Good day, and welcome to the Trimble Incorporated Financial Results Conference Call. Please note, today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to your host, Rob Painter, Chief Executive Officer. Mr. Painter, you may begin your conference.

Welcome, everyone. Before I get started, our presentation is available on our website, and we ask that you refer to the safe harbor at the back. I will lead the call today as David is at home on the back end of the COVID quarantine. Jim Todd, our head of FP&A is in the room with me, and the 3 of us will handle the Q&A. My commentary on revenue and ARR growth today will reflect organic performance, thereby excluding our acquisitions and divestitures and foreign currency movements. Let's begin on Page 2 with our key messages. Our team delivered a record second quarter, exceeding our own expectations. My congratulations to our team and our global partners. Annualized recurring revenue grew 15% and we now stand at $1.51 billion of ARR. Total revenue was up 6%, also ahead of expectations, as was gross margin of 59.7%, a record level for Trimble. This flowed through to exceeding our expectations on EPS. The Trimble operating system balances strategy, people and execution. We have been busy the last few months, demonstrating progression and proof points on many fronts. On strategy, we are seeing solid progress with our Trimble Construction One offering, which is a bundled offering of our construction software solutions currently targeted towards contractors. We tried to start with this segment of Trimble customers as we have the value proposition and momentum on our side. From this new baseline, we will expand to other personas and construction such as architects and designers and owners, and we will roll out the offering on a more global basis. We will then extend this approach across our other applicable businesses. Our indicators are telling us that with Trimble Construction One, our win rates are going up, our sales cycles are becoming shorter and our average…

[Operator Instructions] Your first question comes from the line of Jason Celino with KeyBanc.

So Rob, the Construction One platform, nice to hear the strong performance. I'm curious, though, where are you seeing the most traction. Is it with current customers potentially looking to upgrade and expand or is it with some of the new net wins that you talked about in your prepared remarks?

The majority of the growth, I would say, at the moment is coming from the existing customer base. And that's actually pretty logical from our perspective when we've done the work within our own portfolio. We think there's enormous opportunity to cross-sell and upsell within the customer base. So one of the things that the team has done an excellent job of moving existing customers to Trimble Construction One contract offerings such that they've got an on-ramp to consuming more of the technology. At a net new logo perspective, the team is winning net new logos as well. So -- that is -- I think it's showing some early signs of success. But the bulk and the majority is from existing customers at the moment.

And then I think you mentioned at the beginning that the logic or the premise is to take this type of bundling sweet style approach to some of your other segments.

Yes, exactly, Jason. So right now, we're working in the -- actually the contractor persona within construction and actually really even within building construction, most specifically, then we'll look towards architects and designers. As a persona, we have a bundled offering with TC1, a suite targeted to them than a suite targeted to owners. Trimble Construction One will also apply to our Civil business, where we can connect what we're doing in the field with office on a singular contract. And then in parallel, but at some level, we'll play out a little bit more serially, as with our transportation business and the agriculture business. So it's absolutely consistent mindset we have across the business as we pursue this platform strategy.

Your next question comes from Rob Wertheimer with Melius Research.

Rob, I had kind of a higher-level question. I mean, there's a lot happening in infrastructure construction may actually get going. There's a bunch of kind of mega projects out there that were in the past. And I wonder if you could just kind of assess the strategic landscape for you and your competitors, whether the collection of offerings that you have and are now protecting scaling, is evolving as fast as your competition? Do you anticipate this to be the next 2 or 3 or 4 years that are highly dynamic on acquisitions to get a range portfolio where they want, or is that not necessarily a moment that needs to see people change radically. Just really if you could just assess how you're evolving versus your competitors in the construction landscape.

