of things, they concluded that the documentation that they and we had was not sufficient to meet the standards of the audit of internal controls. Now Chad, the thing I'd point out is that EY's support of our financials is unchanged. This is just about internal controls.
David G. Barnes: So the process is that our 10-K.
David G. Barnes: It was filed as you know in February and the P. C O be selected he lives audit of Trimble for their review.
Speaker Change: The UI team.
David G. Barnes: Looked over their work papers on the internal control side of things. They concluded that the documentation that they and we had.
David G. Barnes: Wood was not sufficient to meet the to meet the standards of the auditor of internal controls that you had the thing I'd point out is that.
David G. Barnes: No issues with our numbers have been identified by EY or us. What's happening is EY is going to go through enhanced audit procedures to confirm the numbers, and then we will issue an amended 10-K, which will enable us to issue the Q as well. We've looked at companies that have gone through this, and it probably takes probably more than a month. It's hard to predict the timing. It's inconvenient, but we at this point have no reason to believe that our numbers will change, and we're working cooperatively with EY to get that done.
David G. Barnes: Eli support of our financials is unchanged. This is just about the internal.
David G. Barnes: Internal controls.
David G. Barnes: No no issues with our numbers have been identified by E y or us.
David G. Barnes: Whats happening as he was going to go through enhanced audit procedures to confirm the numbers and then we will issue.
David G. Barnes: An amended 10-K, which will enable us to.
David G. Barnes: Nishu the Q as well as we've looked at companies have gone through this and it takes probably more than a month.
David G. Barnes: To predict the timing.
David G. Barnes: It's inconvenient, but we at this point have no reason to believe that our numbers will change and we'll we're.
David G. Barnes: We're working cooperatively with E y to get through it.
Robert G. Painter: Great. That's helpful. And just moving to AECO, can you give a little bit more detail on bookings for that business, like during the quarter? And if you can, just talk about what the take rate is on your bundled offerings.
Speaker Change: Great that's helpful.
Speaker Change: And just moving to <unk> can you give a little more detail on bookings for that business like during the quarter and if you can.
Speaker Change: Talk about what the take rate is.
Speaker Change: On your bundled offering.
Speaker Change: Okay.
Robert G. Painter: So bookings in the quarter continued to be strong. So we've put together really a couple of years now of strong progression in the bookings. The bookings, the ACV bookings, were over 20% growth in the quarter.
Speaker Change: So bookings in the quarter continued to be strong so put together really a couple of years now.
Speaker Change: The strong progression in the bookings the bookings the ACD bookings or over 20% growth.
Speaker Change: In the quarter.
Robert G. Painter: So we like what we're seeing in terms of the progression there. Within that, Trimble Construction 1 is clearly an offering that we've been talking a lot about over the last, say, year or so. The bookings grew faster than that within Trimble Construction 1. So we're continuing to increase the level of adoption through that as we've transformed our selling organization and the processes and the systems to go along with that.
Speaker Change: So we like what we're seeing in terms of the progression there within that.
Speaker Change: Construction, one is clearly an offering that we've been talking a lot about.
Speaker Change: Over the last let's say year year, and a half the bookings grew faster than that within trimble construction ones. So trimble construction, one or continuing to increase the level of adoption through that as we've transformed our selling organization and the processes and the systems to go along with that so giving you.
Robert G. Painter: So to give you an example, in North America, about 80% of our bookings were Trimble Construction 1 bookings within the quarter, and those grew at a level of almost 2x the bookings level growth on a year-over-year basis. So, strong progression, Chad.
Speaker Change: Example, in North America.
Speaker Change: Think about 80% of our bookings our terminal construction one.
Speaker Change: <unk> within the quarter and those grew.
Speaker Change: At a level of almost two X the bookings level growth on a year over year basis, So strong progression Chad.
Speaker Change: Please limit yourself to one question and one follow up your next question comes from the line of Jason <unk> from Keybanc. Please go ahead.
Jason Vincent Celino: Please limit yourself to one question and one follow-up. Your next question comes from the line of Jason Celino from KeyBank. Please go ahead.
Jason Vincent Celino: Hey, thanks for taking my question. Maybe double-clicking on that a little bit. When you think about the growth that you're seeing in AUCO and maybe if you go a step deeper on TC1, is there a way to think about it versus net new versus expansion?
Speaker Change: Okay.
Jason: Thanks for taking my question, maybe double clicking on that a little bit when you think about the growth that youre seeing.
Jason: And maybe that.
Jason: Deeper on TC one yes.
Jason: As a way to think about it versus net new versus expansion.
Robert G. Painter: Jason, the breakdown on that is about two-thirds, one-third, two-thirds existing logos, one-third new logos. So if we take new logos, what we see is that the offering is expanding the addressable market. In some cases, that's allowing us to go, I'd say, more in the small, midsize end of the market with the offering. And then on the, let's call it, the mid to upper end of the market, we continue to see customers wanting to buy into an ecosystem. And we think that's driving a good amount of the growth. The team's doing a great job.
Jason: Jason the breakdown on that.
Jason: About two thirds, one third two thirds existing logos, one third new logos. So if we take new logos and what we see is that the offering is expanding the addressable market.
Jason: Some cases, thats, allowing us to go I'd say more in the small mid.
Jason: The mid size and of the market with the with the offering.
And then on the let's call it the mid to upper end of the market, we continue to see customers wanting to buy.
Jason: And to an ecosystem and we think that's driving a good amount of the growth team has done a great job executing.
Robert G. Painter: Yep, I mean, it seems like you're executing quite well. I know the demand environment doesn't make it easy, but maybe relative to, you know, 90 days ago, maybe you could just give us an update on how some of that end market or macro kind of sentiment is within that segment? Thanks.
Yes, I mean, it seems like youre executing quite well.
Jason: On the demand environment.
Jason: Make it easy.
But maybe relative.
Jason: 90 days ago, maybe can you just give us an update on how some of that.
End market or macro.
Sentiment is within that segment.
Robert G. Painter: Yeah, good question. So, on the macro side within AECO, what I would comment on is that we see good growth and on-shoring and re-shoring of manufacturing. We see, and you see, that in Europe and North America. Renewables, data centers, these are strong growers in North America, and those bookings and AR growth support that. Residential with a straight environment is on the other side of that. Trade that that aspect of the market is a bit more is a bit more challenged. You know, we actually also Jason have quite a bit of data within our own systems, as you know. We're managing nearly a third of U.S. construction through our systems, and so we can see that hiring is up in the market here in North America in the non-residential space. We Please go ahead.
Speaker Change: Yeah. Good question.
Speaker Change: So on the on the macro on the macro side within ACO.
Speaker Change: What I would comment on is that we see good growth and onshoring re shoring of manufacturing, we see and you see that in Europe and North America.
Speaker Change: Renewables data centers. These are strong growers in North America, and there's about bookings and air growth.
Speaker Change: Ports that residential with interest rate environment on the other side of that.
