Thank you for standing by, and welcome to the Trimble Fourth Quarter and Full Year 2021 Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rob Painter, Chief Executive Officer of Trimble. Thank you. Please go ahead sir. .

interest rates, supply chain and labor market dynamics.

While the overall landscape presents material short to mid-term planning challenges, what is straightforward is that the global infrastructure spend is a positive catalyst for the long-term health of the business and that in difficult economic environment our value proposition that delivers productivity and sustainability will remain a secular growth catalyst.

Moving to page 3. I'll talk about the progression of our Connect & Scale 2025 strategy, as seen through the lens of the Trimble Operating System capturing strategy, people and execution. Starting with strategy. I'll provide three proof points of our progress in the quarter.

First, we acquired AgileAssets, which provides SaaS solutions with analytical tools to manage roads, bridges, airports and rail assets, so customers can better plan, operate and report on those assets across the life cycle. The addition of AgileAssets to Trimble's platform will add the as-maintained model to our as-designed and as-built data.

Availability of this data within the model creates a robust digital twin for owners throughout the asset life cycle, thereby providing greater predictability, sustainability and lower lifetime asset costs.

Second, we have increased our ambitions in the area of sustainability both internally with our own carbon footprint and externally through the commercialization of sustainability. We have submitted our science-based targets for review, and we plan to reduce greenhouse gas emissions in line with the Paris agreement.

In addition, our most recent score from the climate disclosure project went up again, marking two increases since we first submitted in 2018, and we continue to work diligently to further improve our score.

With an external lens, customers are increasingly asking us to help them think about, manage and verify carbon reductions from the productivity and efficiency gains delivered through the use of our products. We have stepped up our ambition level to meet this market opportunity.

Third, we have continued to transform our software and hardware business model offerings, which has translated into increased bookings and ARR, which in turn gives us visibility into continued growth in 2022. Our Connect & Scale strategy is a platform strategy, and we are executing that strategy in part by partnering to build ecosystems.

As evidence, we have a new Microsoft partnership that will first focus on construction, and we established Trimble Ventures in the third quarter and made our first ventures investment in the fourth quarter. Moving to people in our operating system, I start by reflecting on our purpose in the world.

We are transforming and digitizing industries that support how we live, what we eat and how we move. In a competitive labor environment, we continue to see people attracted to the why of Trimble. We won a couple of Global Culture Survey awards in the fourth quarter both for overall company culture and for diversity.

We made demonstrable progress in our DEI journey in 2021 and our team continues to engage in their local and global communities through company-sponsored days of service and through our Trimble Foundation.

We believe the intersection of a great workplace environment and a purpose-driven organization provides a solid foundation upon which to lead, grow and compete for talent. We were also able to recruit Ann Fandozzi to our Board in 2021. And in January, we announced the addition of Tom Sweet, Dell's CFO to our Board.

I'm encouraged by individuals of this global caliber enthusiastically joining our Board and contributing to our ongoing growth. Moving to execution in the Trimble Operating System, we saw the benefits of ongoing innovation throughout the course of 2021.

In the fourth quarter, we reached a milestone of one million monthly active users of Trimble Connect. With our digital transformation efforts making progress, we now have all of these users on common identity and entitlement stacks.

We launched the new trimble.com web presence in December, the culmination of a couple of years' worth of work to modernize this important vehicle. We've also stepped up our outbound efforts to tell our story and to reach important new audiences.

We look forward to hosting some in-person events in 2022 and such as our Transportation User Conference in August and our Dimensions User Conference for engineering and construction in November. Finally, we see our fundamental responsibility to shareholders as being capital allocators, balancing short-term realities with long-term possibility.

To this end, we divested three businesses in 2021 on top of the four divestitures in 2020. In 2022, we will disproportionately invest in areas of the company such as the infrastructure opportunity, autonomy and our own digital transformation.

We make these investments and are accelerating the transition to recurring revenue models of a number of our software businesses in the context of a challenging supply chain environment, which is constraining our ability to meet customer demand and adding inflationary pressures.

The steps we are taking will moderate our operating leverage over the next few quarters but will move us forward in our ability to reach the full potential of our strategy.

Before I turn it over to David, a big shout out to all 11,500 plus Trimble team members for your ongoing dedication and execution to our global dealer partners and to our strategic partners for their efforts, and to all of you in the investment community who trust us with your capital. David, over to you..

Thanks, Rob. Turning to Slide 4. Fourth quarter revenue was $926 million, up 12% versus a year ago. Organic revenue growth was 14%.

Our strong revenue in the quarter was enabled by the outstanding performance of our supply chain and operations team as hardware revenue grew by over 20% versus the fourth quarter of last year, notwithstanding the extraordinarily difficult supply chain environment.

Backlog of unfilled hardware orders grew in the quarter, reflecting both the strong demand in our end markets and customers placing orders earlier than they would have in the past. Hardware backlog at the end of fourth quarter was nearly four times the level of a year ago before the supply chain challenges emerged.

