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Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Fourth Quarter 2022 Results Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. At this time, I would like to turn the conference over to Rob Painter, Chief Executive Officer. Please go ahead.

Rob Painter: Welcome everyone. Before I get started, our presentation is available on our Web site; 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. The Trimble 3-4-3 operating model simultaneously balances a view on looking forward 3 months, 4 quarters and 3 years. As I think about framing today’s commentary on 2022, I think there is a parallel to look back 3 months at our fourth quarter, 4 quarters to look back at the year 2022, and 3 years back to 2020 when we began our Connect and Scale journey. COVID, supply chain disruptions and net divestitures over these last 3 years has created a dynamic that makes it challenging to discern the signal from the noise in any given quarter, especially when looking at the year-over-year trends; whereas the long baseline reveals the definitive patterns of progression.

As I reflect on the fourth quarter of 2022, let’s begin on Slide 2 with our key messages, which are consistent with the commentary from the prior quarter. Our key growth metric is annualized recurring revenue, which met our expectations and grew 16% to a record level of $1.60 billion. Congratulations to the team for delivering this record performance, which compares to $1.19 billion of ARR at the end of 2019. Total revenue for the year was a record $3.68 billion, up 7% over 2021, and up 6% compounded since 2019, growing through COVID and business model transitions. Total revenue in the quarter was $857 million, flat with last year, and towards the lower end of our guidance range. The delta between the ARR and total revenue performance reflects a slowdown in hardware sales through our dealer partners, as dealers continued to sell-through their inventory while processing mixed macroeconomic sentiment.

For perspective, over the last 3 years, the sum of our civil, agriculture and survey hardware and related software has grown at a 12% compound annual growth rate, with agriculture growing above and survey growing below this baseline. Gross margin finished at a record level of 61.8%, exceeding our expectations, reflecting software mix, the cumulative impact of model conversions and abating supply chain disruptions. For the year, we achieved a 60% gross margin, a record annual level, up 170 basis points year-over-year, which compares to 57.7% gross margin in 2019. EBITDA margin of 24.3% met our expectations in the quarter and ended at 25% for the year, up 210 basis points as compared to 22.9% in 2019. Finally, earnings per share of $0.60 was exactly at the midpoint of our guidance for the quarter.

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 and Infrastructure. The big event for the team was our Trimble Dimensions user conference in November, where we had over 5,700 attendees from the global engineering and construction industry, which provided a great forum to reconnect with our customers and partners. We launched many new innovations, including the Trimble Construction Cloud, powered by Microsoft Azure, which is an industry cloud built to streamline construction projects by connecting users, data and workflow. We also announced extensions of our machine control technology platform to new OEMs and new machine types, further expanding our reach to connect the physical and digital worlds.

The highlight financial achievement in the quarter was delivering over 20% organic growth in ARR, in addition to record levels of ACV software bookings and record levels of cross-sell bookings. We also had a strong start for our newly acquired Bid2Win business, where we’ve had some early cross-sell wins. As we have previously discussed, we continue to allocate incremental capital towards our own digital transformation, as well as our go-to-market efforts, which are generating strong interest from our customers and partners and demonstrating encouraging signs of internal productivity and efficiency. The work we are doing in this business will be highly leveraged across the entirety of the company. In Geospatial, revenue was down further than expected, as dealers moderated their inventory levels in the face of softening demand and macro uncertainty.

Looking at the indicators, we see softness in residential, and while a portion of the expansion of infrastructure is getting consumed by inflation, underlying optimism remains in the market. For perspective, I look at the 3-year CAGR that I talked about on Slide 2 in order to calibrate the long baseline performance. Strategically speaking, in 2022 we continued to launch new innovations in GNSS, 3D laser scanning and handheld data collectors, and we achieved a double-digit increase in ARR as our business model strategy takes hold. In Transportation, we delivered revenue and ARR growth in line with expectations, in addition to delivering the fourth quarter in a row of operating margin expansion. Connect and Scale progression also came in the form of continued development of connected workflows, such as Connected Maintenance, Connected Locations and Engage Lane.

The big story, of course, in the fourth quarter was the announcement of the Transporeon acquisition. To refresh memories, Transporeon operates a leading cloud-based transportation management platform, powering a global network of 145,000 carriers and 1,400 shippers. The platform integrates with more than 3,000 systems and powered more than 25 million transactions in 2022. For me, this is the very definition of a Connect and Scale business. I had a chance to spend a few days in Europe with Stephan Sieber and the Transporeon team in January, and my level of conviction of strategic and cultural fit has only increased. We are still working through regulatory approvals and expect to close the deal in the first half of this year. We are excited to get to work together.

In Resources and Utilities, revenue and ARR growth were led by our positioning services, utilities and forestry businesses. Our definition of utilities covers our work with electrical and water utilities, but our positioning services business can also be thought of as a utility, in this case, precision GPS as a utility. In October, we announced that we crossed a hurdle of 34 million hands-free miles driven with General Motors and their Super Cruise program. Our precise GPS technology enables a vehicle to maintain its lane position in various environments, and we are working on several other Tier 1 and OEM program opportunities. Moving to agriculture, revenue was flat year-over-year, and up when excluding Russia and Ukraine. The 3-year, double-digit CAGR growth on Slide 2 is instructive for calibrating the long baseline growth of the agriculture business.