Speaker Change: Trade that that aspect of the market is a bit more a bit more challenged we actually also Jason have quite a bit of data within our own systems. As you know we were managing nearly a third of the U S. Construction through our our systems and so we can see that hiring.
Speaker Change: <unk> is up in the market here in North America in the nonresidential space. We can see geographically is that theres been the largest growth in the Midwest followed by the southeast with Florida's Carolinas.
Speaker Change: In Georgia.
Speaker Change: Your next question comes from the line of Jonathan Ho with William Blair. Please go ahead.
Jonathan Frank Ho: Hi, good morning. I just wanted to start with a little bit more of a high-level question as
Jonathan Frank Ho: Hi, Good morning, just wanted to start with a little bit more of a high level question as we look at Trimble of moving forward just given the model and mix changes here at what point should we expect a R. R and total revenue growth to converge a little bit more.
Robert G. Painter: Hey Jonathan, good morning. It's Rob.
Jonathan Frank Ho: Hey, Jack Hey, Jonathan Good morning, it's Rob.
Rob: Good question, we actually already see that in <unk>.
Robert G. Painter: Good question. We actually already see that in AECO. And so you can see the growth in the quarter, for example, was 18% on the ARR as well as 18% revenue. If you look in transportation and logistics, you actually have the same phenomenon revenue, total revenue up for ARR up, so it correlates to the amount of recurring revenue. The one that will be disconnected and would remain so for, I think, a number of years would be field systems, which is predominantly a hardware business.
Rob: And so you can see the growth in the quarter for example is the 18%.
Speaker Change: On the on the IRR as well as <unk>.
Speaker Change: 18% revenue if you look in transportation and logistics actually had the same phenomenon of revenue total revenue.
Speaker Change: Up for air are up four so it correlates to the amount of recurring.
Speaker Change: It's in that the one that will be disconnected and would remain so for I think a number of years would be at field systems, which is predominantly a hardware business I think the recurring is call it in the 20%.
Robert G. Painter: I think the recurring revenue is, I'll call it, in the 20% range on that. So those will remain separated and thus leave a separation at the total company level. Got it. And just as a follow-up, can you give us a little bit more detail on Transporeon and, you know, what may be changed there to drive the much improved results? Thank you.
Speaker Change: Range on that so those will remain separate it in us leave a separation at the total company level.
Speaker Change: Okay.
Speaker Change: Got it and just as a follow up can you give us a little bit more detail on transporting on and you know what maybe changed there to drive the much improved results.
Speaker Change: Yeah.
Robert G. Painter: Yeah, a good question as well. So another strong quarter of bookings growth, that's two quarters in a row of records for the business, a record Q4 and then a record Q1 as well. What I would say is a few things to add to that. So the team began successfully cross-selling transport solutions to existing Trimble transportation customers here in North America, which exemplifies go-to-market synergies, and we think we're just getting started.
Speaker Change: Yes, good question.
Speaker Change: Well so another strong.
Speaker Change: Quarter of bookings growth, that's two quarters in a row of.
Of records for the business a record Q4, and then a record with a Q Q1 as well.
Speaker Change: What I would say is a few things to add on to that to the team began successfully cross selling transport solutions to existing terminal transportation customers here in North America, which exemplifies go to market synergies and we think we're just getting started and virtually live and selling some of our maps product solutions into the European.
Robert G. Painter: Conversely, we've been selling some of our MAPS solutions into the European market. The bookings growth was both with the shippers and carrier customers, and that's important because the team's continuing to grow network participants on all sides of the transportation management platform, which effectively connects the buyers and the sellers of freight. Dozens of new logos were added in the quarter. I like what we're seeing with new product development as well as autonomous procurement and autonomous quotation. So I'd say a number of things are coming together. The team's executing quite well, and which is still a very difficult economic or difficult freight market economy, doubly so in Europe.
Speaker Change: Market those bookings growth and we're both with the shippers and carrier customers.
Speaker Change: That's important because we continue with the team is continuing to grow network participants on all sides of the transportation management platform.
Speaker Change: Which effectively connects the buyers and the sellers of freight dozens of new logos.
Speaker Change: Were added in the quarter.
Speaker Change: I like what we're seeing from new product development as well with autonomous procurement and autonomous quotation. So I'd say a number of things coming together the teams executing quite well and which is.
Speaker Change: Still a very difficult economic difficult freight market economy doubly so in Europe.
Speaker Change: Okay.
Jerry David Revich: Your next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.
Speaker Change: Your next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.
Jerry David Revich: Yes, hi. Good morning, everyone.
Jerry David Revich: Yes, hi, good morning, everyone.
Jerry David Revich: I'm wondering if you could just talk about the <unk>.
Jerry David Revich: <unk> margin outlook. So you boats had an outstanding first quarter and I understand the comments about some license sales, but historically you just don't have that type of margin step down that you're guiding to <unk> versus <unk>.
Jerry David Revich: I'm wondering if we could just talk about the 2Q margin outlook. So, you both said an outstanding first quarter, and I understand the comments about term license sales, but historically, you just don't have that type of margin set down that you're guiding to, 2Q versus 1Q. And so, I just want to make sure we understand how much of that is making sure that we can beat numbers like we did this quarter versus a meaningful slowdown in any part of the business because, obviously, the performance in the quarter was really strong.
Jerry David Revich: I just want to make sure we understand how much of that is making sure that we can beat numbers like we did this quarter versus a meaningful slowdown in <unk>.
Jerry David Revich: Any part of the business because obviously the performance in the quarter was really strong.
Phil Sawarynski: Hey, Jerry, it's Phil. And thanks. And a good question, because I know there are a lot of moving parts in our outlook. So yeah, if you think about Q1, as I talked about, the term licenses are largely a Q1 dynamic. And that's that $50 million drop from Q1 to Q2. So if you look at the margin basis, I think it's around a 400, a little bit more than a 400 point drop. So the large part of that, I'll put it into actually four buckets.
Phil: Hey, Jerry it's Phil.
Jerry David Revich: Thanks, and good question, because I know theres, a lot of moving parts in our outlook. So.
Yes, if you think about Q1 as I talked about the term licenses are.
Phil: Largely a Q1 dynamic and that's that $50 million drop from Q1 to Q2. So if you look at the margin basis.
I think it's around 400, a little bit more than a 400 point drop so the large part of that I'll put it into four buckets.
Phil Sawarynski: Half of that, or a little over half of that, is because of the dynamic of the term license. If you remember, term licenses actually get recognized all up front. So that's high-margin revenue. And then as you move into Q2, the other two pieces are, one, we have our merit raises that take effect in April. And so that's about 100 basis points. And then another 100 basis points is some additional OPEX, primarily around the AECO business and the sales and marketing and R&D spend that we've talked about, incremental spend there to continue to drive that growth engine. And then the remainder is the term license to bridge that 400.
Phil: Half of that or a little over half of that is because of the dynamic of the term license. If you remember is the term license is actually get recognized all upfront. So that's high margin.