With this strong backlog, we have unprecedented visibility into demand for our hardware offerings going into 2022. ARR grew at an organic rate of 12% driven by business model conversions, strong bookings and healthy customer retention for recurring solutions in the quarter.

Gross margins were 57.8%, down 90 basis points sequentially from third quarter levels and down 160 basis points from the fourth quarter of 2020. Gross margins were impacted by the mix of hardware revenue, higher inbound freight costs and our aggressive purchases of components in the broker market to support strong demand.

Cost inflation was higher than our expectations and the price increases we took in our hardware offerings did not fully offset an unexpectedly sharp spike in cost inflation in the quarter.

The price increases we have taken so far this year, averaging approximately 5% at the list price level across most of our hardware businesses and accompanied by reduced discounting have been accepted in the market. Given our leading position in the markets we serve, we are confident in our ability to maintain attractive margins.

And we continue to adopt our pricing strategy to the cost outlook. Our EBITDA margin for the quarter was 24.1%, while operating income margins were 22.1%. As we expected, margins in the quarter were lower than the fourth quarter of 2020, but higher than Q4 of 2019. EPS was $0.62.

We generated cash flow from operations of $155 million and free cash flow of over $140 million. Cash flow was lower than Q4 of 2020, driven by increased component inventory purchases. Turning now to slide 5, let's step back and review performance for the full year 2021.

In the face of unprecedented challenges coming from the ongoing COVID disruptions supply chain shortages and accelerating inflation we achieved record results across a broad range of financial metrics. Revenue grew 16% to a record $3.66 billion and the ARR growth improved sequentially.

While gross margins were down modestly, due to both inflation and the higher growth of our hardware revenues, EBITDA and operating margins ended the year above the levels of 2020 and at record levels in Trimble's history. Earnings per share were $2.66 up 19% versus a year ago. Cash flow from operations and free cash flow grew 12% and 14% respectively.

Now on slide 6, from a geographic perspective revenues were up in all regions with the highest growth rate in Europe. North America revenue in the quarter also grew at a double-digit rate. Turning now to other key operating metrics on slide 7, I'll note that backlog ended the year at $1.8 billion. This is up from $1.3 billion a year ago.

While backlog and our recurring offerings continued to grow, the majority of this increase came from hardware. And year-end hardware backlog exceeded our expectations of a quarter ago. Our results for 2021 reflect the achievement of a meaningful milestone.

On a trailing 12-month basis our software services and recurring revenue exceeded $2 billion for the first time. Operating cash flow of over $750 million was also a record and exceeded 1.1 times non-GAAP net income. Turning now to our results by segment on slide 8, revenue was at or above our expectations in all segments.

Buildings and Infrastructure revenue grew 14% versus prior year and 16% organically. Growth was strong across both hardware and software. Our sales of machine control solutions to civil construction customers grew by nearly 30% this quarter, despite supply chain constraints.

ARR growth in the segment was strong with Viewpoint and e-Builder ARR together up at a mid-teens growth rate. SketchUp ARR growth was nearly 40%, while ARR gained momentum in our structures and MEP software businesses as they accelerated their transitions to recurring revenue models in the quarter.

We ended the quarter with strong bookings momentum across our B&I Software businesses. Segment margins in the quarter were over 30%, representing a record fourth quarter for the segment despite cost inflation and the higher growth of hardware revenues. In B&I our price increases more than offset the hardware cost inflation, we saw in the quarter.

Geospatial segment revenue increased 15% overall and 16% on an organic basis. Demand for our core survey and mapping portfolio remains very strong across all regions driven by strong spending in residential construction, civil infrastructure and utilities. Segment revenues also benefited from shipments against several large government contracts.

Operating margins were below the levels of fourth quarter 2020 and the third quarter of 2021, driven principally by a short-term mix shift. The cost inflation we experienced in this segment was largely but not entirely offset by our 5% price increase and lower discounting. Resources and Utilities revenue grew 18% in total and 21% organically.

Hardware backlog grew in R&U, reflective of very strong demand across the agriculture sector. The outlook for capital investment in ag remained strong driven by high crop prices, low inventories and high average equipment age. Segment margins were below those of a year ago and sequentially below third quarter levels.

Product cost inflation was particularly high in this segment, as the cost of many critical components in our ag product offerings increased substantially in the quarter. In this segment our price increases have not yet kept up with inflation and we continue to refine our pricing strategy going forward.

We anticipate operating margins in this segment in the coming year to rebound from the fourth quarter 2021 levels, as our price realization and mix improve.

Consistent with our expectation coming into Q4, revenues and margins in our transportation segment were adversely impacted by supply chain challenges, both within our business and at our OEM customers.

On the cost side, we experienced meaningful component inflation and high freight costs and we incurred costs related to realigning our product portfolio, toward available components. Slow production levels at our OEM customers also constrained our revenue of both hardware and recurring services in the quarter.

