Ladies and gentlemen, thank you for standing by, and welcome to the Trimble Fourth Quarter and 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. Now, I would like to turn it over to Mr. Rob Painter, Chief Executive Officer of Trimble.

Hello everyone. Before I get started, a quick reminder that our presentation is available on our website, and we ask that you please refer to the safe harbor at the back. In addition, please note that we will be comparing against the 2019 that had a 14th week in the fourth quarter. Let’s start on Slide 2 with the three key messages we want to convey today. First, the customer ROI of our technology and the strength of our financial model enabled us to outperform our own expectations in the fourth quarter. Our customer value proposition is rooted in productivity, quality, safety, visibility, and sustainability. We are pleased to announce that annualized recurring revenue, or ARR, grew 9% year-over-year to $1.3 billion, while quarterly revenue grew 0.4% year-over-year to $830 million. Expanding gross margins and execution on costs led to adjusted EBITDA margin of 26.1%, and we finished the year delivering a record $672 million of operating cash flow. Second, executing the Connect & Scale 2025 strategy remains our focus. We are working to connect stakeholders across industry lifecycles and to transform customer workflows, while simultaneously making ourselves easier to do business with. As leaders of the business, we take our responsibility seriously to be effective allocators of capital. To this end, we will continue to invest disproportionately in our cloud and autonomy capabilities, as well as in go-to-market efforts to support and enable our long-term growth opportunities. Third, our long-term market conviction remains strong. We believe the secular trends of digitization provide long-term tailwinds and we maintain our resolve to exit this crisis on a stronger competitive footing than we entered it. As we come into 2021, we are both cautious and humble to recognize market uncertainty and volatility, while also confident that we are on the right track.…

Thanks Rob. Let’s begin on Slide 5, with a review of fourth quarter results. Fourth quarter total revenue was $830 million on a non-GAAP basis, up 0.4% year-over-year. To break that down, currency translation added 1% and acquisitions, net of divestitures, were essentially neutral. Organic growth, excluding the impact of the extra week in the fourth quarter of 2019, was approximately 2%. ARR, or annualized recurring revenue grew to $1.30 billion in the quarter, up 9% year-over-year, and was up 7% on an organic basis. Organic ARR growth, excluding the Transportation segment was up 15%. Adjusted EBITDA, which includes income from our joint ventures and equity investments, was $217 million with a margin of 26.1%, reflecting both strong gross margins and continuing low operating costs. Our non-GAAP tax rate was 16%, down 300 basis points on a year-over-year basis. Net income was up 16% and non-GAAP earnings per share in the fourth quarter were $0.61, up 15% year-over-year. Fourth quarter cash flow from operations was $188 million, up 54% year-over-year, while cash flow from operations for the full-year was $672 million, up 15% versus 2019. Free cash flow, which we defined as cash flow from operations minus capital expenditures, was $177 million for the quarter, up 64% year-over-year, and $615 million for the year, up 19% versus 2019. Note that on a trailing 12-month basis, operating cash flow was approximately 1.2 times non-GAAP net income. Our strong cash flow results reflect the combination of higher profit and improved working capital efficiency. With a strong cash flow in the quarter, we continued to de-lever. At year-end, our net debt to trailing 12-month EBITDA was 1.6 times. Our balance sheet is strong and provides us with flexibility to consider a range of capital allocation options. We expect to continue to de-lever and…

As we wrap up, I would like to thank the Trimble team and our global dealer partner network for their outstanding efforts throughout 2020. We entered the crisis with an objective to exit the crisis on a stronger competitive footing. I’m proud of our accomplishments in 2020 and the progress and commitment we are making towards our Connect & Scale 2025 strategy. We enter 2021 with increased conviction in our ability to fulfill our mission to “Transform the Way the World Works.” Furthermore, I’d also like to take the opportunity to acknowledge Trimble’s inclusion in the S&P 500 as of January 21, a milestone for Trimble’s growth and global impact. Thank you to our customers, our global dealer partners, and our employees past and present for making this possible. It has been a remarkable 42-year journey as a company, and our best days are yet to come. Operator, let’s please go to Q&A.

[Operator Instructions] First question is from Rob Wertheimer from Melius Research.

Hi, good afternoon, everyone.