Phil: Revenue and then as you move into Q2, the other two pieces.
Phil: One we have our merit raises that take effect in April and so that's about 100 basis points and then another 100 basis points as some additional opex, primarily around the ACO business and the sales and marketing and R&D spend where we've talked about incremental spend there to continue to drive that growth engine. So.
Phil: And then the remainder is based is the term license to bridge that 400.
Jerry David Revich: Okay. And then, you know, can I ask separately on the ARR, you know, the nice acceleration in performance in the quarter, really across the segments. You know, as we think about what the transporion rolling into the mix will look like, and it feels like you're looking for an acceleration based on the outlook in slide 15 across the segments, putting the pieces together across the total company, could we see ARR accelerating on an organic basis in the mid-to-high teens from an exit rate standpoint, you know, beyond the full year guide? Think about what 4Q might look like given the cadence that you describe in the slides.
Okay.
Phil: And then.
Speaker Change: Can I ask separately.
Speaker Change: The air are nice acceleration in performance.
Speaker Change: In the quarter.
Across the segments.
Speaker Change: As we think about what the transporting on rolling into the mix will look like.
Speaker Change: It feels like you're looking for an acceleration.
Speaker Change: Based on the outlook on slide 15 across the segments, putting the pieces together across the total company could we see <unk> accelerating on an organic basis in the mid to high teens from an exit rate standpoint.
Speaker Change: Beyond the full year guide just.
Speaker Change: Thinking about what <unk> might look like given the cadence that you described in the slides.
Jerry David Revich: What's a transitorium will certainly help them at the company level in terms of bringing up the AR growth potential. The other side of that is the mobility business. And so the net of that gets to the guide that we put forward, Jerry.
Speaker Change: Well, it's a transport and will certainly help them at the company level in terms of bringing up the AOR growth potential on the other side of that is the mobility business and so the net of that gets to the guide that we put forward Gerry.
Robert G. Painter: And Rob, is it fair to say that there's an acceleration, though, 4Q above the full year ARR guide at this point?
Speaker Change: And Rob is it fair to say that there's an acceleration, though <unk> above the full year our guide.
Robert G. Painter: At this point, no. No, we're maintaining the outlook on that. It would buy us more above the mid, but we're going to leave that guide where we are right now.
Speaker Change: At this point no no we're maintaining that.
Speaker Change: Maintaining the outlook on that it hasnt I mean, it would bias more of the above to the med.
Speaker Change: <unk>.
Speaker Change: We're going to leave that guide, where we are right now.
Speaker Change: Thank you.
Kristen E. Owen: Your next question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.
Speaker Change: Brooklyn. Your next your next question comes from the line of Christian Owen with Oppenheimer. Please go ahead.
Kristen E. Owen: Hi, good morning. Thank you for taking the time to answer the question. Rob, you called out the rule of 40 balance for AECO. And I think it just in this previous question said about 100 basis points going to reinvestment in that business. Just wondering if you can talk about sort of balancing that lifetime customer value versus your customer acquisition cost, you know, how you think about investment versus growth to build out the opportunities that that brings. Yeah, hey, good.
Kristen E. Owen: Hi, Good morning, Thank you for taking the question.
Kristen E. Owen: You called out the rule of 40 balance for ECS.
Kristen E. Owen: Just in the previous question, but about 100 basis points going to reinvestment in that business. Just wondering if you can talk about sort of balancing that that lifetime customer value versus your customer acquisition cost and how you think about investment versus growth.
Kristen E. Owen: <unk> built out the opportunity set in that business.
Robert G. Painter: Yeah, hey, good morning, Kristen. Great question. Let me take that twofold. First, with the, call it the 100 bps of investment, OPEX investment into the ACO segment that Phil referenced. More than half of that is at the sales and marketing level, so that's putting feet on the street sellers to get the business that we think is there. About a quarter of it is in R&D as we continue to drive connectivity and interoperability between the solutions driving workflow capabilities, as well as the AI investments we're making into the products.
Speaker Change: Yeah, Hey, good morning, Kristen Great question.
Let me take that two fold.
Speaker Change: First with the <unk>.
Speaker Change: Call. It the 100 bps of investment Opex investment into the AC ACO segment that Phil referenced more than half of that is that the sales and marketing level. So that's putting feet on the street sellers to go get.
Speaker Change: The business that we think is there.
Speaker Change: About a quarter of it is.
Speaker Change: And R&D as we continue to drive connectivity and interoperability between the solutions driving workflow capabilities as well as AI investments, we're making into the products and then the remainder is in G&A, which is really the systems investments in our systems investments which are enabling.
Robert G. Painter: And then the remainder is in G&A, which is really the systems investments and the systems investments, which are enabling a lot of this to happen. So, at the low level, when we think about the return on investment that we're making to put into the business, we look at that lifetime value over the customer acquisition cost. And the easy heuristic is when we're at a ratio above three, that's telling us to lean forward and invest in the business.
Speaker Change: A lot of this to.
Speaker Change: To happen. So then at the low at the level when we think about the return on investment that we're making.
Speaker Change: To put into the business, we look at that lifetime value over their customer acquisition cost and the easy heuristic is when we're at a ratio above three that's telling us.
Speaker Change: To lean forward and invest into the business or well above.
Robert G. Painter: We're well above that, call it the floor of our thinking. And so when we do that math, this is actually a pretty straightforward exercise to say we should be leaning into investing in this business to go after the market, especially when we're delivering well above the rule of 40 and, in fact, above the rule of 50.
Speaker Change: That.
Caught us up floor of our our thinking and so when we do that math. This is actually it's pretty straightforward exercise to say, we should be leaning into investing in this business to go after the market, especially when we're delivering well above the rule of 40 and in fact above rule of 50 in.
Kristen E. Owen: Okay, thank you. That's helpful.
Speaker Change: Okay. Thank you that's helpful.
Speaker Change: When I think about the overall size of that market opportunity, namely obviously the business is going through a transformation at this point in time TC line really just starting to ramp.
Speaker Change: We look at sort of the five year model for Trimble, how do you think about your mix.
Speaker Change: Market opportunity.
Speaker Change: For continuing growth in ACO is it within your existing customer base is it new products is it new logos just help us understand what sustains this growth on a go forward basis.
Kristen E. Owen: Um, when I think about the overall size of that market opportunity, I mean, we, obviously, the business is going through a transformation at this point in time, TC1 really just starting to ramp. If we look at sort of the five-year model for Trimble, how do you think about your mix of market opportunity for continuing growth in AACO? Is it within your existing customer base? Are they new products? Is it new logos? Just help us understand what sustains this growth on a go-forward basis.
Robert G. Painter: Yeah, it's a great question. So, on a multi-year basis, I would frame this market as the largest available TAM that we have to service. We know the multi-trillion dollar size of global construction, we're playing both in vertical structure construction and horizontal construction. We know it's a market that's large, global, underserved, underpenetrated, has challenges with productivity at the intersection of productivity and sustainability, which are solutions. We see more and more customers wanting to buy into ecosystems, and our right to win, we think, begins with the breadth and depth of solutions we have across the continuum of the life cycle.