The leading indicators from our transportation business continue to give us confidence that we are on the path to better ARR and margin trends, once the dynamics of the supply chain improve. We grew bookings year-on-year once again in Q4 and our net retention is at 100%.

Our OEM customers are seeing stabilization in their own supply chain situation and we expect that orders from them will pick up early this year. Finally, on the cost side, we are introducing new products, which will support improved gross margins.

For all these reasons, we project improved performance across the Transportation segment and ARR revenue and margins in the back half of 2022. Turning now to slide nine, I'd like to provide our financial outlook for 2022. We expect to see continued topline momentum.

Demand from our end markets remain strong and so far, we haven't seen any signs of deceleration as a result of recent inflation and higher interest rates. Our backlog and forward-looking indicators of sentiment give us confidence in our prospects for ARR and revenue growth.

As Rob and I have mentioned, we expect that supply chain disruptions will continue to be with us through 2022. There are signs that the pressure on component availability will abate in the back half of the year, but our plans presume that the supply chain will not be fully restored to equilibrium until 2023.

With those factors in mind, we are initiating annual guidance for 2022. Excluding the impact of any additional acquisitions or divestitures, we project full year revenue of $3.95 billion to $4.05 billion, representing a range of growth outlooks of 8% to 11%.

Our continuing transition of software offerings will present approximately 100 basis points of headwind to revenue growth. Organic ARR growth is expected to accelerate through the year to a mid-teens rate by year-end.

We expect gross margins in 2022 to be comparable to or slightly better than 2021, with sequential improvement in the back half of the year. We expect that operating margins for the full year will be approximately 23%.

Note that operating margins will be adversely impacted by the aforementioned subscription transitions, as well as investments we are making in support of our strategy and the acceleration of ARR. In aggregate, these factors present a headwind to operating margins of approximately 200 basis points.

Income from equity investments is projected to be approximately $30 million, lower than 2021 due to higher product costs in our joint ventures. Net interest expense is forecast to be approximately $65 million and we project that our tax rate will be approximately 18%. Netting all this out, we project to achieve EPS in the range of $2.75 to $2.95.

From a cash flow perspective, we project the free cash flow will once again exceed our non-GAAP net income. Our cash flow trends will be helped by the projected return toward equilibrium in the supply chain, as we anticipate needing lower component inventories by the end of the year.

While we are focusing our guidance on expectations for the full year, I'd like to provide some color on the factors we expect to drive quarterly trends in 2022.

Many of the normal seasonal patterns in our business are being disrupted by the impact of the constrained supply chain, so it is most helpful to think in terms of the expected sequential development from where we ended Q4 of 2021. We expect revenue to grow sequentially through each quarter of the year with ARR accelerating as well.

From a product cost perspective, we expect to see inflation through the first half of 2022, similar to what we experienced in Q4 of 2021, with meaningful improvement in the second half. As a result, gross margins are likely to be relatively flat with Q4 of 2021 through the first half of the year and meaningfully higher in the second half.

We expect that operating margins in the second half of the year will exceed the first half by approximately 150 basis points. I'll close by noting that we are planning an Investor Day in Colorado this September. And with that I'll turn it back over to Rob. .

We entered the COVID crisis almost two years ago. And at that time, we set an objective to exit the crisis on a stronger competitive footing. I'm proud of our accomplishments in 2021 and the progress and commitment we are making towards our Connect & Scale 2025 strategy.

We are a purpose-driven company serving secularly attractive markets, pursuing a differentiated strategy to connect the physical and digital worlds, with a unique set of underlying capabilities.

We deliver a compelling value proposition to our customers in the form of better, faster, safer, cheaper, greener and we deliver a compelling business model to our shareholders. No doubt, we expect to operate in a turbulent environment for the foreseeable future while simultaneously undergoing our own transformation.

The last couple of years serve as evidence, that this team has the courage and conviction to rise to the challenge. Operator let's please go to Q&A. .

[Operator Instructions] Your first question comes from the line of Chad Dillard from Bernstein. Your line is open. Please ask your question..

Hi, good morning, guys..

Good morning..

So my first question is just on the guidance. So what are you contemplating at the low end of your earnings guide? Because it implies about 3% growth and so as I'm kind of like looking through it, first of all, on the revenue side, at the low end you're at 7%.

But if you're talking about price realization of plus 5% and then ARR growth in the teens it seems like that would imply a kind of low single-digit or flattish growth on hardware. So just hoping, you could just kind of just give me a sense for how you're thinking about that low end and the reality of hitting that. .

Hi, Chad. This is David Barnes. I think the low end is 8% revenue growth. And I think your math is right there's some pricing in there. I'll note that the revenue growth will be impacted by about 100 basis points of transition, from perpetual to recurring some of our software businesses.

We do expect hardware growth to moderate versus what we've seen this year. We'll be working through the backlog, but those are some of the big building blocks. .