Well let me give you a perspective, more at the mega project level and with some of the largest customers. Because as you know, I mean, there's a segmentation by size of customer. I met this largest customer level I have actually had a chance to meet with a number of them recently and to meet with customers who are working on some of these mega projects, both in the U.S. and throughout Europe. There's no question from my perspective that customers -- these big customers on the big projects are looking to bring the multiple technologies they have together into a common data environment and I think we're uniquely positioned to be able to deliver a common data environment. We take a view that with as much as we do in construction, engineering and construction, we think we've got the broadest portfolio in the industry. The reality is we don't do everything nor do our competitors or our peers. So our mindset is that of an open system being able to bring data from disparate sources together. And we're informed by that through our own set of technology that we have that can serve the architects through the engineers, through the contractors, through the owners. Customers are putting digitization at the top of their agenda. They're putting sustainability at the top of their agenda. At the moment, inflation is, I'd say, a major concern as is labor availability for these large customers and these large projects. So now if I put that into context of the second part of your question around M&A and where might the markets go over time, well, I would expect construction tech has been a rather active field over the last few years. And with the money going into infrastructure, I would expect to see continued investment into the space. I would suspect all of us -- the bigger companies in the industry will probably be reasonably acquisitive. Then I think you have to put that again in context of the companies that are out there. I think there's a lot of businesses out there that in reality are probably features rather than businesses that are better fit for Trimble of peers of Trimble. There's not a lot of scaled technology companies in this industry. If we look at the combined size of our buildings and infrastructure and really the relevant parts of our Geospatial business, I would submit that we're one of the largest, if not the largest construction technology companies in the world.

And since you touched on inflation, are you seeing any impact on project pacing or delays or cancellations from that inflation, or is it just something people are evaluating? I guess I'll stop there, Rob.

I would say we are seeing a few delays and some -- not so much cancellations but more delays. And I'll be U.S.-centric when I say this, because we do see the cost of the raw materials having gone up significantly. So now there is more money that is starting to -- it looks like to flow out of the infrastructure bill. At the moment, a good amount of that is getting chewed up through inflation. And so we've seen the money as it's being has a longer delay or a longer lag to put in place construction than we've seen in the past. And we think it's -- I'd say some of the -- and I take a DOT, Department of Transportation, stepping back a bit and doing some reassessment, more working trying to figure out how to work through it. Now put that inflation into its own context of the value proposition of Trimble, which is better, faster, safer, cheaper, greener, we are getting these project owners to pay attention to the value of technology. So I'm encouraged by that.

Your next question comes from the line of Chad Dillard with Bernstein.

So I wanted to spend a little bit of time on your comments about Trimble Construction One and plan to roll it out into your broader construction portfolio. So how much of that portfolio do you plan to scale within Trimble Construction One? And then can you just talk about the road map? So I mean how many years are you planning to take to get that to scale? And just what sort of investment do you need to make to get there?

Yes. So I'll give you, I'll say, a part of an answer now, and then I think this will be a good topic for us to have time to go into more detail in our Investor Day in early September. Chad, from a Trimble Construction One perspective, if you ask me -- if you're asking me what -- how much of the portfolio of, I'll say, both of the buildings as an infrastructure segment, I would see it applying to my goal is 100%, okay, maybe in reality, it's something a bit less than that. But in terms of ambition level, I think that's what you want to understand is that we rarely see that almost everything in and the business could apply in this mindset, in this approach to how we go to market. The part that would be back off of saying 100% is, hey, we have some small customers take some architects, for example, that we'll only want to buy our SketchUp product. And they can just buy our SketchUp product. We're not going to make them buy everything in order to use SketchUp. So wherever it can apply to customer sense. Our goal is to do that, both in the building construction side as well as the civil construction side of the business. And then in terms of the rollout, I talked about in the prepared remarks, the rollout to different personas, and we started with the contractor persona and construction. As we come into, say, the first half of next year, I'd say the end of this year and in the first half of next year, we'll start to see those additional personas roll out. And then the thing that goes along parallel with that work of the -- I'll say the product roll out…

And then just my second question, as we stress test the Trimble model for recessionary scenarios, can you just talk about the ebb and flow of recurring revenues, your software revenues in that sort of environment? And how we should think about that going forward?