With a product lens on Connect and Scale, we are now bundling our guidance hardware, software and our positioning services, providing both easier access to the technology and a better value proposition for our customers. With a go-to-market lens on Connect and Scale, users and customers are at the center of our strategy. In pursuit of this strategy, we announced this week that we are taking a different approach to our go-to-market relationship with CNH Industrial. Moving forward, our distribution to aftermarket customers, after a 12-month transition period, will be done entirely through independent dealer partners, with the product bearing the Trimble brand. Less than 20% of our revenue in the Resources and Utilities segment goes through CNH to their dealer network today.

We expect to maintain this revenue and address aftermarket demand and the needs of farmers through our direct relationships with our independent dealer network. This evolved approach to distribution will also enhance our ability to offer OEM brand agnostic solutions to customers to help them orchestrate their field operations with mixed fleets of equipment. Our new approach to aftermarket distribution will improve our ability to sell our full range of technology solutions to aftermarket customers, including guidance, selective spraying, variable rate application, water management and our Connected Farm works center software solution. Our evolving strategy will also enhance our ability to cooperate with OEMs across the industry for their needs for factory-fit equipment.

Let me now turn the call over to David to take us through the numbers.

David Barnes: Thank you, Rob. Starting on Slide 4, I’d like to begin my financial commentary this quarter by discussing organic growth trends across the components of our business. As Rob mentioned earlier, our recurring revenue businesses grew strongly year-on-year in the fourth quarter, with ARR up 16%. The strength of our recurring revenue offerings in a weakening and uncertain macroeconomic environment validates our focus on the continued evolution of our business model. While our recurring revenue streams were strong in the fourth quarter, revenues of hardware and related software were down. Organic hardware revenue was down 13% versus prior year and came in below our expectations. The factors driving the slowdown in our hardware business in the fourth quarter were consistent with what we described in our third quarter call.

During the fourth quarter, our dealers continued to reduce their inventory levels, reflecting both our improving supply chain execution and uncertainty in the future economic outlook. The drop in demand was most pronounced in our Geospatial segment, as our surveying end customers ordered less than they did earlier in 2022. Hardware backlog reduced sequentially during the quarter as expected. From a geographic perspective, revenues were up modestly on an organic basis in both North America and the Rest of World, with strong trends in Latin America, but were down in Europe and in Asia Pacific. Year-on-year, Europe trends were meaningfully impacted by the loss of business in Russia and Ukraine and were up 1% organically excluding that impact. With that as a backdrop, I’d like to turn now to our total financial performance for the fourth quarter and full year 2022.

Starting on Slide 5, fourth quarter revenues of $857 million were flat on an organic basis, and down 8% when including the impact of foreign currency and acquisitions and divestitures. Gross margin was up 400 basis points, reflecting both the accelerating mix shift toward software and the positive net impact of our price increases and moderating cost inflation. EBITDA margin was up 20 basis points and operating margin was down 20 basis points, as increases in our gross margin largely offset higher spending against our Connect and Scale strategy, especially our digital transformation and higher spending on travel and trade shows. Diluted earnings per share were $0.60. Looking at cash flow, both cash flow from operations and free cash flow were, as expected, down year-on-year, with the single biggest factor being the amortization of R&D for tax purposes.

We did not repurchase any shares during the quarter, and do not plan to restart our repurchases until we are well on the way to de-levering following the issuance of debt to fund the Transporeon acquisition. Turning to Slide 6 and results for the full year 2022, we achieved success across a number of critical dimensions. Organic revenue grew by 7%. Gross margin improved by 170 basis points, reflecting the positive impact of our ongoing mix shift. EBITDA margin was 25%, even as we restored spending across a number of areas that had been constrained during the COVID pandemic and as we accelerated investments against our strategy. Cash flow was down year-on-year principally as a result of an increase in our inventories and a change in U.S tax legislation, both of which we expect to normalize over time.

As we move to complete the Transporeon acquisition, we take this on with a strong balance sheet. Working capital remains negative. Our year-end net debt to EBITDA ratio stood at 1.4x and the ratings agencies maintained our bond ratings and stable outlooks following the announcement of the transaction. Turning now to our quarterly and annual results by segment on Page 7. Speaking to the fourth quarter, Buildings and Infrastructure achieved organic ARR growth of over 20% and recurring bookings growth in the high teens. Sales of civil construction hardware were down year-on-year by just over 10%, leading to organic revenue growth for the segment of 2%. Dealers continued to reduce their inventory levels, and end market demand moderated. Segment margins at 25% were down year-on-year, impacted by lower civil construction revenue, our Dimensions user conference, subscription transition and Connect and Scale investments.