Got it. Okay. And then just secondly, on your incremental margins. So the guidance implies about 18%. And during the third quarter, I believe you guys talked about being at the low end of 25% to 30%. So I'm just trying to understand, what changed and perhaps you could just help us bridge that gap. .

Sure. The big -- if there's a change and there is a bit of a change it's that we're going to see more inflation than we had anticipated in the first half of 2022. Our outlook was a little more optimistic on that front. It's now clear that the supply chain being choked up, is going to last at least at some level through the end of next year.

And we don't think the inflation scenario, in terms of our product costs will get meaningfully better. The guidance presumes sort of plateauing at Q4 levels. We do expect to see some price realization. I talked in the prepared remarks about margins in Ag.

The sort of bad news of a lot of backlog is when you implement another price increase, you don't see it in revenue, right away. So those are the principal factors that would have operating leverage lower than we had indicated earlier.

But I will point out that the deliberate decisions we're making in terms of model transition from perpetual to recurring, and then the investments against our strategic initiatives, each of those takes 100 basis points or so out of margins that we would have next year, if we weren't doing those things and that would generate very healthy operating leverage.

.

Chad, one other piece of color on that is compare 2022 in the mid guide to 2019 and we're talking over 45% operating leverage over that time. .

Got it. Thanks I’ll pass it on. .

Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open. Please ask your question. .

Thank you. There's a lot of obviously volatility in the supply chain. Could you be a little bit more specific, if you're willing on what is getting better into 2H, what you have visibility on? There's some talk on chips getting better. I don't know if that's been a big headwind.

And then just your general feeling, is it stable in 1Q? There's obviously a lot of Omicron tick up potential and things like that. I don't know if it started getting better already in any ways? Thanks..

Yeah. Hey, Rob. I'll say that the supply chain challenges you hear a lot of talk about semiconductors, but the issues are broader than that. With regard to electronics, I would say things are already improving.

Part of that is that we several months ago took a number of steps including raising our outlook and making commitments with vendors placing orders that actually impacted our cash flow. We've worked component by component. We've seen meaningful progress.

We're actually seeing visibility to capacity on some of our individual constrained parts with specific vendors. So that's getting better. And the fruits of our effort to redesign our products around very scarce components all of those show signs of improvements. Actually, where things are stickiest now is the non-electronics.

It's cables, it's brackets, it's other kinds of parts. And that is sort of the downstream impact of labor disruptions in many markets all around the world. So that probably has a longer fuse to it.

But you put all that together, that adds up to the outlook we described in the prepared remarks, which is yeah, we'll see inflation in constrained overall supply through the first half of the year and we'll see meaningful improvement albeit not all the way back to normal by year-end..

And then begging your pardon, if you're willing to be so granular, you mentioned you have backlog so you don't have pricing coming through and resources and so on.

The back half margin improvement, is that more pricing? Is that more like you assume expedite freight goes away? Is it more proven in all the things you just discussed, if you're willing? And I'll stop there. Thank you..

Sure. There are many components. Looking at inflation, I think you can group it in a few buckets. There's the underlying just price increases from the suppliers and from our freight providers. And then there's expedited freight, where you use air freight instead of seaborne freight for instance. And then there's buying components in the broker market.

And when you buy components in the broker market, the price can be not a few percent higher, but multiples higher than the normal purchase price. So the outlook for improved margins in the back half of the year is that we have a lot less of the use of the broker market. We have less expedited freight.

We do think though that there will be underlying inflation that will be with us. But you'll see the full impact of the price increases including the ones we haven't taken yet or where we've taken them, they haven't flown through the backlog. And then over time, the mix of our business will improve.

I'll point out that our revenues were up about 12% in the quarter and our hardware revenues in Q4 were up 20%. So that's not helpful to margin. And all those -- that will abate as well. So we add all that up, we think that's how we get to meaningfully better margins in the second half than the first half..

Okay. Thanks..

Sure..

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open. Please ask your question..

Thanks, so much. I want to ask about the AgileAssets acquisition.

I just wanted to get a sense of the speed of the integration into the Trimble platform, and how you're thinking about the digital trend opportunity in terms of customer engagement and expansion of total addressable market?.

Hi. Good morning, Colin. It's Rob. So hey, AgileAssets fits perfectly into our strategy. We think it's really in the center of the bull's-eye. It's a growing SaaS business and it connects well with the broader Trimble platform.

So it is a growth story and we've got a high conviction that we can grow this business on its own and that it can be a catalyst for the growth of other Trimble solutions. When we put it in context of the digital twin in the prepared remarks, we talked about this intersection point of the as-maintained model with an as-designed and an as-built.

So if you think about it from the life cycle point of view, which is really central to our strategy, this adds really that final step in the operations and maintenance phase. And so a digital twin in its truest form is much broader than a design model and often people will talk about it more in a design sense.