Yes, the best data I can give you on that, Chad, will be on Page 3 of the presentation that went along with the script. And so when I look at that and we were thinking about the call, we thought it would be constructive to look at the percent of software in Trimble compared to 10 years ago, the amount of recurring revenue or ARR that we have compared to 10 years ago, as well as the margin and cash flow expansion over that time frame. We were a company that had $361 million of ARR 10 years ago. We stand this quarter at $1.51 billion in ARR. $1.51 billion in ARR, there's not a lot of companies that have that amount of ARR. That's continued to grow over a longitudinal basis has grown 15%. We grew 15% ARR in the quarter, we took the guide up to 16% for the year on the ARR. We believe it's the most resilient of the revenue streams that we have, which is quite logical compared to, let's say, the hardware businesses, which, let's say, in normal times because right now, we do have a backlog in hardware and normal times look something more like a book and burn business. So there is a cyclical undertone to the secular thesis on the hardware business. But this is a major shift we've had in our business over the last few years. And when we've also done the stress test, looking back, you could go back to 2001, we have looked at the financial crisis in the 2008, 2009 time frame. We looked at commodity crash in the '14, '15 time frame as well as early COVID and we stress tested. We could go back and see how we stress tested on variability in the different end markets, as well as revenue streams. And that all informs the point of view we put forward on that ARR and the software side of the revenue.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Rob, I'm wondering if we could just pick up that discussion. So it's interesting because your guidance essentially has you exiting ARR organic growth at about 17%, entering the year at 14%. Can you just talk about what's driving the acceleration? And do you see that acceleration continuing into early '23? I know you folks have a pipeline measurement mechanism that gives you pretty good visibility. I'm wondering if you could just touch on what that pipeline looks like as we exit this year?

Yes. The drivers of the ARR growth are going to be bookings and net retention is the 2 major I'd say, aspects of the ARR growth. So you're right, Jerry, that yes, by the math, we would see -- expect to see a tick-up at the, let's say, in the fourth -- by the fourth quarter in the ARR growth -- in the growth, excuse me, of ARR. Our net retention is running, I'd say, well over 100% across the Trimble businesses. And then the underlying bookings. Bookings have been, I'd say, solid to quite good in the first half of the year, both if we look at before pricing and after pricing view on that. So I think it's one thing that's probably important to communicate is our growth is not just coming from pricing on a, I'll say, a common unit count. So we are actually driving penetration into the business, really both software and hardware as well when I say that. Okay, so as it relates to coming into 2023 and a view on ARR growth, I would be -- I'd hold off on, I'd say, commenting on a specificity for 2023 view on ARR growth, but what I can say is that we would expect to -- just to your point, Jerry, in terms of the visibility in the pipeline and the math is we see double-digit growth next year in that ARR. And I think that's the best way I could answer it at this point.

And then just to shift gears a little bit here. Can you just update us on your plans for subscription transitioning from perpetual license as you folks are moving towards the platforms that you spoke to, Rob, in the prepared remarks? Can you just update us on the size of the businesses that you should be looking for to transitioning to subscription from perpetual license given the platform approach?

Yes, good question, Jerry. So if we look at a TTM revenue on Trimble at the moment, we've got over $450 million in perpetual licenses at the moment. Now if we then we break that $450 million down, the majority of that is associated with the hardware that we sell. So if you're buying let's say, some of the guidance or some of the GNSS receivers, Increasingly, we sell software unlocks to increase capability within the solution. And then from a -- I'll call it, a straight-up perpetual software stand-alone set of revenue, that's actually quite, is becoming quite small today. And that, I'd say, is kudos to our teams having gone through a lot of the transitions, most recently in the Tekla Structures business has been one of the ones that's done the conversion over the last 12 months, which is part of what's throttled some of the revenue, top line revenue this year, but also been part of the acceleration of the overall ARR from that team. What I'd also want to say, Jerry, is when we look at the software that is associated with that hardware, it is our intention in, I'd say, the near to midterm to move more of that to a recurring basis because we do think that we can continue to provide value to our customers through this firmware, the software over-the-air updates, what you see in some other industries like automotive, for example. So I'd say watch out for that over time and for us to update as we move further along with that. And then, hey, we've also talked a little bit about on our hardware businesses where we want to move more of those towards a subscription offering as we can provide technology assurance to our customers.

Your next question comes from the line of Kristen Owen with Oppenheimer.