Hi, Rob.

Results continue to be very impressive on the margin side, and really among the better companies that we follow, I kind of have a strategic question on the results, it is just, it seems like farmers continue to adopt very quickly, you know, whatever tech offerings they're offered. There’s been a lot of, you know take rate success with different products, people have put out. My question is a little bit on how you see the shape of that market evolving? Whether there's a lot in the acquisition pipeline that you want to do or need to do to create increasingly integrated offerings? And, you know how strong your product pipeline is for the next couple or three years? Thank you.

Thanks, Rob. So if we look at the primary products that we offer in the agriculture market today, that would capture guidance, it would capture water management, it would include the variable rates, and then we also have the weed seeker product. So spot spray optimization, and then I would, you know, and then there's the software that we have. And so the strategy we have is the connected farm strategy in agriculture. So, just from an organic view of our product portfolio, we are bullish on the opportunities in agriculture to connect what we're doing together to create additional ROI for our customers. What we'll build on top of that is our autonomy strategy, and we see autonomy as a series of increasing levels of automation over the coming quarters and years to move us really more into that autonomous future. So, we believe we can do a lot of this organically. From an acquisition perspective, you know, we're certainly open if there's acquisitions that could help us accelerate our development and our efforts in any of those, any of those areas.

Thanks, Rob. Are you able to give any metrics on this hand spray, how that product has been going? And I'll stop. Thank you.

Well, we've seen strong double-digit increases in the Weedseeker and the Weedseeker 2. So, yeah, we’ve seen strong increases and really think we're going to see them really for a while. We initially saw that the take rate being very high in South America and then we see that moving around the world.

Thanks.

Next question is coming from the line of Jason Celino from KeyBanc Capital Markets.

Yeah. Thanks, guys. So you gave the update on the transportation enterprise bookings were 80% of subscription. But I'm curious, you know, what was that mix at the beginning of the year because you've talked about accelerating the transition here? And then, more broadly speaking, how should investors measure the progress of the different business solutions you have? And then why not give more metrics like this on a more recurring basis?

So Jason, this is Rob -- at the beginning of the year, we were tracking closer to an inverse of that, because we're really pretty early in the transformation of our enterprise business, so that bookings mix is pretty, actually exceeded our expectations of how quickly it has shifted to subscription offering. And when we do that 80/20 comparison, that’s at a TCV or total contract value levels, right. So, we can do it on an apple-to-apple basis. In terms of measuring the progress of the business and how we measure and look at the proof points in the business, we'll certainly hit on the first one right away, which is the ratio of the of the bookings because that's what we're, you know, the strategy, the end game, from a financial model perspective is to build a recurring offering, and we're talking about the enterprise business because we already have that in our maps business. We already have that in our mobility business, and we really also have that in our shipper business. So, really it's an additive view of moving that direction. And finally, you asked about, you know, additional measures or metrics that we could report in transportation. I think we have an Investor Day. I mentioned in the prepared remarks that we're going to target for the second half of the year. I think it's – we just have to make sure we get the right ones to tell the right story. I'm as – I think, as much as anything showing proof points, like the customer examples, such as the example that was in one of the slides, is the kind of demonstrable evidence that I want to be able to continue to put forward to our investors.

Okay, great. Those were my two. So, thank you.

You're welcome.

Next question is coming from the line of Ann Duignan from JPMorgan.

Hi, good evening it’s Ann Duignan, just FYI. Maybe, Rob, you could give us a rundown on the B&I business, just, you know, the different applications there, and some of the trends you're seeing and you know, usually give us an update on ARR for SketchUp, e-Builder Viewpoint, etcetera just, you know, a little deeper dive into that business and the outlook into 2021 specifically?