We think the combination and intersection of the design with the as-built with the as-maintained is actually a true digital twin and the early indication we have from joint customers and from departments of transportation is quite encouraging to us. .

Great. And then shifting gears to the transportation and logistics business. With the real progress that's being made around Class 8 trucking moving towards autonomy and the more comprehensive software systems that we're starting to see emerge in that space.

How are you thinking about evolving the strategy for Trimble in that space? It seems like there's an awful lot to do, but also a lot to shift around.

And so the cadence of change would be helpful just in terms of your internal thought process and how you see that business evolve for Trimble?.

We see autonomy as it emerges in transportation. I'd say at some level similar to agriculture or construction. And that is in an autonomous world which by the way is probably really more of a more automated world in an autonomous world, the truck still needs to have a work plan. It still needs to understand how to route and how to navigate.

It still needs to understand how to optimize within the entire fleet. It still needs to understand how to give a dynamic estimated time of arrival to the customer. It needs the brains behind it. Arguably, the autonomous vehicle or dozer or tractor is a dumb node. It doesn't know what to do. It needs a work order. It needs a work plan. It needs that brain.

And that intersected with what we do at Trimble in the office the systems of record, the scheduling, routing, dispatch we think provide high relevance in a more automated world. In addition there's autonomous capabilities that we can provide companies on highway.

So for instance in our correction services business, we now have over 10 million miles that have been managed through our correction services which are really providing ADAS capabilities. .

That’s super helpful. I will follow-up offline. Thanks..

Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open. Please ask your question..

Hi. Good morning. Thanks for taking my questions. So the Resource and Utilities margins in the quarter came in below where we were expecting.

Can you expand on that a little bit? And why do you expect unfavorable mix in the near-term? And related to that what is your outlook for agriculture demand longer term in light of farmers moving towards vision and AI technologies?.

I'll defer the longer-term question to Rob. With regard to margins Tami, there's a story both of mix and of higher input costs. There are a number of key components in our displays for guidance in agriculture where the supply was particularly tight.

I mentioned a moment ago that when the markets are tight we and other providers of hardware technology have to go to the broker market to fill the needs. And in some cases a part that would normally cost $3 costs $30 or $40. So it's easy to see really dramatic cost spikes that happened disproportionately in this segment. So we've taken pricing actions.

But in this particular segment the cost increases are meaningfully higher. So we're relooking at our pricing strategy and we're going to have to take some actions to improve our margins going forward. We do think there's partly a story of mix here and what we were shipping in Q4 is disproportionately on the lower end of the margin scale.

So it will get better. But no doubt we have a margin challenge to wrestle with in this segment.

And Rob you want to talk about the longer-term outlook?.

Yes. Actually the other thing -- color I can add to the numbers is you know the revenue in the segment was up over 18%. ARR was in the mid-teens growth. Agriculture hardware revenue was above 30%.

That's -- put the margins in context of the extraordinary growth we have in this business we are making conscious choices to meet the demand the extraordinary demand that's out there in the market. And we saw, the backlog continue to grow in the business. So really feel good about the market demand out there.

And there's a correlation between the extraordinary demand and the margins. So those factors, as we move forward that's part of why we think we can – that will come to equilibrium. In terms of the ongoing outlook in agriculture and our views on that, hey, the indicators look good at the moment in the agriculture business.

So the macros are in support of the growth plans that we have. If we look at farm income, it's projected – 2021 was probably the high point for farm income. The expectations for farm income in 2022 are 20% to 30% above the 10-year average. So punch line is farm income is expected to remain strong. That's a US statistic that, I'm giving you.

And that's able to outpace the increase in the inputs that – input prices, sorry – that farmers are paying. So the reason that farm income can stay up is, because commodity prices are up they remain up and inventory levels remain low.

Now, look at the input prices being higher and connect that to a point of view, we have on the adoption of technology on a go-forward basis. That's exactly what the technology can do is it can minimize and optimize the use of those inputs.

Less seed higher yield; less use of herbicide to spot spray, which also by the way brings a sustainability benefit to the farm. So those factors in aggregate continue to have us bullish on the adoption of Precision Ag technologies going forward, and I'd say also on a global basis..

Understood. That's helpful. That's all for me. Thank you so much..

You’re welcome..

Your next question comes from the line of Gal Munda from Berenberg. Your line is open. Please ask your question..

Hey, good morning. Thanks for taking my question. Maybe the first one just trying to understand a little bit the dynamics around the business model transitions, maybe if you can update us a little bit.

And when you say expectations about 100 basis points headwind to kind of the margins and the growth for FY 2022, which are the brands that are mostly impacting that? And maybe, if we look forward, how long do you think that headwind still lasts? And at what stage it almost becomes a tailwind as well once you kind of cross that majority of the revenue being subscription based on some of those brands as well? Thank you..