I wanted to actually piggyback on that last question and ask specifically about the recurring rates that you noted in Geospatial. I'm wondering is that coming on top of hardware sales? Can you talk about maybe what attach rates look like? And I'm just thinking about what the total addressable market could be for your recurring revenue streams in Geospatial just given the breadth of the hardware that you have in place.

So Geospatial is the most hardware-centric of the businesses have. And we -- therefore, it has the least amount of software, least amount of recurring revenue on an absolute dollar level. What the team has done is they have moved more of the -- some more of the software revenue that is in the business to recurring. So I'd say on a percentage basis, the ARR is growing nicely in Geospatial as it's growing off a smaller base and earlier in the transition. So there's a little bit of the percentages. If I'm only looking at that segment, that as a result of that math. That dilutes at the total company level. So it's really the other businesses that are driving the total company ARR dollars forward. But you asked a good question, which is, okay, given the amount of hardware that we have in that business, could that look more software-centric in the future and have more unlocks? And I'd say definitively, yes. One example is we have we call it a soft GNSS product, it's called Trimble Catalyst and it think of it as positioning-as-a-service. It's probably the best way to describe it. And we're seeing some really interesting levels of adoption of this positioning-as-a-service. And some applications that we wouldn't have expected to see before. In some cases, it's some traditional markets like GIS market, where it's taking up. We also have seen, giving you just a couple of examples, I wouldn't say this is across the business. But we've got a customer in the state of Florida where we did a competitive switch, and we move that customer entirely to an as-a-service basis everything, the hardware and the software, everything. Think of it as like a white glove service to that customer. So I do think that there's opportunity for the team to do that. And actually, one of the things that I think is really interesting that the team -- and very good that the team is doing, as we're consolidating the number of, I'll say, software products we have. So we're going from many and to really just a couple. And we're taking a mindset of microservices, architecture mindset. So capabilities such as photogrammetry or image recognition, we take as a micro service that's sold on our Trimble Business Center software platform within Geospatial. And so I think that does make for some interesting upsell and recurring revenue opportunities over time. Now besides the addressable market, I think, Kristen, will be lower than what we have in our other markets just by nature of the -- still of the underlying fundamental solution.

So then just thinking about what the business models look like and maybe using Construction One as the first iteration of this, I mean, are you thinking that Construction One ultimately looks like a typical subscription model? Or should we be thinking about this as moving towards something that's more consumption based, like where you could flex up and down based on your needs, just thinking about the different models that you could approach with that platform?

Yes, it's a terrific question, Kristen. In the short term, it will look more like a typical subscription model. But I will say we have a couple of the businesses that really are more on a consumption basis today. It could be consumption on a seasonal basis, let's say, on a farm cycle basis. It's in our Tekla Structures business. We have customers who will buy for the duration of a project. So that is something closer to consumption. I think if we were to fast forward, I don't know, I'll pick a number, 10 years. I think what comes after the typical subscription model does start to look like consumption in the -- on a longitudinal basis. And at that point, then you have to ask, are you really -- should you be talking about recurring revenue at that point, or is it total revenue to the metric shift over time. So we'll have a little bit of that consumption. But the vast majority in the next few years will look like a typical subscription model.

Your next question comes from the line of Jonathan Ho with William Blair.

I just wanted to maybe start out with your thoughts around the pricing actions that you're taking. Is there a way you can provide us with a little bit of color in terms of the absolute levels, as well as realization, just given some of the inflationary pressure and FX pressures that your customers are facing?

Jonathan, so 50/50 is the answer. We think it's 50% price, 50%, I'll say, underlying unit volume. We think that weighted a bit higher on pricing, probably in the first half of the year, and we'll wait a little bit more on the unit volume in the second half of the year. There's some differences in the different businesses, ag, construction and whatnot. But there's a bit of a false precision that you can have here in trying to totally quantify this, but that's the best direction I can give you, is about half and half.

And then just in terms of your comments about being much more secular play than cyclical, can you talk a little bit about some of these conversations that you had with large customers and their prioritization of Trimble over maybe more traditional cyclical acquisitions? And Yes, I guess what are you hearing from customers when it comes to preserving their budget spend with Trimble?