Revenues in the hardware centric Geospatial segment were down 12% year-on-year on an organic basis, driven principally by declining dealer inventory levels and softer end market demand across the surveying sector. Segment revenues were also pressured by lower shipments to U.S Federal customers, which vary meaningfully from quarter-to-quarter and can be difficult to predict. Segment margins remained over 25% despite these headwinds. Revenues in our Resources and Utilities segment were up 6% organically driven by growth from Cityworks and positioning services sold to agriculture customers. Our agriculture revenue was impacted by the loss of business in Russia and Ukraine, with an estimated year-on-year impact of minus 5% to the segment in the fourth quarter.

Segment margins improved in the quarter sequentially and versus prior year, coming in just under 36%. Our fourth quarter results in the Transportation segment reflect improvement across a number of dimensions. Organic revenue grew 5%, driven by higher year-on-year sales of Enterprise and Maps software solutions. ARR for the segment grew at a mid-single digit rate in the quarter. Revenue trends in our mobility offerings improved sequentially from prior quarters, driven in part by higher sales to our largest OEM customer. Operating margins of 14.5% were the highest since 2019, and reflect strong performance by our team in managing costs. Let’s turn next to our guidance for 2023 on Slide 8. The projections I will share with you today exclude the impact of our pending acquisition of Transporeon.

Starting with ARR, we expect organic ARR growth at a mid-teens level in 2023. Our strong outlook for ARR growth is grounded in the solid bookings momentum we achieved in 2022, the potential for accelerated cross-sell as our digital transformation rolls out to a growing portion of our business, and the essential role that our software plays in our customers’ operations. Our outlook for revenue, excluding future acquisitions and divestitures, is $3.7 million to $3.8 billion, reflecting an expectation of organic growth in the range of 2% to 5%. As a reminder, divestitures of businesses in 2022 will impact total reported revenue growth trends, with the biggest impact in the first half of the year. Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters, and softer end market demand in an environment of limited GDP growth.

We expect revenue from hardware and related software will be down in the low single digits organically for the year, offset by strong recurring revenue growth. From a margin perspective, we expect that gross margins will improve by over 200 basis points as our business mix continues to shift in the direction of higher margin software. We expect a modest increase in operating margins, as we invest against our strategy in an environment where organic revenue growth is harder to come by. I’ll note here that our leadership teams have been working hard over the last several months to adapt our spending plans to the current economic climate. Allocating capital against our strategic priorities is always a major focus for us, and the need for sharp focus is never higher than in a time of weak economic growth.

We are confident that we can continue to progress our strategy within the constraints of our operating plan. Income from equity investments is expected to be relatively flat with 2022, and net interest expense is forecast at approximately $70 million. Netting this out, we project to achieve earnings per share in the range of $2.66 to $2.86. We expect that cash flow will grow significantly in 2023 driven in part by reductions in inventory levels. We expect free cash flow for the year of approximately 1x non-GAAP net income. Our cash flow forecast for this year now assumes that amortization of R&D costs under Section 174 of the U.S tax code will not be repealed within a time frame that will allow us to recover the accelerated tax payments that we made in 2022.

While we believe that there is bipartisan support for this change, we are less confident than we were a quarter ago that this legislation will pass soon enough to help us this year. By way of reminder, this issue impacts the timing of tax payments and has an immaterial impact on our tax rate. If Section 174 is repealed within the next several months, our free cash flow would benefit by approximately $150M. Note that our cash flow guidance excludes the impact of transactional costs related to the pending Transporeon acquisition. While we are not offering quarterly guidance, a few factors are likely to impact the sequential evolution of our financial results as the year progresses. We expect organic revenue to be down in the first quarter and flat in the first half of the year, reflecting the strong growth in hardware and related offerings that we saw in the first half of 2022.

We expect organic revenue to be up in the mid- to high-single digits in the second half of the year. Influenced by these revenue growth patterns, we expect operating and EBITDA margins to be relatively flat in the first half of the year, and up in the second half. While we expect mid-teens organic ARR growth for the year, growth in the first half is likely to be slightly lower driven by planned churn from a small number of customers. We expect ARR growth to improve sequentially through the year. From a segment perspective, we expect organic revenue growth for the year in the Building and Infrastructure, Resources and Utilities, and Transportation segments, with the strongest growth in Buildings and Infrastructure. Revenues in the Geospatial segment are expected to decline for the year, with the highest levels of organic decline in the first quarter as we lap strong numbers from the first quarter of 2022.

Geospatial trends through 2023 will continue to be impacted by reductions in dealer inventory levels and ongoing softness in demand in a number of the segment’s end markets. We expect margins to be stable in Buildings and Infrastructure and Resources and Utilities. We project growth in Transportation margins, while Geospatial margins will be down modestly for the year. Back to you Rob.

Rob Painter: Let me thank our colleagues, customers and partners for their support and their work in our strategic and financial progression. I’m proud to say that we continue to win culture and innovation awards, and proud to announce that we received approval of our emissions reduction targets by the Science Based Targets Initiative. Our objective is a 50% reduction in scope 1, 2 and 3 emissions by 2030. In addition, we released our first task force on climate related financial disclosures report. In 2022, our highlight financial metrics were ARR growth and gross margin expansion. Our 2022 ACV bookings give us confidence that we can continue to grow ARR at a double-digit rate in 2023. Hardware demand remains the hardest revenue stream to predict.