Sure, Gal. It's David. I'll look both a little bit backward and forward. So for the full year, the measurement we do indicates that the transition impact in 2021 was about 100 basis points negative impact to revenue. That's actually less than we thought going into the year.

And the reason, it's less is that we had higher last-time buys of perpetual offerings in our structural design business. So right now, the impact the vast majority of the impact the 100 basis points whether it's for full year 2021, or full year 2022 are in our building software businesses. There's a decent chunk in the transportation business as well.

Actually, we're going to see a piece of it in the civil software – civil construction software business, as we roll out our platform-as-a-service model. So you asked about the longer outlook.

I'll tell you that the – if you look at our perpetual software revenue just under $500 million for 2021, we're already at a point where 70% or 75% of that perpetual software is sold bundled with hardware.

So the straight software offerings are only 25% of it, by which I mean to say, we will at the end of 2022 be through the significant majority of the model transitions on the straight software businesses.

But we are looking to transform to recurring revenue models the platform-as-a-service where – that's where we're moving, and we'll have some meaningful revenue in civil construction this year. We also have bundled perpetual software with hardware in the surveying business and in Ag, and that will be further out.

So it's a little early to call on, how long that transition will take. Actually that's a topic we plan to cover off at our investor conference in September. But that's less straightforward to transition than a traditional software business. You've got -- you're bundled with hardware, you've got multiple regions and dealers.

And so it's a harder problem to solve. It's likely to take several years..

Got you. And then maybe as a follow-up. When I look at the -- it still has a negative impact on the margins.

But like we said, if the transition stopped today on what you've already transitioned, it seems like incremental margins are being helped, if that makes sense, if we excel that, because if I calculate correctly, we're into kind of four of these incremental margins that we had kind of that two basis -- two percentage points of less of a headwind this year to what you expected and 100 basis points of that is actually coming from business model transitions.

So if I look at an organic as it is today business, as it stands, and as it's already -- if you weren't transitioning it, is it fair to say that the outlook for the margins would have been kind of higher than historically has been on incrementals?.

Yes. So I think I'm following you Gal. The margins are really high on both perpetual software and recurring. The difference is that when you sell subscription, you recognize the revenue and margin over many years rather than upfront.

So I think our math is good that the conversions we're doing reduce revenue versus if you'd stayed in the perpetual model by the numbers we're saying and it essentially all goes through to the bottom line..

And Gal, this is Rob. You're absolutely right by the math. If we were only targeting an op leverage number, you wouldn't do the transitions, that's the wrong decision to take for the customers and for the market.

So you're absolutely hitting on an important point that we will all day long look to convert the business models for the long-term health of the business.

And I think it's more important or certainly equally important that the Street is looking at the growth in the ARR, the look on our cash flow, the net working capital as factors to complement what an EBITDA percentage or an operating income percentage will tell you because it's an incomplete story..

Great. Awesome. Thank you..

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open. Please ask your question..

Yes. Hi. Good morning everyone..

Hi, Jerry..

I'm wondering if you could talk about the outlook for mid-teens ARR growth exiting the year. Really interesting outlook considering e-Builder and Viewpoint are delivering that level of growth now. So I'm wondering what needs to happen in transportation to get to that run rate.

Or are you looking for an acceleration or further acceleration in e-Builder and Viewpoint to get there? Maybe just give us a little bit more clarity on what drives the acceleration from 11% today?.

Hey, Jerry, this is Rob. I think that is arguably the story in this earnings release is the level of ARR growth that we exited the year with meets the ARR projection that David went through in the prepared remarks.

You can look at the backlog that we have, the reported backlog that's in the financials, as evidence that we have a growing amount of revenue to serve. So, in other words, we've got a high level of visibility. We had strong bookings in the fourth quarter in aggregate.

So, yes, the e-Builder and Viewpoint businesses, those continue to grow ARR in the mid-teens. And I'll say, bookings were -- grew faster than that. So the bookings are the forward indicator to the revenue that will eventually be recognized.

Now the other catalyst on top of that, Jerry, is that structures business that we talked about were -- that's the Tekla Structures business that made the model conversion in 2021 that will be part of that growth in 2022. Yes, we do anticipate some increase in transportation, but this projection that David made is not entirely dependent on it.

In fact we have rather modest expectations on transportation. So to the extent that that is a lot better that could be a little potential upside for us. So, we are squarely focused on growing the recurring revenue, the digital transformation investments we're making, David talked about that, almost 100 bps of investment we make into that.

That's the correlation to make to the ARR growth. It is an enabler of that ARR growth and we're absolutely committed to these transformation investments in order to drive these attractive revenue streams..

Yes. Rob got it right, Jerry. We're at or close to mid-teens in the ARR growth of our businesses other than transportation. We're much lower than that in transportation. And we do project a recovery.

We don't think we'll get all the way to numbers we think are good long-term by the end of the year, but the outlook presumes that we maintain and put some momentum across the businesses that are growing well now outside transportation and the transportation begins meaningful growth. So you put all that together, we get to mid-teens.