Robert G. Painter: Yeah, it's a great idea.
Speaker Change: Yes, it's a great question, so on a multiyear basis I would frame. This market has the largest available Tam that we have to service. We know the multi trillion dollar size of global construction, we're playing boats and vertical start the construction.
Speaker Change: Until construction, we know it's a market that is large global underserved underpenetrated has challenges with productivity at the intersection of productivity and sustainability with our solutions.
Speaker Change: Positively effect, we see more and more customers wanting to buy into ecosystems and our right to win we think begins with the breadth and depth of solutions, we have across the continuum of the lifecycle.
Robert G. Painter: Furthermore, if you subscribe to the notion that the world is becoming more data-centric, more data driven, then you will like the touch points we have across this industry where we can, we believe, move from optimizing tasks to optimizing systems.
Speaker Change: Furthermore, if you subscribe to the notion that the.
Speaker Change: The world is becoming more data centric more data driven.
Then you will like the touch points, we have across this industry, but we can we believe moved from optimizing tasks to optimizing systems. So we think we're well and uniquely positioned to do so with respect to how we then think about existing.
Robert G. Painter: So I think we're well and uniquely positioned to do so with respect to how we then think about existing customers versus new logos. Within the existing customer base we have, we think that there are hundreds of millions of dollars of untapped ARR to mine through cross-sell and up-sell, given the breadth of that installed base that we have. With the systems investments that we're making, it becomes more efficient to go to market. Some of those investments are creating, or starting to create, the ability for customers to self-provision.
Speaker Change: Versus new logos within the existing customer base, we have.
Speaker Change: We think that there's hundreds of millions of dollars of untapped.
Speaker Change: Our to mine through cross sell and upsell.
Speaker Change: Given the breadth of that installed base.
Speaker Change: That we have.
With the systems investments that we're making.
Speaker Change: <unk> is more efficient to go to market. Some of those investments are creating starting to create the ability for customers to self provision licenses.
Robert G. Painter: Licences More e-commerce capabilities are starting to come to market, and that, in turn, creates a more efficient go-to-market motion into the smaller end of the market. And so that, we think, would be another, and Tim, that we can unlock through the nature of the business model and the efficiency of which we go to market. We for sure think that we can continue to win new logos along the way as customers and the market overall continue to adopt and continue to digitize.
Speaker Change: Licenses more e-commerce capabilities are starting to come to market that in turn.
It's a more efficient go to market motion into the smaller end of the market and so that we think would be another.
Speaker Change: Tam that we can unlock through the nature of the business model and the efficiency of which we go to market.
Speaker Change: We for sure think that we can continue to win.
Speaker Change: New logo, new logos, along the way as.
Speaker Change: As customers in the market overall continues to adopt and continues to digitize I would expect within that five years that the majority of that revenue would come through the existing base on this land and expand.
Robert G. Painter: I would expect within that five years that the majority of that revenue would come through the existing base in this land and expand, so that's the expectation I'd want to set there. So, continue to feel very, very positive about the work in this business and the progress that we're making, and we'd like to think that we're just getting started. Thanks so much. Your next question comes from the line of Rob Wertheimer for Malias Research.
Speaker Change: So that's the expectation I'd want to I don't want to set there. So we continue to feel very very.
Positive about the work in this business and the progress that we're making and we'd like to think that we're just getting started.
Thanks, so much.
Robert Cameron Wertheimer: Your next question comes from the line of Rob Wertheimer for Malias Research. Please go ahead.
Your next question comes from the line of Rob Wertheimer from Melius Research. Please go ahead.
Speaker Change: Good morning, everybody. This is Jesse pellegrino on for Rob.
Jesse Pellegrino: Wanted to look at the.
Jesse Pellegrino: Equipment side in what is a typical downside in the equipment side look like versus where we're at now are we most of the way into the into a normal downturn just any color there would be helpful. Thank you.
Robert G. Painter: Sure, good morning, and thanks for the question. Well, you know, we certainly are following what the OEMs are reporting on their unit sales, both on the retail side and at wholesale. Demand Level. And there's for sure a correlation within field systems, the field systems business we have in the OEM. So we have OEM exposure, let's say, in field systems that we really don't have nearly as much of in the other two segments of the business.
Speaker Change: Sure Good morning, and thanks for the question.
Speaker Change: We certainly are following what the Oems are reporting on their unit sales both at a retail.
Speaker Change: Side in our wholesale.
Speaker Change: Demand level.
And there is for sure a correlation on within field systems fill systems business, we have and the Oems and we have OEM exposure, let's say in field systems that we really don't have nearly as much in the other two segments of the business, what we would see through our own numbers is that the European.
Robert G. Painter: What we would see through our own numbers is that the European economy is more challenged, and we've seen some of the prints out there on units in, let's say, Europe in construction. Although, interestingly enough, our European business and field systems performed quite well, relatively well in the first quarter. So it's not a perfect, let's say, R-squared.
Speaker Change: <unk> is more challenged than we've seen in some of the prints out there.
Speaker Change: <unk> units in let's say Europe in construction, although interestingly enough our Europe business.
Speaker Change: Field systems performed quite well relatively well in the in the first in the first quarter. So it's not a perfect let's say R squared.
Robert G. Painter: We're also fundamentally architected to serve the aftermarket and to serve the mixed fleet within that. So there's also another, I'd say, I call it the mindset that we have is not to be driven by what are new unit sales, although we do obviously sell onto new units. We see, you know, many, many hundreds of thousands of millions of machines that would benefit from having Trimble technology on them. Machine types like excavators remain low single-digit penetrated with technology, and so we think there are enormous opportunities to drive technology adoption into the base of machines that are out there.
On that on that correlation.
Speaker Change: We're also fundamentally architected to serve the aftermarket and to serve the mixed fleet within that so theres also another I'd say call it the mindset.
Speaker Change: That we have is not to be driven by water new unit sales, although we do obviously sell onto new units as we see.
Speaker Change: Many many hundreds of thousands or millions of machines that would benefit from having trimble technology on it machine types like excavators remained low single digit penetrated with technology and so we think there's enormous opportunities to drive technology adoption into the base of machines that are out there that.
Robert G. Painter: That's just the civil construction side of the business. So in field systems, survey mapping is important. Business. For us, and I would say, we disconnect that from the unit sales coming out of the machinery manufacturers. And there, you know, a surveyor fundamentally creates a digital model of the physical world. That work could be an oil and gas workflow, it could be a cadastral survey, it could be in a residential application, it could be International Parks. There's a wide variety of applications in that market, which would be independent of machines. I hope that helps provide some...
Speaker Change: Just the civil construction side of the business.
Speaker Change: Field systems survey mapping as an important.