While the signals are mixed, and even a bit confusing in the short-term, the long-term secular attractiveness remains. Our ability to uniquely connect the physical and digital worlds provides a guiding light for our business and remains the foundation of our right to win in our served markets. We have surgically reduced our expense structure and moderated spending across the Company to ensure discipline and focus in an uncertain environment. What remains certain is our conviction to grow our business by focusing on our customers and continuing to execute our Connect and Scale strategy. Operator, let’s now open the line for questions.

Operator: Thank you. We will go first to Jonathan Ho at William Blair.

Jonathan Ho: Hi, good morning. I just wanted to maybe start out with the CNH aftermarket deal. Can you maybe give us a little bit more color on why it makes sense to do this now and what this could potentially do for the resources and utility segment, particularly as you engage more with the independent dealers?

Rob Painter: Hey, good morning, Jonathan. It’s Rob. So let me give you — break it down in three respects, context, strategy and next steps. For context, let’s talk about Connect and Scale, and our strategy means to connect users data and workflow and the users are at the center of our universe. And in that we believe we need to be closer to the customers that user, that farmer. So when we talk to the customers, and we work with, by the way over 100 OEMs today, and obviously, the farmers themselves, what they’re asking us to do is to help them manage a mixed fleet. And I personally visited farmers in the last 6 months in Mexico, Chile, Brazil, Japan, Australia, Germany, and here in the U.S. So the strategy is we — go-to-market strategy is we sell-through multiple avenues today to reach our customers we sell.

We have a direct sales, particularly the enterprise farms, we sell-through OEMs, we work with over 100 OEMs and then we sell-through a channel, and the channel breaks down into a Trimble channel that we already have today to reach the aftermarket as well as selling through CNH dealers in the aftermarket. So what we’re moving from is where we sell to CNH today, so call it CNH –from Trimble to CNH corporate to reach the CNH dealer. That’s the from the to — the to be state we’ll be going from Trimble straight to independent dealers. And those independent dealers will be capable of selling the full line of Trimble Cat , which is more than guidance, because we also do variable rate, we do selective spraying, we do water management, and we do software.

So as we look forward to this, as we work through the transition, we need to sign up the dealers to be independent dealers directly with Trimble. And we think it can expand the available set of products and capabilities they have to take to market, we think that will help us be incrementally closer to the end users of the technology and in a context of customer success, which is part of our strategy. And we think we can help customers and those users become more successful with the technology because when we’re out there in the field, talking to them, they are asking for help to integrate and manage a mixed fleet of technology as well as mixed fleet of equipment.

Jonathan Ho: Got it. And then just as a follow-up, I think you’ve also referenced some additional investments that you’d like to make for that Connect and Scale in the 2023 timeframe. Can you help us understand where those investments are going to go? And again, maybe why that makes sense to make those investments now, given the macro environment? Thank you.

Rob Painter: Sure. So we’ve been investing in this strategy incrementally, really for the last couple of years. And demonstrable evidence of where we see the attractiveness of it and I’d say momentum for it is in the growth of the ARR. So the work we’re doing up front really is touching more of our software businesses first, and particularly the recurring revenue businesses that we have. So a post of 16% organic growth on ARR, the 1.6 billion. This is supporting growth, continued growth and as and I think from a shareholder value perspective, this would be the most valuable revenue stream that we have at the company. The investments, they pick up, systems, they pick up, people they pick up, process, so from a systems perspective and customer facing, I think internal facing from a connect — The scale part of Connect and Scale, enabling us to efficiently and effectively grow.

Look at people and the work that we’re doing. We look at customer success. Customer Success is about net retention. That’s the metric you look at for customer success. And the economics of net retention are very, very powerful. So I’m of a mind, we’re of a mind that we continue down this path. And if anything, we continue down this path with more, more conviction. And behind all of this there’s a strong balance sheet 24.3% EBITDA in the quarter. So we believe this is emphatically the right thing to do at this moment.

Jonathan Ho: Thank you.

Rob Painter: Thanks, Jonathan.

Operator: We’ll go next to Rob Wertheimer at Melius Research.

Rob Wertheimer: Hey, good morning, everybody. It seems like there’s a lot of structural progress next quarter on margins on ARR, which is, I guess, continuing and the surprise, I guess, for us was just a bigger destock in the hardware than we would have thought. And so, I had a couple of questions around that. One is, were you able to see those elevated levels of inventory, previously dealers and for the normal after what you look in your outlook, or are they low? I mean, there’s any characterization that I guess there’s been a debate in construction in North America anyway, as to whether large projects will fill in, smaller projects go away. And that seems to be the case. But maybe your mix of your customers is more fragmented than the big ones. I’m just trying to look for context around why that decline happened and is continuing and how big it is.