And if we do even more than that then we'll be on the high end of our outlook. But that's how we get there..

Very interesting. And David, based on the numbers you shared on SketchUp, it sounds like user growth has tripled in that business, give or take since the transition to subscription.

Are you on track with that level of performance in Tekla? And are you thinking about the remaining conversions that are in front of us with that type of user growth potential, or were there any outliers on SketchUp that we should be thinking about?.

I'd be careful about extrapolating from SketchUp to all the other businesses. Certainly, the SketchUp story is an amazing one. It really is sort of great flagship example of how changing the business model expands the addressable market on SketchUp. It has a quasi-consumer appeal, which Tekla would not. It's a very sophisticated product.

So we're early days in the model conversion on Tekla. I don't think you'll see the expansion in the addressable market in that offering that we've had in SketchUp..

Okay. Thanks..

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open. Please ask your question..

Great. Hi, Rob. Hey, David. Appreciate the morning call this time around. As it relates to M&A, the business has delevered very nicely over the past couple of years.

And with these Connect & Scale initiatives and streamlining the business, how should we think about M&A strategy and specifically, where larger M&A might fit in?.

one, product capabilities; and two, geographic reach. Sometimes, those are the same and sometimes, they're mutually exclusive. The majority of acquisitions we've done over time have looked more like a tuck-in than transformative and large ones. We've tended to do the larger ones every few years. And I wouldn't say that's by design.

It's been more by availability. So we are certainly open to that. There's a bit of a bifurcation in the market where there's the really, I'll say, almost mega caps, at least mega cap defined in a Trimble context, and then the long tail of small companies. There's not too many in the middle. So, there's a bit of a scarcity of assets.

So, we're absolutely open to it. We obviously have the balance sheet and we think we've got the right strategy. So if the fit is there we will pursue. On the partnership angle, I mentioned that because in a platform strategy, which is what connected scale is, we believe that partnerships are more important than ever to build out that ecosystem.

We have a long track record of partnerships. We've got a joint venture with Caterpillar in civil construction; we've got a joint venture with Hilti in building construction; we've got a joint venture with Nikon in our survey and mapping business. We announced that relationship with Microsoft, a few months ago.

We think that that is an important partnership to help us extend the reach and the capabilities of what we do. And as we open up, our technology to third parties and those ecosystems to help us extend that I think that's another point of evidence, of where our partnerships will come into play.

And then I'd like to believe, that those partnerships which could also come through a Trimble Ventures arm could become acquisition candidates down the road..

Okay. Interesting. And then when I think about this year and the focus on investments in infrastructure, economy and digital transformation, is the correct way to think about this maybe at the product level, the go-to-market level and then also at the back-end system level? Thanks..

Yes, I think that's a fair way to think about it. I -- the words I tend to use internally are strategy structure systems. I believe an organizational structure follows the strategy and I believe the underlying systems are meant to be enablers of that structure and ultimately the strategy.

So in the strategy of Connect & Scale, we see an enormous opportunity around the infrastructure bill since I think that's what you were asking about, when you said infrastructure. You may have meant our internal infrastructure.

But if we're talking the IAJA, we see a large opportunity there that connects to the acquisition of AgileAssets to bring more aspects of Trimble together to positively impact the opportunity inside of construction. So within that strategy, then we organized ourselves.

Well, sorry, actually also on the strategy side, yes that captures product and go-to-market. So I totally agree with you there.

You've got to have -- and the product looks like the Suite, the collections of our technology and the go-to-market for us has as you look in the totality of Trimble has a hybrid aspect of direct and indirect that comes together. Okay. Then on the organizational structure side, we organize ourselves around the industries that we serve.

So we have an industry leader for civil construction, for building construction, for agriculture, for survey and mapping for transportation. So we have that single point of accountability, to those end markets that we're serving.

And then the underlying systems that captures some of the digital transformation systems work that we are doing, to give us that ability to better serve customers and to help us scale efficiently and effectively. .

Thanks, Rob. Thank you.

You’re welcome..

Your next question comes from the line of Rob Mason [ph]. Your line is open. Please ask your question..

Yes. Good morning. Rob, you had noted the platform-as-a-service opportunity lies ahead of you still for the most part. How should we be thinking that impacts the recurring revenue gross margin or recurring gross margin as that occurs? The simple math would suggest some hardware mix flows towards that line item.

But is there an opportunity for in, which case -- at a gross margin level would the math suggests somewhat dilutive but is there an opportunity there the strategy there to make that less so than maybe face value would tell you?.

Yeah. I'll give you the strategy setup and David can fill in the blanks on the numbers. So platform-as-a-service, that's the I'll say the branding name we've had on the machine control and guidance business in civil. In other words, think about taking that guidance business as a ratable offering that combines hardware and software.