Speaker Change: Business for Us and I would say we disconnect that from the.
Speaker Change: Unit sales coming out of the machinery manufacturers.
Our survey are fundamentally creates a digital model of the physical world that work could be in oil and gas workflow could be cadastral survey it could be residential application it could be.
Speaker Change: And our national parks.
Speaker Change: Good variety of applications.
Speaker Change: And that market, which would be independent of machine units of that helps them provide some color.
Speaker Change: Yes. Thank you.
Robert W. Mason: Your next question comes from the line of Rob Mason from Baird. Please go ahead.
Speaker Change: Your next question comes from the line of Rob Mason from Baird. Please go ahead.
Robert W. Mason: Yes, good morning. Rob, you noted that the transporting business had a win in North America. And I'm just curious, you know; if I think about when you bought the business, I'm not sure that was... The thesis there was heavily predicated on North American penetration, but now that you've owned it for about a year, I'm just curious how you're sizing up the opportunity to bring Transporian, or at least parts of Transporian, to North America, and perhaps any comment on any commercial efforts you have around that as well.
Robert W. Mason: Hi, yes, good morning.
Robert W. Mason: Rob you'd noted the.
Robert W. Mason: Transporting business had a win in North America and I'm, just curious if I think about when you bought the business I'm not sure that was.
Robert W. Mason: The thesis there was heavily predicated on north American penetration, but now that you've owned it for about a year I'm just curious how you're sizing up the opportunity to bring transport or at least parts of transport.
Robert W. Mason: At North American and perhaps any comment on any commercial efforts you have around that as well.
Robert G. Painter: Good morning, Rob, and thanks for the question. You're right about the original thesis of it being that we didn't..., let's say, create our model fundamentally around bringing European applications into North America. We saw that as additive opportunities, and we for sure saw that we could do it; we just didn't predicate the deal on that being the fundamental thesis. So yeah, hey, good news, the example, the customer I talked about in the prepared remarks, is a multi-hundred-thousand-dollar ARR win that we have, and it actually is off using the autonomous.
Speaker Change: Yes, good morning, Robyn. Thanks for the question you are right about the our original thesis of it as we do.
Speaker Change: Didn't.
Speaker Change: Let's say.
Speaker Change: Create our model fundamentally around.
Speaker Change: Bringing the European applications into North America, we saw that as additive opportunities and we for sure. So that we could do it we just didn't predicate the deal.
Speaker Change: On that theme the fundamental thesis, so, yes, hey, good news or at that.
Speaker Change: For example, the customer I talked about in the prepared remarks.
Speaker Change: Multi hundred thousand dollar.
Speaker Change: Our win that we have.
Speaker Change: And it actually is off using the autonomous.
Robert G. Painter: The quotation product that we talked about earlier as well, so not even, let's call it the older or existing application capabilities we had in the business; it's actually a new one. And so we find that very interesting to think about.
Speaker Change: Quotation product.
Speaker Change: Talked about earlier as well so not even I would say the.
Speaker Change: Let's call it the older or existing application capabilities, we had and the business is actually a new one.
And so we find that very interesting to think about.
Robert G. Painter: What's most unique about what we have in special about the North America install base, it's carrier-centric because of the nature of our customers. So when we look at capabilities to bring into North America, on the carrier side, that would look like autonomous quotation, and it's really creating automation around spot transactions.
Speaker Change: What's most unique about what we have in special about the North American installed base, it's carrier centric.
Speaker Change: The nature of our customers. So when we look at capabilities to bring into North America.
Speaker Change: The carrier side that would look like autonomous quotation and it's really.
Speaker Change: Creating automation around spot.
Robert G. Painter: So that's something that makes sense for our sellers to be able to introduce to the existing customer base. In addition, we've talked before about Engage Lane in North America and the marketplace in Europe. We brought those organizations or those teams together into one team to create what's called a global scale and global opportunity around that. So that's another example. And then the third example is real-time visibility. We're doing that as one business now, not separately in Europe and North America. And so that would, those would be additional capabilities that, you know, we want to penetrate here.
Speaker Change: Transactions. So that's something that makes sense for our sellers to be able to introduce.
Speaker Change: To add to the existing customer base. In addition, we've talked before about <unk>.
Speaker Change: Engage lane in North America in the marketplace in Europe.
Speaker Change: We brought those organizations are those teams together into one team.
Speaker Change: To create a global let's cut global scale global opportunity.
Speaker Change: Around that so that's another example.
Speaker Change: The third example is real time visibility if we're doing that as one business now not separately in Europe, and North America, and so that would those would be additional capabilities. Then we want to penetrate into the north American.
Robert W. Mason: Yeah, okay. Just as a follow-up, again, as we go through this year, I guess we'll get recalibrated to the new, the go forward segments and the business without ag, but I'm just curious, in particular, on the hardware and perpetual software gross margin trend. It's trended lower over the last 12 months, but my suspicion is that ag had something to do with that. You know, at 44% in the first quarter, how does that look on a go-forward basis without Ag?
Speaker Change: Yes, okay.
Speaker Change: As a follow up.
Again, as we get through this year I guess, we'll get recalibrated to the new.
Speaker Change: Go forward segments and.
Speaker Change: The business without AG, but I was just curious in particular on the hardware and perpetual software gross margin trend.
Speaker Change: It's trended lower over the last 12 months, but.
Speaker Change: My suspicion and I cant something to do with that.
Speaker Change: At 44% in the first quarter, how does that look on a go forward basis without.
Speaker Change: As we got through this year.
Robert W. Mason: Yeah, it's a good question. Rob and Phil can chime in after I set this up.
Speaker Change: Yes, it's a good.
Speaker Change: A question Robin and Phil can.
Chime in after I set this up.
Speaker Change: And you're right the retina.
Speaker Change: Aaron.
Speaker Change: And the numbers that you see but in addition to that.
Robert G. Painter: And you're right, there is an academic element in the numbers that you see. But in addition to that, we think about... Transitioning more of those hardware models into an element of recurring revenue. And that will naturally have a gross margin impact. So think about a system that might have sold for, let's call it, $40,000. And that for us, you know, from a, I'll call it an accounting perspective, has an element of hardware and software that's in it.
Speaker Change: We think about.
Speaker Change: Transitioning more of those hardware models, so an element.
Speaker Change: Our recurring revenue and that will naturally have a gross margin impact so think about our system that might have sold for let's call it $40000 system.
Robert G. Painter: And let's say that traditionally, that was split, let's call it $25,000 of hardware and $15,000 of software. So a $40,000 sale. That might now convert to $25,000 for the hardware up front and a subscription of $5,000 a year. And in that case, that will have near-term headwinds on the gross margins. Now we're not flipping a switch and going 100% that direction, Rob, but you can see from the ARR growth, which was 13% ARR growth in the first quarter, that it is a model that we are moving towards. So on a longer term basis, that could be two to three hundred basis miles of a headwind.