Sure. Hi, Ann, it’s good to hear from you. So let's start in B&I if we run through the outlook, and what we're hearing from some of the different constituents throughout the chain. I’d start with saying that the outlook is pretty good. There are a few exceptions, but the outlook is pretty good. If we look at the type of work, infrastructure and residential backlogs are improving. EPC is down, so that's going to relate to oil and gas multi-sector, which picks up commercial work that looks flat to down, and not surprisingly retail is down and elements such as data centers and logistics centers are up. When we look at the public sector, the outlook is generally better than it was a quarter as you know the financing is in a stronger position. In January, the Dodge index was at its highest level since the pandemic started. Now, they did warn the recovery may be uneven in the coming months, which sounds about right. And at an OEM level, I would say the signals are mixed, so it is stronger and heavy equipment less so in the automotive space. So, in aggregate that outlook is a net positive. On the ARR front and B&I, really a very solid quarter, really the teams executed at an outstanding level in the quarter and for the year. Our net retention in businesses such as e-Builder and Viewpoint, they're well over a 100%. We had mid-teens ARR growth in Viewpoint and e-Builder. So, continued strong performance from those businesses and those operators. Did I miss anything Ann?

No, I think you captured it all pretty eloquently. Maybe just switching back to transportation, can you just talk a little bit about, you know, what happens if you cannot get the business back to the 20% margin target? You know, what are the strategic alternatives? You know would you be willing now, will you be willing to look at some portfolio cleansing or is the business too strategic to you, you know, even if it takes longer to get back to 20% you're going to ride it out and just curious over the long-term what your contingency plans are?

The transportation business we see as strategic when we see it as attractive. We think we've got a favorable position and a favorable offering. And, you know, I think we have the, say the coverage of assets in this sector, which I think would be quite enviable from a competitive standpoint. So from the 20% level, that's absolutely the target that we have is to get this segment backup to the, I’ll call it the company level of profitability. In terms of how we measure that, you know, given how much of the business is recurring, we'll also look at it from a customer lifetime value perspective. So, I'll be cautious to be overly dogmatic about the 20% so long as we're continuing to get the bookings and to grow the business – grow the business and get that trajectory. So, the first order of business is to be able to show that demonstrable trajectory, which we said, we feel like we'll be able to do towards the later part of the year, second half of the year. And as we've got that trajectory, I think that's going to give all of us the confidence in what we're doing. And you know, we'll look at measures such as lifetime value divided by the customer acquisition cost, because that's a very indicative measure of how the business progresses. And then from the broader, I’d say strategic lens of it, we'll continue to look at – be open to looking at assets or partnerships that help us further and accelerate the strategy.

Okay, thank you. That's helpful. I’ll get back in line. I appreciate it.

Next question is coming from the line of Colin Rusch from Oppenheimer.

Hey, thank you for taking our questions. This is [Kristin] on for Colin. Just wanted to ask a little bit about some of the increased spend that you've highlighted for 2021, the CapEx and OpEx targeting Connect and Scale, the digital information, cloud infrastructure autonomy, etcetera. And just wanted to see, you know, if you could provide a little bit more color there and where you're seeing exactly the opportunities to accelerate and how that connects back to the Connect and Scale strategy?

Hi, [Kristin] it’s David Barnes. So, as you pointed out, a meaningful portion of the increase in year-on-year operating expenditure will be really centered on the Connect and Scale strategy. So, we have a major initiative underway to accelerate our digital transformation. There’s technology and process changes that will enable us to fulfill the potential we have to sell integrated offerings to customers, and we have a major push there. So, our CapEx, which was in the past two years more focused on facilities is this year very much focused on digital transformation, and cloud infrastructure as well, which will enable us to enhance our position as a world-class provider, integrated cloud based services. So that's where the focus of our investment is.

Great. And then I guess my follow-up would be, Rob, you [hearkened] us back to the 2018 Analyst Day. You know, back at that time, I think you outlined a calculus of high-single-digit organic growth, you know, 25% to 30%, incremental margins 20% operating margin, you know, as they think about Connect and Scale, and maybe beyond the 2021 timeframe, is that still the right formula that we should be thinking about for Trimble?

At a high level, it is [Kristin]. What I would augment from a measurement perspective is ARR growth. That is our primary focus of the, you know, the measurements out there. And that interplay, you know, between ARR, and the overall growth is important. So, I'll trade all day long. The top line revenue growth if it's going, if it's moderated because we're accelerating ARR and that's one that I think needs to rise higher in the pecking order.

Thank you so much.

Next is from James Faucette from Morgan Stanley.