David Barnes: Yes, hey, Rob. Its David Barnes. First point I’ll make is that the supply chain, the constraints, and then the removed constraints has really moved trends around in our shipments, in our dealer inventory, that were hard to predict and in some cases, challenging to understand. So just by way of reminder, we had unsustainably and undesirably high hardware backlog early in 2022. Our supply chain even today isn’t fully freed up, but to the extent that it freed up it happened very dramatically at the end of second quarter. So we shipped a lot of product, you’ll recall that the hardware revenue was way up at that timeframe. So dealer inventories did grow. And I’ll say it took us a while to figure out how quickly the dealers were able to find customers for and deploy that inventory.

And that happened exactly while some of the end markets that our dealers serve slow, particularly in the geospatial side. There’s probably the highest within Trimble level of exposure direct and indirect, to residential home construction, which slowed. There’s some anxiety about the general economic outlook. So these two things happened all together, freeing up our supply chains, very big backlog, lots of shipments and I created the destocking that we talked about a quarter ago, and it has picked up. We’re not through it yet. We think we have a pretty good sense of where our dealers want to be and where they will be over the sustained period of time. It’s my guess that we’ll have two more quarters, Q1 and Q2 of meaningful inventory reductions in our dealers and anything after that will be smaller.

But the guidance we’ve given reflects that expectation.

Rob Wertheimer: And any guess on if those two quarters happen, or would dealers be lower than normal at that point, and they maybe don’t have perfect visibility into the channel, I understand.

David Barnes: Yes, well, what I’ll say is that we still do have isolated cases of supply challenges in our Ag, one of them. But I think at that point, they’ll be — so that there may be some reasons For dealers to have a little more inventory than they would have had pre-COVID, not much though. Supply is really good. Hey, Rob, the thing I remind you on as we look at this noise of one quarter to another, big increases in the first half of ’22. And the decline, we just reported, Rob had a good chart in his presentation of the multiyear trend. We’re still way above where we were. So we do think that a lot of this is the noise of the resetting of the supply chain. That’s the bigger factor really than any fundamental change in demand.

Rob Wertheimer: That’s perfect. Thank you.

Operator: We’ll take our next question from Chad Dillard at Bernstein.

Chad Dillard: Hi, good morning, guys.

Rob Painter: Hey. Hi Chad. So I just want to go back to the CNH agreement. I just think in better understand the medium-term organic growth potential and maybe you can talk about what needs to be done to set up the independent channel. And when you expect that to be in place, and just how much of your product portfolio, you’ll be able to sell within that channel versus how much you’re able to sell with CNH.

Rob Painter: Hey, Chad, so this is Rob. I’ll start with the quantitative framework. We had a chart on the second slide that showed over the last 3 years. The CAGR of the hardware businesses has been 12%. Those three businesses are surveys, civil construction, And Ag. Ag has been above that 12%. growth over the last 3 years. And Ag grew this year. And it grew even more if you exclude Russia and Ukraine, which was we were selling quite a bit of kit and to Russia. And so we’ll start to lap that later this year, mid this year. So to call that context, in terms of the growth that we’ve had. And I’ll give you some more context when we look at — we look at units, we look at pricing, we look at share of wallet, we look at market share, and we think we’re holding our own on a global basis and probably growing, growing in, Europe holding around and North America growing in Brazil.

So we now turn to the to the CNH part of your question. For this only for that we’re talking about the aftermarket business that we have with CNH. As we — and that business that we sell-through CNH into the aftermarket today is primarily guidance. So an opportunity we have as we move to independent dealers. And remember we have independent dealers today, they’re Trimble, four line Trimble dealers today in agriculture. As we move the business that goes through CNH, that gives us an opportunity to expand the product portfolio to a set of independent dealers. Those independent dealers could very well be dealers we already work with today, that just will happen in a direct route with a direct relationship with us at Trimble or it may be a fully New Dealer, we have a 12-month transition with CNH on this part of the arrangement.

And it’s a very positive conversation. I want to say that we’ve been having with the CNH with the CNH team. So optimistic here, it’s the right thing to do with what our customers are asking for. And it’s time to get to work to set it up. That’s helpful. And then just my second question. So can you give an update on the digital transformation? What percentage are you done — ’23. Can you talk about some of the focus areas for this coming year, and if you can quantify just like the incremental cost to execute expecting for ’23.

David Barnes: So from — I’ll start with the second part, the incremental cost is about 100 bps to the bottom line consistent with what we’ve we had this year as well. So that’s the cost side of the equation. On the focus side of the equation, the digital transformation, there’s a meta theme, its more than a system transformation for us. So, I think about people, I think about process and think about systems and the systems themselves. And then we think about the go-to-market specs of the digital transformation. And it’s primarily focused right now on supporting our software businesses, particularly software businesses within buildings, and infrastructure. And that connects with the Trimble construction one dialogue that we’ve had with you and others.

And so, first point of reference I look at is continuing to grow the ACB bookings, which is the leading indicator for the growth of the ARR. When we look at net retention as a key metric as well with inside that go-to-market. We look at the organization of the sales team itself and the go-to-market. So in France, Benelux, we’ve put the construction sales team together, software team as 1 organization. We’ve mostly done that in North America as well. And so it’s getting the sales team aligned to sell consolidated offering of Trimble Construction One. And then with Trimble Construction One, it started out as a general — targeted to general contractors and then we will be releasing more persona-based bundles. Remember, we sell to owners in the public sector.