Speaker Change: And that for us from a I'll call. It accounting perspective, there is an element of hardware and software that's that's in there.
Speaker Change: That.
Speaker Change: And let's say that that traditionally was splitting let's call it $25000 of hardware and $15000 of software. So 40000 dollar sale that might now convert to $25000 for the hardware upfront.
Speaker Change: Description of $5000 a year.
Speaker Change: Year.
Speaker Change: And in that case that will have near term headwinds to gross margins now we're not flippant.
Speaker Change: Flipping a switch and go on 100% that direction.
Speaker Change: But you can see from the AOR growth that was 13% AOR growth in the first quarter that it is a model that we are moving towards.
Speaker Change: Towards so on that.
Speaker Change: The longer term basis that could be two to 300 basis points.
Phil Sawarynski: Phil, do you want to go?
Phil Sawarynski: Phil, do you want to add anything? No, I think that's right, Rob.
Speaker Change: A headwind.
Speaker Change: Phil do you want add anything to that.
Phil: No I think that's right Rob.
Robert W. Mason: Okay, that's very helpful. Thank you.
Okay. That's very helpful. Thank you.
Joshua Alexander Tilton: Your next question comes from the line of Josh Tilton with Wolf Research. Please go ahead.
Your next question comes from the line of Josh Tilton with Wolfe Research. Please go ahead.
Joshua Alexander Tilton: Hey guys, happy Friday. Can you hear me?
Joshua Alexander Tilton: Hey, guys that'd be Friday can you hear me.
Robert G. Painter: Yes, hi, good morning.
Joshua Alexander Tilton: Yes, hi, good morning.
Joshua Alexander Tilton: Good morning, guys. So just my first one is kind of a clarification.
Joshua Alexander Tilton: Good morning, guys.
Joshua Alexander Tilton: So just my.
Joshua Alexander Tilton: First one kind of a clarification I appreciate all the color around the term impact to heiko.
Speaker Change: I guess, what I'm trying to understand is because of 606 accounting will there always be a term components in the <unk> revenue line item each quarter basically every time, you renew something or you can find a new deal and then my follow up just a clarification is the reason why we have so much extra rev. In the <unk> segment because of the extra week because they are just that.
Joshua Alexander Tilton: I appreciate all the color around the term impact on ACO. I guess what I'm trying to understand is, because of 606 accounting, will there always be a term component in the ACO revenue line item each quarter, basically every time you renew something or even sign a new deal? And then my follow-up question, just for clarification, is the reason why we have so much extra revs in the ACO segment because of the extra week because there's just a bunch of renewals that will have term licenses tied to those renewals that will land in the extra week of the year? Am I thinking this correctly?
Speaker Change: <unk> renewals that will have term licenses tied to those renewals that will land and the extra week of the year am I thinking about this correctly.
Phil Sawarynski: Yeah, hey, Josh, it's Phil. So your second question is the easy one. Yes, you are thinking about it correctly. Our 53rd week encompasses January 1 of 2025, and a large portion of our term licenses renew around that date. And so, you are correct in thinking that the 53rd week, roughly 70 of the 85 million there are term licenses that renew. And your first question, yes, there is an element of term licenses within AECO that we've had and will continue to have.
Speaker Change: Yeah, Hey, Josh so.
Speaker Change: So.
Speaker Change: Your second question's easy one yes, you are thinking about it correctly or a 50 <unk> week encompasses January one of 2025 and a large portion of our term licenses renew around that date and so so you are correct in thinking that the 50 <unk> week, roughly 70 of the $85 million there or the term licenses that were new.
Speaker Change: And your first question, yes. The there is an element of term licenses within ACO that we've had and we continue we'll continue to have.
Phil Sawarynski: That's largely in our Structures business, and some of it has to do with the complexity and the horsepower around the offering itself, where it's challenging to move that more into the cloud. So you will see that dynamic going forward, at least for the foreseeable future.
Speaker Change: That's largely in our structures business and.
Some of it has to do with the complexity and the horsepower around the offering itself where.
It's challenging to move that more into the cloud.
So you will see that dynamic going forward.
Speaker Change: At least for the foreseeable future.
Joshua Alexander Tilton: So just to be clear, term is not tied to all contracts in AECO, just some of them.
So just to be clear term is not tied to all contract an ACO just some of them.
Phil Sawarynski: Correct. It's a limited subset of the total ACO offering.
Speaker Change: Correct, It's a limited subset of the total ACL offerings.
Joshua Alexander Tilton: Okay, super helpful. And then I guess my follow up is just at a very high level.
Okay Super helpful and then I guess.
Speaker Change: My follow up on the just very high level, we definitely had a lot of positive inbound since you guys have given.
Joshua Alexander Tilton: We've definitely had a lot of positive feedback since you guys gave this new segmentation. But I guess when you guys are sitting around the table right there, did anything change in terms of how you guys think about the business and plan to think about the business going forward that aligns with this segmentation? Or is it kind of just business as usual for you guys there, and this segmentation is more for, you know, us investors to better understand what's already been going on behind the scenes?
Speaker Change: Since you guys have given this new segmentation, but I guess when you guys are sitting around the table right. There did anything change in terms of how you guys think about the business and plan about thinking about the business going forward that aligns with the segmentation or is it kind of just business as usual for you guys. There in this segmentation is more for us investors better understand what.
Speaker Change: Already been going on behind the scenes.
Robert G. Painter: Hey, Josh, it's Rob. I'll take this one.
Speaker Change: Yeah, Hey, Josh it's Rob I'll take this one I think it's a really good question.
Robert W. Mason: Not just business as usual it really does change how we.
We're thinking about the business, how we're running it in some of the value creation opportunities that this unlocks.
Robert G. Painter: I think it's a really good question. It's not just business as usual. It really does change how we're thinking about the business, how we're running it, and some of the, I'd say, some value creation opportunities that this unlocks. This does simplify and focus the company, and I think it provides a great new baseline for us as we move forward in executing the strategy. If we look at the AECO assets in that segment as an example, this is a business that is now operating at over a billion dollars in ARR.
Simplify and focus the company and I think provides a great new baseline for us.
As we move forward in executing the strategy, if we look at the ACO assets.
Robert W. Mason: That segment as an example, this is a business that is now operating in over $1 billion in IRR. It's a scaled are our software business.
Robert G. Painter: It's a scaled ARR software business. This mandate in the business enables the team to take, I'd say, the processes and the systems capabilities across a broader swath of the business than what we were doing previously. If I look within field systems, as an example, this is the first time in decades that we've had our survey business and our civil construction business under one leadership. That is providing a sharper focus and, frankly, a level of accountability for sharing R&D capabilities, being more thoughtful about our positioning technologies and how we're using them across the business.
Robert W. Mason: This mandate and the business.
Enables the team to take I would say that the processes and the systems capabilities across a broader swath of the business and then what we were doing and.
And what were doing previously.