Thanks for taking our question and congrats on the quarter and the progress. I maybe wanted to touch again on the geospatial side, and I know in your prepared remarks, you kind of noted one of the drivers being retail demand in North America. And that seems interesting, just given a preferences for where people live coming out of the pandemic and strong just residential construction more broadly. Can you maybe remind us how much of that business is exposed to residential construction? And you know, if you think that can be a lasting tailwind if it's more near term and source normalized and just what your expectations are over the next year or so?

Sure, and I'll start by up leveling to the whole segment where we saw the outperformance come from a combination of three things: healthy demand, catch up in work, and the third is new products. So, in Europe, we know we think there's an anticipation of a construction led recovery tax incentives also helped, I should add. In North America, there's residential and from the new product innovation perspective our R12i GNSS receiver and the X7 scanner we think really led demand in all our markets. In North America specifically, and looking at residential, we see that as a near to mid-term catalyst, and then I would, you know, have an anticipation of normalization there. If we were to see, you know, more infrastructure work, then clearly our mix would shift or balance with the residential and infrastructure work. Historically, residential has not been a primary driver of the Trimble business. So, it certainly has been an accelerant, certainly from a percentage standpoint.

Got it. That's helpful. And if I could just one follow up, I guess, as perpetual licenses started to recover, at least grew in the quarter, I guess some of that’s seasonally based just on timing of when those get renewed or should we think of that as more indicative of demand just broadly recovering? And if some of the push-outs and subscription growth could also be an opportunity to more quickly convert to subscription based offerings?

Yeah, hey, James. It’s David. Part of what you saw with the perpetual business is, we had meaningful slowdown in earlier quarters, as you'll know. So there's – some of that is catch up on projects that were delayed. Overall, the perpetual sales will obviously be – there will be pressure on that from the subscription transition. So, over time, in many of our businesses, the significant majority, we will be selling recurring rather than perpetual licenses for those businesses where a recurring model is viable.

Got it. Thank you.

Next question is coming in from the line of Chad Dillard from Bernstein.

Good evening, guys. So my question is on, just like the mid-cycle revenues for the transportation business? And how to think about that in this coming cycle versus prior cycles, you know, do expect to actually recover some of the churn that you've experienced? And then how should we think about the impact of, you know, the mix shift – some of the mix shift in there?

We'll start with the question around cycle, because it tends not to be relevant in the Trimble context. It tends to be, you know, I would associate that to an industrial – a straight industrial context, and the fundamental nature of the markets that we're serving as their large global underserved and under penetrated by technology. So our correlation hasn't historically been very tight to cycles. So, I would really see the Trimble story as a secular story with a cyclical undertone. So, the cycle obviously has an impact, but a secular first cyclical undertone. From an expectation of, I think you asked about recovering turn, recovering business in the transportation market. Yes, we're very optimistic around that. I mean, that's table stakes, frankly. And we look at the pieces we have across the technology, landscape, and transportation, and we think we're in a favorite position. We've got over 90% of the top 100 trucking companies use our technology. We've got over a million powered assets. They're managed in the Trimble network. I look at the set of capabilities we have. We do telematics, video, ERP, maintenance, mapping, routing, navigation, analytics, visibility. So, we have a strong set of capabilities. I believe it brings scale to the market. And when we look at Connect and Scale applied in the transportation context, that's where I think we've become really unique as if we can sell [outcome], we look at the bundled offerings. And then not only bundled offerings, but where we can provide unique value by stitching together our products. And that's actually why we put that slide as an example of Trimble dispatch advisor because into the slides is because that's an example where we're pulling capabilities across our tech stack into a uniquely Trimble – and to a unique Trimble offering. So, I hope that helps – give you context and let me know if I missed something.

Yeah, no, that's, that's helpful. And then just second question, just on the 150 basis points, so we've had one from subscription transitions, can you remind us, how does it compare versus 2020? And, you know, how should we think about that in the context of the next couple of years? Are we at the peak in terms of like the overall basis point impact?

Hi Chad, it’s David. The 150 basis points is more than 2020, probably about half again more. So, we're closer to 100 basis points. And that does reflect that in some of the businesses where there's a clear near term opportunity to make the transition. We anticipate making major progress this year. A little early to call [2022] on that. So, I'll resist the temptation, although we are, at that point getting past the valley for many of the subscription businesses, and we'll see more revenue uptick from that than we will this year.