We sell to architects and engineers. So we have targeted portfolios to sell to those personas with the go-to-market team, a sales team that comes more and more together, as 1 organization to be enabled and equipped to sell everything that we do. On the system side, in the second quarter, we’ll have the next, I’ll say, big release of the systems. Those systems are meant to increase the efficiency and effectiveness of our own sellers. And it moves closer and closer to having commerce capabilities — e-commerce capabilities from an external — with an external lens. On the people side, we continue to invest in customer success. And on the process side, we continue to invest in developing the playbooks for how we go-to-market starting with that software business, but then the next wave after that goes into software and other parts of Trimble and then into the hardware that we sell-through our dealer channels.

And I was asked — we got asked a question earlier in the call about visibility into dealers and their inventory. This is another reason that we think that the systems investments are a good thing for us to get increased levels of precision on that visibility. Hope that helps, Chad.

Chad Dillard: That’s helpful. Thank you.

Operator: We will go next to Kristen Owen at Oppenheimer.

Kristen Owen: Great. Thank you for the question. So I wanted to ask about the e-Builder, Viewpoint SketchUp contingency. This business is obviously doing quite well and a pretty stark contrast to some of the more conservative macro views that you’ve expressed. And even just on an ARR growth basis, really strong compared to some of the peers in the software space. We’ve talked about the macro, but I’m just wondering from a portfolio basis, if you can speak to the playbook with these businesses what’s working in this environment? And just how do you intend to port those lessons learned over once the Transporeon acquisition closes?

Rob Painter: Sure. Good morning, Kristen. This is Rob. I will answer the question. So you’re correct, that contingent of businesses is doing very well and it’s even more than e-Builder, Viewpoint, SketchUp, it’s from a Tekla Structures offering our mechanical electrical plumbing software as well or project management software, really the whole contingent is performing. I’ll say 1 thing that is nice on the software side and the recurring revenue is certainly get a higher degree of predictability. There is not a wholesale in between the retail and so you get a clear demand — a clear view of the demand, which is why, by the way, on the hardware side, we’re looking back at the 3-year trend on the CAGR so that we can see the signal through the noise.

In terms of what’s working with it, I would say it’s the value proposition meets the digitization of the market. So call it the secular aspect of digitization, had a chance to meet with a number of construction companies during my travels over the last month was with one of the largest European contractors in the world yesterday here in Colorado. And digitization and data and sustainability are at the top — very top of the agenda of those customers, and they know they need to adopt technology in order to further their strategies. Most of these — many — most of these companies have solid backlog and they need technology to help them get the work done. From a value proposition perspective, we are hearing strong resonance with the — I’d say both the integrated and connected offerings and Trimble Construction One certainly seems to have resonance with the customers that we’re talking to, even in its early form that it is.

We see that and as evidence of that, we had a record level of cross-sell ACV bookings and building infrastructure in the fourth quarter. So that tells me that there’s — it’s not just marketing resonance. It actually has resonance in terms of turning into business. So the value proposition it’s around a connected offering. So customers increasingly are looking to move from optimizing tasks to optimizing the system. And to do that, they need to have more connected data and more connected workflows. We are hearing customers say they — this is — because this is where they want to go, they want to buy it from one company as opposed to having to stitch together multiple, let’s say, multiple vendors on their own. They like the ease of the dealing with the one company or even the one overall account representative.

So there’s an aspect of ease to doing business with us, meets a level of connectivity which is ultimately they’re trying to get to do their work better, faster, safer, cheaper , and it is resonating.

Kristen Owen: Thanks for that, Rob. And some of those lessons with Transporeon, how you see maybe some of that value proposition or combining the offerings, how you see that bleeding into the transportation business once that acquisition has closed.

Rob Painter: Yes. Sorry, I forgot about that — great to. Thanks for the question. So on Transporeon, I’d say the great news of Transporeon is they already have that through the 140,000 carriers. About 1,400 shippers in the network. 3,000 integrations of PRP and management systems and already last year had $25 million –transactions run through the system. It is definitively a platform company really and in the mode of connect and scale. So they have a set of connected capabilities. They’re selling it through a dedicated sales force. There’s a land-and-expand play within that. There’s strong net retention. There’s strong growth retention in the business. So actually, I see as much that we can take from Transporeon to Trimble as much as we — I think that we could take aspects of Trimble into the Transporeon business, I would like to say, it’s 1 of the many reasons I’m excited by that because I think it will be DNA additive to us as where — and I know this, as we’re e-Builder and Viewpoint acquisitions were additive to us at Trimble to take the best of and take it to other model transitions that we’ve done.

And I see the same thing in store with Transporeon.

Kristen Owen: That’s super helpful. I will leave it there. Thank you.

Rob Painter: Thank you.

Operator: We will move to our next question from Tami Zakaria at JPMorgan.

