Thank you for standing by. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Second Quarter 2023 Results Conference Call. 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. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Rob Painter, Chief Executive Officer. Mr. Painter, please go ahead.

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 today will reflect non-GAAP performance metrics, including organic growth comparisons which will relate to the corresponding period of last year, unless otherwise noted. Let's begin on slide 2 with our key messages. Annualized recurring revenue is our key top line metric at Trimble. Our team, led by our construction software group, achieved 14% organic growth in the quarter, beating our internal expectations by 100 basis points. We now stand at a record $1.88 billion of ARR, which compares to $1.2 billion when we began our Connect and Scale journey in 2020. ARR has doubled since 2018 and tripled since 2015. We are on track to achieve $2 billion of ARR by the end of the year, a remarkable figure made possible by the Trimble team who continues to work incredibly hard to execute on our customer-driven systems, process and business model transformation. We delivered EBITDA margin of 25.3%, also slightly ahead of our expectations, which was driven by strong gross margin of 64.2%. For perspective, gross margin was 56.8% in 2015 and 58% in 2018. EPS at $0.64 and year-to-date free cash flow conversion rate to net income of nearly 100% demonstrates the power and potential of our asset-light business model. Our revenue beat in the quarter is attributable to delivering a large federal government order in the geospatial business in the second quarter instead of the third quarter. For the year, we are holding our revenue guidance and raising EPS. Moving to slide 3. Let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with Buildings & Infrastructure. The market backdrop…

Turning now to slide 5 second quarter revenue of $994 million grew three percent organically. Revenue was above our expectations coming into the quarter, driven by the earlier-than-expected shipment of the large order of Geospatial equipment to the Federal Government that Rob mentioned earlier. Excluding that, revenues for the quarter were in-line with our projections. Our total company revenue growth versus prior year was driven by recurring software, both organic and from the addition of Transporeon. Gross margins were strong again in the second quarter, with non-GAAP gross margins of 64.2% tying the record levels of the first quarter. Our gross margins in the second quarter reflect favorable price/cost dynamics, strong growth of recurring software revenues and a higher margin mix within our product offerings. EBITDA margin of 25.3% in the second quarter was up 110 basis points year-over-year, benefiting from our strong gross margin performance. Operating and EBITDA margins continue to grow versus prior year, even as we lap strong year-ago revenues and as we continue to invest in our digital transformation. Cash flow in the second quarter improved on a year-over-year basis even taking into account Transporeon deal-related expenses. Our improved cash flow performance was the result of lower purchases of inventory, lower tax payments, and higher profitability. Our capital allocation priority remains debt repayment. And we made progress through the quarter on reducing our leverage. Turning now to, slide 6 for some additional color on our revenue performance. Product revenue, which includes both hardware and perpetual software, was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter. The year-over-year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022, when our supply chain was freeing…

The Trimble operating system links strategy, people and execution with a belief set that we must strive for excellence across all three dimensions. The progress of the quarter represents the quality of the strategy and our ability to execute. I'll close with comments on people. In the quarter, we won a number of culture awards, reinforcing our ability to attract the best talent in the industry. We believe that part of attracting the best lies in developing the best talent of the future. Through our Trimble Labs initiative, we now sponsor 30 technology labs in 14 countries. We also believe in the health of our communities. In the quarter, we announced breaking ground on a 1.7 megawatt solar array as a renewable energy source at our headquarters, and our own technology is currently being utilized to increase the productivity and quality of this installation. Finally, let me take a moment to acknowledge that Steve Berglund retired from our Board of Directors, completing over 24 years of service at Trimble. We thank Steve for all of his contributions, dedication and years of service to the company. Borje Ekholm will Chair our Board of Directors through our next phase of growth. Operator, let's open the line to questions.

Thank you. [Operator Instructions] Your first question comes from the line of Kristen Owen with Oppenheimer.

Hi. Good morning thank you for taking the question and congratulations on a nice result. I was wondering if we could maybe start by just some of the moving pieces in Resources and Utilities. David, I think you called out this three items, but wondering if you can help us parse out sort of the macro from the distribution channel, what you're seeing in underlying demand there? And then walk us through how that transition is unfolding in the distribution channel?