Thank you.

Next question is coming from the line of Jerry Revich from Goldman Sachs.

Hi, good afternoon and good evening, everyone. Nice to see the momentum on subscription transition, I'm wondering if you could talk about any parts of the transition plan that you folks might be accelerating, heading into 2021, given how strong the preference has been among customers for subscription versus perpetual license. And, David, I'm wondering if you could share the revenue number that's associated with that margin point that you just made? So, if we had, you know, run rate revenue, in 2021, how much higher would it be versus you know, the GAAP revenue guidance that you're providing once we get, you know, the existing products, transition to subscription?

Hey, Jerry, I'll do the second question first, and then hand it over to rob. So, I think I've got your question, right. The 150 basis points, what we're saying there is that if we weren't doing the next round of transitions, our revenue would be 150 basis points higher, and that nearly all flows to operating income, because the margin is very high.

And Jerry, from acceleration perspective, within the business, I look at Buildings and Infrastructure and Transportation. So within Buildings and Infrastructure, you know, we're talking about our building construction businesses accelerating the subscription transformations there. We mentioned in transportation, for example, the 80/20, booking split subscription to perpetual that we're seeing in the enterprise business right now. So, there I would call those the model conversions that are accelerating. And, you know, that's separate from businesses that you already know, like the viewpoints in builders and construction that continue to demonstrate strong growth. And then the last thing I would mention is, on the hardware side, you know, we are in very early days, but you know, early days of the – essentially it’s the hard ways of service, we call it Trimble platform as a service in the civil construction phase.

And in terms of capital deployment, can you talk about your M&A pipeline, as it stands today, obviously, strong free cash conversion. I'm wondering how deep is that pipeline? Because, you know, unfortunately, post the e-Builder and Viewpoint acquisitions, you know, multiples for those types of assets have moved up significantly. So, I'm wondering if you could just comment on, if the pipeline has subscription type businesses in it, and just expand on that opportunity set in-light of the free cash flow, if you don't mind?

Hey Jerry, I characterize our M&A pipeline as being open for business. We have the confidence to assert our strategy, and we have the balance sheet to support it. As it relates to the, I’d say the opportunities themselves within the pipeline. I would say they're decent. I wouldn't say they're like overly robust. And on the other side there, you know, it's also not non-existent. So, I'd say it's a decent pipeline. And when we look at that pipeline, we certainly have a bias. You know, we think about that with a bias, well it’s more than a bias, the imperative is to support the Connect and Scale strategy. The bias, then within supporting the strategy is certainly towards software assets. But David also mentioned, you know, from a – linking it to capital allocation, where we're spending on the digital transformation, we look at capabilities and cloud, we look at capabilities and autonomy, for example. And so autonomy is another area that I would, you know put on that list, and I wouldn't – it doesn't classically define a software.

Okay. Thank you.

Next question is from Richard Eastman from Baird.

Hey, I just want to circle back if you wouldn't mind, and good afternoon, by the way, just wanted to circle back to – the recurring revenue in the quarter looks like it was down, you know, a couple ticks year-over-year. Is that a function of the transportation business?

Hey, Rick. Organic ARR was actually up a little bit. We should have a business, but yeah, organics improved a little bit.

And when you define organic, are you pulling out transportation?

Nope. I'm pulling out the business. Hey, Rick, if you just be careful, you're looking at the 14th week impact. Because the recurring revenue, just take that piece of the P&L. That has an 8% impact.

I see. Okay. All right, then that's going to be the difference. So, organic ARR in the quarter was up low singles. And then for 2021, did I catch in your comments that recurring revenue is expected to grow high single digits?

Yeah. So organic was up 7 in the Q4, and we said we'd end the year, our guidance is high-single-digits. So, faster than we are now, sequentially improving through the year for all the reasons I mentioned: organic growth of our existing offerings, the transitions and improvement of transportation.

Okay. And then, as we look out to, you know, your revenue guide, and your, you know, adjusted op income guide, and EPS guide I guess, you know, at the mid-point of your revenue guide, and EPS guide, we kind of walk up to this, maybe low, low double digits, incremental. And what that's absorbing here, I'm sorry, probably ever repeating what you said already. But what that's absorbing is, you know, almost 50 million of profit from the SaaS conversion headwind, and then the balance of that would be just expense re-inflation in the business.