Tami Zakaria: Hi, good morning. Thank you so much. Hope everyone is doing well. So my first question is the gross margin grade expansion 200 to 250 basis points, how much of that is price cost tailwind? And how much of that is software versus hardware mix change? And are there any other factors driving this leverage this year?

David Barnes: Tami, it’s David. The way to think about that is essentially all of the gross margin improvement is the evolving mix of our business. We are continuing to take price mostly in hardware, but at a lower rate so that’s not real the margin driver. What’s driving our margins up is we’re becoming more and more of a software business and those have higher gross margins.

Tami Zakaria: Got it. So if prices keep coming down, input prices, could that be a source of up site to your gross margin rate?

Rob Painter: It’s — there’s a number of puts and takes in our hardware gross margin. We’ve already seen a benefit. So in the third and fourth quarter of ’22, we got to the point where for our hardware businesses, our price realization more than offset our cost improvements. So that’s sort of baked into the run rate now. We are continuing to take pricing at a moderate level in our hardware businesses. So that ought to help our margins just a little bit on the hardware side, but by far bigger story is the mix shift.

Tami Zakaria: Got it. So one quick one. One is to back to the destocking comment. Can you talk about what sales to end users look like in the fourth quarter against the dealer destocking is to date sales to end users overall moderate, and fourth quarter versus the third quarter?

Rob Painter: Yes. So let me frame it up this way. If we look at our dealer destocking, I would say it had a negative approximately 400 basis point impact on our organic revenue trends. So we reported flat. We would have been roughly up 4% without the dealer destocking. So if you look specifically at hardware, our hardware revenues organically were down 13. So I think you can infer, Tami, that there was some market softness, particularly in Geospatial surveying market in Q4, which partly we think is temporal. We had a lot of new products last year and as in many businesses, when you have new products, you get a spike in orders, and we had a clean supply chain to deliver those through. So we’ve got a bit of a pullback for that reason.

Fundamentally, I would say the secular end market sales to retail trends feel up — maybe not up as much as they were earlier in 2022, but the general direction is up. There’s some soft areas, including anything tied directly to residential construction that is clearly contracted. But on the balance with what’s happening in infrastructure, we think the secular direction of demand is up. But with the dealer destocking and the customer ordering patterns earlier in ’22, we’re seeing a pullback for those reasons.

Tami Zakaria: Got it. Very helpful. Thank you.

Operator: We will go next to Jason Celino at KeyBanc Capital Markets.

Jason Celino: Hi, guys. Good morning. Just a couple of quick ones. So I think you mentioned churn in the first half impacting the ARR growth, what type of customers or what segment are you seeing these come from?

David Barnes: Yes, hey Jason, its David Jason, it’s David. We do expect churn from a handful of customers, principally in our Transportation segment. These are customers that made a decision to come off our platforms many quarters ago, and they’re just now implementing them. So I see that as noise, not signal our customer satisfaction and retention in transportation is on a secular positive trend. We just expect to see a number of these probably in the first quarter pull off. So that will reduce our ARR growth rate a little bit lower in Q1 from what we expect to see for the full year.

Jason Celino: Okay. And then maybe if I were to simplify it, your construction software portfolio seems to be executing quite well. But it’s — completely different drivers than the hardware destocking element. So are you seeing any macro impact on this construction software portfolio? Thanks.

Rob Painter: The short answer is no, not seeing an impact on the software Portfolio.

David Barnes: Excellent. Thanks.

David Barnes: Welcome.

Operator: Our next question comes from Jerry Revich at Goldman Sachs.

Jerry Revich: Yes, good morning, everyone. Rob, I’m wondering if you could just talk about the progress on Trimble construction. One, what proportion of new orders does it account for now? And when we last caught up, you were seeing tripled-AASP versus base orders before. I’m wondering if that trend has continued?

Rob Painter: Hey, Jerry, good morning. It was so, on TC1, the Trimble Construction One, the best evidence I can give you on the progress is that comes in the form of the record level of cross-sell and upsell that we had in the quarter on from an ACV bookings perspective. And the reality is not all of that is the Trimble Construction One branded portfolio. So there are some aspects where we can just sell across the portfolio, which I’d say, a subset really of TC1. That cross-sell is a percent of the total ACV bookings and Buildings & Infrastructure software was nearly 30%. So for us, that’s a record dollars, record percentage level. And when we go through the business reviews, we look at almost every account to look at what they’re buying and why they’re buying it and looking at the competitive win ratios.

What we’re seeing is when we’re selling the bundled offerings, whether it’s less than the full TC1 offering or it’s TC1 as we’re seeing the sales cycles reduce. We’re seeing the size of the bookings go up. We’re seeing the win ratios go up as well. And so in aggregate, it looks to be a winning formula. And I would add to that, Jerry, that it’s still relatively early in the game for us. And so with the sales kickoff meetings that we’ve been having in the last weeks, it is really a big emphasis to the team. So to get the offering out to the general contractors and then the next person is after that in architecture engineering owners and public sector and then geographically rolling that out as well and aligning the sales team behind that and then actually doing the sales enablement work underneath the covers, which is critical to help the sellers with their effectiveness.