Sure. Hi Kristen. First thing I'll point out is that our business with the OEMs was up. So that's the good part of the story. The factors that I mentioned that caused our aftermarket business to be down year-on-year, a part of it is the macros. We see softening sentiment across many of the geographies is much more pronounced in Europe than the rest of the world, but we really see it in Europe. We've also changed our -- made announcement of changes to our distribution network. And so that's causing us and our dealers to sort of rethink our plans, and that clearly had a softening effect in the quarter. And then, we're just lapping really big numbers. Last year, we had really strong shipments as we were working through our supply chain. I'll point out our supply chain improved much more quickly than the OEMs. They get a lot more parts, more complex supply chain. So we saw the surge last year. It's a little tough to attribute, the causal nature of the aftermarket revenue decline to those three. It is a mix, and some of them are interrelated. But I think overall, the sort of long-term outlook remains positive, just as it was. We see these as -- all three of these factors is reasonably temporal.

Okay. Thank you. And just to clarify, on the transition in the distribution network, just any thoughts on how that is playing out at this point and how we should think about the impact from that transition over the remainder of the year?

Hey Kristen. Good morning, it's Rob. The transition is playing out mostly as expected. So, we feel good about where we are in this. It's obviously a process as we go around the globe, but we take an 80-20 principle as we work with our partners around the world from those that we're signing up. Thus far, I think there's very positive sentiment. This creates a closer connection to Trimble. It gets a broader portfolio of technology to take to market. So we're feeling good about it where we are, and there's still clearly a lot of work to be done. So I'd say, largely as expected so far.

That's super helpful. And then as my follow-up, I wanted to ask about a comment that you made regarding the positioning services. Can you just remind us what is your market share in positioning services today as we think about maybe specific to RNU just given the cross-selling opportunities that you called out there? Just trying to think about what the overall TAM is just given your market penetration? And I'll stop there. Thank you.

Yes, this has been an extraordinarily successful business for us really for the last couple of -- I can argue in the last couple of decades. To get that 2-centimeter and less accuracy on a farm or for a survey or for construction equipment, by the way, for ADAS systems and on-road vehicles, you need to have corrections, because you have errors in the atmosphere, you need additional geometry -- ground-based geometry to augment the satellites. So we've been a market leader, a technology leader in this capability for a long time now, continue to actually find ability to innovate in this space. From a market share perspective, I'd say it's pretty clear, we're the market leader as our technology goes on in ag, it goes civil construction equipment and machine control, it shows up in surveying all places where we have the market share lead. So the correlation on to Trimble equipment correlates to the market share we have, I'd say, and beyond because you don't just have to be Trimble on Trimble and we are mixed fleet. On the on-road space, that became a new frontier, let's say, a new addressable market that opened up for us in the last few years as automotive companies start towards their path -- towards autonomy. It's a series of progressive automation. That's why you see ADAS picking up as one of the first applications. So to no absolute position for lane detection, you're going to need to have corrections like we have. So, that's an emerging market with -- that presents an expanded addressable market for us. In terms of actually sizing specifically the addressable market, I have to admit it's a bit hard to do that, but I would put it as a certainly approaching $1 billion type market opportunity when you put the on-road business in as well.

Thank you so much.

Our next question comes from Mr. Jerry Revich of Goldman Sachs.

Yes. Hi, good morning everyone.

Hi, Jerry.

Rob, I'm wondering if you could just share a bit more of the stats for the subscription businesses. I know you have a very tight pipeline process, particularly in B&I, can you just talk about what the pipeline looks like? And any comments that you can add on Transporeon's performance beyond the prepared remarks in terms of what the lead indicators look like in that item business? And if you're willing to touch on new logo growth for the subscription assets within the performance, we would appreciate it? Thanks.