Robert W. Mason: If I look within field systems as an example, there. This is the first time in decades that we have had our survey business and our civil construction business under one leadership that is providing a sharper focus and frankly, a level of accountability to sharing R&D.
Robert W. Mason: Capabilities being more thoughtful about our positioning technologies and how we're using them across the business thats driving better outcomes in terms of attaching things like our positioning services business to the hardware that we sell and survey in civil construction and then Super importantly to go to market level.
Robert G. Painter: We're achieving better outcomes in terms of attaching things like our positioning services business to the hardware that we sell and survey and civil construction. And then, super importantly, at a go-to-market level. The similar competency within this is selling, simply put, hardware through a global dealer channel. So we're bringing more efficiency in how we go to market. We have one leader in the Asia-Pacific region, one in the European region, and one in the Americas.
The similar competency within this is selling frankly simply put selling hardware through our global dealer channel. So we're bringing more efficiency in how we go to market that is to say we are.
Robert W. Mason: Have one leader in Asia Pacific one in the European region, and one in the Americas. So three leaders from these regions overseeing.
Robert G. Painter: So three leaders from these regions overseeing the scope of what we do and survey and civil. Previously, that would have been six people instead of three. So that for us, providing better and more consistent management at the dealers, and then it enables a different way to think about capital allocation where we can put some of those resources into helping dealers. Transportation arguably had the least amount of change in there. It would feel probably a bit more like, um,
The scope of what we do in survey in civil.
Robert W. Mason: Obviously that would have been six people instead of three so that for us providing better and more consistent management at the dealers and then it enables a different way to think about capital allocation, where we can put some of those resources and to helping dealers.
Robert W. Mason: Planned their long term business health and their their strategies to complement the work Youre doing in the short term to help them identify the market opportunities and make the make the number transportation arguably had the least amount of change in there it would feel probably a bit more like.
Robert W. Mason: Business as usual.
Joshua Alexander Tilton: Super helpful. I guess just the last one to kind of tie that all together. As investors, we see this change. We see the change in segmentation. You told us how it's, you know, it's definitely not business as usual. There are new and exciting things going on. Like, what are we going to see in 12 months? Maybe 12 months is too soon. Over the three-year timeframe, like, what should investors be judging you on, looking at you to say, you know, this metric was this much better because of all the changes we made? Like, where are we going to see, where are we going to see all the positivity that you talked about come through in the numbers?
Speaker Change: Super helpful. I guess, just last one to kind of tie that altogether as investors. We see this change we see the change in the segmentation you told us.
Speaker Change: It's definitely not business as usual there are new and exciting things going on like what are we going to see in 12 months, maybe 12 months, it's too soon over the three year timeframe like what should investors be judging you on looking at you at lets say this metric with this much better because of all the changes we made like where are we going to see where are we going to see all the positivity that you.
Speaker Change: Who come through.
Speaker Change: In the numbers.
Robert G. Painter: Yeah, no, I like the question, and I, you know, I was using the words in the prepared remarks about a multi-year overnight success. You know, this journey is a thousand little steps.
Speaker Change: Yes, no I like the question.
Speaker Change: Yes.
Speaker Change: I used the words in the <unk>.
And then prepared remarks about a multi year overnight success.
Speaker Change: This journey is a thousand little steps, we launched connect and scale of January.
'twenty 'twenty I think what we have now creates a new baseline, but let's also let's also look at the.
Robert G. Painter: We launched Connect and Scale in January 2020. I think what we have now creates a new baseline, but let's also, you know, let's also look at the facts. The facts base, I should say. In 2018, we had $1.1 billion of ARR. We closed Q1 at $2.03 billion of ARR. In 2018, we were 31% recurring revenue as a business. As adjusted Q1, we're 63% ARR. We had EBITDA of 22.6% in 2018. We closed Q1 at 27.9%.
Speaker Change: Facts and the fact base I should say in 2018, we had $1 1 billion of IRR. We closed Q1 of two point over $3 billion of IRR and 2018, we were 31% recurring revenue as a business as adjusted Q1 was 63%.
Speaker Change: We had EBITDA of 22, 6% in 2018, we closed Q1 at 27, 9% structurally our gross margins in 2018 were 58% in Q1 adjusted their 67, 5%.
Robert G. Painter: Structurally, our gross margins in 2018 were 58%, and adjusted for Q1, they're 67.5%. Over the last five years, we haven't just decided that this is the direction that we're going.
Speaker Change: <unk> percent over the last five years, we produced 44% operating leverage we haven't just decided that this is the direction that we're going we've been working on this for a number of years. So now as we take this as the baseline I think one of the.
Robert G. Painter: We've been working on this for a number of years, so now as we take this as the baseline, I think one of the better things as an outcome of the re-segmentation is that transparency and that visibility to the investment community, which is what you're highlighting. It is very obvious to see in that AECO business now; this is a scaled ARR business operating well above the Rule of 40, growing ARR in the high teens, and producing 37.4% operating income in the first quarter. I'm emphatically positive and proud of the team and what they've accomplished.
Speaker Change: Probably one of the better things that as an outcome of the re segmentation is that transparency and that visibility to the investment community, which is what youre highlighting it is very obvious to see in that ACO business. Now. This is a scaled <unk> business operating well above rule of 40 growing.
Speaker Change: <unk> in the high teens.
Speaker Change: <unk> 37, 4% operating income.
Speaker Change: In the first quarter <unk> positive and proud of the team and what they've accomplished on that so I look forward in a three year timeframe. We're looking we talk about <unk> and free cash flow to me those are the big book ends and not the only book ends but there are two of the biggest bookends that.
Robert G. Painter: So I look forward to a three-year timeframe. We're looking, we talk about ARR and free cash flow. To me, those are the big bookends, not the only bookends, but they're two of the biggest bookends that we have to drive value. So I'd say in the three-year timeframe, you should be looking for continued ARR growth. We should be able to continue to progress the structural gross margins as software, I would expect, would outgrow hardware over that timeframe.
Speaker Change: That we have to drive value. So I'd say in the three year time frame you should be looking for continued <unk> growth, we should be able to continue to progress the structural gross margins as software.
Speaker Change: Would expect without grow hardware over that timeframe that structural gross margin improvement as an enabler of our ability to drive operating leverage we drive operating leverage that means that we're driving.
Robert G. Painter: That structural gross margin improvement is an enabler of an ability to drive operating leverage. When we drive operating leverage, that means we're driving increased levels of EBITDA. And then, as Phil said in his prepared remarks, I think cumulative free cash flow is the game and the long-term game. And so we'd be looking to continue to progress free cash flow and the business relative to the net income that we have. That's the quantitative framework I'd have around that.
Speaker Change: Kris levels of EBITDA, and then as Phil said in his prepared remarks, I think cumulative free cash flow as the game in the long term game and so we'd be looking to continue to.
Speaker Change: <unk> the free cash flow in the business relative to the.
Speaker Change: The amount to the net income.
Speaker Change: That we that we have that's the quantitative framework I'd have around that.