The fundamental value proposition to the customer is that of technology assurance, being able to stay on the latest version of sensors, or software, gives them ability to better connect to the office-based solutions we have and the connectivity solutions we have, to really round trip the data to and from the field to connect that physical/digital, to connect the office/field, connect the hardware and the software.

So that's the reason and the value proposition that we pursue this. So let's take a guidance system and let's just use round numbers and say it's a $30,000 system today that a customer buys. In that system, you're buying a set of sensors, hardware and embedded software.

The embedded software is actually what drives a lot of and creates a lot of that value. It's the enabling aspect of it today. Now today, the way the accounting works is we would take in that $30,000 example, we would take all of that revenue today.

The way the accounting works is that the value is attributed partially to software, perpetual software and -- so that embedded software attributed to perpetual software and then the rest to hardware. So that's where David refers to it as a bundle. So what we see is that more and more of the value comes through the software aspect of the offering.

And so that software aspect of the offering, so the portion of that $30,000 that's attributed to software that's what we look to take -- that's one of the things we look to take ratable over time. And that's a global offering that we just announced. Now in the US, we've been doing the whole thing as a ratable service.

The accounting makes you take the hardware upfront even though it's ratable. And it's that software that you can take over time. And this global offering that we now have, that's the primary offering buy the hardware upfront and then the software becomes ratable.

So in the short term, I think that's a hit to margin just like you would have in any software business that moves from perpetual to ratable.

What we need to then be able to demonstrate through the numbers and it probably shows up as a term license and therefore in the ARR number is that we can show that ARR growth and link that to any offset in the margin. Now that's the short term.

As you build the cumulative base, your margins slip and then you actually, as we know get back to parity and then have the value expansion opportunity from there, just on the base offering and that's before we talk about the upsell and the linkage to the rest of what we do.

Dave, would you add anything?.

No, I think you nailed it, Rob. So even when you sell a bundle of hardware and software and solutions together, just the way the accounting works, is you figure out how much of the value is hardware and you do recognize that upfront.

I think what's -- but the mega trend going on here that's in the context of the model transition, as Rob said is more and more of the value is with the software and solutions and relatively less of the hardware.

So the impact on the P&L of the transition whereas today, historically the way we do it we recognize all the hardware and all the software and solutions upfront. As we go ratable on the software and the services, that will have a similar impact that it does on all of our other software businesses.

So it will -- what you'll see in the accounting is the hardware still stays upfront, although hardware makes up less and less of the value of the old solution. And then when you go ratable on the solution, then the software part gets spread out overtime..

I see. I see. Thanks for the explanation. I'll just -- one quick follow-up.

Just David, as you think about the guidance for revenue for 2022, what are you assuming in terms of backlog reduction within that call it 9% to 12% or so organic?.

Yeah. So I'll ground it in the -- my comments and the notion that the supply chain won't get back to equilibrium even by the end of 2022. So just round numbers hardware backlog in a normal world is $100 million. We're at nearly four times that somewhere around $375 million.

We're likely to get halfway back or more than halfway back, but still be well above the 100 level..

Very good. Thank you..

Your next question comes from the line of Weston Twigg from Piper Sandler. Your line is open. Please ask your question..

Hi. Thanks for taking my question. I know you talked about ARR this year. But really I'm wondering if you could help us understand, your revenue by segment in terms of which segments may grow faster or slower than the overall top line revenue.

And the reason I ask is, just because you mentioned certain supply chain constraints worse in the agricultural area. And I'm just wondering how much that might slow down revenue in certain segments. So any help there would be great..

As a general trend, it's unlikely that we'll see hardware revenue outstrip total revenue like we did in the fourth quarter. The other book end, I'll put it that obviously our transportation revenue trends have been more modest than the other segments, and we do expect in the second half of the year an uplift in transportation.

But the rest of the businesses are actually quite similar in the sense that demand is very strong backlog is big. Just by the numbers Geospatial of these segments is most hardware related. So we've just had extraordinary growth. And it's -- we're outgrowing by everything we can measure the market in those solutions.

So you're likely to see that segment slow more than the others, but we have a really big backlog in construction and agriculture. And yes, so I think you'll see lowest growth in transportation particularly in the first half. Geospatial, just because its hardware dependent will be lower and the other segments will be -- we expect to be very strong..

That's very helpful. And then, just to follow up real quickly. Gross margin you suggested it would be higher in the second half kind of similar to Q4 through the first half.

What kind of level can you help us understand what kind of level gross margin could hit exiting the year as supply chain starts to get back to normal?.

I think the math is probably pretty easy, if we end up near where we were in Q4 for the first two quarters. And then we'll end the year at or maybe modestly above full year 2021. That will -- I think that gets you there. It will be -- the modeling of that won't get you to 60%, but it will get you closer than the 58% where we are now. So ....

Perfect. That's helpful. Thank you..

There are no further questions at this time. You may continue..

Thank you everyone for joining us on the call. And we look forward to speaking to you next quarter. Thank you..

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