Sure, Jerry. So the pipeline within construction is quite strong. This team is firing on all cylinders at the moment. It showed up in the organic ARR growth greater than 20%, which is clearly better than the company number at the plus 14% level organically. Bookings were grew faster than the ARR growth. Bookings grew sequentially. You'd asked me about that last quarter. So now you work backwards from the bookings and into the pipeline and the coverage ratios, and we like what we see. We see strong pipeline, strong coverage ratios, the Trimble construction one offering continues to get momentum for our sellers in the market. We see strong cross-sell activity within those bookings as the pieces come together quite nice and overlay the market backdrop on that, and infrastructure in North America is clearly a positive catalyst for us in all of the markets. So generally, a favorable macro meets a team executing extremely well and turns into a pipeline, which turns into that ARR. On the Transporeon side of the house, we're four months into the acquisition. So it's still relatively new. We like what we're seeing in the business so far. So as I think about the people, I think about the macros, I think about the business and I think about the integration opportunities that we have there. Now the macro is still more challenging in Europe. It's a mass micro monetization business model. So it's fundamentally transaction-based or consumption-based and then the nature of the mix of that consumption impacts the revenue. What we think we saw in the quarter is that it looks like spot prices might have hit a bottom and time will tell. If that's the case, then the business model is there and poised to increase accordingly. From a customer perspective, from wins in the market, we don't lose customers in this business. We did have new logo wins in the quarter, continue to have bookings growth in the quarter. So I like the start that we have in the business.

Super. Thank you for the detail color. And David, can I ask on the fourth quarter revenue outlook growth, really interesting, so essentially an acceleration in sales of about three points ahead of normal seasonality, 4Q versus 3Q. Can you just unpack what gives you that confidence because Caterpillar is cutting production and we've got a bit of different trends in some of your hardware markets? I'm wondering if you could just talk about the visibility that you have because that element of your guide looks pretty interesting.

Yeah, sure. Jerry, one thing I'll say is that if you compare Trimble's trends with the OEMs, you have to keep in mind the year-on-year comps, including channel inventory, which are completely different for us. We work through our supply chain issues. In early last year, we saw the surge of shipment. Our channel inventories have been declining. That's not true for all the OEMs. The way I get comfort on the fourth quarter is from a couple of directions. First, from the bottom-up look at the businesses, the pipeline, the underlying trends. And then from a top-down perspective, I look at comparisons of our projections with the period before COVID in the supply chain. If you actually look at our organic growth going back to four years ago, so which is pre these disruptions. Actually, the fourth quarter compound organic growth is very comparable to Q3 and is actually consistent with what we've seen for several quarters. So it looks like a ramp-up, but when you take the noise of the supply chain-driven ups and downs from a year or two ago, it looks very achievable. So we're very confident in this fourth quarter outlook.

Super. Thank you.

Our next call comes from Mr. Chad Dillard with Bernstein. Please go ahead.

Hi. Good morning guys. So I was hoping you could drill down a little bit more into the hardware business. Can you just talk about segment by segment, what you're seeing in terms of the year-on-year slowdown? And then also, can you talk about the progress of destocking, to what extent do you think you're going to be finished and when you think you'd be able to produce in line with retail demand?

Hey, Chad. First thing I'd say is that we're nearly all the way through the destocking. It won't be a meaningful factor for the back half of the year. There was some destocking in Q2. It was much smaller than Q1, so I don't really call that out as a major driver. But there's a -- it's not just the destocking this year. It was the increase in inventory levels last year that you're comparing against. So you've got to put those two together to compare our business trends with retail demand. And that's true across the markets we serve. From the segment perspective, the business where we think there has been some end user sales to retail or sales end user decline is in geospatial. That is the segment that is most impacted by residential construction, both in the United States and Europe. So that's been the softest. If you take the channel dynamics out both this year and last and the other businesses in ag and in civil construction, it looks like there's modest sales to retail growth even with the numbers we're posting. So that's kind of how we see it.

That's helpful. And then I wanted to hit on your digital transformation. Can you just talk about how that's progressing? I think you talked about B&I, about 30 of your products are being sold this way. Maybe you can talk also about just what you've learned so far with that one-third of that business segment being transformed?

Yes. So we got through the next phase of our digital transformation during Q2. We put our North American construction enterprise software businesses together on a common digital platform. And as I said in my prepared remarks, these big process and system changes are never easy, they can be disruptive. One of the things I'm most proud of with our team and our results is that we achieved nearly mid-20s-plus -- actually, and the businesses directly impacted by the digital transformation, almost 30% bookings growth, while the tools they use to track and sell have transformed. So that is a huge milestone. It's -- we are now in a position, only just now, to take advantage of the benefits that the common platform provides to us and further enhancements to that are going to roll out even this quarter. So we're getting to the point where cross-sell and the Connect and Scale vision is enabled and not hindered by diversity of systems. Now we have common technology. We have visibility into our pipeline. Salespeople can see what customer business is across the Trimble portfolio in ways that they couldn't systematically before. So we're just getting going. We're just beginning to realize the potential of this new process and tool for that business, and we will continue over the next year or two to roll out the same approach to the rest of our business.