Yeah, you've got the key factors. So, the conversions are there. And then OpEx, as I mentioned, is growing faster than revenue. Some of that is just replacing costs that that sort of naturally came out during the COVID period. So, we will have higher incentive compensation expense. We anticipate that we’ll begin to travel later in the year. A lot of the things we do normally including hiring were really low. And we are investing, as Rob said in the cloud and digital transformation. And then I'll add that part of the OpEx increase is FX because the U.S. dollars weaken. So, over half of our business is outside the U.S. so that naturally causes OpEx to grow.

Okay. I get you. And just one last question, I apologize, the civil business, how do inventories in the channel look there? Is there better – it is book-to-bill or just the sell through, you know, is the sell through greater than the sell-in into the channel on the civil side, the hardware side?

Inventories are low. Yeah.

Okay. Okay. Very good. Excellent. Thank you for the time.

Next question is from the line from Jonathan Ho from William Blair.

Hi, good afternoon. Just wanted to start out with, I guess you made the comment that you're coming out of the downturn stronger and you've been investing 15% into R&D, which is above the typical average. Can you maybe give us some examples of how this has been driving share gains and where you're seeing this show up the most in terms of that competitive position?

Hi Jonathan, I see it in a few areas. One would be through innovation. And so an example we talked about in geospatial is with the R12i and the X7, so the right demonstrable evidence that the investment in R&D is producing new products. And we've seen that in Ag with Weedseeker. As an example, we've seen it in Buildings and Infrastructure with the model conversions, a lot of innovation actually happening there and creating some derivative opportunities in areas such as analytics, for example. And the other place where I see us coming out of – stronger is from an organizational culture perspective. Okay, that's hard to, let's say, measure as it relates to share gains or the other aspects. But I really think when you look at our employee engagement it's in a very strong place. We look at the retention of our people. We're doing well there. We look at – I talked to – used an example in the prepared remarks around how we've ranked in diversity and inclusion score. So, we see the culture in a strong place. And then from a share gain aspect, how all of this relates to, let's say, share gains in our competitive position, it's – I have to admit it's notoriously difficult to be very specific on share gains in our markets. It's just really not a lot of good data. So, you can't – you really can't find like the singular report that's going to tell you all of this. So certainly, we're looking at our results, compared to competitive results. We see how – we look at our win/loss ratios and the businesses that we have, and they indicate to us that we're maintaining or gaining share across the business.

Excellent. And then just as a follow-up, you outlined a number of customers in your examples that are buying a broader solution set. How do we think about ARR growth relative to either new customer acquisitions or upsell just given you can sell a broader suite of solutions today?

Yeah. It's a good question, Jonathan. And we'll keep including examples from now on to show you these proof points around Connect & Scale. Like an example, we didn't put in the deck this quarter is a construction example. So, we sold two in our 400 customers a bundled offering last year. And in both of those examples, we were able to increase ARR 30% with each of those customers by virtue of creating a – essentially a one Trimble offering, making it a lot easier to do business with us. I mean that's the kind of – that's the evidence, as it were, of where we're going and why we're doing this. We see where we're going with Connect & Scale, giving us an ability to better connect the products we have to streamline customer experience and handoffs between the products and the workflows. That expands the value proposition of our offering. It increases and improves the user experience of the products. And along the way, we'll enhance our customer success operations to drive a deeper intimacy with our customers. And we believe that's going to provide our customers better value. They'll get that productivity, quality, safety, visibility, and sustainability out of using our solutions, and that's going to unlock ARR potential. I'll close by saying when we – as we prepared our plans for the year and looking at our strategies and our connected strategies, we're looking at the ARR opportunity from cross-selling and upselling and bundling. And we believe there's a lot of opportunity within our house.

Thank you.

Next question is from the line of Gal Munda from Berenberg Capital.

Thanks for taking my questions. Appreciate it. Guys, the first one, I would just like to ask you about this trend of the billings, you've basically seen deferred revenue growing ahead of ARR again, which kind of indicates the backlog is building up. And in terms of that, I just want to – wanted to see what's driving it? Is there any change in duration of the contract or anything or it's just the natural backlog buildup?