So one of the things we hear from customers relative to the business model. I mean is when you have the -- when you move from CapEx to OpEx, there are a set of customers that you can reach that you weren't previously reaching. So one of the things we've seen when we transition the model in our SketchUp product, and I'll say a shout-out to that team, they're in 11 quarters in a row of over 45% year-over-year ARR growth. far exceeding what I thought was possible. They've done a terrific job. And our Tekla Structures business, that's moved to subscription. We're seeing that we're getting customers that we weren't before. So it is, I'd say, increasing the size of the addressable market. That's a very attractive thing. Okay, so at the largest companies, that's not -- we were already working with many of these companies. What they -- one of the things they like about is the ability to attach the cost of the technology to the specific jobs. So the billing out of technology. So there are some customers who are attracted to that for that reason. Some customers like the ability if they can flex licenses up or down depending on -- because we're moving more and more to named user licenses. If they can flex up or down, that provides value to our customers, and that will be something that -- and that is something that's on the top of their mind. One of the things in addition we see is we move Trimble Construction One. let's say let's talk about the frame agreement part of this is our customers of these big customers, and I met with in Europe were looking to have just one set of terms and conditions and one contract, one frame agreement for them to be able to buy Trimble. And we see some customers, not all, but some customers of the big customers looking to essentially act more like one company and really challenge some of the old paradigms of where technology decisions are made on the individual projects versus trying to drive, I'll say, more corporate efficiency and effectiveness. And so as we move -- for them, as we move the subscription offering, it makes it easier for them to consume a larger amount of Trimble technology. So I felt quite validated with the customers I've met with over the last weeks that this is very much the direction they want us to go.

Your next question comes from the line of Tami Zakaria with JP Morgan.

So I wanted to understand your organic growth guide a little better. I think you lowered your guide by about 1% which seems relatively modest when contrasting that to your comment about moderation in several end markets. So can you help us bridge the 2? Is it that your backlog is supporting your growth outlook this year, but you're seeing new order growth that is expected to be delivered after this fiscal, you're seeing more of a sizable slowdown?

I'll start, and David, if I leave something out, you can jump in on this. A couple of dynamics on that inflection. If I look back to 3 months ago, we had come out of the first quarter, well, quite strong out of the first quarter. And if I take a market like European -- agriculture in Europe that had done quite well at the beginning of the year, that was the same time that we made the decision to exit Russia business. The Ukraine business is effectively shut down at the moment given the war. Between the 2, that's $65 million of revenue. It was my belief that at the 3 months ago that the market was so strong that it could absorb that $65 million, and I was looking at the backlog. I'd say, 3 months later, I was a little too optimistic on that. And if I look at the ag business for the second -- well, actually up level to the segment, the Resources and Utilities segment, we still expect double-digit organic growth in the second half of the year. And I really don't want that point to be lost through my commentary. So we're maintaining a view of double-digit organic growth in agriculture. And to me, the delta from the commentary a few months ago was -- one of the deltas is that I see less ability for that Russia business to just get absorbed into the system. And which I should also say, the majority of our Russia and Ukraine business was agriculture, a strong majority of it. Now connect to the other part of your question on the backlog, we still are running backlog that's, I'd say, a good $140 million ahead of where we would typically see backlog if we're looking back on a longitudinal basis. I think we'll end the year with a higher level of backlog than we expected 3 months ago, different by some of the different businesses in Trimble, and that connects to the commentary around supply chain. David, did I leave anything out?

No, I’ll just sort of what you said in numbers, Rob, that if you look at the midpoint of the revenue guide down $50 million, half of that’s currency, as Rob said. The rest is the mix of demand and supply. There’s actually in a context of an improving supply chain overall. There are some new component supply issues that we actually didn’t anticipate a quarter ago that will pinch our resource business and Geospatial. So as Rob said, that will -- that demand is not expiring. We’re just going to end up for those products with a little more backlog than we expected. And then there’s some residual demand. The ag business in Europe has been really tough. So all the reasons Rob mentioned. There’s not only high inflation, but they’ve had epic heat with lack of productivity. There are issues with constrained availability of fuel. So the sentiment in the ag business globally is definitely less was a quarter ago, and we see it more in Europe. But the demand part of the guide adjustment is quite small.