Great. Thank you.

Our next question comes from Mr. Jonathan Ho with William Blair. Please go ahead.

Hi. Good morning. Just wanted to start with TC1. And can you maybe give us a little bit of additional color in terms of how this is maybe impacting your ability to transact with customers as well as where TC1 maybe has surprised you?

Hey, Jonathan. Good morning. It's Rob. The TC1 so far has been, I'd say, a large success, and I think we're just getting started with it. I've had an example of a customer saying, okay, I used to have to have 14 different transactions with you to do business and now I can do it under one frame agreement. We're making ourselves easier to do business with. When we sign a frame agreement, let's say, with a customer who maybe is only buying one solution within TC1, if you sign the frame agreement, it's now easier to upsell. So that land and expand is more easily enabled because you don't have to go back and with a set of terms and conditions. Customers are able to connect workflows as we have tighter and tighter integrations in the data across the products and solutions that we sell to customers. So any surprise within TC1 to me as to the upside, it absolutely validates Connect and Scale and as the beacon for the rest of the company of what we can do when we rethink how we go to market and how we take our solutions to market. So I was very encouraged with what we're seeing in the business and proud of the team that's delivering it.

Got it. And you also mentioned AI during the prepared remarks. Can you give us a little bit of a sense of how this could be a potential driver of revenue, the timeframes for that as well as on the productivity side? Thank you.

Certainly, let's split the two and then the slide that goes along with the prepared remarks that we made on purpose, put one distinction of the internal facing example separate from the customer-facing examples. So if we take the productivity opportunity internally, I think the place we'll see it show up first is within the R&D on the developer side with the copilot trial that we ran in the second quarter that showed some productivity benefits. I think this is going to be the way that business has done. So where I would like to believe that, we'll see this show up over time as we can get more scalability out of the resources we have. Said another way is, if this works, that turns into op leverage on revenue growth that we have in the future. So call it more scalability, more effectiveness -- and internal effectiveness and efficiency, which I think would ultimately manifest in op leverage or that marginal contribution on the revenue growth. On the customer-facing side, I think it's going to be very interesting to see how this monetizes over time. Right now, I would say, there's an aspect where we make the solutions we sell better. Trimble is a premium price provider in the market. I think this is part of earning that premium is continuing to innovate and develop and have the best. There's another aspect of capabilities, which we believe will come through when you're buying a bundle such as TC1 when you're buying that platform offering or that cloud offering, such that if you have a, I'll say, an incremental set of analytics capabilities, we want to deliver them when you're buying something like TC1, so where you can uniquely get them by virtue of that business model. I suspect that that's going to be the way that we'll see this monetize. I think standalone analytics, I have a question if those will actually be able to monetize independently and on their own. I really think it comes through making our solutions better.

Great. Thank you.

The next question comes from the line of Tami Zakaria with JPMorgan. Please go ahead.

Hi, good morning. Thank you so much. So on Trimble Construction One, can you give us some color on what percent of your B&I customers now have TC1 and using multiple solutions on it? And do you have any set goal or timeframe to convert a certain percent of the customer base into TC1 customers?

Hi, Tami, good morning, it's Rob. Let's take that in here slices within B&I. Within B&I, you know, we have the civil construction -- fundamentally, we have the civil construction business, machine control, as you would know it, and then the construction software. Within the civil construction business, we don't -- we really don't have TC1 today, but that is absolutely where we're going. It's connecting the machine control offering with the software. We do that informally today, like that's the path we'll for sure be going. So I'd say we're not fundamentally doing it in the civil space today. So there would be no customers that we're hitting there. Within the construction software business that we have, this is for sure where we're taking the business and where we're having success. I have one caveat within that, which is our SketchUp product in our architecture and design business because SketchUp has millions of users from makers to architects. And so it's a different market segment. So I don't think that the millions of users of SketchUp are going to all be relevant for TC1. So if I take it within the subset the construction software, we would have an ambition to have, it's well more than half of our customer base on the Trimble Construction One agreement. We've got many thousands of customers on the frame agreements today. The team does a great job even if somebody is not buying a full bundled opportunity that they're putting them on the frame -- customers on the frame agreement such that they have a path to have access to more of our solutions and to have more of those more easily. So I hope that gives you a little color on how we think about the TC1 opportunity within B&I. What we'll continue to do, I guess I'll have a little bit more Tami, is our sweet spot today is at that contractor level with the TC1 offering, then we look at an architecture and engineering experience for TC1. We look at a civil contractor experience for TCI. So I have a series of expansions through tailoring experiences to the customer segments that we serve and then actually also rolling this out on a global basis. So overall, we're still in the early innings, and that's good news in terms of the continued growth opportunity.