Yeah. Gal, it's David. The biggest driver of deferred revenue and backlog is the growth of our recurring businesses. It's not a – it's actually – yes, it's not a meaningful change in the duration of contracts.

Awesome. Thank you so much. And then the other question I had is considering the fact that obviously, professional services are under pressure in a year like this – like 2020 was, how are you thinking coming back from 2020 in terms of the professional services? Some companies have basically – it's definitely helped your gross margins in general. But my question is like, do you reassess how much services you have to provide in order to kind of protect that margin? Or are you quite happy for that revenue to come back as fast as it can? Thank you.

Hi, Gal, this is Rob. I'll start and maybe David will want to add. I think pro services might be a tale of two halves in 2021, first half, second half. Look at the first half. I think that will probably mirror much of what we saw last year where it's difficult to, in many cases, get in to do the implementation. And we've done better and we're learning how to do it, but there are businesses that we have where the pro service is significantly challenged as a result. From a – impact on Trimble gross margins, we don't have that much pro serv. So, it's not really – it's not a fundamental driver of the gross margin at Trimble. I'm looking and thinking more about the revenue impact it would have than, let's say, a margin profile impact at a company level. David, do you see it [similar]?

Yes. I think the only thing I'd add is that some of this is by designer, reflecting the mix shift of the business to more standardized offerings that require less professional services. But that said, what Rob said, some of our professional services business was highly constrained because we couldn't get access to the customer. So, it's a mix of both.

Got it, okay. Thank you so much. Great results and good luck.

Thank you.

Next question is from the line of Blake Gendron from Wolfe Research.

Yes, hey good evening. Thanks for squeezing me on here. My question was around just heightened investment levels for this digital transformation. Wondering if we can delineate, both on the CapEx side and maybe from an R&D perspective, how much is kind of due to this digital transformation. Then as we model it in the out-year, should we think of it over a fixed amount of time or are you essentially going to scale these investment levels with the receptivity of a cloud solution across the portfolio? Thanks.

Yes. Hey Blake, it's David. This is definitely a multi-year effort. And I'll say of the OpEx increase that you can interpolate from our guidance, somewhere around $100 million year-on-year, about a quarter is in the broad category of the strategic investments, which is cloud infrastructure, digital transformation and autonomy. And we've got a lot of conviction around this. This is not all entirely incremental. We started this effort. It was more within divisions or pieces of the business, and now it's a company-wide effort. What we're doing is developing playbook with standard processes that enable cross-selling and a common digital experience across the business. We'll course-correct to see how well it goes. We've got a phased implementation process, but I do see this investment extending beyond this year.

Understood. That's helpful. And then within that, as we think about something like data security, obviously, it's going to be important for your customers as they consider the move to the cloud. It's also going to be a fairly big cost, I would imagine, no matter what cloud application or a cloud platform you're running. So, how do you think about data security in terms of internalizing those costs versus maybe outsourcing those costs and kind of partnering with a third-party tier?

Well, there's no question that we're spending more on cybersecurity. It's – these are the kind of existential issues that all of us in technology businesses face as we manage our customers' systems of record. So, it's incredibly important that we are world-class in the area of cybersecurity. Our spend is really OpEx. It's not CapEx-oriented today. It's primarily our own teams, but we will use third parties to do intrusion detection for an example – or it's best practice. So, we follow best practices, what you want to do with external firms. Of course, we use a lot of external technology but, right, you pay for that on an OpEx basis. It's not capitalized. The last thing I would say around the area of cyber is, as many threats as it provides, we also see it as an opportunity to distinguish ourselves. And the scope, the scale, the breadth of Trimble, we see as an advantage here because this is something customers are increasingly having to look at. And our ability to manage at scale and at this level of sophistication outstrips the ability of a smaller company to keep up and actually draw parallel to things like GDPR. And these are expensive endeavors, and our scale helps in that aspect of it.

Awesome. Thanks for your time.

Thank you.

We have no questions at this time. Michael, you may continue.

Thank you, everyone, for joining us on the call. We look forward to speaking to you again next quarter. Thank you.

This concludes today’s conference call. Thank you all for participating. You may now disconnect.