And quickly, can you remind us your exposure to the residential market across the 4 segments, and whether you’re seeing any slowdown in the revenue end markets?

Okay, transportation, no exposure; agriculture -- resources and utilities excuse me, no exposure. In the geospatial and the B&I businesses are kind of up-level those, engineering and construction. I said, yes, we do have exposure to residential. It’s not kind of an existential exposure. And what I’d want to say is while residential inflected, let’s say, negative or worse over the last couple of months on an absolute basis, it’s still a very high number. And so we haven’t seen any meaningful inflections down in our business -- in our business, from residential at this point. We haven’t. And I’ll give you an example in the civil construction business. Over the last number of years, we moved towards putting more and more of the technology on excavators, it’s the largest machine count in the world, the lowest level of penetration. That has translated over the last couple of years into more work being done on the bigger residential developments. Just on 1 single-family house, okay, you’re not going to -- I don’t think you’re going to use -- my guess is you're going to --not many people are using the technology yet, but you take the larger developments, and they are starting to use technology for site preparation. In the vertical construction side of our business, I’d say it’s a minor level of exposure that we have. I mean the geospatial business, a survey or most surveyors do multiple types of work. So there -- I wouldn’t say there’s many that only do 1 type of work like they only do residential. I’m not aware of surveyors who would, or at least many surveyors who would only do that. An anecdote, I was talking to one of our dealer partners in Florida, he told me that they were seeing residential go down in Florida. But at the same time, the entertainment business, the theme park work, was going way up and completely offsetting what they were seeing as a down on residential. So the work does move around. We clearly need to pay attention to it, both in Europe, as well as here in the States and then pay attention regionally as well as we’ve seen the movements on residential work. But our contractors are busy. They’ve got the backlog, they’re working through it. So to me, it’s going to be a question of what happens to the size of the backlog in these different end markets that are served. We obviously -- you know we think about residential. We think more about infrastructure, we think about commercial work, we think about segments such as EPC and follow the trends in all of these.

Your next question comes from the line of Erik Lapinski with Morgan Stanley.

Congrats on the quarter. Maybe if I could ask you a question just on the transportation business since. We didn't touch too much on that. It looks like the performance for the subscription businesses is definitely improving, but you did not reduce hardware sales in North America. I guess I was just wondering, is that related to any mix within the portfolio of just where you're seeing traction with solutions or improvement? And then you have talked about selling some of that hardware as part of a bundle in the past. Just wondering if that has any factor too.

So the hardware sales yes, this is hardware primarily it's associated with essentially telematics subscription. We call it our mobility business. So you buy an onboard computer that's enabling technology for the I'll call it the long tail subscription, and we sell on a per truck basis. We felt -- we have an OEM business as well as an aftermarket business. We are primarily an aftermarket business. One of the inflections down we saw in the hardware business was one of our OEM partners taking less volume in the quarter than we anticipated. And that's been fluctuating up and down because as we know, both ourselves, but in this case, an OEM partner, they've got their own supply chain fluctuations independent of Trimble. So that was one inflection on the hardware for the quarter. And then in the aftermarket, I'd say that was lower than we had anticipated as well. We have launched an updated I'd say, offering. I talked about it in the prepared remarks. And we've got our biggest user conference in about 1.5 weeks that starts, which is our, I'd say, our best venue to roll out what we're doing in that business. So I'd say we're maybe a couple of months -- a few months behind where I thought we might be at this point and driving new business. But we are seeing the pipeline pick up around it. And then you noted the important point, which to me is the thing I didn't want to be lost in the commentary is that of ARR and the sequential growth in the ARR, and it's -- growth in ARR and sequential growth and if you look at the growth from the first quarter and then the growth into the second quarter on the ARR, that to me…

There are no further questions at this time. I'll turn the call over to the speakers for any closing remarks.

Thank you all. Thank you for attending the call. We look forward to talking to you next quarter.

Trimble will be having an Investor Day on September 7, and hope you can make it. This concludes today's conference. You may disconnect at this time.