Got it. That's very helpful color, Rob. Thank you. And my follow-up question is the price cost benefit in the quarter that you saw that helped gross margin, can you quantify how much it was and what segments drove that?

Yes. I mean just to give you a little higher level color on that for the moment. So the qualitative before quantitative. On the qualitative side, the gross margin improvement is fundamentally about the mix of the software business. So this isn't a price, I'll say, a price-driven benefit where we also see benefit in the margin as from the cost abating the inflation coming down in the supply chain, purchase price variance is going down or going away. So that means the hardware businesses are returning to increase their gross margins, by and large. You put that on top of selling more software, which comes naturally with a higher gross margin, and you get that 64.2% gross margin, which was a time of record we had from Q1 and is a remarkable change from gross margins of the past at Trimble. So it's more -- much more driven by that than price.

Got it. Thank you so much.

Our next question comes from Mr. Rob Mason with Baird. Please go ahead.

Yes. Good morning. I wanted to see if you could -- speaking to maybe the B&I and geospatial areas collectively, could you segment out what you're seeing between infrastructure and trends in non-res construction? And then just with respect to residential construction, do you think you're at a point of stabilization there?

Hi, Rob. Good morning. If we look at the segments within the market, clearly, infrastructure is the strong point, both, I'd say, North America, but also globally. There's also mega projects happening around the world and those are positives for us. On the, I'll say, the non-res side, if I exclude infrastructure non-res where we see pockets of -- continue to see pockets of strength and if I think here in North America, I think about renewable energy projects, we think about some onshoring of manufacturing, data centers, which correlates to AI, we believe, those are areas where we're seeing strength. And residential specifically, there's a little bit of a mixed tail. There's still a fair amount of new homebuilding happening, I'll stay within the US here for a bit on residential. But -- and so we see sort of up and down trends on that. I mean, it's been net down on residential, for sure. And hopefully, we can get to some stabilization on that. I don't know that I would call it stabilized yet in North America. But the economy looks like we might be able to head for us if we had for that soft landing, then that would be a good thing. Residential has been harder in Europe and then, that one have much more of a challenge than the US, and that's worth calling out. So you put the sum of that all together, and you get the forecast what -- we get the results that we have and the forecast that we put going forward.

That's helpful. And then just as a follow-up, David, you did -- I know we just had the discussion around gross margin. But David, you did speak to some -- that steps down in the third quarter. Should we expect that it steps back up in the fourth the mix becomes more favorable again?

Yeah, Rob, it will -- it's mostly mix driven, both the dynamics from Q1 to Q2 and then Q2 for the rest of the year. We do expect it to step down in Q3 and then up again modestly in Q4 driven by more software mix in the business.

Very good. Thank you.

Sure.

Our next question comes from Mr. Devin Au with KeyBanc Capital Markets. Please go ahead.

Great. Thanks for taking my question. I want to ask about your construction software business as well, really strong results there. I think one of our competitors reported yesterday and saw churn maybe up-tick slightly. But I'm just curious, if you've seen any similar dynamics around churn in the quarter, any noticeable up-tick or downtick? And if you can also comment on how retention or NRR has trended from last quarter that would be helpful?

Yeah. The -- in our construction software businesses across the board, we're seeing very strong demand. So as Rob mentioned earlier, the pipeline is strong. We've seen no up-tick in churn and net retention trends are really good. So the fundamental subscription metrics look very solid across our construction software business.

Got it. No, that's great to hear. And then, a quick follow-up for me, as you mentioned the closing of a large federal government order in geospatial, any details on how large that deal is? I just want to get more color on how much revenue got pulled forward from 3Q into 2Q? Thank you.

It was just a touch over $18 million geospatial equipment for the federal government.

Thank you.

You're welcome.