Speaker Change: I hope that helps.
Joshua Alexander Tilton: It definitely did. Sounds fired up. Thank you so much. Ha ha, thank you.
Speaker Change: It definitely did down fired up thank you so much.
Speaker Change: Yeah.
Speaker Change: Yeah.
Tami Zakaria: Your next question comes from the line of Tami Zakaria with J.P. Morgan. Please go ahead.
Speaker Change: Your next question comes from the line of Tami Zakaria with Jpmorgan. Please go ahead.
Tami Zakaria: Hi. Good morning, Rob, Phil, and David. Thank you for taking my question.
Hi, Good morning, Rob Sandlin, David Thank you for taking my question.
Tami Zakaria: I have a follow up on that comment.
Tami Zakaria: So, I have a follow-up on that Transporian comment, the autonomous port solution you sold to a North American customer. Can the same salesperson currently selling the existing Trimble solution sell the new Transporian solution to that customer? Basically, I'm trying to understand how the back end of all of this works in terms of the customer rep for each of the two solutions, the billing, et cetera. And then how did the ACV go up after selling this versus what it was before?
Tami Zakaria: Panama's Port solution you sold.
So north American cosmetic Kim the same sales person.
Tami Zakaria: Includes selling the existing Trimble solution.
Robert Cameron Wertheimer: So the new transport installation to the question basically I'm trying to understand how does the back end of all of this work in terms of the customer rep for each of the two solutions the billing et cetera, and then how did the HCV go up after selling this versus what it was.
Tami Zakaria: Before.
Robert G. Painter: Hi Tami, good morning. This is Rob.
Tami Zakaria: Hi, Tammy good morning. This is Rob I'll take that one so it was a.
Robert G. Painter: I'll take that one. So it was a multi-$100,000 error. It's over $400,000 ARR in that example that I use. So, therefore, the ACDs, you know, over the $400,000 400 Yeah, $400,000 as well in terms of the go-to-market motion. It's the, think of it as a named account seller who's responsible for the account in North America, bringing in a sales engineer or sales specialist from Transporant who knows the depth of the functionality to be able to, I'd say, be conversant with the customer and the value proposition and how to use it.
Robert W. Mason: It's a multi hundred thousand dollar ari's over $400000.
Robert W. Mason: R.
Robert W. Mason: In that example that I use so therefore the ACD.
Robert W. Mason: Over the $400000.
Robert W. Mason: 400, $400000 as as well in terms of the go to market motion.
Robert W. Mason: It's the.
Robert W. Mason: Think of it as a named account seller, who is responsible for the account in North America, bringing in a sales engineer sales specialist firm transport on who knows.
Robert W. Mason: The depth of the functionality.
Robert W. Mason: To be able to I'd say be.
Robert W. Mason: Conversely, with the customer and the value proposition and how to use it and that is actually very similar Tammy to trimble construction, one when we're selling our breath of offerings.
Robert G. Painter: And that's actually very similar, Tami, to Trimble Construction One, where we're selling a breadth of offerings. We'll often have, well, now we do have named account sellers, and then we can bring in the specialists, technical specialists who really know the depths of a given solution, to make sure that customers can get the most value out of that.
Robert W. Mason: We'll often have what we.
Robert W. Mason: Now we do have named account sellers and then we can bring in specialists.
Robert W. Mason: Nickel specialists to really know the depths of a given.
Robert W. Mason: Given solution.
Robert W. Mason: To make sure that customer can get the most value.
Robert W. Mason: Out of that.
Speaker Change: Did I answer your question.
Tami Zakaria: Yes, it does. Thank you. So the second question, after this formation of PTX Trimble, how do you view the organic growth algo potential of this new streamlined portfolio that you have? Basically, I'm curious to know whether you think it's now the right time to refresh the 2027 target.
Speaker Change: Yes. It does thank you.
Speaker Change: So the second question after this formation of Gtx Trimble.
Speaker Change: How do you view the organic growth algo potential of this new streamlined portfolio that you have.
Speaker Change: Basically I'm curious to know whether you think it's now the right time to refresh the 'twenty to 'twenty seven target.
Robert G. Painter: Okay, so hey, on the 2020 multi-year target, we're going to have an Investor Day in December. And Phil mentioned that and has prepared March. I think we had been saying the second half of the year, but we're narrowing that to December.
Speaker Change: Okay, So hey on the 2020.
Speaker Change: It's a multiyear target.
Speaker Change: We're going to.
Speaker Change: Have an investor day in December and Phil mentioned that in his prepared remarks that we had been saying second half of the year, but we're narrowing that too.
Speaker Change: Two December so that's the formal update I appreciate that in the end term.
Robert G. Painter: So that's the formal update. I appreciate that in the end term, there will be questions about how we think about that progression of the business and the model. And I think that...
Speaker Change: There'll be questions of how do we think about that progression of the business.
Speaker Change: And the model.
Speaker Change: And I think that.
Robert G. Painter: I think we can continue to provide color in the next couple of calls, but what we already know is the baseline, and I want to highlight that. We know we have a baseline from the quarter on, or you could actually say take the year of where we're guiding for the level of EBITDA for the company between $26.5 and $27.5. We've talked about the ARR growth there, guiding 11 to 13% organic. So if you take the EBITDA that we have and you continue to play forward the growth we expect and apply operating leverage on that, it's not that hard to see that we could look at about 100 bps of gross margin improvement a year and that that could look like 100 bps on the bottom line, on a year-over-year basis, and if that plays through, then you can get to a 2027 in a plus or minus frame, and then we'll put the finer points and the details around that in 2027, sorry, in December for 2027 or wherever we decide to set the, you know, the next multi year
Speaker Change: We can I think we can continue to provide color in the next couple of calls, but what we already know as the baseline and I want to highlight that we know we have a baseline.
Tami Zakaria: Perfect. This is very helpful. Thank you.
Speaker Change: From the quarter on or you can actually say take the year, where we're guiding.
At the for the level of EBITDA for the company between 26, 5% and 27, 5%.
Percent.
Speaker Change: Talked about the IRR growth, they're guiding 11% to 13% organic so if you apply the if you take the EBITDA that we have and you continue to play forward the growth, we expect and apply our operating leverage.
Speaker Change: On that it's not that hard to see that we could look at about 100 bps of gross margin improvement a year.
Speaker Change: That could look like 100 bps.
On the bottom on the bottom line.
Speaker Change: On a year over year basis, and if that plays through then you can get to a 2027 and a plus or minus frame and then we will put the finer points and the details around that in 2020 I'm sorry in December for 2027 or wherever we decide to set the next multi year Mark.
Speaker Change: I think this is very helpful. Thank you.
Speaker Change: Youre welcome.
Operator: That concludes our question and answer session, and with that, that concludes today's conference call. Thank you for your participation, and you may now disconnect.
Speaker Change: That concludes our question and answer session and with that that concludes today's conference call. Thank you for your participation and you may now disconnect.
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