So I’d say, Jerry, lots in aggregate or in some, I think lots of good things happening on this front, and we’ll keep updating you here every quarter.

Operator: We will go next to Rob Mason at Baird.

Rob Mason: Yes, good morning. First question, I just wanted to clarify a comment from earlier. I think around the cost for Connect and Scale, there was a mention of 100 basis points. Is that — what is built into the ’23 guidance? Or was that the cost for ’22? And then maybe just as an extension to that question, just talk about the — where you’ve settled now on the — maybe the model that you’re planning to implement on the hardware-software bundles that are transitioning those conversions. I think there were several options presented at the Investor Day. I’m just curious, can you speak to the — maybe what year 1, year 2 economics will look like on those.

David Barnes: Yes. Hey, Rob. It’s David Barnes. I’ll try both. On the Connect and Scale discrete investments spending on that ’22versus ’21 was about 100 basis points around $40 million. Embedded in our guidance for 2023 is a deceleration in the rate of growth. So we’ll spend somewhere in the order of another $20 million or a little more than that, $1million incremental, $23 million above $22 million. We still have more to do and we are — we believe this is a high priority investment. With regard to the model options, I would say the menu that we presented at the Investor Day is still out there. This topic is tied with digital transformation, our ability to sell hardware and software bundles together in recurring basis is heavily dependent on the rollout of our digital transformation. We’re doing it in a somewhat way now, but the bulk of that opportunity is ahead of us and all the options that we showed at the investors still options we’re considering.

Rob Painter: And Rob, I want to add just a bit of context too, on top of the Connect and Scale investments because it’s a capital allocation call. And so we’ve taken down spend in other parts of the company, in part to help fund what we’re doing here. So we’ve thought a lot about the cost management aspect of our model. If we look over the last 3 years, organically, ARR has grown double-digit over 12%. Total revenue has grown 6%. The gross margin dollars have grown faster than that, as the mix shifts more software-centric. And our total headcount organically has grown2% over that time frame. So a third of total revenue growth, of the ARR growth. And so it’s very much in context of how we’re thinking about allocating capital at Trimble and where we’re putting it to work.

Rob Mason: Well, maybe as a follow-on to that, Rob. Transporeon following that completion of that, you will be in somewhat of a deleverage mode, but how much flexibility are you giving yourself or to be able to do a transaction like, I guess, a rivet or something along those lines, I guess, on the capital allocation side to supplement Connect and Scale?

Rob Painter: Let’s say, from a flexibility — if we’re talking acquisition and deployment of the balance sheet, I would say here in the next 12 to 18 months, not a lot of flexibility because our primary commitment is to deleverage. So certainly, anything at scale, I would say we’ve limited some flexibility of the balance sheet. Now if it’s not at scale, and so if it’s — whether it’s a rivet size acquisition or it’s Trimble Ventures, where we put single-digit millions to work. In that aspect, I would say we do retain some flexibility with caution to stay close to making sure we understand our model and that we’re taking a relatively conservative view of the balance sheet. Now to the P&L, let’s not forget that in 2022, 38% of our total revenue now recurring.

$1.6 billion that’s grown, we believe will grow double-digit again in next year. So our P&L has more visibility than it’s ever had and therefore the business model has got more resilience. And so — and we maintain the investment grade. So I look at those factors altogether, and I’d say there’s flexibility on a smaller size of capital deployment, not a lot of flexibility on transformative sized deals for the next couple of years.

Rob Mason: Sure. Okay. Thank you.

David Barnes: We’ll go next to at Wolfe Research.

Unidentified Analyst: Hi. This is on for Gal. Thanks for taking my question. Just wanted to follow-up on a prior question regarding digital transformation. How is the progress for revenue being transacted through the connected digital platform tracking versus your expectations? And where did that shake out as a portion of revenue for FY ’22. At the Investor Day, I believe 2% of revenue had or had been expected to be the target as communicated so as that met or exceeded and do the projections show that your investor base still stands for the portion of revenues expected to transact through the digital platform in the future? And then just 1 brief follow-up. Thanks.

Rob Painter: The short answer is yes. Yes, with the 2% our business in Europe, and that’s live and working, and we’re just about to roll out the next phased to North American principally to our North American software businesses and with further rollouts from there. But we’re moving forward.

Unidentified Analyst: Got it. That’s helpful. Thank you. And then just one follow-up. Has anything changed from the time Transporeon was announced that would maybe alter the expectations for revenue and EBITDA initially communicated at the announcement of the acquisition or everything all good there so.

David Barnes: Yes. Look, we’ve communicated the financial parameters there. We still don’t own the business. Obviously, we’re talking to them, but we have no update to our outlook, and we’ll update that outlook once the transaction closes at some point in the first half of this year.

Rob Painter: Thank you guys.

David Barnes: Sure. And that does conclude our question-and-answer session. I’d like to turn the conference back to Michael Leyba for closing remarks.

Michael Leyba: Thank you, everyone, for joining us on the call. We look forward to talking to you next quarter.

Operator: And this concludes today’s conference call. You may now disconnect.